Fund Facts
Did you know?
Transfers are always at NAV, meaning you never
pay a sales charge for a
transfer from another mutual fund.
The largest shareholder of the Value & Growth
Portfolio is its manager.
Every year the Advisor to the Fund donates up to
10% of the management
fee profits to various charities. If you have more
than $15,000 in the Fund,
we would like to know what charity is important to
you. For 1996,
shareholders designated the following charities
For the Love of Christi
Boy Scouts of America
Alzheimer's Association of Austin
Texas Baptist Children's Home
Children's Hospital of Austin
at Brackenridge
St. Vincent De Paul Society
Christian Center - A.G.
Austin Community Foundation
Westbank Library
Valley View Elementary
Austin Smiles
Morningstar reports that "there's a powerful
connection between a
portfolio's aggregate P/E (price-to-earnings) and its
overall risk."
According to Morningstar: High P/E portfolios
tend to correlate with
higher risk, while lower P/E portfolios tend to have
lower risk-i.e. a lower
P/E portfolio should go down less in a bad market.
Take a look at your
own Fund and the statistics we provide each
quarter. We doubt there are
many funds with a lower aggregate P/E. Will we go
down less in the next
bad market? We hope so, but, as in any investment,
there are no
guarantees.
What's the best way to plan for college expenses?
Check out our
LIFEQUESTTM College Planner. We make it
simple.
Need a prospectus and other information for a
friend?
Call 1-888-839-7424.
Have questions about your account?
Call the Transfer Agent at 1-800-628-4077.
Have question for your portfolio manager?
Call (512) 458-8165, or (800) 880-0324.
1
<PAGE>
Fellow Shareholders,
T
he Net Asset Value of the Value & Growth Portfolio
for the period ending
September 30th , 1996 was $11.13. For the quarter,
your fund was up 5.8%
compared to 3.1% for the S&P 500 Index and a
slight loss for the Russell 2000
Index of small companies. For the nine months of
1996, your fund was up
12.1% compared with the S&P 500 Index which
was up 13.5% and the Russell
2000 which was up 9.6%. Between September 30th
and today (November 20th),
we've "caught some wind" and your fund is up
24.0% year to date. After a
slow start, we expect to finish 1996 with
outstanding returns.
<TABLE>
QUARTERLY RETURN COMPARISONS
<CAPTION>
11/06/95 Dec-95 Mar-96 Jun-96 Sep-96 Nov 20-96
<S> <C> <C> <C> <C> <C>
V&G Port. (.7%) (1.6%) 7.7% 5.8% 10.6%
Russell 2000 4.3% 4.7% 4.8% (0.1%) 1.0%
S&P 500 5.0% 5.4% 4.4% 3.1% 8.6%
</TABLE>
<TABLE>
Please keep in mind that the performance
comparisons are hardly relevant, as
the time period of comparison is far too short to be
meaningful. In the
investment business, we are now about five miles
into a twenty-six mile
marathon.
Commentary
A
perceptive client recently called with a simple
question: "You look and talk
like value managers, but all the quarterly reports I
get show the companies
vigorously growing--Are you a value manager or a
growth manager?" A good
question. And not an easy one to answer.
Value or growth? We're a little of both with a
bias to value. A better
definition of the way we invest would be "margin-
of-safety" investors. By that
2
<PAGE>
we mean we spend our time trying to exploit the
differences between the real or
intrinsic value of a company and the way it's priced
in the market.
Everyday, stocks are priced on the stock
exchanges. Sometimes prices are
appropriate, other times they're not. The essence of
a "margin-of-safety"
investor is to look for those few instances when the
price of a stock is
substantially less than its intrinsic value. Our
success and the growth of your
portfolio is directly attributable to how well we
identify and arbitrage the
differences. In fact, we think that exploiting the
differences between price and
intrinsic value is the essence of any investor's return
whether he is classified as
a growth or value investor.
So how do the frequently used terms "value" and
"growth" fit into the
picture?
A fisherman embarks on a fishing trip. He has a
choice between two ponds
to fish. The Growth Pond is very attractive, easily
accessible and well known.
