Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
FYI: I wrote yesterday about what I think is a congealing regulatory view that index funds are Good and should be encouraged, and that active management is Bad and should be discouraged, but here is a wonderful mad corrective from Eric Posner and E. Glen Weyl at Slate, calling on Congress to ban index funds: Regards, Ted http://www.thinkadvisor.com/2015/04/17/should-mutual-funds-be-illegal?t=mutual-funds&page_all=1
The real loss of control began when ownership of companies became so diluted due to so many shares being issued. Management then became the defacto owners/managers of the company.
The sadder truth is the vast majority of mutual fund managers don't care at all about the corporate governance of the companies they own. So the idea that they're pushing airlines to raise prices seems a little silly. They tend to be passive owners whether they're index funds or not. And there is actually an incentive for them to remain passive. Fund companies are always angling for lucrative 401k and pension fund business. If they become activist shareholders pressuring management to do anything, they could lose that business or potential business. So they rubber stamp almost every management proposal and if they don't like a stock they simply sell. Engaging with management requires too much energy for them.
"Engaging with management requires too much energy for them"
This whole concept seems a bit silly.
Why is the management judgement of a mutual fund innately superior to the management judgement of any particular "owned" company?
Why would any mutual fund customer have any reason to believe that "their" mutual fund management would necessarily reflect the desires or beliefs of the mutual fund customers? For that matter why would the desires of the mutual fund customers themselves be consistent, uniform, or even in agreement?
Why would the desires or interests of any particular mutual fund company necessarily be in agreement with those of some other mutual fund company?
Old Joe, "Why would any mutual fund customer have any reason to believe that "their" mutual fund management would necessarily reflect the desires or beliefs of the mutual fund customers?" If you truly believe that, why do you invest in mutual funds at all instead of individual stocks? It comes down to that concept of being a fiduciary, of management putting its customers' interests before their own. But if you are saying managers' desires have nothing to do with your own, how can you trust them as your shareholder representative? The desires of mutual fund customers are obviously not perfectly consistent, but the investment objectives of a fund are supposed to mean something and investors with certain overlapping desires do invest collectively based on them.
OJ - how about this hypothetical: A fund you own has a large stake in a particular company. A known securities fraudster is nominated for the board of said company. Wouldn't you want your fund's shares in the company voted against that board candidate?
@AndyJ- Good morning. In the example that you give, you present an improbable extreme situation, obviously to illustrate your point, which is fair enough. In actuality, the mutual fund would more than likely bail out of that particular position as the most efficient way of dealing with it, and surely regulatory agencies would become involved also.
To be a bit more realistic, how about a real-life situation where a known butcher (remember "Chain-saw Al" Dunlap?) is attempting to dismember the Sunbeam Corporation. Surely it's believable that one mutual fund company might think that "Chain-saw Al" is just what's needed, while another mutual fund company might feel exactly the opposite. How much of the resources of the mutual fund industry is it efficient or practical to devote to a situation like that?
From another discussion, Crash opined the following: "Particular prescriptions are costing a criminal amount of money... Can you say, "Pfizer?" Six letters, but functions as a four-letter-word."
And my question with respect to that situation was this:
If a mutual fund management were to challenge the management of Pfizer, should it be to attempt to convince Pfizer to reduce their prices "so as to be more fair" to sick and needy consumers, or to maintain and increase their profits at the expense of those consumers? At least some of those consumers may very well also be investors with the mutual fund company.
My position is simply that mutual fund companies cannot consistently represent consumer's or investor's best personal interests, and so should just mind their own mutual fund business, and try to make as much profit as possible for their customers.
OJ: "In the example that you give, you present an improbable extreme situation ..."
Maybe, but there could be multiple other reasons to vote against a board candidate or a slate of candidates - cronyism, self dealing, etc., and I'd argue you're giving regulatory agencies more power and more willingness to use it than actually exists.
I agree with your statement about "consistently representing consumers' or investors' best personal interests" - but I don't think that's really the question. Why should they not vote shares on selected questions in a way that they see as clearly in their investors' best interest as investors?
In your Chainsaw Al example, I don't see why an MF shouldn't vote shares on a question like that. The fund managers presumably know what's going on at the company, or they wouldn't have invested there; I don't see how that would cost the fund much in the way of resources, and they may not want to sell the fund if it still fits within their criteria. And who cares if one fund sees the question in a different light from another?
By the way, there are already SEC rules against shareholder resolutions that fiddle around in too detailed a way with company operations.
"why should they not vote shares on selected questions that is clearly in their investors' best interest as investors?"
@AndyJ- No problem with that, Andy. That falls under "try to make as much profit as possible for their customers." I'd agree that there may be "selected situations" where a mutual fund may get involved with the operation of a particular business.
This may feel like math class, but here's another not-so-hypothetical hypothetical: Suppose a mutual fund manager is invested in a bank that is beginning to offer mortgages to poor people and overextended real estate speculators whom the manager believes will ultimately default on those loans years down the road. The bank decides to package those loans into collateralized mortgage backed securities that the fund manager also suspects years down the road will default. The bank also has a hedge fund division that leverages its bets on these CMO securities 20 to 1, which the manager suspects in the long-term will implode. But in the short-term the manager knows these activities will be immensely profitable, and in fact the bank will fall behind other banks doing exactly the same thing if it doesn't offer such loans. What do you see as the fiduciary responsibility of the fund manager in that situation? Bear in mind, that the manager gets to vote on electing boards who hire the CEOs making the decision to do this sort of lending. Also, bear in mind that the manager also gets to vote on the CEO's compensation package as to whether the CEO should get options that vest every quarter based on short-term profits or perhaps long-term restricted stock.
