MFS® International Equity Strategy - Quarterly Portfolio Update

Hello, and thank you for tuning into the MFS third-quarter 2025 International Equity Review. My name is Ann Marie Costello, and I am an investment product specialist on the international equity team. Today, I will review market drivers, performance results and positioning.

Stocks continued their rally in the third quarter as the EAFE Index appreciated 4.8%, bringing the year-to-date return to 25.1% as of September 30. Value continued to outperform growth. In the third quarter, value stocks outperformed growth stocks by a margin of 5% Year to date, value stocks outperformed growth stocks by 13%.

As you know, we have a quality biased portfolio with high returns on capital, strong balance sheets and steady cash flow dynamics that generally outperforms whenever markets sell off.

However, when you look back in time, this strategy has tended to struggle most in what we call narrow market rallies, driven by low quality stocks, and this has been a big headwind for us for much of 2025.

To put this into perspective, for the third quarter, the top quintile of quality stocks in the EAFE benchmark were flat, whereas the lowest quintile of quality stocks were up almost more than 13%.

Year to date, this effect has been persistent, with the top quintile quality stocks in the EAFE benchmark up 18%, whereas the lowest quintile quality stocks were up almost 50%. Given that we have such a strong quality bias, this 30% delta in performance was difficult for us to offset with stock selection within such a short period of time.

Specifically, the strategy lagged the benchmark in the third quarter due to poor stock selection in financials, consumer staples and industrials.

Within financials, banks have been one of the strongest industries within the index. They are up 10% for the quarter, and up 50% year to date. While we were modestly underweight, the higher return on equity banks that we owned lagged the lower return on equity banks by a fairly significant magnitude.

In addition, in the third quarter, an overweight position in German stock exchange Deutsche Boerse detracted from relative performance.

For the quarter, within consumer staples, Carlsberg underperformed as the company reported second-quarter sales that fell short of consensus estimates, with organic sales growth and volume growth both below expectations, primarily driven by underperformance in Asia.

And finally, within industrials, an overweight position in electronics company Hitachi detracted from relative performance. After rallying 26% during the second quarter, the stock sold off more than 8% on the back of concerns around their potential to benefit from the boom in generative AI data centers.

During the quarter, we initiated one new position in British American Tobacco, a UK-based manufacturer of tobacco products. We believe the company’s smoke-free products, including its nicotine pouch, Velo Plus, should drive higher growth and returns on capital going forward. Another potential catalyst may be further regulatory enforcement of illicit vapes in the US. The company trades at an attractive 11x PE multiple with a 6% dividend yield.

While it’s hard to see how long this low-quality rally will last for. From prior experience, it does feel like we’re nearer the later innings than the beginning. For instance, we’re not paying much of a premium to own quality assets anymore.

High valuation multiples, higher long-term rates and high uncertainty are three things that do not typically go together for a long time. We believe one or two of these things will need to give.

So, as AI euphoria, currency movements and geopolitical uncertainties impact many industries, we will continue to take advantage of market volatility and mispricings to upgrade the quality of the portfolio at relatively attractive valuations.

Our conviction in the portfolio’s positioning has never been higher, and we will continue to invest in high-quality companies that we believe can grow earnings faster than the overall market over the long term, while maintaining our strong valuation discipline.

Thank you for joining our quarterly review.

 

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.

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.

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

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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