MFS is known in the US as the company that pioneered the mutual fund but, like many US giants, it had to work hard to make inroads into Europe until it hit on a successful formula
MFS has traditionally prided itself on keeping a low profile, letting its near 90-year pedigree do the talking. But while the US market may know MFS as the company that pioneered the mutual fund, its brand is less well-recognised in Europe and the group has embarked on a more determined effort to raise awareness.
Like many US giants that have come to Europe, MFS tried a number of strategies before it hit on the right one. It started its campaign in Europe with UK, Luxembourg and Cayman-listed funds, before consolidating all the funds into the Luxembourg Meridian fund range in 2005. Equally, it made some initial forays into the retail market in the UK, before deciding to focus on UK institutional, and now wholesale, investors.
However, it has persisted rather than skulked back to the US and has now generated some traction for its range of funds, some of which are now £400m-£500m in size. Within the past five years, it has decided to make a much stronger effort on the wholesale side, selling to private banks, discretionary wealth managers and fund of funds groups. The group’s funds also appear on most major platforms.
Lina Medeiros, president, MFS International , says: “This leveraged a lot of work we had done in the US. We identified six countries on which to focus – the UK, Germany, Switzerland, Italy, France and Spain. But our main focus has been on the UK, Germany and Switzerland, which have the biggest markets, the strongest investment cultures and, for the most part, the better economies.”
The product set with which the group works is the 30 Meridian funds, which are passported across Western Europe. The group made some changes to the range last year, tweaking and consolidating the funds to appeal more to a wholesale market. For example, the Global Growth and Value funds were merged into a Global Concentrated fund; the Strategic Income fund became a Global Multi-asset fund. The European bond fund became an absolute return fund, while the Hong Kong Equity fund was merged into the China Equity fund.
The group’s strongest areas have been its European, global and emerging market debt funds. The emerging market debt fund is the largest at £2.7bn and has also been the group’s top performer. The European Value fund is now £721m in size, while the European Research fund is £459m. The group has also had some success with its global funds. The Global Equity fund is £1.14bn in size and is top quartile over one and three years. The group also run a global mandate for the Witan Investment trust.
Medeiros says that certain funds resonate with certain clients. In the eurozone in particular, the group has led with the European equity suite of funds. It is about to launch a significant marketing campaign around the funds, believing that the tide may be starting to turn for European equities and fund buyers are looking at the sector once again.
Medeiros adds: “We know that European equity has not been a favoured asset class, but there are some investors that have to be invested. We have got to a position where it is difficult to ignore MFS in that market.”
Medeiros attributes the strong performance of the funds to the group’s solid global research platform. She says: “We have a value-based fund, a concentrated large cap fund and a small cap fund, so I think it has more to do with our research platform and our global stockpicking ability. This means that performance is not concentrated in one fund. There has to be a process and approach.”
All the funds run from a central research ‘engine’ that runs from nine locations worldwide. Teams of equity analysts run on global sector lines with quantitative and credit analysts also feeding into the process. Risk assessment is integrated into the process. Across the group’s funds the biggest driver of returns is designed to be security selection. It is at a heart, a fundamentals- and research-driven approach.
In a recent interview, chief investment officer, Mike Roberge said: “The structure ensures that decisions aren’t being made in a vacuum. For example, the technology analyst in the United States never makes decisions with a view isolated on the U.S market. He meets regularly, via teleconference, with our analysts in London, in Tokyo and all of our other international research centres. They compare and contrast opportunities around the world. So we always look at things from a global perspective.”
Overall, the group’s process is built on collaboration. Fund managers and analysts are peer-reviewed on their contribution to the team.
The weakest part of the group’s offering has, perhaps surprisingly, been in its US equity funds. Its US Value fund is fourth quartile over three years, and while recent performance has been somewhat better, it has not been the flagship product the group might have hoped.
Mark Dampier, the head of research at Hargreaves Lansdown, is not surprised: “It is a telling example of a US manager saying that they can run US money and performing poorly. The US has been a graveyard for active managers and it is very hard to find anyone in that sector.”
To be fair to the managers, the fund takes a value approach and this has been out of favour in recent years, but the fund’s quality approach should have compensated to some extent. The longer term performance of the group’s concentrated fund is marginally better.
The group’s product range continues to evolve. It has a bond fund launch slated for February. It has a far wider range of products in the US than it currently markets in Europe, but restricts new launches to areas where it believes that there is a long-term story.
Medeiros says: “We look at the long-term sustainability of an asset class. We do not buy into the market’s latest fad products. We start building capabilities internally – all our growth is organic – and we then seed an internal product and manage it for a while before taking it to market.”
For example, the group was among the first to launch an emerging market debt fund. Medeiros adds: “I remember when it was not a popular asset class. I remember when we had to sell the asset class before we ever got round to talking about our products, but now everyone is bought into emerging market debt”
It may have built its values on being stable and reliable, but it does not necessarily want this to be the whole thrust of its branding. In the group’s new campaign, it has tried to shake off its old-fashioned image, modernising its marketing and re-positioning the brand. Medeiros suggests that investors should expect to see more of the group.
Nevertheless, memories of its short-lived stint in the UK linger with many fund selectors. Patrick Connelly, the head of communications at AWD Chase de Vere, says: “MFS came into the UK with a big fanfare at the end of 2001. However, a combination of bad timing and poor investment performance meant that they never really gained any traction. They then decided to amalgamate their fund range in Luxembourg so they could have one proposition which could be sold across European and global markets.
“They do have an extensive fund range although are seemingly more focused on discretionary and institutional managers than on mainstream UK retail investors. We do not use MFS and would not as a matter of course use Luxembourg-domiciled Sicavs unless there was a strong over-riding reason for doing so or an exceptional fund where there were no onshore equivalents. This is very rarely the case.”
Dampier is more receptive to the idea of offshore funds, saying that investors tend to be agnostic as long as funds are regulated by the FSA. However, he says that offshore providers tend to face the problem that they do not appear in all performance tables and that fund selectors are generally trying to reduce choice rather than expand it.
In practice, the distinction between onshore and offshore funds is diminishing and may continue to erode.
MFS deserves credit for sticking to the European markets when others would have retreated. It has now built a strong presence in Europe through its Luxembourg range, and should do better as European equities find greater favour among investors. Some areas have disappointed, but the group has something to tempt fund strategists.