Mutual Fund Shareholders Reject Divestment Proposals

Votes prompted by concern that the fund industry supports the Sudanese government through investments.

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Shareholders in funds from two well-known companies have in recent weeks rejected proposals to divest from Sudan. Investors in 16 American Funds and two Putnam funds shot down attempts from fellow shareholders to force their managers to pull out of companies that support the Sudanese government. While hardly surprising in isolation, these results add to the setbacks encountered by divestment advocates and raise new questions about the viability of attempts to force the hands of the most prominent fund companies.

[See Should You Invest in Socially Responsible Funds?]

At American Funds and Putnam, small groups of investors brought the proposals before their peers, who rejected them at shareholder meetings last month. The main goal of the proposals was to halt investments in Chinese oil companies, such as PetroChina, that have financial ties to the Sudanese government. Since each of the 18 funds voted separately, results varied widely. Overall, though, Putnam investors were more supportive, with the divestment initiative getting 21 percent of the votes from one fund's shareholders and 24 percent from the other's. At American Funds, the support ranged from 8.5 percent to nearly 12 percent.

Fund companies routinely take positions on issues before shareholders vote on them, and in advance of last month's votes, both Putnam and American Funds provided shareholders with materials outlining their opposition to the divestment proposals.

[See Study Shows Investment Advisers Feel Closest to American Funds.]

Chuck Freadhoff, a spokesman for American Funds, says individual managers can take companies' human rights records into account but should not have their hands tied by bans. "It is indeed one of the things that is considered when we look at a company," he says. "We consider the impact of issues such as those raised by the shareholders who filed the proposals."

Eric Cohen, chairman of the Boston-based nonprofit Investors Against Genocide, the group that encouraged shareholders in the American and Putnam funds to file the proposals, disagrees. "When it comes to the worst companies in the world . . . they do not take it into account whatsoever, and they continue to invest to the tune of hundreds of millions of dollars in PetroChina," he says of American Funds.

Before the most recent votes, Investors Against Genocide experienced similar setbacks with Fidelity and Vanguard. Like American Funds and Putnam, these companies were against divestment. "I think from the [companies'] point of view, it's not really up to the shareholders to tell them how to invest," says Jeff Tjornehoj, Lipper's research manager for the United States and Canada.

Investors tend to pay the most attention to proposals that affect their returns. "This one is a little different. It's more of a moral question, and for some investors, it's not a bright line," says Tjornehoj. And in many cases, investors, like the funds' managers, want to have as much flexibility as possible. "I don't know of anybody who explicitly wants to have Sudan-related stuff in their portfolio," says David Kathman, a Morningstar analyst. "[But] there are some companies in some fairly fast-growing areas that have some Sudan ties, and so I think some people just may not want to have that restriction on their funds."

Still, Cohen points out that fund companies generally argue that finding the right asset classes is more important than making individual stock picks. By their own logic, returns wouldn't suffer if managers avoid a few companies for moral reasons, he says. And pointing to his organization's success with TIAA-CREF, which earlier this year pledged to take a harder stance against companies connected to the Sudanese government, Cohen insists that the effort to change the industry still has some teeth. "It may be that the giants of the industry are too complacent and slow-footed to react," he says, "but I think that other people are going to pick up on it and realize that it's the right thing to do."