Putnam Voyager: End of an Era

Loud Entrance, Soft Exit

On May 6, 2016, a chapter of mutual fund history ended.

Putnam Voyager was launched in 1969, a time in U.S. history that was socially troubled and financially sanguine. The stock markets had boomed for most of the previous two decades, and more seemed yet to come. A new breed of mutual fund had entered the scene--the "performance fund," which jettisoned the usual mutual fund staple of blue chips for "go-go" emerging-growth companies.

Funds created during the late '60s often sounded as if they had been named by George Jetson:

Afuture Alpha Delta Trend Manhattan New York Venture Omega Pilot Quasar Steadman Oceanographic

Austin Powers went bold, or not at all! In 1969, the future appeared to lie with high-concept, small-growth companies, held in mutual funds that were managed by the best and brightest young men (always men). Such was the cutting edge. Putnam Voyager might have been sponsored by a Boston doyen, but its heart was young; it had the name, and the game, to conquer the next half century. It and its performance-fund rivals were the brave new future of the mutual fund industry.

Good in Theory

That story almost convinces me, even now. It truly did have the logic of the times behind it. Common sense argued that the highest future returns would come from rising technology companies--a common sense fortified by the huge stock market gains of

Offering further support were the academics. Professor William Sharpe’s Capital Asset Pricing Model, or CAPM, advanced earlier in the decade and rapidly becoming mainstream theory, equated higher “beta” (that is, sensitivity to overall stock market changes) with higher expected stock market returns. That was good news indeed for Putnam Voyager, because there weren’t any higher betas than those carried by the go-go stocks.

More risk, more reward ... and professional management to see the action through. What could go wrong?

Bad in Practice A great deal, as it turned out. To start, performance funds landed on the wrong side of the investment-style battle. Since Putnam Voyager's launch, the low-priced "value" style stocks that it does not own have comfortably beaten the higher-priced growth companies that it did own. The reasons for this failure of both common sense and the CAPM continue to be debated, but the fact of the defeat does not. Putnam Voyager did not end up flowing with the current. Instead, it battled upstream.

That handicap, perhaps, could have been avoided if the fund had been equipped with other virtues. But it was not.

It was, of course, relatively expensive. Young genius managers don’t come on the cheap, you know. Veteran

Costs Count Increasing the problem of the fund's official costs were its unofficial costs. Putnam Voyager, in common with most emerging-growth funds, is traded aggressively. Early in Putnam Voyager's history, when brokerage costs were much higher than today, funds paid commission bills. Those have largely disappeared along with brokers' fees, but the invisible costs that arise from pushing the price of a stock during a trade remain.

And those can be high indeed. Not only was Putnam Voyager very large in its heyday--more than $25 billion!--and the stocks that it sought relatively small (although the fund did pursue bigger game as its girth expanded), but it also was hampered while trading by its growth-stock style. Value managers have the luxury of trading against market demand, buying stocks that are falling out of favor and selling those that are becoming popular. For growth-stock funds such as Putnam Voyager, the opposite holds true. They pay up for the privilege of making a transaction.

Taxes, as well, would be no friend. Although performance funds pay few if any dividends, which helps their tax bills, they often make large capital gains distributions. In bull markets, their frequent trades unlock profits that must be distributed annually, by mutual fund regulations. In bear markets, their poor performance--those high betas cut both ways!--tends to trigger redemptions, which force their managers to sell stocks to raise cash, which often create realized capital gains. Heads taxes, tails taxes.

Will History Repeat? The funds designed to succeed for the long term failed for the long term. Across the board, they landed on the wrong side of history. They should have adopted the value style; instead, they chose growth. They accepted high expense ratios, trading costs, and tax bills--all items then believed to be only modest in importance but now viewed as critical. They are among the most actively managed of mutual funds, when the passive approach has come to the fore.

And, ultimately, the concept was self-immolating. If and when a performance fund attracted enough assets to be mainstream, it became too bulky to succeed at its investment task. Performance funds could only have become the vanguard of the fund industry (pun fully intended) if investors had somehow not discovered them, or if their sponsoring fund companies had quickly closed them to new investors, thereby shutting down the fund company’s profit opportunities. Both possibilities seem unlikely.

Some, no doubt, will argue that we are just as blind in 2016 as were the performance-fund enthusiasts in 1969 and that today’s fondness for cheap, scalable, broad-market index funds will look as outdated as a Nehru jacket a half century from now. I do not think that will be so; the broad issue is the same, but the details are very different. However, the lesson of Putnam Voyager prevents me from dissenting too severely. Future-casting is a perilous affair. Putnam Voyager illustrates the difficulty of the task.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.