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Advisor select

Joe Fallon is Head of Investment Consulting & Strategy for MassMutual. He oversees the Investment Consulting Team, which consults defined benefit +

MassMutual Select Mid Cap Growth Fund
MEFAX (Class A)
MMELX (Adm Class)
MEFZX (Class I)
MGRFX (Class R5)
MEFYX (Svc Class)
Fund Family
MassMutual Funds
Fund Advisor
MML Investment Advisers, LLC
Sub Advisor
T. Rowe Price Associates, Inc.
Frontier Capital Management Company, LLC
CONTACT

1295 State Street
Springfield, MA 01111

T: 866-444-2601

A Multi-Manager Approach to Better Return Consistency
MassMutual Select Mid Cap Growth Fund
Ticker.com
Jul 24, 2017

Q: What is the history and mission of the fund?

The MassMutual Select Mid Cap Growth Fund opened on May 31, 2000 with the mission is to provide our shareholders consistent, superior performance over time. 

What we do is identify asset managers with well-above-average performance in both up and down markets. Each manager is allocated a portion of the fund’s assets, which they manage independently. We monitor the combined portfolio to insure consistency with the fund’s stated objectives.

Currently, T. Rowe Price Associates, Inc. and Frontier Capital Management Company, LLC are our subadvisors and the fund’s total assets are approximately $3.4 billion.

Q: What is your investable market capitalization range?

The fund’s primary advantage is that it offers investors access to asset managers that might otherwise not be available to the public.

The range for our investable names typically falls within the Russell Mid-Cap Growth benchmark. While we look at companies that fall within the $3 billion to $30 billion market-cap range, most of our portfolio consists of companies with market caps of $7 to $13 billion.

Q: Why did you choose Frontier Capital as the second manager?

When T. Rowe Price announced in 2010 that it was closing its standalone strategy, MassMutual had the option of closing our fund to additional investments or expanding its capacity by adding another manager. We felt it was worthwhile to take on some business risk and decided to add a second manager. We looked for a manager with a performance history like T. Rowe Price.

Frontier was added as a subadvisor in 2010. They offered a similar investment philosophy, process, and risk profile. When combined with T. Rowe Price, the historical return pattern offered a lower, combined standard deviation with similar upside returns. Our fund tends to do well in down markets, and by adding Frontier, we enhanced our risk-return profile.

We have good working business relationships with both firms. Our cash flow has been steady so that the managers aren’t being hit with too much money at one time, which could create liquidity issues for -some of the names in their portfolios. Liquidity is not normally an issue in the mid-cap market, but it certainly could become a problem if money were coming in too fast.

Q: What is the main advantage of investing in your fund?

The fund’s primary advantage is that it offers investors access to asset managers that might otherwise not be available to the public. Frontier does not run its own mid-cap growth fund, so our fund gives investors exposure to Frontier’s management expertise. 

T. Rowe Price does have their own mid-cap fund; however, because of capacity issues at various times, it is not always open to new investors. MassMutual can allocate assets between managers, so we can continue to keep our strategy open.

Q: How do you select and monitor investment managers?

As the fund’s advisor, we are responsible for hiring the investment managers that manage our assets. Both T. Rowe and Frontier run their individual portfolios independently and make their own buy and sell decisions. At the end of each day, our custodian rolls up all the transactions so that we can track the fund’s performance. 

As part of our management oversight responsibility, we check that both T. Rowe and Frontier are staying within our guideline.

Q: How do you allocate assets between these two managers? Do you have plans to increase the number of managers?

Currently, the asset split is 80% for T. Rowe Price and 20% for Frontier. As assets flow in and out of the fund, we maintain the ratio between the two.

We have no plans to add a third manager now. Our cash inflows have been steady, especially since the beginning of 2014, and we continue to provide a stream of new assets for both managers. If the fund’s assets grow so large that they exceed the capacity of our current managers, then we may be forced into the marketplace to find a third manager. In which case, we would look for an experienced manager with a similar investment style.

Q: Are there any specific guidelines that you provide to your investment managers?

