-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Utw8BMZTVOoRJsGIlllzqoR16YyyJv1JU5RWS10k8+rCOKa0qUnOt6ycHZtR8amQ ol7QsZ4C8QUPwqwnxQMrNg== 0000927405-99-000105.txt : 19990312 0000927405-99-000105.hdr.sgml : 19990312 ACCESSION NUMBER: 0000927405-99-000105 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GABELLI GROWTH FUND CENTRAL INDEX KEY: 0000806857 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 133391404 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-04873 FILM NUMBER: 99563064 BUSINESS ADDRESS: STREET 1: ONE CORPORATE CENTER CITY: RYE STATE: NY ZIP: 10580-1434 BUSINESS PHONE: 2124903670 MAIL ADDRESS: STREET 1: ONE CORPORATE CENTER CITY: RYE STATE: NY ZIP: 10580-1434 N-30D 1 THE GABELLI GROWTH FUND ANNUAL REPORT DECEMBER 31, 1998 Morningstar rating(TM) of The Gabelli Growth Fund was 5 stars overall and for the three year period ended 12/31/98 among 2802 domestic equity funds, and for the five and ten year periods ended 12/31/98 among 1702 and 732 domestic equity funds, respectively. [PHOTO] Howard Ward TO OUR SHAREHOLDERS, The fourth quarter of 1998 was full of nostalgia. In the political arena, Senator John Glenn climbed back into the cockpit of a rocket and circled the globe with the greatest of ease. Princeton's favorite Tiger, Bill Bradley, re-launched his political career by announcing a run for the White House. Should he ultimately win his party's nomination, he may face a Bush or a Dole, although now it is Junior and the Mrs. Then there was Operation Desert Fox, the sequel to Operation Desert Storm. Sequels are never as good as originals. In sports, we had the New York Jets, in their retro uniforms, return to glory under the command of good old Bill "The Tuna" Parcells. Dan Reeves, coach of the Atlanta Falcons, is back at the top of his game, returning to the Super Bowl for the first time in 10 years. And then there was Doug Flutie's magnificent return to the NFL. How can anybody not like this man? Of course, speaking of comebacks, consider Major League Baseball. Excited by the home run derby between Mark McGwire and Sammy Sosa, baseball experienced a revival of sorts. Even Marv Albert is back on the air with his biting commentary. - ------------------------------------------------------------------------------- PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Morningstar proprietary ratings reflect historical risk adjusted performance as of December 31, 1998 and are subject to change every month. Morningstar ratings are calculated from a Fund's three, five and ten year average annual returns in excess of 90-day T-Bill returns with appropriate fee adjustments and a risk factor that reflects fund performance below 90-day T-Bill returns. The top 10% of the funds in an investment category receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars and the bottom 10% receive one star. INVESTMENT RESULTS (a)
Quarter ---------------------------------------------- 1st 2nd 3rd 4th Year ------ ------ ------ ------ ------ 1998: Net Asset Value............. $32.32 $33.37 $28.54 $35.40 $35.40 Total Return................ 12.9% 3.2% (14.5)% 30.2% 29.8% - ------------------------------------------------------------------------------------------------------------------- 1997: Net Asset Value............. $24.50 $29.25 $33.41 $28.63 $28.63 Total Return................ 1.5% 19.4% 14.2% 3.1% 42.6% - ------------------------------------------------------------------------------------------------------------------- 1996: Net Asset Value............. $23.75 $24.34 $25.35 $24.14 $24.14 Total Return................ 7.2% 2.5% 4.1% 4.4% 19.4% - ------------------------------------------------------------------------------------------------------------------- 1995: Net Asset Value............. $20.86 $22.99 $24.91 $22.16 $22.16 Total Return................ 6.0% 10.2% 8.4% 4.9% 32.7% - ------------------------------------------------------------------------------------------------------------------- 1994: Net Asset Value............. $21.90 $21.23 $22.58 $19.68 $19.68 Total Return................ (5.8)% (3.1)% 6.4% (0.5)% (3.4)% - ------------------------------------------------------------------------------------------------------------------- 1993: Net Asset Value............. $21.71 $21.84 $23.43 $23.26 $23.26 Total Return................ 0.6% 0.6% 7.3% 2.5% 11.3% - ------------------------------------------------------------------------------------------------------------------- 1992: Net Asset Value............. $20.27 $19.72 $20.50 $21.59 $21.59 Total Return................ (4.7)% (2.7)% 4.0% 8.5% 4.5% - ------------------------------------------------------------------------------------------------------------------- 1991: Net Asset Value............. $18.18 $18.02 $19.51 $21.28 $21.28 Total Return................ 11.7% (0.9)% 8.3% 12.0% 34.3% - ------------------------------------------------------------------------------------------------------------------- 1990: Net Asset Value............. $16.74 $17.80 $15.75 $16.27 $16.27 Total Return................ (1.9)% 6.3% (11.5)% 6.2% (2.0)% - ------------------------------------------------------------------------------------------------------------------- 1989: Net Asset Value............. $13.99 $15.73 $17.46 $17.07 $17.07 Total Return................ 10.6% 12.4% 11.0% 1.5% 40.1% - ------------------------------------------------------------------------------------------------------------------- 1988: Net Asset Value............. $10.87 $12.40 $12.71 $12.65 $12.65 Total Return................ 16.1% 14.1% 2.5% 2.5% 39.2% - ------------------------------------------------------------------------------------------------------------------- 1987: Net Asset Value............. -- $10.84 $11.28 $9.51 $9.51 Total Return................ -- 8.4%(b) 4.1% (15.7)% (4.9)%(b) - -------------------------------------------------------------------------------------------------------------------
