Sun Life MFS Global Growth Fund

Fund commentary | Q3 2023

Opinions and commentary provided by sub-advisor MFS Investment Management Canada Limited.

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.

  • Alphabet - The portfolio's overweight position in the technology company boosted relative performance. The stock price rose as it reported better-than-expected revenue and robust margins.
  • Black Knight Inc. - An overweight position in the integrated software solutions provider supported relative returns. The share price rose as it was wholly acquired by market exchange operator Intercontinental Exchange (ICE).
  • Apple Inc. - An underweight position in the computer and personal electronics maker benefited relative returns. The stock price fell as it posted its third straight quarter of declining sales and predicted similar performance for the current period

  • Estee Lauder - An overweight position in the beauty products maker hindered relative returns after management lowered guidance due to a slower-than-expected demand recovery from Chinese consumers and a large reduction in travel retail inventories.
  • HDFC Bank - The timing of the portfolio's ownership in shares of the banking firm detracted from relative returns. During the period, it revealed the opening financials of the merged entity with HDFC Limited and highlighted some one-off impacts.
  • Equifax Inc. - An overweight position in the consumer credit reporting agency detracted from relative performance. The stock price declined as it reported earnings that missed consensus estimates and reduced its guidance.

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

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

10.70

10.71

7.93

4.46

16.60

-3.99

Sun Life MFS Global Growth Fund - Series F

11.89

11.95 9.18 5.67 17.94 -3.72
MSCI All-Country World Index

10.47

10.55 7.42 7.33 18.86 -1.30

¹Returns for periods longer than one year are annualized. Data as of September 30, 2023.

Inception date September 30, 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 subject to change and 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.

MFS Investment Management Canada Limited is the sub-advisor to the Sun Life MFS Funds; SLGI Asset Management Inc. is the registered portfolio manager. MFS Investment Management Canada Limited has appointed MFS Institutional Advisors, Inc. to provide additional sub-advisory services.

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.