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Sun Life MFS International Value Fund

Fund commentary | Q1 2022

Opinions and commentary provided by MFS Investment Management Canada Limited.

Market Review

As inflation reached 40-year highs in January and investors anticipated an acceleration in interest rate hikes, equity markets started the year on a downward trend. Long-duration, high-quality equities, technology stocks in particular, experienced the steepest declines, admittedly from elevated valuation levels after robust outperformance last year. Meanwhile, energy led the market in January and early February due to increasing demand as the economy recovered from COVID, and financials outperformed on expectations for higher rates and improving earnings.

The Russian invasion of Ukraine on February 24th shocked the world and the Ukrainians’ courageous resistance surprised it, upending the rules-based order that has to a large extent characterized international relations since the end of World War II. Energy and commodity prices surged as Russia produces 12% of global oil and supplies 40% of Europe’s natural gas needs. Russia and Ukraine also account for about 30% of the global wheat supply. Meanwhile, consumer discretionary stocks declined on increasing recession concerns, and consumer staples stocks pulled back on inflationary pressures and revenue exposure to Russia, which accounts for revenues in the midsingle-digit percentage range for most companies in the sector.

The Sun Life MFS International Value Fund lagged the MSCI EAFE Index for the first quarter. The environment was markedly different from typical market corrections, which are generally concurrent with a weakening economy. On a historical basis, the Fund has always outperformed the index in quarters when the market declined by 5% or more, going back to at least 2003. In the first quarter of 2022, however, Energy stocks, which the investment team has avoided, led the market performance by a wide margin. Financials, where the Fund has a substantial underweight, outperformed as central bankers in the U.S. and U.K. are intent on raising interest rates to bring down inflation, even as recessionary pressures are increasing. Information Technology, the largest overweight in the portfolio, was the worst performing sector, and consumer staples, the portfolio’s second largest overweight, also lagged the broader market on concerns about inflationary pressures and Russian revenue exposure.

Franco-Nevada Corp
Shares of gold-focused royalty and streaming company Franco-Nevada (Canada) contributed to relative returns. The stock price advanced as the company reported solid fourth-quarter financial results, driven by strong revenue performance from its precious metals and energy segments.

ASML Holding NV
The timing of the portfolio's ownership in shares of ASML (Netherlands), a lithography systems manufacturer for the semiconductor industry, contributed to relative returns. Although the company reported strong earnings results for the quarter, the stock price declined after appreciating significantly in 2021.

Keyence Corp
Not owning shares of industrial equipment manufacturer Keyence (Japan) helped relative returns. Although the company delivered strong quarterly financial results, the stock price declined during the quarter, reflecting the risk that the conflict in Ukraine leads to a decline in Europe. Higher US interest rates, which may prompt a further shift out of growth names and into value names, further pressured the stock.

Givaudan SA
An overweight position in fragrance and flavour products manufacturer Givaudan (Switzerland) detracted from relative performance. The stock price declined as the company reported earnings results that missed consensus estimates, driven by weaker-than-expected gross margins and an increase in operating expenses due to cost inflation.

BHP Billiton PLC
Not owning shares of mining giant BHP Group (Australia) held back relative performance. The company posted better-than-expected earnings results, driven by strong petroleum and iron ore divisional performance. Lower net debt and a higher-than-expected dividend payout ratio further buoyed the company's share price performance during the quarter.

Royal Dutch Shell
Not owning shares of global energy and petrochemicals company Royal Dutch Shell (United Kingdom) detracted from relative returns. The share price advanced as the company delivered solid fourth-quarter financial results, driven by strong performance in its integrated gas segment.

Significant transactions

Add/Buy

  • Initiating a position in German exchange operator Deutsche Boerse, where the team favors the company’s exposure to market volatility and rising interest rates, while avoiding balance sheet risk.
  • Starting an investment in ASML, the Dutch lithography equipment company that has a near monopoly in leading edge lithography tools, which is supported by a wide moat due to its complex supply chain, after the share price decline earlier in the quarter.
  • Initiating a holding in consulting and French IT services provider Capgemini, an IT services player that is improving its business model over time through more digital and cloud-based revenue mix, and more offshore labor to increase cost flexibility during downturns in the business.
  • Starting a position in Beiersdorf, where the team likes the beauty category, with its historically above-average growth, strong gross margins and mean-repelling competitive environment, and the team anticipates improvement in the company’s growth and margins from ongoing brand investments.
  • Adding to South Korean tech giant Samsung Electronics, where the team favors the company's leading-edge technology capabilities, its leadership in computer memory (DRAM), its high levels of investment in R&D and strong track record of capital allocation supported by a conservative balance sheet, with 25% of the company's market cap in cash.

 

Trim/Sell

  • Trimming investment in Taiwan Semiconductor, to manage the position size in a world of increasing geopolitical risks.
  • Exiting holdings of French dairy products and water company Danone, where management has made limited progress on improving profit margins and expanding or enhancing the WhiteWave brands since the 2017 acquisition.
  • Where allowed, eliminating US-based consumer products company Colgate Palmolive, on concerns about inflationary pressures and to manage exposure to US-listed stocks.
  • Reducing investment in Spectris, a UK-based maker of precision instrumentation and controls, where the team doesn’t see that the company is realizing synergies or additional growth opportunities across its various divisions.
  • Trimming position in French flavour and fragrance company Givaudan, where valuation is extended and the team has incremental worries about input cost inflation, consumer demand destruction and slowing innovation among consumer product companies.

 

Fund Positioning

As we entered 2022, the team was cautious about rising inflation and higher interest rates, excessive levels of debt and lingering COVID-19 concerns. Three months into the year, the challenges have only increased and now include a war in Europe, constrained supply and higher prices for energy and increasing recessionary pressures. The team anticipated that the portfolio might lag the broader market in the initial stages of a market correction and that the high-quality stocks that outperformed by a wide margin last year might underperform in the early stages of a market correction. That scenario did in fact play out in the first quarter, and the portfolio underperformed the MSCI EAFE Index. In an extended market correction, however, the team remains confident that the high-quality, conservatively capitalized companies that the Fund owns could outperform the broader market over the long term.

The strategy remains overweight information technology, where the Fund owns computer software, systems and semiconductor companies that are dominant players in industry niches, with competitive advantages that are supported by differentiated intellectual property. The Fund is also overweight consumer staples, where the team 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 businesses that are leaders in their market niches, emphasizing 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 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 Q1
Sun Life MFS International Value Fund - Series A

9.3

9.8

5.6

4.2

-5.4

-14.8

Sun Life MFS International Value Fund - Series F

10.5

11.1

6.8

5.4

-4.2

-14.6

MSCI EAFE Index

7.6

8.7

5.3

5.4

0.5

-7.0

¹Returns for periods longer than one year are annualized. Data as of March 31, 2022. 
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.

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