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Sun Life MFS Low Volatility Global Equity Fund

Fund commentary | Q2 2020

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Market Review

Global equities rebounded sharply in the second quarter, closely tracking a recovery in mobility data, from the re-opening of economies and a positive reversal of many leading economic indicators from the depressed levels of the COVID-19 lockdowns. Global Manufacturing PMI, which provides an indication of the direction of economic trends, improved significantly during the quarter with the June report suggesting a broad-based recovery is emerging. While the V-shaped recovery in equity markets and leading economic indicators is encouraging, a resurgence of COVID-19 cases in a number of geographies in June, and a corresponding flattening in mobility data rattled markets suggesting the path forward may be bumpy as governments may be forced to slow or reverse re-opening policies. Other risks that may impact the speed and strength of the recovery include: ongoing trade frictions, particularly between the U.S. and China, progress on a COVID-19 vaccine and further policy support.

Market leadership during the quarter was lower quality, beta and narrow, and was generally dominated by the "stay at home" stocks, which are heavily influenced by the mega-cap FANG stocks in the U.S. Markets in the European and Pacific regions generally lagged the broad ACWI benchmark, with Germany, the Netherlands and New Zealand notable exceptions. While emerging markets lagged overall, a number of markets across all regions outperformed significantly including South Africa, Brazil and India.

Sector performance was narrow, with the beneficiaries of the economic lockdowns producing the strongest results. Technology, led by technology software and electronic payment companies, was the strongest performing sector. The consumer discretionary sector also outperformed, benefitting from strength in online retail and home improvement stocks. Strength in media companies also drove outperformance in the communication services sector. The massive expansion of government deficits and central balance sheets to offset the economic contraction benefitted gold stocks and resulted in notably strong performance by the materials sector. Cyclical sectors like financials and industrials underperformed during the quarter; however, performance was volatile. Defensive sectors, such as consumer staples and utilities, were persistently weak during the period.

As would be expected, given the sector performance described above, factor performance was similarly narrow and, with a few exceptions, was led by growth and price momentum globally. While profitability factors like ROE outperformed, other quality factors, such as leverage and accruals, were weak. Market cap performance reflected the rotation away from quality, with smaller-cap stocks outperforming larger-caps. Despite an increasingly supportive macro and technical backdrop, value factor performance lagged during the period. With the robust market performance and declining global VIX indices, the low-volatility factor underperformed significantly during the period.

With the MSCI ACWI posting one of its strongest quarterly returns in history, the Sun Life MFS Low Volatility Global Equity Fund had difficulty keeping up. While the Fund’s emphasis on avoiding the most volatile stocks allowed it to produce respectable absolute performance, the beta-driven rally weighed heavily on relative performance. Another factor impacting results was the Fund’s exposure to higher-yielding stocks, which was negatively impacted by the overhang of potential dividend cuts and the low quality nature of the rally. Turning to the research inputs in our investment process, the Fund’s intersection holdings – stocks that are buy-rated from both our fundamental and quantitative research sources – produced uncharacteristically weak performance. Strong results from our quality focused fundamental research team were overwhelmed by the performance of the value component of the quantitative models, which were negatively impacted by the very strong performance of the most expensive stocks in the benchmark. Other factors in the quantitative models had a mixed impact on results.

The outcome of the research input performance described above was reflected in weak stock selection in the technology sector across multiple regions. Stock selection also detracted from results in the Europe (excl.-U.K.) and U.S. health care sectors, the Japan communication services sector and the U.S. consumer discretionary sector. The Fund’s positioning in a number of sectors, including overweight positions in utilities, real estate and consumer staples, coupled with an underweight position in technology, also detracted from results.

Portfolio positioning

The size, breadth and quick implementation of fiscal and monetary policy helped fuel the unprecedented rally off the March lows and made a retest of the market lows unlikely. The re-opening of economies and improving mobility data, coupled with broad based increases in leading economic indicators, suggest a global economic recovery underway. The rotation into higher beta and smaller cap stocks, coupled with the narrowing of credit spreads, suggest the business cycle is transitioning from contraction to the recovery phase, which should result in more cyclical sector and value factor/style leadership. The unprecedented shutting down of most of the global economy in response to COVID-19 makes this downturn unique; however, investors have crowded into a narrow group of mega-cap growth stocks that has driven up the valuation spread between growth and value to the widest level since the tech bubble, which sets up the potential for a powerful reversal.

While most indicators point to an economic recovery and a corresponding rotation into early cycle leadership, the portfolio manager believes the market is unlikely to continue on the current "V" shaped trajectory. Many COVID-19 related risks remain, including a resurgence of the outbreak, a second wave as well as the success and timing of the development/distribution of a vaccine. Additionally ongoing trade frictions, social unrest and the upcoming U.S. elections have the potential to dampen the economic recovery and impact investor confidence.

Significant impacts on performance

Adobe Systems
An overweight position in software company Adobe Systems (United States) aided relative results. The company reported higher-than-expected revenue, driven by higher demand for Document Cloud due to the increase in remote working caused by the COVID-19 pandemic.

Franco-Nevada
An overweight position in Canadian royalty and gold streaming company Franco-Nevada contributed to relative performance. Investors have turned to gold as a safe-haven in recent turbulent times, which has helped the company’s performance.

KDDI
An overweight position in telecommunications company KDDI (Japan) weakened relative performance. Although quarterly results were largely in line with expectations, its stock price came under pressure after the company failed to announce a much-anticipated 150 billion yen share buyback.

Kyocera
The timing of the portfolio's ownership in shares of ceramics and electronics manufacturer Kyocera (Japan) detracted from relative performance. Operating profits missed consensus estimates, owing to costs related to a lawsuit with electronics maker AVX Corp and disappointing automotive sales as a result of the COVID-19 pandemic.

Apple
Not owning shares of computer and personal electronics maker Apple (United States) detracted from relative returns. Apple's stock price increased after reporting higher-than-expected sales and earnings, driven by higher online sales, service revenue and an all-time record in revenue from its App Store.

Fund performance

Compound returns %1 Since inception2 3 year 1 year Q2
Sun Life MFS Low Volatility Global Equity Fund - Series A 6.3 4.9 0.9 6.1
Sun Life MFS Low Volatility Global Equity Fund - Series F 7.5 6.1 2.1 6.4
MSCI AC World C$ 10.8 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 February 11, 2016 to December 31, 2016.

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.