The Bottom Line: OneFund allows underlying investors to express views on proxy voting whereas otherwise investors don’t such rights through mutual funds and ETF ownership.
Summary/Background
In late May a number of the world’s largest investment management firms and asset owners sided with an environmental activist hedge fund and the leading proxy voting firms to elect three dissident candidates to Exxon Mobil Corp.’s Board of Directors. This is based on updated preliminary results for the election of directors at Exxon Mobil’s annual meeting of shareholders held on May 26, 2021 that were announced on June 2nd. In particular, firms like BlackRock, Vanguard and State Street, which together reportedly held nearly 20% of the voting shares, along with the California Public Employees’ Retirement System (CalPERS) and the New York State Common Retirement Fund, to mention just a few, voted in favor of some of the directors put forward by Engine No. 1—a small hedge fund with about a 0.02% share ownership in Exxon Mobil Corp. The hedge fund ran a reported $30 million campaign over six months aimed at electing its proposed four independent director candidates to the Exxon Mobil Board of Directors so that they might help the firm navigate the risks and opportunities facing the oil company in a rapidly changing industry. The outcome illustrates that under certain circumstances, institutional firms, when acting in unison, have the power to influence proxy contests that are not supported by the company. Individual investors in the form of US households, on the other hand, while they own 37.6% of total U.S. equities either directly or indirectly , in many instances they can’t exercise voting control over public companies because theirs is an indirect ownership of shares via mutual funds and ETFs. This also extends to fund ownership interests in defined contribution 401(k) plans and other similar retirement plans. While this remains the case, a recent proxy voting policy change announcement by Index Funds S&P 500 Equal Weight Fund that will allow underlying investors in the fund to express their views on proxy voting may serve as a model for other mutual funds and ETFs to take account of investors’ sentiment on various issues and allow these to inform the asset manager’s voting decision. Short of broader regulatory changes, this approach could be employed to give shareholders a voice in deciding on proxy voting.
The $84 million Index Funds S&P 500 Equal Weight Fund seeks to replicate the total return performance of the S&P 500 Equal Weight Index
The Index Funds S&P 500 Equal Weight Fund seeks to replicate the total return performance of the S&P 500 Equal Weight Index. This $83.8 million index fund managed by ONEFUND LLC that has been in operation since May 1, 2015 and carries a 25 bps expense ratio net of waivers in effect until July 31, 2021. The fund has recorded an average annual gain of 14.52% for the five years to March 31, 2021 versus 14.74% posted by the S&P 500 Equal Weight Index, a variance that falls within a margin consistent with the fund’s expense ratio. As of April 9, 2021, the fund amended its prospectus to permit its underlying investors to express their views on proxy voting, including any environmental, social and governance (ESG) issues. That said, the fund is not classified as a sustainable fund as it does not pursue a sustainable investing approach.
Fund seeks shareholder proxy views but maintains discretion to vote shares in line with fiduciary obligations
According to the fund’s filing, the fund’s adviser seeks to understand the views of fund shareholders, in addition to the views of the management of the underlying companies, to be more fully informed of all factors. The filing goes on to note that due to the emergence of environmental, social, and governance investing as a priority to investors, seeking shareholder views on proxy voting, including ESG issues, may shed light on what indexed companies should be doing to preserve their value, and, indirectly, the value of the overall index. That said, the fund considers various factors, in addition to shareholder views, in assessing how to vote for a given proposal. Details on the process that seeks to solicit investor sentiments has not yet been made known. Still, this is a unique approach that, short of delegating to underlying investors the right to vote proxies in line with their proportionate fund holdings, could be adopted by fund managers to solicit underlying shareholder input for the purpose of informing their views regarding shareholder sentiment. This along with other relevant considerations consistent with fiduciary obligations, could form the basis for proxy voting that also reflects the views of underlying shareholders.
