Babson
Growth
Fund
Semiannual Report
December 31, 1998
MESSAGE
To Our Shareholders
Babson Growth Fund surged 26.23% (price change and reinvested distributions)
in the fourth calendar quarter and 32.24% for the calendar year ending
December 31, 1998, compared to returns of 22.61% and 22.86%, respectively
for the average growth equity mutual fund (1,123 and 980 funds, respectively)
as measured by Lipper Analytical Services.
This performance earned Babson Growth Fund a top quartile ranking in the
Lipper growth mutual fund peer group for the trailing three months, one year,
two years, three years and five years ending December 31, 1998.1 These
results, especially when viewed on a risk-adjusted basis, have enabled
Babson Growth Fund to sport a 5-star rating for the three year record and an
overall 4-star rating from Morningstar, Inc. (based on a 5-star rating system).
Average annual compounded total returns for one, five and ten year periods
were 32.24%, 21.92% and 16.28%, respectively. Performance data contained in
this report is for past periods only. Past performance is not predictive of
future performance. Investment return and share value will fluctuate, and
redemption value may be more or less than original cost.
In December the Fund paid ordinary income dividends of $.29 per share
(including short-term capital gains of $.27) and realized capital gains of
$2.64 per share. At calendar year-end the net asset value per share was
$20.64.
In the fall of last year investors were confronted with a "wall of worry"
that included many disturbing issues: the recession in Asia, the financial
meltdown in Russia, slowing growth in Latin America, the collapse of several
high profile hedge funds, a potential Clinton impeachment and emerging fears
of a recession here in the United States. Each of these issues added a layer
of uncertainty to the global financial picture. Investor sentiment and
psychology were very negative at the market lows in early October.
Since that time many things have changed. President Clinton appears to have
made progress in his defense against removal from office. The Federal Reserve
has cut short-term interest rates three times in an effort to head off a
slowing economy in the United States and stimulate liquidity in the financial
markets. The bond market, aided by the interest rate cuts, has digested the
turmoil caused by defaults on Russian bonds and blowups by several large
hedge funds. Asia appears to have stabilized and is actually showing slight
signs of an improvement in some areas. The International Monetary Fund has
been aggressive at aiding troubled countries in South America. Investor
psychology has improved dramatically, sending the U.S. stock market up by
28% from the lows reached in early October.
Two large drivers of performance in Babson Growth Fund in the latter half of
1998 were the improvement in the semiconductor industry and continued rapid
growth in communications. After a significant slowdown in the second and
third quarters of last year, the semiconductor industry appears to have
stabilized and is expected to recover to historic levels of growth in
1999/2000. We have large investments (partly a result of aggressive buying
during the market weakness in September/October) in industry-leading
semiconductor companies like Linear Technology, Analog Devices, Maxim
Integrated Products, and Microchip Technology, all of whom experienced
enormous gains in their stock prices in the second half of 1998.
Explosive growth of Internet users and applications as well as the
convergence of voice, data and video traffic over networks are driving
tremendous growth in communications. Investing in companies like Cisco
Systems and Vitesse Semiconductor, key suppliers of the Internet
infrastructure, has been a successful strategy for Babson Growth Fund. We
continue to be very optimistic about the outlook for these companies and the
technology sector in general.
The Fund's large investments in the healthcare sector were also very
rewarding in 1998. New technologies developed in the fields of cardiac rhythm
management and interventional cardiology lead to accelerating
earnings growth and a record year for Guidant. An enormous pipeline of new
blockbuster products coming from Pfizer (who can forget all the publicity
surrounding the launch of Viagra?) drove this company's stock price to new
all-time highs. Cardinal Health, a lessor known pharmaceutical distribution
company, benefited last year from successful new drug launches throughout the
industry.
Babson Growth Fund also invested in several companies with strong defensible
franchises that many would consider boring, but proved to be excellent
investments in 1998. Companies like Safeway (grocery store retailer), CVS
(drug store retailer), Federal Home Loan Mortgage (mortgage finance) and
PayChex (payroll processing) were all top performing holdings last year.