Many fishermen fish in the Growth Pond. To get
to the Value Pond, he must
go through underbrush and wade through a swamp.
The pond itself is not as
attractive as the Growth Pond. Few seek out the
Value Pond.
If our fisherman wants to eat well where does he
go? Unless he has unusual
talents-like billionaire investor Warren Buffett--he
should probably go to the
Value pond.
Can one find discrepancies between price and
intrinsic value in the Growth
pond? Of course, it's just likely to be more difficult
if everyone is trying to fish
in the same pond.
Do we want growth? You bet. But the course
we adhere to is buying with a
margin-of-safety.
3
<PAGE>
Value and Growth Distinctions
Here are some of the distinctions between growth
and value:
Value investors typically look for companies
with low prices to earnings,
bookvalues, cashflow and sales. To the value
investor, each of these
characteristics is a clue to a potentially good stock.
By buying cheap stocks, the
value investor is really increasing his odds of
getting stocks selling below their
intrinsic value, i.e. he is getting stocks with a
margin-of-safety.
Value investors tend to look at what is rather
than what will be. Growth
investors are intuitive while value investors are
more quantitative.
The value investor wants "hard" data-ratios,
measurements and the like,
while the growth investor tends to rely on "soft"
data-estimates, qualitative
data.
The byword of value investing is cheap. For
growth investing it's quality.
Their shortcomings
As you might expect, each method introduces
different decision mistakes.
Value investors with their emphasis on "cheap"
sometimes get what they pay
for-a cheap, lousy company going nowhere fast.
Growth investors with their
emphasis on "quality" frequently pay too much. If
the quality falls short of
expectations, prices get hammered.
However, with their focus on "cheap" the
evidence suggests that value
investors are more likely than growth investors to
buy with a margin of safety.
That's why value investing has historically produced
higher returns. We can
identify 50 to 60 studies which indicate some form
of value investing is more
likely to lead to superior returns than some form of
growth investing. We have
seen no study that shows that growth investing will
lead to higher returns.
4
<PAGE>
Generally, the premium of value over growth runs
at least 3% and, depending
how rigorous the definitions, can run in excess of
8%.
Those are big, big differences.
So, why isn't everyone doing it?
The logical question-if value is so good, why doesn't
everyone invest that
way?
Maybe, we think, because it's too difficult, too
uncomfortable. Perhaps too,
investors have embraced the falsehoods that high
growth equals high profits,
and high quality equals high profits.
You've seen and perhaps read the book, In
Search of Excellence: Lessons
from America's Best Run Companies.
The authors identify six financial measures to
rate each company:
compound asset growth; compound equity growth;
average return on sales, total
capital and equity.
Any financial analyst will tell you these
measures clearly identify excellent
companies. Where most investors err is to assume
excellent companies make
excellent investments. They don't.
Barry Bannister in a follow up study of the 62
companies cited in In Search
of Excellence found that the stock performance of
the excellent companies
underperformed the S&P 500 over the next 10
years. But what most investors
find remarkable is that the "unexcellent"
companies-the companies that
scored the worst on all measures of excellence-
significantly outperformed the
S&P 500 Index. In fact, the unexcellent companies
exceeded the returns of the
excellent companies in 8 out of 10 periods.
In short, the value phenomenon persists because
it's counterintuitive. It
requires patience in a non-patient world. It requires
an ability to accept
5
<PAGE>
apparent uncertainty in a world that craves
certainty. Value investing is
uncomfortable investing. And that is why value
investing will likely work for
another fifty years.
Is That Where My Money is Going?
Are we investing your funds in unexcellent
companies? No. It's not the
unexcellent companies that produced the return, but
the fact that their savorless
nature causes them to sell in the marketplace with a
big margin of safety. The
real source of return in unexcellent companies is the
big discrepancy between
their intrinsic value and their prices.
Abandon Growth?
If value investing is so compelling, do we abandon
growth altogether?
We don't think so. Billionaire Warren Buffett
was a value investor. Now
he is a growth investor. Says Buffett: "In our
opinion, the two approaches are
joined at the hip: Growth is always a component in
the calculation of value".
The bottom line for Buffett and any good investor is
getting much more than
you give, or getting that margin-of-safety.
