February 2, 2002
[PHOTO]
Dear Shareholder:
The net asset value of The Zweig Fund, Inc., including an $0.18
distribution, increased 12.2% in the fourth quarter of 2001. During the same
period, the S&P 500 Index gained 10.7%, including dividends.
For the year ended December 31, 2001, The Zweig Fund's net asset value
decreased 15.0%, including $0.89 in reinvested distributions. In the same
period, the S&P 500 Index declined 11.9%, including dividends.
If a shareholder had invested $10,000 (1,000 shares) at the time of the
Fund's initial public offering in October 1986, these holdings, including
distributions reinvested, would have appreciated to $36,024 (4,560 shares) as
of December 31, 2001.
I am glad that we made a comeback in the fourth quarter and beat the market.
I'm not happy about the loss for the year and lagging the market. As I stated
in our last quarterly report, I became bullish early in the year when the Fed
began to cut. What kept me bullish were the Fed's aggressive cutting and the
aggressively expanding money supply. Similar conditions prevailed for a total
of 12 cumulative years since the Fed started in 1913. If you arbitrarily held
for one year during those periods and cut off when the Fed tightened, the
results were quite remarkable. The Dow Jones Industrials advanced at almost a
33% annualized rate, while the return on the remaining 75 years, when you
didn't have these conditions, was a pretty lame 2.3%. That's basically why we
anticipated a historically valid long-term bullish response to the Fed's
policies. Despite the strong probabilities, it just didn't work this time.
DISTRIBUTION DECLARED
On January 2, 2002, the Fund announced a distribution of $0.195 payable on
January 10, 2002 to shareholders of record December 31, 2001. Including the
fourth-quarter payout, our total distribution to shareholders for tax purposes
in 2001 was $0.815, virtually all of which is treated as a tax-free return of
capital and should not be reported as income. This brings our total payout
since the Fund's inception to $16.925.
MARKET OUTLOOK
Last year was a gloomy one for the stock market. The Dow Jones Industrials
dropped 7.1%, the worst performance since 1981's 9.2% decline; the Nasdaq
Composite fell 21% following the previous year's drop of 39.3%, and the S&P 500
Index was off 10.7% after receding 9.2% in 2000.
What happened last year was a hangover from the bursting of the speculative
bubble in the technology area. That led to a steep drop in capital spending.
The consumer held up reasonably well, and the Fed began to cut in January. The
cuts, which numbered 11 by year-end and brought the rate down to 1.75%,
actually helped the economy from getting worse. However, they weren't enough to
compensate for the excess technological capacity that kept putting pressure on
technology stocks. Eventually, the pressure spread to other stocks as portfolio
managers sought to raise more cash. I thought the economy
was beginning to turn in late summer, but the terrorist attacks came and it all
became academic. That threw everything into a recession, if we hadn't been in
one before.
The economists who meet periodically now tell us that the recession started
last March, but I am not convinced of that date. I believe that the recession
probably began around the time of the 2000 election. Although the economy began
to soften during the summer of 2000, I don't think we were in recession until
late in 2000. When the Fed began to cut in early 2001, I believed the downturn
had about another four to six months to go. The market generally does very well
during such an interval. After the third Fed cut in March, the market did
respond for a couple of months. There was a very strong rally in April-May, but
it died during the summer.
Conventional wisdom is that a recession typically lasts 11 months. If you
accept that supposition and the March onset date, then we are about nine months
into the recession. If the average were to hold, the economy should start
turning up in a month or two. The stock market would be right on course
because, as I mentioned earlier, the market tends to turn up four to six months
before recessions end. Unfortunately, the average figure isn't truly
significant - the recession could be much longer or much shorter.
The last time the Fed rate was under 2% was 40 years ago. We had a low
inflation rate in part of the late 1950s and the early 1960s. There were some
rough patches in there - 1957, 1960 and 1962 were poor - but overall the stock
market did well. Low inflation and low interest rates can be pretty bullish.
The Fed says that it sees inflation continuing to decline, and some analysts
are beginning to worry about the risk of deflation. Well, it's a danger on the
radar screen. However, one of the Fed governors said recently that he didn't
see any risk of deflation. Slight deflation, say minus 1/2% or 1%, is not the
worst thing. If it gets out of hand, it means the economy is in gridlock. We
saw that happen in the 1930s. I doubt that we will see anything like that. If
we were to see even a small amount of outright deflation, it would indicate a
weak economy. At this stage, I would almost prefer a slight uptick in inflation
or at least a leveling out. What we really need for this stock market is an
economic upturn. If that were to happen, I don't think we would see any
deflation, but it's not a sure thing.
Some economists say that interest rates currently are as low as they'll go
and that a historic turning point is at hand. Actually, I'm ambivalent on
interest rates. I hope that rates are near their lows. If rates start to go up
- assuming they just rise slowly - it would probably indicate that the economy
has improved somewhat. I think that would help the market. If rates go up 1/2%
or something like that over the next six to nine months, it's not a big deal.
It would probably be more positive than negative. I would hate to see the Fed
cut another three or four times with rates approaching zero. That would be a
bad economic indicator.
Earnings, forecast as down 16.7% last year following a drop of 16.2% in
2000, are the worst for any year since World War II. These negative earnings,
which are a reflection of the recession, could hurt the market. Compounding the
poor earnings are lots of write-offs. In times like these, companies tend to
write off everything -- including the kitchen sink - because it is a good
opportunity to do so. Consequently, I don't know what the actual earnings were,
but I know they were not good. I also know that earnings tend to do very well
coming out of a recession.
