Active Income

California Tax Exempt Income Fund (Class A)  (PCTEX)

Seeking a high level of tax-free income

Q2 2020 | Putnam Municipal Bond Funds Q&A

  • Unprecedented policy initiatives help allay investor fears about pandemic.
  • The greatest risk and opportunity are in lower-quality securities, in our view.
  • We believe that direct aid to states and municipalities is warranted and necessary given the challenges posed by the pandemic.

How did municipal bonds perform during the second quarter of 2020?

After a challenging start in April, municipal bonds rallied in May and June. Unprecedented policy initiatives designed to ease the economic impact of the pandemic allayed investor fears about the spread of COVID-19. On April 9, the Fed authorized the Municipal Liquidity Facility [MLF] to provide aid to cash-strapped state and local governments. On April 27, Fed officials increased the scope and duration of the MLF’s programs to include a broader group of counties and cities. With regard to fiscal initiatives, Congress passed a new pandemic relief-package totaling $484 billion to aid small businesses and hospitals in April. As COVID-19 came to be better understood and infection rates declined, states began to gradually open during the quarter. With the outlook improving, municipal bond fund flows turned positive, with weekly inflows increasing while supply remained low. These technicals helped to support municipal bond prices.

Against this backdrop, the Bloomberg Barclays Municipal Bond Index [the municipal benchmark] closed the quarter with a return of 2.72%. May was especially rewarding, with the benchmark rising 3.18%. The ICE BofA U.S. 3-Month Treasury Bill Index and the Bloomberg Barclays U.S. Aggregate Bond Index returned 0.02% and 2.90%, respectively, for the quarter. Year to date through June 30, 2020, the municipal benchmark return was 2.08%.

High-yield and lower-investment-grade credit spreads narrowed from the worst levels but were still significantly wider than pre-pandemic levels at quarter-end. Yields on higher-quality bonds remained near record lows. On the credit spectrum, higher-yielding, lower-quality municipal bonds outpaced higher-quality municipal bonds for the quarter. Securities with intermediate-term maturities outperformed securities with long- and short-term maturities. Revenue bonds outperformed general obligation bonds [GOs]. Within revenue-based bonds, the top-performing sectors for the quarter were electric, water and sewer, and tobacco, while housing and special tax-backed bonds were the biggest underperformers.

What strategies or holdings influenced the funds’ performance during the quarter?

From a valuation perspective, municipals started to look very attractive to us in early to mid-April. We took advantage of the market volatility and selectively added to the funds’ positioning in investment-grade municipal bonds. We also extended duration in April to a point where we felt we were longer than the majority of the funds’ Lipper peers. We achieved this mostly by adding higher-quality, longer-term securities. As the market recovered in May and June, the funds benefited from the rally versus our peers given their overweight positioning in lower-investment-grade securities and relatively long duration stance. As the higher-quality segment of the municipal bond market generally normalized in May, we slowly moderated our long duration posture, becoming more neutral relative to the funds’ Lipper peers.

At quarter-end, the funds generally held an overweight exposure to higher-quality bonds rated A and BBB. We also held a neutral exposure to lower-rated, high-yield bonds relative to their Lipper peer groups. Duration positioning, a measure of the portfolios’ interest-rate sensitivity, was slightly longer than that of the Lipper peer groups at quarter-end. The funds’ yield-curve positioning was focused on longer intermediate-term securities with maturities of 15 to 20 years. As part of this strategy, the funds held underweight exposures to long maturity holdings compared with the benchmark. The funds continued to hold an overweight exposure to revenue bonds versus GOs.

Within our state strategy, we believe the financial profile of the state of Illinois continues to stabilize. This was not completely reflected by market spreads, in our view. Thus, we believe these holdings look attractive from a fundamental and relative value standpoint.

We remain cautious about Puerto Rico due to its uncertain economic recovery and a perceived lack of institutional credibility across the Commonwealth’s government. As such, the funds remained underweight in their exposure to uninsured Puerto Rico municipal debt.

What is your current assessment of the health of the municipal bond market?

We believe state and local governments have ample reserves to prepare for potential revenue declines. Those that lack reserves will have some flexibility to balance their budgets using one-time measures. They can also reduce expenses, borrow on a short-term basis from either the market or the MLF, and, in some cases, raise revenues by increasing taxes or fees. In our view, most states and local governments would only see prolonged fiscal stress should economic activity fail to stabilize over the next 12 to 18 months. Our exposure to state and local governments is limited to credits with diverse tax bases and, in our view, the ability to enact broad revenue enhancements or expense cuts.

