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: 811-32
Fundamental Investors, 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
Fundamental Investors, 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)
FUNDAMENTAL INVESTORS
25 years of managing through multiple perspectives
[photo of an apartment building in the reflection of a mirrored glass office
building]
Annual report for the year ended December 31, 2003
FUNDAMENTAL INVESTORS(SM) seeks long-term growth of capital and income primarily
through investments in common stocks.
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 PAGE
Letter to shareholders; Results at a glance 1
Chart: The value of a long-term perspective 4
Special report: 25 years of managing through
multiple perspectives 6
Investment portfolio 12
Financial statements 20
Directors and officers 32
The American Funds family back cover
Please see page 4 for Class A share results with relevant sales charges
deducted. Results for other share classes can be found on page 31. Please see
the inside back cover for important information about other share classes.
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 1.48%. The
fund's distribution rate for Class A shares as of that date was 1.30%. 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.
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. 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. INVESTING OUTSIDE THE
UNITED STATES INVOLVES ADDITIONAL RISKS, SUCH AS CURRENCY FLUCTUATIONS,
POLITICAL INSTABILITY, DIFFERING SECURITIES REGULATIONS AND PERIODS OF
ILLIQUIDITY, WHICH ARE DETAILED IN THE FUND'S PROSPECTUS.
FELLOW SHAREHOLDERS:
[photo of an apartment building in the reflection of a mirrored glass office
building]
We are pleased to report that Fundamental Investors posted a 32.0% total return
for the 12 months ended December 31, 2003, helped by the economic recovery and
the decline in the U.S. dollar.
That result significantly outpaced the returns of its two benchmarks as well as
those of the broader stock market. The Lipper Large-Cap Core Funds Index, which
tracks funds that allow a wide latitude of companies in their portfolios, posted
a 24.8% return. The Lipper Large-Cap Value Funds Index, which tracks funds that
invest in companies that are undervalued within their industries, gained 28.0%.
The broader stock market as measured by the unmanaged Standard & Poor's 500
Composite Index, which tracks relatively large companies listed on U.S.
exchanges, posted a 28.7% gain for the year.
GENERATING A CONSISTENT INCOME
Despite the continuing struggle to find companies that pay high dividends, we
are also pleased to report that the fund met its goal of providing steady
quarterly income, paying shareholders a total of 40 cents a share for the year.
Over the past decade, Fundamental Investors has consistently maintained its
quarterly dividend, even while the payout of dividends as a percentage of
company earnings declined. With the passage of President Bush's tax bill, which
reduced the maximum tax rate on qualified dividends to 15% for shareholders, we
expect that the dividend culture in the United States will improve. This change
is significant to a fund like Fundamental Investors, whose objective is to
provide capital appreciation as well as income.
[Begin Sidebar]
RESULTS AT A GLANCE
Returns for periods ended December 31, 2003, with all distributions reinvested.
1 year 5 years(1) 10 years(1) Lifetime(1)(2)
Fundamental Investors +32.0% +5.1% +11.9% +14.2%
Lipper Large-Cap Core Funds Index +24.8 -1.1 +9.3 --(3)
Lipper Large-Cap Value Funds Index +28.0 +1.2 +10.1 +13.1
Standard & Poor's 500 Composite Index(4) +28.7 -0.6 +11.1 +13.5
(1) Average annual total return.
(2) Since Capital Research and Management Company began managing the fund on
August 1, 1978.
(3) Index began on December 29, 1978.
(4) Unmanaged.
[End Sidebar]
[[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]
A BROAD-BASED RECOVERY
At the beginning of 2003, the fund's portfolio was well positioned to benefit
from a global economic recovery and a decline in the U.S. dollar.
During the past year, the U.S. dollar declined 8.1% on a trade-weighted basis(1)
and significantly more than that against the euro, which has helped U.S.
cyclical companies to gain market share globally. As a result, the fund was
helped by its significant concentration in cyclical stocks such as Dow Chemical
(+40.0%), a chemical manufacturer; Deere (+41.9%), a manufacturer of
agricultural and construction equipment; and Alcoa (+66.8%), an aluminum
producer. All are among the fund's top 10 holdings and posted gains well above
that of the broader stock market.
(1) As measured by the J.P. Morgan Trade-Weighted Real Broad Effective U.S.
Dollar Index.
Semiconductor manufacturer Texas Instruments (+95.7%), another top holding, also
helped the fund's results, as its stock price experienced a significant recovery
after several years of negative returns.
Retail companies, which generally do well during an economic recovery, also
posted solid gains for the period. Among these are Lowe's Companies (+47.7%),
the home-improvement chain, and Limited Brands (+29.4%), an apparel and personal
products retailer.
Of the fund's top 10 holdings, only SBC Communications (-3.8%) declined in
value, in part due to competitive pressures. Despite its struggles, we remain
confident in the company's long-term potential.
AN INCREASE IN INTERNATIONAL HOLDINGS
The decline of the U.S. dollar, which makes foreign currencies worth more in
dollars, helped the stock prices of non-U.S. companies to appreciate this year.
Fundamental Investors' ability to invest up to 30% of its assets in non-U.S.
companies gave us the flexibility to take advantage of the weakening-dollar
trend. Over the past year, we increased the fund's exposure to stocks of
non-U.S. companies from 19.6% to 22.9% of the overall portfolio.
[Begin Sidebar]
[begin pie chart]
WHERE THE FUND'S ASSETS WERE INVESTED
Percent of net assets as of December 31, 2003
United States 73.2%
Europe 12.5%
Asia/Pacific 5.7%
Other 4.7%
Cash & equivalents 3.9%
[end pie chart]
[End Sidebar]
Much of that increase was in Asia/Pacific, where we expanded our presence
significantly, particularly in China and Japan. In China, a growing economy and
improving political climate are creating new investment opportunities. The
increasing number of cellular phone users in that country, for example, has
helped China Telecom (+134.7%) to post significant gains this year.
China's economic growth has also provided a much-needed boost to Japan, which we
believe is finally recovering from a decade-long period of economic malaise.
Over the last eight months of the fiscal year, we added holdings such as
Hitachi, which manufactures electronics equipment, and NEC, which provides
computer-based systems, to the fund's portfolio.
Other non-U.S. holdings that posted strong gains this period include Norsk Hydro
(+38.1%), a Norwegian oil and gas company; Suncor Energy (+60.2%), a Canadian
energy company; and AstraZeneca (+36.9%), a London-based pharmaceutical giant
that made progress in getting several new products to market.
We believe that improving fundamentals and reasonable valuations in many
non-U.S. companies will continue to offer attractive investment opportunities.
[Begin Sidebar]
FUNDAMENTAL INVESTORS' TOTAL RETURN YEAR BY YEAR (ENDING DECEMBER 31)
Capital return Income return Total return
1994 -1.2% +2.5% +1.3%
1995 +31.9 +2.3 +34.2
1996 +18.2 +1.8 +20.0
1997 +25.0 +1.7 +26.7
1998 +15.2 +1.5 +16.7
1999 +23.2 +1.4 +24.6
2000 +3.1 +1.2 +4.3
2001 -10.9 +1.3 -9.6
2002 -19.1 +1.8 -17.3
2003 +30.2 +1.8 +32.0
10-year average annual total return +11.9%
10-year cumulative total return +209.2
Lifetime cumulative total return (since August 1, 1978) +2,803.7
Total return measures both capital results (changes in net asset value) and
income return (from income dividends), assuming reinvestment of all dividends
and capital gain distributions.
[End Sidebar]
STAYING FOCUSED
At this point, we believe that the global economic recovery, led by the United
States and Asia, is still in its early stages and will likely gain momentum,
which should help to increase the profitability of many companies. As a result,
we are not planning any major shifts in the portfolio; we will continue to
remain focused on cyclical and dividend-paying companies.
Over the years, Fundamental Investors' flexibility and ability to react to
changing economic environments have helped the fund to produce solid returns for
shareholders. During the past 10-year period, the fund has earned an average
annual total return of 11.9%, surpassing the S&P 500's 11.1% return, the Lipper
Large-Cap Core Funds Index's 9.3% return and the Lipper Large-Cap Value Funds
Index's 10.1% return.
For a better understanding of what distinguishes Fundamental Investors from
other growth-and-income funds, please see our feature starting on page 6. As
always, we appreciate your continued support.
Sincerely,
/s/ James F. Rothenberg
James F. Rothenberg
Chairman
/s/ Dina N. Perry
Dina N. Perry
President
February 11, 2004
[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]
THE VALUE OF A LONG-TERM PERSPECTIVE
HOW A $10,000 INVESTMENT HAS GROWN
The chart and accompanying table illustrate how a $10,000 investment in the fund
grew between August 1, 1978 -- when Capital Research and Management Company
became Fundamental Investors' investment adviser -- and December 31, 2003. The
chart also shows how Standard & Poor's 500 Composite Index and the Lipper
Large-Cap Value Funds Index fared over this same period, and what happened to
inflation (as measured by the Consumer Price Index).
Fund figures reflect deduction of the maximum sales charge of 5.75% on the
$10,000 investment.1 Thus, the net amount invested was $9,425.
Here are the fund's average annual total returns on a $1,000 investment with all
distributions reinvested for periods ended December 31, 2003, assuming payment
of the 5.75% maximum sales charge at the beginning of the stated periods:
Average annual
Class A shares total return
1 year +24.36%
5 years +3.85%
10 years +11.29%
Results for other share classes can be found on page 31.
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) As outlined in the prospectus, the sales charge is reduced for accounts of
$25,000 or more.
(2) Includes reinvested dividends of $46,655 and reinvested capital gain
distributions of $130,729.
(3) Includes reinvested capital gain distributions of $73,002 but does not
reflect income dividends of $27,279 taken in cash.
(4) For the period August 1, 1978 (when Capital Research and Management Company
became investment adviser) through December 31, 1978.
(5) Computed from data supplied by the U.S. Department of Labor, Bureau of
Labor Statistics.
The results shown are before taxes on fund distributions and sale of fund
shares.
The S&P 500 is unmanaged, does not reflect sales charges, commissions or
expenses and cannot be invested in directly.
