Floating Rate Income Fund (Class Y)  (PFRYX)

An income fund that can benefit from higher interest rates

Floating Rate Income Fund received an  Overall Morningstar Rating  of  

Q2 2020 | Floating Rate Income Fund Q&A

  • High-yield bank loans advanced nearly 10% the past three months, rebounding from an extreme, but short-lived, period of risk aversion in March.
  • Greater-than-benchmark exposure to housing and favorable positioning in broadcasting contributed the most versus the benchmark. Conversely, positioning in technology, services, and health care detracted from relative performance.
  • Despite considerable uncertainty, we have a moderately constructive intermediate-term view on the market's fundamental environment and supply-and-demand backdrop.

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

The fund's class Y shares returned 7.39%, trailing the 9.70% result of the benchmark S&P/LSTA Leveraged Loan Index.

What was the fund’s investment environment like during the second quarter of 2020?

Following their partial recovery in late March, bank loans continued to rebound in April on hopes that massive government stimulus efforts would be enough to offset the near-term economic fallout from the coronavirus pandemic. The market rally continued in May, aided by an easing of coronavirus restrictions and additional policy support. These developments reinforced investors' view that global economic activity had bottomed and would begin to recover, albeit gradually.

The pace of the loan recovery moderated in June. Investors weighed the potential for more support from the U.S. Federal Reserve, along with better-than-expected economic data, against an accelerating rate of coronavirus infections in certain parts of the country. Market participants worried that the possibility of a second wave of infections could slow progress toward the economy reopening.

For the quarter as a whole, high-yield bank loans performed in line with high-yield bonds. Reflecting renewed investor demand for risk, both asset classes handily outperformed the broad investment-grade fixed-income market.

Within the S&P/LSTA index, all cohorts posted gains, led by a 26% retracement in the energy group, following last quarter's -30% return. Automotive [+13%], chemicals [+13%], housing [+12%], and metals & mining [+12%] also registered strong advances. Conversely, transportation [+4%], cable & satellite [+5%], and telecommunications [+7%] notably lagged the fund's benchmark. From a credit-rating perspective, lower-quality loans generated the highest gains, rallying back from the oversold levels reached amid the flight from risk that occurred in March.

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

On the plus side, a larger-than-benchmark allocation in housing and favorable positioning in broadcasting helped the most versus the benchmark. On the downside, adverse positioning in technology, services, and health care detracted from relative performance.

What is your outlook for the bank-loan market over the coming months?

We have a moderately constructive outlook overall. The biggest risk on the horizon is the still-to-be-determined impact of the coronavirus pandemic on economic growth, corporate earnings growth, and cash flows.

That said, except for the energy sector, we have a fairly positive intermediate-term view on corporate fundamentals and the market's supply-and-demand backdrop. Also, even though loan spreads retightened somewhat following their sizable widening in March, we think valuations remain relatively attractive. [Spreads are the yield advantage loans offer over comparable-maturity U.S. Treasuries.]

From a fundamental perspective, we are closely watching sectors vulnerable to the disruption caused by the coronavirus. In addition to energy, we are monitoring the impact on gaming, lodging & leisure, retail, and several other cohorts. Within these groups, we are focusing on the health of issuers' balance sheets and liquidity metrics, as well as the increasing risk of defaults or credit-rating downgrades.

As for supply/demand dynamics, new loan issuance did not experience the resurgence seen in the high-yield bond market. While new issuance picked up in June, total issuance for the second quarter was only $46.4 billion, the lowest amount in more than four years. On a year-to-date basis through June, new-issue volume totaled $245.5 billion, a 56% increase over the same period in 2019. However, much of this issuance occurred in the early months of the year. On the demand side, loan funds [mutual funds and exchange-traded funds] saw outflows of $21 billion year to date.

Collateralized loan obligations [CLOs] remained a relative bright spot for loan demand, despite lower year-over-year volume. [CLOs bundle corporate loans and sell slices of the debt to institutional investors.] Year to date through June, CLO volume totaled $59.3 billion compared with $89 billion for the first half of 2019. CLOs now account for roughly two-thirds of the total assets in the loan market, while retail funds represent only about 10%. As a result, despite continued fund outflows, we think the market's technical environment is favorable. Decreased issuance of new loans is being met by consistent CLO demand.

From a valuation standpoint, the average spread of the fund's benchmark rose 4.9 percentage points during March to about 10 percentage points over Treasuries. This was the highest spread level since mid-2009 and was well above the 11-year average of 5.7 percentage points. The benchmark's average yield spiked to 10.5% during this time. As of period-end, spreads had tightened to 6.9 percentage points over Treasuries and the benchmark's yield was at 7.1%. In our view, spreads at this level continue to offer a broad range of attractive relative-value investment opportunities. Moreover, we think the market's yield remains compelling in the face of much lower global yields.

In addition to coronavirus, risks to our outlook 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. Preservation of capital is a secondary goal.

Strategy and process

  • Floating-rate bank loans: The fund primarily invests in bank loans with yields that are set at a margin above short-term interest rates and adjust when rates change.
  • Guard against rising interest rates: Bank loans have historically performed well amid rising interest rates because their yields adjust higher and become more attractive.
  • Backed by team research: The fund's experienced managers select a diverse range of loans using careful credit research.

