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Gabelli
International
Growth
Fund,
Inc.
THIRD QUARTER REPORT
SEPTEMBER 30, 1998
<PAGE>
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Gabelli International Growth Fund, Inc.
Third Quarter Report - September 30, 1998
* * * * *
Morningstar rated Gabelli International Growth Fund 5 stars overall and
for the three year period ended 9/30/98 among 819 international equity
funds.
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Caesar Bryan
To Our Shareholders,
All equity markets fell during the third quarter of 1998 with the
exception of Korea and Thailand, each of which appreciated by roughly six
percent. Generally, the markets that performed best over the last twelve months
suffered most in the downturn. In Europe, Italy fell 10% while Sweden and
Switzerland were down 20%. Latin America was uniformly poor with Brazil skidding
31%. The Far East was mixed as many of these markets had already declined
sharply. Japan dropped 13% and Hong Kong slipped 8%. Losses overseas were
mitigated for U.S. dollar-based investors as the dollar fell against the major
overseas currencies.
Investment Performance
For the third quarter ended September 30, 1998, The Gabelli International
Growth Fund's (the "Fund") net asset value declined 16.2%. The Lipper Analytical
Services International Fund Average and Morgan Stanley EAFE Index of
international markets declined 16.2% and 14.2%, respectively, over the same
period. Each index is an unmanaged indicator of investment performance. Over the
trailing twelve month period, the Fund declined 3.7%. The Lipper International
Fund Average and Morgan Stanley EAFE Index declined 10.7% and 8.1%,
respectively, over the same twelve month period. Since inception on June 30,
1995 through September 30, 1998, the Fund has a total return of 47.4%, which
equates to an average annual return of 12.6%.
Our Approach
We purchase attractively valued companies, which we believe have the
opportunity to grow earnings more rapidly than the average in that company's
local market. We pay close attention to a company's market position, management
and balance sheet, with particular emphasis on the ability of the company to
finance its growth. Generally, we value a company relative to its local market
but, where appropriate, will attempt to benefit from valuation discrepancies
between markets. Our primary focus is on security selection and not country
allocation, but the Fund will remain well-diversified by sector and geography.
Country allocation is likely to reflect broad economic, financial and currency
trends as well as relative size of the market.
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Past performance is no guarantee of future results. Morningstar proprietary
ratings reflect historical risk adjusted performance as of September 30, 1998
and are subject to change every month. Morningstar ratings are calculated from a
Fund's three, five and ten year average annual returns in excess of 90-day
T-Bill returns with appropriate fee adjustments and a risk factor that reflects
fund performance below 90-day T-Bill returns. The top 10% of the funds in an
investment category receive five stars, the next 22.5% receive four stars, the
next 35% receive three stars, the next 22.5% receive two stars and the last 10%
receive one star.
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INVESTMENT RESULTS(a)
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Quarter
---------------------------------------
1st 2nd 3rd 4th Year
--- --- --- --- ----
1998: Net Asset Value ... $17.03 $17.58 $14.74 -- --
Total Return ...... 18.3% 3.2% (16.2)% -- --
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1997: Net Asset Value ... $13.51 $14.67 $15.31 $14.40 $14.40
Total Return ...... 0.7% 8.6% 4.4% (5.9)% 7.3%
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1996: Net Asset Value ... $11.71 $12.55 $12.53 $13.42 $13.42
Total Return ...... 6.6% 7.2% (0.2)% 7.1% 22.2%
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1995: Net Asset Value ... -- -- $10.57 $10.98 $10.98
Total Return ...... -- -- 5.7%(b) 3.9% 9.8%(b)
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Average Annual Returns - September 30, 1998(a)
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1 Year ................................................................ (3.7)%
3 Year ................................................................ 11.7%
Life of Fund (b) ...................................................... 12.6%
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(a) Total returns and average annual returns reflect changes in share price and
are net of expenses. Of course, returns represent past performance and do not
guarantee future results. Investment returns and the principal value of an
investment will fluctuate. When shares are redeemed they may be worth more or
less than their original cost. (b) From commencement of operations on June 30,
1995. Note: Investing in foreign securities involves risks not ordinarily
associated with investments in domestic issues, including currency fluctuation,
economic and political risks.
