When Putnam Investments named Ed Haldeman president and chief executive officer in November 2003, he says, he knew he needed to restore investor confidence one customer at a time.
"At 2 p.m. the day I was hired I was sitting in the office of the treasurer of the Commonwealth of Massachusetts," Mr. Haldeman said in an interview last month. "We had lost Massachusetts and California" as pension-fund management customers, "and we had to get them back."
The two states fired Putnam in late October, the same week that federal and state authorities had made Putnam the first mutual fund company charged with allowing market timing of its funds. The Securities and Exchange Commission sued and then the company fired Mr. Haldeman's predecessor, Lawrence J. Lasser.
Mr. Haldeman said he knew that to get investors back in the fold he had to regain their trust and that that had to begin with Massachusetts. "It was so visible to the public that we had been fired in our own state," Mr. Haldeman said. "We had to get them back."
Putnam had hired Mr. Haldeman the year before to be its co-head of investments. In promoting him to CEO, it had to be hoping he could repeat what he had done as chief executive of Delaware Investments in Philadelphia. Starting in 2000 with a company that had suffered through 10 years of outflows, he left two years later for Putnam from a firm that had inflows.
Mr. Haldeman joined a company in 2002 that had serious defects. Investors were pulling out in droves, and a streak of declines in assets under management that began in April 2001 has continued at least through December. If Mr. Haldeman succeeds, his turnaround approach will find emulators; otherwise, his tenure would be just a footnote in the decay of a once-majestic investment house.
He said he is realistic about the task. "It could take three years here to turn things around," he said, "but I know it can happen here."
His first challenge was to alter perceptions in the periodic meetings he started with Massachusetts Treasurer Timothy P. Cahill and his chief of staff.
He talked about internal changes at Putnam, changes that swept away 25 of the 50 highest-paid executives and installed a new chief compliance officer, general counsel, chief financial officer, chief administrative officer, and head of operations.
But mostly, Mr. Haldeman recalled, he talked about the oversight Putnam had devised to ensure "zero chance" of further trading abuses at the company. "We had to find a way to save this relationship. We had to find a way to restore the faith with one of our biggest customers," he said. "We knew that we had to get rehired."
"We had to prove to them that Putnam was making changes but we were not changing the quality of our investment management," he said.
The effort began to pay off when, last July, Massachusetts Pension Reserves Investment Management put out a request for proposals to hire a new small-cap value manager. The role was smaller than the one Putnam had as one of the top managers in the pension plan prior to the mutual fund scandal, but the Boston fund company submitted a proposal and was rehired on Dec. 1.
Eileen O'Connor, a spokeswoman for the state treasurer's office, said the meetings with Putnam executives and its own due diligence made the state feel comfortable with a partial reinstatement for Putnam. "After meeting the treasurer, we felt, especially with the new leadership the company had with Mr. Haldeman, that they were turning things around," she said.
Before the allegations of market timing, she said, Putnam had managed $1.7 billion for Massachusetts pension plans. Under the new contract, Putnam will manage $250 million. And Ms. O'Connor said the treasurer's office will closely monitor the company.
Since then, Putnam has been hired to manage state pension assets in both Michigan and Tennessee. Mr. Haldeman said his approach is not flashy. He said he does not plan any elaborate strategic change or broad launching of new products. Putnam will make internal changes, insulate its portfolio managers, and slowly and steadily restore business, he said.
The company has not yet turned the corner, he said. Putnam, a unit of Marsh & McLennan Cos., says it had 3,505 employees at Dec. 31 and managed $213 billion of assets. Both numbers were down sharply since Mr. Haldeman took over; the company managed $263 billion early in the trading scandal; and it had 5,345 employees as recently as Dec. 31, 2003.
Financial Research Corp., a Boston firm that tracks mutual fund flows, said Putnam had $27.1 billion of outflows from its equity and bond funds in 2003 and lost another $28.89 billion in 2004.
"Remember, the problem that hurt Putnam only happened five quarters ago," Mr. Haldeman said. "The problem is just too recent. People still aren't comfortable with us to return. It is like your parents always told you - you can lose a good reputation overnight, but it takes a long time to regain it once you have lost it."
To create inflows, Mr. Haldeman said, Putnam must develop more consistent performance.
Mr. Haldeman said in 1999 Putnam's funds performed well but that in the bear market they slumped across the board.
"We need to produce performance. We have to be consistent, dependable, and superior to the competition, and that has not happened yet," Mr. Haldeman said. "Our performance has just been a series of droughts and floods."
