MERRILL LYNCH
FUNDAMENTAL
GROWTH
FUND, INC.
FUND LOGO
Quarterly Report
May 31, 1996
Officers and Directors
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Steven B. Swensrud, 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
Ira P. Shapiro, Secretary
<PAGE>
Custodian
The Chase Manhattan Bank, N.A.
Global Securities Services
Chase MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
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.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch
Fundamental
Growth Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
DEAR SHAREHOLDER
<PAGE>
For the quarter ended May 31, 1996, total returns for Merrill Lynch
Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and Class
D Shares were +2.65%, +2.41%, +2.41% and +2.58%, respectively,
underperforming the total return of +5.04% for the unmanaged
Standard & Poor's 500 Index (S&P 500). (Results shown do not reflect
sales charges and would be lower if sales charges were included.
Complete performance information, including average annual total
returns, can be found on pages 3--5 of this report to shareholders.)
The Fund's underperformance reflects our focus on relatively stable
growth companies in the healthcare and consumer non-durable goods
and services sectors of the economy. The best investment returns
during the May quarter were achieved by selected technology
companies and smaller-capitalization companies, which are not the
Fund's focus. Although absolute and relative investment returns on
the Fund's shares declined in March and April, there was a
meaningful recovery in May. For the year ended May 31, 1996, total
returns for the Class A, Class B, Class C and Class D Shares were
+30.26%, +28.97%, +28.97% and +30.03%, respectively, outperforming
the S&P 500 total return of +28.40%. The Fund remains essentially
fully invested, with a somewhat higher cash reserve of 6.1% of net
assets at May 31, 1996, compared to 3.7% at the end of the February
29, 1996 quarter.
The Environment
A rebound in real retail sales during the quarter ended May 31, 1996
may have resulted from a substantial increase in Federal tax
refunds, which boosted spending on motor vehicles, housing and
related appliances, furniture and household computer systems. There
was a jump in employment and industrial production related to the
return of factory workers after the settlement of the strike against
General Motors Corp. Significant increases in residential mortgage
interest rates and oil and gasoline prices during the May quarter
appear to have contributed to investor expectations of a sustainable
and meaningfully higher rate of real economic growth for the US
economy during the remainder of 1996. We believe that a broad-based
analysis of economic and business indicators, as well as a review of
statements of business conditions by corporate executives, reflect a
relatively slow-growth environment.
Investment Strategy
Our primary investment strategy is to focus on large-capitalization
global growth companies where we believe the potential exists for
managements to produce consistent and above-average annual growth in
earnings. The Fund's largest industry sector is pharmaceuticals
which comprised 19.3% of net assets at May 31, 1996. The top ten
companies represented 34.1% of net assets, while the top ten
industries represented 66.0% of net assets. (See page 5 of this
report to shareholders for a complete listing.) The industry
weightings in the Fund were shifted toward companies which we
believe will be less likely to provide disappointing earnings
relative to expectations in the event that real growth for the US
economy proves disappointing. The most significant increase in
sector weightings was in the financial sector which includes
banking, financial services, and insurance companies. The Fund's
weighting in this sector increased from 5.0% of net assets on
February 29, 1996 to 14.8% at the end of the May quarter. The most
significant sector reduction was in retailing, which declined from
5.9% of net assets to 1.4%.
<PAGE>
Portfolio Matters
The number of companies in the portfolio increased from 47 at the
end of the February quarter to 53 at May 31, 1996. We added nine
companies and eliminated three companies with capital gains realized
on each sale transaction. We sold Mattel, Inc. and Primark
Corporation at substantial capital gains on the basis of valuation.
Concerns about a near-term slowdown in the rate of growth of retail
sales caused us to sell Toys 'R' Us, Inc. at a capital gain. The
substantial year-to-year increase in Federal tax refunds starting in
late February correlated well with the upturn in retail sales after
a recessionary type of retailing environment in the fourth quarter
of 1995.
