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Robert L. Reynolds: New thinking, new solutions

Robert L. Reynolds: New thinking, new solutions



Five years after the worst economic crisis of our lifetimes, we are still feeling the after-shocks around the world. ...

Five years after the worst economic crisis of our lifetimes, we are still feeling the after-shocks around the world.
Our recent financial past seems to herald one certainty for our collective
financial future: The investment world we grew up with has changed utterly.
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 century — need to be reexamined, revised, or even scrapped.



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    Robert L. Reynolds: New thinking, new solutions Robert L. Reynolds: New thinking, new solutions Document Transcript

    • PUTNAM INVESTMENTS | putnam.comIn this paper, my aim is to sketch some of the new solution-oriented approachesthat Putnam sees emerging on the cutting edge of innovative investment manage-ment — approaches that our firm has attempted to enhance with our own distinctivestrategies, views on portfolio construction, and focus on risk-awareness. As I hopeto show, new thinking in our world today is an imperative rather than an option.As we should have learned from the aftershocks of recent crises, we need to movebeyond our comfort zones when it comes to investing or we will risk being movedthere unwillingly by larger market and economic forces.From a discussion of investment innovation, this paper then moves to suggestthree retirement policy changes that I believe the financial services industry shouldwholeheartedly get behind — without delay — to enhance Americans’ retirementsecurity. To set the stage for this vision of greater retirement security, let’s beginwith a look at the recent, traumatic experiences that continue to shape investors’and advisors’ perceptions of investment risks and opportunities.The lost decadeClearly, the deepest sources of investor anxiety today are the lower returns andincreased volatility that we have seen over the past decade — and longer — amongcore asset classes. Figure 1 contrasts returns with standard deviations amonglarge- and small-company stocks and long-term corporate and government bonds.As the illustration demonstrates, returns from large-company stocks fell from over18% per year in the 1990s to nearly a 1% annual loss over the 2000s. Small-companystock returns also dropped from over 15% to just over 6%. In both cases, volatilityrose — and for small stocks, it soared. It should thus come as no surprise that weoften hear about a “lost decade” for equity returns.And while returns on government and corporate bonds fell only slightly from2000 to 2010 compared with returns in the 1990s — because this was mostly aperiod of falling rates — volatility in the fixed-income markets rose significantly.• Five years after the worsteconomic crisis of ourlifetimes, we are stillfeeling the after-shocksaround the world.• Our recent financial pastseems to herald onecertainty for our collectivefinancial future: Theinvestment world wegrew up with has changedutterly.• Conventional wisdomsshaped by decades ofhigh-return investing —first in equities from 1982to 2000, then in fixed-income markets over mostof this century — need tobe reexamined, revised, oreven scrapped.KeytakeawaysApril 2013 » Putnam perspectivesNew thinking, new solutionsRobert L. ReynoldsPresident and Chief Executive OfficerClearly, the deepest sources of investor anxiety todayare the lower returns and increased volatility thatwe have seen over the past decade — and longer —among core asset classes.
    • 2APRIL 2013 | New thinking, new solutionsFigure 1. Volatile markets shake confidenceLarge-companystocksSmall-companystocks1990s (1/1/90–12/31/99)Long-termcorporatebondsLong-termgovernmentbondsCompound annual returnsAnnualized monthly standard deviations18.2%13.4%16.1%15.1%17.4%23.7%7.6% 7.7%10.8% 11.5%8.4%6.4% 6.3%8.8% 8.2%-0.9%Large-companystocksSmall-companystocks2000s (1/1/00–12/31/09)Long-termcorporatebondsLong-termgovernmentbondsSources: Morningstar; Ibbotson S&P 500 Total Return Index, Small Company Total Return Index, Long-Term 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 anindex. Past performance is not indicative of future results.Figure 2. Volatility drives demand for risk-aware strategies12/31/80 12/31/1212/31/99$10,000$202,516$250,889Source: 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 abroad measure of market performance. It is not possible to invest directly in an index. Past performance is not indicative of future results.In the 1980s and 1990s, it made senseto seek benchmark returns.Since 2000, stocks have faltered,creating a need to focus on risk.Two bear markets caused a“lost decade” for stock investors.
