Larry Lasser was beginning to lose his patience. Sitting on the dais in the Rainbow Room in Rockefeller Center, the CEO of Putnam Investments looked out at some of the country’s top institutional investors, including hedge fund legend George Soros and John Biggs, then CEO of TIAA-CREF. About 100 men and women had gathered at a late October conference hosted by executive recruiter Spencer Stuart to debate corporate governance issues. What, asked one investor, did the Putnam chief have to say about the rash of financial scandals that has plagued U.S. companies for the past two years?
“I think there is some sanctimony going on here,” snapped Lasser, the firm’s CEO since 1985. “We like to think at Putnam that if there’s something wrong with a company, we wouldn’t own the stock in the first place.”
Next question?
Brash, brilliant, rarely one to doubt his own judgment, Lasser transformed Putnam from a middling Boston money management shop into at its peak the 10th-biggest asset manager in the U.S., winning kudos for his intellect and commanding leadership. But his peremptory performance last October belies an uncomfortable truth: Larry Lasser’s Putnam has lately owned an awful lot of the wrong stocks.
Few fund companies soared as high as Putnam did during the ‘90s bull market, and few executives earned greater renown than Lasser. But today Putnam is in free fall, and Lasser is under pressure. Putnam’s assets have plunged 43 percent in the past three years, to $241 billion as of March 31. The 60-year-old CEO -- 34-year company man, famously demanding boss, widely respected industry leader -- must now wage the toughest fight of his career to restore Putnam’s good name and his own reputation. Still in the early stages of his campaign to turn Putnam around, Lasser has shaken up his staff and overhauled the investment process.
How did Putnam find itself in such dire straits? Call it a case of too much, too late. Even as the market was nearing its peak, Putnam feverishly chased the hot retail money and gorged on overpriced growth stocks. In the process, the money manager allowed its disciplined, focused investing system to unravel. The fallout is plain to see. Putnam is saddled with an atrocious performance record (Putnam Investors, the firm’s flagship fund, returned an average annual 21 percent for the three years ended April 25, 7 percentage points worse than the Standard & Poor’s 500 index); shrinking profits, down from $1 billion in 2000 to $560 million in 2002; and eroding margins, down from 32 percent in 2000 to 26 percent in 2002.
Putnam’s experience is hardly unique among asset managers, but it is severe. Among the biggest fund families, perhaps only Janus Capital Management, the hyperaggressive growth fund shop, has been hit as hard. After Janus assets plunged 65 percent from their peak, a new CEO was named to resurrect the once-powerful brand name (Institutional Investor, February 2003).
All money managers continue to struggle with the grinding bear market. Now they face a new threat in the recent flurry of attention from both the House Committee on Financial Services and the Securities and Exchange Commission. Government investigators are examining a wide range of mutual fund industry practices, including fee schedules and trading practices. More regulation means more costs, which further squeezes margins and intensifies pressure on mutual fund companies to reassess their business.
“The mutual fund industry is going through tough times,” says Peter Sundman, head of the mutual fund business at Neuberger Berman. “Everybody has had to retrench and do a fair amount of soul-searching.”
Search the soul of Putnam, a subsidiary of financial services conglomerate Marsh & McLennan Cos. since 1970, and you will find an investment process that ran amok. In the late ‘90s and early 2000 -- in retrospect the timing could not have been worse -- Lasser orchestrated a run after retail money, launching Putnam’s first technology fund, introducing or reopening several hyperaggressive growth funds and transforming basic core equity portfolios into technology-sweetened honey traps. Portfolio managers who once focused on style purity felt pressure to produce huge returns and keep up with growth fund powerhouses like Janus and Pilgrim Baxter & Associates.
Lasser declined to comment for this article, but at the time he remained reasonably sanguine about the industry’s prospects. “I do not want to appear complacent,” he told II in May 2000, “but I do not see the business’s economics deteriorating.”
