May 2002, Volume II, Issue 5
George Cole Scott, Editor

Tri-Continental Interview

Tri-Continental Corporation (TY-NYSE) is a diversified, closed-end investment company investing "primarily for the longer term". Over the years the corporation's objective has been to produce future growth of both capital and income while providing reasonable current income. Common stocks have made up the bulk of the investments; assets held in cash or invested in all types of securities which the corporation's manager, J.&W.Seligman & Co. believes is best suited to current and anticipated economic conditions.

The investments may include repurchase agreements, options, illiquid securities and securities of foreign issuers, each of which could involve certain risks. The manager also serves as manager of twenty other U.S. registered investment companies which make-up the "Seligman Group" which manages assets of approximately $19 billion. The management fee for 2001 was equivalent to 0.39% of the corporation's daily net asset value.

On November 16, 2001, the Board of Directors authorized the renewal of the corporation's on-going share repurchase program to repurchase up to 7.5% of its common stock over a 12 month period, provided the discount remains wider than 10%. The Board's decision benefits all stockholders allowing them to continue to enjoy the advantage of a closed-end structure, while seeking to increase the net asset value of the corporation's outstanding shares. The shares repurchased under this plan are cancelled, increasing the number of authorized but unissued shares available for issuance to participants in the plans. The stock repurchase program seeks, among other things, to moderate growth in the number of shares outstanding, increase the net asset value of the outstanding shares and increase the liquidity of the common stock in the marketplace. As of March 31, 2002, 2,960,667 shares, or approximately 2.39% of the shares outstanding on November 17, 2001, had been repurchased under the program.

Tri-Continental Corp. is very good at shareholder communications. They enclosed a survey card with the 2001 Mid-Year Report to shareholders to "track general trends in stockholder demographics and satisfaction." The company did not release the percentage of respondents, saying, "the number of responses we received was large". The survey showed a significant majority of shareholders were men, 69.8% (registered shares (R)), 76.5% (Street Name (SN) and 74.9% (R) were over 65 years old (SN-75%). It revealed that most shareholders have held the shares more than 15 years (62.2% (R). Another 59% (R) indicated that they were very satisfied with the Corporation and large majority were favorable towards the Stock Repurchase Program (67.1%-(R). The discount pleased 31.3% of registered shareholders and 32.6% of those holding their shares in Street Name.

We interviewed Seligman's Managing Directors, Charles Kadlec and David Guy, Ph.D., who have co-managed Tri-Continental’s portfolio with Ben Ami Gradwohl, Ph.D., since October 2001. The first two questions were printed in the 2001 Annual Report:

What were Tri-Continental's investment results in 2001?

For the 12 months ended December 31, 2001, Tri-Continental Corporation posted a total return of -10.20% based on net asset value and -5.22% based on market price. During the same period, the Standard & Poor's 500 Composite Stock Index(S&P 500) returned -11.88%, and the corporation's peers, as measured by the Lipper Closed-End Growth & Income Funds Average, returned -4.85%.

What was your investment strategy during 2001, and what changes are contemplated going forward?

Tri-Continental's largest sector weightings at year-end were financial, health care, and retailing. Throughout 2001, the Corporation's portfolio was repositioned to anticipate a rebound in the U.S. economy, which we think will occur later in 2002. Because an economic upturn is impossible to time precisely, it is important for Tri-Continental to be invested in advance. Once the rebound is underway, it would likely be too late to take full advantage. Tri-Continental's portfolio became less defensive in 2001 and more weighted towards stocks that tend to benefit from an environment of accelerating economic growth.

Going forward, Tri-Continental's will be constructed using a mixture of a disciplined analytical approach and rigorous fundamental investment analysis. Using a screening process allows for the evaluation of a large number of companies with a great degree of objectivity while seeking to reduce the risk of the portfolio relative to the benchmark, the S&P 500. At the same time, management of the corporation's portfolio will continue to be active with an emphasis on bottom-up stock picking based on indepth company research. The focus will remain on finding reasonably valued stocks with strong earnings. Forward-looking indicators such as earnings acceleration, revenue, and cash flow will still judge individual stocks. In terms of performance, our goal is to minimize volatility and maximize consistency.

Scott: How did you establish your team?

Guy: My co-portfolio manager, Ben Ami and I joined Seligman in January, 2000. We formed the Quantitative Investment Group. During the fourth quarter of 2001 the Growth and Income Team, which was managing Tri-Continental’s portfolio, and the Quantitative Investment Group were merged to form the Disciplined Investment Group. Tri-Continental, with $2.9 billion in assets, is our largest portfolio. We also manage the Seligman Common Stock Fund, the equity portion of the Seligman Income Fund and the Seligman Tax Aware Growth Fund.

Scott: How is the team structured?

Guy: We have nine people on the team, four of which are fundamental analysts covering finance, consumer cyclicals, non-cyclicals, utilities, technology, telecom, energy and healthcare. They are the drivers of our superior, bottom-up stock selection process.

Scott: How do you control risk?

Guy: We do that by wedding detailed analytics with rigorous fundamental analysis to manage the risk associated with any one stock as well as the risk of the overall portfolio.  To us, the risk of the portfolio is measured relative to the S&P 500.

Scott: You seem to be more tuned into that approach than other fund managers.

Guy: We definitely are. For example, during 1999, when we saw so many managers chasing the elusive technology bubble, they ended up with heavily weighted technology portfolios that crashed. This is a typical example of what can happen if you do not pay enough attention to the overall structure of the portfolio. Paying attention to risk is a tradition here at Seligman. We are basically institutional money managers. As part of our history and culture, we ask: "What does the client want from this investment?" Tri-Continental has always been oriented towards future growth of capital and income with reasonable current income. The reference point has been a diversified portfolio of large-cap names exemplified by the S&P 500. That is why we use the S&P 500 as our benchmark. We think it is important that a process incorporates sound fundamental research of companies and uses advanced analytics to get better returns than the index without subjecting the investors in Tri-Continental to inordinate levels of risk.

