Active Income

Income Fund (Class Y)  (PNCYX)

Pursuing income with an all-weather bond portfolio since 1954

Income Fund received an  Overall Morningstar Rating™  of  

Q2 2020 | Income Fund Q&A

  • Risk assets rebounded sharply in the wake of March’s market upheaval.
  • Strategies targeting prepayment risk fueled the fund’s outperformance of the benchmark. On the downside, exposure to commercial mortgage-backed securities detracted.
  • As the second half of 2020 begins, investors will focus on economic data, corporate earnings, and signs of progress toward a coronavirus vaccine.

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

The fund’s class Y shares returned 4.30%, outpacing the 2.90% gain of the benchmark Bloomberg Barclays U.S. Aggregate Bond Index.

What was the market environment like during the second quarter of 2020?

There was a massive reversal in both market sentiment and price levels across asset classes during the quarter. Fiscal and monetary stimulus, along with hopes of a sharp economic recovery, fueled the snapback. The U.S. Federal Reserve [Fed] began implementing a series of lending programs by making asset purchases across a variety of market sectors.

Against this backdrop, investment-grade corporate bonds (Bloomberg Barclays U.S. Corporate Index) and high-yield credit (JPMorgan Developed High Yield Index) advanced 9% and 9.7%, respectively, as investors reembraced risk. Accordingly, more defensive areas of the market lagged, including U.S. government securities and agency mortgage-backed bonds. Interest rates were rangebound throughout the quarter, with the yield on the benchmark 10-year U.S. Treasury note staying below 1%.

In April, oil prices briefly dipped into negative territory before rising on further supply cuts and hopes that demand will increase as the economy reopens. While the energy sector has been one of the biggest laggards for the year to date through June, it was by far the best-performing group in the second quarter. Other sectors that were negatively impacted by the coronavirus also recovered, except for airlines, which continued to struggle amid reduced demand for air travel.

Which holdings and strategies fueled the fund’s outperformance of the benchmark?

Strategies targeting prepayment risk added the most relative value this quarter, particularly our holdings of inverse interest-only [IO] securities. As new issuance resumed following March’s market upheaval, inverse IOs benefited from improving supply-and-demand dynamics.

Tactical mortgage basis positioning also aided our prepayment strategies. Mortgage basis is a strategy that seeks to exploit the yield differential between 30-year agency pass-throughs and 30-year U.S. Treasuries.

Our corporate credit holdings — primarily investment-grade — moderately contributed to relative performance. Following a sizable widening of yield spreads in March, spreads tightened during the quarter. [Spreads are the yield advantage credit-sensitive bonds offer over comparable-maturity U.S. Treasuries. Bond prices rise as spreads tighten and decline as spreads widen.] Unprecedented stimulus measures implemented by government policymakers boosted investor confidence by helping to offset some of the near-term economic uncertainty sparked by the coronavirus pandemic.

What about detractors?

Within our mortgage credit holdings, synthetic exposure to commercial mortgage-backed securities [CMBS] via CMBX was the primary detractor versus the benchmark. [CMBX includes a group of tradeable indexes that reference a basket of 25 CMBS deals issued in a particular year.] In a continuation from March, investors worried that the pandemic could severely impact cash flows in various segments of the commercial real estate market, particularly retail and lodging. Public health policies that curtailed shopping and travel for millions of people constrained the revenues for many malls and travel destinations.

The Fed’s announcement that AAA-rated CMBS would be included in its Term Asset-Backed Loan Facility [TALF], along with renewed demand for risk, helped the sector rebound in June. However, this boost was not enough to fully offset earlier losses. TALF is a reprise of a program launched in 2009 that enabled investors to buy bonds linked to consumer and business debt using money borrowed from the Fed.

What is your near-term outlook?

As the quarter came to a close, coronavirus cases began to reaccelerate, particularly in areas of the country that were the first to open. As a result, plans to fully reopen certain parts of the economy, such as restaurants and bars, have been put on hold in the affected areas.

Amid stronger-than-expected economic reports, investors seem to be shrugging off the increase in infection rates, at least for now. As we begin the second half of 2020, it is likely that the coronavirus will continue to dominate the news. Investors, meanwhile, will remain focused on economic data, indications of progress toward a vaccine, and the impact of second-quarter earnings on corporate balance sheets.

How was the fund positioned as of June 30?

During the past few months, the portfolio’s duration versus the benchmark’s has been neutral to moderately shorter. As of June 30, the fund’s duration was close to the benchmark’s at 5.5 years. The portfolio was positioned to benefit if the yield curve remains relatively steep or steepens further.

Within corporate credit, the fund was modestly underweight investment-grade debt. Our emphasis here continues to be on security selection.

