JPMorgan U.S. GARP Equity R5 JGIRX

Effective May 31, 2023, Jonathan Tse will no longer be a listed manager on JPMorgan U.S. GARP Equity. Tse has been with J.P. Morgan since 2004 and served as a comanager on this strategy since November 2019. Tse was a member of the four-person quantitative research team conducting research in support of the group's investment process, including alpha and risk model development, portfolio optimization, and performance attribution. Head of quantitative research Wonseok Choi and fundamental manager Andrew Stern remain in place. Given their continued involvement, Tse’s departure does not affect JPMorgan U.S. GARP Equity’s People Pillar rating of Average and its Morningstar Medalist Rating of Neutral.

JPMorgan U.S. GARP Equity’s process relies on several common factors, resulting in a Morningstar Analyst Rating of Neutral across all share classes.

This strategy combines quantitative and fundamental elements to try to outperform the Russell 1000 Growth Index. It is sensible and repeatable, but not very distinctive. It starts with a quantitative model screening the U.S large- and mid-cap universe for stocks displaying the best combination of value, quality, and momentum characteristics. The model will look at some traditional metrics such as price ratios for valuation, but it also includes more advanced features, such as language processing components that analyze earnings call transcripts for possible indications about business direction. While many quant strategies use similar characteristics, this strategy also has a group of fundamental analysts that reviews the model to ensure accuracy. They don’t make forecasts but adjust the model’s inputs to reflect one-time items or other material events. The managers can modify the strategy’s exposure to its target factors based on well-defined rules.

In May 2021, Andrew Stern took over as lead manager following the departure of previous longtime manager Jason Alonzo. But Stern is not a stranger to the strategy. He has been an analyst here for more than a decade and a comanager for a few years too. Stern works alongside Wonseok Choi, who leads the quant group’s efforts. But the managers have had to navigate several departures in recent years, including Alonzo’s. The remaining team has the benefit of leaning upon some of JPMorgan’s broader resources, but the increased turnover is a concern.

The fund’s performance in 2019 and 2020 struggled, but it has improved lately. In those earlier years, the fund’s shift toward value stocks backfired as growth stocks outperformed the broader market. But since the start of 2021 through October 2022, the I shares’ 2.6% cumulative loss still beat the index by 3.7 percentage points. Sticking to their principles has paid off, as Morningstar’s risk attribution showed that the strategy’s value exposure was one of the main contributors to its recent success.

The managers’ stock-picking model screens for those three factors using both traditional and nontraditional methods. The model assesses valuation on a variety of measures based on trailing and forward-looking normalized earnings and cash flows. It also tests for stock-price and business momentum as well as short interest trends. Last, the model ranks on earnings and accounting quality. Companies buying back shares score highly, while companies with much higher earnings than cash flows don't. Additional data points are derived from less-traditional sources, such as natural language processing of company filings and earnings calls. While these factors and most of these methods are widely used by so-called strategic-beta exchange-traded funds and other quant managers, the team attempts to get an edge with fundamental analysis. Analysts adjust inputs to control for one-time events and reflect material changes where necessary. The model uses the updated numbers to select stocks and calibrate their weightings in the portfolio.

The managers can also adjust the fund’s exposure to a particular market factor based on rules flagged by the model. Typically, these top-down adjustments are made during periods of market stress when there is greater dispersion between factor returns. In 2020, for example, value stocks underperformed meaningfully, triggering a shift in the portfolio toward cheaper companies to take advantage of the perceived dislocation.

This strategy typically holds 90-120 stocks, much fewer than the Russell 1000 Growth Index’s 400-plus, but it has become more concentrated over time along with its benchmark. The portfolio's top 10 stocks held 44% of assets as of September 2022, up from around 35% for most of 2019. While that's a high mark, it was actually just beneath the Russell 1000 Growth Index’s 46%. The ascension of mega-caps such as Microsoft MSFT, Apple AAPL, and Amazon.com AMZN (the portfolio’s three largest holdings) has defined the large-growth universe, and in turn, this strategy. Still, the strategy maintains some differentiation, even when it comes to these highly influential stocks. The quant model underpinning the strategy was underweight in such high-growth mega-caps in recent years in favor of smaller companies with lower price multiples, though that decision proved costly as mega-caps continued to outperform the broader market.

The portfolio’s tilts toward value and momentum are apparent. Reflecting the stock-picking model’s valuation screens, the portfolio’s average price/earnings, price/book, and price/cash flow multiples were all noticeably lower than the index in September. The portfolio also tends to have higher exposure to momentum than its benchmark, according to Morningstar’s risk model. The quality tilt is defined here by a focus on cash flows and return of capital to shareholders.

Lead manager Andrew Stern has led this strategy only since May 2021, but he is quite familiar with the team and the process. Stern began as an analyst on this team in 2011 and has served as comanager since November 2019. He stepped up to lead manager following the departure of longtime manager Jason Alonzo. Stern works closely with comanager Wonseok Choi, who leads the team’s quant efforts and oversees the development and analysis of the model that underpins the strategy. On the fundamental side, Stern also has a pair of dedicated analysts to cover the portfolio’s day-to-day developments and review the model’s suggested trades.

At the end of 2019, Hamilton Reiner took over as the head of JPMorgan’s structured equity department and encouraged increased interactions between Stern’s team and the firm’s broader resources. An analyst from the firm’s equity data science division, who helped develop some of the factors used here, is now embedded with Stern and his team. Most importantly, the group has also increased their interactions with JPMorgan’s core research team, which effectively covers the large-cap universe.

Despite all these resources, the team has had to navigate several departures. Aside from Alonzo leaving, Stern’s group also lost one analyst in 2021. On the quant side, the group lost two analysts in 2022 and another one two years prior.

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 that month through October 2022, the institutional shares’ 9.6% annualized return beat the average large-growth Morningstar Category peer’s 7.3% but still lagged the index’s 11.4% gain by a decent margin.

While Stern has been a listed manager for only a few years, the quant model that drives the strategy has been in place much longer. Looking back to November 2005 when previous manager Jason Alonzo came aboard through October 2022, the strategy’s 9.8% annualized gain looks a bit better, but it still fell short of the index by 1.0 percentage point annualized.

After a rough stretch in 2019 and 2020, performance has improved over the past year and a half. The fund’s struggles in 2019 and 2020 largely stemmed from a heavier bet on value stocks, which backfired as growth stocks outpaced the broader market. But Morningstar’s risk model attribution shows that sticking to its value exposure has boosted performance recently. Over the trailing 12 months ending October 2022, the strategy’s 22.2% loss, while difficult for investors, still beat the benchmark by 2.4 percentage points. This helped make up some ground, but its trailing three-, five-, and 10-year numbers remain relatively mediocre.

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 Analyst Rating of Neutral.