April 2003, Volume III, Issue 4
George Cole Scott, Editor

Adams Express Interview

Adams Express Company (ADX-NYSE) is a closed-end equity company founded in 1929. Its stated objectives are preservation of capital, reasonable income and an opportunity for capitalgain. The fund, along with its sister fund, Petroleum & Resources Corporation, is internally managed, has a low expense ratio and low turnover.

Ten Largest Portfolio Holdings
as of March 19, 2003

American International Group, Inc.	3.9%
Petroleum & Resources Corp.*	3.8%
General Electric Co.	3.2%
Cisco Systems, Inc.	2.5%
United Technologies Corp.	2.1%
Johnson & Johnson	2.0%
Dean Foods	1.9%
AMBAC Financial Group, Inc.	1.9%
3M Company	1.9%
Wells Fargo & Co.	1.9%
Total	25.6%

Sector Weightings

Consumer	11.1%
Energy	5.2%
Financial	14.6%
Health Care	15.1%
Industrials	13.1%
Materials	1.8%
Technology	11.1%
Telecom
Utilities	8.9%
Cash & Equivalent	14.3%

Average Annualized Returns

	One Year	Three Years	Five Years
NAV	-21.9%	-19.7%	-4.1%
Market (Before Tax)	-20.6%	-15.2%	-0.2%

In March, we interviewed Doug Ober, Chairman Adams Express Company and Petroleum & Resources. Lawrence Hooper, general counsel for the two funds, joined him.

Scott: Let’s see, according to your annual report, you were appointed portfolio manager in 1986.

Ober: I joined the team then. David MCCallen, Bob Wilson and Roy Kelly were still here. Bob, Roy and David were all retired by 1991. Dick, Joe and I worked with David for about five years before he departed. Then he was a consultant and remained on the Board after that time.

Scott: I first visited your office in 1989 and had several very pleasant meetings with David McCallen. Suddenly, one day, he said Doug Ober was going to take over. I said who’s he?

Ober: I had you all checked out by then.

Scott: Oh, you wanted to see if I was OK. We are usually the one that check out funds before we invest in them. That has been the job of The Scott Letter. Carry on Did you have lawyers on your staff then as well?

Ober: We had Jeff Whitney, who was an attorney but never practiced unlike Laurie, who has all the legal talents you can imagine. He keeps me out of a lot of trouble.

Scott: Now, I want to hear about the annual meeting for the Closed-End Fund Association. First, Doug, you chaired the meeting at the New York Stock Exchange in early March. Tell us your thoughts.

Ober: I thought the meeting went very well. I think the subject matter was of great interest to everyone there, from the feedback we have. Everybody thought the slightly long half-day meeting focused on some important subjects.

Scott: We have over 500 readers now and many of them do not know what the Association is. Would you tell us about its mission and purpose?

Ober: The purpose of CEFA is for education about closed-end funds mostly for individuals. Funds pay a fee to join and much of the membership is on the equity side. We have been working diligently to interest the fixed-income closed-end funds to join because they represent a sizable portion of the industry so we can get their input, such as analyst coverage. The Investment Company Institute is a wonderful organization to lobby Congress and to go before the SEC to be sure they aren’t overrun with paperwork, but we feel the ICI hasn’t done a significant marketing job for its closed-end sub-group. That is understandable as over 90% of the assets of the industry are in open-end funds. Why would they spend time educating people to learn about the benefits of closed-end funds? So that was the genesis of CEFA. We have the web site: (www.closed-endfunds.com) and get as many as 10,000 hits per month on its web site. The biggest thrust of CEFA at this point is to attend events like The Money Shows, the Financial Planning Association and communicate with the media about closed-end funds and why we think they make good investments.

Scott: There is certainly a need for education, but the theme of your conference was to learn to market the funds. I thought that was something for mutual funds to do.

Ober: The purpose of the Association is not to market in order to generate additional funds as open-end funds have to do. Our feeling is that by spreading the word about closed-end funds, we can attract more interest from investors which should in time result in narrower discounts and a more knowledgeable investing public. We think closed-end funds make very good sense as core holdings for financial planners to use for their clients. They also have a definite place within the investment universe for individual investors but probably less so for institutions. We think active management using closed-end funds makes a lot of sense.

