Active Insights

Why we believe it's a good time for high quality growth strategies with Richard Bodzy and Gregory McCullough, CFA

September 14, 2022
Active Insights
Why we believe it's a good time for high quality growth strategies with Richard Bodzy and Gregory McCullough, CFA
Show Notes Transcript

In this episode, Chris speaks with Richard Bodzy and Gregory McCullough, portfolio managers of the Putnam Growth Opportunities Fund.    

 During the conversation, they touch on many topics, including: 

  • The current growth environment
  • The benefits of a thematic, long-term approach to growth investing
  • The themes resonating in today’s market
  • The process of identifying growth trends
  • The critical elements evaluated when implementing portfolio ideas
  • The importance of analysts and bottom up research

This material is for informational and educational purposes only. It is not a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. It is not intended to address the needs, circumstances, and objectives of any specific investor. This information is not meant as tax or legal advice. Investors should consult a professional advisor before making investment and financial decisions and for more information on tax rules and other laws, which are complex and subject to change.

 Consider these risks before investing: Growth stocks may be more susceptible to earnings disappointments, and the market may not favor growth-style investing. The value of investments in the fund’s portfolio may fall or fail to rise over extended periods of time for a variety of reasons, including general economic, political, or financial market conditions; investor sentiment and market perceptions; government actions; geopolitical events or changes; and factors related to a specific issuer, geography, industry, or sector. These and other factors may lead to increased volatility and reduced liquidity in the fund’s portfolio holdings. From time to time, the fund may invest a significant portion of its assets in companies in one or more related industries or sectors, which would make the fund more vulnerable to adverse developments affecting those industries or sectors.

The Russell 1000® Growth Index is an unmanaged index of those companies in the large-cap Russell 1000 Index chosen for their growth orientation. You cannot directly invest in an index. 

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.

 Top 10 holdings as of 07/31/22

 | Microsoft Corp | 11.52%
 | Apple | 10.79%
 | Amazon.Com | 6.41%
 | Alphabet | 5.97%
 | Tesla | 3.69%
 | UnitedHealth Group | 3.51%
 | Mastercard | 2.89%
 | Visa | 2.84%
 | Costco Wholesale Corp | 2.59%
 | Nvidia Corp | 2.09%
 | Top 10 holdings, percent of portfolio | 52.29%
 |  Holdings will vary over time. This is not an offer to sell or a recommendation to buy any individual security.   |  

 Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing.

 Putnam Retail Management            AD2420649    9-22 

You should consider the fund’s investment objectives, risks, charges, and expenses carefully before you invest. This and other important information is contained in the fund’s prospectus available on Putnam.com or by calling 1-833-228-5577. Please read carefully before you invest.

Putnam ETFs are distributed by Foreside Fund Services, LLC. Foreside is not affiliated with Putnam Investments.

Putnam Retail Management AD2557752 11/22

Active Insights

Putnam Investments


Episode 16

Patrick Laffin: Welcome to Putnam Investments Active Insights, a podcast series hosted by Chris Galipeau. Chris is the Senior Market Strategist in the Capital Market Strategies Group at Putnam Investments. Each episode, Chris has an in-depth conversation with a different Putnam portfolio manager to share timely insights on the markets and global economy.

 

Chris Galipeau: Thank you for joining us folks. We’ve got a lot to talk about today. This is Chris Galipeau, your host. And today’s podcast is focused on growth investing and we’re very fortunate to have Richard Bodzy and Greg McCullough with us to facilitate the conversation. Richard and Greg are the portfolio managers of the Putnam Growth Opportunities strategy and just by way of background, Richard earned his BA from the University of Michigan and his MBA from the Darden School at the University of Virginia. Richard has been in the investment business, I’m going to round this a little bit, for about 20 years. Greg earned his BA from Davidson College and also earned his MBA from the Darden School at the University of Virginia. Greg is a CFA charter holder and like Richard, has been in the investment business for just about 20 years. So Richard, Greg, thank you very much for taking the time to chat with us today and welcome to the podcast.

