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 our second-quarter update.

 Three quick topics I was looking to touch on today, First, a quick update on performance. Next, I did want to discuss the makeup of the Morningstar Foreign Large Blend category and the impact it’s had on short-term peer rankings and finally, and like we have done in previous sessions, I did want to put the diversification benefits of an allocation to non-US equities into perspective given the immense concentration risk in US benchmarks.

 So, quickly on performance. For the quarter, the International Diversification Fund outperformed its benchmark, the MSCI ACWI ex-US index, as five of the underlying six funds in the strategy outperformed their respective benchmarks.

 Next, as it relates to the Morningstar Foreign Large Blend Category makeup, I did just want to spend a minute here as the peer group is very diverse, specifically as it relates to emerging market exposure, which can have an outsized impact on peer rankings. Now, what I mean by this is that roughly 40% of the peer group is benchmarked to an all-country world index, which includes emerging market exposure, while roughly 60% of peers are benchmarked to an MSCI World or a developed-market-only index. In fact, the average emerging market exposure across the peer group is only about 7%.

 So I bring this up in the context of emerging market exposure in the International Diversification Fund, which is today close to 24%, which is above the peer group average but below that of our benchmark, where emerging market exposure today stands at just about 29%. So we are overweight versus peers but underweight to our benchmark.

 Now as a quick reminder, when we launched this strategy nearly 20 years ago, our goal was to provide investors with broad exposure to non-US markets across style. So think value, core, growth; across market cap, small-, mid, large- and importantly, across regions. So both developed markets as well as emerging markets. And we remain true to our belief that diversification is an important part of client portfolios, particularly in light of the concentrated nature of US markets. 

 And while emerging markets have trailed developed markets over the past several years, we remain confident that having an exposure here is the right thing to do as it relates to the diversification and that the asset class will again at some point have its day in the sun, so to speak. In fact, year-to-date, the MSCI Emerging Market Index is outperforming the developed market EAFE index. So I would say just keep this in mind as it relates to the International Diversification’s peer rankings, particularly over the recent past, so the last one-year, two-year, three-year time periods, as it has had an outsized impact on peer rankings compared to the relative performance of the fund.

 Now just to wrap things up, I just mentioned that we were big believers in the benefits of diversification, and I would say that now more than ever, the benefits of diversification offered by an allocation to non-US markets is tremendous given the concentration of US markets.

 Now with this we will often get the question around concentration risk in the international space particularly given the strong performance of the so-called GRANOLAs. Yes, the GRANOLAs have done quite well in the recent past, but as you will see on this chart here, the MSCI All Country World ex-US index is still nowhere near as concentrated as US markets, which are, generally speaking, mostly technology companies.

 In fact, to get to the market weight of the Magnificent 7 in US markets, it would take all of the GRANOLAs, which today makes up about 12% of the MSCI ACWI ex-US index plus an additional 46 companies. And these companies represent a much wider subset of sectors and industries versus the US, which again, in an environment where the US has become historically concentrated, is a great way for investors to potentially increase their diversification, which traditionally has proven to be a sound investment approach.

 So with that, thank you for your time and I hope to see all of you again next quarter.

 

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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.

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