May 1, 2001
[PHOTO]
Dear Shareholder:
The net asset value for The Zweig Fund, Inc. decreased 14.0% for the three
months ended March 31, 2001, including the $0.27 distribution paid on January
10, 2001. During the same period, the S&P 500 Index lost 11.9%, including
dividends. Diversified stock funds declined an average of 13.1% during the
quarter, according to Lipper Inc. Our Fund's equity exposure during the
quarter averaged 95%.
While I am disappointed by the Fund's performance, I believe that our
aggressive market posture will pay off in the long run. We increased our
equity exposure gradually to 97% following the Federal Reserve's surprise 50-
basis-point interest rate cut on January 3, 2001. Since then, there have been
three additional Fed cuts. As I always say, "Don't fight the Fed."
Historically, as I will point out in more detail later in this report, stocks
have enjoyed considerably above-average returns following significantly
reduced rates by the Fed. At the time of this writing, the Fund shows a
positive return of 8.0% since the start of the second quarter on April 1,
2001.
DISTRIBUTION DECLARED
On March 19, 2001, the Fund declared a distribution of $0.22 payable on
April 26, 2001 to shareholders of record on April 12, 2001. Including this
distribution, our total payout since the Fund's inception is now $16.33.
MARKET OUTLOOK
It was a brutal first quarter for the stock markets. The Nasdaq tumbled
25.5%, its worst first quarter ever. The Dow fell 8.4%, its worst first
quarter since 1978, and the S&P 500 dropped 11.9%, its worst quarter since the
third quarter of 1990.
What we witnessed in the quarter was the breaking of the speculative bubble
built up in technology and Internet stocks during the previous year or two.
The economy started to slow down in the third quarter of last year and
decelerated in the fourth quarter. Earnings totally "hit the wall." Analysts
were shocked by the magnitude of the earnings drop in the first quarter and
probably in the second as well. While the market rallied on the first Fed cut
on January 3, it chose to ignore the second cut on January 31 and suffered
severely over the next six or seven weeks. I think the market overdid it and
is now responding to subsequent Fed cuts.
The market is like a pendulum. You swing it enough times one way and it's
bound to bounce back the other way. The insanity got so high in areas like
technology in 1999 and 2000 that the flip side was inevitable. Also, we saw a
tremendous number of margin calls as many people who bought on margin were
wiped out and had to sell. That's what happens when people get too greedy. The
market goes way above where it should have gone. Then you get that
"cleansing," which carries it below where it should have gone. That was part
of the problem we faced in the first quarter.
In a recent Barron's article, I cited 13 time-tested indicators that seem to
say we might be in a recession, and I have since come up with six more. While
we may be in a recession, it is 100% certain that we are experiencing a
significant economic slowdown. The gross national product
was growing at a 6% rate early last year, but the fourth-quarter rate was only
plus 1% and may still be revised downward. Currently, we are probably not
doing much better.
However, I do not consider that bad news. Actually it is good news. The
average lead time between the Fed's third cut (which came on March 20) and the
end of nine postwar recessions is just 2.7 months. Even if you were to stretch
it out a bit, the economy should be turning around by midyear. What's more,
six months after four postwar rate cuts (which we have already seen this
year), the Dow was up 16.1% on average and a year later was 26.7% higher on
average. Every single case was up--there were no exceptions. So, there's
reason for hope amid the gloom.
We are definitely in an earnings recession. Since 1992, the S&P 500's profit
growth has averaged 11.5% a year compared with 7.1% over the past four
decades. This year's first-quarter earnings are forecast to fall by more than
9%. That would be the sharpest quarterly drop since the 1990-91 recession.
Surprisingly, this is another bullish factor. The market has gone up 15.8% a
year on average when the year-to-year change in S&P earnings is negative.
Because the market is a discounting mechanism, it is always looking ahead. It
does not do too well when profits are too good. That's when inflation heats
up, the Fed starts to hike rates, and the market goes down as we saw happen
last year.
