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Supply Chain Management of J. & W. Seligman & Co. Inc.

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Netra Shetty
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Supply Chain Management of J. & W. Seligman & Co. Inc. - January 11th, 2011

Bearer of an illustrious name and a distinguished past, J. & W. Seligman & Co. Inc. is now only one of many investment firms located in New York City albeit one of the few that remains independent in an increasingly concentrated industry. Although no longer what it once was--a potent force in the rise of the United States to world prominence--the Seligman name still stands for sound investment strategy. The firm manages nearly $20 billion in assets for its clients, mainly in equity mutual funds. The Seligman group of funds offers clients more than 60 investment options, including fixed income, growth and income, growth, and value equity portfolios.

"American Rothschilds": 1837-1937

Joseph Seligman, a German-born Jew, arrived in the United States in 1837 at the age of 17 and worked as an itinerant peddler in Pennsylvania. By 1840 two of his seven brothers had joined him and were working in the dry goods store he had opened in Lancaster, Pennsylvania. By the time J. Seligman & Brothers was founded in New York City in 1846, all seven were under his direction. While opening a store in Watertown, New York, Joseph made a useful connection--an army officer named Ulysses S. Grant. Brothers Jesse and Leopold followed the gold rush out to San Francisco, developed a thriving trade, bought gold bullion with the profits, and shipped the metal back East, making the Seligmans bankers in the process.

By 1857 the eight Seligman brothers had accumulated $500,000 in capital. With the opening of the Civil War in 1861, Joseph told his brothers to put everything in clothing, particularly uniforms, and the Seligmans became purveyors to the Union Army. However, the beleaguered government paid in bonds that Joseph felt the firm could only convert to cash in Europe. With the British and French governments discouraging such sales in the hope that the Confederate cause would be successful, the Seligmans concentrated on the German and Dutch financial markets and by the end of 1863 had placed nearly $125 million in bonds. Based on the model established earlier by the Rothschilds, the Seligmans established branches of their business--now J. & W. Seligman & Co. Inc.--in London, Paris, and Frankfurt, as well as New Orleans and San Francisco.

During the Grant administration (1869-77) Joseph Seligman was so important a financial figure that at one point he was offered the position of secretary of the treasury, which he declined. The firm became fiscal agent for the conversion of existing war bonds to new ones and acted for years as fiscal agents for the Department of State and Department of the Navy. The Seligmans invested heavily in railroads and acted as broker for lucrative transactions engineered by Jay Gould. In New York, the firm invested in the development of the city's elevated railroads.

The eight Seligman brothers fathered no less than 36 sons, but only Isaac Newton Seligman--Joseph's second son--assumed a position of leadership, becoming head of the firm on his uncle Jesse's death in 1894. (Joseph had died in 1880.) During the following years the firm backed the construction of the Panama Canal. Albert and Frederick Strauss became the first non-family managing partners of the firm in 1901. Under their direction J. & W. Seligman underwrote the securities of a variety of companies. Correspondence books for the period are rich in details on the firm's participation in syndicates for underwriting stock and bond issues in the railroad and steel and wire industries, investments in Russia and Peru, the Standard Oil Company, and shipbuilding, bridges, bicycles, mining, and a variety of other industries. In 1910 William Durant of the fledgling General Motors Corporation gave the Seligmans control of his company's board in return for underwriting $15 million worth of corporate notes.

The New Orleans and San Francisco branches of J. & W. Seligman had closed by 1897, when a family liquidation agreement separated the foreign firms from the New York branch. There were still three Seligmans among the nine J. & W. partners in 1928, but the last one resigned in 1937. J. & W. Seligman broke new ground in 1929 when it organized the Tri-Continental Corporation, a diversified closed-end investment company that remains the largest of its kind listed on the New York Stock Exchange. The following year the firm began managing its first mutual fund, Broad Street Investing Co., which later became the Seligman Common Stock Fund. Other early Seligman mutual funds included the Whitehall Fund, National Investor's, and the Seligman Growth Fund.

Wall Street Investment Manager: 1938-89

New Deal legislation in 1934 forced J. & W. Seligman to choose between its banking and underwriting activities, and it chose the latter. But it withdrew from the underwriting of securities in 1938, when Union Securities Corp., an affiliate of Tri-Continental, was established for this purpose, and henceforth confined its activities to investment management, including that of Tri-Continental. Francis Fitz Randolph, a well-connected Yale graduate, was the firm's senior partner in the ensuing years. Oklahoma-born Fred E. Brown was named a general partner in 1955 and managing partner ten years later. Reviewing Seligman's performance in Forbes in 1983, when it was managing six mutual funds with about $4.6 billion in assets, Barbara Rudolph wrote, "The firm was late into money market funds, slow to bring out new mutual funds, cautious in investment policy and little known to the public."

But, as Rudolph noted, Seligman was in the process of change. The firm, long owned by its employees, was incorporated, its antiquated fee structure was revised to raise more capital and offer money managers competitive compensation, and it introduced its first major advertising campaign ever with the headline, "J. & W. Who?" Seligman benefited from the bull market of the 1980s, ending the decade with about $6.7 billion in total assets under management. In 1989 the 43 employees--past and present--who had invested $3.3 million to incorporate the firm were rewarded with $52.6 million in cash and notes from a leveraged buyout group of Seligman directors headed by William C. Morris and financed by insurance company lenders.

Struggling to Survive: 1990-2002

Morris, who succeeded Brown as chairman and chief executive officer of Seligman, invested in marketing the firm and added international equities to its roster of stock mutual funds. Clients were offered the option of paying their mutual fund load fees over time, instead of all at once. The firm's assets under management increased to over $11 billion during the next three years from a combination of open-end mutual funds and pension and individual accounts. Nevertheless Seligman ranked only 128th among U.S. money managers in 1992 in terms of total assets under management. Its 30 or so funds included 19 in the stodgy field of tax-exempt municipal bonds, which Seligman first entered in 1983. The venerable firm moved to Park Avenue in 1993, leaving behind its longtime quarters on Wall Street.

