MERRILL LYNCH
FUNDAMENTAL
GROWTH
FUND, INC.
FUND LOGO
Quarterly Report
May 31, 1998
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
Lawrence R. Fuller, Senior Vice President
and Portfolio Manager
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
Barbara G. Fraser, 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
Printed on post-consumer recycled paper
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
DEAR SHAREHOLDER
For the quarter ended May 31, 1998, total returns for Merrill Lynch
Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and Class
D Shares were +4.13%, +3.84%, +3.88% and +4.04%, respectively. For
the same three-month period, the total return for the unmanaged
Standard & Poor's 500 Index (S&P 500) was +4.35%. (Investment
results shown do not reflect sales charges and would be lower if
sales charges were included. Complete performance information can be
found on pages 3 and 4 of this report to shareholders.)
During the May quarter, the best stock price gains were from equity
positions in the communications equipment and retailing industries.
Six of the companies among the Fund's top ten equity holdings,
including the top four holdings, had total returns significantly
greater than the total return for the unmanaged S&P 500. (See page 4
of this report to shareholders for a complete listing of the Fund's
Ten Largest Holdings.)
The Environment
During most of the May quarter, investors were worried that central
banks in the United States, the United Kingdom and Germany would
tighten monetary policy. We believe that to forecast a tightening of
monetary policy would not take into account the economic and social
dislocations taking place within the major developing economies of
Asia and the very modest real economic growth in Japan. The most
recent business and economic reports on the US economy show
continued robust growth of real consumer spending. US households are
benefiting from a relatively tight labor market in the all-important
service industries and from rising rates of growth in real wages.
Also, residential mortgage financing rates remain at attractive
levels. Finally, state and local legislators, as well as Federal
legislators, are looking for ways to allocate part of budget
surpluses to consumers in the form of future tax cuts. This would
add to the Federal tax cut stimulus to spending for lower and middle-
income consumers which started in January 1998. Price inflation
remains modest because of the competitive pricing of Asian
manufacturers in everything from motor vehicles to apparel. It
appears that US consumers will benefit, while domestic manufacturers
who are trying to compete against global manufacturers in Asia will
be disadvantaged as the comparative cost of manufacturing has
declined substantially relative to US producers.
Investment Strategy
Our investment strategy did not change significantly during the May
quarter. We continued to focus primarily on large-capitalization,
high-quality growth companies. We preferred to invest in companies
that offered value-added products and services with an emphasis
toward research and development of future products and services. In
addition, a majority of the companies in the Fund's portfolio have a
global focus in terms of marketing, sales and service.
During the May quarter, we reduced the Fund's weighting in some of
the major communications equipment companies after the stock prices
of several of these companies rose to record highs. Our investments
in these companies were the most important contributors to the
Fund's returns for the May quarter. However, we have become
concerned about the relative valuations of some of these companies
because they are operating in an environment where they may be
forced to stretch out or cancel some of their major contracts for
communications infrastructure in Asia or Latin America.
We anticipate a continuation of relatively strong real growth in US
consumer spending on computers, home furnishings, electronic
entertainment goods, entertainment services, apparel and healthcare.
Consequently, we maintained significant holdings in general
merchandise retail store and specialty retailing companies. Our
focus in technology investments remains on those companies that we
believe are playing the leadership roles in the expansion of
networked operational systems. Systeme, Anwendungen, Produkte in der
Datenverarbeitung (SAP AG) in Germany continues to be one the
portfolio's top five equity holdings. We believe that the company is
the leading software developer and vendor in networked business
application software for large enterprises.
Merrill Lynch Fundamental Growth Fund, Inc.
May 31, 1998
We added eight companies to the portfolio during the May quarter,
many of them based on their attractive valuations. These companies
were E.I. duPont de Nemours & Company, The Seagram Company Ltd.,
WorldCom, Inc., Chancellor Media Corp., Franklin Resources, Inc.,
Gannett Co., Inc., Federated Department Stores, Inc. and AT&T Corp.
We added duPont because of the relatively modest stock valuation and
the potential for a substantial improvement in returns and earnings
growth over the next five years as the company's current management
becomes more aggressive in corporate restructuring. Since duPont's
management made clear its intentions to liquidate the company's
investment in its energy subsidiary, Conoco, and to exercise its
purchase option for 50% of duPont-Merck Pharmaceuticals, we believe
that management can accomplish a major corporate shift in product
mix toward life sciences.
We added The Seagram Company, Ltd. because of the potential for
enhanced rates of growth in earnings from the acquisition and
integration of PolyGram N.V. into Seagram's Universal Music
subsidiary. We purchased shares of WorldCom, Inc. because of the
company's focus on the most rapidly growing and most profitable
commercial telecommunication businesses on a global basis.
