This stock fund has beaten the S&P 500 with bets on 'enablers' in AI and beyond

By Philip van Doorn

The managers of the Putnam Large Cap Growth Fund pursue 'durable growth' for an all-weather strategy

Investors can be expected to demand something special if they are going to pay higher fees for active management of their money. It is difficult for fund managers to outperform broad stock indexes, and their fees contribute to the underperformance. But active management can also incorporate thoughtful strategies that might lower your risk over the long-term, even if you want to follow a fairly aggressive growth strategy.

One example of a fund that has fared well under active management is the $10.6 billion Putnam Large Cap Growth Fund PGOYX, which is co-managed by Richard Bodzy, who took up the position in August 2017 and Greg McCullough, who has co-managed the fund since May 2019. The fund is rated five stars (the highest rating) within Morningstar's Large Growth category. (Putnam Investments is a unit of Franklin Templeton.)

Speaking to MarketWatch, Bodzy and McCullough stressed the need to invest in companies with durable models that are aligned with broad themes across industries. They also gave examples of "enablers," which are companies well-positioned to work for innovators by providing tools or manufacturing services for them. They expect the enablers to benefit from important trends over the long term, regardless of which of those companies' customers turn out to be the strongest competitors in their industries, and even during economic downturns.

Examples of enablers

Below is a list of the top holdings of the Putnam Large Cap Growth Fund, and you probably won't be surprised to see Microsoft Corp. (MSFT) and Nvidia Corp. (NVDA) at the top. The fund's allocation in these companies is similar to that of its benchmark, the Russell 1000 Growth Index RLG, and it has a heavier allocation to the two companies than the S&P 500 SPX does, as you can see in the comparison below.

These two giants can be considered enablers across various industries, because of Microsoft's ubiquity in cloud desktop applications and corporate services, and because Nvidia is dominating the market for graphics processing units (GPU) being deployed in data centers to support the development of various artificial intelligence technologies.

McCullough said that Microsoft had exposure to three of the broad themes he and Bodzy had been tracking, including AI, software and "increased screen time." This varied opportunity set "helps us build conviction in the duration of growth," he said. Another tailwind for Microsoft is increasing recurring revenue, he added.

Nvidia's stock price has nearly tripled over the past year. But the stock's forward price-to-earnings ratio has declined to 38.5 from 47.5, as rolling 12-month consensus earnings estimates among analysts polled by FactSet have increased more quickly than the share price.

"The magnitude of earnings revisions for Nvidia has been remarkable," Bodzy said. "So the outstanding question is how long this elevated capital expenditure cycle will last for AI."

For now, he expects the high level of AI-related spending to continue, because companies that don't participate in this trend will be at competitive disadvantages. "We think the number of use cases for AI will expand dramatically," he said.

Digging further into enablers, another of the fund's holdings is Cadence Design Systems Inc. (CDNS), "which wouldn't necessarily be associated with AI," Bodzy said. But the company provides a suite of hardware and software tools, which he described as "one of the only ways to design complex chips." He said Cadence has an "effective duopoly" with Synopsys Inc. (SNPS), which the fund also holds.

Another long-term theme cited by McCullough was personalized medicine, through which "DNA or RNA makeup will influence what is prescribed" to people being treated. The fund holds shares of Lonza Group AG (CH:LONN) (LZAGY), which is based in Switzerland and has "the largest cell and gene-therapy-manufacturing facility in the world, in Texas," he said.

"Rather than invest behind one therapy, with binary approval processes, we invest behind one of the largest manufacturing companies" for the biotechnology industry, McCullough said. "Whichever cell and gene therapy is approved, they will need to manufacture their drug for broad commercialization."

Top holdings

Here are the top 10 holdings (out of 48) of the Putnam Large Cap Growth Fund as of April 30. The table also includes those stocks' allocations within the iShares Russell 1000 Growth ETF IWF, which tracks the fund's benchmark index. It also includes percentages for those holdings within the SPDR S&P 500 ETF Trust SPY.

   Company                                     Ticker   % of Putnam Large Cap Growth Fund as of April 30  % of iShares Russell 1000 Growth ETF as of May 28  % of SPY as of May 28 
   Microsoft Corp.                              MSFT                                              12.18%                                             11.86%                  7.17% 
   Nvidia Corp.                                 NVDA                                               8.91%                                              9.37%                  6.30% 
   Apple Inc.                                   AAPL                                               8.52%                                             10.26%                  6.18% 
   Amazon.com Inc.                              AMZN                                               8.00%                                              6.03%                  3.73% 
   Alphabet Inc. Class C                        GOOG                                               6.16%                                              7.13%                  4.30% 
   Berkshire Hathaway Inc. Class B             BRK.B                    1.65% 
   Meta Platforms Inc. Class A                  META                                               3.62%                                              3.92%                  2.37% 
   Broadcom Inc.                                AVGO                                               3.48%                                              1.83%                  1.39% 
   Mastercard Inc. Class A                       MA                                                2.84%                                              1.39%                  0.82% 
   Eli Lilly and Co.                            LLY                                                2.74%                                              2.53%                  1.44% 
   Visa Inc. Class A                             V                                                 2.27%                                              1.62%                  0.96% 
                                                                                                                                         Sources: Putnam, BlackRock, State Street 

The Putnam Large Cap Fund holds Class C shares of Alphabet Inc., while the other two funds hold both Class C and Class A shares of that company. To simplify the table, any holdings of Alphabet are the sum of the funds' Class C (GOOG) and Class A (GOOGL) shares.

The only company on the list not held by the Putnam Large Cap Fund is Berkshire Hathaway, which isn't part of the Russell 1000 Growth Index, but is the eighth-largest component of the S&P 500.

Click the tickers for more about each company.

Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page

Performance

Here is how the Putnam Large Cap Fund's Class Y shares have performed, with dividends reinvested over various periods, compared with returns for IWF and SPY. The Class Y shares are available to institutions or through investment advisers, with no sales charge. Returns are after expenses, which total 0.65% of assets under management annually for the Putnam fund, 0.19% for IWF and 0.0945% for SPY.

   Fund or ETF                              Ticker   2024 through May 28  1 year  3 years  5 years  10 years 
   Putnam Large Cap Growth Fund - Class Y   PGOYX                    16%     36%      38%     131%      337% 
   iShares Russell 1000 Growth ETF           IWF                     15%     35%      39%     140%      336% 
   SPDR S&P 500 ETF Trust                    SPY                     12%     28%      32%     105%      232% 
                                                                                             Source: FactSet 

The fund has performed pretty much in line with the ETF tracking its benchmark, despite having higher expenses. But it has beaten the S&P 500 handily for longer periods.

When asked why an investor might be better served by the fund instead of one tracking the Russell 1000 Growth Index, Bodzy said that "focusing on structurally advantaged and innovative companies" can offer protection from uncertainty.

McCullough said that over the past five to 10 years, the strong have gotten stronger in the stock market. "There is no guarantee that will continue. Our approach allows us to position the portfolio such that if the trend were to change, we would be in a strong position to benefit." he said.

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-Philip van Doorn

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06-01-24 0654ET

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