Pursuing positive returns largely independent of market direction

Absolute return investing is a resourceful strategy that can supplement traditional
investments such as stocks and bonds. While investors justifably look to stocks and
bonds to build wealth over the long term, in the short term traditional strategies
typically expose investors to signifcant market volatility and sustained periods of
negative performance. Both of these risks interfere with the goal of accumulating
wealth and purchasing power.
Absolute return strategies pursue more consistent results in both the short term and
the long term. An absolute return strategy seeks to earn a positive total return over a
full market cycle with less volatility than traditional funds and largely independent of
market conditions. An absolute return strategy can outperform broad markets during
periods of fat or negative market performance.
This paper discusses absolute return investing, its fundamental properties, and how it
can serve investors with qualities such as
• A focus on providing positive returns over time with less volatility
than more traditional funds
• Potential for outperformance in down markets
• Flexibility to pursue global investment opportunities
• Diversifcation across newer and alternative asset classes
• Progressive risk management with modern investment tools, including derivatives
Absolute return investing
Pursues targeted returns above infation with
less volatility over time.
March 201 0
Rob A. Bloemker
Managing Director,
Head of Fixed Income
Washington University, B.S., B.A.
22 years of investment experience
Jefrey L. Knight, CFA
Managing Director,
Head of Global Asset Allocation
The Amos Tuck School of Business,
Dartmouth College, M.B.A.,
Edward Tuck Scholar
Colgate University, B.A.
23 years of investment experience
2
Traditional investing focuses on maximizing returns relative
to a benchmark index
Investors turn to stocks and bonds as a way to build long-term wealth because these
asset classes have a historical track record of positive performance over the long term.
While stocks and bonds have greater risks than short-term securities such as Treasury
bills, over the long haul investors have been rewarded for taking these risks by earning
higher rates of return (see Exhibit 1).
ExhiBit 1: RELAtivE REtuRn Funds puRsuE tRAditionAL AssEt CLAssEs
Cash
3% Inflation
Bonds Stocks
9.8%
5.4%
3.7%
Annualized returns (12/31/25–12/31/09)
Source: Morningstar, 2009. Stocks are represented by the Ibbotson S&P 500 Total Return Index, bonds by the
Ibbotson U.S. Long-Term Government Bond Total Return Index, and cash by the Ibbotson U.S. 30-day Treasury
Bill Total Return Index. The indexes are unmanaged and measure broad sectors of the stock and bond markets.
You cannot invest directly in an index. Past performance is not indicative of future results.
Most traditional mutual funds task the portfolio manager with outperforming a stock
or bond benchmark such as the S&P 500 Index or Barclays Capital U.S. Aggregate Bond
Index. The manager is usually constrained to invest only in the domestic market or in a
specifc asset class. According to the Investment Company Institute, 95% of mutual fund
assets are in funds focused on a specifc asset class — stocks, bonds, or money market
securities. Hybrid funds are an exception. These traditional funds have greater fexibility to
invest across global asset classes. However, only about 5% of industry assets are invested
in hybrid funds. Furthermore, some traditional funds may have even tighter constraints,
such as bond funds that invest only in government bonds or high-yield bonds, and stock
funds that invest only in small companies or growth stocks. Such constraints beneft
investors in that they discourage a money manager from taking a range of unintended
risks and they focus eforts on security selection.
At the same time, constraints carry a disadvantage as well. In a general market decline,
when securities fall in price for systemic, rather than specifc, reasons, there is little that
a constrained manager can do to avoid a negative result. In fact, a manager may do what
is considered a good job — by outperforming the market benchmark — yet, during a bear
market, the fund might post a signifcant decline for shareholders.
A relative return fund
can outperform its
benchmark yet still
register a signifcant
decline in a bear market.
3
There have been 12 bear markets in stocks since World War II, with prices declining
20% over 14 months, on average. Bear markets pose substantial risks. For younger
investors, a downturn interrupts the compounding of returns, and this delays wealth
accumulation. For investors who have already built up savings and may be relying
on them to generate income, the impact of a bear market can be devastating.
For safety, such investors typically favor more conservative investments, which,
with lower rates of return, require a number of years to recover from a downturn
(see Exhibit 2). Since their time horizon is shorter, older investors cannot reallocate
enough money to stocks to beneft from a recovery in prices and restore their wealth.
For retired investors, a bear market poses special risks. Withdrawing money during
declines locks in the low stock prices and leaves investors with a smaller position for
when the market recovers. In short, retirees are particularly vulnerable to bear markets,
which can shrink savings and reduce the potential for generating a future income
stream, because retirees are unable to add to their portfolios from occupational income.
ExhiBit 2: how Long doEs it tAKE to RECovER FRom A mARKEt downtuRn?
Rate of return Size of bear market downturn
-10% -20% -30% -40% -50%
2% 5.25 years 11.25 years 17.75 years 25.50 years 34.75 years
4% 2.75 years 5.50 years 9.00 years 12.75 years 17.25 years
6% 1.75 years 3.75 years 6.00 years 8.50 years 11.50 years
8% 1.25 years 2.75 years 4.50 years 6.50 years 8.75 years
10% 1.00 year 2.25 years 3.50 years 5.25 years 7.00 years
This hypothetical illustration is based on mathematical principles and assumes monthly compounding.
It is not meant as a forecast of future events or as a statement that prior markets may be duplicated.
Recovery periods are rounded to the nearest quarter of a year.
To understand the heightened bear market risk for retired investors, consider the
example of the stock market decline of 2000–2002. Exhibit 3 compares two investors,
one who retired in late 1999, at the start of a bear market, and one who retired in late
2002, near the beginning of a recovery. The frst investor’s portfolio declines during
the bear market and remains well below its original value even after the market
recovers, leaving the investor with less fnancial security. The other investor benefts
from market performance, and the portfolio even appreciates for several years. The
diference highlights the damaging impact of a bear market.
For more information on the importance of stable returns in retirement, visit
theretirementsavingschallenge.com.
4
ExhiBit 3: mARKEts ARE unRELiABLE in thE shoRt Run
Taking
withdrawals
amplifies
market losses
Taking
withdrawals
amplifies
market losses
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 12/99 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
$25,000 $25,750 $26,523 $27,318 $28,138 $28,982 $29,851 $30,747 $31,669 $32,619
$25,000 $25,750 $26,523 $27,318 $28,138 $28,982 $29,851
Annual withdrawals
(5% in year 1,
increased by
3% thereafter)
This illustration depicts two hypothetical $500,000 investments in stocks, as represented by the S&P 500 Index.
One investor starts on 12/31/99, withdraws 5% in year one, and increases that amount by 3% each year to adjust
for infation. Another investor takes the same approach but starts three years later, thereby missing the market
decline of 2000–2002. Past performance is not indicative of future results.
Absolute return strategies aim for greater consistency
than traditional strategies
An absolute return objective removes many constraints on managers and allows
them to implement more strategies for addressing market volatility. More traditional
strategies can have similar types of fexibility, but are generally more constrained.
An absolute return objective focuses money managers on the elementary concerns
of an investor — achieving a positive real return, one that enhances purchasing power.
Pursuing targeted returns means that managers do not have to take the risk of full market
