QUARTERLY REPORT
DECEMBER 31, 1995
FIDUCIARY
CAPITAL GROWTH
FUND, INC.
A NO-LOAD
MUTUAL FUND
FIDUCIARY
CAPITAL GROWTH
FUND, INC.
January 25, 1996
Dear Fellow Shareholder:
Our view, one year ago, that prospects for equity returns had improved,
turned out to be a whopper of an understatement. We felt that interest rate
declines and earnings increases would both be positives for the stock market.
Interest rates declined more and earnings increased more than we anticipated.
The result was the third best rise in the S&P 500 in the last fifty years. And
while medium-sized and smaller company stocks under-performed the larger
companies, the absolute returns were impressive. Fiduciary Capital Growth Fund
increased 26.5% for the year. However, 1995 is, as they say, in the history
books - or, in today's vernacular, on the Internet - and we must look ahead.
ECONOMY
The economy is growing slowly, but we see signs of weakness as we visit with
companies. In the final analysis, economic growth is fueled by the consumer.
Two-thirds of the Gross Domestic Product is comprised of consumer spending.
This requires job growth, rising real disposable income and/or the ability of
the consumer to borrow. Growth in jobs and disposable income is relatively
anemic, and we remain cautious on the consumers' balance sheet. Installment debt
has surpassed one trillion dollars for the first time, and stands at just over
19% of disposable personal income (Chart A). Whether this is a problem from
the standpoint of the consumers' ability to service their debt is open to
debate, but it certainly suggests that expanding consumer credit cannot provide
much fuel for consumer spending. Consumer credit has provided a significant
proportion of spending growth in the past (Chart B).
CHART A
CONSUMER INSTALLMENT DEBT AS A % OF DISPOSABLE PERSONAL INCOME
Dec 72 14.509 Sep 80 14.821 Jun 88 18.000
Mar 73 14.927 Dec 80 14.356 Sep 88 18.042
Jun 73 15.134 Mar 81 14.156 Dec 88 18.052
Sep 73 15.237 Jun 81 14.167 Mar 89 18.232
Dec 73 15.070 Sep 81 13.939 Jun 89 18.509
Mar 74 15.358 Dec 81 13.907 Sep 89 18.647
Jun 74 15.334 Mar 82 13.862 Dec 89 18.452
Sep 74 15.169 Jun 82 13.776 Mar 90 18.026
Dec 74 14.948 Sep 82 13.630 Jun 90 18.027
Mar 75 14.677 Dec 82 13.652 Sep 90 18.188
Jun 75 13.844 Mar 83 13.693 Dec 90 17.604
Sep 75 13.881 Jun 83 13.704 Mar 91 17.267
Dec 75 13.872 Sep 83 13.845 Jun 91 17.249
Mar 76 13.846 Dec 83 14.080 Sep 91 17.179
Jun 76 14.036 Mar 84 14.260 Dec 91 16.764
Sep 76 14.128 Jun 84 14.873 Mar 92 16.411
Dec 76 14.254 Sep 84 15.064 Jun 92 16.253
Mar 77 14.562 Dec 84 15.519 Sep 92 16.069
Jun 77 14.805 Mar 85 16.233 Dec 92 15.208
Sep 77 14.883 Jun 85 16.411 Mar 93 15.207
Dec 77 15.146 Sep 85 16.894 Jun 93 15.048
Mar 78 15.174 Dec 85 17.028 Sep 93 16.280
Jun 78 15.513 Mar 86 17.202 Dec 93 16.445
Sep 78 15.683 Jun 86 17.493 Mar 94 16.616
Dec 78 15.855 Sep 86 17.700 Jun 94 17.053
Mar 79 15.934 Dec 86 17.952 Sep 94 17.398
Jun 79 16.222 Mar 87 17.581 Dec 94 17.614
Sep 79 16.163 Jun 87 17.911 Mar 95 17.909
Dec 79 16.049 Sep 87 18.065 Jun 95 18.559
Mar 80 16.939 Dec 87 17.814 Sep 95 18.807
Jun 80 16.519 Mar 88 17.900
CHART B
CONSUMER DEBT TRENDS
Percent of Spending Financed by Consumer Credit*<F1>
Dec 72 18.826 Mar 81 -1.591 Jun 89 26.528
Mar 73 22.841 Jun 81 2.589 Sep 89 26.939
Jun 73 24.927 Sep 81 6.304 Dec 89 29.664
Sep 73 26.347 Dec 81 9.673 Mar 90 16.145
Dec 73 30.275 Mar 82 11.157 Jun 90 14.997
Mar 74 27.002 Jun 82 10.695 Sep 90 14.194
Jun 74 19.603 Sep 82 9.484 Dec 90 10.637
Sep 74 15.686 Dec 82 7.347 Mar 91 3.139
Dec 74 12.930 Mar 83 8.940 Jun 91 1.837
Mar 75 6.311 Jun 83 9.100 Sep 91 -7.171
Jun 75 2.619 Sep 83 13.100 Dec 91 -8.923
Sep 75 1.143 Dec 83 18.247 Mar 92 1.812
Dec 75 2.789 Mar 84 23.092 Jun 92 -0.996
Mar 76 7.344 Jun 84 30.915 Sep 92 -1.822
Jun 76 12.557 Sep 84 38.164 Dec 92 -0.153
