MFS® International Growth Fund (Class R6 Shares) Second quarter 2021 investment report
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-FGF-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 20
Additional Disclosures 22
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 International Growth Fund PRPEQ-FGF-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. 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 prospectus for further information on these and other risk considerations.
1 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 1 PRPEQ-FGF-30-Jun-21 Disciplined Investment Approach
Investment objective Seekscapitalappreciation
OutperformtheMSCIACWorld(ex-US)GrowthIndex(netdiv)over full Goal market cycles
Webelieve: Over-reaction toshorterterm events provides longer term opportunities Philosophy Qualityisunderappreciated bythemarket OurIntegrated bottomupglobal research platformcan identifythoseopportunities
Generallyhashad70– 90 holdings seekingtooffer above average earnings growth potential Strategy Seeksstockswith long-term earnings growth potential Objective isfor stockselectiontodrivealpha
2 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 2 PRPEQ-FGF-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
54.8 45.8 41.9 40.9 41.5 41.9 36.2 34.2 38.6 38.4 31.3 35.4 24.8 24.8 24.2 19.5 18.1 10.0 8.8 7.8 11.4 6.0 5.0 4.8 9.0 8.9 8.8 8.2 8.2 8.0 6.8 5.0 4.4 1.4 -0.3 -5.5 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 All Country World (ex-US) Growth Index constituents are broken out by MSCI defined sectors. Market review as of 30-Jun-21 The global equity market rally continued in Q2 of 2021, helped by the The growing debate around inflation, even if transitory, is likely to increase further reopening of economies and expanding vaccinations despite the volatility in the market as short-term investors try to switchfrom growthto spread of COVID variants around the world. value and vice versa based on near-term news. Investors’ focus has begun to shift from the post-pandemic recovery to longer-term earnings growth.
3 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 3 PRPEQ-FGF-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 16.2 11.4 Materials 10.3 7.8 33.68 Financials 10.1 7.9 31.10 Top underweights Information Technology 13.6 18.5 Communication Services 3.9 7.2 Consumer Discretionary 14.4 17.1 ^^ MSCI All Country World (ex-US) Growth Index 14.08 13.37 13.23 12.74 The Global Industry Classification Standard (GICS®) was developed by 8.16 7.28 7.77 6.52 7.01 6.60 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 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 International Growth Fund outperformed the MSCI All Country For most recent month-end performance, please visit mfs.com. World (ex-US) Growth 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 • Consumer Discretionary – Stock • Financials – Stock selection favorable. All results assume the reinvestment of dividends and capital gains. selection •Individual stocks: Shares are available without a sales charge to eligible investors. • Consumer Staples – Stock - Canadian National Railway For periods of less than one-year returns are not annualized. selection and an overweight - Flutter Entertainment PLC Source for benchmark performance SPAR, FactSet Research Systems Inc. position - Shopify Inc (not held) ^ MSCI All Country World (ex-US) Growth Index (net div) •Individual stocks: - Hitachi Ltd - SAP AG - Roche Holding Ltd
4 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 4 PRPEQ-FGF-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 9.03 10.16 -1.13 4Q 2020 11.58 13.92 -2.34 1Q 2021 0.70 -0.08 0.78 2Q 2021 7.01 6.60 0.41 2016 2.79 0.12 2.67 2017 32.58 32.01 0.57 2018 -8.79 -14.43 5.64 2019 27.31 27.34 -0.03 2020 15.82 22.20 -6.38 2021 YTD 7.77 6.52 1.24 10 year 8.16 7.28 0.89 5 year 14.08 13.37 0.72 3 year 12.74 13.23 -0.49 1 year 31.10 33.68 -2.58 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. 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 All Country World (ex-US) Growth Index (net div)
5 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 5 PRPEQ-FGF-30-Jun-21 Performance Drivers - Sectors
