MFS Fixed Income History

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Adele Norris
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September 2018 A Heritae of Innovation and Growth In brief History and expertise MFS has a deep history and expertise in fixed income; the firm was an early pioneer in the development of

Leadership The current senior leaders of the firm (Rob Mannin and Mike Robere) have a backround in fixed income and a commitment to the asset class.

1 September 2018 A Heritae of Innovation and Growth In brief History and expertise MFS has a deep history and expertise in fixed income; the firm was an early pioneer in the development of credit-oriented active bond manaement. Robert J. Mannin Executive Chairman Risk manaement A stron risk-aware culture first took root in the fixed income roup before it was established across the firm. Leadership The current senior leaders of the firm (Rob Mannin and Mike Robere) have a backround in fixed income and a commitment to the asset class. Global research platform Close collaboration between equity and fixed income analysts and portfolio manaers, a hallmark of the firm s investment model, was fostered early on in the history of the firm. Michael W. Robere Chief Executive Officer and CIO A pioneer in active bond manaement The history of fixed income (FI) investin at MFS mirrors the enesis of active bond manaement in the financial markets in eneral. In 1970, Keith Brodkin came to MFS from New Enland Life Insurance Company to lead the newly established FI roup and manae the bond sleeve of a balanced fund, Total Return Fund (MTR). It was one of the first funds of its kind to include bonds as an interal component. Up to this point, bonds were enerally owned by wealthy individuals and insurance companies, which held bonds as an asset to match their liabilities. These were buy-and-hold securities held to maturity; the coupons were literally clipped. Brodkin developed the FI roup in the 1970s, hirin numerous colleaues from New Enland Life and, alon with a few other key market players, pioneered active bond investin. He made his mark focusin on security selection based on fundamental credit analysis as a complement to interest rate calls. A key part of his investment stratey was to buy corporate bonds in anticipation of chanes in their credit ratins, with the result bein that these credit strateies emphasized total returns rather than yield. Traditionally, bonds had been seen as a source of income based on yield. The total return focus developed under Brodkin s leadership required that investors appreciate the two components of a bond s return stream: income and capital appreciation or depreciation. This paper was oriinally published in September This document does not constitute an offer or solicitation and is intended for informational purposes only.

