Our thematic investing is much more than “fishing in the right ponds”

Equity Insights offers research and perspectives from Putnam’s equity team on market trends and opportunities.

This month’s authors: Richard E. Bodzy and Gregory D. McCullough, CFA, Portfolio Managers

The growth themes in our portfolio generate a lot of interest from investors. Among the 12 themes are “The humanization of pets,” “The experience economy,” and our newest one, “A healthier tomorrow.” All of our themes represent exciting multiyear trends that we believe can drive sustained growth for many businesses. But finding the best companies requires much more than just “fishing in the right ponds.” Success involves digging into individual company fundamentals, their business models, and the structure of their markets. It also requires an element of research that many investors don’t consider: Looking beyond growth potential to analyze the vulnerabilities of a business and potential downside risks.

The growth potential in “enablers”

In our view, it’s not enough to simply identify a business that is associated with a long-term growth theme. We scrutinize businesses in the context of their industries overall, and often we favor the “enablers” of growth themes and trends. Also known as “pick-and-shovel” businesses, these companies provide products or services that enable the growth of the overall industry. Examples in our portfolio include:

Theme: 5G connectivity | Stock: American Tower

The transition to 5G technology is an important growth theme that we believe will play out in waves globally over the next 15 years. Within this theme, we own American Tower, which rents space on towers and rooftop antennas to wireless carriers and broadcasters. This company is indifferent to which mobile provider will gain the most market share, which might be a challenge to accurately predict. Instead, American Tower stands to benefit from the $30 billion-plus in infrastructure that’s necessary to transition from 4G LTE to 5G.

Theme: Personalized medicine | Stock: Lonza

Personalized medicine refers to the customization of medical treatments based on an individual’s specific needs and genetic makeup. We believe we’re in the early innings of a broad shift to personalized medicine. Many companies are making great strides in cell and gene therapy, with thousands of treatments in various phases of development.

However, when it comes to biopharmaceuticals, there are many complexities, uncertainties, and possible outcomes. Rather than trying to forecast which individual drugs and treatments will be successful, we are invested in Lonza, a company that opened the world’s largest dedicated cell-and-gene-therapy facility for businesses that are developing drugs. Lonza is the outsourced manufacturer for over 1,000 different therapies across modalities. We believe Lonza should benefit as any of these treatments successfully come to market.

We dig deep on downside risk

Before any company enters our portfolio, we need to know what could go wrong with the business. We analyze each company’s vulnerabilities and, when possible, assess how it has performed through difficult times in the past. We also discuss this with management teams of the companies themselves. We analyze the range of operational and financial outcomes for a business. To help manage risk at the portfolio level, we target companies with a narrow range of outcomes and we prefer capital-light businesses.

Risk management is particularly important in cyclical industries that are heavily influenced by economic shifts. The semiconductor industry is a good example, and Cadence Design Systems, a stock we own, shows how we approach cyclical challenges:

Cadence Design Systems

  • Cadence provides chip-design software and hardware to semiconductor companies
  • While its end market is highly cyclical, Cadence benefits from R&D spending by chip companies, which tends to see consistent growth, even through market downcycles
  • Chip companies are compelled to continue spending on the next generation of chips, keeping demand growth steady for Cadence
  • In 2008 and 2009, Cadence was able to grow despite incredible macroeconomic stress and end market weakness for semiconductors
  • Cadence is a key enabler of the semiconductor industry, and allows us to invest in the attractive long-term growth potential in semiconductors with less cyclical risk

We develop new themes to pursue new opportunities

The themes in our portfolio do not change often because they are based on secular trends and our multiyear outlooks. However, we are constantly considering new ones based on changing markets and consumer preferences. To that end, our newest theme is “A healthier tomorrow.” Across the globe, people are prioritizing exercise, diet, and environmental health, and they want greater access to and control over their personal health data.

What’s exciting is that this theme encompasses many different industries, including hospital operators, HVAC equipment manufacturers, medical device makers, and workout apparel and skincare brands. We expect demographic trends to drive increased awareness of this theme, and we anticipate that public policy can further support growth in these markets.

We believe great companies can become even better in challenging markets.

Preparing for slowing macroeconomic growth

There is no question that large-cap growth stocks have struggled in this year’s difficult macroeconomic environment. But we believe great companies can become even better in challenging markets. In periods when growth becomes scarce, we want to own businesses that are unique, with strong balance sheets and revenue visibility. We look for companies that are competitively advantaged, are market share gainers, and have customers that depend heavily on them. We want businesses with the ability to grow at above-market rates and to sustain that growth across an economic cycle. In our view, these are the companies that will distinguish themselves from the competition and the stocks that are most likely to return to favor.

link to Putnam Large Cap Growth Fund


The views and opinions expressed are those of the authors, are subject to change with market conditions, and are not meant as investment advice.

Our investment techniques, analyses, and judgments may not produce the outcome we intend. The investments we select for the fund may not perform as well as other securities that we do not select for the fund. We, or the fund's other service providers, may experience disruptions or operating errors that could have a negative effect on the fund. You can lose money by investing in the fund.

Putnam Large Cap Growth Fund holdings as of 6/30/22: American Tower (2.00%); Lonza Group (0.71%); Cadence Design Systems (1.72%).