Active Income

High Yield Fund (Class A)  (PHYIX)

Seeking a high level of income for investors since 1986

Q2 2020 | High Yield Fund Q&A

  • High-yield bonds advanced nearly 10% during the past three months, rebounding from an extreme but short-lived period of risk aversion in March.
  • The fund’s favorable positioning in chemicals contributed the most versus the benchmark. Conversely, below-benchmark exposure to the rebounding energy sector detracted.
  • 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 9.64%, performing in line with the 9.69% result of the benchmark JPMorgan Developed High Yield Index.

What was the market environment like for high-yield bonds during the second quarter of 2020?

Following its partial recovery in late March, the asset class 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 high-yield recovery slowed 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.

During June, the capital markets continued to reopen to high-yield issuers at a record clip. New-issue volume totaled $61.5 billion for the month, which was the most active month on record. On the demand side, high-yield mutual funds and exchange-traded funds [ETFs] took in $47.7 billion during the 12-week period ending June 17. However, this record pace of inflows stalled by the middle of June.

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

Within the JPMorgan index, all cohorts posted gains, led by a 31% retracement in the energy group, following last quarter’s -40% return. Automotive [+14%], gaming, lodging & leisure [+11%], chemicals [+10%], and retail [+10%] also registered strong advances. Conversely, broadcasting [+3%], cable & satellite [+4%], transportation [+5%], and utilities [+5%] notably lagged the fund’s benchmark. From a credit-rating perspective, lower-quality debt 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, favorable overall positioning in chemicals, along with security selection in technology and financials, added the most value versus the benchmark. On the downside, an underweight allocation in energy more than offset strong bond selection in that sector. Lower-than-benchmark exposure to the automotive sector also detracted on a relative basis.

What is your outlook for the high-yield 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 high-yield spreads retightened somewhat following their sizable widening in March, we think valuations remain relatively attractive. [Spreads are the yield advantage high-yield bonds 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 issuance of high-yield debt resurfaced in April and, as noted above, remained strong through quarter-end. On a year-to-date basis through June, new-issue volume totaled $218.4 billion, a 55% increase over the same period in 2019. On the demand side, high-yield funds [mutual funds and ETFs] saw inflows of $31.9 billion year to date versus $18.8 billion in the first half of 2019. Overall, a resurgence in new-issue supply is being met by renewed demand.

From a valuation standpoint, the average spread of the fund’s benchmark rose 3.65 percentage points during March to about 9.5 percentage points over Treasuries. This was the highest spread level since early 2016 and was well above the 20-year average of 6.1 percentage points. The benchmark’s average yield spiked to 10% during this time. As of period-end, spreads had tightened to 7.2 percentage points over Treasuries and the benchmark’s yield was at 7.6%. 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. Capital growth is a secondary goal when consistent with achieving high current income.

Strategy and process

  • Income-focused: The portfolio managers strive for a higher level of income than most bonds offer by investing in higher-yielding, lower rated corporate bonds.
  • Focus on performance: The managers can invest across a range of industries and companies, and can adjust the fund's holdings to capitalize on market opportunities.
  • Leading research: The fund's managers, supported by Putnam's fixed-income research division, analyze a range of bonds to build a diversified portfolio.

Fund price

Yesterday’s close 52-week high 52-week low
Net asset value $5.71
0.18% | $0.01
$5.94
02/20/20
$4.65
03/23/20
(Optional)

Fund facts as of 06/30/20

Total net assets
$1,207.79M
Turnover (fiscal year end)
37%
Dividend frequency (view rate)
Monthly
Number of holdings
594
Fiscal year-end
November
CUSIP / Fund code
74678J104 / 0019
Inception date
03/25/86
Category
Taxable Income
Open to new investors
Ticker
PHYIX

Management team

Co-Head of Fixed Income
Portfolio Manager
Portfolio Manager



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.

18.71%

Best 5-year annualized return

(for period ending 12/31/95)


-2.91%

Worst 5-year annualized return

(for period ending 09/30/02)


7.40%

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 -0.71% 2.59% 3.57% 5.65%
After sales charge -4.69% 1.21% 2.73% 5.22%
JPMorgan Developed High Yield Index -2.02%2.69%4.49%6.74%

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 4.40% 0.22%
YTD as of 08/03/20 -0.07% -4.07%

Yield

Distribution rate before sales charge
as of 08/03/20
4.41%
Distribution rate after sales charge
as of 08/03/20
4.24%
30-day SEC yield as of 07/31/20
(after sales charge)
4.06%

Risk-adjusted performance as of 06/30/20

Sharpe ratio (3 yrs.) 0.11
Information ratio (3 yrs.) -0.11

Volatility as of 06/30/20

Standard deviation (3 yrs.) 8.64%
Beta 0.94
R-squared 0.99

Lipper rankings as of 06/30/20

Time period Rank/Funds in category Percentile ranking
1 yr. 185/510 37%
3 yrs. 168/457 37%
5 yrs. 176/393 45%
10 yrs. 133/281 48%
Lipper category: High Yield Funds

