JPMorgan Market Expansion Enhanced Index's tight fit to its benchmark doesn't give it a good chance to outperform after fees, resulting in a Morningstar Analyst Rating of Neutral for all share classes.
This strategy, which is slated to convert to an exchange-traded fund in early 2022, attempts to beat the return of the S&P 1000 benchmark using a quantitative model, but its low level of differentiation keeps the strategy from delivering much of an edge. The model screens the S&P 1000 Index for stocks displaying what the J.P. Morgan team running this strategy thinks is the best combination of value and momentum characteristics. It builds a portfolio around these picks subject to constraints intended to keep the proposed allocation closely tied to the index to avoid any unintended bets. It considers stocks’ price multiples to assess valuation and analyzes trends in short interest and earnings revisions to gauge momentum, among other key criteria. A more exotic addition to the model is natural language processing intended to glean insights regarding business momentum from a company's regulatory filings and commentary during earnings calls.
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; however, the strategy's mandate to track its benchmark closely gives the team less leeway here than on their other quantitative strategies. 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.
Despite Houghton's departure, the team remains adequately resourced, particularly when combined with J.P. Morgan's dedicated quantitative 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.
An ETF structure may lead to more tax-efficient returns, but given the strategy's low historical tracking error, investors should expect benchmarklike performance, and little more.