Sep 76 15.203 Dec 84 41.229 Mar 93 3.976
Dec 76 16.354 Mar 85 38.227 Jun 93 8.112
Mar 77 19.136 Jun 85 38.307 Sep 93 13.823
Jun 77 21.120 Sep 85 32.447 Dec 93 24.368
Sep 77 23.330 Dec 85 35.629 Mar 94 26.995
Dec 77 25.043 Mar 86 38.273 Jun 94 35.262
Mar 78 26.922 Jun 86 38.276 Sep 94 39.148
Jun 78 23.027 Sep 86 36.828 Dec 94 41.757
Sep 78 24.708 Dec 86 32.732 Mar 95 49.056
Dec 78 25.308 Mar 87 25.470 Jun 95 48.017
Mar 79 24.720 Jun 87 17.248 Sep 95 52.071
Jun 79 27.964 Sep 87 18.895
Sep 79 23.013 Dec 87 16.665
Dec 79 21.186 Mar 88 20.547
Mar 80 18.566 Jun 88 22.325
Jun 80 13.378 Sep 88 20.557
Sep 80 5.755 Dec 88 19.322
Dec 80 1.203 Mar 89 26.105
*<F1>Annual $ Change in Credit as a Percent of Annual $ Change in Spending.
3 Month Moving Average
As an aside, we question the wisdom of the expanding use of credit cards
backed by home equity and, the latest twist, 401K plan balances. As wonderful
as the free market is, it historically has fueled excesses, and we feel, in this
case, that the borrowing public is being led down the primrose path.
Inflation has been in check for some time, as wages, the primary driver of
inflation, have lagged. The unanimity of thought on inflation, that there is
nothing to worry about, is cause for more concern, not less. We will look for
signs of changing sentiment on the wage front.
INTEREST RATES
We expect interest rates to end the year pretty much where they started, a
bold forecast given the volatility in recent years. While additional cuts in
the Fed Funds rate are likely, this is mostly discounted in the long term sector
of the bond market. A satisfactory budget accord is also in the market;
anything less could result in higher long rates.
CORPORATE EARNINGS
Over the long haul, stock prices move in line with the underlying earnings of
the companies. Hence, the long-term return of about 10% per year in the S&P 500
is comprised of approximately 6% per year price change, driven by the historic
6% per year earnings growth of the S&P companies, plus an average dividend
return of about 4%. Pretty simple. Over the short haul, however, stock prices
reflect investor psychology and expectations as to what earnings will be. The
market can, for relatively long periods, generate returns either less than (1966
to 1979) or greater than (1980-1991) the underlying profit growth. But over the
last thirty years the stock price change is almost identical to the growth in
earnings (Table 1).
TABLE 1
EARNINGS STOCK PRICE
GROWTH GROWTH
-------- -----------
1966-1979 7.80% 1.11%
1980-1991 0.57% 11.92%
1992-1995 22.80% 10.20%
1966-1995 6.70% 6.52%
So what? S&P earnings have been on a tear, increasing over 120% since the
cyclical low in the 4th quarter of 1991. This is a 23% per year increase from
the low (Chart C), but only a 5.5% annual increase from the last peak (Chart D).
The 15-quarter expansion in earnings, through September, is about twice as long
as the previous two expansions. In our view, the cyclical rebound has pretty
well run its course. After-tax profit margins will approximate 6%, a 25-year
high. And despite the benefits of significant corporate restructurings, the
peak to peak gains thus far have actually trailed the historic average.
None of this addresses the quality of earnings issue. Large-scale write-offs
have reduced depreciation and amortization charges, thus boosting reported
earnings. We estimate that reported earnings growth over the past five years is
roughly double the growth in cash earnings (cash flow), and about 4 times the
rate of growth in sales, a clearly unsustainable pace.
If corporate earnings flatten out this year, as we expect, the stronger
earnings prospects of our portfolio companies will be very important, and should
result in better relative performance over the year ahead.
