 |
ADAMS DIVERSIFIED EQUITY FUND |
Formerly The Adams Express Company |
THIRD QUARTER REPORT
SEPTEMBER 30, 2015
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders,
The third quarter was tumultuous for equity markets. The S&P 500 fell 6.4%, sending the year’s return into negative territory with a decline of -5.3%. Adams Diversified Equity Fund performed better than the S&P 500 for the first nine months with a total return on net asset value of -4.9%.
Early in the quarter, markets were buoyed by the news that Greece had reached a deal with its creditors. This was followed by a stream of positive economic data from the U.S. and Europe. Retail sales accelerated, labor markets continued to show improvement and GDP growth for the first six months of the year was revised upward to 3.9%. But these signs of economic strength were not enough to insulate the markets from global economic concerns.
The initial trigger of the market’s instability came from China, where the decision to devalue its currency in August led to investor doubts about global economic growth. Fears over China’s falling demand for raw materials, coupled with excess supply, resulted in a further step down for commodity prices. The Federal Reserve’s September decision to leave U.S. interest rates unchanged, despite falling unemployment and reasonably strong domestic economic indicators, further disappointed investors. As part of its decision, the Fed pointed to the lack of inflation, the strength of the dollar and concerns about growth in China and other emerging markets.
The Energy and Materials sectors bore the brunt of the quarter’s market selloff. The Fund’s holdings in Marathon Petroleum, a refiner, and its large position in ExxonMobil helped cushion the weakness in oil service and exploration & production stocks. On the other end of the spectrum, Utilities was the only sector delivering a positive return in the quarter. An announced takeover of one of the Fund’s utility holdings, AGL Resources, contributed to our positive return.
Apart from economic worries, the Health Care sector was hit with headlines focusing on pricing and health care costs. Biotech companies, including portfolio holdings Biogen and Gilead Sciences, in particular were punished. Political posturing from presidential candidates regarding health care costs put temporary pressure on the stocks, but masks the potential we see for the sector.
The market’s decline in the last three months provided opportunities to increase our commitments in high conviction holdings as well as establish positions in new stocks. Microsoft was one of the positions we increased. The growth of cloud revenues and the recent strong expense discipline affirmed our conviction in the company. New positions were initiated in two stocks that benefit from reduced commodity prices. Recent concerns about capacity additions in the airlines provided an attractive entry point for Southwest Airlines. We believe the industry dynamics remain supportive in the long run and Southwest is uniquely positioned domestically. In the near term, low fuel costs are driving excess cash flow, which is funding increased share buybacks and expansion. Another new position, PPG Industries, also benefits from lower oil prices. As the leader in the global coatings industry, PPG has significant gross margin expansion opportunities from a reduction in raw material costs, most notably resin. We anticipate incremental volume growth as key end-markets (construction and autos) continue to recover. Additionally, its recent acquisition of Comex, a paint manufacturer and retailer in Mexico, provides an additional growth platform.
We also identified an attractive company in the Consumer Discretionary sector, adding Polaris Industries to the portfolio. The company is a recognized leader in the powersports industry. High quality off-road consumer and military vehicles and
LETTER TO SHAREHOLDERS (CONTINUED)
motorcycles are among their products. Multiple revenue growth drivers include innovation, increased distribution domestically, international expansion and market share gains. Also, improvements to Polaris’ manufacturing operations offer margin expansion benefits.
For the nine months ended September 30, 2015, the total return on the Fund’s net asset value (“NAV”) per share (with dividends and capital gains reinvested) was -4.9%. The total return on the market price of the Fund’s shares for the period was -5.8%. These compare to a -5.3% total return for the S&P 500 and a -6.2% total return for the Lipper Large-Cap Core Mutual Funds Average over the same time period.
For the twelve months ended September 30, 2015, the Fund’s total return on NAV was -0.4% and on market price was -0.6%. Comparable figures for the S&P 500 and Lipper Large-Cap Core Mutual Funds Average were -0.6% and -2.2%, respectively.
