QUARTERLY REPORT
JUNE 30, 1999
FIDUCIARY
CAPITAL GROWTH
FUND, INC.
A NO-LOAD
MUTUAL FUND
Fiduciary
Capital Growth
Fund, Inc.
July 22, 1999
Dear Fellow Shareholder:
The market environment for mid- to small-capitalization companies, in which
your Fund focuses, improved dramatically in the second quarter, and your Fund
participated accordingly. For the quarter ended June 30, 1999, the Fiduciary
Capital Growth Fund experienced a 20.9% return. This compares with a return of
6.9% for the S&P 500, and 15.6% for the Russell 2000 Index. Year-to-date,
through June 30, the Fund's return is 14.8%, versus 12.2% for the S&P 500, and
9.3% for the Russell 2000. The Fund's one, five and ten year annual compounded
returns are 11.2%, 17.5% and 13.2%, respectively.
As we had stated in our past communications, we were somewhat puzzled as to
why our companies had not performed better, given their strong earnings gains in
the past year, relative to the S&P 500 and the Russell 2000. Specifically,
while S&P 500 operating earnings were nonexistent in 1998, your companies grew
at about 9%, and accelerated to 10% in the first quarter of this year, while the
S&P 500 operating earnings for the first quarter grew 3.7%. Your companies were
enjoying strong relative earnings growth, while at the end of the first quarter,
the portfolio sold at a 55% discount to the S&P 500's price/earnings ratio; that
conundrum, however, was resolved with a resounding vote of confidence for your
companies in the second quarter, as witnessed by its 20.9% gain. Even with this
strong absolute and relative performance in the second quarter, your portfolio
today still sells at a 44% discount. The environment for corporate
profitability has picked up, both for the broad economy, as well as your
portfolio. We envision the growth in our companies approaching 12-14%, which is
still nicely ahead of the earnings growth that most of Wall Street's pundits
forecast for the S&P.
One of the contributing factors to our strong second quarter performance was
the fact that two of our positions, Superior Services and VWR Scientific
Products, were acquired. We would expect that this phenomenon may well
continue, with the valuation disparity that still exists between large and small
companies. It certainly makes sense for the S&P 500 type of companies to
continue to expand via acquisitions, when these acquisitions can be done
accretively.
From a longer term perspective, as can be seen from the following table which
graphs the performance of large versus small capitalization companies over the
past 40 years, Wall Street will, at times, view one sector more favorably than
the other. With the exception of the 1991-1993 period, when small
capitalization companies outperformed their large cap brethren, it has been an
environment, since the end of 1983, where larger companies have performed
better. At the end of the first quarter of this year, we were almost at
relative valuation levels not seen since 1974, which led to a protracted period
of almost ten years of outperformance for smaller capitalization companies.
Given the significant valuation discrepancies we've discussed in favor of small
cap companies, we think we may be at a period of small cap resurgence which may
well persist for some time to come.
100.00
103.09
102.29
103.39
101.37
102.19
101.71
102.79
103.60
101.48
102.12
98.40
101.18
104.01
109.19
108.72
113.08
117.59
116.68
116.32
125.98
127.03
127.42
120.94
121.62
114.81
118.51
117.08
116.00
113.58
112.48
111.05
111.67
112.61
108.73
109.59
108.90
106.73
105.26
104.37
109.89
111.58
109.40
108.41
106.40
106.13
109.51
109.51
106.41
105.77
106.02
105.72
107.02
106.87
106.28
109.29
107.51
105.75
101.72
97.80
100.18
98.66
96.11
95.88
94.43
98.55
98.34
96.52
95.46
93.21
91.44
91.24
91.28
80.78
83.42
83.82
83.79
87.40
94.44
95.44
92.75
95.14
94.76
95.85
94.30
90.78
89.24
91.26
88.95
92.03
92.10
91.46
92.04
90.56
86.72
87.21
87.87
84.63
83.60
81.92
80.10
81.73
82.79
82.19
80.42
81.24
78.00
74.39
71.22
67.23
68.07
68.85
72.10
74.97
78.39
78.19
78.68
77.58
76.63
77.90
79.88
81.06
80.84
78.32
86.32
88.00
86.79
81.35
82.20
79.47
78.95
78.42
79.42
81.71
85.25
87.24
89.41
86.27
87.28
87.01
88.89
89.08
90.75
91.34
94.80
95.28
93.26
95.35
95.18
96.75
96.87
96.33
93.92
93.02
91.60
93.08
95.20
92.88
92.59
93.76
90.25
90.54
89.39
88.94
87.14
89.55
91.71
93.45
91.34
87.62
87.67
88.24
85.28
87.26
88.13
91.57
93.01
88.89
84.93
88.08
86.68
83.05
80.45
84.19
80.83
78.30
77.82
73.62
77.20
77.02
74.70
80.97
82.40
81.47
77.39
77.45
75.45
75.70
75.04
74.70
72.00
69.38
64.42
60.72
61.49
59.20
58.79
59.04
57.42
54.48
53.16
55.73
57.96
57.34
57.57
Source: The Leuthold Group; as of 5/29/99.