Scott: You have just had the annual meetings for your two funds. Is a copy of your Speech to them available?

Ober: I have spoken more off the cuff and used slides. With the oil fund, we get into more detail about the oil industry, such as what will happen after the war.

Scott: What our readers and especially your shareholders want to know is your investment objectives as stated clearly in your annual report:

1.   Preservation of Capital
2.   Reasonable Income
3.   Opportunities for Capital Gains

We have had lot of questions from your shareholders who have been unhappy with the performance of Adams Express stock which has been so weak in the last few years. How can I answer their concerns about your objective, “preservation of capital”?

Ober: We have made significant changes in our sector weighting from the beginning of 2002 to mid-March of this year by not focusing in getting out of this sector or into that sector. Adams Express is more focused now on names we felt were appropriate for this time period. For instance, the weighting in telecommunications and technology at the end of 2001 was 22.3% versus 15.3% recently. We recently added All Tel to the portfolio.

Scott: How will that help preservation of capital?

Ober: Technololgy and telecom are the more volatile areas and the poorest performing ones in 2002. We felt early in the year that we needed to take some cash from that area in an effort to preserve capital while still maintaining some weighting there. In fact, tech and telecom were the leading groups in the S&P sectors so we didn’t want to eliminate them completely. We also took consumer stocks such as Target and Dean Foods from 7.5% to 11% . Food is a sector seen as defensive in this environment.

Scott: You mean defensive groups such as food, tobacco and beverages.

Ober: We have not purchased tobacco or alcoholic beverages for many many years.

Scott: Good.

Ober: Our cash level was a 6.5% on 12/31/01 and now is 14.3%, a sizeable increase. During that time period, we were also buying back stock.

Scott: That doesn’t make you market timers, does it?

Ober: No, that was the result of the economic environment that we perceived over a two or three year time frame.

Scott: Back to your objectives, your shareholders saw their quarterly dividend drop from $0.08 a share to $0.05. What are your comments about that action, and do you think they will be resumed at some point?

Ober: We have found it has become harder and harder to find individual stocks that are paying dividends that are stable or increasing which fit in with the rest of our investment philosophy. We own Northwestern Corp.which, according to the newspaper, yields 13%. The likelihood of Northwestern paying more than one more dividend at that rate is slim to none. So, what we have tried to do is to maintain and build our Investments in income producing names without adding undue risk to the portfolio.

Scott: Have you ever considered buying convertible bonds? Ober: We have owned as much as 8% of our portfolio in convertible bonds within the last five or six years. Right now, they are less than 1%, because the convertible bond market has been incredibly unattractive. The new issues that come out yield 2% with a 70% premium. This doesn’t make any sense at all in a market in which we may see 6%, 7% or 8% returns over three or four years.

Scott: Is that why you are selling puts and calls?

Ober: We have been selling puts and call options. If we decide that we want to own 5,000 shares of Coca Cola at $22.50, we will write puts on it. [Note: A put is an option to buy a stock at a certain price.] We may want to own that stock at $22.50 and do so if the option is exercised. We have been writing puts for 15 years; it has been a significant addition to our capital gains over the years, but is not significant from an accounting standpoint. In terms of the profits we have made from writing puts and calls over the years, it has been substantial.

Scott: Doesn’t the cash go into your income portion?

Ober: No. For income we have used our securities lending program. The Bank of New York, our transfer agent, is committed to lend as much as 25% of our portfolio to short sellers or anybody else who wants to borrow shares. They pay us for this service. It contributes as much as $100,000 to income each year and is another source of income that few other people are doing as far as we know.

Scott: How about your third objective: “opportunity for capital gains”? Do you expect that will improve this year?

Ober: That depends on what you think the market does.

Scott: What do you think the market will do?

Ober: I would be happy to go to that one later.

Scott: From 2000 to 2002, how well do you think you have met these objectives, particularly preservation of capital? That is the one objective your shareholders really want to understand.

Ober: I can say that in three of the past four years we have beaten the S&P 500 Index. However, we have had negative returns in the past two years. In 2000, we had a positive return with the S&P down about 9%. Have we preserved capital?  No, we are down a lot from three years ago. We paid-out significant capital gains in 2001. As we saw things falling apart, we were taking profits as fast as we could in names we thought would get impacted by the technology crash. So, we generated significant capital gains in spite of the fact that the market was dropping like a stone.

