MFS American US Emerging Growth Fund
The MFS American US Emerging Growth Fund is the offshore clone of the highly successful US-based MFS Emerging Growth Fund, which Don Pitcher has managed since 1988. The fund aims to gather long-term capital growth through investment in the securities of emerging growth companies. In this instance, emerging growth is defined as companies at the early stage of their business life cycles.
Using a pragmatic, bottom-up stock selection process, Pitcher is able to draw upon a sizeable equity analyst team (currently in excess of 20) which is divided by sectors and is primarily responsible for the generation of ideas for the portfolio. MFS as a group strongly emphasises original research and the entire analyst team make in excess of 2,500 company contacts per annum. Stock selection will stress companies that have strong balance sheets, a proprietary product or service and a talented and experienced management team. The management team should also have sizeable stock positions where possible, to ensure that they align their interests with external shareholders. In each case, the analysts will produce forecast earnings and a target price for the companies they review.
The portfolio is constructed on the basis of merit and the manager targets companies which are able to offer growth prospects in excess of 20% per annum for at least the next three years. The manager believes that recognising a company's potential at the early stage of its development is his key skill and the success of the portfolio comes from letting the winners run. He welcomes volatility as it invariably offers opportunity, and he will happily add to opportunities as long as the stock fundamentals remain solid. A holding will be reviewed when it reaches its price target, or the fundamentals deteriorate. The manager targets a portfolio of around 100 stocks with approximately 70% commonality with other emerging growth mandates. The balance of the portfolio allows the manager to express his personal flair and will include stocks which have been long-term holdings.
Following the events of 11 September, Pitcher expects the market to climb a 'wall of worry' as investors look to put their money to work (US$2 trillion remains on the sidelines). His outlook for the market is optimistic as he is confident all the bad news is finally on the table. He can see little that could surprise from here, and expects future announcements to be positive.
He notes that the only way the economy can recover is through US consumer rather than business spending. Although the consumer variable remains difficult, confidence remains. He expects interest rates to continue to move lower and the oil price to remain stable. He suggests we could be in the early stages of a bull market and any further lowering of interest rates by the Federal Reserve would contribute to the sustainability of the up market.
Pitcher continues to believe that the leadership in the stock market has shifted to small and mid-cap stocks, and that the market is in the early stages of a new bull cycle for small caps. He believes the key factors driving performance in the small-cap sector in 2002 will be interest rates, earnings and valuations. Despite the outperformance of small cap stocks over the past two years, small caps have remained at a discount to large caps stocks and are at valuation levels below their long-term averages. He remains optimistic towards the small cap growth names, which historically lead after a slowdown.
Pitcher comments that valuations continue to matter in the technology arena, citing Cisco, which he fears will never return to former highs given that it cannot grow any faster than is justified by a share price of US$25. He continues to favour high-end software companies that provide security solutions for the internet, companies participating in the fast-growing storage networking area, contract manufacturers building systems and semiconductor equipment companies.
He remains optimistic towards semiconductors, and these represent around 25% of the portfolio's technology exposure (he is confident they will lead the technology recovery). He comments that semiconductor stocks tend to move as a group, thus the need to be selective at the stock level is reduced. He has been playing into the semiconductors involved at the consumer-end. Telecommunications represents 5% of total portfolio assets. He notes that the telco sector is continuing to struggle from overcapacity.
Pitcher believes the consumer is continuing to hang on, and has therefore shifted the consumer weighting higher during the quarter. He highlights leisure-related sectors such as retail, restaurants, lodging, and radio broadcasting, which he expects to lead the recovery in the stock market when it becomes apparent that the economy and corporate earnings are picking up.
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