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Putnam Absolute Return Funds

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    Today we are going to discuss Putnam Absolute Return Funds, Putnam’s newest innovation for investors facing challenging financial market conditions. Putnam has a long tradition of introducing solutions for investors. Since 1937, when George Putnam created a diverse mix of stocks and bonds in a single, professionally managed portfolio, Putnam has championed the balanced approach. Today we offer investors a world of equity, fixed-income, multi-asset, and absolute-return portfolios to suit a range of financial goals. Our portfolio managers seek superior results over time, backed by original, fundamental research on a global scale. We believe in the value of experienced financial advice, in providing exemplary service, and in putting clients first in all we do.

    This is our agenda for today. In 2008, we saw a dramatic reversal in the financial markets, with higher volatility and big drops in asset prices across global stocks and most bond market sectors. In 2009, we have seen more volatility for markets, both down and up. The year started with a bear market in stocks, followed by a bull market rally. Bonds have experienced a wide divergence in results, with high-yield sectors rallying while Treasuries have lost ground. In these times, investors are questioning strategies exposed to market risk. We think that investors will be looking for new solutions for investments that can pursue positive returns over time with less volatility than traditional investments. They are seeking out new ideas and new solutions tailored to their individual goals. Putnam has responded to the market place by introducing a new set of absolute return products, which I will tell you about.

    Let’s look at what has happened in the financial markets. In 2008, markets experienced a major reversal. U.S. and international stocks went from strong returns in 2007 to some of the sharpest one-year declines in history. In the bond market, most sectors, including corporate high-yield bonds, shown here, had losses. Of course, the housing market was at the core of the problem, and home prices declined significantly in 2008, worsening the decline that began in 2007.

    To understand the impact of the sort of market volatility we saw in 2008, it’s helpful to look at two investments with similar returns, but different levels of volatility. In this illustration you can see two investments that, over 15 years, have average yearly returns of 9%. However, the difference is that one is more consistent and one is more volatile. The more consistent performer has relatively modest changes in performance year to year, while the more volatile performer has bigger ups and downs. In the end, the more consistent performer has earned more money for its investors. Along the way, the more consistent performer had more years of positive results, which helped returns to compound. This shows that when you are comparing investments, it’s important to look not only at the return potential, but at volatility as well. Volatility plays a role in the outcome for investors. A more consistent performer can serve investors better.

    One strategy to deal with volatility is to get out of the stock market and put your savings in cash. We know many investors did that in 2008, as money in savings accounts, CDs, and money markets grew to a record $11.4 trillion. But here we can see the problem with moving assets into safer investments with lower returns. This table shows how long it takes money to grow at different rates of return. At low rates, it can take much longer to recover from market downturns. Stocks were down over 30% in 2008. If you try to recover that loss using an investment that returns 2%, it would take almost 18 years. Most people don’t have that kind of time horizon. It’s important for investors to keep investing in assets that can potentially generate higher returns in order to recover from 2008.

    It’s also important to keep your investments diversified. Now, we know that diversification has not been working as well as intended. But here we can see some of the risks of giving up on diversification, and trying to pick the best asset class. In financial markets, leadership changes over time. It’s impossible to predict what investment will lead, and it does not make sense to use the most recent market cycle as a guide to determining your future allocations. For example, cash investments outperformed during a bear market for stocks in 1973 and 1974, and also beat stocks for the decade as a whole. But cash would have been a bad choice in the 1980s and 1990s when it lagged stocks and bonds. Similarly, stocks did well in the bull markets of the 1980s and 1990s, but had disappointing results with two bear markets in the most recent decade. Each market cycle is different, and it’s important to keep invested in a number of different opportunities.

    We have laid out an interesting challenge. As investors, you probably want a few things. First, a focus on seeking more consistent positive returns would be helpful to regain ground after recent market performance. Second, you probably want a new approach to diversification, one that does not rely on a simple balance of stocks and bonds. Rather, you probably want freedom to invest in a wider range of both traditional and modern asset classes, with flexibility to favor those that offer the most attractive potential. Third, it would be nice to have more tools available to seek to manage risk when markets get volatile.

