Sun Life MFS Global Total Return Fund

Fund commentary | Q1 2022

Opinions and commentary provided by MFS Investment Management Canada Limited.

Market Review

The new year certainly started out down a very different path, with the global equity market falling sharply. The biggest talking point is clearly the Russia-Ukraine conflict, which has fuelled the inflation debate, slowed the path of global growth and rekindled geopolitical risks. The greatest impact has been on commodity prices, and looking into the detail reveals more of a story. Energy has been the standout sector with a 31% total return. Russia supplies 11% of global oil production and 17% of global gas (40% of European gas). 

Early in the quarter, expensive technology stocks sold off, as these long-duration assets are more vulnerable to rising interest rates, but the late rally in markets pushed many valuations back up again. By quarter end, the materials and utilities sectors moved into positive returns, but every other sector finished down, with double digit falls in information technology, consumer discretionary and communication services. Value stocks outperformed growth stocks by a wide margin, especially those that that benefit from rising commodity prices and those that benefit from rising interest rates.

Central bankers have shifted their language on inflation and ditched the term ‘transitory’ as it was causing confusion. More importantly, they have started to take decisive action, by raising interest rates and unwinding the extraordinary levels of quantitative easing that have supported asset prices. News on COVID-19 and the omicron variant has faded into the background, with the positive stories of reopening and a ‘new normal’ approach to living with the virus, offset by the negative impact of ongoing disruption to global supply chains, especially in China with their zero tolerance approach causing major shutdowns. This continues to add to inflationary pressures.

The Sun Life MFS Global Total Return Fund outperformed its blended benchmark (60% World, 40% Global Agg Hedge C$) in Q1 2022. Within the equity sleeve, stock selection in health care and communication services contributed to relative performance. Underweight position in information technology also contributed to performance as the broad sector performed poorly during the quarter. Stock selection and underweight position in energy hurt performance. Stock selection in industrials also detracted from performance.

Equity Sleeve

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 the team to focus on security selection. The equity portion of the portfolio follows a value based approach has generally been invested in a blend of global, large-cap value equity securities. On the fixed income side, the team employs a broad, global investment grade focused approach, across both government and credit markets.

Equity Positioning

Within the equity sleeve, the Fund follows a value strategy, but not a ‘deep value’ strategy, with a clear focus on business durability and valuation. The team always thinks carefully about the long-term prospects of businesses they own and pay a lot of attention to understanding the downside risk of business models. They continue to find great opportunities across industries and geographies where shares have been trading at attractive valuations, often overlooked in the market gyrations and short-term focus on other investors. During the quarter, the Fund added position to BNP Paribas, Henkel, Texas Instruments, Aptiv Plc, and initiated position in Toyota Motor Corp. The Fund eliminated Novartis, and trimmed positions in Lockheed Martin, Eaton Corp, Intel and KBC Group.

The Fund employs a bottom-up investment approach, the investment decisions are not driven by trying to predict and make macro assumptions on variables such as inflation and interest rates. The team is mindful of the impact on all the companies held within the Fund. Overall, they believe the companies in the portfolio have sustainable competitive advantages, relatively strong pricing power and may be able to withstand the impact of rising input costs better than peers. With regards to rising interest rates, the portfolio is overweight financials, which could benefit if economic growth holds up and cushioned by little exposure to bond proxy sectors such as utilities and real estate. The portfolio is less exposed to long duration assets, notably technology stocks with high terminal values, which are at risk from bigger discounting when interest rates rise.

Fixed Income Positioning

Corporate fundamentals continue to be strong with companies reporting largely positive earnings and cash flows. Profit margins remained a bright spot, despite supply chain challenges and rising input costs. Balance sheet leverage also remains below 2020 peaks. However, corporate margins and the elasticity of demand bear watching given growing headwinds from rising labor and producer prices.

Despite the ECB "pivot" it does remain one of the more accommodating central banks and will continue to operate a quantitative easing program until Q3. This will mean that EUR-denominated corporates will benefit from ongoing buying via the Corporate Sector Purchase Program (CSPP). Meanwhile, both Euribor forward rates and inflation breakevens have already moved to price in a more aggressive ECB and higher structural inflation. The conflict in Ukraine has further consolidated politics within the EU (outside of Hungary) and the accelerated transition towards alternative energy and increased German defense spending should also provide a helpful fiscal boost going forward.

The team expects dispersion to increase between sectors and will look to take advantage of this in credit portfolios. Within investment grade, US sector dispersion is greater than that in Europe, with sectors like technology repricing following underperformance in the equity. The team believes the defence sector will be a clear beneficiary of rising sovereign security budgets, especially in Europe. Meanwhile the sharp rise in soft commodities could impact even defensive sectors such as food producers.

The Fund reduced some of its underweight position in US mortgages as valuations have improved. However, the team is still cautious on the asset class given the accelerated schedule of quantitative tightening by the Fed which alters the technicals of the asset class, with increased participation from other investors such as banks required to offset Fed selling. 

¹Returns for periods longer than one year are annualized. Data as of March 31, 2022.
²Partial calendar year. Returns are for the period from the fund’s inception date of October 1, 2010 to December 31, 2010.