Washington, D.C. 20549
P.O. Box 7650, One Market, Steuart Tower
[logo - American Funds®]
The right choice for the long term®
Fundamental Investors
The continuing importance of income
[photo - rope around a mooring bit]
Annual report for the year ended December 31, 2006
Fundamental InvestorsSM seeks long-term growth of capital and income primarily through investments in common stocks.
This fund is one of the 30 American Funds. The organization ranks among the nation’s three largest mutual fund families. For 75 years, Capital Research and Management Company,SM the American Funds adviser, has invested with a long-term focus based on thorough research and attention to risk.
| Contents | |
| Letter to shareholders | 1 |
| The value of a long-term perspective | 4 |
| The continuing importance of income | 6 |
| Summary investment portfolio | 12 |
| Financial statements | 15 |
| Board of directors and other officers | 31 |
| What makes American Funds different? | back cover |
Figures shown are past results for Class A shares and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity. For current information and month-end results, visit americanfunds.com. Fund results shown, unless otherwise indicated, are at net asset value. If a sales charge (maximum 5.75%) had been deducted, the results would have been lower.
Please see page 4 for Class A share results with relevant sales charges deducted. Results for other share classes can be found on page 30. Please see the inside back cover for important information about other share classes.
The fund’s investment adviser waived 5% of its management fees from September 1, 2004, through March 31, 2005, and increased it to 10% on April 1, 2005. Fund results shown reflect the waiver, without which they would have been lower. Please see the Financial Highlights table on pages 23 and 24 for details.
The fund’s 30-day yield for Class A shares as of January 31, 2007, calculated in accordance with the Securities and Exchange Commission formula, was 1.38% (1.35% without the fee waiver). The fund’s distribution rate for Class A shares as of that date was 1.25%. Both reflect the 5.75% maximum sales charge. The SEC yield reflects the rate at which the fund is earning income on its current portfolio of securities while the distribution rate reflects the fund’s past dividends paid to shareholders. Accordingly, the fund’s SEC yield and distribution rate may differ.
Investing outside the United States is subject to additional risks, such as currency fluctuations and political instability, which are detailed in the fund’s prospectus.
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Fellow shareholders:
For the 12 months ended December 31, 2006, shares of Fundamental Investors rose sharply.
The fund’s 19.2% total return exceeded that of its primary benchmark, the unmanaged Standard & Poor’s 500 Composite Index (a broad measure of the U.S. stock market), which increased 15.8%.
Results for the fund also outpaced the 15.6% gain in the Lipper Growth and Income Funds Index, the fund’s new peer-group benchmark. Historically, we have cited results for the Lipper Large-Cap Value Funds and Large-Cap Core Funds indexes, but we believe this index — which measures funds that combine a growth orientation with an income requirement — better reflects Fundamental Investors’ investment objectives.
In addition, because the fund is able to invest up to 30% of its assets outside the United States and Canada, we are now including returns for the unmanaged MSCI World Index,SM a measure of markets in developed countries, including the United States. For the period, this index climbed 20.7%.
We are encouraged by the fund’s results for the year, but believe that the advantage Fundamental Investors has maintained over its benchmarks for the longer time periods shown in the table below is of even greater importance to investors who share our long-term perspective.
Providing shareholders with regular quarterly income is an important component of the fund’s investment objective. During the 12 months, Fundamental Investors paid dividends totaling 56 cents a share, an amount that includes a 10-cent extra dividend that was added to the December payment. The fund also increased its quarterly dividend from 11 to 12 cents a share beginning with the August payment. In the feature article beginning on page 6, we answer some common questions about how and why Fundamental Investors pursues income as one of its objectives.
In addition to paying dividends, the fund also made a December capital gain distribution of $1.57.
[Begin Sidebar]
Results at a glance
Returns for periods ended December 31, 2006, with all distributions reinvested.
| | | Average annual total return |
| | | | | |
| | 1-year total return | 5 years | 10 years | Lifetime1 |
| | | | | |
| Fundamental Investors | +19.2% | +10.6% | +11.1% | +14.2% |
| Lipper Growth and Income Funds Index | +15.6 | +7.6 | +8.0 | +12.5 |
| Lipper Large-Cap Value Funds Index | +18.3 | +7.7 | +8.5 | +13.0 |
| Lipper Large-Cap Core Funds Index | +13.4 | +5.0 | +7.3 | —2 |
MSCI World Index3 | +20.7 | +10.5 | +8.1 | +12.2 |
Standard & Poor’s 500 Composite Index3 | +15.8 | +6.2 | +8.4 | +13.2 |
1 Since Capital Research and Management Company began managing the fund on August 1, 1978.
2 Index began on December 29, 1978, therefore lifetime results are not available.
3 Unmanaged.
[End Sidebar]
A rising tide
The U.S. market began the year heading higher, taking its cues from robust corporate profits and healthy balance sheets, as well as economic indicators that were upbeat in spite of elevated oil prices. But spring and summer saw a tempering of that optimism as core inflation data climbed and the Federal Reserve seemed to indicate that its pattern of rate hikes might continue. Inflation moderated, however, and the Federal Reserve left the federal funds rate unchanged, which — along with steeply declining oil prices — helped trigger a sharp market climb that continued through the end of the period.
Beyond our shores, all major markets except Japan showed considerable strength and Fundamental Investors benefited from its investments outside the United States.
Returns for many non-U.S. holdings were bolstered by a U.S. dollar that lost significant ground to the pound and euro, though the greenback finished relatively flat against the yen and the Canadian dollar.
Broad portfolio strength
Financial markets were supported by a broad base of sectors and so was Fundamental Investors.
Once again, the fund’s energy holdings played a pivotal role as almost all were borne sharply higher by oil prices that touched $77 per barrel during the summer; most held on to these gains despite the precipitous drop in crude prices that began in August. Among Fundamental Investors’ larger holdings, Norsk Hydro (+50.6%), LUKOIL (+48.1%), Exxon Mobil (+36.4%), Chevron (+29.5%) and Suncor Energy (+25.0%) all rose sharply.
Telecommunications stocks helped returns during the 12 months as industry consolidation, wireless business growth and improving margins buoyed profits and investor sentiment. Shares of BellSouth (+73.8%), Qwest (+48.1%), AT&T (+46.0%) and Verizon (+23.6%) all recorded sizable price increases.
A number of the fund’s holdings with agricultural businesses saw their share prices rise as a severe drought in Australia caused grain prices to climb and the anticipated upswing in ethanol production boosted prospects for future demand. Farm equipment manufacturer Deere (+39.6%) and fertilizer producers Potash (+78.9%) and Mosaic (+46.0%) rose sharply. Dupont (+14.6%), which produces seeds as well as many chemicals used in agriculture, also contributed.
While we’re careful to note that we invest in companies, not countries, the economic boom taking place in Ireland helped boost results for the fund’s Irish holdings. Beverage producer C&C Group (+177.9%), building products manufacturer CRH (+41.6%), Allied Irish Bank (+39.1%) and insurer Irish Life & Permanent (+35.1%) all posted sharp gains.
Holdings that lagged
Though over 80% of the fund’s portfolio companies rose during the 12 months, a handful of sectors and holdings struggled.
Semiconductor manufacturers turned in lackluster results as excess inventory across the electronics food chain softened demand for many of their products. Linear Technology (-15.9%), Texas Instruments (-10.2%) and Intersil (-3.9%) were all down while Applied Materials (+2.8%) lagged the broader market.
Among larger fund holdings posting negative returns were a diverse group including home-improvement retailer Lowe’s (-6.5%), which was hampered by concerns about the health of the housing market as well as a decline in existing home sales. Pharmaceutical manufacturer Eli Lilly
(-7.9%) was down as flat or falling U.S. sales for a handful of its key products, increased competition in its insulin business, and the FDA’s rejection of Arxxant, a drug being developed to treat blindness associated with diabetes, all took their toll. Motorola (-9.0%) stumbled after sales of new products fell short of estimates, adversely impacting margins.
An ever-changing portfolio
As always, our extensive global research effort continued to uncover solid investment opportunities for Fundamental Investors. In fiscal 2006, we built a sizable position in software manufacturer Oracle, believing that it was undervalued and that its integration of recent acquisitions would go more smoothly than the market anticipated. We made a considerable investment in mobile device manufacturer Nokia, which is strongly positioned to benefit from the rising popularity of Internet- and multimedia-enabled mobile devices, as well as the explosion of wireless communications in emerging markets. Mobile telephony provider Vodafone, a company trading at low valuations but showing renewed attention to the interests of shareholders, also became part of the portfolio. We upped our stakes in financial giants Fannie Mae and Freddie Mac, which could benefit from the newly elected Democratic Congress.
[Begin Sidebar]
Fundamental Investors’ total return year by year (ending December 31)
| | | Capital return | | Income return | | Total return | |
| | | | | | | | |
| 1997 | | | +25.0 | % | | +1.7 | % | | +26.7 | % |
| 1998 | | | +15.2 | | | +1.5 | | | +16.7 | |
| 1999 | | | +23.2 | | | +1.4 | | | +24.6 | |
| 2000 | | | +3.1 | | | +1.2 | | | +4.3 | |
| 2001 | | | -10.9 | | | +1.3 | | | -9.6 | |
| 2002 | | | -19.1 | | | +1.8 | | | -17.3 | |
| 2003 | | | +30.2 | | | +1.8 | | | +32.0 | |
| 2004 | | | +11.9 | | | +2.0 | | | +13.9 | |
| 2005 | | | +9.9 | | | +1.8 | | | +11.7 | |
| 2006 | | | +17.6 | | | +1.6 | | | +19.2 | |
| 10-year average annual total return | | | +11.1 | % |
| 10-year cumulative total return | | | +187.4 | |
| Lifetime cumulative total return (since 8/1/78) | | | +4,304.6 | |
Total return measures both capital results (changes in net asset value) and income return (from income dividends).
All returns assume reinvestment of all dividends and capital gain distributions.
[End Sidebar]
In recent years, the fund made sizable investments in many metals and mining companies on the theory that booming global infrastructure and manufacturing growth — particularly in India and China — would increase the demand for, and price of, many commodities. This scenario indeed came to pass and share prices for many of the fund’s holdings in this sector surged. Looking to realize some of those gains, we trimmed a number of our positions during the year.
Cautious optimism, familiar concerns
In last year’s annual report, we expressed cautious optimism about the year that was to come and we sound the same note now. Our outlook is influenced by a number of the concerns raised then, including uncertainty over the direction of oil prices, interest rates and inflation.
However, while we always pay close attention to economic indicators like these, we don’t assemble a portfolio that depends on a particular interest-rate or inflation outcome for success. Instead, we have an investment method — the multiple portfolio counselor system — that allows us to incorporate a diverse range of opinions and outlooks on companies and markets. The net result is a broad-based portfolio of well-researched, high-conviction investments.
This approach has always been at the center of our consistent long-term results and will continue to remain our focus in the coming year and beyond.
We thank you for your commitment to long-term investing.
Sincerely,
/s/ James F. Rothenberg
James F. Rothenberg
Vice Chairman
/s/ Dina N. Perry
Dina N. Perry
President
February 5, 2007
For current information about the fund, visit americanfunds.com.
The value of a long-term perspective
How a $10,000 investment has grown
The chart and the table below it illustrate how a $10,000 investment in the fund grew between August 1, 1978 — when Capital Research and Management Company became Fundamental Investors’ investment adviser — and December 31, 2006. The chart also shows how Standard & Poor’s 500 Composite Index and the Lipper Growth and Income Funds and Lipper Large-Cap Value Funds indexes fared over this same period, and what happened to inflation (as measured by the Consumer Price Index).
Figures shown are past results for Class A shares and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. For current information and month-end results, visit americanfunds.com. Fund figures reflect deduction of the maximum sales charge of 5.75% on the $10,000 investment.1 Thus, the net amount invested was $9,425.2
1 As outlined in the prospectus, the sales charge is reduced for accounts (and aggregated investments) of $25,000 or more and is eliminated for purchases of $1 million or more. There is no sales charge on dividends or capital gain distributions that are reinvested in additional shares.
2 The maximum initial sales charge was 8.5% prior to July 1, 1988.
3 Includes reinvested dividends of $63,269 and reinvested capital gain distributions of $146,299.
4 Includes reinvested capital gain distributions of $80,263 but does not reflect income dividends of $35,188 taken in cash.
5 For the period August 1, 1978 (when Capital Research and Management Company became investment adviser), through December 31, 1978.
6 Computed from data supplied by the U.S. Department of Labor, Bureau of Labor Statistics.
The results shown are before taxes on fund distributions and sale of fund shares.
The S&P 500 is unmanaged and includes reinvested distributions, but does not reflect sales charges, commissions or expenses.
[begin sidebar]
Average annual total returns based on a $1,000 investment
(for periods ended December 31, 2006)*
| | 1 year | 5 years | 10 years |
| | | | |
| Class A shares | +12.38% | +9.30% | +10.48% |
*Assumes reinvestment of all distributions and payment of the maximum 5.75% sales charge.
The total annual fund operating expense ratio was 0.61% for Class A shares as of the most recent fiscal year-end. This figure does not reflect a fee waiver that currently is in effect and which causes the actual expense ratio to be lower.
The fund’s investment adviser waived 5% of its management fees from September 1, 2004, through March 31, 2005, and increased it to 10% on April 1, 2005. Fund results shown reflect actual expenses, with the waiver applied. Fund results would have been lower without the waiver. Please see the Financial Highlights table on pages 23 and 24 for details.
[end sidebar]
| Fundamental Investors with dividends reinvested | Fundamental Investors not including dividends | S&P 500 with dividends reinvested | Lipper Large-Cap Value Funds Index with dividends reinvested | Lipper Growth and Income Funds Index with dividends reinvested | Consumer Price Index (inflation) |
19784 | 9,155 | 8,947 | 9,762 | 9,669 | 9,684 | 10,304 |
| 1979 | 10,556 | 9,892 | 11,579 | 11,667 | 11,995 | 11,674 |
| 1980 | 12,807 | 11,390 | 15,336 | 14,658 | 15,386 | 13,135 |
| 1981 | 12,654 | 10,688 | 14,581 | 14,879 | 15,172 | 14,307 |
| 1982 | 16,957 | 13,522 | 17,723 | 18,622 | 18,839 | 14,855 |
| 1983 | 21,389 | 16,424 | 21,721 | 22,968 | 23,127 | 15,419 |
| 1984 | 22,621 | 16,759 | 23,083 | 24,352 | 24,119 | 16,027 |
| 1985 | 29,448 | 21,148 | 30,407 | 31,784 | 31,006 | 16,636 |
| 1986 | 35,941 | 25,151 | 36,082 | 37,754 | 36,472 | 16,819 |
| 1987 | 37,295 | 25,463 | 37,977 | 38,736 | 37,434 | 17,565 |
| 1988 | 43,246 | 28,561 | 44,267 | 44,776 | 44,304 | 18,341 |
| 1989 | 55,597 | 35,438 | 58,269 | 56,851 | 54,819 | 19,193 |
| 1990 | 52,130 | 32,180 | 56,457 | 54,547 | 51,534 | 20,365 |
| 1991 | 67,947 | 40,940 | 73,620 | 71,251 | 65,836 | 20,989 |
| 1992 | 74,871 | 44,059 | 79,222 | 77,417 | 72,177 | 21,598 |
| 1993 | 88,466 | 50,884 | 87,189 | 87,686 | 82,730 | 22,192 |
| 1994 | 89,641 | 50,319 | 88,336 | 87,848 | 82,387 | 22,785 |
| 1995 | 120,306 | 66,210 | 121,491 | 117,051 | 108,042 | 23,364 |
| 1996 | 144,352 | 78,143 | 149,367 | 141,708 | 130,379 | 24,140 |
| 1997 | 182,855 | 97,513 | 199,183 | 182,058 | 165,420 | 24,551 |
| 1998 | 213,421 | 112,292 | 256,100 | 215,266 | 187,884 | 24,947 |
| 1999 | 265,882 | 138,151 | 309,980 | 238,470 | 210,168 | 25,616 |
| 2000 | 277,235 | 142,315 | 281,766 | 243,131 | 210,997 | 26,484 |
| 2001 | 250,761 | 126,959 | 248,303 | 222,282 | 195,336 | 26,895 |
| 2002 | 207,271 | 102,816 | 193,447 | 178,544 | 160,381 | 27,534 |
| 2003 | 273,523 | 133,434 | 248,903 | 228,532 | 204,175 | 28,052 |
| 2004 | 311,563 | 149,159 | 275,970 | 255,944 | 228,113 | 28,965 |
| 2005 | 347,960 | 163,728 | 289,511 | 271,969 | 243,681 | 29,954 |
| 2006 | 414,9041, 3 | 192,4801, 4 | 335,199 | 321,690 | 281,615 | 30,7156 |
| Year Ended December 31 | | 1978 5 | | 1979 | | 1980 | | 1981 | | 1982 | | 1983 | | 1984 | | 1985 | | 1986 | | 1987 | | 1988 | | 1989 | | 1990 | | 1991 | | 1992 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends in Cash | | $ | 216 | | | 405 | | | 553 | | | 580 | | | 634 | | | 594 | | | 556 | | | 582 | | | 636 | | | 717 | | | 895 | | | 1,225 | | | 1,058 | | | 904 | | | 988 | |
Value at Year- End1 | | $ | 8.9 | | $ | 9.9 | | $ | 11.4 | | $ | 10.7 | | $ | 13.5 | | $ | 16.4 | | $ | 16.8 | | $ | 21.1 | | $ | 25.2 | | $ | 25.5 | | $ | 28.6 | | $ | 35.4 | | $ | 32.2 | | $ | 40.9 | | $ | 44.1 | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends Reinvested | | $ | 217 | | | 421 | | | 603 | | | 665 | | | 768 | | | 755 | | | 734 | | | 795 | | | 894 | | | 1,034 | | | 1,328 | | | 1,877 | | | 1,679 | | | 1,478 | | | 1,655 | |
Value at Year- End1 | | $ | 9.2 | | $ | 10.6 | | $ | 12.8 | | $ | 12.7 | | $ | 17.0 | | $ | 21.4 | | $ | 22.6 | | $ | 29.4 | | $ | 35.9 | | $ | 37.3 | | $ | 43.2 | | $ | 55.6 | | $ | 52.1 | | $ | 67.9 | | $ | 74.9 | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total return | | | -8.4 | | | 15.3 | | | 21.3 | | | -1.2 | | | 34.0 | | | 26.1 | | | 5.8 | | | 30.2 | | | 22.0 | | | 3.8 | | | 16.0 | | | 28.6 | | | -6.2 | | | 30.3 | | | 10.2 | |
| Year Ended December 31 | | 1993 | | 1994 | | 1995 | | 1996 | | 1997 | | 1998 | | 1999 | | 2000 | | 2001 | | 2002 | | 2003 | | 2004 | | 2005 | | 2006 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends in Cash | | | 1,084 | | | 1,238 | | | 1,160 | | | 1,196 | | | 1,351 | | | 1,428 | | | 1,578 | | | 1,716 | | | 1,844 | | | 2,289 | | | 1,850 | | | 2,590 | | | 2,729 | | | 2,590 | | |
Value at Year- End1 | | $ | 50.9 | | $ | 50.3 | | $ | 66.2 | | $ | 78.1 | | $ | 97.5 | | $ | 112.3 | | $ | 138.2 | | $ | 142.3 | | $ | 127.0 | | $ | 102.8 | | $ | 133.4 | | $ | 149.2 | | $ | 163.7 | | $ | 192.5 | 4 | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends Reinvested | | | 1,858 | | | 2,171 | | | 2,082 | | | 2,187 | | | 2,511 | | | 2,691 | | | 3,013 | | | 3,319 | | | 3,611 | | | 4,553 | | | 3,755 | | | 5,345 | | | 5,735 | | | 5,534 | | |
Value at Year- End1 | | $ | 88.5 | | $ | 89.6 | | $ | 120.3 | | $ | 144.4 | | $ | 182.9 | | $ | 213.4 | | $ | 265.9 | | $ | 277.2 | | $ | 250.8 | | $ | 207.3 | | $ | 273.5 | | $ | 311.6 | | $ | 348.0 | | $ | 414.9 | 3 | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total return | | | 18.2 | | | 1.3 | | | 34.2 | | | 20.0 | | | 26.7 | | | 16.7 | | | 24.6 | | | 4.3 | | | -9.6 | | | -17.3 | | | 32.0 | | | 13.9 | | | 11.7 | | | 19.2 | | |
| Average annual total return for 28 1/2 years |
14.0% | 1 |
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The continuing importance of income
The quiet contribution that dividends can make to an investor’s total return may have been overshadowed by the generally strong and steadily rising markets of the past few years. Not surprising, since often it’s only downturns or sideways slides that illuminate the full benefits of regular quarterly income.
