Putnam Absolute Return Funds Q&A Q2 2013

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PUTNAM INVESTMENTS | putnam.com Key takeaways The global investment landscape was disrupted by rising bond yields, as investors contemplated a scaling back of the U.S. Federal Reserve’s bond-buying program. Within fixed income, our mortgage prepayment strategies detracted from performance but rebounded in June, while our term-structure positioning and holdings of commercial mortgage-backed securities aided results. Stock selection within directional strategies and currency positioning in non-directional strategies hampered returns in the 500 Fund and 700 Fund. We have a generally positive outlook for global economic growth and began to modestly increase the funds’ risk positioning in U.S. equities and global fixed income as the quarter concluded. How did the landscape change in global markets during the quarter? There was a significant disruption in the trends we had seen during most of 2012 and into the first quarter of 2013. The positive picture through April darkened somewhat in May and June. Yields across the world rose from historically low levels in April to more normal — but still historically low — levels by the end of June. It was quite a significant pullback across all financial markets and asset classes. U.S. equities held up better than most other assets. Bond investors worldwide reacted to improving U.S. economic data by debating when the Federal Reserve would begin to scale back its stimulative bond-buying program. These concerns intensified in June, when Fed Chairman Ben Bernanke announced that the central bank could begin reducing its stimulus program later in 2013, and end it by mid 2014, sooner than investors expected. Spread sectors — meaning sectors that trade at a yield premium to U.S. Treasuries — which had been buoyed by the massive liquidity created by the Fed’s asset purchases, sold off, with emerging-market [EM] bonds getting hit particularly hard. Q2 | 2013 » Putnam Absolute Return Funds Q&A Absolute return strategies post mixed results amid rising bond yields Portfolio Managers 100 Fund and 300 Fund D. William Kohli (industry since 1986) Michael V. Salm (industry since 1989) Kevin F. Murphy (industry since 1988) Paul D. Scanlon, CFA (industry since 1986) 500 Fund and 700 Fund James A. Fetch (industry since 1994) Robert J. Kea, CFA (industry since 1988) Joshua B. Kutin, CFA (industry since 1998) Robert J. Schoen (industry since 1990) Jason R. Vaillancourt, CFA (industry since 1993)

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The global investment landscape was disrupted by rising bond yields, as investors contemplated a scaling back of the U.S. Federal Reserve’s bond-buying program. Within fixed income, our mortgage prepayment strategies detracted from performance but rebounded in June, while our term-structure positioning and holdings of commercial mortgage-backed securities aided results. Stock selection within directional strategies and currency positioning in non-directional strategies hampered returns in the 500 Fund and 700 Fund. We have a generally positive outlook for global economic growth and began to modestly increase the funds’ risk positioning in U.S. equities and global fixed income as the quarter concluded.

Transcript of Putnam Absolute Return Funds Q&A Q2 2013

Page 1: Putnam Absolute Return Funds Q&A Q2 2013

PUTNAM INVESTMENTS | putnam.com

Key takeaways•The global investment landscape was disrupted by rising bond yields, as investors contemplated a scaling back of the U.S. Federal Reserve’s bond-buying program.

•Within fixed income, our mortgage prepayment strategies detracted from performance but rebounded in June, while our term-structure positioning and holdings of commercial mortgage-backed securities aided results.

•Stock selection within directional strategies and currency positioning in non-directional strategies hampered returns in the 500 Fund and 700 Fund.

•We have a generally positive outlook for global economic growth and began to modestly increase the funds’ risk positioning in U.S. equities and global fixed income as the quarter concluded.

How did the landscape change in global markets during the quarter?There was a significant disruption in the trends we had seen during most of 2012 and into the first quarter of 2013. The positive picture through April darkened somewhat in May and June. Yields across the world rose from historically low levels in April to more normal — but still historically low — levels by the end of June. It was quite a significant pullback across all financial markets and asset classes. U.S. equities held up better than most other assets.

Bond investors worldwide reacted to improving U.S. economic data by debating when the Federal Reserve would begin to scale back its stimulative bond-buying program. These concerns intensified in June, when Fed Chairman Ben Bernanke announced that the central bank could begin reducing its stimulus program later in 2013, and end it by mid 2014, sooner than investors expected. Spread sectors — meaning sectors that trade at a yield premium to U.S. Treasuries — which had been buoyed by the massive liquidity created by the Fed’s asset purchases, sold off, with emerging-market [EM] bonds getting hit particularly hard.

