Putnam Investments To Cut Fees On Many Mutual Funds Aug. 1

   By Sam Mamudi 
 

Since announcing the hire of former Fidelity Investments executive Bob Reynolds in July 2008, mutual-fund firm Putnam Investments has been grabbing headlines with a serious of eye-catching moves. On Tuesday, it made another by saying that it plans to cut fees and change the way it charges investors.

Boston-based Putnam said that from Aug. 1, it will cut management fees on its bond funds by 13% and on its asset-allocation funds by 10%, and it will eliminate so-called wrap fees - the overall advisory fees above fund fees - for its target-date funds.

Putnam, a unit of Canada's Great-West Lifeco Inc. (GWO.T), also plans to change the terms of its management contracts to introduce performance fees for many of its stock funds.

"We want to reiterate the fact that we're a very shareholder-friendly company," said Bob Reynolds, chief executive, in an interview. "Over time, managing the firm to do what's right for the shareholder is the key to being successful."

Under the plans, subject to shareholder approval, Putnam's growth and international stock funds, as well as its Global Equity Fund (PEQUX), will see their management fees change depending on performance relative to each fund's benchmark. The performance will be judged on a rolling three-year period.

"That's how shareholders would evaluate us," said Reynolds, explaining the choice of a three-year term.

"We like to see performance tied to the fund's specific benchmark based on a three-year period for good measure," said Jonathan Rahbar, fund analyst at Morningstar Inc. "This would be a good deal for investors because it aligns the fees paid to Putnam with the performance they experience."

In another change, discounts for fund shareholders based on rising asset levels - given to reflect growing economies of scale - will be based on the growth of all mutual-fund assets, rather than the assets of a particular fund.

"As Putnam grows, that will definitely help shareholders across the firm," said Rahbar.

Putnam's total fees have been typically higher than the industry average. The average expense ratio for its bond funds is 1.19%, compared with the industry average of 1.03%, while its asset-allocation funds charge 0.9%, compared with the industry's 0.87% average, according to Morningstar.

Expense ratios include administrative and distribution costs of a fund. Reynolds said that Putnam's management fees - fees that go directly to the firm - are already below average and that the changes would place the firm in the lowest quartile of the industry.

The changes are the latest in a series of moves by Reynolds, who last year took over a firm struggling with poor performance and the legacy of its involvement in the mutual-fund scandals of 2003. Putnam's assets under management have fallen from $272 billion in late 2003 to just over $100 billion today.

The firm has, however, seen a turnaround in performance this year, and Reynolds said that flows into its bond funds and new offerings have been positive. While the stock funds still see redemptions, "they're half the industry average," he said.

Reynolds said he was confident that the entire fund line will see net inflows in the second half of the year.

As part of Reynolds' rebuilding effort, the firm has hired several new fund managers, traders and researchers; put more emphasis on - and given freer rein to - individual managers; launched 14 new products, including absolute return mutual funds; and launched a new defined-contribution platform for plan sponsors.

"There's been a more sales-focused effort at Putnam" since Reynolds took over, said Rahbar. "So while we're hopeful [of the fee changes helping investors], there is an element of coming into this with your eyes wide open."

But Reynolds said the focus of his changes is Putnam's clients and insisted that approach was the best way to grow.

"I want us to be very competitive in the marketplace and set us up for the next three to five years," said Reynolds. "We'd like to be one of the key players in the industry - not the biggest, but relevant and one of the top performers."

-By Sam Mamudi; 415-439-6400; [e-mail]