What is your outlook for the municipal bond market as the third quarter begins?

The Fed is projecting that it will hold short-term interest rates near zero until 2022. That said, we believe Fed officials stand ready to revisit their non-traditional policy tools should the economy deteriorate further.

We believe the strength of the economic recovery and the pace of normalization will shape the performance of the municipal market in the months ahead. At this point, the greatest risk and opportunity are in lower-quality securities, in our view.

Much of the issuance within the municipal market is used to finance public infrastructure, which includes toll roads, subways, bridges, ports, airports, colleges, and convention centers. It is critical that people be mobile and be able to congregate for these enterprises to generate revenue. Lack of mobility or severely reduced usage by the public could have trickle down effects on state and local municipalities.

We believe it will take time for the market to digest the longer-term impact of COVID-19. While we don’t see a systemic risk to the municipal market, we are seeing credit fundamentals broadly deteriorating. That said, credit spreads remain wide. We believe this market environment plays to our team’s strengths of fundamental credit analysis.

At period-end, we were waiting for more detail about Federal aid for municipalities. We believe that direct aid to states and municipalities is warranted and necessary given the challenges posed by the pandemic.

| Download the complete Q2 2020 fund Q&A

Highlights

Objective

The fund seeks as high a level of current income exempt from federal income tax and California personal income tax as we believe to be consistent with the preservation of capital.

Strategy and process

  • Tax-advantaged income: The fund offers California residents the potential for high current income that is free from federal income tax and California State personal income taxes.
  • Focus on performance: The portfolio managers seek to provide a competitive yield through a combination of careful security selection and portfolio construction strategies.
  • A diversified portfolio: A broadly diversified portfolio enables the managers to pursue current tax-free income opportunities while managing risk and seeking to preserve capital.

Fund price

 Yesterday’s close 52-week high 52-week low
Net asset value $8.34
0.00% | $0.00 		$8.44
02/28/20 		$7.41
03/20/20
(Optional)

Fund facts as of 06/30/20

Total net assets
$1,156.41M
Turnover (fiscal year end)
41%
Dividend frequency (view rate)
Monthly
Number of holdings
395
Fiscal year-end
September
CUSIP / Fund code
74645A301 / 0015
Inception date
04/29/83
Category
Tax-free Income
Open to new investors
Ticker
PCTEX

Management team

Paul M. Drury, CFA

Portfolio Manager

Garrett L. Hamilton, CFA

Portfolio Manager

Literature

Tax-free muni strategies in a low-rate world
Tax-free muni strategies may provide a competitive yield, and preserve capital, whether economic growth accelerates or remains slow.

Performance

Consistency of positive performance over five years

Performance represents 5-year returns in rolling quarter-end periods since inception.

Performance shown above 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 see below.

13.34%

Best 5-year annualized return

(for period ending 06/30/89)

0.48%

Worst 5-year annualized return

(for period ending 12/31/08)

6.07%

Average 5-year annualized return

  • 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 4.07% 4.09% 3.79% 4.53%
After sales charge -0.09% 2.68% 2.94% 4.10%
Bloomberg Barclays Municipal Bond Index 4.45%4.22%3.93%4.22%

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 07/31/20 1.90% -2.17%
YTD as of 08/03/20 3.38% -0.75%

Yield

Distribution rate before sales charge
as of 08/03/20		 2.11%
Distribution rate after sales charge
as of 08/03/20		 2.02%
30-day SEC yield as of 07/31/20
(after sales charge)		 1.17%

Risk-adjusted performance as of 06/30/20

Sharpe ratio (3 yrs.) 0.51
Information ratio (3 yrs.) -0.10

Volatility as of 06/30/20

Standard deviation (3 yrs.) 4.82%
Beta 1.22
R-squared 0.96

Lipper rankings as of 06/30/20

Time period Rank/Funds in category Percentile ranking
1 yr. 23/124 19%
3 yrs. 32/111 29%
5 yrs. 42/100 42%
10 yrs. 37/80 46%
Lipper category: California Municipal Debt Funds

Morningstar Ratings™ as of 06/30/20

Time period Funds in category Morningstar Rating™
Overall 95
3 yrs. 95
5 yrs. 83
10 yrs. 65
Morningstar category: Muni California Long

Distributions

Accrual days 33
Accrual start date 07/01/20
Accrual end date 08/02/20
Payable date 07/31/20
Non-taxable income $0.016120223
Extra taxable income --

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.