[begin mountain chart]
<table>
<s> <c> <c> <c> <c>
Fundamental Investors Fundamental Investors
with dividends not including
reinvested (1) (2) dividends (1) (3)
Initial Investment 7/31/1978 $ 9,425 $9,425
1978 High 11-Sep 10,000 9,919
Low 14-Nov 8,667 8,596
Close 29-Dec 9,155 8,947
1979 Low 27-Feb 9,086 8,880
High 5-Oct 10,823 10,310
Close 31-Dec 10,556 9,892
1980 Low 21-Apr 9,625 8,907
High 20-Nov 13,131 11,876
Close 31-Dec 12,807 11,390
1981 High 27-Apr 13,986 12,308
Low 25-Sep 11,906 10,243
Close 31-Dec 12,654 10,688
1982 Low 22-Jan 10,593 8,947
High 7-Dec 17,346 13,833
Close 31-Dec 16,957 13,522
1983 Low 3-Jan 16,636 13,266
High 10-Oct 21,599 16,721
Close 30-Dec 21,389 16,424
1984 High 9-Jan 22,004 16,896
Low 24-Jul 18,549 13,980
Close 31-Dec 22,621 16,759
1985 Low 1-May 22,882 16,819
High 16-Dec 29,736 21,355
Close 31-Dec 29,448 21,148
1986 Low 14-Feb 31,766 22,665
High 4-Sep 36,571 25,757
Close 31-Dec 35,941 25,151
1987 High 25-Aug 50,132 34,478
Low 4-Dec 33,691 23,002
Close 31-Dec 37,295 25,463
1988 Low 20-Jan 36,464 24,895
High 5-Jul 43,076 28,988
Close 30-Dec 43,246 28,561
1989 Low 3-Jan 43,068 28,443
High 9-Oct 58,786 38,138
Close 29-Dec 55,597 35,438
1990 High 4-Jun 60,265 37,947
Low 11-Oct 46,988 29,390
Close 31-Dec 52,130 32,180
1991 Low 9-Jan 50,201 30,989
High 31-Dec 67,947 40,940
Close 31-Dec 67,947 40,940
1992 Low 8-Apr 66,472 39,828
High 12-Nov 72,487 42,938
Close 31-Dec 74,871 44,059
1993 Low 8-Jan 74,615 43,908
High 2-Nov 88,379 51,169
Close 31-Dec 88,466 50,884
1994 High 2-Feb 91,634 52,706
Low 8-Dec 86,773 48,708
Close 30-Dec 89,641 50,319
1995 Low 3-Jan 89,539 50,261
High 29-Nov 119,498 66,056
Close 29-Dec 120,306 66,210
1996 Low 10-Jan 117,715 64,784
High 26-Nov 145,602 79,119
Close 31-Dec 144,352 78,143
1997 Low 11-Apr 144,443 77,891
High 7-Oct 189,427 101,423
Close 31-Dec 182,855 97,513
1998 High 17-Jul 212,584 112,606
Low 8-Oct 173,534 91,600
Close 31-Dec 213,421 112,292
1999 Low 14-Jan 211,060 111,050
High 10-Dec 258,554 134,742
Close 31-Dec 265,882 138,151
2000 High 1-Sep 293,957 151,363
Low 21-Dec 266,380 136,743
Close 29-Dec 277,235 142,315
2001 High 1-Feb 287,822 147,750
Low 21-Sep 211,970 107,718
Close 31-Dec 250,761 126,959
2002 High 19-Mar 260,698 131,491
Low 9-Oct 182,355 91,253
Close 31-Dec 207,271 102,816
2003 Low 12-Mar 186,058 91,854
High 31-Dec 273,523 133,434
Close 31-Dec 273,523 133,434
S&P 500 Index with
dividends reinvested
Initial Investment 7/31/1978 $10,000
1978 High 12-Sep 10,670
Low 14-Nov 9,306
Close 29-Dec 9,762
1979 Low 27-Feb 9,807
High 5-Oct 11,769
Close 31-Dec 11,579
1980 Low 27-Mar 10,627
High 28-Nov 15,813
Close 31-Dec 15,336
1981 High 6-Jan 15,603
Low 25-Sep 13,172
Close 31-Dec 14,581
1982 Low 12-Aug 12,625
High 9-Nov 17,877
Close 31-Dec 17,723
1983 Low 3-Jan 17,433
High 10-Oct 22,491
Close 30-Dec 21,721
1984 Low 24-Jul 19,933
High 6-Nov 23,337
Close 31-Dec 23,083
1985 Low 4-Jan 22,592
High 16-Dec 30,417
Close 31-Dec 30,407
1986 Low 22-Jan 29,286
High 2-Dec 37,737
Close 31-Dec 36,082
1987 High 25-Aug 51,060
Low 4-Dec 34,314
Close 31-Dec 37,977
1988 Low 20-Jan 37,293
High 21-Oct 44,800
Close 30-Dec 44,267
1989 Low 3-Jan 43,883
High 9-Oct 58,837
Close 29-Dec 58,269
1990 High 16-Jul 61,897
Low 11-Oct 50,026
Close 31-Dec 56,457
1991 Low 9-Jan 53,255
High 31-Dec 73,620
Close 31-Dec 73,620
1992 Low 8-Apr 70,130
High 18-Dec 80,063
Close 31-Dec 79,222
1993 Low 8-Jan 78,011
High 28-Dec 87,854
Close 31-Dec 87,189
1994 High 2-Feb 90,223
Low 4-Apr 82,600
Close 30-Dec 88,336
1995 Low 3-Jan 88,305
High 13-Dec 122,408
Close 29-Dec 121,491
1996 Low 10-Jan 118,049
High 25-Nov 152,084
Close 31-Dec 149,367
1997 Low 2-Jan 148,615
High 5-Dec 201,641
Close 31-Dec 199,183
1998 Low 9-Jan 190,410
High 29-Dec 258,425
Close 31-Dec 256,100
1999 Low 14-Jan 252,550
High 31-Dec 309,980
Close 31-Dec 309,980
2000 High 24-Mar 322,882
Low 20-Dec 269,684
Close 29-Dec 281,766
2001 High 30-Jan 293,173
Low 21-Sep 207,919
Close 31-Dec 248,303
2002 High 19-Mar 253,587
Low 9-Oct 169,983
Close 31-Dec 193,447
2003 Low 12-Mar 176,642
High 31-Dec 248,903
Close 31-Dec 248,903
Lipper Large-Cap Value
Fund Index with
dividends reinvested
Initial Investment 7/31/1978 $ 10,000
1978 High 31-Aug 10,377
Low 31-Oct 9,281
Close 29-Dec 9,669
1979 Low 28-Feb 9,757
High 30-Sep 11,676
Close 31-Dec 11,667
1980 Low 31-Mar 10,929
High 30-Nov 14,925
Close 31-Dec 14,658
1981 High 31-May 15,457
Low 30-Sep 13,965
Close 31-Dec 14,879
1982 Low 31-Jul 14,113
High 31-Dec 18,622
Close 31-Dec 18,622
1983 Low 31-Jan 19,113
High 30-Nov 23,082
Close 30-Dec 22,968
1984 Low 31-May 21,001
High 31-Dec 24,352
Close 31-Dec 24,352
1985 Low 31-Jan 25,997
High 31-Dec 31,784
Close 31-Dec 31,784
1986 Low 31-Jan 32,353
High 31-Aug 38,779
Close 31-Dec 37,754
1987 High 31-Aug 49,169
Low 30-Nov 36,275
Close 31-Dec 38,736
1988 Low 31-Jan 40,556
High 31-Oct 44,818
Close 30-Dec 44,776
1989 Low 28-Feb 46,751
High 29-Dec 56,851
Close 29-Dec 56,851
1990 High 31-May 58,357
Low 31-Oct 49,728
Close 31-Dec 54,547
1991 Low 31-Jan 57,401
High 31-Dec 71,251
Close 31-Dec 71,251
1992 Low 31-Mar 70,391
High 31-Dec 77,417
Close 31-Dec 77,417
1993 Low 31-Jan 78,305
High 31-Dec 87,686
Close 31-Dec 87,686
1994 Low 31-Mar 84,698
High 31-Aug 90,912
Close 30-Dec 87,848
1995 Low 31-Jan 89,430
High 29-Dec 117,051
Close 29-Dec 117,051
1996 Low 31-Jan 120,651
High 30-Nov 144,146
Close 31-Dec 141,708
1997 Low 31-Mar 144,318
High 31-Dec 182,058
Close 31-Dec 182,058
1998 Low 31-Aug 174,202
High 31-Dec 215,266
Close 31-Dec 215,266
1999 Low 28-Feb 213,832
High 30-Jun 239,434
Close 31-Dec 238,470
2000 Low 29-Feb 218,784
High 31-Aug 246,137
Close 29-Dec 243,131
2001 High 31-Jan 245,154
Low 30-Sep 204,448
Close 31-Dec 222,282
2002 High 31-Mar 226,552
Low 30-Sep 164,352
Close 31-Dec 178,544
2003 Low 31-Mar 169,823
High 31-Dec 228,532
Close 31-Dec 228,532
Consumer Price Index
(inflation)(5)
Initial Investment 7/31/1978 $10,000
1978 Low 31-Jul 10,000
High 29-Dec 10,304
Close 29-Dec 10,304
1979 Low 31-Jan 10,396
High 31-Dec 11,674
Close 31-Dec 11,674
1980 Low 31-Jan 11,842
High 31-Dec 13,135
Close 31-Dec 13,135
1981 Low 31-Jan 13,242
High 31-Dec 14,307
Close 31-Dec 14,307
1982 Low 31-Jan 14,353
High 31-Oct 14,947
Close 31-Dec 14,855
1983 Low 31-Jan 14,886
High 30-Dec 15,419
Close 30-Dec 15,419
1984 Low 31-Jan 15,510
High 31-Oct 16,027
Close 31-Dec 16,027
1985 Low 31-Jan 16,058
High 31-Dec 16,636
Close 31-Dec 16,636
1986 Low 30-Apr 16,530
High 31-Dec 16,819
Close 31-Dec 16,819
1987 Low 31-Jan 16,925
High 30-Nov 17,565
Close 31-Dec 17,565
1988 Low 31-Jan 17,610
High 30-Dec 18,341
Close 30-Dec 18,341
1989 Low 31-Jan 18,432
High 29-Dec 19,193
Close 29-Dec 19,193
1990 Low 31-Jan 19,391
High 30-Nov 20,365
Close 31-Dec 20,365
1991 Low 31-Jan 20,487
High 31-Dec 20,989
Close 31-Dec 20,989
1992 Low 31-Jan 21,020
High 30-Nov 21,613
Close 31-Dec 21,598
1993 Low 31-Jan 21,705
High 30-Nov 22,192
Close 31-Dec 22,192
1994 Low 31-Jan 22,253
High 30-Nov 22,785
Close 30-Dec 22,785
1995 Low 31-Jan 22,877
High 31-Oct 23,394
Close 29-Dec 23,364
1996 Low 31-Jan 23,501
High 30-Nov 24,140
Close 31-Dec 24,140
1997 Low 31-Jan 24,216
High 31-Oct 24,597
Close 31-Dec 24,551
1998 Low 31-Jan 24,597
High 31-Oct 24,962
Close 31-Dec 24,947
1999 Low 31-Jan 25,008
High 30-Nov 25,616
Close 31-Dec 25,616
2000 Low 31-Jan 25,693
High 30-Nov 26,499
Close 29-Dec 26,484
2001 Low 31-Jan 26,651
High 30-Sep 27,139
Close 31-Dec 26,895
2002 Low 31-Jan 26,956
High 31-Oct 27,595
Close 31-Dec 27,534
2003 Low 31-Jan 27,656
High 30-Sep 28,189
Close 31-Dec 28,052
</table>
[end mountain chart]
Year ended
December 31 19784(4) 1979 1980 1981 1982 1983 1984
Capital value
Dividends in cash $216 405 553 580 634 594 556
Value at year-end $8,947 9,892 11,390 10,688 13,522 16,424 16,759
Total value
Dividends reinvested $217 421 603 665 768 755 734
Value at year-end $9,155 10,556 12,807 12,654 16,957 21,389 22,621
Total return -8.4% 15.3 21.3 -1.2 34.0 26.1 5.8
Year ended
December 31 1985 1986 1987 1988 1989 1990 1991
Capital value
Dividends in cash 582 636 717 895 1,225 1,058 904
Value at year-end 21,148 25,151 25,463 28,561 35,438 32,180 40,940
Total value
Dividends reinvested 795 894 1,034 1,328 1,877 1,679 1,478
Value at year-end 29,448 35,941 37,295 43,246 55,597 52,130 67,947
Total return 30.2 22.0 3.8 16.0 28.6 -6.2 30.3
Year ended
December 31 1992 1993 1994 1995 1996 1997 1998
Capital value
Dividends in cash 988 1,084 1,238 1,160 1,196 1,351 1,428
Value at year-end 44,059 50,884 50,319 66,210 78,143 97,513 112,292
Total value
Dividends reinvested 1,655 1,858 2,171 2,082 2,187 2,511 2,691
Value at year-end 74,871 88,466 89,641 120,306 144,352 182,855 213,421
Total return 10.2 18.2 1.3 34.2 20.0 26.7 16.7
Year ended
December 31 1999 2000 2001 2002 2003
Capital value
Dividends in cash 1,578 1,716 1,844 2,289 1,850
Value at year-end 138,151 142,315 126,959 102,816 133,434(3)
Total value
Dividends reinvested 3,013 3,319 3,611 4,553 3,755
Value at year-end 265,882 277,235 250,761 207,271 273,523(2)
Total return 24.6 4.3 -9.6 -17.3 32.0
Average annual total rate of return for 25-1/2 years 13.9%(1)
25 YEARS OF MANAGING THROUGH MULTIPLE PERSPECTIVES
[Begin Photo Caption]
[photo of Dina Perry]
VALUE
"I try to look for sectors of the economy that I think have been unrecognized by
the market, not only in terms of valuation but in terms of their growth
prospects."