    • PUTNAM INVESTMENTS | putnam.com3Taking a longer view, Figure 2 shows that an equityinvestor who committed just $10,000 to the S&P 500Index in 1980 would have enjoyed two decades oflargely spectacular returns — admittedly with a fewhiccups — and realized a total return of more than$200,000 by New Year’s Day 2000. That amounts toa 17.6% annualized return.Over the past 13 years, by contrast, that sameinvestor would have seen his or her holdings grow by acumulative 24%, which would have brought the port-folio’s value close to $250,000 — a gain of just 1.6%annualized for that period. This lackluster return furtherassumes that the investor would have had the patienceto sit tight through two of the scariest market sell-offssince the Great Depression.Given this raw experience of low returns and fright-ening volatility, widespread investor risk aversion,marked by flows out of equities and into bonds, is easilyunderstandable. So is the rising interest in a range ofassets and investment strategies that can potentiallymitigate volatility, limit the experience of uncertainty,and better shield retirement portfolios in the face ofmacro and geopolitical upheaval.High volatility among traditional asset classessuggests we look to non-core assets as sources ofpotential diversification. Real assets, such as preciousmetals, other commodities, and real estate — traditionalstays against inflationary forces — might be anticipatedto offer returns that are uncorrelated with those of equi-ties and bonds. However, as Figure 3 shows, the crisisof 2008 leveled the playing field for virtually all assettypes, which, with very few exceptions, joined equitiesin a precipitous decline.Beyond the core: absolute returnIn this way, 2008 drives home the point that attemptingto diversify by asset type is hardly fail-safe. One increas-ingly well-recognized response to the roller-coasterinvestment experience has been to pursue positive,absolute returns regardless of how the markets arebehaving. “Absolute return” funds typically employstrategies that go beyond asset diversification in order toprovide a steadier ride through a complete market cycle.A good way to understand such funds is in termsof offering a new dimension of diversification: not justacross traditional and non-traditional asset classes,Figure 3. Alternatives have shown they can help diversify risk0100200300400500600700800OilGoldREITsStocksBonds1995 1997 1999 2001 2003 2005 2007 2009 2011 12/31/12IndexlevelSources: 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.
    • 4APRIL 2013 | New thinking, new solutionsbut in terms of investment philosophy. Fund managersof these strategies are typically freer to “go anywhere,”and also to use a variety of instruments and tactics,including derivatives and short selling, that are notusually available to long-only equity and bond fundmanagers (Figure 4).In a real sense, absolute return strategies offer whatwe might call “no excuse” investing. Success in thiscategory is defined by positive, real returns, not bybeating a benchmark. Of course, there are a variety ofdifferent metrics that absolute return offerings use todefine success, and because of this they tend to defyeasy summary. But in our own case, at Putnam, the fourfunds in our absolute return suite aim to deliver 1%, 3%,5%, or 7% over inflation, as measured by the Treasurybill rate on a rolling three-year basis. Progress towardthose goals is what our managers are judged on — andcompensated for — putting our interests directly in linewith those of our investors.In the four years since we rolled out Putnam’s abso-lute return fund suite in early 2009, we have seen thenumber of offerings in the category nearly triple acrossthe industry, from about a dozen funds with “absolutereturn” in their names to 30 at the end of 2012.1 Thegrowth is testimony, I believe, to the need for innovationbroadly