    Putnam Absolute Return Funds are innovative. They combine modern features that we have just described, and that many investors might be looking for now. These funds pursue positive returns above inflation over periods of three or more years with less volatility than more traditional funds, no matter what is happening in global markets.

    Absolute return strategies offer something new to investors because their approach is different from more traditional funds. An absolute return strategy has the same philosophy as any ordinary investor — it pursues a positive return, one that enhances purchasing power. This chart helps us to compare and contrast absolute and traditional strategies. For absolute return funds, the name of the game is positive returns. Traditional relative return strategies, on the other hand, define success as beating the market — the stock or bond market, depending on what the fund invests in. Of course, beating the market is a good thing. However, in some time periods, like recently, the market return can be negative. So a traditional strategy might beat the market, yet still have a negative return. An absolute return fund, in general, defines success as earning a positive return. Conversely, it defines risk as losing money. A relative return fund sees risk as deviating too much from the market. If a traditional fund performs much differently from the market, it raises questions about what the manager is investing in. An absolute return strategy can invest anywhere. It can move money out of investments with a negative performance outlook. A relative return strategy is limited; by policy, it must invest in a particular market or narrow investment universe. With these differences you can think of absolute return as a new type of diversification — diversification by philosophy — that can work alongside more traditional types of diversification, such as diversification by asset class or market. If an absolute return strategy succeeds, it can potentially outperform general markets in flat or declining conditions.

    One of the biggest distinguishing features of Putnam Absolute Return Funds is the broad range of securities that the funds can invest in, including a number of newer, modern asset classes that many investors may not yet include in their portfolios. These newer asset classes have become available as financial markets have developed and diversified in recent decades. Examples include floating rate bank loans and real estate investment trusts (REITs). Others are better known and established, such as Treasury inflation-protected securities (TIPS) and emerging-market stocks or bonds. But what is truly innovative about the Absolute Return Funds is their ability to mix this wide range of securities in any combination that can help the funds pursue their objectives. It’s rare to find a fund that can shift money from TIPS to bank loans to high-yield bonds or global bonds. Absolute Return Funds can do that. You can see how these different asset classes have performed in recent years. You see a lot of orange — the newer asset classes, the newer tools in the managers’ tool box — near the top quite frequently, although that changed in 2008. One of the key points to note about these performance rankings is that, as leadership alternates, the flexibility of the absolute return funds is a real advantage. Absolute return has unlimited freedom to invest across a wide range of asset classes, or to focus in specific areas, given market conditions.

    Here you see the primary features of Putnam’s absolute return strategies. First, the funds invest in a wide range of securities across global sectors and can adjust the mix of investments as opportunities change. Second, the funds employ progressive risk management tools to help control risk. These techniques allow the teams to take risks where they see positive opportunities, and to seek to avoid undesired risks. With these tools, the funds can potentially outperform general markets during flat or negative periods. Third, with flexibility to invest anywhere, the funds go beyond the limitations of funds tied to traditional benchmarks. The funds invest dynamically worldwide to pursue positive results over periods of at least three years. Fourth, Putnam brings experience to absolute return strategies. Since 1999, Putnam has managed absolute return strategies for institutional clients, and now manages these strategies for individual investors. Fifth, Putnam has distinguished these products by including a distinctive management fee structure that benefits shareholders by adjusting fees based on how well the funds perform vs. their return targets. This feature aligns the interests of fund managers and shareholders.

    Putnam believes absolute return funds offer important features for all kinds of investors. That’s why Putnam has taken a distinctive approach by offering a set of four funds. Putnam is the first fund family to offer so many choices. Here you can see an overview of the four funds. Putnam also takes the concept of absolute return investing to another level. The funds don’t just aim for positive returns — they aim for positive return targets that are set above the level of inflation, as measured by Treasury bills. So the Putnam funds seek to avoid the risk of negative returns, but also protect money from inflation. The target returns above Treasury bills are shown for each fund. The most conservative is Putnam Absolute Return 100 Fund, which tries to beat T-bills by 1%. The most aggressive is Absolute Return 700 Fund, which tries to beat T-bills by 7%.

