November 1, 2001
[PHOTO]
Dear Shareholder:
The Zweig Total Return Fund's net asset value decreased 2.8% during the
quarter ended September 30, 2001, including $0.18 in reinvested distributions.
For the nine months ended September 30, 2001, the Fund's net asset value
declined 5.9%, including $0.54 in reinvested distributions. The Fund's average
overall exposure during the period was 89%.
The third quarter was a difficult one for the equity markets. The Dow Jones
Industrial Average dropped 15.8%, its worst showing since the last quarter of
1987. The Nasdaq composite declined 31%, and the S&P 500 Index was down nearly
15%./1/ According to Lipper Inc., 99% of equity mutual funds finished the
quarter in the red, and the average diversified mutual fund dipped 16.2%.
--------
/1/The Dow Jones Industrial Average and the S&P 500 Index measure broad stock
market total-return performance. The Nasdaq composite measures technology-
oriented stock total-return performance. All of the indices are unmanaged
and not available for direct investment.
In line with our indicators, which have served us so well in the past, we
were bullish during the quarter for the following reasons. Historically, going
back to 1913, there have been roughly 11.9 cumulative years when we were in a
similar mode--three or more Federal Reserve interest rate cuts and a growing
money supply--and the average annual return for the S&P 500 during that period
was 32.8%. The average rate of return for the remaining 76 years was in the
vicinity of 2.2%.
That is basically why we were bullish. Other indicators pointed in the same
direction. What went wrong--and that was before the terrorist attacks on
September 11--is that I underestimated the impact of the bursting of the
technology bubble on the market and the economy. I thought the Fed actions
would induce capital expenditures in other areas sooner and stimulate consumer
spending. The housing market, for example, did show improvement. However,
conditions unexpectedly worsened in August and the events of September 11 only
exacerbated the market's weakness.
DISTRIBUTION DECLARED
In accordance with our policy of distributing 10% of net assets per year,
which equals 0.83% per month (10% divided by 12 months), the Fund announced a
distribution of $0.056 per share payable on November 26, 2001 to shareholders
of record on November 13, 2001. The amount of the distribution depends on the
exact net asset value at the time of declaration. For the November
distribution, 0.83% of the Fund's net asset value was equivalent to $0.056 per
share. Including this distribution, the Fund's payout since inception is now
$11.36 per share.
MARKET OUTLOOK
Our bond exposure on September 30 was 60% compared with 57% at the end of
the second quarter. If we were fully invested, we would be 62.5% in bonds and
37.5% in stocks. Consequently, at 60%, we are at approximately 96% of a full
position (60%/62.5%).
Treasury securities performed very strongly in the third quarter. As
economic weakness accelerated, the Federal Reserve cut interest rates
dramatically. The 30-year Treasury bond began the quarter yielding 5.69% but
rallied smartly to 5.42% at the end of September. While the long bond
performed well, the sharpest rally came in the front end of the yield curve,
as two-year notes moved 131 basis points, from 4.16% to 2.85%.
The main factors for the powerful performance of shorter dated Treasury
notes included an acceleration of worldwide economic woes, with most U.S. data
pointing to a possible recession; the so-called "flight to quality," with
investors favoring short maturity Treasuries over all other investments after
the terrorist attacks; and the Fed's steep rate cuts.
The Fed has now cut the overall Federal funds rate--the rate it can directly
affect--a total of 400 basis points this year. This is, by far, the most
dramatic reduction implemented by the Fed in so short a time. It seems the Fed
wants the investing public to know that it stands willing to do whatever it
takes to avert a major recession, stemming from a loss in consumer confidence
after the attacks. As a result, excess liquidity has been flowing to the
safety of U.S. Treasury notes and bonds.
Our equity exposure as of September 30 was 34%. At this figure, we were at
about 91% of a full position (34%/37.5%). At the close of the second quarter,
we were at 39%, slightly above our benchmark of 37.5%.
