About leveraged companies

Putnam Capital Spectrum Fund and Putnam Equity Spectrum Fund target the growth potential of leveraged companies — those that use debt as a tool to improve their business performance. Although the funds invest primarily in companies that are leveraged, they do not use leverage themselves as a primary investment strategy.

Leverage tends to accelerate business changes at a company, potentially increasing returns on equity. Leverage creates complexity, which makes it more likely that securities of these companies — common and preferred equity, high-yield bonds, and bank loans — will be mispriced, offering great opportunities to investors who can analyze them correctly.

Leveraged company funds can add a new dimension to investment portfolios because they offer attractive total return potential with different performance characteristics than the broad stock and bond markets.

Some companies take on leverage at the right time for the right reasons. Others do it at the wrong time, or for the wrong reasons. Either of these situations can still result in investment opportunities. But each needs to be analyzed thoroughly.

Leveraged companies include a range of opportunities

Companies become leveraged for different reasons. Common types of leveraged companies include:

  • Capital-intensive businesses, such as telecommunications companies, that borrow money to build and maintain network infrastructure.
  • "Rising stars," or early-stage growth companies, that use borrowing to finance their operations while they develop new products and a customer base. Many young technology and biotechnology companies have this business model.
  • "Fallen angels," or former investment-grade companies, that had been in stronger capital positions but have become more heavily dependent on debt.
  • Special situation companies that use debt as part of a restructuring, or as part of a merger, acquisition, or privatization.

Names of leveraged companies you might know

Several well-known companies have used leverage successfully to pursue business goals. Examples include MCI and Sprint, two of the first long-distance telephone services that were independent of AT&T and Regional Bell operators. In the television industry, Turner Broadcasting and DISH Network also used leverage as part of their business models. These companies fall into the categories of capital-intensive businesses, and they used debt extensively when they were still small companies in the 1980s. They had these common characteristics:

  1. With little equity, the companies issued large amounts of high-yield debt.
  2. They successfully achieved business targets and paid off debt over time.

Securities are for illustrative purposes only. This is not an offer to sell or recommendation to buy or hold any individual security. The reader should not assume investment in any security was or will be profitable.



 Spectrum Funds
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Consider these risks before investing: The funds invest some or all of their assets in small and/or midsize companies with leveraged capital structures. Such investments increase the risk of greater price fluctuations.

The funds invest in relatively few issuers and involve more risk than funds that invest more broadly.

Funds that invest in securities of leveraged companies involve the risk that the securities of leveraged companies will be more sensitive to issuer, political, market, and economic developments than the market as a whole and the securities of other types of companies. Investments in securities of leveraged companies are likely to be more volatile than investments in companies that are not leveraged. The funds may focus investments in types of securities — equities, fixed income, or bank loans — that underperform relative to, or are more volatile than, other types of securities.

Funds that engage in short sales of securities may incur losses if the securities appreciate in value and may experience higher volatility due to leverage resulting from investing the proceeds of securities sold short. When short-selling, investors sell borrowed shares, hoping to repurchase them at a lower price before returning them to the lender.

Additional risks associated with Putnam Capital Spectrum Fund: Funds that invest in bonds are subject to certain risks including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Mortgage-backed securities are subject to prepayment risk.

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