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Sun Life MFS Global Total Return Fund

Fund commentary | Q2 2023

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

Market Review

Equity

The developed markets, represented by the MSCI World Index continued to rise in the second quarter (Q2). Seven mega-cap stocks account for over half the market’s return so far this year and are up significantly on a wave of euphoria about artificial intelligence (AI). Strip these out and the broad market return would have been significantly lower.

It is interesting to note that only two stocks of this “magnificent seven” have seen earnings upgrades (Nvidia and Meta) while the other five (Tesla, Amazon, Microsoft, Apple, Alphabet) have seen flat earnings revisions or downgrades.

From a style perspective, trends have completely reversed from last year when value was in favor. This year is firmly back to growth leadership, with the MSCI World Growth Index 7% ahead of the MSCI World Value Index for Q2.

Fixed Income

Global bonds failed to build on a strong Q1 with returns close to flat in Q2. Rising government yields offset credit gains. Government bonds came under pressure as resilient economic data, sticky core inflation and eventual compromise regarding the U.S. debt ceiling debate led to hawkish central bank actions and rhetoric. The moves particularly impact shorter maturity (two-year) government bonds.

U.S. bonds generally underperformed global peers in Q2, with dispersion remaining high reflecting differing monetary cycles in growth momentum around the world.

Performance Review

The Sun Life MFS Global Total Return Fund F series underperformed the Sun Life MFS Global Return benchmark for the quarter, returning 0.5% against 2.6% for the blended benchmark. 

Equity Sleeve

The equity allocation underperformed the broad MSCI World Index, due to sector allocation and stock selection, especially the underweight to information technology and consumer discretionary, which includes Tesla and Amazon.com. The key factor was the headwind of a market dominated by the performance of growth stocks, which are not the natural focus of this value fund. The biggest negative contributors came mostly from what the Fund did not own, notably Nvidia, Apple, Amazon.com, Microsoft (owned but underweight), Meta Platforms and Tesla, which all rose between 18% and 52%, in U.S. dollar terms, during the quarter.

  • Eaton Corporation Plc - The company reported operating revenue in the Americas region ahead of investor expectations, driven by a robust backlog of electrical orders and power grid improvement projects.
  • Vulcan Materials Co. - The stock price climbed as the company's earnings per share results came in above expectations with aggregate pricing coming in much better than anticipated and volumes holding up better than feared.
  • AbbVie Inc. – Not owning shares of pharmaceutical company AbbVie bolstered relative performance. 

  • Nvidia – (Computer graphics processor)
  • Apple Inc. – (Computer and personal electronics maker) 
  • Amazon.com – (Internet retailer) 

Fixed Income Sleeve

  • Overweight to corporate industrials and financials versus Treasuries and government-related agencies
  • Overweight non-core versus core in Europe
  • Exposure to local currency emerging markets
  • Security selection within European subordinated financials

  • Long duration versus benchmark (U.S., Canada, and the UK)
  • Short duration in China
  • Overweight to the Japanese yen
  • Currency hedging effects back to Canadian dollar

Significant transactions

Changes made to the fund holdings (equity only) during the most recent quarter.

Adds/Buy

  • CME Group Inc. (Buy)
  • General Dynamics Corp. (Add)
  • Home Depot Inc. (Buy)
  • Charles Schwab Corp. (Add)
  • Dun & Bradstreet Holdings (Buy)

Trims/Sell

  • Boston Scientific (Trim)
  • Merck & Co. (Trim)
  • Nasdaq Inc. (Sell)
  • Northrop Grumman (Sell)
  • Yum China (Sell)

Fund Positioning

The Fund has historically been allocated at approximately 60% equity weighting and 40% fixed income weighting. This is designed to remove the market timing element of portfolio management and allows our sub-advisor MFS Investment Management (MFS) to focus on security selection.

Equity Positioning

Against the MSCI World index, the portfolio is overweight in financials and industrials, where MFS continues to find compelling value opportunities. The biggest sector underweights are in information technology and consumer discretionary, given the dominance of growth stocks within the benchmark and the mega-cap weighting impact. Recession in the U.S. and much of Europe has likely been delayed, but not cancelled, with the risk still possible, given the weak lead indicators and lagged effect of higher interest rates. Corporate profit margins and earnings look too high. MFS’s view is that companies have yet to optimize for a vastly different environment.

Fixed Income Positioning

MFS continues to position for a base case of a recession and default cycle potentially higher than those implied by lower-quality credit spread levels. This combined with improving valuations in global government bonds has given reasons to continue to feel comfortable with adding duration in longer- and intermediate-dated bonds in both Europe and the U.S.

MFS continues to favour investment grade bonds at this stage of the credit cycle, with the sharp inversion of the U.S. treasury yield curve still suggesting tight monetary conditions and rising recession probabilities.

Rate & Foreign Exchange Positioning

MFS is supportive of a more constructive duration position in non-U.S. bonds outside of Japan and China, with overweight focused on intermediary maturity bonds. They are more defensive in shorter-maturity bonds (two-year) in areas like core Europe where MFS feels the European Central Bank might need to tighten rates more and maintain higher rates longer than markets expect to sustainably control inflation. MFS likes dollar bloc countries such as Canada and New Zealand that are at a mature stage of their tightening cycles and have economies that are sensitive to tightening monetary conditions due to higher household leverage or inflated real estate values. 

Fund performance

Compound Returns %¹ Since Inception2 10 Year 5 Year 3 Year 1 Year Q2
Sun Life MFS Global Total Return Fund - Series A

6.0

 54 3.6 3.5 8.9 0.2

Sun Life MFS Global Total Return Fund - Series F

7.1

 6.6 4.8 4.7 10.2 0.5
Sun Life MFS Glbl Return Benchmark

8.2

 8.2 6.0 5.4 12.7 2.6

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

²Partial calendar year. Returns are for the period from the fund’s inception date of October 1, 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 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.