Net assets of the Fund at September 30, 2015, were $14.93 per share on 95,419,646 shares outstanding, compared with $15.87 per share at December 31, 2014, on 96,286,656 shares outstanding. On March 2, 2015, a distribution of $0.05 per share was paid, consisting of $0.02 net investment income, $0.01 short-term capital gain, and $0.01 long-term capital gain, realized in 2014, and $0.01 of net investment income realized in 2015, all taxable in 2015. A 2015 net investment income dividend of $.05 per share was paid on June 1, 2015, and another net investment income dividend of $.05 per share was paid on September 1, 2015. These constitute the first three payments toward our annual 6% minimum distribution rate commitment.
The Fund repurchased 883,800 shares of its Common Stock during the nine months ended September 30, 2015. The shares were repurchased at an average price of $14.00 and a weighted average discount to NAV of 13.8%, resulting in a $0.02 increase to NAV per share.
By order of the Board of Directors,
Mark E. Stoeckle
Chief Executive Officer & President
October 8, 2015
Disclaimers
This report contains “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. By their nature, all forward-looking statements involve risks and uncertainties, and actual results could differ materially from those contemplated by the forward-looking statements. Several factors that could materially affect the Fund’s actual results are the performance of the portfolio of stocks held by the Fund, the conditions in the U.S. and international financial markets, the price at which shares of the Fund will trade in the public markets, and other factors discussed in the Fund’s periodic filings with the Securities and Exchange Commission.
This report is transmitted to the shareholders of the Fund for their information. It is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in the report. The rates of return will vary and the principal value of an investment will fluctuate. Shares, if sold, may be worth more or less than their original cost. Past performance is no guarantee of future investment results.
SUMMARY FINANCIAL INFORMATION
(unaudited)
| 2015 | 2014 | ||||||
| At September 30: |
|||||||
| Net asset value per share |
$14.93 | $16.29 | |||||
| Market price per share |
$12.75 | $13.94 | |||||
| Shares outstanding |
95,419,646 | 93,508,989 | |||||
| Total net assets |
$1,424,167,228 | $1,523,281,729 | |||||
| Unrealized appreciation on investments |
$318,499,245 | $438,983,643 | |||||
| For the nine months ended September 30: |
|||||||
| Net investment income |
$8,065,497 | $13,832,515 | |||||
| Net realized gain |
$63,588,775 | $66,415,950 | |||||
| Cost of shares repurchased |
$12,377,017 | $9,986,420 | |||||
| Shares repurchased |
883,800 | 741,600 | |||||
| Total return (based on market price) |
-5.8% | 7.8% | |||||
| Total return (based on net asset value) |
-4.9% | 9.2% | |||||
| Key ratios: |
|||||||
| Expenses to average net assets* |
0.93% | ** | 0.58% | ||||
| Net investment income to average net assets* |
0.80% | ** | 1.26% | ||||
| Portfolio turnover* |
17.3% | 30.1% | |||||
| Net cash & short-term investments to net assets |
2.7% | 0.4% | |||||
| * | Annualized |
