An AFL-CIO-sponsored, low-cost index fund with a twist is attracting a lot of interest from its target audience.
The AFL-CIO Equity Index Fund has amassed $3 billion in assets since it was launched in March 2011. The investment tool is offered to Taft-Hartley pension funds, which are jointly managed by labor unions and companies, as well as union and public employee pension funds. With a minimum investment of $1 million, the fund's 43 investors have chipped in an average of nearly $70 million.
In addition to replicating the S&P 500 index's returns and low expenses, the fund has an additional objective: advocating CEO pay reform and other causes important to union workers and the middle class.
The fund tracks the performance of the S&P 500 index and sports all-in expenses of 1.7 basis points. That means its pension fund investors will pay $170 in annual fees for every $1 million they invest.
"We are extremely well priced in this universe, and it's one of the reasons why people are taking notice," said Shepard Burr, president of ASB Investment Management, the Bethesda, Md., firm that manages the union-sponsored fund.
The AFL-CIO fund grew out of a similar fund ASB has managed since 2001 for pension plans affiliated with the International Brotherhood of Electrical Workers and the National Electrical Contractors Association, an industry group. Together, the two union funds account for $9.6 billion of the $12.5 billion in stock, fixed income and real estate investments ASB manages, Mr. Burr said.
Index funds try to mirror the performance of the S&P 500 and other market indexes. They typically charge investors lower fees because they are less expensive to operate.
Fund managers buy and hold stocks in the index while their counterparts at actively managed funds try to beat the market by trading stocks. Research and trading costs make actively managed funds more expensive. (Expenses for funds that target pension funds and other large institutional investors typically are lower than those paid by retail investors.)
But fees can vary significantly among funds trying to match the same index, and some do a better job than others when it comes to mirroring the index returns.
The AFL-CIO-sponsored fund generated a 2012 return of 15.9 percent vs. 16 percent for the actual index. Based on Morningstar data, the fund's 1.7 basis point expenses compare favorably with the 2 basis points -- or $200 per $1 million invested -- Vanguard charges for its $54 billion Institutional Index Fund [ticker: VIIIX]. The Vanguard fund requires a minimum investment of $20 million. A Morningstar spokesperson said most S&P 500 funds sport expenses higher than those the Vanguard fund imposes.
Mr. Burr said the union fund's low expenses "allow us to introduce ourselves to an investor group that might consider some of our other products along the way."
Another benefit is being able to use the fund's stake in S&P 500 companies to promote issues union members care about. AFL-CIO president Richard Trumka said the fund's growth indicates "union members recognize the value of proxy voting power to improve corporate governance."
David Durkee, president of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, said the fund provides "a tremendous opportunity to invest our dollars in a way that reflects our values."
Because of restrictions that prevent short-term investors from sponsoring shareholder resolutions, this is the first season the fund has been able to propose issues that can be put to a shareholder vote.
Resolutions sponsored by the fund this year target executive compensation reform, long a priority for the labor group.
They propose that companies require executives retain 75 percent of the stock they are awarded until they retire or leave the company; provide more specifics on what type of performance will generate what kind of pay; refrain from accelerating vesting of stock awards in the event of a takeover; and appoint an independent board chairman.
Mr. Burr expects six companies will be voting on proposals sponsored by the fund at shareholder meetings this year.
The private label S&P 500 index fund is one of three investment vehicles the AFL-CIO sponsors.
Its Housing Investment Trust, registered with the Securities and Exchange Commission in 1981, invests in multifamily and single-family housing development that uses union labor.
A sister fund, the AFL-CIO Building Investment Trust, was launched in 1988. It invests in commercial and industrial real estate development. The projects are built with union labor and maintained by union workers.
Projects the funds have invested in include the Heinz Lofts, a 267-unit, mixed income housing project involving the H.J. Heinz Co.'s former North Side plant, and a 151-unit multifamily housing project at Seventh Street and Fort Duquesne Boulevard.
Len Boselovic: firstname.lastname@example.org, 412-263-1941.