Active Insights

The Case for Small Cap Value with Michael Petro, CFA

September 27, 2021 Putnam Investments
Active Insights
The Case for Small Cap Value with Michael Petro, CFA
Show Notes Transcript

In this episode, Chris speaks with Michael Petro, portfolio manager of the Putnam Small Cap Value Fund.  He is responsible for the overall strategy and positioning of Putnam's small-cap value products. Mr. Petro joined Putnam in 2002 and has been in the investment industry since 1999.

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

  • The case for small cap value
  • The process of harvesting ideas that generate Alpha within small caps
  • How working with small companies is different than large companies
  • Inflation and the impact on small caps
  • The art of stock picking
  • How risk can be controlled in small caps


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.

All investments involve risk, including the loss of principal. You can lose money by investing.

The Russell 2000 Value Index is an unmanaged index of those companies in the small-cap Russell 2000 Index chosen for their valueorientation. 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. You cannot invest directly in an index.

To view additional information including performance and holdings, please visit the Putnam Small Cap Value Fund page found on putnam.com. 

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.

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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.

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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: Hi folks, thanks for joining us on the Putnam Active Insights podcast. This is Chris Galipeau, Senior Market Strategist and I’ll be your host today as I normally am. This is podcast number 8 in the series and today our focus is on equities and specifically we’re going to talk about Small Cap Value Equities, and to help us with that our guest today is Mike Petro. Mike runs the Putnam Small Value Fund for us and has done a remarkable job running the fund. Mike joined with Putnam in 2002 and has been in the business since 1999, it’s a good timing on that, Mike, 1999. Prior to joining Putnam, Mike was the Senior Research Analyst at RBC Capital Markets and prior to that Mike serve as Principal Engineer at Quickware Engineering & Design. Mike is BS from MIT and MS from Michigan Go Blue. Mike is also a CFA charter holder. So Mike welcome to the podcast.

 

Mike Petro: Glad to be here, Chris.

 

Chris Galipeau: Yeah, we’re happy to have you. One of the things that we like to do when we start our chat is have you just walk us through your journey from your freshman year in college to September 7, 2021 as a PM.

 

Mike Petro: Sure, sure. So, my background is maybe a little bit different than most PMs. I never went to business school, I don’t have an economics or business undergrad. In fact, I actually went to MIT for my undergraduate in electrical engineering and then I spent 10 years designing computers, sort of, they called it mini-computers, this one is like Digital Equipment Corporation made like sort of baby mainframes back in time, taken us back in time.

 

Chris Galipeau: Yeah, that’s right and what was the symbol?

 

Mike Petro: I think it was DEC.

 

Chris Galipeau: Roget that.

 

Mike Petro: That’s right, yeah. But, as again, I spent 10 years in industry as with a little 5% companies, Quickware Engineering and it’s a really great experience and then I went to grad school in that time too. But again, it wasn’t for business school, it was for electrical engineering, I was in the PhD program studying computer vision. I did know that it was going to be a big deal given back in the ‘90s.

 

Chris Galipeau: Right.

 

Mike Petro: That’s right. But I almost found myself looking at stocks all the time and I also really want to get back to that entrepreneurial experience I had with this 5% company, so I let it go. I left after masters degree in statistical signal processing and I went back to my engineering work and I again, I spent 10 years there. But I was just continually withdrawing back to stock, I bought my first stock when I was 11, I think. Went up 10 times and I lost everything.

 

Chris Galipeau: I’ve been there.

 

Mike Petro: But, yeah, I’ve just always been looking at stocks. I mean, I’ve been reading Wall Street Journal everyday since I was 13, which is really how I learn to invest actually and I learn finance, and I was able to get into the investment business in 1999 as you notice. I do have this knack for getting into things like just when they peak. But I saw an Ad in a newspaper, believe it or not, and The Boston Globe, Dain Rauscher was looking for an equity research associate and they wanted somebody who understands technology because this was 1999 and tech was really high. I did know that technology and I specified the chips that I was going to use. For example, I saw this one as iLinks, so the time it was… 

 

Chris Galipeau: XLNX.

