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