September 24, 2024 • 27 mins
With equities in a fundamental rotation and being shaken by economic surprises, the market may be searching for new sector leadership. On this episode of the Inside Active podcast, host David Cohne, mutual fund and active analyst with Bloomberg Intelligence, along with co-host Gina Martin Adams, BI’s chief equity strategist, spoke with JPMorgan Asset Management’s portfolio manager Felise Agranoff, co-portfolio manager for JPMorgan Active Growth ETF (JGRO) about investing in quality companies with strong and sustainable competitive advantages and best-in-class management teams. They also discussed JPMorgan’s approach to assessing underappreciated growth opportunities, as well as the differences in researching mid-cap and large-cap funds.
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Speaker 1 (00:10):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges and philosophies and security selection. I'm David Cohne,
I lead Mutual fun and Active Research at Bloomberg Intelligence.
Today my co host is Gina Martin Adams, chief equity
strategist at Bloomberg Intelligence. Gina, thank you for joining me.
Speaker 2 (00:33):
Thank you for having me David.
Speaker 1 (00:34):
So, before we bring today's guest in, I wanted to
ask you. You held your US Equity Outlook breakfast last
week you talked about a perfect storm happening. Can you
tell us about this perfect storm?
Speaker 2 (00:47):
Yeah? So, the perfect storm is really a combination of
seasonals with a fundamental rotation with some economic surprises. Unfortunately,
coming into the third quarter was pretty clear that we
were due for some rotation as fundamental earnings growth desceleration
in some of the tech and AI themes really take
(01:09):
some of the wind out of the sales of the market.
But some other fundamental improvements in early cyclicals and other
industries make up for some of that loss. But that
rotation can be pretty tough for the market at large.
When tech was such a big portion of especially the
US market, but also global equity performance over the course
of the year. At the same time, you have very
traditionally poor performance that emerges in the third quarter. September
(01:32):
is the worst month of the year historically, so you've
got the technicals that are working against the market. And
then thirdly, some pretty big surprises on the economic front,
in particular with respect to policy. Coming into July. You know,
the bond market was somewhat complacent with respect to where
we were heading for FED policy, and now all of
a sudden, we're expecting one hundred and fifty bases points
of cuts over the next twelve months. So those three
(01:53):
factors have created a little bit of volatility in the
equity market, to say the least. And I'm really excited
to speak to our guest about those well.
Speaker 1 (02:00):
It sounds like a lot going on, and so with that,
I'd like to welcome Felise Agronov to the podcast. Falise
is a portfolio manager at JP Morgan Asset Management. She's
co PM on the JP Morgan Active Growth ETF, which
as a ticker of jg R ROW, and lead manager
on the JP Morgan Growth Advantage Fund. Which has a
ticker VHIAX Falise. Thank you so much for joining.
Speaker 3 (02:23):
Us, Thank you so much for having me.
Speaker 1 (02:24):
So before we dig in, i'd love to hear how
you got your start in the investment business.
Speaker 3 (02:28):
Yeah, so it's a long story, but I was born
and raised a JP Morgan. I'm just kidding, but I
started at JP Morgan twenty years ago. When I first
started at JP Morgan, I started as a research associate
of covering cyclical sectors on our core research team. I
joined the Growth team eighteen years ago and I started
as a research analyst covering a variety of different sectors.
(02:51):
I started at a time when our growth team was
actually quite small relative to where it is today, and
so I always wore a lot of hats and had
a broader interest in the portfolio is of the sectors
that I covered, and so as a result, I was
named co portfolio manager ten years ago, first of our
mid cap growth fund, and eventually that's also translated into
the Growth Advantage fund that you mentioned as well as Jaygrow.
(03:14):
As you mentioned as well, I'm also a portfolio manager
on our equity focused strategy as well.
Speaker 1 (03:19):
Nice, so you know both. You know, I mentioned jaygro
and you just mentioned it, and you know, so my
first question really has to do with Active regaining relevance
right now, especially in etf rappers. So I'd love to
hear more about Jaygrow and you know the process for
the fund.
Speaker 3 (03:36):
Yeah, No, happy to do that. And I think it
is a really really interesting moment in time after leadership
has been very narrow in the markets is you know
alluded to earlier, and our growth benchmarks are concentrated as
I've ever been And essentially, you know what Jaegro is.
Jagro is an active growth ETF. It's a combination of
(03:56):
the growth advantage strategy that I manage as well as
my all Gary Devipoli's large cap growth strategy. We package
those two long standing strategies with strong historical track records
together in an active ETF, which we launched over two
years ago now is fifty to fifty between large cap
growth and growth advantage, and it's benchmarked against the Russell
(04:17):
one thousand growth. Essentially, what you get with Jagro is
you get the best ideas of the entire growth team
wrapped in an ETF rapper, fully transparent, with a fee
of forty four basis points, and then I'm happy to
get into a little bit more into the philosophy and
the processes. That's helpful as well.
Speaker 2 (04:35):
Great, thank you. I'm curious, Pelise if you could tell
us a little bit more about your migration through your career.
I really piqued my interest when you said you started out,
or at least prior to the last the most recent experience,
you were in mid caps, and I'm curious about your
perspective the difference between managing a mid cap fund and
a large cap fund and how vastly different those experiences
(04:56):
have been, or maybe some commonalities in the two processes.
Speaker 3 (05:00):
Yeah, no, happy to touch on that. And actually I'm
still the lead portfolio manager today. I have our mad
cap growth strategy as well, and essentially what our growth
advantage strategy is is it is a multicap strategy which
leverages our best ideas across the market cap spectrum. So
it includes our best ideas on the large cap side
as well as our best ideas on the mid cap side.
(05:21):
And I would say that our philosophy and process is
actually quite similar between the two, and that might be
a good good point for me to just talk a
little bit about our philosophy and process, and then we
can talk about some of the nuanced differences between made
and large cap.
Speaker 2 (05:35):
If that works, yeah, please go right ahead.
Speaker 3 (05:39):
Okay, that's great. And so essentially what we're looking for
is we look for high quality growth companies, and from
our standpoint, from a quality perspective, we're focused on companies
with strong and sustainable competitive advantages. We do a ton
of due diligence on a company's competitive mode. We also
look for companies with best in class management teams, and
(06:00):
then we look for growth companies with strong financial characteristics.
