MFS Meridian Funds® – Global Intrinsic Value Fund

Strategy Profile: Intrinsic Value

 

Benjamin Stone and Pablo de la Mata, MFS Portfolio Managers, discuss the strategy profile of MFS Meridian Funds® – Global Intrinsic Value Fund

Benjamin Stone: The characteristics of the global intrinsic value strategy is that we are incredibly long-term, and we are absolutely focused on trying to avoid downside risk.

On Screen Graphic: How do you think about risk?

Benjamin Stone: In terms of downside, we're thinking about permanent destruction of capital. That's what we mean by, uh, risk. So we're trying to avoid those businesses that write down that write down their assets, that issue equity, that go bust or are in countries where you just can't get your capital out.

The key differentiating features of the strategy is really all about risk. Uh, risk on an individual basis, risk on a systematic basis, and risk on a macro basis. In terms of risk at the individual basis, we spend our time, um, looking at the financial and the operating leverage of businesses.

So we spend far more time looking at balance sheets and cash flows and what can go wrong than anything else. In terms of systematic risk, we're looking to avoid correlations of risk across the portfolio, in terms of financials or in terms of pharma.

When it comes to think about macro risk, we spend our time looking around the world for where economic and financial bubbles have built up, and then we just try and avoid them like the plague.

Because when bubbles build up, you get an expansion of credit, you get an expansion of multiple.

And when these bubbles implode, that is your greatest single source of downside risk.

Benjamin Stone: The difference between forecasting and analyzing is when you're forecasting, you're trying to predict the unpredictable. You're trying to predict the future which is unknowable. In terms of analyzing, analyzing is really about thinking about a range of outcomes.

Benjamin Stone: One other characteristic we look for is for businesses that take a really longterm view.

They're not trying to milk the business today, they're not trying to earn the highest margin they can today. Rather they are investing hard for the future. They're investing in R&D today.

They're investing in building up their sales force today, because they're wanting to grow the business over the very long run, not just for the next few quarters.

 

Benjamin Stone: Our approach to valuation is all about intrinsic value. A lot of traditional value managers will look at price to equities, price to book. But to my mind, that takes no accounts of the returns, or the duration, or the balance sheet risk of the business. Intrinsic value is looking at the real fundamental underlying value of the business, which is why we spend more time thinking about debt adjusted cash flows, EV to unlevered free cash flow, rather than price to equity, or price to book.

We're also looking for businesses that are over-investing and under-earning today, which is why sometimes when you look at headline multiples, they can be completely misleading as to the true intrinsic value and nature of a business. When thinking about intrinsic value, you have to be very aware of current multiples.

Sometimes current multiples can be elevated because of cyclical or structural factors. Sometimes they can be elevated because the business is fundamentally over-earning and charging its customers too much. And so, we are trying to look at what the true long-term, intrinsic value of the business is. Is it over-earning? Is it under-investing or not?

When it comes to intrinsic value, we also like to have and apply common sense. We like to do the Market cap crosscheck, and just think from first basis, does it make sense for this company? Is the market cap right, or is it far too big? Is it over-earning today, or actually is it investing so hard today, that it's, it's small market captures does not in anyway represent the intrinsic value of this business over the very long term.

Benjamin Stone: We're looking for the very, very long term.

And this is becoming more and more important today, because the rate of change and technological disintermediation has never been greater than today. So to ask that question, is this business model going to be around in 10, 20 years, is becoming harder and becoming more and more important than ever before.

 

 

Important Risk Considerations: Stock: Stock markets and investments in individual stocks are volatile and can decline significantly in response to, or investor perception of, issuer, market, economic, industry, political, regulatory, geopolitical, environmental, public health, and other conditions. Intrinsic Value: The stocks of companies that MFS believes are undervalued compared to their intrinsic value can continue to be undervalued for long periods of time, may not realize their expected value, and can be volatile.

See the fund's offering documents for more details, including information on fund risks and expenses.

For additional information, call Latin America: 416.506.8418 in Toronto or 352.46.40.10.600 in Luxembourg. European Union: MFS International (U.K.) Ltd., One Carter Lane, London, EC4V 5ER UK. Tel: 44 (0)20 7429 7200. Switzerland: Carnegie Fund Services S.A., 11 rue du General-Dufour, 1204 Geneva, Switzerland. Tel: 41.22.705.1177.

 

MFS Meridian Funds is an investment company with a variable capital established under Luxembourg law. MFS Investment Management Company (Lux) S.à.r.l is the management company of the Funds, having its registered office at 4, Rue Albert Borschette, L-1246 Luxembourg, Grand Duchy of Luxembourg (Company No. B.76.467). The Management Company and the Funds have been duly authorised by the CSSF (Commission de Surveillance du Secteur Financier) in Luxembourg.

MFS Meridian Funds may be registered for sale in other jurisdictions or otherwise offered where registration is not required.

MFS Meridian Funds are not available for sale in the United States or Canada or to US persons.

The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.

Unless otherwise indicated, logos, product and service names are trademarks of MFS and its affiliates and may be registered in certain countries. MFS Investment Management Company (Lux) S.à.r.l.

 

For Investment Professional use only. Not intended for retail investors.

 

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