Sun Life MFS Global Growth Fund

Fund commentary | Q3 2022

Opinions and commentary provided by MFS Investment Management Canada Limited.

Market Review

Following a rebound in the earlier part of Q3, global equity markets resumed their decline as most central banks reinforced their determination to fight inflation despite growing recession risks. While there have been signs of peaking inflation in some markets, global inflation remains elevated, keeping most central banks in rate-hike mode. Equity markets have fallen sharply year to date largely driven by multiple compression particularly in growth-oriented stocks. The risk now is downward earnings revisions as companies are challenged by falling demand and higher input costs.

The U.S. market, as measured by the S&P 500 Index, ended lower in Q3 2022. This was a continuation of the selloff during Q2 and was driven by several concerns in the market, including the ongoing war in Ukraine, high inflation and whether rising interest rates will tip the economy into a recession. Economic growth in the United States contracted during Q2 2022, posting a GDP of -0.6%. This is the second quarter of negative growth and meets the informal definition of a recession. The Federal Reserve has said that raising interest rates is necessary to lower four-decade high inflation, even though a recession is possible. For the quarter, growth outperformed value in the large-, mid and small-cap spaces. This is a reversal from the two previous quarters this year and has been driven mostly by the market’s short but strong move higher in July. During Q3, consumer discretionary, energy and financials were the best performing sectors, and communication services, real estate and materials were the worst performing.

The Sun Life MFS Global Growth Fund underperformed its benchmark, MSCI ACW Index for the quarter. After delivering strong excess returns during the first half of the year, the portfolio gave back some relative ground in the third quarter as investors reverted to the pandemic playbook as momentum once again shifted toward a handful of tech-related names perceived to be long-term winners and largely ignored valuation. Tesla and Amazon, stocks the team considered expensive and not held within the Fund, delivered positive returns of 18% and 6% respectively, outpacing the benchmark index's negative return. While the team certainly recognizes that these are good businesses with potential for future growth, they believe valuations are still too far above the range the team considers reasonable for the Fund’s GARP-y investment style. In contrast with the prior quarter (and long-term trends!), the more expensive stocks were in leadership in the third quarter. The portfolio's valuation discipline has consistently kept the Fund away from expensive stocks. While the team believes the portfolio has the potential to perform well in a falling equity market given its strong valuation discipline and focus on quality and earnings durability, it is unusual and unsustainable to see expensive stocks perform best during this type of environment.

  • Stock selection within the Consumer Discretionary sector hurt relative performance.
  • Stock selection and an overweight position in the Communication Services sector detracted from relative performance.
  • Notable individual detractors included Alibaba Group Holding Ltd., Adidas Ag, Naver Corp, Church & Dwight Co Inc., and Tecent Holdings Limited
    • Alibaba – The portfolio's overweight position in online and mobile commerce company Alibaba Group Holding (China) hindered relative returns. The stock price declined during the quarter as the company reported lower-than-expected customer management and commission revenues, mainly due to a resurgence of COVID-19 in several key regions and weaker-than-expected China consumption.
    • Adidas Ag – An overweight position in sportswear and sports equipment manufacturer Adidas (Germany) held back relative performance as management reported a significant decline in sales in China, due to both supply chain disruptions and COVID restrictions. Additionally, investor concerns around weaker consumer spending appeared to have weighed on the stock.
    • Naver Corp – An overweight position in internet search engine and online computer games provider Naver (South Korea) held back relative returns. The stock price came under pressure, driven by weaker-than-expected operating profit results, owing to margin pressure and higher labor and marketing costs. Management also reported a weak earnings outlook, which further weighed on the stock.

  • Stock selection within the Financials and Industrials sectors contributed to relative performance.
  • Currency effect within Financials, Health Care, Information Technology contributed to relative performance.
  • Notable individual contributors included Ross Stores Inc., Kose Corp, Fiserv Inc., HDFC Bank, Charles Schwab Corporation
    • Ross Stores Inc. – An overweight position in discount store retailer Ross Stores (United States) contributed to relative performance. The stock price appreciated during the quarter as the company posted better-than-expected financial results, driven by lower selling, general and administrative expenses.
    • Charles Schwab Corporation – The portfolio's overweight position in financial services provider Charles Schwab (United States) helped relative performance. The stock price rose over the quarter as the company reported increased net interest margins and announced that it would lower its tier 1 capital requirement levels, potentially freeing up capital for other uses such as share buybacks.
    • Kose Corp – The portfolio's overweight position in cosmetic products manufacturer Kose (Japan) boosted relative returns. The company reported operating profit results ahead of forecasts, mainly due to a sharp decline in its selling, general and administrative expense ratio, driven by cost savings and costs postponed to the latter part of fiscal year 2022.