In growth, you don't necessarily need to be maximizing your
margins and free cashow today, but you ultimately need to
have a really attractive financial model. And then we combine
the quality side of our philosophy with growth, where we're
looking for large, underappreciated growth opportunities where we can get
(06:21):
a differentiated perspective. And that differentiated perspective is key, and
we should talk more about it because we believe the
real money way to make money and growth companies is
to have a very different view on a company's longer
term earnings power relative to other market participants, and that
tends to be where we really really win, and we
do that through deep due diligence. At chap and Morgan,
(06:42):
we have incredible access to management teams, and we go
and we visit companies on site on a regular basis.
For example, within technology, twice a year we're out in
Silicon Valley meeting with both public and private companies. But
we also take our research a step further. We are
our industry analysts have decades of experience covering their sectors
(07:03):
and they're out there speaking with industry contacts, customers, competitors, suppliers,
attending trade shows, and that really guides our differentiated perspective
on these large growth opportunities. And we generally feel that
the market often underappreciation rewards both the magnitude and duration
of high quality growth companies. And then as it relates
(07:23):
just to the difference between mid and large caps, we're
in a world where we love to get a differentiated
perspective and we like to find companies as early as possible.
And so what I would say is sometimes the markets
tend to be less efficient as you go down the
market cap spectrum, and so there's even more of a
chance of being able to get a very very different
perspective relative to other market participants to the deep due
(07:46):
diligence that we do. So I think that that's been
a really important part of our process. And one of
the things that we love to do in growth Advantage
in j GROW is we like to own companies really
really early from when they're a MidCap company and then
own them so they become much larger companies. And there's
many examples within the portfolios of companies like this that
we've owned when there were smaller medcap companies and then
(08:08):
became much larger.
Speaker 2 (08:10):
Do you find yourself in today's climate, just because of
concentration and because of the AI phenomenon, spending much more
time in the biggest of the big caps relative to
the smaller caps.
Speaker 3 (08:21):
Yeah. So the reality is that since our benchmarks as
concentrats has ever been, it's become extraordinarily important to have
the right view on all the largest cap companies, and
so relative to history, the larger cap companies are definitely
taking more mind share, they're definitely taking a larger percentage
of the portfolio. However, we are active managers, so we're
(08:42):
not afraid to be different than the benchmark. In fact,
as you look at it today. If you look at Jagro,
we're over a thousand basis points underweight the Magnificent seven.
And so we actually think that, you know, after leadership
has been extraordinarily narrow, our view is that what we're
going to see is we're going to see leadership broad now.
We're going to see more differentiation between companies, whether it's
(09:03):
the largest cap companies or across the market cap spectrum.
And to us, that's providing a really attractive opportunity for
us as stock pickers.
Speaker 2 (09:11):
And then last question, then I'll let David possibly have
a word in edgewise here. I'm curious because one of
the complaints I hear oftentimes from investors is that there
just are a dearth of opportunities in small and mid caps,
in particular because there's been very little issuance, especially into
the small cap index, but very little activity in the
mid cap index. Are seeing, you know, companies go from
(09:31):
small directly into large and large directly into small. Talk
to us about some of the opportunities that you've engaged in,
or maybe some of the ideas that you're generating that
are more mid cap and focus right now.
Speaker 3 (09:43):
Yeah, No, it's a really really good question. One of
the things that I would say is is that you
lack of IPOs has definitely impacted small caps. And so
you may have noticed when I talked about opportunities we're
finding down the market cap spectrum, they tend to be
more mid caps today rather than small caps, as the
quality of the company and small cap is low, I
would say relative to history. However, I think that there
(10:05):
are a lot of interesting companies that have graduated into
the MidCap universe that are really, really interesting. One of
the things that we love about MidCap companies is that
by the time they graduate, they tend to be of
a certain quality to make their way out of small cap,
because many companies never make their way out a small
cap and often they could have the ingredients to become
(10:25):
much much larger companies over time. And so I'm happy
to give you a few examples. I mean, one great
example of a company that we have owned in our
MidCap strategy for a long while and we now also
own in Jagrow, would be paloout On Networks. Palleout On
Networks is a leader in cybersecurity hardware and software. They
(10:48):
have a really really strong competitive position and they're consolidating
market share within cybersecurity as security becomes a really really
high priority part of the tech budget, even if I'm
sure you're going to talk about generative AI, but when
you think about the risks around generative AI and moving
data into large language models, the cybersecurity risks have never
(11:09):
been higher. And so as a result, we're seeing companies
prioritize within their tech budget spending on cybersecurity, and a
company like Palato is able to consolidate market share as
big companies like JP Morgan, we don't want to deal
with multiple vendors. Instead, we want to consolidate or spend
with less and less vendors. And so a company like
(11:31):
Palota Networks that's gone for being a much smaller company
to being a much larger company as the importance of
the platform has really helped them perform and execute well
in the market.
Speaker 1 (11:42):
I actually have a follow up question to you. Know,
you mentioned J grow leverages large cap growth and growth advantage. Yeah,
I guess what is the process? Is it just kind
of taking different securities from each portfolio or is there
you know, kind of a process of how that works.
Speaker 3 (11:59):
Yeah, No, I'm glad you asked that question. And so
the way it works is it is just a combination
of straight combination of large kept growth strategy that's existed
for a long time as well as a growth advantage strategy.
And so we're not doing anything different in the Jagro vehicle. Essentially,
what we're doing is we're just taking half of one
portfolio and half of another portfolio and putting them together
(12:22):
into this vehicle. And so if the name is a
high conviction name both in growth advantage and large kept growth,
then it becomes one of the biggest bets within ja grow.
So a good example of that would be Regeneron, for example,
within healthcare, is a very large bet within jagrow. If
it's a smaller bet and just one of the strategies,
and it ends up being a really small bet within Jagrow.
(12:46):
And so that's why I mentioned that it really represents
the best highest conviction thinking of the entire growth platform
at JPMorgan.
Speaker 1 (12:54):
So I actually have one more question on process. In
the perspectus for the fund, it does mention that this,
you know, an ESG component involved, and I guess my
question is, you know, what is the process for that?