- --Dina Perry
[photo of a door with chipped white paint]
[End Photo Caption]
THIS YEAR, FUNDAMENTAL INVESTORS CELEBRATES ITS 25TH ANNIVERSARY WITH CAPITAL
RESEARCH AND MANAGEMENT COMPANY, ADVISER TO THE AMERICAN FUNDS.
The fund's origins, however, actually date back some 70 years. From its
inception in 1932 through 1978, Fundamental Investors was managed by several
well-known firms. During that 46-year period, the fund lagged the unmanaged
Standard & Poor's 500 Composite Index, which tracks relatively large companies
listed on U.S. exchanges.
On August 1, 1978, Capital Research became the fund's adviser. Although there
have been periods since then when Fundamental Investors lagged the S&P 500, the
fund's average annual total return of 14.2% as of December 31, 2003, outpaced
the S&P 500's return of 13.5%.
While the fund has certainly benefited from the tremendous growth in global
stock markets over the past 25-year period, we believe that it is its unique
management system, consistent investment approach and focus on dividends that
have helped the fund to post above-average returns over the long term.
[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]
In this year's annual report, several of the fund's investment professionals
discuss what distinguishes Fundamental Investors among other growth-and-income
funds. Included in the discussion are Dina Perry, president of the fund, along
with portfolio counselors Gordon Crawford and Mike Kerr, and investment analyst
Ron Morrow.
WHAT MAKES FUNDAMENTAL INVESTORS SPECIAL?
MIKE: The fund is probably the most flexible of the American Funds'
growth-and-income portfolios. It is managed by four individuals who are
extremely different in how they invest and what motivates them. The fund
probably changes its stripes more throughout the investment cycle than the other
growth-and-income funds. Right now, we are more exposed to economic forces than
we would have been a year or two ago.
GORDON: First, I would say that the portfolio counselors who make up the
management team are a more aggressive group on average compared with the other
growth-and-income funds managed by Capital Research. That, coupled with its
relatively smaller size, makes it the most growth-oriented of the
growth-and-income funds. As a result, I think this fund will do best in an up
market, and hopefully do as well or better than the others over a complete
market cycle.
DINA: Another distinguishing characteristic is that Fundamental Investors has a
larger foreign exposure than most of the other growth-and-income funds. The fund
can invest up to 30% of its assets in non-U.S. companies. In addition, let's not
forget that dividends are a very important part of the fund, with the
distribution rate at net asset value currently at 1.39% for the 12 months ended
December 31, 2003.
WHAT ARE THE MAIN BENEFITS OF THE MULTIPLE PORTFOLIO COUNSELOR SYSTEM?
GORDON: I think the mix of people is pretty interesting. We each have very
complementary interests and styles. By nature, I am a growth investor. My
analytical responsibilities historically have been entertainment, insurance and
semiconductor production equipment, so I tend to migrate toward media and
consumer companies, and some financial services and technology. Mike Kerr
focuses on energy and other commodities. Jim Drasdo is at the other extreme from
myself. He's very much a value-oriented investor, and focuses on cyclical and
industrial stocks. Ron Morrow is a food analyst. And Dina's training as an
economist leads her to turnaround stories and companies that are out of favor.
DINA: Given our different backgrounds and given that we all have our individual
prejudices and beliefs, I think we each find different opportunities, some of
which would be missed if the fund was run by just one person.
MIKE: For me, the main benefit is knowing that I can make investment decisions
that may seem unbalanced in my portion of the portfolio because I know they will
be offset by decisions being made by the other counselors. The end result tends
to be a reasonably balanced portfolio. So it allows me to act on my own
convictions and do what I think will produce the best return without having to
worry as much about lack of diversification.
HOW DO YOU DEFINE FUNDAMENTAL?
DINA: I try to look for sectors of the economy that I think have been
unrecognized by the market, not only in terms of valuation but in terms of their
growth prospects. So, for example, when there was a significant selloff in
technology stocks in 2001, we took a look at that area. We also looked at
capital goods stocks because the market assumed the economic recovery would be
weak and that these companies would not do well. The third area I emphasized was
the material sector, which would benefit from a stronger-than-expected global
economic recovery and a weak dollar.
MIKE: As fundamental investors, we are clearly value-oriented, but we are more
willing to match up a high-yielding name such as Altria with a low-yielding name
such as Lowe's Companies in order to generate income, which is a strategy not
typically found in a growth-and-income portfolio. We're also willing to be
flexible to achieve our yield, and that includes looking outside the United
States.
RON: I would define fundamental as those companies that have better-than-average
growth and those industries that have good growth prospects for the next three-
to five-year period. So, I'm looking for companies that can accelerate their
rate of earnings and dividend growth due to changing circumstances in either
their industries or their own businesses.
HOW ARE YOU POSITIONING THE FUND IN THE CURRENT ECONOMIC ENVIRONMENT?
GORDON: Right now, my part of the portfolio is positioned for a synchronized
global economic recovery. The United States is in a strong recovery, boosted by
very low interest rates and a very stimulative fiscal policy. Europe, which has
been the sick man of the world economy, is beginning to show signs of growth.
Perhaps the most exciting part of the global economy is the geographic region
spanning from India to Taiwan. That whole sector of the world is growing rapidly
and that's beginning to lift Japan out of a decade-long period of economic
malaise. So we could have a world in which all the major markets are in an
accelerating mode, and that will probably result in robust corporate profits,
but inflationary pressures.
In that environment, you want to own companies that are economically sensitive
and cyclical. So I own a lot of industrial, media and retail companies -- all of
which are industries that will benefit from a booming economy.
RON: I agree that inflation will probably start to accelerate. So I've been more
interested in companies that have businesses and/or assets "in the ground," such
as Noranda, a copper producer, and Murphy Oil, an oil and gas producer. In
response to the depreciation of the U.S. dollar, I am also positioning my
portfolio toward international companies and some domestic companies that export
internationally.
WHAT ARE SOME OF YOUR FAVORITE STOCKS RIGHT NOW?
MIKE: I have a fairly large exposure to energy, metals and minerals companies,
which typically do well in an inflationary environment. Some of my favorite
holdings include Norsk Hydro, an energy conglomerate; Suncor Energy, another
energy company that has been a long-term holding in the fund; Freeport-McMoRan
Copper & Gold, a mining company; and BHP Billiton, an oil and gas producer.
Another example is Lowe's Companies, which I believe is still a fundamentally
sound value. Despite its terrific price performance -- up about 48% for the year
- -- its price-to-earnings ratio and growth rate are still basically aligned.
[Begin Photo Caption]
[photo of grass]
GROWTH
"I'm looking for companies that can accelerate their rate of earnings and
dividend growth due to changing circumstances in either their industries or
their own businesses."
- -- Ron Morrow
[photo of Ron Morrow]
[End Photo Caption]
[Begin Photo Caption]
[photo of Mike Kerr]
"We have the option to invest in non-U.S. companies, but it is not mandatory.
That allows us to obtain yield overseas and also to take advantage of U.S.
dollar trends as they become visible to us. So again, it's another example of
having the flexibility to react to an environment that we see coming."
- --Mike Kerr
FLEXIBILITY
[photo of orange construction cones]
[End Photo Caption]
[Begin Sidebar]
RESEARCH MAKES THE DIFFERENCE
At the core of Fundamental Investors' investment process is intensive research.
The fund is supported by 20 analysts, who are in turn part of the research
effort maintained by Capital Research and Management Company, adviser to all of
the American Funds.
Fundamental research is approached as an ongoing process of information
gathering, number crunching and relationship building. Analysts spend much time
talking to company officials, competitors, suppliers and creditors to get a
well-rounded view of a company's prospects. They typically have long histories
with the companies they follow, which allows them to take the level of
discussion at meetings with management to a more sophisticated level.
At most of the American Funds, analysts are also given a portion of a fund's
assets to manage on their own. That enables them, within the fund's guidelines,
to act on their own convictions. "It's a great way to communicate ideas," says
Terry McGuire, who oversees the research portfolio. "Most importantly, as an
analyst, it puts you in the role of putting your money where your mouth is. You
have to put your ideas to work."
