JPMorgan US Large Cap Core Plus R2 JLPZX

A growing conviction in the duo that manages JPMorgan U.S. Large Cap Core Plus and its Luxembourg-domiciled sibling JPM U.S. Select Equity Plus, and the vast resources the duo has effectively utilised, recently led to an upgrade of the strategy’s People Pillar rating to Above Average from Average. However, once fees are factored in, our alpha expectations remain modest. Three of the six U.S. mutual fund share classes and only the offshore fund’s cheapest shares receive a Morningstar Analyst Rating upgrade to Bronze from Neutral. All others earn Neutral. Previously, an error in the calculation of the prospectus adjusted expense ratio for the U.S. mutual fund share classes led to Neutral ratings for all six share classes.

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 multisleeve approach was abandoned in 2020.

On this strategy, Luddy was succeeded by Steven Lee, who had been managing the analyst-driven JPMorgan US Research Enhanced Equity since 2014. That strategy’s portfolio serves as a 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. 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. For example, the team prefers semiconductors, digital advertising, and e-commerce offset by shorts in legacy hardware, media, and network providers. 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. That said, higher fees do hinder the strategy’s alpha potential in the highly competitive U.S. equity market.

The strategy rests on a solid philosophy and a clearly designed and consistently applied bottom-up process. The ability to leverage the analysts’ insights through both long and short positions makes it distinctive, though small active bets make us somewhat cautious regarding its alpha potential. The Process rating is 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 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 select longs and shorts based on secular themes, for example owning semiconductors, digital advertising, and e-commerce, offset by shorts in legacy hardware, media, and network providers. The duo is 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.

This benchmark-aware and highly diversified fund held 289 stock positions per end of November 2021, of which 124 are shorts. The long leg of the fund is conservatively managed, with modest bets versus the Russell 1000 Index and an active share of 55%-60%. NXP Semiconductors, Alphabet, and Amazon.com were the largest active positions in the portfolio, with an overweight of around 200 basis points. Rivian was bought in 2021 for risk-management considerations to offset the underweight of Tesla, which the managers never held. Most stocks that are sold short in the 30/30 extension carry a weight of less than 25 basis points. The team has a short position twice that size in Moderna, because it thinks the market is too optimistic about the company's pipeline potential beyond its coronavirus vaccine. Pfizer is also among the shorts, as the duo believes that the windfall from its COVID-19 vaccine is temporary and, while this could allow the company to acquire promising business, it still faces a patent cliff in the coming years. In the healthcare sector, the managers prefer Eli Lily, Bristol-Myers Squibb, and AbbVie. The portfolio is exposed to several secular themes in the 30/30 extension, for example being long in travel and payment stocks like Booking, Lyft, and Mastercard, while holding short positions in consumer staples and brick-and-mortar companies like General Mills, Kellogg, and Macy’s.

Growing confidence in the two experienced portfolio managers and the large and seasoned analyst team supporting them leads to an upgrade of the People Pillar rating to Above Average from 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. 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 US Research Enhanced Equity, the firm's analyst-driven long-short strategy, which serves as the blueprint for this strategy’s 30/30 extension. 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 of 25, which boasts about 20 years of industry experience on average, remains a key success factor and gives the strategy impressive firepower to conduct fundamental research.

A well-resourced, thoughtful, and disciplined steward of client assets, JPMorgan Asset Management maintains an Above Average Parent rating.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various cohorts globally and a diverse set of 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.

JPMorgan US Large Cap Core Plus is among the best performers in its Morningstar Category, and alpha generation versus the Russell 1000 category index has been encouraging, too. Over the past three, five, and 10 years and since its inception in 2005 through the end of 2021, the strategy has achieved a top-decile position within the Morningstar Category of U.S. large blend, as measured by the R6 share class. It has beaten 99% of the competition over the past decade, outperforming the typical rival by roughly 200 basis points. It also outperformed the Russell 1000 Index on a total return and alpha basis since inception and over shorter time horizons. Since Susan Bao and Steven Lee have comanaged the strategy, a more relevant period to consider, the strategy also outperformed its average peer and the index. However, results were a bit mixed during that period, with a disappointing performance in 2018 offset by successful stock-picking predominantly in 2020 and 2021. The strategy had a good year in 2021, as stock selection in the long-leg and in the market-neutral component contributed positively. Positions in semiconductors, banks, and energy helped.

There was insufficient cost data available for this investment at time of publication.