UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
Certified Shareholder Report of
Registered Management Investment Companies
Investment Company Act File Number: 811-04318
The American Funds Income Series
(Exact name of registrant as specified in charter)
333 South Hope Street
Los Angeles, California 90071
(Address of principal executive offices)
Registrant's telephone number, including area code: (213) 486-9200
Date of fiscal year end: August 31
Date of reporting period: August 31, 2007
Kimberly S. Verdick
Capital Research and Management Company
333 South Hope Street
Los Angeles, California 90071
(Name and address of agent for service)
Copies to:
Michael Glazer
Paul, Hastings, Janofsky & Walker LLP
515 South Flower Street, 25th Floor
Los Angeles, California 90071
(Counsel for the registrant)
ITEM 1 – Reports to Stockholders
[logo - American Funds®]
The right choice for the long term®
U.S. Government Securities Fund
[photo from ground level looking up at the Washington D.C. Capital building's rotunda ceiling - back of the George Washington statue in the foreground]
Understanding the yield curve
Annual report for the year ended August 31, 2007
U.S. Government Securities FundSM seeks a high level of current income, consistent with prudent investment risk and preservation of capital, by investing primarily in obligations guaranteed or sponsored by the United States government. The fund may also invest in nongovernment issues rated Aaa/AAA or equivalent.
This fund is one of the 30 American Funds. American Funds 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 | 3 |
Feature report: Understanding the yield curve | 4 |
Summary investment portfolio | 8 |
Financial statements | 11 |
Board of trustees and other officers | 27 |
What makes American Funds different? | back cover |
Fund results shown in this report, unless otherwise indicated, are for Class A shares at net asset value. If a sales charge (maximum 3.75%) 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. 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 September 30, 2007 (the most recent calendar quarter-end): | ||||||||||||
1 year | 5 years | 10 years | ||||||||||
Class A shares | ||||||||||||
Reflecting 3.75% maximum sales charge | +0.67 | % | +2.18 | % | +4.56 | % |
The total annual fund operating expense ratio for Class A shares as of the most recent fiscal year-end was 0.79%. This figure does not reflect a fee waiver currently in effect; therefore, the actual expense ratio is lower.
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 actual expenses, with the waiver applied. Fund results would have been lower without the waiver. Please see the Financial Highlights table on pages 18 and 19 for details.
The fund’s 30-day yield for Class A shares as of September 30, 2007, calculated in accordance with the Securities and Exchange Commission formula, was 4.34% (4.31% without the fee waiver). The fund’s distribution rate for Class A shares as of that date was 4.25% (4.22% without the fee waiver). Both reflect the 3.75% maximum sales charge. The SEC yield reflects the rate at which the fund is earning income on its current portfolio of securities while the distribution rate reflects the fund’s past dividends paid to shareholders. Accordingly, the fund’s SEC yield and distribution rate may differ.
Results for other share classes can be found on page 22.
The return of principal in bond funds is not guaranteed. Bond funds have the same interest rate, inflation and credit risks that are associated with the underlying bonds owned by the fund.
Fellow shareholders:
[photo of the Washington D.C. Capital building's rotunda ceiling]
The fiscal year for U.S. Government Securities Fund ended during a period of unusual volatility that lifted returns on U.S. Treasuries while selectively dampening returns in other sectors of the bond market. As a result, shareholders enjoyed a modest gain in share price in addition to their income return.
For the 12 months ended August 31, 2007, shareholders received monthly dividends totaling about 59 cents a share — an increase of about 10% over the previous year. Shareholders who reinvested dividends recorded an income return of 4.5%, while those who took dividends in cash had an income return of 4.4%. Over the same time period, the fund’s share price rose three cents to $13.35 a share.
The fund’s reinvested dividends, combined with the higher share price, produced a total return of 4.7% for the fiscal year. In comparison, the unmanaged Citigroup Treasury/Government Sponsored/Mortgage Index returned 5.6%, while the Lipper General U.S. Government Funds Average posted a 4.1% return. The higher return for the index is mainly attributable to the higher percentage of Treasuries that compose that benchmark and the absence of management fees.
Bond market overview
The first eight months of the current fiscal year, which began September 1, 2006, were relatively supportive for government securities. Bond yields fluctuated within a fairly narrow trading range, as investors anticipated weaker economic growth in 2007 and, consequently, a decrease in the federal funds target rate. Weaker growth did materialize in early 2007, but the Federal Reserve held firm and did not lower the federal funds rate until after the close of the fiscal year.
In contrast, the final four months of the fiscal year wrought significant changes in investor sentiment that led to higher volatility and a sharp divergence in the bond market. First, bond yields began to rise in early May, as economic data pointed to a strengthening of the economy despite continued weakness in the housing sector. Then, concerns about subprime mortgages prompted a reevaluation of risk premiums that weighed heavily on lower rated bonds and portions of the structured debt market. By mid-July, a flight to quality began that ignited a rally in the Treasury market, but left some riskier pockets of the bond market without a bid — a rare occurrence of illiquidity that roiled stocks and bonds alike.
These events, coupled with lingering concerns about the breadth of weakness in the housing market and its ability to slow the economy, helped move the Federal Reserve to action. On September 18, it cut the federal funds rate half a point to 4.75% — a welcome balm for the troubled markets.
Treasury yields ended the fiscal year sharply lower (as can be seen in the chart on the next page), providing that sector with some of the biggest gains. Results for other sectors varied considerably. Among secured debt obligations, government-supported mortgage-backed bonds fared well, but many other forms of privately originated secured debt lagged the market.
[Begin Sidebar]
Class A share results at a glance
Average annual total returns for periods ended August 31, 2007, with all distributions reinvested | ||||||||||||||||
1 year | 5 years | 10 years | Lifetime* | |||||||||||||
U.S. Government Securities Fund | +4.72 | % | +3.15 | % | +5.02 | % | +6.63 | % | ||||||||
Citigroup Treasury/Government Sponsored/Mortgage Index† | +5.57 | +4.00 | +5.96 | +7.70 | ||||||||||||
Lipper General U.S. Government Funds Average | +4.08 | +2.86 | +5.01 | +6.61 | ||||||||||||
*Since October 17, 1985. | ||||||||||||||||
† The index is unmanaged and its results include reinvested distributions, but do not reflect the effect of sales charges, commissions or expenses. |
[End Sidebar]
How the fund responded
The portfolio counselors of U.S. Government Securities Fund manage the portfolio with a long-term investment perspective that strives to protect principal while uncovering attractive opportunities during market fluctuations. During such periods, they may seek to lighten up on holdings that, in their estimation, become overvalued by the market and to add bonds that appear to be undervalued.
In making those determinations, portfolio counselors rely on the fundamental research of the fund’s investment analysts, as well as the economic and market research of our economists, technical analysts and bond traders. These issuer-specific and big picture outlooks help drive investment decisions and, during the recent fiscal year, led to several portfolio adjustments.
During the year, the fund’s counselors lowered exposure to U.S. Treasuries, bringing the portfolio weighting to 26.9% from 38.4%. Though Treasuries rallied during the last two months of the fiscal year, fund counselors believed there were more attractive long-term values to be found in other high-quality issues, specifically among mortgage-related bonds.
With this in mind, portfolio counselors steadily increased the fund’s exposure to mortgage-backed obligations, bringing the portfolio weighting to 52.7% of assets at year-end from 46.7% last year. Much of this increase stems from the fund’s amended guidelines (discussed in our last annual report), which allows the fund to invest up to 20% of assets in nongovernment structured securities rated AAA. In conjunction, the fund began adding AAA-rated asset-backed securities, which accounted for 5.3% of assets by year-end. Most of these high-quality structured securities provide yields that are appreciably higher than Treasuries and comparable government-supported mortgage-backed obligations.
Overall, U.S. Government Securities Fund ended the year with more than 370 individual bond holdings and 83% of portfolio assets in securities sponsored or guaranteed by the government.
[Begin Sidebar]
Treasury yield curves
[begin line chart]
[end line chart]
8/31/2006 | 8/31/2007 | |||||||
3 month | 5.030 | % | 4.106 | % | ||||
6 month | 5.104 | 4.201 | ||||||
2 year | 4.775 | 4.132 | ||||||
3 year | 4.702 | 4.145 | ||||||
5 year | 4.689 | 4.244 | ||||||
10 year | 4.726 | 4.529 | ||||||
30 year | 4.877 | 4.822 |
Source: Bloomberg
[End Sidebar]
Quality matters
As recently demonstrated, government securities have provided a safe haven when markets are troubled, making them an essential portfolio component for prudent long-term investors. Additionally, U.S. Treasuries afford a unique window into developing market conditions and sentiments. To learn more about this analytic capability, please read our feature article, “Understanding the yield curve,” beginning on page 4.
Finally, many of the concerns that roiled the bond market this summer — housing, subprime mortgages, a diminished appetite for risk and worries about the economy — are likely to linger into the year ahead. In this environment, we believe that U.S. Government Securities Fund will continue to provide reliable income and remain an oasis of calm for our shareholders. As always, the fund’s counselors will keep close watch on market developments and manage the fund with a conservative hand.
We thank you for your support and look forward to updating you on the fund’s progress in six months.
Cordially,
/s/ Paul G. Haaga, Jr.
Paul G. Haaga, Jr.
Vice Chairman
/s/ John H. Smet
John H. Smet
President
October 12, 2007
For current information about the fund, visit americanfunds.com.
The value of a long-term perspective
How a $10,000 investment has grown (for the period October 17, 1985, to August 31, 2007, with dividends reinvested)
Fund figures reflect deduction of the maximum sales charge of 3.75% on the $10,000 investment.1 Thus, the net amount invested was $9,625.2
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Year ended August 31 | U.S. Government Securities Fund | Citigroup Treasury/Government Sponsored/Mortgage Index3 | Consumer Price Index5 | Lipper General U.S. Government Funds Average4 | ||||||||||||
10/17/1985 | $ | 9,625 | $ | 10,000 | $ | 10,000 | $ | 10,000 | ||||||||
8/31/1986 | $ | 10,919 | $ | 11,900 | $ | 10,092 | $ | 11,900 | ||||||||
8/31/1987 | $ | 11,095 | $ | 12,029 | $ | 10,524 | $ | 11,803 | ||||||||
8/31/1988 | $ | 12,028 | $ | 13,015 | $ | 10,948 | $ | 12,605 | ||||||||
8/31/1989 | $ | 13,210 | $ | 14,707 | $ | 11,463 | $ | 13,957 | ||||||||
8/31/1990 | $ | 14,280 | $ | 15,806 | $ | 12,107 | $ | 14,750 | ||||||||
8/31/1991 | $ | 16,025 | $ | 18,102 | $ | 12,567 | $ | 16,727 | ||||||||
8/31/1992 | $ | 18,126 | $ | 20,516 | $ | 12,962 | $ | 18,841 | ||||||||
8/31/1993 | $ | 20,372 | $ | 22,688 | $ | 13,321 | $ | 20,921 | ||||||||
8/31/1994 | $ | 19,621 | $ | 22,386 | $ | 13,707 | $ | 20,285 | ||||||||
8/31/1995 | $ | 21,308 | $ | 24,841 | $ | 14,066 | $ | 22,328 | ||||||||
8/31/1996 | $ | 22,023 | $ | 25,879 | $ | 14,471 | $ | 22,902 | ||||||||
8/31/1997 | $ | 24,023 | $ | 28,397 | $ | 14,793 | $ | 24,989 | ||||||||
8/31/1998 | $ | 26,353 | $ | 31,484 | $ | 15,032 | $ | 27,710 | ||||||||
8/31/1999 | $ | 26,342 | $ | 31,736 | $ | 15,373 | $ | 27,434 | ||||||||
8/31/2000 | $ | 28,204 | $ | 34,245 | $ | 15,897 | $ | 29,305 | ||||||||
8/31/2001 | $ | 31,224 | $ | 38,265 | $ | 16,329 | $ | 32,495 | ||||||||
8/31/2002 | $ | 33,581 | $ | 41,656 | $ | 16,624 | $ | 35,155 | ||||||||
8/31/2003 | $ | 34,350 | $ | 42,810 | $ | 16,983 | $ | 35,643 | ||||||||
8/31/2004 | $ | 35,894 | $ | 45,246 | $ | 17,433 | $ | 37,232 | ||||||||
8/31/2005 | $ | 37,054 | $ | 47,074 | $ | 18,068 | $ | 38,412 | ||||||||
8/31/2006 | $ | 37,438 | $ | 48,010 | $ | 18,758 | $ | 38,782 | ||||||||
8/31/2007 | $ | 39,205 | $ | 50,686 | $ | 19,128 | $ | 40,557 |
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1As outlined in the prospectus, the sales charge is reduced for accounts (and aggregated investments) of $100,000 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. |
2The maximum initial sales charge was 4.75% prior to January 10, 2000. |
3The index is unmanaged and its results include reinvested distributions, but do not reflect the effect of sales charges, commissions or expenses. |
4Calculated by Lipper. The average does not reflect the effect of sales charges. |
5Computed from data supplied by the U.S. Department of Labor, Bureau of Labor Statistics. |
6For the period 10/17/85 to 8/31/86. |
Past results are not predictive of results in future periods. The results shown are before taxes on fund distributions and sale of fund shares.
Average annual total returns based on a $1,000 investment (for periods ended August 31, 2007)* | ||||||||||||
1 year | 5 years | 10 years | ||||||||||
Class A shares | +0.79 | % | +2.37 | % | +4.62 | % | ||||||
*Assumes reinvestment of all distributions and payment of the maximum 3.75% 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 18 and 19 for details.
Understanding the yield curve
U.S. Treasuries are prized worldwide for their safety and liquidity. Non-U.S. investors — including central banks, corporations and individuals — own nearly 50% of U.S. Treasury debt. In the United States, sophisticated money managers as well as cautious individuals rely on Treasuries to form the core of conservative portfolios — as they do in U.S. Government Securities Fund. No other bonds are as widely held or as central to fixed-income investing as are Treasuries.
The safety, universality, simplicity and liquidity of Treasuries make them an ideal benchmark for most other bond issues. Although Treasuries have no credit risk, they are highly sensitive to interest rate fluctuations. This helps to make them a good barometer for reflecting market sentiment.
In the next few pages, we’ll take a look at how Treasuries function as a benchmark and barometer by examining the Treasury yield curve. The deceptively simple structure of the yield curve is an essential market reference for professionals and non-professionals alike. Additionally, we hope this discussion enhances your understanding of U.S. Government Securities Fund and of the importance of active management, even in conservative portfolios.
Posture discloses attitude
The Treasury yield curve is an elemental graph that depicts the daily yields for current Treasury issues having final maturities of three months out to 30 years. (See the charts at right.) The line that connects these yields forms the spine of the curve. Treasury yields fluctuate daily, often moving in tandem across the curve, but sometimes moving independently of each other. These fluctuations alter the shape of the curve and can have a significant impact on a wide range of investment decisions.
[Begin Photo Caption]
[photo of a spiral staircase in the Supreme Court of the United States]
Supreme Court of the United States
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Under normal conditions, the shape of the yield curve is positive, sloping upward as seen in chart A. This shape is considered normal because, in most situations, the longer the maturity date, the higher the yield (or term premium) on the bond. The higher yields reward investors for assuming greater volatility and interest rate risk over longer periods of time. Additionally, higher yields help to compensate long-term investors for the effects of inflation, which lessen the buying power (or value) of the principal when it is returned at maturity.
Less often, the yield curve assumes a flat shape, as seen in chart B. The yield curve is said to be flat when there is little difference between short-term, intermediate- and long-term yields. The flat curve typically occurs when the Federal Reserve is tightening monetary policy (raising short-term interest rates) in an effort to restrain inflation and prevent the economy from overheating. The flattening of the curve is often a transitory position, lasting weeks or months, and is usually followed by a steeper positive slope or an inversion.
The yield curve is said to invert when long-term yields are lower than short-term yields. (See chart C.) Inversions are unusual occurrences that are not sustainable; eventually, short-term yields will fall or long-term yields will rise. Often, an inverted yield curve presages an economic slowdown, which sometimes leads to a recession.
During the past fiscal year, we experienced variations on each of these three yield curve shapes. Each change in the posture of the curve reflected a shift in market forces and sentiment.
What shapes the curve
The shifting shape of the yield curve is determined by the complex interaction of several forces, including monetary policy, fiscal policy, inflation and investor demand.