Scott: One of the criticisms I have also heard is that the portfolio was too heavily in the high tech area and that is not consistent with your objective of preservation of capital. In other words, you didn’t bail out soon enough.

Ober: Yes, 20/20 hindsight would say you are absolutely right. We had too much invested there, and we should have moved sooner if our crystal ball had told us that things were on the way to a collapse. It is hard at the time to recognize those things — we continue to own 10.6% of our portfolio in technology. But, if you look at the names in the portfolio it is consistent from two or three years ago. The names we have owned have been the strongest and best companies within the sector. Cisco and Oracle are the dominant players in their segment. Even though they are down substantially from a few years ago, over the long-term, they are going to fare well again, will regain pricing power, take market share from the smaller players and be superior investments again. We are long-term investors, so we did not want to throw them out because we suffered a decline. We had (a) an attractive cost basis and (b) we had the cream of the crop.

Scott: I don’t want to compare you to General American Investors, but they have had high cash levels and even sold short in the last three years, as well as have bought in shares as you have. You haven’t gotten into higher cash levels until the last few months, isn’t that right?

Ober: Yes.

Scott: Why didn’t you raise cash sooner?

Ober: The objectives for us are to maintain equity investments When we saw the economic situation deteriorating and saw that there was going to be some significant period of time before the economic situation recovered, we felt that it was important to sell those stocks whose likely recovery would be pushed out another two or three years? So, we sold companies we felt we were not going to recover from the Bear Market for more than just 12 or 18 months or longer because the fundamentals of the economy just didn’t look sufficiently attractive to hold those names. Our analyst said that it would be dead money for two years or more given our economic outlook.

Scott: Have you ever considered selling short like some other funds?

Ober: It is permissible under our Charter. To my knowledge, we never have. I don’t see it as a good way for us to maintain a relatively low-risk portfolio. I think that is adding too much risk to the portfolio.

Scott: Selling puts adds some risk too. If you sell a put when a stock is 30 and it drops to 10, you have a loss. You can, of course buy back the put.

Ober: We have done that on occasion, too. If a put gets to a level that it looks like it is liable to get exercised, we will occasionally buy a put back rather than see it go down further. We may write one further out of the money.

Scott: I believe you have a small percentage in puts. Do you have a number?

Ober: It is less than 2%.

Scott: Are you adding to them, subtracting or keeping them the same?

Ober: It is in a constant state of flux. Every month we have some puts and calls that come to their expiration. I would say that about seventy or eighty of them expire worthless so we have earned the premium.

Scott: We have been talking to funds for a long time. Some of them have told us that they used to write calls, but they are now not worth doing because of the low premiums. I see more funds writing calls than writing puts, however. What is your answer to that?

Ober: We generally want to get at least a dollar if we write a call, or it doesn’t make a whole lot of sense. We usually sell them far out of the money, using puts and calls in conjunction with our investment strategy. We don’t write any puts or calls on any stock we intend to put into the portfolio or take out of the portfolio. If we want to trim back our position in GE, we might write some GE calls, but only write calls on stocks we have in the portfolio.

Scott: Do you ever buy a call?

Ober: We have. When we bought some calls in Cisco it was more of a hedging strategy.

Scott: I guess what’s bothering me is that you have a lot of older shareholders who have held the shares a long time. They may read this interview and say, “what in the world are these guys doing”?  They are in the derivatives game and are just trading options with my money. Has anything like that ever come up at your annual shareholders meeting?

Ober: Not a single question, If you look at our annual report fifteen years ago, we have a footnote saying we write puts and covered calls. We have been very up front with our shareholders and have been doing that for a long period of time. I might add, quite successfully. It is not something new for us.

Ober: Another question. You were a $40 dollar stock at one point and then decided to split the stock 3 for 2. I called you. Do you remember what you said to me?

Ober: We wanted to make the price more reasonable to our shareholders.

Scott: Didn’t anybody say anything about this in your just-completed annual meeting?

