NEW YORK—Absolute-return funds may now only total $140 billion, a scant 1.2% of the $11.26 trillion in mutual funds, but that will grow to 10% to 15% over the next decade, predicts Putnam Investments President and Chief Executive Officer Robert Reynolds

Driving this demand will be a listless equity market for the foreseeable future and investors who now prefer positive returns to funds that simply aim to beat a benchmark and adhere to static asset allocation, styles and geographic diversification, said Reynolds and other speakers at Putnam’s Absolute Return Symposium here.

“We are facing a very strange combination of high volatility in the equities markets and zero yield on fixed income, creating a truly profound need for an alternative. Absolute return is a new solution that has really touched a nerve by offering less volatile, more predictable returns,” Reynolds said. “We as professionals need to stretch the bonds of diversification to think outside the style box.”

By comparison, relative return funds aim at beating a benchmark, even if it declines, whereas absolute-return funds must deliver real returns regardless of the market direction, Reynolds explained. “Absolute return managers prioritize limiting losses and risk and are paid for delivering positive returns. Relative managers are paid if they simply beat the market.”

Indeed, the suite of four Putnam Absolute Return funds that the firm unveiled on Dec. 23, 2008 have outpaced their goals. Through Sept. 30, the Putnam Absolute Return 100 Fund, which aims to beat the U.S. Treasury bill net of expenses by 100 basis points, has delivered a 2.4% annualized return. The Putnam Absolute Return 300 Fund has delivered 5.2%, the Putnam Absolute Return 500 Fund is up 5.7% and the Putnam Absolute Return 700 Fund is up 8.6%.

As an asset class, absolute return funds declined 10% in 2008, whereas the broader market dropped 37%, Reynolds noted.

Putnam's funds achieved this performance by investing in short-term bonds, equities and hedging strategies.

And in this timeframe, the funds have amassed nearly $3 billion in assets, sold through 9,000 financial advisers.

“Absolute return investing has been a feature of institutional and high-net-worth investors for decades,” Reynolds said. “The only thing new is its emergence among mainstream America.” Given the volatility investors continue to face and the catastrophic losses they suffered in 2008, “absolute return funds should play a role in every investor’s portfolio and in every adviser’s toolkit. The question is not if but how much – 5%, 10% or 50%? Can they be used as a qualified option in workplace savings plans? Should they be a building block for 529 college savings plans? Are they a viable alternative to passive investing? Can they comprise lifetime income planning? We argue that they are all of the above."

Reynolds continued: “I expect we will see many more applications, including solutions we haven’t even seen yet. We are only beginning to see a sense of their emergence as a major category, like lifecycle funds. The takeoff will be dramatic, like light speed. We aren’t there yet. But that is the rate at which they will grow.”

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