A difficult quarter for small-cap growth stocks

A difficult quarter for small-cap growth stocks

Q1 2022 Putnam Small Cap Growth Fund Q&A

  • Surging inflation figures, shifting economic outlooks, and changing risk appetites were headwinds in the first quarter.
  • Despite a difficult first quarter, the fund outperformed its benchmark for the 1-, 3-, 5-, and 10-year and life-of-fund periods ended March 31, 2022.
  • We continue to focus on what drives stock prices over the long term, and then apply that to our active, fundamental research of individual companies.

How were conditions for investing in the first quarter?

It was a tough start to the year for financial markets. Surging inflation figures, shifting economic outlooks, and changing risk appetites were headwinds, compounded by an intensifying Russia-Ukraine war. Demand for goods was high as we emerged from the pandemic while many supply chains remained disrupted. This combination of rising demand and weaker supply brought inflation to a multi-decade high. The Federal Reserve’s posture on inflation has certainly changed, and the market is recalibrating along with it. The potential for rising interest rates shifted investor appetites away from many of the fastest-growing companies in the market. Many investors also fear that efforts to reduce inflation will ultimately slow the U.S. economy and push it into a recessionary environment in 2023.

How did small-cap growth stocks perform relative to other styles?

Again this quarter, we saw a wide divergence in performance across the market. And while the quarter-end index returns are certainly disappointing, they actually underplay the volatility of the period. The decline of large-cap stocks, as measured by the S&P 500 Index, was less severe than that of small-cap stocks, as measured by the Russell 2000 Index. Among both large- and small-cap stocks, growth underperformed value for the quarter. Within the small-cap growth index, we saw tremendous strength in the energy sector, which gained 34%. Conversely, the consumer discretionary sector declined 19%, with many of the housing and auto industry names leading on the downside.

How did the fund perform?

In this difficult first quarter, the fund underperformed its benchmark. Stock selection in the industrials, energy, and materials sectors detracted from performance, as did our underweight position in the energy sector. However, the fund’s performance over longer periods is worth noting. It outperformed the benchmark for the 1-, 3-, 5-, and 10-year and life-of-fund periods ended March 31, 2022.

What is your outlook as we begin a new quarter?

Uncertainty will likely be the greatest headwind for the market as investors weigh the potential impact of the Russia-Ukraine war, inflation, and a changing monetary policy framework. Over the longer term, we remain optimistic about the potential for equities as technological advancements continue to fuel worker productivity. We continue to focus on what drives stock prices over the long term, and then apply that to our active, fundamental research of individual companies. We seek to target companies that can grow profits at high rates for long periods, and we seek to pay a reasonable price for that growth.

More in: Equity,