Q1 2023 Putnam Small Cap Growth Fund Q&A
- Small-cap growth stocks outperformed their value counterparts by a significant margin in the first quarter.
- The fund outperformed its benchmark for the first quarter and for the 1-, 3-, 5-, and 10-year and life-of-fund periods ended March 31, 2023.
- The fund’s outperformance was largely driven by stock selection, which was strongest in the technology sector.
How were investing conditions in the first quarter?
The first quarter finished with most U.S.-based equities delivering gains, although they came with a lot of week-to-week volatility. Overall equity market performance was led by large technology companies, and the quarter was marked by significant swings in interest-rate expectations. Markets were also challenged by a crisis in the banking industry, where investors witnessed an old-fashioned bank run at modern-day speed. It resulted in the bankruptcies of Silicon Valley Bank and Signature Bank, and emergency action from the Federal Reserve.
Most equity indexes had started to drift lower after their peak on February 2 and as businesses began to report earnings in the following six weeks. Indexes dropped again in response to the banking crisis before stabilizing toward the second half of March. This tumultuous period also saw a Swiss government-engineered takeover of Credit Suisse by UBS, ending years of weakening business lines for Credit Suisse. In the U.S., the Fed worked to reassure investors that deposits were safe, although a full guarantee would require an act of Congress, which does not appear to be imminent.
How was performance for small-cap growth stocks versus other asset classes?
Small- and large-cap growth stocks outperformed their value counterparts by a significant margin in the first quarter. While the large-cap growth index peaked at the close of the quarter, the majority of other size and style indexes topped out in early February and then retreated for much of the next two months.
How did the fund perform?
The fund outperformed the benchmark in the first quarter and for the 1-, 3-, 5-, and 10-year and life-of-fund periods ended March 31, 2023. The outperformance was largely driven by stock selection, while sector allocation contributed modestly. Cash and currency fluctuations were a slight drag on returns. Stock selection was strongest in the technology sector, while selection was weakest in health care. Selection was positive in 6 of 10 sectors.
As we begin a new quarter, how are you positioning the portfolio?
In the first quarter, we added positions in businesses that are levered to industrial activity and new home construction. Within industrial manufacturing, we added companies that have broad end market exposures, through software for industrial design and engineering, as well as through disposal of hazardous waste streams. We believe companies exposed to home building offer an attractive outlook for 2024 despite the well-known decline in demand in 2023. We believe interest rates are near a peak, which should allow for demand to reemerge.
We exited several positions that were tied to the general technology-spending landscape. For some of these firms, their sales enablement data and analytics services are valuable in our view, but we believe the businesses are set to grow at slower rates than we previously estimated. This is due largely to a macroeconomic outlook that will likely reduce spending on software. Similarly, we believe demand for other services, such as technology consulting, is likely to be delayed or canceled, leading to a slower growth outlooks for the businesses. Finally, prior to the banking crisis, we exited ServisFirst Bancshares, as the company was seeing more competition for deposits, which are needed to fund its generally higher-than-average loan production.
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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