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®
The Growth Fund of America
Managing a strong portfolio:
A look at how GFA handles its own growth
[photo of a woman holding the reins of a horse - standing in a pasture]
Annual report for the year ended August 31, 2006
The Growth Fund of America® invests in a wide range of companies that appear to offer superior opportunities for growth of capital.
This fund is one of the 30 American Funds. The organization ranks among the nation’s three largest mutual fund families. For 75 years, Capital Research and Management Company,SM the American Funds adviser, has invested with a long-term focus based on thorough research and attention to risk.
Contents | |
| | |
| Letter to shareholders | 1 |
| The value of a long-term perspective | 4 |
| Managing a strong portfolio | 6 |
| Summary investment portfolio | 11 |
| Financial statements | 17 |
| Board of directors and officers | 32 |
| What makes American Funds different? | back cover |
Figures shown are past results for Class A shares and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity. For current information and month-end results, visit americanfunds.com. Fund results shown, unless otherwise indicated, are at net asset value. If a sales charge (maximum 5.75%) had been deducted, the results would have been lower.
Here are the average annual total returns on a $1,000 investment with all distributions reinvested for periods ended September 30, 2006 (the most recent calendar quarter):
| | | 1 year | | 5 years | | 10 years | |
Class A shares | | | | | | | | | | |
Reflecting 5.75% maximum sales charge | | | +3.18 | % | | +8.86 | % | | +12.41 | % |
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 pages 24 to 25 for details.
Other share class results and important information can be found on page 3.
Fellow shareholders:
[photo of a woman holding the reins of a horse]
Despite investors’ concerns about weakness in the housing market, rising interest rates and high oil prices, the U.S. economy managed to produce fairly strong results during the 12 months ended August 31, 2006. The stock market ended the period with a moderate return after experiencing periods of both optimism and pessimism during the fiscal year.
Against this background, we are pleased to report that The Growth Fund of America (GFA) posted a total return of 9.7%. As the table below shows, GFA’s total return exceeded that of the general market, as represented by the unmanaged Standard & Poor’s 500 Composite Index, and also surpassed the four benchmark indexes used to measure its progress. The S&P 500 gained 8.9% and the fund’s Lipper benchmark indexes had increases ranging from 5.0% to 8.0%. The past 12 months were a tough environment for growth mutual funds. The unmanaged Nasdaq Composite Index, which tracks many growth and technology stocks, rose only 1.5% over the period. Over longer periods, GFA has continued to outpace the general market and the fund’s comparable indexes by significant margins.
What helped the fund
Energy, health care and information technology companies were major contributors. Although oil prices declined in July and August, they remain high, creating a positive backdrop for GFA’s substantial holding of oil and gas producers and equipment and service companies. Among the largest gainers were Schlumberger, the fund’s third-largest holding (+42.2%), and Suncor Energy (+30.7%). The fund also benefited from the acquisition of Burlington Resources, one of the fund’s largest holdings, by ConocoPhillips.
After a difficult year in fiscal 2005, pharmaceutical investments helped the fund during the past 12 months. AstraZeneca (+41.0%) benefited from higher than anticipated sales of its major brands, including Nexium for acid reflux disease, Seroquel, an anti-psychotic drug, and Crestor, a cholesterol-lowering medication. Roche, GFA’s largest holding (+33.4%), had strong earnings because of sales growth of its anti-cancer drugs, including Herceptin for breast cancer and Avastin for colorectal cancer. Fears of an avian flu pandemic also aided sales of its Tamiflu anti-influenza drug.
[Begin Sidebar]
Results at a glance (with all distributions reinvested) | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | |
The Growth Fund of America | | | +9.7 | % | | +7.0 | % | | +13.6 | % | | +15.4 | % |
Standard & Poor’s 500 Composite Index† | | | +8.9 | | | +4.6 | | | +8.9 | | | +11.9 | |
Lipper Capital Appreciation Funds Index | | | +6.7 | | | +4.6 | | | +6.9 | | | +11.7 | |
Lipper Growth Funds Index | | | +6.2 | | | +3.2 | | | +6.9 | | | +10.7 | |
Lipper Multi-Cap Core Funds Index | | | +8.0 | | | +5.8 | | | +8.6 | | | +11.5 | |
Lipper Multi-Cap Growth Funds Index | | | +5.0 | | | +3.1 | | | +6.5 | | | +11.6 | |
* Since Capital Research and Management Company began managing the fund on December 1, 1973.
† Unmanaged.
[End Sidebar]
Although information technology companies had a mixed year, GFA’s tech holdings aided the portfolio on the whole. Contributors included Google, the fund’s second-largest holding (+32.4%), Cisco Systems (+24.8%) and Oracle (+20.7%).
Investments outside the United States and Canada, comprising about 14% of the fund’s portfolio, were also helpful. They included two companies mentioned earlier: AstraZeneca, based in London, and Roche, headquartered in Basel, Switzerland.
[photo of a pack of running horses]
What hurt the fund
Investor concerns about the impact of high gasoline prices on consumer discre-tionary spending hurt some retailers. Among those affected were large holdings Lowe’s (-15.9%) and Target (-10.0%). Carnival (-15.1%), which operates cruises, was negatively impacted because of the same concerns and because it uses large amounts of oil for its ships.
Telecommunications services was another industry that hurt the fund. Sprint Nextel, our 16th largest holding (-34.8%), was particularly weak.
Industry sector diversification
As of August 31, GFA had 20.2% of its total assets in information technology, 13.7% in health care, 13.4% in energy, 10.6% in consumer discretionary, 7.8% in financials and the rest in other industries, cash and short-term securities.
Looking ahead
The U.S. economy looks reasonably healthy with the exception of the housing sector. Corporate earnings and corporate margins continue to be strong at the moment. There are other factors, however, that could add uncertainty to stock markets in the months ahead. They include the effect of a flat yield curve on spending and investment, the impact of high energy prices on consumers and corporate profit margins, and potentially negative geopolitical events around the world. We will continue to seek the best opportunities for capital appreciation for the fund and its shareholders, practicing our research-driven approach with a long-term perspective.
We are pleased to point out that on July 3, the fund’s investment adviser, Capital Research and Management Company (CRMC), celebrated its 75th anniversary of being in business. The longevity of CRMC attests to our investment adviser’s model of long-term investing that we will continue to follow and that has contributed greatly to GFA’s success.
During the past year, some mutual fund industry commentators have written about GFA’s strong growth in the number of shareholders and assets. With this in mind, we thought it a good time to report to shareholders how the fund manages its growth. The feature story on page 6 includes interviews with several of GFA’s decision-makers on how we handle the challenge of growth. We hope you will find it informative.
We welcome our new shareholders and thank our long-term investors for their continuing faith in The Growth Fund of America.
Cordially,
/s/ James F. Rothenberg
James F. Rothenberg
Vice Chairman of the Board
and Principal Executive Officer
/s/ Donald D. O'Neal
Donald D. O’Neal
President
October 3, 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 current information and month-end results, visit americanfunds.com.
Average annual total returns for periods ended September 30, 2006 (the most recent calendar quarter): | | | |
| | | | 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 | | | +3.66 | % | | +9.05 | % | | +1.66 | % |
| Not reflecting CDSC | | | +8.66 | % | | +9.33 | % | | +1.66 | % |
| | | | | | | | | | | |
Class C shares— first sold 3/15/01 | | | | | | | | | | |
| Reflecting CDSC, maximum of 1%, payable only if shares | | | | | | | | | | |
| are sold within one year of purchase | | | +7.58 | % | | +9.28 | % | | +5.00 | % |
| Not reflecting CDSC | | | +8.58 | % | | +9.28 | % | | +5.00 | % |
| | | | | | | | | | | |
Class F shares*— first sold 3/15/01 | | | | | | | | | | |
| Not reflecting annual asset-based fee charged by | | | | | | | | | | |
| sponsoring firm | | | +9.49 | % | | +10.14 | % | | +5.85 | % |
| | | | | | | | | | | |
Class 529-A shares†— first sold 2/15/02 | | | | | | | | | | |
| Reflecting 5.75% maximum sales charge | | | +3.17 | % | | — | | | +6.93 | % |
| Not reflecting maximum sales charge | | | +9.47 | % | | — | | | +8.31 | % |
| | | | | | | | | | | |
Class 529-B shares†— first sold 2/15/02 | | | | | | | | | | |
| Reflecting applicable CDSC, maximum of 5%, payable | | | | | | | | | | |
| only if shares are sold within six years of purchase | | | +3.51 | % | | — | | | +7.03 | % |
| Not reflecting CDSC | | | +8.51 | % | | — | | | +7.36 | % |
| | | | | | | | | | | |
Class 529-C shares†— first sold 2/15/02 | | | | | | | | | | |
| Reflecting CDSC, maximum of 1%, payable only if shares | | | | | | | | | | |
| are sold within one year of purchase | | | +7.50 | % | | — | | | +7.37 | % |
| Not reflecting CDSC | | | +8.50 | % | | — | | | +7.37 | % |
| | | | | | | | | | | |
Class 529-E shares*†— first sold 3/1/02 | | | +9.07 | % | | — | | | +7.68 | % |
| | | | | | | | | | | |
Class 529-F shares*†— first sold 9/16/02 | | | | | | | | | | |
| Not reflecting annual asset-based fee charged by | | | | | | | | | | |
| sponsoring firm | | | +9.65 | % | | — | | | +15.31 | % |
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 pages 24 to 25 for details.
*These shares are sold without any initial or contingent deferred sales charge.
†Results shown do not reflect the $10 initial account setup fee and an annual $10 account maintenance fee.
There are several ways to invest in The Growth Fund of America. 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 0.75 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 0.81 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 lower annual expenses (by 0.02 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.
The value of a long-term perspective
How a $10,000 investment has grown
Figures shown are past results for Class A shares and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. For current information and month-end results, visit americanfunds.com. Fund figures reflect deduction of the maximum sales charge of 5.75% on the $10,000 investment.1 Thus, the net amount invested was $9,425.2
Average annual total returns based on a $1,000 investment (for periods ended August 31, 2006)*
| | | 1 year | | 5 years | | 10 years | |
| | | | | | | | | | | |
Class A shares | | | +3.35 | % | | +5.76 | % | | +12.96 | % |
*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 pages 24 to 25 for details.
[begin mountain chart]
| For Year End | | The Growth Fund of America3 | | Standard & Poor’s 500 Composite Index with dividends reinvested4,5 | | Lipper Multi-Cap Growth Funds Index4 | | Lipper Multi-Cap Core Funds Index 4 | | Consumer Price Index (inflation)6 | |
| | | | | | | | | | | | | | | | | |
| 12/1/1973 | | $ | 9,425 | | $ | 10,000 | | $ | 10,000 | | $ | 10,000 | | $ | 10,000 | |
| 8/31/1974 | | | 7,874 | | | 7,749 | | | 7,845 | | | 7,761 | | | 10,893 | |
| 8/31/1975 | | | 9,792 | | | 9,776 | | | 9,431 | | | 9,873 | | | 11,830 | |
| 8/31/1976 | | | 11,165 | | | 12,043 | | | 10,765 | | | 11,715 | | | 12,505 | |
| 8/31/1977 | | | 12,377 | | | 11,835 | | | 11,007 | | | 11,697 | | | 13,333 | |
| 8/31/1978 | | | 20,136 | | | 13,315 | | | 14,823 | | | 14,369 | | | 14,379 | |
| 8/31/1979 | | | 23,595 | | | 14,881 | | | 17,014 | | | 16,280 | | | 16,078 | |
| 8/31/1980 | | | 31,496 | | | 17,588 | | | 22,374 | | | 20,040 | | | 18,148 | |
| 8/31/1981 | | | 35,383 | | | 18,539 | | | 24,287 | | | 21,228 | | | 20,109 | |
| 8/31/1982 | | | 38,595 | | | 19,134 | | | 25,570 | | | 22,123 | | | 21,285 | |
| 8/31/1983 | | | 56,382 | | | 27,582 | | | 38,044 | | | 32,033 | | | 21,830 | |
| 8/31/1984 | | | 56,805 | | | 29,280 | | | 36,701 | | | 31,782 | | | 22,767 | |
| 8/31/1985 | | | 64,493 | | | 34,616 | | | 41,413 | | | 36,607 | | | 23,529 | |
| 8/31/1986 | | | 82,962 | | | 48,158 | | | 55,640 | | | 48,803 | | | 23,900 | |
| 8/31/1987 | | | 109,731 | | | 64,779 | | | 72,149 | | | 62,610 | | | 24,924 | |
| 8/31/1988 | | | 97,962 | | | 53,241 | | | 58,985 | | | 51,546 | | | 25,926 | |
| 8/31/1989 | | | 136,507 | | | 74,101 | | | 83,543 | | | 69,658 | | | 27,146 | |
| 8/31/1990 | | | 123,184 | | | 70,400 | | | 76,088 | | | 65,613 | | | 28,671 | |
| 8/31/1991 | | | 160,815 | | | 89,300 | | | 101,155 | | | 82,704 | | | 29,760 | |
| 8/31/1992 | | | 168,703 | | | 96,368 | | | 106,268 | | | 87,795 | | | 30,697 | |
| 8/31/1993 | | | 210,269 | | | 110,996 | | | 133,701 | | | 104,956 | | | 31,547 | |
| 8/31/1994 | | | 222,852 | | | 117,057 | | | 138,309 | | | 112,215 | | | 32,462 | |
| 8/31/1995 | | | 279,812 | | | 142,129 | | | 172,196 | | | 132,843 | | | 33,312 | |
| 8/31/1996 | | | 282,323 | | | 168,734 | | | 192,309 | | | 153,447 | | | 34,270 | |
| 8/31/1997 | | | 391,124 | | | 237,282 | | | 252,795 | | | 207,038 | | | 35,033 | |
| 8/31/1998 | | | 390,174 | | | 256,505 | | | 241,989 | | | 204,380 | | | 35,599 | |
| 8/31/1999 | | | 629,203 | | | 358,611 | | | 359,870 | | | 273,501 | | | 36,405 | |
| 8/31/2000 | | | 965,880 | | | 417,104 | | | 549,013 | | | 340,564 | | | 37,647 | |
| 8/31/2001 | | | 721,756 | | | 315,433 | | | 308,552 | | | 263,388 | | | 38,671 | |
| 8/31/2002 | | | 578,827 | | | 258,698 | | | 225,096 | | | 217,245 | | | 39,368 | |
| 8/31/2003 | | | 701,724 | | | 289,889 | | | 272,701 | | | 249,447 | | | 40,218 | |
| 8/31/2004 | | | 762,451 | | | 323,073 | | | 285,459 | | | 274,632 | | | 41,285 | |
| 8/31/2005 | | | 924,112 | | | 363,626 | | | 342,600 | | | 322,690 | | | 42,789 | |
| 8/31/2006 | | | 1,013,358 | | | 395,887 | | | 359,772 | | | 348,654 | | | 44,423 | |
[end mountain chart]
| Year ended August 31 | | 19747 | | 1975 | | 1976 | | 1977 | | 1978 | | 1979 | | 1980 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total value (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | |
| Dividends reinvested | | | — | | $ | .4 | | | .3 | | | — | | | .3 | | | — | | | .3 | |
| Value at year-end | | $ | 7.9 | | | 9.8 | | | 11.2 | | | 12.4 | | | 20.1 | | | 23.6 | | | 31.5 | |
| GFA total return | | | (21.3 | %) | | 24.4 | | | 14.0 | | | 10.9 | | | 62.7 | | | 17.2 | | | 33.5 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended August 31 | | | 1981 | | | 1982 | | | 1983 | | | 1984 | | | 1985 | | | 1986 | | | 1987 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total value (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | |
| Dividends reinvested | | | .5 | | | 1.7 | | | 2.3 | | | 1.6 | | | 1.2 | | | 1.0 | | | 1.4 | |
| Value at year-end | | | 35.4 | | | 38.6 | | | 56.4 | | | 56.8 | | | 64.5 | | | 83.0 | | | 109.7 | |
| GFA total return | | | 12.3 | | | 9.1 | | | 46.1 | | | 0.8 | | | 13.5 | | | 28.6 | | | 32.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended August 31 | | | 1988 | | | 1989 | | | 1990 | | | 1991 | | | 1992 | | | 1993 | | | 1994 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total value (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | |
| Dividends reinvested | | | 1.5 | | | 1.7 | | | 3.6 | | | 3.2 | | | 2.5 | | | 1.5 | | | .9 | |
| Value at year-end | | | 98.0 | | | 136.5 | | | 123.2 | | | 160.8 | | | 168.7 | | | 210.3 | | | 222.9 | |
| GFA total return | | | (10.7 | ) | | 39.3 | | | (9.8 | ) | | 30.5 | | | 4.9 | | | 24.6 | | | 6.0 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended August 31 | | | 1995 | | | 1996 | | | 1997 | | | 1998 | | | 1999 | | | 2000 | | | 2001 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total value (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | |
| Dividends reinvested | | | 1.4 | | | 2.5 | | | 2.0 | | | 2.5 | | | 2.0 | | | 1.1 | | | 3.9 | |
| Value at year-end | | | 279.8 | | | 282.3 | | | 391.1 | | | 390.2 | | | 629.2 | | | 965.9 | | | 721.8 | |
| GFA total return | | | 25.6 | | | 0.9 | | | 38.5 | | | (0.2 | ) | | 61.3 | | | 53.5 | | | (25.3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended August 31 | | | 2002 | | | 2003 | | | 2004 | | | 2005 | | | 2006 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total value (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | |
| Dividends reinvested | | | 1.4 | | | .6 | | | .2 | | | 2.8 | | | 5.9 | | | | | | | |
| Value at year-end | | | 578.8 | | | 701.7 | | | 762.5 | | | 924.1 | | | 1,013.4 | | | | | | | |
| GFA total return | | | (19.8 | ) | | 21.2 | | | 8.7 | | | 21.2 | | | 9.7 | | | | | | | |
Average annual total return for 32-3/4 years 15.1%3
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 $52,146 and reinvested capital gain distributions of $376,823.
