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 first-quarter 2025 update.

So I wanted to use today’s time to provide a quick update on the performance of the International Diversification Fund but maybe more importantly spend a bit of time touching on the current state of non-US equity performance given recent market volatility and the recent outperformance of non-US stocks versus their US counter parts.

So very quickly, for the quarter the International Diversification Fund outperformed the MSCI All Country World ex US Index, with three of the underlying strategies outperforming their respective benchmarks, and three underperforming. From a relative performance standpoint, our International Growth strategy was the top performer, followed by our Emerging Markets Equity Fund and our core EAFE benchmarked International Intrinsic Value Fund. On the opposite side of the ledger, we did see some relative underperformance in our core Research International Fund and our pure play International Large Cap Value Strategy, as well as very modest underperformance in our small- and mid-cap offering, International New Discovery.

Now it’s no secret that on a year-to-date basis, international stocks have strongly outpaced their US counterparts, with the MSCI All Country World ex US Index outperforming the S&P 500 by nearly 12 percentage points in US dollars. And as a result, one of the questions that we get quite often is whether this is a temporary shift in market sentiment, or are there more structural forces at play that could lead to a so-called Great Rotation out of US equities and into International stocks? So to try and get at this, let’s take a quick look at two regions where these structural forces could be starting to materialize, starting with Europe.

Now it’s well known that the current administration in the US has embarked on a path toward the Golden Age of America, and these policies are having knock-on effects across Europe. And while Europe has historically taken a more socialized approach to government, we have seen a more of a move to the right in governments across Europe more recently, in particular in Germany, where the government has adopted more of a capitalistic tilt, as they’ve opened up the fiscal coffers and announced significant spending on defense and infrastructure. Additionally, we’ve seen more coordinated policies out of Europe as a whole, with joint efforts to rearm as the US administration has questioned their commitment to long held security alliances such as NATO. As a result, policies emanating from the US may very well have set Europe on a path toward more integrated policies that are more aligned with the political center that could ultimately prove beneficial to the future profitability of many European companies.

Next, let’s next take a look at Japan. Here, starting with Abenomics back in the late 2000s and early 2010s, there has been a push to get Japanese companies to operate more on behalf of the shareholder rather than the stakeholder. More recently the Tokyo Stock Exchange has embarked on a campaign to call out and eventually threaten to de-list any company not maintaining a price-to-book ratio of 1x.

Some areas of improvement being implemented across Japanese companies, because of this top-down pressure to become more shareholder friendly, include the following:

• Utilizing excess cash sitting on the balance sheet for either buybacks, dividends or accretive mergers and acquisitions
• The unwinding of cross shareholdings, as Japanese companies tend to hold shares of suppliers, customers and other companies
• Spinning off underperforming businesses; here many Japanese companies are composed of unrelated business lines, which can alter the profitability profile of these companies
• Bringing on more independent board members

As a result, we believe that companies that are buying into these changes can structurally place themselves in a more profitable position moving forward.

It’s also worth noting that despite the outperformance of international stocks versus US equities to start the year, if this is in fact the start of the so called Great Rotation, we still appear to be very much in the early innings, as the valuation backdrop in international markets remains particularly attractive at roughly a 40% discount to US equities, levels not see since the dot-com era.

So just to close the loop, the question really becomes, with so much change taking place in the world, will what worked well in the past work well in the future (i.e., tech-heavy US equities), or are we in fact on the cusp of a sustained change in market leadership? And while this question is nearly impossible to answer with any certainty, what I will say is that it does appear we’ve entered a new paradigm, and as to whether or not this is the start of the Great Rotation is still very much up for debate,  but one thing the last several months has shown us with clarity is that the benefits of diversification appear to be alive and well following a unprecedented period of US excellence.
So thank you for your time today and hope to see you next quarter. Thank you.

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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.

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.

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