July 12, 2024

A 7% Return? Absolutely!

A Guaranteed 7%: Can Putnam Pull It Off?

Who wouldn’t want a guaranteed return in this market? To know that you’re going to make money no matter what the market does is an understandably appealing notion. Problem is, the marketers at Putnam Investments agree.

Putnam has just released a series of “absolute return” funds that promise specific percentage returns — 1%, 3%, 5% or 7% above the Merrill Lynch U.S. Treasury Bill Index (a gauge of inflation) — if investors hold on for three years or more.

But like all things that seem too good to be true, so is the notion of a guaranteed return. Judging from the fund names — Absolute 100 (PARTX), Absolute 300 (PTRNX), Absolute 500 (PJMDX) and Absolute 700 (PDMAX) — shareholders could reasonably assume they would get the corresponding return. “It sounds like there are guarantees,” says mutual fund analyst Adam Bold. However, if you read the fine print in the funds’ prospectus you’ll see they don’t actually have to meet the returns indicated in their names. The documents state the funds “are designed to pursue consistent returns” but acknowledge a potential “risk of loss.” What’s more, that risk may actually be greater in these funds than that of relative-return funds. Those offerings typically invest in specific asset classes like large-cap stocks or bonds and try to beat benchmark indexes instead of aiming for specific levels of return. Putnam’s absolute-return funds invest in all manner of stocks, bonds and other securities, which can leave more room for error.

“The more choices you have, the easier it is to pick the wrong thing,” says Morningstar analyst Laura Lutton.

Putnam CEO Robert Reynolds says the broad mandate actually reduces risk and volatility by allowing the portfolio managers to focus on meeting the return.

Reynolds may be enthusiastic because he needs a hit after shaking up the company’s management ranks last year. Morningstar says assets in the company’s open-end funds were chopped in half last year to $40 billion due to outflows and the market downturn.

One thing to consider before buying in: fees. Annual expense ratios range from 1.82% to 2.82%, depending on the asset class. They promise to charge less if they miss their target returns — but not much less. The expense ratio for the Absolute 100 Fund only drops 0.04% if the fund does poorly. “That’s still more expensive than a good balanced fund,” says Bold.

It’s easy to predict the outcome for this fund

The only thing guaranteed here is that Putnam will be facing investor lawsuits down the road.  Salesmen, being what they are, will probably market this fund as having a guaranteed 7% return.  Although a 7% return is in no way guaranteed, an investor not doing his homework could justifiably misinterpret the words “absolute return” to mean “guaranteed return”.

In addition, this fund is classified by Putnam as class A shares which carry a huge front end load of 5.75%.

The following tables show how sales charges of class A shares vary across funds based on investment levels.

Growth, value, blend, asset allocation funds — class A
Amount invested Sales charge
Under $50,000 5.75%
$50,000 to $99,999 4.50
$100,000 to $249,999 3.50
$250,000 to $499,999 2.50
$500,000 to $999,999 2.00

An investor putting money into this fund would incur fees of around 7.55% in the first year for the front end load and the annual expense ratio.  To return 7% to the investor, Putnam would have to achieve over a 14% return on assets.  Over the past 10 years, the average mutual fund now has a negative return.  In addition, the vast majority of managed mutual funds (meaning actively traded) under perform a low expense S&P500 index fund.  The odds of an investor in the Absolute Return 700 Fund achieving a positive return or outperforming the S&P are remote.  The odds of Putnam earning handsome fees on this fund are outstanding.

Does the SEC ever look at these things?   If the SEC was doing its job properly, there would be more stringent rules that limit marketing hype of investment company mutual funds.   Investors have been punished enough over the past decade.

Pass on the “Guarantee”

There are many other places where an investor can put his money and be assured that the fund managers are working for the benefit of the investor.  Pass on this “guarantee”.