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Can Robert Reynolds Save Putnam?
CEO Robert Reynolds has radically overhauled Putnam's investment process.
Robert Reynolds had built a very impressive résumé in nearly 25 years at Fidelity Investments, the Boston-based mutual fund powerhouse. He helped Fidelity break into institutional money management in the late 1980s, spearheaded the firms rise to dominance of the 401(k) business in the 1990s, and then from 2000 oversaw all of the companys operations as vice chairman and COO. But with chairman Edward Johnson III showing no sign of retiring and with three family members ready to succeed him eventually, Reynolds knew his career had hit a ceiling. So in April 2007 the tall, heavyset West Virginian swallowed his pride, walked into Johnsons office and resigned.
"I had gone as far as I could go in the company," says Reynolds. "It was always a family-owned, family-run business, and there was nothing that would persuade me that that was going to change."
Still itching for the chance to run his own show, Reynolds jumped when a former colleague offered to hook him up with the new Canadian owners of Putnam Investments, the once-proud mutual fund outfit that had been on the skids for nearly a decade. In January 2008, over a Tuscan meal at Via Matta, a restaurant in Bostons tony Back Bay neighborhood, Jeffrey Orr, the CEO of Montreal-based Power Financial Corp., asked Reynolds if he would consider taking over as president and CEO and trying to turn Putnam around. "Absolutely," Reynolds responded. "It would be interesting. Whether you get where you want to get is always an adventure."
After some months spent working out the details, Reynolds took over in July. And, oh, what an adventure he has embarked upon. Few firms can match the rich heritage of Putnam: Founded by visionary investor George Putnam more than 70 years ago, it managed one of the first U.S. mutual funds, diversified into institutional money management and then international equities under the ownership of insurance giant Marsh & McLennan Cos. and by the end of the 1990s ranked as the 12th-largest money manager in the U.S. Fewer still can match its dizzying fall from grace: Putnam bet heavily on technology stocks only to be whipsawed by the collapse of the Nasdaq Stock Market in 2000, was tarnished by the market-timing scandal in 2003 and 2004 and then suffered from years of poor performance and ownership uncertainty. Investment losses and massive fund outflows caused Putnams assets under management to crater to just $106 billion at the end of last year, from a peak of $391 billion in 1999. As of February 28, Putnam managed $96 billion in assets. Many in the industry raised eyebrows when Canadas influential Desmarais family, which controls Power Financial, splashed out some $3 billion to buy Putnam in April 2007, questioning whether they could ever earn a decent return on their investment.
Reynolds, 57, hasnt wasted any time trying to prove the skeptics wrong. Over the past nine months, he has radically overhauled the groups investment process by eliminating the chief investment officer position, slashing a large team of quantitative analysts and recruiting a new cadre of portfolio managers and analysts, many of them former colleagues from Fidelity. He has also empowered those managers with a much greater degree of autonomy than had been the norm at Putnam, and motivated them by linking pay to performance. Most recently, he introduced a pair of mutual fund series, one designed to achieve absolute returns and the other to invest in global equities, in a bid to attract investors. Reynolds hopes the changes will revitalize Putnam and ramp performance across the firms range of funds up into the top quartile.
"I thought some dramatic changes needed to take place in order for Putnam to regain its old glory," he says in a recent interview in his corner office overlooking the manicured gardens of Norman B. Leventhal Park in downtown Boston. "Thats how Putnam is going to be Putnam again."
Its too early to tell whether Reynoldss changes will bear fruit, but the stakes couldnt be higher. After such a long slide, this could well be the last chance to return Putnam to anything like its former prominence and to justify the steep price paid by the Desmarais family. The firm risks getting stuck between what are traditionally the most successful types of asset management firms: behemoths such as Fidelity, the Vanguard Group or the Capital Group Cos., which command economies of scale on enormous asset bases of more than $1 trillion each, and lean boutiques that can nimbly manage smaller pools of money with tiny staffs. Reynolds, moreover, is trying to pull off a turnaround in the most challenging market environment in decades. Most money managers are struggling to deliver acceptable returns, and they dont suffer the burden of Putnams troubled legacy.
