Eagle Capital Growth Fund, Inc.
Semiannual Report
June 30, 2020
Top Ten Holdings (as of June 30, 2020)
Dear Fellow Shareholder,
The first half of 2020 was chaotic; hopefully things will settle down during the second half. For the first six months of 2020, Fund net asset value fell 9.9% while the S&P 500 (total return) index fell 3.1%. The
FAANG stocks (Facebook/Apple/Amazon/Netflix/Google) were the primary drivers of the market’s return, and if you didn’t own them you trailed. Our Fund owns shares of Google, but otherwise we don’t have much of a FAANG presence.
“It was the best of times, it was the worst of times,…” Who knew that Dickens was so prescient about the current human condition. The COVID-19 virus continues to run rampant, causing serious health and economic
pain. But, the stock market, particularly NASDAQ and its high tech/high growth components, has shaken off these worries and powered ahead.
When one or more COVID-19 vaccines are generally available, we will breathe a sigh of relief, and will have confidence in the economy (and stock market) going forward. Until then, we remain cautious. The economic
pain of displacing normal activity with pandemic protections has been significant; travel and tourism went from consistent, high levels to a grinding halt. Neither the immediate nor secondary effects are yet clear. Further, the current environment
would normally encourage reduction in risk and pullbacks in spending. However, there’s some data suggesting continued consumer spending and increased levels of speculation in the stock market.
Robinhood, the phone app aimed at Millennials, has created a new generation of investors, many of whom seem to view the stock market as a casino. Robinhood is a brokerage focused on providing investing access for
technology-savvy, younger investors. However, the platform has also provided a platform for speculation for people interested in entertainment and short-term gains, rather than long-term growth. For example, Robinhood investors were reportedly big
buyers of Hertz Global Holdings, Inc. common stock(NYSE: HRZ) then in Chapter 11 bankruptcy, even though Hertz Global bonds, senior in priority to equityholders, were trading at less than 50% of par. Bond buyers tend to do better due diligence
than equity investors, and the Hertz Global situation shows how foolish it is to disregard the clear message that the bond market is sending. Our guess is that Hertz Global’s equity goes to zero, but that assessment will take a couple years to play
out.
Tesla (NASDAQ: TSLA) has been another favorite of this new breed of investors. At its current price, TSLA sports an equity capitalization of just over $280 billion, making it the most valuable car company in the
world. Electric vehicles are currently in vogue, but potential competition abounds. The German carmakers have been working on electric vehicles for many years (due in part to a European Union mandate), and Mercedes, BMW and Volkswagen have
enticing electric vehicle options. Nissan just introduced a midsize electric SUV with a range of 280 to 380 miles. We acknowledge TSLA’s “first mover” advantage, and its technology, but are still scratching our heads about the current valuation.
Check back in five years or so, and we’ll see if the Robinhood investors knew more than we did.
The electric vehicle mania isn’t limited to Tesla. Nikola Corporation (Nasdaq: NKLA) plans to offer in 2022 an electric-powered truck to compete with Ford’s popular F-150
truck. As of yet, while NKLA does not have a product or revenues, it does sport a market capitalization of almost $20 Billion; recently its market capitalization exceeded that of Ford, which sold almost 900,000 F-150s in 2019. The excitement about
the electric carmakers may have gotten ahead of the actual progress.
We could go on, but you get the picture. The investment world is topsy-turvy. Fixed income instruments offer very little yield, bordering on negative yields. Price/earnings multiples are high. Some valuations (see
above) are in the stratosphere. The future, always uncertain, is even murkier than usual. When attractive opportunities present themselves, we intend to put our cash reserves to work.
We happily added small positions in Mastercard and Visa in the market turmoil in the spring. They are terrific companies which we have admired since they became standalone companies about a decade ago. Unfortunately,
terrific companies often sell at expensive prices. This was true in the spring, though we picked them up on sale. We are very pleased to have added them.
As always, we love hearing from Fund shareholders, and all issues are on the table. As you know, however, we can’t talk about purchases or sales of portfolio securities that haven’s been publicly disclosed, or our
future plans with respect to purchasing or selling any security.
Eagle Capital Growth Fund, Inc.
Statement of Assets, Liabilities and Shareholders’ Equity
As of June 30, 2020 (unaudited)
See Notes to Financial Statements.
Eagle Capital Growth Fund, Inc.
Statement of Operations
For the Six Months Ended June 30, 2020 (unaudited)
See Notes to Financial Statements.
Eagle Capital Growth Fund, Inc.
Statements of Changes in Net Assets
See Notes to Financial Statements.
Eagle Capital Growth Fund, Inc.
Financial Highlights
(A) If there was no sale on the valuation date, the bid price for each such date is shown.