Portfolio Changes

In keeping with the Fund’s long-term and somewhat contrarian approach, the trades this quarter involve incrementally going against the market. While all trades are bottom-up driven, in several cases the team upgraded the growth of the portfolio without significantly changing the valuation profile. In other words, they trimmed a slower growth name while adding to a higher growth one at a similar valuation (though not necessarily in the same industry). For example, the team sold out of staples name Colgate and trimmed health insurer Cigna, broadband provider Charter and Chinese ecommerce giant Alibaba. Other significant trims during the quarter included Dollarama, American Tower Corp and Starbucks. On the add side, the team shifted into higher growth names including software firm Adobe, auto supplier Aptiv, health care sterilization leader Steris, asset manager Schwab and spices and Swiss specialty chemical company Sika.

The team started a new position Gartner, the technology research and consulting firm that had been on the watch list for some time. While not cheap on near term estimates, they believe the valuation is within the range they consider appropriate for our GARP-y style. From a growth perspective, the long-term fundamental thesis is driven by Gartner's competitive positioning and research insights as the "gold standard" for chief technology officers in making critical and expensive tech-related decisions for their companies in a fast-changing landscape. In addition, their seat-based licensing model offers a strong value proposition and return on investment for their customers relative to a full-service consultant experience. Competitively, Gartner is 10 times the size of the number two player and is widening its lead through investing more in sales and research. The team believes Gartner will sustain revenue growth compounding potential, fueled by IT industry spending growth, increasing tech complexity requiring more advice, a significantly underpenetrated addressable market, and an ability to capture share faster than the competition. The Fund also initiated a position in Thomson Reuters Corp during the quarter.

Fund Positioning

The team remains purely bottom-up investors, constructing the portfolio stock by stock to try to identify individual businesses that meet the quality and growth hurdles and appear attractively valued on a relative basis with a long-term view. Despite the bottom-up focus, the team continues to have a lot of internal conversations about bigger picture macro and equity market trends amid the recent downside volatility. Regarding multiple compression in the market sell-off, the team still believes that the fastest growth tier of growth stocks generally still appears too expensive for the Fund’s conservative growth style as valuations have gone from very expensive to just expensive. To put that in context, with regard to U.S. stocks in the Fund’s investable universe, the most expensive quintile of stocks in the Russell 1000 Growth index currently trade at more than a 500% premium to the overall S&P 500, which is well above the team’s typical limit. While equities have sold off considerably this year and multiples have contracted, earnings estimates have remained surprisingly resilient across the market. Consensus estimates for corporate earnings growth over the next twelve months are still well above long-term averages, which in our opinion is overly optimistic. On the possibility of continuing high inflation, the team believes that the Fund’s bias towards high-quality franchises naturally tilts the portfolio towards companies with pricing power and high margins, and leaves the Fund relatively well positioned versus the index. Said differently, companies with wide competitive moats and high margin profiles tend to have lower expenses as a percentage of sales so are better able to manage inflating costs than lower-quality companies with the opposite margin profile.

During the quarter, the team trimmed slower growth names while adding to a higher growth ones at a similar valuation. The overweight sectors in Q3 relative to the benchmark remained similar to the previous quarter. However, the Fund made incremental changes to shift exposure from the Consumer Discretionary and Consumer Staple sectors to the Information Technology and Health Care sectors. The Fund’s exposure to Information Technology increased from 25.8% in Q2 to 27.5% in Q3. Health Care also rose marginally from 13.7% to 14.1%. Consumer Staples and Consumer Discretionary lowered from 11.2% to 10.2% and 14.1% to 12.7% respectively. From the underweight sectors, the Fund lowered Real Estate and increased Financials by trimming American Tower Corp and adding to Charles Schwab Corp. The Fund’s exposure to Real Estate declined from 2.1% in Q2 to 1.3% in Q3. While Financials remainded the most underweight sector, it became less underweight relative to the benchmark where exposure increased from 7.2% in Q2 to 8.9% in Q3.

Keep in mind that the team rarely makes drastic changes to the Fund’s overall composition within a short period of time. All changes are made gradually and strategically over the long term. They believe in making incremental changes that will likely have a positive impact to the Fund when opportunities present themselves. The team’s commitment to their investment process and philosophy remains unchanged always. They maintain their long-term investment horizon and focus on owning durable growth compounders where there’s high confidence in the sustainability of profits over the long term. The Fund remains fully invested in the equity markets as the team believes it is challenging to predict equity market returns over the short term.

Fund performance

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

10.2

11.2

8.10

4.1

-15.3

-2.55

Sun Life MFS Global Growth Fund - Series F

11.4

12.5

9.35

5.4

-14.3

-2.27

MSCI All-Country World Index

9.7

10.9

6.4

5.0

-13.9

-0.74

¹Returns for periods longer than one year are annualized. Data as of September 30, 2022.

²Partial calendar year. Returns are for the period from the fund’s inception date of September 30, 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.