Moving target: Sky-high turnover in Putnam’s TDFs

Data shows an 83% flip rate over past three years; firm cites revamp of Retirement Ready line

Putnam Investments, MFS Investment Management and GuideStone Financial Resources market target date fund families with turnover well above the industry average — prompting industry observers to wonder if investors and advisers are aware of what they are investing in.

Lawmakers and fund providers have been looking for ways to lower risks in target date funds since 2010 funds lost an average of 25% in 2008. Most of the scrutiny has been on the glide paths of short-horizon funds — those for people nearing retirement — because of their stock-heavy allocations. In June, the Securities and Exchange Commission proposed rules increasing the disclosure requirements that target date fund managers have to provide investors about their glide paths.

But now, some experts say that regulators may want to look at fund turnover within these products.
Over the past three years, Putnam’s target date fund series saw fund turnover of 83.2%, according to data culled for InvestmentNews by BrightScope Inc. MFS’ target date fund families saw turnover of 37.7% while GuideStone’s target date fund family saw turnover of 36%. The industry average for turnover of funds within target date funds is 22.5%, according to Morningstar Inc.

“In general, it’s getting harder to do due diligence on these funds and know what the strategy is,” said Ryan Alfred, president and co-founder of BrightScope. “This is something that you are supposed to hold on to for 30 years, but you have no idea what they are going to look like in three.”

Putnam’s high turnover rate is a result of the firm’s decision to revamp its Retirement Ready funds after its CEO, Robert Reynolds, came on board in 2008, said Jeffrey Knight, head of global asset allocation at Putnam.

In response to the market crash of 2008, the firm last September incorporated its Absolute Return funds as underlying portfolios within the target date funds to provide more downside protection, said Jeffrey Knight, head of global asset allocation at Putnam.

“We don’t anticipate changing the asset allocation in the future,” he said.

Similarly, MFS’s seeming high fund turnover numbers are due to the fact that the firm added a number of funds to its Lifetime Funds target date series in 2009. “MFS enhanced the funds by adding greater diversification through more underlying funds in the fixed income, international equity and alternative asset classes in 2009,” spokesman Daniel Flaherty wrote an in e-mail.

Christy Smith, a spokeswoman for GuideStone, didn’t return calls by press time.