May 1, 2002
[PHOTO]
Dear Shareholder:
The net asset value of the Zweig Fund, Inc. declined 1.4% for the three
months ended March 31, 2002, including the $0.195 distribution paid on January
10, 2002. During the same period, the Standard & Poor's 500 Index gained 0.3%,
including dividends. Our average equity exposure during the period was
approximately 93%.
Because our indicators were pretty bullish, we had a fairly high exposure.
However, the market was extremely choppy, with a lot of rotation among
industry groups. January was okay; February was very poor; and all the major
indexes staggered during the last few weeks of the quarter. As of March 31,
2002, our exposure was approximately 90%.
DISTRIBUTION DECLARED
On March 18, 2002, the Fund announced a distribution of $0.194 payable on
April 26, 2002, to shareholders of record on April 10, 2002. Including this
distribution, our total payout since the Fund's inception is now $17.119.
MARKET OUTLOOK
The Dow Jones Industrial Average rose 3.8% in the first quarter, while the
Nasdaq Composite Index dropped 5.3%. It was a very selective market. The
Nasdaq is dominated by technology, and there were a lot of technology
problems. Since the end of the first quarter, the Nasdaq has been even worse.
It's not easy to make a case that technology stocks are cheap. I am not saying
that some can't go up, but it has just been really tough. The Dow is a much
narrower group, but here, too, there have been problems. Recently, two big Dow
components--General Electric and IBM--have had accounting and other worries.
So, it's not easy going for the Dow either.
The Fed held interest rates steady in March, saying it viewed the risks to
the economy evenly balanced between sustained weakness and growth so strong it
could ignite inflation. Later, Fed Chairman Alan Greenspan indicated to
Congress that there would be no rush to raise rates from their 40-year lows.
He reported that inflation pressures are well contained.
Following last year's 11 rate cuts, a few hikes would still leave rates on
the low side. I don't think it would necessarily be a bad thing if the Fed
were to lift rates. The Fed would not act unless it felt that the economy was
stronger and the recession was over. A few modest hikes would not be a big
deal. Once you start getting into boosts of, say, 1 1/2% or 2%, it might be
time to start worrying.
The latest data suggest that the U.S. economy grew by 1.7% during last
year's fourth quarter, while productivity surged by 5.2%. These numbers are
still going to be revised. If these numbers are real, they are very favorable.
It means that you can get solid growth in the economy without inflation. Most
likely, the recession was over at the end of the third quarter or during the
fourth quarter. I think the first- quarter figures are likely to be a lot
stronger when they come out.
There are many other indications that the recession has ended. New factory
orders in March came in at the fastest rate in 14 years. The Institute for
Supply Management reported that
its factory index rose to 55.6 in March from 54.7 in February. The Fed said
that industrial production jumped 0.7% in March, the largest increase since
May 2000. Also, the Conference Board reported that its index of consumer
confidence rallied to 110.2 in March, its highest level since August.
I think the economy will also benefit in the short run by increased military
spending. Congress has authorized $17.5 billion for emergency war costs, and
President Bush has proposed increasing the military budget by $48 billion next
year and $120 billion over five years. This will result in a federal budget
deficit.
People have the wrong idea about budget surpluses and deficits. They view
deficits as something horrible and surpluses as something good. It is not that
simple. When the government runs a surplus, it puts a drag on the economy, as
it did during the last couple of years. Under these conditions, we would be
better off cutting taxes and giving the money back to the people.
I certainly am not suggesting that we should always run a deficit. But, we
are going to see deficits during recessions when incomes, earnings, and tax
receipts are down. That is the time the government should try to spend a bit
more to combat the recession. It can cut back the spending when the economy is
strong. Eventually, if the economy gets too strong, increased government
spending can lead to inflation and Fed hikes, and then you have problems.
