Spring is drawing near, and that means warmer weather, baseball and proxy balloting at many mutual fund companies.
This is the season when fund groups traditionally hold their shareholder meetings and voting. And while proxy issues usually don't rank high on the list of shareholder concerns, most experts agree that investors should make an effort to understand what's happening and vote accordingly.
One reason to do so relates to cost. Fund companies face a minimum cost of $20,000 to $30,000 to draw up, print and mail proxies and count the votes--and in most cases those costs are borne by shareholders, says Roy W. Adams Jr., a San Francisco area securities attorney.
For a small fund with perhaps 1,000 shareholders, that works out to $20 to $30 or more each.
When fund companies don't garner enough shareholder participation to validate a proxy vote, the process has to be repeated at additional expense--to say nothing of the inconvenience to shareholders of having to vote again.
Many would also argue that shareholders have a moral obligation to vote. Funds are mutually owned, after all. In addition, there's the more important question of safeguarding your interests.
"You should always be an active investor, even on mundane issues, so that you'll be in the habit of participating when important issues come along," says John Markese of the American Assn. of Individual Investors in Chicago.
Because most funds are set up to avoid annual meetings and votes, when a proxy does arrive in the mail, "it may mean something's up," says Adams.
There's no hard and fast rule to separate the mundane from the significant issues. Topics such as ratifying management's choice of an accounting firm or even renewing the annual management contract would usually qualify as fairly routine.
It's also hard to get too excited about the election of trustees or directors, since you probably won't get enough information to find out who they really are or where they might stand on various issues.
Changes involving fees and a fund's investment policy would be considered more substantive.
The 1.3 million investors in Fidelity Magellan, the nation's largest mutual fund ($32 billion), will vote on 20 proposals in this year's proxy.
Two of those proposals would allow greater use of foreign managers and analysts with expertise in local markets. Another would broaden Magellan's investment range to include "foreign and domestic securities of all types when seeking capital appreciation."
As it is, Magellan, which built its superb long-term record primarily with U.S. stocks and which is commonly classified as a domestic growth portfolio, faces no prospectus limits on the amount of assets it can invest overseas.
At last count, it had an 8% foreign weighting.
Two foreign-based companies within the Fidelity organization specialize in international securities, and the intent of the two foreign-manager proposals is to clarify that Magellan can use them if it chooses, says Arthur S. Loring, Fidelity's vice president for legal affairs.
The proposal dealing with a wider investment parameter is mainly designed to make clear that Magellan can buy corporate debt securities if it wants, Loring says. The fund is not likely to be managed differently with the changes, he adds.
Jack Bowers, editor of Fidelity Monitor, an unaffiliated newsletter based in Rocklin, Calif., doesn't have a problem with these changes and the more mundane issues on the ballot.
"Fidelity managers are sharpening their skills overseas, and they see lots of opportunities there," Bowers says. "It makes sense to give them this freedom."
But Markese feels proxy proposals of this type, if approved, could result in a changed fund. "What manager wouldn't want the ability to go overseas?" he asks. "But that doesn't mean they all should."
Markese says he would be suspicious of such proposals and would look them over carefully. "There are still plenty of good domestic investment opportunities," he says.
In general, other proxy proposals worth scrutiny are those calling for changes in a fund's costs, such as imposition of higher management fees or adoption of a marketing, or 12b-1, fee. Bowers and Markese say they normally vote no on resolutions that boost fees.
In Magellan's case, a different proposal is on the ballot--one calling for approval of a management contract that "can only result in a management fee that is the same or lower compared to the current contract," according to Fidelity.
In essence, a key component of Magellan's management fee would drop slightly when Fidelity's overall assets exceeded $250 billion--almost where they are today. Additional small fee drops would kick in at higher asset levels.
While pointed in the right direction, these economies of scale are minuscule--they would save a $10,000 investor about 50 cents a year, according to the proxy statement.
Also, they don't guarantee that Magellan's shareholder-borne expenses wouldn't rise, because this component is only part of the overall management fee, which is only part of the overall expense ratio.
Magellan's current expense ratio of about 1% is the equivalent of a $100 yearly charge to a shareholder with a $10,000 position in the fund.
As legal documents, most proxies are written in a style that ranges somewhere between boring and incomprehensible. Some documents may run 80 to 90 pages.
If you read the discussion of important proposals and still can't understand what's at stake, a good rule of thumb is to vote no. The fact that hundreds of funds have adopted 12b-1 fees over the past dozen years suggests that plenty of shareholders didn't understand what they were voting on. At a minimum, a no vote could pressure fund companies to publish more understandable proxy documents. More important, it could prevent you from voting to fix something that isn't broken.