What are some of the best ideas today? One answer is leveraged companies.
Chance to receive higher returns on equity
While they carry unique risks, including the risk of default, leveraged companies also possess strong upside potential for investors, including the potential to outperform the stock market by a signifigant margin.
Leveraged companies get a tailwind from economic recovery
Since these companies use debt heavily, they tend to have their best performance when credit is widely available, interest rates are low, and strong economic momentum supports business earnings.
Leveraged-company stocks, bonds, and bank loans were competitive with stocks during the last economic recovery,
In the recovery that followed the 2001 recession, leveraged-company stocks doubled the return of the S&P 500 Index. High-yield bonds and bank loans also provided strong returns in the same period.
Leveraged-company security indexes have remained competitive with stocks in the current recovery,
Relative performance can vary in other time frames, but in the current recovery, leveraged-company stocks, high-yield bonds, and bank loans have once again shown their ability to perform well relative to the broad equity market.
Illustrations are for informational purposes only and do not reflect the performance of any Putnam fund, which will differ. Leveraged-company stocks are measured by the Credit Suisse Leveraged Equity Index, which comprises companies that issue high-yield corporate bonds included in the Credit Suisse High Yield Bond Index; stocks are measured by the S&P 500 Index, a broad measure of stock market performance; high-yield bonds are measured by the JPMorgan Developed High Yield Index, which represents high-yield fixed-income securities issued in developed countries; and bank loans are measured by the S&P/LSTA Leveraged Loan Index, which represents bank loans issued to leveraged companies. Indexes are unmanaged and do not reflect any fees or expenses, and you cannot invest directly in an index. Past performance is not indicative of future results, and results may differ over other performance periods.
For every 1% change in interest rates, a bond's price is expected to move 1% in the opposite direction per year of duration. In other words, the higher a bond's duration, the more sensitive it is to interest-rate movements. For investors who own individual bonds and are willing to hold them until maturity, duration may not be much of a concern. But investors in a government- or index-oriented portfolio who need even a small degree of liquidity should pay careful attention to the level of interest-rate risk they're assuming.
Sources: U.S. Department of the Treasury, Barclays, Putnam Research, as of 3/31/13. ?The Barclays U.S. Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed-income securities. You cannot invest directly in an index. For illustrative purposes only. Performance of Putnam funds will differ.