New Thinking, New Solutions

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Remarks by Robert L. Reynolds, President and Chief Executive Officer, Putnam InvestmentsFinancial Advisor/Private Wealth Innovative Retirement SymposiumOrlando, Florida, March 12, 2013 One reason I was pleased to be invited is that Financial Advisors 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 Lincolns 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 dont 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.


  • 1. New Thinking, New SolutionsRobert L. ReynoldsPresident and CEOPutnam InvestmentsRemarks made at the 4th AnnualFinancial Advisor Retirement SymposiumThe views and opinions expressed are those of the speaker, are subject to changewith market conditions, and are not meant as investment advice.1281070 3/13Mutual funds are distributed by Putnam Retail Management.
  • 2. 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 bondsSource: 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 indicativeof future results.2281070 3/13
  • 3. And rising volatility has fueled demand for newinvestment 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 12/31/12Source: 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 broadmeasure of market performance. It is not possible to invest directly in an index. Past performance is not indicative of future results.3281070 3/13
  • 4. Alternative strategies have shown the potentialto offer broader diversification 800 Bonds Stocks 600 REITs Gold Index level Oil 400 200 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 12/31/12Sources: 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.4281070 3/13
  • 5. One growing response: Strategies that seekabsolute returns no matter what markets doAbsolute return Traditional strategySuccess = positive returns Success = beating market benchmarkRisk = negative returns Risk = lagging the marketFree to go anywhere invest Limited to invest in one marketacross sectors and markets or one type of securityRisk-free benchmark Market benchmark5281070 3/13
  • 6. Offerings of Absolute Return funds have nearlytripled since 2008 35 30 25 20 15 10 5 0 2008 2009 2010 2011 2012Source: Strategic Insight Simfund, 2013. 6 281070 3/13
  • 7. Absolute return strategies may help investorsmitigate risk in their portfoliosAbsolute return funds Fund Standard deviationoffer a low-risk profile Absolute Return 100 1.28 Absolute Return 300 2.88Stock market risk has tested Absolute Return 500 3.99the patience of investors Absolute Return 700 4.80in recent years, as shownby the high 3-year standarddeviations of the equityindexes filling this chart.7281070 3/13
  • 8. Indexes are limited: The S&P 500 coversjust 3% of publicly traded companies Publicly traded U.S. companies S&P 500 (15,000)Source: Bloomberg.8281070 3/13
  • 9. Value beyond the indexes: Of the 500 companies inthe S&P 500, Putnam Capital Spectrum Fund held only 9Data as of 12/31/12.Allocations will vary over time.9281070 3/13
  • 10. Value beyond the indices: Putnam Diversified Income Trustseeks FI opportunities beyond the Barclays Agg and notreliant 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
  • 11. Re-evaluating diversification: Because traditional assetallocation formulas can mask a portfolios true risk allocationFor illustrative purposes only. This is not indicative of any Putnam fund or product.11 281070 3/13
  • 12. Low-beta stocks have producedstrong risk-adjusted returns U.S. large-cap stocks sorted by beta decile compared with the market, 1983 to 2012 0.8 0.7 0.6Sharpe ratio 0.5 0.4 0.3 0.2 0.1 0 1 2 3 4 5 6 7 8 9