Putnam International Value Fund Q&A Q3 2012
Content
Q3 | 2012 » Putnam International Value Fund Q&A
After a slow start, value investing returns in third quarter
Darren A. Jaroch, CFA Portfolio Manager
Portfolio management team
Darren Jaroch leads a team of veteran investors responsible for day-to-day management of the fund.
Key takeaways •The fund outperformed its benchmark during the third quarter, based on stock selection and underweights to the peripheral countries in the eurozone. •After a challenging start, value stocks began to outperform growth stocks toward quarter-end. •Markets were buoyed by bold action by the European Central Bank during the quarter to stabilize the eurozone crisis, but the focus has turned to weakening economic and corporate fundamentals. Despite ongoing global macroeconomic challenges, the third quarter was positive for equities. How did Putnam International Value Fund perform in this environment? More clarity emerged around Europe’s sovereign debt crisis during the quarter, with some significant moves by policymakers in the 17-nation eurozone. As a result, investors grew more comfortable with riskier assets. In early summer, Mario Draghi, president of the European Central Bank [ECB], announced that the ECB would “do whatever it takes” to save the euro. Mr. Draghi’s pledge was realized in early September when the ECB announced its unlimited bondbuying program known as the “European Stability Mechanism” [ESM]. This was followed by a German court approval of the ESM, which demonstrated Germany’s intent to support the bond-buying program. In addition, the U.S. Federal Reserve in mid-September announced a third round of quantitative easing, dubbed “QE3,” to drive interest rates lower and generate lending and consumption. The Fed also pledged to keep interest rates low into 2015. In this environment, the fund outperformed its benchmark, the MSCI EAFE Value Index, and the average return of its Lipper peers.
Karan S. Sodhi, CFA Assistant Portfolio Manager (industry since 1988)
PUTNAM INVESTM ENTS | putnam.com
Q3 2012 | After a slow start, value investing returns in third quarter
What contributed to the fund’s relative outperformance? We achieved outperformance mostly through individual stock picking. We employed a “barbell” strategy that combined a balance of pro-cyclical and defensive stocks. As for themes, the portfolio had significant exposure to European insurance companies, which are high-dividend-paying names. Within sector selection, what contributed most were consumer discretionary, health care, and basic materials. The weakest sector, not surprisingly, was financials. Our performance versus the benchmark also was driven by dramatic underweight positions to the so-called peripheral countries of the eurozone — Spain, Italy, Greece, Portugal, and Ireland — where the region’s ongoing sovereign debt issues were most severe. By contrast, the fund was overweight to the eurozone’s core and more fiscally stable countries — Germany and France — and this positioning also helped relative performance. We are overweight Canada, which has economic ties to the United States, but underweight Australia, whose economy is linked to struggling China. We were also underweight Japan and have sold down some of the portfolio’s emerging-market exposure due to weaker growth in China. What was the environment like for value investing? For the past three years, we have experienced a rally in growth stocks. What we witnessed in the third quarter was a resurgence of value investing. After a challenging start to the quarter, value stocks began to outperform growth stocks. I believe many undervalued stocks exist in Europe today, and to the extent that Europe improves, value stocks are poised for stronger returns in that region. Did you make any changes in fund strategy? We continued to focus on those companies with diversified business models and strong cash flows that can return value to shareholders in the form of dividends. The portfolio remains overweight defensive consumer-staples companies. We are underweight those companies whose profit growth is under pressure, focusing more on names with less downside risk.
2
We continue to have the discipline to sell stocks when they reach their valuation targets and then redeploy the cash into value names. The portfolio continues to use the “barbell” approach, with a decidedly pro-cyclical tilt coupled on the other end with more defensive positions. What is your outlook? From both a macroeconomic and corporate perspective, fundamentals seem to be ticking down for the worse. During the quarter, we did see solutions to the European problems that had the potential to cause economic calamity. The issue now is that investors are beginning to look at data, and concerns are emerging. Much of Europe is in recession and consumer demand and manufacturing data are slipping. German manufacturing data, particularly from automakers, is weakening. France is experiencing economic-growth problems. In the final week of the quarter, revised U.S. GDP figures for the second quarter came in much lower than expectations. China, meanwhile, continues to experience an economic and manufacturing slowdown. Fundamentals seem to be ticking down for the worse. However, for value investing this environment provides opportunities. I believe that given the markets’ rally in the third quarter, there is today significantly more susceptibility to negative macroeconomic news. As a result, I am slightly more cautious about the short-term prospects. Stocks are discounting a better environment than we appear to be getting. We have witnessed a strong rally in equities in many markets around the world year to date. Earnings estimates going into next year, for example, are too high, in my opinion, and will likely be reset to the downside. I believe that as we enter into 2013, with the presidential elections in the United States behind us, we will start to experience the clarity that the market wants. Once that happens, I believe it will be a healthier environment for stocks.
