January 25, 2001
[PHOTO OF MARTIN E. ZWEIG, Ph.D]
Dear Shareholder:
The net asset value for The Zweig Fund, Inc. declined 5.1% for the year
ended December 31, 2000, including $1.18 in reinvested distributions. During
the same period, the Standard & Poor's 500 index dropped 9.2%, with dividends
reinvested.
In the fourth quarter of 2000 the net asset value of the Fund, including re-
invested distributions, decreased 6.5%. During the same period, the S&P 500
Index fell 7.8%, including dividends.
Keeping our portfolio consistent with our risk-averse style, the Fund's av-
erage equity exposure for 2000 was approximately 66%.
We did better than the market last year, which was fine, but we lost money,
which is not fine. By being only two-thirds invested, we didn't go down as
much as the market. That's what we are supposed to do in a declining market.
Although we beat the market in the fourth quarter as well, we got nicked a bit
because I became more bullish. The market still wasn't acting too well, but I
kept increasing our exposure from 79% on September 30 to 90% at the year-end.
I hope this move will pay off in the current year.
For the 14 full years of operations, the Fund showed a total return on net
asset value of 358.6% (11.5% on a compounded annualized basis), including
reinvested distri-butions. Our average equity exposure for the 14 years was 60%.
If a shareholder had invested $10,000 (1,000 shares) at the Fund's Initial
Public Offering in October, 1986, these holdings, including distributions re-
invested, would have appreciated to $40,594 (4,137 shares) as of December 31,
2000.
DISTRIBUTION DECLARED
On January 2, 2001 the Fund announced a distribution of $0.27 payable on
January 10, 2001 to shareholders of record on December 29, 2000. Including the
fourth-quarter payout, our total distribution to shareholders for tax purposes
in 2000 was $1.15. This brings our total payout since the Fund's inception to
$16.11.
Of the $1.15 taxable in 2000, $0.29 is ordinary income and $0.86 is capital
gains.
MARKET OUTLOOK
Last year was a dismal affair for the markets. The Nasdaq Composite/1/
plunged 39.3%, its worst year since its creation in 1971. The Dow Jones Indus-
trial Average/2/ fell 4.7%, its poorest calendar year since 1981. The S&P 500
Index/3/ lost 9.2%, its weakest showing since 1977. It sure was a difficult
year to make money.
There were lots of reasons for the market's bleak performance. For one
thing, the Federal Reserve was still tightening during the year. By mid year
they had done the sixth of several tightenings that began in 1999. And, as I
always say, "Don't fight the Fed."
--------
/1/ The Nasdaq Composite measures technology-oriented stock total-return per-
formance.
/2/ The Dow Jones Industrial Average measures large-capitalization stock to-
tal-return performance.
/3/ The S&P 500 Index measures broad stock market total-return performance.
The indices are unmanaged and not available for direct investment.
Second, there was a bubble in the Internet stocks, especially in the "dot-
com" companies. That bubble, which burst in March, had the effect of pulling
down the Nasdaq Composite for the rest of the year. Because many of the larger
Nasdaq stocks were also represented in the S&P 500, that helped to pull down
that group. Even the Dow did not escape totally because it contained some
technology stocks, such as Microsoft, Intel, IBM, and Hewlett-Packard that
also appear in the other indices.
I also think there was too much optimism early in the year, too much specu-
lation in the market, and too much margin debt. To make matters worse, in Oc-
tober there was a tremendous amount of mutual fund tax-selling. Many mutual
funds have fiscal years that end October 31 for excise tax purposes. When they
finally let up in November and December, it was the public's turn to sell for
tax reasons. This tax-selling continued right up to the end of the year and it
was something the markets could not overcome. Then there were the enormous
number of margin calls in the final months of the year that kept putting more
pressure on the markets, especially the Nasdaq.
The Fed's unexpected half-point cut in the Federal funds rate on January 3,
2001 sparked a sensational one-day rally, but the market quickly fizzled and
gave up most of its gains. The market was surprised because the Fed cut rates
between meetings. The Fed was scheduled to meet at the end of January, and
many people thought the Fed might wait until then to act. The Fed had already
signaled a downward bias in December. But even those who thought the Fed might
cut earlier did not think it would happen so soon. Also, it was a 50-basis-
point reduction, not 25, as many had anticipated. That was more of a shock.
