How the scandal unfolds from here may depend on whether pension officials are game to pursue an exhaustive witch hunt for managers found to have strayed from the fiduciary straight and narrow, or whether they'll follow the old Chinese proverb: "Kill one to warn a hundred."
Some pension executives expect the narrower strategy to prevail. "If you have two or three of these (tarnished money managers) in your portfolio, then firing them puts you in a tight spot" that entails a lot of work, said the executive director of a state fund with more than $15 billion in assets, who requested anonymity. How do you proceed "if everybody is a little bit guilty?" he asked.
In recent weeks, the list of money managers being terminated or put under review has expanded. For example, the $3.3 billion ChevronTexaco Corp. defined benefit plan, San Ramon, Calif., terminated Strong, which managed $50 million in a U.S. small cap equity portfolio, just months after hiring them. Batterymarch Financial Management has taken over the portfolio, according to sources close to the fund. Fund officials declined to comment.
But Putnam remained the focus of public pension fund ire, with institutional and mutual fund outflows totaling roughly $23 billion since the SEC and Massachusetts brought charges against the company on Oct. 28.
Putnam has assumed "poster-child status" for the mutual fund trading scandal — a dangerous place to be considering its extensive list of big public pension fund clients, said Don Phillips, a managing director with Chicago-based Morningstar Inc. The fact that its own portfolio managers were found to be market timing the funds they oversaw has left the company open to sharper criticism than firms that allowed outsiders to market time their funds, he said.
Last week's decision by the $155.5 billion California Public Employees' Retirement System, Sacramento, to fire Putnam as manager of $600 million in international equities and another $600 million in domestic equities was a case in point.
CalPERS officials were clearly taking a big-picture view of the situation, with Putnam cast in the role of "Exhibit A".
"We hope that the Putnam disaster will serve as a catalyst for major improvements in ethical behavior, internal controls and corporate governance not only at Putnam but throughout the industry," said Rob Feckner, chairman of CalPERS' investment committee.
Putnam's firing "sends a strong signal to the marketplace that there will be serious and immediate consequences and penalties to violating the trust we hold with investors and pensioners," said California State Treasurer Philip Angelides.
At the same meeting, CalPERS officials said they plan to introduce an "external code of ethics" in the next few months, which money managers hoping to serve the giant California fund will have to abide by. North Carolina state Treasurer Richard H. Moore detailed his own guidelines last week, including a demand that money managers agree to hold any shares they buy in their company's funds for at least one year, and that two-thirds of a fund's directors be independent.
Ironically, Putnam, in the partial settlement it reached with the SEC on Nov. 13, instituted that one-year holding period for its portfolio managers and called for a minimum of 75% of the trustees on the boards of Putnam mutual funds to be independent.