The New Economy Fund
[photo of a model of a molecule in a person's hand]
Semi-annual report for the six months ended May 31, 2010
The New Economy Fund® seeks long-term growth of capital by investing in securities of companies that can benefit from innovation, exploit new technologies or provide products and services that meet the demands of an evolving global economy.
This fund is one of the 30 American Funds. American Funds is one of the nation’s largest mutual fund families. For nearly 80 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.
Fund results shown in this report, unless otherwise indicated, are for Class A shares at net asset value. If a sales charge (maximum 5.75%) had been deducted, the results would have been lower. Results are for past periods and are not predictive of results for 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, so they may lose value. For current information and month-end results, visit americanfunds.com.
| Here are the average annual total returns on a $1,000 investment with all distributions reinvested for periods ended June 30, 2010 (the most recent calendar quarter-end): | | | | |
| | | | | | | | | | |
| Class A shares | | 1 year | | | 5 years | | | 10 years | |
| | | | | | | | | | |
| Reflecting 5.75% maximum sales charge | | | 4.89 | % | | | 1.03 | % | | | –1.75 | % |
The total annual fund operating expense ratio was 0.95% for Class A shares as of the most recent fiscal year-end.
Investment results assume all distributions are reinvested and reflect applicable fees and expenses. The fund’s investment adviser waived a portion of its management fees from September 1, 2004, through December 31, 2008. Applicable fund results shown reflect the waiver, without which they would have been lower. See the Financial Highlights table on pages 22 to 25 for details.
Results for other share classes can be found on page 28.
Equity investments are subject to market fluctuations. Investing outside the United States may be subject to additional risks, such as currency fluctuations and political instability. Global diversification can help reduce these risks. Investing in small-capitalization stocks can involve additional risks. See the prospectus and the Risk Factors section of this report for more information on these and other risks associated with investing in the fund.
Fellow shareholders:
[photo of a model of a molecule in a person's hand]
During the first half of The New Economy Fund’s fiscal year, equity markets remained skittish, at times buoyed by confidence in the nascent global recovery and at times retreating sharply. During the last several weeks of the period, markets around the world were battered by concerns over the potential fallout of sovereign debt problems in European Union countries, U.S. jobs data, a major oil spill in the Gulf of Mexico and Chinese real estate prices.
For the six months ended May 31, 2010, The New Economy Fund declined 1.7%, which, although down, proved better than the –2.9% of the Global Service and Information Index. This unmanaged index tracks companies in the services and information sectors around the world; its results do not include expenses. In contrast, The New Economy Fund’s results lagged the 4.0% return of the Lipper Multi-Cap Growth Funds Index, which measures 30 growth funds representing a variety of market capitalizations. Over the longer term — as judged by the five-year, 10-year and lifetime returns — the fund outpaced both these indexes, as shown in the table below.
[Begin Sidebar]
| Results at a glance | | | | | | | | | | | | | | | |
| (for periods ended May 31, 2010, with all distributions reinvested) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | Average annual total returns | |
| | | | | | | | | | | | | | | Lifetime | |
| | | Total returns | | | | | | | | | (since | |
| | | 6 months | | | 1 year | | | 5 years | | | 10 years | | | 12/1/83) | |
| | | | | | | | | | | | | | | | |
| The New Economy Fund | | | | | | | | | | | | | | | |
| (Class A shares) | | | –1.7 | % | | | 17.2 | % | | | 3.5 | % | | | –0.4 | % | | | 10.4 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Lipper Multi-Cap Growth | | | | | | | | | | | | | | | | | | | | |
| Funds Index | | | 4.0 | | | | 23.7 | | | | 2.0 | | | | –2.6 | | | | 8.8 | |
| | | | | | | | | | | | | | | | | | | | | |
| Global Service and | | | | | | | | | | | | | | | | | | | | |
Information Index*† | | | –2.9 | | | | 17.4 | | | | –0.2 | | | | –2.5 | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | |
| Standard & Poor’s 500 | | | | | | | | | | | | | | | | | | | | |
| Composite Index* | | | 0.4 | | | | 21.0 | | | | 0.3 | | | | –0.8 | | | | 10.1 | |
| | | | | | | | | | | | | | | | | | | | | |
| *Unmanaged. | | | | | | | | | | | | | | | | | | | | |
† The index is compiled by Capital Research and Management Company, the investment adviser to the fund. | | | | | | | | | | |
[End Sidebar]
Fears that the problems of fiscally overburdened Greece could spill over into other parts of Europe and beyond hurt major global equity markets in May. The high degree of uncertainty was reflected in the global equity markets’ recent volatility. In addition, the U.S. dollar strengthened relative to the euro, especially in the latter part of the fund’s fiscal period, an indication that markets sought a relatively safer haven amid the difficulties.
Portfolio review
The fund’s largest industry concentration, information technology, made up nearly 28% of net assets; it had mixed results in the period. This group includes some of the fund’s largest holdings. The largest holding, technology giant Apple, rose 28.6% during the fiscal period; however, the second-largest holding, software giant Microsoft, fell 12.3%. The third-largest holding, Internet search company Google, dropped 16.8%, but the fifth-largest holding, software maker Oracle, rose 2.2%. Entertainment technology company Rovi, the seventh-largest holding, rose 25.3%. While many companies in the fund are larger capitalization global organizations, the fund invests in small- and mid-cap companies as well. Two smaller cap companies, Rovi and Zions Bancorporation, are examples of how such companies have benefited the fund. Positioning systems m aker Trimble Navigation (+28.7%) and interactive marketing services company Acxiom (+50.9%) are other examples.
[Begin Sidebar]
Where the fund’s assets are invested (percent of net assets) | | | | | | |
| | | | | | | |
| | | As of 5/31/2010 | | | As of 11/30/2009 | |
| | | | | | | |
| United States | | | 59.9 | % | | | 54.4 | % |
| | | | | | | | | |
| Europe | | | | | | | | |
| Euro zone* | | | 7.8 | | | | 12.6 | |
| United Kingdom | | | 3.7 | | | | 2.5 | |
| Switzerland | | | 2.0 | | | | 3.4 | |
| Other Europe | | | 1.8 | | | | 1.3 | |
| | | | 15.3 | | | | 19.8 | |
| | | | | | | | | |
| Asia & Pacific Basin | | | | | | | | |
| China | | | 4.0 | | | | 4.6 | |
| India | | | 1.5 | | | | 1.2 | |
| Japan | | | 1.4 | | | | 1.1 | |
| Taiwan | | | 1.3 | | | | 1.4 | |
| Hong Kong | | | 1.2 | | | | 1.4 | |
| Other Asia & Pacific Basin | | | 3.1 | | | | 2.6 | |
| | | | 12.5 | | | | 12.3 | |
| | | | | | | | | |
| Other (including Latin America) | | | | | | | | |
| Brazil | | | 2.7 | | | | 3.8 | |
| Mexico | | | 1.5 | | | | 1.4 | |
| Other countries | | | 2.3 | | | | 1.9 | |
| | | | 6.5 | | | | 7.1 | |
| | | | | | | | | |
| Short-term securities & other assets less liabilities | | | 5.8 | | | | 6.4 | |
| | | | | | | | | |
| Total | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | |
| *Countries using the common currency, the euro, are Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. | |
[End Sidebar]
In the fiscal period, U.S. stocks did relatively better than European-based securities. In particular, European financial company stocks suffered greater declines than their U.S. counterparts, including Credit Suisse (–25.0%) and Société Générale (–38.8%). The only financial company among the fund’s top 10 biggest holdings was Brazil-based Banco Bradesco (–11.8%). Other financial holdings outside the U.S. — such as Itaú Unibanco Holding (–17.3%), Industrial and Commercial Bank of China (–12.3%) and Bank of China (–11.6%) — also hurt the fund. However, some U.S.-based financial companies did relatively well, including Zions Bancorporation (+82.1%), Bank of New York Mellon (+2.1%) and Wells Fargo (+2.3%).
