JPMorgan U.S. GARP Equity I JPGSX

JPMorgan U.S. GARP Equity continues to come with some open questions that limit its appeal.

Manager Andrew Stern has only led this strategy since May 2021, but he is no stranger to the team and the approach. Stern took over following the departure of longtime manager Jason Alonzo, but Stern had served as an analyst here for more than a decade, as well as a comanager since 2019. He works alongside manager Wonseok Choi, who leads the quant group's efforts. But they have had to navigate a handful of departures in recent years, including Alonzo. More recently in May 2023, quant comanager Jonathan Tse left the strategy, though he remains with the firm. In November 2023, fundamental analyst Grace Liu and quant analyst Ellen Sun were promoted to comanagers. The moves help solidify the team, but the pattern of turnover is still a concern.

This strategy combines quantitative and fundamental elements to try to outperform the Russell 1000 Growth Index; it is sensible and repeatable, but not very distinctive. It starts with a quantitative model screening the U.S. large- and mid-cap universe for stocks displaying the best combination of value, quality, and momentum characteristics. It will look at some traditional metrics such as price ratios for valuation, but it also includes many advanced features such as natural language processing that analyzes earnings call transcripts for possible indications about quality and momentum. While many quant strategies use similar characteristics, the model also draws upon insights from J.P. Morgan’s core research team, such as its earnings and cash flow estimates. Finally, Stern and his fundamental team review the model to ensure its accuracy and can adjust the model's inputs to reflect one-time items or other material events.

The fund's performance in 2019 and 2020 struggled, but it has improved lately. In those earlier years, the fund's shift toward value stocks (relative to most large-growth funds) backfired as growth stocks led the way. But in the three years through October 2023, the institutional shares' 10.3% annualized return ranks in the top decile of all large-growth Morningstar Category peers. Sticking to its principles paid off, as Morningstar’s risk attribution showed that the strategy's value exposure was one of the main contributors to its recent success.

The managers' model screens for value, quality, and momentum traits using both traditional and nontraditional methods. Some of the more routine criteria include price multiples to assess value, the level of cash flow relative to earnings to assess quality, and trends in short interest for momentum. But these traditional metrics have become a smaller part of the model over the years, as the team continues to add new features. For instance, the firm developed a natural language processing algorithm to scrape insights from earnings call transcripts to assess momentum. Another component uses that same data set for clues on quality looking at management's tone and language.

While these factors are widely used by so-called strategic-beta exchange-traded funds and other quant managers, the team attempts to get an edge with fundamental analysis. The model will draw upon insights from J.P. Morgan's core research team, such as their earnings and cash flow estimates. The model uses the updated numbers to select stocks and calibrate their weightings in the portfolio. The managers can also adjust the portfolio's exposure to any of the three factors based on rules flagged by the model. Typically, these top-down adjustments are made during periods of market stress when there is greater dispersion between factor returns.

This strategy typically holds 80-120 stocks, much fewer than the Russell 1000 Growth Index’s 400-plus, but it has become more concentrated over time along with its benchmark. The portfolio's top 10 stocks held 47% of assets as of September 2023, up from around 35% for most of 2019. While that's a high mark, it was still less than the Russell 1000 Growth Index’s 51%. The ascension of mega-caps such as Microsoft MSFT, Apple AAPL, Amazon.com AMZN, and Nvidia NVDA (the portfolio’s four largest holdings) has defined the large-growth universe, and in turn, this strategy. Still, the strategy maintains some differentiation, even when it comes to these highly influential stocks. The strategy was underweight these high-growth mega-caps in recent years in favor of smaller companies with lower price multiples; however, that decision proved costly as mega-caps continued to outperform the broader market.

The strategy’s focus on GARP, or growth at a reasonable price is apparent. The portfolio’s price multiples, such as average price/earnings, price/book, and price/cash flow were all noticeably lower than the index's in September 2023. The model that underpins this strategy also screens toward quality and momentum, but these factor tilts are not always as noticeable. Still, Morningstar's risk model showed very minor tilts toward quality and momentum in September.

Lead manager Andrew Stern has only led this strategy since May 2021, but he is quite familiar with the team and the process. Stern began as an analyst on this team in 2011 before being promoted to comanager in November 2019. He stepped up to lead manager following the departure of longtime manager Jason Alonzo. Stern works closely with comanager Wonseok Choi, who leads the team's quant efforts and oversees the development and analysis of the model that underpins the strategy. The managers are backed by recently promoted fundamental comanager Grace Liu and quant comanager Ellen Sun.

At the end of 2019, Hamilton Reiner took over as the head of J.P. Morgan's structured equity department and encouraged increased interactions between Stern's team and the firm's broader resources. An analyst from the firm’s equity data science division, who helped develop some of the factors used here, is now embedded with Stern and his team. Most importantly, the group has also increased its interactions with J.P. Morgan's core research team, which effectively covers the large-cap universe.

Despite all these resources, the team has had to navigate several departures. In addition to Alonzo's departure, the team lost two fundamental analysts in 2019. On the quant side, the group lost two analysts in 2022 and another one two years prior. Furthermore, quant comanager Jonathan Tse left the strategy in May 2023, though he remains with J.P. Morgan.

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.

From his start through October 2023, the institutional shares' 12.3% annualized return beat the average large-growth Morningstar Category peer's 9.1% return but still lagged the index’s 13.5% gain.

While Stern has only managed this strategy for a few years, the quant model that drives this strategy has been in place much longer. From November 2005 when previous manager Jason Alonzo came aboard through October 2023, the strategy's 10.3% annualized return still lagged the index by 1.0 percentage points. Over this stretch, the strategy's underperformance was fairly consistent, lagging the index in 154 of the 181 rolling three-year periods, or roughly 85% of the time.

The fund had a rough stretch in 2019 and 2020. That largely stemmed from a heavier bet on value stocks (relative to most large-growth funds), which backfired as growth stocks led the way. But that value exposure has buoyed performance more recently, particularly in 2022, when growth fare sold off sharply. In the first 10 months of 2023, the strategy's 22.9% return slightly lagged the index's 23.2% gain. The strategy's value and momentum tilt provided a small boost, but its underweighting in Nvidia NVDA has been a major headwind.

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.