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.
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.