(By Bridget B. Hughes, CFA) MFS is the country's oldest mutual fund company, approaching 90 years old. Many of its positive attributes have endured, including a senior-management team plucked from the investment-research ranks, a commitment to active management and investment research, and for the past several decades, a collaborative, team-oriented culture. It continues to run the oldest mutual fund, MFS Massachusetts Investors Trust
), as a core-oriented equity fund.
There has been some evolution. Once primarily a U.S.-focused investment organization, MFS now has more assets in international-equity mandates. One of its value strategies, represented by separate accounts and MFS Value (MEIAX), has grown to be the firm's largest single strategy as investors have recognized its strong long-term record. Much of the firm's asset growth over the past three years has come from the institutional side, as opposed to the financial-intermediary channel, where MFS had always focused (though the industry is blurring those lines). For the first time, MFS now has more money invested through institutional accounts than it does in its lineup of mutual funds. Assets under management total more than $300 billion, with mutual fund assets making up roughly $90 billion of that.
Also telling was MFS' 2012 branding campaign, one that advertises the firm as "Investment Management for Investment Managers." While the specific campaign was new--and geared toward institutionally minded clients--its underlying message reveals more about MFS. It's rare if not impossible to see MFS marketing or advertising to the public one mutual fund at a time. Investors won't find single funds and their short-term performance records touted. The message is about the firm, and its emphasis on investment research and delivering on its promises. This contact with the outside world reflects a collaborative culture focused on the whole, rather than the parts.
Teamwork Starts at the Top
At the top of the organization is Robert Manning, chairman and CEO. Manning grew up at MFS, first joining the firm in 1984 as a high-yield bond analyst. His right-hand man, president and CIO Mike Roberge, also came up through the investment ranks. Manning says he's most proud of surrounding himself with a strong senior-management team, a big help considering he says he rarely makes executive-level decisions on his own. Also important to the senior-management team has been the firm's chief compliance officer, as MFS adopted a more-rigorous compliance culture following the mutual fund scandals of the early 2000s.
Canadian insurer Sun Life Financial (SLF) bought MFS in 1982 for just $65 million. Although Sun Life once considered selling MFS (in 2006), immediate change is unlikely given the firm's steady asset growth on top of overall good returns. MFS was responsible for more than half of Sun Life's assets under management as of the end of 2011. MFS provides a steady revenue stream, while Sun Life's deep pockets have provided MFS resources. In 2008's sharp and dramatic downturn, for example, MFS was able to largely maintain its investment staff, even though assets declined. More recently, Sun Life's transfer of Canadian money manager McLean Budden to MFS gave MFS more money to run and investment resources, but also a footprint into the large Canadian market, where MFS had theretofore had a limited presence.
Research and Continuity Are Hallmarks
The epicenter of MFS is its investment department. The firm has done a lot of things right here, building out a global investment group that works well for its generally moderate, signature investment strategy and that nurtures its team-oriented culture. At the heart of the approach is a commitment to quality companies. Regardless, if investors are considering a growth or value fund or a corporate-bond fund, the investment philosophy typically stipulates a preference for sustainable businesses and durable, visible earnings and cash flow before highlighting other distinctions among strategies.
For the most part, MFS stays within its wheelhouse, focusing on a diverse lineup of fairly straightforward stock and bond funds. While it launches new funds, it doesn't seem to chase trends, and its lineup thus isn't home to funds that come and go. Its most recent additions fit into three categories: funds that help round out its roster of core and supporting players, like MFS New Discovery Value (NDVAX); funds that leverage broader investment research work already being done, such as its regional offerings; and a few other niche funds, including MFS Global Real Estate (MGLIX) and MFS Commodity Strategy (MCSIX). Those last two, however, aren't available to the public--they're used internally by broader asset-allocation funds--but MFS has introduced other niche strategies in mutual fund form. As MFS continues to cater to institutional investors, it may have to take care not to overexpand into less-familiar territory.
One new area was only recently charted. On Dec. 21, 2012, State Street (STT) filed a preliminary registration statement for three active ETFs that MFS will subadvise in a style that combines fundamental and quantitative research. MFS already offers a similarly styled mutual fund--MFS Blended Research Core (MUEAX) has had good results under the current management team but hasn't gained much traction with the market, as reflected by its small $150 million asset base. How the ETF structure will affect the strategy remains to be seen.
There's No 'I' In MFS
Most of MFS' portfolio managers have come up through the firm's analyst ranks, and MFS has a solid 92% manager retention rate over the past five years. That's in line with the fund industry's average but good among the largest companies. Not everyone at MFS aspires to be a portfolio manager (nor would MFS have the capacity to absorb as many portfolio managers as it has analysts). MFS has thus worked hard to develop a career analyst track, which can include a compensation package that rivals those of portfolio managers. This arrangement discourages analyst turnover, and indeed, MFS reports that its turnover among investment personnel including analysts is in the low- to mid-single digits over the past several years. It also helps nurture the firm's team-oriented culture versus a more-competitive one.
MFS prides itself on such a collaborative culture. Many investment organizations do too, but there is some proof in the pudding here. For example, almost all of MFS' U.S.-oriented mutual funds have a meaningful and, compared with peer groups, greater investment in foreign stocks. And it was working with the firm's fixed-income analysts that kept MFS mostly out of hot water during 2008's financial crisis. (MFS' funds lost money in 2008 but generally performed much better than their category averages.) MFS' three research-driven funds are run by its analyst teams, led by a number of sector leaders. These funds, as well as the fact that most of MFS' funds are set up to highlight fundamental research, creates interdependency between portfolio managers and analysts.
The upshot of MFS' culture has been a generally pleasant experience for its fundholders. In a results-driven industry, MFS isn't shy about making changes to problem funds, but it has also shown confidence and patience in some other managers, leading to continuity. For the most part, while any individual fund can experience a subpar year or three-year period, the funds have generally been successful over longer rolling-return periods. Over the past three- and five-year periods, the firm's success ratios, which consider how many funds have both survived and performed better than their peers, are 68 and 62. Most of its funds have outperformed their category averages over rolling five-year periods.
For the most part, MFS has made good decisions for its shareholders, and its fund lineup is sensible with few out-of-place offerings. As it continues to grow, its challenges include avoiding the temptation to overindulge sometimes-fickle investor demands (this isn't unique to MFS) and most importantly for this firm, continuing to execute its generally moderate approaches well enough to notch strong long-term results.