International Allocation
The accompanying chart presents the Fund's holdings by geographic region
as of September 30, 1998. The geographic allocation will change based on
current global market conditions. Countries and/or regions represented in the
chart and below may or may not be included in the Fund's future portfolio.
[THE FOLLOWING TABLE WAS DEPICTED AS A PIE CHART IN THE PRINTED MATERIAL.]
HOLDINGS BY GEOGRAPHIC REGION -- 9/30/98
United Kingdom ....... 22.2%
Switzerland .......... 15.2%
France ............... 10.9%
Germany .............. 7.7%
Australia ............ 7.1%
Japan ................ 6.1%
South Africa ......... 1.2%
Canada ............... 1.0%
Other Europe ......... 28.6%
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Portfolio Structure
The Fund remains heavily concentrated in the developed equity markets of
Europe. Outside Europe, the Fund is invested in Japan, Australia, Canada and
South Africa. By sector, the Fund is heavily exposed to the consumer, health
care, media and financial services (mainly insurance).
COMMENTARY
The third quarter saw quite an unusual swing among equity investors from
near euphoria to despair. And all of this occurred in about two months. So what
happened? Put simply, it appears that the emerging market crisis, which had been
largely limited to very far away places, finally moved a little closer to home.
For European equity investors, that meant Russia. During the middle of August,
the Russian economic crisis became front page news as the country defaulted on
its debt and devalued the ruble. Markets were shocked because investors felt
that Russia would not be permitted to fail.
The emerging market contagion then spread to South America, with Brazil
under the spotlight. This unnerved American investors due to South America's
close economic links to the U.S. On top of this came the disclosure that Long
Term Capital Management, a very large hedge fund based in Greenwich,
Connecticut, had effectively gone bust. What shocked investors about this
disclosure was that the hedge fund was so heavily leveraged and that no less
than eight foreign government owned agencies were investors in the Fund. So far,
only the central bank of Italy has gone public and admitted to having been
involved. So much for prudent central banking. As other investment portfolios
found trouble, credit spreads between Treasuries and other fixed income
securities widened significantly.
While all of this was occurring, equity markets weakened considerably.
Very few markets or sectors were spared. In general, those markets that had
performed best recently suffered most while some of the Far East markets that
had already been very hard hit held up quite well. With investor fears focused
on recession, economically sensitive sectors did particularly poorly and, of
course, financial stocks, especially banks, fell sharply.
The Chairman of the Federal Reserve Board, Alan Greenspan, appears to be
fully aware of the stress within the financial system and lowered the Federal
Funds rate by 25 basis points to 5.25% at the end of September. This was
followed by another reduction by the same amount in early October. Other major
countries, such as Japan and the United Kingdom, also have reduced interest
rates. During this period, bond yields in most markets have fallen significantly
as investors have sought less risky investments and inflationary expectations
have been reduced. For example, German 10 year government bond yields fell from
4.78% at the end of June to 3.83% by the end of September 1998. This represents
a major move.
One of the causes of stress among emerging markets has been the strong
dollar. However, the dollar weakened following the Federal Reserve Board's
interest rate cuts. This should help many emerging countries service their debt.
Indeed, the dollar's recent decline against the yen was as rapid as anything
most veteran currency traders had ever witnessed. The chronic weakness of the
Japanese banking system is now getting the full attention of the government
authorities who have finally put a credible plan for solving the problem in
place. Still, the Japanese economy is contracting at an annual rate of about
4.0% and further action by the government is required.
Equity market valuations should continue to be supported by historic low
bond yields. However, investors have become very concerned about corporate
earnings growth over the next year. This concern has resulted in a rise in the
equity risk premium. Our strategy is to remain focused on high quality
3
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businesses, which are fairly valued and have financial strength. We look to
avoid companies that have little or no pricing power.
Let's Talk Stocks
The following are stock specifics on selected holdings of our Fund.
Favorable earnings prospects do not necessarily translate into higher stock
prices, but they do express a positive trend which we believe will develop over
time. The share prices of the following holdings are stated in U.S. dollar
equivalent terms as of September 30, 1998.
