Putnam signaling comeback

Putnam Investments has a new spring in its step as Robert L. Reynolds' first full year as CEO draws to a close.

After a decade of misery, investment performance has rebounded dramatically this year, and a long period of net outflows appears poised to end.

Despite that progress, market veterans say Putnam and its parent, Power Financial Corp., continue to face tough choices, such as the decision late last week to exit the actively managed currency institutional segregated account business. In addition, last week's layoff of 5% of Putnam's work force is a sign of short-term challenges.

Others believe an add-on acquisition might be needed to put the money manager on the path of sustainable profitability and growth anytime soon.

For now, what started out looking like a painful year of rebuilding for the one-time industry powerhouse has turned out to be Putnam's best since 1999.

Year to date, key equity strategies are enjoying their best relative performance in a decade. The $3.3 billion Putnam Voyager fund is among the top 2% of competitors in Morningstar Inc.'s large-cap growth equity category, and two large-cap value funds — the $5 billion Putnam Growth & Income fund and the $2.8 billion Putnam Equity Income fund — are both top-quartile performers.

The Boston-based company's fixed-income strategies have shone as well. Two intermediate bond funds — the $1.2 billion Putnam Income fund and the $1.3 billion Putnam U.S. Government Income fund — are both in the top percentile of their respective Morningstar categories year to date.

The turnaround has pleased executives at Putnam's Montreal-based parent, who bought the firm for $3.9 billion in August 2007, but had to write off a chunk of the value of its investment as the market crisis of the past two years resulted in Putnam's assets under management dropping to a low of $95.7 billion this past February. (AUM rebounded to $115 billion as of Nov. 30, up 20% from that recent low although still a fraction of the record $425 billion under management as of March 2000.)

“We think Putnam has made very strong progress in virtually every dimension of its business,” Jeffrey Orr, the CEO of Power Financial and chairman of Putnam's board of directors, said in a recent interview. That progress, he said, includes performance, but extends to such areas as product introductions and distribution initiatives as well.

The money manager's performance gains might be providing some hope for Putnam's long-suffering clients as well.

After years where the firm's once-hefty mutual fund business routinely saw net outflows of $1 billion a month or more, this October a scant $98 million left Putnam's doors.

Despite those signs of hope, Putnam has yet to report a profit this year. For the first three quarters of 2009, Mr. Reynolds, on conference calls detailing financial results for Power Financial's U.S. holding company, Great-West Lifeco Inc., reported Putnam's core business logged successive losses of C$28 million, C$15 million and C$20 million.

Consultants to money managers note that the first-class talent Mr. Reynolds, a former vice chairman of Fidelity Investments, has lured to Putnam cost a pretty penny, making it imperative for Putnam to achieve greater scale.

Putnam's 68 hires this year included industry stalwarts, such as Walter C. Donovan, president of Fidelity's equity division, who joined Putnam in April as chief investment officer, and David Glancy, a former star manager at Fidelity, who arrived in February to launch two funds that invest across the capital spectrum.

On Dec. 9, Putnam eliminated 104 jobs, or 5% of its work force, most of them in technology and operations-related areas, although 16 mostly support staff in the investment division were let go as well.

The decision to withdraw from the actively managed currency business was made after a strategic review concluded demand was unlikely to justify continued investment in a segment that accounted for less than 0.5% of the firm's assets, said Joseph T. Phoenix, head of global institutional management. Mr. Phoenix said Putnam will retain currency capabilities to enhance its own retail and institutional strategies.

Spokesman Jon Goldstein said last week's actions reflect Putnam's efforts to shift resources to areas that will power the firm's growth in coming years. He said company executives plan to continue investing in the investment division and to build the retirement defined contribution capabilities as well as its presence in the institutional marketplace.

Longer term, consultants said Power Financial eventually might have to consider another acquisition to bulk up Putnam's mutual fund business — currently with just more than $50 billion of client money in long-term equity and bond funds — to achieve the critical mass needed to pay for Putnam's aggressive hiring and advertising.

In the current market, “growth is going to be hard for anybody,” said Geoff Bobroff, president of Bobroff Consulting Inc., East Greenwich, R.I. If Mr. Reynolds is serious about making Putnam a top player again in the fund distribution world, the company might need to consider another acquisition or a broad partnership to get there, Mr. Bobroff said. He figures $150 billion in mutual fund assets is the minimum full-service managers will have to bring to the table during the coming years.

Mr. Orr said he's not thinking about outside additions to the business. Power Financial is “very impressed with the momentum” Putnam has now, he said, and is focusing “on supporting the management on what we think is just a terrific turnaround.”

Investment bankers, who admittedly have a potential dog in the fight, say they're betting Power executives eventually will change their minds. None would speak for attribution.

Power “isn't there yet, but we're in that hunt, trying to get them to reconsider,” said one New York-based investment banker. A second, while not ruling out a change of heart, said Power Financial is likely to give Putnam another two years or so before considering something as drastic as another acquisition to jolt its U.S. money management operations.

Putnam may have to keep its momentum going for another year or two before institutional investors begin contributing to the turnaround story in a substantial way, some investment consultants say. “You dig a big hole, it takes more than a year to crawl out,” noted one Chicago-based consultant, who declined to be named.

A third investment banker predicted something could happen sooner, amid signs that Power executives have become “more open to considering an acquisition” in recent months.