MERRILL
LYNCH
FUNDAMENTAL
GROWTH
FUND, INC.
Quarterly Report May 31, 1994
This report is not authorized for use as
an offer of sale or a solicitation of an
offer to buy shares of the Fund unless
accompanied or preceded by the Fund's
current prospectus. Past performance
results shown in this report should not
be considered a representation of future
performance. Investment return and
principal value of shares will fluctuate
so that shares, when redeemed, may be
worth more or less than their original
cost.
Merrill Lynch
Fundamental Growth Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE>
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
DEAR SHAREHOLDER
For the quarter ended May 31, 1994, Merrill Lynch Fundamental Growth
Fund, Inc.'s Class A and Class B Shares had total returns of -6.71%
and -6.87%, resepctively, compared to a total return of -1.61% for
the unmanaged Standard & Poor's 500 Index (S&P 500). (Complete
performance information, including average annual returns, can be
found on page 3 of this report to shareholders.)
The decline in the net asset values of the Fund's Class A and
Class B Shares during the May quarter coincided with rapid and
meaningful increases in both short-term and long-term interest rates.
The Federal Reserve Board started a series of increases in the Federal
Funds rate on February 4, 1994, in response to increases in long-term
measures of inflation.
Beginning on March 18, 1994, we substantially increased the Fund's
cash reserve position of short-term securities in anticipation of
further declines in the equity markets. The substantial price declines
in fixed-income markets and electric utility stocks may not bode well
for the general stock market outlook. It may be that investors have
underestimated the inflationary potential of the rapidly growing domestic
economy and the willingness of the Federal Reserve Board to take decisive
action to reduce the long-term inflationary potential of the rapid real
growth by raising short-term interest rates. We raised Merrill Lynch
Fundamental Growth Fund's substantial cash reserve position by taking
capital gains among a large number of the Fund's individual stock
holdings. The substantial underperformance of the Class A and
Class B Shares relative to the S&P 500 during the May quarter, even
though cash reserves were raised significantly, is because of the
substantial decline in the valuation ratios for many of the companies
remaining in the Fund. Ten of the companies experienced stock price
declines of 20% or more during the May quarter. The stock prices of
growth companies tend to decline substantially when heightened
inflationary expectations cause a substantial rise in long-term
interest rates. The declines in the net asset values per share for
the Class A and Class B Shares would have been significantly greater
during the quarter if action had not been taken to increase the Fund's
cash reserves.
<PAGE>
The Environment
The rapid and substantial increase in interest rates during the May
quarter is leading consumers to expect further increases in interest
rates and is reducing prospects of greater investment in residential
housing and related household durable goods. The Federal tax increase
on upper-income households is showing its impact with a slowdown in
the overall growth of personal disposable income and weaker-than-
anticipated retail sales. However, industry analysts and executives
attribute the current slowdown in sales of US cars and light trucks
to shortages of popular models.
If the current level of interest rates persists, significant slowing
of consumer demand and downward revisions of corporate earnings
estimates may result. A reduction in estimates for corporate earnings,
particularly for the manufacturers of consumer and industrial durable
goods, in combination with the higher levels of interest rates could
produce further downward price adjustment in the general stock market
indexes.
Investment Strategy
Our long-run investment strategy is to focus on the best quality
large and mid-size capitalization growth companies where above-average
growth in earnings and superior rates of return provide an opportunity
for stock price appreciation. Large multinational growth companies
represent a significant core of the Fund's stock holdings. Some of
the companies in this category which provided positive rates of return
during the fiscal quarter were PolyGram N.V.(ADR), Computer Associates
International, Inc., McDonald's Corp., State Street Boston Corp., The
Gillette Co., and WMX Technologies Inc.
The telecommunications industry continues to be the most important
weighting in the Fund with 8.2% of net assets invested in this
sector at the end of the May quarter. Telecommunications, computer
software and services, broadcast media, retailing and the entertainment
industries are merging, as new technologies improve productivity and
create the possibility of new service products. Over 20% of the Fund
is invested in companies in these industries.
<PAGE>
The Fund's investment exposure in large-capitalization growth
companies in Mexico was reduced from 11.0% at the end of the
February quarter to 2.6% as of May 31, 1994, by taking capital gains
in several individual holdings. The Mexican stock market declined 3.9%
from February 28, 1994 to May 31, 1994. During the May quarter, the
Mexican stock market sold off to a level which was 32% below the record
high reached on February 8, 1994, just four days after the US Federal
Reserve Board started to tighten monetary policy. By the end of the May
quarter, the Mexican stock market had recovered 27% from its low on
April 20, 1994. However, we believe that the near-term outlook is
still uncertain because of a slower-than-anticipated economic recovery
so far in 1994 and social and political developments in advance of the
August 21, 1994 election. With a long-term perspective, we still believe
that Mexico is one of the more attractive developing economies with the
potential to benefit significantly from the gradual implementation of the
North American Free Trade Agreement. However, over the short-term real
economic growth in 1994 could be less than 2.0% rather than better than
4.0% as previously forecast by many economists.
