[CLIPPER FUND(TM) LOGO APPEARS HERE]
CLIPPER FUND(TM)
P E R F O R M A N C E
RETURN
Morningstar
CLIPPER S&P 500 Large Value
--------- --------- ------------
Compounded Annual Returns:
One year (1998) 19.2% 28.6% 12.3%
Three Years (1996-1998) 22.9 28.2 19.7
Five Years (1994-1998) 21.3 24.1 17.9
Ten Years (1989-1998) 17.5 19.2 15.5
Since Inception (February 29, 1984) 17.8 18.4 15.5
Annual Returns:
1984* 21.3% 10.8% 9.9%
1985 26.4 31.7 28.3
1986 18.8 18.7 17.4
1987 3.1 5.3 2.4
1988 19.6 16.6 17.5
1989 21.9 31.7 23.5
1990 (7.6) (3.1) (6.4)
1991 32.1 30.5 29.0
1992 15.8 7.6 10.4
1993 11.1 10.1 13.5
1994 (2.4) 1.3 (0.4)
1995 45.2 37.6 32.5
1996 19.4 23.0 20.8
1997 30.2 33.4 26.8
1998 19.2 28.6 12.3
Inception-to-Date
Cumulative Return 1028.2% 1131.6% 743.3%
====== ====== =====
RISK
Third Quarter, 1998 (1.7%) (10.0%) (12.6%)
Fourth Quarter, 1987 (7.5%) (22.5%) (19.2%)
Cumulative Decline During
Down Quarters (39.3%) (52.5%) (50.7%)
Beta Since Inception
(February 29, 1984) 0.69 1.00 0.87
1. All returns are historical and include changes in share price and
reinvestment of dividends and capital gains. Past performance is no
guarantee of future results. Investment return and principal value of
investments fluctuate. Investor's shares, when redeemed, may be worth
more or less than their original cost.
2. Clipper Fund(TM)'s performance is compared with that of the S&P 500 Index,
an unmanaged index of 500 companies widely recognized as representative of
the equity market in general and the Morningstar Large Value Funds Index,
an index of 514 managed large value mutual funds monitored by Morningstar.
*1984 results for Clipper Fund(TM), S&P 500 and the Morningstar Large Value
Funds Index are for the period February 29, 1984 (inception date) through
December 31, 1984.
- -----------------------------------------------------------------------------
Dear Shareholder:
It was a peculiar year. Corporate profits declined slightly. Stock and
bond prices rose substantially. Interrupted only by a brief mini-panic in
the late summer, the longest bull market in history passed every valuation
benchmark known to economic man. Even record valuation levels for the broad
market look pale beside those of Internet stocks today.
Last year also was peculiar in the unusually wide divergence of equity
prices. Large gains were made by a small number of stocks, mostly a few
technology issues and the biggest 25 companies in the S&P 500. Much more
modest gains or outright losses were recorded elsewhere. While your stocks
performed well despite a small exposure to those favored groups, a large cash
position reduced your total return:
S&P 500 (Market Weighted) 28.6%
S&P 500 (Equal Weighted) 12.8%
Dow Jones Industrial Average 18.1%
Morningstar Large Value 12.3%
Your Portfolio 19.2%
- ------------------------------------------------------------------------------
Profitless Prosperity?
Something peculiar is happening to corporate profits. Normally an
economy growing at nearly 4% produces an impressive expansion of
profits. Last year it didn't. By some measures, corporate profits
actually declined. Since vigorous profit growth has been the main engine
propelling the great bull market of the 1990's the obvious question is
whether this profit problem is small or significant.
The answer depends upon which of three related causes had the most
impact. The Asian Crisis is the most obvious culprit. It reduces our
exports to their formerly growing markets and reduces U.S. dollar profits
translated from their newly depreciated currencies. While predictions about
the end of the Asian Crisis are no more reliable than the (absence of)
predictions about its beginning, the situation there seems to be stabilizing
at a level which is disappointing for them but manageable for us. So long as
their conditions do not worsen or produce a new financial crisis by massive
defaults on their loans to our banks, U.S. corporate profits should be able
to muddle through.
