MERRILL
LYNCH
FUNDAMENTAL
GROWTH
FUND, INC.
Quarterly Report November 30, 1993
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
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
DEAR SHAREHOLDER
For the fiscal quarter ended November 30, 1993,
Merrill Lynch Fundamental Growth Fund, Inc.'s Class
A and Class B Shares had modest total returns of
+1.82% and +1.52%, respectively, as compared
with a total return of +0.30% for the unmanaged
Standard & Poor's 500 Index (S&P 500). (Complete
performance information, including aggregate total
returns, can be found on page 4 of this report
to shareholders.)
<PAGE>
The prices of the Fund's Class A and Class B Shares,
the total return of the S&P 500, and the prices of
long-term US Treasury bonds peaked in mid-October.
Since then, long-term interest rates have been rising
modestly in anticipation of a relatively high rate of
real growth for the US economy in the fourth quarter
of 1993 and a meaningfully positive gain in the first
quarter of 1994. At the same time, many investors
have become concerned that the relatively strong
capital investment on a global basis in computers,
software and telecommunications may slow down.
Consequently, the common stock prices of many of
the Fund's holdings in financial services, technology,
and telecommunications companies declined substan-
tially during the latter half of the quarter. Even
though investors appear to be anticipating rising real
growth for the US economy accompanied by rising
inflation and interest rates, the stock prices of some
of the largest consumer nondurable goods companies
in the Fund rose substantially during the fiscal quar-
ter ended November 30, 1993.
Another meaningful positive contributor to Fund
performance was the significant exposure to several
large-capitalization growth companies in Mexico. The
ratification of the North American Free Trade Agree-
ment (NAFTA) by both Houses of Congress had a
positive psychological effect and boosted the values of
the Fund's stock holdings in Mexican companies.
The Environment
The US economy appears to be making a gradual transition from the
early stages of a business cycle, where consumer spending rises
rapidly and is focused on motor vehicles, housing, appliances,
furniture and carpeting, to a more stable growth rate period and
a broader consumption pattern. This transition could account for
the fiscal quarter's double-digit percentage increases of the
stock prices of some of the largest personal care and household
products companies in the Fund, such as The Gillette Company,
Kellogg Company, Colgate-Palmolive Company, and The
Procter & Gamble Company.
The rate of real economic growth for the United States in the
first half of 1994 should be subdued relative to the second half
of 1993. The Federal tax increase is likely to have a meaningful
effect on consumption by upper-income households. The
Congressional debate about the costs of healthcare reform may
cause consumer confidence to decline again after recovering
during the second half of 1993. The recovery in consumer
confidence has led to a rate of growth in consumer spending and
borrowing that exceeds the growth rate of disposable personal
income. A major benefit of a reduced rate of consumer spending
during the first half of 1994 would be the tendency for interest
rates to stay relatively low. As consumers continue to refinance
higher interest rate installment, credit card and mortgage debt,
real disposable income would continue to increase over the long
run. The most likely domestic business outlook appears to be real
growth in the 2%--3% area, with inflation being contained in the
same range.
<PAGE>
Given the negative real growth outlook emerging for Japan and
Germany in 1994, United States', exports to these markets cannot
be looked to for any stimulus to employment or production.
However, relatively high rates of real growth in the developing
economies of Asia and Latin America should boost the United
States' exports of computers, software and telecommunications
equipment. Many of the largest domestic multinational
corporations are rapidly expanding their manufacturing and
marketing presence in these growth markets. The start of the
implementation of NAFTA may contribute to the growth of
employment and production in Canada, the United States and Mexico
in 1994.
Investment Strategy
Interest rates rose sharply recently, as has happened numerous
times during the current economic upturn which started in early
1991. Real consumer spending in the fourth quarter of 1994 could
be up 5% compared to 3% or less during the previous quarters of
1993. The current spending is financed by lower cost motor
vehicle loans and residential mortgage rates, which declined
sharply in the middle of 1993. The recent declines in mortgage
refinancing show that consumers remain very sensitive to prices,
including mortgage rates, which rose with other long-term
interest rates since mid-October. The Fund continues to have a
significant investment exposure in the residential mortgage
finance industry. We think that the household sector will
continue to refinance relatively high-cost consumer installment
and credit card debt as well as mortgage loans with much lower
cost and, in many situations, tax-deductible mortgage interest
expenses. The Fund's investment holdings in this sector are the
Federal National Mortgage Association, Countrywide Credit
Industries, Inc., Reliance Group Holdings, Inc., and MGIC
Investment Corp.