In general, what we are looking for from our managers can be summarized by the three Ps - people, process and performance. 

While past performance is not indicative of any future result, the people we hire to manage the fund’s assets must have a proven track record, portfolio management expertise, and resources necessary to continue driving the excess returns to meet our goals. 

  • Inception: May 31, 2000
  • AUM: $4.8 billion

In addition, we must also feel comfortable with the methodology the managers use in picking stocks and assembling their portfolio. The process must be robust and applicable to any market conditions. Finally, we analyze the fund’s performance on a continual basis to make sure that the managers are generating the return that we expect.

Q: How do you handle the portfolio overlap between the two managers?

The T. Rowe Price portfolio has about 140 names and the Frontier portfolio has about 90. But for the fund in total, there are only about 200 names; so, the overlap is about 30 names. We are okay with that degree of overlap since the portfolios are being managed independently. If the managers are optimizing their portfolio decisions, then the MassMutual Fund shareholders are getting the 80/20, T. Rowe Price/Frontier, split advertised. 

We hire managers because they have a successful track record of adding excess returns. The last thing we want to do is to override their judgment by limiting their stock selections.

Q: How is the multi-manager approach beneficial?

We think the multi-manager approach is beneficial because it adds diversification and flexibility. While both T. Rowe Price and Frontier have similar investment strategies, as well as long-term performance histories, they have achieved their results using two different sets of ideas. 

But both have been successful at managing assets using a conservative investment approach to the mid-cap growth market; and both have shown significantly strong peer ranking and excess returns over the benchmark.

Q: What mid-cap category does your portfolio fall within?

The fund would be considered as a core, mid-cap growth portfolio. It is certainly a growth fund; but its volatility is less than that of other mid-cap growth portfolios.

The companies included in the T. Rowe Price and Frontier portfolios are very similar. Both managers use a bottom-up fundamental approach in identifying secular growth companies with above average earnings growth and attractive valuations. Also, they both are looking for companies that generate good cash flow where the management teams are investing the cash for future growth.

Q: Would you give us an overview of the portfolio?

At the sector level, we are generally within plus-or-minus 10% of the Russell Mid-Cap Growth benchmark. That doesn’t mean that we have predefined limits to benchmark weights. Depending on the attractive opportunities that our managers find, we could have a zero percent benchmark weight.

From a growth and valuation perspective, the managers don’t need to own a certain percentage of various sectors like technology or consumer discretionary, which are 20% plus in the benchmark. In our fund, the managers are typically in the plus-or-minus 10% range for those sectors. Currently, we are running slightly overweight in technology due to some opportunities that the managers have seen in the last couple of years within the software space.

Conversely, we have been underweight consumer discretionary for the last five or six years. That has been due to the managers feeling that the benchmark weight has been too high. Russell reconstitutes their benchmark every year and the Russell consumer discretionary weight within the Russell Mid-Cap Growth jumped up to somewhere in the 25% range five years ago.

Since that time, our fund has been about 17% to 20% range which was an underweight position to that sector. That’s not a top-down call, but certainly a bottoms-up stock-by-stock call by the individual managers. Those are just a couple of examples of some different areas where we have been over and underweight.

Regarding individual position limits, the maximum size of any one position is about 3% of the total portfolio. With about 200 names, we are broadly diversified with many small positions that reflect the independent strategies of our two managers.

Our cash position, which generally ranges from 4% to 5%, is a byproduct of the individual manager’s buying decisions, rather than a market timing strategy.

Q: What are the risk guidelines for both of the investment managers?

Each manager has their own risk guidelines that they follow and we monitor them quarterly and annually. The guidelines are fairly standard and fall within plus-or-minus 10% of the benchmark weight. 

Ultimately what we are looking for at the fund level is to maintain a tracking error relative to benchmark in the 4% to 5% range. We want to keep the expected risk levels below that of the overall benchmark and our peer groups, where the risk level is defined by standard deviation, beta and downside capture.  

We expect the fund to capture less of the downside of the market and to participate in the upside relative to the benchmark and our peer groups. Fortunately, we have been able to maintain those characteristics over past market cycles.


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