As we are getting closer the date of closed-end fund Tri-Continental's (NYSE:TY) shareholder meeting, TY's board and Western Investment have both sent letters out to shareholders. I'll give my take on both of their arguments as to why their candidates should be elected to the board.
Tri-Continental's board started by sending a very strange letter to their shareholders in which they acknowledge that they were illegally withholding a shareholder list from Western Investment, and that a judge subsequently ordered them to provide the list. The tone of the letter made it seem as though the board was doing shareholders a favor by trying to thwart shareholder democracy, and not giving the fund's owners the chance to vote for Western Investment's nominees. The letter also states the following:
In addition, you should know that the proxy statement being used by the Hedge Funds contains a number of false and misleading statements and material omissions. We have brought these to the attention of the Hedge Funds who, as of yet, have not corrected such items.
The board could have corrected the "false and misleading statements and material omissions" in this letter, but chose not to. This leads me to believe that what they are saying is untrue, and that this is just an attempt to discredit the opposition without being able to back up their claim.
If I was a shareholder who received this letter, I would have even less confidence in the board than before.
The board then sent another letter to shareholders outlining why their nominees should be elected. Some points I'll highlight are (my comments are in parentheses):
1. TY is an old fund and has a relatively low expense ratio.
(This is true.)
2. Their directors have integrity and are of high quality.
(From their actions and statements so far in this proxy contest, I'm doubting this one.)
3. Western Investment's nominees are not interested in running TY for the long term.
(This is true. A vote for Western's nominees is essentially a vote to open-end or liquidate the fund.)
4. TY's year to date returns are beating the S&P 500.
(This is correct, but the time frame is too short to draw any conclusions from this.)
5. Merill Lynch's S&P 500 GEARED Fund (GRE) is trading at a discount.
(I really have no idea what their point is with this one.)
6. Virtually all of Tri-Continental’s stockholders acquired their shares at a discount to NAV.
(This is irrelevant. Shareholders should try to maximize their profits regardless of what price they paid for their shares.)
7. The discount is a positive for potential future investors, and past survey results said that most current shareholders are indifferent to the discount.
(As I've written before, the board should run the fund for current shareholders, not future shareholders. If current shareholders really are indifferent to the discount, the board's nominees have a very good chance of winning.)
8. Buying a fund at a 15% discount enhances the dividend yield by 17.6%.
(According to ETF Connect, TY's yield is only 1.37%. I don't think anyone is buying this fund for the yield.)
9. The closed-end format is superior to the open-end format for a number of reasons.
(This is true, but the long term performance of TY is showing that they have not taken advantage of the benefits of being a closed-end fund.)
I'll write about Western Investment's letter in my next post.