The Lehman Corporation | Madison Fund, Incorporated | Massachusetts Investors Trust | Wellington Fund | Tri-Continental Corporation

As you follow how to evaluate the best investment companies here, note that the studies that constitute this chapter are presented as a source of concrete data on the origin, functioning, and record of several investment companies of different types. Obviously, space permits discussion of only a few among the companies in the field. Those chosen do not necessarily have the most out­standing records, but their experience offers the investor the opportunity to gain some understanding of the operations of different types of investment companies. This understanding can be obtained best by considering specific case histories, though you may wish to skip to the comments on each company to first develop you understanding of what is significant in evaluating them.

THE LEHMAN CORPORATION

Origin

For the first of the investment companies we will be looking at to help you evaluate the best investment companies, we will consider the Lehman Corporation. The Lehman Corporation was organized in September 1929, on the eve of the collapse of the stock market. Because of its long existence, its size, and the integrity of its management, the corporation has come to typify in the public mind the closed-end investment company which has a single class of stock and a policy of investing largely in broadly diversified common stocks. From the outset, The Lehman Corporation has been identified with the investment-banking firm of Lehman Brothers.

The corporation is authorized to invest in all forms of secu­rities. There are no restrictions limiting the proportion of its assets, which may be invested in any particular type of security, or in the securities of any one issuer. Lehman has no fixed policy with respect to investments for the purpose of exercising con­trol or management, nor has it any fixed policy with respect to types of securities in which it may invest. The opinion of the board of directors as to economic and other conditions deter­mines the relative amounts invested in bonds, preferred stocks, and common stocks.

It is the policy of the corporation to diversify its investments among a number of different industries. Except for holdings in special situations within the limits permitted diversified invest­ment companies under the Investment Company Act, it is not the policy of the corporation to concentrate its investments in any particular industry or group of industries.

These are the corporation's objectives: to protect and build up the capital fund and to assure the stockholders a reasonable income over and above realized profits from the purchase and sale of securities. The corporation is authorized to issue senior securities and borrow money, but it has never made use of these privileges. The greater part of its funds has always been in­vested in marketable securities.

Capitalization

The Lehman Corporation was organized with a paid-in capi­tal of $100 million represented by 1 million shares. The stock was offered to the public at $104 per share.

Except for repurchases by the corporation, there was no change in the capital stock until 1937, when the shares were split three for one. A two-for-one stock split occurred in 1956. In 1951 and 1955, sales of additional shares were made by sub­scription offers to the existing shareholders.

Currently, The Lehman Corporation has outstanding 10,945,-418 shares of capital stock ($1 par value).

Management

Until 1941, all directors were associated with Lehman Broth­ers. After the adoption of the Investment Company Act of 1940, Lehman Brothers took a minority position on the board of directors. The present management contract between the corporation and Lehman Brothers has been in operation since July 1943; under the terms of which, Lehman Brothers receives $225,000 a year for management services, payable quarterly.

The agreement provides that the firm of Lehman Brothers shall manage the affairs of the corporation, subject to its board of directors, and shall superintend its financial transactions, ad­vise on the purchase and sale of securities, direct the statistical and research organization of the corporation, and place at the corporation's disposal its judgment, experience, statistical infor­mation and other data. All the facilities of Lehman Brothers are at the disposal of the corporation.

The Lehman family and partners of Lehman Brothers and their relatives, including trusts in which they have an interest, have always owned a substantial amount of the corporation's stock.

The policies of the corporation are determined by the board of directors, whose majority is independent of Lehman Brothers. The board consists of seventeen members, six of whom are part­ners of Lehman Brothers; three are employees of the corpora­tion; eight are representative persons neither connected with Lehman Brothers nor employees of the corporation (generally, they are executives of large corporations or retired industrialists).

Organization

The board meets monthly. In addition, the board has an Exec­utive Committee, which meets weekly and on which two out­side directors serve.

The actual day-to-day management of the corporation's investments receives the constant attention of the Portfolio Committee, which is the instrument by which the firm carries out the responsibilities delegated to it under the management contract. The committee reports to the Executive Committee and to the board, as all security transactions are submitted to the board for approval or ratification. The Portfolio Committee is made up of five partners of Lehman Brothers and holds at least one formal meeting a week. This meeting is attended also by all the senior members of the corporation's staff, who are encouraged to express their views freely. In addition to these regular weekly meetings of the Portfolio Committee, there are frequent special meetings to consider specific industries.

At these meetings of the Portfolio Committee, actual invest­ment decisions are made. There is constant examination and reappraisal of the general balance of the portfolio, and decisions are made about the purchase or sale of specific securities. In addition, there are daily informal discussions among members of the research staff and members of the Portfolio Committee with regard to problems which may arise suddenly and as to work which may be in progress.

The core of the research staff is a group of senior security analysts, who investigate and follow closely industries and se­curities already present in the portfolio or under consideration for purchase. Memoranda by members of the staff and their recommendations constitute the basic agenda considered at the Portfolio Committee meetings. Senior staff members visit indus­trial plants, oil fields, and mines and maintain frequent contact with top officers in the companies and industries they follow.1

1 The description of The Lehman Corporation's organization is largely based on an address by Monroe C. Gutman, chairman of the Executive Com­mittee, before the New York Society of Security Analysts, October 22, 1957. Mr. Gutman's remarks on the corporation's policies have also been used.

Investment Management

Table 8 presents the record of The Lehman Corporation to­gether with other relevant data.

As of December 31, 1960, the investor who bought the stock on the original offering and who paid $10,400 for 100 shares would hold 1,200 shares with a net asset value of $32,472. Dur­ing his holding period, he would have received $14,113 in div­idends paid from ordinary net income. The investor would also have received $18,031 from gains realized on investments. In 1951 and 1955, rights were received to subscribe to additional shares of stock.

