Vanguard & Fidelity Not Keen on Proxy Access - Mutual Fund Commentary
The country’s largest mutual fund firms, Fidelity and Vanguard, are reportedly opposed to proposals of letting shareholders ‘nominate corporate directors and challenge entrenched boards’. A report from The New York Times notes that investors are questioning if these two mutual fund giants were the “skunks at the proxy access party”.
Shareholders have been denied this right for decades, and the latest efforts to offer proxy access is facing a hurdle. Fidelity and Vanguard are said to be opposed to hand over the shareholder rights issue of nominating directors. Instead, they seem to be comfortable continuing the ‘insider’s game’.
Some investors opined that institutions against the proxy access had vested interest in maintaining the status quo in the boardrooms. These are alleged to have high executive pay and governance issues. Investors may be disappointed with such a stance from institutions shouldering fiduciary duties.
The Proposals
The New York City comptroller Scott M. Stringer, who manages five city pension funds worth $160 billion in assets, had proposed to 68 companies to allow investors to nominate directors. These investors should own at least 3% stake for a minimum of 3 years.
As of May 27, 47 companies had received the votes from investors and 29 companies saw the majority supporting the proposal. “In a matter of months, the landscape has shifted dramatically in favor of greater accountability…Because of this unprecedented coalition, proxy access is becoming the new normal,” said Stringer. These were however advisory votes, and companies need not abide by them.
However, companies including Abercrombie & Fitch, Big Lots, Staples, and United Therapeutics changed their bylaws to let shareholder nominate the directors. Apache, Avon Products, FirstEnergy and Republic Services also saw significant support for proxy access. Meanwhile, Chevron, Duke Energy and eBay managed to get the majority after a close run, Exxon Mobil saw 49.4% votes being in favor of proxy access.
Fidelity & Vanguard Oppose
A Dallas money management firm Greenbrier Partners’ general partner Frederick E. Rowe said: “Serious investors ought to have access to the boardroom, and Vanguard and Fidelity ought to want it for their shareholders”. This comment comes as some mutual funds are said to be providing “cover to resistant boards”. Stringer said the non support of some major mutual funds “are the reasons we are not batting 1.000”.
A Fidelity spokesman, Vincent Loporchio, confirmed that the company generally votes against proxy access. “Fidelity will generally vote in favor of incumbent and nominee directors except where a director has failed to exercise reasonable judgment,” states Fidelity’s proxy voting guidelines.
However, Fidelity also mentions: “Fidelity believes that there is a strong correlation between sound corporate governance and enhancing shareholder value. The Fidelity Funds' Proxy Voting Guidelines are intended to put this belief into action through the exercise of voting rights by the funds”.
Separately, Vanguard’s spokesman John Woerth said the default position of the company is to support proxy access where longtime investor holds at least a 5% stake. However, the 5% threshold is massive and that actually excludes almost all investors from having the nomination right.
In contrast, shareholders in Europe with just 1% stake for at least a year get the right to nominate directors. Frederick E. Rowe commented: “Whose side are they on?... The side of the entrenched management, or the side of the shareholders they are supposed to represent?”
The impact is evident. According to the comptroller’s office, proposals to allow a 3% threshold failed at 18 companies as Fidelity did not support. At Chipotle Mexican Grill for instance, votes in favor of shareholders’ nomination right was at 49.86%. Fidelity’s support, who holds 14.44% stake, would have secured a majority. At Alexion Pharmaceuticals too, votes in favor halted at 49.22%. Fidelity holds 12.47% stake in this company, and its support would have been a big boost. Fidelity’s 10.17% stake in Peabody Energy was also of no help, as 48.66% were in favor.
No Effect on Fidelity & Vanguard Funds
These two behemoths were also united on another issue. Financial Stability Board’s (FSB) contemplation to designate the biggest asset managers as “systemically important” had not gone down well with top fund managers. They echoed that global financial regulator’s ways to identify too-big-to-fail investment funds as deeply flawed. (Read: Fidelity & Vanguard Call FSB's Approach Deeply Flawed )
However, we believe this will have little impact on the performance of funds. Fidelity and Vanguard are strong names in the industry and their fundamentals, effective management and profitable mutual funds will continue to perform well and be unaffected by these developments.
If we look back to the first quarter performers, several funds from Fidelity boasted year-to-date returns much higher than category average returns. Separately, the top performing Vanguard mutual fund in the first quarter of 2015 managed to gain 8%.
So far this year, Fidelity’s fund focused on china region has been the top performer . Fidelity China Region (FHKCX) has gained about 24% so far in 2015. It also carries a Zacks Mutual Fund Rank #1 (Strong Buy). Fidelity Emerging Asia (FSEAX), carrying a Zacks Mutual Fund Rank #2 (Buy), is next having secured 14% gains. Among funds with favorable Zacks Mutual Fund Rank, Buy-ranked Fidelity Pacific Basin (FPBFX) has gained 11.8%.
Coming to top-performing Vanguard funds , Vanguard International Explorer Inv (VINEX) has notched up about 11% gains so far in 2015. It carries a Zacks Mutual Fund Rank #2 (Buy). Among top-ranked funds, Vanguard International Growth Admiral (VWILX) and Vanguard Developed Markets Index Admiral (VTMGX) have gained 9.9% and 9.8%. While VWILX carries a Zacks Mutual Fund Rank #1, VTMGX currently holds a Zacks Mutual Fund Rank #2.
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