OFFICERS AND DIRECTORS
Daniel T. Geraci
Director, Chief Executive Officer and President
Carlton Neel
Executive Vice President
David Dickerson
Senior Vice President
Marc Baltuch
Chief Compliance Officer and Vice President
Moshe Luchins
Vice President
Kevin J. Carr
Chief Legal Officer and Secretary
Nancy Curtiss
Treasurer
Charles H. Brunie
Director
Wendy Luscombe
Director
Alden C. Olson, Ph.D.
Director
James B. Rogers, Jr.
Director
R. Keith Walton
Director
Investment Adviser
Phoenix/Zweig Advisers LLC
900 Third Avenue
New York, NY 10022-4728
Fund Administrator
Phoenix Equity Planning Corporation
One American Row
Hartford, CT 06103-2899
Custodian
State Street Bank and Trust Company
P.O. Box 5501
Boston, MA 02206-5501
Legal Counsel
Katten Muchin Rosenman LLP
575 Madison Avenue
New York, NY 10022-2585
Transfer Agent
Computershare Trust Company, NA
P.O. Box 43010
Providence, RI 02940-3010
--------------------------------------------------------------------------------
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.
PXP4132 Q3-06
Quarterly Report
The Zweig Fund, Inc.
September 30, 2006
[LOGO] PHOENIX
INVESTMENT PARTNERS, LTD.
A member of The Phoenix Companies, Inc.
November 1, 2006
Dear Fellow ZF Shareholder:
Following is the manager's report and commentary for The Zweig Fund, Inc.
for the quarter ended September 30, 2006.
The Zweig Fund's net asset value increased 3.81% in the third quarter of
2006, including the $0.141 distribution paid on July 26. During the same
period, the S&P 500(R) Index gained 5.66%, including reinvested dividends. The
Fund's average equity exposure for the quarter was approximately 85%.
For the nine months ended September 30, 2006, the Fund's net asset value
rose 8.49%, including the latest distribution. During the same period, the S&P
500 Index increased 8.52%, including reinvested dividends. The Fund's average
equity exposure for the nine months of 2006 was approximately 80%. As
previously announced, the Fund's distribution for the quarter ended September
30, 2006, was $0.144, payable on October 26, 2006, to shareholders of record on
October 11, 2006.
Sincerely,
/s/ Daniel T. Geraci
Daniel T. Geraci
President
The Zweig Fund, Inc.
MARKET REVIEW AND OUTLOOK
Bouncing back from their mid-July lows, the major stock market indicators
all finished higher for the third quarter and the year to date. Recovering 8.8%
from its July low, the Dow Jones Industrial Average/SM/ (the Dow) was up 4.7%
for the quarter and 9% for the year to date.
It was the Dow's fifth consecutive quarterly gain and its best third quarter
since 1995. Shortly after the quarter ended, the Dow finally topped its
previous high of 11,722 set in January 2000, closing the day at 11,727. The
NASDAQ Composite(R) Index climbed 4% from its July low to increase 4% for the
quarter and 2.41% for the year to date. Rallying 8% from its mid-summer low,
the S&P 500 Index closed 5.6% higher for the quarter and 8.5% for the year to
date. It was the S&P 500's best third-quarter performance in nine years.
While the Dow's results were impressive, it's important to note that at the
quarter's end, only 10 of the Dow's 30 components were above their previous
highs and, if adjusted for inflation, the Dow was still 20% below its record.
The NASDAQ was 55% under its former high.
There are several reasons for the strong market surge. First, sellers had
hit the market fairly hard in the spring, creating a certain amount of
pessimism. That means a lot of investors were sold out, paving the way for a
rally. Another factor was a significant drop in oil prices. And, of course, the
Federal Reserve (Fed) passed on raising interest rates at its August meeting.
The market's upward spiral gained momentum when the Fed, as anticipated,
again held its benchmark interest rate steady at 5.25% in September. Explaining
its decision, the Fed
noted that "economic growth has moderated
from its quite strong pace early this year, partly reflecting the gradual
cooling of the housing market and the lagged effects of increases in interest
rates and energy prices." While stating that inflation seems likely to
moderate, the Fed saw inflation risks remaining. Not ruling out any further
increases, the Fed said any additional firming "will depend on the evolution of
the outlook for both inflation and economic growth."