Our Strategy
Successful investors make the fewest errors.
Growth is good, not bad.
Excellence is good, not bad. But it's not just what
you get, but what you give
that makes an investment. Generally, but not
always, high growth, excellent
companies sell with little to no margin-of-safety.
That's why we almost always
do our fishing in the Value pond.
Our approach to making fewer errors can be
described as testing, testing,
testing. We try not to assume, but test, and then
adhere to a highly structured,
6
<PAGE>
quantitative strategy. We want a combination of
growth, profitability, and
balance sheet that, when combined with price,
produces a high return stock.
The result is often growth stocks few have ever
heard of selling at value prices.
In Greek mythology, the story is told of the
Sirens. They sang so beautifully
that sailors who sailed near their shores were pulled
off course to shipwreck
and death.
Investing has many Siren songs. The Siren
songs of growth and excellence
are but two of many. The father of Value Investing,
Benjamin Graham, had it
right so many years ago. It's not value or growth,
but margin-of-safety and the
discipline to stay the course that makes for
investment success.
Investment Policy. We're frequently asked what the
market will do. We wish
we knew, but don't have a clue. Nor does anyone
else really. Rather than
worry about "the market", we believe we can add
the most value to our fund by
constantly searching for undervalued stocks.
Interestingly, we do not feel that
we must "reach" to find good investments. In other
words, the margin-of-
safety in the stocks we are buying look little
different than they did in 1989.
We don't know what implication that has for the
market, but it strikes us as
having favorable implications for your wealth.
Respectfully submitted,
Mark A. Coffelt, CFA
Chief Investment Officer
In any of the discussions of performance in this
report, shareholders should keep in mind that past
performance may not be indicative of future
performance.
7
<PAGE>
<CAPTION>
Hypothetical Illustration of $10,000 Invested in the S&P 500
Index and the Russell 2000 Index vs. The Value & Growth Portfolio
11/06/95 Dec-95 Mar-96 Jun-96 Sep-96 Nov 20-96
<S> <C> <C> <C> <C> <C> <C>
V&G Portfolio $9700 $9641 $9486 $10215 $10,807 $11,952
S&P 500 $10,000 $10,465 $11,023 $11,517 $11,877 $12,944
Russell 2000 $10,000 $10,430 $10,919 $11,442 $11,434 $11,472
<FN>
This chart compares a hypothetical investment of
$10,000 between the Value & Growth Portfolio and
two indices
considered representative of the market. The
maximum 3% sales charge is applied to the Fund as
are management fees
and transaction costs. Neither index has any costs
associated with it, nor is it possible to invest in the
indices as shown.
The S&P 500 Index represents primarily large
capitalization companies, while the Russell 2000
represents primarily
smaller companies. The Advisor believes the Fund
profile is currently closer to the Russell 2000 than
the S&P 500.
The performance shown represents past
performance and is not a guarantee of future results.
The Fund's share price
and investment return will vary with market
conditions, and the principal value of shares, when
redeemed, may be more
or less than original cost.
