A: Currently, our portfolio has about 80 stocks, but typically, we have plus or minus 100. As for asset allocation, our fund portfolio exhibits sector weights that are similar to those of the benchmark. This is because, stock selection is vital to our success and sector weights depends on what stocks are ultimately included in the portfolio. Currently, the financial sector, at 26%, has the highest allocation followed by 14% in industrial materials, 13% in health, 12% in energy, 10% in consumer goods. At 2%, media and utilities sectors have the least weight.

Q:  Can you give some examples of holdings that vindicate your stock selection decisions and improving the fund’s performance?

A: Examples abound in energy sector stocks, including U.S. companies Marathon Oil and Valero Energy, and Canada’s Canadian Natural Resources that delivered good results. Strong oil prices helped these stocks to outperform the benchmark.

However, we have since sold our Canadian Natural Resources holding as it reached our fair value target. Nippon Mining Holdings of Japan, another of our energy holdings, has benefited from rising prices of oil and copper due to strong demand from China.

The basic materials sector benefited from the high prices of both precious and base metals. An example is Arcelor, a Luxembourg- based steel company. A takeover bid by steel giant Netherlands-based Mittal sharply boosted Arcelor. We then sold our holdings in Arcelor at a good profit when it reached our target price. On the U.S. side of this sector, Nucor, a steel manufacturer, and Phelps Dodge, a mining company, also achieved healthy gains.

Q:  You are a global fund. Do you engage in active currency hedging?

A: Yes. We have a currency specialist team within Putnam. Their job is to make calls on currencies around the world. In this portfolio, first they hedge back our currency exposures from our portfolio back to the benchmark, and then they’re given a small risk budget to make active currency bets within the portfolio as well. For example, they may have a 0.50% tracking error, a risk budget, and that’s relative to 3.50% to 4.00% tracking error in the portfolio. Currency has added value on a pretty consistent basis over time but it will not outweigh the influence of individual stock picking in our performance.

Q:  What is your view on risk and how do you manage it?

A: Our expertise at Putnam is in stock selections. When we put together portfolios against global benchmarks, typically, 70% to 80% of our active risk tracking error will come from our stock selection. The rest of it will come from very modest contributions from country and sector selections and also from company sizes and investment styles. Therefore, we believe, where many managers fail is in constructing their portfolios without a rigorous disciplined approach. Consequently, they take unintended bets that may affect return. We, however, are much more disciplined and focus on our in-depth stock selection process. Since both fundamental and quantitative analysis provide insights into potential future returns, we blend insights from both to improve our chances of successful stock selection and portfolio construction.