Webcast | Putnam Diversified Income Trust update | May 7, 2020

Active Income

Diversified Income Trust (Class Y)  (PDVYX)

Offering a diversified portfolio of income opportunities since 1988

Diversified Income Trust received an  Overall Morningstar Rating  of  

Q2 2020 | Diversified Income Trust Q&A

  • Risk assets rebounded sharply since the end of March.
  • Corporate credit holdings and strategies targeting prepayment risk provided a major boost to the fund's performance.
  • As the second half of 2020 begins, investors will focus on economic data, corporate earnings, and signs of progress toward a coronavirus vaccine.

How did the fund perform for the three months ended June 30, 2020?

The fund's class Y shares advanced 7.07%, outpacing the 0.02% return of our cash benchmark, the ICE BofA U.S. Treasury Bill Index. The fund also outperformed the broad investment-grade fixed income market, as measured by the 2.90% gain of the BBG Barclays U.S. Aggregate Bond Index.

What was the market environment like during the second quarter of 2020?

There was a massive reversal in both market sentiment and price levels across asset classes during the quarter. Fiscal and monetary stimulus, along with hopes of a sharp economic recovery, fueled the snapback. The U.S. Federal Reserve [Fed] began implementing a series of lending programs by making asset purchases across a variety of market sectors.

Against this backdrop, investment-grade corporate bonds and high-yield credit advanced 9% and 9.7%, respectively, as investors reembraced risk. Emerging-market debt did even better, jumping 12.3% in U.S.-dollar terms. Meanwhile, more defensive areas of the market lagged, including U.S. government securities and agency mortgage-backed bonds. Interest rates were rangebound throughout the quarter, with the yield on the benchmark 10-year U.S. Treasury note staying below 1%.

In April, oil prices briefly dipped into negative territory before rising on further supply cuts and hopes that demand will increase as the economy reopens. While the energy sector has been one of the biggest laggards for the year to date through June, it was by far the best-performing group in the second quarter. Other sectors that were negatively impacted by the coronavirus also recovered, except for airlines, which continued to struggle amid reduced demand for air travel.

Which holdings and strategies fueled the fund's performance?

Our corporate credit holdings — primarily high-yield bonds and convertible securities — added the most value this quarter. Following a sizable widening of yield spreads in March, spreads tightened during the quarter. [Spreads are the yield advantage credit-sensitive bonds offer over comparable-maturity U.S. Treasuries. Bond prices rise as spreads tighten and decline as spreads widen.] Unprecedented stimulus measures implemented by government policymakers boosted investor confidence by helping to offset some of the near-term economic uncertainty sparked by the coronavirus pandemic.

Strategies targeting prepayment risk also meaningfully contributed, particularly our holdings of interest-only [IO] securities and bonds backed by reverse mortgages. As new issuance resumed following March's market upheaval, these positions benefited from improving supply-and-demand dynamics.

Emerging-market debt was a further notable contributor, primarily positions in Argentina, Senegal, and the Ivory Coast. As noted above, the sector rallied sharply in response to healthier risk appetite and demand for higher-yielding securities.

The fund's interest-rate and yield-curve positioning also helped this quarter. Having a modestly positive portfolio duration during the period aided results as rates fell across the curve.

What about detractors?

Within our mortgage credit holdings, synthetic exposure to commercial mortgage-backed securities [CMBS] via CMBX was the primary detractor this period. [CMBX includes a group of tradeable indexes that reference a basket of 25 CMBS deals issued in a particular year.] In a continuation from March, investors worried that the pandemic could severely impact cash flows in various segments of the commercial real estate market, particularly retail and lodging. Public health policies that curtailed shopping and travel for millions of people constrained the revenues for many malls and travel destinations.

The Fed's announcement that AAA-rated CMBS would be included in its Term Asset-Backed Loan Facility [TALF], along with stronger demand for risk, helped the sector rebound in June. However, this boost was not enough to fully offset earlier losses. TALF is a reprise of a program launched in 2009 that enabled investors to buy bonds linked to consumer and business debt using money borrowed from the Fed.

In the residential mortgage market, our positions in agency credit-risk transfer securities [CRTs] performed well amid rekindled investor demand. The performance of our CRT holdings partially offset the overall negative outcome for our mortgage-credit strategies.

What is your near-term outlook?

As the quarter came to a close, coronavirus cases began to reaccelerate, particularly in areas of the country that were the first to open. As a result, plans to fully reopen certain parts of the economy, such as restaurants and bars, have been put on hold in the areas most affected.

