Ethical Performance
inside intelligence for responsible business


mutual funds under fire

May 2008

Shareholder activists in the US have begun to target mutual funds over their ethical investment policies by filing resolutions for consideration at annual meetings.

Shareholders in two Fidelity funds recently submitted annual meeting resolutions urging them not to invest in companies linked to genocide and human rights abuses. The resolutions, which were the first ever tabled at mutual fund shareholder meetings in the US, were defeated. However they mark a change of tactics by activists who until now have focused on the companies in whose stock mutual funds invest.

Investment companies pool money from individuals in mutual funds, which hold almost a fifth of all publicly traded US stocks and may also invest in bonds, options, commodities or the money markets. As companies, they are subject to shareholder resolutions in the same way as the businesses whose stock they hold. The new challenges have a touch of irony about them, as mutual funds sometimes instigate shareholder activist resolutions at the annual meetings of companies held in their portfolios.

The resolutions at Fidelity, which manages $1.5trillion (£750billion) and is the largest US mutual fund company, were aimed particularly at investments linked to Sudan.

Support for the measures, which was backed by 27 per cent of investors in Fidelity’s Capital & Income Fund and 28 per cent in its Select Health Care Portfolio, was sufficiently encouraging for activists to try the same approach at the annual meetings of other funds, according to Eric Cohen, chairman of Boston-based Investors Against Genocide, a non-profit group that spearheaded the resolution.

‘It’s a huge breakthrough’, said Cohen, who confirmed that similar resolutions have been filed with other mutual funds, including Franklin Templeton, T. Rowe Price and Vanguard.

He said the tactic was being tried because previous petitions and campaigns had largely been unsuccessful. ‘We got something like 200,000 people to sign petitions and call or write to Fidelity and other companies, but unfortunately this was not enough to move them, so we came up with a different strategy,’ he said. ‘By submitting shareholder proposals to individual mutual funds we present them with the voices of their customers and require them to deal with the issue at a shareholder meeting.’

The vast majority of the 88 million US mutual fund investors regard themselves as long-term holders of stock, according to the Investment Company Institute.

Cohen said the new tactic had received extra impetus from recent legislation passed by the US Congress protecting mutual funds from investor lawsuits if they divest from companies active in Sudan.

Tim Smith, senior vice-president at Walden Asset Management and former chair of the US Social Investment Forum, said that until now mutual fund annual shareholder meetings have been concerned only with technical matters such as board or fund manager changes.

He observed: ‘What the folks who are campaigning have done in an unprecedented way is ... to say, “When you have your next stockholder meeting, we want you to put an item on the agenda that isn’t just about who’s going to manage our money’’.’

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