We added Aetna Life & Casualty Company to the Fund's portfolio after
its management announced the agreement to acquire US Healthcare,
Inc. We believed the valuation was attractive and the growth
prospects above-average for what will be one of the largest
healthcare service organizations after the merger. CompuServe
Corporation was added to the portfolio because we believed it had an
attractive valuation for one of the key service organizations in the
rapidly growing market for Internet access and on-line information
and entertainment. Also new to the portfolio is ConAgra, Inc., one
of the leading packaged food companies with an excellent record of
earnings growth and prospects for improved growth from restructuring
its global manufacturing and distribution operations. We invested in
Federal National Mortgage Association because we expect the rate of
earnings growth to be above-average for the next two years--three
years as consumers refinance relatively high installment and credit
card debt service requirements with lower-cost mortgage debt.
Kimberly-Clark Corporation became part of the portfolio because of
the potential for relatively strong earnings growth over the next
five years as restructuring and international growth improve the
rates of return on sales and capital. We invested in Oracle Corp.
because of the potential for continued rapid growth as management
leverages its dominant market position in computer-based relational
data base management systems with new commercial application
software products. Sara Lee Corporation became a Fund holding
because of the potential rise in earnings growth rates over the next
two years--three years as restructuring and a recovery in European
markets improves operating results. Travelers/Aetna Property
Casualty Corp.'s attractive valuation, excellent management and
potential for above-average earnings growth and rates of return as
the combined operations are restructured and refocused, caused us to
add it to the Fund. The investment in Wells Fargo & Company also
provides an opportunity for above-average earnings growth and rising
rates of return as costs are reduced following the acquisition of
First Interstate Bancorp.
<PAGE>
In Conclusion
The Fund's primary focus is toward large-capitalization, global
growth companies where we anticipate relatively stable earnings
growth on an annual basis. This results in a portfolio of largely
consumer non-durable goods and service and commercial service
companies. In the May quarter, investors appeared to have focused on
companies in the basic industries and commercial and consumer
capital goods areas. If the recent upswings in consumer spending,
employment growth and industrial production subside to a slower
expansion pace, investors might refocus on the large-capitalization
growth companies.
We thank you for your continued investment in Merrill Lynch
Fundamental Growth Fund, Inc., and we look forward to reviewing our
strategy and portfolio activities in our upcoming annual report.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Lawrence R. Fuller)
Lawrence R. Fuller
Vice President and Portfolio Manager
June 20, 1996
PERFORMANCE DATA
<PAGE>
About Fund Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end load)
of 5.25% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors, as
detailed in the Fund's prospectus. If you were a Class A shareholder
prior to October 21, 1994, your Class A Shares were redesignated to
Class D Shares on October 21, 1994, which, in the case of certain
eligible investors, were simultaneously exchanged for Class A
Shares.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after 8 years. If you were a Class B shareholder
prior to October 21, 1994, your Class B Shares were redesignated to
Class C Shares on October 21, 1994.
