Q&A: JOHN BALLEN "WE’RE LIKE KIDS IN A CANDY STORE RIGHT NOW"

John Ballen, the manager of MFS Investment Management’s $9 billion Emerging Growth Fund, is not your ordinary stock picker. A graduate of Harvard University and a Fulbright scholar, he almost entered the world of academia by pursuing a doctorate in economics. He abruptly changed his mind, however, and earned an MBA at Stanford. “I decided that I wanted to do something more practical and more active than trying to get articles published that just sit on a shelf somewhere,” says the boyish-looking 38-year-old portfolio manager.

Good thing for investors. Mr. Ballen’s MFS Emerging Growth Fund (B shares) has achieved an annualized return of 21.05% for the 10 years ended July 31, compared to 14.96% for the Wilshire Mid-Cap Growth Index. The fund’s five-year and three-year returns outpaced the benchmark by 4.59 and 6.16 percentage points, respectively.

Of course, that was before the technology-heavy fund (40%) got whacked in the August market rout, depressing its return to -12% for the year through Aug. 31.

Still, Mr. Ballen, who was named president and chief investment officer of Boston-based MFS in July, is patient.

He continues to manage the MFS Growth Fund, which he’s done since the fund’s inception in 1986, by avoiding fads and sticking with fast-growing companies.

While the average mid-cap portfolio manager holds a stock for 11 months, Mr. Ballen keeps a stock for an average of nearly five years.

Such loyalty might explain why he still drives a beat-up Chevy Cavalier he has owned since 1986. “It still runs,” he says with a smile.

Q Given the upheaval in the market, what’s your life been like as a portfolio manager?

A It’s obviously difficult. You feel responsible for the investors and the pain they’re feeling. That’s the hard part. The less-hard part is that you see lots of opportunity and lots of appreciation going forward. You need periods like this. It’s healthy because it wipes the slate clean and allows everyone to move on.

Q What companies are you enthralled with right now?

A There’s a whole list of stocks, about 100 of them that are down well over 50% and that are now selling at quite a big discount to what they are worth intrinsically.

Q Name a few.

A OK. Cendant Corp., Computer Associates International, AccuStaff Inc. and United Healthcare Corp. Most of those companies have buybacks in place and/or great cash flow.

Q What do you look for in a stock?

A There are four different types of securities that we buy. The first are the ones that are just plain undiscovered. We try to find companies very early in their life cycle before they are well known by the rest of Wall Street. We also look for companies that aren’t appreciated in the industry they happen to be in. We look for opportunities in companies that Wall Street has previously discarded. And the fourth type of company we invest in are ones that are just very steady growth companies. Whether you buy them early or whether you buy them not as early, you can count on these companies.

Q Your fund’s turnover is 21%, which is unusually low for a small-cap to mid-cap growth strategy. How do you maintain it at that level?

Continued from Page 27

A We take a long-term focus. We try to find companies that we want to own for five years. If we find them, we hold on to them.

Q How has your strategy changed since the fund has grown to more than $9 billion?

A The management philosophy hasn’t changed at all. The reason we can manage the fund at the large size is because of the lower turnover. We have the same criteria, 25% earnings growth, today as we did when we started the fund.

Q What role does intuition play in your decision to buy a particular stock?

A It’s less intuition and more experience. The managers who do well learn from their previous experiences.

Q Is there a particular experience that taught you a lot?

A There are too many to mention.

Q Can you name one?

A Jiffy Lube is one of my favorites. They were so well set up to succeed. They were the franchiser of Jiffy Lube. They didn’t own the assets; they just owned the royalties. At the time, all the trends were looking very positive for this particular company. The EPA (Environmental Protection Agency) was taking a very dim view of people throwing oil into their backyards, people moved to convenience and fewer were changing oil themselves. There was also a declining number of full-service gas stations and a declining number of places to get your oil changed. Here was a business set up to get a high-margin royalty stream and the biggest mistake they made was to lend money to their franchisees, who couldn’t pay them back. They eventually sold out to Pennzoil at something like a dime a share.

Q Did you lose a lot of money on Jiffy Lube?

A It wasn’t too bad. We originally invested, tripled our money and sold it based on valuation. We bought it back after the (1987) crash for $14 a share and ended up selling it at $7.

Q Cendant, your fourth-largest holding, is down something like 54%. Are you going to keep it?

A Clearly Wall Street has reacted very emotionally to Cendant. The company has had a tremendous track record over the last six years. It’s been a tremendous stock for us, being up almost 20-fold from the time we bought it to where it had its (accounting) issues. We’ve been big investors since (predecessor firm HFS Inc.) became public in December 1992.

Q Are you holding on to it?

A I think it has the characteristics of a good turnaround. If they start making the earnings numbers and there’s no more fraud, the multiples will return and the stock will hopefully go up.

Q Does that mean you’re buying more of it?

A Because of the (legal) requirements about not saying what we’re doing, you’ll have to judge from my previous comments.

Q What’s your prognosis for the technology sector?

A Long-term, the sector is positioned to do very well. The rest of the world is very under-invested in technology. The U.S., as a percentage of gross domestic product, spends twice as much as Japan and 50% more than Europe on technology. With over 50% of a company like Microsoft’s earnings coming from overseas, international is going to be more important going forward. As the wave happens, it’s going to be very good for U.S. technology companies.

Q What about on a short-term basis?

A Technology stocks have been getting whacked pretty hard.

Q What’s your outlook for the market?

A Clearly, people are reassessing their viewpoint on earnings and some are suggesting that we’re going to have flat to down earnings for the S&P 500 for the next couple of years. That could happen. The stock market going down sort of accentuates that.

Q What’s your cash position in the fund?

A It’s negligible, something like 1%.

Q You closed the fund temporarily in 1994. Any chance of doing that again in the near future?

A We closed the fund because we didn’t see a lot of opportunities on the sector. Given the current environment, and the historic low valuations, we’re like kids in a candy store right now.

Vitae

John W. Ballen, 38, president and chief investment officer, MFS Investment Management, Boston.

MFS total assets under management: $80 billion.

MFS Emerging Growth Fund — B shares (assets, $9 billion): year-to-date, 11.27%; 1-year, 9.11%; 3-year, 18.60%; 5-year, 20.68%.

Wilshire Mid-Cap Growth index: year-to-date, -2.96%; 1-year, -0.86%; 3-year, 12.44%; 5-year, 16.09%.

Standard & Poor’s 500 stock index: year-to-date, 16.45%; 1-year, 19.28%; 3-year, 28.36%; 5-year, 22.9%.

Figures are as of July 31 and reflect average annual returns for periods over one year.

Source: Morningstar Inc.