Is Putnam Back From the Brink?

This month Robert L. "Bob" Reynolds will celebrate his third year as chief executive officer of Boston-based Putnam Investments. The firm he inherited in 2008 was on the ropes after a dismal seven-year stretch that included scandal, poor performance, manager exits, and a staggering $112 billion in asset outflows. While three years isn't a terribly long period to hold the corner office, especially at a beleaguered fund family like this one, that length of time does allow for a crucial measuring stick to gauge Reynolds' tenure. By most accounts, he's been a solid manager who has made strides--some controversial--that have put Putnam on the road to recovery.

Reynolds, the former vice chairman and chief operating office of crosstown rival Fidelity, has restocked the executive ranks (many of whom worked with him at Fidelity) and overhauled the equity research strategy with a focus on risk-adjusted performance and manager accountability. He's also been the driving force behind the launching of new fund products and a push into the 401(k) market, a business line he oversaw at Fidelity.

The turnaround isn't complete. The international funds, which in general have been weaker than the fixed-income and domestic-equity offerings, are due to get new leadership this summer. The Absolute Return funds, which were launched in late 2008 and have been a big seller for Putnam, continue to be a controversial touchstone. In addition, Rob Bloemker, the head of fixed income, resigned in February 2011, requiring new leadership for that group.

That said, several of Reynolds' initiatives have been shareholder-friendly and indicate that Putnam is more fundholder-focused under its current leader. Two data points are telling: Fees have dropped at many funds, and performance has improved.

Overhauling the Equity Funds
One of Reynolds' first moves was to hire Nick Thakore and Bob Ewing, who had been running funds at RiverSource, the mutual fund arm of American Express. Reynolds knew them since they both had spent the 1990s working their way up through Fidelity's analyst ranks, serving as assistants on Fidelity Magellan, and then running funds.

At Putnam, Thakore and Ewing were charged with running  Putnam Voyager  and  Putnam Fund for Growth & Income , respectively, two previous flagship funds that had fallen on hard times. More importantly, though, they also were charged with creating a research system that focused on performance and manager accountability. The initial emphasis was on fundamental stock research. The pair thought they could "out-gather" the competition on a stock-selection basis by hiring experienced analysts.

In addition to Thakore, Ewing, and a raft of new analysts, there have been other hires as well. The new skippers are experienced. Gerard Sullivan and Robert Brookby came over from American Century. Sullivan now runs  Putnam Investors  and Putnam Multi-Cap Core (PMYAX). Brookby helms  Putnam Growth Opportunities (POGAX) in addition to taking over responsibility for  Putnam Multi-Cap Growth (PNOPX), the fund formed when Vista and New Opportunities merged. David Calabro, formerly of MFS, now runs  George Putnam Balanced (PGEOX), and David Glancy, who previously ran his own hedge fund, oversees a suite of offerings that invests in a company's overall capital structure (stocks, bonds, and preferreds).

Reynolds left only two areas on the investing side untouched. The fixed-income team, which runs about $60 billion in retail and institutional money, was left intact until recently when its head, Rob Bloemker, resigned. Three company veterans were immediately installed as co-heads of this department. Jeff Knight's asset-allocation team was unchanged. It now oversees three asset-allocation funds, two of the newer absolute return funds, and the target-date series.

The research process and several new managers will start to cross the three-year mark after September 2011. That time frame is relatively extreme from a market-volatility standpoint, and it isn't terribly long-term, but it does provide a crucial measuring stick.

Spurring Growth
While Putnam's research and fund-management overhaul has taken shape, Putnam is also trying to attract assets from 401(k) plans and through new funds. Putnam has tried to reverse the extreme outflows in the years leading up to Reynolds' hire. In 2003 and 2004 alone, Putnam bled $49 billion, and net outflows continued (to a lesser degree) until 2010, when the firm saw just $400 million exit.

With retirement plans, Putnam is trying to set itself apart with fee transparency, advanced plan reporting, and innovative savings tools. For example, the Lifetime Income Analysis tool allows savers to see how much of their retirement income will come from their current balance, any money they put away in the future, company match, and Social Security payments. It also shows the gap between current contribution assumptions and an ultimate income goal. The company also has salvaged its 529 college-savings business after being let go by Ohio; it's rolled out a plan in Nevada.

Concerns Remain
Taken together, the Reynolds Era has made tangible improvements that should benefit fundholders, but key concerns remain, particularly with the international funds.

Putnam's international funds are mostly in the bottom half of their categories over the past decade. Putnam announced in early 2011 that Fidelity alums Shep Perkins and Aaron Cooper would be co-head of international equities and oversee global equity research, respectively. Perkins' and Cooper's hires prompted the exit of Joshua Byrne and Shigeki Makino, two longtime international fund managers.

Another concern centers on Putnam's widely marketed and sold Absolute Returns funds. Since the day they were launched in December 2008, the four funds have been an innovative--and increasingly copied--suite of mutual funds. They have garnered more than $3 billion in assets, and Putnam has a lot riding on their success.

The Absolute Return funds aim not to beat a benchmark but to deliver the target return (after inflation) featured in the name of each offering. By including the target-return numbers in the funds' names, Putnam may have distinguished its funds from competitors, but the names could imply a guaranteed return above a benchmark. Putnam's marketing of the Absolute Return funds also has been potentially misleading. Both the prospectuses and a marketing brochure on the firm's website emphasize early in the documents that the funds try to beat inflation. It is only later--around Page 26 in the 100's prospectus--that Putnam names the funds' inflation bogy, the Bank of America Merrill Lynch U.S. Treasury Bill Index. That index traditionally has been a legitimate measure of inflation, but since the funds were launched, the index has returned a measly 0.25% on average per year. Over time, the funds' Treasury index should revert back to a more accurate reflection of inflation, but for now it means the funds have an easier hurdle to jump.

To its credit, Putnam has stressed to investors that the funds carry no guarantee. The firm has dropped the fees on the 100 and 300 funds considerably, improving their chances at success, and all of the funds are run by experienced managers.

One additional area to watch is Putnam's parent company. Fitch, the rating-services firm, estimates Putnam made $42 million in 2007 but then lost $23 million and $90 million, respectively, in 2008 and 2009. In December 2010, Fitch downgraded Great-West Lifeco, Putnam's holding company and a subsidiary of Power Corp., primarily based on Putnam's performance, saying it "believes that in the near to intermediate term, [Great-West Lifeco] will have to continue to rely on holding company cash and earnings from insurance subsidiaries to service Putnam's approximately CAD$2 billion debt." The holding company, though, remains well above investment grade even after the downgrade. In addition, inflows could spur fee income in 2011.

Overall, those concerns mute some of the improvements Putnam has made to its investment staff and fee schedule, but Putnam's corporate culture meets the industry average.