 

Richard Bodzy: Thanks Chris, great to be here.

 

Chris Galipeau: We’re going to hop right into the questions here folks and Richard, we’ll start with you. Can you talk about why you take a thematic long-term approach to growth investing.

 

Richard Bodzy: Sure. The approach we take prioritizes not only the level of growth but really duration of growth across a cycle. We tend to gravitate towards companies that can grow an above market rates and do so in a variety of economic conditions. In order to identify these companies, we invest behind long-term, multi-year secular growth trends. We have about a dozen identified in the portfolio and these give us confidence that the areas of the market that we are investing in can grow and do so in a sustainable way regardless of economic fluctuations.

 

Chris Galipeau: So you’re spending the vast majority of your time not really worrying about the macro, more worrying about companies, company drivers from the bottom-up lens and through the bottom-up lens.

 

Richard Bodzy: Exactly.

 

Chris Galipeau: Alright. That’s a good segue, Greg. I think to talk about what matters when you’re evaluating an idea and I could say that a little bit differently, I guess, but where do you focused on in the fundamental process as you’re turning over rocks, you’re doing your due diligence, what are the critical elements that you and Richard need to see to get a name into the portfolio.

Greg McCullough: So, we obviously do an extensive amount of fundamental research, both Richard and myself in a concert with our analyst internally. But we really have kind of our starting point where we begin is a focus on three fundamental criterias. So the first one which Richard touched upon already is the growth level and the duration of growth. So, I think a lot of growth managers out there are highly focused on the level of growth and that’s not to say that we’re not focused on the level of growth, we do care about growth, we want our businesses to grow at a multiple of GDP across the cycle. But as important to us is the duration of growth, into some extent, the durability of growth. We want to target companies with the narrow range of financial and operational outcomes. So that’s the first piece. The second criteria would be capital returns of the business and that really focuses on a deep dive into industry structure, market structure. We want to make sure that the companies that we invest in, operate in markets that we think are efficient and can be, over a long period of time, beneficial from an economic standpoint. We prefer capital like business. That doesn’t mean we won’t own more capital intensive businesses. We just have to see high returns on capital and see that management is putting that capital to good use for shareholders, which leads us to the third criteria which is an ownership culture. We want to invest in companies that are run by management teams that act like owners. In most cases, they are owners, most cases they own a healthy amount of stock themselves. We think that alignment is really helpful from our standpoint but we can also look at a track record. We can see how management teams have allocated capital over time. We can look at the incremental returns on that capital and that can give us some comfort in management’s ability to deploy capital, both organically within the business and sometimes inorganically through M&A.

 

Chris Galipeau: Okay. Good. That sounds like a three-pronged approach. So Richard, and that’s a good segue maybe, could you talk about how, what Greg just outlined, might make your strategy and the way you two approach it, different from other “thematic strategies”?

 

Richard Bodzy: Sure. All different types of thematic funds invest differently and one thing that’s really important to understand as far as how we apply our theme, the application of themes, is that we want to invest behind companies that enable these long-term secular trends. So rather than taking on binary risk for instance our personalized medicine theme, instead we own a company that is outsourced manufacturer of over a thousand different therapies including cell and gene therapies which are targeted to an individual’s RNA and DNA. Additionally for our 4G LTE to 5G theme, we own a tower company that’s indifferent who your cellphone provider is, which company gains market share. They simply benefit from the $30 billion plus in infrastructure spin that’s necessary to go from 4G LTE to 5G.

 

Chris Galipeau: Okay.

 

Greg McCullough: And I would just add Chris, the thematic approach ensures that we are fishing in the right ponds effectively. We’re looking at pockets of the economy that we think have natural tailwinds that can drive secular growth over a long period of time, but it’s not enough to find a business that is levered to a theme. I think a lot of thematic funds maybe kind of stop the analysis at that point. It’s really important to us that we dig into the fundamentals, we understand the business model, we understand the market structure, and the financial characteristics of that business and we feel comfortable with those and we feel comfortable that they can compound value over time.

