April 2002, Volume II, Issue 4
George Cole Scott, Editor

Investors Need Advisers, And Advisors Need Prudence
by Charles Kadlec

The need for and value of professional investment advice seldom has been as high as it is today. With the uncertainty of war and the shape of the economic recovery in doubt, the Dow Jones Industrial Average is up 100 points one day and down 100 points the next. Individuals seem more comfortable sitting on their hands than making an investment decision. Consequently, investment advisers find themselves in the most challenging business environment in 20 years.

Implementing a prudent investment strategy at this point is the most valuable recommendation an investment advisor can make — and possibly the most rewarding action an investor can take. From Wall Street to Washington, economists are raising their forecasts for economic growth in 2002 as quickly they downgraded their outlooks last spring. Making investment decisions based on those changing growth forecasts breeds volatility.

Moreover, believing that the growth rate of gross domestic product will, for example, be 1.7% rather than 1.5% adds little value to the investment decisions of the individual investor. The critical element of such investment decisions is the general, long-term direction of the economy. In that respect, the movement toward lower tax rates and free trade is pointing to higher levels of income and employment, above average rates of economic growth, and a potentially positive environment for financial markets.

There continue to be risks — an international monetary crisis, along with war and terrorism — that could derail the U.S. economy from bearing out that optimistic outlook. Cognizant of those risks, we continue to believe that the current recession will be less severe, and the recovery stronger, than most analysts believe. In our opinion, a prudent investment strategy is the best way to capitalize on the impending economic recovery. Proper diversification among investment styles, sizes and disciplines is essential. And proper asset allocation is best determined by an individual's investment time horizon. A full equity weighting may be appropriate for investors with much time to invest, while a weighting towards cash may be appropriate for investors at or near their goals.

Attempting to continually adjust over- or-underweight positions of various asset sizes and styles in an individual investor's portfolio disguises a tactical gambit as an investment strategy, and can turn into a costly exercise. Nearly 80% of (the) upside (since 1981) could have been missed by attempting to time the market. Time in — not timing — the market is the key to growing assets.

Chasing last year's winners is one of the biggest traps market timers can encounter. In the fourth quarter of 2001, investors fled poorly performing large cap equity funds toward the steady absolute returns of money market funds. Fourth quarter returns proved to be a poor tactical move, as the average Lipper large cap growth fund significantly outperformed the average Lipper institutional money market fund.

The events of September 11 also caused individuals to feel compelled to abandon their investment strategies. After those tragic events, we noticed an increase in investor interest in stereotypical safe havens, such as gold funds, money markets, and fixed income assets in general. That may have been a prudent action given that the very foundations of the economy were in question.

At this point, the generally positive direction of economic policy, as well as the preliminary evidence of an economic recovery, suggests that the next ten years will be far more prosperous that the 1970s.

Such an outcome, however, is far from certain. For the United States, further acts of terrorism and a massive escalation of the war on terrorism may divert lives and resources to efforts that will defend, but not necessarily improve, our standard of living. In addition, the current fiscal situation may prompt a round of tax increases at the state and local levels in an attempt to pay for unemployment insurance claims and to balance budgets. We believe such tax increases would work to stunt economic growth and erode, not improve, the budget situation.

Despite the economic slowdown, the economic effects of September 11 and the risks mentioned above, the prospects for prosperity remain intact. The rules of the investment game have not changed. Proper diversification and staying the course are essential. In our opinion, a prudent strategy remains the best way for individuals to achieve their investment goals.

Note: Charles Kadlec is a managing director with J. & W. Seligman & Co. Inc, a New York investment advisor which manages the largest closed-end equity fund, Tri-Continental Corp.  The article is condensed from the March 11, 2002 edition of InvestmentNews, the weekly newsletter for financial advisers.

Will The U.S. Continue to be the Stock Market Leader?

Is the U.S. reign as the global stock market leader beginning to wane? Are the other markets around the world going to replace our leadership? Has the Enron scandal put us in the back seat as far as world leadership in corporate governance goes? These are questions being raised in the financial press. Our research found strong evidence that money flows out of the U.S. late last year into the emerging markets were strong, especially into the European markets. How this will affect the U.S. stock markets seems to becoming a debate in some quarters.

"A major shift of money from the U.S. to overseas markets is inevitable, " argues Steve Auth, director of global portfolio management for Federated Investors. "It's just a question of when."

