JPMorgan US Equity R2 JUEZX

This strategy’s successful lead manager and deep supporting analyst team are enough to earn cheaper share classes of JPMorgan US Equity and its Luxembourg and U.K. clones a Morningstar Analyst Rating of Bronze, while more expensive ones receive Neutral.

Lead manager Scott Davis is up to this strategy’s challenging task of topping its S&P 500 prospectus benchmark. Davis has put up solid results while managing a portion of this formerly multisleeve strategy since 2014 and also in a separate account version dating to 2013. J.P. Morgan gave Davis full control of the Luxembourg- and U.K.-domiciled funds in mid-2019 and the U.S. mutual fund in February 2020 to put its top-performing manager in charge and to simplify the process, ensuring that a single stream of thought guides the portfolio. Davis retains final say despite the November 2021 addition of his first dedicated partner, comanager Shilpee Raina. The additional support may help him cover more ground with the firm’s 20-plus-member analyst roster.

Davis takes pride in his close work with analysts, though a clear edge to the process isn’t yet apparent in a limited sample under his sole watch. J.P. Morgan’s experienced core research team supplies Davis with top picks in their respective industries. Davis maintains a relatively concentrated portfolio of 50-60 stocks but seeks to minimize the magnitude of sector or factor bets. For example, while the portfolio had a minuscule stake in energy companies for much of 2020 because of Davis’ concerns about their competitive environment, he elected to increase the portfolio’s weighting in financials stocks, which were similarly trading cheaply, to ensure that its exposure to cyclical companies wasn’t too light. That decision paid off as value-oriented stocks rebounded late in 2020 and into 2021. He also tends to add and trim positions aggressively as their calculated upside ebbs and flows, a tendency that benefits when stock prices mean revert. While Davis’ artful approach has some appeal, it may not be easily repeatable and has yet to be battle-tested more broadly.

Through the first 11 months of 2021, the U.S.-based R6 shares placed in the top quartile of large-blend Morningstar Category peers, following a similar top-quartile result in 2020. While its long-term track record is quite strong relative to rivals, beating its S&P 500 benchmark has been a tougher task, though it came ahead of it over the trailing five- and 10-year periods ended November 2021 thanks to its strong recent results. Whether or not it can repeat the feat will depend on Davis’ ability to consistently find ways to add value through stock selection and portfolio positioning.

This strategy sports an improved design, but it is not clear that it offers an advantage behind clear and repeatable parameters, resulting in an Average Process Rating.

Lead manager Scott Davis now steers this strategy, which formerly spread its assets across two additional sleeves overseen by other portfolio managers. The new structure reduces redundancies in trading and positioning, allowing a single stream of thought to guide the portfolio’s construction.

While the decision-making framework is different, the core analytical process remains similar. Analysts rank stocks within each sector, assessing current prices relative to expected future dividends or free cash flow, dividing their forecast horizon into three stages of growth. Davis focuses particularly on assumptions around a company’s long-term rate of growth, which drives the bulk of a stock’s present value. He believes that competitively advantaged companies should not be confined to GDP-like terminal growth rates, while questioning whether secularly challenged businesses should receive an average long-term outlook.

Davis maintains a relatively concentrated portfolio of 50-60 stocks but seeks to minimize the magnitude of sector or factor bets. He also tends to add and trim positions aggressively as they become more or less attractive according to analyst models, a tendency that benefits when stock prices mean revert. While Davis’ artful approach has some appeal, it doesn’t have a discernable edge relative to its competition.

Deep analyst resources and a capable manager warrant an Above Average People rating.

This strategy continues to rely heavily on J.P. Morgan’s core research team, but it is now led exclusively by Scott Davis, who oversaw the strongest-performing sleeve of this formerly multimanaged offering. Davis became a named manager in August 2014, inheriting a 10% slice of the strategy, but quickly saw his share grow, most notably after manager Thomas Luddy stepped down at the end of 2017. Before being awarded full control here, Davis managed 65% of the fund to go along with comanager Susan Bao’s 10%, and an analyst-directed sleeve representing 25%. Davis’ track record extends a bit beyond his listed start, as his first management role came on an institutional separate account version of the strategy. His track record there surpassed the S&P 500 index in nearly 70% of rolling one-year periods gross of fees, posting the best performance among the sleeves.

