Sun Life MFS Global Growth Fund

Market Review

Inflation, fears about rising interest rates and the Russia-Ukraine conflict rattled markets during 2022’s first quarter. Accordingly, volatility picked up as the VIX volatility index reached levels unseen since early 2021. The significant selloff of growth stocks that began in November 2021, continued into the first two months of the year, only to recover some of their lost ground in the month of March. The difference between value and growth stocks was stark as the MSCI All Country World Value index returned -0.95% versus -9.72% for the MSCI All Country World Growth index. Supply chain challenges and the war helped bolster commodity prices as the price of oil surged past $100 per barrel, propelling the energy sector in the MSCI All Country World Growth Index to a 14% gain for the quarter. Sectors perceived to be more defensive in a falling equity market including consumer staples and utilities also held-in on a relative basis as investors flocked toward these sectors amid the volatility.

The Sun Life MFS Global Growth Fund F lagged the MSCI All Country World Index for the first quarter. In the first quarter of 2022, Energy stocks, which the Fund has zero exposure, led the market performance by a wide margin. Financials, where the Fund has a substantial underweight, outperformed as central bankers in the U.S. and U.K. are intent on raising interest rates to bring down inflation, even as recessionary pressures are increasing. Stock selection (Sherwin-Williams and Sika Ag) and underweight positioning in materials detracted from relative performance. Stock selection from information technology (Visa Inc., and Fiserv Inc.) contributed to relative performance.

Over the quarter, the most expensive quintile of stocks in the MSCI All Country World Growth index, as measured by forward P/E ratios, sold off the most, lagging the market considerably while returns of the cheapest quintile were about flat during the period versus the -9.72% return for the index overall. The portfolio has almost no exposure to the most expensive quintile and is considerably overweight the three cheapest quintiles of the index. Although expensive stocks recovered somewhat in March and the portfolio gave back some of its relative performance, it managed to finish nicely ahead of the growth index during the quarter.

At the stock level, the drag from avoidance of expensive "tech" names Amazon and Tesla as well as the Fund’s large underweight position in Apple, was partially offset by the positive contribution from avoidance of Meta Platforms, Netflix and PayPal that returned between -27% and -39% for the quarter. Other favorable stock picks that benefited performance this quarter included Alphabet, Aon, Boston

Scientific, Becton Dickinson, Charles Schwab and Dollarama. The team had added to each of these positions on temporary weakness during the 2020 pandemic shutdown when valuations appeared attractive with a long-term view and have started to trim them on recent outperformance and less favorable multiples.

Significant transactions

After several years of strong absolute returns and expanding valuations among growth stocks, the recent correction provided an opportunity to initiate new positions in steady growth compounders the team feels are reasonably valued as a result of the short-term focus of other investors.

Add/Buy

• During the quarter, the Fund initiated new positions in mortgage lending and data software provider Black Knight. On Black Knight, the team is attracted to its well-moated and near monopoly positioning in mortgage servicing where they touch more than half of all mortgages in the U.S. The team is attracted to the platform's massive scale leadership that is both hard to replicate and complicated to replace and take comfort in their low-cost positioning despite how critical it is to their loan servicing customers. While a smaller percentage of revenues today, the team also likes their loan origination technology that is growing much faster than the market fueled by recent innovations and cross-sell opportunities. The team started the position at a small premium relative to the market that was near the relative P/E multiple low since the stock began trading publicly in 2015.
• The Fund initiated new positions in automotive technology supplier Aptiv. On Aptiv, the team likes the company’s exposure to key growth areas within autos, such as providing high voltage electrification and connectors for electric vehicles (EVs), and active safety technologies for all auto types. Within EVs, the company states that it sells about 2.5 times more technology content per EV than it does per internal combustion engine vehicle (ICE). In addition, Aptiv believes it has content on 50% of EV’s versus only 30% of ICE cars. With EV’s expected to ramp globally from 6-7% of cars sold today to 35%-50% of cars sold by the end of the decade, the growth opportunity is clear. With the stock down about 35% for the year to date through the purchases in mid-March, investors appeared to be overly focused on near-term industry-wide supply chain challenges and (potential) demand impact from the Ukraine/Russia conflict. While the team does not attempt to invest with a differentiated view on the duration of these issues, they believe the valuation is compelling with a long-term view, especially considering the expectation for accelerated cross-cycle growth versus history.
• The Fund also added exposure to wireless broadcast towers with a new position in Cellnex, which has similar attractive characteristics to American Tower (which the Fund also owns). The tower-sharing is a win-win business model, contracts are long-term and have pricing escalators, and organic growth has been strong and durable. Despite these attractive characteristics, the team finds the valuation to be reasonable due in part to pressure from rising interest rates.
• Other incremental additions during the quarter included off-price retailers B&M and Ross Stores, global coffee franchise Starbucks, and consumer credit platform Equifax at increasingly attractive valuations.