 

Mike Petro: Yeah, it was a $200 million market cap and I just thought it was the best thing ever. There’s a lot of controversy the time around the fabless model and about programmable logic, but I just knew it was the best thing ever because I designed whit those chips. So, I got into the sale side and two years later, made my way over to Putnam and have been with the Small Cap Value team ever since, so many years as an analyst. I also spent a few years running a SMID Cap Tech and Growth Fund, the Emerging Information Sciences Fund, which worked out pretty well. And then, I became the Portfolio Manager in 2019, so coming up three years early next year.

 

Chris Galipeau: So, I want to ask you this. I just thinking about this as you role through that, did you end up wanting to be a small cap stock picker because of maybe the entrepreneurial spirit in small companies where you were part of one, you can make an impact and seems to be a perfect fit almost.

 

Mike Petro: Yeah. I think that small cap is where you can really win and I was an individual stock picker. Actually, I did mention I started in the investment club back in 1993, I remember like it was September. First it started by signing all the papers at my wedding reception because I knew all my friends were going to be there from all over the country so we actually, “Bring your checkbook, come to the wedding and bring your checkbook.”

 

Chris Galipeau: Yeah, exactly.

 

Mike Petro: Actually, I signed a paperwork at that time and we did very, very well. I was the stock picker who run the fund and I likes small cap stocks because that’s where I could win.

 

Chris Galipeau: Yeah and so my time is always mid and large cap, predominantly large cap, and one of the things I think that the FAs that are listing to us might not appreciate, is how vast your universe is, right, in small-cap land? How minimal the coverage is, [straight] coverage is relative to, let’s say, Intel or Apple maybe 40 or 50 plus analyst following it. And so, what is a great place to harvest ideas, generate alpha, potentially very long runways. One of the questions just on your background and to just draw this out a little bit. Most FAs probably think that, as you mentioned, your background is completely different, right, from undergrad in economics and finance to an MBA and then CFA and that’s the route that people take. You didn’t and I bring this up because we had many people in the walls here at Putnam and in other firms that had super mathematical, statistical, a quantitative backgrounds that end up being able to apply the logic and everything that you learn with that sort of mindset to be excellent stock pickers. So for folks out there listening, if you don’t have an MBA and CFA, there’s still hope if you want to be a stock picker and you probably are already.

 

Mike Petro: Well, I did get the CFA and actually I thought that was very helpful. I always joked I needed to get something with three letters after my name: MSEE and BSEE and four letters, that’s not what you need. I need an MBA or CFA or something like that so I got the CFA. And I thought that was a really good program, actually I learned a lot.

 

Chris Galipeau: Yeah, for sure. Alright. So, maybe we’ll kick it off here with a couple questions. I want to start if we can, just by setting the table at a high-level and you probably don’t want to talk about this too much and I get it. What’s the investment case over decade, let’s say, for small cap and maybe Small Cap Value in particular? Why should FAs have a slug of that in client accounts?

 

Mike Petro: Yeah. So, there was a famous paper by Fama and French decades ago about the small-cap anomaly they called it and said that you could get excess alpha in Small Cap Value but over the last several decades, there’s been some dispute about whether that still exist or indeed whether it ever really existed. So, I’m not making the case that small cap is just better. But I do think that there’s a time for small cap and it’s very good for diversification because—I know this might sound surprising to some of your listeners but large cap isn’t like ordained to always outperform. It has for the last 10 or 20 years but doesn’t have to be that way and small cap tends to work when we’re seeing stronger nominal growth rates in the economy and I think we’re at a point, now where we’re going to see that. We had really crummy growth in the last decade plus. After the great recession of 2008, you got a quarter where you had 3% growth in GDP and you were like, “Wow! What a great quarter.” But you think about that. Like that’s really not very good. So, there’s times where you want to own small cap.