Compagnie Financiere Richemont AG (RIFZ.S - $1,278.61 - Zurich Stock Exchange)
is a Swiss-based holding company which exercises financial and operational
control over companies operating primarily in the fields of tobacco and luxury
goods. Richemont's interests in the tobacco industry are held through Rothmans
International and three of the Group's trademarks: Rothmans, Dunhill and Peter
Stuyvesant are among the top fifteen cigarette brands in the world. Through its
luxury goods subsidiary, Richemont controls a portfolio of leading luxury goods
brands including Cartier, Piaget, Montblanc, Karl Lagerfeld and Alfred Dunhill.
Recently, the company sold its pay television company, Nethold, to Canal + for a
15% stake in Canal +. We believe this was an excellent transaction and shows
management's ability to create value.
Nestle SA (NESZ.S - $99.47 - Zurich Stock Exchange), based in Switzerland, is
one of the world's leading food companies. Its major business groups include
beverages, milk products, prepared dishes and confectionery. Nestle invented
instant coffee and its brand Nescafe is the world's leading instant coffee.
Other well-known brands that Nestle controls include Perrier, Carnation,
Stouffer's, Alcon and L'Oreal. Nestle's sales are spread over the different
regions of the world with particularly strong positions in developing countries
which, we believe, will contribute increasingly to revenues in the future. For
example, of fifteen factories opened in the past three years, twelve were
located in emerging markets. We expect fairly strong profit growth in the medium
term after a few years of lackluster performance. The stock appears undervalued
relative to its peers.
Novartis AG (NOVZN.S - $1,602.96 - Zurich Stock Exchange) is one of the world's
largest pharmaceutical companies and was created by the merger of two of
Europe's dominant pharmaceutical companies, Ciba Geigy and Sandoz, both of which
were headquartered in Basel, Switzerland. Apart from pharmaceuticals, the merged
company has a strong position in agribusiness and nutrition. Ciba Specialty
Chemicals, with sales of nearly $5 billion, was recently spun-off to
shareholders as the new company concentrates on its core divisions. Novartis has
a number of new drugs in development that have excellent sales potential and we
believe management will continue to reduce costs.
Roche Holding AG (ROCZg.S - $10,763.47 - Zurich Stock Exchange) is one of the
world's leading health care companies. Apart from pharmaceuticals, the company
has major positions in vitamins, diagnostics, fragrances and flavors and
orthopedics. The company has recently completed the purchase of Corange for
approximately $11 billion, which we believe will be additive to earnings. This
acquisition will make Roche the largest diagnostic company. We expect Roche to
introduce a number of new drugs during the next few years, which should result
in stronger earnings growth.
SCOR SA (SCOR.PA - $59.41 - Paris Stock Exchange) is a leading European
reinsurance company based in France. The reinsurance industry is in the midst of
a period of consolidation that will likely raise a barrier to entry. This
consolidation trend should have a positive impact on profitability. SCOR trades
at a meaningful discount to its competitors which, we believe, will narrow over
time.
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Minimum Initial Investment - $1,000
The Fund's minimum initial investment for both regular and retirement
accounts is $1,000. There are no subsequent investment minimums. No initial
minimum is required for those establishing an Automatic Investment Plan.
Additionally, The Gabelli International Growth Fund and other Gabelli Funds are
available through the no-transaction fee programs at many major discount
brokerage firms.
Internet
Shareholders will soon be able to receive quarterly reports from Gabelli
Funds via e-mail. We anticipate that this service will be available in early
1999. If you are interested in receiving your quarterly report via e-mail,
please send an e-mail to [email protected] with your name and address and
we will provide you with the appropriate forms. Our investor representatives are
available at 1-800-GABELLI (1-800-422-3554) to assist you as well.
In Conclusion
The Fund's daily net asset value is available in the financial press and
each evening after 6:00 PM (Eastern Time) by calling 1-800-GABELLI
(1-800-422-3554). The Fund's Nasdaq symbol is GIGRX. Please call us during the
business day for further information.