The Fund was not without disappointments last year. Oil prices collapsed and
stayed at unusually low levels throughout the year. This impacted several
energy companies whose fortunes are partially dependent on commodity oil
prices. Weak emerging market economies created a difficult environment for
several of our multinational consumer products companies. These economies
also bruised some of our financial stocks that had outstanding loans in these
regions.
In the second half of calendar year 1998 we made four new investments in
Babson Growth Fund:
Etec Systems - developer of high-precision manufacturing equipment sold to
the semiconductor industry;
Health Management Associates - owner and operator of acute-care and
psychiatric hospitals in rural geographic areas;
MSC Industrial Direct - direct marketer and distributor of industrial
products to small and mid-sized industrial customers in the U.S.;
Vitesse Semiconductor - designer and manufacturer of ultra high speed, high
integration semiconductor chips used in telecommunications, networking, and
semiconductor test equipment products.
Numerous investments were liquidated during this time period, including
Boeing, First Data, Intel, Synopsys, Tenet Healthcare and Wallace Computer.
As of December 31, 1998 the top 10 equity holdings in Babson Growth Fund
comprised just over 37% of total assets:
Top 10 Equity Holdings Percent of Fund Assets
Cardinal Health 4.9
Guidant 4.5
Federal Home Loan Mortgage 4.5
Vitesse Semiconductor 3.5
Linear Technology 3.4
Safeway 3.4
American Home Products 3.4
Maxim Integrated Products 3.3
Pfizer 3.2
KLA-Tencor 3.1
Total 37.2%
Looking ahead we expect a gradual slowdown in economic growth in this
country. This combined with low inflation should keep interest rates at
current low levels. In this type of slow growth environment we believe
companies with the ability to generate sustainable high levels of earnings
growth without disappointing investors will prove to be attractive
investments. These are the types of companies we continue to identify and
invest in on behalf of our fellow shareholders in Babson Growth Fund.
Thank you for your investment and continued interest in Babson Growth Fund.
Sincerely
/s/Larry D. Armel
Larry D. Armel
President
1. Lipper rankings for Babson Growth Fund were 282 of 1,123 funds;
241 of 980 funds; 188 of 778 funds; 129 of 585 funds; 82 of 365 funds; and
100 of 174 funds for the three month, one, two, three, five and ten year
periods ended December 31, 1998.
2. Morningstar's proprietary ratings reflect historical risk-adjusted
performance and are subject to change every month. Overall ratings are
calculated from the fund's three, five and ten year average annual total
return (based upon available track records) in excess of 90-day Treasury
bill returns. The top 10% of funds in an investment category receive 5 stars;
the next 22.5% receive 4 stars; the next 36% receive 3 stars; the next 22.5%
receive 2 stars; and the next 10% receive 1 star. Babson Growth Fund has a
5-star rating for the three and five year periods and a 3-star rating for the
ten year period ended December 31, 1998. There were 2,802; 1,702; and 732
funds in morningstar's domestic equity category for the three, five and ten
year periods ended December 31, 1998, respectively.
HISTORICAL RECORD
Progress of the Fund since it was founded in 1960.
<TABLE>
<CAPTION>
NET
NET ASSET
*LONG- *SHORT- ASSET VALUE
TERM TERM VALUE PER
PER SHARE WITH
FISCAL NET *ORDIANRY CAPTIAL CAPITAL SHARE DIVIDENDS
YEAR TOTAL ASSET INCOME GAINS GAINS WITH AND
CAPITAL CAPITAL
VALUE DIVIDNEDS DISTRB. DISTRIB. GAINS GAINS
ENDED NET PER PER PER PER DISTRIB. DISTRIB.
JUNE 30 ASSETS SHARE SHARE SHARE SHARE REINV. REINV.