Inflation, which is of prime concern to the Fed's interest rate policy, is
sending mixed signals. Core inflation, upon which the Fed focuses, excludes
food and energy. It rose 2.7% in the second quarter versus 2.1% in the first
quarter -- the highest since the 2.8% rate in the first quarter of 2001. To put
this in perspective, the Fed's so-called "comfort zone" on inflation is 1% to
2%. Another inflation threat is posed by unit labor costs, which the Labor
Department reported rose 4.9% in the second quarter, following a 9% gain in the
first three months. On the other hand, commodity prices have fallen sharply.
The Commodity Research Bureau's CRB index -- which covers prices for oil, gas,
and metals -- was down 15% from mid-July at the quarter's end. Meanwhile, the
Labor Department's Producer Price Index, which covers wholesale prices, rose
only 0.1% in August, marking the year's slowest pace for that economic
indicator.
The big question mark about the economy is the cooling housing market, with
analysts differing over whether it will be a soft landing or whether we should
tighten our seat belts. The real estate sector has accounted for about 44% of
the jobs created since 2000 and employs one in ten American workers. The
Commerce Department reported that housing starts fell 6% in August from the
July level, the fifth decline in the past six months, and was the lowest rate
since April 2003. The median sales prices of existing homes fell 1.7% in
August, the first drop in 11 years. Sales of existing homes dipped 0.5% for the
month.
Confirming the bleak housing picture, Fed Chairman Ben S. Bernanke said the
U.S. housing market was in a "substantial correction," which would cut about a
percentage point from economic growth in the second half and restrain expansion
next year. The Commerce Department reported that gross domestic product grew at
a 2.6% annual rate in the second quarter, sharply below the 5.6% rate of the
first quarter.
We don't think the overall housing market is as weak as widely described.
The softening is not
nationwide, with the largest inventory of unsold homes in the Northeast,
Florida, Arizona, California, Nevada, and a few other places. While the decline
is affecting the economy, it is hard to predict its impact on the stock market.
If the economy only slips but does not fall into a recession, it could be
bullish for stocks, because it would tend to keep interest rates low. Should
the housing market turn around, which we don't think will happen in the near
term, it could actually prove to be a negative for stocks.
Other data also indicate that the economy is losing momentum. The Institute
for Supply Management reported that its manufacturing index dipped to 52.9 in
September from 54.5 in August. Readings over 50 indicate expansion, but the
latest figure points to lower growth during the third quarter. The Commerce
Department reported that durable-goods orders slipped 0.5% in August, following
a 27% drop in July, the first back-to-back monthly decline since the spring of
2004. Consumer spending grew only 0.1% in August, sharply below the 0.8% gain
in July, and the lowest rate of growth since last November.
The U.S. economy has its ups and downs, but our trade deficit goes in only
one direction: up. The Commerce Department reported that the trade gap hit a
record $69.80 billion in August, a 2.7% increase from July. We are not worried
about the trade deficit, however. It has been a fact of life for a long time
and seems to have a minimal effect on the economy. Eventually, though, it could
put pressure on the dollar. That would benefit some of our industries by making
exports cheaper overseas. It would also make
2
imports more expensive. While that could contribute to inflation, it could also
cut the demand and help restore a better trade balance.
While foreigners were selling us more of their commodities, they were buying
more of our stocks. Net foreign purchases of U.S. stocks expanded to $10.4
billion in July from $4 billion in June, according to Treasury Department data.
These are figures to watch, as the numbers are getting up there. Foreigners
tend to be wrong, both when they go overboard and buy too much of our stock, or
when they become too pessimistic and sell out. Our guess is that they sold at a
moderate level in June and picked up their buying pace in July. So far, that
market does not seem overheated. Modest foreign buying is bullish, but if such
buying reaches a crescendo, it can be a danger signal.
