Proxy Voting Reports Hefty but Revealing
With about $725 billion in stock mutual funds, American Funds wields considerable clout in the annual proxy votes that all publicly traded companies conduct. Its recent holdings included 9 million shares in toy maker Mattel Inc. and 99 million shares in drug maker Pfizer Inc.
But despite its big stick, American Funds prefers to speak softly. The funds, managed by Los Angeles-based Capital Research & Management Co., don’t discuss individual proxy votes, so as to avoid giving rivals insight into their investment strategies, said spokesman Chuck Freadhoff.
For decades, investors in American Funds and most other mutual funds had no idea of how their shares were even voted on company proxies. But that changed in 2004, when the Securities and Exchange Commission required mutual funds to disclose their proxy-voting policies and records.
At the time, the rule was seen as a major step forward for shareholder rights. Mutual fund investors would be able to put their money into funds that shared their positions on issues such as global warming and pay equality for women, and take it out of funds that took a different point of view.
There’s just one catch: Hardly anyone looks at them. A survey conducted by the Investment Company Institute in February ranked 19 factors that investors said were of greatest importance when buying a fund. How the fund company voted its proxies tied for last place, with only 15% of investors considering it.
“We’ve found this to be a very low priority among fund shareholders,” said Chris Wloszczyna, a spokesman for the Investment Company Institute, a mutual fund trade group. Proxy voting didn’t show up at all as an “after purchase” factor in the survey, which rated fees and performance as top priorities.
That may be because the reports are still relatively new and incredibly weighty. It’s not unusual for a single report to span 1,000 pages. It’s taken even professional investment analysis firms some time to sort through them.
Still, there is a wealth of data in the proxy voting reports, noted Jackie Cook, senior research analyst with Corporate Library, a research firm that mines the reports to determine which funds have the most shareholder-friendly voting records.
The reports tell investors what stocks a fund owns, whether the fund votes its shares in corporate elections and how it votes its shares.
Because some fund companies have business relationships with the companies they buy -- Fidelity Investments, for example, operates retirement plans for many of the Fortune 500 firms it holds in its index funds -- the fund must also tell shareholders how it handles voting when there is a real or perceived conflict of interest.
The reports are “definitely worth reading,” Cook said.
The proxy voting records filed by American Funds, for example, show that though it usually sides with the company, it’s not afraid to challenge management from time to time.
One group of the company’s funds voted against all of Exxon Mobil Corp.’s nominees for its board of directors in April, for example. Freadhoff declined to discuss the reason, but the vote followed disclosures that former Exxon Chief Executive Lee R. Raymond had a retirement package valued at $400 million when he stepped down last year.
American Funds also voted against a shareholder proposal to align pay more closely with performance at El Segundo-based toy maker Mattel. But it did vote for a shareholder proposal opposed by management at Qwest Communications International Inc. that would require a majority vote in board elections.
It also voted against management at JPMorgan Chase & Co., supporting a measure that would eliminate the poison-pill takeover defense that helps protect the company from a hostile takeover.
According to Freadhoff, American Funds has seven proxy committees, which each vote independently. In addition, American Funds’ analysts, who closely follow each of the companies owned by its funds, are consulted about how the fund company should vote proxies, and those analysts don’t always agree among themselves, Freadhoff said.
“A recommendation is put together by the analysts, and you may have different analysts with different points of view,” he said. “It’s not a rubber stamp. They get in there and talk about it -- sometimes fight about it.”
American Funds’ proxy voting guidelines say that the company generally supports management’s choice of directors and supports “reasonable increases in authorized shares.”
But it will vote against management’s recommendations when the company is calling for “blank-check” authorizations of new shares or if the company believes the increase in authorized shares would be dilutive to the interests of existing shareholders, the guidelines say.
The Securities and Exchange Commission requires that mutual funds provide two types of proxy voting information: One is proxy voting guidelines -- essentially a policy statement about whether the fund company will always vote its shares and whether it has particular issues that demand a set position or whether it looks at each corporate election on a case-by-case basis.
The other is so-called N-PX forms, which detail how a fund has voted in every election affecting shares the fund owns over the last year.
This information must be made available to shareholders in one of three ways:
* Print. Shareholders can request a printed copy of their funds proxy voting guidelines and N-PX form by calling a toll-free telephone line maintained by the fund company.
* Internet. Proxy guidelines and N-PX forms are posted on the fund company’s websites.
* SEC. Fund companies also must file these forms with the Securities and Exchange Commission. Investors can look them up on the SEC site at www.sec.gov. Look under “Filings & Forms” and click on “Search for Company Filings.”
From there, scroll down and click on “Mutual Fund Proxy Voting.” Type in the fund name, and from there look for the “annual report of proxy voting,” or form N-PX.
If you have trouble locating the fund on the SEC site, you can call your fund company to ask under what name the fund is listed there. You might also find it easier to find the filing on the company’s website than to access the document through the SEC.
For American Funds, for example, go to www.americanfunds.com and type “proxy voting” in the search field. That immediately brings up a page with relevant hits, including one saying, “Proxy voting and American Funds ... what you need to know.”
This prompt connects investors to the fund company’s six-page proxy voting guidelines and a list of its funds. Investors can click on any fund name and link to that fund’s latest proxy voting record.
It’s best to start with the guidelines because they spell out the company’s voting philosophy. Understanding that philosophy helps investors evaluate voting records that might otherwise seem inconsistent, Cook said.
