Jenine: Hello everybody. Thank you so much for joining us. We just realized this is our 18th episode of Straight Talk, and I am excited to have two guests with me, two strategists, so this is the way we're going to end 2025, but we are talking about the questions every advisor should be asking in 2026. Now, you might recognize this gentleman here, Mike Dembro, you've been on Straight Talk before with us, our market strategist. And then, we also have another strategist, a product strategist, Jennifer Muzerall. Did I pronounce that right?

Jennifer: You did.

Jenine: I did.

Jennifer: Thank you.

Jenine: Very excited about that, that was my big challenge for today. But we have polar opposites of market and product for a reason, because these were highly talked about questions for 2025 that we're going to roll right into 2026. So thank you for being here, excited.

Mike: Of course. Anytime I get to hang out with you.

Jenine: 18th episode, yep. So let's kick it off with our favorite topic, market volatility.

Mike: Yeah. It's been kind of an interesting time. We've recovered a lot of the drawdown we saw recently, but 2025, we didn't see too much volatility outside of the tariff tantrum in April and May. We got a little bit of volatility in the AI space over the last maybe five or six weeks, started about five or six weeks ago, when Sam Altman, who's the CEO of OpenAI, he went on Brad Gerstner's podcast. Brad Gerstner's a friend of his, and Brad Gerstner said, "Hey, Sam, you guys have about $14 billion in revenue and about $1.5 trillion in capital commitments over the coming years, how do you guys plan on funding that?" And his response was funny, he said, "If you don't want to own OpenAI stock, I'll find somebody to buy it tomorrow."

Jenine: This was Sam's friend?

Mike: No, Sam said it to his friend.

Jenine: To his friend.

Mike: The markets kind of got spooked, saying, "Why would he respond to his friend like that? That's a little bit defensive." There were a few other incidents. But basically, it spurred some concerns about OpenAI and the AI complex as a whole, and we saw a 10% peak to trough drawdown in the MAG-7. We've recovered most of that at this point, but there was a couple of weeks there where it was a little dicey. And it kind of lends itself to the bigger question, which is, are we in an AI bubble? I get asked that every week on the road. And the reality is, I tell people it's too soon to know, because the reality is we don't know how we're going to utilize AI, so we can't know how these companies are going to monetize AI, and so we can't figure out who the winners and the losers are going to be yet.

Jenine: Got it.

Mike: What I would say is if we're in an AI bubble, it's early.

Jenine: You're real right now, right, this is not AI? Go ahead, continue on.

Mike: That's not distracting at all, I promise. But the reality is that if we are, we're in the early innings. I hear it talked about as the tech bubble. Can we bring up chart one? So in this chart here, you can see, going back to 1999, a company like Cisco was trading at a forward P/E of 126 times. That was the type of ebullience you saw in the tech bubble. Right now, NVIDIA is trading at 32 times earnings. A lot of the AI CapEx spend has come from free cash flow, not debt. And so, that's why I say, right now, we think we're actually in the early innings.

If we're going to get to a bubble, we see yellow flags, the yellow flags would be the circular financing. So NVIDIA invests $100 billion dollars in OpenAI, OpenAI goes to Oracle and gets cloud space, Oracle goes back to NVIDIA and buys chips. And so, the reality is that we don't like that circular loop, we don't like the special purpose vehicles that are being utilized to take CapEx spend off of balance sheets. And then, we're starting to see the utilization of debt, and that's where you could potentially see some problems down the line.

Jenine: Okay. So it's a good question though, but we don't think we're in a bubble yet?

Mike: No.

Jenine: Got it, okay. Now, what else do we hear a lot about, market volatility, private?

Mike: Yeah, yeah. These are kind of tangential, because if you think about it, the AUM in the private credit space has grown by about 3x to 4x over the last 10 years, so there's a lot of money flowing around in that space. And a lot of these new entrants, we love the stat, there's more private equity and private debt firms in the United States today than there are McDonald's, which is just a wild statistic.

Jenine: Wow.

