November 9, 2010 / 8:29 PM / 9 years ago

Putnam sees absolute-return mutual funds taking off

* Putnam says absolute returns funds attracted $3 billion

* CEO sees 10-15% of mutual fund assets in absolute return

* Industry-wide absolute return funds have $140 bln-Lipper

By Joseph A. Giannone

NEW YORK, Nov 9 (Reuters) - Putnam Investments says demand for absolute return mutual funds, strong over the past two years, will accelerate as more investors seek hedge fund strategies to navigate flat or falling markets.

Putnam, a top mutual fund manager and a unit of Canada’s Power Financial Corp (PWF.TO), says its four new absolute return funds have attracted $3 billion from investors since they were introduced at the end of 2008.

Looking ahead, Putnam Investments Chief Executive Robert Reynolds predicted market demand would explode over the next decade, much as life-cycle funds took off after a slow start in the 1990s.

“The question advisers should ask is not whether they should put clients into absolute return funds, but how much they should deploy,” Reynolds said during a New York presentation to advisers and reporters on Tuesday.

Putnam in December 2008 introduced four funds that aim to outperform U.S. Treasurys, net of expenses, by varying degrees: from 1 percentage point to 7 percentage points. Fees paid by investors ranged from 1.12 percent to 1.59 percent of assets, reflecting Putnam fee caps through February 2011.

Absolute return strategies, common in the hedge fund world, promise investors a certain level of performance regardless of market conditions and with less volatility than traditional funds invested in stocks and bonds.

Last month alone, assets under management in these strategies rose by 10 percent, Gabriel Burstein, global head of investment research for Thomson Reuters’ Lipper and Digital Venture, said at the Putnam briefing. Today there are close to 1,000 funds with $140 billion under management, he said.

Growing demand will come as more pensions, retirement plans and wealth advisers add absolute return strategies to portfolios. Reynolds said these strategies could command 10 to 15 percent of total mutual fund assets.

Based on U.S. mutual fund assets at the end of September, that translates to $1 trillion to $1.5 trillion.

“That’s the way this category is going to take off,” Reynolds said.

So far, he added, some 9,000 financial advisers from 400 firms have sold a Putnam absolute return fund to clients.

There are risks, of course. Putnam “aims” to deliver outperformance but there are no guarantees. Also, absolute return strategies can often lag gains during rising markets.

Lipper’s head of Americas research, Jeff Tjornehoj, says the data shows that a blend of 40 percent stocks and 60 percent bonds “strongly outperformed” the average absolute return fund during the past 12 months.

Lipper and Reuters News are units of Thomson Reuters (TRI.TO) (TRI.N). (Reporting by Joseph A. Giannone. Editing by Robert MacMillan)

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