As alternatives, shareholders -- or prospective shareholders -- who want a copy of American Funds’ proxy voting guidelines and the N-PX forms can call American Funds at (800) 421-0180 for a printed copy.
The SEC will also mail the reports, but it charges 24 cents a page. Reports for just two of American Funds’ funds -- Growth Fund of America and Capital World Growth -- contain 1,535 pages of information, which would cost about $370 to be copied and mailed.
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(BEGIN TEXT OF INFOBOX)
How American Funds voted
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The Los Angeles-based mutual fund giant sometimes sides with management on proxy votes and
sometimes doesnt.
*--* Company Issue How it voted Pfizer Separate role of Against (with management) chairman and CEO U.S. Bancorp Shareholder approval Against (with management) of compensation policy Mattel Link pay more Against (with management) closely with performance Qwest Communications Require directors to For (against management) get a majority vote JPMorgan Chase Eliminate For (against management) poison-pill takeover defense
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Source: Times Research
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Mutual fund expense ratios
-Mutual fund expenses for operations and management fees are reportedas an “expense ratio,” the percentage of fund assets taken annually by the fund company. Certain kinds of funds are more expensive to runthan others, so investors should compare their funds’ expenses with the category averages, shown below.Stock funds
*--* Avg. Avg. expense expense Category ratio Category ratio Long-short 2.3% Small-cap value 1.6% Bear market 2.2 Foreign large-cap blend 1.6 Pacific/Asia 2.1 Natural resources 1.5 ex-Japan Technology 1.9 Convertibles 1.5 Diversified 1.9 Small-cap blend emerging mkts. 1.5 Latin America 1.9 Large-cap growth 1.5 Foreign 1.8 Utilities 1.4 small-/mid-cap grow Health 1.8 Mid-cap value 1.4 Europe 1.8 Foreign large-cap value 1.4 Foreign 1.7 Mid-cap blend 1.4 large-cap growth Diversified 1.7 Large-cap value Pacific/Asia 1.4 Financial 1.7 World allocation 1.3 Foreign 1.7 Moderate 1.2 small-/mid-cap allocation value Small-cap growth 1.7 Large-cap blend 1.2 World 1.7 Conservative allocation 1.2 Communications 1.7 Target date 0.7 2000-2014 Japan 1.6 Target date 2030+ 0.7 Precious metals Target 0.6 1.6 date 2015-2029 Mid-cap growth 1.6 Domestic stock 1.4 fund avg. Real estate 1.6 International 1.7 stock fund avg.
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Bond funds
*--* Avg. expense Avg. expense Category ratio Category ratio Emerging 1.5% Long-term 1.0% markets government Bank loan 1.4 Inflation-prote 1.0 cted Multi-sector 1.3 Short-term 1.0 investment grade High-yield 1.3 Long-term 1.0 (junk) investment grade World 1.3 Short-term 1.0 government High-yield Muni 0.9 muni 1.2 interm.-term (national) Muni single 1.2 Muni California 0.9 state interm./short long-term Muni 1.1 Muni short-term 0.9 California (national) long-term Interm.-term Ultra-short-te 0.8 government 1.1 rm Muni long-term 1.1 Government bond 1.1 (national) fund avg. Interm.-term 1.0 Corporate bond 1.1 invest. grade fund avg. International 1.3 bond fund avg.
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Source: Morningstar Inc.
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Biggest exchange-traded funds
-Here are the 25 largest exchange--traded funds, by assets, ranked bytheir third--quarter performance. ETFs, which trade like stocks, arefunds that track indexes of stock and bond market sectors.
*--* Total return Fund 3rd-q. YTD 3-yr.* iShares Dow Jones Select Dividend Index 11.4% NA 6.2% Utilities Select Sector SPDR 6.1 10.9 19.7% iShares S&P; 500 Growth Index 6.0 5.0 8.2 iShares Russell 1000 Value Index 6.0 13.4 17.1 iShares FTSE/Xinhua China 25 Index 5.9 32.0 NA SPDR 500 5.5 8.7 12.2 iShares S&P; 500 Index 5.4 8.7 12.2 iShares S&P; 500 Value Index 5.0 12.0 16.1 DIAMONDS Trust, Series 1 5.0 10.9 10.5 NASDAQ 100 Trust Shares 4.9 0.6 8.3 Vanguard Total Stock Market ETF 4.5 7.9 13.2 iShares Lehman Aggregate Bond 4.0 2.7 3.0 iShares Lehman TIPS Bond 3.9 1.6 NA iShares MSCI EAFE Index 3.6 14.0 22.0 iShares Russell 1000 Growth Index 3.3 3.0 8.0 iShares MSCI Emerg Mkts Index 3.1 9.7 30.0 iShares Russell 2000 Value Index 2.4 13.2 18.8 iShares Lehman 1-3 Year Treasury Bond 1.9 2.9 1.8 iShares Russell 2000 Index 0.7 8.7 15.4 iShares MSCI Japan Index --0.7 0.2 16.0 MidCap SPDRs --0.8 3.1 14.9 iShares S&P; MidCap 400 Index --1.0 3.1 15.2 iShares S&P; SmallCap 600 Index --1.1 6.6 17.1 streetTRACKS Gold Shares --2.9 15.3 NA Energy Select Sector SPDR --5.5 7.3 32.4
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*Three--year returns are annualized.Returns are based on changes in market value.Source: Morningstar Inc.