In effect, the system offers the best attributes of both individualism and
teamwork, with no need for consensus. As a result, the research portfolio has
sometimes been referred to as "the home for lonely ideas."
For example, the largest holding in the research portfolio right now is SBC
Communications, the telecommunications services company. At first glance, it's a
stock that many investors may overlook. During 2003, as Standard & Poor's 500
Composite Index posted a 28.7% gain, SBC declined by 3.8%, in part due to
competitive pressures. But for Brad Vogt, a telecommunications analyst for the
fund, SBC offers a ripe opportunity to own a company whose stock price does not
necessarily reflect the company's improving outlook and potential.
"SBC has a strong core base of earnings, a sound balance sheet and solid
management," he says. "Plus, it pays a dividend yield more than twice the level
of the S&P 500," which helps the fund to meet its dividend requirement.
Going forward, Brad feels that some of the competitive pressures are easing, and
that the company is making progress in growth areas such as DSL and wireless
services. In addition, the company has recently increased its dividend and
announced a stock buyback. "I believe SBC's earnings will start to recover and
that the company has an opportunity to be a big part of a consolidating
telecommunications sector," he says. "In the meantime, the growing dividend and
return of capital have given me the confidence to hold the stock during a tough
period."
Because analysts are evaluated on their results over rolling four-year periods
- --as are the portfolio counselors -- they can afford to make this kind of
long-term investment in a stock that may not provide immediate results, but
could have a strong impact over time. In effect, the system not only allows
analysts to act on their highest convictions, but also aligns their financial
rewards with yours -- the long-term shareholder. [End Sidebar]
[Begin Photo Caption]
[photo of Gordon Crawford]
"Dividends are ultimately how the shareholder gets paid, particularly if you're
a longer term investor. Dividend-paying companies tend to have better accounting
practices, better balance sheets and better visibility in their process."
- -- Gordon Crawford
INCOME
[photo of five similar potted plants, in various stages of growth]
[End Photo Caption]
DINA: One company I put great emphasis on was Deere, a manufacturer of
agricultural and construction equipment, which gained 42% in 2003. Investors had
overlooked the company because they expected the capital goods cycle and the
recovery in the farm sector to be weak. That was not the case. Just looking at
the supply and demand balance, I felt that the price of agricultural commodities
would increase and, as a result, farm income would increase, which would mean
that farmers would likely buy more equipment. The declining U.S. dollar also
helped by making American exports of agricultural commodities more attractive.
GORDON: My style is more growth-oriented, but I am broadly diversified in the
cyclical area. I own an eclectic group of businesses ranging from paper
companies like International Paper and Temple-Inland, to machinery companies
like Eaton.
I also own growth-oriented companies that are leveraged to a recovery in the
industrial economy, such as electrical-equipment manufacturer Emerson Electric,
and media and technology companies like Time Warner and Microsoft.
HOW DOES THE RESEARCH TEAM BRING VALUE TO THE FUND?
GORDON: There's probably just a handful of other investment management companies
that have as many research analysts in as many geographic locations speaking as
many of their native tongues as we do. As a result, the flow of ideas is
unbelievable, regardless of whether you're interested in investing in India,
China, Japan, Korea or the United States. (For more about our research effort,
see page 9.)
WHAT ROLE DO DIVIDENDS PLAY IN THE FUND?
DINA: Because of the fund's high dividend requirement, we mostly buy stocks with
yields. If I buy a company that doesn't pay any dividends, I have to offset that
with companies that pay a high dividend. For example, I own Cisco Systems, which
doesn't pay a dividend, but I offset that by owning some REITs or utilities,
which have higher dividends than the S&P 500. Given the favorable taxation on
dividends under the new tax code, I think the emphasis on dividends by investors
will increase.
GORDON: Dividends are ultimately how the shareholder gets paid, particularly if
you're a longer term investor. Dividend-paying companies tend to have better
accounting practices, better balance sheets and better visibility in their
process.
DO YOU FIND THAT THE NEW TAX CODE HAS MADE IT EASIER TO FIND INCOME?
MIKE: I think the payout of dividends as a percentage of earnings will increase
after declining for more than a decade. The dividend culture in the United
States has clearly improved over the past two years. Companies used to think we
were old-fashioned when we asked for dividend hikes rather than stock
repurchases. Companies now understand that a dividend, especially with the new
tax code, is probably the best way to reward shareholders. So I think the
overall attitude is improving.
We're proud at Fundamental Investors that we have been able to maintain our
dividend throughout one of the worst dividend-paying periods in S&P 500 history.
That's a tremendous achievement.
[Begin Sidebar]
A UNIQUE MANAGEMENT SYSTEM
Capital Research and Management Company, adviser to the American Funds, has
developed a unique method we call the "multiple portfolio counselor system."
Here's how it works: Fundamental Investors' assets are divided into portions.
Each of the four portfolio counselors manages his or her own portion of the
fund; a fifth segment is managed by the fund's research analysts. What makes
this system unique is that it enables counselors to consult with each other, yet
follow their own highest convictions. It also provides for diverse viewpoints,
with each counselor bringing his or her own investment style to the process and
a depth of experience ranging from 20 to 32 years.
Years of investment Years with American Funds
experience or affiliates
Gordon Crawford 32 32
James Drasdo 31 26
Dina Perry 25 12
Mike Kerr 20 18
[End Sidebar]
HOW DOES THE FUND'S ABILITY TO INVEST UP TO 30% OF ITS ASSETS IN NON-U.S.
COMPANIES ADD VALUE TO THE PORTFOLIO?
MIKE: We have the option to invest in non-U.S. companies, but it is not
mandatory. That allows us to obtain yield overseas and also to take advantage of
U.S. dollar trends as they become visible to us. So again, it's another example
of having the flexibility to react to an environment that we see coming.
GORDON: I think all of us find a lot of value outside the United States. There's
obviously some benefit from owning assets outside the United States with the
dollar declining, but there's also just a lot of world-class companies that sell
at lower multiples in other parts of the world.
WHAT TRENDS AND DEVELOPMENTS DO YOU BELIEVE WILL IMPACT THE FUND OVER THE NEXT
SEVERAL YEARS?
GORDON: We keep looking at the continued development of technology because it
certainly is changing the way people live and work. As a subset of that, I think
we have to be aware not only of opportunities to invest in companies related to
the Internet, but also to avoid owning companies whose businesses are inevitably
threatened by the Internet.
DINA: I think some trends will include the development of new and improved
technologies, strong defense spending and cost containment in the medical area.
Another trend that most people are not anticipating is growth in the
manufacturing sector, which I believe will do well for several reasons. First,
U.S. companies have really consolidated. Secondly, they had a difficult period
due to a strong currency and, as a result, are very lean and mean. Finally, with
the declining U.S. dollar, they are able to have some pricing power.
RON: Being an election year, 2004 is going to be an interesting time for
domestic companies. Changes in the administration and Congress can either be
extremely detrimental or beneficial to companies in the health care,
pharmaceutical and certainly tobacco industries.
Considering how much the dollar has already declined, I will probably look more
toward Asia rather than Europe in some of my international holdings. I'm
extremely interested in the resurgence of the Japanese economy and the growth in
Asia, particularly in China and India. I'm interested in not only the companies
based there, but in some of the domestic companies that will benefit from the
growth in those economies.
MIKE: Globalization is just a nonstoppable trend. The role of China over the
next decade is a huge issue. If China and India are successful in becoming more
meaningful parts of the global economy, it will be extremely bullish for the
global economy because another 2 billion people will have joined the world and
are going to become consumers. Whether China can successfully pull off this
great leap forward is unprecedented and highly risky, but it's the most
meaningful question for anyone investing globally today.
