Dodge & Cox gets relief from shareholder restrictions

Until last week, the buttoned-down money manager Dodge & Cox wasn’t allowed to invest more than 15 cents of a shareholder’s dollar in illiquid investments.
Fund managers at the firm also couldn’t buy stocks on margin, a purchase that requires which borrowed money to purchase stock. Nor could they short sell them.
And they were strictly forbidden from investing in companies with the intent of “exercising control or management.”
That was until last week. Dodge & Cox shareholders last Wednesday approved proposals by the funds’ management that loosened or eliminated those restrictions and another prohibiting one fund’s managers from selling equity options.
Executives at the fund house said they are not changing how they invest or do business as a result of the changes. Instead they said the policies needed to change because they were relics of a bygone era.
“Our funds are quite old and some of the provisions are really outdated and are not included in the modern prospectuses of the other fund companies,” said Charles F. Pohl, the firm’s chairman and chief investment officer.
Many funds have some similar restrictions. Known as fundamental policies and available in a fund’s Statement of Additional Information, they require shareholders to approve any changes. Less restrictive policies would just require board approval of changes.
But voluntary restrictions in an age of increasing compliance issues and competition may make little sense to fund companies, and even less sense in light of the difficulties managers faced in adjusting strategies to deal with the 2008 market rout, according to lawyers that work with fund companies.
“There’s a variety of competitive pressures that would make sense to why you would want to get rid of these things and put yourself on a minimum threshold of regulatory compliance that every other fund is on while recognizing that regulation at the federal level has become more complex as well,” said Peter J. Shea, partner at the law firm Katten Muchin Rosenman.
Lawyers like Mr. Shea are increasingly working with hedge funds that are adopting their strategies to the regulatory burdens imposed on mutual funds regulated by the Investment Company Act of 1940.
“What you’re seeing with a lot of registered funds is they feel they’re being imposed upon by a lot of alternative products,” said Todd Cipperman of Cipperman Compliance Services. “The mutual fund vehicle was designed to be relatively restrictive to reduce risk. That vehicle is designed to be a very plain-vanilla vehicle, to stick to an investment style. It’s designed to tie Ulysses to the mast so he’s not seduced by the siren song of market movements.”
The removal of the restrictions is a rare move for Dodge & Cox, which is generally seen as being more averse to marketing and product proliferation than its competitors.
Before this year, the firm saw outflows every year since 2008. But it largely stuck with its pricing and investment strategy during those years.
The asset manager, founded in 1930, manages just five mutual funds, with one share class apiece, and its average manager has been in place for nearly 23 years, according to Morningstar Inc.
The firm has seen $2.5 billion enter its funds so far this year, raising their total in open-end funds to $158 billion last month, Morningstar said.
Its flagship stock fund (DODGX) and international stock fund (DODFX), are performing above the 8th percentile in their Morningstar category over the last one- and three-years periods. Those funds account for nearly three-quarters of the firms’ mutual fund assets.
Firm executives contend they aren’t reacting to the market environment in making changes, but removing “an unnecessary issue,” according to Thomas M. Mistele, chief operating officer and senior counsel for Dodge & Cox. He said the restrictions were imposed when states imposed a patchwork of requirements on funds that included having certain fundamental policies. States lost that that authority over mutual funds with the enactment of the National Securities Markets Improvement Act of 1996.
Exceeding limits on illiquid investments now will require board approval. The other restrictions were removed outright. The firm said the restriction on buying on margin was “unduly restrictive.” And they said their lawyers had warned them about “how far” conversations with management of companies could go before possibly running afoul of the policy on “exercising control or management.”
“We wind up getting pulled into these conversations and we want to make sure that we’re able to act in a way that’s constructive to the long-term interests of our fund shareholders and not be unduly constrained by the prospectuses,” Mr. Pohl said. “You shouldn’t expect us to become activist investors. We’re not going to try to become Carl Icahn, but we’ve spoken to Carl Icahn a number of times over the years and discussed issues with companies he’s been invested in … He raises some good issues some times.”