MERRILL LYNCH
FUNDAMENTAL
GROWTH
FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Quarterly Report
November 30, 1997
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 -- 11/97
[RECYCLE LOGO]
Printed on post-consumer recycled paper
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
DEAR SHAREHOLDER
For the quarter ended November 30, 1997, total returns for Merrill Lynch
Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and Class D
Shares were +4.49%, +4.13%, +4.19% and +4.40%, respectively,
underperforming the +6.67% total return for the unmanaged Standard &
Poor's 500 Index (S&P 500). However, the total returns of each of the
Fund's classes of shares significantly outperformed the Lipper
Analytical Services' Growth Fund Average return of +3.25% for the
November quarter. (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.)
During November, the common share prices of many of the Fund's
investment holdings in technology and oil service and equipment
companies declined significantly. The uncertainties about possible
declines in the Asian economies may have been caused by austerity
programs being agreed to by various governments in response to
financial market dislocations. These uncertainties appear to have
resulted in investor concerns about earnings prospects for the major
companies in the telecommunications equipment, computer, computer
software and oil services industries and the subsequent declines of
the common share prices of many companies in these industries. The
share price declines of three of the top ten holdings of Merrill Lynch
Fundamental Growth Fund, Inc. -- COMPAQ Computer Corp., Intel Corp.
and Citicorp -- were significant negatives during the November
quarter. However, the seven remaining top ten holdings experienced
share price appreciation which was substantially above the total
returns on the Fund's shares for the November quarter. (See page 9 of
this report for complete listings of the Fund's ten largest industries
and holdings.)
On a year-to-date comparison, the Fund's shareholder net returns
continue to exceed both the Lipper Analytical Services' Growth Funds
average and the unmanaged S&P 500. We continue to have a positive
outlook for the US equity market. In our opinion, the business
dislocations for most US-based companies as a result of the Asian
economic problems are not likely to be substantial or prolonged in
duration. Also, many US companies may benefit from lower costs of
goods which they manufacture in Asian facilities. We view the stock
price declines resulting from concerns about Asian economic problems
as an investment opportunity.
The Environment
The domestic business environment does not appear to us to have
changed much since the end of the August quarter. Consumer spending
continues at a slow growth pace in the United States with the service
sectors, including entertainment and health care, presenting the
strongest growth rates. The most rapid growth can be seen in
commercial capital spending, with the build-out of new digital
wireless and wireline communications infrastructure, and spending on
networked computer systems and software.
The rate of growth of corporate profits on a year-to-year comparison
appears to have increased in the third calendar quarter as compared to
the prior quarter. Corporate cash flow seems positive for continued
capital spending on technology and telecommunications, which we expect
to enhance operational capabilities and productivity. The reduction in
capital gains tax rates appears to be a factor in relatively strong
consumer demand for computers, pleasure boats and pleasure aircraft.
When the reduced household income tax withholding starts in January
1998, we expect to see an increase in the rate of growth of consumer
spending on general merchandise. Consequently, we foresee a favorable
US economic environment in 1998 with an overall positive return on US
stock investments.
Investment Strategy
During the quarter ended November 30, 1997, we focused primarily on
large-capitalization, high-quality growth companies where we believed
managements had the experience and financial resources to grow
earnings at above-average rates. We preferred organizations with
value-added products and services. However, we also invested in
organizations where managements are likely to provide improving
returns and earnings from reorganization and restructuring. Our
perspective on the majority of the Fund's companies was global in
terms of the potential for geographic growth of markets as well as the
role of foreign-based competitors.
The Fund's significant weightings in companies in the communications
equipment, computers, electronics and oil services industries
detracted from otherwise very good investment returns during the
November quarter. The primary reason for these stock price declines
appears related to concerns over significant potential declines in
earnings from declines in sales to Asian customers. We believe that
these expectations are too negative. The only significant change in
the weighting of industry sectors during the November quarter was the
increase in the banking and financial sector from 7.3% of net assets
at the end of the August quarter to 10% of net assets on November 30,
1997. We anticipate that world economic growth rates will subside in
1998 as the International Monetary Fund works with the policymakers of
major Asian countries to stabilize financial and currency markets
through policy changes. These developments are likely to reduce real
economic growth rates over the near term. We believe that these
changes will bring down interest rates on a global basis and benefit
the banking and financial sector.
We added four companies to the portfolio during the November quarter.
