A Predicament Called Putnam

While the firm grapples with continued outflows, Marsh Mac could opt to sell it

It's the incredible shrinking fund company. Putnam Investments (MMC ), once the nation's fourth-biggest mutual-fund firm with more than $260 billion in fund assets in 2000, has slipped to No. 9. Even as investors pour billions into rival funds, continuing net outflows have shrunk the Boston firm's kitty to just $104 billion. Amid this flight, Putnam's owner, Marsh & McLennan Cos. (MMC ), is wondering what to do with it and may even put Putnam on the block.

Why the investor exodus? Putnam can't seem to shake off the taint it suffered in 2003 for allowing two managers and some preferred investors to trade improperly in its funds. Because of such practices as market-timing and excessive trading, Putnam became a symbol of industry abuses and paid $110 million to settle the matter. It didn't help that parent Marsh Mac also drew regulator ire for taking payments to steer clients to preferred insurers, allegations it neither admitted nor denied in its settlement. What's more, Putnam's fund performance has languished since 2000. "Putnam had the triple whammy," says Fred Barstein, chief executive of retirement plan advisory firm 401k Exchange. "It was as bad as it could get." Putnam declined to comment for this story.

Digging out of that hole isn't easy. Unlike Fidelity funds, which investors can buy directly, Putnam's are sold through brokers and other intermediaries. Winning them back has proved difficult. "I don't feel very comfortable selling Putnam funds," says financial planner Roger M. Kalar of Mutual Service Associates, who now has just $800,000 worth of clients' money invested with Putnam, vs. $3 million in 2000.

Similar attitudes are rife across the industry, despite changes at Putnam. Since taking over in late 2003, CEO Charles E. "Ed" Haldeman has labored to rebuild credibility, pushing the idea of building investor wealth over the long term -- a far cry from the sales-centric culture that once dominated Putnam. Its ads now preach discipline and conservatism. Haldeman also reduced sales charges -- from 5.75% to 5.25% on equity funds, lower than many rivals -- and cut expenses. Pressing managers to aim for consistency, he has retooled pay to emphasize reliable one-, three-, and five-year records.


Restoring Putnam's reputation won't achieve miracles. "Haldeman has done a good job at addressing the problems," says Morningstar Inc. (MORN ) analyst Dan McNeela. "But even if people agree that Putnam has put out the fires, it doesn't make it a good place to invest."

Although fund performance is starting to improve, Putnam still has few standouts. Haldeman wants all his funds to perform in the top half of their categories each year, which should spur performance over longer periods. Through May 31, though, only 20 of its 32 equity funds were in the top 50% of their peer group over the past year, according to Morningstar. The bond lineup fared better with 15 out of 21 in the top half. The three- and five-year records -- which advisers often use to pick investments -- look mediocre. Fewer than 25% of Putnam's offerings are in the top quartile. The problem: Many funds have new teams running them since Haldeman cleaned house. Managers need time to improve the numbers.

The weak performance is taking a toll on Marsh Mac. For years, Putnam was the group's cash cow, accounting for more than 50% of its bottom line. In the latest quarter, Putnam earned $79 million, or 17% of the parent's operating income. Still, it's the most profitable business in Marsh Mac's portfolio, boasting margins of 20%, vs. 15% for the insurance group.

It's not yet clear how Putnam's fate will play out. Marsh Mac says it is just reviewing its businesses and has no definite plans to sell Putnam, a move that would incur a big tax bill. Analyst Jay Gelb of Lehman Brothers Inc. (LEH ) says Putnam could fetch $4 billion to $5 billion, giving Marsh Mac a nice sum to pay down a big chunk of its debt. But the size of the franchise -- and its problems -- could make it a tough sell. Just like many of Putnam's funds.

By Adrienne Carter in Chicago

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