Almost 60% of the fund’s net assets were invested in U.S. equities, up from 54.4% when the period began. The percentage of the fund invested in the European Union was 7.8% at the end of the period, down from 12.6% at the start of the fiscal year. Investments in China and Brazil, which represented 8.4% at the start of the period, made up 6.7% of the fund’s net assets on May 31, 2010.
Looking ahead
The global economy appears to be recovering, although its fragility is evident. There are several positive trends, including accommodative monetary policy, few immediate inflationary pressures, and evidence that the consumer is becoming more healthy financially. On the other side, federal and state debt levels are high and will need to be addressed, unemployment remains elevated and income growth sluggish, and credit markets have been slow to pick up. The overleverage that had resided with consumers and companies has shifted in part to governments, and this could take some time to unwind. The deleveraging of global economies that began in 2007 is ongoing, as was evident in Europe this spring.
The New Economy Fund places great emphasis on long-term investing — we have always taken this approach and we are optimistic about finding solid companies that have the potential to benefit from innovation, new technology, or expanding markets.
We remain committed to our disciplined investment strategy based on fundamental research and individual stock-picking. We thank you for your continued confidence in our investment philosophy.
Sincerely,
/s/ Timothy D. Armour
Timothy D. Armour
Vice Chairman of the Board
/s/ Claudia P. Huntington
Claudia P. Huntington
President
July 14, 2010
For current information about the fund, visit americanfunds.com.
Summary investment portfolio, May 31, 2010
The following summary investment portfolio is designed to streamline the report and help investors better focus on a fund’s principal holdings. See the inside back cover for details on how to obtain a complete schedule of portfolio holdings.
[begin pie chart]
Industry sector diversification (percent of net assets) | | | |
| Information technology | | | 27.84 | % |
| Financials | | | 19.09 | |
| Health care | | | 12.73 | |
| Consumer discretionary | | | 11.32 | |
| Industrials | | | 9.64 | |
| Other industries | | | 13.59 | |
| Short-term securities & other assets less liabilities | | | 5.79 | |
[end pie chart]
| Country diversification | | (percent of net assets) | |
| United States | | | 59.9 | % |
| Euro zone* | | | 7.8 | |
| China | | | 4.0 | |
| United Kingdom | | | 3.7 | |
| Brazil | | | 2.7 | |
| Switzerland | | | 2.0 | |
| Mexico | | | 1.5 | |
| India | | | 1.5 | |
| Japan | | | 1.4 | |
| Israel | | | 1.3 | |
| Taiwan | | | 1.3 | |
| Hong Kong | | | 1.2 | |
| Other countries | | | 5.9 | |
| Short-term securities & other assets less liabilities | | | 5.8 | |
| | | | 100.0 | % |
| | | | | |
| *Countries using the euro as a common currency; those represented in the fund's portfolio are Austria, Finland, France, Germany, Greece, Ireland, Italy and Spain. | |
| | | | | | | | | Percent | |
| | | | | | Value | | | of net | |
| Common stocks - 93.14% | | Shares | | | | (000 | ) | | assets | |
| | | | | | | | | | | |
| Information technology - 27.84% | | | | | | | | | | |
| Apple Inc. (1) | | | 702,400 | | | $ | 180,629 | | | | 2.68 | % |
| Microsoft Corp. | | | 6,330,000 | | | | 163,314 | | | | 2.42 | |
| Google Inc., Class A (1) | | | 272,400 | | | | 132,163 | | | | 1.96 | |
| Oracle Corp. | | | 4,668,000 | | | | 105,357 | | | | 1.56 | |
| Rovi Corp. (1) | | | 2,737,700 | | | | 102,226 | | | | 1.51 | |
| QUALCOMM Inc. | | | 2,780,000 | | | | 98,857 | | | | 1.47 | |
| McAfee, Inc. (1) | | | 1,930,000 | | | | 61,374 | | | | .91 | |
| Yahoo! Inc. (1) | | | 3,961,616 | | | | 60,771 | | | | .90 | |
| Cisco Systems, Inc. (1) | | | 2,435,000 | | | | 56,395 | | | | .84 | |
| Accenture PLC, Class A | | | 1,390,000 | | | | 52,153 | | | | .77 | |
| Acer Inc. | | | 19,713,500 | | | | 49,392 | | | | .73 | |
| NetEase.com, Inc. (ADR) (1) | | | 1,615,400 | | | | 49,044 | | | | .73 | |
| BYD Co. Ltd., Class H | | | 5,210,000 | | | | 43,727 | | | | .65 | |
| Other securities | | | | | | | 723,371 | | | | 10.71 | |
| | | | | | | | 1,878,773 | | | | 27.84 | |
| | | | | | | | | | | | | |
| Financials - 19.09% | | | | | | | | | | | | |
| Banco Bradesco SA, preferred nominative | | | 5,269,435 | | | | 87,957 | | | | 1.30 | |
| JPMorgan Chase & Co. | | | 1,525,000 | | | | 60,359 | | | | .89 | |
| Industrial and Commercial Bank of China Ltd., Class H | | | 80,000,000 | | | | 59,283 | | | | .88 | |
| IntercontinentalExchange, Inc. (1) | | | 500,000 | | | | 58,065 | | | | .86 | |
| CME Group Inc., Class A | | | 183,000 | | | | 57,947 | | | | .86 | |
| Société Générale (1) | | | 1,279,953 | | | | 55,149 | | | | .82 | |
| Bank of America Corp. | | | 3,475,000 | | | | 54,696 | | | | .81 | |
| Banco Santander, SA | | | 5,252,568 | | | | 53,754 | | | | .80 | |
| Bank of New York Mellon Corp. | | | 1,920,000 | | | | 52,224 | | | | .77 | |
| HDFC Bank Ltd. | | | 1,135,000 | | | | 46,229 | | | | .69 | |
| Zions Bancorporation | | | 1,925,000 | | | | 46,104 | | | | .68 | |
| Other securities | | | | | | | 656,452 | | | | 9.73 | |
| | | | | | | | 1,288,219 | | | | 19.09 | |
| | | | | | | | | | | | | |
| Health care - 12.73% | | | | | | | | | | | | |
