The Markets May 20, 2007

Mutual Funds’ Protect Themselves With Strategic Voting

Mutual funds seem to vote proxies in ways that protect them from negative reprisals.

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According to a press release, researchers Michael Ostrovsky, Stanford Business School assistant professor of economics, and Harvard Business School doctoral student Gregor Matvos analyzed more than 3 million votes by 3,600 mutual funds from 2003 to 2005 and found that, while certain mutual fund companies exhibited a pattern of withholding votes on board candidates, others sided with a company’s proposed slate much more often. Additionally, those funds that did withhold votes tended to do so in a group.

Explaining why some fund managers or proxy oversight committees generally voted in passive agreement with corporate management’s choices of board candidates and why, when they did not, they tended to do so in a huddle with other nay-saying funds, Ostrovsky said, “Suppose I dislike a director but I know he’ll be voted for by everyone else. I can withhold my vote, but I’ll be sticking my neck out by doing so. Essentially, because that information is now public, I’m showing the management of that company that I’m, in some sense, “against’ them.”

Ostrovsky explained further in the release that firms that are unhappy with a mutual fund company could withhold information needed for trading or deny it future pension plan or investment banking business. For these reasons, mutual funds who dislike a candidate may first find out how other stakeholders are going to vote before casting their vote. By withholding a vote rather than saying nay, a mutual fund can avoid being singled out for negative treatment.

New disclosure rules by the Securities and Exchange Commission helped Ostrovsky and Matvos with their research. “Thanks to the SEC’s disclosure mandate in 2003, for the first time we have fantastic data on mutual fund voting in companies in which they hold shares,’ said Ostrovsky in the press release.

More information can be found at http://www.gsb.stanford.edu/news/knowledgebase.html.

Data & Research May 20, 2007

Retirement Savings Decisions Swayed By Emotions

Fear, regret, inertia, aggressiveness, and susceptibility can influence retirement investors to react to market uncertainty in ways that may not be in their best interest, according to a new Prudential Financial survey.

Reported by

Adrien Martin

Although three of four investors are affected by their emotions to a moderate or high degree, just over a third (35%) believe emotions impact their investment decisions, according to a news release. However, Prudential said, behavioral risk affects nearly all investors.

The survey found that 80% of respondents registered high or moderate degrees of regret, and 71% high or moderate degrees of fear, which can influence financial decisions. For example, 86% of those registering a high degree of susceptibility (those influenced by the advice of friends or relatives) would take some or all money out of the market if confronted with significant market losses. Similarly, 78% of those scoring high on fear would do the same.

Three in four (75%) investors would consider an investment product that could provide various guarantees. With the benefit of these guarantees, most (85%) would be likely to weather out short-term losses.

The “Behavioral Risk in The Retirement Red Zone” research explored the link between emotions and financial decisionmaking in investors approaching or in The Retirement Red Zone – the critical investment window five years before and after retirement, according to Prudential.

“The role emotions play in investment and retirement decisions is being recognized as an important factor in creating a successful retirement,” said David Odenath, president of Prudential Annuities, in the news release. “For Americans in the Retirement Red Zone, understanding the emotions that can influence their behavior can ultimately help mitigate the effects of behavioral risk.’

Focus groups conducted in conjunction with the survey indicated that many investors Prudential classifies as being in the Retirement Red Zone would prefer to rely on their financial professional to better understand the role emotions play in their financial decisionmaking.

Also as part of the research, Prudential partnered with experts in the field of behavioral finance at the University of Connecticut to develop a tool to determine an investor’s Retirement Emotion Quotient (EQ) and found that t

hree of four investors (76%) rate moderate or high on their Retirement EQ score. Seventy-two percent of men and 80% of women have moderate or high EQ scores; however, only one-third of Retirement Red Zone investors (35%) feel emotions have an impact on their decisions.

To download a copy of the report, visit www.retirementredzone.com.