Q2 | 2013 » Putnam Absolute Return Funds Q&A

Absolute return strategies post mixed results amid rising bond yields

Portfolio Managers

100 Fund and 300 Fund

D. William Kohli(industry since 1986)

Michael V. Salm(industry since 1989)

Kevin F. Murphy(industry since 1988)

Paul D. Scanlon, CFA (industry since 1986)

500 Fund and 700 Fund

James A. Fetch(industry since 1994)

Robert J. Kea, CFA(industry since 1988)

Joshua B. Kutin, CFA(industry since 1998)

Robert J. Schoen(industry since 1990)

Jason R. Vaillancourt, CFA(industry since 1993)

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Q2 2013 | Absolute return strategies post mixed results amid rising bond yields

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What are the differentiators for the absolute return strategy?We pursue positive returns with less volatility over time than traditional investments that expose investors to greater market risk. What distinguishes our strategy is the ability to go anywhere and do anything within the portfolios, which are free of an asset-based benchmark — that is, we are not required to hold equities or bonds, nor are we tied to a specific benchmark return. This makes for a highly flexible strategy that enables us to take advan-tage of a wide range of tools. We aim to have a balanced mix of strategies, driven by market returns as well as strategies uncorrelated to market returns. Moreover, we possess the ability to alter our strategy, depending on our view of both risk areas we focus on. If we are bullish on equity markets or credit markets, we will take a positive risk exposure. Conversely, when we don’t have a favor-able view, we can decide not to hold stocks or bonds, or can take short positions in the portfolios.

One commonality among the funds involves fixed-income strategies. How did they affect the funds’ returns during the quarter?Our term-structure strategies — interest-rate and yield-curve positioning — proved beneficial, as we generally took minimal interest-rate risk during a quarter marked by rising Treasury yields. Additionally, our holdings of commercial mortgage-backed securities [CMBS] helped performance, especially earlier in the quarter, as investors took advantage of attractive spreads and positive underlying fundamentals in the sector.

Conversely, our mortgage prepayment strategies hurt the funds' results overall for the quarter. As the quarter began, given the uncertainty about Fed policy, the pace of home refinancing, and that interest rates are still at low levels, our holdings of collateralized mortgage obligations [CMOs] significantly underper-formed. However, the sector rebounded nicely in June, as interest rates continued to rise. With the increase in interest rates, interest-only [IO] CMOs did particularly well, because higher rates led to slower prepayments of the mortgages underlying the securities.

Our holdings of high-yield bonds had a neutral impact on performance, as positive results in April were fully offset by poor returns in May and June. High-yield corporate credit was hampered more by capital flows and by the technical supply and demand dynamics in the sector, than by any breakdown in fundamental support. In fact, the fundamental backdrop for high-yield bonds remained solid; issuers are in reasonably

good financial shape and the default rate remained low at quarter-end. Moreover, high-yield bonds have histori-cally tended to do well during periods of moderate economic growth.

The 500 Fund and 700 Fund can invest outside the fixed-income universe. What were the drivers of performance in those funds?We experienced a pullback in performance in the portfolios as a result of both our directional and non-directional strategies. Among directional strategies, stock selection that worked quite well in 2012 and into the first part of 2013 gave back gains during the quarter. In non-directional strategies, a number of currency positions that worked well in the first quarter also did not perform well in the second quarter.

What is your outlook for the bond markets?Investors have adjusted their expectations about when the Fed may begin to wind down quantitative easing. Consequently, while rates rose significantly during the quarter, we think it’s unlikely that they are going to move substantially higher until the Fed moves closer to actually ending quantitative easing. As a result, we believe the environment for corporate credit and other risk-based fixed-income categories may continue to be favorable. That said, if spreads rise more than economic fundamentals seem to warrant, we will view that as a window of opportunity to try and capitalize on attrac-tively valued securities.

How are the portfolios positioned for the coming quarter?In the 500 Fund and 700 Fund, we continue to manage the blend of non-directional strategies and strategies tied to market direction. We are beginning to have a more sanguine view of equity markets, and specifically to the idea of adding exposure to U.S. equities.

Regarding the fixed-income positioning across all four funds, following the liquidity-driven sell-off in various spread sectors, we added back non-agency residential mortgage-backed securities [RMBS] and high-yield bonds, seeking to benefit from the improved relative value in these sectors. In the 100 Fund and 300 Fund, we increased our allocations in peripheral Euro-pean government bonds, specifically in Italy, Spain, and Greece. In addition to the improved economic backdrop in these countries, we think these bonds offer favorable technical characteristics versus the bond markets in many developing nations.