"It will be a few years before investors can really trust Putnam again," says Wenli Tan, an analyst at Chicago-based investment research firm Morningstar, which is known for its influential ratings of mutual funds. (The firm has rated 33 of 56 Putnam funds that it tracks with just one or two stars, out of a possible five.)
Reynolds is staking his reputation on proving that he can regain investors, though. "I think we can turn it around a lot quicker than most people think," he says. "The company will be profitable."
Some industry observers who know him well say that if anyone can fix Putnam, Reynolds is the one to do it. "He knows something from Fidelity that most other asset management CEOs have forgotten: A smaller, motivated, accountable team can actually cost less and improve the investor experience," says Donald Putnam, a distant relative of George Putnams, who is managing partner at New Yorkbased Grail Partners, which advises asset management firms on mergers and acquisitions.
In taking on the Putnam challenge, Reynolds has the benefit of the patient and deep-pocketed Desmarais family. Patriarch Paul Desmarais, 84, known as the Sage of Sagard after his estate in the Charlevoix region of Quebec province, dropped out of law school in 1951 to buy his fathers ailing commuter bus company in the nickel mining town of Sudbury, Ontario, for a dollar, built it into a major bus operator and then diversified into financial services. Today, his holding company, Power Corp. of Canada, is the countrys fifth-largest business by revenues, generating C$37.1 billion ($30.3 billion) last year; net income was C$868 million. Through its Power Financial subsidiary, it controls Great-West Lifeco, the biggest life insurer in Canada, with a roughly one-third share of the market and is the countrys largest fund manager, overseeing a combined C$101.7 billion in assets at Great-West and three mutual fund managers: Counsel Group of Funds, Investors Group and MacKenzie Financial Corp.
Having grown as large as they can in their home market, the Desmarais family has long had designs on the U.S. Putnam is "a small piece financially but a large piece strategically" of the family empire, says Power Financial CEO Orr. "We are a long-term shareholder, we are committed to making Putnam a success, we think we have the right team in place, and we are very, very supportive."
They had better be, because Putnam has already taken a toll on its owners. Notwithstanding Putnams sorry recent record, several companies bid for the brand when Marsh & McLennan put it up for sale in November 2006. Bidders included Atlanta-based global asset management firm Invesco and Pioneer Investments, the fund management arm of Italys UniCredit Group. Great-West won the contest in April 2007 by paying a whopping $3.9 billion for Putnam and its 25 percent stake in private equity firm Thomas H. Lee Partners. After subtracting $550 million in tax benefits on the deal and a $350 million value on the THL stake, Orr puts the actual cost at about $3 billion. That price tag was at least three times the benchmark valuation for long-only asset managers, which is roughly ten times expected earnings before interest, taxes, depreciation and amortization. Putnam did not disclose ebitda, but it did report an operating profit of $83 million in 2007.
The plunge in equity markets since the acquisition has made the deal all the pricier. Putnams assets under management plummeted 41 percent last year, to $105.7 billion from $178.5 billion, with redemptions causing $17.2 billion of the decline. Operating profit fell to just $3 million. The firm posted a net loss of $19 million after paying severance for the departures of about 50 professionals and 10 percent of support staff. Great-West took a $1.18 billion write-down last year to reflect the deterioration in Putnams value.
Reynolds has been driven to succeed for as long as he can remember. The son of a Metropolitan Life Insurance Co. salesman and a hospital switchboard operator, he grew up with three siblings in a modest house in Clarksburg, West Virginia, a gritty industrial town with glass factories and coal mines nearby. He started doing odd jobs at the age of 13, first shining shoes for tips at the New York Hat Store in Clarksburgs shopping district and later working as kitchen help at a girls summer camp. He also played quarterback for his high school football team. "I was always very ambitious. I always wanted more," he says. He earned a BA in business administration from the West Virginia University College of Business and Economics in 1974, working night shifts at a Carnation milk factory his senior year to help pay his way.
