Putnam Exec: Worst Is Likely Over

Robert Reynolds has been president and chief executive officer of Putnam Investments since mid 2008. When he worked for Fidelity Investments, Reynolds was instrumental in developing target-date funds. Now he thinks that regulators should monitor those funds more closely and that fund managers should cut back the stock portion of their portfolios as the funds approach their target date.

Reynolds says the 55% collapse in Standard & Poor's 500-stock index since the market peaked in 2007 to its trough on March 9 was "a 100-year flood" and believes the worst is over. Nevertheless, he says that millions of people nearing retirement don't have the luxury of relying on time or aggressive investing strategies to rebuild their damaged portfolios. In his view, the mutual fund industry must get better at delivering predictable or "absolute" returns, so that Americans can be confident that they'll have enough money to retire. Reynolds visited the Kiplinger offices on May 6 for a chat with a group of Kiplinger's editors:

KIPLINGER'S: Putnam's newest idea is a collection of "absolute return" funds, called 100, 300, 500 and 700, with the goal of producing a gain of one, three, five or seven percentage points above the rate of inflation. How can something that basic and precise work when stocks are so unpredictable from one day to the next?

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PUTNAM: Well, 2009 is the first year for these funds, but we are on target with our year-to-date returns. And yes, we can get back to normalcy in the valuation of stocks and bonds. We are deleveraging the whole financial system, getting rid of excesses. There aren't as many hedge funds out there, and short-selling is way down. That should create less volatility. Also, our managers try to avoid owning the most volatile securities. The Absolute Return 700 fund has half the volatility of the S&P index.

Is the 401(k) retirement system broken? What kinds of changes would you like to see, if any?

Adjustments over the years have helped participants in 401(k) plans, but there's more to do. For instance, participants should always have an opportunity to opt into a fixed annuity and assure themselves of a steady income stream. And if an investment company is offering a target-date retirement fund, the asset allocation should be appropriate. If it's a 2010 fund, for example, it shouldn't have more than 40% of its portfolio in stocks.

Is the worst over for the markets?

I believe there's a good chance that the worst is over -- not 100%, but there are reasons to be confident. The left end of the tail has been cut off, so you don't hear talk of a depression anymore, and that's been really beneficial to the market. There are still problems with credit cards and losses in commercial real estate, but I'm not so sure they haven't already been priced into valuations.

And the bond guys are happy. We were early with [buying back into depressed] mortgages, which are recovering. You're going to see some bond funds this year with 40% to 50% returns, and that's unleveraged.

Why this light at the end of the tunnel? A restoration of confidence? The stimulus? Or is it just the natural tendency of the economy to right itself?

It's a combination. The government has continued to pump credit into the economy. Corporate balance sheets are in good shape, and inventories are at record lows. In fact, corporate America is doing okay. It was the troubled financial system that made things tough.

Not everyone has the same faith you do. What's going to bring the individual investor back into the market?

I think if we have a good number for year-to-date stock returns to June 30, you'll see people get back in. In February there were so many people who threw up their hands and said never again. But we're not hearing that any more. It will all come down to how much stocks have returned since bottoming out, which appears to have occurred on March 9. And stock returns since the beginning of the year have just turned positive.

Safe, steady returns over a long period of time sound very attractive. But what about baby-boomers who have taken quite a ding and don't have a lot of years left to make it up? What can you say to them?

As a rule of thumb, figure you'll need a return of 10% a year over seven years to make back what you've lost. You can work longer and change your spending habits, but you also have to be invested in the right assets and not have the lion's share sitting in money-market funds and bank deposits. Right now there's $12 trillion in those assets, and cash is a risky investment when you're saving for retirement. If you sit on the sidelines, you'll never make it to your goal.