"How should you vote," a clearly risk-averse woman asked, "when you're in a fine-performing conservative stock fund and they want your permission to do things that are speculative?"
She was referring to the proxy card she had received from the $4.2 billion Janus Fund, the No. 1 capital appreciation fund for the five years ended June 30, according to Lipper Analytical Services, with an average annual total return of 16.2 percent -- well ahead of the 9.7 percent average return for the Standard & Poor's 500 Index.
The card asked her and about 435,000 other shareholders to vote on six items, including a proposal "to amend the Fund's fundamental investment limitations concerning futures, options and other derivative instruments."
Given the fund's good performance record, an easy -- and not necessarily wrong -- answer to her question would have been to accept the fund trustees' recommendation on faith. But that would have been too glib. A better answer: suggest she study the proposal to be sure she understood it and, if necessary, call Janus' 800 number.
Discussed in legalese for nearly three pages (plus an appendix) in an accompanying 49-page proxy statement, the proposal, was not easily understandable. Its purpose -- to protect the fund's portfolio against adverse market movements -- may even have been missed by shareholders who took a bit of time to scrutinize the explanation.
Since one of your funds could submit a similar proposal and proxy statement to you one day for similar reasons, a look at the Janus case may help you to be prepared to weigh what your fund's trustees or directors recommend to you.
Janus' investment limitations had included the provision that the fund couldn't "write, purchase, or sell puts, calls, or combinations thereof, or deal in commodities." Most Janus shareholders probably were unaware of it, inasmuch as it appeared in the fund's statement of additional information, which many usually don't request.
The proxy's proposal (which was approved at a special meeting of shareholders a few days ago) was essentially twofold:
* Kill the prohibition against buying or selling puts and calls.
* Replace the commodities limitation with a complicated longer one and adopt a new operating policy concerning commodities that consists of one 96-word sentence.
It's not hard to see how a hasty reader may have conjured up images of speculation in options or cocoa and pork bellies.
Neither, however, should have been expected of a fund whose stated investment objective has been -- and remains -- "long-term growth of capital in a manner consistent with the preservation of capital."
Nor were such practices what James P. Craig III, portfolio manager since 1987, had in mind when he asked the fund's trustees to submit the proposal to a shareholder vote.
Asserting that "Janus Fund is not changing its stripes," Craig says his principal purpose was to become able to reduce the fund's exposure to the currency exchange risk that arises from his investment in stocks denominated in foreign currencies.
Having been unable to use certain established hedging techniques against the risk that the U.S. dollar may become stronger against other currencies, he has had to cut back his position in a company such as Elsevier, a Dutch publishing firm that he likes. "It's not because of the company," he says, "but because of the dollar."
Elsevier wasn't the only one. "I have had to make other sales that I didn't want to make," he adds.
While Craig has long invested in such foreign stocks as Jaguar and Singapore International Airlines, his dilemma has become greater as his non-U.S. holdings have increased in importance. They now make up 10 percent to 15 percent of Janus' much greater net assets and, unless its investment policy is changed, can run as high as 25 percent.
To hedge against currency risk, Craig would, for example, enter into "rolling forward contracts" -- to sell guilders, say, at a certain price for future delivery if he expected the guilder to weaken.
This is where the proxy proposal's reference to commodities came in. Foreign currencies are regarded as "financial commodities" -- as distinct from "physical commodities" such as cocoa and pork bellies. For him to be able to deal in them, the prohibition against dealing in commodities had to be changed.
The proposed policy also would permit Craig to use S&P 500 or other index futures contracts to hedge against a fall in the U.S. stock market when he feels that risk is high. Gains from such transactions would be expected to offset at least a part of the drop in his portfolio's value and reduce the need to sell stocks.
Until now, he has managed to achieve a good record for down markets by being heavily in cash equivalents. He regards index futures as a potentially useful, additional tool, which would be desirable to have as the fund grows larger.
For now, he has no plans to use them. Having liquidated or trimmed positions in several companies in whose earnings prospects he lacked confidence and finding "there's not a lot of undiscovered earnings growth out there," he currently has Janus at 30 percent cash.