MFS® Growth Strategy - Quarterly Portfolio Update

MFS Growth Strategy-Quarterly Portfolio Update

Hello and thank you for tuning in to the MFS^® second quarter 2024 growth equity review. My name is Laura Granger and I am the institutional portfolio manager on the US Growth team.

I’m going to spend the next five minutes addressing the most common topics coming up in client meetings, including an update on the megacap names, index concentration, what’s driving momentum, and a view on our outlook. 

So, following a very strong first quarter return, the Russell 1000^® Growth index gained a robust 8.3% in the second quarter, beating all other asset classes. Year-to-date, the index is up 20.7%, which puts it in the top five of all time first half returns. While the first quarter was characterized by a broad-based rally with all sectors posting gains, the second quarter we saw greater volatility, bifurcated returns and a larger impact from index concentration.

Despite the fact that earnings growth is broadening, and many stocks performed well in reaction to earnings, the index return was dominated by a handful of names that we’re now gonna call the Super 6. Nvidia, Apple, Microsoft, Alphabet, Amazon and Meta Platforms drove 97% of the index return in the quarter. The Russell Growth^® index ex Super 6 gained only 1%. Some of this performance is definitely deserved due to the outsized earnings growth, but as we have explained in prior calls, these six names are not created equal from an earnings, cash flow or valuation perspective.   

So, this first chart has a lot of data to unpack but it’s a great illustration of the differences in the earnings and valuation amongst the names. Performance in the first two columns shows that Nvidia outperformed significantly both in the quarter and year-to-date, but deservedly so. Because when you look at the third data column, you can see earnings have been revised higher by about 245% over the last year. Contrast that with Apple, which gained 23% on the quarter only on the hopes that AI moving to the edge would catalyze a handset replacement cycle. But notice, the earnings were not revised much higher and the PE is now above a market multiple for subpar growth. Tesla also gained in the quarter on news unrelated to earnings and now trades at whopping 70x forward PE.  Note some of the other names with superior growth rates that are trading below market multiples, like META. So, short-term returns can be volatile, stocks can outperform for various reasons quarter to quarter, but the long-term returns are driven by earnings. And it’s really important to remain selective to generate the best risk-adjusted, long-term returns. 

So this next chart helps to explain the consistent outperformance of the megacap names by comparing the quarterly year-on-year growth rates within the Russell 1000^® Growth index. So, we’re looking at the Super 6, represented by the gray bars, and all other index names represented by the blue bars. You can see the outsized growth rates of the Super 6 in recent quarters. Looking ahead, earnings growth is broadening, decelerating for the Super 6 and accelerating in other areas, narrowing the growth gap. This will create greater opportunities for active managers and could allow for new leaders to emerge.  

So, let’s talk a little bit about the recent index rebalancing and change in index concentration. The June Russell^® rebalance resulted in record index concentration. Which you can see on this next chart.

The Super 6 now account for 53% of the index. Three names, Microsoft, Nvidia and Apple are 32.3% of the index. Information technology and comm services are now close to 63% of the index. The benchmark has a high degree of absolute concentration risk, and it’s really important to be cognizant of this risk to actively manage around it rather than blindly buying the index.  

We are often asked to explain momentum which is measured using relative strength. Stocks that outperform over 6 to 12 months have a high momentum score. And it’s really important to understand what drives that price strength. 

So this next chart illustrates what is driving momentum now, which you see on the left, versus 2000 which is on the right. The dark blue line measures the performance of the top quintile of relative strength stocks. You can see the top performing stocks have been tightly correlated with profits as measured by return on equity, which is the gray line. Low quality stocks with negative earnings, the bright blue line, have underperformed. Contrast this with 2000, when momentum was correlated with low quality and earnings did not matter. This is the big difference in the market today versus the past technology peak. High momentum is really not a concern when it’s supported by earnings and cash flow.

So now let’s shift focus to the portfolio. Regarding the outlook, we have a lot to be excited about. After multiple years of stock price performance being beholden to macro factors, we are transitioning to a more normalized market environment where fundamentals and earnings will drive stock prices. Earnings growth is broadening, and this is great for active managers.  

Our bottom-up research has led us to identify multiple high level themes that have developed over the last five years. We believe we are in the early innings of some important changes in the market that will have large implications across multiple industries. Some of those investment trends include AI, the data center build out, power management, electrification, reshoring and onshoring, aerospace, infrastructure spending, alternative asset managers and new product innovation in health care. The portfolio’s invested in companies benefiting from these long duration trends, driving durable above average growth.  

So in conclusion, we have a lot to be excited about. In the long run, earnings drive the bulk of stock price performance and this favors our bottom up approach. So thanks for taking the time to listen to our second quarter review. If you have any questions, please reach out to your MFS representative, and have a great day.

 

Fundamental Equity Investment Strategies Details

 

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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