INVESTMENT PORTFOLIO, December 31, 2003
[begin pie chart]
Percent of
INDUSTRY DIVERSIFICATION Net Assets
Equity securities 94.92 %
Oil & Gas 8.70
Metals & Mining 5.90
Aerospace & Defense 5.08
Pharmaceuticals 5.05
Commercial Banks 4.98
Other industries 65.21
Bonds & notes 1.16
Cash & equivalents 3.92
[end pie chart]
Percent
of net
LARGEST EQUITY HOLDINGS assets
Dow Chemical 2.67 %
Suncor Energy 2.12
Altria Group 2.07
Time Warner 2.02
Norsk Hydro 1.89
FleetBoston Financial 1.86
Deere 1.84
Microsoft 1.76
Alcoa 1.64
SBC Communications 1.61
Shares or Market value
EQUITY SECURITIES (COMMON AND PREFERRED STOCKS AND CONVERTIBLE DEBENTURES) - 94.92% principal amount (000)
OIL & GAS - 8.70%
Suncor Energy Inc. (Canada) 17,903,010 $ 449,165
Norsk Hydro AS (ADR) (Norway) 3,559,000 219,946
Norsk Hydro AS 2,934,600 180,130
LUKoil Holding (ADR) (Russia) 2,250,000 209,475
Murphy Oil Corp. 2,370,000 154,785
Shell Canada Ltd. (Canada) 3,273,200 154,766
ConocoPhillips 1,700,000 111,469
Unocal Corp. 1,900,000 69,977
Unocal Capital Trust 6.25% convertible preferred 2026 $ 450,000 22,950
ChevronTexaco Corp. 1,000,000 86,390
Burlington Resources Inc. 1,000,000 55,380
Imperial Oil Ltd. (Canada) 1,184,778 52,628
Royal Dutch Petroleum Co., New York registered (Netherlands) 875,000 45,841
Exxon Mobil Corp. 750,000 30,750
METALS & MINING - 5.90%
Alcoa Inc. 9,173,800 348,604
BHP Billiton Ltd. (Australia) 23,945,030 219,501
Freeport-McMoRan Copper & Gold Inc., Class B 4,973,100 209,517
Rio Tinto PLC (United Kingdom) 6,500,000 178,866
CONSOL Energy Inc. (1) (2) 3,700,000 86,247
Phelps Dodge Corp. (3) 965,620 73,474
Inco Ltd. (Canada) (3) 1,632,300 64,998
Massey Energy Co. 2,011,700 41,843
Arch Coal, Inc. 5.00% convertible preferred 2049 $ 200,000 17,068
BlueScope Steel Ltd. (formerly BHP Steel Ltd.) (Australia) 2,113,020 8,898
AEROSPACE & DEFENSE - 5.08%
Boeing Co. 7,350,000 309,729
Raytheon Co. 7,592,732 228,086
Raytheon Co. - RC Trust I 8.25% convertible preferred 2006 1,180,000 units 64,050
Northrop Grumman Corp. 1,150,000 109,940
Northrop Grumman Corp. 7.25% convertible preferred 2004 572,690 units 59,388
General Dynamics Corp. 1,772,900 160,252
Honeywell International Inc. 1,500,000 50,145
United Technologies Corp. 525,000 49,754
Bombardier Inc., Class B (Canada) 7,500,000 31,670
Lockheed Martin Corp. 248,200 12,757
PHARMACEUTICALS - 5.05%
AstraZeneca PLC (Sweden) 2,660,000 129,399
AstraZeneca PLC (United Kingdom) 2,000,000 95,590
AstraZeneca PLC (ADR) 1,676,266 81,098
Sanofi-Synthelabo (France) 2,850,000 213,566
Eli Lilly and Co. 2,850,000 200,440
Bristol-Myers Squibb Co. 4,350,000 124,410
Merck & Co., Inc. 1,700,000 78,540
Schering-Plough Corp. 3,900,000 67,821
Forest Laboratories, Inc. (3) 700,000 43,260
Pfizer Inc 1,000,000 35,330
COMMERCIAL BANKS - 4.98%
FleetBoston Financial Corp. 9,030,000 394,160
Allied Irish Banks, PLC (Ireland) 12,170,334 194,466
Cullen/Frost Bankers, Inc. 2,550,000 103,453
KeyCorp 3,100,000 90,892
Bank of Ireland (Ireland) 6,500,000 88,278
Bank of America Corp. 698,400 56,172
National Bank of Canada (Canada) 1,405,000 46,790
Comerica Inc. 800,000 44,848
St. George Bank Ltd. (Australia) 2,450,279 35,931
DIVERSIFIED TELECOMMUNICATION SERVICES - 4.33%
SBC Communications Inc. 13,050,000 340,213
China Telecom Corp. Ltd., Class H (China) 400,000,000 164,895
Verizon Communications Inc. 4,615,000 161,894
Telecom Italia SpA, nonvoting (Italy) (3) 34,200,000 69,328
Deutsche Telekom AG (Germany) (3) 2,300,000 41,890
Deutsche Telekom International Finance BV 6.50% convertible bonds 2006 Euro 12,000,000 17,612
Swisscom AG (Switzerland) $ 167,510 55,041
Telefonica, SA (Spain) (3) 2,950,000 43,101
AT&T Corp. 800,000 16,240
Sprint Corp. - FON Group 400,000 6,568
MEDIA - 4.29%
Time Warner Inc. (formerly AOL Time Warner Inc.) (3) 23,815,000 428,432
News Corp. Ltd., preferred (ADR) (Australia) 8,610,000 260,452
Comcast Corp., Class A (3) 2,825,500 92,874
Comcast Corp., Class A, special nonvoting stock (3) 500,000 15,640
Dow Jones & Co., Inc. 1,800,000 89,730
Liberty Media Corp., Class A (3) 915,000 10,879
Interpublic Group of Companies, Inc. 1.87% convertible subordinated notes
2006 (1) $ 8,168,000 7,576
UnitedGlobalCom, Inc., Class A (1) (2) (3) 225,035 1,717
Antena 3 Television, SA (Spain) (3) 9,979 438
CHEMICALS - 4.17%
Dow Chemical Co. 13,625,000 566,391
E.I. du Pont de Nemours and Co. 3,000,000 137,670
Shin-Etsu Chemical Co., Ltd. (Japan) 1,940,000 79,110
Air Products and Chemicals, Inc. 1,300,000 68,679
Lyondell Chemical Co. 1,450,000 24,577
Potash Corp. of Saskatchewan Inc. (Canada) 69,200 5,984
MACHINERY - 4.16%
Deere & Co. 5,971,100 388,420
Caterpillar Inc. 2,600,000 215,852
Parker Hannifin Corp. 2,600,000 154,700
Eaton Corp. 850,000 91,783
Illinois Tool Works Inc. 357,200 29,973
INSURANCE - 3.81%
American International Group, Inc. 3,800,000 251,864
Allstate Corp. 3,500,000 150,570
XL Capital Ltd., Class A 1,825,000 141,529
Irish Life & Permanent PLC (Ireland) 7,000,000 112,466
Chubb Corp. 7.00% convertible preferred 2005 1,200,000 units 34,272
Chubb Corp. 300,000 20,430
Aon Corp. 1,767,400 42,312
St. Paul Companies, Inc. 700,000 27,755
21st Century Insurance Group 1,808,900 24,872
PAPER & FOREST PRODUCTS - 2.98%
International Paper Co. 5,275,000 227,405
Weyerhaeuser Co. 2,883,000 184,512
Norske Skogindustrier ASA, Class A (Norway) 6,566,900 124,706
Oji Paper Co., Ltd. (Japan) 6,500,000 41,877
Bowater Inc. 700,000 32,417
Georgia-Pacific Corp., Georgia-Pacific Group 698,640 21,427
INDUSTRIAL CONGLOMERATES - 2.98%
General Electric Co. 9,150,000 283,467
3M Co. 2,500,000 212,575
Tyco International Ltd. 5,125,000 135,813
SPECIALTY RETAIL - 2.57%
Lowe's Companies, Inc. 5,524,900 306,024
Limited Brands, Inc. 13,200,000 237,996
ELECTRIC UTILITIES - 2.31%
Dominion Resources, Inc. 4,590,000 292,980
DTE Energy Co. 1,606,900 63,312
American Electric Power Co., Inc. 1,902,100 58,033
TXU Corp. 1,167,200 27,686
FirstEnergy Corp. 569,200 20,036
E.ON AG (Germany) 300,000 19,483
Entergy Corp. 150,000 8,570
MULTI-UTILITIES & UNREGULATED POWER - 2.15%
Duke Energy Corp. 10,275,000 210,124
Questar Corp. 3,000,000 105,450
Public Service Enterprise Group Inc. 1,480,000 64,824
Constellation Energy Group, Inc. 1,500,000 58,740
El Paso Corp. 2,100,000 17,199
COMPUTERS & PERIPHERALS - 2.14%
International Business Machines Corp. 2,225,000 206,213
Sun Microsystems, Inc. (3) 21,000,000 94,290
NEC Corp. (Japan) 11,516,000 84,593
Hewlett-Packard Co. 3,000,000 68,910
TOBACCO - 2.07%
Altria Group, Inc. 8,050,000 438,081
FOOD PRODUCTS - 1.94%
Unilever NV, New York registered (Netherlands) 4,100,000 266,090
Sara Lee Corp. 3,375,000 73,271
General Mills, Inc. 1,404,200 63,610
Kraft Foods Inc., Class A 200,000 6,444
H.J. Heinz Co. 70,000 2,550
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 1.89%
Texas Instruments Inc. 11,353,424 333,564
Maxim Integrated Products, Inc. 701,600 34,940
Linear Technology Corp. 500,000 21,035
ASML Holding NV 5.50% convertible notes 2010 Euro 6,000,000 10,760
ELECTRONIC EQUIPMENT & INSTRUMENTS - 1.88%
Sanmina Corp. 0% convertible subordinated debentures 2020 $ 166,000,000 85,075
SCI Systems, Inc. 3.00% convertible subordinated debentures 2007 $ 54,500,000 51,775
Agilent Technologies, Inc. (3) 3,700,000 108,188
Agilent Technologies, Inc. 3.00% convertible debentures 2021 (4) $ 15,074,000 16,544
Agilent Technologies, Inc. 3.00% convertible debentures 2021 (1) (4) $ 10,370,000 11,381
Hitachi, Ltd. (Japan) 14,824,000 89,157
Solectron Corp. 7.25% ACES convertible preferred 2004 1,200,000 units 20,016
Murata Manufacturing Co., Ltd. (Japan) 300,000 16,172
SOFTWARE - 1.76%
Microsoft Corp. 13,565,000 373,580
IT SERVICES - 1.59%
Automatic Data Processing, Inc. 5,375,000 212,904
Sabre Holdings Corp., Class A 2,645,304 57,112
Electronic Data Systems Corp. 1,400,000 34,356
Electronic Data Systems Corp. 7.625% FELINE PRIDES 2004 279,600 units 6,411
Ceridian Corp. (3) 1,200,000 25,128
COMMUNICATIONS EQUIPMENT - 1.57%
Cisco Systems, Inc. (3) 7,000,000 170,030
Motorola, Inc. 8,000,000 112,560
Motorola, Inc. 7.00% convertible preferred 2004 800,000 units 34,744
Corning Inc. (3) 1,520,000 15,854
AUTOMOBILES - 1.41%
Toyota Motor Corp. (Japan) 6,000,000 202,216
General Motors Corp. 1,800,000 96,120
ENERGY EQUIPMENT & SERVICES - 1.41%
Halliburton Co. 7,500,000 195,000
Baker Hughes Inc. 3,200,000 102,912
CAPITAL MARKETS - 1.33%
J.P. Morgan Chase & Co. 7,685,000 282,270
ELECTRICAL EQUIPMENT - 1.31%
Emerson Electric Co. 4,300,000 278,425
MULTILINE RETAIL - 1.30%
Target Corp. 4,890,000 187,776
May Department Stores Co. 3,000,000 87,210
BEVERAGES - 1.18%
Anheuser-Busch Companies, Inc. 1,700,000 89,556
PepsiCo, Inc. 1,800,000 83,916
Coca-Cola Co. 1,500,000 76,125
THRIFTS & MORTGAGE FINANCE - 0.97%
Fannie Mae 2,117,800 158,962
Independence Community Bank Corp. 1,295,900 46,614
CONTAINERS & PACKAGING - 0.81%
Temple-Inland Inc. (5) 2,750,000 172,343
ROAD & RAIL - 0.81%
Union Pacific Corp. 1,500,000 104,220
Burlington Northern Santa Fe Corp. 2,100,000 67,935
FOOD & STAPLES RETAILING - 0.61%
Walgreen Co. 3,345,000 121,691
SYSCO Corp. 200,000 7,446
AUTO COMPONENTS - 0.57%
