Active Equities

Equity Income Fund (Class Y)  (PEIYX)

A multidimensional approach that defines value on a daily basis

Equity Income Fund received an  Overall Morningstar Rating  of  

Q1 2020 | Equity Income Fund Q&A

  • For the quarter, U.S. large-cap value stocks declined 26.73%, giving back slightly more than their entire gain for the 2019 calendar year.
  • In extremely challenging conditions, the fund declined less than its Russell 1000 Value benchmark due to how we constructed the portfolio entering the period.
  • We believe our focus on the fundamentals of individual businesses proved to be an advantage.

Equities endured an extremely difficult quarter. How did the fund fare?

This was one of the most challenging periods that we have encountered in our careers as equity managers. In the first three months of 2020, U.S. large-cap value stocks declined 26.73%, giving back slightly more than their entire gain for the 2019 calendar year. Not only were declines sharp across all asset classes and regions, but volatility levels were historic. Outside of equities, fixed-income markets also encountered severe liquidity challenges, and oil prices and investor sentiment plummeted to new lows.

In terms of our portfolio, the fund declined less than its Russell 1000 Value benchmark for the quarter. We believe this was due to the portfolio’s positioning as we entered the period. A key component of our investment process has always been rigorous risk control. Another key strategy — which was very important for weathering this period — is portfolio construction. We had a balanced portfolio that was focused on the fundamentals of individual businesses rather than on macroeconomic or sector trends. This helped prepare the fund for conditions in which unprecedented measures became daily news. To use an analogy, we want to have the house ready before the tornado arrives because trying to fix it during the tornado is very difficult.

What is your perspective on market conditions?

The attempts by authorities to gain an upper hand on the COVID-19 pandemic brought an abrupt demand shock to the markets. For perspective in times like this, investors tend to focus on similar events in history. However, what we experienced in the first quarter had no historical precedent, so markets reacted very aggressively. As the crisis unfolded, we began to see vastly lower multiples and earnings forecasts. Investors favored defensiveness and quality, while riskier cyclical strategies underperformed dramatically. In many ways, the market reaction was relatively predictable.

As we do in any market environment, we remained focused on the longer term, conducting rigorous research at the individual company level. We continued to analyze each company’s ability to manage the crisis and to determine how long it can survive with its business closed. As the weeks have progressed, we have talked to managements and asked about contingency plans. Many companies are dusting off their playbooks from 2008.

How do you manage risk as part of your investment process?

On a regular basis, we conduct stress scenarios. How would the portfolio perform if oil prices fell 20 percent? How would it hold up if growth outperformed value by 10 percent or if interest rates rose or fell? We aim to ensure that the portfolio will not underperform or outperform in a meaningful way in any of these situations. Also, we continue to maintain the balanced structure — a mix of cyclical and defensive holdings — that we had coming into the first quarter.

What is your strategy and outlook going into the second quarter?

At the close of the first quarter, many uncertainties remained, making it difficult to determine how much damage the pandemic will inflict on the economy. Projections around data such as GDP and unemployment have varied dramatically. This uncertainty will likely continue to drive volatility in all asset classes, and in equities in particular.

This crisis will eventually enter recovery and normalization phases, and we want to prepare the portfolio for that as well. In the first quarter, many investors began to focus on existential, or solvency, risk — whether a business will be able to survive the impact of this crisis. We’ve been conducting intensive research to try to understand the solvency risk in the companies we hold, but also to identify those that we believe offer solid prospects in the aftermath of the pandemic.

An exogenous shock by its nature is difficult to foresee, and we don’t yet know how this one will play out. We continue to focus on the investment process we’ve had in place for 20 years, which relies on deep fundamental analysis and active management. We believe this will continue to position the portfolio for long-term success through a range of market environments.

Highlights

Objective

The fund seeks capital growth and current income.

Strategy and process

  • A large-value focus: The fund focuses on large companies whose stocks are priced below their long-term potential, and where there may be a catalyst for positive change.
  • Dividend growth: The fund places a distinct emphasis on companies that can grow their dividends and are able and willing to return cash to shareholders.
  • A disciplined process: The portfolio managers invest using fundamental research and quantitative tools supported by strong risk controls in portfolio construction.

