JPMorgan US Research Enhanced Equity R6 JDEUX

JPMorgan U.S. Research Enhanced Equity's tight constraints limit the strategy’s potential and produce a portfolio that is quite similar to its index.

J.P. Morgan veteran Raffaele Zingone serves as the lead manager here, but it is the firm's central analyst team that drives the picks. He leverages the analysts' research to build this strategy's approximately 200-stock portfolio. A quantitative model that draws upon the analysts' valuations, firm-specific growth catalysts, and confidence in long-term trends highlights the most attractive names. Zingone then builds the final portfolio within fairly tight constraints. For example, the strategy has a ceiling on tracking error (a measure of performance differentiation) at 1.5%. Zingone also aims to keep this strategy factor- and sector-neutral, having no more than a 0.2-percentage-point difference from the S&P 500's sector weightings. These restrictions mean that stock-picking drives returns, but they also limit the portfolio's distinctiveness. Indeed, as of June 2023, the portfolio's active share (a measure of a portfolio's difference from a benchmark) was just 35%, which ranked in the lowest decile of all actively managed large-blend Morningstar Category peers.

J.P. Morgan's 23-member fundamental equity team is experienced, averaging more than 21 years in the industry, but continued analyst turnover is a concern. Since 2018, the team has had 13 departures, including eight in the past three years. Fortunately, turnover slowed to just one departure so far in 2023, but the group needs to show more continuity going forward. J.P. Morgan has hired to keep the overall headcount somewhat steady, but the changes to the team are concerning given the analyst-driven approach.

Despite this, the strategy has delivered decent results since it lowered its tracking-error target in November 2016. From then through August 2023, the institutional shares' 14.2% annualized return narrowly edged out the S&P 500's 13.7% return. Sticking close to the index has worked well relative to peers as the strategy's return ranked in the top decile of its category over that time. The strategy's low fees relative to other actively managed strategies also help, but they're still high relative to passively managed options.

Lead manager Raffaele Zingone leverages J.P. Morgan's 23-member fundamental central analyst team to construct the strategy's roughly 200-stock portfolio. The group forecasts earnings more than five years out for 600-plus companies and incorporates those forecasts into its valuations. The analysts look for firms with competitive advantages, reliable returns on capital, and reasonable valuations. While they rank each name under coverage by sector, Zingone uses a model that considers those analysts' inputs as well as their confidence level in those estimates to highlight the most attractive firms.

Zingone then constructs a portfolio within relatively strict limits, as the strategy targets a tight tracking error (a measure of performance differentiation) of 1.5% versus the S&P 500. Zingone also keeps the portfolio's sector weightings within 0.2 percentage points of the index, and individual positions within 1 percentage point. Such narrow constraints mean that stock-picking, rather than sector allocations, will drive returns—but they also limit the portfolio's distinctiveness.

Sticking to these tight constraints could also spur portfolio turnover, but Zingone has kept trading reasonable. Over the past five calendar years through 2022, turnover averaged roughly 42% versus the median active large-blend category peer's 34%.

With tight construction constraints, the strategy's portfolio looks similar to its S&P 500 prospectus benchmark. Indeed, the strategy’s low 35% active share (a measure of portfolio distinctiveness) in June 2023 ranked it in the lowest decile of all actively managed large-blend vategory peers.

The portfolio typically holds less than 200 names, well below the team's self-imposed limit of 300 and significantly lower than that of the benchmark but quite a lot relative to many category peers. In addition to remaining roughly sector-neutral, the strategy also tends to stay factor-neutral relative to the S&P 500. Individual holdings must stay within 1 percentage point of the bogy's weightings, but most stay much closer. The portfolio's average active bet size as of June 2023 was just under 0.2 percentage points. The team's largest active overweighting that month was its 1.1% allocation to Honeywell International HON, above its 0.4% share of the benchmark. On the flip side, its largest underweighting (excluding JPMorgan Chase JPM, which the fund cannot own) was Broadcom AVGO, whose 0.2% allocation was well below its 1.0% share of the index.

The team sometimes picks out-of-benchmark stocks—but with mixed results. These can come from analysts' coverage or portfolio managers' side work, and they are often mid-cap companies. In June, the portfolio contained 12 such names, but they made up less than 2% of total assets.

The strategy's analyst-driven approach means J.P. Morgan's 23-person fundamental equity team plays a key role. The group is well experienced, averaging more than 21 years in the industry and 11 years with the firm, but it has had to navigate significant churn in recent years. Since 2018, the firm has lost 13 analysts, including eight in the past three years. Things appear to have calmed down in 2023, with only one retirement so far (technology analyst Nitin Bhambhani), but the team needs to show more stability going forward. Fortunately, the firm has hired to fill in the coverage gaps, and transitions have mostly been well executed.

J.P. Morgan veteran Raffaele Zingone leads the strategy and brings some continuity to the group. He has been with the firm for more than three decades and had served as a comanager here since 2002 before taking over lead manager duties in November 2016. His main responsibilities here are portfolio construction and risk management. Comanager Tim Snyder was promoted to the role in 2016 after serving as an analyst at the firm for more than a decade, but he isn't involved in the day-to-day portfolio management.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various global cohorts and diverse asset classes, the firm has more tightly integrated its capabilities in recent years, notably through the development of proprietary analytical and risk systems. Investment teams are robustly staffed and helmed by seasoned contributors. The firm’s strategies tend to produce reliable portfolios, and several flagship offerings are Morningstar Medalists. Manager incentives align with fundholders'; compensation reflects longer-term performance factors, and portfolio managers invest in the firm’s strategies as part of their compensation plans.

The firm’s funds tend to be well-priced, but they aren’t as competitive as many highly regarded peers of similar scale. Recent product launches include thematic and single-country strategies, both of which carry the potential for volatile performance and flows, along with misuse by investors. The firm remains intrepid when it comes to developing an environmental, social, and governance-focused framework and continues to move into other areas such as direct indexing through its 55iP acquisition and China through its joint venture, but these complicated initiatives take time to assess any real and lasting effect.

From then through August 2023, the institutional shares' 14.2% annualized return narrowly edged out the S&P 500's 13.7%, while beating its typical large-blend category peer more handily by 2.6 percentage points. It did this with slightly more volatility, but even on a risk-adjusted basis(as measured by the Sharpe ratio), the strategy surpassed both its typical peer and the benchmark.

The strategy’s tight constraints usually lead to performance that closely resembles the index. Its 2016 mandate change reduced the strategy’s maximum tracking error (a measure of performance differentiation) to 1.5%. They have easily stayed within that bound, though, with an average tracking error of 1.0% over this time. For perspective, that ranked in the lowest 5% of all actively managed large-blend peers.

Performance in the first eight months of 2023 was strong, as the strategy’s 20.4% return outpaced the benchmark by 1.6 percentage points and ranked in the top quintile of its category. Stock selection has been good. The team’s picks in communication services and financials led the way, with its overweighting in Meta META and underweighting in Walt Disney DIS helping drive the results.

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Neutral.