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Sun Life MFS International Value Fund

Fund commentary | Q2 2022

Opinions and commentary provided by MFS Investment Management Canada Limited.

Market Review

Global equity markets declined sharply during the second quarter, as inflation and energy costs remained elevated and central banks began to tighten rates at an accelerated pace, increasing the likelihood of a global recession. All eleven sectors in the EAFE index posted negative returns for the quarter. The worst performing sectors included information technology, materials and industrials, while energy, consumer staples and health care posted the best relative returns, which in this case meant the least-negative performance.

During the quarter, longer-duration, growth-oriented stocks and sectors hit particularly hard. The market has been whipsawed by persistent inflation, and more recently recession fears, as developed market central banks have been tightening monetary policies despite signs of slowing demand and easing commodities inflation. With higher inflation, rising interest rates and slowing growth, a “regime change” is underway after many years of stimulus policies that fueled high equity returns. While equity valuations have fallen from high levels, risks of downward earnings revisions and margin compression continue to weigh on investor sentiment

The US market, as measured by the S&P 500 Index, ended lower in Q2 2022. Investors’ concerns about the Russia-Ukraine war, rising inflation and a possible recession increased over the past three months.Economic growth in the United States contracted during Q1 2022, posting a GDP of - 1.6%. This reversal from the strong growth in Q4 was driven by a resurgence of COVID-19 cases due to the Omicron variant and decreases in government pandemic assistance payments. In addition, inflation cut into consumer spending and corporate profits and supply chain disruptions continue to exist at a time when the US Federal Reserve is aggressively raising interest rates to lower persistently high inflation. For the quarter, value continued to outperform growth in the large-, mid- and small-cap spaces.

The Sun Life MFS International Value Fund lagged MSCI EAFE Index for the quarter. 

  • Stock selection in industrials and our underweight positions in energy and health care detracted from performance. 
  • The high-quality investments in industrials, including Schneider, Legrand and Spirax-Sarco, underperformed the broader market. Despite solid first quarter earnings reports and healthy fundamentals in the difficult environment, all three stocks declined by over 20% as investors became increasingly concerned about a recession. 
  • An overweight position in Consumer Staples and Currency contributed to performance. Stock selection in ASML Holdings NV and Cadence Design Systems Inc. helped performance.

Perspective on current underperformance

While relative performance has been disappointing for the first half of this year, the team remains confident that the strategy has the potential to manage the downside in a recessionary environment. The high-quality companies the Fund owns, which the team believes provide mission-critical, differentiated products to customers and are supported by conservative balance sheets, are, in the team’s view, well-positioned to weather financial or economic crises and thrive longer-term. 

Reckitt Benckiser – The portfolio's overweight position in household products manufacturer Reckitt Benckiser (United Kingdom) supported relative performance, owing to very strong organic sales growth across all business segments, particularly in the company's Nutrition segment, where sales grew by close to 20%.

Toyo Suisan Kaisha Ltd – The timing of the portfolio's ownership in shares of food manufacturer Toyo Suisan Kaisha (Japan) aided relative returns. Although the company reported operating profit results below expectations, the stock price rose after management reported fiscal year 2022 profit guidance well above estimates, as it expects strong growth in its overseas instant noodle business, where the company's strength lies.

Nestle SA – An overweight position in global food company Nestle (Switzerland) contributed to relative returns as the stock depreciated less than the overall market. In April, management reported first-quarter revenue slightly above consensus estimates and confirmed 2022 revenue and margin guidance, which further supported the stock.

Schneider Electric – An overweight position in electrical distribution equipment manufacturer Scheider Electric detracted from relative performance. In late April, the company reported better-than-expected first-quarter growth in its Energy Management and Industrial Automation business segment. Despite these strong results, management’s cautious near-term outlook, resulting from manufacturing and distribution disruptions caused by the Shanghai lockdown, appeared to have weighed on investor sentiment.

Taiwan Semiconductor – Holding shares of semiconductor manufacturer, TSMC, detracted from relative results. Although the company reported strong first-quarter revenue and margin results and raised its sales guidance, the stock price declined following a broad market sell-off of semiconductor-related stocks.

