UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
Certified Shareholder Report of
Registered Management Investment Companies
Investment Company Act File Number: 811-66
American Balanced Fund, Inc.
(Exact Name of Registrant as specified in charter)
P.O. Box 7650, One Market, Steuart Tower
San Francisco, California 94120
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 421-9360
Date of fiscal year end: December 31, 2003
Date of reporting period: December 31, 2003
Patrick F. Quan
Secretary
American Balanced Fund, Inc.
P.O. Box 7650, One Market, Steuart Tower
San Francisco, California 94120
(name and address of agent for service)
Copies to:
Robert E. Carlson, Esq.
Paul, Hastings, Janofsky &Walker LLP
515 South Flower Street
Los Angeles, California 90071
(Counsel for the Registrant)
ITEM 1 - Reports to Stockholders
[logo - American Funds(R)]
The right choice for the long term(R)
AMERICAN BALANCED FUND
SPECIAL REPORT:
MANAGING YOUR FUND'S INVESTMENTS
[photo of an orchard]
Annual report for the year ended December 31, 2003
AMERICAN BALANCED FUND(R) seeks conservation of capital, current income and
long-term growth of both capital and income by investing in stocks and
fixed-income securities. The fund approaches the management of its investments
as if they constituted the complete investment program of the prudent investor.
This fund is one of the 29 American Funds, the nation's third-largest mutual
fund family. For more than seven decades, 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 2
Managing your fund's investments 4
Investment portfolio 11
Financial statements 28
Directors and officers 39
What makes American Funds different? back cover
THE FUND'S 30-DAY YIELD FOR CLASS A SHARES AS OF JANUARY 31, 2004, CALCULATED IN
ACCORDANCE WITH THE SECURITIES AND EXCHANGE COMMISSION FORMULA, WAS 1.70%. THE
FUND'S DISTRIBUTION RATE FOR CLASS A SHARES AS OF THAT DATE WAS 1.98%. BOTH
REFLECT THE 5.75% MAXIMUM SALES CHARGE. The SEC yield reflects the rate at which
the fund is earning income on its current portfolio of securities while the
distribution rate reflects the fund's past dividends paid to shareholders.
Accordingly, the fund's SEC yield and distribution rate may differ.
Results shown in this report are for Class A shares. Results for other share
classes can be found on page 38. Please see the inside back cover for important
information about other share classes.
FIGURES SHOWN ARE PAST RESULTS AND ARE NOT PREDICTIVE OF FUTURE PERIODS. CURRENT
AND FUTURE RESULTS MAY BE LOWER OR HIGHER THAN THOSE SHOWN. BECAUSE SHARE PRICES
MAY DECLINE, THE VALUE OF YOUR HOLDINGS MAY DECREASE. FOR THE MOST CURRENT
INFORMATION AND MONTH-END RESULTS, VISIT AMERICANFUNDS.COM. 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.
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.
AMERICAN BALANCED FUND RESULTS OVER THE PAST 28 YEARS*
(yearly returns through December 31)
Value of Income Total
principal return return+
1976 +20.0% +6.0% +26.0%
1977 -4.5 +5.2 +0.7
1978 +0.6 +5.6 +6.2
1979 +1.6 +6.0 +7.6
1980 +7.1 +7.3 +14.4
1981 -3.5 +7.9 +4.4
1982 +20.8 +8.6 +29.4
1983 +8.4 +7.7 +16.1
1984 +2.2 +7.2 +9.4
1985 +22.3 +6.8 +29.1
1986 +10.9 +6.0 +16.9
1987 -2.3 +6.3 +4.0
1988 +6.6 +6.3 +12.9
1989 +14.9 +6.6 +21.5
1990 -7.3 +5.7 -1.6
1991 +18.6 +6.1 +24.7
1992 +4.4 +5.1 +9.5
1993 +6.3 +5.0 +11.3
1994 -4.2 +4.5 +0.3
1995 +22.4 +4.7 +27.1
1996 +9.2 +4.0 +13.2
1997 +17.1 +3.9 +21.0
1998 +7.5 +3.6 +11.1
1999 -0.1 +3.6 +3.5
2000 +12.0 +3.9 +15.9
2001 +4.5 +3.7 +8.2
2002 -9.0 +2.7 -6.3
2003 +20.2 +2.6 +22.8
Average annual total return for 28 full calendar years: +12.4%
*Full calendar years since Capital Research and Management Company became the
fund's investment adviser on July 26, 1975.
+Total return measures capital appreciation and income return, assuming
reinvestment of dividends and capital gain distributions.
FELLOW SHAREHOLDERS:
[photo of a field]
In 2003, American Balanced Fund produced a total return of 22.8%, exceeding the
Lipper Balanced Funds Index, which had a total return of 19.9%. Stocks, as
measured by Standard & Poor's 500 Composite Index, had a total return of 28.7%.
U.S. investment-grade bonds, as measured by the Lehman Brothers Aggregate Bond
Index, provided a total return of 4.1%. The latter two indexes are unmanaged.
After suffering declines for the past three years, stocks rebounded strongly in
2003. Corporate earnings increased significantly in response to the economic
recovery and the cost-cutting efforts begun during the recession. In addition,
the dramatic weakness of the U.S. dollar also pushed earnings higher for many
companies. While the dollar decline is of some concern longer term, this
favorable impact on earnings should continue in 2004. The sharp recovery in
stocks has brought the market to a level 43% higher than its low in October
2002. Bonds generally produced adequate returns with a lot of volatility and
disparity among the sectors of the bond market.
BROAD STOCK RECOVERY
In 2003, American Balanced Fund benefited from a larger allocation to stocks,
which we had established late in 2002, and from excellent selection within the
bond portfolio. The strength in the stock market was very broadly based, with
virtually all sectors showing positive returns. The fund's approximately 9%
position in technology stocks helped greatly, with EMC and Intel both more than
doubling in price. In addition, a variety of other stocks helped the portfolio,
including Caterpillar (+82%) and J.P. Morgan Chase (+53%). FleetBoston Financial
rose 80% in the wake of an agreement to be acquired by Bank of America. On the
negative side, our position in pharmaceuticals hurt our results, with Merck and
Johnson & Johnson showing declines. AT&T had another disappointing year, with a
decline of 22%.
INCREASING RETAIL HOLDINGS
Within the portfolio, we substantially increased our exposure to the retail
sector from 4.4% to 6.7% as high-quality stocks such as Wal-Mart and Walgreen
seemed to offer attractive opportunities. Earlier in the year, we reduced our
positions in both the telecommunications and energy sectors. We also increased
our exposure to the mortgage finance sector.
Toward the end of 2002, we reduced our holdings in government bonds, reinvesting
the proceeds in corporate bonds at considerably higher yields. In 2003, spurred
by the improving economy and hopes for stronger corporate balance sheets,
corporate bonds rallied. Our bond investments in automobiles, media and gaming
did especially well.
It is American Balanced Fund's policy to have between 50% and 75% invested in
common stocks at all times. The percentage will vary based on our judgment of
the relative attractiveness of equities, bonds and cash. After increasing our
equity exposure late in 2002, our stock and bond allocation was relatively
stable throughout 2003. At year-end, it was 65% in equities, 30% in bonds and 5%
in cash.
Since its inception 71 years ago, the fund has approached the management of its
investments as though they constituted the complete investment program of the
prudent investor. Our special report on page 4 discusses how this principle
affects the fund's investment strategy.
We welcome our new shareholders and thank our continuing investors for their
support.
Cordially,
/s/ Robert G. O'Donnell
Robert G. O'Donnell
Chairman of the Board
/s/ J. Dale Harvey
J. Dale Harvey
President
February 12, 2004
Figures shown are past results and are not predictive of future periods. Current
and future results may be lower or higher than those shown. Because share prices
may decline, the value of your holdings may decrease. For the most current
information and month-end results, visit americanfunds.com. Results shown are at
net asset value. If a sales charge (maximum 5.75%) had been deducted, the
results would have been lower.
[Begin Sidebar]
[photo of an orchard]
IT IS AMERICAN BALANCED FUND'S POLICY TO HAVE BETWEEN 50% AND 75% INVESTED IN
COMMON STOCKS AT ALL TIMES.
[End Sidebar]
HOW AMERICAN BALANCED FUND HAS FARED WITH CAPITAL RESEARCH AND MANAGEMENT
COMPANY AS INVESTMENT ADVISER
Since the fund invests in both stocks and bonds, its results should be weighed
against a combination of stock and bond indexes.
Cumulative Average annual
total retun total return
for the period 7/26/1975-12/31/2003
American Balanced Fund +2,702.2% +12.4%
Lipper Balanced Funds Index* +2,146.5% +11.6%
Standard & Poor's 500 Composite Index +3,124.6% +13.0%
Lehman Brothers Aggregate Bond Index+ +1,123.1% +9.2%
Figures assume reinvestment of all distributions. The S&P 500 and the Lehman
Brothers Aggregate Bond Index are unmanaged.
* The Lipper Balanced Funds Index lifetime return is calculated from July 31,
1975.
+ The Lehman Brothers Aggregate Bond Index did not exist until December 31,
1975. For the period July 31, 1975 to December 31, 1975, Lehman
Brothers Government/Credit Bond Index (formerly known as Lehman Brothers
Government/Corporate Bond Index) was used.
Figures shown are past results and are not predictive of future periods. Current
and future results may be lower or higher than those shown. Because share prices
may decline, the value of your holdings may decrease. For the most current
information and month-end results, visit americanfunds.com. 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.
[Begin Sidebar]
THE VALUE OF A LONG-TERM PERSPECTIVE
HOW A $10,000 INVESTMENT HAS GROWN
This chart shows how a $10,000 investment in American Balanced Fund grew from
July 26, 1975 -- when Capital Research and Management Company became the fund's
investment adviser -- to December 31, 2003.
Fund figures reflect deduction of the maximum sales charge of 5.75% on the
$10,000 investment. Thus, the net amount invested was $9,425.1
As you can see, the $10,000 grew to $264,029 with all distributions reinvested.
Since the fund invests in both stocks and bonds, it should not be surprising
that its return lies between the unmanaged stock and bond indexes tracked on the
chart.
The fund's year-by-year results appear under the chart. You can use this table
to estimate how the value of your own holdings has grown. Let's say, for
example, that you have reinvested all your distributions and want to know how
your investment has done since December 31, 1993. At that time, according to the
table, the value of the investment illustrated here was $91,080. Since then, it
has grown to $264,029. Thus, in the same period, the value of your 1993
investment -- regardless of size -- has almost tripled.
AVERAGE ANNUAL TOTAL RETURNS
(based on a $1,000 investment with all distributions reinvested)
for periods ended
December 31, 2003
Class A shares*
reflecting 5.75% maximum sales charge
1 year +15.76%
5 years +7.07%
10 years +10.57%
*Results for other share classes can be found on page 38.
Please see inside back cover for important information about other share
classes.
original investment $10,000(1)
[Begin Mountain Chart]
<table>
<s> <c> <c> <c>
American Balanced Lehman Brothers
Year ended Fund with dividends S&P 500 with dividends Aggregate Bond
December 31,2003 reinvested(1)(3) reinvested (2) Index(4)
original investment $10,000 $10,000 $10,000
1975 9,948 10,314 10,558
1976 12,533 12,782 12,205
1977 12,620 11,867 12,576
1978 13,404 12,647 12,751
1979 14,427 15,001 12,997
1980 16,498 19,869 13,348
1981 17,224 18,891 14,182
1982 22,280 22,961 18,809
1983 25,869 28,140 20,381
1984 28,291 29,905 23,468
1985 36,527 39,393 28,655
1986 42,690 46,746 33,031
1987 44,406 49,200 33,940
1988 50,123 57,349 36,616
1989 60,915 75,489 41,937
1990 59,959 73,142 45,694
1991 74,765 95,378 53,006
1992 81,853 102,634 56,930
1993 91,080 112,956 62,480
1994 91,386 114,442 60,658
1995 116,179 157,396 71,864
1996 131,474 193,510 74,473
1997 159,131 258,048 81,663
1998 176,846 331,786 88,756
1999 182,974 401,589 88,027
2000 211,985 365,037 98,261
2001 229,339 321,685 106,558
2002 214,967 250,617 117,486
2003 264,029 322,463 122,308
[end mountain chart]
Year ended Dec. 31 1975(5) 1976 1977 1978 1979 1980
Total value
Dividends reinvested $305 594 657 709 800 1,050
Value at year-end1 $9,948 12,533 12,620 13,404 14,427 16,498
AMBAL total return (0.5)% 26.0 0.7 6.2 7.6 14.4
Year ended Dec. 31 1981 1982 1983 1984 1985 1986
Total value
Dividends reinvested 1,303 1,474 1,724 1,852 1,911 2,202
Value at year-end1 17,224 22,280 25,869 28,291 36,527 42,690
AMBAL total return 4.4 29.4 16.1 9.4 29.1 16.9
Year ended Dec. 31 1987 1988 1989 1990 1991 1992
Total value
Dividends reinvested 2,709 2,779 3,283 3,457 3,683 3,815
Value at year-end1 44,406 50,123 60,915 59,959 74,765 81,853
AMBAL total return 4.0 12.9 21.5 (1.6) 24.7 9.5
Year ended Dec. 31 1993 1994 1995 1996 1997 1998
Total value
Dividends reinvested 4,072 4,132 4,336 4,685 5,168 5,780
Value at year-end1 91,080 91,386 116,179 131,474 159,131 176,846
AMBAL total return 11.3 0.3 27.1 13.2 21.0 11.1
Year ended Dec. 31 1999 2000 2001 2002 2003
Total value
Dividends reinvested 6,427 7,213 7,791 6,294 5,568
Value at year-end1 182,974 211,985 229,339 214,967 264,029
AMBAL total return 3.5 15.9 8.2 (6.3) 22.8
Average annual total return for 28-1/2 years: 12.2%1,3
(1) As outlined in the prospectus, the sales charge is reduced for larger
investments. There is no sales charge on dividends or capital gain
distributions that are reinvested in additional shares. The maximum initial
sales charge was 8.5% prior to July 1, 1988. Results shown do not take into
account income or capital gain taxes.
(2) S&P 500 results are calculated with monthly dividends.
(3) Includes reinvested dividends of $95,773 and reinvested capital gain
distributions of $85,687.
(4) The Lehman Brothers Aggregate Bond Index did not exist until December 31,
1975. For the period July 31, 1975, to December 31, 1975, Lehman Brothers
Government/Credit Bond Index (formerly known as Lehman Brothers
Government/Corporate Bond Index) was used.
(5) For the period July 26, 1975 (when Capital Research and Management Company
became the fund's investment adviser) through December 31, 1975.
The market indexes are unmanaged and do not reflect sales charges, commissions
or expenses.
The results shown are before taxes on fund distributions and sale of fund
shares.
[photo of Mark Macdonald, Dale Harvey and Bob O'Donnell]
MANAGING YOUR FUND'S INVESTMENTS
[photo of Bob O'Donnell]
[Begin Photo Caption]
"If this were your only investment portfolio, you would emphasize quality. Our
stocks tend to be companies with earnings or clear prospects of earnings."
Bob O'Donnell
[End Photo Caption]
American Balanced Fund has long been a popular choice for investors saving for
retirement or college. One of the reasons for its popularity is that "the fund
approaches the management of its investments as if they constituted the complete
investment program of the prudent investor."*
*American Balanced Fund Prospectus
We thought it would be a good time to discuss how this principle affects
investment strategy and what it means to shareholders. We met with three
portfolio counselors of American Balanced Fund to learn how the fund puts this
approach into action. All three are experienced investors who have been through
both bear and bull markets. They are:
ROBERT G. O'DONNELL, chairman of the fund and a portfolio counselor who
concentrates on stocks. Bob has 18 years of experience as a portfolio counselor
in the fund and 32 years as an investment professional.
J. DALE HARVEY, elected president of the fund in 2003. Dale has been a portfolio
counselor in the fund for eight years and has 15 years of experience in the
investment business. He focuses on stocks.
MARK R. MACDONALD, a portfolio counselor and a bond investor. Mark has been a
fund portfolio counselor for two years and has 18 years as an investment
professional.
Q: BOB, HOW DOES THE "PRUDENT INVESTOR" PRINCIPLE AFFECT THE OVERALL APPROACH OF
THE FUND?
BOB: First, it leads us to have more in stocks than in bonds because over the
long term, stocks have had a higher return. Secondly, it encourages us to have a
sizeable portion in bonds because an investor should be diversified. It is the
fund's policy to have between 50% and 75% invested in common stocks at all
times. The remainder is held in both bonds and cash. If you were responsible for
investing the money of just one prudent investor, you wouldn't want to be
swinging wildly between stocks and bonds. The percentage in stocks varies within
this range based on our judgment of the relative attractiveness of stocks, bonds
and cash.
Q: HOW DOES THIS APPROACH AFFECT THE STOCKS THE FUND SELECTS OUT OF THE
THOUSANDS OF POSSIBLE CHOICES?
BOB: If this were your only investment portfolio, you would emphasize quality.
Our stocks tend to be companies with earnings or clear prospects of earnings. We
don't invest in untested companies. We seldom buy initial public offerings --
unless they are a spinoff from a proven, large company. We will not have more
than 10% of the fund invested in non-dividend-paying stocks. In addition, we
will not have more than 10% of the fund invested outside the United States.
[photo of Mark Macdonald]
[Begin Photo Caption]
All three portfolio counselors are experienced investors who have been through
both bear and bull markets.
