Washington, D.C. 20549
P.O. Box 7650, One Market, Steuart Tower
Patrick F. Quan
P.O. Box 7650, One Market, Steuart Tower
[Logo - American Funds®]
The right choice for the long term®
Fundamental Investors
The value of multiple perspectives
[photo of six viewfinders overlooking the Hudson River - the Statue of Liberty in the distance]
Annual report for the year ended December 31, 2005
Fundamental InvestorsSM seeks long-term growth of capital and income primarily through investments in common stocks.
This fund is one of the 29 American Funds. The organization ranks among the nation’s three largest mutual fund families. For nearly 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.
Table of contents | Page |
| |
Letter to shareholders | 1 |
The value of a long-term perspective | 6 |
The value of multiple perspectives | 8 |
Summary investment portfolio | 14 |
Financial statements | 18 |
Directors and officers | 35 |
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 the most 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 6 for Class A share average annual total returns with relevant sales charges deducted. Results for other share classes can be found on page 5. 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 the waiver 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 page 27 for details.
The fund’s 30-day yield for Class A shares as of January 31, 2006, calculated in accordance with the Securities and Exchange Commission formula, was 1.25%, which reflects a fee waiver (1.22% without the fee waiver). The fund’s distribution rate for Class A shares as of that date was 1.48%. 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.
Fellow shareholders:
[close-up photo of three viewfinders overlooking the Hudson River]
For the fiscal year ended December 31, 2005, Fundamental Investors delivered superior results to shareholders.
The fund’s 11.7% rise more than doubled the 4.9% increase recorded by the unmanaged Standard & Poor’s 500 Composite Index, a broad measure of U.S. stocks, while considerably outpacing the 6.3% mark turned in by the Lipper Large-Cap Value Funds Index, which measures funds that invest in companies that are undervalued within their industries.
The fund’s 12-month return is representative of the advantage it has enjoyed over its two most relevant benchmarks for each of the longer, more meaningful time periods shown in the table below.
While the majority of the fund’s return came from capital appreciation, our continuing commitment to providing shareholders with quarterly income also contributed. For the 12 months, Fundamental Investors made distributions totaling 59 cents a share — an income return of 1.84% for those who reinvested their dividends.
Markets idle, then climb
In the United States, doubts about the durability of economic growth, concerns about rising interest rates and inflationary worries borne of escalating energy prices kept markets relatively flat for the first half of 2005. But even as the country absorbed the twin blows of hurricanes Rita and Katrina, solid corporate results and profit growth — along with favorable GDP numbers — led markets higher in the final two quarters.
[Begin Sidebar]
Results at a glance
Returns for periods ended December 31, 2005, with all distributions reinvested.
| | | | Average annual total returns | |
| | | | | | 5 years | | | 10 years | | | Lifetime1 | |
| | | | | | | | | | | | | |
Fundamental Investors | | | +11.7 | % | | +4.6 | % | | +11.2 | % | | +14.1 | % |
Lipper Large-Cap Value Funds Index | | | +6.3 | | | +2.3 | | | +8.8 | | | +12.8 | |
Lipper Large-Cap Core Funds Index | | | +5.7 | | | -0.4 | | | +7.9 | | | —2 | |
Standard & Poor’s 500 Composite Index3 | | | +4.9 | | | +0.5 | | | +9.1 | | | +13.1 | |
1Since Capital Research and Management Company began managing the fund on August 1, 1978.
2Index began on December 29, 1978.
3Unmanaged.
[End Sidebar]
Outside the United States, returns for most markets eclipsed their U.S. counterpart. U.S.-based investors in non-U.S. markets benefited, though the dollar’s strengthening against most major currencies trimmed gains. With 26% of assets invested abroad, Fundamental Investors was positively affected.
We believe Fundamental Investors’ ability to invest up to 30% of its holdings outside the United States and Canada significantly contributes to its success. It expands our universe of investment choices, allowing us to seek out the best opportunities throughout the world.
Strength from several sectors
While many areas of the fund’s portfolio supported results, it drew particular strength from a handful of sectors.
First among them was energy, a concentration that has helped fuel Fundamental Investors’ above-average results over the past few years. Limited spare capacity across the entire energy complex, along with supply disruptions caused by the Gulf Coast hurricanes, kept energy markets focused on the ongoing challenge of meeting growing global demand. As a result, oil and gas prices surged, and with them the stock values of most firms within the sector. Every energy company the fund held for the full 12 months rose. Among large positions recording the biggest gains were Burlington Resources (+98.2%), LUKOIL (+92.7%) and Suncor Energy (+78.5%), Fundamental Investors’ largest holding. Exxon Mobil (+9.6%) and Chevron (+8.1%) appreciated more modestly.
Another area turning in outstanding results was metals and mining, as commodity prices remained high due to a combination of robust demand from the developing world and supply growth that was lower than expected due to plant failures and shortages in mining equipment and skilled personnel. Most of the fund’s holdings saw strong gains in their stock prices. Noteworthy examples included Brazil’s Rio Tinto (+55.3%), Freeport McMoRan Copper & Gold (+40.7%) and BHP Billiton (+39.3%) of Australia. Alcoa bucked the upward trend, slipping 5.9%.
Technology investments also benefited the fund. Tech stocks did not move as a group, so good stock selection was key, and evident in the varied group of fund holdings recording sizeable increases in share price. Semiconductor manufacturers Intersil (+48.6%) and Texas Instruments (+30.3%), testing equipment maker Agilent (+38.1%) and hardware producer Motorola (+31.3%) all fared well, though IBM (-16.6%) and Microsoft (-2.1%) lost ground.
On the downside, the fund’s media holdings finished in negative territory as tepid growth prospects took their toll on valuations and share prices. News Corp. (-16.7%), Disney (-13.8%) and Time Warner (-10.3%) all suffered.
A shifting profile
The fiscal year saw some significant shifts in the fund’s portfolio.
We increased our Japanese holdings on the belief that the country’s long-awaited economic turnaround had staying power. Relying on fundamental research, we found reasonably valued companies across a variety of industries and believe our selections will benefit from an improving Japanese economy.
We also reduced or eliminated our holdings in a number of large European telecommunications companies. Believing that increased mergers and acquisitions activity would occur within this sector, we sold some of the potential acquirers that we were concerned might overpay for assets. At the same time, we trimmed our positions in a number of possible targets whose share prices had appreciated on takeover speculation.
[Begin Sidebar]
Fundamental Investors’ total return year by year (ending December 31)
| | Capital return | | Income return | | Total return | |
| | | | | | | | | | |
1996 | | | +18.2 | % | | +1.8 | % | | +20.0 | % |
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 | |
| | | | | | | | | | |
10-year average annual total return | | | | | | | | | +11.2 | % |
10-year cumulative total return | | | | | | | | | +189.3 | |
Lifetime cumulative total return (since 8/1/78) | | | | | | | | | +3,594.0 | |
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]
Invaluable diversity
The kinds of shifts described above are part of the ongoing process by which we build and manage the fund’s portfolio. Paying careful attention to risk, we seek to create a diversified mix of assets that we hope will deliver consistent long-term results to shareholders.
Central to that effort is the method of portfolio management we employ. Known as the multiple portfolio counselor system, it is designed to leverage the diverse investment philosophies and perspectives of those who manage the fund. To learn more about their backgrounds and styles, and to get a better understanding of how they evaluate potential investments, please turn to the feature “The value of multiple perspectives,” that begins on page 8.
Looking ahead
We are cautiously optimistic about the coming year. The global economy appears fundamentally sound, but we believe its continued health is largely dependent on continuing expansion, particularly in the developing world. We are also paying close attention to interest rates, believing that too many additional increases could hamper markets. The possibility of rising oil prices likewise remains a concern.
The origin of Fundamental Investors’ recent and long-term success lies in our research-driven, company-by-company approach to investing. In the coming year, we will not waver from that approach as we seek out the best opportunities for the fund.
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 8, 2006
For current information about the fund, visit americanfunds.com.
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 the most current information and month-end results, visit americanfunds.com.
Average annual total returns for periods ended December 31, 2005:
| | 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 | | | +5.84 | % | | +3.51 | % | | +3.83 | % |
Not reflecting CDSC | | | +10.84 | % | | +3.85 | % | | +3.97 | % |
| | | | | | | | | | |
Class C shares— first sold 3/15/01 | | | | | | | | | | |
Reflecting CDSC, maximum of 1%, payable only if | | | | | | | | | | |
shares are sold within one year of purchase | | | +9.76 | % | | — | | | +5.52 | % |
Not reflecting CDSC | | | +10.76 | % | | — | | | +5.52 | % |
| | | | | | | | | | |
Class F shares1— first sold 3/15/01 | | | | | | | | | | |
Not reflecting annual asset-based fee charged | | | | | | | | | | |
by sponsoring firm | | | +11.64 | % | | — | | | +6.36 | % |
| | | | | | | | | | |
Class 529-A shares2— first sold 2/15/02 | | | | | | | | | | |
Reflecting 5.75% maximum sales charge | | | +5.18 | % | | — | | | +7.85 | % |
Not reflecting maximum sales charge | | | +11.60 | % | | — | | | +9.51 | % |
| | | | | | | | | | |
Class 529-B shares2— first sold 2/19/02 | | | | | | | | | | |
Reflecting applicable CDSC, maximum of 5%, payable | | | | | | | | | | |
only if shares are sold within six years of purchase | | | +5.66 | % | | — | | | +8.45 | % |
Not reflecting CDSC | | | +10.66 | % | | — | | | +9.06 | % |
| | | | | | | | | | |
Class 529-C shares2— first sold 2/15/02 | | | | | | | | | | |
Reflecting CDSC, maximum of 1%, payable only if | | | | | | | | | | |
shares are sold within one year of purchase | | | +9.68 | % | | — | | | +8.59 | % |
Not reflecting CDSC | | | +10.68 | % | | — | | | +8.59 | % |
| | | | | | | | | | |
Class 529-E shares1,2— first sold 3/7/02 | | | +11.24 | % | | — | | | +7.70 | % |
| | | | | | | | | | |
Class 529-F shares1,2— first sold 9/23/02 | | | | | | | | | | |
Not reflecting annual asset-based fee charged | | | | | | | | | | |
by sponsoring firm | | | +11.68 | % | | — | | | +19.02 | % |
The fund’s investment adviser waived 5% of its management fees from September 1, 2004, through March 31, 2005, and increased the waiver 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 page 27 for details.
