The right choice for the long term®
SMALLCAP World Fund
Our constellation of small-cap stocks:
Finding the brightest stars
[photo of a globe sitting on a table]
Annual report for the year ended September 30, 2006
SMALLCAP World Fund® seeks long-term growth of capital through investments in smaller companies in the United States and around the world.
This fund is one of the 30 American Funds. The organization ranks among the nation’s three largest mutual fund families. For 75 years, Capital Research and Management Company,SM the American Funds adviser, has invested with a long-term focus based on thorough research and attention to risk.
| Contents | |
| | |
| Letter to shareholders | 1 |
| The value of a long-term perspective | 3 |
| Our constellation of small-cap stocks: | |
| Finding the brightest stars | 4 |
| Summary investment portfolio | 10 |
| Financial statements | 17 |
| Board of directors and officers | 32 |
| What makes American Funds different? | back cover |
Figures shown are past results for Class A shares and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity. For current information and month-end results, visit americanfunds.com. Fund results shown, unless otherwise indicated, are at net asset value. If a sales charge (maximum 5.75%) had been deducted, the results would have been lower.
Results at a glance | | | | | | | | | |
| | | | | | | | | | | | | | |
| Average annual total returns for periods ended September 30, 2006 (with all distributions reinvested) | | | | |
| | | | 1 year | | | 5 years | | | 10 years | | | Lifetime* | |
| | | | | | | | | | | | | | |
SMALLCAP World Fund | | | +15.3 | % | | +16.9 | % | | +8.9 | % | | +11.2 | % |
S&P/Citigroup Global/World Indexes | | | +14.6 | | | +20.0 | | | +9.8 | | | +10.0 | |
Lipper Global Small-Cap Funds Average | | | +12.3 | | | +15.2 | | | +9.1 | | | +11.3 | |
*Since April 30, 1990.
All market indexes cited in this report are unmanaged and include reinvestment of all distributions. Returns for the S&P/Citigroup Global/World Indexes reflect a combination of two S&P/Citigroup Global indexes and two S&P/Citigroup World indexes that corresponds to the market capitalization ranges used by the fund during comparable periods. The S&P/Citigroup Global indexes, which track more than 8,000 publicly traded stocks around the world with market capitalizations less than $3 billion and less than $2 billion, were used from May 2006 to the present and May 2004 to April 2006, respectively. This index better reflects the fund’s investments in developing countries during this period. The S&P/Citigroup World indexes, which only include stocks in developed countries and reflect market capitalizations less than $1.5 billion and less than $1.2 billion, were used from 2000 to April 2004 and from 1990 to 1999, respectively.
The fund’s investment adviser waived 5% of its management fees from September 1, 2004, through March 31, 2005, and increased the waiver to 10% on April 1, 2005. Fund results shown reflect the waiver, without which they would have been lower. Please see the Financial Highlights table on pages 24 to 25 for details.
Please see page 3 for Class A share results with relevant sales charges deducted. Other share class results and important information can be found on page 27.
Investing outside the United States is subject to additional risks, such as currency fluctuations and political instability, which are detailed in the fund’s prospectus. Investing in small-capitalization stocks can involve greater risk than is customarily associated with investing in stocks of larger, more established companies.
Fellow shareholders:
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SMALLCAP World Fund recorded a healthy gain of 15.3% for its fiscal year ended September 30, 2006, exceeding its small-cap benchmarks as well as the unmanaged Standard & Poor’s 500 Composite Index, a measure of some of the largest U.S. companies. SMALLCAP’s result includes dividends of $0.41 per share and a capital gain of $0.68 per share paid in December 2005.
Funds in SMALLCAP’s peer group, as measured by the Lipper Global Small-Cap Funds Average, rose 12.3% in the same period, while the S&P/Citigroup Global Index gained 14.6%. This index tracks more than 8,000 publicly traded small-cap companies. The S&P 500 rose 10.8% in the same period.
During SMALLCAP’s fiscal year, equity markets around the globe continued to strengthen despite a sharp correction in May and June. Fears of rising interest rates, geopolitical risks and higher energy costs shook the market several times during the year, but investors appeared optimistic at the end of the period.
Global focus
We are pleased to report such a solid year. However, we caution that the seven-year market dominance of small-cap stocks over large-cap stocks in the United States could be nearing an inflection point. Small-cap stocks maintained their lead over large-cap stocks during the first half of the fund’s fiscal year; however, toward the end of the period, large-company stocks gained strength. The Russell 2000 Index, a proxy for small-company stocks, declined 4.6% in the second half of the fiscal year, and the S&P 500, a proxy for large-cap stocks, rose 4.1%. The valuation gap between the two asset classes is narrowing, and we think future returns from small caps could be more closely aligned with the total returns available in global equity markets as a whole.
That said, shifts in market sentiment do not alter the fund’s traditional strength: individual stock-picking. Our global team of analysts is well suited to this task, and we have faith that our painstaking, intensive research process will continue to uncover many potentially rewarding small-company stocks around the world. We look for small companies with bright futures, strong management and good potential for rewarding shareholders. Our investment professionals, who together speak dozens of languages and come from 34 countries, are on the ground investigating these opportunities.
SMALLCAP’s assets indeed have become more global. As of September 30, 2006, it had 51.6% of its assets invested outside the United States, compared to 32.5% in non-U.S. assets five years ago. Our focus on long-term investing is evident: of the stocks held throughout the entire 12-month period, 63% rose in value, 36% fell and 1% did not change.
[Begin Sidebar]
Where are SMALLCAP’s holdings located?
| | | | |
| | | | | |
| United States | | | 38.9 | % |
| Asia & Pacific Basin | | | 29.4 | |
| Europe | | | 14.0 | |
Other (including Canada & Latin America) | | | 8.2 | |
| Short-term securities & other assets less liabilities | | | 9.5 | |
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| | | | |
| | | | | |
| United States | | | 43.0 | % |
| Asia & Pacific Basin | | | 29.7 | |
| Europe | | | 12.3 | |
| Other (including Canada & Latin America) | | | 6.5 | |
| Short-term securities & other assets less liabilities | | | 8.5 | |
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[End Sidebar]
[Begin Sidebar]
Largest equity holdings | | Percent of net assets | |
| | | | | |
| OPTI Canada | | | 0.9 | % |
| Daegu Bank | | | 0.9 | |
| Kingboard Chemical Holdings | | | 0.9 | |
| Quicksilver Resources | | | 0.9 | |
| Pusan Bank | | | 0.8 | |
| Beckman Coulter | | | 0.7 | |
| Michaels Stores | | | 0.7 | |
| Samsung Engineering | | | 0.7 | |
| Corrections Corporation of America | | | 0.7 | |
| Medicis Pharmaceutical | | | 0.6 | |
[End Sidebar]
[Begin Sidebar]
SMALLCAP World Fund scours the globe for dynamic companies with strong financials and exceptional leaders.
[End Sidebar]
What helped the fund
One of SMALLCAP’s largest holdings is Samsung Engineering, which constructs petrochemical and oil-refining plants and has projects in China, India, Indonesia, Iran, Korea, Thailand, Taiwan and Vietnam. This stock helped the fund with its return of 126.6% for the period. Another of the fund’s large holdings is Kingboard Chemical Holdings, a Hong Kong-based manufacturer of laminates and printed circuit boards, which returned 46.1% in the period.
The fund had a large slice of its assets, 5.6%, invested in commercial-banking companies around the world. Many of these companies reported healthy increases, including our second-largest holding, Daegu Bank, up 37.4%, and our fifth-largest holding, Pusan Bank, up 13.5%; both of these banks are based in Korea. Also in this group are India-based HDFC Bank, up 29.0%, and National Bank of Pakistan, up 105.9%.
What hurt the fund
The oil and gas and consumable-fuels sector had difficulties toward the end of the fiscal year as oil prices decreased. Accounting for 5.1% of the portfolio, the industry held back the fund’s return. Oil-sands developer OPTI Canada — the fund’s largest holding— was down 6.0%, and U.S.-based natural-gas company Quicksilver Resources (the fourth-largest holding) lost 33.3%.
Several of our holdings were buffeted to different degrees by the shift toward large-cap stocks and other market fluctuations during the period. However, we have strong conviction in the fundamentals of our stock selections, and we viewed the dips as opportunities to add to positions in solid companies, which now have significantly more compelling valuations. In addition, we were able to add about 90 new stocks to the portfolio; we ended the fiscal year with 580 holdings, up from 490 at the end of fiscal 2005.
Looking ahead
SMALLCAP’s assets totaled $18.5 billion as of the fiscal year’s end, up from $14.7 billion a year ago, making it one of the largest small-cap funds in the world. However, we continue to find many interesting companies for the fund. For insight into a few of these companies, we invite you to read “Our constellation of small-cap stocks: Finding the brightest stars,” starting on page 4.
We are now building our fund’s foundation for the future, hiring more investment professionals and adding resources. We believe it is the strength of our people and the depth of their research that has allowed the fund to have good results, regardless of the general directions of markets. We caution, however, that the small-cap asset class has historically been a volatile one, as illustrated in the chart on page 3.
SMALLCAP World Fund has attracted more than 300,000 new shareholders during the past fiscal year, bringing the number of accounts under management to more than 1.5 million. We welcome all new shareholders and look forward to serving all our shareholders for many years to come. We thank you for your continued support.
Cordially,
/s/ Gordon Crawford
Gordon Crawford
Vice Chairman and
Principal Executive Officer
/s/ Gregory W. Wendt
Gregory W. Wendt
President
November 6, 2006
For current information about the fund, visit americanfunds.com.
The value of a long-term perspective
This chart shows how a $10,000 investment in SMALLCAP World Fund’s Class A shares grew from April 30, 1990 — the fund’s inception — through September 30, 2006, the end of the fund’s latest fiscal year.
As you can see, the $10,000 would have grown to $53,477 even after deducting the maximum 5.75% sales charge. This is significantly more than the $48,175 generated by the unmanaged S&P/Citigroup Global/World Indexes, which reflect a combination of two S&P/Citigroup Global indexes and two S&P/Citigroup World indexes that corresponds to the market capitalization ranges used by the fund during comparable periods. The S&P/Citigroup Global indexes, which track more than 8,000 publicly traded stocks around the world with market capitalizations less than $3 billion and less than $2 billion, were used from May 2006 to the present and May 2004 to April 2006, respectively. This index better reflects the fund’s investments in developing countries during this period. The S&P/Citigroup World indexes, which only include stocks in developed countries and reflect market capitalizations less than $1.5 billion and less than $1.2 billion, were used from 2000 to April 2004 and from 1990 to 1999, respectively. These are virtually the same parameters we have used when selecting stocks for the fund’s portfolio.
Fund figures reflect deduction of the maximum sales charge of 5.75% on the $10,000 investment.1 Thus, the net amount invested was $9,425.
Year ended Sept. 30 | | SMALLCAP World Fund | | S&P/Citigroup Global/World Indexes2,3 | | Consumer Price Index4 | |
| | | | | | | | | | | |
| 1990 | | $ | 8,288 | | $ | 8,918 | | $ | 10,295 | |
| 1991 | | $ | 11,307 | | $ | 11,210 | | $ | 10,644 | |
| 1992 | | $ | 11,640 | | $ | 10,999 | | $ | 10,962 | |
| 1993 | | $ | 15,418 | | $ | 14,341 | | $ | 11,257 | |
| 1994 | | $ | 16,744 | | $ | 15,396 | | $ | 11,590 | |
| 1995 | | $ | 19,856 | | $ | 16,896 | | $ | 11,885 | |
| 1996 | | $ | 22,877 | | $ | 18,911 | | $ | 12,242 | |
| 1997 | | $ | 28,689 | | $ | 21,459 | | $ | 12,506 | |
| 1998 | | $ | 22,749 | | $ | 17,204 | | $ | 12,692 | |
| 1999 | | $ | 32,172 | | $ | 21,980 | | $ | 13,026 | |
| 2000 | | $ | 44,532 | | $ | 24,845 | | $ | 13,476 | |
| 2001 | | $ | 24,516 | | $ | 19,352 | | $ | 13,832 | |
| 2002 | | $ | 23,121 | | $ | 18,799 | | $ | 14,042 | |
| 2003 | | $ | 30,626 | | $ | 26,252 | | $ | 14,368 | |
| 2004 | | $ | 36,736 | | $ | 32,669 | | $ | 14,732 | |
| 2005 | | $ | 46,392 | | $ | 42,041 | | $ | 15,423 | |
| 2006 | | $ | 53,477 | | $ | 48,175 | | $ | 15,741 | |
Past results are not predictive of results in future periods. The results shown are before taxes on fund distributions and sale of fund shares.
