Seeking enablers of long-term growth


Q3 2022 Putnam Growth Opportunities Fund Q&A

  • In periods when growth becomes scarce, we want to own businesses that are unique, with strong balance sheets and revenue visibility.
  • We often favor the "enablers" of growth themes and trends. These are also known as pick-and-shovel businesses.
  • To help manage risk, we analyze each company's vulnerabilities and, when possible, assess how it has performed through difficult times in the past.

What can you tell us about your approach in this year's difficult market environment?

There is no question that large-cap growth stocks have struggled throughout 2022. 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. We believe these are the companies that will distinguish themselves from the competition and the stocks that are most likely to return to favor.

As part of your theme-based approach, you look for "enablers." What does that mean?

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.

An example of an enabler can be found within our personalized medicine theme. Personalized medicine refers to the customization of medical treatments based on an individual's specific needs and genetic makeup. 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.

In light of the market challenges, what can you tell us about your risk management?

Our investment process includes an element of research that many investors don't consider: looking beyond growth potential to analyze the vulnerabilities of a business. Before any company enters our portfolio, we need to know what could go wrong. We analyze each company's potential weaknesses 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 control 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.