Novel Approach: No Managers, Big Gains

Sometimes you can teach an old dog new tricks, as Massachusetts Financial Services has discovered.

The Boston investment company, which unveiled America’s first mutual fund in 1924, came up with a simple yet radically new idea five years ago when it launched MFS Research, a stock fund for which analysts, rather than portfolio managers, call the shots.

The concept worked so well--and performance has been sufficiently impressive--that the company recently unveiled a second such portfolio, the MFS Research Growth & Income Fund. It was made available to investors last month.

Driving both MFS research funds is a belief that analysts can beat portfolio managers at picking stocks.

At certain fund groups, portfolio managers essentially fill the analyst’s role by visiting companies, attending trade shows, talking to customers and suppliers and otherwise researching stocks from the ground up.

But elsewhere, especially at some of the larger funds, managers are too harried to spend a lot of time picking among stocks. They rely on researchers at their own companies for recommendations or tap independent Wall Street research firms for advice.

“We spend more time on the road visiting companies than portfolio managers do,” said Dale Dutile, an MFS analyst who follows computer-hardware stocks. “We also spend more time talking with a company’s customers and suppliers.”

One MFS analyst recently sat in on a hospital surgery in which a new medical device was being used. That’s the sort of grass-roots research for which portfolio managers typically don’t have enough time.

MFS counts 26 stock analysts, each of whom plays a role in managing the two funds. Every Friday the analysts convene to discuss stock picks and decide what to buy and sell. Three MFS analysts in London join the debate via videoconferencing, with a three-second time delay. These meetings range from acrimonious to harmonious, but any bruised feelings usually don’t last long.

“It takes a special corporate culture to make these meetings work,” said Kevin Parke, MFS’ director of stock research. “It’s important that our analysts feel they don’t have to worry about retribution.”

One of the ground rules is that when the analysts want to buy a stock, they often must sell something else to make room. This provides a nice mechanism for getting rid of overpriced or sluggish stocks.

“Having a sell discipline prevents the group from falling in love with certain companies,” said Parke.

The team orientation to the MFS Research portfolios helps to make the funds less volatile, Parke believes.

“When you have this many people involved, you get good diversification,” he said.

Yet the funds’ returns have not been watered down by consensus thinking, as sometimes happens in a team setting, perhaps because each analyst keeps such close tabs on his or her companies.

“It’s a fund that brings out the best ideas from the MFS group,” said Tim Paulin, manager of investment research at Interra Advisory Services, a Minneapolis affiliate of the Dain Bosworth and Rauscher Pierce Refsnes brokerages. MFS Research is one of about 60 mutual funds recommended by Interra.

MFS Research, which invests in a medley of small, medium and large stocks, has comfortably outperformed the competition since adopting the team-analyst approach in February 1992. Over the nearly five years through December 1996, it returned 133%, reports Lipper Analytical Services of Summit, N.J. That compares with 87% for the typical growth fund. Before early 1992, MFS Research had a different name and investment approach.

MFS Research Growth & Income, which follows a similar strategy except that it invests only in large, seasoned firms, returned 29% in 1996, its first year of operation. That compares with 21% for the typical growth-and-income portfolio.

Both funds ([800] 637-2929; $1,000 minimum) levy a maximum 5.75% sales charge on the A shares. The funds also are available in B and C shares, which feature lower front-end charges but higher ongoing costs.

Why hasn’t the analyst-team concept caught on elsewhere? Dutile offers two explanations.

First, not all fund groups utilize a “bottoms up” stock-picking focus that stresses individual-company research instead of broad predictions about the stock market and economy. Second, a fund group would need to have enough analysts contributing detailed stock ideas from many industries, without so many participants that a team meeting would become unruly.

“This type of fund works best with 15 to 30 analysts,” he said.