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 Large Cap Value team here at MFS^®. Coming into this year, investor expectations were for the Federal Reserve to cut interest rates by six times by the end of 2024. Midway through the year, expectations are now for only one rate cut. This is definitely not the backdrop that investors would have expected to benefit long-duration, more expensive growth stocks. However, that is exactly what has happened this year. Through the first half, the Russell 1000^® Growth Index is up nearly 21%, significantly outperforming the Russell 1000^® Value Index and the MFS Large Cap Value strategy. It’s a helpful reminder that even with perfect hindsight on macroeconomic events, there is no assurance stocks will behave as expected, and it’s why we never position the portfolio for a specific macro or market outcome.

The tremendous level of enthusiasm for the potential impact of generative artificial intelligence, or Gen AI, has driven the markets this year. The most significant beneficiary of this has been NVIDIA, which makes graphic processing units that are at the core of training artificial intelligence models. Its shares have appreciated nearly 150% during the first six months of the year and it is single handedly responsible for one-third of the total return of the S&P 500 — that’s something that no single stock has done since 1927 in a period when the market is up double digits.

The AI euphoria of 2024 is reminiscent of the internet excitement during the late 1990s. Companies perceived to benefit from the deployment of Gen AI have performed very well as investors anticipate accelerating growth. AI data centers require an order of magnitude more power than traditional ones, so it is not surprising at all the number of utilities and other companies that supply components into these data centers have been among the best performers.

The strength in the utility sector has been driven primarily by the independent power producers (IPPs). Collectively, the three large cloud service providers have announced data center capacity additions over the next 12 months that are the equivalent of adding another New York City into the grid of the United States! It’s no wonder there has been AI enthusiasm centered on some companies in this sector. This magnitude of change, however, can’t happen overnight and it will certainly take time to provision that much additional capacity. Ensuring that the regulated utilities, which are the companies that are owned in the MFS Large Cap Value strategy, will continue to be able to deliver affordable, reliable service in their territories without saddling ratepayers with stranded assets and additional costs is paramount as these investments are made and come online.

With this broader market backdrop, the drumbeat that value investing is dead has started once again. We are as convicted as ever in the future of value investing, but we concede that it may depend on how you define value. The FTSE Russell Indices uses price/book as the sole valuation metric when constructing the style benchmarks. With modern businesses deriving an increased amount of value from intangible assets — such as intellectual property, brand value and culture — we believe that book valuation metrics are not the best way to assess valuation and could be even less meaningful going forward for most industries.

 

We have always preferred to focus on the valuation metrics that capture how companies create value and have instead emphasized cash-flow-based methodologies. Over the long-term, these metrics have proven to be a much more consistent driver of stock price performance. In this chart, we can see the stark difference between the value added by focusing on price/book versus free cash flow yield valuation metrics. It’s a compelling illustration that a “quality” value focused approach is more efficacious over time.

Looking to the second half of 2024, the level of uncertainty remains high. Remarkably, markets have remained relatively calm and resilient. Over the prior 15 years, US equity markets have compounded nearly 17% per year. That is a level that is far in excess of the long-term average level of returns. With such strong absolute returns, it’s understandable that the importance of focusing on downside risks has been overshadowed in investors’ minds; however we believe it remains imperative. It seems very likely that the future level of returns from here will be more muted from an absolute perspective, and it’s possible there could also be a more protracted downturn. Focusing on downside risk management has always been a critical element of the investment philosophy used in managing the MFS Large Cap Value strategy, and we strongly believe that owning an actively managed value strategy where risk management is of primary importance is crucial in the current environment. Thank you so much for your time.

 

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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.

Distributed by: U.S. - MFS Investment Management; Latin America - MFS International Ltd.; Canada - MFS Investment Management Canada Limited. Please note that in Europe and Asia Pacific, this document is intended for distribution to investment professionals and institutional clients only. U.K./EMEA – MFS International (U.K.) Limited (“MIL UK”), a private limited company registered in England and Wales with the company number 03062718, and authorized and regulated in the conduct of investment business by the U.K. Financial Conduct Authority. MIL UK, an indirect subsidiary of MFS, has its registered office at One Carter Lane, London, EC4V 5ER UK/MFS Investment Management (Lux) S.à r.l. (MFS Lux) – MFS Lux is a company is organized under the laws of the Grand Duchy of Luxembourg and an indirect subsidiary of MFS – both provides products and investment services to institutional investors in EMEA. This material shall not be circulated or distributed to any person other than to professional investors (as permitted by local regulations) and should not be relied upon or distributed to persons where such reliance or distribution would be contrary to local regulation; Singapore – MFS International Singapore Pte. Ltd. (CRN 201228809M); Australia/New Zealand – MFS International Australia Pty Ltd (“MFS Australia”) (ABN 68 607 579 537) holds an Australian financial services licence number 485343. MFS Australia is regulated by the Australian Securities and Investments Commission.; Hong Kong – MFS International (Hong Kong) Limited (“MIL HK”), a private limited company licensed and regulated by the Hong Kong Securities and Futures Commission (the “SFC”). MIL HK is approved to engage in dealing in securities and asset management regulated activities and may provide certain investment services to “professional investors” as defined in the Securities and Futures Ordinance (“SFO”).; For Professional Investors in China – MFS Financial Management Consulting (Shanghai) Co., Ltd. 2801-12, 28th Floor, 100 Century Avenue, Shanghai World Financial Center, Shanghai Pilot Free Trade Zone, 200120, China, a Chinese limited liability company regulated to provide financial management consulting services.; Japan – MFS Investment Management K.K., is registered as a Financial Instruments Business Operator, Kanto Local Finance Bureau (FIBO) No.312, a member of the Investment Trust Association, Japan and the Japan Investment Advisers Association. As fees to be borne by investors vary depending upon circumstances such as products, services, investment period and market conditions, the total amount nor the calculation methods cannot be disclosed in advance. All investments involve risks, including market fluctuation and investors may lose the principal amount invested. Investors should obtain and read the prospectus and/or document set forth in Article 37-3 of Financial Instruments and Exchange Act carefully before making the investments.

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