When we reinvest the Fund's cash reserves in stocks, the assets are
likely to be invested predominantly in companies in the portfolio which
were reduced by sales during the May quarter.
Portfolio Matters
The Fund's cash position at the end of the May quarter was 46.9% of
net assets compared to 4.3% at the end of the February quarter. The
cash was raised by taking capital gains on the stock holdings of 25
companies in the portfolio and by eliminating holdings in two others.
The total number of companies held in the portfolio decreased from
60 to 58 during the May quarter as a result of the sales of Avon
Products Inc. and UNUM Corp. The Avon Products Inc. shares were sold
because of our concerns about the ability of the company's management
to sustain the recent recovery in both US and overseas sales to double-
digit rates of gain over the long term. We sold our shares of UNUM
Corp. at a modest capital loss as a result of an unanticipated adverse
change in disability income claims late in the first quarter of 1994.
We are concerned that the influx of claims from medical professionals
and lawyers may represent long-term change in the claims experience
for these professional groups in the disability income underwriting
area.
<PAGE>
In Conclusion
Your investment in Merrill Lynch Fundamental Growth Fund, Inc. is
appreciated. Our objective is to provide long-term capital appreciation
through investment in the stocks of large to mid-size growth companies.
During the May quarter, we realized capital gains on many of the
investment holdings as a cautionary move in portfolio strategy. We
plan to reinvest the cash reserves as uncertainties in the current
business and political outlook are resolved. We will report our future
changes in strategy and investment activities in our upcoming annual
report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Lawrence R. Fuller)
Lawrence R. Fuller
Vice President and Portfolio Manager
June 21, 1994
PERFORMANCE DATA
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
Class A and Class B Shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
12/24/92--12/31/92 $10.00 $ 9.92 -- -- -0.80%
1993 9.92 10.51 -- -- +5.95
1/1/94--5/31/94 10.51 9.59 -- -- -8.75
Cumulative total return as of 5/31/94: -4.10%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the ex-dividend date, and do not include sales charge;
results would be lower if sales charge was included.
</TABLE>
<PAGE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
12/24/92--12/31/92 $10.00 $ 9.92 -- -- -0.80%
1993 9.92 10.43 -- -- +5.14
1/1/94--5/31/94 10.43 9.49 -- -- -9.01
Cumulative total return as of 5/31/94: -5.10%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the ex-dividend date, and do not reflect deduction of any
sales charge; results would be lower if sales charge was deducted.
</TABLE>
<TABLE>
Recent Performance Results*
<CAPTION>
12 Month 3 Month
5/31/94 2/28/94 5/31/93 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Fundamental Growth Fund, Inc. Class A Shares $9.59 $10.28 $9.33 +2.79% -6.71%
ML Fundamental Growth Fund, Inc. Class B Shares 9.49 10.19 9.30 +2.04 -6.87
Standard & Poor's 500 Index** 456.50 467.14 450.19 +1.40 -2.28
ML Fundamental Growth Fund, Inc. Class A Shares--Total Return +2.79 -6.71
ML Fundamental Growth Fund, Inc. Class B Shares--Total Return +2.04 -6.87
Standard & Poor's 500 Index--Total Return** +4.22 -1.61
<FN>
*Investment results shown for the 3-month and 12-month periods are before
the deduction of any sales charges.
**An unmanaged broad-based Index comprised of common stocks.
Total investment returns for unmanaged indexes are based on estimates.