exposure. While individual absolute return strategies vary, the types of fexibility managers
are given generally fall into three main areas.
First, many absolute return strategies permit sector or asset class fexibility, allowing
managers greater latitude to invest in a wider universe of securities, so that they are not
limited to one sector or asset class that can fall out of favor. This is similar to traditional asset
allocation strategies, with the diference that most traditional strategies have relatively fxed
asset weightings, while absolute return strategies do not. Second, global, or geographic,
fexibility allows managers to invest outside domestic markets. Traditional global strategies
share the ability to invest outside the domestic market, but an absolute return manager can
move money more freely between domestic and international investments. Third, fexibility
to use modern investment tools allows managers to go beyond traditional methods of
obtaining exposure to markets and to alpha opportunities. Alpha refers to returns that do
not depend on positive market direction. Active use of tools that can capture alpha can help
investment performance when markets are fat or negative. Here, as well, many traditional
funds can employ similar tools, but in most cases they are less integral to a strategy when a
fund does not have a specifc return goal, like an absolute return target.
An absolute return objective
focuses money managers
on the elementary concerns
of an investor — achieving
a positive real return, one that
enhances purchasing power.
Ending balance
$504,159
Ending balance
$141,095
5
Giving a money manager fexibility to invest globally, across a variety of sectors and
with modern tools, allows a skilled professional to pursue more consistent positive
returns. Money managers with hands-on experience in a variety of markets can decide
which areas are likely to appreciate and which are not. For example, a bond manager
who can invest in either high-yield or mortgage-backed securities has a better oppor-
tunity to generate positive returns more consistently over time than a manager whose
hands are tied. Similarly, in a strategy without asset class constraints, a manager can
move money out of stocks and into bonds, or out of both stocks and bonds and into
cash and alternative investments. In short, an absolute return manager is free to take
risk only with investments considered likely to generate positive returns, and to avoid
weaker investments.
Diversifying across sectors and global markets
One of the more distinctive tools available to absolute return strategies is the freedom
to own a range of investments and go to any sector or asset class that ofers attractive
opportunities. In an absolute return strategy, this fexibility is greater than in most traditional
asset allocation strategies, and it takes advantage of the increasing diversifcation of fnancial
markets in recent years. Combining investments in securities that have low performance
correlation can reduce portfolio volatility relative to returns.
newer fxed-income sectors. Not only has the volume of securities expanded, but
so has the variety, particularly in the bond market. This ofers a broader range of
opportunities to money managers who can research and evaluate their potential.
Diversifed bond portfolios today can include traditional securities like sovereign
government bonds, investment-grade and high-yield corporate bonds, convertibles,
and mortgage-backed securities (MBS).
Alternative asset classes — commodities, real estate, and foreign currencies.
Another dimension of absolute return investing involves alternative asset classes,
a general category that includes investments beyond stocks and bonds. Examples
include commodities, real estate, and foreign currencies. Freedom to choose among
these investments, when given to an experienced, professional money manager,
can help investment performance in any given market environment. For example,
the manager can determine the periods when it might be benefcial to have broad
diversifcation across a range of asset classes, and at other times, selectively focus
on a handful of areas while dialing down exposure to others. A number of traditional funds
can invest in alternative asset classes, but these are typically specialized funds designed
to provide exposure to the asset class. By contrast, alternative asset classes are employed
opportunistically in an absolute return strategy as a means to achieving its positive return
goal, and may be excluded when negative returns are expected.
6
Adding a range of diferent investments to more conventional investments can diversify
the sources of return that improve performance relative to risk, producing
a more efcient overall portfolio (see Exhibit 4).
ExhiBit 4: inCREAsing ALLoCAtions to modERn AssEt CLAssEs
impRovEd REtuRns RELAtivE to RisK (12/31/99–12/31/09)
Traditional 50%
Modern asset classes 50%
Traditional 0%
Modern asset classes 100%
R
E
T
U
R
N
RISK
4% 8% 12% 16% 20% 24%
0%
4%
8%
12%
Traditional 100%
Modern asset classes 0%
Source: Putnam Investments. Past performance is not indicative of future results. Risk is measured by standard
deviation; both risk and return refect 10-year results from 12/31/99 to 12/31/09. This illustration shows the risk
and return of varying allocations to groups of indexes that represent asset classes considered traditional invest-
ments and more modern investments for individual investors. The more traditional asset classes refected in the
portfolio are U.S. stocks, which are represented by the S&P 500 Index; international stocks, represented by the
MSCI World ex-U.S. Index; T-bills by the BofA Merrill Lynch U.S. 3-month Treasury Bill Index; U.S. bonds by the
Barclays Capital Aggregate Bond Index; international bonds by the Barclays Capital Global Aggregate Bond
ex-U.S. Index; and global high-yield bonds by the JPMorgan Developed High Yield Index. The more modern
asset classes refected in the portfolio are emerging-market stocks, which are represented by the MSCI
Emerging Markets Index; emerging-market bonds, represented by the JPMorgan Emerging Markets Bond
Global Diversifed Index; TIPS (Treasury Infation-Protected Securities) by the Barclays Capital Global Real U.S.
TIPS Index; commodities by the Goldman Sachs Commodities Index; REITs by the Morgan Stanley REIT Index;
and bank loans by the S&P/LSTA Leveraged Loan Index. For each allocation, the indexes are equally weighted
within the traditional and modern groups. For example, the 50/50 portfolio allocation would refect an equal
weighting across all 12 indexes — 6 traditional and 6 modern. All indexes are unmanaged and measure common
sectors of the stock and bond markets. Index performance does not refect fees or expenses. You cannot invest
directly in an index.
77
Among the more prominent alternative asset classes are commodities and REITs.
Commodities can include a range of products such as gold and other precious metals;
natural resources such as paper and timber; industrial metals; and agricultural prod-
ucts, to name a few. This asset class can provide protection from infation because
commodity prices are strongly linked to supply and demand pressures. During periods
of economic expansion, demand increases for commodities, which pushes up prices and
rewards investors. Conversely, when economies slow or recede, demand for commodi-
ties usually falls, and prices decline as well.
Real estate can protect investors from infation for similar reasons. Demand for real
estate usually increases when the economy is strong and infationary pressures are
rising. The utilization of real estate properties typically increases during expansions,
which lifts the cash fow of REITs, and if real estate supply is constrained, rental rates can
also increase.
Currencies also represent a type of alternative asset class. Unlike most other assets,
currencies have no intrinsic value, but they can nevertheless generate a return or loss
because of fuctuations in exchange rates. These fuctuations are caused by a host of
factors, but for investors who turn to currencies as a source of diversifcation, the key
beneft is that exchange-rate fuctuations are generally not correlated with the
performance of other asset classes.
Investing in global opportunities
Absolute return strategies are not constrained by geography. They can invest in the
United States and in non-U.S. markets to draw from a wide range of opportunities.
While the United States is the single largest market, international stock markets
