TO B OR NOT TO B? PUTNAM HOPES TURNING B TO A SPELLS PROFITS

Putnam Investments will cough up tens of millions of dollars per year to reduce the loads paid by investors for several of its top-selling funds.

The nation’s fifth-largest mutual fund company hopes to bolster sales of its more profitable B shares by shortening how long it takes for the shares, which carry a back-end load, to convert to less-expensive A shares. Customers don’t pay commissions on B-shares unless they sell out of a fund before a preset period but they do pay as much as 1% per year in marketing costs known as 12b-1 fees.

Most investors don’t realize it, but that money is used to repay the fund firm for laying out the broker’s commission upfront. When B shares convert to A shares, the 12b-1 fees decline sharply. Investors are not charged a load at the time of conversion.

The typical B share has a 12b-1 fee of 0.85% to 1% of assets per year. By comparison, the traditional A share has an average 12b-1 fee of 0.25%.

The move, which began late last month, will cost Putnam millions each year in forfeited 12b-1 fees, according to sources within the Boston-based firm. Among the 13 funds affected are Voyager, Capital Appreciation, OTC, Emerging Growth and Vista.

In recent years, Putnam’s sales of B shares have been watered down by the introduction of new share classes — such as the popular M shares, which feature a lower front-end cost than A shares and a lower annual fee than B shares. Putnam added M shares to its menu in 1994.

Last year, B-share sales accounted for 37% of net cash flows into Putnam, down from 51% in 1996 and 61% in 1995, according to Financial Research Corp., a consulting firm in Boston.

Putnam hopes the program will be well-received.

In a recent mailing to its more than 100,000 broker-dealers nationwide the firm billed itself as the “only firm in the industry doing this.”

The move comes just as Putnam’s chief rival in the broker-dealer market, Franklin Resources Inc., in San Mateo, Calif., is raising the minimum initial investment required on its funds as well as the front-end loads for its Franklin and Mutual Series stock funds.

“The tremendous performance in several of these funds has enabled us to convert shares early,” says Guy R. Sullivan, a managing director at Putnam and head of the firm’s broker-dealer division. Putnam, which first sold B shares in 1992, is considering cutting the conversion time on other funds later this year, Mr. Sullivan says.

Of course, after last week’s bungee jump ride on Wall Street, Putnam’s strategy may prove short-lived. “There will be a continual reexamination of this issue,” Mr. Sullivan says.

Other fund companies that sell through brokers don’t come close to Putnam in terms of sales of B shares, which is why few could afford to mimic Putnam’s move. Putnam has $63 billion in B share assets. Runner-up AIM Distributors Inc. is a distant second with $21.2 billion and MFS is third with $19.3 billion, according to FRC.

“Putnam is making a lot more money on B shares than the other firms,” says Ray Liberatore, an analyst at FRC. “If anyone can afford (conversion), it’s them.”

Fund companies also vary widely on when they convert B shares to A shares. Some families, such as Morgan Stanley Dean Witter, have B shares that never convert. Others, like Oppenheimer Funds Inc., have shares that are already on a six-year schedule.

“It’ll definitely make their funds a better sell,” says David Peck, a regional director at SII Investments Inc., a broker-dealer in Wisconsin with more than 550 representatives nationwide.

Of course, that’s not how Putnam’s competitors see things. “At this stage in the game, we just don’t see a need to change our system,” says James Griffin, a spokesman for Fidelity, which allows B shares of its Adviser Funds to convert to A shares in seven years.