 

Chris Galipeau: And I think it’s fair to say, chime in if you think I’m wrong here, but other managers may identify a theme that may identify the two or three disruptors that can exploit the theme and their top line’s going to grow exponentially for the next couple years and then that you’re unsure on an ongoing basis whether that continue, that would be number one. And number two, are they profitable and so it’s a lot more, I think, when you dig under the surface, a lot more going on in the way you two run the strategy relative to maybe some of the competitors. Fair?

 

Greg McCullough: Yeah. I think that’s fair. And we do have an allocation within the portfolio towards disruptors, you mentioned disruptors. But the lion’s share of the businesses that we own are pick and shovel businesses, they are enablers of the theme. We do have the wherewithal to go, have exposure to disruptors, companies that we think are small and mid-cap companies that over time can become large cap companies. Truly unique businesses but they still have to meet the fundamental financial criteria that we look for.

 

Chris Galipeau: So that’s a pretty high bar for a small and mid-cap company even if they are a disruptor and a potential benefactor of the theme that you’re trying to exploit. You still have to check the boxes or return invested capital and the other boxes that you want to see.

 

Greg McCullough: That’s right.

 

Chris Galipeau: Okay. Good segue then and Greg maybe we’ll stay with you here and talk. I’d love for you to talk just a little bit about how you work with Putnam’s analyst team, first of all, and then maybe we can morph that into just an example of a name that’s in the portfolio and talk a little bit about how you work with the analyst on the germination of that idea.

 

Greg McCullough: Yeah, great. We are really lucky to have an analyst team with deep sector expertise and decades of experience. We don’t rotate analyst through sectors. As a result, everybody really knows the businesses within their sector. They know the idiosyncratic drivers of that sector that really helps us a lot in our fundamental research process. So, an example maybe of a stock that we’ve owned now for over a year that we think is a fantastic business and it’s a top name in the portfolio is Cadence Design Systems. It’s a software business that serves the semiconductor space. They basically provide software to semiconductor companies that allow them to design chips. So very critical. They are the number two player in this market but it’s a concentrated market with really two big players. One of the things that we love about this business is that their end market is highly cyclical. So if you look at the semiconductor industry, you’ve got highs and lows in spending in aggregate. That’s not something that we’re typically attracted to but you look at Cadence Design Systems, this is a business whose lifeblood is the R&D spend of the semiconductor industry. And so despite the cyclicality in that industry which tends to be driven some by macros, some by inventory cycles, you have unbelievable consistency of spend in R&D. R&D is the lifeblood of these businesses. Once they stop spending on designing the next generation of chips, that becomes a problem for that semiconductor companies. So when you go back and you look at 2008, 2009, Cadence was able to grow through that period of time despite incredible macro stress and end-market stress within semi. So, we started doing some workaround the semiconductor space, trying to find ideas that may be fit our process better from a fundamental standpoint and this looked interesting to us. So Richard and I started to do some work on it. We immediately brought Andy O’Brien in who has a long track record of success in looking at the semiconductor space and has a lot of expertise there. We worked in concert with Andy to meet with the company to do our diligence and really build kind of the fundamental confidence in that business and what makes it unique. We got to the point at the end of a few weeks of looking at this business where it became very clear that this was really good fit for our process. The cyclicality, it takes some of the macro risk out of the secular growth that we find to be really attractive in the semiconductor industry.

 

Richard Bodzy: To Greg’s point, just to add on there. If you’re a semiconductor company and you’re in the adverse part of the cycle, R&D budgets are the last, the very last thing that you’re going to cut. You’re going to cut headcount, you’re going to cut other areas of the business but you’re not going to cut R&D because it’s your future growth. And also to Greg’s point, one of the attractive aspects of this area of the market is that it’s huge. It’s huge, it’s multiple hundreds or billions of dollars of aggregate spend between autos, gaming, data center, PCs, other areas in the market. So we want to be involved and to Greg’s point, we want to be involved in a name that takes out some of the cyclicality and the cyclical risk associated with that end market.

