Putnam US Value Equity
Mandate commentary
Q1 2024
Highlights
① The portfolio outperformed in a strong positive environment for U.S. equities. Stock selection was the main driver of relative performance.
② Central banks face divergent monetary policies.
③ Market momentum and encouraging economic data point to more upside potential in 2024.
Mandate overview
After their worst start to a new year in two decades, U.S. stocks quickly recovered and delivered solid returns for the first quarter. Markets were fuelled in part by strong corporate earnings, led by the information technology sector. Throughout the quarter, investor sentiment fluctuated around central bank policy. Anticipation of rate cuts by the U.S. Federal Reserve (the Fed) sparked rallies, while delays in potential timing for the cuts led to declines. Equities rallied following the Fed’s March meeting, where it forecast three rate cuts for 2024, while also noting that inflation may remain elevated.
In this environment, the portfolio outperformed its benchmark. Stock selection led the outperformance in the strong positive environment for U.S. equities. A small cash balance resulted in a slight drag to performance.
The positive impact from stock selection was led by the utilities, consumer discretionary and information technology sectors. The only sectors to detract from the strength in stock selection were communication services and real estate. Allocation effects were mostly neutral.
Mandate: U.S. Large Cap Value Concentrated SMA.
Performance contributors
Constellation Energy – The overweight position was a top contributor. The nuclear energy producer has become the source of electricity for many data centers.
NRG Energy – An overweight position had a positive impact. The stock was strong amidst fundamental improvements and developing opportunities for electricity producers.
Performance detractors
Charter Communications – An out-of-benchmark position was the top detractor. Shares were weak after the company reported ongoing subscriber losses.
Gaming and Leisure Properties – An overweight position detracted. Shares underperformed amidst an acquisition and capital raise via both debt and equity markets.
Total gross returns:
Total return |
QTD |
YTD |
1YR |
3YR |
5YR |
since INC. (NOV. 14, 2016) |
PUTNAM US VALUE EQUITY |
13.77% |
13.77% |
30.90% |
15.85% |
16.24% |
15.20% |
Mandate repositioning
The U.S. economy has remained strong, but some softening economic data is starting to be seen, which was expected. Looking ahead, other potential challenges include sticky inflation and higher interest rates for longer than expected. Earnings growth expectations are becoming more reserved, and market volatility could result from an increased focus on the U.S. presidential election.
Value stocks, while strong in the first quarter, still have room for catch-up in what remains a narrow market. As a result of this narrow market, the portfolio management team continues to find attractive valuations and opportunities in our investment universe.
By sector, the fund remains within +/-5% of benchmark weight. Currently, the largest overweight positions relative to the benchmark are in the consumer discretionary and utilities sectors. While financials is the largest sector weight in the portfolio and benchmark, it is the largest relative underweight position. The communication services and industrials sectors also remain below benchmark weight.
Market overview: Leap year liftoff – Q1's market highs.
In the first quarter, equity markets delivered a solid performance, reinforcing the sentiment that inflation is nearly under control and recession fears for the U.S. economy are subsiding.
The U.S. maintained a positive economic outlook, whereas Canada has experienced several months of subdued GDP growth, highlighting divergent economic narratives between the two closely linked markets. This contrast may lead the Bank of Canada to enact policy changes before the U.S. Federal Reserve, to address Canada's specific economic hurdles.
Market outlook: Exceptionally strong quarter leads to investor confidence.
As we look ahead, the market's optimism has notably improved from six months ago. U.S. equity markets appear to be priced to perfection, and continued positive economic news is essential to support valuations in the near term. Canadian markets, meanwhile, have been riding the surging wave of global crude prices. This boon from the energy sector is bolstering the country's economic and stock market performance, providing a buffer that could mitigate the impact of a sluggish consumer sector, should higher oil prices persist.
Internationally, markets are on the upswing, rallying from a period of low stock valuations and slow manufacturing. Historically, these signs have often led to a phase of strong economic growth.
We’re encouraged by the momentum in the markets and inflection points in the economic data to the upside, and that leaves us with an optimistic view for investors through the remainder of 2024.
To discuss your investment strategy, speak to your IG Consultant.
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