Webcast | Managing risks across fixed income | April 16, 2020

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  

Q1 2020 | Income Fund Q&A

  • Negative performance in March pushed the fund below the broad investment-grade fixed-income market for the quarter.
  • Synthetic exposure to commercial mortgage-backed securities hampered relative performance. On the plus side, favorable interest-rate and yield-curve positioning aided quarterly results.
  • The economic outlook has deteriorated due to the uncertain impact of the coronavirus pandemic. However, newly attractive valuations should yield many compelling investment opportunities when markets stabilize.

How did the fund perform for the three months ended March 31, 2020?

The fund’s class Y shares returned -0.85%, trailing the 3.15% gain of the benchmark Bloomberg Barclays U.S. Aggregate Bond Index.

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

After a relatively quiet first two months of the new year, the market environment changed dramatically in March. Rapidly growing concerns about the economic impact of a coronavirus outbreak sparked a global sell-off in risk assets. The sharp turn in sentiment reverberated across markets, as global equities fell, developed-market government-bond yields declined, and credit spreads widened. A dispute between Russia and Saudi Arabia over oil production levels further unnerved investors. Due to heightened oil market uncertainty, U.S. crude prices dropped more than 66% during the quarter to $20.48 per barrel on March 31. The rapid decline in oil prices added considerable pressure across corporate supply chains.

An escalating economic crisis elicited unprecedented measures from policymakers. The Trump administration signed a roughly $2 trillion stimulus package into law — the largest economic relief package in U.S. history. The U.S. Federal Reserve rapidly unveiled six new lending facilities designed to help corporations facing a cash flow crisis avoid defaulting on their debt. These programs also provide support for money market funds and commercial debt markets. Dozens of other central banks across Europe, Asia, and elsewhere also announced emergency stimulus measures. Markets that were most directly influenced by this policy support stabilized during the final week of the quarter. Investors were hopeful that massive government stimulus programs would help offset the severity and duration of an economic recession.

A flight to safety pushed the yields on U.S. Treasuries lower. The benchmark 10-year Treasury yield plunged to a closing low of 0.54% on March 9 and ended the quarter at 0.70%, after beginning the year at 1.88%. The spreads on investment-grade bonds, or the risk premiums investors demand to hold these securities rather than U.S. Treasuries, widened to levels not seen since the financial crisis.

Which holdings and strategies hampered the fund’s relative performance?

Within mortgage credit, our synthetic exposure to commercial mortgage-backed securities (CMBS) via CMBX was the biggest relative detractor for the period. CMBX is an index that references a basket of CMBS issued in a particular year. The fund’s allocation to CMBX tranches rated BBB and A performed poorly as spreads widened substantially. (Bond prices fall as spreads widen and rise as spreads tighten.)

Strategies targeting prepayment risk also worked against performance versus the benchmark. Lower interest rates and indiscriminate selling by investors proved to be material headwinds for our positions in agency interest-only collateralized mortgage obligations (IO CMOs) and inverse IO securities. The negative result here was partially offset by favorable tactical mortgage basis positioning. Mortgage basis is a strategy that seeks to exploit the yield differential between 30-year agency pass-throughs and 30-year U.S. Treasuries.

What about contributors?

The fund’s interest-rate and yield-curve strategy aided relative performance. We positioned the portfolio to have greater-than-benchmark sensitivity to the movement of short-term interest rates. This proved beneficial as short-term rates declined more than longer-term rates during the quarter.

The fund’s underweight allocation to investment-grade credit also added value, especially in March amid intensifying negative market sentiment and widening spreads.

What is your near-term outlook?

As the period concluded, the number of coronavirus infections was still rising worldwide. We think greater clarity regarding the trajectory of coronavirus infections and deaths is needed before the economic effects can be more clearly assessed. We will continue to monitor the impact of the pandemic on global supply chains and demand dynamics.

Given the overwhelming policy responses and dramatic actions by the Fed, we think U.S. Treasury yields will remain low across the curve for an extended period. We also believe low oil prices will exert significant disinflationary pressure on the economy.

We plan to take a cautious approach to increasing portfolio risk over the near term. That said, given the compelling valuations resulting from substantially wider yield spreads, we will seek to capitalize on attractive investment opportunities once markets show signs of stabilizing.

How was the fund positioned as of March 31?

Prior to this period, we took steps to reduce risk in the portfolio on the view that volatility was likely to rise and valuations in certain sectors, particularly corporate credit, were becoming increasingly unattractive.

During the past few months, the portfolio’s duration versus the benchmark’s has been neutral to moderately shorter. As of March 31, the fund’s duration was close to the benchmark’s at 5.6 years. The portfolio was positioned to benefit if the yield curve remains relatively steep or steepens further.

Reflecting the fund’s relatively cautious overall positioning, we continue to hold securities across sectors that have less price sensitivity to changes in yield spreads.

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

In CMBS, we continue to have exposure to the A- and BBB-rated tranches of CMBX. In our view, hotel and retail properties will be negatively affected by the coronavirus. However, the portfolio’s CMBS exposure is diversified by property type, and we believe CMBX continues to offer the fund a unique investment opportunity.

Within prepayment-sensitive areas of the market, we plan to maintain the fund’s positions in agency IO CMOs and inverse IOs backed by more seasoned loans. We believe this segment of these markets will have less sensitivity to refinancing risk in a low-interest-rate environment.

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

Net asset value
(yesterday’s close)
$7.25
0.14% | $0.01
52-week high $7.65 (03/06/20)
52-week low $6.85 (03/19/20)
(Optional)

Yield

Distribution rate before sales charge
as of 05/26/20
2.48%
Distribution rate after sales charge
as of 05/26/20
2.48%
30-day SEC yield with subsidy
as of 04/30/20
2.59%
30-day SEC yield without subsidy
as of 04/30/20
2.46%

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.

