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Q3 | 2012Putnam Voyager Fund Q&A

Equities rebound despite lingering macroeconomic issues


Nick C. Thakore Co-Head of U.S. Equities, Portfolio Manager

The most interesting aspect of todays equity market is not the pace at which it has rebounded, but rather the opportunity set that remains.

Key takeaways When you look at historic patterns of earnings, growth rates, and valuation, cyclical stocks today have significant potential to rebound. Investors remain skeptical about the global economic recovery, and are worried about macroeconomic headwinds that could derail growth. It is understandable why investors have sought safety and yield, but in doing so they have left behind many healthy, growing companies with very attractive valuations. U.S. equity indexes reached multi-year highs in the third quarter. What is your perspective on this rally? When you consider all the macroeconomic worries that have plagued the market this year, it may seem surprising that the market had such a strong run. However, I believe the rally is rational for reasons I have outlined for the past several years. My view is based on three important measures: earnings, valuation, and sentiment. In terms of earnings, although the rate of growth has slowed recently, corporate earnings remain at all-time high levels. We are still seeing consensus estimates for S&P 500 companies to deliver roughly $100 per share for 2012. Valuation is another key element considering the S&Ps long-term average price-to-earnings ratio of over 15.5x, and todays low interest-rate and inflation environment, the current valuation appears reasonable. The third factor is sentiment. I believe the fuel for a powerful rally has been with us all along, but we needed to get investor confidence back. In the third quarter, we made some progress, and the market was able to climb a wall of worry as investors reacted favorably to a host of economic stimulus actions. The European Central Bank announced new measures to free up sovereign debt markets, and domestically, the Federal Reserve announced a third round of aggressive quantitative easing.

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Q32012| Equities rebound despite lingering macroeconomic issues

Cyclical stocks rebounded in the quarter, but their valuations are still quite low relative to defensive sectors. Do cyclicals still offer attractive opportunities? To me, the most interesting aspect of todays equity market is not the pace at which it has rebounded, but rather the opportunity set that remains. Investors continue to shun the types of stocks that, in my view, offer the greatest appreciation potential. Sentiment has been a key driver here. Despite the rally, investors are still skeptical about the global economic recovery. They are worried about macroeconomic headwinds that could derail growth. Concerns about the eurozone debt crisis continue, and although earnings remain at record levels, investors are preoccupied with their eventual downturn. For those investors confident enough to choose equities, they continue to favor high-dividend-yield and defensive stocks. As a result, these stocks have reached historic premiums and are more expensive than cyclical stocks by considerable amounts. It is understandable why investors have sought safety and yield, but in doing so they have left behind many healthy, growing companies with very attractive valuations. When you look at historic patterns of earnings, growth rates, and valuation, cyclical stocks today have significant potential to rebound. The fund outperformed for the quarter. Have you made any shifts in the positioning of the portfolio? The funds positioning has not changed materially, and I remain committed to my approach, which seeks a combination of above-average growth potential and attractive valuations. I strive to construct a portfolio with higher forward growth rates for earnings and cash flow than those of the Russell 1000 Growth Index, but to do so without paying up for that growth. Despite not having been rewarded for this approach recently, I believe this remains an effective strategy, particularly in light of the dramatic valuation gap were still seeing in U.S. equities today.

From the beginning of 2011 through consensus forecasts for 2012, cyclical companies are growing earnings by well over 20%, while defensive companies are growing earnings in the mid-single-digits. Yet, since the start of 2011, defensive stocks have outperformed by about 14%. At the same time, valuations for cyclical stocks which I believed were already attractive in 2011 are even cheaper today. In fact, since the start of 2011, cyclicals have become cheaper than defensives by more than 40%. Which macroeconomic risks are you most concerned with? Are there new risks to consider? We are monitoring a number of risks. China, which had been an enormous driver of global growth, continues to struggle with a slowing economy. There have been some positive developments inflation has cooled and Chinas central bank has implemented stimulus measures. However, we have yet to see concrete evidence of improvement, and businesses continue to report slowing demand from China. In Europe, while much progress has been made, eurozone debt woes are likely to affect the markets for some time with fears and volatility escalating on occasion as policymakers work toward a solution. We are also keeping an eye on issues in the Middle East, which have the potential to escalate and become destabilizing to world markets. And in the United States, the fiscal cliff remains an unresolved issue, and at this point its difficult to determine what effect it will have. At best, it will cause some consternation; at worst if its not managed properly it could be very disruptive to markets. It is important to note, however, that this concern has already been priced into many stocks, which may lessen the impact for equity investors.

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Putnam Voyager Fund (PVOYX)


Annualized total return performance as of September 30, 2012 Class A shares (inception 4/1/69)
Last quarter 1 year 3 years 5 years 10 years Life of fund Total expense ratio: 1.17%

Before sales charge


6.32% 24.45 6.00 3.07 6.48 10.35

After sales charge


0.23% 17.28 3.94 1.86 5.85 10.20

Russell 1000 Growth Index


6.11% 29.19 14.73 3.24 8.41

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. To obtain the most recent month-end performance, visit putnam.com. The funds expense ratio is based on the most recent prospectus and is subject to change. Quarterly returns are cumulative. Recent performance may have benefited from one or more legal settlements. The Russell 1000 Growth Index is an unmanaged index of those companies in the large-cap Russell 1000 Index chosen for their growth orientation. You cannot invest directly in an index.

Q32012| Equities rebound despite lingering macroeconomic issues

The views and opinions expressed are those of Nick C. Thakore, Co-Head of U.S. Equities, Portfolio Manager, as of September 30, 2012. They are subject to change with market conditions and are not meant as investment advice. Consider these risks before investing: Investments in small and/or midsize companies increase the risk of greater price fluctuations. Growth stocks may be more susceptible to earnings disappointments, and the market may not favor growth-style investing. 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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