Fund price

Net asset value
(yesterday’s close)
$23.42
1.21% | $0.28
52-week high $27.19 (12/24/19)
52-week low $17.26 (03/23/20)
(Optional)

Yield

Distribution rate before sales charge
as of 07/06/20
1.93%
Distribution rate after sales charge
as of 07/06/20
1.93%
30-day SEC yield as of 06/30/20 2.10%

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.

21.69%

Best 5-year annualized return

(for period ending 06/30/99)


-2.12%

Worst 5-year annualized return

(for period ending 03/31/09)


10.44%

Average 5-year annualized return


Fund facts as of 06/30/20

Total net assets
$11,624.53M
Turnover (fiscal year end)
12%
Dividend frequency (view rate)
Quarterly
Number of holdings
91
Fiscal year-end
November
CUSIP / Fund code
746745405 / 1810
Inception date
10/01/98
Category
Value
Open to new investors
Ticker
PEIYX

Management team

Portfolio Manager
Portfolio Manager, Analyst

Literature

Fund information

Fact Sheet (A share) (PDF)
Fact Sheet (R6 share) (PDF)
Fact Sheet (Y share) (PDF)
Brochure (PDF)
Disciplined process — Defining value daily (PDF)
Comparing Putnam's U.S. equity funds (PDF)

Legal documents

Summary Prospectus (PDF)
Statutory Prospectus (PDF)
Statement of Additional Information (SAI) (PDF)
Proxy voting results (Form N-PX) (PDF)

Commentary

Annual Report (PDF)
Semiannual Report (PDF)
Quarterly commentary (PDF)
Equity Outlook (PDF)

What’s next for the hard-hit financials sector?
The financials sector has been among the hardest hit from the COVID-19-induced equity market selloff, but there are reasons for optimism.

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 -1.68% 5.61% 6.42% 12.00%
After sales charge N/A N/A N/A N/A
Russell 1000 Value Index -8.84%1.82%4.64%10.41%

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 AMT-Free 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 06/30/20 0.16% -
YTD as of 06/30/20 -12.02% -

Yield

Distribution rate before sales charge
as of 07/06/20
1.93%
Distribution rate after sales charge
as of 07/06/20
1.93%
30-day SEC yield as of 06/30/20 2.10%

Risk-adjusted performance as of 05/31/20

Alpha (3 yrs.) 3.24
Sharpe ratio (3 yrs.) 0.24
Treynor ratio (3 yrs.) 4.24
Information ratio (3 yrs.) 1.31

Volatility as of 05/31/20

Standard deviation (3 yrs.) 17.69%
Beta 0.98
R-squared 0.98

Capture ratio as of 05/31/20

Up-market (3 yrs.) 107.86
Down-market (3 yrs.) 94.35

Lipper rankings as of 05/31/20

Time period Rank/Funds in category Percentile ranking
1 yr. 117/493 24%
3 yrs. 121/453 27%
5 yrs. 138/387 36%
10 yrs. 25/241 11%
Lipper category: Equity Income Funds

Morningstar Ratings as of 05/31/20

Time period Funds in category Morningstar Rating
Overall 1108
3 yrs. 1108
5 yrs. 958
10 yrs. 699
Morningstar category: Large Value

Distributions

Record/Ex dividend date 06/26/20
Payable date 06/30/20
Income $0.113
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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** FundVisualizer comparison based on Putnam fund versus the largest fund in its Morningstar category.


Holdings

Microsoft Corp 3.04%
Walmart 3.03%
Bank Of America Corp 2.87%
JPMorgan Chase 2.85%
Citigroup 2.72%
Johnson Johnson 2.34%
Northrop Grumman Corp 2.19%
American Tower Corp 2.04%
Cigna Corp 1.86%
Charter Communications 1.78%
Top 10 holdings, percent of portfolio 24.72%



Portfolio composition as of 05/31/20

Common stock 97.31%
Cash and net other assets 1.95%
Convertible preferred stock 0.74%

Equity statistics as of 05/31/20

Median market cap $45.44B
Weighted average market cap $167.06B
Price to book 1.95
Price to earnings 17.18

Fund characteristics will vary over time.

Due to rounding, percentages may not equal 100%.

