QUARTERLY REPORT
DECEMBER 31, 1998
Fiduciary
Capital Growth
Fund, Inc.
A NO-LOAD
MUTUAL FUND
Fiduciary
Capital Growth
Fund, Inc.
February 8, 1999
Dear Fellow Shareholder:
Collectively, your investment management team here at Fiduciary Management
has over 100 years of investment experience. We have spent the past 17 years
managing the Fund in an investment style that has focused on buying solid growth
companies, but importantly, at reasonable prices. Long-term, this disciplined
approach to investment has served us, and you, very well. In 1998, however, our
approach did not perform up to our long-term standards, and in fact, anything in
1998 that had any valuation underpinnings, including Fiduciary Capital Growth
Fund, suffered. The Fund was down 5% for the year ended 12/31/98, but the 5-
year and 10-year annual compounded returns are 12.8% and 13.0%, respectively -
rates which are very consistent with the earnings growth rates of the companies
which we own in the portfolio. As we had discussed in our letters throughout
1998, the market was led by a handful of growth companies that entered 1998 at
what we would describe as overvalued levels, and exited 1998 at historically
unprecedented valuation levels.
No matter which market index one looks at for 1998, one conclusion is
inescapable - a handful of very expensive securities drove the performance of
each index. In the S&P 500, the top 10% of the companies contributed 61% of the
performance. In the S&P Mid-Cap Index, which holds many of the same types of
securities in which the Fund invests, one stock - America Online - accounted for
over 75% of 1998's performance. Additionally, the mean (geometric) decline of
nearly 7,000 publicly traded stocks under $5 billion in market capitalization
(the Fund's hunting grounds) declined 19%. With that environment as a backdrop,
your portfolio performed reasonably well, although we were certainly not pleased
or satisfied with 1998's results. We are, however, encouraged by the strong
comeback that your portfolio experienced subsequent to the lows of early
October.
Clearly, 1998 was the year of the large-capitalization and large growth
stocks. The historically high level of performance divergence is illustrated in
the table to the right. The median market capitalization of your portfolio is
slightly under $1 billion, and as the table illustrates, this was a particularly
hard-hit segment of the market.
MARKET VALUE PERFORMANCE
<$250 million -22.0%
$250 million - $2 billion -18.0%
$2 billion - $5 billion -8.0%
$5 billion - $20 billion 4.6%
>$20 billion 24.0%
An irony (yet reality) of the 1998 market was the fact that relatively
undervalued stocks such as those in your portfolio declined during the year,
despite better-than-average underlying fundamental growth. Their mirror image
brethren, the highly valued issues -- mostly in the large cap arena -- continued
to march to higher levels, surpassing all previous valuation benchmarks. The
year finished with a narrow group of growth stocks and internet related equities
making spectacular moves. The largest 20 companies in the S&P 500 grew sales and
earnings at 4.1% and 5.4%, respectively, in 1998, yet their cumulative market
value grew 54.1%. This group now trades at 36 times earnings!
Conversely, based on fourth quarter estimates, your companies grew 1998
earnings at approximately 7% compared to First Call estimates of -3.0% for the
Russell 2000 and 2.5% for the S&P 500. Your portfolio currently trades at 13.7
times 1999 earnings' estimates. The Russell 2000 and S&P 500 trade at
comparable multiples of 16 times and 29 times, respectively. We believe the
earnings of your portfolio companies will grow about as fast as the Russell
2000, and perhaps 50-80% faster than the S&P 500, over the next few years.
THE ECONOMY
The producer side of the economy slowed substantially in 1998. Industrial
production slowed, capacity utilization fell and exports declined. Commodity
prices tumbled to 30-year lows and on an inflation-adjusted basis, 50- to 60-
year lows. Asian, Russian, and Latin American economic woes continued to
linger. Relatively rosy U.S. GDP growth of approximately 3.7% was achieved on
the strength of consumption. Housing and autos remained unusually strong in
1998. Not coincidentally, the U.S. savings rate dipped below zero for the first
time since statistics have been kept. Consumers are spending more than they
earn, undoubtedly fueled in part by capital gains.
