Active Income

High Yield Fund (Class Y)  (PHAYX)

Seeking a high level of income for investors since 1986

High Yield Fund received an  Overall Morningstar Rating  of  

Q1 2020 | High Yield Fund Q&A

  • High-yield bonds declined by double digits in the past three months. Despite posting a negative return, the fund outpaced the JPMorgan Developed High Yield Index.
  • A sizable underweighting in the poor-performing energy sector was the top contributor to relative performance. On the downside, adverse overall positioning in housing, financials, and chemicals dampened results versus the benchmark.
  • We have a moderately constructive intermediate-term view on the market’s fundamental environment and supply-and-demand backdrop. We think valuations are compelling.

How did the fund perform for the three months ended March 31, 2020?

The fund’s class Y shares returned -12.69%, outperforming the -14.19% result of the benchmark JPMorgan Developed High Yield Index.

What was the market environment like for high-yield bonds during the first quarter of 2020?

Most of the decline occurred in March. Immediately prior to the period, high yield had rallied strongly as investors welcomed the announcement that a phase-one trade deal between the United States and China would be signed in January. The asset class extended December’s rally through early January before succumbing to a bout of equity-market volatility stemming from the coronavirus outbreak.

In late February, the favorable market environment for corporate credit — both high-yield and investment-grade — collapsed, as rising concerns about the impact of coronavirus sparked a global sell-off in risk assets. The sharp turn in sentiment reverberated across markets, as global equities fell, developed-market government-bond yields declined, and credit spreads widened. A dispute between Russia and Saudi Arabia over oil production levels further unnerved investors. Due to heightened oil market uncertainty, U.S. crude prices dropped more than 66% during the quarter to $20.48 per barrel on March 31.

High-yield bonds endured a historic sell-off and partial recovery in March as the coronavirus outbreak quickly developed into an economic crisis that elicited unprecedented measures from policy makers. The Trump administration signed a roughly $2 trillion stimulus package into law — the largest economic relief package in U.S. history. The U.S. Federal Reserve rapidly unveiled six new lending facilities designed to help corporations facing a cash flow crisis avoid defaulting on their debt. These programs also provide support for money market funds and commercial debt markets.

Within the JPMorgan index, all cohorts posted losses, with energy (-40%) registering the biggest downturn. Other groups experiencing double-digit declines included gaming, lodging & leisure (-20%), automotive (-14%), broadcasting (-14%), and transportation (-16%). Among industries that outperformed the benchmark were utilities (-5%), technology (-5%), and health care (-6%). From a credit-rating perspective, lower-quality debt with either split B or CCC ratings fared the worst, while higher-quality BB-rated credits held up relatively well amid the market downdraft.

What factors had the biggest influence on the fund’s relative performance?

On the plus side, a sizable underweighting in the energy sector added the most value versus the benchmark. Security selection among telecommunications issuers, along with lower-than-benchmark allocations in metals & mining and automotive, also contributed. Conversely, adverse overall positioning in housing, financials, and chemicals dampened relative performance.

What is your outlook for the high-yield market over the coming months?

As the period concluded, the number of coronavirus infections was still rising worldwide. We think greater clarity regarding the trajectory of coronavirus infections and deaths is needed before the economic effects can be more clearly assessed.

That said, excluding the energy sector, we have a fairly constructive view on corporate fundamentals and the market’s supply-and-demand backdrop over the intermediate term. Also, in light of the sizable widening of high-yield spreads that occurred during March, we now think valuations are very attractive. (Spreads are the yield advantage high-yield bonds offer over comparable-maturity U.S. Treasuries.)

Regarding fundamentals, fourth-quarter 2019 earnings largely exceeded expectations. However, given increased uncertainty about the outlook for global economic growth, we are closely watching sectors vulnerable to the disruption caused by the coronavirus. In addition to energy, we are also monitoring the impact on gaming, lodging & leisure, retail, and several other cohorts.

Prior to this period, the overall high-yield default rate was below the long-term average of 3.44%, based on annual default rates dating back to 1980. Going forward, we expect defaults to rise, especially in troubled sectors such as energy.

As for supply/demand dynamics, new-issue activity stalled in March amid the market volatility. Year to date, there has been only $18.7 billion of net new issuance (net of refinancing), compared with $24.9 billion during the same period in 2019. On the demand side, high-yield mutual funds and exchange-traded funds experienced outflows totaling $16.7 billion in the first quarter, compared with inflows of $18.8 billion in the first three months of last year. Overall, reduced new-issue supply has been met by diminished demand.

From a valuation standpoint, the average spread of the fund’s benchmark rose 3.65 percentage points during March to about 9.5 percentage points over Treasuries. This was the highest spread level since early 2016 and was well above the 20-year average of 6.1 percentage points. The benchmark’s average yield spiked to 10%. At the beginning of the year, the average spread and yield were at 4.2 percentage points and 5.9%, respectively. In our view, spreads at this level offer a broad range of attractively valued investment opportunities. Moreover, we think the market’s substantially higher yield is compelling in the face of much lower global yields.

