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