1 As outlined in the prospectus, the sales charge is reduced for accounts (and aggregated investments) of $25,000 or more and is eliminated for purchases of $1 million or more. There is no sales charge on dividends or capital gain distributions that are reinvested in additional shares.
2 These indexes are unmanaged and include reinvested distributions, but do not reflect sales charges, commissions or expenses.
3 High and low points between fiscal year-ends based on daily index values. For shareholder reports prior to 2005, only month-end values were available.
4 Computed from data supplied by the U.S. Department of Labor, Bureau of Labor Statistics.
5 For the period April 30, 1990 (when the fund began operations) through September 30, 1990.
Average annual total returns based on a $1,000 investment (for periods ended September 30, 2006)*
| | | 1 year | | 5 years | | 10 years | |
| | | | | | | | | | | |
Class A shares | | | +8.65 | % | | +15.50 | % | | +8.22 | % |
*Assumes reinvestment of all distributions and payment of the maximum 5.75% sales charge.
The fund’s investment adviser waived 5% of its management fees from September 1, 2004, through March 31, 2005, and increased the waiver to 10% on April 1, 2005. Fund results shown reflect the waiver, without which they would have been lower. Please see the Financial Highlights table on pages 24 to 25 for details.
[photo of a meadow - hills in the background - stars in the sky]
Our constellation of small-cap stocks:
Finding the brightest stars
In the world of small companies, opportunities often emerge quickly and in unexpected places. This keeps the investment professionals of SMALLCAP World Fund ever alert, searching for small-cap companies with bright futures. They look for value in unusual places and build the portfolio one company at a time, with distinctive reasons for choosing each of the fund’s 580 holdings. In the sidebars on the following pages, we’ll take a closer look at just a few of those companies.
Thorough research
The key for SMALLCAP World Fund, and for all of the American Funds, is selectivity at the company level. Small-capitalization stocks have had very strong results in the United States for the past several years, and some say they may be due for a short-term correction. However, our style of investing always has been to keenly focus on the underlying businesses, not on stock market trends. Rather than limiting our focus on regions or industries that seem to offer potential, we look for individual companies whose stocks show possible long-term value. The result of all these individual decisions is a portfolio that includes a very diverse group of nearly 600 securities representing 63 industries located in 41 countries. (See page 10 for a summary of our principal holdings.)
This wide variety across industries and geographic regions is indicative of the depth of research conducted by the fund’s investment professionals. How the investment professionals work to find these companies is noteworthy. “It’s the research behind the portfolio that really captures what we do well,” says Greg Wendt, president of the fund as well as one of its analysts. “More than the companies we pick, it’s how we pick them … how we find these companies, how we follow them.”
Underlying the selective strategy is intensive research. Decisions on investments — which companies to buy and when, which companies to sell and when — benefit from deep fundamental research. SMALLCAP portfolio counselors have the ability to call on research conducted by dozens of investment professionals around the world, people who live and work in the regions they research. These analysts are experts in their fields; many have decades of experience following companies both small and large in their industries.
[Begin Sidebar]
Apollo Hospitals Enterprise Ltd.
[photo of a hand on a stethoscope - stethoscope on a person's chest]
With 38 hospitals in India, several nursing colleges and hospital management schools, and a large chain of pharmacies, Apollo Hospitals is Asia’s largest healthcare group. “Apollo not only caters to wealthy and middle-income Indians, but it has an international business, with people from the United States, Britain and Australia traveling to India for procedures because the quality is high and the cost is low,” portfolio counselor Gordon Crawford says. Most of Apollo’s hospitals offer a range of services, including cardiology, oncology, nephrology, radiology and plastic surgery. The retail pharmacy business is the largest in India, with more than 200 outlets. Intellectual and emotional capital are core values for Apollo, its management reports. It incorporates a multidimensional “wellness ideology,” mixing state-of-the-art Western medicine with ancient healing methods such as yoga and acupuncture. Along with its goal of warm patient caregiving is its practice of top-notch hard science. For example, this year, Apollo joined with Johns Hopkins Medicine International to undertake a collaborative study on cardiovascular diseases.
[End Sidebar]
[Begin Sidebar]
The Knot, Inc.
[photo of chairs decorated with flowers - lined up on grass for a wedding]
The Knot, an online wedding content company, has been helping couples arrange the details of their nuptials for 10 years. Recently, it bought weddingchannel.com, doubling its market share in terms of site traffic and adding 1.6 million unique registered visitors. Although the company will keep its own brand, theknot.com, separate from weddingchannel.com, it hopes to save money through reduced operating expenses. Both sites offer articles, wedding-related shopping, an online wedding gift registry and a community of like-minded brides. The company publishes The KNOT Weddings magazine and other publications on wedding-related topics. It also owns a referral-based online dating services business called GreatBoyfriends.com. Expanding its toehold past the $74 billion wedding industry, the U.S.-based company recently launched The Nest magazine and a companion website for newlyweds, and it purchased the parenting resource the lilaguides.
[End Sidebar]
[Begin Sidebar]
Pantaloon Retail Ltd
[photo of shirts on hangers hanging on a rod]
The India-based clothing manufacturer and retailer Pantaloon is introducing India to the concept of megastores. It operates 16 Pantaloon-brand stores, 21 hypermarkets, 33 Food Bazaars and several other stores. “This is a small aggressive company bringing big-box retailing to a country that has grown up on mom-and-pop stores,” Gordon says. Pantaloon Retail opened its first “depot showroom” this year, selling books, music and gifts. Pantaloon recently hired Bollywood actors Bipasha Basu and Zayed Khan to provide a fresh message in promoting its retail brand, highlighting its up-to-date clothing lines that are refreshed every several weeks, not the usual twice a year.
[End Sidebar]
[Begin Sidebar]
Myogen
[photo of lab vials filled with liquid]
A U.S.-based biopharmaceutical company, Myogen is developing two drugs to treat cardiovascular disorders: ambrisentan for treating patients with pulmonary arterial hypertension and darusentan for patients with resistant hypertension. Just after the end of the fund’s fiscal year, drug maker Gilead Sciences announced plans to buy Myogen. Myogen’s drugs showed positive results in clinical trials. Indicative of ambrisentan’s strong potential, pharmaceutical giant GlaxoSmithKline has licensed the drug from Myogen to market in all territories outside of the United States, where Myogen retains exclusive rights. In exchange, Myogen has the rights to market Glaxo’s Flolan, for pulmonary arterial hypertension, in the United States. The once-daily ambrisentan treats the condition as well as an existing drug, the clinical trials showed, but it demonstrated less liver toxicity and fewer drug interactions. “So we think it looks like an easier, safer drug to take,” says SMALLCAP investment analyst Rick Beleson, who has researched the life sciences industry for more than two decades.
[End Sidebar]
The investment analysts scour the world for dynamic small companies with strong financials and exceptional leaders. They travel extensively to meet in person with company management, as well as scrutinize a company’s income statements, its cash flow and balance sheets. These analysts typically dig even deeper, exploring what customers and clients have to say about company managements and their products. This extensive study helps to uncover what we believe are the most promising smaller companies, whether in the United States or anywhere else.
“We have dedicated a large amount of resources to finding good small-cap companies,” says Brady L. Enright, a portfolio counselor for the fund. “We have about 25 analysts based around the world dedicated solely to finding great small-company ideas, as well as a large number of industry-specific analysts who are working on the fund.” The fund’s investment adviser, Capital Research and Management Company, is increasing the strength of both the core group of small-cap analysts, called the Small Company Research Team, as well as adding to the more than 50 industry analysts who contribute research and ideas about small companies in their fields of expertise.
A global effort
SMALLCAP is one of the few small-cap mutual funds that invests globally. Since it began on April 30, 1990, SMALLCAP has often invested a substantial portion of its assets in the United States because of the large number of small-cap opportunities. But as the world economy changes, the fund has the ability to change as well. Portfolio counselors can increase their investment in non-U.S. companies as they see fit, depending on the current situation.
The portfolio counselors in recent years found greater opportunities internationally. This shift can be seen in the percentage of the fund’s assets invested in non-U.S. companies: It was 51.6% as of September 30, 2006 — compared with 32.5% five years ago. This focus on global regions was rewarded, as small-cap stocks in non-U.S. markets have outperformed small-caps in the United States in recent years.
“We have analysts and portfolio counselors based in Tokyo, Hong Kong, Singapore, London and Geneva, so we can be close to the best companies, wherever they happen to be,” says SMALLCAP portfolio counselor Mark Denning. “With this kind of integrated research capability, we can shift our resources worldwide quite nimbly.”
[Begin Sidebar]
Copa Holdings
[photo of a plane on the tarmac - passenger loading ramp hooked up to the plane]
Through its two airline units, Copa Airlines and AeroRepública, Copa Holdings transports passengers and cargo across the Americas and the Caribbean. The carriers have a strategic partnership with U.S.-based Continental Airlines; through this alliance, the Panama-based airlines saw air traffic of 3 million passengers in 2005, up from 1.6 million in 2000, with many Copa passengers feeding into Continental’s U.S. and international routes. Copa Holdings held its initial public offering in 2005. Copa Airlines offers about 110 daily flights to about 30 destinations in 20 countries across the Americas and the Caribbean. AeroRepública, the second-largest domestic carrier in Colombia, provides service to 12 cities in Colombia, as well as international connectivity with Copa Airlines’ hub in Panama. AeroRepública, with an older fleet than Copa Airlines, recently announced a broad set of initiatives that includes new planes.
[End Sidebar]
[Begin Sidebar]
Geox S.p.A.
Italian shoemaker Geox combines innovative function with strong design in its “no sweat” footwear. Founder Mario Moretti Polegato patented a perforated rubber sole with a special waterproof membrane designed to allow feet to breathe yet remain dry. After failing to sell his idea to major shoe manufacturers, he formed his own company. Geox since has carved out a niche in the business by focusing on products featuring its “breathing” sole (which is patent-protected worldwide), becoming one of Italy’s largest shoe companies. The collections for men, women and children range from sneakers to more formal styles. Geox sells its products in more than 50 countries through a tailored distribution network of 230 single-brand Geox Shop stores and about 8,000 independent retail stores. New challenges will be continuing its expansion in the U.S. and East Asian markets and pushing into the luxury-shoe bracket and apparel goods.
[End Sidebar]
[Begin Sidebar]
Kingboard Chemical Holdings
[photo of circuits on a circuit board]
Kingboard Chemical, based in Hong Kong, manufactures chemicals, laminates and printed circuit boards in more than 40 factories in China. This includes copper foil, insulation and electroplating products, which are in high demand for use in consumer electronics and automotive products. The company raised some of its prices by up to 30% this year, management said, to offset increased costs of copper and other components. New projects under way include a methanol joint venture with government-owned China National Offshore Oil Corp. and a large investment in a caustic soda plant in China’s Hunan province. Caustic soda is used in making detergents, pulp and paper, and in textile dyeing and printing.
[End Sidebar]
[Begin Sidebar]
Cyrela Brazil Realty
[photo of the side of a building - looking up towards a balcony]
Residential housing developer Cyrela Brazil Realty has benefited from a stable and growing domestic economy — inflation is under control and the Brazilian central bank has been reducing the country’s benchmark interest rate. Cyrela has also benefited from a strong real estate market in Brazil. The price of a four-bedroom apartment in São Paolo jumped an average 34% in the past two years, while economic growth averaged 3.5%, according to Brazil’s real estate association. A government program to reduce mortgage costs could also increase home purchasing. “Personal mortgages are just starting in Brazil, and homeownership is really taking off there,” says Gordon Crawford, SMALLCAP portfolio counselor. Cyrela, which went public in 2005 after nearly three decades as a private company, is one of Brazil’s largest developers of luxury residential buildings. Its main focus is on luxury apartments in attractive locations, targeted mainly at upper- and middle-income residents of São Paolo and Rio de Janeiro. Cyrela also develops, sells and leases high-tech and luxury office buildings, and, to a lesser extent, leases and manages shopping centers.
