JPMorgan International Focus A IUAEX

J.P. Morgan announced that it is winding down the global sector specialist team within the international-equity group in May 2024. The global sector specialists combed through the vast array of ideas from J.P. Morgan's regional research teams and then worked with the portfolio managers to identify sector winners across countries. Of the eight members, four will remain with the firm in portfolio management roles, while the other four are leaving the firm.

According to the firm, the need for an additional research layer between the regional analysts and the portfolio managers eroded since Mark Ferguson assumed the global head of research role in 2020. Since then, the firm has adopted a global research framework used by all regional teams (instead of it differing across regions), while also investing heavily in its portfolio management technology platform, resulting in improved collaboration between portfolio managers and regional analysts.

Importantly, J.P. Morgan still boasts huge analytical resources based all around the world that contribute ideas to the international-equity strategies. And the solid London-based portfolio management team, which includes Tom Murray and Shane Duffy, remains in place. Therefore, the Above Average People ratings and Morningstar Medalist Ratings remain intact on JPMorgan International Equity, JPMorgan International Focus, and JPM International ADR.

JPMorgan International Focus is a standout non-US equity strategy because of its strong management team and robust investment approach.

This strategy is in the capable hands of Tom Murray and Shane Duffy. They boast a respective 27 and 24 years of experience—all with J.P. Morgan—and have co-led this offering since its 2011 inception. They work collaboratively and have complementary skill sets, with Murray having more of an energy and materials background, while Duffy previously covered consumer stocks. The managers also work together on the more diversified sibling offering JPMorgan International Equity, alongside teammates James Sutton and Zenah Shuhaiber, who have also been with the firm their entire careers.

The managers make full use of J.P. Morgan's huge analytical resources to build this best-ideas—but still well-balanced—portfolio. Supporting the managers are eight global sector specialists who scour the best ideas from the firm's regional research teams that cover about 2,500 stocks globally. The global specialists ultimately rank prospective stocks from A to C, with A representing their highest-conviction bets, a framework that helps form position-sizing decisions in the end 40- to 50-stock portfolio. The managers have wide flexibility at the sector and country levels, but they are cognizant of minimizing unintended sector, country, and style-related bets relative to the MSCI ACWI ex USA Index. For example, while they are willing to pay up for some growth-oriented opportunities, valuation is an important consideration as well, hence why the end portfolios tend to land in the core portion of the Morningstar Style Box. Overall, management has married the firm's in-house strengths with process traits to maximize the odds of success here, helping drive the Process rating to High from Above Average.

Murray and Duffy have produced compelling returns during their tenure here. Since the strategy’s November 2011 inception, through February 2024, the institutional share class gained 7.1% annualized, beating the index's 5.7% return and 82% of its foreign large-blend Morningstar Category peers. Returns here were also better than JPMorgan International Equity, whose institutional shares returned 6.3% during the same period.

The offering focuses on non-US firms that score well on balance-sheet strength, profitability, and management quality. Idea generation relies on this team's global sector specialists, who scour the best ideas from J.P. Morgan's vast regional equity research teams, which cover approximately 2,500 stocks around the world, by viewing their research with a global lens. The global specialists ultimately rank stocks from A to C, with A representing their highest-conviction bets, a framework that helps form position-sizing decisions. The team is long-term-oriented—it sets five-year expected return targets—so it's no surprise that annual portfolio turnover trends around 30%. While management is willing to pay up for some growth-oriented opportunities, valuation is an important consideration as well. As a result, the portfolio is well-balanced from a style perspective, hence why it has historically landed in the core portion of the style box.

This best-ideas portfolio is fairly concentrated, comprising 40 to 50 stocks, although individual holdings are still typically capped at 5%. Management wants stock selection to drive returns, and while sector and country bets can deviate up to 20 percentage points relative to the MSCI ACWI ex USA Index, full use of that flexibility has been rare in practice.

JPMorgan International Focus shares many traits with its more diversified sibling JPMorgan International Equity, but there are some differences. International Focus is benchmarked to the broader MSCI ACWI ex USA category index (which includes emerging markets), but International Equity is benchmarked to the MSCI EAFE Index, which excludes emerging markets. As of December 2023, International Focus' 12% emerging-markets exposure was well above International Equity's 1% but still represented a sizable underweight compared with the category index's 19%. The MSCI EAFE Index also excludes Canada, so International Equity won’t own Canadian stocks, but they can be owned in International Focus. As of December 2023, International Focus had 4% allocated to Canada, less than the category index's 8%.

Portfolio exposures reinforce that management is cognizant of balancing quality and valuation. Indeed, quality metrics like returns on invested capital have trended above the category index. At the same time, price multiples like price/earnings have typically been slightly higher than the category index over the years but well below the growth version of the index.

Japan has become a growing area of interest for the team, partially owing to improving corporate governance. The team added a handful of Japanese holdings since mid-2022 (through December 2023), including banking firm Mitsubishi UFJ Financial Group. That helps explain the portfolio’s Japan stake rising to 13% from 6% during the same period, now closely in line with the category index's 14%.

Tom Murray and Shane Duffy have co-led this offering since its November 2011 inception. Murray and Duffy have been with J.P. Morgan for their entire careers, possessing 27 and 24 years of investment experience, respectively. They work collaboratively and have complementary skill sets, which is a plus for this best-ideas portfolio. Indeed, Murray has more of an energy and materials background, while Duffy previously covered consumer stocks. The managers also work together on the more diversified sibling offering JPMorgan International Equity, alongside teammates James Sutton and Zenah Shuhaiber, who have also been with the firm their entire careers.

The managers, who are based in London, are supported by eight global sector specialists, averaging 22 years of experience and 12 at J.P. Morgan. The specialists scour the best ideas from the firm's huge equity research resources—by viewing their regional research with a global lens—providing ample comfort around coverage breadth. While the group has been stable over the years, it did see some changes in 2023. Lucy Parken and Sara Bellenda joined the specialist team in March 2023, though both had already been with the firm for many years. Parken took over industrials coverage for the departed Niranjan Aiyagari in addition to team management responsibilities. Bellenda's focus is on real estate, utilities, and infrastructure.

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.

Since then, through February 2024, the institutional share class gained 7.1%, beating the MSCI ACWI ex USA Index's 5.7% return and 82% of its foreign large-blend category peers. While volatility(as measured by standard deviation of returns) was slightly higher than the index's, risk-adjusted returns told a similar story, with its Sharpe ratio of 0.45 beating the index's 0.37 and 82% of its peers. Returns here were also better than its more diversified sibling offering JPMorgan International Equity, whose institutional shares returned 6.3% during the same period.

While the offering is well balanced from a style perspective, it has had a slight growth signature. That helps explain why the strategy's best years have tended to be when growth leads the way, such as in 2019 and 2020. Conversely, the offering struggled in 2022, when value held up much better than growth. The strategy fell 18.5% for the year, which was worse than the index's 16.0% loss and 80% of peers. Poor stock selection in industrials was the primary culprit, including distributor Ferguson. But management stuck to its knitting, and the strategy bounced back nicely in 2023, a year when value again beat growth (outside the US). The offering gained 17.0% in 2023, outpacing the index's 15.6% gain, in part thanks to healthcare firm Novo Nordisk and 2022 laggard Ferguson.

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 Silver.