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Sun Life MFS International Opportunities Fund

Fund commentary | Q2 2020

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Market overview

Non-U.S. equity markets staged a solid recovery from the lows seen in Q1. The sharp reversal in the second quarter was led by lower-quality and economically sensitive areas and stocks that had been expensive at the beginning of the period. Equity markets were driven mainly by massive global monetary and fiscal stimulus, along with hopes of a vaccine for the COVID-19 pandemic and early data points on recovery.

The four biggest central banks have expanded their balance sheets by almost 30% of GDP compared to 7% during the global financial crisis (GFC). The U.S.’s $3 trillion fiscal stimulus package is the largest in history and accounts for 15% of GDP. The U.K. Government announced a £330bn rescue package to save the economy. Germany abandoned its cautious approach to spending by announcing a €130bn fiscal stimulus package. What is different now versus the GFC is that this crisis is truly global and borne out of nature, and not due to leverage or irrational exuberance. That means there is probably no 'magic bullet' to solve this crisis and its length may depend on the arrival of a vaccine.

Portfolio positioning

As of June 30, 2020, the Fund was overweight consumer staples and materials. MFS feels many of the consumer staples companies it owns have pricing power and derive a significant portion of their revenues from underpenetrated emerging market countries. Within materials, the overweight is in the chemicals industry. The Fund owns two industrial gas producers: Linde and Air Liquide. These high-quality cyclicals have generated returns above their cost of capital and significant free cash flow over a full cycle, driven in part by long-term contracts that have built-in price escalations. These companies may experience increased volumes for oxygen and respiratory apparatus in their health care related operations during the pandemic.

The Fund was most underweight consumer discretionary and communication services. In consumer discretionary, the underweight was focused on the internet and direct marketing retail sub-industry. The portfolio manager has consolidated its positions into Tencent, preferring the strategic positioning and longer runway for Cloud payments and advertising. The underweight to communication services is primarily the result of not owning any telecommunications companies that are facing increased regulatory constraints on returns and increased competition.

Significant trades during Q2 include:

  • Added to existing positions in drug makers Novartis and Novo Nordisk. Novartis appeared attractively valued relative to European pharmaceutical peers, and Novo Nordisk has several drugs in late stage development that appear promising.
  • Continued to build new positions in Tencent and Dassault Systèmes.
  • Trimmed Taiwan Semiconductor, a large position that looked expensive relative to the overall market.
  • Sold out of the Alibaba position, as a swap into Tencent.
  • Sold out of the position in Intertek on concerns over valuation long-term growth prospects.

Market outlook

European shares have rebounded as economies across the continent begin the slow process of reopening. Significant monetary intervention from the European Central Bank (ECB) via its Pandemic Emergency Purchase Program, recently increased in scope to €1.35 trillion. Additionally, heavy emergency fiscal outlays across the continent and prospects for a potential first step toward fiscal union, have helped soothe investors' nerves.

Along with the rest of the developed world, U.K. policymakers acted aggressively to offset the economic damage caused by the COVID-19 pandemic using fiscal and monetary tools. As a result of the coronavirus lockdown, the economy is forecast to contract around 7.5% in 2020. Overhanging the U.K. economy is a lack of progress with the European Union toward a post-Brexit trading arrangement. The U.K. has refused to extend the transition period in order to negotiate a comprehensive agreement.

With relatively fewer monetary policy tools at the Bank of Japan's (BOJ) disposal, Japan has aggressively used fiscal policy in an attempt to offset the economic impacts of COVID-19, pledging government expenditures totaling the equivalent of US$2.2 trillion. The BOJ has pledged to maintain its ultra-low rate policy at least through fiscal year 2022, increased purchases of exchange-traded funds and instituted corporate support measures. Foreign demand for Japanese exports will be critical to their economic recovery. The collapse in global demand early in Q2 due to COVID-19 lockdowns will be a difficult hurdle in the near-term, however the hope is that the tremendous amounts of fiscal stimulus being distributed around the globe will be enough to revive demand worldwide, not just domestically.

Recent pandemic-related figures from parts of Asia, including China, South Korea and Vietnam, show that
COVID-19 outbreaks appear under control for now. However, new cases are on the rise in India, Latin America and parts of Africa. As nations with declines in new cases begin to reopen, recoveries are taking place in Asia and parts of Emerging Europe. Although there has been a recent rise in the services Purchasing Managers' Indices among the Brazilian, Russian, Indian, and Chinese (BRIC) economies, the team feels services are likely to lag manufacturing, as manufacturing companies may be less impacted by continued social distancing measures than their service-oriented counterparts.

Significant impacts on performance

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.

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

Alibaba Group Holding
Holding in shares of the online and mobile commerce company contributed to returns after the company reported strong quarterly results.

AIA Group.
An overweight position in the insurance company held back results as both volumes and margins deteriorated more than expected.

The Fund’s position in the pharmaceutical company weakened relative returns after the company reported weaker-than-expected results, driven by lower sales foreign exchange headwinds.

Roche Holding.
An overweight position in the Swiss diagnostics and pharmaceutical company detracted from performance. Despite delivering strong sales results for the quarter, its share price lagged the broader market.

Fund performance

Compound returns %1 Since inception2 7 year 5 year 3 year 1 year Q2
Sun Life MFS International Opportunities Fund - Series A 7,7 8,8 7,2 6,7 3,7 10,7
Sun Life MFS International Opportunities Fund - Series F 8,9 10,1 8,4 7,9 5,0 11,1
MSCI EAFE 7,2 7,8 3,8 2,4 -1,1 9,9

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.

Effective June 1, 2020, Sun Life MFS International Growth Fund was renamed Sun Life MFS International Opportunities Fund.


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.