 

Chris Galipeau: So that, to me, is a great example of why the Growth Opps strategy is different than competitors, right? Where you may be tempted to load the boat in Microns and the AMS of the world that are highly cyclical and this is a play on the same concept, long-run theme, right. Structural grower in nature but you’re dampening the cyclical Beta by the exposure here. Alright. I should add and I want to add and I need to add that what Greg just talked about and what Rich would probably talk about in a second is in no way should it perform drop your pen and go put a big  trade on the blotter here, please do your own research, opinions and environment’s change, this is not a recommendation, so please do your own work on that. But Greg, that was great, so good segue I think. To Richard, maybe we’ll take it from the stock level, we’ll take up to the thematic level and I just love to hear about maybe a newer theme that you two have put in the portfolio and how you arrive that. I think the audience would love to hear the process.

 

Richard Bodzy: Sure. Our newest theme is what we call A Healthier Tomorrow and it highlights an increasing focus on individual health and wellness and it’s reflected in trends such as increased life expectancy, a greater awareness and control of personal health data and an improved quality of life overall, whether it’s in the US or anywhere else across the globe, people are prioritizing exercise, diet and environmental health than gear quality, and they are embracing a comprehensive approach to health and wellness that includes a variety of physical, mental and spiritual aspects. We have multiple-owned companies tied to this theme and it’s one we’re really fired up about. So we’re on a hospital operator HCA which operates in one of the regions in the country where it should be able to grow due to population demographics, in above GDP and above other hospital operator’s rates given its scale. We own a HVAC equipment manufacturer that emphasizes improvements in air quality, Johnson Controls and then innovative workout apparel brands. Some of you may be aware of Lululemon and a Blood Glucose Monitoring Company - Dexcom which ties in the personal health data. To your question of how we come up with these themes, themes can come up in a variety of different ways. This one in particular came up from a little bit of [self-scouting]. We actually already owned a number of these companies and they all—since we kind of have a type, as you can probably tell, they tend to fit in even though they’re on a variety of different industries, they all fit in to this theme of A Healthier Tomorrow and just something worth knowing, these trends, these themes tend to last in our portfolio for a long period of time. We have 12 themes but maybe one or so turns over per year. They’re multi-year in nature and we’re not swapping them in and out. So there’s a lot of thought and a lot of effort that went into this and we’re fired up about it, Chris.

 

Chris Galipeau: So I think another interesting example, so not too similar from Cadence, that is a play on long-term semi-cycle. Here, in a growth mandate, we have a good example of a theme that the average investor probably wouldn’t grab onto, we’re on a hospital and we on JCI, right? That you wouldn’t really think about as necessary growth names. Alright, thank you both for those answers. So, Richard I want to stay with you because I want to talk about one of the things that I think is critical. In my view, one of the things that really separates out the way you and Greg run this portfolio, and that’s the notion of risk control. How that impacts portfolio construction and I ask this because I think it’s fair to say and point out that the Growth Opps mandate has done a very good job during corrective phases and so I think it’s important to talk about that and draw that out and why. How you approach it?

 

Richard Bodzy: So, Greg mentioned that we spend a lot of time on the industry structure. We tend to invest behind companies that operate in oligopoly markets that have pricing power, they have a lack of customer concentration and they have the ability to pass through unexpected input cost inflation, unexpected operating environments. We spend more time, actually, on the vulnerabilities of the businesses we invest behind than the blue sky scenario, which is different from a lot of other growth managers. We tend to gravitate towards companies that don’t have a wide range of outcomes. They have revenue visibility, whether it’s long-term contacts with pricing escalators. They’re competitively advantaged, they’re market share gainers but the portfolio itself—I’d highlight that we’re not trying to time the market, right. We’re fully invested, we have under 2.5% cash at all times. The Beta of the portfolio and strategy is right around one give or take, five basis points. We have a recently concentrated set of names. These are unique compelling growth companies. We have about 50 names in the strategy, 50 to 55 and that doesn’t change. We also operate relative to Russell 1000 Growth Index and the sector weights that we posses in the strategy are typically within 3% of the Russell 1000 Growth weights. So, rather than try and emphasize industrials for the six-month period and health care for the next six-month period, make a relative sector industry call. Instead, we want the operational and financial performance of the companies we own to drive the Alpha for the strategy and so we have a high stock-specific risk. And again, we think these are differentiated companies and we want them to drive the performance of the strategy.

