JPMorgan US Value A VGRIX

JPMorgan US Value boasts a seasoned team plying a time-tested approach.

After running the show here for 20 years, portfolio manager Clare Hart retired on Sept. 5, 2024. Under her watch, the fund's institutional shares beat the Russell 1000 Value prospectus benchmark and drubbed the typical large-value Morningstar Category peer. Hart won Morningstar’s Outstanding Portfolio Manager award for investing excellence in 2024.

While Hart’s retirement was a key loss, this team remains in good hands. Comanagers Andrew Brandon and David Silberman have the skill and experience to drive outperformance over the long term. Brandon came to J.P. Morgan Asset Management as an equity analyst in 2000, joined this team in 2012, and rose to named manager here in November 2019. Silberman joined the firm in 1989 and ran portfolios for private clients before serving as the firm’s corporate governance expert starting in 2008; he joined this team as a comanager in November 2019.

The comanagers have solid support. Dedicated analysts Tony Lee and Lerone Vincent joined this value team in 2018 and 2022, respectively. In January 2024 the managers, including Hart, recruited Laura Huang from the firm’s central analyst team to cover financials—Hart’s area of expertise.

This strategy rests upon a classic value philosophy: A pool of well-run but undervalued companies with consistent earnings and disciplined capital allocation should beat the market. The team seeks 85-110 high-quality companies with reasonable valuations. The key here is not so much in this sensible viewpoint as it is in executing it with discipline and detailed insight.

The strategy’s returns from November 2019 through August 2024 (when Brandon and Silberman managed alongside Hart) thumped the typical peer and prospectus index. It did especially well in the sharp rally following the 2020 pandemic panic as well as the 2022 downturn.

The search for holdings starts with a constant scouring of the US large-value universe for companies with consistent earnings, high returns on invested capital, sound financials, and evidence of capital discipline. The team runs a larger equity-income sibling that requires a dividend; this strategy does not, so the team has leeway to add firms with higher cyclicality, more financial leverage, and often better growth. Without defensive income, this approach has had less scintillating risk-adjusted returns but has often done better in rallies.

After establishing possible target stocks, the team looks for those with relatively low valuations it believes to be trading at a discount to their intrinsic values. While the team uses different metrics for various industries, it generally starts with free cash flow yield and price- and enterprise-value multiples.

The process’s output is an 85- to 110-stock portfolio. The team caps new stocks at 5% of assets but will allow positions to grow past that level. The portfolio maintains exposure to each of the Russell 1000 Value Index’s sectors, but relative weightings can vary by up to 10 percentage points. Its procyclical tilt has long made it lean a bit more toward the core square of the Morningstar Style Box than the typical large-value peer.

The portfolio’s profile illustrates the process’s principles. As of July 2024, the portfolio’s return on equity and return on invested capital—metrics measuring business quality—were 21.1% and 13.4%, much higher than the Russell 1000 Value Index’s 18.2% and 11.0%. And the portfolio’s expected long-term cash flow growth was higher than the bogy’s: 7.9% versus 6.2%. Yet, the portfolio’s price for that free cash flow of 27 times was the same as the index’s.

The portfolio sticks close to its benchmark in key ways. As of August 2024, the strategy’s three-year tracking error—measuring how closely a portfolio’s returns track a benchmark’s—of 2.4% was well below the typical large-value peer’s 3.9% level. And its active share, which measures the holdings differences between a portfolio and index, was just 63%. In July 2024, just eight of the strategy’s 90 holdings were not in the index, but those included recent darlings such as social media giant Meta Platforms and Eli Lilly, maker of GLP-1 drug Mounjaro.

It's tough to steadily outperform with so little deviation from an index, but this strategy’s hallmark trick has been big overweightings of favored index constituents. As of July 2024, the fund’s top 10 holdings held 22% of fund assets but constituted just 12% of the index. Meanwhile, only one top-10 name in the index was underweight: Berkshire Hathaway.

The strategy long had a High People Pillar rating, but longtime lead portfolio manager Clare Hart’s retirement was a key loss of talent. There’s plenty of room for confidence going forward, however, as the value team she built remains intact. In 2019, Andy Brandon and Dave Silberman became listed portfolio managers here (Brandon in February, Silberman in November). Brandon started on this team in 2012 as an analyst. Silberman, a 36-year veteran with the firm, headed the firm’s equity investment director and corporate governance teams after managing private clients’ portfolios. They’ve managed together for nearly five years and have complementary expertise: Brandon oversees energy, materials, and industrial holdings, while Silberman handles the utilities, healthcare, telecom, and technology areas.

The managers have a solid supporting cast of three dedicated analysts. Tony Lee joined the value team in 2018; he covers healthcare, insurance, and REITs. Lerone Vincent joined this team in 2022, covering technology and basic materials. In January 2024, Laura Huang joined and took over financials that Hart long covered herself. All three came from the firm’s central analyst group. And this team has access to that strong crew of 20 analysts, who average 22 years of industry experience.

J.P. Morgan is a well-resourced, diligent, and responsible steward of client assets. Investment teams are seasoned and stalwart, especially in equity and fixed income, the latter of which has successfully undergone substantial transformation in recent years. The firm offers competitive compensation that is aligned with fundholders and shows strong retention at senior levels of the organization. It demonstrates a culture of constant innovation and willingness to evolve. For example, J.P. Morgan recently expanded its investment committee process through which senior leaders review various teams and strategies, and it continues to develop proprietary portfolio management and risk oversight tools. Some funds still face high fee hurdles, but the firm has generally lowered expenses as it has grown.

The firm isn't without its complications. J.P. Morgan's product offering is extensive, and some areas need improvement. For instance, its multi-asset business has faced some challenges as a result of complex investment processes. The firm continues to build out its footprint in China, but its efforts there remain unproven. Although not every strategy is the best in its class, J.P. Morgan remains earnest in the pursuit of excellence, and investors are well-served.

Over lead manager Clare Hart’s tenure from March 2004 through August 2024, the fund’s institutional shares gained an annualized 8.9% versus 8.3% for the Russell 1000 Value category index and 7.6% for the typical large-value peer. With all three portfolio managers, from November 2019 through August 2024, the strategy’s 12.4% annualized return easily topped the benchmark’s 10.4% and typical rival’s 10.9% gains.

This strategy has been a bull-market beast. In the huge run from March 2009 through September 2018, its institutional shares surged 17.0% annualized, topping the Russell 1000 Value’s 16.3% gain and trouncing the typical large-value peer’s 15.1% return. With that more cyclical profile, this strategy tends to have marketlike volatility and often lags in bear markets, but in 2022’s market pullback it did well.

Year-by-year this strategy rarely has clunkers and tends to be good but not great. From 2017 to 2023, it topped the average peer and benchmark every year except 2023 but never had a top-quintile year. In 2024 through August, it is above-average with out-of-index picks like alternative asset manager Ares soaring, although big holdings ConocoPhillips and Charles Schwab have weighed on returns with small losses. For investors who can stomach drawdowns if they come with solid upside, it’s a keeper.

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.