Putnam to enter ETF market with suite of active non-transparents

Putnam Investments has made its first move into the ETF market, aiming at a spring launch of portfolio-protected products. The active manager intends to launch four ETFs using Fidelity’s active equity ETF model, according to disclosures filed last week.

Two will replicate the strategies of existing ESG mutual funds: the $5.8bn Sustainable Leaders and $575m Sustainable Future funds. The other two — Putnam Focused Large Cap Growth ETF and Putnam Focused Large Cap Value ETF — will be concentrated cousins of the firm’s $8.2bn Growth Opportunities and $13.6bn Equity Income mutual funds.

Expenses for the ETFs were not disclosed in the preliminary prospectus filed with the Securities and Exchange Commission.

The asset manager sees investors’ and intermediaries’ taste in equities gravitating toward thematic or research-heavy portfolios, including sustainable strategies, said Aaron Cooper, chief operating officer at Putnam. And now the firm wants to build a record for such products in the active ETF format, he added.

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“When [distributors] have conviction in a team and a strategy, they’re looking for choice in access through different vehicles,” Cooper said. “We think active ETFs, over the long term, are going to have a big place in the market, and we need to be there across the full set of [product] wrappers.”

The company aims to launch the product in the coming months, pending regulatory approvals, the company said on Thursday in a press release.

Company officials acknowledge there is a lot of operational and regulatory work to be done to launch the products so quickly. Putnam tapped Daniel Farrell, the firm’s head of equity trading, to head up the capital markets department. He has been tasked with working with market makers and exchanges on the creation, redemption and trading of the ETFs.

The firm will also use established ETF service providers. State Street will run its back-office services, Foreside will be the distributor and Dechert is handling legal duties. In addition, the manager plans to lean on existing employees who have ETF knowledge from prior employers, rather than hiring ETF-specific staff, Cooper said.

“We don’t feel like a big buildout is needed,” Cooper said. However, the company has the resources to add staff if they find it is needed, he noted.

Several other active mutual fund shops have entered the ETF market. Dimensional Fund Advisors, for example, launched its first ETFs in November. It also plans to convert six existing mutual funds into ETFs. Wells Fargo Asset Management also registered to launch an ultrashort bond ETF, its first such product. And Capital Group last month said it hired a BlackRock executive to help the firm debut its first ETFs.

Putnam had $84bn in open-end assets as of January, making it the 37th-largest mutual fund manager in the United States, according to Morningstar Direct.

Protecting portfolio intellectual property was key to Putnam’s ETF entrance, says Carlo Forcione, the company’s head of product and strategy. The SEC’s approval of five active non-transparent strategies allowed the manager to start intensive due diligence on all of the models. However, the firm was drawn to the methodology built by Fidelity.

Putnam wanted to enter the ETF market with its flagship funds, Forcione said. The manager has a long history in the large-cap equity space, and in some lengthy product performance to point to, he noted. “Our intention is to be relatively early in this space to establish ETF-specific track records,” he adds.

Putnam also sees strong opportunities with its sustainable ETFs. In 2017, Putnam hired Katherine Collins to lead a new sustainable investing unit. A year later, the shop repurposed its Multi-Cap Growth Fund into the Sustainable Leaders Fund, adding a sustainable lens to its investment focus. The firm also redesigned its Multi-Cap Value fund into Sustainable Future, changing its focus to companies that produce products or services that have a positive social or environmental impact.

Industry-wide, Sustainable Leaders was the sixth-largest ESG mutual fund as of the end of 2020, according to Morningstar’s most recent sustainable funds report. However, the fund was already experiencing outflows at the time of the conversion, and those redemptions have continued.

The fund’s $375m in net redemptions last year marked the 20th straight calendar year of outflows for the fund, according to Morningstar. The fund bled $336m in 2019 and $382m in 2018.

Overall, Putnam’s open-end mutual funds bled just over $5bn during the year ended January 31, according to Morningstar Direct.

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