Punt Putnam Again?

Five years ago, I wrote an article querying, “Should You Punt Putnam?” I posed this question not because of the mutual fund late trading scandal, which implicated Putnam and a dozen other major fund companies, but due to the environment at Putnam which allowed severe underperformance despite its high fees while the CEO was pulling down hundreds of millions of dollars. Well, the CEO was fired, fees were lowered but performance has once again become a problem.

In an article last Friday, the Wall Street Journal’s Diya Gullapalli cut to the chase: “Through the end of last month, Putnam's three biggest funds were in the bottom 25% of their peer groups for the one- and five-year periods. Even the firm's $550 million Putnam Research Fund, which is supposed to encompass analysts' best stock picks, is down 12% in the past year and at the bottom of its category.”

Of course there is an explanation---the firm carried big positions in some of the hardest hit housing-related and financial companies, including Countrywide, Bear Stearns, MGIC Investment, Ambac and E*Trade in many of their largest funds, including Putnam Growth & Income and Putnam Voyager, both of which are trailing the S&P 500 index. It appears that Putnam fund managers did not follow their own advice that appears in all of their materials: “You should carefully consider the investment objectives, risks, charges, and expenses of any investment before investing”; “There is always the risk that you may lose money with your investment, regardless of your level of investment diversification”; and the old favorite, “past performance does not indicate future results.”

What kind of firm makes the exact same mistake of over-concentration and following the crowd within a mere five years? Then it was tech, telecom and internet stocks, today it is the new bubble contenders-housing, mortgage-related securities and financials. Is there anyone at Putnam who knows how to sell an asset once it has risen beyond all rational levels? That is the question that Kevin Cronin, Putnam’s new head of investments, will have to ask as he attempts to turn things around.

In the category of understatement, Cronin said, “I was not happy with the returns” in large US stocks, and he is now asking himself whether the firm needs “to make some changes.” If you own Putnam funds, you should ask yourself whether you can afford to wait for Cronin and the firm to complete the process, which may or may not be successful.