Yet because flat and falling markets are an inevitable occurrence for long-term investors, income has always been an important component of Fundamental Investors’ objective. And its effect on the fund’s historical return has been meaningful, as you can see from the chart on page 3.
For the fund, the search for income is not simply about buying stocks with high yields, but about selecting fundamentally sound companies committed to returning cash to shareholders. It’s also about the investment discipline that balancing the twin goals of capital appreciation and income generation brings to building the fund’s portfolio.
In the following pages, we’ll answer some common questions about how and why the fund’s investment professionals continue to make income part of Fundamental Investors’ approach.
[photo - ropes on pulleys]
Q: What is Fundamental Investors’ income objective?
As a growth-and-income fund, Fundamental Investors is committed to paying quarterly income to shareholders, which it accomplishes by investing primarily in companies that pay regular quarterly dividends.
“Income is an important consideration as we build the fund’s portfolio,” explains Dina Perry, the fund’s president and one of its portfolio counselors. “We recognize the role it has played over the years in the fund’s total return and know that dividend-paying companies have historically been an attractive segment of the market from a capital appreciation standpoint as well.”
In terms of the fund’s specific income objective, Fundamental Investors seeks to provide a yield — the percentage of the fund’s share price that is annually paid out to shareholders in the form of quarterly dividends — that is roughly in line with the average yield of its primary benchmark index, Standard & Poor’s 500 Composite Index. (Because fund expenses are deducted from dividends it receives from portfolio holdings, the yield ultimately realized by shareholders is lower than that of the index.)
During those periods when portfolio counselors and research analysts are finding many attractive companies that feature high yields, Fundamental Investors’ income may exceed the amount necessary to meet its quarterly payouts. In such cases, the fund typically elects to return that excess cash to shareholders in the form of an extra dividend, paid out at year-end. Thanks to an improving dividend climate, it has paid an extra dividend in four of the past five years.
And if investment professionals believe that increasing the fund’s quarterly dividend can be accomplished without constraining their investment approach, they do. In 2006, the fund raised its dividend from 11 cents a share to 12 cents a share. However, increases like these are always carefully considered.
“At certain points, we may be finding lots of opportunities among higher yielding companies, so the temptation may be to bump up the quarterly dividend,” explains Dina. “Yet we realize that market scenarios change and, down the road, more opportunity may be found among companies with lower yields. And we don’t want to have increased the dividend to the point where we’re unable to make those investments in lower yielding stocks.”
[Begin Sidebar]
Balancing the twin goals of capital appreciation and income generation brings investment discipline to building the fund’s portfolio.
[End Sidebar]
[photo - boat console with instruments and gauges]
[Begin Sidebar]
A dividend is nothing short of a commitment by a company to regularly return cash to its owners, and this ongoing commitment plays a role in regulating a company’s behavior. In fact, for portfolio counselors and research analysts, a company’s “dividend behavior” often serves as a gauge of its prospects.
[End Sidebar]
Q: How does the fund go about pursuing its income objective?
Within a given investment universe, individual company yields vary widely. Some industries — among them financials, utilities and telecommunications — have a history of returning significant portions of their earnings to shareholders. Other sectors such as technology, that are without strong dividend histories and perhaps seen as being in more growth-heavy phases, may pay only small dividends or none at all.
This broad range of yields means there are multiple approaches to building a portfolio that meets an income objective. And the method of portfolio management employed by the fund’s investment adviser, Capital Research and Management Company, allows the fund’s investment professionals flexibility in pursuing this goal.
That’s because this method, known as the multiple portfolio counselor system, divides the fund’s portfolio into slices, each of which is independently managed — according to fund objectives — by one of Fundamental Investors’ five portfolio counselors. A sixth slice, known as the Research Portfolio or “RP,” is managed by the fund’s research analysts.
Within their slices of the portfolio, counselors are able to pursue the fund’s objectives — including income — in a manner consistent with their respective backgrounds, investment styles and market outlooks. Each investment professional has a different approach.
“To some extent, finding yield comes naturally to us at Capital since we have historically been value investors, and companies characterized as ‘value’ often have higher yields,” explains portfolio counselor Brady Enright. “That being said, among the portfolio counselors there is a range of perspectives and approaches to meeting our income objective. We have lots of flexibility.”
That flexibility serves Brady’s fellow counselor, Ron Morrow, well. “While some of my colleagues may want every company in which they invest to pay a dividend, I tend to ‘barbell’ out my portfolio, which may mean mixing higher yielding companies with those that have lower yields,” he explains. “This fits with my larger investment approach which is to often have sizable concentrations of my portfolio invested in specific sectors. The system can accommodate all our styles.”
Q: How do you ensure a balance of holdings that meets the fund’s income objective?
Each counselor monitors his or her slice of the portfolio to ensure it is meeting the fund’s income goal, and if a counselor’s yield drops below the target, he or she must adjust their holdings accordingly.
The Research Portfolio is likewise expected to meet Fundamental Investors’ yield target, and considerable coordination is needed to ensure that this goal is achieved. The need for coordination stems primarily from the fact that some analysts cover sectors where finding yield can be a challenge, while others have responsibility for industries that traditionally offer higher payouts.
“Since we want all the analysts to be able to invest in companies they cover, we seek a balance, with analysts whose sectors offer higher yield helping compensate for those whose sectors offer less yield opportunity,” explains Terry McGuire, a technology analyst and coordinator of the RP. “We want analysts to be able to invest in the companies they believe in most strongly.”
Q: What can a dividend tell you about a company?
While not every company in which the fund invests pays a dividend, most do. And closely monitoring a company’s “dividend behavior” can offer insight into a company’s sense of its own prospects. Each portfolio counselor looks for different things.
“I always start the investment process by looking at companies that I like; I never start the process looking for yield. But when it comes to using dividends to analyze the quality of a company, I believe a company’s ability to grow its dividend is more important than the size of the dividend,” observes portfolio counselor Mike Kerr. “If I don’t believe a company can grow its dividend over the next, say, five years, that tells me that I’m buying a very mature company with less interesting prospects.”
Adds Brady, “It’s very common for companies to try to grow their dividends at a rate that is roughly equal to the long-term growth rate of their earnings. So if earnings are up 25% but they raise their dividend only 15%, it suggests perhaps that the company is growing at a rate that is not sustainable. The details tell you a lot.”
For some counselors a high yield is attractive, but each is careful to note that not all high yields are created equal. Sometimes a company’s yield grows because it doesn’t have other ways to put its cash to work, which may mean its growth prospects are uncertain. In other cases, a high yield results from a depressed stock value, and that can represent potential opportunity.
“For an investor who seeks companies the market may be undervaluing, a high yield can be attractive on two fronts — income and price appreciation,” explains Dina. “Sometimes it may take a while for the stock price to recover, but the dividend makes it attractive while you wait. Fundamental research is central to determining which undervalued companies are likely to appreciate.”
[Begin Sidebar]
The dividends of experience
Fundamental Investors is managed by five portfolio counselors averaging over 28 years of investment experience. Their diverse backgrounds and varied perspectives on markets and the economy lead each to pursue the fund’s income objective in a slightly different way. But there’s one thing they all share: the recognition that regular quarterly dividends have historically played a crucial role in an investor’s total return. This understanding, together with experience in differing market environments and an awareness of what dividends can tell them about companies, continually reinforces the benefits of seeking income for shareholders.
| | | |
Portfolio counselor | Years of experience | Years with American Funds |
| | | |
| Jim Drasdo | 35 | 30 |
| Brady Enright | 15 | 10 |
| Mike Kerr | 24 | 22 |
| Ron Morrow | 39 | 10 |
| Dina Perry | 29 | 15 |
Years of experience as of March 2007.
[End Sidebar]
Q: Do dividends have value apart from the obvious benefit of cash returned to shareholders?
A dividend is nothing short of a commitment by a company to regularly return cash to its owners, and this ongoing commitment plays a role in shaping corporate behavior.
“It’s very difficult for a company to cut its dividend. It sends too negative a signal to the market about company prospects,” says Dina. “So, in a way, a company that pays a dividend is basically saying ‘Our income stream is steady and we’re willing to pay out a certain percent of our earnings.’”
A dividend can also act as an important check on how a company spends its money. “Having a dividend forces companies to think hard about the real value of new investment,” explains Terry. “A company has to ask itself, ‘Should we really put the money into this new project or do we want to make sure we can cover and grow our dividend?’ It reminds management who the owners of the business are and that there are expectations for consistent performance. A marginal project is less likely to get funded or a marginal acquisition may not get made.”
Q: How does the fund’s ability to invest in non-U.S. companies help with the income objective?
While the value of income is constant, there are times when the market de-emphasizes dividends in favor of capital appreciation. However, certain countries, and in particular certain sectors within those countries, have maintained a strong dividend culture through multiple market environments.
“During the tech heyday of the late 1990s, finding yield in the U.S. became difficult. The focus was on companies that emphasized growth and acquisitions over returning cash to shareholders,” explains Mike. “Yet thanks to our ability to invest up to 30% of assets outside the U.S. and Canada, the fund was able to continue to meet its quarterly income objective by including companies from regions where dividends remained an important part of the investment culture. As a result, we weren’t forced to cut our dividend, which the fund has never done.”
Without this expanded investment universe, simultaneously maintaining an income objective and a commitment to high-conviction investment choices could have proved challenging.
[Begin Sidebar]
How dividend and non-dividend paying companies compare
Fundamental Investors’ income objective keeps portfolio counselors and research analysts focused primarily on dividend-paying companies. As the chart below shows, over the long term, dividend-paying companies within Standard & Poor’s 500 Composite Index have out-gained their non-dividend paying counterparts. And though many dividend-paying companies did not fully participate in the late-90s spike in stock prices, as a group they held up better in the ensuing decline. Moreover, dividend payers have provided stable and steady returns while remaining less volatile — as measured by standard deviation — than companies that paid no dividends.