From a study of Lehman's history, the following factors stand out:

1. The comparatively favorable record



2. The gradual growth of investment income and the relative stability of such income



3. The large capital gains realized from the sale of securities during periods of high stock prices: 1937,1946,1956-1957,1959



4. The few periods in recent years when cash, bonds, and preferred stocks amounted to more than 12 to 15 per cent of the portfolio



5. The premium over net asset value at which the stock has generally sold in recent years



6. Most important, probably, participation of the stock in substantial general advances in common stock prices and also in broad general declines in the stock market

TABLE 8
The Lehman Corporation: Statistical Summary, 2952-1961
Year Ended Dec. 31	Net Assets (millions)	Per Share
		Net Assets	Income Dividends	Capital Gain Dividends	Price Range
1961	$353.8	$31.59	$0.51	$1.33	36⅞ - 26½
1960	296.2	27.06	0.53	1.18	29¾ - 24½
1959	300.6	28.07	0.54	1.34	31⅞ - 26¾
1958	275.8	27.67	0.53	1.09	32 - 22¾
1957	192.8	20.76	0.55	1.30	32½ - 22
1956	234.8	25.26	0.62	1.43	29⅛ -21½
1955	233.3	25.11	0.57	1.04	23¾ - 20⅛
1954	191.1	22.62	0.50	0.63	23 - 17
1953	143.3	17.19	0.49	0.52	20 - 15⅝
1952	152.9	18.30	0.42	0.51	20½ - 17¾

Comment

The most noteworthy feature of the early history of the corporation was the high degree of liquidity (percentage of cash and equivalent to total portfolio), averaging 38 per cent. In the early thirties, the stock sold at discounts of as much as 40 per cent. More than 900,000 shares were acquired by repurchases to December 31, 1932, at a substantial discount from net asset value; and these shares were retired. Small purchases were made later from time to time until 1944, when repurchases were discontinued.

Examining the periods of major changes in the stock market generally, it is apparent that the management was unprepared for the drastic decline in 1937-1938. In part because of the large position in oil stocks, the net asset value per share declined approximately 45 per cent between the end of 1936 and March 31, 1938. Liquidity at the end of 1936 was substantially lower than at any other period, with the exception of 1936. In the 1946-1948 period, the corporation again sustained a substantial shrinkage in the value of its assets as a result of falling stock prices, modified to some extent by payment of exceptionally large dividends out of capital gains. The management had lifted the liquidity rates materially from the previous average level. Year-end net asset value per share, it is noted, was not as high as on December 31, 1945, until the close of 1950.

In the three years 1951-1953, net asset value fluctuated in a comparatively narrow range; but between the third quarter of 1953 and the end of 1954, net asset value rose from $16.01 per share to $22.72. The corporation shared in the rise of stock prices generally, with the net asset value moving up further, to $27.70 per share by the end of March 1956.

After another substantial decline in net assets during the sharp slump in stock prices during the second half of 1957, a marked recovery took place. The period following 1958 was one of relative stability. A relatively heavy position in oils mili­tated against full participation in the rising market of 1959. The extent of the decline in 1960 was moderated, on the other hand, by the size of public utility holdings.

The major groups in recent years in percentage of net assets have been as follows:

	Oil & Gas	Public Utilities	Mining	Metals & Chemicals	Electronics, Electrical Equipments
1961	14.8%	17.8%	7.3%	7.1%	4.1%
1960	15.4	17.0	7.8	8.0	6.9
1959	16.4	14.8	5.6	9.8	8.3
1958	24.3	17.8	7.8	7.1	3.7
1957	30.8	18.6	7.5	6.2	2.8

It is noted that oil and gas stocks at the end of 1961 had cost approximately $13.4 million compared with a market value of around $52.5 million. The low cost may have influenced the de­cision to retain this group, especially the large holdings in Amerada Petroleum and Superior Oil. The public utility, drug, merchandising, and office equipment groups also showed con­spicuously large gains in market value compared with cost.

At the end of 1961, a small number of issues constituted a sizable fraction of the value of all common stocks:

	(Millions of dollars)
International Business Machines	13.0
Amerada Petroleum	13.1
Superior Oil	10.8
International Nickel	8.5
General Foods	7.7
Florida Power & Light	7.6
American Telephone & Telegraph	7.5
	68.2
Total common stocks	345.3

The remainder of the portfolio has been broadly diversified. A noteworthy feature has been the virtual absence of railroad equities and the complete absence of automotive issues. Insur­ance and bank stock holdings have been among the smallest groups represented in the portfolio. Income has been a second­ary factor, and on a per share basis the return from investments was as large in 1950 as in recent years.

Issues have been sought where good management built up assets by reinvestment of earnings in exploration and discovery. The management has believed that a closed-end company, such as The Lehman Corporation, which has no senior securities out­standing, can use some of its funds properly for long-term in­vestment in development situations.

In 1954, 1958, and 1959, additional shares were issued in exchange for assets of six personal holding companies. In addi­tion to being listed on the New York and Pacific Coast Stock Exchanges, the stock is traded on the Geneva Stock Exchange in Switzerland.

In recent years, the stock has generally commanded a pre­mium. The discount at the end of 1955, however, was as high as 12 per cent; yet in the very next year, the discount was succeeded by a premium of 14 per cent. Asset values were little different on December 31,1955, and at the close of 1956. While a larger capital gain payment was distributed in 1956, a small payment was made in 1957, but the premium persisted, attest­ing to the vagaries of supply and demand. In recent years both the discount and premium that prevailed at different times have been relatively slight.

MADISON FUND, INCORPORATED

Origin and Policies

For the second investment company to be evaluated to help you evaluate the best investment companies, we will be considering the Madison Fund. The Pennroad Corporation was organized under the laws of Delaware as a holding company for securities of various rail­roads and related properties. As the company was originally formed by the management of the Pennsylvania Railroad Com­pany, many investors continued to regard it as affiliated with or controlled by Pennsylvania, although no connection between the two companies had existed for many years. Accordingly, the name was changed to Madison Fund, Incorporated, in Oc­tober 1958.

After the drastic decline in railroad securities in the thirties, a gradual change in the policies of the company took place. Beginning in 1937, the transition to a general investment company began. In 1941, the company registered formally under the Investment Company Act. For many years, the company was a non-diversified company as defined in the Investment Company Act. Madison Fund is now a non-leverage, diversified, closed-end investment company.

