Investing with Principle and Conviction: A Q&A with Putnam Investments

This spring, long-time mutual fund issuer Putnam Investments debuted its first ETFs, based on four of its leading equity mutual fund strategies.The initial launch included two ESG-focused ETFs, the Putnam Sustainable Future ETF (PFUT) and the Putnam Sustainable Leaders ETF (PLDR), which eschew one-size-fits-all exclusionary screens in favor of Putnam’s signature approach of engagement with the companies in which it invests.Meanwhile, the Putnam Focused Large Cap Growth ETF (PGRO) takes a thematic approach that slices across 12 distinct emerging themes, such as “the personalization of medicine” and “the humanization of pets”—all part of the issuer’s focus on “big ideas.”Recently, ETF Trends managing editor Lara Crigger sat down with Putnam’s director of content strategy, Andrew Lohmeier, and the firm’s marketing manager, Jack Casady, to learn a little more about why the firm decided to launch a suite of ETFs now, and what sets their approach apart from other active managers entering the industry.Lara Crigger: Could you tell us a little bit about what sets Putnam’s investment approach apart from the other active managers in the space? Andrew Lohmeier: We’re now focusing more on a hybrid, or “mosaic,” research model. Our equity team still has its sector experts, but also our analysts are working more closely with the portfolio management teams on each of our strategies. With this alignment of asset and sector expertise and strategy expertise, we think we can harvest more insights for equity strategies. Because, ultimately our goal is not to be super aggressive or take big risks. Our goal is to provide better insight; to see a clearer picture of the market, before the consensus catches up. We hope to add alpha by seeing things before the rest of the market recognizes them. Our ETFs have the word “focused” in them: their portfolios are more focused than their mutual fund counterparts. So you will see larger position sizes in them—not because they’re trying to load up on a certain risk factor, though, but because they’re high-conviction stocks. Our focus is on understanding the companies and their advantages—building a position out of conviction.Crigger: So as your research experts work in tandem with your portfolio managers, it becomes an approach that’s very much about teamwork, rather than relying on a single genius stock-picker. Lohmeier: On the one hand, our portfolio managers are highly skilled and highly experienced. They are the ones who are accountable for the performance of their portfolios, and very much so. But they do have a lot of interaction with the research team, who give them a lot of good ideas. There’s a lot of feedback and cross-pollination. Plus, all of our ETFs have an assistant manager or two co-managers. (PGRO) [the Putnam Focused Large Cap Growth ETF has Greg McCullough and Richard Bodzy. The sustainable ETFs [the Putnam Sustainable Future ETF (PFUT) and the Putnam Sustainable Leaders ETF (PLDR) have Katherine Collins and Stephanie Dobson. And then on (PVAL) [the Putnam Focused Large Cap Value ETF, there’s Darren Jaroch and Lauren DeMore.  Crigger: Putnam’s investment philosophy is one of “big ideas.” What does that mean, in a concrete sense?Jack Casady: These four ETFs we’ve launched, they’re our flagship Putnam strategies. We have them available as an SMA; we have them available as mutual funds; and now they’re available as an ETF. And consistently, the core idea has been the same across each investment vehicle. Our team looks for the big ideas, the opportunities where maybe others didn’t find them. And if you bundle our equity research team in tandem with our portfolio managers and Putnam’s ability as an asset manager, you see that they’re looking for big ideas that maybe others can’t see.For example, take our growth opportunities fund. We’re looking across 11, soon to be 12 different themes. You’re not getting an ETF that focuses on just one theme, say, infrastructure. You’re getting insight into twelve different themes across the market. With our sustainability funds, we take an inclusive approach, rather than exclusionary. We don’t say no for the sake of saying no. Because a fossil fuel company, for example, might be doing the right thing, and making the right changes to provide for a better future. The opportunity could be there.Lohmeier: You could exclude companies, but we don’t think that’s really the most thoughtful or enduring way to do things. As we look to the future, we want to focus on solutions. So we get to know companies; we see what they’re doing and where their insights lie. We dialogue with industry leaders; we write letters to CEOs. We want to be fully engaged with these companies, knowing that they’re the ones creating solutions down the road. That’s what active management means to us.Crigger: Some active managers treat sustainability as a silo in their firms. They don’t let the ESG team sit at the lunch table, so to speak. But looking at your initial launch of ETFs, fully half of them were ESG products. You came out of the gate saying, “this is who we are: ESG is core to our process and brand.”Casady: It’s true. Our sustainable products are part of the team here at Putnam. They’re integrated. It’s not like our sustainable team is off in the corner somewhere, or that we have one little arm of sustainability separate from the rest of Putnam. We don’t want to put them in a corner, as it’s a growing part of our business.Crigger: There are two prevailing approaches in ESG right now: one of them is excluding the worst offenders and investing in what’s left. The other is trying to build a best-in-class portfolio. Few funds do what you’re talking about, which is to engage the “worst offenders” and help them see that their shareholders want them to improve in specific ways. Can you tell us a little about your process in engaging with companies?Lohmeier: Because Putnam is an active fundamental manager with roughly $200 billion in assets, companies regularly talk to us, and our analysts ask critical questions. Our equity and credit analysts are in constant dialogue with the companies. They have a lot of access to the companies’ chief financial officers, to the CEOs. They’re researching; they’re writing their analyses; they’re doing their process of internal recommendations to the portfolio managers. Each year, they write a formal letter to the CEO. Even a company that’s fairly renowned, like Apple, our team still writes to the CEO and suggests ways to improve for the future.  