Average Relative Relative to MSCI All Country World (ex-US) Portfolio Benchmark Sector Stock Currency relative + + = contribution Growth Index (USD) - second quarter 2021 returns (%) returns (%) allocation1 (%) selection2 (%) effect (%) weighting (%) (%) Contributors Consumer Discretionary -2.7 7.3 4.4 0.1 0.4 0.0 0.5 Consumer Staples 6.4 9.4 8.2 0.1 0.2 -0.0 0.3 Materials 2.5 10.0 8.2 0.0 0.3 -0.0 0.2 Communication Services -3.5 2.9 1.4 0.2 0.0 0.0 0.2 Industrials 1.6 6.3 5.0 -0.0 0.2 -0.0 0.2 Utilities -0.3 10.0 -5.5 0.0 0.1 -0.0 0.1
Detractors Financials 1.3 2.4 8.9 0.0 -0.5 -0.1 -0.6 Energy -0.4 -0.8 8.8 -0.0 -0.1 -0.0 -0.2 Cash 2.1 0.0 – -0.1 – -0.0 -0.2 Information Technology -5.5 7.3 8.0 -0.0 -0.2 0.1 -0.1 Health Care -0.4 11.0 11.4 0.0 -0.2 0.1 -0.0 Real Estate -1.0 – 9.0 -0.0 – 0.0 -0.0
Total 7.3 6.7 0.2 0.3 0.0 0.6 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 International Growth Fund 6 PRPEQ-FGF-30-Jun-21 Performance Drivers - Stocks
Average Weighting (%) Returns (%) Relative to MSCI All Country World (ex-US) Growth Index (USD) - second quarter Relative Portfolio Benchmark Portfolio¹ Benchmark 2021 contribution (%) Contributors Hitachi Ltd 2.7 0.1 26.6 26.6 0.5 LVMH Moet Hennessy Louis Vuitton SE 4.1 1.6 18.2 18.2 0.3 SAP AG 3.3 0.9 16.7 16.7 0.2 Roche Holding Ltd 4.1 1.9 16.2 16.3 0.2 Pernod Ricard SA 1.8 0.1 18.0 1.3 0.2 Detractors Canadian National Railway 2.3 0.6 -8.6 -8.6 -0.3 Flutter Entertainment PLC 1.3 0.1 -15.1 -15.9 -0.3 Shopify Inc – 1.0 – 32.6 -0.3 HDFC Bank 2.1 – -0.9 – -0.2 Taiwan Semiconductor 4.8 3.9 1.9 4.2 -0.1
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 International Growth Fund 7 PRPEQ-FGF-30-Jun-21 Significant Impacts on Performance - Contributors
Relative Relative to MSCI All Country World (ex-US) Growth Index (USD) - second quarter 2021 contribution (%)
Hitachi Ltd The portfolio's overweight position in electronics company Hitachi (Japan) contributed to relative returns. The company posted 0.5 better-than-expected operating profit results, driven by strong performance in its IT segment. In addition, management reported favorable operating profit guidance, which further benefited the stock. LVMH Moet An overweight position in luxury goods company LVMH (France) contributed to relative performance. The company reported 0.3 strong sales results in its Fashion & Leather segment, with Christian Dior a particular standout. Additionally, management reported Hennessy Louis strong sales results in its Wine & Spirits segment, with champagne and cognac sales benefiting from the later timing of the Chinese Vuitton SE New Year and from restocking in the US. SAP AG The portfolio's overweight position in enterprise applications company SAP (Germany) contributed to relative performance. The 0.2 company reported quarterly financial results in line with consensus estimates, driven by strong growth in its cloud and software segments.
8 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 8 PRPEQ-FGF-30-Jun-21 Significant Impacts on Performance - Detractors
Relative Relative to MSCI All Country World (ex-US) Growth Index (USD) - second quarter 2021 contribution (%)
Canadian National An overweight position in railroad company Canadian National Railway (Canada) held back relative results. The stock price -0.3 declined after the company proposed an offer to buy Kansas City Southern in a cash and share deal, which was materially higher Railway than Canadian Pacific's current offer. Flutter The portfolio's overweight position in online betting and gaming operator Flutter Entertainment (United Kingdom) held back -0.3 relative performance. Despite strong Online Sports revenue growth that benefited from COVID-19 lockdowns, the company's share Entertainment PLC price came under pressure on the back of lower-than-expected sales within its Gaming segment, particularly for poker, as well as regulatory headwinds in Germany. Shopify Inc Not owning shares of cloud-based e-commerce platform operator Shopify (Canada) hurt relative performance. The company -0.3 reported above-consensus financial results, driven by the positive economic impact of the US stimulus spending and broader acceleration in e-commerce related to COVID-19 shop-from-home trends.