[End Sidebar]
[Begin Sidebar]
Corrections Corporation of America
Corrections Corporation of America is a U.S.-based private prison company that operates more than 60 facilities. It offers not just beds and housing but inmate services including food, health care, education, vocational training and substance abuse counseling. “State governments hire the company when they find it more economical to step away from running and building their own jails,” said SMALLCAP portfolio counselor Brady L. Enright. The Department of Homeland Security’s secure border initiative, which includes funding for detention beds, should be favorable for private prison operators. Since the company opened its first private prison in Tennessee in 1984, federal and state governments have contracted with the company to build prisons and manage and house inmates. Prisons in the federal and state systems are operating at capacity or above, according to government statistics. “The private prison industry is strong,” says Brady.
[End Sidebar]
About 60% of the analysts who contribute their knowledge and research to SMALLCAP’s portfolio live in Europe and Asia, which is advantageous when analyzing any company outside the United States but is especially important when following smaller companies. “Being close geographically — intimately knowing the regions and the companies in them — is crucial in a world where situations can change quickly,” Mark says.
Many countries have projected growth rates that are much higher than the United States, and that increases the potential that some companies in those regions will see stronger growth. India, Brazil and China are examples. India has grown its gross domestic product (GDP) an average of about 6% per year in the past few years; it’s estimated that China has grown an average of more than 9%. By 2020, the U.S. government predicts the world’s population will be 19% Chinese, 18% Indian and only 4% American. Some economists project that Brazil, Russia, India and China may become among the most dominant economies by 2050, with more than 40% of the world’s population and a combined GDP of about $15 trillion dollars.
[Begin Sidebar]
The portfolio counselors
SMALLCAP World Fund’s portfolio counselors bring together 153 years of investment experience to managing your investment. Here are the years of experience* for these primary decision makers for the fund:
*As of December 2006
| Gordon Crawford | 35 years |
| Claudia P. Huntington | 34 years |
| Mark E. Denning | 24 years |
| J. Dale Harvey | 17 years |
| Brady L. Enright | 15 years |
| Jonathan Knowles | 15 years |
| J. Blair Frank | 13 years |
[End Sidebar]
“When you think about India and China, each with more than 1 billion people moving up the disposable income ladder, the opportunity for exceptional growth from successful small companies is very large,” says portfolio counselor Gordon Crawford. “The valuations are attractive, and we have the resources to search for which of those companies could be the right ones for the long term.”
The history of financial markets shows that they can change rapidly, something that has been particularly true in the last year. Through the ups and downs, we believe the companies that thrive tend to be well-managed, vibrant businesses such as those profiled in these pages. “These are some of the fascinating companies in this fund,” Gordon says. “But you could pick almost any company from our portfolio and it would be just as interesting.”
[Begin Sidebar]
[photo of a plate of food]
Applebee’s International, Inc.
Applebee’s Neighborhood Grill & Bar is a name familiar to many. The parent company develops, franchises and operates more than 1,800 casual dining restaurants in 49 states and 16 countries. The company operated about 480 of them in 2005; franchisees operated about 1,350. The restaurateur’s single-concept focus allows it to concentrate on profitable expansion, national marketing and economies of scale. It has expanded aggressively, opening about 100 restaurants a year for more than a decade. The company named a new CEO in August, Dave Goebel, who has been an executive at Applebee’s since 2001. Applebee’s recently created a partnership with Food Network celebrity chef Tyler Florence, offering new meals such as “Crispy Brick Chicken” and “Bruschetta Burger” as part of its goal to offer tasty food at affordable prices. It also has an alliance with Weight Watchers to offer branded alternative menu items to diet-conscious customers.
[End Sidebar]
[Begin Sidebar]
Schibsted ASA
[photo of a man working on a laptop - sitting at a sidewalk cafe]
The Norwegian Schibsted group is involved in newspapers, television, film, online advertising, mobile-phone content, books and magazines. It owns the largest newspaper in Norway, Estonia’s largest daily paper and half of Sweden’s leading newspaper. It also owns 20 Minutes, a free daily paper published in Madrid, Barcelona and Paris. Schibsted has forayed into Internet advertising across much of Europe. “This is one of the few ways to invest in the Internet in Europe,” Gordon says. “In the late 1990s, Schibsted recognized the fact that the world was changing. Using the newspapers as a base, it aggressively broke into Internet classified advertising and other Internet content and communities. It now completely dominates several areas in Europe.” Schibsted has subsidiary companies in Norway, Sweden, Denmark, Finland, France, Spain, Estonia, Latvia, Lithuania, Austria, Italy, Switzerland, Russia, Slovenia, Venezuela, Mexico, Brazil, Argentina, Colombia and Singapore.
[End Sidebar]
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.
Notes to financial statements
| 1. | Organization and significant accounting policies |
Organization - SMALLCAP World Fund, Inc. (the "fund") is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company. The fund seeks long-term growth of capital through investments in smaller companies in the U.S. and around the world.
The fund offers 14 share classes consisting of four retail share classes, five CollegeAmerica® savings plan share classes and five retirement plan share classes. The CollegeAmerica savings plan share classes (529-A, 529-B, 529-C, 529-E and 529-F) can be utilized to save for college education. The five retirement plan share classes (R-1, R-2, R-3, R-4 and R-5) are sold without any sales charges and do not carry any conversion rights. The fund’s share classes are described below:
Share class | Initial sales charge | Contingent deferred sales charge upon redemption | Conversion feature |
| Class A and 529-A | Up to 5.75% | None (except 1% for certain redemptions within one year of purchase without an initial sales charge) | None |
| Class B and 529-B | None | Declines from 5% to 0% for redemptions within six years of purchase | Class B and 529-B convert to Class A and 529-A, respectively, after eight years |
| Class C | None | 1% for redemptions within one year of purchase | Class C converts to Class F after 10 years |
| Class 529-C | None | 1% for redemptions within one year of purchase | None |
| Class 529-E | None | None | None |
| Class F and 529-F | None | None | None |
| Class R-1, R-2, R-3, R-4 and R-5 | None | None | None |
Holders of all share classes have equal pro rata rights to assets, dividends and liquidation proceeds. Each share class has identical voting rights, except for the exclusive right to vote on matters affecting only its class. Share classes have different fees and expenses ("class-specific fees and expenses"), primarily due to different arrangements for distribution, administrative and shareholder services. Differences in class-specific fees and expenses will result in differences in net investment income and, therefore, the payment of different per-share dividends by each class.
Significant accounting policies - The financial statements have been prepared to comply with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The following is a summary of the significant accounting policies followed by the fund:
Security valuation - Equity securities are valued at the official closing price of, or the last reported sale price on, the exchange or market on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Prices for each security are taken from the principal exchange or market in which the security trades. Fixed-income securities, including short-term securities purchased with more than 60 days left to maturity, are valued at prices obtained from an independent pricing service when such prices are available. However, where the investment adviser deems it appropriate, such securities will be valued at the mean quoted bid and asked prices (or bid prices, if asked prices are not available) or at prices for securities of comparable maturity, quality and type. Securities with both fixed-income and equity characteristics, or equity securities traded principally among fixed-income dealers, are valued in the manner described above for either equity or fixed-income securities, depending on which method is deemed most appropriate by the investment adviser. Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value. The value of short-term securities originally purchased with maturities greater than 60 days is determined based on an amortized value to par when they reach 60 days or less remaining to maturity. The ability of the issuers of the debt securities held by the fund to meet their obligations may be affected by economic developments in a specific industry, state or region. Securities and other assets for which representative market quotations are not readily available or are considered unreliable are fair valued as determined in good faith under procedures adopted by authority of the fund's board of directors. Various factors may be reviewed in order to make a good faith determination of a security’s fair value. These factors include, but are not limited to, the type and cost of the security; contractual or legal restrictions on resale of the security; relevant financial or business developments of the issuer; actively traded similar or related securities; conversion or exchange rights on the security; related corporate actions; and changes in overall market conditions. If events occur that materially affect the value of securities (particularly non-U.S. securities) between the close of trading in those securities and the close of regular trading on the New York Stock Exchange, the securities are fair valued.
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. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. Market discounts, premiums and original issue discounts on fixed-income securities are amortized daily over the expected life of the security.
Class allocations - Income, fees and expenses (other than class-specific fees and expenses) and realized and unrealized gains and losses are allocated daily among the various share classes based on their relative net assets. Class-specific fees and expenses, such as distribution, administrative and shareholder services, are charged directly to the respective share class.
Dividends and distributions to shareholders - Dividends and distributions paid to shareholders are recorded on the ex-dividend date.
Non-U.S. currency translation - Assets and liabilities, including investment securities, denominated in non-U.S. currencies are translated into U.S. dollars at the exchange rates in effect on the valuation date. Purchases and sales of investment securities and income and expenses are translated into U.S. dollars at the exchange rates on the dates of such transactions. In the accompanying financial statements, the effects of changes in non-U.S. exchange rates on investment securities are included with the net realized gain or loss and net unrealized appreciation or depreciation on investments. The realized gain or loss and unrealized appreciation or depreciation resulting from all other transactions denominated in non-U.S. currencies are disclosed separately.
Investment risk - The risks of investing in securities of non-U.S. issuers may include, but are not limited to, investment and repatriation restrictions; revaluation of currencies; adverse political, social and economic developments; government involvement in the private sector; limited and less reliable investor information; lack of liquidity; certain local tax law considerations; and limited regulation of the securities markets.
Taxation - Dividend and interest income is recorded net of non-U.S. taxes paid. Gains realized by the fund on the sale of securities in certain countries are subject to non-U.S. taxes. The fund records a liability based on unrealized gains to provide for potential non-U.S. taxes payable upon the sale of these securities. For the year ended September 30, 2006, non-U.S. taxes paid on realized gains were $1,982,000. As of September 30, 2006, non-U.S. taxes provided on unrealized gains were $9,403,000.
3. Federal income taxation and distributions
The fund complies with the requirements under Subchapter M of the Internal Revenue Code applicable to mutual funds and intends to distribute substantially all of its net taxable income and net capital gains each year. The fund is not subject to income taxes to the extent such distributions are made. Therefore, no federal income tax provision is required.
Distributions - Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as non-U.S. currency gains and losses; short-term capital gains and losses; capital losses related to sales of certain securities within 30 days of purchase; unrealized appreciation of certain investments in non-U.S. securities; cost of investments sold; non-U.S. taxes on capital gains; and income on certain investments. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes. The fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
During the year ended September 30, 2006, the fund reclassified $16,977,000 from undistributed net realized gain to distributions in excess of net investment income; and reclassified $114,000 from distributions in excess of net investment income and $90,000,000 from undistributed net realized gain to capital paid-in on the shares of capital stock to align financial reporting with tax reporting.
As of September 30, 2006, the tax basis components of distributable earnings, unrealized appreciation (depreciation) and cost of investments were as follows:
| (dollars in thousands) | |
Undistributed ordinary income | | $ | 396,784 | |
| Post-October non-U.S. currency loss deferrals (realized during the period November 1, 2005, through September 30, 2006)* | | | (1,930 | ) |
| Undistributed long-term capital gain | | | 1,272,620 | |
| Gross unrealized appreciation on investment securities | | | 4,332,137 | |
| Gross unrealized depreciation on investment securities | | | (1,004,439 | ) |
| Net unrealized appreciation on investment securities | | | 3,327,698 | |
| Cost of investment securities | | | 15,120,074 | |
| *These deferrals are considered incurred in the subsequent year | | | | |
The tax character of distributions paid to shareholders was as follows (dollars in thousands):
| | | Year ended September 30, 2006 | | Year ended September 30, 2005 | |
| | | | Ordinary income | | | Long-term capital gains | | | Total distributions paid | | | Ordinary income | | | Long-term capital gains | | | Total distributions paid | |
| Share class | | | | | | | | | | | | | | | | | | | |
| Class A | | $ | 149,401 | | $ | 247,786 | | $ | 397,187 | | $ | 109,685 | | | - | | $ | 109,685 | |
| Class B | | | 3,425 | | | 9,479 | | | 12,904 | | | 1,283 | | | - | | | 1,283 | |
| Class C | | | 3,828 | | | 9,872 | | | 13,700 | | | 1,395 | | | - | | | 1,395 | |
| Class F | | | 3,420 | | | 5,484 | | | 8,904 | | | 1,691 | | | - | | | 1,691 | |
| Class 529-A | | | 2,333 | | | 3,813 | | | 6,146 | | | 1,252 | | | - | | | 1,252 | |
| Class 529-B | | | 238 | | | 714 | | | 952 | | | 73 | | | - | | | 73 | |
| Class 529-C | | | 599 | | | 1,653 | | | 2,252 | | | 159 | | | - | | | 159 | |
| Class 529-E | | | 129 | | | 249 | | | 378 | | | 57 | | | - | | | 57 | |
| Class 529-F | | | 167 | | | 267 | | | 434 | | | 83 | | | - | | | 83 | |
| Class R-1 | | | 115 | | | 273 | | | 388 | | | 34 | | | - | | | 34 | |
| Class R-2 | | | 2,333 | | | 5,629 | | | 7,962 | | | 841 | | | - | | | 841 | |
| Class R-3 | | | 2,104 | | | 4,041 | | | 6,145 | | | 925 | | | - | | | 925 | |
| Class R-4 | | | 961 | | | 1,515 | | | 2,476 | | | 307 | | | - | | | 307 | |
| Class R-5 | | | 2,151 | | | 3,050 | | | 5,201 | | | 1,592 | | | - | | | 1,592 | |
| Total | | $ | 171,204 | | $ | 293,825 | | $ | 465,029 | | $ | 119,377 | | | - | | $ | 119,377 | |
4. Fees and transactions with related parties
Capital Research and Management Company ("CRMC"), the fund’s investment adviser, is the parent company of American Funds Service Company SM ("AFS"), the fund’s transfer agent, and American Funds Distributors, Inc.SM ("AFD"), the principal underwriter of the fund’s shares.
