Underperforming Putnam fund to vanish in merger

May 23, 1993|By Knight-Ridder News Service

Watch closely, investors. You are about to witness a disappearing act.

Putnam Investments says it will merge its Strategic Income Trust with its much smaller Equity Income Fund.

Critics say the move would allow the Boston company to erase the below-average investment record it has with Strategic Income Trust.

The fund has a 10-year return that averages about 9.5 percent, compared with 16.19 percent for the Standard & Poor's 500-stock index. It has beaten the index only three times since 1977.

Mutual-fund mergers are not new. They usually involve a small fund being gobbled up by a larger relative.

That's not the case with Putnam.

This merger would involve a fund with $1 million in assets eating one with $334 million in assets.

Putnam officials say the merger is not designed to hide the disappointing record of Strategic Income Trust. (The other fund was started less than two years ago and has returned about 17 percent, compared with about 20 percent for the S&P 500.)

Thomas Reilly, managing director at Putnam Investments, said the merger was designed to reflect a basic change in the investment philosophy of Strategic Income Trust.

When the fund was started in the mid-1970s, it was designed to invest in stocks that pay high dividends. And to get an extra boost of income, managers also sold options on the stocks they held.

Mr. Reilly said the strategy works best when stocks trade within a narrow price range. But in the 1980s, the stock market took off, so that strategy was less effective.

In 1991, the fund adopted a more traditional approach -- investing in high-yielding stocks but selling no options. Therefore, Mr. Reilly said, managers decided to merge the fund with the Equity Income Fund, which has a similar strategy.

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