2023-10-20 08:35:22 ET
Summary
- Actively-managed JAVA puts emphasis on value and quality factors in creating its large-cap-heavy portfolio.
- JAVA has underperformed the S&P 500 since the previous note, with materials, utilities, and consumer staples being the most likely detractors.
- Though JAVA’s quality exposure is significant, I am not that optimistic regarding value.
- I believe its value proposition remains unconvincing in the current environment, with interest rates remaining the central concern. I see no meaningful reason for an upgrade.
I started covering the JPMorgan Active Value ETF (JAVA) in August , with a Hold rating. There are two main reasons why I am presenting an update today. First, the portfolio of this exchange-traded fund has seen a few changes, small wonder for an actively managed vehicle. Second, JAVA has significantly underperformed the S&P 500 since my note, partly proving my skepticism was justified. As the previous time I concluded that "the factor mix is uninteresting," today we need to review fresh data to check whether additions and deletions, as well as unsatisfactory performance, have resulted in the mix improving. This could potentially be a reason for a rating upgrade. But first, let us briefly recap the strategy.
Briefly on the strategy
JAVA was launched in October 2021 and has amassed an AUM of about $606.5 million since then.
The JPMorgan website says the fund has an "actively managed investment strategy that seeks to deliver a style pure U.S. large cap value equity portfolio" as it "employs a fundamental, bottom-up approach to identify quality companies at attractive valuations."
How has the portfolio changed since August?
As an actively managed vehicle, JAVA has the luxury of boosting exposure to stocks it considers capable of contributing to better performance compared to the Russell 1000 Value index, its benchmark , and, by the same token, to sell names that no longer have target characteristics without being constrained by an underlying index's rebalancing/reconstitution rules, which is the case with its passively managed counterparts.
Analyzing the JAVA portfolio as of October 17, I have found out that 15 companies were removed; in the August version, their combined weight was about 3.6%. The 3 most notable deletions were Qorvo (QRVO), a semiconductor industry player, US Foods Holding (USFD), a food distributor, and KeyCorp (KEY), a Cleveland-based diversified bank.
Ticker | Weight (August 4) |
QRVO | 0.5% |
USFD | 0.4% |
KEY | 0.4% |
Created using data from JAVA
At the same time, 9 companies were added, with Royal Caribbean Cruises ( RCL ), Globe Life ( GL ), and Silgan Holdings ( SLGN ) having the largest weights.
Ticker | Weight (October 17) |
RCL | 0.28% |
GL | 0.25% |
SLGN | 0.25% |
In all, in the current iteration, there are 150 stocks and REITs in the basket, compared to 156 previously. As of the August article, JAVA's turnover stood at 56%; since then, it has risen to 80%.
Interestingly, JAVA's sector mix has changed only slightly, principally driven by capital appreciation/depreciation of the holdings, with healthcare and energy gaining 1.9% and 1.5%, and financials and IT losing 1.87% and 1.57%, respectively.
As yields march higher, JAVA's value proposition remains unconvincing
Despite JAVA falling by almost 7%, its factor mix has not changed much, as the table below demonstrates.
Metric | Holdings as of August 4 | Holdings as of October 17 |
EY | 5.1% | 5.6% |
MC | $168.27 billion | $178.94 billion |
P/S | 3.1 | 2.98 |
EPS Fwd | 6% | 6.3% |
Revenue Fwd | 6.5% | 6.6% |
ROE | 20% | 31.9% |
ROA | 6.2% | 6.7% |
Created using data from Seeking Alpha and the fund; financial data as of August 6 and October 19
- Surprisingly, its weighted-average market cap even rose, now hovering slightly below $179 billion, with the top contributors unchanged compared to the previous note, namely Apple ( AAPL ), Microsoft ( MSFT ), and Alphabet ( GOOG ), which, as I should reiterate, is somewhat strange for a value-seeking fund. Mega caps continue to be the dominant allocation with a 44.9% weight; exposure to mid caps remains modest at just 5.6% vs. 5.3% in August.
- Nevertheless, the earnings yield did improve, partly due to the addition of General Motors ( GM ), which is currently trading with the highest EY in the basket, ~24.6%.
- But I would not say I am satisfied with this level. First, growth characteristics are hardly spectacular. With only mid-single-digit EPS and revenue growth rates, the EY should be higher, while Price/Sales should be lower.
- And with the United States 10-Year Bond Yield ( US10Y ) a few bps short of 5%, I would definitely prefer a larger EY.
- Another problem is a too-small share of holdings with a B- Quant Valuation grade or higher, just 11.2%.
