Money follows performance.

It is one of the most basic of axioms in the money-management business. Performance, though, can come and go. But distribution -- now there is something you can count on.

Just consider the example of

Putnam Investments

.

For three consecutive years, Boston-based Putnam has outsold every other fund family save

Vanguard Group

, whose index funds have put it in a league all its own.

Putnam's investment results? Nothing special.

According to an analysis by

Kanon Bloch Carre

, a Boston mutual fund consulting firm, Putnam's U.S. and international equity funds ranked fifth among the 10 largest mutual fund families over the last three years. In fact, Putnam was dead last for the fiscal year ended June 1997 and No. 8 for all of 1997.

Putnam rebounded to fifth in 1998, returning 18.7% on an asset-weighted basis; cross-town rival

Fidelity Investments

finished first, with a return of 25.6%, Kanon Bloch says.

Despite the firm's middle-of-the-road investment performance, investors have continued to shove their cash at Putnam. Over the last three years, Putnam attracted $58.3 billion in new sales for its equity and bond funds, second only to Vanguard, according to

Financial Research

, a Boston consulting firm. Assets under management have exploded from $125 billion at the end of 1995 to $295 billion at the end of last year.

Putnam has built its success on two legs: a two-year investment boom in the mid-1990s that put it on the map, and one of the best distribution pipelines in the business, which it has used to sell its funds ever since.

William Dougherty, president of Kanon Bloch, says Putnam rode the spike in small- and mid-cap growth stocks in late 1994 and into 1996. Putnam, for instance, ranked No. 1 among the biggest fund families for the 12 months ended June 1996, with a return of 31.8%, a full 5 percentage points ahead of anyone else.

"They were really on a roll," Dougherty says.

But when the boom stopped, the money didn't.

Putnam sells its funds through the advice industry: 85% of all its funds are sold through traditional brokers, financial planners and the banks. And it offers its funds in a broad array of flavors, priced any way the customer or adviser wants them.

And that distribution pipeline, says William Shiebler, Putnam's senior managing director who ran marketing for the company for nine years, is what distinguishes Putnam from Fidelity -- not performance. A full 70% of fund sales now come through advisers, and that number is growing, he says.

"The big engine driving the business has been advice," Shiebler says.

There is a lesson in Putnam's success: Fund companies can get away with mediocre performance from time to time, but with not big, ugly surprises.

Putnam vs. Fidelity neatly makes the point.

When Fidelity's

(FMAGX) - Get Report

Magellan melted down in 1996, it shook the company in a profound way. The blowup focused exceptional attention on Fidelity not only because of the performance issues, but because the fund was big and visible and investors were shocked to find that fund manager Jeff Vinik had stuffed it full of bonds, not stocks. Investors turned off the tap -- not just to Magellan, but all across Fidelity.

That didn't happen at Putnam. It has had real and sustained problems in its fixed-income shop, as we

pointed out last October, but the equity side has rebounded to the middle-of-the-road after hitting bottom in 1997. Shiebler blames whatever performance problems Putnam has had on the equity side on its decision to stick with its valued-oriented approach, which has been out of favor.

The Putnam lesson: If you're going to have performance problems, do it quietly.

Steven Syre & Steve Bailey write for the Boston Globe. This column is exclusive to TheStreet.com. At time of publication, they held no positions in the stocks or funds discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy stocks or funds.