| ** | The annualized ratios of expenses and net investment income to average net assets were 0.64% and 1.09%, respectively, after excluding a one-time charge of $4,471,424 related to the termination of the Fund’s defined benefit plans. |
TEN LARGEST EQUITY PORTFOLIO HOLDINGS
September 30, 2015 (unaudited)
| Market Value | Percent of Net Assets |
|||||||
| Apple Inc. |
$ | 72,036,930 | 5.1 | % | ||||
| Google Inc. (Class A & Class C) |
44,320,062 | 3.1 | ||||||
| Adams Natural Resources Fund, Inc. * |
39,711,816 | 2.8 | ||||||
| Microsoft Corp. |
37,036,768 | 2.6 | ||||||
| Wells Fargo & Co. |
36,920,650 | 2.6 | ||||||
| Walt Disney Co. |
32,704,000 | 2.3 | ||||||
| PepsiCo, Inc. |
32,392,050 | 2.3 | ||||||
| Comcast Corp. (Class A) |
31,841,424 | 2.2 | ||||||
| Citigroup Inc. |
30,609,370 | 2.1 | ||||||
| CVS Health Corp. |
30,294,720 | 2.1 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 387,867,790 | 27.2 | % | ||||
|
|
|
|
|
|||||
| * | Non-controlled affiliated closed-end fund. |
4
SCHEDULE OF INVESTMENTS
September 30, 2015 (unaudited)
| Shares | Value (A) | ||||||
| Common Stocks — 97.3% |
|
||||||
| Consumer Discretionary — 13.3% |
|||||||
| Amazon.com, Inc. (B) |
50,000 | $ | 25,594,500 | ||||
| BorgWarner Inc. |
137,000 | 5,697,830 | |||||
| Comcast Corp. (Class A) |
559,800 | 31,841,424 | |||||
| Dollar General Corp. |
271,400 | 19,660,216 | |||||
| Hanesbrands Inc. |
608,000 | 17,595,520 | |||||
| Las Vegas Sands Corp. |
150,000 | 5,695,500 | |||||
| Lowe’s Companies, Inc. |
405,000 | 27,912,600 | |||||
| Magna International Inc. |
252,000 | 12,098,520 | |||||
| Polaris Industries Inc. |
83,000 | 9,949,210 | |||||
| Walt Disney Co. |
320,000 | 32,704,000 | |||||
|
|
|
||||||
| 188,749,320 | |||||||
|
|
|
||||||
| Consumer Staples — 9.2% |
|||||||
| Coca-Cola Co. |
186,000 | 7,462,320 | |||||
| CVS Health Corp. |
314,000 | 30,294,720 | |||||
| Kroger Co. |
508,000 | 18,323,560 | |||||
| PepsiCo, Inc. |
343,500 | 32,392,050 | |||||
| Philip Morris International Inc. |
262,800 | 20,847,924 | |||||
| Procter & Gamble Co. |
131,850 | 9,485,289 | |||||
| Spectrum Brands Holdings, Inc. |
131,500 | 12,033,565 | |||||
|
|
|
||||||
| 130,839,428 | |||||||
|
|
|
||||||
| Energy — 7.0% |
|||||||
| Adams Natural Resources Fund, Inc. (C) |
2,186,774 | 39,711,816 | |||||
| Chevron Corp. |
218,000 | 17,195,840 | |||||
| EOG Resources, Inc. |
151,200 | 11,007,360 | |||||
| Exxon Mobil Corp. |
101,000 | 7,509,350 | |||||
| Marathon Petroleum Corp. |
166,000 | 7,690,780 | |||||
| Noble Energy, Inc. |
175,000 | 5,281,500 | |||||
| Schlumberger Ltd. |
171,300 | 11,814,561 | |||||
|
|
|
||||||
| 100,211,207 | |||||||
|
|
|
||||||
| Financials — 16.7% |
|||||||
| Allstate Corp. |
330,000 | 19,219,200 | |||||
| American International Group, Inc. |
145,000 | 8,238,900 | |||||
| American Tower Corp. |
105,000 | 9,237,900 | |||||
| Berkshire Hathaway Inc. (Class B) (B) |
65,200 | 8,502,080 | |||||
| Capital One Financial Corp. |
245,000 | 17,767,400 | |||||
| Citigroup Inc. |
617,000 | 30,609,370 | |||||
| iShares US Real Estate ETF |
147,722 | 10,480,876 | |||||
| JPMorgan Chase & Co. |
450,000 | 27,436,500 | |||||
| Lincoln National Corp. |
270,000 | 12,814,200 | |||||
| Nasdaq, Inc. |
