Now that Sun Life Financial Inc. has decided not to sell MFS Investment Management, the Boston fund unit's chief executive said, it will add products and increase international distribution.
Robert Manning, MFS' chairman and CEO, said he expects his unit to increase assets under management 50% over the next three to five years, to $250 billion. The growth may include acquisitions of some boutique firms, but the bulk of it will come organically, he said.
"Over the next three to five years there will be great opportunities to continue to grow, to get the asset base up and be a more meaningful asset for Sun Life," Mr. Manning said.
Sun Life will commit capital to MFS to allow it to add products and increase distribution, he said. In September the parent hired financial advisers to evaluate "strategic alternatives" for the U.S. money manager it acquired in 1982. At that time Sun Life said that the process was part of a routine review of its divisions, but most outsiders viewed it as the prelude to a sale.
Mr. Manning said that view was misguided.
"This was never, ever about getting rid of MFS. If they wanted to sell, it would have been easy to do," he said.
"Sun, as a public company and with all of the consolidation that is ongoing in the mutual fund industry, was getting calls from a lot of people inquiring about buying MFS," Mr. Manning said. "They sat down and told us that we were an important asset buried inside Sun, but in light of the Legg Mason deal and the BlackRock deal, there was a lot of interest in companies looking to buy MFS."
Sun Life was interested in partnering with another firm that could give MFS more scale, better international distribution, and additional products, he said.
He and his staff identified about a "half dozen or so companies" as potential partners.
"After identifying those companies, it became pretty clear that none of them could provide all of the things that we needed in terms of adding distribution, scale, and products," he said. "So the joint decision that was made was that MFS is well positioned in the marketplace. Clearly, we are an asset that Sun Life wants to continue to invest in."
(Mellon Financial Corp. and Wachovia Corp. were rumored to be among the bidders, but Mr. Manning would neither confirm nor deny these rumors.)
Burton Greenwald, a Philadelphia analyst with BJ Greenwald Associates, said the fact that Sun Life was not willing to sell the unit outright turned off a lot of potential acquirers.
"MFS has had a long and, for the most part, positive image in the industry," Mr. Greenwald said. "They stumbled along the way in the past couple of years, but overall they are highly regarded and were an attractive franchise to acquire. I don't think their brand has been damaged beyond repair."
Mr. Manning said now that Sun Life has "kicked the tires," MFS is ready to get to work expanding its business lines. Analysts said such an expansion could be difficult, given continued outflows from its U.S. mutual funds and continued "reputational issues" from the market-timing scandal.
MFS has had outflows from its long-term funds every month since November 2003, when it came under regulatory scrutiny for alleged market-timing abuses, according to Financial Research Corp. of Boston. In February 2004 the unit announced $350 million worth of settlements with the Securities and Exchange Commission and New York Attorney General Eliot Spitzer in connection with improper mutual fund trading.
"It takes you decades to build a reputation, but you can lose it pretty quickly," said Mr. Manning, who started at MFS in 1984 as a research analyst and was promoted to chairman and CEO in February 2004. "We acted appropriately three years ago to put those things behind us quickly. Most people don't bring the regulatory stuff up anymore. Investors want to make sure we have the right products and the right services and we are distributing them thoughtfully."
He said one reason his unit has faced outflows is that it was heavily invested in growth funds and U.S. distribution. The percentage of its assets in U.S. mutual funds has shifted from 64% in 2000 to 43% as of Oct. 31, while its assets institutional business and managed insurance products have risen from 33% to 52%.
Also over that period, MFS shifted the mix of its assets under management from 84% in U.S. equity funds, primarily growth products, to a more even blend of U.S. equity, international equity, fixed-income, and balanced accounts, Mr. Manning said.
The firm is expanding the types of products it offers to include more value, fixed-income, total return, and asset allocation funds, he said. "We know our outflows on the mutual fund side of the business are not good, and we are working to fix it, but there is another story here. It is a great growth story here."
In the third quarter Sun Life's net income from MFS increased by 37% from a year earlier, to $52 million. Despite the steady outflows from its long-term funds, assets under management have increased 25% since the end of 2004, to $175 billion.
Even though MFS developed its reputation as a U.S. retail mutual fund company, the bulk of its assets under management - $100 billion of its $175 billion - are institutional ones, and the firm is working to continue to develop this business line, Mr. Manning said.
"It is important for the development and growth of the firm's institutional capabilities that we continue expanding our global footprint," he said. "We have offices in Tokyo, Singapore, Australia, London, and Mexico. It is critical to continue to grow our global footprint in order to be a strong institutional money manager."
MFS wants to add personnel in its Latin American, European, Middle Eastern, and Southeast Asian markets and continue to add products globally, Mr. Manning said. "We can really differentiate ourselves in the pension market outside of the U.S. by developing more 'go anywhere' products."
Mr. Greenwald said that MFS has the scale to be a strong player in international institutional markets. Sun Life's investments ultimately may be aimed at selling the unit down the road, he said, because enhancing its institutional and international capabilities could make the unit more attractive to buyers.
"Sun Life put them on the block once, so they might do it again down the line if they decide that the firm has regained value and could command a higher price," he said. "But in the interim, I expect MFS will look to make some small acquisitions to bolster what they perceive as gaps in their lineup."