Another positive market indicator is the fact that we saw bears featured
recently on the covers of Time, Newsweek, and U.S. News & World Report. When
popular magazines that are not huge on business news run such covers, it is a
pretty good indication that all the bad news is already out there. Remember
that the market is a discounting mechanism so the bad news is already
reflected in the market. It is significant that these covers appeared just
about when the markets bottomed in mid-March. Historically, when we have had
two bear covers within a month or so, the Dow has gone up 23% in the following
year. It was up every time. Here, having three such covers, we managed to get
a clean sweep. You could also add Business Week, The Economist, the front page
of The New York Times business section, and covers of magazines I never heard
about. Bears were everywhere.
Stocks on average today are still trading at what some consider relatively
high multiples of their earnings. The price/earnings ratio of the S&P 500,
based on the preceding 12 months earnings, is currently around 22x. This is
far below the levels hit during the recent boom but well above the 14 or 15
multiples at the bottoms of some other bear markets. The P/E of the Dow is
around 20x, a little below that of the S&P. I don't think that the P/Es are
excessive because inflation is low.
When inflation was running at something like 9% or higher in the late 1970s
and early 1980s, the P/E ratio on the Dow was around 8x. Based on a recent
study I made of the relationship between inflation and P/E ratios, that figure
is about right. However, when inflation is around 4%, the P/E should be about
20x. With inflation at 2%, it should be around 23x. We are now running at
about 2.9% inflation, somewhere between the two inflation levels and the P/Es
are between 20x and 23x--which I do not consider high at all.
In addition, I should add that the capital gains tax is part of the P/E
equation. The current rate is 20%, equal to the lows it has been at anytime
since World War II. P/Es should be higher when capital gains taxes are lower.
Given the extreme, if capital gains were taxed at 100%, no one would want to
own stocks. If the rate were lowered to near zero, no one would invest in a
savings account when you have a better chance of making money in the market.
So, the lower the capital gains tax, the higher the P/Es. I have tested this
proposition, and it actually works that way. When the capital gains tax went
above 35%, the Dow's P/E averaged 11.7x. When the tax was 20% or less, the
Dow's P/E has averaged 15.1x.
2
The dividend yield on the S&P 500 at the end of 1968, when stocks were near
their highs after the run-up, was nearly 3%. Today's average dividend yield is
only about 1.2%. However, I do not consider this a matter of concern. Either
because their earnings were reduced or because they prefer using the money to
buy back their own stocks, companies just aren't paying out dividends the way
they used to. Earnings are important, but I don't think dividend payment rates
are necessarily significant.
Only 21 companies went public in the first quarter compared with 123 a year
ago. At least 80 companies canceled or postponed action. I consider these
figures bullish. Too much new stock coming to market hurts the market because
it increases supply. When the supply dries up, it gives the bulls a chance.
Also, too many dubious companies entered the market in the past couple of
years, a sign that trouble was brewing. Now only a quality offering can make
the grade. When you get only quality offerings and few misfits, it is a
bullish indicator.
Some market analysts say we won't see a long-term market rally until there
is a so-called capitulation by many investors who lose faith and sell out all
their holdings. People panicked at the bottoms of 1987, 1990, and 1998. It is
a good sign when people finally give up and walk away because it means more
cash is on the sidelines. Stock funds saw net withdrawals of $3.1 billion in
February, the first withdrawal from stock funds since August 1998. March
projections point to another $9.7 billion of net withdrawals. There has been
more than $100 billion unwinding of margin debt, and hedge funds are holding a
great deal of short sales and lots of cash. We have seen nothing but
capitulation in the last few months.
I am not overly concerned about the so-called negative wealth effect on the
market and the economy. It's true that the stock market is a much bigger part
of the economy with more than 50% of households owning stocks or mutual funds.
