BOSTON - Sagging one-year performance of Putnam Investments' Vista, New Opportunities and Voyager funds has investors wondering whether the growth funds grew too big.
Like cross-town rival Fidelity Investments, which recently closed the $63 billion Magellan Fund, some mutual fund consultants suggest Putnam should close the $18.2 billion Voyager Fund and the $4.3 billion Vista Fund. The $15.4 billion New Opportunities Fund was closed to all new investors June 23.
"You can clearly see a trend that as Putnam funds like New Opportunities got larger and larger, performance has tended to suffer," said Matt Beaudry, a senior consultant at Financial Research Corp., Boston.
Putnam management was concerned enough that it spent the last six months conducting an intensive internal review of the investment style, people and process, said Daniel Miller, managing director and chief investment officer of Putnam's specialty growth equity group.
The conclusion: "Our performance over the last 12 months has more to do with the style being out of favor than with problems with our organization," said Mr. Miller, lead manager of the New Opportunities Fund.
The three- and five-year performance of Vista, New Opportunities and Voyager was good relative to other growth equity funds.
For five years ended Aug. 31, all three funds outperformed the Standard & Poor's 500 Stock Index. New Opportunities/A was in the third percentile of Chicago-based Morningstar Inc.'s midcap growth category; Vista/A, the 26th percentile; and Voyager/A, the 21st.
In the three-year period, none of the funds outperformed the S&P 500, and New Opportunities dropped to the 25th percentile in Morningstar's midcap growth stock category. Vista dropped down to the 34th percentile, while Voyager rose to 19th.
Weaker 12-month performance dropped Voyager and Vista down to roughly the halfway mark of midcap growth funds.
New Opportunities/A had the worst 12-month run of the three, returning 15.34% for the year ended Aug. 31.
By comparison, the average return of the 316 midcap growth funds Morningstar tracks was 22.25%; the S&P 500 returned 40.62%; and the Russell Midcap Growth Index, 31.24%.
New Opportunities subsequently plummeted to the 75th percentile in Morningstar's midcap growth fund category.
Both Vista/A and Voyager/A managed to squeak ahead of the average one-year return of midcap growth funds - Vista/A, 23.50%, and Voyager/A, 22.85%.
New Opportunities' "performance was really bad from September last year to May. It did fairly well relative to funds in the growth sector for May through July, but performance has been dropping since then," said David Masters, senior fund analyst at mutual fund performance tracker Micropal Inc., Boston.
He speculated some of the relative underperformance by New Opportunities might be from a recent reduction in midcap holdings, compared with peer funds.
New Opportunities, which is managed by Mr. Miller and Carol McMullen, also has had a much smaller allocation to small-cap stocks recently compared with its peers, and a smaller cash position, Mr. Masters said.
The New Opportunities Fund is characterized by Putnam as an aggressive midcap growth fund, the most aggressive of the trio.
The fund's managers look for stocks with annual growth rates between 24% and 25%. They split stock selection duties by small-and large-cap growth stocks.
The performance of the Vista/A Fund is "looking pretty sick vs. its peers," said Micropal's Mr. Masters. "The fund's returns look pretty good (over the) the past three years, but not under the three-year mark."
He noted Vista lost 3% against other midcap growth funds in August, perhaps because it reduced midcap stock exposure at a time the rest of the sector was adding to mid- and large-cap holdings.
"The market has been punishing Vista for not holding midcap" stocks, said Mr. Masters.
Vista is more of a core growth fund, investing in growth companies with slightly lower annual growth rates - about 21% - than new Opportunities and in the small- to midcap range.
At Voyager, one manager invests in opportunity or large-cap turnaround stocks; one looks for small to midsized fast-growing companies; and one concentrates on midcap to large-cap, fast-growing companies. All three look for companies with an annual growth of 21%, said Mr. Miller.
Cash flows drop
All three funds experienced reduced cash flows since performance problems started last year, said FRC's Mr. Beaudry.
Net cash flow to New Opportunities dropped steadily to $442 million in the second quarter of 1997 from $1.6 billion for the third quarter of 1996.
Net flows to Voyager declined to $380 million in the second quarter of '97 from $992 million in third quarter of '96. Vista has had relatively smoother cash inflows, dropping to $223 million in the second quarter of this year from $243 million in 1996's third quarter.