| Inverness Medical Innovations, Inc. (1) | | | 2,981,500 | | | | 103,786 | | | | 1.54 | |
| Teva Pharmaceutical Industries Ltd. (ADR) | | | 1,592,000 | | | | 87,273 | | | | 1.29 | |
| Fresenius SE | | | 1,215,000 | | | | 76,771 | | | | 1.14 | |
| Beckman Coulter, Inc. | | | 987,600 | | | | 56,728 | | | | .84 | |
| Vertex Pharmaceuticals Inc. (1) | | | 1,500,000 | | | | 51,885 | | | | .77 | |
| Novartis AG | | | 1,100,000 | | | | 49,968 | | | | .74 | |
| Emergency Medical Services Corp., Class A (1) | | | 920,000 | | | | 49,284 | | | | .73 | |
| McKesson Corp. | | | 600,000 | | | | 42,000 | | | | .62 | |
| Other securities | | | | | | | 341,724 | | | | 5.06 | |
| | | | | | | | 859,419 | | | | 12.73 | |
| | | | | | | | | | | | | |
| Consumer discretionary - 11.32% | | | | | | | | | | | | |
| News Corp., Class A | | | 7,302,815 | | | | 96,397 | | | | 1.43 | |
| DIRECTV, Class A (1) | | | 1,800,000 | | | | 67,842 | | | | 1.00 | |
| Time Warner Inc. | | | 1,880,000 | | | | 58,261 | | | | .86 | |
| Li & Fung Ltd. | | | 11,000,000 | | | | 47,750 | | | | .71 | |
| Pantaloon Retail (India) Ltd. | | | 4,700,000 | | | | 40,315 | | | | .60 | |
| Other securities | | | | | | | 453,729 | | | | 6.72 | |
| | | | | | | | 764,294 | | | | 11.32 | |
| | | | | | | | | | | | | |
| Industrials - 9.64% | | | | | | | | | | | | |
| Ryanair Holdings PLC (ADR) (1) | | | 5,426,300 | | | | 127,735 | | | | 1.89 | |
| Union Pacific Corp. | | | 1,223,035 | | | | 87,361 | | | | 1.30 | |
| MSC Industrial Direct Co., Inc., Class A | | | 1,020,000 | | | | 52,775 | | | | .78 | |
| easyJet PLC (1) (2) | | | 8,267,000 | | | | 48,070 | | | | .71 | |
| AirAsia Bhd. (1) | | | 108,730,000 | | | | 40,672 | | | | .60 | |
| Other securities | | | | | | | 294,130 | | | | 4.36 | |
| | | | | | | | 650,743 | | | | 9.64 | |
| | | | | | | | | | | | | |
| Telecommunication services - 3.74% | | | | | | | | | | | | |
| América Móvil, SAB de CV, Series L (ADR) | | | 1,825,600 | | | | 86,424 | | | | 1.28 | |
| Millicom International Cellular SA | | | 578,269 | | | | 46,221 | | | | .68 | |
| Other securities | | | | | | | 119,726 | | | | 1.78 | |
| | | | | | | | 252,371 | | | | 3.74 | |
| | | | | | | | | | | | | |
| Energy - 1.49% | | | | | | | | | | | | |
| Schlumberger Ltd. | | | 1,152,400 | | | | 64,707 | | | | .96 | |
| Other securities | | | | | | | 35,609 | | | | .53 | |
| | | | | | | | 100,316 | | | | 1.49 | |
| | | | | | | | | | | | | |
| Materials - 1.03% | | | | | | | | | | | | |
| Ecolab Inc. | | | 930,000 | | | | 43,924 | | | | .65 | |
| Other securities | | | | | | | 25,874 | | | | .38 | |
| | | | | | | | 69,798 | | | | 1.03 | |
| | | | | | | | | | | | | |
| Other - 1.78% | | | | | | | | | | | | |
| Other securities | | | | | | | 119,745 | | | | 1.78 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Miscellaneous - 4.48% | | | | | | | | | | | | |
| Other common stocks in initial period of acquisition | | | | | | | 302,108 | | | | 4.48 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total common stocks (cost: $5,911,019,000) | | | | | | | 6,285,786 | | | | 93.14 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | Percent | |
| | | | | | | Value | | | of net | |
| Convertible securities - 1.07% | | | | | | | (000 | ) | | assets | |
| | | | | | | | | | | | | |
| Other - 0.71% | | | | | | | | | | | | |
| Other securities | | | | | | | 47,500 | | | | .71 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Miscellaneous - 0.36% | | | | | | | | | | | | |
| Other convertible securities in initial period of acquisition | | | | | | | 24,332 | | | | .36 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total convertible securities (cost: $53,990,000) | | | | | | | 71,832 | | | | 1.07 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Principal | | | | | | | Percent | |
| | | amount | | | Value | | | of net | |
| Short-term securities - 5.30% | | | (000 | ) | | | (000 | ) | | assets | |
| | | | | | | | | | | | | |
| Fannie Mae 0.18%-0.25% due 7/7-8/16/2010 | | $ | 125,300 | | | | 125,269 | | | | 1.86 | |
| Freddie Mac 0.145%-0.23% due 6/2-6/23/2010 | | | 62,200 | | | | 62,198 | | | | .92 | |
| Procter & Gamble International Funding S.C.A. 0.20% due 6/23/2010 (3) | | | 24,400 | | | | 24,397 | | | | | |
| Procter & Gamble Co. 0.19% due 6/2/2010 (3) | | | 23,200 | | | | 23,200 | | | | .70 | |
| Federal Home Loan Bank 0.19% due 7/28/2010 | | | 41,100 | | | | 41,088 | | | | .61 | |
| Jupiter Securitization Co., LLC 0.30% due 6/4/2010 (3) | | | 24,300 | | | | 24,299 | | | | .36 | |
| Other securities | | | | | | | 57,494 | | | | .85 | |
| | | | | | | | | | | | | |
| Total short-term securities (cost: $357,933,000) | | | | | | | 357,945 | | | | 5.30 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total investment securities (cost: $6,322,942,000) | | | | | | | 6,715,563 | | | | 99.51 | |
| Other assets less liabilities | | | | | | | 33,073 | | | | .49 | |
| | | | | | | | | | | | | |
| Net assets | | | | | | $ | 6,748,636 | | | | 100.00 | % |
Notes to financial statements
unaudited
The New Economy Fund (the "fund") is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company. The fund seeks long-term growth of capital by investing in securities of companies that can benefit from innovation, exploit new technologies or provide products and services that meet the demands of an evolving global economy. Current income is a secondary consideration.
