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JPMorgan Mid Cap Value L FLMVX

Analyst rating as of

Morningstar’s Analysis

Analyst rating as of .

A good option despite a downgrade.

Our analysts assign Silver ratings to strategies that they have high conviction will outperform a relevant index, or most peers, over a market cycle.

A good option despite a downgrade.

Summary

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JPMorgan Mid Cap Value benefits from an accomplished management team and sound investment process but falls short of best-in-class peers given its relatively unproven analyst roster and some recent stock-picking missteps. Accordingly, share classes with a Morningstar Analyst Rating of Gold drop to Silver or Bronze depending on their fee levels, while the lone Silver share class drops to Bronze.

This is a proven strategy, but it hasn’t replicated its early success. It focuses on stocks with cheaper valuations than the broad market and overlays an emphasis on profitability and business quality, which have historically led to lower performance volatility than the Russell Midcap Value Index. Jonathan Simon leveraged this approach admirably during his stint as sole manager from the strategy’s 1997 inception through the end of 2004, putting up very strong results up to and through the dot-com crash. Larry Playford joined Simon as comanager to begin 2005, followed by Gloria Fu in 2006. Each served as the lead decision-maker on certain sectors, though portfolio construction was a group exercise. The trio performed well through 2015 while utilizing a mixed cast of mostly shared analyst resources. Efforts to bolster the analyst team picked up following the departure of the strategy’s lone dedicated analyst in 2015, but more changes followed. The strategy’s performance slid in subsequent years as some of Fu’s consumer picks faltered, ultimately culminating in her departure from the firm in 2019. JPMorgan hired new analysts to replace Fu and enhance coverage in other sectors, which now fall under the purview of either Simon or Playford.

The reconfigured team hasn’t distinguished itself in a limited sample. The typically defensive strategy didn’t provide much protection during late 2018’s pullback or 2020’s first-quarter bear market. The portfolio’s characteristics were broadly consistent, but it suffered from a handful of poor-performing stocks in the consumer, energy, and technology sectors. It also leaned more heavily into sectors such as financials, which suffered most heavily during the pullbacks. To the managers’ credit, they largely maintained their positioning into 2021 and have made up ground, posting a 20.2% year-to-date return through September, which ranked in the second quartile of mid-value Morningstar Category peers and beat the benchmark by about 2 percentage points.

Despite reduced confidence in its prospects, this strategy should still deliver over the long run.

Process

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This strategy’s focus on high-quality value stocks hasn’t been executed with the highest precision in recent years, warranting a Process Pillar downgrade to Above Average from High.

Managers Jonathan Simon and Larry Playford have successfully employed their hybrid quality-and-value approach for many years, though recent missteps highlight gaps in its execution. Both managers prefer steadier businesses with lower revenue cyclicality and earnings volatility. Their ideal stock has a healthy return on capital and reliable profitability that trades at a reasonable valuation. Historically, that focus has produced a relatively durable portfolio that held up well in volatile market stretches such as 2008, 2011, and 2015 (all years when the benchmark produced a negative return). A stock’s enterprise value relative to its pretax earnings power and its cash flow yield are some of the managers’ favorite metrics to assess a stock’s worth. The managers are patient, often looking out three to five years ahead. Portfolio turnover is low and typically falls between 20% and 40% per year.

Despite a focus on quality, the team gave too much leeway to a handful of stocks that carried greater risk. The strategy suffered steep losses on cosmetics and fragrance company Coty COTY, whose string of debt-fueled acquisitions soured, and refiner PBF Energy PBF, whose shares plummeted in 2020 as it ran into a cash shortage. Playford acknowledged these errors but also affirmed that he and the team have redoubled their efforts to shore up the portfolio’s quality profile.

People

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This reassembled team has strengths but doesn’t bear substantial advantages relative to other top rivals, warranting a People Pillar downgrade to Above Average from High.

Two long-tenured managers anchor this strategy. Jonathan Simon has served here since the mutual fund’s 1997 inception. He is joined by Larry Playford, who started at JPMorgan in 1993 and became a comanager at the end of 2004 following two years as analyst. They’ve overseen a strong run of performance powered by stock selection, though results have tapered off some since 2016. They were joined by comanager Gloria Fu from 2006 until February 2019, when she left after a period of poor performance in her consumer stock picks. The managers relied on shared core/value analyst resources for much of its history but added dedicated analysts from 2016 through Fu’s departure in 2019. Playford believes the team is adequately staffed but isn’t ruling out further additions in the utilities and energy sectors.

