Sometimes less is more when it comes to asset management. In the case of the actively managed MFS Institutional International Equity Fund, that equates to an exceptionally low turnover rate of 13% in a portfolio of nearly 80 holdings, as reported at year-end 2021. That was in line with its historical average, but that doesn’t mean the fund’s two portfolio managers make a habit of kicking back, putting their feet on their desk and going through the day on cruise control.
“While our turnover looks low, we’re constantly testing our investment thesis and evaluating relative valuation opportunities,” says Daniel Ling, who runs the fund with his partner, Filipe Benzinho. “We spend a lot of time following up on companies we invest in, and one of the things we do on trips is visit companies we do not own just so we can assess relative opportunities so we can own the best possible ideas.
“And one of the reasons why our turnover is low is because we’re bottom-up investors,” he adds. “We don’t try to make explicit macro bets or currency bets. We’re focused on the quality of a business and not on the short-term volatility of a business. And we try to think about a business over a full business cycle, so you can see why our turnover is low. The average holding period in our portfolio is about seven to eight years.”
Whatever they’re doing has worked because the fund’s average annual returns have handily topped its foreign large-blend category in all of the measurable time periods ranging from one to 10 years, placing it in the upper quartile during these periods, according to Morningstar. (The same goes for the 15-year time frame, but that somewhat predates the tenure of Ling, who assumed portfolio manager duties in October 2009. Benzinho became co-head in 2016.)
But Ling asserts that the fund’s static multiyear returns and high rankings in its peer group aren’t the best way to judge it.
“The one number that bears testament to our long-term approach is to look at our rolling returns since the inception of this strategy,” he says, noting that from February 1996 through December 2021 the strategy has outperformed its benchmark, the MSCI EAFE Index, 88% of the time over rolling three-year periods. Over rolling five-year periods, it has outperformed 93% of the time.
Benzinho offers that the fund’s measured, long-term approach helps it cut through the noise to find enticing companies and avoid potential blowups. “We have the luxury of separating what’s temporary from what’s structural. Time and again we see opportunities to find high-quality businesses when the market overreacts to a short-term temporary issue.”
For example, he says, they invested in Richemont, a Swiss luxury goods company, at a time when the market was overly negative about its watch business and its online efforts. “The watch business then was going through a period of clearing inventory, which depressed revenue and margins,” Benzinho explains. “The online business was a new venture, which required a sizable up-front investment and wasn’t yet profitable. So we took advantage of an opportunity that arose when the market was worried about short-term transitions in smaller parts of the overall business.”
Global Reach
Ling operates from Singapore, and Benzinho is based in London. They work with roughly 40 non-U.S. analysts who cover more than 1,000 companies. Those names might come from within the MSCI EAFE Index, or from without: The result is a portfolio with a heaping dose of developed Europe companies and a smattering of emerging market stocks.
“During the history of this strategy, I think the maximum amount in emerging markets was around 10%. It’s usually a lot lower than that,” Ling says. “And we try to avoid as much as possible owning companies domiciled in the U.S., mainly because a lot of our clients already have U.S.-dedicated managers.”