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Sun Life MFS International Value Fund

Fund commentary | Q2 2020

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Market review

During the second quarter, international markets rallied off the lows of late March in response to the massive monetary and fiscal spending programs announced by governments and central banks around the world. Materials and industrial stocks, with their pro-cyclical characteristics, along with health care stocks that may benefit from changes brought on by the pandemic, led the market gains. Energy was the worst-performing sector, as producers face excess supply, lower demand and the challenges of a world transitioning from carbon-based energy to renewable sources of energy. The more defensive areas, including consumer staples and communication services, lagged the broader market returns, as did real estate.

In technology, the crisis has hastened the transition to a digital economy, with changes that were expected to occur over the next several years happening instead over a few months. The shift to cloud computing, has accelerated, enabling work, education, shopping and leisure activities from home. Cloud infrastructure allows companies to scale up to meet demand or scale down to cut expenses while lowering capital expenditures.

As a key enabler of the connected world, semiconductors are well-positioned to potentially benefit from changes ushered in by the pandemic. While demand for semis, particularly from auto and industrial customers may weaken in the near term, long-term demand could be robust from a number of sources, including cloud infrastructure and a host of other applications such as factory automation, artificial intelligence, electric/autonomous vehicles and the Internet of things.

Looking beyond technology, the portfolio remains conservatively positioned. The Fund is overweight consumer staples. MFS favors the brand name strength, global distribution networks, fortress balance sheets and the ability to adapt to the digital environment across a number of consumer product, food and alcoholic beverage companies. The Fund is overweight information technology, owning computer software, systems and semiconductor companies that are dominant players in industry niches, with competitive advantages that MFS believes are supported by intellectual property and that play critical roles in long duration industrial supply chains. The Fund is overweight industrials and owns a number of differentiated, high-return businesses.

The Fund’s most significant underweight is to financials, as MFS continues to avoid European and Japanese banks with complicated business models and over-levered balance sheets. MFS has avoided most energy companies, which it believes will produce subpar rates of returns over the long term based on their capital expenditure requirements, commodity-oriented markets and the pressure on fossil fuel emissions. The Fund is underweight consumer discretionary, where there are fewer sustainable business models and continues to avoid utilities, which are viewed as a highly-regulated, lower-return businesses.

Significant trades during the second quarter included:

  • Initiated a position in Germany-based Knorr-Bremse, a leading maker of braking systems and safety-critical sub-systems for rail and commercial vehicles.
  • Increased investment in Hirose Electric, a Japanese manufacturer of high-quality electric connectors used in Wi-Fi equipment, which could benefit from ever-increasing digitalization of the global economy.
  • Reduced holdings of Semiconductor Company Infineon Technologies on risks related to the increased debt level and integration of the Cypress Semiconductor acquisition.
  • Trimmed the Fund’s investment in Swiss flavor and fragrance maker Givaudan, on the heels of strong relative performance and a rising valuation.
  • Reduced the Fund’s position in Swiss food products company Nestle, as it looks to manage the position size after strong relative performance
  • Eliminated the position in Canadian insurance and investment firm Fairfax Holding, on concerns about the company's investments in retail and pro cyclical businesses.

Significant impacts on performance

Cadence Design Systems
The Fund’s position in the integrated circuits and electronic devices developer boosted results. Share prices advanced based on higher-than-expected revenue and earnings per share.
Holding shares of the software company contributed to returns. Stock advanced on solid financial results, driven by strong performance in its business solutions collections segment and favourable outlook. .

HSBC Holdings
Avoiding shares of the banking and financial services company helped relative returns. Share prices lagged as the quarterly financial results came in lower than consensus estimates.

Kao Corp.
Holding shares of the household and industrial products manufacturer dampened performance. Stock underperformed on concerns that a pandemic-related reduction in demand in both the cosmetics and fabrics and homecare divisions may weigh on future earnings potential.

BHP Group
Not owning shares of the mining giant hindered returns. Shares recovered from stock market lows as commodity prices recovered, and the company reported better-than-expected iron ore production.

Not owning shares of the diversified electrical engineering company detracted from performance. The stock price appreciated as management reported solid second-quarter financial results, driven by strong order growth.

Fund performance

Compound returns %1 Since inception2 7 year 5 year 3 year 1 year Q2
Sun Life MFS International Value Fund - Series A 10.8 10.7 8.1 7.0 9.2 10.4
Sun Life MFS International Value Fund - Series F 12.0 12.0 9.4 8.3 10.5 10.7
MSCI EAFE Index 7.3 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.

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.