After pioneering mutual funds, MFS sets sights on new horizons

In partnership with SSgA, mutual fund giant dips toe into active-ETF arena

Jan 9, 2014 @ 1:44 pm

By Jason Kephart

MFS Investments is breaking new ground in the investment industry yet again. The company was the first to launch a modern mutual fund in the United States, and now it's become the first major mutual fund company to bring its stock-picking talent to exchange-traded funds.

MFS, in partnership with State Street Global Advisors, the second-largest ETF company, launched three actively managed large-cap ETFs on Thursday. MFS will act as the subadviser to the fund, which means it will handle the investment process, and leave the marketing and distribution to SSgA.

“They're kind of dipping their toe in,” Kathryn Spica, a mutual fund analyst at Morningstar Inc., said of the split arrangement.

MFS isn't the first mutual fund company to partner with an existing ETF powerhouse to get the ball rolling on its push into ETFs. MFS' Boston neighbor Fidelity Investments launched its first ETFs in October in partnership with BlackRock Inc.'s iShares, the largest ETF company.

The big difference is that iShares is acting as a subadviser to the passively managed Fidelity sector ETFs, while Fidelity will handle the distribution and marketing. Fidelity has also filed with the Securities and Exchange Commission to roll out actively managed bond ETFs but has yet to do so.

Active managers have been leery of ETFs due to the daily-disclosure requirement, which they argue could show too much of their hand and allow front running. To combat that, a number of mutual fund companies, most notably Eaton Vance Corp., are currently working with the SEC in the hope of launching ETFs that don't require daily disclosure. Clearly, that's not a big concern for MFS.

“We're agnostic with how the investment management is delivered to clients,” said Jim Jessee, co-head of global distribution at MFS. “We don't get overly concerned with the packaging.”

What should be of more interest to advisers is the much lower price for MFS' investment expertise.

The SPDR MFS Systematic Core Equity ETF, SPDR MFS Systematic Value Equity ETF and SPDR MFS Systematic Growth Equity ETF each will charge an expense ratio of 0.6%. The average equity mutual fund at MFS costs 1.27%, according to Morningstar, and its flagship MFS Massachusetts Investor Trust Fund (MITTX), which was launched in 1924, costs 0.77%.

The ETFs will be managed by the Matthew Krummell and Jonathan Sage, members of the quick-rising quantitative-equity team at MFS. They are also the team behind two low-volatility funds MFS launched in December and took over a sleeve of the $6.6 billion MFS Total Return Fund (MSFRX) last April.

The partnership should also benefit SSgA since MFS has been one of the biggest beneficiaries of the rotation out of bond funds and into equities.

MFS, the 12th-largest mutual fund company, had more than $17 billion in net inflows in the first 11 months of 2013, primarily into its equity funds, ranking it fourth among mutual fund companies.

Whether or not the ETFs share in that success will, of course, come down to their performance over time.

Since the quantitative team's funds are all relatively new, it's still too early to judge them, Ms. Spica said.

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