JPMorgan Equity Income R2 OIEFX

JPMorgan Equity Income’s talented leader and proven approach merit a Morningstar Analyst Rating of Gold for its cheapest share classes and Silver for its most expensive one.

Lead manager Clare Hart has masterfully steered this strategy since August 2004. That she skillfully did so alone on a day-to-day basis for the better part of 15 years didn’t stop her from reinforcing her investment team along the way. In 2019, Hart added then-analyst Andrew Brandon and J.P. Morgan’s corporate governance expert David Silberman as comanagers here--and on sibling strategy JPMorgan U.S. Value VGIIX--to help shepherd the sizable asset bases her success had garnered ($83 billion here and $10 billion on that strategy as of March 2022). In both cases, the three managers work closely with two dedicated analysts trained in Hart’s time-tested investment process and draw upon broader firmwide analytical support.

Hart’s well-rounded approach balances equity income and total return. She and the team focus on competitively advantaged dividend payers with fortified balance sheets, steady cash flows, and capable managements trading at attractive prices. While prospective stocks must offer at least a 2% yield at purchase, the managers try to steer clear of firms straining to pay their dividends by closely monitoring payouts in relation to earnings. They heavily scrutinized ExxonMobil’s XOM profitability, capital allocation, and valuation before adding it to the portfolio in January 2022, for example, despite that company’s longstanding, generous dividend.

Hart’s quality-first, yield-second approach means the 85- to 110-stock portfolio tends to have outstanding quality characteristics and a decent income orientation. As of March 2022, the portfolio kept more of its assets in companies carrying a wide Morningstar Economic Moat Rating than nearly nine tenths of its large-value Morningstar Category peers. Meanwhile, its projected one-year yield of 2.7% (before fees) ranked moderately higher than the typical rival.

Hart’s deft execution has offered reliable downside protection and sparkling long-term returns that have consistently beaten the Russell 1000 Value Index on a total and risk-adjusted basis during her tenure. Closed to new investors since September 2021, this strategy’s winning formula continues to impress.

Lead manager Clare Hart’s quality-oriented and valuation-sensitive approach has stood the test of time and supports a High Process rating.

A focus on competitively advantaged firms sets this strategy apart. Hart scours the U.S. large-cap universe for firms with consistent earnings, high returns on invested capital, conservative financials, and strong management teams. While she concentrates on companies offering healthy dividend yields (at least 2% at purchase), she places equal emphasis on firms with modest payout ratios. That’s because companies paying out too much income today might lack cash to fund future growth.

But Hart won’t pay too large a premium for quality stocks: Valuations are critical to buy-and-sell decisions. Depending on a stock’s industry characteristics, she’ll assess a variety of its price and enterprise value multiples to evaluate its worth.

When constructing the 85- to 110-stock portfolio, Hart typically caps new entrants at 5% of assets each but doesn’t place a hard limit on older positions. She generally maintains some exposure to each of the Russell 1000 Value Index’s sectors, but relative weightings have varied up to 10 percentage points.

Hart’s patient approach has kept trading to a minimum. Annual turnover has ranged from 14% to 23% since 2017, versus about 36% to 46% for the large-value Morningstar Category active peer median.

Lead manager Clare Hart’s search for competitively advantaged businesses typically shows in the portfolio’s relatively high quality metrics. According to Morningstar’s risk model, the portfolio generally contains stocks with strong returns on equity and financial health, as well as low price volatility. It also generally has a hefty stake in companies with economic moats. As of March 2022, for instance, the portfolio's 48% allocation to companies with a wide Morningstar Economic Moat Rating was 10 percentage points higher than the Russell 1000 Value Index and ranked higher than nearly 90% of large-value Morningstar Category peers.

The strategy generally has a mild income orientation: The portfolio’s projected one-year yield of 2.7% (before fees), for example, ranked moderately higher than the typical rival as of March. That reflects manager Clare Hart’s attention to total return rather than pure yield.

Hart’s opportunism shows through as well. She had kept the portfolio relatively light in energy stocks for years, owing to that sector’s track record of poor free-cash-flow generation and undisciplined capital allocation. But in January 2022, she got comfortable enough with Exxon Mobil’s XOM balance sheet and competitive positioning to make it a 1.3% position in the portfolio. Overall, the portfolio’s 7.8% energy stake was 0.7 percentage points higher than the index’s as of March, its highest relative weighting since 2012.

A skilled manager and her experienced support earn this strategy a High People rating.

Lead manager Clare Hart joined J. P. Morgan in 1999 and took the U.S. mutual fund’s helm in August 2004. In November 2019, she added two members to the management squad: Andrew Brandon and David Silberman. Bolstering the roster made sense because Hart had previously overseen an enormous asset base alone. Brandon has worked with Hart as an analyst since 2012, while Silberman, a 30-year firm veteran, previously headed the firm’s equity investment director and corporate governance teams globally. Brandon and Silberman also became Hart’s comanagers on JPMorgan U.S. Value VGIIX in February and November 2019, respectively. That portfolio has significant overlap with this one but includes more cyclicals and stocks with improving fundamentals that don't make the cut for this portfolio.

The managers work alongside two dedicated analysts and have broader firmwide analytical support. Tony Lee joined the team in 2018 and Lerone Vincent joined in early 2022. Vincent replaced Shilpee Raina, who left to join Bronze-rated JPMorgan U.S. Equity JMUEX as a comanager in November 2021. Both Lee and Vincent served in the firm’s core analyst group before joining this team.

Management invests alongside fundholders here (and on JPMorgan U.S. Value): Hart invests more than $1 million in this fund while Brandon and Silberman invest at least $500,000 each.

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 global cohorts and diverse 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 had an impressive risk/reward profile during lead manager Clare Hart’s tenure. From her start in August 2004 through April 2022, the U.S. mutual fund’s Institutional shares' 9.3% annualized return beat the Russell 1000 Value Index and large-value Morningstar Category norm by 1.0 and 1.7 percentage points, respectively. The fund’s edge over its benchmark and peers looked even more impressive on a risk-adjusted basis: Its Sharpe ratio has topped 95% of peers during Hart’s tenure.

The fund tends to shine by losing less during downturns. In fact, the fund dropped less than its index in all 10 market downturns of 10% or more during Hart’s tenure. The first-quarter 2020 bear market was no exception, when the fund’s brutal 36.8% drop was still 1.5 percentage points less than the index’s.

The corollary of consistent downside protection is that the fund's higher-quality dividend payers often lag when more economically sensitive fare surges. For instance, it characteristically trailed the benchmark during the ensuing market rally from March 23, 2020, through December 2020, gaining a cumulative 54.1% versus the index’s 57.4% rise.

The fund has been a relatively strong performer during trailing 12 months through April 2022. Its 4.5% return beat the 1.3% and 3.0% gains for the index and category norm, respectively. Defense contractor General Dynamics GD and drug maker Eli Lilly LLY contributed the most to its outperformance.

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, but based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will be able to overcome its high fees and deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Gold.