MFS® Emerging Markets Equity Fund (Class R6 Shares) Second quarter 2021 investment report
Current portfolio manager Robert Lau will relinquish his portfolio management responsibilities on the portfolio, effective August 1, 2021. NOT FDIC INSURED MAY LOSE VALUE NOT A DEPOSIT 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. ©2021 MFS Fund Distributors, Inc., 111 Huntington Avenue, Boston, MA 02199.
FOR DEALER AND INSTITUTIONAL USE ONLY. Not to be shown, quoted, or distributed to the public. PRPEQ-FEM-30-Jun-21 34135 Table of Contents
Contents Page
Fund Risks 1
Disciplined Investment Approach 2
Market Overview 3
Executive Summary 4
Performance 5
Attribution 6
Significant Transactions 10
Portfolio Positioning 11
Characteristics 14
Portfolio Outlook 15
Portfolio Holdings 18
Additional Disclosures 20
Country and region information contained in this report is based upon MFS classification methodology which may differ from the methodology used by individual benchmark providers. Performance and attribution results are for the fund or share class depicted and do not reflect the impact of your contributions and withdrawals. Your personal performance results may differ. Portfolio characteristics are based on equivalent exposure, which measures how a portfolio's value would change due to price changes in an asset held either directly or, in the case of a derivative contract, indirectly. The market value of the holding may differ.
0 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund PRPEQ-FEM-30-Jun-21 Fund Risks
The fund may not achieve its objective and/or you could lose money on your investment in the fund. 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. Emerging Markets: Emerging markets can have less market structure, depth, and regulatory, custodial or operational oversight and greater political, social, geopolitical and economic instability than developed markets. Please see the prospectus for further information on these and other risk considerations.
1 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 1 PRPEQ-FEM-30-Jun-21 Disciplined Investment Approach
Seekto consistently outperformtheMSCIEmerging Markets Index(netdiv)over full market Goal cycles.
Webelievelong term, fundamental bottomupresearch provides an opportunitytoachieve Philosophy favorable, risk-adjusted returns in a historically volatile andinefficientassetclass
Activelymanaged, all-capportfolio Rely on our proprietary, fundamental research toidentifycompanies that meetour Strategy 5 keyinvestment criteria Collaborate with theEmerging Markets Debtteam on macroeconomic factorsthat might affect our investments in individualsecurities
2 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 2 PRPEQ-FEM-30-Jun-21 Market Overview
Region performance (%) (USD) as of 30-Jun-21 Sector performance (%) (USD) as of 30-Jun-21 2Q 2021 1 Year 2Q 2021 1 Year
45.8 41.9 40.9 76.4 71.9 36.2 34.2 31.3 24.8 45.2 37.0 32.4 32.9 33.7 10.0 8.8 7.8 24.1 6.0 5.0 4.8 20.8 23.2 14.1 13.2 12.6 8.3 6.7 4.6 4.3 -0.3 3.9 3.6 2.1 2.0
-6.0 UK Japan Utilities Energy Canada Services Markets Materials Emerging Emerging Financials Industrials Real Estate Real Consumer Consumer Health Care Health Technology Information Discretionary Europe ex UK ex Europe UnitedStates Pacific ex Japanex Pacific Communication Communication Consumer Staples Consumer Source: FactSet. Region performance based on MSCI regional/country indexes. Source: FactSet. Sector performance based on MSCI sector classification. The analysis of MSCI Emerging Markets Index constituents are broken out by MSCI defined sectors. Market review as at 30-Jun-2021 Emerging markets finished the second quarter in positive Earnings growth across emerging markets has been broadly territory, making it five straight quarters of positive returns positive year to date, partly due to the low base effect from last since the market collapsed in the first quarter of 2020. year.
Style wise, value continued its outperformance that began in the The market appears to be pricing in a strong economic fourth quarter of 2020, aided by higher commodity prices. Mid- recovery, but the rise of COVID-19 variants could potentially and small-cap companies outperformed their large-cap peers. throw a spanner in the works.