It was a terrific day. The Nasdaq Composite was down 1.7% that morning and
closed up 14.2%, about a 16% inter-day swing and the biggest up day percent-
age-wise in the history of the Nasdaq. There was a record volume on the ex-
changes. Part of the reason the market lost back a lot of ground is that such
a buying panic takes out everybody who wants to buy, and there are no bids
left under the market. Eventually prices came down but the lows held, at least
as of this writing, and the markets have been rallying again recently.
For the long term, it is bullish for the markets when the Fed changes course
and cuts sharply. Initial cuts by the Fed are pretty potent. Going back to
1950, the Dow Jones Industrial Average has gone up 11% in the following six
months and 19.8% in the year. That's far higher than the average gains the
market achieved over such periods.
I think we need more Fed cuts to get the next bull market rolling. We al-
ready have excessive pessimism. A lot of people are sold out and there is a
fair amount of cash on the sidelines. That's the liquidity we need to get the
bull market going. It would also be helpful if inflation behaved. If inflation
starts to creep up, there would be no more Fed cuts. The Fed is the catalyst,
and I think we will see at least a few more cuts. A tax reduction could also
help. There's a good chance we will get some tax relief, but I have no idea
what form it will take and when Congress will get around to it.
In the recent long bull market we saw investors rushing to buy on the dips,
which helped the markets bounce back. There are still a number of people who
buy on dips--the day-traders, for example. However, they have been overwhelmed
by the sellers. The amounts of buying and selling are always equal. But the
pressure that comes from one side is not so equal. The markets went down last
year for many reasons that included worries about the economy and earnings.
Companies have reported poor earnings and the market couldn't withstand that.
I suspect that much of that has been discounted, and the market will begin to
overlook weaker earnings provided the Fed keeps cutting.
At this time of year you keep reading about the so-called January effect
when small-cap
2
stocks outperform big caps. This tends to be true because small caps are gen-
erally dominated by the public. As I mentioned previously, the public does a
lot of tax-selling late in the year, and these stocks frequently get tax
bounces. That knowledge doesn't do you much good if you are managing a big
portfolio--all you can do is try to make a quick trade in small-cap stocks.
Incidentally, some people believe January is a bellwether month that is pre-
dictive of the market's behavior over the rest of the year. The record doesn't
bear that out; it is just another stock market myth.
The S&P 500 is currently trading at about 24 times the companies' per share
earningscompared to an average of 16 since 1970. What's happened is that in
recent years many rapidly growing technology and biotech stocks with no earn-
ings or very low earnings were added to the listing. They have high price-
/earnings ratios and have boosted the average ranking. But the median P/E ra-
tio is a lot lower. There may be some stocks that are overvalued, but there
are any number in the S&P that have normal or even below normal P/Es. It is
the handful of the tech stocks that have distorted the true picture.
Many economists warn that the risk of recession is high this year because
consumer spending and business investments are down, with the rising interest
rates and higher energy costs. Others say we are in a normal cyclical slow-
down. I think it could go either way. There are two reasons why we might be
facing a recession. One is that the purchasing managers' index dropped under
44. The last nine times that happened we had eight recessions plus a near miss
in 1966 and 1977 when we had one down quarter. The other is that the four-week
average of initial unemployment claims has risen by more than 100,000. The five
times that happened, we had recessions.
The flip side is that the sudden downturn late in the year was exacerbated
by people absorbed with the election count. They were not very comfortable
waiting for the final results. They were watching television and not shopping.
Secondly, we had a very cold winter coupled with high energy prices that
slowed the economy. Thirdly, I believe the consumer is liquid even though many
say the consumer is tapped out. If you look at installment debt relative to
liquid assets, such as cash equivalents and savings, the consumer still holds
a lot of money.
Our economy is very broadly diversified, much more so than it was years ago.
It is much more service-oriented and it will be harder to get a recession go-
ing. We are definitely in some sort of slowdown, but I don't know whether it
will turn into a recession. I do believe that if the Fed keeps cutting, it
would truncate a recession or perhaps head one off before it fully develops.
Because the economy is slowing, dividends in the S&P 500 slipped 2.5% last
year from the 1999 level. It was the first dip since 1991 and the largest de-
cline since 1951. Including 2000, dividends have fallen in only six post-war
years. With earnings eroding in late 2000 and early 2001, some companies have
gotten into trouble and have had to pare their payouts. Others prefer to buy
back their own stock rather than pay dividends. However, history has shown
that when dividends are cut, it is not necessarily a bad time to buy stocks.
The Initial Public Offering market, which seems to have returned to earth,
was dominated early last year by technology and telecommunications. It now
features new issues in health care, energy, and more traditional businesses.