felt throughout the marketplace — and a much-needed response by the investment managementindustry to investors’ desire for a smoother ride.Our own absolute return funds as of March 31, 2013,reached close to $3 billion under management andhave been sold by more than 15,000 advisors — in justunder four years. As the track records of funds in thiscategory lengthen and as advisors’ familiarity with themgrows, I believe the potential growth of these strategiescould be as great as that of target-date funds — which1 Source: Strategic Insight Simfund, 2013.have gained increasingly wide acceptance in definedcontribution plans. Clearly, their arrival on Main Streetin the midst of one of the most volatile market andeconomic cycles since the Depression era was timely,and their growth trajectory over the next decade maybe dramatic.As readers may recall, the so-called category of “life-cycle” funds grew very slowly in the 1990s, but reallytook off in 2006, when policy in the form of the PensionProtection Act helped foster recognition of these fundsas qualified default investment alternatives (QDIAs) inemployer-sponsored retirement plans.Absolute return funds, by contrast, offer innovationaround solving the problem of volatility — and thiscritical investment philosophy is what the market maydesire above all else in the wake of 2008. Figure 5offers an illustration of this risk-mitigating feature, usingPutnam Absolute Return Funds as relevant examples.With 3-year standard deviations of Putnam’s fourstrategies shown in orange, the standard deviation of17 equity indexes ranging from the S&P 500 to theDow Jones-Wilshire 4500 and MSCI World Indexare shown in gray. This novel illustration makes clearhow our absolute return strategies constrain volatilityeven as both broad areas and niche pockets of globalmarkets offered highly fluctuating returns. The standarddeviation of Putnam Absolute Return 700 Fund isquite constrained; at 4.80, its standard deviation is lessthan a third of that of the S&P 500 Index, a barometerof large-cap U.S. stock performance.We cannot say definitively what share of a totalportfolio should appropriately be devoted to absolutereturn strategies. The answer, of course, will dependon an investor’s goals and tolerance for risk. But asFigure 6 shows, mixing absolute return strategies withmore variable assets could potentially lower a portfolio’soverall volatility.Figure 4. One rising response: Absolute return strategiesAbsolute return Traditional strategySuccess = positive returns Success = beating market benchmarkRisk = negative returns Risk = lagging the marketFree to “go anywhere” — invest across sectorsand marketsLimited to invest in one market or one type of security
    • PUTNAM INVESTMENTS | putnam.com5Figure 5. Absolute return at the core may help reduce portfolio risk2015105MSCIEMFIndex-21.517.91-RussellMidcapGrowthIndex15.66-Russell1000GrowthIndex15.41-Russell1000Index20.72 - Russell 2000 Growth Index19.89 - Russell 2000 Value Index16.74 - MSCI World Index15.73-Russell3000IndexRussell 1000 Value Index - 15.51Russell 2000 Index - 20.219.37-MSCIEAFEIndex15.67-DowJonesWilshire5000IndexDowJonesWilshire4500FloatIndex-18.55S&P500Index-15.09S&P SmallCap 600 Index - 18.96S&P MidCap 400 Index - 17.9RussellMidcapValueIndex-16.76The risk of market ups and downsStandard deviation (SD) measures historical riskby indicating how far monthly returns have variedfrom a long-term average over a three-year period.High SD — many or larger performance swingsLow SD — fewer or smaller performance swingsFundStandarddeviationAbsolute Return 100® 1.28Absolute Return 300® 2.88Absolute Return 500® 3.99Absolute Return 700® 4.80Absolute return funds offer a low-risk profileStock market risk has tested the patience of investors in recentyears, as shown by the high 3-year standard deviations of theequity indexes filling this chart.
