Robert L. Reynolds loves a challenge. Without question, he certainly faces one. Trying to restore Putnam Investments' stature among America's top mutual fund companies after the firm's involvement in the trading scandal of 2003 and depletion of assets, now at $99 billion, a mere quarter of what they were in 2000-is a formidable task.
Not to mention that Reynolds, who took the helm as president and chief executive officer last July, accepted the challenge in the midst of one of the worst recessions in history.
Yet, Reynolds has already achieved big changes, by overhauling the investment team with a laser focus on performance and innovative solutions. Absolute-return, global sector and target-date funds that better manage risk and offer income, Reynolds says, will be critical to the firm's future. In addition, Putnam is also zeroing in on the 401(k) business and recently upgraded its defined contribution platform to FASCore, which offers more features, and is planning to aggressively build out its 401(k) wholesaling staff.
"It's been a tough market, but tough markets are interesting in that everyone gets dealt the same hand," Reynolds recently told Money Management Executive Senior Editor John Morgan. "Whoever plays their hand the best usually comes out the winner. I know we're a much better, much stronger firm today than we were when this whole thing started."
MME: What are you are doing to help rebuild Putnam's stature, brand and reputation in the mutual fund universe, particularly among 401(k) plan providers and participants?
Reynolds: The whole motivation was to bring the Putnam name back. My goal was to build an investment operation that delivers superior returns on a consistent basis across asset categories. When I got here, if you looked at fixed income, that goal was being met. Equities, on the other hand, had pockets of success, but there wasn't across-the-board consistency.
Putnam is an investment firm, and to be a successful investment firm, you have to perform on a consistent basis.
We restructured the way we managed money. Putnam had a team approach. There are many different definitions of team, but here there were multiple people managing a pool of money. Most funds had a fundamental person and a quantitative person. We restructured that so there's a fundamental person who has complete accountability and responsibility for a given portfolio. We pooled the quantitative people out of the direct, decision-making process and used them as a support group to the fundamental process.
The biggest thing we've done is we've been very active in the marketplace. We've brought in seven new fund managers, approximately 20 fundamental equity analysts and really retooled that part of the business. We've been looking for people who have 10, 15, 20 years of experience, proven track records and who can add value over time.
We've been able to attract some great fund managers and have coupled them with experienced analysts. We went across the industry-taking people from the street, people from other fund houses, people from hedge funds-and we've put together what I consider to be a world-class research team.
We've also restructured the compensation structure to reflect the goals of the company, to encourage our managers to be in the top quartile in over a rolling, three-year period, for whatever type of asset they manage. If they're in the top quartile, they'll get 100% of their bonus. If they're in the mid quartile, they'll get half their bonus, and if they fall below the 75th percentile, they get zero bonus.
It puts them on the same side of the table as the client.
MME: Have you seen results? Are your managers more motivated?
Reynolds: Yes, and the initial results are pretty impressive. If you look at 26 of our equity funds, 24 have beaten their benchmark in the first quarter. Five of our eight large-cap equity funds were in the top quartile for a one-year period. I was confident immediate results would happen.
But I did not know we would have the type of fourth quarter we had. Whenever you do have a market like that, it automatically puts a premium on stock picking. If you have the right analytical team and the right people managing the funds, it should provide immediate results, and that's what's happened for us.
Before the bonus structure changes, people just assumed they were going to be paid. I wanted to create a total meritocracy, across the board, whether you're in money management, sales or operations.
MME: How are you going to regain market share? In 2000, Putnam was the fifth-largest fund complex, ranked by long-term assets, and you are now No. 25, according to Financial Research Corp.
Reynolds: One of the reasons I came here was because I saw this as one of the greatest opportunities in the money management business. Whenever you have a 70-year-old brand with a great history that has gone through a tough period, it provides you with a structure from which to build. One of the reasons we've attracted so many excellent people is that they realize that in their careers, they will not be offered opportunities like this very often.
Five to 10 years from now, they'll look back at this and see it as the most rewarding time of their careers. I really believe that.
MME: How has overseeing the first year of this restructuring been for you personally?
Reynolds: Phenomenal. We've put together a great team, we're starting to see results, and we've rolled out some interesting new products that especially make sense in this marketplace.
We've had tremendous success with the Target Absolute Return Funds. These are funds that we set up as a series to provide advisers and their customers a specific return according to various risk tolerance. You can either do T-bills plus 700, T-bills plus 500, T-bills plus 300 or T-bills plus 100. We put performance fees on those, so in order for us to get our standard fee, we have to generate the return we say we're going to generate. If we don't, our fee comes down. If we outperform, we get paid more.
If you look at those returns as an asset allocation, 700 is correspondent to an equity portfolio, 500 to a balanced fund, 300 a bond fund and 100 would be a short-term fund. We rolled those out after the first of the year and we've had phenomenal success, anywhere from $5 million to $10 million a day. The funds themselves are up over $170 million from a small start. We're very pleased.
MME: Do any other fund houses have rivaling products?
Reynolds: Five percent of the mutual fund universe is labeled absolute, but we're the first firm to come out with a fund targeted to a specific return with multiple choices.
MME: How big of a gamble are you making on this fund line?
Reynolds: I think they're going to be a huge category in the mutual fund area, just as age-based funds were 10 years ago.
