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Sun Life MFS International Opportunities Fund

Fund commentary | Q4 2020

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Market review

In November, a clear election result and positive news from multiple vaccine trials buoyed equity markets. The fourth quarter rally was largely fuelled by COVID-19 vaccine optimism. This helped to unleash a powerful pro-cyclical rotation as value outperformed growth. There was a strong rotation in sector leadership, however high-valuation stocks and low-quality stocks still continued to outperform the market.

Portfolio positioning

In the fourth quarter, the portfolio was overweight consumer staples. Many of the Fund’s consumer staples holdings have pricing power and derive a significant portion of their revenues from underpenetrated emerging markets countries, which has historically led to higher revenue growth and more stable earnings growth than the overall market. While e-commerce is negatively affecting many industries, this disruption has not impacted 'brown spirits' distillers, such as Diageo and Pernod, to the same degree as other industries, as these spirits typically take many years to produce.

The portfolio was underweight consumer discretionary and communication services. The underweight to consumer discretionary stems primarily from the Fund’s avoidance of multiline and specialty retailers, many of whom are facing pressure from e-commerce competition. The Fund’s underweight to communication services is the result of not owning many telecommunications companies that MFS believes typically do not have sustainable above-average growth or pricing power.

The overall positioning of the portfolio has not changed materially. The portfolio manager continued to build or initiate positions in high-quality businesses they believed had attractive risk/return profiles, while trimming or eliminating companies they believed had become more fully valued or were facing structural headwinds.

Key trades during the fourth quarter included the following:

  • Initiated a position in Cap Gemini, one of the world's largest IT services companies. New management has improved the business in several dimensions and recently acquired an engineering R&D company, which increases its exposure to higher growth areas and provides support to further margin expansion from cost synergies.
  • Bought Prosus, a holding company whose underlying net income is derived primarily from its ownership of Tencent. MFS believes Tencent has a significant pathway for growth of its chat and payments businesses, and owning Prosus gives the portfolio additional Tencent exposure at a discount.
  • Bought Mahindra & Mahindra, an Indian conglomerate whose crown jewel is their tractor manufacturing business. The portfolio manager believes the company has the ability to build on their leading market share in tractor sales, fueled by the potential for structural growth in India driven by agricultural yield improvements.
  • Added to the position in SAP after a recent profit warning made the valuation more attractive. The profit warning was due to increased investment in their cloud business and a faster transition from licenses to subscriptions.
  • Sold the position in Mettler-Toledo International at higher valuations after strong share price performance.
  • Sold the position in Japan Tobacco on concerns about their ability to manage the shift to heat-not-burn technologies.
  • Sold food catering company Compass Group due to lower conviction around future margins given the negative impact of the pandemic, which may continue even after the pandemic ends.

Market insights

The year of 2020 witnessed the fastest bear and bull market cycle in history, driven by news of a global pandemic, the policy response by central banks and governments and the development of a vaccine. Equity indexes had narrow leadership, and factors such as momentum, high valuation and low quality outperformed the overall market.

The Fund owned attractively valued steady companies. Names like Nestle, Roche, and Novartis are businesses that MFS believes have a greater chance of delivering earnings growth more consistently and predictably than the overall market. The portfolio manager has consistently focused on these types of high-quality companies and that has not changed. Coming into 2021, MFS believes the strategy is positioned to potentially benefit from a combination of market leadership broadening out, a return to fundamentals driving market returns and a renewed focus on valuations. The Fund seeks to own high-quality businesses with significant exposure to long-term secular growth trends, including growth of the emerging markets middle class, aging demographics across the developed world and reshoring.

Market outlook

The global economy continues to recuperate from the early 2020 recession, but the question remains whether this rebound will turn into a full-blown recovery. Unlike many recessions, which were the result of self-inflicted excesses, the pandemic was an exogenous, non-economic catalyst. As a result, the rebound and any economic scars resulting from this downturn may be different from prior downturns and recoveries. While equities generally closed at or near all-time highs to end 2020, earnings remain well-below pre-pandemic levels.

The portfolio manager expects the markets to remain choppy into 2021, as there is limited visibility on how the virus variants and vaccine programs will impede or support economic activity against the backdrop of potential ongoing stimulus. MFS believes having a long-term investment timeframe, grounded in strong fundamental analysis, have never been more important. Things like the impact of a massive increase in the level of government debt, significantly lower interest rates for an extended period of time, pension underfunding and lower long-term global growth could prove not to be transitory.

Significant impacts on performance

Alibaba Group

Owning shares of online and mobile commerce company, Alibaba Group (China), benefited relative performance. 

HDFC Bank

Holdings of banking firm, HDFC Bank (India), contributed to relative returns as the majority of the company's retail business saw a pickup in disbursements from October to November 2020. The share price also reacted positively to core fee income that bounced back to pre-pandemic levels. 

Rolls-Royce

Owning shares of diversified industrial manufacturer, Rolls-Royce (United Kingdom), aided relative results. The company announced a £5bn funding package, including a £2bn fully underwritten rights issue. The package meaningfully improved the liquidity and leverage for Rolls-Royce.

SAP

An overweight position in enterprise applications provider, SAP (Germany), held back relative results after the company posted weaker-than-expected revenue and operating profit results.

Reckitt Benckiser

An overweight position in household products manufacturer, Reckitt Benckiser (United Kingdom), held back relative performance. Despite reporting strong quarterly results and raising its revenue guidance, the share price declined amidst news of COVID-19 vaccine developments/approvals, which could temper demand for the group's hygiene products.

Fund performance

Compound returns %1 Since inception2 10 year 5 year 3 year 1 year Q4
Sun Life MFS International Opportunities Fund - Series A

8.6

8.3

8.7

8.7

10.5

7.0

Sun Life MFS International Opportunities Fund - Series F

9.8

9.5

9.9

9.9

11.8

7.3

MSCI EAFE

8.3

8.2

5.6

4.9

5.9

10.7

¹Returns for periods longer than one year are annualized. Data as of December 31, 2020.

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.

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