Q4 2022 Putnam Large Cap Value Fund Q&A
- The fund slightly underperformed the benchmark for the fourth quarter, but outperformed for the 1-, 3-, 5-, and 10-year periods ended December 31, 2022.
- In 2022, large-cap value stocks outperformed large-cap growth by more than 21%.
- While we foresee an end to interest-rate hikes in 2023, we do not expect cuts any time soon.
How did value stocks perform in the challenging year for financial markets?
Lauren: Large-cap value stocks had a strong fourth quarter, delivering solid gains in October and November but declining in December. For the year overall, value stocks had much better performance than growth. In 2022, large-cap value outperformed large-cap growth by more than 21%.
How did the fund perform?
Darren: For the full year, the fund outperformed its Russell 1000 Value Index benchmark by a considerable margin. This performance strength was broad based, with no individual sector or name dominating returns. Consistent with our strategy, stock selection was the largest driver of outperformance for the year. The fund has also outperformed for longer periods, including the 3-, 5-, and 10-year periods ended December 31, 2022.
For the fourth quarter, the fund slightly underperformed the benchmark. Stock selection in consumer staples, energy, and utilities were the main sources of stock-specific weakness. This was offset somewhat by strength in financials and industrials. The fund also benefited from underweight positions in communication services and real estate.
What are your thoughts on economic conditions as we enter 2023?
Lauren: As the economy shows signs of slowing, we still see surprising strength and durability in the consumer sector. This, we believe, is the result of low unemployment and still-high levels of savings for consumers at all income levels. However, this may shift as Federal Reserve tightening continues. At the same time, we are watching for inflections in key indicators such as supply chains, inflation, labor markets, and consumer spending that may give the Fed a reason to pause.
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. Strength in the U.S. dollar has been a headwind for U.S. exporters, but they could find relief as the Fed reaches the end of its hiking phase while other central banks continue tightening.
How have you positioned the portfolio in this environment?
Lauren: We don’t try to predict the magnitude or duration of macroeconomic forces. Instead, we focus on how they might impact the profitability of the companies we own. For example, many sectors in our value universe are relatively immune to inflationary pressures. However, for those that are challenged, we aim to find companies that have pricing power. We tend to see pricing power in companies with concentrated end markets. However, for larger discretionary products like furniture and electronics, it depends on whether consumers are willing and able to spend in this inflationary climate.
What is your outlook for the months ahead?
Darren: For the foreseeable future, we expect continued volatility and modest returns for equity markets. Labor markets remain tight, which will make inflation an ongoing threat, especially for services, a key component of the Consumer Price Index. While we do foresee an end to interest-rate hikes in 2023, we do not expect cuts any time soon. We believe the Fed is likely to hold rates at the peak level for longer than many investors expect. As always, we seek to manage the fund’s sensitivity to macroeconomic challenges through careful portfolio construction and stress testing.
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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