The muddle through outcome is less likely if the real culprits are
excess capacity and lack of pricing power. The great capital spending binge
of the 1990's produced the predictable hangover in the form of excess
capacity across a broad spectrum of industries-cars, chemicals, computers,
casinos, etc. At the same time pricing power has disappeared; surveys now
show pricing power at the lowest levels in 50 years. The only price still
clearly going up is labor, and that at a faster rate than productivity. The
result is a squeeze on profits whose strength and duration cannot be predicted.
These three causes-Asia, overcapacity, and pricing-are easy to state
separately but impossible to separate analytically. They all affect each
other. Excess capacity leads to price cutting in competitive industries. Much
of the world's excess manufacturing capacity resides in Asia because those
nations pursued capital spending with the zest of Mae West. "Too much of a
good thing can be wonderful." Too much capacity is not wonderful for profits
since prices are set at the margin; only small changes in capacity utilization
in industries such as paper generate large changes in prices and profits.
Today's generous stock prices reflect the twin assumptions that the
profit problem is transitory and that more double-digit growth is just around
the corner. Maybe the market is right. There is no margin of safety, however,
if those optimistic assumptions turn out to be wrong. In this case history is
on the side of the pessimists. As shown in the graph below, the recent level
of corporate profitability has been the highest in history by far. Any
return to (or through) the historical average return on equity would be a
major shock for investors.
Is Corporate Profitability Going Down?
S&P 400 - Return on Equity
Average +1 Std. -1 Std.
Deviation Deviation
'47 0.172 0.148 0.185 0.110
'48 0.197 0.148 0.185 0.110
'49 0.147 0.148 0.185 0.110
'50 0.182 0.148 0.185 0.110
'51 0.150 0.148 0.185 0.110
'52 0.131 0.148 0.185 0.110
'53 0.128 0.148 0.185 0.110
'54 0.130 0.148 0.185 0.110
'55 0.162 0.148 0.185 0.110
'56 0.139 0.148 0.185 0.110
'57 0.134 0.148 0.185 0.110
'58 0.100 0.148 0.185 0.110
'59 0.113 0.148 0.185 0.110
'60 0.105 0.148 0.185 0.110
'61 0.100 0.148 0.185 0.110
'62 0.110 0.148 0.185 0.110
'63 0.117 0.148 0.185 0.110
'64 0.127 0.148 0.185 0.110
'65 0.137 0.148 0.185 0.110
'66 0.135 0.148 0.185 0.110
'67 0.123 0.148 0.185 0.110
'68 0.129 0.148 0.185 0.110
'69 0.122 0.148 0.185 0.110
'70 0.105 0.148 0.185 0.110
'71 0.113 0.148 0.185 0.110
'72 0.124 0.148 0.185 0.110
'73 0.152 0.148 0.185 0.110
'74 0.153 0.148 0.185 0.110
'75 0.127 0.148 0.185 0.110
'76 0.151 0.148 0.185 0.110
'77 0.150 0.148 0.185 0.110
'78 0.159 0.148 0.185 0.110
'79 0.182 0.148 0.185 0.110
'80 0.163 0.148 0.185 0.110
'81 0.155 0.148 0.185 0.110
'82 0.114 0.148 0.185 0.110
'83 0.125 0.148 0.185 0.110
'84 0.148 0.148 0.185 0.110
'85 0.123 0.148 0.185 0.110
'86 0.115 0.148 0.185 0.110
'87 0.162 0.148 0.185 0.110
'88 0.198 0.148 0.185 0.110
'89 0.192 0.148 0.185 0.110
'90 0.170 0.148 0.185 0.110
'91 0.111 0.148 0.185 0.110
'92 0.121 0.148 0.185 0.110
'93 0.154 0.148 0.185 0.110
'94 0.240 0.148 0.185 0.110
'95 0.235 0.148 0.185 0.110
'96 0.251 0.148 0.185 0.110
'97 0.251 0.148 0.185 0.110
'98E 0.231 0.148 0.185 0.110
'99E 0.201 0.148 0.185 0.110
The description of the graph is contained in the paragraph preceding the graph.
The Smarter They Come The Harder They Fall
Diversification for investors, like celibacy for teenagers, is a concept
both easy to understand and hard to practice. Some of the worst investment
disasters occur when apparently diversified assets suddenly sink together.
Conventional wisdom suggests that brainpower confers a positive advantage in
avoiding this mistake, but in fact smart people seem more likely to make it.