    • 6APRIL 2013 | New thinking, new solutionsLooking beyond the indexTraditional investing tends to assume that the best wayto capture market opportunity is to use a representativeindex. But indexes such as the S&P 500 or the BarclaysAggregate may fall short of representing the universeof investment options that investors need to access inorder to efficiently pursue their investment goals. It isinstructive to consider, for example, that the S&P 500includes just 3% of the publicly traded companies in theUnited States. While the index does capture the bulkof gross equity market capitalization, there are manyoptions for pursuing equity investment success beyondthe index.A good example of this would be Putnam CapitalSpectrum Fund, managed by David Glancy. Despiteits strong equity bias, this fund held just nine of the500 names on the S&P 500 Index at year-end 2012.According to David, many of the best equity opportuni-ties are simply not contained in the “broad market” asrepresented by the S&P, and so his strategy is to pursuethe best ideas wherever he finds them — a philosophythat extends to the capital structure itself in the case ofthis fund.At Putnam, we believe that the preservation andgrowth of wealth through investing is always an activeendeavor. The practice of looking beyond broad indexes,therefore, characterizes many of our fixed-incomeapproaches. A striking example of how we seek valuebeyond an index can be seen in a comparison of theholdings of Putnam Diversified Income Trust — a multi-asset fixed-income fund — with the assets representedin Barclays U.S. Aggregate Bond Index. These two setsof securities overlapped by only 11% at year-end 2012.2Clearly, the fund managers sought opportunities fordecent returns — and lower duration risk — far afield ofthe Treasuries, agency securities, and investment-gradecorporate bonds that dominate “the Agg.”2 Sources: Putnam, Barclays.Figure 6. Reevaluating diversification — seeking true “risk allocation”Traditional balancedallocationWhen viewed byPutnam’s analysisof risk and returnReveals a risk allocationthat is concentrated1 32Equity riskCommodities riskFixed-income riskEquitiesCommoditiesFixed incomeDiversification does not assure a profit or protect against loss.It is possible to lose money in a diversified portfolio.At Putnam, we believe that thepreservation and growth of wealththrough investing is always anactive endeavor.
    • PUTNAM INVESTMENTS | putnam.com7Diversifying by riskPutnam Diversified Income Trust, and our fixed incomeand asset allocation teams more broadly, suggest thatwe apply a new lens to today’s market opportunities,especially when we seek forms of diversification that gobeyond diversifying by asset class.An eye-opening measure of the problem of diversi-fication by asset types is evident when we measure therisk in a traditional “balanced” fund allocation (Figure 6).In this case, a portfolio of 60% equities, 10% commodi-ties, and 30% fixed income may seem to be spreadacross much of the market’s available opportunity set —yet the portfolio is anything but diversified. Indeed,90% or more of the risk of this “balanced” portfolio mayproceed just from its 60% exposure to stocks.3 Thus,while assets appear to be diversified, the portfolio risksare clearly concentrated in one source: equities.This is why we believe it is important to incorpo-rate risk-assessment not only in judging portfoliocomposition but within asset classes, as well. In thecase of equities, for example, we divided the invest-able universe of stocks into groupings by historical risk.Figure 7 shows the Sharpe ratios of stocks in the Russell3 Sources: Putnam, S&P 500, Barclays Aggregate Bond Index, GSCI.1000 ranked in ten groups based on their beta over theperiod 1983 to 2012 and compared with the market as awhole and the average stock.A Sharpe ratio measures returns per unit of risk — inother words, it measures the efficiency of investing.Columns 1 through 5 on the left in the illustration repre-sent low-beta stocks that offered significantly betterreturns per unit of risk than the high-beta stock incolumns 6 through 10. These higher-beta stocks actuallyproduced lower risk-adjusted returns than that of thelarger market and the average stock, and this phenom-enon has persisted over quite a long time.This focus on efficient returns will, I believe, becomeeven more critical to investors if we stay in a sustainedperiod of constrained returns and high volatility. Thisis why we believe that there is a real opportunity forstrong returns to be found among low-beta stocks,which we attempt to capitalize on in many of our equitystrategies at Putnam.Figure 7. Low-beta stocks have produced strong risk-adjusted returns1 2 3 4 5 6 7 8 9 10 Market AveragestockSharperatioU.S. large-cap stocks sorted by beta decile compared with the market, 1983 to 201200. Putnam, Russell, IDC, Barra. Chart represents one thousand largest U.S. stocks each month, as represented by the Russell 1000 Index, anunmanaged index of large-cap companies. You cannot invest directly in an index. Ten equal-weighted portfolios were formed each month, one for eachdecile of beta. These portfolios were rebalanced monthly. Beta measures volatility in relation to the fund’s benchmark. A beta of less than 1.0 indicateslower 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.Sharpe ratio is a measure of historical adjusted performance calculated by dividing the fund’s return minus the risk-free rate (Merrill Lynch 3-MonthT-Bill Index) by the standard deviation of the fund’s return. The higher the ratio, the better the fund’s return per unit of risk.We believe it is important toincorporate risk-assessment not onlyin judging portfolio composition butwithin asset classes, as well.