    Each fund is also positioned as an alternative to types of more traditional investments. The 100 Fund is an alternative to short-term securities. The 300 Fund is an alternative to bond funds The 500 Fund is an alternative to balanced funds And the 700 Fund is an alternative to stock funds. The 100 and 300 funds invest in global fixed-income sectors. The 500 and 700 funds, with higher return targets and risk profiles, invest in global fixed-income sectors, stocks, and alternative asset classes, including REITs and commodities.

    Here we can see our experienced fund managers. Since 1999, Putnam has managed absolute return strategies for institutional clients, and Putnam now manages absolute return funds for individual investors. Two experienced Putnam teams manage the funds. The 100 and 300 funds are managed by the fixed income group, which numbers over 80 professionals who specialize in global bond market sectors. The group has managed absolute return strategies since 1999. The 500 and 700 funds are managed by the global asset allocation group, which has managed diversified asset allocation funds for over a decade, and absolute return strategies since 2006.

    Last, another distinction of these funds is a performance fee structure which we believe makes them more attractive for shareholders. Fund management fees adjust based on how well a fund performs versus its return target. The management fee adjustment is 4% of the margin of overperformance or underperformance, and it is determined based on three-year performance. It is capped at certain levels to discourage excessive risk-taking. When a fund’s return is above its target, shareholders obviously benefit, but Putnam’s fee increases slightly — by 4% of the margin of outperformance. This gives the fund managers extra incentive to pursue outperformance. But shareholders still keep 96% of the outperformance. If a fund’s return comes in below its target, the management fee is reduced slightly, by 4%. This reduces the impact of underperformance to shareholders, and the fund managers share in the outcome. The performance fees are based on fund performance relative to their return targets, which are set at a higher level than Treasury bills. Outperforming T-bills is not enough. We believe this feature more closely aligns the interests of fund managers with the interests of shareholders. Management and shareholders are on the same side.

    The funds now have more than six months of performance history, and we are happy to show the results here. All of the funds are in positive territory for returns since inception, and they align quite well with their return targets. The more aggressive the return target, the higher the return. We are proud that the funds have kept a focus on stable, positive returns even as the markets have zig-zagged this year. 2008 began with a 2-month bear market when stocks fell by more than 20%, and was followed by a big rally. Through all of this period, the NAVs of these funds have been very stable, and the funds have posted positive returns through September 30, 2009. The fund managers have been able to produce these results by investing in a range of asset classes, including short-term corporate bonds, mortgage-backed bonds, TIPS, and selective high-yield bond and stock positions. They have also carefully maintained positions in cash while gradually deploying it in opportunities made available by low valuations in the stock and bond markets.

    To summarize, Putnam Absolute Return Funds are an innovation to address today’s market challenges. We have seen how market conditions reversed over the past year. Putnam’s absolute return funds invest in a wide range of securities and use modern tools to manage risk. Putnam’s fund managers are experienced in absolute return strategies with institutional investors, and they are now offering the strategies to individual investors. Putnam’s funds also have adjustable performance fees, so that the goals of fund management and fund shareholders are more closely aligned. Based on what we have covered here, you can take this information and work with your finanical advisor. Review your financial goals. Review how your current portfolio is positioned. Review your appetite for risk. Then consider how Putnam Absolute Return Funds might fit in your portfolio as a complement to traditional investments.

    Putnam Absolute Return Funds can help you to re-enter the market in funds that pursue positive returns over time — in both good markets and bad — and with less volatility than more traditional funds. Putnam is the first fund family to offer a suite of absolute return funds, because we want to provide an absolute return choice for all kinds of investors.