We witnessed this in the sharp recent rises of the European markets. This is evidenced by strong recent moves by the Europe Fund (EF-NYSE) in spite of economic difficulties in the region such as lower earnings, labor problems, and rising unemployment in France, Germany and Italy. A further strengthening of the euro is a major positive as well. The other regional European fund we use, Central European Equity Fund (CEE-NYSE), with most of its assets in Poland and Hungary (73%), could continue its recent strength.

Closed-End Fund Advisors also purchased shares in Templeton Emerging Markets Fund (EMF-NYSE) when it was selling at a steep discount. In early January, we saw EMF rise quickly to a premium. EMF is our best performing fund this year, up 32.24%(to March 29) since January 1. We also see renewed strength in Latin American Discovery (LDF-NYSE). Latin America, with the exception of Argentina and Venezuela, appears ready to recover, in spite of the carry-over of the grim Argentina situation combined with a possible rejection of globalization in Brazil after the upcoming election. Asian funds are rebounding quickly with the expectation of the U.S. recovery.

We prefer the diversity of regional and global funds to single country funds. They are more likely to have a larger float of shares for large purchases. Both EF and EMF have had a sharp rise, EMF is now selling at as much as a 8% premium to its net asset value. When this happens, we always have a dilemma, as historically this fund has sold at a premium for most of its history. To reduce the risk, which we always try to do, we decided to diversify some of the shares into other funds such as Templeton Dragon Fund (TDF), also managed by Mark Mobius, still selling at a 16% discount.

My philosophy is conditioned by always taking some profits when an investment makes a sharp upward move, behaving more like a stock than a diversified investment fund. Although we are long-term investors rather than traders, we feel it is sometimes necessary to reduce the risk by taking some of the pie off the table. In spite of this, we strongly believe in the long-term story for the emerging markets and think closed-end funds are the best way to participate in them. One way to do so is to participate in the brilliant record of Dr. Mobius for the Templeton funds. (See the January 2002 Scott Letter interviews with Sir John Templeton and Mark Mobius.)

The thesis of a shift of market leadership may have validity as many U. S. asset prices are still clearly overvalued by historical standards. According to a Wall Street Journal report, U.S. stock valuations are at a 25-year high compared with Europe's and are trading at a 50% premium to emerging markets, nearly a historic high. The 16-year trade-weighted high of the dollar may be beginning to crack as well, and it accounts for 68% of global currency reserves, up from 51% ten years ago. According to economist David Hensley of J.P. Morgan, since 1999, the world's markets now are the most synchronized in 40 years. The question is when (and how) will divergence occur?

We have seen many opportunities in the last few months to expand our closed-end fund holdings to Europe and Asia and are looking for market weakness to continue what we consider a separate asset class, that is, international investments versus U.S. funds and stocks. It is very difficult for an investor to try to pick individual securities in the foreign markets, in spite of the ability to invest in American Depository Receipts (ADRs), which trade on U.S. exchanges. There are some good foreign mutual funds, but you have to pay net asset value or higher.

James Libera, the country-fund specialist, says the "U.S. has proven to be the (only) global economy capable of driving the rest of the world", and he sees that world growth will accelerate, especially in the second half of 2002. Libera also sees faster growth by the third quarter, aided by monetary easing by the European Central bank and a stronger euro, which will increase returns for U.S. investors.

We have, therefore, raised our foreign exposure for all CEFA accounts to 12% and plan on increasing it further to about 20% during the course of this year. We also find that we have to be more selective in choosing U.S. funds.

Note: There are seven closed-end funds and Real Estate Investment Trusts which have been making new highs as we go to press. Five of the seven are big winners in our portfolios.  If you want to know the names of these or have any questions related to how we consistently outperform our benchmarks, please e-mail or telephone us at 1-800-356-3508. We are also interested in any feedback on these letters so we can try to do a better job of meeting your investment needs. — Editor

Templeton Emerging Markets Fund Proposed Reorganization Will Not Proceed

The Board of Directors of Templeton Emerging Markets Appreciation Fund (TEA-NYSE) and Templeton Emerging Markets Fund (EMF-NYSE) announced that the previously announced reorganization of TEA and EMF, also a closed-end fund, will not proceed. Instead, the fund group has decided to merge TEA into Templeton Developing Markets Trust, a registered open-end investment company. Plans are for the latter funds to merge at the upcoming annual meeting of shareholders currently scheduled for August 26, 2002.

Adams Express Provides Update At Annual Meeting

Baltimore, Maryland, March 26, 2002. The Adams Express Company held its Annual Meeting in Phoenix today and released this update to its shareholders.

