Active Income

Convertible Securities Fund (Class Y)  (PCGYX)

Offering investors the diverse benefits of convertible securities since 1972

Q1 2020 | Convertible Securities Fund Q&A

  • Convertibles yielded to their equity sensitivity during the sell-off but outperformed equities due to their bond-like characteristics.
  • Underweight positioning in sectors that struggled most during the sell-off was the largest contributor to the fund’s outperformance relative to the benchmark.
  • We have a fairly constructive outlook on the convertibles market given the market’s lower exposure to energy and greater exposure to less cyclical sectors.

Please describe conditions in the U.S. convertibles market in the first quarter.

Convertibles started 2020 in strong fashion. The ICE BofA U.S. Convertible Index [the benchmark] rose 2.81% in January, while most other risk asset classes declined. However, February erased nearly all of those gains as coronavirus fears increased. March represented the worst of the sell-off with the benchmark registering a decline of -13.54% for the month. This resulted from the underperformance of a few disproportionately large issuers as well as subindex sector themes. Higher deltas for issuers such as Tesla combined with issuers facing more severe challenges due to the global pandemic were notable laggards within the benchmark, including Caesars Entertainment and Microchip. [Delta is a measure of equity sensitivity.] Finally, convertibles in the small-cap universe and those issued by highly leveraged companies exposed to default risk struggled. This was reflected by the considerable underperformance of the Russell 2000 Index, a benchmark composed of small-cap stocks, and high-yield indices, which ranked among the poorest performers for the quarter.

Against this backdrop, the benchmark recorded a decline of -13.62% for the three months. Sector returns within the benchmark were negative across the board, with the worst results in energy, materials, and consumer staples. Given their hybrid equity and fixed-income characteristics, convertibles were more resilient than equities during the quarter. The asset class suffered only 56% of the downside of their underlying equities.

With economic and market conditions deteriorating, the Federal Reserve aggressively cut its short-term interest rate to near zero in March. The central bank also moved to provide ample liquidity via multiple lending facilities. On the fiscal front, Congress passed a $2.2 trillion stimulus package to support Americans as economic growth slows and to help stabilize markets.

Fixed-income assets rallied in response to the Fed’s aggressive monetary action and increased demand from investors seeking safe harbors. The Bloomberg Barclays U.S. Aggregate Bond Index, which measures the performance of investment-grade bonds, and the ICE BofA U.S. 3-Month Treasury Bill Index returned 3.15% and 0.57%, respectively, for the quarter.

How did you manage the fund through this challenging time?

One of the main tenets of how we manage convertibles is to create a balanced portfolio that has the potential for a positively skewed asymmetric return profile. This, along with our practice of building a portfolio from individual security selection, is beneficial in times of market upheaval. This strategy entails trimming securities that have higher equity sensitivity in favor of more balanced profiles. As a result, the portfolio has greater convexity, a tool we use to manage a portfolio’s exposure to market risk. Because of that convexity and relative outperformance, we believe we are operating from a position of strength.

In addition, we have been taking advantage of market dislocations when appropriate. For example, we purchased convertibles issued by companies with strong financial positions, high margins, and free cash flow business models when their convertible bonds traded below par. With credit spreads widening during the quarter, these convertibles are cheap relative to their theoretical value, in our view. In some instances, they offer greater than upside tracking and downside protection.

We continue to maintain a balanced “pure-play” convertibles portfolio, with few common stocks or straight corporate bonds, which we believe sets the portfolio apart from its peers. The portfolio maintains a delta in the low 50s as equity markets have reset lower. In our opinion, keeping the delta in the 50s range represents a more balanced profile of capital preservation and reduced volatility from the bond component, as well as upside opportunity from the equity conversion option. We believe this positioning will continue to help the fund weather more volatility.

How did the fund perform?

For the three months ended March 31, 2020, the fund’s class Y shares returned -11.88%, outperforming the benchmark.