Chancellor Media Corp. was added in light of the potential for rapid
growth and substantial improvements in returns as management
develops one of the two largest radio and television broadcast
groups by means of acquisitions and mergers under the new Federal
deregulation. In response to expectations of continued rapid growth
and improving returns for the second-largest publicly traded
investment manager in the United States, we purchased shares of
Franklin Resources, Inc. We added Gannett Co., Inc. largely in
response to our expectations of improving rates of return from
restructuring and a favorable environment in the United States for
growth of advertising revenue. We added Federated Department
Stores, Inc. because of the prospects for improved rates of growth
in earnings in a favorable US market environment for consumer
spending. Finally, AT&T Corp. was added in part because of the
prospects for a significant improvement in returns from major
restructuring by the new chief executive officer.
In Conclusion
We continue to have a positive outlook for investment opportunities
in the US equity markets. We appreciate your investment in Merrill
Lynch Fundamental Growth Fund, Inc., and we look forward to
reviewing our investment strategy and outlook with you in our
upcoming annual report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Lawrence R. Fuller)
Lawrence R. Fuller
Senior Vice President and Portfolio Manager
June 25, 1998
Merrill Lynch Fundamental Growth Fund, Inc.
May 31, 1998
PERFORMANCE DATA
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. However, in the
case of certain eligible investors, the shares 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. (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.
* 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. Figures shown in the "Average Annual Total
Return" 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 3/31/98 +47.65% +39.89%
Inception (10/21/94)
through 3/31/98 +28.51 +26.51
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/98 +45.95% +41.95%
Inception (10/21/94)
through 3/31/98 +27.17 +27.01
[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 3/31/98 +45.96% +44.96%
Five Years Ended 3/31/98 +18.50 +18.50
Inception (12/24/92)
through 3/31/98 +16.68 +16.68
[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 3/31/98 +47.14% +39.42%
Five Years Ended 3/31/98 +19.43 +18.15
Inception (12/24/92)
through 3/31/98 +17.59 +16.40
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch Fundamental Growth Fund, Inc.
May 31, 1998
PERFORMANCE DATA (concluded)
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month Since Inception
Total Return Total Return Total Return
<S> <C> <C> <C>
ML Fundamental Growth Fund, Inc. Class A Shares* +30.67% + 4.13% +138.49%
ML Fundamental Growth Fund, Inc. Class B Shares* +29.26 + 3.84 +129.75
ML Fundamental Growth Fund, Inc. Class C Shares* +29.30 + 3.88 +126.33
ML Fundamental Growth Fund, Inc. Class D Shares* +30.33 + 4.04 +136.07
Standard & Poor's 500 Index** +30.69 + 4.35 +153.27/+181.76
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. The
Fund's inception dates are: Class A and Class B Shares, 10/21/94;
and Class C and Class D Shares, 12/24/92.
**An unmanaged broad-based Index comprised of common stocks. Since
inception total returns are: from 10/21/94 to 5/31/98 and from
12/24/92 to 5/31/98, respectively.
</TABLE>
PORTFOLIO INFORMATION
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
Wal-Mart Stores, Inc. 4.0%
General Electric Co. 3.4
SAP AG (Systeme, Anwendungen, Produkte
in der Datenverarbeitung) (ADR) 3.2
Pfizer, Inc. 3.1
Sprint Corporation 2.9
Cisco Systems, Inc. 2.8
COMPAQ Computer Corp. 2.8
Microsoft Corp. 2.6
Procter &Gamble Co. 2.6
Walt Disney Company (The) 2.6
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Software--Computer 8.2%
Pharmaceuticals 7.3
Communications Equipment 6.7
Telecommunications 6.2
Banking & Financial 5.8
Retail Specialty 5.6
Retail Stores 5.3
Household Products 5.2
Computers 4.5
Financial Services 4.3
Equity Portfolio Changes for the
Quarter Ended May 31, 1998
Additions
AT&TCorp.
Chancellor Media Corp. (Class A)
duPont (E.I.) de Nemours &Company
Federated Department Stores, Inc.
Franklin Resources, Inc.
Gannett Co., Inc.
Seagram Company Ltd. (The)
*Sodexho Marriott Services, Inc.
WorldCom, Inc.
Deletions
*Sodexho Marriott Services, Inc.
[FN]
*Added and deleted in the same quarter.
Merrill Lynch Fundamental Growth Fund, Inc.
