N-30D 1 cf2q2002.htm SEMI ANNUAL REPORT 6-30-02 Semi Annual Report 6-30-02

Dear Shareholder:

   A correction is when the other fellow's stocks go down; a bear market is when your stocks go down too. For two years the stock market has been correcting the irrational exuberance in technology and dot-com stocks. Last quarter the decline broadened to encompass more than just those less favored few:

 

2nd Qtr.

Year to
Date

Nasdaq Composite

-20.7%

-25.0%

S&P 500

-13.4%

-13.2%

Morningstar Large Value

-10.8%

-8.9%

 

 

 

Your Portfolio

-6.2%

-0.9%

 

Which One?

     The highest and best value we can add to your portfolio is choosing which stocks to avoid, not which ones to buy. We try to avoid losses not only with the stocks we consider for purchase, but also with the stocks we currently hold in your portfolio. Our assumption is that at least one of our current holdings is a problem; the issue is to find which one. Mikhail Gorbachev stated the same concept in a different context:

"They say that Mitterand has 100 lovers-one with AIDS but he doesn't know which one. Bush has 100 bodyguards-one a terrorist but he doesn't know which one. Gorbachev has 100 economic advisors-one is smart but he doesn't know which one."

     In thinking about which of your current holdings might be a potential problem, the issue is not the price of the stock. Equity prices can be volatile for all kinds of reasons -the good, the bad, and the unknowable. Our focus is on the value of that company to a patient, long-term partner. The question we address through a policy of regular review is simple-have the changing facts made any material difference to the value of the enterprise? The major risk we consider is the permanent loss of value, a risk which is only one of many in the minds of investors.

A Tale of Two Risks

     Risk is a remarkably misleading word for investors. It is singular in form but plural in fact. Choosing which risk to avoid makes a major difference to the portfolio you have and the performance you receive. In this case the choice is between benchmark risk and permanent loss of capital.
     Avoiding criticism is a major objective for most people, investment managers included. The safest way to avoid criticism and, most importantly, to keep one's job is to stay close to an investment benchmark such as the S&P 500. The calculus of one's career is simple; deviating from the benchmark will create the risk of being criticized and fired. Even when the benchmark contains stocks which are widely recognized to be wildly overvalued, deviating from that overvalued benchmark can be hazardous to an investment manager's health. Economists use the term "agency problem" to describe how the goals of the agent (e.g. not being criticized and fired) may not be congruent with those of his client (e.g. to preserve and increase his capital). This is nothing new. J.M. Keynes wrote in 1936 about the peril of deviating from one's conventional benchmark:

"Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for the most criticism, wherever investment funds are managed by committees or boards or banks. For it is the essence of his behavior that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

     We have chosen to avoid a different risk in shaping your portfolio-long-term loss of capital. This means we often will deviate from benchmarks such as the S&P 500. It also means we will be criticized in a year such as 1999 when "irrational exuberance" reached its peak. We did not buy clearly overvalued dot-com and technology stocks then, a decision that made us look like intellectually deficient dinosaurs for an uncomfortably long time. We appreciate the confidence and patience of our investors then; someday we will need their confidence and patience again.
     Mae West said, "Between two evils I always pick the one I never tried before." Her basis of choice may be capricious, but not her recognition of the need to choose. There is no such thing as a decision to avoid risk, only a choice about what risks to avoid. Even Treasury bills, which are riskless as to their nominal value, are risky in terms of their real (inflation adjusted) value, particularly on an after-tax basis. Our basic decision is to try to avoid the permanent loss of your capital by avoiding overvalued stocks and by maintaining a margin of safety. This focus on capital preservation produces an unconventional portfolio of stocks and, we believe, a better one.

Any Hope of Not Needing to Worry?

     Not a chance.
     That hopeful question came from a shareholder. The answer, unfortunately, is a clear "no." We worry about every stock in your portfolio in case we are wrong, which occasionally we are. There is no such thing as a riskless stock or worry-free portfolio. Our continued efforts to address risk and to maintain a margin of safety are intended to reduce the rational need for worry, but no one can eliminate it.
     The psychological need to avoid worry often creates a religious-like faith in some stocks, a faith which few (if any) real world companies can justify over time. AT&T and IBM were warm, fuzzy and worry-free stocks to a previous generation of investors. No one regards them that way today. Cisco and GE were more recent additions to the pantheon of worry-free stocks, at least until the recent declines in their share prices turned their faithful followers into angry apostates. Since "safe stocks" generally carry premium prices, an investor who holds them faces two related risks-the business may falter and the valuation premium may shrink. Investors often pay a high price for the understandable but unattainable goal of a worry-free stock.