(B) Expense ratio does not reflect fees and expenses incurred by the Fund as a result of its investments in shares of investment companies. If fees for Fund investments in investment companies were included in
the expense ratio, the net impact would be an increase of approximately 0.21% for the year ended December 31, 2016. For the years ended December 31, 2015, 2017, 2018, and 2019 and the six month period ending June 30, 2020, there would have been no
increase in the expense ratio.
See Notes to Financial Statements.
Eagle Capital Growth Fund, Inc.
Portfolio of Investments (as of June 30, 2020) (unaudited)
*Non-dividend paying security
See Notes to Financial Statements.
Notes to Financial Statements
Eagle Capital Growth Fund, Inc., a Maryland corporation (“Fund”), is a diversified closed-end investment company subject to the Investment Company Act of 1940.
The Fund follows the accounting and reporting requirements of investment companies under ASC 946 (ASC 946-10-50-1).
Dividends and distributions—Dividends and distributions paid to the Fund from portfolio investments are recorded on the ex-dividend date.
Investments— Investments in equity securities are valued at the closing market price as of the close of regular trading on the applicable valuation date. If no such closing market
price is available on the valuation date, the Fund uses the then most recent closing market price.
In the unlikely event that there is no current or recent closing market price for a portfolio security, whether equity or debt, traded in the over-the-counter market, then the Fund uses the most recent closing bid price.
If there is no closing bid price for a portfolio security for a period of ten (10) consecutive trading days, then the Fund’s Audit Committee or other appropriate committee shall determine the value of such illiquid security. From inception to June
30, 2020, the Fund has not held a security which required an illiquid pricing valuation.
Investment security purchases and sales are accounted for on a trade date basis. Interest income is accrued on a daily basis while dividends are included in income on the ex-dividend date.
Use of estimates—The preparation of 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Federal income taxes—The Fund intends to comply with the general qualification requirements of the Internal Revenue Code applicable to regulated investment companies such as the
Fund. The Fund plans to distribute annually at least 90% of its taxable income, including net long-term capital gains, to its shareholders. In order to avoid imposition of the excise tax applicable to regulated investment companies, the Fund
intends to declare as dividends in each calendar year an amount equal to at least 98% of its net investment income and 98% of its net realized capital gains (including undistributed amounts from previous years).
The following information is based upon the Federal income tax basis of equity portfolio investments as of June 30, 2020:
Expenses—The Fund’s service providers bear all of their expenses in connection with the performance of their services. The Fund bears all of its expenses incurred in connection with its operations
including, but not limited to, investment advisory fees (as discussed in Note 3), legal and audit fees, taxes, insurance, shareholder reporting and other related costs. As noted in Note 3, the Fund’s investment advisor, as part of its
responsibilities under the Investment Advisory Agreement, is required to provide certain internal administrative services to the Fund at such investment advisor’s expense. The Investment Advisory Agreement provides that the Fund may not incur annual
aggregate expenses in excess of two percent (2%) of the first $10 million of the Fund’s average net assets, one and a half percent (1.5%) of the next $20 million of the average net assets, and one percent (1%) of the remaining average net assets for
any fiscal year. Any excess expenses are the responsibility of the investment advisor.
Fair Value Accounting—Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provides a framework for establishing
that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. All of the Fund’s investments are classified as Level
1.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other
inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. These Level 3 fair value measurements are based primarily on
management’s own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset.
The Fund’s financial statements, other than investments, consist of receivables and payables due in the near term. Fair value of those instruments approximates historical cost.
Investment advisor—For its services under the Investment Advisory agreement, the investment advisor receives a monthly fee calculated at an annual rate of three-quarters of one
percent (0.75%) of the weekly net asset value of the Fund, as long as the weekly net asset value is at least $3.8 million. The investment advisor is not entitled to any compensation for any week in which the average weekly net asset value falls
below $3.8 million. Pursuant to the Investment Advisory Agreement, the investment advisor is required to provide certain internal administrative services to the Fund at the investment advisor’s expense.
Effective June 1, 2007, following shareholder approval of the Investment Advisory Agreement, Sims Capital Management LLC (“SCM”) began serving as the Fund’s investment advisor. Pursuant to the Investment Advisory
Agreement, SCM is responsible for the management of the Fund’s portfolio, subject to oversight by the Fund’s Board of Directors. Luke E. Sims, a Director, President and Chief Executive Officer of the Fund and owner of more than five percent of the
Fund’s outstanding shares, owns 50% of SCM. David C. Sims, the Chief Financial Officer, Chief Compliance Officer, Secretary, Treasurer, and Director of the Fund and the son of Luke E. Sims, owns the remaining 50% of SCM.