COVID-19 created significant headwinds for the CMBS market because commercial real estate is in the “eye of the storm.” Uncertainty about the duration of social distancing measures makes for a challenging backdrop, particularly for hotel and retail properties, which have only recently begun reopening.

We believe most properties that were functioning well prior to the crisis and have reasonable levels of equity will survive, buoyed by government support, operator reserves, and/or debt-service modifications.

We continue to have conviction in the fund’s CMBX positions, which we believe offer value at the single A and BBB levels for indexes representing 2012–2014 issuance. In addition, we think the relatively large sell-off in newer vintages has presented additional value in that part of the market.

In our view, prepayment-sensitive areas of the market directly benefit when there are increased frictions in the housing finance industry. Given the potential for a deepening of the recession, there are ongoing risks related to high unemployment, weaker projected home-price appreciation, lower home turnover, and reduced homeowner mobility. Even as the use of mortgage forbearance grows, cash flows to investors from agency mortgages are guaranteed by government-sponsored enterprises. As a result, we continue to have confidence in the fund’s holdings of interest-only collateralized mortgage obligations and inverse IOs backed by more seasoned collateral.

| Download the complete Q2 2020 fund Q&A

Highlights

Objective

The fund seeks high current income consistent with what Putnam management believes to be prudent risk.

Strategy and process

  • Diverse opportunities: The fund invests across all sectors of the U.S. bond market, including mortgage-backed securi­ties, corporate bonds, and other government obligations.
  • Flexible risk allocations: The fund takes a unique approach to asset allocation, dynamically establishing diversified risk expo­sures rather than sector exposures.
  • Bottom-up approach: Security selection is the primary driver of returns, with sub-sector allocations and macro strategies also serving as potential alpha generators.

Fund price

 Yesterday’s close 52-week high 52-week low
Net asset value $7.49
-0.40% | $-0.03 		$7.65
03/06/20 		$6.85
03/19/20
(Optional)

Fund facts as of 07/31/20

Total net assets
$3,847.62M
Turnover (fiscal year end)
820%
Dividend frequency (view rate)
Monthly
Number of holdings
1582
Fiscal year-end
October
CUSIP / Fund code
746792407 / 1803
Inception date
06/16/94
Category
Taxable Income
Open to new investors
Ticker
PNCYX

Management team

Michael V. Salm

Co-Head of Fixed Income

Brett S. Kozlowski, CFA

Portfolio Manager

Emily E. Shanks

Portfolio Manager

Manager commentary | Q2 2020

A deep dive on the fund’s diverse strategies

Portfolio Managers Brett Kozlowski and Emily Shanks explain the fund’s diversification philosophy and current positioning.

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.

20.63%

Best 5-year annualized return

(for period ending 09/30/86)

-1.18%

Worst 5-year annualized return

(for period ending 12/31/08)

7.29%

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 7.15% 5.87% 4.27% 4.80%
After sales charge N/A N/A N/A N/A
Bloomberg Barclays U.S. Aggregate Bond Index 8.74%5.32%4.30%3.82%

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 1.29% -
YTD as of 08/10/20 5.03% -

Yield

Distribution rate before sales charge
as of 08/10/20		 2.55%
Distribution rate after sales charge
as of 08/10/20		 2.55%
30-day SEC yield with subsidy
as of 07/31/20		 1.97%
30-day SEC yield without subsidy
as of 07/31/20		 1.88%

Risk-adjusted performance as of 06/30/20

Sharpe ratio (3 yrs.) 1.01
Information ratio (3 yrs.) 0.21

Volatility as of 06/30/20

Standard deviation (3 yrs.) 4.18%
Beta 1.01
R-squared 0.61

Lipper rankings as of 06/30/20

Time period Rank/Funds in category Percentile ranking
1 yr. 377/515 74%
3 yrs. 23/470 5%
5 yrs. 135/415 33%
10 yrs. 11/300 4%
Lipper category: Core Bond Funds

Morningstar Ratings™ as of 06/30/20

Time period Funds in category Morningstar Rating™
Overall 534
3 yrs. 534
5 yrs. 455
10 yrs. 333
Morningstar category: Intermediate Core-Plus Bond

Distributions

Record/Ex dividend date 07/23/20
Payable date 07/27/20
Income $0.016
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

Fnma Fn30 Tba Umbs 03.5000 07/01/2050 8.36%
Fnma Fn30 Tba Umbs 04.0000 07/01/2050 2.89%
Fnma Fn30 Tba Umbs 02.5000 07/01/2050 2.67%
Gnma Gii30 Tba 03.5000 07/01/2050 1.28%
Gnma Gii30 Tba 04.0000 07/01/2050 1.05%
Verizon Comm 04.3290 09/21/2028 0.87%
Fnma Fn30 Tba Umbs 02.5000 08/01/2050 0.86%
Fnma Fn30 Tba Umbs 04.5000 07/01/2050 0.68%
Comcast Corp 03.4500 02/01/2050 0.62%
Gnr 2019-158 Pi Io 03.5000 12/20/2049 0.61%
Top 10 holdings, percent of portfolio 19.89%

