Putnam Customers Flee After Bad Tech Bets Pummel Returns

2003-06-23 03:12 (New York)

(Published in Bloomberg Markets Magazine.)


     June 23 (Bloomberg) -- In 1996, Putnam Investments LLC

began an advertising campaign touting its mutual funds for

``truth in labeling.'' One of its print ads pictured a

container of cottage cheese, saying the U.S. government had

stricter rules regarding the labeling of ingredients in

groceries than those in mutual funds.

     The point, Putnam said, was that the fifth-largest

manager of mutual funds went beyond requirements to fully

inform customers about where their investment dollars went.

     In prospectuses in late 1999, Boston-based Putnam said

two of its biggest equity funds would invest in a wide mix

of industries: Putnam's Vista Fund prospectus said the fund

was aimed at reducing risk.

     ``Because the fund invests across many sectors, it is

less dependent on any single industry or stock, which may

reduce risk,'' the prospectus said. Putnam's Voyager Fund,

the company's largest at the time, said the same in its


     Filings with the U.S. Securities and Exchange

Commission show that Putnam was depending heavily on a

couple of industries. In January 2000, the Vista Fund had

more than half of its assets invested in just two

industries: technology and telecommunications.

     The Voyager Fund had 49 percent of its investments in

technology and telecommunications plus more in Internet

companies like CN ET Networks Inc., Priceline.com

Inc. and Stamps.com Inc., which were listed in the retail

and media sectors.


                         70 Percent


     Four of Putnam's five largest funds held as much as 70

percent in technology and telecommunications companies in

the past three years, when those industries plunged in

value, SEC filings show.

     The heavy investments in tech have taken their toll on

Putnam. At a time when most mutual fund companies are

feeling the effects of the bear market and increased

customer withdrawals, Putnam is suffering more than the


     Investors withdrew almost $16 billion more than they

added to Putnam funds last year -- the highest level of

withdrawal experienced by any fund company, according to

Financial Research Corp., a Boston-based consulting firm.

     ``We probably took the new economy too seriously,''

Putnam Chief Executive Larry Lasser told Pensions &

Investments magazine last August. Lasser declined to be

interviewed for this article. Executives of Marsh & McLennan

Cos., which owns Putnam, also declined to comment.


                      Lost $180 Billion


     Shareholders in Putnam funds have lost $180 billion in

the past three years, according to the company's SEC

filings. Putnam's 21 U.S. stock funds lost 57 percent from

the time of the stock market peak in March 2000 to the low

reached last October, according to a study by fund

evaluation service Kanon Bloch Carre.

     That was worse than 21 of the firm's 24 largest

competitors, including Fidelity Investments, whose stock

funds lost 46 percent, and Vanguard Group, which lost 39


     The tech-heavy strategy wasn't the first time Lasser

rode an investment hot streak too long. In 1987, Putnam bet

wrongly that the Federal Reserve would lower interest rates.

The Fed instead raised its federal funds rate 1.25

percentage points to 7.25 percent.

     Putnam's High Income Government Trust, the biggest

government bond fund in the industry at the time, lost more

than $100 million.


                      Debt in Tailspin


     In 1998, Putnam bond funds held on to debt of emerging-

market countries -- including Argentina, Brazil and South

Korea -- as the Asian economic crisis sent the debt of all

emerging-market countries into a tailspin. Putnam's five

biggest bond funds posted gains that, on average, trailed 89

percent of their peers, according to Morningstar Inc.

     The bond debacles are still hurting Putnam. Investors

burned by stocks are increasingly putting their money into

bond funds, thereby boosting the fund inflow at Fidelity by

$10.9 billion and at Vanguard by $38.1 billion last year,

according to Financial Research.

     Putnam has missed out on this inflow because of its

past missteps, says Morningstar analyst Scott Berry.

     Earnings and assets at Putnam have plummeted along with

tech stocks. In 2000, Putnam managed $422 billion in assets

and had operating income of more than $1 billion; last year,

Putnam managed $241 billion, on which it earned $560

million. In the past two years, nine fund managers have

left, leaving 85.


