Sun Life MFS Global Growth Fund

Market Review

After a strong start in early 2023, global equity markets fluctuated in Q1, driven by shifting interest rate expectations. The market appreciation YTD has been concentrated in the largest stocks. Long-duration, growth-oriented stocks benefited from lower bond yields, while high beta, lower-quality stocks rose on hopes of central bank dovishness on the horizon.  The liquidity crisis in the banking industry, which is leading to tighter credit conditions for consumers and companies alike, could accelerate the pathway to a recession. As inflation remains elevated, central banks may try to balance financial stability with inflation fight.

The U.S. market, as measured by the S&P 500 Index, finished higher in Q1 2023. After starting the year off strong on hopes that rising interest rates were near an end, the market turned negative in February as stronger employment and inflation data showed that the Federal Reserve would likely need to continue increasing interest rates. While the market ended higher in March, worries about the failure of two regional banks, what impact, if any, that would have on other financial companies and the odds of a possible recession in 2023 initially pressured the market. Economic growth (GDP) in the US expanded during Q4 2022, increasing by 2.6%. This was slightly lower than the previous quarter as the economy continued to slow under higher interest rates. For the quarter, growth outperformed value in the large-cap, mid-cap, and small-cap spaces. This was a reversal of 2022 when value outperformed in all three market capitalization segments. During Q1, technology, communication services and consumer discretionary were the best-performing sectors and financials, energy and health care the worst.

The Fund saw contributions of CAD $46.7 MM and withdrawals of CAD $12 MM during the quarter. The Fund also saw a positive increase in asset of $84 MM driven by market value appreciation, ending the quarter with an AUM of CAD $1.1 B from CAD $968.7 MM from the previous quarter.

The Sun Life MFS Global Growth Fund outperformed its benchmark, MSCI ACW Index for the quarter.

Significant Transactions

Adds/Buys

• Taiwan Semiconductor Manufacturing Co Ltd – Information Technology
• Agilent Technologies Inc – Health Care
• Xcel Energy Inc – Utilities
• Schneider Electric SE - Industrials
• Analog Devices Inc – Information Technology

Trims/Sells

• Alibaba Group Holding Ltd – Consumer Discretionary
• Fidelity National Information Services Inc – Information Technology
• Cognizant Technology Solutions – Information Technology
• Nike Inc – Consumer Discretionary
• Flutter Entertainment - Consumer Discretionary

Fund Positioning

After brutal losses in 2022, stocks surged in the first quarter. Although the broad market trended up for much of the quarter, the bank runs/failures in March led to another leg-up from a recessionary flight-to-safety move from banks to tech. Technology shares rallied on better-than-expected earnings results and demand, effective cost-cutting strategies, and enthusiasm for artificial intelligence. Similar to the stay-at-home environment of 2020, tech and tech-like stocks were among the best performers in the market and had an outsized impact on index returns. Already expensive mega-cap tech appeared to get more expensive as investors flocked toward speculative growth with the promise of big profits down the road. The MSCI ACWI Growth's gains were almost entirely due to multiple rerating and the index appears expensive again.

As always, the Fund invests with a long-time horizon and assess investment opportunities in the context of a 5-to 10-plus year time horizon. The Fund eliminated three names from the portfolio and used the proceeds to add to existing holdings. It exited banking and payments processing conglomerate Fidelity National on concerns about its growth trajectory and that the original thesis for owning the name was no longer valid. The team also felt the company’s announced sale of its underperforming merchant payments technology Worldpay, just three and a half years after acquiring the business in a $43 billion deal, reflected poorly on management and their capital allocation practices. The team also decided to exit Cognizant Technology Solutions on thesis change and growth concerns. Over the past few years, growth slowed after an activist pressured the business to grow margins and return more capital to shareholders and the team is skeptical that management’s recent change in strategy will return the business to its prior growth targets. A recent CEO transition also contributed to the sell decision. The team sold out of Flutter Entertainment, which has undergone significant acquisitions in recent years. Trims during the quarter were mostly focused on reducing exposure to outperformers whose valuations had expanded toward the upper end of the valuation range, including Thermo Fisher, Equifax and Nike, as well as trims to Reckitt and Alibaba to align position sizes with the team’s level of  conviction.

On the buy side, the team continued to build a new position in in electrification, energy efficiency and automation products and services provider Schneider. At a high level, the team believes the increasing shift toward electricity usage globally over the next 30+ years could drive higher annual organic revenue growth for Schneider versus the past. They generally leaned into names on weakness at good relative valuations where they believed position sizes should be larger including electric utility Xcel, global IT consultant Accenture, infection prevention specialist Steris, and consumer staples name Church & Dwight. The team also swapped some basis points out of more expensive Texas Instruments into less expensive Analog Devices whose valuation discount to the market appears attractive relative to its typical premium multiple.

At market extremes, the worst action would be to buy the very expensive stocks that the team internationally is underweight or does not own at all. The Fund’s strategy is well positioned for the long-term because valuation will eventually matter again. The portfolio holds steadfast growth compounders where valuation is now at a larger-than-normal discount to benchmarks given the extreme valuation of mega-cap tech companies. In addition, the past year’s volatility provided many good opportunities to upgrade the quality and growth of the portfolio in a manner that is in keeping with the Fund’s GARP-y style.

Fund performance

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.