QUARTERLY REPORT
JUNE 30, 2000
Fiduciary
Capital Growth
Fund, Inc.
A NO-LOAD
MUTUAL FUND
Fiduciary
Capital Growth
Fund, Inc.
July 25, 2000
Dear Fellow Shareholder:
The first six months of the year continued a pattern of volatility which was
enough to make your head spin. In our last three communiques to you, we warned
of the excesses we saw in the marketplace, particularly in the technology,
biotech and telecom areas. We specifically focused on some of the more egregious
valuations of companies such as Amazon (now down 70% from its high) in our
January shareholder letter, and MicroStrategy in our shareholder letter dated
April 26 (down 90% since its March high). Many of the Internet e-retailers have
experienced declines of 70-80%. In the technology-laden NASDAQ, after advancing
24% from January 1 to March 10 of this year, the Index declined by over 44%
through the end of May, matching the decline that the NASDAQ suffered during the
market crash of 1987. The USA Today index of Internet stocks, through June, was
down 38%. All the major indices, including the Dow, S&P, and Russell
experienced down second quarters. The volatility in the stock market has
increased dramatically in recent years and so far 2000 has been the most
volatile year on record. This volatility conjures up a thought from John
Maynard Keynes' 1936 classic on investing, The General Theory of Employment,
---------------------------------
Interest Rates and Money. Keynes was probably one of the most influential
------------------------
economists of the 20th Century, and was a sophisticated and experienced investor
who understood well the nature of the psychology of investing. In his book,
Keynes stated the following:
"A valuation, which is established as the outcome of the mass
psychology of a large number of ignorant individuals, is liable to
change violently as the result of a sudden fluctuation of opinion, due
to factors which really do not make much difference - since there will
be no strong roots of conviction to hold it steady."
To us, this pretty much sums up the environment we have experienced in the
last several months in the above referenced areas. Many individuals who have
purchased these securities have done so for no other reason than that the stock
prices have moved up, and they wanted to "get on the bandwagon." Many of those
"investors" had little or no understanding of the fundamentals of the companies
they owned, nor the valuations they carried. As a result, when the prices began
to decline, investors ran for the door, again, simply because the stock prices
were declining. Many suffered significant financial damage.
Anyone who has followed the markets realizes that there has been significant
damage wrought on many technology, Internet and biotech stocks. In the
environment that we've experienced, Wall Street has dramatically reassessed many
investments, and in some cases, ceased funding them to the extent that they did
as recently as the end of March of this year. Yet, volatility reigns, and many
speculative stocks have seen large moves again. As a group, we think it will be
difficult to make money in these sectors. However, we will continue to monitor
individual stocks, as we believe there will be opportunities at attractive
valuation levels.
Against this backdrop, we were able to fare rather well with our value
approach in a very volatile and difficult second quarter. Our report card for
the quarter is as follows:
-------------------------------------
Fiduciary Capital Growth Fund +0.1%
-------------------------------------
Dow Jones Industrial Average -4.0%
Standard & Poor's 500 Index -2.7%
NASDAQ Index -13.3%
Russell 2000 Index -3.8%
-------------------------------------
Recent weeks have seen further encouraging strength in our portfolio
holdings, but looking at short-term results these days is a little like the
weather in Milwaukee - it can change quickly.
Predictably, cash flows have continued to move into technology stocks that
haven't "cracked." On the following page, courtesy of the High Tech Strategist,
is a list of the 40 largest NASDAQ stocks by market capitalization. Almost all
are either technology stocks, telecom or biotech companies. These 40 companies
represent roughly 50% of the market capitalization of the NASDAQ, yet constitute
one percent of the companies (40 of 3953 companies) in the Index. Additionally,
these 40 NASDAQ stocks advanced 12 percentage points in the first six months
(the NASDAQ was down 2.5% through June 30), thus, the other 3913 companies
declined roughly 18%. Eight of the companies listed are not earning money,
while the price/earnings ratio of the other 32 companies (excluding Juniper
Network's P/E of over 4000x) is over 230x. Over half of the 40 stocks have
triple-digit price/earnings ratios and sell at 35x book value and 50x sales.
This compares to your average company, which sells at 2.1x book value, and 1.3x
----
sales. These 40 NASDAQ companies now account for $3.25 trillion of value, or
almost one quarter of the total capitalization of all U.S. equities. Yet, even
with what we would consider extreme valuations, these companies have moved up
considerably over the last 52 weeks. In many respects this is typical of what
has occurred in past stock market bubbles; when overpriced groups such as the
Internet stocks unravel, as they have in the past three months, the knee-jerk
reaction of investors is to pile into the perceived "quality" names, such as
these 40 stocks, regardless of valuation.
Although many visible NASDAQ stocks have rebounded, very few have reached
previous highs, and there remains a disturbingly high number of "bombs" (i.e.