Mark Macdonald
[End Photo Caption]
[photo of Bob O'Donnell]
[photo of trees and rolling hills]
[Begin Sidebar]
STRIKING A BALANCE BETWEEN RISK AND RETURN
American Balanced Fund invests in a diversified mix of stocks and fixed-income
securities. If we look back 10 years, as shown at right, the fund has provided
higher returns than both stocks and bonds with volatility between that of bonds
and stocks. During this period, it produced a higher return than the Lipper
Balanced Funds Index at the same level of volatility. It is worth remembering,
however, that figures shown are past results and are not predictive of future
results. Future results may be lower or higher than those shown.
For the 10-year period ended December 31, 2003
Average annual total returns
[BEGIN SCATTER CHART]
AVERAGE ANNUAL TOTAL RETURNS VOLATILITY
More return, less risk AMBAL 11.23% 9.17%
More return, more risk Stocks 11.06% 15.77%
Less return, less risk Bonds 6.95% 3.95%
Less return, less risk Lipper Balanced Funds Index 8.27% 9.24%
[END SCATTER CHART]
Volatility calculated by Lipper using standard deviation, a measure of how
returns over time have varied from the mean; a lower number signifies lower
volatility. The Lipper Balanced Funds Index is an equally weighted index of 30
U.S. balanced funds.
Sources: Stocks - S&P 500; Bonds - Lehman Brothers Aggregate Bond Index. Both
indexes are unmanaged.
[End Sidebar]
[Begin Sidebar]
DOWNSIDE RESILIENCE
Since 1975, there have been 10 significant declines in the stock and bond
markets. American Balanced Fund has held up better than the stock market in
every stock market decline, and better than the bond market in three of four
declines. Figures shown below are total returns for the relevant periods.
SIGNIFICANT STOCK MARKET DECLINES
American
Period Stock market Balanced Fund Difference
9/21/76 - 3/6/78 -13.5% 0.0% +13.5
11/28/80 - 8/12/82 -20.2 +5.5 +25.7
8/25/87 - 12/4/87 -32.8 -19.0 +13.8
7/16/90 - 10/11/90 -19.2 -12.4 +6.8
7/17/98 - 8/31/98 -19.1 -9.1 +10.0
3/24/00 - 10/09/02 -47.4 +4.2 +51.6
SIGNIFICANT BOND MARKET DECLINES
American
Period Bond market Balanced Fund Difference
12/31/76 - 3/31/80 -2.8% +8.2% +11.0
6/30/80 - 9/30/81 -9.0 +5.9 +14.9
4/30/83 - 5/31/84 -0.9 -3.0 -2.1
8/31/93 - 11/30/94 -3.3 +0.2 +3.5
Sources: Stocks -- S&P 500; Bonds -- Lehman Brothers Aggregate Bond Index. The
indexes are unmanaged. Actual stock market declines for periods shown exceeded
15% on a principal basis, excluding dividends. Actual bond market declines
exceeded 10% on a principal basis, excluding interest.
Figures shown are past results and are not predictive of future periods. Current
and future results may be lower or higher than those shown. Because share prices
may decline, the value of your holdings may decrease. For the most current
information and month-end results, visit americanfunds.com. Results shown are at
net asset value. If a sales charge (maximum 5.75%) had been deducted, the
results would have been lower.
[End Sidebar]
Q: MARK, HOW DOES THIS AFFECT AMBAL'S BOND INVESTING STRATEGY?
MARK: Having "balanced fund" in the fund's title explains the role bonds play in
AMBAL. They are designed to be a balance to the equity market, an anchor to
protect against bad stock markets. The bond portion of AMBAL is a bond portfolio
- -- not a portfolio of equities disguised as bonds. For example, high-yield bonds
can behave like equities during periods of bad economic times and of credit
distress like we had in 2002. To balance our equity investments, we invest in
predominantly A-rated (or above) bonds. Their performance is more dependent upon
changes in interest rates and less so on the credit quality of the bond market.
If one of our bonds is downgraded below investment grade (the highest four
rankings given bonds by independent rating agencies), we typically sell it
within six months.
Q: WHAT KIND OF FIXED-INCOME INVESTMENTS CAN THE FUND SELECT WITH THAT MANDATE?
MARK: Our purview is wide: U.S. Treasury bonds; mortgage-backed securities;
asset-backed securities including credit card receivables and automobile
receivables; home equity loans; commercial mortgage-backed securities; federal
agency bonds; and corporate bonds. We have a mix of all those types. No one
class dominates the portfolio. In addition to being a counterweight to equities,
the fund's bond portfolio generates more than half of the fund's income. So we
are looking for bonds that will give us a combination of income, total return
and preservation of capital.
[Begin Sidebar]
WHY BALANCED FUNDS HAVE ENDURED
Balanced funds are one of the most durable mutual fund types. They date back to
1928 when Walter Morgan, a young investment manager, established the first
balanced fund, which later became Vanguard Wellington Fund.
At the time, the idea of adding bonds to a stock portfolio seemed
unconventional. However, it didn't take long for other investors to see the
benefits of a balanced approach. The great stock market crash wiped out 89% of
stock market value from 1929 to 1932, as measured by the Dow Jones Industrial
Average. Diversified portfolios with some assets in bonds and cash fared better
during those bleak days. In 1932, the Commonwealth Investment Company, a
balanced mutual fund, was founded. Commonwealth's management company was later
acquired by another financial services company. In 1975, Capital Research and
Management Company, investment adviser to American Funds, was asked to take over
management of the fund and it became American Balanced Fund. It is now the
largest balanced fund in the United States.
Balanced funds gained popularity during the 1930s. Funds that balanced stocks
with bonds and cash were less volatile and had higher total returns than funds
holding only stocks. This pattern would recur many times in different periods in
the years ahead. Balanced funds seldom led the pack in rising markets but gave
up less ground when stock prices were retreating. Because of this aspect of
managing risk through prescribed asset allocation, balanced funds have regained
considerable favor in the past several years. [End Sidebar]
[photo of Mark Macdonald]
[Begin Photo Caption]
"To balance our equity investments, we invest in predominantly A-rated (or
above) bonds. Their performance is more dependent upon changes in interest rates
and less so on the credit quality of the bond market."
Mark Macdonald
[End Photo Caption]
[Begin Sidebar]
Balanced funds gained popularity during the 1930s. Funds that balanced stocks
with bonds and cash were less volatile and had higher total returns than funds
holding only stocks. This pattern would recur many times in different periods in
the years ahead.
[End Sidebar]
Q: DALE, HOW DOES THE MULTIPLE PORTFOLIO COUNSELOR SYSTEM HELP TO ACCOMPLISH THE
GOAL OF MANAGING AMBAL?
DALE: The multiple manager system is a huge advantage. The balanced investment
portfolio is so diverse that I don't think one manager could do it successfully.
You need a mix of portfolio counselors with different styles and experience.
(Under the multiple portfolio counselor system, the AMBAL portfolio is currently
divided among six portfolio counselors. In addition, a portion is assigned to
research analysts. Three of the six portfolio counselors invest in stocks, two
invest in bonds and the sixth has a balanced role and invests in both.) We spend
a lot of time making sure that we have the right lineup of counselors in the
fund and in the research portfolio.
Q: IS THERE A UNIFYING THEME TO THE PORTFOLIO?
DALE: The "prudent" aspect of the "complete portfolio" focuses on risk. We are
careful to look at the quality of the companies in which we invest. We ask such
questions as "How long have they been around? Do they pay dividends? How is the
balance sheet?" We build financial models to understand the sources of future
earnings, sales and cash flow. We continually meet with each company's top
managers, and talk with each firm's competitors, suppliers and customers, among
others.
Q: HOW DIVERSE ARE THE INVESTMENT STYLES OF THE FUND'S PORTFOLIO COUNSELORS?
DALE: I am a "deep discount investor." My comfort zone is investing in companies
that are currently out of favor and have problems. To invest in one of these
companies, I have to be able to understand why the future will be better than
the recent past. If it works out that way, you can do well. But I am at one end
of the spectrum. Bob O'Donnell's approach is more of a blend of growth and value
investing styles in contrast to my "deep discount" value approach. The research
portfolio has a bit more of a growth focus. Hilda Applbaum is the fund's
balanced portfolio counselor. She invests in both stocks and bonds. She often
acts as a leading indicator, pointing out to the other counselors whether stocks
or bonds are currently the better value. Although we all focus on quality, we
are mindful of investing at an attractive price.
Q: BOB, HOW DOES A SHIFT IN THE ASSET ALLOCATION OF STOCKS VERSUS BONDS HAPPEN?
BOB: If we start nearing the 75% in stocks that is our limit, we start moving
money away from equity managers to bond managers. That protects us from getting
too heavy in stocks at the top of the market. On the other hand, when stocks are
at levels nearing 50%, we start moving assets away from bond managers to stock
managers. In addition, of course, individual counselors may be changing their
own allocations. Only very rarely is the fund higher than 70% in stocks or lower
than 55%.
Q: HOW DOES THIS APPROACH BENEFIT SHAREHOLDERS?
BOB: It helps to protect us against being either too enthusiastic about the
stock or bond markets when things are going well and too pessimistic when things
are bleak. For example, at the end of 1999, only 56% of our assets were invested
in common stocks, 34% in bonds and the rest in cash. We observed rampant
speculation in some areas, with Internet stocks being only the most obvious
example. We limited our exposure to some of the market's most highly valued
technology and telecommunications sectors because we felt most of these stocks
were overpriced. This hurt us in 1999 but it helped us dramatically during the
sharp two-year decline in these stocks. By the end of 2002 with the market down
40% from its high, the fund had 64% of its assets in equities, 31% in bonds and
the rest in cash. Currently the fund has about 65% in stocks, 30% in bonds and
5% in cash.
[photo of Dale Harvey]
[Begin Photo Caption]
Dale Harvey
[End Photo Caption]
[Begin Sidebar]
STOCKS, BONDS AND BALANCE
1976-2003
Total returns U.S. U.S. Lipper Balanced American
stocks bonds Funds Index Balanced Fund
1976 23.9% 15.6% 26.0% 26.0%
1977 -7.2 3.0 -0.7 0.7
1978 6.6 1.4 4.8 6.2
1979 18.6 1.9 14.7 7.6
1980 32.5 2.7 19.7 14.4
1981 -4.9 6.2 1.9 4.4
1982 21.5 32.6 30.6 29.4
1983 22.6 8.4 17.4 16.1
1984 6.3 15.1 7.5 9.4
1985 31.7 22.1 29.8 29.1
1986 18.7 15.3 18.4 16.9
1987 5.3 2.8 4.1 4.0
1988 16.6 7.9 11.2 12.9
1989 31.6 14.5 19.7 21.5
1990 -3.1 9.0 0.7 -1.6
1991 30.4 16.0 25.8 24.7
1992 7.6 7.4 7.5 9.5
1993 10.1 9.7 12.0 11.3
1994 1.3 -2.9 -2.0 0.3
1995 37.5 18.5 24.9 27.1
1996 22.9 3.6 13.1 13.2
1997 33.4 9.7 20.3 21.0
1998 28.6 8.7 15.1 11.1
1999 21.0 -0.8 9.0 3.5
2000 -9.1 11.6 2.4 15.9
2001 -11.9 8.4 -3.2 8.2
2002 -22.1 10.3 -10.7 -6.3
2003 28.7 4.1 19.9 22.8
Average annual
total returns
(1/1/76-12/31/03) 13.1% 9.1% 11.6% 12.4%
Volatility
(1/1/76-12/31/03) 15.3 6.1 10.3 9.7
Volatility calculated by Lipper using standard deviation, a measure of how
returns over time have varied from the mean; a lower number signifies lower
volatility. The Lipper Balanced Funds Index is an equally weighted index of 30
U.S. balanced funds.
Sources: Stocks - S&P 500; Bonds - Lehman Brothers Aggregate Bond Index. Both
indexes are unmanaged.
Figures shown are past results and are not predictive of future periods. Current
and future results may be lower or higher than those shown. Because share prices
may decline, the value of your holdings may decrease. For the most current
information and month-end results, visit americanfunds.com. Results shown are at
net asset value. If a sales charge (maximum 5.75%) had been deducted, the
results would have been lower.
[End Sidebar]
[photo of Mark Macdonald and Dale Harvey]
Begin Photo Caption]
"We are always mindful that we are putting someone's future retirement funds or
college savings on the line."
Dale Harvey
[End Photo Caption]
Q: HOW DID THE FUND FARE DURING THE RECENT BEAR MARKET THAT BEGAN IN MARCH 2000
AND ENDED IN OCTOBER 2002?
BOB: Very well. From March 24, 2000 until October 9, 2002, the stock market (as
represented by the Standard & Poor's 500 Composite Index) produced a total
return of -47.4%. AMBAL posted a total return of +4.2% (both figures assume
reinvestment of dividends). Frankly, I can't imagine that a relative result like
that will ever occur again. It can only be understood as occurring in the
aftermath of perhaps the most speculative period in stock market history. As the
chart on page 6 shows, the fund has held up better than the stock market in
every stock market decline since 1975, the year that AMBAL joined the American
Funds family. The fund has also held up better than the bond market in three of
the four declines since 1975.
Q: IS THIS A FUND THAT MANY INVESTORS IN RETIREMENT OR COLLEGE SAVINGS PLANS
CHOOSE?
DALE: Yes. We estimate that three quarters of the investors in the fund are
using this fund in nontaxable accounts like retirement and college savings
plans. Typically our clients have worked hard for their money, and their
investment in American Balanced Fund is often a core investment. We are always
mindful that we are putting someone's future retirement funds or college savings
on the line. The fund represents people's hopes and dreams. It's not just a
bunch of numbers. That's why approaching the management of the fund as if it
were the complete investment program of the prudent investor is such an
important characteristic of the fund.
[Begin Sidebar]
Figures shown are past results and are not predictive of future periods. Current
and future results may be lower or higher than those shown. Because share prices
may decline, the value of your holdings may decrease. For the most current
information and month-end results, visit americanfunds.com. Results shown are at
net asset value. If a sales charge (maximum 5.75%) had been deducted, the
results would have been lower.
[End Sidebar]
[Begin Sidebar]
A WEALTH OF EXPERIENCE
American Balanced Fund currently has six portfolio counselors who bring together
114 years of investment experience to managing your investment. Here are the
specific years of experience for these primary decision-makers for the fund:
Years of
investment
Portfolio counselor experience
Robert G. O'Donnell 32
John H. Smet 22
Mark R. Macdonald 18
Hilda L. Applbaum 17
J. Dale Harvey 15
Gregory D. Johnson 10
[End Sidebar]
[photo of Bob O'Donnell]
[Begin Photo Caption]
"The fund has also held up better than the bond market in three of the four
declines since 1975."