360,000 | 19,198,800 | |||||
| Navient Corp. |
520,000 | 5,844,800 | |||||
| Prudential Financial, Inc. |
195,000 | 14,860,950 | |||||
| Simon Property Group, Inc. |
89,500 | 16,442,940 | |||||
| Wells Fargo & Co. |
719,000 | 36,920,650 | |||||
|
|
|
||||||
| 237,574,566 | |||||||
|
|
|
||||||
5
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 2015 (unaudited)
| Shares | Value (A) | ||||||
| Health Care — 14.8% |
|||||||
| Aetna Inc. |
183,900 | $ | 20,120,499 | ||||
| Allergan plc (B) |
107,096 | 29,109,764 | |||||
| Biogen Inc. (B) |
47,000 | 13,715,070 | |||||
| Celgene Corp. (B) |
164,000 | 17,739,880 | |||||
| Cigna Corp. |
26,000 | 3,492,260 | |||||
| Edwards Lifesciences Corp. (B) |
122,000 | 17,344,740 | |||||
| Gilead Sciences, Inc. |
275,900 | 27,090,621 | |||||
| Johnson & Johnson |
64,000 | 5,974,400 | |||||
| McKesson Corp. |
87,900 | 16,264,137 | |||||
| Merck & Co., Inc. |
480,000 | 23,707,200 | |||||
| Novartis AG |
239,000 | 21,968,880 | |||||
| Valeant Pharmaceuticals International, Inc. (B) |
77,900 | 13,895,802 | |||||
|
|
|
||||||
| 210,423,253 | |||||||
|
|
|
||||||
| Industrials — 9.4% |
|||||||
| Boeing Co. |
205,000 | 26,844,750 | |||||
| Delta Air Lines, Inc. |
311,900 | 13,994,953 | |||||
| Dover Corp. |
176,000 | 10,063,680 | |||||
| FedEx Corp. |
80,000 | 11,518,400 | |||||
| Fluor Corp. |
130,000 | 5,505,500 | |||||
| General Electric Co. |
246,500 | 6,216,730 | |||||
| Honeywell International Inc. |
287,500 | 27,223,375 | |||||
| Southwest Airlines Co. |
204,900 | 7,794,396 | |||||
| Union Pacific Corp. |
278,000 | 24,577,980 | |||||
|
|
|
||||||
| 133,739,764 | |||||||
|
|
|
||||||
| Information Technology — 20.3% |
|
||||||
| Apple Inc. |
653,100 | 72,036,930 | |||||
| Automatic Data Processing, Inc. |
109,000 | 8,759,240 | |||||
| Cisco Systems, Inc. |
446,000 | 11,707,500 | |||||
| Facebook, Inc. (Class A) (B) |
303,300 | 27,266,670 | |||||
| Gartner, Inc. (B) |
165,000 | 13,848,450 | |||||
| Google Inc. (Class A) (B) |
35,500 | 22,662,135 | |||||
| Google Inc. (Class C) (B) |
35,597 | 21,657,927 | |||||
| Intel Corp. |
166,200 | 5,009,268 | |||||
| Lam Research Corp. |
127,600 | 8,336,108 | |||||
| MasterCard, Inc. (Class A) |
230,000 | 20,727,600 | |||||
| Microsoft Corp. |
836,800 | 37,036,768 | |||||
| Oracle Corp. |
221,000 | 7,982,520 | |||||
| QUALCOMM Inc. |
56,800 | 3,051,863 | |||||
| Visa Inc. (Class A) |
322,000 | 22,430,520 | |||||
| Western Digital Corp. |
83,000 | 6,593,520 | |||||
|
|
|
||||||
| 289,107,019 | |||||||
|
|
|
||||||
| Materials — 2.2% |
|||||||
| CF Industries Holdings, Inc. |
203,155 | 9,121,660 | |||||
| LyondellBasell Industries N.V. (Class A) |
186,000 | 15,504,960 | |||||
| PPG Industries, Inc. |
85,000 | 7,453,650 | |||||
|
|
|
||||||
| 32,080,270 | |||||||
|
|
|
||||||
| Telecommunication Services — 1.8% |
|||||||
| SBA Communications Corp. (Class A) (B) |
90,000 | 9,426,600 | |||||
| Verizon Communications Inc. |
389,000 | 16,925,390 | |||||
|
|
|
||||||
| 26,351,990 | |||||||
|
|
|
||||||
6
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 2015 (unaudited)
| Shares/ Principal |
Value (A) | ||||||
| Utilities — 2.6% |
|||||||
| AGL Resources Inc. |
145,000 | $ | 8,850,800 | ||||
| CMS Energy Corp. |
