Q3 2021 Multi-Asset Absolute Return Fund Q&A
- Global financial markets ended the quarter relatively flat as investors became increasingly cautious.
- Directional strategies finished slightly negative, while nondirectional strategies detracted from results.
- We remain optimistic about the recovery but anticipate more volatility ahead as investors weigh a shift in central bank policy and the unlikely chance of further stimulus.
What was the investment environment like during the third quarter of 2021?Global equity markets ended the period mixed. Stocks were buoyed by a recovering economy, the lifting of Covid-19 restrictions in some countries, and fiscal stimulus. However, multiple risks surfaced as the quarter progressed, and global equities lost much of their earlier gains. Concerns about higher inflation, the Federal Reserve's tapering of its bond-buying program, China's property debt crisis, and the Covid-19 Delta variant weighed on sentiment, causing many investors to become more cautious. For the three-month reporting period, the S&P 500 Index, a broad measure of U.S. stock performance, rose 0.58%. International stocks, as measured by the MSCI EAFE Index [ND], posted a loss of -0.45% for the period.
Interest rates fluctuated within a tight range during the quarter, ultimately ending the quarter slightly higher than where they began. Rates fell when the Fed called the rise in inflation "transitory" and then moved higher when Fed officials signaled asset tapering could begin soon. In late September 2021, the Fed indicated it was ready to scale back asset purchases as early as November 2021 and could lift interest rates in 2022. New projections released at the end of the Fed's two-day policy meeting showed half of 18 Fed officials expect to raise interest rates by the end of 2022. The European Central Bank also said it would conduct bond purchases under its emergency program at a "moderately lower pace" over the next three months. The rate-sensitive Bloomberg U.S. Aggregate Bond Index, a measure of investment-grade corporate bonds, closed out the quarter with a return of 0.05%. The yield on the benchmark 10-year U.S. Treasury note edged slightly higher from 1.45% on June 30, 2021, to 1.52% on September 30, 2021.
Before we discuss performance, would you summarize the fund's overall investment objective and strategy?Putnam Multi-Asset Absolute Return Fund seeks a positive return exceeding the return of Treasury bills over a reasonable period of time, regardless of market conditions. The fund seeks to achieve risk-and-return characteristics by dynamically allocating assets using a combination of directional [or market sensitive] and nondirectional [or market neutral] strategies.
The directional portion of the portfolio consists of two components: a risk-balanced portfolio of stocks and bonds designed to efficiently capture long-term market returns and a dynamic asset allocation overlay to reflect tactical views. The overlay consists of tactical longs and shorts to equities, rates, credit, and commodities based on the portfolio management team's expectations for each of these asset classes. The team manages both the composition and total level of risk, depending on market conditions and the prevailing opportunity set.
The non-directional portion of the portfolio consists of long/short market neutral strategies that provide flexible, uncorrelated sources of alpha.
How did the fund perform for the three months ended September 30, 2021?The fund's class Y shares fell -2.09%, underperforming the cash benchmark, the ICE BofA U.S. Treasury Bill Index, which posted a return of 0.01%.
What factors had the biggest influence on performance?Overall, directional strategies finished slightly negative in the third quarter. The equity portion of the risk-balanced portfolio produced a slight loss, while our tactical positioning to equity risk enhanced performance. The equity position ranged from modestly long to long before we moved to neutral at the end of August 2021. The portfolio was net long equity risk overall, resulting in a positive contribution from directional equity exposure. The fixed income portion of the risk-balanced portfolio ended with negative results, while our modest tactical short position to interest-rate risk had a negligible impact on performance. The portfolio was net long interest-rate risk overall, resulting in a negative contribution from its directional interest-rate exposure. A tactical long position to commodity risk was slightly additive. We removed this position in mid-August 2021. A modest tactical long position to credit risk did not have a material effect on the portfolio. We eliminated this position at the end of August 2021.
Overall, non-directional strategies detracted from results. Currency alpha was a main source of weakness for the period. Fixed income sector alpha also underperformed due to a strategy that shorts U.S. real yields. Equity selection alpha strategies in aggregate finished down, primarily because of our opportunistic reflation and quantitative emerging-market equity strategies. Fixed income selection alpha slightly decreased results due to a strategy focused on structured mortgage credit. Commodity alpha was a notable positive contributor.
How is the fund positioned at the start of the fourth quarter of 2021?The fund is positioned close to a neutral stance entering the fourth quarter. Within our dynamic allocation overlay, we are modestly short interest-rate risk. We do not have any tactical positions to equity risk, credit risk, and commodity risk at this time. Within the overall directional component, which includes the structural risk-balanced portfolio and the dynamic allocation overlay, we are net long equity risk and interest-rate risk.
What is your outlook for the global economy?Despite recent volatility caused by concerns around central bank asset-purchase tapering, inflation, and surging cases of Covid-19, markets have recovered significantly this year. The stimulative monetary and fiscal policy backdrop among the Group of Ten [G10] advanced countries, historically strong earnings, positive economic data, and ample liquidity fueled the performance of financial markets. While we remain optimistic about the recovery, we anticipate more volatility ahead as investors weigh the impact of a shift in central bank policy and the unlikelihood of further stimulus.
Given the current environment, our outlook on equities is neutral. This view is supported by a combination of factors including seasonally increased volatility, peak earnings growth, and the expectation for a shift in central bank policy. While we maintain a positive disposition toward equities, we feel risks have become more balanced.
In fixed income, our outlook on credit is also neutral. Given that spreads have been hovering at the tight end of their recent range, and volatility and defaults are extremely low, we expect an uptick in volatility and thus a lower risk-adjusted return as opposed to a substantial widening in spreads. Our outlook on interest-rate-sensitive fixed income is slightly bearish, as we believe risks are skewed to higher yields given the expectations for continued economic momentum and inflation spikes. We expect upward pressure on yields as asset-purchase tapering and a shift in Fed rate policy approach.
Our view with respect to commodities is neutral. Roll yield and momentum have both diminished recently, reducing risk-adjusted return expectations. We also expect the recent rise in two-year real yields will pressure commodities.
Against this backdrop, we continue to have conviction in our investment strategies.
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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