JPMorgan US Equity A JUEAX

The JPMorgan US Select Equity strategy (which includes the U.S. mutual fund and the U.K. and Luxembourg vehicles) remains a good option in a competitive category outside of a handful of share classes that levy high fees.

Beating a U.S. large-cap index is a tough task, but this offering has been up to the challenge thanks to a sensible design that addresses a pair of challenges. As the large-cap universe has become more concentrated, the decision to not own certain stocks has become more impactful. Additionally, as recent years have reaffirmed, it can be difficult to accurately predict the trajectory of macroeconomic events (or public health crises). Rather than hugging the benchmark to minimize these risks—and thereby reducing the chance to outperform net of fees—this strategy mitigates them while still maintaining a differentiated portfolio. To accomplish this, the team considers underlying factors and correlations that drive the strategy's performance relative to the benchmark. For instance, while the U.S. mutual fund's portfolio had little energy exposure for much of 2020 and 2021, manager Scott Davis held companies with correlations to the sector in Deere DE, a provider of agricultural equipment, and defense company Northrop Grumman NOC, which carried better analyst ratings than energy stocks. Both performed well during 2022, a year when the energy sector soared.

The game plan employed here can be challenging to execute, but results are encouraging. Despite a more concentrated portfolio than its previous multimanager incarnation (which ended in February 2020 for the U.S. mutual fund), the performance profile (as measured by tracking error) has remained relatively similar, while alpha has increased—evidence of the investment process' efficacy.

J.P. Morgan's talented team of 20-plus analysts has delivered for this offering and others. That group contains many tenured analysts who’ve been at the firm for a decade or more, along with a mix of newer analysts who've filled in for the occasional departure or reassignment. The firm tends to hire strong replacements when openings emerge. Davis and comanager Shilpee Raina work closely with the team to pick stocks with a combination of high risk-adjusted upside, portfolio fit, and targeted risk exposure.

Overall, while operating in a highly efficient market segment will always be a steep hill to scale, this offering has a better shot than most to deliver.

Despite generally investing in 50-60 stocks, this portfolio hasn't behaved all that differently from its S&P 500 benchmark, and that is due to manager Scott Davis' work alongside J.P. Morgan's central team of sector analysts. Analysts rank stocks in their coverage universe, but Davis doesn't simply pick the ones on top. He challenges analysts on their picks, pinning their ideas against others that possess similar business characteristics, all with the goal of building a portfolio that will substantially assume the same factor risks as the benchmark. The portfolio's sector weightings tend to differ from those of the benchmark as Davis considers the correlations between stocks more than their official labels.

The result is a concentrated portfolio that behaves like a more diversified one, with the variance explained by idiosyncratic factors rather than sector or style bets. Davis utilizes a quantitative model to backtest hypothetical portfolios, but much of his work is focused on forward-looking risks that cannot be captured by historical data.

Davis is fairly agnostic from a style perspective, though he admits he has a slight preference for stocks with healthier financials in market-leading positions. Still, the portfolio has tended to fall in the blend section of the Morningstar Style Box, reflecting a broad approach.

This portfolio finds a balance between differentiation and keeping a lid on active risk. The U.S. mutual fund held 51 stocks in September 2023, significantly less than the 140-180 it had previously under three independently managed sleeves. However, manager Scott Davis' desire to let stock selection drive results leads to only moderate sector bets relative to its S&P 500 benchmark. Davis also considers factor exposure when building the portfolio. For instance, he increased the portfolio's stake in financials companies toward the end of 2020 to bolster its exposure to cheaper, more cyclical stocks to help offset its lack of exposure to the energy sector.

The strategy also holds a handful of stocks not in its benchmark, such as global semiconductor firms NXP Semiconductors NXPI and ASML Holdings ASML. Davis feels justified in owning these companies as a significant portion of their revenues is derived from the United States. The vast majority of the strategy's assets are invested in U.S.-domiciled firms.

The portfolio has historically leaned a bit more toward a growth style than its benchmark, but it has only been a slight bias. The portfolio still tends to fall in the blend section of the Morningstar Style Box.

Given the strategy's asset base of over $50 billion, it tends to avoid smaller mid-caps due to liquidity reasons but will occasionally invest in the larger ones.

This strategy continues to rely heavily on J.P. Morgan’s core research team, but it is now led exclusively by Scott Davis, who oversaw the strongest-performing sleeve of this formerly multimanaged offering. Davis became a named manager in August 2014, inheriting a 10% slice of the strategy but quickly saw his share grow, most notably after manager Thomas Luddy stepped down at the end of 2017. Before being awarded full control here in 2020 (and in 2019 for the European vehicles), Davis managed 65% of the fund alongside comanager Susan Bao's 10% and an analyst-directed sleeve representing 25%.

Davis continues to leverage the ideas of J.P. Morgan’s core research team, which consists of 20-plus analysts with extensive industry experience. That group tends to see an analyst or two leave most years—sometimes to a different team within the firm—but capable replacements are consistently found. Analysts now have a portion of their compensation tied to this fund's performance, which helps align incentives.

Davis receives additional support from Shilpee Raina, a former analyst on JPMorgan Equity Income HLIEX who became a named comanager in November 2021. Raina has a generalist background but most recently specialized in consumer stocks.

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.

Relative to the large-blend Morningstar Category peer group, the fund landed ahead of 96% of rivals over the trailing 10-year period ended October 2023. While these periods include contributions from other manager sleeves, Davis' stand-alone track record from a similar separately managed account performed better than the overall fund. The fund has been a touch more volatile, but not enough to spoil its advantage. Its Sharpe ratio, a measure of risk-adjusted return, has edged the benchmark's over Davis' tenure.

Stock selection, as opposed to sector or industry allocation, has been the key driver of the fund's excess returns. Top picks over Davis' tenure include industrial REIT Prologis PLD, power management company Eaton ETN, and lithography leader ASML Holding ASML.

While performance in 2022 was below its typical standard, the fund has bounced back through the first 10 months of 2023, gaining 11.4% versus its average rival's 7.3%. Tech picks stood out the most, including overweightings in Nvidia NVDA and Microsoft MSFT, though stakes in Uber Technologies UBER and Eaton were larger contributors.

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.