S&P 500 companies* | | | | | |
| | | | | | |
1987-2006 | | Average annual total returns | | Standard deviation | |
| Dividend Payers | | | 10.11 | % | | 15.19 | |
| Non-dividend Payers | | | 3.39 | % | | 24.55 | |
Date | Dividend payers | Non-dividend payers |
| 12/31/1986 | 100.00 | 100.00 |
| 01/31/1987 | 113.27 | 117.99 |
| 02/28/1987 | 119.24 | 126.40 |
| 03/31/1987 | 121.19 | 128.27 |
| 04/30/1987 | 118.65 | 131.12 |
| 05/31/1987 | 119.24 | 136.36 |
| 06/30/1987 | 125.11 | 135.35 |
| 07/31/1987 | 132.53 | 147.74 |
| 08/31/1987 | 136.30 | 151.02 |
| 09/30/1987 | 133.21 | 150.46 |
| 10/31/1987 | 99.39 | 100.79 |
| 11/30/1987 | 92.63 | 95.46 |
| 12/31/1987 | 100.90 | 102.94 |
| 01/31/1988 | 105.61 | 104.58 |
| 02/29/1988 | 112.71 | 113.18 |
| 03/31/1988 | 110.94 | 113.21 |
| 04/30/1988 | 110.87 | 115.19 |
| 05/31/1988 | 111.22 | 114.45 |
| 06/30/1988 | 117.24 | 123.27 |
| 07/31/1988 | 115.97 | 119.30 |
| 08/31/1988 | 112.41 | 111.82 |
| 09/30/1988 | 116.97 | 115.30 |
| 10/31/1988 | 119.07 | 112.77 |
| 11/30/1988 | 116.05 | 110.13 |
| 12/31/1988 | 118.56 | 116.47 |
| 01/31/1989 | 126.41 | 127.06 |
| 02/28/1989 | 124.49 | 127.09 |
| 03/31/1989 | 127.21 | 125.76 |
| 04/30/1989 | 133.23 | 132.42 |
| 05/31/1989 | 139.12 | 141.03 |
| 06/30/1989 | 137.89 | 138.52 |
| 07/31/1989 | 149.23 | 148.63 |
| 08/31/1989 | 153.03 | 155.07 |
| 09/30/1989 | 150.62 | 152.06 |
| 10/31/1989 | 144.05 | 136.46 |
| 11/30/1989 | 145.92 | 134.81 |
| 12/31/1989 | 148.23 | 133.04 |
| 01/31/1990 | 137.19 | 121.00 |
| 02/28/1990 | 138.54 | 122.85 |
| 03/31/1990 | 141.89 | 131.07 |
| 04/30/1990 | 136.34 | 121.57 |
| 05/31/1990 | 149.42 | 131.68 |
| 06/30/1990 | 147.25 | 126.91 |
| 07/31/1990 | 143.80 | 116.98 |
| 08/31/1990 | 128.06 | 98.55 |
| 09/30/1990 | 118.58 | 86.35 |
| 10/31/1990 | 114.37 | 78.33 |
| 11/30/1990 | 124.26 | 85.68 |
| 12/31/1990 | 129.32 | 87.68 |
| 01/31/1991 | 137.12 | 101.54 |
| 02/28/1991 | 147.87 | 112.62 |
| 03/31/1991 | 152.08 | 116.04 |
| 04/30/1991 | 152.86 | 114.31 |
| 05/31/1991 | 161.39 | 117.04 |
| 06/30/1991 | 153.79 | 106.44 |
| 07/31/1991 | 159.73 | 110.56 |
| 08/31/1991 | 162.40 | 114.95 |
| 09/30/1991 | 159.37 | 109.81 |
| 10/31/1991 | 160.72 | 109.59 |
| 11/30/1991 | 152.13 | 103.77 |
| 12/31/1991 | 168.94 | 114.30 |
| 01/31/1992 | 169.91 | 121.24 |
| 02/29/1992 | 173.60 | 130.07 |
| 03/31/1992 | 170.66 | 122.65 |
| 04/30/1992 | 174.26 | 118.14 |
| 05/31/1992 | 174.72 | 115.77 |
| 06/30/1992 | 171.02 | 110.34 |
| 07/31/1992 | 178.00 | 112.94 |
| 08/31/1992 | 173.42 | 106.53 |
| 09/30/1992 | 175.67 | 110.36 |
| 10/31/1992 | 178.22 | 114.37 |
| 11/30/1992 | 185.20 | 121.49 |
| 12/31/1992 | 188.74 | 125.40 |
| 01/31/1993 | 191.80 | 131.19 |
| 02/28/1993 | 193.81 | 129.28 |
| 03/31/1993 | 198.83 | 131.94 |
| 04/30/1993 | 194.11 | 127.15 |
| 05/31/1993 | 199.31 | 133.29 |
| 06/30/1993 | 199.59 | 131.31 |
| 07/31/1993 | 198.81 | 130.21 |
| 08/31/1993 | 205.99 | 136.40 |
| 09/30/1993 | 203.87 | 136.47 |
| 10/31/1993 | 206.61 | 141.26 |
| 11/30/1993 | 204.58 | 139.23 |
| 12/31/1993 | 208.85 | 142.40 |
| 01/31/1994 | 215.58 | 149.81 |
| 02/28/1994 | 211.06 | 148.15 |
| 03/31/1994 | 201.72 | 139.36 |
| 04/30/1994 | 202.68 | 136.67 |
| 05/31/1994 | 205.08 | 136.16 |
| 06/30/1994 | 200.66 | 130.65 |
| 07/31/1994 | 207.22 | 133.66 |
| 08/31/1994 | 216.95 | 143.26 |
| 09/30/1994 | 210.91 | 138.99 |
| 10/31/1994 | 212.76 | 140.29 |
| 11/30/1994 | 203.22 | 133.63 |
| 12/31/1994 | 206.33 | 135.29 |
| 01/31/1995 | 210.69 | 135.28 |
| 02/28/1995 | 219.68 | 140.91 |
| 03/31/1995 | 225.44 | 145.29 |
| 04/30/1995 | 229.62 | 150.61 |
| 05/31/1995 | 238.07 | 153.14 |
| 06/30/1995 | 241.96 | 163.35 |
| 07/31/1995 | 249.88 | 167.27 |
| 08/31/1995 | 251.60 | 167.32 |
| 09/30/1995 | 257.54 | 169.57 |
| 10/31/1995 | 251.51 | 159.62 |
| 11/30/1995 | 264.19 | 165.48 |
| 12/31/1995 | 268.18 | 163.06 |
| 01/31/1996 | 276.26 | 165.75 |
| 02/29/1996 | 278.85 | 168.85 |
| 03/31/1996 | 285.02 | 167.31 |
| 04/30/1996 | 289.92 | 180.65 |
| 05/31/1996 | 293.06 | 183.49 |
| 06/30/1996 | 290.90 | 176.53 |
| 07/31/1996 | 275.15 | 161.35 |
| 08/31/1996 | 283.81 | 166.55 |
| 09/30/1996 | 297.19 | 175.41 |
| 10/31/1996 | 301.65 | 172.35 |
| 11/30/1996 | 320.41 | 189.93 |
| 12/31/1996 | 314.74 | 184.82 |
| 01/31/1997 | 325.20 | 194.47 |
| 02/28/1997 | 331.46 | 186.94 |
| 03/31/1997 | 318.82 | 180.47 |
| 04/30/1997 | 329.43 | 180.75 |
| 05/31/1997 | 350.75 | 201.14 |
| 06/30/1997 | 365.09 | 202.60 |
| 07/31/1997 | 389.51 | 229.04 |
| 08/31/1997 | 375.70 | 228.76 |
| 09/30/1997 | 395.55 | 235.02 |
| 10/31/1997 | 379.89 | 214.06 |
| 11/30/1997 | 392.70 | 213.43 |
| 12/31/1997 | 399.85 | 207.53 |
| 01/31/1998 | 394.97 | 214.11 |
| 02/28/1998 | 423.93 | 233.96 |
| 03/31/1998 | 444.10 | 244.74 |
| 04/30/1998 | 444.29 | 246.31 |
| 05/31/1998 | 433.49 | 234.06 |
| 06/30/1998 | 435.06 | 239.90 |
| 07/31/1998 | 412.95 | 230.90 |
| 08/31/1998 | 353.47 | 179.51 |
| 09/30/1998 | 370.86 | 189.79 |
| 10/31/1998 | 400.07 | 209.52 |
| 11/30/1998 | 417.83 | 220.94 |
| 12/31/1998 | 423.85 | 236.77 |
| 01/31/1999 | 419.69 | 254.03 |
| 02/28/1999 | 411.92 | 239.45 |
| 03/31/1999 | 417.40 | 245.20 |
| 04/30/1999 | 456.94 | 259.62 |
| 05/31/1999 | 452.61 | 262.34 |
| 06/30/1999 | 466.79 | 279.32 |
| 07/31/1999 | 449.27 | 267.83 |
| 08/31/1999 | 435.92 | 263.92 |
| 09/30/1999 | 414.45 | 256.19 |
| 10/31/1999 | 424.39 | 260.32 |
| 11/30/1999 | 412.75 | 282.27 |
| 12/31/1999 | 417.69 | 318.62 |
| 01/31/2000 | 391.59 | 295.17 |
| 02/29/2000 | 357.98 | 312.96 |
| 03/31/2000 | 398.41 | 326.87 |
| 04/30/2000 | 403.32 | 309.52 |
| 05/31/2000 | 413.91 | 289.37 |
| 06/30/2000 | 394.38 | 300.25 |
| 07/31/2000 | 397.55 | 285.41 |
| 08/31/2000 | 419.43 | 316.69 |
| 09/30/2000 | 416.97 | 289.33 |
| 10/31/2000 | 427.83 | 277.39 |
| 11/30/2000 | 419.29 | 228.91 |
| 12/31/2000 | 448.66 | 233.32 |
| 01/31/2001 | 450.87 | 268.08 |
| 02/28/2001 | 443.37 | 222.26 |
| 03/31/2001 | 427.61 | 195.68 |
| 04/30/2001 | 452.16 | 222.21 |
| 05/31/2001 | 463.06 | 218.07 |
| 06/30/2001 | 450.63 | 217.15 |
| 07/31/2001 | 452.98 | 201.86 |
| 08/31/2001 | 440.69 | 179.71 |
| 09/30/2001 | 395.82 | 139.01 |
| 10/31/2001 | 396.60 | 154.74 |
| 11/30/2001 | 426.06 | 179.16 |
| 12/31/2001 | 439.77 | 181.70 |
| 01/31/2002 | 442.09 | 174.36 |
| 02/28/2002 | 447.76 | 156.86 |
| 03/31/2002 | 470.37 | 171.31 |
| 04/30/2002 | 460.43 | 155.18 |
| 05/31/2002 | 459.06 | 147.40 |
| 06/30/2002 | 431.17 | 124.43 |
| 07/31/2002 | 388.76 | 105.11 |
| 08/31/2002 | 393.67 | 103.79 |
| 09/30/2002 | 351.26 | 87.19 |
| 10/31/2002 | 361.09 | 99.66 |
| 11/30/2002 | 383.74 | 118.25 |
| 12/31/2002 | 369.87 | 105.91 |
| 01/31/2003 | 357.89 | 103.58 |
| 02/28/2003 | 346.83 | 102.13 |
| 03/31/2003 | 347.68 | 101.99 |
| 04/30/2003 | 377.55 | 115.04 |
| 05/31/2003 | 405.79 | 130.80 |
| 06/30/2003 | 408.11 | 131.21 |
| 07/31/2003 | 416.59 | 135.81 |
| 08/31/2003 | 429.07 | 145.99 |
| 09/30/2003 | 423.18 | 141.15 |
| 10/31/2003 | 450.55 | 151.64 |
| 11/30/2003 | 458.21 | 155.81 |
| 12/31/2003 | 483.46 | 161.57 |
| 01/31/2004 | 487.63 | 170.75 |
| 02/29/2004 | 500.09 | 170.60 |
| 03/31/2004 | 499.26 | 166.30 |
| 04/30/2004 | 489.85 | 157.55 |
| 05/31/2004 | 497.10 | 161.81 |
| 06/30/2004 | 512.04 | 165.71 |
| 07/31/2004 | 496.79 | 149.29 |
| 08/31/2004 | 498.63 | 144.41 |
| 09/30/2004 | 509.56 | 149.64 |
| 10/31/2004 | 516.81 | 156.22 |
| 11/30/2004 | 543.85 | 166.98 |
| 12/31/2004 | 561.58 | 174.87 |
| 01/31/2005 | 549.68 | 163.43 |
| 02/28/2005 | 562.11 | 163.93 |
| 03/31/2005 | 556.22 | 159.00 |
| 04/30/2005 | 538.62 | 151.47 |
| 05/31/2005 | 556.53 | 164.44 |
| 06/30/2005 | 564.17 | 166.01 |
| 07/31/2005 | 589.81 | 176.41 |
| 08/31/2005 | 580.62 | 176.44 |
| 09/30/2005 | 582.93 | 178.44 |
| 10/31/2005 | 569.69 | 171.91 |
| 11/30/2005 | 594.45 | 176.81 |
| 12/31/2005 | 598.88 | 177.72 |
| 01/31/2006 | 617.62 | 188.45 |
| 02/28/2006 | 618.27 | 188.04 |
| 03/31/2006 | 627.81 | 191.56 |
| 04/30/2006 | 635.34 | 191.05 |
| 05/31/2006 | 619.69 | 181.64 |
| 06/30/2006 | 621.36 | 177.16 |
| 07/31/2006 | 616.05 | 168.72 |
| 08/31/2006 | 627.40 | 179.70 |
| 09/30/2006 | 642.62 | 184.10 |
| 10/31/2006 | 666.25 | 189.07 |
| 11/30/2006 | 680.59 | 195.18 |
| 12/31/2006 | 686.93 | 194.76 |
[end line chart]
*Returns based on monthly equal-weighted geometric average of total returns of S&P 500 component stocks, with components reconstituted monthly. Underlying data courtesy of Ned Davis Research, Inc. Standard deviation (annualized based on monthly returns) is a measure of how returns over time have varied from the mean and is one of the most common measures of absolute volatility. A lower number means lower volatility.
[End Sidebar]
[photo - mooring buoys on the side of a boat]
Q: How can a growth-and-income strategy benefit an investor?
For more than 80 years, reinvested dividends have made a significant contribution to total return, accounting for about 40% of the average annual total return of Standard & Poor’s 500 Composite Index from 1926 to 2006. But in addition to boosting return, dividends can help smooth out the peaks and valleys that come with long-term investing. The chart on the opposite page reinforces both the capital appreciation advantage and the volatility dampening properties of dividend-paying companies.
“We’re very conscious of the importance of reducing volatility, especially during tumultuous markets, and we believe that reinvested dividends play an important part in doing that,” explains Brady. “Not only do you get some of your total return up front, but you have a company that may better tolerate a weak market because of the dividend support. That’s very important for an investor who has a steady withdrawal program.”
But it’s not only in struggling markets that dividend-paying companies have shown their mettle. In fact, many have been at the center of the healthy market increases of the past few years, as investors have been attracted by their relative steadiness, cash-rich balance sheets and real assets.
Q: What is the current outlook for dividends?
The dividend climate has steadily improved over the past few years, spurred by a handful of key events.
On the heels of the market volatility that typified the dot-com era, many investors reawakened to the importance of investment fundamentals, including real return in the form of dividends. As this attitude took hold anew, demand for dividend-paying companies rose and many of their stock prices rose as well.
An additional boost came in 2003 when a reduction in the tax rate on qualified dividends was put into effect.
Company attitudes toward dividends may be changing as well. “For a long time, companies looking to be viewed as high-growth believed that the market associated dividends with companies whose high-growth days were behind them,” notes Ron. “Consequently, they were reluctant to pay them since doing so could have been seen as a signal to the market that the company was done growing. I think that mentality may be shifting.”
Adds Terry, “In technology, many companies have realized that by offering a yield, they are increasing the base of investors who can own their stocks. In Fundamental Investors, for instance, a company with even a modest yield of 1% becomes easier to own than a comparable company with no yield, because that dividend helps us reach our income objective.
[Begin Sidebar]
Dividends can play an important role in reducing volatility — providing a buffer during tumultuous markets. And dividend-paying stocks have also shown strongly during the rising markets of the past few years, as many investors have rediscovered the attractiveness of real return.
[End Sidebar]
| Fundamental Investors, Inc. |
| Summary investment portfolio, December 31, 2006 |
The following summary investment portfolio is designed to streamline the report and help investors better focus on a fund’s principal holdings. For details on how to obtain a complete schedule of portfolio holdings, please see the inside back cover.
[begin pie chart]
| Energy | | | 14.18 | % |
| Financials | | | 12.79 | |
| Industrials | | | 12.69 | |
| Information technology | | | 11.15 | |
| Health care | | | 10.09 | |
| Other industries | | | 33.39 | |
| Convertible securities | | | 0.13 | |
| Short-term securities & other assets less liabilities | | | 5.58 | |
[end pie chart]
| Common stocks - 94.29% | | Shares | | Market value (000) | | Percent of net assets | |
| | | | | | | | |
| Energy - 14.18% | | | | | | | | | | |
| Suncor Energy Inc. | | | 17,917,553 | | $ | 1,412,203 | | | 3.60 | % |
| Royal Dutch Shell PLC, Class A (ADR) | | | 6,370,000 | | | 450,932 | | | 1.15 | |
| Norsk Hydro ASA | | | 10,840,000 | | | 336,603 | | | | |
| Norsk Hydro ASA (ADR) | | | 3,500,000 | | | 107,345 | | | 1.13 | |
| Chevron Corp. | | | 5,185,674 | | | 381,303 | | | .97 | |
| Baker Hughes Inc. | | | 4,193,000 | | | 313,049 | | | .80 | |
| OAO LUKOIL (ADR) | | | 3,200,000 | | | 279,680 | | | .72 | |
| CONSOL Energy Inc. (1) | | | 7,400,000 | | | 237,762 | | | .61 | |
| Exxon Mobil Corp. | | | 3,000,000 | | | 229,890 | | | .59 | |
| Murphy Oil Corp. | | | 4,343,636 | | | 220,874 | | | .56 | |
| Other securities | | | | | | 1,585,237 | | | 4.05 | |
| | | | | | | 5,554,878 | | | 14.18 | |
| | | | | | | | | | | |
| Financials - 12.79% | | | | | | | | | | |
| Citigroup Inc. | | | 8,505,000 | | | 473,728 | | | 1.21 | |
| Fannie Mae | | | 7,467,800 | | | 443,513 | | | 1.13 | |
| Freddie Mac | | | 6,265,000 | | | 425,393 | | | 1.09 | |
| Allied Irish Banks, PLC | | | 13,800,000 | | | 409,674 | | | 1.04 | |
| Washington Mutual, Inc. | | | 8,580,000 | | | 390,304 | | | 1.00 | |
| Bank of Ireland | | | 11,903,097 | | | 274,837 | | | .70 | |
| Other securities | | | | | | 2,594,545 | | | 6.62 | |
| | | | | | | 5,011,994 | | | 12.79 | |
| | | | | | | | | | | |
| Industrials - 12.69% | | | | | | | | | | |
| Deere & Co. | | | 5,660,000 | | | 538,096 | | | 1.37 | |
| Union Pacific Corp. | | | 4,200,000 | | | 386,484 | | | .99 | |
| Boeing Co. | | | 4,000,000 | | | 355,360 | | | .91 | |
| Caterpillar Inc. | | | 5,400,000 | | | 331,182 | | | .84 | |
| General Electric Co. | | | 8,850,000 | | | 329,309 | | | .84 | |
| Northrop Grumman Corp. | | | 4,166,243 | | | 282,055 | | | .72 | |
| Deutsche Post AG | | | 8,945,000 | | | 269,558 | | | .69 | |
| General Dynamics Corp. | | | 3,545,800 | | | 263,630 | | | .67 | |
| Other securities | | | | | | 2,218,598 | | | 5.66 | |
| | | | | | | 4,974,272 | | | 12.69 | |
| | | | | | | | | | | |
| Information technology - 11.15% | | | | | | | | | | |
| Microsoft Corp. | | | 31,950,000 | | | 954,027 | | | 2.43 | |
| Nokia Corp. | | | 18,900,000 | | | 386,020 | | | | |
| Nokia Corp. (ADR) | | | 10,237,000 | | | 208,016 | | | 1.52 | |
| Oracle Corp. (2) | | | 33,000,000 | | | 565,620 | | | 1.44 | |
| Texas Instruments Inc. | | | 11,383,024 | | | 327,831 | | | .84 | |
| International Business Machines Corp. | | | 3,000,000 | | | 291,450 | | | .74 | |
| Other securities | | | | | | 1,635,976 | | | 4.18 | |
| | | | | | | 4,368,940 | | | 11.15 | |
| | | | | | | | | | | |
| Health care - 10.09% | | | | | | | | | | |
| Roche Holding AG | | | 3,535,000 | | | 633,840 | | | 1.62 | |
| Merck & Co., Inc. | | | 11,200,000 | | | 488,320 | | | 1.25 | |
| Eli Lilly and Co. | | | 7,570,000 | | | 394,397 | | | 1.01 | |
| Abbott Laboratories | | | 6,310,000 | | | 307,360 | | | .78 | |
| Schering-Plough Corp. | | | 9,500,000 | | | 224,580 | | | .57 | |
| Other securities | | | | | | 1,905,902 | | | 4.86 | |
| | | | | | | 3,954,399 | | | 10.09 | |
| | | | | | | | | | | |
| Consumer discretionary - 8.18% | | | | | | | | | | |
| Lowe's Companies, Inc. | | | 16,810,000 | | | 523,632 | | | 1.34 | |
| Target Corp. | | | 7,290,000 | | | 415,895 | | | 1.06 | |
| Limited Brands, Inc. | | | 10,815,980 | | | 313,014 | | | .80 | |
| Other securities | | | | | | 1,953,033 | | | 4.98 | |
| | | | | | | 3,205,574 | | | 8.18 | |
| | | | | | | | | | | |
| Materials - 7.59% | | | | | | | | | | |
| Alcoa Inc. | | | 9,173,800 | | | 275,306 | | | .70 | |
| Weyerhaeuser Co. | | | 3,383,000 | | | 239,009 | | | .61 | |
| Mosaic Co. (2) | | | 10,500,000 | | | 224,280 | | | .57 | |
| International Paper Co. | | | 6,516,000 | | | 222,195 | | | .57 | |
| Other securities | | | | | | 2,012,699 | | | 5.14 | |
| | | | | | | 2,973,489 | | | 7.59 | |
| | | | | | | | | | | |
| Consumer staples - 6.59% | | | | | | | | | | |
| Altria Group, Inc. | | | 10,474,800 | | | 898,947 | | | 2.29 | |
| Coca-Cola Co. | | | 6,300,000 | | | 303,975 | | | .77 | |
| Diageo PLC | | | 11,239,200 | | | 220,614 | | | | |
| Diageo PLC (ADR) | | | 15,200 | | | 1,206 | | | .57 | |
| Other securities | | | | | | 1,158,683 | | | 2.96 | |
| | | | | | | 2,583,425 | | | 6.59 | |
| | | | | | | | | | | |
| Telecommunication services - 5.03% | | | | | | | | | | |
| KDDI Corp. | | | 69,028 | | | 468,114 | | | 1.19 | |
| AT&T Inc. | | | 10,173,536 | | | 363,704 | | | .93 | |
| Verizon Communications Inc. | | | 6,500,000 | | | 242,060 | | | .62 | |
| BellSouth Corp. | | | 5,100,000 | | | 240,261 | | | .61 | |
| Other securities | | | | | | 657,235 | | | 1.68 | |
| | | | | | | 1,971,374 | | | 5.03 | |
| | | | | | | | | | | |
| Utilities - 3.95% | | | | | | | | | | |
| Questar Corp. | | | 3,000,000 | | | 249,150 | | | .63 | |
| Dominion Resources, Inc. | | | 2,790,000 | | | 233,914 | | | .60 | |
