In the eight months since their launch in January, Putnam Investments' new family of absolute-return mutual funds has attracted more than $400 million in new investments and, according to the firm, is on track to top $1 billion by the end of the year.
"We've seen incredible response across the industry," said Jeffrey Carney, senior managing director and head of global marketing, product and retirement at Putnam Investments. "We expect our funds to be one of the most successful fund launches of the year. The response from the industry continues to grow."
Despite its lack of a proven track record or established benchmark for comparison, Putnam's absolute-return funds have been placed on several large brokerage platforms and sold by more than 3,400 advisers, Carney said.
The funds aim for three-year returns that beat Treasury bills by specific percentages. The Putnam Absolute Return 100 Fund aims to beat Treasuries by 1%, the Absolute Return 300 Fund aims to beat the bills by 3%, the Absolute Return 500 Fund by 5% and the Absolute Return 700 Fund by 7%.
Carney said the 100 fund is intended to perform similar to money market funds, the 300 is more like a short-term bond fund, the 500 resembles a balanced fund and the 700 is similar to equities. The funds aim to achieve these goals over a three-year period by allowing their portfolio managers the freedom to invest in a wide range of asset classes, from cash to commodities, corporate bonds, international stocks, asset-backed securities, mortgage-backed securities and Treasury inflation-protected securities, among other things.
Launching absolute-return products just after the crash of 2008 may be viewed as a bold and risky move, but it appears to be capitalizing on investors' desire for safety and stability while maintaining equity exposure.
"We believe the funds offer a compelling way for investors, working with their financial advisers, to re-enter the markets with funds that reflect their individual return targets and risk tolerance," said Robert L. Reynolds, Putnam's president and CEO.
While the funds are not intended to outperform stocks and bonds during strong market rallies and are not guaranteed to be less volatile than securities markets, Reynolds said absolute-return funds can help investors manage volatility no matter what the markets do.
"These funds have a management fee structure that aligns the interests of manager and investor," Reynolds said. "It's simple: If the funds do not achieve the return targets, Putnam will be paid less. If the funds exceed the targets, we will be paid more. Of course, aside from this innovative fee structure, the funds have traditional sales charges."
The absolute-return strategy imitates that of hedge funds, but with far greater transparency and lower fees. Hedge funds typically charge 2% of assets and 20% of returns.
Putnam's absolute-return funds have a sliding scale. The 100 fund has a base fee of 1.25%, the 300 has a fee of 1.35%, the 500 fund's fee is 1.5% and the 700 fund has a fee of 1.65%, Carney said.
He said many high-net-worth investors should consider including absolute-return funds in their portfolio in order to better balance their equity exposure with something more certain.
"No one's really done anything like this in the way we've done it," Carney said. "We think this is going to be a huge category going forward. These funds are great products that complement active investment. The combination of the two products is very powerful."
Reynolds said absolute-return funds may soon represent a growing component of well-diversified portfolios, given that they are mutual funds and required to be transparent, highly liquid and closely regulated.
Facing the Skeptics
Putnam's absolute-return funds have been criticized by some industry leaders for making promises they can't keep, but without a proven track record or a benchmark to track, only time will tell if they work or not.
The funds will likely grow in popularity if markets are slow to recover, but many experts worry that Putnam won't be able to provide its promised returns if markets take another dive. On the other hand, if markets should skyrocket in the next few years, investors would seem foolish to pay such high fees and limit their gains.
Younger investors can afford to take more downside risk because they have more time to recover their losses, but those closer to retirement may still need to take risks without risking everything. Investors who don't have any sense of what the market will do in the next few years may find the promise of absolute returns comforting and worth the price.
"The fees reflect the complexity of the products," Carney said. "What you're doing is cutting off the tails. You avoid some of the downside, but you're also giving up some of the upside. These funds provide more consistent returns over time."
According to Vanguard founder John Bogle, investors should not use absolute-return funds under any circumstances. Bogle, 80, has always advocated investing in simple, cheap index funds, and is wary of anything that deviates from the tried and true.
"Nobody can give you an absolute return," he said. "It implies an absolute positive return. It is greatly oversold."
Others are concerned by mutual funds aiming to imitate hedge funds, noting how aggressive investments in options, derivatives, real estate and use of leveraging caused hundreds of hedge funds to close last year.
"People are debating our product because we did it first," Carney said. "I'm not sure the criticism is well informed, but anything that creates debate is good."
He said Putnam is very confident it can meet its targets, thanks in part to the company's in-house capability, investment talent and the sophisticated analysis and risk parameters built in to the products.
As of Sept. 8, the Putnam Absolute Return 100 Fund was up 2.4% year-to-date, the 300 fund was up 4.9%, the 500 fund was up 6.3% and the 700 fund was up 9.4%.
During the same period, the Dow Jones Industrial Average was up 8.2%, the Standard & Poor's 500 Index was up 12.99% and the Nasdaq was up 27.4%.
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