Q4 2023 Putnam Retirement Advantage Funds Q&A
How were market conditions in the fourth quarter of calendar 2023?
During the three-month period, financial markets were challenged by persistent inflation, tight monetary policy, and conflict in the Middle East. Despite these headwinds, most major asset classes delivered positive returns over the quarter.
Markets experienced weakness in October amid persistent inflation, uncertainty around Federal Reserve tightening, and geopolitical tensions in the Middle East. Surging bond yields and market volatility weighed on sentiment during the month. Positive economic data fueled a bond sell-off as investors considered the Federal Reserve may need to keep rates higher for longer. Stock markets struggled when the yield on the 10-year Treasury note briefly reached 5.0%, a level not seen since 2007. Markets rebounded in November, lifted by easing inflation and improving economic data. This rally extended into December as inflation continued to ease and optimism about future rate cuts grew.
Combatting inflation remained a top priority for the Fed and other key central banks. In early November, the Fed held rates steady, keeping the fed funds rate at 5.25%–5.50%. At its December meeting, the Fed continued its pause on interest-rate hikes but took a more dovish tone, with three potential rate cuts penciled in for 2024.
For the three-month reporting period, U.S. stocks returned 11.69%, as measured by the S&P 500 Index. International stocks rose 10.42%, as measured by the MSCI EAFE Index [ND]. Emerging market stocks, as measured by the MSCI Emerging Markets Index [ND], posted a gain of 7.86%. Global equities, as measured by the MSCI World Index [ND] returned 11.42%.
Over the same period, investment-grade bonds experienced strength, with the Bloomberg U.S. Aggregate Bond Index returning 6.82%. The yield on the 10-year U.S. Treasury note began the quarter at 4.69% and ended the quarter at 3.88%. The yield curve remained inverted over the three months, which in past economic cycles has been an indicator of a future recession. [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 6.82%, as measured by the JPMorgan Developed High Yield Index. Global bonds, as measured by the FTSE World Government Bond Index, rose 8.08%.
How did Putnam Retirement Advantage Trusts perform during the three months ended December 31, 2023?
All Retirement Advantage vintages delivered positive absolute returns. Gains for the longer-dated portfolios resulted from their high equity allocations combined with strength across global equity markets. Shorter-dated, fixed-income-oriented strategies also benefited from this rally in equities but finished with smaller positive returns.
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 weighed modestly on benchmark-relative performance for vintages furthest from retirement and were additive to middle-dated vintages and those closest to retirement. We entered the period with a modest underweight position to equity risk and maintained this position. This detracted from performance in November and December as equities experienced strength, but aided performance when stocks experienced weakness in October. With respect to interest-rate risk, the portfolios maintained a neutral position throughout the period.
Overall, our security selection decisions boosted benchmark-relative performance in the middle-dated vintages and those furthest from retirement. However, they were a drag on performance for vintages closest to retirement. Although our fundamental international equity strategy experienced weakness across the vintages, our quantitative U.S. large-cap core, fundamental U.S. large-cap growth, and quantitative international equity strategies showed strength. Vintages furthest from retirement experienced additional gains from our fundamental emerging market equity strategy, while those closest to retirement benefited from our opportunistic fixed income strategy.
What is your near-term outlook for the markets?
Our near-term outlook for equities is slightly bullish. Recent equity market strength has caused our breadth-thrust signal [a technical indicator that measures market momentum] to fire.
Our near-term outlook for interest-rate-sensitive fixed income is slightly bearish. The rapid drop in yields in November and December was excessive, in our opinion. The bond market appears to have fully embraced the soft landing and Fed pivot narrative, pricing in six cuts in 2024, which we feel is overly aggressive.
Our view on commodities is neutral. Many physical markets remain tight, but the potential for recession and tighter financial conditions are risks to the downside. Commodity volatility has also increased significantly.
We continue to have conviction in our investment strategies and our ability to adapt the portfolios to changing market conditions.
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
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