Principal Changes in Portfolio

During the first quarter through March 15, Adams Express added two new names to its investment list with purchases of Rohm & Haas and Target Corp. Five holdings were eliminated from the investment list with the sales of Ivex Packaging Corp., Mirant Corp., Qwest Communications International, Inc., 5.75% Trends Pfd. Due 2003, RCN Corp. and Time Warner Telecom Inc. The Company added to its holdings in BEA Systems Inc., BJ's Wholesale Club, Brinker International Inc., Bristol-Myers Squibb Co., CINergy Corp., Dean Foods Co., PepsiCo, Inc., Pfizer Inc., Safeway, Inc., and Siebel Systems Inc. The Company reduced its holdings in Black Hills Corp., Cisco Systems, Inc., Citigroup Inc., Engelhard Corp., Genentech, Inc., General Electric Co., Investors Financial Services Corp., ITT Industries, Minnesota Mining & Manufacturing Co., Oracle Corp., Symantec Corp., and Tiffany & Co.

Share Repurchase Program

Adams Exporess announced that, year-to-date in 2002, it has repurchased 296,800 shares of its common stock pursuant to its share repurchase program, for approximately $4.2 million.

The Adams Express Company is a Baltimore-based closed-end investment company. It is traded on the New York Stock Exchange and Pacific Exchange, and its symbol is ADX.

Petroleum & Resources Provides Update At Annual Meeting

Baltimore, Maryland, March 26, 2002. - Petroleum & Resources Corporation held its Annual Meeting in Phoenix today and released this update to its shareholders.

Principal Changes in Portfolio

During the first quarter through March 15, Petroleum & Resources added two new names to its investment list with purchases of Rohm & Haas and Williams Feline PACS. Two holdings were eliminated from the investment list with the sales of Mirant Corp. and Mirant Trust 1 6-1/4 Conv. Pfd. The Corporation added to its holdings in Arch Coal Inc., ChevronTexaco Corp., and Pioneer Natural Resources Co. The Corporation reduced its holdings in Anadarko Petroleum Corp., Devon Energy Corp., Engelhard Corp., Exxon Mobil Corp., and General Electric Co.

Petroleum & Resources Corporation is a Baltimore-based closed-end investment company. It is traded on the New York Stock Exchange and Pacific Exchange, and its symbol is PEO.

Shareholders Defeat meVC’s Bid to Alter Management of Fund

San Francisco. MeVC Draper Fisher Jervetson Fund I, a publicly traded venture capital fund said its move to make a structural change in fund management didn’t receiver enough votes to pass.

That was at least a small victory for dissident shareholder Millennium Partners LP which opposes the change and had been seeking to have the fund, which last week listed Its assets at about $231 million, return some of its cash to investors.

The proposal put forward by meVC in its proxy would have both renewed and altered the fund’s agreements with its two advisers. The change would have given the fund’s board power to make such changes alone in the future. Now, such changes require board and shareholder approval. Just before meVC’s shareholder meeting on March 27, the New York Stock Exchange ruled that the changes were "non-routine” and therefore should go to individual shareholders for a vote. For routine changes, brokerage firms and other money managers that hold shares for investors can vote proxies and generally vote in favor of management proposals.

The fund now has 150 days from the shareholder meeting to renew its agreement with advisers. John Grillos, chief executive of the fund, said meVC will speak with shareholders in that period to determine what majority of shareholders want the relationship between the fund and its advisers to be.

Source: The Wall Street Journal

Ten Rules of the Road for Investors in Uncertain Times

1.		Have a Plan A plan forces you to clearly describe what you want to achieve and makes it far easier to recognize investment choices to fit your goals.
2.		Stick with Quality A great house can't be built with shoddy materials. Similarly, you don't build a secure retirement with get-rich schemes.
3.		Diversify If you can't predict the future, you must prepare for it. Diversify by owning stocks, bonds and cash. Own stocks across a variety of companies and industries. Diversify bonds by maturity date. Always keep a cash reserve for emergencies.
4.		Buy to Keep Most consistently successful investors do not trade frequently. Selling a security that has performed well triggers both commissions and taxes. In addition, trading is difficult to do well. Even among professionals, few consistently outwit the market.
5.		Address Mistakes Quickly Not every investment works out. When it becomes clear that a mistake has been made, sell. Delay and denial won't help.
6.		Don't Be Blinded by Taxes Investment decisions based solely on peculiarities in tax laws are seldom sound. Remember, tax laws change frequently, sometimes with negative results.
7.		Over Time, Quality Stocks Outperform Quality Bonds Over time, quality stocks have outperformed quality bonds, nd history shows that the longer the holding period, the greater the likelihood of success. However, this does not diminish the need for diversification.
8.		What Matters Most Is Time In the Market, Not Timing the Market The stock market reflects the economy and the American economy has a long-term upward bias, despite short-term declines. Too often, market timers miss opportunities because they are not invested when markets begin to rise.
9.		Know Yourself One of America's most successful investors (Warren Buffet) has said he avoids technology stocks because they are beyond his circle of competence. Knowing one's limits is especially important for do it yourselfers.
10.		Review Your Plan Annually Your investment goals and plan should be reviewed once a year or after a life changing event. To review too frequently undermines the value of the plan.

