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Putnam Case Poses Due Diligence Questions For VA Carriers

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Recent allegations of fraud against Putnam Investment Management Inc., Boston, and other fund managers should force variable annuity carriers to revise their criteria for selecting funds, experts say.

Carriers investing in funds need to probe beneath each funds reputation and historical performance, they say.

The Securities and Exchange Commission and state of Massachusetts lawsuits charge Putnam with allowing some of its investment officers to engage in illegal market timing. Market timers take advantage of fixed daily fund prices to make quick profits or avoid losses by trading in and out of international funds, using information not available to the general public.

The lawsuits charge that two former Putnam investment managers traded their personal assets in some of the mutual funds they managed.

In a statement, Putnam said it has launched an investigation into fund trade activities within its firm. The company also stated it has not found any evidence “of late trading in any Putnam fund or of any special arrangement made by anyone at Putnam to allow market timing in any Putnam fund.”

None of the Putnam funds specifically named by the SEC and Massachusetts regulators as illegally traded appeared to be VA subaccounts, VA data from Finetre Corp., Herndon, Va., show. (Until recently, Finetre was known as AnnuityNet/VARDS.)

Charges of fraud against Putnam and other mutual fund companies over the market timing issue should make VA managers rethink their buying of premium-name funds, Rich Carey, director of research for Finetre, suggests.

“The big names do draw capital,” he acknowledges. “But in a new era of heightened due diligence, we need to assess the management situation much more carefully. We need to get into the organizations philosophy.”

In a statement, Hartford Financial Services Group Inc., Hartford, said it will continue its support of Putnam, with which it notes it has had “a long-standing relationship.”

“We are in contact with Putnam management regarding these allegations,” Hartford said. “There are no current plans to modify our investment or insurance products that use Putnam funds as investment choices.”

At press time, Allstate Corp., Northbrook, Ill., and AIG SunAmerica Life Assurance Company, New York, had not responded to requests for comment. Both companies also offer some annuities with extensive Putnam subaccounts. (See chart.)

Geoff Bobroff, head of the asset management consulting firm Bobroff Consulting Inc., East Greenwich, R.I., says carrier asset managers and compliance officers need to rely less on a fund managers reputation and more on the individuals pattern of personal trading.

A key consideration for any fund management firm is whether it has a clear code of ethics that specifically deals with personal trading in the same funds an individual manages, Bobroff says.

“Everyone wants a portfolio manager to eat his own puddingbut that means he should invest in his own funds, not trade in them,” Bobroff says.

When researching a fund, VA advisors need to pose a few probing questions, he suggests.

“Ask, do you have a policy on personal trading? Do you [the fund manager] own your fund? Do you trade your fund? How would the organization deal with violations of ethics?

“Personal trading is OK, but if the purpose is to take advantage of short-term inefficiencies in the market, thats trading for personal gain.”

Brokers and producers may well be concerned about the impact on investor confidence in funds or in VAs that are invested in them, Bobroff says. Its up to them to pressure VA management to do their own research.

“Today, the broker should say [to the VA manager], I selected you for screening and monitoring,” Bobroff advises. “Thats what you are getting 50% of your advisory fee for. What are you doing to earn it? Whats your due diligence review?”

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 31, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.