HEAD-TO-HEAD: MFS versus Morgan Stanley

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Investment approach

The MFS fund’s process is built around three key focus areas: quality, long-term growth, and valuation. The fund therefore has a moderate growth tilt and typically underweights highly priced growth stocks.

“The MFS Meridian US Concentrated Growth fund is quite style agnostic,” said McDermott.

“It’s a growth fund, but it has a strong valuation discipline with less exposure to the technology, media and telecoms sector than the Morgan Stanley product,” he said.

It has a concentrated portfolio of 30-40 stocks, and price multiples such as price/earnings and price/book have typically trended below the index, while return on equity and debt/capital ratios versus peers and the index confirm the fund’s quality tilt.

The managers aim to beat the Russell 1000 Growth Index over a full market cycle by investing in high-quality, companies with above-average growth and sustainable competitive advantages over five- to 10-years. Key attributes strong brands, pricing power, and high barriers to entry.

“The team targets conservatively managed, high quality large-cap businesses with durable franchises and competitive advantages; the managers also look to adopt a contrarian approach,” said McDermott.

Top holdings include Microsoft, Alphabet, Accenture, but notably its 36% sector allocation to information technology is significantly lower than 42% weighting in the Morgan Stanley fund.

Turing to the Morgan Stanley US Advantage Fund, lead manager Dennis Lynch and his team seek companies with defensible business models that dominate their market. The fund typically doesn’t own industry disrupters, instead focusing on established, but growing, firm with sustainable competitive advantages, such as solid brands, scale, network effects, advantaged technology or intellectual property.

“The team also looks at long-term growth rather than short-term events, with stock selection backed by rigorous fundamental analysis,” said McDermott

“The Morgan Stanley fund is firmly in the growth camp, with a large-cap bias,” he emphasised.

A look at the portfolio shows significant exposure to the technology, media and telecoms sector, a recurring theme in the portfolio which explains the strong outperformance this year, particularly since the sell-off, according to McDermott.

“The managers focus on high-quality established companies with strong brand recognition, sustainable competitive advantages, strong current free-cash-flow yields and favourable returns on invested capital trends,” he said.

“Therefore, it is no surprise to see the likes of Amazon, Facebook and Spotify in its top 10 holdings,” he added.

Fund composition

Sector allocation:

Source: Factsheets, 31 August 2020

Top 10 holdings:

Source: Fund factsheets, 31 August 2020

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