Q1 2021 Putnam Multi-Asset Absolute Return Fund Q&A
- Global equity markets edged higher in response to Covid-19 vaccinations, stimulus, accommodative banks, and economic recovery, while inflation fears weighed on fixed-income markets.
- Directional strategies hindered performance, while non-directional strategies added slightly to performance.
- The fund was positioned with a modestly bullish outlook at quarter-end given accommodative monetary policies, U.S. fiscal stimulus, and pent-up demand.
What was the investment environment like during the first quarter of 2021?
Global financial markets ended the period mixed. Key equity market indices edged higher, driven by progress on Covid-19 vaccinations, multiple stimulus packages, accommodative monetary policy, and signs of economic recovery. In February and March, markets experienced bouts of volatility amid a sell-off in technology stocks, a trading frenzy in small and struggling companies, and inflation fears. The S&P 500 Index, a broad measure of U.S. stocks, rose 6.17% for the quarter after repeatedly setting new highs. International stocks, as measured by the MSCI EAFE Index [ND], climbed 3.48%.
The U.S. economic recovery is expected to support a stronger global economic comeback. The accelerated vaccine rollout and President Biden’s $1.9 trillion pandemic relief package, which was signed on March 11, 2021, added more momentum to expectations for U.S. economic growth. In mid-March, Goldman Sachs forecasted U.S. growth of 8% for 2021. The stimulus-fueled growth and inflation expectations drove yields on all but very short-term government debt higher during the quarter. Many investors were concerned that inflationary pressures would eventually lead the Federal Reserve to raise short-term interest rates sooner than anticipated.
As a result, rate-sensitive fixed-income assets ended the quarter lower.
Yields on the 10-year bellwether U.S. Treasury note rose from 0.93% on December 31, 2020, to a high of 1.74% on March 19, 2021 — a level not seen since January 2020 — and closed the quarter at 1.73%. Global bond yields, including high-yield and investment-grade corporate debt, also trended slightly higher due to rising inflation concerns. Global bonds, as measured by the FTSE World Government Bond Index, fell 5.68%. The Bloomberg Barclays U.S. Aggregate Bond Index declined 3.37% for the period. U.S. high-yield bonds experienced slight strength during the quarter.
Commodity prices surged during the period, as investors expect global travel to return with greater strength than initially expected in the coming months, all thanks to Covid-19 vaccine progress. Investors also anticipate that President Biden’s infrastructure spending plan will further increase demand for commodities.
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 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 March 31, 2021?
The fund’s class Y shares recorded a -1.72% decline, underperforming the cash benchmark, the ICE BofA U.S. Treasury Bill Index, which posted a return of 0.03%.
What factors had the biggest influence on performance?
Overall, directional strategies weighed on performance in the first 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 performance. The fixed-income portion of the risk-balanced portfolio significantly underperformed. While we were neutral on rate risk, this structural exposure to duration resulted in the portfolio being net long rates overall, resulting in a negative contribution. A tactical long position to commodity risk aided the portfolio. A modest tactical long position to credit risk, implemented in the second half of the period, had a negligible effect on performance.
Overall, non-directional strategies slightly improved results in the first quarter. Regional fixed-income positioning was a strong positive contributor, due to a strategy that is long high-yield debt and short emerging-market debt. Commodity alpha produced a similar gain. Alternative beta ended positive, driven by volatility-carry outperformance. Currency alpha was another notable positive contributor. These gains were partially offset by equity-selection alpha weakness. Specifically, our forensic accounting long/short strategy weighed on performance.
How is the fund positioned at the start of the second quarter of 2021
The fund is positioned with a modestly bullish stance entering the second quarter. Within our dynamic allocation overlay, we are modestly long equity risk and credit risk, long commodity risk, and neutral 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?
The global economy continues to recover, albeit at a slow pace. We remain encouraged by the current tailwinds for financial assets, including the new U.S. stimulus package, accommodative monetary conditions, potential infrastructure spending, and ample liquidity. Still, we anticipate 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 their asset purchase program. The combination of pent-up demand in the second half of 2021 and the Federal Reserve’s accommodative monetary policy makes a compelling case for equities. In fixed income, our outlook on credit is modestly bullish. Banks have begun easing credit conditions for large corporate commercial and industrial loans. In addition, average total leverage for new high-yield issues is back to the low levels seen in 2013. Our outlook on rate-sensitive fixed income is neutral, as we think there is an equal probability of interest rates either rising or falling. Fed officials have pledged to keep short-term interest-rates low until there is significant progress toward their inflation and employment goals for the U.S. economy. Our view on commodities is favorable. We expect that increased distribution of vaccines, fiscal support, and favorable monetary conditions will stimulate significant global demand for commodities in 2021. Against this backdrop, we continue to have conviction in our investment strategies based on their strong long-term results.
More in: Alternatives,