Putnam’s go-anywhere fund offers plenty of latitude

PMs can invest across range of asset classes, ramp up on leverage

Putnam Investments launched a new Go-Anywhere mutual fund today.

The Putnam Dynamic Risk Allocation Fund is designed to pursue consistent total returns in volatile investment markets by investing in a wide range of markets and asset classes. “We see it as core portfolio holding,” said portfolio manager Jeff Knight, Putnam’s head of global asset allocation.

Putnam’s entry into the increasingly popular world allocation fund category will rely less on equity allocations and more on fixed income, alternative assets and tactical fund management to achieve its returns. “We’ll be less willing to accept a buy-and-hold mantra and more willing to be tactical with the fund,” said Mr. Knight, who has been with Putnam for 18 years.

Indeed, a permissively written fund prospectus will give Mr. Knight and his colleagues wide latitude to invest across asset classes and the freedom to use as much as 2-to-1 leverage to boost returns on less volatile investments. He anticipates leverage to be typically in the range of a 1.25-1.5 to 1 ratio.

The firm has been using similar investment strategies with institutional investors for the last five to six years, said Mr. Knight. Two major insights led the firm to pursue the strategy and to introduce a product for financial advisers and retail investors. “We felt that we were facing lower long-term multiples on stocks and we wanted a product for people willing to settle for a little less return for a lot less risk.” he said.

Mr. Knight intends to reduce risk levels in the fund both by targeting less volatile stocks for the portfolio and, more importantly, by reducing his overall allocations to equities. The typical 60/40 balanced mutual fund actually derives about 90% of its risk from equities, he said. He wants to reduce that equity share of overall risk below 50% by allocating more money to fixed-income investments, commodities, REITs and other alternatives. “We’ll amplify the impact of lower volatility assets in the portfolio with leverage,” Mr. Knight said. “The strategy has delivered about twice the risk-adjusted returns [of traditional balanced fund allocations] over the last 5 years.”

The go-anywhere, tactical fund offering has been popular since market volatility began rising dramatically over the past few years. According to Morningstar Inc. there are currently 125 world allocation funds. Of those, nearly half were launched in the last two years.

“We believe that seeking better diversification by asset class currently offered by the new Putnam fund creates the potential for the fund to produce solid performance in a variety of market environments,” Robert Reynolds, president and CEO of Putnam Investments said in a statement.

The fund launch also provides another sign that Putnam has recovered from the market-timing scandals. The firm was one of the biggest names in the fund industry rocked by regulatory investigations of market-timing trading practices by fund employees in 2003.

Fallout from those scandals and poor performance of several of its funds led to massive redemptions by investors and ultimately to the sale of the firm by parent Marsh & McLennan Cos. Inc. to Power Corp. in August 2007. From a peak of about $450 billion in assets under management prior to the market-timing investigations, AUM fell to below $100 billion not long after Mr. Reynolds — the former chief operating officer of Fidelity Investments — took over in June 2008. The fund firm’s assets under management have since recovered to about $120 billion.