Opening Putnam Investments’ first Absolute Return Symposium in New York City, Reynolds said how after decades of being part of the portfolios of high-net-worth individuals, he is pleased that absolute returns are starting to find their way to “Main St.” He said that while Putnam’s absolute return offerings are “innovative,” he does not believe in innovation just for the sake of innovation–he believes that absolute returns will fill a void in the market place for investments that are less risky and more predictable (see “Putnam Releases Absolute Return Suite“).
Reynolds pointed to the more than 9,000 advisers who have incorporated absolute returns into their portfolios. This growing demand was backed up by research done by Brightwork Partners and presented at the symposium by Merl Baker. In a survey of 256 financial advisers, Brightwork found that 9% are “absolutely certain” they will recommend absolute return funds to their clients, 15% are “very likely” to do so, and 36% are somewhat likely. Those percentages added together represents a major opportunity for growth among the funds.
Baker also discussed how the characteristics of absolute returns align with many advisers’ strategies. Nearly all advisers want to “secure adequate returns in view of market volatility” (99%). And in order to accomplish this:
- Ninety-five percent of advisers believe that “diversifying across a greater number of asset classes” is a very effective or somewhat effective method.
- Ninety-two percent believe that “selecting lower risk investments” can help achieve that objective.
- Fifty-nine percent already believe that absolute return funds are an effective solution.
Reynolds discussed how absolute return funds are different from relative return funds. Relative return funds are considered to be successful if they outrun the benchmarks–even if the market ends up being downside, the relative return fund can also be negative, as long as it’s still higher than the benchmark. Absolute returns on the other hand, are intended to be positive no matter what the benchmarks or markets are. The priority of a relative return fund is to maximize returns, whereas an absolute return fund is intended to minimize risk, said Reynolds.
The Brightwork research asked advisers (only those who were familiar with absolute returns: 94%) to identify what they thought were the strengths and weaknesses of the funds. The top three strengths were:
- Minimizing portfolio volatility (cited by 59%)
- Serving as an asset class diversification strategy (52%)
- Serving as an alternative investment (40%)
The top weaknesses were:
- Having high expense ratios (58%)
- Having a short retail track record (57%)
- Being difficult to explain to clients (46%)
- Being difficult to understand myself (43%)
Reynolds drew an analogy to sum up his feelings towards absolute returns; he likened the current state of absolute return funds to where lifecycle funds stood 15 years ago: “They too had a long incubation period in the 1990s, they were misunderstood at first, but once the lifecycle funds proved their value, their popularity jumped. We’re not there yet, but I believe that’s how this new category will grow. And 10 years from now, we’ll realize we’re on the ground floor of something really great.”