1 These shares are sold without any initial or contingent deferred sales charge.
2 Results shown do not reflect the $10 initial account setup fee and an annual $10 account maintenance fee.
The value of a long-term perspective
How a $10,000 investment has grown
The chart and accompanying table 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, 2005. The chart also shows how Standard & Poor’s 500 Composite Index and the Lipper Large-Cap Value Funds Index 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 the most 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 $57,735 and reinvested capital gain distributions of $130,729.
4 Includes reinvested capital gain distributions of $73,002 but does not reflect income dividends of $32,597 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, does not reflect sales charges, commissions or expenses and cannot be invested in directly.
Average annual total returns based on a $1,000 investment
(for periods ended December 31, 2005)*
Class A shares | |
1 year | +5.26% |
5 years | +3.42% |
10 years | +10.55% |
*Assumes reinvestment of all distributions and payment of the maximum 5.75% sales charge.
The fund’s investment adviser waived 5% of its management fees from September 1, 2004, through March 31, 2005, and increased the waiver 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 page 27 for details.
[begin mountain chart]
| | | Fundamental Investorswith dividends reinvested1,3 | Fundamental Investors not including dividends1,4 | | | S&P 500 with dividends reinvested | | | Lipper Large-Cap Value Funds Index with dividends reinvested | | | Consumer Price Index (inflation)6 |
Initial Investment | 7/31/1978 | $9,425 | $9,425 | | | $10,000 | | | $ 10,000 | | | $10,000 |
19785 | High | 11-Sep | 10,000 | 9,919 | High | 12-Sep | 10,670 | High | 31-Aug | 10,377 | Low | 31-Jul | 10,000 |
| Low | 14-Nov | 8,667 | 8,596 | Low | 14-Nov | 9,306 | Low | 31-Oct | 9,281 | High | 29-Dec | 10,304 |
| Close | 29-Dec | 9,155 | 8,947 | Close | 29-Dec | 9,762 | Close | 29-Dec | 9,669 | Close | 29-Dec | 10,304 |
1979 | Low | 27-Feb | 9,086 | 8,880 | Low | 27-Feb | 9,807 | Low | 28-Feb | 9,757 | Low | 31-Jan | 10,396 |
| High | 5-Oct | 10,823 | 10,310 | High | 5-Oct | 11,769 | High | 30-Sep | 11,676 | High | 31-Dec | 11,674 |
| Close | 31-Dec | 10,556 | 9,892 | Close | 31-Dec | 11,579 | Close | 31-Dec | 11,667 | Close | 31-Dec | 11,674 |
1980 | Low | 21-Apr | 9,625 | 8,907 | Low | 27-Mar | 10,627 | Low | 31-Mar | 10,929 | Low | 31-Jan | 11,842 |
| High | 20-Nov | 13,131 | 11,876 | High | 28-Nov | 15,813 | High | 30-Nov | 14,925 | High | 31-Dec | 13,135 |
| Close | 31-Dec | 12,807 | 11,390 | Close | 31-Dec | 15,336 | Close | 31-Dec | 14,658 | Close | 31-Dec | 13,135 |
1981 | High | 27-Apr | 13,986 | 12,308 | High | 6-Jan | 15,603 | High | 31-May | 15,457 | Low | 31-Jan | 13,242 |
| Low | 25-Sep | 11,906 | 10,243 | Low | 25-Sep | 13,172 | Low | 30-Sep | 13,965 | High | 31-Dec | 14,307 |
| Close | 31-Dec | 12,654 | 10,688 | Close | 31-Dec | 14,581 | Close | 31-Dec | 14,879 | Close | 31-Dec | 14,307 |
1982 | Low | 22-Jan | 10,593 | 8,947 | Low | 12-Aug | 12,625 | Low | 31-Jul | 14,113 | Low | 31-Jan | 14,353 |
| High | 7-Dec | 17,346 | 13,833 | High | 9-Nov | 17,877 | High | 31-Dec | 18,622 | High | 31-Oct | 14,947 |
| Close | 31-Dec | 16,957 | 13,522 | Close | 31-Dec | 17,723 | Close | 31-Dec | 18,622 | Close | 31-Dec | 14,855 |
1983 | Low | 3-Jan | 16,636 | 13,266 | Low | 3-Jan | 17,433 | Low | 31-Jan | 19,113 | Low | 31-Jan | 14,886 |
| High | 10-Oct | 21,599 | 16,721 | High | 10-Oct | 22,491 | High | 30-Nov | 23,082 | High | 30-Dec | 15,419 |
| Close | 30-Dec | 21,389 | 16,424 | Close | 30-Dec | 21,721 | Close | 30-Dec | 22,968 | Close | 30-Dec | 15,419 |
1984 | High | 9-Jan | 22,004 | 16,896 | Low | 24-Jul | 19,933 | Low | 31-May | 21,001 | Low | 31-Jan | 15,510 |
| Low | 24-Jul | 18,549 | 13,980 | High | 6-Nov | 23,337 | High | 31-Dec | 24,352 | High | 31-Oct | 16,027 |
| Close | 31-Dec | 22,621 | 16,759 | Close | 31-Dec | 23,083 | Close | 31-Dec | 24,352 | Close | 31-Dec | 16,027 |
1985 | Low | 1-May | 22,882 | 16,819 | Low | 4-Jan | 22,592 | Low | 31-Jan | 25,997 | Low | 31-Jan | 16,058 |
| High | 16-Dec | 29,736 | 21,355 | High | 16-Dec | 30,417 | High | 31-Dec | 31,784 | High | 31-Dec | 16,636 |
| Close | 31-Dec | 29,448 | 21,148 | Close | 31-Dec | 30,407 | Close | 31-Dec | 31,784 | Close | 31-Dec | 16,636 |
1986 | Low | 14-Feb | 31,766 | 22,665 | Low | 22-Jan | 29,286 | Low | 31-Jan | 32,353 | Low | 30-Apr | 16,530 |
| High | 4-Sep | 36,571 | 25,757 | High | 2-Dec | 37,737 | High | 31-Aug | 38,779 | High | 31-Dec | 16,819 |
| Close | 31-Dec | 35,941 | 25,151 | Close | 31-Dec | 36,082 | Close | 31-Dec | 37,754 | Close | 31-Dec | 16,819 |
1987 | High | 25-Aug | 50,132 | 34,478 | High | 25-Aug | 51,060 | High | 31-Aug | 49,169 | Low | 31-Jan | 16,925 |
| Low | 4-Dec | 33,691 | 23,002 | Low | 4-Dec | 34,314 | Low | 30-Nov | 36,275 | High | 30-Nov | 17,565 |
| Close | 31-Dec | 37,295 | 25,463 | Close | 31-Dec | 37,977 | Close | 31-Dec | 38,736 | Close | 31-Dec | 17,565 |
1988 | Low | 20-Jan | 36,464 | 24,895 | Low | 20-Jan | 37,293 | Low | 31-Jan | 40,556 | Low | 31-Jan | 17,610 |
| High | 5-Jul | 43,076 | 28,988 | High | 21-Oct | 44,800 | High | 31-Oct | 44,818 | High | 30-Dec | 18,341 |
| Close | 30-Dec | 43,246 | 28,561 | Close | 30-Dec | 44,267 | Close | 30-Dec | 44,776 | Close | 30-Dec | 18,341 |
1989 | Low | 3-Jan | 43,068 | 28,443 | Low | 3-Jan | 43,883 | Low | 28-Feb | 46,751 | Low | 31-Jan | 18,432 |
| High | 9-Oct | 58,786 | 38,138 | High | 9-Oct | 58,837 | High | 29-Dec | 56,851 | High | 29-Dec | 19,193 |
| Close | 29-Dec | 55,597 | 35,438 | Close | 29-Dec | 58,269 | Close | 29-Dec | 56,851 | Close | 29-Dec | 19,193 |
1990 | High | 4-Jun | 60,265 | 37,947 | High | 16-Jul | 61,897 | High | 31-May | 58,357 | Low | 31-Jan | 19,391 |
| Low | 11-Oct | 46,988 | 29,390 | Low | 11-Oct | 50,026 | Low | 31-Oct | 49,728 | High | 30-Nov | 20,365 |
| Close | 31-Dec | 52,130 | 32,180 | Close | 31-Dec | 56,457 | Close | 31-Dec | 54,547 | Close | 31-Dec | 20,365 |
1991 | Low | 9-Jan | 50,201 | 30,989 | Low | 9-Jan | 53,255 | Low | 31-Jan | 57,401 | Low | 31-Jan | 20,487 |
| High | 31-Dec | 67,947 | 40,940 | High | 31-Dec | 73,620 | High | 31-Dec | 71,251 | High | 31-Dec | 20,989 |
| Close | 31-Dec | 67,947 | 40,940 | Close | 31-Dec | 73,620 | Close | 31-Dec | 71,251 | Close | 31-Dec | 20,989 |
1992 | Low | 8-Apr | 66,472 | 39,828 | Low | 8-Apr | 70,130 | Low | 31-Mar | 70,391 | Low | 31-Jan | 21,020 |
| High | 12-Nov | 72,487 | 42,938 | High | 18-Dec | 80,063 | High | 31-Dec | 77,417 | High | 30-Nov | 21,613 |
| Close | 31-Dec | 74,871 | 44,059 | Close | 31-Dec | 79,222 | Close | 31-Dec | 77,417 | Close | 31-Dec | 21,598 |
1993 | Low | 8-Jan | 74,615 | 43,908 | Low | 8-Jan | 78,011 | Low | 31-Jan | 78,305 | Low | 31-Jan | 21,705 |
| High | 2-Nov | 88,379 | 51,169 | High | 28-Dec | 87,854 | High | 31-Dec | 87,686 | High | 30-Nov | 22,192 |
| Close | 31-Dec | 88,466 | 50,884 | Close | 31-Dec | 87,189 | Close | 31-Dec | 87,686 | Close | 31-Dec | 22,192 |