- Regarding quality, JAVA is still nicely positioned, with 88.4% of the companies having a B- Profitability rating or better.
- On the negative side, I do not think a mid-single-digit ROA is a strong result for a mega-cap-heavy portfolio.
What stocks have most likely contributed to underperformance?
Since my article was published on August 7, JAVA has declined by almost 7%.
Seeking Alpha
But what were the major culprits? To answer that question, I have analyzed the performance of 141 stocks that were present in both the August 4 and October 17 versions of the portfolio; I have not taken into account newcomers and removed stocks since I was not tracking the portfolio between these dates, and I have no data on when exactly these positions were added or deleted.
As it can be seen on the chart above, a few holdings did deliver a positive price return over that period, including Eli Lilly and Company ( LLY ); LLY's stock price surged by ~35.1% amid the GLP-1 drug hype. But those that were in the red dominated nonetheless. More specifically, while 39 companies delivered gains, 102 saw their stock prices go down, with negative returns ranging from just a few bps to almost 31% in the case of Dollar General ( DG ). The top 5 detractors, including DG, are compiled in the following table (the tables below are based on metrics calculated using data from Seeking Alpha and JAVA, unless otherwise noted).
Stock | Sector | Price decline |
Dollar General ( DG ) | Consumer Staples | -30.85% |
Chemours ( CC ) | Materials | -30.69% |
FMC Corporation ( FMC ) | Materials | -27.69% |
Baxter International ( BAX ) | Health Care | -27.00% |
Southwest Airlines ( LUV ) | Industrials | -24.53% |
All the energy holdings in the group that I analyzed, which are predominantly represented by supermajors and E&P companies, delivered gains ranging from 4.6% in the case of EOG to 14.4% in the case of FANG. The primary reason is obvious: the supply and demand concerns in the oil market have pushed the price of the commodity higher.
Stock | % Change |
Diamondback Energy ( FANG ) | 14.37% |
ConocoPhillips ( COP ) | 11.33% |
Pioneer Natural Resources ( PXD ) | 9.04% |
Hess ( HES ) | 7.87% |
Cheniere Energy ( LNG ) | 7.58% |
Chevron ( CVX ) | 6.03% |
Exxon Mobil ( XOM ) | 5.15% |
EOG Resources ( EOG ) | 4.59% |
At the same time, all the materials companies were in the red.
Overall, for a better context, below are the median returns for each sector. The data show materials, utilities, and consumer staples were the essential detrators.
Sector | Median price return |
Communication | -4.79% |
Consumer Discretionary | -3.38% |
Consumer Staples | -8.39% |
Energy | 7.75% |
Financials | -3.73% |
Health Care | -4.54% |
Industrials | -4.59% |
Information Technology | -4.53% |
Materials | -9.75% |
Real Estate | -7.4% |
Utilities | -9.07% |
Also, it is worth providing an update on annualized returns and other relevant performance parameters. Compared to the previous article, data for August and September were added. The period in focus now is November 2021-September 2023.
Portfolio | JAVA | IVV | IWD |
Initial Balance | $10,000 | $10,000 | $10,000 |
Final Balance | $10,274 | $9,609 | $9,619 |
CAGR | 1.42% | -2.06% | -2.01% |
Stdev | 17.76% | 19.23% | 18.11% |
Best Year | 2.38% | 13.11% | 2.51% |
Worst Year | -0.89% | -18.16% | -7.74% |
Max. Drawdown | -14.65% | -23.93% | -17.78% |
Sharpe Ratio | 0 | -0.17 | -0.19 |
Sortino Ratio | 0 | -0.23 | -0.27 |
Market Correlation | 0.88 | 1 | 0.93 |
Data from Portfolio Visualizer
The good news is that while the iShares Russell 1000 Value ETF ( IWD ), which is a passively managed fund tracking JAVA's benchmark, and the iShares Core S&P 500 ETF ( IVV ) now have negative annualized returns over the period concerned compared to the low-single-digit CAGRs they had as of end-July, JAVA is still in the green, and its standard deviation is still the lowest.
However, since the beginning of the year, JAVA has outperformed IWD by just 18 bps.
Investor takeaway
Actively managed JAVA puts emphasis on value and quality factors in creating its large-cap-heavy portfolio. However, the issue is that, though its quality exposure is significant, I am not that optimistic regarding value. That is to say, I believe its value proposition remains unconvincing in the current environment, with interest rates remaining the central concern. I see no meaningful reason for an upgrade.
For further details see:
As Yields March Higher, JAVA's Value Proposition Remains Unconvincing