Passive fund can be active in way it casts proxy votes

The Insider

Your Money

September 05, 2004|By BILL BARNHART

ONE WAY TO GET cranked up for voting on Nov. 2 is to examine how your mutual funds voted this year.

Last week, in filings to the Securities and Exchange Commission, hundreds of mutual fund companies reported for the first time how they voted in elections of directors and other proxy voting matters at the companies their funds own.

It was the first of a huge annual data dump that is certain to generate many doctoral dissertations and, if you pay attention, improve your knowledge of your investments.

Kunal Kapoor, director of fund analysis at Morningstar, says reviewing how your funds voted, especially on contentious issues, "tells you something about how they are thinking about their investments."

A quick review of the disclosures, called SEC Form N-PX, indicates broad support of corporate management by mutual fund managers - no surprise.

But the notion that corporate democracy is a costly, ivory-tower exercise when an investor can simply sell a troubled stock is rebutted by what appear to be carefully chosen votes against management at the spring's round of annual shareholder meetings.

The Vanguard 500 Index Trust is a passively managed index fund that owns the 500 companies in the S&P 500 index.

Yet there was nothing passive about Vanguard's decision to withhold its votes from seven of the 11 director candidates at Cisco Systems, including Chief Executive Officer John Chambers.

Vanguard Group, along with other major fund organizations, opposed the SEC's rule requiring them to disclose their proxy votes. Unfortunately, Vanguard and other funds refuse to discuss the thinking behind specific votes just disclosed.

But as an experiment, I compared the voting by the Vanguard 500 Index Trust against voting by Institutional Capital, a much smaller fund group that actively manages portfolios.

Institutional Capital and its chief investment officer Robert Lyon have a reputation for attempting to persuade corporate management at companies they own.

"We've always taken [proxy voting]very seriously," said a spokesman for the firm. "We think a lot of the industry has come into this [approach] now."

Similarly, Vanguard's proxy voting guidelines, available on the firm's Web site, confirm Vanguard's intent to exercise its right to vote.

ICAP and Vanguard fund Index 500 were often in sync with companies they targeted.

Both withheld votes for some directors at credit card giant MBNA. But Vanguard refused to support the entire slate of seven candidates, while ICAP endorsed three.

At Lockheed, Vanguard and ICAP joined in opposing director candidates Norman Augustine and Joseph Ralston. But Vanguard, and not ICAP, voted for former Enron director Frank Savage.

On a social issue, ICAP voted against management and in favor of a shareholder proposal at Marathon Oil calling for a report on the company's response to the threat of greenhouse gases and global warming.

Vanguard, following its policy on social issues, abstained.

Over time, mutual fund proxy voting patterns will reflect how closely fund managers are aligned with the voters that matter - their shareholders.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoney @

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