Q: Do you follow a similar process for the bond markets?

A: We rely on Putnam’s fixed income specialists to implement the bond strategies within the fund.

The trading mechanics in fixed-income securities are very different. You have to shop around for your buy and shop for your sell. Different strategies need to be brought to accomplish similar objectives and to keep the transaction costs manageable. In a portfolio that’s 80% invested in equities, the individual bond holdings are unlikely to have a great impact at the portfolio level, and we look for the characteristics of these asset classes rather than for a homerun corporate bond.

We tend to invest in liquid and diversified programs that differ depending on the sector. In high-yield bonds, we hold a diversified portfolio because the payoffs are so asymmetric. At the individual credit level, you always face credit risks and a small win against a big loss. So we use a diversified approach to avoid damage to the portfolio in case of a blow up. In the treasury markets we own a portfolio that accomplishes our duration targets, so the decisions are made class by class to achieve what’s best for the whole portfolio.

Q: How many stocks and bonds do you hold on average? What are the benchmarks that you follow and what’s your definition of the world markets?

A: It is a truly diversified portfolio with security holdings of more than 2000. The number of stocks that we own around the world is more than 500 but on the fixed income side the number is higher. That’s a consequence of our philosophy within the credit categories and the nature of the fixed income sectors.

In terms of our universe, we refer to the Lipper Mixed-Asset Target Allocation Growth category. Currently, the fund is beating over 90% of its category peers for the one, three and five years. Internally, we track ourselves against the Composite Benchmark, which represents a weighted average of the underlying asset classes. The official benchmark is Russell 3000 Index, which reflects the fact that the portfolio, while global, is still predominantly an equity portfolio.

Q: What is your view on risk control, in addition to diversification?

A: I think that risk management should be comprehensive and should involve identification of macro risks at the portfolio level, micro risks at the security level, and a number of perspectives in terms of risk models and analysis techniques.

We actively try to manage every category of risk. The first step is to understand the sources of risks and to use diversification to balance the impact that a surprise could create. Second, we have to be very specific about what other risks we want to take and to differentiate those that we acknowledge and embrace versus the unintended ones. We believe that we have to be ruthless at weeding out unintended risks and that philosophy is embedded in our stock selection process.

We have tools and a separate risk management group at Putnam that monitors our composite risk characteristics relative to the asset class risks. Some of those tools are developed internally and some by third parties. It is an empirical analysis of the behavior of our portfolios in response to market outcomes.