4 Includes reinvested dividends.
5 The S&P 500 is unmanaged and includes reinvested distributions, but does not reflect sales charges, commissions or expenses and cannot be invested in directly.
6 Computed from data supplied by the U.S. Department of Labor, Bureau of Labor Statistics.
7 For the period December 1, 1973 (when Capital Research and Management Company became the fund’s investment adviser), through August 31, 1974.
The results shown are before taxes on fund distributions and sale of fund shares.
Managing a strong portfolio
A look at how GFA handles its own growth
[photo of a woman holding the reins of a horse - standing in a pasture]
[Begin Photo Caption]
[photo of Don O'Neal]
Don O’Neal
[End Photo Caption]
[Begin Photo Caption]
[photo of Blair Frank]
Blair Frank
[End Photo Caption]
[Begin Photo Caption]
[photo of Donnalisa Barnum]
Donnalisa Barnum
[End Photo Caption]
[Begin Sidebar]
The multiple portfolio counselor system is central to GFA’s success in managing a large and growing amount of assets.
[End Sidebar]
[photo of a womans' hands adjusting the reins of a horse]
[Begin Sidebar]
GFA’s low turnover of both assets and investment professionals has permitted the fund to manage growth and size successfully.
[End Sidebar]
The past few years have been extraordinary for The Growth Fund of America. GFA’s assets have grown considerably, and the fund has added a large number of new shareholders. With this in mind, we thought it a good time to take a close look at how GFA manages its growth. In the pages ahead, you will meet several of GFA’s decision-makers to learn more about their perspectives on the fund’s growth.
The multiple portfolio counselor system is central to GFA’s success in managing a large and growing amount of assets. “As our fund grows larger, we add new portfolio counselors to help manage the inflow,” says Don O’Neal, president of GFA. “The task of dealing with new cash flow is divided among many people so that no individual portfolio counselor gets overwhelmed.”
The system works like this: The majority of the fund’s investment portfolio is managed by GFA’s portfolio counselors, who are generalists and invest broadly. With the addition of Blair Frank, who previously specialized in small and mid-sized stocks, the fund now has 10 portfolio counselors. Each is allocated a portion of the portfolio to manage in line with the fund’s objective of “investing in companies that appear to offer superior opportunities for growth of capital.” Upon joining American Funds in 1973, GFA began with two portfolio counselors and has added portfolio counselors as needed ever since.
The fund’s senior investment managers have carefully put together the group of 10 by choosing investment professionals with different styles and approaches. Some do better in up markets and some do better in down markets. And that’s just the beginning. They come from different backgrounds and have different life experiences and areas of expertise.
The final portion of the fund, up to one-fourth of the fund’s assets, is managed by a group of investment analysts who focus on individual industries. In many investment firms, analysts make recommendations to buy and sell stocks but don’t actually manage money themselves. In GFA and the other American Funds, they play an important role in the multiple portfolio counselor system by actually managing a portion of the assets within the industries they research.
The system blends individuality with collaboration. “Each counselor is responsible and accountable for his or her slice of the pie so they have the ability to own only their highest conviction ideas,” says Donnalisa Barnum, one of the portfolio counselors. “I can invest in the companies I understand and the stocks I believe are the most attractive for our shareholders; I don’t have to hold 200 or 300 securities.” Don adds: “No one has to own their 179th favorite stock. They can own companies they understand and that they truly believe will appreciate in value. Maintaining that high conviction throughout the GFA portfolio has been an important factor in our long-term investment results.”
In addition, the system also makes it easier when a portfolio counselor retires or leaves the fund. At that time, only a small portion of the portfolio changes hands. “When we know a portfolio counselor is leaving, we will move those assets to existing or new portfolio counselors over a period of time,” says Blair. These smooth, gradual transitions have helped keep the fund’s investment approach consistent. “Understanding the multiple portfolio counselor system is the first and most important step in comprehending how we have managed our growth, and why we are confident about the future,” says Don.
The benefits of low turnover and a long-term focus
GFA’s low turnover of both assets and investment professionals has also permitted the fund to manage growth and size successfully. Low turnover of investments holds down transaction costs and taxes which would be higher with a high turnover strategy.
[Begin Sidebar]
A wealth of experience
The Growth Fund of America currently has 10 portfolio counselors who bring together 284 years of investment experience to managing your investment. Here are the specific years of experience for these primary decision-makers for the fund.*
| | Years of |
| | investment |
| Portfolio counselor | experience* |
| | |
| R. Michael Shanahan | 42 |
| James F. Rothenberg | 36 |
| Gordon Crawford | 35 |
| James E. Drasdo | 35 |
| Gregg E. Ireland | 33 |
| Donnalisa Barnum | 25 |
| Michael T. Kerr | 23 |
| Donald D. O’Neal | 21 |
| Timothy P. Dunn | 21 |
| Blair Frank | 13 |
*As of November 1, 2006.
[End Sidebar]
[photo of the lower half of a person's body on a horse]
The long-term experience of GFA’s portfolio counselors is also beneficial in managing growth. “With portfolio counselors who have many years of investment experience, it gives us a great advantage,” says Jim Rothenberg, vice chairman and principal executive officer of GFA. “They have seen business cycles come and go. All are focused on the long-term.” Five of GFA’s 10 portfolio counselors have investment experience of more than 30 years.
The experience of GFA’s investment analysts also makes managing growth easier, enabling them to take a longer term perspective on their investments instead of darting in and out of the market to try to capture small changes in stock prices. A number of GFA’s investment analysts have been covering their industries for 10 to 20 years. Barry Crosthwaite, for example, has covered the oil service industry for a decade and the telecommunications equipment business for five years. Before that, he worked as a general manager with a chemical company for 14 years. Having a long history of following companies and getting to know middle managers can provide an invaluable perspective when these executives later become senior officers of a company.
Such was the case with a large company that provides services and technology to the petroleum industry but had recently made less productive acquisitions of companies outside the energy business. Barry got to know a manager at the firm and concluded that if this person ever succeeded to a major position at the company, the manager would likely refocus the company back to its roots instead of making acquisitions outside energy. The executive succeeded in working his way to becoming chief executive of the company. Soon after, he sold the previous acquisitions and refocused the business as the oil industry began another major growth cycle.
The strengths of GFA’s size
The fund’s size and scale have spread fund expenses over many more investors, making GFA’s expenses among the lowest in the industry. “Our financial strength has allowed us to make significant investments in systems and technology to help reduce costs and improve investment and shareholder services,” Don says. “It also allows us to hire and retain the highest caliber talent and to maintain an industry-leading global research capacity, all beneficial to shareholders.”
“As the fund grows larger, we are dealing with two issues — size and complexity,” says Jim. “Some people have suggested that we should close the fund to new investors to limit size. If we felt we should do that, we would. But we have reached a conclusion at this time that we don’t think the size of the fund is getting in the way of producing strong investment returns. In fact, some of our best years have occurred recently when the fund was considered large.”
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[photo of Barry Crosthwaite]
Barry Crosthwaite
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Jim Rothenberg
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Dylan Yolles
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Working in small groups aids investment process
The challenge of managing growth is not new for GFA and other American Funds. “We have been working to address the challenges of growth and complexity for the 36 years that I have been here,” Jim says. “We’ve learned over time that to be effective, investment professionals need to work in small groups. We make better investment decisions when we couple our in-depth research with healthy discussion and debate among a group of portfolio counselors and analysts who are well acquainted with each other.” From time to time, Capital Research and Management Company, the investment adviser for GFA and the other American Funds, has restructured to create different groupings of portfolio counselors and investment analysts.
These small groups include research clusters focused on specific industries or sectors. Dylan Yolles, an investment analyst who follows software companies for GFA, is a member of the technology cluster which comprises analysts who cover technology companies.
[Begin Sidebar]
Different investment styles
A quick look at five GFA investment professionals
We sat down with five GFA investment professionals to talk about their investment approach. They are all investing in companies they hope will appreciate in the future but their ways of identifying them differ.
Blair Frank, portfolio counselor“I have a history with many small companies that have grown to a size that now makes them appropriate for GFA. I got to know management when the companies were younger. I watched them face challenges and evolve their strategies. That perspective should be helpful. Overall, I’m a growth person who likes to invest in companies that are growing their customer base, products, market share and profitability.”
Diana Wagner, investment analyst“I consider myself a value investor. Within the industries that I cover, I seek out-of-favor companies or sectors where the market’s typically short-term outlook often misses long-term value opportunities. I cover healthcare services — a growth industry, as well as the cyclical semiconductor equipment and paper and forest products sectors. Although these are very different industries, this approach helps me identify attractive investments in each area even when the near-term market consensus disagrees.”
Donnalisa Barnum, portfolio counselor“I invest in companies that have some combination of the following: a quality management team, strong research and development, ability to raise prices or cut costs and a strong, positive corporate culture. I prefer growth companies and try to find the disparity between what the ‘street believes’ and what our analysts believe and to buy those companies where I find that inconsistency. Ratios and valuation matter; however, people matter more.”
Dylan Yolles, investment analyst“I try to buy technology companies that are out of favor or trade at depressed valuations — and yet have enduring sources of value such as recurring maintenance revenue streams or strong market franchises. These latter qualities give me the confidence to look beyond bad news that may be pressuring stock prices in the short term.”
Mark Merritt, investment analyst“I cover the retail industry and I think it’s important to try to understand a company’s culture. It is one of the hardest things to figure out, but also one of the most important. In retail, you have tens or hundreds of thousands of employees spread out across the country and it is a big challenge to get that relatively low-paid group to collectively execute on a company’s strategy. I believe that the right culture may be the single biggest clue as to how a company will execute over time.”
[End Sidebar]
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[Begin Sidebar]
The fund’s size and scale have spread fund expenses over many more investors, making the fund’s expenses among the lowest in the industry.
[End Sidebar]
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Diana Wagner
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Mark Merritt
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In 2004, the group went to China, Taiwan and Japan to visit technology companies. “Gaining contacts with a global view of the technology value chain was invaluable,” Dylan says. “For example, Taiwanese companies manufacture many components and products sold by U.S. technology companies. Understanding demand trends in Taiwan can therefore lead to broader investment conclusions.”
Diversification of investment views helps
The GFA portfolio is diversified across more than 300 stocks in many industries. It is also diversified across different investment styles and perspectives on the market. It does not run into the problems that confront sector funds or narrowly focused funds that are forced to invest in overheated sectors, industries or markets when valuations go to extremes, Donnalisa says.
“We choose stocks one at a time after extensive research.” Don says. “We love finding unpopular stocks where our research tells us that they are more valuable than the market is currently pricing them. This investment philosophy leads us to portfolios that are not similar to large index funds such as Standard & Poor’s 500 Composite Index. It is not in our DNA to choose a portfolio that mimics the S&P 500.”
[Begin Sidebar]
We love finding unpopular stocks where our research tells us that they are more valuable than the market is currently pricing them.
[End Sidebar]
Summary investment portfolio, August 31, 2006
The following summary investment portfolio is designed to streamline the report and help investors better focus on a fund’s principal holdings. For details on how to obtain a complete schedule of portfolio holdings, please see the inside back cover.