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)


7.30%

Average 5-year annualized return


Fund facts as of 04/30/20

Total net assets
$3,400.04M
Turnover (fiscal year end)
820%
Dividend frequency (view rate)
Monthly
Number of holdings
1459
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

Co-Head of Fixed Income
Portfolio Manager
Portfolio Manager


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 6.76% 5.06% 3.22% 4.63%
After sales charge N/A N/A N/A N/A
Bloomberg Barclays U.S. Aggregate Bond Index 8.93%4.82%3.36%3.88%

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 2.04% -
YTD as of 05/26/20 0.82% -

Yield

Distribution rate before sales charge
as of 05/26/20
2.48%
Distribution rate after sales charge
as of 05/26/20
2.48%
30-day SEC yield with subsidy
as of 04/30/20
2.59%
30-day SEC yield without subsidy
as of 04/30/20
2.46%

Risk-adjusted performance as of 04/30/20

Sharpe ratio (3 yrs.) 0.92
Information ratio (3 yrs.) 0.12

Volatility as of 04/30/20

Standard deviation (3 yrs.) 4.13%
Beta 1.00
R-squared 0.62

Lipper rankings as of 04/30/20

Time period Rank/Funds in category Percentile ranking
1 yr. 266/515 52%
3 yrs. 12/470 3%
5 yrs. 106/404 27%
10 yrs. 15/297 6%
Lipper category: Core Bond Funds

Morningstar Ratings as of 04/30/20

Time period Funds in category Morningstar Rating
Overall 533
3 yrs. 533
5 yrs. 449
10 yrs. 333
Morningstar category: Intermediate Core-Plus Bond

Distributions

Record/Ex dividend date 05/21/20
Payable date 05/26/20
Income $0.015
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

Fnma Fn30 Tba Umbs 03.5000 06/01/2050 4.70%
Fnma Fn30 Tba Umbs 03.5000 07/01/2050 2.89%
Fnma Fn30 Tba Umbs 04.0000 07/01/2050 2.16%
Fnma Fn30 Tba Umbs 02.5000 06/01/2050 1.84%
Fnma Fn30 Tba Umbs 02.5000 05/01/2050 1.81%
Fnma Fn30 Tba Umbs 03.5000 05/01/2050 1.40%
Gnma Gii30 Tba 03.5000 05/01/2050 1.37%
Gnma Gii30 Tba 04.0000 05/01/2050 1.13%
Fnma Fn30 Tba Umbs 04.0000 06/01/2050 0.94%
Verizon Comm 04.3290 09/21/2028 0.91%
Top 10 holdings, percent of portfolio 19.15%



Fixed income statistics as of 04/30/20

Average effective maturity 7.38 yrs.
Average effective duration 4.97 yrs.
Average yield to maturity 4.82%
Average coupon 3.47%

Sector weightings as of 04/30/20

  Cash investments Non-cash investments Total portfolio
  Weight Spread duration Weight Spread duration Weight Spread duration
Investment-grade corporate bonds 23.50% 1.90 0.00% 0.00 23.50% 1.90
Agency pass-through 5.85% 0.25 16.70% 0.51 22.55% 0.76
Commercial MBS 8.47% 0.24 13.07% 0.21 21.54% 0.45
Agency CMO 14.15% 0.45 0.11% 0.00 14.26% 0.45
Residential MBS (non-agency) 8.73% 0.30 0.00% 0.00 8.73% 0.30
Asset-backed securities (ABS) 2.32% 0.04 0.00% 0.00 2.32% 0.04
High-yield corporate bonds 0.49% 0.02 0.00% 0.00 0.49% 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% -1.16 0.00% -1.16
U.S. Treasury/agency 0.00% 0.00 0.00% 2.18 0.00% 2.18
Net cash 36.37% 0.00 0.00% 0.00 36.37% 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 04/30/20

0 - 1 yr. 22.22%
1 - 5 yrs. 46.11%
5 - 10 yrs. 26.55%
10 - 15 yrs. 0.81%
Over 15 yrs. 4.31%

Quality rating as of 04/30/20

AAA 58.65%
AA 2.47%
A 25.12%
BBB 17.74%
BB 3.03%
B 2.70%
CCC and Below 0.46%
Not Rated -10.17%

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. 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 04/30/20

United States 96.53%
Canada 1.07%
Bermuda 0.75%
United Kingdom 0.59%
Luxembourg 0.23%
France 0.19%
Spain 0.16%
Switzerland 0.13%
Australia 0.11%
 
Other
0.24%
Germany 0.10%
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

 Breakpoint Class A Class B Class C Class M Class R Class R5 Class R6 Class Y
$0-$49,999 4.00% / 3.50% 0.00% / 4.00% 0.00% / 1.00% 3.25% / 3.00% -- -- -- --
$50,000-$99,999 4.00% / 3.50% 0.00% / 4.00% 0.00% / 1.00% 2.25% / 2.00% -- -- -- --
$100,000-$249,999 3.25% / 2.75% -- 0.00% / 1.00% 1.25% / 1.00% -- -- -- --
$250,000-$499,999 2.50% / 2.00% -- 0.00% / 1.00% 1.00% / 1.00% -- -- -- --
$500,000-$999,999 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 $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% -- -- -- -- --

Trail commissions

  Class A Class B Class C Class M Class R Class R5 Class R6 Class Y
  0.25% 0.25% 1.00% 0.40% 0.50% 0.00% 0.00% 0.00%
  NA NA NA NA NA NA NA NA
  NA NA NA NA NA NA NA NA

For sales and trail commission information on purchases over $500,000 and participant-directed qualified retirement plans, see a Putnam fund prospectus and the statement of additional information.

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. 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.