Putnam’s Brief Flirtation with Mutuality

From its beginning in 1936, Putnam had become a respected industry leader. At first it operated a single balanced fund (the George Putnam Fund of Boston) but gradually joined the industry-wide trend in offering a broad line of funds with varying objectives. Privately held by the Putnam family and firm executives, the firm enjoyed solid growth through the mind – 1960s, when allowing founders and managers to cash in on the firm’s success became an industry-wide phenomenon.

In 1965, the management company turn to public ownership via an IPO. In 1969, the firm agreed to be acquired by the incredibly successful Government Employees Insurance Company (GEICO), reaching, as the Putnam announcement stated, “an agreement in principal” (sic) to combine the two firms. (GEICO was later acquired by Warren Buffet’s Berkshire Hathaway.)

Enriching the Manager

That agreement never reached fruition. But just a year later in 1970, Putnam was acquired by the insurance broker Marsh & McLennan. During the great bull market of 1982 2000 era, under the aggressive leadership of new president Lawrence Lasser, Putnam prospered. It became a goldmine for Marsh & McLennan, earning the firm more than $3.3 billion in 2000-2007 alone. (Lasser too, prospered, ofter earning annual compensation of $20 million or more-$27 million in 1999 alone-plus another $78 million when he left the company and restricted stock in Marsh valued at another $29 million.)

But while Putnam earned these profits for its new owner, it was quite another story for the shareholders of its funds. While the manager’s speculative bent produced good performance numbers for their aggressive equity funds to report, most shareholders didn’t jump aboard the speeding train until the returns were history, and investor returns were small, even during the bull market.

Along the way, their once tiny Putnam High Income Government Trust grew to the mammoth size of $11 billion (the second largest in the field in 1987) driven largely by advertising a return of 12 percent when long-term U.S Treasury bonds carried yields in the 6 percent range.

The strategy failed miserably. The Fund’s annual distributions dropped from $1.54 per share in 1987 to $0.62 in 1994, ultimately falling to a low of $0.2 in 2004. Its net asset value fell from $12.47 per share to $8.09. Rather than firing the Fund’s manager, the directors changed the fund’s name to Putnam American Government Income Fund. (In this business, it’s easy to bury our mistakes.) Currently, the fund’s assets total some $700 million, 93% below the peak.

In the early 2000s, when the stock market came back down to earth in the crash, these Putnam equity funds that had taken such high risks fared even worse. In the 1999 edition of Common Sense on Mutual Funds, I had written that the conditions for changing the traditional industry structure-focused on maximizing profits to fund managers – to a mutual structure – focused on maximizing returns for fund shareholders – might come from “investors who get badly burned by a long period of equity underperformance, or even by a significant plunge in stock prices.”

Impoverishing the Shareholder

Now, having produced distinctly inferior performance in the great bear market of 2000 2003, Putnam faced both of those baneful circumstances. What’s more, the firm was a major participant in the fund industry’s “time-zone trading” scandals. Worse, nine of its portfolio managers were found to have been trading against the interests of the very funds that they were managing. Lasser was well aware of this obvious breach of fiduciary participant in the fund industry’s “time-zone trading” scandals. Worse, nine of its portfolio managers were found to have been trading against the interests of the very funds that they were managing. Lasser was well aware of this obvious breach of fiduciary duty, but determined not to inform the funds’ board of directors.

At that point, Marsh & McLennan accepted Lasser’s resignation, and determined to get rid of its Putnam Management subsidiary. So I decided to approach the board of directors of the funds themselves and encourage them to take advantage of this valuable opportunity to mutualize—valuable to fund shareholders, but likely making the Marsh ownership stake worthless.

I telephoned the funds’ independent board chairman John A. Hill, and he invited me to meet with him in New York City to discuss the issue. We enjoyed a pleasant luncheon together, and I made the case that the mutualizing option would better serve the fund shareholders. While he qualified as an “independent” director, I later learned that he had served as CEO of Marsh & McLennan Asset Management years before he became Chairman of Putnam, a fact not disclosed in the proxy statement. I later met with one of his fellow independent directors. In neither instance did I make any progress, and when Mr. Hill stopped returning my phone calls, I got the message: “No dice.”

In 2008, Marsh sold its ownership of Putnam Management Company. The buyer was Power Financial of Canada, and the price, a cool $4 billion(!). But Putnam has yet to turn the corner. The shareholders of its funds have liquidated their shares unremittingly, and the firm has experienced net cash outflow in every year from 2000 through 2011. Fund assets have plummeted from $250 billion to just $53 billion as 2012 begins. It’s hard to imagine that the Putnam fund shareholders would not have received huge benefits from mutualization. As it turned out, even the new owner so well, even at the expense of serving the Putnam fund shareholders to whom the firm owed a fiduciary duty.

From The Clash of Cultures: Investment vs. Speculation