Greater confidence in the investment process of the JPMorgan US Select Equity strategy (which includes the U.S. mutual fund, U.K., and Luxembourg vehicles) leads to a Morningstar Analyst Rating upgrade to Silver from Bronze or to Bronze from Neutral, depending on share class fees. The most expensive share classes remain Neutral.
J.P. Morgan handed manager Scott Davis the keys to this strategy in 2019 for European vehicles and in February 2020 for the U.S. mutual fund, and it has been a good decision thus far. Rather than maintain the previous multimanager structure, the firm consolidated the assets to be steered solely by Davis, who had been the top-performing sleeve manager. But performance wasn’t the whole story, as Davis’ investment style warranted a broader platform to shine. Cultivated over his roughly eight years as a manager, his process is rooted in a close collaboration with sector-focused equity analysts, a more concentrated portfolio than before, and keen attention to overall portfolio risk exposures relative to the S&P 500 benchmark. The results have not only been strong but also consistent with his stated goals of generating alpha through stock selection and keeping tracking error (volatility relative to the S&P 500) within a reasonable range.
Davis’ investment process is a blend of art and science, and its underlying pillars of conviction and creative portfolio positioning can be relied upon. A challenge for a large-blend fund is that it needs to be different enough from the benchmark to outperform net of fees, but without getting burned when an index constituent (particularly a larger one) that the fund doesn’t own outperforms. Davis accounts for this by holding a concentrated selection of analysts’ top ideas while solving for a way to balance the portfolio’s factor exposures and market risks. For instance, as of September 2022, the portfolio maintained an underweighting to the benchmark’s largest holding, Apple AAPL, yet Davis controlled for this by investing in Teradyne TER, a supplier to Apple, which had a more favorable analyst ranking. Such moves apply at the sector level, too: In an effort to mitigate the portfolio’s exposure to interest-rate movements, Davis offset an overweighting to bank stocks heading in 2022 with a larger stake in utilities stocks.
Davis relies heavily on J.P. Morgan’s core research team of 20-plus analysts with over a decade of experience on average, a more formidable resource than many competing shops can trot out. Analysts now have a portion of their compensation tied to this offering, which further helps align incentives.
Few active offerings have been able to outpace passive benchmarks in the large-blend Morningstar Category. This strategy offers a better shot than most to buck the trend.