MFS® Growth Strategy: Quarterly Portfolio Update

Title: MFS Growth Strategy-Quarterly Portfolio Update

Hello and thank you for tuning in to the MFS® First quarter 2024 growth equity review. My name is Laura Granger and I am the institutional portfolio manager on the US Growth team.

I will spend the next five minutes quickly answering the most common questions we get from clients, including giving you an update on the Mag 7, our thoughts on index concentration and our thoughts about the question “Is today like 2000.” And then I’ll pivot to the portfolio and our outlook.

So, the year started on a very strong note with the Russell 1000® growth index gaining 11.4%. The fourth quarter euphoria over potential rate cuts faded and the market refocused on earnings. Gains were seen in all sectors and active managers benefited with the increased dispersion of returns. Companies with strong earnings and guidance outperformed. And this quarter, in our opinion, is a reminder that a disciplined, patient, bottom-up approach pays off. And the growth equity portfolio outperformed.

So, starting with the first question — what about the Mag 7? The seven stocks make up 48% of the Russell 1000® Growth index. Microsoft, Meta, Apple, Amazon, Nvidia, Alphabet and Tesla. They are all different from an earnings and valuation perspective. So, there’s two points to make. First, the overall impact of these seven stocks to index returns is diminishing and, second, the dispersion of returns is increasing.

So, this first chart is a repeat from last quarter, but it illustrates the fact that the impact of these names is diminishing. The contribution of these stocks to the index returns peaked in the first quarter of 2023 at 72%. And while on the surface it may appear they still dominate, driving 55% of index return in the quarter, the spread has narrowed. The Russell 1000® Growth index ex these seven names was up 10% versus the overall index being up 11.4%. Compare this with the first quarter of 2023, where the index ex these names was up only 6% versus 14.5% for the overall index. So clearly the market is broadening.

This next chart has a lot of data to unpack, but we’re going to focus on a few columns. First, we’ve been talking about the decoupling of performance and you can see in the first column. Dispersion of returns widened this quarter, with clear winners and losers. Nvidia, Meta, Amazon and Microsoft all outperformed due to strong earnings results, while Apple and Tesla lagged. The third and fourth columns point out the differences in the expected growth and valuation that are driving these returns. And it’s really interesting to note, that even though META is up about 300% since January of ‘23, it still trades at a below market multiple of 23x. And Nvidia is up about 518% and it trades at only a slight premium. Compare this to Tesla, where the earnings are in decline yet it still trades at the highest PE of all at 56x.

So, question two: What will cause index concentration to change? Our answer is changing fundamentals and valuation. So typically, deteriorating fundamentals and subsequent PE multiple compression of past leaders makes room for new leaders to emerge, which changes the weights in the index, and that’s what’s happening now. So let’s use Apple, Tesla and Nvidia as examples.

So this chart illustrates the concentration of the top five names in the Russell 1000® Growth index over time. While at an all-time high of 42%, there are very significant changes in the weights of individual names. And the bottom table illustrates how leadership has shifted over time as past winners begin to lag and new leaders emerge. So first, let’s take a look at Tesla. It peaked at 4% of the index in 2022, but with weak earnings and stock price performance, it is now out of the top five and it’s only 1.8% of the index. Second, take a look at Apple. Apple peaked at about 13.5% of the index in mid-’23, and it closed the quarter at 9.5%. That’s a 400 basis point drop in weight. Finally, look at Nvidia. The outperformance has driven it to 8% of the index versus where it was in January of ’23 at about 2%. So, the key message for investors is that while index concentration makes this space challenging, it’s really important to stay active. You have to be selective. Pay attention to changing fundamentals and earnings.

So, question three: Is this 2000? And our answer is no. History may rhyme but it doesn’t repeat.

There are multiple differences now versus then, including a very subdued IPO market and lower valuations. But for today, let’s just focus on the profit picture.

While there may be small pockets of excess valuation, market leaders have the support of real earnings. The left chart looks at performance today of a basket of the highest relative strength stocks, which is the dark blue line. And you can see performance is highly correlated with profitability, the gray line. Low quality companies with negative earnings have underperformed, which is the bright blue line. Contrast this with 2000, which is the chart on the right. The best performing stocks were highly correlated with negative earnings, and profits didn’t seem to matter. Overall, valuations are not near 2000 peak as the Russell 1000® growth index trades at about 27.5x versus its March 2000 peak of 47x.

So, let’s now shift focus to the portfolio.

Regarding our outlook, we have a lot to be excited about. We believe this quarter is evidence of a more normalized market environment. Outside of 2024 being an election year, potential disruption from escalating geo-political risks, expectations for interest rate cuts and potential risk to earnings, we believe there will continue to be more dispersion in stock price returns based on fundamentals and earnings, and this favors active managers.

We continue to find interesting opportunities in technology (as AI is driving a long-duration investment cycle), in industrials and materials (where companies continue to benefit from investments in onshoring, de-risking of supply chains, electrification and infrastructure), and in health care (where growth for tools providers is reaccelerating), and also in financials with alternative asset managers.

So, in conclusion, we have a lot to be excited about. In the long run, earnings explain the bulk of stock price performance, and this favors our bottom-up approach.

So, thank you as always for taking the time to listen to our first quarter 2024 update. We covered a lot, so please reach out to your MFS representative for more detail and have a great day.

 

##PRODUCTS##

 

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.

Growth: Investments in growth companies can be more sensitive to the company's earnings and 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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