Speaker 3 (13:06):
Yeah, And so we've you know, We've had a long
standing process around ESG where we fill out I'M a
proprietary questionnaire that focuses on what we believe are the
key es and G issues, and every analyst fills that
out with the companies that they cover, and when we're
incorporating a company into the portfolio, we think about the
(13:28):
ESG risks. Now, we don't focus specifically on ESG as
the only risk, but we look at one of the
many risk factors that we look at when we're thinking
about position sizing.
Speaker 2 (13:37):
Speaking of risks, I would be remiss if I didn't
mention the macro risk that we talked about at the beginning.
Maybe you could talk to us a little bit about
how you navigate through these pretty big shifts, especially in
monetary policy. I think it's pretty clear that the market's
really struggled a little bit with this idea that suddenly
the FED is going to ease and potentially ease a
little bit more than anybody had anticipated. At the same time,
(13:58):
the BOJ is hiking tech and growth stocks seem to
be at the sort of center of that risk right now.
How does that play into your process if at all?
Speaker 3 (14:08):
Yeah, No, it's a good question. And I think risk
is a really important question to explore for us because
we do have a keen focus on risk management. So
I want to explore that more broadly but directly related
to your question around macro risks. And we very much
are bottoms up stock pickers. However, we're very aware of
the market environment that we participate in as well as
(14:28):
many of the macro drivers and what we're not. As
much as we are high quality growth investors, we're not
growth at any price. And so the key for us
is when we're able to find a very differentiated perspective
relative to the market. And so, for example, there are
points in time, say in twenty twenty in twenty twenty one,
(14:51):
which is a very different period than we're in today,
when interest rates were very very low, we were coming
out of COVID, where what we saw was is that
many of the highest growth parts of our universe, such
as technology, they were very very extreme valuations relative to history.
And even though many of the same software companies had
driven very substantial performance for us for many years. We
(15:14):
really pride ourselves in being really really objective and focusing
on where we can get a differentiated perspective and what
we were finding was that we didn't have as great
of a differentiated perspective on many of those tech companies
at that moment in time, given the valuation starting point.
And so at that moment, we pivoted based on the
bottoms up riscrew boards that we were seeing, and we
actually went very very underweight technology. At one point, we
(15:37):
were about one thousand basis points underweight technology relative to
a high weighting in the benchmark. I give you that
background just to show that we're willing to come pivot
based on the environment that we're in, and we really
do let the bottoms up riscrew boards that we're finding
guide it. But it's actually interesting to note. I did
mention that we are very very underweight the Magnificent seven
(15:59):
today based on what we're seeing from a risk reward
standpoint and how differentiated our views are. But when you
look at technology as a whole, we're also very very underweight.
We're over eight hundred basis points underweight technology relative to
a very very concentrated benchmark, and so we are seeing,
you know, some increased risks, I would say, and on
(16:21):
the margin, I think we're looking for more portfolio balance
relative to a very very concentrated benchmark that includes, you know,
investing in a variety of different sectors. We've gone increasingly
overweight healthcare, for example, which is a more defensive sector
and provides more portfolio balance. But then we've also found
interesting opportunities in sectors such as financials that have been
(16:41):
out of favor for a long time, while you know,
areas like tech have been in vogue. And so we're
definitely very much focused on portfolio balance and we don't
want to let you know, the macro environment you know,
overall drive the portfolio. We really want to let our
focus on stockpicking.
Speaker 2 (16:55):
Shine, Can you dig in a little bit to that
underweight on the mag seven and talk to us about
the case for why is it partially evaluations? Mostly evaluations?
Is it you know, the growth cycle and just other
opportunities emerging sort of what's the case that you're making
or that helped you make the decision process beyond portfolio considerations.
Speaker 3 (17:20):
Yeah, So part of it, I would say is that
some of the easy money of the Magnificent seven has
been made. So if you were to back up, you know,
I mentioned I talked about how we were very underweight
technology heading into twenty twenty two and the growth draw
down there. But if you actually, you know, continue the story,
what you'll see is at the end of twenty twenty two,
(17:41):
in early twenty twenty three, we actually added back very
significantly to technology, and that started with many of the
Magnificent Seven, and we built up in video quite substantially.
Once again, we went very overweight meta, for example, and
so we're willing to pivot based on the risk rewards
that we're seeing at at that moment in time. One
of the reasons why we led with the Magnificent seven
(18:03):
when we're adding back tech exposure is because the risk
rewards were incredibly interesting. The free cash yield that we're
seeing relative to the growth we're extremely exciting, particularly relative
to more defensive sectors such as consumer staples. As we
sit here today after a really really strong twenty twenty three,
(18:24):
in early twenty twenty four, what we see is that
the risk rewards aren't as compelling as they once were.
We don't think that this is you know that we're
seeing valuations that are bubbly in the Magnificent seven, but
we just think that the valuation starting point is less interesting,
and so then you know, we get into our process
of looking at where do we have the most differentiated
(18:45):
view on the company's future earnings power? And I would
say that it's to varying degrees. And so Meta is
one example of a company within the Magnificent seven that
we still have a very differentiated view on the company's
long term earnings power, or we have a nice sized pet.
When we look at many of the others, our view
is no longer as differentiated. And we think it's really
(19:06):
important in an environment where we don't have as much
of a differentiated view to utilize that capital to invest
in other companies in other sectors where the magnitude of
our differentiation is hired.
Speaker 2 (19:18):
Today. Great, and I know you mentioned healthcare is an
area where you've moved to an overweight. What specific themes
are really interesting to you or is it a somatic
based sort of overweight. What's driving that healthcare exposure right now?
Speaker 3 (19:32):
Yeah, it's interesting because it's actually quite diversified, and again
it's just finding great bottoms up opportunities. And so I
would just unpack that a little bit and talk about,
you know, a couple of things that are of interest
to us within healthcare. First, I would start with biotech
and biopharma. That's a sector within growth. It's been out
(19:53):
of favor for many, many years, and you know, we
do think in an environment where interest rates are coming
down again and there are many really high quality companies
that have really really interesting catalysts that we're finding many
more interesting opportunities irrelevant of the macroeconomy. I mentioned Regeneron,
(20:13):
for example, as being one of our largest positions. Regeneron
is a great franchise, it trades it an attractive free
cash yield. But I think what's even more interesting is
that people underestimate the importance of their pipeline and the
fact that they're utilizing genetic data in order to improve
drug discovery. The one of the companies that have been
doing this the longest, and we think people massively underappreciate
(20:35):
their pipeline. We're also finding some interesting opportunities in biotech
down the market cap spectrum as well. As nothing has
been more out of favor than small and MidCap biotech.
