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Pace University Finance 351 Portfolio

Matt Tyburski

Table of Contents: Overview: Spring 2011 The Semester of Market Risk Section 1. Information on portfolio Section 1.1. Portfolio Allocation Section 1.2. Portfolio Distribution: Section 1.3. Portfolio Style Section 1.4. Portfolio performance Section 2: Securities discussed in this paper Section 2.1. Pfizer Section 2.1.1 Background Section 2.1.2 The Pharmaceuticals Industry Section 2.1.3. Past Performance of Pfizer Section 2.1.4. News during 2011 spring semester Section 2.1.5 Pfizers pipeline Section 2.1.6 Pfizers spring 2011 performance Section 2.1.7. Who should own Pfizer and why Section 2.2. PHIGX Section 2.2.1. Background Section 2.2.2 Background of junk bonds Section 2.2.3. PHIGX style and holdings Section 2.2.4. PHIGX vs. Benchmark and Industry Section 2.2.5. PHIGX past performance Section 2.2.6. Spring 2011 News Section 2.2.7. PHIGX performance Section 2.2.8. Who should own PHIGX and why? Section 3. Concluding statements

Overview: Spring 2011 The Semester of Market Risk Throughout the spring 2011 semester, there have been numerous events that have affected EPS despite bullish earnings. These events have significantly affected the securities in the Finance 351 portfolio, making it quite difficult to predict future performance. The specific events that have affected the portfolio are the Middle East and North African revolutions, the tsunami and earthquake in Japan, European fiscal deterioration, and commodity inflation. Middle East and North African revolutions greatly increase market risk because there is an abundance of oil in those areas. If these areas were to blow up, there would be a shortage of supply in the market, which would drive up the price of oil. This lowers EPS for most companies, as many companies use oil for production and transportation. Investors are also very wary about this situation, which offsets companies bullish earnings. Specifically, the airline industry has been affected by this crisis, as fuel is one of their main costs. For example, American Airlines lost $436 million in the first quarter of 2011, despite revenue rising 9.2%. This caused EPS to go down 1.31, which is directly caused by the oil crisis. Even if employment numbers have improved over the past few months, the market risk causes investors to be extremely cautious. The tsunami and earthquake in Japan increases market risk because Japan plays such a major role in the economy, and companies such as Sony and Hitachi operate in the affected area. Just to show the impact of these disasters, Sonys stock was $35.00 on March 9, and dropped down to $29.88 on March 16. Additionally, it recovered after the tsunami and went up to $32.28, but then another earthquake caused the stock to slide back down to $29.71. This fluctuation was caused because these disasters impaired the infrastructure of Japan and caused factories to be inoperable. Additionally, Japanese power plants may explode at any moment, which adds additional risk to the situation. Lastly, Japanese companies are not the only corporations affected by these disasters, as many American firms have been affected because of the new idea of a global economy. For example, the S&P 500 dropped from 1305 to 1245 because of the earthquake. Since then, the market has recovered and is currently up to its previous level of 1300.In summation, an earthquake and tsunami and Japan will not only affect the EPS of Japanese companies, but companies all over the world. European fiscal deterioration has caused many problems in the EU countries, as Ireland and Greece needed to be bailed out. Additionally, many people suspect that Portugal will join that list very soon. This affects the international bond market, as the chance of default greatly increases with this fiscal deterioration. Since Greek and Portuguese bonds are riskier than other EU countries, there is a large gap between rates. For example, 10 year German bonds are currently yielding 3.28% and 10 year Greek bonds are yielding 14.48%. This is the largest spread in the history of the EU, and the way things are going, this gap is going to widen even more. Additionally, these bonds are being downgraded often, which means very large losses for investors. Lastly, this means that companies in these countries and the countries themselves are paying much more interest on their loans, which means costs are higher than previous years. This affects EPS of companies in these areas, which affects the global economy.