May 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Percent of
Industries Held Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Advertising 120,000 Interpublic Group of Companies, Inc. $ 4,855,556 $ 7,117,500 0.8%
Banking & Financial 275,000 Banc One Corp. 12,748,106 15,159,375 1.7
75,000 BankAmerica Corp. 5,404,138 6,201,563 0.7
40,000 Citicorp 5,465,186 5,965,000 0.7
200,000 Mellon Bank Corp. 11,074,562 13,487,500 1.5
155,000 State Street Boston Corp. 7,301,335 10,685,313 1.2
------------ ------------ ------
41,993,327 51,498,751 5.8
Beverages 80,000 Coca-Cola Company (The) 4,538,538 6,270,000 0.7
60,000 Seagram Company Ltd. (The) 2,554,446 2,636,250 0.3
------------ ------------ ------
7,092,984 8,906,250 1.0
Broadcasting-- 175,000 Chancellor Media Corp. (Class A) 8,166,700 7,306,250 0.8
Radio & Television 100,000 Clear Channel Communications, Inc. 8,510,355 9,587,500 1.1
------------ ------------ ------
16,677,055 16,893,750 1.9
Chemicals 130,000 duPont (E.I.) de Nemours & Company 10,494,650 10,010,000 1.1
Communications 330,000 Cisco Systems, Inc. 20,134,633 24,915,000 2.8
Equipment 400,000 FORE Systems, Inc. 9,010,073 8,725,000 1.0
155,000 Lucent Technologies, Inc. 7,681,210 10,995,313 1.3
200,000 Newbridge Networks Corporation 8,383,528 5,675,000 0.6
65,000 Northern Telecom Ltd. 3,216,039 4,160,000 0.5
160,000 Telefonaktiebolaget LM Ericsson (ADR)(a) 3,248,268 4,460,000 0.5
------------ ------------ ------
51,673,751 58,930,313 6.7
Computers 880,000 COMPAQ Computer Corp. 20,608,463 24,035,000 2.8
111,000 Dell Computer Corporation 7,489,535 9,143,625 1.0
100,000 Hewlett-Packard Co. 6,776,848 6,212,500 0.7
------------ ------------ ------
34,874,846 39,391,125 4.5
Cosmetics 110,000 Gillette Company (The) 8,698,636 12,883,750 1.5
20,000 International Flavors & Fragrances, Inc. 973,375 960,000 0.1
------------ ------------ ------
9,672,011 13,843,750 1.6
Electrical Equipment 30,000 Emerson Electric Co. 1,226,140 1,822,500 0.2
360,000 General Electric Co. 22,421,969 30,015,000 3.4
10,000 Honeywell, Inc. 748,156 839,375 0.1
------------ ------------ ------
24,396,265 32,676,875 3.7
Electronics 250,000 Intel Corp. 19,253,623 17,843,750 2.0
50,000 STMicroelectronics (NY Registered
Shares) (b) 3,657,534 3,868,750 0.4
220,000 Texas Instruments Inc. 12,827,918 11,302,500 1.3
------------ ------------ ------
35,739,075 33,015,000 3.7
Energy 160,000 El Paso Natural Gas Co. 3,947,494 6,180,000 0.7
75,000 Enron Corp. 3,296,700 3,759,375 0.4
------------ ------------ ------
7,244,194 9,939,375 1.1
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc.
May 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Percent of
Industries Held Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Entertainment 100,000 Viacom, Inc. (Class A) $ 4,607,042 $ 5,506,250 0.6%
200,000 Walt Disney Company (The) 19,382,580 22,625,000 2.6
------------ ------------ ------
23,989,622 28,131,250 3.2
Financial Services 35,000 American Express Company 3,103,538 3,591,875 0.4
95,000 Federal National Mortgage Association 4,954,567 5,688,125 0.7
150,000 Franklin Resources, Inc. 8,168,922 7,331,250 0.8
180,000 Morgan Stanley, Dean Witter,
Discover & Co. 11,328,122 14,051,250 1.6
120,000 Travelers Group, Inc. 5,956,821 7,320,000 0.8
------------ ------------ ------
33,511,970 37,982,500 4.3
Food 30,000 ConAgra Inc. 649,650 877,500 0.1
50,000 Wrigley (Wm.) Jr. Co. (Class B) 3,490,500 4,812,500 0.5
------------ ------------ ------
4,140,150 5,690,000 0.6
Food Merchandising 50,000 Albertson's, Inc. 1,884,337 2,315,625 0.3
150,000 Meyer (Fred), Inc. 2,851,086 6,450,000 0.7
------------ ------------ ------
4,735,423 8,765,625 1.0
Home Furnishings 265,000 Ethan Allen Interiors, Inc. 14,282,904 13,332,813 1.5
Hotel 120,000 Marriott International, Inc. 3,783,091 4,170,000 0.5
Household Products 35,000 Colgate-Palmolive Co. 2,974,055 3,045,000 0.3
80,000 Kimberly-Clark Corporation 4,058,752 3,965,000 0.5
270,000 Procter & Gamble Co. 19,879,296 22,663,125 2.6
