JPMorgan US Large Cap Core Plus I JLPSX

Experienced and capable managers who effectively exploit their deep bench of analysts add to the strategy’s appeal. The strategy, which includes U.S.-domiciled JPMorgan U.S. Large Cap Core Plus and its Luxembourg-domiciled sibling JPM U.S. Select Equity Plus, earns a Morningstar Analyst Rating of Bronze for its cheapest share classes, while pricier ones land at Neutral. Previously, an error in the calculation of the prospectus adjusted expense ratio for the U.S. mutual fund's I share class led to a Neutral rating instead of Bronze.

Susan Bao has managed this strategy since inception in 2005. She’s a J.P. Morgan veteran who joined in 1997 as an analyst and earned her spurs as a portfolio manager when teaming up with her mentor, Tom Luddy. The duo first ran a sleeve of the long-only strategy JPMorgan US Equity since 2001 and managed together this 130/30 strategy since its launch. Luddy stepped down from portfolio management at the end of 2017. Bao retained a smaller sleeve on the long-only fund to ultimately hand it over to Scott Davis as the multi-sleeve approach was abandoned in 2020.

On this strategy, Luddy was succeeded by Steven Lee, who had been managing JPMorgan Research Market Neutral, the firm's long-short strategy, which serves as the blueprint for this strategy’s 30/30 extension. Although the partnership of Bao and Lee is still relatively new, the managers have collaborated well, and they have demonstrated their ability to generate alpha from both long and short ideas provided by the analyst team. This sizable career analyst team is instrumental to the strategy’s success and gives it ample resources to conduct in-depth fundamental research.

The strategy looks sensible and is designed to fully exploit the analyst recommendations by taking long positions in top-ranked companies while shorting stocks disliked by the analysts. Classic fundamental bottom-up research should give the fund an informational advantage. The portfolio is quite diversified, holding 250-350 stocks in total with modest deviations from the category index in the long leg which has become more focused over the 12 months ending December 2022. The 30/30 extension is broadly sector-, style-, and beta-neutral. Here the managers are cognizant of the risks of shorting stocks, where they select stocks on company-specific grounds or as part of a secular theme. Short exposure generally stands at 20%-30%, with the portfolio's net exposure to the market kept at 100%.

The strategy’s performance since inception, which still has some relevance given Bao’s involvement, has been outstanding, beating the Morningstar Category average and Russell 1000 Index over various time horizons. Although that inspires some confidence, we put more weight on the track record since Steven Lee joined. It is reassuring that the managers have generally performed well, beating both yardsticks and with solid contributions from both long and short positions, particularly in 2020 and 2021.

The ability to leverage the analysts’ insights through both long and short positions makes it distinctive, though conservative active bets make us somewhat cautious regarding its alpha potential. The Process rating is Average.

Research analysts conduct fundamental research according to the strategic classification framework and classify companies as Premium, Quality, Trading or Structurally Challenged, based on their economics, duration of value creation and corporate governance. Companies belonging to the first two groups are favoured in the long sleeve of the portfolio, whereas the latter bucket is sourced to identify shorting candidates. This is followed by 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 benchmark-aware and diversified long-only leg of this strategy 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. The duo can also select longs and shorts based on secular themes. They remain cognizant of timing, sizing, and volatility risks when shorting stocks, therefore using a broad array of small positions, which lifts the overall portfolio’s number of holdings to 250-350. Short exposure generally stands at 20%-30%, with the portfolio's net exposure to the market kept at 100%. The U.S.-domiciled fund can short stocks directly, while the offshore vehicle uses derivatives. The portfolios are quite similar, though the offshore fund’s Article 8 SFDR-classification means that it excludes some stocks for sustainability reasons.