Magna International Inc., Class A (Canada) 1,000,000 80,050
Dana Corp. 2,215,300 40,651
GAS UTILITIES - 0.57%
NiSource Inc. 2,800,000 61,432
KeySpan Corp. 1,584,000 58,291
AIR FREIGHT & LOGISTICS - 0.53%
United Parcel Service, Inc., Class B 1,500,000 111,825
REAL ESTATE - 0.46%
Equity Residential 2,850,000 84,104
MI Developments Inc., Class A (Canada) (3) 500,000 13,960
HEALTH CARE PROVIDERS & SERVICES - 0.40%
HCA Inc. 1,000,000 42,960
CIGNA Corp. 725,000 41,688
WIRELESS TELECOMMUNICATION SERVICES - 0.35%
Vodafone Group PLC (United Kingdom) 30,175,000 74,533
AIRLINES - 0.32%
Continental Airlines, Inc., Class B (3) 2,675,000 43,522
Southwest Airlines Co. 1,500,000 24,210
OTHER - 0.41%
Amgen Inc. (3) 500,000 30,900
Allied Waste Industries, Inc., Series C, 6.25% convertible preferred 2006 $ 360,000 27,540
InterActiveCorp (3) 456,000 15,472
Avon Products, Inc. 170,000 11,473
Colgate-Palmolive Co. 10,000 501
MISCELLANEOUS - 1.87%
Other equity securities in initial period of acquisition 396,852
TOTAL EQUITY SECURITIES (cost: $16,872,105,000) 20,107,307
Principal amount
BONDS & NOTES - 1.16% (000)
AIRLINES - 0.75%
Northwest Airlines, Inc.:
8.875% 2006 $ 58,185 53,094
7.625% 2005 37,860 37,103
9.875% 2007 15,335 14,032
7.875% 2008 16,566 13,874
8.52% 2004 5,000 5,050
Continental Airlines, Inc. 8.00% 2005 28,600 27,956
Delta Air Lines, Inc., Series 1993-A2, 10.50% 2016 (6) 11,500 8,740
MEDIA - 0.26%
Charter Communications Holdings, LLC 8.25% 2007 50,000 47,250
Time Warner Inc. 10.15% 2012 6,000 8,021
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.15%
Comcast UK Cable Partners Ltd. 11.20% 2007 19,570 19,864
AT&T Corp. 6.50% 2006 (1) (4) Euro 8,950 12,048
TOTAL BONDS & NOTES (cost: $226,029,000) 247,032
SHORT-TERM SECURITIES - 3.82%
CORPORATE SHORT-TERM NOTES - 3.15%
CAFCO, LLC 1.07%-1.09% due 1/22-1/28/2004 (1) $ 79,700 79,641
Coca-Cola Co. 1.01%-1.03% due 1/26-3/5/2004 72,000 71,918
Park Avenue Receivables Corp. 1.08%-1.09% due 1/9-1/29/2004 (1) 60,999 60,971
Procter & Gamble Co. 1.02%-1.05% due 1/9-2/9/2004 (1) 55,000 54,959
Pfizer Inc 1.02%-1.03% due 1/16-1/28/2004 (1) 54,200 54,170
Receivables Capital Corp. 1.07%-1.08% due 1/20-2/3/2004 (1) 50,000 49,958
Edison Asset Securitization LLC 1.07%-1.08% due 1/8-2/17/2004 (1) 49,100 49,044
Preferred Receivables Funding Corp. 1.08% due 1/29-2/5/2004 (1) 47,611 47,568
E.I. DuPont de Nemours & Co. 1.04%-1.05% due 1/23-1/27/2004 45,000 44,966
BellSouth Corp. 1.01%-1.03% due 1/7-1/21/2004 (1) 35,200 35,187
Netjets Inc. 1.06%-1.07% due 1/12-2/10/2004 (1) 33,600 33,575
Verizon Network Funding Corp. 1.02%-1.03% due 1/22-2/11/2004 25,000 24,979
Merck & Co. Inc. 1.01% due 1/20/2004 21,018 21,006
Caterpillar Financial Serivces Corp. 1.01% due 3/4/2004 20,000 19,964
Harley-Davidson Funding Corp. 1.01%-1.05% due 1/2-1/15/2004 (1) 14,500 14,496
Johnson Controls Inc. 0.94% due 1/2/2004 (1) 5,000 5,000
U.S. TREASURIES - 0.34%
U.S. Treasury Bills 0.87%-0.93% due 2/12-2/19/2004 72,100 72,026
CERTIFICATES OF DEPOSIT - 0.18%
Wells Fargo & Co. 1.04%-1.07% due 1/9-1/13/2004 38,000 38,000
FEDERAL AGENCY DISCOUNT NOTES - 0.15%
International Bank for Reconstruction and Development 1.01% due 2/6/2004 26,100 26,073
Student Loan Marketing Assn. 1.00% due 1/13/2004 5,300 5,298
TOTAL SHORT-TERM SECURITIES (cost: $808,795,000) 808,799
TOTAL INVESTMENT SECURITIES (cost: $17,906,929,000) 21,163,138
OTHER ASSETS LESS LIABILITIES 20,899
NET ASSETS $21,184,037
(1) Purchased in a private placement transaction; resale may be
limited to qualified institutional buyers; resale to the public
may require registration.
(2) Valued under fair value procedures adopted by authority of the Board
of Directors.
(3) Security did not produce income during the last 12 months.
(4) Coupon rate may change periodically.
(5) The fund owns 5.07% of the outstanding voting securities of Temple-Inland
Inc., and thus is considered an affiliate of this company under the
Investment Company Act of 1940.
(6) Pass-through security backed by a pool of mortgages or other loans on
which principal payments are periodically made. Therefore, the effective
maturity is shorter than the stated maturity.
ADR = American Depositary Receipts
See Notes to Financial Statements
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: $17,786,564) $20,990,795
Affiliated issuers (cost: $120,365) 172,343 $21,163,138
Cash 184
Receivables for:
Sales of investments 10,918
Sales of fund's shares 28,061
Dividends and interest 39,234 78,213
21,241,535
LIABILITIES:
Payables for:
Purchases of investments 12,832
Repurchases of fund's shares 32,289
Investment advisory services 4,711
Services provided by affiliates 6,294
Deferred Directors' compensation 1,145
Other fees and expenses 227 57,498
NET ASSETS AT DECEMBER 31, 2003 $21,184,037
NET ASSETS CONSIST OF:
Capital paid in on shares of capital stock $19,291,562
Undistributed net investment income 65,000
Accumulated net realized loss (1,429,024)
Net unrealized appreciation 3,256,499
NET ASSETS AT DECEMBER 31, 2003 $21,184,037
TOTAL AUTHORIZED CAPITAL STOCK - 1,000,000 SHARES, $1.00 PAR VALUE
Net asset
Net assets Shares outstanding value per share
(1)
Class A $19,211,574 665,890 $28.85
Class B 836,257 29,039 28.80
Class C 413,527 14,371 28.78
Class F 310,658 10,771 28.84
Class 529-A 88,073 3,054 28.84
Class 529-B 18,648 647 28.83
Class 529-C 26,786 929 28.83
Class 529-E 4,447 154 28.83
Class 529-F 1,116 39 28.82
Class R-1 2,122 74 28.79
Class R-2 45,068 1,566 28.77
Class R-3 65,698 2,280 28.82
Class R-4 47,539 1,649 28.83
Class R-5 112,524 3,899 28.86
(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 $30.61 and
$30.60, 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 $8,769; also includes
$3,485 from affiliates) $409,558
Interest 73,821 $483,379
Fees and expenses:
Investment advisory services 48,382
Distribution services 50,115
Transfer agent services 20,126
Administrative services 1,703
Reports to shareholders 678
Registration statement and prospectus 341
Postage, stationery and supplies 2,172
Directors' compensation 354
Auditing and legal 84
Custodian 1,002
State and local taxes 1
Other 187
Total expenses before reimbursement 125,145
Reimbursement of expenses 126 125,019
Net investment income 358,360
NET REALIZED LOSS AND UNREALIZED
APPRECIATION ON INVESTMENTS
AND NON-U.S. CURRENCY:
Net realized loss on:
Investments (602,732)
Non-U.S. currency transactions (764) (603,496)
Net unrealized appreciation on:
Investments 5,356,632
Non-U.S. currency translations 51 5,356,683
Net realized loss and
unrealized appreciation
on investments and non-U.S. currency 4,753,187
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $5,111,547
See Notes to Financial Statements
STATEMENT OF CHANGES IN NET ASSETS (dollars in thousands)
Year ended December 31
2003 2002
OPERATIONS:
Net investment income $358,360 $306,427
Net realized loss on investments and
non-U.S. currency transactions (603,496) (425,234)
Net unrealized appreciation (depreciation)
on investments and non-U.S. currency translations 5,356,683 (3,522,999)
Net increase (decrease) in net assets
resulting from operations 5,111,547 (3,641,806)
DIVIDENDS PAID TO SHAREHOLDERS FROM NET INVESTMENT INCOME (283,809) (362,738)
CAPITAL SHARE TRANSACTIONS (69,713) 90,287
TOTAL INCREASE (DECREASE) IN NET ASSETS 4,758,025 (3,914,257)
NET ASSETS:
Beginning of year 16,426,012 20,340,269
End of year (including
undistributed (distributions in excess of)
net investment income: $65,000 and $(19,176),
respectively) $21,184,037 $16,426,012
See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Fundamental Investors, Inc. (the "fund") is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The fund seeks long-term growth of capital and income primarily through
investments in common stocks.
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 for Classes B and 529-B
redemptions within six years convert to classes A and
of purchase 529-A, 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.
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.
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; scheduled
interest payments not received; deferred expenses; cost of investments sold; 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 $17,921,825,000.
During the year ended December 31, 2003, the fund reclassified $9,625,000 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 $ 66,238
Loss deferrals related to non-U.S. currency that were realized during the
period November 1, 2003 through December 31, 2003 (93)
Short-term and long-term capital loss deferrals (1,414,128)
Gross unrealized appreciation on investment securities 4,287,323
Gross unrealized depreciation on investment securities (1,046,010)
Short-term and long-term capital loss deferrals above include capital loss
carryforwards of $95,779,000, $577,387,000 and $740,962,000 expiring in 2009,
2010 and 2011, respectively. The capital loss carryforwards will be used to
offset any capital gains realized by the fund in future years through the
expiration dates. The fund will not make distributions from capital gains while
capital loss carryforwards remain.
