Jumping Ship on Putnam Mutual Funds

We usually advise against letting one bad year persuade you to take a loss on a mutual fund, but the ongoing flux over at Putnam Investments is a good example of when it can make sense to cut and run.

But is it really worth waiting around to see if these other changes bear fruit in better results?

Putnam's flagship fund, the Putnam Fund for Growth & Income (PGRWX), has already had four new managers in the past three years. While it isn't alone in making costly bets on financial stocks, including Countrywide, Lehman Brothers and American International Group (AIG), its longer-term record isn't comforting. It ranks in the bottom 88% of its large-cap value category for three-year returns and the bottom 97% for 10-year returns.

The fund's newest manager, Bob Ewing, just came on board in late November, so maybe he can turn things around. But his record as the former manager of RiverSource Large Cap Value (ALVAX) is "worrisome," says Morningstar analyst Wenli Tan. As late as July, Ewing, who couldn't be reached for comment, added to that fund's stakes in Lehman, Freddie Mac (FRE) and Wachovia.

"On a stewardship level Putnam doesn't look good right now," Tan says.

Why tough it out with Putnam Fund for Growth & Income when you can instead buy, say, the no-load T. Rowe Price Equity Income (PRFDX), which is cheaper, has had the same manager since 1985 and boasts a far better long-term record?

The only Putnam stock fund Tan does recommend right now is Putnam Equity Income (PEYAX), which manager Bart Geer has run since December 2000. In early 2007, Geer got out of companies with subprime mortgage exposure and moved into energy stocks, but then he pulled back on energy stocks as oil prices peaked. Sounds like the sort of deft management you'd expect from a major fund shop, and worth sticking with. (The fund carries a hefty front-end load, though it can be waived for some investors depending on assets and other factors.)

As for the rest of the Putnam funds, it's an open question. Between the management shuffles and turnover at the firm's team of research analysts, the dust has yet to settle and might not for some time.