BOSTON--Life after Lasser at Putnam Investments isn't as bad as it might appear from afar. A staple of Bean Town's financial district, Putnam is in the process of an "Extreme Makeover" after experiencing one of the biggest kicks in the teeth the industry has ever seen.
It has cut fees, settled with regulators and is poised to lift the curtain on transparency. New CEO Charles "Ed" Haldeman, Jr. recently said Putnam is trying to be a leader for reform in the industry, seemingly sounding at times even a bit Bogle-like.
Will it all be enough to make the world forget about Putnam's misdeeds? More importantly, will the public buy into Putnam's remade image and newfound philosophy? Haldeman delves into these topics and more in the second of a two-part interview with MME (see MME 2/9/04).
MME: Why are you the right person to lead Putnam now?
Haldeman: I think there are many people who could -- some at Putnam, some other places.
I can be helpful to Putnam now because I have spent my whole life investing money. I got into the business in 1972 and have spent all of my career as a money manager, so I'm not a businessperson per say. I'm really an investor.
Related to that is the fact that I got into the business back in the 1970s, when people were attracted to this business by the fiduciary nature of it, rather than so much the money-making or business aspect of it. It's sort of natural as defining our job as taking care of other people's money, not so much selling funds or growing the business.
Probably at this point somebody who has been around the industry for a long time and is known in the industry is a pretty good choice to lead Putnam.
I'm also new to Putnam. If you are new to a place, it's pretty easy for you to advocate change and examine everything. Some change is a good thing at Putnam now.
MME: Why should investors choose a Putnam fund over a similar offering from Vanguard or Fidelity, or any other fund company at this point?
Haldeman: The No. 1 reason would be our commitment to consistent, dependable, superior performance over the long term. We have very experienced investment professionals working together as a team as well as a commitment by all the people at Putnam to be the best in the industry in regards to integrity and honesty and the seriousness with which we take our fiduciary responsibility.
You have to remember, we are a place that asked six portfolio managers to leave because they violated a fiduciary trust 3-1/2 years in the past. Everybody here is on notice that you don't get any second chances. There's no statute of limitations on that.
Every employee is on notice about how seriously we take that and what the penalties are if they violate that fiduciary trust. That is going to cause us to have higher standards than just about anybody in the industry.
MME: While it's been mentioned, we have not heard a lot about variable annuities in this scandal. Putnam has a huge VA business. Does the potential for the scandal to explode in this area concern you?
Haldeman: There is some more investigative work that has to be done by variable annuity firms. It would be surprising to me if there was no market timing whatsoever in that industry. I do know that many of the providers tried to police it as well as they could, but that doesn't mean that they were perfect or there weren't any problems in the industry.
We work with some excellent providers that have worked with us for a long time, and we feel good about our relationship with them. But again, I would say that for the VA industry as a whole, it would be surprising if there aren't any problems at all in terms of market timing.
MME: What is your take on what is happening in the fund industry now?
Haldeman: I feel what's going on at Putnam and in the industry is good. There's a cleansing that's going on and a self-examination of the whole industry, and I think the output will be a much better industry and a better product for our clients.
MME: Putnam has already done quite a bit to try and restore investor confidence. Can you explain what else you have planned?
Haldeman: I'll do that first by explaining what we have done to try and restore investor confidence so far.
We sought to get a settlement with the SEC almost immediately. We got it within nine business days of a management change. Secondly, we wanted to make sure that we understood all of the improper market timing that had gone on at Putnam by employees, so we examined the trading records of every employee past and present.
We promised 100% restitution for all damages to our shareholders caused by improper market timing. We hired Barry Barbash (partner with law firm Shearman & Sterling and former director of the division of investment management at the SEC) to come in and work with us on the market timing analysis. He is also helping us set good compliance standards on a going forward basis.
We eliminated the use of commissions to pay for fund sales. We dramatically reduced our use of soft-dollar commissions. We recently announced reductions in our expenses. We reduced our loads by 9%, and we promised that each of our funds would be below average in terms of annual expenses. We also promised increased disclosure, with regard to investment manager compensation and with regards to shares held by Putnam employees.
However, we're not done yet. Some of what we're doing is being more open and available to the media -- to try and help get a balanced story about Putnam out in the marketplace. Putnam for many years was pretty cautious, reserved, unavailable maybe even, with the media. We've changed that.
We're considering an advertising program. As you may know in the fourth quarter of the year we had two full page ads in The New York Times, The The Wall Street Journal and most major regional papers, talking about what we are doing, and I would expect some kind of advertising program on a continuing basis. Then, I suppose, the most important thing we're doing is trying to deliver investment performance, which is superior over the long term.
MME: One of the biggest problems in the fund industry, from the consumer's standpoint, is that a large portion of investors still don't understand the materials they receive. Do you plan on simplifying the material you send to investors and do you think the industry needs to move in this direction?
Haldeman: Yes and yes. In our announcement last week, a big portion of it was disclosure. The part that got the headlines was the lower fees, but at least half of it had to do with better, clearer disclosure, and we're committed to that. It was not just more disclosure, but easy to understand disclosure -- making sure that you really are communicating with the customer what the fees are and where they go.
I think it's absolutely critical for the industry to not just agree to disclosure, but to make sure it's meaningful disclosure. To me there is a difference between having all the data in the prospectus that's buried in there in language that is confusing and difficult to understand versus very clear-cut examples up at the front that catch people's attention and give a true understanding of what is going on.
The industry has to work at meaningful disclosure, not just legal disclosure.
MME: What do you think of the job the ICI has done over the years?
Haldeman: I think the ICI has done a good job in terms of representing our industry. [But] the ICI has to make sure it spends some time thinking about its mission or missions and recognizes that it has a big job to protect the interests of the industry. [At the same time,] it is also looked upon by customers and the outside world as a place where the interest of clients and society at large has to be protected, as well. I think it has a dual job and has to make sure it gets both of them done.
MME: The ICI had initially fought many key provisions of the Mutual Fund Integrity Fee Transparency Act of 2003. In light of everything that has happened, do you think there are areas where the ICI has fallen short?
Haldeman: I think there may be some things it could have done better. It's that balance that I talked about between protecting the interests of the industry and the interests of the clients and the customers.
Those two are sometimes in conflict with each other, and you have to recognize that conflict and balance them out. It may be that the balance was slightly off and was a little bit too much focused on the industry and not enough on the clients.
MME: Putnam just awarded bonuses last Friday, which was early this year, and eliminated its policy of paying bonuses over a five-year span. Was that to retain staff? Aren't you afraid of a large number of employees bolting once they have gotten their payment?
Haldeman: Putnam decided to award bonuses earlier this year because employees asked and management wanted to be responsive. With a shortened bonus period, the amount of management time and employee anxiety was reduced considerably.
We do not anticipate that a large number of employees will leave the firm. Deferred bonuses were eliminated so that there are no financial handcuffs on employees. Those who want to find someplace else to work will leave, and those who are committed to Putnam will stay. That will become clear quickly.
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