MFS® Large Cap Value Strategy and Tariff Update

Kristen Colvin: Well, we are here today to talk about what has been a very interesting start to the markets in 2025. Katie, thanks for joining me today. The first quarter certainly saw quite a reversal in terms of value stocks outperforming growth stocks for first time in a while. How did the strategy hold up?

Katie Cannan: Yeah. Well, it's great to be here. So the first quarter was volatile, but the strategy performed exactly as we would've expected. So we finished the quarter with strong outperformance and that outperformance came when risk appetite shifted. So to be honest, the quarter started feeling a lot like 2024 with momentum and high beta stocks outperforming. And through mid-February, the Russell 1000® Value was up 5.5%, 6% and annualizing at a 50% return for the year. So the strategy trailed in that very strong market environment, but then we started to see a market shift as we got later into February.

So investors started to get data points that raised questions about the health of the US consumer and raised fears about a pullback in AI infrastructure spending. And those concerns, along with policy uncertainty, have come at a time of very extended index-level valuations. So in the second half of the quarter, we saw a risk-off rotation into the more defensive parts of the market where we were well positioned. And so as we've talked to clients, we've been incrementally shifting the portfolio in favor of sectors like health care and utilities where we felt the risk-reward looks more attractive. And so that positioning benefited us in the first quarter and led to strong outperformance.

Kristen Colvin: Okay. So you mentioned a lot of different points of volatility in the quarter. How did that impact the trades or what you did in the first quarter in terms of the portfolio?

Katie Cannan: Yeah. So I think one of the big themes of the trades in the first quarter was a focus on managing valuation risk. So we've shared with clients how we came into the year with the overall market, the S&P 500, trading at 21.5 times forward earnings. And how at these valuation levels, historically, that's prefaced very muted and often negative 10-year forward returns. So in the Large Cap Value Strategy, we've been trying to manage our own valuation risk and try to put the portfolio in a position where the durability of the earnings and free cash flow of the companies owned can really drive the performance.

And then in terms of trading, financials was the sector where we had the most activity in the quarter, both on the buy and the sell side. So some of the larger trims we made were to some of the money center banks. We also trimmed one of our large insurance broker holdings. I think for all of these stocks, we had seen valuations appreciate significantly. We redeployed some of those basis points into a couple of super regional banks, which still have a good balance of earnings coming from more durable fee-based businesses and where we thought the risk-reward looked more attractive. We also added to one of our asset manager positions that pulled back significantly in the quarter.

Kristen Colvin: Okay. So interesting quarter. Yesterday was Liberation Day. So tariffs are dominating the headlines today and likely for the foreseeable future. As are other topics like de-globalization and the implications of DOGE. As you Tom and Nevin think about the portfolio, what are you particularly concerned about or what are you all focused on in terms of those big themes?

Katie Cannan: Yeah. I think in the aftermath of Liberation Day, the million-dollar question that everyone's trying to figure out is what's priced in right now? And I think coming into the year, the Trump administration inherited a relatively stable economy with declining inflation and declining inflation expectations, but still high equity values. And given the high starting valuations, there wasn't much room for error. And I think it's fair to say that the market wasn't priced for the volatility that we've experienced. I think investors expected the administration to balance their pro-growth productivity enhancing policies with their protectionist policies. And at least so far we've seen a lot more of the latter. I think that policy uncertainty had an impact on valuations in the first quarter, but the actual impact on earnings and business outlooks wasn't yet known. And so today, April 3rd, stocks are down a lot, but they're not necessarily cheaper than they were yesterday because earnings estimates haven't adjusted. And I think that's what everyone's trying to figure out right now.

And so for the Large Cap Value Strategy, we're trying to balance incrementally leaning in to some of the names that have sold off on tariff or DOGE concerns, while also acknowledging that there are still a lot of unknowns and there's a lot that companies themselves don't know. So as a team, we're not spending a lot of time trying to handicap the business impacts over the next 12 months. We're trying to focus more on what the companies that we own or the companies that we want to own are going to be doing to manage through these challenges. What do we think is a durable level of earnings and free cashflow? What evaluations look like on those numbers? And then are we getting an attractive risk-reward?

As an example, we've started to lean into one of our analog semiconductor names that sells chips into the automotive market and has sold off on tariff concerns. This company, the chips they sell are essential to the vehicle. They basically control all of the electronics. They cost two to three bucks on average. They're single sourced and they have pricing power. So we think this company is well positioned to navigate a challenging environment and we think the valuation overly discounts the risk to the business if you can look out beyond the next year.

Kristen Colvin: Okay. So certainly a lot of big headline themes. But what else would you point to in terms of areas of focus for you and the rest of the team?

Katie Cannan: Yeah. So Nevin, Tom and I have been busy. I think we've talked about how in the fourth quarter we did a financials trip down in New York. In the first quarter we attended a couple of industrials conferences. And then we actually all just got back from an equity round table in London with our international colleagues from across the globe. So we feel good about how we're positioned, but we're doing work in areas of the market like industrials, which have started to pull back, and where we think we might get a valuation opportunity on some good companies. So within the sector, we have a large overweight in aerospace and defense, but we're underweight industries within the sector like machinery, the multi-industrials, electrical equipment. And there are a lot of good companies in there that fit our framework for business durability and quality that we'd like to own at the right valuation. So we're doing the work and putting together our wish list now in the event that we get a valuation opportunity in the coming months.

Kristen Colvin: Market's certainly providing a lot of different things to look at. Any final thoughts as you look ahead to 2025?

Katie Cannan: Yeah. So I think that there's a lot of uncertainty in the market right now. In my opinion, I think the companies that are going to differentiate themselves in this market backdrop are those that can really navigate this market environment of slowing growth and potential margin pressure. And I think the good news is that the companies owned in the Large Cap Value Strategy should be really well positioned to deliver that durable earnings and free cash flow growth versus the rest of the market.

Kristen Colvin: Awesome. Well, you've given us so many insights today and we look forward to hearing more from you as the year progresses. Certainly off to an interesting start.

Katie Cannan: Thank you.

Kristen Colvin: Yeah.

 

 

The views expressed are those of the speaker and are subject to change at any time.  These views should not be relied upon as investment advice, securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product.  No forecasts can be guaranteed.

Important Risk Considerations: The Strategy may not achieve its objective and/or you could lose money on your investment.

Stock: Stock market and investments 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

FOR INSTITUTIONAL AND INVESTMENT PROFESSIONALS ONLY

61460.1