3 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 3 PRPEQ-FEM-30-Jun-21 Executive Summary
Performance results (%) R6 shares at NAV (USD) as of 30-Jun-21 Sector weights (%) as of 30-Jun-21 Portfolio Benchmark^^ Portfolio Benchmark^ Top overweights Consumer Staples 10.6 5.6 Consumer Discretionary 20.3 17.6 40.90 Financials 19.5 17.8 Top underweights 35.12 Health Care 1.4 5.0 Energy 2.6 5.0 Materials 6.7 8.4 ^^ MSCI Emerging Markets Index 13.03 The Global Industry Classification Standard (GICS®) was developed by 11.45 11.27 and/or is the exclusive property of MSCI, Inc. and S&P Global Market 7.50 7.45 4.94 5.05 Intelligence Inc. ("S&P Global Market Intelligence"). GICS is a service 3.10 4.28 2.17 mark of MSCI and S&P Global Market Intelligence and has been licensed for use by MFS. MFS has applied its own internal sector/industry classification methodology for equity securities and non-equity securities 10 year 5 year 3 year 1 year YTD 2Q 2021 that are unclassified by GICS. Performance data shown represent past performance and are no guarantee of future results. Investment return and principal value fluctuate so your shares, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The MFS Emerging Markets Equity Fund underperformed the MSCI For most recent month-end performance, please visit mfs.com. Emerging Markets Index in the second quarter of 2021. Performance results reflect any applicable expense subsidies and waivers in effect during the Contributors Detractors periods shown. Without such subsidies and waivers the fund's performance results would be less •Individual stocks: • Consumer Discretionary – Stock favorable. All results assume the reinvestment of dividends and capital gains. - AmBev SA selection Shares are available without a sales charge to eligible investors. - Sberbank •Individual stocks: For periods of less than one-year returns are not annualized. - Naspers Ltd (Eq) (not held) - Wuxi Biologics Cayman Inc (not Source for benchmark performance SPAR, FactSet Research Systems Inc. - 51Job Inc held) ^ MSCI Emerging Markets Index (net div) - Ping An Insurance Group Co Of - UPL Ltd China Ltd
4 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 4 PRPEQ-FEM-30-Jun-21 Performance Results
Performance results (%) R6 shares at NAV (USD) as of 30-Jun-21
Excess return vs Period Portfolio (%) Benchmark^ (%) benchmark (%) 3Q 2020 8.88 9.56 -0.68 4Q 2020 18.26 19.70 -1.44 1Q 2021 2.72 2.29 0.43 2Q 2021 2.17 5.05 -2.88 2016 8.98 11.19 -2.21 2017 37.86 37.28 0.58 2018 -13.73 -14.57 0.84 2019 20.20 18.42 1.78 2020 10.61 18.31 -7.70 2021 YTD 4.94 7.45 -2.51 10 year 3.10 4.28 -1.18 5 year 11.45 13.03 -1.58 3 year 7.50 11.27 -3.77 1 year 35.12 40.90 -5.79 Performance data shown represent past performance and are no guarantee of future results. Investment return and principal value fluctuate so your shares, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. For most recent month-end performance, please visit mfs.com. Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund's performance results would be less favorable. All results assume the reinvestment of dividends and capital gains. Performance for Class R shares includes the performance of the fund's Class I shares, adjusted to take into account differences in sales loads and class-specific operating expenses (such as Rule 12b-1 fees), if any, for periods prior to their offering. Please see the prospectus for additional information about performance and expenses. Shares are available without a sales charge to eligible investors. For periods of less than one-year returns are not annualized. Source for benchmark performance SPAR, FactSet Research Systems Inc. ^ MSCI Emerging Markets Index (net div)
5 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 5 PRPEQ-FEM-30-Jun-21 Performance Drivers - Sectors
Average Relative Relative to MSCI Emerging Markets Index Portfolio Benchmark Sector Stock Currency relative + + = contribution (USD) - second quarter 2021 returns (%) returns (%) allocation1 (%) selection2 (%) effect (%) weighting (%) (%) Contributors Communication Services -0.3 4.9 2.0 0.0 0.3 -0.0 0.3 Utilities -1.5 27.6 2.1 0.1 0.1 -0.0 0.2 Real Estate 0.7 1.9 -6.0 -0.1 0.1 0.1 0.2 Materials -1.9 10.6 8.3 -0.1 0.2 -0.1 0.0