Despite the strong stock market performance in the third quarter, the number
of initial public offerings in the U.S. fell. Dealogic reported that 31
companies raised $6.34 billion in the third quarter, compared with 63 companies
raising $10.39 billion a year earlier. The decline may reflect the impact of
the Sarbanes-Oxley rules. These financial regulations, which place a ridiculous
amount of red tape on transactions, are choking many companies. As a result,
some prefer to issue stock in London or other foreign markets.
The rising stock market also did not have a major impact on margin debt at
the New York Stock Exchange. The NYSE reported an increase of only 0.3% in
margin debt from the end of the second quarter through August. Margin debt
peaked at $226.48 billion in March 2000. These numbers indicate that the
speculative juices aren't flowing yet. When the margin debt rises too rapidly,
it's a sign of excessive speculation. We like it when the market, as is the
case now, can advance without an accompanying jump in margin debt.
Corporate profits remain strong. Standard & Poor's forecast that the
operating earnings of the S&P 500 companies in the third quarter will be 14%
above the same period in 2005. This would mark 17 consecutive quarters of
double-digit operating profit growth, a record since S&P began tracking profits
in 1988. Originally forecast at rising only 7%, the second-quarter gain came in
close to 13%. Thomson Financial predicts double-digit growth continuing in the
fourth quarter, but ending in the first half of 2007.
The earnings of many companies that are not in the oil business will be
helped if oil prices stay lower. And, if interest rates behave and the economy
continues to expand at a pace that is not strong enough to fuel inflation,
investors can enjoy a "Goldilocks" scenario that is not too hot or too cold.
That would leave room for more profit growth.
Optimism on the market outlook has kept pace with rising stock prices. At
the end of the third quarter, the survey of market advisors by Investors
Intelligence showed 49% bulls and 33% bears. The score around the end of June
was 37% bulls and 36% bears. There was a lot of pessimism during the spring
sell-off and that is reflected in the June figures that show bulls and bears
almost equal. The later figures show that some optimism has returned, but it is
not at the danger level yet. We have quite a way to go on these numbers before
we hit the warning lights.
At the end of the third quarter, companies in the S&P 500 were trading at
17.9 times operating earnings, little changed from the 17.5 valuation on June
30. Valuations were at 19 times earning on September 30, 2005. At these levels,
we believe the market is neither cheap nor expensive. We wish the numbers were
a bit lower, but they are fine for the time being. If we see another
double-digit gain in earnings, the valuations should dip to the vicinity of 15.
Looking forward a year, our view is that the valuation would come in around the
lower end of the range.
At this writing, we like the equities market. The biggest positive is our
sentiment model,
3
which had been at a fairly good level a few months ago and was, at quarter-end,
neutral. Coming back to neutral after the market started to rally is fine. Our
monetary model, which had been negative, was neutral as of September 30, and
that's fine as well. Seasonality is another favorable factor. Historically, the
interval from October 1 through the end of January has generally produced
favorable results. And February through March or April has not been bad,
either. The tape action has been very good, with the rate of advances topping
declines and new highs being set.
Based on our indicators, we believe the market will do relatively well in
the days ahead. In line with our bullish outlook, we are currently around 90%
invested.
Sincerely,
/s/ Martin E. Zweig
Martin E. Zweig, Ph.D.
President
Zweig Consulting LLC
PORTFOLIO COMPOSITION
The Zweig Fund's leading stock market sectors on September 30, 2006,
included financials, information technology, consumer discretionary, health
care and industrials. While there were changes in allocation percentages, all
of these sectors appeared in our previous report. During the quarter, we added
to our positions in financials and information technologies and trimmed our
holdings in consumer discretionary and industrials.
As of September 30, 2006, the Fund's top equity positions included
Abercrombie & Fitch, Allstate Corp., AT &T Inc., Cisco Systems, Goldman Sachs,
JPMorgan Chase, McDonald's Corp., Morgan Stanley, NASDAQ 100 Trust, and Verizon
Communications. With the exception of Goldman
Sachs and NASDAQ 100 Trust, all of the companies are new to this listing, but
there were no changes in the number of shares held.