Looking back at the markets of recent years, it is clear that investors who followed sound investment principles should have been well-served. A portfolio built on time-tested strategies many help you weather whatever is ahead.

Editor's Note: The above is from an advertisement for the brokerage firm Edward Jones of St Louis. We wish to congratulate them for summarizing so well the basics which even seasoned investors should think about every so often, witness the dot-com mania and the Enron scandal, two events which deceived both professional and small investors. There is always a time for all of us to think about the basics so well presented here. — Editor

Country Fund Week in Review for April 9, 2002

Shares of U.S. – traded closed-end country funds treaded water for the week ending April 5, as once again investor caution kept the markets from breaking out of a tight trading range. Investors are keeping money on the sidelines as we head into the heart of earnings season. Also many investors are keeping a close eye on the political events in the Middle East. U.S. representative Anthony Zinni met with Palestinian Authority President Yasser Arafat this past week, following a United Nations Security Council call for Israeli troops to withdraw from West Bank cities occupied by Palestinian militants. Oil prices have skyrocketed in recent weeks because of the conflict. In economic news, the unemployment rate jumped to 5.7% in March from 5.5% in February, exceeding estimates. The average closed-end country fund dropped 0.12% this week, almost negating the modest 0.35% market upswing in the week prior. Breadth was also mixed with 30 funds delivering positive returns, 31 declining, and 4 remaining unchanged out of 65 country funds tracked by Thomson Wealth Management (formerly Wiesenberger). Investors soured on the funds, driving the average weekly discount to 10.82% from a level of 10.49% a week earlier.

The top performing country fund for the week was the Indonesia Fund and its 10.69% market rise. It was announced that the free trade deal which is being discussed between the United States and Singapore will include goods made in neighboring Indonesia. It may be extended to cover components made in other Southeast Asian nations in the future. Under the deal, certain high-tech electronic goods made on Batam and Bintan, two Indonesian islands near Singapore, will be regarded as Singapore-made products and therefore under free trade status, said George Yeo, Singapore's minister of trade and industry.

The Templeton Vietnam and Southeast Asia Fund followed with a strong 4.63% rise in market value. The Association of Southeast Asian Nations and the United States announced Friday they have constructed a plan aimed at expanding trade and investment between their countries. Vietnam's Trade Minister Vu Khoan said the two sides planned to increase U.S.-ASEAN cooperation in areas such as agriculture, human resources, intellectual property rights, information and biotechnology.

Rounding out the top performers was the India Fund and its 6.06% return on investor’s dollar. Nortel Networks Corp, one of the world's largest telecom gear makers, launched its optical Ethernet solutions business in India. This launch is expected to improve bandwidth availability and reduce the costs of service providers within the country.

On the flip side, the largest percent decliner for the week was the Thai Capital Fund. Thai markets were hurt by speculation that Thai Prime Minister Thaksin Shinawatra, who is hospitalized with an infection, may not be able to attend an international economic forum to be held on the Chinese island of Hainan next week.

The Templeton Russia Fund was the second worst performer of the week with a 5.54% decline. Russia's agriculture minister said Tuesday that Moscow might not lift a ban on U.S. poultry imports, despite a recent agreement that appeared to end the tense trade dispute.

Rounding out the bottom funds was the Morgan Stanley Eastern Europe Fund with a 4.75% decline.

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Note: Clients of Closed-End Fund Advisors as well as employees currently own shares in: Adams Express (ADX-AMEX), Petroleum Resources (PEO-AMEX), Europe Fund (EF-NYSE), Central European Fund (CEE-NYSE), Latin American Discovery (LDF-NYSE) and Templeton Emerging Markets (EMF-NYSE).

Note: None of the information contained herein should be construed as an offer to buy or sell securities or as recommendations. Performance results shown should under no circumstances be construed as an indication of future performance. Data, while obtained from sources we believe is reliable, cannot be guaranteed.

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