[Begin Sidebar]
Shapes of the Treasury yield curve
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The Treasury yield curve is composed of market yields for major Treasury issues. The yield curve has three basic shapes as shown below. We have experienced variations on each of these curves over the past fiscal year, as noted.
A. Positive, upward sloping curve
[begin line chart]
Positive, upward sloping curve | ||||
8/31/2007 | ||||
3 month | 4.106 | % | ||
6 month | 4.201 | |||
2 year | 4.132 | |||
3 year | 4.145 | |||
5 year | 4.244 | |||
10 year | 4.529 | |||
30 year | 4.822 |
The normal shape of the curve is positive, upward sloping, with yields progressively higher as maturities extend.
B. Flat curve
[begin line chart]
Flat curve | ||||
6/5/2007 | ||||
3 month | 4.816 | % | ||
6 month | 4.969 | |||
2 year | 5.000 | |||
3 year | 4.973 | |||
5 year | 4.968 | |||
10 year | 4.991 | |||
30 year | 5.087 |
The flat curve is an intermediate posture that occurs most often when the Federal Reserve is raising short-term interest rates.
C. Inverted curve
[begin line chart]
Inverted curve | ||||
1/31/2007 | ||||
3 month | 5.103 | % | ||
6 month | 5.137 | |||
2 year | 4.916 | |||
3 year | 4.847 | |||
5 year | 4.800 | |||
10 year | 4.808 | |||
30 year | 4.907 |
The inverted curve is a relatively rare occurrence that often anticipates a decline in economic activity and rate cut by the Federal Reserve.
Source: Bloomberg
[End Sidebar]
Short-term yields — primarily for maturities of one year or less — are most influenced by Federal Reserve monetary policies. When the Fed raises the federal funds target rate to tighten (or restrict) credit conditions, short-term yields generally rise as well. Similarly, these yields will generally decline when the Fed cuts rates to ease (or relax) credit, making loans easier to obtain. However, it is important to keep in mind that all Treasury yields — and even the daily federal funds rate — are determined by the market (buyers and sellers). The Federal Reserve provides direction by setting a fixed target, which the markets then approximate.
[Begin Sidebar]
Not all inversions are alike
[photo of the Washington DC Small Senate Rotunda ceiling]
In the past, inverted yield curves have frequently signaled slower growth in the economy. “Contrary to popular belief, inversions are not always followed by recessions,” notes Anne Vandenabeele, an economist with the fund’s adviser. Anne’s research has found that six of the 10 inversions over the past 50 years have indeed been followed by recessions, as noted in the table below. But four have not. Importantly, the length and magnitude of yield curve inversions have varied over time and have occurred at different points in the economic cycle. “To better understand what an inversion signifies, we must first analyze the factors that lead to an inversion,” explains Anne. “A number of causes can lead to an inverted yield curve, not all of them consistent with a recession.”
Length of time | Maximum | Followed by | |
Inversion period | (months) | inversion (bp)* | recession? |
May 66 – Feb 67 | 10 | –60 | No |
Apr 68 – May 70 | 26 | –250 | Yes |
Mar 73 – Dec 74 | 22 | –511 | Yes |
Sept 78 – May 80 | 21 | –596 | No |
Oct 80 – Nov 81 | 14 | –643 | Yes |
Feb 82 – May 82 | 4 | –103 | Yes |
Dec 86 | 1 | –7 | No |
Jan 89 – Jan 90 | 13 | –125 | Yes |
Jun 98 – Dec 98 | 7 | –73 | No |
Apr 00 – Mar 01 | 12 | –121 | Yes |
*The maximum inversion between the federal funds rate and the 10-year Treasury in basis points (one basis point = 0.01%). In the first example, the yield on the 10-year Treasury declined to 60 bp below the federal funds rate. |
Source: Capital Strategy Research
[End Sidebar]
Intermediate and long-term yields, on the other hand, are more broadly influenced by market forces, such as supply and demand, the outlook for inflation and expectations for interest rates going forward. Fiscal policy can influence long-term yields by increasing the supply of debt when the federal government is running a large deficit; this may lead to higher yields in order to make the debt more attractive to investors. The actions of the Federal Reserve can and do influence intermediate and long-term yields, but that influence may also be moderated by other factors weighing more heavily on investor expectations.
We have seen several instances of this over the past few years. As the Federal Reserve steadily raised rates in 2005 and 2006, long-term yields seemed oblivious and largely held fast, resulting in a gradual flattening of the yield curve. Strong investor appetite for long-term Treasuries helped to keep a lid on longer yields until short-term rates overtook them. Then in late 2006 to early 2007, while the Fed focused on inflation pressures, the market focused on a weakening economy and anticipated rate cuts, which helped send long-term Treasury yields even lower. This resulted in an inverted yield curve for a period of time.
Thus, short-term yields tend to reflect current and near-term market conditions, while long-term yields tend to reflect investor expectations regarding future developments.
The pulse of the curve
When analyzing the yield curve, market professionals typically focus on the most current and liquid Treasury issues. Apart from short-term bills, the Treasury regularly auctions two-year, three-year, five-year, 10-year and 30-year maturities. Consequently, these issues tend to form the key plot points of the yield curve.
Yield changes on the current 10-year Treasury function as a bellwether for the broader bond market. Its fluctuations reflect the amalgam of forces that shapes the long end of the yield curve. The 10-year yield is also a key benchmark used to establish the coupon or interest rate on many long-term corporate bonds and some mortgages. Consequently, the 10-year Treasury is keenly watched by market professionals, who plot its fluctuations over time in order to gauge changes in market sentiment and direction.
Lessons from the curve
The yield curve is an important reference for the fund’s portfolio counselors and analysts. As we’ve noted, changes in the shape of the curve can reflect important changes in investor sentiment. An inverted yield curve typically reflects anticipation of declining inflation, often accompanied by slowing economic growth. Conversely, a positive, steeply sloped curve usually reflects expectations of rising inflation, often in conjunction with a strengthening economy.
The shape of the curve is, of course, determined by the difference in term premiums attached to key maturities. The fund’s analysts monitor these yield differences (also known as spreads) to help gauge the direction of the curve’s shape and to identify temporary abnormalities (bulges in the curve) that may represent attractive buying opportunities. These opportunities occasionally arise when the curve is changing shape and a portion of the curve — the yield on the five-year Treasury, for example — appears out of line with the general slope of the curve.
By studying changes in the posture of the curve, plotting yield fluctuations of key maturities and between key maturities over time, portfolio counselors and analysts can begin to develop investment strategies that help to preserve shareholder principal and produce gains for the fund. Remember, changing yields reflect changing prices for bonds. As yields rise, prices decline and vice versa.
To help preserve principal and lessen the impact of rising rates, the fund’s counselors can adjust the maturity structure of the portfolio. In a rising rate environment, short-term bonds tend to retain more of their value than do long-term bonds; under these conditions, the fund’s counselors may seek to shorten the portfolio’s maturity structure to provide a measure of protection.
In a declining rate environment, the opposite response may be desired. Because long-term bonds are more sensitive to yield changes, they tend to increase more in value when rates are declining. At such times, portfolio counselors may seek to lengthen the maturity structure of the portfolio to take advantage of falling rates.
One of many tools
The yield curve rarely tells the whole story, much as taking a patient’s temperature rarely tells physicians all they need to know. But it is a crucial diagnostic tool, a measure of the market’s vital signs. Ongoing analysis of the yield curve in conjunction with economic analysis and the behavior of individual market sectors help to create a fuller picture of the investment climate and can have a direct influence on both short- and long-term investment decisions.
[Begin Sidebar]
The pulse of the curve
[photo of the Memorial Bridge in Washington DC]
This chart shows the changing yields on the two-year and 10-year Treasuries over the past fiscal year. For the first nine months, the yield curve was inverted to flat as evidenced by two-year yields that are higher than 10-year yields. During the final months, the yield curve turned positive, with 10-year yields rising above two-year yields. Wesley Phoa, a quantitative analyst for the fund’s adviser, explains, “By understanding the relationship between these two Treasuries, we can help portfolio counselors develop investment strategies that can take advantage of curve fluctuations and help to protect shareholder principal.”
For the period 9/1/06–8/31/07
[begin line chart]
Date | 2-year Treasury | 10-year Treasury | ||||||
9/1/2006 | 4.76 | % | 4.73 | % | ||||
9/8/2006 | 4.81 | 4.77 | ||||||
9/15/2006 | 4.86 | 4.79 | ||||||
9/22/2006 | 4.67 | 4.59 | ||||||
9/29/2006 | 4.69 | 4.63 | ||||||
10/6/2006 | 4.74 | 4.70 | ||||||
10/13/2006 | 4.87 | 4.80 | ||||||
10/20/2006 | 4.88 | 4.79 | ||||||
10/27/2006 | 4.75 | 4.67 | ||||||
11/3/2006 | 4.82 | 4.72 | ||||||
11/10/2006 | 4.74 | 4.59 | ||||||
11/17/2006 | 4.77 | 4.60 | ||||||
11/24/2006 | 4.73 | 4.55 | ||||||
12/1/2006 | 4.52 | 4.44 | ||||||
12/8/2006 | 4.67 | 4.55 | ||||||
12/15/2006 | 4.72 | 4.60 | ||||||
12/22/2006 | 4.72 | 4.62 | ||||||
12/29/2006 | 4.81 | 4.70 | ||||||
1/5/2007 | 4.75 | 4.65 | ||||||
1/12/2007 | 4.88 | 4.78 | ||||||
1/19/2007 | 4.91 | 4.78 | ||||||
1/26/2007 | 4.97 | 4.88 | ||||||
2/2/2007 | 4.94 | 4.82 | ||||||
2/9/2007 | 4.90 | 4.78 | ||||||
2/16/2007 | 4.83 | 4.69 | ||||||
2/23/2007 | 4.80 | 4.67 | ||||||
3/2/2007 | 4.53 | 4.50 | ||||||
3/9/2007 | 4.67 | 4.59 | ||||||
3/16/2007 | 4.59 | 4.55 | ||||||
3/23/2007 | 4.60 | 4.61 | ||||||
3/30/2007 | 4.58 | 4.65 | ||||||
4/6/2007 | 4.74 | 4.75 | ||||||
4/13/2007 | 4.77 | 4.76 | ||||||
4/20/2007 | 4.65 | 4.67 | ||||||
4/27/2007 | 4.65 | 4.69 | ||||||
5/4/2007 | 4.67 | 4.64 | ||||||
5/11/2007 | 4.71 | 4.67 | ||||||
5/18/2007 | 4.82 | 4.80 | ||||||
5/25/2007 | 4.86 | 4.86 | ||||||
6/1/2007 | 4.97 | 4.95 | ||||||
6/8/2007 | 4.99 | 5.10 | ||||||
6/15/2007 | 5.02 | 5.17 | ||||||
6/22/2007 | 4.91 | 5.13 | ||||||
6/29/2007 | 4.86 | 5.03 | ||||||
7/6/2007 | 4.99 | 5.18 | ||||||
7/13/2007 | 4.92 | 5.10 | ||||||
7/20/2007 | 4.77 | 4.95 | ||||||
7/27/2007 | 4.50 | 4.76 | ||||||
8/3/2007 | 4.42 | 4.69 | ||||||
8/10/2007 | 4.46 | 4.81 | ||||||
8/17/2007 | 4.19 | 4.69 | ||||||
8/24/2007 | 4.30 | 4.62 | ||||||
8/31/2007 | 4.14 | 4.53 |
[end line chart]
Source: Bloomberg
[End Sidebar]
Summary investment portfolio, August 31, 2007
The following summary investment portfolio is designed to streamline the report and help investors better focus on a fund’s principal holdings. For details on how to obtain a complete schedule of portfolio holdings, please see the inside back cover.
