MFS® Growth Strategy - Quarterly Portfolio Update

Hello, and thank you for tuning in to the MFS first quarter 2025 growth equity review.  My name is Laura Granger, and I am the institutional portfolio manager on the US Growth team. 

Today I will start with a discussion on the market volatility, tariffs and our outlook.  I will then review the recent capping of the Russell 1000® Growth Index, with our thoughts on index concentration and the broadening of the market.   Finally, I would like to review our upcoming proxy vote requesting a change of the mutual fund status to non-diversified, so this update will be two minutes longer than usual.  

If we had to coin a phrase to describe the first quarter of 2025, it would be “maximum uncertainty.”

The market hates uncertainty, and as a result, it has been whipsawing daily and the Russell 1000 Growth Index ending the quarter down 9.9%.  This first chart is just a snapshot of how severe the uncertainty is relative to history.  We started the quarter with positive momentum and euphoria over the potential for deregulation and tax cuts, but the tone quickly shifted with the news of DeepSeek, which casted doubt over AI spending trends that catalyzed a sharp sell-off in anything related to AI, not only in technology but also in industrials, and utilities.  The market sell-off then accelerated, with widespread fear over tariffs and ongoing geopolitical conflicts.

And since quarter-end, the uncertainty and risks have heightened dramatically with the announcement of broad and higher-than-expected tariffs.  Economic data has softened, and the fears of recession are growing.   We have not yet seen negative revisions to earnings, but we do expect the earnings outlook to weaken for certain companies.     

Importantly, not every company will be impacted by the same magnitude and the broad-based sell-off on fears of a global recession is creating opportunities.  Some of the highest-quality companies with durable growth models are now trading at valuations 30% to 40% below where they were last year.  This is creating opportunity for active managers to add value, but until the administration clarifies the path forward, we would expect to continue to see more volatility. 

As far as the tariff impact on our portfolio, there is very little direct impact as we generally own asset-light companies that do not have complex supply chains.   The larger risk to the portfolio and the market in general is that ongoing uncertainty is creating a pause in consumer spending, a pause in corporate capital deployment and a potential pause in hiring.  The longer the uncertainty persists, the harder it is for corporate management teams to plan.  This could cause a slowdown in growth or a potential recession.  However, we are focused on companies with exposure to secular growth trends, with durable competitive advantages, high barriers to entry or some sort of idiosyncratic story that will drive revenue and earnings growth, even in a weakening economy.  Companies with differentiated products and services in end markets with secular growth should outperform. 

Shifting gears to the Russell 1000 Growth Index. 

There are a few points to make.  First, FTSE Russell will be capping index weights moving forward on a quarterly basis using the 4.5/45% rule, meaning any position that’s greater than 4.5% weight cannot be more than 45% in aggregate.  

 

The first capping was effective as of March 24^th and is illustrated on this chart.   There was a lot of excitement going into the capping exercise, with hopes it would help correct excessive index concentration.  However, instead of reducing the weight of each of the large names, Russell cut the weight of Meta Platforms so it would fall out of the calculation, and the other weights were adjusted slightly.  The end result: Apple, Microsoft and Nvidia still make up over 30% of the index.   The Mag 7, which includes Tesla, still comprise 51.5%% of the index.

But, most notable for the quarter was the underperformance of the Mag 7 as a group, which you can see in the third set of bars on this chart, down 14.7%.  The Russell 1000 Growth Index ex the Mag 7 actually outperformed this group, down 4%.   In fact, 34% of the stocks in the index posted gains during the quarter.

And as you can see on this next chart, 61% of the index constituents outperformed in the quarter.  This is the strongest breadth we have seen since 2021 as the largest weights have dominated index returns over the last 2 years.    

The group of stocks have dominated returns because earnings growth was so outsized relative to the rest of the market, which you can see in the blue bars for 2023 and 2024 on this chart (that’s the dark blue bars), and the weights of these names masked the strength of other stocks (which you can see in the light blue bars) which also posted decent earnings growth.  But looking forward to 2025 and 2026, you can see the growth rates for the Mag 7 are decelerating, and the spread in growth versus the rest of the index is diminishing.  We expect to see continued broadening in the market and potentially new leaders emerge, which is great for active management.   

Also note in the quarter that we saw continued dispersion in returns and fundamentals amongst the top weights, which you can see on this next chart.

These stocks are all different from earnings, valuation and price performance perspective.   The first column shows the huge dispersion in first quarter performance with Tesla down 35% versus Meta Platforms outperforming the market, down only 1%.   Also look at the EPS growth and valuation columns, these companies have different growth prospects and trade at different valuations.  You don’t want to own a portfolio that blindly buys these top index weights.  Active managers can add value by being overweight or underweight these names according to fundamentals, earnings and valuations.

That leads to our final message for the quarter.  If you’re invested in the mutual fund, you may see a proxy vote come through with the request to change the status of our mutual fund from diversified to non-diversified.  The reason we want to change the status of the fund is as a diversified fund we are subject to the SEC  5/25 rule, where any position in the portfolio that is greater than 5% can not add up to more the 25% of the portfolio at the time of purchase.  We are not required to sell to stay inline with this rule, so the greater than 5% positions have grown to be over 40% of the portfolio because we have owned the stocks for such a long period of time.  As a result, while we can freely sell the stocks, we are not able to buy any of the names if our opinion changes.   The team is asking to move to non-diversified so they can better manage the position sizes of these names according to the fundamental outlook and valuation.  As we just saw on the last slide, each name is so different, and portfolio managers have the opportunity to add value by being actively underweight or overweight each of these large benchmark weights.   It is important to note that moving to a non-diversified portfolio does not mean the portfolio will be more concentrated, it will just provide greater flexibility to the investment team to manage risk around these large positions.    Please reach out to your MFS representative if you have any questions about this proxy vote.

Thank you, as always, for taking the time to listen to our first quarter review.  Have a great day. 

 

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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.

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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