Robert Manning’s Method Drives MFS Turnaround

MFS CEO Robert Manning’s analysts and portfolio managers are empowered to move quickly.


Robert Manning knows all about handling crises. When the veteran fund manager was promoted to CEO of MFS Investment Management five years ago, the Boston-based firm was reeling from years of bad leadership and performance. MFS, the 15th-largest U.S. mutual fund manager, with $150 billion under management, had invested heavily in growth and technology stocks in the late 1990s only to be pummeled by investor redemptions when the tech bubble burst. Then MFS got caught in the market timing scandal of 2003, which cost the firm $225 million and the loss of two top executives, CEO John Ballen and president and CIO Kevin Parke.

Manning, 45, a veteran MFS analyst and portfolio manager, vowed to turn the company around by overhauling the investment process and instilling a more disciplined culture of performance. He abandoned the firm’s reliance on star managers and instituted a system based on teamwork, research and careful diversification rather than big bets. The aim was to balance performance with safety: MFS funds would seek to consistently beat their benchmarks rather than take on large, risky positions that might pay off in a big way but could also generate hefty losses.

The CEO’s method has worked handsomely. MFS, a unit of Canadian insurer Sun Life Financial, ranked fourth among fund companies in asset-weighted performance last year, behind State Farm Mutual Funds, Northern Trust Corp. and State Street Corp., according to research company Lipper. The firm’s analysts recognized trouble early on in the subprime mortgage market, and its fund managers sold stocks with heavy mortgage exposure well before the equity and credit markets tanked. As of April 30, Morningstar had awarded either four or the maximum five stars to 62 percent of MFS’s retail assets, up from 33 percent a year ago. Only Pacific Investment Management Co. has higher ratings, with 70 percent of its assets enjoying four or five stars. Fully 94 percent of MFS’s institutional separate accounts beat their benchmarks during the three-year period ended March 31, 2009.

Now, with markets having suffered their worst losses in decades, Manning wants to exploit MFS’s track record and put his firm back on a growth path. He is beefing up its team of 49 portfolio managers and 75 analysts, particularly in overseas markets, where the firm now has the majority of its equity exposure. He is also broadening distribution to include more brokerage firms and independent advisers, as well as working with advisers to help them build their businesses and generate leads. The executive is confident that MFS can thrive by gaining market share even at a time when poor stock performance and a weak economy have led many retail investors to pull back from equities.

“You don’t often get to stress test what you built. But we got that stress test, and it worked,” Manning told Institutional Investor in a recent interview. “We really rebuilt this company to withstand the highest level of pressure, and the firm separated itself from the pack.”

Manning’s strategy is nothing if not bold. The financial crisis dealt a blow to many leading names in the mutual fund business. Firms such as Legg Mason, OppenheimerFunds and Putnam Investments have struggled with poor performance and have been cutting staff and support for advisers. Even stalwarts like Capital Research & Management’s American Funds have suffered investor defections and laid off employees.

There are no guarantees that Manning will succeed, but his plan is in tune with the risk-averse attitude of today’s shell-shocked investors, analysts say. “Over the past few years, distributors have been seeking investments managed by teams rather than stars,” says Aaron Dorr, managing director at Jefferies Putnam Lovell. “They don’t want performance to be possibly hijacked by one manager, who could get hit by a bus or decide to leave. Following this major downturn a lot of retail and institutional money will be up for grabs over the next 12 to 24 months. It will be a performance story. If MFS has the performance, it will be a winner.”

Manning has already had a fair degree of success in diversifying MFS, increasing exposure to fast-growing overseas markets and building up its institutional business. At the end of March, 57 percent of the firm’s assets were retail and 43 percent institutional, compared with an 80-20 split in 2001. MFS had 34 percent of its assets invested in international stocks, 28 percent in U.S. stocks, 26 percent in fixed income, 10 percent in balanced funds and 2 percent in money markets. By contrast, it had 73 percent of its assets in U.S. stocks as recently as 2001.

The company’s net income declined 29 percent in 2008, to $186 million, and its operating profit margin slipped 6 percentage points, to 30 percent. By contrast, BlackRock posted a 48 percent decline in pretax profits in 2008.

“MFS has a strong culture, and Manning has helped the organization get its confidence back,” says John Casey, chairman of investment management research firm Casey, Quirk & Associates. “We might see behemoths like BlackRock/Barclays Global Investors try to be all things to all people, but there’s room for an MFS that picks its spots.”

In an age when finance spans the globe, Manning stands out as a small-town boy who made good without ever really leaving home. One of three children, he grew up in a modest one-story house in Methuen, Massachusetts, a working-class former mill town about 25 miles north of Boston. The first in his family to go to college, he attended the University of Massachusetts in nearby Lowell, majoring in technology and computers. In 1986 he married his high school sweetheart, Donna, now an oncology nurse at Boston Medical Center who takes care of terminally ill patients. Manning has remained a loyal supporter of UMass. He was appointed to the board of the Massachusetts state university system by then-governor Mitt Romney in 2006 and was elected chairman — a position he still holds — in 2007. Robert Pozen, the MFS chairman, who served as secretary of economic affairs under Romney, introduced Manning to the former governor.

