Tuesday, April 28, 1998

Nearly 75, kicking butt, and one of the very few funds virtually guaranteed to be older than most its shareholders.

The subject is Massachusetts Investors Trust. Its formation in July, 1924 made it the first mutual fund. Indeed, while the mutual fund population now exceeds 9,000, there were only 75 funds in existence when MIT was 25 years old and a mere 314 when the fund was celebrating its 50th birthday.

Now part of Massachusetts Financial Services, the investment management company that has grown from the original fund, you might expect it to take a back seat to younger entries. Instead, its getting in the ring with the Young and Flashy and kicking butt. Whether you look at one year or fifteen, the figures are impressive.

The Oldest Fund Takes on All Contenders

12 mos. 3 years 5 years 10 years 15 years
M.I.T. 47.54% 33.90% 22.21% 19.10% 16.98%
Avg. G&I# 41.04% 28.24% 19.23% 15.81% 14.46%
MIT vs. G&I +6.50% +5.66% +2.98% +3.29% +2.52%
MIT vs. S&P 500 -0.42% +1.11% -0.17% +0.17% -0.80%
Percentile* 23 3 8 9 15

Source: Morningstar Principia, March 31 data; * percentile versus large blend funds as categorized by Morningstar: # growth and income

Significantly, the fund has brought in this performance with less risk than the average fund or than the S&P 500 index. The risk/return advantage is large enough that Morningstar, the Chicago data publishing firm, gives the fund its top rating, five stars.

The fund also has lower expenses than the average mutual fund: the 0.74 percent a year expense ratio includes a 12b-1 fee of 0.35 percent and that, in turn, includes a broker service fee of 0.25 percent. In comparison, the average no-load growth and income fund has expenses of 0.98 percent and the average load fund in the same category has expenses of 1.12 percent.

Categorized in the industry as a third party distributed fund, meaning the fund is sold through brokerage firms, Massachusetts Investors blows away the comparable proprietary funds offered by Dean Witter, IDS, Merrill Lynch, Paine Webber, and Smith Barney. (see table)

MIT vs. Competing Proprietary Funds

Fund 12 mos. 3 years 5 years 10 years 15 years
Dean Witter Dividend Growth B* 40.43 27.72 18.96 16.66 16.16
IDS Stock A 37.91 25.02 17.85 16.43 15.23
Merrill Lynch Basic Value A 40.36 27.69 20.63 16.32 16.50
Paine Webber Growth & Inc. A 46.93 31.25 17.88 15.64 NA
Smith Barney Growth & Inc. A 33.11 25.03 16.29 NA NA

Source: Morningstar; * Dean Witter B shares were used because they have a longer track record.

Nor is this limited to a single category of fund. A recent study by Morningstar compared the average five year returns of MFS equity funds with other third party distributors and MFS was at the top of the list. Its average equity fund provided an annualized total return of 21.01 percent, leading Putnams 19.83 percent and AIMs 19.03 percent. (Needless to say, not every fund MFS offers does so well: the fixed income area, in particular, has been lackluster. MFS Growth, MFS Research, and MFS Utility fund, however, have excellent records.)

Curious, I called Jeff Shames. Mr. Shames was President of MFS until recently. The sudden death of Chairman and CEO Keith Brodkin earlier this year has Mr. Shames juggling all three titles and the task of trying to fill some very large shoes. I asked Mr. Shames what he thought was responsible for the improvements in equity fund performance at the firm. His answer surprised me.

"I think the key thing is that we concentrate on having a great work environment. Weve created these five and ten year records and have lost hardly anybody. We think were getting better as a team and that our experience together is a competitive advantage. I also think that makes us fairly unique, especially in Boston."

I asked how that was made to happen.

"We started with a goal: to be incredibly competitive externally but to have a cooperative environment internally. MFS managers dont get compensated by their (fund) performance alone. They are also graded by the help they give to others. And they are graded by the analysts. About 50 percent of their compensation comes from cooperation.

"We do this because all managers have been analysts at MFS. We dont bring in managers from outside. We do hire analysts from outside, but not portfolio managers.

"Were also not the place to make the most money. We want to be in the top quartile (for compensation) but we want to compete by having a great work environment. Basing a system on compensation only is rarely a good incentive. It tends to be toxic. People tend to leave when they dont like their environment or are frustrated.

"Maybe Wall Street needs to make decisions based entirely on compensation. But its not that way in the rest of the investment world."

Not your usual Bury the Star In Money approach, but it seems to have some nice results for shareholders.