Mike: But there's a lot of money flowing around in the system, and that money needs to get put to work, and where do we need that money? AI CapEx. So you're starting to see private debt being utilized for a lot of this AI CapEx spend. And so, if you think about it by way of example, Meta just used private credit to finance $29 billion of their AI data center they're building in Louisiana. This thing's the size of Manhattan, that's how crazy it is. But they're starting to leverage private debt. And so, you can kind of see how these things are connected. If private debt is going to be the lender to a lot of these AI CapEx spenders, they're going to be linked if we do get into a bubble.

So I want to be careful, because at MFS, we don't have any private credit offerings, and we don't have a problem with it, it's just that these are the things we're watching into 2026 as potential concerns that we always have to keep our eyes on. You've got to see both sides of the equation. And so, we do worry a little bit in the private credit space, if they're getting into riskier areas, you just want to know what you own. At MFS, we prefer the corporate credit space because we like the transparency.

Jenine: Okay. We like the transparency, we like liquidity, right?

Jennifer: Yep.

Jenine: And I'm looking at you.

Jennifer: Yep. So what comes next?

Jenine: Yep, for a reason. So talk to us regarding product, ETFs, liquidity, I'm throwing it to you.

Jennifer: Yeah. No. I think when we look at it from the standpoint of the different asset classes and the different vehicles, obviously we have a very vehicle-agnostic approach to how we launch product and how we continue to think about product. But a large reason in why we launched the active ETS was because of the liquidity and the transparency that the vehicle offers to our investors and to the market, especially in periods of market volatility, it allows clients to move in and out. Now, that's not something to say we want them to do or they should do. But when you look at ETFs as a whole, passive ETFs, it allows, in periods of market volatility, you can move in and out of an ETF more easily than you can, say, a private asset, where your cash and your assets are going to be locked up for 24, 36, 48 months, depending on the holding period.

Jenine: Which is why I'm so surprised, every conference you go to, everyone is talking about privates, privates, privates, but meanwhile, why would you want your money locked up for so long?

Jennifer: I think it's a lot advisor due diligence and advisor education. I think when we're seeing this democratization of private assets going into 401(k) plans and we're seeing a lot of these firms that are joining partners with firms that have always focused on the public space, like the BlackRocks and the Wellingtons are now partnering with the KKRs and the Blackstones of the world, it's all about what they think is driving the demand. Oh, we think investors need this. But is this really something that investors understand? When we look at a vehicle like an ETF, there's transparency and there's liquidity. In the ETF, you can see what's trading in the holdings on a daily basis, particularly the active ETFs, you can see how it's trading in the market from the bid-ask spread. There's just more price discovery that's allowed, which just ultimately creates the liquidity, and it's a safer, more efficient vehicle.

And when you think about it from a cost perspective, ETFs are more cost-efficient than, say, a private asset. We know that those types of assets charge higher fees, and we need to be conscious of that when we're thinking about our investors and our clients. So it's interesting you say that, we're hearing so much about the alt space, but I think sometimes, being in product, we need to create a demand and we need to create the product and we bring clients along, but there's going to have to be a lot of investor education that goes into that, because it's an area where I don't think clients truly understand what it means to own a private asset.

Jenine: Yeah, I agree with you. And if my financial advisor is watching this right now, just so you know, higher fees locking up my money, no good, no good. So on that topic, alternative strategies.

Jennifer: Yep, yep. So from a product perspective, obviously Mike had said, we really strongly believe that there is value that can be added in the public sector. We're always looking at new strategies that we can launch across a variety of vehicles, but I think we remain very cautious about bringing forth any private assets in any type of wrapper at this point. I think we stay true to our philosophies of being an active manager and we can launch that whether it's in an ETF, a CIT, an SMA, but by and large, that's not something we're focused on right now.

I think what we've seen in terms of the growth and the trajectory of active ETF assets and why we've seen them balloon so quickly is a lot of what we call these more alternative esoteric-type strategies, like leverage, like a defined outcome ETF are deemed alternative. And again, that's another area where investors really need to understand what it is that they're owning. A leveraged ETF product can be used for speculative and hedging reasons, but that right now is capped at 2x leverage. So you could be 2x levered whatever the underlying is. But there's concern because you've got product managers who are trying to bring forth 3x and 5x levered products. Again, does an investor truly understand what it means to be inverse levered 5x of whatever asset or sector or geography they're seeking to own? That can be really scary to think about from an investor perspective.

Also, on defined outcome ETFs, we look at those more as managing periods of market volatility, but we have to be very cautious in terms of when are investors getting into those products and where are they from a cap perspective, because you may invest in it and you may not actually achieve its true upside potential that you'd be looking for.

Jenine: Okay. So definite growing vehicle, we are launching a lot of active ETFs, but don't look anytime soon for alternative at this point.

Jennifer: Right.

Jenine: Got it. All right. 2026, the big theme in 2025, market concentration, is that going to continue into 2026?

Mike: Probably. I think the big question is, is it a problem? And I don't think it necessarily is. This is going to shake itself out, that's one thing we know. So if you could bring up chart two, what I think I mentioned earlier, that with AI, we don't know how people are utilizing this and how companies are going to monetize it. So this chart here shows just the number of companies by sector, mentioning the benefits of AI adoption, and it's shockingly low across most sectors.

So what the takeaway is you're not seeing the enterprise-wide adoption of AI by companies quite yet, and so as long as we're not seeing that, it's, again, hard to figure out who the winners and losers are. And so, once we figure out the winners and the losers, you'll start to see that concentration most likely subside, because you're going to have some smaller market caps for the losers, and we think this will naturally work itself out through attrition. So I think the knock-on effect to that is that we think that that's a great sign for active management. Obviously, the last few years have been great for passive because everybody has been equally rewarded by spending on AI CapEx. But eventually, we're going to figure out the winners and the losers, and the losers will be punished, and that's where active management will likely start to shine. So the market concentration isn't necessarily a problem, but we think there are going to be, as we see the shakeout, you'll see those losers and you'll see the opportunity for active management to come back in.

Jenine: That sounds so harsh, there's winners and losers, and those losers will be punished.

Mike: Like everything in life.

Jenine: All right. That was a little intense. Okay, so there will be winners and losers. Let's talk about AI in the product space and with active ETFs.

Jennifer: Yeah. And I think more broadly, from an active management perspective, when we think about AI and its use within our processes and how we're managing assets, like every job, AI is going to infiltrate the space, and everybody's thinking about, "Oh, what are we going to do next? My job's going to be taken over by AI." I think I saw a recent study that lawyers and architects would be the top jobs that AI would consume the most roles and positions within those fields.

Jenine: Really?

Jennifer: Yeah. Which is interesting, but nonetheless, are you telling me that when you're going to court, you want a robot or an AI to stand up to you when defending you from a litigation point of view? So I think about that as, yes, there's absolutely functions that AI can be used for, but there's still value in those professions and careers, just like there is within active management.

We consume a ton of data when we're analyzing stocks and bonds and everything else that goes into our investment decision-making process. From that point of view is we're just taking away some of the functions that allow us to more easily aggregate this data and put it in a refined data set so that we can analyze it. It's essentially making the jobs easier, but it's not taking away the value of what it is that our analysts do from an active perspective. And I think as we look across the industry, all of these firms are already utilizing it to some capacity today and will continue to find ways to refine it. But also still, there will be a value of what it is we do from an active management perspective that is needed from an industry perspective.

Jenine: Yeah. It's interesting, we are at the tip of where AI is going to go, that theme in 2026 is not going to change.

Mike: I was thinking that with the title, I thought we should have said 2026, the year of AI.

Jenine: The year of AI. I bet you it will be, we'll see. Lawyers and architects, huh?

Jennifer: Yeah, I guess so.

Jenine: Wow.

Jennifer: I don't know if I'd trust a house built on AI.

Jenine: Or a bridge or something, yeah. Those poor kids graduating law school right now, that's a tough thing. So when we think about the product... I believe it wasn't just this guy with a slide, right?

Jennifer: Yep.