By late 2001 even the most die-hard optimists could see the damage. Lasser dove into his rescue operation. He imposed tighter risk controls on portfolio managers and shuffled the senior executive ranks. By the end of that year Lasser had laid off 250 staffers, including several top portfolio managers.
The pressure on the driven Lasser is not all from within. Putnam’s decline has hit Marsh & McLennan hard. The firm contributed half of its parent company’s profits in 1999; last year it produced just one quarter. Since 2000 Marsh Mac’s share price has dropped 22 percent, to $46, and longtime company watchers say Jeffrey Greenberg, chairman since May 2000, has Lasser under close watch.
“At some point in the middle of 2002, you began to see Greenberg take a more active role in the situation at Putnam,” says Morgan Stanley insurance analyst Alice Schroeder. “There was a lot of pressure being put on Lasser to get things back on track.” (Greenberg declined to comment for this article.)
Lasser’s most critical response to the pressure was to recruit last October Charles (Ed) Haldeman, the 54-year-old CEO of Philadelphia-based Delaware Investments, to become Putnam’s new co-head of investments and help get the firm back on track. He gave Haldeman -- who inside sources tab as Lasser’s likely successor (see box, page 52) -- free rein to reorganize the investment process.
Haldeman leads a substantial army. Of Putnam’s 5,700 employees, 150 are research analysts -- far more than most comparably sized fund firms -- and 85 are portfolio managers, divided among seven investment groups and covering about 70 products.
Haldeman is moving quickly to improve communication among the firm’s investment groups, better integrate Putnam’s analysts into the stock picking process and bolster the status of Putnam’s portfolio managers, who have traditionally taken a backseat to marketers at the firm. Formerly president of United Asset Management, Haldeman plans to revamp Putnam’s compensation system for portfolio managers and last month made a key hire, recruiting Joshua Brooks, Delaware Investment’s CIO for value funds, to become Putnam’s new head of research.
“Ed Haldeman is the best possible person Lasser could have found to turn the firm in the right direction,” says Burton Greenwald, a mutual fund consultant in Philadelphia. “He is one of the few strategic thinkers who also manages people extraordinarily well and has actually managed money.”
Adds Morgan Sanley’s Schroeder: “If Haldeman is Lasser’s choice as a successor, he’s getting a warm welcome. He’s a turnaround guy and that’s just what Putnam needs.”
Certainly, Putnam’s woes mark a personal defeat for Lasser, who arrived at the Boston firm as an ambitious equity analyst in 1969 and quickly rose through the ranks on the strength of his intelligence and ambition (outsize on both counts), claiming the CEO title in 1985. Under Lasser’s direction, Putnam came into its own, steadily amassing assets, expanding its distribution channels and diversifying its product line. It made a name for itself as a disciplined, risk-conscious asset manager and an unusually effective marketer. In 1985 the firm ranked 35th on the II 300; by last year it was 15th.
“Larry Lasser is probably one of the single most successful executives in the history of the money management business,” says John Casey, an industry veteran and the co-founder of Casey, Quirk & Acito, a Darien, Connecticut, consulting firm. “He may not be the most popular guy in Boston, but in terms of sheer knowledge and vision, there are few who rival him.”
As he writes the final chapters of his career, Lasser is determined to make Casey’s verdict the final word.
THE RARE EXECUTIVE NOWADAYS WHO HAS worked for just one company, Lasser grew up in the New York City suburb of Scarsdale, the eldest son of a garment industry business owner and a housewife. He graduated from Antioch College and earned his MBA at Harvard Business School.
Lasser didn’t begin his working life in money management. While still in business school, he bought and sold modern art out of his apartment. After graduation Lasser opened Graphics 1 & Graphics 2, an art gallery on tony Newbury Street. “I sublet Larry’s apartment just after he graduated and people would still come knock on the door looking to buy lithographs,” recalls Stephen Timbers, now president of Northern Trust Global Investments.
