Striving to help investors pull in higher retirement incomes, Putnam Investments has revamped its existing line of target date funds by integrating target absolute return strategies with traditional mutual funds.
By combining target absolute return and traditional mutual fund strategies into Putnam’s RetirementReady target date fund suite, Putnam says that “the funds will seek to mitigate market volatility and create a more stable sequencing of investment returns.”
Putnam and others in the fund industry have been engaged in the debate–along with the Securities and Exchange Commission and Department of Labor–about whether target date funds are creating the amount of income pre-retiree and retirees’ need–particularly since many of these funds that were heavily weighted in equities saw a significant downturn last year for those nearing retirement.
Using its 10 years of experience in offering absolute return strategies to institutional and high-net-worth investors, Robert Reynolds, president and CEO of Putnam Investments, said Putnam has found that “If you integrate the absolute return with a relative return [mutual fund strategy], you can get just as good a return [as using equities]–sometimes better–and more downside protection and much less volatility.”
In January, Putnam launched the industry’s first suite of target absolute return mutual funds that seek annualized total returns of 1%, 3%, 5%, or 7% above inflation as measured by Treasury bills over a period of three years or more. It is that suite of funds that will be woven into Putnam’s 10 RetirementReady target date funds’ glidepaths, with a greater allocation to absolute return strategies as the investor gets closer to retirement.
In an interview on September 22, Reynolds said that “The closer you get to retirement, the more allocations [you should have] to absolute return because again, you get more predictable returns and less volatility.”
Allocating more to absolute return strategies as a person nears retirement “really protects the investor from the type of year we had last year,” he said. “The real risk in these target date funds is that you have a big downturn right before someone retires. and therefore their nest egg is not what they thought it would be; they either have to work longer or have lower sights for what they can spend in retirement.”
Jon Goldstein, a Putnam spokesman, says that since being launched in January, the absolute return funds have “been tracking extraordinarily well.” Through August 31, 2009, the year-to-date return for the Putnam Absolute Return 100 Fund is 2.3%; the Absolute Return 300 Fund’s return is 4.7%; the Absolute Return 500 Fund’s return is at 6%; and the Absolute Return 700 Fund’s return is at 9%.
Putnam notes that it shifted its RetirementReady Funds traditional fund-of-funds approach to a “more comprehensive management style, with Putnam’s Global Asset Allocation team responsible for all aspects of the funds’ management, from overall diversification strategy and mix of investments, down to individual security selection.” Putnam also notes that the absolute return strategies employed in the RetirementReady Funds enable “portfolio managers to invest anywhere in the world and move dynamically to be positioned in sectors, asset classes, or geographies they see as likely to produce positive returns.”
Downside of Freedom?
Laura Lutton, editorial director in the Fund Research Group at Morningstar, says that such manager freedom in absolute return strategies raises the question of managers’ “ability to stay on the right side of things over the long term.” But Reynolds says that giving the managers a “target return”–such as the Absolute Return 700 Fund seeking 7% return over inflation–”brings in the risk profile of that portfolio.” This way, he says, “you don’t have managers swinging for the fences in order to get a big performance fee.”
That said, Lutton says she still wishes there was more transparency about “where the managers have been and where they have accessed certain asset classes.”