Q3 2023 Putnam Small Cap Growth Fund Q&A
- Most U.S.-based equities posted losses for the third quarter, and growth was weaker than value among small caps.
- The fund outperformed its Russell 2000 Growth Index benchmark in the third quarter and for the 1-, 3-, 5-, and 10-year and life-of-fund periods ended September 30, 2023.
- Excitement over the potential in artificial intelligence remained a prominent theme in the third quarter.
How were market conditions in the third quarter?
Most U.S.-based equities posted losses for the third quarter, and large-cap stocks generally held up better than small caps. Interestingly, declines for growth and value were similar, and the “magnificent seven” mega caps that propelled growth through the second quarter continued to hold firm in the weaker third quarter. Among small-cap stocks, growth was weaker than value for the quarter.
From a macroeconomic perspective, energy prices and interest rates were key trends affecting sentiment in the third quarter. Oil prices surged despite fears of slowing economic growth and the weaker-than-expected China reopening. The yield on the 10-year U.S. Treasury note surged, reaching a 16-year high. Mortgage rates also spiked, hitting multidecade highs and approaching 8%. As for interest rates, the market seemed to get the message of “higher for longer,” as the Federal Reserve appears firmly committed to getting inflation down to its 2% target.
How has the fund performed?
The fund outperformed its Russell 2000 Growth Index benchmark in the third quarter and for the 1-, 3-, 5-, and 10-year and life-of-fund periods ended September 30, 2023. The third-quarter outperformance was largely driven by stock selection, which was positive in 7 of 10 sectors.
Stock selection was strongest in the industrials and information technology sectors. Selection in health care and financials was also positive. Holdings in communications and consumer discretionary detracted somewhat.
Excitement over the potential in artificial intelligence [AI] remained a prominent theme in the third quarter. The continued surge in AI-related demand boosted several of our holdings in the semiconductor and semiconductor equipment industries.
As we begin a new quarter, how are you positioning the portfolio?
We recently exited several positions tied to the health of the consumer, several of which had also benefited from inflation over the past several years. With inflation slowing and the potential for weakness in the consumer sector, we believe the growth outlook for these holdings may deteriorate.
New positions added in the third quarter included a company that enables complicated cross-border transactions such as college tuition payments. Another new holding is a business that enables tracking of advertising spending on mobile platforms. Also, we added a position in a medical device company that specializes in the removal of blood clots, and it is quickly gaining market share.
For informational purposes only. Not an investment recommendation.
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Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
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