American Funds Mum on PetroChina Divestment
February 23, 2010
By Peter Ortiz
After thwarting activists' efforts to pass an anti-genocide shareholder resolution, American Funds has quietly sold off virtually all of its holdings in the oil company linked to atrocities in Darfur that sparked the fight.
The Los Angeles-based money manager's move to divest its holdings of Chinese-owned PetroChina has earned the praise of Investors Against Genocide, the group that proposed the resolution. But the reasons for the sudden change still remain less than clear, and investor activists have questions.
"In the case of taking action in the face of genocide I think it is very much in the interest of customers that they understand why American Funds took action," says Eric Cohen, chairman of Investors Against Genocide. "I'm pleased that they took action, but I think it would do some good speaking publicly."
Leading up to the shareholder vote, American Funds opposed the resolution - which sought to empower the board to prohibit investments in companies deemed to be contributors to genocide or crimes against humanity - on the grounds that decisions regarding investments are best left to investment managers, not the board. The firm's response to the proposal stated: "While some believe total divestment is necessary for change, others generally prefer that the world stay engaged with the offending countries or governments because engagement provides the best - or only - opportunity to exert influence."
In fact, no more than 12% of American Funds' shareholders backed the proposal put forth by Cohen's group, which was on the ballot of 16 funds. The vote dealt a huge blow for the activists, who had managed to get American Funds to put the measure to a vote for the first time.
But in the months leading up to December, American Funds dramatically pared three funds' holdings of PetroChina, according to American Funds website and Securities and Exchange Commission filings. In total, American Funds had 167 million shares worth $190 million in the funds leading up to the Nov. 24 shareholder meeting. By Dec. 31, only 2 million shares were left, representing a reduction of 99%.
Capital World Growth & Income had 76.8 million shares as of Aug. 31. By Nov. 30 it had shed half of its holdings and by Dec. 31 it was left with 1.4 million shares. The Capital Income Builder held 44.4 million shares as of Oct. 31 but by the end of the year was down to 818,000 shares. And the EuroPacific Growth fund went from 46.6 million shares Sept. 30 to zero shares by Dec. 31.
The sell-off is something of a mystery. Allen Good, an analyst for Morningstar who tracks PetroChina, says that the oil company's stock has been relatively steady. "There is nothing sudden, in other words, that would precipitate a sell-off," he says.
American Funds will not say whether it had a sudden collective change of heart, or if it saw something in the fundamentals that prompted the divestment. It did not post a news release, consistent with its overall policy of not publicizing the reasons for selling and purchasing, says spokesman Chuck Freadhoff. The decision to buy and sell is left up to portfolio managers, and human rights issues are among many things considered by managers, he says.
"We look at many factors and will continue to look at the same factors to see if the circumstances have changed," Freadhoff says. "You don't reach a decision to buy or sell a stock based on one factor."
Either way, Cohen says American Funds is missing an opportunity to contrast itself with other funds that continue to invest in PetroChina. Both Fidelity and Vanguard had engaged in a similar strategy as American Funds when those funds urged their shareholders to vote against the anti-genocide proposal.
Since Vanguard's shareholder meeting in July, where an average of 89% of shares voted were against the Investors Against Genocide proposal, the firm has gone on a buying spree for PetroChina stock, Cohen says. Vanguard adopted a human rights policy last year that Cohen calls "toothless."
"Vanguard has since bought hundreds of millions of shares in PetroChina," Cohen says. "It does not sound like their human rights policy is at work."
Vanguard did not respond to requests for comment.
But American Funds' muted voice does not necessarily mean that it will quickly jump back into PetroChina absent change in human rights if the economics alone are enticing, says Timothy Smith, director of socially responsible investing and chairman of the Social Investment Forum at Walden Asset Management. Both Smith and Cohen say they believe American Funds took human rights seriously in making its decision.
Smith adds that many mutual funds would rather not have their name or brand attached to a controversial issue. But any "logical" person would conclude that a combination of outside pressure and the firm's consideration of human rights played a role in the decision.
"I'm perplexed why they have not spoken about it publicly," Smith says.
Other firms have been very up-front and willing to draw attention to their efforts to pressure certain companies with links to genocide. TIAA-Cref, for example, last year announced a nine-month time line for certain companies linked to genocide to make progress in ending genocide or risk all shares being divested. Last month the firm announced that it would divest from four companies with ties to genocide in Darfur, including PetroChina.
Despite American Funds' being less engaged than TIAA-Cref, Cohen and Smith still acknowledge the significant impact the firm's decision may have on other funds.
"I think this is a very big message for the industry as a whole," Cohen says. "If American Funds can divest their holdings in PetroChina [due] to a human rights concern, there is no excuse other mutual funds can't take similar actions."
Still, some companies are not showing any signs of changing their position on the matter.
In a statement given last week, Fidelity wrote that it is sensitive to the "tragedy occurring in Darfur...and repulsed by the genocide and all other crimes against humanity." It also acknowledged respect for requests to divest, but wrote that such action would reduce its "ability to oppose company practices that we do not condone."