Madison Fund's current policy is to invest principally in common stocks. The management attempts to balance the need for sufficient current income to maintain a consistent quarterly dividend policy with an opportunity for capital appreciation by the selection of securities of companies believed to have sound growth potential.

The board of directors is made up of persons of wide experi­ence in finance and industry. Day-to-day operations are the re­sponsibility of a staff of five, each of whom has devoted substan­tially all his business career to the management of investments. Close contact is maintained with developments in industries and companies in which Madison is interested. The pres­ent management assumed control in February 1957. Kuhn, Loeb and Company, investment bankers, were the company's underwriters in connection with the public financing in 1958, and the firm has been represented on Madison's board since the company's inception.

The portfolio is under constant review. Madison Fund has no fixed policy. It buys securities or sells them in the light of current and anticipated market, economic, and other condi­tions. The company is one of the few which declares in its state­ment of policy: "If a particular security should rise sharply in market value subsequent to purchase, sale may be effected even though a short-term profit might result, taxable to the stockholders as ordinary income when distributed."

The company has become a diversified investment company. There are no restrictions to prevent it from issuing debt or sen­ior equity securities, underwriting securities, or buying and selling real estate, commodities, or commodity contracts. Except for a very small loan, Madison Fund has not engaged in any of the latter activities.

Capitalization

As of December 31, 1960, there were outstanding 6,792,594 shares of common stock ($1 par value). In October 1958, Mad­ison Fund offered its stockholders the right to subscribe to 1,286,619 shares of its common stock, at the rate of one share for each four shares held, at $16.25 per share. The proceeds amounted to approximately $20 million.

Investment Management

Madison Fund is an example of almost complete transforma­tion over the years. Offered originally at $15 a share and selling shortly thereafter at $30 per share, in the mid-thirties the stock was quoted as low as $1.25. Redisposition of assets and improved economic conditions brought the net assets up to over $7 per share by the end of 1946. Until 1956, the company was often considered in the light of a special situation. From 1945 (except for 1951) dividends were non-taxable because of the write-down of portfolio securities acquired before the depression.

Gradually, the company succeeded in reducing the impor­tance of investment in affiliated companies and devoted itself to special situations for capital gains. One of these, the invest­ment in Houston Oil Company, representing an average in­vestment of slightly more than $3 million, resulted in a capital gain aggregating $12.6 million. In 1948, approximately 80 per cent of the company's assets consisted of securities of railroads and related properties. By 1954, investments in special situa­tions slightly exceeded Madison Fund's railroad holdings.

With the sale of the investment in Houston Oil in 1956, the trend toward special situations was reversed, and a program of broad diversification was effected. The largest investment for a long period was in the Canton Company, which owns, through the Canton Railroad, extensive real estate and water­front facilities in and around Baltimore. This asset represented about 10 per cent of the company's total investment assets in 1958, and was finally sold early in 1960.

The present management of Madison Fund believes strongly in flexibility. There is no investment committee as such, al­though a staff meeting is held at least once a week to discuss proposed changes in the portfolio. A policy of rotating special­ists is followed so as to avoid the practice of spending time on study of an industry which appears to be in a downward trend. The management does not confine investments to accepted blue chips. At the end of 1960, out of total assets of approximately $145 million, the largest investments were in Philips Incan­descent Lamp Works, International Mining Corporation notes (issued in connection with the purchase of Canton Company), and Orange and Rockland Utilities. The management is "ready to listen to original ideas on stocks which are not popular favor­ites so long as evidence is available that true value and oppor­tunity exists."

Madison Fund for some years usually sold at a substantial discount from net asset value. The gap has closed considerably, presumably because of the efforts of management to interest investors in the company, and also because of the sale of Canton Company. The president has stated frankly that the policy is to bend every effort to keep the discount as narrow as is possible.2 In 1961, the stock sold at an exceptionally high premium, which the management conceded would not continue to prevail. Madison Fund's portfolio changed materially in character. Pub­lic utility stocks were reduced and switched into selected bank stocks. The company's position in electronics and oil and nat­ural gas was cut. At the year end financial companies were the largest holdings, with heavy industry issues also larger. Still. Orange & Rockland Utilities, American Tobacco and R. J. Reyn­olds Tobacco and Atlantic Coast Line were the most important single holdings.

Policy was outlined in the following words: "In spite of spe­cific weak areas, the general emphasis on growth stocks con­tinues unabated, principally because the mutual funds which specialize in this field are accumulating capital at an astounding rate."

2 Edward A. Merkle, president of Madison Fund, Incorporated, in an address before the New York Society of Security Analysts, June 28,  1960.

TABLE 9
Madison Fund: Statistical Summary, 2952-1962
Year Ended Dec. 31	Net Assets (millions)	Per Share
		Net Assets	Income Dividends	Capital Gain Dividends	Price Range
1961	$173.6	$24.05	$0.60***	$1.49***	30½ - 20⅜
1960	144.8	21.32	0.63**	1.35***	21-16⅜
1959	142.7	21.78	0.60	0.82***	20⅛ - 17½
1958	135.8	21.11	0.72	0.63***	18½ - 13¼
1957	86.4	17.29	0.67	0.48	16 - 12⅝
1956	101.0	20.21	0.30	5% stk	16¼ -13
1955	94.9	18.51	0.50	1.50	18⅞ - 13½
1954	93.2	17.76	0.50	0.50	16¾ -12¼
1953	65.9	12.55	0.50	0.50	13⅝ - 11
1952	68.8	13.10	0.50	0.50	13⅝ - 11½

* Includes short-term capital gains
** Partly payable in cash or stock
*** Payable in cash or stock

MASSACHUSETTS INVESTORS TRUST

Origin

When developing an understanding of how to evaluate best investment companies, it will help to consider America's first open-end investment company, which is also one of the largest. It began operations in July 1924. From the begin­ning, emphasis was placed on the fact that the portfolio repre­sented a "composite investment in American industry."

