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Robert Pozen, Chairman of MFS Investment Management, Discusses How to Fix the U.S. Financial System

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Robert Pozen, Chairman, MFS
Robert C. Pozen,Chairman of MFS Investment Management,manages over $200 billion in assets. He speaks to on how US needs to solve some of the problems in its present financial system.


Robert C. Pozen is the Chairman of MFS Investment Management, which manages over $200 billion in assets for over five million investors worldwide. He also serves as a senior lecturer at the Harvard Business School. Bob was formerly vice chairman of Fidelity Investments and president of Fidelity Management & Research Company, the investment advisor to the Fidelity mutual funds. During Bob’s five years as president, Fidelity’s assets increased from $500 billion to $900 billion. In late 2001 and 2002, Bob served on President Bush’s Commission to Strengthen Social Security. He developed two models for closing the system’s long-term deficit: “Retiring on a Budget”, New York Times (Feb 2004), and “Arm Yourself for the Coming Battle over Social Security,” Harvard Business Review (Nov 2002). His plan was endorsed by President Bush, and was included in a series of memoranda to President Obama from the Progressive Policy Institute.

Krittika Raychaudhuri speaks to him.

MFS has grown a lot under your leadership. Can you tell us more about your experience at MFS?

In 2004, Rob Manning and I took the helm of the firm and we focused on two tracks at the same time. One, Rob focused on improving the investment performance and making the operations run well and reinforcing the marketing capabilities. I concentrated on dealing with all of our boards, communicating with Washington and improving the internal compliance and audit structure. The combination worked out very well.  We began in 2004 with about $130 billion in assets and today we are roughly $200 billion. It has not been an easy 5 years, but especially in the last 2 years, MFS has shown our clients that we have continued to deliver good investment performance and we have not experienced any blow ups or any problems. So it is our combined effort that has made for success.

MFS follows the bottom-up investment strategy. Is there any advantage of choosing this versus the top-down strategy?

We think so, that’s why we follow this approach. We believe it is very hard to consistently make macro calls that are correct. A top down strategy also introduces a huge amount of risk in the portfolios    if these macro calls are not right, then we suffer big losses. We believe we have a comparative advantage in terms of looking at individual stocks and individual companies and their relative value. We have a research team that truly integrates analysts in offices across the world.  The key architect of our global research operation is David Antonelli, who started at MFS in 1991 as our first non-U.S. based analyst and has overseen the growth of the platform to today when we have investment offices in Europe, Asia, Latin America and Australia.  That platform has been very helpful because we are able to compare stocks in the same sector across different geographic areas.

What is the future strategy of MFS for emerging Asian markets?

We have an emerging market bond fund and an emerging market stock fund.  We have not focused on individual countries, but prefer diversified portfolios investing in the best companies or credits across all emerging markets.  We identify these investment opportunities through our investment analysts located in Singapore, Tokyo, London and Mexico City. We have distribution offices in all those cities and we also have distribution offices in Hong Kong and in Taiwan. We have a joint venture in India between Sun Life and Birla.

So we are believers in the emerging markets and are increasing our distribution presence there, but we are oriented more towards attracting institutional clients and doing partnerships with large financial firms that are actual retail distributors. Our distribution efforts are more wholesale oriented. We are essentially working together with banks or other insurance companies in the retail arena.

We would like to know more about your latest book “Too Big to Save? How to Fix the U.S. Financial System”. What inspired you to write this book?

There were two driving forces. One is, wherever I went, people were asking me what the financial crisis is about. So I figured that there were a lot of people who wanted to understand what’s happening and wanted some ideas about what to do. The second thing, which probably distinguishes my book from the other books, is that my book actually tries to come up with solutions to the problems. There are detailed recommendations in each chapter. Most of the books in this area are backward looking. Many are just plain narratives, some are quite entertaining narratives and others are analytical narratives going back to Adam Smith or the Great Depression. But nobody was really trying to come to grips with what we should do going forward. So I have tried to do that and, whether you agree or not, at least I have tried to come up with solutions.  It is much easier to describe the problems than to come up with solutions.

In the second chapter of your book, you have discussed Fannie and Freddie. The US Government has guaranteed their debt. What do you think will be the long-term implications?

The debts of Fannie and Freddie are essentially the liabilities of the US government.  Though some officials claim that TARP will cost less than $100 billion, they don’t seem to include Fannie and Freddie. Their liabilities together could easily rise to over $1 trillion. It's sort of a black hole, which represents a serious threat to the U.S. fiscal situation.

Moreover, over 90 percent of all mortgages issued in the last two years have been done through Fannie or Freddie or FHA. Policy makers are afraid to reduce government support now because the housing market is so fragile.  However, over the next several years, there is an evolving consensus that Fannie and Freddie have to change fundamentally.  Even certain Democrats who were very avid supporters have realized that things must change fundamentally. It’s not just a matter of tweaking these institutions one way or another.

As you know from Chapter 2, my proposal is to split the mortgage market in two parts. If we want to subsidize or support low and moderate income housing, Fannie and Freddie are very inefficient ways to achieve these objectives.  Most of the subsidies go to shareholders of Fannie or Freddie, rather than to low or moderate income families.  So we want to have a government department like HUD directly provide subsidies to these families.   On the other hand, if mortgages are for $500,000 and higher, these are appropriate for the private sector. I don’t think they should be subsidized; there should be a market mechanism for securitizing such mortgages. In order to get the private mortgage market going again, there are a lot of problems that we need to resolve. Some of the problems are being addressed through legislation, but there is still a lot to be done.

In the book's chapter 11, you have discussed the role of Boards of Directors. In US, we had Enron and in India, there was a fraud by a software company called Satyam. What changes do you suggest will improve corporate governance?

Lots of commentators since Enron have recommended the procedural approach to corporate governance. They want to have more independent directors, stronger audit committees and more internal controls. In the financial crisis, we have learned that those procedures have limited effectiveness when we are talking about very large institutions.

The most important thing is to have smart directors who really know what the company is doing and spend enough time on company matters. For example, if you looked at Citigroup's board, they had 18 directors, out of which 16 were independent directors. They followed all these procedures but they did not seem to grasp what risks were being taken by the institution. Out of 16 independent directors, there was only one who had ever worked for a financial institution. They showed up at Board meetings every other month for a day. You know that’s a pretty complicated institution so it would be very challenging for them to truly understand Citigroup.  My view is that in these large global companies you need to have a very professional group of directors. By professionals, I mean people who are retired executives from the industry, who have the expertise and the time so that they can really hold management accountable.  If we just try to add more procedures, we are going to just check another set of boxes. There is no substitute for real smart people who know the industry and spend time on the company.

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