Putnam US Value Equity
Mandate commentary
Q4 2024
Highlights
① In a strong quarter for U.S. value stocks, the portfolio underperformed. Stock selection was the main driver of underperformance.
② North American equities finished the year strongly on the back of post-election optimism.
③ A continued easing of monetary policy helped boost performance.
Mandate overview
While U.S. stocks posted a gain in the fourth quarter, value stocks fared differently, posting a modest negative return for the period. They began the quarter with a modest decline in October and experienced a strong month in November following the U.S. presidential election results. In December, however, investor concerns included disappointing outlooks from the information technology sector, plus uncertainty surrounding policy shifts resulting from the new U.S. administration and the pace of U.S. Federal Reserve (the Fed) policy easing. Value stocks were particularly hard hit in the month.
In this environment, the portfolio slightly outperformed its benchmark. Relative performance was driven by strong stock selection, with sector allocation decisions having a slight negative impact. In the weak period for the benchmark, a small cash allocation helped relative results.
Stock selection was strongest in the financials and consumer staples sectors, with information technology and energy holdings providing a partial negative offset. From a sector allocation perspective, the portfolio’s relative underweight exposure to the top-performing financials sector was the main detractor.
Mandate: U.S. Large-Cap Value Concentrated SMA
Performance contributors
Apollo Asset Management — The overweight position was a top contributor as the U.S. election outcome boosted financials sector stocks broadly and the company specifically reported strong results.
Capital One Financial — An overweight position had a positive impact as U.S. election results were viewed positively for the financials sector, particularly Capital One, which has a pending acquisition.
Citigroup — The portfolio benefited from an overweight position as large bank stocks responded positively to the U.S. election results and the potential for decreased regulation on banks.
Performance detractors
PutleGroup — An overweight position was the top detractor. Dovish comments from the Fed regarding the expected trajectory for interest rates weighed on the homebuilder.
Freeport-McMoRoan — An overweight position detracted. Concerns over the health of China’s economy has weighed on commodity prices and producers.
JPMorgan Chase — A relative underweight position weighed on results. Results of the U.S. election boosted most financials sector stocks.
Total gross returns:
Total return |
QTD |
YTD |
1YR |
3YR |
5YR |
since INC. (NOV. 14, 2016) |
PUTNAM US VALUE EQUITY |
-1.86% |
19.69% |
19.69% |
11.34% |
13.77% |
14.42% |
Mandate repositioning
At the start of 2025, valuations and emotions are high across most areas of the market, which puts stocks at risk for any type of surprise or disappointment. The portfolio management team expects continued volatility related to the new U.S. presidential administration, the stability of economic growth, the potential for persistent inflation, and actions — or lack thereof — from the Fed.
The portfolio management team believes ongoing but moderating economic growth will be supportive of earnings growth, and hopefully will be enough to offset a multiple contraction. Value stocks should benefit in the event of a broadening of the market. They also offer more supportive valuations in an environment of potential surprises. Also, the portfolio management team believes traditional value sectors have the ability to perform well in an ongoing higher-rate environment.
By sector, the portfolio remains within +/-5% of benchmark weight. Currently, the largest overweight sector positions are consumer staples and materials. While financials is the largest sector weight in the portfolio, it is one of the largest relative underweight sector positions. Exposures to the industrials, real estate and communication services sectors also remain below benchmark weight.
Market overview: the U.S. dollar and equities dominated the quarter
Investor sentiment turned optimistic in the fourth quarter of 2024, as equities rallied to close the year on a high note. Three defining themes shaped the quarter: a historic U.S. presidential election, ongoing central bank rate cuts and a rise in political risks both domestically and abroad. Collectively, these factors drove market movements, creating an optimistic and rewarding environment for investors following the decisive U.S. election.
Global central banks continued to ease their monetary policies, shifting the focus from combating inflation to supporting economic growth and labour market stability. The Bank of Canada (BoC) cut its overnight rate twice by 50 basis points (half a percentage point) each time, for a total reduction of one percentage point during the quarter, bringing the overnight rate to its lowest level in over two years. Similarly, the U.S. Federal Reserve followed its September cut with two consecutive reductions of one-quarter percentage point each.
Market outlook: global economies are set up for growth into 2025
Our outlook for 2025 is optimistic. With inflation no longer a major concern, central banks can continue their supportive policies. Although political risks remain, the global economic environment seems favourable, and corporate earnings are projected to improve. The historically strong performance in the fourth quarter for sectors like consumer discretionary and financials underscored a solid foundation as we enter the new year.
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