JPMorgan Value Advantage C JVACX

JPMorgan Value Advantage’s portfolio manager and deep analyst resources give it a chance to deliver value, resulting in a Morningstar Analyst Rating of Bronze for cheaper share classes, while more-expensive ones receive Neutral.

This all-cap strategy relies heavily on the insights of manager Jonathan Simon, who has much to offer given his 40 years of experience. He’s steered this strategy since its 2005 inception, producing an admirable track record in aggregate, though one which has become less impressive since the strategy pivoted to large-caps about a decade ago. While Simon’s background is in mid-cap stocks (he’s comanaged Silver-rated JPMorgan Mid-Cap Value FLMVX since 1997), he can rely on J.P. Morgan’s experienced core research team to help with idea generation and monitoring within the large-cap universe.

Simon’s process here differs from his legacy mid-cap strategy, though not in a way that has demonstrated benefits. He focuses on higher-quality companies with strong financial profiles but makes way for stocks with weaker fundamental support if he feels the valuation compensates for the added risk. While a deeper-value skew isn’t a negative in of itself, Simon’s had some noticeable missteps. The portfolio’s multi-year stake in struggling radio station owner Entercom Communications AUD turned sour as the company raised capital to fund acquisitions which didn’t pan out, ultimately leading the company to cut its dividend to pay down debt. Other unprofitable trades include a brief stint in the troubled retailer Sears Holdings Corp. in 2011 and embattled mega-cap bank Wells Fargo WFC, a current holding. To be sure, it hasn’t been easy for many managers to pick winners within the deep-value market segment. While riskier plays may pay off in another environment, Simon hasn’t shown a demonstrable edge thus far.

Simon, now in his early 60s, doesn’t have imminent plans to retire, but there aren’t clear candidates who could pick up his responsibilities should he need to step away unexpectedly. Graham Spence became comanager in November 2020 but operates as a generalist analyst. He figures to play a larger role in the future and could ultimately be a successor, though he lacks other money management experience. Comanager Larry Playford focuses more on the mid-cap value strategy he oversees with Simon. While questions loom, the strategy remains in capable hands for now.

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 investments in struggling companies, such as Entercom Communications, 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, which maintains a higher-quality focus. Poor performance from deeper-value plays has eroded the strategy’s typical advantage in down markets. The strategy fared worse in than the Russell 3000 Value benchmark in late-2018’s drawdown and in 2020’s first-quarter coronavirus-driven bear market. While Simon’s had some blunders, he maintains a diversified portfolio and doesn’t concentrate his bets, which have spared the strategy from steeper losses.

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

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

Lead manager Jonathan 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 and influences this all-cap portfolio mostly through his work on that fund. Gloria Fu was appointed comanager in 2006, but she left in early 2019 after a period of poor performance of her consumer stock picks. She wasn’t directly replaced, but in November 2020, the team promoted Graham Spence, who’s supported Simon and Playford on this strategy as an assistant portfolio manager since 2013, to a comanager’s role.

Simon borrows small- and mid-cap ideas from dedicated analysts on other strategies but leverages J.P. Morgan’s core research team for large-caps. That group is 25 members strong, with most having between 10 and 20 years of industry experience.

While Simon doesn’t plan to retire in the short term, there isn’t a clear successor at the moment. 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.

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 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.

This strategy has built a strong performance record over the long term, but results haven’t been as good over the past 10 years. Since its February 2005 inception through September 2021, the fund's institutional share class returned an annualized 9.5% versus 7.3% 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 majority of the portfolio, the results have merely been competitive with the benchmark.

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 have upended that relationship. The volatility of returns has increased as has the portfolio’s beta, a measure of sensitivity to the market. While long-term performance was buoyed by competitively advantaged companies such as Microsoft MSFT, AutoZone AZO, and The Home Depot HD, recent performance has been hurt by companies with greater leverage and weaker business trends. Companies with flagging profits such as Dish Network DISH or heavier debt burdens, such as Entercom Communications and Coty COTY have led to significant losses.

While the deeper-value pockets within the portfolio haven’t fared well, the strategy performed better in other respects, including stocks it avoided. Staying away from key benchmark constituents, such as General Electric GE and AT&T T, were two of Simon’s better calls.

This all-cap strategy used to be more heavily invested in small- and mid-cap stocks, but asset growth has 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 large-value Morningstar Category peers and Russell 3000 Value benchmark. The strategy held 35% of assets in mid-caps as of August 2021, about 7 percentage points more than the bogey. The portfolio typically holds around 120 stocks with 20% to 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, manager Jonathan Simon isn’t afraid to make meaningful active bets. He doesn’t own large index constituents, such as Exxon Mobil XOM and Comcast CMCSA, and also holds some stocks outside of the benchmark such as small cap fuel-products retailer Murphy USA MUSA. He also held tech conglomerate 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 historically has favored financials due to 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.