9 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 9 PRPEQ-FGF-30-Jun-21 Significant Transactions
Ending From 01-Apr-21 to 30-Jun-21 Sector Transaction type Trade (%) weight (%) Purchases SWEDISH MATCH AB Consumer Staples New position 0.8 0.7 DEUTSCHE BOERSE AG Financials New position 0.5 0.5 LONDON STOCK EXCHANGE GROUP PLCFinancials New position 0.5 0.5 HITACHI LTD Industrials Add 0.5 3.2 RECKITT BENCKISER GROUP PLC Consumer Staples Add 0.4 2.5
Sales DANONE SA Consumer Staples Eliminate position -1.5 – LVMH MOET HENNESSY LOUIS VUITTON SEConsumer Discretionary Trim -1.0 3.3 L'OREAL SA Consumer Staples Trim -0.7 1.5 51JOB INC Industrials Eliminate position -0.4 – NAVER CORP Communication Services Trim -0.2 1.6
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 International Growth Fund 10 PRPEQ-FGF-30-Jun-21 Sector Weights
Underweight/ As of 30-Jun-21 Portfolio (%) Benchmark^ (%) Top holdings overweight (%) Nestle SA, Diageo PLC, Reckitt Benckiser Group Consumer Staples 16.2 11.4 4.8 PLC Materials 10.3 7.8 2.5 Linde PLC, Air Liquide SA, Akzo Nobel NV AIA Group Ltd, HDFC Bank Ltd, DBS Group Financials 10.1 7.9 2.2 Holdings Ltd Hitachi Ltd, Schneider Electric SE, Canadian Industrials 15.6 14.4 1.2 National Railway Co Roche Holding AG, Novartis AG, Novo Nordisk Health Care 12.4 12.0 0.4 AS Utilities 0.6 0.8 -0.2 China Resources Gas Group Ltd Energy 1.5 1.9 -0.4 Reliance Industries Ltd Real Estate – 1.0 -1.0 LVMH Moet Hennessy Louis Vuitton SE, Consumer Discretionary 14.4 17.1 -2.7 EssilorLuxottica SA, Alibaba Group Holding Ltd Communication Services 3.9 7.2 -3.3 Tencent Holdings Ltd, NAVER Corp Taiwan Semiconductor Manufacturing Co Ltd Information Technology 13.6 18.5 -4.9 ADR, SAP SE, Delta Electronics Inc ^ MSCI All Country World (ex-US) Growth Index 1.4% 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 International Growth Fund 11 PRPEQ-FGF-30-Jun-21 Region Weights
As of 30-Jun-21 Underweight/overweight (%)
Europe ex-U.K. 12.2
United Kingdom 1.7
Japan -6.4
Asia/Pacific ex-Japan -2.1
Developed - Middle East/Africa 0.0
North America 3.2
Emerging Markets -9.9
1.4% Cash & cash equivalents
12 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 12 PRPEQ-FGF-30-Jun-21 Region and Country Weights
Portfolio Benchmark^ Underweight/ Portfolio Benchmark^ Underweight/ As of 30-Jun-21 (%) (%) overweight (%) (%) (%) overweight (%) Europe ex-U.K. 45.3 33.1 12.2 Developed - Middle East/Africa 0.4 0.4 0.0 France 16.0 7.3 8.7 Israel 0.4 0.4 0.0 Switzerland 12.7 7.7 5.0 North America 10.1 6.9 3.2 Germany 8.1 4.5 3.6 United States 3.3 0.0 3.3 Ireland 1.3 0.4 0.9 Canada 6.8 6.9 -0.1 Spain 0.7 0.8 -0.1 Emerging Markets 21.5 31.4 -9.9 Italy 1.1 1.3 -0.2 India 5.7 3.0 2.7 Denmark 1.4 2.7 -1.3 Taiwan 6.4 4.4 2.0 Sweden 1.8 3.4 -1.6 Mexico 1.1 0.5 0.6 Netherlands 2.3 4.1 -1.8 Peru 0.3 0.1 0.2 1 Other countries 0.0 0.9 -0.9 Brazil 0.3 1.6 -1.3 United Kingdom 8.8 7.1 1.7 South Korea 1.8 4.2 -2.4 Japan 7.4 13.8 -6.4 China 5.8 12.1 -6.3 Asia/Pacific ex-Japan 5.1 7.2 -2.1 Other countries 1 0.0 5.6 -5.6 Hong Kong 3.2 2.1 1.1 Singapore 1.3 0.7 0.6 Australia 0.7 4.2 -3.5 Other countries 1 0.0 0.2 -0.2
