Dynamic Risk Asset Allocation: Annual Report - Putnam Investments

In this shifting environment, where did youseek positive returns?During the period, the fund maintained atactical benchmark-relative overweightto equities, with a bias toward U.S. stocksover international developed and emergingmarkets, in order to take advantage of themore favorable economic trends in theUnited States. Within fixed income, the fundwas positioned to be underweight to ratesensitiveU.S. fixed income in favor of morecredit-sensitive instruments such as highyieldbonds. Given low levels of inflation, thefund was also underweight to commodities,real estate investment trusts [REITs], andTreasury Inflation-Protected Securities [TIPS].The large-cap U.S. equity overweightboosted returns on an absolute basis. A smalloverweight to U.S. small-cap stocks alsobenefited the fund, as U.S. equities performedrelatively well across market capitalizations.One notable allocation detractor waslower-than-benchmark leverage, which hurtperformance given generally positive returnsacross asset classes.When the investing environment began togrow more turbulent in the beginning of 2014,we kept an eye on it. We maintained the slightlyaltered allocation strategy we had establishedin the final quarter of 2013, when wereduced the portfolio’s overweight to equities,taking advantage of the run-up in stocks.We also pared the portfolio’s exposure tocommodities on worries about slack demand,although current commodity positioning isrelatively neutral. In addition, we narrowed ourunderweight to interest-rate-sensitive fixedincomeassets, creating a more neutral overallpositioning relative to the fund’s benchmark.Corporate earnings remained exceptionallystrong throughout the period. Do youbelieve earnings will continue to growgoing forward?The strength of corporate earnings has beensomewhat of an underappreciated fact ofthis market. We have seen record corporateearnings, but most of it is a result of sustainedcost-cutting and efficiencies and not as muchdue to top-line, or revenue, growth. RevenueRisk allocationsEquity 48.7%Credit 30.9Inflation 19.3Interest rate 1.1Allocations are shown as a percentage of the fund’s net assets as of 5/31/14. Risk contributionis from Putnam research, which uses the historical standard deviation for the respective assetclasses multiplied by the appropriate asset weight. Holdings and allocations may vary over time.8 Dynamic Risk Allocation Fund