Investment advisory services -The Investment Advisory and Service Agreement with CRMC provides for monthly fees accrued daily. These fees are based on a declining series of annual rates beginning with 0.800% on the first billion of daily net assets and decreasing to 0.595% on such assets in excess of $27 billion. CRMC is currently waiving 10% of investment advisory services fees. During the year ended September 30, 2006, total investment advisory services fees waived by CRMC were $10,978,000. As a result, the fee shown on the accompanying financial statements of $109,780,000, which was equivalent to an annualized rate of 0.644%, was reduced to $98,802,000, or 0.579% of average daily net assets.
Class-specific fees and expenses - Expenses that are specific to individual share classes are accrued directly to the respective share class. The principal class-specific fees and expenses are described below:
Distribution services - The fund has adopted plans of distribution for all share classes, except Class R-5. Under the plans, the board of directors approves certain categories of expenses that are used to finance activities primarily intended to sell fund shares and service existing accounts. The plans provide for payments, based on an annualized percentage of average daily net assets, ranging from 0.30% to 1.00% as noted on the following page. In some cases, the board of directors has limited the amounts that may be paid to less than the maximum allowed by the plans. All share classes may use up to 0.25% of average daily net assets to pay service fees, or to compensate AFD for paying service fees, to firms that have entered into agreements with AFD to provide certain shareholder services. The remaining amounts available to be paid under each plan are paid to dealers to compensate them for their sales activities.
For Class A and 529-A, the board of directors has also approved the reimbursement of dealer and wholesaler commissions paid by AFD for certain shares sold without a sales charge. These classes reimburse AFD for amounts billed within the prior 15 months but only to the extent that the overall annual expense limit of 0.30% is not exceeded. As of September 30, 2006, there were no unreimbursed expenses subject to reimbursement for Class A or 529-A.
Share class | Currently approved limits | Plan limits |
| Class A | 0.30% | 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 September 30, 2006, the total administrative services fees paid by CRMC were $6,000, $675,000, and $9,000 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 CollegeAmerica plan. Although these amounts are included with administrative services fees on the accompanying financial statements, the Commonwealth of Virginia is not considered a related party.
Expenses under the agreements described above for the year ended September 30, 2006, were as follows (dollars in thousands):
Share class | Distribution services | Transfer agent services | Administrative services |
CRMC administrative services | Transfer agent services | Commonwealth of Virginia administrative services |
| Class A | $34,860 | $17,370 | Not applicable | Not applicable | Not applicable |
| Class B | 5,342 | 733 | Not applicable | Not applicable | Not applicable |
| Class C | 5,942 | Included in administrative services | $892 | $214 | Not applicable |
| Class F | 883 | 347 | 104 | Not applicable |
| Class 529-A | 421 | 247 | 53 | $ 237 |
| Class 529-B | 417 | 43 | 23 | 42 |
| Class 529-C | 982 | 103 | 47 | 99 |
| Class 529-E | 76 | 16 | 3 | 15 |
| Class 529-F | - | 17 | 4 | 16 |
| Class R-1 | 174 | 23 | 15 | Not applicable |
| Class R-2 | 2,588 | 512 | 1,597 | Not applicable |
| Class R-3 | 1,303 | 385 | 358 | Not applicable |
| Class R-4 | 248 | 144 | 10 | Not applicable |
| Class R-5 | Not applicable | 188 | 5 | Not applicable |
| Total | $53,236 | $18,103 | $2,917 | $2,433 | $409 |
Deferred directors’ compensation - Since the adoption of the deferred compensation plan in 1993, directors who are unaffiliated with CRMC may elect to defer the cash payment of part or all of their compensation. These deferred amounts, which remain as liabilities of the fund, are treated as if invested in shares of the fund or other American Funds. These amounts represent general, unsecured liabilities of the fund and vary according to the total returns of the selected funds. Directors’ compensation of $463,000, shown on the accompanying financial statements, includes $282,000 in current fees (either paid in cash or deferred) and a net increase of $181,000 in the value of the deferred amounts.
Affiliated officers and directors - Officers and certain directors of the fund are or may be considered to be affiliated with CRMC, AFS and AFD. No affiliated officers or directors received any compensation directly from the fund.
5. Capital share transactions
Capital share transactions in the fund were as follows (dollars and shares in thousands):
| Share class | | Sales* | | Reinvestments of dividends and distributions | | Repurchases* | | Net increase | |
| | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | |
Year ended September 30, 2006 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A | | $ | 2,685,423 | | | 71,453 | | $ | 381,591 | | | 10,807 | | $ | (1,974,783 | ) | | (52,904 | ) | $ | 1,092,231 | | | 29,356 | |
| Class B | | | 122,373 | | | 3,363 | | | 12,552 | | | 367 | | | (65,243 | ) | | (1,807 | ) | | 69,682 | | | 1,923 | |
| Class C | | | 265,083 | | | 7,319 | | | 13,251 | | | 390 | | | (96,579 | ) | | (2,688 | ) | | 181,755 | | | 5,021 | |
| Class F | | | 226,333 | | | 6,037 | | | 7,921 | | | 225 | | | (76,064 | ) | | (2,044 | ) | | 158,190 | | | 4,218 | |
| Class 529-A | | | 88,290 | | | 2,366 | | | 6,144 | | | 175 | | | (13,640 | ) | | (365 | ) | | 80,794 | | | 2,176 | |
| Class 529-B | | | 9,920 | | | 271 | | | 952 | | | 28 | | | (1,623 | ) | | (44 | ) | | 9,249 | | | 255 | |
| Class 529-C | | | 33,944 | | | 929 | | | 2,252 | | | 65 | | | (7,790 | ) | | (213 | ) | | 28,406 | | | 781 | |
| Class 529-E | | | 5,862 | | | 159 | | | 378 | | | 11 | | | (1,047 | ) | | (28 | ) | | 5,193 | | | 142 | |
| Class 529-F | | | 6,354 | | | 171 | | | 434 | | | 12 | | | (1,707 | ) | | (46 | ) | | 5,081 | | | 137 | |
| Class R-1 | | | 11,607 | | | 318 | | | 387 | | | 11 | | | (4,858 | ) | | (134 | ) | | 7,136 | | | 195 | |
| Class R-2 | | | 195,251 | | | 5,318 | | | 7,956 | | | 229 | | | (80,898 | ) | | (2,203 | ) | | 122,309 | | | 3,344 | |
| Class R-3 | | | 169,804 | | | 4,569 | | | 6,115 | | | 175 | | | (69,063 | ) | | (1,871 | ) | | 106,856 | | | 2,873 | |
| Class R-4 | | | 68,594 | | | 1,847 | | | 2,476 | | | 71 | | | (21,588 | ) | | (576 | ) | | 49,482 | | | 1,342 | |
| Class R-5 | | | 74,700 | | | 1,998 | | | 4,905 | | | 138 | | | (25,944 | ) | | (687 | ) | | 53,661 | | | 1,449 | |
| Total net increase | | | | | | | | | | | | | | | | | | | | | | | | | |
| (decrease) | | $ | 3,963,538 | | | 106,118 | | $ | 447,314 | | | 12,704 | | $ | (2,440,827 | ) | | (65,610 | ) | $ | 1,970,025 | | | 53,212 | |
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Year ended September 30, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A | | $ | 1,764,979 | | | 56,402 | | $ | 104,783 | | | 3,514 | | $ | (1,571,969 | ) | | (50,360 | ) | $ | 297,793 | | | 9,556 | |
| Class B | | | 82,691 | | | 2,739 | | | 1,249 | | | 43 | | | (42,411 | ) | | (1,396 | ) | | 41,529 | | | 1,386 | |
| Class C | | | 157,635 | | | 5,220 | | | 1,347 | | | 47 | | | (54,448 | ) | | (1,800 | ) | | 104,534 | | | 3,467 | |
| Class F | | | 123,722 | | | 3,962 | | | 1,525 | | | 51 | | | (41,375 | ) | | (1,331 | ) | | 83,872 | | | 2,682 | |
| Class 529-A | | | 56,362 | | | 1,807 | | | 1,252 | | | 42 | | | (6,921 | ) | | (220 | ) | | 50,693 | | | 1,629 | |
| Class 529-B | | | 7,446 | | | 245 | | | 73 | | | 2 | | | (1,115 | ) | | (36 | ) | | 6,404 | | | 211 | |
| Class 529-C | | | 23,292 | | | 760 | | | 159 | | | 6 | | | (3,018 | ) | | (98 | ) | | 20,433 | | | 668 | |
| Class 529-E | | | 3,861 | | | 125 | | | 57 | | | 2 | | | (311 | ) | | (10 | ) | | 3,607 | | | 117 | |
| Class 529-F | | | 3,591 | | | 116 | | | 82 | | | 3 | | | (547 | ) | | (17 | ) | | 3,126 | | | 102 | |
| Class R-1 | | | 6,890 | | | 224 | | | 34 | | | 1 | | | (1,901 | ) | | (62 | ) | | 5,023 | | | 163 | |
| Class R-2 | | | 127,485 | | | 4,134 | | | 841 | | | 29 | | | (42,526 | ) | | (1,375 | ) | | 85,800 | | | 2,788 | |
| Class R-3 | | | 101,847 | | | 3,299 | | | 925 | | | 31 | | | (29,495 | ) | | (950 | ) | | 73,277 | | | 2,380 | |
| Class R-4 | | | 46,825 | | | 1,502 | | | 307 | | | 10 | | | (10,087 | ) | | (321 | ) | | 37,045 | | | 1,191 | |
| Class R-5 | | | 25,084 | | | 791 | | | 1,405 | | | 47 | | | (15,770 | ) | | (506 | ) | | 10,719 | | | 332 | |
| Total net increase | | | | | | | | | | | | | | | | | | | | | | | | | |
| (decrease) | | $ | 2,531,710 | | | 81,326 | | $ | 114,039 | | | 3,828 | | $ | (1,821,894 | ) | | (58,482 | ) | $ | 823,855 | | | 26,672 | |
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| *Includes exchanges between share classes of the fund. | | | | | | | | | | | | | | | | | | | | | |
6. Investment transactions
The fund made purchases and sales of investment securities, excluding short-term securities, of $8,035,940,000 and $6,944,375,000, respectively, during the year ended September 30, 2006.
