The chairman of Putnam's fund trustees is vowing that investors will suffer little if any disruption as a result of the company's sale.
"One of the things that attracted the board to this was the likelihood that very little will change," John Hill told me Wednesday, just hours after it was announced that Putnam would be sold to Canada's Power Financial for $3.9 billion.
"I think we'll see the same lineup of funds a year from now, and we'll see the same portfolio managers -- as long as performance remains strong in the areas where it has been strong, and it continues to improve in the areas where it still needs improvement."
Hill chairs the trustees who oversee the funds on behalf of the investors.
One thing to watch: Putnam's 11 closed-end funds. "We're having a board meeting next Thursday and Friday, and Putnam is coming forward with a series of recommendations across the board with regard to the closed-end funds," Hill said. "Over the next week to 10 days we may announce some proposals. We like closed-end funds, and we're looking at ways to modernize them going forward."
Hill declined to indicate what the changes might be, saying "these are publicly traded funds." In doing so, he tacitly acknowledged that the proposals might have an impact on the closed-end funds' price. Regulations bar the ad hoc release of price-sensitive information, because a private investor could work an angle on the deal if the funds start to move up.
And there's reason to think they might.
"This deal is a potential catalyst for Putnam closed-end funds," says Larry Glazer, a managing partner at Mayflower Advisors in Boston and a longtime Putnam watcher. "Putnam closed-ends perennially traded at a discount because of the uncertainty around the company, and this removes that uncertainty."
Closed-end funds, unlike standard open-ended mutual funds, have a fixed number of units in circulation, and these trade throughout the day on the stock exchange like an ordinary stock. Sometimes units trade at a discount to their underlying assets, giving you a great opportunity to buy $1 worth of assets for, say, 95 cents or even less.
A Free Pop
Which is where we are now with Putnam's closed-ends. Maybe the company's new owner, Power Financial from Canada, will rebrand the funds. Or maybe it will reorganize or merge some of them. Or maybe it will just fold them all into an open-ended fund. It's too early to know.
But if any of this happens, you could be looking at a free pop of 10% or so. It doesn't shoot out the lights, but then you're not taking a lot of risk. These are diversified bond funds.
"This change is a potential catalyst for the Putnam closed-ends," says Glazer. "When we look at these types of funds, we look at the discounts, the credit quality and the sustainability of the yields."
He highlights four Putnam funds that could be worth a look. With
Putnam Municipal Bond, you were paying just 92 cents per dollar of assets at last count. The fund has $13.61 worth of munis per unit, but those units were trading for just $12.50.
Municipal Bond has a pretty plain-vanilla municipals portfolio. About half the bonds are AAA-rated. Nearly four-fifths are A-rated or better. And the portfolio is concentrated toward the short end of the yield curve. Just 7% of the fund is invested in munis that have a 10-year duration or longer.
Does that matter? Only if you think we may see more inflation down the pike than the market is currently expecting. You can count me in.
Bonds are like bank accounts that can never raise their interest rates. So if inflation rises over the next, say, 10 years, someone holding a 30-year bond is going to get the shaft. Back in the hyperinflationary 1970s, long-dated bonds collapsed. Who wants to buy a 5% fixed yield when inflation is running at 10% and the bank will pay you 12%?
The great advantage of municipal bonds is that their interest is free from federal income tax. At current prices, Municipal Bond's monthly dividends add up to an annual yield of 4.84%, tax free. If you're in the top federal tax income bracket, you'd need to earn 6.72% before tax to get that kind of deal.
Putnam Municipal Opportunities fund takes a little more risk -- 10% of the money is in bonds longer than 10 years, and 23% in bonds rated BBB or below. The units also trade at 92 cents on the dollar, or $12.03 per $13.16 in assets. The yield is 4.84% tax free.
The figures are similar for
Putnam Investment Grade Municipals. This fund's holdings are all high grade, with a duration of between five and 10 years. Once again you're paying 92 cents on the dollar -- $10.05 per unit, against $10.94 in assets -- and getting a 4.88% tax-free yield.
Putnam High-Yield Municipals offers slightly more risk, and at $7.38 per unit it trades at 93 cents per dollar of assets. But it pays out more too: a tax-free yield of 5.28%. In the top tax bracket you'd need to earn 7.34% to take home the same amount.
These are useful discounts, especially if you were looking to put some money into munis in the first place. Stay tuned.
In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining TheStreet.com in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.