We're finding a lot of really interesting, high quality companies
that super attractive risk rewards, where we have a very
differentiated perspective on their future market opportunity. And then Beyond biotech,
(20:57):
I would say, you know, another area that we have
a lot of two would be GLP. Once we do
think that the market massively underestimates the obesity market, and
we think that Lily has a really strong competitive advantage
even versus Novo, then will be a huge winner that people.
This is a classic example where people think it maybe
(21:18):
look a little bit more expensive on near term numbers,
but people are massively underappreciating both the magnitude and the
duration of the opportunity. And then beyond pharma, what I
would say is that we're also finding some interesting opportunities
on the device side. Intuitive Surgical's name that we've known
for a very very long time and we've recently built
it up again. They're a leader in robotic surgery, and
(21:41):
they just came out with their latest new robot, which
we think is going to be a really attractive catalyst
to further inflect the penetration of robotic surgery. And we
think we're just at the cusp of seeing the impact
of that. We believe we have a very differentiated view
in the market. And so I can go on and on.
There's many more examples, but what you can see is
that there's a lot of interesting opportunities from a bottoms
(22:02):
up standpoint within healthcare, and we have to worry a
lot less about the macro environment.
Speaker 2 (22:08):
Great, are you seeing anything in the consumer space right now?
I get tons and tons of questions. So many people
are so concerned about the consumer spending outlook and where's
the consumer headed? But things like home builders are breaking
out right and different. You know, there's some clear moving
parts inside the consumer. How are you navigating that as
a growth investor? Are there consumer stocks that are catching
(22:29):
your eye or would this be a place you'd avoid.
Speaker 3 (22:32):
Yes, what I would say is that I just said
at the beginning. But one of the things from us
as growth investors is that when you think about our
growth team, we're actually equally well resourced in every single sector.
So we don't have a disproportion amount of tech analysts.
We actually have a similar amount of consumer analysts and
healthcare analysts, and so we really have proven over time
the ability to generate alpha across sectors and that's been
(22:53):
a key strength of our platform. And so as it
relates to consumer, we actually are finding some interesting opportunity.
I would say that we've been cautious on the consumer
for some time, and as a result, when we think
about the opportunities that have been most attractive to us
and has been in I would say two categories. Either
the value areas of consumer such as for example, we
(23:17):
own tj X, which is a leading off price retailer.
It's a great example of a company that's able to
take advantage of many of the issues in the consumer sectors.
There were significant amounts of over inventory that was happening
within the consumer sector. In TJX, they're the largest off
price retailer and they have the greatest buying power to
(23:37):
take advantage of buying those great brands at discounted prices
when others have too much inventory. As a result, they've
been one of the few consumer companies that have been
able to put up really, really strong results and they're
able to consolidate significant amounts of market share from the
department stores. And so that's been a good example of
where we've been able to find some interesting consumer syxical opportunities.
(24:00):
We've also focused a lot on consumer tech as well,
and so we've owned for example, door Dash as well
as Uber. Those are great examples of businesses that irrelevant
of the economy. They're consolidating significant amounts of market share,
and I think most importantly, they become much better industries
(24:22):
from a competitive intensity standpoint than they've been historically, which
has resulted in much more attractive profitability and free cash
flow generation. And I think DoorDash is a good example
of how we use our imagination to dream to dream.
I think most people when they think of DoorDash, they
think of food delivery and the food delivery business. They're
a leader, they've don does a great job at consolidating
(24:42):
market share, and we expect that to continue. But when
we think about the larger market opportunity that people are underappreciating,
you have to think about the fact that every brick
and mortar retailer has to compete against Amazon. In these days,
we've all become used to getting same day or next
day deliveries and it's very hard for brick and mortar
retailers to compete against that. DoorDash could utilize the logistics
(25:04):
network in order to be able to help and partner
with brick and mortar retailers. For example, they had recently
announced a partnership with Low's, the home improvement store. So
we think people are massively underappreciating the longer term opportunity
for them.
Speaker 1 (25:18):
I do want to take a step back and kind
of just talk about the ETF wrapper for a second. Yeah,
you know, with active kind of coming back over the
last year. You know, one of the things a lot
of firms we're trying to do a few years ago
was the the you know, active kind of semi transparent models,
and a lot of the ETFs now that are gaining
(25:39):
traction a more transparent. So, as a you know, a
portfolio manager, is there anything you do different between you know,
managing the ETF you know, versus the say, the growth
advantage mutual fund, you know, with you know, having a
portfolio that's transparent of their kind of considerations to go
into that, Yeah.
Speaker 3 (26:00):
No, I think it's a really good question. What I
would say is that is one of the reasons why
we've combined our two biggest growth funds into one active
ETF because of the transparency aspect of it. And so
that was that's how we've thought of a lot of
our active ETFs here on existing strategies, that we've combined
two funds into one active ETF. As far as any
(26:21):
differences in the way we manage a strategy. There really
aren't any differences in the way that we manage the
underlying strategies. One of the beauties of being part of
such a big platform like JP Morgan is that we
have an incredible ETF team that we partner with that
makes all of the magic happen behind the scenes while
we can focus on our investing as portfolio managers.
Speaker 1 (26:42):
That makes sense. Before we let you go, I just
have one more question, you know, semi investment related. What
are some of your favorite books? You know, whether it's
you know, investment related or not.
Speaker 3 (26:55):
Yeah, so I would say more an investment standpoint, I
have a lot, but I think one that summarizes the
way I think about investing really well would be One
Up on Wall Street, which is the idea of doing
differentiated work to get a differentiated perspective on companies, and
that really is our north star. That's how we tend
(27:15):
to win, and it's by having a very different view
and a company's fundamentals. And so as much as I
love so many different books, that one tends to be
my favorite.
Speaker 1 (27:25):
Great, Well, this is a great discussion. Felice and Gina,
thank you so much for joining me today.
