Bob Reynolds Putnam Investments CEO

Putnam [see profile] CEO Bob Reynolds rolled out another plank in his campaign to transform the Boston-based fund firm into a thought leader in the mutual business. Tuesday morning he took the wraps off the Putnam Institute, a "think tank" that brings together academics and Putnam executives [see The MFWire, 6/6/2011]. Putnam is not holding back in taking on widely held assumptions as part of its effort to carve out mindshare.

Target date funds are already under attack for letting down shareholders during the 2008 market meltdown, but the first paper out from the Putnam Institute raises the question of whether even the most conservative target date funds are taking too much risk in exchange for what they bring.

W. Van Harlow, director of research at the new institute, told reporters that the Putnam Institute's research shows that the optimal equity allocation in retirement is far lower than what today's target date funds use. In fact, he claims that funds should allocate as little as 10 to 12 percent of assets to equities.

Those low allocations provide better outcomes in both worst case and best case situations, says Van Harlow. The research is published in a white paper released this week by the Putnam Institute.

Earlier in his career Van Harlow helped Fidelity Investments create its target date funds. He says that even he did not appreciate the role that sequence of returns plays in determining how long a person's nest egg will last in retirement.

"It was not until the last two to three years that I fully appreciated the importance of sequence of returns," he confided.

If the research is born out, Van Harlow's thesis could reshape the allocations in target date funds, and that is what Reynolds is hoping to do.

"We want to challenge conventional wisdom," Reynolds explained before adding that Putnam recognizes that innovation will never cease to drive the mutual fund business. "We need to rethink equity allocations in portfolios, especially once people have reached retirement."

A second Putnam Institute white paper released Tuesday was authored by Brightworks' Merl Baker. That paper studied working Americans' retirement readiness. It found that workers are 64 percent of the way to building an adequate nest egg -- a number that Baker admits is surprisingly high.

About half of that amount rests on the Social Security system, showing that people are not as on their own as they may think, says Baker.

His research also found that most workers had a good sense of how well they are prepared for retirement (or not prepared, as the case may be).

Surprisingly, income played little role in how well workers have prepared their nest eggs. More important, said Baker, is how diligently people have saved and whether they have taken part in the employer-sponsored retirement system through a defined contribution, defined benefit plan or both.

The institute has six advisory board members, including former Fidelity executive and current University of Oklahoma Foundation chairman Guy Patton. The others are Keith Brown, professor at University of Texas; Daniel Cassidy of Cassidy Retirement Group; Joseph Coughlin, director of Massachusetts Institute of Technology AgeLab; Christopher Hennessey, associate professor of law at Babson College; and Meir Statman, finance professor at Santa Clara University.

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Company Press Release

BOSTON, June 28, 2011 –- Putnam Investments today announced the launch of the Putnam Institute, which will conduct rigorous research on investment theory and practice related to retirement and educational savings and the provision of lifelong income, to advance discussion and ultimately provide solutions in the retail, institutional and defined contribution markets.

At an event today in New York City, the Institute released its first study, by Research Director, Dr. W. Van Harlow, “Optimal Asset Allocation in Retirement: A Downside Risk Perspective.” The study arrives at a series of conclusions that challenge conventional industry wisdom and practice, including:

o Most lifecycle fund offerings in today’s market are too aggressive in their equity exposures: The appropriate range of equity allocation in retirement is between 5% and 25% (if an investor’s primary goal is to not outlive his or her assets);

o Once an investor begins net withdrawals, the greatest risk to his or her portfolio becomes a potentially unfavorable “sequence of returns” — not inflation, or longevity;

o The onset of net withdrawals should be seen as any investor’s “true” target date — and it should also mark the “terminal allocation” — the end of any roll-down or glide path; and,

o It makes no sense to continue rolling down equity exposure past anyone’s true target date — and funds that do so are overly risky and misleading.