1994 | High | 2-Feb | 91,634 | 52,706 | High | 2-Feb | 90,223 | Low | 20-Apr | 83,827 | Low | 31-Jan | 22,253 |
| Low | 8-Dec | 86,773 | 48,708 | Low | 4-Apr | 82,600 | High | 31-Aug | 90,912 | High | 30-Nov | 22,785 |
| Close | 30-Dec | 89,641 | 50,319 | Close | 30-Dec | 88,336 | Close | 30-Dec | 87,848 | Close | 30-Dec | 22,785 |
1995 | Low | 3-Jan | 89,539 | 50,261 | Low | 3-Jan | 88,305 | Low | 5-Jan | 87,982 | Low | 31-Jan | 22,877 |
| High | 29-Nov | 119,498 | 66,056 | High | 13-Dec | 122,408 | High | 6-Dec | 117,523 | High | 31-Oct | 23,394 |
| Close | 29-Dec | 120,306 | 66,210 | Close | 29-Dec | 121,491 | Close | 29-Dec | 117,051 | Close | 29-Dec | 23,364 |
1996 | Low | 10-Jan | 117,715 | 64,784 | Low | 10-Jan | 118,049 | Low | 10-Jan | 114,077 | Low | 31-Jan | 23,501 |
| High | 26-Nov | 145,602 | 79,119 | High | 25-Nov | 152,084 | High | 29-Nov | 144,146 | High | 30-Nov | 24,140 |
| Close | 31-Dec | 144,352 | 78,143 | Close | 31-Dec | 149,367 | Close | 31-Dec | 141,708 | Close | 31-Dec | 24,140 |
1997 | Low | 11-Apr | 144,443 | 77,891 | Low | 2-Jan | 148,615 | Low | 2-Jan | 140,864 | Low | 31-Jan | 24,216 |
| High | 7-Oct | 189,427 | 101,423 | High | 5-Dec | 201,641 | High | 5-Dec | 185,194 | High | 31-Oct | 24,597 |
| Close | 31-Dec | 182,855 | 97,513 | Close | 31-Dec | 199,183 | Close | 31-Dec | 182,058 | Close | 31-Dec | 24,551 |
1998 | High | 17-Jul | 212,584 | 112,606 | Low | 9-Jan | 190,410 | Low | 8-Oct | 173,949 | Low | 31-Jan | 24,597 |
| Low | 8-Oct | 173,534 | 91,600 | High | 29-Dec | 258,425 | High | 29-Dec | 216,227 | High | 31-Oct | 24,962 |
| Close | 31-Dec | 213,421 | 112,292 | Close | 31-Dec | 256,100 | Close | 31-Dec | 215,266 | Close | 31-Dec | 24,947 |
1999 | Low | 14-Jan | 211,060 | 111,050 | Low | 14-Jan | 252,550 | Low | 10-Feb | 211,538 | Low | 31-Jan | 25,008 |
| High | 10-Dec | 258,554 | 134,742 | High | 31-Dec | 309,980 | High | 16-Jul | 245,265 | High | 30-Nov | 25,616 |
| Close | 31-Dec | 265,882 | 138,151 | Close | 31-Dec | 309,980 | Close | 31-Dec | 238,470 | Close | 31-Dec | 25,616 |
2000 | High | 1-Sep | 293,957 | 151,363 | High | 24-Mar | 322,882 | Low | 25-Feb | 213,261 | Low | 31-Jan | 25,693 |
| Low | 21-Dec | 266,380 | 136,743 | Low | 20-Dec | 269,684 | High | 1-Sep | 246,820 | High | 30-Nov | 26,499 |
| Close | 29-Dec | 277,235 | 142,315 | Close | 29-Dec | 281,766 | Close | 29-Dec | 243,131 | Close | 29-Dec | 26,484 |
2001 | High | 1-Feb | 287,822 | 147,750 | High | 30-Jan | 293,173 | High | 21-May | 247,162 | Low | 31-Jan | 26,651 |
| Low | 21-Sep | 211,970 | 107,718 | Low | 21-Sep | 207,919 | Low | 21-Sep | 190,741 | High | 30-Sep | 27,139 |
| Close | 31-Dec | 250,761 | 126,959 | Close | 31-Dec | 248,303 | Close | 31-Dec | 222,282 | Close | 31-Dec | 26,895 |
2002 | High | 19-Mar | 260,698 | 131,491 | High | 4-Jan | 253,587 | High | 19-Mar | 230,125 | Low | 31-Jan | 26,956 |
| Low | 9-Oct | 182,355 | 91,253 | Low | 9-Oct | 169,983 | Low | 9-Oct | 154,261 | High | 31-Oct | 27,595 |
| Close | 31-Dec | 207,271 | 102,816 | Close | 31-Dec | 193,447 | Close | 31-Dec | 178,544 | Close | 31-Dec | 27,534 |
2003 | Low | 12-Mar | 186,058 | 91,854 | Low | 11-Mar | 176,642 | Low | 11-Mar | 161,368 | Low | 31-Jan | 27,656 |
| High | 31-Dec | 273,523 | 133,434 | High | 31-Dec | 248,903 | High | 31-Dec | 228,532 | High | 30-Sep | 28,189 |
| Close | 31-Dec | 273,523 | 133,434 | Close | 31-Dec | 248,903 | Close | 31-Dec | 228,532 | Close | 31-Dec | 28,052 |
2004 | Low | 17-May | 264,555 | 128,624 | Low | 12-Aug | 240,252 | Low | 12-Aug | 223,845 | Low | 31-Jan | 28,189 |
| High | 30-Dec | 311,756 | 149,252 | High | 30-Dec | 275,924 | High | 30-Dec | 256,244 | High | 30-Nov | 29,072 |
| Close | 31-Dec | 311,563 | 149,159 | Close | 31-Dec | 275,970 | Close | 31-Dec | 255,944 | Close | 31-Dec | 28,965 |
2005 | Low | 28-Apr | 297,315 | 141,898 | Low | 20-Apr | 260,187 | Low | 20-Apr | 244,871 | Low | 31-Jan | 29,026 |
| High | 14-Dec | 352,458 | 167,197 | High | 14-Dec | 294,796 | High | 14-Dec | 275,904 | High | tk | tk |
| Close | 30-Dec | 347,960 | 163,728 | Close | 30-Dec | 289,511 | Close | 30-Dec | 271,969 | Close | 30-Dec | 29,954 |
[end mountain chart]
Year ended | | | | | | | | |
December 31 | 19785 | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 |
| | | | | | | | |
Capital value | | | | | | | | |
Dividends in cash | $216 | 405 | 553 | 580 | 634 | 594 | 556 | 582 |
| | | | | | | | |
Value at year-end1 | $8.9 | 9.9 | 11.4 | 10.7 | 13.5 | 16.4 | 16.8 | 21.1 |
(in thousands) | | | | | | | | |
| | | | | | | | |
Total value | | | | | | | | |
Dividends reinvested | $217 | 421 | 603 | 665 | 768 | 755 | 734 | 795 |
| | | | | | | | |
Value at year-end1 | $9.2 | 10.6 | 12.8 | 12.7 | 17.0 | 21.4 | 22.6 | 29.4 |
(in thousands) | | | | | | | | |
| | | | | | | | |
Total return | (8.4)% | 15.3 | 21.3 | (1.2) | 34.0 | 26.1 | 5.8 | 30.2 |
| | | | | | | | |
Year ended | | | | | | | | |
December 31 | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 |
| | | | | | | | |
Capital value | | | | | | | | |
Dividends in cash | 636 | 717 | 895 | 1,225 | 1,058 | 904 | 988 | 1,084 |
| | | | | | | | |
Value at year-end1 | 25.2 | 25.5 | 28.6 | 35.4 | 32.2 | 40.9 | 44.1 | 50.9 |
(in thousands) | | | | | | | | |
| | | | | | | | |
Total value | | | | | | | | |
Dividends reinvested | 894 | 1,034 | 1,328 | 1,877 | 1,679 | 1,478 | 1,655 | 1,858 |
| | | | | | | | |
Value at year-end1 | 35.9 | 37.3 | 43.2 | 55.6 | 52.1 | 67.9 | 74.9 | 88.5 |
(in thousands) | | | | | | | | |
| | | | | | | | |
Total return | 22.0 | 3.8 | 16.0 | 28.6 | (6.2) | 30.3 | 10.2 | 18.2 |
| | | | | | | | |
Year ended | | | | | | | | |
December 31 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 |
| | | | | | | | |
Capital value | | | | | | | | |
Dividends in cash | 1,238 | 1,160 | 1,196 | 1,351 | 1,428 | 1,578 | 1,716 | 1,844 |
| | | | | | | | |
Value at year-end1 | 50.3 | 66.2 | 78.1 | 97.5 | 112.3 | 138.2 | 142.3 | 127.0 |
(in thousands) | | | | | | | | |
| | | | | | | | |
Total value | | | | | | | | |
Dividends reinvested | 2,171 | 2,082 | 2,187 | 2,511 | 2,691 | 3,013 | 3,319 | 3,611 |
| | | | | | | | |
Value at year-end1 | 89.6 | 120.3 | 144.4 | 182.9 | 213.4 | 265.9 | 277.2 | 250.8 |
(in thousands) | | | | | | | | |
| | | | | | | | |
Total return | 1.3 | 34.2 | 20.0 | 26.7 | 16.7 | 24.6 | 4.3 | (9.6) |
| | | | | | | | |
Year ended | | | | | | | | |
December 31 | 2002 | 2003 | 2004 | 2005 | | | | |
| | | | | | | | |
Capital value | | | | | | | | |
Dividends in cash | 2,289 | 1,850 | 2,590 | 2,729 | | | | |
| | | | | | | | |
Value at year-end1 | 102.8 | 133.4 | 149.2 | 163.74 | | | | |
(in thousands) | | | | | | | | |
| | | | | | | | |
Total value | | | | | | | | |
Dividends reinvested | 4,553 | 3,755 | 5,345 | 5,735 | | | | |
| | | | | | | | |
Value at year-end1 | 207.3 | 273.5 | 311.6 | 348.03 | | | | |
(in thousands) | | | | | | | | |
| | | | | | | | |
Total return | (17.3) | 32.0 | 13.9 | 11.7 | | | | |
Average annual total return for 27-1/2 years 13.8%1
[Begin Photo Caption]
[photo of Dina Perry]
Portfolio counselor: Dina Perry
Years of investment experience: 28*
Years with American Funds: 14*
*As of March 2006.
