Q2 2023 Putnam Large Cap Value Fund Q&A
We are halfway through the year. How have conditions been for equity investors?
Lauren: Market performance was strong through the first half of the year, but much of that strength has been concentrated in mega-cap technology stocks. Broader market returns have been more muted. As of the midpoint of the year, value stocks are relative underperformers. We believe recession fears were largely the cause of value underperformance, as value stocks are typically more exposed to economically sensitive sectors. Pressure in the banking sector, which represents a large portion of the value universe, also hurt value stock performance. After the widely publicized failures of some U.S. regional banks earlier this year, investors have been concerned about rising capital requirements for banks.
How has the fund performed?
Darren: The fund outperformed the benchmark for the second quarter and for the 1-, 3-, 5-, and 10-year periods ended June 30, 2023. Stock selection drove the second-quarter outperformance, while sector allocation decisions had a minimal negative impact. Positions in information technology, communication services, consumer discretionary, and utilities were top contributors to performance. Holdings in consumer staples and health care detracted from returns. Also in the quarter, we significantly reduced our position in Meta Platforms, as it was removed from the benchmark Russell 1000 Value Index when the index was rebalanced in June. The reduction was designed to align our active risk in the portfolio with our conviction in the position.
What is your outlook for the months ahead?
Lauren: As a result of value's relative underperformance, we are seeing some exciting opportunities in terms of valuation. From a macroeconomic perspective, inflation remains the key focus of the Federal Reserve's policy decisions. It appears likely that we will see two or three more interest-rate hikes this year. The employment picture remains quite strong, which supports the view that an economic soft landing is still possible.
Darren: We believe some post-pandemic headwinds bear watching. As pandemic savings continue to dwindle, consumer sentiment could also decline, and we are already seeing some signs of fatigue. Also, the financial burden for many consumers will increase as pandemic-related benefits wind down. Student loan repayments resume later this year, and the significant increase in SNAP benefits, which offer food assistance to low-income individuals, will be expiring.
We continue to analyze the overall market environment in the context of how it affects our individual stock holdings. Our focus is on stock selection, while aiming to keep the portfolio as immune as possible to macroeconomic challenges. This includes stress testing the portfolio against a number of different scenarios, such as rising interest rates, recessionary pressures, and style rotations.
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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