 

Chris Galipeau: Yeah, for sure. And I would even maybe add onto that a little bit. If you look in the rear-view mirror the last decade, you had 2% to 3% real GDP, no real inflation so maybe 4-ish nominal, maybe even a little less disinflation and declining rates, right, which is the perfect scenario for growth.

 

Mike Petro: That’s right.

 

Chris Galipeau: And probability for large cap, right? Which I say that because I live through that as a growth PM and now, we’re in a different situation here, right? We’re first year of an economic expansion behind us, you’ve got—in theory, we should have rising nominal yields where we hope on a go-forward basis. Little price pressure here in the near term and we know that exiting recession value outperforms growth at least in the last 50 years. Not some of the time, most of the time, every time. And the leader in the clubhouse in that category between large and small is small. 

 

Mike Petro: That’s right.

 

Chris Galipeau: And so I feel like if this is ever going to work, Petro, now it’s the time to make this work.

 

Mike Petro: And it has been, right? It’s been a good last 12 months.

 

Chris Galipeau: Right, no it has. Alright. So the asset class, good for turning over stones, good for finding ideas, good for finding maybe new technologies in their incubation period. Not a lot of coverage, plenty of chance for a rigorous fundamental analysis to generate some alpha, which leads me to my next question. You and I, we’re talking before we hit the record button but big universe in small-cap land. Could you give the listeners a high-level view of how you screen for ideas or how you narrow that universe down?

 

Mike Petro: Sure. So as you said, the universe is really large. I mean I’m running against the Russell 2000 Value Index, which curiously enough, does not have 2000 members. It has something like 1,380 because it’s the subset of the Russell 2000 Index, which does have 2000 members. But we look at the universe as being larger than that because in small cap there’s always something going on. Somebody is always doing well, somebody is always doing poorly and so like you’ll have names that may have been on the growth side of the 2000 Index and they screw up and they end up into value territory. So, I’m not just looking at the names that are in the index, I’m looking at the universe that’s—let’s say, like 3000 names. So, there’s a lot to get through. And you can’t get through 3000 names by like starting at A and working through Z and just say that we’re going to look at everyone of them, that’s completely unproductive. So, it really comes down to screening to figure out where to direct our energies and where to dig in for greater detail on a stock, and so we do that lots of ways. First of all, we do have a quant model, you know I am a mathematical guy.

 

Chris Galipeau: You don’t say.

 

Mike Petro: Yeah. And we’re looking at things that we think are going to add value. So first of all, we’re value funds so we’re looking for low-valued stocks. We think that the price you pay for a stock does matter and then we’re also looking for high-quality stocks. Quality can be defined as sort of a longer term basis like return on assets, return on equity, return on invested capital. You can think of it also in shorter term basis on sort of changes in accruals, which have been shown to be predictive and then we’re also looking at earnings momentum. I mean, we feel like stocks that are improving their earnings outlook tend to work and then we’re also looking at price momentum. So, we think that stocks that are starting to outperform the peers, tend to keep outperforming the peers. So we’re looking at all of those factors. Now, you don’t need to get all of those things at once but we’re looking for various combinations of those and we’re also trying to keep the portfolio tilted towards those factors again, which we believe work and we have back testing to indicate that that’s also true. So, we’re screening with quantitative model, which can get us through the 3000 names pretty quickly because their rank orders them, so that’s one way. I’m not proud. Like I’ll take ideas from anywhere. I mean I get ideas from in the sale side, I admit it.

 

Chris Galipeau: Sure.

