MFS European Equity fund is run primarily from London by a team of five research analysts using the ...
MFS European Equity fund is run primarily from London by a team of five research analysts using the bottom-up stockpicking style with which MFS manages over $137bn globally.
The fund is part of MFS's Luxembourg Sicav and since launch in March 1999 has outperformed the MSCI Europe and most of its peer group, having risen by over 62%.
Barnaby Wiener, research analyst with responsibility for telecoms and pharmaceuticals, said: "The portfolio is constructed from 'best ideas' generated by a team of five analysts each with different sector responsibilities.
"Each has freedom to trade in and out of individual stocks in one of their sectors, although a decision to change the overall allocation to a particular sector would have to be taken by the whole team together."
The investment philosophy is to focus almost entirely on the particular characteristics of individual stocks, with sector weightings and country allocations emerging as a result.
Wiener said: "We have no particular bias toward either 'value' or 'growth' stocks. Clearly growth was in favour in the second half of last year and we held a relatively high weighting in technology stocks in the portfolio but this was driven by the outlook for particular stocks rather than being a momentum play. The technology weighting was reduced at the end of 1999."
The highly research-driven stock selection process involves numerous company visits and presentations.
Marcus Smith, who covers the telecom and banks sectors, said: "MFS can use its $137bn under asset as leverage to get access to the top 10 people within companies' management teams."
Most of the specific research is generated in-house. "We do not rely on sell-side data, we make our own cashflow and earnings models. The particular ratios we concentrate on depends on the dynamics of the industry under scrutiny. For example, with banks return on equity versus price to book is one of the best indicators of value creation, while in the telecoms sector it is important to look at market value plus debt divided by operational cashflow.
"Although our research is highly technical, we do not spend too much time creating complex valuation systems. For us it is more important to understand all the dynamics both internal and external that are driving a company. That is the key to understanding what the earnings number or the cashflow number is going to be. Fundamentally, we are simply looking for the best companies in Europe at reasonable valuations."
A particular success story recently has been Mannesman, currently the subject of a hostile takeover bid by Vodaphone Airtouch. As at 20 January this year, the fund had 6.5% invested in Mannesman.
Smith said: "Mannesman has been the largest holding in the portfolio for some time. The flexibility of our research approach meant we were able to spot its potential while most people still viewed it as an engineering conglomerate long before it was classified as a telecom company.
"It was apparent to us from the time Vodaphone took over Airtouch that the company would have to look at Mannesman as a potential for cellular use in Germany. Penetration is lower than in most other European countries while GDP figures are higher."
At present the largest sectoral overweighting is in telecoms.
"Overall sector weightings can tend to mask our company-specific focus. We believe that cellular penetration will increase in Europe. As a result, breaking down the telecoms sector, we are overweight cellular operators and underweight national carriers. We also have some telecom/internet plays."
The fund also uses specific stock plays to make up a market weight in insurers.
"The pensions bubble offers a huge opportunity for insurers to grow and so we are playing this via specific companies - Axa, Skandia and Bank Julius Baer - all of which we think should see strong asset growth. By contrast, we are underweight banks because of the lowering of barriers to entry in that area."
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