The fund has 16 share classes consisting of five retail share classes, five 529 college savings plan share classes and six retirement plan share classes. The 529 college savings plan share classes (529-A, 529-B, 529-C, 529-E and 529-F-1) can be used to save for college education. The six retirement plan share classes (R-1, R-2, R-3, R-4, R-5 and R-6) are generally offered only through eligible employer-sponsored retirement plans. The fund’s share classes are described below:
| Share class | Initial sales charge | Contingent deferred sales charge upon redemption | Conversion feature |
| Classes 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 |
| Classes B and 529-B* | None | Declines from 5% to 0% for redemptions within six years of purchase | Classes B and 529-B convert to Classes 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-1 after 10 years |
| Class 529-C | None | 1% for redemptions within one year of purchase | None |
| Class 529-E | None | None | None |
| Classes F-1, F-2 and 529-F-1 | None | None | None |
| Classes R-1, R-2, R-3, R-4, R-5 and R-6 | None | None | None |
*Class B and 529-B shares of the fund are not available for purchase.
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.
| 2. | 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 fund follows the significant accounting policies described below, as well as the valuation policies described in the next section on valuation.
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.
Currency translation – Assets and liabilities, including investment securities, denominated in currencies other than U.S. dollars 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. On the accompanying financial statements, the effects of changes in 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 currencies other than U.S. dollars are disclosed separately.
The fund’s investments are reported at fair value as defined by accounting principles generally accepted in the United States of America. The fund generally determines its net asset value as of approximately 4:00 p.m. New York time each day the New York Stock Exchange is open.
Methods and inputs – The fund uses the following methods and inputs to establish the fair value of its assets and liabilities. Use of particular methods and inputs may vary over time based on availability and relevance as market and economic conditions evolve.
Equity securities are generally 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 generally valued at prices obtained as of approximately 3:00 p.m. New York time from one or more pricing vendors. Vendors value such securities based on one or more of the inputs described in the following table. The table provides examples of inputs that are commonly relevant for valuing particular classes of fixed-income securities in which the fund is authorized to invest. However, these classifications are not exclusive, and any of the inputs may be used to value any other class of fixed-income security.
| Fixed-income class | Examples of standard inputs |
| All | Benchmark yields, transactions, bids, offers, quotations from dealers and trading systems, new issues, spreads and other relationships observed in the markets among comparable securities; and proprietary pricing models such as yield measures calculated using factors such as cash flows, financial or collateral performance and other reference data (collectively referred to as “standard inputs”) |
| Corporate bonds & notes; convertible securities | Standard inputs and underlying equity of the issuer |
| Bonds & notes of governments & government agencies | Standard inputs and interest rate volatilities |
Where the investment adviser deems it appropriate to do so (such as when vendor prices are unavailable or not deemed to be representative), fixed-income securities will be valued in good faith at the mean quoted bid and asked prices that are reasonably and timely available (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 generally 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 fair 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.
Securities and other assets for which representative market quotations are not readily available or are considered unreliable by the investment adviser are fair valued as determined in good faith under guidelines adopted by authority of the fund's board of trustees. Market quotations may be considered unreliable if events occur that materially affect the value of securities (particularly equity securities trading outside the U.S.) between the close of trading in those securities and the close of regular trading on the New York Stock Exchange. Various inputs may be reviewed in order to make a good faith determination of a security’s fair value. These inputs 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; a ctively 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. Fair valuations and valuations of investments that are not actively trading involve judgment and may differ materially from valuations that would have been used had greater market activity occurred.
Classifications - The fund classifies its assets and liabilities into three levels based on the inputs used to value the assets or liabilities. Level 1 values are based on quoted prices in active markets for identical securities. Level 2 values are based on significant observable market inputs, such as quoted prices for similar securities and quoted prices in inactive markets. Level 3 values are based on significant unobservable inputs that reflect the fund’s determination of assumptions that market participants might reasonably use in valuing the securities. The valuation levels are not necessarily an indication of the risk or liquidity associated with the underlying investment. For example, U.S. government securities are refl ected as Level 2 because the inputs used to determine fair value may not always be quoted prices in an active market. The following table presents the fund’s valuation levels as of May 31, 2010 (dollars in thousands):
| Investment securities: | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Common stocks: | | | | | | | | | | | | |
| Information technology | | $ | 1,872,585 | | | $ | 6,188 | * | | $ | - | | | $ | 1,878,773 | |
| Financials | | | 1,230,011 | | | | 58,208 | * | | | - | | | | 1,288,219 | |
| Health care | | | 852,692 | | | | 6,727 | * | | | - | | | | 859,419 | |
| Consumer discretionary | | | 759,055 | | | | - | | | | 5,239 | | | | 764,294 | |
| Industrials | | | 573,242 | | | | 77,501 | * | | | - | | | | 650,743 | |
| Telecommunication services | | | 229,117 | | | | 23,254 | * | | | - | | | | 252,371 | |
| Energy | | | 100,316 | | | | - | | | | - | | | | 100,316 | |
| Materials | | | 69,798 | | | | - | | | | - | | | | 69,798 | |
| Utilities | | | 33,922 | | | | 26,025 | * | | | - | | | | 59,947 | |
| Consumer staples | | | 59,798 | | | | - | | | | - | | | | 59,798 | |
| Miscellaneous | | | 273,304 | | | | 28,804 | * | | | - | | | | 302,108 | |
| Convertible securities | | | 8,563 | | | | 63,269 | | | | - | | | | 71,832 | |
| Short-term securities | | | - | | | | 357,945 | | | | - | | | | 357,945 | |
| Total | | $ | 6,062,403 | | | $ | 647,921 | | | $ | 5,239 | | | $ | 6,715,563 | |
| | | | | | | | | | | | | | | | | |
| (*) Includes certain securities trading outside the U.S. whose values were adjusted as a result of significant market movements following the close of local trading; therefore, $226,707,000 of investment securities were classified as Level 2 instead of Level 1. | |
| The following table reconciles the valuation of the fund's Level 3 investment securities and related transactions for the six months ended May 31, 2010 (dollars in thousands): |
| | | | | | | | | | |
| | | | | | | | | | |
| | | Beginning value at 12/1/2009 | | | Net unrealized appreciation(†) | | | Ending value at 5/31/2010 | |
| Investment securities | | $ | 5,232 | | | $ | 7 | | | $ | 5,239 | |
| | | | | | | | | | | | | |
| Net unrealized appreciation during the period on Level 3 investment securities held at May 31, 2010 (dollars in thousands) (†): | | | $ | 7 | |
| | | | | | | | | | | | | |
| (†) Net unrealized appreciation is included in the related amounts on investments in the statement of operations. | |
Investing in the fund may involve certain risks including, but not limited to, those described below.
The prices of the common stocks and other securities held by the fund may decline in response to certain events taking place around the world, including those directly involving the issuers whose securities are owned by the fund; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; governmental or governmental agency responses to economic conditions; and currency, interest rate and commodity price fluctuations. The growth-oriented common stocks and other equity-type securities, such as preferred stocks, convertible preferred stocks and convertible bonds, generally purchased by the fund may involve large price swings and potential for loss, particularly in the case of smaller capitalization stock s.
