Docstoc

Investor Education Floating Rate Bank Loans

Document Sample
Investor Education Floating Rate Bank Loans Powered By Docstoc
					Floating rate bank loans for                                                                                   Investor Education


diversification
Putnam Floating Rate Income Fund can help reduce interest-rate
risk in an income-oriented portfolio.
What are floating rate loans?                                Why do loans have less interest-rate
Floating rate loans are debt obligations issued by banks     risk than bonds?
and other financial institutions that consist of loans       The biggest difference between bank loans and traditional,
made to companies. They are called “floating rate”           fixed-rate bonds involves how each reacts to interest-rate
securities because the interest rates on the loans adjust    changes. Bond prices move inversely to interest rates:
at regular intervals to reflect changes in short-term        When interest rates rise, bond prices fall, and when rates
interest rates as tracked by commonly accepted measures      fall, bond prices rise. With floating rate loans, the opposite
such as LIBOR (London Interbank Offered Rate). The           is true: Loan prices tend to move in the same direction as
companies that issue bank loans for financing generally      interest rates. That is because, when short-term interest
lack investment-grade credit ratings.                        rates rise, loans pay higher income, and investors are
                                                             usually willing to bid up their prices. In addition, rates and
Most floating rate loans are senior secured debt and rank
                                                             loan prices typically increase during periods of strong
above bonds and equities in a corporation’s capital struc-
                                                             economic growth, conditions that help to reduce the
ture. This means that the loans have a higher claim on the
                                                             perceived credit risk of bank loans.
company’s assets. Bank loans are considered secured debt
because the company pledges specific tangible assets,        With these characteristics, loans can help diversify a
such as property, equipment, or rights to inventories or     portfolio that favors traditional, fixed-rate bonds. Loans
receivables, as collateral for the loans. Should a company   can benefit from rising interest rates, which typically
enter bankruptcy, the assets can be sold.                    have an adverse impact on fixed-rate bonds.


 BANK LOANS RANK HIGH                                         BANK LOANS OFFER DIFFERENT RISKS THAN BONDS
 IN A COMPANY’S CAPITAL STRUCTURE
                                                                                           Interest- Credit    Liquidity Income
                      Highest priority                                                     rate risk risk      risk      potential
                    Senior Secured Debt                       Floating rate loans          Low       High*     Medium     Medium
                  Senior Unsecured Debt
                                                              High-yield bonds             Medium    High      Medium     High
                       Subordinated
                      Unsecured Debt                          Long-term investment-
                                                                                           High      Low       Low        Medium
                      Preferred Stock                         grade bonds

                         Common                               Money market securities Low            Low       Low        Low
                          Stock
                                                              CDs                          Low       Low       Medium     Medium

                      Lowest priority                        Source: Putnam Investments.
                                                             1While the underlying corporations generally are rated below investment
                                                             grade, a bank loan holder’s claim to company assets is generally the
                                                             highest in the capital structure.
How are floating rate funds different from                       ANNUALIZED TOTAL RETURN PERFORMANCE
money market funds?                                              as of December 31, 2011

Bank loans, like other short-term securities, are influenced    Class A shares                  Before sales           After sales
                                                                inception 8/4/04                charge                 charge
by short-term interest rates, but loans should not be
                                                                 1 year                           1.45%                 0.36%
confused with money market securities, certificates of
deposit (CDs), or other short-term instruments. The              3 years                         15.96                 15.59
prices of bank loans — and mutual funds that invest in
                                                                 5 years                          2.21                  2.01
them — may not be stable, because they can fluctuate
as their interest rates reset periodically, when the market      Life of fund                     3.01                  2.86
perceives changes in credit and default risk, and due to         Total expense ratio: 1.04%
market technicals.
                                                               Current performance may be lower or higher than the quoted past
Floating rate loan funds are not money market funds,           performance, which cannot guarantee future results. Share price, prin-
                                                               cipal value, and return will vary, and you may have a gain or a loss when
and they are not suitable substitutes for money market         you sell your shares. The class A share performance shown assumes
funds and CDs, which seek to provide stability of principal.   reinvestment of distributions and does not account for taxes. After-
                                                               sales-charge returns reflect a maximum load of 1.00%. For a portion of
Floating rate loan funds have no government guarantee.         the periods, the fund had expense limitations, without which returns
                                                               would have been lower. A short-term trading fee of 1% may apply to
Why Putnam Floating Rate Income Fund?                          redemptions or exchanges from certain funds within the time period
                                                               specified in the fund’s prospectus. To obtain the most recent month-end
Putnam Floating Rate Income Fund invests in bank loans
                                                               performance, visit putnam.com.
and gives investors an opportunity to diversify their
portfolios. The fund seeks high current income with
                                                               Consider these risks: Lower-rated bonds may offer higher
preservation of capital as a secondary goal. The fund can
                                                               yields in return for more risk. The use of derivatives involves
offer protection from interest-rate risk, because the yield    special risks and may result in losses. Funds that invest in
on floating rate bank loans adjusts with changes in short-     bonds are subject to certain risks including interest-rate risk,
term interest rates. Bank loans have historically performed    credit risk, and inflation risk. As interest rates rise, the prices
well amid rising interest rates because their yields adjust    of bonds fall. Long-term bonds are more exposed to interest-
higher and become more attractive. In many periods when        rate risk than short-term bonds. Unlike bonds, bond funds
                                                               have ongoing fees and expenses. To the extent the fund holds
interest-rate sensitive bonds and bond funds have lost
                                                               floating rate loans, interest-rate risk may be reduced but
value because of rising interest rates, floating rate loans
                                                               will not be eliminated. While floating rate loans are normally
have provided positive returns.                                secured by specific collateral or assets of the issuer (so that
Putnam Floating Rate Income Fund is actively managed           holders of the loan, such as the fund, will have a priority claim
                                                               on those assets in the event of default or bankruptcy of the
by experts in the sector. Portfolio Managers Paul Scanlon,
                                                               issuer), the value of collateral may be insufficient to meet the
Norman Boucher, and Robert Salvin each have more than          issuer’s obligations, and the fund’s access to collateral may be
25 years of investment experience. They lead fundamental       limited by bankruptcy or other insolvency laws.
credit research teams who analyze bank loans to select a       Diversification does not assure a profit or protect against loss.
portfolio diversified across industries.                       It is possible to lose money in a diversified portfolio.
Talk with your financial advisor about how Putnam              Investors should carefully consider the investment
Floating Rate Income Fund can play a role in a diversified     objectives, risks, charges, and expenses of a fund before
portfolio.                                                     investing. For a prospectus, or a summary prospectus if
                                                               available, containing this and other information for any
                                                               Putnam fund or product, call Putnam at 1-800-225-1581 and
                                                               ask for a prospectus. Please read the prospectus carefully
                                                               before investing.




                                                                                                                Putnam Retail Management
Putnam Investments | One Post Office Square | Boston, MA 02109 | putnam.com                                             II790 272036 2/12

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:2
posted:5/7/2012
language:
pages:2