Fund Industry Pioneer Raises Its Game

Even the oldest mutual fund company can improve--and it has.

MFS' staying power is impressive. The firm, which launched the country's first mutual fund in 1924, has not only stuck around--a feat that shouldn't be taken for granted in an industry where funds, portfolio managers, and even fund families come and go--it also has become one of the 20 largest, with more than $75 billion in mutual fund assets.

Its history hasn't been without disappointment. MFS' most recent struggles came in the early 2000s, when two things tripped up the fund family. One, many of its most-prominent funds simply stunk during the bear market that began in early 2000. Two, MFS, like several other mutual fund complexes, was caught allowing some investors to market-time its funds.

MFS has come a long way since then. Although certain long-held attributes are as prevalent as ever, including its "grow our own" management culture, an aversion to the public spotlight, and a loyalty to its financial-advisor constituency, the firm seems stronger in other aspects. For example, it boasts a large and powerful compliance group, an experienced portfolio-management team and analyst bench that espouse the virtues of teamwork, and for the most part, a set of impressive long-term performance records that include a comparatively attractive 2008.

A Place to Call Home
MFS' mutual fund managers traditionally start as analysts at the firm and then rise to the portfolio-management ranks, often managing funds in teams. The firm's CEO, Robert Manning, started working at MFS when he was in college, eventually moved up to the firm's top fixed-income post, and took over the head office in February 2004.

Not everyone can follow Manning's path, of course, but since the early-2000s bear market--which led to a spate of manager and analyst turnover--MFS has made some appealing changes in the way it thinks about its investment team. One of the more important shifts was the development of a viable career-analyst track, complete with a compensation package that can compete with that of its portfolio managers'.

Retaining the firm's large global analyst staff--MFS' research team is more than 70-strong--is crucial. MFS has long been a proponent of fundamental research, and its investment approach, which eschews big sector bets, means stock-picking has to be strong across the board in order to produce good results. MFS' equity funds managed by analysts, which include  MFS Research (MFRFX) and MFS Research International (MRSAX), are good proxies for the health of its investment personnel. By this account, the firm is doing well: Those funds' relative returns have been strong in recent years, and we have become more confident in the sustainability of that success.

MFS has also seen improvement on the retention of its portfolio-management personnel. True, it lost one global portfolio manager just recently to another fund family. But its manager retention rate has improved in the past four years, and thus now ranks competitively among the largest fund families.

Too Much Risk Control Can Be Risky
MFS has also taken steps to prevent its funds from faring poorly during bear markets, as many of its most prominent did during the early 2000s. Only its most experienced managers now have the flexibility to build their funds exactly as they see fit, and MFS executives have put even these veterans on notice that long-term underperformance will not be tolerated. Less-proven MFS managers must prove both their stock-picking skill and their ability to manage even modest sector bets before they gain additional leeway.

While MFS has shown encouraging progress--during the most-recent bear market between late 2007 and early 2009, most of the family's funds held up better than peers and respective benchmarks--we are still watching to see whether the firm can continue to build on a number of strong long-term performance records. Although most of the portfolio managers have enough room to distinguish the funds in their care, MFS should be careful to avoid becoming indexlike--especially considering its heritage of fundamental research and its proven investment team.

A Quiet Giant
Despite MFS' size and strong performance record, the firm is hardly flashy or arrogant. Manning noted recently that he hardly makes a business decision alone. He prides himself not on what he has accomplished, but on the team surrounding him, which includes chairman Robert Pozen, an industry heavyweight who ushered in new compliance procedures when he joined MFS in 2004. The firm works hard to listen to one of its most important constituents, the financial advisor. And its current advertising, which is prevalent, doesn't tout one fund or another, but MFS overall.

"Public" Pressures
MFS' ownership structure could pose some challenges to the firm's culture. The firm is majority owned by publicly traded SunLife Financial, a Canadian insurance company that bought the fund family in the early 1980s. MFS insiders do control a sizable minority stake in the firm, though. This structure gives MFS the deeper pockets of a larger corporate owner, but it also leaves MFS' executives and fund managers with just partial control of their firm.

This potential conflict was highlighted in 2006, when SunLife said it would consider selling MFS. After several weeks of intense speculation, SunLife said it would keep MFS under its wing.

To keep SunLife content, MFS could come under pressure to grow its assets under management, which may explain the new funds that the firm has launched or may start in the future. It recently launched target-date funds as well as a long-short fund. Keeping its traditional fund lineup on the right track is a big task and MFS has done it well; branching out into new strategies where it has less experience is much harder.

That said, Manning does recognize some holes in MFS' fund lineup, specifically in smaller-cap investing and global value investing, but says his first questions when considering new funds are, Is this good for investors, and can we do a good job?

Conclusion
After making significant progress in a few key areas, such as encouraging its fund managers to be more risk-aware and taking steps to retain investment talent, MFS has strengthened its team-oriented corporate culture. The firm could do better on communicating with its shareholders in its fund reports--detail is provided on what worked and what didn't during the reporting period, but little is said on why investments are held--but its website is robust.

There's much to like at MFS. Its investment strength, team orientation, and humility make its culture well-suited to meet its goal of providing consistent results for investors.