MERRILL LYNCH
FUNDAMENTAL
GROWTH
FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Quarterly Report
May 31, 1997
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
Custodian
The Chase Manhattan Bank
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 #16465 -- 5/97
[RECYCLE LOGO OMITTED]
Printed on post-consumer recycled paper
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
DEAR SHAREHOLDER
For the quarter ended May 31, 1997, total returns for Merrill Lynch
Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and Class D
Shares were +9.00%, +8.68%, +8.66% and +8.83%, respectively. The Fund
outperformed the Lipper Analytical Services' Growth Funds Average and
the unmanaged Standard & Poor's 500 Index, which had total returns of
+6.16% and +7.75%, respectively. We reduced the Fund's cash reserves
from 5.8% of net assets at February 28, 1997 to 3.1% as of May 31, 1997.
This decline in cash reserves during the May quarter reflects our
positive outlook for the US equity market during the remainder of 1997.
(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 Environment
The upward revision of first quarter real gross domestic product mirrors
the growth of inventory investment. The growth of personal spending was
revised down, reflecting a broad-based slowdown in the growth of
spending on motor vehicles, housing and nondurable goods. Growth in
commercial capital spending on telecommunications infrastructure and
networked computer systems and software appears to continue at a
relatively rapid pace.
The reported double-digit gain in overall corporate profits for the
first quarter of 1997, as compared to the first quarter of 1996, should
provide support for ongoing capital spending plans. Growth of consumer
spending is likely to continue at more modest rates until there is a
positive stimulus from lower income taxes and/or lower mortgage
financing rates. Relatively high installment debt service levels for the
majority of households appear to continue to restrain the rate of growth
of spending on consumer durable goods. We anticipate that increases in
real wage growth in 1997 will reflect improvements in productivity and
moderating overall rates of increase in prices.
Investment Strategy
Our investment focus is primarily large-capitalization growth companies
where we believe the valuations are reasonable relative to anticipated
above-average rates of growth in earnings. We look for high-quality
managements, products and services. We also desire managements with the
experience and resources to expand in the emerging markets of Latin
America, Asia and Eastern Europe. Our weighting of individual companies
reflects our confidence level in the near-term earnings momentum of each
company.
We increased the weighting of the ten largest holdings during the May
quarter to 35.7% of net assets from 32.9% at the close of the February
quarter. Pfizer, Inc. remains the largest equity holding at 4.1% of net
assets.
We significantly increased the Fund's top ten industry weighting from
58.2% of net assets on February 28, 1997 to 67.3% at the close of the
May quarter. During the May quarter, the communications equipment
industry became the Fund's largest weighting at 13.0% of net assets at
May 31, 1997, compared to 4.1% at the end of the February quarter. The
largest increases, after communications equipment, were in computer
software, oil services and computers. These changes are consistent with
our expectations for continued real economic growth and corporate
profits growth led by technology, computer software, communications
equipment and oil services companies. The most recent surveys of
investment plans by corporations show expected increased rates of
spending during 1997 on network computer systems, advanced digital
wireless communication infrastructure and energy exploration activities.
Pharmaceutical companies moved to our second-largest industry exposure
at 11.5% of net assets, up from 11.1% at the end of the February
quarter. (See page 5 of this report to shareholders for complete
listings of the Fund's ten largest industries and holdings.)
Portfolio Review
We added five companies and eliminated six companies during the May
quarter, with 58 companies in the portfolio at quarter-end. We added
Baker Hughes, Inc., a technology leader in the energy exploration
equipment and services industry, because of the attractive valuation
relative to the potential rising rate of return over the next two years
- -- three years. We added Citicorp, the world's leading multinational
financial services and banking organization, because of the attractive
valuation relative to expectations of above-average growth in earnings
and rates of return with relative consistency. These characteristics
result from the very broad base of business in the emerging markets of
Asia, Latin America and Eastern Europe as well as the developed world.
Northern Telecom Ltd. was added in response to the attractive valuation
relative to an anticipated acceleration in earnings growth from new
products for both the wireless and wireline communications businesses.
SAP AG (Systeme, Anwendungen, Produkte in der Datenverarbeitung), the
largest supplier of business applications software in the world and the
market leader in client/server business applications, was added because
of its attractive valuation relative to expectations of well above-
average growth in earnings over the next five years. Finally, we added
Walgreen Co., the leading retail pharmacy company, because of its
attractive valuation relative to expectations of consistent and above-
average earnings growth over the next five years.