Merrill Griswold, of the Boston law firm of Gaston, Snow, Saltonstall, and Hunt, became a trustee in 1925 and was chair­man of the board of trustees from 1932 to the date of his re­tirement as a trustee at the close of 1953. Mr. Griswold made a number of important contributions to the open-end concept in its formative period. He took an active part in tax legislation and in laying the groundwork for the Investment Company Act of 1940.

Others who pioneered in the establishment and growth of MIT were L. Sherman Adams and the present chairman, Dwight P. Robinson, Jr., who joined MIT in 1932 as head of the investment research department.

The original capital was $50,000, and by the end of the year there were 200 stockholders, most of whom were from New England. The market value of net assets had grown to $402,000 by the end of 1924; by the end of 1925, assets exceeded $2.2 million.

Policies

For several years, MIT has set forth its policies in the annual report. It is the policy of the trustees to keep the assets invested in common stocks, except for working cash balances and cash invested in short-term notes. The trustees of MIT believe it constitutes a conservative medium for that portion of an in­vestor's capital, which he may wish to have invested in common stocks believed to be of high or improving investment quality.

The term "conservative medium" indicates that the manage­ment tries to make prudence, discretion, and intelligence the animating principles in its selection of investments, with due regard for probable income and probable safety of capital. The phrase "high investment quality" is used to show the intention to avoid speculative stocks or those of doubtful character, even if immediate prospects are tempting.

It is not MIT policy to invest for the purpose of control of management or with a view to making short-term trading prof­its. Funds may be invested in securities as the trustees at their discretion deem proper. Purchases of securities of any one is­suer are limited to 5 per cent of the total assets of MIT and to 10 per cent of any class of securities of an issuer.

The trustees may not purchase the securities of an issuer, which, including predecessors has not been in continuous op­eration for at least three years, except that 2 per cent of total assets may be invested in certain kinds of investment compa­nies. There are further restrictions as to the purchase of securi­ties of investment companies and as to the purchase of securities of companies in which the management personnel have an interest. Borrowing is severely limited in amount and permitted only in the form of temporary loans for extraordinary or emergency purposes.

The object of the restrictions is to prevent investment in pro­motional enterprises or unseasoned businesses and also to eliminate the possibility of dual interests, as well as to avoid complex interrelationships. The limited permission to buy into investment companies was intended to help create a medium for the furnishing of capital for developing new processes and products—so-called venture capital.

The trustees are the operating managers of MIT. They make final decisions on portfolio changes and additions. Formal meet­ings are scheduled twice a week, but the trustees confer daily. They also hold regular weekly meetings with the advisory board at which members of the investment research staff are present. An industry specialist reviews the outlook for an in­dustry and makes recommendations concerning stocks of com­panies in that industry. Outside consultants are also used to obtain specific information on highly technical and scientific subjects. MIT regards investment research as the foundation on which portfolio decisions are made.

Investment Management

Without mincing words, MIT frankly states: "Since the shares of this Trust represent an investment in common stocks, share­holders should understand that the price of the Trust's shares will go up or down with changes in the market value of the stocks held by the Trust. Also, the dividends held by the Trust will increase or decrease in relation to the amount of dividends received from these investments."

The policy of being fully invested assures the impact of gen­eral market conditions on MIT. For example, the asset value at the end of 1936 was not exceeded until 1945. Again, it was not until 1950 that the asset value exceeded the 1945 figure. An exceptionally large gain took place between 1953 and 1954. More moderate improvement followed in the next several years. Changes between 1958 and 1960 were relatively small. It has been difficult in recent years to raise the per share income from dividends received, which in fact has been somewhat larger than for some other investment companies. Table 10 presents the pertinent statistical data.

TABLE 10
Massachusetts Investors Trust: Statistical Summary, 1952-1961
Year Ended Dec. 31	Net Assets (millions)	Per Share
		Net Assets	Income Dividends	Capital Gain Dividends	Price Range
1961	115.7	$1,800	$15.55	$0.39	$0.60
1960	114.5	1,508	13.17	0.42	0.20
1959	111.8	1,558	13.93	0.40	0.22
1958	107.3	1,433	13.35	0.39	0.12
1957	100.5	976	9.72	0.41	0.17
1956	94.5	1,079	11.63	0.40	0.14
1955	87.5	957	10.95	0.38	0.28
1954	84.8	791	9.33	0.34	0.18
1953	80.3	522	6.51	0.31	-
1952	75.3	512	6.81	0.31	0.09

The policy of MIT has been to maintain a consistently large position in oil stocks, the second largest being the public utility group. The utilities, in fact, represent a bigger investment if natural gas equities are included. As the holdings in the latter class are mainly regulated companies, it seems proper to add these to the electric utility group, which would have made the total in electric and gas utilities in 1961 approximately 17.9 per cent of assets.

Among the noteworthy facts about the investments of MIT are that American Telephone & Telegraph is not included in the portfolio. Another fact of interest is the relative importance of the steel group, particularly since 1956. Bank stocks have been owned in comparatively small amounts, and insurance company issues have been absent entirely. Like many other open-end investment companies, tobacco and liquor stocks have been avoided, presumably because of the possible effect on in­vestors who questioned the moral implications of profiting from these industries.

Some years ago, the decision to sell the holdings of MIT in Montgomery Ward when Sewell Avery did not resign raised the question, still undecided, as to the policy that should be followed by an investment company that found management lacking in desirable qualities.

MIT does not regard its size as a handicap. It points to its ability to acquire large blocks of stock readily and to dispose of sizable holdings. The advantages of size are said to be reflected in the quality of the men who are associated with MIT. For example, all five of the trustees at this writing have been chosen from the research staff. The low operating expense ratio is also cited as a benefit of size. In 1961, expenses were 0.17 per cent of average net assets compared with 0.52 per cent in 1940.

As of December 31, 1961, MIT held twenty-seven stocks, the investment in which had a market value of $20 million or more—by far the largest was 270,432 shares of International Business Machines, with a market value of approximately $157 million. IBM had a greater market value than a number of in­dustry groups.