[begin pie chart]
Investment mix by security type | ||||
Mortgage-backed obligations | 52.7 | % | ||
U.S. Treasury bonds & notes | 26.9 | |||
Federal agency bonds & notes | 9.7 | |||
Asset-backed obligations | 5.3 | |||
Short-term securities & other assets less liabilities | 5.4 |
Quality breakdown* | ||||
as of August 31, 2007 | Percent of net assets | |||
U.S. government obligations† | 31.8 | % | ||
Federal agencies | 45.5 | |||
Aaa/AAA | 17.3 | |||
Short-term securities & other assets less liabilities | 5.4 | |||
*Bond ratings reflect those of a credit rating agency; if ratings are not available, they are assigned by the fund's investment analysts. The ratings are not covered by the Report of Independent Registered Public Accounting Firm. | ||||
†These securities are guaranteed by the full faith and credit of the United States government. |
Principal | Market | Percent | |
amount | value | of net | |
Bonds & notes - 94.58% | (000) | (000) | assets |
Mortgage-backed obligations (1) - 52.67% | |||
Fannie Mae: | |||
5.00% 2020 | $ 28,240 | $ 27,718 | |
6.00% 2024 | 40,028 | 40,203 | |
6.00% 2027 | 22,060 | 22,156 | |
5.50% 2033 | 15,110 | 14,807 | |
4.50% 2035 | 35,570 | 32,905 | |
6.50% 2035 | 53,209 | 54,290 | |
6.50% 2036 | 36,404 | 37,212 | |
6.00% 2037 | 14,412 | 14,396 | |
6.50% 2037 | 16,242 | 16,344 | |
7.00% 2037 (2) | 15,500 | 15,794 | |
Series 2003-T1, Class B, 4.491% 2012 | 27,750 | 27,102 | |
Series 2005-68, Class PG, 5.50% 2035 | 18,750 | 18,785 | |
Series 2007-24, Class P, 6.00% 2037 | 35,279 | 35,795 | |
0% -12.00% 2008-2042 (2) (3) | 324,501 | 318,841 | 26.32% |
Freddie Mac: | |||
6.00% 2026 | 15,115 | 15,188 | |
6.00% 2027 | 28,465 | 28,603 | |
5.00% 2035 | 12,640 | 12,027 | |
6.00% 2037 | 75,750 | 75,667 | |
6.012% 2037 (3) | 11,828 | 11,905 | |
Series 3156, Class PF, 5.861% 2036 (3) | 12,217 | 12,121 | |
0%-11.943% 2007-2037 (3) | 156,952 | 150,371 | 11.90 |
Government National Mortgage Assn.: | |||
Series 2004-19, 5.00% 2031 | 13,911 | 13,672 | |
5.00%-10.00% 2009-2036 | 49,350 | 48,580 | 2.42 |
Banc of America Mortgage Securities, Inc. 4.75%-5.00% 2018 | 28,961 | 27,973 | 1.09 |
CS First Boston Mortgage Securities Corp. 4.183%-7.00% 2037-2039 (2) (3) | 26,341 | 26,008 | 1.01 |
Wells Fargo Alternative Loan Trust, Series 2007-PA3, Class V-A-1, 7.00% 2037 (2) | 17,661 | 17,569 | .69 |
Other securities | 237,538 | 9.24 | |
1,353,570 | 52.67 | ||
U.S. Treasury bonds & notes - 26.92% | |||
U.S. Treasury: | |||
3.00% 2007 | 15,425 | 15,392 | |
4.75% 2008 | 18,150 | 18,261 | |
3.625% 2009 | 18,185 | 17,998 | |
4.00% 2010 | 49,000 | 48,774 | |
5.75% 2010 | 11,435 | 11,929 | |
14.50% 2011 | 24,750 | 24,988 | |
4.625% 2011 | 24,000 | 24,337 | |
4.875% 2011 | 12,000 | 12,275 | |
3.625% 2013 | 43,250 | 41,790 | |
3.875% 2013 | 17,250 | 16,910 | |
4.25% 2013 | 92,500 | 92,225 | |
4.25% 2014 | 22,500 | 22,335 | |
11.25% 2015 | 17,500 | 24,950 | |
5.125% 2016 | 26,000 | 27,113 | |
4.625% 2017 | 12,925 | 13,000 | |
8.125% 2019 | 21,100 | 27,522 | |
8.50% 2020 | 31,250 | 42,075 | |
7.875% 2021 (4) | 15,250 | 19,827 | |
7.125% 2023 (4) | 17,500 | 21,782 | |
4.50% 2036 | 39,950 | 37,828 | |
5.00% 2037 | 15,660 | 16,059 | |
0%-12.00% 2008-2037 (2) (5) | 133,568 | 114,522 | 26.92 |
691,892 | 26.92 | ||
Federal agency bonds & notes - 9.74% | |||
Freddie Mac: | |||
5.25% 2011 | 99,680 | 101,415 | |
4.50%-5.50% 2014-2017 | 23,000 | 23,278 | 4.85 |
Small Business Administration: | |||
Series SBIC-PS 2006-10A, Participating Securities, 5.408% 2016 | 12,587 | 12,541 | |
4.84%-6.44% 2021-2023 (1) | 17,417 | 17,468 | 1.17 |
Federal Agricultural Mortgage Corp. 4.875%-5.50% 2011-2017 (6) | 26,925 | 27,065 | 1.05 |
Fannie Mae: | |||
6.125% 2012 | 13,750 | 14,493 | |
6.00% 2011 | 7,550 | 7,865 | .87 |
United States Agency for International Development, Republic of Egypt 4.45% 2015 | 19,000 | 18,358 | .71 |
Federal Home Loan Bank 5.04% 2008 (3) | 13,405 | 13,408 | .52 |
Other securities | 14,592 | .57 | |
250,483 | 9.74 | ||
Asset-backed obligations - 5.25% | |||
Other securities | 134,870 | 5.25 | |
Total bonds & notes (cost: $2,437,943,000) | 2,430,815 | 94.58 | |
Principal | Market | Percent | |
amount | value | of net | |
Short-term securities - 5.79% | (000) | (000) | assets |
Federal Home Loan Bank 4.20%-5.02% due 9/4/-9/27/2007 | $ 67,300 | 67,107 | 2.61 |
Federal Farm Credit Banks 4.50%-5.13% due 9/4/-9/18/2007 | 40,000 | 39,945 | 1.55 |
International Bank for Reconstruction and Development 4.60% due 9/12/2007 | 30,750 | 30,703 | 1.20 |
Other securities | 10,980 | .43 | |
Total short-term securities (cost: $148,735,000) | 148,735 | 5.79 | |
Total investment securities (cost: $2,586,678,000) | 2,579,550 | 100.37 | |
Other assets less liabilities | (9,486) | (0.37) | |
Net assets | $2,570,064 | 100.00% |
"Other securities" includes all issues that are not disclosed separately in the summary investment portfolio. |
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) Principal payments may be made periodically. |
Therefore, the effective maturity date may be |
earlier than the stated maturity date. |
(2) Valued under fair value procedures adopted by authority of the board of trustees. |
The total value of all such securities, including those in "Other securities," was $124,662,000. |
(3) Coupon rate may change periodically. |
(4) This security, or a portion of this security, has been segregated to cover funding requirements |
on investment transactions settling in the future. |
(5) Index-linked bond whose principal amount moves with a government |
retail price index. |
(6) 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 $89,651,000, which represented 3.49% of the net assets of the fund. |
The industry classifications shown in the summary investment portfolio were obtained from sources |
believed to be reliable and are not covered by the Report of Independent Registered Public Accounting Firm. |
See Notes to Financial Statements |
Financial statements
Statement of assets and liabilities | ||||||||
at August 31, 2007 | (dollars and shares in thousands, except per-share amounts) | |||||||
Assets: | ||||||||
Investment securities at market (cost: $2,586,678) | $ | 2,579,550 | ||||||
Cash | 334 | |||||||
Receivables for: | ||||||||
Sales of investments | $ | 18,732 | ||||||
Sales of fund's shares | 10,103 | |||||||
Interest | 13,840 | 42,675 | ||||||
2,622,559 | ||||||||
Liabilities: | ||||||||
Payables for: | ||||||||
Purchases of investments | 44,970 | |||||||
Repurchases of fund's shares | 3,876 | |||||||
Dividends on fund's shares | 578 | |||||||
Investment advisory services | 612 | |||||||
Services provided by affiliates | 2,199 | |||||||
Deferred trustees' compensation | 164 | |||||||
Other | 96 | 52,495 | ||||||
Net assets at August 31, 2007 | $ | 2,570,064 | ||||||
Net assets consist of: | ||||||||
Capital paid in on shares of beneficial interest | $ | 2,626,545 | ||||||
Distributions in excess of net investment income | (166 | ) | ||||||
Accumulated net realized loss | (49,187 | ) | ||||||
Net unrealized depreciation | (7,128 | ) | ||||||
Net assets at August 31, 2007 | $ | 2,570,064 |
Shares of beneficial interest issued and outstanding - unlimited shares authorized (192,490 total shares outstanding) | ||||||||||||
Net assets | Shares outstanding | Net asset value per share* | ||||||||||
Class A | $ | 1,758,062 | 131,673 | $ | 13.35 | |||||||
Class B | 157,611 | 11,805 | 13.35 | |||||||||
Class C | 125,060 | 9,367 | 13.35 | |||||||||
Class F | 99,187 | 7,428 | 13.35 | |||||||||
Class 529-A | 44,491 | 3,332 | 13.35 | |||||||||
Class 529-B | 13,320 | 998 | 13.35 | |||||||||
Class 529-C | 27,360 | 2,049 | 13.35 | |||||||||
Class 529-E | 3,527 | 264 | 13.35 | |||||||||
Class 529-F | 3,245 | 243 | 13.35 | |||||||||
Class R-1 | 4,772 | 357 | 13.35 | |||||||||
Class R-2 | 102,667 | 7,690 | 13.35 | |||||||||
Class R-3 | 87,731 | 6,571 | 13.35 | |||||||||
Class R-4 | 74,549 | 5,584 | 13.35 | |||||||||
Class R-5 | 68,482 | 5,129 | 13.35 | |||||||||
(*) 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 $13.87 each. | ||||||||||||
See Notes to Financial Statements |
Statement of operations | ||||||||
for the year ended August 31, 2007 | (dollars in thousands) | |||||||
Investment income: | ||||||||
Income: | ||||||||
Interest | $ | 122,713 | ||||||
Fees and expenses(*): | ||||||||
Investment advisory services | $ | 7,659 | ||||||
Distribution services | 9,127 | |||||||
Transfer agent services | 3,122 | |||||||
Administrative services | 1,500 | |||||||
Reports to shareholders | 190 | |||||||
Registration statement and prospectus | 152 | |||||||
Postage, stationery and supplies | 331 | |||||||
Trustees' compensation | 95 | |||||||
Auditing and legal | 102 | |||||||
Custodian | 12 | |||||||
State and local taxes | 25 | |||||||
Other | 39 | |||||||
Total fees and expenses before reimbursements/waivers | 22,354 | |||||||
Less reimbursements/waivers of fees and expenses: | ||||||||
Investment advisory services | 766 | |||||||
Administrative services | 216 | |||||||
Total fees and expenses after reimbursements/waivers | 21,372 | |||||||
Net investment income | 101,341 | |||||||
Net realized loss and unrealized appreciation on investments: | ||||||||
Net realized loss on investments | (5,616 | ) | ||||||
Net unrealized appreciation on investments | 11,729 | |||||||
Net realized loss and unrealized appreciation on investments | 6,113 | |||||||
Net increase in net assets resulting from operations | $ | 107,454 | ||||||
(*) 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 | ||||||||
2007 | 2006 | |||||||
Operations: | ||||||||
Net investment income | $ | 101,341 | $ | 88,645 | ||||
Net realized loss on investments | (5,616 | ) | (26,761 | ) | ||||
Net unrealized appreciation (depreciation) on investments | 11,729 | (42,460 | ) | |||||
Net increase in net assets resulting from operations | 107,454 | 19,424 | ||||||
Dividends paid or accrued to shareholders from net investment income | (101,883 | ) | (90,920 | ) | ||||
Net capital share transactions | 208,991 | (24,146 | ) | |||||
Total increase (decrease) in net assets | 214,562 | (95,642 | ) | |||||
Net assets: | ||||||||
Beginning of year | 2,355,502 | 2,451,144 | ||||||
End of year (including distributions in excess of | ||||||||
net investment income: $(166) and $(99), respectively) | $ | 2,570,064 | $ | 2,355,502 | ||||
See Notes to Financial Statements |
Notes to financial statements
1. | Organization and significant accounting policies |
Organization – The American Funds Income Series (the "trust") is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company and has initially issued one series of shares, U.S. Government Securities Fund (the "fund"). The fund seeks a high level of current income, consistent with prudent investment risk and preservation of capital, by investing primarily in obligations guaranteed or sponsored by the United States government. The fund may also invest in nongovernment issues rated Aaa/AAA or equivalent.
The fund offers 14 share classes consisting of four retail share classes, five 529 college savings plan share classes and five retirement plan share classes. The 529 college 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 3.75% | 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 – 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. Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value. The value of short-term securities originally purchased with maturities greater than 60 days is determined based on an amortized value to par when they reach 60 days or less remaining to maturity. The ability of the issuers of the debt securities held by the fund to meet their obligations may be affected by economic developments in a specific industry, state or region.
Securities and other assets for which representative market quotations are not readily available or are considered unreliable by the investment adviser are fair valued as determined in good faith under procedures adopted by authority of the fund's board of trustees. 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. In the event a security is purchased with a delayed payment date, the fund will segregate liquid assets sufficient to meet its payment obligations. 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) are allocated daily among the various share classes based on the relative value of their settled shares. 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 paid to shareholders are declared daily after the determination of the fund’s net investment income and are paid to shareholders monthly. Distributions paid to shareholders are recorded on the ex-dividend date.
Mortgage dollar rolls – The fund may enter into mortgage dollar roll transactions in which the fund sells a mortgage-backed security to a counterparty and simultaneously enters into an agreement with the same counterparty to buy back a similar security on a specific future date at a predetermined price. Each mortgage dollar roll is treated as a financing transaction; therefore, any gain or loss is considered unrealized until the roll reaches completion. Risks may arise due to the delayed payment date and the potential inability of counterparties to complete the transaction. Income is generated as consideration for entering into these transactions and is included in interest income on the accompanying financial statements.
2. | 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.
The fund adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, on June 29, 2007. The implementation of FIN 48 resulted in no material liability for unrecognized tax benefits and no material change to the beginning net asset value of the fund.
As of and during the period ended August 31, 2007, 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 2003 and by state tax authorities for tax years before 2002.
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 short-term capital gains and losses; capital losses related to sales of certain securities within 30 days of purchase; paydowns on fixed-income securities; and net capital losses. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes.
During the year ended August 31, 2007, the fund reclassified $477,000 from accumulated net realized loss to undistributed net investment income, and $2,000 from undistributed net investment income to capital paid in on shares of beneficial interest to align financial reporting with tax reporting.
As of August 31, 2007, the tax basis components of distributable earnings, unrealized appreciation (depreciation) and cost of investment securities were as follows:
(dollars in thousands) | ||||||||
Undistributed ordinary income | $ | 577 | ||||||
Capital loss carryforwards*: | ||||||||
Expiring 2008 | $ | (5,664 | ) | |||||
Expiring 2009 | (8,375 | ) | ||||||
Expiring 2014 | (472 | ) | ||||||
Expiring 2015 | (28,573 | ) | (43,084 | ) | ||||
Post-October capital loss deferrals (realized during the period November 1, 2006, through August 31, 2007)† | (5,924 | ) | ||||||
Gross unrealized appreciation on investment securities | 12,647 | |||||||
Gross unrealized depreciation on investment securities | (19,954 | ) | ||||||
Net unrealized depreciation on investment securities | (7,307 | ) | ||||||
Cost of investment securities | 2,586,857 | |||||||
*The capital loss carryforwards will be used to offset any capital gains realized by the fund in future years through the expiration dates. The fund will not make distributions from capital gains while capital loss carryforwards remain. | ||||||||
†These deferrals are considered incurred in the subsequent year. |
Ordinary income distributions paid or accrued to shareholders from net investment income were as follows (dollars in thousands):
Year ended August 31 | ||||||||
Share class | 2007 | 2006 | ||||||
Class A | $ | 73,884 | $ | 68,319 | ||||
Class B | 5,895 | 5,894 | ||||||
Class C | 4,098 | 3,628 | ||||||
Class F | 3,660 | 2,577 | ||||||
Class 529-A | 1,788 | 1,509 | ||||||
Class 529-B | 472 | 419 | ||||||
Class 529-C | 908 | 729 | ||||||
Class 529-E | 145 | 118 | ||||||
Class 529-F | 126 | 80 | ||||||
Class R-1 | 148 | 116 | ||||||
Class R-2 | 3,593 | 2,863 | ||||||
Class R-3 | 4,163 | 3,579 | ||||||
Class R-4 | 1,856 | 671 | ||||||
Class R-5 | 1,147 | 418 | ||||||
Total | $ | 101,883 | $ | 90,920 |
3. | 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, SM Inc. ("AFD"), the principal underwriter of the fund’s shares.
Investment advisory services – The Investment Advisory and Service Agreement with CRMC provides for monthly fees accrued daily. These fees are based on a declining series of annual rates beginning with 0.30% on the first $60 million of daily net assets and decreasing to 0.15% on such assets in excess of $3 billion. The agreement also provides for monthly fees, accrued daily, based on a declining series of rates beginning with 3.00% on the first $3,333,333 of the fund's monthly gross income and decreasing to 2.00% on such income in excess of $8,333,333. CRMC is currently waiving 10% of investment advisory services fees. During the year ended August 31, 2007, total investment advisory services fees waived by CRMC were $766,000. As a result, the fee shown on the accompanying financial statements of $7,659,000, which was equivalent to an annualized rate of 0.321%, was reduced to $6,893,000, or 0.289% 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 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 0.30% 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 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 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 0.30% is not exceeded. As of August 31, 2007, there were no unreimbursed expenses subject to reimbursement for Class A or 529-A.
Share class | Currently approved limits | Plan limits |
Class A | 0.30% | 0.30% |
Class 529-A | 0.30 | 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, 2007, the total administrative services fees paid by CRMC were $2,000, $210,000 and $4,000 for Class R-1, R-2 and R-3, respectively. Administrative services fees are presented gross of any payments made by CRMC. Each 529 share class is subject to an additional annual administrative services fee of 0.10% of its respective average daily net assets; this fee is payable to the Commonwealth of Virginia for the maintenance of the 529 college savings 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, 2007, 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 | $4,321 | $2,894 | Not applicable | Not applicable | Not applicable |
Class B | 1,596 | 228 | Not applicable | Not applicable | Not applicable |
Class C | 1,124 | Included in administrative services | $167 | $44 | Not applicable |
Class F | 205 | 74 | 24 | Not applicable | |
Class 529-A | 92 | 52 | 13 | $41 | |
Class 529-B | 132 | 17 | 6 | 13 | |
Class 529-C | 254 | 32 | 10 | 25 | |
Class 529-E | 18 | 5 | 1 | 4 | |
Class 529-F | - | 3 | 1 | 3 | |
Class R-1 | 41 | 5 | 7 | Not applicable | |
Class R-2 | 730 | 139 | 470 | Not applicable | |
Class R-3 | 511 | 128 | 141 | Not applicable | |
Class R-4 | 103 | 46 | 5 | Not applicable | |
Class R-5 | Not applicable | 22 | 2 | Not applicable | |
Total | $9,127 | $3,122 | $690 | $724 | $86 |
Deferred trustees’ 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 $95,000, shown on the accompanying financial statements, includes $65,000 in current fees (either paid in cash or deferred) and a net increase of $30,000 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.
