From the April 2010 issue of Boomer Market Advisor • Subscribe!

It's all about the (retirement) income

There was a time, not too long ago in fact, when ensuring investors an adequate income through retirement was an issue the mutual fund industry largely left for others--mainly financial advisors and annuity and life insurance providers--to sort through.

But that was before market upheaval cast serious doubt on the adequacy of mainstream America's retirement nest eggs; before retirement income guarantees became the hottest-selling feature to hit the annuity market in years; before the President of the United States put the retirement savings issue near the top of his policy agenda.

In a world where distribution (or decumulation) is the new accumulation, it was just a matter of time before the mutual fund industry moved in earnest to grab a piece of the retirement income action. And with new income-oriented products such as managed payout funds and absolute return funds, that's exactly what appears to be occurring.

Fund companies are cooking up new income-oriented offerings because there's a "very strong appetite in the marketplace for products that are designed to produce more steady investment returns over time to address volatility, longevity, inflation and income concerns," Putnam Investments President and Chief Executive Officer Robert L. Reynolds explained late last year in announcing that Putnam's family of target absolute return funds had surpassed $1 billion in assets less than a year after they were launched.

Putnam Group is a trailblazer with absolute return funds, which are similar to hedge funds not only in their construction but in their overriding objective of achieving positive returns in all types of markets. These funds represent a new and viable tool for capturing some of the approximately $11 trillion in cash that remains on the sidelines, according to Reynolds. "We think there is enormous potential for the continued growth of these strategies among mainstream investors."

Putnam has geared its suite of four absolute return funds to earn positive real returns with less volatility than traditional mutual funds, although each has its own distinct objective. The Putnam Absolute Return 100 Fund, for example, seeks to outperform inflation by 1 percent over periods of three years or more. It's positioned as an alternative to short-term securities, while the Putnam Absolute Return 700 Fund, which seeks to outperform inflation by 7 percent over periods of three years or more, is touted as an alternative to stock funds.

Putnam claims to be the first to introduce a suite of target absolute return funds, but it likely won't be the last. Vanguard recently sought SEC approval to use an offshore absolute return fund as a component of its family of managed payout funds. Each of Vanguard's three managed payout funds would invest up to 20 percent of assets in the alternative strategies fund, which is based in Ireland. The goal, Vanguard said, is to provide those three funds with exposure to alternative investments that have a low correlation to stocks and bonds. The alternative strategies fund wouldn't be a stand-alone, retail investment vehicle, at least initially, but for Vanguard, it's a step in that direction.

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