This isn't exactly breaking news anymore, but we thought we'd offer a few thoughts on Putnam's introduction of four "absolute return" funds, which the firm claims will "pursue positive returns with less volatility over time than more traditional funds." Sounds great. But...
The lineup is four funds deep, with target returns of 1, 3, 5, and 7% above Treasury bills "in good markets and bad." Let's start at the low end and work our way up. We're not sure how much of a market there is for an entirely new type of fund that seeks to beat T-bills by 1 or 3%. As far as we can tell, those vehicles exist now. They're called "online savings accounts" and "municipal bonds" and "Treasury ETFs."
As for the +5 and +7% targets, Putnam's massive ad campaign includes this telling passage on risks:
All of this strikes us as a bit strange. It's as if the mistake money managers and investors made all along was not targeting absolute returns precisely enough. If they'd only pursued "positive returns with less volatility," maybe things would have turned out better. If only it were that simple.
In the January 13th Wall Street Journal, Matthew Cowley published a "Fund Track" piece that struck us as a kind of revved-up stenography for Putnam. "With household wealth pummeled by the financial and housing-markets crisis," Cowley wrote, "investors want access to mutual funds with more predictable rates of return." Again: No doubt! Here's more press-release pass-through, conspicuously missing quotation marks:
So if things go poorly in those first couple years, don't sweat it. The downturn should be offset by higher returns in the third year. And if the third year doesn't turn out quite as planned, we'd expect various allusions to market conditions being unusually difficult, which leads us to this:
That's actually sort of interesting, and the reduction of fees in the case of under-performance could be a nice feature.*
But what about fees going up in the case of out-performance? It's safe to assume that such out-performance would generally be driven substantially by broader trends in the financial markets--trends that are, by definition, more market-driven than manager-driven. So the better the broad market does relative to T-bills, the less of that margin rank-and-file investors get to keep. Pretty impressive business model!
Over the last decade, of course, this model might have redounded to investors' benefit, as T-bills have outperformed equities over various periods (depending, of course, on when you start counting). In that case, Putnam's managers would have had to do some serious alpha-generation to deliver absolute returns of +5 or +7%. Now, however, with equity prices depressed, and expected future (medium- to long-term) returns higher than they've been in years, Putnam probably has the edge.
But then that's the nature of the Wall Street Selling Machine, isn't it? Figure out where investors are emotionally fragile, assemble products to meet their psychological (if not always financial) needs, and cash some very big checks.
* Forgive us. We haven't taken the time to investigate the particulars of such fee adjustments. Over what periods will performance be measured? How big are the potential fee adjustments? How often would those adjustments be made? If you have that information, send it in and we'll pass it along.
Matthew Cowley, "Putnam Targets Absolute Returns," Wall Street Journal, January 13, 2009