4. | Captial share transactions |
Capital share transactions in the fund were as follows (dollars and shares in thousands):
Share class | Sales(*) | Reinvestments of dividends | Repurchases(*) | Net increase (decrease) | ||||||||||||||||||||||||||||
Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | |||||||||||||||||||||||||
Year ended August 31, 2007 | ||||||||||||||||||||||||||||||||
Class A | $ | 449,880 | 33,761 | $ | 65,732 | 4,930 | $ | (446,653 | ) | (33,525 | ) | $ | 68,959 | 5,166 | ||||||||||||||||||
Class B | 22,141 | 1,661 | 5,311 | 398 | (39,127 | ) | (2,936 | ) | (11,675 | ) | (877 | ) | ||||||||||||||||||||
Class C | 49,217 | 3,690 | 3,649 | 274 | (37,215 | ) | (2,793 | ) | 15,651 | 1,171 | ||||||||||||||||||||||
Class F | 46,916 | 3,524 | 2,404 | 180 | (26,057 | ) | (1,959 | ) | 23,263 | 1,745 | ||||||||||||||||||||||
Class 529-A | 10,677 | 800 | 1,779 | 134 | (6,703 | ) | (503 | ) | 5,753 | 431 | ||||||||||||||||||||||
Class 529-B | 1,420 | 107 | 470 | 35 | (1,692 | ) | (127 | ) | 198 | 15 | ||||||||||||||||||||||
Class 529-C | 8,131 | 609 | 904 | 68 | (5,258 | ) | (395 | ) | 3,777 | 282 | ||||||||||||||||||||||
Class 529-E | 871 | 65 | 144 | 11 | (923 | ) | (69 | ) | 92 | 7 | ||||||||||||||||||||||
Class 529-F | 1,135 | 85 | 125 | 9 | (266 | ) | (20 | ) | 994 | 74 | ||||||||||||||||||||||
Class R-1 | 2,414 | 181 | 146 | 11 | (1,785 | ) | (134 | ) | 775 | 58 | ||||||||||||||||||||||
Class R-2 | 38,659 | 2,899 | 3,559 | 267 | (33,202 | ) | (2,492 | ) | 9,016 | 674 | ||||||||||||||||||||||
Class R-3 | 49,007 | 3,675 | 4,121 | 309 | (72,684 | ) | (5,443 | ) | (19,556 | ) | (1,459 | ) | ||||||||||||||||||||
Class R-4 | 64,729 | 4,847 | 1,836 | 138 | (12,595 | ) | (947 | ) | 53,970 | 4,038 | ||||||||||||||||||||||
Class R-5 | 60,531 | 4,562 | 1,040 | 78 | (3,797 | ) | (285 | ) | 57,774 | 4,355 | ||||||||||||||||||||||
Total net increase | ||||||||||||||||||||||||||||||||
(decrease) | $ | 805,728 | 60,466 | $ | 91,220 | 6,842 | $ | (687,957 | ) | (51,628 | ) | $ | 208,991 | 15,680 | ||||||||||||||||||
Year ended August 31, 2006 | ||||||||||||||||||||||||||||||||
Class A | $ | 389,815 | 29,260 | $ | 61,956 | 4,652 | $ | (515,216 | ) | (38,681 | ) | $ | (63,445 | ) | (4,769 | ) | ||||||||||||||||
Class B | 18,492 | 1,389 | 5,398 | 405 | (45,487 | ) | (3,415 | ) | (21,597 | ) | (1,621 | ) | ||||||||||||||||||||
Class C | 33,065 | 2,480 | 3,279 | 246 | (43,575 | ) | (3,270 | ) | (7,231 | ) | (544 | ) | ||||||||||||||||||||
Class F | 48,817 | 3,677 | 1,918 | 144 | (27,197 | ) | (2,049 | ) | 23,538 | 1,772 | ||||||||||||||||||||||
Class 529-A | 8,621 | 647 | 1,530 | 115 | (8,194 | ) | (616 | ) | 1,957 | 146 | ||||||||||||||||||||||
Class 529-B | 1,410 | 106 | 426 | 32 | (2,064 | ) | (155 | ) | (228 | ) | (17 | ) | ||||||||||||||||||||
Class 529-C | 5,511 | 414 | 740 | 56 | (4,905 | ) | (369 | ) | 1,346 | 101 | ||||||||||||||||||||||
Class 529-E | 815 | 61 | 120 | 9 | (453 | ) | (34 | ) | 482 | 36 | ||||||||||||||||||||||
Class 529-F | 773 | 58 | 82 | 6 | (202 | ) | (15 | ) | 653 | 49 | ||||||||||||||||||||||
Class R-1 | 2,075 | 156 | 117 | 9 | (1,232 | ) | (93 | ) | 960 | 72 | ||||||||||||||||||||||
Class R-2 | 35,720 | 2,681 | 2,893 | 218 | (27,845 | ) | (2,090 | ) | 10,768 | 809 | ||||||||||||||||||||||
Class R-3 | 44,435 | 3,329 | 3,626 | 272 | (29,540 | ) | (2,217 | ) | 18,521 | 1,384 | ||||||||||||||||||||||
Class R-4 | 12,422 | 932 | 677 | 51 | (5,561 | ) | (417 | ) | 7,538 | 566 | ||||||||||||||||||||||
Class R-5 | 5,557 | 415 | 373 | 28 | (3,338 | ) | (252 | ) | 2,592 | 191 | ||||||||||||||||||||||
Total net increase | ||||||||||||||||||||||||||||||||
(decrease) | $ | 607,528 | 45,605 | $ | 83,135 | 6,243 | $ | (714,809 | ) | (53,673 | ) | $ | (24,146 | ) | (1,825 | ) | ||||||||||||||||
(*) Includes exchanges between share classes of the fund. |
5. | Investment transactions |
The fund made purchases and sales of investment securities, excluding short-term securities, of $2,678,275,000 and $2,503,606,000, respectively, during the year ended August 31, 2007.
Financial highlights (1)
Income from investment operations(2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net asset value, beginning of period | Net investment income | Net gains (losses) on securities (both realized and unrealized) | Total from investment operations | Dividends (from net investment income) | Net asset value, end of period | Total return (3) (4) | Net assets, end of period (in millions) | Ratio of expenses to average net assets before reimbursements/ waivers | Ratio of expenses to average net assets after reimbursements/ waivers | (4 | ) | Ratio of net income to average net assets | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Class A: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | $ | 13.32 | $ | .59 | $ | .03 | $ | .61 | $ | (.59 | ) | $ | 13.35 | 4.72 | % | $ | 1,758 | .79 | % | .76 | % | 4.38 | % | |||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .52 | (.39 | ) | .13 | (.53 | ) | 13.32 | 1.04 | 1,685 | .77 | .74 | 3.89 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .44 | - | (5 | ) | .44 | (.46 | ) | 13.72 | 3.23 | 1,801 | .76 | .74 | 3.17 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .43 | .17 | .60 | (.45 | ) | 13.74 | 4.49 | 1,900 | .71 | .71 | 3.14 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .42 | (.10 | ) | .32 | (.46 | ) | 13.59 | 2.29 | 2,374 | .76 | .76 | 3.01 | |||||||||||||||||||||||||||||||||||||||||||||||
Class B: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | 13.32 | .49 | .03 | .52 | (.49 | ) | 13.35 | 3.99 | 158 | 1.51 | 1.47 | 3.66 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .43 | (.39 | ) | .04 | (.44 | ) | 13.32 | .32 | 169 | 1.49 | 1.46 | 3.17 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .34 | - | (5 | ) | .34 | (.36 | ) | 13.72 | 2.51 | 196 | 1.48 | 1.46 | 2.45 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .33 | .17 | .50 | (.35 | ) | 13.74 | 3.72 | 221 | 1.47 | 1.47 | 2.38 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .32 | (.10 | ) | .22 | (.36 | ) | 13.59 | 1.58 | 291 | 1.46 | 1.46 | 2.23 | |||||||||||||||||||||||||||||||||||||||||||||||
Class C: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | 13.32 | .49 | .03 | .51 | (.49 | ) | 13.35 | 3.94 | 125 | 1.55 | 1.52 | 3.62 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .42 | (.39 | ) | .03 | (.43 | ) | 13.32 | .27 | 109 | 1.55 | 1.52 | 3.11 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .33 | - | (5 | ) | .33 | (.35 | ) | 13.72 | 2.45 | 120 | 1.53 | 1.51 | 2.40 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .32 | .17 | .49 | (.34 | ) | 13.74 | 3.65 | 122 | 1.53 | 1.53 | 2.32 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .31 | (.10 | ) | .21 | (.35 | ) | 13.59 | 1.51 | 170 | 1.54 | 1.54 | 2.19 | |||||||||||||||||||||||||||||||||||||||||||||||
Class F: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | 13.32 | .60 | .03 | .62 | (.60 | ) | 13.35 | 4.80 | 99 | .72 | .69 | 4.44 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .53 | (.39 | ) | .14 | (.54 | ) | 13.32 | 1.10 | 76 | .71 | .68 | 3.98 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .44 | - | (5 | ) | .44 | (.46 | ) | 13.72 | 3.24 | 54 | .75 | .73 | 3.18 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .43 | .17 | .60 | (.45 | ) | 13.74 | 4.45 | 33 | .75 | .75 | 3.04 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .42 | (.10 | ) | .32 | (.46 | ) | 13.59 | 2.29 | 23 | .75 | .75 | 3.00 | |||||||||||||||||||||||||||||||||||||||||||||||
Class 529-A: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | 13.32 | .58 | .03 | .61 | (.58 | ) | 13.35 | 4.66 | 44 | .84 | .81 | 4.33 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .52 | (.39 | ) | .13 | (.53 | ) | 13.32 | 1.00 | 39 | .81 | .78 | 3.86 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .43 | - | (5 | ) | .43 | (.45 | ) | 13.72 | 3.18 | 38 | .81 | .79 | 3.13 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .42 | .17 | .59 | (.44 | ) | 13.74 | 4.40 | 34 | .80 | .80 | 3.02 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .42 | (.10 | ) | .32 | (.46 | ) | 13.59 | 2.31 | 31 | .68 | .68 | 2.91 | |||||||||||||||||||||||||||||||||||||||||||||||
Class 529-B: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | 13.32 | .48 | .03 | .50 | (.48 | ) | 13.35 | 3.85 | 13 | 1.64 | 1.60 | 3.53 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .41 | (.39 | ) | .02 | (.42 | ) | 13.32 | .19 | 13 | 1.63 | 1.60 | 3.03 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .32 | - | (5 | ) | .32 | (.34 | ) | 13.72 | 2.34 | 14 | 1.65 | 1.63 | 2.29 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .31 | .17 | .48 | (.33 | ) | 13.74 | 3.54 | 13 | 1.64 | 1.64 | 2.20 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .29 | (.10 | ) | .19 | (.33 | ) | 13.59 | 1.38 | 14 | 1.63 | 1.63 | 1.92 | |||||||||||||||||||||||||||||||||||||||||||||||
Class 529-C: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | 13.32 | .48 | .03 | .50 | (.48 | ) | 13.35 | 3.86 | 27 | 1.63 | 1.60 | 3.54 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .41 | (.39 | ) | .02 | (.42 | ) | 13.32 | .20 | 24 | 1.62 | 1.59 | 3.06 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .32 | - | (5 | ) | .32 | (.34 | ) | 13.72 | 2.35 | 23 | 1.64 | 1.61 | 2.30 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .31 | .17 | .48 | (.33 | ) | 13.74 | 3.55 | 21 | 1.63 | 1.63 | 2.20 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .29 | (.10 | ) | .19 | (.33 | ) | 13.59 | 1.39 | 20 | 1.62 | 1.62 | 1.99 | |||||||||||||||||||||||||||||||||||||||||||||||
Class 529-E: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | 13.32 | .54 | .03 | .57 | (.54 | ) | 13.35 | 4.38 | 4 | 1.12 | 1.09 | 4.05 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .48 | (.39 | ) | .09 | (.49 | ) | 13.32 | .73 | 3 | 1.09 | 1.06 | 3.60 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .39 | - | (5 | ) | .39 | (.41 | ) | 13.72 | 2.88 | 3 | 1.11 | 1.09 | 2.83 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .38 | .17 | .55 | (.40 | ) | 13.74 | 4.08 | 2 | 1.11 | 1.11 | 2.71 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .37 | (.10 | ) | .27 | (.41 | ) | 13.59 | 1.92 | 2 | 1.10 | 1.10 | 2.48 | |||||||||||||||||||||||||||||||||||||||||||||||
Class 529-F: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | $ | 13.32 | $ | .61 | $ | .03 | $ | .64 | $ | (.61 | ) | $ | 13.35 | 4.90 | % | $ | 3 | .62 | % | .59 | % | 4.56 | % | |||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .54 | (.39 | ) | .15 | (.55 | ) | 13.32 | 1.20 | 2 | .60 | .57 | 4.09 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .43 | - | (5 | ) | .43 | (.45 | ) | 13.72 | 3.20 | 2 | .78 | .75 | 3.18 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .41 | .17 | .58 | (.43 | ) | 13.74 | 4.33 | 1 | .86 | .86 | 2.94 | ||||||||||||||||||||||||||||||||||||||||||||||||
Period from 10/11/2002 to 8/31/2003 | 13.83 | .30 | (.15 | ) | .15 | (.39 | ) | 13.59 | 1.04 | 1 | .84 | (6 | ) | .84 | (6 | ) | 2.49 | (6 | ) | |||||||||||||||||||||||||||||||||||||||||
Class R-1: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | 13.32 | .48 | .03 | .51 | (.48 | ) | 13.35 | 3.89 | 5 | 1.65 | 1.57 | 3.57 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .42 | (.39 | ) | .03 | (.43 | ) | 13.32 | .30 | 4 | 1.63 | 1.49 | 3.17 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .33 | - | (5 | ) | .33 | (.35 | ) | 13.72 | 2.46 | 3 | 1.66 | 1.50 | 2.43 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .32 | .17 | .49 | (.34 | ) | 13.74 | 3.66 | 2 | 1.74 | 1.52 | 2.26 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .31 | (.10 | ) | .21 | (.35 | ) | 13.59 | 1.49 | 1 | 2.02 | 1.52 | 1.86 | |||||||||||||||||||||||||||||||||||||||||||||||
Class R-2: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | 13.32 | .49 | .03 | .52 | (.49 | ) | 13.35 | 3.98 | 103 | 1.73 | 1.48 | 3.66 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .43 | (.39 | ) | .04 | (.44 | ) | 13.32 | .32 | 94 | 1.93 | 1.47 | 3.18 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .34 | - | (5 | ) | .34 | (.36 | ) | 13.72 | 2.50 | 85 | 1.94 | 1.47 | 2.46 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .33 | .17 | .50 | (.35 | ) | 13.74 | 3.70 | 68 | 2.02 | 1.48 | 2.32 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .31 | (.10 | ) | .21 | (.35 | ) | 13.59 | 1.53 | 43 | 2.05 | 1.47 | 1.81 | |||||||||||||||||||||||||||||||||||||||||||||||
Class R-3: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | 13.32 | .54 | .03 | .57 | (.54 | ) | 13.35 | 4.39 | 88 | 1.11 | 1.08 | 4.05 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .48 | (.39 | ) | .09 | (.49 | ) | 13.32 | .69 | 107 | 1.20 | 1.09 | 3.56 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .39 | - | (5 | ) | .39 | (.41 | ) | 13.72 | 2.88 | 91 | 1.20 | 1.08 | 2.84 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .38 | .17 | .55 | (.40 | ) | 13.74 | 4.09 | 73 | 1.23 | 1.10 | 2.71 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .37 | (.10 | ) | .27 | (.41 | ) | 13.59 | 1.93 | 50 | 1.16 | 1.08 | 1.80 | |||||||||||||||||||||||||||||||||||||||||||||||
Class R-4: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | 13.32 | .59 | .03 | .62 | (.59 | ) | 13.35 | 4.79 | 75 | .72 | .69 | 4.50 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .53 | (.39 | ) | .14 | (.54 | ) | 13.32 | 1.06 | 21 | .75 | .72 | 3.96 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .44 | - | (5 | ) | .44 | (.46 | ) | 13.72 | 3.25 | 13 | .74 | .72 | 3.21 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .43 | .17 | .60 | (.45 | ) | 13.74 | 4.45 | 8 | .74 | .74 | 3.05 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .42 | (.10 | ) | .32 | (.46 | ) | 13.59 | 2.30 | 5 | .75 | .73 | 2.58 | |||||||||||||||||||||||||||||||||||||||||||||||
Class R-5: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2007 | 13.32 | .63 | .03 | .66 | (.63 | ) | 13.35 | 5.07 | 68 | .45 | .41 | 4.79 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2006 | 13.72 | .56 | (.39 | ) | .17 | (.57 | ) | 13.32 | 1.36 | 10 | .45 | .42 | 4.24 | |||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2005 | 13.74 | .48 | - | (5 | ) | .48 | (.50 | ) | 13.72 | 3.56 | 8 | .43 | .41 | 3.50 | ||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2004 | 13.59 | .47 | .17 | .64 | (.49 | ) | 13.74 | 4.78 | 7 | .42 | .42 | 3.39 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 8/31/2003 | 13.73 | .46 | (.10 | ) | .36 | (.50 | ) | 13.59 | 2.63 | 9 | .43 | .43 | 3.31 |
Year ended August 31 | ||||||||||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
Portfolio turnover rate for all classes of shares | 110 | % | 146 | % | 104 | % | 72 | % | 82 | % |
(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) This column reflects the impact, if any, of certain reimbursements/waivers from CRMC. |
During some of the periods shown, CRMC reduced fees for investment advisory services. |
In addition, during some of the periods shown, CRMC paid a portion of the fund's transfer |
agent fees for certain retirement plan share classes. |
(5) Amount less than $.01. |
(6) Annualized. |
See Notes to Financial Statements |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of The American Funds Income Series - U.S. Government Securities Fund:
We have audited the accompanying statement of assets and liabilities, including the summary investment portfolio, of The American Funds Income Series - U.S. Government Securities Fund (the “Fund”), as of August 31, 2007, 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, 2007, 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 American Funds Income Series – U.S. Government Securities Fund as of August 31, 2007, 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 11, 2007
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 amount for the fund’s fiscal year ended August 31, 2007:
U.S. government income that may be exempt from state taxation | $ | 39,694,000 |
Individual shareholders should refer to their Form 1099 or other tax information, which will be mailed in January 2008, to determine the calendar year amounts to be included on their 2007 tax returns. Shareholders should consult their tax advisers.
