BOSTON - Putnam Mutual Funds is testing a number of new pricing structures and expanding its efforts in distributing mutual funds through banks.
One key effort - the testing of C shares - places Putnam among a small but growing number of firms hoping to capitalize on a popular structure that enables brokers to sell a load fund that looks like a no-load. Putnam's move is a response to industry competition as well as demand from its distributors. Experts say it could trigger widespread use of the so-called level load structure.
Among Putnam's moves:
On a pilot basis, the firm is introducing a C share - alongside existing A and B shares - on its three new asset allocation funds. C shares or "level loads" are gaining favor with many mutual fund sponsors. C shares have no front- or back-end load but do have a higher annual 12(b)1 fee.
Effective immediately, Putnam's new Diversified Equity Trust will have a 4.5% front-end load and a 50 basis point trailing commission - a 12(b)1 fee paid every year thereafter. The fee structure undercuts Fidelity's highly popular group of Advisors funds, which are sold through brokers and carry a 4.75% front-end load and a 65 basis point "trail." It also represents a departure from the pricing of Putnam's other stock funds - typically a front-end load of 5.75% and a 25 basis point trail.
On the bank distribution side, the firm three months ago formed an alliance with Citizens Bank in Providence, R.I. through which the bank will distribute funds offered by Putnam and Fidelity Investments, Boston. Putnam also was appointed to do its first proprietary variable annuity product for Key Bank, Albany, N.Y. Its funds will be offered alongside the bank's proprietary funds. The Hartford Insurance Co., Hartford, Conn., will provide the annuity.
In another distribution initiative, Putnam has applied for a tax ruling from the Internal Revenue Service that would enable it to offer funds through a Hub and Spoke structure. Under the structure, licensed by Signature Financial Group Inc., New York, multiple "spoke" funds that feed into a single "hub" portfolio can be priced and branded as the fund sponsor sees fit. Putnam has not sought the approval of its trustees - nor does it have imminent plans to implement - the new structure.
John Rekenthaler, editor of Morningstar Mutual Funds, Chicago, thinks Putnam's testing of a level load is significant.
"Level loads are very popular right now. In essence, a registered rep can sell a no-load fund. ... It's an easy sale. There are no sales charges you have to talk yourself out of," he said, noting the "bite" comes out invisibly in the expense ratio, to which a customer may or may not pay attention.
William Shiebler, president of Putnam Mutual Funds, said Putnam decided to try C shares largely in response to demand from distributors. The asset allocation funds that feature the shares invest across eight asset classes: value and growth stocks; high yield, corporate and government bonds; international stocks and diversified bonds. The funds were introduced three months ago.
"Putnam has been aggressive on pricing. I'm not surprised they're one of the early ones," Mr. Rekenthaler said.
Putnam was one of the first big fund companies to try B shares in 1992, which carry a contingent deferred sales charge or back-end load.
"B shares are now outselling A shares 2-to-1," Mr. Rekenthaler said. With the growing popularity of C shares, "we may end up seeing them bigger than both (A and B shares) down the road."
But Dennis Dolego, partner of Financial Research Corp., Chicago, a mutual fund consultant, said C shares tend to sell better for high-yield money market or bond funds in which customers want to be able to move in and out quickly without a sales charge. "They're not so appropriate on the equity side because it's a longer term investment, not a yield play."
"On the one hand these types (of shares) are more attractive to fund companies (than B shares)," he said. That's because even though a fund has a back-end load the financial planner or broker-dealer gets the commission upfront. The fund company digs into its pockets to pay the commission. "The (company) gets it back over time with the 12(b)1 and back-end load, but the company would rather not do it," said Chris Wloszczyna, public information officer of the Investment Company Institute, a Washington trade group.
Putnam's other new fee structure - for its Diversified Equity Trust - is used by only 16 other mutual funds tracked by Morningstar Inc., and most of them are bond funds.
The fee "is a little on the low end but hardly unprecedented," said Mr. Rekenthaler.
The real question is whether Putnam is "passing it all back to the broker" who sells the funds, he added. One key to successful distribution is an attractive commission structure for a fund's sales force.
Mr. Shiebler said "this is not an attempt to undercut (Fidelity) - otherwise we would have done it across the board." Rather, he said, it is an opportunity to offer similar pricing to Fidelity Advisors on a new vehicle. The Diversified Equity Trust invests in value, growth and international stocks.
"We think customers may be interested in a new variation and a higher trail. It's not dictated by what somebody else does. It's dictated by what the customer wants and the distributors want. We're listening to our distributors," Mr. Shiebler said.
How does the new pricing compare to that of Putnam's other stock funds? "It depends on the investment performance and whether the investor reinvests or not. Over five years, an investment with the new pricing might be better off depending on the rate of return. At some point after, the investor under the old pricing becomes better off," he said.
On the bank distribution side, Mr. Shiebler is talking to other banks about offering Putnam funds through a proprietary variable annuity. "It helps (our) bank clients offer a broader vehicle and sell their own funds alongside others in one package," he said.
This effort represents a twist on what has been an important distribution channel for Putnam funds for many years. "We think it's a very significant current and future source of business for us," Mr. Shiebler said.
Still, Mr. Rekenthaler said in such arrangements: "It's an uneasy relationship. The bank is going to agree to sell Putnam and Fidelity so it can be seen as credible and independent, but it would love to sell its own products." The fund companies, in turn, "want their own shelf space. ... They'll kind of live with each other."
As for Hub and Spoke, "there are probably going to be a multitude of uses for it. We want to react to the changing needs of our distributors and be able to keep presenting them with the most attractive features and benefits on our products, and most importantly keep the performance in continued good shape," Mr. Shiebler said.
He said the recent changes do not detract from Putnam's mission as a firm with $91 billion in mutual funds under management. "It's not just about pricing or Hub and Spoke. ... Our major business is managing people's money. Our strategy is to have premium investment products, good products to sell, not the best pricing or most aggressive anything."
Still, he acknowledged "there will be a general downward pressure on loads over the next five years. We're trying to make sure we stay at the cutting edge. We react to what the competition is doing - and are leaders from time to time."