^ MSCI All Country World (ex-US) Growth Index 1.4% Cash & cash equivalents 1 The portfolio does not own any securities in countries represented in the benchmark in the following percentages: Russia 1.0%; South Africa 1.0% and 24 countries with weights less than 1.0% which totals to 4.7%. 1 Other countries
13 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 13 PRPEQ-FGF-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 4.9 3.8 IBES long-term EPS growth 1 13.5% 18.6% MANUFACTURING CO LTD Price/earnings (12 months forward) 22.8x 24.4x NESTLE SA 4.5 2.6 Return on invested capital 11.4% 12.1% ROCHE HOLDING AG 4.3 2.0 Market capitalization Market capitalization (USD) 2 159.9 bn 138.3 bn SAP SE 3.3 0.7 LVMH MOET HENNESSY LOUIS Diversification 3.3 1.6 Number of holdings 76 1,162 VUITTON SE Turnover HITACHI LTD 3.2 0.1 3 Trailing 1 year turnover 24% – AIA GROUP LTD 3.2 1.1 Risk/reward (10 year) NOVARTIS AG 2.7 – Standard deviation 14.00% 14.44% Information ratio 0.29 – SCHNEIDER ELECTRIC SE 2.7 0.4 Upside capture 97.63% – DIAGEO PLC 2.6 0.8 Downside capture 91.43% – ^ MSCI All Country World (ex-US) Growth Index Total 34.6 13.0 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 International Growth Fund 14 PRPEQ-FGF-30-Jun-21 Portfolio Outlook and Positioning
MARKET REVIEW Non-US equity markets continued to rally with the MSCI All Country World ex US Growth Index ("the growth index") up 6.6% this quarter, supported by the accelerating roll-out of COVID-19 vaccines. But the shape of the rotation appears to have shifted gears. What started as a ‘COVID-19 recovery trade’ after the vaccine news in November of last year, with a steep rotation in the growth index towards higher beta, lower quality, and very cyclical stocks, has morphed into a broader equity rally with fewer defining features, but more focus on earnings growth. There was a reversal of the rotation towards the end of the quarter after the Federal Reserve (Fed) said it could be raising interest rates by 2023, a year earlier than previous guidance.
At a macro level, there was excitement among investors regarding the speed of re-openings and vaccine roll-outs. Most economists are now penciling in +6% global GDP growth this year and +4.5% for 2022, with expectations of a synchronized acceleration of G7 economies. The US is already above its pre-pandemic GDP level while Europe should reach its pre-pandemic level in the second half of 2021.
The main focus of the markets during the second quarter was whether recent inflationary pressures are transitory or permanent. We believe it is still too early to tell since year-over-year price changes are distorted by falling prices during the lockdown. US inflation (CPI) hit 5% in May, the highest level in 13 years, and in Europe inflation hit 2%, just five months after shaking off a bout of deflation. The long-term debate is whether the deflationary forces holding prices down (demographics, debt, globalization, technology) are still as strong as they were. Globalization led to a huge transfer of production from high-cost economies to lower-cost economies in Asia and Eastern Europe, which may now be reversing. Low inflation has become a global phenomenon and inflation has been falling for 30 years. So far, central banks and most investors believe inflation is transitory, with price pressures caused by supply and demand imbalances distorted by the pandemic.