    • 8APRIL 2013 | New thinking, new solutionsSimilarly, in fixed income, as our earlier illustrationof Putnam Diversified Income Trust suggested, wecontinue to seek value beyond traditional core assets byincluding new drivers of return — specifically, sourcesof risk other than interest-rate risk, which is over-represented in the Barclays Aggregate Index. High-yieldbonds, for example, are a critical source of credit risk,which is not well represented in the Agg. Another typeof risk — prepayment risk — can be found in mortgage-related debt, while still other types of risk that diversifyaway from interest-rate or duration risk can be found inemerging-market fixed-income securities.Figure 8 shows returns over the past year for PutnamDiversified Income Trust versus the Barclays U.S.Aggregate Bond Index. Significantly, the fund continuedto register gains, even when the index stalled andbegan moving sideways. This illustrates our convictionthat finding value in today’s constrained fixed-incomemarkets requires moving beyond a supposedly broadmarket index’s deceptively narrow pool of risk/returnpotential.Figure 8. Risks may be rising in core fixed-income holdings; need new driversAll information presented in this illustration is for informational purposes only and is not intended to be investment advice. The information is notmeant to be an offer to sell or a recommendation to buy any investment product. For complete fund data and performance as of the most recentcalendar quarter-end, see additional disclosure beginning on page 11.All information is historical and not indicative of future results. Current performance may be lower or higher than the quoted past performance, whichcannot guarantee results. Share price, principal value, and return will vary, and you may have a gain or a loss when you sell your shares. Performanceassumes reinvestment of distributions and does not account for taxes. After-sales-charge returns reflect the maximum sales charge applicable to thefund. Performance may not reflect any expense limitation or subsidies currently in effect. Short-term trading fees may apply.
    • PUTNAM INVESTMENTS | putnam.com9Plugging in to the power of stock dividendsAt Putnam, we have noticed an important trend amonglarge-cap companies. A growing number of S&P 500companies have either started to pay dividends orhave raised their dividends as company profits havecontinued to grow — and in some cases, reachedrecord levels.Income, of course, is a critical investment objectiveof many investors, but particularly older ones: babyboomers fast approaching retirement, for example,and retirees who rely on their investments’ ability togenerate cash to cover their expenses on a regular basis.These income-oriented investors have traditionally —and even recently — looked to bonds as their primarysource of income. But the prevailing low-interest-rateenvironment has made their investment objectiveincreasingly difficult to pursue with confidence. For thisreason, we believe income investors with their advisorscould consider dividend-paying equities, many of whichhave offered substantial yields to investors in recentmonths, in addition to capital appreciation potential.Policy innovations to embraceAmerica’s workplace savings system, as I have arguedin other contexts, contains the basic framework forenabling working Americans to provide for their ownfuture incomes in retirement. But there are three keyretirement policy innovations that I believe everyonein the asset management industry and policymakingcircles should support. These innovations are auto-enrollment, national eligibility, and a 10%+ threshold forretirement deferral rates. With these three componentsin place, I would suggest that we could go a long waytoward solving our country’s retirement saving challengeThe first of these policy reforms is already in place.The Pension Protection Act (PPA) of 2006 has alreadysuggested that auto features in plan design now enjoyofficial sanction as helpful facets of a retirement savingsplan structure. I would go further and say they shouldbe mandated as the new norm for all workplace savingsplans.By this, I mean “fully automatic” plans that incor-porate auto-enrollment, annual auto-reenrollment,auto escalation to higher deferral rates, and automaticdefaults to qualified target date or balanced funds.These features should, I believe, be incorporated inevery workplace savings plan in America.This is not just my opinion. Evidence from Putnam-sponsored surveys4 shows that these features aidretirement preparedness across all levels of income andareas of industry specialization.4 See Putnam’s “Lifetime Income Scores III: Our latest assessment ofretirement preparedness in the United States,” a white paper thatpresents the findings of Putnam’s collaborative retirement researchwith Brightwork Partners. For a description of the Lifetime IncomeScoreSM, see additional disclosure beginning on page 11.Figure 9. Income beyond bonds: rising S&P dividends1516682009 2010 2011 2012102433203332213 15 114 1 15 0Increasing their dividendDecreasing their dividendNumber of S&P companiesStarting to payStopping paymentSource: Standard & Poor’s, 2012. There are no guarantees that a company will continue to pay dividends.
