Webcast | Update on PSDYX | March 23, 2020

Effective June 1, 2019, the fund’s name changed from Putnam Short Duration Income Fund.

Active Income

Ultra Short Duration Income Fund (Class R6)  (PSDQX)

Seeking capital preservation and a higher rate of current income

Q1 2020 | Ultra Short Duration Income Fund Q&A

  • After a challenging quarter in which short-term markets experienced significant volatility, we see potential opportunities in commercial paper, corporate bonds, and securitized debt.
  • The Fed’s lending and buying facilities are helping to ease liquidity stress in the financial markets.
  • We expect short-term debt markets to stabilize and recover over time as the Fed facilities work their way through the system.

How were market conditions in the first quarter?

The economic fallout from the coronavirus pandemic and the collapse in oil prices sent global financial markets into a tailspin. The rout extended to fixed-income securities as investors braced for a potential worldwide recession. The S&P 500 Index, a broad measure of stocks, had the worst three months since the 2008 financial crisis. This steep reversal in sentiment comes after the S&P 500 and the Nasdaq Composite rose to record highs in mid-February.

Flight-to-safety pushed the yields on U.S. Treasuries lower. The 10-year Treasury yield plunged to an all-time low of 0.31% on March 9 and ended the quarter at 0.67%, after beginning the year at 1.88%. The withdrawals from corporate investment-grade bond funds and ETFs, especially short-term debt, reached record levels during the quarter. The spreads on investment-grade bonds, or the risk premiums investors demand to hold these securities over U.S. Treasuries, widened to levels not seen since the financial crisis. As a result, the Bloomberg Barclays U.S. 1-3 Year Corporate Index dropped 1.53% during the quarter.

The Fed slashed rates to near zero, extended terms on emergency loans to banks, relaunched financial-crisis-era programs, and threw other lifelines across the bond markets. These measures include the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, and finally the Primary and Secondary Market Corporate Credit Facilities. The Fed also pledged to make unlimited asset purchases. Policy makers aim to protect the financial system and insulate the broader U.S. economy. Dozens of other central banks across Europe, Asia, and elsewhere also announced emergency stimulus measures. These actions taken by the Fed have increased liquidity on the short end of the curve and, in turn, stabilized spreads as we ended the quarter.

How did the fund perform?

The fund underperformed its benchmark, the ICE BofA U.S. Treasury Bill Index, during the period. The fund dropped 1.33% versus a gain of 0.65% for the benchmark index for the three months ended March 31, 2020.

What were the drivers of performance during the quarter?

Corporate credit was the main detractor from the fund’s performance as spreads widened dramatically during the quarter. The fund is primarily invested in investment-grade corporate bonds and commercial paper [CP], so it is most sensitive to corporate spread movements. The spread on the Bloomberg Barclays 1-3 Year Corporate Index widened by 217 basis points during the quarter. Meanwhile, the three-month London Interbank Offered Rate [LIBOR] ended the quarter at 1.45%. Additionally, significant outflows from money market funds, along with a lack of bank balance sheet availability for buying short-term securities, put pressure on the CP market in March.

We believe the meaningful spread widening that corporate securities experienced during the quarter was driven by liquidity pressures in the market rather than credit-related issues. Furthermore, unlike the 2008 credit crisis, we are encouraged to see that banks are part of the solution to help ease the liquidity stresses.

In addition, the fund’s allocation to securitized sectors like non-agency residential mortgage-backed (RMBS) detracted from performance as yield spreads in the sector widened in March. We limit our allocation to securitized sectors to a maximum of 10% of the portfolio. One positive contributor to performance was duration positioning; a positive duration posture proved beneficial as U.S. rates rallied.

We have taken steps to reduce the fund’s sensitivity to credit spread movements as we are cognizant of ongoing uncertainties related to the coronavirus and the U.S. presidential elections this year. Specifically, we have lowered our exposure to the relatively longer-dated securities in the portfolio. We also positioned the portfolio to generate natural liquidity through ongoing bond maturities. Approximately 1.5%–3.0% of fund investments mature daily and 26% mature in 60 days. We also built up liquidity around quarter-end, with 20% of the fund’s holdings maturing in March.

What is the outlook for short-term fixed-income markets?

Putnam’s ultra short-duration portfolio has been impacted by the extreme widening of spreads in the bond markets. With that said, the spreads on investment-grade corporate bonds held in the portfolio, in our view, primarily reflect liquidity dislocations in the market. Meanwhile, in money markets, the decline in market liquidity at the front end of the curve has been the most challenging issue we have seen.

We believe the Fed’s recent measures, including the money market liquidity facility and the corporate credit facilities, will help financial markets function better. The President and Congress also approved the largest economic relief package in U.S. history — a $2 trillion bill intended to rescue the economy shuttered by policies to stop the spread of the coronavirus. All these measures will take time to work their way through the financial system. We expect short-term interest rates to remain near record lows this year.

