Unitholders cannot be characterized as partners. Actions done and decisions made by them through meetings can be regarded as the acts of owners of the rights constituted by the units. They are analogous to assents by beneficiaries of trusts.
Of course, as in companies, in order for actions to be taken by a large aggregate of individuals, meetings and rules for majority decisions are necessary. Voting rights simply are parts of the rights constituting units. Once the majority in a meeting is given the power to bind the minority, there emerges the tension between voting powers as property rights and the notion of fairness in the exercise of those powers. Read the rest of this entry »
Shortly after Charles was decided by the High Court of Australia, another fixed investment trust was the subject of taxation proceedings. This time, it was before the Supreme Court of Canada in MNR v. TransCanada Investment Corporation Ltd. The trust was a typical fixed investment trust. Under the trust deed, an administrator (i.e. the manager) was to purchase a fixed number of predetermined shares of common stock of companies to constitute a trust unit. Upon all the shares of underlying companies of a unit being vested in the trustee, the trustee would issue shares of a trust unit. Each share of a trust unit represented an undivided equal interest in the unit. Read the rest of this entry »
All freely traded liquid markets share common traits related to psychological pressures (fear and greed), but each differs as to fundamental relationships, trading mechanisms, and structural factors. Each market’s individual characteristics must be understood. Once this understanding has been achieved, proper evaluation of similarities or differences, as well as interrelated pricing effects, with other markets can be accomplished.
One market that allows easy application of Drach’s common stock analysis is closed-end funds, also known as publicly traded funds or closed-end investment trusts (CEITs).
Although one of the oldest forms of investment, closed-end funds are among the most misunderstood and consequently often overlooked investment areas. Their origin can be traced back to the establishment of a Belgian fund in 1822; thereafter they flourished, particularly among English and Scottish investors in the latter 1800s. The first U.S. fund was formed in 1893 and, until the time of the stock market crash of 1929, closed-end funds were the dominant form of publically owned investment companies. Read the rest of this entry »
Nearly all of the mutual fund families offer multiple funds that are geared toward international investing. The different kinds of funds can be categorized into index funds, international funds, regional funds, country funds, emerging market funds, and global funds. International mutual funds have higher expense ratios than domestic mutual funds to cover higher trading costs and higher management fees. The funds also tend to have redemption fees to control frequent trading. Examples of funds offered by major mutual fund companies are given below.
* Index funds. These include Fidelity Spartan International Index Fund, Vanguard Developed Markets Stock Index, Vanguard Emerging Markets Stock Index, and Price International Equity Index Fund.
* International funds. These funds do not invest in the domestic market. Funds include Fidelity International Growth, T. Rowe Price International, Fidelity Overseas, Vanguard International Growth, Fidelity Diversified International, and so on.
* Global funds. These funds invest in all countries, including the domestic market, and include Templeton World, GT Global Worldwide, Dreyfus Global, Vanguard Global Equity, Price Global Stock, and so on. Read the rest of this entry »
Buying foreign stocks is cumbersome for an individual investor because it requires currency conversion, opening an account with a foreign broker, taking custody of a foreign company’s shares, and all the associated transactions. Many domestic brokers now offer trading in foreign stocks, but it is still a lot more difficult to buy and sell foreign stocks than it is to trade domestic stocks.
There are, however, alternatives available that do not require direct trading on foreign stock exchanges. These are American depository receipts (ADRs), mutual funds, exchange-traded funds, and multinational companies. Details are provided below.
ADRs are negotiable registered certificates that stand in for the underlying stock of foreign companies. A U.S. bank (called a custodian bank) holds shares of foreign companies and issues receipts (ADRs) against those shares. There could be one ADR for several shares or several ADRs for one share of stock—the custodian bank picks a ratio that puts the ADR in a tradable range of $50-100. For example, each share of British Petroleum is subdivided into six ADRs and each share of British Airways is equal to ten ADRs, while two Honda shares make one ADR but one Sony share is equal to one ADR. Read the rest of this entry »
Underlying the policy debate about merits of institutional activism is the empirical question: Does such activism have a significant impact on corporations that are the target of that activism? The short answer is that it’s unclear.
