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New Thinking, New Solutions
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Remarks by Robert L. Reynolds, President and Chief Executive Officer, Putnam Investments Financial Advisor/Private Wealth Innovative Retirement Symposium Orlando, Florida, March 12, 2013 One reason I was pleased to be invited is that Financial Advisor’s slogan, “Knowledge for the Sophisticated Investor,” echoes the core themes I want to talk with you about today. I believe that there is a crying need — among asset managers, advisors, and investors — for new thinking and new solutions. Abraham Lincoln’s great adage “As our case is new, so we must think anew and act anew” has never been more relevant. Five years after the worst economic crisis to hit global capitalism in our lifetimes, we are still feeling the aftershocks. We find ourselves moving ever so tentatively into a financial future about which the only thing we seem sure of is that it will likely be very different than the investment world we all grew up with. Core topics To me, this suggests that the conventional wisdoms 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 — need to be re-examined, revised, or even scrapped. And while I certainly don’t claim to have all the answers, I do want to sketch some of the new solution-oriented approaches that Putnam sees emerging, such as innovative investment strategies, changed views on portfolio construction, greater risk-awareness, and advances in practice management, including new technologies to enable advisors to reach and influence clients. I would also like to suggest three retirement policy innovations that the financial services industry should take the lead on — now.
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New Thinking, New Solutions
- New Thinking, New Solutions Robert L. Reynolds President and CEO Putnam Investments Remarks made at the 4th Annual Financial Advisor Retirement Symposium The views and opinions expressed are those of the speaker, are subject to change with market conditions, and are not meant as investment advice. 1 281070 3/13 Mutual funds are distributed by Putnam Retail Management.
- Volatile markets have shaken investors’ confidence 1990s 2000s 26.1 Compound annual 20.2 returns 18.2 Annualized monthly 15.9 standard deviations 16.3 15.1 12.4 11.7 8.4 8.8 8.9 7.6 7.7 6.9 6.3 -0.9 Large Small Long-term Long-term Large Small Long-term Long-term company company corporate government company company corporate government stocks stocks bonds bonds stocks stocks bonds bonds Source: Ibbotson Large Company Total Return Index, Small Company Total Return Index, Corporate Bond Index, and U.S. Long-Term Government Bond Index. Indexes are unmanaged and used as a broad measure of market performance. It is not possible to invest directly in an index. Past performance is not indicative of future results. 2 281070 3/13
- And rising volatility has fueled demand for new investment strategies — more focused on risk Since 2000, stocks have faltered, creating a need to focus on risk. $250,889 $202,516 In the 1980s and 1990s, it made sense to seek benchmark returns. Two bear markets caused a “lost decade” for stock investors. $10,000 12/31/80 12/31/99 12/31/12 Source: Ibbotson, data as of 12/31/12. U.S. stocks are represented by the Ibbotson S&P 500 Total Return Index. Indexes are unmanaged and used as a broad measure of market performance. It is not possible to invest directly in an index. Past performance is not indicative of future results. 3 281070 3/13
- Alternative strategies have shown the potential to offer broader diversification 800 Bonds Stocks 600 REITs Gold Index level Oil 400 200 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 12/31/12 Sources: Barclays Global Aggregate Bond Index (bonds), MSCI World Index (stocks), FTSE NAREIT All REITS Index (REITs), S&P GSCI Gold Index (gold), and Dow Jones Global Oil & Gas Index (oil), 2012. Index levels as of 12/31/94 equal 100. Past performance does not guarantee future results. 4 281070 3/13