Financial highlights(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | Income (loss) from investment operations(2) | | | Dividends and distributions | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | Net asset value, beginning of period | | | Net investment income (loss | ) | | | | | Net gains (losses) on securities (both realized and unrealized | ) | | Total from investment operations | | | Dividends (from net investment income | ) | | Distributions (from capital gains | ) | | Total dividends and distributions | | | Net asset value, end of period | | | Total return(3 | ) | | Net assets, end of period (in millions | ) | | | | | Ratio of expenses to average net assets before reimbursements/ waivers | | | | | | Ratio of expenses to average net assets after reimbursements/ waivers | | | (4 | ) | | Ratio of net income (loss) to average net assets | | | | |
Class A: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | $ | 34.77 | | $ | .25 | | | | | $ | 4.94 | | $ | 5.19 | | $ | (.41 | ) | $ | (.68 | ) | $ | (1.09 | ) | $ | 38.87 | | | 15.27 | % | $ | 15,167 | | | | | | 1.08 | % | | | | | 1.01 | % | | | | | .68 | % | | | |
| Year ended 9/30/2005 | | | | | | 27.82 | | | .24 | | | | | | 7.02 | | | 7.26 | | | (.31 | ) | | - | | | (.31 | ) | | 34.77 | | | 26.28 | | | 12,544 | | | | | | 1.09 | | | | | | 1.04 | | | | | | .76 | | | | |
| Year ended 9/30/2004 | | | | | | 23.22 | | | .02 | | | | | | 4.61 | | | 4.63 | | | (.03 | ) | | - | | | (.03 | ) | | 27.82 | | | 19.95 | | | 9,771 | | | | | | 1.12 | | | | | | 1.12 | | | | | | .06 | | | | |
| Year ended 9/30/2003 | | | | | | 17.53 | | | (.01 | ) | | | | | 5.70 | | | 5.69 | | | - | | | - | | | - | | | 23.22 | | | 32.46 | | | 7,833 | | | | | | 1.19 | | | | | | 1.19 | | | | | | (.07 | ) | | | |
| Year ended 9/30/2002 | | | | | | 18.62 | | | (.07 | ) | | | | | (.98 | ) | | (1.05 | ) | | (.04 | ) | | - | | | (.04 | ) | | 17.53 | | | (5.69 | ) | | 6,283 | | | | | | 1.17 | | | | | | 1.17 | | | | | | (.32 | ) | | | |
Class B: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | | 33.59 | | | (.03 | ) | | | | | 4.78 | | | 4.75 | | | (.25 | ) | | (.68 | ) | | (.93 | ) | | 37.41 | | | 14.39 | | | 581 | | | | | | 1.85 | | | | | | 1.78 | | | | | | (.09 | ) | | | |
| Year ended 9/30/2005 | | | | | | 26.90 | | | - | | | (5 | ) | | 6.79 | | | 6.79 | | | (.10 | ) | | - | | | (.10 | ) | | 33.59 | | | 25.31 | | | 457 | | | | | | 1.86 | | | | | | 1.81 | | | | | | (.01 | ) | | | |
| Year ended 9/30/2004 | | | | | | 22.60 | | | (.18 | ) | | | | | 4.48 | | | 4.30 | | | - | | | - | | | - | | | 26.90 | | | 19.03 | | | 329 | | | | | | 1.88 | | | | | | 1.88 | | | | | | (.69 | ) | | | |
| Year ended 9/30/2003 | | | | | | 17.20 | | | (.16 | ) | | | | | 5.56 | | | 5.40 | | | - | | | - | | | - | | | 22.60 | | | 31.40 | | | 201 | | | | | | 1.97 | | | | | | 1.97 | | | | | | (.85 | ) | | | |
| Year ended 9/30/2002 | | | | | | 18.38 | | | (.23 | ) | | | | | (.95 | ) | | (1.18 | ) | | - | | | - | | | - | | | 17.20 | | | (6.42 | ) | | 118 | | | | | | 1.95 | | | | | | 1.95 | | | | | | (1.09 | ) | | | |
Class C: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | | 33.45 | | | (.04 | ) | | | | | 4.74 | | | 4.70 | | | (.26 | ) | | (.68 | ) | | (.94 | ) | | 37.21 | | | 14.33 | | | 696 | | | | | | 1.89 | | | | | | 1.83 | | | | | | (.12 | ) | | | |
| Year ended 9/30/2005 | | | | | | 26.82 | | | (.02 | ) | | | | | 6.78 | | | 6.76 | | | (.13 | ) | | - | | | (.13 | ) | | 33.45 | | | 25.27 | | | 457 | | | | | | 1.90 | | | | | | 1.85 | | | | | | (.05 | ) | | | |
| Year ended 9/30/2004 | | | | | | 22.54 | | | (.19 | ) | | | | | 4.47 | | | 4.28 | | | - | | | - | | | - | | | 26.82 | | | 18.99 | | | 274 | | | | | | 1.92 | | | | | | 1.91 | | | | | | (.71 | ) | | | |
| Year ended 9/30/2003 | | | | | | 17.15 | | | (.16 | ) | | | | | 5.55 | | | 5.39 | | | - | | | - | | | - | | | 22.54 | | | 31.43 | | | 124 | | | | | | 1.97 | | | | | | 1.97 | | | | | | (.85 | ) | | | |
| Year ended 9/30/2002 | | | | | | 18.33 | | | (.22 | ) | | | | | (.95 | ) | | (1.17 | ) | | (.01 | ) | | - | | | (.01 | ) | | 17.15 | | | (6.42 | ) | | 56 | | | | | | 1.96 | | | | | | 1.96 | | | | | | (1.08 | ) | | | |
Class F: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | | 34.58 | | | .26 | | | | | | 4.91 | | | 5.17 | | | (.42 | ) | | (.68 | ) | | (1.10 | ) | | 38.65 | | | 15.28 | | | 446 | | | | | | 1.08 | | | | | | 1.01 | | | | | | .70 | | | | |
| Year ended 9/30/2005 | | | | | | 27.70 | | | .23 | | | | | | 6.98 | | | 7.21 | | | (.33 | ) | | - | | | (.33 | ) | | 34.58 | | | 26.23 | | | 253 | | | | | | 1.12 | | | | | | 1.07 | | | | | | .72 | | | | |
| Year ended 9/30/2004 | | | | | | 23.16 | | | .02 | | | | | | 4.58 | | | 4.60 | | | (.06 | ) | | - | | | (.06 | ) | | 27.70 | | | 19.90 | | | 128 | | | | | | 1.15 | | | | | | 1.14 | | | | | | .06 | | | | |
| Year ended 9/30/2003 | | | | | | 17.48 | | | (.01 | ) | | | | | 5.69 | | | 5.68 | | | - | | | - | | | - | | | 23.16 | | | 32.49 | | | 57 | | | | | | 1.18 | | | | | | 1.18 | | | | | | (.06 | ) | | | |
| Year ended 9/30/2002 | | | | | | 18.60 | | | (.07 | ) | | | | | (.98 | ) | | (1.05 | ) | | (.07 | ) | | - | | | (.07 | ) | | 17.48 | | | (5.73 | ) | | 24 | | | | | | 1.20 | | | | | | 1.20 | | | | | | (.32 | ) | | | |
Class 529-A: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | | 34.68 | | | .25 | | | | | | 4.93 | | | 5.18 | | | (.42 | ) | | (.68 | ) | | (1.10 | ) | | 38.76 | | | 15.25 | | | 284 | | | | | | 1.11 | | | | | | 1.05 | | | | | | .66 | | | | |
| Year ended 9/30/2005 | | | | | | 27.79 | | | .22 | | | | | | 7.00 | | | 7.22 | | | (.33 | ) | | - | | | (.33 | ) | | 34.68 | | | 26.19 | | | 178 | | | | | | 1.14 | | | | | | 1.08 | | | | | | .71 | | | | |
| Year ended 9/30/2004 | | | | | | 23.24 | | | .02 | | | | | | 4.60 | | | 4.62 | | | (.07 | ) | | - | | | (.07 | ) | | 27.79 | | | 19.90 | | | 97 | | | | | | 1.14 | | | | | | 1.14 | | | | | | .06 | | | | |
| Year ended 9/30/2003 | | | | | | 17.53 | | | .01 | | | | | | 5.70 | | | 5.71 | | | - | | | - | | | - | | | 23.24 | | | 32.57 | | | 42 | | | | | | 1.11 | | | | | | 1.11 | | | | | | .03 | | | | |
| Period from 2/19/2002 to 9/30/2002 | | | | | | 21.68 | | | (.03 | ) | | | | | (4.12 | ) | | (4.15 | ) | | - | | | - | | | - | | | 17.53 | | | (19.14 | ) | | 15 | | | | | | 1.18 | | | (6 | ) | | 1.18 | | | (6 | ) | | (.25 | ) | | (6 | ) |
Class 529-B: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | | 33.93 | | | (.07 | ) | | | | | 4.82 | | | 4.75 | | | (.23 | ) | | (.68 | ) | | (.91 | ) | | 37.77 | | | 14.24 | | | 48 | | | | | | 1.97 | | | | | | 1.90 | | | | | | (.20 | ) | | | |
| Year ended 9/30/2005 | | | | | | 27.20 | | | (.05 | ) | | | | | 6.87 | | | 6.82 | | | (.09 | ) | | - | | | (.09 | ) | | 33.93 | | | 25.11 | | | 34 | | | | | | 2.02 | | | | | | 1.96 | | | | | | (.17 | ) | | | |
| Year ended 9/30/2004 | | | | | | 22.88 | | | (.23 | ) | | | | | 4.55 | | | 4.32 | | | - | | | - | | | - | | | 27.20 | | | 18.88 | | | 22 | | | | | | 2.04 | | | | | | 2.04 | | | | | | (.84 | ) | | | |
| Year ended 9/30/2003 | | | | | | 17.43 | | | (.19 | ) | | | | | 5.64 | | | 5.45 | | | - | | | - | | | - | | | 22.88 | | | 31.27 | | | 10 | | | | | | 2.09 | | | | | | 2.09 | | | | | | (.95 | ) | | | |
| Period from 2/20/2002 to 9/30/2002 | | | | | | 21.82 | | | (.14 | ) | | | | | (4.25 | ) | | (4.39 | ) | | - | | | - | | | - | | | 17.43 | | | (20.12 | ) | | 3 | | | | | | 2.08 | | | (6 | ) | | 2.08 | | | (6 | ) | | (1.15 | ) | | (6 | ) |
Class 529-C: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | | 33.94 | | | (.07 | ) | | | | | 4.83 | | | 4.76 | | | (.25 | ) | | (.68 | ) | | (.93 | ) | | 37.77 | | | 14.27 | | | 115 | | | | | | 1.96 | | | | | | 1.90 | | | | | | (.19 | ) | | | |
| Year ended 9/30/2005 | | | | | | 27.21 | | | (.05 | ) | | | | | 6.87 | | | 6.82 | | | (.09 | ) | | - | | | (.09 | ) | | 33.94 | | | 25.13 | | | 77 | | | | | | 2.00 | | | | | | 1.95 | | | | | | (.16 | ) | | | |
| Year ended 9/30/2004 | | | | | | 22.89 | | | (.22 | ) | | | | | 4.54 | | | 4.32 | | | - | | | - | | | - | | | 27.21 | | | 18.87 | | | 43 | | | | | | 2.03 | | | | | | 2.03 | | | | | | (.83 | ) | | | |
| Year ended 9/30/2003 | | | | | | 17.44 | | | (.18 | ) | | | | | 5.63 | | | 5.45 | | | - | | | - | | | - | | | 22.89 | | | 31.25 | | | 20 | | | | | | 2.07 | | | | | | 2.07 | | | | | | (.94 | ) | | | |
| Period from 2/20/2002 to 9/30/2002 | | | | | | 21.82 | | | (.14 | ) | | | | | (4.24 | ) | | (4.38 | ) | | - | | | - | | | - | | | 17.44 | | | (20.07 | ) | | 7 | | | | | | 2.05 | | | (6 | ) | | 2.05 | | | (6 | ) | | (1.12 | ) | | (6 | ) |
Class 529-E: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | | 34.42 | | | .12 | | | | | | 4.89 | | | 5.01 | | | (.35 | ) | | (.68 | ) | | (1.03 | ) | | 38.40 | | | 14.86 | | | 18 | | | | | | 1.44 | | | | | | 1.37 | | | | | | .34 | | | | |
| Year ended 9/30/2005 | | | | | | 27.58 | | | .12 | | | | | | 6.96 | | | 7.08 | | | (.24 | ) | | - | | | (.24 | ) | | 34.42 | | | 25.81 | | | 12 | | | | | | 1.47 | | | | | | 1.42 | | | | | | .37 | | | | |
| Year ended 9/30/2004 | | | | | | 23.09 | | | (.08 | ) | | | | | 4.59 | | | 4.51 | | | (.02 | ) | | - | | | (.02 | ) | | 27.58 | | | 19.52 | | | 6 | | | | | | 1.50 | | | | | | 1.49 | | | | | | (.29 | ) | | | |
| Year ended 9/30/2003 | | | | | | 17.50 | | | (.07 | ) | | | | | 5.66 | | | 5.59 | | | - | | | - | | | - | | | 23.09 | | | 31.94 | | | 3 | | | | | | 1.53 | | | | | | 1.53 | | | | | | (.38 | ) | | | |
