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Putnam Absolute Return Funds Perfecting Aim

Launched last year, the funds have drawn investors by hitting their targets -- and only that.

NEW YORK (TheStreet) -- Investors who crave security should take a look at the four Putnam Absolute Return Funds. Putnam's portfolio managers aim to avoid losses and deliver modest returns every year -- no matter how the markets perform.

Launched in January 2009, the funds have hit their targets, recording respectable gains while protecting shareholders from the erratic moves plaguing the markets.

Absolute return funds are very different from conventional portfolios. The typical mutual fund seeks to surpass a benchmark, such as the

S&P 500

. If the S&P climbs, the funds try to climb higher than the index. If the benchmark dips, the funds try to lose less. But the Putnam funds consider

any

loss to be a failure. While Putnam does not offer guarantees, the company's aim is to hit specific return targets.

Putnam Absolute Return 100

(PARTX) - Get Putnam Short Duration Bond A Report

seeks to outdo Treasury bills by 100 basis points (1 percentage point) annually over a three-year period.

Putnam Absolute Return 300

(PTRNX) - Get Putnam Fixed Inc Absolute Return A Report

seeks to outperform by 3 percentage points. Other funds in the Putnam series try to beat the benchmark by 5 percentage points or 7 percentage points. If the funds achieve their goals, the managers get bonuses.

What happens if

Putnam Absolute Return 700

(PDMAX) - Get Putnam MultiAsset Absolute Ret A Report

surpasses its target and returns 10 percentage points more than T bills? The managers get no extra bonus. Instead of trying to hit home runs, the managers are supposed to reach their goals while taking as little risk as possible.

Consider

Putnam Absolute Return 500

(PJMDX)

. Because T bills yield 0.13%, the fund aims to return about 5.1% annually. Last year the managers exceeded the goal, returning 9.9%. This year the fund has been about flat. But a year and a half after its launch, the fund is on course to hit its target for its first three-year period.

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To accomplish their goals, the portfolio managers of the 500 and 700 funds can hold a wide variety of assets, including stocks and bonds from around the world as well as commodities and cash. The funds can also sell short and use options and futures. The managers are free to put most of the portfolios in stocks or hold no stocks at all. The 100 and 300 funds can hold almost any U.S. and foreign fixed-income securities.

Since the 500 and 700 funds began, they have held few stocks. Because yields on some fixed- income assets have been higher than 5%, the managers figured that they could reach their target returns by holding mostly safe bonds instead of stocks, which can be riskier.

The funds have held a big stake in high-quality commercial mortgage-backed securities. In 2008, the securities sank as hedge funds were forced to sell holdings to raise cash. As the prices of fixed-income securities fall, the yields rise. At one point, the mortgage securities yielded 15 percentage points more than comparable Treasuries. Putnam began buying the securities last year. "The creditworthiness was not in doubt, but the return opportunity was very high," Putnam portfolio manager Jeffrey Knight says.

These days the yields on the mortgage securities have come down to 6% to 7%. Because that will enable the funds to reach the return targets, Knight plans to hold the high-quality securities until they mature.

With the outlook for stocks improving last year, Knight had 20% of assets in stocks in the 500 fund. He still thinks equities can deliver positive results in the next year, but he worries about the increasing volatility of the markets. To stay out of trouble, he has cut the stock allocation to 10%. He has also shed some riskier stocks and is focusing on rock-solid blue chips. Holdings include

Wal-Mart Stores

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and

Kellogg

(K) - Get Kellogg Company (K) Report

.

Sold by advisers, the Putnam funds have already attracted $2.5 billion in assets, a big number for such young funds. Putnam says the funds will continue growing as advisers seek ways to obtain the kind of steady returns that clients want.

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Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.