Reduced conviction in JPMorgan Small Cap Sustainable Leaders’ approach lowers its Process rating to Below Average from Average.
Formerly JPMorgan Small Cap Core, this strategy transitioned to a sustainability focus in July 2021. Previously, a model sifted through the Russell 2000 Index looking for stocks with the best combination of value and momentum characteristics. Now, lead manager Phil Hart and his team curate a list of small-cap companies that they consider leaders in their respective industries on environmental, social, and governancde stewardship. From there, the surviving names are still put into a quantitative model, though it now includes a third factor: quality.
These changes have resulted in a vastly different portfolio than its previous iteration. Now it's much more concentrated and tends to be lighter in energy stocks. Furthermore, adding the quality factor gave the portfolio a slight growth tilt compared with its previous value/blend profile.
The timing of these changes was poor. In the 28 months that the new sustainability focus has been in place, the institutional shares' 15.8% annualized loss through October 2023 ranked among the bottom 3% of all small-blend Morningstar Category peers and was 3.9 percentage points worse than the Russell 2000 Index. The strategy ran into major headwinds in 2022’s market pullback, as growth stocks plummeted and energy stocks were one of the few safe havens.
More concerning, though, was the strategy’s continued underperformance in 2023. While many similar ESG-focused funds have rallied under more favorable conditions, this strategy lost 10.2% through October, lagging the index by 5.7 percentage points, largely owing to poor stock selection. Furthermore, these poor returns and an abundance of outflows have led to the fund being a fraction of what it once was. After having more than $400 million in assets at the end of 2020, the fund stood with less than $40 million in October 2023.
Despite these concerns, the strategy still benefits from its veteran leaders and its adequate resources. Hart has led this strategy's fundamental team since 2010, while comanager Wonseok Choi leads the quant efforts. The overall team has also increased its interactions with J.P. Morgan’s broader resources, such as the global sustainable investing team. These resources should help, but the fund has plenty of ground to make up after a rough recent stretch.