While continuing to run his gallery (he never intended it to be his life’s career and eventually sold the business), Lasser also worked for two years as a research associate at Harvard Business School. In the autumn of 1969, Lasser landed an interview at Putnam through a business school classmate who was working for the firm as an analyst. He interviewed with Norton Reamer, then Putnam’s head of research, who offered Lasser a job as a consumer products analyst. Back then Putnam, led by CEO Robert Riley, managed about $2 billion in a handful of equity mutual funds, including the flagship Putnam Investors fund and the George Putnam Fund of Boston, which was launched in 1937 as the industry’s first balanced fund.
The young analyst rapidly made his mark for being a quick study and well organized. In 1973 Reamer, then the firm’s new chief investment officer, promoted Lasser to assistant director of research. Four years later Lasser got the top research job, reporting directly to Reamer, who was named CEO that year. Reamer replaced Riley, who became head of a new holding company, Marsh & McLennan Asset Management.
Lasser moved up the corporate hierarchy despite the fact he could be abrasive and rebellious and rarely toed the party line. “Larry was so smart that people couldn’t help but listen to him,” says a former Putnam colleague.
Lasser benefited from some churning in the executive ranks. In December 1980 Reamer suddenly left Putnam to start United Asset Management, a holding company for independent money managers looking to cash out. No one had expected Reamer, then just 45, to exit so suddenly. His departure left a void that Riley, the head of MMAM, stepped in to fill. But seven months later, Riley, 51, also left.
Marsh Mac chairman Jack Regan eventually replaced Riley with Martin Hale, a popular portfolio manager who had been running the retail mutual fund business. As president of MMAM, Hale would act as Putnam CEO until a successor to Reamer could be chosen. Hale’s new assignment created an opening for Lasser, who stepped up to become head of the mutual funds in late 1981, when he was just 38.
“It was a chaotic time,” recalls Walter Oechsle, who was then managing Putnam’s international equity group. “There was no strong leadership at the firm.”
At the time, the firm was divided into two groups: Putnam Management, with $2.5 billion in retail assets in 1982, and Putnam Advisory, the institutional arm, with $5 billion in assets. Lasser, president of Putnam Management, and John Sommers, his counterpart at Putnam Advisory, emerged as the top candidates to become the next Putnam CEO.
Lasser was playing a strong hand, because mutual fund sales were exploding. Retail assets increased an extraordinary 600 percent from 1982 to 1985; during the same period, institutional assets rose 60 percent.
Putnam’s retail surge partly reflected the early years of the historic bull market, but it also testified to Lasser’s determination to turn the money manager into a marketing machine. Lasser set up an in-house creative division that produced marketing and advertising materials, an operation widely admired both inside and outside the firm. Charging the highest sales loads permitted -- 8.25 percent in the early 1980s -- Putnam won over wire house brokers, who sold the funds aggressively.
With the numbers clearly on Lasser’s side, he snared the top job in November 1985. In a move to consolidate his power base, one of his first acts was to merge the retail and institutional divisions into one organization. His rival Sommers left.
From the outset, Lasser pushed Putnam to excel as a full-service, multiproduct firm, with a strong presence in both retail and institutional markets, fixed income and equities. When he took over, retail eclipsed institutional and assets were mostly in fixed income. Shoring up institutional marketing was one of his first orders of business.
“Why does Putnam Management have glossy marketing materials and Putnam Advisory is sending out mimeographs?” Lasser asked during his first companywide address as CEO.
On the job for less than a year, Lasser faced his first crisis, which he characteristically seized as an opportunity to assert his authority. In August 1986 Oechsle, then head of the firm’s $1 billion international equity operation, left to launch his own firm, taking seven portfolio managers with him. Lasser retaliated by suing Oechsle to prevent him from poaching clients -- a rare move in Boston’s genteel money management community. Oechsle countersued, and the dispute escalated into a contentious public battle that eventually was settled out of court. The terms were undisclosed, but within a year most of the clients in question had moved to Oeschle’s new firm.