Bob O'Donnell
[End Photo Caption]
INVESTMENT PORTFOLIO
December 31, 2003
[begin pie chart]
Percent
of net
INVESTMENT MIX BY SECURITY TYPE assets
Common stocks 65 %
Corporate bonds & notes 17
Government & other obligations 13
Short-term securities & cash equivalents 5
[end pie chart]
Percent
of net
LARGEST COMMON STOCK HOLDINGS assets
Altria Group 1.7 %
General Electric 1.6
Eli Lilly 1.5
Microsoft 1.4
Bristol-Myers Squibb 1.3
Wal-Mart Stores 1.2
IBM 1.1
American International Group 1.1
AstraZeneca 1.1
Freddie Mac 1.1
Number of Market
shares value
COMMON STOCKS - 64.98% (000)
RETAILING - 6.74%
Albertson's, Inc. 5,200,000 $ 117,780
eBay Inc. (1) 3,472,000 224,256
J.C. Penney Co., Inc. 6,500,000 170,820
Kohl's Corp. (1) 4,750,000 213,465
Lowe's Companies, Inc. 1,950,000 108,010
May Department Stores Co. 1,500,000 43,605
Target Corp. 6,975,000 267,840
TJX Companies, Inc. 7,500,000 165,375
Walgreen Co. 8,400,000 305,592
Wal-Mart Stores, Inc. 6,300,000 334,215
1,950,958
PHARMACEUTICALS & BIOTECHNOLOGY - 5.99%
Amgen Inc. (1) 1,000,000 61,800
AstraZeneca PLC (ADR) 6,505,400 314,731
Bristol-Myers Squibb Co. 12,600,000 360,360
Eli Lilly and Co. 5,950,000 418,464
Johnson & Johnson 4,200,000 216,972
Merck & Co., Inc. 3,650,000 168,630
Pfizer Inc 5,450,000 192,548
1,733,505
ENERGY - 4.96%
Burlington Resources Inc. 1,000,000 55,380
Canadian Natural Resources, Ltd. 1,300,000 65,602
ChevronTexaco Corp. 2,000,000 172,780
ConocoPhillips 4,600,000 301,622
Exxon Mobil Corp. 5,100,000 209,100
Marathon Oil Corp. 1,750,000 57,907
Noble Energy, Inc. (2) 2,860,000 127,070
Royal Dutch Petroleum Co. (New York registered) 4,650,000 243,613
Schlumberger Ltd. 700,000 38,304
Valero Energy Corp. 3,500,000 162,190
1,433,568
TECHNOLOGY HARDWARE & EQUIPMENT - 4.13%
Agilent Technologies, Inc. (1) 3,250,000 95,030
Cisco Systems, Inc. (1) 2,532,900 61,524
Dell Inc. (1) 2,200,000 74,712
EMC Corp. (1) 4,500,000 58,140
Hewlett-Packard Co. 10,200,000 234,294
International Business Machines Corp. 3,500,000 324,380
Motorola, Inc. 7,700,000 108,339
Nokia Corp. (ADR) 4,300,000 73,100
QUALCOMM Inc. 3,050,000 164,486
1,194,005
TELECOMMUNICATION SERVICES - 3.48%
ALLTEL Corp. 3,010,000 140,206
AT&T Corp. 12,549,000 254,745
BellSouth Corp. 9,950,000 281,585
SBC Communications Inc. 3,000,000 78,210
Sprint Corp. - FON Group 15,400,000 252,868
1,007,614
SOFTWARE & SERVICES - 3.37%
Automatic Data Processing, Inc. 7,525,000 298,065
Electronic Data Systems Corp. 9,000,000 220,860
Microsoft Corp. 14,675,000 404,150
Oracle Corp. (1) 4,000,000 52,800
975,875
BANKS - 3.36%
Bank of America Corp. 400,000 32,172
Comerica Inc. 2,600,000 145,756
FleetBoston Financial Corp. 6,400,000 279,360
PNC Financial Services Group, Inc. 3,000,000 164,190
Socidtd Gdndrale 1,100,000 96,650
SunTrust Banks, Inc. 1,500,000 107,250
U.S. Bancorp 2,000,000 59,560
Wells Fargo & Co. 1,500,000 88,335
973,273
FOOD, BEVERAGE & TOBACCO - 3.21%
Altria Group, Inc. 9,100,000 495,222
Coca-Cola Co. 2,300,000 116,725
Del Monte Foods Co. (1) 5,757,100 59,874
H.J. Heinz Co. 2,591,500 94,408
Sara Lee Corp. 3,000,000 65,130
Unilever NV (New York registered) 1,500,000 97,350
928,709
INSURANCE - 3.02%
Allstate Corp. 1,000,000 43,020
American International Group, Inc. 4,800,000 318,144
Aon Corp. 6,500,000 155,610
Jefferson-Pilot Corp. 1,600,000 81,040
Lincoln National Corp. 2,000,000 80,740
Marsh & McLennan Companies, Inc. 4,050,000 193,955
872,509
AEROSPACE & DEFENSE - 2.78%
General Dynamics Corp. 2,245,200 202,944
Honeywell International Inc. 3,900,000 130,377
Northrop Grumman Corp. 2,950,000 282,020
Raytheon Co. 4,385,000 131,725
United Technologies Corp. 600,000 56,862
803,928
THRIFTS & MORTGAGE FINANCE - 2.68%
Fannie Mae 1,750,800 131,415
Freddie Mac 5,380,000 313,762
MGIC Investment Corp. 2,800,000 159,432
Washington Mutual, Inc. 4,250,000 170,510
775,119
INDUSTRIAL CONGLOMERATES - 2.23%
General Electric Co. 14,650,000 453,857
Tyco International Ltd. 7,250,000 192,125
645,982
AUTOMOBILES & COMPONENTS - 2.18%
General Motors Corp. 3,700,000 197,580
Harley-Davidson Motor Co. 2,230,000 105,992
Honda Motor Co., Ltd. 1,250,000 55,395
Johnson Controls, Inc. 1,725,000 200,307
Magna International Inc., Class A 890,000 71,245
630,519
MATERIALS - 2.14%
Dow Chemical Co. 4,380,000 182,077
International Paper Co. 5,350,000 230,639
MeadWestvaco Corp. 2,750,000 81,813
Rio Tinto PLC 2,250,000 61,915
Weyerhaeuser Co. 1,000,000 64,000
620,444
MEDIA - 2.00%
Comcast Corp., Class A (1) 4,000,000 131,480
Gannett Co., Inc. 1,050,000 93,618
Interpublic Group of Companies, Inc. (1) 4,235,000 66,066
Knight-Ridder, Inc. 1,902,900 147,227
Time Warner Inc. (1) 7,750,000 139,423
577,814
DIVERSIFIED FINANCIALS - 1.80%
American Express Co. 3,500,000 168,805
Bank of New York Co., Inc. 2,130,000 70,546
Citigroup Inc. 1,500,000 72,810
ING Groep NV 2,339,200 54,290
J.P. Morgan Chase & Co. 4,175,000 153,348
519,799
HOTELS, RESTAURANTS & LEISURE - 1.33%
Carnival Corp., units 3,200,000 127,136
Carnival PLC 4,250,000 170,613
McDonald's Corp. 3,500,000 86,905
384,654
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 1.32%
Applied Materials, Inc. (1) 4,500,000 101,025
Intel Corp. 5,550,000 178,710
Texas Instruments Inc. 3,500,000 102,830
382,565
UTILITIES - 1.26%
American Electric Power Co., Inc. 1,200,000 36,612
Constellation Energy Group, Inc. 1,100,000 43,076
FPL Group, Inc. 3,250,000 212,615
National Grid Transco PLC 10,200,000 72,808
365,111
HEALTH CARE PROVIDERS & SERVICES - 1.05%
CIGNA Corp. 2,225,000 127,938
McKesson Corp. 5,500,000 176,880
304,818
MACHINERY - 0.98%
Caterpillar Inc. 400,000 33,208
Deere & Co. 1,530,000 99,526
Illinois Tool Works Inc. 1,800,000 151,038
283,772
HOUSEHOLD & PERSONAL PRODUCTS - 0.72%
Avon Products, Inc. 1,600,000 107,984
Procter & Gamble Co. 1,000,000 99,880
207,864
TRANSPORTATION - 0.60%
Burlington Northern Santa Fe Corp. 3,400,000 109,990
Southwest Airlines Co. 3,935,000 63,511
173,501
OTHER - 1.44%
Becton, Dickinson and Co. 2,525,000 103,879
Equity Office Properties Trust 2,900,000 83,085
Equity Residential 2,100,000 61,971
IKON Office Solutions, Inc. 5,000,000 59,300
Leggett & Platt, Inc. 5,000,000 108,150
416,385
MISCELLANEOUS - 2.21%
Other common stocks in initial period of acquisition 638,554
TOTAL COMMON STOCKS (cost: $15,735,646,000) 18,800,845
Number of Market
shares value
CONVERTIBLE SECURITIES & preferred stocks - 0.51% (000)
CONVERTIBLE SECURITIES & PREFERRED STOCKS - 0.46%
Equity Office Properties Trust, Series B, 5.25% convertible preferred 2008 150,000 $ 7,501
Ford Motor Co. Capital Trust II 6.50% cumulative convertible trust preferred
2032 159,600 8,914
NB Capital Corp., Series A, 8.35% exchangeable preferred depositary shares 300,000 8,430
ProLogis, Series D, 7.92% preferred 238,794 5,977
SMFG Finance (Cayman) Ltd. 2.25% mandatorily exchangeable preferred 2005, units 5,289,000,000 92,204
Swire Pacific Capital Ltd. 8.84% cumulative guaranteed perpetual capital
securities (3) 370,000 9,805
132,831
MISCELLANEOUS - 0.05%
Other convertible securities & preferred stocks in initial period of acquisition 14,193
TOTAL CONVERTIBLE SECURITIES & PREFERRED STOCKS (cost: $93,565,000) 147,024
Principal Market
amount value
CORPORATE BONDS & NOTES - 16.76% (000) (000)
TELECOMMUNICATION SERVICES - 1.94%
AT&T Corp.: (4)
7.00% 2006 $ 15,000 $ 16,601
7.80% 2011 55,000 63,417
AT&T Wireless Services, Inc.:
7.875% 2011 25,170 29,174
8.125% 2012 (5) 54,105 63,744
TeleCorp PCS, Inc. 10.625% 2010 4,750 5,555
British Telecommunications PLC: (4)
7.875% 2005 10,000 11,026
8.375% 2010 8,250 10,056
Cingular Wireless LLC 5.625% 2006 5,000 5,367
Deutsche Telekom International Finance BV:
8.25% 2005 (4) 11,500 12,480
3.875% 2008 5,000 5,023
8.50% 2010 (4) 2,250 2,725
5.25% 2013 30,000 30,374
France Telecom: (4)
8.45% 2006 4,000 4,471
9.00% 2011 7,250 8,722
Orange PLC 9.00% 2009 4,000 4,278
Koninklijke KPN NV:
7.50% 2005 5,000 5,423
8.00% 2010 10,500 12,581
PCCW-HKT Capital Ltd. 7.75% 2011 (3) 10,000 11,757
Singapore Telecommunications Ltd. 7.375% 2031 (3) 5,000 5,925
Sprint Capital Corp.:
7.90% 2005 10,000 10,656
6.00% 2007 10,000 10,689
6.375% 2009 6,420 6,871
7.625% 2011 52,350 58,779
8.375% 2012 11,500 13,457
6.90% 2019 3,900 3,995
6.875% 2028 5,000 4,896
Telecom Italia SpA: (3)
Series A, 4.00% 2008 20,000 20,153
Series B, 5.25% 2013 11,000 11,047
Verizon Global Funding Corp. 7.25% 2010 50,500 58,242
Verizon Virginia Inc., Series A, 4.625% 2013 6,000 5,796
Verizon Wireless Capital LLC and Cellco Partnership 5.375% 2006 27,375 29,236
Vodafone Group PLC 7.75% 2010 15,000 17,805
560,321
BANKS - 1.50%
AB Spintab 7.50% (undated) (3) (4) 2,600 2,888
Abbey National PLC: (4)
6.70% (undated) 5,000 5,535
7.35% (undated) 4,500 4,970
Allfirst Preferred Capital Trust 2.65% 2029 (4) 4,000 4,007
Bank of America Corp.:
4.375% 2010 6,000 6,024
5.125% 2014 5,000 4,998
Bank of Nova Scotia 1.375% Eurodollar note (undated) (4) 4,000 3,230
Bank of Scotland 7.00% (undated) (3) (4) 4,225 4,679
HBOS PLC 5.375% (undated) (3) 15,000 15,030
HBOS Treasury Services PLC 3.75% 2008 (3) 18,500 18,535
Barclays Bank PLC: (3) (4)
6.86% callable perpetual core tier one notes (undated) 3,000 3,266
7.375% (undated) 4,000 4,661
Bayer Hypo-Vereinsbank 8.741% 2031 (3) 1,200 1,420
HVB Funding Trust III 9.00% 2031 (3) 5,000 6,052
Bayerische Landesbank, Series F, 2.50% 2006 7,000 7,091
BCI U.S. Funding Trust I 8.01% noncumulative preferred (undated) (3) (4) 4,000 4,605
BNP Paribas Capital Trust 9.003% noncumulative trust preferred 6,000 7,522
(undated) (3)
BNP U.S. Funding LLC, Series A, 7.738% noncumulative preferred 7,000 8,007
(undated) (3) (4)
Canadian Imperial Bank of Commerce 1.375% Eurodollar note 2085 (4) 1,600 1,280
City National Corp. 5.125% 2013 7,000 6,935
Credit Suisse First Boston (USA), Inc.:
4.625% 2008 5,000 5,210
6.50% 2012 3,000 3,344
DBS Capital Funding Corp., Series A, 7.657% noncumulative guaranteed 5,500 6,344
preference shares (undated) (3) (4)
Den Norske CreditBank 1.438% (undated) (4) 3,000 2,246
Fuji JGB Investment LLC, Series A, 9.87% noncumulative preferred 14,425 16,322
(undated) (3) (4)
Household Finance Corp.:
6.50% 2008 7,000 7,811
6.375% 2011 17,500 19,301
6.75% 2011 5,000 5,637
6.375% 2012 17,000 18,682
7.00% 2012 5,000 5,711
HSBC Capital Funding LP: (4)
8.03% noncumulative preferred (undated) 5,000 7,620
Series 2, 10.176% noncumulative step-up perpetual preferred (undated) (3) $ 10,100 14,845
Midland Bank 1.50% Eurodollar note (undated) (4) 4,000 3,439
J.P. Morgan Chase & Co.:
4.50% 2010 15,000 15,141
5.75% 2013 4,000 4,225
JPM Capital Trust I, cumulative capital securities trust, 7.54% 2027 750 823
National Westminster Bank PLC 7.75% (undated) (4) 7,000 8,008
RBS Capital Trust I noncumulative trust preferred, 4.709% (undated) 4,500 4,312
Royal Bank of Scotland Group PLC:
7.648% (undated) (4) 6,000 7,187
Series 3, 7.816% (undated) 8,500 9,347
Popular North America, Inc., Series E, 3.875% 2008 11,000 10,991
SocGen Real Estate Co. LLC, Series A, 7.64% (undated) (3) (4) 47,750 54,000
UnionBanCal Corp. 5.25% 2013 9,000 9,107
US Bank National Association 2.85% 2006 9,000 9,050
Washington Mutual Bank, FA 6.875% 2011 5,000 5,678
Washington Mutual, Inc.:
7.50% 2006 3,000 3,353
5.625% 2007 4,750 5,123
4.375% 2008 10,000 10,290
4.00% 2009 22,000 22,063
Wells Fargo & Co. 3.50% 2008 5,000 5,021
Zions Bancorp 6.00% 2015 13,500 14,191
435,157
AUTOMOBILES & COMPONENTS - 1.29%
ArvinMeritor, Inc.:
6.625% 2007 7,500 7,913
8.75% 2012 9,500 10,925
DaimlerChrysler North America Holding Corp.:
6.40% 2006 9,000 9,648
4.05% 2008 22,500 22,369
4.75% 2008 5,000 5,120
7.30% 2012 10,750 11,988
6.50% 2013 10,000 10,553
Ford Motor Co. 7.45% 2031 10,800 10,946
Ford Motor Credit Co.:
6.875% 2006 35,000 37,374
6.50% 2007 6,000 6,396
6.75% 2008 2,700 2,855
7.375% 2009 5,000 5,497
7.25% 2011 32,000 34,758
7.375% 2011 35,250 38,474
General Motors Acceptance Corp.:
7.75% 2010 15,500 17,592
6.875% 2011 49,150 53,020
7.25% 2011 5,000 5,493
7.00% 2012 41,500 44,688
8.00% 2031 14,500 16,332
General Motors Corp.:
7.20% 2011 15,000 16,515
8.80% 2021 5,000 5,908
374,364
INSURANCE - 1.18%
ACE Capital Trust II 9.70% 2030 2,500 3,271
AIG SunAmerica Global Financing VII 5.85% 2008 (3) 7,750 8,453
International Lease Finance Corp.:
3.75% 2007 8,000 8,166
4.35% 2008 14,500 14,813
4.50% 2008 4,000 4,135
Series O, 4.55% 2009 5,000 4,995
5.875% 2013 12,850 13,562
Allstate Corp. 6.75% 2018 5,970 6,808
Allstate Financial Global Funding LLC: (3)
5.25% 2007 6,000 6,454
4.25% 2008 19,250 19,709
Hartford Financial Services Group, Inc. 4.70% 2007 3,750 3,943
ING Capital Funding Trust III 8.439% noncumulative preferred (undated) (4) 13,000 15,762
International Nederland Bank NV 5.125% 2015 (3) 7,500 7,491
ReliaStar Financial Corp. 8.00% 2006 9,250 10,464
Jackson National Life Global Funding, Series 2002-1, 5.25% 2007 (3) 6,000 6,440
John Hancock Global Funding II, Series 2002-G, 5.00% 2007 (3) 10,000 10,632
Lincoln National Corp.:
6.20% 2011 700 765
7.00% 2018 1,350 1,563
Mangrove Bay Pass Through Trust 6.102% 2033 (3) (4) 32,440 32,174