We are heartened by the strong showing in the second quarter, and believe
that the performance we have achieved thus far, though not sustainable at this
rate of growth, will still be well in excess of the returns one will be able to
achieve in the popular indices in the next two to three years.
PORTFOLIO COMMENTARY
We have often discussed how "bottom-up" fundamental analysis drives the
research process. While it would be foolish to ignore the macroeconomic
environment, we have always felt that picking good businesses at bargain prices
and having a diversified portfolio was the best way to handle whatever "top-
down" forces were presented. This approach does not exclude consideration of
larger "themes," but simply tries to capture a desired theme without taking
undue risk. In the following paragraphs we will address the diversification
issue, and why we feel your portfolio is well positioned for the future.
In the following table, we have outlined the approximate weightings of your
portfolio as well as that of the S&P 500. We use the S&P 500 because the
constituent data is more readily available than it is for the Russell 2000, our
standard benchmark.
MARKET SECTOR FCGF S&P 500
--------------------------------------------------
Technology 20.3% 26.5%
Consumer Staples 13.5% 19.6%
Consumer Cyclicals 8.8% 6.0%
Consumer Services 9.9% 5.7%
Basic Industries 12.7% 3.4%
Industrial 8.7% 6.7%
Financial Services 10.0% 16.2%
Utilities 0.0% 6.8%
Energy 5.5% 6.9%
Transportation 0.0% 1.1%
Building Cyclicals 0.0% 1.3%
Misc.Business Services 5.1% 0.0%
As you will see shortly, we are certainly not an index fund. Of course in
hindsight, shadowing the S&P 500 would have been the smart thing to do the past
few years, as massive fund flows found their way to the very largest market cap
companies that have driven the performance of the S&P 500. If the second
quarter is a harbinger of things to come, this phenomenon should be reversed,
allowing the more neglected stocks to shine. In FCGF, there are sectors that
are heavily overweighted, and others with no exposure at all. If the companies
within a sector do not have the characteristics or valuation that we like, we
avoid that area. Utilities would be a good example of this. Conversely,
sometimes companies with attractive long-term business fundamentals fall into a
sector that is out-of-favor. We may have a double or triple weighting in this
sector. Because of "Y2K" worries, technology services (a subset of technology)
such as Modis, Romac and Keane are examples of this, even though our overall
technology weighting is less than the S&P 500. The interesting feature of our
approach is that a 40-45 stock portfolio of largely niche companies is still
diversified and exposed to the main economic growth sectors that comprise GDP.
In the technology sector, the composition of our portfolio is vastly
different than the S&P 500. The S&P technology weighting is concentrated in a
group of very high valuation, mega-capitalization stocks such as Microsoft,
Lucent, AOL, Cisco and Dell. Your technology stocks are predominantly service-
oriented, and distributors. Companies such as Sungard and National Data have
business models characterized by recurring revenue and high return on capital,
yet sell at reasonable multiples. The electronic distributors are long-term
proxies for the semiconductor and computer industries, yet do not carry the
"innovation" risk of these industries. These companies typically have lower
margins but higher returns on capital employed. As a general rule, we prefer
users as opposed to inventors of technology. Where we do have exposure to a
leading edge technology inventor, such as Methode, the risk is quite manageable.
Methode's optical connector and switch business is experiencing explosive growth
driven by the internet and broadband buildout; yet the company has a highly
profitable and relatively predictable automobile electronics business that
provides a base level of earnings growth. We believe this approach provides
above-average risk adjusted returns.
The underweighted position in the consumer staples category largely reflects
the massive move in a few S&P 500 stocks within the drug, household products and
soft drink sectors (all part of consumer staples). These were the large cap
growth stock "winners" (i.e Coca-Cola at a price/earnings ratio of 45; Gillette
at 46 times earnings; and Pfizer, at 42 times) over the last several years,
currently experiencing slowing profit growth, yet still trading at what we feel
are extraordinary multiples. While our overall healthcare (also part of
consumer staples) exposure is slightly higher than the S&P 500 (12.6% vs.
