Sun Life MFS International Value Fund

Fund commentary | Q3 2022

Opinions and commentary provided by MFS Investment Management Canada Limited.

Market Review

Global equity markets declined at an accelerating pace during the third quarter, as investors grew increasingly alarmed about the persistence of central banks in raising interest rates. Inflation and energy costs remained elevated, while the war in Ukraine and COVID-related lockdowns in China added to the pressures on the global economy. The quarter started with optimism about a possible U.S. Federal Reserve (the “Fed”) pivot and a summer rally; investor sentiment, however, plummeted in late August, in response to Fed Chairman Jerome Powell’s emphasis on restoring price stability, even at the expense of economic pain, during his Jackson Hole speech. The continuing drumbeat of bad news on inflation, energy prices and the war in Ukraine fueled investors’ fears of a recession and contributed to the market’s sharp selloff in September.

While there have been signs of peaking inflation in some markets, global inflation remains elevated, keeping most central banks in rate-hike mode. Equity markets have fallen sharply this year-to-date largely driven by multiple compression particularly in growth-oriented stocks. The risk now is downward earnings revisions as companies are challenged by falling demand and higher input costs.

The Sun Life MFS International Value Fund declined over the quarter but outperformed its benchmark, the MSCI EAFE Index (C$). Market leadership in defensive and high-quality stocks rewarded the investment approach employed by MFS.

  • A combination of both stock selection and an overweight position in Consumer Staples contributed to relative performance.
  • Overweighting Information Technology and stock selection in Industrials also benefited relative results.
  • Portfolio exposure to the U.S. dollar, which strengthened over the quarter, aided returns.
  • Detractors from relative performance included the avoidance of Energy, which was the best performing sector in the benchmark, along with stock selection in Real Estate and Materials.

Manager Outlook

Looking forward, MFS anticipates a recessionary environment, particularly for Europe, in the months ahead. Longer term, the global economy is unlikely to return to a scenario of low inflation, low interest rates and increasing globalization that was in place from the end of the global financial crisis through the end of last year. MFS expects structurally higher inflation, higher energy costs and a continuing trend towards deglobalization amid heightened geopolitical tensions.

  • Cadence Design Systems Inc. – The portfolio’s holdings of integrated circuits and electronics developer Cadence Design Systems (United States) boosted relative returns. The stock price rose as the company reported above consensus earnings and raised its forward guidance on the strength of accelerating demand for its electronic design software, which is used for designing new semiconductor chips and for autonomous driving and machine learning applications.
  • Pernod Ricard SA – The portfolio’s overweight position in wine and alcoholic beverage producer Pernod Ricard (France) boosted relative returns as the company posted organic sales growth that benefited from better pricing and volume trends, particularly in China and Europe.
  • Rohto Pharmaceutical Co. Ltd. – Holdings of pharmaceutical manufacturing company Rohto Pharmaceutical (Japan) contributed to relative performance. The company reported operating profit results that exceeded consensus expectations thanks to the recovery in consumer sentiment triggered by the easing of pandemic-related restrictions on movement, but also from its plentiful lineup of products well suited for living with COVID-19.

  • Taiwan Semiconductor Manufacturing Co. Ltd. – Holdings of semiconductor manufacturer Taiwan Semiconductor (Taiwan) weakened relative performance. Although the company reported solid quarterly financial results, the stock price declined after management noted a slowdown in revenue growth in the upcoming year, citing inventory depletion, slower market share gains and lower-than-expected N3 adaptation.
  • Vonovia – An overweight position in residential real estate management company Vonovia (Germany) held back relative performance. The stock price came under pressure over near-term concerns about a recession, high energy costs and higher interest rates.
  • Novozymes A/S – An overweight position in biotechnology company Novozymes (Denmark) detracted from relative performance. Although the company reported better-than-expected financial results, driven by organic sales growth, shares of the company traded lower, despite the lack of any significant negative news.

Opportunities/risk management

Considering the macroeconomic environment and lessons learned from market history, MFS is making incremental changes to the Fund’s holdings. MFS is staying true to the first principle of their approach: they seek to invest in high quality, differentiated businesses on a 10-year view. In the past, high quality was the leading investment criteria, with flexibility around valuation; now MFS is more evenly balancing considerations of high quality and reasonable valuations. As they uncover opportunities in different areas of the market, such as pharmaceuticals, commodities and financials, MFS is trimming higher-valuation holdings to fund these newer ideas.

Add/Buy

  • Starting a position in Bayer, where the glyphosate litigation saga seems now to be in the rear-view mirror, with future liabilities provisioned and an undemanding valuation. The company’s best-in-class germplasm/trait business should benefit from pricing power and increasing margins, and MFS is encouraged by the emergence of a post-Xarelto pharmaceutical pipeline.
  • Initiating a position in UK-based miner Glencore. MFS believes the company’s base metals/electronification business is well positioned, particularly in a world where supply is constrained. MFS likes the company’s new management team, which has initiated favourable cultural changes and is improving capital allocation with a coal wind-down plan, along with carbon-neutral targets.
  • Adding to the existing position of German exchange operator Deutsche Boerse, where MFS favours the company’s exposure to market volatility and rising interest rates, while avoiding balance sheet risk.
  • Increasing the position in Svenska Cellulosa, Europe’s largest forest owner, which benefits from an integrated value chain (wood, pulp and containerboard) that allows for flexibility in managing inflation and industry cyclicality. There are also long-term environmental benefits of owning trees, which play an important role in reducing carbon in the atmosphere.
  • Adding to holdings in French consulting firm Capgemini, based on the company’s strong position in helping European clients transition their business to the cloud and the stock’s reasonable valuation.

Trim/Sell

  • Where allowed, reducing the 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 holdings of L’Oreal, Nestle and Diageo due to their relatively high valuations.
  • Trimming the investment in French flavour and fragrance company Givaudan, where the valuation looks extended, and the team has incremental worries about input cost inflation.
  • Where allowed, trimming semiconductor holdings, including Taiwan Semiconductor and Texas Instruments 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 MFS believes are supported by differentiated intellectual property. The Fund is overweight Consumer Staples, where MFS favours the brand name strength, global distribution networks, fortress balance sheets and the ability to adapt to the digital environment across several consumer product, food and alcoholic beverage companies. The Fund is also overweight Industrials, where the portfolio management team favours businesses that are leaders in specific market niches, emphasizing innovation to meet future customer needs.

The Fund’s most significant underweight is in Financials, as MFS continues to maintain an underweight in 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. Lastly, the Fund is underweight Consumer Discretionary where the team is finding 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 Q3
Sun Life MFS International Value Fund - Series A

7.3

7.8

1.3

-2.2

-23.8

-2.2

Sun Life MFS International Value Fund - Series F

8.5

9.0

2.5

-1.0

-22.9

-1.9

MSCI EAFE Index

5.8

7.1

1.0

-0.6

-3.4

-3.4

¹Returns for periods longer than one year are annualized. Data as of September 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.

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