Investments in securities issued by entities based outside the U.S. may be subject to the risks described above to a greater extent. These investments may also be affected by currency controls; different accounting, auditing, financial reporting, disclosure, and regulatory and legal standards and practices; expropriation; changes in tax policy; greater market volatility; different securities market structures; higher transaction costs; and various administrative difficulties, such as delays in clearing and settling portfolio transactions or in receiving payment of dividends. These risks may be heightened in connection with investments in developing countries. Investments in securities issued by entities domiciled in the U.S. may also be subject to many of these risks.
5. Taxation and distributions
Federal income taxation – 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.
As of and during the period ended May 31, 2010, the fund did not have a liability for any unrecognized tax benefits. The fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statement of operations. During the period, the fund did not incur any interest or penalties.
The fund is not subject to examination by U.S. federal tax authorities for tax years before 2005, by state tax authorities for tax years before 2005 and by tax authorities outside the U.S. for tax years before 2004.
Non-U.S. 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.
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 different treatment for items such as currency gains and losses; short-term capital gains and losses; net capital losses; and non-U.S. taxes on capital gains. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes.
The components of distributable earnings on a tax basis are reported as of the fund’s most recent year-end. As of November 30, 2009, the components of distributable earnings on a tax basis were as follows:
| | | (dollars in thousands) | |
| Undistributed ordinary income | | | | | $ | 34,836 | |
| Post-October currency loss deferrals (realized during the period November 1, 2009, through November 30, 2009)* | | | | | | (143 | ) |
| Capital loss carryforwards†: | | | | | | | |
| Expiring 2016 | | $ | (126,200 | ) | | | | |
| Expiring 2017 | | | (738,590 | ) | | | (864,790 | ) |
| Post-October capital loss deferrals (realized during the period November 1, 2009, through November 30, 2009)* | | | | | | | (1,276 | ) |
| *These deferrals are considered incurred in the subsequent year. | | | | | | | | |
| †The capital loss carryforwards will be used to offset any capital gains realized by the fund in the current year or in subsequent years through the expiration dates. The fund will not make distributions from capital gains while capital loss carryforwards remain. | |
As of May 31, 2010, the tax basis unrealized appreciation (depreciation) and cost of investment securities were as follows:
| (dollars in thousands) | |
| Gross unrealized appreciation on investment securities | | $ | 952,477 | |
| Gross unrealized depreciation on investment securities | | | (559,801 | ) |
| Net unrealized appreciation on investment securities | | | 392,676 | |
| Cost of investment securities | | | 6,322,887 | |
Ordinary income distributions paid to shareholders from net investment income and currency gains were as follows (dollars in thousands):
| Share class | | Six months ended May 31, 2010 | | | Year ended November 30, 2009 | |
| Class A | | $ | 29,212 | | | $ | 63,512 | |
| Class B | | | - | | | | 172 | |
| Class C | | | 65 | | | | 496 | |
| Class F-1 | | | 1,162 | | | | 791 | |
| Class F-2 | | | 470 | | | | 49 | |
| Class 529-A | | | 584 | | | | 1,067 | |
| Class 529-B | | | - | | | | 33 | |
| Class 529-C | | | - | | | | 89 | |
| Class 529-E | | | 18 | | | | 43 | |
| Class 529-F-1 | | | 44 | | | | 50 | |
| Class R-1 | | | 22 | | | | 43 | |
| Class R-2 | | | - | | | | 260 | |
| Class R-3 | | | 456 | | | | 879 | |
| Class R-4 | | | 516 | | | | 813 | |
| Class R-5 | | | 1,336 | | | | 3,238 | |
| Class R-6* | | | 1,139 | | | | - | |
| Total | | $ | 35,024 | | | $ | 71,535 | |
| | | | | | | | | |
| *Class R-6 was offered beginning May 1, 2009. | | | | | |
6. Fees and transactions with related parties
Capital Research and Management Company ("CRMC"), the fund’s investment adviser, is the parent company of American Funds Distributors,® Inc. ("AFD"), the principal underwriter of the fund’s shares, and American Funds Service Company® ("AFS"), the fund’s transfer agent.
Investment advisory services - The Investment Advisory and Service Agreement with CRMC provides for monthly fees accrued daily. These fees are based on a series of decreasing annual rates beginning with 0.580% on the first $500 million of daily net assets and decreasing to 0.345% on such assets in excess of $27 billion. For the six months ended May 31, 2010, the investment advisory services fee was $14,815,000, which was equivalent to an annualized rate of 0.410% 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 Classes F-2, R-5 and R-6. Under the plans, the board of trustees 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 trustees has limited the amounts that may be paid to less than the maximum allowed by the plans. All share classes with a plan 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 Classes A and 529-A, the board of trustees 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 May 31, 2010, there were no unreimbursed expenses subject to reimbursement for Classes A or 529-A.
| Share class | Currently approved limits | Plan limits |
| Class A | 0.25% | 0.25% |
| Class 529-A | 0.25 | 0.50 |
| Classes B and 529-B | 1.00 | 1.00 |
| Classes C, 529-C and R-1 | 1.00 | 1.00 |
| Class R-2 | 0.75 | 1.00 |
| Classes 529-E and R-3 | 0.50 | 0.75 |
| Classes F-1, 529-F-1 and R-4 | 0.25 | 0.50 |
Transfer agent services – The fund has a transfer agent agreement with AFS for Classes 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 as described below.
Administrative services – The fund has an administrative services agreement with CRMC for all share classes, except Classes A and B, to provide certain services, including transfer agent and record keeping services; coordinating, monitoring, assisting and overseeing third-party service providers; and educating advisers and shareholders about the impact of market-related events, tax laws affecting investments, retirement plan restrictions, exchange limitations, and other related matters. Each relevant share class pays CRMC annual fees up to 0.15% (0.10% for Class R-5 and 0.05% for Class R-6) 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 p arties for performing these services. Each 529 share class is subject to an additional administrative services fee payable to the Commonwealth of Virginia for the maintenance of the 529 college savings plan. The quarterly fee is based on a series of decreasing annual rates beginning with 0.10% on the first $30 billion of the net assets invested in Class 529 shares of the American Funds and decreasing to 0.06% on such assets between $120 billion and $150 billion. The fee for any given calendar quarter is accrued and calculated on the basis of the average net assets of Class 529 shares of the American Funds for the last month of the prior calendar quarter. 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 six months ended May 31, 2010, 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 | $6,685 | $5,029 | Not applicable | Not applicable | Not applicable |
| Class B | 550 | 97 | Not applicable | Not applicable | Not applicable |
| Class C | 942 | Included in administrative services | $143 | $31 | Not applicable |
| Class F-1 | 233 | 138 | 14 | Not applicable |
| Class F-2 | Not applicable | 36 | 2 | Not applicable |
| Class 529-A | 115 | 72 | 14 | $59 |
| Class 529-B | 71 | 10 | 3 | 7 |
| Class 529-C | 195 | 24 | 8 | 20 |
| Class 529-E | 16 | 4 | 1 | 3 |
| Class 529-F-1 | - | 4 | 1 | 3 |
| Class R-1 | 95 | 11 | 4 | Not applicable |
| Class R-2 | 423 | 84 | 183 | Not applicable |
| Class R-3 | 344 | 96 | 58 | Not applicable |
| Class R-4 | 118 | 70 | 5 | Not applicable |
| Class R-5 | Not applicable | 74 | 2 | Not applicable |
| Class R-6 | Not applicable | 45 | -* | Not applicable |
| Total | $9,787 | $5,126 | $811 | $326 | $92 |
* Amount less than one thousand.
