Convertible Securities Fund (Class Y)  (PCGYX)

Offering investors the diverse benefits of convertible securities since 1972

Convertible Securities Fund received an  Overall Morningstar Rating  of  

Q2 2020 | Convertible Securities Fund Q&A

  • Supported by their underlying equities, convertibles rebounded off their March lows and outperformed the S&P 500 Index for the second quarter.
  • Overweight positioning and security selection within the technology sector was the largest contributor to outperformance relative to the benchmark.
  • We remain somewhat cautious given recent equity highs following significant volatility earlier this year.

Please describe conditions in the U.S. convertibles market in the second quarter.

After a challenging first quarter, risk sentiment improved markedly in April 2020.

The spread of COVID-19 slowed in some countries and parts of the U.S. economy began to reopen after weeks of lockdowns. On the fiscal policy front, Congress passed a new $484 billion pandemic-relief package for small businesses and hospitals. The Federal Reserve authorized aid to state and local governments and emphasized that it stood ready to take further steps to address the economic fallout from the pandemic. Given these initiatives and positive supply/demand trends in the convertibles market, the ICE BofA U.S. Convertible Index [the fund's benchmark] rose 4.69% for the month.

The rally continued into May and June, with the momentum supported by the more equity-sensitive, large-cap, and/or growth names, along with cyclical companies that continued to rebound off their lows. By quarter-end, the fund's benchmark had climbed 24.15%, outperforming the S&P 500 Index's return of 20.54%. Given their equity sensitivity, convertibles captured 61% of the upside of their underlying equities, 118% of the upside of the S&P 500 Index, and 95% of the upside of the Russell 2000 Index for the quarter. All 12 sectors within the benchmark posted positive results, with the best results in technology, consumer cyclicals, and consumer staples. In terms of credit quality, below-investment-grade/speculative-grade convertibles bonds outperformed investment-grade convertibles. Finally, with valuations rising from their correction lows, the benchmark's delta, a measure of equity sensitivity, rose from the low 50s to the low 60s by quarter-end.

Fixed-income assets rallied in response to the Fed's aggressive monetary actions and demand from investors seeking safer harbors. The Bloomberg Barclays U.S. Aggregate Bond Index and the ICE BofA U.S. 3-Month Treasury Bill Index rose 2.90% and 0.02%, respectively, for the quarter.

The asset class experienced a surge of new issuance during the quarter. What was behind the increase?

As we have seen with other periods of market stress, the convertible bond market is sometimes used as a vehicle for companies to enter back into capital markets. This can create unique opportunities within the new issue market. In Q2, a record 94 new issues came to market worth $56.8 billion. In April and May, we were pleased to see more first-time issuers entering the market, which has broadened sector diversification across the asset class, in our view. We also saw issuers from industry sectors that have not been significantly active in the convertibles market for some time, including retail, gaming/leisure, and cruise lines. Many of these "rescue" financings were completed on attractive terms, with high coupons, low conversion premiums, and statistical cheapness to fair value, in our view. We believe this adds another layer of alpha, or excess return relative to that of the benchmark, and downside protection. Toward the end of the quarter, we also saw the return of more growth-oriented technology companies refinancing existing convertible issues that have experienced a significant rise in price. These deals, in our opinion, create an opportunity to swap into more balanced (priced at par and less equity-sensitive) securities. These are names that we already own, and we have favorable opinions of them.

With regard to demand, we believe the attractiveness of the convertible bond structures coming to market caught the attention of crossover equity and fixed-income investors, which helped to support prices.

How did the fund perform?

For the three months ended June 30, 2020, the fund's class Y shares returned 25.35%, outperforming the benchmark by a solid margin.

We had overweight positioning versus the benchmark to companies that had advantages in the crisis. These businesses are more accommodative to people working from home or social distancing, as well as names that benefited from reopening. Specifically, our overweight exposure and security selection within the technology sector was the largest contributor to outperformance relative to the benchmark. Security selection within health care also contributed to the fund's outperformance.

Underweight exposure and security selection in the consumer staples sector, along with overweight positioning and security selection within consumer cyclicals, were the largest detractors from the fund's relative returns. This was primarily due to underweight positioning in a few single names that outperformed during the quarter.

How are you positioning the fund as the third quarter begins?

We continue to trim winners, especially those trading with higher price to par and equity sensitivity, and redeploying proceeds to more balanced securities when appropriate. We believe this strategy is an effective way to manage the portfolio amid the economic uncertainty posed by the pandemic. As a result, the portfolio gained greater convexity, a tool we use to manage a portfolio's exposure to market risk.