We expect domestic economic growth to slow in 1999, driven by slower consumer
spending. Although unemployment is quite low and consumers are generally
optimistic, the key is what happens on the margin. Can housing, autos and
general consumer spending get much better than the last few years? We have begun
to see an acceleration in layoffs, particularly in the factory sector and this
may begin to impact the overall economy in 1999.
Asian and other international economies may begin to pick up after nearly two
years of turmoil. There is a great deal of pent-up demand in developing
countries and we continue to believe in the long-term growth story for the world
economy, particularly Asia. We see progress in countries such as Thailand and
South Korea. There are even signs that Japan is facing their issues in a more
head-on fashion. Still, we don't see the strength in foreign economies picking
up the slack from slower U.S. growth.
EARNINGS
As previously stated, First Call estimates predict full year 1998 earnings
growth of 2.5% for the S&P 500. This estimate appears to be highly optimistic,
as the chain-linked growth rate through the September quarter was -9.6%. A 13.4%
growth rate would be required to achieve 2.5% for the year; based on pre-
announcements of earnings disappointments and other anecdotal information, our
guess is that S&P 500 earnings did not grow in the December quarter, and thus
were down close to 10% for the year. This marks the second year of slowing
growth (the third year, if using operating earnings rather than reported
earnings), and the first down year since 1991.
The prime movers of earnings growth for large corporations over the past
seven years have been gradually diminishing. The massive reduction in interest
rates is unlikely to be repeated. Huge restructurings and "one-time" write-downs
in the early to mid-1990s provided several years of good earnings but there is
not much left here. Big companies are relatively lean, profit margins are near
peak levels and previously stalwart, bellwether growth stocks such as Coke,
Gillette and J&J are showing negative earnings growth. Pent-up demand for autos,
housing, and many capital goods have been sated, at least for the next year or
two.
Earnings growth should be much better for smaller companies in this
environment. Attractive niches can be exploited that are too small for the
larger companies. Nimble, entrepreneurial companies have a better chance to
attract talent and find growth. Many of the smaller to mid-sized companies are
just now restructuring, which should provide a boost to future earnings growth.
These are precisely the types of companies you currently own.
OUTLOOK
Imagine that, twelve months ago, you knew the following facts about 1998.
Corporate earnings would decline. Asian economies wouldn't recover. Russia
would collapse. Latin America would see recession. The U.S. savings rate would
be negative. The United States would bomb Iraq. The President would be
impeached. Commodity prices would fall to thirty-year lows. All of these things
happened and indeed helped cause declines in the vast majority of the stocks; in
fact, 5,267 out of the 8,012 publicly held stocks were down in 1998 (fully
66%!), and 43% were down more than a third! But the party continues for a
narrow group of very overvalued stocks. The degree to which these stocks are
overvalued is unprecedented.
Conversely, your portfolio is comprised of stocks which appear to incorporate
a generally low level of expectations. They discount the worries enumerated
above. They have good balance sheets to weather tough times and above-average
long-term growth potential. Although we have been disappointed in the growth
rate of earnings in your portfolio companies this year, 7% versus estimates of
14% from a year ago, they have still exceeded the vast majority of companies. In
1999 we expect somewhat better earnings growth for your portfolio companies, as
the environment has afforded us the opportunity to add several more rapidly
growing companies. As has been true in the past, this will ultimately lead to
superior stock performance. Best of all, your stocks trade at a 50% discount to
the S&P 500 and 15% lower than the Russell 2000.
The investment decision has rarely been clearer than it is today. Chase the
stocks that have been big winners and hope nothing goes wrong, or look for value
and what is most likely to work if the environment changes. We continue to
pursue a disciplined, risk-averse approach to the investment of your assets,
yielding very attractive long-term investment returns.
Thank you for your continued confidence in Fiduciary Capital Growth Fund,
Inc.
