Q4 2020 Putnam Small Cap Growth Fund Q&A
- The fund underperformed in the fourth quarter but outperformed the benchmark for the 1-, 3-, 5-, and 10-year periods and the life-of-fund period ended December 31, 2020.
- The conditions of modest GDP growth, low inflation, and low baseline interest rates should be positive for equities overall in 2021.
- We believe we will see enormous progress from many of the innovative companies in our portfolio over the next three to five years.
How has the fund performed?
For the fourth quarter, the fund delivered a solid return but underperformed its benchmark, the Russell 2000 Growth Index. However, it is worth noting the longer-term performance as well. The fund outperformed the benchmark for the 1-, 3-, 5-, and 10-year periods and the life-of-fund period ended December 31, 2020.
In the fourth quarter, our stock selection in health care and industrials was a drag on performance, as was our underweight exposure to the high-risk biotechnology industry, where stock performance surged.
How were market conditions in the quarter?
The quarter was marked by the U.S. presidential election, global surges in COVID-19 cases, and the authorization and start of distribution for two COVID-19 vaccines. It was a strong quarter for the overall equity market, and we also saw strong risk seeking, as investors turned toward small-cap stocks and the much-beleaguered value stocks. The Russell 2000 Value Index, for example, returned a stunning 33.36% for the fourth quarter. Prior to the election, returns overall were subdued, but they surged once it became clearer that Joe Biden would be the winner.
Could you provide some more detail on the types of companies you own?
We look for small companies that we believe can grow their earnings and cash flows at a rapid pace for many years. Ideally, we seek small-cap companies that can grow into large-cap businesses over time. We are not typically attracted to companies that have been small for a while and are likely to remain small. We are attracted to businesses in big addressable markets that have products or services that enable them to take market share from peers.
The small-cap asset class can be volatile, especially when targeting the fastest growing companies. For this reason, it is important to note that the largest portion of our portfolio consists of stable, well-established companies that we believe are mispriced by the market. We believe these companies, which typically comprise 60% to 80% of the portfolio, can grow at above-average rates and the market is not pricing in their full profitability potential.
What is your outlook going into 2021?
We remain optimistic about the prospects for equity market returns in 2021 and beyond. Monetary policymakers in the United States and abroad remain vigilant. They are keeping policy relatively loose and have hinted that they will do so for the foreseeable future. This will potentially keep interest rates low. Also, the depression-like economic damage caused by the pandemic has eased concerns about inflation.
In terms of economic metrics, in 2021 we are likely to see some dramatic “optics,” but the conditions of modest GDP growth, low inflation, and low baseline interest rates should be positive for equities overall, in our opinion. While it has become a bit cliché, we believe that the pandemic has accelerated many disruptive forces in the economy, with many growth companies becoming the beneficiaries of these changes. Overall, we continue to see compelling opportunities in smaller growth-oriented companies and we believe we will see enormous progress from many of the innovative companies in our portfolio over the next three to five years.
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