On a relative basis, underweight positioning in sectors that struggled most during the sell-off was the largest contributor to the fund’s outperformance. The hardest hit sector was energy. In addition to facing pandemic-related demand concerns, supply fears arising from the breakdown of negotiations between Saudi Arabia and Russia to limit production pushed oil prices to a low of $20 a barrel by quarter-end. Financials also struggled, due to concerns about leverage and overall economic risk.

Security selection in the consumer cyclicals sector was the largest detractor from the fund’s relative returns. This was primarily due to underweight positioning in a single name that outperformed during the quarter.

In light of the challenges posed by the pandemic, what is your outlook for convertibles in the coming months?

Looking into 2020, we expect a sharp economic slowdown due to the repercussions of the pandemic and oil price volatility. However, we have a fairly constructive outlook on the convertibles market given the market’s lower exposure to energy and greater exposure to less cyclical sectors.

The market sell-off has resulted in some compelling absolute and relative value opportunities in the convertibles market. The market has swung from about 1.5% rich to 1.5% cheap according to Barclays, although this is still within historical averages. In addition, we are not seeing the same degree of dislocation that materialized during the 2008 financial crisis. This is largely due to the smaller role that the convertible arbitrage community plays in the market today, Also, there is lower overall leverage today versus that during the financial crisis. Additionally, as we have seen in prior periods of market stress, the convertibles market is sometimes used as a vehicle for companies to re-enter capital markets. This could create some unique buying opportunities within the new-issue market in the months ahead.

The market sell-off also resulted in a significant drop in the delta of the asset class, from roughly 57 at the beginning of the year to 51 at quarter-end. We believe this creates a more balanced environment where investors can experience the most advantageous aspects of the asset class: upside equity tracking, downside protection, and an attractive current yield.

Highlights

Objective

The fund seeks, with equal emphasis, current income and capital appreciation. Its secondary objective is conservation of capital.

Strategy and process

  • Balanced profile: The fund seeks to achieve an equilibrium balancing much of the upside potential of equities, the lower downside risk of bonds, and an attractive current yield.
  • Effective diversification: The fund can provide effective diversification for investor portfolios; convertible securities are not highly correlated with stocks and correlation is near zero versus aggregate bond strategies.
  • Joint venture: Uniquely combining both dedicated fixed income and equity expertise to enhance the ability to fully exploit these hybrid securities.

Fund price

Net asset value
(yesterday’s close)
$25.63
0.95% | $0.24
52-week high $26.82 (02/19/20)
52-week low $20.14 (03/23/20)
(Optional)

Yield

Distribution rate before sales charge
as of 05/22/20
1.70%
Distribution rate after sales charge
as of 05/22/20
1.70%
30-day SEC yield as of 04/30/20 1.55%

Consistency of positive performance over five years

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

Performance shown 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 click on the performance tab.

23.04%

Best 5-year annualized return

(for period ending 03/31/83)


-3.30%

Worst 5-year annualized return

(for period ending 12/31/08)


10.43%

Average 5-year annualized return


Fund facts as of 04/30/20

Total net assets
$711.13M
Turnover (fiscal year end)
60%
Dividend frequency (view rate)
Quarterly
Number of holdings
112
Fiscal year-end
October
CUSIP / Fund code
746476407 / 1807
Inception date
12/30/98
Category
Taxable Income
Open to new investors
Ticker
PCGYX

Management team

Portfolio Manager
Portfolio Manager, Analyst


Performance

  • Total return (%) as of 03/31/20

  • Annual performance as of 03/31/20

Annualized Total return (%) as of 03/31/20

Annualized performance 1 yr. 3 yrs. 5 yrs. 10 yrs.
Before sales charge -1.90% 5.24% 4.19% 7.30%
After sales charge N/A N/A N/A N/A
ICE BofA U.S. Convertible Index -3.52%4.78%4.73%7.89%