Many of these investors feel a lot poorer now. However, the wealth effect
historically has been very small relative to the income effect. The stock
market drop will sober people up, reduce some forms of spending, and abet the
economic slowdown. It is not the end of the world by a long shot.
Summing up, the market positives include the already mentioned four Fed rate
cuts, the bear magazine covers, and the capitulation of the margin holders and
the mutual fund owner. We have already seen the extremes of market pessimism.
As a consequence, my monetary and sentiment indicators are about as favorable
as they can get.
On the negative side, there is always a chance of something like a sudden
war that doubles prices. I have no way to predict that. Other risks are the
normal ones like inflation coming back--which is not realistic near term--and
the Fed overstimulating and overheating the economy. There is no way the Fed
is going to tighten in the near future because of inflation. I would forget
that risk for the moment, although it might rise in the future. The other risk
is of extreme deflation and something worse than a recession like we have seen
in Japan. It is just not going to happen. Our banking system is fine, our
economy is not gridlocked like Japan's, and the Fed is on the case.
With the market positives far outweighing the potential negatives, our
market stance is bullish.
PORTFOLIO COMPOSITION
Aside from minor changes in percentages held, our leading industry groups on
March 31 were unchanged from the year-end listing. They included financial
services, technology, health care, energy, retailing, and telecommunications.
We added to our holdings in the financial services and energy areas, and the
retailing sector held up well.
3
Our leading individual positions at the end of the first quarter included
General Electric, Pfizer, Microsoft, Exxon Mobil, Wal-Mart, Citigroup, Tyco,
Merck, Bristol Myers, and American International Group.
The only new company in the above listing is Microsoft, which had good
relative performance and is up for the year. Cisco, which is no longer in the
group, declined in value.
Sincerely,
/s/ Martin E. Zweig, Ph.D.
Martin E. Zweig, Ph.D.
Chairman
4
OUR PRIVACY COMMITMENT
The Zweig Fund, Inc. recognizes that protecting the privacy and security of
the confidential personal information we collect about you is an important
responsibility. The following information will help you understand our privacy
policy and how we will handle and maintain confidential personal information
as we fulfill our obligations to protect your privacy. "Personal information"
refers to the nonpublic financial information obtained by us in connection
with providing you a financial product or service.
Information We Collect
We collect personal information to help us serve your financial needs, offer
new products or services, provide customer service and fulfill legal and
regulatory requirements. The type of information that we collect varies
according to the products or services involved, and may include:
. Information we receive from you on applications and related forms (such as
name, address, social security number, assets and income); and
. Information about your transactions and relationships with us, our
affiliates, or others (such as products or services purchased, account
balances and payment history).
Information Disclosed in Administering Products and Services
We will not disclose personal information about current or former customers
to non-affiliated third parties except as permitted or required by law. We do
not sell any personal information about you to any third party. In the normal
course of business, personal information may be shared with persons or
entities involved in servicing and administering products and services on our
behalf, including your broker, financial advisor or financial planner and
other service providers and affiliates assisting us.
Procedures to Protect Confidentiality and Security of Your Personal
Information
We have procedures in place that limit access to personal information to
those employees and service providers who need to know such information in
order to perform business services on our behalf. We educate our employees on
the importance of protecting the privacy and security of confidential personal
information. We also maintain physical, electronic and procedural safeguards
that comply with federal and state regulations to guard your personal
information.
We will update our policy and procedures where necessary to ensure that your
privacy is maintained and that we conduct our business in a way that fulfills
our commitment to you. If we make any material changes in our privacy policy,
we will make that information available to customers through our Web site
and/or other communications.
5
THE ZWEIG FUND, INC.