The S&P currently trades at about 30 times estimated earnings. That's not a
reasonable figure - it's too high. And, my major concern right now is the level
of valuations in the market. A lot has to do with the big cap technology stocks
that are selling at very high multiples. Technology, which had been perhaps 35%
of the S&P at one time, is a lot less now. It's closer to the 20% level. It
means that these big cap stocks have an inordinate impact not only on the
market cap of the S&P but also on the earnings. If they are high multiples, it
pushes up the P/E ratio for the market.
2
If you look at non-tech stocks or the smaller cap stocks within the S&P 500,
the P/E ratios are nowhere near as high. Nevertheless, they still don't appear
cheap to me. The stock market has been down two consecutive years.
Consequently, it has discounted some of the bad news. Perhaps the rally we have
had for a few months demonstrates some discounting of an upward turn of the
economy.
Reflecting the state of the economy, dividends in the S&P fell 3.3% last
year, the biggest drop since 4.1% in 1951. Companies, trying to conserve cash,
have been reluctant to pay dividends in recent years. Also, many companies have
been trying to buy back their stocks to strengthen their share prices. Dividend
yields are small and, in most cases, don't offer much support to the level of
stock prices. The low dividends by themselves don't worry me much - it's just
that we need earnings. With the P/E ratios still high, I'm afraid there is a
caution light on because of the valuations. But, this has been the case for the
past five years or so.
A favorable market development is the fact that just 111 companies, raising
a total of $37 billion in equity, came public last year against 386 companies
raising an aggregate $60 billion in 2000. Inordinate numbers of IPOs, which we
saw in the boiling markets of a couple of years ago, suck money out of the
market. This is an indicator that we monitor very closely. It is actually
bullish when IPOs slacken and companies buy back their own stock for cash. We
had a terrible supply and demand picture in early 2000, with huge numbers of
IPOs, much smaller numbers of buybacks, and heavy insider selling of stock.
This situation has turned around somewhat, and those numbers recently are okay.
Another positive indicator for the market is that last year was the first
since 1996 that there were fewer than 10,000 mergers. Companies don't have
their inflated stock to take over other companies. With people trying to
conserve cash, it's harder to make deals for cash. It's probably like the
situation with IPOs. It is not a good sign when merger activity gets too heavy.
When it cools off, it is probably a better signal for stocks.
More significantly, broad money supply after adjusting for inflation, is
expanding by about 10.5%, the highest year-to-year rate in almost 28 years.
That's definitely bullish. After the attacks in September, the Fed pumped money
into the system in a major, major way to help keep the economy from collapsing.
That money is out there circulating, and it has to go somewhere. There really
are only three main outlets. It can go into financial assets like stocks or
bonds; it can go into tangible assets like real estate; or it can go into the
general economy to stimulate business. So far some of it has gone into stocks,
while the real estate picture has been mixed. Some residential areas have held
up nicely, but commercial real estate, not surprisingly during a recession, has
not done as well. Hopefully, a good portion will go into the real economy.
Consumers will be spending more, and companies will start to rebuild
inventories.
So far, the inventory picture is encouraging. Product inventories fell
sharply in the fourth quarter. On an annual rate, the decline is estimated at
between $100 billion and $120 billion. That's a pattern you see late in
recessions as inventories get worked off. A major cause of recessions is the
excessive buildup of inventories. Goods are stuck on shelves, and manufacturers
and retailers have trouble selling their stocks. Typically they cut prices. We
have been going through this process for a few quarters. As the inventory
overhang diminishes, we get closer to the time when manufacturing goes into
higher gear. Inventories are now down to levels similar to those at a late
stage of previous recessions. So I hope we are near the end of this one.
Looking at the broad economic picture, the fact that the government is
facing deficits instead of surpluses is a market positive. People have a hard
time grasping that government surpluses
3
have been negative for the stock market. But, we saw it clearly in 2000 and
2001 when we had surpluses and the market went down. The problem is that a
government surplus puts a drain on the economy by taking money away from people
who tend to spend it. I am not suggesting that the government run a perennial
deficit. But, in the Keynesian way, I think it is judicious for the federal
government to run a moderate deficit during a recessionary period to help
stimulate the economy. Then, as the economy recovers and tax receipts go up,
you can go back to a surplus and pay down some debt. You don't want the deficit
to get too big because it then builds up inflationary pressures. So I think a
little bit of a deficit right now is actually a good thing.
Summing up, I think there are more stock market positives than negatives.
The Fed's monetary policy is pretty bullish. Interest rates are low, and
inflation is low. The money supply is expanding. There has been a fair amount
of pessimism around as a lot of holders have sold out. Now we have regained
some optimism on the rally since September. However, we saw a big shakeout in
mutual fund redemptions and a big drop in margin debt. All that is pretty good.
Looking ahead, I see potential problems with valuations. As I mentioned before,
I don't think the market is cheap. The big question is the direction of the
economy. At this point, I think the economy must improve to help the market.
Since there is more positive than negative evidence on the economy at this
moment, I think the odds favor an upturn, but there is no guarantee. My best
guess is that we are slowly moving out of recession, but it's not a 100% shot.
