UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

 

Investment Company Act file number 811-5976

 

Seligman Select Municipal Fund, Inc.

(Exact name of Registrant as specified in charter)

 

100 Park Avenue

New York, New York 10017

(Address of principal executive offices) (Zip code)

 

Lawrence P. Vogel

100 Park Avenue

New York, New York 10017

(Name and address of agent for service)

 

Registrant’s telephone number, including area code:

(212) 850-1864

 

 

Date of fiscal year end:

12/31

 

Date of reporting period:

12/31/07

 

FORM N-CSR

 

ITEM 1.

REPORTS TO STOCKHOLDERS.

 


Experience

Seligman has been in business for more than 140 years, at times playing a central role in the financial development of the country and its markets. Over that time, the firm has managed clients’ wealth through dramatic market changes and has remained a consistent, reliable presence on Wall Street. Today, Seligman is drawing on its long history and long-term perspective as we focus on the future and on developing investment solutions that help clients arrive at their goals.

Insight

Asset management is driven by insight—into the direction of the economy, how companies will perform, how markets will behave, and how investors will respond. Portfolio managers at the firm have been in the investment business, on average, for more than 20 years. Over that time, they have refined their ability to assess a company’s prospects, management, and products, while also weighing the impact of economic and market cycles, new trends, and developing technologies.

Solutions

Seligman’s commitment to the development of innovative investment products—including the nation’s first growth mutual fund, pioneering single-state municipal funds, and one of the country’s premier technology funds—defines our past and informs our future. Our ongoing research into the nature of investment risk—begun in the early 1990s—has resulted in the Seligman Time Horizon Matrix® asset allocation strategy that redefines the relationship between risk and reward over time. The strategy offers investors a variety of investment solutions for goals ranging from college savings to retirement planning. Whether you select Seligman for one investment product, or as a comprehensive asset manager, we believe we can help you reach your goals.

Table of Contents

To The Stockholders
                 1    
Interview With Your Portfolio Managers
                 2    
Performance and Portfolio Overview
                 6    
Portfolio of Investments
                 8    
Statement of Assets and Liabilities
                 12    
Statement of Operations
                 13    
Statements of Changes in Net Assets
                 14    
Statement of Cash Flows
                 15    
Notes to Financial Statements
                 16    
Financial Highlights
                 21    
Report of Independent Registered Public Accounting Firm
                 23    
Matters Relating to the Directors’ Consideration of the Continuance of the Management Agreement
                 24    
Dividend Investment Plan
                 27    
Directors and Officers
                 29    
Additional Fund Information
                 33    
 

    
To The Stockholders

The annual report for Seligman Select Municipal Fund, Inc. follows this letter. The report contains a discussion with the Fund’s Portfolio Managers, as well as the Fund’s investment results, portfolio of investments, and financial statements.

For the one year ended December 31, 2007, Seligman Select Municipal Fund delivered a total return of 1.5% based on market price and 2.9% based on net asset value. The Fund’s annual distribution rate, based on the current monthly dividend and market price at December 31, 2007, was 4.4%. This is equivalent to a taxable yield of 6.6%, based on the maximum income tax rate of 35% and the Fund’s current estimate of the percentage of the dividends that may be taxable. Preferred Stockholders of the Fund were paid dividends in 2007 at annual rates ranging from 3.6% to 4.9%.

Thank you for your continued support of Seligman Select Municipal Fund. We look forward to serving your investment needs for many years to come.

By order of the Board of Directors,


William C. Morris
Chairman
           
 

Brian T. Zino
President
 

February 27, 2008

 
Manager
J. & W. Seligman & Co.
Incorporated
100 Park Avenue
New York, NY 10017

General Counsel
Sullivan & Cromwell, LLP

Independent Registered
Public Accounting Firm
Deloitte & Touche LLP
           
Stockholder Service Agent
Seligman Data Corp.
100 Park Avenue
New York, NY 10017

Mail inquiries to:
P.O. Box 9759
Providence, RI 02940-9759
   
Important Telephone Numbers
(800) 874-1092 Stockholder Services
(800) 445-1777 Retirement Plan Services
(212) 682-7600 Outside the United States
(800) 622-4597 24-Hour Automated
                           Telephone Access Service
 

1


Interview With Your Portfolio Managers
Thomas G. Moles and Eileen A. Comerford

Q.  