Industry Sector diversification
[begin pie chart]| | Percent | |
| | of net | |
| | assets | |
| | | | |
| Information technology | | 20.16 | % |
| Health care | | 13.65 | |
| Energy | | 13.36 | |
| Consumer discretionary | | 10.55 | |
| Financials | | 7.81 | |
| Other industries | | 23.79 | |
| Short-term securities & other assets less liabilities | | 10.68 | |
[end pie chart]
Largest Equity Holdings | | | |
| | | | | |
| Roche Holding | | | 2.25 | |
| Google | | | 2.12 | |
| Schlumberger | | | 1.74 | |
| Altria Group | | | 1.67 | |
| Oracle | | | 1.62 | |
| Lowe's Companies | | | 1.58 | |
| Microsoft | | | 1.49 | |
| Cisco Systems | | | 1.38 | |
| Target | | | 1.32 | |
| Fannie Mae | | | 1.31 | |
| | | Shares | | Market | | Percent | |
| | | | | | | value | | | of net | |
Common stocks - 89.19% | | | | | | (000 | ) | | assets | |
| | | | | | | | | | | |
Information technology - 20.16% | | | | | | | | | | |
| Google Inc., Class A (1) | | | 8,246,700 | | $ | 3,121,623 | | | 2.12 | % |
| Oracle Corp. (1) | | | 152,458,700 | | | 2,385,979 | | | 1.62 | |
| Microsoft Corp. | | | 85,325,000 | | | 2,191,999 | | | 1.49 | |
| Cisco Systems, Inc. (1) | | | 92,440,000 | | | 2,032,756 | | | 1.38 | |
| Applied Materials, Inc. | | | 88,815,000 | | | 1,499,197 | | | 1.02 | |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | | 505,752,964 | | | 894,443 | | | | |
| Taiwan Semiconductor Manufacturing Co. Ltd. (ADR) | | | 31,786,934 | | | 295,936 | | | .81 | |
| Corning Inc. (1) | | | 53,320,000 | | | 1,185,837 | | | .81 | |
| Samsung Electronics Co., Ltd. | | | 1,676,769 | | | 1,134,249 | | | .77 | |
| Nokia Corp. (ADR) | | | 31,281,500 | | | 653,158 | | | | |
| Nokia Corp. | | | 21,078,000 | | | 440,914 | | | .74 | |
| Texas Instruments Inc. | | | 29,620,200 | | | 965,322 | | | .66 | |
| Yahoo! Inc. (1) | | | 30,950,554 | | | 891,995 | | | .61 | |
| Other securities | | | | | | 11,955,881 | | | 8.13 | |
| | | | | | | 29,649,289 | | | 20.16 | |
| | | | | | | | | | | |
Health care - 13.65% | | | | | | | | | | |
| Roche Holding AG | | | 18,000,000 | | | 3,313,215 | | | 2.25 | |
| Medtronic, Inc. | | | 35,405,000 | | | 1,660,494 | | | 1.13 | |
| AstraZeneca PLC (ADR) | | | 13,072,000 | | | 851,510 | | | | |
| AstraZeneca PLC (Sweden) | | | 9,278,000 | | | 598,420 | | | .99 | |
| WellPoint, Inc. (1) | | | 17,345,000 | | | 1,342,676 | | | .91 | |
| Zimmer Holdings, Inc. (1) | | | 15,650,000 | | | 1,064,200 | | | .72 | |
| Cardinal Health, Inc. | | | 14,005,000 | | | 944,217 | | | .64 | |
| Forest Laboratories, Inc. (1) | | | 17,843,950 | | | 891,841 | | | .61 | |
| Eli Lilly and Co. | | | 15,480,000 | | | 865,796 | | | .59 | |
| UnitedHealth Group Inc. | | | 15,885,000 | | | 825,226 | | | .56 | |
| Genentech, Inc. (1) | | | 10,000,000 | | | 825,200 | | | .56 | |
| Amgen Inc. (1) | | | 11,335,000 | | | 769,987 | | | .52 | |
| Other securities | | | | | | 6,118,901 | | | 4.17 | |
| | | | | | | 20,071,683 | | | 13.65 | |
| | | | | | | | | | | |
Energy - 13.36% | | | | | | | | | | |
| Schlumberger Ltd. | | | 41,811,000 | | | 2,563,014 | | | 1.74 | |
| Suncor Energy Inc. | | | 18,385,952 | | | 1,423,187 | | | .97 | |
| Canadian Natural Resources, Ltd. | | | 26,000,700 | | | 1,363,597 | | | .93 | |
| Devon Energy Corp. | | | 16,919,900 | | | 1,057,325 | | | .72 | |
| Halliburton Co. | | | 27,125,000 | | | 884,818 | | | .60 | |
| Baker Hughes Inc. | | | 11,385,000 | | | 810,384 | | | .55 | |
| EOG Resources, Inc. | | | 12,470,000 | | | 808,305 | | | .55 | |
| Transocean Inc. (1) | | | 11,489,900 | | | 766,951 | | | .52 | |
| ConocoPhillips | | | 11,353,300 | | | 720,140 | | | .49 | |
| Other securities | | | | | | 9,244,072 | | | 6.29 | |
| | | | | | | 19,641,793 | | | 13.36 | |
| | | | | | | | | | | |
Consumer discretionary - 10.55% | | | | | | | | | | |
| Lowe's Companies, Inc. | | | 85,814,400 | | | 2,322,138 | | | 1.58 | |
| Target Corp. | | | 39,985,000 | | | 1,934,874 | | | 1.32 | |
| Carnival Corp., units | | | 36,100,000 | | | 1,512,590 | | | 1.03 | |
| Best Buy Co., Inc. | | | 22,663,400 | | | 1,065,180 | | | .72 | |
| News Corp., Class A | | | 47,234,800 | | | 898,878 | | | .61 | |
| Kohl's Corp. (1) | | | 12,840,000 | | | 802,628 | | | .55 | |
| Other securities | | | | | | 6,978,172 | | | 4.74 | |
| | | | | | | 15,514,460 | | | 10.55 | |
| | | | | | | | | | | |
Financials - 7.81% | | | | | | | | | | |
| Fannie Mae | | | 36,522,600 | | | 1,922,915 | | | 1.31 | |
| American International Group, Inc. | | | 28,325,200 | | | 1,807,714 | | | 1.23 | |
| Freddie Mac | | | 17,602,300 | | | 1,119,506 | | | .76 | |
| Other securities | | | | | | 6,631,213 | | | 4.51 | |
| | | | | | | 11,481,348 | | | 7.81 | |
| | | | | | | | | | | |
Industrials - 7.78% | | | | | | | | | | |
| General Electric Co. | | | 38,710,000 | | | 1,318,463 | | | .90 | |
| Tyco International Ltd. | | | 45,213,900 | | | 1,182,343 | | | .80 | |
| United Parcel Service, Inc., Class B | | | 14,983,500 | | | 1,049,594 | | | .71 | |
| Boeing Co. | | | 12,400,000 | | | 928,760 | | | .63 | |
| General Dynamics Corp. | | | 11,641,400 | | | 786,377 | | | .54 | |
| Other securities | | | | | | 6,172,249 | | | 4.20 | |
| | | | | | | 11,437,786 | | | 7.78 | |
| | | | | | | | | | | |
Consumer staples - 5.68% | | | | | | | | | | |
| Altria Group, Inc. | | | 29,436,700 | | | 2,458,848 | | | 1.67 | |
| Walgreen Co. | | | 32,747,100 | | | 1,619,671 | | | 1.10 | |
| Coca-Cola Co. | | | 16,965,000 | | | 760,202 | | | .52 | |
| PepsiCo, Inc. | | | 10,635,000 | | | 694,253 | | | .47 | |
| Other securities | | | | | | 2,821,638 | | | 1.92 | |
| | | | | | | 8,354,612 | | | 5.68 | |
| | | | | | | | | | | |
Materials - 3.97% | | | | | | | | | | |
| Barrick Gold Corp. | | | 36,210,000 | | | 1,212,311 | | | .83 | |
| Other securities | | | | | | 4,624,218 | | | 3.14 | |
| | | | | | | 5,836,529 | | | 3.97 | |
| | | | | | | | | | | |
Telecommunication services - 2.09% | | | | | | | | | | |
| Sprint Nextel Corp., Series 1 | | | 85,919,750 | | | 1,453,762 | | | .99 | |
| Qwest Communications International Inc. (1) | | | 106,563,100 | | | 938,821 | | | .64 | |
| Other securities | | | | | | 681,107 | | | .46 | |
| | | | | | | 3,073,690 | | | 2.09 | |
| | | | | | | | | | | |
Utilities - 0.14% | | | | | | | | | | |
| Other securities | | | | | | 214,186 | | | .14 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Miscellaneous - 4.00% | | | | | | | | | | |
| Other common stocks in initial period of acquisition | | | | | | 5,890,334 | | | 4.00 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total common stocks (cost: $101,164,868,000) | | | | | | 131,165,710 | | | 89.19 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Preferred stocks - 0.00% | | | | | | | | | | |
| | | | | | | | | | | |
Telecommunication services - 0.00% | | | | | | | | | | |
| Other securities | | | | | | 583 | | | .00 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total preferred stocks (cost: $21,000,000) | | | | | | 583 | | | .00 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Convertible securities - 0.00% | | | | | | | | | | |
| | | | | | | | | | | |
Information technology - 0.00% | | | | | | | | | | |
| Other securities | | | | | | 31 | | | .00 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total convertible securities (cost: $162,000) | | | | | | 31 | | | .00 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Bonds & notes - 0.13% | | | | | | | | | | |
| | | | | | | | | | | |
Other - 0.13% | | | | | | | | | | |
| Other securities | | | | | | 189,921 | | | .13 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total bonds & notes (cost: $172,966,000) | | | | | | 189,921 | | | .13 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | Principal | | | | | | | |
| | | | amount | | | | | | | |
Short-term securities - 10.58% | | | (000 | ) | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Federal Home Loan Bank 5.025%-5.295% due 9/1-11/29/2006 | | $ | 2,328,500 | | | 2,315,120 | | | 1.57 | |
| Freddie Mac 4.97%-5.30% due 9/1/2006-2/6/2007 | | | 2,200,000 | | | 2,181,904 | | | 1.48 | |
| U.S. Treasury Bills 4.70%-5.081% due 9/7-11/24/2006 | | | 1,900,000 | | | 1,890,133 | | | 1.29 | |
| Fannie Mae 4.97%-5.30% due 9/6-12/11/2006 | | | 1,350,000 | | | 1,341,000 | | | .91 | |
| Federal Farm Credit Banks 5.03%-5.25% due 9/7/2006-1/25/2007 | | | 750,000 | | | 746,153 | | | .51 | |
| International Lease Finance Corp. 5.23%-5.34% due 9/11-11/16/2006 | | | 260,000 | | | 258,726 | | | | |
| AIG Funding, Inc. 5.21%-5.33% due 9/8-10/20/2006 | | | 115,000 | | | 114,427 | | | | |
| American General Finance Corp. 5.24%-5.27% due 9/12-9/22/2006 | | | 75,000 | | | 74,832 | | | .31 | |
| Edison Asset Securitization LLC 5.25%-5.37% due 9/22-10/23/2006 (2) | | | 200,000 | | | 198,778 | | | | |
| General Electric Capital Corp. 5.25%-5.35% due 10/25-10/26/2006 | | | 150,000 | | | 148,823 | | | | |
| General Electric Capital Services, Inc. 5.10%-5.25% due 9/8-11/3/2006 | | | 100,000 | | | 99,441 | | | .30 | |
| Other securities | | | | | | 6,189,126 | | | 4.21 | |
| | | | | | | | | | | |
Total short-term securities (cost: $15,558,016,000) | | | | | | 15,558,463 | | | 10.58 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total investment securities (cost: $116,917,012,000) | | | | | | 146,914,708 | | | 99.90 | |
Other assets less liabilities | | | | | | 151,636 | | | .10 | |
| | | | | | | | | | | |
Net assets | | | | | $ | 147,066,344 | | | 100.00 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| "Miscellaneous" securities include holdings in their initial period of acquisition that have not previously been publicly disclosed. | |
| "Other securities" includes all issues that are not disclosed separately in the summary investment portfolio. | | | | |
Investments in affiliates
A company is considered to be an affiliate of the fund under the Investment Company Act of 1940 if the fund's holdings in that company represent 5% or more of the outstanding voting shares of that company. Some of the fund's affiliated holdings listed below are also among the fund's largest holdings and are shown in the preceding summary investment portfolio. Affiliated companies not among the fund's largest holdings are included in the market value of "Other securities" under their respective industry sectors. Further details on these holdings and related transactions during the year ended August 31, 2006, appear below.
