TEAMS, TIME & ALIGNMENT

S e a n M . K e n n e y, C FAM a n a g i n g D i r e c t o r

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FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY.MFS Institutional Advisors, Inc.The views expressed in this presentation are those of the speaker and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations or as an indication of trading intent on behalf of any other MFS investment product. No forecasts can be guaranteed.®

R o b e r t J . M a r r e nM a n a g i n g D i r e c t o r

ALIGNMENTDeveloping long-term a governance framework

TIMEYour greatest asset can work against you

TEAMSFactors that drive team success

PURSUING INVESTMENT EXCELLENCE

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TEAMS

"No matter how brilliant your mind or strategy, if you are playing a solo game, you'll always lose out to a team"

- Reid Hoffman

PREDICTING TEAM PERFORMANCE

FactorThe average & maximum intelligence of team members did not explain group performance

Source:AnitaWilliamsWoolley et al. Science 330, 686 (2010)

The

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DRIVERS OF COLLECTIVE INTELLIGENCE

When they should be focused here

Let's explore each of these in some more detail

NOT SIGNIFICANT• Cohesion• Motivation / Incentives• Satisfaction

SIGNIFICANT• Conversation Turn Taking• Social Intelligence• Diversity

Most organizations focus here

FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY5

FACTOR #1: CONVERSATION TURN TAKING

The pattern of information flow is found to be the largest factor in predicting team performance.

The environment for sharing opinions and ideas openly is critical to collective intelligenceSource: Social Physics, Petland 2014FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY

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FACTOR #1: CONVERSATION TURN TAKING

Team A Team Bvs.

Team B is likely to have a higher collective intelligence than Team AFOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY

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FACTOR #2: SOCIAL INTELLIGENCE

75% to 96% of success in life and work is achieved through Emotional Intelligence, Creative Intelligence, and other Learnable Qualities.

Team members with high social EQ increases collective intelligenceSource: Resource Management of Boston, 2014FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY

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FACTOR #3: DIVERSITY

Diverse skills and expertise

Unified purpose and direction

HIGHCOGNITIVEDIVERSITYLOW

VALUEDIVERSITY

Diversity alone only offers the potential for improved team performanceSource: Mauboussin, Michael & Callahan, Dan (2014), "Building an Effective Team: How to Manage a Team to Make Good Decisions." Credit Suisse (www.credit-suisse.com)FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY 9

FACTOR #3: DIVERSITY

Diversity creates value, but it is only captured through effective transfer

• Contribution of skill / information

FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY10

• Ability of people to effectively communicate

• The environment the team is operating within

INFORMATION PROCESSING

INFORMATION TRANSFER

BRINGING THE THREE FACTORS TOGETHERTeam performance depends on…

Social SensitivityTrue ability to listenCognitive Diversity

Provides the best inputs

Pattern of Information FlowFreedom and security to sharedifferent views

Building effective teams requires attention to all three factorsSource: Woolley, A. Williams, Christopher, F. Chabris, Alex Pentland, Nada Hashimi, and Thomas W. Malone, "Evidence for a CollectiveIntelligence Factor in the Performance of Human Groups," Science, Vol. 330, October 29, 2010, 686–688.FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY 11

TIME

"Unless carefully managed, group dynamics frequently thwart contrarian activities and impose shorter than optimal time horizons."

-David Swensen, 2009"Pioneering Portfolio Management: An Unconventional Approach to Portfolio Management"

Increasing complexity

Fixed, 12%

PrivateEquity,12%

Real Estate, 13%

Non USEquity,22%

US Small Cap, 8%

US Large Cap, 33%

YOUR JOB IS GETTING HARDER

Cash, 27%

Fixed, 73%

Private Equity, 4% Real Estate,

5%

Non-US Equity, 14%

US Small Cap, 5%

US Large Cap, 20%

Fixed, 52%

1995Expected return: 7.5%

Standard Deviation: 6.0%

2005Expected return: 7.5%

Standard Deviation: 8.9%

2015Expected return: 7.5%

Standard Deviation: 17.2%

Increasing risk

Investors need 3x the amount of risk to get the same returnSource: Callan Associates Inc. 13

MEASUREMENT OF SKILL

Investment decisions continue to be anchored to 1-3 year timeframes[Time Tolerance] How long are you willing to tolerate the underperformance of external asset managers before initiating the search for a replacement manager[Board Demand] What time frame are you given within your organization to generate a positive return (e.g. alpha) for your assets?