Q3 2012 | After a slow start, value investing returns in third quarter
Putnam International Value Fund (PNGAX)
Annualized total return performance as of September 30, 2012 Class A shares (inception 8/1/96)
Last quarter 1 year 3 years 5 years 10 years Life of fund Total expense ratio: 1.37%
Before sales charge
8.20% 19.13 2.22 -7.35 7.04 5.41
After sales charge
1.99% 12.28 0.22 -8.44 6.40 5.02
MSCI EAFE Value Index (ND)
7.46% 12.59 -0.11 -6.33 8.49 5.00
Quarterly returns are cumulative. 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. Performance of class A shares assumes reinvestment of distributions and does not account for taxes. After sales charge returns reflect a maximum 5.75% sales load. For a portion of the periods, the fund had expense limitations, without which returns would have been lower. A short-term trading fee of 1% may apply to redemptions or exchanges from certain funds within the time period specified in the fund’s prospectus. To obtain the most recent month-end performance, visit putnam.com. The MSCI EAFE Value Index (ND) is an unmanaged index that measures the performance of equity securities representing the value style in countries within Europe, Australasia, and the Far East.
The views and opinions expressed are those of Darren A. Jaroch, CFA, Portfolio Manager, as of September 30, 2012. They are subject to change with market conditions and are not meant as investment advice. Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging-market securities, including illiquidity and volatility. The use of derivatives involves additional risks, such as the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. Value stocks may fail to rebound, and the market may not favor value style investing. These risks are generally greater for midsize companies. Request a prospectus or summary prospectus from your financial representative or by calling 1-800-225-1581. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
Putnam Retail Management | One Post Office Square | Boston, MA 02109 | putnam.com
EO169 276799 10/12
After a slow start, value investing returns in third quarter
Darren A. Jaroch, CFA Portfolio Manager
Portfolio management team
Darren Jaroch leads a team of veteran investors responsible for day-to-day management of the fund.
Key takeaways •The fund outperformed its benchmark during the third quarter, based on stock selection and underweights to the peripheral countries in the eurozone. •After a challenging start, value stocks began to outperform growth stocks toward quarter-end. •Markets were buoyed by bold action by the European Central Bank during the quarter to stabilize the eurozone crisis, but the focus has turned to weakening economic and corporate fundamentals. Despite ongoing global macroeconomic challenges, the third quarter was positive for equities. How did Putnam International Value Fund perform in this environment? More clarity emerged around Europe’s sovereign debt crisis during the quarter, with some significant moves by policymakers in the 17-nation eurozone. As a result, investors grew more comfortable with riskier assets. In early summer, Mario Draghi, president of the European Central Bank [ECB], announced that the ECB would “do whatever it takes” to save the euro. Mr. Draghi’s pledge was realized in early September when the ECB announced its unlimited bondbuying program known as the “European Stability Mechanism” [ESM]. This was followed by a German court approval of the ESM, which demonstrated Germany’s intent to support the bond-buying program. In addition, the U.S. Federal Reserve in mid-September announced a third round of quantitative easing, dubbed “QE3,” to drive interest rates lower and generate lending and consumption. The Fed also pledged to keep interest rates low into 2015. In this environment, the fund outperformed its benchmark, the MSCI EAFE Value Index, and the average return of its Lipper peers.