Scott: What about other methods of reducing risk like buying-in shares?

Kadlec: Tri-Continental instituted a stock repurchase program in 1998, when the discount was almost 20%. We did so with four objectives: First, when Tri-Continental repurchases its stock at a discount, it increases the net asset value for all stockholders. Second, repurchasing shares decreases the dilutive effects for stockholders who choose to take their capital gains distributions in cash instead of in additional shares. Third, the repurchase program adds to Tri-Continental stock’s liquidity on the New York Stock Exchange. Finally, the extensive research we did on the discount indicates that by reducing the growth in shares outstanding a stock repurchase program has the potential to narrow the discount over time.

Last year we bought back 6.2% of the shares outstanding; we are authorized to buy back up to 7.5.%. This year the fund is on track to repurchase approximately 7% of its outstanding shares. From time to time in recent months, Tri-Continental’s discount has been less than 10%, at which time the share repurchase program is suspended.

Scott: How do you promote the health of the closed-end fund industry?

Kadlec: At Seligman, we are committed to closed-end funds. Tri-Continental is the largest, diversified publicly traded closed-end fund in the United States. Tri-Continental and Seligman are founding members of the Closed-End Fund Association. We believe that individuals should have the opportunity to choose the unique features of a closed-end investment company as one of many options that are offered by the financial services industry.

Scott: What do you think are the benefits of a closed-end fund structure?

Kadlec: One of the most important benefits of a closed-end structure is that it provides the portfolio manager with a fixed pool of capital. The benefit of this structure is particularly apparent during the current period of difficult markets and high levels of uncertainty. Investors in Tri-Continental and other closed-end equity funds do not have to be concerned about their fellow investors selling out at the low, causing the portfolio manager to liquidate securities and otherwise adjust the portfolio to meet withdrawals. Instead, the portfolio manager can maintain a longer-term view, remain fully invested, and not have to react to significant outflows or inflows of capital.

Scott: Why should an investor consider an investment in Tri-Continental?

Kadlec: Tri-Continental is known as “an investment you can live with.” Although net asset value of the portfolio has declined along with the S&P 500, Tri-Continental has done a good job of preserving our investors’ capital in very difficult markets. Over the past year the stock is down, but, relative to the market, the returns are good. The discount has also narrowed. We believe TY is an appropriate investment for people investing in equities who want to be prudent, cautious, and well diversified. We have been investing on behalf of our stockholders since 1929, so we know what difficult markets look like. We believe this economy is in the initial stage of recovery. No one can forecast where the markets will be in a day or a month, but we do know that over the long-term stock market investors who are patient have realized better returns than those who invest in Treasury bills. To be a patient investor, however, requires taking a long-term view of the economy and financial markets and an ability to get through short-term periods of volatility such as those that we are going through now.

There are clearly risks to the longer-term outlook, including the potential for war in the Middle East and the threat of terrorism.  However, these risks do not appear to be any greater than the challenges that the United States has met in the past. As a consequence, we believe that Tri-Continental continues to be an appropriate investment as a core holding for individuals seeking a well-diversified equity investment as part of their overall portfolio.

More information, including daily net asset values, monthly fact sheets, portfolio manager commentary, recent reports and more is available on the Internet at www.tri-continental.com.

Why Emerging Markets?

The basic theory for investing in emerging markets is that they offer above-average economic growth rates. By definition, emerging markets should have much better long-term economic expansion than their developed counterparts. These markets contain the majority of the world's population and generally enjoy a demographic base that is younger and faster growing than the developed world. Brazil is a case in point, boasting a population of nearly 175 million people, almost half of whom are under the age of 25 (vs. 35% for the United States).

A World Bank study of 24 developing countries with a population of 3 billion people showed an average growth in income per capita of 5% versus 2% in "rich" countries during the 1990s. Emerging nations are forecasting to continue to expand faster for the foreseeable future. This year, for example, the IMF expects developing economies as a group to grow 4.3% compared with 1.7% for developing nations.

Other things being equal, countries that invest more in human capital tend to grow more rapidly, and given their immaturity, emerging economies are in a better position to grow their human and physical capital bases faster. Of course, more often than not, that potential has failed to translate into real growth.

Fortunately, economic management, which was once the norm rather than the exception in emerging economies, appears to be on the wane, thanks in part to the painful lessons learned from such crises as the Mexican devaluation in 1994, the Asian crisis of 1997-1998 and the Russian devaluation of 1998.

Many Asian countries discovered the hard way the dangers of excessive dependence on foreign debt to finance investments, especially as many of them proved unproductive. Ongoing convergence between Eastern and Western Europe and between Latin America and the United States has also had a powerful positive impact.

A similar story exists at the corporate level. Emerging markets have always offered significant growth opportunities for companies. Not only are local economies expanding faster, but also many product and service markets are immature or under-penetrated. For example, it is difficult to see the number of telephone lines in the USA doubling in the next ten years, whereas it would almost be a surprise if this did not happen in many emerging countries. There are numerous examples of companies, which have both established dominant positions in under penetrated, immature markets and been able to deliver sustained earnings growth as their markets mature and penetration increases.

Note: The above report was written by David Gait, senior analyst covering emerging markets at First State Investments, UK Ltd., an investment management firm located in Edinburgh and London. Mr. Gait serves the Asia Pacific(ex-Japan) desk, focusing his research on China and Southeast Asia. The report was published in the May edition of "The Babson Staff Letter", published by David L. Babson & Company in Cambridge, Massachusettes.

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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