The World Trade Center attack is perhaps the equivalent of a 1000-year
flood. It presents an entirely new and different set of largely unpredictable
eventualities. However, what happened to the market after the sneak attack on
Pearl Harbor on December 7, 1941, might provide a clue. At the time of the
attack, the market was already down roughly 10% from its previous high. On
news of the attack, the Dow fell 8.8% over a two-week period before recovering
in early January. By November 1942, less than a year later, the Dow had
rallied back to its pre-attack level.
As far as the post-September 11 stock market is concerned, I think there
will be at least five and perhaps six areas of economic stimulus that will be
very important. They are:
One, we will see some tax cuts. I am not sure how Congress will work out the
specifics, but there is some bipartisanship and we'll get something.
Two, there will be more government spending. President Bush is requesting an
economic stimulus package of $75 billion on top of $40 billion in emergency
spending and $15 billion to the airlines. And, we expect there will be more of
that.
Three, we have lower oil prices, partly because of the attack. The effect is
almost like a tax cut.
Four, the Fed has cut rates two more times since the attack, and it is
flooding the economy with liquidity. This may be temporary, but it should
help.
Five, the insurance companies will pay out at least $40 billion. That is not
just for the World Trade Center. It includes life and other property insurance
that will go back to rebuilding the economy.
Then, there is a sixth stimulus that has nothing to do with the terrorist
attack. It is the
2
huge inventory drop, which I was paying a lot of attention to prior to
September 11. Capacity utilization is also way down, but at some point,
inventory gets so thin that it has to be rebuilt.
These are all positives for the economy. As for negatives, we may see one for
housing, depending on the direction of prices. Also, consumer confidence is
pretty poor. Consumer confidence is also low at the end of a recession. That
did not bother me before the attack, but there's an additional fear factor
here. If consumers are reluctant to spend--and I am not making a prediction--
there could be some problems.
I don't know whether or when people will go back to living normally, but
there will be increased spending. But will it be enough to give us a vigorous
recovery? My guess is probably not. However, I think we will come off the lows.
There is an enormous shock effect right now. Whatever the gross national
product is for the third and fourth quarters, I believe we will see a positive
first quarter in 2002, but I don't look for it to be huge.
Prior to the attack, consumers were concerned about the weakening economy.
S&P 500 earnings were down about 22% for the quarter, and the unemployment rate
was up 1% this year to 4.9%. However, the S&P has returned 15.8% in previous
periods when earnings were down versus only 3.8% when earnings were up 10% or
better. In addition, in the nine previous cases when unemployment rose 1% as it
has this year, the S&P was higher a year later in every case by an average of
24.9%. History shows that once economic weakness is this widespread and the Fed
is cutting rates, stocks soon bottom and head sharply higher.
My indicators are bullish. Our monetary model is supported by nine Fed cuts,
T-bills yields down over 50%, long bond yields off over 20%, and a dramatically
steeper yield curve. Our sentiment model is extremely bullish as well
because of the widespread pessimism. The puts/calls ratio, investor sentiment
surveys, and cash levels show that investors have raised cash in fear of lower
stock prices. In previous instances when investors have shown this level of
pessimism, the market has returned over 32% a year.
In view of the above considerations, we remain bullish and as of this
writing, are about 93% invested.
PORTFOLIO COMPOSITION
Our leading industry groups as of September 30 included health care,
financial services, technology, telecommunications, oil and oil services, and
retailing. These groups all appeared on our June 30 listing. During the
quarter, we increased our position in health care, a category that held up well
in a difficult market. Our holdings were trimmed in oil and oil services, a
group that underperformed. Technology lost exposure because of market weakness.
Some of our largest individual holdings include Pfizer, Microsoft, General
Electric, Citigroup, Wal-Mart, Johnson & Johnson, Tyco, SBC Communications,
Verizon, and Eli Lilly.
Eli Lilly is new to our portfolio. Johnson & Johnson, SBC Communications, and
Verizon showed relatively good performance during the quarter. Among the top
holdings listed in our previous quarterly report, we have reduced our stake in
AOL Time Warner, and IBM and Intel underperformed.
Sincerely,
/s/ Martin E. Zweig, Ph.D.
Martin E. Zweig, Ph.D.