My monetary indicators are reasonably bullish, and my sentiment indicators
are still positive. Although the valuation situation is not so hot, we're
bullish overall. We did cut back a few percentage points and are now in the low
90% range in our investment exposure, which for us is a lot. I want to hold at
least a small amount of cash, and we'll see where we go from here.
PORTFOLIO COMPOSITION
As of December 31, 2001, our leading industry groups included technology,
health care, financial services, retailing, oil and oil services, and
telecommunications. All of these groups appeared on our September 30, 2001
listing. Technology exposure increased slightly during the quarter because of
the group's good performance. We cut back slightly on our holdings of financial
services and telecommunications and added slightly to our retailing stocks.
Some of our largest individual holdings include Microsoft, Pfizer,
Citigroup, General Electric, Wal-Mart, Tyco, IBM, Johnson & Johnson, Home
Depot, and Bank of America.
In the above grouping, we increased our exposure for IBM, Home Depot, and
Bank of America, and all three also benefited from appreciation during the
quarter. Among the top holdings listed in our previous report, we have trimmed
our positions in SBC Communications, Verizon, and Eli Lilly, but all three
remain in our portfolio.
Sincerely,
/s/ Martin E. Zweig, Ph.D.
Chairman
/s/(less than)/TC Martin E. Zweig, Ph.D.
Martin E. Zweig, Ph.D.
Chairman
4
THE ZWEIG FUND, INC.
SCHEDULE OF INVESTMENTS
December 31, 2001
Number of
Shares Value
--------- -----------
COMMON STOCKS 93.10%.
AEROSPACE & AIR TRANSPORT 0.90%.
United Technologies Corp........... 68,100 $ 4,401,303
-----------
BUILDING & FOREST PRODUCTS 1.27%.
International Paper Co............. 85,300 3,441,855
Weyerhaeuser Co.................... 51,000 2,758,080
-----------
6,199,935
-----------
CHEMICALS 0.82%.
Dow Chemical Co.................... 119,100 4,023,198
-----------
COMMERCIAL SERVICES 0.62%.
Omnicom Group, Inc................. 33,900 3,028,965
-----------
CONSUMER PRODUCTS 3.62%.
Anheuser-Busch Cos., Inc........... 68,000 3,074,280
Avon Products, Inc................. 34,000 1,581,000
Kimberly-Clark Corp................ 68,000 4,066,400
PepsiCo, Inc....................... 102,200 4,976,118
Procter & Gamble Co................ 51,000 4,035,630
-----------
17,733,428
-----------
ELECTRONICS -- ELECTRICAL 3.70%.
Celestica, Inc..................... 34,000(a) 1,373,260
Emerson Electric Co................ 51,000 2,912,100
Flextronics International Ltd...... 34,000(a) 815,660
General Electric Co................ 324,700 13,013,976
-----------
18,114,996
-----------
ENGINEERING & MACHINERY 0.66%.
SPX Corp........................... 23,600 3,230,840
-----------
FINANCIAL SERVICES 15.66%.
American International Group, Inc.. 102,100 8,106,740
Bank of America Corp............... 153,300 9,650,235
Capital One Financial Corp......... 51,000 2,751,450
Citigroup, Inc..................... 276,000 13,932,480
Fannie Mae......................... 85,100 6,765,450
Freddie Mac........................ 119,500 7,815,300
H & R Block, Inc................... 102,000 4,559,400
Lehman Brothers Holdings, Inc...... 78,200 5,223,760
See notes to financial statements
5
Number of
Shares Value
--------- -----------
FINANCIAL SERVICES (CONTINUED)
MBNA Corp................................. 51,000 $ 1,795,200
Merrill Lynch & Co., Inc.................. 51,000 2,658,120
MetLife, Inc.............................. 68,000 2,154,240
Morgan Stanley Dean Witter & Co........... 78,100 4,368,914
SouthTrust Corp........................... 67,800 1,672,626
Washington Mutual, Inc.................... 68,050 2,225,235
Wells Fargo & Co.......................... 68,000 2,954,600
-----------
76,633,750
-----------
HEALTH CARE 16.13%.
American Home Products Corp............... 78,200 4,798,352
AmerisourceBergen Corp.................... 40,800 2,592,840
Amgen, Inc................................ 68,000(a) 3,837,920
Baxter International, Inc................. 68,000 3,646,840
Biomet, Inc............................... 68,000 2,101,200
Bristol-Myers Squibb Co................... 51,100 2,606,100
Cardinal Health, Inc...................... 33,900 2,191,974
Eli Lilly & Co............................ 68,000 5,340,720
Guidant Corp.............................. 98,600(a) 4,910,280
Johnson & Johnson......................... 178,200 10,531,620
King Pharmaceuticals, Inc................. 51,000(a) 2,148,630
MedImmune, Inc............................ 64,700(a) 2,998,845
Pfizer, Inc............................... 357,800 14,258,330
Pharmacia Corp............................ 68,000 2,900,200
St. Jude Medical, Inc..................... 51,000 3,960,150
Tenet Healthcare Corp..................... 81,900(a) 4,809,168
UnitedHealth Group, Inc................... 74,800 5,293,596
-----------
78,926,765
-----------
HOTELS 0.42%.
Starwood Hotels & Resorts Worldwide, Inc.. 68,000 2,029,800
-----------
INVESTMENT COMPANIES 2.21%.
Nasdaq-100 Index.......................... 278,000 10,816,980
-----------
MANUFACTURING 3.66%.
