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Fribble

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Friday, May 14, 1999

Proxy "Junk" Mail

by Badri Roysam

Like most folks juggling a family, kids, a demanding career, and the like, I treat all junk mail, and anything approaching that description with swift and decisive action -- the summary trash-can toss.

Just a couple of days ago, I received this big, blue envelope from American Express (IDS Funds) marked "Proxy Materials Enclosed -- Immediate Action Requested." In my previous unFoolish days, I had routinely tossed these. After all, how important can my piddling vote be on a multi-billion dollar mutual fund's decision making? Besides, I had more urgent things to take care of, and a life to live.

This time, curiosity got the better of me, and I decided to give this blue envelope a read over a cup of hazelnut coffee. What I saw jolted me enough to spill some of my precious brew! The ever-thoughtful management of these mutual funds had proposed several changes to the funds: (1) Change the name of the fund (IDS was bought over my American Express, so this seemed to be natural and harmless); (2) Add a distribution agreement (I had no idea what this meant, more later); (3) Change the Investment Management Services Agreement; and finally (4) Change some of the investment policies. The final sentence read "After careful consideration, the Board recommends that you vote FOR each proposal."

So why the spill? First of all, if I didn't vote, they were going to interpret this as a vote in favor of the proposal (how embarrassingly undemocratic). Next, I decided to investigate this "distribution agreement" thingie. It didn't take very long to see that they were proposing to tack on additional expenses to the fund for advertising and such. It wouldn't have bothered me too much, except I was painfully aware that these funds have been underperforming the indexes and the proposed increases of about 0.2% - 0.45% were, in fact, more than the TOTAL expenses of the Vanguard index funds!

There were some items that seemed reasonable on the surface, but proved to be unFoolish as I worked through the document. For instance, they were going to reward the management with a 0.12% "performance based incentive adjustment" if the fund beats an index (the part I didn't care about was that they picked a Lipper index of funds, rather than a pure market index like the S&P 500). As you can tell, I had a lot of things on which to vote my teeny little (but resounding nevertheless) NO.

Bottom line? I am still trying to figure out how best to extricate myself from my pre-indexing/pre-Foolish blunders that these funds represent. You see, they have these back-end loads that only disappear in seven years or so. Figuring out the optimal extrication plan will be my next Summer Project, after our camping trip. Someday, I am going to be 100% Foolish. In the meantime I'll pay more attention to the proxy mailings.


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