Detractors Consumer Discretionary 3.3 -3.9 3.6 -0.0 -1.7 0.0 -1.7 Energy -2.5 3.7 12.6 -0.1 -0.2 -0.1 -0.4 Financials 1.6 2.6 4.3 -0.0 -0.2 -0.1 -0.3 Health Care -3.5 19.9 14.1 -0.3 0.1 0.0 -0.2 Industrials -0.4 9.1 13.2 -0.0 -0.1 -0.0 -0.2 Information Technology -2.2 3.0 3.9 0.0 -0.1 -0.0 -0.2 Cash 2.0 0.0 – -0.1 – -0.0 -0.1 Consumer Staples 4.8 4.1 4.6 -0.0 -0.1 0.1 -0.1
Total 2.7 5.1 -0.7 -1.6 -0.2 -2.5 1 Sector allocation is calculated based upon each security's price in local currency. 2 Stock selection is calculated based upon each security's price in local currency and included interaction effect. Interaction effect is the portion of the portfolio's relative performance attributable to combining allocation decisions with stock selection decisions. This effect measures the relative strength of the manager's convictions. The interaction effect is the weight differential times the return differential. Attribution results are generated by the FactSet application utilizing a methodology that is widely accepted in the investment industry. Results are based upon daily holdings using a buy-and-hold methodology to generate individual security returns and do not include fees or expenses. As such, attribution results are essentially estimates and do not aggregate to the total return of the portfolio, which can be found elsewhere in this presentation. To obtain the contribution calculation methodology and a complete list of every holding’s contribution to the overall portfolio’s performance during the measurement period, please email [email protected]. The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and S&P Global Market Intelligence Inc. ("S&P Global Market Intelligence"). GICS is a service mark of MSCI and S&P Global Market Intelligence and has been licensed for use by MFS. MFS has applied its own internal sector/industry classification methodology for equity securities and non-equity securities that are unclassified by GICS.
6 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 6 PRPEQ-FEM-30-Jun-21 Performance Drivers - Stocks
Average Weighting (%) Returns (%) Relative Relative to MSCI Emerging Markets Index (USD) - second quarter 2021 Portfolio Benchmark Portfolio¹ Benchmark contribution (%) Contributors AmBev SA 1.5 0.2 25.5 25.6 0.3 Sberbank 2.8 0.5 15.5 15.5 0.2 Naspers Ltd (Eq) – 1.2 – -12.2 0.2 51Job Inc 1.2 0.0 24.2 24.2 0.2 UPL Ltd 1.3 0.1 21.5 21.5 0.2 Detractors Prosus Nv (Eq) 3.9 – -12.2 – -0.7 Gree Elec Applican 2.2 – -15.7 – -0.5 New Oriental Edu & Tech Group Inc 0.7 0.2 -41.5 -41.5 -0.3 Wuxi Biologics Cayman Inc – 0.6 – 46.3 -0.2 Ping An Insurance Group Co Of China Ltd 1.7 0.9 -16.1 -16.1 -0.2
1 Represents performance for the time period stock was held in portfolio. Attribution results are generated by the FactSet application utilizing a methodology that is widely accepted in the investment industry. Results are based upon daily holdings using a buy-and-hold methodology to generate individual security returns and do not include fees or expenses. As such, attribution results are essentially estimates and do not aggregate to the total return of the portfolio, which can be found elsewhere in this presentation. To obtain the contribution calculation methodology and a complete list of every holding’s contribution to the overall portfolio’s performance during the measurement period, please email [email protected].
7 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 7 PRPEQ-FEM-30-Jun-21 Significant Impacts on Performance - Detractors
Relative Relative to MSCI Emerging Markets Index (USD) - second quarter 2021 contribution (%)
Prosus Nv (Eq) Holdings of e-commerce, social and corporate platforms provider Prosus (Netherlands) hindered relative returns. The company's -0.7 share price declined, following an ownership change proposal. Prosus announced that it is launching a share exchange offer to Naspers shareholders, in an attempt to reduce Naspers' holding of Prosus to 57% and increase Prosus' free float to approximately 60%. The deal presented several potential governance, tax and related-party risks for some of its shareholders. Gree Elec Applican Holdings of air conditioner manufacturer Gree Electric Appliances (China) weighed on relative performance. The company -0.5 reported net profit results that were lower than expected as air conditioners, lifestyle appliances and smart equipment revenue declined.
