Add Putnam Investments of Boston to the list of fund advisers fed up with market timers.
On March 15, for the first time, Putnam imposed a one percent fee on shares redeemed or exchanged within 90 days in two of its mutual funds. The funds are the Putnam Asia Pacific Growth Fund and the Putnam Emerging Markets Fund. The redemption fees only apply to new share purchases made on or after March 15. Existing investments will not be affected, said Putnam in an announcement March 5.
"The intent of the fees is to help Putnam discourage the activity of investors who employ short-term market-timing strategies," said the firm. "The action will protect long-term investors by mitigating short-term trading activities and compensating the fund for transaction costs incurred from excessive trading by a minority of investors."
Rapid and repeated money shifts is not a new problem for mutual fund companies. But with the industry's push toward more fee-based products, individuals are finding they can move more money without incurring additional transaction costs, said Andrew Guillette, managing director of Cerulli Associates, a research and consulting firm in Boston. Lately, wrap programs have grown particularly concerned about the activities of market timers, Guillette said. And fund advisers are becoming impatient with market timers, he said.
Putnam is not alone in its imposition of redemption fees, which are reinvested in a fund to offset the expenses related to redemptions from that fund.
Last month, Lazard Funds, a 12-fund family of funds with both institutional and retail share classes notified investors that on May 1 it would begin imposing a one percent fee on assets redeemed or exchanged within 30 days of purchase. The Lazard Funds are managed by Lazard Asset Management of New York. Last year, Warburg Pincus raised or added redemption fees to two of its Japan equity funds whose stellar 1999 performance had attracted short-term investors according to Morningstar, the fund data and research firm in Chicago.
Also last year, Neuberger Berman of New York and Allegheny Funds of Chicago added their own redemption fees to international and emerging markets funds. The Quant Funds of Lincoln, Mass. and Driehaus Capital Management of Chicago also added redemption fees to all of their funds that did not already have such fees.
Instead of tacking on redemption fees after a fund's introduction, some advisers have begun introducing funds carrying provisions for redemption fees.
Two new funds American Century expects to launch in early June will have redemption fees already in place, the company said. The American Century New Opportunities II Fund and the American Century International Opportunities Fund will both have two percent redemption fees on shares held less than 180 days.
American Century already has fees to prevent frequent redemptions on three other funds, said Beth Randolph Taylor, an American Century spokesperson. The American Century International Discovery Fund, a small cap fund, imposes a two percent redemption fee on shares held less than 180 days. And two rather aggressive funds, the American Century New Opportunities Fund and the American Century Veedot Fund, have even stricter limitations. Both charge investors a two percent redemption fee if funds are liquidated or exchanged within five years of purchase.
Although American Century does not have data to indicate how well redemption fees have worked, the firm believes they work very well on small cap funds, in a relatively illiquid investment environment, or for aggressive funds with inherent volatility, said Randolph Taylor.
The addition of redemption fees by several fund groups raises the question of whether fund advisers are using the fees to prevent assets from leaving because of disappointing performance. But that probably is not the case, especially in instances in which a complex adds the fee to only one or two of its funds, said Guillette of Cerulli. If fund advisers were trying to stop outflows, a redemption fee would be added to all funds in a complex, he said.
Although some fund advisers are adding redemption fees to discourage short-term trading in their mutual funds, most mutual funds do not have such fees.
Only 737 funds (including all share classes of funds) currently have the ability to charge investors a redemption fee, according to Morningstar. That figure represents 6.1 percent of all 12,100 publicly available mutual funds (including all share classes.)
While that fraction of funds has provisions for a redemption fee, not all funds actually impose the fees, said Morningstar.
The average redemption fee is 1.15 percent and the average holding period during which funds apply redemption fees is eight months, said Morningstar.
Many fund groups object to redemption fees. AIM Management of Houston, one such group, discourages market timing by limiting exchanges to 10 per year. The fund also has employees who survey frequent trades to spot market timers. Market timing brokers are asked to withdraw their assets, said Ira Cohen, vice president of operations for AIM Fund Services, the group's transfer agent. In the past 18 months, the group has eliminated $1.2 billion in hot money and it has no regrets, Cohen said.
Within the last few weeks, the fund adviser turned away one market timer who wanted to invest $200 million and consulted with AIM before doing so, said Cohen. AIM is also considering taking the extreme measure of terminating a selling group agreement with one New York brokerage firm which has 29 accounts that have already exceeded their 10 exchange limit so far this year, he said.
"We think we've been very, very successful in reducing the amount of market timing activity," Cohen. "We've taken a very aggressive approach without having to implement a systematic redemption fee."
AIM considered imposing redemption fees and saw several challenges, including the necessity of building new capabilities in its internal systems and in its service providers' operating systems, said Cohen.
