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Sun Life MFS International Value Fund

Fund commentary | Q1 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 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

Novartis

Not owning shares of the pharmaceutical company benefited returns. The stock came under pressure during the period due to the adverse impact of COVID-19, particularly on the company's Oncology and Ophthalmology franchises, as well as a slower ramp-up in revenues for its multiple sclerosis treatment, Kesimpta.

Unilever

Not owning shares of the consumer goods producer benefited results. Although the company reported organic sales growth in line with market expectations, its earnings margins came in below consensus estimates, which appeared to have weighed on the stock.

Iberdrola

Not holding shares of the electric utility company contributed to returns. The company posted quarterly financial results that were below market expectations due to the adverse impacts of COVID-19 on costs and operations.

Nestlé

The portfolio's position in the global food company hindered relative performance. During the quarter, the company agreed to sell its North American regional water and beverage delivery business and forecasted mid-single-digit organic revenue growth. Many consumer staples stocks, including Nestlé, underperformed during the quarter as investors appeared to have continued to favour cyclical and value-oriented stocks.

Kobayashi Pharmaceutical Co

The portfolio's position in the pharmaceutical products company held back relative performance as the company reported quarterly financial results that suffered from disappointing sales.

Givaudan

The portfolio's position in the fragrance and flavour products manufacturer held back relative performance on the back of restricted travel and retail activity due to COVID-19. Moreover, the company's margins came under pressure from rising input costs that are expected to remain elevated in 2021.

Fund performance

Compound returns %1 Since inception2 10 year 5 year 3 year 1 year Q1
Sun Life MFS International Value Fund - Series A

10.8

11.0

8.6

7.6

18.8

-3.5

Sun Life MFS International Value Fund - Series F

12.0

12.3

9.9

8.8

20.2

-3.3

MSCI EAFE Index

8.3

8.3

8.2

5.1

27.7

2.1

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