The two Nobel Prize winners and 25 PhD's at Long Term Capital Management
saw their firm collapse not from a few large bets, but from many small ones
sinking simultaneously, a fate akin to being pecked to death by a flock of
rampaging ducks. As that firm's near failure demonstrates, acquiring a clear
idea of the prospective systematic risk in a portfolio is no easy task.
---------------------------
Another unrecognized and potentially serious systematic risk lurks in
the graph above. Many apparently diverse assets have enjoyed the pleasure of
today's record rates of profitability and probably will experience simultaneous
pain if and when that profitability returns toward long term norms:
* Equities are the obvious victim, since their prices depend
on underlying profits.
* Junk bonds and leveraged buyouts did well as profits soared
and may do poorly if they sink. Bad loans are made in good times,
and we may be close to the end of truly great times for profits.
* Venture capital and private equity may suffer a triple
disadvantage: their investments may produce more modest
returns, the ability to sell stock at remarkable prices to
the public may be limited, and competition from other very
well funded venture capitalists will be intense.
* Even foreign stocks may move in tandem with our own.
The excess capacity which pushes down profit margins is a
global problem, not merely a domestic one.
Diversification is an art, not a science. Buying assets in different
categories is no protection if they share a common systematic risk. Currently
the systematic risk for many classes of assets is dependence on a continuation
of the unprecedented level of corporate profitability we have enjoyed in
the mid-1990's. If (more likely when) that profitability returns toward
longer term norms, then a number of apparently unrelated asset categories are
likely to suffer together, creating a diversification trap for even the
smartest investors.
Now You See Them, Now You Don't
Benjamin Graham viewed Mr. Market as a normally rational fellow who
is subject to occasional severe mood swings in pricing equities. The shares
of Morgan Stanley Dean Witter provide a recent example. We bought the stock
at $37 during the mini-panic in early October, fully expecting to wait
several years until it reached our $60 estimate of intrinsic value. The
actual wait was much shorter; it soared past intrinsic value in only three
weeks! We then sold it along with recently purchased stocks in other
investment firms. Normally our portfolio turnover is low, a fact which
reflects both our long investment horizon and our belief that sloth is an
underappreciated virtue of intelligent investing. In this recent case,
however, our turnover increased as a rational response to remarkable
volatility in share prices.
The stock market's decline in late summer enabled us to add some new
names to your portfolio, a pleasant contrast to the last two years when our
trading activity consisted primarily of selling once cheap stocks as they
rose above their intrinsic values. The cheap stocks we found last summer
were not of the larger capitalization variety which still dominate your
portfolio, but were in the recently neglected medium capitalization sector.
The stock market-not our preferences-determines where the cheapest stocks
are. Our job is to focus your portfolio on them.
We also purchased more of two large holdings in your portfolio-Fannie Mae
and Freddie Mac. The stock prices of both companies plunged with concern over
hedge fund problems. Their values, however, went up precisely because
of those same hedge fund problems. As credit standards of frightened lenders
tightened, many hedge funds were forced to sell their mortgage securities at
discount prices, thereby creating an unusually profitable buying opportunity
for Fannie Mae and Freddie Mac. The consequence for last fall's mini-panic
was a little noticed transfer of wealth from hedge fund partners to
Fannie Mae and Freddie Mac shareholders.
A comment on taxes. We don't like them either. When we take gains, we
try to focus on long term holding periods to minimize your tax liability. In
volatile and generally overvalued markets such as 1998, however, an unusually
large amount of capital gains is inevitable. We too dislike the tax, but we
like the gains even more.
Our Monastery, Their Harem
Monasteries seldom are sited next to harems, but that is how a value
investor feels when watching Internet stocks today. The pleasure of their
soaring prices is obvious; the rational basis for those soaring prices is
obscure. Even past peaks of speculative mania for technology stocks (e.g.
1968, 1982) did not produce valuations remotely comparable to those of
Internet stocks now. While we admit to a certain longing to enjoy the
pleasures of this speculative mania, and we realize the importance of the
Internet, we also admit to a complete incapacity to predict and value Internet
businesses. We suspect most other investors share our limitations, but for
some the absence of adequate knowledge is no barrier to the presence of
speculative fervor.
The Internet stocks seem destined to soar like Icarus until the wax
melts. When they do crash to Earth, their losses will not be a source of
satisfaction to more monastic investors whose genes for caution have not
been deleted. The well-deserved fall of a bull market's favored group
generally envelops many less deserving stocks too, which is like
experiencing a hangover for a party you did not attend. Protecting your
portfolio from permanent loss in such a less enthusiastic stock market
remains our first priority.
