Manager Insights
For savvy investors, a silver lining in
home price declines
Jeffrey L. Knight, CFA, Head of Global Asset Allocation, 2/10/11
While many areas of the U.S. economy continued on the road to recovery in 2010, housing remained a laggard. The S&P Case Shiller Home Price Index showed declines in the final months of the year that reached across all 20 metropolitan areas covered by the survey. Six metropolitan markets hit their lowest levels since 2006.
Finding the right neighborhood
Negative news, however, does not mean that all real-estate-related investments are unattractive. Real estate investment trusts, or REITs, for example, delivered solid returns in 2010, as measured by the MSCI US REIT Index GD, which gained 28.48%. And significant opportunities exist within the sector of residential mortgage-backed securities (RMBS), in our view.
In Putnam’s absolute return funds, our investments in a segment of the RMBS market have allowed the funds to seek gains and temper volatility, even as the news headlines tell of a struggling housing market. These structured mortgage-backed securities use pools of mortgage pass-through bonds, or mortgage loans themselves, as collateral and carve the cash flows into different tranches for investors. The “interest-only” bonds are derived from the interest portion of the underlying mortgages, and are designed so that the longer it takes homeowners to pay down their mortgages, the more money a security holder can make from interest payments on those loans.
This is precisely what has happened in recent months. Despite record-low mortgage rates in 2010, refinancing activity was constrained because many homeowners found it difficult to qualify for a new loan when faced with tight requirements from lenders. In addition, depressed home prices altered the loan-to-home value ratio needed to qualify for a new loan. While these events have clearly been a setback for homeowners, savvy investors may continue to receive attractive levels of income while America waits for the housing sector to recover.
MSCI US REIT Index is a free float-adjusted market capitalization weighted index that is composed of equity REITs
Indexes are unmanaged and used as a broad measure of market performance. It is not possible to invest directly in an index. Past performance is not indicative of future results.
Past performance is not indicative of future results, and performance of Putnam funds will differ.
Consider these risks before investing: Asset allocation decisions may not always be correct and may adversely affect fund performance. The use of leverage through derivatives may magnify this risk. Leverage and derivatives carry other risks that may result in losses, including the effects of unexpected market shifts and/or the potential illiquidity of certain derivatives. International investments carry risks of volatile currencies, economies, and governments, and emerging-market securities can be illiquid. Bonds are affected by changes in interest rates, credit conditions, and inflation. As interest rates rise, prices of bonds fall. Long-term bonds are more sensitive to interest-rate risk than short-term bonds, while lower-rated bonds may offer higher yields in return for more risk. Unlike bonds, bond funds have ongoing fees and expenses. Funds that invest in government securities are not guaranteed. Mortage-backed securities are subject to prepayment risk. For the 500 Fund and 700 Fund, these risks also apply: Stocks of small and/or midsize companies increase the risk of greater price fluctuations. 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.
Any Putnam funds referenced in the above articles are offered only within the United States or to U.S. citizens.
The views and opinions expressed are those of the fund manager above, are subject to change with market conditions, and are not meant as investment advice.
All funds involve risk, and you can lose money. See the prospectus for details.
Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund
or product, contact your financial representative, call Putnam at
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