Speaker 3 (27:31):
Thank you so much for having me.
Speaker 2 (27:33):
Yeah, Thank you David, and thank you Phillise. A great discussion.
It was lovely to have you on.
Speaker 1 (27:37):
Yeah, my pleasure until our next episode. This is David
Cohen with the Inside Active.
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges and philosophies and security selection. I'm David Cohne,
I lead Mutual fun and Active Research at Bloomberg Intelligence.
Today my co host is Gina Martin Adams, chief equity
strategist at Bloomberg Intelligence. Gina, thank you for joining me.
Speaker 2 (00:33):
Thank you for having me David.
Speaker 1 (00:34):
So, before we bring today's guest in, I wanted to
ask you. You held your US Equity Outlook breakfast last
week you talked about a perfect storm happening. Can you
tell us about this perfect storm?
Speaker 2 (00:47):
Yeah? So, the perfect storm is really a combination of
seasonals with a fundamental rotation with some economic surprises. Unfortunately,
coming into the third quarter was pretty clear that we
were due for some rotation as fundamental earnings growth desceleration
in some of the tech and AI themes really take
(01:09):
some of the wind out of the sales of the market.
But some other fundamental improvements in early cyclicals and other
industries make up for some of that loss. But that
rotation can be pretty tough for the market at large.
When tech was such a big portion of especially the
US market, but also global equity performance over the course
of the year. At the same time, you have very
traditionally poor performance that emerges in the third quarter. September
(01:32):
is the worst month of the year historically, so you've
got the technicals that are working against the market. And
then thirdly, some pretty big surprises on the economic front,
in particular with respect to policy. Coming into July. You know,
the bond market was somewhat complacent with respect to where
we were heading for FED policy, and now all of
a sudden, we're expecting one hundred and fifty bases points
of cuts over the next twelve months. So those three
(01:53):
factors have created a little bit of volatility in the
equity market, to say the least. And I'm really excited
to speak to our guest about those well.
Speaker 1 (02:00):
It sounds like a lot going on, and so with that,
I'd like to welcome Felise Agronov to the podcast. Falise
is a portfolio manager at JP Morgan Asset Management. She's
co PM on the JP Morgan Active Growth ETF, which
as a ticker of jg R ROW, and lead manager
on the JP Morgan Growth Advantage Fund. Which has a
ticker VHIAX Falise. Thank you so much for joining.
Speaker 3 (02:23):
Us, Thank you so much for having me.
Speaker 1 (02:24):
So before we dig in, i'd love to hear how
you got your start in the investment business.
Speaker 3 (02:28):
Yeah, so it's a long story, but I was born
and raised a JP Morgan. I'm just kidding, but I
started at JP Morgan twenty years ago. When I first
started at JP Morgan, I started as a research associate
of covering cyclical sectors on our core research team. I
joined the Growth team eighteen years ago and I started
as a research analyst covering a variety of different sectors.
(02:51):
I started at a time when our growth team was
actually quite small relative to where it is today, and
so I always wore a lot of hats and had
a broader interest in the portfolio is of the sectors
that I covered, and so as a result, I was
named co portfolio manager ten years ago, first of our
mid cap growth fund, and eventually that's also translated into
the Growth Advantage fund that you mentioned as well as Jaygrow.
(03:14):
As you mentioned as well, I'm also a portfolio manager
on our equity focused strategy as well.
Speaker 1 (03:19):
Nice, so you know both. You know, I mentioned jaygro
and you just mentioned it, and you know, so my
first question really has to do with Active regaining relevance
right now, especially in etf rappers. So I'd love to
hear more about Jaygrow and you know the process for
the fund.
Speaker 3 (03:36):
Yeah, No, happy to do that. And I think it
is a really really interesting moment in time after leadership
has been very narrow in the markets is you know
alluded to earlier, and our growth benchmarks are concentrated as
I've ever been And essentially, you know what Jaegro is.
Jagro is an active growth ETF. It's a combination of
(03:56):
the growth advantage strategy that I manage as well as
my all Gary Devipoli's large cap growth strategy. We package
those two long standing strategies with strong historical track records
together in an active ETF, which we launched over two
years ago now is fifty to fifty between large cap
growth and growth advantage, and it's benchmarked against the Russell
(04:17):
one thousand growth. Essentially, what you get with Jagro is
you get the best ideas of the entire growth team
wrapped in an ETF rapper, fully transparent, with a fee
of forty four basis points, and then I'm happy to
get into a little bit more into the philosophy and
the processes. That's helpful as well.
Speaker 2 (04:35):
Great, thank you. I'm curious, Pelise if you could tell
us a little bit more about your migration through your career.
I really piqued my interest when you said you started out,
or at least prior to the last the most recent experience,
you were in mid caps, and I'm curious about your
perspective the difference between managing a mid cap fund and
a large cap fund and how vastly different those experiences
(04:56):
have been, or maybe some commonalities in the two processes.
Speaker 3 (05:00):
Yeah, no, happy to touch on that. And actually I'm
still the lead portfolio manager today. I have our mad
cap growth strategy as well, and essentially what our growth
advantage strategy is is it is a multicap strategy which
leverages our best ideas across the market cap spectrum. So
it includes our best ideas on the large cap side
as well as our best ideas on the mid cap side.
(05:21):
And I would say that our philosophy and process is
actually quite similar between the two, and that might be
a good good point for me to just talk a
little bit about our philosophy and process, and then we
can talk about some of the nuanced differences between made
and large cap.
Speaker 2 (05:35):
If that works, yeah, please go right ahead.
Speaker 3 (05:39):
Okay, that's great. And so essentially what we're looking for
is we look for high quality growth companies, and from
our standpoint, from a quality perspective, we're focused on companies
with strong and sustainable competitive advantages. We do a ton
of due diligence on a company's competitive mode. We also
look for companies with best in class management teams, and
(06:00):
then we look for growth companies with strong financial characteristics.
