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Rekenthaler Report

Performance Fees Were the Least of This Fund's Sins

Putnam Capital Spectrum was born to fail.

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Improper Grading?
This spring, The Wall Street Journal's Jason Zweig called out Putnam Capital Spectrum (PVSAX) for competing against an inappropriate benchmark. Unusually for a mutual fund, Putnam Capital Spectrum assesses a performance fee, which rewards or penalizes a fund based on how its returns compare to those of an unmanaged index. For Capital Spectrum, Putnam created a customized benchmark that consists of 50% U.S. stocks and 50% global developed-markets junk bonds.

As Jason pointed out, that choice raises suspicions that Putnam gamed the system, because over its 11-year history the fund has almost always held more than half its assets in stocks. The average has been 70%, with the percentage in late 2017 reaching as high as 88%. Wrote Jason, "Because, over time, stocks usually outperform bonds, a fund with the bulk of its holdings in stocks stands a good chance of beating a benchmark that consists of 50% bonds."

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.