Chairman
3
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF NET ASSETS
September 30, 2001
(Unaudited)
Number of
Shares Value
--------- ------------
Common Stocks 33.58%
Aerospace & Air Transport 0.19%
United Technologies Corp. .......................... 24,500 $ 1,139,250
------------
Automotive 0.12%
General Motors Corp. ............................... 16,000 686,400
------------
Building & Forest Products 0.60%
Cemex S.A. de CV, ADR............................... 28,856 592,702
International Paper Co. ............................ 39,700 1,381,560
Weyerhaeuser Co. ................................... 32,000 1,558,720
------------
3,532,982
------------
Chemicals 0.31%
Dow Chemical Co. ................................... 55,900 1,831,284
------------
Commercial Services 0.22%
Omnicom Group, Inc. ................................ 20,000 1,298,000
------------
Consumer Products 1.38%
Anheuser-Busch Cos., Inc. .......................... 32,000 1,340,160
Avon Products, Inc. ................................ 16,000 740,000
Kimberly-Clark Corp. ............................... 32,000 1,984,000
PepsiCo, Inc. ...................................... 47,800 2,318,300
Procter & Gamble Co. ............................... 24,000 1,746,960
------------
8,129,420
------------
Electronics -- Electrical 1.50%
Celestica, Inc. .................................... 16,000(a) 436,800
Emerson Electric Co. ............................... 32,000 1,505,920
Flextronics International Ltd. ..................... 16,000(a) 264,640
General Electric Co. ............................... 162,000 6,026,400
Jabil Circuit, Inc. ................................ 32,000(a) 572,800
------------
8,806,560
------------
Engineering & Machinery 0.12%
SPX Corp. .......................................... 8,500 704,650
------------
4
Number of
Shares Value
--------- ------------
Financial Services 6.72%
American International Group, Inc. ................. 51,100 $ 3,985,800
Bank of America Corp. .............................. 63,700 3,720,080
Capital One Financial Corp. ........................ 32,000 1,472,960
Citigroup, Inc. .................................... 129,000 5,224,500
Fannie Mae.......................................... 43,100 3,450,586
Freddie Mac......................................... 57,000 3,705,000
H & R Block, Inc. .................................. 64,000 2,467,840
Household International, Inc. ...................... 32,000 1,804,160
Lehman Brothers Holdings, Inc. ..................... 36,800 2,092,080
Lincoln National Corp. ............................. 32,000 1,492,160
MBNA Corp. ......................................... 32,000 969,280
Merrill Lynch & Co., Inc. .......................... 24,000 974,400
MetLife, Inc. ...................................... 48,000 1,425,600
Morgan Stanley Dean Witter & Co. ................... 36,900 1,710,315
SouthTrust Corp. ................................... 32,200 820,134
Washington Mutual, Inc. ............................ 63,850 2,456,948
Wells Fargo & Co. .................................. 40,000 1,778,000
------------
39,549,843
------------
Health Care 5.86%
American Home Products Corp. ....................... 32,000 1,864,000
Amgen, Inc. ........................................ 32,000(a) 1,880,640
Bristol-Myers Squibb Co. ........................... 47,800 2,655,768
Cardinal Health, Inc. .............................. 24,100 1,782,195
Eli Lilly & Co. .................................... 48,000 3,873,600
Guidant Corp. ...................................... 38,400(a) 1,478,400
Johnson & Johnson .................................. 82,800 4,587,120
MedImmune, Inc. .................................... 31,900(a) 1,136,597
Pfizer, Inc. ....................................... 159,200 6,383,920
Pharmacia Corp. .................................... 56,000 2,271,360
St. Jude Medical, Inc. ............................. 24,000 1,642,800
Tenet Healthcare Corp. ............................. 38,100(a) 2,272,665
UnitedHealth Group, Inc. ........................... 40,000 2,660,000
------------
34,489,065
------------
Investment Companies 0.92%
Nasdaq-100 Index.................................... 122,000 3,535,560
Semiconductor Holders Trust......................... 63,000 1,862,280
------------
5,397,840
------------
Manufacturing 1.14%