Wall Street will sell whatever it can sell. If energy or some value stock
sells, they will offer it. I don't think anyone will come out with a "dot-com"
stock and do well. The implications are that we are going to see a change in
industry groups, a rotation. Since the stocks offered now might not be as
sought after as those selling like hotcakes a year or so back, there may be
fewer new issues. If that's true, it will be bullish for the market. We were
choking on a heavy supply of new issues early last year, and it didn't help
the
3
market at all. If you can keep down that supply, it drains less money out of
the market. I would like to see the new-issue market cool for a while.
Mergers and acquisitions started strong in 2000 but slowed considerably dur-
ing the year. As far as the market is concerned, mergers where stock is ex-
changed for stock have no impact because cash is not going in or out of the
market. Cash takeovers are another matter. They reduce the supply of stock,
which is very bullish for the market. There is no way to predict whether there
will be more cash takeovers or not, but I would like to see more of them.
Corporate profits for the first half of this year are expected to show their
first decline since 1998, but this is not necessarily a negative for the mar-
ket. The best market returns frequently occur in the middle of recessions. For
example, earnings were down and the market soared in the recession periods of
late 1970 and early 1971, late 1974 and the first half of 1975, the spring of
1980, 1982, most of 1991, and the latter part of 1998. Surprisingly, the mar-
ket tends to do better when earnings are poor.
Summing up, the chief market positive is that the Fed has finally gotten
friendly to the markets. Second, tremendous pessimism has been built up on the
sidelines, and that's a big plus. I would like to see the Fed cut at the mini-
mum one more time. There are not too many negatives out there. I would not
worry too much about sagging earnings or a soft economy as long as the Fed
does the right thing and keeps cutting.
In view of the above and my favorable indicators, I am reasonably bullish
right now. We are at about 92% invested at this writing and may even go a bit
higher if conditions warrant.
PORTFOLIO COMPOSITION
Although there were minor revisions in the percentages held, our leading in-
dustry groups at the year-end were unchanged from the listing as of September
30. They included technology, financial services, health care, energy and
telecommunications.
Among the various groups, technology was lower because of declining market
value, while financial services and health care, where we added to our posi-
tions, showed relatively good market performance. Energy and telecommunica-
tions were basically unchanged from the previous quarter.
As of December 31, 2000, our leading individual issues included General
Electric, Pfizer, Exxon Mobil, Merck, Citigroup, Wal-Mart, American Interna-
tional Group, Tyco, Cisco, and Bristol Myers.
New to the above group are Merck, Wal-Mart, and Bristol Myers, each of which
benefited from increased purchases and good performance relative to the over-
all market during the quarter.
Of the stocks listed among our leading holdings on September 30, 2000, Sun
Microsystems, EMC, and Microsoft declined in value.
Sincerely,
/s/ Martin E. Zweig, Ph.D.
Martin E. Zweig, Ph.D.
Chairman
4
THE ZWEIG FUND, INC.
SCHEDULE OF INVESTMENTS
December 31, 2000
Number of Value
Shares (Note 3)
--------- ------------
Common Stocks 85.57%
Aerospace & Air Transport 1.41%
AMR Corp............................................ 105,000 $ 4,114,687
Boeing Co........................................... 69,900 4,613,400
------------
8,728,087
------------
Building & Forest Products 0.61%
Cemex S.A. de CV, ADR............................... 70,000 1,264,375
Georgia-Pacific Group............................... 70,000 2,178,750
Louisiana-Pacific Corp.............................. 35,000 354,375
------------
3,797,500
------------
Chemicals 1.08%
Air Products & Chemicals, Inc....................... 70,000 2,870,000
Dow Chemical Co..................................... 105,000 3,845,625
------------
6,715,625
------------
Commercial Services 0.58%
Modis Professional Services, Inc.................... 174,900(a) 721,462
Omnicom Group, Inc.................................. 35,000 2,900,625
------------
3,622,087
------------
Consumer Products 3.07%
Coca-Cola Co........................................ 105,000 6,398,437
Kimberly-Clark Corp................................. 105,000 7,422,450
PepsiCo, Inc........................................ 105,000 5,204,062
------------
19,024,949
------------
Electronics -- Electrical 3.70%
Emerson Electric Co................................. 52,500 4,137,656
General Electric Co................................. 343,000 16,442,562