In an attempt to provide an intermediate-level answer, let us review a few points that emerge from this debate on the impact of institutional activism. To begin, the studies do not usually include proxy fights or takeover bids since these are rare events for institutional investors. In addition, these studies are all premised on the efficient markets theory, so they assume that the impact from shareholder activism can be measured by looking at a change in stock price after a specific event, such as a pension fund’s submission of a stockholder proposal.
These economic studies tend to show no or little positive price effects from proposals to change general governance procedures, such as the introduction of confidential voting or the appointment of an external board chairman (separate from the CEO). Read the rest of this entry »
The presence of dominant local shareholders characterizes the governance structure of many foreign companies.The dominant shareholders typically seek to preserve their influence by relying on a variety of structures designed to frustrate the exercise of rights by minority shareholders and “outside” investors.
France, for example, has a strong tradition of government involvement in the economy. Accordingly, the state maintains several devices to influence corporate decision making, which undermine minority shareholder rights. Read the rest of this entry »
In addition to the influence of dominant local shareholders, the legal relationship between a company board and its shareholders may limit the rights of the minority shareholders. In general, under U.S. state corporate law, a company’s directors owe a fiduciary duty primarily to its shareholders. By contrast, in many non-U.S. legal systems, the board may be required to consider the interests of other stakeholders in the enterprise, including the company’s labor unions and local suppliers, as well as community groups and local government.The interests of these groups may, on occasion, come into conflict with the interests of minority shareholders. Read the rest of this entry »
Despite the absence of SEC rules on fund participation in the governance process of publicly traded companies, mutual fund complexes routinely vote their proxies on items submitted to stockholders for approval. (Such proxy voting should be considered part of the normal exercise of fiduciary duties, as distinct from institutional activism, discussed below.) In voting proxies, fund advisers generally follow written guidelines that have been approved by the independent directors of the funds. The fund adviser typically processes and votes all proxies for shares held by the funds in accordance with these guidelines. On an annual basis, the fund adviser usually submits a report on proxy voting matters to the board of directors of the funds or a committee of the board. Read the rest of this entry »
This article has been compiled with the help of Arthur Andersen, particularly Victor Levy of Arthur Andersen’s Financial Services tax practice in London. It covers the taxation of futures funds and derivatives in a broader sense for the leading European markets. The author would like to thank him and the European offices of Arthur Andersen for their help.
In Belgium, the law of December 1990 regulated in an extensive way the status of investment funds (initially covered by the law of 1957) and created two new types of investment companies: the SICAV and the SICAF. The SICAV is the société d’investissement a capital variable, while the SICAF is the société d’investissement a capital fixe. Read the rest of this entry »
Investment advisers to actively managed funds devote tremendous resources to researching companies and industries. As part of that research, employees of such fund advisers meet regularly with company executives to discuss business results and trends. The analyst assigned to a company usually has detailed knowledge about the company’s business strategy and financial performance, as well as the quality of its management. Read the rest of this entry »
Institutional activists can be divided into three groups: those who seek to implement sound corporate governance, those who target underperforming companies and those who advocate a social or political agenda. In practice, the first two groups tend to converge on companies that have substantially underperformed their peers or a market index. The last group focuses on companies whose businesses or corporate policies are viewed as detrimental to the social welfare in some fashion. Read the rest of this entry »
As mentioned above, one group of activists has social rather than primarily financial agendas for U.S. companies. In the view of these activists, U.S. companies should help achieve social goals such as saving animals, protecting wilderness or alleviating poverty. Let’s consider whether these social goals are appropriate for most mutual funds and then for the subset of funds specifically geared to socially responsible investing.
