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First, and Lasting : Lead Manager of America's Oldest Fund Looks for Value

March 11, 1997

Under lead manager John Laupheimer, the Boston-based Massachusetts Investors Trust stock mutual fund beat the Standard & Poor's 500 index by 3 percentage points in 1996--a remarkable feat given that the vast majority of funds lagged the S&P.

The fund, which Laupheimer manages with the help of Kevin Parke and Mitchell Dynan, also outperformed the S&P over the three-, five- and 10-year periods ended Dec. 31. The $3.5-billion Trust--America's oldest fund--is part of the $54-billion fund family run by Massachusetts Financial Services.

Laupheimer, a Pennsylvania native, developed an interest in investing in the seventh grade, when a math teacher had him track a hypothetical portfolio of stocks.

After receiving a master's degree in management from the Massachusetts Institute of Technology in 1981, he joined MFS.

"I started out as a research analyst and have been at MFS my entire career," he says. "We have a policy of hiring people out of business school and keeping them."

Laupheimer, 39, is married and has two children. He was interviewed by Russ Wiles, a mutual funds columnist for The Times.

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Times: Mass. Investors Trust is America's oldest mutual fund--dating back to 1924--and you've beaten the market over the last 10 years. So how come the fund hasn't become a household name?

Laupheimer: That's a good question. I think it's because MFS has not had the kind of high-profile advertising campaign that a lot of other firms have. Although we're addressing that issue and have started to do some TV advertising, we have suffered from a lack of name recognition. But that's fine with me because it has left the fund at a more manageable size. We have more flexibility than a $20-billion behemoth.

Times: Even so, your assets have roughly doubled over the last two years. Is that causing problems?

Laupheimer: No. Part of that growth reflects the fund's performance. . . . The rest is attributable to cash inflows, but we have not had unreasonable ones. Besides, the stocks we buy are the largest, most liquid companies, for which cash inflows would not cause problems.

Times: You've edged the Standard & Poor's 500 in recent years, but the fund also looks a lot like the index in some respects--roughly the same average price-to-earnings ratio, price-to-book ratio, etc. Is this an index fund in disguise, or are you really different from your benchmark?

Laupheimer: We differentiate ourselves by attempting to deliver modestly above-average gains compared to the index, but with less risk. We are not seeking performance at all costs.

Times: Is that reflected in a lower rate of volatility for the fund, compared with the S&P 500?

Laupheimer: Most competing stock funds have "betas" of 1.1 or higher [indicating that they are 10% more volatile than the S&P]. We sit at around 0.95 or 0.97. That doesn't seem like much, but it's notable in terms of comparisons.

Times: So as fund managers, what do you try to bring to the table?

Laupheimer: First, we have a high-quality team of research analysts who are generating investment ideas across the board, ranging from conservative to aggressive. Then, my co-managers and I are filtering these ideas by focusing on blue-chip, dividend-paying, lower-volatility companies whose businesses are growing but whose stocks are selling at the right price. So the research analysts get credit for the upside performance, while the portfolio managers are responsible for risk control.

Times: Is this a team-managed fund?

Laupheimer: It's run as three separate sub-portfolios. We don't act as a committee because that makes it hard to reward good performance or hold us responsible for poor results. I'm responsible for 50% of the assets, Kevin [Parke] for 30% and Mitch [Dynan] for 20%. Each of us has the mandate to run a "mini-fund."

By having three separate portfolio managers, you smooth out the overall ups and downs because we each will have good and bad years. And as I said, we're accountable.

Times: What types of stocks epitomize what you're looking for?

Laupheimer: One favorite is Norwest [$53 on Monday, New York Stock Exchange], which has fine management and really operates three separate businesses.

The first is a consumer-based bank where they cross-sell different types of financial products and try to increase the number of relationships with customers. For example, they bring in outside mutual fund marketers to sell at individual branches. They also offer incentives for their own employees to cross-sell and develop relationships.

The second business is a low-credit-risk loan operation. Third, Norwest is the largest mortgage origination and servicing company in the country, and they account for their home loans in a very conservative fashion.

Overall, Norwest has achieved 13% to 14% compounded [annual] earnings growth over the last half-dozen or so years, and we think they can keep doing that going forward.

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