Caterpillar, Inc. .................................. 32,000 1,433,600
Honeywell International, Inc. ...................... 32,000 844,800
Tyco International Ltd. ............................ 98,000 4,459,000
------------
6,737,400
------------
5
Number of
Shares Value
--------- ------------
Media 1.21%
Comcast Corp., Class A.............................. 46,700(a) $ 1,675,129
Gannett Co., Inc ................................... 16,000 961,760
Gemstar-TV Guide International, Inc ................ 39,000(a) 768,690
McGraw-Hill Cos., Inc. ............................. 35,500 2,066,100
New York Times Co., Class A......................... 28,500 1,112,355
Viacom, Inc., Class B............................... 16,100(a) 555,450
------------
7,139,484
------------
Metals 0.21%
Alcoa, Inc. ........................................ 39,900 1,237,299
------------
Oil & Oil Services 2.27%
Anadarko Petroleum Corp. ........................... 38,400 1,846,272
BJ Services Co. .................................... 32,000(a) 569,280
Chevron Corp. ...................................... 24,200 2,050,950
El Paso Corp. ...................................... 32,000 1,329,600
Enron Corp. ........................................ 30,100 819,623
Exxon Mobil Corp. .................................. 89,200 3,514,480
Occidental Petroleum Corp. ......................... 32,000 778,880
Santa Fe International Corp. ....................... 16,000 340,000
Talisman Energy, Inc. .............................. 24,000 816,240
USX-Marathon Group ................................. 47,600 1,273,300
------------
13,338,625
------------
Railroads 0.13%
CSX Corp. .......................................... 24,000 756,000
------------
Restaurants 0.22%
McDonald's Corp. ................................... 48,000 1,302,720
------------
Retailing 1.97%
Home Depot, Inc. ................................... 71,000 2,724,270
Kroger Co. ......................................... 32,000 788,480
Lowe's Cos., Inc. .................................. 59,300 1,876,845
Target Corp. ....................................... 36,200 1,149,350
Wal-Mart Stores, Inc. .............................. 102,500 5,073,750
------------
11,612,695
------------
6
Number of
Shares Value
--------- ------------
Technology 5.18%
AOL Time Warner, Inc. .............................. 79,900(a) $ 2,644,690
Applied Materials, Inc. ............................ 29,800(a) 847,512
Cisco Systems, Inc. ................................ 129,700(a) 1,579,746
Corning, Inc. ...................................... 17,000 149,940
Cypress Semiconductor Corp. ........................ 33,000(a) 490,380
Dell Computer Corp. ................................ 87,100(a) 1,613,963
Electronic Data Systems Corp. ...................... 39,900 2,297,442
EMC Corp. .......................................... 50,000(a) 587,500
First Data Corp. ................................... 31,700 1,846,842
Intel Corp. ........................................ 141,400 2,890,216
International Business Machines Corp. .............. 38,400 3,544,320
JDS Uniphase Corp. ................................. 17,000(a) 107,440
Lucent Technologies, Inc. .......................... 62,800 359,844
Microchip Technology, Inc. ......................... 24,500(a) 656,600
Microsoft Corp. .................................... 119,500(a) 6,114,815
Motorola, Inc. ..................................... 32,200 502,320
Network Appliance, Inc. ............................ 17,000(a) 115,600
Oracle Corp. ....................................... 122,700(a) 1,543,566
QUALCOMM, Inc. ..................................... 24,500(a) 1,164,730
Siebel Systems, Inc. ............................... 39,800(a) 517,798
Sun Microsystems, Inc. ............................. 98,000(a) 810,460
USinternetworking, Inc. ............................ 29,950(a) 8,086
Yahoo!, Inc. ....................................... 8,800(a) 77,528
------------
30,471,338
------------
Telecommunications 2.92%
ADC Telecommunications, Inc. ....................... 57,500(a) 200,675
Amdocs Ltd. ........................................ 32,000(a) 852,800
AT&T Corp. ......................................... 98,000 1,891,400
AT&T Wireless Services, Inc. ....................... 72,736(a) 1,086,676
General Motors Corp., Class H....................... 65,000 866,450
