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Sun Life MFS International Opportunities Fund

Fund commentary | Q2 2024

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

Market review

International equity markets posted mixed performance during the second quarter ending June 30, 2024 (Q2). Emerging markets outperformed developed international markets in the period. Outside the U.S., there was no clear risk-on or risk-off trend that influenced markets. As inflation remained sticky, markets expected fewer interest rate cuts by developed markets’ central banks. Against this backdrop, international equities were flat and the MSCI EAFE Index (CA$) rose 0.7% in Q2.

Despite lackluster returns in Latin America, emerging markets outperform developed international markets.

Sun Life MFS International Opportunities Fund Series F (the “Fund”) returned 2.1% in Q2 and outperformed its benchmark, the MSCI EAFE Index. The Fund’s outperformance was driven by industrials and information technology sectors. Financials, health care and consumer staples sectors hurt performance over the period.

  • Stock selection in industrials contributed to relative performance.
  • A combination of both stock selection and an overweight position in information technology contributed to relative performance.
  • A combination of both stock selection and underweight positions in financials and health care detracted from relative performance.
  • A combination of both stock selection and an overweight position in consumer staples detracted from relative results.

 

Manager Outlook

Our sub-advisor MFS Investment Management (MFS) is paying close attention to political risks during the second half of the year. MFS believes there are significant uncertainties in the markets stemming from political risks in international markets.

Despite this near-term uncertainty, our sub-advisor remains focused on the long-term investment horizon and uses short-term market volatility to add and trim positions. MFS has a clear strategy of investing in high-quality companies with sustainable growth, returns and cash flow generation and believes this disciplined approach has historically added value.

  • Taiwan Semiconductor Manufacturing Co. Ltd. - The portfolio's position in the semiconductor manufacturer helped relative performance. The firm’s share price rose as strong demand for AI-related chip production offset weaker-than-expected revenues from smartphone chips.
  • Hitachi Ltd. - The portfolio’s position in the electronics company contributed to relative performance. Hitachi’s stock rose as it reported operating profit results above market expectations, thanks to strong order growth within its digital systems and services, green energy and mobility and connective industries. The company also announced a share buyback that further supported the stock.
  • Toyota Motor Corp. - Not owning shares of the car maker benefited relative returns. The stock price declined due to weaker-than-expected guidance from management that overshadowed the company’s robust operational performance in Q2. 

  • Initiated a position in Obic, a Japanese enterprise resource planning (ERP) software company. Obic has a leading share in serving mid-sized Japanese corporations and has been growing its business in the market for larger corporations. ERP software tends to be very sticky and Obic has a unique direct sales model and more comprehensive solutions. This has led to consistent market share gain versus less focused competitors. The firm’s valuation has declined significantly from its COVID peak, and MFS believes it is one of the highest quality businesses in Japan.
  • Added Heineken, a stock our sub-advisor initially purchased in Q2 2023. MFS believes Heineken has emerged stronger thanks to mergers and acquisitions completed over the last 10 to 15 years. MFS believes Heineken has much better footprint for growth in the faster growing emerging markets.
  • Added Nestlé at a more attractive valuation after recent underperformance. The stock trades at an attractive valuation in comparison to other international growth stocks.
  • Added Deutsche Börse at a more attractive valuation following its acquisition of SimCorp. The company is looking to integrate SimCorp’s investment management software with its own data to strengthen and focus its data and analytics-powered investment management solutions.
  • Added to Nomura Research Institute, which MFS believes has a favourable long-term growth outlook given the historical level of underinvestment by corporate Japan in information technology.
  • Trimmed Hitachi at a higher valuation after a very strong multi-year run in the stock. Over the past several years, Hitachi’s management has done a great job of allocating capital to higher growth and higher return areas of the business and exiting more capital-intensive areas.
  • Trimmed Rolls-Royce Holdings. following strong share price performance over the past 18 months. The firm reported full-year financial results above consensus expectations, driven by strong performance across segments. The company also raised its full-year guidance that further supported the stock.
  • Trimmed SAP after the stock posted strong gains as management demonstrated meaningful progress on transitioning customers to the cloud.

Fund positioning

As of Q2, the portfolio was overweight in the information technology, materials and consumer staples sectors. Information technology represents the Fund’s largest overweight in comparison to its benchmark. Within materials sector, the Fund’s overweight is primarily driven by investments in the specialty chemicals industry. Industrial gas producers Linde and Air Liquide are the Fund’s largest positions in the sector. MFS believes these are high-quality cyclical companies that have generated returns above their cost of capital and recorded strong free cash flow over a full market cycle. The firm believes these companies will also be beneficiaries of reshoring as many global companies revisit their supply chains. Our sub-advisor has long favoured consumer staples companies with strong brands, above-average growth and geographically diverse revenue sources. 

Fund performance

Compound returns %1 Since inception 10 year 5 year 3 year 1 year Q2

Sun Life MFS International Opportunities Fund - Series A

7.4

 7.3 6.0

3.0

10.2

1.8
Sun Life MFS International Opportunities Fund - Series F

8.6

8.5

7.2

4.2

11.5

2.1
MSCI EAFE Index

8.0

 7.0 7.4 6.4 15.3 0.7

¹Returns for periods longer than one year are annualized. Data as of June 30, 2024.

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.