No longer among our top positions are Continental Airlines, Microsoft,
Occidental Petroleum, and PepsiCo., where we trimmed our holdings;
Bristol-Myers Squibb and Costco Wholesale Corp., where there were no changes in
shares held; and Nabors Industries and Valero, where we added to our holdings.
Sincerely,
/s/ Carlton Neel
Carlton Neel
Executive Vice President
Phoenix/Zweig Advisers LLC
The preceding information is the opinion of Zweig Consulting LLC. Past
performance is no guarantee of future results, and there is no guarantee that
market forecasts will be realized.
4
Glossary
ADR (American Depositary Receipt): Represents shares of foreign companies
traded in U.S. dollars on U.S. exchanges that are held by a bank or a trust.
Foreign companies use ADRs in order to make it easier for Americans to buy
their shares.
Dow Jones Industrial Average/SM/: A price-weighted average of 30 blue chip
stocks. The index is calculated on a total return basis with dividends
reinvested.
Federal funds rate: The interest rate charged on overnight loans of reserves by
one financial institution to another in the United States. The federal funds
rate is the most sensitive indicator of the direction of interest rates since
it is set daily by the market.
Federal Reserve (the "Fed"): The central bank of the United States, responsible
for controlling the money supply, interest rates and credit with the goal of
keeping the U.S. economy and currency stable. Governed by a seven-member board,
the system includes 12 regional Federal Reserve Banks, 25 branches and all
national and state banks that are part of the system.
Initial public offering (IPO): A company's first sale of stock to the public.
Institute for Supply Management (ISM) Report on Business(R): An economic
forecast, released monthly, that measures U.S. manufacturing conditions and is
arrived at by surveying 300 purchasing professionals in the manufacturing
sector representing 20 industries in all 50 states.
Investors Intelligence Survey: A weekly survey published by Chartcraft, an
investment services company, of the current sentiment of approximately 150
market newsletter writers. Participants are classified into three categories:
bullish, bearish or waiting for a correction.
NASDAQ Composite(R) Index: A market capitalization-weighted index of all issues
listed in the NASDAQ (National Association Of Securities Dealers Automated
Quotation System) Stock Market, except for closed-end funds, convertible
debentures, exchange traded funds, preferred stocks, rights, warrants, units
and other derivative securities. The index is calculated on a total return
basis with dividends reinvested.
Producer Price Index (PPI): An inflationary indicator, reported monthly by the
U.S. Bureau of Labor Statistics, which measures changes in the wholesale prices
of food, metals, lumber, oil and gas, as well as many other commodities.
Reuters CRB (Commodity Research Bureau) Index: Tracks 17 component commodities
ranging from key economic indicators like gold and oil to other important
commodities such as cocoa, coffee and orange juice.
S&P 500(R) Index: A free-float market capitalization-weighted index of 500 of
the largest U.S. companies. The index is calculated on a total return basis
with dividends reinvested.
Indexes cited are unmanaged and not available for direct investment; therefore
their performance does not reflect the expenses associated with the active
management of an actual portfolio.
5
THE ZWEIG FUND, INC.