- One growing response: Strategies that seek absolute returns no matter what markets do Absolute return Traditional strategy Success = positive returns Success = beating market benchmark Risk = negative returns Risk = lagging the market Free to “go anywhere” — invest Limited to invest in one market across sectors and markets or one type of security Risk-free benchmark Market benchmark 5 281070 3/13
- Offerings of “Absolute Return” funds have nearly tripled since 2008 35 30 25 20 15 10 5 0 2008 2009 2010 2011 2012 Source: Strategic Insight Simfund, 2013. 6 281070 3/13
- Absolute return strategies may help investors mitigate risk in their portfolios Absolute return funds Fund Standard deviation offer a low-risk profile Absolute Return 100® 1.28 Absolute Return 300® 2.88 Stock market risk has tested Absolute Return 500® 3.99 the patience of investors Absolute Return 700® 4.80 in recent years, as shown by the high 3-year standard deviations of the equity indexes filling this chart. 7 281070 3/13
- Indexes are limited: The S&P 500 covers just 3% of publicly traded companies Publicly traded U.S. companies S&P 500 (15,000) Source: Bloomberg. 8 281070 3/13
- Value beyond the indexes: Of the 500 companies in the S&P 500, Putnam Capital Spectrum Fund held only 9 Data as of 12/31/12. Allocations will vary over time. 9 281070 3/13
- Value beyond the indices: Putnam Diversified Income Trust seeks FI opportunities beyond the Barclays “Agg” and not reliant on declining rates Diversified Income Trust Barclays U.S. Aggregate Bond Index 0% U.S. Treasury/agency 41% 2% Agency pass-through 30% 3% Investment-grade corporate bonds 21% 1% International Treasury/agency 3% 12% Emerging-market bonds 2% Commercial MBS 12% 2% High-yield corporate bonds 30% 0% Residential MBS (non-agency) 21% 0% Agency CMO 18% 0% Net cash 7% 0% Other 2% 1% Data as of 12/31/12. Allocations will vary over time. 10 281070 3/13
- Re-evaluating diversification: Because traditional asset allocation formulas can mask a portfolio’s true “risk allocation” For illustrative purposes only. This is not indicative of any Putnam fund or product. 11 281070 3/13
- Low-beta stocks have produced strong risk-adjusted returns U.S. large-cap stocks sorted by beta decile compared with the market, 1983 to 2012 0.8 0.7 0.6 Sharpe ratio 0.5 0.4 0.3 0.2 0.1 0 1 2 3 4 5 6 7 8 9 10 Market Avg stock Source: Putnam, Russell, IDC, Barra. Chart represents one thousand largest U.S. stocks each month, as represented by the Russell 1000 Index, an unmanaged index of large-cap companies. You cannot invest directly in an index. Ten equal-weighted portfolios were formed each month, one for each decile of beta. These portfolios were rebalanced monthly. Beta measures volatility in relation to the fund’s benchmark. A beta of less than 1.0 indicates lower volatility; a beta of more than 1.0, higher volatility than the benchmark. Beta is defined as predicted beta from the Barra U.S.E3 risk model. 12 281070 3/13
- Risks may be rising in core fixed-income holdings while new drivers of return may still deliver results Low point in 10-year Treasury 13 281070 3/13
- Seeking income beyond bonds: Many S&P 500 companies have been raising dividend pay outs Number of S&P companies 320 333 243 151 68 10 13 22 15 11 6 4 1 5 0 1 2009 2010 2011 2012 Increasing their dividend Starting to pay Decreasing their dividend Stopping payment Source: Standard & Poor’s, 2012. 14 281070 3/13
- Three policy innovations our industry should be leading 1 2 3 Make the PPA’s best Extend workplace Raise deferral savings practices the new norm savings coverage to all rates system wide Full “AUTO” Support 10%+ for all AUTO-IRA as the workplace new savings baseline 15 281070 3/13
- New Thinking, New Solutions Robert L. Reynolds President and CEO Putnam Investments The views and opinions expressed are those of the speaker, are subject to change with market conditions, and are not meant as investment advice. 16 281070 3/13 Mutual funds are distributed by Putnam Retail Management.
