Fund Manager Interview: MFS Core Growth

PANICKED MONEY MANAGERS AREN'T A PRETTY SIGHT, but they can provide lessons on what not to do in a falling marketplace. As a young consultant during 1987's crash, Stephen Pesek saw first-hand that many professional investors dumped shares only to miss out on the subsequent recovery in prices.

Coping with some of the same challenges today, Pesek wants to take a different approach. "We are trying to build up the portfolio one stock at a time with the best relative growth opportunities in the market, and extreme volatility provides opportunities," he says.

Maybe it really is different this time, but the early experience helped prepare the 49-year-old portfolio manager for this latest catastrophe. His MFS Core Growth Fund (MFCAX) has done well in the large-cap growth category by sticking to what Pesek does best: ferreting out companies with sustainable earnings growth and improving fundamentals available at reasonable prices. The son of an engineer from the former Czechoslovakia is one of the few portfolio managers in the large-cap growth category who's been a solo manager of the same fund for more than 10 years.

YES, ALL SUCCESS IS RELATIVE -- and especially this year. Pesek is fully invested and does not use cash for tactical allocation. That's contributed to a 34% decline in assets to $1.86 billion since Sept. 2007, and a year-to-date (through Oct. 30) loss of 32.1%. As bad as that sounds, it beats 91% of the fund's peers. It is in the top performance quintile for one-year (off 33%), three-year (down 3.79% annually) and five-year (positive 0.52 %) periods.

Core Growth Fund consistently beats its benchmark, the Russell 1000 Growth index. Plus, its expense ratio of 1.23% for class A shares has been falling, according to Morningstar. That puts it in the middle quintile for a front-load large-growth fund.

Pesek spreads his risk over 100 to 120 companies with an average market cap of $61.8 billion. He admits that he doesn't swing for home runs -- just singles and doubles, and aims to make as few errors as possible. The fund ranks in Lipper's lowest quartile for volatility -- the quarter with least risk -- over the last five years.

Now a father of three, he's been in the stock market since his youth: He used his first paycheck, for $120 he earned as a ball-boy in a tennis tourney at the Longwood Cricket Club in Chestnut Hill, Mass., to buy three shares of Chrysler: "I haven't made my money back on that one," he laughs.

After earning a bachelor's degree from the University of Pennsylvania in 1983, he worked for consultants Cambridge Associates outside Boston, where he analyzed money managers for big institutions.

"THAT WAS NIRVANA TO ME. Talking to all of these great investors trying to figure out what they did," he says.

He later received an MBA at Columbia University, where he learned bottom-up research from Jim Rogers, co-founder with George Soros of the legendary Quantum Fund. Pesek joined MFS in 1994, after seven years as an analyst and portfolio manager at Fidelity Investments. He has been the portfolio manager of MFS Core Growth Fund since its inception in January 1996. He relies on a team of 47 equity analysts spread from Boston to London, Tokyo, Mexico City, Singapore and Sydney; he shares a lot of his picks with other MFS funds.

Pesek looks for businesses with rising profit margins undergoing some sort of positive change, such as launching a new product or restructuring, with managers who have historically provided rising returns on invested capital.

His top holdings include many electronics outfits (he once ran an electronics fund for Fidelity), such as Apple (AAPL), Cisco Systems (CSCO) and IBM (IBM), all of which have suffered big price drops in the downdraft created by the credit crisis. That doesn't faze him because he invests with at least an 18-month time horizon.