| Other securities | | | | | | 1,065,439 | | | 2.72 | |
| | | | | | | 1,548,503 | | | 3.95 | |
| | | | | | | | | | | |
| MISCELLANEOUS - 2.05% | | | | | | | | | | |
| Other common stocks in initial period of acquisition | | | | | | 804,535 | | | 2.05 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total common stocks (cost: $26,373,342,000) | | | | | | 36,951,383 | | | 94.29 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Convertible securities - 0.13% | | | | | | | | | | |
| | | | | | | | | | | |
| Other - 0.13% | | | | | | | | | | |
| Other securities | | | | | | 51,317 | | | .13 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total convertible securities (cost: $38,025,000) | | | | | | 51,317 | | | .13 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Short-term securities - 5.42% | | | Principal amount (000 | ) | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Freddie Mac 5.075%-5.16% due 1/25-3/9/2007 | | | 277,000 | | | 275,294 | | | .70 | |
| CAFCO, LLC 5.24%-5.25% due 1/12-2/2/2007 (1) | | | 88,200 | | | 87,885 | | | | |
| Ciesco LLC 5.25% due 1/24/2007 (1) | | | 38,400 | | | 38,265 | | | .32 | |
| Fannie Mae 5.075%-5.145% due 1/3-2/23/2007 | | | 111,560 | | | 111,055 | | | .29 | |
| Other securities | | | | | | 1,609,696 | | | 4.11 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total short-term securities (cost: $2,122,232,000) | | | | | | 2,122,195 | | | 5.42 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total investment securities (cost: $28,533,599,000) | | | | | | 39,124,895 | | | 99.84 | |
| Other assets less liabilities | | | | | | 63,046 | | | .16 | |
| | | | | | | | | | | |
| Net assets | | | | | $ | 39,187,941 | | | 100.00 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| "Miscellaneous" securities include holdings in their initial period of acquisition that have not previously been publicly disclosed. |
| "Other securities" includes all issues that are not disclosed separately in the summary investment portfolio. |
| | | | | | | | | | | |
| Investments in affiliates | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| A company is considered to be an affiliate of the fund under the Investment Company Act of 1940 if the fund's holdings in that company represent 5% or more of the outstanding voting shares of that company. The market value of the fund's affiliated-company holding is included in "Other securities" under its respective industry sector in the preceding summary investment portfolio. Further details on this holding and related transactions during the year ended December 31, 2006, appear below. | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Company | | Beginning shares | | Purchases | | Sales | | Ending shares | | Dividend income (000) | | Market value of affiliate at 12/31/06 (000) | |
| Intersil Corp., Class A* | | | 7,475,000 | | | 1,100,000 | | | 2,000,000 | | | 6,575,000 | | $ | 1,316 | | $ | 157,274 | |
| | | | | | | | | | | |
| The following footnotes apply to either the individual securities noted or one or more of the securities aggregated and listed as a single line item. | |
| | |
| (1) Purchased in a private placement transaction; resale may be limited to qualified institutional buyers; resale to the public may require registration. The total value of all such restricted securities, including those in "Other securities" in the summary investment portfolio, was $1,427,380,000, which represented 3.64% of the net assets of the fund. | |
| (2) Security did not produce income during the last 12 months. | | | | | | | | | | |
| | | | | | | | | | | |
| * Unaffiliated issuer at 12/31/2006. | | | | | | | | | | |
| | | | | | | | | | | |
| ADR = American Depositary Receipts | | | | | | | | | | |
| The industry classifications shown in the summary investment portfolio were obtained from sources believed to be reliable and are not covered by the Report of Independent Registered Public Accounting Firm. |
| |
| |
| See Notes to Financial Statements |
| Financial statements | | | | | |
| | | | | | |
Statement of assets and liabilities at December 31, 2006 | | | | | |
(dollars and shares in thousands, except per-share amounts) |
| | | | | | |
| Assets: | | | | | |
| Investment securities at market (cost: $28,533,599) | | | | | $ | 39,124,895 | |
| Cash denominated in non-U.S. currencies (cost: $255) | | | | | | 254 | |
| Cash | | | | | | 259 | |
| Receivables for: | | | | | | | |
| Sales of fund's shares | | $ | 126,147 | | | | |
| Dividends and interest | | | 40,395 | | | 166,542 | |
| | | | | | | 39,291,950 | |
| Liabilities: | | | | | | | |
| Payables for: | | | | | | | |
| Purchases of investments | | | 32,227 | | | | |
| Repurchases of fund's shares | | | 46,720 | | | | |
| Investment advisory services | | | 7,648 | | | | |
| Services provided by affiliates | | | 12,638 | | | | |
| Deferred directors' compensation | | | 2,047 | | | | |
| Other | | | 2,729 | | | 104,009 | |
| Net assets at December 31, 2006 | | | | | $ | 39,187,941 | |
| | | | | | | | |
| Net assets consist of: | | | | | | | |
| Capital paid in on shares of capital stock | | | | | $ | 28,430,293 | |
| Undistributed net investment income | | | | | | 117,249 | |
| Undistributed net realized gain | | | | | | 51,474 | |
| Net unrealized appreciation | | | | | | 10,588,925 | |
| Net assets at December 31, 2006 | | | | | $ | 39,187,941 | |
| Total authorized capital stock - 1,500,000 shares, $1.00 par value (978,809 total shares outstanding) | | | | | | | |
| | | Net assets | | Shares outstanding | | Net asset value per share* | |
| | | | | | | | |
| Class A | | $ | 32,186,594 | | | 803,707 | | $ | 40.05 | |
| Class B | | | 1,416,787 | | | 35,455 | | | 39.96 | |
| Class C | | | 1,379,928 | | | 34,566 | | | 39.92 | |
| Class F | | | 1,814,712 | | | 45,333 | | | 40.03 | |
| Class 529-A | | | 414,168 | | | 10,349 | | | 40.02 | |
| Class 529-B | | | 59,814 | | | 1,495 | | | 40.01 | |
| Class 529-C | | | 126,333 | | | 3,158 | | | 40.00 | |
| Class 529-E | | | 20,234 | | | 506 | | | 40.00 | |
| Class 529-F | | | 11,158 | | | 279 | | | 40.00 | |
| Class R-1 | | | 23,458 | | | 587 | | | 39.93 | |
| Class R-2 | | | 290,630 | | | 7,281 | | | 39.92 | |
| Class R-3 | | | 524,486 | | | 13,118 | | | 39.98 | |
| Class R-4 | | | 438,304 | | | 10,959 | | | 39.99 | |
| Class R-5 | | | 481,335 | | | 12,016 | | | 40.06 | |
| (*) Maximum offering price and redemption price per share were equal to the net asset value per share for all share classes, except for Class A and 529-A, for which the maximum offering prices per share were $42.49 and $42.46, respectively. | |
| | | | | | | | | | | |
| See Notes to Financial Statements | | | | | | | | | | |
| Statement of operations | | | | | |
| for the year ended December 31, 2006 | | (dollars in thousands) | |
| | | | | | |
| Investment income: | | | | | | | |
| Income: | | | | | | | |
| Dividends (net of non-U.S. taxes of $11,954; also includes $1,316 from affiliates) | | $ | 635,598 | | | | |
| Interest | | | 98,428 | | $ | 734,026 | |
| | | | | | | | |
| Fees and expenses(*): | | | | | | | |
| Investment advisory services | | | 87,469 | | | | |
| Distribution services | | | 100,663 | | | | |
| Transfer agent services | | | 25,796 | | | | |
| Administrative services | | | 6,321 | | | | |
| Reports to shareholders | | | 915 | | | | |
| Registration statement and prospectus | | | 1,316 | | | | |
| Postage, stationery and supplies | | | 2,408 | | | | |
| Directors' compensation | | | 587 | | | | |
| Auditing and legal | | | 107 | | | | |
| Custodian | | | 1,694 | | | | |
| State and local taxes | | | 1 | | | | |
| Other | | | 139 | | | | |
| Total fees and expenses before reimbursements/waivers | | | 227,416 | | | | |
| Less reimbursements/waivers of fees and expenses: | | | | | | | |
| Investment advisory services | | | 8,747 | | | | |
| Administrative services | | | 223 | | | | |
| Total fees and expenses after reimbursements/waivers | | | | | | 218,446 | |
| Net investment income | | | | | | 515,580 | |
| | | | | | | | |
| Net realized gain and unrealized appreciation on investments and | | | | | | | |
| non-U.S. currency: | | | | | | | |
| Net realized gain (loss) on: | | | | | | | |
| Investments (including $13,742 net gain from affiliates) | | | 1,743,485 | | | | |
| Non-U.S. currency transactions | | | (3,429 | ) | | 1,740,056 | |
| Net unrealized appreciation on: | | | | | | | |
| Investments | | | 3,592,993 | | | | |
| Non-U.S. currency translations | | | 178 | | | 3,593,171 | |
| Net realized gain and unrealized appreciation on investments and non-U.S. currency | | | | | | 5,333,227 | |
| Net increase in net assets resulting from operations | | | | | $ | 5,848,807 | |
| | | | | | | | |
| (*) Additional information related to class-specific fees and expenses is included in the Notes to Financial Statements. | | | |
| | | | | | | | |
| See Notes to Financial Statements | | | | | | | |
| Statements of changes in net assets | | | | (dollars in thousands) | |
| | | | | | |
| | | Year ended December 31 | |
| | | 2006 | | 2005 | |
| Operations: | | | | | | | |
| Net investment income | | $ | 515,580 | | $ | 426,609 | |
| Net realized gain on investments and non-U.S. currency transactions | | | 1,740,056 | | | 590,506 | |
| Net unrealized appreciation on investments and non-U.S. currency translations | | | 3,593,171 | | | 1,849,761 | |
| Net increase in net assets resulting from operations | | | 5,848,807 | | | 2,866,876 | |
| | | | | | | �� | |
| Dividends and distributions paid to shareholders: | | | | | | | |
| Dividends from net investment income and non-U.S. currency gain | | | (473,267 | ) | | (440,865 | ) |
| Distributions from net realized gain on investments | | | (1,471,900 | ) | | - | |
| Total dividends and distributions paid to shareholders | | | (1,945,167 | ) | | (440,865 | ) |
| | | | | | | | |
| Capital share transactions | | | 7,151,659 | | | 1,489,209 | |
| | | | | | | | |
| Total increase in net assets | | | 11,055,299 | | | 3,915,220 | |
| | | | | | | | |
| Net assets: | | | | | | | |
| Beginning of year | | | 28,132,642 | | | 24,217,422 | |
| End of year (including undistributed net investment | | | | | | | |
| income: $117,249 and $85,236, respectively) | | $ | 39,187,941 | | $ | 28,132,642 | |
| | | | | | | | |
| | | | | | | | |
| See Notes to Financial Statements | | | | | | | |
| | | | | | | | |
Notes to financial statements
| 1. | Organization and significant accounting policies |
Organization - Fundamental Investors, Inc. (the "fund") is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company. The fund seeks long-term growth of capital and income primarily through investments in common stocks.
The fund offers 14 share classes consisting of four retail share classes, five CollegeAmerica® savings plan share classes and five retirement plan share classes. The CollegeAmerica savings plan share classes (529-A, 529-B, 529-C, 529-E and 529-F) can be utilized to save for college education. The five retirement plan share classes (R-1, R-2, R-3, R-4 and R-5) are sold without any sales charges and do not carry any conversion rights. The fund’s share classes are described below:
Share class | | Initial sales charge | | Contingent deferred sales charge upon redemption | | Conversion feature |
| Class A and 529-A | | Up to 5.75% | | None (except 1% for certain redemptions within one year of purchase without an initial sales charge) | | None |
| Class B and 529-B | | None | | Declines from 5% to 0% for redemptions within six years of purchase | | Class B and 529-B convert to Class A and 529-A, respectively, after eight years |
| Class C | | None | | 1% for redemptions within one year of purchase | | Class C converts to Class F after 10 years |
| Class 529-C | | None | | 1% for redemptions within one year of purchase | | None |
| Class 529-E | | None | | None | | None |
| Class F and 529-F | | None | | None | | None |
| Class R-1, R-2, R-3, R-4 and R-5 | | None | | None | | None |
Holders of all share classes have equal pro rata rights to assets, dividends and liquidation proceeds. Each share class has identical voting rights, except for the exclusive right to vote on matters affecting only its class. Share classes have different fees and expenses ("class-specific fees and expenses"), primarily due to different arrangements for distribution, administrative and shareholder services. Differences in class-specific fees and expenses will result in differences in net investment income and, therefore, the payment of different per-share dividends by each class.
Significant accounting policies - The financial statements have been prepared to comply with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The following is a summary of the significant accounting policies followed by the fund:
Security valuation - Equity securities are valued at the official closing price of, or the last reported sale price on, the exchange or market on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Prices for each security are taken from the principal exchange or market in which the security trades. Fixed-income securities, including short-term securities purchased with more than 60 days left to maturity, are valued at prices obtained from an independent pricing service when such prices are available. However, where the investment adviser deems it appropriate, such securities will be valued at the mean quoted bid and asked prices (or bid prices, if asked prices are not available) or at prices for securities of comparable maturity, quality and type. Securities with both fixed-income and equity characteristics, or equity securities traded principally among fixed-income dealers, are valued in the manner described above for either equity or fixed-income securities, depending on which method is deemed most appropriate by the investment adviser. Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value. The value of short-term securities originally purchased with maturities greater than 60 days is determined based on an amortized value to par when they reach 60 days or less remaining to maturity. The ability of the issuers of the debt securities held by the fund to meet their obligations may be affected by economic developments in a specific industry, state or region. Securities and other assets for which representative market quotations are not readily available or are considered unreliable by the investment adviser are fair valued as determined in good faith under procedures adopted by authority of the fund's board of directors. Various factors may be reviewed in order to make a good faith determination of a security’s fair value. These factors include, but are not limited to, the type and cost of the security; contractual or legal restrictions on resale of the security; relevant financial or business developments of the issuer; actively traded similar or related securities; conversion or exchange rights on the security; related corporate actions; significant events occurring after the close of trading in the security; and changes in overall market conditions.
Security transactions and related investment income - Security transactions are recorded by the fund as of the date the trades are executed with brokers. Realized gains and losses from security transactions are determined based on the specific identified cost of the securities. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. Market discounts, premiums and original issue discounts on fixed-income securities are amortized daily over the expected life of the security.
Class allocations - Income, fees and expenses (other than class-specific fees and expenses) and realized and unrealized gains and losses are allocated daily among the various share classes based on their relative net assets. Class-specific fees and expenses, such as distribution, administrative and shareholder services, are charged directly to the respective share class.
Dividends and distributions to shareholders - Dividends and distributions paid to shareholders are recorded on the ex-dividend date.
Non-U.S. currency translation - Assets and liabilities, including investment securities, denominated in non-U.S. currencies are translated into U.S. dollars at the exchange rates in effect on the valuation date. Purchases and sales of investment securities and income and expenses are translated into U.S. dollars at the exchange rates on the dates of such transactions. In the accompanying financial statements, the effects of changes in non-U.S. exchange rates on investment securities are included with the net realized gain or loss and net unrealized appreciation or depreciation on investments. The realized gain or loss and unrealized appreciation or depreciation resulting from all other transactions denominated in non-U.S. currencies are disclosed separately.
Investment risk - The risks of investing in securities of non-U.S. issuers may include, but are not limited to, investment and repatriation restrictions; revaluation of currencies; adverse political, social and economic developments; government involvement in the private sector; limited and less reliable investor information; lack of liquidity; certain local tax law considerations; and limited regulation of the securities markets.
