Does your Vanguard portfolio include a company that contributes to genocide?

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Does your Vanguard portfolio include a company that contributes to genocide?
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For many years, money expert Clark Howard has recommended the Vanguard STAR Fund to parents and grandparents who wanted to get started investing for a child or grandchild with a small amount of money.

The recommendation was ideal because a custodial account for a child can be opened with as little as $1,000.

But here’s something that may give parents and grandparents pause if they’re thinking about investing in the STAR Fund or already have investments in it…

An activist investor group says it’s one of nearly four dozen Vanguard funds that support genocide through its investments.

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Genocide-free investing: Proposal 7 and Vanguard’s upcoming proxy vote

On November 15, Vanguard will hold a shareholder meeting and proxy vote for the first time since 2009.

A variety of business will be conducted via the meeting and vote, including the election of trustees for each fund, the approval of new arrangements with wholly owned subsidiaries of Vanguard and the like.

But perhaps the most controversial business up for consideration is Proposal 7 (aka the “Genocide-free investing” proposal), an explanation of which is tucked away on page 25 of a brochure explaining the proxy vote.

Proposal 7 is being brought forth by a group of activist investors calling themselves Investors Against Genocide (IAG), which bills itself as a “citizen-led initiative, dedicated to convincing mutual funds and other investment firms to make an ongoing commitment to genocide-free investing.”

The contention of this group is that Vanguard needs more in the way of “transparent procedures to avoid holding investments in companies that, in management’s judgment, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights.”

In a filing with the Securities and Exchange Commission, IAG notes that Vanguard held $835 million of PetroChina stock as of April 30, 2013.

PetroChina, through its controlling shareholder China National Petroleum Company, is reportedly the largest business partner of the Sudanese government. You may recall the Darfur region of Sudan was home to an infamous genocide that took place there beginning in 2003.

It is the belief of IAG, therefore, that Vanguard’s investments such as its holdings of PetroChina “helps [to] fund ongoing government sponsored genocide and crimes against humanity.”

By extension, individual investors may unknowingly be supporting genocide, the IAG claims in its controversial proposal.

As a remedy, the activist investing group wants “time-limited engagement with problem companies if management believes that their behavior can be changed.”

In other words, IAG wants Vanguard to put some mechanism in place to disclose which of their holdings might constitute socially unenlightened investing. And IAG further wants Vanguard to put such companies in a penalty box and give them a chance to clean up their act before giving them the boot out of their funds’ portfolios.

Vanguard’s response

Vanguard reply to Proposal 7

List: These funds have been flagged as part of Proposal 7

Here’s a list of four dozen Vanguard funds in alphabetical order that are being called out by IAG:

  • 500 Index Fund
  • Capital Opportunity Fund
  • Developed Markets Index Fund
  • Dividend Appreciation Index Fund
  • Emerging Markets Stock Index Fund
  • Energy Fund
  • Equity Income Fund
  • European Stock Index Fund
  • Extended Market Index Fund
  • FTSE All-World ex-US Index Fund
  • FTSE Social Index Fund
  • GNMA Fund
  • Growth Index Fund
  • Health Care Fund
  • Inflation-Protected Securities Fund
  • Institutional Index Fund
  • Intermediate-Term Bond Index Fund
  • Intermediate-Term Treasury Fund
  • International Explorer Fund
  • International Growth Fund
  • International Value Fund
  • LifeStrategy Moderate Growth Fund
  • Long-Term Treasury Fund
  • Mid-Cap Index Fund
  • Mid-Cap Value Index Fund
  • Morgan Growth Fund™
  • Municipal Money Market Fund
  • Pacific Stock Index Fund
  • Precious Metals and Mining Fund
  • Prime Money Market Fund
  • REIT Index Fund
  • Short-Term Bond Index Fund
  • Short-Term Tax-Exempt Fund
  • Short-Term Treasury Fund
  • Small-Cap Growth Index Fund
  • Small-Cap Index Fund
  • Small-Cap Value Index Fund
  • STAR Fund®
  • Tax-Managed Small-Cap Fund
  • Total Bond Market Index Fund
  • Total International Stock Index Fund
  • Total Stock Market Index Fund
  • Value Index Fund
  • Variable Insurance Fund – Balanced Portfolio
  • Wellington Fund™
  • Windsor Fund™
  • Windsor II Fund™

What does this all mean to you?

Maybe you followed Clark’s advice and bought into the STAR Fund for a child in your life years ago. Or maybe you’re checking your 401(k) statement through work and realize you own some of the funds listed above.

We’re not going to attempt to tell you how to vote on this sensitive issue.

But vote you should — either for or against Proposal 7 and the other six proposals up for consideration if they apply to your investments.

Because the reality is that Vanguard has spent nearly $18 million to bring awareness to this vote. Board members do need to be selected and this proxy vote is how it’s being done, after all.

Yahoo Finance reports that if Vanguard cannot attain a quorum of one-third of shareholders for each fund, the company may have to spend additional funds to get the word out about another vote in the near future — until it does get that quorum.

Nobody wants those expenses to be passed on to investors in the form of higher fees.

So no matter what you believe on the issue of Proposal 7, be sure to vote!

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Theo Thimou About the author:
Theo is director of content for clark.com. He has co-written 2 books with Clark Howard, including the #1 New York Times bestseller Clark Howard's Living Large in Lean Times.
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