Tax-Equivalent Yield Calculator

When considering investing in municipal bonds, you should evaluate yields on a tax-equivalent basis, taking into account your tax liability on the interest earned from each.

  • Federally tax-exempt bonds typically yield less income than taxable bonds.
  • State and local income tax-exempt bonds may yield less than those whose interest is taxed in a particular jurisdiction.
1

What is your tax rate?

Incomes higher than $250,000 have NII taxes included

Federal Rate

0.00%

+

State Income

0.00%

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Total Tax Rate

0.00%

2

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You've selected an in-state municipal fund
which currently yields 2.47%.

There are other types of bond funds to consider...

To get the equivalent yield as the in-state municipal
fund, each fund would have to yield:
Yield
In-state
muni
2.47%
Out-of-state muni
2.47%
U.S. Treasuries
2.47%
Other taxable funds
2.47%
Taxes
0%
Tax
5.05%
MA income tax
2.47%
Federal income tax
2.47%
MA + Federal income tax
...because a portion of the yield would go toward taxes!

Yield

Taxes

Equivalent

Putnam Massachusetts Tax Exempt Income Fund
Learn more

— or —

  See how this fund stacks up against its peers with FundVisualizer®

 Disclosures

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 a loss when you sell your shares. Performance of class Y shares assumes reinvestment of distributions and does not account for taxes. Class Y shares, available to investors through an asset-based fee program or for institutional clients, are sold without an initial sales charge and have no CDSC. Performance for class Y shares prior to their inception is derived from the historical performance of class A shares, which have not been adjusted for the lower expenses; had they, returns would have been higher. For the most recent month-end performance, please visit putnam.com.

Putnam

The output of this calculator is for educational purposes only and should not be considered investment, legal or tax advice as is not intended to serve as the primary or sole basis for investment or tax-planning decisions. It is intended for U.S. individual taxpayers residing in the 50 states and the District of Columbia, and is not applicable to trusts, estates, corporations or persons subject to special rules under federal, state or local income tax laws. The taxes calculated on investment income does not apply to funds and accounts held outside qualified retirement plans and other tax-deferred or tax-exempt investments.

Laws of a particular state, or laws which may be applicable to a particular situation, may have an impact on the applicability, accuracy, or completeness of information provided. Putnam does not guarantee that the content is accurate, complete, or timely, or that the calculator produces accurate or complete results.

For more individualized information, consult your tax advisor or investment professional. You bear sole responsibility for any decisions made based on the output of this calculator. The calculator makes certain assumptions that may not apply to you. The calculator has many inherent limitations, and individual results may vary.

Calculator assumptions

The calculator displays the federal and state tax rates assumed in calculating tax equivalent yields based on a chosen income level and filing status. Indicated rates are those that apply to an incremental dollar of additional income, which may vary from your average tax rates. The 3.8% net investment income (NII) federal tax applies to individuals, estates and trusts with modified adjusted gross income (MAGI) above applicable threshold amounts ($200,000 for single and head of household; $250,000 for married filing jointly). While reasonable efforts are made to make timely updates to tax rates and income tax brackets used by this calculator, there may be a delay in when the tool reflects those changes.

The calculator does not take into account:

  • Reductions and limits on federal itemized deductions
  • State and local taxes are not deducted from your federal tax rate. Depending on your personal scenario, this may cause the resulting yield to be overstated
  • Federal alternative minimum tax (AMT)
  • State alternative minimum tax
  • Intangibles taxes levied by individual states
  • Local income tax rates imposed by cities, counties or other local jurisdictions on investment income and gains

You should review the assumed tax rates against your actual tax rates based on your individual tax situation when analyzing and interpreting this calculator's results.

