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.