JPMorgan Europe Dynamic I JFESX

In early October 2023, JPMorgan disclosed that John Baker has announced his intention to leave the firm in spring 2024. Baker was a veteran member in the firm’s Dynamic team, with 29 years of investment experience entirely spent at JPM Asset Management. Within the Dynamic outfit, Baker had a focus on the U.K. market and was a named portfolio manager on seven strategies. The firm will hire a junior analyst on a permanent basis, in keeping with the team’s history of grooming young talent, and reshuffled internal responsibilities by appointing additional portfolio managers across a range of funds. In particular, among his other responsibilities, Baker was a named portfolio manager on the firm’s Europe Dynamic and Euroland Dynamic. As a result, the firm added Alexander Whyte and Blake Crawford to the European and eurozone strategies’ management teams, respectively. While the team will lose an experienced member, we think the rest of the group has sufficient breadth and depth of expertise to continue to execute the investment process with success. All four remaining managers in the team (team head Jon Ingram, as well as Crawford, Whyte, and Victoria Helvert) spent their entire career at JPM and have intimate knowledge of the systems and processes applied here. As evidence of its stability, this is only the second change in the team in 17 years. Managers work collegially and continue to draw from a number of additional resources within the wider International Equity Group. As a result, we reaffirm the strategies’ pillar ratings of Above Average for People and Average for Process.

JPM Europe Dynamic’s strengths lie in its stable and effective team that is well-supported by a far-reaching organization, while the investment process does not stand out in our view.

The quantitatively driven model underpinning this offering has been in place since 2000. Team head Jon Ingram has been responsible here since 2007 alongside comanager John Baker; Blake Crawford was named as an additional comanager in April 2019. Along with them, Alex Whyte and Victoria Helvert are also part of the Dynamic team headed by Ingram, which is part of the wider international-equity group at JPM Asset Management. They sit alongside the research and implementation teams, working closely with them to execute the approach. The global analyst bank, whose bottom-up stock research provides deeper insights and fundamental analysis, is also a positive.

This stable team is well-versed in the process, which attempts to combine quantitative research and fundamental analysis to target relatively cheaper, higher-quality stocks with an improving business outlook. A quantitative model screens the most liquid 60% stocks in Europe. Daily meetings are then held by the team to review the model’s output and cover company updates, published earnings changes, adjustments to estimates, and other relevant news flow around which analysts may carry out further research. The best stock ideas that display positive quality and momentum factors, while also being deemed as attractively valued relative to the market and peers, are combined to build a core portfolio. New positions are initiated on companies displaying positive earnings momentum. This leads to a high portfolio turnover of around 150% per year. Internal risk systems are dynamic, helping to provide a good handle on positioning, style, and active risk contributions.

Over the current management team's tenure, performance is ahead of the MSCI Europe Index and Europe large-cap blend equity Morningstar Category average. However, the strategy tends to be riskier than peers, and its outperformance has been uneven. It lagged the market four calendar years in a row up to the end of 2019, which was its worst consecutive run. The process ultimately hinges on the persistence of factor premiums: When value and especially momentum are out of favor, the strategy struggles to keep up with the broader market. This works both ways, though, as factor exposures represented a tailwind in 2020–22. Overall, the strategy is expected to deliver positive outcome in stable market environments, where earnings and price momentum are driving returns, regardless of the trend direction. On the other hand, similar to many quantitative approaches, inflection points and rapidly changing market conditions may prove challenging to navigate.

The quantitative model screens the European universe on three characteristics: value, quality, and momentum(both price and earnings). This serves as an objective foundation to direct managers’ attention. The team meets daily to cover company updates, published earnings changes, adjustments to estimates, and other relevant news. Managers may instigate follow-up research to assess the nature of earnings upgrades, and qualitative data validation is key to ensuring the model's recommendations have sound foundations. They also consider environmental, social, and governance factors and rely on both sell-side research and the internal analyst team to corroborate their investment thesis. Internal risk systems also help them monitor style and factor exposures. The managers are unconstrained in terms of benchmark-relative deviations but take a measured approach to portfolio construction. They ensure that the portfolio has positive exposures to the quality, value, and momentum factors at all times. The magnitude of these tilts can vary over time, though, depending on the managers’ assessment of the opportunity set. That said, the team typically builds reasonably diversified portfolios, balancing active risk between factors and stock-specific characteristics. The team looks at each stock holistically, but earnings momentum has consistently proved the primary driver of buy-and sell-decisions, with less value added from the fundamental element. Indeed, the team trades aggressively and frequently, which reflects into generally higher transaction costs. All in all, the process has sensible foundations and is fairly structured but depends to a significant degree on solid execution. As such, we think its repeatability is more uncertain. The reliance on a single factor also limits our conviction, leading to an Average Process Pillar rating.

