Putnam Investments: A Deeper Look at the Performance

Tracing its roots to 1937, Putnam Investments is one of active management's oldest families of mutual funds. The Boston-based investment firm, which most recently listed its total assets under management at $179 billion, now operates as a part of Great-West Lifeco. The Canadian-based insurance conglomerate bought it in 2007 for a reported $3.9 billion, pledging to let it run autonomously. 

"There will be no changes to the way we manage money or to our investment processes," a Putnam senior managing director wrote in a letter to investors. Morningstar noted at the time little in the way of redundancies existed between the two firms' funds lineups, according to Morningstar.¹ 

Seven years later, Great-West merged Putnam's large workplace retirement plan business with its own. This was notable since around this same period, Pensions and Investments magazine had ranked Great-West as the defined contribution plan industry's sixth-largest record-keeper. Company executives, however, stressed that Putnam's other funds management operations would largely remain as "separate entities."² 

Even so, Putnam has set about to make "some substantive changes in the past several years," Morningstar noted in a separate report. This includes weeding out underperforming funds through mergers and closings. It also involves a corporate-wide effort to streamline costs and distribution channels. Problems flagged by the independent investment research firm included "high" turnover in some equity research teams and fund performance that was viewed as no better than "average" compared to other active fund managers.³ 

In the past, we've done separate research on Great-West's actively managed mutual funds. Given its penchant to tout an independent investment process, our research team decided to put Putnam's fund family under its microscope. This analysis is part of our ongoing Deeper Look series, which investigates claims by managers of peer performance superiority by holding them to a higher standard -- i.e., how they've done over longer periods against their respective indexes.

Controlling for Survivorship Bias

It's important for investors to understand the idea of survivorship bias. While there are 46 active mutual funds with five or more years of performance-related data currently offered by Putnam, it doesn't necessarily mean these are the only strategies this company has ever managed. In fact, there are 42 mutual funds that no longer exist. This can be for a variety of reasons including poor performance or the fact that they were merged with another fund. We will show what their aggregate performance looks like shortly.  

Fees & Expenses

Let's first examine the costs associated with Putnam's surviving 46 strategies. It should go without saying that if investors are paying a premium for investment "expertise," then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.

The costs we examine include expense ratios, sales loads -- front-end (A), back-end (B) and level (C) -- as well as 12b-1 marketing fees. These are considered the "hard" costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds.

Commissions and market impact costs are real expenses associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades executed by portfolio managers.

We can estimate the costs associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in one year. This is considered an active approach, and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities, such as short- and long-term capital gains distributions, than those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 46 surviving active funds offered by Putnam that have at least five years of complete performance history. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also, remember that this is what is considered an in-sample test; the next level of analysis is to do an out-of-sample test (for more information see here).

Please read the prospectus carefully to review the investment objectives, risks, charges and expenses of the mutual funds before investing. Putnam Investments prospectuses are available at: https://www.putnam.com/individual/mutual-funds/fund-documents/

On average, an investor who utilized a surviving active equity mutual fund strategy from Putnam experienced a 1.10% expense ratio. Similarly, an investor who utilized a surviving active bond strategy from the company experienced a 0.80% expense ratio.

These expenses can have a substantial impact on an investor's overall accumulated wealth if they are not backed by superior performance. The average turnover ratios for surviving active equity and bond strategies from Putnam were 76.41% and 194.33%, respectively. This implies an average holding period of 6.17 to 15.70 months.

In contrast, most index funds have very long holding periods -- decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long-term. Again, turnover is a cost that is not itemized to the investor but is definitely embedded in the overall performance.

Performance Analysis

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Putnam's implementation of active management. We compare all of its 88 strategies, which includes both current funds and funds no longer in existence, against its Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition.

We have included alpha charts for each of their current strategies at the bottom of this article. Here is what we found:

• 88.36% (76 of 88 funds) have underperformed their respective benchmarks or did not survive the period since inception.

• 13.64% (12 of 88 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha.

Here's the real kicker, however:

• 2.27% (2 of 88 funds) wound up outperforming their respective benchmarks consistently enough since inception to provide 97.5% confidence that such outperformance would persist (as opposed to being based on random outcomes).

As a result, this study shows that a majority of funds offered by Putnam have not outperformed their Morningstar-assigned benchmark. The inclusion of the statistical significance of alpha is key to this exercise, as it indicates which outcomes are due to a skill that is likely to repeat and those that are more likely due to a random-chance outcome.

Regression Analysis

How we define or choose a benchmark is extremely important. If we relied solely on commercial indexes assigned by Morningstar, then we may form a false conclusion that Principal has the "secret sauce" as active managers.

Since Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio.

A better way of controlling these possible discrepancies is to run multiple regressions where we account for the known dimensions (betas) of expected return in the U.S. (i.e., market, size, relative price, etc.).

For example, if we were to look at all of the U.S.-based strategies from Putnam that've been around for the past 10 years, we could run multiple regressions to see what each fund's alpha looks like once we control for the multiple betas that are being systematically priced into the overall market.

The chart below displays the average alpha and standard deviation of that alpha for the past 10 years through 2020. Screening criteria include funds with holdings of 90% or greater in U.S. equities and uses the oldest available share classes.

As shown above, none of the mutual funds reviewed had a positive excess return over the stated benchmarks. Also, none of the equity funds studied produced a statistically significant level of alpha, based on a t-stat of 2.0 or greater. (For a review of how to calculate a fund's t-stat, see the section of this study that follows the individual Putnam alpha charts.)

Why is this important? It means that if we wanted to simply replicate the factor risk exposures to these Putnam funds with indexes of the factors, we could blend the indexes and capture similar returns. 

To get similar risks and returns in a mutual fund would require the additional fees of those passively managed funds. That would alter such an analysis, but not by much because of the relatively low fees of the passively managed funds compared to the actively managed funds.

Conclusion

Like many of the other largest financial institutions, a deep analysis into the performance of Putnam has yielded a not so surprising result: Active management is likely to fail many investors. We believe this is due to market efficiency, costs and increased competition in the financial services sector.

As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold and rebalance a globally diversified portfolio of index funds.

Below are the individual alpha charts for the existing Putnam actively managed mutual funds that have five years or more of a track record.

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Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.

Footnotes:

1.) Morningstar, "Putnam Sale Finalized," Feb. 2, 2007. 

2.) Pensions & Investments magazine, "Putnam, Great-West Combine Retirement Businesses," March 20, 2014. 

3.) Morningstar, Parent Rating of Putnam, Jason Kephart, April 12, 2019. 

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance.  For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.