MFS® Large Cap Value Strategy - Quarterly Portfolio Update

MFS® Large Cap Value Strategy: Portfolio Review and Insights

Hi, my name is Kate Mead, and I’m a member of the MFS® value portfolio management team.  Equity markets have remained remarkably resilient this year, with all the major indices up solidly in double digit territory. Through the end of September, the 22% return for the S&P 500 was its highest return for the first nine months of a year since 1997, which has largely been driven on the back of investor enthusiasm for Generative Artificial Intelligence. 

During the third quarter, the market environment began to shift. The deployment of Gen AI infrastructure is currently very expensive, and in early July there were growing questions regarding the sustainability of this level of spending without having visibility to an attractive level of return on these investments. This resulted in a significant selloff in the stocks that had benefited the most from that Gen AI enthusiasm. For a majority of the quarter, value outperformed growth by a really wide margin and the market was led by higher-quality, lower-beta companies. 

In early September, however, a change in investor expectations with respect to Fed policy drove a significant rotation back into growth segments of the market and into high-beta, low-quality companies. 

The MFS Large Cap Value strategy has never performed well in these high beta environments, and the strategy significantly underperformed the Russell 1000® Value during the last few weeks of the quarter. While the absolute returns for the third quarter were robust, with the Russell 1000® Value finishing up 10%, the MFS Large Cap Value strategy underperformed during the period.

Value has been a tougher relative place to be over the last several years. The market has become increasingly concentrated in large-cap technology names that have delivered incredible absolute performance results for the last five years. It is human nature to experience FOMO, or the fear of missing out, because being the odd one out never feels good or comfortable. Incentive structures in our industry, which are often focused on rewarding short-term results, have conspired to make it even more difficult to lean against the trend. Being aware of and managing these natural human tendencies and aligning incentives toward long-term results, as MFS has always done, are imperative in successfully delivering for clients over time. It appears that this misalignment has crept into the large cap–value landscape today, with many of the top performing strategies in the category owning one or more of the Magnificent Seven among their top holdings. Most clients have diversified exposure across the various investment styles within equity markets and have significant exposure to these large technology companies through their growth and core allocations. We would argue that also having exposure to these companies in a value allocation degrades the benefits of having broadly diversified equity exposure. 

The MFS Large Cap Value strategy has remained a true, large cap–value strategy for clients.  

US equity ownership is near all-time high levels, with 62% of the US population having some level of equity ownership according to a recent Gallup poll.  

 

Over the last 100 years, we’ve rarely observed markets as concentrated as they are today. To be sure, concentration is a source of risk that all investors must be mindful of. The significant rise in passive ownership may have the unintended effect of obscuring the fact that low cost is not equivalent to low risk. Knowing what you own has never been more important than it is today.

The underlying drivers of market concentration have varied through time, but the one constant is that markets never stay concentrated over long periods of time.

Since 2020, the influence of macroeconomic considerations and other factors on equity markets has been unusually pronounced. Over long periods of time, however, it’s company fundamentals and valuations that drive the performance of stocks and markets. It seems quite likely that the coming months and years could bring more volatility to markets. Volatility always creates opportunity for long term–oriented investors. We believe the current backdrop is one that is becoming increasingly favorable for fundamental, bottom-up stock pickers who have a disciplined valuation approach and a thoughtful risk management framework. The MFS Large Cap Value team is well positioned to thoughtfully take advantage of opportunities offered by the market, while also managing risk to deliver strong risk-adjusted results for clients in the years to come. 

Thank you very much.

 

 

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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.

Value: The portfolio's investments can continue to be undervalued for long periods of time, not realize their expected value, and be 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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