Q1 2023 Putnam Large Cap Value Fund Q&A
- The fund outperformed the benchmark for the first quarter and the 1-, 3-, 5-, and 10-year periods ended March 31, 2023.
- Large-cap value stocks delivered modest gains in a quarter characterized by many macroeconomic challenges.
- We are generally more cautious after the recent market advance, which was largely due to multiple expansion rather than earnings growth.
How did value stocks perform in the first quarter?
Lauren: Large-cap value stocks delivered modest gains in a quarter characterized by many macroeconomic challenges. Equity markets experienced volatility due to persistent inflation, concerns about economic growth, and continued interest-rate hikes by the Federal Reserve. The quarter also brought significant turmoil to the banking industry with the widely publicized bankruptcies of two U.S. regional banks as well as a Swiss government-engineered takeover of Credit Suisse by UBS. For the quarter, large-cap growth stocks outperformed large-cap value by a wide margin.
How did the fund perform?
Darren: The fund outperformed the benchmark for the first quarter and for the 1-, 3-, 5-, and 10-year periods ended March 31, 2023. Stock selection drove the outperformance, while sector allocation decisions had a minimal overall impact. Positions in communication services, health care, and consumer discretionary were top contributors to performance. Stock selection in the industrials, financials, and real estate sectors detracted from returns. The benefit of our underweight position in the challenged financials sector was offset by an underweight position in the top-performing communication services sector.
Financials make up a significant portion of the value universe. What are your thoughts on the regional bank crisis?
Darren: It’s important to note that this was not a systemic problem like that of the global financial crisis in 2008. It was not a solvency issue, but rather a liquidity issue, which the Fed has both the tools and the experience to manage. The Fed moved quickly and effectively, with a focus on regional banks most at risk — those with less diversified business models. The second-order effects of the crisis may be more challenging for investors. Deposits have flowed out of smaller banks and into the larger institutions. This has had the effect of drying up credit availability and tightening financial conditions beyond what the Fed is already doing in terms of raising interest rates. As financial conditions get tougher, the chances of a recession increase.
Lauren: In terms of our portfolio, we believe our positioning, which favored large banks over regional banks, was beneficial in navigating the challenges. Also, within regional banks, we owned PNC, which held up better than many other regional banks. It is known as a “super regional” bank, is the fifth-largest bank in the country, and is well diversified. No single industry represents more than 15% of its loan book.
Going forward, PNC and the largest banks should benefit from consumers’ flight to quality. Also, the size and scale of these banks should enable them to handle any increased regulation or compliance requirements in the wake of the crisis. At the same time, smaller banks may have a harder time keeping up with any new regulation or capital requirements.
What is your outlook for the months ahead?
Darren: 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.
Lauren: Along with the ongoing tightening of financial conditions, particularly among regional banks, we are generally more cautious after the recent market advance, which was largely due to multiple expansion rather than earnings growth. The market appears to be setting itself up for a negative surprise as first-quarter earnings are expected to show an overall decline.
As always, 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. And we seek to manage the fund’s sensitivity to these challenges through careful portfolio construction and stress testing.
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
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.
Putnam Retail Management.