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
(Inception
April 30)
1960 $ 128,066 $ 4.87 $ -0- $ -0- $ -0- $ 4.87 $ 4.87
1965 5,176,041 6.36 0.100 0.07 - 6.52 6.97
1970 28,729,379 7.16 0.170 0.02 - 7.63 8.87
1971 54,672,327 9.60 0.190 - - 10.23 12.15
1972 77,860,344 10.90 0.180 - - 11.62 14.05
1973 106,017,401 10.66 0.160 0.09 - 11.46 14.05
1974 143,011,492 9.34 0.200 - - 10.04 12.54
1975 207,734,395 10.22 0.220 - - 10.99 14.09
1976 224,727,885 10.00 0.250 - - 10.75 14.16
1977 217,273,868 9.27 0.240 - - 9.97 13.46
1978 217,114,139 9.40 0.280 - - 10.11 14.06
1979 218,528,345 10.20 0.320 - - 10.97 15.76
1980 234,348,577 11.25 0.390 - - 12.08 18.01
1981 281,980,936 12.74 0.410 - - 13.68 21.04
1982 205,749,921 9.67 0.440 0.79 - 11.24 17.97
1983 249,201,722 14.40 0.380 0.19 0.04 16.96 27.97
1984 208,290,661 10.85 0.380 1.615 - 14.68 24.91
1985 215,374,722 13.40 0.4025 1.6285 0.2225 18.14 31.36
1986 253,780,848 13.62 0.3525 1.3725 - 22.89 42.37
1987 288,727,782 16.25 0.305 1.29 0.005 28.45 53.43
1988 237,465,629 11.66 0.2925 2.3425 - 26.09 50.10
1989 266,125,877 11.87 0.3085 1.20 0.0965 29.38 58.38
1990 259,076,870 11.18 0.2725 1.125 0.01 30.36 62.04
1991 235,812,697 11.05 0.245 0.18 - 30.55 63.92
1992 232,400,994 11.70 0.20 0.025 0.011 32.45 69.10
1993 245,201,417 12.30 0.195 0.865 - 36.49 78.97
1994 227,724,061 11.78 0.20 0.7931 - 37.28 81.97
1995 247,282,420 13.43 0.18 0.5345 - 44.19 98.55
1996 280,457,130 14.42 0.132 1.908 - 53.72 121.21
1997 365,224,285 17.80 0.09 0.78 - 69.26 157.69
1998 451,000,905 20.77 0.0619 1.2100 0.2281 87.39 199.84
**1998 512,212,553 20.64 0.02 2.64 0.27 99.62 228.02
</TABLE>
*Includes dividends and distributions applicable to the fiscal year
which may have been paid soon after the fiscal year-end.
**Six months ended December 31, 1998.
STATEMENT OF NET ASSETS
December 31, 1998 (unaudited)
Shares Company Market Value
COMMON STOCKS - 95.15%
BASIC MATERIALS - 4.09%
70,400 duPont (E.I.) deNemours & Co. $ 3,735,600
229,000 Monsanto Co. 10,877,500
180,000 Praxair Inc. 6,345,000
20,958,100
CAPITAL GOODS - 6.08%
105,000 General Electric Co. 10,716,562
260,000 Herman Miller, Inc. 6,987,500
593,400 MSC Industrial Direct, Inc. Cl. A 13,425,675
31,129,737
CONSUMER CYCLICAL - 8.83%
180,000 CVS Corp. 9,900,000
279,100 Office Depot, Inc. 10,309,256
285,000 Safeway, Inc. 17,367,188
255,477 Walt Disney Co. 7,664,310
45,240,754
CONSUMER STAPLES - 11.21%
110,300 Anheuser-Busch Cos., Inc. 7,238,437
130,000 Bestfoods, Inc. 6,922,500
177,800 Gillette Co. 8,589,963
236,000 PepsiCo, Inc. 9,661,250
256,600 Philip Morris Cos., Inc. 13,728,100
250,900 Service Corp. International 9,549,881
19,400 Wrigley William Jr. Co. 1,737,512
57,427,643
ENERGY - 2.64%
100,000 Mobil Corp. 8,712,500
100,000 Royal Dutch Petroleum Co. 4,787,500
13,500,000
FINANCIAL - 12.56%
108,750 American International Group, Inc. 10,507,969
110,000 BankAmerica Corp. 6,613,750
11,500 Berkshire Hathaway, Inc. Cl. A 8,050,000
344,500 Federal Home Loan Mortgage Corp. 22,198,719
117,000 Mellon Bank Corp. 8,043,750
173,675 Paychex, Inc. 8,933,408
64,347,596
HEALTH CARE - 26.30%
290,000 American Home Products Corp. 16,330,625
527,600 Boston Scientific Corp. 14,146,275
