Mutual Fund Wars

Mutual Fund Wars Over Fees AND Proxy Votes

Mutual fund wars are fierce around pricing. What if competition was also fierce around proxy voting? Could that change the world? I certainly think so.

My petition to the SEC could generate mutual fund wars around ensuring proxy votes align with investor values. (Rulemaking Petition for Real-Time Disclosure of Proxy Votes, SEC File 4-748, Jul. 9, 2019)

Whether you invest for maximum shareholder returns, to create a salubrious environment, for the good stakeholders, or something else, easily accessible and comparable voting records could help you choose funds aligned with your values. They could also make it easier for you to decide how to vote shares you hold as a retail investor.

Mutual Fund Wars Around Cost

Low cost investor, Vanguard, is crushing the competition this year, measured by inflows of $106 billion from January through April. Charles Schwab was second with inflows of $24 billion. Much of the money from mutual fund wars is going into passive index funds. However, according to Jeff DeMaso, research director for the Independent Adviser for Vanguard Investors newsletter:

Everyone says index funds are eating the world, but active funds at Vanguard have put up strong numbers. We think it’s more appropriate to compare ‘high cost vs. low cost’ funds, instead of active vs. passive.

There is speculation that Vanguard, with 7% of US equities, could control 30% in less than 20 years with assets of about $20 trillion. (Vanguard crushing the competition with largest fund inflows so far in 2019)

Cost cutting resonates. A record 97% of net inflows into passive funds in 2018 went to products that charged $2 or less for every $1,000 invested, with the vast majority going to those charging $1 or less. Some issuers have not only waived fees altogether but are paying investors for accepting their investments. (Vanguard Poised to Top BlackRock in First Quarter U.S. ETF Flows)

The “Invisible Hand” here is advisers. They are the closest to — and gatekeepers of — the end customer and they’ve become laser focused on fund fees, which is rational and largely done to help clients, but can be taken to extremes. Expense ratios have become the new past performance chart thanks to a shift toward a fee-only model, where the advisers get paid as a percent of client assets, and away from commissions paid by mutual funds. (The ETF Fee War Is No Laughing Matter)

What About Social and Environmental Values?

At the same time we see mutual fund wars around cost cutting, we also see increased interest in SRI and ESG funds. A growing minority of investors not only want to save for retirement, they want to have a positive a positive impact on society and the environment.

One out of every four dollars under professional management in the United States, $12.0 trillion, was invested according to socially responsible investment strategies as of year-end 2017. (Report on US Sustainable, Responsible and Impact Investing Trends) That trend is accelerating. Morningstar reports more than $4 billion flowed into U.S. sustainable open-end and exchange-traded funds during the first quarter of 2019.” (U.S. ESG Funds Gather Record-High Flows in the First Quarter) Many claim there are Advantages of an Integrated ESG Approach to Investment Management.

Mutual Fund Wars 2

However, Morningstar also found ESG funds from BlackRock, Vanguard, Fidelity Investments, TIAA- CREF and others cast a number of votes that appear to conflict with an ESG mandate, especially for funds specifically aimed at the environment.

In contrast, among nine fund companies with a long-term ESG focus, not a single vote was cast against climate-change resolutions that garnered more than 40% of the shareholder vote. Asset managers with a long-term commitment to ESG unanimously voted for the 14 climate-related resolutions. (Morningstar Direct Uncovers ESG Hypocrites)

The Coming Mutual Fund Wars Around Values

As discussed above, money is pouring into funds that promise sustainability or to invest using ESG criteria. However, a survey commissioned by the Main Street Investors Coalition (MSIC) questions the recent surge in environmental and social investing. They surveyed 1,000 investors with assets in exchange traded funds (ETFs) and found that 78% of “people invest in passive funds because they want low-fees and consistent returns – not to advance social and/or political causes.”  Only 22% agreed with the statement “it’s about time that passive funds used their size and influence to promote worthy social and/or political causes.”

MSIC “is demanding that fund managers focus on maximizing performance and ensuring that retail investors who own passive funds have a say in how their shares are voted.” So far, their recommendations have focused more on curtailing the power of proxy advisors than gaining a say for retail investors.

Regardless of where we come down on the issues, why not let the market decide? Give investors the information they need in order to determine if their funds vote proxies in a way that matches their own personal values. Main Street investors and Mr. and Ms. 401(k) could then move their retirement and other investments to funds whose values align with their own. Mutual fund wars will erupt, trying to win investors using scorecards that compare not only their fees and earnings but their proxy voting records with those of competitors.

Compare the sortable near real-time voluntary disclosure of Trillium Asset Management (under “search proxy votes”), which even includes the rationale for each vote, with the currently mandated disclosure (by August 31 each year) of the Vanguard Index Trust Total Stock Market Index Fund, which requires a laborious effort to decipher. Which reporting format do you find most useful?

Disclosures Will Also Help Retail Shareholders

Currently, 91.6% of retail shareholder fail to vote their proxies, depending on delivery mode. (See Positions Voted % by Distribution Type, page 4 at Analysis of Distribution and Voting Trends Fiscal Year Ending June 30, 2017.)

I understand. Most people are too busy with work, family or other aspects of their lives to read through and analyze the typical 80 page proxy. If funds disclose their votes in real-time, retail shareholders can mostly just copy the votes of funds in alignment with their own values. I frequently do this, but only about a dozen funds currently announce each vote prior to annual meetings. I cannot copy the votes of mega-funds like BlackRock, Vanguard, State Street or Fidelity because they mostly disclose votes long after proxy season is over.

