Finding Unintended Consequences Drives Reynolds' Putnam Strategy
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Tuesday, June 29, 2010

Finding Unintended Consequences Drives Reynolds' Putnam Strategy

New regulations, and their accompanying unintended consequences, necessarily open doors to many opportunities. With the flurry of regulatory changes coming thanks to the fall 2008 liquidity crisis, those doors are opening now, believes Putnam Investments CEO Bob Reynolds. One opportunity, says Reynolds, may be in short-term fixed income in an interview.

Reynolds sees fund firms willing to stretch the boundaries of money markets with what he calls "non-dollar denominated" funds (those that do not keep their NAV at a buck).

He points to the new rules that restrict the type and and duration of money fund holdings as creating more of a commodity environment. As the range of possibilities and returns offered by money funds restricts, the opportunity for fund firms to roll out alternatives will expand, predicts Reynolds.

"These new rules will open the door and allow manager the opportunity they need to differentiate themselves," he says.

Interestingly, Putnam is not a big player in money market funds, but it does have a presence on the fixed income side of the ball.

Reynolds' two-year anniversary at Putnam falls this week, and he has spent that time recreating Putnam around another "unintended consequence" of new regulation.

At the start of the century then New York Attorney General Eliot Spitzer, rewrote the rules governing Wall Street research even before he rewrote trading rules for mutual funds. That rewrite created an opportunity for Putnam to rely on proprietary, fundamental research to create a sustainable edge in active equity management, Reynolds believes. The hedge funds using short-term investing strategies have pushed that door even further open, creating still more value in long-term, fundamental research.

To take advantage of that opportunity, Reynolds reports that Putnam has doubled its equity analyst team with 25 new hires since he took over two years ago. He also implemented performance-based fees for the Putnam funds to put Putnam on the "same side of the table" as shareholders.

To align the interests of PMs and analysts, Reynolds also shook up how the bonus pools at the firm are split.

He also developed a strategy to leverage those fundamental research abilities with the absolute return strategies. Those funds target a positive return paired with a premium over inflation.

So far, those funds are hitting on all cylinders. The absolute return family of funds recently surpassed the $2 billion in AUM mark, says Putnam.

"It took a year to cross a billion and another six months to cross the two billion mark," says Reynolds, before adding that "7,500 advisors have sold this product, and another 95 percent say that they would recommend it to another advisor."

In September, Reynolds and his crew at Putnam will push out new funds built around fundamental research in multi-cap strategies to further build on the growing opportunity.

Another opportunity, says Reynolds, is in the still nascent retirement income area.

"There is a huge challenge for the whole industry that we are spending a lot of horsepower on is the issue of retirement income," he says.

Finally, one area where you do not see Putnam leveraging its edge in proprietary research is the ETF market.

Reynolds notes that the ETF space remains dominated by passive equity products and that hurdles remain for active equity specialists seeking opportunities in ETFs.

"Among the drawbacks is that you are exposing the portfolio every day. If we are investing heavily in fundamental, proprietary research showing our cards every day is not a smart move," Reynolds observes.

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