Q3 2021 Putnam Small Cap Growth Fund Q&A
- The fund outperformed its benchmark for the third quarter as well as for the 1-, 3-, 5-, and 10-year periods ended September 30, 2021.
- During the quarter, we saw continued gyrations in the small-versus-large and growth-versus-value performance trends.
- We continue to focus on what drives stock prices over longer time periods.
How did the fund perform in the third 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 periods ended September 30, 2021. Third-quarter outperformance was almost entirely driven by stock selection. Holdings in healthcare and information technology contributed most to returns while financials and energy stocks detracted by modest amounts.
How did small-cap growth stocks perform relative to other styles?
During the quarter, we saw continued gyrations in the small-versus-large and growth-versus-value performance trends. Among small-cap stocks, value outperformed growth for the quarter.
How were investing conditions overall in the quarter?
There was limited good news in the marketplace during the third quarter. While there is always a list of things to worry about, this quarter’s seemed longer and more severe than most. Leading the list were rising cases of the Delta variant of Covid-19 around the globe. In addition, the Chinese investing landscape remained a bit unsettled due to fears of a large potential bankruptcy in the real estate area. This compounded prior concerns about the regulatory oversight of many Chinese technology companies. In the United States, we saw surging transportation costs and shipping delays as well as ongoing microchip shortages. The chip shortages will affect many businesses, but the pain seems especially acute in auto production. Other challenges included labor shortages in areas like homebuilding and restaurants, which slows the economic recovery.
On top of these issues, we also saw “normal” disruptive events like hurricanes and flooding. These seemed to put added stress on supply chains, which were too tight to handle such disturbances. With this backdrop, we saw a minor flight to quality. Large-cap stocks that were perceived as safer tended to outperform small-cap stocks.
What is your outlook for the months ahead?
As we enter the final quarter of 2021, we are starting to see negative earnings revisions, which we haven’t seen in a while. Coming out of the pandemic-induced disruptions, companies had been routinely beating conservative earnings assumptions. The market is now faced with the prospect that the “reopening upside” may not be as great as many anticipated, at least in select areas of the economy.
However, we believe most of these issues are somewhat temporary in nature. They should get worked out with the passage of time, and in our view, the future remains quite bright. In this environment, we continue to focus on what drives stock prices over longer time periods, which is the long-term growth in profits. We then apply that to our active, fundamental research of individual companies.
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