As it presses to improve profitability, Putnam Investments may also have to contend with even more upheaval among its mutual fund managers.
In recent months, the Boston-based company, which has been battered by dwindling assets and persistent outflows from its funds for the past seven years, has been plagued by high turnover among its portfolio managers.
Over the past year, at least seven managers have left the firm, including Josh Brooks, chief investment officer for large-cap equities, who oversaw about $14.6 billion, and Kelly Morgan, former director of research for large-cap growth, who oversaw about $6.7 billion.
"I wouldn't be surprised to see more departures of portfolio managers," said Wenli Tan, a fund analyst at Morningstar Inc., a Chicago-based research firm.
Kevin M. Cronin, who joined Putnam in 1997 as a bond manager and was promoted in early 2005 to head of investments and charged with leading a restructuring of the firm's investment management group, declined to be interviewed about the firm's turnover.
"Turnover in investment managers at Putnam is well below industry averages," he wrote in an e-mail to
InvestmentNews.
Putnam's stock and bond funds experienced $12.5 billion in net outflows in 2007, versus $14.9 billion the year before. Meanwhile, assets in those funds dropped to $83.8 billion, from $95 billion, according to Financial Research Corp. of Boston.
"They need to find replacements for those roles," Ms. Tan said of the departure of Mr. Brooks and Ms. Morgan. "I think we'll see more changes if we don't see them translate into performance in the near future."
With $9.6 billion in net outflows, according to FRC, Putnam's domestic-equity funds are the source of many of the firm's problems — at least on the mutual fund side.
FLAILING PERFORMANCE
Last year, the average domestic-equity fund at Putnam outperformed just 19% of its peers, according to Morningstar, while over the three- and five-year periods, it beat a mere 25% of its peers.
"I wouldn't be surprised to see [more] portfolio manager turnover on these funds," Ms. Tan said of Putnam's domestic-equity funds.
In 2007, Putnam was acquired by Great-West Lifeco Inc., a Winnipeg, Manitoba, unit of Montreal-based Power Financial Corp. Putnam's total work force stands at 2,600. The search for talent comes at a time when the firm is focused on reducing costs.
During a recent fourth-quarter conference call with analysts, Putnam reported an operating margin of 25.4% — well below the industry average of 33%.
"What was done in the fourth quarter to improve margins, we think there is more we can do," Putnam's chief executive, Charles "Ed" Haldeman, told analysts. "We are determined to spend whatever is necessary to make our investment capability world-class. That's why we are so determined to continue to take costs out of the non-investment side of the business so we can both get to the industry average margin and invest what it takes to be world-class on the investment side."
Mr. Haldeman declined to elaborate on his comments during the conference call or to address the possibility of more manager turn-over at Putnam.
The main reason for the lagging margins is that Putnam is managing significantly less money, said Chris Blumas, an equity analyst for Morningstar, who noted that Putnam is managing about $187 billion in assets today, down from $371 billion in 2000.
"They may hold back new purchases," he said. "But typically, compensation is the biggest cost. It's likely to involve some layoffs on the administrative side."
While the company would have done some cost retrenchment over time, they have the infrastructure to manage a lot more money, Mr. Blumas said.
"The two priorities are stemming the outflows and margin enhancement," he said. "There's room to improve or room to build bigger — it's one of the two."
INSTITUTIONAL GAIN
To be sure, the institutional business at Putnam is growing, taking in $2.2 billion in 2007, largely in pension plans. The firm noted many wins in the pipeline and announced that it secured a $40 million retirement savings program for Sensata Technologies Inc. of Attleboro, Mass., and a $350 million plan from the South Carolina Retirement Systems in Columbia.
"I think Putnam is looking for more-permanent fixes for their financial conditions on the long-term to make it more profitable for their parent company," said Jeff Keil, president of Keil Fiduciary Strategies LLC, a Littleton, Colo.-based industry consulting firm. "You may see them consolidate systems, or they may look at discretionary expenses."
Putnam is dealing with a double whammy, said Howard Schneider, president of Practical Perspectives, an industry consulting firm based in Boxford, Mass. "They have significant outflows and the declining equity market," he said.
That said, the market may have broader impact.
"I think you'll see many firms that are going to need to revisit their financials as they did the last time the markets went down," Mr. Schneider said. "I think the yellow caution light is starting to flash for some firms."
Being cautious is expected, said Burton Greenwald, a Philadelphia-based mutual fund consultant. "I think belt-tightening is a natural expectation during down periods like this," he said.
On the investment side at Putnam, "it's a difficult climate," Mr. Greenwald said. "Personnel turnover at a time like this, it wouldn't surprise me."
Of course, Putnam is not the only firm grappling with turnover. Houston's AIM Investments, a subsidiary of Invesco Ltd. of Atlanta, announced the departure of three managers this month.
Meanwhile,
Fidelity Investments of Boston announced plans to lay off about 250 people as part of a re-structuring that began last fall. In November, the firm said that it was laying off 200 employees.
Sue Asci can be reached at [email protected].
