Directional gains helped mitigate non-directional weakness

Putnam Investments, 01/22/21


Q4 2020 Putnam Multi-Asset Absolute Return Fund Q&A

  • Global equity markets advanced in response to COVID-19 vaccines, election results, and stimulus while fixed-income markets finished mixed.
  • Directional strategies added to performance, while non-directional strategies detracted from performance.
  • The fund had near-neutral positioning at quarter-end given the exuberance of equity rally and rising virus infections.

What was the investment environment during the fourth quarter of 2020?

Despite some weakness during the three-month period, global financial markets advanced overall. Equity indices reached record highs, continuing the market's recovery from the downturn earlier in the year. This rally was supported by the development of COVID-19 vaccines and signs of economic recovery. Joe Biden is poised to become the next U.S. President in January 2021. While stock markets moved higher on expectations for the future, COVID-19 infections surged, and new travel and business restrictions went into effect. The S&P 500 Index, a broad measure of stocks, rose 12.15% during the period. International stocks, as measured by the MSCI EAFE Index [ND], gained 16.05%.

Fixed-income assets finished with mixed results in the fourth quarter. U.S. Treasury bond yields moved slightly higher and prices fell, as the passage of an additional COVID-19 stimulus bill boosted investor optimism. Investment-grade bonds ended the quarter roughly flat, after months of strong gains. The Bloomberg Barclays U.S. Aggregate Bond Index posted a return of 0.67% for the three-month period. Global bond prices rose over the period, as central banks continued their pandemic-induced bond-buying programs, keeping interest rates low. Global bonds, as measured by the FTSE World Government Bond Index, posted a return of 2.77%. High-yield bonds finished with strong positive returns as credit spreads tightened, reflecting equity market strength.

Commodity prices experienced significant gains in the fourth quarter, as the rollout of COVID-19 vaccines increased optimism around a return to global travel. In December, the Organization of the Petroleum Exporting Countries [OPEC] agreed to raise output in January 2021, anticipating an increase in demand.

Before we discuss performance, would you summarize the fund's overall investment objective and strategy?

Putnam Multi-Asset Absolute Return Fund seeks a positive return exceeding the return of Treasury bills over a reasonable period of time, regardless of market conditions. The fund seeks to achieve risk-and-return characteristics by dynamically allocating assets using a combination of directional [or market sensitive] and non-directional [or market neutral] strategies.

The directional portion of the portfolio consists of two components: a risk-balanced portfolio of stocks and bonds designed to efficiently capture long-term market returns and a dynamic asset allocation overlay to reflect tactical views. The overlay consists of tactical longs and shorts to equities, rates, credit, and commodities based on the team's expectations for each of these asset classes. The team manages both the composition and total level of risk, depending on market conditions and the prevailing opportunity set.

The non-directional portion of the portfolio consists of long/short market neutral strategies that provide flexible uncorrelated sources of alpha.

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

The fund's class Y shares recorded a -0.95% decline, underperforming the cash benchmark, the ICE BofA U.S. Treasury Bill Index, which posted a return of 0.03%.

What factors had the biggest influence on performance?

Directional strategies added to performance in the third quarter. The equity portion of the risk-balanced portfolio finished positive, while our Overall, directional strategies added to performance in the fourth quarter. The equity portion of the risk-balanced portfolio finished positive, and our modest long position to equity risk also enhanced results. The portfolio was net long equity risk overall, resulting in a positive contribution from directional equity performance. The fixed-income portion of the risk-balanced portfolio finished negative, while our modest tactical short position to interest-rate risk in the first part of the period added to results. The portfolio was net long rates overall, resulting in a slightly negative contribution from directional rates exposure. A modest short position to commodity risk weighed on performance. A modest long position to credit risk in the first half of the period was a small positive contributor.

Overall, non-directional strategies detracted from results in the fourth quarter. Equity-selection alpha strategies weighed down performance. Specifically, our long/short strategies in global equity markets and emerging-market equities experienced the greatest weakness. Our forensic accounting strategy, which seeks to identify and short companies that utilize overly aggressive accounting, was a notable positive.

The alternative beta strategy was a strong positive contributor within non-directional, supported by volatility carry outperformance. Within fixed income, our selection alpha strategy added to performance. This was largely due to a strategy focused on structured mortgage credit. Commodity alpha and currency alpha aided performance, but to a smaller extent.

How was the fund positioned at the start of the first quarter of 2021?

The fund is positioned close to neutral as we enter the first quarter. Within our dynamic allocation overlay, we are modestly long equity risk and neutral in terms of interest-rate risk and credit risk. Just after the start of the first quarter, we moved long commodity risk. Within the overall directional component, which includes the structural risk-balanced portfolio and the dynamic allocation overlay, we are long equity risk, interest-rate risk, and commodity risk.

What is your outlook for the global economy?

While rising virus infections could lead to weaker-than-expected economic activity in the coming months, we believe the passage of additional stimulus and vaccine progress have reduced the chances of much slower growth in 2021. Moderna and Pfizer-BioNTech's vaccines were both approved by the U.S. Food and Drug Administration in December just as infection rates and shutdowns were spiking globally. The financial markets are now pinning hope on widespread vaccinations by the middle of 2021.

As we enter the new year, we are constructive on equities, but remain wary of a persistent run-up in prices and additional virus-related setbacks. We believe credit markets, supported by the Fed's promise to maintain quantitative easing, will continue to recover. With interest rates pinned near zero and asset purchases becoming the main stimulus tool, Fed officials said they wouldn't lift rates before the labor market recovers. There is risk to growth over the next few months amid rising COVID-19 cases across the globe, which will continue to create challenges for consumers, businesses, and policymakers. Oil markets moved higher on positive vaccine news, but we see downside risks until global travel can resume and the demand for oil returns stronger.

On the political front, the Democratic party has slim majorities in Congress. However, we believe there is a higher chance that a more modest pandemic-relief fiscal package can get approved in early 2021. Increased spending by Congress and the White House could potentially help boost economic growth and consumer demand.