[End Photo Caption]
The value of multiple perspectives
The men and women who manage Fundamental Investors work within the multiple portfolio counselor system. This investment method divides the fund’s assets into portions, each of which is independently managed — according to the fund’s objective — by one of the fund’s portfolio counselors. Another portion, known as the research portfolio or “RP,” is managed by the fund’s analysts.
Thanks to this system, Fundamental Investors’ portfolio, rather than representing a solitary point of view or the compromises of a committee, reflects the diverse, sometimes contrasting styles and viewpoints of many people. Over the years, this diversity — of opinion and of holdings — has been critical to the fund’s success, providing shareholders with consistent long-term returns and helping to contain investment risk.
In the following pages, we learn more about the perspectives the investment professionals bring to the fund, and how they translate into a diverse group of holdings for Fundamental Investors.
[Begin Sidebar]
[photo of colored pencils in a clear pencil holder]
“Each of Fundamental Investors’ portfolio counselors brings something different to the table. Our varied backgrounds have shaped our individual investment approaches, which, in turn, influence the choices each of us makes for the fund.”
Dina Perry
[End Sidebar]
[Begin Photo Caption]
[photo of Jim Drasdo]
Portfolio counselor: Jim Drasdo
Years of investment experience: 34*
Years with American Funds: 29*
*As of March 2006.
[End Photo Caption]
Fundamental Investors benefits from the seasoned expertise and varied perspectives of five portfolio counselors: Jim Drasdo, Brady Enright, Mike Kerr, Ron Morrow and fund president, Dina Perry. For this discussion, Brady, Mike and Ron join Dina to talk about their respective backgrounds and approaches to investing. The group also sheds light on how the fund’s investment adviser provides them with the research, resources and access they need to find investments matched to their points of view. Also taking part is Terry McGuire, a research analyst and coordinator of Fundamental Investors’ research portfolio.
Diversity of experience and approach
Dina: When you look at Fundamental Investors’ portfolio counselors, I think it’s pretty clear that each of us brings something different to the table. Our varied backgrounds have shaped our individual investment approaches, which, in turn, influence the choices each of us makes for the fund. For instance, my background is as an economist, so when I think about investing I look first to the economy. I try to develop a view of how it might look in the coming months and years and how that will affect earnings and stock prices. Based on that view, I then look to areas of the market that I think will benefit from a certain economic outcome. This often means I have views that differ from the market consensus and end up focusing on sectors that may be out of favor.
Ron: In my case, I have more than three decades of experience as an analyst covering consumer products companies. Having seen bubbles, busts and numerous economic cycles, I’ve developed a solid understanding of that area of the market. Since I feel at home there, it’s probably fair to say that consumer goods companies are typically going to be a part of my portfolio.
Mike: I’m a geophysicist by training and for many years I worked in the oil and gas industry doing exploration. When I entered the investment business, I did so as an energy analyst so I have a well-developed understanding of that sector. In addition, I know the commodities area very well, as does Jim Drasdo, who was an analyst in the chemical industry for many years and is the fund’s longest tenured portfolio counselor.
Brady: I also was a research analyst, but rather than focusing on a specific industry, I was more of a generalist. This led me to look at things on the level of individual companies rather than taking a more macroeconomic approach. I think good ideas come in all shapes and sizes so I’m less inclined to rely on a view of something like interest rates or currency values, for instance, when thinking about potential investments.
Room for everyone
Mike: Fortunately, the multiple portfolio counselor system accommodates all our viewpoints, since it allows us to build our individual pieces of the portfolio according to our own preferences. Each of those pieces will look different, but taken together they’ll comprise a diverse group of holdings that serve the fund’s growth, income and risk management objectives.
Dina: Taking a more macroeconomic focus often leads me to invest in unloved and unwanted stocks as well as stocks that are, for whatever reason, undervalued. This group often includes cyclicals —companies whose fortunes are, to a large degree, linked to the ebb and flow of an economic cycle. One example would be agricultural equipment. I like to invest in these companies when the prices of commodities like corn and soybeans are low and global inventories have been drawn down. Such conditions generally weaken demand for equipment and keep stock prices depressed. But eventually, because of weather or forces within the market, supply will tighten and commodity prices will turn around. When they do, farm income will rise, farmers will buy more equipment and the stock prices of equipment manufacturers will generally benefit. Analyzing the data helps me determine the opportune time to invest.
[Begin Photo Caption]
[photo of Brady Enright]
Portfolio counselor: Brady Enright
Years of investment experience: 14*
Years with American Funds: 9*
*As of March 2006.
[End Photo Caption]
Ron: Given my background, it’s fair to say that my portion will typically exhibit a bias toward consumer stocks. But I also tend to create a portfolio that looks a little like a barbell, with concentrations in a couple of disparate sectors. For that nonconsumer concentration I tend to look for industries that are growing rapidly, often as a result of where we are in the economic cycle. I would point to energy and metals as areas that I, and a number of my colleagues, became interested in a couple of years ago and that benefited the fund. Also, while I’m certainly value-conscious, I’m not afraid to “pay up” for a good growth company, like Google, for instance, with a business plan and management that I like a lot.
Brady: When things start to change, that means opportunities are being created. So when it comes to thinking about building my piece of the portfolio, my antennae are up for situations where there seems to be change occurring. The market seems to value companies correctly when you’re talking about stable situations, but when things are in flux, there is a broader range of potential outcomes, so I try to dig in and understand those situations better. Because change takes place across the entire economy, I’m drawn to a variety of industries and companies; I tend to drill down and find businesses I feel that I can understand and that I believe have the potential to create a lot of value over time.
Mike: Given my area of expertise, energy and commodities figure prominently among my investments. But I think it’s very important to emphasize that even though each of us has, to one degree or another, formed opinions about the economy and developed an investment philosophy we’re trying to fulfill in our slices of the portfolio, we don’t blindly invest in sectors or according to a single investment thesis. We do fundamentals-based, bottom-up research on every potential investment. If there is an attractively valued, well-managed company that represents a long-term opportunity, we may go ahead and invest even if it doesn’t quite fit in with our overall outlook on the economy or a particular industry. I believe it’s these bottom-up investment ideas that are so crucial to our success.
Finding the right idea
Dina: When it comes to finding investment ideas, whether they’re the kind Mike mentioned or ones that more closely match our points of view, we all rely on the research capability of the fund’s investment professionals. Whether it’s conference calls, meetings, research reports or retreats, there are so many ways to come into contact with investment ideas, as well as information that helps strengthen our convictions.
[Begin Photo Caption]
[photo of Mike Kerr]
Portfolio counselor: Mike Kerr
Years of investment experience: 23*
Years with American Funds: 21*
*As of March 2006.
[End Photo Caption]
[Begin Sidebar]
[photo of a two stacks of books on a table]
“If our fundamentals-based, bottom-up research uncovers an attractively valued, well-managed company that represents a long-term opportunity, I may go ahead and invest even if it doesn’t quite fit in with my overall outlook on the economy or a particular industry.”
Mike Kerr
[End Sidebar]
Mike: Every single day you come into the office, there are multiple investment recommendations coming at you from our analysts around the world. Whenever one of them meets with a contact at one of the companies he or she covers, they issue what we call investment notes. So in relatively real time, we’re getting tidbits of information that help us stay on top of companies and industries. There’s also lots of one-on-one communication with analysts.
Terry: From an analyst’s standpoint, frequent communication helps us understand how portfolio counselors think about things and what they’re looking for at a given moment in time. For example, if a portfolio counselor tells me they have limited interest in technology right now, I’m not going to knock on their door recommending semiconductor stocks. Whereas other times they might say, “I’ve been thinking that we may be moving into a high inflationary environment and if you have companies that you believe would do well in that environment, please let me know.” I would then reflect on this and perhaps conclude that certain hotel stocks might suit their outlook.
[Begin Photo Caption]
[photo of Terry McGuire]
Research analyst and RP coordinator: Terry McGuire
Years of investment experience: 7*
Years with American Funds: 7*
*As of March 2006.
[End Photo Caption]
[Begin Sidebar]
Strengthened by six perspectives
The investment method employed by Fundamental Investors is known as the multiple portfolio counselor system. This approach divides assets into slices, each of which is independently managed — according to the fund’s objectives — by one of the fund’s investment professionals. Another slice, known as the research portfolio or “RP,” is managed by the fund’s research analysts.
Because each portfolio counselor oversees only a fraction of assets, he or she can be extremely selective when making investment choices. Generally, each is invested in only a few dozen companies at a time: thoroughly-researched opportunities matched to an individualized investment perspective.
