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QUARTERLY MUTUAL FUND REPORT

Proxy Voting Reports Hefty but Revealing

October 07, 2006|Kathy M. Kristof | Times Staff Writer

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.

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