JPMorgan Value Advantage C JVACX Fund Analysis

JPMorgan Value Advantage’s time-tested manager adds enough value to earn cheaper share classes a Morningstar Analyst Rating of Bronze, but more expensive ones are rated Neutral.

Lead manager Jonathan Simon’s more than four decades of experience loom large for this flexible offering. Simon combines his extensive work with mid-caps on Silver-rated JPMorgan Mid Cap Value FLMVX with large-cap insights from JPMorgan’s core analyst team and a dedicated small/mid-cap research group. Results have been strong over his nearly 18 years managing this strategy, though performance has been less impressive since it increased its holdings in more-liquid large-cap stocks roughly a decade ago to accommodate a bulkier asset base.

Comanager Graham Spence plays a key role as Simon’s right-hand man. He first joined as a dedicated resource in 2013, covering niche areas of the market while offering analytical support as a generalist. Spence might be an eventual successor for Simon, who is now in his early 60s, though Simon hasn’t indicated that his retirement is imminent.

The market’s recent pivot back in favor of value investing has given Simon extra drive to keep managing the strategy. After a meager 1.8% loss in 2020, the institutional shares gained 28.6% in 2021, and despite a 13.6% drop through the first nine months of 2022, they’ve held up better than the large-value Morningstar Category average and Russell 3000 Value Index benchmark. Simon’s ever-present bias toward financials and an uncharacteristic overweighting in energy stocks boosted performance, though the quality of stock selection was the bigger driver of results. Bank, real estate, and communication services picks were particularly strong.

While the portfolio held up well in 2022’s down market, it hasn’t always been as defensive, as Simon takes greater liberty here than on his other charges to buy cheap stocks with weaker financials. Missteps in struggling companies hurt performance in years past, though Simon hasn’t changed his style.

Even though execution can be hit-or-miss, this strategy has a shot to outperform thanks to its veteran leader.

This all-cap strategy plies a reasonable, diversified approach, but deviations from its core focus on quality companies hasn’t produced an edge, resulting in an Average Process rating.

Manager Jonathan Simon normally gravitates toward financially strong companies, but he’ll make exceptions here if the price is right. Simon generally prefers less-cyclical businesses led by management teams with significant personal investment. He has historically shied away from areas such as energy and industrials in favor of consumer stocks. However, he’ll embrace risk in certain situations. He’s made select investments in struggling companies, such as Entercom Communications (now Audacy AUD), that took on debt to fuel their growth, only to suffer when results failed to materialize. Such purchases didn’t appear in his other charge, JPMorgan Mid-Cap Value FLMVX, which maintains a higher-quality focus. Poor performance from deeper-value plays eroded the strategy’s typical advantage in down markets, most notably from 2018 through 2020. While Simon’s had some blunders, he maintains a diversified portfolio and doesn’t concentrate his bets, and this has spared the strategy from steeper losses. To his credit, the portfolio held up well in 2022’s bear market through September.

Simon’s long-term mindset endures on this strategy. He trades infrequently, resulting in low portfolio turnover, often below 30%.

This all-cap strategy used to be more heavily invested in small- and mid-cap stocks, but asset growth pushed it into the more-liquid large-cap segment. Large caps have taken up about 60% of the portfolio since 2011, though mid-caps remain a key differentiator from its large-value category peers and Russell 3000 Value Index benchmark. The strategy held 32% of assets in mid-caps as of August 2022. The portfolio typically holds around 120 stocks with 20%-25% invested in its top 10 holdings, making it well diversified.

While he is conscious of his positioning relative to the Russell 3000 Value Index, Jonathan Simon isn’t afraid to make meaningful active bets. He doesn’t own large index constituents, such as ExxonMobil XOM and Comcast CMCSA, and he holds some stocks outside of the benchmark such as small-cap fuel-products retailer Murphy USA MUSA. He also held Microsoft MSFT for more than a decade prior to selling the position in July 2021.

The portfolio’s sector positioning reflects Simon’s style. He has historically favored financials because of their stronger yields and below-market valuations and shied away from technology stocks because he is more hesitant to pay up for the promises of higher growth in the future. The portfolio’s average price multiples, such as price/earnings, still tend to hover around those of the benchmark given Simon’s broader focus on financially strong companies, which tend to be pricier relative to their fundamentals.

Lead manager Jonathan Simon’s vast experience in value investing combined with deep analyst resources earn the strategy an Above Average People rating.

Simon has run this strategy since its 2005 inception and has more than $1 million invested here. He started as an analyst at Robert Fleming in 1980 and became a portfolio manager in 1987. Comanager Lawrence Playford focuses more heavily on JPMorgan Mid-Cap Value FLMVX and influences this all-cap portfolio mostly through his work on that fund. In November 2020, the team promoted Graham Spence, who had supported Simon on this strategy as an assistant portfolio manager since 2013, to comanager. Unlike Playford, Spence is an active member of the research staff and collaborates with Simon on portfolio positioning and company analysis.

Simon borrows small- and mid-cap ideas from dedicated analysts on other strategies but leverages JPMorgan’s core research team for large caps. That group has more than 20 members, most having between 10 and 20 years of industry experience.

While Simon hasn’t indicated retirement is imminent, there isn’t a clear successor at the moment should he step away unexpectedly. Graham Spence figures to play a larger role in the future and could ultimately take the reins, though he lacks other money management experience. While questions loom, the strategy remains in capable hands for now.

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

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various cohorts globally and a diverse set of 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.

This strategy has built a strong performance record over the long term, but results haven’t been as good over the past decade. From its February 2005 inception through September 2022, the institutional share class returned an annualized 8.6% versus 6.7% for the Russell 3000 Value Index. However, much of that edge stemmed from the fund’s performance from inception through 2011, when it was much more heavily invested in small- and mid-cap stocks. Since large caps became the bulk the portfolio, the outperformance has become weaker and less consistent.

For much of its history, the strategy displayed a defensive profile, generally outperforming in down markets and lagging slightly in up markets. However, execution missteps in recent years upended that relationship. From 2017 through 2020, the volatility of returns increased as did the portfolio’s beta, a measure of sensitivity to the market. While competitively advantaged companies such as Microsoft MSFT, AutoZone AZO, and Home Depot HD, buoyed long-term performance, companies with greater leverage and weaker business trends hurt results. Companies with flagging profits, such as Dish Network DISH, or heavier debt burdens, such as Entercom Communications (now Audacy) and Coty COTY, experienced significant losses.

Yet smart position sizing minimized the damage from such errors and gave manager Jonathan Simon the chance to dig out of the holes. In 2021 and 2022 through September, strong stock picks propelled the fund to benchmark-beating performance.

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 costliest quintile. Such high fees stack the odds heavily against investors. 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.