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Sun Life MFS International Value Fund

Fund commentary | Q3 2020

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Market review

Global equity markets posted a second consecutive quarter of positive performance in the third quarter of 2020, continuing a surprisingly strong rebound off the market lows of late March. Despite the continuing spread of the coronavirus and an uncertain outlook for the economic recovery, investors favored cyclical areas of the market, with leadership during the third quarter fueled by materials, industrials and consumer discretionary stocks. Energy was the only sector to show a significant decline as the weak global economy and disruption in air travel dragged oil prices down to the US$40 per barrel level. The financial services sector declined modestly as investors grappled with the pressures of low interest rates and rising credit costs for the banking system.

Portfolio review

The Fund outperformed its benchmark, largely fueled by an overweight position and favorable stock selection in technology, the avoidance of most financial services and energy stocks and strong stock selection in consumer staples. The Fund’s underweight exposure to consumer discretionary, specifically avoiding the auto stocks, detracted from relative returns.

While equity valuations suggest a healthy economic recovery in the coming year, MFS is concerned about ever-growing risks to the downside. Before the pandemic, there were concerns about excessive levels of debt on the balance sheets of central banks and governments around the world. Those debt levels have increased as governments unleashed massive fiscal spending programs and central banks initiated efforts to avoid a calamitous depression caused by the COVID-19 pandemic.

MFS has a cautious outlook, and the portfolio remains defensively positioned. The Fund made few trades during the third quarter, trimming some outperformers and adding modestly to a few high-quality cyclical names.

On a year-to-date basis, the Fund has trimmed a number of high-quality stocks that outperformed, including: food product manufacturers Nestlé and Kerry Group; flavor and fragrance makers, Givaudan and Symrise; German residential real estate companies, Vonovia and Deutsche Wohnen, and; technology leaders Cadence Design Systems, Nomura Research Institute and Obic. The Fund reduced companies that it continues to favor long-term but have taken on additional debt and risks related to acquisitions, including Infineon Technology and Texas Instruments.

MFS added to its position some of the Fund’s cyclical holdings that underperformed in the selloff, including Samsung Electronics and SMC, a Japanese manufacturer of pneumatic equipment used in factory automation, as well as mining equipment maker Epiroc and elevator manufacturer and service company Schindler. The Fund added to Google parent Alphabet, based on confidence in the company's dominant position in market niches that will grow in importance over the next decade. An addition was also made to the Fund’s holdings in eyeglass frames and lens maker EssilorLuxottica.

The Fund added to its position in Knorr-Bremse, a German maker of braking systems for trains and commercial vehicles, which MFS believes is well-positioned to benefit from the safety and efficiency enhancements as the world transitions to electric vehicles.

The Fund is overweight to consumer staples, where 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 strategy is overweight to information technology, owning computer software, systems and semiconductor companies considered dominant players in industry niches with competitive advantages MFS believes are supported by intellectual property. With an overweight in industrials, the Fund owns a number of businesses that are dominant leaders in their market niches and emphasize innovation to meet future customer needs.

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. The Fund has avoided most energy companies, which it believes will produce subpar 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 MFS believes there are fewer sustainable business models. MFS continues to avoid utilities, which they view as highly regulated, lower return businesses.

Significant impacts on performance

Taiwan Semiconductor
A position in the semiconductor manufacturer contributed to relative returns. The company reported strong second-quarter net income and provided third-quarter guidance that exceeded expectations.

Givaudan 
The portfolio's position in the fragrance and flavour products manufacturer contributed to relative performance. The share price benefited from sales growth, a better-than-expected margin outlook and a new plan to expand into new markets, including beauty cosmetics, nutrition and functional ingredients.

Ito En
Holdings of the tea and beverages producer aided relative results as shares rose after the company reported better-than-expected quarterly sales results.

Siemens
Not owning shares of the diversified electrical engineering company detracted from relative performance. Stock advanced on better-than-expected third-quarter earnings, driven by strong sales results and solid performance in the Digital Industries division.

NTT DoCoMo.
Not holding shares of the Japanese mobile telecommunications provider held back relative returns. At the end of September, the fixed-line telephony company, NTT, announced that it would privatize its wireless carrier subsidiary, NTT DoCoMo, with a 40% higher price.

Daimler
Not owning shares of the automotive manufacturer hindered relative returns after the company reported impressive operating results driven by strong Mercedes Benz sales, cost controls supported by temporary labour reductions and robust growth in car deliveries in China.

Fund performance

Compound returns %1 Since inception2 10 year 5 year 3 year 1 year Q3
Sun Life MFS International Value Fund - Series A

11.2

11.2

9.2

9.7

15.4

6.4

Sun Life MFS International Value Fund - Series F

12.4

12.4

10.4

10.9

16.8

6.7

MSCI EAFE Index

8.8

7.4

5.2

2.8

1.4

2.8

¹Returns for periods longer than one year are annualized. Data as of September 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.

Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc.

SLGI Asset Management Inc. is the investment manager of the Sun Life Mutual Funds, Sun Life Granite Managed Solutions and Sun Life Private Investment Pools.

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