Amid stronger-than-expected economic reports, investors seem to be shrugging off the increase in infection rates, at least for now. As we begin the second half of 2020, it is likely that the coronavirus will continue to dominate the news. Investors, meanwhile, will remain focused on economic data, indications of progress toward a vaccine, and the impact of second-quarter earnings on corporate balance sheets

How was the fund positioned as of June 30?

Reflecting the fund's relatively cautious overall positioning, we continue to hold securities across sectors that have less price sensitivity to changes in yield spreads.

Within corporate credit, high yield remained the fund's largest allocation. We also have modest allocations in investment-grade credit and convertible securities.

COVID-19 created significant headwinds for the CMBS market because commercial real estate is in the "eye of the storm." Uncertainty about the duration of social distancing measures makes for a challenging backdrop, particularly for hotel and retail properties, which have only recently begun reopening.

We believe most properties that were functioning well prior to the crisis and have reasonable levels of equity will survive, buoyed by government support, operator reserves, and/or debt-service modifications.

We continue to have conviction in the fund's CMBX positions, which we believe offer value at the single A and BBB levels for indexes representing 2012–2014 issuance. In addition, we think the relatively large sell-off in newer vintages has presented additional value in that part of the market.

In our view, prepayment-sensitive areas of the market directly benefit when there are increased frictions in the housing finance industry. Given the potential for a deepening of the recession, there are ongoing risks related to high unemployment, weaker projected home-price appreciation, lower home turnover, and reduced homeowner mobility. Even as the use of mortgage forbearance grows, cash flows to investors from agency mortgages are guaranteed by government-sponsored enterprises. As a result, we continue to have confidence in the fund's holdings of interest-only collateralized mortgage obligations and inverse IOs backed by more seasoned collateral.

Highlights

Objective

The fund seeks as high a level of current income as Putnam management believes is consistent with preservation of capital.

Strategy and process

  • Broad diversification: The fund seeks multiple sources of return outside the constraints of its benchmark, investing across traditional and alternative bond markets.
  • Flexible risk allocations: The fund takes a unique approach to asset allocation, dynamically establishing diversified risk exposures rather than sector exposures.
  • Active duration management: As the fund's duration is independent of any index, the fund employs strategies that seek to reduce interest-rate risk.

Fund price

Net asset value
(yesterday’s close)
$6.37
0.31% | $0.02
52-week high $7.06 (01/13/20)
52-week low $5.73 (03/23/20)
(Optional)

Yield

Distribution rate before sales charge
as of 09/28/20
3.77%
Distribution rate after sales charge
as of 09/28/20
3.77%
30-day SEC yield as of 08/31/20 4.26%

Consistency of positive performance over five years

Performance represents 5-year returns in rolling quarter-end periods since inception.

Performance shown does not reflect the effects of any sales charges. Note that returns of 0.00% are counted as positive periods. For complete fund performance, please click on the performance tab.

16.24%

Best 5-year annualized return

(for period ending 12/31/13)


-4.32%

Worst 5-year annualized return

(for period ending 12/31/08)


5.98%

Average 5-year annualized return


Fund facts as of 08/31/20

Total net assets
$3,113.46M
Turnover (fiscal year end)
701%
Dividend frequency (view rate)
Monthly
Number of holdings
1966
Fiscal year-end
September
CUSIP / Fund code
746704501 / 1822
Inception date
07/01/96
Category
Taxable Income
Open to new investors
Ticker
PDVYX

Management team

Co-Chief Investment Officer, Fixed Income
Portfolio Manager
Portfolio Manager
Portfolio Manager
Portfolio Manager
Co-Chief Investment Officer, Fixed Income
Co-Head of Fixed Income


Performance

  • Total return (%) as of 06/30/20

  • Annual performance as of 06/30/20

Annualized Total return (%) as of 06/30/20

Annualized performance 1 yr. 3 yrs. 5 yrs. 10 yrs.
Before sales charge -3.40% 1.86% 2.44% 3.67%
After sales charge N/A N/A N/A N/A
ICE BofA U.S. Treasury Bill Index 1.71%1.80%1.22%0.66%

Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or loss when you sell your shares. Performance assumes reinvestment of distributions and does not account for taxes. Returns before sales charge do not reflect the current maximum sales charges as indicated below. Had the sales charge been reflected, returns would be lower. Returns at public offering price (after sales charge) for class A and class M shares reflect the current maximum initial sales charges of 5.75% and 3.50% for equity funds and 4.00% and 3.25% for income funds (2.25% for class A of Putnam Floating Rate Income Fund, Short-Term Municipal Income, Short Duration Bond Fund, and Fixed Income Absolute Return Fund), respectively. Class B share returns reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declining to 1% in the sixth year, and is eliminated thereafter (except for Putnam Floating Rate Income Fund, Putnam Short Duration Bond Fund, Putnam Fixed Income Absolute Return Fund, and Putnam Short-Term Municipal Income Fund, which is 1% in the first year, declining to 0.5% in the second year, and is eliminated thereafter). Class C shares reflect a 1% CDSC the first year that is eliminated thereafter. Performance for class B, C, M, N, R, and Y shares prior to their inception is derived from the historical performance of class A shares, adjusted for the applicable sales charge (or CDSC) and, except for class Y shares, the higher operating expenses for such shares (with the exception of Putnam Tax-Free High Yield Fund and Putnam Strategic Intermediate Municipal Fund, which are based on the historical performance of class B shares). Performance for class A, C, R6, and Y shares of Putnam Mortgage Opportunities Fund before their inception is derived from the historical performance of class I shares, which have been adjusted for the applicable sales charge (or CDSC) and the higher operating expenses for such shares. Returns at public offering price (after sales charge) for class N shares reflect the current maximum initial sales charge of 1.50%. Class R5/R6 shares, available to qualified employee-benefit plans only, are sold without an initial sales charge and have no CDSC. Class Y shares are generally only available for corporate and institutional clients and have no initial sales charge. Performance for class R5/R6 shares before their inception are derived from the historical performance of class Y shares, which have not been adjusted for the lower expenses; had they, returns would have been higher. Class A shares of Putnam money market funds have no initial sales charge. For a portion of the period, some funds had expenses limitations or had been sold on a limited basis with limited assets and expenses, without which returns would be lower.

Performance snapshot

  Before sales charge After sales charge
1 mt. as of 08/31/20 0.78% -
YTD as of 09/28/20 -6.52% -

Yield

Distribution rate before sales charge
as of 09/28/20
3.77%
Distribution rate after sales charge
as of 09/28/20
3.77%
30-day SEC yield as of 08/31/20 4.26%

Volatility as of 08/31/20

Standard deviation (3 yrs.) 8.60%

Lipper rankings as of 08/31/20

Time period Rank/Funds in category Percentile ranking
1 yr. 104/131 79%
3 yrs. 74/121 61%
5 yrs. 50/102 49%
10 yrs. 4/31 13%
Lipper category: Alternative Credit Focus Funds

Morningstar Ratings as of 08/31/20

Time period Funds in category Morningstar Rating
Overall 272
3 yrs. 272
5 yrs. 243
10 yrs. 88
Morningstar category: Nontraditional Bond

Distributions

Record/Ex dividend date 09/17/20
Payable date 09/21/20
Income $0.02
Extra income --
Short-term cap. gain --
Long-term cap. gain --

Lipper rankings are based on total return without sales charge relative to all share classes of funds with similar objectives as determined by Lipper. Past performance is not indicative of future results.

The Morningstar RatingTM for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

The up-market capture ratio is used to evaluate how well an investment manager performed relative to an index during periods when that index has risen. The ratio is calculated by dividing the manager’s returns by the returns of the index during the up-market, and multiplying that factor by 100. The down-market capture ratio is used to evaluate how well an investment manager performed relative to an index during periods when that index has dropped. The ratio is calculated by dividing the manager’s returns by the returns of the index during the down-market and multiplying that factor by 100.


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Holdings

Fnma Fn30 Tba Umbs 03.5000 10/01/2050 11.35%
Fnma Fn30 Tba Umbs 04.0000 10/01/2050 6.99%
Fnma Fn30 Tba Umbs 03.5000 09/01/2050 6.64%
Fnma Fn30 Tba Umbs 04.0000 09/01/2050 5.58%
Gnma Gii30 Tba 04.0000 09/01/2050 2.16%
Fnma Fn30 Tba Umbs 02.0000 10/01/2050 1.32%
Republic Of Senegal Regs 06.7500 03/13/2048 1.02%
Fnma Fn30 Tba Umbs 02.0000 09/01/2050 0.89%
Fnma Fn30 Tba Umbs 05.5000 09/01/2050 0.82%
Republic Of Indonesia Regs 04.7500 01/08/2026 0.79%
Top 10 holdings, percent of portfolio 37.56%