200,000 Unilever N.V. (NY Registered Shares) 14,358,141 15,787,500 1.8
------------ ------------ ------
41,270,244 45,460,625 5.2
Information 360,000 First Data Corp. 13,271,227 11,970,000 1.4
Processing
Insurance 10,000 Aetna, Inc. 822,491 781,875 0.1
110,000 American International Group, Inc. 11,331,303 13,619,375 1.5
------------ ------------ ------
12,153,794 14,401,250 1.6
Leisure 230,000 Polygram N.V. (NY Registered Shares) 11,870,421 12,535,000 1.4
Medical--Technology 125,000 Boston Scientific Corp. 7,080,271 7,968,750 0.9
120,000 Guidant Corp. 7,944,182 7,732,500 0.9
20,000 Johnson & Johnson 947,465 1,381,250 0.2
------------ ------------ ------
15,971,918 17,082,500 2.0
Oil Services 135,000 Baker Hughes, Inc. 5,593,791 4,860,000 0.6
80,000 Diamond Offshore Drilling, Inc. 3,336,776 3,825,000 0.4
50,000 Schlumberger Ltd. 3,129,152 3,903,125 0.4
------------ ------------ ------
12,059,719 12,588,125 1.4
Pharmaceuticals 30,000 Amgen, Inc. 1,598,927 1,813,125 0.2
180,000 Bristol-Myers Squibb Co. 16,718,139 19,350,000 2.2
135,000 Merck & Co., Inc. 15,401,794 15,803,437 1.8
260,000 Pfizer, Inc. 20,178,566 27,251,250 3.1
------------ ------------ ------
53,897,426 64,217,812 7.3
Photography 25,000 Eastman Kodak Co. 1,602,338 1,784,375 0.2
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc.
May 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Shares Percent of
Industries Held Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Pollution Control 20,000 Waste Management, Inc. $ 591,174 $ 650,000 0.1%
Publishing 32,000 Gannett Co., Inc. 2,189,434 2,110,000 0.2
Restaurant 25,000 McDonald's Corp. 1,141,245 1,640,625 0.2
Retail Specialty 170,000 CVS Corporation 11,215,613 11,931,875 1.4
170,000 Gap, Inc. (The) 7,300,645 9,180,000 1.0
700,000 Staples Inc. 13,028,523 17,543,750 2.0
310,000 Walgreen Co. 9,852,418 10,908,125 1.2
------------ ------------ ------
41,397,199 49,563,750 5.6
Retail Stores 215,000 Federated Department Stores, Inc. 10,705,901 11,139,687 1.3
640,000 Wal-Mart Stores, Inc. 25,749,479 35,320,000 4.0
------------ ------------ ------
36,455,380 46,459,687 5.3
Semiconductor 320,000 Applied Materials, Inc. 11,709,476 10,240,000 1.2
Capital Equipment
Software--Computer 105,000 Baan Company, N.V. (US Registered
Shares) 4,157,687 4,751,250 0.5
275,000 Microsoft Corp. 22,799,608 23,323,437 2.6
375,000 PeopleSoft, Inc. 17,444,025 16,335,937 1.9
150,000 SAP AG (Systeme, Anwendungen,
Produkte in der Datenverarbeitung)
(ADR)(a) 10,425,846 27,737,670 3.2
------------ ------------ ------
54,827,166 72,148,294 8.2
Telecommunications 320,000 AT&T Corp. 20,900,082 19,480,000 2.2
350,000 Sprint Corporation 22,132,938 25,112,500 2.9
220,000 WorldCom, Inc. 9,650,460 10,010,000 1.1
------------ ------------ ------
52,683,480 54,602,500 6.2
Toys 175,000 Mattel, Inc. 6,563,982 6,628,125 0.7
Travel & Lodging 150,000 Carnival Corporation (Class A) 7,855,208 10,162,500 1.2
Total Stocks 706,667,705 814,540,045 92.4
Face
Amount Short-Term Securities
Commercial $43,561,000 General Motors Acceptance Corp.,
Paper* 5.69% due 6/01/1998 43,547,230 43,547,230 5.0
25,000,000 Lexington Parker Capital Co. LLC,
5.53% due 6/19/1998 24,923,194 24,923,194 2.8
Total Short-Term Securities 68,470,424 68,470,424 7.8
Total Investments $775,138,129 883,010,469 100.2
============
Liabilities in Excess of Other Assets (1,323,017) (0.2)
------------ ------
Net Assets $881,687,452 100.0%
============ ======
Net Asset Class A--Based on net assets of $110,308,740 and
Value: 6,070,827 shares outstanding $ 18.17
============
Class B--Based on net assets of $523,627,940 and
30,244,009 shares outstanding $ 17.31
============
Class C--Based on net assets of $122,745,116 and
7,058,123 shares outstanding $ 17.39
============
Class D--Based on net assets of $125,005,656 and
6,932,693 shares outstanding $ 18.03
============
<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)Formerly known as SGS-Thomson Microelectronics N.V.
</TABLE>