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and an
account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should 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. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
<PAGE>
Class A Shares*
Year Ended 3/31/96 +32.19% +25.25%
Inception (10/21/94)
through 3/31/96 +26.04 +21.42
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/96 +30.90% +26.90%
Inception (10/21/94)
through 3/31/96 +24.83 +22.94
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 3/31/96 +30.80% +29.80%
Inception (12/24/92)
through 3/31/96 + 9.76 + 9.76
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 3/31/96 +31.93% +25.00%
Inception (12/24/92)
through 3/31/96 +10.63 + 8.82
<PAGE>
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
PERFORMANCE DATA (continued)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $ 9.99 $ 9.62 $0.255 $0.051 - 0.54%
1995 9.62 12.61 -- 0.259 +33.75
1/1/96--5/31/96 12.61 13.57 -- -- + 7.61
------ ------
Total $0.255 Total $0.310
Cumulative total return as of 5/31/96: +43.15%**
</TABLE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change***
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $ 9.85 $ 9.46 $0.255 $0.051 - 0.76%
1995 9.46 12.28 -- 0.259 +32.53
1/1/96--5/31/96 12.28 13.15 -- -- + 7.08
------ ------
Total $0.255 Total $0.310
Cumulative total return as of 5/31/96: +40.84%***
</TABLE>
<TABLE>
Performance Summary--Class C Shares++
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change***
<S> <C> <C> <C> <C> <C>
12/24/92--12/31/92 $10.00 $ 9.92 -- -- - 0.80%
1993 9.92 10.43 -- -- + 5.14
1994 10.43 9.46 $0.255 $0.051 - 6.28
1995 9.46 12.28 -- 0.259 +32.53
1/1/96--5/31/96 12.28 13.15 -- -- + 7.08
------ ------
Total $0.255 Total $0.310
<PAGE>
Cumulative total return as of 5/31/96: +38.73%***
</TABLE>
<TABLE>
Performance Summary--Class D Shares++
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
12/24/92--12/31/92 $10.00 $ 9.92 -- -- - 0.80%
1993 9.92 10.51 -- -- + 5.95
1994 10.51 9.61 $0.255 $0.051 - 5.56
1995 9.61 12.58 -- 0.259 +33.58
1/1/96--5/31/96 12.58 13.52 -- -- + 7.47
------ ------
Total $0.255 Total $0.310
Cumulative total return as of 5/31/96: +42.50%**
<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.
***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.
++As a result of the implementation of the Merrill Lynch Select
Pricing SM System, Class A Shares of the Fund outstanding prior to
October 21, 1994 were redesignated to Class D Shares, and Class B
Shares of the Fund outstanding prior to October 21, 1994 were
redesignated to Class C Shares.
</TABLE>
PERFORMANCE DATA (concluded)
<PAGE>
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
5/31/96 2/29/96 5/31/95 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Fundamental Growth Fund, Inc. Class A Shares* $13.57 $13.22 $10.63 +27.66% +2.65%
ML Fundamental Growth Fund, Inc. Class B Shares* 13.15 12.84 10.41 +26.32 +2.41
ML Fundamental Growth Fund, Inc. Class C Shares* 13.15 12.84 10.41 +26.32 +2.41
ML Fundamental Growth Fund, Inc. Class D Shares* 13.52 13.18 10.61 +27.43 +2.58
Standard & Poor's 500 Index** 669.12 640.43 533.41 +25.44 +4.48
ML Fundamental Growth Fund, Inc. Class A Shares--Total Return* +30.26(1) +2.65
ML Fundamental Growth Fund, Inc. Class B Shares--Total Return* +28.97(1) +2.41
ML Fundamental Growth Fund, Inc. Class C Shares--Total Return* +28.97(1) +2.41
ML Fundamental Growth Fund, Inc. Class D Shares--Total Return* +30.03(1) +2.58
Standard & Poor's 500 Index--Total Return** +28.40 +5.04
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
**An unmanaged broad-based Index comprised of common stocks. Total
investment returns for unmanaged indexes are based on estimates.
(1)Percent change includes reinvestment of $0.259 per share ordinary
income dividends.
</TABLE>
PORTFOLIO INFORMATION
Percent of
Ten Largest Holdings Net Assets
Johnson & Johnson 3.7%
First Data Corp. 3.6
Merck & Co., Inc. 3.5
SmithKline Beecham PLC (ADR) 3.5
The Travelers Group Inc. 3.4
Procter & Gamble Co. 3.4
PepsiCo, Inc. 3.3
Computer Associates International, Inc. 3.3
Amgen, Inc. 3.2
Pfizer Inc. 3.2
Percent of
Ten Largest Industries Net Assets
<PAGE>
Pharmaceuticals 19.3%
Software--Computer 8.3
Financial Services 6.2
Beverages 5.4
Household Products 5.4
Banking & Financial 5.1
Information Processing 4.9
Food 4.2
Medical--Technology 3.7
Cosmetics 3.5
Portfolio Changes for the Quarter Ended
May 31, 1996
Additions
Aetna Life & Casualty Company
Compuserve Corporation
ConAgra, Inc.