    • 10APRIL 2013 | New thinking, new solutionsFigure 10. Retirement policy innovations1Make the PPA’s bestpractices the new normFull “AUTO”for allworkplacesavings2Extend workplacesavings coverage to allSupportAUTO-IRA3Raise deferral savingsrates system wide10%+as thenewbaselineFor the second point, I would ask that we cometogether as an industry to explicitly support the exten-sion of some form of workplace savings coverage toall working Americans — so that everyone subject tothe requirement of paying FICA taxes can also have anoption to save for their own future.Let’s require all employers — at a minimum — tooffer a payroll deduction IRA. This is a bipartisan ideaoriginally proposed by the Heritage Foundation andthe Brookings Institution. While it has repeatedly beenintroduced into legislation, it has not yet passed. Givingevery worker subject to FICA the option to also saveon the job via payroll deduction would be a huge stepforward to meeting America’s retirement savingschallenge. And it would also correct a major flaw thatcritics of workplace savings constantly use to attackthe DC system.Third and last, I believe we should lift the bar onsavings rates across the workplace savings systemfrom the roughly 7% level we’ve achieved today to anew baseline of 10%+. Putnam’s annual Lifetime IncomeSurveys, now in their third year, have shown us, pastdoubting, that there is a significant minority today —roughly 19 million people — who are on track to replace100% or more of their incomes once they retire andbegin collecting Social Security.Across all income groups, this successful minorityhas two basic things in common — first, they take partin workplace savings plans and second, they defer 10%or more of their incomes into their retirement savingsplans. I should note that those who draw on the adviceof a professional advisor do even better.To me, this suggests a moral obligation to do every-thing we can to generalize these key elements ofsuccess: workplace savings access and 10%+ deferrals.As a retirement-focused industry, we really do not serveanyone well by allowing them to believe that saving3%, 5%, or even 7% is enough to ensure retirementreadiness. I believe people deserve to hear this truthabout the challenge of retirement saving.Securing savings access for all will require newlegislation, and moving to full-auto plan design and10%+ deferrals means changing plan design and liftingcurrent savings rates by 40%–50% across tens ofthousands of plans and among millions of participants.That said, I can’t think of clearer, more effectivegoals that we could set for ourselves — as investmentprofessionals, providers, and advisors — to do ourshare of solving America’s retirement savings challenge.As a retirement-focused industry, we really do not serve anyone well byallowing them to believe that saving 3%, 5%, or even 7% is enough to ensureretirement readiness.
    • PUTNAM INVESTMENTS | putnam.com11Figure 11. Putnam Diversified Income Trust (PDINX)Annualized total return performance as of March 31, 2013Class A shares(inception 10/3/88)Before saleschargeAfter saleschargeBarclays U.S. AggregateBond IndexLast quarter 3.63% -0.51% -0.12%1 year 10.27 5.86 3.773 years 7.24 5.79 5.525 years 6.13 5.27 5.4710 years 6.21 5.78 5.02Life of fund 6.84 6.66 7.03Total expense ratio: 0.99%Returns for periods of less than one year are not annualized.Current performance, which may be lower or higher than the quoted past performance, cannot guarantee future results.Share price, principal value, and return will vary, and you may have a gain or a loss when you sell your shares. After-sales-charge returns reflect a maximum sales charge of 4.00%. Performance of other share classes will vary. For the most recentmonth-end performance, visit putnam.com. The fund’s expense ratio is based on the most recent prospectus and issubject to change.The Barclays U.S. Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed-income securities. Youcannot invest directly in an index.Ibbotson Large Company Total Return is a market-value-weighted benchmark of large-company stock performancebased upon the S&P 500 Index.Ibbotson Small Company Total Return Index is represented by the fifth capitalization quintile of stocks on the NYSE for1926–1981. For January 1982 to March 2001, the series is represented by the DFA U.S. 9-10 Small Company Portfolio andthe DFA U.S. Micro Cap Portfolio thereafter.Ibbotson Corporate Bond Index represents high-grade (typically AAA and AA) corporate bonds with approximately a20-year maturity.Ibbotson U.S. Long-Term Government Bond Index is an unweighted index that measures the performance of 20-yearmaturity U.S. Treasury Bonds, and includes reinvestment of income.Fund returns and benchmark returns reflect security valuations and currency translations as of March 28, 2013.The Putnam Lifetime Income Survey, with research methodology provided by the Putnam