Sincerely,
/s/
James Gipson
Chairman & President
January 19, 1999
Investment Portfolio
December 31, 1998
Market
Shares Cost Value
---------- ------------- -----------
COMMON STOCKS (66.1%)
CONSUMER PRODUCTS & SERVICES (4.4%)
Mattel, Inc. 1,181,700 $ 30,156,877 $ 26,957,531
Nike, Inc. Class B 662,300 27,325,710 26,864,544
------------- -----------
57,482,587 53,822,075
------------- -----------
FOOD & TOBACCO (15.9%)
Philip Morris Companies, Inc. 2,411,700 99,849,068 129,025,950
McDonald's Corporation 447,800 22,519,181 34,312,675
UST, Inc. 947,800 26,252,882 33,054,525
------------- -----------
148,621,131 196,393,150
------------- -----------
HEALTH CARE (6.7%)
Johnson & Johnson 514,700 21,911,368 43,170,463
Columbia/HCA Healthcare Corporation 1,608,700 32,376,862 39,815,325
------------- -----------
54,288,230 82,985,788
------------- -----------
INSURANCE (0.7%)
Old Republic International Corporation 378,665 7,576,238 8,519,962
------------- -----------
MORTGAGE FINANCE (24.7%)
Freddie Mac 2,317,400 72,824,010 149,327,463
Fannie Mae 1,766,000 75,068,952 130,684,000
Golden West Financial Corporation 268,300 18,463,664 24,599,756
------------- ------------
166,356,626 304,611,219
------------- ------------
RETAILING (1.8%)
General Nutrition Co.* 1,034,400 12,550,795 16,809,000
Toys "R" Us, Inc.* 292,900 7,213,515 4,942,688
------------- ------------
19,764,310 21,751,688
------------- ------------
SECURITIES INDUSTRY (2.8%)
Bear Stearns Companies, Inc. 727,400 22,523,238 27,186,575
Franklin Resources Inc. 210,900 6,333,393 6,748,800
------------- ------------
28,856,631 33,935,375
------------- ------------
SPECIAL SITUATIONS & OTHER (9.1%)
Manpower, Inc. 1,076,600 28,378,499 27,116,862
De Beers Consolidated Mines Ltd. 2,077,300 37,327,340 26,485,575
Morton International Inc. 517,600 12,254,111 12,681,200
Olsten Corp 446,300 4,509,474 3,291,462
Great Lakes Chem Corp. 86,600 3,312,509 3,464,000
All Other Marketable
Equity Securities** 2,752,100 40,054,366 38,957,963
------------- -------------
125,836,299 111,997,062
------------- -------------
TOTAL COMMON STOCKS 608,782,052 814,016,319
------------- -------------
Par Value
-----------
SHORT TERM NOTES (16.4%)
US TREASURY OBLIGATIONS (16.4%)
US Treasury Notes 6.375%, due 5/15/00 72,524,000 73,333,419 74,133,308
US Treasury Notes 5.875%, due 2/15/00 72,361,000 72,660,475 73,299,522
US Treasury Notes 5.500%, due 2/29/99 54,103,000 54,041,555 54,609,945
------------- -------------
200,035,449 202,042,775
------------- -------------
TOTAL INVESTMENT SECURITIES (82.5%) 808,817,501 1,016,059,094
SHORT TERM RESERVES (17.0%)
REPURCHASE AGREEMENT (17.0%)
State Street Bank and Trust Co., 4.25%,
due 1/4/99 collateralized by U.S. Treasury
Obligation, due 7/31/99
valued at $213,648,180, expected proceeds,
including interest, of $209,483,728 209,459,000 209,459,000
------------- -------------
TOTAL INVESTMENT PORTFOLIO (99.5%) $1,018,276,501 1,225,518,094
=============
Cash and Receivables less Liabilities (0.5%) 6,800,695
-------------
NET ASSETS (100.0%) $1,232,318,789
=============
________________________
*Non-income producing securities.
**Includes income & non-income producing securities.
See notes to financial statements.