represent a majority of the world’s securities, as measured by the MSCI World Index.
Fixed-income markets outside the United States feature a wide range of issuers,
including foreign governments and corporations, with diferent profles of risk and
return that allow fexibility for managers constructing portfolios.
With global fexibility, absolute return strategies can pursue the most attractive
investments anywhere in the world and move money out of the least attractive. By
contrast, traditional global funds generally do not move money with the same degree
of fexibility. A traditional global strategy invests in both the U.S. and international
markets at all times, while a traditional international strategy is constrained to invest
only outside the United States. An absolute return strategy can move money without
constraint among global markets at any time in pursuit of its return goal.
Commodities and real
estate may provide
a hedge against infation.
Absolute return strategies
can pursue the most
attractive investments
anywhere in the world.
8
Adapting fexibly to changing markets
Freedom from the constraints of a traditional benchmark means more than the ability to
invest in a wider range of securities. It also gives absolute return strategies the capability
to adjust dynamically to changing market conditions (see Exhibit 5). They can move assets
into the sectors and global markets that ofer the best potential for achieving their return
targets with low volatility because they are not limited to a narrow investment universe.
They can also abandon less attractive sectors that are potentially too risky, or that may
not help them reach their return targets within the specifed time period of the strategy.
In other words, as markets evolve, absolute return strategies can adapt with them. The
goal is to make the strategies more resilient, more versatile in changing markets. This
fexibility can help absolute return strategies as they seek to overcome the short-term
volatility risks that have posed problems for traditional strategies.
ExhiBit 5: ABsoLutE REtuRn poRtFoLios CAn AdJust with ChAnging
mARKEt Conditions
tRAditionAL BALAnCEd Fund ABsoLutE REtuRn Fund
• 60% stocks,
40% bonds
• Maximum and
minimum stock
weightings
prevent deviation
from benchmark
• Vulnerable to
market volatility
100%
80%
60%
40%
20%
0%
• No fxed
allocations
• Flexible to
respond to
changing markets
• Can be largely
independent of
market volatility
Absolute return strategies
can adapt to evolving
opportunities.
9
Hedging risk with modern investment tools
Another type of fexibility usually associated with absolute return strategies is the ability
to use modern investment tools such as derivatives, including forwards, futures, and
option contracts. A trained, professional money manager can use these tools to gain
exposure to specifc markets, to fne-tune portfolio strategies, and to mitigate unwanted
market risks.
Many traditional investment strategies are permitted by prospectus to employ hedging
techniques, but their use of these tools is not guided by an absolute return goal. In
other words, in a traditional strategy hedging might be a blunt instrument to protect
performance in a broad market decline. An absolute return strategy implements hedging
as one of many approaches to achieve a focused goal.
Broadly speaking, a derivative is any type of investment whose value is linked to the
performance of another security. Futures, forwards, and options are among the most
commonly used derivatives. Futures and forward contracts are similar — they are
agreements to buy or to sell something in a specifed quantity and for a specifed price
at a future time. These contracts provide an indication of where investors think prices
are headed, and they are typically used for either speculative or hedging purposes.
Futures or forward contracts may be used to obtain exposure to an investment and
proft if the price moves as expected. In hedging strategies, almost the exact opposite
occurs — the contract is used to lock in a certain price in the future, and thereby remove
the uncertainty involved in the price movement. Forward contracts are also heavily
used to establish positions in currencies, while futures contracts are common tools for
gaining exposure to stock indexes and bonds, such as Treasuries.
Options contracts are also focused on futures prices, but instead of creating an obligation,
these contracts give the buyer or seller the right to purchase or sell securities at a certain
price within a specifed period of time. A put option is the right to sell a security, while a
call option is the right to purchase a security.
Reducing market risk
For the purpose of an absolute return strategy, an attractive feature of forwards, futures,
and options is the ability to reduce risk by hedging against market declines. In particular,
by using put options on market indexes, an investor can build in a bufer against market
declines. That is because a put option becomes more valuable when the underlying
security or index approaches or falls below the put price.
Forwards, futures,
and options contracts
can be used to reduce
uncertainty.
10
Derivatives can be used for many purposes to help funds perform more independently
of overall market direction. They also allow investment managers to implement their views
about which securities, sectors, or markets are likely to appreciate and depreciate. With
this tool, investment managers can more comprehensively capture their overall investment
view in a portfolio, and not be limited to long exposures only.
While derivatives can be a very valuable tool, it is important to remember that they are
not a cure-all that eliminates market declines. First of all, using them efectively requires
analytical and forecasting skills similar to those used in selecting securities. As such, not
every decision made with derivatives will help a strategy. Second, because derivatives
give investors a great deal of leeway, they can also have an outsized impact on perfor-
mance, and when the decisions are wrong, they represent a risk to performance. Third,
trading derivatives involves investment costs that can reduce performance. While highly
specialized and aggressive strategies rely on widespread use of derivatives, for most
investors, a prudent, judicious approach to derivatives is most efective.
Putnam’s approach to absolute return
Putnam Investments ofers absolute return funds for retail investors (see Exhibit 6).
Previously, Putnam’s absolute return strategies were available only to institutional investors,
but they can serve important roles in individual portfolios as well. Particularly in light of
the nearly unprecedented decline seen across global markets in 2008, individuals are
re-examining their investment assumptions and considering strategies that can
complement funds with traditional benchmarks.
Putnam’s four Absolute Return Funds pursue positive returns over a period of three years
with less volatility than more traditional relative return funds, regardless of market condi-
tions. The funds are designed to serve investors by seeking their return targets over a full
market cycle of at least three years by using a wide range of investment tools. Putnam’s
funds can use strategies that add performance potential and seek to provide downside
protection to outperform during periods of fat or negative market performance, though
the funds are not intended to outperform stocks and bonds during strong market rallies.
In this way, Putnam Absolute Return Funds ofer a complement to funds constrained by
traditional benchmarks by addressing the risks of market volatility and sustained periods of
market decline. Putnam’s strategies mix traditional and alternative investments, as well as
traditional security selection, with more advanced active strategies involving derivatives.
Putnam’s funds can use derivatives to obtain or enhance exposure to sectors and markets,
and to mitigate risks. The funds will not borrow money in order to establish leverage, but
some of them can use derivatives to gain leveraged exposure to a range of asset classes.
putnam Absolute Return
Funds use a wide range
of tools to pursue positive
returns over time.
11
ExhiBit 6: putnAm ABsoLutE REtuRn Funds FoR ALL Kinds oF invEstoRs
Putnam Absolute
Return 100 Fund
Putnam Absolute
Return 300 Fund
Putnam Absolute
Return 500 Fund
Putnam Absolute
Return 700 Fund
Return target 1% above T-bills 3% above T-bills 5% above T-bills 7% above T-bills
Holdings