Other share class results
unaudited
Class B, Class C, Class F and Class 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 September 30, 2007 | ||||||||||||
(the most recent calendar quarter-end): | ||||||||||||
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 | –1.16 | % | +1.88 | % | +4.48 | % | ||||||
Not reflecting CDSC | +3.84 | % | +2.23 | % | +4.48 | % | ||||||
Class C shares— first sold 3/15/01 | ||||||||||||
Reflecting CDSC, maximum of 1%, payable only if | ||||||||||||
shares are sold within one year of purchase | +2.79 | % | +2.18 | % | +3.25 | % | ||||||
Not reflecting CDSC | +3.79 | % | +2.18 | % | +3.25 | % | ||||||
Class F shares*— first sold 3/15/01 | ||||||||||||
Not reflecting annual asset-based fee charged | ||||||||||||
by sponsoring firm | +4.64 | % | +2.98 | % | +4.05 | % | ||||||
Class 529-A shares†— first sold 2/20/02 | ||||||||||||
Reflecting 3.75% maximum sales charge | +0.62 | % | +2.14 | % | +3.08 | % | ||||||
Not reflecting maximum sales charge | +4.52 | % | +2.92 | % | +3.78 | % | ||||||
Class 529-B shares†— first sold 2/20/02 | ||||||||||||
Reflecting applicable CDSC, maximum of 5%, | ||||||||||||
payable only if shares are sold within six | ||||||||||||
years of purchase | –1.29 | % | +1.72 | % | +2.74 | % | ||||||
Not reflecting CDSC | +3.71 | % | +2.08 | % | +2.90 | % | ||||||
Class 529-C shares†— first sold 2/19/02 | ||||||||||||
Reflecting CDSC, maximum of 1%, payable only if | ||||||||||||
shares are sold within one year of purchase | +2.71 | % | +2.09 | % | +2.91 | % | ||||||
Not reflecting CDSC | +3.71 | % | +2.09 | % | +2.91 | % | ||||||
Class 529-E shares*†— first sold 3/7/02 | +4.23 | % | +2.61 | % | +3.65 | % | ||||||
Class 529-F shares*†— first sold 10/11/02 | ||||||||||||
Not reflecting annual asset-based fee charged | ||||||||||||
by sponsoring firm | +4.75 | % | — | +3.08 | % | |||||||
*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. |
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 18 and 19 for details.
For information regarding the differences among the various share classes, please refer to the fund’s prospectus.
Expense example
unau dited
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, 2007, through August 31, 2007).
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 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 3/1/2007 | Ending account value 8/31/2007 | Expenses paid during period* | Annualized expense ratio | |||||||||||||
Class A -- actual return | $ | 1,000.00 | $ | 1,016.60 | $ | 3.81 | .75 | % | ||||||||
Class A -- assumed 5% return | 1,000.00 | 1,021.42 | 3.82 | .75 | ||||||||||||
Class B -- actual return | 1,000.00 | 1,013.02 | 7.41 | 1.46 | ||||||||||||
Class B -- assumed 5% return | 1,000.00 | 1,017.85 | 7.43 | 1.46 | ||||||||||||
Class C -- actual return | 1,000.00 | 1,012.78 | 7.66 | 1.51 | ||||||||||||
Class C -- assumed 5% return | 1,000.00 | 1,017.59 | 7.68 | 1.51 | ||||||||||||
Class F -- actual return | 1,000.00 | 1,016.93 | 3.46 | .68 | ||||||||||||
Class F -- assumed 5% return | 1,000.00 | 1,021.78 | 3.47 | .68 | ||||||||||||
Class 529-A -- actual return | 1,000.00 | 1,016.33 | 4.12 | .81 | ||||||||||||
Class 529-A -- assumed 5% return | 1,000.00 | 1,021.12 | 4.13 | .81 | ||||||||||||
Class 529-B -- actual return | 1,000.00 | 1,012.31 | 8.12 | 1.60 | ||||||||||||
Class 529-B -- assumed 5% return | 1,000.00 | 1,017.14 | 8.13 | 1.60 | ||||||||||||
Class 529-C -- actual return | 1,000.00 | 1,012.35 | 8.12 | 1.60 | ||||||||||||
Class 529-C -- assumed 5% return | 1,000.00 | 1,017.14 | 8.13 | 1.60 | ||||||||||||
Class 529-E -- actual return | 1,000.00 | 1,014.86 | 5.59 | 1.10 | ||||||||||||
Class 529-E -- assumed 5% return | 1,000.00 | 1,019.66 | 5.60 | 1.10 | ||||||||||||
Class 529-F -- actual return | 1,000.00 | 1,017.40 | 3.00 | .59 | ||||||||||||
Class 529-F -- assumed 5% return | 1,000.00 | 1,022.23 | 3.01 | .59 | ||||||||||||
Class R-1 -- actual return | 1,000.00 | 1,012.31 | 8.17 | 1.61 | ||||||||||||
Class R-1 -- assumed 5% return | 1,000.00 | 1,017.09 | 8.19 | 1.61 | ||||||||||||
Class R-2 -- actual return | 1,000.00 | 1,012.95 | 7.46 | 1.47 | ||||||||||||
Class R-2 -- assumed 5% return | 1,000.00 | 1,017.80 | 7.48 | 1.47 | ||||||||||||
Class R-3 -- actual return | 1,000.00 | 1,014.94 | 5.49 | 1.08 | ||||||||||||
Class R-3 -- assumed 5% return | 1,000.00 | 1,019.76 | 5.50 | 1.08 | ||||||||||||
Class R-4 -- actual return | 1,000.00 | 1,016.97 | 3.46 | .68 | ||||||||||||
Class R-4 -- assumed 5% return | 1,000.00 | 1,021.78 | 3.47 | .68 | ||||||||||||
Class R-5 -- actual return | 1,000.00 | 1,018.32 | 2.09 | .41 | ||||||||||||
Class R-5 -- assumed 5% return | 1,000.00 | 1,023.14 | 2.09 | .41 |
*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 (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 May 31, 2008. The board approved the agreement following the recommendation of the fund’s Contracts Committee (the “committee”), which is composed of all of the fund’s independent board members. The board and the committee determined that the fund’s advisory fee structure was fair and reasonable in relation to the services provided and that approving the agreement was in the best interests of the fund and its shareholders.
In reaching this decision, the board and the committee took into account information furnished to them throughout the year, as well as information prepared specifically in connection with their review of the agreement based on advice of their independent counsel. They considered the factors discussed below, among others, but did not identify any single issue or particular piece of information that, in isolation, was the controlling factor.
1. Nature, extent and quality of services
The board and the committee considered the depth and quality of CRMC’s investment management process, including its global research capabilities; the experience, capability and integrity of its senior management and other personnel; the low turnover rates of its key personnel; the overall financial strength and stability of its organization; and the ongoing evolution of CRMC’s organizational structure designed to maintain and strengthen these qualities. The board and the committee also considered the nature, extent and quality of administrative, compliance and shareholder services provided by CRMC to the fund under the agreement and other agreements as well as the benefits to fund shareholders from investing in a fund that is part of a large family of funds. The board and the committee concluded that the nature, extent and quality of the services provided by CRMC have benefited and should continue to benefit the fund and its shareholders.
2. Investment results
The board and the committee considered the investment results of the fund in light of its objective of providing a high level of current income as well as preserving capital. They compared the fund’s total returns with those of other relevant funds (including the other funds that are the basis of the Lipper index for the category in which the fund is included) and market data such as relevant market indices. This report, including the letter to shareholders and related disclosures, contains certain information about the fund’s investment results. The board and the committee noted that, although the fund’s investment results were generally below relevant indices, this was affected by its emphasis on maintaining the safety of its assets and low volatility in the price of its shares, and that the fund’s risk (as measured by standard deviation of total returns) was less than average. The board and the committee concluded that the fund’s short- and long-term results have been satisfactory and that CRMC’s record in managing the fund indicated that its continued management should benefit the fund and its shareholders.
3. Advisory fees and total expenses
The board and the committee compared the advisory fees and total expense levels of the fund to those of other relevant funds. They observed that the fund’s advisory fees and expenses remain significantly below those of most other relevant funds. The board and the committee also noted the breakpoint discounts in the fund’s advisory fee structure that reduce the level of fees charged by CRMC to the fund as fund assets increase and the 10% advisory fee waiver in effect since April 2005. In addition, they reviewed information regarding the advisory fees paid by institutional clients of an affiliate of CRMC with investment mandates similar to those of the fund. They noted that, although the fees paid by those clients generally were lower than those paid by the fund, the differences appropriately reflected the significant investment, operational and regulatory differences between advising mutual funds and institutional clients. The board and the committee concluded that the fund’s cost structure was fair and reasonable in relation to the services provided, and that the shareholders receive reasonable value in return for the advisory fees and other amounts paid to CRMC by the fund.
4. 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. The board and the committee took these ancillary benefits into account in evaluating the reasonableness of the advisory fees and other amounts paid to CRMC by the fund.
5. Adviser financial information
The board and the committee reviewed information regarding CRMC’s costs of providing services to the American Funds, including personnel, systems and resources of investment, compliance, trading, accounting and other administrative operations. They considered CRMC’s costs and willingness to invest in technology, infrastructure and staff to maintain and expand services and capabilities, respond to industry and regulatory developments and attract and retain qualified personnel. They noted information previously received regarding the compensation structure for CRMC’s investment professionals. The board and the committee also compared CRMC’s profitability to the reported results of several large, publicly held investment management companies. The board and the committee noted the competitiveness and cyclicality of both the mutual fund industry and the capital markets, and the importance in that environment of CRMC’s long-term profitability for maintaining its independence, company culture and management continuity. They further considered the breakpoint discounts in the fund’s advisory fee structure and the impact of CRMC’s current 10% advisory fee waiver. The board and the committee concluded that the fund’s advisory fee structure reflected a reasonable sharing of benefits between CRMC and the fund’s shareholders.
Board of trustees and other officers
“Independent” trustees | ||
Year first | ||
elected a | ||
trustee of | ||
Name and age | the fund¹ | Principal occupation(s) during past five years |
Ambassador | 1999 | Corporate director and author; former U.S. |
Richard G. Capen, Jr., 73 | Ambassador to Spain; former Vice Chairman, Knight-Ridder, Inc. (communications company); former Chairman and Publisher, The Miami Herald | |
H. Frederick Christie, 74 | 1985 | Private investor; former President and CEO, The Mission Group (non-utility holding company, subsidiary of Southern California Edison Company) |
James G. Ellis, 60 | 2006 | Vice Provost, Globalization, University of Southern California; Dean and Professor, Marshall School of Business, University of Southern California |
Martin Fenton, 72 | 1989 | Chairman of the Board, Senior Resource Group LLC |
Chairman of the Board | (development and management of senior living | |
(Independent and | communities) | |
Non-Executive) | ||
Leonard R. Fuller, 61 | 1994 | President and CEO, Fuller Consulting (financial management consulting firm) |
R. Clark Hooper, 61 | 2005 | Private investor; former President, Dumbarton Group LLC (securities industry consulting); former Executive Vice President — Policy and Oversight, NASD |
Richard G. Newman, 72 | 1991 | Chairman of the Board, AECOM Technology Corporation (engineering, consulting and professional technical services) |
Frank M. Sanchez, 64 | 1999 | Principal, The Sanchez Family Corporation dba McDonald’s Restaurants (McDonald’s licensee) |
Steadman Upham, Ph.D., 58 | 2007 | President and Professor of Anthropology, The University of Tulsa; former President and Professor of Archaeology, Claremont Graduate University |
“Independent” trustees | ||
Number of | ||
portfolios | ||
in fund | ||
complex2 | ||
overseen by | ||
Name and age | trustee | Other directorships3 held by trustee |
Ambassador | 15 | Carnival Corporation |
Richard G. Capen, Jr., 73 | ||
H. Frederick Christie, 74 | 21 | AECOM Technology Corporation; Ducommun Incorporated; IHOP Corporation; Southwest Water Company |
James G. Ellis, 60 | 12 | Genius Products; Professional Business Bank |
Martin Fenton, 72 | 18 | None |
Chairman of the Board | ||
(Independent and | ||
Non-Executive) | ||
Leonard R. Fuller, 61 | 16 | None |
R. Clark Hooper, 61 | 18 | JPMorgan Value Opportunities Fund; The Swiss Helvetia Fund Inc. |
Richard G. Newman, 72 | 14 | Sempra Energy; Southwest Water Company |
Frank M. Sanchez, 64 | 13 | None |
Steadman Upham, Ph.D., 58 | 14 | None |
Diane C. Creel resigned from the board in September 2007. The trustees thank Ms. Creel for her service and dedication to the fund. |
“Interested” trustees4 | ||
Year first | ||
elected a | ||
trustee 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 |
Abner D. Goldstine, 77 | 1985 | Senior Vice President — Fixed Income, Capital |
Vice Chairman of the Board | Research and Management Company; Director, Capital Research and Management Company | |
Paul G. Haaga, Jr., 58 | 1985 | Vice Chairman of the Board, Capital Research and |
Vice Chairman of the Board | Management Company; Senior Vice President —Fixed Income, Capital Research and Management Company; Director, The Capital Group Companies, Inc.5 | |
John H. Smet, 51 | 1993 | Senior Vice President — Fixed Income, Capital |
President | Research and Management Company; Director, American Funds Distributors, Inc.5 | |
“Interested” trustees4 | ||
Number of | ||
portfolios in | ||
fund complex2 | ||
Name, age and | overseen | |
position with fund | by trustee | Other directorships3 held by trustee |
Abner D. Goldstine, 77 | 13 | None |
Vice Chairman of the Board | ||
Paul G. Haaga, Jr., 58 | 14 | None |
Vice Chairman of the Board | ||
John H. Smet, 51 | 2 | None |
President |
The statement of additional information includes additional information about fund trustees and is available without charge upon request by calling American Funds Service Company at 800/421-0180. The address for all trustees and officers of the fund is 333 South Hope Street, Los Angeles, CA 90071, Attention: Fund Secretary.
Please see page 28 for footnotes.
Other officers | ||
Year first | ||
elected an | 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 |
Thomas H. Hogh, 44 | 2004 | Senior Vice President — Fixed Income, Capital |
Vice President | Research Company5 | |
Kristine M. Nishiyama, 37 | 2003 | Vice President and Senior Counsel — Fund Business |
Vice President | Management Group, Capital Research and Management Company; Vice President and Counsel — Capital Bank and Trust Company5 | |
Kimberly S. Verdick, 43 | 1994 | Vice President — Fund Business Management |
Secretary | Group, Capital Research and Management Company | |
Ari M. Vinocor, 33 | 2007 | Vice President — Fund Business Management |
Treasurer | Group, Capital Research and Management Company | |
Courtney R. Taylor, 32 | 2006 | Assistant Vice President — Fund Business |
Assistant Secretary | Management Group, Capital Research and Management Company | |
Sharon G. Moseley, 39 | 2002 | Vice President — Fund Business Management |
Assistant Treasurer | Group, Capital Research and Management Company |
1Trustees and officers of the fund serve until their resignation, removal or retirement. |
2Capital Research and Management Company manages the American Funds, consisting of 30 funds. Capital Research and Management Company also manages American Funds Insurance Series,® which is composed of 15 funds and serves as the underlying investment vehicle for certain variable insurance contracts; American Funds Target Date Retirement Series,® Inc., which is composed of nine funds and is available to investors in tax-deferred retirement plans and IRAs; and Endowments, which is composed of two portfolios and is available to certain nonprofit organizations. |
3This includes all directorships (other than those in the American Funds) that are held by each trustee 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). |
5Company affiliated with Capital Research and Management Company. |
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
(Please write to the address nearest you.)
