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Sun Life MFS Global Growth Fund

Fund commentary | Q3 2021

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Portfolio review

In the first half of 2021, investors bid stock prices sharply higher as hopes that the worst of the pandemic was behind us, allowing value stocks to lead growth for the first time in recent memory. However, this summer the delta variant sent many investors back to their 2020 playbook as investors rotated out of value into growth stocks during the quarter. Performance dispersion across sectors was more varied than seen in the recent past, with Energy and Utilities leading the market higher while Consumer Discretionary and Real Estate lagged. There was also differentiation of performance among stocks within the same sector, suggesting that the market is finally beginning to pay more attention to individual company fundamentals and valuations.

Typically, an environment that is stock selection-driven where strong fundamentals and attractive valuations may be rewarded would be favorable to the Fund’s style. In many cases, that was true as top positions in outperformers Alphabet, Microsoft, and Accenture along with an avoidance of names like Amazon, Meituan, Paypal, Adobe, and Zoom Video added value. However, the team’s strong stock selection was offset by the Fund’s ownership of underperforming Chinese internet names Alibaba and Tencent who were dragged down by a recent wave of regulatory announcements within the country.

China's proposed regulations of Alibaba and Tencent have pressured the stocks in the near term, the team believes the regulations are mostly reasonable, and in-line with those in many Western nations. It is reasonable to expect increased scrutiny of monopolistic behavior and some form of government regulation of quasi-monopolies like Alibaba and Tencent. The regulatory changes to date appear sensible and reasonable. The market has reacted negatively to the increased regulatory enforcement of the portfolio's Chinese holdings, MFS does not believe the regulations are a business or earnings risk of significant concern for these companies. The sell-off in these names appears to be a market overreaction, since a careful analysis of the regulatory impact shows limited impact on EPS for these companies.

Key Transactions

  • The team initiated a position in B&M European Value Retail, a UK discount retailer that lures customers in with well-known brands and keeps inventory turnover high to create "fresh" merchandise and a treasure hunt experience. B&M's strong growth track record supports the success of their "simple" and "quick" business model. Key barriers to entry include their purchasing scale (B&M is UK's 2nd largest container importer from China) and B&M's efficiency in operating 20 thousand square foot, high sales density boxes in retail parks (e.g., no advertising).
  • The Fund added to its position in Church and Dwight (brands Arm & Hammer, Oxy Clean, Orange Glo, etc) that fits squarely with the growth-at-a reasonable price style of the Fund. The team views Church as one of the Fund’s best positioned staples ideas due to its consistent market share gains, leadership in many attractive niche categories, and solid management execution over the years. The company's smaller size allows incremental M&A to be more material to growth than most of its big competitors.
  • The team added to payments name Fidelity National Information Services (FIS) on weakness. While the technology is changing fast and competitive threats are increasing, it appears that FIS has also been making the appropriate strategic investments and competing well, judging by share trends and incoming new orders. Strong end market growth in merchant acquiring and required digitization investments in banking also provide a comforting tailwind
  • The Fund added to Japanese cosmetics company Kose, which has along with other Asian cosmetic makers struggled due to the pandemic. The team’s view is that, the company appears not to have lost share in either Japan or China, and valuation has become very attractive assuming it gets back to a pre-COVID profit level.
  • The team added to life science tools name Thermo Fisher and Industrial technology conglomerate Fortive at attractive valuations.
  • The team added to its position in Tencent at a more attractive valuation.
  • The fund exited from positions in Bayer and Danone, due to less confidence in their growth prospects.
  • The team also sold out of L’Oreal after a strong run left the shares fully valued.
  • The Fund trimmed other outperformers at more expensive valuations, including life science tools company Agilent Technologies, consumer credit agency Equifax, insurance broker AON and Alphabet. The Alphabet trim also served to manage a large position size down, due to increasing regulatory uncertainty and difficulty predicting duration of growth in search.

The team’s commitment to its investment process and philosophy remains unchanged. MFS maintains its long-term investment horizon and focus on owning durable growth compounders where the team has high confidence in the sustainability of profits over the long term. The team will continue to apply its buy and sell criteria consistently, and its analysis of company fundamentals (and relative valuations) will continue to determine how the portfolio is ultimately positioned. The Fund’s objective is to add value for clients through a series of individual, bottom-up investment decisions, rather than through what MFS believes are difficult-to-predict macroeconomic events. Additionally, the Fund remains fully invested in the equity markets, since MFS believes it is challenging to predict equity market returns over the short term.

Significant impacts on performance

Icon Plc Holding

shares of clinical research organization ICON (Ireland) contributed to performance. The company reported solid second-quarter financial results, driven by strong revenue growth from net business wins.

Alphabet Inc

Shares of technology company Alphabet (United States) benefited performance. The stock price rose as the company posted strong advertising sales, notably in search and YouTube, which drove second-quarter earnings ahead of consensus estimates. The company's cloud business also performed well, driven by better-than-expected growth.

Aon Plc

An overweight position in risk management and human capital consulting services provider Aon (United States) contributed to performance. The company's stock price rose after it announced the termination of its proposed acquisition of Wills Towers Watson due to the DOJ's civil antitrust action to block the deal. An upside earnings surprise provided additional support to the stock price, thanks to solid margins and strong organic growth from new business generation.

Alibaba Group Holding Ltd

Overweighting shares of online and mobile commerce company Alibaba Group (China) weakened performance. The company's stock price fell over the reporting period as increased pressure from Chinese regulators, including areas such as e-commerce marketplaces, advertising, gaming and tax rate subsidies, appeared to have weighed on investor sentiment. The increased regulations come as Chinese President Xi Jingping announced broader plans to spread common prosperity and to reduce economic inequality within the nation.

Kose Corp

An overweight position in cosmetic products manufacturer Kose (Japan) hindered performance. The stock price fell as the company announced disappointing first-quarter business results as profit margins in China declined and sales from Japanese drugstores came in weaker than expected.

Tencent Holdings Limited

Overweighting shares of multinational technology conglomerate Tencent (China) weakened returns. Shares of the company declined as new technology and gaming regulations from Chinese authorities appeared to have weighed on investor sentiment.

Fund performance

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

12.9

14.7

14.1

14.1

15.5

0.2

Sun Life MFS Global Growth Fund - Series F

14.1

15.9

15.4

15.4

16.8

0.5

MSCI All-Country World Index

12.3

14.1

12.4

11.8

20.9

1.2

¹Returns for periods longer than one year are annualized. Data as of September 30, 2021.

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.

Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc.

SLGI Asset Management Inc. is the investment manager of the Sun Life Mutual Funds, Sun Life Granite Managed Solutions and Sun Life Private Investment Pools.

© SLGI Asset Management Inc. and its licensors, 2021. SLGI Asset Management Inc. and MFS Investment Management Canada Limited are members of the Sun Life group of companies. All rights reserved.