JPMorgan International Equity R2 JIEZX

JPM International Equity boasts a strong investment team and a well-codified investment approach.

This strategy is in the capable hands of Tom Murray. He became a comanager in 2004 and has been lead manager since September 2017. Murray is joined by comanagers Shane Duffy, James Sutton, and Zenah Shuhaiber, all of whom have been with J.P. Morgan for their entire investment careers. This is the same team that runs the ADR-only sibling offering JPM International ADR, while Murray and Duffy together co-lead the more concentrated, best ideas offering JPMorgan International Focus. Backing the London-based managers are a stable cast of eight global specialists who scour the best ideas from the firm’s huge regional research teams that cover approximately 2,500 stocks in offices all over the world.

Alongside a solid team is a robust approach. The team focuses on non-U.S. firms that score well on balance sheet strength, profitability, and management quality. The global specialists rank stocks from A to C, with A representing their highest-conviction bets, a framework that helps form position-sizing decisions in the end 70- to 100-stock portfolio. While management is willing to pay up for some growth-oriented opportunities, valuation is also an important consideration. As a result, the portfolio is well-balanced from a style perspective, hence why it has landed in the core portion of the Morningstar Style Box.

The strategy has posted respectable returns under Murray’s leadership. Since Murray took the lead in September 2017, through June 2023, the mutual fund’s institutional shares gained 4.2% annualized, beating the MSCI ACWI ex USA Index's 3.2% return and 68% of its foreign large-blend Morningstar Category peers. Given he’s been a comanager here since 2004, longer-term results remain relevant, too. In the trailing 15 years through June 2023, the fund’s 3.6% annualized return beat the index’s 2.9% gain and 64% of peers. Volatility (as measured by standard deviation of returns) was in line with the index, so risk-adjusted returns tell a similar story.

The offering focuses on non-U.S. firms that score well on balance sheet strength, profitability, and management quality. Idea generation relies on this team’s global sector specialists, who scour the best ideas from J.P. Morgan’s 200-plus regional equity investment professionals—who cover approximately 2,500 stocks in offices around the world—by viewing their research with a global lens. The global specialists rank stocks from A to C, with A representing their highest-conviction bets, a framework that helps form position-sizing decisions. The team is long-term oriented—they set five-year expected return targets—so it’s no surprise that annual portfolio turnover trends around 30%. While management is willing to pay up for some growth-oriented opportunities, valuation is also an important consideration. As a result, the portfolio is well balanced from a style perspective, hence why it has landed in the core portion of the Morningstar Style Box.

The end portfolio is comprised of 70 to 100 stocks, with individual holdings capped at 5%. Management wants stock selection to drive returns, so sector weightings are generally held close to the MSCI ACWI ex USA Index, though country-relative weightings can diverge up to 15 percentage points. Up to 15% of portfolio assets can be invested in emerging markets, but in practice the exposure hasn’t exceeded mid-single digits.

The portfolio’s exposures are commensurate with the approach in place here. Indeed, quality metrics such as returns on invested capital and net margins have trended above the MSCI ACWI ex USA Index. At the same time, price/earnings, price/cash flow, and other price multiples have typically been slightly higher than the core index over the years, but well below the MSCI ACWI ex USA Growth Index. This reinforces that management is cognizant about balancing quality and valuation.

The mutual fund’s Japan exposure rose to 18% from 13% in the past year through May 2023, and is now overweight the index’s 15% stake. During a June 2023 meeting, management noted that corporate governance in Japan is improving, albeit slowly. The team added five Japanese holdings in the past year, including banks Sumitomo Mitsui Financial and Mitsubishi UFG Financial as well as tire maker Bridgestone. While Japan was the portfolio’s largest absolute stake as of May 2023, France was the biggest overweight relative to the index. The fund's 17% stake there was well above the index’s 8%, including luxury goods player LVMH and energy conglomerate TotalEnergies.

From a sector perspective, healthcare was the largest overweight as of May 2023, but its 12% stake was only marginally above the index’s 10%. Conversely, the largest underweighting was to communication services, with its 3% stake being below the index’s 6%.

Tom Murray has been this strategy’s lead manager since September 2017, when longtime manager James Fisher retired. Murray has 26 years of investment experience, having spent his entire career with J.P. Morgan, and he’s been a comanager here since 2004. He’s supported by fellow comanagers Shane Duffy, James Sutton, and Zenah Shuhaiber, all of whom sit in London and have been with the firm for their entire careers. Duffy, who joined the firm in 1999, has been a comanager here since 2013, and currently leads the JPM International Growth strategy. Murray and Duffy have also co-led the concentrated sibling offering—JPMorgan International Focus—since its 2011 inception. Sutton and Shuhaiber are the newest additions here, coming aboard as comanagers in 2020 and 2022, respectively. Sutton joined J.P. Morgan in 2010 and was previously the team’s metals/mining specialist, while Shuhabier’s firm tenure dates back to 2005, having since managed global and European equity mandates.

The managers are supported by a stable group of eight global sector specialists, averaging 22 years of experience, 12 of them at J.P. Morgan. They scour the best ideas from the firm’s 200-plus regional equity investment professionals—by viewing their research with a global lens—providing ample comfort around coverage breadth.

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.

Since then, through June 2023, the mutual fund's institutional shares gained 4.2% annualized, beating the MSCI ACWI ex USA Index's 3.2% return and 68% of its foreign large-blend Morningstar Category peers. The overweighting to — and strong stock selection within — information technology buoyed returns, with individual contributors including semiconductor players ASML Holding and TSMC. Solid picks in materials and financials also helped, including industrial gas supplier Linde and Singaporean banking firm DBS Group.

Murray has been a comanager on this offering since 2004, so longer-term results remain relevant, too. In the trailing 15 years through June 2023, the fund’s 3.6% annualized return beat the index’s 2.9% gain and 64% of peers. Volatility (as measured by standard deviation of returns) was in line with the index, so risk-adjusted returns tell a similar story, with its Sharpe ratio of 0.24 beating the index’s 0.21 and 62% of peers.

Despite some performance woes in 2022—when the strategy’s slight growth signature detracted—it bounced back in 2023’s first half. It gained 12.8%, beating the index’s 9.5% return and 80% of its peers. Stock selection was solid across most sectors, including consumer discretionary and industrials, where French luxury goods player LVMH and Japanese air conditioner manufacturer Daikin Industries led the way, respectively.

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.