MFS: How to Rethink Risk, Rotation, and Reserve Currency Exposure

If you’re in the business of allocating capital, it’s been a year of whiplash. Currency swings, benchmark re-jigs, policy pivots—and somewhere in there, clients still want clarity.

In the latest Portfolio Perspectives¹ for Q3 2025, MFS Investment Management’s Strategy and Insights Group—led by Jonathan Hubbard, CFA, and Soumya Mantha, CFA—offers just that. Think of this report as part reality check, part roadmap. The overarching message? The old rules of thumb may not cut it anymore.

1. The Dollar’s Slipping Grip

The greenback hasn’t lost its crown yet—but it’s definitely wobbling. While the U.S. dollar isn’t about to be dethroned as the world’s reserve currency, MFS says it’s time to stop treating dollar dominance as a given.

Why the concern? “Dollars that are spent to import goods from abroad make their way back to the US through purchases of things such as US government debt, equities and real estate,” the authors explain. “Fewer dollars sent outside the US for goods purchases means there will be fewer dollars to recycle back into US financial assets.”

Translation: a shrinking trade deficit might feel good politically, but it reduces foreign demand for U.S. securities. Combine that with rising debt, and the case for diversifying away from the dollar gets stronger.

And while global equities have grabbed most of the attention lately, MFS is quietly bullish on global aggregate bonds. Why? Because these portfolios offer a global mix of currencies, fixed income asset classes, and yield curves—all while sticking to investment-grade credit. “These strategies can provide exposure to multiple fixed income asset classes and currencies… while still maintaining investment-grade credit quality,” they note.

2. Don’t Sleep on Your Benchmark

Benchmarks aren’t just backdrops—they shape how portfolios are built, measured, and judged. And the June 2025 reshuffling of the Russell indexes is a textbook example of why that matters.

Three members of the Magnificent Seven—Alphabet, Meta, and Amazon—have crossed into value territory. That means the Russell 1000® Value index just got a lot more tech-heavy. After the reclassification, those three names alone now make up roughly 5.5% of the index.

Here’s the problem: “It is important for asset allocators to recognize these changes as they could impact measures used for portfolio monitoring, including tracking error, active share and sector exposures.” In other words, if your manager didn’t change, but the benchmark did, it might look like they’re off course—when they’re not.

3. The Mid-Cap Comeback?

In a market obsessed with tech mega-caps, mid-sized companies have been largely ignored. But MFS thinks that might be a mistake.

“US mid-cap equities have been overshadowed by their large-cap counterparts over the last decade,” they acknowledge. Yet zoom out to 1990, and mid-caps have actually beaten large caps by more than 500%.

Even more compelling? Mid-caps are now trading “two standard deviations cheap” relative to large caps—a valuation gap rarely seen. Plus, mid-caps are less concentrated, more value-oriented, and less tied to big tech than the S&P 500. During volatile markets, that kind of diversification can be a lifeline.

And in an age of reshoring and trade friction, mid-caps may have another advantage: they’re more focused on the U.S. domestic market. MFS highlights the “Big Beautiful Bill Act,” which allows immediate expensing of R&D and factory upgrades—something mid-caps are better positioned to benefit from than global giants.

4. Rates Settling Down—But Not for Long?

If you feel like bond markets are finally calming down, you’re not wrong—but don’t get too comfortable. The worst of the post-pandemic rate volatility may be behind us, but inflation uncertainty is still hanging around.

“While the potential for a resurgence in rate volatility is a potential tail risk,” MFS writes, “a Fed on hold, solid corporate balance sheets and strong investor demand could mean more stable performance in investment grade credit prices.”

Still, long-duration bonds carry a flashing yellow light. Higher tariffs or surprise inflation shocks could send yields swinging again—especially if deficits keep ballooning and bond investors start to get twitchy.

Their playbook? Stay high-quality, limit duration, and consider spread-based strategies like agency MBS or asset-backed securities. These tend to be “linked to domestic consumer spending and real estate,” and are less sensitive to geopolitical tremors.

5. Global Equities: Running Ahead of the Pack

While U.S. equities are still solid, the real action has been overseas. European and Asia ex-Japan markets are on a roll, and “valuations have re-rated higher,” MFS says—trading at 19x forward earnings vs. a 20-year average of 16x.

Germany and Spain stand out, helped by a global investor base that’s finally moving some chips off the U.S. table. Even the panic around U.S. tariffs in April proved short-lived. Markets not only bounced back—they hit fresh all-time highs.

Meanwhile, economic fundamentals in the U.S. remain strong. “GDP trackers continue to suggest the US economy is growing at a healthy clip,” MFS reports, “with labor markets and consumption remaining strong.”

6. The 60/40 Portfolio: Not Dead Yet

Yes, it’s taken a beating in recent years. But MFS makes the case that the classic 60/40 portfolio still holds up over the long haul.

Their numbers show a 10-year annual return of 6.87% with a Sharpe ratio of 0.49. For allocators balancing growth and income in a volatile world, that’s still a respectable anchor.

Final Word

This isn’t a market for autopilot investing. Currency volatility, benchmark reshuffling, shifting sector dynamics—all of it demands a more active, more nuanced approach. But as MFS makes clear, with the right tools, investors can still find opportunity in the noise.

“Asset class and style diversification can provide risk and return benefits to portfolios—so too can currency diversification,” Hubbard and Mantha remind us.

Time to update the playbook.

Footnote:

1 Hubbard, Jonathan, and Soumya Mantha. Portfolio Perspectives: Practical Applications for Asset Allocators – Q3 2025. MFS Investment Management, July 2025. ↩︎