The Fund's most important investment theme is to focus on the
largest multinational growth companies, regardless of the
national location of corporate headquarters, where management is
investing in manufacturing and marketing to develop growth
opportunities from Latin America to Asia and the viable economies
in Eastern Europe. The Coca-Cola Co., The Gillette Co., Kellogg Co.,
Wrigley (Wm.) Jr. Co., and Vodafone Group PLC, which is based in
the United Kingdom, are representative of our investments in
this area.
<PAGE>
Over time the passage of NAFTA should enhance the growth
prospects for the Fund's investments in large-capitalization
growth companies in Mexico. We continue to believe that Mexico
represents one of the lower-risk developing economies with above-
average rates of growth of population, personal income,
consumption spending and capital investment. One of our Mexican
companies, Consorcio G Grupo Dina, S.A. de C.V., the leading
manufacturer and servicer of heavy duty truck and bus vehicles,
announced an agreement to acquire Motor Coach Industries
International, Inc. (MCII) of Phoenix, Arizona. MCII is the
leader in the United States and Canada in the design, manufacture
and marketing of intercity coaches and their replacement parts.
This will improve the prospects for growth for both companies in
North America. Our other major investments in Mexico are Cifra,
S.A. de C.V., 'C', the largest and best-managed Mexican retailer,
and Grupo Televisa, S.A. de C.V., 'L', a global broadcast and media
organization. The Fund's investments in Mexican and other Latin
American companies were approximately 12.5% of net assets at
November month-end.
There was a significant development in the area of telecommunications
and cable broadcasting with the announcement of plans for Bell Atlantic
Corp. to acquire Tele-Communications Inc. in a friendly merger.
This plan shows the extent to which there is an acceleration of capital
investment by both Bell Telephone companies and cable companies in the
technology to deliver a new generation of residential consumer services
which integrate personal telecommunications, interactive entertainment,
shopping, financial information and other services. Over 12% of the
Fund's net assets is invested in companies which should benefit
either directly or indirectly from the capital investment in the
technological infrastructure and the marketing of these new consumer
services.
Portfolio Matters
The cash position of the Fund at the end of the November quarter
was 8.2% of net assets. The total number of companies in the
portfolio increased from 58 to 59 during the fiscal quarter as a
result of our eliminating 14 and adding 15 companies. Scientific
Atlanta, Inc. was eliminated from the Fund at a significant gain
because of a relatively high valuation. Telefonos de Mexico, S.A.
de C.V. (Telmex) (ADR) was eliminated at a modest capital gain.
Significant-to-modest percentage losses were recognized by the
elimination of a number of companies where the operating results
have been disappointing in 1993 and where we believe that
managements do not have a clear-cut and reasonable strategy for
resuming their previously high rates of growth in earnings. These
companies, which were eliminated from the portfolio, are Philip
Morris Companies, Inc., Novell Inc., The Limited Inc., Reader's
Digest Association, Inc., Tambrands Inc., Corning Inc., Donnelly
(R.R.) & Sons Co., and Apple Computer, Inc. We sold Automatic
Data Processing, Inc. and Block (H & R), Inc. because we have
concerns about their managements' ability to maintain long-term
rates of growth in earnings. We sold the Fund's investment in
Toys 'R' Us, Inc. as part of a program to reduce the portfolio's
industry weighting in retailing as this sector rose in valuation
during the November quarter.
<PAGE>
We added several large multinational growth companies to the
portfolio during the fiscal quarter. McDonald's Corp. appears
to have increased the size of its international operations
to a point where a planned acceleration in restaurant openings
in foreign markets should result in a meaningful rise in its
double-digit rate of growth of earnings. In addition, we added
International Flavors & Fragrances Inc. to the Fund when the
stock price declined sharply as a result of a short-term problem
with foreign currency translation losses. We added MGIC Investment
Corp., the leading private residential mortgage insurance company,
to the group of companies in the Fund where the focus is the
long-term potential growth in the residential mortgage finance
industry.
