Q1 2022 Putnam Sustainable Funds Q&A
- The first quarter was very challenging for financial markets, and particularly for growth stocks.
- We remained attuned to macroeconomic concerns while also focusing on our disciplined process, fundamental research and valuation analysis, and active risk management.
- Our research report, "Investing to thrive," explores insights and themes of our sustainable investing approach (available to financial professionals at Putnam.com/advisor).
How were investing conditions in the first quarter?
It was a very challenging time for financial markets, and particularly for growth stocks, which are a focus of these funds. The Russia-Ukraine War rattled global financial markets, volatility surged, and uncertainty grew over the long-term impact of this humanitarian and geopolitical crisis. At the same time, inflation remained a top concern for investors, as did the potential for interest-rate hikes and continued supply chain disruptions.
Your team's research report, "Investing to thrive," details themes of your sustainable investing approach. Could you share an example of one of those themes?
Within the overarching category of Thriving PlanetTM, we examine sustainable agriculture. Roughly 24% of global greenhouse gas emissions come from the agriculture, forestry, and land use sectors of the economy. More sustainable farming practices like crop rotation, decreasing or eliminating tillage, and reducing the use of chemical pesticides can help improve the environmental impact of farms and drive higher profits for farmers. As the global population grows, there is a need to employ increasingly efficient and sustainable farming practices to meet growing demand with limited supply. Additionally, consumers increasingly are willing to pay a premium for sustainably sourced ingredients. The report highlights investment themes and examples of companies in our portfolios related to them.
Could you describe the strategy of Putnam Sustainable Leaders Fund?
The Sustainable Leaders portfolio invests in companies that have demonstrated leadership in the sustainability issues that are financially material to their businesses. Our investment thesis is that companies that exhibit this type of commitment also often demonstrate potential for strong long-term financial performance. The stocks of these companies are typically, but not always, considered to be growth stocks, and often are large cap in size.
We characterize leadership in sustainability using four criteria: (1) a focus on material, or relevant, sustainability is-sues; (2) creativity to go beyond compliance or box checking; (3) transparency demonstrated by specific company goals and clear and consistent progress reporting; and (4) impact, or sustainability characteristics that create benefit beyond a company's "borders." Some examples of areas for leadership could include clean and efficient materials use, reductions in environmental intensity, or improvements in workplace equality and diversity.
Could you describe the strategy of Putnam Sustainable Future Fund?
The Sustainable Future portfolio invests in companies whose products and services provide solutions to essential sustainability challenges. Our investment thesis is that solutions-oriented companies with potential to create positive social and environmental impact also demonstrate potential for strong growth and long-term financial performance. The stocks of these companies are typically, but not always, considered to be growth stocks, and are often mid cap or small cap in size. Some examples of areas where a company might offer sustainable solutions include prevention and treatment of chronic disease, access to information and opportunity, growth of the renewable energy supply, or development of the circular economy.
What is your outlook for the coming months?
We are aware, as seasoned investors, that continued stock market volatility is likely in the months ahead. We remained attuned to macroeconomic concerns while also focusing on our disciplined process, fundamental research and valuation analysis, and active risk management.
For informational purposes only. Not an investment recommendation.
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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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