Morningstar Ratings as of 06/30/20

Time period Funds in category Morningstar Rating
Overall 639
3 yrs. 639
5 yrs. 546
10 yrs. 346
Morningstar category: High Yield Bond

Distributions

Record/Ex dividend date 07/23/20
Payable date 07/27/20
Income $0.021
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

Cco Holdings Llc P/P 144a 05.3750 06/01/2029 1.20%
Sprint Corp 07.8750 09/15/2023 0.82%
Ally Financial 08.0000 11/01/2031 0.78%
Chs/Community Health Sys 06.2500 03/31/2023 0.63%
Dish Dbs Corp 05.8750 11/15/2024 0.58%
Diamond 1 Fin/Diam P/P 144a 06.0200 06/15/2026 0.57%
Sprint Capital Corporation 06.8750 11/15/2028 0.53%
Tempo Acq Llc/Fi P/P 144a 06.7500 06/01/2025 0.51%
Energy Transfer Operatng 06.6250 02/15/2028 0.50%
Pultegroup 07.8750 06/15/2032 0.50%
Top 10 holdings, percent of portfolio 6.62%



Fixed income statistics as of 06/30/20

Average effective maturity 4.97 yrs.
Average effective duration 3.85 yrs.
Average yield to maturity 6.09%
Average coupon 5.85%

Sector weightings as of 06/30/20

  Cash investments Non-cash investments Total portfolio
  Weight Spread duration Weight Spread duration Weight Spread duration
High-yield corporate bonds 74.93% 2.94 -1.17% -0.05 73.76% 2.89
Investment-grade corporate bonds 14.79% 0.78 0.00% 0.00 14.79% 0.78
Bank loans 4.98% 0.21 0.00% 0.00 4.98% 0.21
Convertible securities 1.83% 0.01 0.00% 0.00 1.83% 0.01
Emerging-market bonds 1.40% 0.07 0.00% 0.00 1.40% 0.07
International Treasury/agency 0.45% 0.02 0.00% 0.00 0.45% 0.02
Equity investments 0.33% 0.00 0.00% 0.00 0.33% 0.00
Net cash 1.30% 0.00 0.00% 0.00 1.30% 0.00

Spread duration is displayed in years and reflects the contribution by sector to the portfolio's total spread duration with the exception of the Treasury and Interest-rate swap sectors where effective duration is displayed. Spread duration estimates the price sensitivity of a specific sector or asset class to a 100 basis-point movement, 1%, (either widening or narrowing) in its yield spread relative to Treasuries. Effective duration provides a measure of a portfolio's interest-rate sensitivity. The longer a portfolio's duration, the more sensitive the portfolio is to shifts in the interest rates. Allocations may not total 100% of net assets because the table includes the notional value of derivatives (the economic value for purposes of calculating periodic payment obligations), in addition to the market value of securities.

Maturity detail as of 06/30/20

0 - 1 yr. 8.13%
1 - 5 yrs. 49.96%
5 - 10 yrs. 37.18%
10 - 15 yrs. 2.52%
Over 15 yrs. 2.21%

Quality rating as of 06/30/20

A 0.15%
BBB 15.37%
BB 44.34%
B 28.26%
CCC and Below 9.00%
Not Rated 1.58%
Net cash 1.30%

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 (a significant part of the fund's investments). 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. Unlike bonds, funds that invest in bonds have fees and expenses. 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 22.07%
Communication services 12.48%
Basic materials 10.81%
Energy 10.05%
Financials 9.32%
Health care 8.67%
Capital goods 7.71%
Consumer staples 7.54%
Technology 5.45%
 
Other
4.74%
Utilities 3.98%
Net Cash 1.30%
Transportation 0.45%
Conglomerates 0.18%
Non-cash investments -1.17%

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 85.29%
Canada 4.92%
Luxembourg 1.86%
United Kingdom 1.78%
France 1.26%
Ireland 1.13%
Netherlands 1.13%
Israel 0.75%
Switzerland 0.73%
 
Other
1.15%
Mexico 0.56%
Norway 0.43%
Indonesia 0.09%
Cayman Islands 0.07%

Expenses

Expense ratio

Class A Class B Class C Class M Class R Class R6 Class Y
Total expense ratio 1.02% 1.77% 1.77% 1.27% 1.27% 0.66% 0.77%
What you pay 1.02% 1.77% 1.77% 1.27% 1.27% 0.66% 0.77%

Sales charge

Investment Breakpoint Class A Class B Class C Class M Class R Class R6 Class Y
$0-$49,999 4.00% 0.00% 0.00% 3.25% -- -- --
$50,000-$99,999 4.00% 0.00% 0.00% 2.25% -- -- --
$100,000-$249,999 3.25% -- 0.00% 1.25% -- -- --
$250,000-$499,999 2.50% -- 0.00% 1.00% -- -- --
$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 M 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% -- -- -- --

The JPMorgan Developed High Yield Index is an unmanaged index of high-yield fixed-income securities issued in developed countries. 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 (a significant part of the fund's investments). 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. Unlike bonds, funds that invest in bonds have fees and expenses. 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.