 

Mike Petro: And sometimes they even work. So yeah, they gave me ideas. I go to conferences—well, now they’re virtually. Maybe I’ll be going back in person sometime soon, will see. But when I get the list of 150 companies come to the conference, I don’t just kind of eyeball it and say, “That sounds kind of interesting.” No, I have a spreadsheet, I run it through, when I look and I’ve got it all organized by valuation. I can see who’s got earnings momentum going up, I can look at free cash flow yields. I look at the spreadsheet to see which companies I want to meet with. I’m not just looking at names that sound familiar to me and then also technical analysis. One member of our team is a CMT and that’s a great way to get through a big universe and he can look at—I don’t know how many charts he can look through in a day but it’s a lot and he kind of just tip me off to things like, “Hey Mike, I don’t know why but this stock seems to be working. You might want to take a look at it.”

 

Chris Galipeau: Yeah.

 

Mike Petro: So, we’ve gotten ideas that way too.

 

Chris Galipeau: For sure and I’m a big proponent of that and Jim and I are close and good friends but I think there is a lot to be gained potentially by the potential price momentum in stock especially if it’s combined with all the other factors you just ripped off there: revenue growth, earnings estimate revision, FCF generation so on and so forth with a backdrop of low valuation, you have to ask yourself when you see that combo, “Okay, something is happening here. Can I identify the catalyst for a re-rating or get my arms around the story?”

 

Mike Petro: Yeah, and that’s actually very important, the catalyst. I’m looking for stocks that are a good value; number one, I’d like to get quality if I can get it. I mean, I’m also not one of this people who says, “Oh, I only buy quality stocks.” I don’t think that’s true. I think there’s a time for quality and a time for junk. Like for example, last fall and the spring was a time for junk. And so we had a lot of junk and that was great. But valuation and then broadly had light of quality if I can get it and then I’m also looking for a catalyst and that’s really important because it’s easy for a stock that’s cheap to stay cheap. So, we have to have a reason why we think those numbers are going up and that also provides a test case or rather a thesis test for us, are we right or not.

 

Chris Galipeau: Yeah and so I think that’s a loss on a lot of people is you can have stocks that are cheap that might be traps. You can have stocks that are cheap because there’s been a couple series of missteps but if they do have the quant data that you want to see and you can identify a discernible catalyst to re-rate the stock. How much of trying to dig out and find the catalyst comes from you talking with management, you talking with the street and that sort of thing?

 

Mike Petro: Yeah, that’s really most of it.

 

Chris Galipeau: Yeah.

 

Mike Petro: And I want to be clear. Like the quant model doesn’t tell us what to do, it’s just another input and we buy plenty of stocks that screen poorly on the quantitative screening. There are multiple ways to get into the portfolio, that’s just one of the ways. But yeah, I’m looking for that catalyst and we’re going to talk to management all the time we buy a stock and I’m trying to understand what the earnings power with this company is. Let’s say the street thinks they’re going to earn $1 next year, I want to explore can they earn $1.15, what has to happen and that’s where we win. It’s like we have a view of reality that’s better than what the street has out there and then, this is really important, we’re right, you got to be right.

 

Chris Galipeau: Exactly. There’s a great book by William O’Neil, JT would know, and the title of the book is “Being Right or Making Money.” Right? But we see that all the time, right? This company had characteristics Alpha, Bravo, Charlie and in theory this should work and I bought it at $18 now it’s trading $10 but I still think I’m right. Probably not.

 

Mike Petro: And actually I think my background in business, having spent 10 years in a small business helps me here because I’ve actually been in their shoes. When you’re at the startup you wear lots of hats so I raised financing, I made some major sales presentations in addition to engineering the product. So, it gives me credibility and when you talk about like “Oh the product slipped,” I can talk with them about what happened and I have an idea of how long it takes to debug  a product, I’ve been there.

 

Chris Galipeau: Right. Okay, that’s great. So, you’re building the portfolio stock by stock. How many names are in the portfolio today roughly?

 

Mike Petro: 110.

 

Chris Galipeau: 110, okay. So, I asked that because I wanted to go into how you think about, and I  know we’re very sophisticated here and you probably have your own risk control process in addition to the other [gurgles] that we have. How do you think about controlling risk in the portfolios. You’ve got 110 names. How do you come up with the weighing scheme in that sort of thing?