 

Chris Galipeau: You want to add to that Greg?

 

Greg McCullough: Yeah. Just one thing to add and just a highlight from Richard’s answers. We do think about risk control, risk management at two levels: there’s the portfolio level, which Richard ended on. We’re talking about sector exposure and just portfolio composition, how we manage the portfolio, but there’s also risk control that happens at the security level. Every single stock that we own in the portfolio, we think about the range of operational outcomes we’ve talked about before. We think about the downside scenario should something go wrong. We look at the past performance of a business if it’s been around a long time, which isn’t always a luxury that we’re afforded but if the business has been around a long time, how did the business perform in prior cycles, both the stock and the finacials of the business? And that can help us build confidence in those downside scenarios and control risk.

 

Chris Galipeau: And so, we might be entering into a period like that where it’s been choppy, but so I’d like to takeaway from that would be—it’s not just looking through rose-colored lens all the time and I think one of the pitfalls potentially of growth mandates in this—broad-brushing this high-level statement is some of the mandates can get very earnings momentum sensitive, price momentum sensitive and then when the music stops, those mandates are right over the cliff and so I think what I heard you both say was we do our rigorous research. We’ve essentially built a base case, a bull case but we also built a bear case and we need to know how to identify if maybe we’ve got one wrong here and I think that too is a little bit different. Certainly different than the way I ran the portfolio, not your portfolio but another portfolio, where it was sometimes it can get to be all gas, no brake and that’s not a smooth ride and good experience and I think the way you two approach it is very different. Alright, we’re going to finish here. Last question. Greg, we’ll go to you and then Richard, if you have any thoughts on this, but what I wanted to talk about a little bit because the last question was a good segue to—we are actually in tune. We do actually pay attention to downside, what can go wrong? We study a company’s financial performance through expansions through contractions. I don’t know where we are here macro-wise but clearly, things are slowing down. In your own words, tell us why—tell the audience why growth companies, long-term structural players may have a little more Teflon and the GDP slowdown when earnings may be impacted to a significant degree.

 

Greg McCullough: Sure. I mean, I would start by saying—we try to position the portfolio in a way where the portfolio is going to perform well regardless of the economic environment that we find ourselves in, so that’s really our goal to start of the day. If we do find ourselves in a period where maybe the macro is slowing, we think in past periods that look like that, growth becomes more scarce at the company-specific level and in that type of environment, you want to own businesses that are unique, businesses that have really strong financial characteristics, really strong market positioning. Those difficult macro environments are often the periods where those truly great companies become even better companies. They have strong balance sheets, their customers depend heavily on them, and they’re able to become relative to the competition and on an absolute basis, better companies during that tough period of time. So, if we think about what’s happened from a macro standpoint over the last couple of years, we had the global pandemic, we had four shutdowns globally that caused relatively short period of immense stress on the economy. We came roaring out of that bottom and very quickly, became an environment from a stock-specific standpoint where it was very easy for a lot of companies to grow at really high rates on very easy comparisons. So, we think we have come through the vast majority of that period. We’re now at a—what I would say as a somewhat precarious period or setup from a macro standpoint and I think your initial question, the way you framed it is a good way to frame it. We may be at a time now where macro stress is increased, the economy slows a little bit and if that’s the case, we have a lot of confidence in the businesses that we own in the portfolio and we think that they’ll perform well.