                       Regaining Trust


     Lasser's challenge now involves more than merely

overcoming the losses; it has to do with regaining the trust

of investors. ``I worry that the Putnam brand name has been

tarnished somewhat,'' says Bill Batcheller, a senior

portfolio manager at National City Corp. Batcheller's

company owned 2.3 million Marsh & McLennan shares at the end

of 2002.

     One of those customers is Janet Fischer, a sales

coordinator who's nearing retirement at a Boston area

software company, which she asked not be named. Fischer says

she put half of her 401(k) into Putnam domestic stock funds

in 1999 and lost most of her investment.

     ``I thought I was getting the workhorses of the

industry,'' she says. ``In the end, they did very badly. I

know everything was losing money, but they seemed to be

losing the most.''

     Chris Berner, a lawyer in Manhattan who believed

Putnam's claims, says he stayed with his investment in the

Putnam Voyager Fund until a few months ago, when he finally

decided to dump it.


                     `The Worst Guesses'


     ``If they had just made the same mistakes as everybody

else, they would have done better,'' Berner says. ``They

seemed to be making the worst estimates, the worst guesses.

The fund just nose-dived.''

     The Voyager Fund tumbled 17 percent in 2000, 22 percent

in 2001 and 27 percent last year. Its three-year track

record placed it behind 87 percent of all U.S. mutual funds

and 62 percent of other growth funds, according to Bloomberg


     Putnam funds often charge investors sales fees of as

much as 5.75 percent -- higher than the average of 4.9

percent for funds that charge fees, according to


     Putnam sells its funds through brokers at such firms as

Edward Jones & Co. and Merrill Lynch & Co. as well as

through independent investment advisers. It also manages

401(k) plans, which offer the funds without sales charges.


                        Brokers Angry


     Pitching funds with a sales fee and then watching them

plummet has left brokers angry with Putnam, says Louis

Harvey, whose consulting firm Dalbar Inc. surveys brokers

and financial advisers. ``What I hear most often from

brokers is, `How can we give business to a firm that lost

half our clients' money?''' says Harvey.

     He blames Putnam's reliance on technology and

telecommunications stocks for Putnam funds' poor showings on

his surveys.

     The Putnam focus on technology came from Lasser's team

investing approach, says Jim Lowell, editor of the Fidelity

Investor Newsletter, which is not affiliated with Fidelity

Investments. Rather than naming a single manager to run each

fund, Putnam puts a group of fund managers in charge of

numerous funds, Lowell says.

     ``At the end of the day, you have a lack of

accountability leading to a kind of group think,'' Lowell

says. ``It's like they were all marching to the beat of one

drummer.'' Four of Putnam's five largest stock funds had

technology and telecom stakes of 39-70 percent in 2000,

according to SEC filings.


                      Buying More Tech


     Putnam fund managers made things worse by buying more

technology and telecommunications stocks as share prices

plummeted in 2000 and 2001, SEC filings show.

     At Voyager, managers bought shares of network equipment

maker Cisco Systems Inc., software maker Microsoft Corp. and

computer maker Sun Microsystems Inc. in the second half of

2000 and in 2001, according to filings.

     Shares of those three tech companies lost an average of

65 percent from March 2000 to March 2001 and then another 36

percent in the next two years.

     ``The strategies worked when the market was going one

way, but when the market reversed, the effects got amplified

in reverse,'' says Geoffrey Bobroff, a former SEC trial

lawyer who's been a consultant to Putnam's board of



                       `A Taskmaster'


     Rivals say the team strategy reflects an unwillingness

by Lasser, who started as a consumer products analyst at

Putnam in 1969, to create star fund managers.

     ``Lasser is known to be a taskmaster, and he doesn't

have a lot of tolerance for things that aren't working

well,'' says Chip Mason, chief executive of Baltimore-based

money management and brokerage firm Legg Mason Inc.