Average Annual Returns - December 31, 1998 (a) - ---------------------------------------------- 1 Year ......................... 29.8% 5 Year ......................... 23.2% 10 Year ......................... 19.8% Life of Fund (b) ................. 19.4% Dividend History - --------------------------------------------------------------------- Payment (ex) Date Rate Per Share Reinvestment Price - ----------------- -------------- ------------------ December 28, 1998 $1.745 $35.15 December 30, 1997 $5.790 $28.58 December 31, 1996 $2.324 $24.14 December 29, 1995 $3.960 $22.16 December 30, 1994 $2.790 $19.68 December 31, 1993 $0.760 $23.26 December 31, 1992 $0.646 $21.59 December 31, 1991 $0.573 $21.28 December 31, 1990 $0.460 $16.27 December 29, 1989 $0.654 $17.07 December 30, 1988 $0.377 $12.65 January 4, 1988 $0.152 $9.58 (a) Total returns and average annual returns reflect changes in share price and reinvestment of dividends and are net of expenses. The net asset value of the Fund is reduced on the ex-dividend (payment) date by the amount of the dividend paid. Of course, returns represent past performance and do not guarantee future results. Investment returns and the principal value of an investment will fluctuate. When shares are redeemed they may be worth more or less than their original cost. (b) From commencement of investment operations on April 10, 1987. 2 COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE GABELLI GROWTH FUND AND THE S&P 500 INDEX [GRAPH] Popular culture looked back to the future as well. Bell bottom pants are in - sort of. The Volkswagen Beetle is back although now the engine is in the front. Tom Wolfe of Bonfire of the Vanities fame finally finished his new tome, A Man In Full. War movies are back, led by Saving Private Ryan. Tom Brokaw is right. The men and women who served and supported freedom in World War II were of special character. We worry about the Dow, they worried about surviving. They are the Greatest Generation. My father served as a captain in the U.S. Army in the European theater during the war. My father-in-law served as a Captain in the U.S. Navy in the North Atlantic and North Sea. My mother's brother was a lieutenant in the Navy and served on a destroyer in the South Pacific. There are many families like ours, where men and women served and returned home without serious injury. We have nothing but compassion for the families that were less fortunate. We salute all of you that have served our country in uniform, whether in Europe, the South Pacific, Korea, Vietnam, Grenada, Panama or, more recently, the Middle East. While 1998 will be remembered as the year the masses discovered the Internet, it was also a year when some of America's original blue chip companies reasserted themselves in the marketplace and in the stock market. Congratulations to IBM (and Lou Gerstner) for its success in services, electronic commerce and personal computers. The quick improvement of fortunes at AT&T is the work of Michael Armstrong as he has single-handedly turned that battleship around. Impressive. Finally, Apple is back. With the return of Steve Jobs, Apple launched the iMAC personal computer and it quickly became the best selling PC in the market. It is difficult for an analyst to quantify the value of a Lou Gerstner, Michael Armstrong or Steve Jobs, but they are clearly valuable assets and special people. 3 INVESTMENT PERFORMANCE For the fourth quarter ended December 31, 1998, The Gabelli Growth Fund's (the "Fund") total return was 30.2%. The Lipper Analytical Services Growth Fund Average and Standard and Poor's ("S&P") 500 Index had returns of 22.6% and 21.4%, respectively, over the same period. Each index is an unmanaged indicator of investment performance. The Fund was up 29.8% for 1998. The Lipper Growth Fund Average and S&P 500 rose 22.9% and 28.7%, respectively, over the same twelve month period. For the ten year period ended December 31, 1998, the Fund's total return averaged 19.8% annually versus average annual total returns of 16.7% and 19.2% for the Lipper Growth Fund Average and S&P 500, respectively. Since inception on April 10, 1987 through December 31, 1998, the Fund had a cumulative total return of 704.3%, which equates to an average annual return of 19.4%. Our direct shareholders total 62,843 and net assets are $1.865 billion as of December 31, 1998. ECONOMIC BACKGROUND Federal Reserve Board Chairman Alan Greenspan's three quick interest rate easing moves, all within a two month span, worked magic on the psychology of the markets and the economy by stimulating borrowing, lending and risk taking. We appear to have dodged the feared recession. We are enjoying the lowest unemployment rate since 1970. Simultaneously, we have the lowest interest rates since 1967. This is not supposed to happen. Keynesian economists believe in something called the Phillips Curve: the Phillips Curve says there is an inverse relationship between unemployment and inflation. It states that inflation should rise as unemployment falls. For years, Arthur Laffer, a supply side economist, has said this is not true. Right now, he looks pretty smart. As of January 1, 1999, the current U.S. economic expansion set a postwar peacetime record of 93 months. The U.S. economy is continuing to grow at a real Gross Domestic Product ("GDP") rate of 2.0% or better. The information and technology industries are the engines of growth as the more cyclical basic industry and manufacturing sectors contract somewhat. According to Business Week magazine, 37% of new jobs in 1998 came from information related service industries, versus 15% just three years ago. Problems include Asia and Latin America which are likely to crimp U.S. exports. Capital spending may slow as well, given some softness in utilization rates. On a more positive note, consumers taking advantage of lower interest rates to refinance mortgages have more cash in their pockets. Furthermore, we might see Congress cut taxes this year due to the rising budget surplus - another plus for consumers. Finally, there is an outside chance that interest rates could decline further, given the lack of inflation and reduced levels of government debt issuance. With near record low unemployment, low mortgage rates, a possible tax cut and some shot at still lower interest rates, consumers will keep spending. Since consumer spending represents two-thirds of GDP, we caution against being too negative on the subject of economic growth in 1999, at least in the U.S. 4 THE STOCK MARKET The NBA players were locked out this Fall and nobody noticed. Basketball fans discovered the stock market. They had so much fun investing online in AOL, Amazon.com, and E-Bay that Patrick Ewing