Putnam hurt by exposure to financials

Putnam Investments is paying the price for calling the bottom in financial stocks too early.

Performance among the Boston-based firm’s domestic-equity mutual funds — particularly those that invest in large-capitalization equities — has suffered in relation to those offered by other fund groups, said Wenli Tan, a fund analyst with Morningstar Inc. of Chicago.

“We’d probably recommend investors look elsewhere,” she said.

Putnam maintains that no such call was placed on financials — at least not at a firm level.

“Funds vary in sector weightings based on investment management decisions and fund objectives,” said Laura McNamara, a spokeswoman for Putnam.

That may be so, but Putnam funds with large-cap equity exposure have made bigger bets on financials than their peers, according to industry experts.

Putnam, the nation’s 17th-largest fund group, had total assets of $85.8 billion at the end of November, according to Financial Research Corp. of Boston. That compares with total assets of $95.5 billion a year earlier, said FRC.

Last year, Putnam experienced net outflows of $11.64 billion, compared with $13.84 billion in 2006, said FRC.

Such outflows aren’t surprising given the performance of some of Putnam’s biggest funds.

The $12.29 billion Putnam Fund for Growth & Income (PGRWX) significantly trails its large-cap-value peers because of large bets in financial stocks, Ms. Tan said.

At the end of September, the most recent date for which data are available, 4.87% of the fund’s assets were in Charlotte, N.C.-based Bank of America Corp. (BAC), 3.66% in New York-based Citigroup Inc. (C) and 2.2% in The Bear Stearns Cos. Inc. of New York (BSC).

The three were hurt by uncertainty over how much exposure they have to the subprime crisis.

Bank of America shares, for example, fell 19.2% last year. Citigroup’s plummeted 44.9%, and shares of Bear Stearns dropped 45.9%.

Predictably, the Putnam fund’s performance suffered.

It finished last year 6.2% in the red, placing it in the 91st percentile of its large-value category, according to Morningstar.

For the three-year period ended Jan. 2, it had an annualized return of 3.99%, placing it in the 92nd percentile of its category. It had an annualized five-year return of 9%, placing it in the 93rd percentile of its category.

The results are reminiscent of the time when the fund company made big bets in technology that ended up hurting the funds, said Howard Schneider, president of Practical Perspectives, an industry consulting firm in Boxford, Mass.

“Putnam’s track record won’t allow for forgiveness,” he said. “They have already used their mulligan.”

Putnam’s past mistakes were reason enough to overlook the company’s funds, said Richard Schroeder, executive vice president of Schroeder Braxton & Vogt Inc., an Amherst, N.Y., financial advisory firm with $220 million under management.

Now it will be even harder to include them in a client’s portfolio mix, he said.

“Once you lose confidence in someone, it’s hard to win it back,” Mr. Schroeder said. “Anything that seems to confirm the loss of confidence makes it worse.”

Making a big bet in any sector, let alone financials, doesn’t engender confidence, said James Kibler, president of Eldridge Financial Planning LLC of New York, a financial advisory firm with $35 million under management.

“I really try and stay away from funds that take big bets one way or the other,” he said.

Putnam Fund for Growth & Income is not the only Putnam fund to suffer.

The $6.3 billion Putnam Voyager fund (PVOYX), the firm’s flagship large-cap-growth offering, also bet heavily on Bear Stearns. In fact, shares of Bear Stearns accounted for 1.99% of the portfolio at the end of September. As a result, its performance lagged its large-cap-growth peers.

It finished 2007 up 5.3%, placing it in the 87th percentile of the large-cap-growth category, according to Morningstar.

For the three-year period ended Jan. 2, it posted an annualized return of 4.79%, placing it in the 89th percentile, and it had a five-year annualized return of 7.77%, ranking it in the 92nd percentile.

Of course, Putnam isn’t the only fund firm to suffer.

The $51.6 billion Vanguard Windsor II Fund (VWNFX), a large-cap-value fund from The Vanguard Group Inc. of Malvern, Pa., also placed large bets in financials and, as a result, saw its performance lag.

Its top holdings at the end of September included a 2.76% portfolio stake in Bank of America, a 2.13% stake in Citigroup and a 1.88% stake in Bear Stearns.

As a result, the usually reliable Windsor II fund lagged its peers with regard to short-term performance.

It finished 2007 up 2.2%, placing it in the 46th percentile of its large-cap-value category.

For the three-year period ended Jan. 2, the fund had an annualized return of 8.43%, placing it in the 38th percentile. It had a five-year annualized return of 13.78%, placing it in the 19th percentile of its category.

The focus on Putnam is due mainly to the extent to which Putnam appeared willing to bet on financials, Ms. Tan said.

At the end of September, Putnam was the second-biggest holder of Bear Stearns stock, with a total of 6,675,783 shares, or 5.78% of the shares outstanding. Only Dallas-based money manager Barrow Hanley Mewhinney & Strauss Inc. held more, with a total of 10,734,784 shares, or 9.3% of the shares outstanding.

Putnam also ranked eleventh among holders of stock in Countrywide Financial Corp. of Calabasas, Calif., with a total of 20,645,916 shares, or 3.6% of the shares outstanding.

Countrywide was directly affected by the subprime-mortgage mess and saw its stock finish 2007 down 78.5%.

Given such results, it’s not surprising that change appears to be afoot at Putnam.

Joshua Brooks, chief investment officer for large-cap equities at Putnam, resigned abruptly in December. He joined Putnam in April 2003.

In addition to Mr. Brooks’ departure, Kelly Morgan relinquished her role as director of research.

That’s a particularly important move because she was involved in hiring and overseeing the research staff at Putnam, Ms. Tan said.

Ms. Morgan, however, remains as head of large-growth equities and as one of the managers of the Putnam Voyager Fund.

Given the poor performance of its large-cap domestic-equity funds, Ms. Tan said she wouldn’t be surprised to see other management changes.

Putnam isn’t saying, however, if such changes are in the works.

“I have not heard of plans for anyone to leave Putnam in 2008,” Putnam’s Ms. McNamara said.

However, at least some mid-level salespeople and possibly some money managers are contemplating leaving as a result of Putnam’s sale to Great-West Lifeco Inc., a Winnipeg, Manitoba, unit of Montreal-based Power Financial Corp., said two industry recruiters, who asked not to be identified.

Such departures are only natural when there’s a change in ownership, they said.

David Hoffman can be reached at [email protected].