Q3 2023 Putnam Large Cap Growth Fund Q&A
- After very strong performance all year, stocks lost some momentum in the third quarter.
- We anticipate a reasonably slow-growth economy for the remainder of this year and into 2024.
- The ability of certain companies to grow through the headwinds will differentiate individual stock returns.
What can you tell us about market conditions in the third quarter?
After very strong performance all year, stocks lost some momentum in the third quarter. Along with most of the broad market, large-cap growth stocks posted a decline. The Russell 1000 Growth Index has recovered considerably from its drawdown in 2022 and is up nearly 25% year to date. Throughout the quarter, stocks struggled due to persistent inflation, uncertainty about the path of monetary tightening, and concern about economic growth and the possibility of recession. The yield on the 10-year Treasury note surged, reaching a 16-year high and sparking a sell-off for equities. Mortgage rates also surged, hitting multi-decade highs.
A thematic overlay is a distinctive feature of your investment process. Could you tell us about one of your growth themes?
We identify key themes — trends or problems, for example — that businesses are working to address. We constantly monitor the themes to determine which companies are poised to benefit from them. One theme example is autonomous and electric vehicles. Electric vehicles represent less than 3% of new car sales today, and self-driving vehicles are only in the testing phase. However, the revenue opportunity for semiconductor companies that supply these end markets is already meaningful and growing at above-market rates.
One of our holdings within this theme is Cadence Design Systems, the second-largest player in the electronic design automation (EDA) market. The company produces hardware, software, and silicon used to facilitate and enable chip design. We believe we are at the start of a multiyear, potentially a decade-long, shift in growth rates for EDA companies. Cadence stock has been resilient in a variety of market conditions — notably in 2022 — as revenues grew ahead of consensus on strong demand for its software and chip designs.
What is your outlook as we begin the final quarter of 2023?
We anticipate a reasonably slow-growth economy for the remainder of this year and into 2024. Interest rates are likely to move a bit higher, and the impact of higher mortgage rates and student loan repayments will impact consumer sentiment. The ability of certain companies to grow through the headwinds will differentiate individual stock returns.
We believe that the portfolio is fundamentally positioned to succeed in a variety of economic conditions given the types of businesses that we own. We are focused on businesses with pricing power, longer-term contracts, price escalators, a lack of customer concentration, and high barriers to entry. We conduct rigorous analysis that is based on growth prospects over time periods of years rather than months or quarters. At a high level, the companies we seek tend to be in areas of the market that are less vulnerable to fluctuations in the economy.
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