Karan S. Sodhi, CFA Assistant Portfolio Manager (industry since 1988)
PUTNAM INVESTM ENTS | putnam.com
Q3 2012 | After a slow start, value investing returns in third quarter
What contributed to the fund’s relative outperformance? We achieved outperformance mostly through individual stock picking. We employed a “barbell” strategy that combined a balance of pro-cyclical and defensive stocks. As for themes, the portfolio had significant exposure to European insurance companies, which are high-dividend-paying names. Within sector selection, what contributed most were consumer discretionary, health care, and basic materials. The weakest sector, not surprisingly, was financials. Our performance versus the benchmark also was driven by dramatic underweight positions to the so-called peripheral countries of the eurozone — Spain, Italy, Greece, Portugal, and Ireland — where the region’s ongoing sovereign debt issues were most severe. By contrast, the fund was overweight to the eurozone’s core and more fiscally stable countries — Germany and France — and this positioning also helped relative performance. We are overweight Canada, which has economic ties to the United States, but underweight Australia, whose economy is linked to struggling China. We were also underweight Japan and have sold down some of the portfolio’s emerging-market exposure due to weaker growth in China. What was the environment like for value investing? For the past three years, we have experienced a rally in growth stocks. What we witnessed in the third quarter was a resurgence of value investing. After a challenging start to the quarter, value stocks began to outperform growth stocks. I believe many undervalued stocks exist in Europe today, and to the extent that Europe improves, value stocks are poised for stronger returns in that region. Did you make any changes in fund strategy? We continued to focus on those companies with diversified business models and strong cash flows that can return value to shareholders in the form of dividends. The portfolio remains overweight defensive consumer-staples companies. We are underweight those companies whose profit growth is under pressure, focusing more on names with less downside risk.
2
We continue to have the discipline to sell stocks when they reach their valuation targets and then redeploy the cash into value names. The portfolio continues to use the “barbell” approach, with a decidedly pro-cyclical tilt coupled on the other end with more defensive positions. What is your outlook? From both a macroeconomic and corporate perspective, fundamentals seem to be ticking down for the worse. During the quarter, we did see solutions to the European problems that had the potential to cause economic calamity. The issue now is that investors are beginning to look at data, and concerns are emerging. Much of Europe is in recession and consumer demand and manufacturing data are slipping. German manufacturing data, particularly from automakers, is weakening. France is experiencing economic-growth problems. In the final week of the quarter, revised U.S. GDP figures for the second quarter came in much lower than expectations. China, meanwhile, continues to experience an economic and manufacturing slowdown. Fundamentals seem to be ticking down for the worse. However, for value investing this environment provides opportunities. I believe that given the markets’ rally in the third quarter, there is today significantly more susceptibility to negative macroeconomic news. As a result, I am slightly more cautious about the short-term prospects. Stocks are discounting a better environment than we appear to be getting. We have witnessed a strong rally in equities in many markets around the world year to date. Earnings estimates going into next year, for example, are too high, in my opinion, and will likely be reset to the downside. I believe that as we enter into 2013, with the presidential elections in the United States behind us, we will start to experience the clarity that the market wants. Once that happens, I believe it will be a healthier environment for stocks.
Q3 2012 | After a slow start, value investing returns in third quarter
Putnam International Value Fund (PNGAX)
Annualized total return performance as of September 30, 2012 Class A shares (inception 8/1/96)
Last quarter 1 year 3 years 5 years 10 years Life of fund Total expense ratio: 1.37%
Before sales charge
8.20% 19.13 2.22 -7.35 7.04 5.41
After sales charge
1.99% 12.28 0.22 -8.44 6.40 5.02
MSCI EAFE Value Index (ND)
7.46% 12.59 -0.11 -6.33 8.49 5.00
Quarterly returns are cumulative. 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. Performance of class A shares assumes reinvestment of distributions and does not account for taxes. After sales charge returns reflect a maximum 5.75% sales load. For a portion of the periods, the fund had expense limitations, without which returns would have been lower. A short-term trading fee of 1% may apply to redemptions or exchanges from certain funds within the time period specified in the fund’s prospectus. To obtain the most recent month-end performance, visit putnam.com. The MSCI EAFE Value Index (ND) is an unmanaged index that measures the performance of equity securities representing the value style in countries within Europe, Australasia, and the Far East.
The views and opinions expressed are those of Darren A. Jaroch, CFA, Portfolio Manager, as of September 30, 2012. They are subject to change with market conditions and are not meant as investment advice. Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging-market securities, including illiquidity and volatility. The use of derivatives involves additional risks, such as the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. Value stocks may fail to rebound, and the market may not favor value style investing. These risks are generally greater for midsize companies. Request a prospectus or summary prospectus from your financial representative or by calling 1-800-225-1581. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
Putnam Retail Management | One Post Office Square | Boston, MA 02109 | putnam.com
EO169 276799 10/12