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
December 31, 1998 (Unaudited)
QUOTED
MARKET
SHARES VALUE (B)<F2>
------ -------------
LONG-TERM INVESTMENTS 96.8% (A)<F1>
COMMON STOCKS 94.7% (A)<F1>
BANKS/SAVINGS & LOANS -- 1.1%
13,000 Associated Banc-Corp. $ 444,444
CHEMICAL/SPECIALTY MATERIALS -- 11.3%
44,000 Cambrex Corp. 1,056,000
31,000 Great Lakes Chemical Corp. 1,240,000
22,000 Minerals Technologies Inc. 900,636
23,000 OM Group, Inc. 839,500
25,000 Sigma-Aldrich Corp. 734,375
----------
4,770,511
DISTRIBUTION -- 10.3%
53,000 Arrow Electronics, Inc. 1,414,464
34,500 Black Box Corp. 1,306,687
125,000 Pioneer-Standard Electronics, Inc. 1,171,875
25,000 VWR Scientific Products Corp. 434,375
----------
4,327,401
ELECTRONICS -- 1.6%
43,500 Methode Electronics, Inc. 679,688
ENERGY/ENERGY SERVICES -- 6.6%
40,000 Burlington Resources Inc. 1,432,520
35,500 Noble Affiliates, Inc. 874,188
36,100 Pogo Producing Co. 469,300
----------
2,776,008
HEALTH INDUSTRIES -- 10.1%
77,500 Dentsply International Inc. 1,995,625
27,000 Haemonetics Corp. 614,250
20,000 Morrison Health Care, Inc. 381,260
46,000 Sybron International Corp. 1,250,648
----------
4,241,783
INSURANCE -- 4.9%
13,005 Delphi Financial Group, Inc. 681,956
8,000 Executive Risk Inc. 439,504
42,000 Old Republic International Corp. 945,000
----------
2,066,460
LEISURE/RESTAURANTS -- 1.1%
20,000 International Game Technology 486,260
MEDIA/COMMUNICATION -- 1.0%
34,000 Allegiance Telecom, Inc. 412,250
MISCELLANEOUS-BUSINESS SERVICES -- 4.3%
2,600 Grey Advertising Inc. 946,400
30,000 Modis Professional Services, Inc. 435,000
20,000 Romac International, Inc. 445,000
----------
1,826,400
MISCELLANEOUS-TECHNOLOGY MANUFACTURING -- 8.2%
35,000 Bell & Howell Co. 1,323,455
86,200 Paxar Corp. 770,456
41,700 Raychem Corp. 1,347,452
----------
3,441,363
PAPER/PACKAGING -- 6.2%
21,800 Liqui-Box Corp. 1,133,600
83,500 Wausau-Mosinee Paper Corp. 1,476,948
----------
2,610,548
PRINTING/PUBLISHING/FORMS -- 7.8%
72,000 PRIMEDIA Inc. 846,000
16,000 Scholastic Corp. 858,000
42,000 Thomas Nelson, Inc. 567,000
39,000 Wallace Computer Services, Inc. 1,028,625
----------
3,299,625
PRODUCER MANUFACTURING -- 2.0%
36,000 Regal-Beloit Corp. 828,000
REAL ESTATE -- 0.9%
27,700 Security Capital Group Inc. CL B 375,695
RETAIL TRADE -- 10.6%
41,000 Autozone, Inc. 1,350,458
83,000 Casey's General Stores, Inc. 1,081,573
75,000 Consolidated Stores Corp. 1,514,100
76,700 Stein Mart, Inc. 534,522
----------
4,480,653
SOFTWARE/SERVICE -- 6.7%
51,000 First Data Corp. 1,616,088
53,000 Reynolds & Reynolds Co. 1,215,714
----------
2,831,802
----------
Total common stocks 39,898,891
REITS -- 2.1% (A)<F1>
43,400 Prologis Trust 900,550
----------
Total long-term investments 40,799,441
PRINCIPAL
AMOUNT
--------
SHORT-TERM INVESTMENTS -- 3.3% (A)<F1>
VARIABLE RATE DEMAND NOTE
$1,387,921 Firstar Bank U.S.A., N.A. $ 1,387,921
----------
Total investments 42,187,362
Liabilities, less cash and
receivables (0.1%) (A)<F1> (23,167)
----------
NET ASSETS $42,164,195
----------
----------
Net Asset Value Per Share
($0.01 par value 10,000,000
shares authorized), offering
and redemption price
($42,164,195 / 2,583,538
shares outstanding) $ 16.32
----------
----------
(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
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.
