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, 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,” says Robert Reynolds, president and CEO of Putnam Investments.
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. “The closer you get to retirement the more allocations to absolute return because again, you get more predictable returns and less volatility,” says Reynolds. Allocating more to absolute return strategies as a person nears retirement “really protects the investor from the type of year we had last year. 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 sites for what they can spend in retirement.”
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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 also 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 says 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.”
Laura Lutton, editorial director in the Fund Research Group at Morningstar, says that such manager freedom in absolute return strategies raises the question of managements’ “ability to stay on the right side of things over the long-term.” But Reynolds says that giving the managers a “target return,” for instance, 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.”
Washington Bureau Chief Melanie Waddell spoke with Reynolds in late September about Putnam’s revamped target date funds as well as the investing environment in general.
Can you talk about Putnam’s new strategy of integrating the absolute-return strategy into its RetirementReady target date funds? Is this strategy the answer for target date funds, getting them to show better performance, considering the losses they incurred last year?
We’ve been doing absolute return for over a decade for institutional clients and earlier this year we came out with a family of [target absolute return mutual funds] to allow the advisor/client a choice of return they were looking for and the commensurate risk with that. Then we started ….looking at where does [target absolute return mutual funds] make sense as far as a fit in a total portfolio. At the same time the whole debate was raging, which we were participating in, around target date funds and whether they are really doing what they should be doing for investors. Basically the work we did on absolute return funds [found] they do provide returns with a lot less volatility….Again looking at these and trying to grapple with the real challenge that target date funds have, and the challenge is as you get close to retirement, what amount of your portfolio should be in equities? And that’s where the debate was. Some firms had 80% equity in 2010 funds and then you had firms like us that were less than 30% in equities. We do think there is a challenge to these funds as people get close to retirement that they don’t take a major hit on their nest egg.
What do you say to critics who say integrating absolute return with traditional mutual funds is an unproven strategy?
We’ve been doing absolute return on the institutional side for over a decade. I think the absolute return funds have been used for many, many years by large institutions and high-net-worth individuals and that is the whole start of hedge funds. That rather than chasing a benchmark like the S&P 500 or Russell, you had a fund that tried to invest every year to generate a positive return in some excess return over inflation. That’s where the whole concept [of a hedge fund] came from. And I think over time what happened as the way the manager was rewarded, the greater the performance the greater the rewards, so it became an imbalance as to risk and what the manager was trying to do. By targeting returns, and we think these are very reasonable returns–700 over T-bills, 500, 300, and 100–that you lower the risk posture of these underlying funds by targeting these different returns.