Social activists who attempt to change corporate policies or challenge corporate practices take many different tacks in pursuit of their goals, but all are motivated by one fundamental principle: corporations shouldn’t be solely profit-maximizing entities; rather, they have an obligation to take into account their impact on social issues. Activists seek to influence companies through a variety of means—including litigation, picketing and public relations offensives—in an effort to encourage a company to alter its social policies in some fashion. Read the rest of this entry »
C. Inadequate Proxy Disclosure
The quality of the proxy information provided to shareholders in most other countries is generally much less comprehensive than in the United States. In many countries, companies provide only the most basic information describing the proposals to be voted on at a shareholders‘ meeting. There is generally very little or no disclosure information related to executive compensation, a valuable aspect of U.S. proxy statements. Nor is there much information about a company’s pension liabilities, interested transactions or business segments in any disclosure documents distributed by most foreign issuers. Moreover, in many countries, proxy information need be published Read the rest of this entry »
E. Recent Improvements
Notwithstanding the difficulties outlined above, many U.S. institutional investors attempt to exercise their voting rights in many markets around the world. As in the United States, mutual fund complexes are rarely activist overseas, although an institution may become involved when fundamental factors affecting the value of its investments are at issue. Indeed, as their foreign holdings increase in size, institutional investors have recently become more successful in certain situations in asserting their rights as shareholders. For example, in 1997, institutional investors in the French company Eramet, including Fidelity Investments and TIAA-CREF, successfully forced the company to abandon a politically motivated and financially damaging plan to dispose of assets engineered by the French government, its majority shareholder. Read the rest of this entry »
BACKGROUND AND PURPOSE
The primary purpose of regulations is to protect investors, and the roots of governmental regulation of mutual funds in the longer-established markets are often associated with major scandals and market crashes.
In the USA, the stock market crash of 1929 prompted an extensive investigation by Congress into the securities industry. It revealed that overselling, or ‘ramming’ of shares, particularly radio company shares, had created unrealistic expectations and false, overvalued markets. The investigation resulted finally in the Investment Company Act 1940, which established the Securities and Exchange Commission (SEC) - this Act remains the cornerstone of US mutual fund regulation - and the Investment Advisers Act 1940. Along with two Acts passed into Federal law in the 1930s - the Securities Act 1933 and the Securities Exchange Act 2934 - these four Acts provide the bulk of federal powers over the activities of US investment companies. In fact, the only addition to US legislation affecting all companies since 1940 is the Sarbanes-Oxley Act of 2002 and that has only an indirect bearing on mutual funds themselves, being more concerned with accounting, auditing and disclosure practices of trading companies, following the Enron and Worldcom scandals. Read the rest of this entry »
Korea- like Japan, Korea in the late 1960s needed to mobilise domestic capital to facilitate long-term, stable financing of large-scale industrial and infrastructure projects. The securities investment industry naturally attracted special attention and the Securities Investment Trust Business Act (SITBA) was passed in 1969, to allow the setting up of contractual-type investment trusts, and the first of these, Korea Investment Corporation, was launched that year. Under SITBA, which was implemented by related Presidential Decrees and Enforcement Ordinances, the Ministry of Finance and Economy had, by 1989, authorised three investment trust companies to undertake operations nationwide and five in provincial areas to distribute investment trusts in Seoul and in their respective specified regional areas. Read the rest of this entry »
Each mutual fund has one or more investment objectives. For example, to provide an above-average and increasing income and a yield about 50% higher than the relevant index. It is the investment manager’s task to achieve these objectives, by pursuing a stated investment policy. Each investment management company will adopt an appropriate policy for each of its funds hut will tend to have an overall ‘house style’ or strategy. Two contrasting approaches are:
- Bottom up’. Known as stock-picking. The manager looks for outstanding individual companies. They can be identified from research reports or from personal knowledge of their products, services and management.
- Top<down’. Starts with asset allocation. The manager reviews world or national economy trends first, determines his asset allocation model in terms of geographic and industrial spread, then examines industries in detail and finally selects companies that will benefit from the trends.
Another contrast in styles between different houses is between passive and active management. passive management occurs when portfolio changes are made cannot be breached by the investment manager, Regulations usually will specify also that the investment objectives and policy as set out in scheme documents cannot be changed materially without approval by vote of the share- or unit holders. Read the rest of this entry »