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    Putnam Absolute Return Funds - Presentation Transcript

    1. No Bank Guarantee May Lose Value Not FDIC Insured
    2. A BALANCED APPROACH A WORLD OF INVESTING A COMMITMENT TO EXCELLENCE | EO093 257389 10/09
      • In 2008, market volatility changed how we look at investing
      • Investors will likely demand new solutions that can pursue positive returns with less volatility over time
      • Putnam is responding with a suite of Absolute Return Funds for all kinds of investors
    4. A nearly unprecedented decline * Annualized return. U.S. stock performance is measured by the S&P 500 Index; international stock performance by the Morgan Stanley Capital International (MSCI) EAFE Index; high-yield bonds by the JPMorgan Global High Yield Index; investment-grade bonds by the Barclays Capital Credit Index; and home prices by S&P/Case Shiller Home Price Index. You cannot invest directly in an index. Past performance is not indicative of future results. Source: Putnam Investments. Widespread declines, 2007–2008 * 2007 2008
    5. Volatile investments may underperform… * Average of yearly returns for the 15-year period. The example is for illustrative purpose only and does not reflect average annualized returns or the performance of any Putnam fund, which will fluctuate. Consistent performance is illustrative of Ibbotson U.S. Long-Term Government Bond Total Return Index. Volatile performance is illustrative of Goldman Sachs Commodities Index. You cannot invest directly in an index. Note that the reverse could be true and a more volatile investment may result in outcomes favorable to investors. $100,000 -8% +32% -1% +16% +13% -9% +21% +4% +18% +1% +9% +8% +1% +10% +24% +5% +20% +34% -14% -36% +41% +50% -32% +32% +21% +17% +26% -15% +33% -46% 9% return* $348,805 Consistent performance Year 15 2008 14 13 12 11 10 9 8 7 6 5 4 3 2 Year 1 1994 9% return* $192,111 Volatile performance
    6. …but cash does not provide growth
      • Low-return assets take many years to grow
      This hypothetical illustration is based on mathematical principles and assumes monthly compounding. It is not meant as a forecast of future events or as a statement that prior markets may be duplicated. Recovery periods are rounded to the nearest quarter of a year. Years to recover 11.50 6.00 1.75 6% 7.00 3.50 1.00 10% Size of market downturn 34.75 years 17.75 years 5.25 years 2% -10% -50% -30% Investor’s rate of return
    7. Stay diversified, because markets are unpredictable Source: Putnam Investments. Past performance is not indicative of future results. Diversification does not insure a profit or protect against loss. In these illustrations, stocks are represented by the Ibbotson S&P 500 Total Return Index, bonds are represented by a 50/50 blend of the Ibbotson U.S. Long-term Corporate Bond Index and the Ibbotson U.S. Intermediate-term Government Total Return Index, and cash is represented by the Ibbotson U.S. 30-day T-bill Total Return Index. All indexes are unmanaged and measure common sectors of the stock and bond markets. Index performance does not reflect fees or expenses. You cannot invest directly in an index. Market performance during selected bull and bear periods BEAR 1999 –2002 BULL 1996 –1999 BULL 1983 –1986 BEAR 1973 –1974
    8. Can a mutual fund seek positive returns with less volatility?
    9. Absolutely. Putnam Absolute Return Funds Putnam Absolute Return 700 Fund Putnam Absolute Return 500 Fund Putnam Absolute Return 300 Fund Putnam Absolute Return 100 Fund
    10. What is absolute return investing? Seeks positive returns in good markets and bad Free to “go anywhere” — invest across sectors and markets Risk = negative returns Success = positive returns Absolute Return Limited to invest in one market or one type of security Risk = lagging the market Success = beating market Traditional strategy