Additions to the Fund's investments in Mexico and Latin America
during the fiscal quarter were Coca-Cola FEMSA, S.A. de C.V., a
producer, marketer and distributor of soft drinks in Mexico City
and adjoining areas which serves about 29% of the Mexican
population; and Panamerican Beverages, Inc., the largest soft-
drink bottler in Latin America, producing primarily Coca-Cola
soft-drink products in central Mexico (excluding Mexico City),
Brazil and Colombia.
In the sector of the Fund where our strategy is to capitalize on
the growth opportunities from the rapid evolution of a new set of
consumer services which are based on new telecommunication,
computer and software developments, we have added investments in
Bell Atlantic Corp. and Oracle Systems Corp. We added Turner
Broadcasting System and Infinity Broadcasting Corp. to the Fund
because these companies are likely to experience very rapid rates
of growth in cash flow and earnings over the next five years.
There are expanded business opportunities for owners of major
cable and radio broadcasting franchises which are likely to
attract a much larger percentage of the advertising expenditures
from major corporations. In addition, recent acquisitions by
Turner Broadcasting System should add significantly to the
organization's library of video product.
In the healthcare sector of the Fund, we added IVAX Corp., which
is the second-largest generic drug distributor in the United
States and complements the Fund's investment in Teva Pharmaceutical
Industries Ltd. In the United Kingdom, IVAX is the largest generic
drug company. Another new investment in the healthcare area is
Haemonetics Corp., which is a leader in the blood-component therapy
business.
<PAGE>
In the publishing and interactive media sector, we added
Scholastic Corp., which is one of the leading publishers of
children's books. Scholastic is successfully developing and
introducing instructional and multimedia materials which are
accessed through a personal computer, and in the near future
through interactive cable systems. This appears to be a major
growth opportunity.
We added ALC Communications Corp. to the Fund because it is
successfully exploiting the growth in long distance telephone
communications by servicing the small and medium-size commercial
customers. This is a market segment which has been neglected by
the three largest companies in the industry.
Finally, we added Computer Associates International, Inc. to the
Fund because management is generating an acceleration of revenues
and earnings from new software products. These products
facilitate the movement of customers with large, traditional
mainframe computer centers to a distributed computing environment
with efficiency and system security.
In Conclusion
We thank you for your continued investment in Merrill Lynch
Fundamental Growth Fund, Inc., and we look forward to reporting
our progress on implementing our strategy and related investment
activities in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Lawrence R. Fuller)
Lawrence R. Fuller
Vice President and Portfolio Manager
December 27, 1993
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.
<PAGE>
<TABLE>
Recent Performance Results*
<CAPTION>
Since Inception 3 Month
11/30/93 8/31/93 12/24/92** % Change % Change
<S> <C> <C> <C> <C> <C>
ML Fundamental Growth Fund, Inc. Class A Shares $10.09 $9.91 $10.00 +0.90% +1.82%
ML Fundamental Growth Fund, Inc. Class B Shares 10.01 9.86 10.00 +0.10 +1.52
ML Fundamental Growth Fund, Inc. Class A Shares--Total Return +0.90 +1.82
ML Fundamental Growth Fund, Inc. Class B Shares--Total Return +0.10 +1.52
<FN>
*Investment results shown for the 3-month and since inception periods are before the deduction of any sales charges.
