Filed On 6/6/03 10:27am ET · SEC File 811-04739 · Accession Number 950109-3-3527
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
6/06/03 Zweig Fund Inc/MD N-30B-2 3/31/03 1:11 Donnelley R R & S..01/FA
Periodic or Interim Report Mailed to Shareholders · Rule 30b-2
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Document/Exhibit Description Pages Size
1: N-30B-2 Zweig Fund, Inc. 11 54K
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May 7, 2003
Dear Shareholder:
The Zweig Fund's net asset value declined 0.65%* for the three months ended
March 31, 2003, including the $0.137 distribution paid on January 10, 2003.
During the same period, the Standard & Poor's 500 Index dropped 3.15%,
including dividends. The fund's average equity exposure during the period was
approximately 62%.
The Zweig Fund announced new management as of April 1, 2003. Carlton Neel
and David Dickerson will manage the Fund in conjunction with the asset
allocation strategies provided by Dr. Martin Zweig and his advisory firm Zweig
Consulting LLC. Previously, Neel and Dickerson managed the Phoenix-Zweig and
Phoenix-Euclid open end mutual funds. The Fund's investment objectives will
remain the same under the new management.
DISTRIBUTION DECLARED
On March 17, 2003, the Fund declared a distribution of $0.131 payable on
April 28, 2003 to holders of record April 9, 2003. Including this distribution,
our total payout since the Fund's inception is now $17.696.
Sincerely,
/s/ Philip R. McLoughlin
Philip R. McLoughlin
Chairman
MARKET OUTLOOK
The first quarter was a difficult one for the stock market. For the quarter,
the Dow Jones Industrial Average fell 4.9%, the S&P 500 Index dipped 3.15%, and
the Nasdaq Composite Index eked out a meager 0.42% gain.
In the first quarter the market was largely concerned over the potential war
with Iraq. Fears about the possible developments in the war, combined with
higher oil prices that have since abated, put a monkey wrench in the economy
and the market consequently sold off.
While people were concerned with the war, they still followed the economic
numbers, which were poor. The war became a major short-term worry, but the
market had tremendous problems before Iraq took center stage and it still does.
There is still a hangover from the bursting of the stock market bubble, there
is too much debt in the economy, and stock prices are too high on a valuation
basis. With the war virtually over, the other economic problems remain.
To help with the reconstruction of Iraq, some American companies will
benefit from contracts estimated as high as $100 billion. No one knows how
these contracts will be paid, be it through oil money from Iraq or the U.S.
Government. Regardless of who pays, it is unlikely that this expenditure will
give the overall economy a significant lift.
The small amount of cash held by mutual funds is a huge negative for the
market. In 1990, mutual funds held about 13% of their assets in cash. Now, they
are running at about 4.5%. This cash level is close to the lowest in history.
Making matters worse, mutual funds have had net redemptions. This means that
they have to sell more and more stock to meet the buyouts. It makes no sense
for mutual funds to be sig-
--------
* Past performance is not indicative of future results.
nificantly optimistic while holding minimal amounts of cash. In my opinion, the
long-term bear market will not be over until the cash position at mutual funds
is much higher.
In February, investors withdrew a net $11.1 billion from stock funds. It was
the eighth month out of the past nine where more money was taken out than put
in. During much of the 1990s, particularly in the late 1990s, the public was
buying mutual funds hand-over-fist, at inflated prices. Now, the public has
been burned and turned off to mutual funds. This situation probably will
continue. It will put a drag on the market, just as money pouring in helped
push the market up.
Sometimes panic in mutual funds--such as in 1998--will result in a huge
figure in net redemptions. But, what is taking place is not a panic. It has
been going on month after month. It's a war of attrition and I don't see it
turning around until the market is no longer overpriced.
S&P 500 stocks are trading at about 28 times earnings over the past year. At
the end of the 1990-1991 recession, that number was about 15.5. But, it is hard
to evaluate these figures because of questions regarding the quality of
reported earnings. A recent article in Barron's indicated that if companies
recognized stock options as an expense, which they should, S&P earnings would
be 10% lower than reported. And, that forecast doesn't address the case of
pension accounting, which has overstated earnings for a few years. In addition,
there is confusion regarding operating earnings and pro-forma earnings and we
continue to see more cases of fraud and accounting deception. Even if the
numbers were not overstated, the price/earnings ratios are still too high.
Overall bullish sentiment at the end of the 1990-1991 recession was about
34% compared to about 47% today. Back then, Wall Street strategists' bullish
sentiment was about 47% and now it is about 63%. The first percentages refer to
the numbers of stock market investment newsletters that were and are bullish.