P.O. Box 25065
Santa Ana, CA 92799-5065
P.O. Box 659522
San Antonio, TX 78265-9522
P.O. Box 6007
Indianapolis, IN 46206-6007
P.O. Box 2280
Norfolk, VA 23501-2280
Custodian of assets
JPMorgan Chase Bank
270 Park Avenue
New York, NY 10017-2070
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, 2007, portfolio of U.S. Government Securities Fund’s investments is available free of charge by calling AFS or visiting the SEC website (where it is part of Form N-CSR).
U.S. Government Securities 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. (800/SEC-0330). Additionally, the list of portfolio holdings also is available by calling AFS.
This report is for the information of shareholders of U.S. Government Securities Fund, but it also may be used as sales literature when preceded or accompanied by the current prospectus, which gives details about charges, expenses, investment objectives and operating policies of the fund. If used as sales material after December 31, 2007, this report must be accompanied by an American Funds statistical update for the most recently completed calendar quarter.
[logo - American Funds®]
The right choice for the long term®
What makes American Funds different?
For 75 years, we have followed a consistent philosophy 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 40 million shareholder accounts.
Our unique combination of strengths includes these five factors:
•A long-term, value-oriented approach |
We seek to buy securities at reasonable prices relative to their prospects and hold them for the long term. |
•An extensive global research effort |
Our investment professionals travel the world to find the best investment opportunities and gain a comprehensive understanding of companies and markets. |
•The multiple portfolio counselor system |
Our unique method of portfolio management, developed nearly 50 years ago, blends teamwork with individual accountability and has provided American Funds with a sustainable method of achieving fund objectives. |
•Experienced investment professionals |
American Funds portfolio counselors have an average of 24 years of investment experience, providing a wealth of knowledge and experience that few organizations have. |
•A commitment to low operating expenses |
The American Funds provide exceptional value for shareholders, with operating expenses that are among the lowest in the mutual fund industry. |
American Funds span a range of investment objectives
•Growth funds |
Emphasis on long-term growth through stocks |
AMCAP Fund® |
EuroPacific Growth Fund® |
The Growth Fund of America® |
The New Economy Fund® |
New Perspective Fund® |
New World FundSM |
SMALLCAP World Fund® |
•Growth-and-income funds |
Emphasis on long-term growth and dividends through stocks |
American Mutual Fund® |
Capital World Growth and Income FundSM |
Fundamental InvestorsSM |
The Investment Company of America® |
Washington Mutual Investors FundSM |
•Equity-income funds |
Emphasis on above-average income and growth through stocks and/or bonds |
Capital Income Builder® |
The Income Fund of America® |
•Balanced fund |
Emphasis on long-term growth and current income through stocks and bonds |
American Balanced Fund® |
•Bond funds |
Emphasis on current income through bonds |
American High-Income TrustSM |
The Bond Fund of AmericaSM |
Capital World Bond Fund® |
Short-Term Bond Fund of AmericaSM
> | U.S. Government Securities FundSM |
Intermediate Bond Fund of America®
•Tax-exempt bond funds |
Emphasis on tax-free current income through municipal bonds |
American High-Income Municipal Bond Fund® |
Limited Term Tax-Exempt Bond Fund of AmericaSM |
The Tax-Exempt Bond Fund of America® |
State-specific tax-exempt funds |
The Tax-Exempt Fund of California® |
The Tax-Exempt Fund of Maryland® |
The Tax-Exempt Fund of Virginia® |
•Money market funds |
The Cash Management Trust of America® |
The Tax-Exempt Money Fund of AmericaSM |
The U.S. Treasury Money Fund of AmericaSM |
•American Funds Target Date Retirement Series® |
The Capital Group Companies
American Funds Capital Research and Management Capital International Capital Guardian Capital Bank and Trust
Lit No. MFGEAR-922-1007P
Litho in USA WG/CG/8058-S10036
Printed on recycled paper
ITEM 2 – Code of Ethics
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, 333 South Hope Street, Los Angeles, California 90071.
ITEM 3 – Audit Committee Financial Expert
The Registrant’s board has determined that Frank M. Sanchez, 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.
ITEM 4 – Principal Accountant Fees and Services
Registrant: | ||||
a) Audit Fees: | ||||
2006 | $69,000 | |||
2007 | $73,000 | |||
b) Audit-Related Fees: | ||||
2006 | $754 | |||
2007 | $1,000 | |||
The audit-related fees consist of assurance and related services relating to the examination of the Registrant’s investment adviser conducted in accordance with Statement on Auditing Standards Number 70 issued by the American Institute of Certified Public Accountants. | ||||
c) Tax Fees: | ||||
2006 | $6,000 | |||
2007 | $6,000 | |||
The tax fees consist of professional services relating to the preparation of the Registrant’s tax returns. | ||||
d) All Other Fees: | ||||
2006 | None | |||
2007 | None | |||
Adviser and affiliates (includes only fees for non-audit services billed to the adviser and affiliates for engagements that relate directly to the operations and financial reporting of the Registrant and were subject to the pre-approval policies described below): | ||||
a) Not Applicable | ||||
b) Audit-Related Fees: | ||||
2006 | $415,000 | |||
2007 | $1,011,000 | |||
The audit–related fees consist of assurance and related services relating to the examination of the Registrant’s transfer agent, principal underwriter and investment adviser conducted in accordance with Statement on Auditing Standards Number 70 issued by the American Institute of Certified Public Accountants. | ||||
c) Tax Fees: | ||||
2006 | $6,000 | |||
2007 | $5,000 | |||
The tax fees consist of consulting services relating to the registrant’s investments. | ||||
d) All Other Fees: | ||||
2006 | $9,000 | |||
2007 | None | |||
The other fees consist of consulting services related to the Registrant’s compliance program. |
The Registrant’s audit committee will pre-approve all audit and permissible non-audit services that the committee considers compatible with maintaining the independent registered public accounting firm’s 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 $721,000 for fiscal year 2006 and $1,293,000 for fiscal year 2007. 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.
ITEM 5 – Audit Committee of Listed Registrants
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 6 – Schedule of Investments
[logo – American Funds®]
U.S. Government Securities FundSM
Investment portfolio
August 31, 2007
Bonds & notes — 94.58% | Principal amount (000) | Market value (000) | ||||||
MORTGAGE-BACKED OBLIGATIONS1— 52.67% | ||||||||
Fannie Mae 8.50% 2008 | $ | — | $ | — | ||||
Fannie Mae 7.00% 2009 | 15 | 15 | ||||||
Fannie Mae 7.00% 2009 | 10 | 10 | ||||||
Fannie Mae 9.00% 2009 | 9 | 9 | ||||||
Fannie Mae 7.00% 2010 | 167 | 168 | ||||||
Fannie Mae 8.50% 2010 | 13 | 13 | ||||||
Fannie Mae 7.00% 2011 | 18 | 18 | ||||||
Fannie Mae 9.50% 2011 | 14 | 14 | ||||||
Fannie Mae 8.50% 2013 | 3 | 3 | ||||||
Fannie Mae 8.50% 2014 | 2 | 2 | ||||||
Fannie Mae 7.00% 2017 | 182 | 189 | ||||||
Fannie Mae 10.50% 2018 | 1,520 | 1,748 | ||||||
Fannie Mae 12.00% 2019 | 551 | 628 | ||||||
Fannie Mae 4.50% 2020 | 10,472 | 10,069 | ||||||
Fannie Mae 5.00% 2020 | 28,240 | 27,718 | ||||||
Fannie Mae 6.00% 2021 | 583 | 589 | ||||||
Fannie Mae 6.00% 2021 | 439 | 444 | ||||||
Fannie Mae 6.00% 2021 | 431 | 436 | ||||||
Fannie Mae 9.50% 2022 | 49 | 54 | ||||||
Fannie Mae 6.00% 2024 | 40,028 | 40,203 | ||||||
Fannie Mae 11.029% 20252 | 3,915 | 4,503 | ||||||
Fannie Mae 6.00% 2026 | 2,669 | 2,680 | ||||||
Fannie Mae 9.50% 2026 | 284 | 323 | ||||||
Fannie Mae 6.00% 2027 | 22,060 | 22,156 | ||||||
Fannie Mae 8.50% 2027 | 22 | 24 | ||||||
Fannie Mae 7.50% 2029 | 363 | 385 | ||||||
Fannie Mae 7.50% 2030 | 43 | 45 | ||||||
Fannie Mae 7.50% 2030 | 27 | 28 | ||||||
Fannie Mae 7.50% 2031 | 248 | 261 | ||||||
Fannie Mae 7.50% 2031 | 89 | 95 | ||||||
Fannie Mae 7.50% 2031 | 87 | 91 | ||||||
Fannie Mae 7.50% 2031 | 49 | 52 | ||||||
Fannie Mae 8.00% 2031 | 3,135 | 3,341 | ||||||
Fannie Mae 4.381% 20332 | 3,630 | 3,603 | ||||||
Fannie Mae 5.50% 2033 | 15,110 | 14,807 | ||||||
Fannie Mae 4.469% 20352 | 4,355 | 4,297 | ||||||
Fannie Mae 4.50% 2035 | 35,570 | 32,905 | ||||||
Fannie Mae 4.50% 2035 | 5,812 | 5,379 | ||||||
Fannie Mae 4.50% 2035 | 3,473 | 3,213 | ||||||
Fannie Mae 4.50% 20352 | 2,497 | 2,464 | ||||||
Fannie Mae 4.50% 2035 | 1,686 | 1,562 | ||||||
Fannie Mae 4.555% 20352 | 3,773 | 3,726 | ||||||
Fannie Mae 5.50% 2035 | 10,249 | 10,025 | ||||||
Fannie Mae 5.50% 2035 | 5,496 | 5,381 | ||||||
Fannie Mae 6.50% 2035 | 53,209 | 54,290 | ||||||
Fannie Mae 4.50% 2036 | 2,120 | 1,963 | ||||||
Fannie Mae 5.424% 20362 | 7,578 | 7,558 | ||||||
Fannie Mae 5.50% 2036 | 11,764 | 11,487 | ||||||
Fannie Mae 5.50% 2036 | 365 | 356 | ||||||
Fannie Mae 5.547% 20362 | 8,951 | 8,948 | ||||||
Fannie Mae 6.00% 2036 | 5,560 | 5,555 | ||||||
Fannie Mae 6.00% 2036 | 790 | 790 | ||||||
Fannie Mae 6.00% 2036 | 386 | 386 | ||||||
Fannie Mae 6.50% 2036 | 36,404 | 37,212 | ||||||
Fannie Mae 5.50% 2037 | 10,920 | 10,662 | ||||||
Fannie Mae 5.50% 2037 | 10,251 | 10,008 | ||||||
Fannie Mae 5.50% 2037 | 6,875 | 6,635 | ||||||
Fannie Mae 5.50% 2037 | 4,686 | 4,523 | ||||||
Fannie Mae 5.50% 2037 | 3,076 | 2,971 | ||||||
Fannie Mae 5.888% 20372 | 5,501 | 5,545 | ||||||
Fannie Mae 5.90% 20372 | 7,650 | 7,713 | ||||||
Fannie Mae 6.00% 2037 | 14,412 | 14,396 | ||||||
Fannie Mae 6.00% 2037 | 10,000 | 9,989 | ||||||
Fannie Mae 6.00% 2037 | 5,644 | 5,638 | ||||||
Fannie Mae 6.00% 20373 | 2,998 | 2,939 | ||||||
Fannie Mae 6.00% 2037 | 1,736 | 1,734 | ||||||
Fannie Mae 6.50% 2037 | 16,242 | 16,344 | ||||||
Fannie Mae 6.50% 2037 | 11,591 | 11,664 | ||||||
Fannie Mae 6.50% 2037 | 9,924 | 9,987 | ||||||
Fannie Mae 6.50% 2037 | 7,000 | 7,120 | ||||||
Fannie Mae 6.50% 2037 | 6,838 | 6,885 | ||||||
Fannie Mae 6.50% 2037 | 2,983 | 3,034 | ||||||
Fannie Mae 6.836% 20372 | 2,486 | 2,543 | ||||||
Fannie Mae 7.00% 20373 | 15,500 | 15,794 | ||||||
Fannie Mae 7.00% 2037 | 9,791 | 10,006 | ||||||
Fannie Mae 7.00% 2037 | 6,096 | 6,287 | ||||||
Fannie Mae 7.00% 2037 | 4,430 | 4,555 | ||||||
Fannie Mae 7.00% 2037 | 2,747 | 2,807 | ||||||
Fannie Mae 7.00% 20373 | 2,685 | 2,727 | ||||||
Fannie Mae 7.00% 2037 | 1,732 | 1,770 | ||||||
Fannie Mae 7.00% 2037 | 861 | 880 | ||||||
Fannie Mae 7.50% 2037 | 2,500 | 2,581 | ||||||
Fannie Mae 7.50% 2037 | 1,415 | 1,462 | ||||||
Fannie Mae, Series 1998-M6, Class A-2, 6.32% 2008 | 400 | 401 | ||||||
Fannie Mae, Series 2003-T1, Class B, 4.491% 2012 | 27,750 | 27,102 | ||||||
Fannie Mae, Series 35, Class 2, 12.00% 2018 | 21 | 25 | ||||||
Fannie Mae, Series 2003-48, Class TJ, 4.50% 2022 | 6,466 | 6,258 | ||||||
Fannie Mae, Series 1992-119, Class Z, 8.00% 2022 | 244 | 259 | ||||||
Fannie Mae, Series 2001-4, Class NA, 11.889% 20252 | 3,410 | 3,806 | ||||||
Fannie Mae, Series 1997-M6, Class ZA, 6.85% 2026 | 2,669 | 2,665 | ||||||
Fannie Mae, Series 2002-W3, Class A-5, 7.50% 2028 | 820 | 852 | ||||||
Fannie Mae, Series 2002-W7, Class A-5, 7.50% 2029 | 3,073 | 3,214 | ||||||
Fannie Mae, Series 2001-25, Class ZA, 6.50% 2031 | 1,472 | 1,521 | ||||||
Fannie Mae, Series 2001-20, Class E, 9.619% 20312 | 103 | 113 | ||||||
Fannie Mae, Series 2001-20, Class C, 11.927% 20312 | 439 | 490 | ||||||
Fannie Mae, Series 2003-M2, Class D, 4.68% 20332,3 | 11,000 | 9,402 | ||||||
Fannie Mae, Series 2005-29, Class AK, 4.50% 2035 | 11,659 | 11,259 | ||||||
Fannie Mae, Series 2005-68, Class PG, 5.50% 2035 | 18,750 | 18,785 | ||||||
Fannie Mae, Series 2006-56, Class OG, principal only, 0% 2036 | 7,112 | 5,369 | ||||||
Fannie Mae, Series 2006-83, Class AO, principal only, 0% 20363 | 5,502 | 3,845 | ||||||
Fannie Mae, Series 2006-65, Class PF, 5.785% 20362 | 7,825 | 7,776 | ||||||
Fannie Mae, Series 2006-49, Class PA, 6.00% 2036 | 1,294 | 1,319 | ||||||
Fannie Mae, Series 2007-33, Class HE, 5.50% 2037 | 7,846 | 7,794 | ||||||
Fannie Mae, Series 2007-40, Class PT, 5.50% 2037 | 4,932 | 4,885 | ||||||
Fannie Mae, Series 2007-24, Class P, 6.00% 2037 | 35,279 | 35,795 | ||||||
Fannie Mae, Series 1999-T2, Class A-1, 7.50% 2039 | 1,096 | 1,152 | ||||||
Fannie Mae, Series 2002-W1, Class 2A, 7.50% 2042 | 808 | 841 | ||||||
Freddie Mac 8.25% 2007 | — | — | ||||||
Freddie Mac 7.00% 2008 | 9 | 9 | ||||||
Freddie Mac 8.75% 2008 | 2 | 2 | ||||||
Freddie Mac 8.50% 2009 | 14 | 15 | ||||||
Freddie Mac 8.00% 2012 | 15 | 15 | ||||||
Freddie Mac 6.00% 2014 | 208 | 211 | ||||||