Solectron Corp...................................... 70,000(a) 2,373,000
------------
22,953,218
------------
Engineering & Machinery 1.01%
Ingersoll-Rand Co................................... 105,000 4,396,875
SPX Corp............................................ 17,500 1,893,281
------------
6,290,156
------------
See notes to financial statements
5
Number of Value
Shares (Note 3)
--------- ------------
Financial Services 14.08%
ACE Ltd............................................. 104,900 $ 4,451,694
Allstate Corp....................................... 141,800 6,177,162
American Express Co................................. 105,000 5,768,437
American International Group, Inc................... 105,000 10,349,062
Bank of America Corp................................ 105,000 4,816,875
Chase Manhattan Corp................................ 147,050 6,681,584
Citigroup, Inc...................................... 210,000 10,723,125
Fannie Mae.......................................... 35,000 3,036,250
Freddie Mac......................................... 115,500 7,955,062
Household International, Inc........................ 70,000 3,850,000
KeyCorp............................................. 70,000 1,960,000
Knight Trading Group, Inc........................... 105,000(a) 1,463,437
Lehman Brothers Holdings, Inc....................... 70,000 4,733,750
Marsh & McLennan Cos., Inc.......................... 35,000 4,095,000
Merrill Lynch & Co., Inc............................ 70,000 4,773,125
Washington Mutual, Inc.............................. 122,500 6,500,156
------------
87,334,719
------------
Health Care 11.30%
Amgen, Inc.......................................... 80,400(a) 5,140,575
Bristol-Myers Squibb Co............................. 132,800 9,818,900
Cardinal Health, Inc................................ 17,500 1,743,437
Eli Lilly & Co...................................... 52,500 4,885,781
Johnson & Johnson................................... 77,000 8,089,812
MedImmune, Inc...................................... 52,300(a) 2,494,056
Merck & Co., Inc.................................... 119,000 11,141,375
Pfizer, Inc......................................... 293,900 13,519,400
Schering-Plough Corp................................ 87,500 4,965,625
St. Jude Medical, Inc............................... 70,000 4,300,625
Wellpoint Health Networks, Inc...................... 35,000(a) 4,033,750
------------
70,133,336
------------
Investment Companies 3.83%
Asia Tigers Fund, Inc............................... 70,000 468,125
Emerging Markets Telecommunications Fund, Inc....... 54,074 439,351
Gabelli Global Multimedia Trust, Inc................ 105,000 1,082,812
INVESCO Global Health Sciences Fund, Inc............ 71,700 1,250,269
iShares S&P 500 Index Fund.......................... 140,000 18,390,312
Korea Fund, Inc..................................... 105,000 1,108,800
Morgan Stanley Dean Witter Emerging Markets Fund,
Inc................................................ 119,600 1,046,500
------------
23,786,169
------------
See notes to financial statements
6
Number of Value
Shares (Note 3)
--------- ------------
Manufacturing 1.66%
Tyco International Ltd.............................. 185,500 $ 10,295,250
------------
Media 4.13%
Comcast Corp., Class A.............................. 142,200(a) 5,936,850
Grupo Televisa S.A., GDR............................ 70,000(a) 3,145,625
McGraw-Hill Cos., Inc. ............................. 52,500 3,077,812
New York Times Co., Class A......................... 71,800 2,876,488
News Corp. Ltd., ADR................................ 70,000 2,257,500
Viacom, Inc., Class B............................... 69,800(a) 3,263,150
Walt Disney Co. .................................... 175,000 5,064,063
------------
25,621,488
------------
Metals 0.57%
Alcoa, Inc. ........................................ 105,000 3,517,500
------------
Oil & Oil Services 7.40%
AES Corp. .......................................... 70,000(a) 3,876,250
Baker Hughes, Inc. ................................. 87,500 3,636,719
Chevron Corp. ...................................... 77,000 6,501,688
Enron Corp. ........................................ 104,900 8,719,813
EOG Resources, Inc.................................. 69,900 3,822,656
Exxon Mobil Corp. .................................. 129,400 11,249,713
Talisman Energy, Inc................................ 70,000(a) 2,594,375
USX-Marathon Group.................................. 122,500 3,399,375
Williams Cos., Inc.................................. 52,400 2,092,725
------------
45,893,314
------------
Restaurants 0.30%
Wendy's International, Inc.......................... 70,000 1,837,500
------------
Retailing 6.06%
Best Buy Co, Inc.................................... 70,000(a) 2,069,375
CVS Corp. .......................................... 70,000 4,195,625
