Sun Life MFS International Opportunities Fund

Fund commentary | Q1 2023

Opinions and commentary provided by MFS Investment Management Canada Limited.

Market review

After a strong start in early 2023, international equity markets fluctuated in the first quarter, driven by shifting interest rate expectations. The MSCI EAFE Index (C$) rose 8.3% over the first quarter.

Gains were largely front-loaded into January on hopes the U.S. Federal Reserve (the “Fed”) would pivot to slowing interest rate increases. The index was buoyed by receding recession worries in developed markets and long-duration, growth-oriented stocks benefited from lower bond yields amidst the largest quarterly decline in yields since the pandemic in early 2020. The U.S. Treasury yield curve remained inverted, although yields fell across most of the curve. Other supportive factors during the quarter were continued excitement over China reopening and mild winters in both Europe and the U.S. Headwinds over the period were the concerns over the collapse of Credit Suisse and failure of two U.S. regional banks.

Most sectors in the index rose over the quarter, most notably economically sensitive areas like Information Technology, Communication Services, Consumer Discretionary and Industrials, which were all up double digits in Canadian dollar terms. Yet, it is noteworthy that despite the deteriorating economic backdrop, these sectors have rallied over this period. Within Information Technology, stocks of semiconductor companies rose by double digits amid signs inventory levels are improving in certain segments of the market. Consumer Discretionary stocks also posted significant gains amid sentiment that a recession may be avoided this year. LVMH shares advanced after the luxury goods giant reported record-high revenue of $86 billion (USD) in 2022, driven largely by the return of international travel and tourism.

Economic growth and employment data came in stronger than anticipated for most of the quarter, and optimism was fueled by the notion that the Fed was nearly done tightening, mortgage rates were falling, employment remained healthy and nothing in the economy had broken. This stronger growth was illustrated by the rebound in the U.S. and European composite Purchasing Managers’ Index (PMI) business surveys since the start of the year, in particular the services component as the manufacturing component in most countries signals a contraction. Lower energy and oil prices have probably played an important role in the improvement in business sentiment, along with the reopening of China. As equity prices increased, optimistic investors crafted a wide assortment of bullish narratives including the “no landing” economic scenario. In March, the collapse of Credit Suisse and two U.S. regional banks sent fears of contagion through the markets. Since then, at the margin, the market appeared to increasingly consider the risk of recession.

While non-economic factors, particularly China’s abrupt reopening and mild winters in Europe and the U.S., may have contributed to a stronger-than-expected start to 2023, most economic indicators point to recession for developed market countries. At this point, three key ingredients for a recession are in place. Synchronized global central bank tightening has occurred with aggressive Fed tightening. Spikes in food and energy inflation are apparent and banks are tightening lending standards. Historically, this combination has always led to a hard landing or recession. Further, the global debt burden is at record levels as measured by a steadily rising global debt-to-GDP ratios over the past decade which may weigh heavier in a higher rate environment.

With the lagged effects of higher interest rates, equity returns are likely to be impacted by whether earnings can remain resilient. Margins for the index appear to have come off peak levels and the question will be to what extent earnings per share (EPS) growth declines. There are inevitable consequences when it comes to slower economic activity and declining company earnings. Declining EPS can set the stage for weak markets and a deterioration in employment trends.

The Sun Life MFS International Opportunities Fund (the “Fund”) outperformed the EAFE Index for the first quarter. Relative performance was primarily driven by Fund investments in the Information Technology, Consumer Discretionary and Energy sectors.

  • An overweight position in Information Technology, the best performing sector in the index, aided relative returns
  • Stock selection in Consumer Discretionary contributed to relative performance
  • Underweight positions in Real Estate and Energy, both weaker-performing sectors in the index, contributed to relative performance
  • Stock selection in Health Care detracted from relative performance
  • A combination of both stock selection and an overweight in Consumer Staples detracted from relative performance


Manager Outlook

One of the biggest concerns for the sub-advisor (MFS Investment Management), and their base case, is the likelihood of recession and the corresponding impact on company earnings. The debate is around how much a fall in earnings has been priced into valuations as a recession edges closer. From their bottom-up perspective, the market seems in denial about the level of economic stress increasing in international equity markets.

While there are some positive narratives in the marketplace, market concerns revolve around a higher-for-longer Fed in response to sticky services inflation and a tight labour market, tighter credit conditions following recent banking sector turmoil, downside risks to consensus earnings estimates as margins continue to revert, eroding excess savings/consumer balance sheet cushions, geopolitics and de-globalization. The total amount of global debt has only increased through the COVID pandemic which makes the effects of quantitative tightening quite unpredictable. The likely solution to these current scenarios probably involves some level of economic and market pain before it resolves.

With such uncertainty in the near term, MFS remains focused on doing what they believe they do best: investing with a long-term horizon and using short-term market volatility as an opportunity to add and trim (and start and eliminate) positions. MFS has a clear strategy of investing in quality companies with durable growth, returns and cash flow generation through the cycle, but with an added focus on downside risk management and assessing risk that others often seem willing to overlook. Longer term, they continue to believe that stock selection will be the key component of generating alpha and seeking to avoid significant drawdowns.

