MFS® Large Cap Value Strategy - Quarterly Portfolio Update

The US equity market is more concentrated today than at any point in history, presenting both challenges and opportunities for investors. For the last three decades, thinking differently and leaning into parts of the market that have been overlooked is how we’ve been able to deliver value for clients through time. With so much of the market today levered to the same trend, it’s never been more important for clients to have diversified equity exposure.

The right-hand side of the chart shows just how significant the beta rotation toward the end of the third quarter was, with the Goldman Sachs High Beta Momo index turning parabolic. And on the left, you can see that over the last five years, since the bottom of the market during Covid, the lowest beta and highest quality companies have significantly underperformed the high beta/low quality companies.  

Since this strategy’s inception, our disciplined approach has consistently led to a portfolio that has had less absolute risk than the market — meaning that high beta environments have always been more challenging from a relative performance perspective. Therefore, it is not surprising that the MFS Large Cap Value strategy underperformed the market during the third quarter.

Over the long-term lower beta companies have steadily outperformed the highest beta cohort, with the recent period being more anomalous. You can see on the right side of the chart: the last five years have been marked by significant shifts in investor appetite for beta. The magnitude of these moves has been quite unusual. 

While we cannot predict the timing of a market shift, it is inevitable. Equity markets eventually change direction, often abruptly. We believe that maintaining exposure to strategies exhibiting lower correlations with the prevailing market concentration will offer substantial value to clients in the coming years. 

As of the end of September, the top 10 companies in the S&P 500, which account for just 2% of the largest 500 US companies, comprise nearly 40% of the index, far surpassing the dot-com-bubble peak in 2000. 

Even more striking, the top 10 stocks in the Russell 1000® Growth Index, eight of which are mega-cap technology companies, account for over 60% of that index. The overlap between the large cap-style segments in the US equity market is at an all-time-high level.

With such concentrated technology exposure within core and growth allocations, does it make sense to also have these same exposures in your Large Cap Value portfolios? It may be surprising to know that within the Morningstar Large Cap Value category, all of the top performers and most of the top asset gatherers have significant exposure to these same mega-cap technology companies. We believe if you’d like to own more growth stocks, you should allocate more towards your growth manager.

If the growth in GenAI continues as expected, clients will definitely benefit. But what if it doesn’t?  We strongly believe that having a diversified exposure across the equity market is critical and will be paramount for clients in the years to come.

Focusing on quality and valuation has been a powerful combination in adding value for clients over several decades. Maintaining a disciplined approach — focusing on companies with durable franchises and attractive valuations — means that the MFS Large Cap Value strategy won’t outperform in every environment, but it should hold up better in more difficult periods and compound value for clients in a lower risk manner, offering an important source of diversification in today’s concentrated markets.

We believe that the opportunity from here for fundamental, bottom-up, quality value investors like MFS is extremely compelling. Thank you. 

 

Fundamental Equity Investment Strategies Details

 

The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. No forecasts can be guaranteed. Past performance is no guarantee of future results.

Important Risk Considerations:
The strategy may not achieve its objective and/or you could lose money on your investment.

Stock: Stock markets and investments in individual stocks are volatile and can decline significantly in response to or investor perception of, issuer, market, economic, industry, political, regulatory, geopolitical, environmental, public health, and other conditions.

Value: The portfolio's investments can continue to be undervalued for long periods of time, not realize their expected value, and be more volatile than the stock market in general.

Please see the applicable prospectus for further information on these and other risk considerations.

The portfolio is actively managed, and current holdings may be different.

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