MFS® Growth Strategy - Quarterly Portfolio Update

MFS Growth Strategy-Quarterly Portfolio Update

Hello, and thank you for tuning in to the MFS^® Fourth Quarter 2024 growth equity review. My name is Laura Granger, and I am the institutional portfolio manager on the US Growth team.

I will spend the next few minutes discussing fourth quarter and 2024 key market drivers, including the Mag Seven, and then give you our thoughts on our outlook for 2025.

So, starting with the quarter, stocks continued their advance higher in the fourth quarter, with the Russell 1000^® Growth index gaining 7.1%. Stocks soared after the US election on investor hopes that Trump 2.0 policies focused on deregulation supporting business, lower taxes and government efficiencies would be good for corporate earnings. The investor euphoria fueled a high-beta, low-quality rally that was a headwind for a lot of active managers. Risk assets outperformed significantly, and maybe the best example of this was Bitcoin hitting $100,000.

To put this into perspective we evaluated the performance of both the quality and beta quintiles of the Russell 1000^® Growth index. Looking at the first set of bars on this chart, you can see the lowest quality cohort of names in the index gained 17.3% in the quarter, while the highest quality names gained just 3.8%. Low quality outperformed by over 1300 basis points. Looking at the bars on the right, the effect of high beta was even greater, where the highest beta quintile gained 15% versus the lowest beta quintile gaining just 10 bps, high beta outperformed by 1500 bps. These sharp factor moves that we often call a risk-on, high-beta rally, were a headwind for the portfolio, which has a beta below the market and is focused on investing in high quality companies.

Also impacting returns in the quarter were concerns over health care reform, drug pricing, the impact of tariffs on inflation, and border control, which could impact labor. The market sold off in December when the Fed cut its forecast for further rate cuts and the 10-year Treasury yield curve steepened. However, the outlook for earnings remains positive.

The strength in Q4 caps another remarkable year of stock price returns with the Russell 1000^® Growth index gaining 33.4% on top of the 42.8% return in 2023. Market returns were broad based in 2024, with many sectors posting double digit gains. As you can see, the blue bars on the sector return chart, all sectors except real estate gained on the year. Utilities was the strongest, followed by communication services, information technology. Even financials and energy posted strong double-digit gains.

So, while you hear a ton about the Mag Seven driving market returns, the reality is market breadth has been better than it looks on the surface. This next chart helps to illustrate the point. Looking at the first two sets of bars showing 2023 and 2024 index returns, the Mag Seven outperformed the rest of the market and accounted for a large portion of index returns. But most importantly, look at the light blue bars, which measure the performance of the index ex the Mag Seven. The rest of the index gained 20% this year on top of a 26% gain in 2023. The reality is there is more to investing in growth stocks than the Mag Seven.

It is important to note though, mega-cap tech did not outperform due to momentum. They have outperformed due to outsized earnings growth, which you can see in the gray bars on this next chart. However, growth for the six largest tech names is expected to decelerate while growth for the rest of the index, the blue bars, is improving. While growth for mega-cap tech will remain strong, the gap in growth rate with the rest of the index is diminishing. There are many opportunities for active managers to add value outside the largest index weights.

It is tough to predict where index concentration is headed with a high degree of confidence, but we are highly confident that the stock prices follow fundamentals and earnings. Index concentration is a big risk in our benchmark as the Mag Seven now accounts for 56% of the index weight. Three names, Microsoft, Apple and Nvidia, account for 33.5% of the index. These stocks are all different from earnings and valuation perspective and it is important to be selective. You can see the differences in earnings trends and valuations in this next chart. Note the differences in companies like Meta, Amazon and Nvidia where valuations have been supported by rising earnings estimates versus Apple, where estimate revisions are not as strong, and Tesla, with negative revisions. Lofty valuation without the support of earnings or cash flow is not sustainable long term. Changing fundamentals and earnings should lead to changes in index weights.

Looking ahead, we just experienced two years in a row of very strong equity returns that were supported by better-than-expected earnings growth. It is rare to have three back-to-back double digit return years, but the outlook for 2025 is positive. We believe overall growth in the US will outpace the rest of the world. Demand and capital investment remains strong, supported by multiple trends, including AI, onshoring/nearshoring, de-risking supply chains, energy efficiency, electrification, infrastructure spending and data center build out. We believe there will be greater dispersion in stock price returns based on fundamentals and earnings. Companies with differentiated products and services in end markets with secular growth should outperform. Our portfolio is built by our bottom-up stock selection, focusing on companies that we believe will sustain above average rate and duration of growth. We are finding opportunities in a broad range of sectors and industries. While aggregate valuations are above average, we remain disciplined and invest in companies with valuation support from real earnings and cash flow.

Thank you for taking the time to listen to our fourth quarter review. If you have any questions, please reach out to your MFS Representative and have a great day.

 

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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.

Growth: Investments in growth companies can be more sensitive to the company's earnings and 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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