Q2 2021 Putnam Small Cap Growth Fund Q&A
- During the second quarter, we saw some reversal of first-quarter trends, but volatility remains high.
- We are seeing year-over-year measures of inflation and GDP that we know are massively skewed and difficult to interpret.
- We believe the market is unlikely to reward earnings growth that is based purely on a post-pandemic rebound.
How did the fund perform in the second quarter?
For the quarter, the fund delivered a positive return but slightly underperformed its benchmark, the Russell 2000 Growth Index. The minor underperformance was partially due to sector allocation, particularly an underweight allocation to the energy sector. Stock selection was mixed, with generally strong performance in the information technology sector that was largely offset by weaker performance for several consumer staples and consumer discretionary holdings.
How did small-cap growth stocks perform relative to other styles?
During the second quarter, we saw some reversal of first-quarter trends. In the first quarter, small-cap stocks outperformed large-cap stocks by a considerable margin. In the second quarter, large caps pulled ahead once again. Looking at year-to-date performance, we are seeing returns that are somewhat similar across large and small capitalizations. Our portfolio does not typically focus on micro-cap stocks, due to their liquidity risks. However, micro caps have been a notable force in 2021. They significantly outperformed the broader small-cap universe early in the year, although this settled down in the second quarter. In terms of investment styles among small caps, the outperformance of value over growth was modest in the second quarter relative to much stronger outperformance in the first quarter.
How were investing conditions overall in the second quarter?
The equity market continued to exhibit a lot of volatility in the second quarter, and we saw even more turbulence within some underlying sectors and industries. This should be expected as the markets are grappling with unfamiliar territory. Investors are weighing the impact of reopening economies after a global shutdown, continued efforts worldwide to combat Covid-19, and a variety of government stimulus measures. Also, we are now seeing some index returns up more than 100% off their 2020 lows, which is a rarity in investment history. On the macroeconomic side, we are seeing year-over-year measures of inflation and GDP that we know are massively skewed and difficult to interpret using historical norms.
How are you positioning the portfolio in this environment?
We believe it is important to focus on what drives stock prices over longer time periods, and then apply that to our active, fundamental research of individual companies. In our portfolio, we seek to target companies that can grow profits at high rates for long periods, and we seek to pay a reasonable price for that growth. In 2021, many companies are likely to experience considerably higher earnings growth rates coming out of the pandemic. However, we believe the market is unlikely to reward earnings growth that is based purely on a post-pandemic rebound. Rather, we believe companies that offer sustainable growth potential through market cycles continue to offer the greatest long-term potential.
More in: Equity,