may need a Visa card to get into the Garden. The action is at the corner of Broad and Wall, home of the New York Stock Exchange, and not at 34th and Eighth Avenue, home of Madison Square Garden. Michael Jordan decided investing online was easier than banging the boards with The Mailman (e-mailman?). He retired. Indeed, the S&P 500 has compounded at approximately a 30% rate over the last four years (The Gabelli Growth Fund did a little better). Why work? Who needs a job? Of course, it is a market of stocks and most mutual funds fared worse than the popular averages. All stocks are not created equal. The high returns have generally been the exclusive domain of the domestic, large cap growth stocks. This will not always be the case. There is a cyclicality to returns that has been absent of late. It may be hard to believe at this juncture, but there are years when value investors outperform growth investors. Sometimes, small caps beat large caps. We even feel compelled to confess that we have seen years when foreign stocks beat our dollar denominated friends. Stranger things have happened. Some people regard the excitement over Internet stocks as strange. In reality, the Internet stocks represent a speculative bubble. It is a classic mania. They happen every so often and this is a wild one that has gone farther than most. It has the look and feel of the "Nifty Fifty" era which peaked in 1972. The glamorous growth stocks of that era included IBM, Xerox, Polaroid, Eastman Kodak and Avon Products. It took a period of years for some of those stocks to reach new highs after peaking in 1972 (and losing much of their market value during 1973 and 1974). In a few cases, it took over twenty years. The "Nifty Nets", as some refer to them, represent the latest Gold Rush. In my opinion, some of last year's hot Internet Initial Public Offerings ("IPOs") are highly flammable. Obviously, we believe valuations matter. We expect a number of Internet stocks to blow up. This will have an impact on the technology sector at large but may not doom the overall market. In the time line of history this is a sweet spot for investors. Just as inflation encourages spending, lack of inflation stimulates saving. We have savings galore thanks to aging baby boomers who are earning more and spending less (regardless of what the poorly constructed government statistics say). This new and large class of capitalists have become stock market wise having grown up with the bull market that really started in August of 1982. Helping to fuel the ongoing rally is corporate prosperity. After all, earnings drive share prices. This record breaking peacetime expansion is being aided by the technology revolution. No company has been more prosperous than Microsoft, the leader of the revolution, which is now the most valuable company in the world in stock market terms. Leading technology companies sell products that allow other companies to be more productive. This process enriches the buyer, the seller and both sets of shareholders. The robust stock price performance of many technology companies last year was no random walk. The leaders like Microsoft, Cisco Systems, Lucent Technologies, IBM and Intel are like 5 300 pound offensive linemen. This is the business equivalent of power football. Good luck pushing these behemoths off the line of scrimmage. Importantly, the emergence of global markets enhances the story further. These markets are massive (292 million people in the European Union vs. 268 million in the U.S.) and rich with opportunity. American companies, not just technology companies, are more than well represented among the leaders. The belt popping waistlines of the 300 pound linemen act like an expanding cushion to the popular stock market averages such as the S&P 500. Support for stocks can also be found in the record level of mergers and acquisitions in 1998. Apparently, big is in. You need size to compete in a world of power football. Announced deals worldwide hit $2.5 trillion in 1998, up 54% from 1997. In the U.S., announced deals reached $1.6 trillion, an increase of 78% from the previous year. If you want global reach, clout with your suppliers and customers and want to jump-start your earnings, merge. No one is too big to buy at this point. Last year's announced mega-mergers included Exxon and Mobil, Citicorp and Travelers, NationsBank and BankAmerica, Daimler Benz and Chrysler, British Petroleum and Amoco, Bell Atlantic and GTE, AT&T and Tele-Communications Inc., SBC Communications and Ameritech, Norwest and Wells Fargo and BancOne and First Chicago NBD. The Fortune 500 is about to become the Fortune 5. Were it not for that long forgotten third quarter market meltdown, IPOs would have set a record too. As it was, IPOs raised about $35 billion, 10% below 1997's $39 billion rate and 29% below the 1996 record of $49.5 billion. It looks like the investment bankers can still put steak on the table. There was no shortage of liquidity for stocks last year. PORTFOLIO HIGHLIGHTS The fourth quarter was wild. We aggressively moved to take advantage of depressed technology stock prices early in the quarter. Significant additions were made to existing holdings of Microsoft, Cisco Systems, Lucent Technologies, Intel, EMC and Dell Computer. What's more, we initiated important new commitments in IBM and Texas Instruments. Our weighting in pure technology stocks rose from 17% on September 30, 1998 to 25% by year's end. That is our self-imposed maximum limit. Outside of technology, we materially increased holdings of Clear Channel Communications, Rite Aid and Wal-Mart. Other new holdings of meaningful size were Time Warner (entertainment), Omnicom Group (advertising) and Infinity Broadcasting (the radio and outdoor display business of CBS). Purchases were funded with the outright sales of Schering Plough (a huge winner), Computer Associates (a modest winner) and our oil service shares (mostly unprofitable). A number of partial sales were arranged as we took some profits from Gillette, Johnson & Johnson, Eli Lilly, Merck, McGraw-Hill and Walgreen. We also trimmed some Tellabs, which rose 72% during the quarter. The Fund's strong quarterly performance was powered by holdings such as Charles Schwab (+114%), Tellabs (+72%), Tiffany (+65%), Lowe's (+61%), Lucent Technologies (+59%) and Home Depot (+55%). We must also credit Cisco Systems (+50%), Wal-Mart (+49%), EMC (+48%), Interpublic Group (+48%), Bank of New York (+47%), Merrill Lynch (+41%), PepsiCo (+39%) and Intel (+38%). No one was more surprised at the magnitude of the market's quarterly melt-up than I. Luckily, we were ready for it and participated fully. 