GREENSPRING FUND, INCORPORATED
THIRD QUARTER REPORT
SEPTEMBER 30, 1997
This report is authorized for distribution
only to shareholders who have received a
copy of the official Prospectus of the
Greenspring Fund, Incorporated.
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October 1997
Dear Shareholders:
The stock market posted excellent results during the third quarter.
Small-cap stocks outperformed large-cap securities by a wide margin, as measured
by the equity-only Lipper Small-Cap Fund Index and the Dow Jones Industrial
Index. The smaller, lesser-known companies gained more than 15% during the
quarter, as compared with a gain of less than 4% for the Dow Jones Industrials.
This superior performance by small-cap stocks, after abysmal relative
performance during the early months of 1997, allowed their year-to-date
performance to finally catch up to that of the Dow Jones Industrials and the
Standard & Poor's 500 Index. The Greenspring Fund also had a very strong
quarter finishing with a gain of 8.6%, which brings the Fund's year-to-date
performance to 22%
With the general stock market trading at unprecedented valuation levels
following the strong surge of the last several years, we thought an appropriate
topic for this letter would be a discussion of our selling strategy. At the
Greenspring Fund, we have always stressed that the preservation of capital is
one of the most important tenets of our investment philosophy. Consequently,
we are more cognizant than most mutual funds of the risks of holding overvalued
securities.
The basic precept underlying the Fund's selling strategy is that a
security should be sold when the original premise that caused us to buy that
security is no longer valid. Every holding in the portfolio must be frequently
scrutinized and subjected to an analysis that compares the desirability of
holding a security with the alternative of converting the security to cash and
benefitting from the much lower, yet risk-free, return available in money market
instruments. We try to be very careful not to rationalize holding a security
for reasons that are different from those that caused us to buy it in the first
place. Such a shifting of rationale may be a psychological reluctance to "admit
defeat" and sell a disappointing holding or a hesitancy to part with a
successful investment that has provided a boost to both the portfolio and our
psyche. It must never be forgotten that the stock market is an objective,
impassive mechanism that has no regard for any individual's cost basis
or emotional attachment to a given security.
Decisions to sell equity securities are usually made differently from
those to sell either fixed income securities or "workout" investments. First,
we will explain our methodology regarding stocks.
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At the Greenspring Fund, we seek to purchase stocks that the investment
community does not follow efficiently. These securities usually have little
or no sponsorship from Wall Street, which allows our research efforts to provide
us with a competitive advantage. By the time we purchase a security, our
knowledge about a company is superior to most other investors. Optimally, we
will purchase a company's stock when its valuation is inexpensive relative to
the overall market, the company's peers, and the company's historical valuation
levels. This condition will allow the company's stock performance to be driven
by events that are specific to the company, as opposed to being heavily
influenced by the movement of the general stock market. Ideally, securities
we purchase possess sufficiently powerful company-specific prospects that would
enable them to provide positive performance to the Fund, even if the overall
market declines.
With a "successful" investment, the security will experience price
appreciation as Wall Street "discovers" the security, research recommendations
follow, and the ensuing buying interest results in upward pressure on the stock
price. Hopefully, this increased sponsorship will propel the stock price higher
to a level where the company's stock may no longer be undervalued relative to
the market, its peers, or its historical valuation norms. At this point, the
company's stock is now more efficiently followed by the investment community.
Future, positive, company-specific events may be widely anticipated and already
factored into the stock price. Consequently, the stock price may become much
more sensitive to factors that influence the overall market and less driven
by company-specific developments. It is at this stage that we believe the
risk/reward characteristics may have deteriorated to a point that a sale or
partial sale may be warranted, thus limiting the Fund's exposure to market
volatility. We recognize it is quite possible that we may "leave some money
on the table" when we decide to reduce a holding. However, if a security no
longer meets our investment criteria and we believe the risk, whether
market-related or company-specific, is significant, we will sell at least
part of our investment position.
After a "successful" investment has appreciated, rationalizing holding
on to that security can be a natural tendency. After all, such an investment
may be a longtime "favorite" that has produced strong gains that cosmetically
look good in the portfolio. One must remain objective and not "fall in love"
with a security. Absent tax considerations that may be important in taxable
accounts, the only question in an investor's mind should be, "At this time,
does the security still fit into my investment philosophy and do the risk/reward
characteristics justify continuing to hold it?"
