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Sun Life MFS U.S. Growth Fund

Fund commentary | Q1 2022

Opinions and commentary provided by MFS Investment Management Canada Limited.

Market Review

The Russell 1000 Index finished a volatile quarter down 6.19% with war, inflation and monetary policy all influencing performance. U.S. equities steadily declined in January, prompted by investor concerns about more restrictive central bank policies. The sell-off intensified in February with the Russian invasion of Ukraine which triggered a spike in volatility and a risk off rotation. By early March the combination of extremely bearish investor sentiment and an oversold technical condition provided fuel for a rally into quarter-end which was led by mega cap growth stocks despite a back-up in bond yields. 

Soaring commodity prices coupled with a coincident back-up in bond yields and a shift to defensives heavily influenced sector leadership during quarter. Energy, and to a lesser extent materials, dominated sector performance within the broader S&P 500, with both responding to supply-related challenges posed by the war in Ukraine. Financials also outperformed, led by insurance companies, which offset broad-based weakness in banks and capital markets-related industries. Investor confidence turned bearish, which coincided with outperformance of the traditional defensive sectors – Utilities, Consumer staples and Health Care. The Industrials sector also outperformed, bolstered by strength in defense and farm machinery stocks. Unsurprisingly, given the elevated energy and inflation levels, the Consumer Discretionary sector was a significant underperformer during the period. The Communication services sector, which has substantial weights in social media companies, also underperformed by a wide margin as did the Information Technology sector, despite posting a strong rally in the back half of March. 

Fund Positioning

As of March 31, 2022, the portfolio was most overweight Information Technology - software, Industrials - professional services and Health Care - life sciences & tools.  

  • In Information Technology, MFS continues to favor vertical software businesses, such as Adobe, Intuit, Autodesk and Cadence Design Systems, that they feel 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. 
  • In Industrials - professional services, top overweight remain in data providers such as Verisk Analytics, which provides data analytics for customers in insurance, energy markets and financial services, data analytics firm Clarivate, 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 - life sciences & tools, MFS remains positive on names such as Danaher, Thermo Fisher Scientific and clinical research organization ICON. Within Health Care, MFS continues to focus on the potential range of outcomes for the businesses. The 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. 

As of March 31, 2022, the portfolio remained most underweight to hardware, storage & peripherals within Information Technology, also to automobiles and specialty retail within Consumer Discretionary. The Fund is underweight to sectors like Financials, Consumer Staples and does not have exposure to Energy and Utilities. The Fund is close to market weight to Consumer discretionary. 

  • Within Information Technology, MFS remain underweight areas of the sector that require higher capital intensity and that have traditionally been more cyclically exposed to global growth. These areas include industries such as hardware, storage & peripherals, driven by the meaningful underweight to Apple.  
  • Within Consumer Discretionary, the avoidance of Tesla drives the underweight in automobiles, while not owning big box retailers such as Home Depot and Lowes account for the majority of the underweight in specialty retail. 

The Sun Life MFS US Growth Fund underperformed the benchmark Russel 1000 during the quarter. For the quarter, value outperformed growth in the large-, mid- and small-cap spaces.

During Q1, Energy, Utilities and Consumer staples were the best performing sectors, and Communication services, Consumer discretionary and Information technology were the worst-performing. An overweight position to Information Technology and Communication service were leading detractors for the fund during the quarter. Not having exposure to Energy also contributed to underperformance in comparison to the benchmark. An underweight position to Consumer Discretionary contributed to fund performance during the quarter.  

Home Depot Inc
Not owning shares of building materials and home improvements retailer Home Depot contributed to relative results. The stock price declined as the company reported lower-than-expected fiscal-year 2022 earnings per share guidance figures due to supply chain cost pressures. 

Amazon
Overweighting shares of internet retailer Amazon.com aided relative returns. The stock price outperformed broader equity markets as the company reported solid fourth-quarter financial results with operating income ahead of expectations, despite supply-chain challenges and inflation. 

Aon Plc
An overweight position in risk management and human capital consulting services provider Aon boosted relative performance. The company delivered impressive quarterly financial results, driven by strong organic growth with continued strength across the majority of its business segments. Robust margin expansion and continued share buybacks also supported the share price performance. 

Intuit Inc
An overweight position in financial management solutions provider Intuit held back relative performance. Although the company reported solid second-quarter financial results, driven by strength in its Credit Karma and QuickBooks brands, the stock price declined as the broader equity markets, particularly technology stocks, pulled back during the quarter as investors appeared to have digested the impacts of higher inflation and the war in Ukraine. 

Adobe Systems Inc
The portfolio's overweight position in software company Adobe Systems held back relative returns. Although the company delivered solid financial results, driven by strong revenue performance, the stock price declined as weaker-than-expected 2022 earnings and revenue guidance appeared to have weighed on the stock. 

Sherwin Williams Co
An overweight position in paint and coating manufacturer Sherwin Williams detracted from relative performance. The stock price declined as the company delivered earnings per share results below consensus estimates, owing to supply chain issues and higher raw material costs. 

Significant transactions 

Add/Buy 

  • MFS added to the portfolio's position in financial exchange operator CME Group. The company has a strong position in index and volatility derivatives and has benefitted from increased volume due to globalization and capital efficiency. MFS believe that increased volatility, notably from higher interest rates, could provide an additional earnings growth tailwind. 
  • MFS established a position in credit card and services company American Express. Similar to the holdings in Visa and MasterCard, MFS believes, the company is a beneficiary of secular trends towards more credit usage and spend over time, while also benefitting from higher levels of international travel and business expenditures as COVID-19 restrictions are lifted globally. 
  • MFS added Dollar Tree to the portfolio, noting increased synergies from their acquisition of Family Dollar and positive pricing moves, and a more attractive growth profile and risk/reward profile than Dollar General, which MFS exited. 

 

Trim/Sell 

  • MFS continued to trim the position in Meta Platforms (formerly Facebook) as the risks associated with potential regulation, as well as the large, committed investment to the ‘metaverse’, have widened out the potential range of outcomes. 
  • MFS exited the position in Sea Limited, noting the increased competitive intensity of their eCommerce business in new markets and weakening position of their leading game FreeFire, against a more demanding valuation. 
  • MFS trimmed the position in PayPal, 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. 

 

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.

Fund performance

Compound returns %1 Since inception2 10 year 5 year 3 year 1 year Q1
Sun Life MFS U.S. Growth Fund - Series A

15.7

16.1

15.3

13.7

5.3

-13.6

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

17.0

17.4

16.7

15.0

6.5

-13.3

Russell 1000 Index

16.9

17.1    

14.3

16.1

12.6

-6.2

¹Returns for periods longer than one year are annualized. Data as of March 31, 2022. 
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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