Nokia Corp., ADR.................................... 70,000 1,095,500
Nortel Networks Corp. .............................. 65,000 364,650
SBC Communications, Inc. ........................... 87,900 4,141,848
Telephone & Data Systems, Inc. ..................... 15,900 1,499,370
TyCom Ltd. ......................................... 22,500(a) 176,625
Verizon Communications, Inc. ....................... 71,900 3,890,509
WorldCom, Inc. -- WorldCom Group.................... 73,950(a) 1,112,208
------------
17,178,711
------------
7
Number of
Shares Value
----------- ------------
Utilities -- Electric & Gas 0.39%
Calpine Corp. ................................... 43,400(a) $ 989,954
Exelon Corp. .................................... 28,800 1,284,480
------------
2,274,434
------------
Total Common Stocks............................ 197,614,000
------------
Unit Investment Trusts 0.43%
S&P MidCap 400 Depositary Receipts............... 31,800 2,516,970
------------
Principal
Amount
-----------
United States Government Obligations 59.63%
FHLMC, 6.875%, 1/15/05........................... $70,500,000 77,244,242
FHLMC, 5.125%, 10/15/08.......................... 38,100,000 38,560,515
FHLMC, 7.00%, 3/15/10............................ 42,000,000 47,410,776
United States Treasury Notes, 6.00%, 8/15/09..... 21,900,000 24,090,876
United States Treasury Bonds, 10.75%, 5/15/03.... 15,000,000 16,907,235
United States Treasury Bonds, 8.125%, 5/15/21.... 33,700,000 44,620,923
United States Treasury Bonds, 6.875%, 8/15/25.... 40,500,000 47,913,404
United States Treasury Bonds, 5.25%, 11/15/28.... 40,000,000 38,603,160
United States Treasury Bonds, 5.375%, 2/15/31.... 15,700,000 15,606,789
------------
Total United States Government Obligations..... 350,957,920
------------
Short-term Investments 5.56%
CitiBank Capital, 3.47%, 10/01/01................ 10,000,000 10,000,000
Volkswagen Corp., 3.40%, 10/01/01................ 22,700,000 22,700,000
------------
Total Short Term Investments............................... 32,700,000
------------
Total Investments -- 99.20%................................ 583,788,890
Cash and Other Assets Less Liabilities -- 0.80%............ 4,715,053
------------
Net Assets (Equivalent to $6.51 per share based on
90,417,863 shares of capital stock outstanding) -- 100%... $588,503,943
============
--------
(a) Non-income producing security
8
THE ZWEIG TOTAL RETURN FUND, INC.
FINANCIAL HIGHLIGHTS
September 30, 2001
(Unaudited)
Net Asset Value
Total Net Assets per share
-------------------------- ----------------
Beginning of period: December 31,
2000............................ $671,055,863 $ 7.48
Net investment income.......... $ 12,420,590 $ 0.14
Net realized and unrealized
loss on investments........... (51,187,488) (0.57)
Dividends from net investment
income and distributions from
net long-term and short-term
capital gains................. (48,559,194) (0.54)
Net asset value of shares
issued to shareholders in
reinvestment of dividends
resulting in issuance of
common stock.................. 4,774,172 --
------------ -------
Net decrease in net assets/net
asset value................... (82,551,920) (0.97)
------------ -------
End of period: September 30,
2001............................ $588,503,943 $ 6.51
============ =======
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KEY INFORMATION
1-800-272-2700 Zweig Shareholder Relations:
For general information and literature
1-800-272-2700 The Zweig Total Return 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 Quarterly Report
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. [LOGO] Zweig
Director The Zweig Total
Return Fund, Inc.
Investment Adviser
Phoenix/Zweig Advisers LLC September 30, 2001
900 Third Avenue
New York, NY 10022
Fund Administrator
Phoenix Equity Planning Corp.
56 Prospect St.
P.O. Box 150480
Harford, 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
--------------------------------------------------------------------------------
This report is transmitted to the shareholders of The Zweig Total Return
Fund, Inc. for their information. This is not a prospectus, circular or repre-
sentation intended for use in the purchase of shares of the Fund or any securi-
ties mentioned in this report.
PXP 1376 3206-3Q-01
[LOGO] PHOENIX INVESTMENT PARTNERS
A member of The Phoenix Companies, Inc