Fund outperforms in a solid quarter for equity markets

Fund outperforms in a solid quarter for equity markets

Q2 2023 Putnam Small Cap Growth Fund Q&A

How were investing conditions in the second quarter?

U.S. stocks of all styles and sizes finished the quarter with gains, but mega-cap technology stocks were the dominant performers. Artificial intelligence [AI] was a major theme for investors in the quarter, as interest in the technology intensified. Demand for AI-related components led to shockingly strong earnings for NVIDIA, a leading supplier of GPUs, which are needed to power generative AI. NVIDIA’s quarterly revenues soared, and its market cap topped $700 billion. Investors became focused on determining which other businesses would benefit and which would be hurt by a pending wave of AI competition and spending.

How has performance compared across asset classes?

For all asset classes, the second quarter finished on a high note, with most indexes up in June after generally flat re-turns in April, and mixed performance in May. Most notable is the year-to-date performance of large-cap growth stocks. For the six months ended June 30, 2023, the Russell 1000 Growth Index returned an eye-popping 29.02%. Small-cap growth stocks were also strong year to date, with the Russell 2000 Growth Index up 13.55%. Year-to-date gains were more modest for small- and large-cap value stocks.

How has the fund performed?

The fund outperformed its Russell 2000 Growth Index benchmark in the second quarter and for the 1-, 3-, 5-, and 10-year and life-of-fund periods ended June 30, 2023. The second-quarter outperformance was largely driven by stock selection, which was positive in 7 of 10 sectors. Stock selection was strongest in the technology sector, while selection in health care detracted somewhat.

As we begin a new quarter, how are you positioning the portfolio?

In the second quarter, we added positions in two businesses that supply the global aerospace and defense industries with specialty metals and alloys. We believe both should benefit from strong multiyear outlooks for commercial aircraft builds and a withdrawal of Russian capacity. We also added a semiconductor equipment provider that stands to benefit from the ongoing demand for smaller and higher-performance chips.

We also exited several positions based on our belief that inflation was peaking and the ability of businesses to pass on higher prices was beginning to slow. We also exited a longtime position in a retailer that had grown larger in market cap and was facing a downturn in its pricing power.

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