Donald Putnam is a dream lunch guest. He is worldly, affable and articulate, with a fine gift of turning a quick aphorism.
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Who: Donald H. Putnam, Managing Partner, Grail PartnersWhere: Ferro's 145 East 50th Street, New York, July 16, 2008 On the Menu: Veal chop in mushroom sauce and finding investment delicacies.
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Sometimes he is almost too loquacious. It is hard to keep him off broad issues of international politics and economics and on the narrow subject at hand — which happens to be the investment advisory industry and the role of private equity in its future. He concedes self-deprecatingly that he has plenty of strong opinions about plenty of subjects.
"That's us. Rarely right, but never in doubt."
That's something of an overstatement. Putnam must have done something very right in his career. Prior to starting his current project in 2005, the merchant bank Grail Partners, he founded Putnam Lovell Securities in 1987. Putnam Lovell was sold to National Bank Financial in 2002. It is currently part of Jeffries, but retains its distinct investment banking brand focused exclusively on the global financial services industry.
Reviewing the IndustryGrail's business and investment portfolio is also comprised of companies in the same field — asset managers, financial planners and investment advisors. It is an industry Putnam knows inside out, having started his career back in 1973 designing investment products for Bankers' Trust.
On Grail's website, its investment approach is symbolized, rather startlingly, by a truffle pig, a remarkably ugly and single-minded beast whose job is to root under the trees. Nevertheless, Putnam himself starts from a broad perspective on the industry, which helps him identify future trends and pinpoint winners and losers. Presumably, Grail then roots out outperforming companies among those.
"There are two components to financial planning," he says. "One is relatively easy and the other is rather hard."
The easy part is identifying the client's financial goals. A more complex problem is how to meet those goals. Putnam is critical of the way the overall industry is doing it now — both conceptually and in terms of execution. What it boils down to, he points out, is remarkably simple: cash. All the talk about income, appreciation, aggressive growth, principal protection, etc., obscures the fundamental fact that what investors really need is cash. Cash now and cash later.
"If I were a 65-year old retiring now, I would need a sum of money which I will allocate so that I have sufficient income now and money coming to me later — because I don't want to die broke," asserts Putnam. "It's as simple as that."
For that, asset allocation and investment selection have to work hand in glove, in order to achieve the client's investment goals. Instead, the industry proposes two extremes: "It is as if you wanted a cup of tea that is cool enough to drink, but you were brought instead a cup of boiling hot water and a bucket of ice."
An investment manager, in Putnam's view, should be flexible, changing asset allocations as the situation demands in order to meet the client's financial goal.
"If you had a trusted investment advisor, say Warren Buffett, what would you rather do," Putnam asks. "Set him limits on how much he should invest in a given asset class or allow him to adjust his portfolio according to the situation in the market?"
To Putnam, the answer is obvious. An investment manager should emulate the way hedge fund managers operate, shifting investment strategy along with shifting market conditions.
