Active Equities

Equity Income Fund (Class A)  (PEYAX)

A multidimensional approach to value investing

Darren Jaroch, CFA, and Lauren DeMore, CFA, manage a disciplined process to target a wider array of opportunities than many other equity income funds. In selecting stocks, they place extra emphasis on businesses that could enhance the fund’s capital appreciation potential.

About this multidimensional strategy

Q2 2020 | Equity Income Fund Q&A

  • The fund outperformed the benchmark for the quarter as well as for the 1-, 3-, 5-, and 10-year periods ended June 30, 2020.
  • Today, U.S. banks are part of the solution to the crisis, rather than the cause, as they were in 2008.
  • At the midpoint of 2020, there is a considerable disconnect between the markets and the economy.

Market conditions remained volatile in the second quarter. How did the fund perform?

The fund delivered a solid return for the quarter and outperformed its Russell 1000 Value benchmark. We are pleased to report that the fund also outperformed its benchmark for the 1-, 3-, 5-, and 10-year periods ended June 30, 2020.

Performance was helped by a balanced portfolio that contained a mix of cyclical and defensive holdings. In addition, we remained focused on the fundamentals of individual businesses rather than on macroeconomic or sector trends. This portfolio construction helped prepare the fund for the continued uncertainty and market volatility.

How have value stocks fared in this year’s turbulence?

Coming into 2020 and through the steep declines in March, value stocks continued to underperform growth stocks. This is understandable given the severe market downturn and business shutdowns brought on by the COVID-19 pandemic. Value stock benchmarks tend to have a much higher level of cyclicality. The largest value sectors include financials, energy, real estate, and industrials, which are also the most sensitive to macroeconomic shifts. Not surprisingly, when the market quickly priced in a recession in response to the COVID-19 crisis, value stocks took it on the chin.

In the second quarter, however, we saw value begin to outperform growth. Leadership has alternated as the market tries to determine the longer-term impact of the crisis. If the first-quarter downturn was a quick hit and we see a resumption of normalcy, more cyclical stocks should do well. However, if the health crisis has a longer-duration impact on growth and GDP, the less cyclical stocks, in areas such as technology and health care, are likely to be the stronger performers.

For the financials sector in particular, 2020 has been difficult. What is your perspective on the sector as we look ahead to the second half of the year?

With its high sensitivity to the macro economy, this sector has certainly struggled. The pain has been particularly acute for banks, as lower interest rates pressure net interest margins — the difference between interest earned and interest paid on loans and deposits. Also, as the economy entered a recession, concerns grew about lower borrowing rates. Credit card use, for example, plummeted as the COVID-19 crisis escalated.

The other issue for financials relates to investor sentiment and memories of the 2008/2009 global financial crisis. Financials were at the epicenter of that crisis, in which irresponsible lending and leverage exposed insufficient capital levels and caused systemic failures. However, coming into 2020, the financials sector was in considerably better shape than it was in 2008. Today, U.S. banks are very well capitalized as a result of much stricter regulation, and they are part of the solution to today’s crisis, rather than the cause, as they were in 2008. In the final weeks of the quarter, performance in the sector improved, in part because banks are playing an essential role in transmitting Federal Reserve and Treasury policy into the markets. There is no concern in the market around capital levels, and the largest U.S. banks are maintaining their dividends, unlike many of their global peers.

What is your outlook for the coming months?

At the midpoint of 2020, there is a considerable disconnect between the markets and the economy. The news on the macroeconomic front is bleak, yet the market seems to believe that the damage from the shutdown will be temporary. At the same time, government and central bank stimulus has been immediate, massive, and global. The Federal Reserve is not planning to raise interest rates before late 2022, and many investors seem to believe there will be no price to pay for the stimulus. There will be consequences at some point, and that is why we remain focused on our risk control and portfolio construction strategies.

Our goal, as always, is to prepare the fund for a range of scenarios with a balanced structure for the portfolio. We plan to maintain a mix of cyclical and defensive holdings, investing in our best ideas with a focus on the fundamentals of the businesses.

Highlights

Objective

The fund seeks capital growth and current income.

Strategy and process

  • A large-value focus: The fund focuses on large companies whose stocks are priced below their long-term potential, and where there may be a catalyst for positive change.
  • Dividend growth: The fund places a distinct emphasis on companies that can grow their dividends and are able and willing to return cash to shareholders.
  • A disciplined process: The portfolio managers invest using fundamental research and quantitative tools supported by strong risk controls in portfolio construction.

Fund price

Yesterday’s close 52-week high 52-week low
Net asset value $24.02
0.50% | $0.12
$27.17
12/23/19
$17.25
03/23/20
(Optional)

Fund facts as of 07/31/20

Total net assets
$11,926.88M
Turnover (fiscal year end)
12%
Dividend frequency (view rate)
Quarterly
Number of holdings
87
Fiscal year-end
November
CUSIP / Fund code
746745108 / 0010
Inception date
06/15/77
Category
Value
Open to new investors
Ticker
PEYAX

Management team

Portfolio Manager
Portfolio Manager, Analyst


Manager commentary | Q2 2020

Active stock picks drove performance

Portfolio Managers Darren Jaroch, CFA, and Lauren DeMore, CFA, discuss their disciplined approach to stock selection.


