Now that Putnam Investments has reduced fees to keep up with larger competitors, the looming questions are whether other midsize fund companies will be compelled to do the same (odds are, yes) and whether this will work (early predictions say no).
The Boston fund company announced plans Tuesday to cut fees on retail mutual funds. Jeff Carney, a managing director and the head of global marketing, products and retirement for the unit of Canada's Power Financial Corp., said the company hopes its price-cutting will help it rebuild assets under management. It managed $102.8 billion at June 30, down 40.2% from a year earlier.
Of the total, $54.6 billion was in retail mutual funds, down from $83.7 billion a year earlier, according to Lipper. Putnam said that it plans to cut fees on its fixed-income funds by an average of 13%, to 46 basis points, and on its asset allocation funds by 10%, to 57 basis points. Putnam also said it will eliminate "wrap" management fees on certain retirement funds, saving about 5 basis points.
All the pricing changes are to take effect Saturday.
Vanguard Group, which has the lowest fees, has an average expense ratio of 20 basis points. The industry average is 119 basis points, according to Vanguard.
"Our goal is to see assets under management and gross sales go up and to increase our share in the next few years," Carney said. "We have to have a competitive offering, both in terms of products and pricing, to do that."
Geoffrey Bobroff at Bobroff Consulting in East Greenwich, Conn., said competing on price with Vanguard and Fidelity Investments "is a tall order."
"It is tough for a $100 billion organization to compete with a trillion-dollar organization on price," he said. "They just have so many more economies of scale. This is certainly a positive step, though, for Putnam. They are closing the gap with Fidelity and illustrating to customers that they recognize the economic climate."
Bobroff said Putnam's announcement would force other midsize fund companies to trim prices. "We are in a difficult financial environment, and fund companies like Putnam have already had to downsize, and now they are being forced to get creative," he said. "The pressure is on the smaller companies. I think we'd like to see others follow, but I don't know if everyone can."
Melissa Nassar, a principal in Vanguard's financial adviser services, said she expects other fund companies, particularly public ones, to reduce fees.
"We are at an inflection point where firms have to think about survival," she said. "Asset managers are in the business of gathering assets, and one way to do that is to make products more appealing by making them less expensive."
Calls to several midsize companies were not returned, but Shelley Peterson, a spokeswoman at Janus Capital Group, said the Denver fund company, which has $132.6 billion of assets under management, has no plan to reduce the fees on its products. Fees on its fixed-income products are already "below the average," she said.
Bobroff said if Putnam wants to compete in the intermediary and retirement markets, cutting fees is not enough. "Things are less price-driven than performance-driven," he said.
Putnam said it will adopt "performance fees" on some funds to reflect their track records against a benchmark.
"Costs certainly do matter," Bobroff said. "It isn't a surprise the three largest players also have the lowest fees. A lot of these players with $50 billion to $100 billion in assets have to determine if they can afford to be competitive."