| Company | | | Beginning shares or principal amount | | | Purchases | | | Sales | | | Ending shares or principal amount | | | | | |
| | | | | | | | | | | | | | | | | | |
| Lowe's Companies, Inc. | | | 33,160,400 | | | 52,654,000 | | | - | | | 85,814,400 | | $ | 10,444 | $ | 2,322,138 |
| Carnival Corp., units | | | 16,750,000 | | | 19,350,000 | | | - | | | 36,100,000 | | | 28,400 | | 1,512,590 |
| Applied Materials, Inc. | | | 58,665,000 | | | 51,250,000 | | | 21,100,000 | | | 88,815,000 | | | 13,008 | | 1,499,197 |
| Zimmer Holdings, Inc. (1) | | | - | | | 15,650,000 | | | - | | | 15,650,000 | | | - | | 1,064,200 |
| Qwest Communications International Inc. (1) | | | 117,900,000 | | | 1,500,000 | | | 12,836,900 | | | 106,563,100 | | | - | | 938,821 |
| Qwest Capital Funding, Inc. 7.625% 2021 | | $ | 25,000,000 | | | - | | $ | 25,000,000 | | | - | | | 579 | | - |
| Qwest Capital Funding, Inc. 7.75% 2031 | | $ | 53,800,000 | | | - | | $ | 53,800,000 | | | - | | | 1,107 | | - |
| U S WEST Capital Funding, Inc. 6.50% 2018 | | $ | 25,250,000 | | | - | | $ | 25,250,000 | | | - | | | 544 | | - |
| U S WEST Capital Funding, Inc. 6.875% 2028 | | $ | 36,000,000 | | | - | | $ | 36,000,000 | | | - | | | 655 | | - |
| Forest Laboratories, Inc. (1) | | | 19,755,600 | | | 2,265,000 | | | 4,176,650 | | | 17,843,950 | | | - | | 891,841 |
| EOG Resources, Inc. | | | 12,430,000 | | | 40,000 | | | - | | | 12,470,000 | | | 2,491 | | 808,305 |
| Linear Technology Corp. | | | 15,175,000 | | | 4,675,000 | | | - | | | 19,850,000 | | | 9,890 | | 675,098 |
| Harrah's Entertainment, Inc. | | | 8,319,036 | | | 1,504,000 | | | - | | | 9,823,036 | | | 14,062 | | 612,565 |
| Maxim Integrated Products, Inc. | | | 17,640,000 | | | 3,200,000 | | | - | | | 20,840,000 | | | 10,379 | | 606,444 |
| KLA-Tencor Corp. | | | 10,375,000 | | | 2,565,000 | | | - | | | 12,940,000 | | | 5,468 | | 568,195 |
| Freeport-McMoRan Copper & Gold Inc., Class B | | | 9,596,000 | | | - | | | - | | | 9,596,000 | | | 32,986 | | 558,583 |
| Limited Brands, Inc. | | | 20,700,000 | | | - | | | - | | | 20,700,000 | | | 12,420 | | 532,611 |
| Potash Corp. of Saskatchewan, Inc. | | | 1,904,000 | | | 3,400,000 | | | - | | | 5,304,000 | | | 1,825 | | 519,633 |
| Xilinx, Inc. | | | 18,850,000 | | | 3,850,000 | | | - | | | 22,700,000 | | | 7,264 | | 519,149 |
| Altera Corp. (1) | | | 20,400,000 | | | 3,550,000 | | | - | | | 23,950,000 | | | - | | 484,508 |
| Bunge Ltd. | | | 3,500,000 | | | 3,750,000 | | | - | | | 7,250,000 | | | 4,168 | | 408,465 |
| CONSOL Energy Inc. (2) | | | 3,700,000 | | | 3,700,000 | | | - | | | 7,400,000 | | | 2,072 | | 269,878 |
| CONSOL Energy Inc. | | | 1,728,200 | | | 1,728,200 | | | - | | | 3,456,400 | | | 968 | | 126,055 |
| Newfield Exploration Co. (1) | | | 5,674,800 | | | 2,590,000 | | | - | | | 8,264,800 | | | - | | 357,370 |
| Sealed Air Corp. | | | 3,384,400 | | | 1,904,600 | | | - | | | 5,289,000 | | | 2,295 | | 274,340 |
| CDW Corp. | | | 3,500,000 | | | 500,000 | | | - | | | 4,000,000 | | | 2,080 | | 233,200 |
| Sabre Holdings Corp., Class A | | | 7,062,811 | | | - | | | - | | | 7,062,811 | | | 2,754 | | 154,817 |
| Getty Images, Inc. (1) | | | - | | | 4,050,000 | | | 1,000,000 | | | 3,050,000 | | | - | | 138,562 |
| Abraxis BioScience, Inc. (1) (3) | | | 3,800,000 | | | - | | | 1,600,000 | | | 2,200,000 | | | - | | - |
| Big Lots, Inc. (1) (3) | | | 3,000,000 | | | 3,200,000 | | | 1,948,000 | | | 4,252,000 | | | - | | - |
| BJ Services Co. (3) | | | 8,975,000 | | | 8,975,000 | | | 10,650,000 | | | 7,300,000 | | | 2,525 | | - |
| Brinker International, Inc. (3) | | | 5,000,000 | | | - | | | 3,000,000 | | | 2,000,000 | | | 1,500 | | - |
| Burlington Resources, Inc. (3) | | | 20,260,000 | | | - | | | 20,260,000 | | | - | | | 5,666 | | - |
| Ceridian Corp. (1) (3) | | | 9,219,900 | | | - | | | 4,219,900 | | | 5,000,000 | | | - | | - |
| Express Scripts (3) | | | 9,000,000 | | | - | | | 9,000,000 | | | - | | | - | | - |
| IAWS Group PLC (3) | | | - | | | 6,175,000 | | | - | | | 6,175,000 | | | 966 | | - |
| Michaels Stores, Inc. (3) | | | 6,700,000 | | | - | | | 3,350,000 | | | 3,350,000 | | | 2,814 | | - |
| Microchip Technology (3) | | | 12,755,000 | | | - | | | 4,005,200 | | | 8,749,800 | | | 9,887 | | - |
| Noble Corp. (3) | | | 7,585,000 | | | 430,000 | | | 2,473,317 | | | 5,541,683 | | | 1,023 | | - |
| Teradyne (1) (3) | | | 12,725,000 | | | - | | | 4,000,000 | | | 8,725,000 | | | - | | - |
| UAL Corp. (1) (3) | | | - | | | 5,000,000 | | | - | | | 5,000,000 | | | - | | - |
| | | | | | | | | | | | | | | $ | 190,240 | $ | 16,076,565 |
| The following footnotes apply to either the individual securities noted or one or more of the securities aggregated and listed as a single line item. | |
| | | | | | | | | | | |
| (1) Security did not produce income during the last 12 months. | | | | | | | | | | |
(2) 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 $3,922,095,000, which represented 2.67% of the net assets of the fund. | |
| (3) Unaffiliated issuer at 8/31/2006. | | | | | | | | | | |
| | | | | | | | | | | |
| ADR = American Depositary Receipts | | | | | | | | | | |
| | | | | | | | | | | |
The descriptions of the companies shown in the summary investment portfolio, which were obtained from published reports and other sources believed to be reliable, are supplemental and are not covered by the Report of Independent Registered Public Accounting Firm. | |
| | | | | | | | | | | |
| See Notes to Financial Statements | | | | | | | | | | |
Financial statements
Statement of assets and liabilities | | | | | |
| at August 31, 2006 | | | (dollars and shares in thousands, except per-share amounts) | |
| | | | | | | | |
Assets: | | | | | | | |
| Investment securities at market: | | | | | | | |
| Unaffiliated issuers (cost: $103,815,725) | | $ | 130,838,143 | | | | |
| Affiliated issuers (cost: $13,101,287) | | | 16,076,565 | | $ | 146,914,708 | |
| Cash denominated in non-U.S. currencies | | | | | | | |
| (cost: $54,619) | | | | | | 54,216 | |
| Cash | | | | | | 603 | |
| Receivables for: | | | | | | | |
| Sales of investments | | | 154,592 | | | | |
| Sales of fund's shares | | | 361,069 | | | | |
| Dividends and interest | | | 151,569 | | | 667,230 | |
| | | | | | | 147,636,757 | |
Liabilities: | | | | | | | |
| Payables for: | | | | | | | |
| Purchases of investments | | | 248,856 | | | | |
| Repurchases of fund's shares | | | 182,408 | | | | |
| Investment advisory services | | | 30,226 | | | | |
| Services provided by affiliates | | | 104,421 | | | | |
| Deferred directors' compensation | | | 2,195 | | | | |
| Other fees and expenses | | | 2,307 | | | 570,413 | |
Net assets at August 31, 2006 | | | | | $ | 147,066,344 | |
| | | | | | | | |
Net assets consist of: | | | | | | | |
| Capital paid in on shares of capital stock | | | | | $ | 112,725,579 | |
| Undistributed net investment income | | | | | | 740,684 | |
| Undistributed net realized gain | | | | | | 3,603,185 | |
| Net unrealized appreciation | | | | | | 29,996,896 | |
Net assets at August 31, 2006 | | | | | $ | 147,066,344 | |
Total authorized capital stock - 5,500,000 shares, $.001 par value (4,637,227 total shares outstanding) | | |
| | | | Net assets | | | Shares outstanding | | | Net asset value per share* | |
| | | | | | | | | | | |
| Class A | | $ | 78,854,400 | | | 2,469,762 | | $ | 31.93 | |
| Class B | | | 6,839,217 | | | 221,818 | | | 30.83 | |
| Class C | | | 9,036,361 | | | 294,085 | | | 30.73 | |
| Class F | | | 17,612,771 | | | 554,491 | | | 31.76 | |
| Class 529-A | | | 1,968,499 | | | 61,876 | | | 31.81 | |
| Class 529-B | | | 423,752 | | | 13,681 | | | 30.97 | |
| Class 529-C | | | 618,577 | | | 19,962 | | | 30.99 | |
| Class 529-E | | | 106,588 | | | 3,375 | | | 31.58 | |
| Class 529-F | | | 51,886 | | | 1,632 | | | 31.80 | |
| Class R-1 | | | 245,467 | | | 7,885 | | | 31.13 | |
| Class R-2 | | | 2,164,155 | | | 69,456 | | | 31.16 | |
| Class R-3 | | | 9,723,600 | | | 308,779 | | | 31.49 | |
| Class R-4 | | | 12,557,546 | | | 395,777 | | | 31.73 | |
| Class R-5 | | | 6,863,525 | | | 214,648 | | | 31.98 | |
| (*) 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 $33.88 and $33.75, respectively. | |
| | | | | | | | | | | |
| See Notes to Financial Statements | | | | | | | | | | |
Statement of operations | | | | | | | |
| for the year ended August 31, 2006 | | | (dollars in thousands) | |
| | | | | | | | |
Investment income: | | | | | | | |
| Income: | | | | | | | |
| Dividends (net of non-U.S. taxes of $37,245; | | | | | | | |
| also includes $187,355 from affiliates) | | $ | 1,332,610 | | | | |
| Interest (includes $2,885 from affiliates) | | | 695,842 | | $ | 2,028,452 | |
| | | | | | | | |
| Fees and expenses(*): | | | | | | | |
| Investment advisory services | | | 369,674 | | | | |
| Distribution services | | | 469,634 | | | | |
| Transfer agent services | | | 84,461 | | | | |
| Administrative services | | | 77,421 | | | | |
| Reports to shareholders | | | 3,162 | | | | |
| Registration statement and prospectus | | | 6,438 | | | | |
| Postage, stationery and supplies | | | 8,750 | | | | |
| Directors' compensation | | | 462 | | | | |
| Auditing and legal | | | 167 | | | | |
| Custodian | | | 8,748 | | | | |
| State and local taxes | | | 1 | | | | |
| Other | | | 516 | | | | |
| Total fees and expenses before reimbursements/waivers | | | 1,029,434 | | | | |
| Less reimbursements/waivers of fees and expenses: | | | | | | | |
| Investment advisory services | | | 36,967 | | | | |
| Administrative services | | | 48 | | | | |
| Total fees and expenses after reimbursements/waivers | | | | | | 992,419 | |
| Net investment income | | | | | | 1,036,033 | |
| | | | | | | | |
Net realized gain and unrealized | | | | | | | |
appreciation on investments and non-U.S. currency: | | | | | | | |
| Net realized gain (loss) on: | | | | | | | |
| Investments (including $1,715,271 net gain from affiliates) | | | 4,053,101 | | | | |
| Non-U.S. currency transactions | | | (3,004 | ) | | 4,050,097 | |
| Net unrealized appreciation (depreciation) on: | | | | | | | |
| Investments | | | 6,329,037 | | | | |
| Non-U.S. currency translations | | | 142 | | | 6,329,179 | |
| Net realized gain and unrealized appreciation | | | | | | | |
| on investments and non-U.S. currency | | | | | | 10,379,276 | |
Net increase in net assets resulting | | | | | | | |
from operations | | | | | $ | 11,415,309 | |
| | | | | | | | |
| (*) 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 August 31 | |
| | | | 2006 | | | 2005 | |
Operations: | | | | | | | |
| Net investment income | | $ | 1,036,033 | | $ | 617,584 | |
| Net realized gain on investments and | | | | | | | |
| non-U.S. currency transactions | | | 4,050,097 | | | 1,054,704 | |
| Net unrealized appreciation | | | | | | | |
| on investments and non-U.S. currency translations | | | 6,329,179 | | | 16,660,095 | |
| Net increase in net assets | | | | | | | |
| resulting from operations | | | 11,415,309 | | | 18,332,383 | |
| | | | | | | | |
Dividends and distributions paid to | | | | | | | |
shareholders: | | | | | | | |
| Dividends from net investment income and non-U.S. currency gain | | | (674,862 | ) | | (281,650 | ) |
| Distributions from net realized gain | | | | | | | |
| on investments | | | (924,494 | ) | | - | |
| Total dividends and distributions paid | | | | | | | |
| to shareholders | | | (1,599,356 | ) | | (281,650 | ) |
| | | | | | | | |
Capital share transactions | | | 22,595,190 | | | 17,405,596 | |
| | | | | | | | |
Total increase in net assets | | | 32,411,143 | | | 35,456,329 | |
| | | | | | | | |
Net assets: | | | | | | | |
| Beginning of year | | | 114,655,201 | | | 79,198,872 | |
| End of year (including undistributed | | | | | | | |
| net investment income: $740,684 and $383,091, respectively) | | $ | 147,066,344 | | $ | 114,655,201 | |
| | | | | | | | |
| | | | | | | | |
| See Notes to Financial Statements | | | | | | | |
Notes to financial statements
| 1. | Organization and significant accounting policies |
Organization - The Growth Fund of America, Inc. (the "fund") is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company. The fund invests in a wide range of companies that appear to offer superior opportunities for growth of capital.
The fund offers 14 share classes consisting of four retail share classes, five CollegeAmerica® savings plan share classes and five retirement plan share classes. The CollegeAmerica savings plan share classes (529-A, 529-B, 529-C, 529-E and 529-F) can be utilized to save for college education. The five retirement plan share classes (R-1, R-2, R-3, R-4 and R-5) are sold without any sales charges and do not carry any conversion rights. The fund’s share classes are described below:
Share class | Initial sales charge | Contingent deferred sales charge upon redemption | Conversion feature |
| Class A and 529-A | Up to 5.75% | None (except 1% for certain redemptions within one year of purchase without an initial sales charge) | None |
| Class B and 529-B | None | Declines from 5% to 0% for redemptions within six years of purchase | Class B and 529-B convert to Class A and 529-A, respectively, after eight years |
| Class C | None | 1% for redemptions within one year of purchase | Class C converts to Class F after 10 years |
| Class 529-C | None | 1% for redemptions within one year of purchase | None |
| Class 529-E | None | None | None |
| Class F and 529-F | None | None | None |
| Class R-1, R-2, R-3, R-4 and R-5 | None | None | None |
Holders of all share classes have equal pro rata rights to assets, dividends and liquidation proceeds. Each share class has identical voting rights, except for the exclusive right to vote on matters affecting only its class. Share classes have different fees and expenses ("class-specific fees and expenses"), primarily due to different arrangements for distribution, administrative and shareholder services. Differences in class-specific fees and expenses will result in differences in net investment income and, therefore, the payment of different per-share dividends by each class.
