Q4 2021 Putnam Large Cap Value Fund Q&A
- The fund outperformed its Russell 1000 Value Index benchmark for the 1-, 3-, 5-, and 10-year periods ended December 31, 2021.
- We seek to immunize the portfolio, to the extent reasonably possible, from external shocks such as inflation or rising and falling interest rates.
- We remain focused on relative value — analyzing the valuation of companies compared with businesses in the same sector.
How has the fund performed?
Darren: For the fourth quarter, the fund modestly underperformed its Russell 1000 Value Index benchmark. However, for the 2021 calendar year, it delivered a solid return and outperformed the benchmark. The fund also outperformed the benchmark for the 3-, 5-, and 10-year periods ended December 31, 2021.
The past year was marked by growing concerns about inflation and interest rates. What can you tell us about managing your portfolios in this environment?
Darren: In late 2020, the perfect recipe for inflation was emerging. It included a combination of optimism about reopening economies, massive government stimulus, personal savings rates reaching all-time highs, and enormous pent-up demand from consumers. Inflation concerns mounted throughout 2021, despite the Federal Reserve’s initial description of inflation as “transitory.” In late November, Fed Chair Jerome Powell said it was time to retire that term, further fueling investor concerns. Inflation has broad implications for the global economy, for the growth/value trade, and for sector and industry performance. However, in managing our portfolios, we are most focused on how inflation and other macro factors will affect the fundamentals of individual companies — those we own or those we are considering for the fund.
Lauren: We don’t try to predict the direction, the timing, or the magnitude of macroeconomic factors like inflation. But we do seek to immunize the portfolio, to the extent reasonably possible, from external shocks such as inflation or rising and falling interest rates. We use real-time, proprietary tools for portfolio risk snapshots, and our portfolios undergo regular stress tests. These tests help determine how a portfolio is expected to perform if subjected to stresses from certain market or macroeconomic events.
You also manage non-U.S. value portfolios. How does your global perspective help with investment decisions, and where are you seeing opportunities in value stocks outside the United States?
Darren: Our analysis of global markets is invaluable for finding opportunities in every portfolio. For many large-cap companies, a significant portion of their revenue is sourced outside the United States, so an understanding of the global investment landscape is critical. In addition, companies within most sectors and industries compete globally, which expands the fundamental opportunity set well beyond U.S.-centric considerations. We believe that understanding the global competitive dynamic makes us better fundamental investors at a regional level. For this reason, we’ve structured our research organization around this global philosophy, and we find it’s a significant advantage.
Lauren: As for opportunities in non-U.S. markets, we are optimistic about the rotation into yield-sensitive sectors like banks and commodities. These sectors continue to lag behind their U.S. peers in terms of share price recovery. European bank stocks, like their U.S. counterparts, were the epicenter of earnings uncertainty in 2020, but performed well in 2021. However, their valuations remain at a significant discount to U.S. bank stocks and, more important, at a discount to stocks in the broader international markets. Looking ahead, we believe European bank stocks are poised for continued outperformance.
How are you positioning the portfolio as we begin a new year?
Lauren: We remain focused on relative value — analyzing the valuation of companies compared with businesses in the same sector. We also seek to manage interest-rate risk by maintaining a mix of holdings with varying interest-rate sensitivity. Our goal is to prepare the fund for a range of scenarios with a balanced stance.
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