6 LOOKING AHEAD This Wall Street soap opera, known as the bull market, has outlasted Dallas, Dynasty and Seinfeld. No one knows how or when the last episode is going to air. The market pundits have been so wrong for so long that they are a tragedy of comic proportions. Listen to them at your peril. What we do know is that stocks are not cheap and we should temper our expectations. Earnings are growing for most of the service sector but less so for manufacturing and basic industry companies. In this market of stocks, can the muscle bound Microsofts and General Electrics continue to pull the averages higher? Maybe. Would we be surprised to see the market run out of steam this year? No. However, we continue to caution against timing the market. The market may remain high and "extended" for a long time. LET'S TALK STOCKS The following are stock specifics on selected holdings of our Fund. Favorable earnings prospects do not necessarily translate into higher stock prices, but they do express a positive trend which we believe will develop over time. Cisco Systems Inc. (CSCO - $92.8125 - Nasdaq) is the undisputed leader in data networking equipment. As such, it is one of the primary beneficiaries of the growth in Local Area Networks ("LANs"), Wide Area Networks ("WANs") and the Internet. The Home Depot Inc. (HD - $61.1875 - NYSE) is the undisputed leader of the home improvement warehouse retailers. Led by Bernie Marcus and Arthur Blank, the company's founders, Home Depot is testing new store formats which appeal to new markets (smaller stores and upscale furnishings), providing incremental growth to what remains a terrific franchise in do-it-yourself home hardware and supplies. Geographic expansion continues to drive square footage growth as the company increases its presence in the Midwest and continues to penetrate the Northeast. Home Depot has substantial international potential over the long term. The company plans to offer on-line shopping as soon as possible. Marsh & McLennan Companies Inc. (MMC - $58.4375 - NYSE), with the acquisitions of Johnson and Higgins and Sedgewick, holds the number one position in insurance brokerage. Additionally, the company owns The Putnam Group, the Boston-based asset manager (assets under management exceed $225 billion), and Mercer Group, a leader in employee benefits consulting. Lucent Technologies Inc. (LU - $110.00 - NYSE) was formerly the research arm of AT&T and known as Bell Labs. AT&T spun-off Bell Labs in 1996 under the Lucent name. The company is a leader in providing voice networking equipment and is strengthening its data networking prospects with the recent announcement to acquire Ascend Communications. The company is benefiting from the strong growth in network traffic capacity requirements as Lucent is a supplier to most of the major telephone companies. 7 MediaOne Group Inc. (UMG - $47.00 - NYSE) was formerly known as US West Media Group and controlled the cable television operations of telecommunications provider US West. The company is the third largest operator of cable television systems in the U.S. MediaOne Group also owns 25% of Time Warner Entertainment and several foreign cellular telephone properties. We expect the company to be a leader in providing Internet access and cable telephony in addition to traditional cable services. Mellon Bank Corp. (MEL - $68.75 - NYSE), with the acquisitions in recent years of Dreyfus Corp., The Boston Company and Founders Asset Management, has become a powerhouse in money management services. We believe the rising contribution to earnings from predictable fee sources will enhance the company's valuation. We expect a continuation of Mellon's share repurchase program this year. Current business trends are strong. Microsoft Corp. (MSFT - $138.6875 - Nasdaq) is the world's leading provider of computer software with a dominant position in personal computer operating systems. The company is a leading provider of application software as well, with such popular programs as OFFICE '97 and Microsoft Word. Northern Trust Corp. (NTRS - $87.3125 - Nasdaq) is one of a few public asset managers with a strong franchise in the wealth management market. With nearly $200 billion in assets under management and fees generating 65% of income, the bank's stock appears undervalued. Northern Trust is a trophy property within the banking sector. Sun Microsystems Inc. (SUNW - $85.625 - Nasdaq) is a leading provider of hardware and software for network-based distributed computing systems. While most of the company's revenue is derived from UNIX based workstations and client servers, it is becoming best known for its Java operating software. Time Warner Inc. (TWX - $62.0625 - NYSE) owns one of the best collections of media assets in the world. In addition to being the largest operator of cable television systems, the company is a leading content provider through its ownership of CNN, Warner Bros., HBO, Turner Broadcasting and other premium and basic cable programs. Time Warner is also a major factor in music and publishing. MINIMUM INITIAL INVESTMENT - $1,000 The Fund's minimum initial investment for both regular and retirement accounts is $1,000. There are no subsequent investment minimums. No initial minimum is required for those establishing an Automatic Investment Plan. THE ROTH IRA The Taxpayer Relief Act of 1997 included new tax incentives and more opportunities to save for retirement and other major expenditures. The Roth IRA is just one of these new opportunities now available at Gabelli Funds. Our investor representatives are available at 1-800-GABELLI (1-800-422-3554) to speak with you about the advantages of converting to a Roth IRA and to discuss your investment choices. 