Against this backdrop, we expect to keep the portfolio’s current duration of approximately 0.25 years. Overall, we are constructive on the outlook for the investment-grade corporate bond market. On a valuation basis, we think spreads are attractive as the market is currently pricing in substantial downgrade risks. The situation remains fluid, but our base case is that the markets will stabilize, and then recover over time. Furthermore, we think there is an attractive liquidity premium in the market currently, which is most apparent at the front end of the yield curve. With that in mind, we continue to structure the portfolio with a barbell approach (emphasizing positions at separate points on the yield curve): investing in lower-quality investment-grade securities (BBB or equivalent) maturing in 1 year or less and in higher-quality investment-grade securities (A or AA rated) maturing between 1 and 3.5 years.

Despite ongoing changes in the market environment, capital preservation remains the primary objective of the fund. We believe our expertise on the short end will allow us to appropriately position the fund as the markets evolve.

Highlights

Objective

The fund seeks as high a rate of current income as we believe is consistent with preservation of capital and maintenance of liquidity.

Strategy and process

  • A broader opportunity set: The fund invests in a diversified portfolio composed of short duration, investment-grade money market and other fixed-income securities.
  • Active risk management: In today's complex bond market, the fund's experienced managers actively manage risk with the goal of superior risk-adjusted performance over time.
  • Higher income potential: Access to a wider range of income opportunities means the fund may offer higher income potential than other short-term investments.

Fund price

Net asset value
(yesterday’s close)
$10.09
0.00% | $0.00
52-week high $10.09 (06/29/20)
52-week low $9.81 (03/24/20)
(Optional)

Yield

Distribution rate before sales charge
as of 07/02/20
0.77%
Distribution rate after sales charge
as of 07/02/20
0.77%
30-day SEC yield with subsidy
as of 06/30/20
0.85%
30-day SEC yield without subsidy
as of 06/30/20
0.78%

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.

1.70%

Best 5-year annualized return

(for period ending 06/30/20)


0.79%

Worst 5-year annualized return

(for period ending 03/31/17)


1.10%

Average 5-year annualized return


Fund facts as of 06/30/20

Total net assets
$15,784.02M
Turnover (fiscal year end)
27%
Dividend frequency (view rate)
Monthly
Number of issuers
370
Fiscal year-end
July
CUSIP / Fund code
74676P672 / 8878
Inception date
07/02/12
Category
Taxable Income
Open to new investors
Ticker
PSDQX

Management team

Portfolio Manager
Co-Head of Fixed Income
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. Life (inception: 07/02/12 )
Before sales charge 2.29% 2.18% 1.70% 1.29%
After sales charge N/A N/A N/A N/A
ICE BofA U.S. Treasury Bill Index 1.71%1.80%1.22%--

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 0.38% -
YTD as of 07/02/20 1.12% -

Yield

Distribution rate before sales charge
as of 07/02/20
0.77%
Distribution rate after sales charge
as of 07/02/20
0.77%
30-day SEC yield with subsidy
as of 06/30/20
0.85%
30-day SEC yield without subsidy
as of 06/30/20
0.78%

Morningstar Ratings as of 05/31/20

Time period Funds in category Morningstar Rating
Overall 162
3 yrs. 162
5 yrs. 124
Morningstar category: Ultrashort Bond

Distributions

Accrual days 30
Accrual start date 06/01/20
Accrual end date 06/30/20
Payable date 06/30/20
Income $0.007924094
Extra taxable income --
Dividend frequency Monthly

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

Putnam Short Term Investment Fund 1.85%
Bank of America 1.41%
Credit Suisse 1.29%
Canadian Imperial Bank of Commerce 1.28%
Citigroup 1.27%
Morgan Stanley 1.26%
Bank of Montreal 1.25%
Sumitomo Mitsui Financial 1.21%
Toyota 1.21%
TD Bank 1.17%
Top 10 issuers, percent of portfolio 13.20%


Full holdings

(PDF)

Portfolio composition as of 05/31/20

Investment-grade corporate bonds 60.23%
Commercial paper 18.09%
Residential MBS (non-agency) 6.86%
Certificates of deposit 6.15%
Short-term asset-backed securities 3.84%
Asset-backed securities (ABS) 2.31%
Net cash 1.39%
U.S. Treasury/agency 0.62%
Repurchase agreements 0.50%
Agency CMO 0.01%

Fixed income statistics as of 05/31/20

Average effective maturity 0.95 yrs.
Average effective duration 0.30 yrs.
Average yield to maturity 1.21%
Average coupon 1.51%

Quality rating as of 05/31/20

A-1+ 5.17%
A-1 8.85%
A-2 10.29%
A-3 1.05%
AAA 10.53%
AA 17.76%
A 32.45%
BBB 12.18%
Not Rated 0.33%
Net cash 1.39%

Fund characteristics will vary over time.

