Fund Facts
Your Charity Input. Every year the Advisor to the Funds donates up to 10% of
the advisor profits to various charities. If you have more than $15,000 in the
Funds, please mail or preferably FAX us a letter to: FAX 512.458.8166, or Texas
Capital Value Funds, Inc., 1600 W. 38th Street, Suite 412, Austin, TX 78731
with the following information prior to September 30, 1999. We realize that
in our previous request you may have not received your 1998 annual report with
sufficient time to respond, so we are asking early this year. The 1998
designated contribution amount will be rolled into 1999.
Charity Name Your Name
Charity Address Your Address
Charity Phone # Your Account Balance
Remember, the group must be a valid charity under the IRS rules, Section 501
(c)(3)
For 1997, shareholders designated the following charities:
AIDS Services of Austin
Alzheimers Association
American Cancer Society
American Heart Association
Animal Trustees of Austin
Arthritis Foundation
Austin Sunshine Camp
Austin YMBL Sunshine Camps
Boy Scouts of America
Brenham Christian Academy
The Columban Fathers
Compassion International
Cross Pointe Church
Cystic Fibrosis Foundation
Family Violence Project
Faith Home for Babies with AIDS
Forgotten Childrens Fund
Habitat for Humanity
Harvard Law School Fund
Hilo Salvation Army
The Home Care Program/MSKCC
Make-A-Wish Foundation
MD Anderson Childrens Art Project
Medical Institute for Sexual Health
Methodist Childrens Home
National Cancer Institute
National Kidney Cancer Association
Nature Conservancy of Tennessee
Nevada SPCA
Northwest Hills United Methodist
Peoples Community Clinic
Rapheal Free Clinic
Red Cloud Indian School
Salvation Army
San Diego Historical Society
SOVA Food Pantry
St. Michaels Academy
Texas Baptist Childrens Home
Union Station
United Way of the Flint Hills
Wesleyan Homes Alzheimers
Women Helping Women
Change of Transfer Agents. Beginning January 2, 1999, the Funds will begin to
use Firstar as the new transfer agent. Please make a note of the new phone
number and address:
Phone: 888-839-7424
Address: Texas Capital Value Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
Have questions about your account?
Call the Transfer Agent at 1-888-839-7424.
Fellow Shareholders,
The Net Asset Value of the Value & Growth Portfolio (V&G) for the period ending
September 30th , 1998 was $13.48. For our new Mid-Cap Focus Portfolio, the Net
Asset Value was $9.18. The bear market in small and mid-cap value stocks has
been difficult. We hope you will pay special attention to our commentary
this quarter, and note that your management continues to add its own
money to both funds.
Smaller Companies Mid-size Companies
Period V&G1 Russell 2000 Mid-Cap Focus2 Russell Mid-Cap
Last Quarter -16.5% -5.4% -8.3% -0.5%
Last 6 Months 0.2% 10.0 18.3% 17.9
19983 -3.1% -2.5% NA NA
19973 45.6% 22.4% NA NA
19963 26.3% 16.5% NA NA
Since Inception
(annualized) 12.2% 11.6% (7.9)% 0.0%
Of course, you know the old caveat, past performance may not be indicative of
future results.
1 After the maximum sales charge of 4.5%, the returns for the last quarter, 6
months, 1997, 1996, and since inception (11/06/95) would be: (20.3)%, (4.3)%,
(7.4)%, 39.0%, 20.6%, and 10.7%, respectively.2 After the maximum
sales charge of 4.5%, the returns for the last quarter, 6 months,
and since inception (3/18/98) would be: (12.4)%, 13.0%, and (11.9)%,
respectively. 3 Calendar years.
Wall Street was recommending the popular stocks regardless of price. Merrill
Lynch liked International Business Machines at thirty-nine times earnings.
Bache & Co. was pushing Xerox at fifty times. Blair & Co. was touting
Avon at fifty-six times.That was 1967. Two years later, Warren Buffett
wrote to his investment partners: Essentially I am out of step with present
conditions. On one point, however, I am clear. I will not abandon a
previous approach whose logic I understand even though it may mean
forgoing large, and apparently easy, profits to embrace an approach which
I dont fully understand, have not practiced successfully and which, possibly,
could lead to substantial permanent loss of capital. Not a lot has changed
since 1967. Today, its the Internet and the very largest of the large
stocks that are doing well. Small to mid-size stocks, especially value
stocks, have done miserably over the last 12 months.
