MFS European Equity has survived the market falls of last year due to its unusual method of portfolio management
MFS European Equity, which will be three years old in March, is unusual in that there is no designated portfolio manager. The fund is a collection of 'best ideas' put forward by a team of seven London-based analysts who split the pan-European universe up by sector.
The fund has survived the market falls of last year relatively well ' it is ahead of its peer group average and the index over the last 12 months.
Within each analyst's sector they may sell a stock if they decide to, for example, if it has reached its price target or the fundamentals change. However, if they want to buy a stock or add to an existing holding they must either sell something else within the sector, or persuade the group as a whole that the opportunity justifies allocating more money.
There is no rigid research model for stock selections; analysts have the freedom to look at their own sector as they choose. But to present to the group in this way they are required to present detailed earnings analysis and a summary of the investment case, which is then subjected to rigorous scrutiny.
Each analyst covers two or three industries and concentrates on understanding the companies within these on a purely bottom-up basis.
Barnaby Wiener, who covers pharmaceuticals, said: 'For a lot of fund managers, the investment process involves making calls on the macro-economic environment. We think it is very difficult to add value by doing that. Although we do consider the macro backdrop if our bottom-up indication is to go overweight a sector, we really focus on the stock ideas. As analysts, 95% of our time is spent researching companies.'
Wiener believes that the fact there is no overall manager has helped the fund to perform relatively well in difficult market conditions. 'When there is one person in charge they are not able to spend all their time visiting companies. Inevitably they begin to take a more top-down thematic view.'
The focus on individual company research meant the fund avoided much of the tech bubble. 'Our 'kicking the tyres' approach made it very difficult for us to countenance buying into companies without revenues. For example, I looked at the Bookham Technology IPO in May 2000. Clearly many people bought into it because optical was the 'hot sector' at the time. But when I tried to make a model work, it became clear that it was impossible on the basis of existing revenues, or indeed anything that could reasonably be expected in the future.'
The portfolio, which comprises around $180m altogether, is made up of around 60 stocks. Because of the nature of the portfolio it is not highly correlated to the index in terms of its holdings. Only around one-third of the companies in the Euro Stoxx would be held in the portfolio, added Wiener. 'Clearly, we have to think carefully about not owning a large index name because if you get that call wrong, you can suffer. But we are decisive about our convictions and if a stock does not meet our criteria, or if there is a better opportunity elsewhere, we will not hold it.' On this basis the fund does not hold any Nokia, Glaxo or Royal Dutch stocks.
The biggest theme that has emerged from the bottom-up research over the past year was, unsurprisingly, a heavy underweighting in tech. Wiener commented: 'As at the end of July we were around 2% underweight technology; however we were substantially more underweight in the middle of last year. We had no telecoms equipment companies at all ' which were, at the time, a big part of the index.'
Although the fund's overall orientation is still fairly defensive, the biggest overweighting is healthcare, with an emphasis on medical devices and services. Earnings visibility, Wiener says, is still relatively good in this area.
There is also an overweight in media. 'This area is cyclical and these stocks have been beaten up pretty badly. We think that, when the market begins to recover, some of them should function as leveraged recovery plays,' he adds.
About the manager
Barnaby Wiener is a research analyst for MFS Investment Management. He specialises in the European aerospace/engineering, pharmaceutical and technology industries.
Wiener joined MFS as a research analyst in 1998. Previously, he was an equity research analyst at Merrill Lynch. Prior to that, he served as an equity research analyst at CrÃ©dit Lyonnais and as a captain in the British Army.
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