Global bonds

Global bonds

Global bonds,
stocks, and alterna-
tive asset classes
Global bonds,
stocks, and alterna-
tive asset classes
Alternative to
Short-term
securities
Bond fund Balanced fund Stock fund
Each fund seeks to outperform Treasury bills by targeted amounts. While Treasury bills are backed
by the U.S. government, investments in mutual funds are not.
These attributes help to distinguish Putnam Absolute Return Funds from funds with more
traditional benchmarks. Putnam’s funds ofer modern investment strategies that seek to
reduce market risk. If successful, the strategies can be expected to outperform general
securities markets during periods of fat or negative market performance, although they
may lag during market rallies.
The hallmarks of Putnam’s approach to absolute return
• A focus on positive returns with less volatility over time than more traditional funds
• Potential for outperformance during a fat or negative market environment
• A wide range of investments
• Progressive risk management with modern investment tools
• Flexibility to invest without constraints
• Portfolio managers experienced in absolute return strategies over many years
Putnam’s experience and capabilities
Putnam’s Fixed-Income Group has managed absolute return strategies for institutional
investors since 1999. The absolute return portfolio managers have worked together for
more than 10 years, backed by more than 70 fxed-income experts in all sectors. Putnam’s
Global Asset Allocation Group has managed a multi-asset strategy for institutions since
2006, applying strategies that refect the skills that the group has developed over 15 years
of managing asset allocation funds.
putnam portfolio
managers have years
of experience with
absolute return investing.
Putnam Investments
One Post Ofce Square
Boston, Massachusetts 02109
putnam.com
Putnam retail Management II861 261039 3/10
Consider these risks before you invest:
Asset allocation decisions may not always be correct and may adversely afect fund
performance. The use of leverage through derivatives may magnify this risk. Leverage and
derivatives carry other risks that may result in losses, including the efects of unexpected
market shifts and/or the potential illiquidity of certain derivatives. International investments
carry risks of volatile currencies, economies, and governments, and emerging-market secu-
rities can be illiquid. Bonds are afected by changes in interest rates, credit conditions, and
infation. As interest rates rise, prices of bonds fall. Long-term bonds are more sensitive to
interest-rate risk than short-term bonds, while lower-rated bonds may ofer higher yields in
return for more risk. Unlike bonds, bond funds have ongoing fees and expenses. Stocks of
small and/or midsize companies increase the risk of greater price fuctuations. REITs involve
the risks of real estate investing, including declining property values. Commodities involve
the risks of changes in market, political, regulatory, and natural conditions. Additional risks
are listed in the funds’ prospectus.
Request a prospectus, or a summary prospectus if available, from your fnancial representa-
tive or by calling Putnam at 1-800-225-1581. The prospectus includes investment objectives,
risks, fees, expenses, and other information that you should read and consider carefully
before investing.