</TABLE>
<PAGE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/94 +0.31% -6.21%
Inception (12/24/92)
through 3/31/94 -2.46 -7.50
[FN]
*Maximum sales charge is 6.5%
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/94 -0.41% -1.41%
Inception (12/24/92)
through 3/31/94 -3.17 -3.17
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to
0% after one year.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Held/ Percent of
Industries Face Amount Stocks & Bonds Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Advertising 20,000 Interpublic Group of Companies, Inc. $ 697,450 $ 650,000 1.2%
Automotive & Truck 75,000 Consorcio G Grupo Dina, S.A. de C.V.(ADR)(a) 1,203,575 975,000 1.8
2,000 Daimler-Benz AG(ADR)(a) 96,537 98,250 0.2
20,000 Ek Chor China Motorcycle Co. Ltd. 734,300 482,500 0.9
----------- ----------- ------
2,034,412 1,555,750 2.9
Banking & Financial 5,000 State Street Boston Corp. 165,000 201, 875 0.4
Beverages 15,000 The Coca-Cola Co. 619,025 605,625 1.1
2,000 Coca-Cola FEMSA, S.A. de C.V.(ADR)(a) 58,807 62,250 0.1
2,000 Panamerican Beverages, Inc.(Class A) 55,510 59,750 0.1
10,000 PepsiCo, Inc. 418,300 360,000 0.7
----------- ----------- ------
1,151,642 1,087,625 2.0
Broadcast--Cable 40,000 Tele-Communications Inc. (Class A) 995,000 830,000 1.5
15,000 Time Warner Inc. 641,706 581,250 1.1
----------- ----------- ------
1,636,706 1,411,250 2.6
Broadcast--Media 5,000 Grupo Televisa, S.A. de C.V.,'L'(GDS)(b)(c) 178,253 288,750 0.5
15,000 Infinity Broadcasting Corp. 432,708 352,500 0.7
30,000 Turner Broadcasting System, Inc. 787,265 573,750 1.1
----------- ----------- ------
1,398,226 1,215,000 2.3
Business Services 5,000 The Olsten Corp. 143,483 163,750 0.3
$500,000 The Olsten Corp., Convertible Bond, 4.875%
due 5/15/2003 500,000 517,500 1.0
----------- ----------- ------
643,483 681,250 1.3
<PAGE>
Chemical Producers 5,000 Duracell International Inc. 139,675 210,625 0.4
10,000 Great Lakes Chemical Corp. 732,730 551,250 1.0
----------- ----------- ------
872,405 761,875 1.4
Communications 5,000 Cabletron Systems, Inc. 612,028 495,000 0.9
5,000 cisco Systems, Inc. 137,188 123,750 0.2
----------- ----------- ------
749,216 618,750 1.1
Consumer Products 30,000 CUC International, Inc. 781,014 877,500 1.6
& Services
Cosmetics 5,000 The Gillette Co. 305,300 348,750 0.6
5,000 International Flavors & Fragrances Inc. 173,742 192,500 0.4
----------- ----------- ------
479,042 541,250 1.0
Electronics 10,000 Intel Corp. 653,750 625,000 1.2
Entertainment 30,000 Electronic Arts Inc. 1,049,792 607,500 1.1
Finance 15,000 Countrywide Credit Industries, Inc. 264,350 253,125 0.5
Financial Services 40,000 MGIC Investment Corp. 1,337,450 1,115,000 2.1
30,000 The Travelers Corp. (d) 1,292,652 982,500 1.8
----------- ----------- ------
2,630,102 2,097,500 3.9
Food 5,000 General Mills, Inc. 340,300 273,750 0.5
5,000 Kellogg Co. 302,175 261,875 0.5
5,000 Wrigley (Wm.) Jr. Co. (Class B) 163,690 255,625 0.5
----------- ----------- ------
806,165 791,250 1.5
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Percent of
Industries Shares Held Stocks & Bonds Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Health Care-- 20,000 IVAX Corp. $ 388,909 $ 377,500 0.7%
Pharmaceuticals 10,000 Teva Pharmaceutical Industries Ltd.(ADR)(a) 237,500 227,500 0.4
----------- ----------- ------
626,409 605,000 1.1
Health Services 10,000 Caremark International, Inc. 174,350 198,750 0.4
5,000 Novacare Inc. 76,565 89,375 0.2
----------- ----------- ------
250,915 288,125 0.6
Home Furnishings 20,000 Shaw Industries, Inc. 354,650 360,000 0.7
Household Products 5,000 Colgate-Palmolive Co. 274,675 286,250 0.5
10,000 Proctor & Gamble Co. 569,475 563,750 1.0
----------- ----------- ------
844,150 850,000 1.5
Information Processing 5,000 First Financial Management Corp. 274,038 280,000 0.5
Insurance 4,000 American International Group, Inc. 351,780 373,500 0.7
5,000 General Reinsurance Corp. 615,525 598,750 1.1
150,000 Reliance Group Holdings, Inc. 1,096,250 825,000 1.5
----------- ----------- ------
2,063,555 1,797,250 3.3
Leisure 30,000 PolyGram N.V.(ADR)(a) 799,150 1,245,00 2.3
