Q4 2022 Putnam Retirement Advantage Funds Q&A
- Financial markets rebounded over the three-month period, and major asset classes generated positive returns.
- All Retirement Advantage vintages delivered positive absolute returns, driven primarily by the rally across equity markets.
- We believe the market is too optimistic with respect to a Fed policy pivot.
How were market conditions in the fourth quarter?
Financial markets rebounded over the three-month period despite ongoing volatility and economic uncertainty. All major asset classes experienced positive returns. Stocks gained over the quarter thanks to better-than-expected third-quarter earnings reports, steady employment, and optimism that the Federal Reserve would soon begin to slow the pace of interest-rate hikes. Signs that inflation was cooling provided a significant boost to markets. Although equities ended the quarter higher, many converging risks drove persistent volatility, which led to a sell-off in December. The intensifying Russia-Ukraine War, civil unrest in China, fears of recession, and hawkish Fed rhetoric ranked high among investor concerns.
Bonds posted positive returns for the quarter but underperformed equities. Stubbornly high inflation remained a top priority for the Fed and other central banks. In early November, the Fed raised its benchmark interest rate by 0.75%, the fourth consecutive increase of this magnitude. However, it signaled it might soon begin to slow the pace of tightening, which bolstered sentiment. A smaller hike of 0.50% in mid-December brought the federal funds rate to 4.25%–4.50%, a level not seen in 15 years. Fed officials indicated they would continue raising rates in 2023 until there was sufficient evidence inflation was sustainably trending downward. The markets ended the quarter and 2022 amid uncertainty and worries about a recession in 2023.
For the three-month reporting period, U.S. stocks returned 7.56%, as measured by the S&P 500 Index. International stocks soared 17.34%, as measured by the MSCI EAFE Index [ND]. Emerging market stocks, as measured by the MSCI Emerging Markets Index [GD], climbed 9.79%. Global equities, as measured by the MSCI World Index [ND], posted a gain of 9.77%.
For the three-month period, investment-grade bonds gained, with the Bloomberg U.S. Aggregate Bond Index returning 1.87%. The yield on the 10-year U.S. Treasury note began the quarter at 3.83%. After peaking at 4.23% on October 24, the 10-year U.S. Treasury yield ended the quarter at 3.88%. The yield curve remained inverted over the three months, which in past economic cycles has been an indicator for recession. High-yield bonds returned 3.76%, as measured by the JPMorgan Developed High Yield Index. Global bonds, as measured by the FTSE World Government Bond Index, rose 3.82%.
How did Putnam Retirement Advantage Trusts perform during the three months ended December 31, 2022?
All Retirement Advantage vintages delivered positive absolute returns, driven primarily by the rally across equity markets. For the quarter, global equities outperformed U.S. fixed income, though all asset classes finished positive. As a result, fixed income-oriented portfolios for savers nearing their retirement target date finished below equity-centric, longer-dated strategies.
Longer-dated portfolio gains were a product of their higher equity allocations and strength across equity markets. Shorter-dated, fixed income-oriented strategies also benefited from this move higher in equities but finished with smaller positive returns as fixed income underperformed equities.
Putnam Retirement Advantage Trusts invest in underlying Putnam collective investment trusts to create a diversified target-date portfolio. We use an important tool called a glide path to determine the funds’ allocations among asset classes and the underlying funds over time. With the glide path as a reference point, our portfolio managers make tactical decisions based on our analysis of current market risks and opportunities. Funds intended for investors further from retirement outperformed near-retirement funds during the quarter.
What strategies affected performance positively and what detracted?
Overall, our asset allocation decisions slightly detracted from benchmark-relative performance. We entered the period with an underweight position to equity risk and moved further underweight by quarter-end. This hurt performance as equities rallied due to better-than-expected third-quarter earnings and cooling inflation. An out-of-benchmark, modest long position to commodity risk led to a small gain. The portfolios were neutral with respect to interest-rate risk.
Overall, our security selection decisions slightly weakened benchmark-relative performance. Our quantitative U.S. large-cap core and international equity strategies detracted over the quarter. Our quantitative U.S. small-cap core equity strategy benefited the portfolios. Our opportunistic fixed income strategy also enhanced results during the quarter.
What is your near-term outlook for the markets?
Volatility has been a major constant across markets in 2022. We expect high inflation, monetary policy tightening, the war in Ukraine, and recession fears will continue to weigh on market sentiment for the foreseeable future.
Our near-term outlook for equities is bearish. We believe the market is too optimistic with respect to a Fed policy pivot. We believe the Fed is unlikely to execute a soft landing and will either continue hiking rates more than the market anticipates or break the economy and trigger a recession. Both paths should prove negative for equities, in our view.
Our near-term outlook for rate-sensitive fixed income is neutral. The Fed’s plans to continue hiking interest rates is negative for duration exposure. However, our view is tempered by the reality of deteriorating economic data and heightened recession risk, which could be a catalyst for interest rates to move lower.
Our view on commodities is slightly bullish. A strengthening U.S. dollar, rising real yields [which adjust for the impact of inflation], and building recessionary forces are headwinds for commodities, in our view. However, in the medium term, we believe supply constraints are a reason to be bullish.
Against this backdrop, we continue to have conviction in our investment strategies given our ability to adapt the portfolios to changing market conditions.
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