Interview with Robert J. Manning

Robert J. Manning joined MFS Investment Management straight out of college, as a high-yield bond analyst. Twenty years later, he was named chief executive after an industrywide market-timing investigation effectively cleared out the blue-blooded firm’s executive suite.

At the time — February 2004 — some market veterans wondered whether Mr. Manning, not yet 40, was the right person to lead a company that had yet to recover from being overexposed to technology stocks when the Internet bubble burst in March 2000.

Today, the ranks of doubting Thomases are much diminished. The firm has delivered consistent outperformance — even during the darkest days of 2008 — while pulling in more than $16 billion in net inflows over the past two years.

Mr. Manning credited the extension of his own “paranoia” about bonds’ risk to the broader company as one contribution to that success. He says the market’s latest bout of volatility has revived the outperformance of MFS’ portfolio managers after a period in which gains by more speculative companies had dented MFS’ returns.

Barely five months into then-New York Attorney General Eliot Spitzer’s market-timing purge, you went from head of fixed income to CEO of MFS at 39. Had you aspired to the top post?

I actively pursued the management track at the firm … so when that happened, I was pretty well-prepared. But did I ever believe that I would be the CEO of MFS? No.

Were you a natural, or did you have to grow into the role?

Certainly, I had to learn a lot of things. But the thing I always say — and this isn’t disparaging anybody else — but if you didn’t grow up as an investment person, trading securities, analyzing securities and generating alpha, I think it’s very difficult over a long cycle to run an asset management firm. The biggest and most important piece of the company is the manufacturing plant. I grew up in that plant and understand how it’s wired together, how it works and how difficult it is to get the teams to operate and work so they can be successful over a cycle. It’s maybe an insular view because of the way I grew up, but I believe MFS should always have an investment person running the firm.

Did you see a need for incremental change or something more dramatic?

I grew up as a fixed-income person. I learned credit and analyzing specific companies, but I also learned the quantitative nature of fixed income, and controlling risk and building systems around that. One of the things that we implemented was to transfer a lot of the technology we had on the fixed-income side, in terms of portfolio controls and risk, to the equity side of the shop. I think that that has really played to a huge strength of ours, not only in “08, when the world came unglued and we protected our clients, but as we speak right now. MFS is outperforming again because we have the controls built into the portfolios from a top-down point of view to make sure that we don’t blow up.

What risk controls did you introduce on the equity side?

Twice a year, we sit down with each portfolio manager and we go through an exhaustive review of where their attribution came from and what their bets have been. We want to give people the freedom and the artistic ability to go make bets, because we get paid as active managers to take risks in the portfolios, but we don’t want it to be so big in any one dimension that if you have a 3 standard-deviation move, like we had in the last cycle, that you destroy a portfolio and ruin a long-term track record.

You added those controls as soon as you became CEO?

Yes, eight years ago, and it works. You have to be very cognizant of risk, be paranoid about it and make sure you understand that the unexpected usually happens at some point down the road. Implementing that paranoia, for lack of another word, in the systemic discipline around thinking about risk differently is what’s really helped the firm.

Is there a danger those risk controls could promote indexlike returns?

Absolutely not, because we give people a wide enough scope … we actually have tracking error minimums. If it’s too low, we’ll go to a portfolio manager and say you’re not taking enough risk, you need to put more exposure in the portfolio away from the index so you can generate excess return.

You’ve said the interplay of MFS’ equity and bond teams helped you avoid the worst of 2008.

We have this global research team — in Sydney, Singapore, Japan, London, Mexico City — on eight global sector teams, and on each you have the trader that trades the sector, a quantitative analyst, high-grade and high-yield fixed-income analysts, as well as the domestic and international equity analysts. They meet once a week by video or in person and go over what’s going on in the markets, what they’re seeing in their industries. I can guarantee you that no one else in the industry has that. My philosophy around this business is that if you don’t have a comparative advantage, you will not win over a cycle. You have to have a differentiated product or process. Analysts are compensated and reviewed twice a year to see how well they’re cooperating with one another and sharing ideas.

And then secondly, we take a long-term view around stock and bond picking. We don’t weight one-year numbers at all in the firm. We care about three- and five- and 10-year performance. Then you can determine whether someone did a good job picking the right securities and managing the portfolio well. We call that “time arbitrage.” That and the global research platform are the two things MFS does differently from other people — our comparative advantage.

Even admirers say they’re not aware of MFS’ competing in fast-growing areas such as absolute-return and alternative products.

We actually manage about $1.5 billion now in alternative products and we have a big effort, not only in long-short equity, but global tactical asset allocation and absolute return, to generate specific outcomes. It’s unclear to me how this is all going to evolve, but the bottom line is, we need to make sure that the platform we have continues to be vibrant and that we’re doing a good job across all the sectors. Then we can package our alpha and put it in any form that anybody wants. But we think we can fill up the capacity of our existing strategies, even in the long-only space, and really grow this firm substantially from where it is today, without all these alternative-type products. So it’s really R&D for the future.

What do you think about the market’s last month or two?

We expected it. Look at what happened in “08 and the debt that’s been created in the system. None of the problems have been fixed. What was really working was deep cyclicals, based on the China play, and low-quality companies that were given liquidity to get through a difficult period. We didn’t own that stuff. We tend to own higher-quality, steady companies. That has reversed in the last month and we’ve actually picked up a significant amount of performance. For the next 10 years, it’s going to be a low-return, high-volatility, very difficult global economy — and the types of companies that are going to succeed are the ones we tend to focus on.

Douglas Appell is a reporter for sister publication Pensions & Investments.