Q1 2022 Putnam Large Cap Value Fund Q&A
- In a challenging first quarter for financial markets, the fund delivered a positive return, while its benchmark posted a loss.
- We aim to find companies that have pricing power — the ability to raise prices to cover their increased costs without negatively impacting demand.
- We also seek to manage interest-rate risk by maintaining a mix of holdings with varying interest-rate sensitivity.
How has the fund performed?
Darren: In a challenging first quarter for financial markets, the fund delivered a positive return, while its benchmark posted a loss. The fund also outperformed the benchmark Russell 1000 Value Index for the 1-, 3-, 5-, and 10-year periods ended March 31, 2022. In terms of sectors for the quarter, holdings in health care and industrials contributed most to performance, while financials were the largest detractor.
Inflation is a top concern for investors. How is it affecting your investment strategy?
Lauren: We’ve clearly seen that inflation can have wide-ranging effects — from the labor markets to transportation to raw materials and beyond. U.S. inflation reached a 40-year high in February, which has broad implications for the global economy. As portfolio managers, we don’t try to predict the duration or magnitude of inflationary forces. However, we do focus on how it might impact the profitability of the companies we own. We aim to find companies that have pricing power — the ability to raise prices to cover their increased costs without negatively impacting demand. But we’re also mindful of instances where pricing power will be challenged. For example, we’ve seen banks reporting higher levels of wage inflation. This tends to be a cost that is not easy to pass on, especially in an industry as competitive as banking.
Through careful portfolio construction and stress testing, we seek to manage the portfolio’s sensitivity to inflation as well as to interest-rate and bond-yield movements. Looking back to last summer, the market wasn’t expecting any hikes from the Federal Reserve in 2022. Fast-forward eight months, and the Fed is projecting six or more hikes this year. With our risk management process, we work to keep the portfolio from meaningfully underperforming in a rising-rate environment. We also seek to manage interest-rate risk by maintaining a mix of holdings with varying interest-rate sensitivity.
Volatility can be an advantage for actively managed portfolios. How has it influenced your strategy?
Lauren: There are two basic strategies for taking advantage of volatility — offense and defense. On the defense side, we have trimmed or liquidated holdings that outperformed significantly over a short time frame. For offense, it’s about exploring new ideas and finding stocks the market has sold off due to short-term issues. Recently, supply chain problems have been a common theme, and they have caused investors to overlook improving fundamentals for many businesses.
You also manage non-U.S. value portfolios. Are you seeing opportunities in value stocks outside the United States?
Darren: We believe non-U.S. markets currently offer more value opportunities than U.S. markets. For example, we see rich opportunity sets in Europe and Japan, which are lagging the U.S. in their macroeconomic cycles. In many cases, valuations in these markets are significantly more attractive, and we anticipate improving earnings growth will boost share prices.
Lauren: Non-U.S. markets are also lagging in terms of fiscal stimulus. Here in the U.S., we saw significant stimulus measures implemented early in the Covid-19 pandemic. In Europe, on the other hand, the stimulus push will be greater over the next few years. This is likely to be a tailwind for value stocks in Europe. Also, many of the classic value sectors in international markets haven’t recovered nearly as much as they have in the U.S.
What is your outlook as we begin a new quarter?
Darren: The financial markets are likely to face continued volatility due in large part to uncertainty over the Russia-Ukraine War. Inflation, supply chain disruptions, and shortages of critical goods will also be headwinds for the markets. For value stocks specifically, it’s important to focus on quality over cheapness. The winners in a value portfolio are those that are underappreciated and undervalued. They are companies that are poised to exceed expectations for earnings and revenue growth, that are more disciplined in their capital expenditures, and that will return more capital to shareholders than anticipated.
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