Speaking Tuesday at a conference in Florida, Reynolds called on the investment industry to usher in a new era of helping investors address a dynamic set of ongoing market challenges by breaking down the barriers of conventional wisdom and embracing a range of needed innovations to the marketplace.
Five years after the worst economic crisis to hit global capitalism in several generations and with investors still feeling the aftershocks, Reynolds urged asset managers, financial advisers and their clients to consider and apply a new set of investment strategies, driven by a modern view of portfolio construction, risk management and diversification.
“We find ourselves moving, ever so tentatively, into a financial future with seemingly only one certainty: it will likely be very different than the investment world in which we all grew up,” Reynolds said. “This suggests that conventional wisdom shaped by decades of high-return investing—first in equities from 1982 to 2000, then in fixed-income markets over most of this young century—needs to be re-examined, revised or even scrapped.”
Reynolds noted that over the last several years, Putnam has developed and introduced a series of investment offerings that seek to create a “shock-absorber effect” to help fulfill a diverse range of client financial goals – including accumulating and withdrawing income for retirement, and preparing for higher education costs. In many of its products, according to Reynolds, Putnam has sought to manage multiple risk factors that investors need to balance, including unprecedented market volatility, inflation, taxes, increasing longevity and lifelong income shortfalls.
Reynolds called on the financial services industry to take the lead on three key retirement policy changes that could dramatically lift America’s retirement readiness by strengthening the workplace savings system:
Make the “full-auto” best practices endorsed by the Pension Protection Act of 2006 standard—perhaps even mandatory—for every workplace savings plan in America, featuring: auto-enrollment, annual re-enrollment, auto escalation, and automatic default to qualified target-date or balanced funds;
Support the extension of workplace savings coverage to all working Americans—so that everyone who pays mandated Social Security taxes also has an option to save for their own retirement; and
Lift the industry average of a 7% participant savings rate in today’s workplace plans by 50% or more—to a new baseline of 10% plus—the level that Putnam’s Lifetime Income Score shows is key to retirement readiness. “We don’t serve anyone well, “Reynolds explained, “by allowing them to believe that saving 3%, or 5%, or even 7% is enough to ensure retirement readiness. Let’s tell people the truth.”
Reynolds’ comments followed Putnam’s recently launched awareness building campaign, “New Ways of Thinking,” that emphasizes the importance for financial advisers and investors to continually anticipate the evolution of the investment markets – and then act to seize new opportunities and mitigate unforeseen challenges. (See “Putnam Campaign Advises Anticipating, Not Reacting.”)
Reynolds pointed to the lower returns and increased volatility of core equity and bond markets over the past decade as the deepest sources of investor angst. He stressed some new directions in investment thinking that could help asset managers and advisers serve clients trying to navigate an era of constrained fixed-income returns and geopolitically driven anxiety that often roils global equities.
In this often daunting environment, Reynolds suggested investment providers and advisers could offer tremendous value to their clients by:
- Seeking value beyond mainstream indices (in both equity and fixed income markets)
- Looking beyond bonds to dividend stocks as a key source for income
- Adopting strategies that may help curb volatility and deliver a smoother, more reliable sequence of returns
- Pursuing “diversification of investment philosophy” by incorporating absolute-return strategies in portfolios along with traditional benchmark-driven investments
- Applying a stringent risk-allocation lens to assess the real “balance” in investment portfolios
- Investing in low-beta stocks to seek less volatile, more precisely risk-adjusted returns
- Applying Sharpe-ratio, or “high efficiency” metrics to judge securities and strategies
“The old conventions and rules of thumb we’ve learned to live by may no longer serve to position investors for longer-term success.” Reynolds noted. “Amid higher volatility, rising tax rates, political uncertainties and near-zero interest rates, Abraham Lincoln’s great adage, ‘We need to think anew – and act anew,’ is more relevant than ever. Investors, advisers and asset management providers all should consider a new blend of traditional and alternative strategies to help reach critical financial goals in this new investment era.”
In summing up the necessity of innovation and policy reform to strengthen the long-term prospects of the modern-day investor, Reynolds said, “None of these changes—of mindset or approach—will be easy, but I believe that if we embrace new thinking and new solutions, we’ll find it exciting, liberating —and rewarding.”