when securities fall in price for systemic. bonds. bonds by the Ibbotson U. The manager is usually constrained to invest only in the domestic market or in a specific asset class. rather than specific. or money market securities. constraints carry a disadvantage as well.4% 3% Inflation 3. At the same time. However. some traditional funds may have even tighter constraints. the fund might post a significant decline for shareholders. during a bear market.8% 5. Past performance is not indicative of future results.S. Aggregate Bond Index.S. and cash by the Ibbotson U. Source: Morningstar. there is little that a constrained manager can do to avoid a negative result. According to the Investment Company Institute.S. 95% of mutual fund assets are in funds focused on a specific asset class — stocks. a manager may do what is considered a good job — by outperforming the market benchmark — yet. reasons. The indexes are unmanaged and measure broad sectors of the stock and bond markets. Stocks are represented by the Ibbotson S&P 500 Total Return Index. Most traditional mutual funds task the portfolio manager with outperforming a stock or bond benchmark such as the S&P 500 Index or Barclays Capital U.Traditional investing focuses on maximizing returns relative to a benchmark index Investors turn to stocks and bonds as a way to build long-term wealth because these asset classes have a historical track record of positive performance over the long term. 2009. 30-day Treasury Bill Total Return Index. and stock funds that invest only in small companies or growth stocks. only about 5% of industry assets are invested in hybrid funds. such as bond funds that invest only in government bonds or high-yield bonds.7% Cash Bonds Stocks A relative return fund can outperform its benchmark yet still register a significant decline in a bear market. You cannot invest directly in an index. Hybrid funds are an exception. Long-Term Government Bond Total Return Index. ExhiBit 1: RELAtivE REtuRn Funds puRsuE tRAditionAL AssEt CLAssEs Annualized returns (12/31/25–12/31/09) 9. Furthermore. Such constraints benefit investors in that they discourage a money manager from taking a range of unintended risks and they focus efforts on security selection. 2 . While stocks and bonds have greater risks than short-term securities such as Treasury bills. over the long haul investors have been rewarded for taking these risks by earning higher rates of return (see Exhibit 1). In fact. These traditional funds have greater flexibility to invest across global asset classes. In a general market decline.

25 years 5. Exhibit 3 compares two investors. with lower rates of return. retirees are particularly vulnerable to bear markets.50 years 3.25 years -30% 17.50 years 12. older investors cannot reallocate enough money to stocks to benefit from a recovery in prices and restore their wealth. on average.25 years -50% 34.00 years 6. It is not meant as a forecast of future events or as a statement that prior markets may be duplicated.There have been 12 bear markets in stocks since World War II. For more information on the importance of stable returns in retirement.00 year -20% 11.75 years 2. In short.00 years This hypothetical illustration is based on mathematical principles and assumes monthly compounding. leaving the investor with less financial security. such investors typically favor more conservative investments.50 years 8. For investors who have already built up savings and may be relying on them to generate income. near the beginning of a recovery.25 years 11.75 years 2. The difference highlights the damaging impact of a bear market. visit theretirementsavingschallenge. which. and this delays wealth accumulation. Bear markets pose substantial risks. Withdrawing money during declines locks in the low stock prices and leaves investors with a smaller position for when the market recovers.75 years 1.25 years 2. a downturn interrupts the compounding of returns.75 years 17. the impact of a bear market can be devastating. ExhiBit 2: how Long doEs it tAKE to RECovER FRom A mARKEt downtuRn? Rate of return Size of bear market downturn -10% 2% 4% 6% 8% 10% 5.50 years 6. The other investor benefits from market performance. For safety. with prices declining 20% over 14 months. To understand the heightened bear market risk for retired investors.75 years 8. 3 .00 years 4. at the start of a bear market. Since their time horizon is shorter. which can shrink savings and reduce the potential for generating a future income stream. The first investor’s portfolio declines during the bear market and remains well below its original value even after the market recovers. For younger investors. one who retired in late 1999. consider the example of the stock market decline of 2000–2002.25 years 1.com.75 years 9. and one who retired in late 2002. Recovery periods are rounded to the nearest quarter of a year.50 years 3. require a number of years to recover from a downturn (see Exhibit 2).75 years 7.50 years 5. a bear market poses special risks. and the portfolio even appreciates for several years.75 years 1.50 years -40% 25. For retired investors. because retirees are unable to add to their portfolios from occupational income.