In growth, you don't necessarily need to be maximizing your
margins and free cashow today, but you ultimately need to
have a really attractive financial model. And then we combine
the quality side of our philosophy with growth, where we're
looking for large, underappreciated growth opportunities where we can get
(06:21):
a differentiated perspective. And that differentiated perspective is key, and
we should talk more about it because we believe the
real money way to make money and growth companies is
to have a very different view on a company's longer
term earnings power relative to other market participants, and that
tends to be where we really really win, and we
do that through deep due diligence. At chap and Morgan,
(06:42):
we have incredible access to management teams, and we go
and we visit companies on site on a regular basis.
For example, within technology, twice a year we're out in
Silicon Valley meeting with both public and private companies. But
we also take our research a step further. We are
our industry analysts have decades of experience covering their sectors
(07:03):
and they're out there speaking with industry contacts, customers, competitors, suppliers,
attending trade shows, and that really guides our differentiated perspective
on these large growth opportunities. And we generally feel that
the market often underappreciation rewards both the magnitude and duration
of high quality growth companies. And then as it relates
(07:23):
just to the difference between mid and large caps, we're
in a world where we love to get a differentiated
perspective and we like to find companies as early as possible.
And so what I would say is sometimes the markets
tend to be less efficient as you go down the
market cap spectrum, and so there's even more of a
chance of being able to get a very very different
perspective relative to other market participants to the deep due
(07:46):
diligence that we do. So I think that that's been
a really important part of our process. And one of
the things that we love to do in growth Advantage
in j GROW is we like to own companies really
really early from when they're a MidCap company and then
own them so they become much larger companies. And there's
many examples within the portfolios of companies like this that
we've owned when there were smaller medcap companies and then
(08:08):
became much larger.
Speaker 2 (08:10):
Do you find yourself in today's climate, just because of
concentration and because of the AI phenomenon, spending much more
time in the biggest of the big caps relative to
the smaller caps.
Speaker 3 (08:21):
Yeah. So the reality is that since our benchmarks as
concentrats has ever been, it's become extraordinarily important to have
the right view on all the largest cap companies, and
so relative to history, the larger cap companies are definitely
taking more mind share, they're definitely taking a larger percentage
of the portfolio. However, we are active managers, so we're
(08:42):
not afraid to be different than the benchmark. In fact,
as you look at it today. If you look at Jagro,
we're over a thousand basis points underweight the Magnificent seven.
And so we actually think that, you know, after leadership
has been extraordinarily narrow, our view is that what we're
going to see is we're going to see leadership broad now.
We're going to see more differentiation between companies, whether it's
(09:03):
the largest cap companies or across the market cap spectrum.
And to us, that's providing a really attractive opportunity for
us as stock pickers.
Speaker 2 (09:11):
And then last question, then I'll let David possibly have
a word in edgewise here. I'm curious because one of
the complaints I hear oftentimes from investors is that there
just are a dearth of opportunities in small and mid caps,
in particular because there's been very little issuance, especially into
the small cap index, but very little activity in the
mid cap index. Are seeing, you know, companies go from
(09:31):
small directly into large and large directly into small. Talk
to us about some of the opportunities that you've engaged in,
or maybe some of the ideas that you're generating that
are more mid cap and focus right now.
Speaker 3 (09:43):
Yeah, No, it's a really really good question. One of
the things that I would say is is that you
lack of IPOs has definitely impacted small caps. And so
you may have noticed when I talked about opportunities we're
finding down the market cap spectrum, they tend to be
more mid caps today rather than small caps, as the
quality of the company and small cap is low, I
would say relative to history. However, I think that there
(10:05):
are a lot of interesting companies that have graduated into
the MidCap universe that are really, really interesting. One of
the things that we love about MidCap companies is that
by the time they graduate, they tend to be of
a certain quality to make their way out of small cap,
because many companies never make their way out a small
cap and often they could have the ingredients to become
(10:25):
much much larger companies over time. And so I'm happy
to give you a few examples. I mean, one great
example of a company that we have owned in our
MidCap strategy for a long while and we now also
own in Jagrow, would be paloout On Networks. Palleout On
Networks is a leader in cybersecurity hardware and software. They
(10:48):
have a really really strong competitive position and they're consolidating
market share within cybersecurity as security becomes a really really
high priority part of the tech budget, even if I'm
sure you're going to talk about generative AI, but when
you think about the risks around generative AI and moving
data into large language models, the cybersecurity risks have never
(11:09):
been higher. And so as a result, we're seeing companies
prioritize within their tech budget spending on cybersecurity, and a
company like Palato is able to consolidate market share as
big companies like JP Morgan, we don't want to deal
with multiple vendors. Instead, we want to consolidate or spend
with less and less vendors. And so a company like
(11:31):
Palota Networks that's gone for being a much smaller company
to being a much larger company as the importance of
the platform has really helped them perform and execute well
in the market.
Speaker 1 (11:42):
I actually have a follow up question to you. Know,
you mentioned J grow leverages large cap growth and growth advantage. Yeah,
I guess what is the process? Is it just kind
of taking different securities from each portfolio or is there
you know, kind of a process of how that works.
Speaker 3 (11:59):
Yeah, No, I'm glad you asked that question. And so
the way it works is it is just a combination
of straight combination of large kept growth strategy that's existed
for a long time as well as a growth advantage strategy.
And so we're not doing anything different in the Jagro vehicle. Essentially,
what we're doing is we're just taking half of one
portfolio and half of another portfolio and putting them together
(12:22):
into this vehicle. And so if the name is a
high conviction name both in growth advantage and large kept growth,
then it becomes one of the biggest bets within ja grow.
So a good example of that would be Regeneron, for example,
within healthcare, is a very large bet within jagrow. If
it's a smaller bet and just one of the strategies,
and it ends up being a really small bet within Jagrow.
(12:46):
And so that's why I mentioned that it really represents
the best highest conviction thinking of the entire growth platform
at JPMorgan.
Speaker 1 (12:54):
So I actually have one more question on process. In
the perspectus for the fund, it does mention that this,
you know, an ESG component involved, and I guess my
question is, you know, what is the process for that?
Speaker 3 (13:06):
Yeah, And so we've you know, We've had a long
standing process around ESG where we fill out I'M a
proprietary questionnaire that focuses on what we believe are the
key es and G issues, and every analyst fills that
out with the companies that they cover, and when we're
incorporating a company into the portfolio, we think about the
(13:28):
ESG risks. Now, we don't focus specifically on ESG as
the only risk, but we look at one of the
many risk factors that we look at when we're thinking
about position sizing.
