MFS® International Diversification Fund - Quarterly Portfolio Update

MFS^® International Diversification Fund — Quarterly Update

Hi, my name is Nick Paul, and I am a co-portfolio manager on the MFS^® International Diversification Fund. Thank you for taking the time to join us for our first-quarter update.

So as I thought about this most recent update, what I decided to do was to take a quick step back and look at the underlying drivers of performance for both the portfolio as well as the index from last year, as I believe this is extremely important in terms of addressing some of the short-term underperformance that we’ve witnessed, and how we are thinking about the strategy moving forward, and also why we feel like our long-term focus and emphasis on underwriting quality businesses with durable earnings in non-US equity markets will potentially continue to lead to strong long-term performance results like we’ve experienced in the past.

Ok, so first let’s take a quick step back to last year because, again, I think this is very important to understand the underlying dynamics of the strategy as we think about the near-term performance as well as long-term performance expectations going forward. So last year, despite strong absolute returns, we did modestly underperform the All-Country World ex-US index by just over one percentage point last year. Now while both the fund and the index delivered relatively similar returns, how this was achieved by the index, and how this was achieved by our approach, could not have been more different — and here’s what I mean.

So as you will see on the chart here, at the start of 2023, the All-Country World ex-US index traded at a starting valuation of 11.9x price to forward earnings. So fast forward to the end of last year, the forward p/e for the index stood at 13.2x. So as you can see on the chart here, roughly 70% of the index’s return last year, or the vast majority of that return, was due to the multiple rerating higher. So from there, one could draw the logical conclusion that the remaining 30% of performance for the benchmark was driven by some combination of earnings as well as dividends.

Now let’s compare that to the return profile for the International Diversification Fund last year as what drove that return of the Fund was very different from that of the index. And here’s what I mean… So here, the fund started the year with a forward price to earnings multiple of 13.4x and ended the year with a forward p/e multiple of 13.7x. So in other words — again as you can see on this chart here — only about 14% of the Fund’s total return was driven by multiple expansion. Or said differently, 86% of our total return was driven by fundamentals (i.e., earnings and/or dividends).

So again, this is a very different experience from how the index achieved its return last year, which was mainly multiple expansion, and I would argue that International Diversification’s experience — one where earnings were the main driver of returns — we believe is far superior and should serve us well over the long term.

So why do we think that, and why is it even important? Well as you’ll see on this next slide here, over time, earnings and dividends drive stock prices, period. Here we are looking at international markets, but this is also true in the US. And so, maintaining a superior earnings profile is critical to long-term success. And what we also see here is that multiples, or simply what investors are willing to pay for a particular asset or asset class, will have much less of an impact on total return over the long term. And on top of this — then it’s also important to understand that multiples are driven largely by short-term investor sentiment — so risk on/risk off, the direction of interest rates, geopolitics, essentially everything that has been driving markets over the last few years. And given the performance of our Fund last year was clearly driven by superior earnings versus that of the index, where it was primarily multiple expansion, this is why we continue to feel as confident as we do that we can potentially add value and outperformance to client portfolios over the long term despite the market’s current, I’ll call it, “overemphasis” on the macro (hard landing, soft landing, no landing, higher rates, lower rates, geopolitics), which again has led to some short-term underperformance of the Fund, including a bit of underperformance to start the year. And when the market ultimately comes back to focusing on earnings, which it inevitably will, we feel like we will be in a very strong position, given our focus on underwriting quality businesses across all six of the underlying strategies in the International Diversification Fund.

So just to wrap things up, going forward we remain extremely confident that taking a high-quality approach and focusing on fundamental stock selection where we look to identify those businesses with what we believe to have superior earnings will serve our clients well over the long term, despite the market’s extreme focus on all things macro and short term over the last couple of years, as over time earnings drive stock prices. And if last year was any indication of the underlying strength of earnings of the companies we own versus those in the index — again we believe we should be in very good shape moving forward.

So, as always, thank you for your time today and I hope to see you again next quarter. Thank you.

 

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The views expressed are those of the speakers 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.

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

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.

International: Investments in foreign markets can involve greater risk and volatility than U.S. investments because of adverse market, currency, economic, industry, political, regulatory, geopolitical, or other conditions.

Underlying Funds: MFS’ strategy of investing in underlying funds exposes the fund to the risks of the underlying funds. Each underlying fund pursues its own objective and strategies and may not achieve its objective. In addition, shareholders of the fund will indirectly bear the fees and expenses of the underlying funds.

Before investing, consider the fund’s investment objectives, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact MFS^® or view online at mfs.com. Please read it carefully.

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

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FOR INVESTMENT PROFESSIONAL USE ONLY. Not intended for retail investors.
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