MIT points out that the number of shareholders at the end of 1960 and 1961 exceeded 200,000 (214,670 on December 31, 1961). The last year in which the number declined from the preceding year was 1941.

With reference to the shareholders, owners of stock have holdings averaging about $7,000, and holders with shares with a value of more than $50,000 have an aggregate investment of $485 million. Among the ten largest shareholders in order of size are a savings bank, beneficial association, personal holding company, labor union, pension plan, individual, school, indus­trial employees' fund, and fiduciary.
In the table on the next page, the figures represent each in­dustry as a percentage of the total net assets of MIT.

Case Studies Of Investment Companie

	1952	1953	1954	1955	1956	1957	1958	1959	1960	1961
Petroleum	21.3	20.5	21.0	20.3	22.0	21.6	20.8	17.0	16.5	15.7
Utilities	12.9	14.0	11.6	10.6	8.0	10.3	10.6	11.0	12.9	13.7
Steels	2.5	2.6	5.2	7.7	9.2	7.4	10.2	10.6	8.8	5.2
Tires & Rubber	5.1	5.0	5.9	5.8	5.6	6.2	5.9	6.0	4.5	3.0
Metals & Mining	6.6	5.4	6.2	6.6	6.9	5.9	5.8	5.8	5.3	5.0
Chemicals	6.4	6.7	6.9	7.2	5.9	5.8	4.8	4.8	5.3	5.0

WELLINGTON FUND

Origin and Policies

Fourth as you develop your understanding of how to evaluate best investment companies here is the Wellington fund. The corporation is representative of the balanced open-end investment company. It has been under substantially the same management since it was incorporated in 1928.

Wellington has as its objectives: conservation of principal, reasonable income return, and profits without undue risk. The management seeks to achieve these objectives through policies carried out since the Fund was established: (1) careful se­lection of individual securities; (2) continuous conservative management supervision; (3) balanced investment in bonds, preferred stocks, and common stocks of many separate com­panies in different industries.

The third point listed makes Wellington a balanced fund. Although the company's certificate and bylaws place no limit upon the percentage of the Fund's assets which may be in­vested in common stocks or senior securities, Wellington has followed a basic policy of balancing its investments. The per­centage of common stockholdings to total assets has ranged from 33 per cent, in July 1929, to 69 per cent, in December 1942. As of November 30, 1961, common stocks represented 64 per cent of assets. Purchases and sales of securities are limited to those made for investment or, when necessary, against re­demption of Wellington shares. I would point out that in the period of over a quarter of a century since its organization, great economic and political changes have occurred; and dur­ing all this time Wellington's management has steered a mid­dle-of-the-road course.

Management

The Fund has used the Wellington Company to furnish sta­tistical, research, and general management services. The rate of compensation is 0.5 per cent on the first $70 million of average net assets, computed as of the end of each month, 0.375 per cent on the next $50 million of average net assets, and 0.25 per cent on average net assets over $120 million.

As a result of the growth of the Fund, many additions have been made to the original management group to handle man­agement's increased responsibilities. A research staff searches for attractive securities by analyzing and checking reports, new developments, and current information from the field and from more than fifty analytical and research organizations. All this material is compared and digested by the research staff, whose reports are then submitted to the Investment Committee.

Determining the effect of changing conditions on business and securities prices is the function of the Investment Com­mittee. This committee recommends purchases and sales of investments and changes in bond and stock ratios. The Com­mittee has five members, four of whom are directors and three of whom are also officers of the Fund.

At one time, appreciation bonds and preferred stocks amounted to 10 per cent or more of the Fund's assets. Such is­sues are of less than highest-grade quality, and their price movements are influenced not only by changes in interest rates but by the course of earnings of the securities. Usually, yields are higher than can be obtained by the purchase of common stocks of investment quality. Sometimes, such issues are the outgrowth of corporate reorganizations. In any event, Welling­ton's holdings of this type have been relatively small since 1950.

The ideal operation of balanced funds in an ideal securities market would be to have the largest holdings in common stocks when common stock prices are depressed and fixed income se­curity prices high and to reduce equity holdings as their prices rise and prices of fixed-income securities (bonds and preferred stocks) fall. Wellington Fund at one time stressed the change in ratios among the various types of securities to meet changing economic and financial conditions. For example, in the 1948 prospectus, a long-term chart indicated the way "Wellington dollars are invested" and it was observed that "common stocks have been gradually reduced and more conservative invest­ments have gradually been increased with the rise in the se­curities market since 1942." Table 11 condenses the long-term record of Wellington Fund.

TABLE 11
Wellington Fund: Statistical Summary, 1952-1961
Year Ended Nov. 30	Number of Shares	Net Assets (millions)	Per Share
			Net Assets	Income Dividends	Capital Gain Dividends
1961	90.7	$1,423	$15.67	$0.47	$0.51
1960	81.0	1,087	13.42	0.47*	0.48
1959	71.9	1,017	14.15	0.46	0.48
1958	61.8	858	13.88	0.45	0.45
1957	52.3	605	11.56	0.46	0.43
1956	44.6	579	12.99	0.45	0.45
1955	37.3	497	13.31	0.44	0.44
1954	32.7	402	12.30	0.41	0.32
1953	28.1	281	9.99	0.40	0.23
1952	23.6	256	10.44	0.40	0.25**

* Includes $0.03 of income accumulated but undistributed in prior years.
** Includes $0,025 a share realized in preceding year.

In 1953, when net assets amounted to more than $280 million (compared to $49 million in 1947), the point was made that common stocks and other equities were gradually reduced from about 67 per cent of resources at the beginning of the year to about 58 per cent at the year-end. This was shortly after the beginning of the great bull market, during which common stock prices doubled in three years.

Shifting among various types of securities in accordance with changes in the business cycle would have greater possibilities in practice if the pattern were not so irregular. For example, in the fall and winter of 1957, bonds and preferred stocks and common stocks all declined substantially. And in the mid-thir­ties, common stocks failed to respond to the extremely easy money policies of the time. More recently, the earnings multiple for leading groups of stocks had been altered drastically by prices that threw out of gear the long-term relationship between bond and common stock yields. This has created difficulties for balanced funds like Wellington in conforming to traditional policy.