We have also taken advantage of record new issue volume in order to make the portfolio more balanced. Ultimately, we believe convertibles will continue to be an attractive option for investors seeking current income and capital appreciation, and a good choice for reducing the volatility of an equity portfolio.

What is your outlook for convertibles in the coming months?

Looking into 2020, we expect a sharp economic slowdown due to the repercussions of the COVID-19 outbreak and oil price volatility. We continue to have a fairly constructive outlook on the convertibles market, although we remain somewhat cautious given recent equity highs following significant volatility this year.

In the aftermath of the March 2020 sell-off, we believe there were a few notable developments in the convertibles market that have implications for the asset class. With the markets rallying back and valuations approaching pre-COVID levels, we think it is important to keep in mind the potential for future downside if the economy does not experience a quick recovery. In February and March 2020, the convertibles market tracked about 60% of the downside of the equity market, while in April and May, the convertibles exhibited 95% of the upside of broader equity indices.* Overall, we think the asset class's convexity has proved to be favorable, providing support in volatile times and better risk-adjusted returns over the long term.

*Based on average returns of the S&P 500 Index and Russell 2000 Index.

Highlights

Objective

The fund seeks, with equal emphasis, current income and capital appreciation. Its secondary objective is conservation of capital.

Strategy and process

  • Balanced profile: The fund seeks to achieve an equilibrium balancing much of the upside potential of equities, the lower downside risk of bonds, and an attractive current yield.
  • Effective diversification: The fund can provide effective diversification for investor portfolios; convertible securities are not highly correlated with stocks and correlation is near zero versus aggregate bond strategies.
  • Joint venture: Uniquely combining both dedicated fixed income and equity expertise to enhance the ability to fully exploit these hybrid securities.

Fund price

Yesterday’s close 52-week high 52-week low
Net asset value $29.75
1.05% | $0.31
$29.96
08/05/20
$20.14
03/23/20
(Optional)

Fund facts as of 07/31/20

Total net assets
$851.61M
Turnover (fiscal year end)
60%
Dividend frequency (view rate)
Quarterly
Number of holdings
126
Fiscal year-end
October
CUSIP / Fund code
746476407 / 1807
Inception date
12/30/98
Class Y  
Category
Fixed Income
Open to new investors
Ticker
PCGYX

Management team

Portfolio Manager
Portfolio Manager, Analyst



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 17.23% 12.40% 9.01% 10.37%
After sales charge N/A N/A N/A N/A
ICE BofA U.S. Convertible Index 15.34%11.71%9.24%10.91%

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 07/31/20 7.62% -
YTD as of 08/12/20 20.41% -

Yield

Distribution rate before sales charge
as of 08/12/20
1.47%
Distribution rate after sales charge
as of 08/12/20
1.47%
30-day SEC yield as of 07/31/20 0.56%

Risk-adjusted performance as of 06/30/20

Alpha (3 yrs.) 1.00
Sharpe ratio (3 yrs.) 0.79
Treynor ratio (3 yrs.) 11.10
Information ratio (3 yrs.) 0.30

Volatility as of 06/30/20

Standard deviation (3 yrs.) 13.66%
Beta 0.97
R-squared 0.97

Capture ratio as of 06/30/20

Up-market (3 yrs.) 101.38
Down-market (3 yrs.) 98.73

Lipper rankings as of 06/30/20

Time period Rank/Funds in category Percentile ranking
1 yr. 33/77 43%
3 yrs. 32/75 43%
5 yrs. 32/68 47%
10 yrs. 19/50 38%
Lipper category: Convertible Securities Funds

Morningstar Ratings as of 06/30/20

Time period Funds in category Morningstar Rating
Overall 75
3 yrs. 75
5 yrs. 68
10 yrs. 50
Morningstar category: Convertibles

Distributions

Record/Ex dividend date 06/26/20
Payable date 06/30/20
Income $0.109
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

Tesla 3.48%
Microchip Technology 2.63%
Broadcom 2.56%
Docusign 1.85%
Splunk 1.80%
Danaher Corp 1.76%
Southwest Airlines 1.74%
Dexcom 1.73%
Servicenow 1.68%
Coupa Software 1.51%
Top 10 holdings, percent of portfolio 20.74%