When it comes to an "unsuccessful" security, the analysis should be
virtually the same. Investors should ignore the fact that an investment has
been a disappointment to date. Instead, one should objectively assess whether
or not the original investment rationale still exists and whether or not it is
still valid. If it is still legitimate, then a stock's decline should be viewed
as a temporary impairment of capital and an opportunity to acquire additional
shares at a more favorable price than the original investment. Conversely, if
the original reason for purchasing the security is no longer present or is no
longer supportable, then the security should be sold immediately. In this
instance, the sooner the loss is realized, the better. Failure to admit defeat
and cut losses quickly leads, at a minimum, to frustration and opportunity
cost in terms of both money and research efforts. Worse yet, holding on to
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an unsuccessful security can lead to a permanent impairment of the portfolio's
capital.
One of the most common mistakes that investors make is to rationalize
holding a disappointing investment that should be sold. Waiting for an
investment to get back to "break-even" is a decision justified more by trying
to avoid a blow to one's ego than by rational investment analysis.
Additionally, human nature leads many investors to "throw good money after bad"
as they purchase additional shares at lower and lower prices in the hope that
an investment "this time" will turn out to be a profitable one. Investors
should continue to hold a security because they have a strong conviction that
it will go up, not merely because they hope or wish that it will.
A marked difference exists between the Greenspring Fund's selling
strategy for fixed income and workout investments and our strategy for selling
equities. The exit strategy in a fixed income investment is much more clearly
defined at the time of purchase. Typically, it is one of the following: a
bond's maturity, a company's decision to redeem the bond at a date earlier than
its maturity, or a decision by the bondholder to force the company to repurchase
the bond. Similarly, for workout investments, a decision to sell may not be
necessary due to an exit strategy that will result in the distribution of cash
to holders according to a time schedule that is known or expected at the time of
purchase. This characteristic is a major advantage of our method of fixed
income and workout investing. Unlike successful equity investing, a successful
investment in a fixed income or workout security is not necessarily dependent
upon increased sponsorship by Wall Street. However, if greater recognition of
the merits of a particular fixed income investment does result in a higher
security price, then the expected return on the investment may be achieved
sooner than anticipated, resulting in a higher than expected annualized return
and/or an earlier than expected sale decision.
The strategy an investor utilizes in selling securities is an important
one, but often is not given much attention, especially during bull markets such
as the one experienced during the last several years. By having a proactive
attitude toward selling, an investor increases his flexibility and is better
prepared to take advantage of newly discovered investment opportunities. We
believe that the Greenspring Fund's disciplined selling strategy has greatly
benefited the portfolio, by sharply reducing risk on an everyday basis, limiting
permanent losses in securities, and better positioning the Fund to take
advantage of promising new investments.
Respectfully,
Charles vK. Carlson
President
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
COMMON STOCKS (61.38%)
Shares Value
Aerospace (.70%)
11,000 Lockheed Martin Corp. $ 1,172,875
1,172,875
Banking (9.38%)
600 *Bank Plus Corp. 7,725
15,000 Bayview Capital Corp. 410,625
31,000 BostonFed Bancorp, Inc. 652,937
49,400 Charter Financial, Inc. 1,037,400
18,000 Chase Manhattan Corp. 2,124,000
15,000 *Coast Savings Financial, Inc. 786,563
25,000 Columbia Bancorp, Inc. 725,000
89,728 Crestar Financial Corp. 4,206,000
50,000 Dime Bancorp, Inc. 1,046,875
34,000 GA Financial, Inc. 633,250
15,000 Mercantile Bankshares Corp. 487,500
