MFS® International Diversification Fund - Quarterly Portfolio Update

Hi, my name is John Mahoney and I am a co-Portfolio Manager on the MFS International Diversification Fund. Thank you for taking the time to join us for our third quarter 2025 update.

I wanted to start today’s session with a quick update on non-US market performance during the third quarter and then turn to the performance of the International Diversification Fund.

So, the third quarter of 2025 was a positive one, with most major asset classes delivering positive returns. This was largely driven by easing trade tensions, ongoing enthusiasm for artificial intelligence, and rising expectations for near-term interest rate cuts from the Federal Reserve. With this, the MSCI All Country World ex US Index returned a solid 6.9% in US dollar terms, with emerging markets the standout region delivering over 10% in US dollars.

This “risk-on” sentiment was supported throughout the period with the materials, consumer discretionary, and technology sectors leading the way in the broader MSCI All Country World ex US Index. You had tariff negotiations following the market downturn in April, and the Federal Reserve reduced interest rates in September for the first time this year, with further cuts anticipated. As noted, emerging markets outperformed developed markets, led in large part by China, which was up over 20%. Domestic policy support for Chinese chipmakers, increased AI investment, and new product launches from major Chinese technology companies contributed to the rally. Macro drivers were also favorable as the market priced in prospective rate cuts in major economies — most notably in the US — lowering discount rates and supporting risk-taking more broadly. Trade tensions, especially between the US and China, remained a bit of a wildcard, yet intermittent easing or periods of truce supported confidence in global supply chains and cross-border commerce.

Turning now to the performance of the International Diversification Fund, the fund trailed its benchmark, the MSCI All Country World ex US Index, during the period, although five of the six underlying strategies finished well relative to their respective peer groups. The notable exception here was the performance of the MFS Research International Fund. The fund, which represents 27.5% of the International Diversification Fund, underperformed, primarily driven by performance within the financial services, health care, and materials sector. Within financials, exchanges — Euronext and the London Stock Exchange — weighed on results as Euronext faced a valuation reset after a period of strong performance following solid transaction volume in the first quarter, as well as benefiting from its addition to the French stock market index (the CAC 40), while the London Stock Exchange pulled back on concerns about potential AI-driven disruption to its Data & Analytics division. Our bank holdings were also negatively impacted by our lack of exposure to names such as Banco Santander and HSBC, as well as by our position in HDFC.

Within health care, underperformance was due to stock selection in pharmaceuticals, which presented several challenges. Our overweight position in Novo Nordisk had a modest impact on shares, reflecting both a tempered US sales growth for its GLP-1 therapies and some pricing pressure in Europe. Outside of pharmaceuticals, owning Convatec and CSL also weighed on results. Convatec declined after reporting weaker organic revenue growth and lowered its full-year margin outlook, while CSL came under pressure due to muted plasma collection trends and cautious profit statements in its September update.

Finally in the materials sector, an overweight exposure and stock selection in specialty chemicals companies detracted from performance, as several holdings struggled with weaker demand and margin pressure. The underweight in metals and mining also hurt, as the sector benefited from a rebound in commodity prices and renewed investor interest in precious metals.

Looking forward, while it’s difficult to determine how long the current environment of outsized strong returns will persist, we know from history that higher valuation multiples, higher interest rates, and high uncertainty typically do not coexist for long periods of time. Meanwhile, as AI euphoria, currency movements, and geopolitical uncertainties impact many industries, we will continue to look to take advantage of market volatility and mispricings to upgrade the quality of the underlying portfolios at what we perceive as attractive valuations. This time-tested approach has been effective in various market environments historically, given the over 20 years track record of the International Diversification Fund and its strong performance over long time periods. The conviction in the positioning of the underlying strategies remains strong, and we will continue our long-term approach of investing in high-quality companies that we believe can grow earnings faster than the overall market over the long term, while maintaining the strong valuation discipline.

With that, I would like to thank you for listening to our quarter update.

 

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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.

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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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