Significant accounting policies - The financial statements have been prepared to comply with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The following is a summary of the significant accounting policies followed by the fund:
Security valuation - Equity securities are valued at the official closing price of, or the last reported sale price on, the exchange or market on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Prices for each security are taken from the principal exchange or market in which the security trades. Fixed-income securities, including short-term securities purchased with more than 60 days left to maturity, are valued at prices obtained from an independent pricing service when such prices are available. However, where the investment adviser deems it appropriate, such securities will be valued at the mean quoted bid and asked prices (or bid prices, if asked prices are not available) or at prices for securities of comparable maturity, quality and type. Securities with both fixed-income and equity characteristics, or equity securities traded principally among fixed-income dealers, are valued in the manner described above for either equity or fixed-income securities, depending on which method is deemed most appropriate by the investment adviser. Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value. The value of short-term securities originally purchased with maturities greater than 60 days is determined based on an amortized value to par when they reach 60 days or less remaining to maturity. The ability of the issuers of the debt securities held by the fund to meet their obligations may be affected by economic developments in a specific industry, state or region. Securities and other assets for which representative market quotations are not readily available or are considered unreliable are fair valued as determined in good faith under procedures adopted by authority of the fund's board of directors. Various factors may be reviewed in order to make a good faith determination of a security’s fair value. These factors include, but are not limited to, the type and cost of the security; contractual or legal restrictions on resale of the security; relevant financial or business developments of the issuer; actively traded similar or related securities; conversion or exchange rights on the security; related corporate actions; significant events occurring after the close of trading in the security; and changes in overall market conditions.
Security transactions and related investment income - Security transactions are recorded by the fund as of the date the trades are executed with brokers. Realized gains and losses from security transactions are determined based on the specific identified cost of the securities. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. Market discounts, premiums and original issue discounts on fixed-income securities are amortized daily over the expected life of the security.
Class allocations - Income, fees and expenses (other than class-specific fees and expenses) and realized and unrealized gains and losses are allocated daily among the various share classes based on their relative net assets. Class-specific fees and expenses, such as distribution, administrative and shareholder services, are charged directly to the respective share class.
Dividends and distributions to shareholders - Dividends and distributions paid to shareholders are recorded on the ex-dividend date.
Non-U.S. currency translation - Assets and liabilities, including investment securities, denominated in non-U.S. currencies are translated into U.S. dollars at the exchange rates in effect on the valuation date. Purchases and sales of investment securities and income and expenses are translated into U.S. dollars at the exchange rates on the dates of such transactions. In the accompanying financial statements, the effects of changes in non-U.S. exchange rates on investment securities are included with the net realized gain or loss and net unrealized appreciation or depreciation on investments. The realized gain or loss and unrealized appreciation or depreciation resulting from all other transactions denominated in non-U.S. currencies are disclosed separately.
Investment risk - The risks of investing in securities of non-U.S. issuers may include, but are not limited to, investment and repatriation restrictions; revaluation of currencies; adverse political, social and economic developments; government involvement in the private sector; limited and less reliable investor information; lack of liquidity; certain local tax law considerations; and limited regulation of the securities markets.
Taxation - Dividend and interest income is recorded net of non-U.S. taxes paid. Gains realized by the fund on the sale of securities in certain countries are subject to non-U.S. taxes. The fund records a liability based on unrealized gains to provide for potential non-U.S. taxes payable upon the sale of these securities. For the year ended August 31, 2006, non-U.S. taxes paid on realized gains were $251,000. As of August 31, 2006, non-U.S. taxes provided on unrealized gains were $679,000.
3. Federal income taxation and distributions
The fund complies with the requirements under Subchapter M of the Internal Revenue Code applicable to mutual funds and intends to distribute substantially all of its net taxable income and net capital gains each year. The fund is not subject to income taxes to the extent such distributions are made. Therefore, no federal income tax provision is required.
Distributions - Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as non-U.S. currency gains and losses; short-term capital gains and losses; capital losses related to sales of certain securities within 30 days of purchase; deferred expenses; cost of investments sold; and non-U.S. taxes on capital gains. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes. The fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
During the year ended August 31, 2006, the fund reclassified $3,255,000 from undistributed net investment income to undistributed net realized gains; and reclassified $323,000 from undistributed net investment income and $166,470,000 from undistributed net realized gains to capital paid-in on the shares of capital stock to align financial reporting with tax reporting.
As of August 31, 2006, the components of distributable earnings, unrealized appreciation (depreciation) and cost of investments on a tax basis were as follows:
| (dollars in thousands) | |
Undistributed ordinary income | $ | 769,408 | |
| Post-October non-U.S. currency loss deferrals (realized during the period November 1, 2005, through August 31, 2006)* | | (1,779 | ) |
| Undistributed long-term capital gain | | 3,674,053 | |
| Gross unrealized appreciation on investment securities | | 32,830,951 | |
| Gross unrealized depreciation on investment securities | | (2,928,873 | ) |
| Net unrealized appreciation on investment securities | | 29,902,078 | |
| Cost of investment securities | | 117,012,630 | |
| *These deferrals are considered incurred in the subsequent year. | | | |
The tax character of distributions paid to shareholders was as follows (dollars in thousands):
| | | Year ended August 31, 2006 | | Year ended August 31, 2005 | |
| | | | Ordinary income | | | Long-term capital gains | | | Total distributions paid | | | Ordinary income | | | Long-term capital gains | | | Total distributions paid | |
| Share class | | | | | | | | | | | | | | | | | | | |
| Class A | | $ | 445,843 | | $ | 527,973 | | $ | 973,816 | | $ | 196,961 | | | - | | $ | 196,961 | |
| Class B | | | - | | | 48,592 | | | 48,592 | | | - | | | - | | | - | |
| Class C | | | - | | | 58,820 | | | 58,820 | | | - | | | - | | | - | |
| Class F | | | 87,642 | | | 100,251 | | | 187,893 | | | 33,311 | | | - | | | 33,311 | |
| Class 529-A | | | 9,506 | | | 11,506 | | | 21,012 | | | 3,701 | | | - | | | 3,701 | |
| Class 529-B | | | - | | | 2,743 | | | 2,743 | | | - | | | - | | | - | |
| Class 529-C | | | - | | | 3,781 | | | 3,781 | | | - | | | - | | | - | |
| Class 529-E | | | 299 | | | 632 | | | 931 | | | 20 | | | - | | | 20 | |
| Class 529-F | | | 242 | | | 254 | | | 496 | | | 69 | | | - | | | 69 | |
| Class R-1 | | | 230 | | | 1,185 | | | 1,415 | | | - | | | - | | | - | |
| Class R-2 | | | - | | | 13,343 | | | 13,343 | | | - | | | - | | | - | |
| Class R-3 | | | 32,485 | | | 54,873 | | | 87,358 | | | 9,434 | | | - | | | 9,434 | |
| Class R-4 | | | 59,655 | | | 68,134 | | | 127,789 | | | 24,656 | | | - | | | 24,656 | |
| Class R-5 | | | 38,960 | | | 32,407 | | | 71,367 | | | 13,498 | | | - | | | 13,498 | |
| Total | | $ | 674,862 | | $ | 924,494 | | $ | 1,599,356 | | $ | 281,650 | | | - | | $ | 281,650 | |
4. Fees and transactions with related parties
Capital Research and Management Company ("CRMC"), the fund’s investment adviser, is the parent company of American Funds Service Company SM ("AFS"), the fund’s transfer agent, and American Funds Distributors, Inc.SM ("AFD"), the principal underwriter of the fund’s shares.
Investment advisory services -The Investment Advisory and Service Agreement with CRMC provides for monthly fees accrued daily. These fees are based on a declining series of annual rates beginning with 0.50% on the first $1 billion of daily net assets and decreasing to 0.245% on such assets in excess of $130 billion. The board of directors approved an amended agreement effective September 1, 2006, continuing the series of rates to include additional annual rates of 0.242% on daily net assets in excess of $144 billion but not exceeding $166 billion; and 0.239% on such assets in excess of $166 billion. During the year ended August 31, 2006, CRMC reduced investment advisory services rates to those provided by the amended agreement. CRMC is currently waiving 10% of investment advisory services fees. During the year ended August 31, 2006, total investment advisory services fees waived by CRMC were $36,967,000. As a result, the fee shown on the accompanying financial statements of $369,674,000, which was equivalent to an annualized rate of 0.276%, was reduced to $332,707,000, or 0.249% of average daily net assets.
Class-specific fees and expenses - Expenses that are specific to individual share classes are accrued directly to the respective share class. The principal class-specific fees and expenses are described below:
Distribution services - The fund has adopted plans of distribution for all share classes, except Class R-5. Under the plans, the board of directors approves certain categories of expenses that are used to finance activities primarily intended to sell fund shares and service existing accounts. The plans provide for payments, based on an annualized percentage of average daily net assets, ranging from 0.25% to 1.00% as noted below. In some cases, the board of directors has limited the amounts that may be paid to less than the maximum allowed by the plans. All share classes may use up to 0.25% of average daily net assets to pay service fees, or to compensate AFD for paying service fees, to firms that have entered into agreements with AFD to provide certain shareholder services. The remaining amounts available to be paid under each plan are paid to dealers to compensate them for their sales activities.
For Class A and 529-A, the board of directors has also approved the reimbursement of dealer and wholesaler commissions paid by AFD for certain shares sold without a sales charge. These classes reimburse AFD for amounts billed within the prior 15 months but only to the extent that the overall annual expense limit of 0.25% is not exceeded. As of August 31, 2006, unreimbursed expenses subject to reimbursement totaled $7,138,000 for Class A. There were no unreimbursed expenses subject to reimbursement for Class 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 August 31, 2006, the total administrative services fees paid by CRMC were $48,000 for Class R-2. 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 above for the year ended August 31, 2006, were as follows (dollars in thousands):
Share class | Distribution services | Transfer agent services | Administrative services |
CRMC administrative services | Transfer agent services | Commonwealth of Virginia administrative services |
| Class A | $187,421 | $77,580 | Not applicable | Not applicable | Not applicable |
| Class B | 66,120 | 6,881 | Not applicable | Not applicable | Not applicable |
| Class C | 82,473 | Included in administrative services | $12,096 | $1,861 | Not applicable |
| Class F | 37,309 | 12,723 | 1,404 | Not applicable |
| Class 529-A | 3,114 | 1,500 | 260 | $ 1,715 |
| Class 529-B | 3,857 | 338 | 152 | 386 |
| Class 529-C | 5,435 | 477 | 181 | 545 |
| Class 529-E | 466 | 81 | 14 | 93 |
| Class 529-F | - | 36 | 6 | 41 |
| Class R-1 | 1,873 | 239 | 56 | Not applicable |
| Class R-2 | 14,441 | 2,841 | 5,192 | Not applicable |
| Class R-3 | 41,077 | 11,634 | 2,690 | Not applicable |
| Class R-4 | 26,048 | 15,492 | 163 | Not applicable |
| Class R-5 | Not applicable | 5,148 | 57 | Not applicable |
| Total | $469,634 | $84,461 | $62,605 | $12,036 | $2,780 |
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 $462,000, shown on the accompanying financial statements, includes $305,000 in current fees (either paid in cash or deferred) and a net increase of $157,000 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(*) | | Reinvestments of dividends and distributions | | Repurchases(*) | | Net increase | |
| | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | |
Year ended August 31, 2006 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A | | $ | 14,458,668 | | | 463,064 | | $ | 936,264 | | | 30,378 | | $ | (10,006,575 | ) | | (320,708 | ) | $ | 5,388,357 | | | 172,734 | |
| Class B | | | 823,189 | | | 27,187 | | | 46,761 | | | 1,563 | | | (620,386 | ) | | (20,541 | ) | | 249,564 | | | 8,209 | |
| Class C | | | 2,377,709 | | | 78,847 | | | 56,267 | | | 1,886 | | | (1,037,829 | ) | | (34,430 | ) | | 1,396,147 | | | 46,303 | |
| Class F | | | 6,741,333 | | | 216,406 | | | 156,176 | | | 5,094 | | | (2,480,307 | ) | | (79,812 | ) | | 4,417,202 | | | 141,688 | |
| Class 529-A | | | 522,834 | | | 16,805 | | | 21,012 | | | 684 | | | (85,598 | ) | | (2,746 | ) | | 458,248 | | | 14,743 | |
| Class 529-B | | | 73,313 | | | 2,412 | | | 2,743 | | | 91 | | | (14,256 | ) | | (469 | ) | | 61,800 | | | 2,034 | |
| Class 529-C | | | 168,188 | | | 5,528 | | | 3,781 | | | 126 | | | (38,240 | ) | | (1,255 | ) | | 133,729 | | | 4,399 | |
| Class 529-E | | | 28,956 | | | 936 | | | 931 | | | 30 | | | (5,552 | ) | | (179 | ) | | 24,335 | | | 787 | |
| Class 529-F | | | 21,303 | | | 681 | | | 496 | | | 17 | | | (2,664 | ) | | (85 | ) | | 19,135 | | | 613 | |
| Class R-1 | | | 153,153 | | | 5,004 | | | 1,406 | | | 46 | | | (42,793 | ) | | (1,394 | ) | | 111,766 | | | 3,656 | |
| Class R-2 | | | 906,870 | | | 29,689 | | | 13,338 | | | 441 | | | (458,510 | ) | | (14,959 | ) | | 461,698 | | | 15,171 | |
| Class R-3 | | | 4,432,439 | | | 143,562 | | | 87,347 | | | 2,868 | | | (1,757,738 | ) | | (56,800 | ) | | 2,762,048 | | | 89,630 | |
| Class R-4 | | | 5,699,587 | | | 182,999 | | | 127,670 | | | 4,167 | | | (2,020,474 | ) | | (65,033 | ) | | 3,806,783 | | | 122,133 | |
| Class R-5 | | | 4,050,715 | | | 130,036 | | | 70,624 | | | 2,291 | | | (816,961 | ) | | (26,081 | ) | | 3,304,378 | | | 106,246 | |
| Total net increase | | | | | | | | | | | | | | | | | | | | | | | | | |
| (decrease) | | $ | 40,458,257 | | | 1,303,156 | | $ | 1,524,816 | | | 49,682 | | $ | (19,387,883 | ) | | (624,492 | ) | $ | 22,595,190 | | | 728,346 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended August 31, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A | | $ | 11,936,861 | | | 441,726 | | $ | 188,689 | | | 7,094 | | $ | (8,043,207 | ) | | (297,741 | ) | $ | 4,082,343 | | | 151,079 | |
| Class B | | | 792,730 | | | 30,457 | | | - | | | - | | | (487,396 | ) | | (18,609 | ) | | 305,334 | | | 11,848 | |
| Class C | | | 1,888,048 | | | 72,219 | | | - | | | - | | | (726,215 | ) | | (27,757 | ) | | 1,161,833 | | | 44,462 | |
| Class F | | | 4,413,012 | | | 163,978 | | | 28,586 | | | 1,080 | | | (1,339,348 | ) | | (49,720 | ) | | 3,102,250 | | | 115,338 | |
| Class 529-A | | | 411,150 | | | 15,278 | | | 3,701 | | | 139 | | | (46,982 | ) | | (1,733 | ) | | 367,869 | | | 13,684 | |
| Class 529-B | | | 73,941 | | | 2,818 | | | - | | | - | | | (8,482 | ) | | (320 | ) | | 65,459 | | | 2,498 | |
| Class 529-C | | | 129,269 | | | 4,900 | | | - | | | - | | | (19,885 | ) | | (747 | ) | | 109,384 | | | 4,153 | |
| Class 529-E | | | 22,803 | | | 854 | | | 20 | | | 1 | | | (2,601 | ) | | (97 | ) | | 20,222 | | | 758 | |
| Class 529-F | | | 11,393 | | | 427 | | | 69 | | | 2 | | | (1,256 | ) | | (46 | ) | | 10,206 | | | 383 | |
| Class R-1 | | | 77,632 | | | 2,932 | | | - | | | - | | | (28,663 | ) | | (1,077 | ) | | 48,969 | | | 1,855 | |
| Class R-2 | | | 766,575 | | | 28,964 | | | - | | | - | | | (277,631 | ) | | (10,385 | ) | | 488,944 | | | 18,579 | |
| Class R-3 | | | 3,313,918 | | | 124,192 | | | 9,421 | | | 358 | | | (952,949 | ) | | (35,566 | ) | | 2,370,390 | | | 88,984 | |
| Class R-4 | | | 4,688,956 | | | 175,888 | | | 24,612 | | | 930 | | | (1,063,809 | ) | | (39,544 | ) | | 3,649,759 | | | 137,274 | |
| Class R-5 | | | 2,033,183 | | | 75,500 | | | 13,271 | | | 499 | | | (423,820 | ) | | (15,721 | ) | | 1,622,634 | | | 60,278 | |
| Total net increase | | | | | | | | | | | | | | | | | | | | | | | | | |
| (decrease) | | $ | 30,559,471 | | | 1,140,133 | | $ | 268,369 | | | 10,103 | | $ | (13,422,244 | ) | | (499,063 | ) | $ | 17,405,596 | | | 651,173 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| * Includes exchanges between share classes of the fund. | | | | | | | | | | | | | | | | | | | | | |
6. Investment transactions
The fund made purchases and sales of investment securities, excluding short-term securities, of $45,132,538,000 and $26,835,115,000, respectively, during the year ended August 31, 2006.
