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Sun Life MFS U.S. Growth Fund

Fund commentary | Q2 2022

Opinions and commentary provided by MFS Investment Management Canada Limited.

Market Review  

Looking at the US markets, many of the major indexes had some of their worst quarterly returns on record. From a style perspective, value outperformed growth across the market cap spectrum, however, leadership shifted back towards growth late in the quarter as bond yields declined in response to increasing recession risks. Market cap leadership also reflected a defensive shift with large caps outperforming smaller cap stocks across all style boxes. All sectors in the Russell 1000 Index finished the period in negative territory. Within the index, Consumer Staples, Energy and Health Care were the top performing sectors, while Consumer Discretionary, Communication Services and Information Technology were the worst performers, all down greater than 17% for the period. 

Fund Positioning  

As of June 30, 2022, the portfolio was overweight to industries like software in Information Technology, professional services in Industrials and to life sciences & tools in Health Care.  

  • In Information Technology, MFS continues to favor vertical software businesses such as Adobe, Intuit, Salesforce and ServiceNow. 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 portfolio remained underweight to technology hardware, storage and peripherals. The portfolio avoids companies that have higher capital intensity and to companies traditionally more cyclically exposed to global growth. 
  • In Industrials, MFS favours professional services. Top overweight is to data providers such as Verisk, which provides data analytics for customers in insurance, energy markets and financial services, CoStar Group, which provides commercial real estate information and analytics and credit reporting agencies, TransUnion and Equifax. MFS tend to favor this area of the Industrials sector given the capital light nature of the business and the high barriers to entry provided by proprietary data.  
  • In Health Care, MFS favours life sciences & tools. MFS remains positive on names such as Danaher, Thermo Fisher Scientific and clinical research organization ICON. Within health care MFS continue to focus on the potential range of outcomes for the businesses MFS hold. Conviction in a tighter range of positive outcomes for these names remains high as MFS feel they are well positioned to potentially benefit from accelerated growth in new diagnostic and therapeutic platforms to meet the expanding needs of drug development into a strong therapeutic innovation cycle. The portfolio is underweight health care providers and services-oriented companies.  
  • In comparison to the benchmark, some of the underweight sectors in the portfolio are Financials, Consumer Staples and Energy. 

The Fund underperformed its benchmark during the second quarter. Stock selection in Information Technology, Real Estate, Materials and Consumer Staples contributed to relative returns over the period. Conversely, overweight allocation to Information Technology and underweight allocation to Consumer Staples and Energy stocks proved the leading detractors from relative performance. 

  • Tesla Inc : Not holding shares of electric vehicle manufacturer Tesla supported relative performance. Although the company reported strong first-quarter financial results, production shutdowns at Tesla's plant in Shanghai reduced vehicle deliveries and appeared to have weighed on investor sentiment.  
  • Vertex Pharmaceuticals Inc: An overweight position in biotechnology company Vertex Pharmaceuticals bolstered relative performance after the company's impressive results in the clinical trial of gene-editing cell therapy showing long-term effects on the symptoms of both beta-thalassemia and sickle cell disease. In addition, several positive developments for the company's cystic fibrosis franchise also benefited the stock.  
  • Colgate-Palmolive Co: An overweight position in global consumer products company Colgate-Palmolive benefited relative returns. The company reported flat share price performance, which significantly outperformed during a period of broad equity declines. Fundamental results were favourable, with topline growth driven by the company's Hill's pet food segment and emerging markets, despite higher commodity and logistics costs and transactional foreign exchange headwinds.  

  • Amazon.Com Inc: The portfolio's overweight position in internet retailer Amazon.com held back relative returns. Despite the company's solid operational performance, the stock price declined as technology stocks came under pressure due to a combination of rising interest rates and a shift away from growth stocks to more defensive stocks, amid a global market drop and uncertain macroeconomic conditions.  
  • NVIDIA Corp: An overweight position in computer graphics processor maker NVIDIA detracted from relative performance. Although the company posted better-than-expected earnings per share results, the stock price declined as management lowered its forward-looking guidance, citing the negative effects on gaming revenue from the lockdowns in China and having exited the Russian market.  
  • Alphabet Inc: The portfolio's overweight position in Information Technology company Alphabet held back relative returns. Despite solid operational performance, the company's stock price declined, along with other technology stocks, as the sector came under pressure during the quarter. The sharp rise in interest rates intra-quarter appeared to have reduced investor appetite for long-duration growth and valuations for technology growth stocks were hit hard amid the broader market sell-off.  

  

Significant transactions  

Add/Buy  

  • MFS added a new position in UnitedHealth Group Inc as the company has successfully transitioned to a more integrated business model that expanded their total market opportunity. MFS believes, the company is in a stronger position with an improved value proposition for its customers, and increased visibility in revenue growth and margins.  
  • MFS added small positions in Energy to the portfolio as part of risk management relative to the benchmark. MFS believes energy prices can stay higher for longer, given the industry supply/demand dynamics. MFS purchased Hess Corp, which is a high-quality, leading global independent exploration & production company. MFS believe Guyana is a transformative asset for the company with lowest cost production providing multiple years of strong cash flow growth.  
  • MFS also added EOG Resources Inc from the Energy sector, which they believe is the most disciplined operator and capital allocator in US shale and has one of the more conservative balance sheets. 

Trim/Sell  

  • MFS exited the position in Netflix Inc following the latest earnings report. MFS believes the growth thesis is broken as new subscriber growth has peaked and the company shifts its focus from a user growth model to average revenue per user (ARPU) contemplating price increases, changing the password structure and potentially offering free service with advertising.  
  • Following a number of trims, MFS exited the position in PayPal Holdings Inc, where MFS witnessed a slowing user growth profile and greater emphasis on growing average revenue per user (ARPU), which may face headwinds due to the increasing competitive intensity of eCommerce/checkout platforms.  
  • MFS exited the position in videogame maker Activision Blizzard Inc. MFS had been trimming the stock since the announced acquisition by Microsoft. 

Outlook  

While persistent inflation and the prospect of rising interest rates over the near term have had an outsized negative impact on longer duration asset classes, such as US large cap growth stocks, the long-term outlook for durable growth businesses that exhibit pricing power remains unchanged. MFS continues to believe that 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 have resided in the growth universe. The portfolio continues to focus on companies that MFS believes can generate above-average, sustainable earnings growth over the next two to three years. 

As long-term investors operating in an asset class known for innovation, MFS want to ensure they are on the right side of disruption and focus their time and effort on companies that operate in industries where profit pools are likely to go over the next decade in both traditional as well as non-traditional growth sectors. MFS continues to look to own companies that are in balance with their multiple stakeholders – be it customers, employees, suppliers, local communities, investors, board of directors, as well as their environment. Importantly, MFS continues to stay true to their history of style purity and bottom-up security selection and not get caught up in trying to time markets, or styles or other factors that drive short-term performance.

 

Fund performance

Compound returns %1 Since inception2 10 year 5 year 3 year 1 year Q2
Sun Life MFS U.S. Growth Fund - Series A

13.5

14.3

10.3

5.4

-20.9

-17.2

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

14.8

15.7

11.6

6.7

-20.1

-16.9

Russell 1000 Index

15.0

15.1    

10.9

9.7

-9.4

-13.9

¹Returns for periods longer than one year are annualized. Data as of June 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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