Statement of Assets and Liabilities
December 31, 1998
ASSETS:
Investment Portfolio:
Investment securities, at market value
(identified cost: $808,817,501) $ 1,016,059,094
Short-term investments, at cost, which is
equivalent to market (Note 6) 209,459,000
-------------
1,225,518,094
Cash 12,340
Receivable for:
Fund shares sold 5,256,519
Dividends & Interest 4,528,590
Directed Commission Recapture (Note 5) 113,885
-------------
9,898,994
-------------
1,235,429,428
-------------
LIABILITIES:
Payable for:
Accrued expenses (including $1,047,475 due adviser) 1,084,433
Fund shares repurchased 1,065,091
Investments purchased 961,115
-------------
3,110,639
-------------
NET ASSETS: (equivalent to $75.37 per share on 16,349,768
shares of Capital Stock outstanding--
200,000,000 shares authorized) $1,232,318,789
=============
SUMMARY OF SHAREHOLDERS' EQUITY:
Paid-in Capital $1,025,070,820
Unrealized appreciation of investments (Note 4) 207,241,593
Distributions in excess of realized capital gains (Note 4) (3,642)
Undistributed net investment Income 10,018
-------------
Net assets at December 31, 1998 $1,232,318,789
=============
______________________________________
See notes to financial statements.
Statement of Operations
Year Ended December 31, 1998
INVESTMENT INCOME:
Interest $ 21,284,110
Dividends 10,871,562
------------
Total Investment Income 32,155,672
EXPENSES:
Management fee (Note 2) 9,994,778
Transfer agent 282,546
Custodian and accounting (Note 5) 152,378
Registration fees 145,800
Postage & other 123,497
Printing 32,249
Insurance 26,317
Auditing 19,400
Directors fees (Note 2) 16,250
ICI Dues 14,430
Legal 13,991
Taxes 800
Miscellaneous 2,961
----------
10,825,397
Reduction of Expenses (Note 5) (152,378)
----------
Total Expenses 10,673,019
-----------
Net Investment Income 21,482,653
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain on investments
(excluding short-term investments):
Proceeds from investments sold 597,410,443
Cost of investments sold 438,942,962
-----------
Net realized gain on investments (Note 3 and 4) 158,467,481
Unrealized appreciation of investments:
Beginning of year 208,387,597
End of year (Note 4) 207,241,593
-----------
Decrease in unrealized appreciation of investments (1,146,004)
-----------
Net realized and unrealized gain on investments 157,321,477
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 178,804,130
===========
________________________________________
See notes to financial statements.
Statements of Changes in Net Assets
Year Ended December 31,
1998 1997
------------ ------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 21,482,653 $ 12,661,687
Net realized gain on investments (Note 4) 158,467,481 92,041,217
Net unrealized appreciation (depreciation)
of investments (1,146,004) 68,073,353
------------- -------------
Net increase in net assets resulting
from operations 178,804,130 172,776,257
------------- -------------
Distributions to shareholders from:
Net investment income
($1.64 and $1.36 per share, respectively (21,356,677) (12,704,789)
Net realized capital gain
($12.86 and $9.83 per share, respectively (158,471,123) (92,041,217)
------------- -------------
Decrease in net assets resulting from
distributions (179,827,800) (104,746,006)
------------- -------------
Capital Stock Transactions:
Proceeds from Capital Stock sold (6,722,616
and 3,277,834 shares, respectively) 516,533,933 254,474,897
Proceeds from Capital Stock purchased by
reinvestment of dividends and
distributions (2,415,186 and 1,279,154
shares, respectively) 168,461,418 97,548,227
Cost of Capital stock redeemed
(3,509,366 and 1,868,661
shares, respectively) (275,735,555) (138,723,619)
------------- -------------
Increase in net assets resulting
from Captial Stock transactions 409,259,796 213,299,505
------------- -------------
Total increase in net assets 408,236,126 281,329,756
NET ASSETS:
Beginning of year (includes no undistributed
net nvestment income) 824,082,663 542,752,907
------------- -------------
End of year (includes $10,018 of undistributed
net investment at December 31, 1998 $1,232,318,789 $ 824,082,663
============= =============
______________________________________
See notes to financial statements.