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, 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 04/30/20 11.02% -
YTD as of 05/22/20 3.32% -

Yield

Distribution rate before sales charge
as of 05/22/20
1.70%
Distribution rate after sales charge
as of 05/22/20
1.70%
30-day SEC yield as of 04/30/20 1.55%

Risk-adjusted performance as of 04/30/20

Alpha (3 yrs.) 0.66
Sharpe ratio (3 yrs.) 0.53
Treynor ratio (3 yrs.) 7.13
Information ratio (3 yrs.) 0.17

Volatility as of 04/30/20

Standard deviation (3 yrs.) 12.81%
Beta 0.95
R-squared 0.98

Capture ratio as of 04/30/20

Up-market (3 yrs.) 100.40
Down-market (3 yrs.) 98.73

Lipper rankings as of 04/30/20

Time period Rank/Funds in category Percentile ranking
1 yr. 32/77 42%
3 yrs. 33/75 44%
5 yrs. 27/64 42%
10 yrs. 16/49 32%
Lipper category: Convertible Securities Funds

Morningstar Ratings as of 04/30/20

Time period Funds in category Morningstar Rating
Overall 75
3 yrs. 75
5 yrs. 64
10 yrs. 49
Morningstar category: Convertibles

Distributions

Record/Ex dividend date 03/26/20
Payable date 03/30/20
Income $0.109
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.


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Holdings

Microchip Technology 3.61%
Tesla 2.86%
Broadcom 2.59%
Bank of America 2.39%
Dexcom 2.29%
Servicenow 2.01%
Crown Castle International Corp 1.88%
Akamai Technologies 1.80%
Splunk 1.73%
Okta 1.72%
Top 10 holdings, percent of portfolio 22.88%



Portfolio composition as of 04/30/20

Convertible bonds and notes 73.15%
Mandatories 16.25%
Convertible preferred stock 4.94%
Cash and net other assets 3.31%
Common stock 2.26%
Corporate bonds and notes 0.09%

Equity statistics as of 04/30/20

Median market cap $9.15B
Weighted average market cap $34.50B
Price to book 3.32
Price to earnings 37.53

Fixed income statistics as of 04/30/20

Average stated maturity 4.70 yrs.
Average effective duration 1.86 yrs.
Average yield to maturity -3.15%
Average coupon 2.21%

Maturity detail as of 04/30/20

0 - 1 yr. 13.76%
1 - 5 yrs. 56.74%
5 - 10 yrs. 25.88%
Over 15 yrs. 3.62%

Quality rating as of 04/30/20

A 3.35%
BBB 8.46%
BB 5.20%
B 9.01%
CCC and Below 0.44%
Not Rated 70.23%
Cash and net other assets 3.31%

Fund characteristics will vary over time.

Due to rounding, percentages may not equal 100%.

Consider these risks before investing: Convertible securities prices may fall or fail to rise over time for several reasons, including general financial market conditions, changing market perceptions (including perceptions about the risk of default and expectations about monetary policy or interest rates), changes in government intervention in the financial markets, and factors related to a specific issuer or industry. These and other factors may lead to increased volatility and reduced liquidity in the fund's portfolio holdings. These risks are generally greater for convertible securities issued by small and/or midsize companies. Convertible securities' prices may be adversely affected by underlying common stock price changes. While convertible securities tend to provide higher yields than common stocks, the higher yield may not protect against the risk of loss or mitigate any loss associated with a convertible security's price decline. Convertible securities are subject to credit risk, which is the risk that an issuer of the fund's investments may default on payment of interest or principal. Credit risk is generally greater for below- investment-grade convertible securities. Convertible securities may be less sensitive to interest-rate changes than non-convertible bonds because of their structural features (e.g., convertibility, "put" features). Interest-rate risk is generally greater, however, for longer-term bonds and convertible securities whose underlying stock price has fallen significantly below the conversion price. 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/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. Equity securities are shown in the not-rated category. Cash and net other assets, if any, represent the market value weights of cash and derivatives and may show a negative market value as a result of the timing of trade versus settlement date transactions. The fund itself has not been rated by an independent rating agency.

