Sun Life MFS Global Growth Fund

Market Review

The market rally in the first half of the year continued at the start of the third quarter (Q3), led by mega-cap tech stocks that surged on excitement surrounding artificial intelligence (AI). This changed late in Q3 after investors began to worry that the U.S. Federal Reserve would keep interest rates higher for longer than expected, which would hold back the economy and potentially hurt stock valuations. Growth stocks are susceptible to the impact of higher rates as the present value of their future growth becomes smaller as interest rates increase. With much uncertainty in growth, inflation and interest rates outlook, equity markets may remain volatile as the lagged effects of higher interest rates and tighter credit standards continue to weigh on the economic and earnings outlook.

Performance Review

The market rally in the first half of the year continued at the start of the third quarter (Q3), led by mega-cap tech stocks that surged on excitement surrounding artificial intelligence (AI). This changed late in Q3 after investors began to worry that the U.S. Federal Reserve would keep interest rates higher for longer than expected, which would hold back the economy and potentially hurt stock valuations. Growth stocks are susceptible to the impact of higher rates as the present value of their future growth becomes smaller as interest rates increase. With much uncertainty in growth, inflation and interest rates outlook, equity markets may remain volatile as the lagged effects of higher interest rates and tighter credit standards continue to weigh on the economic and earnings outlook. While the Fund’s relative performance began to improve as the market sold off, its relative gain against later in the Q3 were not enough to offset July underperformance.

Stock selection in financials and consumer staples were the biggest negative contributors to performance. Not owning energy stocks also detracted from performance as the sector gained amid rising oil prices. Saudi Arabia’s decision to cut back how much oil it sends to global markets has pushed prices higher. 

From a stock selection perspective, a few stocks, both owned and unowned, contributed to the portfolio’s performance. Not owning any shares of Nvidia or Meta, both of which have become larger benchmark weights resulting from their exceptional performance this year, detracted from relative results. In both cases, our sub-advisor MFS Investment management (MFS) believes the market has yet to price-in potential for considerable long-term earnings duration risk. The portfolio’s lack of exposure to biopharma giant Eli Lilly also hindered results as positive results from its key weight loss drug have driven the stock higher. MFS remains comfortable avoiding the stock, whose shares appear expensively valued after the market priced in much of the future growth potential. The long held underweight to the technology sector helped relative results.

Significant Transactions

Portfolio Outlook

On a year-to-date basis, growth stocks have been driven by a narrow group of mega cap tech related companies that experience strong upward price momentum, supported by investor excitement over investments in generative AI software. More than 60% of the index’s total return during the first nine months of the year was from just seven stocks (Apple, Microsoft, NVIDIA, Amazon, Tesla, Alphabet, Meta Platforms), while the other 1771 stocks in the index delivered the remainder. The portfolio has consistently been underweight the top seven stocks, which comprised 32% of the index but only 14% of the portfolio at the end of Q3. The portfolio is largely absent the most expensive quintile of stocks in the index since the fund’s “growth at a reasonable price” (GARP) style keeps the investment team away from these highly valued names.

However, there were growth opportunities beyond the seven mega-cap technology stocks where valuation appeared more reasonable. During Q3, MFS increased exposure to the portfolio’s long-standing overweight to information technology services companies by initiating position in Capgemini. It is well positioned to benefit from the long-duration trend of companies needing to digitalize their businesses.

MFS also searches for potential AI winners and losers, and made some AI-related trades in the second quarter, including the topping up of the portfolio’s large Microsoft and TSMC positions.

Nike stock has lagged since earlier this year, giving up most of the China re-opening gains, while its relative P/E is only slightly below its historical average.

MFS has also has been slowly building position in Disney as nearly all its value can be attributed to its theme parks, so MFS believes very little is paid for the media assets. Synergies are expected when Disney eventually combines Hulu, ESPN+ and Disney+ into one platform.

The portfolio topped up its Visa position during Q3. The stock lagged while the company’s forward earnings estimates have outperformed the market, resulting in a past decade low relative P/E which appears undervalued.

MFS managed valuation risk by lowering exposure to software company Adobe on performance strength and a higher valuation. They also exited position in Black Knight on outperformance since the announcement of and eventual closure of the deal with intercontinental Exchange. Trims to Roche, Equifax, Fortive and Electronic Arts reflected thesis concerns as MFS used the proceeds to fund higher conviction ideas.

Fund performance