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Sun Life MFS International Value Fund

Fund commentary | Q2 2021

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Portfolio outlook and positioning

Global equity markets continued to climb during the second quarter, with market leadership transitioning from the "reopening trade" over the prior two quarters that favored procyclical value stocks to more broad-based gains across the various sectors. Health care, Consumer Staples and Information Technology were the best performing sectors in the EAFE universe, as investors preferred higher-quality areas, while Utilities, Energy, Communication Services and Financials were laggards. The rotation in leadership contributed to a more constructive environment for the Fund’s investment approach, and the MFS International Value strategy outperformed the EAFE Index for the three-month period. 

In trading activity during the second quarter, the Fund initiated a position in German sportswear maker Adidas. The company benefits from a leadership position in the global sportswear duopoly with Nike, powered by brand, endorsements and product innovation. The team is attracted to the company's ongoing direct-to-customer shift and structurally improved margins. 

The Fund started a new investment in Germany-based Zalando, the largest European e-commerce retailer for shoes and apparel. The company is taking advantage of the structural shift to online shopping, which had reached 20% across Zalando’s European markets in 2019 and undoubtedly increased in 2020. This shift is expected to drive margin and productivity improvements going forward. 

The Fund added to Wolters Kluwer, a Dutch information services company that provides "expert solutions," or workflow automation software, for applications in the health care, legal and accounting industries. The company is increasing the value of their offerings by converting their databases into content-driven "expert solutions," in other words, growing its digital and software mix to drive higher renewal rates and improving margins. 

The team initiated an investment in US-based medical equipment company Agilent, which provides analytical instruments, software, services and consumables for the workflow of laboratories. MFS favors the company's high quality, differentiated products and its focus on R&D and innovation, which is enabling share gains versus its competitors.

The team added to its position in German elevator company Schindler, based on the oligopolistic nature of the global elevator market. MFS anticipates higher returns for 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 Fund reduced its position in German residential real estate firm Deutsche Wohnen, after the stock price advanced on the announcement that rival firm Vonovia would acquire the company at an 18% premium to the prior day's closing stock price. 

The Fund pared back its investment in Spanish software firm Amadeus. While MFS continues to like the company's Global Distribution System business and its leading position in IT solutions for air travel and new hotels, the stock has advanced by over 50% since the vaccine approvals in early November signaled an eventual reopening of the global economy. The team is downsizing the position size due to uncertainty about corporate travel volumes post-COVID. 

The Fund continued to reduce its position in Compass Group, the UK-based institutional catering firm, on concerns that the shift towards more corporate employees working from home going forward will be a headwind to the company's food service business. The team trimmed its position in Nordson, a US-based maker of industrial dispensing equipment, after strong outperformance and rising valuation. 

The team trimmed its holdings of Colgate Palmolive, a US-based maker of oral care and household products, on the heels of strong relative performance. 

Before the pandemic began last year, MFS was concerned about the unprecedented levels of global debt outstanding. Over the past year, governments and central banks have initiated massive monetary and fiscal spending programs in an effort to minimize the human and economic damage of the coronavirus. While necessary to a large extent, it increases concerns about ever-expanding debt levels. Inflation is accelerating, raising the question of whether the increases are transitory, due to pandemic-related dislocations, or more long-term in nature, driven by the stimulus programs. 

MFS’s view is that inflation may remain at higher levels than the markets had grown accustomed to in the recent years. The team’s response is to carefully consider which companies are likely to have pricing power that will enable them to pass along higher prices (a consideration that has always been part of the Fund’s investment process). The winners in an inflationary environment are likely to be companies offering differentiated, high-value, mission-critical products to their customers. The Fund has established positions in gold streaming/mining companies in the portfolio, as gold has traditionally served as an effective hedge against rising inflation. 

The strategy remains overweight to Information Technology, focusing on 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, favoring 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 portfolio is overweight Industrials, owning 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 it continues to avoid European and Japanese banks with complicated business models and over levered 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 it is underweight Consumer Discretionary, as fewer businesses meet our criteria for sustainability over the long term.

Significant impacts on performance

Givaudan

The portfolio's position in fragrance and flavour products manufacturer Givaudan (Switzerland) supported returns as the company's like-for-like sales beat consensus estimates. Strong volume growth in the Consumer Products division of its Fragrance & Beauty segment, and a strong recovery in its Foodservices and Food Retails divisions, were the primary contributors to the stronger-than-expected earnings results. 

Nestle

Holdings of global food company Nestle (Switzerland) bolstered returns after the company delivered its highest quarterly organic sales growth in over a decade. While strong earnings results were broad-based, management noted particular strength in its coffee and pet care businesses. 

Wohnen

The portfolio's position in real estate company Deutsche Wohnen (Germany) contributed to performance. The company reported solid first-quarter financial results, driven by like-for-like rental income growth, due in part to rental claims related to the invalidity of the Berlin rent freeze. In addition, the stock price benefited from the news that real estate company Vonovia had launched a takeover offer for Deutsche Wohnen.

Toyota Motor

Not holding shares of auto manufacturer Toyota Motor (Japan) detracted from relative performance. The stock price appreciated during the period as the company reported strong first-quarter operating profits. 

Kao

The timing of the portfolio's ownership in shares of household and industrial products manufacturer Kao (Japan) hindered relative performance. The company's operating profits declined substantially, particularly within its Hygiene & Living Care segment, due to a sharp fall in demand. 

Henkel

The portfolio's overweight position in chemical products company Henkel (Germany) detracted from relative returns. Although the company reported strong organic revenue growth for the first quarter, concerns over higher raw material costs affecting margin performance, weighed on the stock.

Fund performance

Compound Returns %¹ Since Inception2 10 Year 5 Year 3 Year 1Year Q2
Sun Life MFS International Value Fund - Series A 11.0 11.2 9.3 8.5 12.8 4.8

Sun Life MFS International Value Fund - Series F

12.2 12.5 10.6 9.8 14.1 5.1
MSCI EAFE Index 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 October 1, 2010 to December 31, 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 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.