The biggest risk to our moderately constructive outlook is the still-to-be-determined impact of coronavirus on economic growth, corporate earnings growth, and cash flows. Additional risks include price volatility in oil and other commodities, policy missteps by global central banks, and heightened geopolitical tension.

Highlights

Objective

The fund seeks high current income. Capital growth is a secondary goal when consistent with achieving high current income.

Strategy and process

  • Income-focused: The portfolio managers strive for a higher level of income than most bonds offer by investing in higher-yielding, lower rated corporate bonds.
  • Focus on performance: The managers can invest across a range of industries and companies, and can adjust the fund's holdings to capitalize on market opportunities.
  • Leading research: The fund's managers, supported by Putnam's fixed-income research division, analyze a range of bonds to build a diversified portfolio.

Fund price

Net asset value
(yesterday’s close)
$5.84
0.34% | $0.02
52-week high $6.28 (02/20/20)
52-week low $4.92 (03/23/20)
(Optional)

Yield

Distribution rate before sales charge
as of 07/02/20
5.14%
Distribution rate after sales charge
as of 07/02/20
5.14%
30-day SEC yield as of 06/30/20 4.73%

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.

18.71%

Best 5-year annualized return

(for period ending 12/31/95)


-2.56%

Worst 5-year annualized return

(for period ending 09/30/02)


7.61%

Average 5-year annualized return


Fund facts as of 06/30/20

Total net assets
$1,207.79M
Turnover (fiscal year end)
37%
Dividend frequency (view rate)
Monthly
Number of holdings
594
Fiscal year-end
November
CUSIP / Fund code
74678J401 / 1819
Inception date
12/31/98
Category
Taxable Income
Open to new investors
Ticker
PHAYX

Management team

Co-Head of Fixed Income
Portfolio Manager
Portfolio Manager



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 -0.64% 2.83% 3.81% 5.91%
After sales charge N/A N/A N/A N/A
JPMorgan Developed High Yield Index -2.02%2.69%4.49%6.74%

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 0.60% -
YTD as of 07/02/20 -3.62% -

Yield

Distribution rate before sales charge
as of 07/02/20
5.14%
Distribution rate after sales charge
as of 07/02/20
5.14%
30-day SEC yield as of 06/30/20 4.73%

Risk-adjusted performance as of 05/31/20

Sharpe ratio (3 yrs.) 0.10
Information ratio (3 yrs.) 0.16

Volatility as of 05/31/20

Standard deviation (3 yrs.) 8.67%
Beta 0.94
R-squared 0.99

Lipper rankings as of 05/31/20

Time period Rank/Funds in category Percentile ranking
1 yr. 181/512 36%
3 yrs. 132/458 29%
5 yrs. 123/391 32%
10 yrs. 75/281 27%
Lipper category: High Yield Funds

Morningstar Ratings as of 05/31/20

Time period Funds in category Morningstar Rating
Overall 641
3 yrs. 641
5 yrs. 544
10 yrs. 346
Morningstar category: High Yield Bond

Distributions

Record/Ex dividend date 06/23/20
Payable date 06/25/20
Income $0.025
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

Cco Holdings Llc P/P 144a 05.3750 06/01/2029 1.26%
Ally Financial 08.0000 11/01/2031 0.81%
Sprint Corp 07.8750 09/15/2023 0.77%
Chs/Community Health Sys 06.2500 03/31/2023 0.61%
Diamond 1 Fin/Diam P/P 144a 06.0200 06/15/2026 0.54%
Dish Dbs Corp 05.8750 11/15/2024 0.54%
Sprint Capital Corporation 06.8750 11/15/2028 0.50%
Tenet Healthcare P/P 144a 04.8750 01/01/2026 0.49%
Tempo Acq Llc/Fi P/P 144a 06.7500 06/01/2025 0.48%
Energy Transfer Operatng 06.6250 02/15/2028 0.48%
Top 10 holdings, percent of portfolio 6.48%



Fixed income statistics as of 05/31/20

Average effective maturity 4.74 yrs.
Average effective duration 3.49 yrs.
Average yield to maturity 6.04%
Average coupon 5.77%

Sector weightings as of 05/31/20

  Cash investments Non-cash investments Total portfolio
  Weight Spread duration Weight Spread duration Weight Spread duration
High-yield corporate bonds 71.99% 2.71 1.50% 0.07 73.49% 2.78
Investment-grade corporate bonds 14.17% 0.73 0.00% 0.00 14.17% 0.73
Bank loans 4.78% 0.21 0.00% 0.00 4.78% 0.21
Convertible securities 1.53% 0.01 0.00% 0.00 1.53% 0.01
Emerging-market bonds 1.24% 0.06 0.00% 0.00 1.24% 0.06
Equity investments 0.48% 0.00 0.00% 0.00 0.48% 0.00
International Treasury/agency 0.44% 0.02 0.00% 0.00 0.44% 0.02
Net cash 5.37% 0.00 0.00% 0.00 5.37% 0.00

Spread duration is displayed in years and reflects the contribution by sector to the portfolio's total spread duration with the exception of the Treasury and Interest-rate swap sectors where effective duration is displayed. Spread duration estimates the price sensitivity of a specific sector or asset class to a 100 basis-point movement, 1%, (either widening or narrowing) in its yield spread relative to Treasuries. Effective duration provides a measure of a portfolio's interest-rate sensitivity. The longer a portfolio's duration, the more sensitive the portfolio is to shifts in the interest rates. Allocations may not total 100% of net assets because the table includes the notional value of derivatives (the economic value for purposes of calculating periodic payment obligations), in addition to the market value of securities.