XL Capital Finance (Europe) PLC 6.50% 2012 3,015 3,305
MetLife, Inc. 3.911% 2005 12,385 12,741
Monumental Global Funding Trust II: (3)
2001-B, Series B, 6.05% 2006 5,000 5,374
3.45% 2007 15,000 15,094
2002-A, Series A, 5.20% 2007 21,000 22,422
Nationwide Life Insurance Co. 5.35% 2007 (3) 6,000 6,464
Nationwide Mutual Insurance Co. 7.875% 2033 (3) 5,000 5,802
PRICOA Global Funding I, Series 2003-2, 3.90% 2008 (3) 16,500 16,527
Prudential Holdings, LLC, Series C, 8.695% 2023 (3) (6) 29,500 36,521
Prudential Insurance Co. of America 6.375% 2006 (3) 3,075 3,352
Principal Life Global Funding I 4.40% 2010 (3) 15,000 15,123
Travelers Property Casualty Corp. 3.75% 2008 9,000 9,048
United Energy Distribution Pty Ltd., AMBAC insured, 4.70% 2011 (3) 10,000 10,160
341,533
CAPITAL GOODS - 0.87%
BAE SYSTEMS 2001 Asset Trust, Series 2001: (3) (6)
Class B, 7.156% 2011 15,583 17,019
Class G, MBIA insured, 6.664% 2013 13,117 14,505
Caterpillar Financial Services Corp.:
Series F, 2.35% 2006 5,000 4,977
2.70% 2008 4,000 3,869
Deere & Co. 8.95% 2019 7,330 9,053
John Deere Capital Corp. 3.90% 2008 14,500 14,750
General Dynamics Corp. 4.50% 2010 3,000 3,071
General Electric Capital Corp., Series A:
5.00% 2007 20,000 21,320
5.375% 2007 7,000 7,535
3.50% 2008 23,000 23,046
6.00% 2012 8,000 8,690
General Electric Co. 5.00% 2013 29,000 29,382
Hutchison Whampoa Finance Ltd., Series B, 7.45% 2017 (3) 2,750 3,000
Hutchison Whampoa International Ltd.: (3)
7.00% 2011 3,500 3,852
6.50% 2013 21,500 22,438
Raytheon Co.:
6.50% 2005 8,917 9,506
4.85% 2011 15,000 15,042
Tyco International Group SA:
6.125% 2008 8,000 8,600
6.375% 2011 26,175 28,105
6.00% 2013 (3) 3,250 3,364
251,124
MEDIA - 0.78%
Chancellor Media Corp. of Los Angeles 8.00% 2008 5,500 6,394
Clear Channel Communications, Inc.:
6.00% 2006 8,000 8,654
4.625% 2008 15,000 15,489
5.75% 2013 3,000 3,139
Comcast Cable Communications, Inc.:
8.375% 2007 19,000 22,048
6.875% 2009 8,000 9,031
Comcast Corp. 6.50% 2015 2,500 2,719
TCI Communications, Inc. 8.75% 2015 2,670 3,386
Cox Communications, Inc. 7.75% 2006 5,000 5,612
Cox Radio, Inc. 6.625% 2006 17,495 18,932
Gannett Co., Inc. 4.95% 2005 4,125 4,290
Liberty Media Corp.:
7.75% 2009 7,000 8,037
7.875% 2009 18,000 20,879
8.25% 2030 8,750 10,507
AOL Time Warner Inc.:
6.875% 2012 21,500 24,241
7.625% 2031 5,000 5,790
Time Warner Inc. 8.18% 2007 3,000 3,477
Univision Communications Inc.:
2.875% 2006 10,000 9,972
3.875% 2008 2,700 2,674
7.85% 2011 11,000 13,096
Viacom Inc.:
5.625% 2007 15,500 16,771
6.625% 2011 10,000 11,369
226,507
MATERIALS - 0.77%
Alcan Inc. 5.20% 2014 30,480 30,868
Dow Chemical Co.:
5.00% 2007 3,000 3,164
5.75% 2008 3,100 3,327
5.75% 2009 6,250 6,700
6.00% 2012 9,700 10,228
ICI Wilmington, Inc. 5.625% 2013 17,100 17,215
Inco Ltd. 7.75% 2012 3,500 4,089
International Paper Co.:
6.75% 2011 15,000 16,702
5.85% 2012 10,000 10,436
5.50% 2014 8,000 8,045
Norske Skogindustrier ASA: (3)
6.125% 2015 24,550 24,922
7.125% 2033 10,000 10,409
Packaging Corp. of America:
4.375% 2008 4,000 4,008
5.75% 2013 13,000 13,157
SCA Coordination Center NV 4.50% 2015 (3) 18,000 16,869
Scotia Pacific Co. LLC, Series B:
Class A-1, 6.55% 2028 (6) 3,522 3,313
Class A-3, 7.71% 2028 5,000 3,200
Weyerhaeuser Co.:
5.95% 2008 11,875 12,778
5.25% 2009 8,125 8,449
6.75% 2012 13,000 14,205
222,084
DIVERSIFIED FINANCIALS - 0.71%
Capital One Bank:
8.25% 2005 12,000 12,985
6.875% 2006 15,000 16,235
4.875% 2008 20,000 20,603
CIT Group Inc.:
5.50% 2007 10,000 10,716
5.75% 2007 2,500 2,700
7.375% 2007 11,500 12,999
4.00% 2008 6,000 6,074
6.875% 2009 8,000 8,999
7.75% 2012 8,500 10,058
Citigroup Inc. 3.50% 2008 6,000 6,028
MBNA America Bank, National Association 7.125% 2012 7,650 8,763
MBNA Corp.:
Series F, 6.125% 2013 3,500 3,765
5.00% 2015 5,000 4,861
SLM Corp., Series A:
3.625% 2008 4,000 3,987
3.95% 2008 17,500 17,692
4.00% 2009 13,000 13,104
5.00% 2015 10,000 9,887
USA Education, Inc. 5.625% 2007 31,995 34,698
204,154
UTILITIES - 0.68%
Alabama Power Co., Series U, 2.65% 2006 7,000 7,049
Appalachian Power Co., Series G, 3.60% 2008 7,000 6,924
Cilcorp Inc.:
8.70% 2009 13,000 15,707
9.375% 2029 10,620 14,325
Consolidated Edison Co. of New York, Inc., Series 2003-A, 3.625% 2008 4,000 4,005
Constellation Energy Group, Inc. 6.125% 2009 8,750 9,622
Dominion Resources, Inc.:
Series 2002-D, 5.125% 2009 6,250 6,534
Series 2002-C, 5.70% 2012 (4) 8,250 8,710
Series 2003-E, 6.30% 2033 4,000 4,068
Virginia Electric and Power Co.:
Series 2002-A, 5.375% 2007 7,785 8,309
Series 2003-B, 4.50% 2010 3,500 3,534
Duke Energy Corp. First and Refunding Mortgage Bonds 4.50% 2010 2,250 2,298
Exelon Generation Co., LLC 6.95% 2011 19,520 21,960
Israel Electric Corp. Ltd.: (3)
7.75% 2009 5,000 5,655
7.75% 2027 7,500 7,833
Kern River Funding Corp. 4.893% 2018 (3) (6) 6,801 6,789
NiSource Finance Corp.:
7.625% 2005 10,000 10,930
6.15% 2013 6,000 6,463
Oncor Electric Delivery Co. 6.375% 2012 8,600 9,467
PacifiCorp, First Mortgage Bonds 5.45% 2013 5,000 5,197
Progress Energy, Inc.:
6.05% 2007 7,375 7,924
5.85% 2008 4,586 4,924
SP PowerAssets Ltd. 3.80% 2008 (3) 11,500 11,560
Tri-State Generation and Transmission Association, Inc., Series 2003-A, 6,865 7,056
6.04% 2018 (3) (6)
196,843
REAL ESTATE - 0.45%
Developers Diversified Realty Corp. 4.625% 2010 15,625 15,561
EOP Operating LP:
7.75% 2007 6,500 7,458
6.75% 2008 10,495 11,684
8.10% 2010 3,750 4,416
6.75% 2012 4,125 4,563
Federal Realty Investment Trust 6.125% 2007 4,000 4,277
First Industrial, LP 6.875% 2012 8,625 9,436
Hospitality Properties Trust 6.75% 2013 13,345 14,006
Kimco Realty Corp. 6.00% 2012 2,750 2,925
ProLogis Trust:
7.05% 2006 4,000 4,456
5.50% 2013 5,000 5,151
Rouse Co. 7.20% 2012 19,500 22,016
Simon Property Group, LP 4.875% 2010 5,500 5,614
United Dominion Realty Trust, Inc. 6.50% 2009 17,375 19,171
130,734
HEALTH CARE EQUIPMENT & SERVICES - 0.38%
Aetna Inc.:
7.375% 2006 26,486 29,155
7.875% 2011 14,125 16,722
Columbia/HCA Healthcare Corp. 8.85% 2007 6,000 6,789
HCA Inc.:
7.125% 2006 3,250 3,523
6.95% 2012 5,000 5,370
6.25% 2013 6,750 6,921
6.75% 2013 5,000 5,312
HCA - The Healthcare Co. 8.75% 2010 11,577 13,803
Humana Inc.:
7.25% 2006 13,250 14,486
6.30% 2018 2,500 2,638
UnitedHealth Group Inc. 7.50% 2005 4,750 5,217
109,936
OTHER INDUSTRIES - 1.47%
BP Capital Markets PLC 2.75% 2006 7,000 7,016
Bristol-Myers Squibb Co. 4.00% 2008 (3) 6,000 6,102
Carnival Corp.:
3.75% 2007 (3) 5,000 5,013
6.15% 2008 3,000 3,270
Cendant Corp.:
6.875% 2006 10,835 11,896
6.25% 2008 11,750 12,831
7.375% 2013 14,000 16,081
7.125% 2015 3,000 3,394
Centex Corp. 4.75% 2008 15,000 15,490
ChevronTexaco Capital Co. 3.50% 2007 3,000 3,058
ConocoPhillips 3.625% 2007 6,000 6,054
Costco Wholesale Corp. 5.50% 2007 4,750 5,128
CVS Corp.: (3) (6)
6.117% 2013 10,553 11,361
5.789% 2026 22,000 21,984
Devon Financing Corp., ULC 6.875% 2011 10,000 11,357
Electronic Data Systems Corp.:
7.125% 2009 4,600 4,918
Series B, 6.00% 2013 (4) 63,250 62,286
Hyatt Equities, LLC 6.875% 2007 (3) 17,750 19,083
Kroger Co. 7.25% 2009 1,875 2,138
Lennar Corp. 5.95% 2013 4,000 4,194
MDC Holdings, Inc. 5.50% 2013 5,000 5,020
Motorola, Inc.:
6.75% 2006 12,000 12,935
8.00% 2011 31,820 37,699
5.22% 2097 10,314 7,792
Office Depot, Inc. 6.25% 2013 10,740 11,297
OXYMAR 7.50% 2016 (3) 4,000 4,320
Pemex Finance Ltd. 9.69% 2009 (6) 10,360 12,315
Pulte Homes, Inc.:
6.25% 2013 5,000 5,317
7.875% 2032 14,750 17,185
Schering-Plough Corp. 5.30% 2013 8,500 8,668
SUPERVALU INC 7.50% 2012 14,750 16,782
Toll Brothers, Inc. 6.875% 2012 13,750 15,187
Toys "R" Us, Inc.:
7.875% 2013 6,250 6,735
7.375% 2018 10,855 10,872
Unilever Capital Corp. 5.90% 2032 10,000 10,066
Valero Energy Corp. 6.125% 2007 1,475 1,603
Waste Management, Inc. 6.50% 2008 8,500 9,364
425,811
PRIVATE ISSUE MORTGAGE-BACKED OBLIGATIONS (6) - 2.81%
Banc of America Commercial Mortgage Inc., Series 2001-1, Class A-2, 6.503% 2036 5,000 5,582
Banc of America Mortgage Securities Trust: (4)
Series 2003-F, Class 2-A-1, 3.734% 2033 19,683 19,899
Series 2003-G, Class 2-A-1, 4.088% 2033 18,161 18,237
Series 2003-D, Class 2-A-1, 4.183% 2033 6,713 6,747
Bear Stearns ARM Trust: (4)
Series 2003-6, Class A-2, 4.074% 2033 31,119 31,451
Series 2003-3, Class II-A-2, 4.211% 2033 5,909 5,950
Series 2003-3, Class III-A-1, 5.185% 2033 12,582 12,731
Series 2003-9, Class III-A-3, 4.457% 2034 50,951 51,476
Series 2003-9, Class III-A-2, 5.082% 2034 34,277 34,887
Bear Stearns Commercial Mortgage Securities Inc.:
Series 2002-HOME, Class A, 1.77% 2013 (3) (4) 4,420 4,411
Series 2000-WF2, Class A-2, 7.32% 2032 2,000 2,330
Series 2001-TOP2, Class A-2, 6.48% 2035 6,000 6,717
Chase Commercial Mortgage Securities Corp.:
Series 1998-2, Class A-2, 6.39% 2030 28,150 31,296
Series 1998-1, Class A-2, 6.56% 2030 6,000 6,670
Chase Manhattan Bank - First Union National Bank, Commercial Mortgage Trust, 3,000 3,503
Series 1999-1, Class C, 7.625% 2031
CHL Mortgage Pass-Through Trust:
Series 2003-J-6, Class 2-A-1, 4.75% 2018 16,626 16,501
Series 2003-HYB3, Class 4-A-1, 3.551% 2033 (4) 11,878 11,863
Series 2003-27, Class A-1, 3.842% 2033 (4) 12,453 12,385
Series 2003-56, Class 6-A-1, 4.958% 2033 (4) 48,122 48,391
CS First Boston Mortgage Securities Corp.:
Series 2003-AR20, Class 2-A-2, 4.026% 2033 (4) 8,699 8,745
Series 2001-CF2, Class A-2, 5.935% 2034 8,000 8,501
Series 2001-CF2, Class A-3, 6.238% 2034 7,000 7,690
Series 2002-CKP1, Class A-1, 4.627% 2035 3,857 3,998
Series 2002-CKN2, Class A-1, 4.637% 2037 3,847 4,000
Series 1998-C1, Class A-1B, 6.48% 2040 8,375 9,281
Series 1999-C1, Class A-1, 6.91% 2041 18,714 20,382
DLJ Commercial Mortgage Corp., Series 1999-CG1, Class A-1B, 6.46% 2032 3,750 4,171
DLJ Mortgage Acceptance Corp., Series 1996-CF2, Class A-1B, 7.29% 2021 (3) 1,515 1,556
First Union National Bank Commercial Mortgage Trust:
Series 2000-C1, Class A-1, 7.739% 2032 10,569 11,825
Series 2002-C1, Class A-1, 5.585% 2034 6,783 7,256
First Union-Lehman Brothers-Bank of America Commercial Mortgage Trust, 1,990 2,090
Series 1998-C2, Class A-1, 6.28% 2035
GGP Mall Properties Trust, Series 2001-C1A, Class A-2, 5.007% 2011 (3) 7,369 7,754
GMAC Commercial Mortgage Securities, Inc., Series 1999-C3, Class F, 7.78%
2036 (4) 4,000 4,401
GS Mortgage Securities Corp. II, Series 1998-C1, Class D, 7.208% 2030 (4) 10,000 10,996
Hilton Hotel Pool Trust, Series 2000-HLT, Class A-1, 7.055% 2015 (3) 7,792 8,606
Host Marriott Pool Trust, Series 1999-HMTA, Class A, 6.98% 2015 (3) 7,539 8,170
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2001-CIBC1, 7,010 7,627
Class A-2, 6.001% 2033
L.A. Arena Funding, LLC, Series 1, Class A, 7.656% 2026 (3) 17,545 18,472
LB Commercial Mortgage Trust, Series 1998-C1, Class A-3, 6.48% 2030 7,400 8,192
LB-UBS Commercial Mortgage Trust, Series 2000-C3, Class A-2, 7.95% 2010 3,750 4,476
Merrill Lynch Mortgage Investors, Inc.:
Series 1995-C3, Class A-3, 7.117% 2025 (4) 1,977 2,020
Series 1999-C1, Class A-2, 7.56% 2031 6,750 7,659
Morgan Stanley Capital I, Inc.:
Series 2003-KIDS, Class A, 1.843% 2016 (3) (4) 14,863 14,863
Series 1997-HF1, Class B, 7.33% 2029 (3) 8,656 9,684
Series 1999-FNV1, Class A-2, 6.53% 2031 10,000 11,165
Morgan Stanley Dean Witter Capital I Trust:
Series 2002-HQ, Class A-1, 4.59% 2034 2,458 2,546
Series 2002-IQ2, Class A-2, 5.16% 2035 10,000 10,611
Series 2001-TOP5, Class A-3, 6.16% 2035 9,000 9,896
Series 2003-TOP9, Class A-1, 3.98% 2036 4,830 4,857
Nomura Asset Securities Corp., Series 1998-D6, Class A-1A, 6.28% 2030 6,157 6,568
Opryland Hotel Trust, Series 2001-OPRA, Class C, 2.11% 2011 (3) (4) 5,000 4,889
PNC Mortgage Securities Corp., Series 1998-10, Class 1-B1, 6.50% 2028 5,301 5,403
Prudential Mortgage Capital Funding, LLC, Series 2001-ROCK, 15,555 17,469
Class A-2, 6.605% 2034
Residential Funding Mortgage Securities I, Inc., Series 2003-S15, 37,003 36,606
Class A-1, 4.50% 2018
Salomon Brothers Commercial Mortgage Trust, Series 2001-C1, 20,000 22,234
Class A-3, 6.428% 2035
Structured Asset Securities Corp., Series 1998-RF2, Class A, 8.541% 3,537 3,908
2027 (3) (4)
WaMu Mortgage Pass-Through Certificates Trust: (4)
Series 2003-AR7, Class A-7, 3.84% 2033 16,032 15,740
Series 2003-AR8, Class A, 4.03% 2033 18,612 18,782
Series 2003-AR5, Class A-7, 4.21% 2033 9,386 9,411
Series 2003-AR6, Class A-1, 4.38% 2033 14,148 14,137
Wells Fargo Mortgage Backed Securities Trust:
Series 2003-13, Class A-1, 4.50% 2018 19,766 19,790
Series 2003-12, Class A-1, 4.75% 2018 33,382 33,308
Series 2003-B, Class A-1, 4.15% 2033 (4) 12,599 12,686
Series 2003-K, Class I-A-1, 4.522% 2033 (4) 19,891 19,588
813,036
PRIVATE ISSUE ASSET-BACKED OBLIGATIONS (6) - 1.93%
ACLC Business Loan Receivables Trust, Series 2002-1, Class A-1, 5.408% 4,608 4,658
2022 (3)
America West Airlines, Inc., Series 2000-1, Class G, AMBAC insured, 3,905 4,251
8.057% 2022
American Airlines, Inc.:
Series 2003-1, Class G, AMBAC insured, 3.857% 2010 8,500 8,406
Series 2001-2, Class A-2, 7.858% 2013 5,000 5,077
AmeriCredit Automobile Receivables Trust, Series 2003-CF, Class A-4, FSA 15,000 15,295
insured, 3.48% 2010