    11. Flexible to invest in many asset classes As of 12/31/08. Source: Putnam Investments. Past performance is not indicative of future results. In this illustration, T-bills are represented by the Merrill Lynch U.S. 3-month Treasury Bill Index; international bonds by the Barclays Capital Global Aggregate Bond ex-U.S. Index; global high-yield bonds by the JPMorgan Developed High Yield Index; emerging-market bonds by the JPMorgan Emerging Markets Bond Global Diversified Index; TIPS (Treasury Inflation-Protected Securities) by the Barclays Capital Real U.S. TIPS Index; U.S. stocks by the S&P 500 Index; international stocks by the MSCI World ex-U.S. Index; emerging-market stocks by the MSCI Emerging Markets Index; commodities by the Goldman Sachs Commodities Index; U.S. bonds by the Barclays Capital Aggregate Bond Index; REITs by the Morgan Stanley REIT Index; and bank loans by the S&P LSTA Leveraged Loan Index. All indexes are unmanaged and measure common sectors of the stock and bond markets. Index performance does not reflect fees or expenses. You cannot invest directly in an index. Please see slide 20 for more information on risks. Traditional asset classes Modern asset classes Annual return rankings EM stocks Commodities Intl stocks REITs U.S. stocks Bank loans Global HY bonds EM bonds TIPS T-bills Intl bonds U.S. bonds 2008 REITs Bank loans Global HY bonds T-bills U.S. stocks EM bonds U.S. bonds Intl bonds TIPS Intl stocks Commodities EM stocks 2007 Commodities TIPS U.S. bonds T-bills Bank loans Intl bonds EM bonds Global HY bonds U.S. stocks Intl stocks EM stocks REITs 2006 Intl bonds U.S. bonds Global HY bonds TIPS T-bills U.S. stocks Bank loans EM bonds REITs Intl stocks Commodities EM stocks 2005 T-bills U.S. bonds Bank loans TIPS U.S. stocks Global HY bonds EM bonds Intl bonds Commodities Intl stocks EM stocks REITs 2004 2003 2002 2001 2000 1999 T-bills U.S. stocks Commodities EM stocks Intl bonds U.S. bonds Intl stocks Intl stocks Intl stocks REITs TIPS EM stocks U.S. stocks U.S. stocks U.S. bonds Bank loans T-bills Intl bonds Global HY bonds Global HY bonds Intl bonds Bank loans EM stocks Intl bonds TIPS Commodities Global HY bonds Bank loans Bank loans Bank loans EM bonds REITs T-bills T-bills T-bills Global HY bonds U.S. bonds Global HY bonds U.S. bonds EM bonds U.S. stocks EM bonds TIPS EM bonds U.S. stocks REITs TIPS U.S. bonds TIPS Intl stocks Intl stocks Intl bonds EM bonds REITs Commodities EM stocks Commodities REITs Commodities EM stocks
    12. How Putnam manages absolute return 4 Experienced management 5 Shareholder- friendly fee structure 3 Ultimate flexibility 2 Progressive risk management 1 Wide range of global securities
    13. Four absolute return choices with innovative return targets Each fund seeks to earn a positive total return that exceeds the rate of inflation by a targeted amount over a reasonable period of time regardless of market conditions. For illustrative purposes only. Does not represent actual holdings or strategies of any Putnam fund or product. There can be no assurance that a fund will meet its objective. The funds are not intended to outperform stocks and bonds during strong market rallies. +3% Putnam Absolute Return 300 Fund +5% Putnam Absolute Return 500 Fund +7% Putnam Absolute Return 700 Fund Target return above T-bills Each fund seeks to outperform inflation as measured by Treasury bills +1% Putnam Absolute Return 100 Fund
    14. For all kinds of investors Each fund seeks to earn a positive total return that exceeds the rate of inflation by a targeted amount over a reasonable period of time regardless of market conditions. For illustrative purposes only. Does not represent actual holdings or strategies of any Putnam fund or product. There can be no assurance that a fund will meet its objective. The funds are not intended to outperform stocks and bonds during strong market rallies. Bond funds Putnam Absolute Return 300 Fund Balanced funds Putnam Absolute Return 500 Fund Stock funds Putnam Absolute Return 700 Fund Alternative to Each fund can fit in a portfolio of traditional funds Short-term securities Putnam Absolute Return 100 Fund
    15. Managed by experienced teams
      • Fixed Income Group
      • 7 portfolio managers
      • Avg. 20 years of experience
      • Absolute return strategies since 1999
      • Asset Allocation Group
      • 5 portfolio managers
      • Avg. 18 years of experience
      • Absolute return strategies since 2006
    16. Managers are paid to beat targets
      • Aligns interests of fund managers and shareholders