     ``Our managers operate separately,'' Mason says. ``We

have people who are certainly stars. You start putting

shackles on them, you're either going to lose them or

they're not going to do what they did in the past.'' Mason

says all fund managers at Legg Mason are responsible for the

performance of their funds.

     The son of the owner of a New York garment business,

Lasser has a mix of intelligence and hotheadedness that

reminds his friend Barbara Krakow of John McEnroe, the

champion tennis player with the quick temper.


                     Art Gallery Rivals


     ``It's not just that he's smarter,'' says Krakow, a

Boston art dealer who's known Lasser for more than 30 years.

``He's concentrated, focused on his goals, always has a


     Lasser was just as single-minded when he owned an art

gallery on Newbury Street in Boston from the late 1960s

until 1981 while he was moving up the ranks at Putnam. He

opened his shop across from a gallery at which he'd formerly

shopped, says Bernie Pucker, another neighborhood gallery


     Lasser's gallery sold the works of similar artists,

thereby creating competition that surprised the dealer

community, Pucker says. ``It felt unnecessary, gratuitous,''

he says. ``We had generally played by a gentleperson's

rules. Larry was going to do whatever Larry was going to do.

He didn't care.''


                       Selling Prints


     Lasser got an MBA from Harvard Business School in 1967

after combining his studies in finance with his interest in

contemporary American art. He and a roommate flew to Paris

to buy prints -- not paintings, Putnam spokeswoman Nancy

Fisher emphasized after checking with Lasser -- by such

artists as American painter Ellsworth Kelly.

     He then sold them in Boston, Fisher says.

     As head of Putnam, Lasser responded to the stock fund

slide by shaking up his staff. Nine fund managers have left

-- some quit, some got fired -- in the past two years,

leaving 85 professionals at Putnam who run funds or oversee

fund managers.

     Marsh & McLennan continues to reward Lasser highly; he

received total cash compensation of $74.6 million in the

past three years, down from $88.7 million in the previous

three years, SEC filings show. Lasser also held almost a

million stock options at the end of 2002.


                     Management Changes


     In June 2002, Lasser hired Brian O'Toole from Citigroup

Asset Management to head the large-cap growth team,

replacing Beth Cotner, who retired.

     In October, he replaced head of investments Tim

Ferguson with coheads of investing Charles Haldeman --

formerly chief executive of the money management business of

Lincoln National Corp., the sixth-largest U.S. life insurer

-- and Stephen Oristaglio, who'd reported to Ferguson.

     In March, Lasser replaced William Landes as head of

global research with Joshua Brooks, also from Lincoln

National. Richard Leibovitch, head of global trading,

resigned, and his responsibilities were delegated to others,

Fisher says.

     Haldeman and Oristaglio communicated with investors in

a question-and-answer session on Putnam's Web site in April.

Haldeman said he wants to get Putnam's staff of more than

150 analysts more involved in buy and sell decisions and in

talking directly to fund managers more often.


                        Risk Controls


     ``I want to see Putnam effectively connect its

centralized research with portfolio managers who have deep

passion, ownership and commitment,'' he said on the Web. The

two also said they plan to emphasize risk controls that

monitor concentrations of holdings. Both declined to be


     This year, Putnam U.S. stock funds have boosted their

performance, gaining 13.5 percent on average through June 6,

according to Bloomberg data. That was in line with the 13.7

percent average gain by all U.S. equity funds.

     That's not enough for Janet Fischer, who moved the

money in her 401(k) out of Putnam funds last year when her

company's plan added funds from competitors. She's switched

from stocks to bonds, choosing the Pimco Total Return Fund,

which was the top-selling fund in 2002. ``We're all

struggling to find someplace safe to invest now,'' she says.

     She says she might consider investing with Putnam again

someday -- but not now.


--Aaron Pressman in the Boston newsroom (617) 338-5822 or

apressman@Bloomberg.net. Editors: Neumann, Colby, Henkoff,