MFS® International Equity Strategy - Quarterly Portfolio Update

Hello, and thank you for tuning in to the MFS fourth quarter 2025 International Equity review. My name is Peter Loncto, and I am an investment product specialist on the international equity team. I’ll spend the next few minutes reviewing fourth quarter market action and performance, as well as our outlook going forward.   

International equity markets closed out their best year since 2009 with positive gains in the fourth quarter. Investor sentiment remained robust across European and Asian markets, fueled by continuing reductions in inflation and a careful approach taken by central banks regarding interest rate changes. Economic conditions in major regions like the eurozone and Japan appeared to stabilize, while contained geopolitical tensions in the Middle East helped keep energy prices steady. Markets continued to be fueled by optimism around substantial new investments in AI technologies and infrastructure. 

Turning to relative performance, the strategy modestly underperformed the benchmark during the fourth quarter. Similar to the first three quarters of the year, we continued to face stylistic headwinds in the fourth quarter, with leadership by lower-quality parts of the market. This slide demonstrates that low quality leadership, which has been pronounced in recent years. Given our emphasis on owning higher-quality companies, this has been a challenge for our approach. This chart, based on fundamental thematic baskets, makes  it more granular. In Europe, leadership in the fourth quarter was by companies that were more cyclical and exposed to economic recovery. Our approach seeks to identify companies that are less cyclical and aren’t reliant on an economic recovery to grow earnings. At the bottom of this chart, the factors that underperformed include many of the traits that we look for: stable growers, quality and balance-sheet strength.

As excitement around artificial intelligence continued to drive markets, semiconductor manufacturers benefited from elevated demand. The portfolio’s underweight to semis and semi-cap equipment detracted from relative performance, while an overweight to software — where many companies are perceived to have higher risk from AI — was also a negative.  The market has been focused on identifying AI winners and losers, and it appears that every stock in areas like semis and software are being painted with a very broad brush.

At MFS, we evaluate the impact of AI from a bottom-up perspective, evaluating the risks and opportunities for each individual business. For example, within software, we analyze how proprietary a company’s data is, how it's integrated into the workflows of clients and how critical accuracy is in those workflows. This stock-by-stock approach in evaluating AI risk is critical to understanding the long-term impact of AI on each company and is a differentiator of our approach versus the broader market.

Financials was an area of relative strength for the strategy in the fourth quarter. Select European bank holdings benefited from resilient earnings and continued improvement in net interest margins. We increased exposure to select European banks in 2025, and that benefited relative performance in the fourth quarter. 

The portfolio continues to be managed with a high-quality bias despite the massive outperformance of lower-quality stocks in 2025. We believe the portfolio’s high-quality bias is likely to be rewarded sooner rather than later since, at year end, high-quality stocks were trading at their smallest valuation premium compared to low-quality stocks since the end of the Global Financial Crisis. While it certainly is difficult to predict when high-quality stocks will regain leadership or what the catalyst for that might be, we do believe the low-quality trade has largely played itself out, and high-quality stocks look very attractively priced today. As 2026 begins, we will continue to invest in high-quality companies that we believe can grow earnings faster than the overall market over the long-term, while maintaining our strong valuation discipline.

Thank you for joining our quarterly review. For more detail, please reach out to your MFS representative and have a great day.

 

Fundamental Equity Strategies

 

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.

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.

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

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