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Sun Life MFS US Growth Fund

Fund commentary | Q3 2021

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Portfolio outlook and positioning

During the quarter, the equity market seemingly climbed a wall of worry as the number of items to worry about increased. The list of worries grew to include slowing economic growth, potential stagflation, Fed tapering, increasing COVID-19 concerns and uncertainty around taxes, among other items. These worries proved too much and in September, the S&P 500 experienced its worst month since March of 2020. The other notable factor influencing market returns has been interest rates. Sector and factor leadership shifted with the direction of interest rates, with higher yields leading to outperformance of value and cyclicality, and lower rates leading to outperformance of growth, technology and quality. Towards the end of the quarter, Federal Reserve Chairman Jerome Powell provided taper guidance indicating they could move ahead at their next meeting, setting off a spike in rates and volatility that put pressure on the growth and quality trade.

In Information Technology, the team continues to favor vertical software businesses, such as Adobe, Autodesk and Cadence Design Systems, that do not trade at extreme price/sales multiples. MFS prefers vertical software businesses over horizontal software due to the focused nature of improving and optimizing a product set for one specific industry versus trying to be all things to all people. The team avoids extremely expensive names, notably on a price/sales basis, where the upper end of a wide range of outcomes is largely priced in, leaving little room for error on a valuation basis.

In professional services, the Fund has overweights in data providers such as Verisk, which provides data analytics for customers in insurance, energy markets and financial services, data analytics firm Clarivate and CoStar Group, which provides commercial real estate information and analytics to credit reporting agencies TransUnion and Equifax. The Fund favors this area of the Industrials sector given the capital light nature of the business and the high barriers to entry provided by proprietary data. Top holdings in entertainment include gaming companies Electronic Arts, Activision Blizzard, Take-Two Interactive and ROBLOX. Alphabet remains a top name in interactive media and services.

In health care equipment and supplies, the team is positive on names such as Danaher, Boston Scientific and Abbott laboratories. Focused on the potential range of outcomes, the team’s conviction in a tighter range of positive outcomes for these names has increased. Tailwinds continue to build as the expanding needs of drug development is expected to drive accelerated growth in new diagnostic and therapeutic platforms, resulting in a strong therapeutic innovation cycle, of which these companies are likely to participate.

The Fund’s long-term outlook for durable growth businesses that exhibit pricing power remains unchanged.

The team looks at the US equity landscape from an industry perspective and seeks to identify which companies are growing at above market rates (versus those that are not) and where the profit pools may go over the next decade. This provides a helpful check on the outlook for growth stocks. Moreover, it highlights why the team feels certain growth-oriented companies, despite the near-term market rotation, continue to take market share and why MFS believes this trend will continue over the longer-term.

Take the autos and housing industry and think about where future growth potential is likely to come from. Here, one could argue, any future growth is likely to come from underpenetrated areas of the industry with large addressable markets such as electric vehicles and the Internet of Things (i.e., smart elevators, smart cars, connected homes, etc.), just to name a few. Even in traditionally lower-growth areas, such as consumer staples, niche brands and healthy eating, there are long term trends which are enabled largely by the internet and ecommerce as consumer have more choices available to them. This trend can be seen in more traditional value sectors such as energy and financials. In energy, profits and growth are coming from solar or other alternative sources of energy, while in financials, most of the growth is coming from fintech.

In health care, the team feels growth is likely to come from areas such as biotech, telehealth, next generation tools and life sciences companies. In industrials, similar to autos and housing, it is all things digital, direct-to-consumer and the Internet of Things. Within leisure, expected potential growth is expected to be in areas like streaming video on-demand as well as video games. Finally, in retailing, it's all about e-commerce, digital or omni-channel or more direct to consumer businesses.

With that said, there will always be points in time where companies, many of which lack real pricing power, will be aided by some external driver of earnings growth (i.e., higher GDP, higher interest rates, higher inflation, etc.). MFS believes over time sustainable earnings growth will come from those companies that possess pricing power, the result of sustainable competitive advantages, high barriers to entry, intellectual property and differentiated products and services, many of which reside in the Fund’s investible universe.

Key Transactions

  • The team added to its medical device holdings, notably Boston Scientific, Edwards Lifesciences and Abbott Labs. The combination of current position size, valuation and earnings growth potential relative to other portfolio holdings led to incrementally upsizing the positions.
  • The Fund trimmed its position in broadband cable operator Charter Communications. The team believes the potential range of outcomes has widened, with increased risks from potential subscriber slowdowns and regulatory intervention.
  • The Fund exited its position in Global Payments as competition has intensified in the payment processing space. The team has consolidated its positions in the diversified card networks that operate the rails and the digital wallet/payment opportunities.
  • The team exited positions in Spotify and Pinterest, where valuation remains demanding for the fundamental opportunity.

The portfolio is focused on companies the team believes can generate above-average, sustainable earnings growth over the next two to three years. The Fund’s strategy focuses on companies that have the following characteristics: pricing power, strong secular growth, large potential opportunity sets, sustainable competitive advantages, superior business models and strong management teams. In addition to above-average, sustainable earnings growth potential, stock valuations are important when considering investments for the portfolio. 

Alphabet Inc.

An overweight position in technology company Alphabet (United States) benefited performance. The stock price rose as the company posted strong advertising sales, notably in search and YouTube, which drove second-quarter earnings ahead of consensus estimates. The company's cloud business also performed well, driven by better-than-expected growth.

MSCI Inc.

An overweight position in index data provider MSCI (United States) aided returns as the stock price rose steadily throughout the period. The company reported better-than-expected second-quarter revenues and earnings, driven by strong ESG and climate data demand. Solid client retention rates and recurring revenue trends also supported the results.

Danaher Corp

The portfolio's overweight position in healthcare equipment manufacturer Danaher (United States) contributed to returns. The company reported earnings per share results that exceeded analyst estimates, mainly due to stronger-than-expected COVID-19 related revenues within both its Life Sciences and Diagnostic segments.

Amazon.Com Inc.

Overweighting shares of internet retailer Amazon.com (United States) held back returns. The stock price declined during the quarter after the company reported financial results that were softer than expected. The underperformance was primarily driven by weaker-than-expected online store revenue growth, as more markets reopened post-pandemic, and improved mobility trends, given the widespread acceptance of COVID-19 vaccines.

Paypal Holdings Inc.

The portfolio's overweight position in digital payment technology developer PayPal (United States) held back performance. The stock price declined as the company posted quarterly earnings results below market expectations due to lower-than-expected transaction revenues driven by lower eBay volumes.

Tesla Inc.

Not holding shares of electric vehicle manufacturer Tesla (United States) dampened performance. While the company's second-quarter vehicle deliveries were largely in line with expectations, its second-quarter earnings came in ahead of estimates as favourable pricing of its model 3 and Y vehicles helped improve profitability.

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

17.3

18.9

19.0

17.4

14.9

3.1

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

18.6

20.3

20.4

18.8

16.2

3.4

Russell 1000 Index

17.4

19.1

16.3

15.6

24.2

2.5

¹Returns for periods longer than one year are annualized. Data as of September 30, 2021.

²Partial calendar year. Returns are for the period from the fund’s inception date of September 30, 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.