Putnam Investments says (almost) nothing is the same as it was in the new financial markets.
To help advisors get through the challenges presented in today’s market, Putnam on Tuesday released the first of four white papers, this one called “Four Strategies for a World of Uncertainty.” The papers are being released as part of the firm’s continuing “Maneuver in Markets” program.
The four strategies in the paper are designed to show advisors what should be considered in managing risk and in seeking to make the most of opportunities that current market turmoil may be masking.
Investors, who are often motivated by fear, can find it hard to manage the volatility affecting their portfolios, especially since correlations within equities can rise dramatically during periods of high volatility, says Putnam. One way to counter this correlation problem is to employ an absolute return approach that seeks uncorrelated sources of return, the financial firm advises.
“Absolute returns 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,” says Putnam.
In a traditional portfolio with a 60/40 split between stocks and bonds, 90 percent of the risk can be in the equities, says Scott Sipple, head of global investment strategies at Putnam. Advisors who are concerned about this might want to go to such things as high-yield mortgages or emerging market debt to solve for that or use hedging strategies. These will require professional management, he adds.
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, the white paper says. Over longer time frames, 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.
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 Putnam. 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.
Another strategy that may no longer be what it seems is using money market funds, which are considered to be among the very safest investments. New regulations intended to make these investments more liquid have also had the effect of limiting their scope—shrinking the universe of what is considered safe, says Putman. Investors may find that their short-term investment vehicles potentially leave them at greater risk than they had thought.
“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,” says Robert L. Reynolds, Putnam’s president and CEO. “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.”
Putnam will add other white papers to this series in the coming months and reach out to advisors in a number of ways to help them navigate the market, Sipple says.