Guidant Corp. is one of the leading developers and marketers of high
technology medical devices. We anticipated an acceleration in earnings
growth from a successful new product launch and a subsequent increase
in the stock's valuation. We added Mattel, Inc. in response to the
attractive valuation relative to a potential rise in the rate of
growth of earnings from restructuring of manufacturing and
distribution. Also, the corporation could benefit from a significant
reduction in manufacturing costs from the depreciation of Asian
currencies in markets where the company has meaningful manufacturing
operations. We added Mellon Bank Corp. in response to the attractive
valuation and the potential for above-average earnings growth as this
financial service company continues to develop fee-based businesses
through acquisitions and internal growth. We added Unilever N.V. as a
result of its attractive valuation relative to the potential for
management to increase earnings from the restructuring and
rationalization of this global consumer products company.
In Conclusion
We continue to have a positive outlook for investment opportunity in
the US equity markets. We thank you for your investment in Merrill
Lynch Fundamental Growth Fund, Inc., and we look forward to updating
you on our investment strategy and outlook in our upcoming semi-annual
report.
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/LAWRENCE R. FULLER
Lawrence R. Fuller
Senior Vice President and Portfolio Manager
January 6, 1998
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 9/30/97 +38.40% +31.13%
Inception (10/21/94)
through 9/30/97 +28.73 +26.39
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/97 +37.04% +33.04%
Inception (10/21/94)
through 9/30/97 +27.42 +27.00
* 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 9/30/97 +37.06% +36.06%
Inception (12/24/92)
through 9/30/97 +15.77 +15.77
* 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 9/30/97 +38.09% +30.84%
Inception (12/24/92)
through 9/30/97 +16.67 +15.36
* 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 -- 11/30/97 13.77 18.15 -- -- +31.81
Total $0.883 Total $0.930
Cumulative total return as of 11/30/97: +108.74%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
</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 -- 11/30/97 13.31 17.38 -- -- +30.58
Total $0.883 Total $0.833
Cumulative total return as of 11/30/97: +102.17%**
* Figures may include short-term capital gains distributions.
** Figures do not reflect deduction of sales charge; results would be lower if sales charge was deducted.
</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 -- 11/30/97 13.34 17.42 -- -- +30.58
Total $0.883 Total $0.805
Cumulative total return as of 11/30/97: +99.17%**
* Figures may include short-term capital gains distributions.
** Figures do not reflect deduction of sales charge; results would be lower if sales charge was deducted.
</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 -- 11/30/97 13.71 18.03 -- -- +31.51
Total $0.883 Total $0.908
Cumulative total return as of 11/30/97: +106.95%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
</TABLE>
<TABLE>
<CAPTION>
12 Month 3 Month
11/30/97 8/31/97 11/30/96 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Fundamental Growth Fund, Inc. Class A Shares* $18.15 $17.37 $15.57 +21.86%(1) +4.49%
ML Fundamental Growth Fund, Inc. Class B Shares* 17.38 16.69 15.01 +21.22(1) +4.13
ML Fundamental Growth Fund, Inc. Class C Shares* 17.42 16.72 15.01 +21.49(1) +4.19
ML Fundamental Growth Fund, Inc. Class D Shares* 18.03 17.27 15.50 +21.63(1) +4.40
Standard & Poor's 500 Index** 955.40 899.47 757.02 +26.21 +6.22
ML Fundamental Growth Fund, Inc. Class A Shares -- Total Return* +27.09(2) +4.49