Commodity inflation also plays a big factor in increasing market risk. Commodity inflation increases the price of consumer goods, or the amount of profit and EPS a company makes. For example, if the price of corn goes up, then food prices will increase. This price increase occurs because corn is in over 90% of all food products. An increase in price may lead to a price war amongst competitors to see who can keep their margins the lowest in order to keep the price low. Additionally, commodity inflation will increase the demand for futures, as many companies want to lock in their costs. Furthermore, if a commodity such as oil goes up, then companies costs go up, causing them to take losses or raise prices. In either situation, the economy is affected, as EPS goes down if they decide to take a loss, and demand goes down if they raise prices. Lastly, if the price of gold goes up, this means that the value of the dollar will depreciate, which will affect the market as a whole. In this case, gold may be a better investment than equity, which will decrease the demand for equity and lower EPS and stock price. In summation, an increase in market risk has significantly affected EPS, even if earnings are fairly bullish. The events that have occurred have either impaired production, driven costs up, or increased the risk of the investment. With that being said, earnings of the securities in the Spring 2011 portfolio have been greatly affected by the events that have occurred, and would have done much better without these disasters. Section 1. Information on portfolio Section 1.1. Portfolio Allocation In the spring 2011 semester, the Finance 351 class was assigned a portfolio to track throughout the duration of the semester. The following is an overview of the portfolio: Common Stock Pfizer Apple Verizon Mutual Fund Putnam New Opportunities Putnam High Yield Trust Bonds US Treasury 5/15/39 General Electric 2/15/20 Options Joy Global July 90 Google June 550 Futures S&P 500 June Ticker Symbol PFE APPL VZ Ticker Symbol PNOPX PHIGX Ticker Symbol 912810QB7 36962G4J0 Ticker Symbol
JOYG110716C00090000 GOOG110421P00550000

Position Long Long Short Position Long Long

Size 1000 100 600 Size 600 3000

Purchase Price $18.47 $341.60 $35.79 Purchase Price $51.70 $7.84

Investment $18,470.00 $34,160.00 $21,474.00 Investment $31,020.00 $23,520.00

Position Size Long 20,000 Long 20,000

Purchase Price Investment 96.109% $19,221.80 106.64% $21,328.00

Position Size Long 15 Short 5

Purchase Price Investment $6.00 $9,000.00 $14.20 $7,100.00

Ticker Symbol June_2011_S_P_500

Position Size Purchase Price Investment Long $320,650 $1,282.60 $28,125.00

T-Bond June Total

June_2011_T_Bond

Short

$100,000

120.25%

$3,240.00 $216,658.80

Section 1.2. Portfolio Distribution:

Portfolio Distribution
Stocks Mutual Funds Bonds Options Futures

15% 7% 34%

19%

25%

Section 1.3. Portfolio style: Based on the securities we have selected, we have classified ourselves as very risk tolerant. This means that this portfolio is suitable for someone who does not mind taking the risk of losing their money. With that being said, this portfolio has the potential to have very high returns given the associated risk level.

The chart above shows what the risk reward trade off line would be like for our portfolio. There are few securities with low risk and return (Ex: Treasury bond), but an abundance of high risk and return securities (Options and Futures). Section 1.4: Portfolio performance The following chart shows the overall performance of the portfolio from 1/25/2011-5/6/2011 Common Stock Pfizer Apple Verizon Mutual Fund Putnam New Opportunities Putnam High Yield Trust Bonds US Treasury 5/15/39 General Electric 2/15/20 Options Joy Global July 90 Google June 550 Futures Ticker Symbol PFE APPL VZ Ticker Symbol PNOPX PHIGX Ticker Symbol 912810QB7 36962G4J0 Size 1000 100 600 Size 600 3000 Size 20,000 20,000 Purchase Price Selling Price $18.47 $20.55 $341.60 $346.66 $35.79 $37.28 Purchase Price Selling Price $51.70 $54.17 $7.84 Purchase Price 96.109% 106.64% $7.98 Selling Price 99.5% Profit $2,080.00 $506.00 $(894.00) Profit $1,482.00 $420.00 Profit $684.40

