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MFS CEO Sees Research as Key to Success

Robert Manning took the helm of the nation's oldest fund shop during its darkest hour, but five months removed from its monumental settlement with regulators, it's time to refocus on performance, he said.

With the majority of MFS Investments' legal troubles in the rear-view mirror, now is the time to concentrate on portfolio managers' stock-picking abilities, Manning said. This is an area he knows well, having come from the investment side of the business with a background in distressed debt and junk bonds.

Manning, who took over for suspended CEO John Ballen and President Kevin Parke, grew up at MFS and is a 20-year veteran of the firm. Aside from his role as CEO, Manning is also MFS' president, investment chief and a member of the firm's management committee. Overseeing both the equity and fixed income departments, he is responsible for more than $140 billion in assets under management from more than six million investor accounts.

Manning sat down with Money Management Executive Associate Editors Chris Frankie and Kevin Burke at the firm's plush Boston headquarters overlooking the Charles River to discuss where the firm is finding investment opportunities, how it is retaining talent and paying its managers, and how it is managing its move away from using soft dollars to pay for research.

MME: What is your economic outlook for the coming year?

Manning: We're in an incredible profit cycle right now, which has been discounted by the stock market. We're expecting earnings to be up 25% year-over-year and next year, double-digit growth.

The market trades at 17 times earnings and the small- and mid-cap area has done extremely well, so there's probably going to be a rotation back into large-cap stocks. The problem is that we think the major market moves are behind us, and it's just going to be a stock-picker's market where you're trying to add value through research, which is the hallmark of our company.

We actually think that international equities look relatively cheap when compared to domestic equities, so where we can, in our global portfolio, we're moving more towards international equities. We're particularly interested in continental European companies because our studies show they trade at 60 cents on the dollar versus U.S. companies.

MME: What about returns?

Manning: Our feeling right now is that you probably should expect 8% to 9% returns on U.S. stocks. It'll be choppy here between now and certainly the end of the summer with the election coming up. You're facing a headwind with the Fed potentially continuing to raise interest rates. But, we think that if you do the homework and do the research, there's value in the market, and you can find those companies that are going to grow, beat earnings expectations and go up in value.

Last year's bull market was all low-quality, broken-balance-sheet companies that went up dramatically. Going forward, we think it is going to be the higher-quality companies that can execute and beat earnings estimates that are going to do well. We feel that 04 will have 4% to 4.5% GDP growth. We're looking for 4% next year. So, we're not doomsayers, but we don't think the world's taking off, either. People need to get used to lower equity returns and yields, which is the environment we're going to be in.

We're moving into more cyclical type of companies that we think will do well as the economy continues to expand and just using our research to find more value.

MME: What about inflation concerns?

Manning: We think inflationary issues are temporary. We think normalized inflation is still going to be 2% or less. The Fed really lowered short-term rates way below where they should be, and it has real negative yields at this point in time. So, they just need to get back to a normal Fed funds rate of 2.5% to 3%.

MME: Where do you stand on the proposals to disclose more in-depth portfolio manager compensation information, including revealing managers' personal stakes in the fund and in the company?

Manning: As a company, we think you can't impose the disclosure just upon our industry and not on anybody else's. There's always going to be unique circumstances, and the example we use is: Why would a muni-manager who lives in Massachusetts buy a California muni-fund that they manage?

Where we are on board and believe disclosure is appropriate is to divulge the structure of compensation, which we have done. We have no problem telling people the structure of how people get paid and what the components are that derive that compensation.