"What do you see as the fiduciary responsibility of the fund manager in that situation?"
How about the fund manager sells the position and loudly announces why he's doing so? Since implosion is in the cards, but no one can accurately predict "when", what kind of fiduciary responsibility is it to expose fund investors to that situation, believing that it's just a matter of time?
I would argue that the index fund manager's and the buy and hold money manager's fiduciary responsibility is quite different in this situation from an aggressive quant manager who rapidly trades hundreds of stocks. The index fund manager must buy and hold forever if they're invested in large-cap stocks or every stock. So the only excuse they have for allowing such bad corporate governance is ignorance. But if you're right, Maurice, that history is repeating itself and such mortgages are happening again, what will be the index fund manager's excuse this time? How do they justify on a fiduciary level rubber stamping compensation packages for bank executives that reward short-term performance over long-term profit when they know from past experience it is detrimental? And it's not just index funds. There are a number of value funds, focus funds and long-term growth funds that claim to investigate stocks intensively and hold for the long-term. During the 2008-09 crash, some of those managers had highly concentrated positions in stocks such as Washington Mutual--I won't name the managers but I bet the old timers can guess--and held all the way down. Are they still rubber stamping such compensation packages and approving of CEOs with that short-term mindset? Or is it their fiduciary responsibility as ostensibly long-term shareholders to step up and say hey cut it out? Yet I agree a fund that trades aggressively has a good excuse, as its objectives are known to its shareholders.
"Or is it their fiduciary responsibility as ostensibly long-term shareholders to step up and say hey cut it out?"
@LewisBraham- A really good question. I suppose that another alternative would be to sell the positions and make it clearly understood (as on the front page of the WSJ "B" section, accompanied by a few op-eds) exactly what they see going on, by, whom, and why. If a large fund or two did that, it would be very interesting to see the fallout.
"A known securities fraudster is nominated for the board of said company. Wouldn't you want your fund's shares in the company ....." Could you give some recent examples?, I'm unfamiliar with any ? Maybe your Fund managers are looking into their (your) investments...... their job
Comments
This whole concept seems a bit silly.
Why is the management judgement of a mutual fund innately superior to the management judgement of any particular "owned" company?
Why would any mutual fund customer have any reason to believe that "their" mutual fund management would necessarily reflect the desires or beliefs of the mutual fund customers? For that matter why would the desires of the mutual fund customers themselves be consistent, uniform, or even in agreement?
Why would the desires or interests of any particular mutual fund company necessarily be in agreement with those of some other mutual fund company?
"Why would any mutual fund customer have any reason to believe that "their" mutual fund management would necessarily reflect the desires or beliefs of the mutual fund customers?" If you truly believe that, why do you invest in mutual funds at all instead of individual stocks? It comes down to that concept of being a fiduciary, of management putting its customers' interests before their own. But if you are saying managers' desires have nothing to do with your own, how can you trust them as your shareholder representative? The desires of mutual fund customers are obviously not perfectly consistent, but the investment objectives of a fund are supposed to mean something and investors with certain overlapping desires do invest collectively based on them.
To be a bit more realistic, how about a real-life situation where a known butcher (remember "Chain-saw Al" Dunlap?) is attempting to dismember the Sunbeam Corporation. Surely it's believable that one mutual fund company might think that "Chain-saw Al" is just what's needed, while another mutual fund company might feel exactly the opposite. How much of the resources of the mutual fund industry is it efficient or practical to devote to a situation like that?
From another discussion, Crash opined the following: "Particular prescriptions are costing a criminal amount of money... Can you say, "Pfizer?" Six letters, but functions as a four-letter-word."
And my question with respect to that situation was this:
If a mutual fund management were to challenge the management of Pfizer, should it be to attempt to convince Pfizer to reduce their prices "so as to be more fair" to sick and needy consumers, or to maintain and increase their profits at the expense of those consumers? At least some of those consumers may very well also be investors with the mutual fund company.
My position is simply that mutual fund companies cannot consistently represent consumer's or investor's best personal interests, and so should just mind their own mutual fund business, and try to make as much profit as possible for their customers.
Maybe, but there could be multiple other reasons to vote against a board candidate or a slate of candidates - cronyism, self dealing, etc., and I'd argue you're giving regulatory agencies more power and more willingness to use it than actually exists.
I agree with your statement about "consistently representing consumers' or investors' best personal interests" - but I don't think that's really the question. Why should they not vote shares on selected questions in a way that they see as clearly in their investors' best interest as investors?
In your Chainsaw Al example, I don't see why an MF shouldn't vote shares on a question like that. The fund managers presumably know what's going on at the company, or they wouldn't have invested there; I don't see how that would cost the fund much in the way of resources, and they may not want to sell the fund if it still fits within their criteria. And who cares if one fund sees the question in a different light from another?
By the way, there are already SEC rules against shareholder resolutions that fiddle around in too detailed a way with company operations.
@AndyJ- No problem with that, Andy. That falls under "try to make as much profit as possible for their customers." I'd agree that there may be "selected situations" where a mutual fund may get involved with the operation of a particular business.
Regards- OJ
How about the fund manager sells the position and loudly announces why he's doing so? Since implosion is in the cards, but no one can accurately predict "when", what kind of fiduciary responsibility is it to expose fund investors to that situation, believing that it's just a matter of time?
@LewisBraham- A really good question. I suppose that another alternative would be to sell the positions and make it clearly understood (as on the front page of the WSJ "B" section, accompanied by a few op-eds) exactly what they see going on, by, whom, and why. If a large fund or two did that, it would be very interesting to see the fallout.
Could you give some recent examples?, I'm unfamiliar with any ? Maybe your Fund managers are looking into their (your) investments...... their job