The Giant Mutant Cockroach

     We are not doing our job right unless we have some controversial and worry-generating stocks in your portfolio. Currently Tyco qualifies as the most controversial by a wide margin. The following observations focus on separating facts which are known from fears which are possible:

  • What about its accounting? Tyco's accounting is complex, as you might expect from a highly diversified company with hundreds of subsidiaries. They did encourage about-to-be-acquired companies to pay expenses aggressively, a policy that made subsequent growth rates appear larger. The overall accounting, however, receives an unqualified opinion from its auditor, an opinion that still carries weight even in the Age of Enron. The Securities and Exchange Commission also conducted an inquiry into Tyco's accounting three years ago and recommended only a few minor changes. If there is any significant accounting fraud, it is buried so deeply that neither auditors nor federal investigators can find it.

  • What about the resignation of its CEO? Normally a resignation for "personal reasons" generates skepticism, but in this case the reasons are plausible-a criminal investigation into his personal taxes. Dennis Kozlowski's skill set was largely in buying more companies, a skill set no longer relevant to Tyco's current task of managing its existing businesses profitably. He also was an example of excessive executive compensation during the late 1990s, a mistake we hope Tyco's new board of directors will not repeat. In short, Kozlowski's departure does not change our value of the company's existing businesses.

  • What about CIT Financial? With the benefit of hindsight, Tyco paid too much for CIT a little over one year ago. Now CIT has been sold, a step that improves Tyco's balance sheet and better enables CIT to fund itself cheaply.

     A good but unwanted test of character for a rational investor is a decline in the price of his stock. If there is no change in value, then he should be willing to buy more. We viewed Kozlowski's departure as a non-event for value and bought more stock when its price dived after he left. Panic, fear and hysteria often (but not always) create opportunities for an investor who is not afflicted by those emotions. It probably will be many months, however, before there are enough facts to confirm or deny whether the current panic is justified.
     Of course we could be wrong. We think a lot about that in a business where present decisions about future events make some mistakes inevitable. Warren Buffett summarized the problem: "If I could take back just the ten worst mistakes I have made I would add a zero to my net worth." While we are less worried than other investors about the conventional concerns over Tyco, we recognize there is a real risk in the cockroach theory-where a few roaches are visible, many more are likely. Tyco's stock is so cheap, however, that no ordinary cockroach will do. Only a giant mutant cockroach-sized problem can justify its current modest stock price. No such creature is visible as we write this letter; one may become visible as you read it. Based on present facts, however, we believe Tyco's share price pays an investor very well to take the risk that the future will mutate his fears into facts.

Things Go Worse with Coke

     It began with Coca-Cola, the first blue chip company to grant its CEO a compensation package with numbers once reserved for the age of dinosaur bones. That precedent near the beginning of the 1990s was like a small snowball tossed on top of a large mountain; as the decade ended it rolled into an avalanche of excess. Precedent plays a powerful role in regulating human behavior for better or worse. Coke chose worse. In the context of those far more frugal times, the company set a precedent for executive pay best described as "Whoopee!"
     Things got worse with Coke. Not content with establishing a precedent for lavish pay, the company's directors decided to create a second repellant principle of executive compensation-awesome pay for awful performance. There was some rationale for the original large pay package because then-CEO Goizueta presided over a long period of excellent fundamental and financial performance. That was not the case with his successors who largely missed the second half of the longest economic expansion in American history. They received a fortune anyway.
     We mention the issue of executive compensation because it is part of today's hot topic of corporate governance. The media rightly is busy digging up abuses of corporate governance, although its prime focus seems to be on present conditions rather than past causes. The consequences for future investing will be a topic in our next quarterly letter.
      There was one change in our firm's staff recently. We are pleased to announce that effective July 1st, Nugroho "Dédé" Soeharto became a principal of the firm.

Sincerely,

/s/
James H. Gipson
Chairman & President

/s/
Michael C. Sandler
Co-Manager

/s/
Bruce G. Veaco
Co-Manager

/s/
Peter J. Quinn
Co-Manager

/s/
Kelly Sueoka
Co-Manager

 

July 2, 2002

Investment Portfolio
June 30 2002

Common Stocks (67.8%)

Shares

 

 

Value

 

 

Advertising (3.2%)

 

5,674,300

 

The Interpublic Group of Companies, Inc.