After a span of low profits, the companies in the S&P 500 Index are
projected to report earnings of $11.23 per share for the first quarter, up
nearly 7% from the fourth quarter but off nearly 9% from the final quarter of
last year. I have no idea whether these figures will be met, but earnings have
been depressed. Historically, when we come out of a recession, earnings tend
to skyrocket. It is possible that this may not happen in the capital spending
area because of so much oversupply. However, I expect that a lot of industries
will see earnings recover. If not, we are in trouble, and I would get more
bearish.
With sales outpacing redemptions for the fifth consecutive month, investors
added $4.69 billion to stock mutual funds in February. That's what I like to
see--a moderate amount of money coming into mutual funds. Historically, the
huge amounts of inflows have come near market tops. That's when people get as
exuberant as they did during the first quarter of 2000. Conversely, when
people panic and dump their mutual funds, you are usually near a bottom.
That's what happened last September. We are now way past that market bottom.
What I would like to see is a slow and steady stream of money coming into the
funds. We could be in that territory now, and I hope it continues.
I am also pleased to see the decline in margin debt, which fell to $147.03
billion in February, a drop of 2.3% from the end of the fourth quarter. Since
the peak two years ago, when we had a speculative mania in technology, margin
debt has fallen approximately by half, which is good. Relative to market
capitalization, it is still on the high side. Relative to credit balances,
which represent cash in brokerage accounts, margin debt is very low. There is
more free cash in brokerage accounts than there is debt. We have only seen
that situation twice before--at the market bottoms in 1990-91 and 1987. With a
lot of the debt eliminated and a lot of cash in brokerage houses, there is
fuel to keep the market going. What you don't want to see is a lot of debt.
Another trend to watch is the number of new issues. Newly public companies
raised $10.2 billion in equity capital in the first quarter, up $7.1 billion
from the first quarter of last year. The figure for the first quarter of 2000
was $17.8 billion. The current moderate numbers are not bad. What you don't
want to see is what happened a few years ago when several new issues were
coming out daily, and the totals were huge. New issues eat up cash and take
money out of the market, so you don't want too many of them.
In addition to the above straightforward new issues, there have been a lot
of convertible
2
issues. This is a problem because they generally are sold by not-so-solid
companies that are having a hard time getting financing. They are able to sell
convertibles because people hedge them away by shorting the common stock.
There have been a lot of these pseudo-equity offerings. If you add them to the
overall total, I am sort of concerned, but I don't think we are at a danger
level yet.
Another market factor is the number of U.S. mergers and acquisitions. This
volume dropped by more than half to $88.9 billion in the first quarter from
$194.1 billion in the first quarter of 2001. I like to look at all these
figures together--the initial public offerings, the convertibles, and the
takeovers of other companies for cash. When mergers are just share for share,
they have no effect on supply and demand. Cash takeovers are positive for the
market because they shrink the number of shares and make cash available for
the market. It is not great that these transactions are slowing down. I wish
we had more cash takeovers.
Summing up, my monetary model is about neutral. Money supply growth has
slowed after having been very strong, but interest rates and inflation still
aren't bad. The sentiment area has actually improved in the past few weeks and
is at a high positive level. My overall model is consistent with somewhat
above-average returns for the market. However, I am not looking for a
gangbuster market. I don't have a crystal ball, but if you held a gun to my
head, I'd say the market could go up about 10% in the next nine to 12 months.
Right now, I am moderately bullish, but if my indicators worsen, we'll cut
back. If the indicators improve, we'll increase our exposure.
PORTFOLIO COMPOSITION
Our leading industry groups on March 31, 2002, included technology,
financial services, health care, manufacturing, retailing, and energy. With
the exception of manufacturing, all of the above groups appeared in our year-
end listing. During the quarter, we cut back our holdings in technology,
health care, retailing, and telecommunications. We maintained our positions in
financial services and energy and added to our manufacturing stocks.
