MFS EQUITY INCOME FUND
The average equity income fund is barely up a couple of percent this year. But here's one with a double-digit total return.
If you like portfolio managers who stick to their discipline, you'll probably like Lisa Nurme. She's portfolio manager of the MFS Equity Income Fund; has been since the fund's inception in January 1996; and has racked up a performance record worth noting. This year, for instance, when the average equity income fund in Lipper's universe was up 1.69 percent, the MFS Equity Income Fund's total return was up over 13.4 percent as of Sept. 21.
....How does she do it? Like all MFS funds, picking stocks for this fund's portfolio is a team affair. "We have an in-house team of analysts who drive the bottoms-up stock picking approach that supports us," says Nurme. " So I use them in a collaborative efforts." Because her fund has a value bent to it, sometimes she generates the ideas; sometimes the analysts do. But in the end, they all work together.
....Nurme likes to keep about 100 stocks in the fund's portfolio; loves buying good companies when they are out of favor; and sticks to her knitting when picking companies to invest into. "This fund has stayed true to its discipline despite the very hostile environment for value, particularly last year," says the 37-year old portfolio manager. "We've not going into high-priced telecomm, so it has strictly been a value fund focused on equities."
Here's more on how Nurme manages her fund:
....Q: Morningstar classifies the MFS Equity Income Fund as a mid-cap value fund. Would you agree?
Nurme: No. If you look at its style, it has pretty consistently been between large- and mid-cap with a large-cap bias. But, because I've stayed focused on value stocks,--where the relative market cap has shrunk---that has brought my average market-cap down. Lipper includes it in their equity income category, which is where I think it belongs.
....Q: Where does the income portion of the fund come from?
Nurme: It's strictly from yield. There is no fixed income in the fund and, currently, I'm making relatively little use of convertibles. So it's a conservative fund, that does provide income but producing income is not a (primary) goal of the fund--- although it does provide yield.
Q: What are some of the stocks providing the greatest source of income?
Nurme: If you look at the sector concentration, as of the end of August, financials had the largest concentration at 27 percent; utilities, number two at 21.4 percent; and energy, number three at 14.8 percent. Those three sectors are traditionally the higher yielding sectors of the equity market.
But this fund is not an income vehicle and I am not buying stocks strictly to create income. So income is not a goal in and of itself. The role of yield is one way of finding value stocks, a way to reduce the volatility of the fund, and a way to help us manage downside risk.
Q: Can you give me an example of a holding that's worked well for you?
Nurme: In terms of the way we do things, St. Paul Companies would be a good example. They are a commercial property causality insurer and the number 1 holding in the fund.
We started getting interested in commercial property causality stocks last summer. Property causality had been in a multi-year decline and we were sensing that pricing was beginning to trough and was poised to recover. St. Paul happens to be a quality company, with a strong balance sheet and an attractive yield so we started nibbling away at it.
We also had a good sense that institutional investors had absolutely no interest in these stocks (commercial property causality). Which for me is a great sign because I happen to think that value investing has a lot to do with investing in companies that other investors are ignoring and sort of shunning.
Q: How about one that hasn't worked out?
Nurse: A stock that we continue to like but has not worked has been Verison Communication. We still own it, we still like it but it's been taken down with the entire telecom segment.
Here you have a company that provides local telephone service, so its got the customer; it actually owns the copper that connects the customer to the telephone service; it also has the best wireless business in the country; it is quickly entering the long-distance business as it gains approval on a state-by-state basis; has broadband capabilities; and an Internet backbone it got through the acquisition of GTE. So its really got the whole package and the whole bundle of services that we think will end up being a winner.
Q: Who is this fund best suited for?
Nurme: It's for a risk adverse investor who wants equity like returns. But this is not a portfolio with a lot of juice. Our technology holdings are currently under 4 percent. Technology has never been a big holding in this fund; neither is it likely to be.
|FUND NAME:||MFS Equity Income Fund|
|TOP SECTORS:||Financial Services; Utilities and Communication; Energy; and Health Care.|
|TOP FIVE HOLDINGS:||St. Paul, Hartford Finl Services; Gallagher Arthur J; Akzo Nobel; and ExxonMobil.|
|PAST PERFORMANCE:||Through Sept. 21, the fund's year-to-date total return was up 13.4 percent. In 1999, total return was 6.81 percent; in 1998, up 17.09 percent; and in 1997, up 33.93 percent.|
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