MFS Meridian Funds–Global Equity Fund‧Morningstar Fund Awards 2010 Special Editorial

Winner of Global Large-Cap Equity

MFS Meridian Funds – Global Equity Fund

Morningstar Fund Award Winning History of MFS Meridian Funds – Global Equity Fund

-        2010 Global Large-Cap Equity

-        2008 Global Equity

Unlike the winners in the previous Fund Award Special Editorials, MFS is not a familiar name to Hong Kong fund investors. When its name firstly appeared in Morningstar Fund Award 2008, many investors asked, “Who MFS is?” Yes, MFS is indeed a new comer, but her truly long-term investment philosophy is undoubtedly impressive, attested by the fact that the fund beats its peers consistently. MFS Meridian Funds - Global Equity Fund, the winner of the Morningstar Fund Awards 2010 Global Large-Cap Equity Category, was also the winner of Global Equity Category in Morningstar Fund Awards in 2008.

Performance

More volatile small/mid-caps led the rally last year, and thus most of large-cap equity funds look like laggards. Global equity funds also followed this pattern. MFS Meridian Funds - Global Equity Fund rose 10.92% last year. The fund’s long term performances were markedly impressive in terms of degree of outperformance and performance consistency. The fund’s 3-, 5- and 10-year annualized returns are 2.03%, 4.36% and 6.00% respectively as at April-end, all outperforming its peers by at least 2 percentage points.

Key to Success

“Long term investors, not speculators” is the backbone of the investment skeleton. Ben Kottler, Investment Officer and Institutional Portfolio Manager of MFS Investment Management, emphasized the fund’s long term focused strategy is its key to success. “We invest on a 3 to 5 years investment timeline, that’s why the portfolio turnover is so low.” Kottler said. “Portfolio turnover last year was below 20%, while the average for competitors was above 70%.”

Besides, concentrating on the companies’ businesses themselves is another mainstay for success. “Any of the change in the portfolio depends on stock opportunities that we find in the market. We don’t have any sort of top-down or macroeconomic views. Each investment decision is driven by where we find attractive businesses trading at reasonable valuations. Macroeconomic event will only be viewed as the risk consideration.” Kottler added. And this is also one of the reasons why the recent disasters in Japan and the European debt crisis did not smack the fund. Moreover, MFS seeks stocks with above-norm returns, strong brands, healthy balance sheets and geographical diversity. 

Investors often get lost amid short-term noises, and it’s good to learn from Kottler about how to stick to the strategy and focus on quality.

Focuses

Thanks to the robust stock selection processes, the management team has strong conviction upon the holdings. “We are currently overweighting consumer staples, which was also the main positioning last year, including both food and non-food sectors.” Kottler said. He believed that the industry growth is probably sustainable. In 2010, the fund brought in some new holdings including Akzo Nobel, Colgate-Palmolive, Visa and Honeywell International.

Lowering the weighting of energy sector was another major move during 2010. European utility company GDF Suez and integrated oil company Total were sold. Kottler explained the long term fundamental of the energy sector is deteriorating. “The major oil companies are spending more and more on capex, but their reserves of oil and gas remained flat over the last decade.” In addition to the tougher regulation imposed on the industry after the disaster in the Gulf of Mexico, he thought that high energy sector returns are now “in the past”.

How about Asian stocks? You may wonder why this global equity fund is significantly underweighting Asia region relative to its benchmark and peers. “Most of the businesses we invested are global businesses.” Kottler claimed, “We find fewer opportunities within Asia including Japan at this moment because of the relatively high valuation compared to businesses we find elsewhere in the world.” Underweighting Asia doesn’t mean that the manager gave up the opportunities in the region. In contrast, the management team tries to capture the growth opportunities through global businesses with exposure to Asia. 

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Since individual stock analysis plays a key role in the investment process, the investment team is a valuable contributor to the fund’s success. Kottler agreed that the analyst team is important, and he also appraised MFS’s culture of encouraging team work. The team members managing this fund station separately in US, Europe, Asia and Latin America and they hold a global weekly meeting to share investment ideas. “We debate and challenge one another and we believe that this really allows us to make better decision.” But the team members do not bound themselves here. “We are still trying to improve the amount and quality of communication among the analyst around the world. We always think we can do better!”