Although the managers have intentionally increased the portfolio’s concentration a bit over the 12 months ending December 2022, it remains a well-diversified and benchmark-aware portfolio. The number of long positions in the portfolio declined in that period from 165 to 136 as the team sold smaller positions and increased the active weights for some higher conviction positions including Mastercard where the active position increased by roughly 100 basis points to 250 basis points. Despite that, active weights typically don’t exceed 200 basis points and the strategy’s active share versus the Russell 1000 index is just shy of 60%, which is fairly conservative versus category peers. Where concentration has modestly risen in the long leg of the portfolio, the shorts remain very diversified. While the US-domiciled vehicle invests in several defence companies like Raytheon Technologies and Northrop Grumman, companies that generate more than 10% of their revenue from the production of conventional weapons are excluded from the investable universe for the Luxembourg-domiciled vehicle and cannot be shorted either. Per end December 2022 the portfolio’s largest overweight is within pharma and medtech companies where the duo finds many attractively valued defensive companies where AbbVie is their highest conviction position. The managers continue to see secular tailwinds for the semiconductor sector and added ASML to the portfolio, but they became more conservative and concentrated their semiconductor positions to those with exposure to industrials and the auto sector. The reopening of China made the managers unwind the short on Starbucks, while they also added to Nike and Estee Lauder.

The strategy earns a People pillar rating of Above Average.

Susan Bao is an experienced and long-tenured manager on this strategy and is well-versed in the firm’s hallmark investment process. She joined JP Morgan in 1997 and started managing money in 2001 on the firm’s long-only strategy, JPMorgan US Equity, where she ran a 50% sleeve with her mentor Tom Luddy. When Luddy stepped down from his portfolio manager roles at the end of 2017, Bao retained a 10% sleeve in the long-only fund until it abandoned its multisleeve approach in 2020. Bao and Luddy have also managed this 130/30 strategy together since the start of the U.S.-domiciled vehicle in 2005 and since 2007 on its offshore counterpart. Bao has a good grasp of the companies she’s investing in and those that she considers to be interesting candidates to sell short.

Steven Lee succeeded Luddy in 2018. Lee brings close to three decades of experience, but most of it was gained as an analyst. Since 2014, he has managed JPMorgan Research Market Neutral, the firm's long-short strategy, which serves as the blueprint for this strategy’s 30/30 extension. Laura Huang, a former analyst who joined the portfolio management team in 2017, has become a more important sparring partner over time. She collaborates with Bao on a concentrated long-only version of the strategy that’s run as a separate mandate, while also supporting Lee on his long-short strategy. Although portfolio management is collegial, Bao concentrates on consumer, financials, and healthcare, while Lee is the lead for industrial/commodities, technology, and utilities/telecom. While their collaboration is still relatively short, it has already proved fruitful, and the managers have demonstrated their ability to generate alpha from both long and short ideas provided by the analyst team. This sector analyst team encompasses more than 20 career analysts and boasts about 20 years of industry experience on average. Despite regular personnel turnover it remains a key success factor and gives the strategy impressive firepower to conduct fundamental research.

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.

Both the US-and Luxembourg-domiciled funds rank comfortably in the top-quartile of their respective Morningstar categories over the trailing three-, five-, 10-, and 15-years ending December 2022. With the departure of Tom Luddy and the arrival of long-short specialist Steven Lee, the strategy’s record since 2018 is more relevant. Encouragingly, thanks to effective stock selection the vehicles have been able to generate a positive alpha versus the Russell 1000 Morningstar Category Index. Stock picking was exceptionally strong during the coronavirus pandemic period, both in the long leg of the portfolio and in the 30/30 extension. In 2020, the security selection within semiconductors and hardware proved to be very effective, but also within financials the team’s stock picks added value. On the stock level, the overweight positions in PayPal, Amazon.com, and Morgan Stanley boosted returns. In 2021, positions in semiconductors, banks, and energy drove performance. Diamondback Energy and Alphabet were key contributors in that year. The macro-influenced year of 2022 proved to be a more challenging period for the strategy. Positive sector allocation largely compensated for weaker stock selection results.

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.