      Source: Putnam. Class A shares include a maximum initial sales charge of 3.25% for the 100 and 300 Funds, and 5.75% for the 500 and 700 Funds. A 1% redemption fee may apply to any shares redeemed or exchanged within seven days of purchase. Fees increase when the fund’s actual return is above target. Fees decrease when the fund’s actual return is below target.
    17. Ahead of targets in a volatile 2009 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 a loss when you sell your shares. The class A share performance shown assumes reinvestment of distributions and does not account for taxes. After-sales-charge returns reflect a maximum load of 5.75% for Putnam Absolute Return 500 Fund and 700 Fund and 3.25% for Putnam Absolute Return 100 Fund and 300 Fund. “What you pay” reflects Putnam Management’s decision to contractually limit expenses through 10/31/2010. A 1% short-term trading fee may apply. To obtain the most recent month-end performance, visit putnam.com. Indexes are unmanaged and used as a broad measure of market performance. It is not possible to invest in them. The Merrill Lynch U.S. Treasury Bill Index is an unmanaged index that tracks the performance of U.S. dollar denominated U.S. Treasury bills publicly issued in the U.S. domestic market. Qualifying securities must have a remaining term of at least one month to final maturity and a minimum amount outstanding of $1 billion. To obtain the most recent month-end performance, visit putnam.com. You cannot invest directly in an index. Cumulative total return performance as of 9/30/09 Class A shares (inception 12/23/08) 1.65 2.07 4.62 11.00 Absolute Return 700 Fund 0.26 Merrill Lynch U.S. Treasury Bill Index 1.50 1.92 1.41 7.60 Absolute Return 500 Fund 1.35 1.82 2.05 5.52 Absolute Return 300 Fund 1.25% 1.66% -0.66% 2.72% Absolute Return 100 Fund What you pay Total expense ratio After sales charge Before sales charge
    18. An innovation for today’s investors
      • Talk with your financial advisor to set your goals
      • Review your portfolio and risk profile
      • Add Putnam Absolute Return Funds to diversify a portfolio of traditional funds
      • Putnam Absolute Return Funds have exceeded their target returns with low volatility in 2009
    19. Absolutely for all kinds of investors. An alternative to stock funds An alternative to balanced funds An alternative to bond funds An alternative to short-term securities Putnam Absolute Return 700 Fund Putnam Absolute Return 500 Fund Putnam Absolute Return 300 Fund Putnam Absolute Return 100 Fund
    20. Printed on 11/23/09 Consider these risks: For all funds: Asset allocation decisions may not always be correct and may adversely affect fund performance. The use of leverage through derivatives may magnify this risk. Leverage and derivatives carry other risks that may result in losses, including the effects of unexpected market shifts and/or the potential illiquidity of certain derivatives. International investments carry risks of volatile currencies, economies, and governments, and emerging-market securities can be illiquid. Bonds are affected by changes in interest rates, credit conditions, and inflation. As interest rates rise, prices of bonds fall. Long-term bonds are more sensitive to interest-rate risk than short-term bonds, while lower-rated bonds may offer higher yields in return for more risk. Unlike bonds, bond funds have ongoing fees and expenses. For the 500 Fund and the 700 Fund , these risks also apply: Stocks of small and/or midsize companies increase the risk of greater price fluctuations. REITs involve the risks of real estate investing, including declining property values. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. Additional risks are listed in the funds’ prospectus. Investors should carefully consider the investment objective, risks, charges, and expenses of a fund before investing. For a prospectus containing this and other information for any Putnam fund or product, call your financial advisor or contact Putnam at 1-800-225-1581. Investors should read the prospectus carefully before investing. Putnam Retail Management putnam.com
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