Investors Look to Active Management to Navigate Increasing Volatility

Nearly Three-Quarters of US Professional Investors Look to Active Managers for Capital Protection

More than Three-Quarters Call Risk Management the Most Important Active Skill

BOSTON--(BUSINESS WIRE)-- According to results from the MFS Active Management Sentiment study, 63% of professional US investors expect an increase in market volatility over the next 12 months. And whether market volatility over the past month is temporary or a sign of things to come, 70% of professional US investors surveyed call protecting capital in down markets one of the most important attributes when considering an active manager. The study, which was conducted by the research firm, CoreData between April and June of 2015, includes insights from 1,083 financial advisors, institutional investors and professional buyers around the globe, including 575 respondents in the United States.

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"At some point, we will see additional volatility and that creates opportunity for active managers to identify risks and generate alpha," said Joe Flaherty, chief investment risk officer at MFS Investment Management. "Downside risk management is part of the value proposition that active managers can deliver through research and security selection. Many active global managers have significantly outperformed in falling markets."

Investors recognize this capability. In the United States, 63% of those surveyed believed actively managed strategies work best in falling markets. Evidence supports their conviction. Over the past 25 years, the top quartile of active managers has added 7.6% in excess returns in falling markets.1

Downside risk management may garner more consideration from investors following the S&P 500 Index's rise of over 200% since the end of the global financial crisis in March 2009. Despite significant flows into passive investment strategies in recent years, only 38% of US professional investors surveyed are highly confident in passive management and surprisingly, only 6 in 10 investment professionals said passive investments have no ability to adapt in volatile markets.

"A passive strategy, by definition, takes full market risk. In recent years, strategies that straddle the line between active and passive have become increasingly popular with investors," said Flaherty. "And while that shows some desire for active decision-making on the part of investors, many of these strategies are fairly new and have not been tested during a sustained downturn in the market."

Recognizing skilled active managers

Professional investors surveyed highlighted risk management, long-term conviction and research expertise as the most important attributes in identifying skilled active managers. In the United States, 83% of survey respondents indicated that a firm's active risk management process is the most important trait of a skilled active manager. Many active managers have shown the ability to outperform the markets over full market cycles, which is typically measured from market trough to trough (There's No Substitute for Skill, MFS Investment Management, June 2015).

"We believe there are clear signs of a skilled active manager — establishing and adhering to disciplined research and portfolio management processes, demonstrating long-term conviction through differentiated portfolios and long holding periods, and adding value in volatile markets," said Mike Roberge, Co-CEO of MFS Investment Management.

An active manager's ability to develop convictions matters. Among US investors surveyed, 67% pointed to active security selection as the most important attribute when considering an active manager, while 64% thought a robust investment research platform is very important.

Long-term performance matters

When considering the merits of active management, particularly in light of recent market conditions, respondents called short-term thinking one of their top concerns. In fact, 68% of survey participants worldwide said investors are too focused on short term investment returns (12 months). It's not surprising then, that investors are willing to pay for strategies that can provide strong long-term results. In the United States, 82% of professional investors surveyed said they are willing to pay more for outperformance over five years while 68% said they are willing to pay more for managers who can outperform over 10 years.

"It's difficult to deliver significant outperformance over short time periods without taking a lot of risk," said Roberge. "Actively managed investment strategies aim to deliver outperformance over a full market cycle, which includes both a bull and a bear market. Differentiated security selection and patient investing are the keys to delivering risk-adjusted returns."

From 1995 to 2013, portfolios with the highest active share — or differentiation from their benchmarks — and low portfolio turnover have outperformed their benchmarks by 1.9%.2

Despite recent passive flows and some headwinds, active management appears to remain the preferred approach for investment professionals, with 60% of US professional investors surveyed indicating that actively managed strategies will play a significant role in their portfolios in the future. Of those surveyed, professional investors in the United States have allocated 77% of their assets under management to active investment strategies. US investors said they will continue to allocate the majority of their assets (68%) to active strategies over the next five years. More than half (52%) of all survey respondents said they are highly confident in active management.

To compare the US results to the global survey results, please visit mfs.com.

1Analysis using Morningstar data. Rising and falling markets based on calendar year returns when the S&P 500 rose or fell (1990-2014). Top quartile and median taken from the Morningstar Large Blend category. Excess returns, net of all fees (including 12b-1) but excluding sales charges, calculated against the S&P 500 TR. Analysis covers all share classes and includes funds which have since been liquidated or merged, but excludes index funds. The falling markets are 1990, 2000, 2001, 2002 and 2008. Analysis includes extended performance where available. Extended performance refers to the blending of performance between a new share class and the original portfolio to help investors see how the portfolio as a whole has performed over time.2Cremers, M. and Ankur Pareek, 2014, "Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently," Working Paper. Annualized returns relative to the fund's self-declared benchmark where available, otherwise benchmark that minimizes active share is selected. US equity mutual funds 1995-2013. Returns are holdings-based, net of all fees (including 12b-1) but excluding sales charges. Active share is calculated by summing the absolute difference in weight of each holding in the portfolio versus the index and dividing by 2.

About the survey

MFS Investment Management partnered with CoreData Research, an independent third-party research provider, to design and field a study among financial advisors, institutional investors and professional buyers in North America, Latin America, Europe and Asia-Pacific. The sample totaled 1,083 respondents, broken out as follows: 700 financial advisors, 258 institutional investors and 125 professional buyers. To qualify, study participants had to be responsible for the management, selection or oversight of retail investor, pension, endowment, or foundation assets, or their firm's investment platforms. The survey was conducted from April 28, 2015 through June 1, 2015. MFS was not identified as the sponsor of the survey.

About MFS Investment Management

Established in 1924, MFS is an active, global asset manager with investment offices in Boston, Hong Kong, London, Mexico City, São Paulo, Singapore, Sydney, Tokyo and Toronto. We employ a uniquely collaborative approach to build better insights for our clients. Our investment approach has three core elements: integrated research, global collaboration and active risk management. As of June 30, 2015, MFS manages US$440.5 billion in assets on behalf of individual and institutional investors worldwide. Please visit mfs.com for more information.

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MFS Investment Management
James Aber, 617-954-6154
or
Dan Flaherty, 617-954-4256

Source: MFS Investment Management

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