How Putnam is working to put itself aright
When Robert Reynolds took over Putnam Investments a year ago, he introduced himself to the firm’s senior managers by saying he would spend 60 days learning about the company. After that, “all bets are off,’’ he told them in a meeting his first day on the job.
“If you don’t like change, you better not be around very long, because things are going to change,’’ Reynolds recalled saying.
It turns out Reynolds couldn’t wait that long. Within a week, he made his first change, one that fundamentally altered Putnam’s approach to managing mutual funds: He jettisoned the team approach and made one manager responsible for each fund’s performance. As it was, he felt no one was on the hook when a fund missed its mark, or received due rewards for hitting home runs.
He said the organizational structure doomed Putnam “to a life of mediocrity. And that’s not who were are or who are going to be. So,’’ Reynolds added, “we blew up the structure.’’
That was just the beginning. Since then, the 57-year-old Reynolds has replaced dozens of investment managers, launched innovative new products, expanded in the 401(k) retirement market, and become one of the most visible executives in the mutual fund world.
While Reynolds has improved investment performance and reduced customer defections, he has much greater ambitions for Putnam: to make it again one of the country’s largest mutual fund companies.
Founded in 1937, Putnam was once one of the most venerated mutual fund companies in Boston. But six years ago, a trading scandal made it the poster child of a problem-plagued industry. Putnam had allowed several fund managers and other employees, as well as some customers, to rapidly trade in and out of mutual funds in violation of policies that barred short-term trading.
The scandal cost longtime Putnam chief executive Lawrence J. Lasser his job, the firm $193.5 million in penalties and fines and restitution, and tens of billions of dollars of customer accounts.
But Putnam was struggling even before the scandal. It had bet heavily on tech stocks, and the crash of 2000 decimated many of its investors’ savings. The mediocre results continued long after the stock market recovered earlier this decade. In May 2008, Putnam funds ranked worse than two-thirds of its peers’ funds over the previous three years.
Many investors simply gave up on the firm. Putnam’s assets are $103 billion, down from a peak of $425 billion in 2000. According to Strategic Insight, Putnam is the 22d-largest mutual fund firm; a decade ago its was the fourth largest.
After buying Putnam in 2007, Canadian owner Power Financial Corp., asked Reynolds to rejuvenate the firm.
A West Virginia native who speaks slowly in a gravely voice, Reynolds is one of the biggest figures in Boston’s mutual fund industry. He spent 24 years at cross-town rival Fidelity, the last seven as vice chairman and chief operating officer. He left Fidelity in 2007, after it became clear he was not going succeed Fidelity chairman Edward C. “Ned’’ Johnson III. Reynolds said he had a choice of remaining the number two executive or going elsewhere to become chief executive; he picked the latter.
In size, reach, or reputation, Putnam is no Fidelity. But in his quest to make Putnam among the country’s four-largest mutual fund companies and managers of 401(k) plans, Reynolds has drawn from his Fidelity past.
More than one-third of Reynolds’s 35 senior hires have Fidelity ties. Putnam’s new chief investment officer, for example, is Walter Donovan, Fidelity’s former head of equities.
Robert D. Ewing, a portfolio manager who once worked for him at Fidelity, said Reynolds was a big reason he agreed to join Putnam.
“I’ve known Bob Reynolds for a long time,’’ Ewing said. “I thought the odds that we were going to create something special were quite high.’’
The moves have also impressed Putnam watchers.
“He is building an arsenal of experienced executives,’’ said Bridget Bearden, an analyst with Financial Research Corp., a Boston financial research firm.
Putnam funds are showing some improvement. Over the past year, Putnam funds overall have performed about average, according to mutual fund watcher Morningstar Inc. And through the first six months of this year, Putnam funds have performed better than roughly 60 percent of others.
Morningstar analyst Jonathan Rahbar said Reynolds has gotten off to a strong start. But he said Putnam needs several years of consistent results before he would recommend its funds.
“Things have only begun to change in the past six months, which is a very short time,’’ Rahbar said.
Reynolds also believed Putnam needed fresh offerings to woo customers. The company hadn’t offered any new products in the four years before he joined; since then, it’s launched 14.
One includes a new line of “Absolute Return’’ funds, which aim to produce a specific investment return (between 1 and 7 percent a year above Treasury bonds) over a rolling three-year period. Reynolds said such products are commonly used by large institutions, but rarely marketed to small investors. The funds have already attracted more than $250 million, making them one of the hottest new mutual fund products this year.
“I’m impressed with what they are doing right now,’’ said Donald Sowa, whose East Providence, R.I., financial planning firm has $300 million in management, about $35 million of it in Putnam funds. “They seem to be doing everything right.’’
But Sowa would like Putnam to improve performance even more, or cut its expenses, saying its fees now are not justified by current results.
“If I am going to pay for a manager, the manager has to be exceptional,’’ Sowa said.
Another sign of progress is that Putnam has stanched the loss of customers, with account withdrawals running at about half the industry average, Reynolds said.
Getting lots of new customers or winning old ones back has proved harder. Putnam’s asset growth still trails the industry average, according to Financial Research.
Barnet Goverman, a certified financial planner in Dedham, hasn’t recommended Putnam since the trading scandal. Indeed, he noted clients still get settlement checks from lawsuits against the firm - fresh reminders of what Putnam would prefer they forget.
“Although management has changed and they appear to be trying to do it right, there are too many other better alternatives,’’ Goverman said. Goverman said he’ll only reconsider after Putnam proves itself in both strong and weak economies.
Because of the steep stock market decline, Putnam executives think many investors are also disenchanted with their current money managers and are willing to give Putnam a fresh look. But they also acknowledge Putnam remains trapped by its recent reputation.
“I think we have to work twice as hard as everybody else,’’ said Fidelity alum Jeff Carney, who is now Putnam’s chief of global marketing, products, and retirement. “We have to earn their business.’’
Todd Wallack can be reached at twallack@globe.com. 