Trying to Fix Putnam Putnam funds boss Ed Haldeman hopes his reforms will win back your trust. The next step: Improving performance
(MONEY Magazine) – Six months ago we called it the greed machine. Putnam Investments, the country's sixth-largest fund family, was under fire from the Securities and Exchange Commission and Massachusetts regulators over charges that a few of its own managers made quick, in-and-out trades in its funds. But we saw something worse: a company that was obsessed with marketing rather than sound investing principles, and that had a nasty habit of sucking its customers into risky or ill-timed investments. (And with high fees to boot.)
In April, Putnam settled with the regulators for $110 million. And CEO Charles "Ed" Haldeman, who was promoted to the job after the scandal broke, has made some meaningful changes. He's cut fund expenses, improved disclosure to investors and replaced half of the firm's top 20 executives. What remains to be seen is whether Putnam can deliver better, more consistent performance to investors. MONEY's Amy Feldman recently spoke with Haldeman about what he's accomplished so far, whether he's worth $13 million--and why investors should trust Putnam again.
Q. Of all the changes you've made so far, what is the most important?
A. I would put fee reductions high on the list. That should cost us $35 million a year, and they were voluntary. I think that is a strong statement about us doing things that reduced our income but were good for shareholders.
Q. So what are your top priorities now?
A. For many, many years this company was thought of as one of the most prudent places to put your money. We'd like to earn back that reputation.
Q. Why should investors believe you'll be able to do that?
A. In plenty of asset classes, our record is beginning to show signs of consistency. We need to do it for a longer period of time so that people will see superior results. Look at the percentage of our assets that rank in the bottom quartile of performance, because that is where you hurt investors. Only 6% of our assets are in the bottom quartile.
Q. How, specifically, will you improve fund performance?
A. One thing is to make clear what a fund's goals are and to align managers' compensation with those goals. We want to be consistently above average. As a result, a manager's one-year performance counts for only 20% when we calculate his bonus. Three-year performance is 40%, and five-year returns are 40%. Second, with respect to that one-year piece, once managers get into the top half of their category, they max out. They get nothing extra for being in the top 10%. So there's no incentive for taking big, extreme positions.
Q. How have Putnam employees responded to all these changes?
A. Many people thought we would have significant turnover in our investment people because of the problems last year. Instead, turnover is way down and retention is way up.
Q. Have you invested in Putnam funds?
A. I have some of my money in Putnam funds.
Q. Do you have a timetable for fixing Putnam?
A. I don't have a contract. I'm trying to do a good job so they'll keep me around. I'd like to think that in two to three years it will be absolutely clear to everybody how good Putnam is in terms of investing and client service. That is my hope and expectation, but I am realistic enough to understand that there is some randomness in terms of initial investment results.
Q. You made $13 million last year. Why are you worth $13 million?
A. I don't think I'm worth the $13 million I got paid last year. Unless you can dunk, I don't think anyone is worth that kind of money. Having said that, when Putnam and Putnam's parent Marsh & McLennan were recruiting me, part of that was compensation promises. The compensation I have gotten over the past two years was based on that recruitment and those promises. I grew up in a normal American middle-class family, and I know how hard people work and what normal compensation is. Given that, it is very hard to say anybody is worth the kind of money that I got paid. It just happens to be the way the supply-demand relationship works in our business.