Why mitigating downside risk matters

In today’s uncertain market environment, preserving capital may be more important to investors than chasing growth. How a portfolio weathers downturns has a vital impact on achieving long-term client outcomes.

Asset manager MFS believes to achieve long-term growth, it is inherently important to not only grow the upside, but arguably even more important to manage the downside.

For the MFS Meridian Funds – Prudent Capital Fund, this is nothing new. The fund strives to avoid substantial market drawdowns, though allows for participation to the upside. Since inception, the fund has consistently captured far less downside than the MSCI World Index (net div) during periods of large market drawdowns and therefore needed less upside to breakeven, as seen in the graph below.

As Portfolio Manager Ed Dearing explains in this video here, the MFS Meridian® Funds – Prudent Capital Fund stands out from most other funds in its raison d’être - the purpose for the fund's existence. Whereas most funds are created with the initial assumption of delivering superior performance to a selected benchmark, the Prudent Capital Fund begins with the question "What do our investors actually want?"

The answer, for seasoned investors who have lived through many economic and business cycles, is preserving and growing capital in real terms. Whereas young investors can afford to take more risk in the fluctuation of equity prices through market cycles, since they have a long investment road ahead of them, investors in the Prudent Capital Fund are often looking for their capital to sustain themselves and their family for years and decades to come. In this situation, preservation of capital and limiting downside risk becomes core investment principles.

Also, structural alignment of interests between the fund managers and investors, with fund managers personally investment in the fund, allows for investor confidence that decisions will be made with a sense of shared risk. This distinction is important to point out, since often fund managers do not have personal capital on the line, and thus are not inherently exposed to the same risk.