When the six slices — those of Fundamental Investors’ five portfolio counselors plus the RP — are combined, the fund’s overall portfolio often comprises investments in nearly 200 different companies. Perhaps most importantly, these holdings represent the diverse perspectives and highest conviction ideas of the fund’s investment professionals. Historically, this has tended to smooth out the peaks and valleys of investing and helped deliver consistent long-term results for shareholders.
[Pie chart with six slices, one of which is separated from the pie. Portfolio counselors represent the five slices and Research portfolio, Global equity analysts, represent the one separated slice]
[End Sidebar]
[Begin Sidebar]
“Frequent communication helps research analysts understand how portfolio counselors think about things and what kinds of investment opportunities they may be looking for at a given moment in time.”
Terry McGuire
[photo of a jigsaw puzzle with one piece missing]
[End Sidebar]
[Begin Photo Caption]
[photo of Ron Morrow]
Portfolio counselor: Ron Morrow
Years of investment experience: 38*
Years with American Funds: 9*
*As of March 2006.
[End Photo Caption]
Getting to know companies
Ron: Obviously, we rely heavily on the recommendations and research of our analysts. But when rounding out our views, we’re also very fortunate in that we’re able to meet with top management from almost all the companies our analysts cover. By sitting down with the people who run the businesses and trying to understand what they are all about and whether they see opportunities the way we do, we gain insight into their thinking and formulate opinions that allow us to act with conviction. There’s no substitute for that. Moreover, Capital’s standing within the investment world often enables us to interview a company’s suppliers, customers and competitors as well. We’re sharpening our own analysis by getting the perspectives of others.
Brady: We also go on the road with analysts. A few months back, a group of my colleagues and I spent several days in Taiwan and Tokyo. We visited numerous companies and came away with a number of interesting ideas — some pertaining to the companies themselves, others relating to their competitors and the economies of the countries. You take in a lot of information that you’re able to think about and discuss with colleagues, which is extremely valuable.
Dina: We understand the importance of leveraging not just the knowledge of the fund’s analysts, but of our fellow portfolio counselors as well. If Ron gets interested in a particular consumer products company, or Jim has a thesis on the materials sector, I pay attention. The opinions of my fellow portfolio counselors carry a great deal of weight with me.
Ensuring collaboration
Mike: In addition to informal interactions, we have another invaluable tool that fosters communication, particularly between the portfolio counselors and analysts. And that’s the research portfolio or “RP.” The RP is a slice of the fund’s assets that is managed directly by the fund’s research analysts. This means that analysts not only recommend companies within the sectors they cover, they invest in them. This is highly unusual within the mutual fund industry.
Terry: The RP is the place where analysts can really indicate the strength of our convictions in some of the companies we cover. When we build or reduce a position in the RP, it sends a signal to the portfolio counselors and often initiates a discussion. It creates a link between us and makes us partners in the process. In addition, the RP adds yet another perspective to the fund — one made up entirely of extremely high-conviction ideas. That increases the portfolio’s diversity.
Dina: That diversity is welcome since we strive to have many different ideas and opinions represented in Fundamental Investors. Some of them are going to be right and some are not, but it’s good to know that, in all likelihood, they’re not all going to be wrong at the same time. And given that one of our primary objectives is managing investment risk for shareholders, that’s good to know.
Summary investment portfolio, December 31, 2005
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]
| (percent of |
Industry sector diversification | net assets) |
| |
Energy | 17.76% |
Industrials | 12.68 |
Financials | 12.36 |
Information Technology | 10.42 |
Materials | 9.00 |
Other industries | 33.75 |
Convertible securities | 0.41 |
Bonds & notes | 0.05 |
Short-term securities & other assets less liabilities | 3.57 |
[end pie chart]
| | Shares | | Market | | Percent | |
| | | amount | | | value | | | of net | |
Common stocks - 95.97% | | | | | | (000 | ) | | assets | |
| | | | | | | | | | |
Energy - 17.76% | | | | | | | | | | |
Suncor Energy Inc. | | | 18,550,712 | | $ | 1,169,911 | | | 4.16 | % |
Royal Dutch Shell PLC, Class A (ADR) | | | 7,440,000 | | | 457,486 | | | 1.63 | |
Halliburton Co. | | | 6,000,000 | | | 371,760 | | | 1.32 | |
Norsk Hydro ASA | | | 2,168,000 | | | 222,542 | | | | |
Norsk Hydro ASA (ADR) | | | 700,000 | | | 72,226 | | | 1.05 | |
Baker Hughes Inc. | | | 4,828,000 | | | 293,446 | | | 1.04 | |
OAO LUKOIL (ADR) | | | 4,700,000 | | | 277,300 | | | .99 | |
CONSOL Energy Inc. (1) | | | 3,700,000 | | | 241,166 | | | .86 | |
Burlington Resources Inc. | | | 2,781,000 | | | 239,722 | | | .85 | |
Chevron Corp. | | | 4,185,674 | | | 237,621 | | | .84 | |
Murphy Oil Corp. | | | 4,063,000 | | | 219,361 | | | .78 | |
Other securities | | | | | | 1,193,474 | | | 4.24 | |
| | | | | | 4,996,015 | | | 17.76 | |
| | | | | | | | | | |
Industrials - 12.68% | | | | | | | | | | |
Deere & Co. | | | 5,500,000 | | | 374,605 | | | 1.33 | |
Union Pacific Corp. | | | 4,200,000 | | | 338,142 | | | 1.20 | |
Caterpillar Inc. | | | 5,400,000 | | | 311,958 | | | 1.11 | |
General Electric Co. | | | 7,400,000 | | | 259,370 | | | .92 | |
Deutsche Post AG | | | 8,945,000 | | | 216,663 | | | .77 | |
Mitsubishi Corp. | | | 9,490,000 | | | 209,924 | | | .75 | |
Boeing Co. | | | 2,900,000 | | | 203,696 | | | .72 | |
General Dynamics Corp. | | | 1,772,900 | | | 202,199 | | | .72 | |
Tyco International Ltd. | | | 6,830,000 | | | 197,114 | | | .70 | |
Parker Hannifin Corp. | | | 2,800,000 | | | 184,688 | | | .66 | |
Other securities | | | | | | 1,069,283 | | | 3.80 | |
| | | | | | 3,567,642 | | | 12.68 | |
| | | | | | | | | | |
Financials - 12.36% | | | | | | | | | | |
Washington Mutual, Inc. | | | 8,580,000 | | | 373,230 | | | 1.32 | |
Citigroup Inc. | | | 7,130,000 | | | 346,019 | | | 1.23 | |
Freddie Mac | | | 3,225,000 | | | 210,754 | | | .75 | |
Fannie Mae | | | 4,317,800 | | | 210,752 | | | .75 | |
Allied Irish Banks, PLC | | | 9,600,000 | | | 204,938 | | | .73 | |
Other securities | | | | | | 2,132,385 | | | 7.58 | |
| | | | | | 3,478,078 | | | 12.36 | |
| | | | | | | | | | |
Information technology - 10.42% | | | | | | | | | | |
Microsoft Corp. | | | 21,725,000 | | | 568,109 | | | 2.02 | |
Texas Instruments Inc. | | | 11,713,024 | | | 375,637 | | | 1.34 | |
International Business Machines Corp. | | | 3,050,000 | | | 250,710 | | | .89 | |
Automatic Data Processing, Inc. | | | 4,600,000 | | | 211,094 | | | .75 | |
Intersil Corp., Class A | | | 7,475,000 | | | 185,978 | | | .66 | |
Other securities | | | | | | 1,339,342 | | | 4.76 | |
| | | | | | 2,930,870 | | | 10.42 | |
| | | | | | | | | | |
Materials - 9.00% | | | | | | | | | | |
BHP Billiton Ltd. | | | 17,995,030 | | | 300,326 | | | 1.07 | |
Dow Chemical Co. | | | 6,836,700 | | | 299,584 | | | 1.07 | |
Alcoa Inc. | | | 8,773,800 | | | 259,441 | | | .92 | |
Rio Tinto PLC | | | 5,066,709 | | | 231,188 | | | .82 | |
Weyerhaeuser Co. | | | 3,183,000 | | | 211,160 | | | .75 | |
Freeport-McMoRan Copper & Gold Inc., Class B | | | 3,500,000 | | | 188,300 | | | .67 | |
Other securities | | | | | | 1,041,819 | | | 3.70 | |
| | | | | | 2,531,818 | | | 9.00 | |
| | | | | | | | | | |
Health care - 8.62% | | | | | | | | | | |
Roche Holding AG | | | 2,965,000 | | | 444,761 | | | 1.58 | |
Merck & Co., Inc. | | | 8,800,000 | | | 279,928 | | | 1.00 | |
Abbott Laboratories | | | 6,710,000 | | | 264,575 | | | .94 | |
Eli Lilly and Co. | | | 4,070,000 | | | 230,321 | | | .82 | |
Sanofi-Aventis | | | 2,192,600 | | | 191,896 | | | .68 | |
Other securities | | | | | | 1,014,071 | | | 3.60 | |
| | | | | | 2,425,552 | | | 8.62 | |
| | | | | | | | | | |
Consumer discretionary - 8.46% | | | | | | | | | | |
Lowe's Companies, Inc. | | | 6,015,000 | | | 400,960 | | | 1.42 | |
Target Corp. | | | 5,790,000 | | | 318,276 | | | 1.13 | |
Time Warner Inc. | | | 15,925,000 | | | 277,732 | | | .99 | |
Limited Brands, Inc. | | | 10,815,980 | | | 241,737 | | | .86 | |
Other securities | | | | | | 1,142,030 | | | 4.06 | |
| | | | | | 2,380,735 | | | 8.46 | |
| | | | | | | | | | |
Consumer staples - 5.26% | | | | | | | | | | |
Altria Group, Inc. | | | 8,274,800 | | | 618,293 | | | 2.20 | |
Other securities | | | | | | 862,069 | | | 3.06 | |
| | | | | | 1,480,362 | | | 5.26 | |
| | | | | | | | | | |
Utilities - 4.35% | | | | | | | | | | |
Dominion Resources, Inc. | | | 3,390,000 | | | 261,708 | | | .93 | |