MFS continues to see economic stress increasing in international markets, and believe the portfolio is well positioned from their defensive positioning given the increasing risk of recession and their valuation investment discipline in a potentially slower growth, more volatile market environment.

  • Taiwan Semiconductor Manufacturing Co., Ltd. – Holdings of semiconductor manufacturer Taiwan Semiconductor Manufacturing (Taiwan) helped relative returns. The share price benefited from a stronger-than-expected outlook rebound due to very strong N3 (3nm semiconductor transistors) customer engagements across smartphone and high-performance computing.
  • LVMH Moët Hennessy Louis Vuitton SE (LVMH) – An overweight position in luxury goods company LVMH (France) boosted relative performance as the company reported strong top-line growth despite softer-than-anticipated margins. Much of the upside came from the company's Selective Retailing and Fashion & Leather divisions. Additionally, the re-opening of China and lifting of COVID-related restrictions further benefited the stock.
  • Rolls-Royce Holdings Plc – The portfolio's overweight position in diversified industrial manufacturer Rolls-Royce (United Kingdom) bolstered relative results. The share price appreciated during the period as the company's earnings exceeded consensus estimates, led by stronger-than-expected cash flows. Additionally, the firm benefited from the implementation of a transformation program aimed at growing operating margins and improving operational efficiency by increasing working capital through better inventory management and a faster recovery of receivables.

  • Roche Holding AG – The portfolio's overweight holdings of pharmaceutical and diagnostic company Roche Holding (Switzerland) weakened relative results. The stock price declined as the company reported a profit miss for 2022 and cited a softer-than-expected sales and earnings outlook for the remainder of the year.
  • AIA Group Ltd. – The portfolio's overweight holdings of insurance company AIA Group (Hong Kong) detracted from relative performance. The stock price of AIA Group declined during the period, after having rallied in Q4 2022 due to China's post-COVID re-opening.
  • QIAGEN NV – The portfolio's overweight position in molecular diagnostics provider QIAGEN (Netherlands) hindered relative returns. Although the company reported strong financials with better-than-expected sales and revenue growth, the share price appeared to have detracted due to profit-taking activity and an uncertain macroeconomic outlook.

Portfolio Activities

MFS’ focus on high-quality, above-average growth companies continues to drive portfolio positioning. 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. MFS seeks to apply their buy criteria in a disciplined manner, irrespective of economic conditions. Combined with their long-term investment horizon, this typically results in very modest shifts in portfolio positioning from quarter to quarter.

During the first quarter, 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 had become more fully valued or were facing structural headwinds.

Key trades included:

  • Initiated a position in Chugai Pharmaceutical (Japan), which is focused primarily on research and proof of concept of drugs. With their recent focus on polypeptides, it has several interesting drugs in the early stage of development.
  • Continued to build up a new position in SK Hynix (South Korea), although the industry has been in a cyclical downturn, the company has a solid balance sheet, strong market position and balanced portfolio of DRAM and NAND memory chips, which serves a diverse geographic base and end market applications.
  • Added to an existing position in Amadeus IT Group (Spain), a company that provides transaction processing services for the global travel and tourism industry. MFS believes its competitive position has improved in recent years and its hotel IT business could be more of a growth driver going forward.
  • Trimmed Novartis (Switzerland) and used part of the proceeds to add to Roche (Switzerland), which in MFS’ view, is more attractively valued and has a stronger pipeline.
  • Trimmed Flutter Entertainment Plc after strong share price gains due to optimism about their U.S. sports gambling business. The position was reduced back to a more modest size given the valuation and regulatory risk.
  • Exited Japanese cosmetics company Kao on lower conviction in the company’s growth prospects going forward.


Fund Positioning

As at March 31, 2023, the Fund was overweight Materials and Industrials. Within Materials, two of the largest active positions include industrial gas producers Linde and Air Liquide. MFS believes 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. In addition, they believe these companies will also be likely beneficiaries of re-shoring as many global companies re-visit their supply chains. The Fund’s Industrials exposure is comprised of companies in the following industries: industrial conglomerate (Hitachi), electrical equipment, ground transportation (railways) and building products.

The Fund was underweight Communication Services. The underweight to Communication Services 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 portfolio exposure in Communication Services is in the interactive media and services industry with companies such as Tencent, Naver and Z Holdings.

Related to the banking crisis and Adani scandal during the first quarter, it is worth noting that the Fund has been underweight the Financials sector and owns emerging markets banks over developed market banks and had no exposure to any of the Adani listings.

Fund performance

Compound returns %1 Since inception2 10 year 5 year 3 year 1 year Q1

Sun Life MFS International Opportunities Fund - Series A







Sun Life MFS International Opportunities Fund - Series F









8.1 4.5 11.1 (6.9) 8.3

¹Returns for periods longer than one year are annualized. Data as of March 31, 2023.

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.

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.