Time Tolerance Board Demand

10-years

7-years

5-years

3-years

1-year

Avg 3.1 years

Results for North America, n=100 14

Avg 3.6 years

FULL MARKET CYCLE

Bear market Bull market

A full market cycle is peak to peak or trough to trough

6.9 years (15%)

8.6 years (20%)

Market cycle

Market cycle

Peak

TroughTrough

Peak

Bull market Bull marketBear market

Source: "Defining a Market Cycle," Manning & Napier. 15

Full market cycle

ACTIVE MANAGEMENT

MEASURING RESULTS

1/3/5 years

THE DELEGATION OF DECISIONS

Committee

Pension: 20-30 years E/F/SWF: infinite

Principal/Agent friction can be caused by misalignment16

Asset Owners

ASSET ALLOCATION DECISIONS

Internal / ExternalInvestment Manager

Board / Investment

THE STRONG MAY FALL...

Top quartile

Second quartile

Third quartile

Bottom quartile

22%

28%

25%

25%

17%

24%

47%

12%

32%

28%

14%

26%

21%

32%

22%

25%

Oct-1990 –Sep - 1995

Buyer's remorse is all too common with investment committeesSource: eVestment Alliance. Data Analysis: MFS Investment ManagementThe universe includes 456 strategies in the eVestment Database with a Universe included in All US Equity and an inception date on or before 09/30/1990. Rankings include both surviving investments and those liquidated and/or merged prior to the end of the full calculation period (10/1/1990-09/30/2015). Performance is utilized for periods where it is available. Performance is calculated gross of fees. The entire universe of funds is analyzed during each five year period. 17

Oct-2005 –Sep-2010

Oct-2000 –Sep-2005

Oct -1995 –Sep -2000

Oct-2010 –Sep-2015

...WHILE THE WEAK MAY RISE

Top quartile

Second quartile

Third quartile

Bottom quartile

19%

9%

50%

23%

18%

30%

19%

35%

30%

21%

32%

27%

23% 30% 17%21%

Oct-1990 –Sep-1995

Oct-2005 –Sep-2010

Oct-2000 –Sep-2005

Oct -1995 –Sep -2000

Oct-2010 –Sep-2015

Performance may not be predictive of future successSource: eVestment Alliance. Data Analysis: MFS Investment ManagementThe universe includes 456 strategies in the eVestment Database with a Universe included in All US Equity and an inception date on or before 09/30/1990. Rankings include both surviving investments and those liquidated and/or merged prior to the end of the full calculation period (10/1/1990-09/30/2015). Performance is utilized for periods where it is available. Performance is calculated gross of fees. The entire universe of funds is analyzed during each five year period. 18

SKILL TAKES TIME

Warren Buffett's Berkshire Hathaway lagged the S&P500 in more than one-third of rolling three-year periods

in the 25 years since 1987*

The world's best will underperform in shorter time periods19

*ʺShortfall Risk: TheGrandUnifying Theory for Investments?ʺMarkBaumgartner, NMSExchange,November 2012.

ALIGNMENT

"Long-horizon investors have an edge… Unfortunately, the two biggest mistakes of long-horizon investors —procyclical investments and misalignments between asset owners and managers — negate the long-

horizon advantage."

- Ang and Kjaer, 2011"Investing for the Long-Run"

Communication to stakeholders should emphasize long-term return objectives

Goal Setting MeasurementPartnerships

ALIGNMENTStrengthening Governance and Managing Agency Risk

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Communication to stakeholders should emphasize long-term return objectives

WRAP-UP

Teams

Commit to improving collective intelligence &

decision making

Commit to using time as an advantage

Commit to a develop alignment through your

governance and partnerships

Time

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Alignment

Improving investment outcomes through strong teams aligned around a long-term framework

MFS INVESTMENT STUDY METHODOLOGIES

MFS GLOBAL INVESTMENT TIME HORIZON STUDY

Methodology: CoreData Research, an independent third-party provider, conducted a study among institutional investors (including private or public DC/DB, endowments/foundations, and gov't entities) in North America, Europe, and Asia Pacific on behalf of MFS. MFS was not identified as the sponsor of the study. To qualify, participants had to work at an institution with at least $20MM in assets. Other criteria included use of active strategies, proportion of assets managed externally, and involvement in selecting/hiring asset managers/asset allocation.

Data Collection Period: October – November, 2015Total (n=350); North America (n=100), Europe (n=100), Asia Pacific (n=150)

THANK YOU

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