Sun Life MFS Global Growth Fund

Market Review

Concerns over the potential need for a faster pace of interest rate hikes to combat higher inflation and the economic implications of Russia's war with Ukraine continued to weigh on equities. Value stocks, which have tended to benefit from rising interest rates, outperformed growth stocks by a wide margin for the second quarter in a row. From a sector perspective, expensive technology and tech-like stocks in consumer discretionary and communications services performed worst as these “long-duration” assets are viewed as being more vulnerable to rising interest rates. The traditionally defensive consumer staples sector was one of the top performers, and higher oil prices and constricted supply helped energy stocks significantly outperform the overall market.

The Sun Life MFS Global Growth Fund outperformed its benchmark, MSCI ACW Index for the quarter. As in the past, the team has remained steadfast in the commitment to their conservative growth investment style despite considerably adversity in recent years where expensive mega cap tech stocks have dominated the market. Given the long-term focus on durable growth compounders at reasonable valuations has generally performed best during more challenging market environments with above average volatility, it should come as no surprise that the portfolio outperformed by a considerable margin during a quarter when the market sold off sharply. In a realignment with long-term trends, valuation continued to be a winning factor during the quarter as the most expensive stocks lagged the market considerably.

• At the stock level, continued avoidance of expensive "tech" names, Amazon, Nvidia, Tesla, Netflix and Meta Platforms, provided a significant tailwind to relative performance. Although the team has continued to sharpen our pencils on these names as these stocks have sold off between -45% and -70% from their November highs, the team concluded in each case that their valuations had not reached a level that we felt was attractive for our GARP-y style.
• The portfolio benefited from strong relative performance out of holdings American Tower, Colgate, Church & Dwight, Kweichow Moutai, Reckitt Benckiser, Becton Dickinson, Cigna and Thermo Fisher as their defensive characteristics were on display while the market was in decline.
• This was partially offset by an underweight to the relatively strong-performing energy sector, and adverse stock selection in financials and health care.

Opportunities/risk management

In keeping with the long-term and somewhat contrarian approach, the trades this quarter involve incrementally leaning against the market. The team has added stocks that have lagged with higher secular growth and in some cases higher cyclical exposure, while they are trimming stocks that have outperformed with a bit less secular growth and higher defensive qualities.

Add/Buy

• After several years of strong absolute returns and expanding valuations among growth stocks, especially in tech, the recent correction provided the team an opportunity to initiate a new position in digital content software company Adobe Systems. We have been significantly underweight software due to high valuations and while software in general still seems expensive, Adobe's valuation has come down into a GARPY range as a result of having disappointed the market in recent quarters. We are not too concerned about the quarterly choppiness and are focused on what we believe to be a solid long-term revenue growth outlook combined with a reasonable valuation in our view. We are attracted to their strong competitive positioning from three dominant software businesses – Creative and Document are near monopolies and are the industry standard (Creative Cloud for creative pros, Adobe PDF for enterprise documents) and Experience is a major player (along with Salesforce Inc) in e-commerce software. We believe in their strong secular growth outlook as the word becomes more digital – more digital content creators with new ways of sharing content, and as every business tries to become a digital-first enterprise, Adobe provides tools to help digitalized internal collaboration and workflows (document cloud) and improve e-commerce capabilities (experience cloud).
• The team added to the position in ICON. The team leaned into the name while the market appears concerned about a possible slowdown in near-term biotech funding, resulting in a multiple for the stock that is similar to the market despite a double-digit long-term EPS growth outlook due to the secular growth exposure to "science" and outsourced clinical trials.
• The Fund added to Taiwan Semiconductor Manufacturing Company after the shares lagged on concerns about geopolitics and the duration of the semiconductor cycle. The team believes this is one of the best businesses they own given their dominance and secular growth outlook.
• The Fund also added to payments name Visa that has been a laggard on weak cross-border revenues as well as paints company Sherwin Williams, Japanese HVAC manufacturer Daikin, and global coffee franchise Starbucks which have underperformed recently on higher cost inflation.

Trim/Sell

• For Funding, the team decided to take advantage of the recent stock performance in the tough market to exit the remaining position in medical equipment company Medtronic. Recent execution challenges in their manufacturing and supply chain have made the team question the initial thesis about improved performance and growth, and the team has more conviction in other medical technology holdings.
• The team also trimmed insurance broker AON, discount retailer Dollarama, risk analytics platform Verisk, insurer Cigna and staples company Colgate on strong outperformance and a less attractive multiple.

Fund Positioning

The team took a high level look at how growth stock valuations now look versus valuations of core stocks. The conclusion was that relative valuations for the broader growth category have recently compressed but are still elevated versus history. The team’s general takeaway is that they should trust their bottom-up analysis and not force a more abrupt move to growthier assets.

Regarding multiple compression of the growthiest of growth stocks, the fastest growth tier of growth stocks with durable franchises that the team has recently evaluated still screen too expensive for the Fund’s conservative growth style. In many cases, valuations have gone from very expensive to just expensive. Everything is relative, and the team measures valuation against a broad market which traded at 14.2x ’23 EPS consensus. So how they view a company that traded at 30x as of 6/30/22 is different today than it was a year ago.

The team’s investment style resulted in the Fund being defensively positioned and less growthy/less expensive than the index. The intention is to move towards cyclicality and higher growth incrementally as the market provides opportunities, one stock at a time. The recent trades are consistent with incremental moves towards higher growth and more cyclically exposed names that have lagged and now appear relatively more attractive. The team does intend to quickly transform the portfolio though, partly because they are not finding an abundance of super compelling cyclical and/or high growth opportunities, and partly because they simply don’t move that fast! For context, the portfolio entered this correction with considerable overweights to the “defensive” health care and staples sectors. They have tended to prefer companies they perceive as having good downside risk management, and they are comfortable with the portfolio's continued defensive skew. If they continue to lean against the market, they aim to be less defensive at market bottoms.

On the possibility of continuing high inflation, the team believes that their bias towards seeking 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. Avoiding the most expensive names could also help.

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.