MFS® International Diversification Fund - Quarterly Portfolio Update

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 third-quarter update.

So today, following a quick update on performance, I did want to take a step back and talk about a topic, or more specifically a region, that has been out of favor for quite some time now, in emerging markets.

But before we do that, lets first talk about performance. For the quarter, the International Diversification Fund outperformed its benchmark, the MSCI ACWI ex US index. And this outperformance was what I would consider broad based in nature as five of the six underlying funds in the strategy outperformed their respective benchmarks. Now this marks the second quarter in a row now of relative outperformance for the fund.

Ok, so as I mentioned, next I did want to provide a bit of an update as it relates to emerging market equities as well as our exposure to the asset class both relative to our benchmark as well as relative to our peers, as this has been an area of focus for investors for some time now.

First, just to take a step back, when we launched the MFS International Diversification Fund 20 years ago, the driving force was to offer investors broad diversification to non-US equity markets through a single offering. Now this broad diversification was specifically aimed at ensuring investors gained exposure to non-US markets across three important dimensions, and these dimensions are simply across style (so think Value, Core and Growth), across market cap (exposure to both large-cap stocks as well as  small- and midcap companies) and importantly, across regions (so dedicated exposure to both non-US developed markets as well as emerging markets). And we’ve remained dedicated to this diversified approach ever since.

Now with that said, over several decades, there will always be points in time where a particular asset class or region will come in and out of favor as market performance tends to ebb and flow over time. After all, this is what diversification is all about. Now more recently, emerging market equities have had a tough go of it for a number of years now, and particularly over the last three or four years. Now, duly noted, this is very short-term perspective, but perhaps we are starting to see some early signs of a shift back in favor of emerging markets. In fact, if you look at performance on a year-to-date basis across major non-US markets you will see that so far emerging markets has been a top performer.

So what’s been behind this strong performance? Well, it’s been a number of factors, including the strong performance of Chinese stocks more recently, following a spate of Chinese monetary and fiscal policies aimed at stimulating growth by supporting consumption and encouraging stock buybacks late in September as well as the impact of a falling USD since early in July as emerging market stocks and the USD have historically had a very strong inverse relationship. With that said, the drivers behind this recent strong performance is not really the point that I’m trying to make here, rather what I’m really trying to get at here is that emerging markets which have been out of favor for some time now, will at some point in the future once again have their day in the sun, so to speak, and having exposure to the asset class through a broadly diversified portfolio like International Diversification, we feel, makes for a sound investment approach.

 

So where does IDF stand on its exposure to emerging markets versus both our index as well as peers.

Well, as you will see on this chart here. As of September 30 while we were underweight emerging markets versus our benchmark, the MSCI ACWI ex US index, which at the end of the moth stood at just over 29% exposure to emerging markets, we are meaningfully more overweight to this area of the market than the vast majority of peers in the Morningstar Foreign Large Blend category, as average EM exposure across the peer group is only about 7%.

So just to bring this full-circle and back to where we started today and perhaps more importantly back to when we first launched the fund 20 years ago. The point being that diversification matters and the International Diversification Fund has been an effective tool in providing investors with diversification across non-US equities, both developed markets as well as emerging markets, in a single offering, and I would argue that now more than ever, given the tremendous concentration risk in US markets, the benefits of diversification offered by an allocation to non-US markets, including emerging markets, may prove to be an extremely important component of client portfolios over the years to come.

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

 

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The strategy may not achieve its objective and/or you could lose money on your investment.

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