That figure has never gotten as low as it did near the bear market bottoms in
recent years. The numbers for the Wall Street strategists don't go back quite
as far. They go back to the 1980s and we are now close to a record high of
optimism for this group.
Can this group of Wall Street strategists be right at the bottom of one of
the worst bear markets ever? While not wholly optimistic, the advisors are not
as pessimistic as they usually get at bear market bottoms. As with the mutual
fund managers, the optimism among advisors and strategists is simply not
realistic right now.
There is one segment of society that is not optimistic. Consumer sentiment
fell in March to 62.5%, the lowest reading in about ten years. In the past when
consumer sentiment has gotten this pessimistic, we had stock market bottoms.
This occurred during short-lived recessions after World War II. We have had
several recessions that lasted for a couple of quarters during a poor economy.
Amid consumer pessimism, the market hit bottom. In 2001, we had a recession. It
has been over for quite a while, but the recovery has been anemic and the
question is whether we are going into a second recession or something worse.
In either scenario, perhaps the extreme consumer pessimism doesn't really
matter. If we had surveys back in the 1930s, I guarantee that consumers would
have been pessimistic long before the stock market bottomed. Back then, the
economy then was in an unusual period of collapsing on itself. We may be facing
something roughly akin to that. I don't think we will have a 1930s depression.
However, we may be in for a period of very slack economic growth or even a
double-dip recession. In that case, it may be premature to look at the
pessimistic consumer sentiment numbers and say, therefore, the market will go
up.
A more positive indicator is the fact that there were just five initial
public offerings in the
2
U.S. in the first quarter, raising $642 million--the poorest level since the
fourth quarter of 1990. That was the last time this market raised less than $1
billion. One sign to look for in identifying a bear market bottom is the drying
up of IPOs. It reflects an environment so bleak, a new issue can't be sold.
However, there were periods in the long bear markets, such as in 1973-1974,
when the markets kept going down, despite a lack of IPOs. However, in and of
itself, I think that today's low rate of IPOs is a positive factor. It is in
our sentiment models, but there's a lot more out there that is negative.
The recent rise in labor productivity is not a very positive sign for the
stock market. Productivity climbed 4.8% in 2002, the greatest jump since 8.5%
in the 1950s. When productivity gains as much as it has, the stock market
generally does not do well. It happens regularly after recessions like the one
we had in 2001. After large layoffs, there are fewer people producing the
goods, which increases productivity rates. I don't consider what has happened
to be productivity advancement. It simply underscores that we have had a
recession. When productivity rises for four or five quarters, the market
usually underperforms.
Although productivity is rising, manufacturing activity is falling. The
Institute of Supply Management reported that its index of manufacturing
activity dropped to 46 in March from 50.5 in February. That's below the
50-level that marks the link between economic expansion and contraction. In the
past, when that number has dipped to the low 40s, it has usually signaled a
bottom for the stock market. But, I take that March number with a grain of salt
because it was impacted by the war. I would not be surprised if the next number
showed improvement. In any event, the recent numbers are mediocre and not a
good sign for the economy.
At its March meeting, the Fed left interest rates unchanged at l.25%--its
lowest level in 4l years--saying it couldn't characterize the current risks in
the economy. As indicated earlier, I'm not predicting that we will have
double-dip inflation, but it is a possibility. What we have to contend with are
simultaneous deflationary and inflationary trends. Deflationary pressures
include an excess capacity, an unwillingness to invest in capital improvements,
and a torrent of cheap goods flooding the world from low-cost labor markets
such as China, Mexico, India, and others.
If the Fed is worried about deflation or the economy, it will try
stimulation through monetary growth and lower interest rates. That kind of
stimulation can be inflationary and we have already seen some inflation
recently in oil and energy related areas. As for money supply, its rate of
growth has diminished quite a bit and that is not inflationary. Of course, we
also have the war and recession-related government deficits that tend to be
inflationary. So, it's hard to see if we're heading for inflation or deflation
and we don't know if the Fed will cut rates some more--considering that it has
already cut a dozen times, with little impact.
I don't put much stock in the Congressional Budget Office's projection that
President Bush's proposed round of tax cuts could produce a string of deficits
exceeding $1.82 trillion over the coming decade. I think long-term estimates of
deficits are very unreliable. No one has ever gotten them right or even close.
How can anyone know what will happen five or ten years down the road? However,
if the deficits keep getting bigger, the markets will have problems with that.
After going through a war and a recession, it's normal to have a deficit. If we
get a recovery, it won't be a problem. But, I have my doubts whether we will
see much recovery in the short term.