STATEMENT OF NET ASSETS
March 31, 2001
(Unaudited)
Number of
Shares Value
--------- ------------
Common Stocks 94.48%
Aerospace & Air Transport 1.79%
Boeing Co........................................... 76,900 $ 4,284,099
Southwest Airlines Co............................... 140,000 2,485,000
United Technologies Corp............................ 35,000 2,565,500
------------
9,334,599
------------
Automotive 1.26%
Ford Motor Co....................................... 105,000 2,952,600
General Motors Corp................................. 70,000 3,629,500
------------
6,582,100
------------
Building & Forest Products 0.84%
Cemex S.A. de CV, ADR............................... 70,000 1,505,000
International Paper Co.............................. 80,500 2,904,440
------------
4,409,440
------------
Chemicals 1.52%
Dow Chemical Co..................................... 98,000 3,093,860
E. I. du Pont de Nemours & Co....................... 80,500 3,276,350
Praxair, Inc........................................ 35,000 1,562,750
------------
7,932,960
------------
Commercial Services 0.79%
Modis Professional Services, Inc.................... 139,900(a) 643,540
Omnicom Group, Inc.................................. 42,000 3,480,960
------------
4,124,500
------------
Consumer Products 3.55%
Adolph Coors Co., Class B........................... 35,000 2,290,400
Anheuser-Busch Cos., Inc............................ 35,000 1,607,550
Coca-Cola Co........................................ 87,500 3,951,500
Kimberly-Clark Corp................................. 70,000 4,748,100
Leggett & Platt, Inc................................ 70,000 1,346,100
PepsiCo, Inc........................................ 105,000 4,614,750
------------
18,558,400
------------
Electronics -- Electrical 3.44%
General Electric Co................................. 350,000 14,651,000
Jabil Circuit, Inc.................................. 52,400(a) 1,132,888
Sanmina Corp........................................ 35,000(a) 684,687
Solectron Corp...................................... 77,000(a) 1,463,770
------------
17,932,345
------------
6
Number of
Shares Value
--------- ------------
Engineering & Machinery 0.97%
Ingersoll-Rand Co................................ 87,500 $ 3,474,625
SPX Corp......................................... 17,500 1,588,300
------------
5,062,925
------------
Financial Services 17.63%
ACE Ltd.......................................... 69,900 2,569,524
Allstate Corp.................................... 124,100 5,204,754
American Express Co.............................. 70,000 2,891,000
American International Group, Inc................ 98,000 7,889,000
Bank of America Corp............................. 105,000 5,748,750
Bank of New York Co., Inc........................ 70,000 3,446,800
Citigroup, Inc................................... 210,000 9,445,800
Fannie Mae....................................... 52,500 4,179,000
FleetBoston Financial Corp....................... 70,000 2,642,500
Freddie Mac...................................... 115,500 7,487,865
H & R Block, Inc................................. 52,500 2,628,150
Household International, Inc..................... 70,000 4,146,800
J.P. Morgan Chase & Co........................... 147,050 6,602,545
KeyCorp.......................................... 70,000 1,806,000
Knight Trading Group, Inc........................ 105,000(a) 1,535,625
Lehman Brothers Holdings, Inc.................... 70,000 4,389,000
Marsh & McLennan Cos., Inc....................... 35,000 3,326,050
Merrill Lynch & Co., Inc......................... 70,000 3,878,000
Morgan Stanley Dean Witter & Co.................. 66,500 3,557,750
SouthTrust Corp.................................. 42,000 1,921,500
Washington Mutual, Inc........................... 122,500 6,706,875
------------
92,003,288
------------
Health Care 11.89%
Amgen, Inc....................................... 80,400(a) 4,839,075
Baxter International, Inc........................ 17,500 1,647,450
Bristol-Myers Squibb Co.......................... 132,800 7,888,320
Cardinal Health, Inc............................. 42,000 4,063,500
Johnson & Johnson................................ 84,000 7,347,480
MedImmune, Inc................................... 59,300(a) 2,127,387
Merck & Co., Inc................................. 105,000 7,969,500