Some of our largest individual holdings include Microsoft, Citigroup,
General Electric, Pfizer, Wal-Mart, Bank of America, Intel, Pepsi, and Wells
Fargo. In the above grouping, we added to our positions in Pepsi and Wells
Fargo.
Sincerely,
/s/ Martin E. Zweig, Ph.D.
Martin E. Zweig, Ph.D.
Chairman
3
THE ZWEIG FUND, INC.
STATEMENT OF NET ASSETS
March 31, 2002
(Unaudited)
Number of
Shares Value
--------- ------------
Common Stocks 90.20%
Aerospace & Air Transport 1.76%
Raytheon Co. ....................................... 68,000 $ 2,791,400
United Technologies Corp. .......................... 74,900 5,557,580
------------
8,348,980
------------
Autos -- Auto Parts 0.87%
General Motors Corp. ............................... 68,000 4,110,600
------------
Building & Forest Products 1.14%
International Paper Co. ............................ 71,700 3,083,817
Smurfit-Stone Container Corp. ...................... 136,000(a) 2,331,040
------------
5,414,857
------------
Chemicals 1.15%
Dow Chemical Co. ................................... 68,100 2,228,232
E. I. du Pont de Nemours & Co. ..................... 68,000 3,206,200
------------
5,434,432
------------
Commercial Services 3.37%
Cendant Corp. ...................................... 204,000(a) 3,916,800
FedEx Corp. ........................................ 34,000(a) 1,975,400
First Data Corp. ................................... 51,300 4,475,925
Omnicom Group, Inc. ................................ 42,400 4,002,560
Sabre Holdings Corp. ............................... 34,000(a) 1,588,140
------------
15,958,825
------------
Consumer Products & Services 5.07%
Anheuser-Busch Cos., Inc. .......................... 68,000 3,549,600
Colgate-Palmolive Co. .............................. 51,000 2,914,650
Kimberly-Clark Corp. ............................... 68,000 4,396,200
PepsiCo, Inc. ...................................... 136,200 7,014,300
Procter & Gamble Co. ............................... 68,000 6,126,120
------------
24,000,870
------------
4
Number of
Shares Value
--------- ------------
Finance -- Financial Services 15.03%
Allstate Corp. ..................................... 68,000 $ 2,568,360
American International Group, Inc. ................. 91,900 6,629,666
Bank of America Corp. .............................. 126,000 8,570,520
Capital One Financial Corp. ........................ 85,000 5,427,250
Citigroup, Inc. .................................... 286,200 14,172,624
Fannie Mae.......................................... 68,100 5,439,828
Freddie Mac......................................... 68,200 4,321,834
Lehman Brothers Holdings, Inc. ..................... 74,800 4,835,072
MBNA Corp. ......................................... 51,000 1,967,070
Merrill Lynch & Co., Inc. .......................... 74,800 4,142,424
Morgan Stanley Dean Witter & Co. ................... 108,700 6,229,597
Travelers Property Casualty Corp., Class A.......... 6,800(a) 136,000
Wells Fargo & Co. .................................. 136,000 6,718,400
------------
71,158,645
------------
Food, Beverages, Tobacco 1.11%
Kraft Foods, Inc., Class A.......................... 136,000 5,256,400
------------
Health Care 11.99%
AmerisourceBergen Corp. ............................ 34,000 2,322,200
Amgen, Inc. ........................................ 102,000(a) 6,087,360
Baxter International, Inc. ......................... 54,400 3,237,888
Bristol-Myers Squibb Co. ........................... 51,100 2,069,039
Cardinal Health, Inc. .............................. 33,900 2,403,171
Eli Lilly & Co. .................................... 34,000 2,590,800
Guidant Corp. ...................................... 85,000(a) 3,682,200
Johnson & Johnson................................... 133,100 8,644,845
MedImmune, Inc. .................................... 34,100(a) 1,341,153
Pfizer, Inc. ....................................... 272,800 10,841,072
Tenet Healthcare Corp. ............................. 68,200(a) 4,570,764
UnitedHealth Group, Inc. ........................... 68,000 5,196,560