Questar Corp. | | | 3,000,000 | | | 227,100 | | | .81 | |
Other securities | | | | | | 734,927 | | | 2.61 | |
| | | | | | 1,223,735 | | | 4.35 | |
| | | | | | | | | | |
Telecommunication services - 4.12% | | | | | | | | | | |
AT&T Inc. | | | 17,545,622 | | | 429,692 | | | 1.53 | |
BellSouth Corp. | | | 7,100,000 | | | 192,410 | | | .68 | |
Other securities | | | | | | 535,875 | | | 1.91 | |
| | | | | | 1,157,977 | | | 4.12 | |
| | | | | | | | | | |
Miscellaneous - 2.94% | | | | | | | | | | |
Other common stocks in initial period of acquisition | | | | | | 825,633 | | | 2.94 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total common stocks (cost: $20,024,817,000) | | | | | | 26,998,417 | | | 95.97 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Convertible securities - 0.41% | | | | | | | | | | |
| | | | | | | | | | |
Total convertible securities (cost: $89,301,000) | | | | | | 116,317 | | | .41 | |
| | | | | | | | | | |
| | | | | | | | | | |
Bonds & notes - 0.05% | | | | | | | | | | |
| | | | | | | | | | |
Total bonds & notes (cost: $14,967,000) | | | | | | 14,571 | | | .05 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | Principal | | | | | | | |
| | | amount | | | | | | | |
Short-term securities - 3.27% | | | (000 | ) | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
General Electric Capital Corp. 4.20% due 1/3/2006 | | $ | 34,000 | | | 33,984 | | | .12 | |
CAFCO, LLC 4.36% due 2/23/2006 (1) | | | 25,000 | | | 24,836 | | | .09 | |
Cloverleaf International Holdings, SA 4.22% due 1/30/2006 (1) | | | 17,200 | | | 17,140 | | | .06 | |
Other securities | | | | | | 842,624 | | | 3.00 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total short-term securities (cost: $918,573,000) | | | | | | 918,584 | | | 3.27 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total investment securities (cost: $21,047,658,000) | | | | | | 28,047,889 | | | 99.70 | |
Other assets less liabilities | | | | | | 84,753 | | | .30 | |
| | | | | | | | | | |
Net assets | | | | | $ | 28,132,642 | | | 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. | | | | |
| | | | | | | | | | |
The following footnote to the summary investment portfolio applies to either the individual securities noted or one or more of the securities | |
aggregated and listed as a single 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 $887,482,000 which represented 3.15% of the net assets of the fund. | | | | | | | | | | |
| | | | | | | | | | |
ADR = American Depositary Receipts | | | | | | | | | | |
| | | | | | | | | | |
See Notes to Financial Statements | | | | | | | | | | |
Statement of assets and liabilities | | | | | |
at December 31, 2005 | | (dollars and shares in thousands, except per-share amounts) |
| | | | | | | |
Assets: | | | | | | | |
Investment securities at market (cost: $21,047,658) | | | | | $ | 28,047,889 | |
Cash | | | | | | 104 | |
Receivables for: | | | | | | | |
Sales of investments | | $ | 4,499 | | | | |
Sales of fund's shares | | | 86,400 | | | | |
Dividends and interest | | | 42,562 | | | 133,461 | |
| | | | | | 28,181,454 | |
Liabilities: | | | | | | | |
Payables for: | | | | | | | |
Purchases of investments | | | 1,880 | | | | |
Repurchases of fund's shares | | | 26,180 | | | | |
Investment advisory services | | | 5,667 | | | | |
Services provided by affiliates | | | 8,750 | | | | |
Deferred directors' compensation | | | 1,577 | | | | |
Other fees and expenses | | | 4,758 | | | 48,812 | |
Net assets at December 31, 2005 | | | | | $ | 28,132,642 | |
| | | | | | | |
Net assets consist of: | | | | | | | |
Capital paid in on shares of capital stock | | | | | $ | 21,278,567 | |
Undistributed net investment income | | | | | | 85,236 | |
Accumulated net realized loss | | | | | | (226,915 | ) |
Net unrealized appreciation | | | | | | 6,995,754 | |
Net assets at December 31, 2005 | | | | | $ | 28,132,642 | |
Total authorized capital stock - 1,000,000 shares, $1.00 par value (794,857 total shares outstanding) | | | | | | |
| | | Net assets | | | Shares outstanding | | | Net asset value per share (1 | ) |
| | | | | | | | | | |
Class A | | $ | 24,390,549 | | | 688,980 | | $ | 35.40 | |
Class B | | | 1,090,118 | | | 30,855 | | | 35.33 | |
Class C | | | 775,834 | | | 21,981 | | | 35.30 | |
Class F | | | 661,951 | | | 18,707 | | | 35.39 | |
Class 529-A | | | 231,217 | | | 6,535 | | | 35.38 | |
Class 529-B | | | 39,552 | | | 1,118 | | | 35.37 | |
Class 529-C | | | 71,113 | | | 2,011 | | | 35.37 | |
Class 529-E | | | 11,571 | | | 327 | | | 35.36 | |
Class 529-F | | | 4,862 | | | 137 | | | 35.36 | |
Class R-1 | | | 10,688 | | | 303 | | | 35.31 | |
Class R-2 | | | 154,959 | | | 4,391 | | | 35.29 | |
Class R-3 | | | 219,614 | | | 6,213 | | | 35.35 | |
Class R-4 | | | 205,239 | | | 5,805 | | | 35.36 | |
Class R-5 | | | 265,375 | | | 7,494 | | | 35.41 | |
(1) 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 $37.56 and $37.54, respectively. | |
| | | | | | | | | | |
See Notes to Financial Statements | | | | | | | | | | |
Statement of operations | | | | | | | |
for the year ended December 31, 2005 | | | (dollars in thousands) | |
Investment income: | | | | | | | |
Income: | | | | | | | |
Dividends (net of non-U.S. withholding tax of $14,109) | | $ | 533,209 | | | | |
Interest | | | 60,165 | | $ | 593,374 | |
| | | | | | | |
Fees and expenses:(1) | | | | | | | |
Investment advisory services | | | 67,323 | | | | |
Distribution services | | | 74,628 | | | | |
Transfer agent services | | | 20,671 | | | | |
Administrative services | | | 3,917 | | | | |
Reports to shareholders | | | 779 | | | | |
Registration statement and prospectus | | | 615 | | | | |
Postage, stationery and supplies | | | 2,252 | | | | |
Directors' compensation | | | 450 | | | | |
Auditing and legal | | | 155 | | | | |
Custodian | | | 1,868 | | | | |
State and local taxes | | | 1 | | | | |
Other | | | 275 | | | | |
Total fees and expenses before reimbursements/waivers | | | 172,934 | | | | |
Less reimbursement/waiver of fees and expenses: | | | | | | | |
Investment advisory services | | | 5,938 | | | | |
Administrative services | | | 231 | | | | |
Total fees and expenses after reimbursements/waivers | | | | | | 166,765 | |
Net investment income | | | | | | 426,609 | |
| | | | | | | |
Net realized gain and change in unrealized | | | | | | | |
appreciation on investments | | | | | | | |
and non-U.S. currency: | | | | | | | |
Net realized gain (loss) on: | | | | | | | |
Investments | | | 592,418 | | | | |
Non-U.S. currency transactions | | | (1,912 | ) | | 590,506 | |
Net change in unrealized appreciation on: | | | | | | | |
Investments | | | 1,849,893 | | | | |
Non-U.S. currency translations | | | (132 | ) | | 1,849,761 | |
Net realized gain and | | | | | | | |
change in unrealized appreciation | | | | | | | |
on investments and non-U.S. currency | | | | | | 2,440,267 | |
Net increase in net assets resulting | | | | | | | |
from operations | | | | | $ | 2,866,876 | |
| | | | | | | |
(1) 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 | |
| | | 2005 | | | 2004 | |
Operations: | | | | | | | |
Net investment income | | $ | 426,609 | | $ | 438,828 | |
Net realized gain on investments and | | | | | | | |
non-U.S. currency transactions | | | 590,506 | | | 611,565 | |
Net change in unrealized appreciation | | | | | | | |
on investments and non-U.S. currency translations | | | 1,849,761 | | | 1,889,494 | |
Net increase in net assets | | | | | | | |
resulting from operations | | | 2,866,876 | | | 2,939,887 | |
| | | | | | | |
Dividends paid to shareholders from net | | | | | | | |
investment income and non-U.S. currency gains | | | (440,865 | ) | | (404,177 | ) |
| | | | | | | |
Capital share transactions | | | 1,489,209 | | | 497,675 | |
| | | | | | | |
Total increase in net assets | | | 3,915,220 | | | 3,033,385 | |
| | | | | | | |
Net assets: | | | | | | | |
Beginning of year | | | 24,217,422 | | | 21,184,037 | |
End of year (including undistributed | | | | | | | |
net investment income: $85,236 and $100,738, respectively) | | $ | 28,132,642 | | $ | 24,217,422 | |
| | | | | | | |
| | | | | | | |
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 CollegeAmericaÒ 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 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 change in unrealized appreciation or depreciation on investments. The realized gain or loss and change in 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. withholding 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. As of December 31, 2005, non-U.S. taxes provided on unrealized gains were $4,432,000.
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.
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; capital losses related to sales of certain securities within 30 days of purchase; unrealized appreciation of certain investments in non-U.S. securities; deferred expenses; cost of investments sold; and net capital losses. 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. As of December 31, 2005, the cost of investment securities for federal income tax purposes was $21,058,110,000.