In 1957, the annual report noted that the management had cut back the proportion of the Fund invested in common stocks to 63 per cent of resources, compared with 67 per cent at the beginning of the year.

The reductions were made principally in certain cyclical in­dustries, such as building, machinery, and railroad equipment. At the same time, however, food stocks were eliminated, which hardly seems to fit in with the reasons for selling the cyclical equities. By September 1958, the Fund referred to the increase in its investment in some stocks that were expected to show better earnings with business recovery. Some of these were cy­clical, such as metal and mining and steel, which presumably were at higher prices than in the last quarter of 1957.

By November 30, 1960, when net assets exceeded $1 billion, the Fund had securities in 187 companies. The backlog of bonds and preferred stocks was increased from 32 per cent to 38 per cent during 1959 and to 42 per cent by April 1, 1960. At the close of the 1960 fiscal year (November 30), the backlog of senior securities was again down to 39 per cent of assets.

In the spring of 1961, a more conservative and selective com­mon stock policy was adopted. More emphasis was placed on the stocks of companies in the growing consumer products, financial, and electric utility fields.

Nevertheless, even though higher returns were available on fixed income securities, dividend payments from investment in­come were higher in 1960 only because of the inclusion of a dividend from income accumulated but undistributed in previous years. The low return on common stocks of the "growth" type undoubtedly pulled down the average return from the securities held in the portfolio. From the year-end peak net asset value of 1959, a moderate decline took place, with the November 30,1960, value lower than in 1958, excluding capital gain distributions of 48 cents per share paid in both 1959 and 1960, with a substantial recovery in 1961.

The growth of Wellington Fund has been so rapid that it has been difficult in view of the policies followed to build up a large unrealized profit representing the excess of market values over cost prices. In terms of the size of the Fund and the rise in common stock prices, the change has been very moderate.

	INVESTMENTS
	AT COST	AT MARKET
November 30, 1960	$951,113,880	$1,082,049,722
November 30, 1957	561,194,304	597,857,093
November 30, 1953	257,903,373	276,068,442

The long-term record indicates that a holder who bought Wellington Fund at the end of 1945 would have had to wait until 1952 before he had a substantial profit. Likewise, the purchaser at the close of 1955 would not have had a sizable profit even after the striking recovery in common stock prices that took place in the fall of 1958.

Investment income has been somewhat larger than for com­mon stock funds because of the unusual relationship in recent years between the yields of blue chips and fixed-income secu­rities; and changes in net asset value have been more moderate than in common stock funds.

Insofar as the common stock portfolio is concerned, Welling­ton has concentrated less than some other funds. For example, at the end of 1961, the largest proportion of common stock­holdings to the total investment was 12.2 per cent in electric, telephone, and natural gas utilities; the oil group was second with 7.0 per cent. In some earlier years, the degree of concen­tration was even lower. A number of other funds prefer to have 20 per cent or more in industries that are favored, with 10 to 15 per cent in industries favored only a little less.

Distribution and Redemption

The Wellington Company, Philadelphia, is the principal un­derwriter and distributor of the shares. Shares are offered at liquidating value plus a premium of approximately 8.7 per cent of the value or 8 per cent of the offering price on amounts below $25,000. The offering price is based on asset values, computed twice daily. The offering price may be changed at other than the usual effective time, however, when the Dow-Jones average fluctuates 2 per cent or more in accordance with the Fund's established policy that new or retiring shareholders will be on terms of approximate equality with all other shareholders.

Shares are redeemable at any time at net asset value. In no year has the number of shares outstanding failed to show an increase, usually a sizable increase.

In recent years, shares issued and redeemed and net assets have been as follows:

	Number Of Shared Issues	Number Of Shares Redeemed	Net Asset As Of December 31
1961	12,024,282	2,303,199	$1,422,513,478
1960	10,921,161	1,771,816	1,087,130,246
1957	8,921,336	1,169,783	604,578,038
1953	2,755,812	486,157	280,893,214
1949	2,091,975	140,597	105,441,702

It is too early to tell whether the formation of Wellington Equity Fund, Incorporated, which offered 3.5 million shares in October, 1958, and received $38,640,000 will arrest the growth of Wellington Fund. The management is an affiliated company of the managers of Wellington Fund, with substan­tially the same officers, directors, and personnel. The new fund was intended to provide a program in equity securities through which investors may share in the ownership and long-term progress of American industry. Investments are largely in com­mon stocks, and the Equity Fund is designed not to give in­vestors a balanced investment account, but is intended for those who believe they own sufficient fixed-income and fixed-dollar investments.

TRI-CONTINENTAL CORPORATION

Origin and Policies

Lastly for consideration in connection with best investment companies is the Tri-Continental Corporation. The Tri-Continental Corporation was formed as a result of a consolidation at the end of 1929, under the sponsorship of the investment banking firm of J. and W. Seligman and Company. Despite its somewhat "synthetic" name, throughout its history it has been basically interested in North American companies.

Tri-Continental is the largest diversified closed-end invest­ment company and is unique in several other respects, includ­ing its development, capital structure, and management.

Organized initially with assets of around $75 million, Tri-Continental was hit hard by the collapse of the stock market and the world-wide depression of the 1930's. It was a period of discouragement for managers of funds and stockholders alike. Tri-Continental had faith in the ultimate recovery of the econ­omy and operations of well-managed investment companies. A policy was adopted of acquiring the assets of other investment companies, several of which had sought out the managerial and investment facilities of Tri-Continental. Working control was obtained, and later, particularly between 1940 and 1953, a series of corporate simplifications and consolidations was ef­fected. "Special interests" were greatly reduced.

In recent years, the policy of Tri-Continental has been to­ward broad diversification in securities of companies with progressive managements, ideas, and policies in fields with pros­pects for growth. At the same time, although income is not a controlling factor, an effort has been made to bear "in mind that Tri-Continental stockholders want good income, and we have done our best to get it for them (Remarks of Francis F. Randolph, chairman of the board and president, before the New York Society of Security Analysts, November 19, 1956.)."