New Oriental Edu & An overweight position in private educational services provider New Oriental Education & Technology Group (China) detracted -0.3 from relative performance. Although the company reported strong first-quarter revenue results, its stock price declined following Tech Group Inc concerns that the Chinese government was looking to introduce policies to regulate private tutoring companies.
8 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 8 PRPEQ-FEM-30-Jun-21 Significant Impacts on Performance - Contributors
Relative Relative to MSCI Emerging Markets Index (USD) - second quarter 2021 contribution (%)
AmBev SA An overweight position in beverage manufacturer AmBev (Brazil) aided relative results. The stock price rose as the company 0.3 reported higher-than-expected adjusted earnings, driven by increased revenue in Brazil Beer, and greater-than-expected margins, primarily due to a substantial mix improvement, as Ambev continued to report substantial growth of its premium portfolio. Sberbank The portfolio's overweight position in commercial banking firm Sberbank (Russia) helped relative returns, driven by 0.2 better-than-expected net profits, which were supported by lower provisions and lower operating costs. Naspers Ltd (Eq) Not owning shares of multinational media company Naspers (South Africa) aided relative returns. Although the company reported 0.2 solid financial results for the quarter, driven by revenue growth in its food delivery and online classified segments, its stock price declined, despite the lack of any significant negative news.
9 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 9 PRPEQ-FEM-30-Jun-21 Significant Transactions
Ending From 01-Apr-21 to 30-Jun-21 Sector Transaction type Trade (%) weight (%) Purchases HON HAI PRECISION INDUSTRY CO LTDInformation Technology New position 1.1 1.2 ALROSA PJSC Materials Add 0.5 0.8 B3 SA - BRASIL BOLSA BALCAO Financials Add 0.4 1.1 UNITED TRACTORS TBK PT Energy Add 0.3 1.2 CREDICORP LTD Financials Add 0.2 0.6 TAIWAN SEMICONDUCTOR Information Technology Trim -0.5 8.3 Sales MANUFACTURING CO LTD ALDAR PROPERTIES PJSC Real Estate Eliminate position -0.5 – ABSA GROUP LTD Financials Trim -0.4 0.9 LUNDIN MINING CORP Materials Trim -0.4 0.5 SAMSUNG ELECTRONICS CO LTD Information Technology Trim -0.4 6.6
The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and S&P Global Market Intelligence Inc. ("S&P Global Market Intelligence"). GICS is a service mark of MSCI and S&P Global Market Intelligence and has been licensed for use by MFS. MFS has applied its own internal sector/industry classification methodology for equity securities and non-equity securities that are unclassified by GICS.
10 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 10 PRPEQ-FEM-30-Jun-21 Sector Weights
Underweight/ As of 30-Jun-21 Portfolio (%) Benchmark^ (%) Top holdings overweight (%) Kweichow Moutai Co Ltd, Inner Mongolia Yili Consumer Staples 10.6 5.6 5.0 Industrial Group Co Ltd, China Resources Beer Holdings Co Ltd Alibaba Group Holding Ltd ADR, Prosus NV, Yum Consumer Discretionary 20.3 17.6 2.7 China Holdings Inc Sberbank of Russia PJSC, AIA Group Ltd, Housing Financials 19.5 17.8 1.7 Development Finance Corp Ltd Real Estate 2.5 2.0 0.5 ESR Cayman Ltd Tencent Holdings Ltd, NetEase Inc ADR, NAVER Communication Services 11.3 11.3 0.0 Corp Industrials 3.9 4.9 -1.0 51job Inc ADR, Techtronic Industries Co Ltd Taiwan Semiconductor Manufacturing Co Ltd, Information Technology 18.9 20.4 -1.5 Samsung Electronics Co Ltd, Tata Consultancy Services Ltd Utilities 0.3 1.9 -1.6 CESC Ltd Materials 6.7 8.4 -1.7 UPL Ltd, Gold Fields Ltd ADR Energy 2.6 5.0 -2.4 LUKOIL PJSC ADR, United Tractors Tbk PT Health Care 1.4 5.0 -3.6 Hugel Inc ^ MSCI Emerging Markets Index 2.0% Cash & cash equivalents The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and S&P Global Market Intelligence Inc. ("S&P Global Market Intelligence"). GICS is a service mark of MSCI and S&P Global Market Intelligence and has been licensed for use by MFS. MFS has applied its own internal sector/industry classification methodology for equity securities and non-equity securities that are unclassified by GICS.
