Global rally bolsters equity returns

Q4 2021 Multi-Asset Absolute Return Fund Q&A

  • In global financial markets, equities rallied to record highs while fixed income languished, hampered by rising rates.
  • Both directional and nondirectional strategies contributed to performance results.
  • Given the strength of the rally and rising rates, the fund is positioned close to neutral as 2022 begins.

What was the investment environment like during the fourth quarter of 2021?

Global financial markets produced mixed results for the quarter. Equities rallied in response to the recovering global economy, the lifting of mobility restrictions in many countries, and fiscal stimulus. However, higher inflation, rising interest rates, China’s weaker economy, and Covid-19 variants weighed on sentiment at times. The S&P 500 Index, a broad measure of U.S. equity performance, and the MSCI World Index [ND], a broad measure of equity securities from developed countries, rose 11.03% and 7.77%, respectively, for the three-month period.

In mid-December, the Federal Reserve pivoted toward tighter monetary policy with plans to end its bond-buying stimulus program in March 2022, paving the way for higher interest rates. Most Fed officials expect to raise interest rates three times in 2022. Other global central banks are also scaling back stimulus measures. The European Central Bank further reduced its bond purchases under the Pandemic Emergency Purchase Program, which is due to end in March 2022. The rate-sensitive Bloomberg U.S. Aggregate Bond Index, a measure of U.S. investment-grade fixed-income securities, and the Bloomberg Global Aggregate Bond Index, returned –1.54% and –4.71%, respectively, for the period. The yield on the benchmark 10-year U.S. Treasury note fell to 1.52% by the end of December 2021 after rallying to as high as 1.68% in October 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 December 31, 2021?

The fund’s class Y shares returned 2.85%, outperforming 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 boosted performance in the fourth quarter. The equity portion of the risk-balanced portfolio experienced strength, and there was no tactical exposure to equity risk. 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 slightly down, while our modest tactical short position to interest-rate risk led to a small gain. The portfolio was net long interest-rate risk overall, resulting in a slightly negative contribution from directional interest-rate exposure. The portfolio did not have any tactical exposure to credit risk or commodity risk.

Overall, non-directional strategies aided performance, but to a lesser extent than directional strategies. Commodity alpha (seeks returns from long and short opportunities in commodity markets) was a notable positive contributor over the period. Alternative beta (seeks returns from different sources of market beta or risk premiums that are market neutral) was slightly additive, driven by cross-asset trend strategies. Fixed income sector alpha (seeks returns from long and short opportunities across fixed income sectors) finished negative, led by a strategy that shorts U.S. real yields. Currency alpha (seeks returns from relative movements in currency exchange rates) also weighed on results. Equity selection alpha (seeks returns from long and short opportunities across equity asset classes) in aggregate finished slightly up, due to strength from our quantitative emerging market equity long/short and global equity long/short strategies.

How is the fund positioned at the start of the first quarter of 2022?

The fund is positioned close to a neutral stance entering the first 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?

In 2021, the global economy continued to recover from the pandemic-induced downturn, fueled by substantial monetary and fiscal policy support, pent-up consumer demand, and Covid vaccine progress. Economic data improved and stocks soared to record highs, but volatility crept into markets due to uncertainties surrounding inflation and supply-chain issues, central bank policy, and Covid variants. As 2022 begins, these uncertainties are still present, and we believe the levels of volatility and sentiment currently priced into markets do not adequately account for them. Thus, we are maintaining our tactically neutral posture.

Given this backdrop, our outlook for equities is neutral. This view is supported by narrowing market breadth, an expectation for higher interest rates, and our belief that earnings growth in 2022 will not match that of 2021. While we maintain a positive disposition toward equities, we feel risks have become more balanced.

In fixed income, our outlook on credit is slightly bullish. High-yield bond index fundamentals have moved back to reasonable levels, and thus we expect that corporate and structured credit will continue to attract capital in a yield-starved environment. Our outlook on rate-sensitive fixed income is slightly bearish. Real yields are still exceptionally low, and we expect that U.S. monetary policy is likely to tighten. Fed officials are anticipating three rate hikes in 2022.

Our view with respect to commodities is neutral. OPEC+ is focused on increasing supply as the impact on demand from the Omicron variant is expected to be less severe than originally anticipated.

Against this backdrop, we continue to have conviction in our investment strategies.