MORE MUNI-BOND DEFECTIONS PLAGUE MFS: RESTRUCTURING OF UNIT COULD BE TO BLAME

A long-time portfolio manager and an analyst have joined the growing ranks of those leaving Massachusetts Financial Services Co.’s municipal bond department as it is being reorganized.

David Smith, who managed a number of MFS’s state-specific municipal bond funds, and muni bond analyst Karen Gadbois resigned last week to join other Boston-based firms.

The defections are just the latest to hit MFS’s 24-person municipal bond department. Once considered one of the firm’s top-performing groups, the division for several years has been a laggard in terms of gathering fresh assets. Municipal bond assets total $6.5 billion at MFS, the same level as in 1996. U.S. municipal bond assets, meanwhile, climbed 9.5% from the end of 1996 through March 31, according to Washington, D.C.-based Investment Company Institute.

MFS’s equity assets have doubled to $64 billion since year-end 1996.

MFS spokesman John Reilly confirmed there is a shakeup going on within the municipal bond department.

“We have been adopting a new strategy, or a new process, and there’s been some fallout from that,” he says.

That strategy, says Mr. Reilly, involves giving portfolio managers less leeway in overseeing their own investments. They are being discouraged from taking interest rate bets or big credit risks in favor of a “more structured approach” which utilizes quantitative analysis.

8 investment pros exited

Heading up that effort is Joan Batcholder, who was named head of the municipal group last summer after running MFS’s high-yield department for 14 years.

All told, about eight municipal bond analysts and portfolio managers have left MFS in the last six months, say industry sources. Included on that list is high-yield portfolio manager Cynthia Brown, who quit in December. And Robert Dennis, an 18-year veteran who had managed the national fund, left to “pursue other interests” in March.

“My sense is that some people don’t like being told what to do,” says a source familiar with MFS’s new strategy. “They are leaving because they can’t — or won’t –adapt.”

MFS is not the only firm making changes to its municipal bond department. In March, Putnam Investments dismissed two portfolio managers, Triet Nguyen and Howard Manning, as part of an overall reorganization of the fixed-income department. Putnam also dismissed six other fixed-income money managers as part of the overhaul.

“The equity market is blazing,” says Bonny E. Boatman, head of the $5 billion municipal bond group at Colonial Group, a Boston-based mutual fund company with $18 billion in assets under management.

where’s the beef?

“Fixed-income products just don’t look as beefy as they used to. They are a very tough sell in this environment.”

Starting in June, Mr. Smith — who had been at MFS for 10 years — will manage municipal bond holdings for high-net-worth investors at Pell Rudman & Co., a Boston-based money manager with $4 billion in assets, $750 million of which are in municipal bond portfolios.

At MFS, John Kihn and Geoff Schechter will run the funds Mr. Smith managed, until he’s replaced.

Ms. Gadbois is stepping into an analyst’s position with Boston’s Gannett Welsh & Kotler, which oversees $1.7 billion in tax-exempt assets. She has not yet been replaced at MFS.