Ameriquest Mortgage Securities Inc., Asset-Backed Pass-Through Certificates, 5,000 5,013
Series 2003-5, Class A-2, 2.43% 2033
Banco Itau SA, XLCA insured: (3) (4)
Series 2002-2, 1.828% 2006 7,000 6,965
Series 2002, 1.878% 2007 6,750 6,716
Burlington Northern and Santa Fe Railway Co. Pass Through Trust, Series 3,750 3,940
2002-1, 5.943% 2022
California Infrastructure and Economic Development Bank, Special Purpose
Trust, Series 1997-1:
SCE-1, Class A-6, 6.38% 2008 3,397 3,620
PG&E-1, Class A-7, 6.42% 2008 8,781 9,345
Centex Home Equity Loan Trust:
Series 2003-A, Class AF-3, 2.708% 2026 3,200 3,199
Series 2003-C, Class AF-6, 4.81% 2033 5,000 5,030
Chase Credit Card Owner Trust, Series 2003-4, Class B, 1.813% 2016 (4) 14,000 14,064
Chase Funding Trust:
Series 2003-5, Class IA-6, 4.597% 2015 10,000 9,744
Series 2003-1, Class IA-3, 3.14% 2023 3,500 3,528
CIT Equipment Collateral, Series 2002-VT1:
Class B, 3.97% 2009 1,474 1,489
Class C, 4.44% 2009 2,991 2,933
CitiFinancial Mortgage Securities Inc., Series 2003-3, Class AF-5, 4.553% 2033 8,000 7,888
Conseco Finance Home Equity Loan Trust, Series 2001-C, Class A-3, 5.39% 2025 341 341
Conseco Finance Manufactured Housing Contract Trust, Series 2001-3, Class 3,648 3,693
A-2, 5.16% 2033
Green Tree Financial Corp., Series 1998-4, Class A-5, 6.18% 2030 2,869 2,840
Continental Airlines, Inc.:
Series 1998-1, Class A, 6.648% 2019 2,601 2,542
Series 1997-4, Class A, 6.90% 2019 2,107 2,081
Series 1999-1, Class B, 6.795% 2020 6,783 5,731
Series 1999-2, Class A-1, 7.256% 2021 2,006 2,039
CPS Auto Receivables Trust: (3)
Series 2003-A, Class A-2, XLCA insured, 2.89% 2009 5,997 5,988
Series 2002-B, Class A-2, XLCA insured, 3.50% 2009 2,287 2,330
Series 2003-D, Class A-2, 3.56% 2010 10,000 10,072
Delta Air Lines, Inc.:
Series 2001-1, Class A-2, 7.111% 2013 2,000 2,018
Series 2002-1, Class C, 7.779% 2013 8,297 7,094
Drive Auto Receivables Trust, Series 2002-1, Class A-4, MBIA insured, 4.09%
2008 (3) 7,000 7,214
Drivetime Auto Owner Trust, Series 2003-C, Class A-3, MBIA insured, 2.715%
2009 (3) 12,000 12,090
Duck Auto Owner Trust, Series 2002-B, Class A, XLCA insured, 2.985% 2007 (3) 1,232 1,235
Educational Enhancement Funding Corp. Tobacco Settlement Bonds, Series 2002-A, 19,225 18,340
Class A, 6.72% 2025
Financial Pacific Funding II, LLC, Series 2003-A, Class A, FSA insured, 2.29%
2009 (3) 7,121 7,121
First Investors Auto Owner Trust, Series 2003-A, Class A, MBIA insured, 2.58%
2011 (3) 20,484 20,638
Franklin Auto Trust, Series 2002-1, Class A-4, MBIA insured, 4.51% 2010 12,500 13,032
GRCT Consumer Loan Trust, Series 2001-1A, Class 2BRV, 6.251% 2020 (3) 3,484 3,575
Green Tree Home Improvement and Home Equity Loan Trust, Series 1996-C, Class 3,860 3,872
HI-B1, 7.75% 2021
Household Automotive Trust, Series 2001-3, Class A-4, 4.37% 2008 7,500 7,742
Household Private Label Credit Card Master Note Trust I, Series 2002-1, Class B, 4,000 3,959
1.713% 2011 (4)
Hyundai Auto Receivables Trust, Series 2002-A, Class C, 3.91% 2009 (3) 10,500 10,659
Long Beach Acceptance Auto Receivables Trust, Series 2002-A, Class A-3, FSA 4,000 4,051
insured, 3.175% 2006
Madison Avenue Manufactured Housing Contract Trust, Series 2002-A, Class M-2, 4,000 3,545
3.391% 2032 (4)
MBNA Credit Card Master Note Trust, Series 2002-C1, Class C-1, 6.80% 2014 12,500 13,611
Merrill Lynch Mortgage Investors, Inc., Series 2002-NC1: (4)
Class M-1, 1.841% 2033 4,974 4,997
Class M-2, 2.341% 2033 4,000 3,982
Metris Master Trust: (4)
Series 2001-1, Class A, 1.369% 2007 5,000 5,003
Series 2001-3, Class A, 1.379% 2008 12,800 12,663
MMCA Auto Owner Trust:
Series 2002-2, Class A-3, 3.67% 2006 5,000 5,007
Series 2002-1, Class A-3, 4.15% 2006 526 526
Series 2001-2, Class B, 5.75% 2007 2,256 2,291
Series 2001-4, Class B, 4.84% 2008 3,436 3,446
Series 2002-4, Class A-4, 3.05% 2009 7,000 7,050
Series 2002-2, Class A-4, 4.30% 2010 13,000 13,153
Series 2002-2, Class B, 4.67% 2010 3,018 2,614
New South Motor Vehicle Trust, Series 2002-A, Class A-3, AMBAC insured,
3.03% 2010 5,000 5,080
NextCard Credit Card Master Note Trust, Series 2001-1A, Class A, 1.42%
2007 (3) (4) 39 38
Nordstrom Credit Card Master Note Trust, Series 2002-1A, Class B, 1.863%
2010 (3) (4) 5,000 5,030
Northwest Airlines, Inc.:
Series 1999-3, Class G, 7.935% 2020 9,424 9,989
Series 2002-1, Class G-2, MBIA insured, 6.264% 2021 2,000 2,086
Oakwood Mortgage Investors Trust, Series 2002-B, Class A-3, 6.06% 2025 5,000 4,531
Pass-through Amortizing Credit Card Trusts, Series 2002-1A: (3)
Class A-2FX, 4.685% 2012 7,504 7,578
Class A-3FX, 6.298% 2012 6,174 6,257
PF Export Receivables Master Trust, Series 2001-B, MBIA insured, 6.60% 2011 (3) 5,250 5,703
PP&L Transition Bond Co. LLC, Series 1999-1, Class A-7, 7.05% 2009 7,000 7,828
Prestige Auto Receivables Trust, Series 2003-1, Class A-2, FSA insured,
2.41% 2010 (3) 6,485 6,527
Providian Master Trust, Series 2000-1, Class C, 2.291% 2009 (3) (4) 6,000 5,915
Residential Asset Mortgage Products Trust:
Series 2003-RS1, Class A-I-3, 3.495% 2028 3,700 3,736
Series 2003-RZ4, Class A-7, 4.79% 2033 8,500 8,472
Series 2003-RS11, Class A-I-7, 4.828% 2033 9,000 8,968
Series 2003-RS9, Class A-I-7, 5.06% 2033 13,381 13,454
Residential Asset Securities Corp. Trust:
Series 2003-KS2, Class A-I-2, 2.15% 2024 3,000 3,000
Series 2003-KS10, Class A-I-2, 2.71% 2026 9,200 9,207
Series 2001-KS3, Class A-I-6, 5.96% 2031 12,000 12,692
Series 2001-KS6, Class A-2, 1.441% 2033 (4) 9,417 9,414
Series 2003-KS8, Class A-I-6, 4.83% 2033 8,500 8,576
Residential Funding Mortgage Securities II, Inc., AMBAC insured:
Series 2001-H13, Class A-I-4, 6.09% 2015 508 508
Series 2001-HS2, Class A-4, 5.135% 2016 (4) 1,617 1,637
SeaWest Securitization LLC, Series 2003-A, Class A-2, XLCA insured,
2.84% 2009 (3) 9,915 10,034
Southern Capital Corp. Pass Through Trust, Series 2002-1, Class G, MBIA insured, 2,585 2,697
5.70% 2023 (3)
Tobacco Settlement Financing Corp., Tobacco Settlement Asset-Backed Bonds, 5,169 5,058
Series 2001-A, Class A, 6.36% 2025
Triad Automobile Receivables Owner Trust, AMBAC insured:
Series 2002-A, Class A-3, 2.62% 2007 5,000 5,055
Series 2002-1, Class A-3, 3.00% 2009 (3) 6,435 6,530
Union Pacific Railroad Co. Pass Through Trust, Series 2002-1, 6.061% 2023 6,775 7,328
Vanderbilt Acquisition Loan Trust, Series 2002-1, Class A-3, 5.70% 2023 6,000 6,190
WFS Financial Owner Trust, Series 2002-3, Class A-4, 3.50% 2010 5,000 5,117
World Financial Network Credit Card Master Note Trust, Series 2001-A, Class B, 4,000 4,001
1.833% 2008 (4)
557,582
TOTAL CORPORATE BONDS & NOTES 4,849,186
Principal Market
amount value
GOVERNMENT OBLIGATIONS - 12.17% (000) (000)
U.S. TREASURY NOTES & BONDS - 9.03%
6.00% August 2004 $ 101,000 $ 104,061
7.875% November 2004 30,000 31,720
10.75% August 2005 100,000 114,625
5.75% November 2005 149,750 160,770
6.875% May 2006 40,000 44,469
3.50% November 2006 250,000 258,438
3.375% January 2007 (7) 80,864 87,594
6.25% February 2007 44,000 49,067
4.375% May 2007 100,000 105,922
6.625% May 2007 180,000 203,710
3.25% August 2007 (5) 150,000 153,024
3.00% November 2007 181,000 182,555
3.625% January 2008 (7) 123,677 136,804
3.00% February 2008 150,000 150,704
2.625% May 2008 20,000 19,700
5.625% May 2008 (5) 25,000 27,695
4.75% November 2008 20,000 21,412
10.375% November 2009 15,000 16,160
10.00% May 2010 4,500 5,010
5.75% August 2010 20,000 22,431
3.50% January 2011 (7) 47,834 53,798
5.00% February 2011 25,000 26,856
3.375% January 2012 (7) 62,515 70,026
4.375% August 2012 72,000 73,452
10.375% November 2012 8,000 10,219
11.250% February 2015 8,000 12,810
9.875% November 2015 4,000 5,968
8.125% August 2019 100,000 135,125
6.25% August 2023 88,500 100,932
6.875% August 2025 67,750 82,909
5.25% February 2029 15,000 15,134
3.375% April 2032 (7) 104,229 128,810
2,611,910
FEDERAL AGENCY: MORTGAGE PASS-THROUGH OBLIGATIONS (6) - 2.38%
Fannie Mae:
4.50% 2019 20,000 20,022
5.00% 2018 - 2033 37,783 38,003
5.50% 2016 - 2034 132,948 136,333
6.00% 2013 - 2033 68,101 71,164
6.50% 2013 - 2032 21,213 22,299
7.00% 2008 - 2031 2,688 2,858
7.50% 2030 - 2031 4,351 4,669
8.50% 2027 1,065 1,164
9.00% 2016 1,342 1,457
10.50% 2022 1,436 1,664
11.00% 2018 - 2020 2,104 2,476
Freddie Mac:
4.50% 2019 24,250 24,254
5.00% 2019 - 2034 90,000 90,729
6.00% 2034 30,000 31,003
6.50% 2031 1,437 1,508
7.50% 2022 - 2024 228 245
8.50% 2008 - 2020 1,016 1,120
10.00% 2018 958 1,106
Government National Mortgage Association:
5.50% 2017 - 2034 87,785 89,215
6.00% 2014 - 2034 64,957 67,437
6.50% 2031 - 2032 19,661 20,780
7.00% 2022 - 2032 17,272 18,502
7.50% 2022 - 2032 20,794 22,436
8.00% 2023 - 2030 10,492 11,413
9.00% 2009 2,643 2,867
10.00% 2020 - 2021 2,756 3,218
687,942
FEDERAL AGENCY: NON-PASS-THROUGH OBLIGATIONS - 0.38%
Federal Home Loan Bank 4.125% 2004 23,140 23,684
Freddie Mac:
4.25% 2005 64,250 66,677
5.75% 2010 Euro 3,000 4,128
6.25% 2012 $ 5,000 5,274
6.75% 2031 7,850 9,072
108,835
FEDERAL AGENCY: COLLATERALIZED MORTGAGE OBLIGATIONS (6) - 0.30%
Fannie Mae:
Series 2002-W7, Class A-2, 4.80% 2022 6,970 7,177
Series 2001-4, Class NA, 11.79% 2025 (4) 1,646 1,907
Series 2002-W3, Class A-5, 7.50% 2028 4,384 4,789
Series 2001-20, Class D, 11.034% 2031 (4) 299 348
Series 2003-W10, Class 1A-2B, 3.112% 2037 19,200 19,206
Series 2001-T10, Class A-1, 7.00% 2041 2,716 2,932
Series 2001-50, Class BA, 7.00% 2041 2,682 2,859
Series 2002-W1, Class 2A, 7.50% 2042 3,975 4,343
Freddie Mac:
Series H009, Class A-2, 1.876% 2008 (4) 4,314 4,273
Series SF2, Class GC, 2.64% 2009 10,000 9,558
Series 2310, Class B, 9.911% 2015 (4) 645 719
Series T-041, Class 3-A, 7.50% 2032 15,601 17,093
Series T-056, Class A-2A, 2.842% 2036 8,000 8,018
Series T-042, Class A-2, 5.50% 2042 4,596 4,665
87,887
NON-U.S. GOVERNMENT OBLIGATIONS - 0.08%
State of Qatar 9.75% 2030 5,000 7,075
United Mexican States Government, Global:
4.625% 2008 3,500 3,553
10.375% 2009 6,500 8,255
Eurobonds, 6.375% 2013 5,000 5,200
24,083
TOTAL GOVERNMENT OBLIGATIONS 3,520,657
Principal Market
amount value
OTHER OBLIGATIONS - 0.40% (000) (000)
MUNICIPALS OBLIGATIONS - 0.06%
State of California Dept. of Water Resources, Power Supply Revenue Bonds,
Series 2002-E:
3.585% 2004 $ 10,425 $ 10,481
4.33% 2006 7,500 7,711
18,192
MISCELLANEOUS - 0.34%
Other obligations in initial period of acquisition 99,246
Total other obligations 117,438
TOTAL BONDS & NOTES (cost: $8,162,570,000) 8,487,281
Principal Market
amount value
SHORT-TERM SECURITIES - 5.94% (000) (000)
CORPORATE SHORT-TERM NOTES - 4.80%
Anheuser-Busch Cos. Inc. 1.01% due 2/3/2004 (3) (5) $ 25,000 $ 24,976
Bank of America Corp. 1.10% due 3/15-4/5/2004 (5) 36,500 36,404
Receivables Capital Corp. 1.10% due 2/6/2004 (3) 36,357 36,316
BellSouth Corp. 1.01% due 2/2/2004 (3) 50,000 49,954
ChevronTexaco Corp. 1.02% due 1/23/2004 (5) 22,400 22,385
Citicorp 1.07% due 1/5/2004 (5) 50,000 49,992
Clorox Co. 1.02% due 1/13/2004 40,000 39,985
Coca-Cola Co. 1.02%-1.03% due 3/8-3/10/2004 50,700 50,597
E.I. DuPont de Nemours & Co. 1.03%-1.07% due 1/14-2/20/2004 121,200 121,090
Edison Asset Securitization LLC 1.09% due 1/22-2/5/2004 (3) 71,700 71,639
FCAR Owner Trust I 1.09%-1.10% due 1/6-2/3/2004 50,000 49,969
Gannett Co. 1.03% due 1/27/2004 (3) 15,300 15,288
Harley-Davidson Funding Corp. 1.03% due 1/7/2004 (3) 15,000 14,997
Household Finance Corp. 1.08% due 1/13-1/26/2004 41,300 41,269
IBM Credit Corp. 1.01%-1.02% due 1/6-1/16/2004 32,900 32,890
Medtronic Inc. 1.02%-1.03% due 1/13-1/22/2004 (3) 47,400 47,376
Merck & Co. Inc. 1.01% due 1/21/2004 50,000 49,971
Motiva Enterprises LLC 1.03%-1.04% due 1/7-1/12/2004 45,000 44,988
New Center Asset Trust 1.07% due 1/20-1/22/2004 47,400 47,370
Park Avenue Receivables Corp. 1.09% due 1/12-1/15/2004 (3) 44,500 44,482
Pfizer Inc 1.01%-1.04% due 1/9-2/13/2004 (3) 115,100 115,019
Preferred Receivables Funding Corp. 1.08%-1.09% due 1/21-3/1/2004 (3) 108,800 108,683
Private Export Funding Corp. 1.05%-1.08% due 2/12-4/1/2004 (3) 63,000 62,882
Procter & Gamble Co. 1.01%-1.02% due 1/9-1/15/2004 (3) 30,700 30,692
SBC International Inc. 1.05% due 1/14/2004 (3) 25,000 24,990
Triple-A One Funding Corp. 1.09% due 1/7-1/8/2004 (3) 50,209 50,198
United Parcel Service Inc. 0.92% due 1/21/2004 25,000 24,985
USAA Capital Corp. 1.03%-1.05% due 1/15-2/17/2004 53,900 53,857
Verizon Network Funding Corp. 1.03% due 2/20/2004 25,000 24,963
1,388,207
U.S. TREASURIES - 0.43%
U.S. Treasury Bills 0.895%-0.96% due 1/2-3/18/2004 (5) 124,600 124,463
CERTIFICATES OF DEPOSIT - 0.42%
Wells Fargo & Co. 1.04%-1.05% due 1/20-2/17/2004 120,500 120,499
FEDERAL AGENCY DISCOUNT NOTES - 0.29%
Federal Farm Credit Banks 1.00% due 2/23/2004 25,000 24,962
International Bank for Reconstruction and Development 1.00% due 2/13/2004 34,600 34,558
Student Loan Marketing Assn. 0.963% due 6/17/2004 (4) 25,000 24,975
84,495
TOTAL SHORT-TERM SECURITIES (cost: $1,717,671,000) 1,717,664
TOTAL INVESTMENT SECURITIES (cost: $25,709,452,000) 29,152,814
Other assets less liabilities (220,934)
NET ASSETS $28,931,880
(1) Security did not produce income during the last 12 months.