**Commencement of Operations.
</TABLE>
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (12/24/92)
through 9/30/93 +0.40% -6.13%
[FN]
*Maximum sales charge is 6.5%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Inception (12/24/92)
through 9/30/93 -0.20% -1.20%
[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>
OFFICERS AND DIRECTORS
Arthur Zeikel, President and 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
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
<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 $ 605,000 1.1%
Auto & Truck 75,000 Consorcio G Grupo Dina, S.A. de C.V. (ADR) (a) 1,203,575 1,650,000 3.1
Banking & Financial 20,000 State Street Boston Corp. 651,250 757,500 1.4
Beverages 30,000 Coca-Cola FEMSA, S.A. de C.V. (ADR) (a) 704,668 855,000 1.6
20,000 Panamerican Beverages, Inc. (Class A) 553,296 727,500 1.4
10,000 PepsiCo Inc. 418,300 402,500 0.8
5,000 The Coca-Cola Co. 208,425 211,250 0.4
---------- ---------- ----
1,884,689 2,196,250 4.2
Broadcast--Cable 40,000 Tele-Communications Inc. (Class A) 995,000 1,200,000 2.3
<PAGE>
Broadcast--Media 60,000 Grupo Televisa, S.A. de C.V., 'L' (b) 1,139,944 1,780,358 3.4
25,000 Infinity Broadcasting Corp. 714,375 631,250 1.2
20,000 Turner Broadcasting System, Inc. 522,915 485,000 0.9
---------- ---------- ----
2,377,234 2,896,608 5.5
Business Services 5,000 The Olsten Corp. 143,483 129,375 0.2
$ 500,000 The Olsten Corp., Convertible Bond, 4.875% due
5/15/2003 500,000 517,500 1.0
---------- ---------- ----
643,483 646,875 1.2
Chemical Producers 20,000 Duracell International Inc. 605,575 690,000 1.3
10,000 Great Lakes Chemical Corp. 689,900 745,000 1.4
---------- ---------- ----
1,295,475 1,435,000 2.7
Communications 15,000 cisco Systems, Inc. 711,875 840,000 1.6
Consumer Products 30,000 CUC International, Inc. 781,014 1,001,250 1.9
& Services
Cosmetics 10,000 Avon Products Inc. 573,100 498,750 0.9
5,000 International Flavors & Fragrances Inc. 521,225 547,500 1.0
15,000 The Gillette Co. 890,475 937,500 1.8
---------- ---------- ----
1,984,800 1,983,750 3.7
Electronics 20,000 Intel Corp. 1,040,000 1,225,000 2.3
Entertainment 20,000 Electronic Arts Inc. 708,750 695,000 1.3
Finance 20,000 Countrywide Credit Industries, Inc. 558,800 515,000 1.0
Financial Services 20,000 Federal National Mortgage Association 1,543,900 1,510,000 2.9
20,000 MGIC Investment Corp. 1,337,450 1,142,500 2.2
30,000 Primerica Corp. 1,292,652 1,200,000 2.3
---------- ---------- ----
4,174,002 3,852,500 7.4
Food 15,000 General Mills, Inc. 1,058,400 911,250 1.7
10,000 Kellogg Co. 604,350 603,750 1.1
20,000 Sara Lee Corp. 458,700 520,000 1.0
20,000 Wrigley (Wm.) Jr. Co. (Class B) 654,760 860,000 1.6
---------- ---------- ----
2,776,210 2,895,000 5.4
</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. $ 521,200 $ 505,000 1.0%
Pharmaceuticals 30,000 Teva Pharmaceutical Industries Ltd. (ADR) (a) 711,250 828,750 1.6
---------- ---------- ----
1,232,450 1,333,750 2.6
Health Services 100,000 Caremark International Inc. 1,636,738 1,762,500 3.3
Home Furnishings 10,000 Shaw Industries, Inc. 315,600 475,000 0.9
Household Products 10,000 Colgate-Palmolive Co. 553,100 592,500 1.1
10,000 Procter & Gamble Co. 554,350 567,500 1.1
---------- ---------- ----
1,107,450 1,160,000 2.2
Information Processing 15,000 First Financial Management Corp. 664,637 821,250 1.6
Insurance 7,000 American International Group, Inc. 589,750 602,875 1.1
5,000 General Reinsurance Corp. 615,525 549,375 1.0
150,000 Reliance Group Holdings, Inc. 1,096,251 1,162,500 2.2
