Putnam's Manager Turnover Raises Concerns

Maybe it's something in the Boston air.

In January, we expressed our concern over the frequency of manager changes during the past couple of years at Fidelity's international funds. The fact is Fidelity has company--and it's right in the same town. During the same period, another Boston fund giant, Putnam, has also been dealing with a series of defections from its international teams--a trend that shows no signs of slowing down.

The latest turn of Putnam's revolving door came in mid-March, when the firm announced that two of the three managers of  Putnam Europe Equity , Heather Arnold and Mark Pollard, would soon be leaving the firm. That news may not seem earth-shattering: After all, Europe Equity, with about $540 million in assets, is not exactly an industry heavyweight, and it has just an average record under those managers. Yet the announcement merits attention. Not only do the circumstances of these departures raise an eyebrow, but they follow a long line of manager changes on Putnam's international funds. In fact, the firm announced yet another departure--Christopher Crawford, a member of the team running  International Capital Opportunities (PNVAX)--the same day it revealed that Arnold and Pollard were headed out the door.

Changes of management can sometimes improve a fund. But we get concerned when we see a seemingly endless series of departures and additions at a broad array of a firm's funds. A string of manager changes is particularly worrisome when it comes at a firm that is trying to reorganize and rebuild itself, as Putnam is after being damaged by the mutual fund trading scandals. Moreover, the international side isn't the only part of Putnam's fund organization that's in flux. Many of Putnam domestic-stock funds have also had changes of management in the past couple of years. What's more, several key higher-level investment personnel have also left the firm.

The Europe Background
Putnam's international-fund operation suffered directly from the mutual fund scandal when Omid Kamshad was dismissed in autumn 2003 for his alleged involvement in inappropriate trading. Kamshad was not only the lead manager for  Putnam International Equity (POVSX) and Europe Equity, but he also served as the overseer of all Putnam's international funds. Putnam chose to abolish the latter position rather than name a replacement.

A closer look reveals that the management of the Europe fund has been unsettled for years now. It lost one comanager in 2002, and another (in addition to Kamshad) the following year. After Kamshad was shown the door, Heather Arnold, who had been brought in from the outside in September 2003, took over as lead manager. Then, about a year after that, Putnam brought in Pollard, who had worked at Putnam for a decade prior to leaving in 2000.

Upon his arrival, Pollard was named the head of the European equity-analyst group based in London--a key position, for that team not only provides research for the Europe fund but for Putnam's other international funds as well. Reflecting that importance, Pollard was also named a comanager on the firm's broadly focused foreign flagship, International Equity. After a brief period of confusion, it was decided that Arnold would remain the day-to-day lead manager of the Europe fund, with Pollard focusing more on directing the research group, which consists of about 10 analysts.

Given that background, the significance of these departures becomes clear. It's disturbing that Arnold is leaving just two and a half years after arriving at Putnam. It's even more worrisome that Pollard, brought back specifically to head up the important Europe-equity research operation, is out before he even reached the two-year mark.

The result for the Europe fund isn't as bad as it could be. Joshua Byrne, who has been on the Europe team since 1990 and serves as co-lead manager of International Equity, is taking Pollard's place as head of the Europe research group and is also replacing Arnold as lead manager of Putnam Europe. The record of International Equity during Byrne's tenure as co-lead manager is not all that exciting, but at least the Europe fund isn't being saddled with a newbie. That said, the continuing instability at both the Europe fund and European research group is hardly reassuring.

Broader International Funds Not Immune
The continuing changes at the Europe fund, a regional offering with a limited audience, are one thing. But the instability extends to Putnam's broad-based international funds. Don't forget that Pollard was one of three managers of Putnam International Equity. Another broad fund,  International New Opportunities , also lost one of its three managers when Peter Hadden--who had been in that position for five years�left the firm in late 2005. And  Global Equity (PEQUX) lost one experienced team member at the beginning of 2004 and another around the end of that year.

There's more. As mentioned above, International Capital Opportunities, a small-cap offering, has just lost Crawford. Because he wasn't the lead manager, and that fund usually has about five people on its team, his departure wouldn't be all that noteworthy--except that the same fund already had lost two other managers in the past two years.

Finally, value-oriented  International Growth and Income (PNGAX) has had its own revolving door. In mid-2005, it lost George Stairs, who had been that fund's co-lead manager for many years before being switched to a supporting role in 2004. (Interestingly, Stairs recently resurfaced at Fidelity.) And in late 2004 that fund added a quantitative specialist--who left Putnam about eight months later. The fund replaced him with a different quant expert.

To be sure, there's a brighter side to this picture. The lead managers of three of the six international funds have remained in place, and their tenures all go back before 2000. Stephen Dexter, whose unusual, eclectic style makes International New Opportunities worth a look, has been running that fund since 1999. Joe Joseph has been in charge of International Capital Opportunities just as long, and that fund also has some appeal. Meanwhile, while Global Equity is less attractive, at least lead manager Shigeki Makino has been there for the long haul. And to their credit, Makino and Joseph each have more than $1 million of his own money invested in his respective fund. That shows an admirable commitment to their strategies and a willingness to invest alongside their shareholders.

In addition, one could argue that Putnam is suffering for its candor in providing the names of so many team members on its international funds. If it had labeled most of these comanagers as "analysts," their departures would have been less obvious and to some, less alarming. But that reasoning only goes so far. Putnam can only get so much credit for telling the truth in identifying managers as managers. And the level of turnover would raise concerns even if we hadn't been aware of some of the departures listed above. (Indeed, we haven't even mentioned a few other instances of team members on these funds who made brief appearances in our database over the past few years.)

What to Make of It
Manager changes aren't always red flags, especially when performance under the previous managers wasn't anything to write home about. But investors should be uncomfortable when instability becomes the norm. In such an atmosphere, shareholders and prospective shareholders can't have any confidence that the people running their fund will still be around in a year or two--making it very difficult for them to make informed decisions on whether to buy the fund or sell it.

More broadly, even though some of the individuals involved may have had perfectly innocent reasons for their departures--family issues or the like--the sheer number of moves naturally leads one to question how smoothly the restructuring of Putnam's international-fund organization is proceeding. Until the firm can get that problem under control, therefore, the concerns raised by the frequency of those changes will equal in importance, or even overshadow, any positive stories that come out of its international lineup.