Pension board to review mutual fund company
By Deborah Adamson
Advertiser Staff Writer
One of the major mutual fund companies charged with fraud in the expanding mutual fund scandal manages half a billion dollars in retirement money for state and county employees and pensioners.
Boston-based Putnam Investments handles $440 million, or 5.5 percent, of assets in the state Employees' Retirement System. Putnam, the nation's fifth-largest fund company, also manages $43 million in the state's Deferred Compensation Plan.
"We are very concerned about everything that's taking place in the mutual fund industry and Putnam in particular," said Kimo Blaisdell, chief investment officer of the Employees' Retirement System.
Blaisdell said the pension plan's board will discuss Putnam at a meeting tomorrow. Hired in early 2000, Putnam is the pension plan's sixth-largest money manager.
Since September, state and federal regulators have charged a growing number of companies, Putnam included, with illegal late trading or improper market timing of mutual fund shares at the expense of long-term investors.
At least six other state pension plans have fired Putnam in recent weeks, pulling more than $4 billion from the firm. They are in Pennsylvania, Iowa, Massachusetts, Rhode Island, Vermont and New York. California is considering the issue.
The allegations also led to the resignation of Lawrence Lasser, Putnam's chief executive.
Putnam has said that it is cooperating with regulators but denied that it committed fraud.
Last week, the board of the state Deferred Compensation Plan decided at its annual meeting to stay with Putnam after considering its investment consultant's advice. The decision could change if new charges surface.
"It's status quo," said Kathleen Watanabe, the board's chairwoman. Currently, "there is no threat or danger to the investment money."
Watanabe said a Putnam representative told the board last week that fraud allegations center on market timing in some international funds, which the state Deferred Compensation Plan does not offer to members.
Almost 8,250 people are invested in the Putnam New Opportunities fund through the Deferred Compensation Plan. The plan has almost $1 billion in total assets, covering 43,000 people.
For the retirement system's Blaisdell, the bottom line in the ongoing investigations is the erosion of trust.
With Putnam insiders accused of being involved in improper trading, "it calls into question the integrity and ethics of the firm," he said. "Putnam is losing clients and losing assets. (We're concerned about) what effect that will have on the firm itself. Litigation could be a distraction."
Besides Putnam, the list of firms under investigation include Janus Capital Group, Bank of America, Bank One and Strong Capital Management. Seven former Prudential brokers also had been charged with market timing.
In market timing, investors or fund company insiders would trade in and out of shares quickly. Although market timing isn't illegal, such activity boosts trading costs and volatility, which could hurt the returns.
With late trading, favored investors were allowed to illegally buy or sell mutual fund shares after daily prices were set to take advantage of late-breaking developments that would affect prices the next day.
Because the state Deferred Compensation Plan offers mutual funds, it's more vulnerable to Putnam's alleged improper trading than the state pension plan.
The pension system uses separately managed accounts, where money is invested directly into securities such as stocks and bonds and not funds. Thus, returns largely are protected from trading of fund shares.
As such, the impact on the pension returns of 93,000 state and county employees could be minimal. However, participants in the $8 billion plan would still bear the cost of switching money managers and getting in and out of securities.
Putnam's investment record could also play a role in the retirement system's decision on its fate.
In the past three years, pension funds invested in U.S. large-cap growth stocks by Putnam have lost 17.59 percent annually on average. That compares with an 11.2 percent annual loss for the Standard & Poor's 500 Index and a decline of 18.69 percent for other managers using the same investment style.
If the pension plan's board decides to fire Putnam, it could reallocate funds to existing managers or find a new money management firm. The latter option would take at least a month, because the board would want to carefully screen other fund companies.
This week, legislation to improve mutual fund transparency and disclosure was introduced in Washington by a bipartisan trio that included U.S. Sen. Daniel Akaka, D-Hawai'i.
"Trust is the cornerstone of effectively functioning markets," Akaka said in a hearing earlier this week. "The abuses involving mutual funds that have been raised include having different sets of rules for large and small investors, ethical misconduct, and individuals enriching themselves illegally at the expense of fund shareholders."
Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
