One board takes its role seriously

Your Funds

Dollars & Sense

August 18, 2002|By CHARLES JAFFE

FOR YEARS, investors have heard regulators talk about the importance of independent boards and how such leadership protects investors.

They've also watched those boards avoid major, visible actions that boot management and reshape a fund.

That's why the recent decision by the board of the Japan Fund to dump its management is so interesting. It's not likely to spur a trend in the fund industry, but every one of these rare corporate-control fights is watched carefully, and investors should be heartened any time a board steps up to its protective role.

The Japan Fund's board, in documents filed last month, wants shareholders to cut ties to Deutsche Bank AG of Germany, which recently purchased the fund. In Deutsche's place, the board wants investors to approve Fidelity Investments to manage the money, with SEI Investments Distribution Co. taking care of the back-office work.

The Japan Fund - which started as a closed-end fund and is the nation's oldest Japanese investment issue - has been part of Zurich Scudder Investments, which in April completed its second merger in five years, combining with Deutsche. When the Zurich-Deutsche deal was finished, Japan Fund manager Seung Kwak - who had been with the fund for 14 years - stepped down.

That resignation and the change in ownership spurred the board to act. According to the proxy statement - directors did not return calls - the management turnover was the problem. A new manager and a new investment firm do not make for the "stability, performance, cost-effectiveness and independence" the board is seeking.

"When a fund is being sold and there is clearly going to be a material change in management as well as a new entity overseeing managers, directors should step in," says Mercer Bullard, the securities lawyer who runs Fund Democracy, a shareholders' advocacy group. "What usually happens is that the directors close their eyes and sign off on the deal."

Still, anyone wishing for more of these types of control battles - particularly if they wrested control away from lousy managers - must be careful what they hope for.

The $335 million Japan Fund shows why.

Morningstar ranks the fund atop all Japan funds over the past 10 years and among the top 25 percent of its peers over the last one, three and five years. For the decade, the fund's annual gain is roughly 3 percent, compared with the average peer's loss of 1 percent.

But Deutsche is not necessarily a slouch when it comes to running a fund invested in Japan. Deutsche's Japanese Equity fund is the best fund in the group for the last three years (it has an annualized loss of roughly 2.4 percent, while the average Japan fund's loss is four times greater).

Meanwhile, Fidelity's Japan Fund had been near the top of the charts over the past three and five years, but it has been a laggard over the last year, losing more than 15 percent and trailing the vast majority of its peers.

And the directors are changing managers and investment firms, which might increase stability over the next decade but increases the fund's turmoil in the short run.

In other words, investors getting the proxy might wonder whether directors are betting on the right horse by changing to Fidelity.

It wouldn't be the first time investors thought an active board was wrong. In cases for control of the Yacktman Fund and one of the Navellier funds several years ago, shareholders voted for the namesake managers and against the directors.

Also making fund proxy fights rare is the biggest firms' general use of one board to represent most or all of the family's funds. Directors bring home big paychecks to sit at the helm of, say, 60 funds and might be reluctant to get aggressive with one fund when the resulting controversy could cost them their paychecks from the other 59.

"I don't know of any situation like this occurring where the directors sat on multiple boards for one big company," says Geoff Bobroff of Bobroff Consulting Group in East Greenwich, R.I. "That said, there are cases where directors have stepped in and made changes to how a fund operates. It hasn't been `Let's find another manager,' but it has involved demanding some accountability."

Bobroff and others think boards could get more aggressive, particularly if a fund is a consistent loser. Bullard counters that shareholders pick the managers and directors make sure the fund's expense structure and oversight are proper.

Either way, it's a good argument for the industry to have.

"I'd like to think that every time there is one of these cases and these issues come to light, shareholders win," Bobroff says.

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

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