Trustees’ deferred compensation – Since the adoption of the deferred compensation plan in 1993, trustees 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. Trustees’ compensation of $423,000, shown on the accompanying financial statements, includes $302,000 in current fees (either paid in cash or deferred) and a net increase of $121,000 in the value of the deferred amounts.
Affiliated officers and trustees – Officers and certain trustees of the fund are or may be considered to be affiliated with CRMC, AFS and AFD. No affiliated officers or trustees received any compensation directly from the fund.
7. Capital share transactions
Capital share transactions in the fund were as follows (dollars and shares in thousands):
| Share class | | Sales(1) | | | Reinvestments of dividends and distributions | | | Repurchases(1) | | | Net (decrease) increase | |
| | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | |
| Six months ended May 31, 2010 | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A | | $ | 323,291 | | | | 14,297 | | | $ | 27,841 | | | | 1,229 | | | $ | (563,146 | ) | | | (25,164 | ) | | $ | (212,014 | ) | | | (9,638 | ) |
| Class B | | | 4,615 | | | | 212 | | | _ (2) | | | _ (2) | | | | (24,204 | ) | | | (1,119 | ) | | | (19,589 | ) | | | (907 | ) |
| Class C | | | 25,791 | | | | 1,198 | | | | 62 | | | | 3 | | | | (26,773 | ) | | | (1,262 | ) | | | (920 | ) | | | (61 | ) |
| Class F-1 | | | 43,541 | | | | 1,940 | | | | 963 | | | | 42 | | | | (59,955 | ) | | | (2,724 | ) | | | (15,451 | ) | | | (742 | ) |
| Class F-2 | | | 19,152 | | | | 852 | | | | 373 | | | | 17 | | | | (16,708 | ) | | | (749 | ) | | | 2,817 | | | | 120 | |
| Class 529-A | | | 14,491 | | | | 645 | | | | 584 | | | | 26 | | | | (5,634 | ) | | | (252 | ) | | | 9,441 | | | | 419 | |
| Class 529-B | | | 594 | | | | 27 | | | | - | | | | - | | | | (1,587 | ) | | | (72 | ) | | | (993 | ) | | | (45 | ) |
| Class 529-C | | | 5,301 | | | | 243 | | | | - | | | | - | | | | (2,204 | ) | | | (101 | ) | | | 3,097 | | | | 142 | |
| Class 529-E | | | 761 | | | | 34 | | | | 18 | | | | 1 | | | | (474 | ) | | | (22 | ) | | | 305 | | | | 13 | |
| Class 529-F-1 | | | 998 | | | | 45 | | | | 44 | | | | 2 | | | | (469 | ) | | | (21 | ) | | | 573 | | | | 26 | |
| Class R-1 | | | 5,950 | | | | 273 | | | | 22 | | | | 1 | | | | (3,020 | ) | | | (140 | ) | | | 2,952 | | | | 134 | |
| Class R-2 | | | 20,687 | | | | 940 | | | | - | | | | - | | | | (18,684 | ) | | | (854 | ) | | | 2,003 | | | | 86 | |
| Class R-3 | | | 37,775 | | | | 1,699 | | | | 456 | | | | 20 | | | | (31,359 | ) | | | (1,410 | ) | | | 6,872 | | | | 309 | |
| Class R-4 | | | 30,760 | | | | 1,362 | | | | 516 | | | | 23 | | | | (20,545 | ) | | | (908 | ) | | | 10,731 | | | | 477 | |
| Class R-5 | | | 21,586 | | | | 954 | | | | 1,335 | | | | 59 | | | | (56,938 | ) | | | (2,631 | ) | | | (34,017 | ) | | | (1,618 | ) |
| Class R-6 | | | 72,126 | | | | 3,257 | | | | 1,139 | | | | 51 | | | | (28,076 | ) | | | (1,238 | ) | | | 45,189 | | | | 2,070 | |
| Total net increase | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (decrease) | | $ | 627,419 | | | | 27,978 | | | $ | 33,353 | | | | 1,474 | | | $ | (859,776 | ) | | | (38,667 | ) | | $ | (199,004 | ) | | | (9,215 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended November 30, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A | | $ | 731,159 | | | | 40,531 | | | $ | 60,575 | | | | 4,001 | | | $ | (1,045,409 | ) | | | (60,724 | ) | | $ | (253,675 | ) | | | (16,192 | ) |
| Class B | | | 18,436 | | | | 1,075 | | | | 167 | | | | 11 | | | | (40,314 | ) | | | (2,412 | ) | | | (21,711 | ) | | | (1,326 | ) |
| Class C | | | 57,146 | | | | 3,267 | | | | 478 | | | | 33 | | | | (39,225 | ) | | | (2,428 | ) | | | 18,399 | | | | 872 | |
| Class F-1 | | | 106,969 | | | | 5,619 | | | | 688 | | | | 45 | | | | (155,000 | ) | | | (9,610 | ) | | | (47,343 | ) | | | (3,946 | ) |
| Class F-2 | | | 50,580 | | | | 2,614 | | | | 39 | | | | 3 | | | | (6,165 | ) | | | (329 | ) | | | 44,454 | | | | 2,288 | |
| Class 529-A | | | 19,211 | | | | 1,052 | | | | 1,067 | | | | 71 | | | | (10,441 | ) | | | (596 | ) | | | 9,837 | | | | 527 | |
| Class 529-B | | | 1,367 | | | | 78 | | | | 33 | | | | 2 | | | | (1,182 | ) | | | (68 | ) | | | 218 | | | | 12 | |
| Class 529-C | | | 7,561 | | | | 421 | | | | 89 | | | | 6 | | | | (4,500 | ) | | | (265 | ) | | | 3,150 | | | | 162 | |
| Class 529-E | | | 1,260 | | | | 71 | | | | 43 | | | | 3 | | | | (794 | ) | | | (47 | ) | | | 509 | | | | 27 | |
| Class 529-F-1 | | | 2,606 | | | | 141 | | | | 49 | | | | 3 | | | | (702 | ) | | | (41 | ) | | | 1,953 | | | | 103 | |
| Class R-1 | | | 5,237 | | | | 290 | | | | 43 | | | | 3 | | | | (3,297 | ) | | | (197 | ) | | | 1,983 | | | | 96 | |
| Class R-2 | | | 32,254 | | | | 1,873 | | | | 260 | | | | 17 | | | | (24,662 | ) | | | (1,422 | ) | | | 7,852 | | | | 468 | |
| Class R-3 | | | 46,623 | | | | 2,561 | | | | 879 | | | | 59 | | | | (34,068 | ) | | | (1,913 | ) | | | 13,434 | | | | 707 | |
| Class R-4 | | | 31,805 | | | | 1,797 | | | | 813 | | | | 54 | | | | (21,230 | ) | | | (1,202 | ) | | | 11,388 | | | | 649 | |
| Class R-5 | | | 91,779 | | | | 5,217 | | | | 3,166 | | | | 209 | | | | (144,473 | ) | | | (8,199 | ) | | | (49,528 | ) | | | (2,773 | ) |
Class R-6(3) | | | 129,948 | | | | 7,242 | | | | - | | | | - | | | | (3,862 | ) | | | (192 | ) | | | 126,086 | | | | 7,050 | |
| Total net increase | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (decrease) | | $ | 1,333,941 | | | | 73,849 | | | $ | 68,389 | | | | 4,520 | | | $ | (1,535,324 | ) | | | (89,645 | ) | | $ | (132,994 | ) | | | (11,276 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Includes exchanges between share classes of the fund. | | | | | | | | | | | | | | | | | | | | | | | |
(2)Amount less than one thousand. | | | | | | | | | | | | | | | | | | | | | | | |
(3)Class R-6 was offered beginning May 1, 2009. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
8. Investment transactions
The fund made purchases and sales of investment securities, excluding short-term securities and U.S. government obligations, if any, of $1,518,368,000 and $1,660,174,000, respectively, during the six months ended May 31, 2010.