Relative calm has descended across bond markets, with yields actually falling, as fears of an interest rate shock are dissipating, at least for now. An interest rate shock could have punctured high equity valuations, especially for long-duration assets, that have been bid up in technology and other thematic areas (e.g. clean energy stocks). The yield on the benchmark 10-year US Treasury has eased back below 1.5%, having peaked close to 1.8%. Falling interest rates have been the engine for several bull markets in bonds and equities over the last decade or more. The question now is whether this is a turning point and that regime is over. The Fed's balance sheet has doubled to $8 trillion since the start of 2020, which is over 30% of GDP and at some point needs to be unwound.
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Within the growth index, the most expensive stocks once again significantly outperformed the least expensive stocks during the second quarter. Despite facing the same headwind that hurt our relative performance in 2020, our strong stock selection more than offset this adverse market environment.
The current differential between the highest and lowest valuation groupings (quintiles) of stocks in the growth index is the highest we have seen since the 'dotcom' bubble. This market dynamic is also noticeable when comparing the portfolio's relative valuation multiple to the growth index, as the portfolio currently trades at its lowest relative valuation in two years. Our valuation discipline has kept us focused on identifying attractively valued growth companies, even as the market's appetite for hyper-growth, high-multiple stocks has continued.
All sectors within the growth index appreciated in the second quarter with the exception of utilities. The top-performing sector was health care, which lagged in Q1 when investors focused on more economically sensitive areas of the market. Real estate also performed well during the second quarter with further signs of post-pandemic recovery and lower interest rates, followed by financials, energy and consumer staples.
PORTFOLIO POSITIONING Our focus on high-quality, above-average growth companies continues to drive portfolio positioning. We seek to invest in companies that can compound above-average growth at high returns. These companies typically are market leaders with durable business models that have experienced management teams and competitive advantages that should allow them to maintain higher returns and earnings growth than their peers. We seek to apply our buy criteria in a disciplined manner, irrespective of economic conditions. Combined with our long-term investment horizon, this typically results in very modest shifts in portfolio positioning from quarter to quarter.
The information technology sector comprised 18.5% of the growth index at the end of the quarter, making it the largest sector. The MFS International Growth portfolio has exposure to a range of industries within the information technology sector, including software, IT services and electronic equipment instruments and components. However, the portfolio was nearly 500bps underweight this sector due to our significant underweight to semiconductor companies.
While semiconductor companies are benefiting from secular growth trends, including AI, Cloud/Data Center, Big Data/Analytics, 5G, Internet of Things and autonomous/electric vehicles, we believe the semiconductor industry is still a high fixed cost, cyclical industry. We also believe the
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current chip shortage is forcing customers to increase their capital spending significantly, which could ultimately cause the next down cycle for chipmakers.
The portfolio's only semiconductor exposure today is long-time holding Taiwan Semiconductor (TSMC), which remains a top position in the portfolio. TSMC benefits from scale and industry-leading technology. TSMC has about 60% share of the foundry market but an even higher percentage of advanced node capacity. Over time, as nodes sizes have continued to shrink, transitions have become more technologically challenging and costs have risen, forcing the less profitable semiconductor companies to exit the industry. Today, only three companies globally are still pursuing this leading-edge technology: TSMC, Samsung and Intel.
Given the market environment, while many semiconductor companies do not look particularly expensive on forward earnings estimates, we believe this is optically misleading, since many of these companies are generating earnings well above normalized levels. On normalized earnings, we believe these stocks look significantly more expensive than they do on forward earnings, which is another reason why we remain significantly underweight semiconductors today.
As of June 30, 2021, the portfolio was most overweight consumer staples and materials. We have long favored consumer staples companies that have strong brands, sustainable, above-average growth and geographically diverse revenue sources. We have spent significant time analyzing prior deflationary and inflationary periods and have come to a rather ordinary conclusion: businesses with pricing power fair best in either extreme. Many of our consumer staples companies have pricing power and derive a significant portion of their revenues from underpenetrated emerging markets countries, which typically leads to higher revenue growth and more stable earnings growth than the overall market.
