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.
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.
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
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.
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
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
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.''
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
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.
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,
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.
``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,