</FN>
</TABLE>
<TABLE>
Value & Growth Portfolio Returns
<CAPTION>
Total Return Annual Return
<S> <C> <C>
Inception to 9-30-96 11.40%
Inception to 11-20-96 23.18% 22.26%
<FN>
Returns assume the reinvestment of all
distributions. Including the cost of the maximum
sales charge of 3%, the total returns would have been 8.16% and
19.57%, respectively. Inception was 11-06-95.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Price/Earnings* Price/Bookvalue*
<S> <C> <C>
Value & Growth Portfolio 11.5X 2.4x
Average Growth Fund 25.8X 4.7x
Average Aggressive Growth Fund 34.1X 6.2x
Average Small Company Fund 28.2X 4.5x
<FN>
*Ratios for average funds from latest Morningstar
and may not be exactly comparable to the Value &
Growth Portfolio.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
Value & Growth Portfolio
Portfolio of Investments
<CAPTION>
For the Period Ending September 30th 1996
Short-Term Principal Issues Value ($) % net
Investments - 1.3% Amount assets
<S> <C> <C> <C> <C>
Bank of Boston - 15,854 Repurchase 15,854 1.3
Agreement
(Collateralizrd
by U.S. Treasury
Notes,
First Boston)
Total Cash & 15,854 1.3
Cash Equivalents
Common Stocks - 98.7% Shares
Aerospace/Defense 3000 United Industrial 17,250 1.4
Auto Parts 900 Borg-Warner 31,950 2.5
1300 Excel 21,613 1.7
53,563 4.2
Banks 300 Citicorp 27,188 2.2
772 Bank of 22,678 1.8
New York
1000 City National 18,125 1.4
67,991 5.4
Banks: Canadian 5000 National Bank 45,000 3.6
of Canada
1700 Hees International 20,468 1.6
65,468 5.2
Building Materials 3000 Jannock Ltd. 34,219 2.7
Cement & Aggregates 600 Medusa 18,450 1.5
Computer & Peripherals 500 Compaq* 32,063 2.5
400 Adaptec* 24,000 1.9
500 Western Digital* 20,062 1.6
900 Gateway 2000* 43,087 3.4
1,270 Stratus* 25,083 2.0
144,295 11.4
8
<PAGE>
Diversified Company 3,697 Gilbert 44,826 3.6
400 Raychem 30,000 2.4
74826 6.0
Electronics 1,700 Cubic 33,150 2.6
300 CTS Corp. 12,638 1.0
700 Augat 14,875 1.2
60,663 4.8
Financial Services 3000 Power Corp. 52,770 4.2
600 Travelers 29475 2.3
900 Countrywide
Credit 23063 1.8
400 First USA 22150 1.8
1,800 Transmedia
Network 10575 0.8
120 Dean Witter
Discover 6600 0.5
144633 11.5
Home Furnishings 1,100 La-Z-Boy 33137 2.6
Machinery:
Construction/Mfg. 2500 Global Industrial
Technology * 45937 3.6
Manufactured
Housing/RV 3160 Coachmen 81370 6.4
1500 Thor 35812 2.8
117182 9.3
Medical Supplies 1200 Bio-Rad* 34500 2.7
Oilfield
Services/Equipment 2,000 Daniel 25500 2.0
Precision Instruments 600 Tektronix 24525 1.9
Recreation 1200 Quiksilver* 30000 2.4
9
<PAGE>
Restaurant 350 Sbarro 9056 0.7
Retail: Specialty 2000 Dress Barn* 21750 1.7
Securities Brokerage 2000 Inter-Regional
Financial 64750 5.1
965 Alex Brown 55849 4.4
1180 Raymond James 28615 2.3
300 Merrill Lynch 19687 1.6
700 Quick & Reilly 18550 1.5
187451 14.9
Toiletries/Cosmetics 2400 Helen of Troy* 36000 2.9
Total Common Stocks 1246396 98.7
(Cost $1,126,288)
Total
Investment
Portfolio 1,262,250
Other Assets
Less
Liabilities -9,869
Net Assets -
100% 1,252,381
(Applicable to
112,258
shares
outstanding)
<FN>
*Non-Income Producing Security
</FN>
</TABLE>
<TABLE>
At September 30, 1996, the net unrealized
appreciation based on the cost of investments
for income tax purposes of $1,126,288 was as
follows:
<S> <C>
Gross unrealized appreciation 148,921
Gross unrealized depreciation (28,813)
Net unrealized appreciation 120,108
</TABLE>
10
<PAGE>
<TABLE>
Statement of Assets and Liabilities for the Period Ending September
30th 1996
<S> <C>
Assets: $1,246,396
Investments at Market Value,
(Identified Cost $1,126,288)
(Note 1-A)
Cash 15854
Dividends and Interest Receivable 851
Total Assets 1,263,101
Liabilities:
Payable for securities purchased 9808
Accrued Expenses 912
Total Liabilities 10,720
Net Assets $1,252,381
(Applicable to 112,528 shares outstanding,
$.001 par value, unlimited
shares authorized)
Net Asset Value and
Repurchase Price per Share $11.13
Maximum Offering Price per Share $11.46
(100/97 of net asset value)
Net Assets
At September 30, 1996,
net assets consisted of:
Paid-in Capital $1107396
Accumulated net realized
gains on investments 24,877
Unrealized appreciation of investments 120108
$1252381
</TABLE>
11
<PAGE>
<TABLE>
Statement of Operations
November 6, 1995 (Commencement of Operations) to September 30, 1996
<S> <C>
Investment Income
Income
Dividends $10,957
Interest 1,891
Total Investment Income 12,848
Expenses
Advisory fee (Note 2) 7,588
Distribution fees 2,544
Administration Fees 6,606
