A value investor, Katrina (Kate) Mead looks for global businesses that feature durable and sustainable franchises, considerable cash flows and managers that are good stewards of capital.
"But we're also looking for companies that are trading at attractive valuations, looking out on a three- to five-year time frame," says Mead, institutional equity portfolio manager at Boston-based MFS Institutional Advisor Inc. (a unit of Sun Life Financial Inc.), and a member of the team that oversees Sun Life MFS Global Total Return A.
The fund is modelled after the US$775- million MFS Global Total Return B, a U.S.-based fund launched in 1991. It has a fixed allocation: 60% is in equities and 40% in investment-grade bonds. While the mix will vary slightly over time, the managers will regularly rebalance the fund. Sun Life Global Investments, a unit of Sun Life Financial, introduced the $3.5-million Canadian fund to domestic investors in October 2010.
While the equity portion is designed to deliver the bulk of the performance, it is executed in a way which involves less risk than the broader equity market, says Mead. Besides a focus on downside protection, the team also aims to provide performance in stronger markets.
"The most challenging environment for us tends to be markets like the one in 2009: rotation into the riskiest assets, with junky companies leading the charge," says Mead. "We don't own those kinds of businesses. But we get ahead at the end of the day, because we don't lose that much on the downside."
For the year ended Dec. 31, the fund returned 2.8% versus a loss of 1.8% for the median fund in the Global Neutral Balanced category.
Stock selection lies at the core of the process, with the result that industry and country weightings are secondary. Equity holdings are limited to 3% of fund assets, and portfolio turnover is generally low.
One representative holding in the 110-name equity portfolio is Swiss-based Nestlé SA, the global consumer-staples manufacturer that generates about one-third of its sales from fast-growing emerging markets. "When you look at the compounding of its above-average returns over time, you can see the value creation," says Mead. "But the market does not recognize it. Nestlé, and others, are in that camp."
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Another favourite is Vodafone Group PLC, the global wireless telecom player. Its stock is trading at around 12 times trailing earnings and pays a 5% dividend yield. "It has leading market positions in most developed areas of the world and is quite good at returning cash to shareholders," says Mead. "It's one of those companies that is very durable and yet somewhat under-appreciated. The valuation is reflective of this. Even if the stock doesn't grow, between share repurchases and dividends, you are earning double-digit returns on a yearly basis."
A Denver native, Mead has been in the investment industry for 15 years. After graduating with a bachelor of science and a major in finance at Villanova University in 1993, she decided to make use of her real-estate licence, which she earned while at college.
But after working for two years as a real-estate consultant at Coopers Lybrand in Philadelphia, Mead decided to further her education and earned an MBA at the Wharton School. On graduation, she landed a post as equity research analyst at MFS in 1997.
Mead followed industries such as auto parts, medical devices and U.S. regional banks. In 2002, she became an institutional portfolio manager. Today, she participates in two teams: U.S. value, and global-value total return. Mead has been involved with the global total-return fund since 2005.
Mead's colleagues on the U.S. value side, Nevin Chitkara and Steven Gorham, are also on the global value team that also includes Barnaby Wiener and Benjamin Stone, who are based in London. Both teams are backed by 77 analysts around the world.
The fixed-income portion, managed by Erik Weisman and Richard Hawkins, generally adheres to the JP Morgan Global Government Bond Index benchmark. "We're not making big duration bets," says Mead. "If we are making bets, it's on the credit side where we see opportunities."
Looking ahead, Mead argues that equity returns should improve once the market starts to fully appreciate large-cap companies such as Nestlé, Philip Morris International Inc. PM and Johnson & Johnson JNJ.
"They are as cheap as they have ever been, which is not a normal relationship to the market," says Mead, noting that the companies in the fund have a three-year average return on equity over 20%, versus 17% for the MSCI World Index. "The highest quality companies typically have valuations that reflect those qualities."