After graduation, he took a sales job in the trust department of a local bank, Wheeling Dollar Bank (now WesBanco), then moved two years later to a similar position at North Carolina National Bank, now part of Bank of America Corp., in Charlotte. He climbed swiftly there and ran the trust departments sales and business development from 1980 to 1984.
Reynolds joined Fidelity in 1984 as senior vice president, and he quickly established a reputation as a business builder. Promoted in 1986 to head of sales of Fidelity Management Trust Co. (now Pyramis Global Advisors), which invests money for institutional clients, he increased the units assets under management from $1 billion to $12 billion in just three years. Based on that success, chairman Johnson in 1989 tapped Reynolds to launch a subsidiary, Fidelity Institutional Retirement Services Co., to break into the 401(k) business. The strategy he developed focused on first-rate asset management, service and employee education. "I said, If we can build the best in each of those three disciplines and put it together as a package, then no one can touch us," Reynolds recalls.
In 1996, Johnson promoted Reynolds to oversee all of Fidelitys institutional operations. He maintained growth by constantly reorganizing the investment management and client-facing teams. "Once the teams became a certain size, we broke them apart and created smaller teams, and that way we focused on quality, cost, control," Reynolds says. The 401(k) business had grown to about $300 billion in assets by the time Reynolds was promoted to chief operating officer of Fidelity in 2000 and to some $600 billion by the time he left the company, more than twice the size of the No. 2 player, Capital Groups American Funds. In the process he also established Fidelity as a leader in the use of technology to reach investors on the Internet.
Under his tenure as COO from 2000 to 2007, Fidelitys assets doubled, to $1.5 trillion. The bull market kept the 401(k) business roaring ahead, and when growth in the institutional business slowed, Reynolds in 2004 replaced its senior managers, renamed the unit Pyramis and saw assets grow at a compound annual rate of 21 percent for the next three years, ahead of the 15 to 20 percent pace of its rivals. But he began sensing he had hit a plateau at the firm and started looking for an outlet. In 2006, Reynolds, who had officiated college football games in the Ivy and Patriot leagues for 14 years, told Johnson he was making a bid to become the next commissioner of the National Football League. The NFL looked at nearly 200 candidates and in August 2006 interviewed five finalists, three of whom including Reynolds were from outside the NFL. Reynolds lost out on what he called "the chance of a lifetime" to NFL insider Roger Goodell. Mentally, he had one foot out of Fidelitys door. Eight months later he walked out for good.
George Putnam founded his firm with a single fund in 1937 three years before Congress passed the Investment Company Act of 1940, which gave birth to the U.S. mutual fund industry and built it into an American institution. New Yorkbased Marsh & McLennan bought Putnam in 1970, and under its ownership the firm pushed into institutional money management. But that business was flagging in 1985 when Lawrence Lasser, a 16-year Putnam veteran, became CEO. Lasser embarked on a dramatic expansion, launching a variety of retail growth, value and bond mutual funds. He also opened offices in London and Tokyo, positioning Putnam as a premier manager of international equities. In the latter half of the 1990s, the firm rode the run-up of technology stocks; assets soared, and revenues more than doubled, from $1.3 billion in 1996 to $3.2 billion in 2000. Lasser was blindsided by the Nasdaq crash, however, and by December 2000, the firm had lost $31 billion in assets; revenues dropped 25 percent in 2001, to $2.4 billion.
"Lassers commitment to growth equities in the late 1990s, particularly in technology, was the beginning of the undoing of Putnam," says Geoffrey Bobroff, president of Bobroff Consulting, an East Greenwich, Rhode Islandbased mutual fund consulting and advisory firm.