Caterpillar, Inc.......................... 68,000 3,553,000
Honeywell International, Inc.............. 68,000 2,299,760
Tyco International Ltd.................... 204,600 12,050,940
-----------
17,903,700
-----------
MEDIA 3.21%.
Comcast Corp., Class A.................... 103,300(a) 3,718,800
Gannett Co., Inc.......................... 34,000 2,285,820
Gemstar -- TV Guide International, Inc.... 68,800(a) 1,905,760
See notes to financial statements
6
Number of
Shares Value
--------- -----------
MEDIA (CONTINUED)
McGraw-Hill Cos., Inc......... 67,700 $ 4,128,346
New York Times Co., Class A... 85,300 3,689,225
-----------
15,727,951
-----------
METALS 0.62%.
Alcoa, Inc.................... 85,100 3,025,305
-----------
OIL & OIL SERVICES 5.58%.
Anadarko Petroleum Corp....... 51,000 2,899,350
ChevronTexaco Corp............ 50,800 4,552,188
El Paso Corp.................. 68,000 3,033,480
Exxon Mobil Corp.............. 170,400 6,696,720
Occidental Petroleum Corp..... 68,000 1,804,040
Royal Dutch Petroleum Co...... 68,000 3,333,360
Talisman Energy, Inc.......... 51,000 1,930,350
USX-Marathon Group............ 102,400 3,072,000
-----------
27,321,488
-----------
RAILROADS 0.40%.
Union Pacific Corp............ 34,000 1,938,000
-----------
RESTAURANTS 0.61%.
McDonald's Corp............... 68,000 1,799,960
Wendy's International, Inc.... 40,800 1,190,136
-----------
2,990,096
-----------
RETAILING 8.27%.
Home Depot, Inc............... 190,600 9,722,506
Kroger Co..................... 68,000 1,419,160
Lowe's Cos., Inc.............. 135,900 6,307,119
Sears, Roebuck & Co........... 102,000 4,859,280
Staples, Inc.................. 68,000(a) 1,271,600
Target Corp................... 102,000 4,187,100
Wal-Mart Stores, Inc.......... 220,300 12,678,265
-----------
40,445,030
-----------
TECHNOLOGY 17.56%.
AOL Time Warner, Inc.......... 170,100(a) 5,460,210
Applied Materials, Inc........ 59,700(a) 2,393,970
Cisco Systems, Inc............ 290,500(a) 5,260,955
Citrix System, Inc............ 68,000(a) 1,540,880
Corning, Inc.................. 35,000 312,200
Cypress Semiconductor Corp.... 70,000(a) 1,395,100
Dell Computer Corp............ 204,900(a) 5,569,182
Electronic Data Systems Corp.. 68,100 4,668,255
See notes to financial statements
7
Number of
Shares Value
--------- ------------
TECHNOLOGY (CONTINUED)
EMC Corp.............................. 115,000 $ 1,545,600
First Data Corp....................... 68,300 5,358,135
Intel Corp............................ 273,500 8,601,575
International Business Machines Corp.. 88,400 10,692,864
JDS Uniphase Corp..................... 35,000(a) 303,800
Lucent Technologies, Inc.............. 147,200 925,888
Microchip Technology, Inc............. 52,500(a) 2,033,850
Microsoft Corp........................ 255,500(a) 16,926,875
Motorola, Inc......................... 67,800 1,018,356
Network Appliance, Inc................ 35,000(a) 765,450
Oracle Corp........................... 262,300(a) 3,622,363
QUALCOMM, Inc......................... 52,500(a) 2,651,250
Siebel Systems, Inc................... 68,200(a) 1,908,236
Sun Microsystems, Inc................. 210,000(a) 2,583,000
USinternetworking, Inc................ 70,050(a) 14,010
Yahoo!, Inc........................... 21,200(a) 376,088
------------
85,928,092
------------
TELECOMMUNICATIONS 6.09%.
ADC Telecommunications, Inc........... 122,500(a) 563,500
Amdocs Ltd............................ 68,000(a) 2,309,960
AT&T Corp............................. 210,000 3,809,400
AT&T Wireless Services, Inc........... 136,264(a) 1,958,114
General Motors Corp., Class H......... 140,000 2,163,000
Nokia Corp., ADR...................... 136,400 3,345,892
Nortel Networks Corp.................. 140,000 1,050,000
SBC Communications, Inc............... 170,100 6,662,817
Verizon Communications, Inc........... 119,100 5,652,486
WorldCom, Inc. -- WorldCom Group...... 161,050(a) 2,267,584
------------
29,782,753
------------
UTILITIES -- ELECTRIC & GAS 1.09%.
