Why Putnam Has Struggled With Its Absolute Return Funds

In Like a Lion The biggest fund happening of 2009 was the launch of the Putnam Absolute Return series. In the late '90s, Putnam had briefly been the nation's largest mutual fund company, but the next decade was unkind, to put the matter gently. To state the problem more directly, Putnam had no outstanding funds whatsoever and precious few good ones. It had nothing to sell.

Below were the Morningstar Ratings for Putnam’s funds (oldest share class), in January 2009. (As a refresher, the star ratings are assigned quantitatively based on a fund’s past performance and are distributed symmetrically so that there are equal amounts of low and high ratings.)

- 0

- 2

- 22

- 23

- 8

The technical term for that result is “disaster.”

So, Putnam bet the house, yard, and barn on four new funds: Putnam Absolute Return 100 PARTX, Putnam Absolute Return 300 PTRNX,

From the hype, you would have thought that New Coke had returned. In his excellent June 2009 article (I wish I had written that!), Nathan Hale of CBS MoneyWatch wrote, "If you missed the recent launch of Putnam's new Absolute Return funds, you really have only yourself to blame. Their debut earlier this year was backed by a full court press push: full page color ads, press releases, interviews, and prime real estate on the Putnam website."

And the claims were not shy. “No one’s really done anything like this in the way we’ve done it,” said Putnam managing director Jeffrey Carney. “We think this is going to be a huge category going forward."

Out Like a Lamb However, the category is not, nor are Putnam's funds. Today, funds with "absolute return" in their names command a total of $22 billion--one month's work for Vanguard. Putnam's share is just under $3 billion. That is a modest amount indeed, given that for several years the Absolute Return Series was the company's favored child. As a result of this underwhelming showing, Putnam has announced that it is "repositioning" the Absolute Return series by merging two funds and changing the other two.

(Not that the company was trumpeting the news. Its press release was crafted to be ignored. Its headline: “Putnam Investments Bringing New Focus and Definition to Several Products to Address Evolving Marketplace.” Brilliantly awful. Who would wish to read further?)

Specifically, Putnam is merging the series’ two largest funds, 700 and 500. The conjoined fund will be renamed Putnam Multi-Asset Absolute Return, and it will retain 700’s investment strategy and track record. The 300 fund will become Putnam Fixed Income Absolute Return. Its investment strategy will not change, but the fund will now start paying a monthly dividend, as do traditional bond funds. Finally, the 100 Fund will abandon the absolute return name altogether, becoming Putnam Short Duration Bond.

It would not be accurate to write that Putnam has abandoned ship. The company continues to offer two funds that retain the absolute return name, and, if the Fixed Income Fund’s claim for that designation is slightly dubious because of its new monthly dividend, Multi-Asset's is not. However, the announcement signals a strategic retreat--the admission of at least some level of failure. Successful launches lead to expansion, not contraction.

Nonbelievers For many observers, the reboot comes as no surprise. Hale was far from the only naysayer. In "Absolute return absolute nonsense," Jeff Benjamin of Investment News whacked the concept, quoting one source as saying, "The only absolute guarantee you have as an investor is that the market will go up or down, and you may or may not make money." Another stated that such funds "are misleading the retail market, and they're also misleading a lot of sophisticated investors." Investment author Bill Bernstein wasn't biting, either.

In 2012's "Absolute Tonic Water?" (oh, those puns), by Financial Advisor's Eric Rasmussen, I said, "Absolute return ... is a goal ... not an investment asset class or investment type. ... What's more, it's a fuzzy goal. Because it's not achievable, technically. None of these [absolute return] funds turn out a profit every month in a row or every quarter. The only way to do that, besides being in Treasuries, is to have Madoff next to your name."

Broadly speaking, other Morningstar researchers share my view. Although 48 funds (encompassing 200 share classes) put “absolute return” in their names, Morningstar has never created an absolute return category, despite lobbying from fund companies. It is not that the category would be too narrow. Rather, it is that absolute return funds don’t have much in common besides their labels.

In addition, the group is inherently unstable. Because absolute return is an ambition rather than an investment strategy and, furthermore, a very difficult ambition to achieve, funds that carry that label are liable to reinvent themselves. A fund that calls itself “U.S. large-company stock” or “short-term bond” is highly likely to continue doing what it has been doing unless it is merged out of existence. An absolute return fund, on the other hand, might become anything.

The Hard Way I would not go so far as to call absolute return funds "absolute nonsense" (a phrase that I also once used for the group, but I have become more moderate with age). However, I remain unconvinced. Investing in risky assets to achieve something approaching risk-free performance is akin to chasing unicorns. You may catch one, under extraordinary circumstances. But it's a hard way to go through life.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.