Among the features of Tri-Continental are the variety of securities provided because of the nature of the capital structure; the wholly owned subsidiary, Tri-Continental Financial Cor­poration, with assets of about $18 million as of December 31, 1960,      which is used for intermediate or "bridge" financing trans­actions; and the very low management and operating expenses.

Capitalization

The capital structure of Tri-Continental as of December 31, 1961, follows:

Long-term debt	$20,000,000
$2.70 cumulative preferred Stock ($50 par)	$40,537,000
Common stock ($1 par)	7,373,967

As of December 31, 1961, there were reserved for issuance 954,620 shares of common stock upon exercise of 751,670 war­rants. Each warrant entitles the holder to purchase 1.27 shares of common stock at any time at $17.76 per share.

The capital structure of Tri-Continental is unique, as few investment companies have a substantial amount of senior se­curities, let alone warrants.

The use of long-term debt and preferred stock to furnish cap­ital provides leverage for the common stock. Beginning in 1955, the management increased holdings of bonds and preferred stocks in the portfolios. In this way, the degree of leverage was reduced. Thus, as of December 31, 1961, the company's port­folio included cash and equivalent, corporate bonds, and pre­ferred stocks in the amount of $51.0 million, and this was only about $7 million less than the debentures and preferred stock in the capital structure of Tri-Continental.

Further comment on the capitalization will be found under Investment Management.

Management

The board of directors of Tri-Continental consists of fourteen men with a broad range of experience. They hold directorates in a large number of important industrial and financial companies. The active management is under the Executive Com­mittee of the board. This committee holds a formal meeting every day and is available at any hour of the day, whenever any question arises. In a sense, it is in almost continuous ses­sion. Since a number of members of the Executive Committee have met together almost every weekday since before the Great Depression, they have learned how to get the fullest advantage of teamwork. The Executive Committee recommends policies to the board and makes investment decisions involving the purchase and sale of securities. Group effort is the keynote in reaching decisions.

The Executive Committee is assisted by, and work is fed to it through, the Investment Research Committee, made up of six director officers. This committee guides and manages the investment research staff of Union Service Corporation. The members of the committee screen the work of the staff and bring the results, together with their recommendations, to the Executive Committee for final action.

J. and W. Seligman and Company has been closely associated with Tri-Continental since its inception. During the thirties, it decided that investment company management was a prom­ising field and that this would be its basic activity. Five of the firm's partners spend a large part of their time on the affairs of Tri-Continental and three associated mutual investment com­panies.

For many years, Tri-Continental provided investment re­search and administration for its affiliated and associated com­panies for a fee. Finally, in 1938, Union Service was organized to handle the research and administrative work on a coopera­tive, non-profit basis. The cost of this work is spread over Tri-Continental and the associated mutual investment companies in proportion to their size. The result has been a reduction in the burden of operating expenses (including all officers' salaries and costs), which in 1961 amounted to only 0.20 per cent of assets.

Organization of Research

Union Service Corporation has a staff of about 100. It serves exclusively Tri-Continental and three mutual funds: Broad Street Investing Corporation, National Investors Corporation, and Whitehall Fund, Incorporated. Union Service handles ad­ministrative tasks, such as accounting, corporate record-keep­ing, and office service. The main function is to provide investment research and management.

The work of the research staff is organized around these func­tions:

1. The Economics Department keeps continuous watch on the general economic situation and outlook as a guide to broad investment policy in order to help determine when and in what proportions different classes and types of securities should be owned.



2. The Investment Research Department studies the pros­pects of many industries and companies to provide a basis for selecting the individual securities best suited to the company's objectives and policies. It also watches developments affecting these securities once they have been bought.



3. The Market Department makes a continuing survey of the state and condition of markets for securities in general and many individual securities to assist in investment selections and for the effective execution of purchases and sales of securities.

In research work, each industry (and certain companies which cut across several industries) is assigned to a particular analyst or group of analysts. To appraise the ability of manage­ment, members of the staff endeavor to rely, at least in part, on face-to-face interviews in field investigations.

Tri-Continental has an executive committee that is respon­sible for directing the work of the research staff. It reviews and screens their findings. The research staff is composed of indi­viduals ranging in experience from thirty years to trainees just out of college. The policy is to train and develop young men rather than add to the staff, analysts with experience gained on the outside. Analysts are encouraged to develop their own ideas and to plan their work within the fields assigned to them.

The method of operation has been described by the president of Tri-Continental: "An analyst's work is his own. If he can sell the Investment Committee on an idea he has developed and the research job behind it, this idea is reduced to a specific recommendation and taken before the Executive Committee. This is the firing line and the analyst is the gunner. He presents his own ideas and analyses and we expect him to make a defi­nite recommendation. Then the counter fire begins. Often an analyst is overruled—but he learns to stand on his own feet. We work hard on the selection of men for our research staff, and we work equally hard on the development of their invest­ment judgment (Remarks of Fred E. Brown, before the New York Society of Security Analysts, January 5, 1960.)."

Investment Management

Unlike most other large investment companies, the policies of Tri-Continental have been influenced substantially by its capital structure, particularly in recent years. Accordingly, a brief reference to the securities constituting the capitalization is helpful.

Currently, the company has outstanding about $20 million in debentures, which carry the low interest rate of 3.875 per cent. Marketable assets cover the debentures some twelve times, and bonds and other senior securities in the portfolio are alone equal to 2.3 times the principal amount of de­bentures. They are mainly attractive to institutional investors.

The $2.70 preferred stock ($50 par) is outstanding in the amount of approximately $41 million and is callable at $55 per share. The dividend is well covered by investment income; at par, the asset coverage in recent years has averaged close to five times. Dividends have been paid without interruption since the issuance of the preferred stock in 1929. It is held principally by investors who are interested in stable income at a better rate than can be obtained generally on prime industrial and public utility preferred stocks.

