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Reviving a Struggling Fund Firm Is No Easy Task

Encouraging signs are mixed with question marks in the effort to jolt Putnam back to life.

Since bringing in a new CEO in the summer of 2008, Putnam--once one of the biggest fund firms but more recently one of the least respected--has embarked on a vigorous campaign to restore its image and improve its performance. Many changes have been made and much effort expended to publicize them. So, where does Putnam's corporate culture truly stand right now? That's a complex question without a simple answer. It deserves a detailed look.

A New Leader and More
Putnam has come a long way in the time since Bob Reynolds was appointed CEO in mid-2008, but it faces competitors that have been executing well on strategy and stewardship for decades.

Reynolds, who spent the majority of his career at crosstown rival Fidelity, came to Putnam about a year after the firm was sold to Canada-based Power Financial Company by insurance giant  Marsh & McLennan (MMC). Reynolds came to a firm that was struggling because of excessive management turnover and poor performance across its fund lineup. At the end of 2008, Putnam's five-year fund manager retention rate was the lowest among the United States' largest mutual fund managers, and performance of some of its flagship funds, including  Putnam Fund for Growth & Income  and  Putnam Voyager , had been in the bottom half of its peer group for each of the previous five years.

Reynolds has made a number of significant moves since his arrival. Most notably, he's overhauled the firm's investment personnel and lowered fund costs. To start, Reynolds implemented a single-manager structure to make portfolio managers more accountable for the performance of individual funds. Under Putnam's former chief, Ed Haldeman, funds were team-managed, with quantitative experts paired with fundamental managers. Sometimes four or five individuals were listed as managers of a single fund. Soon after Reynolds took over, the majority of quantitative managers were laid off or transitioned into other roles within the firm, leaving the fundamental portfolio managers--just one per fund, for the most part--with the duty of restoring Putnam's tarnished record. Reynolds also cut the expense ratios of many of the firm's fixed-income and asset-allocation funds and implemented firmwide fee breakpoints, helping to bring down the costs paid by shareholders of the funds.

Research Efforts Take Shape
Putnam has also brought in several portfolio managers from outside firms in an effort to help turn around weak fund performance. For starters, Reynolds tapped Fidelity alumni Nick Thakore and Bob Ewing to head up the firm's large-cap equities team. Thakore manages Putnam Voyager, while Ewing is the manager on Putnam Fund for Growth & Income. Two portfolio managers from American Century also joined the large-cap team: Jerry Sullivan, who now runs  Putnam Investors , and Rob Brookby of  Putnam Growth Opportunities (POGAX). Leading those fund managers is Walter Donovan, who left his post as head of equities at Fidelity in April 2009 to become Putnam's chief investment officer. Donovan succeeds Kevin Cronin, who stepped down as head of investments and CIO of large-cap equities in October 2008. Donovan oversees the equity and fixed-income teams, including the small- and mid-cap equity team that was led by Ned Shadek until his retirement in November 2009. He's also making a concerted effort to serve as a mentor for analysts and portfolio managers.

In addition, Putnam hopes to bolster the performance of its funds by more-actively monitoring the risks in its portfolios. For example, Donovan has pledged to provide more transparency behind the positioning of portfolios that include exotic securities, such as the firm's fixed-income and target-date funds, in order to clarify their specific risks and potential rewards. If this effort bears fruit, it would address a serious issue that was painfully highlighted by the credit crisis: the lack of critical details in the portfolios provided to shareholders by the fixed-income funds at Putnam and many other firms.

Overall, the above changes seem like positive steps. Still, implementing sweeping change at any company is notoriously difficult to pull off, partly because the effort must battle against existing cultural practices. Therefore, although these moves offer an encouraging start, only after more time has passed will it be clear how well they have succeeded in providing deep and long-lasting improvement to a troubled fund firm.

New Funds and New Ads
Other changes at Putnam are of questionable benefit to fund shareholders. Since the end of 2008, for example, the firm has launched a number of global sector funds, a suite of absolute-return funds, and a pair of funds that invest in the securities of leveraged companies. The sector funds do give Putnam analysts an opportunity to manage money. Historically, though, investors have not owned these types of funds effectively, as evidenced by Morningstar Investor Returns, which take cash inflows and outflows into account to reflect a typical investor's returns in a fund. Investors may be more likely to stick with absolute-return funds, which look to achieve a specific return over three years regardless of market conditions. But it remains to be seen whether Putnam can consistently deliver the returns featured in these funds' names.

Putnam has been aggressively marketing its funds to investors, particularly the absolute-return suite. This effort may attract assets to Putnam's retail funds, which have been in net redemptions in each of the past nine calendar years. Investors have pulled out more than $120 billion from Putnam mutual funds since 2001, though far less money left in 2009 ($3.6 billion) than in previous years. Some of the marketing efforts, however, focus on the extremely strong one-year performance of certain funds, which can create unrealistic investor expectations and may attract those who simply chase big returns. Such investors often withdraw their money as soon as returns disappoint.

Conclusion
Under its new leadership, Putnam has made noteworthy improvements in its corporate culture in a relatively short period of time. But it still faces considerable challenges. While it's encouraging that some outside managers now seek to come to Putnam--something that wasn't the case just a couple of years ago--that doesn't mean the new managers are miracle workers. (Large-cap equity managers Thakore and Ewing both struggled at RiverSource just prior to joining Putnam.) Much of the firm's marketing effort has been focused on the new absolute-return funds, which are unproven.

Unfortunately, very few money managers have successfully revolutionized their corporate cultures while also providing strong performance. Meanwhile, investors have thousands of funds to choose from--many run by firms with spotless stewardship records and consistently strong performance. Putnam still has a long way to go before it's running alongside these industry leaders, but it seems to be heading in a better direction.

 

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