225,000 | 7,947,000 | |||||
| Edison International |
98,000 | 6,180,860 | |||||
| NextEra Energy, Inc. |
81,000 | 7,901,550 | |||||
| Pinnacle West Capital Corp. |
97,500 | 6,253,650 | |||||
|
|
|
||||||
| 37,133,860 | |||||||
|
|
|
||||||
| Total Common Stocks |
|
||||||
| (Cost $1,067,711,432) |
|
1,386,210,677 | |||||
|
|
|
||||||
| Other Investments — 0.0% |
|
||||||
| Financial — 0.0% |
|
||||||
| Adams Funds Advisers, LLC (B) (D) |
33,871 | ||||||
|
|
|
||||||
| Short-Term Investments — 2.7% |
|
||||||
| Money Market Account — 1.3% |
|
||||||
| M&T Bank, 0.10% |
$ | 18,114,613 | 18,114,613 | ||||
| Money Market Funds — 1.4% |
|
||||||
| Fidelity Institutional Money Market – Money Market Portfolio (Institutional Class), 0.17% (E) |
20,000,000 | 20,000,000 | |||||
|
|
|
||||||
| Total Short-Term Investments |
|||||||
| (Cost $38,114,613) |
38,114,613 | ||||||
|
|
|
||||||
| Total Investments — 100.0% of Net Assets |
|||||||
| (Cost $1,105,859,916) |
$ | 1,424,359,161 | |||||
|
|
|
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Notes:
| (A) | Common stocks are listed on the New York Stock Exchange or the NASDAQ and are valued at the last reported sale price on the day of valuation. |
| (B) | Presently non-dividend paying. |
| (C) | Non-controlled affiliate, a closed-end sector fund, registered as an investment company under the Investment Company Act of 1940. |
| (D) | Controlled affiliate valued using fair value procedures. |
| (E) | Rate presented is as of period-end and represents the annualized yield earned over the previous seven days. |
7
ADAMS DIVERSIFIED EQUITY FUND, INC.
Board of Directors
| Enrique R. Arzac 1,2,4 |
Frederic A. Escherich 2,3 |
Craig R. Smith 1,2,4 | ||
| Phyllis O. Bonanno 2,3 |
Roger W. Gale 1,3,4 |
Mark E. Stoeckle 1 | ||
| Kenneth J. Dale 1,3,4 |
Kathleen T. McGahran 1,5 |
| 1. | Member of Executive Committee |
| 2. | Member of Audit Committee |
| 3. | Member of Compensation Committee |
| 4. | Member of Nominating and Governance Committee |
| 5. | Chair of the Board |
Officers
| Mark E. Stoeckle |
Chief Executive Officer & President | |
| James P. Haynie, CFA |
Executive Vice President | |
| D. Cotton Swindell, CFA |
Executive Vice President | |
| Nancy J.F. Prue, CFA |
Executive Vice President, Director of Shareholder Communications | |
| Brian S. Hook, CFA, CPA |
Vice President, Chief Financial Officer and Treasurer | |
| Lawrence L. Hooper, Jr. |
Vice President, General Counsel and Secretary | |
| Steven R. Crain, CFA |
Vice President—Research | |
| Michael E. Rega, CFA |
Vice President—Research | |
| David R. Schiminger, CFA |
Vice President—Research | |
| Christine M. Sloan, CPA |
Assistant Treasurer |
500 East Pratt Street, Suite 1300, Baltimore, MD 21202
410.752.5900 800.638.2479
Website: www.adamsfunds.com
E-mail: contact@adamsfunds.com
Tickers: ADX (NYSE), XADEX (NASDAQ)
Counsel: Chadbourne & Parke LLP
Independent Registered Public Accounting Firm: PricewaterhouseCoopers LLP
Custodian of Securities: Brown Brothers Harriman & Co.
Transfer Agent & Registrar: American Stock Transfer & Trust Company, LLC
Stockholder Relations Department
6201 15th Avenue
Brooklyn, NY 11219
(877) 260-8188
Website: www.amstock.com
E-mail: info@amstock.com