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

  1. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 11. Re-evaluating diversification: Because traditional assetallocation 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
  12. 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 10 Market Avg stockSource: 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 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.12 281070 3/13
  13. 13. Risks may be rising in core fixed-income holdingswhile new drivers of return may still deliver results Low point in 10-year Treasury13 281070 3/13
  14. 14. Seeking income beyond bonds: Many S&P 500companies have been raising dividend pay outsNumber 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 paymentSource: Standard & Poor’s, 2012.14 281070 3/13
  15. 15. Three policy innovations our industryshould 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 baseline15 281070 3/13
  16. 16. New Thinking, New SolutionsRobert L. ReynoldsPresident and CEOPutnam InvestmentsThe views and opinions expressed are those of the speaker, are subject to changewith market conditions, and are not meant as investment advice.16 281070 3/13Mutual funds are distributed by Putnam Retail Management.
  17. 17. The views and opinions expressed are those of the Robert L. Reynolds, President and CEO of Putnam Investments, as of March 12, 2013, aresubject 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 aprospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call yourfinancial 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 stocksand 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 financialmarket conditions and factors related to a specific issuer or industry. You can lose money by investing in the fund. Our active trading strategy maylose money or not earn a return sufficient to cover associated trading and other costs. Our use of leverage obtained through derivatives increasesthese risks by increasing investment exposure. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bondinvestments 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 maydefault on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater forbelow-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 ofderivatives 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 theinstrument to meet its obligations. The fund may not achieve its goal, and it is not intended to be a complete investment program. The fund’seffort 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. Inaddition, under certain market conditions, the fund may accept greater volatility than would typically be the case, in order to seek its targetedreturn. Our alpha strategy may lose money or not earn a return sufficient to cover associated trading and other costs. REITs involve the risks ofreal estate investing, including declining property values. Commodities involve the risks of changes in market, political, regulatory, and naturalconditions. Additional risks are listed in the funds’ prospectus.Putnam Retail Managementputnam.com17 281070 3/13