JPMorgan Mid Cap Growth R2 JMGZX

JPMorgan Mid Cap Growth will have a new lead manager in early 2024, but there is enough continuity and research support to make the offering worthwhile at the right price.

J.P. Morgan gave investors and this strategy’s investment team plenty of notice when it announced lead manager Tim Parton’s retirement in 2022. Parton will step off his charges on multiple strategies in early 2024, making way for his longtime partner Felise Agranoff. Agranoff has comanaged this fund since year-end 2015 and has over a decade of experience as an analyst prior to that promotion. She’ll be the sole decision-maker but will get help from Daniel Bloomgarden, who was an analyst for seven years on the strategy before being named comanager in July 2022.

A long lead time and deep familiarity with the strategy’s style, holdings, and personnel should ensure a smooth transition, though it remains to be seen whether the investment process will evolve at all. Indications are that Agranoff and Parton have many commonalities in terms of their view on markets and style of analysis, but it is possible that some changes will emerge. The strategy’s existing process has deftly balanced risk management with alpha opportunities. It has one of the lowest active share marks within the mid-growth Morningstar Category, meaning that its portfolio is less differentiated from the benchmark than peers. Agranoff cites that the team has been cautious when it comes to bet sizes versus the Russell Midcap Growth Index because they’d like to avoid big stakes in fast-growing stocks with volatile share prices. However, the portfolio’s performance has still stood out from the benchmark, as evidenced by a tracking error of around 3%-4%, a reasonable figure for an active strategy. It remains to be seen how the investment process will evolve under new leadership, and whether it can be as effective using a somewhat unorthodox approach.

The fund’s I shares are holding their own through the first seven months of 2023, landing in the second quartile of peers. Long-term performance remains quite strong. While there are some doubts about its future, this fund should still offer a decent shot to outperform.

Under lead manager Tim Parton, this fund has skillfully weaved its way around a growth-stock bubble while maintaining just enough differentiation from the benchmark for performance to stand out net of fees. The approach is a bit unorthodox as the portfolio has become defined by the benchmark and is less differentiated than almost any other rival offering. While it used to be bolder, poor performance in 2016 led to a more conservative approach to position sizing. Since then, the tail of the portfolio has grown, giving Parton and Agranoff more cushion to keep investing in fast-growing stocks while balancing risk. The volatility of the fund has come down since the implementation of these changes, but performance has remained fairly strong. While results have been encouraging, the strategy benefited from a steady hand to guide it, and new lead manager Felise Agranoff isn’t as proven as her predecessor. She may yet apply her own changes, though she’s pledged consistency.

The core of the process will remain intact. The team looks for stocks with underappreciated growth prospects believed to have some form of enduring advantage. Some holdings can be fast growers, while others steadier businesses, though the former has historically been the focus. The team likes to initiate positions in stocks with fundamentals inflecting higher, which leads to a positive momentum tilt.

This portfolio of 90-130 stocks is well diversified and tends to roughly mirror the composition of its Russell Midcap Growth Index benchmark. As expected for a growth strategy, most of the assets tend to be invested in the technology, healthcare, and consumer discretionary sectors. However, there is some differentiation. The portfolio has maintained an overweighting in financials stocks since 2016 and is usually overweight in industrials. Investors shouldn’t expect much in the real estate, utilities, or consumer staples sectors.

The dispersion of stock weightings in the portfolio is relatively flat. The largest positions at any given time tend to be around 2%-3% of assets, while the average weighting comes in around 1%.

The managers’ attention to the benchmark keeps the portfolio anchored in the mid-growth section of the Morningstar Style Box. Cash usually runs below 2% of assets.

A preference, on balance, for fast-growing companies typically skews the fund away from entrenched businesses with established profits and toward those looking to take share from incumbents or blaze their own trail. Portfolio-level measures of profitability tend to run below the benchmark, while measures of expected and trailing growth tend to run higher.

The strategy earns an Above Average People rating.

Having spent the vast majority of her 19 years at J.P. Morgan on this team as an analyst and then comanager, Agranoff is an unsurprising successor. She’s been mentored by Parton over her career and has done the same for others. While Parton has maintained final say on portfolio decisions, Agranoff has been a key collaborator and wielded particular authority in financials and industrials stocks (her sectors of expertise.)

Agranoff and newly named comanager Daniel Bloomgarden oversee an experienced seven-member analyst team averaging 16 years in the industry. While adequately staffed, the team lost a senior technology analyst in 2019 and a second tech analyst in 2021. Tech has been an area of strength historically, so the departures are important, though the firm addressed its need when it hired Eric Ghernati in early 2020 to assume the lead position. Healthcare, the second-largest sector in the mid-cap growth universe next to tech, is on steady footing behind analyst Matt Cohen, who has worked on the team for 18 years.

The group does most of the heavy lifting but can also lean on J.P. Morgan's central research analyst team.

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.

The fund endured greater volatility to achieve those results, but it still had an edge on a risk-adjusted basis. Its Sharpe ratio, for example, came in just ahead of its bogy's over the same period.

The fund's momentum bias helped produce particularly strong performance from 2017 through 2020 as the market rewarded high-multiple stocks with lofty expectations for future growth. Top picks over this period include electric automaker Telsa TSLA, software company Veeva Systems VEEV, and generator company Generac Holdings GNRC.

However, what differentiated this fund is that it captured much of the growth bull market’s upside but missed some of the downside. Parton became bearish on tech valuations following 2020’s runup and reduced exposure to fast-growing companies with lofty expectations. Such positioning was prescient, as the fund had a decent showing in 2021 and 2022 after stellar results in 2019 and 2020.

The first seven months of 2023 are off to a lukewarm start, though perhaps better than they otherwise would have been had Parton and Felise Agranoff not increased exposure to higher-growth stocks early in the year.

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 Medalist Rating of Neutral.