108.34% $339.20

Ticker Symbol
JOYG110716C00090000 GOOG110421P00550000

Size 15 5 Size

Purchase Price Selling Price $6.00 $5.80 $14.20 $22.45

Profit $(300.00) $4,125.00

Purchase Price Selling Profit Price $1,282.60 $1,334 $13,000.00 S&P 500 June June_2011_S_P_500 $320,650 June_2011_T_Bond $100,000 120.25% 124.37% $(4,125.00) T-Bond June Dividends $470.00 Profit $17,787.60 With these results, the portfolio had a ROI of 8.2%. On January 25, 2011, The S&P was valued at $1,291 and on May 6, 2011, it was valued at $1,340. This is only a 3.8% increase, which means the portfolio has outperformed the market by 4.4%. Section 2: Securities discussed in this paper In this paper, two securities in the portfolio will be discussed: Pfizer and PHIGX. These securities are particularly interesting, and are considered to be great values. Section 2.1. Pfizer

Ticker Symbol

Section 2.1.1 Background Pfizer is a global pharmaceuticals company founded in 1849 that offers prescription medicine for humans and animals. They are number one in sales in the pharmaceuticals industry, with revenue of 67.8 billion in 2010. They are part of the drug manufacturers industry and the Dow Industrial. Additionally, they are a large cap stock, with a current market capitalization of 164.14bn. Furthermore, Pfizers governance risk factor is low in all areas (Board, Audit, Compensation Shareholder Rights). On January 26, 2009, Pfizer acquired Wyeth for $68 billion, which made them the largest pharmaceutical company in the world. Additionally, in October 2010, Pfizer bought King Pharmaceuticals for $3.6 billion. Section 2.1.2. The Pharmaceuticals Industry The pharmaceuticals industry has been extremely popular with investors over the past few decades, largely because of consistent growth. This growth started in the 1940s, with the introduction of Penicillin and the new concept of R&D. In the 1970s, generic brands were starting to be produced, as the government no longer allowed permanent patents on drugs. Since generic brands were now allowed, there was a large increase in competition. Additionally, there were many advancements in technology and regulatory laws which strengthened this competition. Furthermore, acquisitions such as Pfizers buyout of Wyeth and King have tried to offset this competition. Pfizers main competitors are Bayer, Merck, and Novartis. The following chart shows a comparison of all of these companies to Pfizer:

As shown in the chart, Pfizer has the largest market cap, revenue, and gross margin. Additionally, they have the 2nd highest net income, which would be the highest if it wasnt for a large lawsuit from Nigeria over deaths of their citizens and a $2.3 billion fraud lawsuit. These lawsuits have greatly affected net income, but as time goes on, net income will go back to previous levels. Therefore, now may be the right time to buy Pfizer, as net income is expected to rise. Lastly, Pfizer has a much lower P/E ratio than Merck and Bayer, which means that Pfizer could be potentially undervalued given its past and present performance.

The pharmaceuticals industry has been very popular over the last few decades due to various political, economic, social, and technological factors. Many people believe that in order to maintain economic stability, there must be a proper health care system in place. For example, Obama insists that in order to fix our countries economic crisis, there must be a universal health care system. This universal health care system would increase demand for prescription drugs, which would positively affect the industry as a whole. Additionally, the pharmaceutical industry is expected to grow 4-7% through 2013, reaching a market value of over $975 billion by 2013. In addition to these growth expectations, people are generally becoming more health conscious and are living longer, which will increase the demand for prescription medication. For example, the AIDS breakout in the 1980s has caused a huge growth in the industry, and many companies are continuing to advance treatment of AIDS with new developments. Furthermore, the average life expectancy has been increasing over the years, which also increases the demand for prescription drugs. Lastly, technological advancement has put more pressure on the industry to come out with better products faster. With that being said, pharmaceutical companies are now putting more money into innovation, which has caused people to have an increased interest in the industry. Despite constant growth in the pharmaceutical industry over the past few decades, there are still many areas that are untapped. For example, there are many parts of Africa that are currently developing and will be able to afford more medication for their AIDS epidemic. Additionally, Indias biotech industry grew 17% from 2009-2010, with 60% of that growth coming from the pharmaceuticals industry. Lastly, many countries in Asia such as China, India, South Korea, Malaysia, and Indonesia have increased disposable incomes. This means people can now afford more medication, and are also becoming more educated. With this increase in income and education, the demand for pharmaceuticals is likely to grow rapidly. Section 2.1.3. Past Performance of Pfizer Over the past three years, Pfizer has consistently outperformed the pharmaceutical industry and the S&P 500 in total return. The following chart demonstrates this by giving the trailing returns:

