CHAPTER
5
How to Influence Your Fund Manager
If you do not hold equities directly but instead are invested in mutual funds or exchange-traded funds (ETF) or in a pension fund, you still have rights and can take action. The first step is to understand exactly what you own. Following are some basic definitions.
WHAT IS A MUTUAL FUND?
A mutual fund40 is an investment vehicle that is made up of capital from many investors for the purpose of investing in a basket of securities, such as stocks, bonds, money markets, and other assets. Mutual funds are actively managed by fund managers41 who invest the fund’s capital and decide what assets to hold in an attempt to produce income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.42
If you own shares in a mutual fund, you do not own the underlying stocks, bonds, and other assets. You own shares in the mutual fund itself. If you want to buy or sell shares of the fund, you put in an order, and it is executed at the close of business based on its net asset value (NAV), which is calculated at the end of every day.
WHAT IS AN EXCHANGE-TRADED FUND?
An exchange-traded fund (ETF)43 is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.44 Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold and typically have higher daily liquidity and lower fees than mutual funds, making them a good option for individual investors. Because it trades like a stock, an ETF does not have its net asset value calculated once at the end of every day like a mutual fund.
UNDERSTANDING YOUR 401(K) AND 403(B)
Most company-sponsored retirement plans are now online, and you can go to your account and see what mutual funds you are currently invested in. If you are not online, you should be getting a quarterly statement in the mail. These often include a pie chart showing how each contribution deducted (pre-tax) from your pay check, along with any company match, is allocated into the funds you have chosen. You can change your allocations at any time. This is your right, and you can shift your retirement savings from one fund to another and reallocate the percentage of any contributions among the funds available.
Once you identify the funds you are invested in, you can perform some due diligence on each one. Start by reading the prospectus. This is a formal legal document, required by and filed with the Securities and Exchange Commission. It should be linked to your online platform, but if not, you can search for it by name or ticker. The prospectus provides details about an investment offering for sale to the public. It lays out the basic investing philosophy of the fund and provides guidance for the fund manager, the person who buys and sells stocks, bonds, and other financial products.
ALIGN YOURSELF WITH THE FUND PHILOSOPHY
If you find that the basic investing philosophy described in the prospectus is not aligned with your values, then that’s a pretty good tip-off that this may not be a fund you should be investing in. On the other hand, you may find a fund that specifically states it is designed to address a specific set of issues—for instance, to ensure gender diversity, empower women, or reduce exposure to fossil fuels. In addition, you can see if it is using ESG screens—in other words, excluding companies that do not meet certain environmental, social, and governance guidelines. Also look to see if it is focused on big companies (large-cap) or smaller ones (small-cap) that may be more volatile and therefore offer more risk but also more possible gain. All of these are laid out in the prospectus. Also, check to see if it is diversified.45 This means that it holds stocks and bonds from a broad range of sectors. For instance, an undiversified fund may be focused only on information technology but not on industrials, telecommunications, or healthcare.
WHAT IF NONE OF THE FUNDS OFFERED IN YOUR PLAN MATCH YOUR VALUES?
A prospectus is a good place to start to understand basic philosophy. However, if you want to see exact holdings, you will need other tools, as the prospectus generally will only show the top 10 holdings. It’s nearly impossible to know exactly what a fund holds at any given moment, because mutual fund managers may buy and sell stocks at any time, and they only report to the SEC once a quarter, and the SEC only publishes it to their public database once a year. Even if you search long and hard to find every holding in a fund, the search will likely be out of date.
However, there are new tools to help you do this, and we devote chapter 12 to a detailed tour of some of these tools to help you see the gender diversity of corporate boards and the fossil fuel holdings of companies within the most-held funds.
Your company-sponsored retirement plan will probably have approximately 15 to 40 funds to pick from. These are generally a variety of large-cap, small-cap, international, bonds, and other types of mutual funds and ETFs. However, many of these funds do not use ESG principles at all; only recently have new funds been offered focused on gender equity, LGBT rights, human rights, and other issues. Few are fossil-free. This means that if you want specific funds offered to you and the rest of the employees at your company, you will need to talk to your plan administrator. Chapter 13 is devoted to a step-by-step guide about how to approach your plan administrator to request that new offerings be added to align with your values.
HOW FUNDS VOTE THEIR PROXIES
The Employee Retirement Income Security Act (ERISA) is a federal law that was enacted to protect the interests of employee benefit plan participants and their beneficiaries. It establishes minimum standards for pension plans and provides rules for employee benefit plans. While ERISA does not specifically lay out fiduciary responsibilities regarding proxy voting, the Department of Labor does consider the voting of proxies a fiduciary act of the management of the plan.46 Proxies are considered an asset of the plan and need to be voted in a manner that supports the shareholders of the company.47 There are also rules stating that it is the plan trustee who must decide how to vote. The bottom line is that they must vote, and how they do tells a lot about how the fund aligns with your values.
Online tools like Proxy Democracy48 track selected mutual fund voting on a range of ESG issues. You can also go to the fund sites and see their voting history. This is very telling, as a fund that basically rubber-stamps management on excessive CEO pay, does not support fair labor and human rights, and votes against climate disclosure on its shareholder proxy resolutions may not be aligned with your values.
Many pension funds also display their voting records on their websites. If they don’t, you can call your fund managers and ask for this information. Challenging how your money is invested in pension funds is difficult. First of all, pension funds generally own the entire market. Also, they have detailed procedures to make sure that they do not violate their fiduciary duty. If their investing philosophy is not in alignment with your values, you can talk to their staff to find out how to work your request through the proper channels. If enough pensioners sign letters, show up at investment committee meetings, and follow the prescribed process for change, you will get a fair hearing, and the pension fund may integrate your thinking into their future plans. It was this kind of pressure that got the world’s largest pension fund, NORGES to divest from coal.49