Q2 2021 Putnam Multi-Asset Absolute Return Fund Q&A
- Global financial markets mostly moved higher in response to economic recovery.
- Directional strategies enhanced performance, while non-directional strategies detracted from results.
- The fund was positioned with a modestly bullish outlook at quarter-end.
What was the investment environment like during the second quarter of 2021?
Global financial markets ended the period mostly higher. Key equity market indexes advanced, supported by widespread Covid-19 vaccinations, fiscal stimulus, low interest rates, and signs of economic recovery. However, stocks and other higher-risk assets came under pressure at times due to concerns about rising inflation and a strong economic recovery that could prompt central bankers to pare back their accommodative monetary policies. The S&P 500 Index, a broad measure of U.S. stocks, rose 8.55% for the quarter, repeatedly setting new highs. International stocks, as measured by the MSCI EAFE Index [ND], climbed 5.17%.
The Federal Reserve surprised investors by signaling it might raise short-term interest rates sooner than anticipated if inflationary pressures stemming from the rebounding U.S. economy persisted. These concerns eased somewhat when Fed policymakers called the rise in inflation “transitory” and stated they would not rush into raising rates. Some central banks across Europe and Latin America have already started to lift rates. However, the European Central Bank has pledged to maintain its accommodative money policies. The rate-sensitive Bloomberg Barclays U.S. Aggregate Bond Index, a measure of investment-grade corporate bonds, rose 1.83% for the period. Yields on the benchmark 10-year U.S. Treasury note began the quarter at 1.74% and moved lower to end at 1.45%. Global bond yields, including high-yield and investment-grade corporate debt, also trended slightly lower due to easing inflation fears.
Commodity markets experienced further gains, adding to their momentum from the first quarter. Demand rose higher due to the reopening of economies, a return to global travel, and potential infrastructure spending by the Biden administration. Temporary supply bottlenecks caused by the pandemic also contributed to rising prices.
Before we discuss performance, would you summarize the fund’s overall investment objective and strategy?
Putnam Multi-Asset Absolute Return Fund seeks a positive return exceeding the return of Treasury bills over a reasonable period of time, regardless of market conditions. The fund seeks to achieve risk-and-return characteristics by dynamically allocating assets using a combination of directional [or market sensitive] and non-directional [or market neutral] strategies.
The directional portion of the portfolio consists of two components: a risk-balanced portfolio of stocks and bonds designed to efficiently capture long-term market returns and a dynamic asset allocation overlay to reflect tactical views. The overlay consists of tactical longs and shorts to equities, rates, credit, and commodities based on the portfolio management team’s expectations for each of these asset classes. The team manages both the composition and total level of risk, depending on market conditions and the prevailing opportunity set.
The non-directional portion of the portfolio consists of long/short market neutral strategies that provide flexible, uncorrelated sources of alpha.
How did the fund perform for the three months ended June 30, 2021?
The fund’s class Y shares rose 2.43%, outperforming the cash benchmark, the ICE BofA U.S. Treasury Bill Index, which posted a return of 0.00%.
What factors had the biggest influence on performance?
Overall, directional strategies enhanced performance in the second quarter. The equity portion of the risk-balanced portfolio finished positive, and our modest tactical long position to equity risk also enhanced results. The portfolio was net long equity risk overall, resulting in a positive contribution from directional equity exposure. The fixed income portion of the risk-balanced portfolio ended positive, while our modest tactical short position to interest-rate risk led to a slight loss. The portfolio was net long rates overall, resulting in a positive contribution from directional rates exposure. A tactical long position to commodity risk boosted performance during the period. A modest tactical long position to credit risk was slightly additive.
Overall, non-directional strategies detracted from results. Fixed income sector alpha experienced the greatest weakness due to a strategy that shorts U.S. real yields. Currency alpha ended with a similar loss. Fixed income-selection alpha finished negative due to a strategy focused on structured mortgage credit. Alternative beta contributed a small loss driven by volatility carry underperformance. Strength from commodity alpha and a small positive contribution from equity-selection alpha helped to mitigate losses.
How is the fund positioned at the start of the third quarter of 2021?
The fund is positioned with a modestly bullish stance entering the third quarter. Within our dynamic allocation overlay, we are modestly long equity risk and credit risk, long commodity risk, and modestly short interest-rate risk. Within the overall directional component, which includes the structural risk-balanced portfolio and the dynamic allocation overlay, we are long all asset classes.
What is your outlook for the global economy?
Widespread vaccine distribution continues to facilitate the global economic recovery and a return to normal life. We are encouraged by the current tailwinds for financial markets in the United States, especially the impact of fiscal stimulus, an improving labor market, and significant pent-up demand, which can help support recovering economies abroad. Still, we anticipate some volatility in the months ahead as investors weigh the continued rollout of vaccines and the pace of reopening, with its implications for inflation and higher interest rates.
Given the current environment, we are bullish on equities in the second half of 2021 until the Fed is close to signaling a taper of its asset purchase program. The combination of pent-up demand and the Fed’s accommodative monetary policy makes a compelling case for equities.
In fixed income, our outlook on credit is modestly bullish. Banks have eased credit conditions for large corporate commercial and industrial loans. In addition, average total leverage for new high-yield issues has declined to low levels that were last seen in 2013. Our outlook on interest-rate risk is slightly bearish, as we believe risks are skewed to higher yields given the expectations for continued economic momentum and the potential for an overreaction to some temporary inflation spikes. Upward pressure on yields could extend into the second half of the year as an eventual taper and change in the Fed’s rate policy slowly approaches.
Our view on commodities is favorable. We expect that increased distribution of vaccines, fiscal support, and favorable monetary conditions will stimulate global demand for commodities in 2021 from levels seen during the pandemic-induced downturn. Against this backdrop, we continue to have conviction in our investment strategies based on their strong long-term results.
More in: Alternatives,