Looking for the positive
An ancestor of George Putnam, the founder of US mutual fund manager Putnam Investments, established the original ‘prudent man principle’ which money managers to handle investor’s money as they would their own
Three years ago Putnam Investments was involved in an improper trading scandal where some employees were found to be market timing – exploiting short-term movements in money. By skimming profits from long-term investors in this way, money managers were effectively treating investors’ money differently from their own.
Putnam, based in Boston and owned by insurance brokerage and financial services giant Marsh & McLennan, acted promptly to repair the damage. It reported the findings of its own investigation to the Securities & Exchange Commission, sacked the employees who were involved, repaid clients $4m.
Inevitably, the scandal led to a haemorrhage of assets under management as clients withdrew their business. At 31 December 2002 Putnam had worldwide assets under management of €239,368m. By 31 March 2005 it had €154,413m.
It also lost some key institutional clients. The two leading pension funds in the US, CalPERS and CalSTERS, both terminated their contracts with Putnam in 2003.
Today Putnam is working hard to re-establish its reputation and win back clients. The man in charge of this task is 56-year-old Charles ‘Ed’ Haldeman.
Haldeman joined Putnam in 2002 as co-head of investments, and took over as chief executive officer in 2003. He had already had some experience of turnarounds, having transformed Delaware Investments, a Philadelphia-based mutual fund company, into a top performer.
At Putnam, he has been responsible for managing a cultural shift from what had become a money marketing company back to a money management company. Haldeman sees the shift as a change in perspective from an emphasis on short-term gains to a concern for long-term results: “When I took over, there was a culture that was a result of such a desire to succeed, to be number one, that there may have been too much focus on the short term. If there has been a change in perspective since 2003 it has been to recognise that our goal on behalf of clients is to do a good job for them over the long term. That may be produced by some interim periods where we don’t look to be number one.”
This has meant a switch from a search for spectacular outperformance, whatever the cost in terms of investment risk, to the delivery of consistent if unspectacular returns, says Haldeman
“We’ve recognised in our mutual fund business that extremely volatile performance in either direction is probably not in the best interest of shareholders. If you seek to be the top performing mutual fund in a three-month period, the only way you can do that is by taking extreme positions with regard to a security or an economic sector or some other investment factor. That’s the only way you can get to the absolute top in a short period of time.
“The problem with that is that when you take extreme positions, not only will there be those times when you’re at the very top, but there will be short time periods where you’ll be at the very bottom.”
Taking the rough with the smooth is not an option, he says. “The problem is that the investor joins the fund immediately after the extraordinarily positive experience, and then tends to be disappointed. They get nervous. They can’t tell it’s only for a short period of time while they’re going through it, and they sell it out. That causes the total experience in the fund to be very disappointing.
“That’s led us to believe that we can provide a more satisfactory experience for the client if we seek to be above average on a consistent basis and outperform our peer group and the benchmarks we compete against on the short term, but not strive to be the absolutely number one performing fund in a short period of time.”
The retail mutual fund business remains the dominant part of the business, with a 70% share of assets under management. Institutional assets account for the remaining 30%. The 70:30 split of business has remained constant over the past years, and Haldeman is happy that it should remain so.
“We don’t have a goal for a percentages of retail and institutional business. What we do have is a goal to be very diversified in terms of ultimate clients and distribution channels. We think that makes for a healthy business.
“The reason we want to be in so many different distribution channels – retail mutual funds, institutional and US and non-US – is so that we have a more stable revenue stream.
“One can imagine some themes that would make the institutional business a little less attractive for us - a movement away from active management or a movement towards hedge funds, for instance.
“So if we supplement our institutional business with a good retail business that means our revenue stream is more stable than it would be if we were just in the institutional business.”
One area of institutional business that appears to be in decline in the US and elsewhere is the defined benefit (DB) pension plan. “A lot of people think the defined benefit market is going to be in decline for a period of time. That will have an impact on us but not nearly as much as on somebody who is exclusively in the defined benefit business,” he says.
“If you’ve got this broad diversification of distribution channel or markets you can offer a more secure income stream to your investment professionals. That’s a healthy thing because then you can provide your ultimate shareholder investors with stability in the management of their assets.”
Putnam’s aim is also to maintain a diversified client base, he says. “We want to be in as many markets as we can - the insurance market, the pension business, the endowment business.”
Putnam’s pension fund business, as a percentage of total institutional business, has shrunk since the market timing scandal. In 2003 pension fund business accounted for 76% of institutional business. In 2005 it accounted for only 26%.
Haldeman is optimistic that the lost pension fund business can be recovered. “We would like to be larger in the pension market and we will become larger. Some of those assets left us during the market-timing problem and we’ve been succeeding in winning some of them back.
“We won back the Commonwealth of Massachusetts pension fund. We won back the State of Florida. We now manage money for six state pension funds. But that’s still down from where we were at our peak and we want to continue to win them back.”
Geographical diversification will be important in winning new business, he says. “We are aggressively seeking to expand in Europe and we’ve been highly successful in certain aspects of our European diversification.”
Putnam has established a presence in Europe, mainly through a series of partnerships with European financial institutions. In Germany, Putnam has a partnership with HDI and its fund company Ampega. In Italy it distributes its products through FinecoGroup. In Austria it sells its global equity product through Erste Bank.
Recently it entered the Spanish institutional market in an alliance with Abante Alternative Investments. The firm will distribute Putnam’s funds and asset manangment capabilities to institutional investors such as pension funds.
In other countries, Putnam has chosen to put a representative on the ground. In 2004 Putnam recruited Jillert Blom, former co-head of institutional asset sales at Robeco Asset Management to lead its institutional business development and client services in the Benelux region. “He’s done a wonderful job of increasing our presence in the Netherlands,” says Haldeman.
Putnam signalled its commitment to its European businesses with Haldeman’s decision to move the investment management of European equities to London. A similar decision was taken to run the management of the Asia Pacific team from London.
The high yield European team, led by Anton Simon, has been based in London since it was formed following Putnam Investments’ acquisition of New Flag Asset Management in 2002.
“It used to be the case at Putnam that all portfolio management had to be in Boston,” says Haldeman. “My view was that that wasn’t required. I felt we could get better investment results ands at the same time demonstrate our commitment to Europe by expanding our investment management capability in London.”
Putnam is now a slimmer operation, down from 5,300 when Haldeman took over to around 3,000 today. Yet Haldeman is proud of the fact that, in spite of the downsizing, Putnam has retained range of offerings. “Even though we had to shrink the size of the company, we have not eliminated any of our asset classes nor have we eliminated any of our distribution channels. It was important for us to continue to be highly diversified to maximise the probability of coming back and being successful.”
One test of this success will reverse the outflow of assets, begun in 2003.
‘We’re optimistic that some time during 2006 we will become cash flow positive,” says Haldeman.
When that happens, it will be an important moment, psychologically, for the company’s employees. “For me personally, what gets me excited is how good a job we are doing managing existing clients’ money. But I’m more relaxed about winning new money than the consensus of people at Putnam.
“Putnam people will get a real morale boost the day we have positive client flow. It will convince them that we have turned the business around completely, that it is repaired totally and that we are back in growth mode. For that reason it has become important.”