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January 27, 2005 at 07:00 PM
Jan. 19, 2005 — Continuity is the byword for MFS Value Fund/A (MEIAX). After Lisa Nurme retired in May 2004, co-manager Steven Gorham stayed on to run the portfolio, and Edward Baldini, now a portfolio manager, continued to oversee separate accounts run in the style, handling communications with the fund’s extensive team of analysts. The firm, which traditionally promotes from within, eventually may replace Nurme with another co-manager. “But it’s not urgent,” Baldini said. “We’ll wait until we find the right person.”
To date, the fund’s management process, team-oriented approach, and investment philosophy have all remained unchanged. Now with $6.9 billion in assets, the fund is sticking to its conservative, bottom-up strategy, identifying undervalued but high-quality large-cap stocks, and holding them for two or more years. “We also look at cash generation relative to net income growth,” Baldini says of stock selection. The fund is required to keep 65% of its portfolio in dividend-yielding stocks.
For the five years ended in December, MFS Value rose 8.1% annualized, versus 3.7% for the average large-cap value fund. For the three-year period, the fund returned 7.4% on average, versus a gain of 5.3% for its peers. And in calendar 2004, MFS Value also managed to edge out the competition, rising 15.1%, versus 12.5% for its peers.
To meet its goal of outperforming the Russell 1000 Value Index with less volatility (the fund’s standard deviation is lower than that of its peers), the managers take what Baldini calls a “consistent approach to value,” avoiding the “racier, high-beta names.” This helped to insulate the portfolio from the ravages of the technology meltdown. From March 2000 through October 2002, MFS Value slid 4.0%, versus a decline of 32.7% for the style index, and 43.7% for the category index.
The fund also reduces volatility by avoiding sectors with “tough balance sheets,” like airlines, and staying underweight in those that don’t generate much cash, like technology and energy merchants. “We are typically focused on the Russell 1000, as well as large, liquid ADRs and global companies — a universe of about 1,200 stocks,” Baldini said. As of the end of December, the fund’s largest sectors were financials (29.3%), energy (11.0%), consumer staples (10.7%), utilities and communications (10.7%), and basic materials (9.8%).
Of its 98 holdings, one that typifies the fund’s investment style is PPG Indus (PPG). The specialty chemicals company has a dividend yield of about 2.7%, Baldini said, and operates in a number of areas of the specialty chemicals business, including coatings, sealants, glass, and chemical operations. Its chlor-alkali business is benefiting from a cyclical rebound, while a restructuring at the firm is reducing costs and increasing cash flow, he noted. “It’s a higher-quality inexpensive chemical company with restructuring and a cyclical recovery helping to support the outlook,” Baldini said.
Another representative holding is Altria Group (MO). The firm’s domestic and international businesses are significant cash generators. The Kraft food business has survived the low-carb craze intact, Baldini believes, while tobacco litigation liabilities are largely settled, and the threat of future judgments may be diminishing. “Even in the worst-case scenario, if the U.S. tobacco business were ultimately bankrupted, the company would still be able to pay its dividends from the non-U.S. business,” Baldini said. “The franchise wouldn’t be threatened.”