11 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 11 PRPEQ-FEM-30-Jun-21 Region Weights
As of 30-Jun-21 Underweight/overweight (%)
Emerging Asia -13.8
Emerging EMEA 0.2
Emerging Latin America 2.2
Developed - Other 9.4
2.0% Cash & cash equivalents
12 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 12 PRPEQ-FEM-30-Jun-21 Region and Country Weights
Portfolio Benchmark^ Underweight/ Portfolio Benchmark^ Underweight/ As of 30-Jun-21 (%) (%) overweight (%) (%) (%) overweight (%) Emerging Asia 65.1 78.9 -13.8 Emerging Latin America 10.0 7.8 2.2 Indonesia 1.9 1.1 0.8 Brazil 6.3 5.2 1.1 India 10.4 9.9 0.5 Mexico 2.6 1.7 0.9 Pakistan 0.0 0.0 0.0 Peru 0.6 0.2 0.4 South Korea 13.1 13.2 -0.1 Chile 0.5 0.4 0.1 Thailand 1.2 1.6 -0.4 Argentina 0.0 0.1 -0.1 Philippines 0.0 0.6 -0.6 Colombia 0.0 0.1 -0.1 Malaysia 0.3 1.2 -0.9 Developed - Other 9.7 0.3 9.4 Taiwan 10.0 13.9 -3.9 Hong Kong 5.6 0.2 5.4 China 28.2 37.3 -9.1 Netherlands 3.6 0.0 3.6 Emerging EMEA 13.2 13.0 0.2 Canada 0.5 0.0 0.5 Russia 7.9 3.3 4.6 Sweden 0.0 0.0 0.0 Greece 1.8 0.1 1.7 Turkey 0.8 0.2 0.6 Czech Republic 0.7 0.1 0.6 Egypt 0.0 0.1 -0.1 Hungary 0.0 0.2 -0.2 Kuwait 0.0 0.5 -0.5 Qatar 0.0 0.6 -0.6 Poland 0.0 0.7 -0.7 United Arab Emirates 0.0 0.7 -0.7 South Africa 2.0 3.5 -1.5 Saudi Arabia 0.0 2.9 -2.9
^ MSCI Emerging Markets Index 2.0% Cash & cash equivalents
13 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 13 PRPEQ-FEM-30-Jun-21 Characteristics
As of 30-Jun-21 Portfolio Benchmark^ Top 10 issuers as of 30-Jun-21 Portfolio (%) Benchmark^ (%) TAIWAN SEMICONDUCTOR Fundamentals - weighted average 8.3 6.1 IBES long-term EPS growth 1 16.0% 20.3% MANUFACTURING CO LTD Price/earnings (12 months forward ex-negative 16.1x 13.8x SAMSUNG ELECTRONICS CO LTD 6.6 4.6 earnings) Return on equity (3-year average) 17.4% 12.6% ALIBABA GROUP HOLDING LTD 6.0 5.0 Long term debt/capital 21.0% 23.8% TENCENT HOLDINGS LTD (EQ) 3.8 5.0 Market capitalization PROSUS NV (EQ) 3.6 – Market capitalization (USD) 2 – 166.8 bn Diversification SBERBANK 2.9 0.5 Top ten holdings 41% 27% YUM CHINA HOLDINGS INC 2.8 0.3 Number of holdings 69 1,412 NETEASE INC 2.5 0.5 Turnover Trailing 1 year turnover 3 37% – AIA GROUP LTD 2.4 – Risk/reward (5 year) TATA CONSULTANCY SERVICES LTD 2.4 0.5 Beta 1.00 – Total 41.3 22.6 Standard deviation 16.57% 16.23% ^ MSCI Emerging Markets Index Past performance is no guarantee of future results. No forecasts can be guaranteed. 1 Source: Ibbotson 2 Weighted average. 3 US Turnover Methodology: (Lesser of Purchase or Sales)/Average Month End Market Value
14 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 14 PRPEQ-FEM-30-Jun-21 Portfolio Outlook and Positioning
2Q21 MARKET REVIEW AND OUTLOOK
Emerging markets finished the second quarter in positive territory, making it five straight quarters of positive returns since the market collapsed in the first quarter of last year. Style wise, value continued its outperformance that began in the fourth quarter of 2020, as commodity-related sectors such as energy, materials and industrials did well on the back of higher commodity prices. Meanwhile, mid- and small-cap companies outperformed their large- cap peers, as investor sentiment on the large-cap Chinese internet companies remains suppressed by regulatory concerns.