Holdings

Golden St Tobacco Sec 05.0000 06/01/2040 2.41%
Bay Area Toll-C 00.0400 04/01/2053 2.22%
Ca St Univ-A 05.0000 11/01/2041 1.73%
Golden St Tobacco Sec 05.0000 06/01/2045 1.66%
San Francisco Arpt-B 00.0700 05/01/2058 1.60%
Sthrn Ca Tobacco -Ref 05.0000 06/01/2048 1.43%
Coronado Cda-A-Ref 05.0000 09/01/2033 1.41%
Ca Poll Cntrl-Amt P/P 144a 05.0000 11/21/2045 1.28%
Nrthrn Energy Auth-A 04.0000 07/01/2049 1.27%
Ca Hlth Fin Auth-A 05.0000 11/15/2046 1.17%
Top 10 holdings, percent of portfolio 16.18%

Portfolio composition as of 06/30/20

Municipal bonds and notes 93.85%
Cash and net other assets 6.15%

Fixed income statistics as of 06/30/20

Average stated maturity 21.16 yrs.
Average effective maturity 6.36 yrs.
Option adjusted duration 8.67 yrs.
Duration to worst 5.55 yrs.
Average yield to maturity 3.51%
Average coupon 4.22%
AMT exposure 7.15%

Quality rating as of 06/30/20

AAA 1.51%
AA 42.16%
A 26.82%
BBB 15.07%
BB 1.64%
Not Rated 6.65%
Cash and net other assets 6.15%

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. The fund's performance will be closely tied to the economic and political conditions in California, and can be more volatile than the performance of a more geographically diversified fund. To the extent investments in securities of issuers located outside of California are made, the fund may also be exposed to the risks affecting other states. Certain provisions of the California Constitution and state statutes limit the taxing and spending authority of California's government entities, which could impair the ability of California issuers to pay principal and/or interest on their obligations. Capital gains, if any, are taxed at the federal and, in most cases, state levels. For some investors, investment income may be subject to the federal alternative minimum tax. 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. Tax-exempt bonds may be issued under the Internal Revenue Code only by limited types of issuers for limited types of projects. As a result, the fund's investments may be focused in certain market segments and be more vulnerable to fluctuations in the values of the securities it holds than a more broadly invested fund. Interest the fund receives might be taxable. 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. A bond rated BBB or higher (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. Cash and net other assets, 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

Local Debt 14.06%
Health care 13.46%
Land 10.84%
Education 10.39%
State Debt 9.47%
Transportation 8.92%
Utilities 7.48%
Cash and net other assets 6.15%
Tobacco 5.35%
 
Other		 13.88%
Financials 4.11%
Prerefunded 3.04%
Special Tax 2.83%
Other 2.27%
Housing 1.16%
Industrials 0.47%

Sectors will vary over time.

Expenses

Expense ratio

 Class A Class B Class C Class R6 Class Y
Total expense ratio 0.72% 1.36% 1.51% 0.51% 0.51%
What you pay 0.72% 1.36% 1.51% 0.51% 0.51%

Sales charge

Investment Breakpoint Class A Class B Class C Class R6 Class Y
$0-$49,999 4.00% 0.00% 0.00% -- --
$50,000-$99,999 4.00% 0.00% 0.00% -- --
$100,000-$249,999 3.25% -- 0.00% -- --
$250,000-$499,999 2.50% -- 0.00% -- --
$500,000-$999,999 0.00% -- -- -- --
$1M-$4M 0.00% -- -- -- --
$4M-$50M 0.00% -- -- -- --
$50M+ 0.00% -- -- -- --

CDSC

  Class A (sales for $500,000+) Class B Class C 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% -- --

The Bloomberg Barclays Municipal Bond Index is an unmanaged index of long-term fixed-rate investment-grade tax-exempt bonds. 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. The fund's performance will be closely tied to the economic and political conditions in California, and can be more volatile than the performance of a more geographically diversified fund. To the extent investments in securities of issuers located outside of California are made, the fund may also be exposed to the risks affecting other states. Certain provisions of the California Constitution and state statutes limit the taxing and spending authority of California's government entities, which could impair the ability of California issuers to pay principal and/or interest on their obligations. Capital gains, if any, are taxed at the federal and, in most cases, state levels. For some investors, investment income may be subject to the federal alternative minimum tax. 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. Tax-exempt bonds may be issued under the Internal Revenue Code only by limited types of issuers for limited types of projects. As a result, the fund's investments may be focused in certain market segments and be more vulnerable to fluctuations in the values of the securities it holds than a more broadly invested fund. Interest the fund receives might be taxable. 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. A bond rated BBB or higher (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. Cash and net other assets, 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.