What happened to the turnaround at Putnam Investments?
Early last year, Putnam’s chief, Bob Reynolds, pointed to overachieving mutual funds and predicted that fund investors would soon be giving the company more money than they withdrew, reversing a damaging trend that had hurt the company for nearly a decade.
But 2011 never turned into the year Putnam envisioned. Positive sales trends reversed course by midyear - as they did throughout the mutual fund industry - and individual fund customers eventually withdrew about $4 billion more than they gave to the company to manage through the first 11 months of 2011. Though many other fund companies suffered from similar trends, the degree of redemptions at Putnam far exceeded the industry average.
Meanwhile, the investment performance at Putnam’s funds declined sharply in 2011. A majority of Putnam’s funds performed worse than most of their peers. Four of the company’s five largest mutual funds ranked below the middle of their classes, and two of those five finished the year among the worst 2 percent of all comparable funds, according to Morningstar Inc.
The most obvious example: Putnam Voyager, a growth fund that turned heads with superior performance over the previous two years. It lost 17.6 percent in 2011, while the Standard & Poor’s 500 index produced a total return of 2.1 percent, and finished near the bottom of rankings for comparable funds.
“It was a difficult year,’’ Reynolds told me yesterday. “But our three-year record is fine. Our focus has always been on being able to execute over a longer period of time because that’s what benefits shareholders.’’
Reynolds believes Putnam’s sales and mutual fund performance slump can be traced to a cautious market that did not react as expected to the shares of growing companies. He said Putnam managers made good decisions but were not rewarded last year.
“We’re right on target for earnings projections for companies, yet the stocks haven’t reacted the way you would think,’’ he said. “It’s just upside down.’’
Reynolds is right about longer-term performance. Financial advisers usually measure returns over at least three years, and a majority of Putnam funds rank above average over the past three.
He also points out Putnam was gaining business among big institutional clients while it was leaking money in operations serving individuals last year. Those two trends roughly canceled each other out last year.
But Putnam, a company that has been on its heels for so many years, needs to do better than break even, and it seemed to be on track during the first half of 2011. That’s why the business recovery that eventually fizzled was such a disappointment last year.
Last week, Putnam said it would lay off 78 employees, or 4.4 percent of its workforce, citing last year’s volatile markets.
Putnam likes to point out that investors withdrew more than $135 billion from stock funds industrywide last year - certainly evidence of a trend bigger than any individual company. But those withdrawals amount to just 2.5 percent of all the industry’s stock mutual fund assets. Add bond funds to the sales mix, and the industry actually attracted a modest amount of new money overall.
The scale of customer cash leaving Putnam mutual funds is much more serious. The $4 billion that left Putnam amount to more than 8 percent of the company’s stock and bond fund assets measured in calculations performed for me by Morningstar.
That withdrawal total would have been more serious without the benefit of popular new products rolled out over the past several years. As a group, those funds generated more than $1 billion in new sales last year.
Among the most popular offerings: Absolute return funds that aim for a specific gain above the current interest rate offered by US Treasury bills. Putnam offers such funds targeting Treasury bill interest plus 1 percent, 3 percent, 5 percent, and 7 percent.
But those funds, which recently reached their third anniversary, have each produced average annual returns slightly below targets.
Putnam’s mutual funds performed better in the final months of 2011 and got off to a good start for the new year. They need more strong performance - and a stock market that actually gains ground - to get Putnam back on track in 2012.