About a year after the settlement, Lasser confronted a new threat. Interest rates spiked in the summer of 1987, savaging Putnam’s fixed-income portfolios. At the start of the year, $22 billion of Putnam’s $32 billion in assets were in retail accounts. Most of the money was in bond funds. Assets of the High-Income Government Fund, the industry’s biggest government bond fund, plunged from $11 billion at its peak in the winter of 1987 to $5.5 billion by the end of 1989, largely the result of fund outflows. Brokers began to shun any fund labeled Putnam.
The bond fund debacle taught Lasser an old lesson: Retail money can vanish in an instant. “We were burned once, and we’re not going to be burned twice,” he later told The Boston Globe. To mend relations with brokers, Lasser hired William Shiebler, the Dean Witter Reynolds mutual funds chief, to run Putnam’s mutual funds in the autumn of 1990.
As he shifted his attention from retail to institutional, Lasser shrewdly determined, earlier than most of his peers, that the 401(k) market would soon take off. To target the new territory, he assigned Richard Pallan, who had joined Putnam as an analyst the same year as Lasser, to launch the business. Lasser also hired Boston Co. Asset Management sales executive Thomas Lucey, a charismatic former IBM Corp. salesman, as the firm’s new head of institutional marketing. Lucey built a fast-growing defined benefit business and helped Putnam win numerous new mandates.
Lasser’s next key move came two years later when he lured Peter Carman, the respected CIO of Sanford C. Bernstein & Co., to replace retiring equity chief Francis Kelly. Putnam’s investment process reflected Lasser’s management style: The CEO liked to keep his portfolio managers on a short leash compared with their counterparts at rival firms. Equities chief Carman executed Lasser’s vision for an investment process that discouraged prima donna portfolio managers -- Lasser wasn’t looking for another Peter Lynch -- and relied instead on a quantitative system of stock picking. Carman created a series of proprietary screens that narrowed a universe of 5,000 stocks into groups of 100 to 200 acceptable companies for any given style category. Research analysts were assigned to cover names on the list, and portfolio managers were not permitted to stray from the roster.
Lasser created a culture of perfectionism, often pitting executives against one another. Success was acknowledged, but even the smallest failure was scorned. Salesmen who lost out in the finals for a pension mandate had to endure a one-hour “loss-review” session with their bosses. The CEO’s trademark: his “Lasser-grams,” critical memos that lambasted everything from inferior performance to unwelcome food (he once banned microwave popcorn).
“Larry always liked to have two or three guys slugging it out at his feet,” says a former Putnam executive. “No one ever really knew where they stood.”
Lasser’s approach worked. Putnam’s investment pros delivered superior performance, enabling the money manager to grow faster than its rivals. Assets hit $126 billion in 1995, up from $44 billion at the start of the decade. During that five-year period, 401(k) assets grew from zero to $8 billion and institutional assets increased from $14 billion to $54 billion. During the next two years, as the bull market began to roar, Putnam’s assets nearly doubled, to $235 billion.
The retail marketing machine that Lasser had begun to build in the early 1980s was also humming along. Brokers at Merrill Lynch & Co., Smith Barney and other major wire house firms kept pushing Putnam funds. Performance explains some of their enthusiasm, but the firm’s funds also consistently carried the highest sales loads in the industry. In the mid-1990s most Putnam equity funds carried a 5.75 percent load, versus 4.5 percent for rival fund families. (Those loads prevail today.)
Putnam’s rhythm might have stalled in May 1997 when the much-admired Carman left Putnam to become CIO at Citigroup Asset Management, but Lasser used his departure as an occasion to reorganize the investment division. He consolidated Putnam’s domestic and international equity groups into one department, to be headed by international equity chief Timothy Ferguson, who had joined the firm in 1996 from HSBC Asset Management, where he was president.
Initially, the move paid off in a big way, but longer term it backfired. Ferguson led Putnam deeper into the momentum growth game, which pulled in more and more cash. Veteran value portfolio manager Anthony Kreisel, who ran a large-cap value equity fund, was forced out. Thomas Reilley, the longtime head of Putnam’s value equity team, was reassigned. “There was overwhelming pressure to run after growth stocks,” says one former portfolio manager.