Manning joined MFS straight out of university, at the age of 20, working as a cable-television and steel analyst in the company’s junk bond group. In his spare time he went to night school at Boston College and earned an MBA in finance. He rose through the ranks at MFS, working on a fund that invested in distressed debt, becoming chief strategist of fixed income and ultimately head of fixed income in 2001.

Just like the mill town where Manning grew up, MFS enjoyed a rich heritage but had fallen on hard times in recent years. It launched the first mutual fund — Massachusetts Investors Trust — in 1924 and in subsequent decades developed a reputation for steady if staid returns. The company thrived in the 1990s by betting heavily on technology and growth stocks, and its performance attracted plenty of investors eager to partake in the boom. MFS boasted $147 billion in assets at the end of 2000. The firm was whipsawed by the tech bust at the start of this decade, however, and saw investors flee to rivals with more consistent performance, such as American Funds and the Vanguard Group. The market-timing scandal, in which MFS allowed hedge funds to trade in and out of its mutual funds to the disadvantage of long-term investors, compounded the damage. Assets had dwindled to $113 billion by the end of 2002. After the firm settled charges with regulators, former CEO Ballen and CIO Parke resigned; the company also paid a $50 million fine and $175 million in restitution to investors and cut its management fees by $125 million over five years.

When Manning took the top job in February 2004, MFS’s assets had recovered to some $140 billion, but morale remained low. He insisted on taking over a combined role of CEO and CIO, a move that underscored his belief that MFS needed to change its investment process if it was to recover. “Separating yourself from the investment side as a CEO of an asset manager is not only dangerous, I think it’s disastrous,” he says. “MFS prides itself on the ability to manage other people’s money, and my greatest skill, having grown up as an investment person for 25 years, is on the investment side.”

Manning also surrounded himself with a cadre of trusted colleagues. He tapped Robin Stelmach, who had been director of fixed-income quantitative research, as chief operating officer, a new position to help oversee the firm and its infrastructure. And he lured back Maria Dwyer to serve as the firm’s chief regulatory officer; she had been with MFS in the early 1990s but had left to become president of Fidelity Funds. “We’ve got our team in place. We’ve figured out what we’re good at. And given our performance, we’ve got a historic opportunity,” says Michael Roberge, head of U.S. investments.

In overhauling MFS’s investment procedures, Manning wanted to retain the firm’s traditional strength in stock selection while eliminating its reliance on star portfolio managers, which had allowed stock pickers to gun for performance without adequately taking account of risk. He assembled teams of portfolio managers to oversee funds so investment decisions would reflect multiple opinions, rather than an individual’s gut instinct. He also elevated the role of the firm’s analysts, creating a career track in eight sectors and basing compensation on the success of their stock choices.

“Analysts were almost like second-class citizens to portfolio managers,” he says. “We wanted a foundation of having a very seasoned, experienced analyst follow a sector for years and years and pick the best securities that the firm could use in all portfolios.”

Manning supplemented bottom-up stock picking with quantitative tools. The company tracks how managers generate returns and makes sure that portfolios are weighted to an index and aren’t overly concentrated in particular sectors or individual stocks. The aim is for returns to be a function of good stock selection rather than sector, currency or macroeconomic bets.

The new approach proved its mettle as credit markets started to deteriorate in early 2007. When HSBC Holdings announced a big jump in loan-loss provisions because of its exposure to U.S. subprime mortgages in March of that year, a team including Boston-based financials analyst Kevin Conn, London-based financials analyst Florence Taj and fixed-income analyst Gerald Pendleton took it as a signal that worse was to come. They called for MFS funds to adjust by dumping holdings of mortgage lenders, including Fannie Mae and Freddie Mac, and commercial banks with big subprime positions and by focusing financial exposure in safer areas, like custody banks.

“When you get into a stressed environment like we’ve had, things begin to move quickly,” says Manning. “If you’re not talking to the credit person in the financial area about what’s going on with the banks and understanding what’s on their balance sheets that can trigger problems for the equity value, and conversely things on the equity side that can affect the credit, you won’t be making good decisions in portfolios for clients.”

Analysts say Manning’s shift in strategy is appreciated by many investment advisers. “Intermediaries, whether pension consultants or brokerage firms, talk about hot returns, but in the end they are interested in dependability and reliability,” says Casey. Manning is now looking to sustain growth at MFS. He is not keen on acquisitions, notwithstanding all the industry talk of consolidation in the aftermath of BlackRock’s decision in June to purchase Barclays Global Investors. “We don’t see how one would fit,” he says of potential acquisitions. “We might acquire assets if they are attractively priced, but our focus has been on maintaining our culture and on organic growth, and acquisitions present challenges to that.”

Manning believes MFS’s revamped infrastructure is capable of managing up to $300 billion in assets, more than twice its current total. Achieving that won’t be easy, but the CEO is up for the challenge. “I’m programmed for that environment. I grew up a scrappy kid. Nothing ever came easy.”