Style preferences fluctuate in a challenging quarter

Q3 2021 Putnam Growth Opportunities Fund Q&A

  • In the third quarter, investor style preferences continued to oscillate between growth and value.
  • Our process is consistent regardless of moves in interest rates, inflation expectations, Covid-19 cases, or any other macroeconomic factors.
  • E-commerce and payment processing, one of our 12 portfolio themes, became more relevant as a result of the Covid-19 pandemic.

How were investing conditions in the third quarter?

Investor style preferences continued to oscillate between growth and value. For the third quarter, large-cap growth stocks and the fund posted modest gains. Late in the quarter, we saw a clear rotation into lower-price-multiple stocks. This was due in large part to the rising 10-year U.S. Treasury yield. With this as a backdrop, some of our newer ideas featured stocks with lower multiples relative to the rest of the portfolio. These are typically less sensitive to interest rates. Overall, however, our process remains consistent regardless of short-term moves in interest rates, inflation expectations, Covid-19 cases, debt-ceiling discussions, or any other macroeconomic factors.

Could you describe some key components of your process?

From a fundamental perspective, we apply several criteria when analyzing businesses. One is the level of growth potential for the business and the durability of that growth. We seek companies we believe can grow at above-market rates, regardless of the market context. Then we assess growth durability — structural and other advantages that tell us a company has strong potential to grow over the longer term. Another notable feature of our process is looking for an ownership culture. This means we seek companies whose management acts like owners and the interests of their executives align with the interests of their shareholders.

Importantly, we combine these company-specific factors with a top-down thematic lens. Together with a team of research analysts, we examine global trends as well as problems and potential solutions. From this analysis, we identify themes that could drive sustained growth for businesses over a multiyear time horizon. There are currently 12 themes across the holdings in our portfolio. Approximately 90% of the companies held by the fund are tied to at least one of these themes.

Could you offer an example of one of those themes?

One theme, which gained traction as a result of the Covid-19 pandemic, is e-commerce and payment processing. Over the past 18 months or so, increased digitization is one of the major shifts we have seen in the economy. Prior to the pandemic, peer-to-peer electronic money transfers were already becoming much more common and accepted. This trend accelerated as they became a necessity for many businesses and consumers. E-commerce transactions and one-button checkout are taking share from cash and physical card payments. The U.S. e-commerce market has grown at 16% annually since 2001, well ahead of aggregate retail sales during the same time period.