Q1 2023 Putnam Large Cap Growth Fund Q&A
- After several challenging quarters, large-cap growth stocks delivered solid returns in the first quarter.
- Cost management actions on the part of many businesses should contribute to margin integrity and profitable growth.
- We are optimistic about the innovation we believe will come from traditional growth sectors in the next 3 to 5 years.
What can you tell us about market conditions in the first quarter?
After several challenging quarters, large-cap growth stocks delivered solid returns in the first quarter. Our investing process remained consistent, and we were encouraged to see the market was increasingly attracted to the types of stocks we favor, despite continued macroeconomic challenges.
We focus on companies with strong long-term growth potential and a narrow range of operational and financial outcomes. We look for higher-quality business models and stronger track records that will likely prove more resilient in a wide array of operating and market scenarios.
Do you believe conditions will continue to favor large-cap growth stocks in the months ahead?
Yes, we are optimistic about prospects for large-cap growth. Through most of last year, the types of stocks that outperformed were largely in the value universe or did not meet our specific growth criteria. However, growth stock multiples have pulled back substantially over the past 12 to 18 months. At the same time, forward revenue and earnings growth estimates have come down to more reasonable — less “heroic” — levels. And we are starting to see upside again in consensus growth estimates for the stocks that we own, which is encouraging. Finally, we believe the Federal Reserve will stop its monetary tightening within the next 12 months, and interest rates will stabilize.
For large-cap technology stocks specifically, many companies are no longer chasing every incremental dollar of revenue at any cost. Cost management actions on the part of many businesses should contribute to margin integrity and profitable growth. More broadly, we are optimistic about the innovation we believe will come from traditional growth sectors in the next 3 to 5 years. These sectors include technology, health care, consumer discretionary, and industrials. Conversely, the energy sector is coming off a massive run-up in 2022, and it has pulled back significantly year to date. Another sector with immense year-to-date challenges is financials, particularly some of the less well-capitalized banks.
What insights would you offer to growth investors today?
You have to be present to win. This means staying invested for the long term in good markets and challenging ones. We don’t try to identify which day, month, or quarter a stock will outperform. We look for durable growth companies that tend to perform competitively within their industries across a full economic cycle. We also look for companies that offer the powerful combination of an advantaged business model and a capable, properly incentivized management team.
More in: Equity,