8 INTERNET You can now visit us on the Internet. Our home page at http://www.gabelli.com contains information about Gabelli Asset Management Inc., the Gabelli Mutual Funds, IRAs, 401(k)s, quarterly reports, closing prices and other current news. You can send us e-mail at info@gabelli.com. IN CONCLUSION Our mission remains the same. We are charged with building a well-diversified portfolio of America's greatest established growth companies. This approach has led to a compound return of 30.8% over the last four years. Last year was a challenging year for investors and this year may be equally difficult. Let's keep our expectations down and hope to be pleasantly surprised at the millennium. The Fund's daily net asset value is available in the financial press and each evening after 6:00 PM (Eastern Time) by calling 1-800-GABELLI (1-800-422-3554). The Fund's Nasdaq symbol is GABGX. Please call us during the business day for further information. We thank you for your loyalty and as always, pledge our best efforts on your behalf. Sincerely, /s/ HOWARD F. WARD, CFA Howard F. Ward, CFA Portfolio Manager January 29, 1999 TOP TEN HOLDINGS DECEMBER 31, 1998 ------------------ Home Depot Inc. Marsh & McLennan Companies Northern Trust Corp. Time Warner Inc. Cisco Systems Inc. Lucent Technologies Inc. Microsoft Corp. Sun Microsystems Inc. Mellon Bank Corp. MediaOne Group Inc. NOTE: The views expressed in this report reflect those of the portfolio manager only through the end of the period stated in this report. The manager's views are subject to change at any time based on market and other conditions. 9 THE GABELLI GROWTH FUND PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 1998 - --------------------------------------------------------------------------------
MARKET SHARES COST VALUE ------ ---- ------ COMMON STOCKS--99.6% BROADCASTING--4.7% 950,600 CBS Corp.+..................... $ 27,571,836 $ 31,132,150 841,600 Clear Channel Communications 37,722,180 45,867,200 Inc.+......................... 365,000 Infinity Broadcasting Corp.+... 7,681,075 9,991,875 -------------- -------------- 72,975,091 86,991,225 -------------- -------------- BUSINESS SERVICES--4.8% 330,000 Automatic Data Processing 16,294,823 26,461,875 Inc. ......................... 60,000 Ceridian Corp.................. 3,654,187 4,188,750 489,050 Interpublic Group of Companies 21,892,432 39,001,737 Inc. ......................... 292,000 Omnicom Group Inc. ............ 15,272,092 16,936,000 95,000 Young & Rubicam Inc. .......... 2,712,500 3,075,625 -------------- -------------- 59,826,034 89,663,987 -------------- -------------- CABLE--2.6% 1,020,000 MediaOne Group Inc.+........... 39,028,859 47,940,000 -------------- -------------- COMMUNICATIONS EQUIPMENT--7.3% 680,750 Cisco Systems Inc.+............ 31,213,350 63,182,107 470,000 Lucent Technologies Inc. ...... 37,533,315 51,700,000 305,000 Tellabs Inc.+.................. 17,165,220 20,911,563 -------------- -------------- 85,911,885 135,793,670 -------------- -------------- COMPUTER HARDWARE--7.5% 320,000 Dell Computer Corp.+........... 9,336,719 23,420,000 320,000 Hewlett-Packard Co. ........... 22,393,890 21,860,000 240,000 International Business Machines 38,612,310 44,340,000 Corp. ........................ 595,000 Sun Microsystems Inc.+......... 22,143,722 50,946,875 -------------- -------------- 92,486,641 140,566,875 -------------- -------------- COMPUTER SOFTWARE AND SERVICES--10.3% 335,000 BMC Software Inc.+............. 10,872,161 14,928,437 670,600 Computer Sciences Corp.+....... 28,110,416 43,211,787 560,000 EMC Corp.+..................... 28,179,147 47,600,000 447,000 Microsoft Corp.+............... 40,741,130 61,993,313 612,000 SunGard Data Systems Inc.+..... 22,149,129 24,288,750 -------------- -------------- 130,051,983 192,022,287 -------------- -------------- CONSUMER PRODUCTS--2.7% 429,800 Gillette Co.................... 17,752,867 20,764,712 155,000 Procter & Gamble Co. .......... 11,668,444 14,153,438 471,000 Ralston Purina Group........... 11,927,370 15,248,625 -------------- -------------- 41,348,681 50,166,775 -------------- -------------- DIVERSIFIED INDUSTRIAL--4.9% 285,000 General Electric Co. .......... 24,961,368 29,087,812 353,000 Honeywell Inc.................. 23,745,632 26,585,312 701,200 Sundstrand Corp................ 36,249,882 36,374,750 -------------- -------------- 84,956,882 92,047,874 -------------- -------------- ELECTRONICS--3.6% 335,000 Intel Corp..................... 31,964,246 39,718,437 330,000 Texas Instruments Inc. ........ 27,071,373 28,235,625 -------------- -------------- 59,035,619 67,954,062 -------------- -------------- ENTERTAINMENT--3.7% 503,000 Disney (Walt) Co. ............. 11,402,015 15,090,000 860,000 Time Warner Inc................ 36,903,431 53,373,750 10,000 Viacom Inc., Cl. B+............ 548,200 740,000 -------------- -------------- 48,853,646 69,203,750 -------------- -------------- FINANCIAL SERVICES--8.0% 185,500 American International Group 6,114,574 17,923,937 Inc. ......................... 944,500 Marsh & McLennan Companies 51,051,005 55,194,219 Inc. ......................... 245,000 Merrill Lynch & Co. ........... 14,982,106 16,353,750 750,750 Schwab (Charles) Corp. ........ 15,458,751 42,182,766 533,000 T. Rowe Price Associates 15,596,159 18,255,250 Inc. ......................... -------------- -------------- 103,202,595 149,909,922 -------------- --------------
MARKET SHARES COST VALUE ------ ---- ------ FINANCIAL SERVICES: BANKS--10.4% 740,000 Bank of New York Inc. ......... $ 21,770,862 $ 29,785,000 813,000 Mellon Bank Corp. ............. 32,231,642 55,893,750 770,000 Northern Trust Corp. .......... 43,379,525 67,230,625 579,400 State Street Corp. ............ 21,527,917 40,304,513 -------------- -------------- 118,909,946 193,213,888 -------------- -------------- FOOD AND BEVERAGE--2.3% 200,000 Coca-Cola Co................... 8,520,813 13,375,000 337,000 PepsiCo Inc.................... 8,852,736 13,795,938 553,000 Sysco Corp..................... 9,218,165 15,172,938 -------------- -------------- 26,591,714 42,343,876 -------------- -------------- HEALTH CARE--8.9% 272,000 Abbott Laboratories............ 6,344,738 13,328,000 310,000 Baxter International Inc. ..... 16,732,395 19,936,875 304,000 Becton Dickinson & Co. ........ 11,091,671 12,977,000 252,000 Bristol-Myers Squibb Co. ...... 27,726,373 33,720,750 147,000 Johnson & Johnson.............. 8,634,194 12,329,625 160,000 Lilly (Eli) & Co. ............. 10,721,594 14,220,000 168,000 Merck & Co. Inc................ 17,517,119 24,811,500 123,000 Pfizer Inc..................... 8,504,608 15,428,813 249,000 Warner-Lambert Co. ............ 