Portfolio outlook and positioning
The markets staged a strong rebound from the March lows and delivered the strongest quarter in over 20 years. This was driven by stimulus and improving economic and COVID-19 data. At the end of the quarter, the S&P 500 was less than 10% from its previous peak. However, with COVID-19 cases increasing in the U.S., the market rally eased as the quarter ended.
As of June 30, 2020, the Fund was most overweight IT services, professional services companies, entertainment and select software firms. Within IT services, while a bit more cautious over the short term, the Fund continues to favor companies with exposure to digital payments, which could benefit from the trend of cash-to-card conversion. Within the space, MFS continues to favor global payment service providers Visa and Mastercard as well as Global Payments, which provides payment processing solutions and software.
In professional services, the largest overweights include data providers, such as analytics firm Verisk, which services customers in insurance, energy markets and financial services, data analytics firm Clarivate, credit-reporting agency TransUnion, and global information provider IHS Markit. The team tends to favor this area of the sector due to the capital-light nature of the business and the high barriers to entry provided by proprietary data. Top holdings in software include Adobe, Intuit and Salesforce.com.
The Fund was most underweight technology hardware, storage & peripherals, specialty retail, semiconductors & semiconductor equipment as well as health care providers & services and biotechnology. Within information technology, the Fund is underweight areas of the sector that require higher capital intensity and that have traditionally been more cyclically exposed to global growth.
This includes industries such as hardware, storage & peripherals, with a meaningful underweight to Apple and semiconductors (no exposure to Broadcom and QUALCOMM). The portfolio manager has become more favorable on the long-term outlook for semiconductors since the onset of the pandemic, as they feel some companies in the space may benefit from increased spending in cloud and other areas of technology, potentially lessening the historic cyclicality.
The underweight to health care is due to an underweight to health care providers & services and biotechnology companies. Health care providers & services and biotechnology are areas of the market where MFS now has a more favorable long-term outlook as governments around the world may increase spending on health care in coming years, including vaccines, testing equipment, and hospitals in the coming years to be better prepared in the event of another pandemic.
Significant transactions over the period included:
- Increased positions in semiconductor manufacturer Nvidia and semiconductor design software company Cadence Design Systems. The Fund established new positions in Lam Research Corp, ASML Holding NV and Applied Materials. MFS believes the product and service offering of these companies positions them for a potential increase in demand in the future.
- Added to positions in Merck and Vertex, and established positions in biopharmaceutical companies Seattle Genetics and Alnylam Pharmaceuticals.
- Reduced positions in medical device companies Medtronic and Thermo Fisher. Added to Illumina and established a position in Steris.
- Trimmed positions in payment processing software companies Fiserv and Global Payments to account for greater risks associated with exposure to more small- and medium-sized businesses.
Significant impacts on performance