Mr. Beaudry said cash flows suffered not only because of poorer performance, but also because Putnam has a new marketing initiative, aimed at selling more of its international and global funds through its broker/dealer distribution network. "Putnam isn't out there talking about its growth funds. They could be selling these popular funds to the brokers, even if performance is off . . .," he said.
The three aggressive growth funds are among the top 60 mutual funds most used by defined contribution plans, according to Pensions & Investments' annual survey (March 17). As of Aug. 31, Voyager managed $4 billion for defined contribution plan investors; New Opportunities, $1.5 billion; and Vista, $700 million.
Diane Vallerie Improta, a senior consultant at Segal Advisors Inc., New York, said only a few participants are likely to move out of these aggressive growth funds, "because the funds are behaving as we would expect them to."
Putnam's own analysis
When asked what Putnam found in its own analysis, Mr. Miller said:
"The basic answer to the question about the performance of these funds is that they are very aggressively managed and the best performing growth funds this year have been large-cap and conservatively managed,
"We compare our funds very carefully with funds managed with similar styles and while our numbers still aren't great, they are in the middle of the pack. That gives me confidence that the problems are style-related, rather than structural," he said.
But Christine Benz, a Morningstar equity analyst, said: "The investment style being out of favor can't quite explain why the fund is underperforming its peers."
Putnam's aggressive growth funds aren't easy to compare to other aggressive growth funds, Mr. Miller said. "We manage these funds more to adhere to their style than because we worry about managing to meet or beat some benchmark."
As part of its internal review, Putnam analyzed other benchmarks, concluding it probably will continue to use the Russell Mid-Cap Growth Index for all three funds.
"This benchmark is not the best fit for the market cap ranges of these funds, but it is the best style fit," said Mr. Miller.
Keep it in perspective
Observers cautioned the one-year and shorter term returns of Putnam's aggressive growth funds need to be kept in perspective. "So-called performance problems need to be related to the extraordinary performance of the market. . . . A 25% return is still, in an absolute sense, a very good return," said Burton J. Greenwald, president of consultant B.J. Greenwald Associates, Philadelphia.
But many consultants, Mr. Greenwald included, remain concerned about the size of the funds relative to their investment style.
"The closing of (Fidelity's) Magellan Fund was a watershed event. It legitimized the question of size relative to a fund's performance. Size may be a big factor in performance if the fund is not investing in large-cap stocks or indexes," said Mr. Greenwald.
"If you're interested in a high-octane fund, the size of these Putnam funds would scare the heck out of me."
Morningstar's Ms. Benz agreed. "Voyager and New Opportunities are really big funds to be managing in the midcap range. These two funds are among the largest we track in the category. Now that smaller-cap stocks are beginning to be favored by the market, these funds are going to have more problems because of their size. They can't be as nimble as they once were in making good small-cap stock investments."
"Size of funds can't be overlooked or talked away. The growth of these funds has coincided with the downturn in performance. Why would you close New Opportunities unless it was getting too big? And Voyager is a very, very large fund. It is impossible for its performance not to be affected by its size," said Mr. Beaudry.
Closing seemed to help
Early indications are that closing New Opportunities might have helped. Performance data from CDA/Wiesenberger, Rockville, Md., showed improvement in performance.
For the 12 months ended June 30, New Opportunities/A returned 4.3%, compared with an average return of 23.5% for its peers in the domestic growth equity fund category. But for the 12 months ended Aug. 31 - including more than two months that the fund was closed - it returned 15.3% vs. 32.8% for other domestic growth equity funds.
Mr. Miller said severely curtailing the cash flow has made it much easier to manage New Opportunities because he doesn't have to deal with large swings of money.
Closing also helped the whole growth area at Putnam, because managers of the other funds don't have to compete with the fund's huge appetite for new stocks as he struggled to remain close to the goal of being fully invested.
Voyager, with its three-manager/three-style approach and greater use of large-cap stocks, probably can absorb a lot more cash flow, Mr. Miller said.
"We don't need to close Voyager, because that large-cap element is so much easier to invest in and much more liquid."
With Vista, Mr. Miller said, Putnam management is "acutely aware of the size . . . and attendant problems with small- to midsized stock investment. We are watching it all the time."
Mr. Miller said Putnam officials are confident the aggressive growth style is poised to return to favor.
"We should do pretty well into the end of the year, if we pick stocks right," he said. "The fourth quarter last year was a throw-in-the-towel kind of period."