Fund Facts
Your Charity Input. 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,
please send us a letter (Texas Capital Value Funds, Inc.,
1600 W. 38th Street, Suite 412, Austin, TX 78731) with the
following information prior to December 25:
Charity Name Your Name Charity Address Your Address
Charity Phone # Your Account # Your Account Balance
Remember, the group must be a valid charity under the IRS
rules, Section 501 ( c )(3).
4 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
Austin Community Foundation
Westbank Library
Valley View Elementary
Austin Smiles
4 How to Pay No Sales Charges? Transfer assets from
another mutual fund. Transfers are always at NAV, meaning
you never pay a sales charge for a transfer from another
mutual fund.
4 Who is one of the largest individual shareholders? Your
manager, Mark Coffelt.
4 Need a prospectus and other information for a friend?
Call 1-888-839-7424.
4 Have questions about your account? Call the Transfer
Agent at 1-800-628-4077.
4 Have a question for your portfolio manager?
Call (512) 458-8165, or (800) 880-0324. Ask for Mark or
Eric.
4 Daily NAV. Call (512) 302-6099.
1
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Fellow Shareholders,
The Net Asset Value of the Value & Growth Portfolio for the
period ending September 30th, 1997 was $17.66, resulting in
the following performance:
<TABLE>
Period The Fund Russell 2000 S&P 500
<S> <C> <C> <C>
Last Quarter 20.5% 14.5% 7.5%
Last 6 Months 43.3% 32.5% 26.2%
Year-to-date 46.4% 25.2% 29.6%
Last 12 Months 64.9% 31.0% 40.4%
Since Inception
(annualized) 37.7% 23.7% 27.7%
</TABLE>
For the 12 months ended October 2nd, Lipper Analytical ranks
your fund as the 4th best performing Growth Fund out of a
total of 775 funds, and the 16th highest performing fund out
of all funds monitored by Lipper. We're pleased with our
progress so far. We hope you are too. As always, please
keep in mind that past performance may not be indicative of
future results.
Commentary
The following is an interview between Mark Coffelt and Jerry
Breitner, host of The Mutual Fund Report of WGBB, a New York
radio station. We thought Jerry asked particularly good
questions and we think you will find the interview
illuminating.
1. Why don't we start by your explaining the investment
philosophy of the Texas Capital Value and Growth Fund?
Well, we're looking for growth stocks at value prices, with
the emphasis on value. In essence, we are trying to get the
best of both the growth and value worlds.
In the growth world, investors typically look for quality
companies that are growing rapidly. The mistake growth
investors make is that they pay too much for growing
earnings.
At the other end of the spectrum are the value investors.
Value investors focus on price. They want to buy a cheap
company, and by cheap, I mean companies that are selling for
low prices to earnings, low prices to cashflow, and low
prices to bookvalue. The mistake typically made by the
Value Investor is that some companies deserve to be cheap,
because they are in poor businesses or are not very well
managed.
What we try to do at the Texas Capital Value & Growth Fund
is take the best of both growth and value, and minimize the
mistakes of each. We want quality, growing, companies
selling at value prices. That's not GARP, or Growth At a
Reasonable Price, but growth companies at value prices.
Our bias to value is for one very simple reason--Every piece
of academic research we can find gives the nod to value
investing. Over time, value investing has produced superior
results. Since value investing is difficult to do, my guess
is that it will continue to produce superior results.
2. You use a highly structured, quantitative approach to
stock selection within your fund. Can you discuss this
process now as well as the advantages to this strategy?
There are lots of ways to invest. In the decision making
process, most investors and most funds use a combination of
brokerage ideas, intuition, quantitative screens, company
visits, expensive research, and so forth.
2
<PAGE>
How well has all this research served them? If you look at
the statistics, not well at all. Vanguard's S&P 500 Index
fund has beaten most managers over the last decade, managers
with the best research money can buy.
So we believe that to be successful, you have to be removed
from the Wall Street herd. You have to have a well thought
out strategy, and most importantly, that strategy has to be
executed with rigorous discipline, which is exactly what the
quantitative strategy provides.
There's a professor at the University of Minnesota, by the
name of Paul Meehl. Professor Meehl has spent a lifetime
showing that in any complex decision, be it reading
radiology charts, making a diagnosis of mental disorders, or
the college admissions process, if the decision maker will
predetermine what's important and then follow his own
criteria rigorously, about 98% of the time the outcome will
be better than just using judgment.
Now, why is it necessary to predetermine what's important,
and then follow it rigorously?
What Meehl's research shows is that decision makers are good
at determining what is important, but not so good at
following through. You see that in investing. If you ask
most fund managers what it takes to beat the market, I
believe they would tell you to invest in stocks with low
prices to earnings (P/E's) and other value characteristics.
There's no mystery about this. But how do they invest?