Andrew Schwedel, a partner in Bain & Co. who follows the fund industry, said Putnam was the second-largest fund company in 1996 but by 2001 was not even in the Top 10. To change its course, Putnam must remedy its problems from the inside out, he said.
"They have got to get their performance story right," he said. "First and foremost, if a fund company cannot tell a good story with performance, a firm cannot get traction with sales."
Mr. Haldeman said, however, that there is no quick fix. Putnam is not worried about short-term considerations and is not looking for the next "hot product." Since he took over as chief executive, the company has added only one product, a floating-rate bond fund last summer, while closing seven to 12 other funds.
Other fund companies scarred by the trading scandals have introduced fresh products in an effort to bounce back.
Steve Scheid, the chairman and chief executive officer of Janus Capital Group, said during an earnings' conference call last week that the Denver fund company will look to aggressively launch products this year and look for potential acquisitions in an effort to turn around the asset declines that, like Putnam's, began during the bear market early in this decade.
Janus was among the first fund companies named in New York Attorney General Eliot Spitzer's investigation of companies said to have allowed some investors to market-time their fund trading.
Mr. Scheid said that, as a result of some of the trading abuses, his company has started a compensation plan for portfolio managers and top executives that links their pay to Janus funds' performance. The firm suffered an $18.6 billion decline in assets last year.
Mr. Haldeman said Putnam is really an exception to the rule in accepting that there is no quick fix in the wake of the fund scandals. "We are not a proponent of launching a lot of products," he said. "Many of our competitors have launched a lot of products to increase sales, and that is really not in the best interest of investors."
Typically when a fund company starts a "hot product," Mr. Haldeman said, it is only after the sector has been growing for two to three years, so "you are getting customers to invest in an asset class when it is at its peak and there is a lot of hype and excitement about it."
"Our strategy is not to just launch a bunch of new products," he added. "We want to offer the right mix and produce performance." For most investors, he said, the best thing is to invest in a single, fully diversified fund that contains a mix of equity, fixed-income, and international stocks.
Mr. Haldeman said he does not want to ask his portfolio managers for "blowout" results. Putnam's strategy is to tell its portfolio managers to relax, he said.
"We have to be certain not to rush things too much," he said. "I am convinced that if you try too hard you are only going to make things worse. If you are a baseball coach and you tell a player, 'Hey, don't strike out,' I think you have only increased the probability that they are going to strike out."
External stability and an internal overhaul are Putnam's answers, Mr. Haldeman said, but this required him to change the culture at Putnam, and that meant major internal changes.
The first step was admitting its mistake. Putnam launched a television ad campaign during the NCAA College Basketball Tournament last March to admit what it had done wrong and what it was doing to correct itself. The company plans another ad campaign in mid-February to update customers about its progress and continue to build trust.
Last September, Putnam adopted an array of protections and disclosures for investors that gave retail investors the same information that large institutional investors demand, and receive. These protections were intended to illustrate that Putnam is committed to going beyond its settlement with federal and state regulators and the requirements of the SEC.
"We have become an industry leader in terms of disclosure and integrity," Mr. Haldeman said. "In 2000, we made a mistake [when the trading abuses occurred], and we are going to make sure that this is a mistake that never happens again."
"Now, we set the standard for disclosure," he added. "We have put in procedures for disclosure to do everything possible to make certain that this never happens again."
The disclosure guidelines were commended by Calpers and Calstrs, the state of California's retirement subsidiaries, and Putnam was allowed to compete for retirement business in the state less than a year after being fired.
The changes also have meant layoffs. By November 2004, Mr. Haldeman had reduced staff by 11% and pledged to cut his work force a further 2%. He said he had to reduce the layers of management at Putnam in order to create a more "entrepreneurial" environment for money management.
"We are making changes to our internal structure, and I just want to be careful," he said. I want this to get done fast more than anyone, but I don't want to push too hard [so] that we collapse."
Bain's Mr. Schwedel said the economy is much different today than it was five years ago at Delaware Investments when Mr. Haldeman joined it.
"Fund companies have to realize that ownership of mutual funds has really plateaued," he said.
Mr. Haldeman said he is realistic. Putnam has started to see improvement. In addition to regaining Massachusetts and adding Michigan and Tennessee as institutional customers, it has also seen improvement in its redemption rates, moving it closer to the industry average, he said.
"We want to be like a swan on the lake," he added. "We want to appear nice and peaceful on the exterior while underwater we are paddling like crazy."
