February 15, 2018
- MFS has a thoughtful, disciplined approach to succession planning, which complements our long-term investment time horizon.
- Clients don’t hire a particular portfolio manager (PM) when they hire the firm, they hire our global research and investment process, which is our alpha-generating engine.
- When PMs are selected from the analyst pool, a key selection criteria is how effectively they’re able to engage with our global investors across the firm to bring our best investment ideas to clients’ portfolios.
- There are more than two recent examples of PM-transitions, where having two and sometimes three PMs on strategies has, and is expected to continue to, facilitate an orderly transition of PM responsibility.
Active investment management, at its heart, centers on talented people making prudent judgments about the expected risk and returns on the assets under consideration over a particular time frame. For some managers, such as MFS, the investment time horizon is a long one — a market cycle of five to seven years and even longer. For others, it could be months, weeks or even days. MFS’ long-term time horizon is one of the pillars on which the firm’s investment philosophy and decision making process are built.
Strategic planning for the development and succession of key investment professionals falls within the scope of thoughtful long-term talent and investment management. MFS’ approach to hiring and developing skilled investors, and also planning for succession, is in keeping with its long-term investment philosophy. Taking a longer- term approach to talent resource development is just as important to the investor as it is to the client: It is hard to conceive of people making sound investment judgments over longer time-frames if investors themselves are not being evaluated and mentored with the same long term philosophy. We think that the long term development of our investors is just as important as the long term investment horizon for our clients; our interests are aligned.
We are acutely aware of the fiduciary role we play for our clients and the responsibility we bear managing investments on their behalf. We know change is disruptive for clients and we endeavor to manage portfolio manager transitions as smoothly as possible, providing clients with full transparency and long transition periods. Our approach to PM transitions is another example of how MFS puts clients first.
MFS has a thoughtful, disciplined approach to succession planning, which complements our long-term investment time horizon.
While focusing on succession planning, this note will also review a number of related facets of the firm's approach to managing investments, people and the firm' s culture — the factor that frequently defines how successful organizations are at achieving their objectives. We include two recent case studies detailing PM-transitions for two global strategies (International Value and Global Equity).
Global Research Platform
At MFS, we actively foster a collaborative investment process rather than a star manager system — and we have created institutional policies and practices to support collaboration. Each year, our investment professionals from around the world gather at two global roundtable meetings to present and participate in discussions on investment topics and, also, just as importantly, to develop relationships with colleagues. Investors across asset classes often travel together to visit companies and attend conferences, and global sector teams comprising equity, fixed income and quantitative investors attend weekly meetings, either in person or via video conference, to discuss and debate investment themes, names and positioning.
A collaborative research platform can only be productive if the flow of ideas between the investors takes place regularly across geographies, asset classes and sectors to enable the sharing and building of investment insights. Indeed, research at MIT has shown that the most effective teams are not necessarily those with the most intelligent team members, but rather those in which information flows most effectively between team members.1
The collaborative research process is integral to the firm's investment philosophy and forms the foundation of the culture of the firm. Our team-oriented approach has created a virtuous cycle over time: Investors have seen how their own success and the success of the firm depends on productive dialogue with their colleagues, and they are keen to participate as a result. The firm's investment track record has lent credence to this approach and further fueled the virtuous cycle.
As any business leader knows, a positive culture takes time to create and nurture. It is not easy to replicate and requires strong leadership, self-policing, dedication to clients and continual reflection and learning. PM transitions at MFS take place within such a culture. The result is that departing PMs are invariably focused on doing all they can to facilitate their colleagues’ continued success — in addition to ensuring clients are well served.
The emphasis on investment process rather than on a star manager means that clients do not hire a particular PM when they hire the firm they hire our global research and investment platform, which is our alpha-generating engine.
Hiring, 360 reviews and incentives
We have an extensive hiring process that explicitly vets candidates for their team-orientation and collaboration potential, as well as their overall character attributes. Candidates are more likely to be rejected for reasons related to character and cultural fi than for lack of expertise. In our experience, the latter can more easily be acquired, while the former are very difficult to mold. Some people are just more collaborative by nature than others.
Clients don’t hire a particular portfolio manager when they hire the firm, they hire our global research and investment process, which is our alpha-generating engine.
