Putnam Absolute Return Funds: Performance and Outlook as of June 30, 2010
Performance
Performance varied for the four Putnam Absolute Return Funds during the second quarter of 2010. The 100 Fund and 300 Fund posted positive results at net asset value, as fixed-income strategies continued to perform well. The 500 Fund and 700 Fund experienced small declines as equity markets experienced their worst quarterly decline since the fourth quarter of 2008, near the low point of the recession. Results for the Absolute Return Funds over one year and since inception remained positive. The funds continued to employ a wide range of tools to pursue positive results with lower volatility than securities markets, with the goal of achieving their return targets over three-year periods.
For fund performance and portfolio holdings as of 6/30/10, go to www.putnam.com/absolutereturn.
Outlook
The fixed-income strategies continue to reflect a posture the funds have taken since inception: to capitalize on the historic return opportunities in the bond market. In 2008 there was a massive flight to quality and every risky asset underperformed. This was followed in 2009 by a massive rally across these formerly rejected sectors. In 2010 the flight-to-quality trend has resumed because of the European sovereign debt crisis.
In the short term, our outlook for interest rates is neutral, because it appears that rates could move in either direction. The funds continue to have little interest-rate exposure because of our desire to reduce volatility and our long-term view that inflation is likely to increase.
The 500 Fund and 700 Fund are pursuing largely the same fixed-income strategies as the 100 Fund and 300 Fund. In addition, the 500 Fund and 700 Fund have reduced their already-modest exposure to equities because we anticipate higher volatility in the short run. The stocks that remain in the funds are large caps that have historically been less volatile than the market. Also, the funds have bought S&P 500 put options, allowing U.S. equity exposure to be sold at predetermined prices. This provides further protection in the event of greater downside volatility.
In addition, all four funds seek to pursue currency strategies that can achieve positive results with low correlation to the stock market. The recent volatility in currency markets has produced a number of return opportunities from exchange-rate movements.
As we look ahead, we believe a more conservative stance makes sense given the volatility caused by market sentiment. That said, there is no evidence yet that the economic recovery has gone off track. We will watch employment trends closely to gauge the strength of the recovery, recognizing that disappointment in this area could generate additional volatility, while improving employment trends could solidify the recovery.
The views and opinions expressed are those of Rob Bloemker, Managing Director and Portfolio Manager, and Jeff Knight, Managing Director and Portfolio Manager, of Putnam Investments as of June 30, 2010, are subject to change with market conditions, and are not meant as investment advice. Past performance is not indicative of future results.
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Funds with the words “absolute return” in their names have been garnering attention and generating discussion lately. According to The Wall Street Journal, investor interest has resulted in $5 billion in net flows into these relatively new strategies as of May 31, 2010.
One seeming paradox in absolute return investing is that the funds are designed to be less volatile, yet they grant portfolio managers great freedom to invest in a wide variety of asset classes, sectors, and global markets — even emerging markets.
Market volatility has become the norm in recent months, and investors need only look back a year or two to see the impact that volatile swings in the market can have on retirement savings.
Fueled by investor anxiety over sovereign debt in Europe and the May 6 “flash crash” of the Dow, 
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