MFS Mid Cap Growth Strategy - Quarterly Portfolio Update

Hello, thank you for tuning in to the fourth quarter MFS Mid Cap Growth Equity review. My name is Laura Granger, and I’m the institutional portfolio manager on the MFS US Growth team.

I’ll spend the next few minutes discussing the fourth quarter and 2025 market review for midcap growth and then transition to our outlook.

While most major US indices closed the year at new highs, midcap growth stocks posted lackluster returns for the quarter and the year. The Russell Midcap® Growth Index declined 3.7% in the quarter, ending the year up just 8.7%. Value stocks shined as midcap value outperformed, gaining 1.4% for the quarter and 11% for the year.

It was a highly unusual year for midcap. Within the growth index, non-earners performed the best, gaining about 47%. Within the value index, non-earning companies also performed the best, gaining 34.5%. It was a low-quality rally in both growth and value. So this chart, which looks at the correlation of momentum (which is the dark blue line) to Return on Equity (which is the gray line) and non-profitable companies (the light blue line) clearly shows this trend — after liberation day in April, sentiment shifted and momentum decoupled from earnings, and non-profitable companies outperformed.  

Even though there was a slight reversal in this trend in December, high beta, low quality dominated market returns for the year. This chart looks at the spread in factor performance quintiles of the Russell Midcap® Growth index. The first set of bars, you can see high beta outperformed low beta by about 2,300 basis points, and the second set, low quality outperformed high quality by about 1,400 basis points. This extreme factor dispersion was a headwind for portfolio returns.  

Our midcap growth strategy focuses on high-quality companies that we believe can sustain above-average growth over the long term, and this next chart helps to illustrate how poorly long-duration, steady-growth companies performed over the last three years. The top two charts illustrate steady compounders significantly underperformed this year, by about 12%. Cumulative over the last three years, steady compounders underperformed by a staggering 38%. The bottom chart illustrates that steady compounders (represented by the dark blue line) outperform over the long term, despite short-term periods of weakness, like what we just experienced. The trend of high beta, low quality outperformance will reverse at some point.

It was a tough year for midcap growth managers in general, as only 27% of active managers outperformed the index. The lingering effect of Palantir on the benchmark returns is one reason why. Even though Palantir exited the index with the June 2025 rebalance, the stock still has an outsized impact on the one-, three- and five-year returns. Palantir at its peak was 9.5% of the index, and you can see in the pie chart on the left, Palantir (represented by the gray-shaded area) accounted for close to 40% of the index return in 2025. The index ex-Palantir gained just 5.2%. Palantir, combined with Applovin, which is another name that graduated out of the index, accounted for 22% of the three-year and 30% of the five-year total index return. This type of index concentration is unusual in the midcap space and will have a lingering impact on managers’ one-, three- and five-year relative returns. Fortunately, Russell is moving to a twice-a-year index rebalancing in 2026, which could prevent this from ever happening again.

So finally, a few words on our outlook. Our process follows the belief that earnings and cash flow drive long-term price performance. We strive to identify opportunity where the market is mispricing a company’s long-term earnings power. We believe midcap growth stocks offer opportunities for investors seeking exposure to innovative companies with growth potential earlier in their growth cycle.  

Strong earnings growth and positive earnings revisions have fueled stock market returns, and the outlook for earnings remains positive for 2026. Aggregate valuation is above the long-term average, but there is really wide dispersion among the index constituents. We believe there is greater risk to the high-P/E, low-quality names.

We continue to identify companies with durable competitive advantages and improving fundamentals across multiple industries. In the midcap universe, there are really no pure-play AI names, and we gain exposure to AI through companies where AI is a new, smaller part of the business that’s growing faster and is more profitable than its legacy business. When new business is supported by secular growth, it can be a powerful driver of earnings revisions and P/E multiple expansion. However, if there is a pause in anything at all related to AI, there is real risk to the downside in earnings and P/E multiple, and we manage risk in the portfolio to ensure we are not too overexposed to this AI trait.  

Thank you for taking the time to listen to our fourth quarter midcap growth update. For more details, please reach out to your MFS representative, 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.

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.

Mid-cap: Investments in mid-cap companies can be more volatile than investments in larger companies.

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.

Distributed by: U.S. - MFS Investment Management; Latin America - MFS International Ltd.; Canada - MFS Investment Management Canada Limited. Please note that in Europe and Asia Pacific, this document is intended for distribution to investment professionals and institutional clients only. U.K./EMEA – MFS International (U.K.) Limited (“MIL UK”), a private limited company registered in England and Wales with the company number 03062718, and authorized and regulated in the conduct of investment business by the U.K. Financial Conduct Authority. MIL UK, an indirect subsidiary of MFS, has its registered office at One Carter Lane, London, EC4V 5ER UK/MFS Investment Management (Lux) S.à r.l. (MFS Lux) – MFS Lux is a company is organized under the laws of the Grand Duchy of Luxembourg and an indirect subsidiary of MFS – both provides products and investment services to institutional investors in EMEA. This material shall not be circulated or distributed to any person other than to professional investors (as permitted by local regulations) and should not be relied upon or distributed to persons where such reliance or distribution would be contrary to local regulation; Singapore – MFS International Singapore Pte. Ltd. (CRN 201228809M); Australia/New Zealand – MFS International Australia Pty Ltd (“MFS Australia”) (ABN 68 607 579 537) holds an Australian financial services licence number 485343. MFS Australia is regulated by the Australian Securities and Investments Commission.; Hong Kong – MFS International (Hong Kong) Limited (“MIL HK”), a private limited company licensed and regulated by the Hong Kong Securities and Futures Commission (the “SFC”). MIL HK is approved to engage in dealing in securities and asset management regulated activities and may provide certain investment services to “professional investors” as defined in the Securities and Futures Ordinance (“SFO”).; For Professional Investors in China – MFS Financial Management Consulting (Shanghai) Co., Ltd. 2801-12, 28th Floor, 100 Century Avenue, Shanghai World Financial Center, Shanghai Pilot Free Trade Zone, 200120, China, a Chinese limited liability company regulated to provide financial management consulting services.; Japan – MFS Investment Management K.K., is registered as a Financial Instruments Business Operator, Kanto Local Finance Bureau (FIBO) No.312, a member of the Investment Trust Association, Japan and the Japan Investment Advisers Association. As fees to be borne by investors vary depending upon circumstances such as products, services, investment period and market conditions, the total amount nor the calculation methods cannot be disclosed in advance. All investments involve risks, including market fluctuation and investors may lose the principal amount invested. Investors should obtain and read the prospectus and/or document set forth in Article 37-3 of Financial Instruments and Exchange Act carefully before making the investments.

Unless otherwise indicated, logos and product and service names are trademarks of MFS^® and its affiliates and may be registered in certain countries.

FOR INVESTMENT PROFESSIONAL USE ONLY. Not intended for retail investors.
MFS Fund Distributors, Inc., Member SIPC, Boston, MA

 

65439.3