The Question Begs
Should we abandon our strategy and do the obvious that is, buy the stocks going
up, regardless of value? Should you concede that small and mid-size companies
will never again do well, and move to the funds
investing in larger companies?
One of the most difficult aspects of an investment managers job is sticking
to a strategy when its temporarily not working. (We understand it is pretty
difficult for shareholders too.) Buffetts discipline, his unwillingness to
compromise his investment strategy, is we think, a major contributing factor to
his overwhelming investment success.
We cannot control the returns of your portfolio, although we can, and do,
control the process. The process today that has produced poor returns in the
last 12 months is the same process that produced outstanding returns the
year before, and the outstanding returns the year before that, and the year
before that, and the outstanding test returns over a decade. So, why dont
we do the obvious and buy the mega-cap stocks that are going up?
1 Buffett, The Making of An American Capitalist, Roger Lowenstein
Obvious=Wrong
In investing, when its obvious, its usually wrong. David Dreman, in his book
The New Contrarian Investment Strategy, analyzed the survey history of
investment managers. Over a 50 year period, various magazines including
Trusts and Estates, Institutional Investor, Financial World and so on, would
survey investment managers and ask them their favorite industry
for the next year. Of course, the favorite industry was also where the
managers were most heavily invested. Wed equate favorite with obvious.
How did the obvious industry do the next year?
Out of a total of 52 surveys, the favorite industry underperformed the
market 77% of the time. Risk was also higher. When the markets did poorly,
the obvious industry was usually down more.
In 1971, Institutional Investor surveyed 150 money managers to get their
top five picks for the next year. The magazine noted that there was a
remarkable consensus regarding the top ten favorites. Sounds a little like
today, doesnt it?
How did the obvious stocks do the next year? They were up 1.3% in a market
up 15.6%.
If at first you dont succeed, try again. The next Institutional Investor
survey was in 1973. For the next year, the top ten obvious stocks to buy were
down 40.4% while the market was down 17.4%.
We recall a period about 12 years ago, when the obvious thing to do in
Austin was to invest in real estate, and for bankers, to loan on real estate.
The result was that most investors lost big, and today, there
are no local banks. They all went bankrupt doing the obvious.
Our own experience with the Value and Growth fund is illustrative. When
the fund was up year-over-year some 90%, investors were pouring money into the
fund, perhaps because it was obviously a good fund. We were also getting
articles in the New York Times and interviews on CNBC. Never underestimate
the press to catch the popular trend.
Those investors who bought when it was obvious are underwater so far. Now
that our stocks are cheap, and we have less downside risk than a year ago, only
the savviest investors are adding money. We are not being overwhelmed by
requests for press interviews either. Warren Buffett once said about investing:
If all you had to do was look at past performance, all librarians would be
rich. Unfortunately, most investors today are acting like librarians, much to
their detriment.
This time is not different.
The most dangerous words in investing are this time is different. Those words
are being uttered today to justify the continuing mania for large-cap stocks.
We wont repeat the arguments here, but it does beg the question asked by one of
our institutional clients: Should we concede that small and mid-cap stocks will
never again do well?
Investing has cycles much like the ocean has tides. The devilish aspect
of investing is that there is no calendar. We dont know when the tides will
change. We do know they will.
Enormous High Tides
Nova Scotias Bay of Fundy has the highest tides in the world. You can walk
[chart]
the seafloor when the tide is out. Six hours later, the same area will be
covered with 45-55 feet of water. When the tide comes in for small stocks, it
will be huge, much like the tidal surge in the Bay of Fundy. We believe this
for two reasons.
Small value stocks have historically produced enormous high tides. For the
last 35 years, the cumulative difference in return is profound.
Small Value = 27,521%
Large Growth = 4,384%
You can see the advantage even better by looking at the growth of $100 invested
over 35 years in the chart above.
The second reason we are optimistic about small value is that their returns
have been especially compelling after extended periods of underperformance
relative to large growth.
Over the last 35 years, there have been three periods when small value
lagged large growth on a cumulative basis by more than 10%. Following each
period, small value clobbered large growth in the next
1 year, 3 years, 5 years, and 7 years.
The latest period is now the largest cumulative underperformance for the
last 35 years. Of course, this says nothing about the timing of the shift.