In an attempt to bolster the economy and the stock market, President Bush
has been pushing a proposal to end dividend taxation. Administration officials
claim it could boost stock prices by 15 to 20%. While it's hard to quantify
3
the effect of such action, I think it already has had a positive impact on the
market. However, the plan has run into snags in Congress and it's not likely
that dividend taxes will be eliminated entirely. We may see a gradual phase-in
or a partial exemption. Should that happen, it would make some companies
willing to pay more dividends. But, with the dividend yields so low and the
market so overvalued, I don't know whether it would have a significant
short-term impact.
In the last annual report, we ventured that we didn't think stocks had
bottomed at their recent lows. That opinion still holds. I believe the market
will continue for a long time on a major bear trend basis. We could get six
months or even a year on the upside, but, eventually, the market will go lower.
In addition to its heavy overvaluation, it has too many other problems.
Indicators were not too bad at the last bottom early in the year, but a lot
of the improvement has gone by the boards. Many shorter-term indicators had
improved, but now they're not as strong. I'm looking at mediocre sentiment
indicators right now. This is typical of a bear market rally, which is what I
believe we are experiencing. If the market goes higher, I believe my indicators
that are now in a neutral zone, will get worse.
Summing up, I don't believe there is enough long-term pessimism in the
market. I see the economy as a real problem, with stocks greatly overvalued. On
the near-term positive side, the winding down of the war may lift consumer
psychology. It should help keep oil prices lower, which could help the economy.
But, we rallied before and during the war and the market doesn't discount the
same things twice. While the war outcome is a distinct plus, I don't think it
offsets the market's other problems.
At this writing we are about 62% invested and hold about 38% cash. So, I am
not a flat-out bear, but I am trying to be very cautious.
Sincerely,
[GRAPHIC]
Martin E. Zweig, Ph.D.
President
Zweig Consulting LLC
PORTFOLIO COMPOSITION
Our leading industry groups at the end of the first quarter included health
care, financial services, technology, consumer products, energy, and retailing.
With the exception of retailing, all of these groups were in our previous
listing. During the quarter, we added to our holdings in energy and health care.
Our largest individual holdings include Microsoft, Pfizer, IBM, Johnson &
Johnson, General Electric, Pharmaceutical HOLDRs Trust, Citigroup, Wells Fargo,
Dell, and Bank of America. During the quarter, we added to our position in
Pharmaceutical and trimmed our holdings in AIG, which was on our previous
listing.
Sincerely,
[SIGNATURE]
/s/ Carlton Neel
Carlton Neel
Executive Vice President
4
THE ZWEIG FUND, INC.
STATEMENT OF NET ASSETS
March 31, 2003
(Unaudited)
[Download Table]
Number of
Shares Value
--------- ------------
COMMON STOCKS 61.53%
AEROSPACE & AIR TRANSPORT 2.67%
Boeing Co..................................... 52,100 $ 1,305,626
L-3 Communications Holdings, Inc.............. 52,500(a) 2,108,925
Northrop Grumman Corp......................... 35,000 3,003,000
Raytheon Co................................... 68,500 1,943,345
United Technologies Corp...................... 34,200 1,976,076
------------
10,336,972
------------
BUILDING & FOREST PRODUCTS 1.23%
International Paper Co........................ 54,700 1,848,860
Smurfit-Stone Container Corp.................. 120,400(a) 1,608,424
Temple-Inland, Inc............................ 35,000 1,309,000
------------
4,766,284
------------
CHEMICALS 0.70%
E.I. du Pont de Nemours & Co.................. 69,900 2,716,314
------------
COMMERCIAL SERVICES 0.66%
First Data Corp............................... 69,300 2,564,793
------------
CONSUMER PRODUCTS & SERVICES 5.57%
Anheuser-Busch Cos., Inc...................... 69,400 3,234,734
Avon Products, Inc............................ 84,500 4,820,725
Kimberly-Clark Corp........................... 70,000 3,182,200
PepsiCo, Inc.................................. 58,900 2,356,000
Procter & Gamble Co........................... 56,600 5,040,230
Unilever NV, ADR.............................. 49,000 2,912,560
------------
21,546,449
------------
EXCHANGE TRADED FUNDS 2.44%
iShares Dow Jones U.S. Consumer Non-Cyclical
Sector Index Fund........................... 70,000 2,683,800
Pharmaceutical HOLDRs Trust................... 91,000 6,747,650
------------
9,431,450
------------
FINANCE -- FINANCIAL SERVICES 9.97%
Allstate Corp................................. 69,400 2,301,998
American International Group, Inc............. 55,000 2,719,750
Bank of America Corp.......................... 86,500 5,781,660
5
[Download Table]
Number of
Shares Value
--------- ------------
FINANCE -- FINANCIAL SERVICES (CONTINUED)
