MFS IM: Lessons learnt from 100 years of investing

Time is an investor’s greatest asset

Investors are bombarded with information and most of it is noise that can distract from making meaningful decision-making. Over 55,000 public companies report quarterly results, creating short- term signals that may or may not reflect a company’s long-term success or failure.¹

Over the past 100 years, our long-term investing philosophy has been integral to our investment process, and historically this has shown that time can be an investor’s greatest asset in building wealth and purchasing power, as evidenced by the average 10-year returns for various types of portfolios shown below as compared with cash and inflation.

Question to consider
Are your investment managers’ processes aligned with your time horizon? Are they incentivised to take a long-term view when it comes to your portfolio?

Fundamentals matter

In 1924, the lack of accessible company information led MFS to create one of the first in-house investment research teams. While the availability of data has increased, our focus on fundamentals – such as business model durability, financial health and valuation – remains unchanged.

Understanding a company’s fundamentals is crucial for accessing future earnings potential, as earning drive stock market returns. With over 300 investment professionals globally, we leverage diverse insights to navigate complex market dynamics.

Question to consider
Do your managers apply fundamental analysis to consider issues that drive long-term earnings growth for the companies they invest in?

Focus on value, not just price

In our daily lives, we sometimes overpay for products without adequate research, a behaviour that can happen in the stock markets as well. Investors may buy hot stocks without fully accessing the value.

We have learned that a disciplined valuation approach is critical to long-term investment success. Historical data indicates that low starting price-to-earnings (P/E) ratios often correlate with higher future returns, while high starting P/Es tend to result in lower future returns.

Valuations are based on assumptions and learning from experience is a critical part of our valuation discipline. MFS constantly learns from the past and tries to apply those learnings as we contemplate future decisions.

Question to consider
What is your manager's valuation process and how does it impact portfolio construction and buy-and-sell decisions?

Diversification has worked

MFS pioneered open-ended mutual funds to provide ordinary investors with access to diversified portfolios.

Today, diversification is more complex with multiple dimensions including asset class, sector, industry, geography and currency. Active investment strategies can drive excess returns through diversification by employing various levers, such as sector and quality selection, as well as duration and yield curve positioning in fixed income.

While this does not guarantee a profit or protect against a loss, at its core diversification is about managing risk. We think investors can benefit by diversifying sources of return and by combining managers who focus on different alpha strategies that weather market volatility.

Question to consider
Is your portfolio diversified across sectors, regions and asset classes, as well as potential sources of alpha?

Balance opportunity and risk

Market downturns are a natural part of investing with 25 bear markets over the past century lasting about 10 months on average. Market downturns often give us opportunities to deliver long-term outcomes to our clients. We believe high-quality companies with durable earnings tend to be less impacted in down markets than low-quality companies.

If the stock market is down 20%, a 25% return is needed to get back to even. A portfolio that is down 15% in that same market needs only a 17% return to break even. This illustrates the importances of risk management. Our team identifies the changes during a market downturn and the opportunities to capitalise on price declines with companies attractive for the long term.

In fixed income, our teams can use changing credit and rate environments to reallocate risk to areas they believe will be compensated. Building liquidity as spreads tighten and then redeploying that liquidity into opportunity areas when spreads widen is a core philosophy of our fixed income teams.

Question to consider
Are risk management and managing the downside cornerstones of your managers’ philosophy?

Disruption is constant

Every generation has its disruptors, and over the past 100 years MFS has invested through countless examples from the advent of television to the rise of streaming services.

Today, emerging technologies like artificial intelligence (AI) present both risks and opportunities for investors. Our approach involves thorough research and thoughtful evaluation of potential investments in ad evolving and disrupting world.

Question to consider
What is the structure of your asset manager’s research team and how is information shared across sector and industry teams? Does the manager have the breadth and depth of resources to analyse disruption across impacted industries?

Teams over individuals

Teamwork is at the heart of everything we do at MFS. The past 100 years have taught us that allocating capital responsibly relies on a culture of teamwork.

We believe teams of diverse thinkers contribute different perspectives. This helps us better understand and incorporate all financially material factors into our analysis, which we believe fosters better investment outcomes.

Question to consider
Are you able to leverage the collective experience of your extended team to learn from the past to better serve your stakeholders?

Aiming for the goal

Investment professionals must be attuned to ongoing changes but grounded in a process and philosophy that can withstand the test of time.

These lessons learned from a century of investing have helped us keep our focus on allocating capital responsibly over the long-term for our clients.

Source
1 - World Federation of Exchanges, Market Statistics, February 2024

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