Periods When Next 1 Year Next 3 Years Next 5 Years Next 7 Years
Small Value Sm Lg Excess Sm Lg Excess Sm Lg Excess Sm Lg Excess
Underperformed V Gth Return V Gth Return V Gth Return V Gth Return
1/69-12/73-46%-18%-30% 12% 94% 12% 82% 188% 9% 179% 413% 77% 336%
2/80-11/80-10% 9% -8% 17% 114% 23% 92% 193%50% 143% 217% 77% 141%
9/89-12/91-39% 30% 7% 23% 58% 11% 47% 147%85% 62% 204%198% 6%
11/97-2/99-49% ? ? ? ?
Conclusion
While small to mid-cap value stocks have certainly disappointed in the last
year, ironically, we think the next six months may be the best entry point for
small and mid-cap value stocks in the next seven years.
The father of value investing and Warren Buffetts teacher, Benjamin
Graham, once said that the market in the short run is like a voting machine,
swayed by the whims and emotions of investors. But over the long run, the
market is very much a weighing machine, calculating the true value of companies.
Focusing on the long run by keeping the investment discipline we use is
the only way we know to produce outstanding long-run returns. With your
portfolio valuations substantially cheaper and with growth prospects as good, if
not better, than the larger companies, were confident your money, and ours, is
in the appropriate place.
Respectfully submitted,
Mark A. Coffelt, CFA
S T O C K P R I C E S R E L A T I V E TO
Earnings Cash flow Book value
Value & Growth 11.7 13.6 2.1
Avg Small Value Fund 18.3 12.4 2.4
Avg Small Growth Fund 32.4 26.1 6.4
Mid-Cap Focus (est.) 11.6 11.7 3.1
Avg Mid Value Fund 21.9 13.8 3.4
Avg Mid Growth Fund 37.5 28.1 8.5
S&P 500 34.6 24.4 8.8
Data from Morningstar Mutual Funds 3/99 with the exception of Mid-Cap Focus
which is estimated.
Industry Shares Company Market Value %
Aerospace/Defense 23,900 Ducommon* 224,063 0.5
Apparel 59,000 North Face* 737,500 1.8
12,200 Oshkosh B'Gosh 215,788 0.5
953,288 2.3
Banking 37,700 Bank United 1,540,988 3.7
128,000 Resource Banc. 1,648,000 4.0
165,100 Sovereign Banc. 2,022,475 4.9
5,211,463 12.6
Building Materials 73,700 Kaufman & Broad 1,662,856 4.0
95,275 Modtech* 857,475 2.1
23,000 NCI Building Sys.* 540,500 1.3
140,200 Standard Pacific 1,805,075 4.3
61,400 Centex Const. 2,137,488 5.1
7,003,394 16.8
Computer Hardware 9,700 Dialogic* 295,850 0.7
108,100 Pomeroy Computer* 1,405,300 3.4
83,100 Tech Data* 1,906,106 4.6
3,607,256 8.7
Computer Software 232,500 GT Interactive* 1,075,313 2.6
160,800 Mapics* 1,236,150 3.0
106,500 Symantec* 1,803,844 4.3
71,300 T-HQ* 1,452,738 3.5
5,568,045 13.4
Electrical Equipment 25,000 Methode Electronics 278,125 0.7
Financial Services 115,200 FirstFed Financial* 1,850,400 4.4
Household Products 137,700 Nature's Sunshine 1,514,700 3.6
Machinery 62,200 Esterline Tech.* 804,713 1.9
Manuf. Housing/RVs 105,300 Champion Enterp.* 2,040,188 4.9
102,600 Coachmen Industries 2,103,300 5.1
87,400 National RV* 1,933,725 4.6
6,077,213 14.6
Medical Supplies 91,900 ADAC Laboratories* 1,252,138 3.0
Office Equip./Supplies 224,000 OfficeMax* 1,932,000 4.6
Publishing 17,600 Franklin Covey* 158,400 0.4
Restaurant 47,500 Applebees 1,178,594 2.8
138,680 Buffets* 1,369,465 3.3
2,548,059 6.1
Trucking/Transportation 37,400 Werner Enterp. 589,050 1.4
Human Resources 59,700 CDI Corp.* 1,436,531 3.5
*Non-income producing Total Common Stocks 41,008,838 98.5
(Cost $44,801,613)
Short-Term Investments
Banking Wisc. Corp Cent. Cr. Union D Note 211,147 0.5
(4.6087% 12-31-2031, Cost $211,147)
Drugs Warner Lambert Demand Note 43,298 0.1
(4.5700% 12-31-2031, Cost $43,298) 254,445 0.6
Total Investments(Cost $44,801,613) 41,263,283 99.1
Other Assets and Liabilities 371,658 0.9
Net Assets 41,634,936 100.0
At March 31, 1999, the net unrealized depreciation based on the cost of
investments for income tax purposes of $44,801,613 was $3,792,779.