| Period from 3/15/2002 to 9/30/2002 | | | | | | 23.21 | | | (.06 | ) | | | | | (5.65 | ) | | (5.71 | ) | | - | | | - | | | - | | | 17.50 | | | (24.60 | ) | | 1 | | | | | | 1.51 | | | (6 | ) | | 1.51 | | | (6 | ) | | (.60 | ) | | (6 | ) |
Class 529-F: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | | 34.64 | | | .31 | | | | | | 4.93 | | | 5.24 | | | (.43 | ) | | (.68 | ) | | (1.11 | ) | | 38.77 | | | 15.44 | | | 19 | | | | | | .94 | | | | | | .87 | | | | | | .83 | | | | |
| Year ended 9/30/2005 | | | | | | 27.72 | | | .23 | | | | | | 6.99 | | | 7.22 | | | (.30 | ) | | - | | | (.30 | ) | | 34.64 | | | 26.22 | | | 12 | | | | | | 1.11 | | | | | | 1.06 | | | | | | .74 | | | | |
| Year ended 9/30/2004 | | | | | | 23.20 | | | (.01 | ) | | | | | 4.60 | | | 4.59 | | | (.07 | ) | | - | | | (.07 | ) | | 27.72 | | | 19.81 | | | 7 | | | | | | 1.25 | | | | | | 1.24 | | | | | | (.04 | ) | | | |
| Year ended 9/30/2003 | | | | | | 17.53 | | | (.02 | ) | | | | | 5.69 | | | 5.67 | | | - | | | - | | | - | | | 23.20 | | | 32.34 | | | 3 | | | | | | 1.27 | | | | | | 1.27 | | | | | | (.10 | ) | | | |
| Period from 9/17/2002 to 9/30/2002 | | | | | | 18.24 | | | - | | | (5 | ) | | (.71 | ) | | (.71 | ) | | - | | | - | | | - | | | 17.53 | | | (3.89 | ) | | - | | | (7 | ) | | .04 | | | | | | .04 | | | | | | .01 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Class R-1: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | $ | 34.07 | | $ | (.04 | ) | | | | $ | 4.83 | | $ | 4.79 | | $ | (.29 | ) | $ | (.68 | ) | $ | (.97 | ) | $ | 37.89 | | | 14.31 | % | $ | 21 | | | | | | 1.92 | % | | | | | 1.82 | % | | | | | (0.11 | )% | | | |
| Year ended 9/30/2005 | | | | | | 27.34 | | | (.01 | ) | | | | | 6.90 | | | 6.89 | | | (.16 | ) | | - | | | (.16 | ) | | 34.07 | | | 25.27 | | | 12 | | | | | | 1.97 | | | | | | 1.85 | | | | | | (.05 | ) | | | |
| Year ended 9/30/2004 | | | | | | 23.00 | | | (.19 | ) | | | | | 4.55 | | | 4.36 | | | (.02 | ) | | - | | | (.02 | ) | | 27.34 | | | 18.98 | | | 6 | | | | | | 2.01 | | | | | | 1.91 | | | | | | (.71 | ) | | | |
| Year ended 9/30/2003 | | | | | | 17.49 | | | (.16 | ) | | | | | 5.67 | | | 5.51 | | | - | | | - | | | - | | | 23.00 | | | 31.50 | | | 2 | | | | | | 2.43 | | | | | | 1.93 | | | | | | (.78 | ) | | | |
| Period from 6/19/2002 to 9/30/2002 | | | | | | 21.60 | | | (.04 | ) | | | | | (4.07 | ) | | (4.11 | ) | | - | | | - | | | - | | | 17.49 | | | (19.03 | ) | | - | | | (7 | ) | | 7.56 | | | | | | .54 | | | | | | (.22 | ) | | | |
Class R-2: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | | 34.09 | | | (.03 | ) | | | | | 4.83 | | | 4.80 | | | (.28 | ) | | (.68 | ) | | (.96 | ) | | 37.93 | | | 14.35 | | | 414 | | | | | | 2.06 | | | | | | 1.80 | | | | | | (.09 | ) | | | |
| Year ended 9/30/2005 | | | | | | 27.36 | | | (.01 | ) | | | | | 6.90 | | | 6.89 | | | (.16 | ) | | - | | | (.16 | ) | | 34.09 | | | 25.28 | | | 258 | | | | | | 2.17 | | | | | | 1.82 | | | | | | (.03 | ) | | | |
| Year ended 9/30/2004 | | | | | | 23.00 | | | (.18 | ) | | | | | 4.56 | | | 4.38 | | | (.02 | ) | | - | | | (.02 | ) | | 27.36 | | | 19.05 | | | 131 | | | | | | 2.30 | | | | | | 1.88 | | | | | | (.67 | ) | | | |
| Year ended 9/30/2003 | | | | | | 17.49 | | | (.15 | ) | | | | | 5.66 | | | 5.51 | | | - | | | - | | | - | | | 23.00 | | | 31.50 | | | 46 | | | | | | 2.59 | | | | | | 1.89 | | | | | | (.75 | ) | | | |
| Period from 5/31/2002 to 9/30/2002 | | | | | | 22.62 | | | (.05 | ) | | | | | (5.08 | ) | | (5.13 | ) | | - | | | - | | | - | | | 17.49 | | | (22.68 | ) | | 2 | | | | | | .85 | | | | | | .63 | | | | | | (.29 | ) | | | |
Class R-3: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | | 34.39 | | | .11 | | | | | | 4.87 | | | 4.98 | | | (.35 | ) | | (.68 | ) | | (1.03 | ) | | 38.34 | | | 14.82 | | | 319 | | | | | | 1.49 | | | | | | 1.42 | | | | | | .30 | | | | |
| Year ended 9/30/2005 | | | | | | 27.58 | | | .11 | | | | | | 6.96 | | | 7.07 | | | (.26 | ) | | - | | | (.26 | ) | | 34.39 | | | 25.75 | | | 188 | | | | | | 1.51 | | | | | | 1.44 | | | | | | .36 | | | | |
| Year ended 9/30/2004 | | | | | | 23.12 | | | (.08 | ) | | | | | 4.59 | | | 4.51 | | | (.05 | ) | | - | | | (.05 | ) | | 27.58 | | | 19.52 | | | 85 | | | | | | 1.55 | | | | | | 1.49 | | | | | | (.28 | ) | | | |
| Year ended 9/30/2003 | | | | | | 17.51 | | | (.07 | ) | | | | | 5.68 | | | 5.61 | | | - | | | - | | | - | | | 23.12 | | | 32.04 | | | 30 | | | | | | 1.67 | | | | | | 1.51 | | | | | | (.37 | ) | | | |
| Period from 6/20/2002 to 9/30/2002 | | | | | | 21.43 | | | (.02 | ) | | | | | (3.90 | ) | | (3.92 | ) | | - | | | - | | | - | | | 17.51 | | | (18.29 | ) | | 2 | | | | | | .52 | | | | | | .42 | | | | | | (.11 | ) | | | |
Class R-4: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | | 34.68 | | | .25 | | | | | | 4.91 | | | 5.16 | | | (.43 | ) | | (.68 | ) | | (1.11 | ) | | 38.73 | | | 15.20 | | | 126 | | | | | | 1.11 | | | | | | 1.04 | | | | | | .67 | | | | |
| Year ended 9/30/2005 | | | | | | 27.79 | | | .23 | | | | | | 7.01 | | | 7.24 | | | (.35 | ) | | - | | | (.35 | ) | | 34.68 | | | 26.25 | | | 67 | | | | | | 1.12 | | | | | | 1.06 | | | | | | .74 | | | | |
| Year ended 9/30/2004 | | | | | | 23.22 | | | .02 | | | | | | 4.61 | | | 4.63 | | | (.06 | ) | | - | | | (.06 | ) | | 27.79 | | | 19.95 | | | 20 | | | | | | 1.13 | | | | | | 1.13 | | | | | | .07 | | | | |
| Year ended 9/30/2003 | | | | | | 17.53 | | | - | | | (5 | ) | | 5.69 | | | 5.69 | | | - | | | - | | | - | | | 23.22 | | | 32.46 | | | 10 | | | | | | 1.17 | | | | | | 1.16 | | | | | | (.02 | ) | | | |
| Period from 7/24/2002 to 9/30/2002 | | | | | | 18.55 | | | (.01 | ) | | | | | (1.01 | ) | | (1.02 | ) | | - | | | - | | | - | | | 17.53 | | | (5.50 | ) | | - | | | (7 | ) | | .70 | | | | | | .21 | | | | | | (.03 | ) | | | |
Class R-5: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended 9/30/2006 | | | | | | 34.93 | | | .36 | | | | | | 4.97 | | | 5.33 | | | (.48 | ) | | (.68 | ) | | (1.16 | ) | | 39.10 | | | 15.60 | | | 216 | | | | | | .80 | | | | | | .74 | | | | | | .97 | | | | |
| Year ended 9/30/2005 | | | | | | 27.97 | | | .33 | | | | | | 7.05 | | | 7.38 | | | (.42 | ) | | - | | | (.42 | ) | | 34.93 | | | 26.62 | | | 142 | | | | | | .81 | | | | | | .76 | | | | | | 1.04 | | | | |
| Year ended 9/30/2004 | | | | | | 23.33 | | | .10 | | | | | | 4.64 | | | 4.74 | | | (.10 | ) | | - | | | (.10 | ) | | 27.97 | | | 20.34 | | | 105 | | | | | | .82 | | | | | | .81 | | | | | | .36 | | | | |
| Year ended 9/30/2003 | | | | | | 17.55 | | | .05 | | | | | | 5.73 | | | 5.78 | | | - | | | - | | | - | | | 23.33 | | | 32.93 | | | 72 | | | | | | .83 | | | | | | .83 | | | | | | .28 | | | | |
| Period from 5/15/2002 to 9/30/2002 | | | | | | 23.36 | | | - | | | (5 | ) | | (5.81 | ) | | (5.81 | ) | | - | | | - | | | - | | | 17.55 | | | (24.87 | ) | | 53 | | | | | | .31 | | | | | | .31 | | | | | | .01 | | | | |
| | | | Year ended September 30 | |
| | | | 2006 | | | 2005 | | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | | | | | | | | |
| Portfolio turnover rate for all classes of shares | | | 45 | % | | 45 | % | | 48 | % | | 49 | % | | 51 | % |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of SMALLCAP World Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of SMALLCAP World Fund, Inc. (the “Fund”), including the summary investment portfolio, as of September 30, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2006, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of SMALLCAP World Fund, Inc. as of September 30, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Costa Mesa, California
November 8, 2006
Other share class results unaudited
Class B, Class C, Class F and Class 529
Figures shown are past results and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. For current information and month-end results, visit americanfunds.com.
Average annual total returns for periods ended September 30, 2006: |
| | | | |
| | 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 | +9.39% | +15.75% | -0.39% |
| Not reflecting CDSC | +14.39% | +15.97% | -0.39% |
| | | | |
Class C shares — first sold 3/15/01 | | | |
| Reflecting CDSC, maximum of 1%, payable only if | | | |
| shares are sold within one year of purchase | +13.33% | +15.95% | +9.64% |
| Not reflecting CDSC | +14.33% | +15.95% | +9.64% |
| | | | |
Class F shares*— first sold 3/15/01 | | | |
| Not reflecting annual asset-based fee charged | | | |
| by sponsoring firm | +15.28% | +16.86% | +10.53% |
| | | | |
Class 529-A shares†— first sold 2/19/02 | | | |
| Reflecting 5.75% maximum sales charge | +8.61% | — | +13.07% |
| Not reflecting maximum sales charge | +15.25% | — | +14.53% |
| | | | |
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 | +9.24% | — | +13.08% |
| Not reflecting CDSC | +14.24% | — | +13.35% |
| | | | |
Class 529-C shares†— first sold 2/20/02 | | | |
| Reflecting CDSC, maximum of 1%, payable only if | | | |
| shares are sold within one year of purchase | +13.27% | — | +13.37% |
| Not reflecting CDSC | +14.27% | — | +13.37% |
| | | | |
Class 529-E shares*†— first sold 3/15/02 | +14.86% | — | +12.65% |
| | | | |
Class 529-F shares*†— first sold 9/17/02 | | | |
| Not reflecting annual asset-based fee charged by | | | |
| sponsoring firm | +15.44% | — | +21.86% |
The fund’s investment adviser waived 5% of its management fees from September 1, 2004, through March 31, 2005, and increased the waiver to 10% on April 1, 2005. Fund results shown reflect the waiver, without which they would have been lower. Please see the Financial Highlights table on pages 24 to 25 for details.