- The views and opinions expressed are those of the Robert L. Reynolds, President and CEO of Putnam Investments, as of March 12, 2013, are subject to change with market conditions, and are not meant as investment advice. Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing. Consider these risks before investing: Our allocation of assets among permitted asset categories may hurt performance. The prices of stocks and bonds in the fund’s portfolio may fall or fail to rise over extended periods of time for a variety of reasons, including both general financial market conditions and factors related to a specific issuer or industry. You can lose money by investing in the fund. Our active trading strategy may lose money or not earn a return sufficient to cover associated trading and other costs. Our use of leverage obtained through derivatives increases these risks by increasing investment exposure. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage- backed securities are subject to prepayment risk. International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging-market securities, including illiquidity and volatility. Our use of derivatives may increase these risks by increasing investment exposure (which may be considered leverage) or, in the case of many over-the- counter instruments, because of the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. The fund may not achieve its goal, and it is not intended to be a complete investment program. The fund’s effort to produce lower volatility returns may not be successful and may make it more difficult at times for the fund to achieve its targeted return. In addition, under certain market conditions, the fund may accept greater volatility than would typically be the case, in order to seek its targeted return. Our alpha strategy may lose money or not earn a return sufficient to cover associated trading and other costs. REITs involve the risks of real estate investing, including declining property values. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. Additional risks are listed in the funds’ prospectus. Putnam Retail Management putnam.com 17 281070 3/13
Hinweis der Redaktion
- Remarks by Robert L. Reynolds, President and Chief Executive Officer, Putnam Investments Financial Advisor /Private Wealth Innovative Retirement Symposium Orlando, Florida, March 12, 2013 The views and opinions expressed are those of the Robert L. Reynolds, President and CEO of Putnam Investments, as of March 12, 2013, are subject to change with market conditions, and are not meant as investment advice. One reason I was pleased to be invited is that Financial Advisor’s slogan, “Knowledge for the Sophisticated Investor,” echoes the core themes I want to talk with you about today. I believe that there is a crying need — among asset managers, advisors, and investors — for new thinking and new solutions. Abraham Lincoln’s great adage “ As our case is new, so we must think anew and act anew ” has never been more relevant. Five years after the worst economic crisis to hit global capitalism in our lifetimes, we are still feeling the aftershocks. We find ourselves moving ever so tentatively into a financial future about which the only thing we seem sure of is that it will likely be very different than the investment world we all grew up with. Core topics To me, this suggests that the conventional wisdoms 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 — need to be re-examined, revised, or even scrapped. And while I certainly don’t claim to have all the answers, I do want to sketch some of the new solution-oriented approaches that Putnam sees emerging, such as innovative investment strategies, changed views on portfolio construction, greater risk-awareness, and advances in practice management, including new technologies to enable advisors to reach and influence clients. I would also like to suggest three retirement policy innovations that the financial services industry should take the lead on — now.
- Volatile markets shake investors’ confidence Clearly, the deepest sources of investors’ anxiety are the lower returns and increased volatility among core asset classes that we’ve seen over the past decade and longer. This slide contrasts the returns — in blue — and the standard deviations — in yellow — among large and small company stocks and long-term corporate and government bonds. The decade of the 1990s is shown on the left and the first decade of the 2000s on the right. As you can see, returns from large company stocks fell from over 18% a year in the 1990s to nearly a 1% annual loss over the decade of the “double aughts.” Small company stock returns also dropped from over 15% to just over 6%. In both cases, volatility rose — and for small stocks, it soared. It is no surprise, then, that we often hear about a “lost decade” for equity returns. And while returns on government and corporate bonds fell only slightly from 2000 to 2010 compared with returns in the 90s, because this was mostly a period of falling rates, volatility in the fixed-income markets rose significantly.
