First, and Lasting : Lead Manager of America’s Oldest Fund Looks for Value
Under lead manager John Laupheimer, the Boston-based Massachusetts Investors Trust stock mutual fund beat the Standard & Poor’s 500 index by 3 percentage points in 1996--a remarkable feat given that the vast majority of funds lagged the S&P.;
The fund, which Laupheimer manages with the help of Kevin Parke and Mitchell Dynan, also outperformed the S&P; over the three-, five- and 10-year periods ended Dec. 31. The $3.5-billion Trust--America’s oldest fund--is part of the $54-billion fund family run by Massachusetts Financial Services.
Laupheimer, a Pennsylvania native, developed an interest in investing in the seventh grade, when a math teacher had him track a hypothetical portfolio of stocks.
After receiving a master’s degree in management from the Massachusetts Institute of Technology in 1981, he joined MFS.
“I started out as a research analyst and have been at MFS my entire career,” he says. “We have a policy of hiring people out of business school and keeping them.”
Laupheimer, 39, is married and has two children. He was interviewed by Russ Wiles, a mutual funds columnist for The Times.
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Times: Mass. Investors Trust is America’s oldest mutual fund--dating back to 1924--and you’ve beaten the market over the last 10 years. So how come the fund hasn’t become a household name?
Laupheimer: That’s a good question. I think it’s because MFS has not had the kind of high-profile advertising campaign that a lot of other firms have. Although we’re addressing that issue and have started to do some TV advertising, we have suffered from a lack of name recognition. But that’s fine with me because it has left the fund at a more manageable size. We have more flexibility than a $20-billion behemoth.
Times: Even so, your assets have roughly doubled over the last two years. Is that causing problems?
Laupheimer: No. Part of that growth reflects the fund’s performance. . . . The rest is attributable to cash inflows, but we have not had unreasonable ones. Besides, the stocks we buy are the largest, most liquid companies, for which cash inflows would not cause problems.
Times: You’ve edged the Standard & Poor’s 500 in recent years, but the fund also looks a lot like the index in some respects--roughly the same average price-to-earnings ratio, price-to-book ratio, etc. Is this an index fund in disguise, or are you really different from your benchmark?
Laupheimer: We differentiate ourselves by attempting to deliver modestly above-average gains compared to the index, but with less risk. We are not seeking performance at all costs.
Times: Is that reflected in a lower rate of volatility for the fund, compared with the S&P; 500?
Laupheimer: Most competing stock funds have “betas” of 1.1 or higher [indicating that they are 10% more volatile than the S&P;]. We sit at around 0.95 or 0.97. That doesn’t seem like much, but it’s notable in terms of comparisons.
Times: So as fund managers, what do you try to bring to the table?
Laupheimer: First, we have a high-quality team of research analysts who are generating investment ideas across the board, ranging from conservative to aggressive. Then, my co-managers and I are filtering these ideas by focusing on blue-chip, dividend-paying, lower-volatility companies whose businesses are growing but whose stocks are selling at the right price. So the research analysts get credit for the upside performance, while the portfolio managers are responsible for risk control.
Times: Is this a team-managed fund?
Laupheimer: It’s run as three separate sub-portfolios. We don’t act as a committee because that makes it hard to reward good performance or hold us responsible for poor results. I’m responsible for 50% of the assets, Kevin [Parke] for 30% and Mitch [Dynan] for 20%. Each of us has the mandate to run a “mini-fund.”
By having three separate portfolio managers, you smooth out the overall ups and downs because we each will have good and bad years. And as I said, we’re accountable.
Times: What types of stocks epitomize what you’re looking for?
Laupheimer: One favorite is Norwest [$53 on Monday, New York Stock Exchange], which has fine management and really operates three separate businesses.
The first is a consumer-based bank where they cross-sell different types of financial products and try to increase the number of relationships with customers. For example, they bring in outside mutual fund marketers to sell at individual branches. They also offer incentives for their own employees to cross-sell and develop relationships.
The second business is a low-credit-risk loan operation. Third, Norwest is the largest mortgage origination and servicing company in the country, and they account for their home loans in a very conservative fashion.
Overall, Norwest has achieved 13% to 14% compounded [annual] earnings growth over the last half-dozen or so years, and we think they can keep doing that going forward.
We first bought the stock when it traded at nine times earnings--when other people considered it to be just another basic, junky bank. Now the stock trades for 13 to 14 times [estimated 1997] earnings, and we think it could go higher. We think Norwest can resemble Banc One [$48.25, NYSE] of several years back, when it generated higher earnings growth than the S&P; 500 for about a decade.
Times: What’s another favorite stock?
Laupheimer: Philip Morris [$138.75, NYSE], our largest position, is another blue-chip company that’s big and has consistent growth, a well-established franchise and a shareholder-focused management.
Often, when you find all those traits, you find an expensive stock. But in Philip Morris’ case, you have a very low price-to-earnings multiple because the company makes cigarettes and there’s concern over [health liability] litigation. A lot of people think tobacco firms will face the same types of problems that befell the breast-implant and asbestos businesses, and they assume there eventually will be a crippling class-action settlement.
We don’t think so. Philip Morris’ business is still viable, and it throws off considerable cash flow that allows the company to maintain a substantial long-term legal defense. Those other two industries [breast implants and asbestos] weren’t in a position to do that because the businesses didn’t exist anymore and there was no cash flow to support a legal defense. Managements in those two cases had no choice but to settle. We don’t see the tobacco companies settling, certainly not at such a disadvantage.
