Proxying fund shareholders is often seen as a necessary evil in order to make significant changes to a fund, or, in some cases, liquidate it.

Two mutual fund advisors have recently proposed major changes to their funds - but told shareholders that their votes won't carry any weight. In both cases, the funds' advisors, distributors, executives, managers, and board members collectively own enough shares of each fund to win passage of the proposals, without one single other shareholder vote being cast.

In the mutual fund world where majority rules, it's all perfectly legal.

On Oct. 7, Davis Advisors of Tucson, Ariz., the investment manager to the Davis International Total Return Fund, filed a prospectus amendment notifying investors that the fund's board of directors had approved the hiring of Marcstone Capital Management as the new sub-advisor beginning Feb. 1. The fund has been managed since March of 2000 by Fiduciary Trust Company of New York, a Franklin Resources subsidiary.

While fund investors were told they would be "invited to vote" on the proposal at the official Dec. 22 shareholder meeting, they were also told it would be a waste of time. Since the firm's executives already control more than 50% of the shares, enough of a voting block to effect the change, shareholder input wouldn't be required, or even counted.

In addition, little information about the investment advisor, Marcstone, was offered except for the firm's name and a brief description of it as a "globally oriented investment manager with a value focus." But the fund manager did promise that shareholders would eventually receive information about the company.

Marcstone is a New York City-based hedge fund manager that specializes in European securities. Moreover, in a preliminary prospectus filed just one day later, Davis proposed a new series fund named the Davis Global Value Fund, which will also be sub-advised by Marcstone and likely debut early next year.

Of course, while changing fund sub-advisors is important, it isn't earth-shattering. It's commonplace in the institutional money management arena. In the past few years, dozens of fund advisors have applied for and received individual exemptions from the SEC allowing them to change a fund's sub-advisor without requiring a shareholder vote. Many new funds are now launched with this built-in flexibility, allowing the fund sponsor to hire and fire sub-advisors as deemed appropriate, so long as the fund's board approves.

In this case, Davis didn't need to petition the SEC for permission to change the day-to-day fund manager. That's because its most recently filed Statement of Additional Information (SAI) - the often-unseen Part B of the prospectus - shows that the fund's affiliated sub-advisor and one other affiliated company together own more than 75% of the fund's outstanding shares. Davis manages a total of eight retail mutual funds and three variable annuity portfolios.

And it's no surprise that Davis desired a new sub-advisor. The $16 million fund's five-year annualized return of negative 11.95% through Oct. 10 puts it in the basement, lagging behind 96% of its peer funds, according to Morningstar of Chicago. It has lost over 23% year-to-date.

Officials at Davis did not respond to a request for comment.

In yet another case, Van Eck Global Investments of New York, the distributor of the $1.7 million Van Eck Troika Dialog Fund, similarly told investors it was pulling the plug on the fund and liquidating all assets because the fund's double-digit expenses were too high, and as of November would no longer be subsidized by the advisor.

A spokesperson confirmed that the fund was closing due to insufficient growth of assets and an unacceptably high expense ratio.

The fund invests in the securities of Russia, the former Soviet Union, Poland, Hungary and the Czech Republic, and is advised by Troika Dialog Asset Management of Moscow, an affiliate of The Bank of Moscow. Troika Dialog had previously sub-advised the Lexington Troika Dialog Fund which, through successive acquisitions, became the now $97 million ING Russia Fund.

More than 52% of the shares of the Van Eck fund are owned by Troika Dialog, with another 29% owned by members of the Van Eck family and the fund's Van Eck-controlled distributor. All told, more than 81% of all shares are controlled by insiders, making the liquidation proposal a slam-dunk. Once again, investors were notified of a Oct. 28 meeting, but told that "it will be unnecessary to solicit additional votes to approve this plan."

Interestingly, this isn't the first time Van Eck investors have been left out of the voting loop. Prior to its August 2001 deal, naming Troika as the fund's adviser, the fund had been known as the Van Eck Emerging Markets Vision Fund and was managed internally at Van Eck. But in deciding to refocus the fund in Russia and Central Europe, again, shareholders were not proxied because insiders owned 67% of the then $704,000 in fund shares.

"If insiders own 80% of the shares of a fund, they have the right to vote to make those changes," said Jeff Keil, vice president at Lipper, Inc.'s Denver office.

By law, fund advisers must identify what individual, institutional investor, company or other entity owns 5% or more of a fund's outstanding shares. But this information is only required to be disclosed in the fund's SAI, a document which investors often are unaware of and must formally request from the fund company. But do investors even bother to check if the fund they are entrusting their assets to is majority owned by the firm's executives?

"How many people even read the prospectus, let alone the SAI?" asked Roy Weitz, proprietor of Fund Alarm, a mutual fund commentary Web site.

"An advisor that controls a fund by reason of its ownership of fund securities greatly exacerbates the potential problem of self-dealing," said Mercer Bullard, founder and CEO of Fund Democracy, a fund shareholder advocacy group, and former assistant chief counsel at the SEC's Division of Investment Management.

What happens to those minority shareholders who are suddenly facing a vastly different fund than the one they signed up for? "That's the risk investors take when there's concentrated ownership," said John Orrico, manager of` the $22 million Arbitrage Fund and president of its advisor, Water Island Capital in New York. Investors can get some sense of whether a fund may be majority owned by insiders just by a fund's diminutive size, he added, noting that his fund isn't majority held.

Of course, having an insider own a significant portion of the fund can be a powerful marketing message for a fund. Increasingly, fund directors are being asked to purchase shares of at least some of the funds they oversee so as to align their interests with shareholders. And a portfolio manager who plops his own money into his fund is celebrated for eating his own cooking. "It is a strong selling point," said Dan Sondhelm, vice president and partner at SunStar, a PR firm in Alexandria, VA.

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