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Sun Life MFS Global Growth Fund

Fund commentary | Q2 2020

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Market overview

The equity market rally that began in late March continued into the second quarter, sending the MSCI All Country World Index up 19.2% during the second quarter alone. Growth stocks outpaced value as the MSCI All Country World Growth index returned 25.1% in the second quarter versus 12.7% for the MSCI All Country World Value Index, the widest differential in performance between the two in the twenty-year history of the indexes.

Portfolio review

This environment proved challenging for the Fund’s conservative GARP growth style that seeks above-average durable growth compounders at reasonable valuations. The portfolio manager’s investment style has historically performed best during difficult market environments (e.g., down markets or periods of heightened volatility) but has lagged during especially strong, absolute return environments like the second quarter. The Fund is underexposed to the fairly narrow group of higher-valued growth names that have been leading the market higher, which makes it difficult to keep up with the index. These names were surprisingly strong during the quarter, despite the COVID-19-driven shutdown in economic activity. In particular, an underweight to Apple and not holding Amazon had the largest negative impact on the Fund’s relative performance this quarter. The team is comfortable not owning Amazon, which traded at a P/E ratio of 138x trailing 12-month earnings and being underweight to this higher-valued group of stocks, both for style reasons and because growth in general appears expensive today compared to history after many years of expanding relative valuations. The Fund’s underexposure to growth/high valuation has widened recently, and the team wants to keep the underweight from continuously expanding and potentially overwhelming portfolio performance. In line with this, MFS increased exposure to key secular growth trends (e.g., cloud, ecommerce, digital payments, digital advertising), while staying true to its GARP style.

The team added a new position in Tencent (messaging and gaming). It increased its position in Alibaba (ecommerce/payments and cloud services), Microsoft (cloud services and software), Comcast (high-speed broadband), Electronic Arts (online gaming) and Naver (search engine). The Fund’s exposure to other stocks that have benefited from similar growth trends include Alphabet (digital advertising and cloud platform), Baidu (China's dominant search engine), Accenture and Cognizant (global IT consulting), Visa and Mastercard (digital payments) and Fiserv and Fidelity National Information Services (digital payments). The portfolio manager is optimistic about the long-term prospects for these companies, and while some of them were good performers this year, their contribution to portfolio results was not enough to offset the Fund’s underweight to the previously mentioned benchmark names.

The types of well-positioned and reasonably valued durable growth compounders the Fund focuses on generally delivered positive performance results during the quarter but lagged the overall index. Apparel maker Adidas shares rebounded in the second quarter after reporting signs of a sales recovery in China, its largest market. The portfolio manager believes the shares are attractively valued relative to their long-term growth prospects, which could benefit from the trend towards athleisure and the fact that it operates in a moated duopoly with Nike.

MFS invests with a long-term horizon, assessing investment opportunities in the context of a 5 to 10-year (or more) time horizon. While thinking long term, the team continued to trade slightly more than normal in the quarter in order to try to take advantage of market dislocations as dispersions remained elevated. The Fund started a new position in Boston Scientific, which had been pressured by a decline in acute surgical procedures. MFS purchased PRA Health Sciences and ICON PLC. Both are contract research organizations that run clinical drug trials on behalf of biotech and pharma companies that often lack the scale to do it themselves.

The Fund made several other trims on recent outperformance and higher valuation, including Ecolab, Mettler-Toledo, Nordson, Abbott Labs, and Kweichow Moutai. After a huge recovery in Marriott the portfolio manager sold the rest of the position in late May on the belief that travel-related climate change concerns will only increase over time.
In summary, the Fund’s commitment to its investment process and philosophy remains unchanged. MFS maintains its long-term investment focus on owning durable growth compounders where it has high confidence in the sustainability of profits over the long term.

Significant impacts on performance

Naver
An overweight position in the Korean internet search engine and online computer games provider contributed to performance. First-quarter operating profit results were ahead of estimates, driven by better-than-expected advertising growth.

Equifax Inc.
An overweight position in the consumer credit reporting agency supported performance. Stock price recovered after the company reported revenues that exceeded expectations.

Tencent Holdings Limited
The timing of the Fund’s ownership in shares of the internet services and advertising company contributed to performance. The stock advanced on better-than-expected first-quarter earnings results, driven by strong revenue from online games and online advertising.

Apple Inc.
An underweight position detracted from returns. Stock price increased after the company reported higher-than-expected sales and earnings.

Amazon.com
Not holding shares weighed on results. Stock advanced, benefiting from strong e-commerce volumes as consumers adjusted to lockdowns in response to the COVID-19 pandemic.

Becton Dickinson and Co.
Owning shares of this medical technology company hindered performance. The company posted quarterly earnings per share results that were weaker-than-expected due to declines in revenue, as many elective procedures were delayed due to COVID-19 shutdowns.

Fund performance

Compound returns %1 Since inception2 7 year 5 year 3 year 1 year Q2
Sun Life MFS Global Growth Fund - Series A 12.1 13.2 10.9 12.0 10.9 14.1
Sun Life MFS Global Growth Fund - Series F 13.3 14.4 12.2 13.3 12.2 14.4
MSCI All-Country World Index 11.0 11.8 8.3 7.8 6.4 14.1

1Returns for periods longer than one year are annualized. Data as of June 30, 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 SLGI Asset Management 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 SLGI Asset Management 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.

© SLGI Asset Management Inc., 2020. SLGI Asset Management Inc. and MFS Investment Management Canada Limited are members of the Sun Life group of companies.