FinanceAsia recently caught up with Edward “Ted” Maloney, the chief investment officer (CIO) and incoming chief executive officer (CEO) of MFS Investment Management, the $576 billion asset manager founded in Boston a century ago.
The CIO starts in the CEO role from January 1, 2025, and spoke to FA on topics ranging from fixed income to emerging market equity trends, valuations of equities globally, and artificial intelligence (AI).
FA: What are you views on fixed income amidst the current volatility?
Maloney (pictured): We're seeing a substantial amount of cash sitting on the sidelines, earning over 5%. As central banks worldwide begin to ease monetary policies, client interest in reallocating funds from cash to fixed income and risk assets is growing. We see increased interest in duration, suggesting that focusing on fixed income makes more sense than holding excess cash at this stage.
Our approach is guided by two key factors: the fundamental outlook in various regions and what the market is or isn’t discounting, which helps us uncover value.
Our views on major market drivers align with broader consensus, leading us to take a more conservative risk posture, particularly in credit and duration. We are managing risk more cautiously than usual. For instance, in the credit space, maintaining a neutral duration risk while being overweight in Europe and underweight in the US to balance risk and seek alpha for our clients.
Asia is diverse, encompassing both highly developed countries and emerging markets.
We believe inherent volatility in emerging markets presents ongoing opportunities. Our clients rely on us to manage this volatility rather than focusing on specific emerging markets, so we don’t have many high-conviction recommendations for specific intra-Asia markets currently."
FA: What are you views on global equities?
Maloney: Global equities currently are challenging to define. In the past three to five years, a small number of stocks have driven most global equity returns, resulting in highly concentrated markets. We believe that the returns at the index level have outpaced what is sustainable long-term, so we advise clients to be cautious about overall equity market returns.
However, as markets transition from these concentrated levels to more normalised conditions, we see substantial opportunities to generate value in the global equity space—opportunities that have been limited in recent years, where success hinged on a few key stocks.
FA: What are some of the opportunities in AI?
Maloney: We believe this is the most meaningful technological change ever, presenting tremendous opportunities. While some firms have created significant value in the AI space, equity markets have priced in much of that—if not more. Consequently, we think many AI-leveraged companies are currently overvalued.
Despite acknowledging their potential, market valuations seem to have surpassed even their significant achievements. We’re finding more value outside heavily AI-focused areas.
A stock-by-stock approach is crucial; within sectors, some stocks appear overvalued and face fundamental risks, while others are undervalued with upside potential.
Currently, we see more value in value-oriented sectors compared to growth sectors, and more in small- and mid-cap stocks than in large or mega-cap stocks.
FA: Is it the right time to invest in mid and small caps?
Maloney: While we see opportunities in the small- and mid-cap spaces, it's important to note that these categories are not monolithic and are relative to ultra-mega-cap stocks. Now is not the time to blindly invest in all small- and mid-cap equities globally, as there will be many losers alongside some winners.
The low-end consumer sector faces economic challenges, whereas the high-end consumer remains strong. This disparity allows for strategic identification of winners and losers through fundamental economic analysis and valuation assessments.
FA: Can you name some regional dynamics and preferences in equities?
Maloney: In our global portfolios, we are underweight US equities, particularly due to the concentrated performance driven by just a few dominant stocks, often referred to as the "Magnificent Seven (Mag-7)."
This concentration creates risks, as historical trends show that high concentration levels are unsustainable. We believe actively managing investments or adopting an equal-weighted strategy will outperform as the market deconcentrates.
Our approach focuses on skilful selection of well-positioned companies while avoiding overvalued ones, emphasising the importance of looking forward rather than relying solely on past performance.
FA: Outside the US, what are you preferences in indices?
Maloney: When we consider Japan, we see it as a market that offers both significant opportunities and risks. The unsynchronised monetary policies compared to the rest of the world create a unique landscape for investment. One particularly interesting aspect of Japan is the ongoing shift in corporate governance towards a model more akin to Western practices, which brings both potential benefits and risks.
From an alpha generation perspective, we find the Japanese market particularly appealing. Overall, in response to the larger question, our geographic positioning reflects a meaningful underweight in the US, while being overweight in nearly all other regions. However, it’s important to note that this positioning is more of a residual effect. Within these other regions, we identify tremendous opportunities across various countries, though we wouldn't categorise our stance as meaningfully overweight or underweight in any specific area.
FA: What are you views on European indices?
Maloney: Global indices, especially outside Japan, are heavily weighted toward Europe, which is not a monolithic economy but rather a collection of nuanced markets. While we expect slower growth in Europe, influenced by various country-specific challenges, there are outstanding companies that thrive on global sales or leverage faster-growing sectors within the region.
Our investment strategy prioritises not only growth rates but also the potential value of stocks or bonds relative to their prices.
FA: How does this play within the Asian story?
Maloney: My perspective will focus on specific stocks and bonds, highlighting the potential for growth in various parts of Asia due to their developmental cycles. However, some areas and stocks already reflect this growth in their valuations.
For example, while we are optimistic about India’s growth and recognise its outstanding companies, the high valuations make direct investment less appealing. Instead, we suggest identifying global multinationals or companies based in regions with lower multiples that generate significant revenue from India. This strategy allows investors to benefit from India’s growth while paying a lower valuation.
We aim to mitigate downside risk without relying solely on multiple increases. Instead of recommending specific funds or stocks tied to India, we encourage a broader global investment approach to seek similar opportunities.
Conversely, we see value opportunities in Japan, where several undervalued stocks can yield significant gains from minor positive developments, presenting minimal valuation risk. This creates a barbell scenario: high-growth companies with elevated multiples on one end and low-growth, low-multiple stocks with substantial upside potential on the other. This dynamic is enhanced by changing monetary policies and evolving corporate governance in Japan.
China remains critical in the global economy. While recent geopolitical shifts toward protectionism, especially between the US and China, pose challenges, they also present new opportunities. We view China's financial market interventions as positive steps to address specific risks, and we are encouraged by the market's reaction. While challenges exist, China continues to hold growth potential.
FA: What are your views on private markets?
Maloney: There is significant interest in private investments and alternatives, which we believe are important for client portfolios. However, we focus exclusively on public fixed income and equity to deliver strong results. We see opportunities in private credit, aligning with our expertise, but currently view this market as overheated due to excessive inflows that dilute its potential benefits.
The private credit market is opaque, making it hard to accurately assess return rates, which we believe are low compared to public market spreads. When the credit cycle turns, we expect challenges in this sector. For now, we offer clients liquid alternatives while monitoring the situation.
Some clients are drawn to the illiquidity of private investments, believing it mitigates daily market volatility. However, the underlying volatility of private and public assets is equivalent; the key difference is public assets are marked daily. This misconception drives inflows into private investments but ultimately distorts market value.
While there is broad interest in alternatives for various reasons, we contend that long-term investors should not assign inherent value to illiquidity. Those with a similar time horizon for public markets shouldn't be swayed by daily pricing.
We hope that during market corrections, investors will reassess their focus, realising that the essence lies in the assets themselves, regardless of their classification.
Please note that quotes have been edited for brevity.