As shown by the chart, Pfizer has outperformed the market by 11.21% in returns over the last 3 months, and the drug manufacturers industry by 14.63%. Additionally, it has outperformed the

market by .82% in returns over the last 3 years and the drug manufacturers industry by 1.07%. This shows that Pfizer is a good stock to have for both long term and short term success. Additionally, the following chart demonstrates Pfizers success over the past year.

As shown by the chart, Pfizers stock has gone up 22.49% over the past year, which has been consistent and not very volatile. This means that you can count on Pfizer to deliver consistent results without the fear of it plummeting. Lastly, Pfizer has delivered consistent dividend income over the past decade. The chart below shows the financials of Pfizer since 2001.

As shown by the chart, dividends have averaged $0.72 a share over the past 10 years, and they have never failed to pay a dividend. Additionally, revenues have grown rapidly since 2008, which demonstrates potential future growth in the company. Section 2.1.4. News during 2011 spring semester During the spring 2011 semester, many analysts have been very wary about the future of Pfizer, as they will be losing patents. According to the NY Times, Pfizer will be losing $10 billion in revenue per year from the expiration of the Lipitor patent. Pfizer is not the only company affected, as 10 mega medicines will lose patents in 2011. 2011 will be a year of change for the pharmaceuticals industry, as many companies are dependent on the drugs that made them the most profitable business sector in the world. This change has become a reality when Morgan Stanley recently downgraded the pharmaceutical companies based on Europe to cautious. These companies included Pfizers competitors Novartis and Bayer, but Pfizer was not on this

downgrade list. In order to deal with these downgrades and loss of profit, pharmaceutical firms cut 53,000 jobs last year, which has caused panic in the industry. Additionally, even though research spending is up to $45 billion industry wide over the past decade, there are tighter regulations which have hampered the approval of the drugs that come out of this research. In order to counteract this, Pfizer has specifically said that they will cut R&D by 30% and only put the research funds towards the products that have the most potential. Additionally, even when Pfizers patents expire, they have $20 billion in cash and continue to pay attractive dividends. Furthermore, large drug companies have been buying out other smaller drug firms in order to counteract the loss of patents. Since they have $20 billion in cash, they may use some of this money to buy out yet another company that has potential mega medicines in development. In addition to patents expiring, many countries are looking for ways to slash the price of medicine and healthcare. For example, China plans to cut hundreds of drug prices by 40%, which would be a large hit for the industry because China is the 3rd largest drug market. Additionally, the US is also taking actions to cut drug prices, which would significantly harm the industrys profits because the US pharmaceuticals market is the largest in the world. Lastly, doctors seem to be prescribing less name brand medicine, as only three name brand drugs made the top drugs prescribed by doctors. Of these three, Pfizers Lipitor had the top position at number 8. Even with this news, many analysts say that these pharmaceutical companies are a good buy because they have fairly low P/E ratios and high dividend yields. With that being said, it may be wise to invest in Pfizer, since many analysts believe it is undervalued, and it produces good dividend income. On May 3, 2011, Pfizer announced that its net income rose 10% in 1Q 2011 and that its sales were slightly down. This increase in net income was because they managed to cut costs, which are expected to be 30% less than last year. Additionally, there has been news that Pfizer may breakup their assets. Pfizer says that they will not announce a decision until the 2nd half of the year, but analysts are becoming very impatient with the company. If Pfizer splits their company, analysts say that the parts can be worth $180 billion, which is 11% more than what its worth now. Many analysts believe that it will be a great move for the company, as it will make up for the loss of Lipitor and it will cut costs. This has led the stock to be up around 20% since the beginning of the year, which is the highest since 2008. Section 2.1.5 Pfizers pipeline Despite losing some of its mega patents, Pfizer still has an extensive pipeline filled with potential mega drugs. The following chart is the most recent pipeline snapshot from February 2011:

Of the projects in the pipeline, 28% of the drugs are either in phase 3 or registration, which means they will most likely be completed. As shown by the drugs in registration below, it seems as though Pfizer is focusing on cardiovascular and neuroscience drugs.

Pfizer is probably targeting cardiovascular and metabolic disease because of the huge market. According to the AHA 81,000,000 people in the United States have some form of cardiovascular disease. Additionally, among adults who take prescription drugs, 38% say that they are taking a cardiovascular drug. Furthermore, Americans spent $32 billion on cardiovascular drugs in 2007, and this number is greatly increasing as people want to live longer. Additionally, Lipitor also prevents cardiovascular disease, so they are trying to put out a drug that will potentially replace their product before the patent runs out. Lipitor made $11.5 billion in sales for Pfizer last year, so these three drugs may potentially make up for the loss of revenue for Pfizer. Along with three cardiovascular drugs, Pfizer also has two neuroscience pain drugs in registration. This is also a large market to get into, as the market for neuropathic pain drugs was

$6 billion in 2008 and is expected to grow to $9.7 billion by 2018. One of the pain drugs they list in their pipeline, Celebrex, is currently on the market and has a patent expiring in 2013. They may be looking to re-register the drug under an updated formula in order to get an extension on the patent. Celebrex made $810 million in revenue for Pfizer in 2010, so they are certainly looking to get the patent extended in any way. In addition to the drugs registered, Pfizer also has 25 drugs which are in the 3rd stage of research. Of the 25 drugs, 9 of them are in the pain and inflammation category, and 8 treat cancerous diseases. This means that 68% of the 3rd stage research is focused on pain, inflammation and cancer. They probably wanted to focus less on cardiovascular disease in this stage as they had an abundance of cardiovascular drugs in the registration process. Additionally, cancer drugs are an extremely large market, expected to grow to $75-$80 billion worldwide in 2012. Additionally, cancer and heart disease drugs are the most prescribed classes of drugs worldwide, so Pfizer most likely wants a large breakthrough in this area. In the United States alone, the market for cancer, heart disease, and pain drugs in around $87 billion. This doesnt take into factor growing markets such as China in India, in which Pfizer sees a lot of potential in. Therefore, since they are making major developments in the cancer, heart disease, and pain drugs, Pfizer may be able to cover the loss of the Lipitor patent. Section 2.1.6 Pfizers spring 2011 performance Overall, Pfizer has proven to be a great buy for the 2011 semester. They are continuing to cut costs in order to fight off the loss of their patents, which has proven to be successful thus far. Common Stock Pfizer Ticker Symbol Size Purchase Price Selling Profit Price $20.55 $2,080.00

PFE

1000

$18.47

As shown by the chart, Pfizer has made the portfolio $2,080.00 for the semester, which is a significant ROI of 11.2%. Much of Pfizers success is because analysts continue to believe that it is undervalued, and that Pfizer may breakup the company and relist it on the exchange. This decision would increase Pfizers value, and shareholders would see significant profits. In addition, Pfizer also continues to be a dividend stock, as the portfolio made an additional $200.00 in dividends from Pfizer. This brings Pfizers total profit for the portfolio to $2,280.00, which is a total ROI of 12.3%. Lastly, the following chart graphs Pfizers performance over the semester.