Financial highlights(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Income (loss) from investment operations(2) | | | Dividends and distributions | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Net asset value, beginning of period | | | Net investment income (loss | ) | | | | | 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 (loss) to average net assets | | | | |
Class A: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | $ | 29.51 | | $ | .28 | | | | | $ | 2.56 | | $ | 2.84 | | $ | (.19 | ) | $ | (.23 | ) | $ | (.42 | ) | $ | 31.93 | | | 9.66 | % | $ | 78,854 | | | .65 | % | | | | | .63 | % | | | | | .89 | % | | | |
| Year ended 8/31/2005 | | | | | | 24.43 | | | .21 | | | | | | 4.96 | | | 5.17 | | | (.09 | ) | | - | | | (.09 | ) | | 29.51 | | | 21.20 | | | 67,793 | | | .68 | | | | | | .66 | | | | | | .76 | | | | |
| Year ended 8/31/2004 | | | | | | 22.49 | | | .05 | | | | | | 1.90 | | | 1.95 | | | (.01 | ) | | - | | | (.01 | ) | | 24.43 | | | 8.65 | | | 52,432 | | | .70 | | | | | | .70 | | | | | | .20 | | | | |
| Year ended 8/31/2003 | | | | | | 18.57 | | | .06 | | | | | | 3.88 | | | 3.94 | | | (.02 | ) | | - | | | (.02 | ) | | 22.49 | | | 21.23 | | | 41,267 | | | .76 | | | | | | .76 | | | | | | .28 | | | | |
| Year ended 8/31/2002 | | | | | | 23.20 | | | .04 | | | | | | (4.62 | ) | | (4.58 | ) | | (.05 | ) | | - | | | (.05 | ) | | 18.57 | | | (19.80 | ) | | 30,644 | | | .75 | | | | | | .75 | | | | | | .18 | | | | |
Class B: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | | 28.55 | | | .04 | | | | | | 2.47 | | | 2.51 | | | - | | | (.23 | ) | | (.23 | ) | | 30.83 | | | 8.80 | | | 6,839 | | | 1.40 | | | | | | 1.38 | | | | | | .14 | | | | |
| Year ended 8/31/2005 | | | | | | 23.73 | | | - | | | (5 | ) | | 4.82 | | | 4.82 | | | - | | | - | | | - | | | 28.55 | | | 20.31 | | | 6,098 | | | 1.43 | | | | | | 1.41 | | | | | | .01 | | | | |
| Year ended 8/31/2004 | | | | | | 22.00 | | | (.13 | ) | | | | | 1.86 | | | 1.73 | | | - | | | - | | | - | | | 23.73 | | | 7.86 | | | 4,788 | | | 1.44 | | | | | | 1.44 | | | | | | (.55 | ) | | | |
| Year ended 8/31/2003 | | | | | | 18.28 | | | (.09 | ) | | | | | 3.81 | | | 3.72 | | | - | | | - | | | - | | | 22.00 | | | 20.35 | | | 3,490 | | | 1.53 | | | | | | 1.53 | | | | | | (.49 | ) | | | |
| Year ended 8/31/2002 | | | | | | 22.98 | | | (.13 | ) | | | | | (4.57 | ) | | (4.70 | ) | | - | | | - | | | - | | | 18.28 | | | (20.45 | ) | | 2,170 | | | 1.52 | | | | | | 1.52 | | | | | | (.60 | ) | | | |
Class C: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | | 28.47 | | | .02 | | | | | | 2.47 | | | 2.49 | | | - | | | (.23 | ) | | (.23 | ) | | 30.73 | | | 8.75 | | | 9,036 | | | 1.47 | | | | | | 1.44 | | | | | | .07 | | | | |
| Year ended 8/31/2005 | | | | | | 23.68 | | | (.01 | ) | | | | | 4.80 | | | 4.79 | | | - | | | - | | | - | | | 28.47 | | | 20.23 | | | 7,054 | | | 1.48 | | | | | | 1.46 | | | | | | (.05 | ) | | | |
| Year ended 8/31/2004 | | | | | | 21.96 | | | (.14 | ) | | | | | 1.86 | | | 1.72 | | | - | | | - | | | - | | | 23.68 | | | 7.83 | | | 4,814 | | | 1.50 | | | | | | 1.50 | | | | | | (.60 | ) | | | |
| Year ended 8/31/2003 | | | | | | 18.26 | | | (.10 | ) | | | | | 3.80 | | | 3.70 | | | - | | | - | | | - | | | 21.96 | | | 20.26 | | | 2,762 | | | 1.55 | | | | | | 1.55 | | | | | | (.52 | ) | | | |
| Year ended 8/31/2002 | | | | | | 22.95 | | | (.13 | ) | | | | | (4.56 | ) | | (4.69 | ) | | - | | | - | | | - | | | 18.26 | | | (20.44 | ) | | 1,370 | | | 1.55 | | | | | | 1.55 | | | | | | (.63 | ) | | | |
Class F: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | | 29.37 | | | .28 | | | | | | 2.54 | | | 2.82 | | | (.20 | ) | | (.23 | ) | | (.43 | ) | | 31.76 | | | 9.62 | | | 17,613 | | | .64 | | | | | | .61 | | | | | | .91 | | | | |
| Year ended 8/31/2005 | | | | | | 24.33 | | | .20 | | | | | | 4.94 | | | 5.14 | | | (.10 | ) | | - | | | (.10 | ) | | 29.37 | | | 21.18 | | | 12,122 | | | .70 | | | | | | .68 | | | | | | .73 | | | | |
| Year ended 8/31/2004 | | | | | | 22.41 | | | .04 | | | | | | 1.90 | | | 1.94 | | | (.02 | ) | | - | | | (.02 | ) | | 24.33 | | | 8.66 | | | 7,237 | | | .72 | | | | | | .72 | | | | | | .17 | | | | |
| Year ended 8/31/2003 | | | | | | 18.53 | | | .05 | | | | | | 3.87 | | | 3.92 | | | (.04 | ) | | - | | | (.04 | ) | | 22.41 | | | 21.22 | | | 3,721 | | | .75 | | | | | | .75 | | | | | | .28 | | | | |
| Year ended 8/31/2002 | | | | | | 23.19 | | | .03 | | | | | | (4.61 | ) | | (4.58 | ) | | (.08 | ) | | - | | | (.08 | ) | | 18.53 | | | (19.83 | ) | | 1,576 | | | .77 | | | | | | .77 | | | | | | .15 | | | | |
Class 529-A: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | | 29.42 | | | .27 | | | | | | 2.54 | | | 2.81 | | | (.19 | ) | | (.23 | ) | | (.42 | ) | | 31.81 | | | 9.57 | | | 1,968 | | | .68 | | | | | | .66 | | | | | | .86 | | | | |
| Year ended 8/31/2005 | | | | | | 24.38 | | | .19 | | | | | | 4.95 | | | 5.14 | | | (.10 | ) | | - | | | (.10 | ) | | 29.42 | | | 21.13 | | | 1,386 | | | .73 | | | | | | .71 | | | | | | .69 | | | | |
| Year ended 8/31/2004 | | | | | | 22.47 | | | .04 | | | | | | 1.90 | | | 1.94 | | | (.03 | ) | | - | | | (.03 | ) | | 24.38 | | | 8.63 | | | 815 | | | .74 | | | | | | .74 | | | | | | .16 | | | | |
| Year ended 8/31/2003 | | | | | | 18.56 | | | .07 | | | | | | 3.88 | | | 3.95 | | | (.04 | ) | | - | | | (.04 | ) | | 22.47 | | | 21.35 | | | 409 | | | .67 | | | | | | .67 | | | | | | .36 | | | | |
| Period from 2/15/2002 to 8/31/2002 | | | | | | 22.62 | | | .01 | | | | | | (4.07 | ) | | (4.06 | ) | | - | | | - | | | - | | | 18.56 | | | (17.95 | ) | | 144 | | | .86 | | | (6 | ) | | .86 | | | (6 | ) | | .07 | | | (6 | ) |
Class 529-B: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | | 28.71 | | | .01 | | | | | | 2.48 | | | 2.49 | | | - | | | (.23 | ) | | (.23 | ) | | 30.97 | | | 8.68 | | | 424 | | | 1.52 | | | | | | 1.50 | | | | | | .02 | | | | |
| Year ended 8/31/2005 | | | | | | 23.91 | | | (.04 | ) | | | | | 4.84 | | | 4.80 | | | - | | | - | | | - | | | 28.71 | | | 20.08 | | | 335 | | | 1.59 | | | | | | 1.57 | | | | | | (.16 | ) | | | |
| Year ended 8/31/2004 | | | | | | 22.20 | | | (.18 | ) | | | | | 1.89 | | | 1.71 | | | - | | | - | | | - | | | 23.91 | | | 7.70 | | | 219 | | | 1.62 | | | | | | 1.62 | | | | | | (.72 | ) | | | |
| Year ended 8/31/2003 | | | | | | 18.48 | | | (.12 | ) | | | | | 3.84 | | | 3.72 | | | - | | | - | | | - | | | 22.20 | | | 20.13 | | | 120 | | | 1.66 | | | | | | 1.66 | | | | | | (.63 | ) | | | |
| Period from 2/15/2002 to 8/31/2002 | | | | | | 22.62 | | | (.08 | ) | | | | | (4.06 | ) | | (4.14 | ) | | - | | | - | | | - | | | 18.48 | | | (18.30 | ) | | 39 | | | 1.66 | | | (6 | ) | | 1.66 | | | (6 | ) | | (.74 | ) | | (6 | ) |
Class 529-C: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | | 28.72 | | | .01 | | | | | | 2.49 | | | 2.50 | | | - | | | (.23 | ) | | (.23 | ) | | 30.99 | | | 8.71 | | | 619 | | | 1.52 | | | | | | 1.49 | | | | | | .03 | | | | |
| Year ended 8/31/2005 | | | | | | 23.91 | | | (.04 | ) | | | | | 4.85 | | | 4.81 | | | - | | | - | | | - | | | 28.72 | | | 20.12 | | | 447 | | | 1.58 | | | | | | 1.56 | | | | | | (.15 | ) | | | |
| Year ended 8/31/2004 | | | | | | 22.21 | | | (.17 | ) | | | | | 1.87 | | | 1.70 | | | - | | | - | | | - | | | 23.91 | | | 7.65 | | | 273 | | | 1.61 | | | | | | 1.61 | | | | | | (.71 | ) | | | |
| Year ended 8/31/2003 | | | | | | 18.48 | | | (.12 | ) | | | | | 3.85 | | | 3.73 | | | - | | | - | | | - | | | 22.21 | | | 20.18 | | | 136 | | | 1.65 | | | | | | 1.65 | | | | | | (.61 | ) | | | |
| Period from 2/15/2002 to 8/31/2002 | | | | | | 22.62 | | | (.08 | ) | | | | | (4.06 | ) | | (4.14 | ) | | - | | | - | | | - | | | 18.48 | | | (18.30 | ) | | 45 | | | 1.64 | | | (6 | ) | | 1.64 | | | (6 | ) | | (.72 | ) | | (6 | ) |
Class 529-E: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | | 29.23 | | | .17 | | | | | | 2.52 | | | 2.69 | | | (.11 | ) | | (.23 | ) | | (.34 | ) | | 31.58 | | | 9.21 | | | 107 | | | 1.00 | | | | | | .97 | | | | | | .54 | | | | |
| Year ended 8/31/2005 | | | | | | 24.22 | | | .10 | | | | | | 4.92 | | | 5.02 | | | (.01 | ) | | - | | | (.01 | ) | | 29.23 | | | 20.73 | | | 76 | | | 1.06 | | | | | | 1.04 | | | | | | .36 | | | | |
| Year ended 8/31/2004 | | | | | | 22.37 | | | (.05 | ) | | | | | 1.90 | | | 1.85 | | | - | | | - | | | - | | | 24.22 | | | 8.27 | | | 44 | | | 1.09 | | | | | | 1.09 | | | | | | (.19 | ) | | | |
| Year ended 8/31/2003 | | | | | | 18.55 | | | (.02 | ) | | | | | 3.87 | | | 3.85 | | | (.03 | ) | | - | | | (.03 | ) | | 22.37 | | | 20.78 | | | 23 | | | 1.11 | | | | | | 1.11 | | | | | | (.08 | ) | | | |
| Period from 3/1/2002 to 8/31/2002 | | | | | | 22.95 | | | (.02 | ) | | | | | (4.38 | ) | | (4.40 | ) | | - | | | - | | | - | | | 18.55 | | | (19.17 | ) | | 6 | | | .56 | | | | | | .56 | | | | | | (.10 | ) | | | |
Class 529-F: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | | 29.38 | | | .33 | | | | | | 2.53 | | | 2.86 | | | (.21 | ) | | (.23 | ) | | (.44 | ) | | 31.80 | | | 9.79 | | | 52 | | | .50 | | | | | | .47 | | | | | | 1.05 | | | | |
| Year ended 8/31/2005 | | | | | | 24.34 | | | .19 | | | | | | 4.94 | | | 5.13 | | | (.09 | ) | | - | | | (.09 | ) | | 29.38 | | | 21.12 | | | 30 | | | .72 | | | | | | .70 | | | | | | .70 | | | | |
| Year ended 8/31/2004 | | | | | | 22.45 | | | .02 | | | | | | 1.89 | | | 1.91 | | | (.02 | ) | | - | | | (.02 | ) | | 24.34 | | | 8.53 | | | 16 | | | .84 | | | | | | .84 | | | | | | .07 | | | | |
| Period from 9/16/2002 to 8/31/2003 | | | | | | 18.39 | | | .03 | | | | | | 4.06 | | | 4.09 | | | (.03 | ) | | - | | | (.03 | ) | | 22.45 | | | 22.27 | | | 5 | | | .86 | | | (6 | ) | | .86 | | | (6 | ) | | .16 | | | (6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Class R-1: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | $ | 28.88 | | $ | .03 | | | | | $ | 2.49 | | $ | 2.52 | | $ | (.04 | ) | $ | (.23 | ) | $ | (.27 | ) | $ | 31.13 | | | 8.75 | % | $ | 245 | | | 1.45 | % | | | | | 1.42 | % | | | | | .11 | % | | | |
| Year ended 8/31/2005 | | | | | | 24.02 | | | (.01 | ) | | | | | 4.87 | | | 4.86 | | | - | | | - | | | - | | | 28.88 | | | 20.23 | | | 122 | | | 1.47 | | | | | | 1.44 | | | | | | (.05 | ) | | | |
| Year ended 8/31/2004 | | | | | | 22.28 | | | (.15 | ) | | | | | 1.89 | | | 1.74 | | | - | | | - | | | - | | | 24.02 | | | 7.81 | | | 57 | | | 1.51 | | | | | | 1.51 | | | | | | (.61 | ) | | | |
| Year ended 8/31/2003 | | | | | | 18.53 | | | (.11 | ) | | | | | 3.87 | | | 3.76 | | | (.01 | ) | | - | | | (.01 | ) | | 22.28 | | | 20.29 | | | 23 | | | 1.59 | | | | | | 1.53 | | | | | | (.53 | ) | | | |
| Period from 6/6/2002 to 8/31/2002 | | | | | | 21.08 | | | (.03 | ) | | | | | (2.52 | ) | | (2.55 | ) | | - | | | - | | | - | | | 18.53 | | | (12.10 | ) | | 1 | | | .46 | | | | | | .36 | | | | | | (.16 | ) | | | |
Class R-2: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | | 28.86 | | | .03 | | | | | | 2.50 | | | 2.53 | | | - | | | (.23 | ) | | (.23 | ) | | 31.16 | | | 8.77 | | | 2,164 | | | 1.46 | | | | | | 1.43 | | | | | | .09 | | | | |
| Year ended 8/31/2005 | | | | | | 24.01 | | | (.01 | ) | | | | | 4.86 | | | 4.85 | | | - | | | - | | | - | | | 28.86 | | | 20.20 | | | 1,567 | | | 1.51 | | | | | | 1.45 | | | | | | (.04 | ) | | | |
| Year ended 8/31/2004 | | | | | | 22.26 | | | (.14 | ) | | | | | 1.89 | | | 1.75 | | | - | | | - | | | - | | | 24.01 | | | 7.86 | | | 857 | | | 1.60 | | | | | | 1.48 | | | | | | (.57 | ) | | | |
