Since their introduction in January, Putnam Investments' family of absolute-return mutual funds has attracted more than $400 million of new investment assets and, according to the Boston investment management company, is on track to top $1 billion by yearend.
"We've seen incredible response across the industry," said Jeffrey Carney, a senior managing director and head of global marketing, products and retirement at the investment management firm. "We expect our funds to be one of the most successful fund launches of the year."
Despite their lack of a proven track record or an established benchmark for comparison, Putnam's absolute-return funds have been placed on several large brokerage platforms and are being sold by more than 3,400 financial advisers, he said.
The funds aim for three-year returns that beat Treasury bills by specific percentages. The Putnam Absolute Return 100 Fund aims to beat Treasuries by 1%; the Absolute Return 300 Fund, by 3%; the Absolute Return 500 Fund, by 5%, and the Absolute Return 700 Fund, by 7%.
Carney said that the 100 fund is intended to perform similarly to money market funds, the 300 is more like a short-term bond fund, the 500 resembles a balanced fund and the 700 is similar to equities.
The family of funds aim to achieve these goals over three years by investing in a range of asset classes, including cash, commodities, corporate bonds, international stocks, asset-backed securities, mortgage-backed securities and Treasury inflation-protected securities.
Introducing the funds amid a recession may be viewed as risky, but it appears to be capitalizing on investors' desire for safety and stability while maintaining equity exposure.
"We believe the funds offer a compelling way for investors, working with their financial advisers, to reenter the markets with funds that reflect their individual return targets and risk tolerance," said Robert L. Reynolds, Putnam's president and chief executive.
Though the funds are not intended to outperform stocks and bonds during strong market rallies and are not guaranteed to be less volatile than securities markets, Reynolds said, absolute-return portfolios can help investors manage volatility regardless of market conditions.
"These funds have a management fee structure that aligns the interests of manager and investor," Reynolds said. "It's simple: If the funds do not achieve the return targets, Putnam will be paid less. If the funds exceed the targets, we will be paid more. Of course, aside from this innovative fee structure, the funds have traditional sales charges."
The absolute-return strategy imitates hedge funds but with greater transparency and lower fees.
Hedge funds typically charge 2% of assets and 20% of returns. Putnam's absolute return funds have a sliding scale. The 100 fund has a base fee of 1.25%; the 300 has a fee of 1.35%; the 500 fund's fee is 1.5%, and the 700 fund has a fee of 1.65%, Carney said.
He said many wealthy investors should consider including absolute-return funds in their portfolios to balance equity exposure. "No one's really done anything like this in the way we've done it," he said. "We think this is going to be a huge category going forward. These funds are great products that complement active investment. The combination of the two products is very powerful."
Reynolds said that absolute-return funds may soon be a growing component of well-diversified portfolios, given that they are mutual funds and required to be transparent, highly liquid and closely regulated.
Putnam's portfolios in this category have been criticized by some industry leaders for making promises they cannot keep, but only time will tell whether they work, given the lack so far of a proven track record or a benchmark for tracking.
The funds will probably grow in popularity if market conditions are slow to recover, but many experts worry that Putnam will not be able to deliver its promised returns if the markets decline further. And if market conditions improve, investors would look foolish to pay such high fees and limit their gains.
Younger investors can afford to take more downside risk because they have more time to recover their losses, but those closer to retirement may still need to take risks, though not big ones.
Wealthy investors who do not have any sense of what equity markets will do in the next few years may find the promise of absolute returns comforting and worth the price.
"The fees reflect the complexity of the products," Carney said. "What you're doing is cutting off the tails. You avoid some of the downside, but you're also giving up some of the upside. These funds provide more consistent returns over time."
Vanguard Group founder John Bogle says that investors should not use absolute-return funds under any circumstances. He has always advocated investing in simple, cheap index funds and is wary of anything that deviates from the tried and true.
"Nobody can give you an absolute return," he said. "It implies an absolute positive return. It is greatly oversold."
Others are concerned by mutual funds' aiming to imitate hedge funds, noting how aggressive investments in options, derivatives and real estate and the use of leveraging caused hundreds of hedge funds to close last year.
"People are debating our product because we did it first," Carney said. "I'm not sure the criticism is well informed, but anything that creates debate is good."
Putnam remains confident that it can meet its targets, he said.
On Sept. 8, the Putnam Absolute Return 100 Fund was up 2.4% for the year, the 300 fund was up 4.9%, the 500 fund was up 6.3%, and the 700 fund was up 9.4%.
During the same period, the Dow Jones industrial average was up 8.2%, the Standard & Poor's 500 12.99%, and the Nasdaq 27.4%.