- And volatility drives demand for risk-aware strategies Taking a longer view, our next slide shows that an equity investor who committed just $10,000 to the S&P in 1980 would have enjoyed two decades of rip-roaring returns — admittedly with a few hiccups — and realized a total return of more than $200,000 by New Year’s Day 2000 — 17.6% per year, compounded. Over the past 13 years, though, that same investor would have seen their holdings grow just 24% to $250,000, a gain of just 1.6% a year, less than inflation, and that’s assuming this investor had the guts to hang tough through two of the scariest sell-offs since the Great Depression. Given this still-recent experience of low returns and frightening volatility, the flows we’ve seen in recent years out of equities into bonds are easily understandable, and so is the rising interest in a range of assets that can potentially offer some diversification from equity indexes.
- Alternative strategies have shown they can help diversify risk These strategies include not only bonds, but precious metals, real estate, and commodities. Yet as we see on this slide, even these alternatives can sometimes fail to offer the diversification investors seek, as happened in the crash of 2008, when most of these assets — except gold — joined equities in spiraling down.
- One rising response: Absolute return strategies One response to this kind of roller-coaster experience is a growing interest in strategies that seek positive, absolute returns, no matter what markets do. What these strategies offer, in my view, is a new dimension of diversification — not just across asset classes, but across investment philosophies. In a real sense, absolute return strategies offer what we might call “no excuse” investing. Success in this category is defined by positive, real returns, not by beating a benchmark, which may, after all, be down. Fund managers of these strategies are freer to “go anywhere” and also to use a variety of instruments and tactics, including derivatives and shorting that are not usually available to long-only fund managers. On the other hand, absolute return strategies are measured, typically, against a virtually “risk-free” benchmark, such as Treasury bills,. That’s what I mean by saying they have “no excuse” if they deliver negative returns over the time frame targeted in their prospectus.
- Absolute return offerings have been proliferating In the four years since we rolled out Putnam Absolute Return Funds in early 2009, we’ve seen the number of offerings in the category nearly triple across the industry from about a dozen funds with “absolute return” in their names to 30 at the end of last year. I believe the potential growth of these strategies could be as great as that of target date funds. Many of you may remember that lifecycle funds grew only very slowly in the 1990 s, and only really surged beginning in 2006, when they were recognized as qualified defaults for 401(k) plans. Here’s another reason why I believe we’re only beginning to see the rise of absolute return strategies.
- Absolute return at the core may help reduce portfolio risk That is their potential to provide a stabilizing “core” in investment portfolios. This slide illustrates the 3-year standard deviations of Putnam’s four Absolute Return Fund strategies, shown here in orange, contrasted with the standard deviations of 17 other equity indexes ranging from the S&P 500 and the Dow Jones-Wilshire 4500 to the MSCI World Equity and a host of others, shown here in gray. As you can see, the standard deviation of our Absolute Return Funds is quite constrained. At this point in the evolution of absolute return offerings, we can’t say definitively what share of a total portfolio should appropriately be devoted to these strategies. That depends on an investor’s or advisor’s goals and tolerance for risk. But as this slide shows, mixing absolute return strategies with more variable assets clearly has the potential to lower almost any portfolio’s overall volatility.
- Indexes are limited Even broad indexes like the S&P 500 or the Barclays Agg really don’t capture the full universe of investment options we need to access in order to succeed. The S&P, for example, includes just 3% of publicly traded U.S. companies. And while the S&P does capture the bulk of gross equity market capitalization, there are many, many options by which to pursue success if we look beyond the index.
- Value beyond the indexes Despite its strong equity bias, Putnam Capital Spectrum Fund held just nine of the 500 names on the S&P Index at year-end 2012. That’s illustrated on this slide by the 500 circles, 491 of them grey, just 9 of them orange. This is active management. But then again, at Putnam, we believe that the preservation and growth of wealth through investing is always an active endeavor, not only in equities, but in fixed income as well.