We realized a modest capital loss on the elimination of Electronic Data
Systems Corp. from the portfolio. We became concerned about the possible
deterioration in the long-run growth prospects for earnings as the
company's corporate customers appear to be migrating from the
traditional computer data center to a networked client/server data
processing environment. We sold Rite Aid Corp. at a capital gain because
of the relative high valuation. All of the other eliminations in the
portfolio were at capital gains and based on valuation criteria relative
to the fundamentals. Other holdings eliminated were Sara Lee Corp-
oration, Travelers/Aetna Property Casualty Corp., U.S. Bancorp and Wells
Fargo & Company. The increase in the valuation of U.S. Bancorp was based
on the friendly takeover offer by First Bank System Inc.
In Conclusion
We continue to have a positive outlook on US stock market returns for
the remainder of 1997, and we maintain a fully invested portfolio. We
thank you for your investment in Merrill Lynch Fundamental Growth Fund,
Inc., and we look forward to reviewing our outlook and strategy in our
next report to shareholders.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/LAWRENCE R. FULLER
Lawrence R. Fuller
Vice President and Portfolio Manager
June 25, 1997
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select PricingSM System, which offers four pricing alternatives:
[bullet] 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.
However, in the case of certain eligible investors, the shares
were simultaneously exchanged for Class A Shares.
[bullet] 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. (There is no initial
sales charge for automatic share conversions.) 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.
[bullet] 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.
[bullet] 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. Figures shown in the "Average Annual Total Return"
tables as well as the total returns and cumulative total returns in the
"Performance Summary" tables assume reinvestment of all dividends and
capital gains distributions at net asset value on the ex-dividend date.
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**
Class A Shares*
Year Ended 3/31/97 +14.95% + 8.91%
Inception (10/21/94)
through 3/31/97 +21.40 +18.75
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/97 +13.76% + 9.76%
Inception (10/21/94)
through 3/31/97 +20.20 +19.57
* 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 3/31/97 +13.85% +12.85%
Inception (12/24/92)
through 3/31/97 +10.71 +10.71
* 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 3/31/97 +14.68% + 8.66%
Inception (12/24/92)
through 3/31/97 +11.57 +10.17
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Performance Summary -- Class A Shares
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
1996 12.61 13.77 0.628 0.620 +19.05
1/1/97 -- 5/31/97 13.77 15.87 -- -- +15.25
Total $0.883 Total $0.930
Cumulative total return as of 5/31/97: +82.52%**
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class B Shares
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
1996 12.28 13.31 0.628 0.523 +17.71
1/1/97 -- 5/31/97 13.31 15.28 -- -- +14.80
Total $0.883 Total $0.833
Cumulative total return as of 5/31/97: +77.74%***
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class C Shares
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
1996 12.28 13.34 0.628 0.495 +17.73
1/1/97 -- 5/31/97 13.34 15.31 -- -- +14.77
Total $0.883 Total $0.805
Cumulative total return as of 5/31/97: +75.04%***
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class D Shares
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
1996 12.58 13.71 0.628 0.598 +18.69
1/1/97 -- 5/31/97 13.71 15.78 -- -- +15.10
Total $0.883 Total $0.908
Cumulative total return as of 5/31/97: +81.12%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower
if sales charge was included.
*** Figures do not reflect deduction of sales charge; results
would be lower if sales charge was deducted.
</TABLE>
<TABLE>
<CAPTION>
Recent Performance Results
12 Month 3 Month
5/31/97 2/28/97 5/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Fundamental Growth Fund, Inc. Class A Shares* $15.87 $14.56 $13.57 +22.26%(1) +9.00%
ML Fundamental Growth Fund, Inc. Class B Shares* 15.28 14.06 13.15 +21.65(1) +8.68
ML Fundamental Growth Fund, Inc. Class C Shares* 15.31 14.09 13.15 +21.88(1) +8.66
ML Fundamental Growth Fund, Inc. Class D Shares* 15.78 14.50 13.52 +22.04(1) +8.83
Standard & Poor's 500 Index** 848.28 790.82 669.12 +26.78 +7.27
ML Fundamental Growth Fund, Inc. Class A Shares -- Total Return* +27.50(2) +9.00
ML Fundamental Growth Fund, Inc. Class B Shares -- Total Return* +26.20(3) +8.68
ML Fundamental Growth Fund, Inc. Class C Shares -- Total Return* +26.17(4) +8.66
ML Fundamental Growth Fund, Inc. Class D Shares -- Total Return* +27.11(5) +8.83
Standard & Poor's 500 Index -- Total Return** +29.39 +7.75
* 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 $0.628 per share capital gains distributions.
(2) Percent change includes reinvestment of $0.620 per share ordinary income dividends and $0.628 per share capital gains
distributions.
(3) Percent change includes reinvestment of $0.523 per share ordinary income dividends and $0.628 per share capital gains
distributions.