SCHEDULE OF INVESTMENTS AND SECURITIES SOLD SHORT
September 30, 2006
(Unaudited)
Number of
Shares Value
--------- -----------
INVESTMENTS
DOMESTIC COMMON STOCKS 74.39%
CONSUMER DISCRETIONARY -- 9.39%
Abercrombie & Fitch Co./(e)/.................. 105,000 $ 7,295,400
Ford Motor Corp./(e)/......................... 800,000 6,472,000
Gap, Inc. (The)............................... 330,000 6,253,500
McDonald's Corp............................... 180,000 7,041,600
Newell Rubbermaid, Inc./(e)/.................. 235,000 6,655,200
Nike, Inc. Class B/(e)/....................... 72,000 6,308,640
-----------
40,026,340
-----------
CONSUMER STAPLES -- 7.15%
Archer-Daniels-Midland Co./(e)/............... 140,000 5,303,200
Costco Wholesale Corp./(e)/................... 125,000 6,210,000
Kimberly-Clark Corp........................... 100,000 6,536,000
PepsiCo, Inc./(d)/............................ 95,000 6,199,700
Procter & Gamble Co........................... 100,000 6,198,000
-----------
30,446,900
-----------
ENERGY -- 5.29%
ConocoPhillips................................ 95,000 5,655,350
Halliburton Co................................ 190,000 5,405,500
Occidental Petroleum Corp..................... 110,000 5,292,100
Valero Energy Corp............................ 120,000 6,176,400
-----------
22,529,350
-----------
FINANCIALS -- 17.56%
Allstate Corp................................. 115,000 7,213,950
Bank of America Corp./(d)/.................... 130,000 6,964,100
Goldman Sachs Group, Inc...................... 45,000 7,612,650
Huntington Bancshares, Inc./(e)/.............. 250,000 5,982,500
JPMorgan Chase & Co........................... 150,000 7,044,000
Merrill Lynch & Co., Inc...................... 90,000 7,039,800
Morgan Stanley................................ 100,000 7,291,000
New York Community Bancorp, Inc./(e)/......... 340,000 5,569,200
PNC Financial Services Group, Inc............. 90,000 6,519,600
Wachovia Corp................................. 120,000 6,696,000
Wells Fargo & Co.............................. 190,000 6,874,200
-----------
74,807,000
-----------
See notes to schedule of investments and securities sold short
6
Number of
Shares Value
--------- ------------
HEALTH CARE -- 8.96%
Amgen, Inc./(b)/................................. 85,000 $ 6,080,050
Bristol-Myers Squibb Co.......................... 250,000 6,230,000
Gilead Sciences, Inc./(b)/....................... 100,000 6,870,000
Merck & Co., Inc................................. 150,000 6,285,000
Pfizer, Inc...................................... 240,000 6,806,400
UnitedHealth Group, Inc./(e)/.................... 120,000 5,904,000
------------
38,175,450
------------
INDUSTRIALS -- 7.75%
AMR Corp./(b)(e)/................................ 300,000 6,942,000
Boeing Co. (The)................................. 70,000 5,519,500
Continental Airlines, Inc. Class B/(b)(e)/....... 230,000 6,511,300
General Electric Co./(d)/........................ 170,000 6,001,000
L-3 Communications Holdings, Inc./(d)/........... 80,000 6,266,400
Norfolk Southern Corp............................ 40,000 1,762,000
------------
33,002,200
------------
INFORMATION TECHNOLOGY -- 12.56%
Cisco Systems, Inc./(b)/......................... 315,000 7,245,000
EMC Corp./(b)/................................... 575,000 6,888,500
Hewlett-Packard Co............................... 190,000 6,971,100
International Business Machines Corp............. 85,000 6,964,900
Microsoft Corp./(e)/............................. 250,000 6,832,500
National Semiconductor Corp./(e)/................ 250,000 5,882,500
Palm, Inc./(b)(e)/............................... 400,000 5,824,000
QUALCOMM, Inc.................................... 190,000 6,906,500
------------
53,515,000
------------
MATERIALS -- 2.40%
Dow Chemical Co./(d)/............................ 160,000 6,236,800
Freeport-McMoRan Copper & Gold, Inc. Class B
(Indonesia)/(c)(e)/............................ 75,000 3,994,500
------------
10,231,300
------------
TELECOMMUNICATIONS SERVICES -- 3.33%
AT&T Corp./(e)/.................................. 220,000 7,163,200
Verizon Communications, Inc./(e)/................ 190,000 7,054,700
------------
14,217,900
------------
Total Domestic Common Stocks (Identified Cost
$263,246,254)..................................... 316,951,440
------------
FOREIGN COMMON STOCKS/(c) / 9.43%
CONSUMER DISCRETIONARY -- 2.05%
