With more than $100 billion in U.S.-listed ETF assets, JPMorgan is one of the fastest-growing issuers, aided by advisor interest in actively managed ETFs. We previously profiled the investment approach of the JPMorgan Equity Premium Income ETF (JEPI) but wanted to chat with the managers of the JPMorgan Active Value ETF (JAVA) as traditional value investing regained popularity in 2022. Unlike the managers of index-based ETFs that have no discretion on what to buy, JAVA’s experienced team, led by Clare Hart and Scott Blasdell, regularly makes fundamental and valuation decisions.
Todd Rosenbluth: You have an extensive background in managing value-oriented strategies. Can you talk about the investment approach for JAVA and how it might differ from some of the mutual funds you manage?
Clare Hart, JPMorgan
Clare Hart: The investment approach for the value mutual funds we run, JPMorgan Equity Income and U.S. Value, is grounded in finding high-quality companies at reasonable valuations. Given our emphasis on quality, we typically avoid investing in cyclical areas of the market (i.e., home builders or commodity pure-plays). The JAVA ETF combines our quality orientation with the complementary approach of another tenured value investor, Scott Blasdell, who runs JPMorgan Large Cap Value. Scott emphasizes valuation, willing to invest in more cyclical areas of the market when they look attractive. This expands the opportunity set of companies we can capture with JAVA. JAVA provides investors access to JPMorgan’s value platform through a fully transparent, actively managed ETF.
Rosenbluth: JAVA launched in 2021, but in its first full calendar year in 2022, the fund outperformed the Russell 1000 Value Index by more than 600 basis points. What were some of the drivers?
Hart: 2022 was a rollercoaster ride for investors. We were fortunate to provide a strong client experience during JAVA’s first full year. We had strong stock selection in healthcare as the market favored more value-oriented pharma and managed care names. Additionally, an overweight to energy and underweight to technology helped performance. Our aim is for consistent outperformance vs. the benchmark (the Russell 1000 Value), which we delivered in 2022 by outperforming in every distinct quarter.
Rosenbluth: Unlike the Russell index, JAVA is actively managed. What are some of the shifts you made during the year that make the fund different in December than how it started in January 2022?
Scott Blasdell, JPMorgan
Scott Blasdell: 2022 was a year to be active. Coming into the year, our biggest overweight was to consumer discretionary as consumer balance sheets looked strong, and there was a lot of pent-up demand. However, we quickly realized the Fed was behind the curve combatting inflation, so we reduced some cyclicality accordingly. By mid-year, healthcare became our biggest overweight, given its defensive characteristics at undemanding valuations. By year-end, that positioning worked well, so we pruned the winners. Despite the large sell-off in technology companies, this sector remains our biggest underweight today. We are cautious that the next few quarters may be difficult in many end markets, and earnings estimates will likely be revised down further.
Rosenbluth: The fund takes a bottom-up approach, so can you talk about the rationale for some of the key holdings as we start 2023?
Hart: Our top holdings in JAVA are companies that represent the intersection of quality and value. This will be critical in 2023, which could be yet another volatile year, as the economy slows down, the consumer potentially weakens, and companies likely revise earnings and guidance lower. An example of a quality company with an undemanding valuation is Raytheon Technologies (RTX) in the industrials sector. This is an aerospace and defense company that has strong business fundamentals and generates plenty of free cash flow but sports a reasonable valuation given their commercial business has yet to recover fully.
Rosenbluth: After years of underperforming growth strategies, in general, value investing bounced back in 2022. Are traditional value sectors too richly valued?
Blasdell: Given a decade of underperformance, value still looks inexpensive relative to its own history and relative to growth. Some of the more defensive/quality areas of the market that held up well in 2022 look less compelling, but there are still pockets of value that make us excited today. For example, even after energy’s latest run, the sector seems relatively inexpensive given constrained supply dynamics and double-digit free cash flow yields. Finally, valuation spreads (the price between the most expensive and least expensive companies) are elevated, making us believe this will be a stock-picker’s market, regardless of style.
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