$140,495,668

 

 

 

 

 

 

Food & Tobacco (17.5%)

 

4,683,200

 

Philip Morris Companies Inc.

204,562,176

6,155,900

 

McDonald's Corporation

175,135,355

3,943,700

 

UST Inc.

134,085,800

3,152,700

 

Kraft Foods Inc. Class A

129,103,065

4,823,500

 

Sara Lee Corporation

99,557,040

1,222,624

 

Tyson Foods Inc. Class A

18,962,898

 

 

 

761,406,334

 

 

 

 

 

 

Industrial & Electrical Equipment (9.7%)

 

27,319,200

 

Tyco International Ltd.

369,082,392

1,323,300

Pitney Bowes Inc.

52,561,476

 

 

 

421,643,868

 

 

 

 

 

 

Insurance & Financial Services (4.7%)

 

4,500,300

 

American Express Company

163,450,896

1,344,040

 

Old Republic International Corporation

42,337,260

 

 

 

205,788,156

 

 

 

 

 

 

Mortgage Finance (13.8%)

 

4,881,300

 

Freddie Mac

298,735,560

2,863,000

 

Fannie Mae

211,146,250

1,314,100

 

Golden West Financial Corporation

90,383,798

 

 

 

600,265,608

 

 

 

 

 

 

Real Estate Investments (9.7%)

 

5,155,800

 

Equity Residential

148,229,250

2,692,300

 

Equity Office Properties Trust

81,038,230

2,728,800

 

Archstone-Smith Trust

72,858,960

1,365,900

 

Apartment Investment & Management Company

67,202,280

1,474,500

 

Mack-Cali Realty Corporation

51,828,675

 

 

 

421,157,395

 

 

 

 

 

 

Retailing (6.0%)

 

4,103,200

 

Safeway Inc.*

119,772,408

4,192,400

 

The Kroger Co.*

83,428,760

3,049,000

 

Staples, Inc.*

60,065,300

 

 

 

263,266,468

 

 

 

 

 

 

Special Situations (3.2%)

 

3,561,200

 

R.R. Donnelley & Sons Company

98,111,060

1,084,400

 

Manpower Inc.

39,851,700

 

 

 

137,962,760

 

 

 

 

 

 

Total Common Stocks (Cost $2,933,225,333)

2,951,986,257

Short Term Investments (31.6%)

Par Value

 

 

 

 

 

Short Term Notes (26.6%)

 

 

 

Federal Home Loan Bank Board Agency Notes (10.8%)

$219,710,000

 

3.875%, due 12/15/04

222,348,717

 145,810,000

 

3.625%, due 10/15/04

147,020,223

 98,668,000

 

4.750%, due 06/28/04

101,922,071

 

 

 

471,291,011

 

 

U.S. Treasury Notes (6.5%)

 

$277,708,000

 

3.875%, due 07/31/03

283,031,662

 

 

Federal Home Loan Mortgage Corporation (4.3%)

$183,525,000

 

4.500%, due 08/15/04

188,834,378

 

 

Federal National Mortgage Association Reference Notes (4.2%)

$183,674,000

 

3.500%. due 09/15/04

184,889,922

 

 

Federal Farm Credit Bank Agency Notes (0.8%) 

$ 32,420,000

 

3.875%, due 12/15/04

32,794,127

 

 

Total Short Term Notes ($1,145,254,882)

1,160,841,100

 

 

State Street Repurchase Agreements (5.0%)  (Note 6)

$219,395,000

 

1.25%, dated 06/28/02, due 07/01/02 (Cost $219,395,000)

219,395,000

 

 

Total Short Term Investments (Cost $1,364,649,882)

1,380,236,100

 

 

Total Investment Portfolio (99.4%) (Cost $4,297,875,215)

4,332,222,357

Cash and Receivables less Liabilities (0.6%)

26,198,171

Net Assets (100.0%)

$4,358,420,528
===========

*Non-income producing securities
See notes to financial statements

(UNAUDITED)

Statement of Assets and Liabilities
June 30, 2002

Assets:

 

 

 

Investment Portfolio:

 

 

Investment securities, at market value (identified cost: $4,297,875,215)

$4,332,222,357

 

 

 

 

 

Cash

 

93

 

 

 

4,332,222,450

 

 

 

 

 

Receivable for:

 

 

