Arthur Lipson, through his Western Investments funds, has filed a definitive proxy statement asking shareholders to support his slate of nominees for the board of Tri-Continental Corporation (CEF: TY). If elected, they intend to pursue strategies that would allow shareholders to sell their shares at NAV. His arguments for why this is necessary center around TY’s NAV (under) performance relative to the S&P 500, and its double-digit discount that has persisted since 1995.
An interesting point he makes is that a prior survey revealed that as of 12/31/2004, 75% of Tri-Continental shareholders that were surveyed were 65 or older. Lipson believes that these shareholders may want to cash out of their investment sooner rather than later. It could be inferred that these shareholders would support Lipson’s nominees in the hope that they won’t have to sell their shares at a large discount. However, assuming that these older shareholders purchased shares many years ago, they’ve stuck with the fund through its performance and discount problems rather than selling their shares. So they may be satisfied with TY up to this point and will therefore support the fund’s current management when they vote. Overall I don’t see the age of the shareholder base giving a clear signal as to how the vote will turn out.
From my analysis I feel that Tri-Continental should be open-ended or liquidated. I consider TY to be similar to the Salomon Brothers Fund (SBF) which itself most likely will become an open end fund soon. Looking at the two funds, a stronger argument could be made that SBF should remain a closed-end fund. SBF’s NAV returns for the past decade have been roughly the same as the S&P 500. If SBF could keep its returns in the vicinity of the S&P 500 going forward, an investor could make money trading into and out of the fund when the discount is either unusually high or low. With TY, because of its regular underperformance of the S&P 500, this strategy would not work as well. Unless the discount decreases in any given year by a larger percentage than the fund under performs the S&P 500, an investor would be better off in the Index. Because of SBF’s persistent discount, shareholders did not support that fund’s management, and it is good that shareholders will have an alternative option in TY’s election this year.
One of the big advantages that Tri-Continental’s management has in this contest can be seen in this post from ETF Investor. The current board will use shareholder money to pay for Georgeson Shareholder Communications to solicit proxies on their behalf. Dissident shareholders have to spend their own money in their solicitations, which sometimes gets paid back to them. Because of this, management can go all out and pay for a calling campaign, a mailing campaign, and then have follow-up calls if they don’t hear back from shareholders. Dissident shareholders usually don’t have as much money to spend on their solicitations. This is fair in the sense that shareholders should not have to fund solicitations for outlandish proposals that have no chance for approval. But it does give management an advantage when they are fighting with outsiders about the future direction of the fund.