MFS Growth Eyes Secular Trends

10/11/2019 5:00 am EST

Focus: BONDS

Todd Rosenbluth

Senior Director of ETF & Mutual Fund Research, CFRA Research

MFS Growth Fund (MFEGX) is an active fund that seeks under-appreciated stocks with secular tailwinds, notes CFRA Research analyst Todd Rosenbluth in The Outlook.

The fund earns a four-star rating based on a combination of holdings analysis and fund attributes, including relative total return and costs.

Year to date through August 30, MFEGX’s 28% total return was well ahead of its large-cap growth Lipper peers’ 22%. If this positive differential holds, it would generate a fifth consecutive year of outperformance. The MFS fund gained ground in 2018, even as the peer average declined.

On a one and three-year annualized total return basis, MFEGX was in the top quartile of its peer group. Further supporting our high rating are the fund’s below-average standard deviation and above-average Sharpe ratio. (A higher Sharpe ratio, combined with a lower standard deviation, indicates a strategy is producing strong returns relative to the risk that is being incurred.)

As strong as this is, CFRA does not think investors should rely on past performance success alone when assessing mutual funds. Our star ratings incorporate additional holdings-level and cost factor analysis.

Long-time portfolio manager Eric Fischman and co-manager Paul Gordon seek companies with growth potential that they think is underappreciated by the market.

The co-managers work with the more than 100-person MFS central research team to identify candidates for inclusion in the portfolio, based on meetings with company management, suppliers, etc. They like to invest in companies with secular tailwinds rather than those dependent on economic growth.

While the fund holds approximately 80 positions, the top-10 recently represented 40% of assets. CFRA has qualitatively derived Buy recommendations on nine of the ten, while six of them earn a favorable S&P Global Market Intelligence Quality Ranking of B+ or higher.

Microsoft (MSFT) and Amazon (AMZN) are the two largest positions in the fund and it is common for largecap growth funds to hold these heavyweights. However, management is also bullish on other stocks viewed as attractive to CFRA equity analysts.

Fischman highlighted Adobe (ADBE) as a high-quality company based on its high return on equity, low debt leverage and strong management team.

He views the company’s positioning as the backbone of compiling internet usage statistics as providing strong competitive positioning and enabling recurring revenue to support long-term growth potential.

CFRA Equity Analyst John Freeman projects ADBE to generate 20% revenue growth and 25% earnings growth over the next three years. He views the stock as attractively valued based on a P/E analysis.

The fund recently had 37% of assets in Information Technology stocks, with Fiserv (FISV), Mastercard (MA) and Visa (V) also among the top-10 holdings. Within Health Care (13% of assets), Fischman explained he and Gordon do not want to invest in heavily regulated parts of the sector such as managed care or pharmaceuticals.

The fund’s largest position in the sector is Thermo Fisher Scientific (TMO), a life sciences tools & services company. TMO makes high-end equipment that is scalable and Fischman views the business as one that has high barriers for entry by any potential rivals.

CFRA Equity Analyst Colin Scarola, who has a Buy recommendation on TMO, likes the company’s dual strategy of investing heavily in internal innovation for organic growth and pursuing merger-and-acquisitions to leverage scale and cross-selling opportunities across segments.

With strong performance, assets in MFEGX recently increased to about $6 billion, up from $4.3 billion at the end of 2016.

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