Total Expenses 16,738
Net Investment (Loss) (3,890)
Realized and Unrealized Gain on Investment
Net Realized gain from security transactions 28,969
Increase in unrealized appreciation of
investments 120,108
Net realized and unrealized gain on investments 149,077
Net Increase in Net Assets Resulting from
Operations $145,187
</TABLE>
12
<PAGE>
<TABLE>
Statement of Changes in Net Assets
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM
Operations:
Net Investment Loss (3,890)
Net Realized gain (Loss) on investments 28,969
Increase in unrealized appreciation of
investments 120,108
Net Increase in Net Assets from Operations 145,187
Distributions to Shareholders
Net Realized gains (202)
Capital Share Transactions (a)
Increase in net assets resulting
from capital share transactions 1,007,396
Total increase in net assets 1,152,381
Net Assets
Beginning of Period 100,000
End of Period 1,252,381
(a) Summary of capital share activity follows:
<C>
Shares Value
Shares Sold 115,274 1,143,762
Distributions Reinvested 20 202
Shares Redeemed (12,766) (136,568)
Net Increase 102,528 1,007,396
</TABLE>
<TABLE>
13
<PAGE>
Value & Growth Portfolio
Financial Highlights
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period 10.00
Income from investment operations:
Net investment income (loss) (.03)
Net Realized and unrealized gain on
investments 1.17
Total from investment operations 1.14
Less Distributions from
Net capital gains (.01)
Net Asset Value end of period 11.13
Total Return 11.40%
Ratios/ Supplemental Data
Net Assets -- End of Period ($000) 1,252
Ratios to average net assets
Expenses 2.20% (a)
Net investment income (loss) (.51)% (a)
Portfolio Turnover 148%
Average Commissions per Share $.08
<FN>
(a)Annualized
</FN>
14
<PAGE>
To the Shareholders and Board of Directors
Texas Capital Value Funds, Inc.
Value & Growth Portfolio
We have audited the accompanying statement of
assets and liabilities of Value
& Growth Portfolio (the "Fund"), a series of shares
of Texas Capital Value
Funds, Inc., including the portfolio of investments,
as of September 30, 1996,
and the related statements of operations and
changes in net assets, and the
financial highlights for the period November 6,
1995 (commencement of
operations) to September 30, 1996. These financial
statements are the
responsibility of the Fund's management. Our
responsibility is to express an
opinion on these financial statements and financial
highlights based on our
audit.
We conducted our audit in accordance with
generally accepted auditing
standards. Those standards require that we plan
and perform the audit to
obtain reasonable assurance about whether the
financial statements and
financial highlights are free of material
misstatement. An audit includes
examining, on a test basis, evidence supporting the
amounts and disclosures in
the financial statements. Our procedures included
confirmation of securities
owned as of September 30, 1996, by correspondence
with the custodian and
brokers. An audit also includes assessing the
accounting principles used and
significant estimates made by management, as well
as evaluating the overall
financial statement presentation. We believe that
our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and
financial highlights referred to
above present fairly, in all material respects, the
financial position of Value &
Growth Portfolio of the Texas Capital Value Funds,
Inc. as of September 30,
1996, the results of its operations, the changes in its
net assets and the financial
highlights for the period November 6, 1995 to
September 30, 1996 in
conformity with generally accepted accounting
principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
November 1, 1996
September 30, 1996
15
<PAGE>
(1) ORGANIZATION AND SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES
Texas Capital Value Funds, Inc. was incorporated
on June 26, 1995 as a
Maryland Corporation and is registered under the
Investment Company
Act of 1940 as a non-diversified, open-end
management investment
company. The Value & Growth Portfolio (the
"Fund"), a series of the
Texas Capital Value Funds, Inc., began investment
operations on
November 6, 1995. The Fund's investment
objective is capital
appreciation, with income a secondary
consideration. The following is a
summary of significant accounting policies followed
by the Fund in the
preparation of the financial statements. The
policies are in conformity
with generally accepted accounting principles.