 

Richard Bodzy: We often get the question from advisors and consultants and even internal audiences, when is it that you underperform and will there be an adverse backdrop for you? And every strategy has its vulnerabilities and we’d say that the weakest or the least optimal backdrop for us is off the bottom when the lowest quality names rip and when the index itself is up, call it 30% to 50% on an annual basis, and we don’t see that as a likely outcome going forward. We’d like to keep up on those environments and we have typically, over time, 100%  upside capture but we also really pride ourselves on our downside capture and we take that into account at the individual stock level before any name enters the portfolio. 

 

Chris Galipeau: Alright. So, for the audience, I think there’s a few key takeaways in my mind here: number one, Greg and Richard taking a long-term thematic approach to growth investing, very deep and rigorous fundamental research, finding out what drives the company. If they can, looking at prior periods, where we’ve had tough macro backdrops or just secular factors in their industry. Can the companies continue to grow at above-average rate through that? If there’s an adverse economic backdrop or some adverse situation, is the company able to navigate through that and do the financials essentially hold up over time? Very thoughtful process around portfolio construction. As Richard mentioned, concentrated portfolio, 50 to 55 names but I think we all heard here, whether it was Greg giving names in the portfolio or Richard ripping four or five names. I think the takeaway there is diversified portfolio structured around idiosyncratic drivers of Alpha, stock-specific risk driving the return stream in the portfolio and I would say, in my own experience, that is  a very different approach than most growth managers take and so guys, we’re going to wrap it up there. Thanks for taking the time to sit down and talk with us. I think our conversation really does a nice job of bringing out what is valuable and potentially what is different about the way you two run this portfolio relative to other growth mandates in the marketplace. So, thanks for stopping by and we’ll be back with you here for our next podcast where we’re going to talk with Paul Drury on muni bonds. Thanks everybody for tuning in.

 

Greg McCullough: Thank you so much!

 

Richard Bodzy: Thanks, Chris!

 

Patrick Laffin: All opinions expressed by the podcast host or podcast guests are solely their own opinions and do not represent the opinions or views and Putnam Investments or any affiliates. This podcast is not investment advice and is not intended as a recommendation to buy or sell any type of securities. This production is for informational purposes only.

 

This material is for informational and educational purposes only. It is not a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. It is not intended to address the needs, circumstances, and objectives of any specific investor. This information is not meant as tax or legal advice. Investors

should consult a professional advisor before making investment and financial decisions and for

more information on tax rules and other laws, which are complex and subject to change.

 

Consider these risks before investing: Growth stocks may be more susceptible to earnings disappointments, and the market may not favor growth-style investing. The value of investments in the fund’s portfolio may fall or fail to rise over extended periods of time for a variety of reasons, including general economic, political, or financial market conditions; investor sentiment and market perceptions; government actions; geopolitical events or changes; and factors related to a specific issuer, geography, industry, or sector. These and other factors may lead to increased volatility and reduced liquidity in the fund’s portfolio holdings. From time to time, the fund may invest a significant portion of its assets in companies in one or more related industries or sectors, which would make the fund more vulnerable to adverse developments affecting those industries or sectors.

 

Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.

 

The Russell 1000® Growth Index is an unmanaged index of those companies in the large-cap Russell 1000 Index chosen for their growth orientation. You cannot directly invest in an index.

 

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.

 

Top 10 holdings as of 07/31/22

 

 | Microsoft Corp | 11.52%
 | Apple | 10.79%
 | Amazon.Com | 6.41%
 | Alphabet | 5.97%
 | Tesla | 3.69%
 | UnitedHealth Group | 3.51%
 | Mastercard | 2.89%
 | Visa | 2.84%
 | Costco Wholesale Corp | 2.59%
 | Nvidia Corp | 2.09%
 | Top 10 holdings, percent of portfolio | 52.29%
 |  Holdings will vary over time. This is not an offer to sell or a recommendation to buy any individual security.   |  

 

Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund

before investing. For a prospectus, or a summary prospectus if available, containing this and other

information for any Putnam fund or product, call your financial representative or call Putnam at 1-

800-225-1581. Please read the prospectus carefully before investing.

 

Putnam Retail Management                                                                            AD2420649    9/22