Within materials, two of our largest active positions are industrial gas producers Linde and Air Liquide. These high-quality cyclicals have generated returns above their cost of capital and have generated significant free cash flow over a full cycle, driven in part by long-term contracts that have built-in price escalators. We believe these companies will also be likely beneficiaries of re-shoring as many global companies revisit their supply chains.
As of June 30, 2021, the portfolio was most underweight information technology and communication services. As noted above, within information technology, we are significantly underweight semiconductor companies. Our underweight to communication services is primarily the result of not
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owning many telecommunications companies that typically do not have sustainable above-average growth, returns and free cash flow characteristics.
In terms of the positioning of the portfolio over the period, we continued to build or initiate positions in high-quality businesses that we believed had attractive risk/return profiles while trimming or eliminating companies that we believed had become more fully valued or were facing structural headwinds. Key trades during the second quarter included the following:
We initiated a position in Swedish Match, which makes moist smokeless tobacco products, cigars and lighters. We believe their tobacco- free nicotine pouch, Zyn, will be a key growth driver for Swedish Match.
We initiated a position in London Stock Exchange and Deutsche Boerse. Both companies have diversified away from the more cyclical parts of their businesses (financial exchanges and clearing) towards market data. This has increased the proportion of revenues that come from less volatile and more recurring income streams versus the more cyclical part of the business.
We added to Hitachi, the Japanese conglomerate with several world-class technologies, including robotics, factory automation and medical electronics equipment. Management has done a credible job of changing the corporate culture to one more focused on shareholder returns, highlighted by a simplification of their corporate structure, which has resulted in a more focused and profitable business with better growth prospects.
We sold out of Danone due to the deteriorating attractiveness of their main categories: water, infant formula and dairy. The infant formula business is challenged by declining births and emerging Chinese competition, while the bottled water business is impacted by increasing consumer aversion to plastic packaging.
We exited our position in Chinese online job recruitment business 51Job Inc. on news of the completion of the take-out by a consortium of Chinese investors.
We trimmed LVMH Moet Hennessey and L'Oreal at higher valuations after strong share price gains. We continued to believe these were attractive businesses with strong fundamentals.
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Finally, during the quarter, David Antonelli, a portfolio manager who had worked on the International Growth strategy since 2010, retired from MFS. We wish David all the best!
MARKET OUTLOOK It is pleasing to be able to look ahead with optimism and enjoy the economic boom as countries emerge from the pandemic, with some of the easiest financial conditions on record and unprecedented fiscal and monetary support in place. The market is certainly more focused now, looking closely at the near-term and long-term earnings growth of companies once again, as we move beyond the disruption phase. Although, after the volatility of the past year, it will no doubt take time for market imbalances to work through the system. There will be bumps in the road ahead, not least the risk of COVID-19 variants, and markets could stay volatile and unpredictable as we work through this in the coming months. One of the biggest questions soon will be the extent to which governments and citizens are prepared to live with the virus. That answer will have crucial implications for the shape of the recovery and the new steady-state we are heading to. The inflation debate will rumble on, with investors looking for tell-tale signs of transitory or permanent change, while awaiting the inevitable tightening from central banks as interest rates get reset and QE gets unwound. The narrative on the timing of these moves and the potential impact on the US dollar is being closely watched by investors.
As we move further into 2021, we believe the strategy is positioned to benefit from a combination of market leadership broadening out, a return to fundamentals driving stock price returns and a renewed investor focus on valuations. We believe the portfolio is attractively positioned with exposure to high-quality companies that have significant exposure to long-term secular growth trends, including the growth of the emerging markets middle class consumer and aging demographics across the developed world.
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.
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.