Computer Associates, BMC, Compuware). We believe the entire group will
eventually suffer significant declines not dissimilar to that which the Internet
sector experienced in the first half of this year. We still strongly believe
that there are further significant declines ahead for those individuals who are
heavily invested in the technology sector. The valuations, by any historic
yardstick, are simply out of line, and we think this sector is in for an
extended period of under-performance.
As we've said in our past letters, we continue to believe your portfolio is
quite reasonably valued at only 14.1x this year's estimate, and 11.5x our 2001
estimate. While we are pleased to see the strong relative performance of your
stocks in the first half of 2000, we think we are at only the beginning of what
will be a protracted period of relative out-performance for our type of
investing.
STILL GROSSLY OVERPRICED
TOP 40 NASDAQ STOCKS AS OF 7/2/00
<TABLE>
7/2/00 Price Market Cap
($) P/E Ratio ($Billions) Price/Book Price/Sales
------------ --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Intel 133 11/16 58 453 12 15
Cisco Systems 63 9/16 177 449 22 27
Microsoft 80 48 418 11 19
Oracle 84 1/16 120 227 37 25
Ericsson 20 87 161 20 7
Sun Microsystems 90 5/16 100 143 22 11
WorldCom 45 7/8 30 130 3 4
Dell 49 15/16 77 126 23 5
JDS Uniphase 119 7/8 N/A 98 13 74
Applied Materials 90 5/8 56 74 13 11
Amgen 70 1/4 68 71 22 22
Yahoo 123 7/8 539 69 42 97
Broadcom 218 15/16 476 48 72 87
Nextel 61 3/16 N/A 44 20 11
Juniper 145 9/16 4159 46 97 237
Qualcomm 60 77 45 8 12
Veritac 113 1/64 278 11 11 53
Comcast 40 1/2 39 37 2 5
Siebel Systems 163 9/16 260 33 40 40
Level Three Comm. 88 N/A 33 6 51
Tellabs 68 7/16 49 29 13 12
Sycamore Networks 110 3/8 N/A 28 18 165
Xilinx 82 9/16 110 28 15 28
PMC Sierra 177 11/16 265 26 94 89
Redback Netwks 179 1/8 N/A 26 6 152
ADC Telecom 83 7/8 95 27 15 11
Voicestream 116 19/64 N/A 26 7 18
Network Appliances 80 1/2 383 25 59 48
Immunex 49 7/16 353 26 54 43
Infosys 177 1/4 377 24 118 115
Ciena 166 11/16 981 24 38 40
Global Crossing 26 5/16 N/A 22 2 6
SDL Inc. 286 3/16 648 23 42 92
Altera 101 15/16 84 21 17 23
3Com 57 5/8 31 19 5 4
Linear Technologies 63 15/16 82 20 17 33
Brocade Communications 183 1/2 834 20 185 138
Tibco Software 107 15/64 N/A 21 145 112
Maxim Integrated Tech. 67 15/16 87 20 17 28
Palm Computer 33 3/8 371 18 18 17
Averages 230 35 50
</TABLE>
Table courtesy of Fred Hickey, Editor; The High-Tech Strategist;
Issue #152; July 3, 2000
ECONOMY
-------
Investor attention has been focused on the Federal Reserve and its attempt,
for the past year, to slow economic growth from the torrid pace indicated by the
5.5% real growth experienced in the first quarter. Early reports seem to
suggest that the Fed, with its most recent 50 basis point increase in May, is
having some success. Indications for the second quarter point toward real
growth somewhere between 3.3-3.6%. Whether this rate of growth is slow enough
to forestall another rate increase in August is still unclear. Recent data,
including the government report that June employment growth was weaker than
expected, was received positively by Wall Street. Consumer confidence, while
still very high, has moderated as well in the last couple months. Weaker retail
sales notwithstanding, consumers still view economic prospects favorably.
Higher interest rates began to have some impact on new home sales in the month
of May, as well as sales of existing homes. Given the current mortgage rates of
8.5%+, the rate of both new and existing home sales will most likely show
further moderation in the months ahead. In line with other recent economic
reports, personal income and spending growth have both eased in the last couple
of months, while the savings rate has increased, but only modestly. In our
view, there is little doubt that the wealth effect of the stock market of the
last couple of years has had some impact on consumers' willingness to spend
beyond what historically would be their normal pattern of consumption. As an
engine for future growth in the economy, we think it unlikely that consumers can
continue spending at the rate of the last 24 months. Therefore, with the
ratcheting up of interest rates and a somewhat extended consumer (still
accounting for two thirds of the overall economy), we feel it is likely that the
Fed's impact, coupled with the aforementioned items, will lead to slower
economic growth. If, however, growth does not moderate into the 3.0-3.5% area,
we have no doubt that the Fed will continue to raise rates.
Against this backdrop, corporate profits continue to be reasonably robust.