CHART C
STANDARD & POOR'S 500 EARNINGS
1982 15.36 1987 14.48 1992 15.97
14.81 15.10 16.19
14.17 14.42 17.05
13.56 15.86 18.04
1983 12.64 1988 17.50 1993 19.06
12.42 18.59 19.84
12.59 21.67 19.33
13.30 22.73 20.41
1984 14.03 1989 23.75 1994 21.89
15.26 24.96 22.71
16.20 25.22 25.20
16.58 23.69 27.33
1985 16.64 1990 22.87 1995 30.65
16.39 21.67 32.55
15.61 21.26 34.43
15.23 21.74 35.18
1986 14.51 1991 21.34
14.52 20.94
14.71 19.41
14.95 17.82
Sources: Standard & Poor's Corporation o Copyright 1996 Crandall,
Pierce & Company
CHART D
STANDARD & POOR'S 500 EARNINGS PER SHARE GROWTH
Business Cycles
Trough to Trough Q1 1983 to Q2 1987 4.25 Years 3.6%
Peak to Peak Q4 1984 to Q2 1989 4.5 Years 9.7%
Trough to Trough Q2 1987 to Q4 1991 4.5 Years 2.3%
Peak to Peak Q2 1989 to Q3 1995 6.25 Years 5.5%
Sources: Standard & Poor's Corporation; Crandall, Pierce & Company
THE STOCK MARKET
After three years of strong absolute and relative performance by medium-sized
and smaller companies compared to the S&P 500, 1994 saw slight out-performance
by the S&P, and 1995, an even wider spread. Last year, the S&P 500 outperformed
over 85% of the domestic equity mutual funds. Investors poured money into index
funds. Meanwhile, the market is expensive by most measures, except nominal p/e
ratios. And adjusting for the quality of earnings issue raised above, the S&P
is probably selling for over 20 times earnings. There has never been a longer
period without a 10% correction in the Dow, and the modest mid-year correction
of 3.3% in the Dow last year was the smallest on record. None of this suggests
disaster ahead, but investor expectations should reflect the likelihood of a
more difficult 1996.
Rarely do cautionary admonitions come to pass as rapidly as the unraveling of
the technology sector, primarily semiconductors, which we discussed at length
last July. Most technology stocks peaked within weeks after that, and declines
of 25-50% are commonplace among the major companies, with many smaller companies
declining much more. We will continue to follow many of these excellent
companies as we look for future investment opportunities.
The market became increasingly two-tiered during 1995. Of 7512 companies
with a market cap less than $1 billion, 2668, or 35%, are down 33% or more from
their 52-week highs. Of 431 companies with a market cap greater than $4
billion, seven, or 1.6%, are down over 33% from their 52-week highs. From a
valuation standpoint, we are definitely fishing in the right pond.
While we feel that 1996 will generally be more difficult for stock market
investors, and that absolute returns will be substantially less than those
achieved during 1995, we feel that we are positioned to do well relative to the
market, and that our companies will perform very well in an environment of
slowing corporate profits.
Thank you for your continuing confidence in Fiduciary Capital Growth Fund,
Inc.
Sincerely,
/s/ Ted D. Kellner, C.F.A. /s/ Donald S. Wilson, C.F.A.
Ted D. Kellner, C.F.A. Donald S. Wilson, C.F.A.
President Vice President
225 E. Mason St. o Milwaukee, WI 53202 414-226-4555
Fiduciary Capital Growth Fund, Inc.