They have portfolios full of glamour stocks, or "feel-good"
stocks.
The Glamour stocks are the ones every one wants to own-and
you guessed it, where demand is high, so too are prices.
What our quantitative strategy does is allow us to tune in
to those companies having robust value characteristics,
without getting pulled off course by all the noise of Wall
Street.
3
<PAGE>
3. Everyone knows about past performance not being an
indicator of future results. You have a somewhat different
take on this. Please explain.
Well, first of all, the reason the phrase "past performance
may not be indicative of future results," is used is that
frequently it's true. Past performance may not be
indicative of future performance for us. But let's step
back for a moment and ask why past performance frequently
doesn't repeat.
I think there are three reasons:
1. Reason one is that the manager who created the
performance is no longer there. I'm always amused when I
read about some fund with a long, hot track record and a
manager who has only been there 6 months. So the first
question an investor should ask is "Is the manager who
created the record still there?"
2. Reason two is that the manager had no valid strategy, he
was just lucky. In essence, he managed to flip ten heads in
a row, and was crowned a master coin flipper. So, the
second question an investor should ask is, "Is the strategy
sound; is it based upon valid research such as low P/E's and
other value characteristics?" The unfortunate experience of
a number of investors in high growth funds, which blew up in
the last year, would be an example of an invalid strategy
that was lucky for a short period.
3. Reason three is that even good managers with valid
strategies drift off course. This is sometimes called style
drift. So the third question an investor should ask is "Is
the manager doing what he said he was going to do?"--because
as a manager I can tell you that with all the variables in
investing, it's easy to drift off course and not even know
it. That's why the approach we take is so rigorously
disciplined. We don't want to drift off course.
Will our performance continue to be outstanding? Time
will tell, but our focus on value strategies which we have
extensively tested in the last few years, as have other
researchers over the last fifty years,
4
<PAGE>
combined with a rigorous implementation of those strategies, I think, gives
us a pretty good shot at continuing to perform well.
4. You focus on Small Cap-Value Stocks with low P/E
ratio's, low P/CF and low P/BV. Is it difficult finding
stocks that meet your criteria and can this strategy help
reduce risk?
No, we are finding plenty of stocks that meet our criteria,
but that's primarily because we are looking in the small cap
area. Personally, I would not want any of my money invested
today in the S&P Index, for the simple reason that the S&P
500 is at least fully priced, if not over priced.
Additionally, I think large companies are going to have
difficulty producing earnings gains. Many of the larger
companies have produced such gains through cost cutting. I
am doubtful that monetary gains through cost cutting going
forward will continue to add to large company earnings.
There is a limit to how much earnings gains can be the
result of cost cutting. Finally, big companies like Coke
and IBM and so forth have huge foreign operations. When the
dollar goes up, those operations produce less dollar
earnings. So, it's becoming harder for big companies to
produce positive earnings gains.
Smaller companies, on the other hand, don't have exposure to
foreign sales, and haven't produced earnings gains through
cost cutting. Smaller companies have real sales growth.
But I think most significantly, small companies are much
cheaper. So, your question, "Will smaller companies help
reduce risk?" I would answer with "It sure looks that way to
us." And small companies may well have the greatest return
potential going forward.
5. The expenses of your fund are high relative to your
peers. Can you comment on this.
Our expenses are higher, but that is really a function of
our size. As the assets of the fund grow, our expenses will
decline. We have actually targeted our expense levels to be
average across various fund
5
<PAGE>
sizes. So, relative to other
smaller funds, we are quite comparable. However, there is a
flip side. As a small fund we are able to buy into a lot of
small companies that large funds can only dream about. The
evidence, so far, I believe is that our higher expenses have
been more than offset by our flexibility.
6. How can your fund be used as a tool to help
diversification?
My guess is that for most investors, the most under-
represented area in their portfolios are small value funds,
simply because that area of the market has done so poorly in
the last few years. Ironically though, small-cap value
stocks, over the long run, have been where the highest
returns have been. We don't buy what other funds buy and,
as such, would probably be a good diversification choice for
a part of most investors' portfolios. As for myself, this
is the only place my money goes.
7. Finally, small cap stocks, after badly lagging Large
Caps over the previous 2 years have recently been doing
much better. --Looking into your crystal ball, how do you
see this playing out in the future?
I don't know how small caps will do in the next few years,
but given the number of low valuations we are finding
relative to large stocks, I think small value has a long way
to go. So, you could say, I'm really bullish on small
stocks going forward and more specifically, on our strategy.
