Amid the uncertainty wrought by US President Donald Trump’s trade war, non-US stock markets have posted strong gains, lifting funds like the Bronze-rated Sun Life MFS International Opportunities F. Yet Greg Johnsen, institutional portfolio manager at Boston-based MFS Investment Management and a member of the team that oversees this fund, remains upbeat about the prospects for international equities.
“While the tariff backdrop has increased uncertainty globally, there are a variety of influences that have helped support EAFE [Europe, Australasia and the Far East] relative to the United States,” Johnsen says. At the end of 2024, non-US equities were quite cheap relative to the US, and he says they remain cheap in pockets now.
He thinks European markets hold particular promise. “The dramatic recent shift in Europe’s defense posture is likely to unleash significant fiscal stimulus within the low-growth European Union economy,” he says. “Germany has been flirting with recession for several years, but the loosening of its debt limit will allow for dramatic increases in defense and infrastructure spending, approximating EUR 1 trillion over the next dozen years. Similarly, the EU is embarking on a plan to increase defense spending by as much as EUR 800 billion in coming years. All of this is expected to lift the region’s growth potential.”
At the same time, Johnsen says that if Russia and Ukraine reach a peace deal in the months ahead, lower energy costs could improve the competitiveness of the European economy. Meanwhile, he believes Japan’s economy is “reinflating” after decades of deflation: “The normalization of monetary policy is creating near-term headwinds, but a return to growth should be a benefit over the medium to long term,” He adds that China’s recent artificial intelligence breakthroughs, along with increased government focus on rejuvenating domestic demand, could have spillover effects on international markets if its economy withstands US tariffs.
Johnsen notes that international equity markets remain inexpensive, with the benchmark MSCI EAFE trading at 14.5 times the next 12 months’ earnings. “Certain industries—luxury goods, alcoholic beverages, steel—have been notably impacted by tariffs, but overall, the market has benefitted from several tailwinds, including European Central Bank rate cuts, optimism about an end to the war in Ukraine, plans for significantly increased fiscal spending (most notably in Germany and China), and a lower US dollar.”
Led by equity portfolio managers Matthew Barrett and Kevin Dwan, Sun Life MFS International Opportunities F has had its off years, but its long-term track record lands it solidly in the top half of the international equity category. Over the last 12 months, the F class is up 14.78%, comfortably ahead of the 9.50% gain on the average fund in the category and the 11.88% return on its Morningstar benchmark. That lands the fund in the top fifth of its category. For the last three years, the International Opportunities Fund is up 10.86% per year, ranking in the 35th percentile, and over the past five years, its 11.47% annual return puts it in the 45th percentile.
Looking back at 2024, Johnsen notes that stock selection more than offset a challenging market environment in which lower-quality companies outperformed higher-quality ones and value stocks outperformed growth. The fund returned 18.20% that year, versus 11.39% for the category. “It was a year that saw significant changes in market leadership and momentum from quarter to quarter, to some extent following the directions in the macro environment and in particular changes in inflation and interest rate expectations,” says Johnsen.
The portfolio, which currently has 85 holdings, has 22.66% in technology stocks, followed by 18.65% industrials, 13.45% healthcare, 10.44% financials and smaller holdings in sectors such as consumer cyclical. Portfolio turnover is low, clocking in at 23.6%.
Johnsen attributes fund performance to stock selection in information technology and industrials. “Technology drivers were owning SAP and not owning Samsung,” he says. “SAP, a leading vendor of enterprise resource planning software, continued to execute on its move to a Software-as-a-Service environment, which we believed was less risky for that firm than many other software incumbents that have struggled.” He adds that Samsung was a significant underperformer for the year, driven by concerns over their competitive positions against the likes of Taiwan Semiconductor Manufacturing.
The fund also benefitted from industrials such as Hitachi, RB Global, Schneider Electric, Mitsubishi Heavy Industries, and Rolls Royce. “Hitachi was driven by continued execution of their reform agenda, good organic growth, robust domestic IT spending in Japan, and deeper market appreciation for the grid assets that they bought from Sweden’s ABB, plus some tailwinds from their involvement in artificial intelligence and the markets’ related exuberance.” Johnsen says that shares in RB Global rose in response to changes in management and increasing investor confidence that its acquisition of auctioneer IAA will be sound over the long term.
Johnsen explains: “Schneider continues to execute on organic growth drivers, including the global buildout of electricity infrastructure grids with increased demand for crypto, artificial intelligence, and electrification. Mitsubishi was driven by increasing defense budgets in Japan, higher profitability allowances for Japanese defense contractors and their approval to engage in US Navy repair work in its shipyards in Japan.” He adds that Rolls Royce extended its gains over the past few years: “Rolls’ success was driven by its strong free cash flow generation from the remarkably successful XWB engines on the popular A350.”
Johnsen admits that the team lagged in consumer staples as inflation eroded purchasing power and interest rates bit into the longer-duration holdings in this area. “Negative sentiment around the prospects for tariffs also impacted our beverage holdings, such as Heineken, Pernod Ricard, and Diageo.”
While the portfolio managers are mindful of macroeconomic trends and use top-down analysis to some extent, the stock-picking part of the process dominates and is based primarily on bottom-up, fundamental analysis. “This is what overwhelmingly drives our portfolios’ industry, sector and regional positioning. However, macroeconomic factors and geopolitical events can influence our views on companies and portfolio positioning. For example, in 2019, the prospect for higher inflation after years of declining inflation led the team to review companies exposed to gold and resulted in the addition of two companies into the portfolio.”
The MFS team focuses on high-quality, above-average growth companies with reasonable valuations. “These companies typically are market leaders with durable business models that have experienced management teams and competitive advantages that we believe will allow them to maintain higher returns and earnings growth than their peers,” says Johnsen. “Given our focus on companies that can grow earnings at above-average rates, we have generally been overweight in information technology relative to the core-oriented MSCI EAFE index. Within that sector, we have been most overweight the software industry, which has in our view a more durable business model than hardware, based on stronger barriers to entry and more durable competitive advantages.” Besides holding SAP, the managers also like IT services companies such as Capgemini, which is positioned to benefit from increasing complexity of technology and growth of outsourcing. “Our final area of focus is semiconductors and semi cap equipment, where we own companies such as TSMC.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
