The board of Tri-Continental Corporation (TY) has sent a letter to shareholders urging them to vote for management’s board nominees, and made some arguments as to why shareholders should support them over Western Investment’s nominees. I have never owned shares of Tri-Continental, so I feel I am able to objectively review the arguments both sides put forward in this proxy contest. After reading the arguments made in favor of TY’s current management, I don’t believe their nominees should be elected, and I have serious doubts that the current board members are qualified to be on the board of any fund.
The first point the letter makes is the following:
Contrary to the misleading assertions of the dissident Hedge Fund Group, the discount at which Tri-Continental's shares trade relative to its net asset value (NYSE:NAV) does not represent "lost value." In fact, stockholders who purchase Tri-Continental at a discount actually benefit. For example, at a 13.1% discount (the discount on March 15, 2006), every $1.00 invested by a stockholder in Tri-Continental buys the benefit of approximately $1.15 worth of underlying assets. Many of our common stockholders take advantage of this - over 63% of stockholders whose accounts are held on the Corporation's books are currently taking advantage of this situation either by participating in a plan that allows stockholders to take the Corporation's dividends, year-end gain distributions, or both, in additional shares, or by purchasing additional shares through one of the plans offered by the Corporation. This opportunity to invest at a discount would be lost after open-ending.
The board seems to be forgetting that their fiduciary duty is to the current owners of the fund, not to some future shareholders who will be buying at a huge discount to NAV. For the current shareholders mentioned above that are buying shares now, buying them at a discount is a benefit. However, these shares have to be purchased from someone. The other side of the transaction is the current shareholder who is forced to sell at the equally large discount. This is not good for them. I have always been led to believe that one shareholder’s rights were just as important as another's. But apparently Tri-Continental’s board believes it is desireable for there to be a transfer of wealth from selling shareholders to buying shareholders.
If we do assume that the board is right and a majority of shareholders do prefer TY to trade at a discount, I would question what the board feels the discount should be, and what steps they are taking to increase it to that level. My guess is that the board believes that whatever the discount is on any given day is appropriate as long as Seligman is getting their management fees.
The second point made in the letter was:
Any short-term gain that could be realized through open-ending or similar proposals would be offset by the significant expenses that implementing such proposals could entail, including the costs of obtaining stockholder approval, legal expenses, potential negative tax consequences, costs associated with liquidating the Corporation's assets to meet redemption requests (possibly at inopportune times), and the ongoing distribution and other costs of operating an open-end fund. Partly for this reason, Tri-Continental stockholders have rejected proposals to open-end on nine prior occasions.
According to my calculations, the short-term gain to shareholders of open-ending TY would be around $325 million. I find it hard to believe that the expenses associated with open-ending a fund could possibly cost this much. That the board made such a statement leads me to question their integrity.
The third argument in favor of the status quo was:
On March 15, 2006, Tri-Continental's NAV per share reached $23.28, the highest level in more than four years. The Corporation's expense ratio is 0.64% - a level that compares very favorably to the expense ratios of funds that invest similarly to Tri-Continental.
That the NAV is at a four year high is true, but isn’t that great of an achievement considering that the indexes TY should be benchmarked against are also at multi-year highs. The part about the expense ratio is also accurate. This is lower than can be found with most open end funds.
As I’ve stated before, I have been in favor of open-ending TY, but after seeing how the board is attempting to mislead investors, I feel much more strongly that the current management needs to be replaced. Of course, it is up to the shareholders in the fund to come to their own conclusions.