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Sun Life MFS US Growth Fund

Fund commentary | Q4 2020

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Opinions and commentary provided by MFS Investment Management Canada Limited.

Portfolio outlook and positioning

In the fourth quarter, value outperformed growth in the large-, mid- and small-cap spaces. While it is too early to know if this is a longer-term shift in investor behavior, it was a notable change from the first nine months of the year.

The portfolio manager has stressed that the strategy has generally performed well when leadership of the market has been among high quality, growth-oriented companies with stocks selling at reasonable valuations. Conversely, the strategy has generally underperformed when leadership was narrow or driven by momentum, irrespective of valuation.

As of December 31, 2020, the portfolio’s top holdings in software include Adobe, Intuit, Autodesk and ServiceNow. In professional services, holdings include data providers such as: Verisk, which provides data analytics for customers in insurance, energy markets and financial services; data analytics firm Clarivate; credit reporting agency TransUnion; and CoStar Group, which provides commercial real estate information and analytics. MFS tends to favor this segment of the industrials sector given the capital-light nature of the business and the high barriers to entry facilitated by proprietary data.

Within IT services, while still somewhat cautious over the short-term as it relates to traditional payment providers, the portfolio manager continues to favor companies with exposure to digital payments, which have benefitted from the strong secular trend of cash-to-card conversion. Tailwinds in the space include continued penetration in e-commerce, low cost acceptance, mobile/contactless payments, financial inclusion and the potential impact to longer-term behavioral changes as a result of COVID-19. Within the space, the Fund continues to favor global payment service providers Visa and Mastercard as well as PayPal and Square, which provide payment processing solutions and software. In entertainment, gaming companies Electronic Arts, Activision Blizzard and Take-Two Interactive lead the way.

Significant transactions over the period included:

  • Established a position in digital advertising platform company, Pinterest. The portfolio manager believes the company is uniquely positioned to allow advertisers to get messages in front of users through multiple points of engagement, including new discovery as well as search intent.
  • Established a position in the ecommerce and game publishing platform, Sea Ltd., which MFS believes will gain increasing share of the consumer wallet and discretionary spending via increased mobile/smartphone penetration.
  • Exited the position in payment processing software company, Fiserv. Holdings of the company were sold to account for what the portfolio manager sees as greater risks associated with more small- and medium-sized business exposure, a segment suffering the most significant impact from global lockdowns.
  • Exited the position in Illumina following the recently announced acquisition of Grail, Inc., which focuses on early screening for cancer. MFS believes the potential range of outcomes from a risk perspective, both to the upside and downside, involved in the position have increased as the underlying business model could meaningfully change.

The portfolio remains focused on companies that MFS believes can generate above average, sustainable earnings growth over the short-term. The portfolio manager’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, stock valuations are important factors the portfolio manager considers when making investments for the portfolio.

The MFS Growth philosophy is about trying to identify long-term secular growth trends rather than timing cyclical swings. Additionally, MFS seeks to invest in the highest quality businesses that look to capture the economics of those long-term trends while not overpaying on a valuation basis. By focusing on secular growth through good times and bad, MFS aims to avoid the race for the exits when the music ultimately stops.

Significant impacts on performance

Zoom Video Communications
Not owning shares of the communications platform provider boosted relative performance. After a period of strong growth, accelerated by the shift to work-from-home during the COVID-19 shutdowns, the company's share price declined following new of a vaccine and expectations for an economic re-opening.

Amgen 
Not holding shares of the biotechnology firm benefited relative returns. The stock price lagged broader equity markets after declining early in the period as the company announced weaker-than-expected Phase III trial results for its in-development heart failure medication.

Square
An overweight position in credit card payment processing solutions provider aided relative results. The company delivered quarterly earnings per share results that far exceeded market expectations, primarily due to strong revenue growth in Cash App and Seller.

Tesla
Not holding shares of the electric vehicle manufacturer weakened relative performance. The stock price rose as the company's third-quarter earnings largely beat expectations due to strong gross profits, and as free cash flow generation hit record highs. Towards the end of the period, Tesla was added as a constituent to the S&P 500 Index.

Alibaba Group
A position in online and mobile commerce company detracted from relative performance. Despite reporting second-quarter sales that largely met expectations, the stock fell as its e-commerce platform became the subject of an anti-monopoly probe by the regulator. Additionally, there appeared to have been some concerns that Ant Financial, of which Alibaba Group has a 33% stake, would have to abandon or separate themselves from their non-payments business.

Adobe Systems 
An overweight position in the software company weighed on relative results. Although the company reported strong quarterly financial results, shares traded only slightly higher during the period, underperforming the broader market, after management provided 2021 earnings per share guidance in-line with expectations, which implied a deceleration in growth due to a higher tax rate.

Fund performance

Compound returns %1 Since inception2 10 year 5 year 3 year 1 year Q4
Sun Life MFS U.S. Growth Fund - Series A

17.3

16.9

15.7

21.2

26.4

2.5

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

18.7

18.2

17.1

22.6

27.8

2.8

Russell 1000 Index

17.3

16.9

13.6

15.5

18.8

8.4

¹Returns for periods longer than one year are annualized. Data as of December 31, 2020.

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.

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