SOS at MFS

This wasn’t supposed to happen to MFS Investment Management.

Throughout the late 1990s and into this decade, the Boston company was hailed as a shimmering example of what every mutual fund shop should be: agile, aggressive and teeming with brilliant stock pickers.

Demand for its funds was so great that MFS pulled in $12.3 billion in fresh money in 2000, compared with $7.6 billion for Boston neighbor Fidelity Investments, the nation’s biggest fund company.

There was even talk of a public offering for MFS, a unit of Toronto-based Sun Life Financial Services of Canada Inc.

Not anymore.

Sales down

If Jeff Shames, chief executive of MFS, and the rest of his management posse don’t do something fast, they risk obliterating the company’s reputation.

“You won’t see any MFS customers’ yachts named MFS,” lamented one investor recently on an Internet message board.

Today, sales are down, and some of the company’s biggest funds are cranking out mediocre returns – at best. The Securities and Exchange Commission also is investigating MFS for allegedly using insider information to trade Treasury bonds.

As much as executives at MFS loathe admitting it, the company is in a similar boat as some of its more troubled competitors – namely Janus Capital Corp. in Denver and Putnam Investments Inc. in Boston.

Like the others, MFS stock pickers got caught up in the technology stock frenzy that surged through the market like an electric jolt two years ago. Even today, growth stocks still account for more than 40% of MFS assets.

And, as did the others, managers at MFS had a tendency to feast from the same trough. A look at the top holdings of the company’s biggest funds shows that many still own generous numbers of shares of the same companies, including such downtrodden issues as Oracle Corp. and Tyco International Ltd.

But there are important distinctions between MFS and the others. For starters, the company continues to draw fresh cash, albeit far less than it used to. MFS is also better diversified, with a handful of top-performing value funds – an investment style that is in favor now.

MFS also has yet to see any of its biggest funds stage a total meltdown – the sort that rips at the hearts of investors with quarter after quarter of double-digit losses.

“MFS still has time to right the ship before their public perception takes a hit,” says Chris Brown, director of research at Financial Research Corp. in Boston. “Clearly, that hasn’t happened yet. They have been quite fortunate.”

Still, MFS is paying dearly for its transgressions.

The company’s stock and bond funds posted net sales of $858 million during the first three months of 2002, compared with $2.61 billion during the period a year earlier, according to FRC.

FRC also reports that the company’s share of the industry’s $4.2 trillion in long-term fund assets had dropped to 1.96% by the end of the quarter, from 2.04% a year earlier.

“I don’t use a lot of their funds,” Ron Boiuso, president of RJB Financial, an investment advisory firm in Boca Raton, Fla., says of MFS. “I just haven’t seen anything I really wanted to buy.”

Chief investment officer Kevin Parke concedes that the MFS has seen better days, but he bristles at the notion that his company is on the same path as Putnam and Janus, which last year saw outflows of $4.5 billion and $12.2 billion, respectively.

“They are two fine institutions, with great histories and great people,” he says. “But I’d rather not compare myself to them.”

Mr. Parke blames most of the problems at MFS on the crash of growth funds in general – rather than on anything the company has done, or not done, in particular.

“The numbers have been weaker on an absolute basis because growth has been so out of favor,” he says. “The issues will work themselves out based upon the strength of our performance on a broad basis.”

While MFS has increased its focus on other investment disciplines, such as value and international stock picking, it maintains an ironclad devotion to growth stocks.

“Our growth managers are working as hard as they can to find growth companies that are going to outperform over the next three to five years,” Mr. Parke says. “They are not hiding in something that has worked well for the past two or three years.”

But for the advisers who sell MFS funds and the investors who have bought them, there’s cause for concern. Some of the company’s biggest funds are showing early signs of buckling under the strain of a difficult stock-picking environment.

Consider, for example, $8.9 billion MFS Emerging Growth. Investors in the fund – the company’s third-biggest – had lost 13.12% year-to-date through last Tuesday and 25.14% for the one-year period, according to Morningstar Inc., the Chicago fund tracker.

By comparison, the average large-cap-growth fund had shed 8.90% year-to-date and 19.70% for the one-year period.

Then there’s Massachusetts Investors Growth, the biggest MFS fund, with $14.1 billion in assets.

The fund had dropped 8.84% year-to-date and 20.34% over the one-year period, according to Morningstar, which classifies the fund as a large-cap-blend fund. The average large-cap-blend fund had shed 5.52% year-to-date and 13.08% for the 12 months.

For its part, MFS insists that Massachusetts Investors Growth should be measured against large-cap-growth funds. But even by that measure, the fund’s performance isn’t great. The average large-cap-growth fund had lost 8.90% year-to-date and was down 19.70% for the 12 months.

MFS Capital Opportunities also is in trouble. The $4.8 billion fund had fallen 7.60% and 25.29% for the year-to-date and one-year periods, respectively. The average large-cap-blend fund had shed 5.52% and 13.08%, respectively.

The fund’s longer-term record looks better.

Capital Opportunities was down 4.16% and up 9.29% over the three- and five-year annualized periods, respectively. Its peer group, meanwhile, was on average down 4.99% and up 6.68% over the same periods.

“There are some large funds where performance is less than satisfactory,” says Mr. Parke. “You can trust that we are doing everything we can to turn that around.”

Toward that end, MFS has revamped its research group. In February, the 40-person group was put under the sole direction of David Antonelli, director of global research and the man previously responsible for running the company’s international stock-picking group.

John Laupheimer, who was in charge of MFS’ U.S. research group, stepped aside to devote more time to his role as manager of Massachusetts Investors Trust, a $10.3 billion fund that has leaked assets for 10 consecutive quarters due to underperformance.

The company also has adjusted systems for awarding bonuses so that top-performing money managers and analysts earn more and underperformers earn less.

“This is very much a pay-for-performance business,” Mr. Parke says.