Seligman decided to concentrate on institutional investors in 1995, when it sold the accounts it was managing for wealthy individuals and families to U.S. Trust Corp. The transaction paid Seligman cash for the $900 million in assets that it shed. As part of the agreement, U.S. Trust also bought Seligman's trust bank, which meant the firm would no longer be trustee for the 6,000 individual retirement accounts and 1,500 retirement plans that it was managing. Seligman continued to manage $6.5 billion in mutual funds and $3.5 billion in institutional accounts and to sell its mutual funds through wholesalers to stockbrokers, who in turn offered them to their investment clients.

Seligman's star at this time was Phil Wick, the 32-year-old manager of Seligman Communications & Information Fund, which at midyear was the biggest technology fund in the United States. This fund was the best performing one over the past 12 months and five years, having climbed 289 percent since mid-year 1974 and 860 percent for the decade, according to one count. About half the fund was invested in stocks related to the semiconductor industry, including companies such as Oracle, Compaq Computer, Hewlett-Packard, and Seagate Technology. So popular was this fund--which had only $40 million in assets when Wick assumed its management at the end of 1989--that it closed its doors to new investors in mid-1995. (After technology stocks dropped in price in the first half of 1996, the fund became available for customers of the retail brokerage Charles Schwab & Co.)

Tri-Continental, by contrast, was delivering mediocre performance by the standards of the bull market, with an annual average return of only 10.03 percent over the ten years ended in April 1997. Writing in Forbes, Thomas Easton contended, "Customers are locked in because that's the way closed-end funds work. The sponsor does not redeem shares. ... So if ... you want out, you have to auction them on the New York Stock Exchange. Given the weak results at the fund. ... They trade at an 18% discount to their net asset value." Easton maintained that Seligman was "well paid" for its "unsuccessful efforts to beat the market" and added that by the terms of a rights offering made in 1992, existing shareholders could buy a certain number of new shares at a discount. This meant, he argued, that those declining to do so would experience dilution of net asset value to their shares. Seligman, however, gained a bigger asset base ($2.7 billion in 1997) from which to draw management fees.

As a new millennium began to dawn, Seligman was seen as being in a perilous position by one consultant, who told Bond Buyer that the firm was "too large to be called a boutique, but too small to have the marketing infrastructure and resources to compete" with major mutual fund firms such as Putnam Investments Inc. "They're caught in a very, very difficult position in terms of building market share," he added. In 1997 the firm began offering mutual funds to foreign investors with the introduction of Seligman Global Horizon Funds, a Luxembourg-based investment company available exclusively to investors not citizens or residents of the United States. To better serve its clients Seligman introduced, in late 1998, a computer program that it distributed free to financial planners. Once the user entered its clients' financial data and goals, the program recommended suitable Seligman investments for both long- and short-term needs.

A few months later, Seligman sought to capitalize on Wick's success by launching Seligman New Technologies Fund, a diversified open-end fund to be co-managed by its technology-stock wizard. In 2000 the firm introduced a closed-end fund by the same name. The plan for this fund involved placing as much as 35 percent of its assets in private equity, investing directly in venture capital companies as well as in private funds investing in those companies. It was described by a Seligman officer as a cross between a specialty technology fund and a private equity fund. In addition to being difficult to dispose of, the fund required a minimum initial investment of $10,000, a 3 percent upfront sales charge, and what Patrick McGeehan of the Wall Street Journal described as an "especially steep" annual expense ratio of 3 percent, including a 2 percent management fee.

Although Wick's reputation lost some of its luster during the fall from favor of technology stocks, which lasted through 1998, Marion Schultheis, a Seligman managing director, won attention for her performance as manager of the Seligman Capital Fund. As of mid-September 2000, this growth fund was in the top 3 percent of all 8,040 equity funds for the year. Schultheis, who also was head of the growth investment team at Seligman, was said to rely on her staff for involved mathematical analysis of a company's stock while employing intuition and a vision of the future as well as studying both the underlying fundamentals of a firm and industry and economic trends.

The bear market of the early years of the new century wrought havoc with J. & W. Seligman. The firm's Communication & Information Fund retained only about half of the $6.5 billion in its coffers in 1999, and Wick, who acknowledged to Ian McDonald of the Wall Street Journal that the 2000-02 free-fall of technology stocks had been "incredibly depressing," said he was now gravitating to companies engaged in medical technology. By the fall of 2003 Seligman was engaged in the third round of layoffs since 2000, its assets having dropped from $40 billion to only $17 billion. Institutional Investor reported that the firm was nearly sold to New York Life Insurance Co. during the year, but that an agreement broke down over Morris's insistence that Seligman's partners retain a controlling interest. The firm was said to be worth as much as $200 million in any acquisition.

Principal Subsidiaries: Seligman Capital Fund, Inc.; Seligman Common Stock Fund, Inc.; Seligman Data Corp.; Seligman Frontier Fund, Inc.; Seligman Growth Fund, Inc.; Seligman Henderson Global Fund Series, Inc.; Seligman Income Fund, Inc.; Seligman Municipal Fund Series, Inc.; Seligman New Technologies Fund, Inc.; Seligman Portfolios, Inc.; Seligman Time Horizon/Harvest Series, Inc.; Seligman Value Fund Series, Inc.; Tri-Continental Corp.

Principal Competitors: INVESCO Capital Management Inc.; Janus Capital Group Inc.; John Nuveen Co.; Putnam Investments Inc.
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