10,000 UNUM Corp. 523,725 492,500 0.9
---------- ---------- ----
2,825,251 2,807,250 5.2
Leisure 30,000 PolyGram N.V. (ADR) (a) 799,150 1,158,750 2.2
Medical--Technology 20,000 Haemonetics Corp. 549,480 475,000 0.9
Oil Services 10,000 Schlumberger Ltd. 649,350 575,000 1.1
Pollution Control 20,000 WMX Technologies Inc. 623,700 532,500 1.0
Publishing 20,000 Scholastic Corp. 909,841 795,000 1.5
Restaurant 10,000 McDonald's Corp. 581,850 586,250 1.1
Retail--Specialty 15,000 Staples Inc. 553,525 525,000 1.0
10,000 The Pep Boys--Manny, Moe & Jack 249,350 257,500 0.5
---------- ---------- ----
802,875 782,500 1.5
Retail Stores 600,000 Cifra, S.A. de C.V., 'C' (b) 1,161,042 1,664,248 3.1
<PAGE>
Semiconductors 10,000 Texas Instruments Inc. 761,850 642,500 1.2
Software--Computer 30,000 Computer Associates International, Inc. 1,070,496 1,192,500 2.3
15,000 Microsoft Corp. 1,308,750 1,200,000 2.3
20,000 Oracle Systems Corp. 588,542 630,000 1.2
---------- ---------- ----
2,967,788 3,022,500 5.8
Telecommunications 40,000 ALC Communications Corp. 1,052,644 1,070,000 2.0
20,000 Bell Atlantic Corp. 1,303,700 1,200,000 2.3
20,000 MCI Communications Corp. 540,000 485,000 0.9
20,000 QUALCOMM Inc. 1,100,000 1,055,000 2.0
15,000 Vodafone Group PLC (ADR) (a) 1,186,525 1,215,000 2.3
---------- ---------- ----
5,182,869 5,025,000 9.5
Toys 40,000 Mattel, Inc. 1,068,649 1,220,000 2.3
Total Stocks & Bonds 46,324,177 49,233,731 93.1
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Percent of
Amount Short-Term Securities Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Commercial Paper* $2,000,000 Cooper Industries Inc., 3.07% due 12/07/1993 $ 1,998,977 $ 1,998,976 3.8%
2,350,000 General Electric Co., 3.20% due 12/01/1993 2,350,000 2,350,000 4.4
Total Short-Term Securities 4,348,977 4,348,976 8.2
Total Investments $50,673,154 53,582,707 101.3
===========
Liabilities in Excess of Other Assets (678,347) (1.3)
----------- -----
Net Assets $52,904,360 100.0%
=========== =====
Net Asset Class A--Based on net assets of $7,006,501 and 694,676 shares outstanding $ 10.09
Value: ===========
Class B--Based on net assets of $45,897,859 and 4,583,138 shares outstanding $ 10.01
===========
<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 Depositary Receipt (ADR).
(b)Foreign Stock--Mexico.
</TABLE>
<PAGE>
PORTFOLIO INFORMATION
For the Quarter Ended November 30, 1993
Ten Largest Percent of
Equity Holdings Net Assets
Grupo Televisa, S.A. de C.V., 'L' 3.4%
Caremark International Inc. 3.3
Cifra, S.A. de C.V., 'C' 3.1
Consorcio G Grupo Dina, S.A.
de C.V. (ADR) 3.1
Federal National Mortgage Association 2.9
Intel Corp. 2.3
Mattel, Inc. 2.3
Vodafone Group PLC (ADR) 2.3
Tele-Communications, Inc. (Class A) 2.3
Primerica Corp. 2.3
Additions
ALC Communications Corp.
Bell Atlantic Corp.
Coca-Cola FEMSA, S.A. de C.V. (ADR)
Computer Associates International, Inc.
Haemonetics Corp.
*Home Depot, Inc.
IVAX Corp.
Infinity Broadcasting Corp.
International Flavors & Fragrances Inc.
MGIC Investment Corp.
McDonald's Corp.
Oracle Systems Corp.
Panamerican Beverages, Inc. (Class A)
Scholastic Corp.
Turner Broadcasting System, Inc.
Deletions
Apple Computer, Inc.
Automatic Data Processing, Inc.
Block (H & R), Inc.
Corning Inc.
Donnelley (R.R.) & Sons Co.
*Home Depot, Inc.
Novell Inc.
Philip Morris Companies, Inc.
Reader's Digest Association, Inc., Class A (Non-Voting)
Scientific-Atlanta, Inc.
Tambrands Inc.
Telefonos de Mexico, S.A. de C.V. (Telmex) (ADR)
The Limited Inc.
Toys 'R' Us, Inc.
[FN]
*Added or deleted in the same quarter.