Also, high-net-worth individuals and institutions have been using absolute-return strategies for years, very successfully. In fact, that's how we got into the space; we've been doing it for institutional clients for over a decade, and it's been an area that we've been extremely successful in. It provides a tool for advisers to focus in on the return and the type of risk they want to take for their individual clients.
It's a great product for all types of markets, but whenever you go through the type of market we went through in 2008, it becomes even more important and a better opportunity.
MME: Your timing on the launch of the absolute-return funds couldn't be better, but do you think these products will still be as popular if equities make a big rebound?
Reynolds: Sure, I think they should be. If you look at the allocation of high-net-worth individuals and institutions over time, they've had anywhere from 25% to 50% of their portfolios in absolute-return-type investments. If someone is an aggressive investor and you achieve T-bills plus 700 basis points, that's a pretty good return, regardless of what's going on in the marketplace.
MME: What other projects are you working on for this year?
Reynolds: We just came out with global industry funds. Global technology, global healthcare-in fact, our healthcare fund is one of the top-performing specialty funds in the country. We've had a healthcare fund for some time, but we made it global to reflect the nature of the capabilities of the organization. We're in the eight major sectors.
We also changed our age-based funds to better manage risk. In the industry, age-based funds have really been funds-of-funds. In fact, I was the individual who was responsible for the Freedom Funds at Fidelity. That was an idea I had.
Whenever you run a fund-of-funds, if you're the overlay manager, you're always at the mercy of the underlying manager. We decided that for these funds to achieve what they promise for participants, we needed to better control risk right down to the individual securities. We restructured them to allow the manager to do that. That was a major change we made.
Also, we hired an individual who had a phenomenal track record both at Fidelity and as a hedge fund manager at Andover Capital, a gentleman by the name of David Glancy. David looks primarily at equities, and once he finds equities he likes, he then looks at the capital structure of the company. He looks at the bonds, the bank loans, and really goes to the part of the capital structure of a company that is priced the cheapest. These funds will roll out in mid-May.
MME: Have you been developing any retirement-income solutions or target-date funds? Are those a big area for Putnam?
Reynolds: It's going to be huge. We've been in the 401(k) business, but we want to be a bigger player, both on the service side and the asset management side. There is a huge opportunity in age-based funds for a different type structure than what's been out there before. Some of the fallout from the 2008 market as it relates to 401(k)s is that a lot of companies have set up age-based funds as a default option, and when people were near retirement, they still got hit with the equity market like everyone else. We think it is a huge opportunity to weave in income guarantees and similar products to protect people as they approach retirement. You will see some major announcements from us on that in the next 30 to 60 days.
MME: You seem to have hired a Who's Who of executives from Fidelity. Why have you tapped so heavily into that bench strength, and how have you been able to convince some of these people who were your former colleagues to jump ship and follow you to Putnam?
Reynolds: I spent 24 years at Fidelity, so I have a lot of respect and admiration for people who worked there and people who continue to work there. It just so happens that the Fidelity connection has been played out.
Walter Donovan, our new chief investment officer, is a major hire, and he's joining us the first week in May. He headed up the equity group at Fidelity. He's someone I've known for 15 years. He's been involved in all different types of asset classes, whether it's fixed income, money market, high yield or equities, and it was an opportunity for us to get someone who I think is one of the top investment people in the business.
I think the attraction for him was exactly what I laid out before: to get in on the ground floor of something that can be great. Walter definitely believes that, and we were able to convince him to join us.
MME: The Putnam Prime Money Market Fund was forced to close in September after a temporary surge of redemptions not even related to Putnam. What action do you think the SEC should take to prevent future crises in the money market fund world?
Reynolds: I think the SEC could set some requirements around liquidity and maturity. Anyone managing these funds should know their client base, especially if you're managing an institutional fund. At some point, you have to look at whether maintaining a dollar is really as important to the customer as it's been presented.
MME: Do you anticipate any major changes this year to mutual fund regulations under SEC Chairman Mary Schapiro?
Reynolds: I don't. I think the industry has really stood up to the volatility in the market, and it continues to provide shareholders with what they want. The next five to 10 years will be a very attractive period for mutual funds. Mutual funds are heavily regulated, have transparency, and have liquidity. They're the ideal investment for people, and the next five to 10 years are going to be huge for the mutual fund industry.
MME: Everybody in the industry was surprised when you were picked to be one of the finalists to become National Football League commissioner in 2006. Just the fact that you were in the running seemed to signal you weren't destined to stay in the industry.
Reynolds: That was a little stretch on my part. At the time, I was very happy at Fidelity. I officiated college football for a number of years, like 14. I was very involved in sports, so I think that was the connection.
The NFL was looking for someone with a business background on a global level. It was a combination of being involved in sports and the business background that made it attractive. I love professional football. There were only two commissioners that I knew of in my lifetime. If a headhunter calls you one day and asks you if you'd like to be considered for this, I think anyone would be interested. I never thought, "Well, I'm tired of the asset management business." I love the business. It was a unique opportunity that presents itself maybe once in your lifetime.
MME: So, what are your career goals at this point?
Reynolds: My total focus is to make Putnam one of the premiere money management funds in the world. I think we can do it.
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