Sincerely,
/s/ Caesar Bryan
Caesar Bryan
President and Portfolio Manager
October 30, 1998
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Top Ten Holdings
September 30, 1998
------------------
Novartis AG
SCOR SA
Nestle SA
Glaxo Wellcome plc
Compagnie Financiere Richemont
Roche Holding AG
Invik & Co. AB
CGU plc
Vodafone Group plc
CRH plc
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NOTE: The views expressed in this report reflect those of the portfolio manager
only through the end of the period of this report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions.
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Gabelli International Growth Fund, Inc.
Portfolio of Investments -- September 30, 1998 (Unaudited)
================================================================================
Market
Shares Value
------ -----
COMMON STOCKS - 92.4%
Automotive - 2.1%
8,000 Renault SA ................................. $ 319,726
9,000 Toyota Motor Corp. ......................... 201,660
-----------
521,386
-----------
Automotive: Parts and Accessories - 1.0%
11,500 Phoenix AG ................................. 241,511
-----------
Broadcasting - 5.3%
3,700 Audiofina .................................. 155,552
36,000 Granada Group plc .......................... 452,721
1,650 NRJ SA ..................................... 267,895
1,800 Pathe SA ................................... 337,211
35,000 Publishing and Broadcasting Ltd. ........... 123,502
-----------
1,336,881
-----------
Building and Construction - 2.2%
45,000 CRH plc .................................... 566,666
-----------
Business Services - 1.1%
5,833 Reuters Holdings plc, ADR .................. 288,004
-----------
Computer Software and Services - 0.6%
20,000 Merkantildata ASA .......................... 152,663
-----------
Conglomerates - 2.5%
8,800 Invik & Co. AB, B Free ..................... 634,627
-----------
Consumer Products - 10.0%
2,500 Christian Dior SA .......................... 200,721
520 Compagnie Financiere Richemont AG .......... 664,878
20,000 Matsushita Electronic Industrial Co. Ltd. .. 272,554
4,000 Nintendo Co. Ltd. .......................... 377,314
25,000 Reckitt & Colman plc ....................... 369,833
4,200 Sony Corp. ................................. 292,815
550 Swatch Group AG ............................ 330,164
-----------
2,508,279
-----------
Diversified Industrial - 4.3%
3,500 Deutsche Babcock AG ........................ 184,282
10,000 Indus Holding AG ........................... 382,923
4,500 Oerlikon-Buhrle Holding AG ................. 524,990
-----------
1,092,195
-----------
Energy - 2.5%
23,000 British Petroleum Co. plc .................. 351,776
5,500 Veba AG .................................... 286,295
-----------
638,071
-----------
Equipment and Supplies - 0.7%
1,000 KSB AG ..................................... 185,478
-----------
Financial Services - 3.8%
144,492 Colonial Ltd. .............................. $ 407,851
7,000 Safra Republic Holdings SA ................. 296,660
15,000 Schroders plc .............................. 245,989
-----------
950,500
-----------
Financial Services: Banks - 7.9%
50,000 Banca Commerciale Italiana ................. 301,189
110,000 Banca Nazionale Lavoro ..................... 286,708
7,500 Banco Pastor SA ............................ 395,945
30,237 Bank of Ireland ............................ 540,474
50,000 Bank of Scotland ........................... 477,107
-----------
2,001,423
-----------
Food and Beverage - 6.0%
180,000 Foster's Brewing Group Ltd. ................ 392,306
1,000 Moevenpick Holding AG ...................... 433,428
7,000 Nestle SA, ADR ............................. 696,303
-----------
1,522,037
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Health Care - 14.3%
33,000 Astra AB, Cl. A ............................ 564,424
23,000 Glaxo Wellcome plc ......................... 678,928
600 Novartis AG ................................ 961,778
60 Roche Holding AG ........................... 645,808
2,000 Schering AG ................................ 206,719
15,000 Zeneca Group plc ........................... 530,214
-----------
3,587,871
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Insurance - 10.8%
25,000 AMP Ltd.+ .................................. 302,787
40,670 CGU plc .................................... 629,981
120,000 Istituto Nazionale delle Assicurazioni ..... 305,002
8,600 Mapfre Corp. ............................... 171,013
13,000 SCOR SA .................................... 772,373
40,000 Skandia Forsakrings AB ..................... 520,772
-----------
2,701,928
-----------
Metals and Mining - 2.7%
5,000 Anglogold Ltd. ............................. 134,375
26,081 Antofagasta Holding plc .................... 75,348
5,000 Barrick Gold Corp. ......................... 100,000
30,000 Harmony Gold Mining Ltd.+ .................. 141,581
75,000 Lihir Gold Ltd.+ ........................... 96,833
10,000 Placer Dome Inc. ........................... 138,125
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686,262
-----------
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Gabelli International Growth Fund, Inc.
