Dear Fellow Shareholders:
At October 31, 1990, the unaudited net asset value attributable to the 2,435,394 shares of Common Stock outstand was $25.44 per share, compared with unaudited net asset values of $30.82 per share at July 31, 1990 and $20.37 per share at October 31, 1989. At November 30, 1990, unaudited net asset value was $25.48 per share.
The fluctuations in net asset value are attributable, by and large, to swings in the market prices of Nabors Industries Common Stock, which thus far in calendar 1990 has ranged from a high of 7 ¼ to a low of 3 ¼; at November 30, Nabors Common closed at 5 ¼. While the Nabors common stock is likely to continue to fluctuate at least over the near term, the Nabors business seems to be making steady, admirable progress. The Company remains extremely well financed; I would not be surprised were the tax sheltered earnings from operations to exceed $0.60 per share in the fiscal year to end of September 30, 1991. Based on the Funds carrying value (a ½ point discount from market), Nabors Common accounted for 86% of total Fund assets at October 31. Equity Strategies owns 5.15 share of Nabors Common Stock for each one share of Equity Strategies Common Stock outstanding.
There were a few significant changes in the portfolio during the October quarter. The Fund established new positions in the Home Insurance Company Preferred Stock; Digital Communication Associates Common Stocks; and First Constitutional Financial Corp. Common Stocks. The Home Insurance Preferred equity affords a current return of about 23% based on the Fund’s cost; we expect this issue, which is senior to all holdings company debt, including bank loans, to continue to be a performing instrument. Digital Communications Associates is an extremely well-financed computer peripheral manufacturer whose common stock is selling near historic lows at a material discount from net asset value. First Constitution is a New Haven Connecticut saving bank holding company. First Constitution has $1.8 billion portfolio consisting mostly of Connecticut real estate mortgages about $1 billion on which are secured by single family residences. The Company remains in capital compliance for all regulatory purposes despite severe write-offs; however, non-performing loans continue to increase; our purchase price of 1 ¼ compares with a stated net asset value at September 30, 1990 of $13.16 per share. Although real estate conditions continue to decline in Connecticut, First Constitution seems much better capitalized that almost all if its competitors. I think First Constitution is very likely to be a survivor.
At October 31, the Fund had liabilities for deferred taxes on unrealized appreciation of about $12.7 million, or approximately $5.25 per Equity Strategies share. This tax liability will never actually become payable unless profits are realized upon the sale of securities, especially Nabors Common Stock. Given this “phantom liability”, your Board concluded in 1986 that is would be prejudicial to existing shareholders if Equity Strategies instituted a continuous offering of Equity Strategies Common shares to that the number of Common shares outstanding would increase. In that case, new shareholders buying common stocks at net asset value would receive a bargain versus existing shareholders since the price new shareholders would pay, would reflect a 100% deduction for these deferred tax liabilities which might never, in fact, become payable. To overcome this prejudice against existing stockholder of Equity Strategies Fund, and still permit new investments into a mutual fund, a new Fund, Third Avenue Fund, has commenced operations. Third Avenue has the same management and Board of Directors of Equity Strategies. Third Avenue Fund, Inc. has a continuous offering of its common shares with a minimum subscription amount of $1,000.