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Thursday, November 5, 2009

Putnam Investments Has Quite A Deal For You....

I have been looking into the newest product/gimmick from Putnam Investments, their absolute return funds, These funds are designed to produce a targeted return over inflation as represented by the till rate. The target returns are 1% 3% 5% and 7%.

I'll have more to say about this fund in a later post but the unattractiveness of the 100 fund is apparent based on the fees alone. This fund which has a target return of 1% above tbills is 71% cash equivalents and carries a management fee of 1.25%.

Let's count the cash equivalent portion as virtually the same as a money market fund.
With 71% of the portfolio in cash and multiplying the management fee of 1.25% by 71% that means you are paying a management fee of .89% (.71x 1.25%) which is obviously outrageously high and figure the other 29% of the assets which are all bonds is the equivalent of a bond fund that part of the portfolio carries and effective management fee of .53%(.29x 1.85) not terrible but not very attractive compared to the vanguard short term bond etf fee of .11%.

so an investor could create a portfolio that would perform in pretty much the same manner with 2 holdings

a low cost money fund (vanguard's is .14%(
a short term bond etf (etfs as low as .11%)

so the portfolion would have a blended management fee of .12% ! (.71x.14% +.29x.11%)

Oh, and just to "sweeten" the deal for investors, this fund carries sales charges. The A shares with the 1.25% operating expenses have an intial sales charge (front end load) of 3.25%. That means of every $100 invested $3.25 goes out in a sales charge. Which actually means that in the first year of any investment the it is impossible under current market conditions to provide a net return to investors of 1% above inflation as represented by tbills.

Here's the math

90 day tbill rate .07%
1% return above tbill 1.07%

so the value after one year on an investment in the fund after deducting sales charges is 97.43 or a loss of 2.57%. If you do the math you can see that the tbill rate has to rise to 2.25% to even breakeven with this fund.


It seems the putnam 100 is one to just say no to. Putnam funds are only available through financial advisors. Needless to say I have great problems with any advisor that would recommend this fund.

more later

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