Dominion Resources, Inc............... 44,200 2,656,420
Duke Energy Corp...................... 68,000 2,669,680
------------
5,326,100
------------
Total Common Stocks
(Cost $519,201,743).............. 455,528,475
------------
See notes to financial statements
8
Principal
Amount Value
----------- ------------
SHORT-TERM INVESTMENTS 6.87%
St. Paul Cos., 1.80%, 1/02/02........ $13,600,000 $ 13,599,320
UBS Financial Corp., 1.80%, 1/02/02.. 20,000,000 19,999,000
------------
Total Short-Term Investments
(Cost $33,598,320)............. 33,598,320
------------
Total Investments (Cost $552,800,063) -- 99.97% 489,126,795
Other assets less liabilities -- 0.03%.. 134,515
------------
Net Assets -- 100%...................... $489,261,310
============
--------
(a) Non-income producing security
For Federal income tax purposes, the tax basis of investments owned at
December 31, 2001 was $553,960,482 and net unrealized depreciation of
investments consisted of:
Gross unrealized appreciation. $ 39,603,640
Gross unrealized depreciation. (104,437,327)
-------------
Net unrealized depreciation... $ (64,833,687)
=============
See notes to financial statements
9
THE ZWEIG FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2001
ASSETS
Investments, at value (identified cost $552,800,063)...... $489,126,795
Cash...................................................... 538,188
Dividends receivable...................................... 300,417
Prepaid expenses.......................................... 18,197
------------
Total Assets........................................... 489,983,597
------------
LIABILITIES
Accrued advisory fees (Note 4)............................ 351,998
Accrued administration fees (Note 4)...................... 53,835
Other accrued expenses.................................... 316,454
------------
Total Liabilities...................................... 722,287
------------
NET ASSETS $489,261,310
============
NET ASSET VALUE, PER SHARE
($489,261,310 / 61,445,846 shares outstanding -- Note 5).. $ 7.96
============
Net Assets consist of
Capital paid-in........................................... $580,581,989
Accumulated net realized loss on investments.............. (27,647,411)
Net unrealized depreciation on investments................ (63,673,268)
------------
$489,261,310
============
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2001
Investment Income
Income
Interest.................................................... $ 967,052
Dividends (net of foreign withholding taxes of $11,370)..... 5,098,189
------------
Total Income............................................. 6,065,241
------------
Expenses
Investment advisory fees (Note 4)........................... 4,448,708
Administrative fees (Note 4)................................ 680,390
Transfer agent fees......................................... 380,315
Printing and postage expenses............................... 213,011
Directors' fees and expenses (Note 4)....................... 89,711
Professional fees........................................... 82,821
Custodian fees.............................................. 68,543
Miscellaneous............................................... 276,046
------------
Total Expenses........................................... 6,239,545
------------
Net Investment Loss................................... (174,304)
------------
Net Realized and Unrealized Losses
Net realized loss on investments............................... (38,614,009)
Increase in unrealized depreciation on investments............. (50,005,448)
------------
Net realized and unrealized loss on investments............. (88,619,457)
------------
Net decrease in net assets resulting from operations........ $(88,793,761)
============
See notes to financial statements
10
THE ZWEIG FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended
December 31
----------------------------
2001 2000(a)
------------- -------------
Increase (Decrease) in Net Assets
Operations
Net investment income (loss)................................... $ (174,304) $ 11,287,717
Net realized gain (loss) on investments........................ (38,614,009) 56,826,038
Increase in unrealized depreciation of investments............. (50,005,448) (110,322,012)
------------- -------------
Net decrease in net assets resulting from operations........ (88,793,761) (42,208,257)
------------- -------------
Dividends and distributions to shareholders from
Net investment income.......................................... (477,795) (11,287,717)
Net realized short-term gains.................................. (4,254,673) (7,752,592)
Net realized long-term gains................................... -- (51,919,743)
Tax return of capital.......................................... (49,117,006) --
------------- -------------
Total dividends and distributions to shareholders........... (53,849,474) (70,960,052)
------------- -------------
Capital share transactions
Net asset value of shares issued to shareholders in
reinvestment of dividends resulting in the issuance of
common stock................................................. 11,550,317 --
------------- -------------
Net increase in net assets derived from capital share
transactions................................................. 11,550,317 --
------------- -------------
Net decrease in net assets..................................... (131,092,918) (113,168,309)
Net Assets
Beginning of year.................................................. 620,354,228 733,522,537
------------- -------------
End of year (including undistributed net investment income of
$477,795 at December 31, 2000)................................... $ 489,261,310 $ 620,354,228
============= =============
--------
(a) The dividends and distributions on the statement of changes in net
assets for the year ended December 31, 2000 have been reclassified for
comparative purposes.
See notes to financial statements
11
THE ZWEIG FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE 1 -- Organization
The Zweig Fund, Inc. (the "Fund") is a closed-end, diversified management
investment company registered under the Investment Company Act of 1940 (the
"Act"). The Fund was incorporated under the laws of the State of Maryland on
June 18, 1986.
NOTE 2 -- Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
Portfolio securities that are traded only on stock exchanges are valued at
the last sale price. Secu- rities traded in the over-the-counter market which
are National Market System securities are valued at the last sale price. Other
over-the-counter securities are valued at the most recently quoted bid price
provided by the principal market makers. Portfolio securities which are traded
both in the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market, as determined by the
Adviser. Debt securities may be valued on the basis of prices provided by an
independent pricing service, when such prices are believed by the Adviser to
reflect the fair market value of such securities. Short-term investments having
a remaining maturity of 60 days or less when purchased are valued at amortized
cost (which approximates market value). Futures contracts traded on commodities
exchanges are valued at their closing settlement price on such exchange.
Securities for which market quotations are not readily available (of which
there were none at December 31, 2001) and other assets, if any, are valued at
fair value as determined under procedures approved by the Board of Directors of
the Fund.
B. Security Transactions and Investment Income
Security transactions are recorded on trade date. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. Discount and premium on securities
purchased other than short-term securities are accreted on the constant yield
method over the life of the respective securities. Prior to January 1, 2001,
premium on securities was not amortized.
