The portfolio managers of the JPMorgan American Investment Trust (JAM) look for stocks where they have a view on a company’s growth or value prospects that is not reflected in the stock price.
JAM is a concentrated 40-stock portfolio that combines ideas from two investment perspectives: growth and value. Although the two portfolio managers use different investment strategies to find the 20 best growth ideas and 20 best value ideas for the portfolio, their investment approaches have more in common than one may realize.
What is the market missing?
The growth and value research teams focus on high-quality companies where the stock price is not properly or fully reflecting a company’s prospects and the team has a differentiated perspective on what the market is missing.
For the growth team, that often means large underappreciated market opportunities, where a company may be able to grow its revenue and earnings faster than expected. The growth of generative AI has provided some big opportunities. JAM took a position in NVIDIA in late 2022 as the growth team felt they had a differentiated perspective on the magnitude of spending that was about to happen. Indeed, the level of capital expenditure (capex) on AI and the growth story surpassed the team’s early expectations.
The value team seeks to apply that same differentiated perspective toward finding companies that look inexpensive relative to their intrinsic value or the amount of cash flow the company is generating. Recently, the team has been finding opportunities in the health care sector, where valuations of some companies, such as Gilead Sciences and Johnson & Johnson, are not pricing in their high-quality fundamentals.
Analysing AI’s impact
Technology stocks continue to dominate the S&P 500 and performance is increasingly bifurcated into perceived “AI winners” and “AI losers”. JAM’s growth portfolio manager, Felise Arganoff, shared some updated insights on the portfolio’s technology positions, most of which come from the growth team, and how the team thinks about the impact of AI on companies and business models.
Overall, the JAM portfolio managers are still excited about technology stocks, which make up over a quarter of the portfolio and JAM’s largest sector weighting. However, this exposure to technology is significantly less than the S&P 500, largely due to underweight positions in Apple and Microsoft.
The underweight to Microsoft reflects one of the key dynamics in technology: Open AI is setting the pace in a race with Anthropic to build the most advanced AI technology. Microsoft had an early relationship with Open AI but is now having to invest more capital to develop its own proprietary large language models (LLMs).
Indeed, many big technology companies are going to the debt markets to raise extra cash for capex related to AI, and indicator that corporate spending cycle is entering a riskier phase. The JAM portfolio managers speak regularly with J.P. Morgan Asset Management’s fixed income investment professionals and both teams agree that most of the companies using debt to fund spending have very strong balance sheets and can afford to take on some debt.
While market sentiment suggests some concerns over peak capex, the JAM portfolio managers believe spending will continue. However, the team recognizes that differentiating between technology companies and how they may be specifically impacted is critical. For example, JAM has an overweight to NVIDIA, given the company’s dominant position in advanced chips, as well as Broadcom, which is helping companies like Google and Meta make custom chips. Broadcom also provides networking for the industry and is gaining market share.
AI winners and losers are not always obvious
Software companies are currently being perceived as particularly vulnerable to AI disruption and many stocks have underperformed. The JAM portfolio managers believe software is an area where consensus opinion is rushing to judgement without carefully looking at company fundamentals, business models and management teams. For example, JAM’s positions in Hubspot and Intuit have recently underperformed with software stocks although they actually had positive earnings revisions.
The portfolio managers spend significant time talking to industry contacts, enterprises and start-ups to form a deeper and more holistic view of the software industry. One of the key insights from these conversations is that traditional software companies are more resilient to AI disruption than headlines might suggest. While start-ups are building AI-native alternatives, most large enterprises are not about to rip out the systems they already rely on, such as customer relationship management (CRM) software, anytime soon.
Similarly, software related to data infrastructure will remain essential, which is exactly what one of the portfolio’s new positions, Snowflake, provides. The stock has recently declined along with the software sector, despite its importance to the AI ecosystem. Snowflake is also a high-quality, market-leading company with a best-in-class management team led by a CEO who understands AI disruption and has the ability to adapt the company as the market evolves.
Non-tech “AI winners”
The impact of AI—from the massive capex to the potential for disruption—extends well beyond the technology sector. JAM has a position in Booking Holdings, the online travel application, which some market participants believe may be disrupted by AI, similar to software companies. However, a closer look at Booking’s business model reveals the company’s domain expertise, including relationships with many small hotels all over the world. This expertise improves accuracy, which is critical when booking travel. The excellent management team are investing in their own AI agents and using them internally to improve their own productivity and cost structure, while increasing margins. The portfolio managers believe that Booking’s stock price is underestimating the sustainability of its revenue growth and the company is buying back its own stock.
JAM has positions in several other non-tech companies that are benefiting from the AI infrastructure build-out, including Quanta Services and Comfort Systems, both of which offer electrical expertise needed for data centers. Quanta is a leader in connecting to electricity transmission and distribution, which is in high demand given the current shortage of power needed for data centers and boosting demand for Quanta’s highly skilled labour and training.
Comfort Systems provides the specialist workforce needed for the electrical work in a data center once it is built. The company has been managing its business well by consolidating many contractors and building modular data centers. Comfort Systems plays in a niche area that is challenging for many market participants to understand. As a result, many investors mismodel the company’s growth and Comfort has therefore positively surprised the market relative to expectations.
Best of both worlds
JAM invests in the 20 best growth ideas and 20 best value ideas from the J.P. Morgan Asset Management research teams, while also allocating 5%–10% to a small cap blend fund. The portfolio also has the flexibility to tilt its growth/value weighting to a 60%/40% split in either direction.
Despite the distinct research from each team, the JAM portfolio managers discuss the portfolio almost every day and think about portfolio construction holistically, in an effort to provide investors impactful, differentiated active exposure to US equities.