Proxy statement means `watch that fund'

Your Funds

Your Money

November 20, 2005|By CHARLES JAFFE

The folks running the Oppenheimer funds don't know my father-in-law.

If they did, they never would have sent him a 91-page proxy statement asking him to vote on 13 issues, all for two funds that "we don't have very much of our money in."

"It's not that I couldn't figure it out," the 79-year-old retired lawyer and judge told me. "It's that I don't want to work that hard. I'd bet that 95 percent of the people who got this just threw it right away and that most of the people who sent it back just voted with the board without actually knowing if that was the right thing to do or not."

The judge (that's what I call him) did neither. He sent the booklets to me along with one basic question: "Do these things change my fund to where I might want to get rid of it?"

Critical question

For any investor faced with a mutual fund's proxy ballot, that is the critical question to answer. Fund companies don't send proxies often, but when they do, the industrywide trend has been toward bigger, tougher-to-read booklets covering more issues than ever.

That's borne more out of expediency and a concern for costs than from an effort to conceal something nefarious. Because regular proxies aren't required - and because shareholders pay the freight for all costs when votes are necessary - management lets little issues build up until some unavoidable vote comes along.

The firm then loads every minor issue requiring a vote into one mailing, minimizing cost but maximizing confusion. That's how Oppenheimer's booklet becomes 91 pages and how firms such as Vanguard, Fidelity, Janus and others have issued proxy booklets of more than 50 pages on some funds in recent years.

Most of the issues being voted on concern investment rules and policies, but the real issue is equal footing for all funds within a family.

Other frameworks

At Oppenheimer, for example, some of the 11 funds covered by the proxy started in other families (the Rochester funds and Quest for Value funds). As such, they were built on a different prospectus framework than funds that began life in the Oppenheimer family.

Operating all of a firm's funds on the same rules structure makes them a bit easier to run and govern.

Management companies know that proxies are a pain. Because they are so dense, my father-in-law's logic holds: Investors frequently toss the ballot without voting, forcing the fund company to spend more shareholder money to hire a solicitor to bring out the vote.

Investors also ignore proxies because they figure their vote doesn't count for much. With the exception of the extremely rare big deal - of which there have been maybe three cases in the last 15 years - the votes go through precisely as the fund board recommends.

If you can't stop these votes from going the board's way, it's easy to think there is little reason to care.

In the case of the Oppenheimer funds, the board wants more flexibility on certain investment policies, such as short-selling or standards for diversification.

Management makes it clear that altering current policies does not mean that the funds will suddenly tilt in new directions.

Shareholders aren't likely to wake up and find their fund suddenly investing in something completely out of the charter.

The ballot includes 13 issues, but it's hard to believe an investor will notice a single difference, assuming everything passes on Dec. 5. (I've told my father-in-law to hang onto the funds.)

Many proxies are not so kind. Shareholders who don't pay attention could find themselves voting to approve a 12b-1 fee for sales and marketing of the fund - which raises the expense ratio paid by investors - and could be changing policies about diversification, investment strategies or even what issues management will need a vote on in the future.

Even in the most benign situations, like the Oppenheimer case, there is no denying that when a fund's board of directors gets more control through charter changes approved in a proxy vote, there is potential for below-the-radar alterations in the future.

Warning sign

Those issues aren't necessarily a problem, until they surface in the form of deteriorating performance caused by management moves the shareholder might not have thought were possible. It doesn't happen often, but that's no reason to ignore the proxy as a potential warning sign.

Management doesn't ask for your opinion as a shareholder every day. When it does, it's a wake-up call; make sure you can live with the proposed changes, but put the funds on your "watch list" until you feel certain that they live up to the standard proxy-ballot promise that nothing bad will happen when you vote "Yes."

Charles Jaffe is senior columnist for MarketWatch. He can be reached by mail at Box 70, Cohasset, Mass. 02025-0070.

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