With the adoption of the revised AICPA Audit and Accounting Guide, Audits of
Investment Companies ("Audit Guide"), the Fund is required to amortize premium
and discount on all fixed income securities, and classify gains and losses on
asset-backed securities presently included in realized gains and losses, as
part of interest income. Upon initial adoption, the Fund adjusted the cost of
its fixed-income
12
securities by the cumulative amount of amortization that would have been
recognized had amortization been in effect from the purchase date of each
holding. Adopting this accounting principle did not affect the Fund's net asset
value. The adoption of this principle had no impact on the financial statements.
Realized gains and losses on sales of investments are determined on the
identified cost basis for financial reporting and tax purposes.
C. Federal Income Tax Information
It is the policy of the Fund to comply with the requirements of the Internal
Revenue Code ("the Code"), applicable to regulated investment companies, and to
distribute all of its taxable income to its shareholders. In addition, the Fund
intends to distribute an amount sufficient to avoid the imposition of any
excise tax under Section 4982 of the Code. Therefore, no provision for federal
income taxes or excise taxes has been made.
D. Dividends and Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. Income
and capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences include the treatment of net operating losses, losses
deferred due to wash sales and the timing of distributions. For financial
reporting purposes, book basis capital accounts are adjusted to reflect the tax
character of permanent book/tax differences. The reclassifications have no
impact on the net assets or net asset value of the Fund. As of December 31,
2001, the Fund increased undistributed net investment income by $174,304 and
decreased paid in capital by $(174,304).
As of December 31, 2001, the components of distributable earnings on a tax
basis (excluding unrealized appreciation/(depreciation) which is disclosed in
the schedule of investments) were as follows:
Undistributed Ordinary Income........ $0
Undistributed Long-term Capital Gains $0
Capital Loss Carryovers.............. $38,468,937 expiring 2009
Capital loss carryovers may be used to offset future capital gains. The
differences between the book basis and tax basis components of distributable
earnings relate principally to the timing of recognition of income and gains
and distributions for federal income tax purposes. Short-term gain
distributions reported in the statement of changes in net assets are reported
as ordinary income for federal tax purposes.
NOTE 3 -- Portfolio Transactions
During the year ended December 31, 2001, purchases and sales of investments,
excluding short-term investments were:
Common
Stocks
------------
Purchases. $402,392,038
============
Sales..... $416,283,813
============
13
NOTE 4 -- Investment Advisory Fees and Other Transactions with Affiliates
a) Investment Advisory Fee: The Investment Advisory Agreement (the
"Agreement") between Phoenix/Zweig Advisers LLC (the "Adviser"), the Fund's
investment adviser, and the Fund provides that, subject to the direction of the
Board of Directors of the Fund and the applicable provisions of the Act, the
Adviser is responsible for the actual management of the Fund's portfolio.
Phoenix/Zweig Advisers LLC is a wholly-owned subsidiary of Phoenix Investment
Partners, Ltd. ("PXP"). PXP is an indirect, wholly-owned subsidiary of The
Phoenix Companies, Inc. ("PNX"). The responsibility for making decisions to
buy, sell or hold a particular investment rests with the Adviser, subject to
review by the Board of Directors and the applicable provisions of the Act. For
the services provided by the Adviser under the Agreement, the Fund pays the
Adviser a monthly fee equal, on an annual basis, to 0.85% of the Fund's average
daily net assets. During the year ended December 31, 2001, the Fund accrued
advisory fees of $4,448,708.
b) Administration Fee: Phoenix Equity Planning Corporation ("PEPCO"), an
indirect wholly-owned subsidiary of PNX, serves as the Fund's Administrator
(the "Administrator") pursuant to an Administration Agreement with the Fund.
The Administrator generally assists in all aspects of the Fund's operations,
other than providing investment advice, subject to the overall authority of the
Fund's Board of Directors. The Administrator determines the Fund's net asset
value daily, prepares such figures for publication on a weekly basis, maintains
certain of the Fund's books and records that are not maintained by the Adviser,
custodian or transfer agent, assists in the preparation of financial
information for the Fund's income tax returns, proxy statements, quarterly and
annual shareholder reports, and responds to shareholder inquiries. Under the
terms of the Agreement, the Fund pays the Administrator a monthly fee equal, on
an annual basis, to 0.13% of the Fund's average daily net assets. During the
year ended December 31, 2001, the Fund accrued administration fees of $680,390.
c) Directors' Fee: The Fund pays each Director who is not an interested
person of the Fund or the Adviser a fee of $10,000 per year plus $1,500 per
Directors' or committee meeting attended, together with the out-of-pocket costs
relating to attendance at such meetings. Any Director of the Fund who is an
interested person of the Fund or the Adviser receives no remuneration from the
Fund.
d) Brokerage Commission: During the year ended December 31, 2001, the Fund
paid PXP Securities Corp., a wholly-owned subsidiary of PXP, brokerage
commissions of $89,430 in connection with portfolio transactions effected
through them. In addition, PXP Securities Corp. charged $45,036 in commissions
for transactions effected on behalf of the participants in the Fund's Automatic
Reinvestment and Cash Purchase Plan.
NOTE 5 -- Capital Stock and Reinvestment Plan
At December 31, 2001, the Fund had one class of common stock, par value $.10
per share, of which 100,000,000 shares are authorized and 61,445,846 shares are
outstanding.