Citigroup, Inc................................ 189,800 $ 6,538,610
Fannie Mae.................................... 52,300 3,417,805
Goldman Sachs Group, Inc...................... 52,500 3,574,200
Lehman Brothers Holdings, Inc................. 69,600 4,019,400
Morgan Stanley................................ 69,500 2,665,325
Washington Mutual, Inc........................ 35,000 1,234,450
Wells Fargo & Co.............................. 140,200 6,307,598
------------
38,560,796
------------
HEALTH CARE 10.70%
Amgen, Inc.................................... 100,000(a) 5,755,000
Barr Laboratories, Inc........................ 73,500(a) 4,189,500
Johnson & Johnson............................. 123,300 7,135,371
MedImmune, Inc................................ 51,100(a) 1,677,613
Medtronic, Inc................................ 35,000 1,579,200
Pfizer, Inc................................... 308,600 9,615,975
St. Jude Medical, Inc......................... 87,500(a) 4,265,625
UnitedHealth Group, Inc....................... 34,800 3,190,116
Wyeth......................................... 105,000 3,971,100
------------
41,379,500
------------
MANUFACTURING 1.82%
General Electric Co........................... 275,800 7,032,900
------------
MEDIA 3.39%
Clear Channel Communications, Inc............. 51,500(a) 1,746,880
Gannett Co., Inc.............................. 35,000 2,465,050
Tribune Co.................................... 80,500 3,623,305
Viacom, Inc., Class B......................... 87,500(a) 3,195,500
Walt Disney Co................................ 122,900 2,091,758
------------
13,122,493
------------
METALS 0.25%
Inco Ltd...................................... 52,500(a) 977,550
------------
OIL & OIL -- GAS DRILLING 5.95%
ConocoPhillips................................ 76,000 4,073,600
Exxon Mobil Corp.............................. 148,800 5,200,560
Occidental Petroleum Corp..................... 149,500 4,479,020
Talisman Energy, Inc.......................... 51,200 2,030,592
TotalFinaElf SA, ADR.......................... 45,500 2,878,785
Valero Energy Corp............................ 105,000 4,344,900
------------
23,007,457
------------
6
[Download Table]
Number of
Shares Value
----------- ------------
RAILROADS 0.50%
Union Pacific Corp............................ 35,000 $ 1,925,000
------------
RESTAURANTS 0.55%
Wendy's International, Inc.................... 77,000 2,118,270
------------
RETAILING 3.50%
Best Buy Co., Inc............................. 70,000 (a) 1,887,900
Kroger Co..................................... 105,000(a) 1,380,750
Lowe's Cos., Inc.............................. 70,500 2,877,810
Reebok International Ltd...................... 52,000 (a) 1,708,200
Wal-Mart Stores, Inc.......................... 108,900 5,666,067
------------
13,520,727
------------
TECHNOLOGY 9.05%
Cisco Systems, Inc............................ 207,300(a) 2,690,754
Dell Computer Corp............................ 218,900(a) 5,978,159
Intel Corp.................................... 294,400 4,792,832
International Business Machines Corp.......... 91,000 7,137,130
Microsoft Corp................................ 409,900 9,923,679
Nokia Corp., ADR.............................. 139,700 1,957,197
Texas Instruments, Inc........................ 155,500 2,545,535
------------
35,025,286
------------
TELECOMMUNICATIONS 1.28%
CenturyTel, Inc............................... 105,000 2,898,000
SBC Communications, Inc....................... 103,400 2,074,204
------------
4,972,204
------------
UTILITIES -- ELECTRIC & GAS 1.30%
Entergy Corp.................................. 52,900 2,547,135
Exelon Corp................................... 49,000 2,470,090
------------
5,017,225
------------
Total Common Stocks.................................. 238,021,670
------------
Principal
Amount
-----------
SHORT-TERM INVESTMENTS 38.56%
BMW US Capital LLC, 1.38%, 4/01/03............ $19,100,000 19,100,000
Merrill Lynch & Co., Inc., 1.35%, 4/01/03..... 18,900,000 18,900,000
UBS Financial Corp., 1.39%, 4/01/03........... 19,100,000 19,100,000
Wal-Mart Stores, Inc., 1.25%, 4/01/03......... 9,600,000 9,600,000
Deluxe Corp., 1.27%, 4/10/03.................. 19,500,000 19,493,809
Merck & Co., Inc, 1.22%, 4/10/03.............. 15,000,000 14,995,425
Toyota Motor Credit Corp., 1.23%, 4/11/03..... 18,000,000 17,993,850
7
[Download Table]
Principal
Amount Value
----------- ------------
SHORT-TERM INVESTMENTS (CONTINUED)
Goldman Sachs & Co., 1.25%, 4/17/03........ $15,000,000 $ 14,991,667
7-Eleven Inc., 1.27%, 5/05/03.............. 15,000,000 14,982,008
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Total Short-Term Investments.................... 149,156,759
------------
Total Investments -- 100.09%.................... 387,178,429
------------
Liabilities Less Cash and Other Assets -- (0.09%) (336,236)
------------
Net Assets (Equivalent to $5.28 per share based on
73,233,013 shares of capital stock
outstanding) -- 100%.......................... $386,842,193
============
--------
(a) Non-income producing security.