Honda Motor Co., Ltd. ADR (Japan)/(d)/........... 170,000 5,717,100
Sony Corp. ADR (Japan)........................... 75,000 3,027,000
------------
8,744,100
------------
See notes to schedule of investments and securities sold short
7
Number of
Shares Value
---------- ------------
ENERGY -- 1.43%
Nabors Industries Ltd. (United States)/(b)(e)/.... 205,000 $ 6,098,750
------------
FINANCIALS -- 1.56%
Deutsche Bank AG (Germany)........................ 55,000 6,638,500
------------
INFORMATION TECHNOLOGY --4.39%
Amdocs Ltd. (United States)/(b)(e)/............... 170,000 6,732,000
Nokia Oyj ADR (Finland)........................... 315,000 6,202,350
Seagate Technology (Singapore)/(b)(e)/............ 250,000 5,772,500
------------
18,706,850
------------
Total Foreign Common Stocks (Identified Cost
$34,355,913)........................................ 40,188,200
------------
EXCHANGE TRADED FUNDS 2.46%
iShares MSCI Japan Index Fund..................... 145,000 1,963,300
NASDAQ-100 Shares/(e)/............................ 210,000 8,536,500
------------
Total Exchange Traded Funds (Identified Cost $9,847,164) 10,499,800
------------
Total Long Term Investments --86.28% (Identified Cost
$307,449,331)....................................... 367,639,440
------------
SHORT-TERM INVESTMENTS 27.25%
MONEY MARKET MUTUAL FUNDS -- 13.21%
State Street Navigator Prime Plus (5.28% seven
day effective yield)/(f)/ (Identified Cost
$56,285,777).................................... 56,285,777 56,285,777
------------
Par
(000's)
----------
FEDERAL AGENCY SECURITIES -- 7.02%
FNMA 2.625%, 11/15/06/(d)/ (Identified Cost
$29,910,507).................................... $30,000 29,902,860
------------
See notes to schedule of investments and securities sold short
8
Par
(000's) Value
------- ------------
COMMERCIAL PAPER -- 7.02%/(g)/
Manhattan Associates, Inc. 5.37%, 10/2/06.... $ 9,900 $ 9,898,523
Rabobank USA Finance Corp. 5.35%, 10/2/06.... 20,000 19,997,028
------------
Total Commercial Paper (Identified Cost
$29,895,551)................................ 29,895,551
------------
Total Short-Term Investments (Identified cost
$116,091,835)............................... 116,084,188
------------
Total Investments (Identified Cost
$423,541,166) -- 113.53%.................... 483,723,628/(a)/
Securities Sold Short (Proceeds $7,354,178) --
(2.45)%..................................... (10,450,000)
Other Assets Less Liabilities -- (11.08)%..... (47,189,182)
------------
Net Assets -- 100.00%......................... $426,084,446
============
--------
(a) Federal Tax information: Net unrealized appreciation of investment
securities is comprised of gross appreciation of $69,358,691 and gross
depreciation of $10,124,781 for federal tax purposes. At September 30,
2006, the aggregate cost of securities for federal income tax purposes was
$424,489,718.
(b) Non-income producing.
(c) A common stock is considered to be foreign if the security is issued in a
foreign country. The country of risk, noted parenthetically, is determined
based on criteria in Note 1D "Foreign security country determination" in
the Notes to Schedule of Investments and Securities Sold Short.
(d) Position, or a portion thereof, has been segregated to collateralize for
securities sold short.
(e) All or a portion of security is on loan.
(f) Represents security purchased with cash collateral for securities on loan.
(g) The rate shown is the discount rate.
See notes to schedule of investments and securities sold short
9
Number of
Shares Value
--------- -----------
SECURITIES SOLD SHORT
DOMESTIC COMMON STOCKS 1.10%
CONSUMER DISCRETIONARY -- 1.45%
Wendy's International, Inc................... 70,000 $ 4,690,000
-----------
Total Domestic Common Stocks (Proceeds $2,424,303) 4,690,000
-----------
EXCHANGE TRADED FUNDS 1.35%
iShares Russell 2000 Index Fund.............. 80,000 5,760,000
-----------
Total Exchange Traded Funds (Proceeds $4,929,875) 5,760,000
-----------
Total Securities Sold Short (Proceeds $7,354,178) 10,450,000/(h)/
===========
--------
(h) Federal Tax information: Net unrealized depreciation of securities sold
short is comprised of gross appreciation of $0 and gross depreciation of
$3,095,822 for federal income tax purposes. At September 30, 2006, the
aggregate proceeds of securities sold short for federal income tax
purposes was ($7,354,178).
