Friday 14th November 2003
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Putnam, one of a number of US fund managers netted in an investigation of the industry by New York Attorney-General Eliot Spitzer, manages about $1.75 billion for BT.
BT New Zealand chief executive Craig Stobo said BT clients had not been affected by any of the practices unearthed at Putnam.
BT had convened a working group of senior executives to assess developments and examine the "compliance enhancements" Putnam was putting in place, including recent management changes.
BT's relationship with Putnam last week brought it a negative ratings watch from researcher FundSource.
FundSource acknowledged investors in the 18 BT funds placed on negative watch were not directly affected by improper trading at Putnam.
The watch action reflected key staff terminations at Putnam which, together with the SEC investigation, might affect Putnam's "capability to effectively manage the mandate on behalf of BT's clients."
Putnam's chief executive of 18 years, Lawrence Lasser, stepped down on November 3 and four portfolio managers have been charged with improper trading activity.
Allegations involve market timing trading rapidly in and out of funds to take advantage of pricing inefficiencies in the market; late trading trading in units after the daily cut-off time, possibly using information unavailable to other investors; and managers trading personal accounts in funds which they managed.
Putnam, owned by Marsh & McLennan, is the fifth largest mutual fund manager in the US with funds under management of $US272 billion.
FundSource notes that has fallen from $US425 billion over the last three years.
"During this period its US mutual funds have, on average, underperformed their peers and have had significant fund redemptions in each of the last three years," FundSource said.
"As a result of recent allegations there is considerable potential for more such redemptions to occur in coming months."
BT appointed Putnam in October 2002 to manage the international share assets in its managed fund range.
Asked why it appointed a manager that had been underperforming its peers, Stobo said average performance didn't recognise Putnam's leadership in the area of international growth equities.
"They have a very strong track record in that area and came highly recommended."
Meanwhile a BT test case on the "invalid units" affair, that has tripped an unknown number of overseas fund managers, will have a callover hearing in the High Court on November 19.
BT said it expected the court to appoint representative defendants to act for each class of affected investors.
BT is arguing its breaches of filing requirements are technical in nature and have disadvantaged nobody.
It is asking the court to retrospectively validate units issued while it was in breach.
If it fails it may have to repay unitholders' subscriptions with 10% a year interest.
In a letter to unitholders, BT group chief executive David Clarke said proposed new legislation meant courts would validate units on application by the issuer unless investors objected.
Even if they did, the court would validate unless investors had been prejudiced materially by the filing breaches.
It could make compensation orders only if investors had suffered loss.
The legislation will come as a relief to an industry which stood to pay out tens of millions of dollars under the old regulatory regime.
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