Wyeth............................................... 57,800 3,794,570
------------
56,781,622
------------
Hotels 0.91%
Harrah's Entertainment, Inc. ....................... 34,000(a) 1,504,840
Starwood Hotels & Resorts Worldwide, Inc. .......... 74,800 2,813,228
------------
4,318,068
------------
Manufacturing 6.49%
Caterpillar, Inc. .................................. 102,000 5,798,700
General Electric Co. ............................... 341,700 12,796,665
Pitney Bowes, Inc. ................................. 68,000 2,910,400
SPX Corp. .......................................... 33,800 4,785,404
Tyco International Ltd. ............................ 136,400 4,408,448
------------
30,699,617
------------
5
Number of
Shares Value
--------- ------------
Media 5.48%
AOL Time Warner, Inc. .............................. 170,100(a) $ 4,022,865
Clear Channel Communications, Inc. ................. 68,000(a) 3,495,880
Comcast Corp., Class A.............................. 103,300(a) 3,284,940
Gannett Co., Inc. .................................. 34,000 2,587,400
General Motors Corp., Class H....................... 140,000 2,303,000
McGraw-Hill Cos., Inc. ............................. 67,700 4,620,525
New York Times Co., Class A......................... 68,200 3,264,052
Walt Disney Co. .................................... 102,000 2,354,160
------------
25,932,822
------------
Metals Nonferrous 0.54%
Alcoa, Inc. ........................................ 68,100 2,570,094
------------
Oil & Oil-Gas Drilling 5.64%
Anadarko Petroleum Corp. ........................... 81,600 4,605,504
Ashland, Inc. ...................................... 68,000 3,094,680
ChevronTexaco Corp. ................................ 33,900 3,060,153
Exxon Mobil Corp. .................................. 153,300 6,719,139
Marathon Oil Corp. ................................. 68,200 1,964,160
Phillips Petroleum Co. ............................. 81,600 5,124,480
Talisman Energy, Inc. .............................. 51,000 2,128,740
------------
26,696,856
------------
Restaurants 0.78%
McDonald's Corp. ................................... 68,000 1,887,000
Wendy's International, Inc. ........................ 51,000 1,783,980
------------
3,670,980
------------
Retailing 5.72%
Circuit City Stores -- Circuit City Group........... 102,000 1,840,080
Home Depot, Inc. ................................... 103,900 5,050,579
Jones Apparel Group, Inc. .......................... 51,000(a) 1,782,450
Lowe's Cos., Inc. .................................. 54,300 2,361,507
Sears, Roebuck & Co. ............................... 47,600 2,440,452
Staples, Inc. ...................................... 68,000(a) 1,357,960
Target Corp. ....................................... 47,600 2,052,512
Wal-Mart Stores, Inc. .............................. 166,100 10,180,269
------------
27,065,809
------------
Technology 17.10%
ADC Telecommunications, Inc. ....................... 122,500(a) 498,575
Amdocs Ltd. ........................................ 51,000(a) 1,359,150
Analog Devices, Inc. ............................... 34,000(a) 1,531,360
Applied Materials, Inc. ............................ 69,900(a) 3,793,473
Celestica, Inc. .................................... 68,000(a) 2,465,680
Cisco Systems, Inc. ................................ 372,100(a) 6,299,653
Corning, Inc. ...................................... 35,000(a) 266,700
6
Number of
Shares Value
--------- ------------
Technology (continued)
Dell Computer Corp. ................................ 170,700 $ 4,456,977
EMC Corp. .......................................... 193,200(a) 2,302,944
Intel Corp. ........................................ 273,500 8,317,135
JDS Uniphase Corp. ................................. 35,000(a) 206,150
Lucent Technologies, Inc. .......................... 147,200(a) 696,256
Microsoft Corp. .................................... 272,500(a) 16,434,475
Micron Technology, Inc. ............................ 68,000(a) 2,237,200
Motorola, Inc. ..................................... 67,800 962,760
Nokia Corp., ADR.................................... 102,300 2,121,702