11,365,379 18,721,688 -------------- -------------- 118,638,071 165,474,251 -------------- -------------- PUBLISHING--5.7% 600,000 Gannett Co. Inc. .............. 30,620,165 39,712,500 217,000 McGraw-Hill Companies Inc. .... 11,715,279 22,106,875 768,000 New York Times Co., Cl. A...... 22,012,718 26,640,000 255,000 Tribune Co..................... 10,548,414 16,830,000 -------------- -------------- 74,896,576 105,289,375 -------------- -------------- RETAIL--12.2% 1,517,718 Home Depot Inc. ............... 24,493,089 92,865,370 904,000 Lowe's Companies Inc. ......... 31,411,002 46,273,500 325,000 Rite Aid Corp.................. 13,710,563 16,107,813 517,100 Tiffany & Co................... 23,048,041 26,824,563 440,000 Wal-Mart Stores Inc. .......... 27,264,250 35,832,500 176,000 Walgreen Co.................... 1,709,613 10,307,000 -------------- -------------- 121,636,558 228,210,746 -------------- -------------- 1,278,350,781 1,856,792,563 TOTAL COMMON STOCKS............ -------------- -------------- PRINCIPAL AMOUNT - ---------- U.S. GOVERNMENT OBLIGATIONS--0.4% $8,036,000 U.S. Treasury Bills, 4.09% to 4.54%++, due 01/07/99 to 03/18/99...................... 7,980,107 7,982,413 -------------- -------------- TOTAL INVESTMENTS--100.0%...... $1,286,330,888* 1,864,774,976 ============== OTHER ASSETS AND LIABILITIES (NET)--(0.0)%..... (218,882) -------------- NET ASSETS--100.0% (52,671,581 shares outstanding)............... $1,864,556,094 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE..................................... $35.40 ======
------------------------ * For Federal tax purposes: Aggregate cost............................ $1,287,370,751 ============== Gross unrealized appreciation............. $ 577,938,115 Gross unrealized depreciation............. (533,890) -------------- Net unrealized appreciation............... $ 577,404,225 ==============
- --------------- + Non-income producing security. ++ Represents annualized yield at date of purchase. See accompanying notes to financial statements. 10 THE GABELLI GROWTH FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1998 - ---------------------------------------------------------- ASSETS: Investments, at value (Cost $1,286,330,888)........................ $1,864,774,976 Cash..................................... 562 Dividends receivable..................... 1,009,947 Receivable for investments sold.......... 181,346 Receivable for capital shares sold....... 4,775,404 -------------- TOTAL ASSETS........................... 1,870,742,235 -------------- LIABILITIES: Payable for Fund shares redeemed......... 3,469,624 Payable for investment advisory fees..... 1,509,796 Payable for distribution fees............ 377,449 Payable for custodian fees............... 47,000 Payable to Trustees...................... 2,056 Other accrued expenses................... 780,216 -------------- TOTAL LIABILITIES...................... 6,186,141 -------------- NET ASSETS applicable to 52,671,581 shares outstanding................... $1,864,556,094 ============== NET ASSETS CONSIST OF: Shares of beneficial interest, at par value.................................. $ 526,716 Additional paid-in capital............... 1,286,184,261 Distributions in excess of net realized gain on investments and foreign currency transactions.................. (598,971) Net unrealized appreciation on investments............................ 578,444,088 -------------- TOTAL NET ASSETS....................... $1,864,556,094 ============== NET ASSET VALUE, offering and redemption price per share ($1,864,556,094 / 52,671,581 shares outstanding; unlimited number of shares authorized of $0.01 par value)............................... $35.40 ======
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 - ---------------------------------------------------------- INVESTMENT INCOME: Dividends................................. $ 12,908,009 Interest.................................. 2,797,401 ------------ TOTAL INVESTMENT INCOME................. 15,705,410 ------------ EXPENSES: Investment advisory fees.................. 14,542,759 Distribution fees......................... 3,508,441 Shareholder services fees................. 1,096,456 Custodian fees............................ 235,178 Trustees' fees............................ 89,000 Legal and audit fees...................... 60,817 Miscellaneous expenses.................... 991,136 ------------ TOTAL EXPENSES.......................... 20,523,787 ------------ NET INVESTMENT LOSS..................... (4,818,377) ------------ NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain on investments and foreign currency transactions........... 87,865,238 Net change in unrealized appreciation on investments............................. 299,383,776 ------------ NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS............................ 387,249,014 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................ $382,430,637 ============
STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- OPERATIONS: Net investment loss..................................... $ (4,818,377) $ (1,809,135) Net realized gain on investments and foreign currency transactions........................................... 87,865,238 161,959,991 Net change in unrealized appreciation on investments.... 299,383,776 106,084,148 -------------- ------------- Net increase in net assets resulting from operations.......................................... 382,430,637 266,235,004 -------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income................................... -- (47,113) In excess of net investment income...................... -- (8,321) Net realized gain on investments........................ (87,865,238) (160,337,412) In excess of net realized gain on investments........... (202,354) (97,442) -------------- ------------- Total distributions to shareholders................. (88,067,592) (160,490,288) -------------- ------------- SHARE TRANSACTIONS: Net increase in net assets from shares of beneficial interest transactions.................................. 626,207,999 228,835,326 -------------- ------------- Net increase in net assets.......................... 920,571,044 334,580,042 NET ASSETS: Beginning of period..................................... 943,985,050 609,405,008 -------------- ------------- End of period........................................... $1,864,556,094 $ 943,985,050 ============== =============
