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).
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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.