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JPMorgan US Small Company L JUSSX

Analyst rating as of

Morningstar’s Analysis

Analyst rating as of .

A lukewarm option.

Our analysts assign Neutral ratings to strategies they’re not confident will outperform a relevant index, or most peers, over a market cycle.

A lukewarm option.

Senior Analyst

Summary

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JPMorgan U.S. Small Company's tightly constrained process relies on common factors, resulting in a Morningstar Analyst Rating of Neutral for all share classes.

This strategy attempts to beat the return of the Russell 2000 Index using a quantitative model, but its low level of differentiation keeps it from delivering much of an edge. The model screens the Russell 2000 Index for stocks displaying what the JPMorgan team running this strategy thinks is the best combination of value and quality characteristics. It builds a portfolio of 350-500 stocks, subject to constraints intended to avoid making any large bets. It considers stocks’ price multiples to assess valuation and analyzes company cash flows and management buyback policies to assess quality, among other criteria. A more exotic addition to the model is an algorithmic replication of JPMorgan analyst-assigned ratings designed to more accurately assess a stock’s quality attributes.

Lead manager Phil Hart, comanager Akash Gupta, and two other analysts scrutinize the model’s output, looking for abnormalities or exogenous factors, such as an impending legal ruling, that could likely influence a stock’s price. The team may also manually adjust a stock’s fundamental ranking if there is reason to emphasize one input metric over another. Hart and Gupta were joined by comanager Lindsey Houghton from November 2019 through June 2021, though he has left the firm. Others assumed Houghton’s coverage of consumer stocks and banks pending a replacement hire.

Despite Houghton’s departure, the team remains adequately resourced, particularly when combined with JPMorgan’s dedicated quant team, led by comanager Wonseok Choi, and an equity data science team. A member of the equity data science team who developed some of the factors currently used is now embedded with the group, part of structured equity head Hamilton Reiner’s vision to increase collaboration across the firm’s various research units.

While a blend between quality and value themes is a logical fit, investors shouldn’t expect this strategy to provide an enduring edge given its extremely diffuse portfolio.

Process

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The strategy’s quant-driven investment approach centers on well-known factors and signals and warrants an Average Process rating.

The managers’ model screens for value and quality traits using both traditional and nontraditional methods. More routine criteria include price multiples to assess value and the level of cash flow relative to earnings to assess quality. Proprietary techniques add some flair but aren’t revolutionary. For instance, the firm developed natural language processing algorithms to scrape insights from earnings call transcripts regarding the quality and sincerity of management. The model constructs the portfolio with stock, sector, factor, and thematic risk controls such that the resulting allocation isn’t too different from the benchmark.

This strategy also also draws upon fundamental insights. Phil Hart and his team review proposed trades and conduct further analysis to improve the model’s accuracy, mostly to reflect one-time items or other material events rather than forecast earnings. The managers can also adjust the portfolio's exposure to value and quality 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. In 2020, for example, value stocks underperformed meaningfully, which triggered a heavier shift toward companies trading at lower valuations to take advantage of the perceived dislocation. While the trade didn’t work out at the time, the strategy’s quality focus provided some ballast.

People

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This strategy is adequately resourced despite the loss of a couple of team members, but it doesn’t stand out relative to peers, resulting in an Average People rating.

Phil Hart leads the day-to-day operations of the strategy, but a number of individuals have an influence. Key among them is Wonseok Choi, who oversees the quant model that underpins the strategy. Choi is joined by comanager Jonathan Tse and one additional quant, though one other analyst left the firm earlier in the year. On the fundamental side, comanager Akash Gupta and analysts Robert Ippolito and Edward Berman share coverage duties with Hart. They evaluate the model’s suggested trades and make adjustments when needed. Former team member Lindsey Houghton left the firm after comanaging the strategy from November 2019 through June 2021. The broader team is handling his stock coverage until a replacement is found.

Hamilton Reiner, head of structured equity at JPMorgan, has been keen to increase interactions between Hart’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 is now embedded with the group. Increased resources to improve the strategy’s efficacy could be useful following a subpar stretch of performance in 2019-20.

Parent

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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.

Price

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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-cheapest quintile. Even so, 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.

Performance

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Since lead manager Phil Hart’s November 2010 start through October 2021, the fund’s L shares returned 13.2% annualized, edging the Russell 2000 Index’s 12.9%. As of October, the fund ranked in the third quartile of small-blend category peers over the trailing five years but in the top quartile over 10 years.

While it ranked well against peers, its performance relative to the Russell 2000 benchmark is mixed: It came ahead in just 45% of rolling three-year periods over Hart’s tenure. Risk-adjusted returns are equally mediocre as the strategy has been just a tad more volatile than its bogy, though it held up relatively well in recent market drawdowns such as in late 2018 and the first quarter of 2020. Unlike Neutral-rated JPMorgan Small Cap Sustainable Leaders VSSCX (formerly JPMorgan Small Cap Core), this strategy’s inclusion of quality factors helped cushion its fall though the market’s mid-March trough. The fund declined 41.4% at its lowest point during the crash, edging the benchmark’s 41.7% loss. The fund’s performance from 2017 through 2020, a period in which growth stocks vastly outperformed value stocks, was also better than that of its siblings, suggesting that the quality factor has been a better hedge.

Portfolio

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The portfolio tends to resemble its benchmark, though its strategic weightings toward value and quality are apparent.

The strategy held 486 stocks as of September 2021, on the higher side of its historical norm of around 370. The quant model that builds the portfolio typically increases the number of holdings when volatility is higher, as was the case in 2020. The model diversifies its holdings across stocks and business types, seeking to remain roughly sector-neutral relative to the Russell 2000 Index. The fund’s active share (a measure of differentiation relative to a benchmark) regularly ranks among the lowest in the small-blend Morningstar Category.

The strategy tilts toward value and quality factors. Reflecting the stock-picking model’s valuation screens, the portfolio’s typical holding traded at a lower price/earnings, price/book, and price/cash flow multiple than the index in September. The quality tilt is defined here by a focus on cash flows and return of capital to shareholders, which are less obvious in traditional metrics, though the portfolio typically sports lower weightings in stocks with negative free cash flow.