Ask Which Market Your Fund is Beating

In a recent Wall Street Journal article, columnist Jason Zweig highlights and questions the fee practices of a Putnam Investment mutual fund, noting that the interests of fund managers and investors can sometimes become “misaligned.”

Zweig writes that the Putnam Capital Spectrum Fund, launched in 2009, touted “unusual objectives and fees”: It could buy any securities its manager (David Glancy, who has since left Putnam) found attractive and charged a “fulcrum” fee that matched downward performance and upward performance alike—that is, if the fund underperformed its benchmark, the manager would be required to pay a “rebate” into the fund.

Since Capital Spectrum owned a varied mixture of investments, Putnam calculated this against a 50/50 blend of the S&P 500 and the JPMorgan Developed High Yield index (a global basket of low-rated corporate bonds). From its launch through October 2013, the article reports, the fund performed well and attracted investors, growing to nearly $11 billion in 2015. “However,” Zweig points out, “the fund never had anything close to 50% of its assets in global high-yield bonds,” adding that most of the assets were in stocks.

For the 12 months ended April 2015, the article reports, the fund outperformed its benchmark but lagged the S&P 500, adding that SEC filings reflected that “the fund had as much as 80% of its money in stocks during the period, giving it a big tailwind against its half-bond benchmark.”

“Meanwhile,” Zweig writes, “the fund’s returns started fading,” while the S&P 500 continued to grow, causing fund investors to start exiting. SEC filings show that since 2017, the fund has had to pay about $5 million in fulcrum-fee rebates.

Zweig cites comments from former SEC chief counsel (in the investment-management division) Douglas Scheidt: “The people involved here knew, or should have known, they were benefiting from investing in a manner drastically inconsistent with the index that was used to calculate their performance fee. As a result, they obtained excessive compensation in good times and less negative compensation in bad times.”