Davis continues to leverage the ideas of J.P. Morgan’s core research team, which consists of 23 analysts with extensive industry experience. He now has additional support from Shilpee Raina, a former analyst on Gold-rated JP Morgan Equity Income, who became a named comanager in November 2021. Raina has a generalist background but most recently specialized in consumer stocks, an area the team could use additional support in after parting ways with a pair of underperforming analysts.

J.P. Morgan Asset Management’s strong investment culture, which shows through its long-tenured, well-aligned portfolio managers and deep analytical resources, supports a renewed Above Average Parent rating.

Across asset classes and regions, the firm's diverse lineup features many Morningstar Medalists, such as its highly regarded U.S. equity income strategy that’s available globally. There's been some turnover in the multi-asset team recently, but it remains deeply resourced and experienced. Manager retention and tenure rates, and degree of alignment for U.S. mutual funds compare favorably among the competition. Managers' compensation emphasizes fund ownership over stock ownership, which is distinctive for a public company.

The firm continues to streamline its lineup and integrate its resources further. For instance, in late 2019, the multi-asset solutions division combined with the passive capabilities. The firm hasn’t launched trendy offerings as it’s mostly expanded its passive business lately, but acquisition-related redundancies and more hazardous launches in the past weigh on its success ratio, which measures the percentage of funds that have both survived and outperformed peers. Fees are regularly reviewed downward globally; they're relatively cheaper in the U.S. than abroad. Also, the firm is building its ESG capabilities and supports distinctive initiatives on diversity.

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s second-costliest quintile. That’s poor, and based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral.

It has been difficult for many large-cap blend active managers to beat their benchmarks, but this strategy has held up better than most. Since manager Scott Davis’ August 2014 debut through November 2021, the U.S.-based R6 share class gained an annualized 15.0%, which beat the S&P 500’s 14.2%. While that time frame includes contributions from other manager sleeves, Davis’ stand-alone track record from a similar separately managed account performed better than the overall fund.

A good portion of the fund’s success came in 2020, which skews the trailing return figures a bit. Its 26.7% gain in 2020 outpaced the benchmark by over 8 percentage points, the best calendar year since Davis debuted. The fund’s case over other time periods is weaker: It outperformed the bogy about 51% of the time on a rolling one-year basis since Davis joined.

Still, the strategy has handily outpaced most peers. As of November, it landed in the top decile of large-cap blend category rivals over the trailing three-, five-, and 10-year periods. It has been a touch more volatile, though, but not enough to spoil its advantage. Its Sharpe ratio, a measure of risk-adjusted return, came in at 0.95 versus the peer average’s 0.80 over the course of Davis’ tenure.

This portfolio finds a balance between differentiation and careful risk management. It held 51 stocks at the end of September 2021, significantly less than the 140-180 it used to have when it had three independently managed sleeves. However, manager Scott Davis’ desire to let stock selection drive results leads to only modest sector and industry tilts relative to its S&P 500 benchmark. Davis also considers factor exposure when building the portfolio. For instance, he increased the portfolio’s stake in financials companies toward the end of 2020 to bolster its exposure to cheaper, more cyclical stocks to help offset its lack of exposure to the energy sector.

The strategy also holds a few stocks not in its benchmark such as global semiconductor firms NXP Semiconductors NXPI and ASML Holdings ASML. Davis feels justified in owning these companies as a significant portion of their revenues is derived from the United States. The vast majority of assets are invested in U.S.-domiciled firms.

The portfolio has historically leaned a bit more toward a growth style, and that still rings true. It displayed a slight growth bias relative to the benchmark as of October, sporting higher valuation metrics such as price/sales and faster trailing revenue- and earnings-growth rates.