2 The firm built an institutional business based on Brodkin s track record. The first institutional account was established in In 1974 the Corporate Bond Fund was launched, which souht to enhance returns with rerated bonds. The same year, a watershed event occurred in the bond markets: Penn Central Transportation Company went bankrupt. It marked a turnin point for the FI markets and propelled the rowth of active bond manaement. A buy it-and-foret it approach was no loner feasible. Investors needed to be aware of the implicit credit risk associated with all corporate bonds. Beinnin in the 1970s, MFS was at the forefront of the rowth of the FI credit markets beyond the standard liability-driven insurance product that predominated until then. The firm s focus on credit investin and total returns today can be traced back to this time. Batchelder plays an instrumental role Brodkin continued to expand the FI product set and hired Joan Batchelder from Keystone Investments to help manae the Hih Income Fund, which was launched in The firm was amon the early entrants in the hih-yield cateory with the introduction of this fund, consistent with the emphasis on credit. Batchelder was the first person to be hired with a dedicated focus on taxable credit investments. She came to play a key leadership role in the development of the firm s FI capabilities and trained a whole eneration of investment professionals and future leaders of the firm, includin Rob Mannin, Mike Robere and Jim Swanson. Mannin was hired as a hih-yield analyst and went on to become a portfolio manaer and director of FI research under Batchelder; he became director of FI when she retired, a post he held until he became CEO. Robere joined the firm as a municipal (muni) analyst from the credit ratin aency Moody s. He manaed a muni portfolio until his responsibilities increased when he became director of FI research, followin in Mannin s footsteps. He became director of FI when Mannin was appointed CEO, and later CIO and then co-ceo with Mannin. Batchelder similarly mentored Swanson and paved the way for him to step into the chief investment strateist role for the firm. She built the framework for security selection and manain credit exposures in portfolios, as well as the system of risk manaement versus the benchmark. It was Batchelder who championed the idea that portfolio manaers should avoid unforced errors. The philosophy that consistency and risk manaement should form the foundation of FI investin was firmly inculcated in the roup under her leadership. The mantra was to avoid disasters like Penn Central: Winnin by not makin mistakes. Avoidin errors is particularly important in FI iven the asymmetric nature of bond returns. The return distribution of FI differs quite markedly from equity: In the best case scenario, an investor is returned his or her principal at maturity; in the worst case, the issuer defaults and the investor is not repaid. This approach of diversifyin risk and allocatin the risk budet to the area where we think the firm has the most skill credit selection chaned the firm s investment philosophy and formed the basis for the risk manaement process that permeates the entire investment department today. When Batchelder took the helm of the FI department in 1999 and Mannin became director of research, they worked with Joe Flaherty, the current chief investment risk officer, to institute the semiannual risk review process, which involves senior manaement reviewin every stratey with every portfolio manaer twice a year. This riorous risk review process was subsequently adopted for all of the firm s strateies and has become a hallmark of MFS investment process. In addition to her focus on investment process and risk manaement, Batchelder was also instrumental in dismantlin silos and fosterin a culture of teamwork and collaboration, both within FI and across the firm. She also deserves reconition as one of the pioneerin women in investment manaement at a time when women faced sinificant career obstacles in the industry. She famously recounted how as a bond analyst she was ushered throuh back entrances into business meetins in men s clubs in Boston and Pittsburh and at one in New York City was barred entirely. Credit analysis and risk manaement became inrained in the DNA of fixed income at MFS early on. 2 of 5

3 MFS funds in the forefront The firm continued to play a leadership role as the fixed income markets continued to evolve. MFS launched a muni fund in 1976 ( Municipal Income Fund), one of the nation s first, soon after leislation permitted muni bond mutual funds. MFS was a pioneer in investin in new bond markets around the world as they opened up to forein investors in the 1980s and 1990s. In 1981, the firm launched America s first lobal fixed income mutual fund ( International Bond Fund), which invested in lobal soverein bonds. These investments by definition required oriinal research. At the time, soverein bond markets were prone to volatility, and extensive soverein credit analysis was required to position portfolios to earn excess returns. The lobal fund actively traded derivatives and currencies, the first MFS fund to do so. This set the stae for the extensive use of currency forwards to manae currency exposure, as well as the employment of bond futures and swaps to manae interest rate risk. These derivative strateies first used with the lobal portfolios are an interal part of active FI manaement. It was this application of the MFS research philosophy to international opportunities which subsequently led to the firm s expansion into emerin markets and, more recently, international credit markets. The lobal/international bond portfolios were early adopters of emerin market bonds (EMD), investin opportunistically startin in the early 1990s. As the asset class rew in breadth and depth, MFS launched a dedicated EMD stratey in 1996, one of the first of its kind. The firm continued to focus on credit investment strateies and, in 1984, Municipal Hih Income Fund was introduced as the first US mutual fund seekin hih tax-advantaed income from lowerrated municipal securities. In 1986, Municipal Income Trust was launched as the first closed-end mutual fund to seek hih, taxadvantaed income, followed by Intermediate Income Trust in 1988, a closed-end mutual fund which attracted $2 billion in the larest initial public offerin (IPO) in US history up to that point. In the 1980s, the firm also introduced the Government Securities Fund, which invested primarily in Treasuries, Aencies and mortae-backed securities (MBS), and bean investin in asset backed securities (ABS). In the 1990s, commercial mortaebacked securities (CMBS) were added to the product mix alon with emerin market debt. In the early 2000s, dedicated structured product assets and a TIPS (Treasury Inflation-Protected Securities) fund were introduced, followed by local emerin market debt and more recently, lobal credit strateies. See the timeline on pae 4 for a detailed listin of major FI fund launches. Since the 1970s, MFS has been a leader in the establishment of new FI funds, particularly credit-oriented investment strateies. Global research platform: A collaborative approach from the outset The close collaboration between equity and FI analysts and portfolio manaers, a hallmark of the firm s investment model, was established early on. The FI team leveraed the firm s equity research analysts quite extensively in the beinnin, particularly in the case of the strateies that called for credit analysis. The team benefited from joinin their equity counterparts in meetins with company manaement and the insihts that stemmed from the equity side of the capital structure. Similarly, equities derived value from understandin the leverae and debt issuance of a company. This team approach is an important component of the way the firm manaes money to this day. MFS investment model has encouraed cross-capital structure collaboration from the beinnin and is a key differentiator to this day. 3 of 5