Custodian—US Bancorp serves as the Fund’s custodian pursuant to a custodian agreement. As the Fund’s custodian, US Bancorp receives fees and compensation of expenses for services
provided including, but not limited to, an annual account charge and security transaction fees.
Transfer Agent— American Stock Transfer & Trust Company (“AST”) serves as the Fund’s transfer agent and dividend disbursing agent. AST receives fees for services provided
including, but not limited to, account maintenance fees, activity and transaction processing fees and reimbursement for its out-of-pocket expenses. AST also acts as the agent under the Fund’s Dividend Reinvestment and Cash Purchase Plan (“DRIP”).
The Fund has a Dividend Reinvestment and Cash Purchase Plan which allows shareholders to reinvest cash dividends and make cash contributions. Pursuant to the terms of the DRIP, cash dividends may be used by the DRIP agent
to either purchase shares from the Fund or in the open market, depending on the most favorable pricing available to DRIP participants. Voluntary cash contributions from DRIP participants are used to purchase Fund shares in the open market. A
complete copy of the DRIP is available on the Fund’s website (www.eaglecapitalgrowthfund.com) or from AST, the DRIP agent.
Purchases and sales of securities, other than short-term securities, for the six-month period ended June 30, 2020 were $3,599,695 and $2,348,554, respectively.
The Financial Highlights present a per share analysis of how the Fund’s net asset value has changed during the periods presented. Additional quantitative measures expressed in ratio form analyze important relationships
between certain items presented in the financial statements. The total investment return based on market value assumes that shareholders bought into the Fund at the bid price and sold out of the Fund at the bid price. In reality, shareholders buy
into the Fund at the asked price and sell out of the Fund at the bid price. Therefore, actual returns may differ from the amounts shown.
2020 Annual Shareholder Meeting
The Fund’s 2020 annual meeting of shareholders (“Annual Meeting”) was held on April 16, 2020, for the following purposes:
The following directors were elected under Proposal 1: Robert M. Bilkie, Jr. and Phillip J. Hanrahan. Under Proposal 2, shareholders ratified the selection of Plante & Moran, PLLC as the Fund’s independent registered public accountants for
the 2020 calendar year.
Tabulation Report
Proposal 1 – Election of Directors
Proposal 2 – Selection of Plante & Moran, PLLC
Total shares issued and outstanding on record date: 4,074,321.
Compensation.
The following table sets forth the aggregate compensation paid to all Fund directors for the six-month period ended June 30, 2020. Directors who are not “interested persons” of the Fund receive an annual retainer of $11,000 a year, paid in equal
quarterly installments, together with $1,000, paid quarterly, for service on the Audit Committee. The Audit Committee Chairman receives an additional $500 annual retainer, paid quarterly. Directors who are “interested persons” of the Fund are not
entitled to receive directors’ fees. Directors are reimbursed for out-of-pocket expenses in connection with attending Board meetings.
Luke E. Sims and David C. Sims, who are deemed to be Interested Persons of the Fund, are not entitled to receive directors’ fees from the Fund.
No Fund officer receives compensation in his capacity as an officer of the Fund. Fund officers are: Luke E. Sims, President and Chief Executive Officer; and David C. Sims, Chief Financial Officer, Chief Compliance Officer, Treasurer, Secretary
and Director. Robert M. Bilkie, Jr. is the Fund’s Chairman, which is not an executive officer position.
Sims Capital Management LLC (“SCM”), the investment advisor for the Fund, was paid $127,495 by the Fund in the first six months of 2020. SCM is 50% owned by Luke E. Sims, the President, CEO and a Director of the Fund, as well as an owner of more
than five percent of the Fund’s outstanding shares. David C. Sims, the Fund’s Chief Financial Officer, Chief Compliance Officer, Treasurer, Secretary and Director, owns the remaining 50% of SCM.
Directors who are Interested Persons of the Fund:
Directors who are not Interested Persons of the Fund:
Board of Directors
Shareholder Information
Trading. Fund shares trade under the symbol GRF on the NYSE American Exchange.
Fund Stock Repurchases. The Fund is authorized, from time to time, to repurchase its shares in the open market, in private transactions or otherwise, at a price or prices reasonably related to the then
prevailing market price.
Dividend Reinvestment and Cash Purchase Plan. By participating in the Fund’s Dividend Reinvestment and Cash Purchase Plan (“Plan”), you can automatically reinvest your cash dividends in additional Fund
shares without paying brokerage commissions. A copy of the plan is included earlier in the Annual Report.
Alternatively, you can secure a copy of the Plan from the Fund’s website (www.eaglecapitalgrowthfund.com) or by contacting American Stock Transfer & Trust Company LLC, 6201 15th Avenue, Brooklyn, NY 11219, telephone number (877)
739-9994.