STATEMENT OF NET ASSETS
December 31, 1995 (Unaudited)
QUOTED
MARKET
SHARES VALUE (B)<F2>
- --------- -----------
LONG-TERM INVESTMENTS - 89.3% (A)<F1>
COMMON STOCKS - 84.7% (A)<F1>
BANKS/SAVINGS & LOANS - 3.1%
52,000 Marshall & Ilsley Corp. $1,352,000
CHEMICAL/SPECIALTY MATERIALS - 5.3%
12,000 Minerals Technologies Inc. 438,000
33,000 Raychem Corp. 1,876,875
---------
2,314,875
COMPUTERS - 3.3%
42,000 Stratus Computer, Inc. 1,454,250
CONSUMER PRODUCTS - NON-DURABLES - 1.5%
25,000 Newell Co. 646,875
CONSUMER SERVICES - 1.4%
18,000 Roto-Rooter, Inc. 594,000
DISTRIBUTION - 2.0%
26,500 Fisher Scientific International 884,437
ELECTRONICS - 0.4%
7,600 Belden Inc. 195,700
Energy/Energy Services - 4.0%
45,000 Burlington Resources Inc. 1,766,250
HEALTH INDUSTRIES - 5.4%
20,000 Dentsply International Inc. 800,000
38,500 Haemonetics Corp. 683,375
38,000 Sybron International Corp. 902,500
---------
2,385,875
INDUSTRIAL SERVICES - 1.0%
8,000 Bandag, Inc. 424,000
INSURANCE - 7.6%
20,000 John Alden Financial Corp. 417,500
32,000 Old Republic International Corp. 1,136,000
19,000 Progressive Corp. (Ohio) 928,625
21,000 Providian Corp. 855,750
---------
3,337,875
LEISURE/RESTAURANTS - 4.6%
75,000 Brinker International, Inc. 1,134,375
128,500 Ryan's Family Steak Houses, Inc. 899,500
---------
2,033,875
MISCELLANEOUS - BUSINESS SERVICES - 2.9%
50,000 G & K Services, Inc. $1,275,000
MISCELLANEOUS - CONSUMER
MANUFACTURING - 1.6%
22,500 Corning Inc. 720,000
MISCELLANEOUS - FINANCE - 3.3%
11,600 Federal National
Mortgage Association 1,439,850
PAPER/PACKAGING - 5.0%
20,700 AptarGroup, Inc. 773,663
20,000 P. H. Glatfelter Co. 342,500
20,000 Liqui-Box Corp. 592,500
17,600 Wausau Paper Mills Co. 479,600
---------
2,188,263
POLLUTION CONTROL - 4.4%
58,000 Browning-Ferris Industries, Inc. 1,711,000
33,000 Harding Lawson Associates
Group, Inc. (formerly
Harding Associates, Inc.) 198,000
---------
1,909,000
PRINTING/PUBLISHING/FORMS - 5.2%
21,500 Banta Corp. 946,000
46,000 Deluxe Corp. 1,334,000
---------
2,280,000
PRODUCER MANUFACTURING - 8.7%
46,000 Pall Corp. 1,236,250
57,000 Regal-Beloit Corp. 1,239,750
57,000 Watts Industries, Inc. 1,325,250
---------
3,801,250
RETAIL TRADE - 5.5%
53,000 Casey's General Stores, Inc. 1,159,375
90,000 Family Dollar Stores, Inc. 1,237,500
---------
2,396,875
SOFTWARE/SERVICE - 8.5%
58,000 Mentor Graphics Corp. 1,058,500
26,000 Policy Management
Systems Corp. 1,238,250
50,000 SunGard Data Systems Inc. 1,425,000
---------
3,721,750
MISCELLANEOUS - 0.0 %
1,297 Windmere Warrants, 01/19/98 $0
----------
Total common stocks 37,122,000
----------
U.S. TREASURY NOTES - 4.6% (a)<F1>
2,000,000 U. S. Treasury Notes,
4.375%, due 08/15/96 1,989,062
----------
Total long-term
investments 39,111,062
SHORT-TERM INVESTMENTS - 10.3% (a)<F1>
VARIABLE RATE DEMAND NOTES
1,838,000 American Family
Financial Services 1,838,000
1,111,376 Pitney Bowes Credit Corp. 1,111,376
1,555,000 Wisconsin Electric Power
Company 1,555,000
---------
Total short-term
investments 4,504,376
----------
Total investments 43,615,438
Cash and receivables, less
liabilities 0.4% (a)<F1> 195,611
----------
NET ASSETS $43,811,049
----------
----------
Net Asset Value Per Share
($0.01 par value
10,000,000 shares
authorized), offering
and redemption price
($43,811,049 / 2,179,140
shares outstanding) $20.10
----------
----------
(a)<F1>Percentages for the various classifications relate to net assets.
(b)<F2>Each security, excluding short-term investments, is valued at the last
sale price reported by the principal security exchange on which the issue is
traded, or if no sale is reported, the latest bid price. Securities which are
traded over-the-counter are valued at the latest bid price. Short-term
investments are valued at cost which approximates quoted market value.
FIDUCIARY CAPITAL GROWTH FUND, INC.
225 East Mason Street
Milwaukee, Wisconsin 53202
BOARD OF DIRECTORS
TED D. KELLNER
THOMAS W. MOUNT
DONALD S. WILSON
INVESTMENT ADVISER
AND ADMINISTRATOR
FIDUCIARY MANAGEMENT, INC.
225 East Mason Street
Milwaukee, Wisconsin 53202
CUSTODIAN, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
FIRSTAR TRUST COMPANY
615 East Michigan Street
Milwaukee, Wisconsin 53202
INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP
100 East Wisconsin Avenue
Suite 1500
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
FOLEY & LARDNER
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