Literature


What’s next for the hard-hit financials sector?
The financials sector has been among the hardest hit from the COVID-19-induced equity market selloff, but there are reasons for optimism.

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.

21.64%

Best 5-year annualized return

(for period ending 06/30/99)


-2.36%

Worst 5-year annualized return

(for period ending 03/31/09)


10.31%

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 -1.94% 5.34% 6.15% 11.72%
After sales charge -7.58% 3.28% 4.90% 11.06%
Russell 1000 Value Index -8.84%1.82%4.64%10.41%

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 3.13% -2.80%
YTD as of 08/03/20 -8.83% -14.07%

Yield

Distribution rate before sales charge
as of 08/03/20
1.66%
Distribution rate after sales charge
as of 08/03/20
1.56%
30-day SEC yield as of 07/31/20
(after sales charge)
1.59%

Risk-adjusted performance as of 06/30/20

Alpha (3 yrs.) 3.52
Sharpe ratio (3 yrs.) 0.21
Treynor ratio (3 yrs.) 3.77
Information ratio (3 yrs.) 1.47

Volatility as of 06/30/20

Standard deviation (3 yrs.) 17.68%
Beta 0.98
R-squared 0.98

Capture ratio as of 06/30/20

Up-market (3 yrs.) 108.45
Down-market (3 yrs.) 93.35

Lipper rankings as of 06/30/20

Time period Rank/Funds in category Percentile ranking
1 yr. 141/489 29%
3 yrs. 132/449 30%
5 yrs. 162/391 42%
10 yrs. 27/241 12%
Lipper category: Equity Income Funds

Morningstar Ratings as of 06/30/20

Time period Funds in category Morningstar Rating
Overall 1109
3 yrs. 1109
5 yrs. 970
10 yrs. 703
Morningstar category: Large Value

Distributions

Record/Ex dividend date 06/26/20
Payable date 06/30/20
Income $0.099
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.


Holdings

Microsoft Corp 3.38%
Walmart 2.94%
Citigroup 2.91%
Bank Of America Corp 2.84%
JPMorgan Chase 2.76%
Johnson Johnson 2.22%
American Tower Corp 2.05%
Fidelity National Information Services 2.04%
Northrop Grumman Corp 2.02%
Eli Lilly And 1.82%
Top 10 holdings, percent of portfolio 24.98%



Portfolio composition as of 06/30/20

Common stock 96.00%
Cash and net other assets 2.28%
Preferred stock 0.94%
Convertible preferred stock 0.78%

Equity statistics as of 06/30/20

Median market cap $43.44B
Weighted average market cap $175.87B
Price to book 1.99
Price to earnings 17.09

Fund characteristics will vary over time.

Due to rounding, percentages may not equal 100%.

Consider these risks before investing: Value stocks may fail to rebound, and the market may not favor value-style investing. Income provided by the fund may be reduced by changes in the dividend policies of, and the capital resources available at, the companies in which the fund invests. 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. 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.

Top industry sectors as of 06/30/20

Financials 17.60%
Health care 16.85%
Industrials 10.81%
Information technology 10.78%
Consumer staples 8.68%
Energy 6.52%
Materials 5.96%
Communication services 5.84%
Consumer discretionary 5.79%
 
Other
11.17%
Utilities 5.05%
Real estate 3.84%
Cash and net other assets 2.28%

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

Sectors will vary over time.


Expenses

Expense ratio

Class A Class B Class C Class R Class R5 Class R6 Class Y
Total expense ratio 0.91% 1.66% 1.66% 1.16% 0.65% 0.55% 0.66%
What you pay 0.91% 1.66% 1.66% 1.16% 0.65% 0.55% 0.66%

Sales charge

Investment Breakpoint Class A Class B Class C Class R Class R5 Class R6 Class Y
$0-$49,999 5.75% 0.00% 0.00% -- -- -- --
$50,000-$99,999 4.50% 0.00% 0.00% -- -- -- --
$100,000-$249,999 3.50% -- 0.00% -- -- -- --
$250,000-$499,999 2.50% -- 0.00% -- -- -- --
$500,000-$999,999 2.00% -- 0.00% -- -- -- --
$1M-$4M 0.00% -- -- -- -- -- --
$4M-$50M 0.00% -- -- -- -- -- --
$50M+ 0.00% -- -- -- -- -- --

CDSC

  Class A (sales for $1,000,000+) Class B Class C Class R Class R5 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 Russell 1000 Value Index is an unmanaged index of those companies in the large-cap Russell 1000 Index chosen for their value orientation. You cannot invest directly in an index.

Consider these risks before investing: Value stocks may fail to rebound, and the market may not favor value-style investing. Income provided by the fund may be reduced by changes in the dividend policies of, and the capital resources available at, the companies in which the fund invests. 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. 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.