Respectfully submitted,
Mark A. Coffelt, CFA
6
<PAGE>
<TABLE>
S T O C K
P R I C E S R E L A T I V E TO
<CAPTION>
Earnings Cash flow Book value
<C> <C> <C>
Value & Growth Portfolio 18.1x 10.2x 2.5x
Avg Small Value Fund 21.6x 13.8x 3.0x
Avg Small Growth Fund 34.0x 25.4x 5.9x
S&P 500 Index 25.8x 16.6x 5.9x
</TABLE>
All Ratios from Morningstar Mutual Funds October, 1997.
This chart compares a hypothetical investment of $10,000
between the Value & Growth Portfolio and two indices
considered representative of the market. The maximum 4.5%
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.
7
<PAGE>
<TABLE>
<CAPTION>
Short-Term 0.4% Principal Issues Market As % of
Investments Amount/Shares Value Net Assets
<S> <C> <C> <C> <C> <C>
$128,607 Bank of Boston
Repurchase Agreement
$128,607 0.4
(5.00% due 2/15/99 & 5.50% due 12/31/00
Collateralized by U.S. Treasury Notes)
Common Stocks 99.5%
Agriculture 18,800 Universal Corp. 681,500 2.5
Automobile Parts 2,200 Borg-Warner 125,125 0.5
55,000 Standard Products 1,447,187 5.2
13,500 Superior Industries 373,781 1.3
1,946,093 7.0
Building Materials 39,900 LaFarge Corp. 1,286,775 4.6
29,900 Medusa Corp. 1,423,988 5.1
2,710,763 9.7
Computer Products 12,900 Sequent Computer* 320,081 1.2
19,000 Storage Technology* 914,375 3.3
3,800 Stratus Computer* 183,825 0.7
27,300 Western Digital* 1,095,413 3.9
2,513,694 9.1
Diversified 50,100 Katy Industries 901,800 3.2
3,300 Raychem Corp. 278,850 1.0
1,180,650 4.2
8
<PAGE>
Electronics 16,800 Dynatech Corp.* 688,800 2.5
Financial Services 23,000 Countrywide Credit 838,063 3.0
8,500 Green Tree 399,500 1.4
1,237,563 4.4
Furniture 33,500 La-Z-Boy 1,239,500 4.5
Homebuilding 116,500 Standard Pacific Corp. 1,223,250 4.4
Insurance 26,500 Nac Re Corp. 1,358,125 4.9
Machinery 39,000 Gleason Corp. 1,072,500 3.9
Maritime 53,100 Sea Containers 1,506,712 5.4
Metal Fabricating 51,400 Oregon Metallurg.* 1,288,212 4.7
Oilfield Services 2,500 Tidewater Inc. 148,125 0.5
Precision Instrument 2,000 Coherent Inc.* 110,750 0.4
Recreation 13,700 Callaway Golf 477,788 1.7
Restaurant 15,300 Bob Evans Farms 290,700 1.0
68,600 Brinker International* 1,217,650 4.4
21,800 Outback Steakhouse* 602,225 2.2
2,110,575 7.6
9
<PAGE>
Retail 9,900 Dress Barn* 237,600 0.9
34,500 Ross Stores 1,177,312 4.2
1,414,912 5.1
Security Brokerage 32,200 Advest Group 847,263 3.0
28,000 Lehman Bros. 1,492,750 5.4
2,340,013 8.4
Thrift 58,200 Dime Savings NY 1,218,563 4.4
Trucking 48,700 Werner Enterprises 1,180,975 4.2
Total Common Stocks 27,649,063 99.5
(Cost $25,210,946)
Total Investment Portfolio 27,777,670 99.9
Other Assets
Less Liabilities 21,590 0.1
Net Assets - 100% $27,799,260 100.0
<FN>
*Non-Income Producing Security
<CAPTION>
At September 30, 1997, the net unrealized appreciation based
on the cost of investments for income tax purposes of $25,210,946
was as follows:
<S> <C>
Gross unrealized appreciation $2,493,009
Gross unrealized depreciation (54,892)
Net unrealized appreciation $2,438,117
10
<PAGE>
<CAPTION>
ASSETS
<S> <C>
Investments at Market Value,
(Identified Cost $25,210,946) (Note 1-A) $27,649,063
Cash & Equivalents 128,607
Dividends and Interest Receivable 9,862
Receivable for Securities Sold 45,386
Receivable for Shares Sold 627,450
Total Assets 28,460,368
<CAPTION>
LIABILITIES
<S> <C>
Administration Fee (Note 2) 11,086
Management Fee (Note 2) 18,624
12B-1 Fees 7,287
Payable for Securities Purchased 623,783
Other Liabilities 328
Total Liabilities 661,108
<CAPTION>
<S> <C>
NET ASSETS $27,799,260
(Applicable to 1,574,023 shares outstanding,
$.001 par value, 25 million shares authorized)
NET ASSET VALUE AND REPURCHASE PRICE PER SHARE $17.66
MAXIMUM OFFERING PRICE PER SHARE $18.49
(100/95.5 of net asset value)
<CAPTION>
NET ASSETS
At September 30, 1997, net assets consisted of:
<S> <C>
Paid-in Capital $24,491,946
Accumulated Net Realized Gain on Investments 869,197
Net Unrealized Appreciation on Investments 2,438,117
$27,799,260
11
<PAGE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Dividends $49,290
Interest 9,367
TOTAL INVESTMENT INCOME 58,657
EXPENSES
Administrative Fee (Note 2) 35,970
Management Fee (Note 2) 59,431
