Proxy disclosures can raise questions

Your Funds

Your Money

May 02, 2004|By CHARLES JAFFE

THERE ARE many ways to "follow the rules."

So when regulators talk about making changes in the way funds operate, the results of their new requirements don't always live up to expectations.

Proof of that came to my house last week, when I received a notice of the new proxy voting guidelines for one of my largest mutual fund holdings, the Muhlenkamp Fund.

Regular readers of this column know that I seldom mention my own investments, not only to avoid potential conflicts of interest, but also because I don't want my investment position to be seen as an endorsement. One reason I like this fund is manager Ron Muhlenkamp's plain-spoken, straightforward memos to investors.

His new proxy voting guidelines pull no punches.

Regulators require fund companies to disclose how they vote on corporate issues so that fund shareholders can be certain the people running their money are acting in line with their expectations and values.

"In the past," Muhlenkamp's statement says, "we've voted our proxies based upon what we perceived to be the merits of the individual proposals.

"In most cases, we've voted with management [if we don't like what management's doing, we wouldn't own the stock], but in areas such as poison pills and management bonuses, we've often voted against management.

"The new [proxy disclosure] rule will require us to keep records of our votes and, presumably, would require us to defend those votes at a future date. To better use our time and to simplify this hassle, we have adopted the policy of simply always voting in line with management recommendations."

In other words: We're not wasting time on this; we'd rather pick stocks than vote proxies.

"I suspect Muhlenkamp is just putting in writing what a lot of other people are doing, but it bothers me," says Roy Weitz, founder of the Web site. "Fund managers should not be picking which rules they follow and which ones they don't."

Muhlenkamp, who noted that his public relations guy thought he was crazy to make the disclosure, acknowledges that the company's new policy is the opposite of what regulators intended.

"But I don't want to be in a position five or 10 years from now having to justify the way I voted on something today," Muhlenkamp says. "To defend my position today would require voluminous notes, which would take time that I don't have.

"The trustees have decided the best use of my time is to make money, not to justify my position on a proxy vote so that I can defend what I was thinking. If we don't like what a company is doing, we'll sell the stock. That decision - what we buy and sell - is the one we need to be most focused on."

Muhlenkamp's position is not that different from those of many fund managers. It's the public pronouncement that's unusual.

At most large companies, fund managers don't sit on the proxy-voting committee. They're not voting the proxy on every stock they own. The committee makes the decision. and the manager is mostly uninvolved. That has not changed just because rules require disclosure of votes.

There is little doubt that investors prefer results to disclosures and returns to process. Muhlenkamp noted that only one shareholder (besides me) has called him to discuss the issue.

Still, the feeling that rules are being ignored has to rub investors the wrong way.

"This is management's prerogative, but I think it's a stretch to say that an `always-side-with-management' approach is consistent with the obligations of a fiduciary," says fund manager Amy Domini, one of those behind the proxy disclosure rules. "My gut reaction is that this is someone saying, `If you tell me what to do, I won't do anything.'"

From the perspective of an investor in the fund, Muhlenkamp's decision is nerve-racking.

I believe funds have a responsibility to vote proxies with shareholder interest in mind, but I also want management to keep its eye on the ball and pick great stocks.

On principle, Muhlenkamp's decision bothers me. But so does rushing out to pay Uncle Sam a year's worth of capital gains that would be realized if I made a change to my portfolio.

In the end, most investors will live with this kind of behavior if performance justifies it.

Says Muhlenkamp: "We've left it so that if there is a proxy issue we feel strongly about, we can review the voting procedure. But if there's an issue that really bothers us, we won't own the stock. The decision won't be that we are afraid to vote against management in a proxy; it's that we voted against management by putting our money someplace else. I think our shareholders will be able to live with that."

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