Distributions paid to shareholders from net investment income and currency gains
were as follows (dollars in thousands):
YEAR ENDED DECEMBER 31
Share class 2003 2002(1)
Class A $ 267,613 $ 345,886
Class B 6,070 8,215
Class C 2,626 3,168
Class F 3,841 3,838
Class 529-A 962 482
Class 529-B 89 64
Class 529-C 127 90
Class 529-E 35 15
Class 529-F 8 2
Class R-1 7 1
Class R-2 213 49
Class R-3 477 78
Class R-4 415 43
Class R-5 1,326 807
Total $ 283,809 $ 362,738
(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 0.390% on the first $1 billion
of daily net assets and decreasing to 0.246% on such assets in excess of $27
billion. For the year ended December 31, 2003, the investment advisory services
fee was $48,382,000, which was equivalent to an annualized rate of 0.275% 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 below. 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, there were no unreimbursed expenses subject to
reimbursement for classes A or 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 SERVICES ADMINISTRATIVE
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class A $38,778 $19,207 Not applicable Not applicable Not applicable
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class B 6,809 919 Not applicable Not applicable Not applicable
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class C 3,117 Included $467 135 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class F 594 Included 357 40 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class 529-A 62 Included 87 11 $ 58
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class 529-B 123 Included 18 8 12
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class 529-C 173 Included 26 8 17
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class 529-E 14 Included 4 1 1
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class 529-F 1 Included 1 -* 3
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class R-1 9 Included 1 2 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class R-2 182 Included 40 177 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class R-3 190 Included 59 57 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class R-4 63 Included 38 3 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Class R-5 Not applicable Included 70 2 Not applicable
in
administrative
services
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Total $50,115 $20,126 $1,168 $444 $91
--------------------------------------------------------------------------------------------------------------
* 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 $188,000 in current fees (either paid in cash or deferred) and a net
increase of $166,000 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) and distributions
Amount Shares Amount Shares
Year ended December 31, 2003
Class A $ 1,760,807 73,050 $ 252,281 10,556
Class B 106,466 4,450 5,861 248
Class C 103,912 4,277 2,524 106
Class F 105,565 4,359 3,347 139
Class 529-A 32,444 1,333 962 40
Class 529-B 7,209 297 89 4
Class 529-C 11,156 458 127 5
Class 529-E 2,001 83 35 1
Class 529-F 730 30 8 -*
Class R-1 2,361 97 7 -*
Class R-2 37,622 1,581 213 9
Class R-3 57,216 2,436 461 19
Class R-4 35,621 1,487 415 17
Class R-5 42,345 1,675 1,097 45
Total net increase
(decrease) $ 2,305,455 95,613 $ 267,427 11,189
Year ended December 31, 2002(2)
Class A $ 2,510,082 99,589 $ 325,159 13,445
Class B 196,132 7,724 7,923 335
Class C 161,418 6,407 3,050 130
Class F 135,377 5,446 3,355 141
Class 529-A 44,610 1,774 482 21
Class 529-B 9,031 362 64 3
Class 529-C 12,734 508 90 4
Class 529-E 1,753 72 15 1
Class 529-F 227 10 2 -*
Class R-1 179 8 1 -*
Class R-2 8,884 402 49 2
Class R-3 14,900 674 78 3
Class R-4 7,251 326 43 2
Class R-5 69,699 2,695 607 27
Total net increase
(decrease) $ 3,172,277 125,997 $ 340,918 14,114
Share class Repurchases(1) Net (decrease) increase
Amount Shares Amount Shares
Year ended December 31, 2003
Class A $ (2,408,135) (101,674) $ (395,047) (18,068)
Class B (82,223) (3,502) 30,104 1,196
Class C (46,686) (1,989) 59,750 2,394
Class F (68,012) (2,847) 40,900 1,651
Class 529-A (1,893) (78) 31,513 1,295
Class 529-B (373) (15) 6,925 286
Class 529-C (881) (35) 10,402 428
Class 529-E (81) (3) 1,955 81
Class 529-F (29) (1) 709 29
Class R-1 (760) (31) 1,608 66
Class R-2 (8,100) (342) 29,735 1,248
Class R-3 (15,665) (670) 42,012 1,785
Class R-4 (4,201) (174) 31,835 1,330
Class R-5 (5,556) (217) 37,886 1,503
Total net increase
(decrease) $ (2,642,595) (111,578) $ (69,713) (4,776)
Year ended December 31, 2002(2)
Class A $ (3,217,263) (133,389) $ (382,022) (20,355)
Class B (96,136) (4,053) 107,919 4,006
Class C (46,109) (1,969) 118,359 4,568
Class F (48,639) (2,052) 90,093 3,535
Class 529-A (818) (36) 44,274 1,759
Class 529-B (81) (4) 9,014 361
Class 529-C (247) (11) 12,577 501
Class 529-E (5) -* 1,763 73
Class 529-F -* -* 229 10
Class R-1 (2) -* 178 8
Class R-2 (1,911) (86) 7,022 318
Class R-3 (4,035) (182) 10,943 495
Class R-4 (188) (9) 7,106 319
Class R-5 (7,474) (326) 62,832 2,396
Total net increase
(decrease) $ (3,422,908) (142,117) $ 90,287 (2,006)
* 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 $603,538,000, which represented 2.85% 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 $5,266,791,000 and $5,506,954,000, 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 $1,002,000 included $7,000
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 $22.23 $.50 $6.52 $7.02
Year ended 12/31/2002 27.45 .42 (5.14) (4.72)
Year ended 12/31/2001 31.16 .40 (3.34) (2.94)
Year ended 12/31/2000 32.59 .42 .90 1.32
Year ended 12/31/1999 28.92 .41 6.45 6.86
CLASS B:
Year ended 12/31/2003 22.19 .31 6.51 6.82
Year ended 12/31/2002 27.40 .23 (5.14) (4.91)
Year ended 12/31/2001 31.12 .18 (3.34) (3.16)
Period from 3/15/2000 to 12/31/2000 31.93 .15 1.02 1.17
CLASS C:
Year ended 12/31/2003 22.17 .30 6.51 6.81
Year ended 12/31/2002 27.39 .21 (5.14) (4.93)
Period from 3/15/2001 to 12/31/2001 28.52 .11 (1.13) (1.02)
CLASS F:
Year ended 12/31/2003 22.22 .49 6.52 7.01
Year ended 12/31/2002 27.44 .40 (5.14) (4.74)
Period from 3/15/2001 to 12/31/2001 28.56 .28 (1.12) (.84)
CLASS 529-A:
Year ended 12/31/2003 22.22 .50 6.52 7.02
Period from 2/15/2002 to 12/31/2002 26.71 .33 (4.34) (4.01)
CLASS 529-B:
Year ended 12/31/2003 22.22 .27 6.52 6.79
Period from 2/19/2002 to 12/31/2002 26.27 .16 (3.91) (3.75)
CLASS 529-C:
Year ended 12/31/2003 22.22 .27 6.52 6.79
Period from 2/15/2002 to 12/31/2002 26.71 .16 (4.34) (4.18)
CLASS 529-E:
Year ended 12/31/2003 22.21 .40 6.52 6.92
Period from 3/7/2002 to 12/31/2002 28.13 .26 (5.85) (5.59)
CLASS 529-F:
Year ended 12/31/2003 22.22 .45 6.52 6.97
Period from 9/23/2002 to 12/31/2002 21.22 .12 1.08 1.20
CLASS R-1:
Year ended 12/31/2003 22.19 .27 6.54 6.81
Period from 6/19/2002 to 12/31/2002 26.04 .13 (3.75) (3.62)
CLASS R-2:
Year ended 12/31/2003 22.18 .30 6.51 6.81
Period from 5/21/2002 to 12/31/2002 27.39 .14 (5.13) (4.99)
CLASS R-3:
Year ended 12/31/2003 22.21 .40 6.52 6.92
Period from 6/4/2002 to 12/31/2002 26.66 .18 (4.38) (4.20)
CLASS R-4:
Year ended 12/31/2003 22.21 .48 6.53 7.01
Period from 7/25/2002 to 12/31/2002 21.75 .22 .55 .77
CLASS R-5:
Year ended 12/31/2003 22.23 .56 6.53 7.09
Period from 5/15/2002 to 12/31/2002 27.62 .28 (5.34) (5.06)
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 $(.40) $- $(.40) $28.85
Year ended 12/31/2002 (.50) - (.50) 22.23
Year ended 12/31/2001 (.40) (.37) (.77) 27.45
Year ended 12/31/2000 (.40) (2.35) (2.75) 31.16
Year ended 12/31/1999 (.40) (2.79) (3.19) 32.59
CLASS B:
Year ended 12/31/2003 (.21) - (.21) 28.80
Year ended 12/31/2002 (.30) - (.30) 22.19
Year ended 12/31/2001 (.19) (.37) (.56) 27.40
Period from 3/15/2000 to 12/31/2000 (.13) (1.85) (1.98) 31.12
CLASS C:
Year ended 12/31/2003 (.20) - (.20) 28.78
Year ended 12/31/2002 (.29) - (.29) 22.17
Period from 3/15/2001 to 12/31/2001 (.11) - (.11) 27.39
CLASS F:
Year ended 12/31/2003 (.39) - (.39) 28.84
Year ended 12/31/2002 (.48) - (.48) 22.22
Period from 3/15/2001 to 12/31/2001 (.28) - (.28) 27.44
CLASS 529-A:
Year ended 12/31/2003 (.40) - (.40) 28.84
Period from 2/15/2002 to 12/31/2002 (.48) - (.48) 22.22
CLASS 529-B:
Year ended 12/31/2003 (.18) - (.18) 28.83
Period from 2/19/2002 to 12/31/2002 (.30) - (.30) 22.22
CLASS 529-C:
Year ended 12/31/2003 (.18) - (.18) 28.83
Period from 2/15/2002 to 12/31/2002 (.31) - (.31) 22.22
CLASS 529-E:
Year ended 12/31/2003 (.30) - (.30) 28.83
Period from 3/7/2002 to 12/31/2002 (.33) - (.33) 22.21
CLASS 529-F:
Year ended 12/31/2003 (.37) - (.37) 28.82
Period from 9/23/2002 to 12/31/2002 (.20) - (.20) 22.22
CLASS R-1:
Year ended 12/31/2003 (.21) - (.21) 28.79
Period from 6/19/2002 to 12/31/2002 (.23) - (.23) 22.19
CLASS R-2:
Year ended 12/31/2003 (.22) - (.22) 28.77
Period from 5/21/2002 to 12/31/2002 (.22) - (.22) 22.18
CLASS R-3:
Year ended 12/31/2003 (.31) - (.31) 28.82
Period from 6/4/2002 to 12/31/2002 (.25) - (.25) 22.21
CLASS R-4:
Year ended 12/31/2003 (.39) - (.39) 28.83
Period from 7/25/2002 to 12/31/2002 (.31) - (.31) 22.21
CLASS R-5:
Year ended 12/31/2003 (.46) - (.46) 28.86
Period from 5/15/2002 to 12/31/2002 (.33) - (.33) 22.23
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 31.96% $19,212 .66% 2.08%
Year ended 12/31/2002 (17.34) 15,201 .67 1.68
Year ended 12/31/2001 (9.55) 19,331 .65 1.41
Year ended 12/31/2000 4.27 19,872 .64 1.28
Year ended 12/31/1999 24.58 16,603 .63 1.33
CLASS B:
Year ended 12/31/2003 30.97 836 1.44 1.30
Year ended 12/31/2002 (17.97) 618 1.45 .91
Year ended 12/31/2001 (10.24) 653 1.42 .64
Period from 3/15/2000 to 12/31/2000 3.73 299 1.39 (5) .53 (5)
CLASS C:
Year ended 12/31/2003 30.93 413 1.50 1.23
Year ended 12/31/2002 (18.06) 266 1.50 .86
Period from 3/15/2001 to 12/31/2001 (3.60) 203 1.55 (5) .49 (5)
CLASS F:
Year ended 12/31/2003 31.92 311 .71 2.02
Year ended 12/31/2002 (17.38) 203 .72 1.65
Period from 3/15/2001 to 12/31/2001 (2.97) 153 .74 (5) 1.31 (5)
CLASS 529-A:
Year ended 12/31/2003 31.99 88 .68 2.03
Period from 2/15/2002 to 12/31/2002 (15.16) 39 .76 (5) 1.64 (5)
CLASS 529-B:
Year ended 12/31/2003 30.74 19 1.61 1.10
Period from 2/19/2002 to 12/31/2002 (14.35) 8 1.62 (5) .77 (5)
CLASS 529-C:
Year ended 12/31/2003 30.75 27 1.60 1.11
Period from 2/15/2002 to 12/31/2002 (15.74) 11 1.60 (5) .79 (5)
CLASS 529-E:
Year ended 12/31/2003 31.42 4 1.08 1.61
Period from 3/7/2002 to 12/31/2002 (19.92) 2 1.07 (5) 1.35 (5)
CLASS 529-F:
Year ended 12/31/2003 31.72 1 .82 1.81
Period from 9/23/2002 to 12/31/2002 5.65 - (4) .22 .51
CLASS R-1:
Year ended 12/31/2003 30.90 2 1.50 (6) 1.08
Period from 6/19/2002 to 12/31/2002 (13.91) - (4) 1.50 (5,6) 1.11 (5)
CLASS R-2:
Year ended 12/31/2003 30.93 45 1.46 (6) 1.19
Period from 5/21/2002 to 12/31/2002 (18.22) 7 1.46 (5,6) 1.05 (5)
CLASS R-3:
Year ended 12/31/2003 31.45 66 1.08 (6) 1.60
Period from 6/4/2002 to 12/31/2002 (15.75) 11 1.08 (5,6) 1.41 (5)
CLASS R-4:
Year ended 12/31/2003 31.91 48 .71 1.94
Period from 7/25/2002 to 12/31/2002 3.51 7 .32 (6) .96
CLASS R-5:
Year ended 12/31/2003 32.34 112 .39 2.30
Period from 5/15/2002 to 12/31/2002 (18.34) 53 .40 (5) 1.91 (5)
YEAR ENDED DECEMBER 31
2003 2002 2001 2000 1999
Portfolio turnover rate for all classes of shares 31% 38% 29% 43% 46%
(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 1.70%, 1.94%
and 1.10% for classes R-1, R-2 and R-3, respectively, during the year
ended December 31, 2003, and 4.20%, 1.64%, 1.13% and .34% for classes
R-1, R-2, R-3 and R-4, respectively, during the period ended December
31, 2002.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FUNDAMENTAL INVESTORS, INC.:
We have audited the accompanying statement of assets and liabilities of
Fundamental Investors, 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
Fundamental Investors, 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.