See notes to schedule of investments and securities sold short
10
THE ZWEIG FUND, INC.
FINANCIAL HIGHLIGHTS
September 30, 2006
(Unaudited)
Net Asset Value
Total Net Assets per share
-------------------------- ---------------
Beginning of period: December 31, 2005.................. $426,377,980 $5.82
Net investment income................................ $ 3,950,855 $ 0.05
Net realized and unrealized gain on investments...... 27,758,460 0.39
Dividends from net investment income and
distributions from net long-term and short-term
capital gains*..................................... (32,002,849) (0.44)
Tax return of capital................................ -- --
Net asset value of shares issued to shareholders in
reinvestment of dividends resulting in issuance of
common stock....................................... -- --
------------ ------
Net increase (decrease) in net assets/net asset
value.............................................. (293,534) 0.00
------------ -----
End of period: September 30, 2006....................... $426,084,446 $5.82
============ =====
--------
*Please note that the tax status of distributions is determined at the end of
the taxable year. However, based on interim data as of September 30, 2006,
we estimate that 43% of distributions represent return of capital and 45%
represent excess gain distributions which are taxable as ordinary income.
11
THE ZWEIG FUND, INC.
NOTES TO SCHEDULE OF INVESTMENTS AND SECURITIES SOLD SHORT
September 30, 2006
(Unaudited)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Zweig Fund, Inc. (the "Fund") in the preparation of the
Schedule of Investments and Securities Sold Short. The preparation of the
Schedule of Investments and Securities Sold Short in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets and liabilities
at the date of the Schedule of Investments and Securities Sold Short. Actual
results could differ from those estimates.
A. Security Valuation
Equity securities are valued at the official closing price (typically last
sale) on the exchange on which the securities are primarily traded, or if no
closing price is available, at the last bid price.
Debt securities are valued on the basis of broker quotations or valuations
provided by a pricing service, which in determining value utilizes information
with respect to recent sales, market transactions in comparable securities,
quotations from dealers, and various relationships between securities in
determining value.
As required, some securities and assets may be valued at fair value as
determined in good faith by or under the direction of the Directors.
Certain foreign common stocks may be fair valued in cases where closing
prices are not readily available or are deemed not reflective of readily
available market prices. For example, significant events (such as movement in
the U.S. securities market, or other regional and local developments) may occur
between the time that foreign markets close (where the security is principally
traded) and the time that the Fund calculates its net asset value (generally,
the close of the NYSE) that may impact the value of securities traded in these
foreign markets. In these cases, information from an external vendor may be
utilized to adjust closing market prices of certain foreign common stocks to
reflect their fair value. Because the frequency of significant events is not
predictable, fair valuation of certain foreign common stocks may occur on a
frequent basis.
Short-term investments having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market.
B. Security Transactions and Related Income
Security transactions are recorded on the trade date. Dividend income is
recorded on the ex-dividend date, or in the case of certain foreign securities,
as soon as the Fund is notified. Interest income is recorded on the accrual
basis. The Fund amortizes premiums and accretes discounts using the effective
interest method. Realized gains and losses are determined on the identified
cost basis.
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C. Foreign Currency Translation
Foreign securities and other assets and liabilities are valued using the
foreign currency exchange rate effective at the end of the reporting period.
Cost of investments is translated at the currency exchange rate effective at
the trade date.
D. Foreign Security Country Determination
A combination of the following criteria is used to assign the countries of
risk listed in the schedule of investments and securities sold short: country
of incorporation, actual building address, primary exchange on which the
security is traded and country in which the greatest percentage of company
revenue is generated.
