January 23, 1984
Dear Fellow Shareholders:
My name is Martin J. Whitman and I am President of M.J. Whitman & Co., Inc., a member firm of the National Association of Securities Dealers, Inc. which beneficially owns 44,200 shares of the Common Stock of Equity Strategies Fund, Inc. (the “Corporation”). I have also recommended the purchase of the Corporation’s stock to clients of my firm. Messrs. Zohar Ben-Dov and Eugene M. Isenberg are beneficial owners of 69,650 and 66,050 shares of the Corporation’s stock, respectively. We have formed a Committee and own in the aggregate more than 25% of the Corporation’s common stock. Pursuant to the Corporation’s By-Laws, Section 1.02, a Special Meeting may be called on written request of shareholders entitled to cast at least 25% of all the votes entitled to be cast at a meeting. We have exercised this right and have made a demand for a Special Meeting for the purposes of removing the present directors of the Corporation, and electing a new Board of Directors.
If a majority of the shareholders in interest of the Corporation, votes FOR the removal of the present Board of Directors by attending the meeting or by proxy by marking the appropriate space provided on the enclosed Proxy Card and by signing, dating and promptly returning the Proxy Card in the enclosed envelope then the present directors will be removed from office.
If a majority of the shareholders in interest of the Corporation present at the meeting and entitled to vote either in person OR by proxy, votes FOR the elections of the new Board of six directors named in the annexed Proxy Statement, by attending the meeting or by proxy by marking the appropriate space on the enclosed Proxy Card and by signing, dating and promptly returning the enclosed Proxy Card in the enclosed envelope, then such new Board shall be elected provided only the present Board has been removed.
If you do not wish to replace the Board of Directors then you should vote against both proposals, or alternatively, not vote at all. In the event that either or both of the above proposals are not approved by the requisite vote, then the present Board will remain in office.
Your prompt return of the enclosed Proxy Card may spare the necessity and expense of further solicitation in order to insure a quorum at the Special Meeting. I urge you to attend the Special Meeting, at which time you may vote in person, even if you previously mailed a Proxy Card.
Martin J. Whitman, President
M.J. Whitman & Co. Inc.
Probable Change in Fundamental Investment Policy of the Corporation
If the new Board of Directors is elected, it is the present intention of each of the nominees to seek, at the Annual Meeting scheduled to be held on April 11, 1984, shareholder approval for a change in the fundamental investment policy of the Corporation.
The Corporation was organized on August 14, 1981. The present investment policy of the Corporation is to attain as high a level of return as possible, focusing primarily on purchasing equity securities, writing covered listed call options, purchasing listed call options, purchasing listed put options, and purchasing money market instruments and other short-term debt securities. At present, the Corporation is managed by Security Pacific Investment Managers, Inc. (“Adviser”), which provides investment advice and investment supervisory services pursuant to a Management and Investment Advisory Agreement (“Investment Advisory Agreement”). The Investment Advisory Agreement is terminable on sixty days’ written notice by any party thereto.
The nominees, if elected, presently intend to propose at the next Annual Meeting of the Corporation, the adoption of a new fundamental investment policy. The proposed new investment policy will be based essentially on a buy-and-hold strategy emphasizing long-term investment, in which the portfolio will consist largely of debt and equity securities which have special, non-general market characteristics as follows:
It is anticipated that, if the new investment policy is adopted, a substantial portion of the Corporation’s portfolio may be invested in securities having relatively inactive markets. It is also likely that at any time that new purchases are being made, such purchases will be made in the securities of companies in the industries which are depressed. For example, if substantial new investments were to be made at present, such investments would be concentrated in the equity securities of companies in the energy, real estate and financial industries, as well as in the debt securities of certain issuers attempting to reorganize under the Federal Bankruptcy Code. It is the intention of the nominees, if elected, to seek investments in the equity securities of companies where debt service consumes a small part of such companies’ cash flow. Investments may also be made in companies which could benefit from reorganization under the Bankruptcy Code, which would result in a reduction in debt service requirements. The Corporation will invest, on a long-term basis, in the securities of an issuer when it believes that either its debt securities will provide an above-average return, or when the market prices of its equity securities reflect, in management’s estimation, a substantial discount from the net asset value of the issuer. Net asset value represents the fair market value of assets less the fair market value of liabilities. Net asset value is not necessarily the same as book value because, for the most part, book value is derived from historic cost, not estimates of market value. Of necessity, this investment approach means de-emphasizing consideration of near-term outlooks and current conditions in securities markets.
Based upon the most recently issued quarterly report for the Corporation dated September 30, 1983, the total percentage of common equities and options in the Corporation’s portfolio was 90.7%. It is anticipated that in the event that the proposed investment policy change is effectuated, none of the Corporation’s assets will be invested in options. At present, the change in proportion of investment in equity securities to debt securities cannot be estimated, as all investments resulting from the proposed change in investment policy will be based upon their individual characteristics in relation to the general and non-general considerations discussed above.
Research efforts in connection with the proposed new investment policy will emphasize analysis of documents, especially stockholder mailings and Securities and Exchange Commission filings by issuers. In the case of equity issues, four criteria in selecting investments would generally be stressed:
- Strong financial position.
- Responsible management and control groups, especially in terms of their apparent recognition of the rights of outside shareholders.
- Availability of financial and related information.
- Availability at a market price which management believes is below its estimate of net asset value.
In contrast with equity investment, in investing in debt securities, the proposed new investment policy, if adopted, would result in concentration in debt securities which management believes provide either above average current yields or yields to maturity, or the opportunity for the realization of capital gain because the debtor may be reorganized, restructured or liquidated. In this connection, management is likely to analyze issuers which either sought relief under the bankruptcy statutes or are candidates for such relief, in an effort to select debt securities which will benefit from changes arising out of the reorganization. Such changes could include reductions in debt service for the issues, which may result in the creditors’ receipt of equity securities in exchange for part or all of their debt, and/or in the deferral or reduction in interest payments, and/or the extension of the maturity of the debt.
Accordingly, it is possible that if the proposed new investment policy is adopted, a considerable portion of the Corporation’s portfolio would be invested in the securities of issuers which have sought relief under the Federal Bankruptcy Code, or companies which may seek such relief. Such investments carry special and substantial risks. In the case of any particular issue, it is very difficult to estimate prospects for the issuer emerging from bankruptcy, the period of time that may be involved and how much the particular issue will be worth either as a unimpaired claim under the Federal Bankruptcy Code, as a participant in a reorganization or as a participant in a liquidation.
It is also the intention of the new Board of Directors, if elected, to seek shareholder approval for changing the Corporation from a diversified management investment company to a non-diversified management investment company, pursuant to Section 13(a) of the Investment Company Act of 1940, in order to permit the Corporation to have more portfolio concentration, and less portfolio diversification than is now permitted.
The nominees, if elected, will formulate specific implementation procedures only upon shareholder approval of the new fundamental investment policy. The officers of the Corporation will not begin utilizing the new policy until the Board has reviewed and approved definitive procedures. Any specific plans developed will be intended to comply with applicable regulatory requirements. No assurance can be given that the proposed change in investment objectives, if implemented, will result in the appreciation of the Corporation’s assets. If the new directors are elected and the shareholders of the Corporation subsequently disapprove of the proposed change in investment policy, the new directors will continue the present investment policy of the Corporation.