Challenged by market volatility, Jeffrey Carney, Head of Global Marketing, Products and Retirement, said that the firm wanted to try to figure out how the firm could better construct lifecycle funds to mitigate some of the risks faced by investors, specifically those nearing or in retirement. The change, which was made about two weeks ago, seeks to mitigate market volatility and create a more stable sequencing of investment returns by combining target absolute return strategies with more conventional benchmark-focused mutual fund strategies.
Jeffrey Knight, Putnam Investments Head of Global Asset Allocation, said the enhancement is designed to better mitigate the risk of depleting assets in retirement. “Even our most conservative approach did not shield investors from losses [last year],” Knight said.
Putnam’s highest priority objective in managing these funds is to avoid depletion, not to leave people with an enormous estate, Knight explained. It is not enough to go to fixed income or stable value funds, Knight said, because those asset classes still have to meet benchmarks and peer groups. Absolute return funds work to accentuate lifecycle funds because they are not interested in beating the market or any peer groups, and are instead focused on meeting their target, he explained.
The Putnam RetirementReady suite of 10 lifecycle funds, with about $285 million in assets, has nine funds targeted to investors expecting to retire in specified five-year time bands between now and 2050 as well as a maturity fund, intended for investors currently in or near retirement. Earlier this year, Knight said Putnam changed the architecture of the RetirementReady Funds from a classic fund-of-funds approach to one that allowed them to invest in asset allocation funds managed by Putnam’s Global Asset Allocation team, which is responsible for all aspects of the funds’ management, ranging from overall diversification strategy and mix of investments - down to individual security selection.
In January 2009, Putnam launched target absolute return mutual funds, designed to seek annualized total returns of 1%, 3%, 5%, or 7% above inflation as measured by Treasury bills over a period of three years or more. Carney said that those funds are approaching $600 million in assets, about $80 million of which is coming from lifecycle fund assets (see "Putnam Releases Absolute Return Suite ").
Researching the potential new inclusion, Knight said they found that absolute return helped along all parts of the glide path. For example, the 2050 fund has an 11% allocation to absolute return, the 2015 fund has an allocation of 35%, the 2010 fund is about 50%, and the maturity fund allocates close to 60% of its assets to absolute return strategies.
Within the total allocation to absolute return, the RetirementReady Funds will make use of varying combinations of Putnam Absolute Return Funds at different allocation levels, depending on the proximity to a target date's maturity, Knight said. For example, the 2050 fund allocation is primarily invested in the Putnam Absolute Return 700 Fund, while the maturity fund is invested across the Putnam Absolute Return 100, Putnam Absolute Return 300, and Putnam Absolute Return 500 funds.
In terms of making room for this new allocation in the respective glidepaths of each target-date fund, Knight said that the absolute return will be a pro rata substitution from the relative return lineup. Each of the absolute return funds’ risk profiles is similar to the risk profile of another investment, whether equity, balanced fund, fixed income, or money market, so that will be how the allocation is determined from the relative return lineup, he said.
Carney indicated that Putnam wanted to build upon the firm’s risk-focused rolldown strategy, already among the most conservative in the industry, he said, through the introduction of strategies that provide exposure to asset classes needed to generate the types of investment returns that will fuel sufficient accumulation, as well as limit the impact of severe market swings.
“We believe the prospect of reduced volatility and higher income potential from their retirement investments will resonate with plan sponsors, participants, and advisers, who will definitely want to consider this next generation of target date fund offerings," Carney said.