Tuesday, November 18th, 2008
more of the same

Yesterday, Putnam Investments announced a number of important changes to its equity investment unit. A look at the firm’s press releasePutnam Investments | It is entitled “Putnam Makes Bold Move in Equities.” As is evident from my commentary, I’m not sure whether that is the right adjective. and the initial reporting on the moves in Pensions & InvestmentsPensions & Investments | This piece also reports that Putnam’s assets under management declined by a third in the four months ending October 31. supports the notion that it is business as usual for investment firms when it comes to structure.

The playbook at Putnam includes fund consolidations, which may well be warranted, but which always occur at this part of the cycle. The problem usually isn’t with the consolidations, but with the asset-gathering zeal that creates the “redundancies” cited in the press release every time around, which subsequently need to be corrected. Another goal of the fund mergers — “to sharpen style discipline” –  can also be worthwhile, or it can be a backward-looking trap for the firm and its investors.the research puzzle | I wrote about this in “where we draw the lines.”

In addition, Putnam moved from a team management structure to one that “vests full authority and responsibility with individual fund managers” and settles on fundamental research as “the corner-stone” of its approach. A number of quantitative portfolio managers were let go, and quantitative analysts were relegated to “providing support to — but not driving — investment decisions.” In addition, all large-cap research globally was brought under common leadership and some new portfolio managers were brought in from elsewhere.

None of those actions is revolutionary on the surface, and each could be argued in the abstract either way. How the decisions are implemented will be crucial. Of particular interest, though, is the retreat from an equal footing for fundamental and quantitative research, since it is yet another sign that one of the most elusive problems facing investment firms — the integration of the two — seems to never be solved. The default application at most shops dominated by fundamental analysts still amounts to lip service to the notion of using quantitative work (“we look at it”), with the kind of loosely-defined support that Putnam appears to be adopting being one step up from that.

New incentives for the investment professionals were also announced, with the most questionable being that top-decile performers “may receive significantly more” than mere top-quartile performers. Such structures often beget bad behavioral trade-offs when applied to review periods of a year or two — and ignore the reality that performance that is moderately above average year-in and year-out is what matches the needs of investors. On the research side, analysts have been promised “greater rewards for successful equity recommendations.” Once again, it’s not an easy thing to provide the right evaluation system and incentives, and a lot harder to measure true research performance than portfolio performance.

It is somewhat unfair for me to pick on Putnam, because I could replace its name with any number of other firms that have used the playbook of late or will do so shortly in response to the need to cut costs or appear unique to the purveyors of packaged products now holding hands with their shaken clients.

Where is the innovation? The structures, roles, and incentives are old and worn, and have apparently not been particularly effective given the performance of the industry. When will someone do something truly bold?