 

Mike Petro: Yeah. So that actually is a pretty quantitative process too. As I said we have the model and I talked about the quantitative model for the purpose of screening. It’s one of several ways that I can identify stocks that might have some promise, but it’s also important for risk control. Because again, I’ve said I believe in low valuation, I believe in quality, I believe in earnings momentum, I believe in price momentum. And so, I want to see does the portfolio reflect those beliefs and so everyday I get to see and it shows how the portfolio ranks against the benchmark. Is it cheaper, is it better quality, is it better earnings momentum, is it better price momentum. And the answer is yes. So, I’m always trying to maintain that exposure to the factors that I believe in and that’s one way. But then also, we have quantitative libraries which break the portfolio and the universe into different factors. So, you can talk about your exposure to momentum, you’re exposure to growth or value which by the way are actually not opposites. It’s not can be both value and growth. And so, I’m trying to keep limited exposures to those or if they’re not limited, at least I want to know what my bets are and be intentional about them. So, for example in last fall, I decided “Gosh, I really need to get value because this economy is going to come back strong.” And so, I wanted to have an overweight in value so I bought a lot of value stocks and was screening in fact very heavily on value, and so I had a risk factor there, “Gosh, Mike you’re really overweight value,” but I knew what I was doing and wanted that. Making bets is not a problem. The problem is making bets that you don’t know about.

 

Chris Galipeau: Oh. I say that to our FAs all the time and so I haven’t run money in probably a decade, but we didn’t have the risk control systems and ability to decompose the portfolio and say, “Hey Mike, you have price momentum beta of 1.6 in the portfolio,” and you are assuming you might have different loadings and so I think that is a huge help and an objective measure too of how the portfolio is positioned. One of the things that struck me when you were talking to Putnam as an organization, to our Salesforce a month ago or so, is you gave the Salesforce a couple of examples and one of the things, I think you might have been talking about—was it a yarn company?

 

Mike Petro: Oh, yeah.

 

Chris Galipeau: So, I was thinking about that this morning and one of the things that struck me is and a point that you made that I thought was excellent, was in working with small companies who are usually one maybe two-product companies, a couple channels, I don’t remember exactly what you said but it’s not rocket science, pretty easy, kind of boring sometimes for me to figure out what’s going on here. So, could you give us a couple of examples and before you do that, I need to tell everybody that whatever Mike’s about to say is not an endorsement to run out here and you know go buy the name that Mike talks about and remember that Mike’s portfolio reflects his current thinking and his forward-thinking as well. So please do your own due diligence FAs and listeners,  don’t take what we say as gospel but a couple examples would be great, even one example.

 

Mike Petro: Sure. So, one of the larger weight names in the portfolio is PennantPark Investment Corp and this is a business development company. Business development companies or BDCs are known or kind of esoteric. They’re high yield vehicles. They make low ends to middle market companies and sort of like REITs in the way that they’re not taxed to the corporate level the same way like that and they pay out very high dividends because of that, so this stock has a dividend yield like a 7.5% or so.

 

Chris Galipeau: Wow.

 