Stock selection within consumer discretionary was the major detractor this quarter. In particular, our holdings in Prosus and New Oriental Education & Technology Group hurt. Prosus is a holding company. The vast majority of Prosus' NAV is made up of its 30% stake in China's Tencent. Sentiment on Tencent and more broadly Chinese internet companies has been weak over the past few quarters due to numerous manifestations of heightened regulatory risks, such as the anti-monopoly law.
In our opinion, so far, these antitrust regulations mostly look like good regulation and are applied evenly across companies. Since the antitrust regulations were promulgated, various companies have been fined notional amounts for not submitting previous M&A deals for appropriate regulatory screening or for improper anti-competitive pricing. The regulator appears to be mostly focused on compliance with fair trading rules and enforcing the M&A approval process. Regardless, regulatory concerns will likely continue to weigh on internet companies in the near term.
Longer term, we remain positive on the business fundamentals for Tencent. Its Wechat app is the most popular app in China and therefore has strong network effects. It is a deeply moated monopoly that earns high margins. Furthermore, we believe the Wechat app is undermonetized relative to time spent on the app, which offers scope for significant revenue growth going forward. In our opinion, the Wechat app's dominance also allows Tencent to leverage itself into adjacent duopolies such as game publishing, payments and cloud.
The share price of New Oriental Education & Technology, which provides private education services, has been under pressure as investors are increasingly concerned about tighter regulations for the broader industry. Notably, there has not been an official policy announcement. We witnessed a similar episode of tighter regulations for the industry back in 2018, and the industry eventually emerged stronger. In our opinion, the Chinese government’s objective is ultimately to alleviate concerns around the quantity and quality of education services, and not to ‘kill’ profits for the industry. In fact, we believe that tighter regulations could potentially be more beneficial to larger players such as New Oriental, as the cost of compliance will be exponentially higher for the smaller players.
15 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 45695.6 15 PRPEQ-FEM-30-Jun-21 Portfolio Outlook and Positioning
Also, our underweight to Chinese auto manufacturers, particularly electric vehicle manufacturers, hurt. Within the autos industry, we prefer Indian auto manufacturers such as Mahindra & Mahindra and Hero Motocorp. India is one of the handful of auto markets globally where there is still growth, as very few people own cars as compared to other countries globally. We believe there is still a long runway for growth for these Indian auto manufacturers.
Earnings growth in the region has been broadly positive year to date, partly due to the low base effect from last year. However, earnings growth is still somewhat concentrated within companies in the technology and materials sectors. This can be directly attributed to the strong demand for semiconductors, which in turn is powered by increasing demand for higher computing power globally across a variety of applications. Ideally, for the market rally to be sustainable, we would like to see earnings growth broaden out to other sectors like financials and consumer services.
The limited supply of COVID-19 vaccines has so far prevented a stronger economic recovery within emerging markets. Therefore, it is reasonable to assume that as vaccination programs ramp up, it will allow an easing of COVID-19 related mobility restrictions and open the way to a more broad-based recovery across emerging markets. In our opinion, this appears to be the base case that is currently priced in by the market, as emerging markets are now trading above pre-COVID levels, up more than 60% from the end of the first quarter of 2020.
