Solid annual performance driven by active, fundamental research

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Q4 2020 Putnam Sustainable Funds Q&A

• Both funds underperformed their benchmarks for the quarter, but they outperformed by a considerable margin for the 1-year period ended December 31, 2020.
• We believe our active investment approach and fundamental research was key to the outperformance in an extremely challenging year.
• Our latest research report explores insights and investment implications of mental health (available to financial professionals at Putnam.com/advisor).

How have the funds performed?

Katherine: For the fourth quarter, both funds underperformed their benchmarks, but we are pleased to report that they outperformed by a considerable margin for the 1-year period ended December 31, 2020. It was a challenging year that helped us test our processes and performance in an extreme set of conditions. We believe our active investment approach and fundamental research was key to the outperformance.

Your team recently published a research report titled “Mental health: Insights and investment implications.” What can you tell us about it?

Stephanie: Mental illness was already widespread and undertreated prior to the COVID-19 pandemic, with an estimated 10% of the U.S. population suffering from either major depressive disorder or generalized anxiety disorder. Less than half of those affected received treatment, and there is evidence that these numbers increased in 2020. Given the prevalence of mental illness, we believe this is a topic that matters to society at large and to businesses, and therefore should be relevant for investors.

In addition to the human toll on patients and families, there are economic and social costs to mental illness. Mental disorders accounted for the most costly set of health conditions as of 2013, at an estimated $201 billion, or 9% of total health-care expenditures. Indirect costs, while hard to measure, include lost time at work and lower productivity. Companies that show leadership in addressing mental illness are likely to see both human and financial benefits. Solutions-oriented companies, like those in the telemedicine arena, are helping to increase access to mental health care, especially in rural areas, which is driving faster growth. Recent regulatory changes also play an important role.

Katherine: In addition to the costs of mental illness, the report explores a number of other mental health topics. They include the impact of the COVID-19 pandemic; the current government response and potential implications; the impact on businesses and their efforts to support employees’ mental health; examples of companies showing leadership in this area; and potential solutions and innovations to watch.

Could you describe the strategy for Putnam Sustainable Leaders Fund?

Stephanie: With this fund, we seek companies with strong fundamentals that are linked to leadership in financially material sustainability issues. The stocks of these companies are typically, but not always, considered to be growth stocks, and in most cases they are large-cap in size. We look for performance that demonstrates true leadership — not just compliance — in areas that are relevant to the companies we invest in. These areas can include clean and efficient materials use, reductions in carbon or water intensity, improvements in workplace equality and diversity, and alignment of management incentives with the company’s sustainability objectives. We invest in companies where strength in relevant sustainability issues is increasing their long-term business potential. By focusing on material ESG issues for each individual business, we aim to identify companies with durable financial performance and potentially lower risk profiles.

Could you describe the strategy of Putnam Sustainable Future Fund?

Katherine: Our emphasis for this fund is on solutions-oriented companies — those that offer innovative ways to address our greatest sustainability challenges. The stocks of these companies are typically, but not always, considered to be growth stocks, and often are mid-cap or small-cap in size. We seek to invest in companies whose products and services contribute to positive environmental, economic, or social impact. By providing these solutions, the companies in the portfolio offer potential for strong financial growth and profitability, in our view. Again, we always seek a combination of three attributes: strong fundamental prospects, reasonable valuation, and positive impact.

What are some examples of positive impact that you seek from companies?

Stephanie: We are always looking for positive impact that is linked to long-term fundamental prospects and fi-nancial performance. From an environmental perspective, positive impact could mean improving water quality or reducing greenhouse gas emissions. Positive social impact could include improvements in health and well-being or better access to information and opportunity. Throughout our research process for both portfolios, we take a tailored, company-specific approach, including first-hand interactions with management teams of companies and ongoing collaboration with Putnam’s research analysts.