The November news of a COVID-19 vaccine led to a significant shift in leadership as stocks most levered to a re-opening of the economy generally performed best, while the stay-at-home beneficiaries, especially the narrow group of mega cap "tech" stocks MFS views as too expensive to own, finally began to lag. Although performance was aided by the Fund’s avoidance of expensive tech names that lagged the market, including Amazon, Salesforce.com, NVIDIA, Facebook and Zoom, the portfolio's stock selection in consumer discretionary, modest cash position and an underweight to information technology contributed to underperformance for the quarter.
Despite the Fund’s underweight positioning to expensive mega-cap tech, MFS remains optimistic about its significant exposure to many of the same key secular growth trends (e.g., cloud, e-commerce, digital payments, digital advertising, etc.) while staying true to the Fund’s growth at a reasonable price style.
Top holdings 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)
- Baidu (China's dominant search engine)
- Flutter (gaming and sports betting)
- Electronic Arts (secular shift to online gaming).
The portfolio manager remains bullish about the long-term prospects for these companies going forward.
The Fund continues to invest with a long time horizon and assess investment opportunities in the context of a 5-to 10-plus year time frame. In keeping with the Fund’s process, fourth quarter trading activity focused on adding to above-average growth compounders that lagged during the year and traded at discounts to historical relative multiples.
The Fund added to medical equipment names, such as Boston Scientific, whose multiples compressed while many medical procedures were temporarily deferred during COVID-19 shutdowns. In health care, the Fund added to PRA Health Sciences, which MFS believes is a uniquely affordable way to gain exposure to scientific advancements (e.g., cell and/or gene therapy, messenger RNA and more complex clinical trials), while lacking much of the single product risk, volatility and duration risk associated with a direct investment in a drug company. Funding for these purchases came from trimming outperformers whose valuations became more expensive, such as luxury goods maker, LVMH Moet Hennessy Louis Vuitton. Spanish airport operator Aena and India's Adani Ports and Special Economic Zones were also sold from the portfolio on lower conviction.
The portfolio manager is optimistic that the strategy is well-positioned to seek long-term outperformance for a few reasons. First, because MFS believes that eventually, valuation will matter again and the portfolio holds steady growth compounders whose valuations have been a larger-than-normal discount to growth benchmarks given the extreme valuation of mega-cap tech. Second, volatility in 2020 provided opportunities to upgrade the quality and growth of the portfolio while staying aligned with the Fund’s GARP-style (growth at a reasonable price). Finally, MFS believes there are several signals indicating the market is at extremes.
In summary, MFS’s commitment to the investment process and philosophy of the Fund remains unchanged. The portfolio manager maintains its long-term investment horizon and focus on owning durable growth compounders where it has high confidence in the sustainability of profits over the long-term. MFS continues to apply its buy and sell criteria consistently, and its analysis of company fundamentals (and relative valuations) continues to determine how the portfolio is positioned. The Fund’s objective is to add value through a series of individual, bottom-up investment decisions, rather than through, what MFS believes are difficult-to-predict macroeconomic events. Additionally, MFS remains fully invested in the equity markets, as they believe it is challenging to predict equity market returns over the short-term.
Significant impacts on performance