| Year ended 8/31/2003 | | | | | | 18.53 | | | (.10 | ) | | | | | 3.86 | | | 3.76 | | | (.03 | ) | | - | | | (.03 | ) | | 22.26 | | | 20.29 | | | 305 | | | 1.82 | | | | | | 1.49 | | | | | | (.49 | ) | | | |
| Period from 5/21/2002 to 8/31/2002 | | | | | | 22.11 | | | (.03 | ) | | | | | (3.55 | ) | | (3.58 | ) | | - | | | - | | | - | | | 18.53 | | | (16.19 | ) | | 8 | | | .49 | | | | | | .42 | | | | | | (.17 | ) | | | |
Class R-3: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | | 29.15 | | | .18 | | | | | | 2.52 | | | 2.70 | | | (.13 | ) | | (.23 | ) | | (.36 | ) | | 31.49 | | | 9.30 | | | 9,724 | | | .96 | | | | | | .94 | | | | | | .59 | | | | |
| Year ended 8/31/2005 | | | | | | 24.18 | | | .12 | | | | | | 4.91 | | | 5.03 | | | (.06 | ) | | - | | | (.06 | ) | | 29.15 | | | 20.83 | | | 6,389 | | | .96 | | | | | | .94 | | | | | | .46 | | | | |
| Year ended 8/31/2004 | | | | | | 22.35 | | | (.03 | ) | | | | | 1.88 | | | 1.85 | | | (.02 | ) | | - | | | (.02 | ) | | 24.18 | | | 8.28 | | | 3,148 | | | 1.05 | | | | | | 1.05 | | | | | | (.14 | ) | | | |
| Year ended 8/31/2003 | | | | | | 18.55 | | | (.02 | ) | | | | | 3.86 | | | 3.84 | | | (.04 | ) | | - | | | (.04 | ) | | 22.35 | | | 20.75 | | | 743 | | | 1.11 | | | | | | 1.11 | | | | | | (.11 | ) | | | |
| Period from 5/21/2002 to 8/31/2002 | | | | | | 22.11 | | | (.01 | ) | | | | | (3.55 | ) | | (3.56 | ) | | - | | | - | | | - | | | 18.55 | | | (16.10 | ) | | 11 | | | .33 | | | | | | .31 | | | | | | (.06 | ) | | | |
Class R-4: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | | 29.35 | | | .27 | | | | | | 2.54 | | | 2.81 | | | (.20 | ) | | (.23 | ) | | (.43 | ) | | 31.73 | | | 9.60 | | | 12,558 | | | .69 | | | | | | .66 | | | | | | .86 | | | | |
| Year ended 8/31/2005 | | | | | | 24.35 | | | .19 | | | | | | 4.94 | | | 5.13 | | | (.13 | ) | | - | | | (.13 | ) | | 29.35 | | | 21.15 | | | 8,032 | | | .70 | | | | | | .68 | | | | | | .72 | | | | |
| Year ended 8/31/2004 | | | | | | 22.44 | | | .05 | | | | | | 1.90 | | | 1.95 | | | (.04 | ) | | - | | | (.04 | ) | | 24.35 | | | 8.70 | | | 3,320 | | | .71 | | | | | | .71 | | | | | | .20 | | | | |
| Year ended 8/31/2003 | | | | | | 18.57 | | | .05 | | | | | | 3.87 | | | 3.92 | | | (.05 | ) | | - | | | (.05 | ) | | 22.44 | | | 21.19 | | | 401 | | | .74 | | | | | | .74 | | | | | | .26 | | | | |
| Period from 5/28/2002 to 8/31/2002 | | | | | | 22.01 | | | .01 | | | | | | (3.45 | ) | | (3.44 | ) | | - | | | - | | | - | | | 18.57 | | | (15.63 | ) | | 3 | | | .25 | | | | | | .20 | | | | | | .05 | | | | |
Class R-5: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 8/31/2006 | | | | | | 29.56 | | | .37 | | | | | | 2.55 | | | 2.92 | | | (.27 | ) | | (.23 | ) | | (.50 | ) | | 31.98 | | | 9.92 | | | 6,863 | | | .39 | | | | | | .36 | | | | | | 1.17 | | | | |
| Year ended 8/31/2005 | | | | | | 24.50 | | | .28 | | | | | | 4.97 | | | 5.25 | | | (.19 | ) | | - | | | (.19 | ) | | 29.56 | | | 21.52 | | | 3,204 | | | .40 | | | | | | .38 | | | | | | 1.02 | | | | |
| Year ended 8/31/2004 | | | | | | 22.52 | | | .12 | | | | | | 1.91 | | | 2.03 | | | (.05 | ) | | - | | | (.05 | ) | | 24.50 | | | 9.02 | | | 1,179 | | | .41 | | | | | | .41 | | | | | | .50 | | | | |
| Year ended 8/31/2003 | | | | | | 18.58 | | | .11 | | | | | | 3.89 | | | 4.00 | | | (.06 | ) | | - | | | (.06 | ) | | 22.52 | | | 21.61 | | | 297 | | | .43 | | | | | | .43 | | | | | | .56 | | | | |
| Period from 5/15/2002 to 8/31/2002 | | | | | | 22.40 | | | .03 | | | | | | (3.85 | ) | | (3.82 | ) | | - | | | - | | | - | | | 18.58 | | | (17.05 | ) | | 95 | | | .13 | | | | | | .13 | | | | | | .14 | | | | |
| | | | Year ended August 31 | |
| | | | 2006 | | | 2005 | | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | | | | | | | | |
| Portfolio turnover rate for all classes of shares | | | 22 | % | | 20 | % | | 19 | % | | 25 | % | | 30 | % |
| (1) Based on operations for the periods shown (unless otherwise noted) and, accordingly, may not be representative of a full year. |
| (2) Based on average shares outstanding. |
| (3) Total returns exclude all sales charges, including contingent deferred sales charges. |
(4) The ratios in this column reflect the impact, if any, of certain reimbursements/waivers from CRMC. During some of the periods shown,CRMC reduced fees for investment advisory services for all share classes. In addition, during the start-up period for the retirement plan share classes (except Class R-5), CRMC agreed to pay a portion of the fees related to transfer agent services. |
| (5) Amount less than $.01. |
| (6) Annualized. |
| |
| |
| See Notes to Financial Statements |
<page>
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of The Growth Fund of America, Inc.:
We have audited the accompanying statement of assets and liabilities of The Growth Fund of America, Inc. (the “Fund”), including the summary investment portfolio, as of August 31, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of August 31, 2006, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of The Growth Fund of America, Inc. as of August 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Costa Mesa, California
October 5, 2006
<page>
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 fund hereby designates the following amounts for the fund’s fiscal year ended August 31, 2006:
| Long-term capital gains | $924,494,000 |
| Qualified dividend income | 100% |
| Corporate dividends received deduction | 100% |
| U.S. government income that may be exempt from state taxation | $128,433,000 |
Individual shareholders should refer to their Form 1099-DIV or other tax information, which will be mailed in January 2007, to determine the calendar year amounts to be included on their 2006 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 (March 1, 2006, through August 31, 2006).
Actual expenses:
The first line of each share class in the table on the next page provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses paid during period" to estimate the expenses you paid on your account during this period. There are some account fees that are charged to certain types of accounts, such as Individual Retirement Accounts and CollegeAmerica accounts (generally, a $10 fee is charged to set up the account and an additional $10 fee is charged to the account annually) that would increase the amount of expenses paid on your account. In addition, retirement plan participants may be subject to certain fees charged by the plan sponsor, and Class F and 529-F shareholders may be subject to fees charged by financial intermediaries, typically ranging from 0.75% to 1.50% of assets annually depending on services offered. You can estimate the impact of these fees by adding the amount of the fees to the total estimated expenses you paid on your account during the period as calculated above. In addition, your ending account value would also be lower by the amount of these fees.
Hypothetical example for comparison purposes:
The second line of each share class in the table on the next page provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio for the share class and an assumed rate of return of 5.00% per year before expenses, which is not the actual return of the share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5.00% hypothetical example with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds. There are some account fees that are charged to certain types of accounts, such as Individual Retirement Accounts and CollegeAmerica accounts (generally, a $10 fee is charged to set up the account and an additional $10 fee is charged to the account annually) that would increase the amount of expenses paid on your account. In addition, retirement plan participants may be subject to certain fees charged by the plan sponsor, and Class F and 529-F shareholders may be subject to fees charged by financial intermediaries, typically ranging from 0.75% to 1.50% of assets annually depending on services offered. You can estimate the impact of these fees by adding the amount of the fees to the total estimated expenses you paid on your account during the period as calculated above. In addition, your ending account value would also be lower by the amount of these fees.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of each share class in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| | | Beginning account value 3/1/2006 | | Ending account value 8/31/2006 | | Expenses paid during period* | | Annualized expense ratio | |
| | | | | | | | | | | | | | |
| Class A -- actual return | | $ | 1,000.00 | | $ | 1,010.78 | | $ | 3.14 | | | .62 | % |
| Class A -- assumed 5% return | | | 1,000.00 | | | 1,022.08 | | | 3.16 | | | .62 | |
| Class B -- actual return | | | 1,000.00 | | | 1,006.85 | | | 6.93 | | | 1.37 | |
| Class B -- assumed 5% return | | | 1,000.00 | | | 1,018.30 | | | 6.97 | | | 1.37 | |
| Class C -- actual return | | | 1,000.00 | | | 1,006.87 | | | 7.23 | | | 1.43 | |
| Class C -- assumed 5% return | | | 1,000.00 | | | 1,018.00 | | | 7.27 | | | 1.43 | |
| Class F -- actual return | | | 1,000.00 | | | 1,010.83 | | | 3.04 | | | .60 | |
| Class F -- assumed 5% return | | | 1,000.00 | | | 1,022.18 | | | 3.06 | | | .60 | |
| Class 529-A -- actual return | | | 1,000.00 | | | 1,010.48 | | | 3.29 | | | .65 | |
| Class 529-A -- assumed 5% return | | | 1,000.00 | | | 1,021.93 | | | 3.31 | | | .65 | |
| Class 529-B -- actual return | | | 1,000.00 | | | 1,006.18 | | | 7.53 | | | 1.49 | |
| Class 529-B -- assumed 5% return | | | 1,000.00 | | | 1,017.69 | | | 7.58 | | | 1.49 | |
| Class 529-C -- actual return | | | 1,000.00 | | | 1,006.49 | | | 7.49 | | | 1.48 | |
| Class 529-C -- assumed 5% return | | | 1,000.00 | | | 1,017.74 | | | 7.53 | | | 1.48 | |
| Class 529-E -- actual return | | | 1,000.00 | | | 1,008.95 | | | 4.91 | | | .97 | |
| Class 529-E -- assumed 5% return | | | 1,000.00 | | | 1,020.32 | | | 4.94 | | | .97 | |
| Class 529-F -- actual return | | | 1,000.00 | | | 1,011.46 | | | 2.38 | | | .47 | |
| Class 529-F -- assumed 5% return | | | 1,000.00 | | | 1,022.84 | | | 2.40 | | | .47 | |
| Class R-1 -- actual return | | | 1,000.00 | | | 1,006.81 | | | 7.23 | | | 1.43 | |
| Class R-1 -- assumed 5% return | | | 1,000.00 | | | 1,018.00 | | | 7.27 | | | 1.43 | |
| Class R-2 -- actual return | | | 1,000.00 | | | 1,006.78 | | | 7.18 | | | 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 | | | 1,009.29 | | | 4.71 | | | .93 | |
| Class R-3 -- assumed 5% return | | | 1,000.00 | | | 1,020.52 | | | 4.74 | | | .93 | |
| Class R-4 -- actual return | | | 1,000.00 | | | 1,010.51 | | | 3.34 | | | .66 | |
| Class R-4 -- assumed 5% return | | | 1,000.00 | | | 1,021.88 | | | 3.36 | | | .66 | |
| Class R-5 -- actual return | | | 1,000.00 | | | 1,012.36 | | | 1.83 | | | .36 | |
| Class R-5 -- assumed 5% return | | | 1,000.00 | | | 1,023.39 | | | 1.84 | | | .36 | |
| | | | | | | | | | | | | | |
* 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, 2007. The agreement was amended to add additional advisory fee breakpoints if and when the fund’s net assets exceed $144 billion and $166 billion. The board approved the agreement following the recommendation of the fund’s Governance and Contracts Committee (the “committee”), which is composed of all of the fund’s independent board members. The information, material facts and conclusions that formed the basis for the committee’s recommendation and the board’s subsequent approval are described below.