Nortel Networks Corp. .............................. 140,000(a) 628,600
Oracle Corp. ....................................... 292,900(a) 3,749,120
QUALCOMM, Inc. ..................................... 34,100(a) 1,283,524
Siebel Systems, Inc. ............................... 102,200(a) 3,332,742
Sun Microsystems, Inc. ............................. 210,000(a) 1,852,200
Technology Select Sector SPDR....................... 340,000 7,367,800
Texas Instruments, Inc. ............................ 136,000 4,501,600
VeriSign, Inc. ..................................... 34,000(a) 918,000
VERITAS Software Corp. ............................. 68,000(a) 2,980,440
Yahoo!, Inc. ....................................... 21,200(a) 391,564
------------
80,955,780
------------
Telecommunications 3.69%
AT&T Corp. ......................................... 221,600 3,479,120
BellSouth Corp. .................................... 136,000 5,012,960
SBC Communications, Inc. ........................... 136,100 5,095,584
Verizon Communications, Inc. ....................... 61,300 2,798,345
WorldCom, Inc. -- WorldCom Group.................... 161,050(a) 1,085,477
------------
17,471,486
------------
Utilities -- Electric & Gas 2.36%
Dominion Resources, Inc. ........................... 40,800 2,658,528
Duke Energy Corp. .................................. 47,600 1,799,280
El Paso Corp. ...................................... 68,000 2,994,040
TXU Corp. .......................................... 68,000 3,706,680
------------
11,158,528
------------
Total Common Stocks............................... 427,005,271
------------
7
Principal
Amount Value
----------- ------------
Short-Term Investments 9.72%
Anheuser-Busch Cos., Inc., 1.78%, 4/01/02........... $ 6,000,000 $ 6,000,000
Avery Dennison, 1.84%, 4/01/02...................... 20,000,000 20,000,000
UBS Financial Corp., 1.85%, 4/01/02................. 20,000,000 20,000,000
------------
Total Short-Term Investments.................................. 46,000,000
------------
Total Investments -- 99.92%................................... 473,005,271
Cash and Other Assets Less Liabilities -- 0.08%............... 365,302
------------
Net Assets (Equivalent to $7.66 per share based on 61,834,947
shares of capital stock outstanding) -- 100%................. $473,370,573
============
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(a) Non-income producing security.
8
THE ZWEIG FUND, INC.
FINANCIAL HIGHLIGHTS
March 31, 2002
(Unaudited)
Net Asset Value
Total Net Assets per share
-------------------------- ----------------
Beginning of period: December 31,
2001............................ $489,261,310 $ 7.96
Net investment loss............ $ (28,204) $ --
Net realized and unrealized
loss on investments........... (6,938,878) (0.11)
Dividends from net investment
income and distributions from
net long-term and short-term
capital gains................. (11,981,945) (0.19)
Net asset value of shares
issued to shareholders in
reinvestment of dividends
resulting in issuance of
common stock.................. 3,058,290 --
------------ -------
Net decrease in net assets/net
asset value................... (15,890,737) (0.30)
------------ -------
End of period: March 31, 2002.... $473,370,573 $ 7.66
============ =======
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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.
9
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
EquiServe Trust Co., N.A.
PO Box 43010
Providence, RI 02940-3010
Legal Counsel
Rosenman & Colin LLP
575 Madison Avenue
New York, NY 10022
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This report is transmitted to the shareholders of The Zweig Fund, Inc. for
their information. This is not a prospectus, circular or representation in-
tended for use in the purchase of shares of the Fund or any securities men-
tioned in this report.
PXP 1375 4902-1Q-02
Quarterly Report
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The Zweig Fund, Inc.
March 31, 2002
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