The following article is a transcript of a conversation between Joseph Taylor and MFS’s CIO and CEO-elect Ted Maloney, who recently visited Australia on a tour of MFS offices in the Asia-Pacific region.
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Joseph Taylor: Hi, Ted. Great to have you here with us today.
Ted Maloney: Great to be here. Thank you.
Taylor: You’re visiting us here from the US and obviously, even here in Australia, we see a lot of headlines about the US economy and the Fed. What's your view on that at the moment?
Maloney: We don't have a very differentiated view actually. We think the most likely outcome is the soft landing. Inflation is back in the box. Central banks have managed inflation down to a level that's manageable for the economy and we probably muddle through. But we'll be watching for risks to both sides of that equation, whether we see some weakening on the labor side or some stresses on the inflation side.
We can see scenarios where both of those could happen. We think what's most important is to manage those risks for our clients through a cycle and try to help our clients stay fully invested so they can compound returns through the cycle.
Taylor: Most asset classes have performed really well recently and some of them even look quite pricey at this stage. What's the best way for investors to generate returns in that kind of environment?
Maloney: Again, I think the most important thing you can do is to stay invested through the cycle for the long term. But as you say, there are some pockets of really high valuations in the market across asset classes.
We think the concentration in a number of indices, including US tech, is concerning. We think those are great companies that obviously have great prospects for the long term. But whenever you've seen markets get as concentrated as some U.S. and global benchmarks are today, it poses real risk for clients. So being thoughtful about real risk versus risk just versus a benchmark is one of the most important things we think clients can focus on today.
Taylor: You touched on concentration there, and it’s true that quite a small number of names have really driven the broader market’s returns. How do you see this playing out in terms of its implications for active managers?
Maloney: The exact details of how it plays out are uncertain, but we're reasonably confident that over time, the next five to ten years, markets will become less concentrated and exposure to that concentration will pose real risks.
If you take two periods that we think are analogous to today, the NIFTY 50 and the dotcom bubble, those were the only times that markets got as concentrated as they are today. And if you take any period of time around that level of concentration and look forward five to ten years, the overall benchmarks meaningfully underperformed equal-weighted versions of those benchmarks.
They became less concentrated because the areas of concentration underperformed, and we think that's the most likely outcome over the next five to ten years. Although when that happens, how it happens, what causes it, there's a lot of different scenarios there.
Taylor: Perhaps turning to nearer-term drivers, obviously you've got an election going on back home. How does a Trump or Harris victory affect markets from here?
Maloney: Politics are very fraught in the U.S. and around the world, and there are lots of important issues on the table. In terms of the ones that most directly affect markets, the policies both candidates are proposing might have some similar impacts. Both of them have different versions of policies that are directionally inflationary. So we think that if they're able to enact those policies, there might be more of an increased risk of inflation. Both are also more protectionist than the U.S. has been over the last number of decades.
In both of those cases, we think they're directionally similar impact and their ability to actually get them through both the legislature and the overall bureaucracy probably puts a damper on both of them. But in terms of market impacts, other than the volatility that could happen around protests and otherwise, we actually don't think it's as big a driver as maybe the amount of attention that it gets.
Taylor: Another investment theme that has had a lot of attention is AI. How do you see that having an impact on markets and also on your industry?
Maloney: We think that AI is both the most important technological change that the world has ever seen and, simply, the most recent technological change that the world has ever seen. So, it'll have meaningful impact but it'll be a step function and evolutionary.
We think that companies and economic actors that fail to embrace AI will be left behind. We think it'll have dislocating effects in terms of what it means for various parts of the labor market and various consumer drivers. But company by company, market by market, actors in the markets will implement it or not. It’ll come back to stock picking, bond picking, understanding the details underneath the macro picture.
Taylor: You’ll soon move from CIO to CEO of MFS. Congratulations. What kind of opportunities and challenges do you see going forward for the business?
Maloney: I think our biggest opportunity is to do what we've done well for 100 years, which is serve clients by prudently allocating their capital through cycles, being stewards of their capital in addition to managers of it, offering them solutions across the full spectrum of public equity and fixed income, and waking up every day with a focus on delivering value for our clients.
Our key lever to that is our global platform of MFS employees working together across the globe. We think that does differentiate us and it takes a lot of work. It takes a lot of investment. As CEO, my primary job is to make sure that we've got the right teams, the right people in the right seats, and importantly, bringing the culture forward to deliver results for our clients.
Taylor: Maybe if we could look beyond some of the macro themes, what one thing would you like individual investors to take home from this?
Maloney: It may sound boring and simple, but it's actually pretty difficult and extremely important: just stay invested through the cycle. We’re here to add value within asset classes, as well as to advise clients on which asset classes to be in. But if you stay fully invested in a diversified portfolio across equity and fixed income for the long term, you're going to do better than just about any attempt to be tactical within that. Clients that sell low and buy high are going to destroy all the value that we and others can add along the way. So, stay invested for the long term. It sounds boring but trust me. It's going to work out.
Joseph Taylor is an Associate Investment Specialist, Morningstar Australia and Firstlinks.
Ted Maloney is chief investment officer at MFS Investment Management, a sponsor of Firstlinks. This article is for general informational purposes only and should not be considered investment advice or a recommendation to invest in any security or to adopt any investment strategy.
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