Top industry sectors as of 04/30/20

Information technology 39.43%
Health care 14.93%
Consumer discretionary 11.78%
Communication services 7.34%
Financials 6.95%
Utilities 6.29%
Industrials 5.13%
Real estate 3.53%
Cash and net other assets 3.31%
 
Other
1.31%
Materials 0.84%
Energy 0.47%

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

Sectors will vary over time.

Country allocation as of 04/30/20

United States 94.61%
Cash and net other assets 3.31%
Israel 1.35%
France 0.67%
China 0.06%

Expenses

Expense ratio

Class A Class B Class C Class R Class R6 Class Y
Total expense ratio 1.05% 1.80% 1.80% 1.30% 0.72% 0.80%
What you pay 1.05% 1.80% 1.80% 1.30% 0.72% 0.80%

Sales charge

 Breakpoint Class A Class B Class C Class R Class R6 Class Y
$0-$49,999 5.75% / 5.00% 0.00% / 4.00% 0.00% / 1.00% -- -- --
$50,000-$99,999 4.50% / 3.75% 0.00% / 4.00% 0.00% / 1.00% -- -- --
$100,000-$249,999 3.50% / 2.75% -- 0.00% / 1.00% -- -- --
$250,000-$499,999 2.50% / 2.00% -- 0.00% / 1.00% -- -- --
$500,000-$999,999 2.00% / 1.75% -- 0.00% / 1.00% -- -- --
$1M-$4M 0.00% / 1.00% -- -- -- -- --
$4M-$50M 0.00% / 0.50% -- -- -- -- --
$50M+ 0.00% / 0.25% -- -- -- -- --

CDSC

  Class A (sales for $1,000,000+) Class B Class C 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% -- -- --

Trail commissions

  Class A Class B Class C Class R Class R6 Class Y
  0.20%1 0.25% 1.00% 0.50% 0.00% 0.00%
  0.25%2 NA NA NA NA NA
  NA NA NA NA NA NA
  1. Through 12/31/89
  2. After 12/31/89

For sales and trail commission information on purchases over $1 million and participant-directed qualified retirement plans, see a Putnam fund prospectus and the statement of additional information.

The ICE BofA U.S. Convertible Index tracks the performance of publicly issued U.S. dollar denominated convertible securities of U.S. companies. You cannot invest directly in an index.

Consider these risks before investing: Convertible securities prices may fall or fail to rise over time for several reasons, including general financial market conditions, changing market perceptions (including perceptions about the risk of default and expectations about monetary policy or interest rates), changes in government intervention in the financial markets, and factors related to a specific issuer or industry. These and other factors may lead to increased volatility and reduced liquidity in the fund's portfolio holdings. These risks are generally greater for convertible securities issued by small and/or midsize companies. Convertible securities' prices may be adversely affected by underlying common stock price changes. While convertible securities tend to provide higher yields than common stocks, the higher yield may not protect against the risk of loss or mitigate any loss associated with a convertible security's price decline. Convertible securities are subject to credit risk, which is the risk that an issuer of the fund's investments may default on payment of interest or principal. Credit risk is generally greater for below- investment-grade convertible securities. Convertible securities may be less sensitive to interest-rate changes than non-convertible bonds because of their structural features (e.g., convertibility, "put" features). Interest-rate risk is generally greater, however, for longer-term bonds and convertible securities whose underlying stock price has fallen significantly below the conversion price. 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/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. Equity securities are shown in the not-rated category. Cash and net other assets, if any, represent the market value weights of cash and derivatives and may show a negative market value as a result of the timing of trade versus settlement date transactions. The fund itself has not been rated by an independent rating agency.