Fund commentary | Q1 2020
Opinions and commentary provided by MFS Investment Management Canada Limited.
Portfolio outlook and positioning
Sun Life MFS Low Volatility Global Equity Fund outperformed its benchmark in Q1 2020.
- Overweight least volatile stocks
- Intersection holdings rated buy from both a fundamental and quantitative perspective
- Overweight healthcare, consumer staples and utilities
- Stock selection, especially in health care
- Overweight Japan
- Portfolio exposure to momentum and quality components of quantitative model
- Portfolio exposure to valuation component of quantitative model
- Underweight lowest-yielding stocks
- Stock selection in leisure and retail
- Underweight technology
Global equities retreated into bear market territory in the first quarter as the rapidly spreading coronavirus and an oil-price war caused the global economic and earnings outlook to collapse. With the growth outlook quickly deteriorating, policymakers were quick to respond. Global central banks cut rates and flooded markets with much-needed liquidity. The fiscal response has also been swift, although the size of stimulus packages has varied by geography, with the United States and a number of European countries passing packages significantly larger than those enacted during the 2008 Global Financial Crisis. Asia Pacific governments, so far, have been more restrained. While there are a few signs of improvement in the economic data coming out of China, and some encouraging signs the that coronavirus infection rates in Italy and Spain may be peaking, a lot of uncertainty remains around the duration and extent of the damage to global economies, which will likely cause further market volatility.
Given the worsening outlook for economic growth and earnings, market leadership was broadly defensive. The spread of the coronavirus across the globe was generally reflected in the geographic shifts in market leadership throughout the quarter. Emerging markets, which are heavily influenced by China, and Japanese equities underperformed early in the quarter in response to early outbreaks of the virus. Later in the quarter, the stocks of other countries and regions sharply sold off as the virus spread globally. For the quarter, Japanese equities produce the best relative performance, reflecting the lack of COVID-19 spread in the country, which allowed policymakers to avoid the stringent social-distancing policies employed in other countries. U.S. equities modestly outperformed, benefitting from their relative safe-haven status as well as being on the tail end of the virus's global wave. U.K. and European equities underperformed the most, followed by equity markets in the Pacific (ex Japan) region, which declined significantly in the final weeks of the quarter.
Sector leadership was consistently defensive throughout the quarter, with healthcare, consumer staples, and technology shares becoming relative beneficiaries of the impacts of the spreading virus. Utilities and telecom, traditionally defensive sectors, were strong relative performers. The deteriorating economic outlook, coupled with the breakout of the oil price war between Saudi Arabia and Russia, caused energy prices and energy stocks to plummet. As expected with the essential shutdown of many economies, cyclical sectors such as financials, industrials and energy all lagged significantly. Also notable was the collapse of REITs, as occupancy and rents are likely to remain challenged in the coming months.
Factor performance, as expected, was consistently defensive globally. Based on MSCI factor indexes, price momentum, which is currently heavily weighted regionally in the United States and the defensive sectors, was the strongest factor. Growth, quality and low-volatility factors were also strong outperformers during the quarter. Value factors, which tend to perform best when the economic outlook is improving, underperformed significantly, in-line with the quickly deteriorating growth outlook.
The portfolio outperformed in the first quarter as equity markets experienced historically negative performance. Defensive and lower-volatility stocks, such as health care and consumer staples, provided some security; however, certain other lowvolatility biases, such as being overweight REITs and insurance, felt the full brunt of the sell-off. Each region experienced downward market pressure; however, the portfolio was overweight Japan, which experienced less extreme downward pressure than other regions. While the overall low-volatility bias of the portfolio contributed significantly to outperformance, stock selection, particularly in intersection holdings, demonstrated the effectiveness of the research process. Allocations towards fundamental buys as well as quantitative buys outperformed.
The most significant detractor from relative performance was the portfolio's underweight allocation to technology stocks, which outperformed. Some individual positions also detracted from performance: not owning Amazon, which experienced a surge in demand due to shelter-in-place practices, Microsoft and Apple, which all outperformed. REITs associated with retail and housing, some of which were held in the portfolio, underperformed. Although the portfolio was underweight certain cyclical areas, such as energy, materials and transportation, it did have some exposure to resorts, which also underperformed.
Although defensive biases and MFS’ research process contributed to the outperformance of the portfolio, the broad market sell-off did not spare much of the equity market, apart from some technology and health care stocks, as well as Amazon. The portfolio manager anticipates markets willremain volatile at least for the near term. Given the market extremes, lack of visibility and shocks that will reshape businesses and consumer behaviour, the portfolio manager believes that their process is wellpositioned to respond to ongoing dynamics.
Looking ahead, the supply and demand disruptions caused by the coronavirus have derailed the global economic and earnings acceleration that was emerging at the end of 2019. While similar health panics such as SARS and Zika did not have lasting economic impacts, a number of factors, including quarantines, border closures and social distancing, make this time different. As noted above, the response from policymakers around the globe has been significant and is still evolving. However, a lot of uncertainty remains around the duration of the crisis, the damage to economies, as well the timing and path of the eventual recovery. A number of other issues could potentially impact markets throughout the rest of 2020, including the fallout from the collapse in energy prices, U.S. elections and trade matters.
Using historical comparisons and technical indicators as a guide, it does appear that many of the risks noted above have been priced into markets. However, market bottoms are typically a volatile process, and individual stocks tend to bottom before both indexes and earnings.
The portfolio manager believes the quality metrics of their quantitative models, coupled with MFS’ unique, quality-focused fundamental research input, may benefit relative performance in the current challenging economic environment. The portfolio’s construction, which seeks to minimize risk by avoiding the most volatile stocks in the global universe, may benefit investors by providing broader diversification than passive alternatives. Using long-term average sector and region weights to diversify also aims to reduce absolute downside risk.
|Compound returns %1||Since inception2||3 year||1 year||Q1|
|Sun Life MFS Low Volatility Global Equity Fund - Series A||5.0||3.5||-4.4||-9.8|
|Sun Life MFS Low Volatility Global Equity Fund - Series F||6.1||4.7||-3.3||-9.6|
|MSCI AC World C$||8.0||3.7||-5.4||-13.7|
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 February 11, 2016 to December 31, 2016.
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.
This commentary may contain forward-looking statements about the economy and markets, their future performance, strategies or prospects or events and are subject to uncertainties that could cause actual results to differ materially from those expressed or implied in such statements. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.
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.