Most economic forecasters and market analysts predict a 14-18% earnings growth
rate for the Standard & Poor's 500 this year. The companies in your portfolio
are experiencing a rate of growth quite similar to the S&P this year, but as we
have discussed in our past few letters, the valuations on the Fund portfolio is
still only about half that of the S&P 500. Specifically, the Fund sells at
14.1x this year's estimate, while the S&P boasts a multiple of roughly 27.5x
earnings. We believe that this continued very favorable relative valuation gap,
in favor of your companies, is one of the major contributing factors to the
strong relative performance we have experienced in the first half of this year,
and most importantly, will be the greatest factor in what we see as a two- to
three-year period of very strong relative outperformance for value-type
investments, such as those in Fiduciary Capital Growth Fund.
We are extremely optimistic about the continuation of these prospects, and as
always, thank you for your continued support and belief in our approach to value
investing here at Fiduciary Management, 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
June 30, 2000 (Unaudited)
QUOTED
MARKET
SHARES VALUE (B)<F2>
------ -------------
LONG-TERM INVESTMENTS -- 97.3% (A)<F1>
COMMON STOCKS -- 92.9% (A)<F1>
BANKS/SAVINGS & LOANS -- 0.8%
16,500 Associated Banc-Corp. $ 359,906
CHEMICAL/SPECIALTY MATERIALS -- 11.2%
43,700 Cambrex Corp. 1,966,500
29,000 Great Lakes Chemical Corp. 913,500
23,200 Minerals Technologies Inc. 1,067,200
37,300 Sigma-Aldrich Corp. 1,091,025
-----------
5,038,225
CONSUMER SERVICES -- 2.3%
32,100 H & R Block, Inc. 1,039,237
DISTRIBUTION -- 4.2%
37,700 Arrow Electronics, Inc. 1,168,700
50,000 Pioneer-Standard Electronics, Inc. 737,500
-----------
1,906,200
HEALTH INDUSTRIES -- 12.7%
120,000 Covance Inc. 1,057,500
63,000 Dentsply International Inc. 1,941,187
21,300 Haemonetics Corp. 447,300
16,600 IDEXX Laboratories, Inc. 379,725
19,600 Renal Care Group, Inc. 479,281
71,000 Sybron International Corp. 1,406,688
-----------
5,711,681
INDUSTRIAL SERVICES -- 7.5%
104,000 Casella Waste System, Inc. 1,118,000
142,300 Republic Services, Inc. 2,276,800
-----------
3,394,800
INSURANCE -- 8.8%
46,957 Delphi Financial Group, Inc. 1,593,603
24,000 MGIC Investment Corp. 1,092,000
79,325 Old Republic International Corp. 1,308,863
-----------
3,994,466
MEDIA/COMMUNICATION -- 1.8%
10,600 Adelphia Communications Corp. 496,875
27,000 Completel Europe N.V. 324,000
-----------
820,875
MISCELLANEOUS-BUSINESS SERVICES -- 10.2%
80,000 G & K Services, Inc. 2,005,000
20,300 Keane, Inc. 438,987
24,600 kforce.com, Inc. (formerly
Romac International, Inc.) 170,663
98,000 Modis Professional Services, Inc. 747,250
44,000 Morrison Management
Specialists, Inc. 1,240,250
-----------
4,602,150
MISCELLANEOUS-TECHNOLOGY
MANUFACTURING -- 5.2%
18,500 Bell & Howell Co. 448,625
30,600 Brady Corp. 994,500
75,100 Paxar Corp. 896,506
-----------
2,339,631
PAPER/PACKAGING -- 3.7%
51,300 AptarGroup, Inc. 1,385,100
35,000 Wausau-Mosinee Paper Corp. 299,687
-----------
1,684,787
PRINTING/PUBLISHING/FORMS -- 1.0%
45,200 Wallace Computer Services, Inc. 446,350
PRODUCER MANUFACTURING -- 2.1%
59,000 Regal-Beloit Corp. 947,688
REAL ESTATE -- 1.2%
31,000 Security Capital Group Inc. CL B 527,000
RETAIL TRADE -- 10.3%
131,000 Casey's General Stores, Inc. 1,359,125
150,000 Consolidated Stores Corp. 1,800,000
75,000 Family Dollar Stores, Inc. 1,467,188
-----------
4,626,313
SOFTWARE/SERVICE -- 9.9%
31,000 Acxiom Corp. 844,750
37,000 NOVA Corp./Georgia 1,033,688
84,000 SunGard Data Systems Inc. 2,604,000
-----------
4,482,438
-----------
Total common stocks 41,921,747
REITS -- 4.4% (A)<F1>
92,500 Prologis Trust 1,971,406
-----------
Total long-term investments 43,893,153
SHORT-TERM INVESTMENTS -- 2.8% (A)<F1>
VARIABLE RATE DEMAND NOTE
$1,268,336 Firstar Bank U.S.A., N.A. 1,268,336
-----------
Total investments 45,161,489
Liabilities, less cash and
receivables (0.1%) (A)<F1> (41,549)
-----------
NET ASSETS $45,119,940
-----------
-----------
Net Asset Value Per Share
($0.01 par value 10,000,000
shares authorized), offering
and redemption price
($45,119,940 / 2,510,076
shares outstanding) $ 17.98
-----------
-----------
(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, N.A.
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.