Today, Simon makes the calls in the financials, real estate, healthcare, and consumer sectors, while Playford is accountable for decisions in the industrials, materials, utilities, energy, and technology sectors. Though their responsibilities differ, the managers consult each other frequently on portfolio transactions and collaborate on position sizing. Simon is now in his early 60s but intends to keep managing the fund for the near future. Playford’s experience and a larger analyst team should help ensure an orderly transition once Simon does step away.

Parent

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J.P. Morgan Asset Management’s strong investment culture, which shows through its long-tenured, well-aligned portfolio managers and deep analytical resources, supports a renewed Above Average Parent rating.

Across asset classes and regions, the firm's diverse lineup features many Morningstar Medalists, such as its highly regarded U.S. equity income strategy that’s available globally. There's been some turnover in the multi-asset team recently, but it remains deeply resourced and experienced. Manager retention and tenure rates, and degree of alignment for U.S. mutual funds compare favorably among the competition. Managers' compensation emphasizes fund ownership over stock ownership, which is distinctive for a public company.

The firm continues to streamline its lineup and integrate its resources further. For instance, in late 2019, the multi-asset solutions division combined with the passive capabilities. The firm hasn’t launched trendy offerings as it’s mostly expanded its passive business lately, but acquisition-related redundancies and more hazardous launches in the past weigh on its success ratio, which measures the percentage of funds that have both survived and outperformed peers. Fees are regularly reviewed downward globally; they're relatively cheaper in the U.S. than abroad. Also, the firm is building its ESG capabilities and supports distinctive initiatives on diversity.

Price

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It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s second-cheapest quintile. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.

Performance

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This strategy’s long-term track record is stellar, though its advantage has dwindled over time. From its November 1997 inception through September 2021, the L share class’ 12.2% annualized return easily outpaced the Russell Midcap Value Index’s 9.8%. However, much of that difference owes to the fund’s performance from inception through 2003. From that point onward, the fund has merely been competitive with the benchmark over a variety of long-term holding periods. Its case looks better relative to peers, as it has consistently come ahead of the mid-value category average. As of September 2021, it landed in the second quartile of peers over the trailing 10-year period and in the first quartile over the 15-year period. Its results also get a boost after considering risk (as measured by standard deviation) leading to benchmark-beating risk-adjusted performance.

The strategy’s quality focus typically pays off in down markets and hurts in up markets. It outperformed the benchmark in difficult years like 2008, 2011, and 2015 but lagged in notable rallies as in 2009 and 2013. However, it didn’t fare well in 2018 and 2020--two years featuring steep declines--because of stock-picking woes. Still, the broader body of work is strong thanks to holdings such as Sherwin Williams SHW and Synopsys SNPS, two stocks each held for more than a decade that returned multiples of their initial investment.

Portfolio

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This strategy’s profile fits with its process. The core of the portfolio usually lands on the border of the value and blend sections of the Morningstar Style Box, reflective of the managers’ focus on the combination of growth, profitability, and valuation. Measures of profitability, such as return on assets, typically come in higher than the Russell Midcap Value Index. Such characteristics are usually supported by a form of competitive advantage. Longtime holding Autozone AZO receives a narrow Morningstar Economic Moat Rating thanks to its brand and cost advantages, while companies including orthopedic product maker Zimmer Biomet Holdings ZBH and semiconductor firm Analog Devices ADI carry wide moat ratings.

The portfolio is well diversified across sectors and individual positions, usually holding 90-120 stocks with 15%-20% of assets invested in the top 10 holdings. No stock can exceed a 5% weight in the portfolio. However, the managers ensure there is sufficient differentiation from the Russell Midcap Value Index and aren’t afraid to be over- or underweight in particular sectors or industries. Mid-caps represent most of the portfolio, though the managers make way for a smattering of small and large caps, though they won’t initiate a position in a stock with a market cap greater than that of the largest company in the benchmark.