Ferguson nudged some of Putnam’s core equity portfolios into tech-heavy growth funds. In 1994 Putnam hired C. Beth Cotner, a Kemper Financial Services portfolio manager, to lead the team running Putnam Investors, a large-cap core product, and shift it into growth gear. She produced strong returns over the next few years.
Under Ferguson’s leadership, a similar style shift took place in 1998 in both the New Opportunities and Voyager funds, which migrated from small-cap growth to large-cap growth stocks. Growth paid off in 1999, when many Putnam funds delivered exceptional returns. Voyager returned 56 percent. Putnam’s top performer that year, the tech-laden Putnam OTC Emerging Growth fund, soared 127 percent.
Nonetheless, Putnam posted sluggish sales results for the year, pulling in just $5 billion in net retail inflows, to rank tenth in fund family sales. Why? Most of Putnam’s portfolio performance came in the fourth quarter, so sales did not take off until after the year-end numbers were in.
“Right about then you saw Putnam start to get really aggressive,” says Morningstar analyst Daniel McNeela. Adds a former Putnam staffer: “Lasser was disappointed by fund sales in 1999. You could feel the pressure to keep up with the competition.”
Indeed. In early 2000 Putnam launched an all-out assault on the retail front. In January the firm introduced Putnam New Century Growth Fund, an aggressive-growth product with a strong emphasis on New Economy companies. It grew to $1 billion within a few weeks. In June, three months after Nasdaq peaked, Putnam launched its first pure technology fund.
The cash started to flow. Putnam reported $17.5 billion in net mutual fund sales for 2000, trailing only Janus and Vanguard. Overall, the firm’s assets peaked at $420 billion in August, up from $391 billion at the start of the year.
While other growth fund managers were backing away from New Economy stocks by the first half of 2001, Putnam portfolio managers stayed the course. “Putnam was slower than most to adjust to the idea that the New Economy was not panning out,” explains a rival. “Aggressive growth had served them so well that they thought they were just encountering a bump in the road.”
For example, the Putnam OTC Emerging Growth fund kept doubling down on fiber-optic companies such as JDS Uniphase throughout 2001. “We stayed too long at the dance as far as our technology weightings,” laments one former Putnam executive.
By the end of 2001, the young Technology Fund had lost 40 percent. New Opportunities dropped 30 percent and the Putnam OTC Emerging Growth fund plunged 46 percent, coming in next to last in Morningstar’s ranking of 540 growth funds. That year investors pulled $4.5 billion out of Putnam. Only Janus and Morgan Stanley saw greater outflows.
“You would expect a momentum firm like Janus to get caught up in this tech bubble,” says consultant Greenwald, “but for a disciplined, multiproduct shop like Putnam to collapse was kind of a shock.”
Toward the end of 2001, sobered by the dismal showing, Lasser ordered up a full-scale review of the firm’s investment process. As Lasser assessed product lineups and performance track records across the Putnam organization, he concluded that the firm was saddled with too many growth funds and that stock pickers had stuffed their portfolios with far too many overpriced New Economy names and held on to them too long.
Lasser also tightened risk controls. Analytic software aimed at preventing portfolios from becoming too concentrated in any one security or sector, which had been available since about 1998, became a mandatory tool for all portfolio managers. Lasser’s message to his investment team was a simple one: Stop swinging for the fences. Singles will do just fine.
In October, Lasser demoted Ferguson, moving him into an amorphous “strategic and administrative” role. Then Lasser brought Haldeman on board as co-head of investments along with Stephen Oristaglio, who had been deputy CIO under Ferguson. Though the two have been working closely together, Haldeman, it was clear from the start, would be Lasser’s right-hand man in his campaign to save Putnam.
Haldeman has boosted morale, especially among investment professionals who appreciate his experience as a money manager. For all his talent Lasser had never managed a portfolio. Nor had Ferguson. “It’s refreshing to have someone heading up investments who has actually managed money,” says one Putnam portfolio manager. “Haldeman speaks our language. He knows what it takes to succeed.”