12B-1 Fees (Note 2) 14,858
TOTAL EXPENSES 110,259
NET INVESTMENT LOSS (51,602)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net Realized Gain from Security Transactions 959,264
Increase in Unrealized Appreciation of Investments 2,318,009
NET GAIN ON INVESTMENTS 3,277,273
NET INCREASE IN NET ASSETS FROM OPERATIONS $3,225,671
12
<PAGE>
<CAPTION>
<S> <C> <C>
Year ended Nov. 6, 1995*
INCREASE (DECREASE) IN NET ASSETS FROM: Sept. 30, 1997 to Sept. 30, 1996
OPERATIONS
Net Investment Loss $(51,602) $(3,890)
Net Realized Gain on Investments 959,264 28,969
Increase in Unrealized
Appreciation on Investments 2,318,009 120,108
INCREASE IN NET ASSETS FROM OPERATIONS 3,225,671 145,187
DISTRIBUTIONS TO SHAREHOLDERS
Net Realized Gains (63,343) (202)
CAPITAL SHARE TRANSACTONS: (a)
Shares Sold 23,834,857 1,143,762
Shares Redeemed (510,028) (136,568)
Distributions Reinvested 59,722 202
INCREASE FROM CAPITAL SHARE TRANSACTIONS23,384,551 1,007,396
TOTAL INCREASE IN NET ASSETS 26,546,879 1,152,381
NET ASSETS
Beginning of Period 1,252,381 100,000
End of Period $27,799,260 $1,252,381
(a) CAPITAL SHARE TRANSACTIONS
Shares Sold 1,487,704 115,274
Shares Redeemed (31,203) (12,766)
Distributions Reinvested 4,994 20
TOTAL INCREASE IN SHARES 1,461,495 102,528
13
<PAGE>
<CAPTION>
Year ended Nov. 6, 1995*
Sept. 30, 1997 to Sept. 30, 1996
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.13 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Loss (.03) (.03)
Net Realized and Unrealized Gain on Investments 7.03 1.17
TOTAL FROM INVESTMENT OPERATIONS 7.00 1.14
LESS DISTRIBUTIONS
Net Capital Gains (.47) (.01)
NET ASSET VALUE, END OF PERIOD $17.66 $11.13
TOTAL RETURN FOR FISCAL YEAR 64.9% 11.4%
RATIOS/SUPPLEMENTAL DATA
Net Assets -- End of Period ($000s) $27,799 $1,252
RATIOS TO AVERAGE NET ASSETS
Expenses 1.83% 2.20%
Net Investment Loss (0.86)% (0.51)%
Portfolio Turnover Rate 103.3% 148.0%
Average Commissions Per Share $.06 $.08
<FN>
* Commencement of Operations, all ratios for the period, except
total return, have been annualized
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 the Value & Growth Portfolio (the "Fund"), a
series of shares of the Texas Capital Value Funds, Inc.,
including the portfolio of investments, as of September 30,
1997, and the related statements of operations, changes in
net assets, and the financial highlights for the periods
indicated thereon. 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, 1997, 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,
1997, the results of its operations, the changes in its net
assets and the financial highlights for each of the periods
indicated thereon, in conformity with generally accepted
accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
November 10, 1997
15
<PAGE>
SEPTEMBER 30, 1997
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 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. 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.
16
<PAGE>
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.
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.
In addition, the Advisor is acting as the administrator to
the Fund. For these services, the Advisor receives a fee,
computed daily based on the average daily net assets at an
annual rate of .70% on the 1st $5 million, .50% on the next
$25 million, .28% on the next $70 million, .25% on the next
$100 million, and .20% for over $200 million.
Transactions with the Distributor
Choice Investments, Inc., the Company's Distributor and
clearing through Southwest Securities, was paid $4,140 in
commissions for executing portfolio transactions.
17
<PAGE>
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 Distributor received a
fee, computed daily at an annual rate of .25% of the average
daily net assets. For the period ending September 30, 1997,
the amount paid to the Distributor was $14,858 plus sales
charges.
3. PURCHASES AND SALES OF SECURITIES
For the period ended September 30, 1997 the cost of
purchases and the proceeds from sales of securities,
excluding short-term securities, were $29,916,473 and
$6,791,080 respectively.
18
</TABLE>
