Founded in 1937, George Putnam Fund of Boston/A (PGEOX) is one of the oldest mutual funds in the world, and possibly the very first balanced portfolio. Lead Manager Jeanne L. Mockard took over the $5.3-billion fund, one of Putnam's most conservative products, five years ago. She works with a team of equity and bond specialists, including Michael J. Abata, Kevin M. Cronin, Jeffrey L. Knight and Raman Srivastava, to construct a portfolio of large-cap value stocks and high-quality fixed-income securities that generate reasonable returns in bull markets, and protection against losses during down markets.
For the one-year period ended August 12, George Putnam Fund of Boston gained 12.5%, versus 17.7% for the S&P 500, and 13.8% for the average U.S. balanced fund. For the three-year period, the fund registered an average annualized return of 9.5%, versus 12.6% for the Index, and 10.1% gain for the peer group. However, for the longer five-year period, the fund has soundly beat the index and similar funds, rising 5.1%, versus 2.1% for its peers, and a loss of 2.0% for the benchmark. Volatility, as measured by standard deviation, comes in at 8.25%, a hair above the peer group's 8.13% average. The fund's 1.00% expense ratio matches that of the peer group.
George Putnam Fund of Boston essentially runs with three moving parts: The equity and bond portions are actively managed, while the management team determines the most attractive allocation between them. Using a proprietary quantitative model and fundamental research, the equity team looks for large-cap companies that are undervalued, and on the verge of significant price appreciation based on some identifiable catalyst. "We believe that well-established companies that pay regular dividends outperform the overall market over the long-term," she notes. The bond portion of the fund is run against the Lehman Aggregate Index, so it includes primarily high-quality, investment-grade corporate bonds, mortgage-backed securities and Treasuries. Typically, these securities have intermediate to long-term maturities.
Overall, The fund likes to maintain a 55%-65% allocation to stocks, and a 35%-45% stake in bonds. As of July 31, 2005, 59.7% of the fund's assets were invested in stocks; 25.7% in mortgage-backed securities; and 11.2% in corporate bonds & notes. Right now the fund is about 5% underweight in bonds, which is not surprising given The Fed's commitment to tightening credit. Within the bond exposure, Mockard is underweight in corporates. "This has helped us, given the historic downgrades of Ford Motor (F) and General Motors (GM).
As of July 31, 2005, the fund's top ten equity holdings were Exxon Mobil (XOM), Citigroup Inc. (C), Chevron Corp. (CVX), Bank of America (BAC), Pfizer Inc. (PFE), Altria Group (MO), U.S. Bancorp (USB), Tyco (TYC), Hewlett-Packard (HPQ) and IBM (IBM). These positions represented 17.6% of total assets. The top industry sectors as of that date: financials, 26.7%; energy, 12.7%; technology, 10.4%; healthcare, 10.2%; consumer cyclicals, 10.2%; consumer staples, 7.9%; utilities, 4.6%; and capital goods, 4.6%.
Financials represent a slight overweight position. Within that large and diverse category, the fund is underweight in banks, and overweighted in insurance companies. "Insurance stocks are less sensitive to interest rates, which are, of course, rising," she notes. "When the yield curve is flattening, and spreads are squeezed, you don't want to be invested in banks."
Mockard says insurance firms have enjoyed improved pricing starting over the last six-to-nine months, but their stock prices have continued to lag, making for a very attractive investment opportunity. The fund's insurance exposure includes such stocks of companies such as St. Paul Travelers Cos. (STA), Hartford Financial Services Group (HIG), and Chubb Corp. (CB).
Energy also represents an overweight, despite rising crude oil prices already accompanied by skyrocketing stock prices. However, as a value buyer, Mockard has moved away from aggressive names -- particularly stocks in the surging exploration & production sector -- and into integrated oil companies, which are trading at much cheaper prices. "We are still using a value strategy within the energy sector," she explained. "For example, Chevron has lagged the market, and its energy peers, because it is a little less sensitive to commodity prices, possessing both upstream and downstream operations, including, refining, marketing, transportation, and the petrochemicals business.
Chevron, which recently completed a massive $18.3-billion merger with Unocal last week, has seen its stock rise about 18% year-to-date. The stock's P/E is at a very modest 9.3.
Mockard currently has a slight overweight in drugs stocks. "Broadly speaking, the drug sector has gone through a transition from growth to value," she says. "They have had to reinvent themselves. Some pharma companies are talking about cutting their salesforces. They are focusing more than ever on the bottom line as they have to compete more with generic drug companies, and the reimportation of cheap drugs from Canada. We wanted a significant allocation in health care because of the attractive valuations we found there."
Mockard's most prominent drug holding is pharma giant Pfizer, which endured a severe price decline after reports of medical risks related to its arthritis drug Celebrex. "But Pfizer kept the product on the market, and its remaining drug pipeline looks very promising," Mockard says.
Although she invests almost exclusively in domestic stocks, Mockard has a keen eye on China, a country whose booming economy, she feels, will have a great impact on the future performance of U.S. companies. She places heavy emphasis on meeting with company managements, and recently visited China, where increasing numbers of U.S. corporations are setting up shop.
While Mockard has no plans to invest in Chinese stocks, she believes the growing importance of China to the global economy cannot be ignored, particularly with respect to energy. "As a net importer of oil, China has a great impact on global oil prices," she says. Global oil players like Exxon Mobil and Chevron will depend more on Chinese demand to drive future growth.
But it's not only energy that will feel the effect. "China is also buying steel and other commodities, affecting their prices," she says. "In fact, there are very few sectors of the U.S. economy that aren't looking at China to expand its business."Contact Bob Keane with questions or comments at: firstname.lastname@example.org.