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Mortgage Securities Semi-Annual Report

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Mortgage Securities Semi-Annual Report Putnam Mortgage Securities Fund Semiannual report 3 | 31 | 21 Income funds invest in bonds and other securities with the goal of providing a steady stream of income over time. FUND SYMBOL CLASS A PGSIX Putnam Mortgage Securities Fund Semiannual report 3 | 31 | 21 Message from the Trustees 1 Interview with your fund’s portfolio manager 4 Your fund’s performance 9 Your fund’s expenses 12 Consider these risks before investing 14 Terms and definitions 15 Other information for shareholders 17 Financial statements 18 Message from the Trustees May 7, 2021 Dear Fellow Shareholder: As society continues to grapple with the Covid-19 pandemic, optimism remains tempered by concern about newer, more aggressive strains of the virus. After infection rates dropped early in the year, they began to rise again in some areas during March. At the same time, the pace of vaccinations accelerated, and several states eased restrictions on consumer activity. Markets appear to expect an improving economy. The S&P 500 Index crossed the 4,000 threshold as the calendar turned to April. In addition, yields rose in the bond market. This is typically a sign that fixed-income investors anticipate both higher gross domestic product (GDP) growth and the risk of inflation. No matter how markets move, Putnam’s portfolio managers and analysts keep their focus on researching new opportunities and potential risks. This active approach is intended to serve you through changing conditions. As always, thank you for investing with Putnam. Respectfully yours, Robert L. Reynolds Kenneth R. Leibler President and Chief Executive Officer Chair, Board of Trustees Putnam Investments Performance history as of 3/31/21 Annualized total return (%) comparison The fund — class A shares Fund’s primary Fund’s secondary Fund’s Lipper before sales charge benchmark benchmark peer group average‡ Putnam Mortgage Bloomberg Barclays Bloomberg Barclays GNMA- U.S. Mortgage Funds Securities Fund (PGSIX) U.S. MBS Index† Bloomberg Barclays U.S. MBS Linked Benchmark*† 10.85 6.85 6.83 6.33 5.98 5.81 4.65 4.20 3.75 3.79 3.75 2.83 2.81 2.92 2.89 2.49 2.43 2.34 2.68 0.51 LIFE OF FUND 10 YEARS 5 YEARS 3 YEARS 1 YEAR 6 MONTHS§ (since 2/8/84) –0.09–0.09 –0.86–0.86 Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will fluctuate, and you may have a gain or a loss when you sell your shares. Performance of class A shares assumes reinvestment of distributions and does not account for taxes. Fund returns in the bar chart do not reflect a sales charge of 4.00%; had they, returns would have been lower. See below and pages 9–11 for additional performance information. For a portion of the periods, the fund had expense limitations, without which returns would have been lower. To obtain the most recent month-end performance, visit putnam.com. Before April 19, 2018, the fund was managed with a materially different investment strategy and may have achieved materially different performance results under its current investment strategy from that shown for periods before this date. * The Bloomberg Barclays GNMA-Bloomberg Barclays U.S. MBS Linked Benchmark represents performance of the Bloomberg Barclays GNMA Index from inception date of the fund, February 8, 1984, through April 18, 2018, and performance of the Bloomberg Barclays U.S. MBS Index from April 19, 2018 and thereafter. † Source: Bloomberg Index Services Limited. ‡ Source: Lipper, a Refinitiv company. § Returns for the six-month period are not annualized, but cumulative. 2 Mortgage Securities Fund Performance history as of 3/31/21 Annualized total return (%) comparison Recent broad market index and fund performance The fund — class A shares Fund’s primary Fund’s secondary Fund’s Lipper ‡ U.S. stocks before sales charge benchmark benchmark peer group average (S&P 500 Index) 19.07% Putnam Mortgage Bloomberg Barclays Bloomberg Barclays GNMA- U.S. Mortgage Funds Securities Fund (PGSIX) U.S. MBS Index† Bloomberg Barclays U.S. MBS Linked Benchmark*† Putnam Mortgage Securities Fund (class A shares before sales charge) 6.33% 10.85 Cash (ICE BofA U.S. 3-Month Treasury Bill Index) 0.06% 6.85 6.83 6.33 Fund’s primary benchmark 5.98 5.81 (Bloomberg Barclays U.S. MBS Index)* –0.86% 4.65 4.20 3.75 3.79 3.75 Fund’s secondary benchmark 2.83 2.81 2.92 2.89 2.49 2.43 2.34 2.68 (Bloomberg Barclays GNMA-Bloomberg Barclays –0.86% U.S. MBS Linked Benchmark)* 0.51 U.S. bonds LIFE OF FUND 10 YEARS 5 YEARS 3 YEARS 1 YEAR 6 MONTHS§ (Bloomberg Barclays U.S. Aggregate Bond Index)* –2.73% (since 2/8/84) –0.09–0.09 –0.86–0.86 This comparison shows your fund’s performance in the context of broad market indexes for the six months ended Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. 