The common stock differs in two respects from the shares of investment companies having the same kind of widely diver­sified portfolio. Since the claim of the debentures and preferred stock on assets is fixed, changes in the market value of the com­pany's assets can result in a larger change in assets per share. This is also true of changes in investment income. In addition, the warrants represent a right to share in the asset value and income for the common stock upon payment of a fixed exercise price. When the asset value is above this price ($17.76 per share), the warrant-holder's right to acquire common stock at the lesser price is a potential source of dilution of assets and of income available for the common stock. The number of out­standing warrants is now relatively small, and their exercise would dilute the asset value of the common stock by less than 10 per cent.

In several annual reports it was pointed out that the effect of leverage in the capital structure of Tri-Continental in mag­nifying changes in the asset value and income of the common stock may be varied by raising or lowering the proportion of cash, bonds, and preferred stocks held in the portfolio or by changing the character of the securities owned. The effect of leverage on the asset value of the common stock was minimized in 1956 and 1957 by maintaining a substantially larger position in senior securities and cash items than the outstanding amount of funded debt and preferred stock—at the end of 1957, the respective amounts were $75 and $58 million. As recently as 1953, investment in senior securities was approximately $35 million, and outstanding funded debt and preferred stock ex­ceeded $58 million. Now the balance is such that the senior capital structure has little influence on the asset value of the common stock.

The long-term investment record of Tri-Continental and other relevant data are presented in Table 12.

TABLE 12
Tri-Continental Corporation: Statistical Summary, 1952-1961
		Per Share
Year Ended Dec. 31
	Net Assets	Net Assets*	Income Dividends	Capital Gain Dividends	Price Range
1961	$494.2	$58.80	$1.50		52⅞ - 36
1960	412.4	49.15	1.47		27⅞ - 20¼
1959	414.3	49.15	1.47		31⅞ - 25⅛
1958	392.1	48.38	1.47	$0.97	31⅞ - 13⅜
1957	303.4	36.42	1.50	0.25	20⅝ - 11
1956	311.0	45.26	1.50	0.50	13¾ - 9⅛
1955	278.0	49.44	1.50		14⅛ - 9
1954	236.2	42.42	1.27		13½ - 4
1953	176.3	28.21	1.11		5⅛ - 3¼
1952	170.7	29.27	1.04		5⅛ - 3¾
* Before potential dilution from exercise of warrants.

As indicated by the management, it was not moved by fears of a depression in 1945 and 1946 and maintained its investment position. Net asset value per share of common stock shrank from close to $15 to less than $11 by the close of 1947; but a fast recovery occurred, with uninterrupted year-end gains which brought net asset value per share up to more than $29 at the end of 1952 and to above $49 by the close of 1955.

The decline in the per share asset value was quite large be­tween 1956 and 1957, but a partial explanation was the issu­ance of a substantial number of new shares due to the exercise of warrants. Adjusted for the net effect of extra dividends de­clared and of changes in tax provisions, assets per common share, assuming the exercise of all warrants, declined 6.9 per cent in 1957 compared with a decline of 12.8 per cent in the Dow-Jones industrial average. Tri-Continental par­ticipated in the recovery of 1958, and net asset value per share reached a peak of $49.84 as of June 30, 1959. The broad recovery in stock prices in 1961 brought the value as of December 31,1961, to the highest point in the company's history.

Tri-Continental has continued to sell at a discount from net asset value, although the size of the discount has diminished. At the end of 1955, the discount was fully 48 per cent. More recently, the discount has tended to hover in the 20-to-25 percent ranges. The management does not believe that it is its func­tion to attempt to close the gap by purchases of the stock in the market.

Portfolio policy has been in the direction of broad diversifica­tion. As of December 31, 1961, individual securities owned numbered 179. The company pointed out that the names of the enterprises they represent generally are well known. The break­down by groups shows the continued large commitment in pub­lic utility issues over the years. Oils have declined in importance, partly due to the decline in the prices of oil stocks. The steel group has been relatively large. Tri-Continental has had little or no representation in bank and insurance issues. A wholly owned subsidiary, Tri-Continental Financial Corporation, with assets of 4 to 5 per cent of the total assets of the parent corpora­tion, functions to invest in special situations.

Some highlights of the investment policy of the company are disclosed in the percentage breakdown of common stock hold­ings by industry. The five principal groups in recent years (all data as of December 31) have been as follows:

	1957	1958	1959	1960	1961
Public utility	18.4%	19.0%	19.0%	21.9%	22.4%
Oil	13.0	12.5	8.7	8.4	8.9
Steel	3.6	8.3	7.5	9.3	6.9
Electrical & Electronics	5.4	7.6	10.6	8.8	7.2
Chemical	3.7	4.9	7.5	7.6	7.7

While portfolio turnover is relatively low, changes in policy and in market fluctuations have resulted in some interesting variations in the ten largest holdings of common stocks as listed on the next page.

Stocks	Value as of December 31, 1961 (Millions)
International Business Machines	$17.9
Florida Power & Light	15.2
Minneapolis-Honeywell	14.4
Avon Products	12.8
American Electric Power	10.8
R. J. Reynolds Tobacco	9.6
Montana Power	9.2
Maytag	9.1
Southern Co.	9.1
Virginia Electric & Power	8.8
Minneapolis-Honeywell	11.8
E. I. du Pont (incl. Christiana Securities)	8.8
National Lead	6.8
Bethlehem Steel	6.6
American Electric Power	6.3
Florida Power & Light	5.1
Standard Oil of California	5.4
Aluminum	5.4
Standard Oil (N.J.)	5.3
Gulf Oil	5.2

Seven stocks in the first ten in 1956 are not included in the tabulation of values at the end of 1960.

Tri-Continental has been more successful than some other investment companies in building up investment income per share over the years, aided by the excellent dividend record of public utility companies, in which its holdings have been large. The broad diversification policy and good dividend record prob­ably account for the fact that the common stock has continued to be among the first ten stocks used by investors in the Monthly Investment Plan (MIP) of member firms of the New York Stock Exchange.

Tri-Continental follows a different dividend policy than most other investment companies. All current net income from interest and dividends is distributed, and under ordinary condi­tions, the policy is to retain and keep using capital representing long-term gains realized on the sale of securities after payment of the applicable tax.