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 am a member of the MFS Large Cap Value investment team. Equity markets had another banner year in 2024, with all major indices posting double digit returns, driven primarily by P/E multiple expansion.  2023 and 24 have been the strongest consecutive returns for US equity markets since 1997 and 98, during the height of the Tech Bubble, and have been fueled by an extraordinary run for growth stocks and the Magnificent 7.  If you were a momentum investor, 2024 was your year.  According to data from Piper Sandler, there have only been seven years in the last 40 where momentum has performed better than in 2024.

The duration and magnitude of the growth-oriented market environment has left many investors less convinced in the long-term benefit of allocating to value investment styles. We were value investors in the late 1990s and the last couple of years has started to feel a bit like that era, when “Old Economy” companies were left for dead in favor of ones that were perceived to be part of the “New Economy” during the internet craze.  The current level of enthusiasm surrounding the long-term growth of Generative Artificial Intelligence (Gen AI) appears to have reached a fever pitch.  While we are incredibly optimistic about the potential for this emerging technology to significantly impact nearly every single industry in ways that we can only start to imagine, these transitions rarely progress in a straight line.

It might be surprising to see that the average quality of companies in the Russell 1000^® Value and the Russell 1000^® Growth are virtually the same today, based on Bank of America Merrill Lynch’s quality rankings.

And yet, the valuation of the Russell 1000^® Value index currently sits at nearly a 45% discount to the Russell 1000^® Growth index.  The only time it’s been cheaper was in the late 1990s. The long-term data showing the importance of valuation in driving stock price performance is compelling. While our attention has always been focused here, it’s only a matter of time before other investors reorient back in this direction.

For the fourth quarter, the MFS Large Cap Value strategy underperformed the Russell 1000^® Value index and we finished behind the benchmark for the calendar year.  All of the strategy’s annual underperformance occurred from early September through mid-December as investor expectations solidified that the Fed would begin a campaign of lowering interest rates and the election of Donald Trump would have positive benefits for US equity markets. 

A significant high beta, low quality rally ensued.  This is a factor backdrop that has always presented relative performance headwinds for the MFS Large Cap Value strategy. 

In the multi-decade history of this strategy, we have been through periods where the relative performance has been similarly challenged.  We never lose sight of our goal of adding value for our clients over the long-term, using our time-tested, consistent, disciplined process. Staying true to our proven investment philosophy has meant that when market shifts occur, as they inevitably do, the MFS Large Cap Value strategy and our clients have been well positioned to benefit.

We remain committed to delivering a true large cap, high quality value exposure to our clients.  This is increasingly a source of differentiation from the large cap value peer group, a number of whom own one or more of the Magnificent 7 among their top 10 holdings.  Over the last few years, ownership of these companies has definitely been a benefit to performance and peer ranks; however, is not helpful in providing clients with the diversification that should come within a large cap value allocation.  Clients that maintain a US growth and/or a US Core allocation have significant exposure already to the Magnificent 7 companies through those allocations.  We do not believe it is prudent to amplify those exposures within a Large Cap Value allocation.  The MFS Value strategy does not own any of these stocks because we do not believe they meet our valuation and durability criteria.

It is possible that the pace of equity returns and this growth driven market environment can continue into 2025 or even the next several years.  However, history would suggest that this is not the most likely outcome, particularly as we extend the timeframe.  Our expectation is for a muted absolute returns in the coming years, with the possibility of a significant market correction and a rotation back to more attractively valued companies.  Of course, predicting the timing of these shifts is a fool’s errand and we never attempt to position the MFS Large Cap Value strategy for a particular outcome.  We are always focused on investing in companies that have a high degree of business resiliency who can be successful through a variety of markets over long periods of time.

Thank you very much.

 

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.

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.

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