Tuesday, July 17, 2012

Is your fund batting for you?

A company decides to treble pay for its top personnel after its profits fall. A pharma major wants to sink millions into real-estate development.

As a small shareholder, you may not be able to do much to stall such ill-considered company moves. But can your mutual fund do something about it? It can; the question is whether it will.

In a bid to raise governance standards, the Securities Exchange Board of India (SEBI) has been pushing funds to take a more activist role in the companies they invest in.

A March 2010 circular also asked funds to make public their voting policy and the manner in which they cast votes at shareholder meetings.

But sifting through these disclosures on fund Web sites is a disappointment. In most cases, fund houses either seem to vote with the management or abstain from voting.

The voting disclosures of ICICI Prudential Mutual Fund, the third largest fund house, for instance, reveal that it abstained from voting on most proposals put forth by companies in its portfolio in the past financial year. The top dogs — HDFC Mutual Fund and Reliance Mutual Fund — participated in most meetings, but rarely voted against the management.

From the voting disclosures we examined, one fund that seemed fairly keen on exercising its voting rights was Franklin Templeton. There have been quite a few occasions over the past financial year when the fund has voted against company proposals for mergers, restructure, higher remuneration, etc.

Least resistance
The voting policies put up by funds supply some explanations on why many of them take the path of least resistance, when it comes to voting on company proposals.

Conflict of interests is one. Many fund sponsors in India are part of conglomerates which also have interests in banking, insurance and manufacturing. Now, voting at shareholder meetings of companies that are part of the promoter group or have a borrower relationship with the parent creates a conflict of interest.

But the question that an investor must ask is, if a fund perceives so many instances of conflict of interest with the companies it invests in, must the sponsor run a mutual fund business at all?
Fund houses also have exclusions on the company proposals they will vote on.

ICICI Prudential Mutual Fund, for instance, says that it may not vote on company proposals where its investments are below a certain minimum threshold. Quantum Mutual Fund says that it will not vote on proposals from companies that are part of its index fund, as these are passive positions.

There are other houses which state that they would vote with the management when the matter is ‘routine’. Given that the SEBI has already laid out a list of broad proposals that fund houses must exercise their voting rights on, this is a case of unnecessary hair-splitting.

Why bother?
Apart from these reasons, though, two other factors seem to work against mutual funds exercising their voting rights.

One, as a big holder of a company’s stock, a fund may be concerned about shooting itself in the foot by taking a public stance against the company’s proposal. What if the share value plunges due to the adverse publicity, taking down the fund’s net asset value?
Well, the counter to that is that if the proposed move by the company will destroy shareholder value, the stock market would surely rejoice at the move being nipped in the bud.

Two, as stocks can always be sold, why should a fund house bother with all this voting business? If against a particular move, it can simply sell its holdings.

Very true. But as key institutional players in the Indian stock market, mutual funds surely owe it to the investors and markets at large to flag the practices at India Inc that are patently detrimental to shareholders.
This may not result in Indian promoters turning over a new leaf. But the fund industry can look on this as its version of corporate social responsibility.

Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article3639875.ece

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