Sun Life MFS U.S. Growth Fund

Fund commentary | Q3 2022

Opinions and commentary provided by MFS Investment Management Canada Limited.

Market Review  

U.S. equity markets declined over the third quarter of 2022 in U.S. dollar terms but rose in Canadian dollar terms on account of the declining Canadian dollar. The decline in U.S. dollar terms was a continuation of the selloff during the second quarter of 2022 and was driven by several concerns in the market, including the ongoing war in Ukraine, high inflation and whether rising interest rates will tip the economy into a recession.

For the quarter, Growth stocks outperformed Value stocks, mostly on account of the performance of two stocks: Tesla and Amazon. The outperformance of Growth over Value is a reversal from the previous quarters this year and has been driven mostly by the market’s short, but strong move higher in July. Consumer Discretionary, Energy and Financials were the strongest-performing sectors, while Communication Services, Real Estate and Materials were the worst performing.

Most of the market decline this year to date can be explained by price-to-earnings multiple compressions. Companies are now facing downward earnings risk due to weakening demand and higher input costs. MFS is concerned that while aggregate estimates have moved lower, they do not appear to fully reflect the deteriorating economic environment. The U.S. Federal Reserve has clearly communicated its intent to continue to combat inflation. U.S. dollar strength has also continued to be a headwind. While the stronger dollar helps to alleviate some of the inflation burden, about 40% of S&P 500 earnings originate outside of the U.S., putting significant pressure on profits at a time when demand is weakening and margins are in decline, suggesting an earnings-driven recession may be coming.

The Sun Life MFS U.S. Growth Fund underperformed its benchmark, the Russell 1000 Index (C$) over the quarter.

  • A combination of both stock selection and overweight positions in Information Technology and Communication Services detracted from relative performance.
  • An underweight in the outperforming Energy sector also detracted from relative performance.
  • Stock selection in the Materials and Financials aided the Fund’s relative performance.

Manager Outlook

2022 has been a seesaw year for equities coming off three years of unusually strong equity returns. In 2020 and 2021, the unprecedented monetary and fiscal stimulus response to COVID helped lift equity valuations as much as three standard deviations above normal and allowed many low-quality companies to achieve record revenue growth, margin expansion and earnings. In MFS’ opinion, these trends were not sustainable, and the result has been an unwinding of these excesses with a selloff that has been indiscriminate of quality or earnings sustainability. While investor sentiment is very pessimistic and markets may appear oversold in the short term, MFS believes global earnings growth will decelerate and it will take time to work through some of the excesses and the impact of rising interest rates and inflation.

  • Adobe Inc. – An overweight position in software company Adobe (United States) weighted on relative performance as the company lowered its revenue guidance and announced its intention to acquire privately-owned design and collaboration tool company Figma.
  • Tesla Inc. – Not owning shares of electric vehicle manufacturer Tesla (United States) detracted from relative performance. Despite a challenging quarter, driven by the company’s Shanghai factory shutdown and increased costs related to new factories in Berlin and Texas, shares of Tesla appreciated as market expectations increased regarding its improving production and higher gross margins.
  • Alphabet Inc. – An overweight in technology company Alphabet (United States) held back relative returns. The share price declined during the quarter as the company raised concerns regarding advertising revenue and consumer spending. Furthermore, the company was fined US$4.1 billion in an antitrust violation for using its Android mobile operating system to thwart competitors, which further pressured the stock.

  • Amazon.com, Inc. – The portfolio’s overweight position in internet retailer Amazon.com (United States) boosted relative performance. The stock price appreciated during the quarter as the company reported quarterly revenues that topped consensus estimates, driven by revenue growth in its Amazon Web Services and advertising segments. Lower-than-expected shipping costs and overall headcount further drove the upside during the quarter.
  • Vulcan Materials Co. – The portfolio’s overweight position in construction materials company Vulcan Materials (United States) contributed to relative returns as the company posted higher sales for aggregates, asphalt and concrete and raised overall prices to stay in front of inflation pressures. The company also raised its long-term profitability targets on its Analyst Day, which further supported the stock.
  • Charles Schwab Corp. – The portfolio’s overweight position in financial services provider Charles Schwab (United States) helped relative performance. The stock price rose over the quarter as the company reported increased net interest margins and announced that it would lower its tier 1 capital requirement levels, potentially freeing up capital for other uses, such as share buybacks.

Opportunities/risk management

MFS does not attempt to forecast inflation trends or interest rates but are diligent in evaluating company fundamentals, earnings and understanding how a higher inflation and interest rate environment could impact an individual company’s long-term earnings outlook. In an environment where aggregate earnings are at risk and there is a scarcity of earnings growth, stock selection becomes even more important. The portfolio management team has not changed their bottom-up process of focusing on high-quality companies that have above-average duration of and rates of growth over a full market cycle. MFS’ bottom-up research suggests there is still elevated risk to both earnings and valuation, and they are being very diligent to avoid those companies they feel are most at risk. They are finding better opportunities in companies where there is greater visibility in a lower range of potential earnings outcomes. Over the quarter, the portfolio management team started a few new positions and added to holdings in which they have high conviction in their long-term outlook and that are trading at reasonable valuations.

Add/Buy

  • Started a new position in LVMH Moët Hennessy Louis Vuitton as the high-end consumer appears to be resilient. LVMH is a market leader in luxury goods, with a diversified portfolio of brands across multiple categories.
  • Started a new position in automotive aftermarket parts retailer and supplier O’Reilly Automotive. O’Reilly is a best-in-class auto parts retailer with a wide moat and strong management team. MFS believes the immediacy of need and the service component of automotive repair allows the company to pass along price increases to customers and is an important offset to online competition.
  • Established a new position in research and advisory company Gartner. MFS believes the company has made significant progress since the acquisition of CEB, and the company’s products, which empower customers with technology information for purchasing decisions, offer a differentiated product with attractive growth opportunities.
  • Continued to add to the existing position in UnitedHealth Group given the attractive secular growth in Medicare Advantage and capitated value-based care. The company has successfully transitioned to a more integrated business model that expanded their total market opportunity. It is in a stronger position with an improved value proposition for its customers and has increased visibility in revenue growth and margins.

Trim/Sell

  • After trimming the position over the past 12 months, the position in Meta Platforms was exited as the risks associated with potential regulation as well as the large investment in the “metaverse” have widened the potential range of outcomes.
  • The position in software company Adobe was trimmed, reflecting a wider range of outcomes driven by emerging competition, advances in artificial intelligence for digital creative design and the uncertainty surrounding the announced acquisition of Figma.

Fund Positioning

The Sun Life MFS U.S. Growth Fund remains overweight Information Technology, Health Care, Communication Services and Materials. Within the Health Care sector, the portfolio management team-maintained positions in many of the life sciences, tools, and services companies which they believe are well positioned to benefit from accelerated growth in new diagnostics and therapeutic platforms to meet the expanding needs of drug innovation and development. These positions included Thermo Fisher and Danaher Corp.

The portfolio has relative underweights in Financials, Consumer Staples, and Energy. The portfolio’s exposure in financial services is comprised primarily of non-bank financials that offer services and data solutions to a variety of segments of the financial services industry, including index data provider MSCI Inc. and insurance broker Aon Plc.

Fund performance

Compound returns %1 Since inception2 10 year 5 year 3 year 1 year Q3
Sun Life MFS U.S. Growth Fund - Series A

13.1

13.9

10.0

4.5

-23.8

-0.70

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

14.4

15.2

11.2

5.7

-22.9

-0.41

Russell 1000 Index

14.8

15.3    

10.0

9.2

-10.21

-1.61

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