A Conservative, Income-Focused Fund

Adams Express is a closed-end fund with a curious history. In 1852, it began as a New York-based delivery service, competing with the likes of American Express and Wells Fargo. During the Civil War, the company distributed paychecks to both Confederate and Union soldiers. Later, it delivered goods to California miners during the Gold Rush. Just as American Express and Wells Fargo eventually morphed into financial enterprises, Adams Express converted into a closed-end fund shortly before the stock-market crash of 1929. It remains one of only a handful of funds that survived the Great Depression.

As a closed-end fund, Adams Express trades on an exchange just like a stock. The shares can be worth more or less than the assets the fund holds, depending on investor demand. With $1.3 billion in assets, Adams Express (symbol ADX) closed Thursday at $13.22 a share, a 14.4% discount to net asset value (NAV). For investors seeking a conservatively run, low-cost income-focused fund with a decent record, Adams Express is worth consideration.

Manager Doug Ober uses a bottom-up stock picking process, which means he doesn't invest based on economic themes or factors, or by jumping into attractive sectors. Instead, Ober chooses his stocks one by one, based on in-person company visits and recommendations from a handful of in-house analysts. He favors dividend-yielding, blue-chip stocks with good long-term growth prospects. "What a company will do in the next few quarters isn't as important to us as what it will do in the next ten years," says Ober, who has been managing the fund since 1991. Portfolio turnover is 13%, meaning he typically holds a stock seven to eight years.

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Most of the 80 holdings in Adams Express's portfolio are household names, including General Electric, Microsoft, Pfizer and Wachovia. "We want solid, recognizable companies that are going to make investors feel comfortable," says Ober. That's important, because two-thirds of shareholders are age 65 and older. Though large companies are the fund's mainstay, Ober has the flexibility to dabble in small and midsize companies. One of the portfolio's newest additions is Harley-Davidson, a company with a market capitalization of $15 billion (about half the size of the fund's average holding.) "With gasoline at the price it is these days, people are looking at things smaller than an SUV," Ober says. He also has also been increasing the fund's international exposure by investing more in U.S.-headquartered firms, such as PepsiCo, that conduct a significant amount of business overseas.

In an effort to boost income, Adams Express sells call options on stocks it owns and put options on stocks that Ober would be happy to own at lower prices. (Options are contracts that allow the holder to sell or buy a certain quantity of a stock at a specified price up to a specified date.) The fund yields 1.5% after expenses, which, at 0.47%, are extremely low.

Adams Express's performance over the long term has been solid, though not show-stopping. Over the past ten years through June, it returned an annualized 7.9% on NAV (the best way to measure the manager's performance). Over the same period, Standard Poor's 500-stock index returned 8.3% annualized.

Ober also runs a sector closed-end fund called Petroleum Resources. Adams Express's relationship with Petroleum Resources Corporation goes back to the 1950s, when the two firms began sharing office space and accounting expenses. Eventually they came to share the same board of directors and senior management -- including Ober, who became chairman and CEO of both closed-end funds in 1991. In fact, Adams Express's largest holding is Petroleum Resources Corporation, at about 5% of the portfolio.

Petroleum Resources holds 55 stocks, led by such energy giants as Exxon Mobil, BP, Chevron, ConocoPhillips and Schlumberger. The $762-million fund closed Thursday at $33.97 a share, representing an 11.5% discount to NAV. Over the past decade through June, the fund (PEO) returned an annualized 12.0% on NAV, slightly less than the Dow Jones Energy Index's annualized 12.4% return. The fund yields 1.6% and annual expenses are 0.59%.