Portfolio outlook and positioning
Global equity markets continued to climb in the first quarter of 2021 as investors looked to the "reopening" of the global economy to drive an acceleration in earnings growth. Similar to the fourth quarter of last year, pro-cyclical areas of the market led the gains, with the strongest performance in the MSCI EAFE universe coming from energy and financials. The higher quality, more defensive sectors that outperformed the broader market in 2020 gave up some of their gains, as health care, consumer staples and utilities posted negative returns for the first three months of the year.
The Fund’s sector allocation, with an underweight to energy and financials and overweight to consumer staples, detracted from performance. Stock selection was also a drag on relative returns as lower quality, higher beta value stocks were the best performers, while the higher quality, lower beta names the portfolio owns were laggards.
In trading activity during the first quarter, the Fund added to its position in Canadian precious metals company Wheaton Precious Metals. With the aggressive monetary and fiscal stimulus programs initiated by central banks around the world, the portfolio manager believes that investments in precious metals may provide a valuable hedge against higher inflation in the future.
The Fund added to its holdings of Shimadzu, a Japanese manufacturer of analytical and measuring instruments used in medical, technology, industrial and consumer applications, as MFS favors the company's differentiated products and its business mix of equipment and consumables sales.
The portfolio manager increased investment in EssilorLuxottica, a French eyewear company, on the belief the company could realize revenue and cost synergies from its 2018 merger which brought together the world's largest maker of eyeglass lenses and largest manufacturer and retailer of eyeglass frames.
The Fund added to its position in German elevator company Schindler, where MFS favors the oligopolistic nature of the global elevator market. The portfolio manager has conviction in the company going forward due to the newer monitoring systems in elevators, which favor the manufacturers rather than independent service providers for maintenance and repair.
The portfolio manager exited Alphabet, the U.S. based internet search and cloud services giant, after the stock advanced by more than 50% since the Fund initiated the position in March of last year.
The Fund trimmed its positions in Taiwan Semiconductor and Cadence Design Systems, a U.S. maker of electronic design software for creating new semiconductors.
The portfolio manager continued to reduce its position in Compass Group, the U.K. based institutional catering firm, on concerns that the shift towards more corporate employees working from home beyond the pandemic could be a headwind to the company's food service business.
The Fund continued to pare back holdings of French dairy products and water company Danone, as management has made limited progress on improving profit margins and expanding or enhancing the WhiteWave brands since the 2017 acquisition.
MFS is encouraged by the vaccine approvals and looks forward to a reopening of the global economy but remains cautious in its outlook, as challenges remain and parts of the economy will be slow to recover. The massive fiscal and monetary stimulus programs necessary to mitigate the economic damage of the pandemic could unfortunately increase the already high levels of debt on corporate and government balance sheets around the world. Not surprisingly, the International Value portfolio remains defensively positioned.
The strategy is overweight to information technology, where the Fund owns computer software, systems and semiconductor companies that are dominant players in industry niches, with competitive advantages that MFS believes are supported by intellectual property. The Fund is overweight consumer staples, where it favors the brand name strength, global distribution networks, strong balance sheets and the ability to adapt to the digital environment across a number of consumer product, food and alcoholic beverage companies. The Fund is overweight industrials, where it owns a number of businesses that are dominant leaders in their market niches, with an emphasis on innovation to meet future customer needs.
The Fund’s most significant underweight is financials, as we continue to avoid European and Japanese banks with complex business models and over-levered balance sheets. The portfolio is underweight health care, on concerns of patent cliffs, the high cost of drug development and increasing government pressure on drug prices. It is also underweight consumer Discretionary, where the portfolio manager finds fewer sustainable business models.
Significant impacts on performance