An extensive 360 degree review is administered annually alongside the quantitative investment performance assessment to support the collaborative review process. It gathers qualitative input on each investor from a large number of people she/he interacts with at the firm on the person’s contribution to the broader investment team. The investor’s performance is discussed among the global management team to better understand his or her strengths as well as any opportunities for improvement. This discussion and the ultimate resulting “collaboration score” has a significant impact on management’s evaluation of investors and their compensation and, just as important, helps form the basis of a more constructive review process for all investors globally. In sum, we believe in hiring and mentoring talented people who have the “collaboration gene” — and that it is a key requirement for success at MFS.
Planning for succession
At MFS, we plan for succession at all levels within the investment team and also for transitions in the management ranks across all of the major functional areas of the firm including Distribution, Legal and Compliance. We ask people about their future aspirations and goals, i.e., where they would like to be in five to ten years’ time. In our view, succession planning involves having thoughtful conversations of this nature on an ongoing basis. This ensures we have a deep bench of people who can step into leadership roles as the need arises.
We know change is disruptive for clients and we endeavor to manage portfolio manager transitions as smoothly as possible, providing clients with full transparency and long transition periods.
In some cases, analysts express an interest in becoming a PM. It should be noted that this is not the only path of progression for analysts: An analyst can remain just that and have a long successful career (including perhaps as a sector leader) at the firm. There is no hierarchy between analysts and PMs; analysts and PMs collaborate as equals.
We have chosen to have two or in some cases even three PMs on most investment strategies, particularly the international strategies, to allow for more collaborative input in the investment decision making process and as a way of enabling smoother PM transitions. This comes at a significant explicit and implicit cost to the firm but is a cost we are willing to bear in light of the benefits. Co-portfolio management is pure at MFS — all decisions with regard to the relevant portfolio are made jointly, with no “senior” or “junior” PM, no sector, regional or industry “lead.” This is one of the ways our long- term perspective makes its way into how we manage investments and transitions.
Succession: When the time comes
The firm's culture, our direct colleague dialogue and the global research process set the stage for how successions unfold when a PM makes the decision to finally leave our firm. In the spirit of the “clients first philosophy, PMs have, almost without exception, provided the fi with a long lead time — typically 12 to 24 months — and have been more than willing to stay on if a longer off-ramping period is required.
The co-PM system ensures invaluable continuity — a seamless transition — when a PM leaves the firm while the global research platform provides a deep talent pool from which management can draw a replacement. In addition, the continuity that the investment process provides is central to our success. When an analyst is selected to succeed a PM, he or she will usually have 12 to 24 months to be mentored in the PM role and get up to speed on the portfolio. Equally important, the analyst needs to ensure the successful transition of his or her analyst responsibilities and work closely with selected successors to ensure a smooth transition in this regard.
PM selection criteria
In the ongoing conversations that take place among analysts, those that show an interest in a broader array of sectors and display generalist skills are identified as more likely to succeed in a PM role. A key PM skill is the ability to effectively leverage the investment platform, given the firm's emphasis on the cross-pollination of ideas in the research process. In addition, it is important that PMs exhibit a holistic understanding of risk management; this is another key requirement for the role, which includes managing the risk profile of a portfolio of securities.
In identifying potential PMs, we look for people who are
- respected and talented investors
- great team players
- investment thought leaders
- strong leaders by example
- passionate about the role
- committed to long-term investing
The co-PM system ensure invaluable continuity - a seamless transition - when a PM leaves the firm, while the global research platform provides a deep talent pool from which management can draw a replacement.
Our collaborative research process, along with our long-term time horizon, lie at the heart of our investment philosophy designed to deliver alpha for clients. In a world where transitions are a part of managing any business, we plan for succession in the investment team in a very deliberate way to ensure that our work for clients continues uninterrupted as much as possible. Disciplined planning in this regard is in keeping with our longer-term approach to managing investments. We know that our clients value continuity in investment outcomes and durability in a business partner.
1Woolley, A. Williams, Christopher, F. Chabris, Alex Pentland, Nada Hashmi and Thomas W. Malone, “Evidence for a Collective Intelligence Factor in the Performance of Human Groups,” Science, Vol. 330, 29 October 2010, 686–688. This research shows that team effectiveness is correlated with average social sensitivity, which relates to the ability to read and work with others, as well as more equal conversation turn-taking in the group.
The views expressed are those of the author(S) 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 a solicitation or investment advice from the Advisor.