Home Depot, Inc..................................... 140,200 6,405,388
Kroger Co........................................... 140,000 3,788,750
Lowe's Cos., Inc. .................................. 52,500 2,336,250
Target Corp. ....................................... 91,000 2,934,750
Wal-Mart Stores, Inc................................ 201,700 10,715,313
Walgreen Co......................................... 122,500 5,122,031
------------
37,567,482
------------
See notes to financial statements
7
Number of Value
Shares (Note 3)
--------- ------------
Technology 13.94%
America Online, Inc................................. 140,000(a) $ 4,872,000
Applied Materials, Inc.............................. 70,300(a) 2,684,581
Atmel Corp.......................................... 70,000(a) 813,750
Cisco Systems, Inc.................................. 262,800(a) 10,052,100
Citrix Systems, Inc................................. 35,000(a) 787,500
Compaq Computer Corp................................ 140,000 2,107,000
Corning, Inc........................................ 35,000 1,848,438
Cypress Semiconductor Corp.......................... 70,000(a) 1,378,125
Dell Computer Corp.................................. 106,000(a) 1,848,375
Electronic Data Systems Corp........................ 70,000 4,042,500
EMC Corp............................................ 111,500(a) 7,414,750
Intel Corp. ........................................ 281,800 8,471,613
Jabil Circuit, Inc.................................. 52,400(a) 1,329,650
JDS Uniphase Corp................................... 35,000(a) 1,459,063
Lucent Technologies, Inc............................ 140,200 1,892,700
Microchip Technology, Inc........................... 52,500(a) 1,151,719
Microsoft Corp...................................... 204,500(a) 8,870,188
Motorola, Inc....................................... 83,800 1,696,950
Network Appliance, Inc.............................. 35,000(a) 2,246,563
Oracle Corp......................................... 262,300(a) 7,623,094
QUALCOMM, Inc....................................... 70,000(a) 5,753,125
Sun Microsystems, Inc............................... 210,000(a) 5,853,750
Teradyne, Inc....................................... 35,000(a) 1,303,750
USinternetworking, Inc.............................. 70,050(a) 350,250
Yahoo!, Inc......................................... 21,200(a) 637,325
------------
86,488,859
------------
Telecommunications 8.05%
ADC Telecommunications, Inc......................... 105,000(a) 1,903,125
AT&T Corp........................................... 105,000 1,817,813
AT&T Wireless Group................................. 70,300(a) 1,217,069
BellSouth Corp...................................... 105,000 4,298,438
CenturyTel, Inc..................................... 104,900 3,750,175
General Motors Corp., Class H....................... 140,000 3,220,000
Nokia Corp., ADR.................................... 124,700 5,424,450
Nortel Networks Corp................................ 119,000 3,815,438
SBC Communications, Inc............................. 122,500 5,849,375
Tele Norte Leste Participacoes S.A., ADR............ 107,000 2,440,938
Telephone & Data Systems, Inc....................... 52,500 4,725,000
Tellabs, Inc........................................ 70,000(a) 3,955,000
Verizon Communications, Inc......................... 105,000 5,263,125
WorldCom, Inc....................................... 161,050(a) 2,264,766
------------
49,944,712
------------
See notes to financial statements
8
Number of Value
Shares (Note 3)
----------- ------------
Textile & Apparel Manufacturer 0.79%
NIKE, Inc., Class B................................ 87,500 $ 4,883,594
------------
Utilities -- Electric & Gas 2.00%
Exelon Corp........................................ 105,000 7,372,050
FPL Group, Inc..................................... 70,000 5,022,500
------------
12,394,550
------------
Total Common Stocks
(Cost $544,970,319)......................................... 530,830,095
------------
Unit Investment Trusts 4.44%
S&P 500 Depositary Receipts (Cost $27,076,971)..... 210,000 27,549,375
------------
Principal
Amount
-----------
Short-Term Investments 11.44%
Ford Motor Credit Co., 6.53%, 1/04/01.............. $20,000,000 19,989,117
General Electric Capital Corp., 6.55%, 1/04/01..... 25,000,000 24,986,354
UBS Financial Corp., 6.50%, 1/02/01................ 1,000,000 999,819
USA Education, Inc., 6.60%, 1/05/01................ 25,000,000 24,981,667
------------
Total Short-Term Investments (Cost $70,956,957).............. 70,956,957
------------
Total Investments (Cost $643,004,247) -- 101.45%............. 629,336,427
Liabilities in excess of other assets -- (1.45%)............. (8,982,199)
------------
Net Assets -- 100.00%........................................ $620,354,228
============
--------
(a) Non-income producing security.
