MFS® International Diversification Fund - Quarterly Portfolio Update

MFS^® International Diversification Fund — Quarterly Portfolio Update

 

Hi, my name is Nick Paul, and I am a co-portfolio manager on the MFS International Diversification Fund. Thank you for taking the time to join us for our fourth quarter/year-end update.

Like in previous updates, I wanted to use today’s time to provide a quick update on the performance of both the International Diversification Fund but to also spend a bit of time touching on non-US equity performance in 2024 as well as our outlook for the asset class more broadly moving forward.

So, with that, let’s first talk about the performance of International Diversification. While the strategy came in mostly flat versus its benchmark in the fourth quarter, for the calendar year of 2024, the fund outperformed the MSCI ACWI ex-US index and also fared quite well versus its peers in the foreign large blend category. And as I mentioned during our last update, for me what proved most compelling related to the outperformance in 2024, was it was relatively broad based when viewed through the lens of the underlying strategies that make up IDF in that four of the six underlying funds outperformed their respective benchmarks. From a relative performance standpoint, our International Growth strategy was the top performer, followed closely by our Emerging Markets Fund, while our core EAFE benchmark International Intrinsic Value Fund as well as our pure play value strategy, International Large Cap Value, also outperformed. On the other side of the ledger, we did see a bit of relative underperformance in our core Research International Fund as well as our small- and midcap offering, International New Discovery, as higher beta, momentum and low quality led the way in the international small- and midcap asset class 2024. All in, international equities, as defined by the MSCI All Country World ex-US index, finished the year up about 5.5% in US dollar terms. But also worth noting is that, in local currency, the index was up just over 12.5%, the difference being the result of the impact of significant US dollar strength over the last three months of the year.

So, from here, I thought I’d spend the last few minutes to provide some quick thoughts on the outlook for non-US equities and, more importantly, the role they might play in a broader portfolio over the years to come. So, for some time now we’ve talked about the role of international equities being one — primarily of diversification. And coming out of 2024, where the S&P 500 returned north of 20% for the second year in a row, and once again driven largely by a relatively small cohort of stocks, I can’t help but to think that, going forward, the benefits of diversification provided, perhaps in part, by an allocation to international equities may be more important than ever given the elevated concentration risk in US markets. Now diversification aside for moment, one of the main reasons we feel that an allocation to international stocks might play an important role in portfolios over the years to come (aside from the well-known argument that valuations for non-US equities are significantly lower than their US counterparts) is that while technology and artificial intelligence will certainly be an important part of our daily lives going forward, we also believe that future trends in investment and spending, leading in many cases to better earnings growth — which at the end of the day is what drives stock prices — will likely benefit a wider cohort of sectors and industries outside of just the tech-centric US companies that disproportionately benefited over last decade. So, trends such as increased capex spending (versus tech-focused opex spending), spending to upgrade infrastructure, energy and the energy transition (think about defense and national security, as well as the reshoring and the localization of supply chains, just to name a few), all stand to benefit from these trends. And while many US companies stand to benefit from these trends, many international companies stand to benefit as well. And while the US dominates the technology landscape globally, I think it would be naïve to assume that all the best companies in the world across this much wider subset of sectors and industries reside in a single region or country.

Now the other topic that’s top of mind for most international investors is the direction of the dollar over the years to come, because, as we witnessed last year, dollar strength or weakness can have a meaningful impact on the return profile for US dollar–based investors. Here again, while the dollar could certainly continue to strengthen over the near term, driven mainly by policy and interest rates, the dollar, like US markets sits at multi-decade high and really, at this point, appears to be priced to perfection, with a lot of positives baked into the price at this point. And should the dollar flatten out or perhaps, even better yet, trend lower over the years to come, this would be an additional catalyst or tailwind for improved performance for non-US equity returns, especially for dollar-based investors.

So, look at the end of the day, I don’t view it as a conversation around the US versus non-US (it’s not an either-or proposition). It’s really more a conversation around diversification versus concentration and market extremes, and I do think that the benefits of diversification offered by an allocation to non-US markets may prove to be extremely important in the years to come.

With that, thank you for your time today and I hope to see all of you again next quarter. Thank you.

##PRODUCTS##

 

The views expressed are those of the speakers 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.

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

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.

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.

Underlying Funds: MFS’ strategy of investing in underlying funds exposes the fund to the risks of the underlying funds. Each underlying fund pursues its own objective and strategies and may not achieve its objective. In addition, shareholders of the fund will indirectly bear the fees and expenses of the underlying funds.

Before investing, consider the fund’s investment objectives, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact MFS^® or view online at mfs.com. Please read it carefully.

Please see the prospectus for further information on these and other risk considerations.

Unless otherwise indicated, logos and product and service names are trademarks of MFS^® and its affiliates and may be registered in certain countries.

FOR INVESTMENT PROFESSIONAL USE ONLY. Not intended for retail investors.
MFS Fund Distributors, Inc., Member SIPC, Boston, MA

51976.11