Although Putnam Investments' decision to lower the management fees for some of its mutual funds — and to link its fees on others to performance — didn't go unnoticed by financial advisers, many say that they will hold off putting their clients' money into Putnam's funds until they see signs of improved long-term performance
“Lowering fees may make me look at the funds,” said Chuck Gibson, president of Financial Perspectives of Newark, Calif., which has $50 million in assets. “But I don't own any Putnam funds because they were not in the top 5% or 15% of their peers in performance.”
Mr. Gibson, who judges funds in part on their three- and five-year track records, said that he would rather pay higher fees than settle for mediocre performance.
In recent weeks, Boston-based Putnam has touted a turnaround in its performance, particularly among its large-cap equity funds.
On average, the firm's large-cap equity lineup ranked in the 21st percentile through July 31, meaning that the funds outperformed 79% of their peers, according to Morningstar Inc. of Chicago.
NOT STACKING UP
But Putnam's long-term performance, relative to its peers, isn't as attractive.
Last year, the firm's large-cap equity funds fell into the 42nd percentile on average, meaning that they beat 58% of their peers. And in 2007, the funds' category average fell into the 81st percentile, meaning that they only outperformed 19% of their peers.
“They are going in the right direction and lowering fees will help,” said Brian O'Rourke, principal at O'Rourke & Co. Inc. of Boston, which has $125 million in assets.
“But the industry is also going in that direction, and it is not as if Putnam is announcing bargain-basement pricing. If the performance is not there, it won't make a difference,” Mr. O'Rourke said.
On Aug. 1, Putnam lowered the management fees on many of its fixed-income, asset allocation and target date funds.
Putnam's fees weren't egregious to begin with, said Jonathan Rahbar, a fund analyst at Morningstar. “But they also weren't as low as Fidelity and Vanguard.”
“As we grow, fees will come down and it will make us more competitive with those firms,” said Jeffrey Carney, senior managing director for global marketing and products at Putnam.
Under the new pricing scheme, management fees on Putnam's 20 fixed-income funds dropped an average of 13%, to 0.49% from 0.55%.
As a result, the average expense ratio on those funds fell to 0.92% from 0.96%.
Putnam dropped the management fee on its three asset allocation funds an average of 10%, to 0.57% from 0.63%. The total expense ratio for those funds will likely remain more or less flat, but Putnam is expecting to bump up service and other fees, said company spokes-man Jonathan Goldstein.
Putnam also eliminated the 0.05% wrap fee on its nine Retirement Ready target date funds, dropping their average expense ratio to 1.15% from 1.25%, or 7.5%.
In addition, the company an-nounced it would seek shareholder approval this fall to attach performance fees to some of its equity funds and to implement “breakpoints” — that is, asset thresholds that would raise or lower costs depending on whether funds' assets rise or fall.
Performance fees “put the in-vestor and the advisers of the fund on the same side of the table,” said Tom Orecchio, a principal at Modera Wealth Management of Old Tappan, N.J., which has $420 million in assets. “It could also provide an incentive for the management firm of the fund to take greater risks.”
Putnam, for its part, dismisses the notion that performance fees might encourage its portfolio managers to take more risks.
“To the contrary, the performance fees are based on a rolling three-year performance, so it's designed to address sustained performance,” Mr. Goldstein said.
“Putnam's own revenue is on the line, and there are boundaries to the over- and under-performance that are in line with the volatility of the funds. You reach a certain ceiling where we will not get the additional performance fee,” Mr. Goldstein said.
The changes are the latest twist in the restructuring at Putnam that began a year ago when Robert Reynolds took over as the firm's president and chief executive.
“We knew we had to fix the in-vestment performance,” Mr. Carney said. “Our goal is to deliver superior performance over a long horizon.”
Putnam has $103 billion in assets under management.
E-mail Sue Asci at [email protected].
