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Sun Life MFS International Opportunities Fund

Fund commentary | Q1 2021

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Market review

Key themes during 2020 were the sharp outperformance of "growth at any price", high-multiple stocks versus low-multiple stocks, the outperformance of lower-quality stocks versus higher-quality stocks, and high beta dominating low beta stocks. Those market drivers are typical of early cycle market behavior and those market dynamics were significant portfolio headwinds last year. During the first quarter, overall, these headwinds largely subsided as the market saw an easing of such extremes. While three months does not make a trend, many indicators are pointing to a shift to mid-cycle from early-cycle economic and market dynamics.

The bond markets saw significant moves in the first quarter, with a sharp sell-off causing long-dated U.S. government bonds to endure their worst quarter in 40 years. The yield on 10-year Treasury bonds has risen above 1.7% from a low of 0.4% just over a year ago. This has been sparked by fears of rising inflation, following the extraordinary levels of fiscal and monetary stimulus pumped into the system from governments and central banks. The Organization for Economic Co-operation and Development (OECD) has increased its forecast and now expects global GDP growth of +5.6% this year, revised up from its December forecast of +4.2%, with global output rising above pre-pandemic levels by mid-2021.

U.S. President Biden’s $1.9 trillion stimulus, known as ‘The American Rescue Plan,' is one of the largest government interventions ever, equivalent to Italy's GDP and will add 9% to U.S. GDP. What is more remarkable is that it occurred quickly on the heels of $900 billion agreed by Congress just three months earlier and the initial $2.2 trillion plan that was agreed to last year. This results in a staggering US$5 trillion fiscal injection into the U.S. economy (over 20% of projected 2021 GDP). In Europe, while the headlines are not quite as eye-catching, however the $750 billion EU recovery fund is still large in scale.

The big debate is whether this huge growth stimulus risks stoking inflation and whether the Federal Reserve will need to slam on the brakes earlier than the market is anticipating. The U.S. 5-year break-even interest rate – a measure of investors’ medium-term inflation expectations – reached 2.6% for the first time in 13 years, above the fed’s historic 2% target. In Europe, inflation expectations are more muted with the European Central Bank forecasting a rise to 1.5% this year, still below its target.

Portfolio positioning

The Fund’s focus on high-quality, above-average growth companies continues to drive portfolio positioning. The portfolio manager seeks to invest in companies that can compound above average growth at high returns. These companies typically are market leaders with durable business models that have experienced management teams and competitive advantages that MFS believes should allow them to maintain higher returns and earnings growth than their peers. The portfolio manager seeks to apply its buy criteria in a disciplined manner, irrespective of economic conditions. Combined with their long-term investment horizon, this typically results in very modest shifts in portfolio positioning from quarter to quarter.

As of March 31, 2021, the portfolio was most overweight consumer staples. The Fund continues to favor a number of consumer staples companies, many of which are now trading at discount P/E multiples last seen during the Global Financial Crisis. The portfolio manager has long favored consumer staples companies that have strong brands, sustainable, above-average growth and geographically diverse revenue sources. Many of the Fund’s consumer staples companies have pricing power and derive a significant portion of their revenues from underpenetrated emerging markets countries, which has typically led to higher revenue growth and more stable earnings growth than the overall market.

The overall positioning of the portfolio has not changed materially. The Fund continued to build or initiate positions in high-quality businesses that the portfolio manger believed had attractive risk/return profiles while trimming or eliminating companies that they believed had become more fully valued or were facing structural headwinds. Key trades during the first quarter included the following: 

  • The Fund initiated a position in Sweden's Assa Abloy. The company has a dominant position in locks and entry systems, which remains a relatively fragmented market with attractive structural growth potential due to urbanization, increased demand for security and a shift in technology and adoption to electromechanical and digital products.
  • The portfolio manager trimmed Tencent and added to Alibaba after recent regulatory actions by the Chinese government caused Alibaba shares to trade at a nearly 40% discount to Tencent.
  • The Fund initiated a position in Indian conglomerate Reliance Industries. The bulk of Reliance's business is in petro-chemicals and telecommunications services, two industries where Reliance has leading market positions in India. The portfolio manger believes their digital investments (Cloud, Entertainment, E-commerce) have significant upside potential and were not reflected in the stock price when the position was initiated.
  • The Fund initiated a position in U.K.-based food delivery company Just Eat/Takeaway. Although competition in most of their markets is intense, MFS believes that Just Eat/Takeaway has the potential to grow market share, particularly in markets where they are a market leader and can use the profits from their platform business to subsidize their more recent expansion into delivery services.
  • The Fund sold out of Accenture and Bandai Namco Holdings and trimmed Naver and L'Oreal on valuation concerns after strong share price gains. 