Even information from the dozen or so funds currently reporting in advance of meetings has not been made widely available since the demise of MoxyVote.

Proxy Scorecard and Fund Competition

See also my post Proxy Scorecard and Fund Competition on the Harvard Law School Forum on Corporate Governance and Financial Regulation.

In 2003 the SEC enacted a rule requiring funds to disclose their proxy votes using form N-PX. In contrast to the rule’s stated intent (Final Rule: Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies), a review of its impact would find N-PX filings do not “enable fund shareholders to monitor their funds’ involvement in the governance activities of portfolio companies.” Filings do not shed light on mutual fund voting to “illuminate potential conflicts of interest and discourage voting that is inconsistent with fund shareholders’ best interests.” Filings do not enable shareholders to “evaluate how closely fund managers follow their state proxy voting policies, and to react adversely to fund managers who vote inconsistently with these policies.”

To my knowledge, no retail investors use N-PX filings for their stated purpose. Data reported on the N-PX is not freely available in a user-friendly format. The SEC could accomplish the original goals of Rule 30b1-4, including the empowerment of worker-investors, by simply revising its N-PX reporting rules to require filings in real-time and in a user-friendly format. Rapid disclosure and reporting of proxy votes would foster public debate on the issues faced by corporations and investors. With real-time disclosure, funds would begin to compete not only on the basis of cost and returns but also on how their votes align with the values of Main Street investors or Mr. and Ms. 401(k), as SEC Chairman Clayton frequently calls working investors.

Minor amendments to a rule mandating an obscure reporting form could make all the difference in getting mutual funds to stick up for workers and other stakeholders. Proxy scorecards will take their place alongside scorecards comparing historical costs and returns. Mutual funds will become advocates for the workers they represent, and corporate directors will see worker-investors as important constituents.


Think of the competition that would be created if thousands of funds announce their votes in advance of annual meetings. Sites and phone applications like ProxyInsight, Morningstar, Say, Stake, Just Capital,, SumOfUs,  Center for Political Accountability, Gender Diversity Exchange, and the Main Street Investors Coalition can be expected to take a role in widely disseminating proxy voting scorecards.

Funds/ETFs would become advocates for their investors and retail shareholders. Directors would recognize that mutual fund/ETF investors and retail shareholder are their constituents. Competition around proxy voting values would be transformative. Fund might just start asking investors what their values are.

Take Action: E-mail the SEC

It would be helpful if the SEC received comments in support of the proposal. Send comments to The subject line of your message must include File 4-748. If you attach a document, indicate the format or software used (e.g., PDF, Word Perfect, MS Word, ASCII text, etc.) to create the attachment. DO NOT submit attachments in the following formats: HTML, GIF, TIFF, PIF, ZIP, or EXE.

Of course, the most effective comments tell the SEC how the rulemaking would have a positive impact on you, specifically. Form response are categorized by SEC staff by type of concern and are generally not as effective as personalized statements. They are reported as 22 individuals using Type Letter A, 15 using Type Letter B, etc. However, I offer the 3 following templates to help you start formulating your own e-mail.

  1. I am an individual investor. As requested by File 4-748, the rulemaking petition for Real-Time Disclosure of Proxy Votes, please review and amend existing fund reporting requirements for proxy votes to require real-time disclosure in a sortable format. The existing system is of little use to me as a fund investor because the information is often reported a year after the fact, whereas I live in real time. Additionally, users must flip through hundreds of pages to find specific votes at specific funds within fund families. There is really no way to compare the proxy voting record of one fund against another without spending months creating spreadsheets or paying for a service such as ProxyInsight, which is too expensive for the average retail investor. How funds vote proxies has an impact not only on my investments but also on the world I will live in ten years from now. I don’t like investing in an ESG fund, only to find out a year later the fund voted against good shareholder proposals aimed at addressing concerns like climate change.
  2. I participate in my company’s 401(k) retirement plan. I support File 4-748 and the request to require real-time disclosure of proxy votes in machine readable format. I invest for high returns; nothing else. I don’t want funds I invest in voting in favor of costly measures that aren’t legally required to address pollution or so-called “social” problems. I certainly don’t want companies to be more democratic. Most people are idiots, especially do-gooder who think companies should serves as charities. If investors have more say in how companies are run, profits will suffer. My 401(k) provides a scorecard that compares fees but nothing that compares how the various funds on offer in our plan vote their proxies. I want to only invest in funds that vote with management, except in really rare circumstances. Company management has inside information. They know far more about their own company than someone at a mutual fund or at a proxy advisory service that gets paid to stir up trouble. Give us the information on how funds vote, not last year but yesterday. Make them put it on the internet in a sortable grid. Give me the information so I can tell not only who has the lowest fees and highest returns but which funds leave management alone so they can concentrate on making us more money.
  3. Please take up File 4-748 and make mutual fund disclose their proxy votes as soon as they vote in a way that can easily be sorted by ballot item. I hold stock in several companies but rarely bother to vote. Who has time to read though 100 pages of legal gobbledegook? If I could see how funds vote prior to the day I have to cast my ballot, I could actually vote because I would be able to save a lot of time by copying the votes of funds I trust. When I vote in elections for government representatives or ballot issues, I generally depend a lot on endorsements. If someone I trusts says vote for or against someone or some issue, that makes my decision a lot easier. I want the same kind of information when I vote my proxies.


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