[Awards Q&A] Best US Equity Fund - MFS Meridian U.S. Concentrated Growth A1 USD

To help our readers better observe what makes a successful fund house, we sent out questionnaires to the winning teams earlier and asked them to shed lights on their team structure, how various risks have affected their investment decisions, and the major portfolio changes over last year, etc.

Morningstar Editors 16 March, 2020 | 10:35
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Winner of Best US Equity Fund - MFS Meridian U.S. Concentrated Growth A1 USD

Key Stats
Inception Date: 1999-03-12
Morningstar Rating (2020-02-29): ★★★★
Manager: Constantino C. Jeffrey, Skorski Joseph

Q1) Can you highlight any major changes you made to the portfolio over the course of 2019? Were there any particular holding(s) or theme(s) that drove the fund’s performance for the year?

Given the our long term focus and low turnover approach, there were no significant changes to portfolio positioning that lead to the strong performance in 2019. Instead, our time-tested focus on high quality, durable franchises trading at reasonable valuations, coupled with the opportunity to compound above-average growth at high returns on investment for many years into the future was rewarded.

We finished 2019 nicely ahead of the large growth index and peer averages as a result of strong stock selection across a variety of sectors and individual companies, which is a credit to the excellent work of the MFS global research platform. The result was consistent with our portfolio construction and risk management processes that seek to limit significant factor biases in favor of bottom-up stock-driven returns. A typical holding in the portfolio would be one that has a premier franchise with a strong competitive advantage that should allow above- average growth compounding to work in our favor for well into the future. In previous periods, we had added many of these stocks at more attractive valuations during periods of weakness that we felt were temporary.

Some of the stocks found in the index that we avoided last year also turned out to be strong contributors to relative portfolio performance. We continued to avoid the biotech industry, where we have ongoing concerns about the high cost of prescription drugs and the sustainability of profits in the face of patent expirations.

Finally, it is worth noting that the market also tended to favor high-quality companies with durable growth characteristics during 2019, which played into our investing style. For most of the year, investors appeared to be concerned that falling interest rates and a slowing economy was foreshadowing a recession. As a result, investors gravitated toward companies with high earnings durability and away from the cyclical companies. This shift played to our strength as our investment process focuses on durable growth compounders where we have high confidence in the sustainability of profits over the long term. These well-positioned secular growth companies are precisely the type of stock that we hold in the fund.

Q2) What are some specific opportunities you have identified for 2020, and do you expect your 2019 outperformers to persist in 2020? What are the top risk factors that could impact your portfolio, and how are you positioned to mitigate these potential risks?

Since we invest with a long-term horizon that focuses on company fundamentals and valuations, our approach is not predicated on speculating as to which themes, sectors, factors, etc. are likely to be in favor in the near term. Rather, we apply our investment philosophy with discipline, based on our conviction that buying high quality businesses with durable competitive advantages at attractive valuations should lead to attractive risk-adjusted returns relative to the benchmark over the long term. So while we do expect our holdings, including the 2019 outperformers, to deliver positive results over the long term, the fund isn’t explicitly positioned based on a near term outlook for 2020.

That said, we believe several of the fund holdings are well positioned to benefit from secular growth trends that we expect to continue in the coming year (and beyond). We remain attracted to the coatings space due to its durable growth characteristics and a business model that is relatively less commodity-exposed than the typical metals and mining companies we have chosen to avoid in the Materials sector. Within financials, we have historically shied away from banks given a general lack of durable growth and concerns about high leverage and interest rate sensitivity, but we have identified non-bank Financials that we find attractive on a fundamental basis.

Given our approach, over the long term, we always consider the biggest risk to be at the individual stock level, i.e. picking the wrong stocks. In the short term, we may face a performance challenge during periods when the market does not reward high quality and sustainability of businesses, and instead rewards momentum and/or more cyclical stocks.

Q3) In which areas do you think risk is over/understated with respect to (i) the outcome of the US Presidential election, (ii) persistently loose monetary policies by major economies, (iii) Coronavirus impact on global growth, and how are you expressing these views in your portfolio?

Consistent with our long-term focus, we are not trying to be tactical with these risks. The strength of our global research platform is using fundamental analysis to determine which companies have the durable and sustainable business models that will allow them to outgrow their peers over the long term, rather than trying to speculate on macro variables. We do consider the potential impact of these risks on individual companies, and in situations where volatility drives valuations lower because investors are worried about near term transient issues. We often seek to add to stocks if we believe their long-term fundamentals are not impacted.

Q4) How is your investment team organized? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future?

The investment team includes Portfolio Managers Jeffrey Constantino, CFA, Joseph Skorski and Institutional Portfolio Manager Andrew Boyd. The portfolio managers jointly manage the fund and debate, discuss, and ultimately agree on all trades. The success of our investment approach is based on the individual strengths of our portfolio managers and the strength of the 109 members of MFS’ global research platform who are organized into eight global sector teams. The investment process is highly collaborative and portfolio managers make decisions based on significant input from the research analysts.

Joseph Skorski, who has been at MFS since September 2007, joined the team as a portfolio manager in July 2019. We do not have any plans to add to the portfolio management team of this fund in the near future. We expect to continue to invest in our global research platform going forward.

Q5) Where do you feel that the investment team or the investment process can be improved upon in the future?

While the strength of our global research platform remains a key competitive advantage for MFS, we are always seeking to improve the breadth and depth of our research coverage to benefit our investors.


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