Thank You for Investing

A very curious right-wing mutual fund.

Are you a right-wing, free-market type who believes that Fortune 500 CEOs have devolved into a gaggle of eco-friendly squishes? Do you like paying high expenses for stock market returns that lag the S&P 500? Would you trust a former tobacco executive and a critic of junk science to manage your money? Then have I got a mutual fund for you! The Free Enterprise Action Fund.

Mutual-fund investors face a bewildering array of choices—about 8,002 at most recent count, according to the Investment Company Institute. Whatever their investment style, mutual funds aim, first and foremost, to deliver returns to their shareholders. But FEAF also has something else in mind. In a scenario that could have been written by Christopher Buckley (with a little help from James Cramer), FEAF seems to be a lobbying enterprise masquerading as a mutual fund.

While FEAF’s Web site notes that the fund’s managers, Thomas Borelli and Steven Milloy, have “30 years of combined experience in public policy issues and advocacy,” it makes no mention of any experience they have managing money professionally. Milloy is an author and proprietor of the blog and, as Paul Thacker noted in the New Republic in January, has been a practitioner of the fine art of pay-for-punditry. Borelli, a biochemist and former manager of corporate scientific affairs for Philip Morris, is a senior fellow at the National Center for Public Policy Research and the executive director of, a clearing house of information for those opposed to the horrid concept of “corporate social responsibility.”

The way Borelli and Milloy appear to see it, America’s publicly held companies are becoming playgrounds for lefties. Every year, legions of socially aware investors—union pension funds, or outfits like the Calvert Socially Responsible Mutual Funds—use shareholder resolutions and their growing assets to bully meek CEOs into taking action on global warming, or remaining silent on Social Security reform proposals, or channeling corporate resources to dubious environmental and social justice nonprofits. As investing has become politics by other means, they note, “left-wing social and political activists are harnessing the power, resources and influence of publicly-owned corporations to advance their social and political agendas.”

FEAF aims to act as a counterweight to do-gooders. (Here’s its prospectus.) In addition to tangible returns that should come from roughly tracking the S&P 500, it promises a bonus: a “pro free enterprise ideological benefit through advocacy that promotes shareholder value and defends the American system of free enterprise.”

Since opening for business in March 2005, the fund has bought very small stakes in nearly 400 different companies and used these tiny holdings to take their fight to the business establishment. The fund has zinged the Business Roundtable for insufficient vigilance in “defending capitalism and free enterprise against efforts in Congress to confiscate business earnings and shareholder assets.” Last December, it challenged Microsoft to “reverse its recently announced plan to stop using PVC plastic as a packaging material.” (Here’s Microsoft’s announcement.) In March it told General Electric that while the fund is all for GE’s “Ecomagination” initiative, the company shouldn’t put itself on the record in favor of government regulations of emissions. In March, Milloy, Borelli, and a colleague made a spectacle at the annual meeting of Goldman Sachs. (They’re angered that CEO Henry Paulson is a tree-hugger, and that Goldman had given land in Chile to a conservancy group.)

Judging by the early returns, these free-marketers are failing the test of the marketplace. The fund has attracted a paltry $5.2 million in assets as of March 31. Returns have lagged the S&P 500 badly. In its first 10 months in business, the fund returned 2.32 percent while the S&P 500 rose 4.72 percent.

Meanwhile, its efforts to stiffen the spine of corporate America have been quixotic and unfocused. A resolution the fund filed with Goldman failed by a margin of about 473 million to 178, in part because “the resolution was unavoidably filed late and so was not included in Goldman’s proxy statement.” The 2005 annual report notes that the fund filed resolutions asking Johnson & Johnson, among others, to report on the impact “of the flat tax as discussed in ‘Flat Tax Revolution: Using a Postcard to Abolish the IRS’ by Steve Forbes.” It also initiated action on “an effort by the New York Times to investigate the adoption of children by Supreme Court Justice John Roberts.” Huh? Your guess is as good as mine. After agreeing to an interview with me, Milloy didn’t return several messages.

In many ways, FEAF differs from typical mutual funds. Most mutual funds don’t publish a list of individual investors. (Surprise, many are lobbyists and members of the pundit-industrial complex.) Most mutual funds don’t list their press releases and media hits in their annual report. Here, at least, FEAF has had some success tapping into the supply-side echo chamber. The reliable Amity Shlaes plugged Milloy and Borelli in her Bloomberg column last month, and Larry Kudlow had Milloy on his show in March.

FEAF’s managers also don’t appear to be very interested in making money. Assembling a portfolio of 392 teeny positions (111 shares of Federal Express, 60 shares of Tiffany, etc.) is an incredibly inefficient and costly way of trying to mimic the S&P 500. Asset managers get paid based on the assets they manage. At FEAF, the Adviser (Milloy plus Borelli) receives a fee equal to 1.25 percent of assets. Five million dollars in assets throws off about $62,000 in fees annually, which is nowhere near enough to pay the salary of a professional money manager.

Page 17 of the annual report shows that the fund incurred total expenses of $302,117, a whopping 6 percent of assets. But the prospectus promises that fees won’t eat up more than 2 percent of total assets each year. And so in 2005, the adviser (i.e., Borelli and Milloy) waived his entire $44,727 management fee. What’s more, the adviser reimbursed some $185,616 in trading, administrative, and legal expenses to the fund. If the fund’s assets rise sharply in the next few years, the adviser can theoretically recoup these waived payments and reimbursements. But in the short term, it looks like Borelli and Milloy are essentially paying the fund for the privilege of using it as a platform to broadcast their views on corporate governance, global warming, and a host of other issues.

Thank you for investing!