JPMorgan Equity Income R6 OIEJX

JPMorgan Equity Income benefits from a prudent, time-tested approach and an experienced team.

Longtime lead manager Clare Hart rode off into the sunset on Sept. 5, 2024 after successfully running the strategy for 20 years. The institutional shares thumped its prospectus benchmark Russell 1000 Value Index and trounced the typical large-value Morningstar Category peer during her tenure. 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 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 here—Hart’s area of expertise.

The process isn’t flashy but is time-tested and consistent. The managers use the same approach that Hart designed, seeking 85-110 high-quality companies with reasonable valuations that can maintain stable dividend yields of at least 2%. Their classic value philosophy holds that a pool of well-run but undervalued companies with reliable earnings and disciplined capital allocation policies will beat the market over the long term. The key here is not so much in this sensible viewpoint, but in executing it with discipline and detailed insight.

The strategy’s returns since Brandon and Silberman joined as managers in November 2019 have lagged, but there’s cause for optimism. During that span the market has had two sharp rallies, in which the strategy tends to lag. And it did show its trademark low volatility and relative buoyancy during the 2022 downturn.

The team employs a time-tested, focused approach that doesn’t require screening for new ideas. The managers watch the compact US large-value universe for companies with consistent earnings, high returns on invested capital, conservative financials, and dividend yields of at least 2%. Those dividends must be modest payouts to ensure the funding of future business growth. Moreover, management teams must have a track record of solid capital discipline.

After meeting the financial strength thresholds, the team focuses on companies that are trading at a discount to their intrinsic values. It employs different metrics for various industries, but most begin with free cash flow yield as well as price- and enterprise-value multiples.

The resulting portfolio holds 85-110 stocks. The skippers limit new purchases to 5% of assets but will allow positions to appreciate beyond that level. The portfolio maintains exposure to all the sectors in the Russell 1000 Value Index, but weightings can vary by up to 10 percentage points from that bogy’s. Large-value managers are generally a patient group, but this crew is more so. Since Andy Brandon and Dave Silverman became managers, the strategy’s annual portfolio turnover has averaged just 15%, lower than 90% of category peers.

The portfolio’s profile attests to the process’ ethos of focusing on quality companies trading at reasonable prices. In July 2024, the portfolio’s return on equity and return on invested capital (measures of business quality) were 22.1% and 13.3%, respectively, much higher than the Russell 1000 Value Index’s 18.2% and 11.0%. The strategy’s price/earnings ratio was a bit higher than the bogy’s (21.2 versus 20.33) while its price/free cash flow ratio of 26.2 was below the index’s 27.8.

To drive returns, the portfolio doesn’t veer much from its benchmark. As of August 2024, the strategy had just a 3.3% tracking error with the Russell 1000 Value Index, meaning it more closely tracked that benchmark than the median large-value peer, which scored 3.9%. While its 1.8% trailing-12-month yield was above average in the large-value category, it didn’t rank in the top quartile.

The strategy gets ahead by heavily overweighting the managers’ favorite stocks within the benchmark. In July 2024, just 10 of the strategy’s 85 holdings were not in the Russell 1000 Value Index, and those included technology blue chips such as Microsoft and Apple. Of the eight stocks that held at least 2% of assets, only UnitedHealth Group was more than 2 percentage points in the index; the others averaged less than a 1-percentage-point difference relative to the benchmark.

The strategy long held a High People 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 assembled remains intact. In November 2019, Andy Brandon and Dave Silberman became listed portfolio managers here. 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 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 aren’t alone and have a decent 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 analysts came from the firm’s central analyst group.

This team also has access to the firm’s strong central analyst crew of 20, 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.

On Clare Hart’s just-completed watch from August 2004 through August 2024, the fund’s institutional shares rose an annualized 9.4% versus 8.5% for the Russell 1000 Value Index and 7.9% for the typical large-value category peer. For the period since Andy Brandon and Dave Silberman became comanagers in November 2019, the strategy’s 10.7% gain lagged the index’s 11.2% return and the typical peer’s 11.5% mark. That’s a predictable outcome given the period’s sharp rallies around the 2020 and 2022 downturns, not a reflection on their skill.

The strategy’s top attraction is its risk/reward profile. Over its full 20-year history, its Sharpe ratio (a risk/reward metric) of 0.63 was much better than the typical peer’s 0.48 and the Russell 1000 Value Index’s 0.51 in part thanks to its lower volatility. Rather remarkably, over its 20-year span, the strategy’s rolling five-year Sharpe ratios topped the average peer’s 98% of the time and the index’s 99% of the time.

A key driver of that risk profile has been solid defense in bear markets. The S&P 500 has had five drops of at least 20% since 2004. During those, the Russell 1000 Value Index’s average fall was 32% and the typical category peer’s average drop was 31%. This strategy’s institutional shares slid an average of 27%—materially better.

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 Gold.