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