<TABLE>
<CAPTION>
Financial Highlights
Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Per Share Data:
Net asset value,
beginning of year $ 76.86 $ 67.57 $ 60.74 $ 46.09 $ 50.02
------ ------ ------ ------ ------
Income (loss) from
investment operations:
Net investment income 1.64 1.36 0.83 0.76 0.71
Net realized and unrealized
gain (loss) on investments 11.36 19.12 11.10 20.07 (1.93)
------ ------ ------ ------ ------
Total Income (loss) from
investment operations 13.00 20.48 11.93 20.83 (1.22)
Less distributions:
Dividends from net
investment income (1.63) (1.36) (0.83) (0.76) (0.71)
Distributions from net
realized gain on investments (12.86) (9.83) (4.27) (5.42) (2.00)
------ ------ ------ ------ ------
Net asset value, end of year $ 75.37 $ 76.86 $ 67.57 $ 60.74 $ 46.09
====== ====== ====== ====== ======
Total Return 19.2% 30.2% 19.4% 45.2% (2.4%) 11.1%
Ratios and Supplemental Data:
Net assets at end of period (000's) $1,232,319 $824,083 $542,753 $403,526 $247,057 $271,863
Ratio of expenses
to average net assets 1.06% 1.08% 1.08% 1.11% 1.11% 1.11%
Ratio of net investment income
to average net assets 2.13% 1.84% 1.32% 1.39% 1.41% 1.41%
Portfolio turnover rate 65% 31% 24% 31% 45% 64%
Number of shares outstanding
at end of period (000's) 16,350 10,721 8,033 6,643 5,360 5,435
Average commission rate $0.046 $0.048 $0.049 $0.050 - -
</TABLE>
_____________________________________
See notes to financial statements.
Notes to Financial Highlights
December 31, 1998
Note 1 - The Clipper Fund(TM) is registered under the Investment Company Act
of 1940, as amended, as a non-diversified open-end investment company. The
investment objective of the Fund is long-term growth of capital consisting
primarily of equity and equity substitute securities that are considered by
Fund management and the Investment Adviser to have long-term capital
appreciation potential. Bonds may be used when they are judged to offer
higher potential long-term returns than stocks. The following is a
summary of significant accounting policies consistently followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles:
(a) Security Valuation - Investments in securities traded on a national
securities exchange are valued at the last sale price on such exchange
on the business day as of which such value is being determined. Securities
traded in the over-the-counter market and listed securities for which no
sale was reported on that date are valued at the last reported bid price.
If no bid price is quoted on such day, then the security is valued by such
method as the Board of Directors of the Fund shall determine in good faith
to reflect its fair value. All other assets of the Fund, including
restricted and not readily marketable securities, are valued in
such manner as the Board of Directors of the Fund in good faith
deems appropriate to reflect their fair value.
(b) Federal Income Taxes - The Fund intends to comply with the
requirements of the Internal Revenue Code, as amended, applicable
to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore, no Federal income
tax provision is required.
(c) Use of Estimates - The preparation of the financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
(d) Other - As is common in the industry, security transactions
are recorded on the trade date. Dividend income and distributions
to shareholders are recorded on the ex-dividend date. Interest
income is recorded on the accrual basis.
Note 2 - The Investment Adviser's fee is equal to 1% per annum of the Fund's
average daily net asset value. The management fee is accrued daily in
computing the net asset value per share.
Each Director who is not an interested person of the Investment Adviser is
compensated by the Fund at the rate of $1,250 per quarter.
Note 3 - The cost of securities purchased (excluding short-term investments)
for the year ended December 31, 1998, was $701,601,898. The cost of securities
held is the same for Federal income tax and financial reporting purposes.
Realized gains or losses are based on the specific identification method.
Note 4 - During the year ended December 31, 1998, the Fund realized net
capital gains of $158,467,481 from securities transactions for Federal
income tax and financial reporting purposes. As of December 31, 1998,
unrealized appreciation of investment securities for tax and financial
reporting purposes aggregated $207,241,593, of which $227,590,749 related to
appreciated securities and $20,349,156 related to depreciated securities.
Note 5 - During the year ended December 31, 1998, the total amount of
transactions and related commissions with respect to which the Fund directed
brokerage transactions to brokers, in order to reduce custody expenses, was
$234,766,071 and $152,378, respectively.
Note 6 - The Fund requires the custodian to take possession, to have
legally segregated in the Federal Reserve Book Entry System or to have
segregated within the custodian's vault, all securities held as collateral
for repurchase agreements. The market value of the underlying securities is
required to be at least 102% of the resale price at the time of purchase.
