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JPMorgan SMID Cap Equity A PECAX

Medalist Rating as of | See JPMorgan Investment Hub
  • NAV / 1-Day Return 15.42  /  −0.06 %
  • Total Assets 399.3 Mil
  • Adj. Expense Ratio
    1.090%
  • Expense Ratio 1.090%
  • Distribution Fee Level Below Average
  • Share Class Type Front Load
  • Category Mid-Cap Blend
  • Investment Style Small Growth
  • Min. Initial Investment 1,000
  • Status Open
  • TTM Yield 0.33%
  • Turnover 32%

USD | NAV as of Apr 11, 2024 | 1-Day Return as of Apr 11, 2024, 10:17 PM GMT+0

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Morningstar’s Analysis PECAX

Medalist rating as of .

A solid approach and a veteran team.

Our research team assigns Bronze ratings to strategies they’re confident will outperform a relevant index, or most peers, over a market cycle on a risk-adjusted basis.

A solid approach and a veteran team.

Associate Analyst Tony Thorn

Tony Thorn

Associate Analyst

Summary

JPMorgan SMID Cap Equity’s proven and stable team applies a methodical approach centered on quality. Its three cheapest share classes earn a Morningstar Medalist Rating of Silver, while the three more expensive ones are rated Bronze.

Managers Don San Jose and Dan Percella lead a small but capable team of three analysts. They have managed this strategy since April 2016 in separate accounts but inherited this mutual fund offering in November 2020. The managers know each other well, having worked together on sibling strategy JPMorgan Small Cap Equity VSEIX since 2008. In addition to their core group of five, they also occasionally collaborate with other J.P. Morgan Asset Management analysts. Overall, San Jose, Percella, and their team have proven their worth over the years with strong stock picks, producing stellar risk-adjusted returns.

The team’s consistent investment approach is key to this success. It focuses on companies operating in narrow niches that can leverage their competitive positioning to protect and grow their returns on capital at rates higher than the market foresees. These traits, along with a preference for earnings and free cash flow over top-line revenue growth, lead them to steadier business models. This process is a carbon copy of their highly successful small-cap strategy but ventures further into mid-cap territory. The focus of their approach also helps the relatively small team navigate their expansive universe.

Unfortunately, their good historical record running this strategy has not yet translated to the mutual fund. From the separate account’s inception in April 2016 through March 2023, the composite’s 11.3% annualized return (gross of fees) beat the Russell 2500 Index by 1.9 percentage points; however, the mutual fund has lagged the index since San Jose and Percella took over in November 2020. The strategy typically shines when markets decline, but it struggled in 2022 owing to a lack of exposure to the surging energy sector. It ran into some more trouble in 2023 by owning a couple of the collapsed regional banks, but overall it remains in capable hands and is still a strong option.

Rated on Published on

The team’s consistent and disciplined execution of its quality-oriented process earns an Above Average Process rating.

Associate Analyst Tony Thorn

Tony Thorn

Associate Analyst

Process

Above Average

The process here is all about finding great businesses priced as merely good ones. Managers Don San Jose and Dan Percella scour the Russell 2500 Index for best-in-class companies with consistently high levels of profitability and management teams that have proved to be efficient capital allocators. They focus on companies operating in narrow niches that can leverage their competitive positioning to protect and grow their returns on capital at rates higher than the market foresees. These traits, along with a preference for earnings and free cash flow over top-line revenue growth, lead them to firms with steadier business models.

The team analyzes firms’ growth potential on a three- to five-year basis, but their view on margins tends to be the key differentiator. The team will happily own a company growing at a modest rate if it can expand its margins over time to produce strong earnings and cash flow that the market will reward. The managers build out new positions gradually, looking for validation of their investment thesis.

The managers trim holdings as they appreciate—few climb above 2.0% of assets each—but tolerate higher valuations as long as their theses remain intact. They’ll hold on to their winners but will start to sell them once they hit the $20 billion market-cap range.

While the fund’s name implies a blend of small- and mid-cap stocks, its skews more towards mid-caps. As of April 2023, it held roughly 53% in equity holdings classified by Morningstar as mid-caps, while small caps made up only 40%. Thanks mostly to a broader market selloff, that difference has narrowed compared with one year prior, when the portfolio held 64% in mid-caps and only 30% in small caps. The managers’ preference for riding their best-performing stocks contributes to this skew, but they are cognizant not to drift too far off course.