*These shares are sold without any initial or contingent deferred sales charge.
† Results shown do not reflect the $10 initial account setup fee and an annual $10 account maintenance fee.
There are several ways to invest in SMALLCAP World Fund. Class A shares are subject to a 5.75% maximum up-front sales charge that declines for accounts (and aggregated investments) of $25,000 or more and is eliminated for purchases of $1 million or more. Other share classes, which are generally not available for certain employer-sponsored retirement plans, have no up-front sales charges but are subject to additional annual expenses and fees. Annual expenses for Class B shares were 0.77 percentage points higher than for Class A shares; Class B shares convert to Class A shares after eight years of ownership. If redeemed within six years, Class B shares may also be subject to a contingent deferred sales charge (“CDSC”) of up to 5% that declines over time. Class C shares were subject to annual expenses 0.82 percentage points higher than those for Class A shares and a 1% CDSC if redeemed within the first year after purchase. Class C shares convert to Class F shares after 10 years. Class F shares, which are available only through certain fee-based programs offered by broker-dealer firms and registered investment advisers, had the same annual expenses as did Class A shares, and an annual asset-based fee charged by the sponsoring firm. Expenses are deducted from income earned by the fund. As a result, dividends and investment results will differ for each share class.
Expense example unaudited
As a shareholder of the fund, you incur two types of costs: (1) transaction costs such as initial sales charges on purchase payments and contingent deferred sales charges on redemptions (loads); and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund so you can compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (April 1, 2006, through September 30, 2006).
Actual expenses:
The first line of each share class in the table on the next page provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses paid during period" to estimate the expenses you paid on your account during this period. There are some account fees that are charged to certain types of accounts, such as Individual Retirement Accounts and CollegeAmerica accounts (generally, a $10 fee is charged to set up the account and an additional $10 fee is charged to the account annually) that would increase the amount of expenses paid on your account. In addition, retirement plan participants may be subject to certain fees charged by the plan sponsor, and Class F and 529-F shareholders may be subject to fees charged by financial intermediaries, typically ranging from 0.75% to 1.50% of assets annually depending on services offered. You can estimate the impact of these fees by adding the amount of the fees to the total estimated expenses you paid on your account during the period as calculated above. In addition, your ending account value would also be lower by the amount of these fees.
Hypothetical example for comparison purposes:
The second line of each share class in the table on the next page provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio for the share class and an assumed rate of return of 5.00% per year before expenses, which is not the actual return of the share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5.00% hypothetical example with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds. There are some account fees that are charged to certain types of accounts, such as Individual Retirement Accounts and CollegeAmerica accounts (generally, a $10 fee is charged to set up the account and an additional $10 fee is charged to the account annually) that would increase the amount of expenses paid on your account. In addition, retirement plan participants may be subject to certain fees charged by the plan sponsor, and Class F and 529-F shareholders may be subject to fees charged by financial intermediaries, typically ranging from 0.75% to 1.50% of assets annually depending on services offered. You can estimate the impact of these fees by adding the amount of the fees to the total estimated expenses you paid on your account during the period as calculated above. In addition, your ending account value would also be lower by the amount of these fees.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of each share class in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| | | Beginning account value 4/1/2006 | | Ending account value 9/30/2006 | | Expenses paid during period* | | Annualized expense ratio | |
| | | | | | | | | | | | | | |
| Class A -- actual return | | $ | 1,000.00 | | $ | 982.81 | | $ | 4.97 | | | 1.00 | % |
| Class A -- assumed 5% return | | | 1,000.00 | | | 1,020.05 | | | 5.06 | | | 1.00 | |
| Class B -- actual return | | | 1,000.00 | | | 978.80 | | | 8.78 | | | 1.77 | |
| Class B -- assumed 5% return | | | 1,000.00 | | | 1,016.19 | | | 8.95 | | | 1.77 | |
| Class C -- actual return | | | 1,000.00 | | | 978.44 | | | 9.03 | | | 1.82 | |
| Class C -- assumed 5% return | | | 1,000.00 | | | 1,015.94 | | | 9.20 | | | 1.82 | |
| Class F -- actual return | | | 1,000.00 | | | 982.71 | | | 5.02 | | | 1.01 | |
| Class F -- assumed 5% return | | | 1,000.00 | | | 1,020.00 | | | 5.11 | | | 1.01 | |
| Class 529-A -- actual return | | | 1,000.00 | | | 982.53 | | | 5.17 | | | 1.04 | |
| Class 529-A -- assumed 5% return | | | 1,000.00 | | | 1,019.85 | | | 5.27 | | | 1.04 | |
| Class 529-B -- actual return | | | 1,000.00 | | | 978.24 | | | 9.37 | | | 1.89 | |
| Class 529-B -- assumed 5% return | | | 1,000.00 | | | 1,015.59 | | | 9.55 | | | 1.89 | |
| Class 529-C -- actual return | | | 1,000.00 | | | 978.24 | | | 9.37 | | | 1.89 | |
| Class 529-C -- assumed 5% return | | | 1,000.00 | | | 1,015.59 | | | 9.55 | | | 1.89 | |
| Class 529-E -- actual return | | | 1,000.00 | | | 980.85 | | | 6.75 | | | 1.36 | |
| Class 529-E -- assumed 5% return | | | 1,000.00 | | | 1,018.25 | | | 6.88 | | | 1.36 | |
| Class 529-F -- actual return | | | 1,000.00 | | | 983.25 | | | 4.28 | | | .86 | |
| Class 529-F -- assumed 5% return | | | 1,000.00 | | | 1,020.76 | | | 4.36 | | | .86 | |
| Class R-1 -- actual return | | | 1,000.00 | | | 978.32 | | | 8.98 | | | 1.81 | |
| Class R-1 -- assumed 5% return | | | 1,000.00 | | | 1,015.99 | | | 9.15 | | | 1.81 | |
| Class R-2 -- actual return | | | 1,000.00 | | | 978.82 | | | 8.88 | | | 1.79 | |
| Class R-2 -- assumed 5% return | | | 1,000.00 | | | 1,016.09 | | | 9.05 | | | 1.79 | |
| Class R-3 -- actual return | | | 1,000.00 | | | 980.55 | | | 7.00 | | | 1.41 | |
| Class R-3 -- assumed 5% return | | | 1,000.00 | | | 1,018.00 | | | 7.13 | | | 1.41 | |
| Class R-4 -- actual return | | | 1,000.00 | | | 982.23 | | | 5.12 | | | 1.03 | |
| Class R-4 -- assumed 5% return | | | 1,000.00 | | | 1,019.90 | | | 5.22 | | | 1.03 | |
| Class R-5 -- actual return | | | 1,000.00 | | | 983.91 | | | 3.63 | | | .73 | |
| Class R-5 -- assumed 5% return | | | 1,000.00 | | | 1,021.41 | | | 3.70 | | | .73 | |
| | | | | | | | | | | | | | |
* Expenses are equal to the annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the period (183), and divided by 365 (to reflect the one-half year period). | |
Tax information unaudited
We are required to advise you within 60 days of the fund’s fiscal year-end regarding the federal tax status of certain distributions received by shareholders during such fiscal year. The fund hereby designates the following amounts for the fund’s fiscal year ended September 30, 2006:
| Long-term capital gains | | $ | 293,826,000 | |
| Foreign taxes | | | 19,845,000 | |
| Foreign source income | | | 253,273,000 | |
| Qualified dividend income | | | 179,370,000 | |
| Corporate dividends received deduction | | | 32,816,000 | |
| U.S. government income that may be exempt from state taxation | | | 1,861,000 | |
Individual shareholders should refer to their Form 1099-DIV or other tax information, which will be mailed in January 2007, to determine the calendar year amounts to be included on their 2006 tax returns. Shareholders should consult their tax advisers.
Approval of Investment Advisory and Service Agreement
The fund’s board members have 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 November 30, 2007. 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 information, material factors and conclusions that formed the basis for the committee’s recommendation and the board’s subsequent approval are described below.
1. Information reviewed
Materials reviewed— During the course of each year, board members review a wide variety of materials relating to the services provided by CRMC, including reports on the fund’s investment results, portfolio composition, portfolio trading practices, shareholder services, and other information relating to the nature, extent and quality of services provided by CRMC to the fund. In addition, the committee requests and reviews supplementary information that includes extensive materials regarding the fund’s investment results, advisory fee and expense comparisons, financial and profitability information regarding CRMC, descriptions of various functions such as compliance monitoring and portfolio trading practices, and information about the personnel providing investment management and administrative services to the fund.
Review process— The committee received assistance and advice regarding legal and industry standards from independent counsel to the board. The committee discussed the approval of the agreement with CRMC representatives and in a private session with counsel at which no representatives of CRMC were present. In deciding to recommend the approval of the agreement, the committee did not identify any single issue or particular piece of information that, in isolation, was the controlling factor. This summary describes the most important, but not all, of the factors considered by the board and the committee.
2. Nature, extent and quality of services
CRMC, its personnel and its resources— The board and the committee considered the depth and quality of CRMC’s investment management process, including its global research capabilities; the experience, capability and integrity of its senior management and other personnel; the low turnover rates of its key personnel; the overall financial strength and stability of its organization; and the ability of its organizational structure to address the recent growth in assets under management. The board and the committee also considered that CRMC made available to its investment professionals a variety of resources and systems relating to investment management, compliance, trading, investment results and portfolio accounting. They considered CRMC’s commitment to investing in information technology supporting investment management and compliance. They further considered CRMC’s continuing need to attract and retain qualified personnel and to maintain and enhance its resources and systems. The board and the committee also considered the benefits to the fund’s shareholders from investing in a fund that is part of a large family of funds offering a variety of investment objectives.
Other services— The board and the committee considered CRMC’s policies, procedures and systems designed to comply with applicable laws and regulations and its commitment to compliance; its efforts to keep the board members informed; and its attention to matters that may involve potential conflicts of interest with the fund. The board and the committee also considered the nature, extent, quality and cost of administrative, distribution and shareholder services provided by CRMC to the fund under the agreement and other agreements, including the information technology, legal, and fund accounting and treasury functions.
3. Investment results
The board and committee considered the investment results of the fund in light of its objective of long-term growth of capital through investments primarily in stocks of companies located around the world with small market capitalizations measured at the time of purchase. They compared the fund’s total returns with the total returns of the Lipper Global Small Company Index (the Lipper category that includes the fund) and the averages of the funds included in the index each year. In reviewing the fund’s relative performance, the board and the committee took into account the fund’s unique characteristics and its asset size, diversification and range of investments.
The board and the committee noted that for the three months ended March 31, 2006 the fund’s investment results were superior to the average of the Lipper Global Small Company Index. The board also noted that for the three-year period and five-year period ended March 31, 2006, and for the period from the fund’s inception on April 30, 1990 through March 31, 2006, the fund’s investment results were below the average for the Lipper Global Small Company Index. The board and the committee considered the differences between the fund and other funds in the Lipper Global Small Company Index.
4. Advisory fees and total expenses
The board and the committee compared the advisory fees and total expenses of the fund (each as a percentage of average net assets) with the median fee and expense levels of all other funds in the Lipper Global Small Company Index.
The board and the committee observed that the fund’s advisory fee was below the median of the other funds included in the index for the year ended September 30, 2005, and below the median of the other funds for the previous nine years, and that its total expenses were below the median for all such other funds for the 10 years ended September 30, 2005. The board and the committee also noted the 10% advisory fee waiver that CRMC put into effect on April 1, 2005.
The board and the committee also reviewed information and materials regarding the advisory fees paid by institutional clients of an affiliate of CRMC with similar investment mandates. They noted that, although the fees paid by those clients generally were lower than those paid by the American Funds, these differences reflected the significant investment, operational and regulatory differences between advising mutual funds and institutional clients.