ML Fundamental Growth Fund, Inc. Class B Shares -- Total Return* +25.75(3) +4.13
ML Fundamental Growth Fund, Inc. Class C Shares -- Total Return* +25.77(4) +4.19
ML Fundamental Growth Fund, Inc. Class D Shares -- Total Return* +26.68(5) +4.40
Standard & Poor's 500 Index -- Total Return** +28.50 +6.67
* 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>
<TABLE>
<CAPTION>
Merrill Lynch Fundamental Growth Fund, Inc. November 30, 1997
SCHEDULE OF INVESTMENTS
Shares Percent of
Industries Held Stocks Cost Value Net Assets
<S> <C> <C> <C> <C> <C>
Advertising 75,000 Interpublic Group of Companies, Inc. $ 2,084,537 $ 3,595,313 0.7%
Banking & Financial 120,000 Banc One Corp. 5,616,201 6,165,000 1.3
170,000 BankAmerica Corp. 12,322,915 12,410,000 2.6
110,000 Citicorp 14,427,164 13,193,125 2.7
165,000 Mellon Bank Corp. 8,941,487 9,353,438 1.9
125,000 State Street Boston Corp. 5,611,432 7,437,500 1.5
------------ ------------ ------
46,919,199 48,559,063 10.0
Beverages 70,000 The Coca-Cola Co. 3,760,705 4,375,000 0.9
Communications 75,000 Cisco Systems, Inc. 5,397,982 6,464,062 1.3
Equipment 375,000 FORE Systems, Inc. 8,522,573 6,468,750 1.3
75,000 Lucent Technologies, Inc. 5,552,064 6,009,375 1.2
200,000 Newbridge Networks Corp. 8,383,528 8,425,000 1.8
125,000 Northern Telecom Ltd. 10,518,737 11,226,562 2.3
200,000 Telefonaktiebolaget LM Ericsson (ADR)(a) 7,985,741 8,075,000 1.7
------------ ------------ ------
46,360,625 46,668,749 9.6
Computers 300,000 COMPAQ Computer Corp. 11,398,053 18,731,250 3.9
40,000 Hewlett-Packard Co. 2,192,800 2,442,500 0.5
------------ ------------ ------
13,590,853 21,173,750 4.4
Cosmetics 100,000 The Gillette Co. 7,495,792 9,231,250 1.9
20,000 International Flavors & Fragrances Inc. 973,375 963,750 0.2
------------ ------------ ------
8,469,167 10,195,000 2.1
Electrical Equipment 30,000 Emerson Electric Co. 1,226,140 1,650,000 0.3
220,000 General Electric Co. 10,464,489 16,225,000 3.4
50,000 Honeywell, Inc. 3,741,630 3,275,000 0.7
------------ ------------ ------
15,432,259 21,150,000 4.4
Electronics 185,000 Intel Corp. 13,413,643 14,360,625 3.0
Energy 140,000 El Paso Natural Gas Co. 6,632,053 8,592,500 1.8
200,000 Enron Corp. 8,433,697 7,750,000 1.6
------------ ------------ ------
15,065,750 16,342,500 3.4
Entertainment 130,000 Viacom, Inc. (Class A) 6,082,341 4,517,500 0.9
75,000 The Walt Disney Co. 5,383,158 7,120,313 1.5
------------ ------------ ------
11,465,499 11,637,813 2.4
Financial Services 110,000 American Express Company 8,842,497 8,676,250 1.8
285,000 Federal National Mortgage Association 12,180,789 15,051,563 3.1
300,000 Travelers Group Inc. 11,156,398 15,150,000 3.1
------------ ------------ ------
32,179,684 38,877,813 8.0
Food 60,000 ConAgra Inc. 1,334,300 2,156,250 0.4
30,000 Wrigley (Wm.) Jr. Co. (Class B) 1,890,550 2,373,750 0.5
------------ ------------ ------
3,224,850 4,530,000 0.9
Food Merchandising 175,000 Albertson's, Inc. 6,733,739 7,765,625 1.6
150,000 Meyer (Fred), Inc. 2,851,086 5,081,250 1.0
------------ ------------ ------
9,584,825 12,846,875 2.6
Hotel 20,000 Marriott International, Inc. 994,115 1,448,750 0.3
Household Products 120,000 Colgate-Palmolive Co. 8,092,210 8,017,500 1.7
20,000 Kimberly-Clark Corporation 1,078,644 1,041,250 0.2
100,000 Procter & Gamble Co. 5,346,649 7,631,250 1.6
45,000 Unilever N.V. (NY Registered Shares) 2,568,609 2,612,813 0.5
------------ ------------ ------
17,086,112 19,302,813 4.0
Information 250,000 First Data Corp. 9,431,215 7,078,125 1.5
Processing
Insurance 10,000 Aetna Inc. 822,491 753,750 0.1
47,500 American International Group, Inc. 3,603,647 4,788,594 1.0
------------ ------------ ------
4,426,138 5,542,344 1.1