- Value beyond the indices This slide offers another example of seeking value beyond the indices. In this case, it shows that at year-end 2012, the holdings of Putnam Diversified Income Trust, shown here in gold, overlapped only 11% with the assets represented in Barclays U.S. Aggregate Bond Index, shown in blue. DIT’s managers sought opportunities for both decent return and lower duration risk far afield of the Treasury, agency, and investment-grade corporate bonds that dominate the “ Agg. ” More broadly, we believe that today’s markets call for applying a new “lens” to assessing risk and measuring true diversification.
- Re-evaluating diversification — seeking true “risk allocation” When you do measure the risk in a hypothetical “traditional balanced” fund allocation — in this case, 60% S&P 500 Index representing equities, 10% GSCI representing commodities, and 30% Barclays U.S. Aggregate Bond Index representing fixed income — what you may find is that your “risk allocation” is anything but diversified, and that, in fact, 90% or more of that portfolio’s risk may stem from its 60% exposure to stocks. That’s not diversification — it is concentration. And that’s why we believe it’s important to incorporate risk-assessment not only in judging portfolio composition, but within asset classes, too. Let me give you an example.
- Low-beta stocks have produced strong risk-adjusted returns This slide shows the Sharpe ratios of stocks among the Russell 1000 ranked in ten “buckets” based on their beta over the period 1983 to 2012, compared with the market as a whole and the average stock. Since Sharpe ratios measure returns per unit of risk, that is, efficiency of investing, buckets 1 through 5 on the left represent low-beta stocks that offered significantly better returns per unit of risk than the high-beta stock in buckets 6 through 10. These higher-beta stocks actually produced lower returns — considering the risks assumed — than the market as a whole, or even the average stock, and this phenomenon has persisted over quite a long time. This focus on efficient returns will, I believe, become even more critical to investors if we stay in a sustained period of constrained returns and high volatility. And that’s why we believe that there is a real opportunity for superior returns to be found among low-beta stocks, and we’re aiming to capitalize on that in our equity strategies at Putnam.
- Risks may be rising in core fixed-income holdings Similarly, in fixed income, as the earlier illustration on Putnam Diversified Income Trust suggested, we’ll continue to seek value beyond traditional core assets by including new drivers of return in high-yield bonds, in debt that carries pre-payment risk rather than interest-rate or duration risk, and offshore, in emerging-market debt. This slide shows the returns over the past eight years of Putnam Diversified Income Trust — in blue — versus those of the Barclays Aggregate — in gold. You can see that DIT continued to register gains, even when the “ Agg ” stalled and began moving sideways. Again, this illustrates our conviction that finding value in today ’ s constrained fixed-income markets requires moving beyond the indices, even while keeping a sharp eye on risk. And fixed income is not the only source for yield.
- Income beyond bonds: Rising S&P dividends We’re seeing a growing tendency among S&P 500 companies to either start paying dividends or to raise their dividends as companies’ profits continue to reach record levels. Income investors — boomers close to retirement, for example — would do well to consider dividend-paying equities, many of which offer substantial yields already, plus potential for capital appreciation even if interest rates do — someday —begin climbing. After all, while a rising-rate environment might crush some bonds, it could also reflect the kind of robust growth in the economy that drives successful companies’ profits. So this trend of rising dividend payouts could have legs.