Mike Petro: So anyway, the attraction here is that this stock is very undervalued. It trades at about 68% of its tangible book value and the BDC universe on average is slightly above 1.0 times. Now, the reason of this one is so much cheaper is because they have a lot of equity. I said BDCs make loans to middle market businesses. Well, sometimes I’d make equity investments too, sometimes by on purpose, and sometimes they end up that way when the loan doesn’t work out and then you end up getting equity in the business instead because the loan defaulted. PennantPark had a number of these situations back with the energy collapse in 2014. So they were kind of heavy into energy producers and what prices has cratered and they ended up owning a lot of equity. But then they also had some other equity that they got into a little more intentionally. One of which is Cano Health which is acquired by SPAC and has done fantastically well. So, they’re making lemonade out of the lemons they had and they also had some true good fruit I would say as well, but 30% of their portfolio is equities which is really high for BDC. Usually, this be under 10% and so they’re not able to pay us high dividend as people would like. That 7% plus is actually a little low for a BDC because a lot of their portfolio, 30% or 35% is in equities and so the thesis is that they can sell some of these equities at this point. Like this Cano is being monetized now. They have a 6-month lock up but I think that they’ll monetize that soon. Some of their energy positions, now that WTI is up to $67 or $68 a barrel, there’s a lot more interest in energy equities. So, the idea is that they can monetize these equity positions and that they can re-deploy that into new loans, the middle market companies and then be able to raise the dividend.

 

Chris Galipeau: Got it.

 

Mike Petro: So, you’re getting the 7% plus yield while you wait and I think the stock, let say again, has 68% of tangible book value, don’t give it one time like everybody else does. Just give it 90% of tangible book and you’ve got a really nice upside.

 

Chris Galipeau: Yeah. That’s great, appreciate it. So, that’s a big yield.

 

Mike Petro: Yeah, yeah. It’s a real yield, probably up to 10 years.

 

Chris Galipeau: Yeah, it’s a real yield. I want to shift gears a little bit here. One of things that you’ve talked about probably for the last six months that may have the timeframe run is when your asset class, your style Small Cap Value, size and style I guess, those companies generally probably US-centric mainly and benefactors of little price pressure, little inflation. And I think as a firm, we probably have a view that we’re in this little near term bubbling in core inflation, we’ve got base effects that are causing that, you’ve got supply chain disruptions that are amplifying that but it probably goes by the boards in a couple quarters. You might not agree with that, right?

 

Mike Petro: Yeah. I’m a little more concerned that inflation is starting to make the turn here. We’ve had, gosh what is it, 40 plus years of this inflation. I actually do remember the inflationary times.

 

Chris Galipeau: The ‘70s and the ‘80s?

 

Mike Petro: Yeah. You remember that? I remember I had a CD that I got 11% or something like that. I don’t know. But I do remember those times and you have to keep in mind that the Fed has been trying to stoke inflation to some degree for at least the last 14 years, right. Since ‘07, since the great financial crisis, they have been trying to get a little inflation to system and I think they’re finally going to succeed and they’re getting a major assist from the Federal Government because if you look at all that stimulus that we got in the last 18 months, with more on the way in the form o f the Biden Democratic budget plan. It adds up to something like, I don’t know, $5 trillion, $6 trillion, $7 trillion. I mean that’s a real number. Like when you look at what GDP is in the US, it’s $20 trillion or $22 trillion depending on what day you measured it. You’re talking like 25%, 30% of GDP. Ben Bernanke famously talked about helicopter money back 15 years ago, what if it just drop likes that’s a hundreds—the helicopter, with that can inflation going and this is it! 

 

Chris Galipeau: The [unintelligible] is sitting right in their account. 

 

Mike Petro: This is what you are seeing—you are seeing people getting checks. They didn’t even know they were getting the check from the government, like they’re getting the childcare credit every month, they’re getting extended unemployment benefits. I’ve heard that, like $50,000 was sort of break-even, like we may less than $50,000 a year, you were better off just staying home and collecting the extra unemployment than actually going to get a good job. So like, we are seeing the experiment of what happens when you drop massive amounts of money into people’s wallets and I think they’re going to spend it and that’s going to drive inflation.

 

Chris Galipeau: Maybe we can try and tie that concept of higher inflation, maybe higher core inflation or maybe headline, or maybe both. Tie that back to the portfolio in terms of buying names that are beneficiaries of higher inflation, well there’s raw material company, could be consumer discretionary company. And I’ve heard you talk about that, you’ve probably done some of that. How long you think that this last? I know that’s probably a crazy question. But...