In October 2002, Lasser hired Charles (Ed) Haldeman from Delaware Investments, where he had been CEO, to serve as CIO and help Putnam adapt to the new value environment. Haldemans solution was to develop a large quantitative research team with some of its members stationed in the fundamental stock-picking teams. Ostensibly, the quants were simply supposed to screen stocks for selection by the fundamentals teams, but they actually participated in making investment decisions. "I didnt understand how this added value," says Reynolds.
"Haldeman never delivered on his promise to fix the investment division, especially the equity products," says Michael Travaglini, executive director of the Massachusetts Pension Reserves Investment Management Board, which had been a longtime Putnam investor.
In 2003, Putnam became embroiled in the market-timing scandal, one of a dozen firms accused by the Securities and Exchange Commission of allowing a few large investors to trade rapidly in and out of mutual funds at the expense of small investors. Lasser resigned in November 2003, just days after the SEC made its accusation. Haldeman was promoted to CEO and spent months negotiating with the SEC and the Commonwealth of Massachusetts.
Putnam stood out during the market-timing scandal because two of its fund managers Omid Kamshad and Justin Scott were charged in a separate SEC civil lawsuit that accused them of personally trading rapidly in and out of their funds. In April 2004, Putnam agreed to pay $110 million in a settlement with the SEC and Massachusetts. (Three years later Scott and Kamshad settled with the SEC and the state, agreeing to pay a total of $1.5 million in fines and penalties and accepting a one-year ban from the industry.) Many institutional investors bolted. Massachusetts Pension Reserves Investment Management, which like many pension funds was required by its rules to fire any firm that was caught up in the scandal, withdrew $1.75 billion in assets. Putnams total assets dropped by $27 billion, to $213 billion, in 2004, a year in which the Standard & Poors 500 index rose 9 percent.
Events outside Putnams control also hurt the firm. In January 2005, parent Marsh & McLennan agreed to pay $850 million to its insurance brokerage clients to settle fraud and bid-rigging charges filed by thenNew York Attorney General Eliot Spitzer. Speculation that Marsh would sell Putnam to raise cash, which it ultimately did, hampered Haldemans efforts to win back clients.
So did poor results. Throughout Haldemans tenure as CIO and CEO, from October 2002 to July 2008, Putnams funds delivered average annual returns of 8.5 percent, a worse showing than 61 percent of their peers, according to Lipper, a mutual fund rating agency based in Denver.
Many funds continue to underperform. Only eight of the 60 Putnam mutual funds traded by Lipper were in the top quartile of performers in 2008; 14 were in the second quartile, 15 in the third, and the remaining 23 funds in the bottom quartile. Last year Putnams funds suffered $15.9 billion in net outflows, with more than 90 percent of that coming from retail offerings, which represent roughly half the firms assets. Excluding money market funds, since 2005 investment flows have been negative every year, to the total tune of $81.3 billion.
Reynolds had been on the job for less than two months when yet another crisis hit. On September 16 the Reserve Primary Fund, one of the largest money market funds in the U.S., announced that its share price had fallen below the sacred $1.00 mark because of losses on securities of the collapsed Lehman Brothers Holdings, sparking a rush of redemptions across the industry. The $12.3 billion Putnam Prime Money Market Fund was hit even though it had no exposure to Lehman. On September 18, Reynolds closed the fund; four days later the Federal Reserve Board announced an insurance program for money market managers. But the move came too late for Putnam, which took a $90 million charge to transfer Putnam Primes assets to Pittsburgh-based fund manager Federated Investors, resulting in a net loss of $18 million in the quarter ended September 30.
If Reynolds had been looking for an excuse to shake up management, the Putnam Prime debacle handed it to him on a platter. He accepted the resignation of chief of investments Kevin Cronin, who had been with the firm for 12 years, and did not replace him, believing that recruiting top talent and giving them the freedom to call their own shots would produce better results. Then he hired Jeffrey Carney, who had been head of client relations for all retirement products at BofA, as head of global marketing and product development. He also recruited a new chief financial officer, Clare Richer, and a new financial controller, Andra Bolotin, both former Fidelity CFOs.