Registered shareholders may elect to receive all distributions in cash paid
by check mailed directly to the shareholder by EquiServe as dividend paying
agent. Pursuant to the Automatic Reinvestment and Cash Purchase Plan (the
"Plan") shareholders not making such election will have all such amounts
automatically reinvested by EquiServe, as the Plan agent, in whole or
fractional shares of the Fund, as the case may be. For the year ended December
31, 2001 there were 1,310,223 shares issued pursuant to the Plan. There were no
shares issued for the year ended December 31, 2000.
14
On December 17, 2001, the Board of Directors declared a distribution of the
greater of 2.5% of its net value on December 31, 2001 or all available net
investment income plus net short and long term gains.
On January 2, 2002, the Fund announced a distribution of $0.195 per share to
shareholders of record on December 31, 2001. This distribution has an
ex-dividend date of January 3, 2002 and is payable on January 10, 2002.
NOTE 6 -- Financial Highlights
Selected data for a share outstanding throughout each year:
Year Ended December 31
--------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Per Share Data
Net asset value, beginning of year......................... $ 10.32 $ 12.20 $ 12.03 $ 12.63 $ 11.45
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income...................................... -- 0.20 0.20 0.23 0.35
Net realized and unrealized gains (losses)................. (1.47) (0.90) 1.16 0.55 2.03
-------- -------- -------- -------- --------
Total from investment operations........................... (1.47) (0.70) 1.36 0.78 2.38
-------- -------- -------- -------- --------
Dividends and Distributions
Dividends from net investment income....................... (0.01) (0.21) (0.19) (0.35) (0.31)
Distributions from net realized gains...................... (0.07) (0.97) (1.00) (0.87) (0.89)
Tax return of capital...................................... (0.81) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions.......................... (0.89) (1.18) (1.19) (1.22) (1.20)
-------- -------- -------- -------- --------
Effect on net asset value as a result of rights offering*.. -- -- -- (0.16) --
-------- -------- -------- -------- --------
Net asset value, end of year............................ $ 7.96 $ 10.32 $ 12.20 $ 12.03 $ 12.63
======== ======== ======== ======== ========
Market value, end of year**............................. $ 7.90 $ 9.81 $ 10.06 $ 10.81 $ 13.25
======== ======== ======== ======== ========
Total investment return***................................. (11.27)% 9.45% 3.61% (8.68)% 34.76%
======== ======== ======== ======== ========
Ratios/Supplemental Data
Net assets, end of period (in thousands)................... $489,261 $620,354 $733,523 $723,521 $666,366
Ratio of expenses to average net assets.................... 1.19% 1.12% 1.12% 1.12% 1.16%
Ratio of net investment income (loss) to average net assets (0.03)% 1.74% 1.68% 1.90% 2.88%
Portfolio turnover rate.................................... 80.3% 114.8% 114.9% 68.7% 93.0%
--------
* Shares were sold at a 5% discount from the average market price.
** Closing Price -- New York Stock Exchange.
*** Total investment return is calculated assuming a purchase of common
stock on the opening of the first business day and a sale on the closing
of the last business day of each period reported. Dividends and
distributions, if any, are assumed for the purposes of this calculation,
to be reinvested at prices obtained under the Fund's Automatic
Reinvestment and Cash Purchase Plan. Generally, total investment return
based on net asset value will be higher than total investment return
based on market value in periods where there is an increase in the
discount or a decrease in the premium of the market value to the net
assets from the beginning to the end of such years. Conversely, total
investment return based on net asset value will be lower than total
investment return based on market value in periods where there is a
decrease in the discount or an increase in the premium of the market
value to the net asset value from the beginning to end of such periods.
15
Report of Independent Accountants
To the Board of Directors and Shareholders of The Zweig Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of The Zweig Fund, Inc. (the
"Fund") at December 31, 2001, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at December 31, 2001 by correspondence with the custodian,
provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 13, 2002
16
FUND MANAGEMENT
Information pertaining to the Directors and officers of the Fund is set
forth below. The address of each individual, unless otherwise noted, is c/o
Phoenix/Zweig Advisers LLC, 900 Third Avenue, New York, NY 10022.
Number of
Term of Portfolios
Office and in Fund
Length of Complex
Name, (Age), Address Time Overseen Principal Occupation(s)
and Position(s) with Fund Served by Director During Past 5 Years and Other Directorships Held
------------------------- ----------- ----------- ------------------------------------------------------------------
DISINTERESTED DIRECTORS
Charles H. Brunie (71).... Term: Until 2 Chairman, Brunie Associates (investments) since April 2001;
Brunie Associates 2003. Chairman, Oppenheimer Capital (1969-2000); Chairman Emeritus,
600 Third Avenue, Served Board of Trustees, Manhattan Institute (since 1990); Trustee,
17th Floor since: Milton and Rose D. Friedman Foundation for Vouchers (since
New York, NY 10016 1988. 1999).
Director
Elliot S. Jaffe (75)...... Term: Until 2 Chairman and Chief Executive Officer of The Dress Barn, Inc.
30 Dunnigan Drive 2002. since 1963. Director, National Retail Federation (since 1994);
Suffern, NY 10901 Served Stamford Hospital Foundation (since 1997). Member, Board of
since: Overseers of The School of Arts and Sciences, University of
Director 1988. Pennsylvania (since 1998); Trustee, Teachers College, Columbia
University (since 1996). Director of Citigroup Funds (since 1990).