5. Adviser financial information
The board and the committee reviewed information regarding CRMC’s costs of providing services to the American Funds, as well as the resulting level of profits to CRMC, comparing those to the reported results of several large, publicly held investment management companies. The committee noted that its members had also received information during previous periods regarding the structure and manner in which CRMC’s investment professionals were compensated and CRMC’s view of the relationship of such compensation to the attraction and retention of quality personnel. The board and the committee considered CRMC’s willingness to invest in technology, infrastructure and staff to reinforce and offer new services and to accommodate changing regulatory requirements. They further considered the impact of each fund’s asset growth on advisory fee levels, noting that total fees paid to the adviser increase as assets increase, and then considered the extent to which such fees are reduced through breakpoint discounts in the fund’s advisory fee structure and the current 10% advisory fee waiver.
6. Ancillary benefits
The board and the committee considered a variety of other benefits received by CRMC and its affiliates as a result of CRMC’s relationship with the fund and the other American Funds, including fees for administrative services provided to certain share classes; fees paid to CRMC’s affiliated transfer agent; sales charges and distribution fees received and retained by the fund’s principal underwriter, an affiliate of CRMC; and possible ancillary benefits to CRMC’s institutional management affiliates. The board and the committee reviewed CRMC’s portfolio trading practices, noting that, while CRMC receives the benefit of research provided by broker-dealers executing portfolio transactions on behalf of the fund, it does not obtain third-party research or other services in return for allocating brokerage to such broker-dealers.
7. Conclusions
Based on their review, including their consideration of each of the factors referred to above, the board and the committee concluded that the agreement is fair and reasonable to the fund and its shareholders, that the fund’s shareholders received reasonable value in return for the advisory fees and other amounts paid to CRMC by the fund, and that approval of the agreement was in the best interests of the fund and its shareholders. The board and the committee concluded that each of the factors discussed above supported such approval.
Board of directors
“Independent” directors | | |
| | Year first | |
| | elected | |
| | a director | |
Name and age | of the fund1 | Principal occupation(s) during past five years |
| | | |
| Joseph C. Berenato, 60 | 2000 | Chairman of the Board and CEO, Ducommun Incorporated (aerospace components manufacturer) |
| | | |
| Ambassador | 1993 | Corporate director and author; former U.S. |
| Richard G. Capen, Jr., 72 | | Ambassador to Spain; former Vice Chairman, Knight-Ridder, Inc. (communications company); former Chairman and Publisher, The Miami Herald |
| | | |
| H. Frederick Christie, 73 | 1990 | Private investor; former President and CEO, The Mission Group (non-utility holding company, subsidiary of Southern California Edison Company) |
| | | |
| John G. Freund, 53 | 2000 | Founder and Managing Director, Skyline Ventures (venture capital investor in health care companies); former Managing Director — Alternative Asset Management Group, Chancellor Capital Management |
| | | |
| R. Clark Hooper, 60 | 2006 | President, Dumbarton Group LLC (consulting); former Executive Vice President — Policy and Oversight, NASD |
| | | |
| Leonade D. Jones, 59 | 1995 | Co-founder, VentureThink LLC (developed and managed e-commerce businesses) and Versura Inc. (education loan exchange); former Treasurer, The Washington Post Company |
| | | |
| William H. Kling, 64 | 1990 | President, American Public Media Group |
| Chairman of the Board | | |
| (Independent and Non-Executive) | | |
| | | |
| Norman R. Weldon, Ph.D., 72 | 1990 | Managing Director, Partisan Management Group, Inc. (venture capital investor in medical device companies); former Chairman of the Board, Novoste Corporation; former President and Director, Corvita Corporation |
| | | |
| Patricia K. Woolf, Ph.D., 72 | 1990 | Private investor; corporate director; former Lecturer, Department of Molecular Biology, Princeton University |
| | | |
| | | |
“Independent” directors | | |
| | Number of | |
| | portfolios | |
| | in fund | |
| | complex2 | |
| | overseen by | |
Name and age | director | Other directorships3 held by director |
| | | |
| Joseph C. Berenato, 60 | 6 | Ducommun Incorporated |
| | | |
| Ambassador | 15 | Carnival Corporation |
| Richard G. Capen, Jr., 72 | | |
| | | |
| H. Frederick Christie, 73 | 20 | Ducommun Incorporated; IHOP Corporation; Southwest Water Company |
| | | |
| John G. Freund, 53 | 2 | XenoPort, Inc. |
| | | |
| R. Clark Hooper, 60 | 18 | JPMorgan Value Opportunities Fund |
| | | |
| Leonade D. Jones, 59 | 6 | None |
| | | |
| William H. Kling, 64 | 8 | Irwin Financial Corporation |
| Chairman of the Board | | |
| (Independent and Non-Executive) | | |
| | | |
| Norman R. Weldon, Ph.D., 72 | 3 | AtriCure, Inc. |
| | | |
| Patricia K. Woolf, Ph.D., 72 | 6 | First Energy Corporation |
| | | |
| | | |
“Interested” directors4 | | |
| | | |
| | Year first | |
| | elected a | |
| | director or | Principal occupation(s) during past five years and |
Name, age and | officer of | positions held with affiliated entities or the principal |
position with fund | the fund1 | underwriter of the fund |
| | | |
| Gordon Crawford, 59 | 1992 | Senior Vice President, Capital Research and |
| Vice Chairman of the Board | | Management Company; Director, The Capital Group Companies, Inc.5 |
| | | |
| Gregory W. Wendt, 45 | 1992 | Senior Vice President, Capital Research Company;5 |
| President | | Director, American Funds Distributors, Inc.;5 Director, Capital Management Services, Inc.5 |
| | | |
| | | |
“Interested” directors4 | | |
| | | |
| | Number of | |
| | portfolios | |
| | in fund | |
| | complex2 | |
Name, age and | overseen by | |
position with fund | director | Other directorships3 held by director |
| | | |
| Gordon Crawford, 59 | 2 | None |
| Vice Chairman of the Board | | |
| | | |
| Gregory W. Wendt, 45 | 1 | None |
| President | | |
The statement of additional information includes additional information about fund directors and is available without charge upon request by calling American Funds Service Company at 800/421-0180. The address for all directors and officers of the fund is 333 South Hope Street, Los Angeles, CA 90071, Attention: Fund Secretary.
1 Directors and officers of the fund serve until their resignation, removal or retirement.
2 Capital Research and Management Company manages the American Funds, consisting of 30 funds. Capital Research and Management Company also manages American Funds Insurance Series,® which serves as the underlying investment vehicle for certain variable insurance contracts, and Endowments, whose shareholders are limited to certain nonprofit organizations.
3 This includes all directorships (other than those in the American Funds) that are held by each director as a director of a public company or a registered investment company.
4 “Interested persons” within the meaning of the 1940 Act, on the basis of their affiliation with the fund’s investment adviser, Capital Research and Management Company, or affiliated entities (including the fund’s principal underwriter).
5 Company affiliated with Capital Research and Management Company.
Other officers | | |
| | | |
| | Year first | |
| | elected | Principal occupation(s) during past five years |
Name, age and | an officer | and positions held with affiliated entities or the |
position with fund | of the fund1 | principal underwriter of the fund |
| | | |
| J. Blair Frank, 40 | 1999 | Vice President, Capital Research Company5 |
| Senior Vice President | | |
| | | |
| Jonathan Knowles, Ph.D., 45 | 2000 | Senior Vice President, Capital Research Company5 |
| Senior Vice President | | |
| | | |
| Grant L. Cambridge, 44 | 2001 | Vice President and Director, Capital Research |
| Vice President | | Company5 |
| | | |
| Noriko H. Chen, 39 | 2006 | Vice President and Director, Capital Research |
| Vice President | | Company |
| | | |
| Brady L. Enright, 39 | 2004 | Senior Vice President, Capital Research Company5 |
| Vice President | | |
| | | |
| Winnie Kwan, 34 | 2006 | Vice President, Capital Research Company5 |
| Vice President | | |
| | | |
| Chad L. Norton, 46 | 1990 | Vice President — Fund Business Management |
| Secretary | | Group, Capital Research and Management Company |
| | | |
| David A. Pritchett, 40 | 1999 | Vice President — Fund Business Management |
| Treasurer | | Group, Capital Research and Management Company |
| | | |
| Steven I. Koszalka, 42 | 2005 | Assistant Vice President — Fund Business |
| Assistant Secretary | | Management Group, Capital Research and Management Company |
| | | |
| Sheryl F. Johnson, 38 | 1998 | Vice President — Fund Business Management |
| Assistant Treasurer | | Group, 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
135 South State College Boulevard
Brea, CA 92821-5823
Principal underwriter
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, CA 90071-1406
Transfer agent for shareholder accounts
American Funds Service Company
(Please write to the address nearest you.)
P.O. Box 25065
Santa Ana, CA 92799-5065
P.O. Box 659522
San Antonio, TX 78265-9522
P.O. Box 6007
Indianapolis, IN 46206-6007
P.O. Box 2280
Norfolk, VA 23501-2280
Custodian of assets
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110-2804
Counsel
Paul, Hastings, Janofsky & Walker LLP
55 Second Street, 24th floor
San Francisco, CA 94105-3441
Independent registered public accounting firm
Deloitte & Touche LLP
695 Town Center Drive
Suite 1200
Costa Mesa, CA 92626-7188
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 September 30, 2006, portfolio of SMALLCAP World Fund’s investments is available free of charge by calling AFS or visiting the SEC website (where it is part of Form N-CSR).
SMALLCAP World 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 SMALLCAP World Fund, but it may also be used as sales literature when preceded or accompanied by the current prospectus, which gives details about charges, expenses, investment objectives and operating policies of the fund. If used as sales material after December 31, 2006, this report must be accompanied by an American Funds statistical update for the most recently completed calendar quarter.
[logo - American Funds®]
The right choice for the long term®
What makes American Funds different?
For 75 years, we have followed a consistent philosophy that we firmly believe is in our investors’ best interests. The range of opportunities offered by our family of just 30 carefully conceived, broadly diversified funds has attracted over 35 million shareholder accounts.
Our unique combination of strengths includes these five factors:
• A long-term, value-oriented approach
We seek to buy securities at reasonable prices relative to their prospects and hold them for the long term.
• An extensive global research effort
American Funds investment professionals search the world to gain a comprehensive understanding of companies and markets.
• The multiple portfolio counselor system
Our unique method of portfolio management, developed nearly 50 years ago, blends teamwork with individual accountability and has provided American Funds with a sustainable method of achieving fund objectives.
• Experienced investment professionals
American Funds portfolio counselors have an average of 23 years of investment experience, providing a wealth of knowledge and experience that few organizations have.
• A commitment to low operating expenses
The American Funds provide exceptional value for shareholders, with operating expenses that are among the lowest in the mutual fund industry.
30 mutual funds, consistent philosophy, consistent results
• Growth funds
Emphasis on long-term growth through stocks
AMCAP Fund®
EuroPacific Growth Fund®
The Growth Fund of America®
The New Economy Fund®
New Perspective Fund®
New World FundSM
> SMALLCAP World Fund®
• Growth-and-income funds
Emphasis on long-term growth and dividends through stocks
American Mutual Fund®
Capital World Growth and Income FundSM
Fundamental InvestorsSM
The Investment Company of America®
Washington Mutual Investors FundSM
• Equity-income funds
Emphasis on above-average income and growth through stocks and/or bonds
Capital Income Builder®
The Income Fund of America®
• Balanced fund
Emphasis on long-term growth and current income through stocks and bonds
American Balanced Fund®
• Bond funds
Emphasis on current income through bonds
American High-Income TrustSM
The Bond Fund of AmericaSM
Capital World Bond Fund®
Intermediate Bond Fund of America®
Short-Term Bond Fund of AmericaSM
U.S. Government Securities FundSM
• Tax-exempt bond funds
Emphasis on tax-free current income through municipal bonds
American High-Income Municipal Bond Fund®
Limited Term Tax-Exempt Bond Fund of AmericaSM
The Tax-Exempt Bond Fund of America®
State-specific tax-exempt funds
The Tax-Exempt Fund of California®
The Tax-Exempt Fund of Maryland®
The Tax-Exempt Fund of Virginia®
• Money market funds
The Cash Management Trust of America®
The Tax-Exempt Money Fund of AmericaSM
The U.S. Treasury Money Fund of AmericaSM
The Capital Group Companies
American Funds Capital Research and Management Capital International Capital Guardian Capital Bank and Trust
Lit. No. MFGEAR-935-1106P
Litho in USA BBC/ALD/8067-S7502
Printed on recycled paper