Taxation - Dividend and interest income is recorded net of non-U.S. taxes paid. Gains realized by the fund on the sale of securities in certain countries are subject to non-U.S. taxes. The fund records a liability based on unrealized gains to provide for potential non-U.S. taxes payable upon the sale of these securities. For the year ended December 31, 2006, non-U.S. taxes paid on realized gains were $6,804,000. As of December 31, 2006, non-U.S. taxes provided on unrealized gains were $2,504,000.
3. Federal income taxation and distributions
The fund complies with the requirements under Subchapter M of the Internal Revenue Code applicable to mutual funds and intends to distribute substantially all of its net taxable income and net capital gains each year. The fund is not subject to income taxes to the extent such distributions are made. Therefore, no federal income tax provision is required.
Distributions - Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as non-U.S. currency gains and losses; short-term capital gains and losses; and non-U.S. taxes on capital gains. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes.
During the year ended December 31, 2006, the fund reclassified $10,233,000 from undistributed net investment income to undistributed net realized gain; and reclassified $67,000 from undistributed net investment income to capital paid in on shares of capital stock to align financial reporting with tax reporting.
As of December 31, 2006, the tax basis components of distributable earnings, unrealized appreciation (depreciation) and cost of investments were as follows:
| | | (dollars in thousands) | |
| Undistributed ordinary income | | | | | $ | 120,074 | |
| Post-October non-U.S. currency loss deferrals (realized during the period November 1, 2006, through December 31, 2006)* | | | | | | (778 | ) |
| Undistributed long-term capital gain | | | | | | 61,925 | |
| Gross unrealized appreciation on investment securities | | | | | | 10,788,672 | |
| Gross unrealized depreciation on investment securities | | | | | | (207,827 | ) |
| Net unrealized appreciation on investment securities | | | | | | 10,580,845 | |
| Cost of investment securities | | | | | | 28,544,050 | |
| | | | | | | | |
| *These deferrals are considered incurred in the subsequent year. | | | | | | | |
The tax character of distributions paid to shareholders was as follows (dollars in thousands):
| | | Year ended December 31, 2006 | | Year ended December 31, 2005 | |
| Share class | | Ordinary income | | Long-term capital gains | | Total distributions paid | | Ordinary income | | Long-term capital gains | | Total distributions paid | |
| | | | | | | | | | | | | | |
| Class A | | $ | 415,933 | | $ | 1,209,190 | | $ | 1,625,123 | | $ | 398,335 | | | - | | $ | 398,335 | |
| Class B | | | 8,802 | | | 53,464 | | | 62,266 | | | 10,375 | | | - | | | 10,375 | |
| Class C | | | 7,248 | | | 51,882 | | | 59,130 | | | 6,729 | | | - | | | 6,729 | |
| Class F | | | 18,703 | | | 68,161 | | | 86,864 | | | 9,749 | | | - | | | 9,749 | |
| Class 529-A | | | 4,668 | | | 15,407 | | | 20,075 | | | 3,286 | | | - | | | 3,286 | |
| Class 529-B | | | 294 | | | 2,243 | | | 2,537 | | | 312 | | | - | | | 312 | |
| Class 529-C | | | 603 | | | 4,713 | | | 5,316 | | | 553 | | | - | | | 553 | |
| Class 529-E | | | 180 | | | 752 | | | 932 | | | 137 | | | - | | | 137 | |
| Class 529-F | | | 130 | | | 417 | | | 547 | | | 68 | | | - | | | 68 | |
| Class R-1 | | | 113 | | | 882 | | | 995 | | | 90 | | | - | | | 90 | |
| Class R-2 | | | 1,503 | | | 10,912 | | | 12,415 | | | 1,327 | | | - | | | 1,327 | |
| Class R-3 | | | 4,196 | | | 19,585 | | | 23,781 | | | 2,603 | | | - | | | 2,603 | |
| Class R-4 | | | 4,339 | | | 16,233 | | | 20,572 | | | 2,838 | | | - | | | 2,838 | |
| Class R-5 | | | 6,555 | | | 18,059 | | | 24,614 | | | 4,463 | | | - | | | 4,463 | |
| Total | | $ | 473,267 | | $ | 1,471,900 | | $ | 1,945,167 | | $ | 440,865 | | | - | | $ | 440,865 | |
| | | | | | | | | | | | | | | | | | | | |
4. Fees and transactions with related parties
Capital Research and Management Company ("CRMC"), the fund’s investment adviser, is the parent company of American Funds Service Company SM ("AFS"), the fund’s transfer agent, and American Funds Distributors, Inc.SM ("AFD"), the principal underwriter of the fund’s shares.
Investment advisory services - The Investment Advisory and Service Agreement with CRMC provided for monthly fees accrued daily. At the beginning of the period, these fees were based on a declining series of annual rates beginning with 0.390% on the first $1 billion of daily net assets and decreasing to 0.240% on such assets in excess of $27 billion. The board of directors approved an amended agreement effective September 1, 2006, continuing the series of rates to include additional annual rates of 0.237% on daily net assets in excess of $34 billion but not exceeding $44 billion; and 0.234% on such assets in excess of $44 billion. CRMC is currently waiving 10% of investment advisory services fees. During the year ended December 31, 2006, total investment advisory services fees waived by CRMC were $8,747,000. As a result, the fee shown on the accompanying financial statements of $87,469,000, which was equivalent to an annualized rate of 0.260%, was reduced to $78,722,000, or 0.234% of average daily net assets.
Class-specific fees and expenses - Expenses that are specific to individual share classes are accrued directly to the respective share class. The principal class-specific fees and expenses are described below:
Distribution services - The fund has adopted plans of distribution for all share classes, except Class R-5. Under the plans, the board of directors approves certain categories of expenses that are used to finance activities primarily intended to sell fund shares and service existing accounts. The plans provide for payments, based on an annualized percentage of average daily net assets, ranging from 0.25% to 1.00% as noted below. In some cases, the board of directors has limited the amounts that may be paid to less than the maximum allowed by the plans. All share classes may use up to 0.25% of average daily net assets to pay service fees, or to compensate AFD for paying service fees, to firms that have entered into agreements with AFD to provide certain shareholder services. The remaining amounts available to be paid under each plan are paid to dealers to compensate them for their sales activities.
For Class A and 529-A, the board of directors has also approved the reimbursement of dealer and wholesaler commissions paid by AFD for certain shares sold without a sales charge. These classes reimburse AFD for amounts billed within the prior 15 months but only to the extent that the overall annual expense limit of 0.25% is not exceeded. As of December 31, 2006, there were no unreimbursed expenses subject to reimbursement for Class A or 529-A.
Share class | Currently approved limits | Plan limits |
| Class A | 0.25% | 0.25% |
| Class 529-A | 0.25 | 0.50 |
| Class B and 529-B | 1.00 | 1.00 |
| Class C, 529-C and R-1 | 1.00 | 1.00 |
| Class R-2 | 0.75 | 1.00 |
| Class 529-E and R-3 | 0.50 | 0.75 |
| Class F, 529-F and R-4 | 0.25 | 0.50 |
Transfer agent services - The fund has a transfer agent agreement with AFS for Class A and B. Under this agreement, these share classes compensate AFS for transfer agent services including shareholder recordkeeping, communications and transaction processing. AFS is also compensated for certain transfer agent services provided to all other share classes from the administrative services fees paid to CRMC described below.
Administrative services - The fund has an administrative services agreement with CRMC to provide transfer agent and other related shareholder services for all share classes other than Class A and B. Each relevant share class pays CRMC annual fees up to 0.15% (0.10% for Class R-5) based on its respective average daily net assets. Each relevant share class also pays AFS additional amounts for certain transfer agent services. CRMC and AFS may use these fees to compensate third parties for performing these services. CRMC has agreed to pay AFS on the fund's behalf for a portion of the transfer agent services fees for some of the retirement plan share classes. For the year ended December 31, 2006, the total administrative services fees paid by CRMC were $2,000 and $221,000 for Class R-1 and R-2, respectively. Administrative services fees are presented gross of any payments made by CRMC. Each 529 share class is subject to an additional annual administrative services fee of 0.10% of its respective average daily net assets; this fee is payable to the Commonwealth of Virginia for the maintenance of the CollegeAmerica plan. Although these amounts are included with administrative services fees on the accompanying financial statements, the Commonwealth of Virginia is not considered a related party.
Expenses under the agreements described on the previous page for the year ended December 31, 2006, were as follows (dollars in thousands):
Share class | Distribution services | Transfer agent services | Administrative services |
CRMC administrative services | Transfer agent services | Commonwealth of Virginia administrative services |
| Class A | $67,941 | $24,604 | Not applicable | Not applicable | Not applicable |
| Class B | 12,606 | 1,192 | Not applicable | Not applicable | Not applicable |
| Class C | 10,712 | Included in administrative services | $1,408 | $218 | Not applicable |
| Class F | 2,950 | 876 | 122 | Not applicable |
| Class 529-A | 587 | 255 | 39 | $318 |
| Class 529-B | 496 | 40 | 19 | 50 |
| Class 529-C | 975 | 78 | 29 | 98 |
| Class 529-E | 79 | 13 | 2 | 16 |
| Class 529-F | - | 6 | 1 | 7 |
| Class R-1 | 164 | 21 | 11 | Not applicable |
| Class R-2 | 1,679 | 330 | 819 | Not applicable |
| Class R-3 | 1,777 | 499 | 252 | Not applicable |
| Class R-4 | 697 | 399 | 12 | Not applicable |
| Class R-5 | Not applicable | 376 | 7 | Not applicable |
| Total | $100,663 | $25,796 | $4,301 | $1,531 | $489 |
Deferred directors’ compensation - Since the adoption of the deferred compensation plan in 1993, directors who are unaffiliated with CRMC may elect to defer the cash payment of part or all of their compensation. These deferred amounts, which remain as liabilities of the fund, are treated as if invested in shares of the fund or other American Funds. These amounts represent general, unsecured liabilities of the fund and vary according to the total returns of the selected funds. Directors’ compensation of $587,000, shown on the accompanying financial statements, includes $274,000 in current fees (either paid in cash or deferred) and a net increase of $313,000 in the value of the deferred amounts.
Affiliated officers and directors - Officers and certain directors of the fund are or may be considered to be affiliated with CRMC, AFS and AFD. No affiliated officers or directors received any compensation directly from the fund.
5. Capital share transactions
Capital share transactions in the fund were as follows (dollars and shares in thousands):
| | | Sales* | | Reinvestments of dividends and distributions | | Repurchases* | | Net increase | |
| Share class | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | |
| Year ended December 31, 2006 | | | | | | | | | | | | | | | | | |
| Class A | | $ | 5,807,510 | | | 150,813 | | $ | 1,556,073 | | | 39,076 | | $ | (2,898,417 | ) | | (75,162 | ) | $ | 4,465,166 | | | 114,727 | |
| Class B | | | 242,131 | | | 6,302 | | | 60,167 | | | 1,507 | | | (123,484 | ) | | (3,209 | ) | | 178,814 | | | 4,600 | |
| Class C | | | 551,355 | | | 14,335 | | | 57,032 | | | 1,428 | | | (122,224 | ) | | (3,178 | ) | | 486,163 | | | 12,585 | |
| Class F | | | 1,130,387 | | | 29,210 | | | 74,949 | | | 1,878 | | | (172,348 | ) | | (4,462 | ) | | 1,032,988 | | | 26,626 | |
| Class 529-A | | | 144,288 | | | 3,732 | | | 20,072 | | | 504 | | | (16,375 | ) | | (422 | ) | | 147,985 | | | 3,814 | |
| Class 529-B | | | 13,817 | | | 359 | | | 2,537 | | | 63 | | | (1,745 | ) | | (45 | ) | | 14,609 | | | 377 | |
| Class 529-C | | | 46,215 | | | 1,198 | | | 5,315 | | | 132 | | | (7,072 | ) | | (183 | ) | | 44,458 | | | 1,147 | |
| Class 529-E | | | 6,630 | | | 172 | | | 932 | | | 24 | | | (651 | ) | | (17 | ) | | 6,911 | | | 179 | |
| Class 529-F | | | 5,683 | | | 146 | | | 547 | | | 14 | | | (708 | ) | | (18 | ) | | 5,522 | | | 142 | |
| Class R-1 | | | 14,244 | | | 369 | | | 983 | | | 24 | | | (4,185 | ) | | (109 | ) | | 11,042 | | | 284 | |
| Class R-2 | | | 147,153 | | | 3,832 | | | 12,407 | | | 310 | | | (48,232 | ) | | (1,252 | ) | | 111,328 | | | 2,890 | |
| Class R-3 | | | 325,070 | | | 8,397 | | | 23,740 | | | 595 | | | (80,993 | ) | | (2,087 | ) | | 267,817 | | | 6,905 | |
| Class R-4 | | | 234,425 | | | 5,947 | | | 20,545 | | | 515 | | | (50,824 | ) | | (1,308 | ) | | 204,146 | | | 5,154 | |
| Class R-5 | | | 187,718 | | | 4,875 | | | 23,765 | | | 597 | | | (36,773 | ) | | (950 | ) | | 174,710 | | | 4,522 | |
| Total net increase | | | | | | | | | | | | | | | | | | | | | | | | | |
| (decrease) | | $ | 8,856,626 | | $ | 229,687 | | $ | 1,859,064 | | $ | 46,667 | | $ | (3,564,031 | ) | $ | (92,402 | ) | $ | 7,151,659 | | $ | 183,952 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A | | $ | 3,005,984 | | | 90,443 | | $ | 375,768 | | | 11,039 | | $ | (2,648,000 | ) | | (80,442 | ) | $ | 733,752 | | | 21,040 | |
| Class B | | | 109,936 | | | 3,324 | | | 9,966 | | | 289 | | | (95,999 | ) | | (2,920 | ) | | 23,903 | | | 693 | |
| Class C | | | 218,924 | | | 6,608 | | | 6,422 | | | 186 | | | (79,167 | ) | | (2,409 | ) | | 146,179 | | | 4,385 | |
| Class F | | | 244,749 | | | 7,340 | | | 8,448 | | | 247 | | | (106,338 | ) | | (3,245 | ) | | 146,859 | | | 4,342 | |
| Class 529-A | | | 72,664 | | | 2,186 | | | 3,286 | | | 96 | | | (9,106 | ) | | (273 | ) | | 66,844 | | | 2,009 | |
| Class 529-B | | | 7,547 | | | 228 | | | 312 | | | 9 | | | (942 | ) | | (28 | ) | | 6,917 | | | 209 | |
| Class 529-C | | | 23,294 | | | 702 | | | 553 | | | 16 | | | (3,668 | ) | | (111 | ) | | 20,179 | | | 607 | |
| Class 529-E | | | 3,417 | | | 103 | | | 137 | | | 4 | | | (312 | ) | | (10 | ) | | 3,242 | | | 97 | |
| Class 529-F | | | 2,261 | | | 68 | | | 68 | | | 2 | | | (214 | ) | | (7 | ) | | 2,115 | | | 63 | |
| Class R-1 | | | 5,776 | | | 176 | | | 89 | | | 3 | | | (2,202 | ) | | (66 | ) | | 3,663 | | | 113 | |
| Class R-2 | | | 71,936 | | | 2,187 | | | 1,327 | | | 38 | | | (24,346 | ) | | (735 | ) | | 48,917 | | | 1,490 | |
| Class R-3 | | | 110,345 | | | 3,339 | | | 2,595 | | | 76 | | | (35,242 | ) | | (1,065 | ) | | 77,698 | | | 2,350 | |
| Class R-4 | | | 130,964 | | | 4,035 | | | 2,837 | | | 83 | | | (26,250 | ) | | (795 | ) | | 107,551 | | | 3,323 | |
| Class R-5 | | | 152,129 | | | 4,640 | | | 4,015 | | | 117 | | | (54,754 | ) | | (1,618 | ) | | 101,390 | | | 3,139 | |
| Total net increase | | | | | | | | | | | | | | | | | | | | | | | | | |
| (decrease) | | $ | 4,159,926 | | | 125,379 | | $ | 415,823 | | | 12,205 | | $ | (3,086,540 | ) | | (93,724 | ) | $ | 1,489,209 | | | 43,860 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| * Includes exchanges between share classes of the fund. | | | | | | | | | | | | | | | | | | | | | | | | | |
6. Investment transactions
The fund made purchases and sales of investment securities, excluding short-term securities, of $11,338,058,000 and $6,608,994,000, respectively, during the year ended December 31, 2006.
Financial highlights (1)
| | | | | Income (loss) from investment operations(2) | | Dividends and distributions | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net asset value, beginning of period | | Net investment income | | Net gains (losses) on securities (both realized and unrealized) | | Total from investment operations | | Dividends (from net investment income) | | Distributions (from capital gains) | | Toal dividends and distributions | | Net asset value, end of period | | Total return (3) | | Net assets, end of period (in millions) | | | | Ratio of expenses to average net assets before reimbursements/ waivers | | | | Ratio of expenses to average net assets after reimbursements/ waivers (4) | | | | Ratio of net income to average net assets | | | |
| Class A: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | $ | 35.40 | | $ | .62 | | $ | 6.16 | | $ | 6.78 | | $ | (.56 | ) | $ | (1.57 | ) | $ | (2.13 | ) | $ | 40.05 | | | 19.24 | % | $ | 32,187 | | | | | | .61 | % | | | | | .58 | % | | | | | 1.60 | % | | | |
| Year ended 12/31/2005 | | | 32.25 | | | .58 | | | 3.16 | | | 3.74 | | | (.59 | ) | | - | | | (.59 | ) | | 35.40 | | | 11.68 | | | 24,390 | | | | | | .62 | | | | | | .60 | | | | | | 1.75 | | | | |
| Year ended 12/31/2004 | | | 28.85 | | | .61 | | | 3.35 | | | 3.96 | | | (.56 | ) | | - | | | (.56 | ) | | 32.25 | | | 13.91 | | | 21,543 | | | | | | .63 | | | | | | .63 | | | | | | 2.05 | | | | |
| Year ended 12/31/2003 | | | 22.23 | | | .50 | | | 6.52 | | | 7.02 | | | (.40 | ) | | - | | | (.40 | ) | | 28.85 | | | 31.96 | | | 19,212 | | | | | | .66 | | | | | | .66 | | | | | | 2.08 | | | | |
| Year ended 12/31/2002 | | | 27.45 | | | .42 | | | (5.14 | ) | | (4.72 | ) | | (.50 | ) | | - | | | (.50 | ) | | 22.23 | | | (17.34 | ) | | 15,201 | | | | | | .67 | | | | | | .67 | | | | | | 1.68 | | | | |
| Class B: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | | 35.33 | | | .32 | | | 6.14 | | | 6.46 | | | (.26 | ) | | (1.57 | ) | | (1.83 | ) | | 39.96 | | | 18.33 | | | 1,417 | | | | | | 1.38 | | | | | | 1.35 | | | | | | .83 | | | | |
| Year ended 12/31/2005 | | | 32.19 | | | .33 | | | 3.15 | | | 3.48 | | | (.34 | ) | | - | | | (.34 | ) | | 35.33 | | | 10.84 | | | 1,090 | | | | | | 1.39 | | | | | | 1.36 | | | | | | .99 | | | | |
| Year ended 12/31/2004 | | | 28.80 | | | .38 | | | 3.35 | | | 3.73 | | | (.34 | ) | | - | | | (.34 | ) | | 32.19 | | | 13.03 | | | 971 | | | | | | 1.40 | | | | | | 1.39 | | | | | | 1.29 | | | | |
| Year ended 12/31/2003 | | | 22.19 | | | .31 | | | 6.51 | | | 6.82 | | | (.21 | ) | | - | | | (.21 | ) | | 28.80 | | | 30.97 | | | 836 | | | | | | 1.44 | | | | | | 1.44 | | | | | | 1.30 | | | | |
| Year ended 12/31/2002 | | | 27.40 | | | .23 | | | (5.14 | ) | | (4.91 | ) | | (.30 | ) | | - | | | (.30 | ) | | 22.19 | | | (17.97 | ) | | 618 | | | | | | 1.45 | | | | | | 1.45 | | | | | | .91 | | | | |
| Class C: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | | 35.30 | | | .30 | | | 6.13 | | | 6.43 | | | (.24 | ) | | (1.57 | ) | | (1.81 | ) | | 39.92 | | | 18.23 | | | 1,380 | | | | | | 1.43 | | | | | | 1.41 | | | | | | .77 | | | | |
| Year ended 12/31/2005 | | | 32.17 | | | .30 | | | 3.15 | | | 3.45 | | | (.32 | ) | | - | | | (.32 | ) | | 35.30 | | | 10.76 | | | 776 | | | | | | 1.45 | | | | | | 1.43 | | | | | | .91 | | | | |
| Year ended 12/31/2004 | | | 28.78 | | | .37 | | | 3.34 | | | 3.71 | | | (.32 | ) | | - | | | (.32 | ) | | 32.17 | | | 12.96 | | | 566 | | | | | | 1.47 | | | | | | 1.46 | | | | | | 1.24 | | | | |
| Year ended 12/31/2003 | | | 22.17 | | | .30 | | | 6.51 | | | 6.81 | | | (.20 | ) | | - | | | (.20 | ) | | 28.78 | | | 30.93 | | | 413 | | | | | | 1.50 | | | | | | 1.50 | | | | | | 1.23 | | | | |
| Year ended 12/31/2002 | | | 27.39 | | | .21 | | | (5.14 | ) | | (4.93 | ) | | (.29 | ) | | - | | | (.29 | ) | | 22.17 | | | (18.06 | ) | | 266 | | | | | | 1.50 | | | | | | 1.50 | | | | | | .86 | | | | |
| Class F: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | | 35.39 | | | .62 | | | 6.15 | | | 6.77 | | | (.56 | ) | | (1.57 | ) | | (2.13 | ) | | 40.03 | | | 19.21 | | | 1,815 | | | | | | .61 | | | | | | .58 | | | | | | 1.58 | | | | |
| Year ended 12/31/2005 | | | 32.24 | | | .57 | | | 3.16 | | | 3.73 | | | (.58 | ) | | - | | | (.58 | ) | | 35.39 | | | 11.64 | | | 662 | | | | | | .66 | | | | | | .63 | | | | | | 1.71 | | | | |
| Year ended 12/31/2004 | | | 28.84 | | | .59 | | | 3.35 | | | 3.94 | | | (.54 | ) | | - | | | (.54 | ) | | 32.24 | | | 13.84 | | | 463 | | | | | | .70 | | | | | | .70 | | | | | | 2.02 | | | | |
| Year ended 12/31/2003 | | | 22.22 | | | .49 | | | 6.52 | | | 7.01 | | | (.39 | ) | | - | | | (.39 | ) | | 28.84 | | | 31.92 | | | 311 | | | | | | .71 | | | | | | .71 | | | | | | 2.02 | | | | |
| Year ended 12/31/2002 | | | 27.44 | | | .40 | | | (5.14 | ) | | (4.74 | ) | | (.48 | ) | | - | | | (.48 | ) | | 22.22 | | | (17.38 | ) | | 203 | | | | | | .72 | | | | | | .72 | | | | | | 1.65 | | | | |
| Class 529-A: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | | 35.38 | | | .60 | | | 6.15 | | | 6.75 | | | (.54 | ) | | (1.57 | ) | | (2.11 | ) | | 40.02 | | | 19.16 | | | 414 | | | | | | .66 | | | | | | .63 | | | | | | 1.55 | | | | |
| Year ended 12/31/2005 | | | 32.24 | | | .55 | | | 3.15 | | | 3.70 | | | (.56 | ) | | - | | | (.56 | ) | | 35.38 | | | 11.60 | | | 231 | | | | | | .70 | | | | | | .67 | | | | | | 1.66 | | | | |
| Year ended 12/31/2004 | | | 28.84 | | | .59 | | | 3.34 | | | 3.93 | | | (.53 | ) | | - | | | (.53 | ) | | 32.24 | | | 13.77 | | | 146 | | | | | | .73 | | | | | | .72 | | | | | | 2.00 | | | | |
| Year ended 12/31/2003 | | | 22.22 | | | .50 | | | 6.52 | | | 7.02 | | | (.40 | ) | | - | | | (.40 | ) | | 28.84 | | | 31.99 | | | 88 | | | | | | .68 | | | | | | .68 | | | | | | 2.03 | | | | |
| Period from 2/15/2002 to 12/31/2002 | | | 26.71 | | | .33 | | | (4.34 | ) | | (4.01 | ) | | (.48 | ) | | - | | | (.48 | ) | | 22.22 | | | (15.16 | ) | | 39 | | | | | | .76 | | | (5 | ) | | .76 | | | (5 | ) | | 1.64 | | | (5 | ) |
| Class 529-B: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | | 35.37 | | | .27 | | | 6.16 | | | 6.43 | | | (.22 | ) | | (1.57 | ) | | (1.79 | ) | | 40.01 | | | 18.18 | | | 60 | | | | | | 1.50 | | | | | | 1.47 | | | | | | .71 | | | | |
| Year ended 12/31/2005 | | | 32.23 | | | .27 | | | 3.16 | | | 3.43 | | | (.29 | ) | | - | | | (.29 | ) | | 35.37 | | | 10.66 | | | 40 | | | | | | 1.54 | | | | | | 1.52 | | | | | | .82 | | | | |
| Year ended 12/31/2004 | | | 28.83 | | | .33 | | | 3.35 | | | 3.68 | | | (.28 | ) | | - | | | (.28 | ) | | 32.23 | | | 12.83 | | | 29 | | | | | | 1.59 | | | | | | 1.59 | | | | | | 1.13 | | | | |
| Year ended 12/31/2003 | | | 22.22 | | | .27 | | | 6.52 | | | 6.79 | | | (.18 | ) | | - | | | (.18 | ) | | 28.83 | | | 30.74 | | | 19 | | | | | | 1.61 | | | | | | 1.61 | | | | | | 1.10 | | | | |
| Period from 2/19/2002 to 12/31/2002 | | | 26.27 | | | .16 | | | (3.91 | ) | | (3.75 | ) | | (.30 | ) | | - | | | (.30 | ) | | 22.22 | | | (14.35 | ) | | 8 | | | | | | 1.62 | | | (5 | ) | | 1.62 | | | (5 | ) | | .77 | | | (5 | ) |
| Class 529-C: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | | 35.37 | | | .28 | | | 6.14 | | | 6.42 | | | (.22 | ) | | (1.57 | ) | | (1.79 | ) | | 40.00 | | | 18.16 | | | 126 | | | | | | 1.49 | | | | | | 1.47 | | | | | | .71 | | | | |
| Year ended 12/31/2005 | | | 32.23 | | | .27 | | | 3.16 | | | 3.43 | | | (.29 | ) | | - | | | (.29 | ) | | 35.37 | | | 10.68 | | | 71 | | | | | | 1.53 | | | | | | 1.51 | | | | | | .83 | | | | |
| Year ended 12/31/2004 | | | 28.83 | | | .34 | | | 3.34 | | | 3.68 | | | (.28 | ) | | - | | | (.28 | ) | | 32.23 | | | 12.84 | | | 45 | | | | | | 1.58 | | | | | | 1.58 | | | | | | 1.14 | | | | |
| Year ended 12/31/2003 | | | 22.22 | | | .27 | | | 6.52 | | | 6.79 | | | (.18 | ) | | - | | | (.18 | ) | | 28.83 | | | 30.75 | | | 27 | | | | | | 1.60 | | | | | | 1.60 | | | | | | 1.11 | | | | |
| Period from 2/15/2002 to 12/31/2002 | | | 26.71 | | | .16 | | | (4.34 | ) | | (4.18 | ) | | (.31 | ) | | - | | | (.31 | ) | | 22.22 | | | (15.74 | ) | | 11 | | | | | | 1.60 | | | (5 | ) | | 1.60 | | | (5 | ) | | .79 | | | (5 | ) |
| Class 529-E: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | | 35.36 | | | .48 | | | 6.15 | | | 6.63 | | | (.42 | ) | | (1.57 | ) | | (1.99 | ) | | 40.00 | | | 18.80 | | | 20 | | | | | | .97 | | | | | | .95 | | | | | | 1.23 | | | | |
| Year ended 12/31/2005 | | | 32.23 | | | .44 | | | 3.15 | | | 3.59 | | | (.46 | ) | | - | | | (.46 | ) | | 35.36 | | | 11.24 | | | 12 | | | | | | 1.02 | | | | | | .99 | | | | | | 1.34 | | | | |
| Year ended 12/31/2004 | | | 28.83 | | | .49 | | | 3.35 | | | 3.84 | | | (.44 | ) | | - | | | (.44 | ) | | 32.23 | | | 13.40 | | | 7 | | | | | | 1.06 | | | | | | 1.05 | | | | | | 1.66 | | | | |
| Year ended 12/31/2003 | | | 22.21 | | | .40 | | | 6.52 | | | 6.92 | | | (.30 | ) | | - | | | (.30 | ) | | 28.83 | | | 31.42 | | | 4 | | | | | | 1.08 | | | | | | 1.08 | | | | | | 1.61 | | | | |
| Period from 3/7/2002 to 12/31/2002 | | | 28.13 | | | .26 | | | (5.85 | ) | | (5.59 | ) | | (.33 | ) | | - | | | (.33 | ) | | 22.21 | | | (19.92 | ) | | 2 | | | | | | 1.07 | | | (5 | ) | | 1.07 | | | (5 | ) | | 1.35 | | | (5 | ) |
| Class 529-F: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | | 35.36 | | | .67 | | | 6.15 | | | 6.82 | | | (.61 | ) | | (1.57 | ) | | (2.18 | ) | | 40.00 | | | 19.40 | | | 11 | | | | | | .47 | | | | | | .45 | | | | | | 1.73 | | | | |
| Year ended 12/31/2005 | | | 32.22 | | | .59 | | | 3.15 | | | 3.74 | | | (.60 | ) | | - | | | (.60 | ) | | 35.36 | | | 11.68 | | | 5 | | | | | | .58 | | | | | | .56 | | | | | | 1.76 | | | | |
| Year ended 12/31/2004 | | | 28.82 | | | .58 | | | 3.33 | | | 3.91 | | | (.51 | ) | | - | | | (.51 | ) | | 32.22 | | | 13.73 | | | 2 | | | | | | .81 | | | | | | .80 | | | | | | 1.95 | | | | |
| Year ended 12/31/2003 | | | 22.22 | | | .45 | | | 6.52 | | | 6.97 | | | (.37 | ) | | - | | | (.37 | ) | | 28.82 | | | 31.72 | | | 1 | | | | | | .82 | | | | | | .82 | | | | | | 1.81 | | | | |
| Period from 9/23/2002 to 12/31/2002 | | | 21.22 | | | .12 | | | 1.08 | | | 1.20 | | | (.20 | ) | | - | | | (.20 | ) | | 22.22 | | | 5.65 | | | - | | | (6 | ) | | .22 | | | | | | .22 | | | | | | .51 | | | | |
| Class R-1: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | $ | 35.31 | | $ | .29 | | $ | 6.13 | | $ | 6.42 | | $ | (.23 | ) | $ | (1.57 | ) | $ | (1.80 | ) | $ | 39.93 | | | 18.19 | % | $ | 23 | | | | | | 1.47 | % | | | | | 1.43 | % | | | | | .74 | % | | | |
| Year ended 12/31/2005 | | | 32.18 | | | .29 | | | 3.16 | | | 3.45 | | | (.32 | ) | | - | | | (.32 | ) | | 35.31 | | | 10.74 | | | 11 | | | | | | 1.50 | | | | | | 1.46 | | | | | | .88 | | | | |
| Year ended 12/31/2004 | | | 28.79 | | | .37 | | | 3.33 | | | 3.70 | | | (.31 | ) | | - | | | (.31 | ) | | 32.18 | | | 12.92 | | | 6 | | | | | | 1.53 | | | | | | 1.49 | | | | | | 1.26 | | | | |
| Year ended 12/31/2003 | | | 22.19 | | | .27 | | | 6.54 | | | 6.81 | | | (.21 | ) | | - | | | (.21 | ) | | 28.79 | | | 30.90 | | | 2 | | | | | | 1.70 | | | | | | 1.50 | | | | | | 1.08 | | | | |
| Period from 6/19/2002 to 12/31/2002 | | | 26.04 | | | .13 | | | (3.75 | ) | | (3.62 | ) | | (.23 | ) | | - | | | (.23 | ) | | 22.19 | | | (13.91 | ) | | - | | | (6 | ) | | 4.20 | | | (5 | ) | | 1.50 | | | (5 | ) | | 1.11 | | | (5 | ) |
| Class R-2: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | | 35.29 | | | .30 | | | 6.14 | | | 6.44 | | | (.24 | ) | | (1.57 | ) | | (1.81 | ) | | 39.92 | | | 18.26 | | | 291 | | | | | | 1.54 | | | | | | 1.41 | | | | | | .77 | | | | |
| Year ended 12/31/2005 | | | 32.17 | | | .30 | | | 3.14 | | | 3.44 | | | (.32 | ) | | - | | | (.32 | ) | | 35.29 | | | 10.73 | | | 155 | | | | | | 1.64 | | | | | | 1.43 | | | | | | .91 | | | | |
| Year ended 12/31/2004 | | | 28.77 | | | .38 | | | 3.34 | | | 3.72 | | | (.32 | ) | | - | | | (.32 | ) | | 32.17 | | | 13.02 | | | 93 | | | | | | 1.76 | | | | | | 1.45 | | | | | | 1.29 | | | | |
| Year ended 12/31/2003 | | | 22.18 | | | .30 | | | 6.51 | | | 6.81 | | | (.22 | ) | | - | | | (.22 | ) | | 28.77 | | | 30.93 | | | 45 | | | | | | 1.94 | | | | | | 1.46 | | | | | | 1.19 | | | | |
| Period from 5/21/2002 to 12/31/2002 | | | 27.39 | | | .14 | | | (5.13 | ) | | (4.99 | ) | | (.22 | ) | | - | | | (.22 | ) | | 22.18 | | | (18.22 | ) | | 7 | | | | | | 1.64 | | | (5 | ) | | 1.46 | | | (5 | ) | | 1.05 | | | (5 | ) |
| Class R-3: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | | 35.35 | | | .47 | | | 6.14 | | | 6.61 | | | (.41 | ) | | (1.57 | ) | | (1.98 | ) | | 39.98 | | | 18.75 | | | 525 | | | | | | .99 | | | | | | .96 | | | | | | 1.21 | | | | |
| Year ended 12/31/2005 | | | 32.21 | | | .45 | | | 3.16 | | | 3.61 | | | (.47 | ) | | - | | | (.47 | ) | | 35.35 | | | 11.26 | | | 220 | | | | | | 1.01 | | | | | | .98 | | | | | | 1.35 | | | | |
| Year ended 12/31/2004 | | | 28.82 | | | .50 | | | 3.33 | | | 3.83 | | | (.44 | ) | | - | | | (.44 | ) | | 32.21 | | | 13.41 | | | 125 | | | | | | 1.05 | | | | | | 1.04 | | | | | | 1.69 | | | | |
| Year ended 12/31/2003 | | | 22.21 | | | .40 | | | 6.52 | | | 6.92 | | | (.31 | ) | | - | | | (.31 | ) | | 28.82 | | | 31.45 | | | 66 | | | | | | 1.10 | | | | | | 1.08 | | | | | | 1.60 | | | | |
| Period from 6/4/2002 to 12/31/2002 | | | 26.66 | | | .18 | | | (4.38 | ) | | (4.20 | ) | | (.25 | ) | | - | | | (.25 | ) | | 22.21 | | | (15.75 | ) | | 11 | | | | | | 1.13 | | | (5 | ) | | 1.08 | | | (5 | ) | | 1.41 | | | (5 | ) |
| Class R-4: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | | 35.36 | | | .59 | | | 6.14 | | | 6.73 | | | (.53 | ) | | (1.57 | ) | | (2.10 | ) | | 39.99 | | | 19.12 | | | 438 | | | | | | .67 | | | | | | .65 | | | | | | 1.52 | | | | |
| Year ended 12/31/2005 | | | 32.22 | | | .55 | | | 3.16 | | | 3.71 | | | (.57 | ) | | - | | | (.57 | ) | | 35.36 | | | 11.61 | | | 205 | | | | | | .69 | | | | | | .66 | | | | | | 1.66 | | | | |
| Year ended 12/31/2004 | | | 28.83 | | | .60 | | | 3.33 | | | 3.93 | | | (.54 | ) | | - | | | (.54 | ) | | 32.22 | | | 13.85 | | | 80 | | | | | | .69 | | | | | | .69 | | | | | | 2.04 | | | | |
| Year ended 12/31/2003 | | | 22.21 | | | .48 | | | 6.53 | | | 7.01 | | | (.39 | ) | | - | | | (.39 | ) | | 28.83 | | | 31.91 | | | 48 | | | | | | .71 | | | | | | .71 | | | | | | 1.94 | | | | |
| Period from 7/25/2002 to 12/31/2002 | | | 21.75 | | | .22 | | | .55 | | | .77 | | | (.31 | ) | | - | | | (.31 | ) | | 22.21 | | | 3.51 | | | 7 | | | | | | .34 | | | | | | .32 | | | | | | .96 | | | | |
| Class R-5: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 12/31/2006 | | | 35.41 | | | .71 | | | 6.16 | | | 6.87 | | | (.65 | ) | | (1.57 | ) | | (2.22 | ) | | 40.06 | | | 19.50 | | | 481 | | | | | | .38 | | | | | | .35 | | | | | | 1.83 | | | | |
| Year ended 12/31/2005 | | | 32.26 | | | .65 | | | 3.17 | | | 3.82 | | | (.67 | ) | | - | | | (.67 | ) | | 35.41 | | | 11.94 | | | 265 | | | | | | .39 | | | | | | .36 | | | | | | 1.96 | | | | |
| Year ended 12/31/2004 | | | 28.86 | | | .68 | | | 3.35 | | | 4.03 | | | (.63 | ) | | - | | | (.63 | ) | | 32.26 | | | 14.19 | | | 141 | | | | | | .39 | | | | | | .39 | | | | | | 2.31 | | | | |
| Year ended 12/31/2003 | | | 22.23 | | | .56 | | | 6.53 | | | 7.09 | | | (.46 | ) | | - | | | (.46 | ) | | 28.86 | | | 32.34 | | | 112 | | | | | | .39 | | | | | | .39 | | | | | | 2.30 | | | | |
| Period from 5/15/2002 to 12/31/2002 | | | 27.62 | | | .28 | | | (5.34 | ) | | (5.06 | ) | | (.33 | ) | | - | | | (.33 | ) | | 22.23 | | | (18.34 | ) | | 53 | | | | | | .40 | | | (5 | ) | | .40 | | | (5 | ) | | 1.91 | | | (5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31 |
| | 2006 | | 2005 | | 2004 | | 2003 | | 2002 |
| | | | | | | | | | |
| Portfolio turnover rate for all classes of shares | | 21% | | 24% | | 30% | | 31% | | 38% |
| (1) Based on operations for the periods shown (unless otherwise noted) and, accordingly, may not be representative of a full year. |
| (2) Based on average shares outstanding. |
| (3) Total returns exclude all sales charges, including contingent deferred sales charges. |
| (4) The ratios in this column reflect the impact, if any, of certain reimbursements/waivers from CRMC. During some of the periods shown, CRMC reduced fees for investment advisory services for all share classes. In addition, during the start-up period for the retirement plan share classes (except Class R-5), CRMC agreed to pay a portion of the fees related to transfer agent services. |
| (5) Annualized. |
| (6) Amount less than $1 million. |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Fundamental Investors, Inc.:
We have audited the accompanying statement of assets and liabilities of Fundamental Investors, Inc. (the “Fund”), including the summary investment portfolio, as of December 31, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2006, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Fundamental Investors, Inc. as of December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Costa Mesa, California
February 12, 2007
Expense example | unaudited |
As a shareholder of the fund, you incur two types of costs: (1) transaction costs such as initial sales charges on purchase payments and contingent deferred sales charges on redemptions (loads); and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund so you can compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006, through December 31, 2006).