84,900 Bristol-Myers Squibb Co. 11,360,681
332,250 Cardinal Health, Inc. 25,209,469
211,000 Guidant Corp. 23,262,750
362,400 Health Management Associates, Inc. Cl. A 7,836,900
113,200 Johnson & Johnson 9,494,650
78,000 Merck & Co., Inc. 11,519,625
124,000 Pfizer, Inc. 15,554,250
134,715,225
TECHNOLOGY - 23.44%
334,200 Analog Devices, Inc. 10,485,525
107,600 Automatic Data Processing, Inc. 8,628,175
307,100 Cadence Design Systems, Inc. 9,136,225
80,550 Cisco Systems, Inc. 7,476,047
238,100 Etec Systems, Inc. 9,524,000
282,500 KLA-Tencor Corp. 12,253,437
180,300 Linear Technology Corp. 16,148,119
336,300 Maxim Integrated Products, Inc. 14,692,106
366,100 Microchip Technology, Inc. 13,545,700
18,600 Microsoft Corp. 2,579,588
341,800 Vitesse Semiconductor Corp. 15,594,625
120,063,547
TOTAL COMMON STOCKS - 95.15% 487,382,602
Face Amount Description Market Value
SHORT-TERM CORPORATE NOTE - 1.95%
$10,000,000 Ford Motor Credit Corp.,
5.35%, due January 13, 1999 10,000,000
REPURCHASE AGREEMENT - 2.82%
14,435,000 UMB Bank, n.a.,
4.35%, due January 4, 1999
(Collateralized by Federal
National Mortgage Association,
due March 11, 1999) 14,435,000
TOTAL INVESTMENTS - 99.92% $ 511,817,602
Other assets less liabilities - 0.08% 394,951
TOTAL NET ASSETS - 100.00%
(equivalent to $20.64 per share;
100,000,000 shares of $1.00 par
value capital shares authorized;
24,814,082 shares outstanding) $ 512,212,553
See accompanying Notes to Financial Statements.
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1998 (unaudited)
ASSETS:
Investment securities, at market value
(identified cost $264,214,029) $ 511,817,602
Dividends receivable 284,848
Interest receivable 22,385
Cash 87,718
Total assets 512,212,553
LIABILITIES AND NET ASSETS:
Total liabilities -
NET ASSETS $ 512,212,553
NET ASSETS CONSIST OF:
Capital (capital stock and paid-in capital) $ 259,649,289
Accumulated undistributed income:
Undistributed net investment income 11,099
Accumulated net realized gain on investment transactions 4,948,592
Net unrealized appreciation in value of investments 247,603,573
NET ASSETS APPLICABLE TO OUTSTANDING SHARES $ 512,212,553
Capital shares, $1.00 par value
Authorized 100,000,000
Outstanding 24,814,082
NET ASSET VALUE PER SHARE $ 20.64
See accompanying Notes to Financial Statements.
STATEMENT OF OPERATIONS
Six Months Ended December 31, 1998 (unaudited)
INVESTMENT INCOME:
Income:
Dividends $ 1,829,441
Interest 352,412
2,181,853
Expenses:
Management fees (Note 3) 1,764,869
Registration fees and other expenses 19,848
1,784,717
Net investment income 397,136
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 1):
Realized gain from investment transactions
(excluding repurchase agreements):
Proceeds from sales of investments 74,439,969
Cost of investments sold 50,583,021
Net realized gain from investment transactions 23,856,948
Unrealized appreciation on investments:
Beginning of period 207,462,670
End of period 247,603,573
Increase in net unrealized appreciation on investments 40,140,903
Net gain on investments 63,997,851
Increase in net assets resulting from operations $ 64,394,987
See accompanying Notes to Financial Statements.
