Putnam Equity Income Fund Q4 | 2015
Research is critical amid uncertainty
and earnings challenges
Darren A. Jaroch, CFA | Portfolio Manager
Key takeaways
•A lack of earnings growth, combined with relatively high valuations, are the biggest
challenges for equity investors today.
Walter D. Scully, CPA
Assistant Portfolio Manager
(industry since 1996)
•For world stock markets, a dominant theme as we head into 2016 will be divergent
monetary policies.
•We must avoid focusing too much on what has happened historically in U.S. interest-rate
hike cycles. Today, we are truly in unfounded territory.
In your view, what are the biggest risks for U.S. equities as we head
into 2016?
Equity markets around the world are faced with an array of macroeconomic risks.
Investor worries continue to escalate over slowing growth in China, which is a carefully
watched market and a significant global consumer. At the same time, oil price volatility
remains a critical challenge for financial markets and businesses. After plunging rapidly
in 2014, oil prices remained volatile in 2015, declining to a six-year low last summer. And
just after the close of the year, in early January, oil prices hit an 11-year low.
As a value investor and portfolio manager, however, I am more focused on stockspecific risks such as valuation and earnings. I believe equities are generally expensive
today, trading at historically high valuations. This makes it challenging to find opportunities, particularly with a value-style investing approach. Another risk facing equities
relates to earnings growth. Profits for S&P 500 companies declined year-over-year in
the second and third quarters of 2015. This lack of earnings growth, combined with relatively high valuations, are the biggest challenges for equity investors today, in my view.
Another macroeconomic issue has been uncertainty about interest
rates and monetary policies. What is your perspective on this?
For world stock markets, I believe a dominant theme as we head into 2016 will be
divergent monetary policies. Until recently, most regions were working to stimulate
their economies and bring liquidity into their systems. Now, however, regions are
beginning to move in different directions. The United States has clearly moved toward
tightening; the Federal Reserve’s long-anticipated move came in December, when
it raised short-term rates by 0.25%, the first such increase in almost a decade. While
the U.S. Fed is tightening, governments in Europe and Japan have become more
aggressive in their easing policies. This divergence could lead to some disruption,
particularly in the context of currencies, across global financial markets.
PUTNAM I NVESTM ENTS | putnam.com
Q4 201 5 | Research is critical amid uncertainty and earnings challenges
In the United States, I believe we must avoid focusing
too much on what has happened historically in interestrate hike cycles. Today, we are truly in unfounded
territory. The Fed has left a zero-interest-rate policy in
place for a number of years, and there is really no precedent for this. I expect we will see more volatility in the
equity markets as we adjust to this new paradigm of
normalization from the Fed.
Putnam Equity Income Fund (PEYAX)
Annualized total return performance as of
December 31, 2015
Class A shares
(inception 6/15/77)
Last quarter
1 year
Stocks in the energy and basic materials
sectors appear to be quite inexpensive. Are
you finding opportunities here?
Certainly, based on generic measures of valuation,
whether earnings multiples or cash-flow multiples, the
energy and basic materials sectors look extraordinarily
cheap. However, we remain cautious about the fundamentals of the commodities themselves, particularly the
supply-demand dynamics of oil, copper, and iron ore.
We don’t anticipate improvement in demand fundamentals for several more quarters. Therefore, while
the valuations are attractive, we are proceeding with
caution in these areas.
Value stocks, which are the focus of your
fund, underperformed growth stocks in 2015.
What are your thoughts on this, and might
this trend continue?
Yes, value stocks underperformed growth by a considerable margin in 2015. The Russell 1000 Value Index
declined 3.83% for the year, while the Russell 1000
Growth Index gained 5.67%. This has been a challenge,
but it is important to take a closer look at the lack of
breadth in the growth equity space. Throughout 2015,
and particularly over the past six months, we saw a
small number of growth stocks driving the vast majority
of equity performance. Because such a narrow group of
stocks is involved, I don’t believe it can signal a trend for
growth or value performance in the year ahead.
Before
sales
charge
4.03%
–3.18
Russell
1000
Value
Index
After
sales
charge
–1.96%
5.64%
–8.75
–3.83
3 years
12.74
10.54
13.08
5 years
11.66
10.34
11.27
7.72
7.08
6.16
10.08
9.91
—
10 years
Life of fund
Total expense ratio: 0.98%
Returns for periods of less than one year are not
annualized.
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 before
sales charge assumes reinvestment of distributions and
does not account for taxes. After-sales-charge returns
reflect a maximum 5.75% load. The fund’s expense
ratio is based on the most recent prospectus and is
subject to change. To obtain the most recent month-end
performance, visit putnam.com.
The Russell 1000 Value Index is an unmanaged index
of those companies in the large-cap Russell 1000 Index
chosen for their value orientation. You cannot invest
directly in an index.
There are no guarantees that a company will continue
to pay dividends.
The views and opinions expressed are those of Darren A. Jaroch, Portfolio Manager, as of December 31, 2015.
They are subject to change with market conditions and are not meant as investment advice.
Consider these risks before investing: Value stocks may fail to rebound, and the market may not favor value-style
investing. Income provided by the fund may be reduced by changes in the dividend policies of, and the capital resources
available at, the companies in which the fund invests. Stock prices may fall or fail to rise over time for several reasons,
including general financial market conditions and factors related to a specific issuer or industry. You can lose money by
investing in the fund.
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.
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