See accompanying notes to financial statements. 11 THE GABELLI GROWTH FUND NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION. The Gabelli Growth Fund (the "Fund") was organized on October 24, 1986 as a Massachusetts business trust. The Fund is a diversified, open-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund's primary objective is capital appreciation. The Fund commenced investment operations on April 10, 1987. 2. SIGNIFICANT ACCOUNTING POLICIES. The preparation of financial statements in accordance with generally accepted accounting principles 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. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. SECURITY VALUATION. Portfolio securities listed or traded on a nationally recognized securities exchange, quoted by the National Association of Securities Dealers Automated Quotations, Inc. ("Nasdaq") or traded on foreign exchanges are valued at the last sale price on that exchange as of the close of business on the day the securities are being valued (if there were no sales that day, the security is valued at the average of the closing bid and asked prices or, if there were no asked prices quoted on that day, then the security is valued at the closing bid price on that day). All other portfolio securities for which over-the-counter market quotations are readily available are valued at the latest average of the bid and asked prices. Portfolio securities traded on more than one national securities exchange or market are valued according to the broadest and most representative market, as determined by Gabelli Funds, Inc. (the "Adviser"). Securities and assets for which market quotations are not readily available are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Board of Trustees. Short term debt securities with remaining maturities of 60 days or less are valued at amortized cost, unless the Trustees determine such does not reflect the securities' fair value, in which case these securities will be valued at their fair value as determined by the Trustees. Short term debt instruments having a greater maturity are valued at the highest bid price obtained from a dealer maintaining an active market in those securities. REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with primary government securities dealers recognized by the Federal Reserve Bank of New York, with member banks of the Federal Reserve System or with other brokers or dealers that meet credit guidelines established by the Trustees. Under the terms of a typical repurchase agreement, the Fund takes possession of an underlying debt obligation subject to an obligation of the seller to repurchase, and the Fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during the Fund's holding period. The Fund will always receive and maintain securities as collateral whose market value, including accrued interest, will be at least equal to 100% of the dollar amount invested by the Fund in each agreement. The Fund will make payment for such securities only upon physical delivery or upon evidence of book entry transfer of the collateral to the account of the custodian. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market on a daily basis to maintain the adequacy of the collateral. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited. 12 THE GABELLI GROWTH FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are accounted for on the trade date with realized gain or loss on investments determined by using the identified cost method. Interest income (including amortization of premium and accretion of discount) is recorded as earned. Dividend income is recorded on the ex-dividend date. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions to shareholders are recorded on the ex-dividend date. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments of income and gains on various investment securities held by the Fund, timing differences and differing characterization of distributions made by the Fund. Permanent differences incurred during the year ended December 31, 1998 resulting from different book and tax accounting policies for currency gains and losses and certain distributions received by the Fund are reclassified between net investment income (loss) and net realized gain (loss) on investments at year end. For the year ended December 31, 1998, reclassifications were made to increase undistributed net investment loss for $4,818,377 and decrease distributions in excess of net realized gain on investments and foreign currency transactions for $3,085 with an offsetting adjustment to additional paid-in capital. PROVISION FOR INCOME TAXES. The Fund has qualified and intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. As a result, a Federal income tax provision is not required. 3. INVESTMENT ADVISORY AGREEMENT. The Fund has entered into an investment advisory agreement (the "Advisory Agreement") with the Adviser which provides that the Fund will pay the Adviser a fee, computed daily and paid monthly, at the annual rate of 1.00% of the value of the Fund's average daily net assets. In accordance with the Advisory Agreement, the Adviser provides a continuous investment program for the Fund's portfolio, oversees the administration of all aspects of the Fund's business and affairs and pays the compensation of all Officers and Trustees of the Fund who are its affiliates. 4. DISTRIBUTION PLAN. The Fund's Board of Trustees has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. For the year ended December 31, 1998, the Fund incurred distribution costs payable to Gabelli & Company, Inc., an indirect wholly-owned subsidiary of the Adviser, of $3,508,441, or 0.25% of average daily net assets, the annual limitation under the Plan. Such payments are accrued daily and paid monthly. 5. PORTFOLIO SECURITIES. Purchases and sales of securities for the year ended December 31, 1998, other than short term securities, aggregated $1,098,283,197 and $563,841,299, respectively. 6. LINE OF CREDIT. The Fund has access to an unsecured line of credit up to $25,000,000 from the custodian for temporary borrowing purposes. Borrowings under this arrangement bear interest at 0.75% above the Federal Funds rate on outstanding balances. There were no borrowings against the line of credit during the year ended December 31, 1998. 13 THE GABELLI GROWTH FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 7. SHARES OF BENEFICIAL INTEREST. Transactions in shares of beneficial interest were as follows:
YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------ -------------- ------------ -------------- Shares sold................................................ 31,588,783 $ 992,367,041 29,696,140 $ 857,263,991 Shares issued upon reinvestment of dividends............... 2,299,838 80,836,284 5,734,075 153,468,414 Shares redeemed............................................ (14,188,364) (446,995,326) (27,348,725) (781,897,079) ----------- ------------- ----------- ------------- Net increase........................................... 19,700,257 $ 626,207,999 8,081,490 $ 228,835,326 =========== ============= =========== =============
8. SUBSEQUENT EVENT. On February 9, 1999, the Adviser reorganized its operations and corporate structure by transferring a portion of its assets and liabilities to a successor adviser, Gabelli Funds, LLC, which is wholly owned by Gabelli Asset Management Inc., a newly formed publicly traded company that is 80% owned by the former Adviser. Counsel to the former Adviser has concluded that the ownership change does not constitute an assignment as defined by the Investment Company Act of 1940, as amended. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- Selected data for a share of beneficial interest outstanding throughout each period.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- OPERATING PERFORMANCE: Net asset value, beginning of year....................... $ 28.63 $ 24.14 $ 22.16 $ 19.68 $ 23.26 ---------- -------- -------- -------- -------- Net investment income/(loss)............................. (0.07) (0.06) 0.03 0.05 0.07 Net realized and unrealized gain/(loss) on investments... 8.58 10.34 4.27 6.39 (0.86) ---------- -------- -------- -------- -------- Total from investment operations......................... 8.51 10.28 4.30 6.44 (0.79) ---------- -------- -------- -------- -------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income.................................... -- (0.00)(a) (0.02) (0.05) (0.08) In excess of net investment income....................... -- (0.00)(a) -- -- (0.01) Net realized gain on investments......................... (1.74) (5.79) (2.30) (3.91) (2.39) In excess of net realized gains.......................... (0.00)(a) (0.00)(a) -- -- (0.31) ---------- -------- -------- -------- -------- Total distributions...................................... (1.74) (5.79) (2.32) (3.96) (2.79) ---------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD........................... $ 35.40 $ 28.63 $ 24.14 $ 22.16 $ 19.68 ========== ======== ======== ======== ======== Total return+............................................ 29.8% 42.6% 19.4% 32.7% (3.4)% ========== ======== ======== ======== ======== RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA: Net assets, end of period (in 000's)..................... $1,864,556 $943,985 $609,405 $533,041 $482,471 Ratio of net investment income/(loss) to average net assets................................................. (0.33)% (0.23)% 0.12% 0.22% 0.31% Ratio of operating expenses to average net assets........ 1.41% 1.43% 1.43% 1.44% 1.36% Portfolio turnover rate.................................. 40% 83% 88% 140% 40%
- --------------- + Total return represents aggregate total return of a hypothetical $1,000 investment at the beginning of the period and sold at the end of the period including reinvestment of dividends. (a) Amount represents less than $0.005 per share. See accompanying notes to financial statements. 14 REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF THE GABELLI GROWTH FUND In our opinion, the accompanying statement of assets and liabilities, including the portfolio 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 Gabelli Growth Fund (the "Fund") at December 31, 1998, 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 generally accepted accounting principles. 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 generally accepted auditing standards 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, 1998 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP 1177 Avenue of the Americas New York, New York February 25, 1999 1998 TAX NOTICE TO SHAREHOLDERS (UNAUDITED) For the year ended December 31, 1998, the Fund paid to shareholders, on December 28, 1998, long term capital gains totaling $1.745 per share. The Fund did not make an ordinary income distribution (comprised of net investment income and short term capital gains) in 1998. 15 THE GABELLI GROWTH FUND One Corporate Center Rye, New York 10580-1434 1-800-GABELLI [1-800-422-3554] FAX: 1-914-921-5118 HTTP://WWW.GABELLI.COM E-MAIL: INFO@GABELLI.COM (Net Asset Value may be obtained daily by calling 1-800-GABELLI after 6:00 P.M.) BOARD OF TRUSTEES Mario J. Gabelli, CFA Karl Otto Pohl Chairman and Chief Former President Investment Officer Deutsche Bundesbank Gabelli Asset Management Inc. Felix J. Christiana Anthony R. Pustorino Former Senior Vice President Certified Public Accountant Dollar Dry Dock Savings Bank Professor, Pace University Anthony J. Colavita Anthony Torna Attorney-at-Law Herzog, Heine & Geduld, Inc. Anthony J. Colavita, P.C. James P. Conn Anthonie C. van Ekris Former Chief Investment Managing Director Officer BALMAC International, Inc. Financial Security Assurance Holdings Ltd. OFFICERS AND PORTFOLIO MANAGERS Bruce N. Alpert Howard F. Ward, CFA President and Treasurer Portfolio Manager James E. McKee Secretary
DISTRIBUTOR Gabelli & Company, Inc. CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT State Street Bank and Trust Company LEGAL COUNSEL Skadden, Arps, Slate, Meagher & Flom LLP - --------------------------------------- This report is submitted for the general information of the shareholders of The Gabelli Growth Fund. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. - --------------------------------------- [THE GABELLI GROWTH FUND LOGO] THE GABELLI GROWTH FUND ANNUAL REPORT DECEMBER 31, 1998 -----END PRIVACY-ENHANCED MESSAGE-----