Active Management Insights from Putnam CEO Bob Reynolds

Putnam Investments announced a new client education and thought leadership campaign it is calling “Always Active,” aimed at helping institutional and retail investors understand the characteristics of active management funds.

As the 2018 PLANADVISER Defined Contribution Investment Only (DCIO) Survey confirms, the firm is making a concerted effort to expand its footprint in the retirement planning marketplace. According to CEO Bob Reynolds and Mark McKenna, head of global marketing, DCIO growth for Putnam should accelerate in 2019 as investors learn more about the merits of active management.

As the pair told PLANADVISER during a wide-ranging discussion about “Always Active,” the investment markets naturally go through periods where passive management is preferred by investors, as well as periods where active management can shine. While not encouraging market timing, they said there are signs that volatility will continue and that active management will have strong opportunities to excel in the next year to 24 months. They also encouraged retirement plan investors to think in a more sophisticated way about active management—explaining how active management can be used both for growth and as a defensive tool that dampens volatility in sensitive retirement portfolios.

Volatility, slower growth and active strategies

“Whenever there is a spike in equity market volatility or lower growth expectations, this is generally going to be a good time to be talking about active management and explaining what the benefits of active management can be,” Reynolds said. “However, we have been planning this new campaign for some time. Given our background as an active fund manager, this new thought leadership campaign is tied into who we are and what our philosophy is at Putnam.”

According to Reynolds, the firm aims to make a statement in 2019 that active management remains an important ingredient in portfolio construction. To this end, he said Putnam is being as active as it can in terms of reaching out to educate advisers and their plan sponsor clients about the benefits of active management, particularly at the tail end of a business cycle.

“One of the challenges we will face in this campaign is the common misconception that exists out there that assumes index funds and passive management automatically deliver less risk versus actively managed funds,” Reynolds said. “We know this is just not right. You can invest actively and take much less risk than what you might be able to get in a passive product. Frankly a lot of people aren’t really aware of the full scope of active management opportunities. Sometimes you will want to take more risk, and active management can allow you to do that too.”

ESG and active management

Asked about what Putnam has seen develop this year in terms of environmental, social and governance (ESG) investing programs, and about how ESG fits into the discussion of active and passive management, Reynolds had a lot to say.

“For us, the ESG topic is about performance,” Reynolds said. “When we look at funds that do better on ESG factors, in our proprietary research, we can demonstrate that they have out-performed over time relative to peers that do less well on ESG factors. This doesn’t drive every buy or sell decision, but it’s certainly part of it.”

Reynolds said that, over time, it “has become very clear to Putnam that putting together portfolios with an awareness of ESG factors brings along a tremendous advantage.”

“We are seeing a lot of interest from our clients on this topic, so I think these funds will be a more and more important part of the landscape,” he said.

“We find it interesting and exciting to see the investment results, and we are asking ourselves whether there has been a failure to communicate the real benefits of ESG to investors until now,” McKenna said. “We did focus groups on this topic, and we learned that people in retirement plans want access to these products. At the same time, advisers and sponsors are asking us about this topic as well—wanting more information about how to explain and assess the offerings that are out there.”

Putnam learned a lot from the ESG focus groups, including the interesting fact that a lot of people don’t know what the full “ESG” acronym stands for. There is an understanding of environmental awareness but less about the benefits of social and governance considerations in building portfolios. For some groups of retirement plan investors, they really resonate more with the “sustainability” label.

“Part of our strategy in 2019 will be talking about the fact that ESG can really complement active management strategies,” Reynolds said.

Big reforms coming in 2019?

Beyond the topics of active management and ESG, Reynolds said there are other points of optimism for the firm—and the broader retirement plan ecosystem—as providers and clients look ahead to 2019.

“I am optimistic about what may develop in 2019—it could be the big year for retirement reforms that we have been waiting for,” Reynolds said. “Unlike on many topics, there is real bipartisan support in Congress to enhance the U.S. retirement system, whether it be through open multiple employer plan (MEP) reforms, increasing automatic enrollment limits or solving challenges having to do with disclosures or even retirement income.”

McKenna and Reynolds said they would be keeping a close eye on Congress. “I will be watching what happens with the outgoing House Ways and Means Committee Chairman Kevin Brady [R-Texas] as well as the incoming committee leader Richard Neal [D-Massachusetts],” Reynolds said. “Both the majority and minority leaders of the committee are interested in retirement plan issues.”

Advisers’ take on active management

Recent research from Cerulli shows advisers believe that both active and passive investing play a vital role in their clients’ portfolios. More than 80% believe that passive investments can reduce fees—the same number that believes active managers are ideal for certain asset classes.

“Approximately 75% of advisers agree that active and passive investments complement each other,” says Brendan Powers, senior analyst at Cerulli. “Cerulli argues that the debate of active or passive has shifted to active and passive, with more focus on how to best use both as tools to build more efficient client portfolios.”

In general, Powers expects active funds will retain a key role in a number of asset classes. As he explains, the asset classes where more than half of advisers prefer actively managed mutual funds include international/global fixed income (61%), multi-asset class (60%), emerging markets fixed income (58%), emerging markets equity (53%) and international/global equity (51%).

As to which U.S. equity asset categories advisers plan to boost allocations to, the most common are technology (33%) and small cap (30%). The top portfolio objective that advisers are focused on, cited by 98%, is downside risk protection.

Cerulli also discovered that advisers currently allocate 64% of client assets to actively managed strategies.