33,000 *PFF Bancorp, Inc. 639,375
21,100 PS Financial, Inc. 356,063
53,712 Patriot Bank Corp. 953,388
16,500 *Rocky Ford Financial Corp. 239,250
28,600 Statewide Financial Corp. 614,900
2,500 Wells Fargo & Company 687,500
15,608,351
Business Services (1.19%)
59,400 Standard Register Company 1,978,762
1,978,762
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
COMMON STOCKS (CON'T)
Shares Value
Consumer Products/Services (4.70%)
52,400 *American Safety Razor $ 962,850
475,200 *BEC Group 2,465,100
306,800 *Eagle Food Centers, Inc. 1,572,350
36,600 First Brands Corporation 979,050
19,900 Genesee Corporation Class B 950,225
60,000 *Host Marriott Services 892,500
7,822,075
Construction (.82%)
68,000 *Emcor Group Inc. 1,360,000
1,360,000
Electric Power (.31%)
25,150 *NRG Generating, Inc. 521,863
521,863
Environmental Services (2.65%)
417,774 *ATC Group Services, Inc. 4,412,738
4,412,738
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
COMMON STOCKS (CON'T)
Shares Value
Financial Services (10.02%)
300,900 Criimi Mae Inc. $ 4,776,788
68,500 *ITLA Capital Corp. 1,387,125
332,400 *Long Beach Financial Corp. 4,508,175
125,300 Ocwen Asset Investment Corp. 2,881,900
35,000 *Ocwen Financial, Inc. 1,474,375
107,900 *Ugly Duckling Corp. 1,645,475
16,673,838
Healthcare Products/Services (.56%)
69,700 *Mediq, Inc. 588,094
15,071 *VWR Scientific 344,749
932,843
Insurance (4.39%)
75,000 PartnerRe Holdings, Ltd. 3,229,688
102,416 Reliastar Financial Corp. 4,077,437
7,307,125
Manufacturing (10.81%)
150,000 *Barringer Tech 1,593,750
11,300 C & D Technologies, Inc. 518,387
115,300 *Figgie International 1,671,850
69,600 *Figgie International Class A 1,026,600
278,300 *Griffon Corporation 4,522,375
55,200 *Middleby Corp. 545,100
421,000 UNR Industries, Inc. 2,105,000
165,000 U.S. Industries, Inc. 4,785,000
35,000 Woodward Governor Company 1,225,000
17,993,062
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
COMMON STOCKS (CON'T)
Shares Value
Media (1.34%)
100,000 *US West Media Group $ 2,231,250
2,231,250
Natural Resources (5.90%)
339,917 Castle Energy Corp. 4,843,817
32,500 Mitchel Energy & Development Corp. Cl. A 920,156
47,300 *Norex Industries, Inc. 1,087,900
98,730 Penn Virginia Corp. 2,943,388
3,900 United States Lime & Minerals 31,687
9,826,948
Real Estate (5.90%)
181,200 Mark Centers Trust 1,710,075
307,800 Prime Retail, Inc. 4,809,375
175,945 The Town and Country Trust 3,298,968
9,818,418
Companies in Liquidation (2.71%)
226,976 *Atlantic Realty Trust 2,695,340
583,800 *EQK Realty Investors 1 693,262
581,450 *Hi Shear Industries, Inc. 1,126,269
4,514,871
Total Common Stocks
(Cost $70,357,064) 102,175,019
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
PREFERRED STOCKS (4.11%)
Shares/
Principal
Amount Value
Convertible Pfd. Stocks (1.70%)
117,000 Prime Retail, Inc., 8.50% Pfd. B $ 2,837,250
Total Convertible Pfd. Stocks 2,837,250
Non-Convertible Pfd. Stocks (2.41%)
1,000 Bank United Capital, 10.25%, Series A 1,025,000
14,500 Illinois Power Company, Adj. Rate Pfd.,
Series A 734,062
94,500 *River Bank America $3.75, Series A 2,244,375
Total Non-Convertible Pfd. Stocks 4,003,437
Total Pfd. Stocks (Cost $6,000,633) 6,840,687
BONDS (17.20%)
Convertible Bonds (8.98%)
$ 1,500,000 Alexander Haagen Properties, Inc.,
7.50%, 1/15/01 1,501,250
2,000,000 Bell Sports Corp., 4.25%, 11/15/00 1,770,000
5,000,000 Corporate Express, Inc., 4.50%, 7/1/00 4,740,625
1,176,000 Kelley Oil & Gas Partners, Ltd.,
8.50%, 4/1/00 1,164,240
685,000 Kelley Oil & Gas Partners, Ltd.,
7.875%, 12/15/99 667,875
500,000 Liberty Properties Limited Partnership,
8.00%, 7/1/01 671,250
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
BONDS (CON'T)
Principal
Amount Value
Convertible Bonds (Con't)
$ 5,000,000 +Physicians Resource Group,
6.00%, 12/1/01 $ 4,431,250
Total Convertible Bonds 14,946,490
Non-Convertible Bonds (7.96%)
3,417,000 Bally Health & Fitness, 13.00%, 1/15/03 3,679,152
2,445,000 Bayview Capital Corp., 9.125%, 8/15/07 2,536,688
1,500,000 B.F. Saul Real Estate Investment Trust,
11.625%, 4/1/02 1,601,250
1,000,000 Figgie International, 9.875%, 10/1/99 1,047,813
1,983,000 Homeland Stores, 10.00%, 8/1/03 1,913,595
1,000,000 +Life Savings Bank, 13.50%, 3/15/04 1,001,250
400,000 Ocwen Financial, 11.875%, 10/1/03 450,500
1,000,000 U.S. Treasury, 7.125%, 9/30/99 1,024,844
