Mutual funds becoming shareholder activists

BOSTON (Reuters) - The world's largest mutual fund firm is about to take on an unlikely title: activist shareholder.

Fidelity Investments is expected next week to vote against a buyout offer for U.S. broadcaster Clear Channel Communications Inc., highlighting the increasingly active approach mutual funds are taking to boost investment returns.

Competition from hedge funds that routinely take activist positions, as well as regulations that have made funds more accountable to their shareholders, are driving the $10.6 trillion mutual fund industry to become vocal on their investments.

Fidelity, Clear Channel's biggest institutional shareholder with a 9.7 percent stake, will on May 8 thumb its nose at a nearly $20 billion sweetened takeover offer for the broadcaster by bidders Thomas H. Lee and Bain Capital, a source close to Fidelity said.

Charles Mangum, a Fidelity portfolio manager, has said on Fidelity's Web site that an earlier offer of $37.60 per share for Clear Channel <CCU.N> "significantly undervalues the company's assets."

That offer and another one made at $39 a share had the management's backing.

Boston-based Fidelity's vote is being watched closely, not only because of its substantial holdings in hundreds of companies, but also because it and other mainstream funds have rarely opposed management.

"It's basically uncharacteristic for Fidelity to vote against management, especially in any sort of public display of voting against management," said Jim Lowell, editor of independent newsletter Fidelity Investor.

"They are basically trying to jaw-bone Clear Channel's management into changing course. But if they don't, they will vote with their shareholders' dollars just the way their shareholders vote with their dollars based on their underlying performances."

Other mutual funds have also turned into agitators. OppenheimerFunds Inc. teamed up with other investors in March to oust the management of video game maker Take-Two Interactive Software Inc. <TTWO.O>. T.Rowe Price Group Inc. <TROW.O> opposed a management-led buyout of Laureate Education Inc. <LAUR.O> in January.

And ClearBridge Advisors, a unit of mutual fund firm Legg Mason Inc. <LM.N>, said on Friday it will support billionaire Carl Icahn's quest to win a seat on the board of mobile phone maker Motorola Inc. <MOT.N>

"We will see more of that, not less of that," said Steven Howard, chief of investment funds practice at law firm Thacher Proffitt & Wood LLP.

REGULATIONS CHANGE GAME

Until 2004, mutual funds did not have to reveal how they voted on strategy and governance issues such as executive compensation and director elections. It was generally thought they either sided with management or abstained from voting. If they disagreed totally with management, they sold out.

But regulations in effect since the industry-wide trading scandal broke in 2003 now force them to reveal how they vote.

"Because they are now under the spotlight, they are having to take a position. They can't get away with abstaining or voting with management on issues," said Jackie Cook, senior researcher at governance research group The Corporate Library.

The scandal also led to laws that made mutual fund board of directors more independent of the fund firm's management.

"Now management of the mutual fund is being pressed by a very articulate, well-informed expert group in these boards. And those boards are saying to their advisors like Fidelity: 'Look, you have to protect our shareholder value'," said Howard of Thacher Proffitt & Wood.

Growing competition with hedge funds is also helping the trend. Mutual fund managers in some instances are starting to mimic the activist demands of hedge funds and private equity managers, and that has become easier as more firms offer all three capabilities under one roof.

"That kind of activist behavior can, in fact, be rewarding and that's not lost on the managers of Fidelity," said Lowell of Fidelity Investor.