Maturity detail as of 05/31/20

0 - 1 yr. 9.41%
1 - 5 yrs. 49.14%
5 - 10 yrs. 37.37%
10 - 15 yrs. 2.22%
Over 15 yrs. 1.86%

Quality rating as of 05/31/20

A 0.14%
BBB 14.37%
BB 42.74%
B 27.51%
CCC and Below 8.42%
Not Rated 1.45%
Net cash 5.37%

Fund characteristics will vary over time.

Due to rounding, percentages may not equal 100%.

Consider these risks before investing: 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. Lower-rated bonds may offer higher yields in return for more risk. Bond investments are subject to interest-rate risk (the risk of bond prices falling if interest rates rise) and credit risk (the risk of an issuer defaulting on interest or principal payments). Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds (a significant part of the fund's investments). Risks associated with derivatives include increased investment exposure (which may be considered leverage) and, in the case of over-the-counter instruments, the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. Unlike bonds, funds that invest in bonds have fees and expenses. 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.

Credit qualities are shown as a percentage of the fund's net assets. A bond rated BBB or higher (A-3 or higher, for short-term debt) is considered investment grade. This chart reflects the highest security rating provided by one or more of Standard & Poor’s, Moody’s, and Fitch. Ratings and portfolio credit quality will vary over time. Net cash, if any, represent the market value weights of cash, derivatives, and short-term securities in the portfolio. The fund itself has not been rated by an independent rating agency.

Top industry sectors as of 05/31/20

Consumer cyclicals 20.81%
Communication services 12.34%
Basic materials 10.69%
Financials 9.21%
Energy 8.85%
Health care 8.50%
Capital goods 8.05%
Consumer staples 7.26%
Net Cash 5.37%
 
Other
10.42%
Technology 4.93%
Utilities 3.55%
Non-cash investments 1.50%
Transportation 0.28%
Conglomerates 0.16%

Allocations may not total 100% of net assets because the table includes the notional value of certain derivatives (the economic value for purposes of calculating periodic payment obligations), in addition to the market value of securities.

Sectors will vary over time.

Country allocation as of 05/31/20

United States 86.03%
Canada 4.79%
Luxembourg 1.77%
United Kingdom 1.65%
Ireland 1.15%
France 1.10%
Netherlands 1.09%
Israel 0.71%
Switzerland 0.71%
 
Other
1.00%
Mexico 0.45%
Norway 0.39%
Indonesia 0.09%
Cayman Islands 0.07%

Expenses

Expense ratio

Class A Class B Class C Class M Class R Class R6 Class Y
Total expense ratio 1.02% 1.77% 1.77% 1.27% 1.27% 0.66% 0.77%
What you pay 1.02% 1.77% 1.77% 1.27% 1.27% 0.66% 0.77%

Sales charge

 Breakpoint Class A Class B Class C Class M Class R Class R6 Class Y
$0-$49,999 4.00% / 3.50% 0.00% / 4.00% 0.00% / 1.00% 3.25% / 3.00% -- -- --
$50,000-$99,999 4.00% / 3.50% 0.00% / 4.00% 0.00% / 1.00% 2.25% / 2.00% -- -- --
$100,000-$249,999 3.25% / 2.75% -- 0.00% / 1.00% 1.25% / 1.00% -- -- --
$250,000-$499,999 2.50% / 2.00% -- 0.00% / 1.00% 1.00% / 1.00% -- -- --
$500,000-$999,999 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 $500,000+) Class B Class C Class M Class R 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 M Class R Class R6 Class Y
  0.25% 0.25% 1.00% 0.40% 0.50% 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 $500,000 and participant-directed qualified retirement plans, see a Putnam fund prospectus and the statement of additional information.

The JPMorgan Developed High Yield Index is an unmanaged index of high-yield fixed-income securities issued in developed countries. You cannot invest directly in an index.

Consider these risks before investing: 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. Lower-rated bonds may offer higher yields in return for more risk. Bond investments are subject to interest-rate risk (the risk of bond prices falling if interest rates rise) and credit risk (the risk of an issuer defaulting on interest or principal payments). Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds (a significant part of the fund's investments). Risks associated with derivatives include increased investment exposure (which may be considered leverage) and, in the case of over-the-counter instruments, the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. Unlike bonds, funds that invest in bonds have fees and expenses. 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.

Credit qualities are shown as a percentage of the fund's net assets. A bond rated BBB or higher (A-3 or higher, for short-term debt) is considered investment grade. This chart reflects the highest security rating provided by one or more of Standard & Poor’s, Moody’s, and Fitch. Ratings and portfolio credit quality will vary over time. Net cash, if any, represent the market value weights of cash, derivatives, and short-term securities in the portfolio. The fund itself has not been rated by an independent rating agency.