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When Fund Firms Lose Their Luster

Jason Stipp
Russel Kinnel

Jason Stipp: I'm Jason Stipp for Morningstar. 

Morningstar FundInvestor is celebrating its 20th anniversary this month, and we're checking in today with longtime editor Russ Kinnel. He's going to talk a bit about some of the fund companies that have hit the toughest times.

Russ, thanks for joining me.

Russ Kinnel: Good to be here.

Stipp: We have a few fund companies that have been in the leaderboards [in the past], and [more recently] they've suffered some asset declines. The first fund [firm] was actually in the top five, and it's fallen quite a bit, and that's Putnam. What's the story at Putnam and why have they had such a reversal of fortune?

Kinnel: It's really an interesting story, and it's amazing how much things can change over the course of a decade. So at Putnam, first they got caught in the fund scandal with market-timing, etc., in '02, '03. But at the same time they also really got hit hard in the bear market that was just wrapping up in '03. The combination of the two really caused investors to lose faith in the firm because, you had big losses and a scandal. Not an ideal situation.

But even since then, things have continued to erode. I recently looked at the 30 largest fund companies and rated them on a bunch of criteria. Putnam didn't even make it, because they are now No. 31, which is shocking for someone that had been in the top five.

So I think performance has lagged, they've had some turnover in the manager area as well as their top management has changed at least once or twice. So that kind of continued turnover and sluggish performance has led assets to continue to bleed out.

Stipp: And Putnam has also typically sold through load channels or advisor channels. With that distribution, once they have a reputation because of certain issues that they've had, is it harder, then, for them to get back into the good graces of some of the folks that are moving the bigger amounts of money around?

Kinnel: Advisors have very long memories, and if you've done well for them, they'll be loyal to you. Many of them still remember the problems, and they've moved on, and it's tough to win them back.

Stipp: Another fund shop that maybe there's a dichotomy between their equity and their fixed-income side, is Oppenheimer. What's the story there? How has performance been and how much have they suffered from outflows or asset declines?

Kinnel: Dichotomy is a good word, because on the equity side they still have some strong performance, particularly on the foreign side. But their taxable-bond funds and their municipal-bond funds really hit some big bumps in '08. They lost big chunks of money on the taxable side. Their muni funds were hurt by their tobacco bond exposure. They've since made some changes, but they also lost some 529 business, because of that, and there's been a lot of disappointment because they really had some very aggressive bond funds that got burned in '08.

Stipp: So you mentioned that they have made some changes. You think that jury is still out on whether they are going to be able to turn performance around, or do you think this is one that investors may want to look elsewhere?

Kinnel: I think the jury is still out on the taxable side. The muni side, they haven't made as many changes. They are still pretty aggressively positioned. So my favorite part there is still their foreign equities.

Stipp: The last one, Russ, is a fund company that actually owns a few different nameplates: Legg Mason. They have a couple of divisions that I think we still feel are very favorable, but Legg Mason itself has suffered from some asset declines. What's the story on that one?

Kinnel: I think if you ask the average investor about Legg Mason 8 or 10 years ago, they would have said, Bill Miller, the great streak against the S&P 500.

Today the performance of his fund had really declined. He recently retired and some of the other Legg Mason-branded funds have also had a hard time of it. So I think Legg Mason's name has certainly fallen a few notches in the average investor's view.

On the plus side, they do own Western Asset and Royce Funds, which have done pretty well overall, and a lot of investors probably hold them in high regard.

Stipp: So, Russ fund company rankings will be in an upcoming edition of FundInvestor.

Kinnel: That's right.

Stipp: I know you'll also be sitting on a panel to celebrate FundInvestor's 20th birthday; that's Sept. 19th. So we'll have viewers tune in for that. But thank you for joining me today.

Kinnel: Good to be here.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.