138 $28. many traditional funds can employ similar tools.851 3% thereafter) This illustration depicts two hypothetical $500.095 12/99 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Annual withdrawals $25. but in most cases they are less integral to a strategy when a fund does not have a specific return goal. Absolute return strategies aim for greater consistency than traditional strategies An absolute return objective removes many constraints on managers and allows them to implement more strategies for addressing market volatility. Traditional global strategies share the ability to invest outside the domestic market. Alpha refers to returns that do not depend on positive market direction. Another investor takes the same approach but starts three years later. but an absolute return manager can move money more freely between domestic and international investments.982 $29.619 (5% in year 1.318 $28. many absolute return strategies permit sector or asset class flexibility. One investor starts on 12/31/99. increased by $25.000 $25.750 $26. Third. so that they are not limited to one sector or asset class that can fall out of favor.ExhiBit 3: mARKEts ARE unRELiABLE in thE shoRt Run Ending balance $504. the types of flexibility managers are given generally fall into three main areas. one that enhances purchasing power. as represented by the S&P 500 Index. Active use of tools that can capture alpha can help investment performance when markets are flat or negative. This is similar to traditional asset allocation strategies. but are generally more constrained.318 $28. as well.000 $25. while absolute return strategies do not. or geographic.000 investments in stocks. While individual absolute return strategies vary. thereby missing the market decline of 2000–2002. with the difference that most traditional strategies have relatively fixed asset weightings.851 $30. An absolute return objective focuses money managers on the elementary concerns of an investor — achieving a positive real return. Second. More traditional strategies can have similar types of flexibility.982 $29. flexibility to use modern investment tools allows managers to go beyond traditional methods of obtaining exposure to markets and to alpha opportunities. allowing managers greater latitude to invest in a wider universe of securities. global. Pursuing targeted returns means that managers do not have to take the risk of full market exposure. like an absolute return target. flexibility allows managers to invest outside domestic markets. Past performance is not indicative of future results. 4 .669 $32. one that enhances purchasing power. Here. withdraws 5% in year one.747 $31. and increases that amount by 3% each year to adjust for inflation. First.750 $26. An absolute return objective focuses money managers on the elementary concerns of an investor — achieving a positive real return.159 Taking withdrawals amplifies market losses Ending balance $141.138 $28.523 $27.523 $27.

For example. particularly in the bond market. Freedom to choose among these investments. and may be excluded when negative returns are expected. real estate. Not only has the volume of securities expanded. Money managers with hands-on experience in a variety of markets can decide which areas are likely to appreciate and which are not. and foreign currencies. real estate. and at other times. convertibles. an absolute return manager is free to take risk only with investments considered likely to generate positive returns. investment-grade and high-yield corporate bonds. a manager can move money out of stocks and into bonds. but these are typically specialized funds designed to provide exposure to the asset class. across a variety of sectors and with modern tools. selectively focus on a handful of areas while dialing down exposure to others. In short. allows a skilled professional to pursue more consistent positive returns. a bond manager who can invest in either high-yield or mortgage-backed securities has a better opportunity to generate positive returns more consistently over time than a manager whose hands are tied. but so has the variety. professional money manager. and foreign currencies. Combining investments in securities that have low performance correlation can reduce portfolio volatility relative to returns. can help investment performance in any given market environment. Examples include commodities. a general category that includes investments beyond stocks and bonds. For example. this flexibility is greater than in most traditional asset allocation strategies. This offers a broader range of opportunities to money managers who can research and evaluate their potential. the manager can determine the periods when it might be beneficial to have broad diversification across a range of asset classes. or out of both stocks and bonds and into cash and alternative investments. Diversified bond portfolios today can include traditional securities like sovereign government bonds. in a strategy without asset class constraints. when given to an experienced. Diversifying across sectors and global markets One of the more distinctive tools available to absolute return strategies is the freedom to own a range of investments and go to any sector or asset class that offers attractive opportunities. In an absolute return strategy. 5 . and it takes advantage of the increasing diversification of financial markets in recent years. alternative asset classes are employed opportunistically in an absolute return strategy as a means to achieving its positive return goal. By contrast.Giving a money manager flexibility to invest globally. A number of traditional funds can invest in alternative asset classes. Alternative asset classes — commodities. and to avoid weaker investments. Another dimension of absolute return investing involves alternative asset classes. and mortgage-backed securities (MBS). newer fixed-income sectors. Similarly.

ExhiBit 4: inCREAsing ALLoCAtions to modERn AssEt CLAssEs impRovEd REtuRns RELAtivE to RisK (12/31/99–12/31/09) 12% Traditional 0% Modern asset classes 100% 8% RETURN Traditional 50% Modern asset classes 50% Traditional 100% Modern asset classes 0% 4% 0% 4% 8% 12% 16% 20% 24% RISK Source: Putnam Investments. represented by the MSCI World ex-U. the indexes are equally weighted within the traditional and modern groups. U. bonds by the Barclays Capital Aggregate Bond Index. T-bills by the BofA Merrill Lynch U. All indexes are unmanaged and measure common sectors of the stock and bond markets. Past performance is not indicative of future results.S. Index. For example. Index performance does not reflect fees or expenses. which are represented by the MSCI Emerging Markets Index.Adding a range of different investments to more conventional investments can diversify the sources of return that improve performance relative to risk. stocks. You cannot invest directly in an index. TIPS (Treasury Inflation-Protected Securities) by the Barclays Capital Global Real U. TIPS Index. The more traditional asset classes reflected in the portfolio are U. international stocks. This illustration shows the risk and return of varying allocations to groups of indexes that represent asset classes considered traditional investments and more modern investments for individual investors. represented by the JPMorgan Emerging Markets Bond Global Diversified Index.S.S. both risk and return reflect 10-year results from 12/31/99 to 12/31/09. For each allocation. Risk is measured by standard deviation. Index. REITs by the Morgan Stanley REIT Index. and bank loans by the S&P/LSTA Leveraged Loan Index. commodities by the Goldman Sachs Commodities Index.S. which are represented by the S&P 500 Index. and global high-yield bonds by the JPMorgan Developed High Yield Index.S.S. international bonds by the Barclays Capital Global Aggregate Bond ex-U. emerging-market bonds. 3-month Treasury Bill Index. producing a more efficient overall portfolio (see Exhibit 4). the 50/50 portfolio allocation would reflect an equal weighting across all 12 indexes — 6 traditional and 6 modern. 6 . The more modern asset classes reflected in the portfolio are emerging-market stocks.