Section 2.1.7. Who should own Pfizer and why If you are a retired individual looking for consistent income and stability in a stock, Pfizer is the stock for you. Not only has it shown a trailing return of 22.74% over the past year, but it pays out dividends of $0.72 per share, which is expected to grow as the patents expire. As previously mentioned, Pfizer has $20 billion in cash, which can be used to consistently pay out dividends to its shareholders. Additionally, Pfizer has 34 drugs that are either in the process of being registered or are in the 3rd stage of development. This means that the next mega drug could be in the making, especially since the drugs they are focusing on have a market of $87 billion. Lastly, in the semester of market risk, Pfizer has done very well, having a ROI of 12.3%. Many analysts are also confident that Pfizer will breakup the company, which will make shareholders profit even further. With this information, it can be said that Pfizer has not only shown consistent growth, but also provides dividend income for its shareholders. Section 2.2. PHIGX Section 2.2.1. Background

PHIGX is a high yield junk bond fund managed by Putnam Investments since 1978. According to their website, the fund's objective is to seek high current income with capital growth as a secondary objective. Additionally, PHIGX has the following qualities: Income focused: The portfolio managers strive for a higher level of income than most bonds offer by investing in higher-yielding, lower rated corporate bonds. Active risk management: The managers can adjust the fund's holdings to capitalize on market opportunities, such as emphasizing bonds with higher credit quality when credit risk increases. Leading research: The managers, supported by Putnam's fixed-income research division, analyze a range of bonds to build a diversified portfolio.

The current managers of the fund are Robert L. Salvin., Paul Scanlon, and Norman P. Boucher. Section 2.2.2 Background of junk bonds A junk bond is defined as a bond that is sold below investment grade when it is bought. Bonds with a credit rating of under BB+ and under are considered to be in this category. These bonds are different from investment grade bonds because they are far more risky and have a much higher yield. The risks that these bonds carry are default risk and interest rate risk. Default risk means that the bond issuer may not be able to pay the interest and par value of the bond. The higher the amount of default risk, the more of a chance there is of this occurring. Risk is measured by credit rating, ranging from AAA(the best) to D(the worst). Interest rate risk is fluctuation in interest rates causing changes in the bonds value. For example, if a bond currently has a yield of 4% and a new bond of the same risk level enters the market at 5%, the older bond's value goes down. This is because you can get a higher yield for your risk with the new bond, thus making it valued higher than the old bond. Additionally, if a bond is rated BB+ and has a yield of 5%, then gets upgraded to AA, the value of the bond will go up, as your risk is being decreased. This is the hope for every manager of a junk bond fund; for the bonds to be upgraded. On the contrary, every manager of a junk bond fund hopes that the bonds do not default, as they will then be worth 0. As previously stated, you are getting a higher yield on junk bonds because you are taking on additional risk. History has shown that junk bonds typically have yields 6% higher than treasury bonds. In Europe, there is currently a crisis over the "spreads" between German bonds and Greek and Portuguese bonds. This is a problem, as a country like Greece has to pay around 14% on their debt, and a country like Germany only has to pay around 3%. This may lead to the collapse of the European Union, as stable countries like Germany and the UK have to bail out these countries. According to the library of economics, 95% of U.S. corporations with revenues over $35 million are non-investment grade. This is a big change from the mid-20th century, as almost all bonds that were publically issued prior to the 1970s were investment grade. After the 1970s, there was very high inflation and interest rates, which led to very high borrowing costs for companies. Since only the companies with the highest reputations could receive loans, the "junk bond market" emerged, and is worth over a half trillion dollars today. This market exploded because

borrowers could get lower borrowing rates through these bond auctions and buyers (lenders) could get a greater risk-adjusted return for their investment. The junk bond market grew rapidly until the years 2000-2002 when many internet companies defaulted on their bonds. During this time, the average return for investors in the junk bond market was 0%. Since then, the junk bond market grew once again, but then declined with the recent economic downturn. Investors are now extremely risk averse, which means that they would rather would their money in a fund that has very little risk.