During the year ended December 31, 2005, the fund reclassified $1,189,000 from undistributed net investment income to undistributed net realized gains; and reclassified $57,000 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, 2005 the components of distributable earnings on a tax basis were as follows (dollars in thousands):
| |
Undistributed net investment income and non-U.S. currency gains | $86,813 |
Short-term capital loss deferrals | (216,463) |
Gross unrealized appreciation on investment securities | 7,698,696 |
Gross unrealized depreciation on investment securities | (708,917) |
Net unrealized appreciation on investment securities | 6,989,779 |
Short-term capital loss deferrals above include a capital loss carryforward of $216,463,000 expiring in 2011. During the year ended December 31, 2005, the fund realized, on a tax basis, a net capital gain of $590,978,000, which was offset by the utilization of capital loss carryforwards. The remaining capital loss carryforward will be used to offset any capital gains realized by the fund in future years through the expiration date. The fund will not make distributions from capital gains while a capital loss carryforward remains.
| | Year ended December 31 | |
Share class | | | 2005 | | | 2004 | |
Class A | | $ | 398,335 | | $ | 372,550 | |
Class B | | | 10,375 | | | 9,991 | |
Class C | | | 6,729 | | | 5,262 | |
Class F | | | 9,749 | | | 7,307 | |
Class 529-A | | | 3,286 | | | 2,122 | |
Class 529-B | | | 312 | | | 234 | |
Class 529-C | | | 553 | | | 363 | |
Class 529-E | | | 137 | | | 89 | |
Class 529-F | | | 68 | | | 30 | |
Class R-1 | | | 90 | | | 51 | |
Class R-2 | | | 1,327 | | | 831 | |
Class R-3 | | | 2,603 | | | 1,486 | |
Class R-4 | | | 2,838 | | | 1,232 | |
Class R-5 | | | 4,463 | | | 2,629 | |
Total | | $ | 440,865 | | $ | 404,177 | |
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 ("AFS"), the fund’s transfer agent, and American Funds Distributors, Inc. ("AFD"), the principal underwriter of the fund’s shares.
Investment advisory services -The Investment Advisory and Service Agreement with CRMC provides for monthly fees accrued daily. These fees are 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. CRMC is currently waiving a portion of investment advisory services fees. At the beginning of the period, CRMC waived 5% of these fees and increased the waiver to 10% on April 1, 2005. During the year ended December 31, 2005, total investment advisory services fees waived by CRMC were $5,938,000. As a result, the fee shown on the accompanying financial statements of $67,323,000, which was equivalent to an annualized rate of 0.266%, was reduced to $61,385,000, or 0.243% 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 for providing 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, 2005, 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, 2005, the total administrative services fees paid by CRMC were $2,000 and $229,000 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, 2005, 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 | $53,469 | $19,717 | Not applicable | Not applicable | Not applicable |
Class B | 9,984 | 954 | Not applicable | Not applicable | Not applicable |
Class C | 6,408 | Included in administrative services | $912 | $146 | Not applicable |
Class F | 1,302 | 568 | 66 | Not applicable |
Class 529-A | 326 | 201 | 26 | $ 180 |
Class 529-B | 334 | 38 | 14 | 34 |
Class 529-C | 557 | 62 | 19 | 56 |
Class 529-E | 45 | 10 | 1 | 3 |
Class 529-F | 2 | 3 | -* | 9 |
Class R-1 | 85 | 12 | 6 | Not applicable |
Class R-2 | 916 | 183 | 556 | Not applicable |
Class R-3 | 841 | 245 | 130 | Not applicable |
Class R-4 | 359 | 215 | 7 | Not applicable |
Class R-5 | Not applicable | 211 | 4 | Not applicable |
Total | $74,628 | $20,671 | $2,660 | $975 | $282 |
* Amount less than one thousand.
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 $450,000, shown on the accompanying financial statements, includes $292,000 in current fees (either paid in cash or deferred) and a net increase of $158,000 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):
Share class | | Sales(1) | | Reinvestments of dividends | | Repurchases(1) | | Net increase | |
| | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2004 | | | | | | | | | | | | | | | | | | | | | | | | | |
Class A | | $ | 2,128,875 | | | 71,901 | | $ | 351,340 | | | 11,834 | | $ | (2,413,347 | ) | | (81,685 | ) | $ | 66,868 | | | 2,050 | |
Class B | | | 110,433 | | | 3,739 | | | 9,629 | | | 320 | | | (86,500 | ) | | (2,936 | ) | | 33,562 | | | 1,123 | |
Class C | | | 147,896 | | | 5,005 | | | 5,035 | | | 167 | | | (57,179 | ) | | (1,947 | ) | | 95,752 | | | 3,225 | |
Class F | | | 187,702 | | | 6,362 | | | 6,418 | | | 216 | | | (88,450 | ) | | (2,984 | ) | | 105,670 | | | 3,594 | |
Class 529-A | | | 46,582 | | | 1,571 | | | 2,122 | | | 71 | | | (5,035 | ) | | (170 | ) | | 43,669 | | | 1,472 | |
Class 529-B | | | 8,121 | | | 274 | | | 234 | | | 8 | | | (586 | ) | | (20 | ) | | 7,769 | | | 262 | |
Class 529-C | | | 15,730 | | | 531 | | | 363 | | | 12 | | | (2,040 | ) | | (68 | ) | | 14,053 | | | 475 | |
Class 529-E | | | 2,339 | | | 79 | | | 89 | | | 3 | | | (190 | ) | | (6 | ) | | 2,238 | | | 76 | |
Class 529-F | | | 1,251 | | | 42 | | | 31 | | | 1 | | | (222 | ) | | (8 | ) | | 1,060 | | | 35 | |
Class R-1 | | | 4,263 | | | 146 | | | 51 | | | 1 | | | (915 | ) | | (31 | ) | | 3,399 | | | 116 | |
Class R-2 | | | 52,680 | | | 1,793 | | | 831 | | | 28 | | | (14,324 | ) | | (486 | ) | | 39,187 | | | 1,335 | |
Class R-3 | | | 68,710 | | | 2,325 | | | 1,481 | | | 49 | | | (23,310 | ) | | (791 | ) | | 46,881 | | | 1,583 | |
Class R-4 | | | 44,674 | | | 1,514 | | | 1,233 | | | 42 | | | (22,061 | ) | | (723 | ) | | 23,846 | | | 833 | |
Class R-5 | | | 27,580 | | | 928 | | | 2,298 | | | 78 | | | (16,157 | ) | | (550 | ) | | 13,721 | | | 456 | |
Total net increase | | | | | | | | | | | | | | | | | | | | | | | | | |
(decrease) | | $ | 2,846,836 | | | 96,210 | | $ | 381,155 | | | 12,830 | | $ | (2,730,316 | ) | | (92,405 | ) | $ | 497,675 | | | 16,635 | |
6. Investment transactions
The fund made purchases and sales of investment securities, excluding short-term securities, of $7,625,604,000 and $5,699,726,000, respectively, during the year ended December 31, 2005.
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 | ) | | Total 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 12/31/2005 | | | | | $ | 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 | | | | |
Year ended 12/31/2001 | | | | | | 31.16 | | | .40 | | | (3.34 | ) | | (2.94 | ) | | (.40 | ) | | (.37 | ) | | (.77 | ) | | 27.45 | | | (9.55 | ) | | 19,331 | | | | | | .65 | | | | | | .65 | | | | | | 1.41 | | | | |
Class B: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | | | |
Year ended 12/31/2001 | | | | | | 31.12 | | | .18 | | | (3.34 | ) | | (3.16 | ) | | (.19 | ) | | (.37 | ) | | (.56 | ) | | 27.40 | | | (10.24 | ) | | 653 | | | | | | 1.42 | | | | | | 1.42 | | | | | | .64 | | | | |
Class C: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | | | |
Period from 3/15/2001 to 12/31/2001 | | | | | | 28.52 | | | .11 | | | (1.13 | ) | | (1.02 | ) | | (.11 | ) | | - | | | (.11 | ) | | 27.39 | | | (3.60 | ) | | 203 | | | | | | 1.55 | | | (5 | ) | | 1.55 | | | (5 | ) | | .49 | | | (5 | ) |
Class F: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | | | |
Period from 3/15/2001 to 12/31/2001 | | | | | | 28.56 | | | .28 | | | (1.12 | ) | | (.84 | ) | | (.28 | ) | | - | | | (.28 | ) | | 27.44 | | | (2.97 | ) | | 153 | | | | | | .74 | | | (5 | ) | | .74 | | | (5 | ) | | 1.31 | | | (5 | ) |
Class 529-A: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 12/31/2005 | | | | | | 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 12/31/2005 | | | | | | 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 12/31/2005 | | | | | | 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 12/31/2005 | | | | | | 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 12/31/2005 | | | | | $ | 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 12/31/2005 | | | | | | 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 12/31/2005 | | | | | | 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 12/31/2005 | | | | | | 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 12/31/2005 | | | | | | 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 | |
| | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | |
Portfolio turnover rate for all classes of shares | | | 24 | % | | 30 | % | | 31 | % | | 38 | % | | 29 | % |
(1) Based on operations for the period 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. |
|
See Notes to Financial Statements |
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, 2005, 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, 2005, 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, 2005, 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 14, 2006
Tax information unaudited
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 information below is provided for the fund’s fiscal year ended December 31, 2005.
Individual shareholders are eligible for reduced tax rates on qualified dividend income. The fund designates 100% of the dividends paid by the fund as qualified dividend income.
Corporate shareholders may exclude up to 70% of qualifying dividends. The fund designates $381,709,000 of dividends received as qualified dividend income.
For state tax purposes, certain states may exempt from income taxation that portion of the income dividends paid by the fund that were derived from direct U.S. government obligations. The fund designates $2,029,000 as interest derived on direct U.S. government obligations.