Medical--Technology 20,000 Haemonetics Corp. 549,480 360,000 0.7
Oil Services 10,000 Schlumberger Ltd. 649,350 572,500 1.1
Pollution Control 20,000 WMX Technologies Inc. 623,700 547,500 1.0
<PAGE>
Publishing 20,000 Scholastic Corp. 909,841 710,000 1.3
Restaurant 10,000 McDonald's Corp. 581,850 620,000 1.1
Retail--Specialty 5,000 The Pep Boys--Manny, Moe & Jack 124,675 156,250 0.3
5,000 Staples Inc. 118,258 145,000 0.3
----------- ----------- ------
242,933 301,250 0.6
Retail Stores 50,000 Cifra, S.A. de C.V.,'C'(b) 98,537 131,547 0.2
Semiconductors 2,500 Texas Instruments Inc. 190,462 200,625 0.4
Software--Computer 25,000 Computer Associates International, Inc. 936,038 1,040,625 1.9
5,000 Oracle Systems Corp. 144,375 170,625 0.3
----------- ----------- ------
1,080,413 1,211,250 2.2
Telecommunications 30,000 Bell Atlantic Corp. 1,866,779 1,601,250 3.0
40,000 MCI Communications Corp. 1,097,143 960,000 1.8
40,000 QUALCOMM Inc. 1,100,000 650,000 1.2
15,000 Vodafone Group PLC(ADR)(a) 1,186,525 1,205,625 2.2
----------- ----------- ------
5,250,447 4,416,875 8.2
Toys 10,000 Mattel, Inc. 218,480 263,750 0.5
Total Stocks & Bonds 31,621,115 28,737,172 53.3
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Percent of
Amount Short-Term Securities Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Commercial $2,000,000 Amoco Credit Corp., 4.18% due 6/17/1994 $ 1,996,284 $ 1,996,284 3.7%
Paper* 2,770,000 General Electric Co., 4.22% due 6/01/1994 2,770,000 2,770,000 5.1
2,000,000 J.P. Morgan & Company, 3.92% due 6/22/1994 1,995,427 1,995,427 3.7
1,000,000 Knight-Ridder Inc., 3.93% due 6/20/1994 997,926 997,926 1.9
2,000,000 Matterhorn Capital Corp., 4.25% due 6/09/1994 1,998,111 1,998,111 3.7
1,000,000 Miles Inc., 4.23% due 6/23/1994 997,415 997,415 1.8
1,000,000 Monsanto Co., 4% due 6/03/1994 999,778 999,778 1.9
1,500,000 National Australia Funding Corp., 3.82%
due 6/01/1994 1,500,000 1,500,000 2.8
1,000,000 Nomura Securities Co., Ltd., 4.45% due 7/05/1994 995,797 995,797 1.8
1,000,000 Penney (J.C.) Co., 4.23% due 6/28/1994 996,827 996,827 1.8
2,000,000 Preferred Receivables Corp., 4.28% due 6/13/1994 1,998,583 1,998,583 3.7
1,000,000 Premium Funding Inc., 4.35% due 6/06/1994 999,396 999,396 1.9
1,000,000 Sheffield Receivables Funding Corp., 4.25%
due 6/07/1994 998,573 998,573 1.9
2,000,000 Student Loan Marketing Association, 4.22% due
6/20/1994 1,995,546 1,995,546 3.7
2,000,000 UBS Finance (Delaware) Inc., 4.25% due 6/22/1994 1,995,042 1,995,042 3.7
1,000,000 U.S. West Communications Group, 4.23%
due 6/01/1994 999,412 999,413 1.9
1,000,000 Xerox Credit Corp., 4.22% due 6/20/1994 997,773 997,773 1.9
Total Short-Term Securities 25,231,890 25,231,891 46.9
Total Investments $56,853,005 53,969,063 100.2
===========
Liabilities in Excess of Other Assets (83,570) (0.2)
----------- ------
Net Assets $53,885,493 100.0%
=========== ======
Net Asset Value: Class A--Based on net assets of $8,113,867 and 845,656 shares outstanding $ 9.59
===========
Class B--Based on net assets of $45,771,626 and 4,822,762 shares outstanding $ 9.59
===========
<FN>
*Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
(a)American Depositoary Receipts (ADR).
(b)Foreign Stock--Mexico.
(c)Global Depositary Shares (GDS).
(d)Formerly Primerica Corp.
</TABLE>
<PAGE>
PORTFOLIO INFORMATION
For the Quarter Ended May 31, 1994
Ten Largest Percent of
Equity Holdings Net Assets
Bell Atlantic Corp. 3.0%
PolyGram N.V. (ADR) 2.3
Vodafone Group PLC (ADR) 2.2
MGIC Investment Corp. 2.1
Computer Associates International, Inc. 1.9
The Travelers Corp. 1.8
Consorcio G Grupo Dina, S.A. de C.V. (ADR) 1.8
MCI Communications Corp. 1.8
CUC International, Inc. 1.6
Tele-Communications Inc. (Class A) 1.5
Deletions
Avon Products Inc.
UNUM Corp.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Harry Woolf, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Lawrence R. Fuller, Vice President and Portfolio Manager
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
Custodian
The Chase Manhattan Bank, N.A.
Global Securities Services
Chase MetroTech Center
Brooklyn, New York 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
