MFS® Large Cap Value Strategy - Quarterly Portfolio Update

MFS Large Cap Value Strategy – Portfolio Review and Insights

Hi, I’m Kate Mead, and I’m a member of the MFS® Large Cap Value investment team. Equity markets have had a really strong start to the year, continuing the momentum from the end of 2023. The Russell 1000® Value finished the quarter up 9% and is up nearly 20% over the last six months. While outperforming in more difficult market environments has been a critical factor in how the MFS Large Cap Value strategy has added value to clients over the long-term, this strategy has also been able to keep pace in a majority of stronger market environments, including the most recent period. This is a strategy that can be owned by clients through a cycle, and not just for a cycle. 

Over the last 15 years, US equity market investors have enjoyed annualized returns of over 16%. While there have been a few brief market downturns over that period, including the COVID shock in 2020 and the market reaction to rate hikes in 2022, these episodes were followed by a rapid recovery, establishing a “Buy the Dip” mentality in the mindset of many investors. It’s been 17 years since the last protracted US equity market correction.

We believe that the lack of a prolonged bear market in recent years has obscured the significant value that downside risk management can have for investors. The math is quite simple. Significant declines require an even greater level of appreciation to recoup value that was lost. We are optimistic about the long-term opportunities for active equity investors, but market cycles have not disappeared, and it seems inevitable that the market will experience a more sustained downturn at some point. We are prepared for that eventuality.

The MFS Large Cap Value strategy has always been focused on assessing downside risks and in constructing a portfolio that can hold up better in more difficult market environments. It’s really hard to predict the direction of markets and to forecast macroeconomic factors accurately. As a result, we do not position the portfolio for any particular outcome. Focusing on robust bottom-up fundamental analysis, assessing the long-term durability and valuation of companies that we own and applying a strong risk management framework enables us to end up with a portfolio that we believe is well-positioned to weather whatever may come.

The valuation of the market today sits at higher-than-average levels. Over shorter-term periods, there is virtually no correlation between valuation and equity market returns. There is nothing to say that, from here, valuations and markets can’t continue to appreciate and even become more extended. Over the long-term, however, valuation ALWAYS matters. Over rolling 10-year periods, higher beginning valuations have resulted in lower future returns.

Sell side analysts are typically focused on near-term earnings, generally looking out over the next 12 to 18 months. The average holding period of a stock on the New York Stock Exchange sits at a paltry eight months. Our very long-term investment time horizon has been a critical source of value for clients invested in this strategy. This time horizon mismatch often creates significant investment opportunities. Stocks overreact to short-term headwinds — which may have no bearing on the long-term value on the company — providing an opportunity for us to purchase good companies when valuations are overly discounting negative news for the long-term benefit of clients.

At the start of every year, analysts tend to be overly optimistic about the future direction and magnitude of company earnings, only to revise numbers down as actual data comes in throughout the year. Earnings growth estimates for 2024 and 2025 remain quite robust, expecting double digit growth in both years. This could be a source of volatility as we move throughout the year.

We are very optimistic about the prospects for the MFS Large Cap Value strategy, but less so for absolute returns and earnings growth of the market overall. Looking to the remainder of the year, we are faced with a high degree of uncertainty with regards to the direction of inflation, rates and economic growth coupled with heightened geopolitical tensions, two wars and an upcoming US presidential election (along with national elections for over 80% of the world’s market capitalization). With a backdrop that seems poised for higher volatility, we believe that 2024 will present numerous opportunities for us to add long-term value for clients. We are confident that our long-term focus, collaborative research organization and rigorous bottom-up investment process positions us well to continue to add value through active management for many years to come. Thank you.

 

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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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