New Mutual Fund Aiming To Beat Back Social Activism
NEW YORK -- One mutual fund is mad as hell, and it's not going to take it any more.
The Free Enterprise Action Fund, a new fund with a stock portfolio of about $4 million, says it is the first with the main goal of promoting "the American system of free enterprise."
Founded by Steven Milloy, a columnist for FoxNews.com and The New York Sun, the fund aims to get good returns for investors while - in his words - evening the score with leftist forces that are chipping away at business. Culprits include corporate management, mutual funds and other groups that promote so-called corporate social responsibility.
"Businesses are being pressured by radical politicized left-wing activists to do things not in the best interest of the whole free-enterprise system," said Milloy, also an adjunct scholar at the Cato Institute and publisher of junkscience.com, a commentary site that bears the motto: "All the junk that's fit to debunk." "We want to be a counterforce to the activists," Milloy added.
Assets in the new fund so far have come from "a fairly tight group of individuals, pretty well-known people on my side," according to Milloy, who added that the assets have been growing. The strategy for making growth continue combines investment and advocacy.
On the investment front, the Free Enterprise Action Fund doesn't sound much different from a regular mutual fund. It owns stocks in about 400 S&P 500 companies, so by default supports a number of companies targeted by activists.
"We also may drop a company from our portfolio if it's incorrigible," said Milloy. "If a management is hell-bent on capitulating to activists, then we would get rid of them."
As for advocacy, the fund will lead anti-activist campaigns to "intervene in situations where law-abiding businesses have been targeted" by activists, according to its website. It will also sponsor shareholder resolutions and meet with corporate management on issues it deems important.
The latter might be a tough call right now, with only $4 million to kick around, according to some who know the governance scene well. True, one can sponsor a proxy resolution after holding $2,000 worth of company stock for at least a year, but "if you offer a resolution that's going to get less than 10% support, you're not going to get any meaningful degree of reception with the board of directors," said Patrick McGurn, senior vice president and special counsel at Institutional Shareholder Services Inc., a proxy advisory firm in Rockville, Md.
Activist mutual funds like Calvert and Pax World Funds put their money into companies they deem socially responsible, often shunning companies that produce tobacco, alcohol or gambling-related products, the so-called sin stocks. For example, Pax World Funds said last month that it had dumped its Starbucks Corp. (SBUX) stock because it disapproves of a deal the coffee chain has with Jim Beam Brands Co. to sell a coffee-based alcoholic beverage. Though the fund family had invested in Starbucks for nearly a decade, the liqueur deal violated its policy of avoiding what it dubs the "addiction stocks."
Fund Doesn't Screen Stocks
But Free Enterprise Action Fund doesn't screen stocks. So what's the difference between it and other funds that don't have a social-responsibility mandate? "The difference between us and, say Fidelity Investments, is that we're out there actively promoting the free enterprise system," Milloy said. "We hope to give our investors an ideological return as well as financial return."
First and foremost, the fund - as with any new fund - will have to prove itself on its investment merit, said Tim Smith, president of the Social Investment Forum, and senior vice president of Walden Asset Management, a Boston-based social investment firm that manages about $1.4 billion.
To that end, Milloy, who is the lead advisor for the fund, has hired Think or Swim Advisors, a Michigan investment advisory firm, as a subadvisor to help him manage the money. Robert Stapleton, the CEO of Think or Swim, said his firm isn't currently advising any other mutual funds, though it advised two in the past. It now works with high-net-worth individuals and institutional clients.
Anita Green, vice president of social research for Pax World Funds, said she has been puzzled by Milloy's labeling of socially responsible investing as leftist.
"It's rooted in the church, and that's not exactly a bastion of liberalism," said Green, who noted that two Pax founders were Methodist ministers. "The idea that you run your business in line with your ethics goes back to the Quakers."
And Smith, of Walden Asset Management, took issue with the idea - one that Milloy hits hard - that management at some corporations has caved into pressure from activists.
"This perspective badly misses the point," said Smith of the Walden Asset Management. "Global corporations who are committed to leadership in corporate responsibility are doing so because they believe it's smart business and good for long term shareholder values."
But Milloy does have something of a kindred spirit in Dan Ahrens, president of Mutual Advisors Inc., and portfolio manager of the Vice Fund at Mutuals.com. The $32 million fund, founded in 2002, invests in alcohol, gambling and tobacco stocks. The idea for the fund "came up," Ahrens said, because others were screening out the stocks.
Ahrens said he is completely against screening out a stock strictly on its social merit. How have the so-called socially responsible funds affected his fund?
"I wouldn't say it's helped or hurt, but I'd say it's ridiculous," said Ahrens. "It's a nuisance to corporations trying to do their jobs. And no matter what the stock market is doing or the economy is doing, people will drink, smoke and gamble."
-By Arden Dale, Dow Jones Newswires; 201-938-2052; firstname.lastname@example.org