(2) The fund owns 5.04% of the outstanding voting securities of Noble Energy,
Inc. and thus is considered an affiliate of this company under the
Investment Company Act of 1940.
(3) Purchased in a private placement transaction; resale may be
limited to qualified institutional buyers; resale to the public
may require registration.
(4) Coupon rate may change periodically.
(5) This security, or a portion of this security, has been segregated to cover
funding requirements on investment transactions settling in the future.
(6) Pass-through securities backed by a pool of
mortgages or other loans on which principal payments are
periodically made. Therefore, the effective maturities
are shorter than the stated maturities.
(7) Index-linked bond whose principal amount moves with a government
retail price index.
ADR = American Depositary Receipts
See Notes to Financial Statements
EQUITY SECURITIES APPEARING IN THE PORTFOLIO SINCE JUNE 30, 2003
Amgen
Bank of America
Bank of New York
BellSouth
Burlington Resources
Citigroup
Fannie Mae
FPL Group
Freddie Mac
Harley-Davidson Motor
Illinois Tool Works
Jefferson-Pilot
Knight-Ridder
Magna International
Marsh & McLennan Companies
McKesson
Procter & Gamble
QUALCOMM
Rio Tinto
SBC Communications
Southwest Airlines
SunTrust Banks
U.S. Bancorp
Wall-Mart Stores
EQUITY SECURITIES ELIMINATED FROM THE PORTFOLIO SINCE JUNE 30, 2003
Aetna
Analog Devices
CenturyTel
Chubb
Crompton
Duke Energy
Exelon
Flextronics International
Halliburton
Imperial Oil
Kerr-McGee
Kingfisher
Linear Technology
Millennium Chemicals
National City
NIKE
NiSource
Royal & Sun Alliance Insurance Group
Schering-Plough
TXU
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES (dollars and shares in thousands,
at December 31, 2003 except per-share amounts)
ASSETS:
Investment securities at market:
Unaffiliated issuers (cost: $25,605,292) $29,025,744
Affiliated issuers (cost: $104,160) 127,070 $29,152,814
Cash 705
Receivables for:
Sales of investments 110,208
Sales of fund's shares 135,857
Dividends and interest 129,940 376,005
29,529,524
LIABILITIES:
Payables for:
Purchases of investments 545,752
Repurchases of fund's shares 32,847
Investment advisory services 5,979
Services provided by affiliates 11,956
Deferred Directors' compensation 908
Other fees and expenses 202 597,644
NET ASSETS AT DECEMBER 31, 2003 $28,931,880
NET ASSETS CONSIST OF:
Capital paid in on shares of capital stock $25,502,322
Undistributed net investment income 7,508
Accumulated net realized loss (21,403)
Net unrealized appreciation 3,443,453
NET ASSETS AT DECEMBER 31, 2003 $28,931,880
TOTAL AUTHORIZED CAPITAL STOCK - 2,500,000 SHARES, $.001 PAR VALUE
Net assets Shares outstanding Net asset value per share (1)
Class A $19,951,146 1,153,959 $17.29
Class B 3,343,443 193,884 17.24
Class C 2,967,980 172,190 17.24
Class F 658,912 38,115 17.29
Class 529-A 389,211 22,522 17.28
Class 529-B 137,321 7,948 17.28
Class 529-C 192,854 11,162 17.28
Class 529-E 26,558 1,537 17.28
Class 529-F 6,703 388 17.27
Class R-1 16,422 952 17.24
Class R-2 293,177 17,004 17.24
Class R-3 562,735 32,616 17.25
Class R-4 258,429 14,957 17.28
Class R-5 126,989 7,341 17.30
(1) Maximum offering price and redemption price per share were equal to the net
asset value per share for all share classes, except for classes A and 529-A, for
which the maximum offering prices per share were $18.34 and $18.33,
respectively.
See Notes to Financial Statements
STATEMENT OF OPERATIONS
for the year ended December 31, 2003 (dollars in thousands)
INVESTMENT INCOME:
Income:
Dividends (net of non-U.S. withholding tax of $3,304;
also includes $455 from affiliates $324,078
Interest 322,134 $646,212
Fees and expenses:
Investment advisory services 55,043
Distribution services 88,954
Transfer agent services 22,746
Administrative services 8,032
Reports to shareholders 841
Registration statement and prospectus 1,437
Postage, stationery and supplies 2,807
Directors' compensation 309
Auditing and legal 76
Custodian 393
State and local taxes 1
Other 69
Total expenses before reimbursement 180,708
Reimbursement of expenses 418 180,290
Net investment income 465,922
NET REALIZED GAIN AND UNREALIZED APPRECIATION ON INVESTMENTS
AND NON-U.S. CURRENCY:
Net realized gain (loss) on:
Investments 154,255
Non-U.S. currency transactions (710) 153,545
Net unrealized appreciation on:
Investments 3,961,627
Non-U.S. currency translations 42 3,961,669
Net realized gain and unrealized appreciation
on investments and non-U.S. currency 4,115,214
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,581,136
See Notes to Financial Statements
STATEMENT OF CHANGES IN NET ASSETS (dollars in thousands)
Year ended December 31
2003 2002
OPERATIONS:
Net investment income $465,922 $365,757
Net realized gain (loss) on investments and
non-U.S. currency transactions 153,545 (171,397)
Net unrealized appreciation (depreciation)
on investments and non-U.S. currency translations 3,961,669 (1,185,492)
Net increase (decrease) in net assets
resulting from operations 4,581,136 (991,132)
DIVIDENDS AND DISTRIBUTIONS PAID TO
SHAREHOLDERS:
Dividends from net investment income (469,461) (376,231)
Distributions from net realized gain
on investments - (17,049)
Total dividends and distributions paid
to shareholders (469,461) (393,280)
CAPITAL SHARE TRANSACTIONS 8,395,553 7,776,719
TOTAL INCREASE IN NET ASSETS 12,507,228 6,392,307
NET ASSETS:
Beginning of year 16,424,652 10,032,345
End of year (including undistributed
net investment income: $7,508 and $7,282, respectively) $28,931,880 $16,424,652
See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - American Balanced Fund, Inc. (the "fund") is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The fund seeks conservation of capital, current income and long-term
growth of both capital and income by investing in stocks and fixed-income
securities.
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) are sponsored by the Commonwealth of Virginia and 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 Conversion feature
charge upon redemption
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Classes A and 529-A Up to 5.75% None (except 1% for None
certain redemptions
within one year of
purchase without an
initial sales charge)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Classes B and 529-B None Declines from 5% to zero Classes B and 529-B convert to
for redemptions within classes A and 529-A,
six years of purchase respectively, after eight years
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Class C None 1% for redemptions within Class C converts to Class F
one year of purchase after 10 years
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Class 529-C None 1% for redemptions within None
one year of purchase
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Class 529-E None None None
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Classes F and 529-F None None None
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Classes R-1, R-2, R-3, None None None
R-4 and R-5
- ---------------------------------------------------------------------------------------------------------
Holders of all share classes have equal pro rata rights to assets, dividends and
liquidation. 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 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 at prices
for securities of comparable maturity, quality and type. Short-term
securities maturing within 60 days are valued at amortized cost, which
approximates market value. The ability of the issuers of the debt
securities held by the fund to meet their obligations may be affected
by economic developments in a specific industry, state or region.
Securities and other assets for which representative market quotations
are not readily available are fair valued as determined in good faith
by authority of the fund's Board of Directors. Various factors may be
reviewed in order to make a good faith determination of a security's
fair value. These factors include, but are not limited to, the type
and cost of the security; contractual or legal restrictions on resale
of the security; relevant financial or business developments of the
issuer; actively traded similar or related securities; conversion or
exchange rights on the security; related corporate actions;
significant events occurring after the close of trading in the
security; and changes in overall market conditions.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security
transactions are recorded by the fund as of the date the trades are
executed with brokers. Realized gains and losses from security
transactions are determined based on the specific identified cost of
the securities. 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 at the
end of the reporting period. 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.
MORTGAGE DOLLAR ROLLS - The fund may enter into mortgage dollar roll
transactions in which the fund sells a mortgage-backed security to a
counterparty and simultaneously enters into an agreement with the same
counterparty to buy back a similar security on a specific future date
at a predetermined price. Each mortgage dollar roll is treated as a
financing transaction, therefore, any realized gain or loss is
deferred until the roll reaches completion. Risks may arise due to the
delayed payment date and the potential inability of counterparties to
complete the transaction. Income is generated as consideration for
entering into these transactions and is included in interest income in
the accompanying financial statements.
2. NON-U.S. INVESTMENTS
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.
3. FEDERAL INCOME TAXATION AND DISTRIBUTIONS
The fund complies with the requirements under Subchapter M of the Internal
Revenue Code applicable to mutual funds and intends to distribute substantially
all of its net taxable income and net capital gains each year. The fund is not
subject to income taxes to the extent such distributions are made.
DISTRIBUTIONS - Distributions paid to shareholders are based on net investment
income and net realized gains determined on a tax basis, which may differ from
net investment income and net realized gains for financial reporting purposes.
These differences are due primarily to differing treatment for items such as
non-U.S. currency gains and losses; short-term capital gains and losses; capital
losses related to sales of securities within 30 days of purchase; unrealized
appreciation of certain investments in non-U.S. securities; deferred expenses;
cost of investments sold; paydowns on investments; and net capital losses. The
fiscal year in which amounts are distributed may differ from the year in which
the net investment income and net realized gains are recorded by the fund. As of
December 31, 2003, the cost of investment securities for federal income tax
purposes was $25,710,965,000.
During the year ended December 31, 2003, the fund reclassified $3,765,000 from
accumulated net realized loss to undistributed net investment income to align
financial reporting with tax reporting.
As of December 31, 2003, the components of distributable earnings on a tax basis
were as follows:
(dollars in thousands)
Undistributed net investment income and currency gains
$9,231
Loss deferrals related to non-U.S. currency that were realized during the period November 1, (67)
2003 through December 31, 2003
Capital loss carryforward expiring in 2010 (20,638)
Gross unrealized appreciation on investment securities 3,792,797
Gross unrealized depreciation on investment securities (350,948)
Capital gains realized during the year ended December 31, 2003, were offset by
capital losses of $126,876,000, which were realized during the period November
1, 2002 through December 31, 2002, and the utilization of a capital loss
carryforward of $22,893,000. The remaining capital loss carryforward will be
used to offset any capital gains realized by the fund in future years through
the expiration date. The fund will not make distributions from capital gains
while a capital loss carryforward remains.
The tax character of distributions paid to shareholders was as follows (dollars
in thousands):
YEAR ENDED DECEMBER 31, 2003
Distributions from Distributions from
ordinary income long-term capital gains Total distributions paid
Share class
Class A $ 364,606 - $ 364,606
Class B 39,762 - 39,762
Class C 31,736 - 31,736
Class F 10,466 - 10,466
Class 529-A 6,048 - 6,048
Class 529-B 1,347 - 1,347
Class 529-C 1,852 - 1,852
Class 529-E 338 - 338
Class 529-F 57 - 57
Class R-1 133 - 133
Class R-2 2,551 - 2,551
Class R-3 5,528 - 5,528
Class R-4 2,648 - 2,648
Class R-5 2,389 - 2,389
Total $ 469,461 - $ 469,461
YEAR ENDED DECEMBER 31, 2002(1)
Distributions from Distributions from
Share class ordinary income long-term capital gains Total distributions paid
Class A
Class B $ 316,029 $ 14,753 $ 330,782
Class C 27,444 1,200 28,644
Class F 21,424 882 22,306
Class 529-A 6,630 212 6,842
Class 529-B 2,132 2 2,134
Class 529-C 493 -* 493
Class 529-E 733 -* 733
Class 529-F 102 - 102
Class R-1 2 - 2
Class R-2 15 - 15
Class R-3 253 - 253
Class R-4 513 - 513
Class R-5 132 - 132
Total 329 - 329
$ 376,231 $ 17,049 $ 393,280
* Amount less than one thousand.
(1) Class 529-A, 529-B, 529-C, 529-E and 529-F shares were offered beginning
February 15, 2002. Class R-1, R-2, R-3, R-4 and R-5 shares were offered
beginning May 15, 2002.
4. FEES AND TRANSACTIONS WITH RELATED PARTIES
Capital Research and Management Company ("CRMC"), the fund's investment adviser,
is the parent company of American Funds Service Company ("AFS"), the fund's
transfer agent, and American Funds Distributors, Inc. ("AFD"), the principal
underwriter of the fund's shares.
INVESTMENT ADVISORY SERVICES - The Investment Advisory and Service Agreement
with CRMC provides for monthly fees accrued daily. These fees are based on a
declining series of annual rates beginning with 0.420% on the first $500 million
of daily net assets and decreasing to 0.232% on such assets in excess of $27
billion. For the year ended December 31, 2003, the investment advisory services
fee was $55,043,000, which was equivalent to an annualized rate of 0.259% 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. The plans
provide for annual expenses, based on a percentage of average daily
net assets, ranging from 0.25% to 1.00% as noted on the following
page. In some cases, the Board of Directors has approved expense
amounts lower than plan limits.
------------------------------------------------ ----------------------------- -----------------------------
Share class Currently approved limits Plan limits
------------------------------------------------ ----------------------------- -----------------------------
------------------------------------------------ ----------------------------- -----------------------------
Class A 0.25% 0.25%
------------------------------------------------ ----------------------------- -----------------------------
------------------------------------------------ ----------------------------- -----------------------------
Class 529-A 0.25 0.50
------------------------------------------------ ----------------------------- -----------------------------
------------------------------------------------ ----------------------------- -----------------------------
Classes B and 529-B 1.00 1.00
------------------------------------------------ ----------------------------- -----------------------------
------------------------------------------------ ----------------------------- -----------------------------
Classes C, 529-C and R-1 1.00 1.00
------------------------------------------------ ----------------------------- -----------------------------
------------------------------------------------ ----------------------------- -----------------------------
Class R-2 0.75 1.00
------------------------------------------------ ----------------------------- -----------------------------
------------------------------------------------ ----------------------------- -----------------------------
Classes 529-E and R-3 0.50 0.75
------------------------------------------------ ----------------------------- -----------------------------
------------------------------------------------ ----------------------------- -----------------------------
Classes F, 529-F and R-4 0.25 0.50
------------------------------------------------ ----------------------------- -----------------------------
All share classes may use up to 0.25% of average daily net assets to
pay service fees, or to compensate AFD for paying service fees, to
firms that have entered into agreements with AFD for providing certain
shareholder services. Expenses in excess of these amounts, up to
approved limits, may be used to compensate dealers and wholesalers for
shares sold.
For classes 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. Each class reimburses AFD
for amounts billed within the prior 15 months but only to the extent
that the overall annual expense limit of 0.25% is not exceeded. As of
December 31, 2003, unreimbursed expenses subject to reimbursement
totaled $14,613,000 for Class A. There were no unreimbursed expenses
subject to reimbursement for Class 529-A.
TRANSFER AGENT SERVICES - The fund has a transfer agent agreement with
AFS for classes A and B. Under this agreement, these share classes
compensate AFS for transfer agent services including shareholder
recordkeeping, communications and transaction processing. AFS is also
compensated for certain transfer agent services provided to all other
share classes from the administrative services fees paid to CRMC
described below.
ADMINISTRATIVE SERVICES - The fund has an administrative services
agreement with CRMC to provide transfer agent and other related
shareholder services for all classes of shares other than classes A
and B. Each relevant class pays CRMC annual fees of 0.15% (0.10% for
Class R-5) based on its respective average daily net assets. Each
relevant 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. During the start-up period for
classes R-1, R-2 and R-3, CRMC has voluntarily agreed to pay a portion
of these fees. 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 in the accompanying
financial statements, the Commonwealth of Virginia is not considered a
related party. Administrative services fees are presented gross of any
payments made by CRMC.
Expenses under the agreements described above for the year ended
December 31, 2003, were as follows (dollars in thousands):
--------------------------------------------------------------------------------------------------------------
Share class Distribution Transfer agent Administrative services
services services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
CRMC Transfer agent Commonwealth of
administrative services Virginia
services administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class A $38,148 $19,613 Not applicable Not applicable Not applicable
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class B 24,294 3,133 Not applicable Not applicable Not applicable
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class C 19,954 Included $2,993 $842 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class F 1,111 Included 667 72 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class 529-A 292 Included 377 44 $251
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class 529-B 919 Included 138 43 92
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class 529-C 1,234 Included 185 43 123
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class 529-E 85 Included 25 3 17
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class 529-F 7 Included 4 -* 3
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class R-1 86 Included 13 8 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class R-2 1,194 Included 239 839 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class R-3 1,347 Included 404 330 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class R-4 283 Included 170 14 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class R-5 Not applicable Included 91 2 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Total $88,954 $22,746 $5,306 $2,240 $486
--------------------------------------------------------------------------------------------------------------
* Amount less than one thousand.
