In 2003, the mutual fund industry got slammed when the Securities and Exchange Commission started investigating the market timing and late-day trading activities of several fund families, including Putnam Investments, Janus Capital Group, Invesco, Alliance Capital and Strong Funds. Putnam, founded in 1937, was at the top of the mutual fund food chain, with nearly $184 billion in assets under management at the end of 2000. The Putnam name was among the most respected in the industry. But when news broke of Putnam's involvement in the scandals, investors reacted, redeeming $68.45 billion from 2003 to 2005, or 57 percent of its asset level at the end of 2002, according to Morningstar. From 2002 through the end of 2008, Putnam's net asset level dropped $79.1 billion.
Advisors, brokerages and registered investment advisories took the news predictably: That is to say, badly. All the funds suffered, but Putnam's fall from grace was a shocker. Take advisor Paul Miller, now portfolio management director at Burlington, Mass.-based Axial Financial Group. Prior to 2003, Miller, then at a wirehouse, was heavily invested with Putnam Investments. But for about three years, Miller stopped using Putnam, as his wirehouse removed the fund company from its recommended list. He also had to contend with his retail investors, who were concerned about the Boston-based money manager's negative headlines. “We had to take a stand at that point,” Miller says.
But it seems like those dark days may be over. Since 2008, Putnam's assets have grown from $39.8 billion to $69 billion as of the end of March. In April 2010, CEO Robert Reynolds was named Fund Leader of the Year by the editors of Fund Action and Fund Directions for his turnaround efforts. The company was the top-ranked fund family in the 2010 annual Lipper/Barron's Fund Families Survey, based on performance of its funds in 2009. Putnam is now back at the top of advisors' lists, particularly with wirehouse-based advisors. (Putnam's AUM is split roughly evenly between institutions and retail mutual fund investors.)
Back in the Saddle
In the first quarter of 2011, Putnam took in $189 million in net new assets, according to Morningstar. Investors poured $371 million into Putnam's Absolute Return Funds — a relatively new lineup of offerings — during the first quarter of this year, on top of the $1.6 billion the funds gathered in 2010. Putnam's flagship Voyager Fund (PVOYX) has already raked in $502 million in net new assets this year through March, compared to $85 million in 2010. Also, according to Cogent Research's 2010 Advisor Brandscape, Putnam rose from a ranking of 30th in 2009 to 15th in 2010 when advisors were asked, unaided, which firms they would likely consider working with. More advisors also consider Putnam their primary fund family, bumping it up to a ranking of 19th from 27th in 2009. “Given this impressive performance and other changes planned or under way at Putnam, there is tangible evidence that this formerly strong brand is finally on the mend,” the Cogent study says.
In 2006, Miller and his team started to reinvest in Putnam. For him, what was missing was an interesting, innovative investment strategy that filled a niche that couldn't be filled elsewhere. Miller found that in Putnam's Absolute Return Funds, launched in January 2009. Miller's Axial advisory started using absolute return funds in a big way, and now the firm has $20 million of its $650 million in assets invested with Putnam.
In short, Putnam has rebranded itself around these niche funds that serve specific needs. Reynolds, who joined in July 2008, also cleaned house, making several key hires and whipping the firm's investment performance into shape.
Many financial advisors are responding to the changes. “They've reinvented themselves in the last couple of years,” Miller says. “They're a very different company than what they used to be.”
Putnam is no longer known for its growth funds, says Tom Bartholomew, a financial advisor with Worcester, Mass.-based Bartholomew & Company. The Absolute Return Funds have helped the firm reposition itself as a provider of more sophisticated product offerings, he says, and these funds are more attuned to what the market needs.
“I think Putnam was early to the party with that idea,” Bartholomew says.
