MFS Global Growth Equity Strategy: Investment Approach and Opportunities

MFS^® Global Growth Equity: Investment Approach and Opportunities

What are distinguishing characteristics of the Global Growth Strategy?
Global Growth is a global, large-cap, growth equity strategy which has generally held 70 to 90 stocks. We take a long-term investment horizon and we typically evaluate stocks with a 10-plus-year forward view, so we are seeking to own stocks across full market cycles.

Very simply, in order for us to invest in a security, we need three criteria to be met. One, we must perceive the company to be very high quality. This means well-moated, differentiated and durable. Two, we must believe the company will compound EPS growth at above average rates across full market cycles. And three, the valuation must be reasonable. We are very careful not to overpay.

Can you elaborate on the valuation discipline of the strategy?
We think our valuation discipline is unique relative to most growth managers in our peer group. We believe a key risk in growth investing is simply paying too high a price for projected future growth; we are careful to invest when valuation is on our side. So while we are willing to pay an above average valuation for companies that meet our investing criteria, we do have limits.

In practice, we're very unlikely to pay above a 50% premium to the average forward P/E multiple of the broader stock market. For example, if the market multiple was hypothetically trading at a 20x forward P/E ratio, then we would consider paying up to roughly a 30x forward P/E ratio as an upper limit. Historical analysis shows that the most expensive quintile of stocks among the 1,000 largest global companies, based on P/E ratio, have subsequently underperformed the universe.

What market environments are most favorable to the strategy’s success, and which ones pose the greatest challenges?
We would anticipate that our approach would deliver strong performance over full market cycles, including periods of both up and down markets. In difficult market environments, we would expect our portfolio to hold up well relative to the benchmark due to our strong focus on downside risk management that results from our quality bias and valuation sensitivity. We would expect the high-quality stocks we favor, with characteristics including high margins, strong balance sheets, pricing power and more stable end markets, to provide resilience during adverse market conditions.

Our valuation discipline is intended to help protect against extreme multiple compression in more challenging markets. At the other end of the spectrum, in markets powered by momentum and led by the most expensive securities, we would expect that our style may temporarily lag the global market. 

Given the unusual concentration in equity benchmarks, how are you investing?
The benchmarks we compete against have become more concentrated, particularly among technology names including the group of stocks that have been referred to as the Magnificent 7. While my co-manager Joe Skorski and I are very aware of the weights in the benchmark, our primary focus remains working on stocks one idea at a time, through our bottom-up investing process, and trying to build the best possible portfolio of stocks for our clients, that fit our investment philosophy.

So while we are fully aware of the benchmark weights, we don't change our process or style as a result of the unique benchmark concentration. Having said that, if we reach a point where we feel too much of the portfolio's tracking error is coming from a very narrow group of large benchmark stocks, we can and do work with our quantitative solutions group at MFS^® to evaluate possible benchmark risk mitigation strategies, while always staying true to our investing style.

Where are you finding opportunities?
We source our investment ideas through working with our global research platform, which we believe is a strong source of competitive advantage at MFS. We are very engaged and interact regularly with the research team to uncover and evaluate potential investment opportunities. Through this process, we have recently increased exposure to stocks benefiting from two important global growth themes, artificial intelligence and electrification. We of course accumulated these positions in a valuation-sensitive way, consistent with our investment philosophy. 

On AI, we have exposure through semiconductor companies involved in making the chips to power AI, through cloud vendors involved in hosting AI workloads, through IT services companies who help businesses clean their data and develop AI strategies, through software companies who bundle AI into their existing software offerings for a price, and even through information-based companies with large pools of moated, proprietary data who can use AI to increase insights to their customers.

On the electrification theme, we have increased our exposures to several electrical equipment manufacturers. These companies should benefit from the gradual and long term move towards an all-electric economy in order to help reduce the world's carbon emissions and combat global climate change. This electrification effort requires upgrading and adding all types of electrical equipment in buildings, the grid, homes, data centers and vehicles, which should help drive growth for the electrical equipment manufacturers we hold in this portfolio.

Do you think the strategy is appropriate for today’s uncertain and volatile environment?
Joe and I feel confident about our ability to outperform across full market cycles. Our long-term investment horizon enables us to take advantage of any near-term uncertainty and volatility in the market, which may present us with additional attractive stock opportunities to consider for the Global Growth portfolio. We don't try to predict the market’s near-term direction, no one can really do that accurately on a consistent basis, but we believe certain attributes of the Global Growth portfolio may be attractive to investors trying to navigate risks present in the current investing environment.

Pockets of the growth stock universe have become quite expensive in our view, increasing valuation risk to investors who seek growth stocks. This valuation risk is present both in the actively managed growth universe and in passive benchmarks. The Global Growth portfolio we are discussing today seeks to achieve above average compounding while minimizing exposures to these higher valued pockets of the market. Similarly, after many years of a strong, sustained global macro environment driving global stocks higher, we recognize the path ahead could be more challenging than the recent past. Markets and economies of course go through cycles and, as mentioned previously, our focus on downside risk management is an integral component of this strategy.

Thank you very much for your interest in the Global Growth Strategy.

 

 

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 of investment advice from the Advisor.

Important risk considerations
The fund may not achieve its objective and/or you could lose money on your investment in the fund. • 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. • Emerging Markets: Emerging markets can have less market structure, depth, and regulatory, custodial or operational oversight and greater political, social, geopolitical and economic instability than developed markets. • 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 prospectus for further information on these and other risk considerations.

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