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Sun Life MFS International Opportunities Fund

Fund commentary | Q1 2024

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

Market review

Global markets entered 2024 riding a wave of optimism about a “soft landing” for the U.S. and high expectations for interest rate cuts from the U.S. Federal Reserve (the Fed) and other key central banks. Market momentum was quite strong and, in part, driven by ongoing enthusiasm around artificial intelligence (AI). Given this backdrop, international equities posted solid returns, as the MSCI EAFE Index (CA$) rose 8.6% over the first quarter (Q1).

While a resilient U.S. economy and labour force tempered hopes for rate cuts from the Fed in Q1, markets still continued to rise. Investor willingness to pay higher valuation multiples rather than earnings growth, drove market gains. While Japanese stocks outperformed the market, Hong Kong equities underperformed. 

Performance review

Sun Life MFS International Opportunities Fund (the “Fund”) underperformed its benchmark, the MSCI EAFE Index in the quarter. Relative underperformance was driven by financials, consumer staples and consumer discretionary sectors. The Fund’s investments in industrials, information technology and materials sectors helped relative performance in Q1.

  • A combination of both stock selection and an underweight position in financials detracted from relative performance.
  • A combination of both stock selection and an overweight position in consumer staples, hurt relative performance.
  • Stock selection in consumer discretionary negatively affected relative performance.
  • A combination of both stock selection and overweight positions in industrials and information technology helped relative performance.
  • Stock selection in materials aided relative performance.

Despite the strong rally in Q1, our sub-advisor MFS Investment Management (“MFS”) believes there are significant uncertainties in the market. Wage growth has eased from peak levels but remains elevated, which may keep price inflation sticky. Oil prices were volatile amid conflicts in the Middle East. As key financial assets look priced for perfection, rising economic, political and geopolitical risks could quickly prompt concerns over valuation. Despite this near-term uncertainty, MFS is focussed on exploiting short-term market volatility as an opportunity to add and trim positions. 

  • Taiwan Semiconductor Manufacturing Co. – The Fund’s position in the semiconductor manufacturer bolstered relative returns. The company reported better-than-expected quarterly financial results and forecasted strong 2024 earnings per share growth as AI adaption gathers further momentum.
  • SAP – The Fund's overweight position in the enterprise applications company helped relative performance. The stock advanced on stronger-than-anticipated cloud revenue growth and robust margin expansion.
  • Hitachi – An overweight position in the electronics company bolstered relative performance. It reported quarterly sales and operating profit results above market expectations, thanks to sales growth in key segments.

  • AIA Group – Overweighting shares of the insurance company AIA Group held back relative performance. It reported solid new business growth driven by Hong Kong, Thailand and China. The market seemed disappointed that no additional updates were reported on the company's share buyback program. Further, lower than expected after tax profits due to post-pandemic medical claims hurt performance.
  • Toyota Motor – Not owning shares of the car maker hindered relative performance. The stock advanced in Q1 as the company posted higher-than-consensus operating profit results, primarily driven by demand in North America and Japan and increased sales of hybrid electric vehicles.
  • Novo Nordisk – Not owning shares of the pharmaceutical company weakened relative returns. The stock rose as it reported strong financial results and better-than-expected guidance

Significant transactions

Adds/Buys

  • Initiated a position in Zalando, the largest branded apparel e-commerce retailer in Continental Europe. The Fund believes the company has the potential for gross margin expansion.
  • Added to Franco-Nevada, a gold streaming company based in Canada, after shares sold off on concerns about disruption to their revenue from a Panamanian mine. MFS believes the company may get a better outcome in arbitration than the market is anticipating. The sub-advisor also continues to like the underlying business environment.
  • Added to Hong Kong-based life insurer AIA Group at more attractive valuations after recent underperformance. Although sentiment has been negative towards companies with significant China exposure, MFS continues to like this conservatively managed, well-capitalized company that is operating in high-growth underinsured Asian markets. 

Sells/Trims

  • Exited the position in Bayer based on concerns about ongoing litigation, corporate structure and its new operating model.
  • Trimmed Roche Holdings to better align the position’s active weight within the Fund.

Fund positioning

As of the end of Q1, the portfolio was overweight information technology, materials and industrials sectors. Information technology currently represents the largest overweight given the Fund’s overweight position towards software companies. Within materials, 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 they can generate significant free cash flow over a full market cycle, driven in part by long-term contracts. MFS expects these companies will also be beneficiaries of reshoring as many global companies revisit their supply chains. The overweight to industrials include positions in tech-oriented Japanese conglomerate Hitachi, electrical equipment company Schneider Electric and aerospace and defense company Rolls-Royce Holdings.

The portfolio is underweight in the communication services sector primarily and does not own any diversified telecommunications companies, which typically do not have above-average earnings growth.

Fund performance

Compound returns %1 Since inception 10 year 5 year 3 year 1 year Q1

Sun Life MFS International Opportunities Fund - Series A

7.4

 7.1 6.1

4.0

8.5

7.2
Sun Life MFS International Opportunities Fund - Series F

8.6

7.4

7.9

5.3

9.8

7.5
MSCI EAFE Index

8.1

 7.6 7.4 7.4 15.3 8.6

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