Things keep getting better for the US Postal Service. Shareholders of Tri-Continental (NYSE:TY) will be receiving another package soon, this one from the Chairman of Tri-Continental in response to statements made in the previous two letters sent by Western Investment. I'll list some of the responses below, and of course add my thoughts in between.
Mr. Lipson's willingness to attack me personally in his letters says a great deal more about his character than mine. But some of our stockholders may be concerned with what he wrote, so please permit me to set the record straight. The mutual fund investigation that Mr. Lipson referred to does not in any way relate to Tri-Continental, and was fully disclosed to you by letter nearly three years ago and in the 2003 Annual Report to Stockholders. Contrary to what Mr. Lipson's letters may insinuate, there are no regulatory lawsuits pending against Tri-Continental, Seligman, or me personally.
I'm not sure that Western Investment claimed that there were lawsuits pending against Seligman. Maybe they did, and I just missed it. However, it is definitely fair to bring up that Seligman is under investigation, and Eliot Spitzer did go to court to try to force Seligman to provide more information.
Mr. Lipson also implies that I have no investment experience outside of J. & W. Seligman & Co. Incorporated, where I have been Chairman for 17 years. Sadly, he knowingly ignores the additional 17 years I spent at Lehman Brothers as head of investment banking and a member of the Executive Committee that ran that diversified investment firm. Mr. Lipson himself was an associate at Lehman Brothers during my tenure there, a fact discussed at the 2006 Tri-Continental Annual Meeting.
This might just be a difference of opinion on what constitutes professional investment experience. It's not clear that Mr. Morris dealt directly with the asset management part of Lehman Brothers, even though he may have indirectly. I think both sides can claim the other is distorting the truth on this point.
Mr. Lipson represents himself and his hedge fund group as Tri-Continental stockholders since 1999. In truth, he and his hedge funds owned only a single share as late as September 2002. Prior to that time, they repeatedly bought and sold Tri-Continental solely for short-term trading purposes. Although they have been sometime stockholders, you should not consider them long-term investors.
If the above is true then I think Western's position on this point is a little misleading. If the shares held in the past were mainly just for trading, they should make this more clear.
Mr. Lipson contends that his "interests are aligned" with Tri-Continental stockholders. However, he fails to disclose in either his recent letters or SEC proxy filings that his hedge funds have hedged their position in the Corporation using sophisticated derivative strategies to minimize the market risk of his holdings. In effect, the actual investment results of the Corporation are of little consequence to him. Our knowledge of this comes from Mr. Lipson himself, who personally told officers of the Corporation about his hedging practices.
I think this is probably true because Western did not deny this claim when it was brought up during the last election. As a result of this, narrowing the discount would likely be Western's main priority, but they have stated that narrowing the discount would be a priority all along.
Mr. Lipson claims he does not seek to open-end or liquidate Tri-Continental. You should find it difficult to reconcile this assertion with the statements made in his previous proxy. Earlier this year, Mr. Lipson urged Directors to immediately "convert Tri-Continental to an open-ended mutual fund" or "adopt a plan of dissolution and liquidation..." Considering his history of waging or joining campaigns to open-end other closed-end funds, you and I as Tri-Continental stockholders have a right to be skeptical about his ultimate intentions.
Yes, shareholders do have the right to be skeptical. I get the feeling that if Western's nominees were elected that they would start out by making large tender offers or something along those lines before proposing to open-end or liquidate TY, which shareholders would have to approve of anyway. But only Western really knows what their plans are. I think shareholders can feel assured though that if the incumbent directors are re-elected, nothing will change.
Should Mr. Lipson and his candidates be elected to the Board, they will owe allegiance both to Tri-Continental and to the Western Investment hedge funds. Because of the short-term importance to Mr. Lipson's hedge funds of its Tri-Continental holdings, it strains credulity that they will make decisions that favor all Tri-Continental stockholders at the expense of his hedge funds. Every member of Mr. Lipson's slate is an investor in one of his hedge funds. We should not elect "independent" directors with such conflicting loyalties.
As I've written above, if Western Investment's nominees are elected, I think their main priority will be to narrow the discount. Taking steps to narrow the discount won't necessarily hurt the longer-term performance of the fund. And I'm not sure that bringing up questions about the conflicting loyalties of Western's nominees is a good idea. It could easily be argued that conflicting loyalties of the incumbent board is the reason they have stuck with Seligman for 15 years of underperformance.
Not surprisingly, Mr. Lipson's letters ignore Tri-Continental's more recent investment performance; it continues to improve under the leadership of portfolio manager John B. Cunningham. Last week, Tri-Continental's net asset value (NYSE:NAV) and market price reached near five-year highs. You will see in the chart below that Tri-Continental's year-to-date performance is ahead of the S&P 500 Index.
TY's year to date performance is beating the S&P 500, but I don't think short-term performance is all that relevant. It will be several more years before anyone can claim that the new manager is better or the same as previous managers. Investors need to ask themselves if they are willing to wait and find out.
TY 1-yr chart: