For an investment company, it's a long way from Wall Street to Charles Street.
But the Adams Express Co. and its sister firm, Petroleum and Resources Corp., say they have found happiness and a smaller tax bill since their move from Manhattan to Baltimore in 1976.
"We were driven from New York primarily for tax reasons," says W. D. MacCallan, the chairman and chief executive officer of the two companies, which together form the fourth largest closed-end investment firm in the nation.
"At that time, New York State did not see fit to treat investment companies as favorably as the federal tax code did," he said. "Albany has since seen the error of its ways, but we are here to stay and have no intentions of going back."
But why Baltimore? "When we knew that we were going to have to move we sat down and said 'Where can go to?' " he said. "We decided that since a vast majority of corporate headquarters are still located in the greater New York area; we didn't want to get too far from the city."
"We looked as far north as Maine and as far south as Virginia. In terms of alternatives, the Maryland climate was the best. The tax situation in Maryland was definitely the best; followed closely by Delaware," said MacCallen. "But we thought Wilmington wasn't really a very attractive place to be, so we chose Baltimore."
He says that reduced office rentals, a smaller tax bill and overall lower costs of doing business helped the companies recoup the cost of their move in just 26 months.
As publicly traded investment companies, the twin firms are similar to mutual funds in that both are owned by investors whose capital is invested by professional managers in a diversified portfolio of stocks, bonds and other securities. Both give investors the chance to widen investment opportunities and reduce risk by diversifying their holdings.
The differences between a closed-end investment company and a mutual fund are significant from the company's point of view, however. Mutual funds are "open-ended" and can therefore sell an unlimited number of shares. When an investor wants to buy shares in a mutual fund the company simply issues new stocks.
Publicly traded closed-end funds like Adams and Petroleum generally have a fixed number of shares of stock outstanding, just like industrial corporations. An investor who decides to buy shares must purchase them from another investor who already owns shares, usually buying the stock through a broker.
The advantage of closed-end funds is that they are not subject to federal income tax on net income distributed to stockholders.
Another important difference is that the price of mutual fund shares are tied directly to net value of the stocks and other assets owned by the fund. Prices of the stocks of closed-end investment funds fluctuate with the stock market, influenced by other market factors in addition to the fund's asset value per share.
Petroleum and Resources maintains a portfolio made up exclusively of energy stocks. The $230 million investment fund contains multimillion-dollar holdings in most of the top 10 oil companies and somewhat lesser investments in major oil exploration companies plus broad holdings in energy distribution and energy services firms. The company also has minor holdings in mining and paper and forest products.
The Adams Express portfolio is much more diversified. "Our present path is to try and stick pretty close to the consumer dollar," says MacCallan. "We've got quite a lot of money in things like Procter and Gamble and Coke."
Adams' $332 million portfolio contains holdings in data processing (including a $17 million stake in IBM), electric utilities, electronics, health care, machinery, insurance, retailing, energy (including $25 million in Petroleum and Resources), paper and forest products and telecommunications.
By their nature closed-end companies are caught in a Catch-22 when it comes to growth and expansion. By limiting their number of shares, the companies are able to qualify as "regulated investment companies" under the Investment Company Act of 1940 and are therefore not subject to federal income tax on net income distributed to stockholders.
The problem is that limiting the number of shares also limits the companies' avenues of growth. Mutual funds like Baltimore's T. Rowe Price can issue new stock as fast as they can sell it. Closed-end funds can't do that; their chief avenue for expansion is for investors to take their capital gains in stocks rather than cash.
MacCallan says that about half of the company's stockholders reinvest their capital gains. Last February, Adams Express distributed capital gains of 81 cents a share to stockholders and paid a year-end investment income dividend of 56 cents. About 52 percent of the payout was taken in stock, a total of 851,000 new shares.
Petroleum & Resources paid a $1.87 a share capital gain distribution and a 92 cent investment income dividend in February; 47 percent of that was taken in the form of 357,000 new shares.
Adams' investment income for the six months ended June 30 amounted to $8.4 million (44 cents a share) down from $9.2 million (50 cents) in the same period a year earlier.
Assets of the Adams company increased to $19.59 a share from $14.21 a share during the year ended June 30, while Petroleum's asset value climbed to $31.40 a share from $25.42.
Petroleum & Resources earned $6.6 million (65 cents) in the first half compared with $5.7 million (80 cents) a year earlier.
MacCallan said there is another avenue of growth for the company--managing pension funds. "We have a young lady who is presently preparing to go out and get us some business from the pension funds," he says. "I think we are going to be very successful in this venture and we are presently in the process of getting Securities and Exchange Commission approval."
He says that an influx of capital in the $1 billion range would present no logistical problem for the company. "We're perfectly capable of managing a billion dollars of outside money in addition to the $600 million we presently have without significant expansion of our present staff of 27.
"The idea is that we can offer a side account; an Adams-like account although it would naturally not be an exact clone. You can't buy Schlumberger for $6 a share anymore," he says with a laugh. "We already have the analytical capacity in place and it would be nice to have the extra fees."
MacCallan describes the connection between the two companies as a "very close affiliation." While separate boards of directors are maintained, the management and staff of the two companies are the same.
MacCallan is chairman and chief executive officer of both and Robert J. M. Wilson is president.
"It's just like an investment counselor having several clients, only in this case there are only two," says MacCallan. "We practice what is known as 'internalized management,' which was popular with investment companies in the early days. More recently, various of them have externalized management--brought in outside financial planners--for various reasons."
The two companies also share some historical ties. Adams was formed in New York in 1854 as an express company, a firm that delivered small parcels and communications.
The company at one time was bigger than American Express and Wells Fargo, but all three companies ran into trouble in 1913 when the U.S. Post Office was authorized to carry small packages. Five years later, when the government took control of railroads during World War I, the express companies were forced to merge their operations into the American Railway Express Co. in exchange for stock.
Adams continued to own shares in the package delivery firm when Railway Express returned to private control after the war and in 1929 became an investment company.
Petroleum and Resources was incorporated in 1929 as Petroleum Corp. of America, but fell on hard times in the 1930s when Sinclair Oil Co., one of its founding investors, began drawing out its investment.
Adams, which had originally owned a small stake in Petroleum, refused to sell its stock. As other stockholders sold out, Adams' stake in the company grew and it began purchasing additional shares. Adams now owns 13 percent of Petroleum and Resources and is its largest single shareholder.
The two companies began sharing offices and executives during the 1940's and have operated as twins ever since.