The portfolio’s focus on quality is consistent. It scores higher than the Russell 2500 Index on metrics such as return on assets, return on equity, and free-cash-flow yield. Trailing earnings- and revenue-growth rates are a touch lower on average, but that’s consistent with the managers’ preference for profitability over sales growth.

The strategy typically invests across all sectors, but the team sold its small group of energy stocks in 2020 as the pandemic highlighted the difficulties in forecasting commodity-driven businesses. Lead manager Don San Jose believes his team’s efforts are better spent on sectors with secular growth drivers and will likely steer clear of energy until such companies’ management teams can consistently prove to be more judicious in their capital spending and production goals. He did buy a small stake in natural gas pipeline operator DT Midstream DTM in early 2023, however, to get energy exposure through a company he thinks is less tied to commodities prices than most.

Rated on Published on

A small but proven team earns an Above Average People rating.

Associate Analyst Tony Thorn

Tony Thorn

Associate Analyst

People

Above Average

Managers Don San Jose and Dan Percella have run this SMID-cap strategy in a separate account format since 2016. San Jose is a J.P. Morgan veteran, joining the firm in 2000, while Percella joined several years later. They know each other well, having worked together on sibling strategy JPMorgan Small Cap Equity VSEIX since 2008. There, the managers built an impressive record relying on strong stock-picking.

The managers primarily work with a team of three analysts. Two of them—Jon Brachle and Chris Carter—have been on the team since 2015 and have more than 15 years of industry experience apiece. Newest analyst Jesse Huang started working with group in a junior role in 2018 but was recently promoted to analyst. The team sometimes collaborates with other J.P. Morgan Asset Management analysts but largely works independently.

One minor concern is that San Jose and Percella have increased their workload in recent years. In October 2021, San Jose took over as CIO of J.P. Morgan’s Value Equity Division, while Percella was appointed comanager on large-cap offering JPM America Equity in August 2022. That strategy is quite different from this one, but Percella has much less responsibility there. Currently, these workload concerns are not overbearing but worth monitoring.

Rated on Published on

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

Associate Director Emory Zink

Emory Zink

Associate Director

Parent

Above Average

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.

Rated on Published on

Since this fund adopted its current mandate in November 2020, performance has struggled, but managers Don San Jose and Dan Percella have a successful track record of running this approach as a separately managed account since April 2016.

Associate Analyst Tony Thorn

Tony Thorn

Associate Analyst

Performance

The mutual fund’s institutional shares returned 6.2% annualized from November 2020 through May 2023, trailing its Russell 2500 Index prospectus benchmark’s 7.7% return. However, from the separate account’s inception in April 2016 through March 2023, the composite’s 11.3% annualized return (gross of fees) beat the index by 1.9 percentage points.

The strategy’s broader performance pattern is a close match to that of its relatively defensive small-cap sibling, JPMorgan Small Cap Equity VSEIX. The SMID separate account composite outperformed in a difficult 2018 and again during 2020’s coronavirus-induced bear market. However, its relative underperformance in 2022 stemmed from the strategy’s lack of exposure to the surging energy sector.

Performance so far in 2023 has been sluggish largely owing to a decent stake in several regional banks. The strategy had exposure to collapsed banks Signature Bank and Silicon Financial Group (the parent of Silicon Valley Bank), as well as several other banks that took massive hits such as Western Alliance Bancorp WAL and Commerce Bancshares CBSH because of volatility and fear in the industry. As a result, the institutional shares' 0.6% loss through the first five months of 2023 trailed the index by 0.9 percentage points.

Published on

It’s critical to evaluate expenses, as they come directly out of returns.

Associate Analyst Tony Thorn

Tony Thorn

Associate Analyst

Price

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Bronze.

Published on

Portfolio Holdings PECAX

  • Current Portfolio Date
  • Equity Holdings
  • Bond Holdings
  • Other Holdings
  • % Assets in Top 10 Holdings 15.5
Top 10 Holdings
% Portfolio Weight
Market Value USD
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Consumer Defensive

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Healthcare