Portfolio composition as of 06/30/20

Convertible bonds and notes 76.87%
Mandatories 14.84%
Common stock 3.11%
Convertible preferred stock 2.61%
Cash and net other assets 2.49%
Corporate bonds and notes 0.08%

Equity statistics as of 06/30/20

Median market cap $10.44B
Weighted average market cap $36.10B
Price to book 3.95
Price to earnings 63.89

Fixed income statistics as of 06/30/20

Average stated maturity 4.65 yrs.
Average effective duration 1.59 yrs.
Average yield to maturity -3.76%
Average coupon 2.12%

Maturity detail as of 06/30/20

0 - 1 yr. 10.28%
1 - 5 yrs. 64.25%
5 - 10 yrs. 23.15%
Over 15 yrs. 2.32%

Quality rating as of 06/30/20

A 2.93%
BBB 6.58%
BB 2.78%
B 10.39%
CCC and Below 0.34%
Not Rated 74.49%
Cash and net other assets 2.49%

Fund characteristics will vary over time.

Due to rounding, percentages may not equal 100%.

Consider these risks before investing: Convertible securities prices may fall or fail to rise over time for several reasons, including general financial market conditions, changing market perceptions (including perceptions about the risk of default and expectations about monetary policy or interest rates), changes in government intervention in the financial markets, and factors related to a specific issuer or industry. These and other factors may lead to increased volatility and reduced liquidity in the fund's portfolio holdings. These risks are generally greater for convertible securities issued by small and/or midsize companies. Convertible securities' prices may be adversely affected by underlying common stock price changes. While convertible securities tend to provide higher yields than common stocks, the higher yield may not protect against the risk of loss or mitigate any loss associated with a convertible security's price decline. Convertible securities are subject to credit risk, which is the risk that an issuer of the fund's investments may default on payment of interest or principal. Credit risk is generally greater for below- investment-grade convertible securities. Convertible securities may be less sensitive to interest-rate changes than non-convertible bonds because of their structural features (e.g., convertibility, "put" features). Interest-rate risk is generally greater, however, for longer-term bonds and convertible securities whose underlying stock price has fallen significantly below the conversion price. 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/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. Equity securities are shown in the not-rated category. Cash and net other assets, 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.

Top industry sectors as of 06/30/20

Information technology 37.14%
Health care 18.13%
Consumer discretionary 16.55%
Communication services 8.95%
Utilities 4.86%
Industrials 4.36%
Financials 4.14%
Cash and net other assets 2.49%
Real estate 1.95%
 
Other
1.43%
Energy 0.83%
Materials 0.60%

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

Sectors will vary over time.

Country allocation as of 06/30/20

United States 95.42%
Cash and net other assets 2.49%
Israel 1.41%
France 0.63%
China 0.05%

Expenses

Expense ratio

Class A Class B Class C Class R Class R6 Class Y
Total expense ratio 1.05% 1.80% 1.80% 1.30% 0.72% 0.80%
What you pay 1.05% 1.80% 1.80% 1.30% 0.72% 0.80%

Sales charge

 Breakpoint Class A Class B Class C Class R 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 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 R6 Class Y
  0.25% 0.25% 1.00% 0.50% 0.00% 0.00%
  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 ICE BofA U.S. Convertible Index tracks the performance of publicly issued U.S. dollar denominated convertible securities of U.S. companies. You cannot invest directly in an index.

Consider these risks before investing: Convertible securities prices may fall or fail to rise over time for several reasons, including general financial market conditions, changing market perceptions (including perceptions about the risk of default and expectations about monetary policy or interest rates), changes in government intervention in the financial markets, and factors related to a specific issuer or industry. These and other factors may lead to increased volatility and reduced liquidity in the fund's portfolio holdings. These risks are generally greater for convertible securities issued by small and/or midsize companies. Convertible securities' prices may be adversely affected by underlying common stock price changes. While convertible securities tend to provide higher yields than common stocks, the higher yield may not protect against the risk of loss or mitigate any loss associated with a convertible security's price decline. Convertible securities are subject to credit risk, which is the risk that an issuer of the fund's investments may default on payment of interest or principal. Credit risk is generally greater for below- investment-grade convertible securities. Convertible securities may be less sensitive to interest-rate changes than non-convertible bonds because of their structural features (e.g., convertibility, "put" features). Interest-rate risk is generally greater, however, for longer-term bonds and convertible securities whose underlying stock price has fallen significantly below the conversion price. 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/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. Equity securities are shown in the not-rated category. Cash and net other assets, 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.