DEFERRED DIRECTORS' COMPENSATION - Since the adoption of the deferred
compensation plan in 1993, Directors who are unaffiliated with CRMC may elect to
defer the cash payment of part or all of their compensation. These deferred
amounts, which remain as liabilities of the fund, are treated as if invested in
shares of the fund or other American Funds. These amounts represent general,
unsecured liabilities of the fund and vary according to the total returns of the
selected funds. Directors' compensation in the accompanying financial statements
includes $193,000 in current fees (either paid in cash or deferred) and a net
increase of $116,000 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):
Reinvestments of dividends
Share class Sales(1) dividends and distributions
Amount Shares Amount Shares
Year ended December 31, 2003
Class A $ 6,685,693 428,711 $ 347,356 22,523
Class B 1,275,567 82,397 37,767 2,452
Class C 1,377,511 87,810 29,706 1,926
Class F 335,973 21,445 9,442 609
Class 529-A 184,592 11,785 6,048 390
Class 529-B 65,096 4,213 1,347 87
Class 529-C 97,757 6,243 1,852 120
Class 529-E 13,195 844 338 22
Class 529-F 5,632 357 57 4
Class R-1 13,694 883 133 8
Class R-2 268,105 17,435 2,548 162
Class R-3 493,130 31,459 5,527 351
Class R-4 241,670 15,289 2,648 166
Class R-5 102,322 6,998 2,340 149
Total net increase
(decrease) $ 11,159,937 715,869 $ 447,109 28,969
Year ended December 31, 2002(2)
Class A $ 6,783,079 447,156 $ 315,045 20,870
Class B 1,468,184 96,537 27,147 1,813
Class C 1,306,014 85,679 20,945 1,401
Class F 312,781 20,616 6,155 411
Class 529-A 169,551 11,236 2,134 145
Class 529-B 57,835 3,854 494 33
Class 529-C 81,746 5,414 733 50
Class 529-E 10,545 707 102 7
Class 529-F 461 32 2 -*
Class R-1 2,176 153 15 1
Class R-2 46,107 3,238 253 17
Class R-3 86,856 6,118 511 36
Class R-4 25,170 1,743 132 9
Class R-5 27,932 1,852 280 19
Total net increase
(decrease) $ 10,378,437 684,335 $ 373,948 24,812
Share class Repurchases(1) Net increase
Amount Shares Amount Shares
Year ended December 31, 2003
Class A $ (2,407,191) (157,596) $ 4,625,858 293,638
Class B (228,752) (15,035) 1,084,582 69,814
Class C (270,580) (17,675) 1,136,637 72,061
Class F (94,200) (6,161) 251,215 15,893
Class 529-A (11,389) (723) 179,251 11,452
Class 529-B (2,565) (162) 63,878 4,138
Class 529-C (8,455) (537) 91,154 5,826
Class 529-E (552) (34) 12,981 832
Class 529-F (70) (5) 5,619 356
Class R-1 (1,334) (85) 12,493 806
Class R-2 (53,929) (3,494) 216,724 14,103
Class R-3 (73,072) (4,663) 425,585 27,147
Class R-4 (34,748) (2,198) 209,570 13,257
Class R-5 (24,656) (1,592) 80,006 5,555
Total net increase
(decrease) $ (3,211,493) (209,960) $ 8,395,553 534,878
Year ended December 31, 2002(2)
Class A $ (2,509,940) (169,986) $ 4,588,184 298,040
Class B (182,620) (12,719) 1,312,711 85,631
Class C (181,313) (12,625) 1,145,646 74,455
Class F (77,496) (5,336) 241,440 15,691
Class 529-A (4,394) (311) 167,291 11,070
Class 529-B (1,098) (77) 57,231 3,810
Class 529-C (1,823) (128) 80,656 5,336
Class 529-E (127) (9) 10,520 705
Class 529-F (1) -* 462 32
Class R-1 (113) (8) 2,078 146
Class R-2 (4,971) (354) 41,389 2,901
Class R-3 (9,807) (685) 77,560 5,469
Class R-4 (736) (52) 24,566 1,700
Class R-5 (1,227) (85) 26,985 1,786
Total net increase
(decrease) $ (2,975,666) (202,375) $ 7,776,719 506,772
* Amount less than one thousand.
(1) Includes exchanges between share classes of the fund.
(2) Class 529-A, 529-B, 529-C, 529-E and 529-F shares were offered beginning
February 15, 2002. Class R-1, R-2, R-3, R-4 and R-5 shares were
offered beginning May 15, 2002.
6. RESTRICTED SECURITIES
The fund has invested in certain securities for which resale may be limited to
qualified buyers or which are otherwise restricted. These securities are
identified in the investment portfolio. As of December 31, 2003, the total value
of restricted securities was $1,613,564,000, which represented 5.58% of the net
assets of the fund.
7. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES
The fund made purchases and sales of investment securities, excluding short-term
securities, of $14,097,366,000 and $6,390,502,000, respectively, during the year
ended December 31, 2003.
The fund receives a reduction in its custodian fee equal to the amount of
interest calculated on certain cash balances held at the custodian bank. For the
year ended December 31, 2003, the custodian fee of $393,000 included $42,000
that was offset by this reduction, rather than paid in cash.
FINANCIAL HIGHLIGHTS (1)
Income (loss) from investment operations (2)
Net
Net asset gains(losses)
value, Net on securities Total from
beginning investment (both realized investment
of period income and unrealized) operations
Class A:
Year ended 12/31/2003 $14.42 $.37 $2.87 $3.24
Year ended 12/31/2002 15.85 .42 (1.40) (.98)
Year ended 12/31/2001 15.47 .51 .73 1.24
Year ended 12/31/2000 14.42 .57 1.62 2.19
Year ended 12/31/1999 15.76 .56 (.04) .52
Class B:
Year ended 12/31/2003 14.38 .25 2.86 3.11
Year ended 12/31/2002 15.82 .31 (1.41) (1.10)
Year ended 12/31/2001 15.46 .39 .73 1.12
Period from 3/15/2000 to 12/31/2000 13.65 .33 2.41 2.74
Class C:
Year ended 12/31/2003 14.38 .24 2.87 3.11
Year ended 12/31/2002 15.82 .30 (1.41) (1.11)
Period from 3/15/2001 to 12/31/2001 15.47 .30 .63 .93
Class F:
Year ended 12/31/2003 14.42 .36 2.88 3.24
Year ended 12/31/2002 15.85 .42 (1.40) (.98)
Period from 3/15/2001 to 12/31/2001 15.50 .40 .62 1.02
Class 529-A:
Year ended 12/31/2003 14.41 .37 2.87 3.24
Period from 2/15/2002 to 12/31/2002 15.82 .37 (1.33) (.96)
Class 529-B:
Year ended 12/31/2003 14.41 .23 2.87 3.10
Period from 2/15/2002 to 12/31/2002 15.82 .26 (1.33) (1.07)
Class 529-C:
Year ended 12/31/2003 14.41 .23 2.87 3.10
Period from 2/19/2002 to 12/31/2002 15.62 .26 (1.12) (.86)
Class 529-E:
Year ended 12/31/2003 14.41 .31 2.87 3.18
Period from 3/5/2002 to 12/31/2002 16.14 .31 (1.76) (1.45)
Class 529-F:
Year ended 12/31/2003 14.41 .35 2.86 3.21
Period from 9/17/2002 to 12/31/2002 14.18 .13 .21 .34
Class R-1:
Year ended 12/31/2003 14.39 .24 2.86 3.10
Period from 5/29/2002 to 12/31/2002 15.93 .19 (1.56) (1.37)
Class R-2:
Year ended 12/31/2003 14.39 .24 2.87 3.11
Period from 5/21/2002 to 12/31/2002 15.97 .20 (1.60) (1.40)
Class R-3:
Year ended 12/31/2003 14.40 .31 2.85 3.16
Period from 6/4/2002 to 12/31/2002 15.70 .22 (1.32) (1.10)
Class R-4:
Year ended 12/31/2003 14.41 .36 2.88 3.24
Period from 6/21/2002 to 12/31/2002 15.32 .24 (.93) (.69)
Class R-5:
Year ended 12/31/2003 14.43 .41 2.87 3.28
Period from 5/15/2002 to 12/31/2002 16.07 .30 (1.71) (1.41)
Dividends and distributions
Dividends
(from net Distributions Total Net asset
investment (from capital dividends and value, end
income) gains) distributions of period
Class A:
Year ended 12/31/2003 $(.37) $ - $(.37) $17.29
Year ended 12/31/2002 (.43) (.02) (.45) 14.42
Year ended 12/31/2001 (.56) (.30) (.86) 15.85
Year ended 12/31/2000 (.56) (.58) (1.14) 15.47
Year ended 12/31/1999 (.56) (1.30) (1.86) 14.42
Class B:
Year ended 12/31/2003 (.25) - (.25) 17.24
Year ended 12/31/2002 (.32) (.02) (.34) 14.38
Year ended 12/31/2001 (.46) (.30) (.76) 15.82
Period from 3/15/2000 to 12/31/2000 (.35) (.58) (.93) 15.46
Class C:
Year ended 12/31/2003 (.25) - (.25) 17.24
Year ended 12/31/2002 (.31) (.02) (.33) 14.38
Period from 3/15/2001 to 12/31/2001 (.32) (.26) (.58) 15.82
Class F:
Year ended 12/31/2003 (.37) - (.37) 17.29
Year ended 12/31/2002 (.43) (.02) (.45) 14.42
Period from 3/15/2001 to 12/31/2001 (.41) (.26) (.67) 15.85
Class 529-A:
Year ended 12/31/2003 (.37) - (.37) 17.28
Period from 2/15/2002 to 12/31/2002 (.43) (.02) (.45) 14.41
Class 529-B:
Year ended 12/31/2003 (.23) - (.23) 17.28
Period from 2/15/2002 to 12/31/2002 (.32) (.02) (.34) 14.41
Class 529-C:
Year ended 12/31/2003 (.23) - (.23) 17.28
Period from 2/19/2002 to 12/31/2002 (.33) (.02) (.35) 14.41
Class 529-E:
Year ended 12/31/2003 (.31) - (.31) 17.28
Period from 3/5/2002 to 12/31/2002 (.28) - (.28) 14.41
Class 529-F:
Year ended 12/31/2003 (.35) - (.35) 17.27
Period from 9/17/2002 to 12/31/2002 (.11) - (.11) 14.41
Class R-1:
Year ended 12/31/2003 (.25) - (.25) 17.24
Period from 5/29/2002 to 12/31/2002 (.17) - (.17) 14.39
Class R-2:
Year ended 12/31/2003 (.26) - (.26) 17.24
Period from 5/21/2002 to 12/31/2002 (.18) - (.18) 14.39
Class R-3:
Year ended 12/31/2003 (.31) - (.31) 17.25
Period from 6/4/2002 to 12/31/2002 (.20) - (.20) 14.40
Class R-4:
Year ended 12/31/2003 (.37) - (.37) 17.28
Period from 6/21/2002 to 12/31/2002 (.22) - (.22) 14.41
Class R-5:
Year ended 12/31/2003 (.41) - (.41) 17.30
Period from 5/15/2002 to 12/31/2002 (.23) - (.23) 14.43
Ratio of Ratio of
Net assets, expenses net income
Total end of period to average to average
return(3) (in millions) net assets net assets
Class A:
Year ended 12/31/2003 22.82% $19,951 .67% 2.38%
Year ended 12/31/2002 (6.27) 12,405 .70 2.79
Year ended 12/31/2001 8.19 8,915 .68 3.26
Year ended 12/31/2000 15.85 6,042 .69 3.93
Year ended 12/31/1999 3.47 5,981 .66 3.59
Class B:
Year ended 12/31/2003 21.90 3,344 1.42 1.62
Year ended 12/31/2002 (7.04) 1,784 1.46 2.07
Year ended 12/31/2001 7.34 608 1.44 2.46
Period from 3/15/2000 to 12/31/2000 20.52 38 1.44 (5) 3.02 (5)
Class C:
Year ended 12/31/2003 21.84 2,968 1.48 1.55
Year ended 12/31/2002 (7.08) 1,440 1.51 2.03
Period from 3/15/2001 to 12/31/2001 6.08 406 1.54 (5) 2.36 (5)
Class F:
Year ended 12/31/2003 22.79 659 .69 2.34
Year ended 12/31/2002 (6.29) 320 .72 2.81
Period from 3/15/2001 to 12/31/2001 6.64 104 .75 (5) 3.15 (5)
Class 529-A:
Year ended 12/31/2003 22.87 389 .67 2.36
Period from 2/15/2002 to 12/31/2002 (6.19) 160 .72 (5) 2.91 (5)
Class 529-B:
Year ended 12/31/2003 21.74 137 1.58 1.44
Period from 2/15/2002 to 12/31/2002 (6.85) 55 1.60 (5) 2.04 (5)
Class 529-C:
Year ended 12/31/2003 21.76 193 1.57 1.46
Period from 2/19/2002 to 12/31/2002 (5.63) 77 1.59 (5) 2.05 (5)
Class 529-E:
Year ended 12/31/2003 22.37 27 1.05 1.97
Period from 3/5/2002 to 12/31/2002 (9.02) 10 1.06 (5) 2.60 (5)
Class 529-F:
Year ended 12/31/2003 22.63 7 .80 2.16
Period from 9/17/2002 to 12/31/2002 2.36 - (4) .23 .87
Class R-1:
Year ended 12/31/2003 21.77 16 1.48 (6) 1.50
Period from 5/29/2002 to 12/31/2002 (8.61) 2 1.48 (5,6) 2.23 (5)
Class R-2:
Year ended 12/31/2003 21.83 293 1.44 (6) 1.54
Period from 5/21/2002 to 12/31/2002 (8.79) 42 1.45 (5,6) 2.30 (5)
Class R-3:
Year ended 12/31/2003 22.27 563 1.05 (6) 1.94
Period from 6/4/2002 to 12/31/2002 (7.04) 79 1.06 (5,6) 2.67 (5)
Class R-4:
Year ended 12/31/2003 22.81 258 .68 2.28
Period from 6/21/2002 to 12/31/2002 (4.52) 25 .71 (5,6) 3.13 (5)
Class R-5:
Year ended 12/31/2003 23.16 127 .38 2.62
Period from 5/15/2002 to 12/31/2002 (8.77) 26 .39 (5) 3.27 (5)
Year ended December 31
2003 2002 2001 2000 1999
Portfolio turnover rate for all classes of shares 32% 41% 50% 51% 48%
(1) Based on operations for the period shown (unless otherwise noted) and,
accordingly, may not be representative of a full year.
(2) Year ended 1999 is based on shares outstanding on the last day of the year;
all other periods are based on average shares outstanding.
(3) Total returns exclude all sales charges, including contingent deferred
sales charges.
(4) Amount less than 1 million.
(5) Annualized.
(6) During the start-up period for this class, CRMC voluntarily agreed to pay a
portion of the fees relating to transfer agent services. Had CRMC not paid
such fees, expense ratios would have been 1.52% and 1.70% for classes R-1
and R-2, respectively, during the year ended December 31, 2003, and 1.83%,
1.54%, 1.08% and .75% for classes R-1, R-2, R-3 and R-4, respectively,
during the period ended December 31, 2002. The expense ratio for Class R-3
was not affected by any payments made by CRMC during the year ended
December 31, 2003.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF AMERICAN BALANCED FUND, INC.:
We have audited the accompanying statement of assets and liabilities of American
Balanced Fund, Inc. (the "Fund"), including the investment portfolio, as of
December 31, 2003, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. 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 the auditing standards generally
accepted in the United States of America. 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2003, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. 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
American Balanced Fund, Inc. as of December 31, 2003, 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 five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 5, 2004
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.
As a result of recent tax legislation, individual shareholders are now eligible
for reduced tax rates on qualified dividend income received during the year. For
purposes of computing the dividends eligible for reduced tax rates, 67% of the
dividends paid by the fund from net investment income are considered qualified
dividend income.
Corporate shareholders may exclude up to 70% of qualifying dividends received
during the year. For purposes of computing this exclusion, 61% of the dividends
paid by the fund from net investment income represent qualifying dividends.
Certain states may exempt from income taxation that portion of the dividends
paid from net investment income that was derived from direct U.S. government
obligations. For purposes of computing this exclusion, 9% of the dividends paid
by the fund from net investment income were derived from interest on direct U.S.
government obligations.
Dividends and distributions received by retirement plans such as IRAs,
Keogh-type plans and 403(b) plans need not be reported as taxable income.
However, many retirement plan trusts may need this information for their annual
information reporting.
SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV OR OTHER TAX INFORMATION WHICH
WAS MAILED IN JANUARY 2004 TO DETERMINE THE AMOUNTS TO BE INCLUDED ON THEIR 2003
TAX RETURNS. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISERS.
OTHER SHARE CLASS RESULTS (UNAUDITED)
CLASS B, CLASS C, CLASS F AND CLASS 529
Returns for periods ended December 31, 2003:
1 year Life of class
CLASS B SHARES
Reflecting applicable contingent deferred sales charge
(CDSC), maximum of 5%, payable only if shares are
sold within six years of purchase +16.90% +10.00%(1)
Not reflecting CDSC +21.90% +10.60%(1)
CLASS C SHARES
Reflecting CDSC, maximum of 1%, payable only if shares
are sold within one year of purchase +20.84% +6.77%(2)
Not reflecting CDSC +21.84% +6.77%(2)
CLASS F SHARES(3)
Not reflecting annual asset-based fee charged by sponsoring firm +22.79% +7.59%(2)
CLASS 529-A SHARES
Reflecting 5.75% maximum sales charge +15.80% +4.51%(4)
Not reflecting maximum sales charge +22.87% +7.88%(4)
CLASS 529-B SHARES
Reflecting applicable CDSC, maximum of 5%, payable
only if shares are sold within six years of purchase +16.74% +4.91%(4)
Not reflecting CDSC +21.74% +6.94%(4)
CLASS 529-C SHARES
Reflecting CDSC, maximum of 1%, payable only if shares
are sold within one year of purchase +20.76% +7.74%(5)
Not reflecting CDSC +21.76% +7.74%(5)
CLASS 529-E SHARES(3) +22.37% +6.06%(6)
CLASS 529-F SHARES(3)
Not reflecting annual asset-based fee charged by sponsoring firm +22.63% +19.31%(7)
Figures shown are past results and are not predictive of future periods. Current
and future results may be lower or higher than those shown. Because share prices
may decline, the value of your holdings may decrease. For the most current
information and month-end results, visit americanfunds.com.