Speaker 2 (13:37):
Speaking of risks, I would be remiss if I didn't
mention the macro risk that we talked about at the beginning.
Maybe you could talk to us a little bit about
how you navigate through these pretty big shifts, especially in
monetary policy. I think it's pretty clear that the market's
really struggled a little bit with this idea that suddenly
the FED is going to ease and potentially ease a
little bit more than anybody had anticipated. At the same time,
(13:58):
the BOJ is hiking tech and growth stocks seem to
be at the sort of center of that risk right now.
How does that play into your process if at all?
Speaker 3 (14:08):
Yeah, No, it's a good question. And I think risk
is a really important question to explore for us because
we do have a keen focus on risk management. So
I want to explore that more broadly but directly related
to your question around macro risks. And we very much
are bottoms up stock pickers. However, we're very aware of
the market environment that we participate in as well as
(14:28):
many of the macro drivers and what we're not. As
much as we are high quality growth investors, we're not
growth at any price. And so the key for us
is when we're able to find a very differentiated perspective
relative to the market. And so, for example, there are
points in time, say in twenty twenty in twenty twenty one,
(14:51):
which is a very different period than we're in today,
when interest rates were very very low, we were coming
out of COVID, where what we saw was is that
many of the highest growth parts of our universe, such
as technology, they were very very extreme valuations relative to history.
And even though many of the same software companies had
driven very substantial performance for us for many years. We
(15:14):
really pride ourselves in being really really objective and focusing
on where we can get a differentiated perspective and what
we were finding was that we didn't have as great
of a differentiated perspective on many of those tech companies
at that moment in time, given the valuation starting point.
And so at that moment, we pivoted based on the
bottoms up riscrew boards that we were seeing, and we
actually went very very underweight technology. At one point, we
(15:37):
were about one thousand basis points underweight technology relative to
a high weighting in the benchmark. I give you that
background just to show that we're willing to come pivot
based on the environment that we're in, and we really
do let the bottoms up riscrew boards that we're finding
guide it. But it's actually interesting to note. I did
mention that we are very very underweight the Magnificent seven
(15:59):
today based on what we're seeing from a risk reward
standpoint and how differentiated our views are. But when you
look at technology as a whole, we're also very very underweight.
We're over eight hundred basis points underweight technology relative to
a very very concentrated benchmark, and so we are seeing,
you know, some increased risks, I would say, and on
(16:21):
the margin, I think we're looking for more portfolio balance
relative to a very very concentrated benchmark that includes, you know,
investing in a variety of different sectors. We've gone increasingly
overweight healthcare, for example, which is a more defensive sector
and provides more portfolio balance. But then we've also found
interesting opportunities in sectors such as financials that have been
(16:41):
out of favor for a long time, while you know,
areas like tech have been in vogue. And so we're
definitely very much focused on portfolio balance and we don't
want to let you know, the macro environment you know,
overall drive the portfolio. We really want to let our
focus on stockpicking.
Speaker 2 (16:55):
Shine, Can you dig in a little bit to that
underweight on the mag seven and talk to us about
the case for why is it partially evaluations? Mostly evaluations?
Is it you know, the growth cycle and just other
opportunities emerging sort of what's the case that you're making
or that helped you make the decision process beyond portfolio considerations.
Speaker 3 (17:20):
Yeah, So part of it, I would say is that
some of the easy money of the Magnificent seven has
been made. So if you were to back up, you know,
I mentioned I talked about how we were very underweight
technology heading into twenty twenty two and the growth draw
down there. But if you actually, you know, continue the story,
what you'll see is at the end of twenty twenty two,
(17:41):
in early twenty twenty three, we actually added back very
significantly to technology, and that started with many of the
Magnificent Seven, and we built up in video quite substantially.
Once again, we went very overweight meta, for example, and
so we're willing to pivot based on the risk rewards
that we're seeing at at that moment in time. One
of the reasons why we led with the Magnificent seven
(18:03):
when we're adding back tech exposure is because the risk
rewards were incredibly interesting. The free cash yield that we're
seeing relative to the growth we're extremely exciting, particularly relative
to more defensive sectors such as consumer staples. As we
sit here today after a really really strong twenty twenty three,
(18:24):
in early twenty twenty four, what we see is that
the risk rewards aren't as compelling as they once were.
We don't think that this is you know that we're
seeing valuations that are bubbly in the Magnificent seven, but
we just think that the valuation starting point is less interesting,
and so then you know, we get into our process
of looking at where do we have the most differentiated
(18:45):
view on the company's future earnings power? And I would
say that it's to varying degrees. And so Meta is
one example of a company within the Magnificent seven that
we still have a very differentiated view on the company's
long term earnings power, or we have a nice sized pet.
When we look at many of the others, our view
is no longer as differentiated. And we think it's really
(19:06):
important in an environment where we don't have as much
of a differentiated view to utilize that capital to invest
in other companies in other sectors where the magnitude of
our differentiation is hired.
Speaker 2 (19:18):
Today. Great, and I know you mentioned healthcare is an
area where you've moved to an overweight. What specific themes
are really interesting to you or is it a somatic
based sort of overweight. What's driving that healthcare exposure right now?
Speaker 3 (19:32):
Yeah, it's interesting because it's actually quite diversified, and again
it's just finding great bottoms up opportunities. And so I
would just unpack that a little bit and talk about,
you know, a couple of things that are of interest
to us within healthcare. First, I would start with biotech
and biopharma. That's a sector within growth. It's been out
(19:53):
of favor for many, many years, and you know, we
do think in an environment where interest rates are coming
down again and there are many really high quality companies
that have really really interesting catalysts that we're finding many
more interesting opportunities irrelevant of the macroeconomy. I mentioned Regeneron,
(20:13):
for example, as being one of our largest positions. Regeneron
is a great franchise, it trades it an attractive free
cash yield. But I think what's even more interesting is
that people underestimate the importance of their pipeline and the
fact that they're utilizing genetic data in order to improve
drug discovery. The one of the companies that have been
doing this the longest, and we think people massively underappreciate
(20:35):
their pipeline. We're also finding some interesting opportunities in biotech
down the market cap spectrum as well. As nothing has
been more out of favor than small and MidCap biotech.
