IE 11 is not supported. For an optimal experience visit our site on another browser.

How Putnam can survive

The embattled Boston money manager may not be on the brink of going out of business, but it is at a critical point in its history, one that could have a lasting effect on its future.
/ Source: Boston Business Journal

Will Putnam Investments survive the scandal and fraud charges that threaten to destroy it?

THE EMBATTLED BOSTON money manager may not be on the brink of going out of business, but it is at a critical point in its history, one that could have a lasting effect on its future. Investment industry experts contacted by the Boston Business Journal believe Putnam must take several steps to take the tarnish off its image.

They say Putnam must commit to a number of changes, including:

Transform itself from a target of inquiry into a leader of industry reform.

Quantify the monetary damage that’s been done to the average investor, to clarify the small financial losses market timing has cost.

Restore the shaken trust of brokers and investment advisers, who see scandal as a new reason not to recommend Putnam products to their clients.

Rebuild the confidence of pension funds.

Although in the cross hairs of state and federal regulators, Putnam must use this opportunity to convert from sinner to savior, according to Louis Harvey, president of Boston-based Dalbar Inc.

“They have to get behind reform in the industry,” said Harvey. “That will rebuild confidence in the average adviser who sells the Putnam funds to consumers.”

Having Putnam back competitive pricing of broker commissions, which currently are flat, would be a start, Harvey said.

Harvey, and others, believe Putnam also would benefit from quantifying the cost of the market-timing scandal for the average investor, Harvey said.

“They’ve got to be able to say, ‘Our failure to track this problem cost the average investor X number of cents” in value per mutual share, according to Harvey.


Putnam, with $263 billion in assets, went on an advertising blitz in early November, taking out full-page ads in various newspapers laying out how the company plans to address its problems.

InsertArt(2071696)Burton Greenwald, a Philadelphia mutual fund consultant, said Putnam must do more than just take out ads. It must fix its damaged relations with its salespeople — the advisers who sell their funds.

“They have to build confidence in the broker community,” said Greenwald.

Putnam sells its mutual funds through brokers, who still feel burned by those funds’ poor performance in recent years. The discontent has shown through Putnam’s string of 27 consecutive months of net mutual fund redemptions, going back to May 2001. That figure does not include the recent avalanche of withdrawals — $14 billion between Oct. 31 and Nov. 7.

Putnam can improve the performance of its funds and stem outflows, “but that takes time,” Greenwald said.

The fund company also has to hit the road and tell its story to the chiefs of public pension funds, who are under much more pressure than individuals to pull money out of Putnam, said Robert Glovsky, president of Boston-based Mintz Levin Financial Advisors LLC.

“How long can you ask states with fiduciary and political issues to hang in there when the news gets worse and worse?” said Glovsky, whose parent firm, Mintz Levin Cohn Ferris Glovsky and Popeo PC, has represented Putnam.

Similarly, Glovsky said, Putnam needs to do the same with its private clients.

“How many more institutions are going to pull the plug before Putnam goes out to the companies and says, ‘We’re changing,’ ” Glovsky said.

Putnam so far has taken several highly publicized steps of its own to regain shaken public confidence, spokeswoman Sinead Martin said.


In addition to the promotion of No. 2 man Charles “Ed” Haldeman to president and CEO, Martin pointed to the installation by parent company Marsh & McLennan Cos. Inc. of two of their own executives at Putnam, Steven Spiegel as vice chairman and A.J.C. “Ian” Smith as chairman.

InsertArt(2071692)Marsh & McLennan also retained former SEC attorney Barry Barbash to conduct an internal review of Putnam’s policies and controls.

Putnam also moved to discourage market timing through a 1 percent redemption fee — payable to the funds to offset the trading costs incurred in short-term trading — for global and international fund shares exchanged within 90 days of their purchase. The fee takes effect Dec. 1.

Also, Putnam pledged to reimburse funds for “any losses incurred as a result of any improper market timing ... by either Putnam employees or within Putnam-administered 401(k) plans.”


But for some, the changes, while applauded, could have come sooner.

Putnam’s recent troubles became public in September, when Massachusetts Secretary of State William Galvin acknowledged the firm was under investigation for market timing, frequent short-term trades often prohibited by fund firms. They escalated on Oct. 28, when Galvin and the U.S. Securities and Exchange Commission charged Putnam and two of its investment managers with fraud. Two Putnam managers were accused of market timing in funds they managed.

Between Oct. 31 and Nov. 7, when withdrawals peaked, institutional and individual investors withdrew $14 billion — 5 percent of Putnam’s assets.

In some circles, Putnam’s crisis invites comparisons between the deluge that led to the surprising unraveling of Arthur Andersen, the Chicago accounting firm torpedoed in 2001 by what some say was an overzealous prosecution. Putnam, too, has been fervently pursued, in this case by state and federal regulators.

“There could be such a large snowball effect ... that it could render Putnam a takeover candidate or potentially put them out of business,” said David Marder, a former U.S. Securities and Exchange Commission attorney, now with Robins, Kaplan, Miller & Ciresi LLP in Boston.

Other industry experts, including Joseph Barri, an attorney with Hale and Dorr LLP, which has represented Putnam, rejected the comparison, saying that Andersen had been buffeted by other troubles, such as alleged accounting irregularities involving other clients.

For Barri, the distinction is simple: “No mutual fund investors were really being ripped off,” Barri said.

Copyright 2003 American City Business Journals Inc.