BOSTON, May 24, 2016 — Putnam Investments today released “Four Strategies for a World of Uncertainty,” a thoughtful new strategic blueprint to help financial advisors — and their clients — navigate today’s dynamic markets. As part of its continuing “Maneuver in MarketsTM“ program, Putnam will be rolling out a series of written perspectives on modern investment approaches that should be considered in managing risk and seeking to make the most of opportunities that current market turmoil may be masking.
“Today’s financial advisor and investor face a complex web of market drivers and environmental factors that make the task of long-term investing seemingly more challenging and daunting than ever,” said Robert L. Reynolds, President and CEO, Putnam Investments. “Our firm believes there is a new framework of thinking that can be helpful in maneuvering these markets and is designed to address the protection and growth of investment assets.”
“Four Strategies for a World of Uncertainty,” identifies key market challenges related to “specific segments that have been transformed by interventionist central bank policy and macroeconomic uncertainties” prevailing in recent years, along with corresponding strategies to allow a portfolio to potentially weather adverse conditions and seize stealth opportunities.
Navigating rates by investing outside common indexes
Bonds have long been valued by investors who are seeking a reliable source of income and refuge from the volatility of stocks. However, as central banks consider scaling back ultra-low interest rates, pursuing income with benchmark-aligned strategies may be less safe than many people think, according to the just-released Putnam paper. Currently, the benchmark Barclays U.S. Aggregate Bond Index, which represents more than $18 trillion worth of bonds, is marked by long duration. If rates start to rise across the yield curve, longer-duration debt could incur real losses.
As an alternative, advisors, on behalf of their clients, should consider looking beyond traditional bond indexes at securities that are not overly subject to the risk of rising rates, such as high-yield debt, emerging market debt and non-agency residential mortgage-backed securities.
Exploring new opportunities at the short end of the yield curve
Money market funds have long been considered among the very safest investments. New regulations intended to make these investments more liquid also have had the effect of limiting their scope — shrinking the universe of what is “safe.” Moreover, the addition of mechanisms to allow redemption fees and “gates” — limits on redemptions — actually could make advance runs more likely if investors fear they will not be able to get their money out quickly in a crisis. Investors may find that their short-term investment vehicles potentially leave them at greater risk than they had thought.
Advisors may want to consider short-term investment vehicles that can exploit the space between money markets and ultra-short bond funds, which could offer both a robust capital preservation profile as well as real higher-yield potential.
Managing market volatility with modern diversification strategies
Despite the recent flurry of rule changes and efforts to reduce systemic risks, market volatility continues to rattle investors’ nerves. Motivated by fear, investors often move with the herd, whether that means expecting the worst risks will come to pass or feeling like risk has suddenly disappeared. Diversification is one option, but investors can find it hard to manage the volatility affecting their portfolios, especially since correlations within equities can rise dramatically during periods of high volatility.
One way to counter this correlation problem is to employ an absolute return approach that seeks uncorrelated sources of return. Absolute return funds generally take a highly flexible approach to asset classes, geographies and trading strategies: Not only can they invest in stocks, bonds, cash and derivatives, but they also can invest anywhere, sell securities short to benefit from declining markets and employ leverage to enhance performance when markets are flat.
Active strategies offer valuable sources of growth
Pursuing greater returns in the equity markets may seem like one of the most difficult paths an investor can take but, as more investors shed riskier assets during uncertainty, the balance of risk and reward may tilt in favor of stock investments. In choppy markets, investors need to assess whether something fundamental has changed for the worse in a given stock, or whether a compelling buying opportunity is emerging, particularly for those companies where the fundamentals have not slipped.
In working with their clients, advisors will want to stay committed to an investment plan rather than to try to guess the best time to be in the market, especially during short periods of volatility. Over longer timeframes, earnings matter most in the determination of stock prices, so investors should consider actively-managed stock selection backed by deep research into company fundamentals such as balance sheet flexibility, market share advantage and superior technological attributes.
“We view advisors as our full partners in serving investors, and we want them to have the best information and tools available to help their clients make the right decisions,” said Scott Sipple, Head of Global Investment Strategies, Putnam Investments. “The ‘Maneuver in Markets’ program, exemplified by leading-edge thought pieces such as “Four Strategies for a World of Uncertainty,” has been created to provide extra assistance in navigating today’s markets.”
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: Our allocation of assets among permitted asset categories may hurt performance. The prices of stocks and bonds in the funds’ portfolio may fall or fail to rise over extended periods of time for a variety of reasons, including both general financial market conditions and factors related to a specific issuer or industry. Our active trading strategy may lose money or not earn a return sufficient to cover associated trading and other costs. Our use of leverage obtained through derivatives increases these risks by increasing investment exposure. Bond investments are subject to interest-rate risk (the risk of bond prices falling if interest rates rise) and credit risk (the risk of an issuer defaulting on interest or principal payments). Interest-rate risk is greater for longer-term bonds, and credit risk is greater for below-investment-grade bonds. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging-market securities, including illiquidity and volatility. Our use of derivatives may increase these risks by increasing investment exposure (which may be considered leverage) or, in the case of many over-the-counter instruments, because of the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. The funds may not achieve their goal, and they are not intended to be a complete investment program. The funds’ effort to produce lower-volatility returns may not be successful and may make it more difficult at times for the fund to achieve their targeted return. In addition, under certain market conditions, the funds may accept greater volatility than would typically be the case, in order to seek their targeted return. For the 500 Fund and 700 Fund these risks also apply: REITs involve the risks of real estate investing, including declining property values. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. The funds are not intended to outperform stocks and bonds during strong market rallies. Additional risks are listed in the funds’ prospectus. You can lose money by investing in the funds.
Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing.