Q3 2022 Putnam Large Cap Value Fund Q&A
- The fund outperformed the benchmark Russell 1000 Value Index for the third quarter and for the 1-, 3-, 5-, and 10-year periods ended September 30, 2022.
- Year to date, value stocks have outperformed growth by almost 13%. Among value stocks in the third quarter, energy was the only sector with a positive return.
- We are paying close attention to corporate earnings estimates and the potential for downward revisions as the global economy slows.
How were conditions for investing in the third quarter?
After a very difficult first half of 2022, equity markets had a brief recovery in the month of July. However, we returned back to bear market territory in August and September. Contributing factors included persistent high inflation, ongoing interest-rate increases, tight supply chains, and deteriorating low-end retail spending patterns.
How did value stocks perform?
Growth stocks outperformed value for the quarter, but this was entirely due to the rally in July. Value outperformed in both August and September, and year to date, value stocks have outperformed growth by almost 13%. Within value, energy was the only sector with a positive return for the quarter. Energy and utilities are the only two sectors where corporate earnings are expected to increase for the 2022 calendar year. The communication services sector was particularly weak in the third quarter, and it has experienced the most severe reduction in earnings expectations, along with consumer discretionary.
How did the fund perform in this environment?
In this tough quarter, the fund declined less than its Russell 1000 Value Index benchmark. The fund also outperformed the benchmark for the 1-, 3-, 5-, and 10-year periods ended September 30, 2022. In terms of sectors, holdings in health care and information technology contributed most to performance for the quarter.
What helped the fund outperform its benchmark?
Fund performance was particularly durable in the weaker two months of the quarter. The bulk of our outperformance is attributable to stock selection, but our underweight positions in two of the weakest sectors — communications services and real estate — were also helpful. Holdings in consumer staples, health care, and consumer discretionary were top contributors to relative performance. As always, we had a balanced portfolio that was focused on the fundamentals of individual businesses rather than on macroeconomic, factor, or sector trends.
What is your outlook as we enter the final quarter of 2022?
The current macroeconomic challenges affect all companies broadly, but their impact on the consumer sector — particularly the lower end — warrants careful examination. We are considering the impact on retail inventory levels, credit trends, and the sales mix of discretionary and durable items. Also, we are paying close attention to corporate earnings estimates and the potential for downward revisions as the global economy slows in response to aggressive central bank policies. The U.S. Federal Reserve has been among the most aggressive, which has boosted the U.S. dollar and put U.S. exporters at a disadvantage.
We continue to analyze the overall market environment in the context of how it affects our individual stock holdings. Our focus is on stock selection, while aiming to keep the portfolio as immune as possible to macroeconomic challenges. This includes stress testing the portfolio against a number of different scenarios, such as high inflation, rising interest rates, style rotations, and macro trends.
For informational purposes only. Not an investment recommendation.
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