Fixed income statistics as of 06/30/20

Average effective maturity 7.37 yrs.
Average effective duration 5.48 yrs.
Average yield to maturity 5.07%
Average coupon 3.56%

Sector weightings as of 06/30/20

  Cash investments Non-cash investments Total portfolio
  Weight Spread duration Weight Spread duration Weight Spread duration
Investment-grade corporate bonds 24.71% 1.96 0.00% 0.00 24.71% 1.96
Commercial MBS 10.52% 0.30 12.94% 0.15 23.46% 0.45
Agency pass-through 5.30% 0.24 17.87% 0.52 23.17% 0.76
Agency CMO 12.84% 0.42 0.11% 0.00 12.95% 0.42
Residential MBS (non-agency) 10.64% 0.40 0.00% 0.00 10.64% 0.40
Asset-backed securities (ABS) 2.65% 0.10 0.00% 0.00 2.65% 0.10
High-yield corporate bonds 0.48% 0.02 0.00% 0.00 0.48% 0.02
Municipal bonds 0.10% 0.01 0.00% 0.00 0.10% 0.01
Interest rate swaps 0.00% 0.00 0.00% -0.89 0.00% -0.89
U.S. Treasury/agency 0.00% 0.00 0.00% 2.00 0.00% 2.00
Net cash 32.76% 0.00 0.00% 0.00 32.76% 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. 18.56%
1 - 5 yrs. 46.89%
5 - 10 yrs. 28.81%
10 - 15 yrs. 1.49%
Over 15 yrs. 4.25%

Quality rating as of 06/30/20

AAA 64.76%
AA 3.93%
A 16.02%
BBB 18.98%
BB 3.09%
B 2.84%
CCC and Below 0.48%
Not Rated -10.10%

Fund characteristics will vary over time.

Due to rounding, percentages may not equal 100%.

Consider these risks before investing: Funds that invest in government securities are not guaranteed. Mortgage-backed investments, unlike traditional debt investments, are also subject to prepayment risk, which means that they may increase in value less than other bonds when interest rates decline and decline in value more than other bonds when interest rates rise. 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). The fund may have to invest the proceeds from prepaid investments, including mortgage-backed investments, in other investments with less attractive terms and yields. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds. 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. 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.

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. To-be-announced (TBA) mortgage commitments, if any, are included based on their issuer ratings. Ratings may vary over time. Cash, derivative instruments, and net other assets are shown in the not-rated category. Payables and receivables for TBA mortgage commitments are included in the not-rated category and may result in negative weights. The fund itself has not been rated by an independent rating agency.

Country allocation as of 06/30/20

United States 96.29%
Canada 1.14%
Bermuda 0.69%
United Kingdom 0.56%
Switzerland 0.38%
Luxembourg 0.22%
France 0.19%
Spain 0.16%
Germany 0.12%
 
Other		 0.25%
Australia 0.11%
Japan 0.06%
Norway 0.05%
Netherlands 0.03%

Expenses

Expense ratio

 Class A Class B Class C Class M Class R Class R5 Class R6 Class Y
Total expense ratio 0.85% 1.60% 1.60% 1.10% 1.10% 0.56% 0.49% 0.60%
What you pay† 0.74% 1.49% 1.49% 0.99% 0.99% 0.45% 0.38% 0.49%

† The fund's expense ratio is taken from the most recent prospectus and is subject to change. What you pay reflects Putnam Management's decision to contractually limit expenses through 02/28/21

Sales charge

Investment Breakpoint Class A Class B Class C Class M Class R Class R5 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 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 Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed-income securities. You cannot invest directly in an index.

Consider these risks before investing: Funds that invest in government securities are not guaranteed. Mortgage-backed investments, unlike traditional debt investments, are also subject to prepayment risk, which means that they may increase in value less than other bonds when interest rates decline and decline in value more than other bonds when interest rates rise. 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). The fund may have to invest the proceeds from prepaid investments, including mortgage-backed investments, in other investments with less attractive terms and yields. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds. 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. 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.

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. To-be-announced (TBA) mortgage commitments, if any, are included based on their issuer ratings. Ratings may vary over time. Cash, derivative instruments, and net other assets are shown in the not-rated category. Payables and receivables for TBA mortgage commitments are included in the not-rated category and may result in negative weights. The fund itself has not been rated by an independent rating agency.