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Sun Life MFS U.S. Growth Fund

Fund commentary | Q3 2024

Opinions and commentary provided by sub-advisor MFS Investment Management Canada Limited.

Market review

Following a robust first half performance, the Russell 1000 Index (CA$) gained about 4.7% over the third quarter of 2024 (Q3), pushing the year-to-date return to 24.2%. Large-cap U.S. growth stocks have posted strong absolute returns over the last 15 months. Q3 was volatile, with sharp moves in both directions as stocks reacted to macro events. Q3 started out strong as stocks reacted positively to better-than-expected earnings results. Mid quarter, there was a sharp selloff in reaction to the unwinding of the “yen carry trade.” However, technology stocks that were top performers year to date were hit the hardest despite strong earnings results.

There was also notable rotation in market leadership in Q3 as value stocks, represented by the Russell 1000 Value Index (CA$) gained 8% outpacing growth stocks. Sectors considered bond proxies that are heavily weighted in the Russell 1000 Value Index outperformed, with utilities, real estate, financials and materials posting robust gains. Also of note was a rotation in size leadership as large cap lagged both midcap and small-cap indices.

Sun Life MFS U.S. Growth Fund (the “Fund”) underperformed its benchmark, the Russell 1000 Index (CA$) during Q3.

  • A combination of both stock selection and an overweight position in information technology, an area of weakness in the benchmark, detracted from relative performance.
  • Stock selection in consumer discretionary detracted from relative performance.
  • A combination of both stock selection and an underweight position in real estate, an area of strength in the benchmark, detracted from relative performance.
  • An underweight position in energy, an area of weakness in the benchmark, contributed to relative results.

 

Manager outlook

After multiple years where stock price performance was beholden to macro factors, our sub-advisor MFS Investment Management (MFS) believes equities are transitioning to a more “normalized” environment where fundamentals and earnings are driving stock price returns. Recent returns for U.S. stocks have been dominated by a handful of technology companies, called the “Super 6,” which have been supported by outsized earnings growth. However, earnings growth is broadening to other market areas and the spread between the mega-cap technology companies and the rest of the market is narrowing. MFS is optimistic that the environment for active management is improving.

  • Meta Platforms Inc. - Overweighting shares of the social networking service provider aided relative performance. The share price rose as the company announced solid growth in digital advertising revenue, primarily from its Facebook and Instagram platforms, which appeared to outpace many of its competitors in the space.
  • TransUnion - The portfolio's overweight position in the consumer credit reporting agency boosted relative returns as it posted solid revenue results ahead of investor expectations.
  • KKR & Co. Inc. - The portfolio's overweight position in the asset management services provider supported relative performance. The stock price climbed as it reported better-than-expected second-quarter financial results driven by higher fee-related earnings. 

  • Alphabet Inc. - An overweight position in technology company Alphabet (United States) weighed on relative performance. Despite reporting strong results in its cloud segment, driven by artificial intelligence (AI), its share price declined as the U.S. Department of Justice announced an antitrust case alleging that the company maintains a monopolistic position in its search engine.
  • ASML Holding N.V. - The portfolio's position in the lithography semiconductor equipment manufacturer negatively impacted relative results. Although it reported revenue, net income, and new bookings above consensus estimates, the stock price declined as management guided Q3 revenue below analyst expectations, citing a weakening macro environment.
  • Lam Research Corp. - The portfolio's overweight position in the semiconductor manufacturing equipment company weighed on relative returns. Despite reporting strong quarterly financial results, its share price weakened amid the broad-based sell-off in semiconductor-related names.

Fund positioning

MFS’ portfolio positioning is driven by bottom-up stock selection, focusing on idiosyncratic factors that highlight individual company potential for durable revenue and earnings growth. MFS’ portfolio management team’s bottom-up fundamental analysis has led them to identify multiple high-level themes that have developed over the last five years. Some of those investment trends include AI, data centre build-out, power management and electrification, reshoring/onshoring, aerospace, infrastructure spending, health care product innovation and alternative asset managers.

The most notable shift in portfolio positioning during the quarter is the decreased weight in information technology. The Fund trimmed its position in Nvidia as the stock price appreciated significantly. While MFS still likes the company long term, it is concerned about the widening range of potential earnings outcomes given the uncertainty around future levels of AI capital investment and the ultimate path to monetization. From this perspective, it was prudent to take profits and reduce risk. 

 

Portfolio activity

  • The portfolio maintains a small underweight in consumer discretionary, reflecting a cautious view on the consumer, but also due to not owning large benchmark weights such as Tesla Inc., Home Depot Inc. and Booking Holdings Inc. Top holdings in the portfolio have not changed and include Hilton Worldwide Holdings, LVMH and Amazon.com.
  • Positioning in financials is comprised of non-bank financial companies. The Fund does not own any bank stocks. Top holdings in the sector include Mastercard Inc. and KKR & Co. The Fund continued to build the position in bond rating agency Moody’s Corp., which is poised to benefit from improved debt issuance with interest rate cuts.
  • Positioning in industrials continues to be supported by long-duration secular trends such as onshoring, derisking of supply chains, electrification, infrastructure, aerospace and energy efficiency. Within industrials, the Fund added a new position in Trane Technologies, whose order growth is accelerating with increasing demand for energy efficient solutions. Top holdings include Eaton Corp., TransUnion and Howmet Aerospace.

As at September 30, 2024, the portfolio is overweight communication services, information technology and materials in comparison to the Russell 1000 Index. The portfolio is underweight consumer staples, financials, energy and utilities.

Fund performance

Compound returns %1 Since inception 10 year 5 year 3 year 1 year Q3
Sun Life MFS U.S. Growth Fund - Series A

15.4

15.0

14.1

8.8

39.7

-0.5
Sun Life MFS U.S. Growth Fund - Series F

16.7

16.4

15.4

10.1

41.3

-0.2
Russell 1000 Index

16.5

15.3

16.1

13.2

35.6

4.7

¹Returns for periods longer than one year are annualized. Data as of September 30, 2024. 

Inception date September 30, 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 subject to change and 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.

MFS Investment Management Canada Limited is the sub-advisor to the Sun Life MFS Funds; SLGI Asset Management Inc. is the registered portfolio manager. MFS Investment Management Canada Limited has appointed MFS Institutional Advisors, Inc. to provide additional sub-advisory services.

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.