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Putnam's Reynolds Focuses on Innovation

Robert L. Reynolds loves a challenge. Without question, he certainly faces one. Trying to restore Putnam Investments' stature among America's top mutual fund companies after the firm's involvement in the trading scandal of 2003 and depletion of assets, now at $99 billion, a mere quarter of what they were in 2000-is a formidable task.

Not to mention that Reynolds, who took the helm as president and chief executive officer last July, accepted the challenge in the midst of one of the worst recessions in history.

Yet, Reynolds has already achieved big changes, by overhauling the investment team with a laser focus on performance and innovative solutions. Absolute-return, global sector and target-date funds that better manage risk and offer income, Reynolds says, will be critical to the firm's future. In addition, Putnam is also zeroing in on the 401(k) business and recently upgraded its defined contribution platform to FASCore, which offers more features, and is planning to aggressively build out its 401(k) wholesaling staff.

"It's been a tough market, but tough markets are interesting in that everyone gets dealt the same hand," Reynolds recently told Money Management Executive Senior Editor John Morgan. "Whoever plays their hand the best usually comes out the winner. I know we're a much better, much stronger firm today than we were when this whole thing started."

MME: What are you are doing to help rebuild Putnam's stature, brand and reputation in the mutual fund universe, particularly among 401(k) plan providers and participants?

Reynolds: The whole motivation was to bring the Putnam name back. My goal was to build an investment operation that delivers superior returns on a consistent basis across asset categories. When I got here, if you looked at fixed income, that goal was being met. Equities, on the other hand, had pockets of success, but there wasn't across-the-board consistency.

Putnam is an investment firm, and to be a successful investment firm, you have to perform on a consistent basis.

We restructured the way we managed money. Putnam had a team approach. There are many different definitions of team, but here there were multiple people managing a pool of money. Most funds had a fundamental person and a quantitative person. We restructured that so there's a fundamental person who has complete accountability and responsibility for a given portfolio. We pooled the quantitative people out of the direct, decision-making process and used them as a support group to the fundamental process.

The biggest thing we've done is we've been very active in the marketplace. We've brought in seven new fund managers, approximately 20 fundamental equity analysts and really retooled that part of the business. We've been looking for people who have 10, 15, 20 years of experience, proven track records and who can add value over time.

We've been able to attract some great fund managers and have coupled them with experienced analysts. We went across the industry-taking people from the street, people from other fund houses, people from hedge funds-and we've put together what I consider to be a world-class research team.

We've also restructured the compensation structure to reflect the goals of the company, to encourage our managers to be in the top quartile in over a rolling, three-year period, for whatever type of asset they manage. If they're in the top quartile, they'll get 100% of their bonus. If they're in the mid quartile, they'll get half their bonus, and if they fall below the 75th percentile, they get zero bonus.

It puts them on the same side of the table as the client.

MME: Have you seen results? Are your managers more motivated?

Reynolds: Yes, and the initial results are pretty impressive. If you look at 26 of our equity funds, 24 have beaten their benchmark in the first quarter. Five of our eight large-cap equity funds were in the top quartile for a one-year period. I was confident immediate results would happen.

But I did not know we would have the type of fourth quarter we had. Whenever you do have a market like that, it automatically puts a premium on stock picking. If you have the right analytical team and the right people managing the funds, it should provide immediate results, and that's what's happened for us.

Before the bonus structure changes, people just assumed they were going to be paid. I wanted to create a total meritocracy, across the board, whether you're in money management, sales or operations.

MME: How are you going to regain market share? In 2000, Putnam was the fifth-largest fund complex, ranked by long-term assets, and you are now No. 25, according to Financial Research Corp.