Massachusetts state fund’s trustees said the money would be pulled out immediately and handed over to a so-called transition manager, after voting to dismiss Putnam during an emergency meeting. State Treasurer Tim Cahill, who is chairman of the board, said the decision was made based on the determination that Putnam “allowed market timing to happen and possibly harm our retirees. We won’t stand for that,” according to a Reuters report.
“The bottom line is our fiduciary duty – not Putnam’s welfare,” Cahill continued.
The move by the $29-billion pension fund is the first major blow after the nation’s fifth-largest mutual fund company was accused Tuesday of fraud by Massachusetts Secretary of State William Galvin and the SEC for failing to stop two former money managers from trading shares of funds they managed to generate quick profits for themselves at the expense of their customers (See Putnam Call-Center Rep Says Market-Timing Warnings Were Ignored ).
The charges say Putnam failed to stop two former managers – Omid Kamshad and Justin Scott – from trading shares of funds they ran and of allowing members of a New York boilermakers’ union to make market timing trades (See Market Timing Leads to “Late” Departure of Putnam Fund Managers). While the practice of quick-paced buying and selling of mutual fund shares is not illegal per se, it is prohibited by many companies, including Putnam, because it drives up trading costs and waters down returns for long-term investors.
Ultimately, the actions also did not sit well with Cahill and the rest of the state’s pension fund board. Even though they found no evidence of market timing in the Massachusetts pension fund’s accounts, he did say that the Putnam managers who have been accused of civil securities fraud also worked on the pension fund’s accounts.
The Bay State may not be alone in its decision to fire Putnam for long. Connecticut may pull more than $200 million in state pension fund money managed by Putnam Investments, state Treasurer Denise Nappier told Dow Jones.
Connecticut’s investment was made in a separate account at Putnam as part of a move to diversify assets into international funds. The state, which handles investments for 160,000 teachers, state and municipal employees, now has about 18% of its funds invested in international equities, split among about a dozen managers, including Putnam.
However, as soon as the market-timing news emerged, Nappier said she put Putnam on a watch list with an eye toward yanking the funds. “It’ s certainly not a buy,” she told Dow Jones. “We’re not putting any more money in there.”
The “watch list” was a popular theme in Florida too, where pension officials are also mulling over various courses of action to take with their pension funds managed by the embattled Kamshad, according to a Miami Herald report. In total, the Sunshine State had approximately $1 billion in pension assets managed by Kamshad and roughly $14 million for Florida public employees who direct their own retirement investments, said Coleman Stipanovich, the state board’s director.
In addition to other states that have placed Putnam on their own version of a “watch list” – a group that includes Iowa, New York California and Rhode Island – at least one city is also questioning its relationship with the mutual fund company. New York City announced plans that it could shift $725 million in pension fund investments currently managed by Putnam to other investment managers, a spokeswoman for city controller William Thomson told the New York Daily News.