Mutual fund managers who buy and sell stocks for a living ran into a problem this year. Did they have enough buckets for all the money they were making?
How do you single out one manager when the worst average performance among nine different stock fund categories tracked by Morningstar Inc. — the worst one — is on target to earn a total return of slightly more than 30 percent in 2013?
So obviously to start you need someone who will make more than 30 percent this year. Beyond that, I look for superior performance compared with competitors and benchmarks. I want to see an exceptional record established over years, not just this year. I try to pick managers who earn big returns while limiting risk.
There were several candidates who met those qualifications for this year’s Boston Capital mutual fund manager of the year honors. From that group, I chose David Glancy of Putnam Investments. He runs two Putnam funds with similar missions and both have enjoyed a spectacular year.
Glancy’s $1.9 billion Putnam Equity Spectrum Fund had earned 43.6 percent for 2013 through the end of last week, more than 11 percentage points above the Standard & Poor’s 500 index. His $4.4 billion Putnam Capital Spectrum Fund, which can invest in a range of securities, had gained 34.8 percent.
Both funds focus on businesses that carry a lot of debt. Glancy’s equity fund is just stocks of debt-laden companies, while the Capital Spectrum fund invests in stocks, junk bonds, and other securities issued by such companies.
The world of high-leverage stocks and junk bonds can be a volatile, risky place. The idea: Make lots of money when times are good and try not to lose your shirt when markets go south. The past year has been a time for opportunity.
“The history of leveraged finance is that it’s a really good movie,” says Glancy. “There are great stories, great disasters. There are times to be neck deep in it and other times to be completely dry.”
Glancy’s funds have performed well in different markets. As impressive as his performance has been this year, Glancy may have done even better work by earning much less — 9.2 percent — in his stock fund during a rougher market in 2011. He ranked among the top 1 percent of peers that year, according to Bloomberg News. Glancy followed that up with another market-beating performance in 2012.
Both of Glancy’s funds defy any standard investment description. He owns stocks of some companies that do not fit the high-leverage profile, simply because he considers them undervalued (Putnam Equity Spectrum counts Apple Inc. among its top 10 holdings). Both funds are permitted to short securities — to bet that those investments will lose value in the future — though neither do much of that now.
What really makes Glancy’s Putnam funds look different are the huge piles of cash they hold. Putnam Equity Spectrum maintains about 14 percent of its assets in cash. Putnam Capital Spectrum invests about 20 percent of its holdings in cash.
All that cash provides safety and investment flexibility, but it dampens returns when markets are hot. Both funds would have earned a lot more this year if they had been fully invested.
“I don’t have a big cash balance just to say I have it,” says Glancy. “I feel better about my ability to engage an investment opportunity when I don’t have to sell something” else to buy it. “It’s a strategy I think works best over long periods of time.”
Glancy, 52, has lots of experience in the world of high leverage. He started his career as an accountant but moved on to Standard & Poor’s to analyze investments during the first junk bond gold rush of the 1980s.
Glancy landed at Fidelity Investments a few years later and was eventually selected to lead two well-known funds: the new Fidelity Leveraged Company and Fidelity Capital & Income. Those mutual funds were ranked among the company’s top performers when he left Fidelity in 2003 to start a hedge fund firm.
The hedge fund produced mixed results and the firm closed several years later. Putnam chief executive Robert Reynolds, himself a Fidelity alum, recruited Glancy back to the mutual fund business in 2009. Putnam created its two spectrum funds, which look a lot like the products Glancy managed at Fidelity, and put him in charge.
Lists of the biggest investments in each of Glancy’s funds share a lot in common. Each fund counts Dish Network Corp. (up 57 percent) and the related EchoStar Corp. (up 43 percent) as its top two holdings. Glancy’s funds own 6.7 percent of Dish and nearly 19 percent of EchoStar.
Other top stock holdings that boosted performance for Glancy’s funds this year include Jazz Pharmaceuticals PLC (up 133 percent), Cubist Pharmaceuticals Inc. of Lexington (up 61 percent), and Japan Airlines Co. (up 38 percent).
The big stock holding in each portfolio that contributed relatively little? That would probably be Apple, which has gained about 5 percent this year.
The Putnam Capital Spectrum Fund is permitted to own all kinds of things but Glancy has sunk most of its money into stocks. You have to look hard to find any junk bonds there.
“Right now I think high yield is pretty unattractive,” says Glancy. “There are a lot of owners who don’t appreciate the risk they’re taking — the yield-starved mom and pop who can’t take the zero percent interest in their money market account. I’m not predicting it’s going to be terrible in ’14 or even ’15, but if I don’t have to own them, I’m not going to, and I don’t.”
To start the new year, Glancy thinks the stocks he picks will continue to offer the best opportunities for his shareholders. No one will argue with the returns they produced in 2013.