 

Mike Petro: Well, so what I’m saying that I think inflation is going to come back, I’m talking about the end of the big cycle, it’s the end of the 40-year cycle. And if you go 40, I guess an 80-year cycle right, because 40 years is just one way. But if you look back in those past 40 years, there are plenty of periods where you saw inflation going up in the context of that greater 40-year disinflationary period. So if I think that’s going to reverse, I’m not saying that inflation is going to be like a one-way ticket from1.5% to 10%. There are going to be periods when it comes back down and quiets down. I’m just saying that I think longer term, we could be in an inflationary period that could last a long time. So, it’s hard to really say, it doesn’t affect my stock picking on a day to day basis where I’m saying like, “Oh yeah, inflation’s going up to, 5% this month, then I’m going to buy the stock because of that”. I still have to layer on all of my normal analysis.

 

Chris Galipeau: What views have you expressed in the portfolio, have they captured that?

 

Mike Petro: Yeah, what areas would benefit from inflation, well based on the materials we mentioned that. So we are in fact pretty strongly overweight based on materials. Also, I think that banks can do well. Because if we think about it, money is actually their stock in trading, they’re not making wages, they’re like selling new money and so, if businesses are going to need higher working capital because everything costs more, then they’re going to need to finance that from banks. So, I think banks can see stronger long demand eventually. It has been pretty weak but I think that’s starting to turn and I’m [flexing] that in some small cap banks where they’re actually seeing long growth and not to mention the fact that if inflation then causes long rates to go up and then we got a steepening of the curve, then that’s a very direct beneficiary to banks bottomlines. 

 

Chris Galipeau: Especially your banks that are the spread lenders.

 

Mike Petro: The spread lenders, that’s right, small cap banks are usually spread lenders. So yes, based on the materials, we’ve got banks and energy as well.

 

Chris Galipeau: Right, sure. Left for dead in the side of the road a year ago. 

 

Mike Petro: And the interesting thing is that this comes back to the case for Small Cap Value. Those areas are all way overweight in the Small Cap Value index as compared to the growth or the large cap indices. The growth on large cap indices have a lot of healthcare, a lot of IT, a lot of the beneficiaries of the COVID lockdown but if you’re talking about what would benefit from the reopening and what would benefit from a more inflationary picture, a higher nominal GDP, it’s the Small Cap Value index, [let’s test] those names.

 

Chris Galipeau: Yup, totally agree. Alright, we’re up against the clock here a little bit Mike so I want to shift it here and get the listeners to know a little bit more about you. So, you and I spend all day at the conference and we’re talking with some small cap basic industry company and I’ll look and say, “Mike, we’re going to go get some food. Where are we going?

 

Mike Petro: Well okay, that could be a tough one.

 

Chris Galipeau: What are we eating, I guess?

 

Mike Petro: Alright, so let’s just say we are like in Upstate New York or maybe Chicago. Let’s say Chicago.

 

Chris Galipeau: Chicago is more realistic.

 

Mike Petro: I would say “Let’s go get Golumpki”.

 

Chris Galipeau: I don’t even know what that is. 

Mike Petro: Yeah. Well, if I would, it’s a Polish dish and it’s actually translated as stuffed cabbage. 

 

Chris Galipeau: I do know what that is.

 

Mike Petro: Yeah, so it’s stuffed cabbage as what everybody knows it but we call it Golumpki in Polish.

 

Chris Galipeau: Okay. I have a good friend of mine who’s Polish and she always, well not always, but would come over and make stuff and that’s one of the things she’s brought. It’s good.

 

Mike Petro: My mother used to make it and she taught my family how to make it, so now we make it.

 

Chris Galipeau: Alright, okay so we’re going to get Polish food for dinner. And in the Uber ride to the restaurant, what kind of music is Mike throwing on after a long day?

 

Mike Petro: Well, I guess I’m kind of boring here, I’m more of the classic album-oriented rock kind of guy especially it’s got blues or southern rock kind of vibe to it. 

