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| | Mutual Funds
Putnam is reformed, but its funds still stink
Heads have rolled, shady practices have ended and fees have been slashed -- but none of that makes up for the downright lousy performance of Putnam's offerings.
By Timothy Middleton
No mutual fund company has suffered more in the scandals of the last 10 months than Putnam Investments. Investors have yanked tens of billions of assets, and that financial hemorrhage is far from over.
Corporate 401(k) plans are continuing to drop Putnam as an administrator. Hannaford Bros., a Maine-based grocery chain with 21,000 employees, recently told workers it would move their $230 million of assets this fall to Vanguard Group. Such moves are seldom publicly announced, so only Putnam knows how many other companies plan to do likewise, and its not talking.
Meanwhile, some fund observers, notably Morningstar, have revised their original negative views on the company to reflect the numerous changes Putnam has made in the wake of scandal, from firing fund managers to overhauling top management to slashing fees.
My view is different, and it is shared by a financial adviser whose clients include at least one Hannaford Bros. employee. Culture takes a long time to change, says Jeffrey Bogue, an adviser in Wells, Maine. He thinks some of Putnams changes are cosmetic, and genuine reforms will take years to work their way through the organization.
Then there's the more basic issue: There are so many mediocre funds (at Putnam): Why own them? he says.
Struggling after the scandal
Why, indeed? For months to come, and maybe years, Putnam will struggle with the scandal and its aftermath. It wont be the prestigious place to work it once was. That will weigh on performance, which is already miserable. Although the fines and penalties the firm has agreed to pay wont come out of shareholder pockets, poor performance will.
And shrinking assets could force Putnam fund managers to sell long-term holdings and realize capital gains, the taxes on which would have to be paid by shareholders who hang on. Putnam can be expected to try to minimize them, but whether and the degree to which it succeeds is a roll of the dice by someone elses hand.
Putnam has agreed to pay $110 million in settlements with federal and Massachusetts regulators. Amid charges of rapid trading in Putnam funds, including allegations of trading by the firms own portfolio managers to exploit short-term price movements to the detriment of long-term shareholders, it dismissed more than a dozen employees and replaced its chief executive and other senior officials.
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It has also agreed to cut sales commissions, to 5.25% on equity-fund A shares from 5.75%, and to reduce the expense ratios of some of its funds from above to below the industry average. It put a price tag of $35 million annually on these steps.
In addition, Putnam has adopted a host of internal reforms, including promises of greater transparency in how its portfolio managers are paid and whether they invest in the funds they manage.
Committing to reform
The company declined to make officials available for interviews for this story, but sent an e-mail in the name of CEO Charles Haldeman, saying, Putnam is committed to continual improvement and to having one of the strongest fiduciary cultures in the fund business."
Laudatory as these efforts are, they're an explicit repudiation of business practices that Putnam long observed, and many others in the industry still do. The fact is, as Ive noted in numerous columns since last September, you could've seen these scandals coming because this is an industry that owns more yachts than its doctor-and-lawyer customers: Its native avarice is almost boundless.
Indeed, Bogue, the Maine investment adviser, was warning his clients away from Putnam long before the scandals became public. One of his clients, Brian Norton, a Hannaford employee in Falmouth, Maine, was persuaded last spring to drop all the actively managed Putnam funds in his 401(k) in favor of an S&P 500 ($INX) index fund.
If it hadnt been for Jeffs good advice, I would have been touched by (the scandal), he says. Norton confesses he knows little about investing -- thats why he hired Bogue -- but hes relieved his employer is switching to Vanguard, which is known for its low costs.
Hannaford says it is switching plan administrators not only because of the scandal, but also because of poor investment performance at Putnam. The firms go-go growth style was golden in the late 1990s, but turned sour in the bear market and hasnt recovered.
Failing to deliver
Ethics aside, investors care about performance, and Putnam doesnt deliver the goods. I restrict my own investments to funds that consistently rank among the top 25% of their peers. Heres how Putnam funds rank, based on the Morningstar database:
| Putnams poor showing | | Period | % of Putnam funds in top 25% of category | | One month | 20.3 | | Year to date | 20.3 | | 12 months | 31.5 | | Three years | 16.7 | | Five years | 9.6 | | 10 years | 4.9 |
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Notes: As of 4/30/2004. Based on 54 distinct portfolios for all periods of three years or less, 52 portfolios for five years and 41 funds with 10-year records.
Source: MSN Money, Morningstar
Putnams long-term performance record is wretched, with fewer than 5% of its funds managing to hold onto superior performance for a decade. By contrast, 73.2% of Vanguards funds managed this feat.
Even over the last 12 months, when growth investing -- Putnams forte -- was in fashion, fewer than a third of its funds managed to excel. This year, only one in five is doing a fine job.
You dont have to be able to handicap the Preakness to figure out these odds. Vanguard has become the nations biggest mutual fund complex through superior performance, derived in part from rock-bottom fees. (Not average fees, as Putnam is framing the issue, but low ones.)
Putnam, deservedly, has fallen from among the industrys top five players to an also-ran, at No. 7.
If you feel inclined to own a Putnam fund, Id like to interest you in a certain bridge. Its even older than Putnam, and more famous, and it hasnt fallen down.
At the time of publication, Timothy Middleton didnt own any securities mentioned in this article. He was never a customer of Putnam, and he is a customer of Vanguard.
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