MFS® International Diversification Fund - Quarterly Portfolio Update

Hi, my name is Nick Paul and I am a co-portfolio manager on the MFS International Diversification Fund. Thank you for taking the time to join us for first-quarter 2026 review.

So, what I thought I’d do today is provide just a very quick recap on first-quarter performance of the International Diversification strategy and then share some thoughts on why we believe International Diversification, with its focus on quality businesses, is well positioned for the future, given recent market events.

So, as it relates to the MFS International Diversification Fund, the fund modestly outperformed the MSCI All Country World ex US Index in the first quarter. Now for me, what’s always nice to see was that the outperformance was relatively broad-based as four of the six underlying funds that make up International Diversification outperformed their respective benchmarks during the period.

So, that was great to see, but that’s behind us, so maybe more importantly now let’s  look forward. So, despite some near-term challenges, we remain confident that our time-tested approach is well positioned to potentially benefit from both its broad diversification across international markets, but more importantly to benefit from its emphasis on quality businesses. And just to better define quality — what I’m really talking about here are those businesses that possess some element of pricing power, the result of a differentiated product or service they offer. So why is this emphasis on quality so important? One would just assume that buying strong durable businesses, with strong balance sheets, good free cash-flows and pricing power is a sound investment approach. And while this approach has worked tremendously well over the long term, the market works in cycles, and this most recent cycle, this cycle has been one where low-quality stocks have really ruled the day.

And we can see this in the chart here, where over the last three to five years, low quality stocks have outperformed high-quality by close to double. Now this stands in stark contrast to what has worked over the long term, where high-quality stocks have outperformed low-quality significantly, by nearly three times the amount over the last 15 years. In other words, to have outperformed over the last thee to five years, I would have had to walk into your office five years ago and said, “Here’s what we are buying: we buy highly cyclical businesses, with inconsistent cash flows, that are highly leveraged, extremely cheap, high beta stocks, with a lot of short-term momentum behind them…” And you probably would have said, “Thank you very much, but no thank you. That’s not how I want to invest my capital…” But that’s exactly what’s worked.

But we at MFS, like our clients, invest for the long term, not the short term. And we invest our client’s capital responsibly. And we always will. In other words, we invest, we don’t speculate. And we are always going to underwrite what we believe to be the highest quality international companies across sectors and regions. And if history is any sort of a guide, over the long term this approach should be proven correct.

So, in closing, look, again, the market moves in cycles over shorter periods of time. And anything can happen over the short term. And this most recent short-term cycle was marked by the strong performance of, quite frankly, not very good, cheap, businesses. But this isn’t sustainable over the long term, particularly given where valuations stand today. Going forward the ability to deliver consistent earnings growth through pricing power is what’s going to drive stock performance. Valuation worked the last few years, now it’s going to be up to earnings to drive prices higher.

So, with that as the backdrop, we’re going to continue to show up every day and do what we do best and believe is in the best long-term interests of our clients. And that is to deliver a well-diversified portfolio of importantly high-quality international businesses, which we believe is not only the right thing to do, but one that will be proven successful over time, just as it has in the past.

So, with that, as always, thank you for your time today, and I look forward to seeing you again next quarter.

 

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The views expressed are those of the speakers 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.

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

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.

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.

Underlying Funds: MFS’ strategy of investing in underlying funds exposes the fund to the risks of the underlying funds. Each underlying fund pursues its own objective and strategies and may not achieve its objective. In addition, shareholders of the fund will indirectly bear the fees and expenses of the underlying funds.

Before investing, consider the fund’s investment objectives, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact MFS^® or view online at mfs.com. Please read it carefully.

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FOR INVESTMENT PROFESSIONAL USE ONLY. Not intended for retail investors.
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