They just don’t run mutual fund firms like they used to

Chris Laursen could think of just one way to express his displeasure with Putnam Investments over the latest mutual fund scandal: He took his money elsewhere.

“If you look at what they supposedly took and divide it by each investor it’s a small amount of money,” said Laursen, of Seaford, N.Y., a construction company executive who recently shifted his $300,000 retirement savings account from Putnam to TD Waterhouse. “But it really shows the people who were running their funds were more interested in taking care of special clients than in taking care of everybody.”

The scandal plaguing the once-pristine mutual fund industry has left many smaller-scale investors like Laursen feeling discouraged. But not everyone shares his certainty over how to proceed.

Should they follow some of the big, professionally managed institutional investors like pension funds who have pulled their money out of Putnam and Strong Capital Management Inc., the most prominent fund firms ensnared in the scandal thus far?

Or is it more dangerous to overreact to a problem where the damage affected only a few funds and has already been done?

Compounding the confusion is that many aren’t even sure what “market timing” and “late trading” mean.

“I think they’re incredibly confused,” said Janet Briaud of Briaud Financial Planning in Bryan, Texas, who has been fielding calls from clients about Putnam. “I think they don’t even know what to ask. They understand a little bit, but frankly I’m not even sure that our whole industry understands what’s going on.”

The early verdict is that investors are still putting money into mutual funds overall, though many are pulling out of Putnam and Strong. According to AMG Data Services of Arcata, Calif., investors pulled $4.4 billion out of Putnam mutual funds in the week ended Wednesday, the week after the company was accused by regulators of civil fraud for turning a blind eye to market timing trades that violated internal rules.

That’s on top of at least $4 billion that big institutional investors have announced they would pull from the firm, which lists $272 billion in assets.

Strong funds have also suffered. Investors pulled $136 million out of Strong, out of assets of $13.5 billion, during the week ending Wednesday, according to AMG.

AMG President Robert Adler said Putnam’s outflow was “significant,” the largest weekly outflow for any fund group this year, though as a percentage of assets it appears manageable for Putnam – for now.

“We don’t know yet whether this is a reaction or the beginning of a response,” Adler said.

A Putnam spokeswoman declined to comment on the outflows. Asked for comment on Putnam’s efforts to reach out to small investors, she provided a copy of a letter the company sent earlier this month to investors outlining new management and new trading policies and promising to reimburse any lost funds related to improper trading.

Federal and state regulators say Putnam and Strong violated their fiduciary duties by allowing certain customers, and in Putnam’s case employees, to engage in market timing – quick, in-and-out trades – despite company rules prohibiting it.

Putnam has dispatched executives to reassure big customers who manage retirement funds for states, companies and labor unions. Incoming chief executive Charles “Ed” Haldeman and Jeffrey Greenberg, CEO of Putnam parent company Marsh &McLennan, paid a personal visit to Massachusetts treasurer Tim Cahill this week after the state fired Putnam as manager of $1.7 billion in state funds. They won a promise from Cahill to reconsider the state’s future with Putnam next year.

But connecting with individual investors will be tougher, and the company will first to have restore trust with the independent financial advisers whom it counts on to direct business Putnam’s way.

Samuel Hull, a financial planner in Bedford, N.H., has advised clients to drop Putnam funds for now if they can do so without tax consequences. Elisabeth C. Plax, a financial planner in Pepper Pike, Ohio, has moved clients’ money from Putnam equity accounts and into Putnam cash accounts there because she’s afraid the equity funds could lose value if forced to make large-scale redemptions.

“There’s just too much going on, it just seems to be unwrapping all the time,” Hull said.

Adler, of AMG, said his company’s figures show substantial outflows from share classes traditionally held by small investors. But he said Putnam’s money market accounts had inflows of nearly $500 million, indicating some customers are keeping money in Putnam, just moving it out of stock funds, at least for now.

The problems go beyond Putnam and Strong, however. Plax said some customers have asked whether they should pull out of mutual funds altogether.

“The scandal goes to the integrity of the system,” said John Markese, president and chief executive officer of the American Association of Individual Investors. “I think this was an industry that was trusted.”

Earl Murnane, a 69-year-old retired Teamster in Milwaukee who is contemplating whether to sell a fund managed by Strong Investments, said his confidence in the whole industry is shaken.

“I don’t put too much faith in anybody,” he said. “I think anybody who thinks they can get away with it, does.”

But Briaud, the Texas financial adviser, said she’s telling clients to focus on the positive; Putnam’s problems will likely scare the entire industry into greater vigilance.

“It will cause people to clean up their acts and be careful because the consequences are so horrible,” she said. “The consumer should feel wonderful about it in a way, because it’s going to be much more consumer friendly.”

Copyright ©2003 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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