3/31/21. See above and pages 9–11 for additional fund performance information. Index descriptions can be found Share price, principal value, and return will fluctuate, and you may have a gain or a loss when you sell your shares. on pages 16–17. Performance of class A shares assumes reinvestment of distributions and does not account for taxes. Fund returns in the * Source: Bloomberg Index Services Limited. bar chart do not reflect a sales charge of 4.00%; had they, returns would have been lower. See below and pages 9–11 for additional performance information. For a portion of the periods, the fund had expense limitations, without which returns would have been lower. To obtain the most recent month-end performance, visit putnam.com. Before April 19, 2018, the fund was managed with a materially different investment strategy and may have achieved materially different performance results under its current investment strategy from that shown for periods before this date. * The Bloomberg Barclays GNMA-Bloomberg Barclays U.S. MBS Linked Benchmark represents performance of the Bloomberg Barclays GNMA Index from inception date of the fund, February 8, 1984, through April 18, 2018, and performance of the Bloomberg Barclays U.S. MBS Index from April 19, 2018 and thereafter. † Source: Bloomberg Index Services Limited. ‡ Source: Lipper, a Refinitiv company. § Returns for the six-month period are not annualized, but cumulative. Mortgage Securities Fund 3 Interview with your fund’s portfolio manager Interview with your fund’s portfolio manager Mike Salm discusses the investing environment and strategies driving fund performance for the six-months ended March 31, 2021, as well as his outlook for the fund. What was the market environment like during the reporting period? For much of the period, the environment was generally favorable for mortgage credit and other risk assets. Encouraging vaccine news and fiscal stimulus, including President Michael V. Salm Portfolio Manager Biden’s $1.9 trillion package, bolstered investor optimism about the strength of the economic Mike is Co-Chief Investment Officer, recovery in 2021. Against this backdrop, rising Fixed Income. He has a B.S. from Cornell prices for stocks and commodities also helped University. Mike joined Putnam in 1997 and has been in the investment lift the overall market environment. industry since 1989. Credit performed well, with yield spreads tight- Jatin Misra, Ph.D., CFA, and ening across the spectrum. [Spreads are the Brett S. Kozlowski, CFA, are also yield advantage credit-sensitive bonds offer Portfolio Managers of the fund. over comparable-maturity U.S. Treasuries.] However, concerns about the potential infla- tionary impact of additional stimulus on top of an already-recovering economy led to an exodus from government bonds in February and March. This drove longer-term interest rates higher and placed a degree of pressure on the credit market. After beginning the period at 0.68%, the yield on the benchmark 10-year U.S. Treasury note reached 1.74% by March 31. Similarly, the 30-year Treasury rose from 1.45% to 2.41%. 4 Mortgage Securities Fund Sector weightings CASH INVESTMENTS NON-CASH INVESTMENTS TOTAL PORTFOLIO Agency pass-through 8.7% 41.2% 49.9% Commercial MBS 19.8% 25.3% 45.1% Agency CMO 39.7% 0.6% 40.3% Non-agency residential MBS 20.9% 0.0% 20.9% Asset-backed securities 5.4% 0.0% 5.4% Cash and net other assets 5.5% 0.0% 5.5% Allocations are shown as a percentage of the fund’s net assets as of 3/31/21. Cash and net other assets, if any, represent the market value weights of cash, derivatives, short-term securities, and other unclassified assets in the portfolio. Summary information may differ from the portfolio schedule included in the financial statements due to the inclusion of derivative securities, any interest accruals, the use of different classifications of securities for presentation purposes, and rounding. Allocations may not total 100% because the table includes the notional value (non-cash investments) of certain derivatives (the economic value for purposes of calculating periodic payment obligations), including to-be-announced (TBA) commitments, if any, in addition to the market value of securities. Holdings and allocations may vary over time. Credit quality overview A-1+ 16.6% AAA 85.9% AA 6.1% A 4.0% BBB 12.7% BB 4.8% B 4.4% CCC and below 2.0% Not rated –36.5% Credit qualities are shown as a percentage of the fund’s net assets as of 3/31/21.
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