Next, in November, Reynolds took an ax to Putnams quantitative research team, reducing it to ten from 25 and limiting their role to screening stocks for the fundamentals teams.
Reynolds has already recruited 27 new portfolio managers and analysts while slimming Putnams ranks of investment professionals by 27, to a total of 149. Many of the new recruits worked with him at Fidelity. In November he hired Nick Thakore and Robert Ewing, a pair of portfolio managers who had managed large-cap funds at Fidelity until 2002, when they defected to RiverSource Investments, a unit of Minneapolis-based Ameriprise Financial. To back them up, Reynolds brought in three other portfolio managers with long track records two from Kansas City, Missouribased American Century Investments and one from MFS Investment Management in Boston as well as a new head of equity trading from RiverSource, and about a dozen analysts to work at Putnams offices in Boston, London and Tokyo.
The India-born Thakore, 41, manages a team of 17 analysts and serves as portfolio manager of the $2.3 billion large-cap growth Voyager Fund, which fell 36.9 percent last year but still performed better than 81 percent of its peers. Thakore says hes taking full advantage of the autonomy that Reynolds has bestowed upon him. "This market creates opportunities that are unusual," he says. "Its a fantastic stock-picking environment when there is confusion and uncertainty."
Ewing, a 40-year-old native of Darien, Connecticut, also welcomes the carte blanche Reynolds is offering. "Bob has given us the latitude and authority that we need to build a new organization over time," he says. "The new culture here is all about performing." By that score, Ewing has his work cut out for him. His value-oriented Putnam Fund for Growth and Income fell 38.8 percent last year, a worse performance than 69 percent of comparable funds, according to Lipper. "Their track record is a little bit discouraging," Morningstars Tan says of Ewing and Thakore.
To give portfolio managers and analysts an incentive to perform, Reynolds is breaking with tradition at Putnam by linking pay to performance. Managers and analysts of funds that are in the top quartile over a rolling three-year period will receive a full bonus that is a multiple of their base salary. Those whose funds are in the second quartile will receive a half bonus, and those who are in the bottom two quartiles will get no bonus. "All this is new," says Reynolds. "In the past it was not much of a meritocracy."
The CEO also believes that Putnam needs new products to attract investors. Working with Rob Bloemker, head of fixed income, he devised retail versions of a series of absolute-return funds that Putnam had been selling to institutional investors. The funds receive performance fees on returns above the London interbank offered rate. Reynolds seized on the idea of using performance fees to convince investors that Putnam was sharing in their risk.
In December the firm launched four different versions of the Putnam Absolute Return Funds, two of which invest in equity as well as fixed income. The funds target returns above three-month U.S. Treasury bills of 1, 3, 5 and 7 percentage points, respectively. The funds charge a fixed base fee, plus a performance fee that varies with returns.
In January, Reynolds rolled out nine Global Sector Funds, which he says offer best-of-breed stocks in different sectors from around the world. The funds are based on existing Putnam products that specialize in domestic sectors such as utilities and health care.
To hear Reynolds tell it, institutional investors were beginning to warm to Putnam even before he arrived, indicating that the firms brand remains a draw and that his turnaround plans are being sown in fertile ground. In the first half of 2008, for example, South Carolina Retirement Systems, which had been conducting due diligence on Putnam for a year, invested $700 million in Putnam Total Return, an institutional balanced equity-and-debt strategy that few other managers offer, says Robert Borden, CIO of the South Carolina fund. Managed by Jeffrey Knight, head of global asset allocation at Putnam, that strategy turned out to be one of South Carolinas two best-performing accounts in 2008, notes Borden.
Reynolds will have to do much more if Putnam is to become competitive again. But he insists that the firm will emerge from the current financial turmoil stronger than when it entered. "Everyone is going to come out of this market in pretty much the same condition," he explains. "The question is, Who has invested through it, who has made their products better, who is coming out with new products that meet the type of market environment we are in?"