Hawai'i fund cuts ties with Putnam

By Deborah Adamson
Advertiser Staff Writer

The board of trustees for the state Deferred Compensation Plan, a retirement fund for 30,000 state employees, voted yesterday to kick out a $43 million mutual fund managed by scandal-tainted Putnam Investments.

The $1 billion retirement plan, recently renamed Island Savings Plan, will remove the Putnam New Opportunities Fund from its list of funds offered to participants and replace it with another large-cap growth fund within a month.

"Given what's gone on over the past weeks ... we have to err on the side of caution," said Kathleen Watanabe, chairwoman of the board.

The money employees had invested in Putnam was not at risk, but the actions of the company eroded trust among investors. Money in mutual funds is kept in a trust and would not be lost even if a fund company failed.

Putnam and other mutual fund companies have been accused of improper trading, such as market timing and illegal late trading, which favors certain clients at the detriment of long-term investors.

Last week, Boston-based Putnam Investments settled fraud charges with the Securities and Exchange Commission but remains under investigation by Massachusetts regulators. Allegations of improper market timing have led to the ouster of its chief executive.

In late October, the board of Island Savings Plan decided to retain Putnam Investments after getting feedback from a consultant and receiving assurances from Putnam that trading improprieties were limited to certain international funds.

A week after the board's decision, the state Employees' Retirement System board of trustees voted to fire Putnam, which handled $440 million of participants' money in separately managed accounts.

Yesterday's change of heart stems from the expanding investigation of Putnam, concerns that its management may become distracted, and the continuing outflow of money from the company, Watanabe said.

Since news of the probe came out, Putnam has lost about $21 billion in assets, with several state pension funds firing the company.

Watanabe said the board had put the Putnam fund on probation since last year for underperformance.

The Island Savings Plan trustees did not take any action on about $728 million handled by Prudential. Earlier this month, seven of its brokers were charged with market timing of funds.

Bloomberg News Service contributed to this report. Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.