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Eagle Capital Growth Fund (NYSE MKT: GRF) 2013 Semiannual Letter To Shareholders

|Includes: Eagle Capital Growth Fund (GRF)

The letter below was printed in August 2013 as a Letter to Shareholders in the Eagle Capital Growth Fund, Inc. (NYSE MKT: GRF) 2013 Semiannual Report:

Fellow Shareholders,

For the first six months of 2013 our Fund was up 11.7%, although we lagged our benchmark S&P 500 index (total return) by a couple percent, which rose 13.8%. Given our large cash position, we're pleased with the performance of the Fund.

Of all of the metrics which summarize the profitability of a company, return on equity (ROE) does a very good job, as long as debt level is low. The Fund's portfolio companies are all very profitable, which is evident from the table below:


Return on Equity

Abbott Laboratories Inc.




Automatic Data Processing, Inc.


Berkshire Hathaway Inc.


The Chubb Corporation


The Coca-Cola Company


Colgate-Palmolive Co.


Deere & Company


Eaton Vance Corp.


Emerson Electric Co.


Franklin Resources, Inc.


Gardner Denver Inc.


Hillenbrand, Inc.


Illinois Tool Works Inc.


Johnson & Johnson


Paychex, Inc.


PepsiCo, Inc.


Sigma-Aldrich Corp.


Stryker Corp.


Waters Corp


Wells Fargo & Company


We added Coca-Cola, Deere, Wells Fargo and AFLAC in the first half. Coca-Cola, Deere and Wells Fargo are excellent companies with storied histories and bright futures.

AFLAC was a long-term Fund holding which we sold at an attractive price a couple years ago. AFLAC's share price then suffered even though the company's operations continued to thrive. AFLAC straightened out its European fixed income portfolio, solving our major concern. We jumped at the opportunity to add AFLAC back to the Fund.

The Fog

Our clients often ask us to predict the future. As noted in past shareholder letters, we focus on businesses rather than trying to predict short-term fluctuations in share prices. But there is some truth to clients' requests: investing in a business is investing in its future. If we can get a clearer view about a business's future then we can have more confidence in the company today.

When driving, a clear day enables a driver to see long distance down the road; on a foggy day, a driver's vision is limited. Investors face the same fog, as they try to evaluate the future profitability of a company. Stable, consistent industries enable investors to extrapolate current profitability into the future; volatile industries introduce too much uncertainty for investors to have any confidence in future profitability.

Past is prologue. Industries, comprised of companies which have stable and consistent earnings historically, are likely to have predictable futures. Similarly, industries comprised of companies that go from "boom-to-bust" on a regular basis will likely produce similar conditions in the future.

To illustrate the issue, let's take a look at a couple of industries. For an industry with a foggy future, let's look at mobile phone companies. In the past 20 years, they have raked in huge profits and suffered severe losses, their results changing in just a couple of years. In 2005, Motorola made $6.5 billion by selling their popular RAZR phones. However, with limited success in the transition to smartphones, Motorola's prospects dimmed, creating huge losses even while selling millions of phones each year. Nokia faced the same issue, an inability to introduce a blockbuster smartphone after a decade of success. Research in Motion's Blackberry dominated the smartphone market until Apple introduced the iPhone. Since then, Blackberry has lost market share, and its profitability has suffered. Each time a leader has emerged in this industry, it has been displaced within ten years, with huge implications for the incumbent company's profitability. A company's current position in the mobile phone business has very little to do with where it will be in five years.

Let's look at an industry with less volatility, the branded food industry. With brands, companies are likely to have future results which resemble past performance. Heinz had the number one ketchup in 2003, with operating profitability at 14%; in 2013, it had the number one ketchup and an operating margin of 14%. Hershey Co. had an operating margin of 17% in 2002; in 2012, it had an operating margin of 17%. The stability of profitability within the branded food industry gives investors a reasonably clear idea of future profitability. With a less dynamic industry, investors can have more confidence that the future will resemble the past.

To be clear, we are not suggesting that industries do not change and evolve over time. However, some industries are inherently more stable, in terms of continued and expected profitability. As investors looking to minimize risk while maximizing return, we avoid foggy industries in favor of clear ones. We invest in excellent industries, and we are able to invest confidently in companies with long time horizons.

As always, we love hearing from our shareholders. We won't comment on any purchases or sales that the Fund has made or is considering.

Luke E. Sims David C. Sims

E-mail: E-mail:

(NYSE:O): 414/755-6790 (O): 414/765-1107

July 19, 2013

Disclosure: The author is long GRF.

Additional disclosure: Sims Capital Management LLC is the investment advisor to Eagle Capital Growth Fund, Inc. (NYSE MKT: GRF). The letter above was printed and distributed to shareholders in mid-2013. Readers should understand that the letter reflects a dated view of the world. Neither Sims Capital Management LLC nor Eagle Capital Growth Fund, Inc. intends to provide updates to the letter.