This portfolio consists of 60–110 positions. The number of holdings is mainly a function of market volatility, and as of September 2023, it stood at the lower end of the range, in line with the recent past. Individual weightings mainly depend on relative risk/reward, managers’ conviction, liquidity, and portfolio construction considerations. Risk is managed on a relative basis. The managers aim to have positive exposure to three factors—value, quality, and momentum—at all times, although the weightings are a product of the team's bottom-up stock selection. The quality factor was added to the quant model in early 2012 with the aim of increasing resilience in down markets. The team can seek opportunities down the market-cap scale, too, with exposure changing based on the model's indications. The portfolio is frequently turned over, with an average holding period of less than one year, and the managers are not afraid to make sizable bets against its MSCI Europe Index benchmark when deemed appropriate. As of September 2023, the strategy was underweight healthcare (10% versus 16% weight in the benchmark), most notably among pharma companies. The fund also had a small allocation to technology of 1.2% of assets, in just one name (STMicroelectronics). Managers found more opportunities among consumer cyclicals (whose weight has doubled from the year before) and industrials (which was the fund’s largest underweighting in mid-2022), especially among capital goods companies. The fund was also overweight energy, financials, and utilities.

It is led by Jon Ingram, an investor with 24 years of experience entirely spent at JPMorgan, where his tenure at his longest-running mandates spans over more than 15 years. Here he is supported by comanagers John Baker and Blake Crawford, who have also spent their entire careers at the firm and who boast 29 and 15 years of experience, respectively. The three have equal say on investment decisions, but Ingram is ultimately responsible for performance. Crawford was appointed to this strategy in April 2019 following the departure of Anis Lahlou-Abid, who was a named manager since 2011 — the only leaver from this unit in the last decade. Alex Whyte and Victoria Helvert round out the Dynamic team. The outfit runs a range of European and technology-focused portfolios. Within the firm’s European equity fund range, these tend to be higher-conviction strategies. Given the managers’ hands-on approach, workload bears watching, but the breadth and depth of resources available to them represent a key competitive advantage, in our view. This unit is part of the much broader International Equity Group within JPM Asset Management. The team therefore leverages the fundamental, operational, and quantitative capabilities of the wider organization, leaning on its global analyst bank for bottom-up stock research, while also counting on the quantitative research group headed by Nick Horne and responsible for the systematic model deployed in this process. Additional support comes from the implementation team for cash flows management, as well as the sustainable-investing team for ESG insights. The trading and analytics function is also critical, as managers rely on a range of systems and tools developed in-house for idea generation, research, and portfolio construction. Overall, managers work closely together while also benefiting from the wider platform. This stable team is also well-versed in the process, further supporting an Above Average People rating.

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 March 2005 through the end of August 2023, the Luxembourg-domiciled fund’s 7% annualized return in EUR for the C share class is 135 basis points ahead of the MSCI Europe Index. The strategy tends to be slightly riskier than its peers and benchmark, though, exhibiting typically a higher standard deviation of returns and more pronounced drawdowns. Still, over the long term, it produced superior risk-adjusted returns, as measured by the fund’s alpha and Sortino and Sharpe ratios. While ahead of its benchmark and peers over longer stretches, the strategy’s outperformance has been uneven. It underperformed four calendar years in a row up to the end of 2019, which was its worst consecutive run. As with other strategies that rely on quantitative models, this approach can sometimes struggle at market inflection points. The process also hinges on the persistence of factor premiums: When value and especially momentum are out of favor, the strategy struggles to keep up with the broader market. This works both ways, though, as factor exposures represented a tailwind in between 2020 and 2022. Adding to technology-led momentum names drove returns in 2020. As value came back into vogue in the latter part of 2020 and into 2021, the process nudged the managers toward value cyclical names, which was also beneficial. In 2022, the strategy benefited from its selection in value names with positive earnings momentum, notably among financials and energy names. In 2023 through the end of August, the strategy was again pressured by the widening of valuation spreads. Momentum also represented a relative headwind of late.

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Bronze.