Consider these risks before investing: Value stocks may fail to rebound, and the market may not favor value-style investing. Income provided by the fund may be reduced by changes in the dividend policies of, and the capital resources available at, the companies in which the fund invests. The value of investments in the fund's portfolio may fall or fail to rise over extended periods of time for a variety of reasons, including general economic, political or financial market conditions, investor sentiment and market perceptions, government actions, geopolitical events or changes, and factors related to a specific issuer, geography, industry or sector. These and other factors may lead to increased volatility and reduced liquidity in the fund's portfolio holdings. Our investment techniques, analyses, and judgments may not produce the outcome we intend. The investments we select for the fund may not perform as well as other securities that we do not select for the fund. We, or the fund's other service providers, may experience disruptions or operating errors that could have a negative effect on the fund. You can lose money by investing in the fund.

Top industry sectors as of 05/31/20

Financials 18.18%
Health care 16.94%
Industrials 10.68%
Information technology 10.06%
Consumer staples 8.69%
Energy 6.62%
Communication services 6.20%
Consumer discretionary 5.93%
Materials 5.58%
 
Other
11.12%
Utilities 5.41%
Real estate 3.76%
Cash and net other assets 1.95%

The unclassified sector (where applicable) includes exchange traded funds and other securities not able to be classified by sector.

Sectors will vary over time.


Expenses

Expense ratio

Class A Class B Class C Class R Class R5 Class R6 Class Y
Total expense ratio 0.91% 1.66% 1.66% 1.16% 0.65% 0.55% 0.66%
What you pay 0.91% 1.66% 1.66% 1.16% 0.65% 0.55% 0.66%

Sales charge

 Breakpoint Class A Class B Class C Class R Class R5 Class R6 Class Y
$0-$49,999 5.75% / 5.00% 0.00% / 4.00% 0.00% / 1.00% -- -- -- --
$50,000-$99,999 4.50% / 3.75% 0.00% / 4.00% 0.00% / 1.00% -- -- -- --
$100,000-$249,999 3.50% / 2.75% -- 0.00% / 1.00% -- -- -- --
$250,000-$499,999 2.50% / 2.00% -- 0.00% / 1.00% -- -- -- --
$500,000-$999,999 2.00% / 1.75% -- 0.00% / 1.00% -- -- -- --
$1M-$4M 0.00% / 1.00% -- -- -- -- -- --
$4M-$50M 0.00% / 0.50% -- -- -- -- -- --
$50M+ 0.00% / 0.25% -- -- -- -- -- --

CDSC

  Class A (sales for $1,000,000+) Class B Class C Class R Class R5 Class R6 Class Y
0 to 9 mts. 1.00% 5.00% 1.00% -- -- -- --
9 to 12 mts. 1.00% 5.00% 1.00% -- -- -- --
2 yrs. 0.00% 4.00% 0.00% -- -- -- --
3 yrs. 0.00% 3.00% 0.00% -- -- -- --
4 yrs. 0.00% 3.00% 0.00% -- -- -- --
5 yrs. 0.00% 2.00% 0.00% -- -- -- --
6 yrs. 0.00% 1.00% 0.00% -- -- -- --
7+ yrs. 0.00% 0.00% 0.00% -- -- -- --

Trail commissions

  Class A Class B Class C Class R Class R5 Class R6 Class Y
  0.25% 0.25% 1.00% 0.50% 0.00% 0.00% 0.00%
  NA NA NA NA NA NA NA
  NA NA NA NA NA NA NA

For sales and trail commission information on purchases over $1 million and participant-directed qualified retirement plans, see a Putnam fund prospectus and the statement of additional information.

The Russell 1000 Value Index is an unmanaged index of those companies in the large-cap Russell 1000 Index chosen for their value orientation. You cannot invest directly in an index.

Consider these risks before investing: Value stocks may fail to rebound, and the market may not favor value-style investing. Income provided by the fund may be reduced by changes in the dividend policies of, and the capital resources available at, the companies in which the fund invests. The value of investments in the fund's portfolio may fall or fail to rise over extended periods of time for a variety of reasons, including general economic, political or financial market conditions, investor sentiment and market perceptions, government actions, geopolitical events or changes, and factors related to a specific issuer, geography, industry or sector. These and other factors may lead to increased volatility and reduced liquidity in the fund's portfolio holdings. Our investment techniques, analyses, and judgments may not produce the outcome we intend. The investments we select for the fund may not perform as well as other securities that we do not select for the fund. We, or the fund's other service providers, may experience disruptions or operating errors that could have a negative effect on the fund. You can lose money by investing in the fund.