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Sun Life MFS International Opportunities Fund

Fund commentary | Q3 2023

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

Market review

The MSCI EAFE Index (C$) declined 2.03% over the third quarter (Q3) of 2023. This follows a string of three consecutive positive quarters with the index (C$) up 6.85% on a year-to-date basis. The market selloff was largely due to pressure by rising interest rates, higher bond yields and slowing growth in some of the world’s largest economies. Even as global inflationary levels subsided, indications that central banks may keep monetary policy tight weighed on stock and bond markets.

Looking across both developed international and emerging markets, the U.K., Japan and emerging markets fared better than continental Europe. European stocks declined in the face of rising interest rates and signs of weakness in the eurozone economy. In foreign exchange markets, a strong U.S. dollar put added pressure on international developed and emerging markets.

Sun Life MFS International Opportunities Fund (the “Fund”) underperformed the MSCI EAFE Index over Q3.

  • Both stock selection and underweight positions in financials and energy, two of the strongest-performing sectors in the index, detracted from relative performance
  • Stock selection in consumer discretionary and healthcare detracted from relative performance
  • Stock selection in industrials contributed to relative performance

Manager Outlook

Our sub-advisor MFS Investment Management (MFS) continues to monitor the stalled re-opening in China, the world’s second largest economy. China is experiencing a confluence of cyclical and structural factors creating a crisis of confidence in an environment with no growth drivers on the horizon. MFS can see that households want to save more, youth unemployment is high and private businesses don’t want to invest. The causes are fear about income and employment growth, ad-hoc regulation and a lack of growth opportunities.

With a lack of clarity in economic growth, inflation and interest rates outlook, equity markets may remain volatile as the lagged effects of higher interest rates and tighter credit standards continue to weigh on the economic and earnings outlook.

  • Rolls-Royce Holdings plc – The portfolio's overweight position in the diversified industrial manufacturer bolstered relative results. The share price appreciated during the period as its earnings exceeded consensus estimates.
  • Hitachi Ltd. – The portfolio's overweight position in the electronics company Hitachi contributed to relative returns. The stock price rose as it posted above-consensus operating profit results.
  • Amorepacific Corp. – Shares of the beauty and health products developer benefited relative performance. 

  • LVMH Moët Hennessy Louis Vuitton SE – An overweight position in the luxury goods company negatively impacted relative returns. After months of strong share price growth, the stock price declined following an operating profit miss.
  • Pernod Ricard SA – An overweight position in the wine and alcoholic beverage producer held back relative performance. The stock price declined as management reported fiscal fourth -quarter revenues and earnings slightly below consensus estimates.
  • Amadeus IT Group SA – An overweight position in the tourism and travel IT solutions provider detracted from relative returns. The stock price fell as it reported weaker-than-expected total air level demand and revenues per passenger.

Portfolio Activities

Mexico and Canada have overtaken China as America’s largest trade partners as friend shoring is apparent in imports from major trading partners compared to mid-2018. Reshaped by the after effects of the U.S.-China trade war, pandemic disruptions and rising political pressures to deglobalize, global supply chain reconfiguration is likely to accelerate going forward. This is evident in a significant increase in U.S. construction spending on manufacturing in the past year. MFS has been discussing a polarizing world for many years, and they believe many positions in the portfolio, such as the industrial gas producers, may benefit from this trend.

During Q3, MFS continued to build or initiate positions in high-quality businesses that they 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 included:

  • Initiated a position in British consumer health care company Haleon plc. The company has leading brands such as Sensodyne in oral health, Tums in digestive health and Advil in over-the-counter pain relief. MFS likes the consumer health industry and believe it has the potential to take market share as a leader.
  • Initiated a position in Tenaris SA, an Italian manufacturer and supplier of steel pipes and related services, primarily for the energy industry. MFS believes it has an improved competitive position.
  • Added to Mexican banking group Grupo Financiero Banorte SAB de CV. A recent meeting confirmed MFS’ confidence in the management team, which has made significant investments in technology and customer service over the past few years which are driving increased profitability.
  • Trimmed positions in Delta Electronics and SK Hynix on valuation after strong runs in their share prices, fuelled largely by enthusiasm around artificial intelligence.
  • Trimmed the position in Hitachi to manage the position size of what had become the Fund’s largest active weight.
  • Trimmed Singaporean bank DBS Group Holdings in order to fund the addition to Banorte, which MFS believes has a stronger long-term growth profile.

Fund Positioning

As at September 30, 2023, the portfolio was overweight materials and consumer staples. Within materials, two of the Fund’s largest active positions include industrial gas producers Linde and Air Liquide. These high-quality cyclicals generate returns above their cost of capital and generate significant free cash flow over a full cycle, driven in part by long-term contracts that have built-in price escalators, making them more defensive cyclicals. MFS has long favoured consumer staples companies that have strong brands, durable, above average growth and geographically diverse revenue sources.

The portfolio is underweight communication services. This underweight is primarily the result of not owning many telecommunications companies that typically do not have durable above-average growth, returns and free cash flow characteristics. Most of the Fund’s communications services exposure is in the interactive media and services industry, such as Tencent, Naver and Z Holdings.

Fund performance

Compound returns %1 Since inception 10 year 5 year 3 year 1 year Q3

Sun Life MFS International Opportunities Fund - Series A

6.44

 6.40 3.46

1.25

14.63

-6.47
Sun Life MFS International Opportunities Fund - Series F

7.66

7.62

4.67

2.43

15.96

-6.20
MSCI EAFE

7.11

 6.71 4.17 6.18 23.63 -2.03

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

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.