Uncertainty, concentration force a rethink on selectivity: MFS

For both selective and passive asset owners today, the dominant theme can be distilled into a single word.

"Uncertainty," said Sean Kenney, executive vice president and head of global distribution at MFS Investment Management. "There's uncertainty everywhere. Geopolitics, trade wars, actual wars. You've got supply chain disruption happening because of some of the geopolitical challenges we have. You've got massive AI disruption that's changing the technology landscape, the energy landscape, the real economy.”

According to Kenney, asset owners, along with large retail distributors and wealth managers, are all asking the same question - how long can the current dynamic last? 

A case for active management

That uncertainty forces a reckoning with how portfolios are built and what risk management actually means now, Kenney noted. After all, the timing, speed, and catalyst of any rotation remain unknown, leaving investors struggling with how to position portfolios and what risk management should even mean in this environment. He noted that the past decade has been punishing for active managers, particularly those who diversify beyond the narrow group of names driving returns.

But as disruption reshapes the economy, he argued, the gap between companies that can adapt and those that cannot will widen, creating fertile ground for selectivity. The challenge, he said, is that making that case in a concentrated, momentum driven market remains difficult, and clients want to know where to begin as they start rotating.

“Those that have flexible supply chains, those who have really strong consumer brands, those companies that can navigate uncertainty through pricing power, those companies that will be net winners of gen AI because they have really strong operational capabilities and can adopt gen AI capabilities, they will be the winners and there will be losers,” said Kenney.

“The time for active management has maybe never been better, but it's a really difficult moment in time where proving the value of active management in a highly concentrated, momentum-driven market is very difficult," he added.

How plan sponsors can be more selective

When asked what selectivity looks like in practice, he emphasized the work comes down to understanding individual businesses one at a time. For example, he pointed to software, where some companies will be wiped out entirely while others will be transformed, with no way to predict outcomes at the sector level.

He added that the same granular analysis applies to consumer facing companies, where supply chain management has become critical amid tariffs and regional conflicts. Across MFS, analyst teams are collaborating across sectors to map how each company is exposed to the major forces reshaping markets, noted Kenney.

According to Kenney, market concentration on the equity side, fuelled largely by the AI buildout, is the single hardest thing for clients to navigate right now. Selling out of positions that keep rising is difficult, and the question of when to take money off the table and rotate into credit, small and mid caps, or other asset classes has no clean answer. Yet he noted that some asset owners are already making that move, shifting into non-US equities and mid cap allocations while trimming large and mega cap exposure.

Complexity adds to portfolio risk for plan sponsors

Meanwhile, Andrew Kitchen, head of Canadian distribution at MFS, agreed that uncertainty looms over client conversations, but added a second word he hears just as often: complexity. Notably, clients are confronting complexity in product types, in private assets, and in regulatory oversight.

"Overwhelmingly, they're coming to us, they're looking to us and saying, ‘Don't sell, but solve. Solve a problem for me, come to me with a solution,’" Kitchen said. “They're kind of challenging us now to say, ‘Okay, don't come with risks we know, tell us where we're going wrong, tell us our gaps, tell us what we're missing.’ So it becomes a push and a pull conversation with a sophisticated investor now.”

In the defined contribution world, Kitchen noted, that translates into demand for target date funds and pre-packaged solutions that can carry a participant from accumulation through to retirement.

On the defined benefit side, Kitchen emphasized how plan sponsors want clarity on what risks they are actually holding, whether that is concentration in equities or the risk of falling short on liabilities. Kitchen said the shift is away from chasing high performing strategies and toward a more collaborative model, where managers, consultants, and asset owners work together to align advice with implementation.

Passive is not riskless: Kenney

Still, Kenney believes passive belongs in portfolios, depending on an asset owner's risk budget, tracking tolerance, and fee constraints. He acknowledged the industry conversation around passive and private markets is valid and that passive managers have earned their place.

But his concern is more around portfolios where passive has become the dominant allocation within public equities, because that is where he sees concentrated exposures and elevated drawdown risk.

"To think that passive is riskless is false," Kenney said, adding MFS recently published a paper challenging the narrative that passive benchmarks function like the risk-free rate.

He noted how market cap weighted benchmarks today carry substantial embedded risk, and he argued that underperforming those benchmarks over short stretches might actually represent prudent risk taking rather than failure.

On the private markets side, he flagged liquidity risk and the question of whether credit allocations built up over years can be unwound if a credit cycle arrives. Each approach carries its own set of risks, he said, and the formula asset owners need to work through is how to combine them while understanding where the exposures sit across the whole portfolio.

Still, Kenney framed risk as inseparable from opportunity, saying investors cannot eliminate one without losing the other. The real imperative is to understand the bets being made, whether those are passive bets on market concentration, active bets on manager selection, or private market bets that carry liquidity and capital cycle risk.

Diversification remains key for active management

Most asset owners thinking across decades and multiple cycles land on diversification as the answer, because few are comfortable with binary outcomes hitting their portfolios in a meaningful way. The two agree that diversification has never been more relevant.

"The only way a sophisticated investor now can sort of mute the risk is diversify, diversify, diversify," Kitchen said.

But even diversifying introduces a different kind of risk, Kenney said, pointing to governance risk. Accepting short term underperformance against a stated benchmark may be the right long term investment decision, but it carries real near-term consequences.

"That's the hardest thing we talk to clients about because the governance risk, while over the longest term is probably the right investment decision, in the near term it's the most career risk," Kenney noted.

To that end, Kitchen cautioned against letting the industry's push toward low-cost providers obscure what investors are actually getting for their money, particularly as risk management, financial planning, and access to a full range of options all carry real value, he said.

For Kitchen, that value can be lost when the conversation narrows to fee minimization alone.

"Don't let cost eclipse value for money," he warned.