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The Really Long View From Doug Ober of Adams Express—Weekend Interview

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When the CEO of Adams Express talks about investing, clients and the markets, he takes the long view. While other money managers and leaders of investment firms might voice a similar commitment to the “long term,” Doug Ober’s words are qualitatively different. That’s because Adams has been in business since the mid-1850s and has been operated as a closed-end fund since 1929.

“We’ve paid dividends every year since 1935 and capital gains every year since 1952,” Ober said in a Thursday interview in New York with AdvisorOne. While he’s certainly fluent in current market and economic trends (see below), Ober is just as comfortable discussing the history of the railroads and the express business—dropping the name of personages like “Mr. Wells and Mr. Fargo” and their not-always-friendly interactions with Adams and American Express in the 19th century, through all the changes that remade the railroad industry in the 20th century—along with the development of tax policy in this country and how it has affected investors and money manager behavior over the last, say, six decades.

Understandably he’s an advocate for the Adams Express closed-end fund (ADX) an actively managed and internally managed fund with a broad investment mandate. “It’s an income generator,” he says of ADX, “plus a core holding that you can build around.”

Why not buy an index mutual fund and do the same thing? “You can buy an index fund,” he readily admits, “and that will give you index fund returns.” Or you can buy ADX, whose performance stacks up quite favorably against that of the S&P 500 and its Lipper peer group over multiple time periods, but which also has averaged a combined 6.2% in dividend and cap gains payouts over the past six years.

Several other metrics that Adams Express can boast of would be appealing to advisors. For one thing, the firm eats its own cooking. Every employee of Adams is a shareholder in the fund, and higher-ups like the research staff are required to own a certain percentage of ADX in their portfolios. The expense ratio on ADX is 55 basis points (helped by the fact that it doesn’t have an outside advisor), its beta hovers around 0.92 or 0.93 and its annual turnover rate runs between 10% and 20%.

There’s a little over $1 billion in the fund, held primarily by individual investors, some two-thirds of whom are over the age of 65. “And you can buy us at a discount” to the fund’s NAV, Ober states, almost in passing.

During the extreme volatility of the market that followed S&P’s downgrade of the U.S. in early August, Ober proudly reports that not only did “our discount stay about the same,” but that “our phones were very quiet.”

If ADX shareholders had called, however, they would be likely to find Ober himself on the other end of the line. “I like to talk to shareholders about the market. Half of them are shocked to find the chairman and CEO answering their calls, but I tell them that ‘I’m just running your portfolio for you.’”

Discussing Adams Express’ outlook on the economy and the markets—and speaking a day before Ben Bernanke’s much-anticipated utterances at the economic summit meeting in Jackson Hole, Wyo., on Friday—Ober recalled that in early 2009, “we swung toward industrials and away from consumer discretionary; we felt a recovery was on its way.” That worked, he said, until April of last year, when the European sovereign debt crisis put the brakes on the recovery.

However, he remains sanguine about a continued “slow” recovery, though he says his outlook is now “more modest than even in January of this year,” citing the issues faced by European-based companies. However, he said  “we liked the durable goods orders” numbers on Aug. 24, which rose 4% in July, indicating a willingness from consumers to spend on bigger-ticket items.

That optimism “was confirmed by Emerson Electric’s report yesterday on its new orders,” Ober said, and he expects demand for industrials to remain strong as China and India continue to invest in their infrastructures.

Back home, Ober seems cautiously optimistic about the country’s long-term
budget and debt issues—“it seems Congress is willing to address these things”—but he remains concerned about bank lending. “We have some exposure to Bank of America” in ADX, he admitted, though he also noted that “we seem to be in good company with Warren,” referring to Warren Buffett, who on Aug. 25 invested $5 billion in BofA stock.

Acknowledging that “we need improvement in housing and employment,” Ober noted that many industrial companies are beginning to spend their cash, but to improve productivity, not to hire more workers.

A “great many” of the companies in ADX’s portfolio receive more than 50% of their revenue from overseas, he said, turning to the energy issue, another timely topic in the wake of the near-fall of Moammar Gadhafi’s regime in Libya and of particular interest at Adams, which has a sister company Petroleum & Resources Corp. (PEO), another closed-end equity fund that focuses on energy.

“Oil stocks are down 30%” he pointed out, even though the cost of oil has declined nowhere near that amount. While Ober said that the price of oil “could dip below $80,” he didn’t think that resolution of the civil war in Libya and its eventual return to significant oil exporting would greatly affect the price. “Oil is an eminently fungible commodity,” he deadpanned, “unless you have to ship it around Somalia, and then it’s a different matter.”

For Ober, however, “natural gas is a more interesting problem. The U.S. is producing lots of it, but American industry is only glacially adding” applications for all that production. “The number of rigs drilling [for natural gas’ is increasing but prices are falling.” The exploration and drilling companies are “producing more but not making any money.”

One development that could tip the scales in favor of natural gas would be if “T. Boone’s bill goes through.” That’s the legislation promoted by 82-year-old oilman and billionaire T. Boone Pickens and introduced in Congress last April that would provide up to $1 billion in tax incentives over five years to get truck manufacturers to build, in Ober’s words “18-wheelers that run on natural gas.”

He says he thinks passage of the bill unlikely however, partly because of the expense that would be involved on behalf of the truck manufacturers—some $60,000 per truck to retrofit from diesel to natural gas.” As a final, but not random thought, Ober asks rhetorically what the biggest exporter of coal is in the world. The answer? Indonesia, which ships its output to China.

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