Fund price

Yesterday’s close 52-week high 52-week low
Net asset value $8.02
0.00% | $0.00
$8.48
01/16/20
$6.68
03/23/20
(Optional)

Fund facts as of 07/31/20

Total net assets
$334.44M
Turnover (fiscal year end)
33%
Dividend frequency (view rate)
Monthly
Number of issues
189
Fiscal year-end
February
CUSIP / Fund code
746763226 / 1857
Inception date
10/04/05
Class Y  
Category
Fixed Income
Open to new investors
Ticker
PFRYX

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 -2.71% 1.49% 2.16% 3.80%
After sales charge N/A N/A N/A N/A
S&P/LSTA Leveraged Loan Index -1.96%2.07%2.89%4.18%

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 2.03% -
YTD as of 08/07/20 -2.87% -

Yield

Distribution rate before sales charge
as of 08/07/20
2.87%
Distribution rate after sales charge
as of 08/07/20
2.87%
30-day SEC yield as of 07/31/20 2.73%

Risk-adjusted performance as of 06/30/20

Sharpe ratio (3 yrs.) -0.02
Information ratio (3 yrs.) -0.39

Volatility as of 06/30/20

Standard deviation (3 yrs.) 7.45%
Beta 0.87
R-squared 0.98

Lipper rankings as of 06/30/20

Time period Rank/Funds in category Percentile ranking
1 yr. 97/250 39%
3 yrs. 63/224 28%
5 yrs. 81/200 41%
10 yrs. 22/88 25%
Lipper category: Loan Participation Funds

Morningstar Ratings as of 06/30/20

Time period Funds in category Morningstar Rating
Overall 225
3 yrs. 225
5 yrs. 203
10 yrs. 88
Morningstar category: Bank Loan

Distributions

Accrual days 33
Accrual start date 07/01/20
Accrual end date 08/02/20
Payable date 07/31/20
Income $0.019149108
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

PG&E 1.35%
DELL Technologies 1.28%
Altice Numericable 1.25%
Charter Communications 1.24%
Transdigm 1.23%
Altice USA 1.06%
CRC Escrow Issuer LLC/CRC Finco 1.06%
ADT Security Services 1.05%
Kronos Inc 1.04%
Scientific Games 1.04%
Top 10 holdings, percent of portfolio 11.60%



Fixed income statistics as of 06/30/20

Average effective maturity 4.31 yrs.
Average effective duration 0.10 yrs.
Average yield to maturity 4.57%
Average coupon 3.79%

Maturity detail as of 06/30/20

0 - 1 yr. 9.03%
1 - 5 yrs. 53.39%
5 - 10 yrs. 37.58%

Quality rating as of 06/30/20

A 1.10%
BBB 11.23%
BB 40.66%
B 38.18%
CCC and Below 2.44%
Not Rated 0.23%
Net cash 6.16%

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. Unlike bonds, funds that invest in bonds have fees and expenses. 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. Floating-rate loans may reduce, but not eliminate, interest-rate risk. These loans are typically secured by specific collateral or assets of the issuer (so that holders of the loan, such as the fund, have a priority claim on those assets in the event of the issuer's default or bankruptcy). The value of collateral may be insufficient to meet the issuer's obligations, and the fund's access to collateral may be limited by bankruptcy or other insolvency laws. 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 06/30/20

Consumer cyclicals 24.18%
Capital goods 11.54%
Technology 11.17%
Communication services 9.86%
Basic materials 9.08%
Health care 8.04%
Financials 7.82%
Consumer staples 6.47%
Net Cash 6.16%
 
Other
5.68%
Energy 2.77%
Utilities 2.32%
Transportation 0.59%

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 06/30/20

United States 98.64%
France 0.58%
Canada 0.47%
Israel 0.31%

Expenses

Expense ratio

Class A Class B Class C Class R Class R6 Class Y
Total expense ratio 1.03% 1.23% 1.78% 1.28% 0.70% 0.78%
What you pay 1.03% 1.23% 1.78% 1.28% 0.70% 0.78%

Sales charge

 Breakpoint Class A Class B Class C Class R Class R6 Class Y
$0-$49,999 2.25% / 2.00% 0.00% / 1.00% 0.00% / 1.00% -- -- --
$50,000-$99,999 2.25% / 2.00% 0.00% / 1.00% 0.00% / 1.00% -- -- --
$100,000-$249,999 1.75% / 1.50% -- 0.00% / 1.00% -- -- --
$250,000-$499,999 1.25% / 1.00% -- 0.00% / 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 R Class R6 Class Y
0 to 9 mts. 1.00% 1.00% 1.00% -- -- --
9 to 12 mts. 1.00% 1.00% 1.00% -- -- --
2 yrs. 0.00% 0.50% 0.00% -- -- --
3 yrs. 0.00% -- 0.00% -- -- --
4 yrs. 0.00% -- 0.00% -- -- --
5 yrs. 0.00% -- 0.00% -- -- --
6 yrs. 0.00% -- 0.00% -- -- --
7+ yrs. 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 $500,000 and participant-directed qualified retirement plans, see a Putnam fund prospectus and the statement of additional information.

The S&P/LSTA Leveraged Loan Index is an unmanaged index of U.S. leveraged loans. 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. Unlike bonds, funds that invest in bonds have fees and expenses. 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. Floating-rate loans may reduce, but not eliminate, interest-rate risk. These loans are typically secured by specific collateral or assets of the issuer (so that holders of the loan, such as the fund, have a priority claim on those assets in the event of the issuer's default or bankruptcy). The value of collateral may be insufficient to meet the issuer's obligations, and the fund's access to collateral may be limited by bankruptcy or other insolvency laws. 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.