(4) Percent change includes reinvestment of $0.495 per share ordinary income dividends and $0.628 per share capital gains
distributions.
(5) Percent change includes reinvestment of $0.598 per share ordinary income dividends and $0.628 per share capital gains
distributions.
</TABLE>
PORTFOLIO INFORMATION
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
Pfizer, Inc. 4.1%
cisco Systems, Inc. 4.0
Microsoft Corp. 3.9
The Gillette Co. 3.6
The Coca-Cola Co. 3.6
COMPAQ Computer Corp. 3.4
Intel Corp. 3.4
General Electric Co. 3.3
Lucent Technologies 3.2
Amgen, Inc. 3.2
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Communications Equipment 13.0%
Pharmaceuticals 11.5
Software -- Computer 8.6
Oil Services 6.6
Computers 6.1
Energy 5.4
Banking & Financial 4.3
Electrical Equipment 4.1
Cosmetics 3.9
Medical Technology 3.8
Equity Portfolio Changes for the
Quarter Ended May 31, 1997
Additions
Baker Hughes, Inc.
*Baan Company, N.V. (ADR)
Citicorp
Northern Telecom Ltd.
SAP AG (Systeme, Anwendungen, Produkte in der Datenverarbeitung) (ADR)
*Travelers Property Casualty Corp. (Class A)
Walgreen Co.
Deletions
*Baan Company, N.V. (ADR)
Electronic Data Systems Corp.
Rite Aid Corp.
Sara Lee Corporation
Travelers/Aetna Property Casualty Corp.
U.S. Bancorp
*Travelers Property Casualty Corp. (Class A)
Wells Fargo & Company
* Added and deleted in the same quarter.
<TABLE>
<CAPTION>
Merrill Lynch Fundamental Growth Fund, Inc. May 31, 1997
SCHEDULE OF INVESTMENTS
Percent of
Industries Shares Held Stocks Cost Value Net Assets
<S> <C> <C> <C> <C> <C>
Advertising 50,000 Interpublic Group of Companies, Inc. $2,084,537 $2,993,750 0.9%
Banking & Financial 200,000 Banc One Corp. 9,369,505 8,650,000 2.7
25,000 Citicorp 2,878,605 2,859,375 0.9
50,000 State Street Boston Corp. 1,351,163 2,231,250 0.7
------------ ------------ ------------
13,599,273 13,740,625 4.3
Beverages 165,000 The Coca-Cola Co. 6,427,205 11,261,250 3.6
Commmunications 185,000 cisco Systems, Inc. 10,677,923 12,487,500 4.0
Equipment 200,000 FORE Systems, Inc. 4,973,550 3,300,000 1.0
160,000 Lucent Technologies, Inc. 8,529,486 10,180,000 3.2
75,000 Newbridge Networks Corp. 2,591,241 3,009,375 1.0
100,000 Northern Telecom Ltd. 7,958,971 8,400,000 2.7
100,000 Telefonaktiebolaget LM Ericsson (ADR)(a) 3,379,803 3,562,500 1.1
------------ ------------ ------------
38,110,974 40,939,375 13.0
Computers 100,000 COMPAQ Computer Corp. 8,282,432 10,825,000 3.4
165,000 Hewlett-Packard Co. 8,994,629 8,497,500 2.7
------------ ------------ ------------
17,277,061 19,322,500 6.1
Cosmetics 130,000 The Gillette Co. 5,708,764 11,553,750 3.6
20,000 International Flavors & Fragrances Inc. 973,375 887,500 0.3
------------ ------------ ------------
6,682,139 12,441,250 3.9
Electrical Equipment 20,000 Emerson Electric Co. 658,040 1,080,000 0.3
170,000 General Electric Co. 6,962,125 10,263,750 3.3
20,000 Honeywell, Inc. 1,444,774 1,455,000 0.5
------------ ------------ ------------
9,064,939 12,798,750 4.1
Electronics 70,000 Intel Corp. 9,764,268 10,596,250 3.4
Energy 150,000 El Paso Natural Gas Co. 6,910,825 8,887,500 2.8
200,000 Enron Corp. 8,433,697 8,150,000 2.6
------------ ------------ ------------
15,344,522 17,037,500 5.4
Entertainment 130,000 Viacom, Inc. (Class A) 6,082,341 3,916,250 1.2
45,000 The Walt Disney Co. 2,948,388 3,684,375 1.2
------------ ------------ ------------
9,030,729 7,600,625 2.4
Financial Services 70,000 Federal National Mortgage Association 2,487,324 3,053,750 1.0
100,000 Travelers Group Inc. 4,350,898 5,487,500 1.7
------------ ------------ ------------
6,838,222 8,541,250 2.7