Industry Shares Company Market Value %
Banks 930 Banc One 51,208 4.6
4,000 Sovereign Bancorp 49,000 4.4
100,208 9.0
Building 2,330 Kaufman & Broad 52,571 4.8
1,360 Centex 45,390 4.1
97,961 8.9
Computer Software 1,800 Diebold 43,200 3.9
1,800 Sterling Software* 42,750 3.9
3,280 Symantec* 55,555 5.0
141,505 12.8
Energy 830 Columbia Energy 43,368 3.9
Financial Services 900 Countrywide Credit 33,750 3.1
2,400 MBNA Corp. 57,300 5.2
2,650 Power Corp. 50,625 4.6
1,100 Reliastar Financial 46,888 4.3
188,563 17.2
Home Appliances 900 Maytag 54,338 4.9
Home Furnishings 2,510 Hon Industries 55,063 5.0
Housewares 1,700 Premark Int'l 55,994 5.1
Industrial Services 1,800 Manpower 42,075 3.8
Insurance 1,740 Conseco 53,723 4.9
860 Washington Mutual 35,153 3.2
88,876 8.1
Office Equip./Supplies 5,400 OfficeMax* 46,575 4.2
Retail 1,050 Ross Stores 46,003 4.2
1,000 Sears Roebuck 45,188 4.1
1,300 TJX Companies 44,200 4.0
135,391 12.3
Thrifts 2,060 Dime Bancorp 47,766 4.3
*Non-income producing Total Common Stocks $ 1,097,683 99.6
(Cost $1,137,472)
Other Assets and Liabilities 3,966 0.4
Net Assets $ 1,101,649 100.0
At March 31, 1999, the net unrealized depreciation based on the cost of
investments for income tax purposes of $1,137,472 was $39,792.
Value & Mid-Cap
Growth Focus
ASSETS
Investments at Market Value, 41,263,278 1,097,680
(Identified Cost $44,801,612 and $1,137,472) (Note 1-A) $
Cash & Equivalents 2,342 6,606
Dividends and Interest Receivable 6,848 1,575
Receivable for Securities Sold 714,892 0
Receivable for Fund Shares Sold 20,890 0
Total Assets 42,008,250 1,105,861
LIABILITIES
Distribution Payable 389 0
Administration Fee (Note 2) 36,999 947
Management Fee (Note 2) 17,106 661
12B-1 Fees (Note 2) 30,700 2,352
Payable for Securities Purchased 121,863 0
Payable for Fund Shares Purchased 163,427 0
Other Liabilities 2,831 255
Total Liabilities 373,315 4,215
NET ASSETS $ 41,634,936 1,101,646
(Applicable to 3,087,902 and 119,989 shares outstanding, $.0001 par value, 25
million shares authorized each fund).
NAV AND REPURCHASE PRICE PER SHARE 13.48 9.18
MAXIMUM OFFERING PRICE PER SHARE 14.12 9.61
(100/95.5 of net asset value)
NET ASSETS
At March 31, 1999, net assets consisted of:
Capital Stock @ Par 58,157,145 1,161,663
Capital in Excess of Par 821,481 5,657
Accum Net Realized Loss on Investments 11,907,949 14,568
Net Unrealized Depreciation on Investments 3,792,779 39,792
$ 41,634,936 1,101,646
Value & Growth Mid-Cap Focus
INVESTMENT INCOME
Dividends $ 206,234 5,724
Interest 21,811 842
TOTAL INVESTMENT INCOME 228,045 6,566
EXPENSES
Administrative Fee (Note 2) 122,725 3,695
Management Fee (Note 2) 302,959 5,278
12B-1 Fees (Note 2) 75,740 1,320
TOTAL EXPENSES 501,424 10,293
NET INVESTMENT GAIN/(LOSS) (273,379) (3,727)
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net Realized Loss from Sec Trans (6,575,035) 2,311
Incr/(Decr) in Unrealized Appreciation 8,696,763 155,013
NET GAIN/ (LOSS) ON INVESTMENTS 2,121,728 157,324
NET INCREASE/(DECREASE) IN NET ASSETS
FROM OPERATIONS $ 1,848,349 153,597
Value & Growth Mid-Cap Focus
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net Investment Gain/(Loss) $ (275,195) (3,998)
Net Realized Gain/(Loss) on Investments (6,575,037) 2,311
Incr in Unrealized Appr on Investments 8,696,763 155,012
INCR/(DECR) IN NET ASSETS FROM OPERATIONS 1,846,532 153,325
CAPITAL SHARE TRANSACTIONS: (a)
Shares Sold 24,764,522 241,439
Shares Redeemed 37,608,543 90,418
INCREASE FROM CAPITAL SHARE TRANSACTIONS(12,844,022) 151,021
TOTAL INCREASE IN NET ASSETS (10,997,489) 304,347
NET ASSETS
Beginning of Period 52,543,544 796,064
End of Period $ 41,634,936 1,101,646
(a) CAPITAL SHARE TRANSACTIONS
Shares Sold 6,473,271 149,035
Shares Redeemed 2,653,384 10,288
TOTAL INCREASE IN SHARES 3,819,887 138,747
Value & Growth Mid-Cap Focus
PER SHARE OPERATING PERFORMANCE
NAV, BEGINNING OF PERIOD $ 13.45 7.76
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (Loss) (.07) (.03)
