Investor's Business Daily, May 7th, 2007
Sometimes a new face can make a difference, or at least the bosses at MFS Investment Management hope so.
Enter Matthew Krummell. He was promoted to manage MFS Mid-Cap Growth OTCAX last June. He brings a focus on stock picking to MFS' bent for quantitative analysis.
He had his work cut out for him. He took over a fund that showed a 10.11% average annual return for three years, compared with 14.5% for its mid-cap peers tracked by Lipper.
Krummell joined MFS in 2001 as a quantitative analyst. He had been a portfolio manager at a previous firm, Pioneer Investments, but this was the first time he had been given a fund at MFS.
Morningstar put its MFS Mid Cap Growth's five-year performance at worse than 98% of its peers at the time.
It wasn't always like this. The fund once outperformed its peers most years. By the end of 2000, the fund boasted an average annual return of 32.39% for three years and 25.29% for five years. It was outperforming the Russell Mid Cap growth index by a handy 19 percentage points going into 2001.
Then came the crash. Like many growth funds, the portfolio was tech-heavy in 2000. Network Solutions made up 8.71% of the assets in June of 2000.
By the end of 2002, the fund's three-year average annual return slumped to -23%. It trailed its benchmark by 20 percentage points that year and kept on trailing each year after.
MFS made several manager changes. But the fund still struggled.
Since Krummell took the reins, though, the fund has looked a little better. Year to date, it still is in the bottom half of its peers, outperformed by 55% of them, but that is a lot better than it was.
Gap Narrows
The distance between the fund and mid-cap growth funds tracked by Morningstar also has narrowed. Over one year it underperformed by 4.48 percentage points, but year to date that has gone to 2.22, and over three months ending May 4 that has dropped to 1.93.
Krummell says part of the problem was large sector bets. When he arrived, half of the performance could be traced to two or three sectors.
That can bring great returns but offers no protection if a sector runs into trouble. "We are trying to win by picking the best stocks," he said. "We want 80% of our return to come from stock picking."
While it's possible for the best stocks to be concentrated in one sector, that should be a result of stock- picking, rather than a driver, Krummell says.
Krummell also tries to take a long view of performance. He aims for placing in the top third of funds consistently, rather than beating everyone in one year.
In the meantime, he set out to clean house. Usually turnover is about 70% per year for the 100-plus stock fund. Under Krummell turnover has been 65% just to reposition the portfolio.
Krummell also has tried to lower the average P-E to 17 or 18. It was closer to 25 before, which was a bit higher than he was comfortable with. A lower P-E leaves a little more room to grow in, he says.
He also dropped the tech weighting to about 12% from 17%, and added to holdings in industries not ordinarily tagged as growth sectors, such as airlines and home building.
Krummell put 1% of assets in Continental Airlines CAL. He kept his existing position in AMR AMR. While most wouldn't call airlines growth stocks, Krummell notes that street estimates show earnings for both airlines rising sharply.
On the housing front, he bought NVR NVR, which has risen about 21% this year. While home building earnings may go down, the company also offers non-subprime financing.
Krummell notes he has lifted assets in basic materials from nothing to about 5%. Basic materials is another non-traditional growth sector. He says economic growth in places such as China will feed demand, making materials a growth option.
Quality of earnings is as important as the earnings themselves, Krummell says. Philips Van Heusen PVH owns such solid brands as Calvin Klein.
That stock, he says, is cheap relative to others in its group, despite having risen 27% since September.
Krummell also pays attention to cash flow divided by sales, which tells you what percentage is coming from actual business, rather than accounting strategies.
