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Sun Life MFS Global Growth Fund

Fund commentary | Q2 2021

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Portfolio review

Equity markets continued to rally sharply higher in the second quarter as investors cheered the re-opening of economies following the pandemic. In a reversal from the prior quarter, growth stocks resumed leadership over value stocks. Top performers included sectors and industries most exposed to an accelerating economy and the re-opening such as real estate, select retailers and consumer credit providers thanks to soaring consumer demand. Semiconductors, the most cyclical subindustry in technology, also led the way within the sector. In addition, several of the mega-cap tech-related companies that are unowned in the portfolio including computer graphics processor provider. Nvidia and media platform Facebook, led the market higher.

The Fund is a conservatively managed large cap growth portfolio with a heavy focus on downside risk. The portfolio generally has lagged in exceptionally strong up markets and performed best during more volatile periods. The strong market rally in the second quarter where valuation and earnings durability were underappreciated proved to be challenging for the Fund’s style. The portfolio had zero exposure to the energy sector, traditional real estate companies and consumer credit providers because MFS believes they generally do not offer long term-growth compounding potential.

The Fund has long held a sizeable position in Alphabet, which is a leader in digital advertising due to its dominance in search and online video content, not to mention the increasing demand for its cloud services platform. Many of the high-quality businesses held in the portfolio, whose durable growth doesn't change markedly from quarter to quarter, lagged. In health care several of the medical equipment stocks such as Stryker, Boston Scientific and Becton Dickinson started to see a late-quarter recovery in surgical procedures with COVID waning but it has not yet fully reflected in revenues or earnings. In consumer staples, holding Colgate performed reasonably well yet investors focused on the drag from near-term raw materials inflation even though revenue growth was aided by pricing power resulting from their strong brand equities and premiumization strategy.

In aggregate, the portfolio manager does not believe these performance headwinds are sustainable and remain confident in the Fund’s investment style, approach and extensive research platform. the portfolio manager firmly believes the consistent application of the Fund’s investment process will lead to durable outperformance over the long term with careful consideration for downside risks.

Despite today's higher market valuations, the team continues to seek out and find great opportunities in steady growth compounders they feel are reasonably valued as a result of a sharp cyclical rotation and short-term focus of other investors. The Fund started a position in Xcel Energy following some excellent discussions with experts on our utilities sector team. The Fund became more interested in evaluating utilities as a potential fit for a growth portfolio due to the potential for low double-digit return compounding relative to the overall market's arguably above-trend earnings growth profile today, especially considering the lower risk profile from utilities. The Fund see’s upside risk to utility growth given the high need for investments in the electrical grid and renewables as well as potentially more headroom for rate growth over time as other elements of the customer utility bill decline. The portfolio manager is increasingly viewing utilities as "part of the solution" for tackling climate change, which could possibly result in higher valuations. The Fund is attracted to Xcel's strong management team with a consistent history of execution, attractive geographies in good regulatory jurisdictions of Colorado and Minnesota, with plenty of wind and sun as well and a serious plan to decarbonize. The purchase was funded by trimming lower conviction holding Cigna.

The Fund swapped its Comcast holdings into a new Charter Communications position which the team considers to be an upgrade to the Fund’s cable exposure. MFS believes Charter has a better growth outlook with 100% cable exposure, lower broadband pricing, either provides more opportunity to raise pricing in the future or less risk from regulation and better capital allocation. As with Comcast, the long-term thesis of continued broadband strength leading to higher margins and lower capital intensity appears to be playing out now. While Charter is expensive compared to Comcast, Charter's lower pricing strategy is a lever in their back pocket that the team feels they may be able to monetize over time. A hypothetical overlay of Comcast's pricing structure onto Charter's cost structure suggests Charter's free cash flow is considerably below where it could be. With that lens Charter actually looks cheap relative to Comcast. The Fund decided to further pare back its Danone position whose categories have deteriorated over time. Water, infant nutritional’s, dairy and an uninspiring track record even when these categories were stronger.

In summary, the Fund’s commitment to its investment process and philosophy remains unchanged. The portfolio manager 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 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

Equifax

Holdings of consumer credit reporting agency Equifax (United States) contributed to performance. The company reported solid first-quarter financial results, driven by solid performance in its U.S. Information Solutions (USIS) segment, owing to strong US mortgage market volumes.

Adidas

The portfolio's overweight position in sportswear and sports equipment manufacturer Adidas (Germany) supported performance as the company reported first-quarter earnings above consensus estimates, driven by strong performance in the Greater China region and solid gross margin results, owing to lower operating expenditure..

Tesla

Not holding shares of electric vehicle manufacturer Tesla (United States) benefited performance. Although the company reported in-line revenue results, concerns surrounding the firm's China operations appeared to have weighed on investor sentiment during the period.

Nvidia Corp

Not owning computer graphics processor maker NVIDIA (United States) held back performance. The company posted strong revenues for the quarter, driven by better-than-anticipated broad-based demand and capacity additions at its Gaming, Datacenter, and Pro Vis segments.

Fiserv Inc

The timing of the portfolio's ownership in shares of financial technology services provider Fiserv (United States) weighed on performance. The stock price declined after the company reported revenue and operating income that missed expectations, mostly due to weaker revenues from its payment and network, corporate and other divisions.

HDFC Bank

The portfolio's position in banking firm HDFC Bank (India) hindered performance as the company reported profit-after-tax results that missed market expectations, due to higher-than-expected provisions for loan losses as the country dealt with a second wave of COVID-19. 

Fund performance

Compound returns %1 Since inception2 10 year 5 year 3 year 1 year Q2
Sun Life MFS Global Growth Fund - Series A

13.2

13.4

15.2

14.9

24.2

5.4

Sun Life MFS Global Growth Fund - Series F

14.4

14.6

16.5

16.3

25.6

5.7

MSCI All-Country World Index

12.4

12.7

13.5

12.3

26.6

5.8

¹Returns for periods longer than one year are annualized. Data as of June 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.