Putnam US Value Equity
Mandate commentary
Q3 2024
Highlights
① In a strong quarter for U.S. value stocks, the portfolio underperformed. Stock selection was the main driver of underperformance.
② Active central bank policies were key market drivers.
③ An improving market environment, as interest rates fall.
Mandate overview
U.S. equity markets posted solid gains for the third quarter, but also encountered volatility. Most notable was a sharp decline in August, when major U.S. indexes posted their worst three-day losses since 2022. Early in the quarter, inflation and labour market data raised questions about the strength of the overall economy and whether the U.S. Federal Reserve (the Fed) waited too long to cut interest rates. After a sharp decline in early September, stocks rebounded and all three major indexes posted gains for the month. Also in September, the Fed announced a 50-basis-point interest-rate cut, its first easing since 2020.
In this environment, the portfolio underperformed its benchmark. Stock selection led the underperformance, although sector allocation decisions also detracted. In the strong period for the benchmark, a small cash allocation had a negative impact.
Stock selection was weakest in the financials, health care, information technology and utilities sectors. Strength in our position in the communication services sector provided a slight positive offset.
Mandate: US Large Cap Value Concentrated SMA
Performance contributors
PulteGroup – The overweight position was a top contributor. The homebuilder continued to post strong results in the midst of a challenging environment.
Oracle – An overweight position had a positive impact as the company showcased continued strong momentum in its cloud business.
Performance detractors
NXP Semiconductors – An out-of-benchmark position was the top detractor. Inventory corrections in the automotive end market weighed on shares.
McKesson – An overweight position detracted. The company’s weak guidance heightened concerns over slowing revenue growth.
Total gross returns:
Total return |
QTD |
YTD |
1YR |
3YR |
5YR |
since INC. (NOV. 14, 2016) |
PUTNAM US VALUE EQUITY |
5.25% |
21.95% |
33.02% |
15.58% |
16.13% |
15.18% |
Mandate repositioning
Since the midpoint of 2024, a broadening of performance in U.S. equity markets has been seen. Notably, leadership is no longer limited to large-capitalization technology stocks, and value stocks have become more meaningful participants in the market’s advance. Although expectations for corporate earnings growth have declined, the Fed’s efforts to boost economic growth and the positive impact of lower interest rates should continue to be supportive of earnings.
Despite the upbeat sentiment, the portfolio management team continues to keep a balanced approach in managing the portfolio. The portfolio management team sees potential for disruptions to the market’s high expectations, especially given relatively lofty valuations.
By sector, the portfolio remains within +/-5% of benchmark weight. Currently, the largest overweight positions are in the consumer staples and materials sectors. While financials is the largest sector weight in the portfolio, it is the largest relative underweight position. Positions in the industrials, real estate and communication services sectors also remain below benchmark weight.
Market overview: markets rallied with expanding breadth
Investor sentiment shifted to a “risk-on” attitude in the third quarter, in response to changes in central bank monetary policy across key economies. It began with the Bank of Canada (BoC) and the European Central Bank (ECB) in the second quarter and continued into the third. The BoC was particularly active, making two additional cuts of 25 basis points (0.25 percentage points) to its overnight rate this quarter.
The U.S. Federal Reserve (the Fed) started its own policy easing with a surprise 50 basis-point (0.5-percentage-point) cut in mid-September, launching rallies in both bonds and equity markets. The Fed noted an increase in the unemployment rate and that the battle against inflation was no longer a primary reason to maintain a restrictive monetary policy.
Market outlook: the market environment is generally improving
Looking ahead, central banks in Canada and the United States will continue to focus on supporting labour markets. Stimulus measures in China could help boost domestic consumer demand by propping up the Chinese stock market, property market and economy. Despite geopolitical risks from the Middle East conflict and the upcoming U.S. election, the market environment is improving.
We see a soft-landing scenario emerging in the U.S. and other areas around the world. This should support equity markets and help bond returns, as interest rates continue to fall from where they are today.
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