This gives us reason to be more cautious as the rise of COVID-19 variants could potentially throw a spanner in the works. Additionally, political uncertainty as most Latin American countries head into elections season is another risk that we are mindful of. As we have seen in recent elections globally, it is very difficult to forecast with any accuracy what will happen. Our focus remains firmly on companies that are cash flow generative and have a healthy balance sheet.
PORTFOLIO POSITIONING
The portfolio is overweight to consumer staples and discretionary companies and high-quality, long-term holdings within financials such as AIA, HDFC and Sberbank. This is offset by our underweight to health care, as well as the more cyclical sectors such as materials and energy. Over the course of the quarter, we mostly made adjustments at the margins, trimming relative winners and topping up relative underperformers where we have conviction in the investment thesis.
Key trades for the quarter include:
We started a new position in Taiwan’s Hon Hai Precision Industry, a global leader in electronics contract manufacturing. Hon Hai’s long-term strategic goal is to be involved in three emerging areas of manufacturing — growth, electric vehicles (EVs), robotic and digital healthcare — all of which will be 16 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 45695.6 16 PRPEQ-FEM-30-Jun-21 Portfolio Outlook and Positioning
developed by leveraging their expertise in manufacturing at scale for hardware verticals. Hon Hai has been working on its own EV ecosystem for the past four years and has collaborated with a large list of partners. In particular, the arrangement to make EVs for Geely, a company that currently makes some 1.2M cars annually, is the most promising one from a long-term perspective. In our opinion, there is significant growth potential for Hon Hai, if it can successfully execute on its strategy to transform into a serious player within the EV manufacturing value chain. Meanwhile, Hon Hai’s core electronics assembly business is humming along smoothly. Management appears confident on further improving efficiencies and has guided for a 70% improvement in margins on the assembly business. We funded this by trimming relative outperformers such as Taiwan Semiconductor, Samsung Electronics and Vtech holdings.
We continued to build our position in B3, the Brazilian stock exchange. We have a positive view on the exchange business as they are typically near monopoly businesses that have diversified away from trading volume-linked revenue in the past to more recurring, less volatile revenue streams such as providing information services today. The business has generated strong returns and has had strong free cash flow conversion. The Brazilian equity market is still relatively underdeveloped, but penetration is rising so we believe there is a long runway for growth for the exchange business in this market.
We topped up our holdings in Alrosa early in the quarter. Alrosa is a Russian diamond mining company and is the world's largest diamond miner by volume. We believe that demand for diamonds will continue to be strong as economies reopen. This is consistent with what we have seen with other luxury goods companies. At the same time, Alrosa’s diamond inventory levels are at a multi-year low and this gives the company the opportunity to increase its prices to meet demand. Alrosa is working to improve its product mix by selling higher quality diamonds, which in turn should result in higher earnings and margins in the medium term. Towards the end of the quarter, its share price moved up very strongly within a short period of time and so we decided to take a small trim and lock in some profits.
The portfolio has consistently maintained a bias towards high-quality, above-average-growth companies. We rely on our global research platform to identify companies that meet our five key criteria: free cash flow generation, high return on invested capital, low leverage, strong corporate governance and reasonable valuation.
The commentary included in this report was based on a representative fully discretionary portfolio for this product style; as such the commentary may include securities not held in your portfolio due to account, fund, or other limits.
