Mutual Fund Fees

I have not written at length about the mutual fund scandal as of yet but this press release from 2009 I happened to come across and thought I would offer quick remarks. Having followed mutual funds for many years, I have come to the conclusion that most (not all) are simply a part of the scam I coin as “Wall Street Greed.” The media entices people to invest in mutual funds saying they are great vehicles because they offer professional management, built in diversification and convenience.

The dark side of some mutual funds is what takes place behind the scenes: market timing, excessive fees and poor performance (relative to benchmark stock indices), shelf space payments – all the stuff you have absolutely no clue about. When all the smoke clears it becomes pretty apparent of what Wall Street’s motive is…to keep your money as long as possible. Why? Because Wall Street makes its money by managing your money…plain and simple.

So when a company like Putnam got exposed during the mutual fund scandal (which continues to this day) for its role in hurting its shareholders with its illegal practices they have to find away to “reinvent themselves” after investors in their funds left in droves. Thus it peaked my interest when I came across this press release in the Boston Globe:

Putnam fund fees will drop or be linked to performance

By Todd Wallack, Globe Staff | July 29, 2009

Putnam Investments, which has drawn complaints from some investors for charging high fees while delivering sub-par returns over the past decade, announced plans yesterday to dramatically overhaul its fee structure.

The Boston money manager said it plans to lower the management fees for many of its fixed income funds on Aug. 1, to make them more price-competitive. And it plans to tie fees for many of its other funds to performance, so Putnam will only be paid a premium if it delivers strong results and will be paid less if it stumbles badly.

“This puts us on the same side of the table as the shareholder,’’ said Putnam chief executive Robert Reynolds.

Among the more dramatic examples, the Putnam American Government Income Fund’s management fee will be reduced from 0.62 percent of the money invested to 0.41 percent a year. The average fee reduction for bond funds would be 13 percent, and 10 percent for asset allocation funds. Putnam has $102.8 billion in assets under management.

The new price structure is just the latest in a series of changes introduced by Reynolds, a longtime Fidelity Investments executive, who took over Putnam a year ago. Over the past 13 months, Reynolds has added products, recruited dozens of investment professionals, and changed the way Putnam manages its funds.

Where they sorely lagged in previous years, Putnam funds generally have performed better than average so far this year, according to Morningstar, a Chicago research firm that tracks mutual funds.

Morningstar analyst Jonathan Rahbar praised the fee reduction as “shareholder friendly’’ and said it could help Putnam in its battle to attract investors.

“It’s something that opens another door for them’’ Rahbar said. “But performance and consistency will be the main factors behind whether investors go back to Putnam.’’

Avi Nachmany, executive vice president of Strategic Insight, another research firm that tracks mutual funds, said Putnam management fees are currently about average for mutual funds. But Nachmany said the changes are another example of how Putnam has become “very innovative and forward looking’’ under Reynolds.

Reynolds said the management fees for its stock funds are already among the lowest in the industry and he wanted fees on Putnam’s fixed income funds to be as well; currently, he said, the fees on fixed income funds are about average.

Fees on mutual funds have been getting a bad rap lately as seen by the number of lawsuits filed and congressional involvement. So let’s get this right…Putnam is enticing investors back to their funds by promising to lower fees that are already too high and if they beat performance expectations (not defined in release) they get MORE money but if they don’t they get less money. This sounds like a WIN-WIN for Putnam. Any way you slice it Putnam makes money…its just a matter of how much. Now the underlying danger lies in how rich risk Putnam will take with its funds in an effort to “beat performance expectations.”

If Putnam truly wants to be “on the same side of the table with investors” how about Putnam saying they make money ONLY if their shareholders make money. That’s true innovation!