Food 30,000 ConAgra Inc. 1,334,300 1,803,750 0.6
5,000 Wrigley (Wm.) Jr. Co. (Class B) 222,850 296,250 0.1
------------ ------------ ------------
1,557,150 2,100,000 0.7
Food Merchandising 110,000 Albertson's, Inc. 4,309,983 3,685,000 1.2
80,000 Meyer (Fred), Inc. 2,738,011 3,670,000 1.1
------------ ------------ ------------
7,047,994 7,355,000 2.3
Hotel 20,000 Marriott International, Inc. 994,115 1,155,000 0.4
Household Products 10,000 Colgate-Palmolive Co. 374,260 620,000 0.2
20,000 Kimberly-Clark Corporation 1,078,644 1,002,500 0.3
40,000 Procter & Gamble Co. 3,811,715 5,515,000 1.8
------------ ------------ ------------
5,264,619 7,137,500 2.3
Information Processing 210,000 First Data Corp. 7,619,302 8,400,000 2.7
Insurance 10,000 Aetna Inc. 822,491 1,010,000 0.3
35,000 American International Group, Inc. 3,560,163 4,738,125 1.5
------------ ------------ ------------
4,382,654 5,748,125 1.8
Leisure 115,000 Polygram N.V. (NY Registered Shares) 5,983,544 5,505,625 1.7
Medical -- Technology 100,000 Boston Scientific Corp. 5,374,396 5,337,500 1.7
110,000 Johnson & Johnson 4,344,330 6,586,250 2.1
------------ ------------ ------------
9,718,726 11,923,750 3.8
Oil Services 125,000 Baker Hughes, Inc. 4,634,890 4,687,500 1.5
100,000 Diamond Offshore Drilling, Inc. 6,897,042 7,112,500 2.3
75,000 Schlumberger Ltd. 8,231,003 8,934,375 2.8
------------ ------------ ------------
19,762,935 20,734,375 6.6
Pharmaceuticals 150,000 Amgen, Inc. 6,219,799 10,031,250 3.2
50,000 Bristol-Myers Squibb Co. 2,397,314 3,668,750 1.1
110,000 Merck & Co., Inc. 6,712,286 9,886,250 3.1
125,000 Pfizer, Inc. 5,746,463 12,859,375 4.1
------------ ------------ ------------
21,075,862 36,445,625 11.5
Photography 15,000 Eastman Kodak Co. 953,578 1,243,125 0.4
Pollution Control 20,000 Waste Management Inc.** 591,174 635,000 0.2
Restaurant 25,000 McDonald's Corp. 1,141,245 1,256,250 0.4
Retail Specialty 5,000 Staples Inc. 79,583 110,000 0.0
Retail Stores 120,000 Wal-Mart Stores, Inc. 2,901,419 3,570,000 1.1
70,000 Walgreen Co. 3,082,436 3,272,500 1.1
------------ ------------ ------------
5,983,855 6,842,500 2.2
Software -- Computer 100,000 Baan Company, N.V. 4,914,825 6,012,500 1.9
100,000 Microsoft Corp. 8,547,136 12,400,000 3.9
60,000 Oracle Corp. 2,572,500 2,797,500 0.9
100,000 SAP AG (Systeme, Anwendungen, Produkte
in der Dat enverarbeitung) (ADR) (a) 5,522,875 6,100,000 1.9
------------ ------------ ------------
21,557,336 27,310,000 8.6
Toys 255,000 Hasbro, Inc. 6,485,209 7,395,000 2.3
Travel & Lodging 25,000 Carnival Corporation (Class A) 588,075 950,000 0.3
Total Stocks 255,010,825 309,520,000 98.0
Face Amount Short-Term Securities
Commercial Paper* $9,937,000 General Motors Acceptance Corp., 5.62%
due 6/02/1997 9,933,897 9,933,897 3.1
Total Short-Term Securities 9,933,897 9,933,897 3.1
Total Investments $264,944,722 319,453,897 101.1
=============
Liabilities in Excess of Other Assets (3,534,695) (1.1)
------------ ------------
Net Assets $315,919,202 100.0%
============= =============
Net Asset Value: Class A -- Based on net assets of $48,905,384 and
3,082,424 shares outstanding $15.87
=============
Class B -- Based on net assets of $161,938,686 and
10,600,246 shares outstanding $15.28
=============
Class C -- Based on net assets of $63,654,179 and
4,157,879 shares outstanding $15.31
=============
Class D -- Based on net assets of $41,420,953 and
2,624,093 shares outstanding $15.78
=============
* Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
** Formerly WMX Technologies Inc.
(a) American Depositary Receipts (ADR).
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