Putnam Institute’s inaugural study focuses on one of the most critical investment decisions individuals face once they retire: how to allocate the assets in their portfolios. The study approaches the allocation issue by analyzing the downside risks created by uncertainty over investment returns and life expectancy. The research found that the range of appropriate equity asset allocations in retirement is strikingly low compared with those of typical target-date, lifecycle and other retirement funds now in the marketplace.

“Americans are confronted daily with complex personal finance decisions as they try to save and invest for their futures. All too often, they face uncertainty about how best to proceed, especially with issues such as asset allocation,” said Robert L. Reynolds, President and CEO of Putnam Investments, which will sponsor the Institute’s activities. “Putnam Institute’s first study challenges many common beliefs about asset allocation in retirement portfolios, and gives investors and their financial advisors a new perspective — and some clarity — on how best to secure their retirement portfolios.”

Commenting on the findings, Harlow noted that “The optimal asset allocation for retirement portfolios is surprisingly conservative. This study should give any retiree pause when setting an asset allocation path. If reducing the risk of outliving one’s assets is the main goal, then it is critical to limit equity exposure and recognize the impact that investment volatility can have on the sustainability of retirement assets.”

Harlow has been named Director of Research of Putnam Institute and will manage its activities. Drawing on resources from within Putnam Investments and the academic and policymaking communities, Putnam Institute will critically examine investment theories, strategies and assumptions, and suggest changes that can achieve better outcomes for companies, institutions, retirement plan sponsors, investment advisors and individual investors. The Institute will help advance the debate on these issues by publicly sharing its studies and by holding seminars and other educational events, including many intended to benefit the financial advisor community.

Harlow, who holds an MBA, a Ph.D. in financial economics and the Chartered Financial Analyst (CFA) designation, has been a thought leader in the asset management industry for more than two decades. In addition to serving as Director of Research of Putnam Institute, he also serves as Director, Investment Retirement Solutions, at Putnam Investments, and has long been active in professional circles, serving as Editor-in-Chief of Financial Analysts Journal from 1993 to 1998, and also as a member of the Council on Education and Research and the Research Foundation for the CFA Institute.

“I’m excited by the impact Putnam Institute can have on personal finance and financial services challenges. With the resources of Putnam Investments available to us, and access to many of the leading academics, policymakers and practitioners in this field, we have a unique opportunity to deepen the quality of the debate on a wide range of issues,” said Harlow. “We have a bias toward practical action, based on our core belief that there may be no perfect solutions, but that well-grounded research and experience can guide an unending process of innovation and improvement.”

The activities of the Institute also will be guided by an Advisory Board whose members have expertise in various fields relevant to the Institute’s mission. The charter members of the Advisory Board are:

o Keith C. Brown, Ph.D., CFA, Distinguished Teaching Professor, University of Texas

o Daniel Cassidy, FSA, CFA, Cassidy Retirement Group

o Joseph Coughlin, Ph.D., Director, Massachusetts Institute of Technology AgeLab

o Christopher P. Hennessey, J.D., CPA, Associate Professor of Law, Babson College

o Guy L. Patton, Chairman, University of Oklahoma Foundation

o Meir Statman, Ph.D., Professor of Finance, Santa Clara University

About Putnam Institute

Putnam Institute is a research and educational organization funded by Putnam Investments. Its focus is primarily on investment theory and practice related to retirement and educational savings and the provision of lifelong income. It aims to critically examine key investment theories, strategies and assumptions and suggest changes that can achieve better outcomes for companies, institutions, plans sponsors, investment advisors and individual investors. The Institute seeks to impact the investment, academic and policy-making communities by sharing its studies, seminars and other educational events with the public, the media and government officials. The full body of current research from Putnam Institute is available at www.putnaminstitute.com.

About Putnam Investments

Founded in 1937, Putnam Investments is a leading global money management firm with over 70 years of investment experience. At the end of May 2011, Putnam had $129 billion in assets under management, including mutual fund assets of $70 billion and institutional assets of $59 billion. Putnam has offices in Boston, London, Frankfurt, Amsterdam, Tokyo, Singapore and Sydney. For more information, visit putnam.com.  

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