4 Conclusion MFS played a pioneerin role in the development of creditoriented active bond manaement. A reat deal of experience and expertise has been ained durin the course of the firm s lonstandin enaement in FI. The transmission of this knowlede base is facilitated by the stron team-oriented culture of MFS. Our investment professionals tend to have lon tenures, positionin themselves to transmit a leacy of expertise as they mentor junior teammates in an environment that actively rewards the sharin of ideas. The collaborative team approach bolsters the strenth of the lobal research platform, which spawns valuable insihts on security selection. Moreover, the 2008 lobal financial crisis demonstrated the value of manaers conductin their own credit analysis and not relyin too much on the credit ratin aencies. The firm s risk manaement protocols and risk-aware culture help to ensure that FI can potentially serve to further diversify a well-constructed portfolio. One should also bear in mind that MFS senior manaement has a deep understandin and commitment to FI born of their experience investin in the asset class. In sum, the firm s storied history in FI particularly in the creditoriented markets and stron collaborative culture provide a solid foundation on which to row the FI franchise. A history of innovation: Select key dates and MFS fixed income launches 1924 Massachusetts Investors Trust introduced as America's first mutual fund Massachusetts Financial Services Company created to expand the oranization's product line and investment manaement capabilities Fixed Income Department established to serve mutual fund investment counsel accounts Total Return Fund 1974 Corporate Bond Fund 1976 Municipal Income Fund introduced as soon as leislation permitted municipal bond mutual funds Hih Income Fund introduced; one of the first of its kind International Bond Fund introduced as America's first lobally diversified fixed income mutual fund MFS became a wholly owned subsidiary of Sun Life (US) and thus affiliated with Sun Life Assurance Company of Canada, one of the world's larest life insurance companies Municipal Hih Income Fund introduced as the first mutual fund seekin hih, tax-free income from lower-rated municipal securities Municipal Income Trust introduced as the first closed-end mutual fund to seek hih, tax-free income Intermediate Income Trust introduced; a closed-end mutual fund that attracted $2 billion in the larest initial public offerin in US history up to that point Global Total Return Fund 1996 Emerin Markets Debt Fund 1998 Global Hih Yield Fund 2003 Inflation-Adjusted Bond Fund 2006 Emerin Markets Debt Local Currency Fund 2006 Diversified Income Fund MFS funds mentioned are not reistered for sale outside of the United States. This paper does not constitute an offer or solicitation and is intended for informational purposes only. 4 of 5

5 MFS funds mentioned are not reistered for sale and have not been approved by the applicable reulatory authorities outside of the United States. Any historical reference to these funds is not intended to constitute an offer or solicitation of such fund in any country outside the United States and is intended for informational purposes only. MFS Investment Manaement Issued in Canada by MFS Investment Manaement Canada Limited. No securities commission or similar reulatory authority in Canada has reviewed this communication. MFSE-PFIHIS-WP-9/

Morningstar Investment Services

Morningstar Investment Services Morninstar Investment Services Peter Duery, SVP National Sales and Distribution For Financial Advisor Use Only-Not for Use With the Public. This presentation is not complete without accompanyin disclosures.