Net Realized and Unrealized Gains/ (Losses) .10 1.45
TOTAL FROM INVESTMENT OPERATIONS: .03 1.42
NAV, END OF PERIOD $ 13.48 9.18
TOTAL RETURN FOR SIX MONTHS 0.2% 18.3%
RATIOS/SUPPLEMENTAL DATA
Net Assets-End of Period $ 41,634,936 1,100,411
RATIOS TO AVERAGE NET ASSETS
Expenses .84 .98
Net Investment Income (Loss) (.45) (.26)
Portfolio Turnover Rate 97.6 103.0
Avg. Debt Per Share $ None None
Avg. amount of debt outstanding ($000) $ None None
Avg. number of shares outstanding (000) 4,066,555 114,320
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 V&G) and the Mid-Cap Focus Portfolio (the Mid-Cap Focus and
formerly BlueChip Value Portfolio) are series of the Texas Capital Value
Funds, Inc, collectively (the Funds). V&G began investment operations on
November 6, 1995, while Mid-Cap Focus began investment operations on
March 18, 1998. V&Gs investment objective is capital appreciation.
Mid-Cap Focus investment objective is growth, with income a secondary
consideration. The following is a summary of significant accounting policies
followed by the Funds 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 Funds 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 Funds 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 Funds intend to pay distributions as required to avoid imposition of excise
tax. Therefore, no federal income tax provision is required.
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. Distributions to Shareholders. Distributions from investment income
and realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are
primarily due to net operating losses and post-October capital losses.
E. 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 Funds have investment
advisory agreements with the Advisor, First Austin Capital Management, Inc.,
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 portfolios and pays the cost of compensation of
the officers of the Funds, occupancy and certain clerical and administrative
costs involved in the day to day operations of the Funds..In addition, the
Advisor is acting as the administrator to the Funds. 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 of each series. The Advisor bears most of the
operating expenses of the Funds including legal, audit, printing, and insurance
Transactions with the Distributor
Choice Investments, Inc., was the Companys Distributor through 10/31/98 and
clearing through Southwest Securities, was paid $7,740 in commissions for
executing portfolio transactions for the Value & Growth Portfolio. No
commissions were paid to the Companys new Distributor, Rafferty Capital
Management, Inc.
Distribution Agreement and Plan
The Funds have adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act under which the Funds contract with registered broker-dealers and
their agents to distribute shares of the Funds. The Distributor received
a fee, computed daily at an annual rate of .25% of the average daily
net assets. For the period ending March 31, 1999, the amounts paid to the
Distributor were $75,740 and $1,320, for V&G and Mid-Cap Focus,
respectively, plus charges for sales of the Funds shares in the amount
$15,634.
3. PURCHASES AND SALES OF SECURITIES--For the period ended March 31, 1999 the
cost of purchases and the proceeds from sales of securities, excluding
short-term securities, were $567,869,148 and $71,625,244, respectively,
for the Value & Growth Portfolio and $1,254,262 and $1,079,167 for Mid-Cap
Focus Portfolio, respectively.
4. LINE OF CREDIT The Funds have a $9 million secured line of credit with
Firstar Bank NA. Borrowings under this arrangement bear interest at the
banks prime rate. At March 31, 1999, the Funds had no borrowings
outstanding. Based upon balances outstanding during the year, the weighted
average interest rate was 0% and the weighted average amount outstanding was
$0 for the Value & Growth Portfolio and $0 for the Mid-Cap Focus Portfolio.
