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By Wealth Professional | Nov. 29, 2023

Originally published in Wealth Professional on Nov. 27, 2023

Lauren DeMore Portfolio Manager of the Canada Life U.S. Value Fund, sat down with Wealth Professional to provide insights on the U.S. economy’s challenges and the silver lining in value investing. Access the expertise Putnam Investments brings to the Canada Life funds with Canada Life U.S. Value Fund. 

Putnam Investment’s Lauren DeMore provides insights on the U.S. economy’s challenges and the silver lining in value investing

The U.S. economy is facing unprecedented challenges including soaring debt levels, climbing interest rates, and changing trade policies. These challenges are so significantly different from previous decades that they could potentially jeopardize overall investment and the economy.

Lauren DeMore, portfolio manager of the Canada Life U.S. Value Fund looks to the value side and notes, “When shifting the focus towards value stocks, specifically the Russell large cap value benchmark, we observe a more optimistic outlook. The Russell value benchmark is trading at a discount to its own history and is at a significant discount to the growth benchmark. Historically, the value benchmark has traded at about a 40% discount to growth, but the gap is currently much wider.“

Sectors that comprise the value benchmark, such as financials, healthcare, staples, and utilities, tend to outperform following the last Federal Reserve (Fed) hike. If we’re nearing or have seen the last Fed hike, these sectors are poised to outperform, presenting an attractive opportunity for investors.”

The value in value stocks 

DeMore further goes on to highlight that the starting point of valuation is crucial when considering investments in value stocks. There’s a more significant upside potential in stocks within the value benchmark compared to the rest of the market. For instance, DeMore finds the energy sector currently presents an attractive free cash flow yield relative to its history. Similarly, the utilities sector has underperformed throughout the year but is now trading at appealing valuation levels.

There are some interesting market dynamics are at play, particularly in the life sciences sector, due to the impact of GLP-1 drugs used for diabetes and weight loss. This has resulted in a sharp sell-off in companies providing services and devices related to obesity and related health conditions. These companies, which offer services like joint replacements and glucose monitoring, are currently undervalued as the market anticipates a potential future where obesity and its associated health conditions are less prevalent.

Putnam’s multidimensional approach to value investing 

DeMore says, “At Putnam, our unique approach involves not taking explicit bets on sectors, but rather focusing on owning the best stocks within each sector. This is because anticipating the dispersion between sectors can be challenging, and our goal is to optimize performance by owning the best stocks, regardless of sector.”

“We utilize a quantitative model to source ideas and highlight areas of apathy in the market for further fundamental research. This model has been instrumental in identifying undervalued companies like McKesson Corp., a drug distributor, which has seen significant gains since being added to the portfolio.”

As active managers, DeMore places a strong emphasis on portfolio construction, ensuring that each stock's position size is aligned with their level of conviction and the potential alpha it offers. This may involve adding to positions that have underperformed but still hold strong conviction or trimming positions that have outperformed and may offer less upside potential. The portfolio’s turnover rate is approximately 20% per year, with half of that turnover used to optimize position sizes based on performance and conviction.

When it comes to market volatility, DeMore aims to ensure that we don’t place any bets on volatility in relation to the benchmark. The portfolio manager says, “This is true for all risk or style factors; our goal is to concentrate risk in individual stock positions. Our downside capture is approximately 90%, which means that we tend to outperform when the market is declining. This trend is evident when you look at the calendar years where the Russell Benchmark has declined; we have outperformed during each of these events over the past 10 years.”

The data below uses the Large Cap Value composite track record, gross of fees. Highlighted years are the negative benchmark years.

Morningstar Star Ratings reflect performance of F Series as of Sept. 30, 2023 and are subject to change monthly. The ratings are an objective, quantitative measure of a fund’s historical risk-adjusted performance relative to other funds in its category. Only funds with at least a three-year track record are considered. The overall star rating for a fund is a weighted combination calculated from a fund’s 3-, 5-, and 10-year returns, as available, measured against the 91-day treasury bill and peer group returns. A fund can only be rated if there are a sufficient number of funds in its peer group to allow comparison for at least three years. If a fund scores in the top 10% of its fund category, it gets 5 stars; if it falls in the next 22.5%, it receives 4 stars; a place in the middle 35% earns a fund 3 stars; those in the next 22.5% receive 2 stars; and the lowest 10% receive 1 star. For more details on the calculation of Morningstar Star Ratings, see www.morningstar.ca.

For the Canada Life U.S. Value Fund (Series F), the star ratings and number of Canadian mutual funds in the U.S. Equity category for each period are as follows: three years – 5 stars, 1216 funds, five years – 4 stars, 996 funds.

For the Canada Life U.S. Value Fund 75/75(P), the star ratings and number of Canadian mutual funds in the U.S. Equity category for each period are as follows: three years – 3 stars, 726 funds.

©2023 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

The views expressed in this commentary are those of this investment manager as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice.  

The Canada Life U.S. Value Fund is available through a segregated funds policy issued by The Canada Life Assurance Company or as a mutual fund managed by Canada Life Investment Management Ltd. offered exclusively through Quadrus Investment Services Ltd. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. A description of the key features of the segregated fund policy is contained in the information folder. Any amount allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.

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