17 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 45695.6 17 PRPEQ-FEM-30-Jun-21 Portfolio Holdings
Equivalent Equivalent As of 30-Jun-21 Country As of 30-Jun-21 Country exposure (%) exposure (%) Cash & Cash Equivalents 2.0 Energy 2.6 Cash & Cash Equivalents 2.0 United Tractors Tbk PT Indonesia 1.2 Communication Services 11.3 Financials 19.5 Tencent Holdings Ltd China 3.8 Sberbank of Russia PJSC Russia 2.9 NetEase Inc ADR China 2.5 AIA Group Ltd Hong Kong 2.4 NAVER Corp South Korea 1.9 Housing Development Finance Corp Ltd India 1.8 Hellenic Telecommunications Organization SA Greece 1.8 Ping An Insurance Group Co of China Ltd China 1.7 Mobile TeleSystems PJSC ADR Russia 0.7 Moscow Exchange MICEX-RTS PJSC Russia 1.6 Telkom Indonesia Persero Tbk PT Indonesia 0.5 China Construction Bank Corp China 1.4 Consumer Discretionary 20.3 Samsung Fire & Marine Insurance Co Ltd South Korea 1.3 Alibaba Group Holding Ltd ADR China 6.0 B3 SA - Brasil Bolsa Balcao Brazil 1.1 Prosus NV Netherlands 3.6 HDFC Bank Ltd India 1.0 Yum China Holdings Inc China 2.8 Absa Group Ltd South Africa 0.9 Gree Electric Appliances Inc of Zhuhai China 2.0 Komercni banka as Czech Republic 0.7 Mahindra & Mahindra Ltd India 1.6 Credicorp Ltd Peru 0.6 Lojas Renner SA Brazil 1.4 E.Sun Financial Holding Co Ltd Taiwan 0.5 MakeMyTrip Ltd India 1.2 Tisco Financial Group PCL Thailand 0.5 Hero MotoCorp Ltd India 0.8 Banco de Chile Chile 0.5 New Oriental Education & Technology Group Inc China 0.5 Grupo Financiero Inbursa SAB de CV Mexico 0.3 ADR Public Bank Bhd Malaysia 0.3 Kangwon Land Inc South Korea 0.5 Health Care 1.4 Consumer Staples 10.6 Hugel Inc South Korea 0.8 Kweichow Moutai Co Ltd China 1.6 Genomma Lab Internacional SAB de CV Mexico 0.6 Inner Mongolia Yili Industrial Group Co Ltd China 1.5 Industrials 3.9 China Resources Beer Holdings Co Ltd China 1.4 51job Inc ADR China 1.4 Ambev SA ADR Brazil 1.4 Techtronic Industries Co Ltd Hong Kong 1.1 Orion Corp/Republic of Korea South Korea 1.2 Doosan Bobcat Inc South Korea 0.8 Tingyi Cayman Islands Holding Corp China 1.0 Shanghai International Airport Co Ltd China 0.6 Gruma SAB de CV Mexico 0.8 Information Technology 18.9 Wal-Mart de Mexico SAB de CV Mexico 0.8 Taiwan Semiconductor Manufacturing Co Ltd Taiwan 8.3 BIM Birlesik Magazalar AS Turkey 0.8 Samsung Electronics Co Ltd South Korea 6.6 Hanjaya Mandala Sampoerna Tbk PT Indonesia 0.2 Tata Consultancy Services Ltd India 2.4 Energy 2.6 Hon Hai Precision Industry Co Ltd Taiwan 1.2 LUKOIL PJSC ADR Russia 1.4 18 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 18 PRPEQ-FEM-30-Jun-21 Portfolio Holdings
Equivalent As of 30-Jun-21 Country exposure (%) Information Technology 18.9 VTech Holdings Ltd Hong Kong 0.4 Materials 6.7 UPL Ltd India 1.4 Gold Fields Ltd ADR South Africa 1.1 Vale SA ADR Brazil 1.0 Alrosa PJSC Russia 0.8 PTT Global Chemical PCL Thailand 0.8 Suzano SA Brazil 0.7 Polymetal International PLC Russia 0.5 Lundin Mining Corp Canada 0.5 Real Estate 2.5 ESR Cayman Ltd Hong Kong 0.9 Multiplan Empreendimentos Imobiliarios SA Brazil 0.8 Hang Lung Properties Ltd Hong Kong 0.5 Swire Properties Ltd Hong Kong 0.3 Utilities 0.3 CESC Ltd India 0.3 The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and S&P Global Market Intelligence Inc. ("S&P Global Market Intelligence"). GICS is a service mark of MSCI and S&P Global Market Intelligence and has been licensed for use by MFS. MFS has applied its own internal sector/industry classification methodology for equity securities and non-equity securities that are unclassified by GICS.
19 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 19 PRPEQ-FEM-30-Jun-21 Additional Disclosures
Index data source: MSCI. 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.
20 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS Emerging Markets Equity Fund 20 PRPEQ-FEM-30-Jun-21