Morningstar Advisor - October/November 2013 - (Page 46)

Spotlight A Fund Firm Defies Indexing Trend MFS thrives selling actively managed equity funds at a time when most firms are seeing outflows in those strategies. By Rob Wherry A close read of Morningstar’s asset flows data shows the usual suspects such as T. Rowe Price, Vanguard, and Fidelity comfortably ensconced among the top 20 recipients of investors’ cash in 2013. But the company landing in fourth place is something of a surprise: MFS. The firm took in nearly $13.2 billion through the end of August. That take—and positive flows in each of the previous four calendar years—marks something of a comeback for MFS, which saw assets head out the door for much of the 2000s. MFS’ asset flows may not be large when compared with the industry’s behemoths, but they do deserve attention for one specific reason. MFS has been able to attract assets with actively managed equity funds at a time when those types of strategies are losing ground to other parts of the market, including investment vehicles such as exchange-traded funds. One need only look at the firm’s lineup to see why. In most cases, MFS is marketing funds that have sturdy long-term records, reasonable fees, and strategies that make sense. For example, 35 of the 47 funds in the retail lineup that have 15-year track records are in the top half of their respective peer groups during that time period, and almost two thirds of MFS’ retail funds held losses to less than their category averages in 2008. “Our managers aren’t looking to be the winners in the second half of 2013; they look out over five or 10 years,” says Jim Jessee, head of distribution at MFS. “If you [focus on short term performance], you get into an uncomfortable spot.” In addition, only six funds in the current lineup receive a Morningstar Fee Level rating of Above Average or worse. Flagship funds such as MFS Value MEIAX and MFS International Value MGIAX, which accounted for 40% of 2013 inflows, rank among the best funds in their categories over the long haul. 46 Morningstar Advisor October/November 2013 “I’m looking for long-term consistency, not the hot fund of the year,” says Gil Armour, a financial planner with SagePoint Financial in San Diego. Armour has a few clients in MFS funds along with offerings from shops like Franklin Templeton. “There are managers out there that through outperformance or risk management can earn their salt.” But solid performance doesn’t tell the entire story. MFS’ success also stems from the firm adapting to the changing nature of fund distribution. Several years ago, MFS developed in-house sales teams devoted to specific parts of the distribution world. For example, the Advisory Resources Group focuses on firm gatekeepers that do manager selection and on the major platforms. To ensure an open line of communication, the team has an accompanying web site that links clients to performance and strategy data and to team member contact information. A separate but similar team is focused on the definedcontribution channel, which has become a growing part of the firm’s business. The fruits of that effort are apparent from the strong flows that come in through the funds’ institutional and retirement share classes. MFS also offers separate account versions of popular strategies that can be customized depending on a given client’s needs. Although it has largely resisted the temptation to launch trendy alternative funds, it will team later this year with State Street on three actively managed ETFs that focus on growth, value, and core strategies. However, that doesn’t signal a shift away from what got the firm to where it is today. “We aren’t opposed to [alternative investment vehicles],” Jessee says. “But open-end mutual funds still serve most needs pretty darn good.” Rob Wherry is associate editor of Morningstar Advisor magazine. For example, PIMCO Total Return can be purchased in an amount as small as a single share. (The shares were trading at $103 each in September.) The ETF version has no loads (though investors may pay brokerage commissions and will cover the bid-ask spread) and charges an annual expense ratio of 55 basis points. Meanwhile, the mutual fund version has a minimum investment requirement of $1,000, a front-end load of 3.75%, and an annual expense ratio of 0.85%. For investors, the math clearly favors for the ETF. The potential to reduce the cost of investing is the single most promising feature of the active ETF category. To date, those firms that have realized and harnessed this potential have had success. Meanwhile, those that have used the wrapper more as the basis for a marketing strategy than an avenue to lower distribution costs have fallen flat. K Ben Johnson, CFA, is director of global passive fund research at Morningstar.

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2013

Morningstar Advisor - October/November 2013
Letter From the Editor
How to Make Social Media Work for You
Do Mutual Funds Still Have a Role?
More Personal Than Finance
How to Handle Your TIPS Positions
A Real Estate Veteran Starts From Scratch
Investments á la Carte
Investment Briefs
When to Say No
Take a Guarded Approach to Homebuilders
Fund Distribution Has Been Turned on Its Head. Now What?
Winning the Distribution Battle
Active ETFs Wait for Their Heyday
A Fund Firm Defies Indexing Trend
Piloting New Channels
A Good Fit
The Predictive Power of Fair Value Estimates
Does Being Prudent Pay Off?
Utilizing Utilities’ Total Return
Stuck in the Middle Is Not a Bad Place to Be
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Good Guys Win

Morningstar Advisor - October/November 2013