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JPMorgan US Large Cap Core Plus C JLPCX

Analyst rating as of

Morningstar’s Analysis

Analyst rating as of .

Decent, but not convincing.

Our analysts assign Neutral ratings to strategies they’re not confident will outperform a relevant index, or most peers, over a market cycle.

Decent, but not convincing.

Summary

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Although JPMorgan U.S. Large Cap Core Plus benefits from experienced hands, deep resources, and a decent process, the managers running this fund must prove their value. The strategy earns a Morningstar Analyst Rating of Neutral for all share classes.

Seasoned portfolio manager Susan Bao has been involved with the strategy since its launch in 2007. She used to comanage the fund with Tom Luddy, but since he stepped down in 2017, Steven Lee is her partner on the fund. Whereas Bao had been the lead manager and key decision-maker, as of 2020 Bao and Lee split sector coverage and have decision-making power for their respective sectors, with Bao focusing on consumer, financials, and healthcare, while Lee is the lead for industrial/commodities, technology, and utilities/telecom.

The duo relies on a large and experienced sector analyst team comprising more than 20 analysts with two decades of experience on average. Although this team gives the fund impressive firepower to conduct fundamental bottom-up research, it has seen turnover in recent years and stock-picking has been uneven.

The strategy rests on a sound philosophy and a consistently applied, robust process. The analysts produce a long-term fair value estimate for each security, based on an in-house dividend discount model. Stocks are then ranked into quintiles from most attractive to least. This strategy can benefit from their insights on both the long-only leg and the 30/30 long-short extension.

The long-only leg of this fund mostly consists of stocks ranked in the first and second quintiles, although stocks scored lower might be held for risk-reduction purposes. The 30/30 extension is broadly sector-, style-, and beta-neutral, where the managers pick shorts within the lowest quintiles. This leads to a very diversified portfolio of 250-350 positions. Short exposure generally stands at 20%-30%, with the portfolio's net exposure to the market kept at 100%. Despite the multiple levers they can pull, the managers have not been able to consistently add value on a risk-adjusted basis.

Process

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The strategy relies on a sound philosophy and a consistently applied bottom-up process. Its potential to leverage the analysts’ insights through both long and short positions sounds appealing, but the managers have not been able to execute it effectively. The Process Pillar rating is therefore Average.

The strategy aims to capture temporarily mispriced opportunities through consistent use of the analysts' long-term valuation forecasts. Those derive from an in-house dividend-discount model that is fed by the team's earnings, cash flow, and growth-rate estimates. The analysts rank stocks in each industry based on their estimated fair value. The managers incorporate these rankings into their stock-picking, expressing modest sector preferences based on their macroeconomic view. The long-only leg of this fund mostly consists of stocks ranked in the first and second quintiles, although stocks scored lower might be held for risk-reduction purposes. The 30/30 extension is broadly sector-, style-, and beta-neutral, where the managers pick shorts within the lowest quintiles. This leads to a very diversified portfolio of 250-350 positions, with a relatively low active share of 55%-65% for the long leg. Short exposure generally stands at 20%-30%, with the portfolio's net exposure to the market kept at 100%. The managers trade positions frequently, with annual portfolio turnover averaging 120% in the past five years.

People

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Although the duo that runs this strategy is experienced and can leverage on deep resources, a change in the manager's collaboration, implemented in 2020, team turnover, and uneven stock-selection results from the analyst team warrant a People Pillar rating of Average. This fund is led by the experienced Susan Bao, who joined JPMorgan in 1997 and has been running the strategy since its 2005 inception. Steven Lee was appointed comanager at the end of 2017, replacing Tom Luddy, who stepped down. Lee has been with the firm for 16 years and has managed portfolios since 2014. The partnership between the two managers is relatively fresh, but their collaboration has also changed. The two managers now split sector coverage and have decision-making power for their respective sectors, with Bao focusing on consumer, financials, and healthcare, while Lee is the lead for industrial/commodities, technology, and utilities/telecom. This changed the dynamics within the team, though portfolio management remains collegial.

The 23-strong sector analyst team, which boasts 20 years of industry experience on average, is a key resource for the managers’ bottom-up-driven strategy. Although this team gives the fund impressive firepower to conduct fundamental research, team turnover in recent years and uneven stock-picking results have reduced some of its appeal.

Parent

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J.P. Morgan Asset Management’s strong investment culture, which shows through its long-tenured, well-aligned portfolio managers and deep analytical resources, supports a renewed Above Average Parent rating.

Across asset classes and regions, the firm's diverse lineup features many Morningstar Medalists, such as its highly regarded U.S. equity income strategy that’s available globally. There's been some turnover in the multi-asset team recently, but it remains deeply resourced and experienced. Manager retention and tenure rates, and degree of alignment for U.S. mutual funds compare favorably among the competition. Managers' compensation emphasizes fund ownership over stock ownership, which is distinctive for a public company.

The firm continues to streamline its lineup and integrate its resources further. For instance, in late 2019, the multi-asset solutions division combined with the passive capabilities. The firm hasn’t launched trendy offerings as it’s mostly expanded its passive business lately, but acquisition-related redundancies and more hazardous launches in the past weigh on its success ratio, which measures the percentage of funds that have both survived and outperformed peers. Fees are regularly reviewed downward globally; they're relatively cheaper in the U.S. than abroad. Also, the firm is building its ESG capabilities and supports distinctive initiatives on diversity.

Price

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It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s costliest quintile. Such high fees stack the odds heavily against investors. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, 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.

Performance

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The fund’s 10-year total return through February 2021 ranked comfortably in the top-quartile of the U.S. large-cap blend Morningstar Category, and it has also outperformed the average peer over shorter periods. Since the strategy’s 2005 launch, it has also beaten the Russell 1000 Index, though its performance relative to the market barometer has been mixed over shorter periods. The strategy performed well in 2020, helped by positive allocation and stock selection in the long leg and effective stock-picking in the 30/30 extension. Positions in PayPal PYPL, Amazon.com AMZN, and Morgan Stanley MS paid off, while shorting names that were hit hard by the lockdown proved successful. Although 2020 was a solid year for the fund, its stock-picking success over the longer term has been uneven.

While its total returns versus peers and the index look promising, adjusting for risk leads to a less-appealing track record, as the strategy’s volatility of returns has been structurally higher. The fund’s Sharpe ratio since inception edges that of the Russell 1000 Index, but over shorter periods it has consistently lagged the index. Although the strategy’s performance in 2020 was promising, we have yet to see that the managers can consistently add value with their stock-picking in both the long leg and the 30/30 extension.

Portfolio

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The portfolio is quite diversified. It held 285 stocks at January 2021, of which 122 were short positions. Around 75% of the portfolio was allocated to stocks that ranked in the first two quintiles, while fifth-quintile stocks were sourced for short ideas. Sector deviations relative to the S&P 500 are very modest. Basic materials, media, and financial services are preferred, but the overweightings don’t exceed 100 basis points. The team likes payment companies that are less sensitive to interest-rate developments, exemplified by the position in Mastercard MA, one of the fund’s largest overweightings. The allocation to banks has declined over the years, and the team continued to trim the exposure in 2020 to around 2.5% of the portfolio per January 2021, from over 7% in 2018. However, the team thinks the case for banks is improving, as buybacks have been approved, credit quality looks decent, and margin compression might stall. Although several lockdown-sensitive companies were short targets, the team bought Booking Holdings BKNG in 2020, as its exposure is global and the firm can benefit from a reopening of the global economy and increasing travel or holiday bookings. Shorts have been found among hotels, energy, big pharma, communication services, and real estate.