Federal National Mortgage Association
Kimberly-Clark Corporation
Oracle Corp.
Sara Lee Corporation
Travelers/Aetna Property Casualty Corp.
Wells Fargo & Company
Deletions
Intel Corp. (Warrants)
Mattel, Inc.
Primark Corporation
Toys 'R' Us, Inc.
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Percent of
Industries Shares Held Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Advertising 100,000 Interpublic Group of Companies, Inc. $ 3,895,297 $ 4,637,500 2.1%
Automotive & Truck 20,000 Ek Chor China Motorcycle Co. Ltd.
(ADR)(a) 734,300 285,000 0.1
Banking & Financial 100,000 State Street Boston Corp. 4,844,132 5,212,500 2.4
25,000 Wells Fargo & Company 6,176,137 6,025,000 2.7
------------ ------------ ------
11,020,269 11,237,500 5.1
<PAGE>
Beverages 100,000 The Coca-Cola Co. 3,093,675 4,600,000 2.1
220,000 PepsiCo, Inc. 4,960,134 7,315,000 3.3
------------ ------------ ------
8,053,809 11,915,000 5.4
Chemical Producers 30,000 Duracell International Inc. 1,437,230 1,398,750 0.6
Computers 25,000 Compaq Computer Corp. 1,244,100 1,215,625 0.5
Cosmetics 115,000 The Gillette Co. 4,665,801 6,799,375 3.1
20,000 International Flavors & Fragrances Inc. 973,375 972,500 0.4
------------ ------------ ------
5,639,176 7,771,875 3.5
Electrical Equipment 10,000 Emerson Electric Co. 658,040 856,250 0.4
70,000 General Electric Co. 4,792,949 5,792,500 2.6
------------ ------------ ------
5,450,989 6,648,750 3.0
Electronics 15,000 Intel Corp. 906,803 1,130,625 0.5
Energy 100,000 Enron Corp. 3,806,500 4,000,000 1.8
Entertainment 100,000 Viacom, Inc. (Class A) 5,086,791 4,125,000 1.9
50,000 The Walt Disney Co. 3,020,500 3,037,500 1.4
------------ ------------ ------
8,107,291 7,162,500 3.3
Financial Services 200,000 Federal National Mortgage Association 6,269,309 6,175,000 2.8
180,000 The Travelers Group Inc. 5,598,991 7,470,000 3.4
------------ ------------ ------
11,868,300 13,645,000 6.2
Food 50,000 ConAgra, Inc. 2,075,500 2,131,250 1.0
200,000 Sara Lee Corporation 6,615,479 6,675,000 3.0
10,000 Wrigley (Wm.) Jr. Co. (Class B) 436,070 523,750 0.2
------------ ------------ ------
9,127,049 9,330,000 4.2
Food Merchandising 20,000 Albertson's, Inc. 590,663 797,500 0.4
Hotel 50,000 Marriott International, Inc. 2,098,265 2,375,000 1.1
Household Durables 100,000 Rubbermaid, Inc. 2,944,159 2,800,000 1.3
Household Products 10,000 Colgate-Palmolive Co. 747,686 787,500 0.4
50,000 Kimberly-Clark Corporation 3,917,004 3,643,750 1.6
85,000 Procter & Gamble Co. 6,000,117 7,469,375 3.4
------------ ------------ ------
10,664,807 11,900,625 5.4
<PAGE>
Information Processing 100,000 First Data Corp. (b) 5,018,831 7,975,000 3.6
50,000 General Motors Corp. (Class E) 2,534,330 2,818,750 1.3
------------ ------------ ------
7,553,161 10,793,750 4.9
Insurance 40,000 Aetna Life & Casualty Company 2,840,475 2,950,000 1.3