 

Chris Galipeau: With [Lynyrd Skynyrd]?

 

Mike Petro: Oh absolutely, definitely and Led Zeppelin, Tom Petty but less you think that I am only interested in people who have at least one of the band members already passed on, I do like Greta Van Fleet.

 

Chris Galipeau: Okay, it’s awesome! Alright, so the last question, we’ve got some great responses from your colleagues in the building and I hear from advisors that when we want to ask you, have you read a book or two that have impacted your career path, maybe in the CFA program, ton of books that you had to read through that or just something else. Anything stick out to you that you’ve read is okay, I really need, maybe I should incorporate that into the spreadsheet for instance.

 

Mike Petro: This is another time when I think I’m just different than other people. I am actually not a big investment book reader. I did read securities analysis like everybody says they did. Back 20 years ago, I probably read that.

 

Chris Galipeau: It had to be Graham and Dodd.

 

Mike Petro: Yeah, that’s what I mean. Right. And I did get a few things out of it I think. For a statement analysis. But honestly, I don’t know that I finished it. I mean it’s dry as sawdust.

 

Chris Galipeau: I know.

 

Mike Petro: So, I’m not really a big investment book reader. I actually get most of my knowledge out of the Wall Street Journal by reading it everyday since I was 13 and they do a really great job at explaining concepts.

 

Chris Galipeau: It’s so interesting that you say that. So one of the things that I tell the younger folks in the organization that, maybe they are a couple years out of college, they’ll ask me frequently “Chris, what should I read?” and I tell them, “Well, there’s plenty that you can read, The Economist, Barron's and make sure you read the Wall Street Journal everyday, I mean everyday, for months, and quarters and years”.

 

Mike Petro: Yeah, you need to keep reading it, that’s right. And then, I kind of get a lot of my knowledge just by 10-K, yeah, by doing it. I’m an engineer, right, so it’s like that I’ll just figure it out on my own’ kind of attitude. So I would call this back as an amateur, I would call up companies and say, “Could you send me your investment pack?”and they send me their 10-K annual report and I would read that and that’s how I learned accounting by like reading the footnotes in the 10-K and then I remember once I actually went to the library and I looked up the tax code which is about two and a half feet long in the book until I figured out inventory counting, so like I just always been a ‘do it myself’ kind of a guy.

 

Chris Galipeau: Yeah, Mike Petro self-made man. Alright, Mike, thanks for hopping on with us. We’re going to wrap it up here. Folks, our next podcast we’ll have Bill Cass. So Bill runs Putnam’s Wealth Management operations so he’s CFP, does a lot of work around, government policies and how they made impact investing and all the things that are really covered in Wealth Management. So, Mike Petro, thanks for joining us. We’re signing off. Thanks everybody for listening.

 

Patrick Laffin:

Thank you for listening to Active Insights. For more information on Putnam Investments, please visit Putnam.com. 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.

 

Online Title and Description:

The Case for Small Cap Value with Michael Petro, CFA

 

In this episode, Chris speaks with Michael Petro, portfolio manager of the Putnam Small Cap Value Fund.  He is responsible for the overall strategy and positioning of Putnam's small-cap value products. Mr. Petro joined Putnam in 2002 and has been in the investment industry since 1999.

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

·       The case for small cap value

·       The process of harvesting ideas that generate Alpha within small caps

·       How working with small companies is different than large companies

·       Inflation and the impact on small caps

·       The art of stock picking

·       How risk can be controlled in small caps

 

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.

 

All investments involve risk, including the loss of principal. You can lose money by investing.

 

The Russell 2000 Value Index is an unmanaged index of those companies in the small-cap Russell 2000 Index chosen for their valueorientation. 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. You cannot invest directly in an index.

 

To view additional information including performance and holdings, please visit the Putnam Small Cap Value Fund page found on putnam.com. 

 

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.

 

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