One Part Equities, Two Parts Bonds
January 6, 2003
While most investment companies separate fixed income and equity departments, MFS Investment Management, Boston, has been emphasizing teamwork between the two.
Five years after implementing this change, the $107 billion fund group claims to be reaping the rewards. For the past five years through Oct. 31, MFS' international equity funds ranked in the top-performance decile, according to Lipper, New York. The MFS International New Discovery Fund, a small-cap value fund, ranked first of 143 funds.
On the bond side, 90%, or 26 of the 29 MFS bond funds, ranked in the top half of their categories over the past year ending in October. And over the past five years, half of the MFS bond funds have ranked in the top quartile of their respective categories.
The high rankings came as MFS analysts and managers on both the equity and bond side worked together and shared information. While many analysts at MFS actually earn more than portfolio managers, both portfolio managers and analysts receive bonuses for engaging in teamwork.
MFS also aims to provide analysts with incentives to move up the organization, becoming career analysts. As a result, a large number of MFS equity and bond fund analysts have fatter paychecks than star skippers.
This is in sharp contrast to most investment companies, which typically promote competition and consider analysts underlings to portfolio managers.
The MFS Research Bond Fund, which invests in the MFS analysts' best picks, is the fund group's best-performing bond fund. Recently, it was selected as a sub account within Merrill Lynch's asset management program. It was in the top 4% of the Lipper A-rated bond category over the past three years. The fund invests in corporate bonds with an average credit rating of A.
Rob Manning, chief of fixed income at MFS, says that prior to 1998, MFS had municipal, high-grade, high-yield and international bond fund groups. Each group worked alone and was headed by a director of investments. But management believed that with interest rates down dramatically since the 1980s, the bond investment climate had changed, and it was no longer possible to rely on declining rates to fuel the financial markets.
A Balance of Income & Assets
Manning and Joan Batchelder, a veteran bond fund manager, suggested that bond and equity analysts needed to share information. It was a nice fit because equity analysts typically focus on a company's income statement, while bond analysts look at the balance sheet. As a result, sharing information should help the performance of their stock and bond funds.
"Most shops have group leaders, and each group may work alone," Manning said. "We look at that as a stupid way to evaluate stocks and bonds. With our new platform, the capital and credit markets are linked. All fixed-income managers and analysts report to me. Kevin Parke, the chief investment officer, deals with the equity side. We all share research ideas."
Manning said the teamwork really paid off early in 2002, when large companies like Enron and WorldCom melted down. MFS was able to sidestep most of the problems because the equity and bond fund analysts worked together, spotting problems on the firms' financial statements long before the companies' demises made the headlines.
On the international equity side, Senior Vice President David Mannheim says MFS made another strategic move four years ago, just after the teamwork concept was implemented, by hiring 18 highly regarded foreign students with U.S. MBAs as analysts. MFS positioned these new hires in its London, Tokyo and Singapore offices.
Experienced MFS analysts have acted as mentors to the rookies, Mannheim says, evaluating the new blood not only by their performance, but also by how well they work with others. Via videoconferences, MFS analysts around the globe share financial information in order to make bottoms-up stock picks.
Fund watchers believe that MFS is successful with the team approach, but it is not foolproof.
Laura Pavlenko Lutton, an analyst at Morningstar of Chicago, said that the team approach has worked well for the international equity and bond funds. But on the domestic equity side, MFS funds have exhibited mediocre returns over the few years following the bull market. For example, the MFS Research Fund and Emerging Growth Fund, which are both analyst-run funds, have less than stellar returns relative to their peers.
"Other firms say they have a team approach, but MFS is unique," Lutton said. "They have a team approach and promote from within. They do not go outside the firm to hire hot-shot managers. Overall, the team approach has worked for them."
On the domestic equity side, Lutton said MFS management just made some changes that should pay off in 2003. Seven managers and analysts have been laid off. Stronger analysts were reassigned to follow industries with the largest concentrations of stocks held by their domestic stock funds.
"It's a smart move," Lutton said. "Time will tell if there is improvement. But you get the impression that MFS wants the team approach to work."