If the seller (State Street Bank & Trust Co.) of the agreement defaults and
the value of the collateral declines, or if the seller enters an insolvency
proceeding, realization of the value of the collateral by the Fund may be
delayed or limited.
Note 7 - (Unaudited) Like other mutual funds and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by the adviser/administrator and other service providers
do not properly process and calculate date-related information and data from
and after January 1, 2000. This is commonly referred to as the "Year 2000
Issue." The adviser/administrator is taking steps that it believes are
reasonably designed to address the "Year 2000 Issue" with respect to
computer systems that it uses and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service
providers. At this time, we have no reason to believe that there will be a
material problem related to the "Year 2000 Issue", however, there can be no
assurances that these steps will be sufficient to avoid adverse impact on or
to the Fund.
Report of Independent Auditors
To the Shareholders and Board of Directors of Clipper Fund(TM):
We have audited the accompanying statement of assets and liabilities of
Clipper Fund(TM), including the investment portfolio, as of December 31, 1998,
the related statement of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended
and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned at December 31, 1998, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Clipper Fund(TM) at December 31, 1998, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five
years in the period then ended in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Los Angeles, California
January 22, 1999
Change in Value of $10,000 Initial Investment
Clipper S&P 500 Morningstar
Large Value
'84 10000 10000 10000
10172 10173 9898
10301 9912 10710
11536 10872 10986
'85 12128 11076 11890
13013 12093 12767
14000 12980 12292
13681 12447 14096
'86 15330 14588 16085
17970 16647 16764
17944 17627 15889
17596 16397 16543
'87 18206 17310 19417
20414 21006 19962
20354 22061 20963
20300 23516 16935
'88 18778 18218 18213
20473 19255 19337
21423 20537 19483
22452 20607 19897
'89 22452 21244 21219
24052 22750 22732
26544 24759 24687
28388 27410 24570
'90 27365 27975 23858
25324 27133 24753
26785 28840 21286
22597 24877 23006
'91 25285 27106 26350
28510 31045 26337
28380 30973 27808
30236 32630 29686
'92 33399 35365 29839
32975 34470 30255
34448 35125 30939
35954 36231 32763
'93 38685 38056 34576
40299 39715 35067
40150 39909 36478
40741 40940 37191
'94 42981 41882 36074
40945 40302 36251
41041 40472 37696
41924 42455 37041
'95 41938 42448 40192
46979 46581 43462
52967 51027 46666
56934 55086 49069
'96 60891 58402 51904
64089 61537 53247
67467 64299 54826
72855 71821 59264
'97 75098 73750 60205
85754 86608 68396
89559 93097 74602
94651 95771 75116
'98 101387 109130 83513
102225 112742 82863
100441 101524 72412
112815 123148 84334
Past performance is no guarantee of future results. These returns assume
redemption at the end of each period. For comparison purposes, the S&P 500
Index is an unmanaged index of 500 companies widely recognized as
representative of the equity market in general. The Morningstar Large Value
Funds Index is an index of 514 managed large value mutual funds monitored by
Morningstar. Data presented from inception of Fund (February 29, 1984)
through December 31, 1998.
==============================================================================
CLIPPER FUND(TM)
9601 Wilshire Boulevard
Beverly Hills, California 90210
Telephone (800) 776-5033
Shareholder Services
& Audio Response (800) 432-2504
Internet: www.clipperfund.com
INVESTMENT ADVISER
Pacific Financial Research
DIRECTORS
James H. Gipson
Norman B. Williamson
Professor Lawrence P. McNamee
F. Otis Booth, Jr.
TRANSFER & DIVIDEND PAYING AGENT [CLIPPER FUND(TM) LOGO GOES HERE]
National Financial Data Services
Post Office Box 419152
Kansas City, Missouri 64141-6152
(800) 432-2504
Overnight Address:
330 W. 9th Street, 4th Fl.
Kansas City, MO 64105
CUSTODIAN
State Street Bank and Trust Company A N N U A L R E P O R T
COUNSEL DECEMBER 31, 1998
Paul, Hastings, Janofsky & Walker LLP
INDEPENDENT AUDITORS
Ernst & Young LLP
This report is not authorized for
distribution to prospective investors
unless accompanied by a current prospectus.
==============================================================================
CF 4QTR 1298