(1) Average annual total return from March 15, 2000, when Class B shares were
first sold.
(2) Average annual total return from March 15, 2001, when Class C and Class F
shares were first sold.
(3) These shares are sold without any initial or contingent deferred sales
charge.
(4) Average annual total return from February 15, 2002, when Class 529-A and
Class 529-B shares were first sold.
(5) Average annual total return from February 19, 2002, when Class 529-C shares
were first sold.
(6) Average annual total return from March 5, 2002, when Class 529-E shares were
first sold.
(7) Average annual total return from September 17, 2002, when Class 529-F shares
were first sold.
BOARD OF DIRECTORS AND OFFICERS
"NON-INTERESTED" DIRECTORS
YEAR FIRST
ELECTED
A DIRECTOR
NAME AND AGE OF THE FUND(1) PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
ROBERT A. FOX, 66 1976-1978 Managing General Partner, Fox Investments LP;
1982 former Professor, University of California; retired President and
CEO, Foster Farms (poultry producer)
LEONADE D. JONES, 56 1993 Co-founder, VentureThink LLC (developed and managed e-commerce
businesses) and Versura Inc. (education loan exchange); former
Treasurer, The Washington Post Company
JOHN M. LILLIE, 67 2003 Business consultant; former President, Sequoia Associates LLC
(investment firm specializing in medium-size buyouts); former Vice
Chairman of the Board, Gap, Inc. (specialty apparel retailing)
JOHN G. MCDONALD, 66 1975-1978 The IBJ Professor of Finance, Graduate School of Business,
1988 Stanford University
JAMES K. PETERSON, 62 1999 Managing Director, Oak Glen Consultancy LLC (consulting services to
charitable organizations, pension funds and other financial
management companies)
HENRY E. RIGGS, 69 1989 Chairman of the Board and President Emeritus, Keck Graduate Institute
of Applied Life Sciences
ISAAC STEIN, 574 2004 President, Waverley Associates (private investment fund); Managing
Director, Technogen Associates L.P (venture capital partnership);
Chairman of the Board of Trustees, Stanford University
PATRICIA K. WOOLF, PH.D., 69 1988 Private investor; corporate director; lecturer, Department of
Molecular Biology, Princeton University
"NON-INTERESTED" DIRECTORS
NUMBER OF
BOARDS WITHIN
THE FUND
COMPLEX(2)
ON WHICH
NAME AND AGE DIRECTOR SERVES OTHER DIRECTORSHIPS(3) HELD BY DIRECTOR
ROBERT A. FOX, 66 7 Crompton Corporation
LEONADE D. JONES, 56 6 None
JOHN M. LILLIE, 67 2 None
JOHN G. MCDONALD, 66 8 iStar Financial, Inc.; Plum Creek Timber Co.; Scholastic Corporation;
Varian, Inc.
JAMES K. PETERSON, 62 2 None
HENRY E. RIGGS, 69 4 None
ISAAC STEIN, 574 2 None
PATRICIA K. WOOLF, PH.D., 69 6 Crompton Corporation; First Energy Corporation; National Life Holding
Co.
"INTERESTED" DIRECTORS(5)
YEAR FIRST
ELECTED A
DIRECTOR OR PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
NAME, AGE AND OFFICER AND POSITIONS HELD WITH AFFILIATED ENTITIES OR THE
POSITION WITH FUND OF THE FUND(1) PRINCIPAL UNDERWRITER OF THE FUND
ROBERT G. O'DONNELL, 59 1990 Senior Vice President and Director,
Chairman of the Board and Capital Research and Management Company
Principal Executive Officer
PAUL G. HAAGA, JR., 55 1994 Executive Vice President and Director, Capital Research and Management
Company; Director, The Capital Group Companies, Inc.;(6) Director,
American Funds Distributors, Inc.(6)
"INTERESTED" DIRECTORS(5)
NUMBER OF
BOARDS WITHIN
THE FUND
COMPLEX(2)
NAME, AGE AND ON WHICH
POSITION WITH FUND DIRECTOR SERVES OTHER DIRECTORSHIPS(3) HELD BY DIRECTOR
ROBERT G. O'DONNELL, 59 3 None
Chairman of the Board and
Principal Executive Officer
PAUL G. HAAGA, JR., 55 17 None
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 29 funds. Capital Research and Management Company also
manages American Funds Insurance Series,(R) 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) Elected effective February 18, 2004.
(5) "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).
(6) 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
POSITION WITH FUND OF THE FUND(1) THE PRINCIPAL UNDERWRITER OF THE FUND
J. DALE HARVEY, 38 1997 Vice President, Capital Research and Management
President Company
ABNER D. GOLDSTINE, 74 1990 Senior Vice President and Director,
Senior Vice President Capital Research and Management Company
JOHN H. SMET, 47 2000 Senior Vice President, Capital Research and
Senior Vice President Management Company
HILDA L. APPLBAUM, 43 1999 Senior Vice President, Capital Research Company(2)
Vice President
GREGORY D. JOHNSON, 40 2003 Senior Vice President, Capital Research Company(2)
Vice President
JEFFREY T. LAGER, 35 2002 Vice President, Capital Research Company(2)
Vice President
MARK R. MACDONALD, 44 2003 Senior Vice President, Capital Research and
Vice President Management Company
PATRICK F. QUAN, 45 1986 Vice President-- Fund Business Management
Secretary Group, Capital Research and Management Company
DAYNA G. YAMABE, 36 2000 Vice President-- Fund Business Management
Treasurer Group, Capital Research and Management Company
R. MARCIA GOULD, 49 1994 Vice President -- Fund Business Management
Assistant Treasurer Group, Capital Research and Management Company
(1) Directors and officers of the fund serve until their resignation, removal
or retirement.
(2) Company affiliated with Capital Research and Management Company.
OFFICES
OFFICE OF THE FUND
One Market
Steuart Tower, Suite 1800
Mailing address: P.O. Box 7650
San Francisco, CA 94120-7650
INVESTMENT ADVISER
Capital Research and Management Company
333 South Hope Street
Los Angeles, CA 90071-1406
135 South State College Boulevard
Brea, CA 92821-5823
TRANSFER AGENT FOR SHAREHOLDER ACCOUNTS
American Funds Service Company
(Please write to the address nearest you.)
P.O. Box 25065
Santa Ana, CA 92799-5065
P.O. Box 659522
San Antonio, TX 78265-9522
P.O. Box 6007
Indianapolis, IN 46206-6007
P.O. Box 2280
Norfolk, VA 23501-2280
CUSTODIAN OF ASSETS
JPMorgan Chase Bank
270 Park Avenue
New York, NY 10017-2070
COUNSEL
Paul, Hastings, Janofsky & Walker LLP
515 South Flower Street
Los Angeles, CA 90071-2228
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two California Plaza
350 South Grand Avenue
Los Angeles, CA 90071-3462
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, CA 90071-1406
There are several ways to invest in American Balanced 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. Other share classes, which are
generally not available for certain employer-sponsored retirement plans, have no
up-front sales charges but are subject to additional annual expenses and fees.
Annual expenses for Class B shares were 0.75 percentage points higher than for
Class A shares; Class B shares convert to Class A shares after eight years of
ownership. If redeemed within six years, Class B shares may also be subject to a
contingent deferred sales charge ("CDSC") of up to 5% that declines over time.
Class C shares were subject to annual expenses 0.81 percentage points higher
than those for Class A shares and a 1% CDSC if redeemed within the first year
after purchase. Class C shares convert to Class F shares after 10 years. Class F
shares, which are available only through certain fee-based programs offered by
broker-dealer firms and registered investment advisers, had higher annual
expenses (by 0.02 percentage points) than did Class A shares, and an annual
asset-based fee charged by the sponsoring firm. Expenses are deducted from
income earned by the fund. As a result, dividends and investment results will
differ for each share class.
INVESTORS SHOULD CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES
OF AMERICAN BALANCED FUND AND COLLEGEAMERICA CAREFULLY. THIS AND OTHER IMPORTANT
INFORMATION IS CONTAINED IN THE PROSPECTUS, WHICH CAN BE OBTAINED FROM YOUR
FINANCIAL ADVISER AND SHOULD BE READ CAREFULLY BEFORE INVESTING. YOU MAY ALSO
CALL AMERICAN FUNDS SERVICE COMPANY 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 UPON REQUEST, FREE OF CHARGE,
BY CALLING AMERICAN FUNDS SERVICE COMPANY, VISITING THE AMERICAN FUNDS WEBSITE
OR ACCESSING THE U.S. SECURITIES AND EXCHANGE COMMISSION WEBSITE AT WWW.SEC.GOV.
This report is for the information of shareholders of American Balanced 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
March 31, 2004, this report must be accompanied by an American Funds statistical
update for the most recently completed calendar quarter.
[logo - American Funds(R)]
The right choice for the long term(R)
WHAT MAKES AMERICAN FUNDS DIFFERENT?
For more than 70 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 29 carefully conceived, broadly diversified funds has
attracted over 25 million shareholder accounts.
OUR UNIQUE COMBINATION OF STRENGTHS INCLUDES THESE FIVE FACTORS:
A LONG-TERM, VALUE-ORIENTED APPROACH
Rather than follow fads, we pursue a consistent strategy, focusing on each
investment's long-term potential.
AN UNPARALLELED GLOBAL RESEARCH EFFORT
American Funds draws on one of the industry's most globally integrated research
networks.
THE MULTIPLE PORTFOLIO COUNSELOR SYSTEM
Every American Fund is divided among a number of portfolio counselors. Each
takes responsibility for a portion independently, within each fund's objectives;
in most cases, research analysts manage a portion as well. Over time this method
has contributed to a consistency of results and continuity of management.
EXPERIENCED INVESTMENT PROFESSIONALS
The recent market decline was not the first for most of the portfolio counselors
who serve the American Funds. Nearly 70% of them were in the investment business
before the sharp market decline of 1987.
A COMMITMENT TO LOW OPERATING EXPENSES
American Funds' operating expenses are among the lowest in the mutual fund
industry. Our portfolio turnover rates are low as well, keeping transaction
costs and tax consequences contained.
29 MUTUAL FUNDS, CONSISTENT PHILOSOPHY, CONSISTENT RESULTS
o GROWTH FUNDS
Emphasis on long-term growth through stocks
AMCAP Fund(R)
EuroPacific Growth Fund(R)
The Growth Fund of America(R)
The New Economy Fund(R)
New Perspective Fund(R)
New World Fund(SM)
SMALLCAP World Fund(R)
o GROWTH-AND-INCOME FUNDS
Emphasis on long-term growth and dividends through stocks
American Mutual Fund(R)
Capital World Growth and Income Fund(SM)
Fundamental Investors(SM)
The Investment Company of America(R)
Washington Mutual Investors Fund(SM)
o EQUITY-INCOME FUNDS
Emphasis on above-average income and growth through stocks and/or bonds
Capital Income Builder(R)
The Income Fund of America(R)
o BALANCED FUND
Emphasis on long-term growth and current income through stocks and bonds
> American Balanced Fund(R)
o BOND FUNDS
Emphasis on current income through bonds
American High-Income Trust(SM)
The Bond Fund of America(SM)
Capital World Bond Fund(R)
Intermediate Bond Fund of America(R)
U.S. Government Securities Fund(SM)
o TAX-EXEMPT BOND FUNDS
Emphasis on tax-free current income through municipal bonds
American High-Income Municipal Bond Fund(R)
Limited Term Tax-Exempt Bond Fund of America(SM)
The Tax-Exempt Bond Fund of America(R)
STATE-SPECIFIC TAX-EXEMPT FUNDS
The Tax-Exempt Fund of California(R)
The Tax-Exempt Fund of Maryland(R)
The Tax-Exempt Fund of Virginia(R)
o MONEY MARKET FUNDS
The Cash Management Trust of America(R)
The Tax-Exempt Money Fund of America(SM)
The U.S. Treasury Money Fund of America(SM)
THE CAPITAL GROUP COMPANIES
American Funds
Capital Research and Management
Capital International
Capital Guardian
Capital Bank and Trust
Lit. No. MFGEAR-911-0204
Litho in USA AGD/L/8050
Printed on recycled paper
ITEM 2 - Code of Ethics
This Registrant has adopted a Code of Ethics that applies to its Principal
Executive Officer and Principal Financial Officer. The Registrant undertakes to
provide to any person without charge, upon request, a copy of the Code of
Ethics. Such request can be made to American Funds Service Company at
800/421-0180 or to the Secretary of the Registrant, 333 South Hope Street, Los
Angeles, California 90071.
ITEM 3 - Audit Committee Financial Expert
The Registrant's Board has determined that James K. Peterson, a member of the
Registrant's Audit Committee, is an "audit committee financial expert" and
"independent," as such terms are defined in this Item. This designation will not
increase the designee's duties, obligations or liability as compared to his
duties, obligations and liability as a member of the Audit Committee and of the
Board; nor will it reduce the responsibility of the other Audit Committee
members. There may be other individuals who, through education or experience,
would qualify as "audit committee financial experts" if the Board had designated
them as such. Most importantly, the Board believes each member of the Audit
Committee contributes significantly to the effective oversight of the
Registrant's financial statements and condition.
ITEM 4 - Principal Accountant Fees and Services
Fees paid to the registrant's auditors for each of the last two fiscal years,
including fees for non-audit services billed to the adviser and affiliates for
engagements that relate directly to the operations and financial reporting of
the registrant, and a description of the nature of the services comprising the
fees, are listed below:
Registrant:
a) Audit Fees:
2002 $50,000
2003 $49,000
b) Audit- Related Fees:
2002 none
2003 none
c) Tax Fees:
2002 $5,000
2003 $5,000
The tax fees consist of professional services relating to
the preparation of the fund's tax returns. d) All Other
Fees: 2002 none 2003 none
Adviser and affiliates (includes only fees for non-audit
services billed to the adviser and affiliates for
engagements that relate directly to the operations and
financial reporting of the registrant and were subject to
the pre-approval policies described below):
b) Audit- Related Fees:
2002 $318,000
2003 $305,000
The audit-related fees consist of assurance and related
services relating to the examination of the fund's transfer
agency conducted in accordance with Statement on Auditing
Standards Number 70 issued by the American Institute of
Certified Public Accountants.
c) Tax Fees:
2002 none
2003 none
d) All Other Fees:
2002 none
2003 none
The registrant's Audit Committee will pre-approve all audit and permissible
non-audit services that the Committee considers compatible with maintaining the
auditors' independence. The pre-approval requirement will extend to all
non-audit services provided to the registrant, the investment adviser, and any
entity controlling, controlled by, or under common control with the investment
adviser that provides ongoing services to the registrant, if the engagement
relates directly to the operations and financial reporting of the registrant.
The Committee will not delegate its responsibility to pre-approve these services
to the investment adviser. The Committee may delegate to one or more Committee
members the authority to review and pre-approve audit and permissible non-audit
services. Actions taken under any such delegation will be reported to the full
Committee at its next meeting. The pre-approval requirement is waived with
respect to non-audit services if certain conditions are met. The pre-approval
requirement was not waived for any of the services listed above under paragraphs
b, c and d.
Aggregate non-audit fees paid to the registrant's auditors, including fees for
all services billed to the adviser and affiliates were $360,000 for fiscal year
2002 and $315,000 for fiscal year 2003. The non-audit services represented by
these amounts were brought to the attention of the Committee and considered to
be compatible with maintaining the auditors' independence.
ITEM 5 - Audit Committee Disclosure for Listed Companies
Not applicable.
ITEM 6 - Reserved
ITEM 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
Not applicable to this Registrant, insofar as the Registrant is not a closed-end
management investment company.
ITEM 8 - Reserved
ITEM 9 - Controls and Procedures
(a) The officers providing the certifications in this report in accordance with
rule 30a-2 under the Investment Company Act of 1940 have concluded, based
on their evaluation of the Registrant's disclosure controls and procedures
(as such term is defined in such rule), that such controls and procedures
are adequate and reasonably designed to achieve the purposes described in
paragraph (c) of such rule.
(b) There were no changes in the Registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Investment Company Act of
1940) that occurred during the Registrant's last fiscal half-year (the
Registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 10 - Exhibits
(a) The Code of Ethics that is the subject of the disclosure required by Item 2
is attached as an exhibit hereto.
(b) The certifications required by Rule 30a-2 of the Investment Company Act of
1940, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act of
2002 are attached as exhibits hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN BALANCED FUND, INC.
By /s/ Robert G. O'Donnell
----------------------------------------
Robert G. O'Donnell, Chairman and PEO
Date: March 10, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ Robert G. O'Donnell
--------------------------------------------------
Robert G. O'Donnell, Chairman and PEO
Date: March 10, 2004
By /s/ Dayna G. Yamabe
-------------------------------------------------
Dayna G. Yamabe, Treasurer
Date: March 10, 2004