Q4 2021 Putnam Small Cap Growth Fund Q&A
- The fund outperformed its benchmark for the fourth quarter as well as for the 1-, 3-, 5-, and 10-year and life-of-fund periods ended December 31, 2021.
- The fourth quarter capped a volatile year in terms of market leadership.
- Our one-year outperformance was largely driven by positive stock selection in 8 of 10 sectors.
How did the fund perform in the fourth quarter?
For the quarter, the fund outperformed its benchmark, the Russell 2000 Growth Index. The fund also outperformed for the 1-, 3-, 5-, and 10-year and life-of-fund periods ended December 31, 2021. The fourth-quarter outperformance was driven by positive stock selection in 6 of the 10 sectors, with health care, industrials, and consumer discretionary holdings contributing most. Stock selection in technology detracted from performance.
The fund’s one-year performance was especially strong relative to the benchmark. What were some strategies that contributed to returns?
The one-year outperformance was largely driven by stock selection in 8 of 10 sectors. Our stock selection in health care and information technology contributed the most to relative performance, while selection in financials and consumer staples detracted slightly. At the industry level, the top four contributors were biotechnology, software, health care equipment and supplies, and semiconductors/semiconductor equipment.
How did small-cap growth stocks perform relative to other styles?
For the quarter, we saw a wide divergence in performance across the market. The performance of large-cap stocks, as measured by the S&P 500 Index, surpassed that of small-cap stocks, as measured by the Russell 2000 Index. Among large caps, growth outperformed value, while among small caps, value outperformed growth. In the fourth quarter, the Russell Microcap Index fell 2.67%, perhaps continuing the “flight to quality” that favored large caps beginning in the summer of 2021.
We also saw considerable deviation in sector performance. The health care sector fell roughly 11% in the quarter, and consumer discretionary declined slightly. Information technology and industrials delivered gains.
How did market leadership look for the 2021 calendar year?
The fourth quarter capped a volatile year in terms of market leadership. Large-cap growth stocks ended the year ahead of large-cap value. Among small-cap stocks for the full year, growth lagged value meaningfully. The Russell Microcap Index rose 19.31% for the year, outperforming the Russell 2000 Index. All of the micro-cap outperformance occurred in the first quarter of 2021.
What is your outlook as we enter a new year?
Looking ahead, we think the equity markets may remain somewhat unsettled. We are hopeful we may finally be able to put the Covid pandemic disruptions behind us by midyear in many of the developed markets. However, there is still a lot of uncertainty in that forecast. Additionally, investors will again be faced with largely unprecedented circumstances as we “reemerge” from the pandemic and struggle with a changing monetary policy framework.
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