This asset class can provide protection from inflation because commodity prices are strongly linked to supply and demand pressures.S. These fluctuations are caused by a host of factors. Absolute return strategies are not constrained by geography.Commodities and real estate may provide a hedge against inflation. and agricultural products. which pushes up prices and rewards investors. While the United States is the single largest market. Commodities can include a range of products such as gold and other precious metals. During periods of economic expansion. the key benefit is that exchange-rate fluctuations are generally not correlated with the performance of other asset classes. when economies slow or recede. They can invest in the United States and in non-U. Demand for real estate usually increases when the economy is strong and inflationary pressures are rising. while a traditional international strategy is constrained to invest only outside the United States. demand for commodities usually falls. Currencies also represent a type of alternative asset class. 7 . rental rates can also increase. but they can nevertheless generate a return or loss because of fluctuations in exchange rates. Unlike most other assets. traditional global funds generally do not move money with the same degree of flexibility. industrial metals. which lifts the cash flow of REITs. The utilization of real estate properties typically increases during expansions. By contrast. natural resources such as paper and timber. to name a few. Among the more prominent alternative asset classes are commodities and REITs. and prices decline as well. Fixed-income markets outside the United States feature a wide range of issuers.S. absolute return strategies can pursue the most attractive investments anywhere in the world and move money out of the least attractive. including foreign governments and corporations. Real estate can protect investors from inflation for similar reasons. as measured by the MSCI World Index. with different profiles of risk and return that allow flexibility for managers constructing portfolios. currencies have no intrinsic value. An absolute return strategy can move money without constraint among global markets at any time in pursuit of its return goal. With global flexibility. Investing in global opportunities Absolute return strategies can pursue the most attractive investments anywhere in the world. A traditional global strategy invests in both the U. and if real estate supply is constrained. but for investors who turn to currencies as a source of diversification. markets to draw from a wide range of opportunities. and international markets at all times. demand increases for commodities. international stock markets represent a majority of the world’s securities. Conversely.

absolute return strategies can adapt with them. ExhiBit 5: ABsoLutE REtuRn poRtFoLios CAn AdJust with ChAnging mARKEt Conditions tRAditionAL BALAnCEd Fund • 60% stocks. This flexibility can help absolute return strategies as they seek to overcome the short-term volatility risks that have posed problems for traditional strategies. as markets evolve. Freedom from the constraints of a traditional benchmark means more than the ability to invest in a wider range of securities. more versatile in changing markets. 40% bonds • Maximum and minimum stock weightings prevent deviation from benchmark • Vulnerable to market volatility 100% 80% 60% 40% 20% 0% ABsoLutE REtuRn Fund • No fixed allocations • Flexible to respond to changing markets • Can be largely independent of market volatility 8 . It also gives absolute return strategies the capability to adjust dynamically to changing market conditions (see Exhibit 5). The goal is to make the strategies more resilient. In other words.Adapting flexibly to changing markets Absolute return strategies can adapt to evolving opportunities. They can also abandon less attractive sectors that are potentially too risky. or that may not help them reach their return targets within the specified time period of the strategy. They can move assets into the sectors and global markets that offer the best potential for achieving their return targets with low volatility because they are not limited to a narrow investment universe.

A trained. Futures and forward contracts are similar — they are agreements to buy or to sell something in a specified quantity and for a specified price at a future time. Many traditional investment strategies are permitted by prospectus to employ hedging techniques. Futures. while a call option is the right to purchase a security. futures. and options contracts can be used to reduce uncertainty. An absolute return strategy implements hedging as one of many approaches to achieve a focused goal. and options is the ability to reduce risk by hedging against market declines. an attractive feature of forwards. almost the exact opposite occurs — the contract is used to lock in a certain price in the future. including forwards. In hedging strategies. Reducing market risk For the purpose of an absolute return strategy. futures. and option contracts. to fine-tune portfolio strategies. Broadly speaking. Forwards. These contracts provide an indication of where investors think prices are headed. 9 . professional money manager can use these tools to gain exposure to specific markets. futures. but their use of these tools is not guided by an absolute return goal. Forward contracts are also heavily used to establish positions in currencies. Futures or forward contracts may be used to obtain exposure to an investment and profit if the price moves as expected. by using put options on market indexes. and thereby remove the uncertainty involved in the price movement. such as Treasuries.Hedging risk with modern investment tools Another type of flexibility usually associated with absolute return strategies is the ability to use modern investment tools such as derivatives. Options contracts are also focused on futures prices. and options are among the most commonly used derivatives. but instead of creating an obligation. and they are typically used for either speculative or hedging purposes. A put option is the right to sell a security. In other words. In particular. and to mitigate unwanted market risks. forwards. while futures contracts are common tools for gaining exposure to stock indexes and bonds. these contracts give the buyer or seller the right to purchase or sell securities at a certain price within a specified period of time. a derivative is any type of investment whose value is linked to the performance of another security. in a traditional strategy hedging might be a blunt instrument to protect performance in a broad market decline. That is because a put option becomes more valuable when the underlying security or index approaches or falls below the put price. an investor can build in a buffer against market declines.