Actual expenses:
The first line of each share class in the table on the next page provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses paid during period" to estimate the expenses you paid on your account during this period. There are some account fees that are charged to certain types of accounts, such as Individual Retirement Accounts and CollegeAmerica accounts (generally, a $10 fee is charged to set up the account and an additional $10 fee is charged to the account annually) that would increase the amount of expenses paid on your account. In addition, retirement plan participants may be subject to certain fees charged by the plan sponsor, and Class F and 529-F shareholders may be subject to fees charged by financial intermediaries, typically ranging from 0.75% to 1.50% of assets annually depending on services offered. You can estimate the impact of these fees by adding the amount of the fees to the total estimated expenses you paid on your account during the period as calculated above. In addition, your ending account value would also be lower by the amount of these fees.
Hypothetical example for comparison purposes:
The second line of each share class in the table on the next page provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio for the share class and an assumed rate of return of 5.00% per year before expenses, which is not the actual return of the share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5.00% hypothetical example with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds. There are some account fees that are charged to certain types of accounts, such as Individual Retirement Accounts and CollegeAmerica accounts (generally, a $10 fee is charged to set up the account and an additional $10 fee is charged to the account annually) that would increase the amount of expenses paid on your account. In addition, retirement plan participants may be subject to certain fees charged by the plan sponsor, and Class F and 529-F shareholders may be subject to fees charged by financial intermediaries, typically ranging from 0.75% to 1.50% of assets annually depending on services offered. You can estimate the impact of these fees by adding the amount of the fees to the total estimated expenses you paid on your account during the period as calculated above. In addition, your ending account value would also be lower by the amount of these fees.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of each share class in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| | | Beginning account value 7/1/2006 | | Ending account value 12/31/2006 | | Expenses paid during period* | | Annualized expense ratio | |
| | | | | | | | | | |
| Class A -- actual return | | $ | 1,000.00 | | $ | 1,095.73 | | $ | 3.01 | | | .57 | % |
| Class A -- assumed 5% return | | | 1,000.00 | | | 1,022.33 | | | 2.91 | | | .57 | |
| Class B -- actual return | | | 1,000.00 | | | 1,091.23 | | | 7.06 | | | 1.34 | |
| Class B -- assumed 5% return | | | 1,000.00 | | | 1,018.45 | | | 6.82 | | | 1.34 | |
| Class C -- actual return | | | 1,000.00 | | | 1,090.97 | | | 7.38 | | | 1.40 | |
| Class C -- assumed 5% return | | | 1,000.00 | | | 1,018.15 | | | 7.12 | | | 1.40 | |
| Class F -- actual return | | | 1,000.00 | | | 1,095.38 | | | 3.06 | | | .58 | |
| Class F -- assumed 5% return | | | 1,000.00 | | | 1,022.28 | | | 2.96 | | | .58 | |
| Class 529-A -- actual return | | | 1,000.00 | | | 1,095.19 | | | 3.27 | | | .62 | |
| Class 529-A -- assumed 5% return | | | 1,000.00 | | | 1,022.08 | | | 3.16 | | | .62 | |
| Class 529-B -- actual return | | | 1,000.00 | | | 1,090.43 | | | 7.75 | | | 1.47 | |
| Class 529-B -- assumed 5% return | | | 1,000.00 | | | 1,017.80 | | | 7.48 | | | 1.47 | |
| Class 529-C -- actual return | | | 1,000.00 | | | 1,090.48 | | | 7.69 | | | 1.46 | |
| Class 529-C -- assumed 5% return | | | 1,000.00 | | | 1,017.85 | | | 7.43 | | | 1.46 | |
| Class 529-E -- actual return | | | 1,000.00 | | | 1,093.28 | | | 4.96 | | | .94 | |
| Class 529-E -- assumed 5% return | | | 1,000.00 | | | 1,020.47 | | | 4.79 | | | .94 | |
| Class 529-F -- actual return | | | 1,000.00 | | | 1,096.24 | | | 2.32 | | | .44 | |
| Class 529-F -- assumed 5% return | | | 1,000.00 | | | 1,022.99 | | | 2.24 | | | .44 | |
| Class R-1 -- actual return | | | 1,000.00 | | | 1,090.53 | | | 7.48 | | | 1.42 | |
| Class R-1 -- assumed 5% return | | | 1,000.00 | | | 1,018.05 | | | 7.22 | | | 1.42 | |
| Class R-2 -- actual return | | | 1,000.00 | | | 1,090.97 | | | 7.43 | | | 1.41 | |
| Class R-2 -- assumed 5% return | | | 1,000.00 | | | 1,018.10 | | | 7.17 | | | 1.41 | |
| Class R-3 -- actual return | | | 1,000.00 | | | 1,093.21 | | | 5.01 | | | .95 | |
| Class R-3 -- assumed 5% return | | | 1,000.00 | | | 1,020.42 | | | 4.84 | | | .95 | |
| Class R-4 -- actual return | | | 1,000.00 | | | 1,094.89 | | | 3.38 | | | .64 | |
| Class R-4 -- assumed 5% return | | | 1,000.00 | | | 1,021.98 | | | 3.26 | | | .64 | |
| Class R-5 -- actual return | | | 1,000.00 | | | 1,096.88 | | | 1.85 | | | .35 | |
| Class R-5 -- assumed 5% return | | | 1,000.00 | | | 1,023.44 | | | 1.79 | | | .35 | |
* Expenses are equal to the annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the period (184), and divided by 365 (to reflect the one-half year period).
We are required to advise you within 60 days of the fund’s fiscal year-end regarding the federal tax status of certain distributions received by shareholders during such fiscal year. The fund hereby designates the following amounts for the fund’s fiscal year ended December 31, 2006:
| Long-term capital gains | $1,471,900,000 |
| Qualified dividend income | 100% |
| Corporate dividends received deduction | $437,012,000 |
| U.S. government income that may be exempt from state taxation | 8,686,000 |
Individual shareholders should refer to their Form 1099 or other tax information, which was mailed in January 2007, to determine the calendar year amounts to be included on their 2006 tax returns. Shareholders should consult their tax advisers.
Approval of Investment Advisory and Service Agreement
The fund’s board has approved the fund’s Investment Advisory and Service Agreement (the “agreement”) with Capital Research and Management Company (“CRMC”) for an additional one-year term through August 31, 2007. The agreement was amended to add two additional advisory fee breakpoints if and when the fund’s net assets exceed $34 billion and $44 billion, respectively. The board approved the agreement following the recommendation of the fund’s Governance and Contracts Committee (the “committee”), which is composed of all of the fund’s independent board members. The information, material facts and conclusions that formed the basis for the committee’s recommendation and the board’s subsequent approval are described below.
1. Information reviewed
Materials reviewed— During the course of each year, board members review a wide variety of materials relating to the services provided by CRMC, including reports on the fund’s investment results, portfolio composition, portfolio trading practices, shareholder services and other information relating to the nature, extent and quality of services provided by CRMC to the fund. In addition, the committee requests and reviews supplementary information that includes extensive materials regarding the fund’s investment results, advisory fee and expense comparisons, financial and profitability information regarding CRMC, descriptions of various functions such as compliance monitoring and portfolio trading practices, and information about the personnel providing investment management and administrative services to the fund.
Review process— The committee received assistance and advice regarding legal and industry standards from independent counsel to the board. The committee discussed the approval of the agreement with CRMC representatives and in a private session with counsel at which no representatives of CRMC were present. In deciding to recommend approval of the agreement, the committee did not identify any single issue or particular piece of information that, in isolation, was the controlling factor. This summary describes the most important, but not all, of the factors considered by the board and the committee.
2. Nature, extent and quality of services
CRMC, its personnel and its resources— The board and the committee considered the depth and quality of CRMC’s investment management process, including its global research capabilities; the experience, capability and integrity of its senior management and other personnel; the low turnover rates of its key personnel; the overall financial strength and stability of its organization; and the ability of its organizational structure to address growth in assets under management. The board and the committee also considered that CRMC made available to its investment professionals a variety of resources and systems relating to investment management, compliance, trading, investment results and portfolio accounting. They considered CRMC’s commitment to investing in information technology supporting investment management and compliance. They further considered CRMC’s continuing need to attract and retain qualified personnel and to maintain and enhance its resources and systems. The board and the committee also considered the benefits to fund shareholders from investing in a fund that is part of a larger family of funds offering a variety of investment objectives.
Other services— The board and the committee considered CRMC’s policies, procedures and systems designed to comply with applicable laws and regulations and its commitment to compliance; its efforts to keep the board members informed; and its attention to matters that may involve potential conflicts of interest with the fund. The board and the committee also considered the nature, extent, quality and cost of administrative, distribution and shareholder services provided by CRMC to the fund under the agreement and other agreements, including the information technology, legal, and fund accounting and treasury functions.
3. Investment results
The board and the committee considered the investment results of the fund in light of its objective of providing both capital appreciation and income by investing primarily in common stocks of large, established companies that offer growth potential at reasonable prices. They reviewed the fund’s absolute investment results, and compared the fund’s total returns with the total returns of the Lipper Large-Cap Value Funds Index (the Lipper category that includes the fund), the Lipper Large-Cap Core Funds Index, the averages of the funds included in those indexes as of February 28, 2006, and the Standard & Poor’s 500 Composite Index. The board and the committee noted that the fund’s investment results exceeded all these comparative measures for 2005, for the first three months of 2006, and for the five- and 10-year periods ended March 31, 2006.
4. Advisory fees and total expenses
The board and the committee reviewed the advisory fees and total expenses of the fund (each as a percentage of average net assets) and compared such amounts with the median fee and expense levels of all other funds in the Lipper Large-Cap Value Funds Index and the Lipper Large-Cap Core Funds Index. The board and the committee observed that the fund’s advisory fees and total expenses had been below the median of all the other funds included in the indexes for the entire nine-year period ended on December 31, 2005. The board and the committee also noted the 10% advisory fee waiver that CRMC put into effect on April 1, 2005.
The board and the committee also reviewed information regarding the advisory fees paid by institutional clients of an affiliate of CRMC with similar investment mandates. They noted that, although the fees paid by those clients generally were lower than those paid by American Funds, the differences appropriately reflected the significant investment, operational and regulatory differences between advising mutual funds and institutional clients.
5. Adviser financial information
The board and the committee reviewed information regarding CRMC’s costs of providing services to the American Funds, as well as the resulting level of profits to CRMC, comparing those to the reported results of several large, publicly held investment management companies. The committee also received information during previous periods regarding the structure and manner in which CRMC’s investment professionals were compensated and CRMC’s view of the relationship of such compensation to the attraction and retention of quality personnel. The board and the committee considered CRMC’s willingness to invest in technology, infrastructure and staff to reinforce and offer new services and to accommodate changing regulatory requirements. They further considered that breakpoint discounts in the fund’s advisory fee structure reduce the level of fees charged by CRMC to the fund as fund assets increase. They also considered the impact of CRMC’s current 10% advisory fee waiver.
6. Ancillary benefits
The board and the committee considered a variety of other benefits received by CRMC and its affiliates as a result of CRMC’s relationship with the fund and the other American Funds, including fees for administrative services provided to certain share classes; fees paid to the investment adviser’s affiliated transfer agent; sales charges and distribution fees received and retained by the fund’s principal underwriter, an affiliate of CRMC; and possible ancillary benefits to CRMC’s institutional management affiliates. The board and the committee reviewed CRMC’s portfolio trading practices, noting that, while CRMC receives the benefit of research provided by broker-dealers executing portfolio transactions on behalf of the fund, it does not obtain third-party research or other services in return for allocating brokerage to such broker-dealers.
7. Conclusions
Based on their review, including their consideration of each of the factors referred to above, the board and the committee concluded that the agreement is fair and reasonable to the fund and its shareholders, that the fund’s shareholders receive reasonable value in return for the advisory fees and other amounts paid to CRMC by the fund, that each of the factors discussed above supported approval of the agreement, and that approval of the agreement was in the best interests of the fund and its shareholders.
| Other share class results | unaudited |
Class B, Class C, Class F and Class 529
Figures shown are past results and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. For current information and month-end results, visit americanfunds.com.