A. Security Valuation - Portfolio securities that are
listed on national
securities exchanges or the NASDAQ National
Market System are
valued as of the close of business of the exchange on
each business day
which that exchange is open (presently 4:00pm
Eastern time). Unlisted
securities that are not included in such System are
valued at the mean
of the quoted bid and asked prices in the over-the-
counter-market.
Securities and other assets for which market
quotations are not readily
available are valued at fair value as determined in
good faith by the
Advisor under procedures established by and under
the general
supervision and responsibility of the Fund's Board
of Directors. Short-
term investments are valued at amortized cost, if
their original maturity
16
<PAGE>
was 60 days or less, or by amortizing the values as
of the 61st day prior
to maturity, if their original term to maturity
exceeded 60 days.
B. Income Taxes - The Fund intends to continue to
qualify for the tax
treatment applicable to regulated investment
companies under the
Internal Revenue Code and to make the requisite
distributions to
shareholders which will be sufficient to relieve the
Fund from income
and excise taxes.
C. Securities Transactions, Investment Income and
Other - Securities
transactions are recorded on the next business date
after trade date.
Realized gains and losses on sales of investments
are calculated on the
identified cost basis. Dividend income is recorded
on the ex-dividend
date and interest income is recorded on the accrual
basis.
D. Accounting Estimates - The preparation of
financial statements in
accordance with generally accepted accounting
principles requires
management to make estimates and assumptions
that affect the reported
amounts of assets and liabilities at the date of the
financial statements
and the amounts of income and expense during the
reporting period.
Actual results could differ from those estimates.
2. TRANSACTIONS WITH AFFILIATES
Investment Advisory and Administrative
Agreements
The Fund has an investment advisory agreement
with the Advisor, pursuant
to which the Advisor receives a fee, computed daily,
at an annual rate of
1.0% of the average daily net assets.
17
<PAGE>
The Advisor provides continuous supervision of the
investment portfolio
and pays the cost of compensation of the officers of
the Fund, occupancy
and certain clerical and administrative costs
involved in the day to day
operations of the Fund.
Under the investment advisory agreement, if the
aggregate expenses of the
Fund (including the fees to the Advisor but
excluding taxes, interest,
brokerage fees and commissions, distribution fee
and extraordinary
expenses) exceed the limitations imposed by state
securities administrators,
the Advisor, at its option, may reduce its fee by the
amount of such excess.
In addition, the Advisor is acting as the
administrator to the Fund. For
these services, the Advisor receives a fee, computed
daily at an annual rate
of .70% of the average daily net assets. The
administrator's fee was
reduced from .90% to .70%, effective August 28,
1996.
Transactions with the Distributor
Choice Investments, Inc., the Company's
Distributor, was paid $4,111 in
commissions for executing Fund transactions.
Distribution Agreement and Plan
The Fund has adopted a Distribution Plan pursuant
to Rule 12b-1 under the
1940 Act under which the Company contracts with
registered broker-
dealers and their agents to distribute shares of the
Fund. The distribution
fee was reduced from .35% to .25%, effective
August 28, 1996. For the
period ending September 30, 1996, the amount paid
to the Distributor was
$2,544.
18
<PAGE>
3. PURCHASES AND SALES OF
SECURITIES
For the period ended September 30, 1996, the cost
of purchases and the
proceeds from sales of securities, excluding short-
term securities, were
$2,337,372 and $1,240,053, respectively.
4. FEDERAL INCOME TAXES
It is the Fund's policy to meet the requirements of
the Internal Revenue
Code applicable to regulated investment companies
and to distribute all of
its taxable net income to its shareholders. In
addition, the Fund intends to
pay distributions as required to avoid imposition of
excise tax. Therefore,
no federal income tax provision is required.
19
<PAGE>
</TABLE>
