Portfolio outlook and positioning
Global equity markets surged during the fourth quarter, as vaccine approvals triggered a sharp market rally. In anticipation of a "reopening" of the global economy, equity market leadership shifted from defensive to economically sensitive areas of the market or from higher quality/growth to value/cyclical stocks.
During the fourth quarter, the Fund initiated a position in Wheaton Precious Metals, a Canadian gold and silver streaming company. With the aggressive monetary stimulus programs initiated by central banks around the world in response to the pandemic, MFS believes that investments in precious metals may provide a valuable hedge against higher inflation in the future.
The Fund initiated an investment in Lion Corp., a Japanese consumer staples company with the number one market position in oral care and number three position in fabric and home care in Japan. MFS favors the company's industry leading positions and its strong balance sheet, with 15% of its market cap in cash.
The portfolio manager added to the Fund’s holdings of Epiroc, a Swedish maker of underground mining equipment. MFS likes the company's high-quality equipment focused on safety, efficiency and automation as well as the duopoly structure of the industry and Epiroc's profit stream, three-quarters of which is generated by aftermarket sales.
The Fund trimmed its investment in Cadence Design Systems, a U.S. maker of electronic design software for creating new semiconductors, after the stock advanced more than 50% in the first three quarters of 2020. The portfolio manager eliminated its position in Swedish bank Svenska Handelsbanken as the stock price surged in the cyclical rally of the fourth quarter.
The portfolio manager pared back its holdings of French dairy products and water company Danone, as management has made limited progress on improving profit margins and expanding or enhancing the White Wave brands since the 2017 acquisition. The Fund also reduced its investment in Omron, a maker of Japanese automation and medical equipment, on the heels of strong relative performance.
The portfolio manager is encouraged by the vaccine approvals and looks forward to the return to a more normal life and the reopening of the global economy. MFS, however, is, 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 will unfortunately increase the already high levels of debt on corporate and government balance sheets around the world.
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, favouring brand name strength, global distribution networks, strong balance sheets and the ability to adapt to the digital environment. The Fund is overweight industrials, owning a number of businesses that the portfolio manager considers 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. It is underweight consumer discretionary where MFS believes there are fewer sustainable business models.
Significant impacts on performance