11.3%), the constituents are again quite different. Valuations keep us away from
the drug stocks currently, but we are participating in the underlying growth of
the industry through Covance and Cambrex. As big pharmaceutical companies face
profit margin pressure, they are outsourcing research (Covance) and
manufacturing (Cambrex). Both these companies are leaders in these areas and
should continue to benefit from this trend. Our other healthcare investments
are strong niche players with high levels of recurring revenue. For example,
Dentsply is the leading worldwide manufacturer of dental consumables and
equipment. They are number one or two in virtually all of their product lines
and carry an estimated 40-45% overall market share. As a general rule, our
healthcare investments try to minimize the risks associated with government
reimbursement issues. From this standpoint, we feel the portfolio is much
better positioned than the S&P 500 going forward.
One area that has struggled recently for us is retail (within the consumer
cyclical category), where we have also been modestly overweight. This is an
area where we have had good historical success and the franchises that we own
have solid long-term records. Nonetheless, the recent performance has been
unacceptable. We have recently intensified our research effort in this area and
some changes may be forthcoming.
Our 12.7% weighting in basic industries doesn't reflect investments in
commodity chemical, fertilizer or paper companies, where the lion's share of the
S&P weighting is. The largest investment is Cambrex, which has both a
healthcare and specialty chemical product mix. The other investments in this
sector are unique companies producing products in metal-based derivatives (OM
Group), polymer additives and specialty chemicals (Great Lakes Chemical),
esoteric research chemicals (Sigma-Aldrich), and precipitated calcium carbonate
(Minerals Technologies). All of these companies have above average
profitability and growth.
Our underweight position in financial services reflects the growing
commoditization of the banking sector and our view that margins will be squeezed
here over the next several years. Our lack of participation in the large multi-
line insurance companies also explains the lower weighting. The six companies
we own have established niches, solid profitability and in aggregate are growing
at about twice the S&P 500.
The overweighted position in the industrial category does not reflect
investments in heavy machinery, trucks, etc. Most of our exposure is in the
relatively predictable, high-margin waste services industry; i.e. Republic
Services, Casella Waste, and Superior Services, which is in the process of being
acquired.
Finally, underweight positions in utilities, energy, transportation, and
building cyclicals reflect the inability to find our kinds of companies at the
right price.
As always, thank you for your support of Fiduciary Capital Growth Fund.
Sincerely,
/s/Ted D. Kellner /s/Donald S. Wilson /s/Patrick J. English
Ted D. Kellner, C.F.A Donald S. Wilson, C.F.A Patrick J. English, C.F.A.
President Vice President Portfolio Manager
225 E. Mason St. o Milwaukee, WI 53202 o 414-226-4555
Fiduciary Capital Growth Fund, Inc.
STATEMENT OF NET ASSETS
June 30, 1999 (Unaudited)
QUOTED
MARKET
SHARES VALUE (B)<F2>
- ------ -------------
LONG-TERM INVESTMENTS -- 95.2% (A)<F1>
COMMON STOCKS -- 93.0% (A)<F1>
BANKS/SAVINGS & LOANS -- 1.2%
13,000 Associated Banc-Corp. $ 539,500
CHEMICAL/SPECIALTY MATERIALS -- 9.1%
47,000 Cambrex Corp. 1,233,750
20,000 Great Lakes Chemical Corp. 921,250
11,700 Minerals Technologies Inc. 653,006
23,000 OM Group, Inc. 793,500
15,000 Sigma-Aldrich Corp. 516,563
-----------
4,118,069
DISTRIBUTION -- 9.6%
53,000 Arrow Electronics, Inc. 1,007,000
17,500 Black Box Corp. 877,187
125,000 Pioneer-Standard
Electronics, Inc. 1,500,000
25,000 VWR Scientific Products Corp. 917,188
-----------