8
THE ZWEIG FUND, INC.
FINANCIAL HIGHLIGHTS
March 31, 2003
(Unaudited)
[Enlarge/Download Table]
Net Asset Value
Total Net Assets per share+
------------------------- --------------
Beginning of period: December 31, 2002 ................. $400,162,779 $ 5.46
Net investment income................................ $ 185,188 --
Net realized and unrealized loss on investments...... (3,472,845) $(0.05)
Dividends from net investment income and
distributions from net long-term and short-term
capital gains...................................... (185,188) --
Tax return of capital................................ (9,847,741) (0.13)
Net asset value of shares issued to shareholders in
reinvestment of dividends resulting in issuance of
common stock....................................... -- --
----------- ------
Net decrease in net assets/net asset value........... (13,320,586) (0.18)
------------ ------
End of period: March 31, 2003........................... $386,842,193 $ 5.28
============ ======
--------
+ Per share data are being calculated based on average share method.
--------------------------------------------------------------------------------
SUBSEQUENT EVENT
On May 7, 2003, the Board of Directors appointed the following new officers
of the Fund: Carlton Neel, Executive Vice President; David Dickerson, Vice
President; and Nancy Curtiss, Treasurer.
9
KEY INFORMATION
1-800-272-2700 Zweig Shareholder Relations:
For general information and literature
1-800-272-2700 The Zweig Fund Hot Line:
For updates on net asset value, share price, major industry
groups and other key information
REINVESTMENT PLAN
Many of you have questions about our reinvestment plan. We urge
shareholders who want to take advantage of this plan and whose shares are
held in "Street Name," to consult your broker as soon as possible to
determine if you must change registration into your own name to participate.
-----------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may from time to time purchase its shares of
common stock in the open market when Fund shares are trading at a discount from
their net asset value.
10
OFFICERS AND DIRECTORS
Philip R. McLoughlin
Chairman of the Board and President
Jeffrey Lazar
Executive Vice President and Treasurer
Nancy J. Engberg
Secretary
Christopher M. Capano
Vice President
Charles H. Brunie
Director
Elliot S. Jaffe
Director
Wendy Luscombe
Director
Alden C. Olson, Ph.D.
Director
James B. Rogers, Jr.
Director
Investment Adviser
Phoenix/Zweig Advisers LLC
900 Third Avenue
New York, NY 10022
Fund Administrator
Phoenix Equity Planning Corporation
56 Prospect St.
PO Box 150480
Hartford, CT 06115-0480
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Transfer Agent
EquiServe Trust Co., N.A.
PO Box 43010
Providence, RI 02940-3010
Legal Counsel
Katten Muchin Zavis Rosenman
575 Madison Avenue
New York, NY 10022
--------------------------------------------------------------------------------
This report is transmitted to the shareholders of The Zweig Fund, Inc. for
their information. This is not a prospectus, circular or representation
intended for use in the purchase of shares of the Fund or any securities
mentioned in this report.
PXP 1375 4902-1Q-03
Quarterly Report
Zweig
The Zweig Fund, Inc.
March 31, 2003
[GRAPHIC]
Dates Referenced Herein and Documents Incorporated By Reference
| Referenced-On Page |
|---|
| This N-30B-2 Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 12/31/02 | | 9 | | | | | NSAR-B, N-30D |
| | 1/10/03 | | 1 |
| | 3/17/03 | | 1 |
| For The Period Ended | | 3/31/03 | | 1 | | 11 |
| | 4/1/03 | | 1 |
| | 4/9/03 | | 1 |
| | 4/28/03 | | 1 |
| | 5/7/03 | | 1 | | 9 |
| Filed On / Filed As Of / Effective As Of | | 6/6/03 |
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