Putnam battles sinking returns, defections

Mutual Funds

Old-line firm buffeted in changing world of do-it-yourself investing

June 27, 1999|By Lynnley Browning | Lynnley Browning,BOSTON GLOBE

BOSTON -- Putnam Investments strode into the mutual fund arena this decade with sure-footed investment performance and a knockout sales strategy that made its hometown rival, Fidelity Investments, take notice. But lately, the old-line firm has taken a few blows.

After years of blistering growth, nearly as much money is flowing out of Putnam's funds as is coming in. The firm's fixed-income unit, once among the nation's hottest, is struggling to regain its footing after sinking returns, client defections and a jarring reorganization.

And Putnam, which sells its funds via brokers, financial planners and banks, rather than directly to investors, stands amid a changing world in which the traditional middleman is threatened by do-it-yourself investing and online stock trading.

The shifts could mean "a changing of the guard" for fund firms that sell through intermediaries, and Putnam is challenged by fast-rising competitors after years of leading the pack, wrote Financial Research Corp., a research firm, in a recent report.

To be sure, Putnam still has good funds, and its gross sales are the best in the "wholesale," or intermediary, business. Last quarter, the firm said, investors put $12.3 billion into Putnam funds -- a rise of 15 percent from the corresponding period last year.

But industry observers say investors also pulled large sums out of Putnam funds. According to Financial Research, the company's net sales, or new cash minus money withdrawn, fell to $1.7 billion from $5.2 billion a year earlier. Putnam, owned by insurance broker Marsh & McLennan Cos., declined to state redemption levels.

Thomas J. Lucey, Putnam's head of sales and marketing, downplayed the outflows. Redemptions were up across the industry, he said, and Putnam, which oversees a hefty $238 billion in assets, was merely being penalized for managing so much money. Higher redemption rates hurt large fund firms more.

"To be honest, I think a lot of people are playing games with their money," Lucey said, adding that customers were withdrawing money to buy individual stocks or finance houses and vacations. "The market is conducive to it."

Putnam investors are generally viewed as an older, affluent group that likes the company's conservative "truth-in-labeling" philosophy, in which a fund won't change its focus to follow the market.

Under its hard-driving chief executive officer, Lawrence Lasser, Putnam concentrates more on value stocks, or bargain-priced shares, than on growth stocks, the steady-earning blue chips that have produced the bulk of Wall Street's gains in recent years. It generally does not take big bets on individual sectors or issues.

In a stock market full of young day traders, high-flying Internet stocks, and portfolio managers making outsize bets on a handful of blue chips, the firm seems downright unfashionable.

Putnam's $38.8 billion Growth & Income fund, which saw investors pull out $700 million last quarter, according to Financial Research, has gained 7.8 percent so far this year, beating a 5.3 percent rise in the Standard & Poor's 500 index, a broad market measure. While that is nothing to sniff at, the fund ranks as a middle-of-the-pack offering compared with other growth and income funds, said Jeffrey McConnell, an equity analyst at Morningstar.

Even amid strong sales, the steep withdrawals exact a toll by spooking investors, distracting managers, reducing profits and harming Putnam's reputation.

Putnam's bond department has more substantial woes. Dismal returns and the loss of key accounts from major retirement plans led the company to overhaul the unit a year ago, firing nearly a dozen portfolio managers, streamlining command chains, intensifying its team approach, and giving Tim Ferguson, who oversees equity investments, control over the bond group as well. The changes have yet to bear much fruit; while returns at some bond funds have improved, Putnam's corporate bond funds are some of the worst performers around.

With all the bumps and bruises, one would think the intermediaries who distribute Putnam funds would be upset. But Putnam's third-party channels are famously loyal.

"We have confidence that their problems will pass," said Thomas Miltenberger, who oversees marketing at Edward Jones, a Missouri brokerage that is a major seller of Putnam products.

Pub Date: 6/27/99

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