And Putnam is reaping the benefits, with its newer offerings seeing more traction, especially the Absolute Return Funds. (See chart below.) Putnam now holds over $3.2 billion in assets in these funds, with about 10,000 advisors using them. From 2009 to 2010, net flows to the Absolute Return Funds improved 62 percent, putting them in the top five most popular funds for 2010. The firm's Capital Spectrum Fund (PVSAX) grossed $131 million in net new assets last year and $126 million during the first quarter, while its Equity Spectrum Fund (PYSAX) pulled in $130 million last year. Both funds were launched in the spring of 2009.
The Putnam Income Fund (PINCX) was another popular fund last year, with $126 million in net inflows, according to Morningstar. The Diversified Income Fund (PDINX), which is the largest of Putnam's mutual funds, had the biggest intake of any of Putnam's funds so far this year, raking in $454 million in the first quarter.
Putnam, which has $69 billion in retail assets under management, offers 80 mutual funds, but its largest funds aren't necessarily the most popular. For example, the Putnam Fund for Growth & Income (PGRWX), the second-largest, saw outflows of about $1 billion in 2009, $740 million in 2010 and $209 million in the first quarter of this year. The Multi-Cap Growth Fund (PNOPX), the fourth-largest, and Putnam Equity Income Fund (PEYAX), the fifth-largest, also had outflows in 2009, 2010 and this year.
Rebuilding the Advisor Relationship
From about 2003 to 2005, KSP Financial Consultants reduced some of its Putnam positions by 90 percent, says Matt Sliwa, a partner at KSP. While the Waltham, Mass.-based firm knew the market-timing wasn't condoned throughout the whole organization, the scandal did undermine Putnam's credibility. “From a public trust perspective, it was difficult to go through.”
But Putnam stayed committed throughout the entire process, at least locally. Putnam continued to provide education and present ideas to Sliwa's firm, even without the dollars flowing in. “Business doesn't happen just because you show up,” he says. Two years later, KSP started sending money Putnam's way.
Gene Ellison, an advisor with Commonwealth Financial Network, had a similar experience; his wholesaler, Bob McDermott, stuck around through the good times and bad. When he wasn't invested with them, their economists and analysts would still come and share insights. The minute McDermott showed that they had cleaned up, put new people at the top and restored Putnam to its former place in the industry — at the top — he started to put money with them.
Putnam also lured advisors back the old-fashioned way: strong performance. But that was not always the case. The company's investment performance, particularly in equities, was not good from about 2003 to 2007. Reynolds started to turn that around by hiring seven new fund managers and 30 equity analysts. He changed the compensation structure across the organization, setting a bonus target for managers to be in the top quartile of their respective peer groups. If they end up in the top quartile, they get up to 150 percent of their bonus goals. Median managers get 50 percent of the bonus, while bottom quartile managers get zilch.
Reynolds also restructured the firm's equity research. Previously, Putnam used a combination of fundamental and quantitative research, and it made no sense to have both, he says. “It's almost like having two religions working on the same issue.” Under the new regime, fundamental research is the main focus of the organization, while managers can call the quant group on an ad hoc basis. The manager is responsible for the fund, and the fundamental research group is there to support.
Before Reynolds joined, the Voyager Fund, Putnam's large-cap growth fund, had a Lipper ranking of 91 percent for the three years ending June 30, 2008. Following his move, the Lipper ranking went to 1 percent for the two years and one quarter ending Sept. 30, 2010. This means that Putnam beat out 99 percent of the large-cap growth funds in their Lipper peer group.
In 2008, Reynolds tapped Nicholas Thakore from RiverSource Investments to turn the fund around.
“Now, it's just a phenomenal fund,” says Harold Nahigian, regional director and one of the founders of Financial Network. It's now Nahigian's largest holding. For the year ending March 31, the fund was up 15.72 percent. During the first quarter of this year, the fund returned 3.59 percent. Lipper recently honored it as the top large-cap growth fund for its three-year performance.
But can the fund family retain its position at the top?
Charles Zhang, managing partner and president of Zhang Financial, doesn't seem to think the euphoria will last. He compares the firm to Janus, who was also a star in the eyes of advisors but crashed.
“I think they're rising, but I think they will fall again.”