Pfizer, Inc...................................... 293,900 12,035,205
Pharmacia Corp................................... 52,500 2,644,425
St. Jude Medical, Inc............................ 70,000 3,769,500
Tenet Healthcare Corp............................ 84,000(a) 3,696,000
Wellpoint Health Networks, Inc................... 42,000(a) 4,003,020
------------
62,030,862
------------
Hotels & Resorts 0.50%
Starwood Hotels & Resorts Worldwide, Inc......... 77,000 2,618,770
------------
7
Number of
Shares Value
--------- ----------
Investment Companies 1.85%
Nasdaq-100 Index................................... 210,000 $8,221,500
Semiconductors Holders Trust....................... 35,000 1,452,150
----------
9,673,650
----------
Manufacturing 2.12%
Textron, Inc....................................... 34,900 1,983,716
Tyco International Ltd............................. 210,000 9,078,300
----------
11,062,016
----------
Media 5.11%
Comcast Corp., Class A............................. 152,700(a) 6,403,856
Gemstar-TV Guide International, Inc................ 35,000(a) 1,006,250
Grupo Televisa S.A., GDR........................... 70,000(a) 2,338,700
McGraw-Hill Cos., Inc. ............................ 59,500 3,549,175
New York Times Co., Class A........................ 71,800 2,941,646
News Corp. Ltd., ADR............................... 70,000 2,198,000
Viacom, Inc., Class B.............................. 73,300(a) 3,223,001
Walt Disney Co..................................... 175,000 5,005,000
----------
26,665,628
----------
Metals 0.67%
Alcoa, Inc......................................... 98,000 3,523,100
----------
Oil & Oil Services 8.87%
Baker Hughes, Inc.................................. 105,000 3,812,550
Burlington Resources, Inc.......................... 77,000 3,445,750
Chevron Corp....................................... 63,000 5,531,400
Enron Corp......................................... 104,900 6,094,690
Exxon Mobil Corp................................... 132,900 10,764,900
Kinder Morgan, Inc................................. 35,000 1,862,000
Santa Fe International Corp........................ 52,400 1,703,000
Talisman Energy, Inc............................... 70,000(a) 2,542,400
Transocean Sedco Forex, Inc........................ 70,000 3,034,500
USX-Marathon Group................................. 140,000 3,773,000
Williams Cos., Inc................................. 87,400 3,745,090
----------
46,309,280
----------
Railroads 0.38%
Canadian National Railway Co....................... 52,500 1,977,675
----------
Restaurants 0.30%
Wendy's International, Inc......................... 70,000 1,562,400
----------
Retailing 7.21%
CVS Corp........................................... 70,000 4,094,300
Federated Department Stores, Inc................... 10,500(a) 436,275
Home Depot, Inc.................................... 150,700 6,495,170
8
Number of
Shares Value
--------- ----------
Retailing (continued)
Kroger Co.......................................... 105,000(a) $2,707,950
Lowe's Cos., Inc................................... 70,000 4,091,500
Safeway, Inc....................................... 70,000(a) 3,860,500
Target Corp........................................ 70,000 2,525,600
Wal-Mart Stores, Inc............................... 208,700 10,539,350
Walgreen Co........................................ 70,000 2,856,000
----------
37,606,645
----------
Technology 14.39%
Agilent Technologies, Inc.......................... 70,000(a) 2,151,100
AOL Time Warner, Inc............................... 147,000(a) 5,902,050
Applied Materials, Inc............................. 87,800(a) 3,819,300
Atmel Corp......................................... 105,000(a) 1,030,312
Cisco Systems, Inc................................. 280,300(a) 4,432,244
Citrix Systems, Inc................................ 35,000(a) 739,375
Compaq Computer Corp............................... 140,000 2,548,000
Corning, Inc....................................... 35,000 724,150
Cypress Semiconductor Corp......................... 70,000(a) 1,241,100
Dell Computer Corp................................. 141,000(a) 3,621,937
Electronic Data Systems Corp....................... 52,500 2,932,650
EMC Corp........................................... 115,000(a) 3,381,000