Dividends & interest

18,863,670

 

Fund shares sold

16,190,486

 

Investments sold

3,491,575

 

Directed commission recapture (Note 5)

334,480

 

 

 

38,880,211

 

 

 

4,371,102,661

Liabilities:

 

 

Payable for:

 

 

 

Fund shares repurchased

8,649,173

 

Accrued expenses (including $3,651,919 due adviser)

4,032,960

 

 

 

12,682,133

 

 

 

 

Net Assets: (equivalent to $82.81 per share on 52,630,277 shares

 

 

of Capital Stock outstanding-200,000,000 shares authorized)

$4,358,420,528
==============

 

 

 

 

Summary of Shareholders' Equity:

 

 

Paid-in Capital

$4,163,006,333

 

Undistributed realized capital gains (Note 4)

134,346,715

 

Unrealized appreciation of investments (Note 4)

34,347,142

 

Undistributed net investment income

26,720,338

 

Net assets at June 30, 2002

$4,358,420,528
==============

See notes to financial statements.

 

(UNAUDITED)

Statement of Operations
Six Months Ended June 30, 2002

 

 

 

 

Investment Income:

 

 

 

Dividends

 

$29,967,415

 

Interest

 

16,570,408

 

Total Investment Income

 

46,537,823

 

 

 

 

Expenses:

 

 

 

Management fee (Note 2)

$18,726,153

 

 

Transfer agent

1,291,922

 

 

Registration fees

296,150

 

 

Custodian and accounting (Note 5)

204,165

 

 

Postage & other

184,393

 

 

Printing

61,586

 

 

Insurance

23,138

 

 

Legal

10,231

 

 

Auditing

9,383

 

 

Directors' fees (Note 2)

7,519

 

 

ICI Dues

7,304

 

 

Taxes

400

 

 

Miscellaneous

1,080

 

 

 

20,823,424

 

 

Reduction of Expenses (Note 5)

(974,970)

 

 

Total Expenses

 

19,848,454

 

Net Investment Income

 

26,689,369

 

 

 

 

Net Realized and Unrealized Gain on Investments:

 

 

Realized gain on investments (excluding short-term investments):

 

 

Proceeds from investments sold

570,940,841

 

 

Cost of investments sold

437,623,689

 

 

Net realized gain on investments (Notes 3 and 4)

133,317,152

 

Unrealized appreciation of investments:

 

 

 

Beginning of period

296,345,490

 

 

End of period (Note 4)

34,347,142

 

 

Decrease in unrealized appreciation of investments

(261,998,348)

 

Net realized and unrealized gain on investments

(128,681,196)

Net Increase in Net Assets resulting from Operations

$(101,991,827)

 

=============

(UNAUDITED)

Statement of Changes in Net Assets

 

 

 

Six Months Ended

Year Ended

 

 

June 30, 2002

Dec. 31, 2001

Increase in Net Assets:

 

 

 

 

Operations:

 

 

 

 

Net investment income

 

$26,689,369

$ 32,083,043

 

Net realized gain on investments (Note 3 and 4)

133,317,152

82,778,683

 

Net unrealized (depreciation) appreciation investments

(261,998,348)

74,306,122

 

Net (decrease) increase in net assets resulting from operations

(101,991,827)

189,167,848

 

 

 

 

 

Distributions to shareholders from:

 

 

 

Net investment income

 

-0-

(32,052,074)

 

Net realized capital gain

 

-0-

(81,749,120)

 

Decrease in net assets resulting from distributions

-0-

(113,801,194)

 

Capital Stock Transactions:

 

 

 

 

Proceeds from Capital Stock sold

 

 

 

(25,664,882 and 22,008,326 shares, respectively)

2,220,576,825

1,799,146,298

 

Proceeds from Capital Stock purchased by

 

 

 

reinvestment of dividends and distributions

 

 

 

(-0- and 1,799,323 shares, respectively)

-0-

109,265,284

 

Cost of Capital Stock redeemed

 

 

 

 

(5,178,532 and 8,424,197 shares, respectively)

(445,295,088)

(665,023,689)

 

Increase in net assets resulting

 

 

 

from Capital Stock transactions

 

1,775,281,737

1,243,387,893

 

Total increase in net assets

1,673,289,910

1,318,754,547

Net Assets:

 

 

 

 Beginning of period (includes $30,969 and $-0- of undistributed

 net investment income, respectively)

