“We’re very upfront on our commitment to active management”

The Massachusetts Investors Trust was introduced as America's first mutual fund in 1924. To celebrate the asset manager’s 100th anniversary, MFS Investment Management’s CEO Michael Roberge and country head Luxembourg Michael Derwael told Delano about the firm’s commitment to active management, the rise of ETFs and more.

MFS Investment Management in 2024 is celebrating 100 years since the launch of the first US open-end mutual fund. For the occasion, CEO Michael Roberge came to Luxembourg and together with Michael Derwael--who was earlier this year--the two told Delano about their market outlook, active investment, exchange-traded funds and more.

Outlook and risks to consider

With rate hikes starting in mid-2022, the European Central Bank has --the main refinancing operations, the marginal lending facility, and the deposit facility--to 4.50%, 4.75% and 4.00%, respectively, in an attempt to get inflation back down towards 2%.

“We’ve been of the view that inflation would come down and we think it will continue to come down globally,” said Roberge. “We’ve seen that happen more dramatically in Europe, in the UK, than we have in the US. One of the biggest differences is just more fiscal policy that’s impacted the economy in the US relative to the rest of the world. We think that as the year progresses, inflation comes down, central banks are likely to cut policy rates, starting here--again--in Europe, followed by the US.”

But “policy rates have been relatively high, and that has a delayed impact on the economy,” Roberge added. “As we make our way through the balance of the year, we expect slowing in the economy. And the question is, do you get a soft landing? What kind of landing do you get? And I think the jury’s still out on that. We do expect softening at this point in time; we’re not expecting recession. But we’ll see as the year progresses.”

What we’re trying to do is identify those companies that we think can--as the economy slows--better protect earnings, that are trading at reasonable valuations

Michael Roberge, CEO, MFS Investment Management

Geopolitics was one thing Roberge mentioned when it comes to risks for investors, from Russia’s war in Ukraine to what’s happening in the Middle East, as well as politics alone. The US will elect its next president in November, and that “is going to have a big impact--potentially--on markets, depending on who wins, what policy actions the next president takes. And that’s likely to weigh on the markets as we make our way into the latter half of the year as well.”

While MFS doesn’t really invest in sectors or themes--they’re more “pickers” of stocks or individual securities--Roberge said that “what we’re trying to do is identify those companies that we think can--as the economy slows--better protect earnings, that are trading at reasonable valuations. And then on the fixed-income side, it would be similar: companies that we think are going to be more durable as the economy slows, that are trading in spreads that we think compensate for the risks through the cycle.”

Retail investors are “sitting in cash”

Asked about trends in asset management more generally, Roberge replied that retail investors are “sitting in cash” in Europe, the US and around the globe. “Investors got used to yields that were exceptionally low for a long period of time. And now they look and there’s yield in relatively safe short-term securities.” They were “very comfortable sitting in those parts of the market.” But ultimately, “as central banks begin to lower policy rates and cash yields being to decline, we think investors will begin to participate and engage in the markets again.”

Another trend has been the move from active funds to passive funds. MFS has been communicating “why an investor would own an active product and what we do as active investors. And that’s true in terms of our engagement with companies and identifying how they run their businesses. But that’s particularly true when you think about sustainability and the way in which we engage and identify those things that are material to the long-term success of a business. We’re very upfront on our commitment to active management, the importance of active management.”

Investors aren’t going to need to move into the alternative space in the same way they thought they were going to need to

Michael Roberge, CEO, MFS Investment Management

And as interest rates were really low, added Roberge, investors looking for additional return in a low-yielding environment looked to alternatives. But now, “we think that with higher yields around the world--and yields that are likely to stay certainly higher than they were post-financial crisis--that investors aren’t going to need to move into the alternative space in the same way they thought they were going to need to. You take on additional complexity risk within those markets, and you take on a liquidity risk within those markets. The products that we offer offer daily liquidity to all of our investors. Our view is we’re offering them active returns through a cycle, and we’re doing that with their ability to get the money back on a daily basis--which isn’t true in alternatives,” he said. Staying focused on active portfolio management over the long-term will allow MFS to stay “highly relevant” for clients.

Lack of liquidity makes alternatives unattractive for retail investors

There’s been a lot of talk about the “democratisation of private assets” and the entry of retail investors into this space. Is this something that’s expected to accelerate?

“We have not yet seen retail investors [move into alternatives] en masse,” replied Roberge. “Our experience is retail investors--particularly when they get concerned about risks--want liquidity. So whilst we would expect there to be some increase in private assets that are owned by retail--particularly higher net worth retail investors--we don’t believe that that’s going to be a significant risk to our retail business, because we think that liquidity is so important to those investors.”

Technology to help people spend more time thinking

It seems like everybody is talking about technology and artificial intelligence and how this might impact the financial industry. What role will new tech play in asset management and will humans still be necessary?

“They are. They will be,” answered Roberge. “We think of it very similarly to the productivity enhancements of the computer.” Computers have made people much more productive, allowing them more time to think, and “the same was true with the development of the internet and the ability to instantaneously get information.”

“I was an investment analyst,” he added. Before the internet, if he wanted information on a company, he’d have to call them up, ask for a prospectus, wait for it to be delivered by mail, then finally carry out his analysis. With faster access to information via the internet, “I spent a lot more time thinking and identifying those things that drive long-term value.”

“I think gen AI is going to do the same thing. It’s going to make it much easier for people to prepare information and allow people to think and add value,” said Roberge. “People end up changing jobs, but it creates new jobs and different jobs and higher-value jobs.”

Looking to Luxembourg

With the launch of the first mutual fund by MFS in the US in 1924, it was a “revolutionary change for individual investors to be able to invest in a diversified portfolio that was actively managed, provided full transparency, reasonable fees and daily liquidity. That was a massive change for individuals,” said Roberge, and it started what is today an industry worth trillions of dollars.

“A number of years ago, we identified our ability to begin to grow our non-US business as well,” he added, with a “huge opportunity to serve individual investors in Europe and other parts of the world through our Sicav structure.”

Which brings us to MFS’ presence here. Incorporated in the grand duchy in 2000, MFS Investment Management is authorised under Luxembourg law as a management company for funds domiciled in Luxembourg.

The Luxembourg office has grown, country head Derwael explained, from two people a decade ago to 20-some people today, plus branches in France, the Netherlands, Spain, Italy and Germany. Together, there are around 50 employees. “We have all the key functions represented here: client-facing people, risk management and compliance, finance, legal and so on.” And “depending on how things go, I think we might be adding some reinforcement here and there,” he added. “We got to the point where we can really scale things. That’s something very important for MFS, being actually able to scale things. We have become very efficient. When I compare what I’ve seen at other places to here, it’s really strongly streamlined, whether in MFS operations or how we deal with our key partners.”

“Taking the right steps” on exchange-traded funds

Looking ahead, Roberge said that he expected the “core” of what MFS is doing to remain the same “What is changing--and it’s being led now in the US--is just the vehicles with which we provid our capabilities. We recently filed to launch--interestingly, in our 100th year--active ETFs.” The tax regime, however, differs between the US and Europe. In the US, an investor in a mutual fund incurs “tax events” every year for any gains that are realised through the vehicle, regardless of how long it’s held. With ETFs, on the other hand, a tax event is only incurred in the case the investor conducts a transaction on the ETF. “So there’s a benefit--from a tax perspective--in owning an ETF versus a mutual fund in the US.”