Putnam’s strategies mix traditional and alternative investments. Putnam’s four Absolute Return Funds pursue positive returns over a period of three years with less volatility than more traditional relative return funds. Third. or markets are likely to appreciate and depreciate. it is important to remember that they are not a cure-all that eliminates market declines. as well as traditional security selection. and when the decisions are wrong. because derivatives give investors a great deal of leeway. Putnam’s absolute return strategies were available only to institutional investors. They also allow investment managers to implement their views about which securities. with more advanced active strategies involving derivatives. a prudent. though the funds are not intended to outperform stocks and bonds during strong market rallies. Putnam Investments offers absolute return funds for retail investors (see Exhibit 6). With this tool. Second. Putnam’s approach to absolute return putnam Absolute Return Funds use a wide range of tools to pursue positive returns over time.Derivatives can be used for many purposes to help funds perform more independently of overall market direction. sectors. The funds are designed to serve investors by seeking their return targets over a full market cycle of at least three years by using a wide range of investment tools. regardless of market conditions. Putnam’s funds can use strategies that add performance potential and seek to provide downside protection to outperform during periods of flat or negative market performance. First of all. for most investors. 10 . but they can serve important roles in individual portfolios as well. judicious approach to derivatives is most effective. using them effectively requires analytical and forecasting skills similar to those used in selecting securities. individuals are re-examining their investment assumptions and considering strategies that can complement funds with traditional benchmarks. and to mitigate risks. but some of them can use derivatives to gain leveraged exposure to a range of asset classes. trading derivatives involves investment costs that can reduce performance. Putnam’s funds can use derivatives to obtain or enhance exposure to sectors and markets. While highly specialized and aggressive strategies rely on widespread use of derivatives. In this way. investment managers can more comprehensively capture their overall investment view in a portfolio. not every decision made with derivatives will help a strategy. they can also have an outsized impact on performance. Particularly in light of the nearly unprecedented decline seen across global markets in 2008. The funds will not borrow money in order to establish leverage. Previously. Putnam Absolute Return Funds offer a complement to funds constrained by traditional benchmarks by addressing the risks of market volatility and sustained periods of market decline. As such. While derivatives can be a very valuable tool. and not be limited to long exposures only. they represent a risk to performance.

backed by more than 70 fixed-income experts in all sectors.ExhiBit 6: putnAm ABsoLutE REtuRn Funds FoR ALL Kinds oF invEstoRs Putnam Absolute Return 100 Fund Return target Holdings 1% above T-bills Global bonds Putnam Absolute Return 300 Fund 3% above T-bills Global bonds Putnam Absolute Return 500 Fund 5% above T-bills Global bonds. Putnam’s funds offer modern investment strategies that seek to reduce market risk. Putnam’s Fixed-Income Group has managed absolute return strategies for institutional investors since 1999. stocks. While Treasury bills are backed by the U. If successful. government.S. 11 . and alternative asset classes Balanced fund Putnam Absolute Return 700 Fund 7% above T-bills Global bonds. the strategies can be expected to outperform general securities markets during periods of flat or negative market performance. These attributes help to distinguish Putnam Absolute Return Funds from funds with more traditional benchmarks. and alternative asset classes Stock fund Alternative to Short-term securities Bond fund Each fund seeks to outperform Treasury bills by targeted amounts. The hallmarks of Putnam’s approach to absolute return • A focus on positive returns with less volatility over time than more traditional funds • Potential for outperformance during a flat or negative market environment • A wide range of investments • Progressive risk management with modern investment tools • Flexibility to invest without constraints • Portfolio managers experienced in absolute return strategies over many years Putnam’s experience and capabilities putnam portfolio managers have years of experience with absolute return investing. The absolute return portfolio managers have worked together for more than 10 years. Putnam’s Global Asset Allocation Group has managed a multi-asset strategy for institutions since 2006. stocks. applying strategies that reflect the skills that the group has developed over 15 years of managing asset allocation funds. investments in mutual funds are not. although they may lag during market rallies.

International investments carry risks of volatile currencies. Commodities involve the risks of changes in market. Request a prospectus. Stocks of small and/or midsize companies increase the risk of greater price fluctuations. including the effects of unexpected market shifts and/or the potential illiquidity of certain derivatives. while lower-rated bonds may offer higher yields in return for more risk. Massachusetts 02109 putnam.Consider these risks before you invest: Asset allocation decisions may not always be correct and may adversely affect fund performance. and governments. risks. expenses. regulatory. prices of bonds fall. including declining property values. economies. and other information that you should read and consider carefully before investing. Additional risks are listed in the funds’ prospectus. Putnam Investments One Post Office Square Boston. As interest rates rise. Bonds are affected by changes in interest rates. political. and inflation. from your financial representative or by calling Putnam at 1-800-225-1581. Unlike bonds. fees. Leverage and derivatives carry other risks that may result in losses. REITs involve the risks of real estate investing. Long-term bonds are more sensitive to interest-rate risk than short-term bonds. The prospectus includes investment objectives. and natural conditions. bond funds have ongoing fees and expenses. or a summary prospectus if available. The use of leverage through derivatives may magnify this risk. credit conditions. and emerging-market securities can be illiquid.com Putnam retail Management II861 261039 3/10 .

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