Dec. 30–Mutual funds that were tainted by the trading scandals of 2003 have suffered dramatic outflows of assets, according to a consultant’s estimates for the month of November.
Among the hardest hit was Boston’s Putnam Investments, which recorded a 9 percent fall in long-term mutual fund assets in November, a decline of $13 billion, according to estimates prepared by Financial Research Corp. of Boston.
Money also fled the Janus Capital Group Inc. of Denver and Strong Capital Corp. of Wisconsin, both of which were implicated in alleged improper trading by a hedge fund.
Putnam was hurt by the quick departure of institutional funds, including an investment from the nation’s largest pension fund, the California Public Employees Retirement System, which withdrew $1.2 billion from Putnam in late November.
“There’s no question that investors are voting with their feet,” said Burt Greenwald, managing director of Greenwald Associates, a mutual fund consultant in Philadelphia. “That will continue for a long period of time.”
“As a matter of policy, we don’t comment on specific flow figures,” said Putnam spokeswoman Nancy Fisher. She said that news about improper trading accelerated redemptions but that the company’s fund flows showed “significant improvement” in December.
The mutual fund industry as a whole saw a net inflow of $16.9 billion in November. Based on FRC’s total measured assets of $44.452 trillion, that represents an increase of three-tenths of 1 percent.
Putnam has been battered since October, when the Securities and Exchange Commission and Massachusetts Secretary of State William F. Galvin each filed civil charges accusing the company of allowing market timing, a practice prohibited by individual mutual fund prospectuses. On Nov. 13, Putnam reached a partial settlement with the SEC, agreeing to implement a series of reforms without admitting or denying guilt. The state investigation continues.
Janus was named in September by New York Attorney General Eliot Spitzer as one of several fund companies that permitted Canary Capital, a hedge fund, to market time in its funds. Janus had big net outflows over the past three months, according to FRC. Outflows in September, October, and November were 3.1 percent, 2.3 percent, and 2.9 percent, respectively, of long-term mutual fund assets at the start of each month, the firm reported.
Blair Johnson, a spokesman for Janus, said, “We’re encouraged that the vast majority of our investors are taking a wait-and-see approach to Janus. That makes sense given our solid fund performance this year and the fact we’ve taken a very proactive stance in addressing the regulatory issues and are working hard to restore investor confidence.”
Johnson said an internal investigation found “limited” frequent trading at seven Janus funds. The company paid $31.5 million to compensate investors for high transaction costs, and it continues to work with regulators including the Colorado Securities Commission.
Other funds affected by the scandal and their recent net outflows as measured by FRC, include:
Pilgrim, Baxter & Associates of Wayne, Pa. The SEC and Spitzer last month charged cofounders Gary Pilgrim and Harold Baxter with a variety of trading improprieties at their firm. The founders resigned before charges were filed. PBHG funds had a net outflow of $127.9 million, or 1.9 percent, last month.
Strong Capital allegedly allowed Canary Capital to market time its funds. Chairman and founder Richard Strong, who allegedly profited from timing trades in Strong funds, resigned, and the company is conducting an internal review. Strong funds suffered an outflow of nearly $1.6 billion in November, or 6.5 percent of assets under management at the start of the month.
Alliance Capital Management of New York reached agreements with the SEC and Spitzer on Dec. 18 for a variety of charges related to market timing. Alliance agreed to set up a $250 million fund to compensate shareholders and agreed to lower fees by 20 percent for five years. About 2 percent of Alliance Capital’s fund assets, or $786 million, flowed out in November.
Invesco Funds Group of Houston, part of Amvescap PLC of Britain, was charged with civil fraud by the SEC and Spitzer on Dec. 2 for allegedly violating internal rules against market timing. AIM Distributors Inc., the distributor of Invesco funds in the United States, experienced a net outflow of $2.16 billion, or 2.8 percent, in November.
Putnam and Janus both experienced net outflows in their funds for each of the past 12 months. Dan McNeela, an analyst with Morningstar Inc., the fund research company, said poor performance hurt the firms before the scandal surfaced in September.
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