Individual shareholders should refer to their Form 1099-DIV or other tax information, which was mailed in January 2006, to determine the calendar year amounts to be included on their 2005 tax returns. Shareholders should consult their tax advisers.
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, 2005, through December 31, 2005).
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 Class 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 Class 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 7/1/2005 | | | Ending account value 12/31/2005 | | | Expenses paid during period1 | | | Annualized expense ratio | |
| | | | | | | | | | | | | |
Class A -- actual return | | $ | 1,000.00 | | $ | 1,107.81 | | $ | 3.13 | | | .59 | % |
Class A -- assumed 5% return | | | 1,000.00 | | | 1,022.23 | | | 3.01 | | | .59 | |
Class B -- actual return | | | 1,000.00 | | | 1,103.53 | | | 7.16 | | | 1.35 | |
Class B -- assumed 5% return | | | 1,000.00 | | | 1,018.40 | | | 6.87 | | | 1.35 | |
Class C -- actual return | | | 1,000.00 | | | 1,103.41 | | | 7.48 | | | 1.41 | |
Class C -- assumed 5% return | | | 1,000.00 | | | 1,018.10 | | | 7.17 | | | 1.41 | |
Class F -- actual return | | | 1,000.00 | | | 1,108.13 | | | 3.14 | | | .59 | |
Class F -- assumed 5% return | | | 1,000.00 | | | 1,022.23 | | | 3.01 | | | .59 | |
Class 529-A -- actual return | | | 1,000.00 | | | 1,107.57 | | | 3.40 | | | .64 | |
Class 529-A -- assumed 5% return | | | 1,000.00 | | | 1,021.98 | | | 3.26 | | | .64 | |
Class 529-B -- actual return | | | 1,000.00 | | | 1,102.70 | | | 7.84 | | | 1.48 | |
Class 529-B -- assumed 5% return | | | 1,000.00 | | | 1,017.74 | | | 7.53 | | | 1.48 | |
Class 529-C -- actual return | | | 1,000.00 | | | 1,103.15 | | | 7.79 | | | 1.47 | |
Class 529-C -- assumed 5% return | | | 1,000.00 | | | 1,017.80 | | | 7.48 | | | 1.47 | |
Class 529-E -- actual return | | | 1,000.00 | | | 1,105.60 | | | 5.09 | | | .96 | |
Class 529-E -- assumed 5% return | | | 1,000.00 | | | 1,020.37 | | | 4.89 | | | .96 | |
Class 529-F -- actual return | | | 1,000.00 | | | 1,108.61 | | | 2.44 | | | .46 | |
Class 529-F -- assumed 5% return | | | 1,000.00 | | | 1,022.89 | | | 2.35 | | | .46 | |
Class R-1 -- actual return | | | 1,000.00 | | | 1,103.16 | | | 7.69 | | | 1.45 | |
Class R-1 -- assumed 5% return | | | 1,000.00 | | | 1,017.90 | | | 7.38 | | | 1.45 | |
Class R-2 -- actual return | | | 1,000.00 | | | 1,103.06 | | | 7.53 | | | 1.42 | |
Class R-2 -- assumed 5% return | | | 1,000.00 | | | 1,018.05 | | | 7.22 | | | 1.42 | |
Class R-3 -- actual return | | | 1,000.00 | | | 1,105.71 | | | 5.20 | | | .98 | |
Class R-3 -- assumed 5% return | | | 1,000.00 | | | 1,020.27 | | | 4.99 | | | .98 | |
Class R-4 -- actual return | | | 1,000.00 | | | 1,107.65 | | | 3.51 | | | .66 | |
Class R-4 -- assumed 5% return | | | 1,000.00 | | | 1,021.88 | | | 3.36 | | | .66 | |
Class R-5 -- actual return | | | 1,000.00 | | | 1,109.04 | | | 1.91 | | | .36 | |
Class R-5 -- assumed 5% return | | | 1,000.00 | | | 1,023.39 | | | 1.84 | | | .36 | |
| | | | | | | | | | | | | |
1 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). | | | |
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, 2006. The board approved the agreement following the recommendation of the fund’s Governance and Contracts Committee (the “committee”), which is comprised of all of the fund’s independent board members. The information, material factors 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 the recent 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 large 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 March 31, 2005, 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 2004 and for the three-, five- and 10-year periods ended March 31, 2005, except the Large-Cap Value Funds Index for the five-year period.
4. Advisory fees and total expenses
The board and the committee compared the advisory fees and total expenses of the fund (each as a percentage of average net assets) 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 10-year period ended on December 31, 2004. The board and the committee also noted the 5% advisory fee waiver that CRMC put into effect September 1, 2004, which was increased to 10% on April 1, 2005.
The board and the committee also reviewed information and materials 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 the American Funds, these differences 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 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 the impact of the fund’s asset growth on advisory fee levels, noting the extent to which such fees are reduced through breakpoint discounts and the 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 CRMC’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.
Board of directors
“Non-interested” directors | | |
| | |
| Year first | |
| elected | |
| a director | |
Name and age | of the fund1 | Principal occupation(s) during past five years |
| | |
Joseph C. Berenato, 59 | 2003 | Chairman of the Board and CEO, Ducommun Incorporated (aerospace components manufacturer) |
| | |
Robert J. Denison, 64 | 2005 | Chair, First Security Management (private investments) |
| | |
Robert A. Fox, 68 | 1998 | Managing General Partner, Fox Investments LP; corporate director; retired President and CEO, Foster Farms (poultry producer) |
| | |
Leonade D. Jones, 58 | 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, 68 | 1998 | Professor of Finance, Graduate School of Business, |
| | Stanford University |
| | |
Gail L. Neale, 71 | 1985 | President, The Lovejoy Consulting Group, Inc. (a pro bono consulting group advising nonprofit organizations) |
| | |
Henry E. Riggs, 71 | 1989 | President Emeritus, Keck Graduate Institute |
Chairman of the Board | | of Applied Life Sciences |
(Independent and Non-Executive) | | |
| | |
Patricia K. Woolf, Ph.D., 71 | 1998 | Private investor; corporate director; former Lecturer, Department of Molecular Biology, Princeton University |
| | |
| | |
“Non-interested” directors | | |
| | |
| Number of | |
| portfolios | |
| in fund | |
| complex2 | |
| overseen by | |
Name and age | director | Other directorships3 held by director |
| | |
Joseph C. Berenato, 59 | 6 | Ducommun Incorporated |
| | |
Robert J. Denison, 64 | 6 | None |
| | |
Robert A. Fox, 68 | 7 | Chemtura Corporation |
| | |
Leonade D. Jones, 58 | 6 | None |
| | |
John G. McDonald, 68 | 8 | iStar Financial, Inc.; Plum Creek Timber Co.; Scholastic Corporation; Varian, Inc. |
| | |
Gail L. Neale, 71 | 6 | None |
| | |
Henry E. Riggs, 71 | 4 | None |
Chairman of the Board | | |
(Independent and Non-Executive) | | |
| | |
Patricia K. Woolf, Ph.D., 71 | 6 | First Energy Corporation |
| | |
“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, 59 | 1998 | President and Director, 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, 60 | 1994 | Senior Vice President, Capital Research and |
President | | 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, 59 | 2 | None |
Vice Chairman of the Board | | |
| | |
Dina N. Perry, 60 | 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.
Other officers6 | | |
| | |
| Year first | |
| elected | Principal occupation(s) during past five years |
Name, age and | an officer | and positions held with affiliated entities or |
position with fund | of the fund1 | the principal underwriter of the fund |
| | |
Gordon Crawford, 59 | 1994 | Senior Vice President and Director, Capital Research |
Senior Vice President | | and Management Company |
| | |
Paul G. Haaga, Jr., 57 | 1994 | Executive Vice President and Director, Capital |
Senior Vice President | | Research and Management Company; Director, The Capital Group Companies, Inc.5 |
| | |
Michael T. Kerr, 46 | 1995 | Vice President, Capital Research and Management |
Senior Vice President | | Company; Senior Vice President, Capital Research Company5 |
| | |
Martin Romo, 38 | 1999 | Executive Vice President and Director, Capital |
Senior Vice President | | Research Company5 |
| | |
Ronald B. Morrow, 60 | 2004 | Senior Vice President, Capital Research Company5 |
Vice President | | |
| | |
Patrick F. Quan, 47 | 1989-1998 | Vice President — Fund Business Management |
Secretary | 2000 | Group, Capital Research and Management Company |
| | |
Sheryl F. Johnson, 37 | 1998 | Vice President — Fund Business Management |
Treasurer | | Group, Capital Research and Management Company |
| | |
David A. Pritchett, 39 | 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 29 funds. Capital Research and Management Company also manages American Funds Insurance Series,® which serves as the underlying investment vehicle for certain variable insurance contracts, 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
Office 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
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
Custodian of assets
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110-2804
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 0.76 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 higher annual expenses (by 0.03 percentage points) than 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, 2005, 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 may also 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, 2006, 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 nearly 75 years, we have sought to provide consistently superior long-term investment results for American Funds shareholders. The range of opportunities offered by our family of just 29 carefully conceived, broadly diversified funds has attracted over 35 million shareholder accounts.
Our unique combination of strengths includes these five factors:
• A long-term, value-oriented approach
We buy stocks and bonds of well-managed companies at reasonable prices and hold them for the long term.
• An extensive global research effort
American Funds investment professionals search the world to gain a comprehensive understanding of companies and markets.
• The multiple portfolio counselor system
Our unique method of portfolio management, developed more than 45 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 23 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.
29 mutual funds, consistent philosophy, consistent results
• 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®
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
The Capital Group Companies
American Funds Capital Research and Management Capital International Capital Guardian Capital Bank and Trust
Lit. No. MFGEAR-910-0206P
Litho in USA KBDA/GP/8056-S4703
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 $1,126,000 for fiscal year 2004 and $925,000 for fiscal year 2005. 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.