The more interesting letters, of course, are in areas like energy. Last year, the sustainability team worked with an energy company who many ESG investors wouldn’t invest in because their carbon footprint is so large. But they said: “We know this company; we talk with them on a regular basis. They understand the future will be outside of fossil fuels, and they’re making the investments now to reposition that company.” That’s the kind of “big idea” that helps distinguish our sustainable team. I’m not saying they look for controversy, but they have conviction in their process. They’re talking to companies that are changing, in order to solve future problems. They don’t just want to take an arm’s length view, but they want to understand how companies solve problems and think about capital stewardship. The fact is, these companies have money, and they’re going to invest it in their own operations. Our team wants to know how they’re going to deploy that capital. So when our team sees a company making the decisions in the right direction, then yes, they may invest in a company that would have a higher carbon footprint than others that might not pass a more exclusionary, rules-driven strategy. Crigger: Many investors don’t realize that some of the big oil companies are the ones making the biggest investment – from a sheer numbers perspective – into renewable energies, like wind. Companies like Exxon, they just have so much capital at their disposal, so when they make an investment in clean energy, it moves the needle. Casady: Exactly. The sustainability team looks at themselves as really strong researchers. They say: “What’s the how and the why? And how does that affect our investment choice.”We also take a more thematic approach to sustainable investing. We look at what is needed to provide a thriving public, a thriving planet, and a thriving people. Often, when investors think about a sustainable environment, they focus solely on the environment—windmills, perhaps, or solar panels. We focus on that but also on people. For example, we just published a new research paper on racial justice. That’s incredibly differentiated from our peers. Why are we looking at racial justice? Because justice is a moral question and a business challenge; it can improve economic and business growth. More inclusive companies become better problem-solvers. We want to be at the forefront of what’s important in this life. It’s not just the environment, though that’s a very key part of it, but it’s also public health, the public goods. Another example: last year, we did a paper on mental health. That’s also something that’s incredibly important, not just for investing in medicine or finding opportunities; but also investing in people, and making sure that people are getting hired and getting the support they need. That company investing in you is also investing in a better future. Crigger: On the flip side, however, many active managers hyper-focus on environmental metrics because it’s easier to source robust data about a company’s carbon footprint than, say, documentation about how the company aligns with racial justice. How does your research team source the data needed to devise an investment approach?Lohmeier: It’s a good question, and it’s something that we agree, we do need better data for analyzing those issues. Many companies track diversity information, but they’re not required to release it—though, this is something the SEC is considering right now. Either way, diversity is really just the first step. As Katherine Collins, our PM of our sustainability ETFs, says, the future goal is greater equity and justice; diversity is an early step toward understanding that. Companies must operate within a society, rather than in tension with that community. If your company reflects the diversity of the community and the society it works in, then it not only gets better teamwork, because you have diversity of viewpoints, but it also makes for a better system overall, where companies, their employees, and the community all have a sense of common belonging. Crigger: So if Putnam has been around for 80 years, if you have mutual funds and SMAs, why enter the ETF world at all? And why wait until now?Casady: It makes sense in a lot of ways. One of the great things about ETFs is that they democratize investing. It allows anybody to go into a brokerage and say, “I’d like access to this product.” Instead of the old days, where maybe I can get a mutual fund through my brokerage but more often than not, I worked through a third party. ETFs are great. They’re more tax-efficient. They have lower fees. They trade throughout the day, like a stock. And now there are around 30+ semi-transparent ETFs in the space—that number’s only going to grow. We went that route because it protects how we generate alpha. You see a snapshot of what our fund is doing. During the day, there’s tracking baskets, so you see around 80% of what’s happening, versus a fully transparent active ETF where you get the full holdings every few seconds. Crigger: You’re using the Fidelity semitransparent active ETF model, right?Casady: Yes. ETFs are just the way the industry is moving. It’s the next space we need to be a part of. It also was a great way to make our products more available. Like I said, these are flagship Putnam products, just available in a new way. The underlying power under them is the same. Lohmeier: Like I said earlier, we are committed to active. So we needed a model like the semi-transparent active ETF, where we could protect the intellectual capital that we think drives our performance. We try to see what the investing public wants and needs and meet them, while staying true to our principles.For more news, information, and strategy, visit the Big Ideas Channel.

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