Philadelphia Reflections

Mutual Fund Governance

Mutual Funds

Unfortunately, mutual funds' main advisory revenue often or even usually comes from selling the fund they work for to corporate pension systems. Although the money belongs to the employees, the choice of fund is usually left to the employer. The revenue of that fund, and hence the revenue of that fund's management adviser firm, is based on the volume of assets; the bigger the fund, the more they all are paid. For the most part, corporation managements can readily change the mutual funds which handle employee pension savings. Consequently, If word gets around that some fund manager often votes the proxies against corporate management in proxy fights, there's ample opportunity for retaliation. So, effective reform of both corporate governance and mutual fund performance seemingly must either exclude corporate management from the selection of employee pension advisers or else from the right to vote the proxies. However, that's too simple. The unspoken bargain is "If you don't criticize our performance (and reimbursement), we won't criticize yours."

Originally published: Wednesday, June 21, 2006; most-recently modified: Friday, May 24, 2019