We're finding a lot of really interesting, high quality companies
that super attractive risk rewards, where we have a very
differentiated perspective on their future market opportunity. And then Beyond biotech,
(20:57):
I would say, you know, another area that we have
a lot of two would be GLP. Once we do
think that the market massively underestimates the obesity market, and
we think that Lily has a really strong competitive advantage
even versus Novo, then will be a huge winner that people.
This is a classic example where people think it maybe
(21:18):
look a little bit more expensive on near term numbers,
but people are massively underappreciating both the magnitude and the
duration of the opportunity. And then beyond pharma, what I
would say is that we're also finding some interesting opportunities
on the device side. Intuitive Surgical's name that we've known
for a very very long time and we've recently built
it up again. They're a leader in robotic surgery, and
(21:41):
they just came out with their latest new robot, which
we think is going to be a really attractive catalyst
to further inflect the penetration of robotic surgery. And we
think we're just at the cusp of seeing the impact
of that. We believe we have a very differentiated view
in the market. And so I can go on and on.
There's many more examples, but what you can see is
that there's a lot of interesting opportunities from a bottoms
(22:02):
up standpoint within healthcare, and we have to worry a
lot less about the macro environment.
Speaker 2 (22:08):
Great, are you seeing anything in the consumer space right now?
I get tons and tons of questions. So many people
are so concerned about the consumer spending outlook and where's
the consumer headed? But things like home builders are breaking
out right and different. You know, there's some clear moving
parts inside the consumer. How are you navigating that as
a growth investor? Are there consumer stocks that are catching
(22:29):
your eye or would this be a place you'd avoid.
Speaker 3 (22:32):
Yes, what I would say is that I just said
at the beginning. But one of the things from us
as growth investors is that when you think about our
growth team, we're actually equally well resourced in every single sector.
So we don't have a disproportion amount of tech analysts.
We actually have a similar amount of consumer analysts and
healthcare analysts, and so we really have proven over time
the ability to generate alpha across sectors and that's been
(22:53):
a key strength of our platform. And so as it
relates to consumer, we actually are finding some interesting opportunity.
I would say that we've been cautious on the consumer
for some time, and as a result, when we think
about the opportunities that have been most attractive to us
and has been in I would say two categories. Either
the value areas of consumer such as for example, we
(23:17):
own tj X, which is a leading off price retailer.
It's a great example of a company that's able to
take advantage of many of the issues in the consumer sectors.
There were significant amounts of over inventory that was happening
within the consumer sector. In TJX, they're the largest off
price retailer and they have the greatest buying power to
(23:37):
take advantage of buying those great brands at discounted prices
when others have too much inventory. As a result, they've
been one of the few consumer companies that have been
able to put up really, really strong results and they're
able to consolidate significant amounts of market share from the
department stores. And so that's been a good example of
where we've been able to find some interesting consumer syxical opportunities.
(24:00):
We've also focused a lot on consumer tech as well,
and so we've owned for example, door Dash as well
as Uber. Those are great examples of businesses that irrelevant
of the economy. They're consolidating significant amounts of market share,
and I think most importantly, they become much better industries
(24:22):
from a competitive intensity standpoint than they've been historically, which
has resulted in much more attractive profitability and free cash
flow generation. And I think DoorDash is a good example
of how we use our imagination to dream to dream.
I think most people when they think of DoorDash, they
think of food delivery and the food delivery business. They're
a leader, they've don does a great job at consolidating
(24:42):
market share, and we expect that to continue. But when
we think about the larger market opportunity that people are underappreciating,
you have to think about the fact that every brick
and mortar retailer has to compete against Amazon. In these days,
we've all become used to getting same day or next
day deliveries and it's very hard for brick and mortar
retailers to compete against that. DoorDash could utilize the logistics
(25:04):
network in order to be able to help and partner
with brick and mortar retailers. For example, they had recently
announced a partnership with Low's, the home improvement store. So
we think people are massively underappreciating the longer term opportunity
for them.
Speaker 1 (25:18):
I do want to take a step back and kind
of just talk about the ETF wrapper for a second. Yeah,
you know, with active kind of coming back over the
last year. You know, one of the things a lot
of firms we're trying to do a few years ago
was the the you know, active kind of semi transparent models,
and a lot of the ETFs now that are gaining
(25:39):
traction a more transparent. So, as a you know, a
portfolio manager, is there anything you do different between you know,
managing the ETF you know, versus the say, the growth
advantage mutual fund, you know, with you know, having a
portfolio that's transparent of their kind of considerations to go
into that, Yeah.
Speaker 3 (26:00):
No, I think it's a really good question. What I
would say is that is one of the reasons why
we've combined our two biggest growth funds into one active
ETF because of the transparency aspect of it. And so
that was that's how we've thought of a lot of
our active ETFs here on existing strategies, that we've combined
two funds into one active ETF. As far as any
(26:21):
differences in the way we manage a strategy. There really
aren't any differences in the way that we manage the
underlying strategies. One of the beauties of being part of
such a big platform like JP Morgan is that we
have an incredible ETF team that we partner with that
makes all of the magic happen behind the scenes while
we can focus on our investing as portfolio managers.
Speaker 1 (26:42):
That makes sense. Before we let you go, I just
have one more question, you know, semi investment related. What
are some of your favorite books? You know, whether it's
you know, investment related or not.
Speaker 3 (26:55):
Yeah, so I would say more an investment standpoint, I
have a lot, but I think one that summarizes the
way I think about investing really well would be One
Up on Wall Street, which is the idea of doing
differentiated work to get a differentiated perspective on companies, and
that really is our north star. That's how we tend
(27:15):
to win, and it's by having a very different view
and a company's fundamentals. And so as much as I
love so many different books, that one tends to be
my favorite.
Speaker 1 (27:25):
Great, Well, this is a great discussion. Felice and Gina,
thank you so much for joining me today.
Speaker 3 (27:31):
Thank you so much for having me.
Speaker 2 (27:33):
Yeah, Thank you David, and thank you Phillise. A great discussion.
It was lovely to have you on.
Speaker 1 (27:37):
Yeah, my pleasure until our next episode. This is David
Cohen with the Inside Active.
Host
Gina Martin Adams
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