What Does Your Mutual Fund Say About You?

By Lisa Smith AAA

When you purchase a mutual fund, you delegate the voting authority on the shares of underlying companies in the fund to the fund managers. Historically, this wasn't an area where investors paid much attention, trusting the fund and the companies they invested in to do the right thing on behalf of shareholders.

In this article, we show you how to determine whether your mutual fund managers are acting in your best interests and in line with your beliefs.

SEE: 5 Ways To Measure Mutual Fund Risk

Do You Know? Do You Agree? Does It Matter?
Do you know what your money is supporting? For the vast majority of investors, the answer is "No." Their understanding of their investments is often limited to whether the investments have generated positive or negative returns. For those who do care, the sheer size of mutual fund investment portfolios, with a single fund often holding hundreds of positions, makes it difficult and time consuming to look at the way the fund voted on each of its underlying shares. Keeping in mind that each underlying company may have had three, four, five, or more issues to vote on, and the math multiplies rapidly.

Numbers like this raise the question of whether, if you do care about whether your mutual fund supports your beliefs - you can even have an impact. The short answer is "maybe." For example, you could purchase stock in individual companies in order to retain your proxy voting rights. This would require that you conduct a significant amount of research on an ongoing basis, construct and maintain a portfolio with the proper asset allocation, learn about the proxy issues, and then cast your vote. However, your vote may mean little in the face of the proxies cast by the major institutional investors and mutual fund companies, which often have significant volumes of a particular company's stock.

To up the ante, you could submit a shareholder proposal to the company, requesting a vote on the issue of your concern. While the company is likely to recommend against your proposal and galvanize institutional investors to back their position, this tactic has been used to at least elevate a variety of shareholder concerns to the attention of the board and other shareholders. In some cases, companies have even responded by agreeing to take certain steps, such as studying the feasibility of a particular issue, in order to get such proposals rescinded. Of course, this effort requires a significant amount of work.

The Issue
From a practical corporate governance perspective, investors want to know whether the fund in which they invest supports the best interests of shareholders, such as policies for expensing stock options, the manner in which the board of directors is chosen, the adoption of poison pills, shareholder approval of golden parachute executive compensation plans, separating CEO and chairman positions, non-discrimination policies, and executive compensation and conflicts of interest (such as voting with management to get a shot at managing pension funds). For related reading, see Governance Pays.)

The good news for investors is that there are some requirements that shed some light on the issue and provide greater clarity for mutual fund shareholders.

The SEC Provides Guidelines
In 2004, the Securities and Exchange Commission (SEC) required that fund companies disclose proxy votes, voting guidelines and conflicts of interest in the voting process. All funds must make these disclosures to the SEC through an N-PX filing, which must either be available to shareholders on the fund company's websites or upon request by telephone. You can also find your fund's N-PX filing on the SEC website.

The N-PX filing will show how the fund voted on proxy issues, detailing whether the issue was recommended by management or shareholders, how the fund voted and what management's recommendation was. However, the filing will not provide all of the details behind each proxy vote, so you will need to cross reference the vote against the company's proxy statement.

Fund companies must also disclose the policies and procedures used to determine how the fund will vote on corporate issues. This information is also available from each fund company in a myriad of forms, including through the fund's "statement of additional information," in its semi-annual or annual reports, as well as by telephone request.

By looking at the fund company's voting record and its policies, fund holders can get a general idea of how the company votes on key issues and if its votes are in line with the best interests of shareholders.

Socially Responsible Funds
A relatively new solution to the problem of monitoring investment managers and how they act on behalf of investors is the creation of
socially responsible funds. These funds view successful investment returns and responsible corporate behavior as going hand in hand.

For example, Domini Social Investments was the first fund company to publish its voting record and did so in 1999 - five years before the SEC mandated such disclosure. Today, socially responsible mutual funds provide easy access to detailed information about their investment philosophies and structure their portfolios accordingly. This information makes it easy for investors to choose a fund that matches their beliefs.

Use Your Money to Shape Your World
Whether y
ou conduct your own research, read reports distributed by a variety of organizations dedicated to socially responsible investing or choose socially responsible mutual funds, putting your money where your conscience is has never been easier. With just a little bit of extra effort, you can ensure that your mutual fund manager is acting in a similar manner to how you would act. If this isn't the case, look on the bright side: there are thousands of funds to choose from.

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