Jenine: Do you have a slide talking about-

Jennifer: I do have a slide as well, yep. And I think here, when we're thinking about going into 2026 and what are the themes, one of the themes that we see resonating is the move from the mutual fund to the active ETF. And this just shows, again, when we look at advisors' net change and product allocation over the next two years, we see almost 50% are saying that they're planning to increase their product allocation to active ETFs over the next two years, shortly followed by those looking to allocate to SMAs. So again, there is a time and a place, absolutely, for the mutual fund vehicle, but I do think we see this trend continuing into 2026. When we look at the data, active ETF assets are only 10% of overall ETF assets, which currently sit at 13 trillion. But if you look at the flows, that's 526 billion going into active ETF today, that's 35% of all net-new flows into ETFs are active ETFs this year.

Jenine: Wow.

Jennifer: So just the trajectory and that magnitude is really, really telling. And again, I do want to caveat that there has been a lot of mutual fund-to-ETF conversions, and that obviously instantly adds AUM-

Jenine: So that goes into that, okay.

Jennifer: It goes into the number. But when we look at organic growth rate, it's about 42% for active ETFs, which is five times that of passive ETFs. So when we just look at the space and the field, there's been a ton of product proliferation, I think we're standing at over 800 ETFs that were launched this year and 86% of them are actively managed. Again, to my point before, yes, some of them are in the defined outcome leverage space, where those launch constantly, so you're adding to your account very quickly. But when we look at other considerations, like ETF as a share class, there's everything pointing in the direction that we're going to continue to see more assets flowing into active ETFs from an industry perspective.

Jenine: Okay, okay. So 2026, what else, anything else that you see rolling in? We definitely see the growth of active ETFs, market volatility is staying, 2026 is the year of AI.

Mike: AI adoption.

Jenine: AI adoption.

Mike: Yep.

Jenine: What am I missing for 2026, anything else before we go to a couple of questions?

Mike: I don't think so. I think you got it.

Jenine: You think I got it? Okay. AI adoption. I've got to get on that then. Okay. So we have a time for just a couple of quick questions. So one, this was the year also, we did not give international the credit it deserved. And maybe that's because at the beginning of the year, you had your predictions and you said that US was going to outperform international, and so far, it looks like you could be wrong. Is that why you eliminated it from your...

Mike: Subterfuge.

Jenine: Yeah, yeah.

Mike: No.

Jenine: So that must surprise you?

Mike: I own it when I'm wrong. I was wrong, and it's been great to see. It was the first time in 10 years we could say diversification, not diworsification, and so it's been great. I can't say that it's my base case that I think international will continue to outperform, but it doesn't matter is the takeaway, because I think international will perform well. So the reason I didn't see it is that it's the earnings story. If you think about it, in the US, the earnings story has been consistent, robust. We're near record profit margins in the S&P 500, and you don't have that same level of earnings in Europe. If you peel back the layer of the onion, most of the return this year was actually currency translation and multiple expansion. But what we did see this year also-

Jenine: Sounds like an excuse, but anyways, just keep going.

Mike: But what we did see was a lot of fiscal and monetary stimulus in Europe. You had ECB cut eight times, you had the German fiscal package, you had the EU mandate, which says that EU members must spend 5% on defense in support of Ukraine. And so, all of that stimulus pumped into the economy will likely help start to increase those earnings. But that said, with the consistency in near record-level profit margins in the US, it's hard to bet against the US. I think you want to own both is the answer.

Jenine: Got it, okay, I'll take that. And you know what? International, we've been talking about that for a long time, so I'm glad that it did have its come back. And it is one of our ETFs that actually is gathering the most flows right now. So the other question that we had goes to you, Jen, with product, are we developing more active ETFs as opposed to active mutual funds?

Jennifer: Well, we take a very holistic and methodical approach when we launch product, we want to make sure that we're meeting our clients' needs and bringing product forth in a capability, we want to remain very focused from a vehicle-agnostic perspective. But the short answer is yes, we will continue to launch more active ETFs. We'll also launch SMAs and CITs, and we're going to continue to look at existing strategies that we own today in terms of our capabilities to see if they are suitable for the ETF vehicle, and we'll start to consider new strategies as well too. But I think by and large, on a go-forward basis, when we're thinking about actively managed products and from a vehicle and structure perspective, we'll continue to see more active ETFs being launched.