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 (December 1, 2009, through May 31, 2010).
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.
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.
Notes:
There are some account fees that are charged to certain types of accounts, such as individual retirement accounts and 529 college savings plan 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-1, F-2 and 529-F-1 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 abo ve. In addition, your ending account value would be lower by the amount of these fees.
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 12/1/2009 | | | Ending account value 5/31/2010 | | | Expenses paid during period* | | | Annualized expense ratio | |
| | | | | | | | | | | | | |
| Class A -- actual return | | $ | 1,000.00 | | | $ | 983.35 | | | $ | 4.30 | | | | .87 | % |
| Class A -- assumed 5% return | | | 1,000.00 | | | | 1,020.59 | | | | 4.38 | | | | .87 | |
| Class B -- actual return | | | 1,000.00 | | | | 979.48 | | | | 8.09 | | | | 1.64 | |
| Class B -- assumed 5% return | | | 1,000.00 | | | | 1,016.75 | | | | 8.25 | | | | 1.64 | |
| Class C -- actual return | | | 1,000.00 | | | | 979.12 | | | | 8.14 | | | | 1.65 | |
| Class C -- assumed 5% return | | | 1,000.00 | | | | 1,016.70 | | | | 8.30 | | | | 1.65 | |
| Class F-1 -- actual return | | | 1,000.00 | | | | 983.28 | | | | 4.30 | | | | .87 | |
| Class F-1 -- assumed 5% return | | | 1,000.00 | | | | 1,020.59 | | | | 4.38 | | | | .87 | |
| Class F-2 -- actual return | | | 1,000.00 | | | | 984.35 | | | | 2.92 | | | | .59 | |
| Class F-2 -- assumed 5% return | | | 1,000.00 | | | | 1,021.99 | | | | 2.97 | | | | .59 | |
| Class 529-A -- actual return | | | 1,000.00 | | | | 982.94 | | | | 4.50 | | | | .91 | |
| Class 529-A -- assumed 5% return | | | 1,000.00 | | | | 1,020.39 | | | | 4.58 | | | | .91 | |
| Class 529-B -- actual return | | | 1,000.00 | | | | 978.67 | | | | 8.63 | | | | 1.75 | |
| Class 529-B -- assumed 5% return | | | 1,000.00 | | | | 1,016.21 | | | | 8.80 | | | | 1.75 | |
| Class 529-C -- actual return | | | 1,000.00 | | | | 978.62 | | | | 8.53 | | | | 1.73 | |
| Class 529-C -- assumed 5% return | | | 1,000.00 | | | | 1,016.31 | | | | 8.70 | | | | 1.73 | |
| Class 529-E -- actual return | | | 1,000.00 | | | | 981.49 | | | | 5.98 | | | | 1.21 | |
| Class 529-E -- assumed 5% return | | | 1,000.00 | | | | 1,018.90 | | | | 6.09 | | | | 1.21 | |
| Class 529-F-1 -- actual return | | | 1,000.00 | | | | 983.82 | | | | 3.56 | | | | .72 | |
| Class 529-F-1 -- assumed 5% return | | | 1,000.00 | | | | 1,021.34 | | | | 3.63 | | | | .72 | |
| Class R-1 -- actual return | | | 1,000.00 | | | | 979.47 | | | | 8.04 | | | | 1.63 | |
| Class R-1 -- assumed 5% return | | | 1,000.00 | | | | 1,016.80 | | | | 8.20 | | | | 1.63 | |
| Class R-2 -- actual return | | | 1,000.00 | | | | 979.31 | | | | 8.29 | | | | 1.68 | |
| Class R-2 -- assumed 5% return | | | 1,000.00 | | | | 1,016.55 | | | | 8.45 | | | | 1.68 | |
| Class R-3 -- actual return | | | 1,000.00 | | | | 981.93 | | | | 5.88 | | | | 1.19 | |
| Class R-3 -- assumed 5% return | | | 1,000.00 | | | | 1,019.00 | | | | 5.99 | | | | 1.19 | |
| Class R-4 -- actual return | | | 1,000.00 | | | | 983.12 | | | | 4.30 | | | | .87 | |
| Class R-4 -- assumed 5% return | | | 1,000.00 | | | | 1,020.59 | | | | 4.38 | | | | .87 | |
| Class R-5 -- actual return | | | 1,000.00 | | | | 984.83 | | | | 2.77 | | | | .56 | |
| Class R-5 -- assumed 5% return | | | 1,000.00 | | | | 1,022.14 | | | | 2.82 | | | | .56 | |
| Class R-6 -- actual return | | | 1,000.00 | | | | 984.93 | | | | 2.52 | | | | .51 | |
| Class R-6 -- assumed 5% return | | | 1,000.00 | | | | 1,022.39 | | | | 2.57 | | | | .51 | |
*The “expenses paid during period” 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, and divided by 365 (to reflect the one-half year period).
