Fund commentary | Q1 2020
Opinions and commentary provided by MFS Investment Management Canada Limited.
After a strong start to the year, global equity markets reversed course in late February and plummeted in March as the spread of the coronavirus pandemic brought businesses around the world to a virtual standstill. The market selloff was initially indiscriminate across asset classes as investors scrambled to raise cash while the economy sunk into a severe recession. Adding to the market chaos, Saudi Arabia and Russia announced plans to flood the markets with cheap oil, triggering a rout in energy prices. The U.S. and European central banks quickly rolled out monetary easing policies to backstop financial markets, and governments around the world announced massive stimulus spending programs to bring stability to financial markets and provide a lifeline to individuals and small businesses. By the end of March, the extreme market volatility had eased, even as the future course of the pandemic, and its effects on the global economy, remained in question.
Not surprisingly, the best-performing sectors in the EAFE universe during the first quarter were the defensive areas of health care, consumer staples and utilities, along with information technology. With plummeting energy prices and the global economy heading into recession, energy and financial services were the worst performing sectors.
The current environment brings to mind a quote attributed to Mark Twain: “History doesn’t repeat itself, but it often rhymes.” The coronavirus pandemic is unprecedented in recent history and was certainly not anticipated by many. However, the resulting crisis of liquidity and leverage has been a common feature of every major economic crisis. Since the global financial crisis of 2008 to 2009, MFS has been acutely aware of the ever-increasing debt levels on the balance sheets of corporations and governments, and the firm has been anticipating a crisis of liquidity and leverage, whereby some unknown catalyst brings the long-running expansion to an end.
During the first quarter, the portfolio manager made changes to some portfolio holdings on the margin as the market presented opportunities, and added to several high-quality cyclical stocks whose valuations have come down and the portfolio manager feels the companies may come through the storm in strong shape:
- Initiated a position in Alphabet, the parent company of Google. The portfolio manager believes Alphabet has the greatest scale and durable competitive advantages in several businesses that will be important to the global economy for the foreseeable future.
- Added to the Fund’s position in Shimadzu, a Japanese manufacturer of analytical and measuring instruments used in medical, technology, industrial and consumer applications. The portfolio manager favours the company's mission-critical, differentiated products and its business mix of equipment and consumables sales.
- Increased investment in South Korean technology giant Samsung Electronics, whose leadership position in semiconductor memory technology—a critical component of a wide variety of technology innovations — MFS favours.
Meanwhile, the portfolio manager has trimmed several defensive names that have outperformed the market. In some cases, the companies have some debt on the balance sheet that could become an issue at some point, or have competitive positions that may weaken:
- Trimmed the Fund’s investment in European flavour and fragrance companies Givaudan and Symrise, as the stocks handily outperformed the index last year and again during the first quarter.
- Pared back the Fund’s German residential real estate holdings Deutsche Wohnen and Vonovia. These stocks performed well during the first quarter on a relative basis, declining less than 10%, but have some debt on their balance sheets, as with most real estate companies.
- Exited U.S.-based dental and oral product company Dentsply Sirona after the stock price advanced more than 50% last year, due concerns about pricing pressure for the company’s consumable products that have become increasingly commoditized.
- Eliminated German chemicals company Brenntag on concerns that increasing competitive pressures for chemical prices could limit the company’s future returns.
Looking forward, the portfolio manager feels the Fund is defensively positioned. The Fund is overweight consumer staples, where MFS favours the brand-name strength, global distribution networks, strong balance sheets and the ability to adapt to the digital environment across a number of consumer product, food, and alcoholic beverage and tobacco companies. The Fund is overweight information technology, in which it strategically owns companies that are dominant players in industry niches, with competitive advantages that the portfolio manager believes are supported by intellectual property, and that play critical roles in long-duration industrial supply chains. Additionally, the Fund is overweight industrials, owning a number of differentiated and high-return businesses is this sector.
The Fund’s most significant underweight is in financials, as the portfolio manager continues to avoid European banks with complicated business models and over-levered balance sheets. The Fund has avoided most energy companies, which the portfolio manager believes may produce sub-par rates of returns over the long term, based on their capital expenditure requirements and commodity-oriented markets. The Fund is underweight consumer discretionary and continues to avoid utilities, which the portfolio manager views as highly regulated, lower-return businesses that are less attractive relative to opportunities in other sectors.
Significant impacts on performance
The portfolio's position in Nestlé (Switzerland) contributed to performance as the company benefited from solid performance in developed markets and better overall pricing. Nestlé's share price was relatively resilient to the ongoing situation with the COVID-19 virus.
Holdings of the fragrance and flavour products manufacturer Givaudan (Switzerland) bolstered returns as the firm experienced robust profit growth supported by healthy margin gains from higher prices, cost-cutting efforts and synergies from recent acquisitions.
The portfolio's position in household and industrial products manufacturer Kao (Japan) contributed to performance as the stock price outperformed the broader market after reporting better-than-expected earnings results.
Toyota Motor Corp.
Not owning shares of automaker Toyota Motor (Japan) weighed on results as the company's share price outperformed the broader market after reporting higher-than-expected earnings per share.
Amadeus IT Holding
Holdings of tourism and travel IT solutions provider Amadeus IT (Spain) held back returns. Although the company reported strong quarterly earnings, the stock price was negatively affected by concerns over the adverse impact that COVID-19 may have on the firm's revenues, which are derived mainly from travel.
Not owning shares of pharmaceutical company Novartis (Switzerland) hindered relative returns. The company's shares held up relatively well during the market sell-off, given the defensive characteristics of its business and its relative resilience to the COVID-19 crisis.
|Compound returns %1||Since inception2||7 year||5 year||3 year||1 year||Q1|
|Sun Life MFS International Value Fund - Series A||9.9||10.3||5.4||5.3||0.6||-6.4|
|Sun Life MFS International Value Fund - Series F||11.2||11.5||6.6||6.5||1.8||-6.1|
|MSCI EAFE Index||6.4||6.8||1.7||0.3||-8.8||-15.3|
1Returns for periods longer than one year are annualized. Data as of March 31, 2020.
2Partial calendar year. Returns are for the period from the fund’s inception date of October 1, 2010 to December 31, 2010.
Views expressed are those of MFS Investment Management Canada Limited, sub-advisor to select Sun Life mutual funds for which Sun Life Global Investment (Canada) Inc. acts as portfolio manager. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by Sun Life Global Investments (Canada) Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. This commentary is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Information contained in this commentary has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.
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Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Investors should read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual compounded total returns including changes in security value and reinvestment of all distributions and do not take into account sales, redemption, distribution or other optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
While Series A and Series F securities have the same reference portfolio, any difference in performance between these series is due primarily to differences in management fees and operating fees. The management fee for Series A securities also includes the trailing commission, while Series F securities does not. Series A securities of the fund are available for purchase to all investors, while Series F securities are only available to investors in an eligible fee-based or wrap program with their registered dealer. Investors in Series F securities may pay a separate fee-based account fee that is negotiated with and payable to their registered dealer.