- Retirement policy innovations I hope I have adequately expressed the need — among asset managers, advisors, and investors — for new thinking and new solutions. We’re also committed to working to shape public policy, especially as it impacts retirement. I believe there are three basic policy innovations that all of us in retirement investing should offer leadership on. First, let’s drive to make the best practices endorsed by the Pension Protection Act of 2006 the new norm for all workplace savings plans. By that I mean, let’s go “full-auto” — auto-enrollment, auto-re-enrollment annually, and auto escalation to higher deferrals, plus automatic default to qualified target date or balanced funds — for every workplace savings plan in America. There really is no room left for doubt that these basic structural elements raise participation, deferrals, account balances, and the likelihood of retirement readiness. Personally, I would be pleased to see these auto-features be made mandatory for all workplace savings, through legislation or regulatory guidance, or maybe just through a mass attack of common sense. Second, let’s come together as an industry to explicitly support the extension of some form of workplace savings coverage to all working Americans, so that everyone subject to the mandate of paying FICA taxes can also have an option to save for their own future. Let’s require all employers, at a minimum, to offer a payroll deduction IRA — a bipartisan idea proposed by the Heritage Foundation and the Brookings Institution — and repeatedly introduced into legislation, but not yet passed. Giving every worker subject to FICA the option to also save on the job via payroll deduction would be a huge step forward to meeting America’s retirement savings challenge. And it would also, by the way, correct a major flaw that critics of workplace savings constantly use to attack the DC system. I’ll be urging support for extended access to workplace savings in every industry forum and trade group we take part in. Let me urge all of you to do the same. Third, let’s lift the bar on savings rates across the workplace savings system from the roughly 7% level we’ve achieved today to a new baseline of 10%+. Putnam’s annual Lifetime Income Surveys — now in their third year — have shown us, past doubting, that today there is a significant minority of roughly 19 million people who are on track to replace 100% or more of their income once they retire and begin collecting Social Security. Across all income groups, this successful minority has two basic things in common — first, they take part in workplace savings plans, and second, they defer 10% or more of their income. I should note that those who draw on the advice of a professional advisor do even better, but I don’t think we can make that mandatory! To me, this suggests a moral obligation to do everything we can to generalize these key elements of success: workplace savings access and 10%+ deferrals. We really don’t serve anyone well by allowing them to believe that saving 3%, or 5%, or even 7% is enough to ensure retirement readiness. These three steps to retirement security are easy to state, but tough to do. Securing savings access for all will require new legislation, and moving to full-auto plan design and 10%+ deferrals means changing plan design and lifting current savings rates by 40%–50% across tens of thousands of plans and among millions of participants. That said, I can’t think of clearer, more effective goals that we could set for ourselves — as investment professionals, providers, and advisors — to do our share of solving America’s retirement savings challenge.
- We live in interesting times. For all of us in financial services, these times make new thinking an imperative — not an option. Over the next few years, most of us will need to move well beyond our comfort zones. We’ll have to question rules of thumb we’ve lived by for decades. We’ll be called on to innovate and to change, and to offer leadership on retirement policy. And none of this will be easy. But I believe that if we embrace new thinking and new solutions, we’ll find it exciting, liberating, and rewarding. That’s certainly been our experience at Putnam. Thanks for listening. I would be glad to take your questions.
- The views and opinions expressed are those of the Robert L. Reynolds, President and CEO of Putnam Investments, as of March 12, 2013, are subject to change with market conditions, and are not meant as investment advice. Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing. Consider these risks before investing: Our allocation of assets among permitted asset categories may hurt performance. The prices of stocks and bonds in the funds’ portfolio may fall or fail to rise over extended periods of time for a variety of reasons, including both general financial market conditions and factors related to a specific issuer or industry. You can lose money by investing in the fund. Our active trading strategy may lose money or not earn a return sufficient to cover associated trading and other costs. Our use of leverage obtained through derivatives increases these risks by increasing investment exposure. Bond investments are subject to interest-rate risk, which means the prices of the funds’ bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging-market securities, including illiquidity and volatility. Our use of derivatives may increase these risks by increasing investment exposure (which may be considered leverage) or, in the case of many over-the-counter instruments, because of the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. The funds may not achieve their goal, and they are not intended to be a complete investment program. The funds’ effort to produce lower-volatility returns may not be successful and may make it more difficult at times for the funds to achieve their targeted return. In addition, under certain market conditions, the fund may accept greater volatility than would typically be the case, in order to seek its targeted return. Our alpha strategy may lose money or not earn a return sufficient to cover associated trading and other costs. REITs involve the risks of real estate investing, including declining property values. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. Additional risks are listed in the funds’ prospectus. Putnam Retail Management putnam.com
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