Dividend Checks/Stock Certificates/Address Changes/Etc. If you have a question about lost or misplaced dividend checks or stock certificates, have an address change to report, or have a comparable
shareholder issue or question, please contact the Fund’s transfer agent, American Stock Transfer & Trust Company LLC, 6201 15th Avenue, Brooklyn, NY 11219, telephone number (877) 739-9994.
Proxy Voting. The Fund typically votes by proxy the shares of portfolio companies. If you’d like information about the policies and procedures that the Fund follows in voting, or how the Fund has voted
on a particular issue or matter during the most recent 12-month period ended June 30, you can get that information (Form N-PX) from the SEC’s website (www.sec.gov) or the Fund’s website (www.eaglecapitalgrowthfund.com), or by calling the Fund at
(414) 765-1107 (collect) or by sending an e-mail request (to dave@simscapital.com).
Fund Privacy Policy/Customer Privacy Notice (January 1, 2020). We collect nonpublic personal information about you from the following sources: (i) information we receive from you on applications or
other forms and (ii) information about your transactions with us or others. We do not disclose any nonpublic personal information about you to anyone, except as permitted by law, and as follows. We may disclose all of the information we collect,
as described above, to companies that perform marketing services on our behalf or to other financial institutions with whom we have joint marketing agreements. If you decide to close your account(s) or no longer be a shareholder of record, we will
adhere to the privacy policies and practices as described in this notice. We restrict access to your personal and account information to those employees who need to know that information to provide services to you. We maintain physical,
electronic, and procedural safeguards to guard your nonpublic personal information. In this notice, the term “we” refers to the Fund, Eagle Capital Growth Fund, Inc.
Additional Information. The Fund has historically filed a complete schedule of its portfolio holdings with the Securities and Exchange Commission (SEC) on SEC Form N-Q as of the end of the first and third
calendar quarter. Commencing during 2020, the Fund is required to file a complete schedule of its portfolio holdings monthly with the SEC on SEC Form N-PORT, although only these forms for the first and third calendar quarter will be available to
the investing public generally. You can obtain copies of these public filings, and other information about the Fund, from the SEC’s website (www.sec.gov), from the Fund’s website (www.eaglecapitalgrowthfund.com), or by calling the Fund at (414)
765-1107. The Fund’s historic Forms N-Q and public Forms N-PORT can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and you can obtain information about the operation of the SEC’s Public Reference Room by calling the
SEC at (800) 732-0330.
Approval of Renewal of Investment Advisory Agreement. At its December 9, 2019 Board meeting, the Board of Directors approved the renewal of the Fund’s Investment Advisory
Agreement with SCM (with Directors Luke E. Sims and David C. Sims abstaining.) The Board reviewed various factors in determining to retain SCM as investment advisor including, among other things, the nature, extent and quality of services provided
by SCM, the cost of services provides by SCM (and benefits to be realized by SCM as a result of its relationship with the Fund), the economies of scale that may be realized as the Fund grows, whether the fee level reflects the economies of scale for
the benefit of Fund investors, the investment philosophy of SCM, the Fund’s portfolio turnover, best execution and trading costs, personnel considerations, resources available to SCM, SCM’s ability to satisfy compliance obligations and other relevant
factors. In support of its analysis, the Board noted: (i) the Fund’s long-term investment performance has been satisfactory, (ii) the Fund’s expense ratio (forecasted to be around 1.4% for 2019 and headed lower for 2020) was at the lower range for
comparably-sized funds, (iii), the Fund’s portfolio turnover was reasonable (in spite of being higher than normal) by reason of the lack of reasonable short-term fixed income investments, (iv) SCM’s fee as investment advisor at 0.75% annually is at
the low end of compensation for similarly-situated investment advisors, (v) the Fund’s brokerage and similar costs are closely scrutinized and monitored (as evidenced by the favorable expense ratio), (vi) given the Fund’s relatively small size, there
are few, if any, economies of scale to be enjoyed, and (vii) in light of SCM’s conservative, long-term investment philosophy, Fund investors will be well served given then-current market uncertainties. Overall, the Board remained satisfied with
the nature, extent and quality of services provided by SCM.
Electronic Distribution of Shareholder Reports and Other Communications. If you’d like to receive copies of the Fund’s annual report, semiannual report, proxy statement, press releases and other
comparable communications electronically, please provide your e-mail address to dave@simscapital.com. By providing your e-mail address to the Fund, you are consenting to the Fund sending the identified materials to you by e-mail.
General Inquiries. If you have a question or comment on any matter not addressed above, please contact the Fund at: Eagle Capital Growth Fund, Inc., 225 East Mason Street, Suite 802, Milwaukee, WI
53202-3657, telephone number (414) 765-1107, or the Fund’s investment advisor, Sims Capital Management LLC (dave@simscapital.com).