Trim/Sell

• The Fund trimmed some of the winners at more expensive valuations, including consumer staple Church & Dwight, whose outperformance resulted in an oversized position.
• The Fund also trimmed back on Stryker and Boston Scientific positions, partially to reduce its large overweight to the medical equipment industry on strong relative performance since the growth selloff began late last year. Also influencing these trims is a recognition of the risk that COVID-related pent-up demand may not be as significant as originally anticipated.
• Other trims included recent outperformers Charles Schwab, Alphabet and Dollarama.

Fund Positioning

Over the next year or two, against a backdrop of rising rates, the team expects value to outperform growth. Value companies tend to be less interest rate sensitive than growth stocks. Their relatively steady cash flows (when compared with growth companies) offer a cushion that growth companies do not. Value companies tend to be more asset-heavy than their growth peers, which means the value of their assets benefit from an inflationary environment. Strong economic growth tends to be more supportive for value companies than growth companies, which outperform when growth (and thus profits) are relatively scarce.

As a growth-oriented fund, it is naturally attracted to technology, data, online services and other areas that are exposed to secular growth trends. However, the investing strategy is very much a growth-at-a-reasonable-price (GARP) strategy that seeks stocks with attractive valuations and avoids the more expensive stocks.  Despite avoidance of the more expensive technology related stocks, the team has been able to invest in many of the key secular growth trends (e.g., cloud, e-commerce, digital payments, digital advertising, etc.) while staying true to the GARP-y style. Top holdings in these areas include Microsoft (cloud services and software growth), Alphabet (dominant in digital advertising and a growing cloud platform), Accenture (global IT consulting), Visa and MasterCard (secular shift to digital payments and e-commerce growth), Alibaba (strong e-commerce/payments platform and cloud services growth), Tencent (the dominant messaging, cloud and gaming platform in China), Naver (dominant search engine in South Korea), and Electronic Arts (secular shift to online gaming). The Fund remains bullish about the long-term prospects for these companies going forward.  The Fund has not owned the more expensive technology-related stocks such as Amazon, Shopify, Netflix, Adobe, Salesforce Facebook/Meta and Tesla based primarily on concerns about their expensive valuations.

Bitcoin has run up in price recently as retail investors have piled in, but there are also many questions around potential market manipulation since cryptos trade on non-traditional platforms and lack a centralized regulatory structure. A similar price run up happened in 2017 only to be followed by a price collapse months later. The Fund has exposure to companies that have some exposure to cryptocurrencies, but the crypto/blockchain exposure is not part of the core thesis. Recently the team has seen different levels of exposure/engagement with the products and services that the companies offer. Visa/MasterCard have made headlines for exploring blockchain technologies and others (i.e. Microsoft/Amazon) have started to explore more decentralized identity use cases. For most of these companies, it is still an incredibly small part of their business, but as leaders in digital payments/software, their ultimate goal is not to be disrupted by new technology, so exploring the use cases may improve their long-term duration of growth prospects if it becomes a bigger part of the payments ecosystem beyond a largely speculative endeavor.

The Fund continues to not own metals and mining companies. Although the metals and mining stocks can be an effective hedge against inflation, they tend to sell commoditized products, are highly cyclical, and have high capital intensity.  The portfolio has consistently had a bias towards high-quality companies with unique competitive advantages and sustainable as opposed to cyclical earnings, and therefore the team has found few opportunities in metals and mining companies.

The Fund has zero and limited exposure to Russia and Ukraine, respectively. The team hasn’t shifted the fund’s geographic positioning based on the recent Russia/Ukraine military conflict.  All of the team’s investment decisions are based on a long-term investment horizon, and they don’t tactically shift the portfolio in an attempt to express any top-down view with regards to countries or sectors.  The team will monitor potential impacts of the Russia/Ukraine situation on a company-by-company basis, relying on the global research platform, which incorporates macro, market and tail risk events into analysis while being mindful that rising volatility and market drawdowns can create opportunities for patient, long-term investors.

The Fund owns Chinese companies, Tencent, Alibaba, Kweichow Moutai and JD.com, with an aggregate exposure just under 5% of total net asset. Prior to Russia's invasion of Ukraine, most observers probably expected a move by China to reunify with Taiwan by force to be the most persistent geopolitical risk. However, the combination of Russia's difficulty in pacifying Ukraine, along with a significantly more severe global backlash than expected against Russia, could make China think twice before undertaking such an action. While China still very much wants to reunify with Taiwan, the risk of such an action any time soon has receded.    

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.