E. Short Sales
A short sale is a transaction in which the Fund sells a security it does not
own in anticipation of a decline in market price. To sell a security short, the
Fund must borrow the security. The Fund's obligation to replace the security
borrowed and sold short will be fully collateralized at all times by the
proceeds from the short sale retained by the broker and by cash and securities
deposited in a segregated account with the Fund's custodian. If the price of
the security sold short increases between the time of the short sale and the
time the Fund replaces the borrowed security, the Fund will realize a loss, and
if the price declines during the period, the Fund will realize a gain. Any
realized gain will be decreased, and any realized loss increased, by the amount
of transaction costs. On ex-dividend date, dividends on short sales are
recorded as an expense to the Fund. At September 30, 2006, the value of
securities sold short amounted to $10,450,000 against which collateral of
$34,170,163 was held. The collateral includes the deposits with the broker for
securities held short and the value of the segregated investments held long, as
shown in the Schedule of Investments and Securities Sold Short. Short selling
used in the management of the Fund may accelerate the velocity of potential
losses if the prices of securities sold short appreciate quickly. Stocks
purchased may decline in value at the same time stocks sold short may
appreciate in value, thereby increasing potential losses.
F. Security Lending
The Fund loans securities to qualified brokers through an agreement with
State Street Bank (the "Custodian") and the Fund. Under the terms of the
agreement, the Fund receives collateral with a market value not less than 100%
of the market value of loaned securities. Collateral is adjusted daily in
connection with changes in the market value of securities on loan. Collateral
may consist of cash, securities issued or guaranteed by the U.S. Government or
its agencies and the sovereign debt of foreign countries. Cash collateral has
been invested in a short-term money market fund. Dividends earned on the
collateral and premiums paid by the borrower are recorded as income by the Fund
net of fees and rebates charged by the Custodian for its services in connection
with this securities lending program. Lending portfolio securities involves a
risk of delay in the recovery of the loaned securities or in the foreclosure on
collateral.
NOTE 2 -- Credit Risk and Asset Concentrations
In countries with limited or developing markets, investments may present
greater risks than in more developed markets and the prices of such investments
may be volatile. The consequences of political, social or economic changes in
these markets may have disruptive effects on the market prices of these
investments and the income they generate, as well as a Fund's ability to
repatriate such amounts.
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The Fund may invest a high percentage of their assets in specific sectors of
the market in their pursuit of a greater investment return. Fluctuations in
these sectors of concentration may have a greater impact on a Fund, positive or
negative, than if a Fund did not concentrate its investments in such sectors.
NOTE 3 -- INDEMNIFICATIONS
Under the Fund's organizational documents, its directors and officers are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, the Fund enters into contracts that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts and expect the risk of loss to be remote.
NOTE 4 -- SUBSEQUENT EVENT
Effective November 9, 2006 Daniel T. Geraci resigned as director and
president of the Fund, coincident with the notification of his resignation from
Phoenix Investment Partners Ltd., parent of the adviser, and subsidiary of The
Phoenix Companies, Inc.
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KEY INFORMATION
Zweig Shareholder Relations: 1-800-272-2700
For general information and literature, as well as 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.
REPURCHASE OF SECURITIES
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.
PROXY VOTING INFORMATION (FORM N-PX)
The Adviser and Sub-Adviser vote proxies relating to portfolio securities in
accordance with procedures that have been approved by the Fund's Board of
Directors. You may obtain a description of these procedures, along with
information regarding how the Fund voted proxies during the most recent
12-month period ended June 30, 2006, free of charge, by calling toll-free
1-800-243-1574. This information is also available through the Securities and
Exchange Commission's website at http://www.sec.gov.
FORM N-Q INFORMATION
The Fund files a complete schedule of portfolio holdings with the Securities
and Exchange Commission (the "SEC") for the first and third quarters of each
fiscal year on Form N-Q. Form N-Q is available on the SEC's website at
http://www.sec.gov. Form N-Q may be reviewed and copied at the SEC's Public
Reference Room. Information on the operation of the SEC's Public Reference Room
can be obtained by calling toll-free 1-800-SEC-0330.
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