What market conditions and economic factors materially impacted Seligman Select Municipal Fund, Inc.’s investment results during the year?


A.  

One of the most significant developments in the municipal marketplace in recent years has been the increased participation of non-traditional investors, which includes hedge funds, arbitrage accounts, derivative product originators, and even foreign buyers. While traditional investors — individuals, mutual funds, and insurance companies — continue to comprise the largest segment of municipal bond holders, non-traditional investors have become a significant presence in the municipal bond market. Many non-traditional buyers have been attracted to the municipal market due to the positive yield spread between short-term and long-term municipal bonds. These investors seek to profit by buying long-term municipal bonds and financing those purchases at short-term yields. The growing use of this strategy has had a major impact on the slope of the municipal bond yield curve, yield levels, relative value of municipal bonds, and credit quality spreads.


   

Over the past several years, strong demand for long-term municipal bonds, concurrent with the creation of short-term structured securities, contributed to a steady narrowing of the yield spread between the long-end and short-end of the municipal yield curve. By February 2007, the difference between 30-year and one-year municipal bond yields fell to its lowest level on record.


   

Strong demand for longer-term municipal bonds also caused the yield spread between municipal bonds and US Treasury bonds to widen, reducing the relative value, or yield advantage, of municipal bonds. While after-tax municipal yields remained attractive for investors in higher tax brackets, the benefit was at a ten-year low for most of the first half of 2007.


   

During the first quarter of 2007, long-term municipal yields, as measured by the Bond Buyer 20-Bond General Obligation Index, declined to their lowest level in 40 years. As a result of the prevailing low yield environment, investors increasingly began to seek out lower quality bonds given their relatively higher yields. Concurrent with strong demand for lesser quality bonds, positive credit trends among state and municipal issuers led to a reduction in risk premiums. As a consequence, the yield spread between high quality bonds and lower quality bonds, including “junk” bonds, narrowed substantially. In the first quarter of 2007, the yield spread between AAA-rated and BBB-rated general obligation bonds compressed to less than one-quarter of a percentage point. The re-pricing of risk that occurred during the second half of 2007 caused the AAA/BBB yield spread to widen to more than three-quarters of a percentage point.


   

During the second half of 2007, the major credit rating agencies announced extensive rating downgrades of sub-prime mortgage securities, igniting a crisis in the credit markets and shaking investor confidence. The Federal Reserve Board intervened in


2


Interview With Your Portfolio Managers
Thomas G. Moles and Eileen A. Comerford

   

an attempt to restore stability, but turmoil in the credit markets continued, leading to massive bank and brokerage write-downs. While the credit markets struggled, the stock market continued to rally. However, as the magnitude and far reaching implications of the credit crisis became more apparent and, as economic reports revealed a marked slowdown in economic activity, the stock market began to falter, declining sharply into the new year.


   

The municipal market became enmeshed in the credit crisis when it was revealed that most of the so-called “monoline” municipal bond insurers had significant exposure to securities tied to the sub-prime housing market. The news prompted speculation that losses in this sector of the insurers’ business could jeopardize the firms’ AAA ratings. As the prospects for these municipal insurers became bleaker, the municipal marketplace ceased to function normally. Demand for bonds backed by the weakened insurers fell sharply. Further, price levels for these bonds began to reflect the underlying rating of the issuer rather than the rating of the monoline insurers.


   

During the fourth quarter of 2007, negative rating actions on the monoline insurers appeared increasingly likely, and security evaluations began to adjust in anticipation of the rating downgrades. Subsequent to year-end, the three major rating agencies announced rating downgrades of the monoline insurers: Standard & Poor’s and Fitch Ratings lowered FGIC to AA from AAA, while Moody’s lowered FGIC to A3. Fitch also downgraded Ambac to AA from AAA. The impact of insurer rating downgrades on the Fund’s net asset value during the past year was muted. The Fund’s portfolio of strong underlying credits has also helped to mitigate the impact of the insurer downgrades. Almost all of the Fund’s holdings have published underlying ratings. All underlying ratings are in the four highest rating categories, commonly referred to as “investment grade,” and better than 90% of underlying ratings are A and higher.