For Federal income tax purposes, the tax basis of investments owned at
December 31, 2000 was $644,019,594 and net unrealized depreciation of
investments consisted of:
Gross unrealized appreciation................................. $ 58,046,300
Gross unrealized depreciation................................. (72,729,467)
------------
Net unrealized depreciation................................... $(14,683,167)
============
See notes to financial statements
9
THE ZWEIG FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2000
ASSETS
Investments, at value (identified cost $643,004,247)............ $629,336,427
Cash............................................................ 452,428
Dividends receivable............................................ 590,352
Prepaid expenses................................................ 14,013
------------
Total Assets.................................................. 630,393,220
------------
LIABILITIES
Payable for investment securities purchased..................... 9,290,904
Accrued advisory fees (Note 5).................................. 445,849
Accrued administration fees (Note 5)............................ 68,189
Other accrued expenses.......................................... 234,050
------------
Total Liabilities............................................. 10,038,992
------------
NET ASSETS........................................................ $620,354,228
============
NET ASSET VALUE, PER SHARE
($620,354,228/60,135,623 shares outstanding -- Note 6).......... $ 10.32
============
Net Assets consist of
Capital paid-in................................................. $618,322,982
Undistributed net investment income............................. 477,795
Undistributed net realized gain on investments.................. 15,221,271
Net unrealized depreciation on investments...................... (13,667,820)
------------
$620,354,228
============
See notes to financial statements
10
THE ZWEIG FUND, INC.
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2000
Investment Income
Income
Interest..................................................... $ 14,837,528
Dividends (net of foreign withholding taxes of $12,084)...... 4,050,522
-------------
Total Income............................................... 18,888,050
-------------
Expenses
Investment advisory fees (Note 5)............................ 5,774,100
Administrative fees (Note 5)................................. 883,098
Transfer agent fees.......................................... 384,596
Printing and postage expenses................................ 114,106
Custodian fees............................................... 90,326
Professional fees (Note 5)................................... 84,735
Directors' fees and expenses (Note 5)........................ 71,360
Miscellaneous................................................ 198,012
-------------
Total Expenses............................................. 7,600,333
-------------
Net Investment Income.................................... 11,287,717
-------------
Net Realized and Unrealized Gains (Losses)
Net realized gain on investments............................... 56,826,038
Decrease in unrealized appreciation on investments............. (110,322,012)
-------------
Net realized and unrealized loss on investments.............. (53,495,974)
-------------
Net decrease in net assets resulting from operations......... $ (42,208,257)
=============
See notes to financial statements
11
THE ZWEIG FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended
December 31
---------------------------
2000 1999
------------- ------------
Increase (Decrease) in Net Assets
Operations
Net investment income......................... $ 11,287,717 $ 11,938,706
Net realized gain on investments.............. 56,826,038 60,575,456
Increase (decrease) in unrealized appreciation
of investments............................... (110,322,012) 9,048,663
------------- ------------
Net increase (decrease) in net assets
resulting from operations.................. (42,208,257) 81,562,825
------------- ------------
Dividends and distributions to shareholders from
Net investment income......................... (11,287,717) (11,381,848)
Net realized gains on investments............. (58,346,061) (60,179,570)
Distribution in excess of net investment
income....................................... (1,326,274) --
------------- ------------
Total dividends and distributions to
shareholders............................... (70,960,052) (71,561,418)
------------- ------------
Net increase (decrease) in net assets......... (113,168,309) 10,001,407
Net Assets
Beginning of year............................... 733,522,537 723,521,130
------------- ------------
End of year (including undistributed net
investment income of $477,795 and $2,962,281,
respectively).................................. $ 620,354,228 $733,522,537
============= ============
See notes to financial statements
12
THE ZWEIG FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
NOTE 1 -- Acquisition
On March 1, 1999, Phoenix Investment Partners, Ltd. ("Phoenix"), completed
the acquisition of Zweig Advisors, Inc., the Fund's previous investment
adviser (currently Phoenix/Zweig Advisers LLC (the "Adviser")), Zweig/Glaser
Advisers the Fund's previous Administrator and Zweig Securities Corp.
(currently PXP Securities Corp.), an affiliated broker-dealer registered under
the Securities Exchange Act of 1934.
In order to continue to have access to the advisory and consulting services
of Dr. Martin E. Zweig and his associates, the Adviser entered into a sub-
advisory servicing agreement with Zweig Consulting, LLC.
