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S&P Decides Two Putnam Funds Aren't 'Select' After All

Joe Bousquin

Flexing its muscles in the increasingly competitive field of mutual fund tracking services, Standard & Poor's Fund Services yanked its top rating from two Putnam funds on Tuesday because of a lack of portfolio disclosure.

S&P stripped Putnam's (PVISX Quote)Vista and (PINVX Quote) Investors funds of their "select" status because they wouldn't provide monthly and quarterly portfolio updates.

"There's nothing wrong with the funds," says Philip Edwards, managing director of S&P's fund division. "It's just that we don't have the information that we feel is necessary to continue to monitor the funds on an ongoing basis."

Putnam says it discloses its portfolio holdings twice a year, as required by the Securities and Exchange Commission. But its corporate policy precludes it from doing so more often because of fears that other investors will trade on the information. "That policy is there to protect shareholders of the funds," says spokesman Matt Keenan. "It didn't fit what S&P wanted to do."

The move demonstrates that S&P, widely known for its influential debt-rating services, is less-than-willing to take fund firms at their word when it comes to assessing their performance, even if that puts it in an awkward position.

S&P is a newcomer to the fund-tracking field, taking on such established rivals as Lipper and Morningstar. In March, it launched its fund-ranking services by naming just 24 large-cap growth funds worthy of its "select" label. That move instantly set it apart from its more established competitors, which assign rankings to virtually all funds they track. So far, S&P has designated 74 select funds in five investment categories, and expects to name 31 more large-cap select funds on Wednesday.

Before bestowing a select designation, a committee evaluates a fund's performance data, looks for consistent management and philosophy, conducts face-to-face manager interviews and analyzes the fund's portfolio holdings over time. The firm then either rates a fund as select or doesn't rate it at all.

While Putnam managers did meet with S&P face-to-face, S&P's Edwards says Putnam never provided S&P with the required portfolio information.

As it demonstrated Tuesday, S&P is not afraid to deselect a fund. But it wasn't the first time the rating had been pulled. It also kicked (VSEAX Quote)Chase Vista Small Cap Equity Fund out of the select ranks in August because the fund's entire management team left when the asset management group was relocated from New York to Houston.

"We don't fill quotas. The decisions are based purely on the quality of the funds," says S&P fund analyst David Masters, though he concedes that "so far it's turning out to be about 10% of the funds in the universe, give or take a few percent."

At Lipper, funds are ranked within the categories based exclusively on performance numbers. (See Tuesday's story on changes to Lipper's categories). Morningstar's one- to five-star ratings take into account factors such as consistency of style and risk-adjusted returns, but a set percentage of funds -- the top 10% -- always receive five stars.

While S&P doesn't yet have the influence of Morningstar or Lipper in the mutual fund arena, the company's name carries a lot of weight, says Geoff Bobroff, a fund consultant in East Greenwich, R.I.

"Obviously, S&P is trying to deliver a message into the market place that their ratings have a degree of credibility," Bobroff says. "Getting the [portfolio] information on a consistent basis allows them to monitor and police rather than getting snapshots two or three times a year, which arguably can be window-dressing. And that comment isn't directed at Putnam. It's directed at any fund group."

For Putnam, losing the as-yet little-known select designation poses few risks. But it could also have unforeseen results down the road.

"Putnam falling off the log at this point is no big deal," Bobroff says. "Five years from now when we've seen its influence, falling off the log may be a very painful thing."