2,685,130,618

1,366,376,071

 End of period (includes $26,720,338 and $ 30,969 of undistributed

 

 net investment income, respectively)

$ 4,358,420,528
===============

$ 2,685,130,618
===============

See notes to financial statements

(UNAUDITED)

Statement of Financial Highlights

Six Months

Ended June 30

              Year Ended December. 31,            

2002

2001

2000

1999

1998

1997

Per Share Data

Net asset value
     beginning of period

$83.53

$79.25

$65.28

$75.37

$76.86

$67.57

Income (loss) from investment operations

     Net investment income

0.50

1.08

1.83

2.27

1.64

1.36

     Net realized and unrealized
        gain (loss) on investments

(1.22)

7.03

22.40

(3.96)

11.36

19.12

Total income (loss)
     from investment operations

(0.72)

8.11

24.23

(1.69)

13.00

20.48

Less distributions

     Dividends from net
        investment income

-

(1.08)

(1.86)

(2.25)

(1.63)

(1.36)

     Distributions of
        Return of Capital

-

-

(0.02)

-

-

-

     Distributions from net
        realized gain on investments

-

(2.75)

(8.38)

(6.15)

(12.86)

(9.83)

Net asset value, end of period

$82.81

$83.53

$79.25

$65.28

$75.37

$76.86

TOTAL RETURN

(0.9%)
======

10.3%
======

37.4%
=====

(2.0%)
=====

19.2%
=====

30.2%
=====

Ratios and Supplemental Data:

Net assets ($000s),
     end of period

$4,358,420

$2,685,131

$1,366,376

$960,722

$1,232,319

$824,083

Ratio of expense to average net assets:

     Net of Expense Reduction      (Note 5)

1.06%

1.08%

1.09%

1.10%

1.06%

1.08%

     Gross of Expense      Reduction

1.11%

1.12%

1.11%

1.11%

1.08%

1.09%

Ratio of net investment income
     to average net assets

1.43%

1.72%

2.88%

2.54%

2.13%

1.84%

Portfolio turnover rate

31%

23%

46%

63%

65%

31%

Number of share outstanding
     at end of period (000s)

52,630

32,144

17,241

14,716

16,350

10,721

 

See notes to financial statements

Notes to Financial Statements
June 30, 2002

note 1 - The Clipper FundSM ("Fund") is registered under the Investment Company Act of 1940, as amended, as a non-diversified open-end investment company. The investment objective of the Fund is long-term capital growth and capital preservation achieved primarily by investing in equity and equity substitute securities that are considered by Fund management and the Investment Adviser to have long-term capital appreciation potential. Bonds may be used when they are judged to offer higher potential long-term returns than stocks. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles in the United States:

(a)

Security Valuation - Investments in securities traded on a national securities exchange are valued at the last sale price on such exchange on the business day as of which such value is being determined. Securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the last reported bid price. If no bid price is quoted on such day, then the security is valued by such method as the Board of Directors of the Fund shall determine in good faith to reflect its fair value. Discounts and premiums are accreted and amortized over the life of the respective securities. Short term investments are stated at amortized cost, which approximates value. All other assets of the Fund, including restricted and not readily marketable securities, are valued in such manner as the Board of Directors of the Fund in good faith deems appropriate to reflect their fair value.

(b)

Federal Income Taxes - The Fund intends to comply with the requirements of the Internal Revenue Code, as amended, applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required.

(c)

Use of Estimates - The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

(d)

Other - As is common in the industry, security transactions are recorded on the trade date. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest income is recorded on the accrual basis.

note 2 - The Investment Adviser's management fee is equal to 1% per annum of the Fund's average daily net asset value. The management fee is accrued daily in computing the net asset value per share.

Each Director who is not an interested person of the Investment Adviser is compensated by the Fund at the rate of $1,250 per quarter.

note 3 - The cost of securities purchased (excluding short-term investments) for the six months ended June 30, 2002, was $1,762,577,653. The cost of securities held is the same for Federal income tax and financial reporting purposes. Realized gains or losses are based on the specific identification method.

note 4 - During the six months ended June 30, 2002, the Fund realized net capital gains of $133,317,152 from securities transactions for Federal income tax and financial reporting purposes. As of June 30, 2002, unrealized appreciation of investment securities for tax and financial reporting purposes aggregated $34,347,142 of which $187,428,063 related to appreciated securities and $153,080,921 related to depreciated securities.

