Putnam Investments has launched the Putnam Dynamic Risk Allocation Fund, a ’40 Act mutual fund that uses the “risk parity” approach of its successful Putnam Total Return portfolio for institutional investors, which has delivered average annual returns of 9% since inception five years ago.
The Putnam Dynamic Risk Allocation Fund uses leverage and a flexible mandate to actively balance portfolio risk across multiple, less-volatile asset classes. The leverage is applied to lower-volatility investments and/or less-correlated assets to make them more powerful, so that equities do not dominate the fund’s risk profile. The aim is to providing consistent levels of total return.
“We apply a lens of risk allocation to invest in stocks with better risk-adjusted performance, and use the leverage to diversify—not increase risk,” said Jeff Knight, managing director and head of global asset allocation at Putnam.
In a traditional 60/40 fund with 60% of the holdings invested in equities and 40% in bonds, more than 90% of the risk comes from equities, Knight explained. With the ability to leverage up to 50% of its holdings, the Dynamic Risk Allocation Fund can hold up to 50% in U.S. and global fixed income, 50% in inflation-sensitive securities such as TIPS, commodities and real estate investment trusts (REITs), 20% in high-yield and emerging market bonds, and 30% in U.S., global and emerging market equities.
“We have taken a step back from traditional products to assess the volatility of the past three to five years,” said Jeff Carney, head of global marketing and products at Putnam.
“We have addressed this through the Putnam Absolute Return Funds, which have amassed nearly $4 billion in assets under management since their inception three years ago and which are now used in our Retirement Ready Lifecycle Funds,” Carney noted. “We will have some forthcoming retirement income solutions with the same approach. Our Global Asset Allocation teams are constantly challenging themselves to find new solutions. We really think risk parity funds will expand and should be a core holding.
“It’s exciting because the Dynamic Risk Allocation Fund does so many things that traditional funds don’t do,” Carney continued. “It would be very hard for a financial adviser to replicate this. It will be a big product for Putnam.”
“The motivation in the business is to take whatever risk is required to obtain return,” Knight said. “The real key to making money is losing less in down markets and having more of your portfolio in tact. Static strategies can be hurt by unexpected changes in market risk. We’ve learned a lot managing this strategy for our institutional clients, particularly in 2008. That’s why Putnam Dynamic Risk Allocation Fund diversifies risk across less-volatile assets and flexibly adjusts with market opportunities.”
As for Knight’s current market outlook, he says he and his team have an “ongoing program of tailoring risk hedging strategies” and a “more intense willingness to cut risk.” Knight called 2008 “an education on more aggressively cutting risk. Certainly, the market is challenging right now, but I don’t think we’ve ever seen a more well-advertised credit crisis. That said, it is important to respect the tail—it could go down that path—without being caught flat-footed when the market turns around.”