Section 2.2.3. PHIGX style and holdings According to Morningstar, PHIGX fits into the following style box:

As shown by the chart, funds in this type of style box will have low quality fixed-income securities that have low interest rate risk. They have fairly low interest rate risk because they tend to have very high yields, so the likelihood of new bonds with higher yields and the same risk level being issued is lower. Additionally, as previously stated, this is a junk bond fund, so all of the bonds will be low quality. According to the Putnam website, their PHIGX fund currently has $1.47 billion in assets. Additionally, they have 644 holdings, which have a maturity of 6.23 years. Lastly, their fund has a standard deviation of 15.3%, and pays monthly dividends, and has a turnover rate of 70.53%. The following chart shows the portfolio distribution of the PHIGX fund:

PHIGX Holdings
High Yield Corporate Bonds Bank Loans Emerging Market Bonds 5.41% 1.57% 6.81% 0.35% Investment Grade Corporate Bonds Cash

85.86%

As you can see by their portfolio distribution, 85.86% of their holdings are high yield corporate bonds. In order to make their fund more attractive to investors, Putnam also added in investment grade corporate bonds to their portfolio. This will offset some of the risk of having so many risky bonds, which will attract more investors. PHIGXs holdings are spread out amongst numerous sectors. The following chart demonstrates these sectors:

Many consumer cyclical stocks tend to be risky, as they are very affected by economic conditions. Examples of consumer cyclical stocks are cars and entertainment. These items are not necessities, but are considered to be things that people buy when they have disposable

income. Additionally, financial stocks are also fairly risky as of late, with the bailouts of Citigroup and downfall of Lehman Brothers. Although PHIGX contains mostly junk bonds, it has bonds with a variety of ratings:

The managers of PHIGX take a very large amount of risk having most of its bonds BB and under, which may turn away many investors. But, it also attracts many adventurous investors who are willing to take the risk of investing in the fund. Of the bonds in the fund, a majority are in the 1-10 year length:

As bond maturity date goes up, so does the risk associated with that bond. This is because there is a longer period of time where the price of the bond can be affected. With that being said, the managers do not want to have too many bonds that have a very long maturity, as the bonds are already below investment grade to begin with. This causes the managers to have many bonds that are in the 1-10 year length, as they do not want to have even more risk than they already have. Although most of the bonds are American bonds, there are also bonds from other countries:

Interestingly, they do not hold extremely risky Portuguese and Greek bonds, but do own Irish bonds. Additionally, it is very interesting that the only Asian bond they own is from Singapore. Since PHIGX is a risky fund, many of the holdings have high yields and coupon and price:

The large coupon causes the bonds to be sold at a premium, as coupons are guaranteed income and are not affected by fluctuations in the market. Additionally, many people who take on risky bonds like to have a high coupon as an incentive. Of their holdings, the top ten represent 5.92% of the entire portfolio:

In addition, none of their individual securities make up for more than 1% of the entire portfolio. This means that the fund is extremely spread out amongst a variety of assets. Section 2.2.4. PHIGX vs. Benchmark and Industry The following charts provide a variety of benchmarking information about the fund with regards to allocation and classification. The benchmark that is being used is the Barclays Capital aggregate bond. The industry that the fund is being compared to is the high yield bond category. Please note that these charts are from 12/31/2010, so the previous charts are more updated. As shown by the chart(see next page), the fund is far more risky than the Barclays Capital aggregate bond fund and fairly even with the industry average when it comes to credit quality of the holdings. Additionally, when it comes to sector weightings, PHIGX does not have mortgage and US Government bonds, which both the benchmark and industry average have in their holdings. With regards to foreign bonds, PHIGX does not invest in foreign government bonds, but does invest in foreign corporate bonds. This is different from both the benchmark and average, as they hold both foreign corporate and foreign government bonds. Furthermore, PHIGX is fairly similar to the industry average when it comes to coupon payments, but is very different from the lower coupon average that the benchmarks holdings have. Lastly, most of PHIGXs holdings have a maturity between 3 and 10 years (87.94%), which is fairly similar to the industry average (91.44%). But, the benchmarks holdings have a far longer maturity date, as 37.27% expire in 20-30 years. The benchmarks holdings probably have a longer maturity date because they contain mostly AAA rated bonds that carry very little risk. Since they carry mostly AAA rated bonds, they can add a longer maturity date in order to increase return. (Refer to chart on next page for previous paragraph)

Section 2.2.5. PHIGX past performance Since PHIGX contains many financial bonds and consumer cyclical bonds, it was greatly affected by the recent economic crisis:

However, if you look at the funds NAV in 2006, it has fully recovered and may continue to increase since they took on a lot of risk during the crisis. Additionally, the fund has consistently had higher trailing returns than both the benchmark and the industry.