One of Haldeman’s first moves was to change how Putnam’s investment professionals are paid. Earlier this year Haldeman informed the investment teams that, as of year-end 2003, bonuses will be awarded to investment groups, not individual staffers. That approach should foster greater team cooperation, but it’s also likely to cut into staffing. If a group can manage with fewer people, the survivors could each enjoy a greater share of the bonus pool. “At Putnam,” an insider explains, “the success of a CIO for any given asset class was somehow equated with how many people reported to them. Haldeman is trying to reverse this.”
In another key move, Haldeman tackled the most damaged area of the investment team -- specialty growth, which manages aggressive and small-cap products. For the better part of the past decade, the team was led by Daniel Miller and Eric Wetlaufer, who enjoyed considerable autonomy even as their performance deteriorated. Haldeman placed specialty growth under the supervision of Justin Scott, who had been the CIO for core equity.
Haldeman is also sending the message that he wants to strengthen the investment culture at Putnam, enabling portfolio managers to feel more engaged and appreciated. As one Putnam staffer puts it, “Haldeman has come in and told portfolio managers to relax and enjoy the process of managing money.”
After interviewing key employees, Haldeman realized that as the New Economy bubble grew larger, portfolio managers were too often ignoring their own analysts’ research. So last month he replaced William Landes as head of research and brought in Joshua Brooks, the value equity CIO at his old firm, Delaware Investments. Brooks takes on a clear mandate to improve communication between analysts and portfolio managers.
Certainly, Lasser and Haldeman have taken the first steps toward a turnaround, moving to restore the investment discipline that served Putnam so well for so many years. That’s critical, because without stronger performance the money manager can never recover.
Putnam is hardly alone in its bear market mea culpa, of course. In today’s tough market many mutual fund companies are rethinking the ways they do business. But few feel a greater sense of urgency than the 78-year-old Putnam Investments and its 60-year-old CEO.
A secret succession plan? Ed Haldeman, Putnam Investments’ new co-head of investments, has been acting as CEO Larry Lasser’s right-hand man. He may also be Lasser’s successor.
Both men declined requests for an interview. Through a spokesman, Lasser notes that his contract extends until the end of 2005. He has not offered the CEO title to Haldeman, the spokesman adds. But inside sources tell Institutional Investor that Haldeman and Lasser have an understanding: The top job at Putnam is Haldeman’s to lose. The 17-person board of Marsh & McLennan Cos., led by chairman and CEO Jeffrey Greenberg, will make the final decision.
A Philadelphia native and Dartmouth College graduate, Haldeman earned his MBA and JD from Harvard University, where he ranked in the top 10 percent of his class at both graduate schools. In 1972 he joined Cooke & Bieler, a Philadelphia-based value equity boutique, as an analyst. “Ed Haldeman has integrity and a true work ethic,” says Robert Arthur, co-chairman of the executive committee at Cooke & Bieler, which became an affiliate of United Asset Management in 1994. In 1998 Haldeman became president of UAM and deputy to CEO Norton Reamer.
Then in January 2000 Haldeman jumped ship to become chief executive at struggling Delaware Investments, which, during the greatest bull market in U.S. history, was somehow bleeding assets. Thanks to dreadful portfolio performance, Delaware, whose assets totaled $40 billion at the end of 1996, posted net outflows of $14 billion between 1997 and 2000.
On the job for just a few months, Haldeman recruited a 24-person fixed-income team, a contrarian gambit when Nasdaq was riding high. That decision, along with some staff changes, has paid off handsomely. Delaware attracted $2 billion in net inflows in 2002.
When Lasser first approached Haldeman about joining Putnam, Haldeman resisted, mostly because he didn’t want to leave his hometown. Eventually, the CEO made an offer too sweet to resist. According to reliable sources, Haldeman’s compensation package could be worth $25 million over the next 18 months. -- R.B.
