SELIGMAN, BLOODY BUT UNBOWED, FIGHTING FOR INSTITUTIONAL WORK

Bruised by bad press about its flagship $3.5 billion Tri-Continental fund and lagging growth in its institutional business, J. & W. Seligman & Co. Inc. has taken major steps toward setting things right.

The New York company has reorganized its institutional marketing operations — tapping Rodney Smith, chief executive of its international joint venture, to head the division — and hired a former Merrill Lynch & Co. closed-end fund analyst to market Tri-Continental, one of the country’s largest and oldest closed-end stock funds.

What’s more, Seligman, which operates 25 load funds and a variable annuity, is helping to organize an industry association that will work to polish the tarnished image of closed-end funds.

Although assets under management have more than doubled over the last three years, to $25 billion, the growth of 133-year-old Seligman’s institutional business has slowed. Pension plans are shifting from defined-benefit to defined-contribution, which have different back-office and investment needs.

Like other old-line money managers, Seligman has been adding new funds since the early 1990s, when it formed a joint venture with London-based Henderson PLC, one of Europe’s largest money managers. Executives felt they needed to offer a greater variety to compete in the retail arena and to keep its institutional clients from flocking to competitors with more to offer.

Of Seligman’s $25 billion under management, 75% comes from individual investors and 25% from institutional clients, while five years ago the split was 65%/35%, according to company officials.

tech fund sizzles

Although the firm has had a difficult time attracting investors to some of its global products, other funds have struck a more responsive chord. Seligman, for instance, boasts one of the country’s hottest technology funds, its $4.6 billion Communications and Information technology portfolio.

The fund has held up well throughout the recent turbulence in the sector, posting a 28.60% annual return for A shares for the
three-year period ended Feb. 5, which beats the 23.15% gain for Lipper Analytical Services’ science and technology fund index.

On another front, Seligman has been grappling with 68-year-old Tri-Continental, which has persistently traded way below net asset value. Since 1993, the value-oriented large-cap fund — one of three closed-end funds managed by Seligman — has been saddled with an average discount of about 10%.

The discount, reflecting demand on the New York Stock Exchange, has bottomed at about 17% over the past couple of years.

During that time, some investors have unsuccessfully waged public battles to make the fund open-ended. Such a move would boost its price, but it could also prompt many investors to cash out, shrinking assets and management fees.

In general, closed-end funds have traded at unusually high discounts during the last couple of years, and their sponsors have come under increasing pressure from investors to take steps to boost share prices. The Securities and Exchange Commission, analysts say, has usually sided with unhappy investors.

“Fund companies do not like persistent big discounts because it looks bad and sometimes it leads to efforts to open-end and get rid of the discount,” says Bill Rocco, an analyst with Chicago-based Morningstar Inc.

Seligman officials argue that most Tri-Continental shareholders are happy with the status quo, noting that about 85% of them voted down the last two proposals to open-end the fund. In both cases, the fund’s board recommended against open-ending, arguing that closed-end funds are more stable because they don’t face constant inflows and redemptions. Shareholders rarely vote against management recommendations.

Tri-Continental has also been hammered in the press for having less-than-stellar returns, coupled with high management fees, although some analysts say it has gotten a bum rap. Tri-Continental posted a 23.60% annual return for the three-year period ended Jan. 31, compared to a 30.52% gain for the Standard & Poor’s 500 i
ndex during the same period. New York-based Lipper ranks the fund No. 5 out of six closed-end growth-and-income funds.

“You can’t beat them up for having below-market absolute returns because their beta (a measure of relative volatility) is below that of the market,” says Anthony N. Maltese, a managing director at New York-based Salomon Smith Barney.

Analysts suggest another reason for Tri-Continental’s woes is that value-oriented large-cap stocks had been out of favor until last year.

Additionally, tax-sensitive investors may be put off by the large unrealized gains in the fund. In early February, its net asset value was $33.58, with unrealized gains accounting for $9.34 of that, says Seligman’s president, Brian Zino.

marketing pays

“Most of the money has been going into open-end funds because that is what people are familiar with. That’s what they hear about on TV and read about,” says Edward McRedmond, an analyst with St. Louis-based brokerage A.G. Edwards & Sons Inc.

Enter Alicia D. Polak, Seligman’s new marketing guru for the fund, who will reach out to brokerages and oversee a print advertising campaign. Ms. Polak will work with Charles W. Kadlec, a managing director who has been marketing the fund part-time, and its co-manager, Charles Smith Jr.

In a world of cutthroat competition and no-load mutual fund powerhouses that grow bigger by the day, Seligman can no longer rest on its laurels.

“We are investing more money into people, systems and promotions and plan to continue to expand sales and marketing,” says Mr. Zino. “Our competitors are doing it every day.”