As shown by the chart, PHIGX has done very well compared to competition, as has been getting higher returns for the past 15 years. This shows that the fund is very well managed, as funds with a similar risk level are not getting returns as good as PHIGX. Section 2.2.6. Spring 2011 News The major news about PHIGX during the 2011 Spring semester was that Putnam was named the retirement leader of the year. According to Putnam Investments Putnam was recognized for its leadership initiatives and innovative solutions in the workplace savings arena, including its efforts to sharpen the focus on retirement income and encourage the industry and policy makers to further strengthen the workplace savings system. This is an extremely prestigious award for Putnam, especially when retirees are always trying to maximize income without increasing risk. This proves that Putnam is extremely well managed, and truly cares about their clients needs. Even though Putnam won this award, PHIGX is not a fund that retired people should invest in, as it is one of the riskier funds that Putnam manages. Nonetheless, the news still shows that PHIGX is managed by some of the best fund managers. Section 2.2.7. PHIGX performance Mutual Fund Ticker Symbol Size Purchase Price Selling Profit Price $7.98 $420.00

Putnam High Yield Trust

PHIGX

3000

$7.84

As shown by the chart, PHIGX has made the portfolio $420.00 during the spring 2011 semester, which is a 1.8% ROI. Additionally, the portfolio made an additional $270.00 off of PHIGXs dividends, which brings the ROI to around 3%. This shows that PHIGX has been steadily growing throughout the semester. Additionally, if the economy picks up, PHIGX is expected to grow even more, as many of their junk bonds may be upgraded. Lastly, the following chart shows PHIGXs growth over the semester:

The chart above demonstrates that PHIGX has shown significant growth since the beginning of the semester, and has bounced back from a brief setback in March when the tsunami occurred. Section 2.2.8. Who should own PHIGX and why? If you are someone who is young, ambitious, and willing to take risk, PHIGX is an excellent security to own. As previously stated, it has outperformed both the benchmark and the industry, and is managed by an award winning firm. Additionally, this semester it had an ROI of around 3%, which would have been much higher if it wasnt for the significant market risk of the semester. In the future, as market risk decreases, you can expect to see significant growth from PHIGX, as many of their junk bonds may be upgraded. If you are willing to take this risk, PHIGX is a great buy, and also provides dividend income to offset some of the risk. Section 3. Concluding statements Despite significant amounts of market risk, PHIGX and Pfizer have done fairly well compared to their benchmarks and industry. Additionally, many analysts believe these two securities will continue to grow, as Pfizer may breakup their assets and junk bonds may be upgraded as the market grows. Furthermore, both securities pay a consistent dividend, which offsets some of the risk involved in owning these securities. Overall, these two securities generated $2500.00 in capital gains and $470.00 in dividend income, which is a total of $2970.00 in total. This is a

5.1% ROI, which shows that these securities were a major reason why the portfolio did very well. In conclusion, PHIGX and Pfizer have proven to be great buys for the semester, and will continue to grow as the year goes on.

Works cited http://www.pharmaceutical-drug-manufacturers.com/articles/pharmaceutical-market-trends2010.html http://www.verbigena.com/case_studies/history_analysis.pdf http://en.wikipedia.org/wiki/Pharmaceuticals_in_India http://performance.morningstar.com/stock/performancereturn.action?region=USA&t=pfe&culture=en-US http://blogs.wsj.com/health/2011/04/19/what-drug-did-doctors-prescribe-most-lastyear/?mod=yahoo_hs

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