As of October 31, 1999, Zweig/Glaser Advisers assigned the rights and
obligations under the Administration Agreement dated March 1, 1999, between
the Fund and Zweig/Glaser Advisers to Phoenix Equity Planning Corp. ("PEPCO")
under the same terms as the previous Administration Agreement. Effective
October 31, 1999, PEPCO sub-contracted the Fund's mutual fund accounting to
The Bank of New York who also serves as the Fund's custodian. PEPCO is an
affiliate of the Adviser and the Fund.
NOTE 2 -- 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 3 -- 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 principals
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. Securities 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
Investment Adviser. Debt securities may be valued on the basis of prices
provided by an independent pricing service, when such prices are believed by
the Investment 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
13
exchange. Securities for which market quotations are not readily available,
(of which there were none at December 31, 2000) 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.
In November 2000, a revised AICPA Audit and Accounting Guide, Audits of
Investment Companies, was issued, and is effective for fiscal years beginning
after December 15, 2000. The revised guide will require the Fund 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 will be
required to adjust the cost of its fixed-income 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 these accounting
principles will not affect the Fund's net asset value, but will change the
classification of certain amounts between interest income and unrealized
gain/loss in the Statement of Operations. The Fund expects that the impact of
the adoption of these principles will not be material to 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. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recorded as assets. During the period the futures contract is open, changes in
the value of the contract are recognized as unrealized gains or losses by
marking the contract to market on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets or liabilities, depending upon
whether unrealized gains or losses are incurred. When a futures contract is
closed, the Fund realizes a gain or loss equal to the difference between the
proceeds from (or cost of) the closing transaction and the Fund's basis in the
contract. There are several risks in connection with the use of futures
contracts as a hedging device. The change in value of futures contracts
primarily corresponds with the value of their underlying instruments, which
may not correlate with the change in value of the hedged investments.
Therefore, anticipated gains may not result and anticipated losses may not be
offset. In addition, as no secondary market exists for futures contracts,
there is no assurance that there will be an active market at any particular
time.
D. 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 incur a
loss, and if the price declines during the period, the Fund will realize a
gain. Any realized gain will be decreased, and any incurred loss increased, by
the amount of transaction costs. Dividends or interest the Fund pays
14
in connection with such short sales are recorded as expenses. In addition to
the short sales described above, the Fund may make short sales "against the
box". A short sale "against the box" is a short sale whereby at the time of
the short sale, the Fund owns or has the immediate and unconditional right, at
no added cost, to obtain the identical security.
E. Federal Income Tax
The Fund has elected to qualify and intends to remain qualified, as long as
management's view is that it is in the best interests of the shareholders, as
a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended. The principal tax benefits of qualifying as a
regulated investment company, as compared to an ordinary taxable corporation,
are that a regulated investment company is not itself subject to Federal
income tax on ordinary investment income and net capital gains that are
currently distributed (or deemed distributed) to its shareholders and that the
tax character of long-term capital gains recognized by a regulated investment
company flows through to its shareholders who receive distributions of such
gains.
F. Dividends and Distributions to Shareholders
Dividends and distributions to shareholders are recorded on the ex-dividend
date. In the event that amounts distributed are in excess of accumulated net
investment income and net realized gains on investments (as determined for
financial statement purposes), such amounts would be reported as a
distribution from paid-in capital during the fiscal year in which such a
distribution is made. Income dividends and capital gain distributions are
determined in accordance with income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to timing differences and differing
characterization of distributions made by the Fund as a whole. During the year
ended December 31, 2000, the Fund reclassified ($1,158,212) and $1,281,606 to
undistributed net investment income and undistributed net realized gain on
investments, respectively, from capital paid-in.
NOTE 4 -- Portfolio Transactions
During the year ended December 31, 2000, purchases and sales of investments,
excluding short-term investments were:
Common
Stocks
------------
Purchases .................................................... $711,770,987
============
Sales ........................................................ $526,672,548
============
NOTE 5 -- Investment Advisory Fees and Other Transactions with Affiliates
a) Investment Advisory Fee: The Investment Advisory Agreement (the
"Agreement") between the 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. 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, 2000, the Fund accrued advisory
fees of $5,774,100.
15
b) Administration Fee: Phoenix Equity Planning Corp. serves as the Fund's
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 Investment 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, 2000, the Fund
accrued administration fees of $883,098.
