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By Putnam Investments | July 30, 2021
Jyotsana Wadera, Senior Investment Director, Putnam Investments

Putnam Investments believes economic trends that have arisen from the COVID-19 pandemic offer exciting, durable and long-term growth opportunities, particularly for the technology and healthcare sectors. In this article, Senior Investment Director Jyotsana Wadera examines growth trends across sectors. She focuses on nuances in growth benchmarks, how exposure to certain sectors can impact growth and the importance of investing in innovation, regardless of sector or industry. 

Taking an active approach to identifying innovative companies is at the core of Putnam Investments’ decision-making process. The Putnam team believes there’s a benefit from tracking the benchmark but also from looking at opportunities that arise from new and emerging market dynamics each and every day. Investors can access Putnam’s approach and the opportunities that come with it through the Canada LifeTM shelf with the new Canada Life US All Cap Growth Fund.

The multi-cap growth managers at Putnam Investments believe the technology and healthcare sectors stand apart for bringing new products, ideas and services to market. These sectors can also accelerate change in other industries. This inventive spirit gives them prime real estate in growth benchmarks, which tend to be more heavily exposed to the parts of the market that are growing fastest, with the most change and innovation. 

Most investors want to add some of these growth elements to their portfolio — but may be overlooking a few important nuances around exposures that could help get them there.

1. Benchmark basics

Investors who want to potentially benefit from growth should be mindful of the way benchmarks are set, the cycles that feed them, and how they may correlate to various sectors. 

Every index is reconstituted on its own calendar, and the timing of this calendar matters. Since growth is the subject of this article, we’ll focus on the Russell 3000 Growth benchmark. Russell reconstitutes its indexes annually on the last Friday in June. 

What is the benchmark?

The Russell 3000 Index is the “parent” of the Growth (and Value) benchmark. It’s a core index of approximately 3,000 of the largest companies in the U.S. equity market. Its Growth and Value benchmarks, which are style subsets of the larger index, each have more than a thousand holdings, with some stocks held in both. 

How are the benchmarks determined?

The Russell 3000 Value Index is determined by one metric: price/book, which is the stock's market price divided by its book value. Book value is determined by a company's assets minus liabilities, divided by the number of shares available to common stockholders. 

The Russell 3000 Growth Index, by contrast, is determined by two metrics: the Institutional Brokers’ Estimate System (IBES) forecast medium-term growth, and sales per share historical growth (trailing 5 years). Individual positions are determined according to their market caps. 

How are the benchmarks reconstituted?

During the annual reconstitution process, the benchmarks are completely rebuilt to reflect the market landscape at that time. 

How does this affect portfolio decisions?

This reconstitution process can lead to "concentration" at both the sector and stock level. This means that certain benchmarks will be more heavily weighted in certain sectors or stocks.

Sector weights as of 5/31/21
Russell 3000 Growth Index
Russell 3000 Value Index
Information technology
42.39%
8.70%
Energy
0.11%
5.09%
Financials
2.10%
22.00%

Benchmark indexes are unmanaged and do not incur expenses. You cannot invest directly in a benchmark index. Past performance is not a guarantee of future results. The Russell 3000 Growth Index is an unmanaged index of those companies in the broad-market Russell 3000 Index chosen for their growth orientation. The Russell 3000 Value Index is an unmanaged index of those companies in the broad-market Russell 3000 Index chosen for their value orientation. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company.

This table reflects the 2020 Russell 3000 benchmarks and shows three typical sector concentrations in Growth and Value. It illustrates how different the sector exposures can be between the two benchmarks. 

The table shows that roughly 27% of the Value index is concentrated in two sectors — financials and energy. Similarly, roughly 42% of the Growth index is concentrated in technology. By contrast, technology only constituted about 9% of the Value benchmark and financials and energy together only constituted about 2% of the Growth benchmark.

What does this mean to investors?

It means that if investors want exposure in technology, they might not be getting it if their investment is largely in the Value universe. It also means that the Value index is likely to be much more highly impacted by volatile commodity prices than Growth. 

This concentration in sectors can have a big impact on the performance of each benchmark. Since about one fifth of the Value benchmark is in financials, the performance of finance's largest industries (banks and insurance companies) will have an outsized impact on the Value index compared to the Growth index. Meanwhile, the technology exposure in Growth means that when technology sees strong performance during a period, the Growth index will likely outperform the Value index.

Anything else to keep in mind about benchmarks?

A key issue investors should keep in mind is what happens when major events — like the COVID-19 pandemic — are timed such that they aren't reflected in the benchmark. Think of the difference in the global situation between June 2019, when the Russell 3000 Growth was reconstituted for the coming year, and March 2020, when the pandemic lockdowns began. Massive market shifts, like the lockdown-driven dependence on cloud technology or the closure of physical retail, wouldn’t (and couldn’t) be reflected in the 2019 benchmark.

2. The even bigger picture behind the big picture

When our multi-cap growth managers look at companies as potential growth opportunities, they strive to look at the bigger picture behind the very important picture provided by benchmarks. 

In the broadest terms, we believe growth tends to be equated not so much with specific sectors or industries, but with innovation. Companies and sectors that may innovate or benefit from innovation cycles are more likely to fall into the growth universe, alongside structural advantages like size that are likely to drive ongoing growth and competitive strength. 

Semiconductors are a good example of how companies in one sector can have big, lasting impacts on multiple other sectors. The semiconductor industry is known for its “chip cycles.” Atthis point in the cycle, automotive companies need chips in order to offer navigation and in-car apps. Semiconductor companies get a boost from demand for innovative products in another industry ­­– autos ­­– while simultaneously contributing to innovation in other industries. 

The cloud is another example of this mutuality. Prior to the pandemic, the retail sector wasn’t the boon to cloud providers that it is today. But, in  a social-distancing or lockdown scenario, if a retailer doesn’t have an online presence or is unable to access its data on the cloud, it can be difficult to do business at all. As such, technology provides an important benefit to the retail sector, and the retail sector accelerates growth in the tech companies that enable it to continue to do business. 

At Putnam Investments, our growth managers seek exposure to companies that are going to be able to use innovation to continue to grow over the long term, as well as companies that enable other companies to grow over the long term. This analysis traces the logical stepping stones of the innovation chain in an effort to identify companies that enable an innovation, benefit from an innovation, or offer other factors like size or capacity that empower dominance for durable growth. 

Active management can potentially make a difference

While benchmarks are highly important, we believe a key benefit of active management is the potential benefit from fund managers who track not only the benchmarks but also the opportunities that arise from new and emerging market dynamics every single day. 

At Putnam Investments, we believe that shifts and trends in the economy since March of 2020 may offer long-term, durable growth opportunities. These shifts include broad themes such as increased digitization, a growing number of businesses with direct sales channels, and more scaled, capital-light business models. Huge industries, like healthcare and parts of the industrial and consumer complex, are ripe for technological change. Our growth managers seek to own businesses that enable and benefit from this change. 

The growth profiles for many of the companies held in our U.S Multi-Cap Growth strategy are supported by the kinds of durable tailwinds described above. The managers also specifically incorporate prior cycle downside capture into their risk framework and expect to continue this approach into the future.

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