Other share class results
unaudited
Classes B, C, F and 529
Fund results shown are for past periods and are not predictive of results for 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 June 30, 2010 (the most recent calendar quarter-end): | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | 10 years1/ | |
| | | 1 year | | | 5 years | | | Life of class | |
Class B shares2 | | | | | | | | | |
| Reflecting applicable contingent deferred sales charge | | | | | | | | | |
| (CDSC), maximum of 5%, payable only if shares are | | | | | | | | | |
| sold within six years of purchase | | | 5.38 | % | | | 1.07 | % | | | –1.78 | % |
| Not reflecting CDSC | | | 10.38 | | | | 1.45 | | | | –1.78 | |
| | | | | | | | | | | | | |
Class C shares — first sold 3/15/01 | | | | | | | | | | | | |
| Reflecting CDSC, maximum of 1%, payable only if | | | | | | | | | | | | |
| shares are sold within one year of purchase | | | 9.40 | | | | 1.44 | | | | 0.87 | |
| Not reflecting CDSC | | | 10.40 | | | | 1.44 | | | | 0.87 | |
| | | | | | | | | | | | | |
Class F-1 shares3 — first sold 3/15/01 | | | | | | | | | | | | |
| Not reflecting annual asset-based fee charged by | | | | | | | | | | | | |
| sponsoring firm | | | 11.25 | | | | 2.23 | | | | 1.68 | |
| | | | | | | | | | | | | |
Class F-2 shares3 — first sold 8/1/08 | | | | | | | | | | | | |
| Not reflecting annual asset-based fee charged by | | | | | | | | | | | | |
| sponsoring firm | | | 11.57 | | | | — | | | | –3.62 | |
| | | | | | | | | | | | | |
Class 529-A shares4 — first sold 2/15/02 | | | | | | | | | | | | |
| Reflecting 5.75% maximum sales charge | | | 4.77 | | | | 0.99 | | | | 2.98 | |
| Not reflecting maximum sales charge | | | 11.18 | | | | 2.20 | | | | 3.72 | |
| | | | | | | | | | | | | |
Class 529-B shares2,4 — first sold 2/19/02 | | | | | | | | | | | | |
| Reflecting applicable CDSC, maximum of 5%, payable | | | | | | | | | | | | |
| only if shares are sold within six years of purchase | | | 5.31 | | | | 0.98 | | | | 3.14 | |
| Not reflecting CDSC | | | 10.31 | | | | 1.35 | | | | 3.14 | |
| | | | | | | | | | | | | |
Class 529-C shares4 — first sold 2/21/02 | | | | | | | | | | | | |
| Reflecting CDSC, maximum of 1%, payable only if | | | | | | | | | | | | |
| shares are sold within one year of purchase | | | 9.32 | | | | 1.35 | | | | 3.27 | |
| Not reflecting CDSC | | | 10.32 | | | | 1.35 | | | | 3.27 | |
| | | | | | | | | | | | | |
Class 529-E shares3,4 — first sold 3/15/02 | | | 10.85 | | | | 1.87 | | | | 2.63 | |
| | | | | | | | | | | | | |
Class 529-F-1 shares3,4 — first sold 10/11/02 | | | | | | | | | | | | |
| Not reflecting annual asset-based fee charged by | | | | | | | | | | | | |
| sponsoring firm | | | 11.39 | | | | 2.38 | | | | 8.71 | |
| | 1Applicable to Class B shares only. All other share classes reflect results for the life of the class. |
| | 2These shares are not available for purchase. |
| | 3These shares are sold without any initial or contingent deferred sales charge. |
| | 4Results shown do not reflect the $10 account setup fee and an annual $10 account maintenance fee. |
Investment results assume all distributions are reinvested and reflect applicable fees and expenses. The fund’s investment adviser waived a portion of its management fees from September 1, 2004, through December 31, 2008. Applicable fund results shown reflect the waiver, without which they would have been lower. See the Financial Highlights table on pages 22 to 25 for details that include expense ratios for all share classes.
For information regarding the differences among the various share classes, refer to the fund’s prospectus.
Offices
Offices of the fund and of the investment adviser
Capital Research and Management Company
333 South Hope Street
Los Angeles, CA 90071-1406
6455 Irvine Center Drive
Irvine, CA 92618
Transfer agent for shareholder accounts
American Funds Service Company
(Write to the address near you.)
P.O. Box 6007
Indianapolis, IN 46206-6007
P.O. Box 2280
Norfolk, VA 23501-2280
Custodian of assets
State Street Bank and Trust Company
One Lincoln Street
Boston, MA 02111
Counsel
O’Melveny & Myers LLP
400 South Hope Street
Los Angeles, CA 90071-2899
Independent registered public accounting firm
PricewaterhouseCoopers LLP
350 South Grand Avenue
Los Angeles, CA 90071-2889
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 summary prospectus and prospectus, which can be obtained from your financial professional 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 Procedures and Principles” — which describes how we vote proxies relating to portfolio securities — is available on the American Funds website or upon request by calling AFS. The fund files its proxy voting record with the U.S. Securities and Exchange Commission (SEC) for the 12 months ended June 30 by August 31. The proxy voting record is available free of charge on the SEC website at sec.gov and on the American Funds website.
A complete May 31, 2010, portfolio of The New Economy Fund’s investments is available free of charge by calling AFS or visiting the SEC website (where it is part of Form N-CSR).
The New Economy Fund 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. Additional information regarding the operation of the Public Reference Room may be obtained by calling the SEC’s Office of Investor Education and Advocacy at 800/SEC-0330. Additionally, the list of portfolio holdings is available by calling AFS.
This report is for the information of shareholders of The New Economy Fund, but it also may be used as sales literature when preceded or accompanied by the current summary prospectus or prospectus, which gives details about charges, expenses, investment objectives and operating policies of the fund. If used as sales material after September 30, 2010, this report must be accompanied by an American Funds statistical update for the most recently completed calendar quarter.
What makes American Funds different?
For nearly 80 years, we have followed a consistent philosophy to benefit our investors. Our 30 carefully conceived, broadly diversified funds, in addition to the target date retirement series, offer opportunities that have attracted over 50 million shareholder accounts.
Our unique combination of strengths includes these five factors:
| | •A long-term, value-oriented approach |
| | We seek to buy securities at reasonable prices relative to their prospects and hold them for the long term. |
| | •An extensive global research effort |
| | Our investment professionals travel the world to find the best investment opportunities and gain a comprehensive understanding of companies and markets. |
| | •The multiple portfolio counselor system |
| | Our unique approach to portfolio management, developed more than 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 26 years of investment experience, providing a depth of knowledge and broad perspective that few organizations have. |
| | •A commitment to low management fees |
| | The American Funds provide exceptional value for shareholders, with management fees that are among the lowest in the mutual fund industry. |
American Funds span a range of investment objectives
| | The Growth Fund of America® |
| | Capital World Growth and Income FundSM |
| | International Growth and Income FundSM |
| | The Investment Company of America® |
| | Washington Mutual Investors FundSM |
| | The Income Fund of America® |
| | American High-Income TrustSM |
| | The Bond Fund of AmericaSM |
| | Intermediate Bond Fund of America® |
Short-Term Bond Fund of AmericaSM
| | U.S. Government Securities FundSM |
| | American Funds Short-Term Tax-Exempt Bond FundSM |
| | 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® |
American Funds Money Market Fund®
| | •American Funds Target Date Retirement Series® |
The Capital Group Companies
American Funds Capital Research and Management Capital International Capital Guardian Capital Bank and Trust
Lit. No. MFGESR-914-0710P
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