Wendy Luscombe (50)....... Term: Until 2 Principal, WLK Associates, Inc. (investment management) (since
c/o Phoenix/Zweig Advisers 2002. 1994). Fellow, Royal Institution of Chartered Surveyors. Member,
LLC Served Chartered Institute of Arbitrators. Director, Amadeus Vision
900 Third Avenue since: Capital, plc (since 1999). Director, Endeavour Real Estate
New York, NY 10022 2001. Securities, Ltd. (since 2000). Director, PXRE Corp. (reinsurance)
(since 1994).
Director
Alden C. Olson (73)....... Term: Until 2 Currently retired. Chartered Financial Analyst (since 1964).
2711 Ramparte Path 2004. Professor of Financial Management, Investments at Michigan
Holt, MI 48842 Served State University (1959 to 1990).
since:
Director 1996.
James B. Rogers, Jr. (59). Term: Until 2 Private investor (since 1980). Chairman, Beeland Interests (Media
352 Riverside Drive 2003. and Investments) (since 1980). Regular Commentator on CNBC
New York, NY 10025 Served (1998). Author of "Investment Biker: On the Road with Jim
since: Rogers" (1994). Visiting Professor, Columbia University (1998).
Director 1986. Columnist, WORTH Magazine (since 1995). Director, Emerging
Markets Brewery Fund (since 1993). Director, Levco Series Trust
2 portfolios (since 1996).
17
Number of
Term of Portfolios
Office and in Fund
Length of Complex
Name, (Age), Address Time Overseen Principal Occupation(s)
and Position(s) with Fund Served by Director During Past 5 Years and Other Directorships Held
------------------------- ------------ ----------- -----------------------------------------------------------------
INTERESTED DIRECTOR
Martin E. Zweig (59)........ Term: Until 9 President, Zweig Consulting LLC (investment management)
Chairman and President 2004. (since 1999). President, Phoenix-Zweig Trust (since 1986) and
Served Phoenix-Euclid Funds (since 1998). Managing Director, Zweig-
since: 1986. DiMenna Associates LLC (investment management) (since 1995).
President, Zweig-DiMenna International Managers, Inc., Zweig-
DiMenna Associates, Inc. and Gotham Advisors, Inc. Shareholder,
Watermark Securities, Inc. Director and President, Zweig Total
Return Advisors, Inc. and Zweig Advisors Inc. (until 1999).
Chairman, Zweig/Glaser Advisers and Euclid Advisors LLC (until
1999). Member, Under-graduate Executive board of The Wharton
School, University of Pennsylvania. Trustee, Manhattan Institute.
OFFICERS WHO ARE NOT DIRECTORS
Jeffrey Lazar (42).......... Served Vice President, Phoenix/Zweig Advisers LLC (since 1999).
Executive Vice President and since 1988. Director and Vice President, The Zweig Fund, Inc. (until 1999);
Treasurer Vice President and Treasurer, The Zweig Advisors, Inc. (until
1999).
Christopher M. Capano (34).. Served Investment Professional, Phoenix/Zweig Advisers LLC (since
Vice President since: 1996. 1994).
Nancy J. Engberg (45)....... Served Vice President and Counsel, Phoenix Investment Partners, Ltd.
56 Prospect Street since: 1999. since 1999. Counsel, Phoenix Home Life Mutual Insurance
Hartford, CT 06115 Company. (1994 to 1999).
Secretary
18
THE ZWEIG FUND, INC.
YEAR END RESULTS
Total Return
on Net Asset Net Asset NYSE Premium
Value Value Share Price (Discount)
------------ --------- ----------- ----------
Year ended 12/31/2001..... (15.0%) $ 7.96 $ 7.9000 (0.8%)
Year ended 12/31/2000..... (5.1%) 10.32 9.8125 (4.9%)
Year ended 12/31/1999..... 12.9% 12.20 10.0625 (17.5%)
Year ended 12/31/1998..... 6.6% 12.03 10.8125 (10.1%)
Year ended 12/31/1997..... 22.0% 12.63 13.2500 4.9%
Year ended 12/31/1996..... 14.5% 11.45 10.8750 (5.0%)
Year ended 12/31/1995..... 18.3% 11.06 11.2500 1.7%
Year ended 12/31/1994..... (2.7%) 10.33 10.3750 0.4%
Year ended 12/31/1993..... 13.3% 11.68 13.7500 17.7%
Year ended 12/31/1992..... 0.4% 11.36 13.0000 14.4%
Year ended 12/31/1991..... 30.1% 12.40 13.7500 10.9%
Year ended 12/31/1990..... 1.9% 10.48 11.0000 5.0%
Year ended 12/31/1989..... 22.3% 11.43 12.3750 8.3%
Year ended 12/31/1988..... 17.9% 10.35 10.3750 0.2%
Year ended 12/31/1987..... 14.7% 9.73 9.0000 (7.5%)
Inception 10/2/86-12/31/86 (0.4%) 9.31 9.1250 (2.0%)
--------------------------------------------------------------------------------
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.
19
OFFICERS AND DIRECTORS
Martin E. Zweig, Ph.D.
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.
P.O. Box 43010
Providence, RI 02940-3010
Legal Counsel
Rosenman & Colin LLP
575 Madison Avenue
New York, NY 10022
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
--------------------------------------------------------------------------------
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 1337
4902-ANN 12/01
[GRAPHIC] Annual Report
[LOGO] Zweig
The Zweig Fund, Inc.
December 31, 2001
[LOGO] PHOENIX INVESTMENT PARTNERS
A member of The Phoenix Companies, Inc.