Due to rounding, percentages may not equal 100%.

Consider these risks before investing: Putnam Ultra Short Duration Income Fund is not a money market fund. The effects of inflation may erode the value of your investment over time. Funds that invest in government securities are not guaranteed. Mortgage-backed investments, unlike traditional debt investments, are also subject to prepayment risk, which means that they may increase in value less than other bonds when interest rates decline and decline in value more than other bonds when interest rates rise. The fund may have to invest the proceeds from prepaid investments, including mortgage-backed investments, in other investments with less attractive terms and yields. 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. 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. Credit risk is generally greater for debt not backed by the full faith and credit of the U.S. government. 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 net assets as of the date indicated above. A bond rated BBB or higher (A-3/SP-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 may vary over time. Net cash, if any, represent the market value weights of cash and derivatives and may show a negative market value as a result of the timing of trade versus settlement date transactions. The fund itself has not been rated by an independent rating agency.

Country allocation as of 05/31/20

United States 67.99%
Canada 6.46%
United Kingdom 5.70%
France 3.97%
Netherlands 3.34%
Australia 2.95%
Japan 2.89%
Sweden 1.85%
Net cash 1.39%
 
Other
3.46%
Norway 1.02%
Germany 0.85%
Switzerland 0.75%
Spain 0.69%
Bermuda 0.07%
Finland 0.06%
Denmark 0.02%

Expenses

Expense ratio

Class A Class B Class C Class N Class R Class R6 Class Y
Total expense ratio 0.48% 0.88% 0.88% 0.63% 0.88% 0.37% 0.38%
What you pay† 0.40% 0.80% 0.80% 0.55% 0.80% 0.29% 0.30%

† The fund's expense ratio is taken from the most recent prospectus and is subject to change. What you pay reflects Putnam Management's decision to contractually limit expenses through 11/30/20

Sales charge

 Breakpoint Class A Class B Class C Class N Class R Class R6 Class Y
$0-$49,999 -- -- -- 1.50% / 1.25% -- -- --
$50,000-$99,999 -- -- -- 1.25% / 1.00% -- -- --
$100,000-$249,999 -- -- -- 1.00% / 0.75% -- -- --
$250,000-$499,999 -- -- -- 0.00% / 0.25% -- -- --
$500,000-$999,999 -- -- -- 0.00% / 0.25% -- -- --
$1M-$4M -- -- -- 0.00% / 0.25% -- -- --
$4M-$50M -- -- -- 0.00% / 0.15% -- -- --
$50M+ -- -- -- 0.00% / 0.10% -- -- --

CDSC †

Putnam Ultra Short Duration Income Fund has no redemption fees except under certain circumstances.

  Class A Class B Class C Class N (sales for $250,000+) Class R Class R6 Class Y
0 to 9 mts. 1.00% 5.00% 1.00% 0.25% -- -- --
9 to 12 mts. 1.00% 5.00% 1.00% 0.00% -- -- --
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% -- -- -- --
† A deferred sales charge on class A, B and C shares may apply to certain redemptions of shares purchased by exchange from another Putnam fund. A deferred sales charge on class M shares may apply to redemptions of shares from certain rollover accounts.

Trail commissions

  Class A Class B Class C Class N Class R Class R6 Class Y
  0.10% 0.00% 0.50% 0.25% 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 $1,000,000 and participant-directed qualified retirement plans, see a Putnam fund prospectus and the statement of additional information.

The ICE BofA U.S. Treasury Bill Index is an unmanaged index that tracks the performance of U.S. dollar denominated U.S. Treasury Bills publicly issued in the U.S. domestic market. Qualifying securities must have a remaining term of at least one month to final maturity and a minimum amount outstanding of $1 billion. You cannot invest directly in an index.

Consider these risks before investing: Putnam Ultra Short Duration Income Fund is not a money market fund. The effects of inflation may erode the value of your investment over time. Funds that invest in government securities are not guaranteed. Mortgage-backed investments, unlike traditional debt investments, are also subject to prepayment risk, which means that they may increase in value less than other bonds when interest rates decline and decline in value more than other bonds when interest rates rise. The fund may have to invest the proceeds from prepaid investments, including mortgage-backed investments, in other investments with less attractive terms and yields. 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. 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. Credit risk is generally greater for debt not backed by the full faith and credit of the U.S. government. 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 net assets as of the date indicated above. A bond rated BBB or higher (A-3/SP-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 may vary over time. Net cash, if any, represent the market value weights of cash and derivatives and may show a negative market value as a result of the timing of trade versus settlement date transactions. The fund itself has not been rated by an independent rating agency.