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JPMorgan Small Cap Equity C JSECX

Medalist Rating as of | See JPMorgan Investment Hub
  • NAV / 1-Day Return 22.46  /  +0.58 %
  • Total Assets 4.6 Bil
  • Adj. Expense Ratio
    1.750%
  • Expense Ratio 1.750%
  • Distribution Fee Level Low
  • Share Class Type Level Load
  • Category Small Blend
  • Investment Style Small Growth
  • Min. Initial Investment 1,000
  • Status Open
  • TTM Yield 1.08%
  • Turnover 22%

USD | NAV as of Apr 20, 2024 | 1-Day Return as of Apr 20, 2024, 12:09 AM GMT+0

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Morningstar’s Analysis JSECX

Medalist rating as of .

A solid approach and a veteran team.

Our research team assigns Bronze ratings to strategies they’re confident will outperform a relevant index, or most peers, over a market cycle on a risk-adjusted basis.

A solid approach and a veteran team.

Associate Analyst Tony Thorn

Tony Thorn

Associate Analyst

Summary

JPMorgan Small Cap Equity’s proven and stable team applies a methodical approach centered on quality. The fund's four cheapest share classes earn a Morningstar Medalist Rating of Silver, while the four more expensive ones earn Bronze.

Managers Don San Jose and Dan Percella lead a small but capable team of three analysts. San Jose started on the strategy as an analyst in 2004 before becoming a comanager in 2007 and then taking over lead responsibilities in 2013. Percella has been by his side for much of that time, being on the small-cap team since 2008 and getting promoted to comanager in 2014. In addition to their core group of five, they also occasionally collaborate with other J.P. Morgan Asset Management analysts. Overall, San Jose, Percella, and their team have proved their worth over the years with strong stock picks, producing stellar risk-adjusted returns at this strategy.

The team’s consistent investment approach is key to this success. It focuses on companies operating in narrow niches that can leverage their competitive positioning to protect and grow their returns on capital at rates higher than the market foresees. These traits, along with a preference for earnings and free cash flow over top-line revenue growth, lead them to steadier business models. The focus of their approach also helps the relatively small team navigate the expansive small-cap universe.

This approach has produced stellar results. Since San Jose was appointed comanager in November 2007 through May 2023, the institutional shares’ 8.9% annualized return beat the fund's Russell 2000 Index prospectus benchmark by 2.3 percentage points. The fund’s outperformance has been consistent, but it particularly shines when markets decline, including during last year’s pullback.

After being closed to new investors for nearly six years, the strategy reopened in October 2022. The team has shown prudent capacity management in the past, not being afraid to close after surges of inflows. While the strategy is still fairly large for a small-cap fund (roughly $7.5 billion in assets as of March 2023), it has performed well at even higher levels in the past.

Rated on Published on

The team’s consistent and disciplined execution of its quality-oriented process earns an Above Average Process rating.

Associate Analyst Tony Thorn

Tony Thorn

Associate Analyst

Process

Above Average

The process here is all about finding great businesses priced as merely good ones. Managers Don San Jose and Dan Percella scour the small-cap universe for best-in-class companies with consistently high levels of profitability and management teams that have proved to be efficient capital allocators. They focus on companies operating in narrow niches that can leverage their competitive positioning to protect and grow their returns on capital at rates higher than the market foresees. These traits, along with a preference for earnings and free cash flow over top-line revenue growth, lead them to firms with steadier business models.

The team analyzes firms’ growth potential on a three- to five-year basis, but its view on margins tends to be the key differentiator. The team will happily own a company growing at a modest rate if it can expand its margins over time to produce strong earnings and cash flow that the market will reward. The managers build out new positions gradually, looking for validation of their investment thesis.

The managers trim holdings as they appreciate—few climb above 2.0% of assets—but tolerate higher valuations as long as their theses remain intact. They’ll hold onto their winners but will start to sell them once they hit the $10 billion market-cap range.

Despite its small-cap moniker, the portfolio contains both small- and mid-cap stocks. Its average market cap as of April 2023 was roughly $4.4 billion, nearly double its Russell 2000 Index prospectus benchmark’s $2.3 billion but slightly below the Russell 2500 Index’s $4.6 billion. The managers’ preference for riding their best-performing stocks contributes to this skew, but they are cognizant not to drift too far off course. Recent sales to preserve the strategy’s small-cap profile include longtime holdings Aspen Technology AXPN, First Horizon FHN, and Molina Healthcare MOH, all of which grew into mid-caps.

The portfolio’s focus on quality is consistent. It scores higher than the Russell 2000 Index on metrics such as return on assets, return on equity, and free-cash-flow yield. Trailing earnings- and revenue-growth rates are a touch lower on average, but that’s consistent with the managers’ preference for profitability over sales growth.

