How this large-cap value fund added inflation protection to beat the market in 2022

Published Sun, May 1 20229:01 AM EDT

For Scott Blasdell, taking over the large cap value fund at J.P. Morgan Asset Management nearly a decade ago felt like a bit of a homecoming. The fund manager started his career as a large cap value analyst at Wellington Management in 1994, where he worked for John Ryan, who ran a large cap value fund for Vanguard. Eventually, Blasdell moved on to cover REITs at Merrill Lynch, and later at J.P. Morgan. By 2013, when he began running a large-cap value fund, Blasdell felt it suited both his experience and personality. "I was glad to come back to value in 2013 because it felt like what I had been trained to do," the Williams College and Wharton Business School grad said. Having cut his teeth on the value side of the market at Wellington just as TMT investing took off in the 90s, Blasdell now knows what fits his personality. "I like to find things that are inexpensive." Blasdell's focus on bargains spills over to his home life too, where his kids have been known to complain about his preference for less costly goods, such as generics over name brands, while grocery shopping. "For me, value just kind of fits," he said. The J.P. Morgan Large Cap Value A fund (OLVAX) has outperformed using the same methodology for 30 years. After his team reviews more than 600 companies for attractive valuations, Blasdell applies a macroeconomic overlay, which lately means a focus on the effects of inflation, to make his final stock picks. This year, the fund is beating the market — gaining 3.1% as of April 28 against a more than 12% loss in the S & P 500 — after Blasdell, alarmed last year by the size of the Biden administration's fiscal packages and the Federal Reserve's expansive monetary policy, added protection against inflation. The portfolio is overweight energy, basic materials and healthcare stocks that make it more defensive in a high-inflation environment. "I knew from economic history that inflation was likely to happen, but I did not see other investors really reacting to that," Blasdell said. Inflation protection Energy and basic materials are driving outperformance this year. About 10.5% of the $3.3 billion portfolio is in energy, compared to 7.1% in the Morningstar US Large-Mid Cap Broad Value Index. "We entered 2021 somewhat overweight energy but kept adding to it last year as it became clear that U.S. E & P companies were changing their behavior and focusing on capital discipline instead of growth at all costs," said Blasdell. Another 7.4% of the fund is in basic materials, versus 3.2% in a comparable index from Morningstar. The fund's largest metals and mining position is now in copper producer Freeport-McMoRan after Blasdell opened a position in 2020 and added to it more aggressively last year. Freeport's stock price tumbled nearly 10% on April 21 after management disclosed poor earnings guidance. Still, Blasdell said last week's decline doesn't change his long term view on Freeport, whose free cash flow will benefit from high copper prices, and as new mines open and the world transitions to more solar panels, electric vehicles and other sources of clean energy. "We're still not seeing enough investment in the energy area or basic materials to meet demand," Blasdell said. Health care and reopening plays Health care stocks have also been a major contributor to this year's gains, with Bristol Myers Squibb a favorite Blasdell pick. The sector got "quite cheap," he said, as fears of drug price regulation from the Biden administration spurred investors to sell. Still, a slate of upcoming drugs from Bristol Myers has J.P. Morgan bullish on its long-term outlook. Year to date, Bristol Myers Squibb is up more than 22%. "We saw that there was a lot of potential in their pipeline assets, a lot of stage three drugs that could come to market, so we thought that eight and a half times earnings was just too low of a multiple," Blasdell said. The fund has also added some reopening plays that the analyst believes will benefit disproportionately as the pandemic winds down. For example, US Foods , a supplier to restaurants that has recently reported rising demand. "There will be another 10% growth in volumes" in reopening stocks such as US Foods and Royal Caribbean , Blasdell said. Selling For Blasdell, it's just as important to know when to say goodbye to a stock as it is to buy. The large cap value fund also has a rule not to own more than 5% of a stock compared to the benchmark Russell 1000 Value Index. The fund sold off Trane Technologies after it reached a point last summer where J.P. Morgan considered it fully valued. The company, which is expected to benefit from the environmental social and governance theme, builds HVAC systems for homes. "We said, you know what, we see better opportunities elsewhere," Blasdell said. "It's time to move on." That discipline has served Blasdell well. The fund gained 15.20% annually in the three years to April 28, and 13.02% a year over 10 years. The fund's 3- and 10-year performance earned it four-star ratings from Morningstar, which says the fund ranks in the 7th percentile over 3 years and 4th percentile over 10 years. It currently charges a 0.40% management fee.

Dado Ruvic | Reuters

For Scott Blasdell, taking over the large cap value fund at J.P. Morgan Asset Management nearly a decade ago felt like a bit of a homecoming.