25,000 American International Group, Inc. 2,074,962 2,356,250 1.1
89,500 Travelers/Aetna Property Casualty Corp. 2,237,500 2,438,875 1.1
------------ ------------ ------
7,152,937 7,745,125 3.5
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Percent of
Industries Shares Held Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Leisure 100,000 PolyGram N.V. (ADR)(a) $ 5,158,347 $ 5,862,500 2.7%
Medical--Technology 85,000 Johnson & Johnson 6,241,399 8,276,875 3.7
Oil Services 20,000 Schlumberger Ltd. 1,707,480 1,667,500 0.8
Pharmaceuticals 120,000 Amgen, Inc. 4,409,831 7,125,000 3.2
120,000 Merck & Co., Inc. 6,515,954 7,755,000 3.5
100,000 Pfizer Inc. 3,889,338 7,075,000 3.2
165,000 Pharmacia & Upjohn, Inc. (c) 4,902,245 6,744,375 3.0
110,000 Schering-Plough Corp. 5,723,607 6,448,750 2.9
150,000 SmithKline Beecham PLC (ADR)(a) 7,759,567 7,650,000 3.5
------------ ------------ ------
33,200,542 42,798,125 19.3
Photography 25,000 Eastman Kodak Co. 1,567,035 1,859,375 0.8
Pollution Control 35,000 WMX Technologies Inc. 1,034,554 1,233,750 0.6
Restaurant 10,000 McDonald's Corp. 365,170 481,250 0.2
Retail Specialty 25,000 Staples Inc. 397,917 496,875 0.2
Retail Stores 100,000 Wal-Mart Stores, Inc. 2,258,504 2,587,500 1.2
Software--Computer 110,000 Compuserve Corporation 3,346,175 2,681,250 1.2
100,000 Computer Associates International, Inc. 6,497,687 7,275,000 3.3
15,000 Microsoft Corp. 1,334,375 1,779,375 0.8
200,000 Oracle Corp. (d) 6,437,365 6,600,000 3.0
------------ ------------ ------
17,615,602 18,335,625 8.3
<PAGE>
Telecommunications 70,000 MCI Communications Corp. 1,854,375 2,030,000 0.9
Toys 100,000 Hasbro, Inc. 3,851,771 3,775,000 1.7
Travel & Lodging 45,000 Carnival Corporation (Class A) 1,053,675 1,338,750 0.6
Total Stocks 178,601,476 207,533,250 93.9
Face Amount Short-Term Securities
Commercial $ 4,410,000 Ford Motor Credit Co., 5.40% due
Paper* 6/03/1996 4,408,677 4,408,677 2.0
9,000,000 Gannett Co., Inc., 5.28% due
6/12/1996 8,985,480 8,985,480 4.1
Total Short-Term Securities 13,394,157 13,394,157 6.1
Total Investments $191,995,633 220,927,407 100.0
============
Other Assets Less Liabilities 95,575 0.0
------------ ------
Net Assets $221,022,982 100.0%
============ ======
Net Asset Value: Class A--Based on net assets of $40,807,405 and
3,007,493 shares outstanding $ 13.57
============
Class B--Based on net assets of $106,950,569 and
8,132,959 shares outstanding $ 13.15
============
Class C--Based on net assets of $53,322,493 and
4,055,092 shares outstanding $ 13.15
============
Class D--Based on net assets of $19,942,515 and
1,475,245 shares outstanding $ 13.52
============
<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 Receipts (ADR).
(b)First Data Corp. acquired First Financial Management Corp.
(c)Upjohn Co. merged with Pharmacia AB.
(d)Formerly known as Oracle Systems Corp.
</TABLE>
<PAGE>