45686.6 19 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 19 PRPEQ-FGF-30-Jun-21 Portfolio Holdings
Equivalent Equivalent As of 30-Jun-21 Country As of 30-Jun-21 Country exposure (%) exposure (%) Cash & Cash Equivalents 1.4 Energy 1.5 Cash & Cash Equivalents 1.4 Reliance Industries Ltd India 1.0 Communication Services 3.9 Oil Search Ltd Australia 0.5 Tencent Holdings Ltd China 1.7 Financials 10.1 NAVER Corp South Korea 1.6 AIA Group Ltd Hong Kong 3.2 Z Holdings Corp Japan 0.5 HDFC Bank Ltd India 2.1 Consumer Discretionary 14.4 DBS Group Holdings Ltd Singapore 1.3 LVMH Moet Hennessy Louis Vuitton SE France 3.3 Element Fleet Management Corp Canada 1.0 EssilorLuxottica SA France 2.4 Grupo Financiero Banorte SAB de CV Mexico 0.8 Alibaba Group Holding Ltd China 2.2 Deutsche Boerse AG Germany 0.5 Flutter Entertainment PLC Ireland 1.3 London Stock Exchange Group PLC United Kingdom 0.5 Kering SA France 1.2 AEON Financial Service Co Ltd Japan 0.4 Burberry Group PLC United Kingdom 0.9 Credicorp Ltd Peru 0.3 Koito Manufacturing Co Ltd Japan 0.7 Health Care 12.4 Prosus NV Netherlands 0.6 Roche Holding AG Switzerland 4.3 Yum China Holdings Inc China 0.5 Novartis AG Switzerland 2.7 Mahindra & Mahindra Ltd India 0.5 Novo Nordisk AS Denmark 1.4 Just Eat Takeaway.com NV Netherlands 0.5 QIAGEN NV Germany 1.2 Yum China Holdings Inc China 0.3 Bayer AG Germany 1.1 Ocado Group PLC United Kingdom 0.2 Terumo Corp Japan 1.0 Consumer Staples 16.2 Hypera SA Brazil 0.3 Nestle SA Switzerland 4.5 Alcon Inc Switzerland 0.3 Diageo PLC United Kingdom 2.6 Hugel Inc South Korea 0.2 Reckitt Benckiser Group PLC United Kingdom 2.5 Industrials 15.6 Pernod Ricard SA France 1.9 Hitachi Ltd Japan 3.2 L'Oreal SA France 1.5 Schneider Electric SE France 2.7 Swedish Match AB Sweden 0.7 Canadian National Railway Co Canada 2.1 Kao Corp Japan 0.7 Ritchie Bros Auctioneers Inc Canada 1.6 ITC Ltd India 0.5 Experian PLC United Kingdom 1.4 Kose Corp Japan 0.5 Prysmian SpA Italy 1.1 Sugi Holdings Co Ltd Japan 0.5 Assa Abloy AB Sweden 1.0 Wal-Mart de Mexico SAB de CV Mexico 0.3 GEA Group AG Germany 0.9 Rolls-Royce Holdings PLC United Kingdom 0.8
20 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 20 PRPEQ-FGF-30-Jun-21 Portfolio Holdings
Equivalent As of 30-Jun-21 Country exposure (%) Industrials 15.6 INGERSOLL-RAND INC United States 0.8 Information Technology 13.6 Taiwan Semiconductor Manufacturing Co Ltd ADR Taiwan 4.9 SAP SE Germany 3.3 Delta Electronics Inc Taiwan 1.5 Infosys Ltd ADR India 0.9 Capgemini SE France 0.8 Amadeus IT Group SA Spain 0.7 Dassault Systemes SE France 0.6 Kingsoft Corp Ltd China 0.5 Nice Ltd ADR Israel 0.4 WiseTech Global Ltd Australia 0.1 Materials 10.3 Linde PLC United States 2.5 Air Liquide SA France 1.7 Akzo Nobel NV Netherlands 1.3 Agnico Eagle Mines Ltd Canada 1.1 Symrise AG Germany 1.1 Franco-Nevada Corp Canada 1.0 Sika AG Switzerland 0.9 UPL Ltd India 0.7 Utilities 0.6 China Resources Gas Group Ltd China 0.6 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.
21 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 21 PRPEQ-FGF-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.
22 FOR DEALER AND INSTITUTIONAL USE ONLY. - MFS International Growth Fund 22 PRPEQ-FGF-30-Jun-21