STATEMENTS OF CHANGES
IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
DECEMBER 31, 1998 JUNE 30,
(UNAUDITED) 1998
</CAPTION>
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 397,136 $ 1,250,719
Net realized gain from investment transactions 23,856,948 66,315,424
Increase in net unrealized appreciation on investments 40,140,903 28,508,726
Net increase in net assets resulting from operations 64,394,987 96,074,869
Net equalization included in the price of shares issued
and redeemed (Note 1) (331) (15,772)
DISTRIBUTIONS TO SHAREHOLDERS FROM:*
Net investment income (435,305) (1,286,252)
Net realized gain from investment transactions (63,331,861) (29,517,660)
Total distributions to shareholders (63,767,166) (30,803,912)
INCREASE FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from 1,768,785 and 3,112,295 shares sold 35,396,791 60,231,708
Net asset value of 2,973,014 and 1,617,238 shares
issued for reinvestment of distributions 58,379,337 28,406,410
93,776,128 88,638,118
Cost of 1,640,398 and 3,537,566 shares redeemed (33,191,970) (68,116,683)
Net increase from capital share transactions 60,584,158 20,521,435
Total increase in net assets 61,211,648 85,776,620
NET ASSETS:
Beginning of period 451,000,905 365,224,285
End of period (including undistributed net investment income
of $11,099 and $49,599, respectively) $ 512,212,553 $ 451,000,905
*Distributions to shareholders:
Income dividends per share $ 0.020 $ 0.0619
Capital gains distribution per share $ 2.910 $ 1.4381
</TABLE>
See accompanying Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Fund is registered under the Investment Company Act of 1940, as amended,
as a diversified open-end management investment company. The financial
statements have been
prepared in conformity with generally accepted accounting principles which
require management to make certain estimates and assumptions at the date of
the financial statements. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its
financial statements.
Investments - Common stocks traded on a national securities exchange are
valued at the last reported sales price on the last business day of the
period or, if no sale was reported on that date, at the average of the last
reported bid and asked prices. Common stocks traded over-the-counter are
valued at the average of the last reported bid and asked prices. Investment
transactions are recorded on the trade date. Dividend income and distributions
to shareholders are recorded on the ex-
dividend dates. Realized gains and losses from investment transactions and
unrealized appreciation and depreciation of investments are reported on the
identified cost basis.
Federal and State Taxes - The Fund's policy is to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Therefore, no provision for federal or state tax is required.
Equalization - The Fund uses the accounting practice known as equalization,
by which a portion of the proceeds from sales and costs of redemption of
capital shares, equivalent on a per share basis to the amount of undistributed
net investment income on the date of the transactions, is credited or charged
to undistributed income. As a result, undistributed net investment income per
share is unaffected by sales or redemptions of capital shares.
2. PURCHASES AND SALES OF SECURITIES:
The aggregate amounts of security transactions during the period ended
December 31, 1998 (excluding short-term commercial notes and repurchase
agreements) were as follows:
Purchases $ 54,625,539
Proceeds from sales 74,439,969
3. MANAGEMENT FEES:
Management fees, which include all normal expenses of the Fund other than
taxes, fees and other charges of governmental agencies for qualifying the
Fund's shares for sale, special legal fees, interest and brokerage commissions,
are paid to Jones & Babson, Inc., an affiliated company. These fees are based
on average daily net assets of the Fund at the annual rate of .85 of one
percent on net assets up to $250,000,000, and .70 of one percent on net assets
exceeding that amount. Certain officers and/or directors of the Fund are also
officers and/or directors of Jones & Babson, Inc.
This report has been prepared for the information of the Shareholders of
David L. Babson Growth Fund, Inc., and is not to be construed as an offering
of the shares of the Fund. Shares of this Fund and of the other Babson Funds
are offered only by the Prospectus, a copy of which may be obtained from
Jones & Babson, Inc.
EQUITIES
Growth Fund
Enterprise Fund*
Enterprise Fund II
Value Fund
Shadow Stock Fund
International Fund
FIXED INCOME
Bond Trust
Money Market Fund
Tax-Free Income Fund
*Closed to new investors.
Babson Funds
Jones & Babson Distributors
A member of the Generali Group
BMA Tower
700 Karnes Blvd.
Kansas City, MO 64108-3306
816-751-5900
1-800-4-BABSON
(1-800-422-2766)
www.babsonfunds.com
JB6C-1 505496