Freddie Mac 4.00% 2015 | 2,171 | 2,045 | ||||||
Freddie Mac 6.00% 2017 | 694 | 702 | ||||||
Freddie Mac 8.00% 2017 | 238 | 250 | ||||||
Freddie Mac 8.50% 2018 | 3 | 3 | ||||||
Freddie Mac 8.50% 2020 | 192 | 206 | ||||||
Freddie Mac 8.50% 2021 | 62 | 66 | ||||||
Freddie Mac 10.00% 2025 | 1,430 | 1,626 | ||||||
Freddie Mac 6.00% 2026 | 15,115 | 15,188 | ||||||
Freddie Mac 6.00% 2027 | 28,465 | 28,603 | ||||||
Freddie Mac 4.645% 20352 | 10,753 | 10,596 | ||||||
Freddie Mac 5.00% 2035 | 12,640 | 12,027 | ||||||
Freddie Mac 5.00% 2035 | 6,718 | 6,390 | ||||||
Freddie Mac 5.50% 2035 | 3,035 | 2,966 | ||||||
Freddie Mac 5.50% 2035 | 3,001 | 2,932 | ||||||
Freddie Mac 5.50% 2037 | 9,939 | 9,702 | ||||||
Freddie Mac 5.50% 2037 | 9,727 | 9,497 | ||||||
Freddie Mac 5.50% 2037 | 2,170 | 2,119 | ||||||
Freddie Mac 6.00% 2037 | 75,750 | 75,667 | ||||||
Freddie Mac 6.00% 2037 | 10,000 | 9,995 | ||||||
Freddie Mac 6.00% 2037 | 6,000 | 5,997 | ||||||
Freddie Mac 6.00% 2037 | 5,750 | 5,744 | ||||||
Freddie Mac 6.00% 2037 | 3,600 | 3,595 | ||||||
Freddie Mac 6.012% 20372 | 11,828 | 11,905 | ||||||
Freddie Mac 6.405% 20372 | 4,464 | 4,517 | ||||||
Freddie Mac 6.472% 20372 | 5,311 | 5,375 | ||||||
Freddie Mac 6.50% 2037 | 2,886 | 2,903 | ||||||
Freddie Mac, Series 2356, Class GD, 6.00% 2016 | 6,362 | 6,466 | ||||||
Freddie Mac, Series 2289, Class NA, 11.943% 20202 | 1,971 | 2,181 | ||||||
Freddie Mac, Series 178, Class Z, 9.25% 2021 | 64 | 64 | ||||||
Freddie Mac, Series 2289, Class NB, 11.418% 20222 | 402 | 450 | ||||||
Freddie Mac, Series 2626, Class NG, 3.50% 2023 | 1,647 | 1,491 | ||||||
Freddie Mac, Series 1567, Class A, 4.441% 20232 | 66 | 61 | ||||||
Freddie Mac, Series 1617, Class PM, 6.50% 2023 | 2,117 | 2,177 | ||||||
Freddie Mac, Series 2153, Class GG, 6.00% 2029 | 4,034 | 4,103 | ||||||
Freddie Mac, Series T-041, Class 3-A, 7.50% 2032 | 682 | 708 | ||||||
Freddie Mac, Series 3061, Class PN, 5.50% 2035 | 4,820 | 4,819 | ||||||
Freddie Mac, Series 3156, Class PO, principal only, 0% 2036 | 10,288 | 7,553 | ||||||
Freddie Mac, Series 3171, Class MO, principal only, 0% 2036 | 5,409 | 4,012 | ||||||
Freddie Mac, Series 3146, Class PO, principal only, 0% 2036 | 4,834 | 3,454 | ||||||
Freddie Mac, Series 3213, Class OG, principal only, 0% 2036 | 3,124 | 2,345 | ||||||
Freddie Mac, Series 3257, Class PA, 5.50% 2036 | 5,494 | 5,483 | ||||||
Freddie Mac, Series 3156, Class PF, 5.861% 20362 | 12,217 | 12,121 | ||||||
Freddie Mac, Series 3233, Class PA, 6.00% 2036 | 7,482 | 7,604 | ||||||
Freddie Mac, Series 3272, Class PA, 6.00% 2037 | 9,764 | 9,922 | ||||||
Government National Mortgage Assn. 7.50% 2009 | 19 | 19 | ||||||
Government National Mortgage Assn. 7.50% 2009 | 11 | 11 | ||||||
Government National Mortgage Assn. 9.00% 2009 | 67 | 67 | ||||||
Government National Mortgage Assn. 9.50% 2009 | 18 | 19 | ||||||
Government National Mortgage Assn. 7.50% 2011 | 56 | 58 | ||||||
Government National Mortgage Assn. 7.50% 2011 | 8 | 8 | ||||||
Government National Mortgage Assn. 5.50% 2013 | 43 | 43 | ||||||
Government National Mortgage Assn. 6.00% 2013 | 458 | 465 | ||||||
Government National Mortgage Assn. 6.00% 2014 | 341 | 346 | ||||||
Government National Mortgage Assn. 6.00% 2014 | 204 | 207 | ||||||
Government National Mortgage Assn. 6.00% 2014 | 98 | 99 | ||||||
Government National Mortgage Assn. 6.50% 2014 | 176 | 180 | ||||||
Government National Mortgage Assn. 6.50% 2014 | 169 | 172 | ||||||
Government National Mortgage Assn. 6.50% 2014 | 150 | 154 | ||||||
Government National Mortgage Assn. 6.50% 2014 | 126 | 128 | ||||||
Government National Mortgage Assn. 6.50% 2014 | 118 | 121 | ||||||
Government National Mortgage Assn. 6.50% 2014 | 113 | 116 | ||||||
Government National Mortgage Assn. 6.50% 2014 | 109 | 111 | ||||||
Government National Mortgage Assn. 6.50% 2014 | 85 | 86 | ||||||
Government National Mortgage Assn. 6.50% 2014 | 83 | 85 | ||||||
Government National Mortgage Assn. 6.50% 2014 | 81 | 83 | ||||||
Government National Mortgage Assn. 6.50% 2014 | 13 | 14 | ||||||
Government National Mortgage Assn. 6.50% 2014 | 13 | 13 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 715 | 712 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 452 | 450 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 441 | 439 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 408 | 406 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 377 | 376 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 342 | 341 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 330 | 329 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 307 | 305 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 247 | 246 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 205 | 204 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 185 | 184 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 177 | 176 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 140 | 140 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 117 | 117 | ||||||
Government National Mortgage Assn. 5.50% 2016 | 77 | 77 | ||||||
Government National Mortgage Assn. 6.00% 2016 | 879 | 890 | ||||||
Government National Mortgage Assn. 6.50% 2016 | 434 | 443 | ||||||
Government National Mortgage Assn. 6.50% 2016 | 395 | 403 | ||||||
Government National Mortgage Assn. 9.00% 2016 | 57 | 63 | ||||||
Government National Mortgage Assn. 5.50% 2017 | 4,025 | 4,007 | ||||||
Government National Mortgage Assn. 5.50% 2017 | 3,184 | 3,170 | ||||||
Government National Mortgage Assn. 10.00% 2019 | 1,049 | 1,191 | ||||||
Government National Mortgage Assn. 8.50% 2021 | 58 | 63 | ||||||
Government National Mortgage Assn. 8.50% 2021 | 12 | 13 | ||||||
Government National Mortgage Assn. 10.00% 2021 | 359 | 411 | ||||||
Government National Mortgage Assn. 8.50% 2022 | 20 | 21 | ||||||
Government National Mortgage Assn. 8.50% 2022 | 18 | 20 | ||||||
Government National Mortgage Assn. 8.50% 2022 | 6 | 7 | ||||||
Government National Mortgage Assn. 6.00% 2035 | 31 | 31 | ||||||
Government National Mortgage Assn. 5.50% 2036 | 11,744 | 11,508 | ||||||
Government National Mortgage Assn., Series 2004-19, 5.00% 2031 | 13,911 | 13,672 | ||||||
Government National Mortgage Assn., Series 2003-116, Class JD, 5.00% 2032 | 10,000 | 9,599 | ||||||
Government National Mortgage Assn., Series 2003-46, 5.00% 2033 | 10,000 | 9,633 | ||||||
Banc of America Mortgage Securities, Inc., Series 2003-8, Class 2-A-4, 4.75% 2018 | 11,352 | 10,907 | ||||||
Banc of America Mortgage Securities, Inc., Series 2003-7, Class A-3, 5.00% 2018 | 8,852 | 8,579 | ||||||
Banc of America Mortgage Securities, Inc., Series 2003-8, Class 2-A-5, 5.00% 2018 | 8,757 | 8,487 | ||||||
CS First Boston Mortgage Securities Corp., Series 2004-C5, Class A-2, 4.183% 2037 | 1,335 | 1,298 | ||||||
CS First Boston Mortgage Securities Corp., Series 2005-C3, Class A-4, 4.686% 2037 | 2,250 | 2,095 | ||||||
CS First Boston Mortgage Securities Corp., Series 2002-CKN2, Class A-3, 6.133% 2037 | 3,000 | 3,067 | ||||||
CS First Boston Mortgage Securities Corp., Series 2007-5, Class 1-A-9, 7.00% 20373 | 9,956 | 9,904 | ||||||
CS First Boston Mortgage Securities Corp., Series 2005-C5, Class A-AB, 5.10% 20382 | 5,000 | 4,854 | ||||||
CS First Boston Mortgage Securities Corp., Series 2006-C1, Class A-AB, 5.681% 20392 | 4,800 | 4,790 | ||||||
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2004-CIBC10, Class A-3, 4.184% 2037 | 5,000 | 4,868 | ||||||
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2005-CIBC11, Class A-2, 5.016% 2037 | 3,000 | 2,964 | ||||||
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2004-C3, Class A-3, 4.545% 2042 | 5,000 | 4,811 | ||||||
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2005-LDP2, Class A-4, 4.738% 2042 | 2,000 | 1,870 | ||||||
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2005-LDP3, Class A-4A, 4.936% 20422 | 5,000 | 4,743 | ||||||
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2006-CIBC14, Class A-4, 5.481% 20442 | 3,000 | 2,951 | ||||||
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2006-LDP7, Class A-4, 6.066% 20452 | 2,000 | 2,029 | ||||||
Wachovia Bank Commercial Mortgage Trust, Series 2005-C16, Class A-PB, 4.692% 2041 | 5,500 | 5,314 | ||||||
Wachovia Bank Commercial Mortgage Trust, Series 2005-C18, Class A-PB, 4.807% 2042 | 5,500 | 5,281 | ||||||
Wachovia Bank Commercial Mortgage Trust, Series 2005-C17, Class A-4, 5.083% 20422 | 2,700 | 2,591 | ||||||
Wachovia Bank Commercial Mortgage Trust, Series 2005-C20, Class A-7, 5.118% 20422 | 5,000 | 4,796 | ||||||
Wachovia Bank Commercial Mortgage Trust, Series 2006-C23, Class A-PB, 5.446% 2045 | 3,000 | 2,973 | ||||||
Wells Fargo Alternative Loan Trust, Series 2007-PA3, Class II-A-4, 6.00% 2037 | 3,250 | 3,147 | ||||||
Wells Fargo Alternative Loan Trust, Series 2007-PA3, Class V-A-1, 7.00% 20373 | 17,661 | 17,569 | ||||||
GE Commercial Mortgage Corp., Series 2005-C2, Class A-4, 4.978% 2043 | 8,000 | 7,632 | ||||||
GE Commercial Mortgage Corp., Series 2006-C1, Class A-4, 5.518% 20442 | 6,750 | 6,611 | ||||||
GE Commercial Mortgage Corp., Series 2006-C1, Class A-AB, 5.518% 20442 | 5,000 | 4,920 | ||||||
Chase Mortgage Finance Trust, Series 2003-S10, Class A-1, 4.75% 2018 | 8,398 | 8,069 | ||||||
Chase Mortgage Finance Trust, Series 2004-S1, Class A-1, 5.00% 2019 | 9,126 | 8,845 | ||||||
WaMu Mortgage Pass-Through Certificates Trust, Series 2003-S8, Class A-2, 5.00% 2018 | 9,054 | 8,775 | ||||||
WaMu Mortgage Pass-Through Certificates Trust, Series 2003-S12, Class A-3, 5.00% 2018 | 1,921 | 1,861 | ||||||
WaMu Mortgage Pass-Through Certificates Trust, Series 2006-AR18, Class 1-A1, 5.35% 20372 | 3,208 | 3,153 | ||||||
WaMu Mortgage Pass-Through Certificates Trust, Series 2007-HY5, Class 3-A1, 5.826% 20372 | 2,897 | 2,827 | ||||||
Countrywide Alternative Loan Trust, Series 2005-23CB, Class A-15, 5.50% 2035 | 3,524 | 3,392 | ||||||
Countrywide Alternative Loan Trust, Series 2007-8CB, Class A-1, 5.50% 20373 | 2,083 | 2,084 | ||||||
Countrywide Alternative Loan Trust, Series 2007-HY4, Class 3-A-1, 5.886% 20472 | 5,646 | 5,578 | ||||||
Countrywide Alternative Loan Trust, Series 2007-HY4, Class 4-A-1, 5.989% 20472 | 4,788 | 4,689 | ||||||
Citigroup Mortgage Loan Trust, Inc., Series 2003-1, Class I-A1, 4.75% 2018 | 10,031 | 9,661 | ||||||
Citigroup Mortgage Loan Trust, Inc., Series 2003-UST1, Class A-3, 5.00% 2018 | 2,488 | 2,417 | ||||||
CHL Mortgage Pass-Through Trust, Series 2004-J7, Class 3-A-1, 5.00% 2019 | 11,130 | 10,788 | ||||||
American Tower Trust I, Series 2007-1A, Class A-FX, 5.42% 20374 | 10,750 | 10,634 | ||||||
Structured Asset Securities Corp., Series 2003-29, Class 1-A-1, 4.75% 2018 | 8,122 | 7,803 | ||||||
Morgan Stanley Capital I Trust, Series 2005-HQ7, Class A-2, 5.374% 20422 | 5,000 | 4,948 | ||||||
Morgan Stanley Capital I Trust, Series 2006-IQ11, Class A-4, 5.944% 20422 | 2,455 | 2,468 | ||||||
MASTR Asset Securitization Trust, Series 2003-5, Class 2-A-1, 5.00% 2018 | 5,990 | 5,805 | ||||||
Cendant Mortgage Capital LLC, Series 2003-4, Class II-A-1, 5.00% 2033 | 5,747 | 5,565 | ||||||
Bear Stearns Commercial Mortgage Securities Trust, Series 2006-PWR13, Class A-4, 5.54% 2041 | 5,500 | 5,421 | ||||||
Banc of America Mortgage Securities Trust, Series 2003-10, Class 3-A-1, 5.00% 2019 | 5,559 | 5,388 | ||||||
Merrill Lynch Mortgage Investors, Inc., Series 2006-A1, Class II-A-1, 6.153% 20362 | 5,179 | 5,225 | ||||||
J.P. Morgan Mortgage Trust, Series 2004-S1, Class 1-A-7, 5.00% 2019 | 5,004 | 4,846 | ||||||
Structured Adjustable Rate Mortgage Loan Trust, Series 2007-8, Class 2-A3, 6.00% 20372,3 | 4,750 | 4,679 | ||||||
IndyMac IMSC Mortgage Loan Trust, Series 2007-F3, Class 3-A-1, 7.00% 20373 | 4,665 | 4,641 | ||||||
GSR Mortgage Loan Trust, Series 2004-10F, Class 1-A-5, 4.50% 2019 | 4,818 | 4,589 | ||||||
Banc of America Commercial Mortgage Inc., Series 2006-2, Class A-3, 5.902% 20452 | 3,000 | 3,000 | ||||||
Greenwich Capital Commercial Funding Corp., Series 2005-GG5, Class A-4-1, 5.243% 20372 | 3,000 | 2,963 | ||||||
Merrill Lynch Mortgage Trust, Series 2005-LC1, Class A-3, 5.289% 20442 | 3,000 | 2,951 | ||||||
Commercial Mortgage Trust, Series 2003-LNB1, Class A-2, 4.084% 2038 | 3,000 | 2,794 | ||||||
Wells Fargo Mortgage-backed Securities Trust, Series 2003-16, Class II-A-1, 4.50% 2018 | 2,875 | 2,738 | ||||||
Lehman Mortgage Trust, Series 2007-7, Class 6-A4, 7.00% 2037 | 1,978 | 2,024 | ||||||
CHL Mortgage Pass-Through Trust, Series 2007-HY4, Class 1-A-1, 6.125% 20472,3 | 2,000 | 2,002 | ||||||
Structured Adjustable Rate Mortgage Loan Trust, Series 2007-6, Class 3-A-1, 5.944% 20372,3 | 1,987 | 1,937 | ||||||
GMAC Commercial Mortgage Securities, Inc., Series 2005-C1, Class A-M, 4.754% 2043 | 2,000 | 1,880 | ||||||
Citicorp Mortgage Securities, Inc., Series 2003-10, Class A-1, 4.50% 2018 | 1,594 | 1,518 | ||||||