/s/ 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, 98% 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, 90% 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, 0.17% 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
WILL BE 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 +25.97% -0.71%(1)
Not reflecting CDSC +30.97% +0.01%(1)
CLASS C SHARES
Reflecting CDSC, maximum of 1%, payable only if
shares are sold within one year of purchase +29.93% +1.21%(2)
Not reflecting CDSC +30.93% +1.21%(2)
CLASS F SHARES(3)
Not reflecting annual asset-based fee charged by sponsoring firm +31.92% +2.02%(2)
CLASS 529-A SHARES
Reflecting 5.75% maximum sales charge +24.37% +2.92%(4)
Not reflecting maximum sales charge +31.99% +6.22%(4)
CLASS 529-B SHARES
Reflecting applicable CDSC, maximum of 5%, payable
only if shares are sold within six years of purchase +25.74% +4.20%(5)
Not reflecting CDSC +30.74% +6.26%(5)
CLASS 529-C SHARES
Reflecting CDSC, maximum of 1%, payable only if
shares are sold within one year of purchase +29.75% +5.30%(4)
Not reflecting CDSC +30.75% +5.30%(4)
CLASS 529-E SHARES(3) +31.42% +2.85%(6)
CLASS 529-F SHARES(3)
Not reflecting annual asset-based fee charged by sponsoring firm +31.72% +29.68%(7)
Figures shown are past results and 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-C shares were first sold.
(5) Average annual total return from February 19, 2002, when Class 529-B
shares were first sold.
(6) Average annual total return from March 7, 2002, when Class 529-E shares
were first sold.
(7) Average annual total return from September 23, 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
JOSEPH C. BERENATO, 57 2003 Chairman of the Board and CEO, Ducommun Incorporated
ROBERT A. FOX, 66 1998 Managing General Partner, Fox Investments LP; former Professor,
University of California; retired President and CEO, Foster Farms
(poultry producer)
LEONADE D. JONES, 56 1998 Co-founder, VentureThink LLC (developed and managed e-commerce
businesses) and Versura Inc. (education loan exchange); former
Treasurer, The Washington Post Company
JOHN G. MCDONALD, 66 1998 The IBJ Professor of Finance, Graduate School of Business, Stanford
University
GAIL L. NEALE, 69 1985 President, The Lovejoy Consulting Group, Inc. (a pro bono consulting
group advising nonprofit organizations)
HENRY E. RIGGS, 69 1989 Chairman of the Board and President Emeritus, Keck Graduate Institut
of Applied Life Sciences
PATRICIA K. WOOLF, PH.D., 69 1998 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
JOSEPH C. BERENATO, 57 4 Ducommun Incorporated
ROBERT A. FOX, 66 7 Crompton Corporation
LEONADE D. JONES, 56 6 None
JOHN G. MCDONALD, 66 8 iStar Financial, Inc.; Plum Creek Timber Co.; Scholastic Corporation;
Varian, Inc.
GAIL L. NEALE, 69 5 None
HENRY E. RIGGS, 69 4 None
PATRICIA K. WOOLF, PH.D., 69 6 Crompton Corporation; First Energy Corporation; National Life Holding
Co.
GUILFORD C. BABCOCK, a member of the Board since 1991, has retired. The Directors thank him for his many contributions to the fund.
"INTERESTED" DIRECTORS(4)
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
JAMES F. ROTHENBERG, 57 1998 President and Director, Capital Research and
Chairman of the Board Management Company; Director, American Funds
and Principal Executive Officer Distributors, Inc.;(5) Director, American Funds Service Company; (5)
Director, The Capital Group Companies, Inc.; (5) Director, Capital
Group Research, Inc. (5)
JAMES E. DRASDO, 58 1987 Senior Vice President, Capital Research and
Vice Chairman of the Board Management Company; Director, The Capital Group Companies, Inc. (5)
"INTERESTED" DIRECTORS(4)
NUMBER OF
BOARDS
WITHIN THE
FUND COMPLEX(2)
NAME, AGE AND ON WHICH
POSITION WITH FUND DIRECTOR SERVES OTHER DIRECTORSHIPS(3) HELD BY DIRECTOR
JAMES F. ROTHENBERG, 57 3 None
Chairman of the Board
and Principal Executive Officer
JAMES E. DRASDO, 58 2 None
Vice Chairman of the Board
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) "Interested persons" within the meaning of the 1940 Act on the basis of
their affiliation with the fund's investment adviser, Capital Research and
Management Company, or affiliated entities (including the fund's principal
underwriter).
(5) Company affiliated with Capital Research and Management Company.
(6) All of the officers listed, except Martin Romo, are officers and/or
Directors/Trustees of one or more of the other funds for which Capital
Research and Management Company serves as investment adviser.
OTHER OFFICERS(6)
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
DINA N. PERRY, 58 1994 Senior Vice President, Capital Research and
President Management Company; Director, Capital Research Company(5)
GORDON CRAWFORD, 57 1994 Senior Vice President and Director, Capital
Senior Vice President Research and Management Company
PAUL G. HAAGA, JR., 55 1994 Executive Vice President and Director, Capital
Senior Vice President Research and Management Company; Director, The Capital Group
Companies, Inc.;(5) Director, American Funds Distributors, Inc.(5)
MICHAEL T. KERR, 44 1995 Senior Vice President, Capital Research Company(5)
Senior Vice President
MARTIN ROMO, 36 1999 Executive Vice President and Director, Capital
Vice President Research Company(5)
PATRICK F. QUAN, 45 1989-1998 Vice President-- Fund Business Management
Secretary 2000 Group, Capital Research and Management Company
SHERYL F. JOHNSON, 35 1998 Vice President-- Fund Business Management
Treasurer Group, Capital Research and Management Company
DAVID A. PRITCHETT, 37 1999 Vice President-- Fund Business Management
Assistant Treasurer Group, Capital Research and Management Company
OFFICE OF THE FUND
One Market
Steuart Tower, Suite 1800
Mailing address: P.O. Box 7650
San Francisco, CA 94120-7650
INVESTMENT ADVISEr
Capital Research and Management Company
333 South Hope Street
Los Angeles, CA 90071-1406
135 South State College Boulevard
Brea, CA 92821-5823
TRANSFER AGENT FOR SHAREHOLDER ACCOUNTS
American Funds Service Company
(Please write to the address nearest you.)
P.O. Box 25065
Santa Ana, CA 92799-5065
P.O. Box 659522
San Antonio, TX 78265-9522
P.O. Box 6007
Indianapolis, IN 46206-6007
P.O. Box 2280
Norfolk, VA 23501-2280
CUSTODIAN OF ASSETS
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02105-1713
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 Fundamental Investors. 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 0.78 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 0.84 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 0.05 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 FUNDAMENTAL INVESTORS 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 Fundamental Investors, 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:
o A LONG-TERM, VALUE-ORIENTED APPROACH Rather than follow fads, we pursue a
consistent strategy, focusing on each investment's long-term potential.
o AN UNPARALLELED GLOBAL RESEARCH EFFORT American Funds draws on one of the
industry's most globally integrated research networks.
o 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.
o 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.
o 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
throughstocks 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-910-0204
Litho in USA KBD/GRS/8056
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 Leonade D. Jones, a member of the
Registrant's Audit Committee, is an "audit committee financial expert" and
"independent," as such terms are defined in this Item. This designation will not
increase the designee's duties, obligations or liability as compared to his
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 $57,000
2003 $57,000
b) Audit- Related Fees:
2002 none
2003 none
c) Tax Fees:
2002 $6,000
2003 $5,000
The tax fees consist of professional services relating to
the preparation of the fund's tax returns including returns
relating to the fund's investments in a non-U.S.
jurisdiction.
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 $362,000 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.
FUNDAMENTAL INVESTORS, INC.
By /s/ James F. Rothenberg
-------------------------------------------------------
James F. Rothenberg, Chairman and PEO
Date: March 8, 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/ James F. Rothenberg
- --------------------------------------------------
James F. Rothenberg, Chairman and PEO
Date: March 8, 2004
By /s/ Sheryl F. Johnson
- -------------------------------------------------
Sheryl F. Johnson, Treasurer
Date: March 8, 2004