Ober: I addressed the subject in the meeting and talked about the large number of companies that were not increasing their dividend and were reducing their dividend or eliminating their dividends within the S&P 500 so the yield on the S&P has gone from about 3% to about 1.4% right now. All that does is to reduce the yield. We have the decline of the S&P 500 yield and interest rates going from 7% to 1.25%. So, the ability to generate yield is poor. A number of closed-end funds decided that it is better for them to buy-in shares than it is to pay dividends.

Scott: Do you think Congress will pass any reduction in taxes on dividends?

Ober: I thought we had a pretty good chance of it until two days ago when I thought the Democrats initiative came to slice it in half. This will put pressure on the double taxation aspect of the fiscal stimulus plan. I think we will see some change in taxation; I doubt there will be elimination, but there will be some reduction, perhaps on 50% of your dividend, reducing it from 38% to 19%, or 36.5% depending on your tax rate. I think the President is committed to doing something about the dividend. I am not betting on it, however.

Scott: The last question is related to your cash levels. At year-end you had 15.8% in cash. What is it now?

Ober: It is down about 1.50%. On March 19, it was about 14.3% as was stated in the recent press release. We have added some names to the portfolio.

Scott: What is your outlook for the stock market?

Ober: There are not a lot of bargains out there. I think that valuations are still on the high side, even with trough-cyclical valuations. Certainly, we have discovered that technology is indeed a cyclical industry. We have forgotten that for about ten years. Telecommunications equipment is a cyclical industry, we have forgotten that as well. So, more of the market is in cyclical industries than people have thought five or six years ago. By my calculation, the trailing earnings of the price/earnings ratio for the S&P 500 is somewhere around 35 times earnings. There is a lot of obscurity in that e-number now as a result of all the accounting scandals that continue.

Scott: What about insider buying? Have you had much of it? I see a lot of this mentioned in press releases. By insider buying I mean purchases of the stock by your employees, or your board, whatever?

Ober: Outside of the 401k, probably not, because everybody is a participant in our 401k plan.

Scott: What about share purchases by directors?

Ober: There has been some buying by directors in both funds. That was in the proxy statement. I don’t have information since the end of 2002. They have to file with the SEC.

Hooper (attorney for the funds): They have to file Form 3 and 4 with the SEC now. within two days of the purchase or sale.

Scott: You haven’t published that information.

Ober: No.

Scott: Wouldn’t it be a good idea?

Hooper: George, when our new Directors have come on the Board they have been buying shares as Susan Schwab and Ned Kelly have done recently. They have made a paper filing of Form 4. As we go forward, the SEC is requiring them to file electronically, which will be available through the Edgar filing system. It will then be easier to get copies. We update annually these holdings in our proxy. We also will be required to post the Form 4s on our web site.

Scott: I just punched up General American Investors and see on March 19th one insider sells 5,000 shares, another buys shares and so on.

Scott: Do you have any preferred stock planned? Do you have any plans to leverage with preferred shares?

Ober: We have not looked at them any time recently. We are struggling enough now with the 12% to 14% cash we have now. To bring more cash into the fund doesn’t seem sensible to me. Certainly the return you can get from the cash is not the kind of return we would like to get for our shareholders this year and down the road. If I invested that cash at money market rates, I would get about 1.2%.

Scott: Closed-End Fund Advisors gets a lot of e-mails from investors such as “which closed-end funds have preferred stock or are leveraged? Do you have any plans foe a preferred issue or another rights offering?

Ober: No, sir, we don’t.

Scott: What about liquidations or mergers?

Ober: [He chuckles.] We are always on the lookout, but not for a liquidation, but for mergers, yes.

Scott: The fund is buying in its shares continuously, isn’t that right?

Ober: Continuously, that is close to accurate. We reported at the annual meeting that we had repurchased731,400 shares thus far this year.

Scott: Are your press releases on the Dow Jones news wire that stockbrokers and other money managers see?

Hooper: Dow Jones has to decide whether they want to pick it up or not. They get the feed.

Scott: I will have to bug them. I used to work there, but it was too long ago.

Ober: Now, don’t date yourself, George.

Scott: Any concluding remarks?

Ober: Just that we feel the portfolio is in good condition that once the hostilities[in Iraq] end, we will be fine.

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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