January 2024
Avoiding Market Pitfalls: Lessons From the Dot-com Era
MFS’ differentiated approach to research — collaboration among risk, portfolio management and analyst teams across asset classes — helped the firm see risks from all angles and make investment decisions that avoided the worst impacts of the dot-com and global financial crises.
Having seen its fair share of global market, economic and political crises since 1924, MFS® has relied on the three “R’s” to minimize the impact on investors: research, risk analysis and relationships. The first two — thorough bottom-up fundamental research and a clear understanding of what might be a material risk to a business — have been crucial. But both depend upon the relationships among investment team members, which drive information sharing, and a willingness to engage in what current CEO Mike Roberge calls, “respectful debate.” And throughout the firm’s history, it has led to better outcomes.
This collaborative, leave-no-stone-unturned process has been integral to MFS’ culture since the firm’s founders debated potential holdings for the first open-end mutual fund, Massachusetts Investors Trust (MIT). But it became the investment culture of collective expertise that we know today back in the late 1990s, in the aftermath of the dot-com era.
At the time, the rise of the internet opened the floodgate to new tech companies coming to market and overexuberant investors buying them without really understanding what the companies did or what they were worth. It seemed that anything with “dot-com” in its name was a hot commodity, and many did little to question the suspicious and often unfounded daily increase in value for these stocks.
But MFS Chief Sustainability Officer, Barnaby Wiener, then a young analyst new to the London office, wasn’t one of them. After watching other US equity managers from competing firms buy unproven dot-com company stocks, Wiener said, “These companies would come to market, and I didn’t even understand what they did, let alone how they were ever going to generate revenue or a profit. So, my attitude was to ignore them.”
Wiener, much like seasoned professionals David Antonelli and David Mannheim, favored the firm’s longstanding investment philosophy to prioritize careful risk management and a long-term view. Given the eventual dot-com era fallout — failure of numerous tech startups and the substantial losses suffered by investors — it was the right way to go. As Antonelli said, “Coming out of that, we sort of got back to our roots,” — meaning, know what you own. The dot-com crisis was a stark reminder of why that mattered so much, and it gave the firm further incentive to adapt the research and risk management process toward doing just that.
space
In what was one of the worst financial crises on record, having an investment structure and culture that fostered information sharing across geographies and asset classes helped MFS connect the dots early on to better protect clients.
space
The first step was to integrate the fixed income and equity teams. Next, the firm asked the fixed income research associates to hone their quantitative research abilities. MFS was already known for thorough, bottom-up fundamental analysis, which helped the firm understand a company’s business, management team and market opportunities. Adding quantitative analysis, which could sift through lots of data quickly, would help them see patterns and build portfolios of securities with attractive characteristics. Together, these two capabilities would help MFS know the businesses the firm owned and what role each played in their portfolios.
The investment risk structure MFS implemented following the dot-com days demonstrated to clients a repeatable, transparent process that still serves clients well today. It was this research process, together with collaborative relationships across the investment teams that helped the firm minimize and, in some cases, avoid negative exposure during the Global Financial Crisis (2007-08).
In 2006, while MFS equity and fixed income analysts had been watching for signs of trouble in the credit markets, late that year, the fixed income team saw an uptick in mortgage delinquencies in the subprime market. After finding that deteriorating credit conditions were causing banks to restate their earnings, one of the London-based equity analysts notified the entire financial services team. The more the fixed income and equity teams worked collaboratively, the more their concerns about the subprime mortgage market grew. Together, they were able to figure out which companies and securities would be most negatively affected. By the second half of 2007, when other investors were just seeing signs of trouble, MFS was ahead of the recession and many of their competitors, having sold off negatively affected companies like American International Group, Citigroup and Fannie Mae.1
In what was one of the worst financial crises on record, having an investment structure and culture that fostered information sharing across geographies and asset classes helped MFS connect the dots early on to better protect clients. As former MFS Chair Rob Manning said, “You don’t often get to stress test what you built. But we got that stress test, and it worked.”2
Please note: Not all of the funds included in this material may be available for sale in your country.
Endnotes