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RESEARCH HAS HELPED GUIDE J.P MORGAN’S INVESTMENT process since the 1980s, providing a solid foundation for decisions by the company’s portfolio managers. A decade ago, most equity analysts had a poor opinion of U.S. railroad stocks, which were earning 3 to 5 percent return on capital. However, a J.P. Morgan Asset Management research team led by veteran analyst Steven Lee looked more closely at the industry fundamentals and saw that by consolidating and reducing their cost structures, railroads were poised to gain a long-term competitive advantage over the trucking industry.
“After a careful evaluation, we invested heavily in the railroad industry,” says Paul Quinsee, head of US Equity, J.P. Morgan Asset Management. “Several years later, Warren Buffett also bought into railroads, whose return on capital has soared to 10 percent or more.”
That’s just one example of how J.P. Morgan’s long-standing commitment to incomparable research leads to investment results. “At a time when active management styles are out of favor, our experienced and skilled global team of analysts has played a key role in driving the success of our funds and strategies,” says Quinsee.
Today, product cycles are shorter, volatility is rising, structural changes are more frequent and the world is “harder to predict” notes Helge Skibeli, director of research, J.P. Morgan Asset Management. “As a result, having a strong equity research team is more important now than ever before.”
Building a global team
“We have focused on excellence in research for more than three decades,” says Quinsee, who notes that many issues facing the equities market in 1985, such as the balancing of investments, are the same as they are today. For example, there has been extensive discussion about the core/satellite approach to equity allocations, with investors questioning: What is the right mix of investments?
“J.P. Morgan’s robust research platform looks to help investors evaluate these investment strategies and find the right solutions,” Quinsee says
“Having analysts who have followed an industry through several cycles is very helpful in understanding the fundamental changes in each sector.”
Skibeli says the most important element in J.P. Morgan’s research success is its worldwide team
of analysts, who are based in New York, London and Asia, and constantly share their findings. For instance J.P. Morgan’s veteran analyst for the semiconductor industry has spent considerable time in Taipei, Beijing and Singapore as well as New York and has a deep understanding of Asian manufacturing operations and potential opportunities within the semiconductor value chain.
Noting that J.P. Morgan’s researchers have an average of 17 years experience, Skibeli says, “We have turned equity research into a rewarding career. In keeping with that philosophy, J.P. Morgan in 1997 created an analysts’ fund, whose investments would be guided by their own research recommendations. Through the years, the analysts have consistently picked stocks that have outperformed the S&P 500, says Skibeli, adding, “Today, we manage more than $100 billion in U.S. equities’ analyst-driven strategies.”
A consistent long-term approach
In addition to having great people, Skibeli says J.P. Morgan’s research platform includes two other key components: a consistent fundamental analytic process and a systematic valuation framework. “We follow and analyze at the fundamentals for each industry,” he says. “How did it perform in the past, how does it look today and what will it look like five years from now?” Then, the research team digs into the industry to identify companies that are likely to be winners and losers over the next five years
“We want analysts who think critically and don’t just accept the version of reality that is offered by the management team,” says Quinsee. “While every company’s situation is different, there are certain warning signs, such as overconfidence, that may indicate problems in the future. On the positive side, we want to see a management team with the ability to grow the business through good times and bad.”
That detailed analytic process sets the stage for J.P. Morgan’s consistent valuation framework. “We take the same approach across all sectors, using discounted earnings and cash flow projections for each company,” Skibeli says. “We want to be sure we make ‘apples-to-apples’ comparisons between different companies and industry sectors.”
Learning lessons
While J.P. Morgan’s approach hasn’t changed since the 1980s, the equities research team has learned some important lessons along the way. Quinsee notes that the high-tech recession of 2001-02 reinforced the need to look at macro economic environments when looking at individual companies and sectors.
Those insights helped J.P. Morgan reposition its portfolios over the next few years, and avoid disastrous mistakes. For instance, J.P. Morgan’s researchers recognized in 2007 that many banks were overleveraged and had become over-exposed to the superheated U.S. housing market.
“Our analysts saw that the high level of profitability in the financial sector was unsustainable, and recommended a pullback,” says Quinsee. “As a result, we made it safely through the collapse, and 2009 was one of the best years for our company’s research-driven strategies.”
In addition, Quinsee points out that being able to identify “losers” as well as “winners” plays an important role in many of J.P. Morgan’s strategies, such as long-short investing funds. “If your research focuses only on the winners, you are ignoring a big part of each sector.”
Today, the J.P. Morgan equity research team continues to update its assessments of different sectors, such as the airline industry. “After many years of underperformance, we feel the fundamentals have changed,” says Quinsee. “Now, the airlines are practicing pricing discipline, their costs are lower, the return on capital is now exceeds the cost of capital and the price of their stocks reflects that fundamental improvement.”
The growing importance of research
Looking ahead, Skibeli expects global equity research to play an increasingly important role in the next decade. “Overall market returns are expected to remain relatively low in the coming years, compared with the last few years” he says. “In that environment, active management – informed by a strong research team – can provide an important source of added value for institutional investors.”
For J.P. Morgan Asset Management, a robust research foundation will continue to guide the decision-making process for its portfolio managers. “Our commitment to building a powerful research team and follow a consistent process has allowed our managers to surpass their benchmarks on a consistent basis,” Quinsee says. “We believe our commitment to research will continue to provide clear and sustainable benefits to our clients.”
Contact Information:
Kenneth Poliziani
Managing Director
Head of Institutional Marketing for the Americas
J.P. Morgan Asset Management
212-648-1590
kenneth.a.poliziani@jpmorgan.com