Q1 2023 Putnam Retirement Advantage Funds Q&A
- Global equities and fixed income rallied for the second consecutive quarter.
- All Retirement Advantage vintages delivered positive absolute returns, driven primarily by equity market strength.
- Bond market prices now reflect more near-term interest-rate hikes and a higher Fed terminal rate, in our view.
How were market conditions in the first quarter?
Financial markets experienced volatility during the three-month period due to persistent inflation, monetary policy tightening, and concerns about the stability of the banking sector. Despite these headwinds, all major asset classes delivered positive returns.
The markets started the quarter strong in January amid signs of cooling inflation. Volatility picked up in February on renewed fears that the Federal Reserve might lift interest rates higher than anticipated following the release of hotter-than-expected inflation data and continued labor market tightness in January. Volatility persisted into March, as markets sold off due to a few high-profile bank failures. Quick actions by global central banks to minimize systemic risk, including shoring up bank deposits, prevented contagion across the global financial system. While the turmoil stirred recession concerns, it also led to changing expectations about the future path of Fed monetary policy. Investors hoped that a continued economic slowdown might give the Fed room to ease monetary policy.
Tackling stubbornly high inflation remained a top priority for the Fed and other key central banks. Just before the quarter began, Fed officials indicated they would raise rates in 2023 until there was sufficient evidence inflation was sustainably trending downward. The Fed announced 0.25% rate hikes in early February and late March. Following its March increase, the Fed signaled it may soon pause rate hikes.
For the three-month reporting period, U.S. stocks returned 7.50%, as measured by the S&P 500 Index. International stocks climbed 8.47%, as measured by the MSCI EAFE Index [ND]. Emerging market stocks, as measured by the MSCI Emerging Markets Index [ND], rose 3.96%. Global equities, as measured by the MSCI World Index [ND], posted a gain of 7.73%.
Over the same period, investment-grade bonds gained, with the Bloomberg U.S. Aggregate Bond Index returning 2.96%. The yield on the 10-year U.S. Treasury note began the quarter at 3.88% and ended at 3.47%. The yield curve remained inverted over the three months, which in past economic cycles has been an indicator of a recession to come. [The yield curve is a graphical representation of the yields/interest rates of bonds with equal credit quality but differing maturity dates.] High-yield bonds returned 3.83%, as measured by the JPMorgan Developed High Yield Index. Global bonds, as measured by the FTSE World Government Bond Index, rose 3.51%.
How did Putnam Retirement Advantage Trusts perform during the three months ended March 31, 2023?
All Retirement Advantage vintages delivered positive absolute returns. Gains for the longer-dated portfolios were a result of their higher equity allocations and strength across global 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 on a relative basis.
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.
What strategies contributed to and detracted from performance?
Asset allocation decisions detracted from benchmark-relative performance. We entered the period with an underweight position to equity risk and maintained this position. This weighed on performance as equities experienced strength. An out-of-benchmark position to commodity risk that ranged from modestly long to neutral led to a loss. The portfolios entered the period neutral with respect to interest-rate risk. In early February, we shifted the position to modestly underweight. In early March, we shifted the position back to neutral. This tactical positioning within interest-rate risk led to a gain over the period.
Overall, our security selection decisions lifted benchmark-relative performance. Our quantitative U.S. large-cap core and fundamental U.S. large-cap value strategies enhanced performance. Vintages further from retirement also benefited from our fundamental emerging market equity strategy.
What is your near-term outlook for the markets?
We expect elevated inflation, tighter financial conditions, 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 Fed is unlikely to execute a soft landing and will either maintain interest rates at higher levels than the market anticipates or break the economy and trigger a recession. Both paths would prove negative for equities, in our view.
Our near-term outlook for interest-rate-sensitive fixed income is neutral. We believe duration risks appear more balanced going forward.
Our view on commodities is neutral. Many physical markets remain tight, but escalating potential for recession from recent crises and a tightening in financial conditions are risks for downside. Commodity volatility has also increased significantly.
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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