"There is the possibility that driving publicly traded companies out of Sudan may actually make the situation worse, exposing the region to state-owned companies or companies that are not traded on the world's exchanges and, therefore, not subject to any shareholder influence whatsoever," the statement reads.
The Los Angeles-based money manager's move to divest its holdings of Chinese-owned PetroChina has earned the praise of Investors Against Genocide, the group that proposed the resolution. But the reasons for the sudden change still remain less than clear, and investor activists have questions.
"In the case of taking action in the face of genocide I think it is very much in the interest of customers that they understand why American Funds took action," says Eric Cohen, chairman of Investors Against Genocide. "I'm pleased that they took action, but I think it would do some good speaking publicly."
Leading up to the shareholder vote, American Funds opposed the resolution - which sought to empower the board to prohibit investments in companies deemed to be contributors to genocide or crimes against humanity - on the grounds that decisions regarding investments are best left to investment managers, not the board. The firm's response to the proposal stated: "While some believe total divestment is necessary for change, others generally prefer that the world stay engaged with the offending countries or governments because engagement provides the best - or only - opportunity to exert influence."
In fact, no more than 12% of American Funds' shareholders backed the proposal put forth by Cohen's group, which was on the ballot of 16 funds. The vote dealt a huge blow for the activists, who had managed to get American Funds to put the measure to a vote for the first time.
But in the months leading up to December, American Funds dramatically pared three funds' holdings of PetroChina, according to American Funds website and Securities and Exchange Commission filings. In total, American Funds had 167 million shares worth $190 million in the funds leading up to the Nov. 24 shareholder meeting. By Dec. 31, only 2 million shares were left, representing a reduction of 99%.
Capital World Growth & Income had 76.8 million shares as of Aug. 31. By Nov. 30 it had shed half of its holdings and by Dec. 31 it was left with 1.4 million shares. The Capital Income Builder held 44.4 million shares as of Oct. 31 but by the end of the year was down to 818,000 shares. And the EuroPacific Growth fund went from 46.6 million shares Sept. 30 to zero shares by Dec. 31.
The sell-off is something of a mystery. Allen Good, an analyst for Morningstar who tracks PetroChina, says that the oil company's stock has been relatively steady. "There is nothing sudden, in other words, that would precipitate a sell-off," he says.
American Funds will not say whether it had a sudden collective change of heart, or if it saw something in the fundamentals that prompted the divestment. It did not post a news release, consistent with its overall policy of not publicizing the reasons for selling and purchasing, says spokesman Chuck Freadhoff. The decision to buy and sell is left up to portfolio managers, and human rights issues are among many things considered by managers, he says.
"We look at many factors and will continue to look at the same factors to see if the circumstances have changed," Freadhoff says. "You don't reach a decision to buy or sell a stock based on one factor."
Either way, Cohen says American Funds is missing an opportunity to contrast itself with other funds that continue to invest in PetroChina. Both Fidelity and Vanguard had engaged in a similar strategy as American Funds when those funds urged their shareholders to vote against the anti-genocide proposal.
Since Vanguard's shareholder meeting in July, where an average of 89% of shares voted were against the Investors Against Genocide proposal, the firm has gone on a buying spree for PetroChina stock, Cohen says. Vanguard adopted a human rights policy last year that Cohen calls "toothless."
"Vanguard has since bought hundreds of millions of shares in PetroChina," Cohen says. "It does not sound like their human rights policy is at work."
Vanguard did not respond to requests for comment.
But American Funds' muted voice does not necessarily mean that it will quickly jump back into PetroChina absent change in human rights if the economics alone are enticing, says Timothy Smith, director of socially responsible investing and chairman of the Social Investment Forum at Walden Asset Management. Both Smith and Cohen say they believe American Funds took human rights seriously in making its decision.
Smith adds that many mutual funds would rather not have their name or brand attached to a controversial issue. But any "logical" person would conclude that a combination of outside pressure and the firm's consideration of human rights played a role in the decision.
"I'm perplexed why they have not spoken about it publicly," Smith says.
Other firms have been very up-front and willing to draw attention to their efforts to pressure certain companies with links to genocide. TIAA-Cref, for example, last year announced a nine-month time line for certain companies linked to genocide to make progress in ending genocide or risk all shares being divested. Last month the firm announced that it would divest from four companies with ties to genocide in Darfur, including PetroChina.
Despite American Funds' being less engaged than TIAA-Cref, Cohen and Smith still acknowledge the significant impact the firm's decision may have on other funds.
"I think this is a very big message for the industry as a whole," Cohen says. "If American Funds can divest their holdings in PetroChina [due] to a human rights concern, there is no excuse other mutual funds can't take similar actions."
Still, some companies are not showing any signs of changing their position on the matter.
In a statement given last week, Fidelity wrote that it is sensitive to the "tragedy occurring in Darfur...and repulsed by the genocide and all other crimes against humanity." It also acknowledged respect for requests to divest, but wrote that such action would reduce its "ability to oppose company practices that we do not condone."
"There is the possibility that driving publicly traded companies out of Sudan may actually make the situation worse, exposing the region to state-owned companies or companies that are not traded on the world's exchanges and, therefore, not subject to any shareholder influence whatsoever," the statement reads.