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) Legal Fee: The Fund accrued legal fees of $16,715 during the year ended
December 31, 2000, for the services of Rosenman & Colin LLP, of which Robert
E. Smith, a former Director of the Fund, is counsel.
e) Brokerage Commission: During the year ended December 31, 2000, the Fund
paid PXP Securities Corp. brokerage commissions of $143,629 in connection with
portfolio transactions effected through them. In addition, PXP Securities
Corp. charged $111,706 in commissions for transactions effected on behalf of
the participants in the Fund's Automatic Reinvestment and Cash Purchase Plan.
NOTE 6 -- Capital Stock and Reinvestment Plan
At December 31, 2000, the Fund had one class of common stock, par value $.10
per share, of which 100,000,000 shares are authorized and 60,135,623 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 years ended
December 31, 2000 and December 31, 1999 there were no shares issued pursuant
to the Plan.
On December 11, 2000, the board of directors declared a distribution of the
greater of 2.5% of its net value on December 29, 2000 or all available net
investment income plus net short and long term gains.
On January 2, 2001, the Fund announced a distribution of $0.27 per share to
shareholders of record on December 29, 2000. This distribution has an ex-
dividend date of January 4, 2001 and is payable on January 10, 2001.
16
NOTE 7 -- Financial Highlights
Selected data for a share outstanding throughout each year:
Year Ended December 31
-------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Per Share Data
Net asset value, begining
of year................... $ 12.20 $ 12.03 $ 12.63 $ 11.45 $ 11.06
-------- -------- -------- -------- --------
Income From Investment
Operations
Net investment income...... 0.20 0.20 0.23 0.35 0.34
Net realized and unrealized
gains(losses)............. (0.90) 1.16 0.55 2.03 1.15
-------- -------- -------- -------- --------
Total from investment
operations................ (0.70) 1.36 0.78 2.38 1.49
-------- -------- -------- -------- --------
Dividends and Distributions
Dividends from net
investment income......... (0.21) (0.19) (0.35) (0.31) (0.30)
Distributions from net
realized gains............ (0.97) (1.00) (0.87) (0.89) (0.80)
-------- -------- -------- -------- --------
Total dividends and
distributions............. (1.18) (1.19) (1.22) (1.20) (1.10)
-------- -------- -------- -------- --------
Effect on net asset value
as a result of rights
offering*................. -- -- (0.16) -- --
-------- -------- -------- -------- --------
Net asset value, end of
year..................... $ 10.32 $ 12.20 $ 12.03 $ 12.63 $ 11.45
======== ======== ======== ======== ========
Market value, end of
year**................... $ 9.81 $ 10.06 $ 10.81 $ 13.25 $ 10.88
======== ======== ======== ======== ========
Total investment
return***................. 9.45% 3.61% (8.68)% 34.76% 6.92%
======== ======== ======== ======== ========
Ratios/Supplemental Data
Net assets, end of period
(in thousands)............ $620,354 $733,523 $723,521 $666,366 $589,081
Ratio of expenses to
average net assets........ 1.12% 1.12% 1.12% 1.16% 1.18%
Ratio of net investment
income to average net
assets.................... 1.74% 1.68% 1.90% 2.88% 3.12%
Portfolio turnover rate.... 114.8% 114.9% 68.7% 93.0% 137.2%
--------
* Shares were sold at a 5% discount from the average market price.
** Closing Price -- New York Stock Exchange.
*** Total investment return is calculated using market value 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
Distribution 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.
17
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, 2000, 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, 2000 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers llp
New York, New York
February 15, 2001
TAX INFORMATION NOTICE (UNAUDITED)
For the fiscal year ended December 31, 2000, the Fund distributed long-
term capital gain dividends in the amount of $51,919,743.
For federal income tax purposes, the percentage of the ordinary income
dividends paid by the Fund for the dividend received deduction for corporate
shareholders is 19.12%.
18
THE ZWEIG FUND, INC.
YEAR END RESULTS
Total Return
on Net Asset Net Asset NYSE Premium
Value Value Share Price (Discount)
------------ --------- ----------- ----------
Year ended 12/31/2000............. (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
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 Corp.
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
State Street Bank & Trust Co.
c/o EquiServe
PO Box 8040
Boston, MA 02266
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 in-
tended for use in the purchase of shares of the Fund or any securities men-
tioned in this report.
PXP 1337 4902-ANN 12/00
Annual Report
[LOGO OF ZWEIG]
The Zweig Fund, Inc.
December 31, 2000
[LOGO OF PHOENIX INVESTMENT PARTNERS]