Average annual total returns for periods ended December 31, 2006:
| | 1 year | 5 years | Life of class |
Class B shares— first sold 3/15/00 | | | |
Reflecting applicable contingent deferred sales charge | | | |
(CDSC), maximum of 5%, payable only if shares | | | |
are sold within six years of purchase | +13.33% | +9.48% | +5.97% |
Not reflecting CDSC | +18.33% | +9.75% | +5.97% |
| | | | |
Class C shares— first sold 3/15/01 | | | |
Reflecting CDSC, maximum of 1%, payable only if | | | |
shares are sold within one year of purchase | +17.23% | +9.68% | +7.61% |
Not reflecting CDSC | +18.23% | +9.68% | +7.61% |
| | | | |
Class F shares* — first sold 3/15/01 | | | |
Not reflecting annual asset-based fee charged by | | | |
sponsoring firm | +19.21% | +10.55% | +8.47% |
| | | | |
Class 529-A shares†— first sold 2/15/02 | | | |
Reflecting 5.75% maximum sales charge | +12.30% | — | +10.08% |
Not reflecting maximum sales charge | +19.16% | — | +11.42% |
| | | | |
Class 529-B shares†— first sold 2/19/02 | | | |
Reflecting applicable CDSC, maximum of 5%, | | | |
payable only if shares are sold within six | | | |
years of purchase | +13.18% | — | +10.60% |
Not reflecting CDSC | +18.18% | — | +10.88% |
| | | | |
Class 529-C shares†— first sold 2/15/02 | | | |
Reflecting CDSC, maximum of 1%, payable only | | | |
if shares are sold within one year of purchase | +17.16% | — | +10.48% |
Not reflecting CDSC | +18.16% | — | +10.48% |
| | | | |
Class 529-E shares*†— first sold 3/7/02 | +18.80% | — | +9.91% |
| | | | |
Class 529-F shares*†— first sold 9/23/02 | | | |
Not reflecting annual asset-based fee charged | | | |
by sponsoring firm | +19.40% | — | +19.11% |
The fund’s investment adviser waived 5% of its management fees from September 1, 2004, through March 31, 2005, and increased it to 10% on April 1, 2005. Fund results shown reflect the waiver, without which they would have been lower. Please see the Financial Highlights table on pages 23 and 24 for details.
*These shares are sold without any initial or contingent deferred sales charge.
† Results shown do not reflect the $10 initial account setup fee and an annual $10 account maintenance fee.
Board of directors
“Independent” directors | | |
| | | |
| | Year first | |
| | elected | |
| | a director | |
Name and age | of the fund1 | Principal occupation(s) during past five years |
| | | |
| Joseph C. Berenato, 60 | 2003 | Chairman of the Board, President and CEO, Ducommun Incorporated (aerospace components manufacturer) |
| | | |
| Robert J. Denison, 65 | 2005 | Chair, First Security Management (private investments) |
| | | |
| Robert A. Fox, 69 | 1998 | Managing General Partner, Fox Investments LP; corporate director; retired President and CEO, |
| Foster Farms (poultry producer) | | |
| | | |
| Leonade D. Jones, 59 | 1998 | Co-founder, VentureThink LLC (developed and managed e-commerce businesses) and Versura Inc. (education loan exchange); former Treasurer, The Washington Post Company |
| | | |
| John G. McDonald, 69 | 1998 | Stanford Investors Professor, Graduate School of Business, Stanford University |
| | | |
| Gail L. Neale, 72 | 1985 | President, The Lovejoy Consulting Group, Inc. |
| (a pro bono consulting group advising nonprofit organizations) | | |
| | | |
| Henry E. Riggs, 72 | 1989 | President Emeritus, Keck Graduate Institute of |
| Chairman of the Board | | Applied Life Sciences |
| (Independent and Non-Executive) | | |
| | | |
| Patricia K. Woolf, Ph.D., 72 | 1998 | Private investor; corporate director; former Lecturer, Department of Molecular Biology, Princeton University |
| | | |
“Independent” directors | | |
| | | |
| | Number of | |
| | portfolios | |
| | in fund | |
| | complex2 | |
| | overseen by | |
Name and age | director | Other directorships3 held by director |
| | | |
| Joseph C. Berenato, 60 | 6 | Ducommun Incorporated |
| | | |
| Robert J. Denison, 65 | 5 | None |
| | | |
| Robert A. Fox, 69 | 7 | Chemtura Corporation |
| | | |
| Leonade D. Jones, 59 | 6 | None |
| | | |
| John G. McDonald, 69 | 8 | iStar Financial, Inc.; Plum Creek Timber Co.; Scholastic Corporation; Varian, Inc. |
| | | |
| Gail L. Neale, 72 | 5 | None |
| | | |
| Henry E. Riggs, 72 | 4 | None |
| Chairman of the Board | | |
| (Independent and Non-Executive) | | |
| | | |
| Patricia K. Woolf, Ph.D., 72 | 6 | None |
| | | |
“Interested” directors4 | | |
| | | |
| | Year first | |
| | elected a | |
| | director or | Principal occupation(s) during past five years and |
Name, age and | officer of | positions held with affiliated entities or the principal |
position with fund | the fund1 | underwriter of the fund |
| | | |
| James F. Rothenberg, 60 | 1998 | Chairman of the Board, Capital Research and |
| Vice Chairman of the Board | | Management Company; Director, American Funds |
| | | Distributors, Inc.;5 Director, The Capital Group Companies, Inc.;5 Director, Capital Group Research, Inc.5 |
| | | |
| Dina N. Perry, 61 | 1994 | Senior Vice President and Director, Capital |
| President | | Research and Management Company |
| | | |
| | | |
“Interested” directors4 | | |
| | | |
| | Number of | |
| | portfolios | |
| | in fund | |
| | complex2 | |
Name, age and | overseen by | |
position with fund | director | Other directorships3 held by director |
| | | |
| James F. Rothenberg, 60 | 2 | None |
| Vice Chairman of the Board | | |
| | | |
| Dina N. Perry, 61 | 1 | None |
| President | | |
The statement of additional information includes additional information about fund directors and is available without charge upon request by calling American Funds Service Company at 800/421-0180. The address for all directors and officers of the fund is 333 South Hope Street, Los Angeles, CA 90071, Attention: Fund Secretary.
Please see page 32 for footnotes.
Other officers6 | | |
| | | |
| | Year first | |
| | elected | Principal occupation(s) during past five years |
Name, age and | an officer | and positions held with affiliated entities or the |
position with fund | of the fund1 | principal underwriter of the fund |
| | | |
| Paul G. Haaga, Jr., 58 | 1994 | Vice Chairman of the Board, Capital Research and |
| Senior Vice President | | Management Company; Director, The Capital Group Companies, Inc.5 |
| | | |
| Michael T. Kerr, 47 | 1995 | Vice President, Capital Research and Management |
| Senior Vice President | | Company; Senior Vice President, Capital Research Company5 |
| | | |
| Martin Romo, 39 | 1999 | Director, Capital Research and Management |
| Senior Vice President | | Company; Executive Vice President and Director, |
Capital Research Company5 | | |
| | | |
| Ronald B. Morrow, 61 | 2004 | Senior Vice President, Capital Research Company5 |
| Vice President | | |
| | | |
| Patrick F. Quan, 48 | 1989-1998 | Vice President — Fund Business Management |
| Secretary | 2000 | Group, Capital Research and Management Company |
| | | |
| Jeffrey P. Regal, 35 | 2006 | Vice President — Fund Business Management |
| Treasurer | | Group, Capital Research and Management Company |
| | | |
| David A. Pritchett, 40 | 1999 | Vice President — Fund Business Management |
| Assistant Treasurer | | Group, Capital Research and Management Company |
1 Directors and officers of the fund serve until their resignation, removal or retirement.
2 Capital Research and Management Company manages the American Funds, consisting of 30 funds. Capital Research and Management Company also manages American Funds Insurance Series,® which serves as the underlying investment vehicle for certain variable insurance contracts, American Funds Target Date Retirement Series, Inc.,SM which is available to investors in tax-deferred retirement plans and IRAs, and Endowments, whose shareholders are limited to certain nonprofit organizations.
3 This includes all directorships (other than those in the American Funds) that are held by each director as a director of a public company or a registered investment company.
4 “Interested persons” within the meaning of the 1940 Act, on the basis of their affiliation with the fund’s investment adviser, Capital Research and Management Company, or affiliated entities (including the fund’s principal underwriter).
5 Company affiliated with Capital Research and Management Company.
6 All of the officers listed, except Martin Romo and Ronald B. Morrow, are officers and/or directors/trustees of one or more of the other funds for which Capital Research and Management Company serves as investment adviser.
Offices of the fund
One Market
Steuart Tower, Suite 1800
Mailing address: P.O. Box 7650
San Francisco, CA 94120-7650
Investment adviser
Capital Research and Management Company
333 South Hope Street
Los Angeles, CA 90071-1406
135 South State College Boulevard
Brea, CA 92821-5823
Custodian of assets
State Street Bank and Trust Company
One Lincoln Street
Boston, MA 02111
Transfer agent for shareholder accounts
American Funds Service Company
(Please write to the address nearest you.)
P.O. Box 25065
Santa Ana, CA 92799-5065
P.O. Box 659522
San Antonio, TX 78265-9522
P.O. Box 6007
Indianapolis, IN 46206-6007
P.O. Box 2280
Norfolk, VA 23501-2280
Counsel
Paul, Hastings, Janofsky & Walker LLP
515 South Flower Street
Los Angeles, CA 90071-2228
Independent registered public accounting firm
Deloitte & Touche LLP
695 Town Center Drive
Suite 1200
Costa Mesa, CA 92626-7188
Principal underwriter
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, CA 90071-1406
There are several ways to invest in Fundamental Investors. Class A shares are subject to a 5.75% maximum up-front sales charge that declines for accounts (and aggregated investments) of $25,000 or more and is eliminated for purchases of $1 million or more. Other share classes, which are generally not available for certain employer-sponsored retirement plans, have no up-front sales charges but are subject to additional annual expenses and fees. Annual expenses for Class B shares were 0.77 percentage points higher than for Class A shares; Class B shares convert to Class A shares after eight years of ownership. If redeemed within six years, Class B shares may also be subject to a contingent deferred sales charge (“CDSC”) of up to 5% that declines over time. Class C shares were subject to annual expenses 0.83 percentage points higher than those for Class A shares and a 1% CDSC if redeemed within the first year after purchase. Class C shares convert to Class F shares after 10 years. Class F shares, which are available only through certain fee-based programs offered by broker-dealer firms and registered investment advisers, had the same annual expenses as did Class A shares, and an annual asset-based fee charged by the sponsoring firm. Expenses are deducted from income earned by the fund. As a result, dividends and investment results will differ for each share class.
Investors should carefully consider the investment objectives, risks, charges and expenses of the American Funds. This and other important information is contained in the fund’s prospectus, which can be obtained from your financial adviser and should be read carefully before investing. You may also call American Funds Service Company (AFS) at 800/421-0180 or visit the American Funds website at americanfunds.com.
“American Funds Proxy Voting Guidelines” — which describes how we vote proxies relating to portfolio securities — is available free of charge on the U.S. Securities and Exchange Commission (SEC) website at sec.gov, on the American Funds website or upon request by calling AFS. The fund files its proxy voting record with the SEC for the 12 months ended June 30 by August 31. The report also is available on the SEC and American Funds websites.
A complete December 31, 2006, portfolio of Fundamental Investors’ investments is available free of charge by calling AFS or visiting the SEC website (where it is part of Form N-CSR).
Fundamental Investors files a complete list of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. This filing is available free of charge on the SEC website. You may also review or, for a fee, copy this filing at the SEC’s Public Reference Room in Washington, D.C. (800/SEC-0330). Additionally, the list of portfolio holdings also is available by calling AFS.
This report is for the information of shareholders of Fundamental Investors, but it also may be used as sales literature when preceded or accompanied by the current prospectus, which gives details about charges, expenses, investment objectives and operating policies of the fund. If used as sales material after March 31, 2007, this report must be accompanied by an American Funds statistical update for the most recently completed calendar quarter.
[logo - American Funds®]
The right choice for the long term®
What makes American Funds different?
For 75 years, we have followed a consistent philosophy that we firmly believe is in our investors’ best interests. The range of opportunities offered by our family of just 30 carefully conceived, broadly diversified funds has attracted over 40 million shareholder accounts.
Our unique combination of strengths includes these five factors:
• A long-term, value-oriented approach
We seek to buy securities at reasonable prices relative to their prospects and hold them for the long term.
• An extensive global research effort
Our investment professionals travel the world to find the best investment opportunities and gain a comprehensive understanding of companies and markets.
• The multiple portfolio counselor system
Our unique method of portfolio management, developed nearly 50 years ago, blends teamwork with individual accountability and has provided American Funds with a sustainable method of achieving fund objectives.
• Experienced investment professionals
American Funds portfolio counselors have an average of 24 years of investment experience, providing a wealth of knowledge and experience that few organizations have.
• A commitment to low operating expenses
The American Funds provide exceptional value for shareholders, with operating expenses that are among the lowest in the mutual fund industry.
American Funds span a range of investment objectives
• Growth funds
Emphasis on long-term growth through stocks
AMCAP Fund®
EuroPacific Growth Fund®
The Growth Fund of America®
The New Economy Fund®
New Perspective Fund®
New World FundSM
SMALLCAP World Fund®
• Growth-and-income funds
Emphasis on long-term growth and dividends through stocks
American Mutual Fund®
Capital World Growth and Income FundSM
> Fundamental InvestorsSM
The Investment Company of America®
Washington Mutual Investors FundSM
• Equity-income funds
Emphasis on above-average income and growth through stocks and/or bonds
Capital Income Builder®
The Income Fund of America®
• Balanced fund
Emphasis on long-term growth and current income through stocks and bonds
American Balanced Fund®
• Bond funds
Emphasis on current income through bonds
American High-Income TrustSM
The Bond Fund of AmericaSM
Capital World Bond Fund®
Intermediate Bond Fund of America®
Short-Term Bond Fund of AmericaSM
U.S. Government Securities FundSM
• Tax-exempt bond funds
Emphasis on tax-free current income through municipal bonds
American High-Income Municipal Bond Fund®
Limited Term Tax-Exempt Bond Fund of AmericaSM
The Tax-Exempt Bond Fund of America®
State-specific tax-exempt funds
The Tax-Exempt Fund of California®
The Tax-Exempt Fund of Maryland®
The Tax-Exempt Fund of Virginia®
• Money market funds
The Cash Management Trust of America®
The Tax-Exempt Money Fund of AmericaSM
The U.S. Treasury Money Fund of AmericaSM
• American Funds Target Date Retirement SeriesSM
The Capital Group Companies
American Funds Capital Research and Management Capital International Capital Guardian Capital Bank and Trust
Lit. No. MFGEAR-910-0207P
Litho in USA KBDA/L/8056-S7513
Printed on recycled paper
The Registrant has adopted a Code of Ethics that applies to its Principal Executive Officer and Principal Financial Officer. The Registrant undertakes to provide to any person without charge, upon request, a copy of the Code of Ethics. Such request can be made to American Funds Service Company at 800/421-0180 or to the Secretary of the Registrant, One Market, Steuart Tower, San Francisco, California 94120.
The Registrant’s board has determined that Leonade D. Jones, a member of the Registrant’s audit committee, is an “audit committee financial expert” and "independent," as such terms are defined in this Item. This designation will not increase the designee’s duties, obligations or liability as compared to his or her duties, obligations and liability as a member of the audit committee and of the board, nor will it reduce the responsibility of the other audit committee members. There may be other individuals who, through education or experience, would qualify as "audit committee financial experts" if the board had designated them as such. Most importantly, the board believes each member of the audit committee contributes significantly to the effective oversight of the Registrant’s financial statements and condition.
The Registrant’s Audit Committee will pre-approve all audit and permissible non-audit services that the Committee considers compatible with maintaining the auditors’ independence. The pre-approval requirement will extend to all non-audit services provided to the Registrant, the investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Registrant, if the engagement relates directly to the operations and financial reporting of the Registrant. The Committee will not delegate its responsibility to pre-approve these services to the investment adviser. The Committee may delegate to one or more Committee members the authority to review and pre-approve audit and permissible non-audit services. Actions taken under any such delegation will be reported to the full Committee at its next meeting. The pre-approval requirement is waived with respect to non-audit services if certain conditions are met. The pre-approval requirement was not waived for any of the non-audit services listed above provided to the Registrant, adviser, and affiliates.
Aggregate non-audit fees paid to the Registrant’s auditors, including fees for all services billed to the Registrant and the adviser and affiliates that provide ongoing services to the Registrant were $925,000 for fiscal year 2005 and $1,008,000 for fiscal year 2006. The non-audit services represented by these amounts were brought to the attention of the Committee and considered to be compatible with maintaining the auditors’ independence.
Not applicable to this Registrant, insofar as the Registrant is not a listed issuer as defined in Rule 10A-3 under the Securities Exchange Act of 1934.
ITEM 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Not applicable to this Registrant, insofar as the Registrant is not a closed-end management investment company.
Not applicable to this Registrant, insofar as the Registrant is not a closed-end management investment company.
ITEM 9 - Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers
Not applicable to this Registrant, insofar as the Registrant is not a closed-end management investment company.
There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s board of directors since the Registrant last submitted a proxy statement to its shareholders. The procedures are as follows. The Registrant has a nominating committee comprised solely of persons who are not considered ‘‘interested persons’’ of the Registrant within the meaning of the Investment Company Act of 1940, as amended. The committee periodically reviews such issues as the Board’s composition, responsibilities, committees, compensation and other relevant issues, and recommends any appropriate changes to the full board of directors. While the committee normally is able to identify from its own resources an ample number of qualified candidates, it will consider shareholder suggestions of persons to be considered as nominees to fill future vacancies on the board. Such suggestions must be sent in writing to the nominating committee of the Registrant, c/o the Registrant’s Secretary, and must be accompanied by complete biographical and occupational data on the prospective nominee, along with a written consent of the prospective nominee for consideration of his or her name by the nominating committee.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
