JPMorgan Mid Cap Growth I HLGEX

JPMorgan Mid Cap Growth remains a decent option at the right price thanks to a good investment team and the support of a strong firm.

This strategy is settling in under a new lead manager, but it still has the resources to succeed. Felise Agranoff assumed the top spot after longtime manager Tim Parton retired in March 2024. She's a 20-year veteran of the firm who spent many years supporting Parton as an analyst and then as comanager from the start of 2016. All along, the strategy has performed quite well, ranking in the top quartile of the mid-cap growth Morningstar Category over the trailing 10-year period ended June 2024. Agranoff is joined by comanager Daniel Bloomgarden, who was promoted from an analyst position in July 2022. The two leverage an eight-member dedicated analyst team with a reasonable amount of industry experience and tenure at the firm.

The investment process here is unusual, and despite some favorable qualities, it remains to be seen how it will fare under Agranoff. Despite typically sporting one of the category's least differentiated portfolios relative to the Russell Midcap Growth Index, the strategy has still been able to generate a performance edge. That's because it has thrived using breadth rather than a handful of bold picks. The portfolio usually holds over 100 stocks, including a mix of high-conviction ideas and ones with less certainty but enough upside to warrant exposure, particularly if they are a large benchmark constituent. Agranoff intends to keep this structure.

Less certain though, is its stylistic orientation. It historically traded stocks using fundamental momentum as a component, preferring to initiate positions in stocks on the rise and cut those seeing slowing business trends. Agranoff fully subscribes to that philosophy, and perhaps more so than under Parton. According to the Morningstar Risk Model, the portfolio's exposure to the momentum factor relative to the benchmark recently reached its highest point since she joined as comanager in 2016. This may just be a blip on the radar, however, and it is too early in Agranoff's tenure as lead manager to draw meaningful conclusions about the process' evolution, if any.

Former lead manager Tim Parton skillfully weaved his way around a growth-stock bubble while maintaining enough differentiation from the benchmark for performance to stand out net of fees. The approach is a bit unorthodox in that the portfolio is less differentiated from the benchmark than almost any over actively managed mid-growth peer. While it used to be bolder, poor performance in 2016 led to more conservative position sizing. Results since then have been encouraging, but the strategy benefited from a steady hand to guide it, and new lead manager Felise Agranoff isn't as proven as her predecessor.

The core of the process will remain intact. The team looks for stocks with underappreciated growth prospects and some form of enduring advantage. Some holdings can be fast growers, while others steadier businesses, though the former has historically been the focus. The team likes to initiate positions in stocks with fundamentals inflecting higher, which leads to a price momentum tilt. Relative to the category benchmark, the portfolio's exposure to momentum was recently at its highest level in years, according to the Morningstar Risk Model, which raises the question of just how big an emphasis momentum will be under new leadership.

This portfolio of 90-130 stocks is well diversified and tends to roughly mirror the composition of its Russell Midcap Growth Index benchmark. As expected for a growth strategy, most of the assets tend to be invested in the technology, healthcare, and consumer discretionary sectors. However, there is some differentiation. The portfolio has maintained an overweighting in financials stocks since 2016 and is usually overweight in industrials. Investors shouldn't expect much in the real estate, utilities, or consumer staples sectors.

The dispersion of stock weightings in the portfolio is relatively flat. The largest positions at any given time tend to be around 2% to 3% of assets, while the average weighting comes in around 1%.

The managers' attention to the benchmark keeps the portfolio anchored in the mid-growth section of the Morningstar Style Box. Cash usually runs below 2% of assets.

A preference, on balance, for fast-growing companies typically skews the fund away from entrenched businesses with established profits and toward those looking to take share from incumbents or blaze their own trail. Portfolio-level measures of profitability tend to run below the benchmark, while measures of expected and trailing growth tend to run higher.

Having spent the vast majority of her 20 years at J.P. Morgan on this team as an analyst and then comanager, Felise Agranoff is an unsurprising successor to former manager Tim Parton. She's been mentored by Parton over her career and has done the same for others. While Parton had maintained the final say on portfolio decisions until his March 2024 departure, Agranoff was a key collaborator.

Agranoff and recently named comanager Daniel Bloomgarden are supported by an experienced eight-member analyst team averaging 16 years in the industry. While adequately staffed, the team's senior healthcare analyst, Matt Cohen, will step down from his role in early 2025. The group brought on Chris Kuehnle as a replacement. He'll have time to ramp up on coverage, which is a best practice when transitions do occur. The team has good breadth in other sectors, with a dedicated tech, financials, consumer, an additional healthcare analyst, and an industrials/energy analyst. The team also powers JPMorgan Small Cap Growth, which has a good long-term track record.

This group does most of the heavy lifting but can also lean on J.P. Morgan's central research analyst team for certain insights.

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.

Using the mutual fund’s institutional share class from Felise Agranoff's January 2016 start as an official comanager, the fund's 12.3% annualized return through June 2024 beat its average peer by nearly 2 percentage points and the Russell Midcap Growth benchmark by roughly 0.5 percentage points. Those returns came with roughly the same degree of volatility, as measured by standard deviation, leading to superior risk-adjusted returns.

The fund's momentum bias helped produce particularly strong performance from 2017 through 2020 as the market rewarded high-multiple stocks with lofty expectations for future growth. Top picks over this period include electric automaker Telsa, software company Veeva Systems, and generator company Generac Holdings.

However, what differentiated this fund is that it captured much of the bull market's upside but avoided some of the downside. Former manager Tim Parton became bearish on tech valuations following 2020's runup and reduced exposure to fast-growing companies. That call paid off, as the fund had a decent showing in 2021 and 2022 considering its more aggressive orientation.

In 2023, the fund outpaced most peers but lagged the index. Through the first six months of 2024, it edged the benchmark thanks to good stock picks in the industrials and telecom sectors.

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.