1. Information reviewed
Materials reviewed — During the course of each year, board members review a wide variety of materials relating to the services provided by CRMC, including reports on the fund’s investment results, portfolio composition, portfolio trading practices, shareholder services, and other information relating to the nature, extent and quality of services provided by CRMC to the fund. In addition, the committee requests and reviews supplementary information that includes extensive materials regarding the fund’s investment results, advisory fee and expense comparisons, financial and profitability information regarding CRMC, descriptions of various functions such as compliance monitoring and portfolio trading practices, and information about the personnel providing investment management and administrative services to the fund.
Review process — The committee received assistance and advice regarding legal and industry standards from independent counsel to the board. The committee discussed the approval of the agreement with CRMC representatives and in a private session with counsel at which no representatives of CRMC were present. In deciding to recommend approval of the agreement, the committee did not identify any single issue or particular piece of information that, in isolation, was the controlling factor. This summary describes the most important, but not all, of the factors considered by the board and the committee.
2. Nature, extent and quality of services
CRMC, its personnel and its resources — The board and the committee considered the depth and quality of CRMC’s investment management process, including its global research capabilities; the depth and quality of CRMC’s investment professionals providing services to the fund in light of the substantial growth in fund assets over recent years, and whether it would be in the best interests of the fund’s shareholders to restrict further growth in fund assets; 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 growth of capital. They compared the fund’s total returns with the average returns of all funds included in the Lipper Multi-Cap Growth Funds category (the Lipper category that includes the fund), the average returns of all funds included in the Lipper Multi-Cap Core Funds, the Lipper Multi-Cap Growth Funds and Multi-Cap Core Funds Indexes, and the average returns of a group of selected growth funds which had assets over $2 billion as of December 31, 1995, and had been in continuous operation since that time. The board and the committee noted that for 2005 and for the five- and 10-year periods ended March 31, 2006, the fund’s investment results were better than all of these measurements (except for the five-year comparison to the funds in the Multi-Cap Core Funds Index, which was slightly below the average).
4. Advisory fees and total expenses
The board and the committee reviewed the advisory fees and total expenses of the fund (each as a percentage of average net assets) and compared such amounts with the median fee and expense levels of all other funds (excluding index funds and funds of funds) in the Lipper Multi-Cap Growth Index and the Lipper Multi-Cap Core Index, and with the effective advisory fees at various asset levels of a number of the largest other funds in the Multi-Cap Growth Funds Index (the “selected large funds”). The board and the committee observed that the fund’s advisory fees and expenses were well below the medians for all such other funds in the Lipper Indexes as of the end of each of the fund’s last 10 fiscal years, and that the fund’s effective advisory fee rates were below those of all of the selected large funds at asset levels in excess of approximately $5 billion. The board and the committee also discussed with management appropriate future advisory fee breakpoints in light of the substantial growth in fund assets, and established new breakpoints if and when the fund’s net assets exceed $144 billion and $166 billion. They also noted that the 5% advisory fee waiver that CRMC put into effect in September 2004 was increased to 10% on April 1, 2005.
The board and the committee also reviewed information regarding the advisory fees paid by institutional clients of an affiliate of CRMC with similar investment mandates. They noted that, although the fees paid by those clients generally were lower than those paid by American Funds, the differences appropriately reflected the significant investment, operational and regulatory differences between advising mutual funds and institutional clients.
5. Adviser financial information
The board and the committee reviewed information regarding CRMC’s costs of providing services to the American Funds, as well as the resulting level of profits to CRMC, comparing those to the reported results of several large, publicly held investment management companies. The committee also received information during previous periods regarding the structure and manner in which CRMC’s investment professionals were compensated and CRMC’s view of the relationship of such compensation to the attraction and retention of quality personnel. The board and the committee considered CRMC’s willingness to invest in technology, infrastructure and staff to reinforce and offer new services and to accommodate changing regulatory requirements. They further considered that breakpoint discounts in the fund’s advisory fee structure reduce the level of fees charged by CRMC to the fund as fund assets increase. They also considered the impact of CRMC’s current 10% advisory fee waiver.
6. Ancillary benefits
The board and the committee considered a variety of other benefits received by CRMC and its affiliates as a result of CRMC’s relationship with the fund and the other American Funds, including fees for administrative services provided to certain share classes; fees paid to 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 and officers
“Independent” 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, 60 | 2003 | Chairman of the Board and CEO, Ducommun Incorporated (aerospace components manufacturer) |
| | | |
| Robert J. Denison, 65 | 2005 | Chair, First Security Management (private investments) |
| | | |
| Robert A. Fox, 69 | 1970 | Managing General Partner, Fox Investments LP; corporate director; retired President and CEO, Foster Farms (poultry producer) |
| | | |
| Leonade D. Jones, 58 | 1993 | Co-founder, VentureThink LLC (developed and managed e-commerce businesses) and Versura Inc. (education loan exchange); former Treasurer, The Washington Post Company |
| | | |
| John G. McDonald, 69 | 1976 | Stanford Investors Professor, Graduate School of Business, Stanford University |
| | | |
| Gail L. Neale, 71 | 1998 | President, The Lovejoy Consulting Group, Inc. (a pro bono consulting group advising nonprofit organizations) |
| | | |
| Henry E. Riggs, 71 | 1989 | President Emeritus, Keck Graduate Institute of |
| Chairman of the Board | | Applied Life Sciences |
| (Independent and Non-Executive) | | |
| | | |
| Patricia K. Woolf, Ph.D., 72 | 1985 | Private investor; corporate director; former Lecturer, Department of Molecular Biology, Princeton University |
| | | |
| | | |
“Independent” directors | | |
| | | |
| | Number of | |
| | portfolios | |
| | in fund | |
| | complex2 | |
| | overseen by | |
Name and age | director | Other directorships3 held by director |
| | | |
| Joseph C. Berenato, 60 | 6 | Ducommun Incorporated |
| | | |
| Robert J. Denison, 65 | 6 | None |
| | | |
| Robert A. Fox, 69 | 7 | Chemtura Corporation |
| | | |
| Leonade D. Jones, 58 | 6 | None |
| | | |
| John G. McDonald, 69 | 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., 72 | 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, 60 | 1997 | Chairman of the Board, Capital Research and |
| Vice Chairman of the Board | | Management Company; Director, American Funds |
| | | Distributors, Inc.;5 Director, The Capital Group |
| | | Companies, Inc.;5 Director, Capital Group |
| | | Research, Inc.5 |
| | | |
| Donald D. O’Neal, 46 | 1995 | Senior Vice President and Director, Capital |
| President | | Research and Management Company |
| | | |
| | | |
“Interested” directors4 | | |
| | | |
| | Number of | |
| | portfolios | |
| | in fund | |
| | complex2 | |
Name, age and | overseen by | |
position with fund | director | Other directorships3 held by director |
| | | |
James F. Rothenberg, 60 2 | None | |
Vice Chairman of the Board | | |
| | | |
Donald D. O’Neal, 46 3 | 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.
1 Directors and officers of the fund serve until their resignation, removal or retirement.
2 Capital Research and Management Company manages the American Funds, consisting of 30 funds. Capital Research and Management Company also manages American Funds Insurance Series,® which serves as the underlying investment vehicle for certain variable insurance contracts, 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 Messrs. Beleson, Merritt and Vogt, 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.
| | Year first | |
| | elected | Principal occupation(s) during past five years |
Name, age and | an officer | and positions held with affiliated entities or the |
position with fund | of the fund1 | principal underwriter of the fund |
| | | |
| Gordon Crawford, 59 | 1992 | Senior Vice President, Capital Research and |
| Senior Vice President | | Management Company |
| | | |
| Paul G. Haaga, Jr., 57 | 1994 | Vice Chairman of the Board, Capital Research and |
| Senior Vice President | | Management Company; Director, The Capital Group Companies, Inc.5 |
| | | |
| Michael T. Kerr, 47 | 1998 | Vice President, Capital Research and Management |
| Senior Vice President | | Company; Senior Vice President, Capital Research Company5 |
| | | |
Bradley J. Vogt,6 41 | 1999 | President and Director, Capital Research Company;5 |
| Senior Vice President | | Director, American Funds Distributors, Inc.5 |
| | | |
Richard M. Beleson,6 52 | 1992 | Senior Vice President, Capital Research Company5 |
| Vice President | | |
| | | |
Mark E. Merritt,6 37 | 2004 | Senior Vice President, Capital Research Company5 |
| Vice President | | |
| | | |
| Patrick F. Quan, 48 | 1986-1998 | Vice President — Fund Business Management |
| Secretary | 2000 | Group, Capital Research and Management Company |
| | | |
| Jeffrey P. Regal, 35 | 2006 | Vice President — Fund Business Management |
| Treasurer | | Group, Capital Research and Management Company |
| | | |
| David A. Pritchett, 40 | 1999 | Vice President — Fund Business Management |
| Assistant Treasurer | | Group, Capital Research and Management Company |
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
Custodian of assets
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110-2804
Transfer agent for shareholder accounts
American Funds Service Company
(Please write to the address nearest you.)
P.O. Box 25065
Santa Ana, CA 92799-5065
P.O. Box 659522
San Antonio, TX 78265-9522
P.O. Box 6007
Indianapolis, IN 46206-6007
P.O. Box 2280
Norfolk, VA 23501-2280
Counsel
Paul, Hastings, Janofsky & Walker LLP
515 South Flower Street
Los Angeles, CA 90071-2228
Independent registered public accounting firm
Deloitte & Touche LLP
695 Town Center Drive
Suite 1200
Costa Mesa, CA 92626-7188
Principal underwriter
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, CA 90071-1406
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 August 31, 2006, portfolio of The Growth Fund of America’s investments is available free of charge by calling AFS or visiting the SEC website (where it is part of Form N-CSR).
The Growth Fund of America 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 The Growth Fund of America, 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 December 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 75 years, we have followed a consistent philosophy that we firmly believe is in our investors’ best interests. The range of opportunities offered by our family of just 30 carefully conceived, broadly diversified funds has attracted over 35 million shareholder accounts.
Our unique combination of strengths includes these five factors:
• A long-term, value-oriented approach
We seek to buy securities at reasonable prices relative to their prospects and hold them for the long term.
• An extensive global research effort
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 nearly 50 years ago, blends teamwork with individual accountability and has provided American Funds with a sustainable method of achieving fund objectives.
• Experienced investment professionals
American Funds portfolio counselors have an average of 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.
30 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®
Short-Term Bond Fund of AmericaSM
U.S. Government Securities FundSM
• Tax-exempt bond funds
Emphasis on tax-free current income through municipal bonds
American High-Income Municipal Bond Fund®
Limited Term Tax-Exempt Bond Fund of AmericaSM
The Tax-Exempt Bond Fund of America®
State-specific tax-exempt funds
The Tax-Exempt Fund of California®
The Tax-Exempt Fund of Maryland®
The Tax-Exempt Fund of Virginia®
• Money market funds
The Cash Management Trust of America®
The Tax-Exempt Money Fund of AmericaSM
The U.S. Treasury Money Fund of AmericaSM
The Capital Group Companies
American Funds Capital Research and Management Capital International Capital Guardian Capital Bank and Trust
Lit. No. MFGEAR-905-1006P
Litho in USA AGD/AL/8057-S7512
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 $1,167,000 for fiscal year 2005 and $755,000 for fiscal year 2006. The non-audit services represented by these amounts were brought to the attention of the Committee and considered to be compatible with maintaining the auditors’ independence.
Not applicable to this Registrant, insofar as the Registrant is not a listed issuer as defined in Rule 10A-3 under the Securities Exchange Act of 1934.
ITEM 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Not applicable to this Registrant, insofar as the Registrant is not a closed-end management investment company.
Not applicable to this Registrant, insofar as the Registrant is not a closed-end management investment company.
ITEM 9 - Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers
Not applicable to this Registrant, insofar as the Registrant is not a closed-end management investment company.
There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Directors since the Registrant last submitted a proxy statement to its shareholders. The procedures are as follows. The Registrant has a Nominating Committee comprised solely of persons who are not considered ‘‘interested persons’’ of the Registrant within the meaning of the Investment Company Act of 1940, as amended. The committee periodically reviews such issues as the Board’s composition, responsibilities, committees, compensation and other relevant issues, and recommends any appropriate changes to the full Board of Directors. While the committee normally is able to identify from its own resources an ample number of qualified candidates, it will consider shareholder suggestions of persons to be considered as nominees to fill future vacancies on the Board. Such suggestions must be sent in writing to the Nominating Committee of the Registrant, c/o the Registrant’s Secretary, and must be accompanied by complete biographical and occupational data on the prospective nominee, along with a written consent of the prospective nominee for consideration of his or her name by the Nominating Committee.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
