JPMorgan Mid Cap Value L
Despite a couple blemishes in recent years, this strategy’s investment parameters are sound and have been constant over time, resulting in an Above Average Process rating.
Managers Jonathan Simon and Larry Playford have successfully employed their hybrid quality-and-value approach for many years. Both managers prefer steadier businesses with lower revenue cyclicality and earnings volatility. Their ideal stock has a healthy return on capital, reliable profitability, and trades at a reasonable valuation. But they are also willing to wade into stocks with greater uncertainty or operational headwinds as long as they feel strongly that the company has the financial strength to withstand a temporary rough patch. The managers pay close attention to position sizing to ensure higher-risk bets are smaller.
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 long-term investors, often looking out three to five years ahead.
Historically, these parameters have produced a portfolio of relatively durable companies that held up well in volatile market stretches such as 2008, 2011, and 2015 (all years when the benchmark produced a negative return). While performance stumbled in 2018 and 2020’s drawdowns as the managers misjudged the quality of certain holdings, it rebounded in 2021 and fared relatively better through the first nine months of 2022’s down market thanks to better execution.
This strategy’s portfolio 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 average 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 such as orthopedic product maker Zimmer Biomet Holdings ZBH 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% weighting 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 make up 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.