note 5 - During the six months ended June 30, 2002, the total amount of transactions and related commissions with respect to which the Fund directed brokerage transactions to brokers, in order to reduce operating expenses, was $880,432,231 and $1,306,964 respectively, of which $974,969 in commissions were recaptured to off set operating expenses.

note 6 - As of June 30, 2002, the Fund held State Street Bank repurchase agreements, collateralized by U.S. Government Securities, due November 20 and 22, 2002, February 13, March 28, May 28 and 29, June 5 and 13 and November 11, 2003, and March 18, 2004, respectively. The Fund requires the custodian to take possession, to have legally segregated in the Federal Reserve Book Entry System or to have segregated within the custodian's vault, all securities held as collateral for repurchase agreements. The market value of the underlying securities is required to be at least 102% of the resale price at the time of purchase. If the seller (State Street Bank & Trust Co.) of the agreement defaults and the value of the collateral declines, or if the seller enters an insolvency proceeding, realization of the value of the collateral by the Fund may be delayed or limited.

Proxy Results


On March 22, 2002, the Annual Shareholders' meeting for the Clipper FundSM was held. At the meeting, shareholders were asked to approve a slate of four (4) directors to serve for the coming year.
Elected as directors of the Fund were James H. Gipson, Norman B. Williamson, Lawrence P. McNamee and F. Otis Booth, Jr.
Votes were cast as follows:

 

 

 

 

Broker

 

For

Against

Withheld

Non-Votes

 

 

 

 

 

James H. Gipson

20,072,070

-

433,128

-

Norman B. Williamson

20,373,304

-

131,894

-

Lawrence P. McNamee

20,373,412

-

131,786

-

F. Otis Booth, Jr.

20,365,762

-

139,436

-

Performance
June 30, 2002

 

 

Morningstar

 

 

CLIPPER

Large Value

S&P 500

Compounded Annual Returns:

 

 

 

One year

5.0%

(12.2%)

(18.0%)

Three Years

12.3%

(3.2%)

(9.2%)

Five Years

14.1%

3.8%

3.7%

Ten Years

17.0%

10.8%

11.4%

Fifteen Years

15.1%

11.2%

10.9%

Since Inception (February 29, 1984)

16.6%

12.1%

13.6%

 

 

 

 

Risk

 

 

 

 

Third Quarter, 2001

(2.5%)

(12.3%)

(14.7%)

Fourth Quarter, 1987

(7.5%)

(19.2%)

(21.5%)

Cumulative Decline During Down Quarters

(50.9%)

(67.9%)

(74.3%)

Beta Since Inception (February 29, 1984)

0.52

0.81

1.00

Notes
All returns are historical and include changes in share price and reinvestment of dividends and capital gains. Past performance is no guarantee of future results. Investment return and principal value of investments fluctuate. Investor's shares, when redeemed, may be worth more or less than their original cost.
Clipper Fund's performance is compared with that of the S&P 500 Index, an unmanaged index of 500 companies widely recognized as representative of the equity market in general and the Morningstar Large Value Funds Index, an index of 945 actively managed large value mutual funds monitored by Morningstar.
As disclosed in the letter to shareholders, the Nasdaq Composite Index, which is market-value weighted, measures all Nasdaq domestic and non-U.S. based common stocks listed on the Nasdaq Stock Market.

CLIPPER FUNDSM

 

9601 Wilshire Boulevard, Suite 800

 

Beverly Hills, California 90210

 

Telephone (800) 776-5033

 

Shareholder Services

 

& Audio Response (800) 432-2504

 

Internet: www.clipperfund.com

 

 

 

INVESTMENT ADVISER

 

Pacific Financial Research, Inc.
Internet: www.pfr.biz

 

 

 

DIRECTORS

QUARTERLY REPORT

June 30, 2002

F. Otis Booth, Jr.

James H. Gipson

Norman B. Williamson

Professor Lawrence P. McNamee

 

TRANSFER & DIVIDEND PAYING AGENT

National Financial Data Services

Post Office Box 219152

Kansas City, Missouri 64121-9152

(800) 432-2504

 

Overnight Address

330 W. 9th Street, 4th Fl.

Kansas City, MO 64105

 

CUSTODIAN

State Street Bank and Trust Company

 

COUNSEL

Paul, Hastings, Janofsky & Walker LLP

 

INDEPENDENT AUDITORS

Ernst & Young LLP

 

 

This report is not authorized for distribution to prospective investors unless accompanied by a current prospectus.

CF 2QTR 0602