   

Many states continued to report positive nominal revenue growth, compared with 2006, although the pace of growth has declined. Personal income tax revenue has shown moderate improvement, while corporate income tax and sales tax revenue have slowed considerably. State and local officials have become increasingly concerned about future tax revenue, given the deterioration in the housing market, elevated energy costs, and deteriorating job market. In addition to the challenges of a weakening economy, the states face significant expenditure pressures from increasing health care costs, Medicaid, unfunded pensions, and Other Post Employment Benefits (OPEB).


3


Interview With Your Portfolio Managers
Thomas G. Moles and Eileen A. Comerford

Q.  

What investment strategies and techniques materially affected the Fund’s investment results during the year?


A.  

Our investment strategy over the past 12 months has been consistent with our expectations for a reversal of the trends that characterized the first half of 2007. As a result of the credit crisis and weakening economy during the second half, long-term yields rose modestly, the yield curve steepened, and credit spreads widened. Further, we anticipated that the yield spread between municipal and Treasury bonds would narrow to reflect more typical levels, thereby improving the relative value of municipal bonds.


   

The Fund is comprised entirely of premium coupon bonds, most of which were purchased during periods of higher interest rates. Over the past year, new purchases were limited to coupons in the 5.00% to 5.25% range, resulting in an average weighted coupon of slightly more than 5.25%. Over the past 12 months, premium coupon bonds outperformed current, discount, and zero coupon bonds.


   

During the year, pre-refunded bonds enjoyed strong performance, relative to other sectors of the municipal market, ending the year as the best performing sector of the Lehman Brothers Municipal Bond Index. In past years, Fund holdings that were advance refunded often experienced substantial price appreciation. Though refunding activity in the Fund slowed considerably in 2007, compared with recent years, our decision to maintain the Fund’s overweight position in pre-refunded bonds contributed to positive investment results. More than 90% of the Fund’s net assets rated AAA at year-end. Our emphasis on high-quality bonds benefited the Fund over the past year as widening credit spreads during the second half of 2007 caused the high-yield sector to underperform by a wide margin. For the year ended December 31, 2007, the Lehman Brothers Municipal Bond Index and the Lehman Brothers Insured Municipal Bond Index outperformed the Lehman Brothers Non-Investment Grade Municipal Bond Index.


   

The Fund has exposure to longer maturity bonds (although weightings have been substantially reduced over the past several years). Currently, the Fund has an average weighted maturity of just over 15 years. Municipal bonds maturing in 22 or more years were the worst performing maturity sector of the Lehman Brothers Municipal Bond Index during 2007. The short and intermediate sector of the yield curve generated the highest returns. Our decision to overweight cash and maintain positions within the ten-year maturity range added to our relative investment results.


   

The Fund’s monthly common stock dividend distributions were negatively impacted by higher preferred stock dividend rates in 2007. The Fund, however, did benefit from a reduction in bond call activity, which allowed the Fund to retain its significant percentage of older, higher-yielding bonds. (Following the end of the year, the preferred stock dividend rates dropped significantly, which will add to net income available for distribution to Common Stockholders.)


4


Interview With Your Portfolio Managers
Thomas G. Moles and Eileen A. Comerford

Consistent with our conservative management style, the Fund has no exposure to tobacco bonds, airline debt, or the automotive sector. We also avoid sectors of the market that have historically been more prone to credit deterioration, such as continuing care facilities, stadiums, and land development deals. The ongoing credit market crisis reinforces the importance of in-depth credit analysis. Municipal research has always been critical to the successful management of all of our municipal bond funds. We have always viewed municipal bond insurance as an enhancement; therefore, insured bonds will not be purchased unless the underlying credits meet our strict criteria. Accordingly, we perform comprehensive credit analysis on all municipal bonds prior to purchase and continue to monitor credits as long as they remain in our municipal bond portfolios.

The views and opinions expressed are those of the Portfolio Manager(s), are provided for general information only, and do not constitute specific tax, legal, or investment advice to, or recommendations for, any person. There can be no guarantee as to the accuracy of market forecasts. Opinions, estimates, and forecasts may be changed without notice.  

    A Team Approach
   
Seligman Select Municipal Fund, Inc. is managed by the Seligman Municipal Team, headed by Thomas G. Moles. Mr. Moles and Co-Portfolio Manager Eileen A. Comerford are assisted in the management of the Fund by a group of seasoned professionals who are responsible for research and trading consistent with the Fund’s investment objective. Team members include Senior Credit Analyst Audrey Kuchtyak, Steven Hallac, and Debra McGuinness.