Tech-lash pains Putnam

As the longtime chief executive of Putnam Investments, Lawrence J. Lasser hasn’t suffered fools gladly.

But thanks to a healthy dose of tech-induced foolishness, the nation’s No. 4 mutual fund company is facing a crisis in confidence among brokers and analysts.

Many fund companies were hit hard by the stock crash, but some analysts are surprised by the degree that Putnam was caught off guard by the souring market.

Many Putnam managers were left holding badly battered growth stocks, especially in the technology sector.

“They really took their eye off the ball,” says Kelli Stebel, an analyst at Morningstar Inc., of Putnam’s high weightings in technology. “You just don’t often see a big shop like Putnam falling on its face so hard.”

Too aggressive

Indeed, Boston-based Putnam’s stock and bond funds experienced outflows of $1.53 billion during the first eight months of 2001, compared with inflows of $15.02 billion during the same period a year earlier, according to Boston’s Financial Research Corp.

In contrast, the top 25 fund companies had inflows of $103.8 billion over the same period, down 36.8% from inflows of $164.4 billion for the same time last year.

The outflows, coupled with a merciless market, have devastated assets. Putnam was managing $182.5 billion in long-term assets Aug. 31, a 31.3% drop from $265.8 billion a year earlier, according to FRC.

“I just don’t sell their funds like I have in the past,” says Anthony Trofimow, a broker in Winchester, Mass., for St. Louis-based Edward Jones, which is among Putnam’s top sellers.

“They just didn’t stay true to form,” he explains. “With some of their funds, it seemed like they were much more aggressive than they led us to believe.”

Steven Spiegel, senior managing director in charge of global distribution, confirms that some of the top sellers of Putnam funds are dismayed by recent investment results.

Some 200,000 advisers – at broker-dealers, banks and financial planning firms – sell the company’s funds. This has not been Putnam’s “finest hour,” Mr. Spiegel acknowledges. But he adds that the company wasn’t doing anything more aggressive “than we said we were doing.”

No one is suggesting that Putnam’s managers abandoned their funds’ mandates. But the risks they were willing to take within those mandates were staggering.

Consider, for example, Putnam OTC Emerging Growth, which has always been one of the fund industry’s most aggressive offerings.

At the end of August 2000 – nearly six months after the tech market began to falter – managers Steve Kirson and Michael Mufson still had 85.1% of the fund’s assets invested in technology issues, according to Morningstar, the Chicago-based fund tracker.

The heavy weighting in tech stocks persisted because the managers erroneously believed the downturn was going to be short-lived and that such stocks were trading at bargain-level prices, according to Stephen Oristaglio, deputy head of investments at Putnam.

“We thought that the correction in those prices adequately compensated us for what we saw ahead as far as the growth rate of these companies,” he says. “In hindsight, we overestimated their growth rates over the short term.”

OTC was not the only Putnam fund to err. New Opportunities, another growth stock fund, had 56.3% of its assets invested in technology stocks at the end of June 2000, while Voyager had 44.3% of its assets parked in the doomed category.

Lasting scar

For the advisers who sell Putnam funds and the investors who have bought them, the blunder has been excruciating.

Putnam OTC, which has $2.49 billion in assets, lost 51.3% in 2000 and was down 52.73% year-to-date through Wednesday, which puts it ahead of only about 2% of its peers in the mid-cap-growth category, according to Morningstar.

The fund was down 11.47% over three years and 9.58% over five years.

New Opportunities, which has $14.2 billion in assets, fell 26.1% last year and another 36.10% year-to-date, which puts it behind 82% of its large-cap-growth peers.

For the three- and five-year periods, annualized returns were up only modestly, 0.82% and 3.18%, respectively.

Voyager, the company’s flagship fund at $23.5 billion in assets, lost 16.8% in 2000 and was down 26.52% year-to-date as of Wednesday, putting it ahead of 56% of large-cap-growth funds.

The picture is better for longer-term investors, however: The fund had positive annualized returns of 5.76% and 7.56%, respectively, over three and five years.

On average, Putnam’s stock funds produced an asset-weighted return of -31.9% over the past four quarters, placing the company 15th among the top 20 fund groups, according to Kanon Bloch Carre, a mutual fund consulting firm in Boston.

“Even though a broker will say that a fund that goes up 60% in [a] year is bound to go down 50% the next, it leaves a lasting scar,” says Burton Greenwald, a mutual fund consultant in Philadelphia.

confidence needed

“It is up to Lasser and his team to regain everyone’s confidence so that when times get better this won’t have a lasting impact,” he adds.

By all indications, Putnam is moving aggressively to do just that. The company’s top brass, including Mr. Lasser, Mr. Spiegel and Tim Ferguson, senior managing director and head of investments, is meeting with brokers on a regular basis.

“We want to have good relationships with our intermediaries,” Mr. Spiegel says. “We’re doing more of what we normally do.”

The company is putting more automated systems in place to control risk in its portfolios. It is also significantly reducing tech weightings in many of its funds and adding more-experienced fund managers.

For example, Richard Weed, who is a specialist in quantitative analysis in Putnam’s specialty growth-stock group, recently joined Daniel L. Miller as co-manager of the New Opportunities fund.

Last month, Roland Gillis, manager of Putnam Voyager II, was recruited to assist Mr. Kirson and Mr. Mufson with the OTC fund.

“We believe [that] we’ve got a good range of skills now, from picking the emerging companies to balancing off the risk and reward characteristics,” Mr. Oristaglio says.