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Q2 2013 | Absolute return strategies post mixed results amid rising bond yields

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Fund symbols

Absolute Return 100 Fund® Absolute Return 300 Fund® Absolute Return 500 Fund® Absolute Return 700 Fund®

Class A PARTX PTRNX PJMDX PDMAX

Class B PARPX PTRBX PJMBX PDMBX

Class C PARQX PTRGX PJMCX PDMCX

Class M PARZX PZARX PJMMX PDMMX

Class R PRARX PTRKX PJMRX PDMRX

Class Y PARYX PYTRX PJMYX PDMYX

Annualized total return performance as of June 30, 2013

Class A shares (inception 12/23/08)

Absolute Return 100 Fund

Absolute Return 300 Fund

Absolute Return 500 Fund

Absolute Return 700 Fund

BofA Merrill Lynch U.S. Treasury Bill

Index

Before sales charge

After sales charge

Before sales charge

After sales charge

Before sales charge

After sales charge

Before sales charge

After sales charge

Last quarter 0.29% -0.71% -0.19% -1.18% -2.25% -7.87% -2.87% -8.45% 0.03%

1 year 2.24 1.22 5.34 4.29 2.53 -3.36 3.06 -2.87 0.13

3 years 0.89 0.55 1.88 1.54 3.90 1.87 4.61 2.57 0.14

Life of fund 1.54 1.32 3.16 2.95 4.57 3.21 5.97 4.59 0.18

Total expense ratio 0.65% 0.82% 1.17% 1.31%

What you pay 0.65% 0.82% 1.15% 1.31%

Returns for periods less than one year are not annualized.

Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or a loss when you sell your shares. Performance of class A shares after sales charge assumes reinvestment of distributions and does not account for taxes. After-sales-charge returns reflect a maximum 1.00% load for Putnam Absolute Return 100 Fund and Putnam Absolute Return 300 Fund, and a maximum 5.75% load for Putnam Absolute Return 500 Fund and Putnam Absolute Return 700 Fund. For a portion of the periods, the funds had expense limitations, without which returns would have been lower. “What you pay” reflects Putnam Management’s decision to contractually limit expenses through June 30, 2014. To obtain the most recent month-end performance, visit putnam.com.

The BofA Merrill Lynch U.S. Treasury Bill Index is an unmanaged index that tracks the performance of U.S. dollar denominated U.S. Treasury bills publicly issued in the U.S. domestic market. Qualifying securities must have a remaining term of at least one month to final maturity and a minimum amount outstanding of $1 billion. You cannot invest directly in an index.

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Q2 2013 | Absolute return strategies post mixed results amid rising bond yields

The views and opinions expressed are those of the portfolio managers as of June 30, 2013, are subject to change with market conditions, and are not meant as investment advice. All performance and economic information is historical and is not indicative of future results.

The funds are not intended to outperform stocks and bonds during strong market rallies.

Consider these risks before investing: Our allocation of assets among permitted asset categories may hurt perfor-mance. The prices of stocks and bonds in the funds' portfolio may fall or fail to rise over extended periods of time for a variety of reasons, including both general financial market conditions and factors related to a specific issuer or industry. Our active trading strategy may lose money or not earn a return sufficient to cover associated trading and other costs. Our use of leverage obtained through derivatives increases these risks by increasing investment exposure. Bond invest-ments are subject to interest-rate risk, which means the prices of the funds' bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is gener-ally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Inter-national investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging-market securities, including illiquidity and volatility. Our use of deriva-tives may increase these risks by increasing investment exposure (which may be considered leverage) or, in the case of many over-the-counter instruments, because of the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. The funds may not achieve their goal, and they are not intended to be a complete investment program. The funds' effort to produce lower volatility returns may not be successful and may make it more difficult at times for the funds to achieve their targeted return. In addition, under certain market conditions, the funds may accept greater volatility than would typically be the case, in order to seek their targeted return. For the 500 Fund and 700 Fund, these risks also apply: REITs involve the risks of real estate investing, including declining property values. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. Additional risks are listed in the funds’ prospectus. You can lose money by investing in the funds.

Request a prospectus or summary prospectus from your financial representative or by calling 1-800-225-1581. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.

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