Leisure 115,000 Polygram N.V. (NY Registered Shares) 5,983,544 5,893,750 1.2
Medical -- Technology 125,000 Boston Scientific Corp. 7,080,271 5,648,437 1.2
25,000 Guidant Corp. 1,609,790 1,606,250 0.3
70,000 Johnson & Johnson 2,915,118 4,405,625 0.9
------------ ------------ ------
11,605,179 11,660,312 2.4
Oil Services 210,000 Baker Hughes, Inc. 8,364,742 8,793,750 1.8
240,000 Diamond Offshore Drilling, Inc. 8,892,889 11,970,000 2.5
165,000 Schlumberger Ltd. 9,351,028 13,581,562 2.8
------------ ------------ ------
26,608,659 34,345,312 7.1
Pharmaceuticals 165,000 Amgen, Inc. 7,109,486 8,435,625 1.8
110,000 Bristol-Myers Squibb Co. 9,407,947 10,298,750 2.1
60,000 Merck & Co., Inc. 4,447,361 5,673,750 1.2
75,000 Pfizer, Inc. 3,180,350 5,456,250 1.1
------------ ------------ ------
24,145,144 29,864,375 6.2
Photography 25,000 Eastman Kodak Co. 1,602,338 1,515,625 0.3
Pollution Control 20,000 Waste Management Inc. 591,174 492,500 0.1
Restaurant 25,000 McDonald's Corp. 1,141,245 1,212,500 0.3
Retail Specialty 165,000 CVS Corporation 9,252,392 10,951,875 2.3
250,000 Staples Inc. 6,482,815 7,046,875 1.4
325,000 Walgreen Co. 8,120,299 10,460,937 2.2
------------ ------------ ------
23,855,506 28,459,687 5.9
Retail Stores 350,000 Wal-Mart Stores, Inc. 11,504,809 13,978,125 2.9
Software -- Computer 160,000 Baan Company, N.V. (US Registered Shares) 9,147,950 11,390,000 2.3
30,000 Microsoft Corp. 3,328,750 4,243,125 0.9
270,000 Oracle Corp. 8,992,505 8,977,500 1.9
130,000 SAP AG (Systeme, Anwendungen, Produkte
in der Datenverarbeitung) (ADR) (a) 7,936,625 13,227,500 2.7
------------ ------------ ------
29,405,830 37,838,125 7.8
Toys 175,000 Mattel, Inc. 6,563,982 7,010,937 1.4
Travel & Lodging 50,000 Carnival Corporation (Class A) 1,757,860 2,703,125 0.6
------------ ------------ ------
Total Stocks 398,254,446 462,658,906 95.5
Face
Amount Short-Term Securities
Commercial $18,954,000 General Motors Acceptance Corp.,
Paper* 5.75% due 12/01/1997 18,947,945 18,947,945 3.9
3,000,000 International Securitization Corp.,
5.62% due 12/01/1997 2,999,064 2,999,064 0.7
------------ ------------ ------
Total Short-Term Securities 21,947,009 21,947,009 4.6
------------ ------------ ------
Total Investments $420,201,455 484,605,915 100.1
============
Liabilities in Excess of Other Assets (248,369) (0.1)
------------ ------
Net Assets $484,357,546 100.0%
============ ======
Net Asset Value: Class A -- Based on net assets of $65,129,145
and 3,589,335 shares outstanding $ 18.15
============
Class B -- Based on net assets of $268,380,129
and 15,440,340 shares outstanding $ 17.38
============
Class C -- Based on net assets of $83,130,843
and 4,772,592 shares outstanding $ 17.42
============
Class D -- Based on net assets of $67,717,429
and 3,755,998 shares outstanding $ 18.03
============
* 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).
</TABLE>
PORTFOLIO INFORMATION
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
COMPAQ Computer Corp. 3.9%
General Electric Co. 3.4
Travelers Group Inc. 3.1
Federal National Mortgage Association 3.1
Intel Corp. 3.0
Wal-Mart Stores, Inc. 2.9
Schlumberger Ltd. 2.8
SAP AG (Systeme, Anwendungen, Produkte
in der Datenverarbeitung) (ADR) 2.7
Citicorp 2.7
BankAmerica Corp. 2.6
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Banking & Financial 10.0%
Communications Equipment 9.6
Financial Services 8.0
Software -- Computer 7.8
Oil Services 7.1
Pharmaceuticals 6.2
Retail Specialty 5.9
Computers 4.4
Electrical Equipment 4.4
Household Products 4.0
Equity Portfolio Changes for the
Quarter Ended November 30, 1997
Additions
Guidant Corp.
Mattel, Inc.
Mellon Bank Corp.
Unilever N.V. (NY Registered Shares)
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