First Data Corp.................................... 84,000 5,015,640
Intel Corp......................................... 281,800 7,414,863
i2 Technologies, Inc............................... 35,000(a) 507,500
JDS Uniphase Corp.................................. 35,000(a) 645,313
Lucent Technologies, Inc........................... 147,200 1,467,584
Microchip Technology, Inc.......................... 52,500(a) 1,328,906
Microsoft Corp..................................... 204,500(a) 11,183,594
Motorola, Inc...................................... 83,800 1,194,988
Network Appliance, Inc............................. 35,000(a) 588,438
Oracle Corp........................................ 262,300(a) 3,929,254
QUALCOMM, Inc...................................... 52,500(a) 2,972,813
Siebel Systems, Inc................................ 34,900(a) 949,280
Sun Microsystems, Inc.............................. 210,000(a) 3,227,700
SunGard Data Systems, Inc.......................... 35,000(a) 1,723,050
USinternetworking, Inc............................. 70,050(a) 80,995
Yahoo!, Inc........................................ 21,200(a) 333,900
----------
75,087,036
----------
Telecommunications 7.06%
ADC Telecommunications, Inc........................ 122,500(a) 1,041,250
AT&T Corp.......................................... 210,000 4,473,000
AT&T Wireless Group................................ 87,800(a) 1,684,004
General Motors Corp., Class H...................... 140,000 2,730,000
Nokia Corp., ADR................................... 128,200 3,076,800
9
Number of
Shares Value
----------- ------------
Telecommunications
(continued)
Nortel Networks Corp...... 140,000 $ 1,967,000
SBC Communications, Inc... 122,500 5,467,175
Tele Norte Leste
Participacoes S.A., ADR.. 107,000 1,741,960
Telephone & Data Systems,
Inc...................... 52,500 4,908,750
TyCom, Ltd................ 52,500(a) 690,375
Verizon Communications,
Inc...................... 122,500 6,039,250
WorldCom, Inc............. 161,050(a) 3,009,622
------------
36,829,186
------------
Utilities -- Electric &
Gas 2.34%
AES Corp.................. 70,000(a) 3,497,200
Calpine Corp.............. 42,000(a) 2,312,940
Dynegy, Inc............... 35,000 1,785,350
Exelon Corp............... 70,000 4,592,000
------------
12,187,490
------------
Total Common Stocks..... 493,074,295
------------
Unit Investment Trusts 1.70%
S&P Mid-Cap 400 Depositary
Receipts................. 105,000 8,862,000
------------
Principal
Amount
-----------
Short-Term Investment 3.85%
UBS Financial Corp.,
5.50%, 4/02/01........... $20,100,000 20,096,929
------------
Total Investments -- 100.03%........ 522,033,224
Cash and Other Assets Less
Liabilities -- (0.03)%............. (152,795)
------------
Net Assets (Equivalent to $8.65 per
share based on 60,306,062 shares of
capital stock outstanding) --
100.00%........................... $521,880,429
============
--------
(a) Non-income producing security.
10
THE ZWEIG FUND, INC.
FINANCIAL HIGHLIGHTS
March 31, 2001
(Unaudited)
Net Asset Value
Total Net Assets per share
-------------------------- ----------------
Beginning of period: December 31,
2000............................ $620,354,228 $ 10.32
Net investment income.......... $ 493,353 $ 0.01
Net realized and unrealized
loss on investments........... (84,489,823) (1.41)
Dividends from net investment
income and distributions from
net long-term and short-term
capital gains................. (16,236,260) (0.27)
Net asset value of shares
issued to shareholders in
reinvestment of dividends
resulting in issuance of
common stock.................. 1,758,931 --
------------ -------
Net decrease in net assets/net
asset value................... (98,473,799) (1.67)
------------ -------
End of period: March 31, 2001.... $521,880,429 $ 8.65
============ =======
-------------------------------------------------------------------------------
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.
11
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 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
--------------------------------------------------------------------------------
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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 1375 4902-1Q-01
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