Mutual Fund Voting

Bill Sjostrom —  5 October 2006

The W$J ran a story earlier in the week on mutual fund voting (see here). The story reported on the somewhat old news that academic research has “found no evidence of fund companies tailoring their votes to specific business relationships,” contrary to earlier claims by shareholder activists. The article is nonetheless of interest because it describes the varying processes mutual fund companies use in deciding how to vote.

One thing I’ve found puzzling about mutual fund voting is that the SEC requires fund investment advisers to vote the shares in the portfolios they manage. The SEC asserts that “[t]he duty of care requires an adviser with proxy voting authority to monitor corporate events and to vote proxies.” This requirement has more or less spawned the proxy advisory industry and the attendant fees paid by mutual funds to ISS, Glass Lewis and the like for their voting advice. In my mind a specific fiduciary duty to vote is foolish. Certainly, the voting of proxies by mutual fund managers should be subject to the duty of care and loyalty. But a fund manager should be free to decide that it’s in the best interest of a fund for the manager to not to spend the time and money involved in voting. At least a fund manager should be able to disclaim the fiduciary duty to vote by saying as much in the fund prospectus. Personally, I would rather a fund not spend money on proxy advisers or voting thereby reducing fund expenses. I’m in complete agreement with the sentiment expressed in the article–if a fund manager does not agree with a company’s direction, they should either not invest or sell as opposed to attempting to change the direction of the company through voting. As for index funds that don’t have this luxury, I don’t care. I invest in these funds to get the market return. I don’t want to pay higher expenses in the event the index fund manager decides to engage in shareholder activism. Leave it to the hedge funds and keep my expense ratios low.

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