Times: Do you take much flak from shareholders for making Philip Morris your top holding?
Laupheimer: Once in a while. My basic response is that most people who smoke choose to do so. We all know people who have been able to quit. The ultimate issue for Philip Morris is whether society will decide that individuals should not be held responsible for their own behavior if it’s harmful. The stock sells cheaply because people think the government either will allow lawsuits to bankrupt the tobacco companies or will make the sale of cigarettes illegal. If the companies go bankrupt, you still will have 18% of the population wanting to smoke--people who are growing more militant about their right to smoke. If the government outlaws cigarettes, you face all of the issues of Prohibition. There’s no public-policy interest in either of those outcomes.
Times: How about a less-controversial stock pick?
Laupheimer: Gillette [$83.75, NYSE]. It’s a company that meets all of our criteria--blue chip, great franchise, consistent earnings and cash flow, and a shareholder-oriented management.
We view it as a fabulous company that has been able to sustain earnings growth of 20% a year because of the global strength of their franchise and the opportunities they enjoy in developing nations. What companies like Wrigley [$61.50, NYSE], Gillette and even Philip Morris have going for them is that all of their products are affordable throughout the world.
There’s a big difference between Gillette’s prospects and those of Honda Motor, whose products are not that affordable throughout the world. A lot more people can buy a good razor than a car. Gillette’s stock sells for 29 times [estimated 1997] earnings, but you’d be hard-pressed to name another true 20% grower over the long term. You might come up with a technology company, but you would face substantially more risk in terms of product obsolescence and volatility of the earnings stream.
Times: But don’t you worry that the price-to-earnings multiples of stocks like Gillette are simply too high today?
Laupheimer: In a low-inflation environment, 29 times earnings is an attractive valuation.
Times: Four of your top five holdings are consumer companies with global reach. Is that a specific theme you’ve pursued for the portfolio?
Laupheimer: Yes, but our themes come about by finding stocks we like. We don’t sit around and say, “Gee, we need to find some global franchises.” We find stocks we like, then notice that they all have something in common. We discover our themes after we buy the stocks.
Times: Do you and your co-managers try to time the market’s cycles, or do you stay fully invested?
Laupheimer: We stay fully invested. We have only an average ability to time the market, which means we’re bad at it. We don’t think shareholders should have to pay for that skill.
We believe stocks provide superior returns to most other asset classes over the long term. Where we add value is being able to find stocks that are more attractive than the market as a whole. Timing the market is like running a casino and saying, “Gee, the customers look lucky tonight, so maybe we ought to shut down.” It’s just not what you do.
In the stock market, you know the long-term odds are in your favor. Shutting down is not the answer. The answer is to keep on looking for good stocks.
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Massachusetts Investors Trust
Strategy: Seeks long-term appreciation and modest income by investing in large companies with good growth prospects, well-established franchises and shareholder-oriented managements.
VITAL STATISTICS
MIT year-to-date gain: +8.3%
Avg. growth & income fund: +6.0
MIT 5-year gain, through 1996: +105
Avg. growth & income fund: +92
MIT 10-year gain, through 1996: +323
Avg. growth & income fund: +247
Massachusetts Investors Trust’s five biggest holdings:
1. Philip Morris. 2. Gillette. 3. Norwest. 4. Colgate-Palmolive. 5. General Electric.
Max. sales charge: 5.75% on A shares Assets: $3.5 billion
Min. investment: $1,000 Phone: (800) 637-2929
Morningstar risk-adjusted performance rating, 1-5: ****
Sources: Lipper Analytical Services, Morningstar
Sector Shuffle
A ranking of 12 key sectors representing the U.S. economy, based on the last five days of trading on major equity markets:
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5-day Rev. EPS Sector %chg P/E Yield P/Book ROE Q/chg Q/chg Transportation 4.9 20.9 1.8 2.6 15.0 10.6 9.7 Financial 4.1 17.8 2.0 2.7 16.5 13.6 17.4 Energy 3.2 19.2 2.8 3.2 17.1 29.1 36.5 Conglomerates 2.8 23.0 1.9 4.7 19.7 9.2 14.4 Health care 2.5 28.9 1.6 7.6 24.9 16.0 21.5 Capital goods 2.1 20.7 1.5 3.7 19.2 19.4 24.8 Basic materials 1.5 23.1 2.2 3.9 19.7 6.3 1.9 Services 1.0 25.6 2.5 4.0 14.5 18.9 16.3 Consumer (non-cyc) 0.8 30.3 1.9 10.9 34.5 7.9 13.4 Consumer (cyclical) 0.2 19.5 2.5 3.4 18.0 8.9 21.9 Technology 0.2 30.4 0.9 6.8 22.9 23.9 33.7 Utilities -0.2 14.9 5.3 1.8 12.1 18.1 6.0
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Source: Market Guide; all data as of Friday
Note: Each sector includes several industry groups, which in turn are made up of individual stocks. You can examine the industry groups and individual stocks that make up each sector at https://www2.marketguide.com/MGI/HOT/hotsect.htm on the World Wide Web.
Chart explanation: Sectors and sector data are weighted by market capitalization.
NM: Not meaningful; P/E: Friday price divided by most recent trailing one--year earnings; Yield: Annual return of dividend based on most recent stock price and recent dividend information; P/Book: Price-to-book; price divided by latest available quarterly book value per share; ROE: Return on equity, most recent available trailing 12-month period; Rev. and EPS: Revenue and earnings per share, percentage change in most recent quarter versus year-ago quarter.