Total Non-Convertible Bonds 13,255,092
Bonds in Reorganization (.26%)
2,900,000 #Lomas Mortgage, 10.25%, 10/1/02 431,810
Total Bonds in Reorganization 431,810
Total Bonds (Cost $26,810,585) 28,633,392
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
SHORT-TERM INVESTMENTS (17.48%)
Principal
Amount Value
Commercial Paper (15.62%)
$ 6,000,000 American Express Credit Corp.,
5.541%, 10/6/97 $ 6,000,000
6,000,000 Ford Motor Credit Corp.,
5.535%, 10/28/97 6,000,000
7,000,000 General Electric Credit Corp.,
5.525%, 10/16/97 7,000,000
7,000,000 Household Finance Corp.,
5.535%, 10/22/97 7,000,000
Total Commercial Paper 26,000,000
Other Short-Term Investments (1.86%)
Rodney Square Money Market 3,087,020
Total Other Short-Term Investments 3,087,020
Total Short-Term Investments
(Cost $29,087,020) 29,087,020
Total Investments in Securities (100.17%)
(Cost $132,255,302) 164,757,356
Other Assets Less Liabilities ((.17%)) (283,332)
Total Net Assets (100%) $164,474,024
*Non-income producing securities
+144A securities, representing 3.26% of net assets
#Non-income producing, illiquid security, representing .26% of net assets
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
Securities traded primarily on a principal securities exchange are valued at the
last reported sales price on the exchange of major listing. Securities which
are traded principally in the over-the-counter market, listed securities for
which no sale was reported on the day of valuation, listed securities for which
the last reported sale price is not in the context of the highest closing bid
price and the lowest closing offering price, and listed securities whose primary
market is believed by the Advisor to be over-the-counter are valued at the
mean of the closing bid and asked prices obtained from sources that the Advisor
deems appropriate. Short-term investments are valued at amortized cost which
approximates fair market value. The value of securities that either mature or
have an announced call within 60 days may be amortized on a straightline
basis from the market value one day preceding the beginning of the amortization
period. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by the Advisor as
directed by the Board of Directors.
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GREENSPRING FUND, INCORPORATED
PERFORMANCE SINCE INCEPTION
HOW $10,000 INVESTED ON 7/1/83
WOULD HAVE GROWN*
(GRAPH)
7/83 $10,000.00
12/83 11,223.00
12/84 12,691.50
12/85 15,238.00
12/86 17,127.10
12/87 19,303.70
12/88 22,389.30
12/89 24,761.70
12/90 23,149.94
12/91 27,626.00
12/92 32,190.40
12/93 36,905.90
12/94 37,951.70
12/95 45,081.70
12/96 55,291.30
9/97 67,465.80
*Figures include changes in principal value, reinvested dividends, and capital
gain distributions. Cumulative total return represents past performance. Past
expense limitations increased the Fund's return. Investment returns and
principal value will vary and shares will be worth more or less at redemption
than at original purchase.
Average annual total returns for the one, five and ten year periods ended
September 30, 1997 were 32.85%, 17.17% and 12.49%, respectively. Average annual
returns for more than one year assume a compounded rate of return and are not
the Fund's year-by-year results, which fluctuated over the periods shown.
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Greenspring Fund, Incorporated
2330 West Joppa Road, Suite 110
Lutherville, MD 21093
(410) 823-5353
(800) 366-3863
DIRECTORS
Charles vK. Carlson, Chairman
William E. Carlson
David T. Fu
Michael J. Fusting
Michael T. Godack
Richard Hynson, Jr.
OFFICERS
Charles vK. Carlson
President and Chief Executive Office
Michael T. Godack
Sr. Vice President and Secretary
Michael J. Fusting
Vice President, Treasurer, and Chief
Financial Officer
INVESTMENT ADVISOR
Key Equity Management Corporation
2330 West Joppa Road, Suite 108
Lutherville, MD 21093-7207
TRANSFER AGENT
Rodney Square Management Corporation
1105 North Market Street, Third Floor
Wilmington, DE 19890
(800) 576-7498
CUSTODIAN
Wilmington Trust Company
1100 North Market Street
Wilmington, DE 19890
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
217 East Redwood Street
Baltimore, MD 21202-3316
LEGAL COUNSEL
DeMartino Finkelstein Rosen & Virga
1818 N Street, N.W.
Washington, DC 20036-2492
