Once high-flying and now beleaguered b-to-b asset managersâincluding Putnam Investments, Janus Capital Group, Bank of America Corp. and Alliance Capital Management Holdingsâare in a struggle to save their brands amid ongoing government investigations into questionable trading practices.
Institutional investorsâthe foundations, endowments and pension plans that annually place hundreds of billions of dollars with asset management companiesâare increasingly pulling their money from firms alleged by New York State Attorney General Eliot Spitzer to have engaged in market timing and late trading activity.
Some say the damage may be irreparable. "If someoneâs involved in a scandal, the reaction in todayâs climate can be very severe," said David Haigh, CEO of Brand Finance, London. "Anything that smacks of wrongdoing is punished, and punished to an extreme."
Robert Rothberg, who teaches marketing at Rutgers Business School and sits on the board of a $160 million community foundation endowment fund, said: "We canât afford to be involved with those [asset managers] that have been blemished. We have plenty of other choices."
Last September, Spitzerâand later the Securities & Exchange Commissionâbegan alleging that firms including Putnam and Janus allowed favored clients to conduct late trading and market timing.
Late trading involves buying mutual fund shares after the 4 p.m. market close, which is illegal as it allows favored investors to act on information not reflected in the share price or net asset value. "Allowing late trading is like allowing betting on a horse race after the horses have crossed the finish line," Spitzer said at the time.
Market timing involves buying and selling mutual fund shares to take advantage of times when a fundâs net asset value doesnât reflect the current market value of the stocks held by the fund. While not illegal, market timing takes advantage of market inefficiencies, is considered unethical and can hurt long-term fund shareholdersâincluding institutional investors.
Boston-based Putnam continues to be hit harder than most of its peers, having lost more than $50 billion in assets since being embroiled in the scandal, including the funds of big clients such as Interpublic Group of Cos. Putnamâs management, which in November settled market-timing charges with the SEC and ousted CEO Lawrence Lasser, is still being cited by some financial industry watchers for having taken too long to recognize the severity of the firmâs problems.
"Their business will deteriorate; doors are being slammed in their face," said Marco Protano, professor of marketing at New York University. "This is a relationship business. There is a trust factor. And once youâve crossed that line, there are incredible impacts."
Executives at Janus, meanwhile, were cited by Spitzer and later admitted to allowing some clients to engage in market timing, a practice the firmâs prospectuses claimed it discouraged. Investors reacted by pulling $8.1 billion from the firm. Since then redemptions have slowed, and some say the firmâs swift acknowledgement of wrongdoingâand a decision to redeem shareholders $31.5 millionâmight have saved Janusâ reputation.
"Janus took responsibility and took steps to repair its brand," said Jay Nagdeman, CEO of financial marketing consultancy Suasion Resources.
Janus was intent on restoring institutional investorsâ confidence and letting them know that similar problems wouldnât happen again, said Shelley Peterson, a spokeswoman at the Denver-based asset manager. "We understood we had to immediately address this issue, and it was paramount that we had to address restoration issues quickly," she said.