Troubled funds face task of hanging on to investors

Your Funds

Dollars & Sense

November 09, 2003|By CHARLES JAFFE

INVESTORS don't marry their mutual funds. Relationships can, and sometimes should, be broken over the telephone.

But just as a jilted lover may try to win back a partner, fund companies try to hang on to investors.

The question is whether investors should be swayed by those desperate moves.

That question is particularly important at Putnam Investments, the nation's fifth-largest fund company and the first firm to face direct charges in a trading scandal.

Massachusetts Secretary of the Commonwealth William Galvin filed a civil case last month alleging that Putnam allowed participants in a few retirement plans to make frequent trades that should have been prohibited. The case suggests Putnam allowed the trading to secure lucrative retirement plans.

More damning were charges that several Putnam managers also made rapid-fire trades, quick turnarounds in their funds that ordinary investors were barred from. Putnam executives have acknowledged knowing about the trading three years ago, but they failed to sack the bad guys until the problem resurfaced in Galvin's civil case.

Putnam and its staffers remain innocent until proved otherwise, but it's not hard to see why investors have bailed out fast. Massachusetts Treasurer Timothy Cahill's move to pull roughly $1.8 billion in state pension funds from Putnam was a start. The firm will lose billions of dollars in assets under management over this.

And no investor bailing out now will get an argument from me.

In general, you could say that Putnam's funds have had a reasonably good year. Supporters suggest that trend will not be affected by a civil case about trading activity from years past.

But any investor losing sleep over the actions of their fund firm would be better off by moving along.

That sentiment is what Putnam must fight now.

The company took the first step toward recovery Monday, ousting chief executive Lawrence J. Lasser.

Lasser received more than $100 million in salary and bonuses in the past five years, a period when Putnam's performance has been mostly dreadful.

Putnam put Charles Haldeman in charge. Haldeman came to the company about a year ago from Delaware Investments. The good news is that he's an outsider, not steeped in Putnam's woes; the bad news is that he hardly turned Delaware into a household name. This move helps, but Putnam will have to do more.

Putnam executives don't exactly listen to me (I'm a former shareholder, having held Putnam funds because they were the only choice in the retirement plan of a past employer), but if they don't take some of the following steps soon, they won't deserve to keep any investors in the fold:

Ensure that this can't happen again.

International fund arbitrage - the game Putnam's managers and clients were playing with their timing trades - is stunted when funds use "fair-value pricing." Putnam needs to prove it's serious that the shenanigans have stopped, so it must adopt the better pricing model. It might also create rules that push any trade received after 2:30 p.m. into the next day, a voluntary move that would stop the market-timers cold.

Enforce a hefty surrender penalty on short-term trades.

Putnam put rules in place last year to stop managers from trading excessively in their own funds (rules that the Investment Company Institute is endorsing for the whole industry), but it should also put a big redemption fee on funds where market timing was an issue (this is another practice ICI is recommending).

Traders won't want to give up 2 percent on rapid-fire trades, so this would complete the move to drive fund timers elsewhere.

Allow a free, unencumbered exit.

Putnam has billions of dollars in shares with back-end loads. But if the firm's actions make shareholders want to bail, Putnam should let them go without penalties.

Investors should be allowed to switch funds within Putnam without facing any additional sales charges. And Putnam's sales force - the brokerage and financial planning cult that loved the firm during the bull market - should waive any transaction costs involved in moving investors to something that gives them peace of mind.

By showing a willingness to let customers leave, Putnam would encourage them to stay.

Restitution, and then some.

If Putnam is found guilty, it will pony up profits earned from discretionary trading deals. But it should also forfeit something it might earn from investors who stay put, such as sales loads or fees from investors who ride out this controversy. By voluntarily cutting costs for, say, a year after any judgment, Putnam would repay the people - particularly those in retirement plans with few options to move - most affected by its actions.

Improve performance.

Investors have been pulling money from Putnam in recent years because of results, not scandals. Putnam's numbers have been up this year, but the firm has no chance to woo investors if returns don't get a lot better soon.

Chuck Jaffe is senior columnist for CBS MarketWatch. He can be reached at or Box 70, Cohasset, Mass. 02025-0070.

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