MASTR Alternative Loan Trust, Series 2004-10, Class 2-A-1, 5.50% 2019 | 1,030 | 1,016 | ||||||
LB-UBS Commercial Mortgage Trust, Series 2004-C8, Class A-2, 4.201% 2029 | 840 | 817 | ||||||
Paine Webber CMO, Series O, Class 5, 9.50% 2019 | 226 | 246 | ||||||
1,353,570 | ||||||||
U.S. TREASURY BONDS & NOTES — 26.92% | ||||||||
U.S. Treasury 3.00% 2007 | 15,425 | 15,392 | ||||||
U.S. Treasury 3.625% 20083,5 | 2,070 | 2,064 | ||||||
U.S. Treasury 4.75% 2008 | 18,150 | 18,261 | ||||||
U.S. Treasury 3.625% 2009 | 18,185 | 17,998 | ||||||
U.S. Treasury 3.625% 2010 | 8,030 | 7,922 | ||||||
U.S. Treasury 4.00% 2010 | 49,000 | 48,774 | ||||||
U.S. Treasury 5.75% 2010 | 11,435 | 11,929 | ||||||
U.S. Treasury 6.50% 2010 | 10,000 | 10,523 | ||||||
U.S. Treasury 2.375% 20113,5 | 2,073 | 2,069 | ||||||
U.S. Treasury 4.50% 2011 | 24,750 | 24,988 | ||||||
U.S. Treasury 4.50% 2011 | 10,200 | 10,300 | ||||||
U.S. Treasury 4.625% 2011 | 24,000 | 24,337 | ||||||
U.S. Treasury 4.875% 2011 | 12,000 | 12,275 | ||||||
U.S. Treasury 4.875% 2011 | 11,245 | 11,492 | ||||||
U.S. Treasury 3.625% 2013 | 43,250 | 41,790 | ||||||
U.S. Treasury 3.875% 2013 | 17,250 | 16,910 | ||||||
U.S. Treasury 4.25% 2013 | 92,500 | 92,225 | ||||||
U.S. Treasury 12.00% 2013 | 4,000 | 4,283 | ||||||
U.S. Treasury 2.00% 20143,5 | 6,342 | 6,191 | ||||||
U.S. Treasury 4.00% 2014 | 5,560 | 5,455 | ||||||
U.S. Treasury 4.25% 2014 | 22,500 | 22,335 | ||||||
U.S. Treasury 4.25% 2014 | 11,025 | 10,912 | ||||||
U.S. Treasury 11.25% 2015 | 17,500 | 24,950 | ||||||
U.S. Treasury 5.125% 2016 | 26,000 | 27,113 | ||||||
U.S. Treasury 2.375% 20173,5 | 6,224 | 6,219 | ||||||
U.S. Treasury 4.625% 2017 | 12,925 | 13,000 | ||||||
U.S. Treasury 8.125% 2019 | 21,100 | 27,522 | ||||||
U.S. Treasury 8.50% 2020 | 31,250 | 42,075 | ||||||
U.S. Treasury 7.875% 20216 | 15,250 | 19,827 | ||||||
U.S. Treasury 8.00% 2021 | 400 | 529 | ||||||
U.S. Treasury 6.25% 2023 | 8,665 | 9,980 | ||||||
U.S. Treasury 7.125% 20236 | 17,500 | 21,782 | ||||||
U.S. Treasury 6.50% 2026 | 1,230 | 1,476 | ||||||
U.S. Treasury 6.25% 2030 | 6,000 | 7,134 | ||||||
U.S. Treasury 5.375% 2031 | 5,000 | 5,354 | ||||||
U.S. Treasury 3.375% 20323,5 | 3,504 | 4,192 | ||||||
U.S. Treasury 4.50% 2036 | 39,950 | 37,828 | ||||||
U.S. Treasury 5.00% 2037 | 15,660 | 16,059 | ||||||
U.S. Treasury Principal Strip 0% 2019 | 2,000 | 1,154 | ||||||
U.S. Treasury Principal Strip 0% 2037 | 30,000 | 7,273 | ||||||
691,892 | ||||||||
FEDERAL AGENCY BONDS & NOTES — 9.74% | ||||||||
Freddie Mac 5.25% 2011 | 99,680 | 101,415 | ||||||
Freddie Mac 4.50% 2014 | 5,000 | 4,890 | ||||||
Freddie Mac 5.25% 2016 | 9,000 | 9,114 | ||||||
Freddie Mac 5.50% 2017 | 9,000 | 9,274 | ||||||
Small Business Administration, Series SBIC-PS 2006-10A, Participating Securities, 5.408% 2016 | 12,587 | 12,541 | ||||||
Small Business Administration, Series 2001-20K, 5.34% 20211 | 2,782 | 2,807 | ||||||
Small Business Administration, Series 2001-20J, 5.76% 20211 | 1,472 | 1,498 | ||||||
Small Business Administration, Series 2001-20F, 6.44% 20211 | 4,551 | 4,699 | ||||||
Small Business Administration, Series 2003-20B, 4.84% 20231 | 8,612 | 8,464 | ||||||
Federal Agricultural Mortgage Corp. 4.875% 20114 | 6,750 | 6,767 | ||||||
Federal Agricultural Mortgage Corp. 5.125% 2011 | 3,500 | 3,538 | ||||||
Federal Agricultural Mortgage Corp. 5.50% 20114 | 6,450 | 6,622 | ||||||
Federal Agricultural Mortgage Corp. 5.125% 20174 | 10,225 | 10,138 | ||||||
United States Agency for International Development, Republic of Egypt 4.45% 2015 | 19,000 | 18,358 | ||||||
United States Agency for International Development, State of Israel, Class 1-A, 5.50% 2023 | 5,000 | 5,146 | ||||||
Fannie Mae 6.00% 2011 | 7,550 | 7,865 | ||||||
Fannie Mae 6.125% 2012 | 13,750 | 14,493 | ||||||
Federal Home Loan Bank 5.04% 20082 | 13,405 | 13,408 | ||||||
United States Government-Guaranteed Certificates of Participation, Overseas Private Investment Corp., | ||||||||
Series 2000-044-A, 3.74% 20151 | 5,644 | 5,498 | ||||||
United States Government-Guaranteed, Perforadora Centrale SA de CV (Title XI) 4.92% 20181 | 2,301 | 2,319 | ||||||
United States Government-Guaranteed Ship Financing Obligations, Rowan Companies, Inc. (Title XI) 5.88% 20121 | 1,591 | 1,629 | ||||||
250,483 | ||||||||
ASSET-BACKED OBLIGATIONS1 — 5.25% | ||||||||
CPS Auto Receivables Trust, Series 2007-A, Class A-4, MBIA insured, 5.05% 20133,4 | 5,000 | 4,745 | ||||||
CPS Auto Receivables Trust, Series 2006-D, Class A-4, FSA insured, 5.115% 20134 | 2,000 | 1,996 | ||||||
CPS Auto Receivables Trust, Series 2007-B, Class A-4, FSA insured, 5.60% 20144 | 5,500 | 5,564 | ||||||
Drive Auto Receivables Trust, Series 2006-1, Class A-4, FSA insured, 5.54% 20134 | 10,000 | 10,070 | ||||||
Hyundai Auto Receivables Trust, Series 2006-B, Class A-4, 5.15% 2013 | 10,000 | 9,989 | ||||||
Long Beach Acceptance Auto Receivables Trust, Series 2007-A, Class A-4, FSA insured, 5.025% 2014 | 10,000 | 9,959 | ||||||
Drivetime Auto Owner Trust, Series 2005-A, Class A-3, MBIA insured, 4.302% 20094 | 2,611 | 2,597 | ||||||
Drivetime Auto Owner Trust, Series 2006-B, Class A-3, MBIA insured, 5.227% 20122,4 | 5,083 | 5,085 | ||||||
Irwin Home Equity, Series 2006-P1, Class 2-A4, AMBAC insured, 5.80% 20372,3,4 | 6,578 | 6,475 | ||||||
Residential Funding Mortgage Securities II, Inc., Series 2007-HSA3, Class A-I-3, MBIA insured, 6.03% 20372 | 4,000 | 3,834 | ||||||
Residential Funding Mortgage Securities II, Inc., Series 2007-HSA2, Class A-1F, MBIA insured, 8.47% 20372,3 | 2,560 | 2,432 | ||||||
CWHEQ Home Equity Loan Trust, Series 2007-9, Class 2-A-3, 5.685% 20472,4 | 5,965 | 5,698 | ||||||
Prestige Auto Receivables Trust, Series 2007-1, Class A-3, FSA insured, 5.58% 20143,4 | 5,500 | 5,495 | ||||||
AmeriCredit Automobile Receivables Trust, Series 2006-B-G, Class A-4, FGIC insured, 5.21% 2013 | 2,500 | 2,498 | ||||||
AmeriCredit Automobile Receivables Trust, Series 2007-C-M, Class A-4-A, MBIA insured, 5.55% 2014 | 2,812 | 2,832 | ||||||
AEP Texas Central Transitioning Funding II LLC, Senior Secured Transition Bonds, Series A, Class A-3, 5.09% 2015 | 5,450 | 5,330 | ||||||
GMAC Mortgage Loan Trust, Series 2007-HE2, Class A-3, FGIC insured, 6.193% 20372,3 | 5,500 | 5,280 | ||||||
Capital One Auto Finance Trust, Series 2007-A, Class A-3-A, AMBAC insured, 5.25% 2011 | 5,000 | 4,991 | ||||||
PSE&G Transition Funding II LLC, Series 2005-1, Class A-2, 4.34% 2014 | 4,990 | 4,883 | ||||||
West Penn Funding LLC, Transition Bonds, Series 2005-A, Class A-1, 4.46% 20104 | 4,830 | 4,772 | ||||||
PG&E Energy Recovery Funding LLC, Series 2005-2, Class A-2, 5.03% 2014 | 4,600 | 4,601 | ||||||
Chase Issuance Trust, Series 2006-8, Class A, 5.671% 20162 | 4,500 | 4,406 | ||||||
J.P. Morgan Mortgage Acquisition Trust, Series 2007-CH1, Class A-F-6, 5.501% 20362 | 4,000 | 3,807 | ||||||
Capital One Multi-asset Execution Trust, Series 2005-11, Class A, 5.651% 20132 | 1,670 | 1,659 | ||||||
Capital One Multi-asset Execution Trust, Series 2006-3, Class A, 5.05% 20183 | 2,000 | 1,977 | ||||||
MBNA Master Credit Card Trust II, Series 2000-H, Class A, 5.861% 20132 | 3,250 | 3,251 | ||||||
Susquehanna Auto Lease Trust, Series 2007-1, Class A-3, 5.25% 20104 | 3,000 | 2,993 | ||||||
Santander Drive Auto Receivables Trust, Series 2007-1, Class A-3, FGIC insured, 5.05% 2011 | 3,000 | 2,991 | ||||||
UPFC Auto Receivables Trust, Series 2006-B, Class A-3, AMBAC insured, 5.01% 2012 | 2,000 | 1,993 | ||||||
Argent Securities Trust, Series 2006-W3, Class A-2C, 5.685% 20362 | 2,000 | 1,915 | ||||||
Oncor Electric Delivery Transition Bond Co. LLC, Series 2003-1, Class A-3, 4.95% 2015 | 395 | 392 | ||||||
Reliant Energy Transition Bond Company LLC, Series 2001-1, Class A-4, 5.63% 2015 | 200 | 202 | ||||||
Triad Automobile Receivables Trust, Series 2006-C, Class A-2, AMBAC insured, 5.40% 2010 | 158 | 158 | ||||||
134,870 | ||||||||
Total bonds & notes (cost: $2,437,943,000) | 2,430,815 | |||||||
Short-term securities — 5.79% | ||||||||
Federal Home Loan Bank 4.20%–5.02% due 9/4–9/27/2007 | 67,300 | 67,107 | ||||||
Federal Farm Credit Banks 4.50%–5.13% due 9/4–9/18/2007 | 40,000 | 39,945 | ||||||
International Bank for Reconstruction and Development 4.60% due 9/12/2007 | 30,750 | 30,703 | ||||||
Tennessee Valley Authority 5.12% due 9/13/2007 | 11,000 | 10,980 | ||||||
Total short-term securities (cost: $148,735,000) | 148,735 | |||||||
Total investment securities (cost: $2,586,678,000) | 2,579,550 | |||||||
Other assets less liabilities | (9,486 | ) | ||||||
Net assets | $ | 2,570,064 |
1Principal payments may be made periodically. Therefore, the effective maturity date may be earlier than the stated maturity date.
2Coupon rate may change periodically.
3Valued under fair value procedures adopted by authority of the board of trustees. The total value of all such securities was $124,662,000.
4Purchased 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 was $89,651,000, which represented 3.49% of the net assets of the fund.
5Index-linked bond whose principal amount moves with a government retail price index.
6This security, or a portion of this security, has been segregated to cover funding requirements on investment transactions settling in the future.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so you may lose money.
Investors should carefully consider the investment objectives, risks, charges and expenses of the American Funds. This and other important information
is contained in each fund’s prospectus, which can be obtained from a financial adviser and should be read carefully before investing.
MFGEFP-922-1007O-S10927
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INVESTMENT PORTFOLIO
To the Shareholders and Board of Trustees of
The American Funds Income Series - U.S. Government Securities Fund
We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements of The American Funds Income Series - U.S. Government Securities Fund, (the “Fund”) as of August 31, 2007, and for the year then ended and have issued our report thereon dated October 11, 2007, which report and financial statements are included in Item 1 of this Certified Shareholder Report on Form N-CSR. Our audit also included the Fund’s investment portfolio (the “Schedule”) as of August 31, 2007, appearing in Item 6 of this Form N-CSR. This Schedule is the responsibility of the Fund’s management. Our responsibility is to express an opinion based on our audit. In our opinion, the Schedule referred to above, when considered in relation to the basic financial statements taken as a whole of the Fund referred to above, presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
October 11, 2007
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.
ITEM 8 – Portfolio Managers of Closed-End Management Investment Companies
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.
ITEM 10 – Submission of Matters to a Vote of Security Holders
There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s board of trustees since the Registrant last submitted a proxy statement to its shareholders. The procedures are as follows. The Registrant has a nominating and governance 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 trustees. 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 and governance 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 and governance committee.
ITEM 11 – Controls and Procedures
(a) | The Registrant’s Principal Executive Officer and Principal Financial Officer have concluded, based on their evaluation of the Registrant’s disclosure controls and procedures (as such term is defined in Rule 30a-3 under the Investment Company Act of 1940), that such controls and procedures are adequate and reasonably designed to achieve the purposes described in paragraph (c) of such rule. |
(b) | There were no changes in the Registrant’s internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the Registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
ITEM 12 – Exhibits
(a)(1) | The Code of Ethics that is the subject of the disclosure required by Item 2 is attached as an exhibit hereto. |
(a)(2) | The certifications required by Rule 30a-2 of the Investment Company Act of 1940, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are attached as exhibits hereto. |
SIGNATURES
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.
THE AMERICAN FUNDS INCOME SERIES | |
By /s/ John H. Smet | |
John H. Smet, President and Principal Executive Officer | |
Date: November 8, 2007 |
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.
By /s/ John H. Smet |
John H. Smet, President and Principal Executive Officer |
Date: November 8, 2007 |
By /s/ Ari M. Vinocor |
Ari M. Vinocor, Treasurer and Principal Financial Officer |
Date: November 8, 2007 |