Institute, was conductedonline by Brightwork Partners and completed in January 2013. The survey of 4,089 working adults aged 18 to 65 wasweighted to U.S. Census parameters for all working adults.IMPORTANT: The projections, or other information generated by the Lifetime Income Score regarding the likelihood ofvarious investment outcomes, are hypothetical in nature. They do not reflect actual investment results and are not guar-antees of future results. The results may vary with each use and over time.The Putnam Lifetime Income ScoreSM represents an estimate of the percentage of current income that an individual mightneed to replace from savings in order to fund retirement expenses. This income estimate is based on the individual’samount of current savings as well as future contributions to savings (as provided by participants in the survey) andincludes investments in 401(k) plans, IRAs, taxable accounts, variable annuities, cash value of life insurance, and incomefrom defined benefit pension plans. It also includes future wage growth from present age (e.g., 45) to the retirement ageof 65 (1% greater than the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)) as well an esti-mate for future Social Security benefits.
    • APRIL 2013 | New thinking, new solutionsPutnam Retail Management | One Post Office Square | Boston, MA 02109 | putnam.com  EO195 281179 4/13The Lifetime Income Score estimate is derived from the present value discounting of the future cash flows associatedwith an individual’s retirement savings and expenses. It incorporates the uncertainty around investment returns (consis-tent with historical return volatility) as well as the mortality uncertainty that creates a retirement horizon of indeterminatelength. Specifically, the Lifetime Income Score procedure begins with the selection of a present value discount rate basedon the individual’s current retirement asset allocation (stocks, bonds, and cash). A rate is determined from historicalreturns such that 90% of the empirical observations of the returns associated with the asset allocation are greater thanthe selected discount rate. This rate is then used for all discounting of the survival probability-weighted cash flows toderive a present value of a retirement plan. Alternative spending levels in retirement are examined in conjunction with thisdiscounting process until the present value of cash flows is exactly zero. The spending level that generates a zero retire-ment plan present value is the income estimate selected as the basis for the Lifetime Income Score. In other words, it isan income level that is consistent with a 90% confidence in funding retirement. It is viewed as a “sustainable” spendinglevel and one that is an appropriate benchmark for retirement planning. The survey is not a prediction, and results may behigher or lower based on actual market returns.The views and opinions expressed are those of Robert L. Reynolds, President and CEO of Putnam Investments, aresubject to change with market conditions, and are not meant as investment advice.Consider these risks before investing: Our allocation of assets among permitted asset categories may hurtperformance. The prices of stocks and bonds in the funds’ portfolio may fall or fail to rise over extended periods of timefor a variety of reasons, including both general financial market conditions and factors related to a specific issuer orindustry. You can lose money by investing in the funds. Our active trading strategy may lose money or not earn a returnsufficient to cover associated trading and other costs. Our use of leverage obtained through derivatives increases theserisks by increasing investment exposure. Bond investments are subject to interest-rate risk, which means the prices ofthe funds’ bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which isthe risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greaterfor longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be consideredspeculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offerhigher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backedsecurities 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 potentialinability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meetits 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 forthe funds to achieve their targeted return. In addition, under certain market conditions, the funds may accept greatervolatility than would typically be the case, in order to seek their targeted return. REITs involve the risks of real estateinvesting, 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.Request a prospectus, or a summary prospectus if available, from your financial representative or by calling Putnamat 1-800-225-1581. The prospectus includes investment objectives, risks, fees, expenses, and other information thatyou should read and consider carefully before investing.