Samsung Electronics – The portfolio's overweight position in microchip and electronics manufacturer Samsung Electronics (South Korea) hurt relative returns. The company reported quarterly revenues and operating profit results below market expectations, primarily due to higher raw material and logistics costs, which led to weaker-than-expected profit in its appliances segment.

Opportunities/risk management

Given the dramatic changes in the economic environment this year, in particular the high levels of inflation along with slowing growth, the team has made marginal changes to the portfolio. The team has added a few names that may persist in an environment of stagflation and reduced exposure to several higher multiple stocks that may struggle in such an environment.

Add/Buy

  • Initiating a position in Ireland-based CRH, the largest building materials company in North America and a large player in Europe as well. The company offers a broad range of products including aggregates, asphalt, ready-mix concrete, architectural building products and building envelopes. Trading at a reasonable valuation, CRH is well-positioned to benefit from increased infrastructure construction spending in the US, and its aggregate reserves of building materials should provide a hedge in an environment of rising inflation.
  • Adding to holdings of Swiss pharmaceutical company, Roche Holding, which provides more exposure to health care and has a better-than- average R&D engine and culture within the industry. The team likes the broad and diversified “shots on goal” in the development pipeline and potential for an improvement in investor sentiment as the Avastin/Herceptin/Rituxan biosimilar cliff fades away.
  • Initiating an investment in French consulting firm CapGemini, based on the company’s strong position in helping clients transition their business to the cloud and the stock’s reasonable valuation.Increasing investment in German consumer staples company Beiersdorf, where the team likes the beauty category, with its history of above-average growth, strong gross margins, and mean-repelling competitive environment. The team believes there is potential for improvement in the company’s growth and margins from ongoing brand investments. The company’s continued investment in sustainability, digitalization, and growth markets paid off in terms of added brand appeal. 
  • Adding, where allowed, to holdings of US-based life science tool maker, Agilent Technologies, which, is well positioned to benefit from the potential growth in drug development, discovery and production.

Trim/Sell

  • Where allowed, reducing position in Cadence Design Systems to manage the position size of a highly valued technology stock and to fund additions to the portfolio trading at lower valuations.
  • Trimming investment in French flavor and fragrance company Givaudan, where valuation looks extended and the team has incremental worries about input cost inflation, consumer demand destruction, and slowing innovation among consumer product companies in the current environment.
  • Reducing position in Japanese consumer staples company, Kao, along with smaller trims to Kobayashi and Ito En, where the inflationary impact of higher input costs may be hard to overcome with higher prices, due to the deflationary mindset in Japan.
  • Where allowed, trimming semiconductor holdings, including Taiwan Semiconductor and Texas Instruments and exiting Infineon, to manage semiconductor exposure as the global economy slows.

 

Fund Positioning

The Sun Life MFS International Value Fund remains defensively positioned. The portfolio is overweight information technology, where the Fund owns computer software, systems and semiconductor companies that are dominant players in industry niches, with competitive advantages that they believe are supported by differentiated intellectual property. The Fund is overweight consumer staples, where the team favors the brand name strength, global distribution networks, fortress balance sheets and the ability to adapt to the digital environment across a number of consumer product, food and alcoholic beverage companies. And the team is overweight industrials, where they own businesses that are leaders in specific market niches, emphasizing innovation to meet future customer needs.

The Fund’s most significant underweight is financials, as the team continues to avoid European and Japanese banks with complicated business models and over-leveraged balance sheets. The Fund is underweight health care on concerns about patent cliffs, the high cost of drug development and increasing government pressure on drug prices, and the Fund is underweight consumer discretionary, where the team finds fewer businesses that meet their criteria for cash flow generation and sustainability over the long term.

Fund performance

Compound Returns %¹ Since Inception2 10 Year 5 Year 3 Year 1 Year Q2
Sun Life MFS International Value Fund - Series A

7.7

8.4

1.6

-1.3

-21.9

-13.5

Sun Life MFS International Value Fund - Series F

8.9

9.7

2.8

-0.1

-20.9

-13.2

MSCI EAFE Index

6.3

7.9

2.1

0.6

-14.3

-11.7

¹Returns for periods longer than one year are annualized. Data as of June 30, 2022.

²Partial calendar year. Returns are for the period from the fund’s inception date of September 1, 2011 to December 31, 2011.

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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