Q1 2022 Putnam Growth Opportunities Fund Q&A
- Companies across most industries and sectors faced issues such as supply chain disruptions and higher costs for energy, labor, and materials.
- We stayed focused on companies we believe can grow at above-market rates across a full economic cycle.
- We could see a wider range of stock price outcomes in 2022, which would be favorable for our active management strategy.
How were investing conditions in the first quarter, and how did large-cap stocks fare?
It was a challenging quarter for large-cap growth stocks. Companies across most industries and sectors faced issues such as supply chain disruptions and higher costs for energy, labor, and materials. Concerns about Covid-19 variants and Russia’s invasion of Ukraine weighed on investor sentiment as well. One of the biggest headwinds for the financial markets was concern about inflation and the potential for several interest-rate hikes in the coming year.
How did you manage the portfolio in this environment?
In a difficult environment for growth stocks, the fund performed in line with its benchmark for the first quarter. In managing the portfolio, we stayed focused on companies we believe can grow at above-market rates across a full economic cycle. This means high-quality companies with strong long-term growth potential and a narrow range of outcomes.
Could you describe some key components of your process?
Despite short-term headwinds, our process remains the same. We continue to prioritize above-market growth across a cycle, regardless of the economic backdrop. We focus on the return profiles of businesses we invest in, including return on invested capital, industry structure, and pricing power. We also prioritize an ownership culture, which includes insider ownership, divisional accountability, and managers who act like owners. We seek businesses with high levels of recurring revenue, long-term customer contracts, the ability to set prices, and a lack of customer concentration.
What is your outlook as we begin a new quarter?
Looking ahead, we believe equity markets will remain volatile and growth will become scarcer than it was over the past year, meaning fewer companies will report strong earnings growth. Not all businesses will be able to adequately cope with the effects of inflation, supply chain disruptions, difficult earnings comparisons, and macroeconomic headwinds. As companies navigate this wide array of challenges, it’s reasonable to assume we’ll see a wider range of stock price outcomes in 2022 than in typical years. We believe this will be a favorable environment for our active management strategy because we focus on stocks with a narrower range of likely outcomes.
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