Proxy season is here again, so read carefully, and then vote

Your Funds

Dollars & Sense

January 27, 2002|By CHARLES JAFFE

SPEAKING TO a small group of fund investors recently, I asked how many people owned Janus Funds.

About half of the 40 people there raised their hands.

Just one of those investors had voted on the proxy statement they received from Janus weeks ago announcing changes to the company and its investment policy.

The nonaction was explained away with phrases like "Couldn't make heads or tails of it."

It's proxy season, the time of year when fund firms with issues to resolve send dense, complicated reading material your way.

Proxies can be as important as they are confusing. Though passed off by fund firms as routine, they should raise big red warning flags with investors.

Proxy paralysis - where investors don't vote - is common for all fund firms, not just Janus. But the Denver firm's proxy is a 108-page booklet, practically a dreadfully dull novella.

Its requests are commonplace, just in more dense language than most. The current Wasatch funds proxy, by comparison, is nine letter-size pages.

What's curious about the Janus proxy - and others issued this year - is the timing. The easiest way for a firm to get a positive proxy outcome is to take the vote when things are going well. All seven of the Wasatch funds, for example, are up over the last 12 months, compared with the average fund, which is down nearly 8 percent.

That performance may explain why Wasatch shareholders aren't particularly nervous about, say, voting to let the funds buy stocks on margin.

At Janus, roughly five in six funds have underperformed the average fund in the last year.

Given that shortfall, investors are flummoxed by the firm's request to let its funds buy certain derivative securities. Derivatives, after all, have been linked to financial catastrophes.

"It does seem an inauspicious time for Janus to be asking for more latitude," said Don Phillips of Morningstar Inc., the Chicago-based fund research firm. "Any investor who knows what's being asked of them has to wonder what's going on."

For the most part, firms issue proxies only when there are material changes that must be approved by shareholders. Because of the expense involved - a cost typically borne by shareholders -- funds tend to piggyback votes. Something big requires the proxy, and lesser issues get tacked on.

Notes Phillips: "Fund companies are always incredibly frustrating on proxies, saying they have no intention of buying derivatives or selling short or whatever is on the table. ... But if they have no intention of ever doing this, they don't have much reason to ask for it. And why shouldn't I worry that a fund will be different and that the past record will be even less of a prelude to the future under the new rules?"

Janus spokeswoman Jane Ingalls was quick to say the current proxy won't impact day-to-day operations of the funds.

She noted that company founder Tom Bailey's decision last year to sell his stake in the firm could have been considered a change in control of the firm, and therefore required proxy action. That unique circumstance means the company - and not shareholders - is paying for this particular proxy vote, allowing Janus to take care of housekeeping at no cost to investors.

The desire to capture the cost savings for the shareholder, Ingalls notes, explains the poor timing.

If you are faced with a hard-to-understand proxy vote, do the following: First, call the fund for an explanation; vote based on how comfortable you are with explanations of how the funds could change.

If the fund isn't helpful, don't automatically vote against the proposals. The fund company almost surely wins if it achieves a quorum; "no" votes help it cross that threshold.

Not voting at all often hurts a fund firm more than a "no" vote (though it may also force the firm to try again and to bill shareholders for the cost).

Finally, watch the fund's future portfolio disclosures. If commodities, derivatives, and more show up in the semi-annual report of your plain-vanilla growth fund, you'll know the fund has changed flavors even if they told you things would taste the same after the proxy vote.

Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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