Portfolio of Investments (Continued) -- September 30, 1998 (Unaudited)
================================================================================
Market
Shares Value
------ -----
COMMON STOCKS (Continued)
Publishing - 7.5%
25,000 Arnoldo Mondadori Editore SpA .............. $ 288,541
56,573 Independent Newspapers Ltd. ................ 199,957
35,000 Independent Newspapers plc ................. 126,393
55,037 News Corp. Ltd. ............................ 354,640
30,000 Pearson plc ................................ 558,255
30,000 Schibsted SA ............................... 372,877
-----------
1,900,663
-----------
Telecommunications - 1.2%
40 Nippon Telegraph & Telephone Corp. ......... 292,389
-----------
Textile - 0.9%
30,000 Simint SpA+ ................................ 216,043
-----------
Transportation - 1.3%
15,637 MIF Ltd.+ .................................. 316,885
-----------
Wireless Communications - 3.7%
60,000 Telecom Italia Mobile SpA .................. 349,626
5,150 Vodafone Group plc, ADR .................... 580,663
-----------
930,289
-----------
TOTAL COMMON STOCKS ........................ 23,272,051
-----------
PREFERRED STOCKS - 1.3%
Automotive - 1.3%
7,000 Volkswagen AG Pfd .......................... 318,305
-----------
OPTIONS - 0.0%
Metals and Mining - 0.0%
16,000 Durban Roodepoort Deep Ltd.+ ............... 6,258
-----------
TOTAL INVESTMENTS - 93.7% .................. $23,596,614
Other Assets and
Liabilities (Net) - 6.3% ................. 1,592,760
-----------
NET ASSETS - 100.0%
(1,708,948 shares outstanding) ........... $25,189,374
===========
NET ASSET VALUE,
Offering and Redemption
Price Per Share .......................... $14.74
======
Net
Principal Settlement Unrealized
Amount Date Appreciation
------ ---- ------------
FORWARD FOREIGN EXCHANGE CONTRACTS
156,678(a) Deliver Australian Dollars
in exchange for USD 92,691 ........ 10/02/98 $102
- ----------
(a) Principal amount denoted in Australian Dollars.
+ Non-income producing security.
ADR - American Depositary Receipt.
7
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Gabelli International Growth Fund, Inc.
One Corporate Center
Rye, New York 10580-1434
1-800-GABELLI
[1-800-422-3554]
fax: 1-914-921-5118
http://www.gabelli.com
e-mail: [email protected]
(Net Asset Value may be obtained daily by calling
1-800-GABELLI after 6:00 P.M.)
Board of Directors
Mario J. Gabelli, CFA
Chairman and Chief
Investment Officer
Gabelli Funds, Inc.
Werner J. Roeder, MD
Director of Surgery
Lawrence Hospital
Anthony J. Colavita
Attorney-at-Law
Anthony J. Colavita, P.C.
Anthonie C. van Ekris
Managing Director
BALMAC International, Inc.
Karl Otto Pohl
Former President
Deutsche Bundesbank
Officers and Portfolio Managers
Caesar Bryan
President and
Portfolio Manager
Bruce N. Alpert
Vice President
and Treasurer
James E. McKee
Secretary
Distributor
Gabelli & Company, Inc.
Custodian, Transfer Agent and Dividend Agent
State Street Bank and Trust Company
Legal Counsel
Willkie Farr & Gallagher
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This report is submitted for the general information of the shareholders of
Gabelli International Growth Fund, Inc. It is not authorized for distribution to
prospective investors unless preceded or accompanied by an effective prospectus.
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