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Sun Life MFS International Opportunities Fund

Fund commentary | Q2 2021

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Market review

What started as a ‘COVID-19 recovery trade’ after the vaccine news in November of last year, with a steep rotation towards  higher beta, lower quality, and very cyclical stocks, has morphed into a broader equity rally with fewer defining features, but more focus on earnings growth. There was however a reversal of the rotation towards the end of the quarter after the Federal Reserve (Fed) said it could be raising interest rates by 2023, a year earlier than previous guidance. At a macro level, there was excitement among investors regarding the speed of re-openings and vaccine roll-outs. 

The main focus of the markets during the second quarter was whether recent inflationary pressures are transitory or permanent. MFS believes it is still too early to tell since year-over-year price changes are distorted by falling prices during the lockdown. The long-term debate is whether the deflationary forces holding prices down (demographics, debt, globalization, technology) are still as strong as they were. Globalization led to a huge transfer of production from high-cost economies to lower-cost economies in Asia and Eastern Europe, which may now be reversing. Low inflation has become a global phenomenon and inflation has been falling for 30 years. So far, central banks and most investors believe inflation is transitory, with price pressures caused by supply and demand imbalances distorted by the pandemic.

Relative calm has descended across bond markets, with yields actually falling, as fears of an interest rate shock are dissipating, at least for now. An interest rate shock could have punctured high equity valuations, especially for long-duration assets, that have been bid up in technology and other thematic areas (e.g. clean energy stocks). The yield on the benchmark 10-year US Treasury has eased back below 1.5%, having peaked close to 1.8%. Falling interest rates have been the engine for several bull markets in bonds and equities over the last decade or more. 

Portfolio positioning

The Fund’s focus on high-quality, above-average growth companies continues to drive portfolio positioning. MFS 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 should allow them to maintain higher returns and earnings growth than their peers. 

The portfolio was overweight consumer staples and materials. The Fund has favored consumer staples companies that have strong brands, sustainable, above-average growth and geographically diverse revenue sources. MFS has spent significant time analyzing prior deflationary and inflationary periods and have come to a rather ordinary conclusion: businesses with pricing power fair best in either extreme. 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 typically leads to higher revenue growth and more stable earnings growth than the overall market.

Within materials, two of the Fund’s largest active positions are industrial gas producers Linde and Air Liquide. These high-quality cyclicals have generated returns above their cost of capital and have generated significant free cash flow over a full cycle, driven in part by long-term contracts that have built-in price escalators. MFS believes these companies are likely to be beneficiaries of re-shoring as many global companies revisit their supply chains.

The portfolio was underweight Communication Services as a result of not owning many telecommunications companies that typically do not have sustainable above-average growth, returns and free cash flow characteristics.

During the quarter the Fund continued to build or initiate positions in high-quality businesses that MFS believed had attractive risk/return profiles while trimming or eliminating companies that it believed had become more fully valued or were facing structural headwinds. 

Key trades during the second quarter included the following:

  • The Fund initiated a position in Swedish Match, which makes moist smokeless tobacco products, cigars and lighters. MFS believes their tobacco free nicotine pouch, Zyn, will be a key growth driver for the company.
  • The Fund initiated a position in London Stock Exchange and Deutsche Boerse. Both companies have diversified away from the more cyclical parts of their businesses (financial exchanges and clearing) towards market data. This has increased the proportion of revenues that come from less volatile and more recurring income streams versus the more cyclical part of the business.
  • The portfolio Manager added to Hitachi, the Japanese conglomerate with several world-class technologies, including robotics, factory automation and medical electronics equipment. Management has done a credible job of changing the corporate culture to one more focused on shareholder returns, highlighted by a simplification of their corporate structure, which has resulted in a more focused and profitable business with better growth prospects. 
  • The Fund sold out of Danone due to the deteriorating attractiveness of their main categories: water, infant formula and dairy. The infant formula business is challenged by declining births and emerging Chinese competition, while the bottled water business is impacted by increasing consumer aversion to plastic packaging. 
  • The Fund exited its position in Chinese online job recruitment business 51Job Inc. on news of the completion of the take-out by a consortium of Chinese investors.
  • The Fund trimmed LVMH Moet Hennessey and L'Oreal at higher valuations after strong share price gains. MFS continues to believe these are attractive businesses with strong fundamentals. 

Market Outlook

It is pleasing to be able to look ahead with optimism and enjoy the economic boom as countries emerge from the pandemic, with some of the easiest financial conditions on record and unprecedented fiscal and monetary support in place. The market is certainly more focused now, looking closely at the near-term and long-term earnings growth of companies once again, as we move beyond the disruption phase. Although, after the volatility of the past year, it will no doubt take time for market imbalances to work through the system. There will be bumps in the road ahead, not least the risk of COVID-19 variants, and markets could stay volatile and unpredictable as we work through this in the coming months. One of the biggest questions soon will be the extent to which governments and citizens are prepared to live with the virus. That answer will have crucial implications for the shape of the recovery and the new steady-state we are heading to. The inflation debate will rumble on, with investors looking for tell-tale signs of transitory or permanent change. As we move further into 2021, MFS 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 is attractively positioned with 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 and aging demographics across the developed world. 

Significant impacts on performance

Hitachi

The portfolio's overweight position in electronics company Hitachi (Japan) contributed to returns. The company posted better-than-expected operating profit results, driven by strong performance in its IT segment. In addition, management reported favourable operating profit guidance, which further benefited the stock.

LVMH Moet Hennessy Louis Vuitton

An overweight position in luxury goods company LVMH (France) contributed to performance. The company reported strong sales results in its Fashion & Leather segment, with Christian Dior a particular standout. Additionally, management reported strong sales results in its Wine & Spirits segment, with champagne and cognac sales benefiting from the later timing of the Chinese New Year and from restocking in the US.

SAP

The portfolio's overweight position in enterprise applications company SAP (Germany) contributed to performance. The company reported quarterly financial results in line with consensus estimates, driven by strong growth in its cloud and software segments.

Flutter Entertainment

The portfolio's overweight position in online betting and gaming operator Flutter Entertainment (United Kingdom) detracted from performance. Despite strong Online Sports revenue growth that benefited from COVID-19 lockdowns, the company's share price came under pressure on the back of lower-than-expected sales within its Gaming segment, particularly for poker, as well as regulatory headwinds in Germany.

HDFC

The portfolio's position in banking firm HDFC Bank (India) hindered returns as the company reported profit-after-tax results that missed market expectations, due to higher-than-expected provisions for loan losses as the country dealt with a second wave of COVID-19.

Reckitt Benckiser

Holdings of gold mining company Newmont (United States) held back relative returns on the back of materially lower production volumes and a weaker pricing mix.

Fund performance

Compound returns %1 Since inception2 10 year 5 year 3 year 1 year Q2
Sun Life MFS International Opportunities Fund - Series A

8.6

8.7

11.0

8.4

17.8

4.9

Sun Life MFS International Opportunities Fund - Series F

9.8

9.9

12.3

9.7

19.2

5.2

MSCI EAFE

8.4

8.6

9.2

6.1

20.3

3.6

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