State pension board fires Putnam Investments
By Deborah Adamson
Advertiser Staff Writer
The state Employees' Retirement System voted yesterday to fire Putnam Investments and pull back the $440 million managed by the firm after it was charged with securities fraud.
Hawai'i joined a growing number of states whose public employee pension plans have fired Boston-based Putnam, the fifth-largest mutual fund firm in the country. In the past two weeks, states have taken away $6 billion from Putnam as confidence eroded in the scandal-tainted company.
The ERS board said its action against Putnam, which managed 5.5 percent of ERS assets, was based on a lack of trust, not performance.
"We have to hold ourselves as board members to the highest standards and we have to hold the people who work for us to the highest standards," said Rick Humphreys, vice chairman of the state pension fund board of trustees.
The decision to fire Putnam will not result in any losses to 93,000 public employees and pensioners covered by the plan. The pension plan's costs will be limited to some trading expenses as it switches from one money management firm to another.
The money managed by Putnam will be put in an index fund that tracks the S&P 500 until the board chooses another manager, which could come as soon as Nov. 21.
Regulators have charged that two of Putnam's money managers engaged in market timing. In market timing, fund shares are rapidly traded. Such activity boosts trading costs and volatility in the fund to the detriment of long-term investors. While not illegal, market timing is prohibited by Putnam's policy.
Putnam fired the two managers. One of them, Justin Scott, had oversight over large-cap growth stock investments in which the state pension plan had money, said ERS consultant Callan Associates.
When the market timing activities were discovered, Putnam told the managers to "cut it out" but didn't go much further, Ron Peyton, president of San Francisco-based Callan, told the state pension board. The response later "created controversy and outcry over corporate governance issues in Putnam."
"The action and inaction of management has been a troubling point," added Kimo Blaisdell, the state ERS chief investment officer.
Putnam's firing is a warning to other managers, Humphreys said.
"We will do that to any manager that we find are unethical in their dealings," he said.
The ERS board also voted to send inquiry letters to two other investment firms, Invesco and Jennison, an indirect subsidiary of Prudential, which are under investigation for conducting trading activities that favored some investors to the detriment of others.
Invesco handles $260 million in real-estate assets for the state pension plan while Jennison manages $207 million in small-cap stocks. The board is seeking more information about any investigations.
The state pension plan also reported yesterday that its investments grew by 2.89 percent in the quarter ended Sept. 30, compared to the quarter before that. The median growth in the quarter for large public funds tracked by Callan Associates was 3.05 percent. Over the past 12 months, ERS has returned 16.95 percent vs. 17.65 percent for large public funds.
The board also took action on underperforming managers. It left Bank of Hawai'i, Schroder Capital and Capital International on its watch list and took off Pacific Income Advisors because of improved performance. The pension added Bank of Ireland and Bradford & Marzec to the watch list; it also decided to send warning letters to T. Rowe Price and Independence Investment Associates for underperformance.
Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