4,301,375
ELECTRONICS -- 2.2%
43,500 Methode Electronics, Inc. 995,062
ENERGY/ENERGY SERVICES -- 5.5%
19,000 Burlington Resources Inc. 821,750
35,500 Noble Affiliates, Inc. 1,000,656
36,100 Pogo Producing Co. 672,363
-----------
2,494,769
HEALTH INDUSTRIES -- 13.7%
42,000 Covance Inc. 1,005,375
50,000 Dentsply International Inc. 1,400,000
27,000 Haemonetics Corp. 541,687
10,000 National Data Corp. 427,500
73,000 Steris Corp. 1,414,375
50,000 Sybron International Corp. 1,378,125
-----------
6,167,062
INDUSTRIAL SERVICES -- 5.6%
18,000 Casella Waste System, Inc 468,000
43,000 Republic Services, Inc. CI A 1,064,250
37,600 Superior Services Inc. 1,003,450
-----------
2,535,700
INSURANCE -- 4.0%
25,602 Delphi Financial Group, Inc. 918,472
50,000 Old Republic
International Corp. 865,625
-----------
1,784,097
LEISURE/RESTAURANTS -- 0.8%
20,000 International Game
Technology 370,000
MEDIA/COMMUNICATION -- 1.2%
7,500 Telephone & Data
Systems, Inc. 547,969
MISCELLANEOUS BUSINESS SERVICES -- 9.7%
2,600 Grey Advertising Inc. 865,800
20,000 Keane, Inc. 452,500
63,000 Modis Professional
Services, Inc. 866,250
40,000 Morrison Health Care, Inc. 1,000,000
40,000 NFO Worldwide, Inc. 560,000
68,100 Romac International, Inc. 604,388
-----------
4,348,938
MISCELLANEOUS FINANCE -- 1.3%
11,500 Financial Security Assurance
Holdings Ltd. 598,000
MISCELLANEOUS TECHNOLOGY
MANUFACTURING -- 4.1%
28,600 Bell & Howell Co. 1,081,438
86,200 Paxar Corp. 775,800
-----------
1,857,238
PAPER/PACKAGING -- 3.8%
6,400 Aptargroup, Inc. 192,000
83,500 Wausau-Mosinee
Paper Corp. 1,503,000
-----------
1,695,000
PRINTING/PUBLISHING/FORMS -- 2.2%
39,000 Wallace Computer
Services, Inc. 975,000
PRODUCER MANUFACTURING -- 2.3%
43,500 Regal-Beloit Corp. 1,027,687
REAL ESTATE -- 1.4%
42,700 Security Capital Group
Inc. CL B 621,819
RETAIL TRADE -- 10.2%
41,000 Autozone, Inc. 1,235,125
94,000 Casey's General Stores, Inc. 1,410,000
46,000 Consolidated Stores Corp. 1,242,000
76,700 Stein Mart, Inc. 719,062
-----------
4,606,187
SOFTWARE/SERVICE -- 5.1%
23,000 First Data Corp. 1,125,562
19,000 Reynolds & Reynolds Co. 442,938
21,000 SunGard Data Systems Inc. 724,500
-----------
2,293,000
-----------
Total common stocks 41,876,472
REITS -- 2.2% (A)<F1>
48,900 Prologis Trust 990,225
-----------
Total long-term
investments 42,866,697
PRINCIPAL
AMOUNT
- ---------
SHORT-TERM INVESTMENTS -- 4.9% (A)<F1>
VARIABLE RATE DEMAND NOTES
$2,000,000 Firstar Bank U.S.A., N.A. 2,000,000
196,733 General Mills, Inc. 196,733
-----------
Total Short-Term
investments 2,196,733
Total investments 45,063,430
-----------
Liabilities, less cash and
receivables (0.1%) (A)<F1> (48,555)
-----------
NET ASSETS $45,014,875
-----------
-----------
Net Asset Value Per Share
($0.01 par value 10,000,000
shares authorized), offering
and redemption price
($45,014,875 / 2,402,972
shares outstanding) $ 18.73
-----------
-----------
(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
414-226-4555
BOARD OF DIRECTORS
BARRY K. ALLEN
GEORGE D. DALTON
PATRICK J. ENGLISH
TED D. KELLNER
THOMAS W. MOUNT
DONALD S. WILSON
INVESTMENT ADVISER
AND ADMINISTRATOR
FIDUCIARY MANAGEMENT, INC.
225 East Mason Street
Milwaukee, Wisconsin 53202
TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
FIRSTAR MUTUAL FUND SERVICES, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202
800-811-5311 or 414-765-4124
CUSTODIAN
FIRSTAR BANK MILWAUKEE, NA
615 East Michigan Street
Milwaukee, Wisconsin 53202
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
100 East Wisconsin Avenue
Suite 1500
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
FOLEY & LARDNER
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of Fiduciary Capital Growth Fund unless accompanied or
preceded by the Fund's current prospectus. Past performance is not indicative
of future performance. Investment return and principal value of an investment
may fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