Market Outlook

Looking ahead, MFS is encouraged that there is an end in sight from the chaos brought on by the pandemic and optimistic about the return to some semblance of normality in markets. Undoubtedly, 2021 will produce yet more surprises and challenges as a result of the enormous disruption COVID-19 has inflicted on people, businesses and economies. COVID-19 variants are certainly worrying to the portfolio manager. Geopolitical risks appear to be rising and now investors have to contend with the question of regime change and whether 2020 marked the low point for inflation and interest rates. The real impacts are probably yet to reveal themselves or have yet to be fully recognised. At the same time, the global economic data looks strong as the world, in various stages, begins to open up with vaccine rollouts, reopening momentum, and a potential of pent up demand aided by the massive fiscal and monetary stimulus.

The portfolio manager believes the strategy is positioned to benefit from a combination of market leadership broadening out, a return to fundamentals driving stock price returns and a renewed investor focus on valuations. MFS believes the portfolio's exposure to high-quality companies that have significant exposure to long-term secular growth trends, including the growth of the emerging markets middle class consumer, aging demographics across the developed world and companies' reshoring their supply chains, is attractive.

Significant impacts on performance

Naver 

Overweighting shares of the internet search engine and online computer games provider aided performance. Stronger-than-expected quarterly sales and operating profits helped drive the share price upwards during the reporting period. Growth in display ads, payment and digital were notable highlights. 

Hitachi

The portfolio's overweight position in the electronics company contributed to returns. The company reported better-than-expected operating profits, driven by strong performance in its IT segment. Also, management raised its full-year operating profit guidance, which further supported the stock. 

Linde

Holdings of the industrial gas supplier bolstered performance. The company reported better-than-expected earnings per share for the quarter, driven by strong sales and operating profit results. Management also provided favourable earnings guidance for 2021, which further supported the stock.

Asml Holding

Not owning shares of the lithography systems manufacturer for the semiconductor industry, weakened returns. The company reported strong financial results for the quarter, driven by revenue growth in extreme ultraviolet machines (EUV), along with a reassuring outlook.

Novartis

The portfolio's position in the pharmaceutical company weakened performance. The stock came under pressure during the period due to the adverse impact of COVID-19, particularly on the company's Oncology and Ophthalmology franchises, as well as a slower ramp-up in revenues for its multiple sclerosis treatment, Kesimpta.

SAP

The portfolio's overweight position in the enterprise applications company detracted from performance. Although the company reported quarterly financial results in line with consensus estimates, driven by cloud revenue growth and cost control measures, the stock price declined, despite the lack of any significant negative news.

Fund performance

Compound returns %1 Since inception2 10 year 5 year 3 year 1 year Q1
Sun Life MFS International Opportunities Fund - Series A

8.3

8.4

10.0

8.1

24.4

-0.3

Sun Life MFS International Opportunities Fund - Series F

9.5

9.6

11.3

9.4

25.8

-0.1

MSCI EAFE

8.3

8.3

8.2

5.1

27.7

2.1

¹Returns for periods longer than one year are annualized. Data as of March 31, 2021.

²Partial calendar year. Returns are for the period from the fund’s inception date of September 30, 2010 to December 31, 2010.

 


 

Effective June 1, 2020, Sun Life MFS International Growth Fund was renamed Sun Life MFS International Opportunities Fund.

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.

Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc.

SLGI Asset Management Inc. is the investment manager of the Sun Life Mutual Funds, Sun Life Granite Managed Solutions and Sun Life Private Investment Pools.

© SLGI Asset Management Inc. and its licensors, 2021. SLGI Asset Management Inc. and MFS Investment Management Canada Limited are members of the Sun Life group of companies. All rights reserved.