Q4 2021 Putnam Small Cap Value Fund Q&A
- The fund outperformed its Russell 2000 Value Index benchmark for the fourth quarter and for the 1-, 3-, 5-, and 10-year and life-of-fund periods ended December 31, 2021.
- Stock selection was the primary driver of the fund’s outperformance in 2021, particularly in the basic materials and health care sectors.
- We believe any initial interest-rate increases in 2022 will not derail the economy and are already priced into stocks.
How did the fund perform in the fourth quarter?The fund delivered a solid return and outperformed its benchmark for the fourth quarter. It also outperformed for the 1-, 3-, 5-, and 10-year and life-of-fund periods ended December 31, 2021.
The fund’s one-year performance was especially strong relative to the benchmark. What were some strategies that contributed to returns?Stock selection was the primary driver of the fund’s outperformance, particularly in the basic materials and health care sectors, as well as in banks. The portfolio’s underweight positioning in health care also aided returns relative to the benchmark.
How did small-cap value stocks perform relative to other styles?In the fourth quarter, small-cap value stocks outperformed small-cap growth stocks by several percentage points. However, they trailed large-cap stocks, both growth and value, by several percentage points. For the full 2021 calendar year, small-cap value stocks outperformed large-cap value as well as large- and small-cap growth stocks.
How were investing conditions in the quarter?The performance of small-cap value stocks was largely driven by Covid-19 trends. The fourth quarter began on an optimistic note as the number of new Covid cases continued to decline from a late-summer peak. As a result, expectations grew for an imminent return to a more normal economy. However, news of the highly contagious Omicron variant caused a rapid reversal of these factors in late November. Small-cap stocks then retreated as investors anticipated a less-robust economy. Stocks rebounded strongly in the last two weeks of the year as fears about Omicron’s economic impact began to ebb.
What is your outlook for the months ahead?Small-cap value stocks are especially sensitive to the rate of economic recovery. In the near term, that recovery is likely to be heavily influenced by the state of the pandemic as well as the supply chain problems that many companies have been combatting. We expect both issues to ease in the coming months. This should improve investor confidence in the economic recovery and raise valuations for small-cap stocks. While the possibility of interest-rate increases by the Federal Reserve later in 2022 could cause volatility in the stock market, we believe any initial rate increases will not derail the economy and are already priced into stocks.
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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