The strategy typically invests across all sectors, but the team sold its small group of energy stocks in 2020 as the pandemic highlighted the difficulties in forecasting commodity-driven businesses. Lead manager Don San Jose believes his team’s efforts are better spent on sectors with secular growth drivers and will likely steer clear of energy until such companies’ management teams can consistently prove to be more judicious in their capital spending and production goals. However, he did buy a small stake in natural gas pipeline operator DT Midstream DTM in early 2023 to get energy exposure through a company he thinks is less tied to commodity prices than most.

Rated on Published on

A small but proven team earns an Above Average People rating.

Associate Analyst Tony Thorn

Tony Thorn

Associate Analyst

People

Above Average

Managers Don San Jose and Dan Percella have built impressive records. After joining J.P. Morgan in 2000, San Jose became a comanager on this strategy in 2007 and took over lead responsibilities in February 2013. Percella joined him at the helm in January 2014, after serving on the small-cap core team since 2008. The pair also comanages JPMorgan SMID Cap Equity WOOSX, which has the same investment process but targets slightly larger firms (by market cap).

The managers primarily work with a team of three analysts. Two of them—Jon Brachle and Chris Carter—have been on the team since 2015 and have more than 15 years of industry experience apiece. Newest analyst Jesse Huang started working with group in a junior role in 2018 but was recently promoted to analyst. The team sometimes collaborates with other J.P. Morgan Asset Management analysts but largely works independently.

One minor concern is that San Jose and Percella have increased their workload in recent years. In October 2021, San Jose took over as CIO of J.P. Morgan’s Value Equity Division, while Percella was appointed comanager on large-cap offering JPM America Equity in August 2022. That strategy is quite different from this one, but Percella has much less responsibility there. Currently, these workload concerns are not overbearing but worth monitoring.

Rated on Published on

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

Associate Director Emory Zink

Emory Zink

Associate Director

Parent

Above Average

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.

Rated on Published on

Manager Don San Jose has built a stellar record.

Associate Analyst Tony Thorn

Tony Thorn

Associate Analyst

Performance

Since his appointment to manager in November 2007 through May 2023, the Institutional shares’ 8.9% annualized return beat the fund's typical small-blend Morningstar Category peer’s 6.1% and its Russell 2000 Index prospectus benchmark’s 6.6% gain. It also beat the 7.5% return of the Russell 2500 Index, a relevant bogy given the fund’s large average market cap. His record since taking over as lead manager in 2013 is equally impressive.

The strategy’s outperformance has been consistent. Of the 152 rolling three-year periods since November 2007, the strategy topped its benchmark in 139 (or 91%) of them. Since the start of 2008, the strategy has beaten its benchmark in all but three calendar years and ranked in the category’s top third in nine of those 15 years.

The strategy’s defensive tilt helps it shine in most market selloffs. For example, it excelled in the 2008 global financial crisis, the 2011 euro crisis, and late 2018’s pullback. During 2022’s market drawdown, the strategy’s 16.1% drop still beat the index by 4.3 percentage points, but it could have fared even better. The fund did not own any names in the surging energy sector in 2022, a large underweighting compared with the Russell 2000 Index’s 5%-8% energy exposure. Fortunately, the overall portfolio’s quality and defensive nature along with solid picks in industrials and healthcare still propelled the fund to outperform on a relative basis during the year.

Published on

It’s critical to evaluate expenses, as they come directly out of returns.

Associate Analyst Tony Thorn

Tony Thorn

Associate Analyst

Price

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Bronze.

Published on

Portfolio Holdings JSECX

  • Current Portfolio Date
  • Equity Holdings
  • Bond Holdings
  • Other Holdings
  • % Assets in Top 10 Holdings 15.7
Top 10 Holdings
% Portfolio Weight
Market Value USD
Sector

JPMorgan Prime Money Market Inst

2.72 132.1 Mil
Cash and Equivalents

MSA Safety Inc

1.74 84.8 Mil
Industrials

Performance Food Group Co

1.73 84.1 Mil
Consumer Defensive

WillScot Mobile Mini Holdings Corp

1.71 83.3 Mil
Industrials

Novanta Inc

1.53 74.3 Mil
Technology

MACOM Technology Solutions Holdings Inc

1.52 74.0 Mil
Technology

Simpson Manufacturing Co Inc

1.52 73.7 Mil
Basic Materials

BJ's Wholesale Club Holdings Inc

1.50 73.1 Mil
Consumer Defensive

Casella Waste Systems Inc Class A

1.50 72.9 Mil
Industrials

Encompass Health Corp

1.48 71.9 Mil
Healthcare