Minutia from the fund can affect the investor

THIS MONTH, Invesco sent proxy voting materials to shareholders, asking for approval of previously announced mergers and consolidations, while also handling some issues that could best be described as "mundane housekeeping."

The question on the mind of investors - whether in Invesco funds or the countless others that handle these tasks each year - is just how routine and ordinary these chores are.


The Invesco proxy includes one of the most common fund-governance questions of recent years, where shareholders are asked to let the fund's holding company move its current home to Delaware.

While these issues hardly affect the day-to-day fund management or performance, they are worth looking into. So put on your hip waders and let's plunge into the world of fund minutia so that you'll be prepared when your fund comes a-calling.


For starters, let's recognize that fund firms hate proxy votes.

Investors frequently ignore the paperwork, forcing the firms to hire solicitors who promote the vote. Moreover, many proxies truly concern mundane structure issues, rather than substantive investment stuff.

That's typically why firms put off proxy votes until they have no choice. Once they face a required vote, they throw every conceivable issue on the ballot, muddling the situation and making proxy materials that much more dense.

As a shareholder, that practice - though mind-numbing - is good business. It means the firm isn't spending your dollars to pay for small-issue votes on issues that aren't timely or crucial.

Avoiding future votes has a lot to do with the Invesco booklet sent to investors. (The inside cover includes a phone number investors can call with questions about what the questions mean.) Denver-based Invesco and its sister firm, AIM Investments, have been consolidating operations to save money. Both firms are part of Amvescap, a London-based firm that has been suffering during the weak market for funds over the past few years. AIM and Invesco recently announced proposals to merge some funds and combine other business operations.

The holding companies for Invesco's funds are Maryland companies, while most of AIM's funds are Delaware statutory trusts. Delaware, Maryland and Massachusetts are the three states where the vast majority of funds are based legally, thanks to laws favorable to investment firms.

By combining the firms and moving the remaining Invesco funds to Delaware, Amvescap winds up with virtually all of its funds operating under the same basic rules.

"It certainly makes sense for the company to have its funds working under one organizational structure," says Goeff Bobroff of Bobroff Consulting Group in East Greenwich, R.I. "The question is how much sense does it make for shareholders."


That can be a hard question to answer.

On certain issues, investors clearly are better off with the change.

Maryland-based funds, for example, have a set number of authorized shares; a fund that brings in a flood of money could literally run out of shares to issue, even to existing holders (something that briefly happened to the Internet Fund a few years back). Maryland's rules also mandate significant shareholder input.

That's where shareholders might be nervous.

The boards of funds domiciled in Delaware have more power to act without a shareholder vote. They can't overhaul a fund and alter its investment objective - that's covered by federal rules - but they can approve mergers with similar funds, and can make charter changes that might let a fund invest in whatever newfangled idea the investment community comes up with next.

"Typically these types of reorganizations are designed to provide operational flexibility, and the shareholder doesn't really notice them," says Phil Newman, who chairs the investment management practice at the Boston law firm of Goodwin, Proctor & Hoar. "The business trust status in Delaware gives the fund more flexibility, but it's not something most investors in the fund would ever really notice."


So long as the fund firm isn't doing something way outside the norm -- such as relocating its legal base of operations to, say, New Mexico - don't lose sleep on the issue.

"You're not going to stop it by voting against it, and it would be the exceptional case where this ever became something you noticed," says Burton J. Greenwald of the Philadelphia fund consulting firm B.J. Greenwald Associates.

But if you can't stop it and won't notice it, why should you care? Typically, when boards get more control - through state rules or via rule and charter changes approved in other proxy votes - there is potential for a future shift in the fund.

Says Bobroff: "If a fund is doing something today that takes away the shareholders' ability to control the fund, it should make you watch the fund more closely. ... You never know what kind of unpleasant surprise you could get if the fund changes and they don't have to tell you about it."