Jenine: That's great, that's exciting.

Jennifer: Job security for me, no AI.

Jenine: Job security, that's right, no AI coming your way.

Mike: By the way, you can't just pick on me. Let's remember, I called for 20% on the S&P 500 this year, we're pretty close. I get some things right.

Jenine: You do, you do, you do. I'm just pointing it out that you did not mention international with your commentary, which is so wild since it's doing so well. So to wrap up, what would be... It sounds exciting things happening for next year. So obviously, for advisors out there, keep a close eye on MFS, because we will continue to roll out more strategies. What is any words of wisdom before we highlight some key takeaways?

Mike: From my perspective, I think it's watch the labor market. Companies have gotten really good at protecting their profit margins, and if the earnings story continues, this market will continue to grind higher. The thing that would undo it is the labor market. The US consumer represents 4% of global population, but 30% of global consumption. That's what we do as US consumers, we buy things. And so, the entire global economy hinges on the US labor market to some degree. If we lost the US labor market, it could be a global economic recession. We don't think that's going to be the case, but that's always the risk we're watching. And that's why they say when the US sneezes, the rest of the world catches a cold.

Jenine: Okay, okay. Good to know.

Jennifer: Did you get your flu shot?

Mike: I did not.

Jenine: Exactly. The loss of the US workforce, sounds like we don't need the pandemic coming our way.

Jennifer: Exactly.

Jenine: What about you, any last words of wisdom?

Jennifer: No. I think again, just continuing to monitor flows into the ETF vehicle. I think we're going to continue to see more mutual fund-to-ETF conversions. I know the ETF share class is top of mind for a lot. We're still a ways off from there, from an operational perspective, a readiness perspective, from an industry perspective, not MFS, but just industry-wide. It's going to be a very slow adoption rate to see that move forward. But I think we're going to continue to see more sponsors bring product to market, continue to see more investors investing into active ETFs and more exciting things to come from us.

Jenine: That's exciting, great. So two things that I'm taking away is the need for education, regardless whether it's new vehicles that are coming out that investors might not be familiar with or the markets and volatility. So if you're not familiar with our market client seminar... You know about that, you helped create it.

Mike: I did.

Jenine: What's it called?

Mike: Which one are we talking about?

Jenine: Beyond-

Mike: Beyond the Headlines, right, sorry.

Jenine: Beyond the headlines, yep. Now, you're getting me screwed up. Beyond the Headlines. So great client seminar for your clients, all of our wholesalers are fantastic in delivering that. And then, we also have a lot of educational materials, and it's in your console right now, regarding the difference in investment vehicles to continue to learn as new investment vehicles continue to roll out. So that is going to be our wrap for 2025. What is your holiday big gift? Well, you can't say it, I'm sure your kids aren't watching, but holiday tradition you're looking forward to before the end of the year?

Jennifer: Holiday tradition is taking some time off of work to go ski with the family.

Jenine: Love it. What mountain?

Jennifer: We'll be between Sugar Sunday River and Shawnee Peak. Well, now called Pleasant Mountain.

Jenine: Okay, fabulous. Sounds pleasant to me.

Mike: I'm done with the cold weather. I don't know how she does it. I'm taking the kids to Florida.

Jenine: Awesome. Where?

Mike: Fort Lauderdale.

Jenine: Fort Lauderdale. All right. Say hi to our good friends in Fort Lauderdale for us.

Mike: I will.

Jenine: All right, everybody, thank you so much for joining us. Take care, have a great holiday, and we will see you next year in 2026.

The views expressed in this presentation are those of the presenter. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product. MFS does not provide legal, tax, or accounting advice. Clients of MFS should obtain their own independent tax and legal advice based on their particular circumstances.

Past performance is no guarantee of future results. No forecasts can be guaranteed.

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