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 811-5522
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AXP SECTOR SERIES, INC.
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(Exact name of registrant as specified in charter)
50606 AXP Financial Center, Minneapolis, Minnesota 55474
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(Address of principal executive offices) (Zip code)
Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268
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(Name and address of agent for service)
Registrant's telephone number, including area code: (612) 330-9283
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Date of fiscal year end: 6/30
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Date of reporting period: 12/31
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AXP(R)
Utilities
Fund
Semiannual Report
for the Period Ended
Dec. 31, 2003
AXP Utilities Fund* seeks to provide shareholders with a high level of current
income. Secondary goals are growth of income and capital.
* Renamed AXP(R) Dividend Opportunity Fund on Feb. 18, 2004.
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(logo) (logo)
American AMERICAN
Express(R) EXPRESS(R)
Funds
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Table of Contents
Fund Snapshot 3
Questions & Answers
with Portfolio Management 4
Investments in Securities 9
Financial Statements 11
Notes to Financial Statements 14
Proxy Voting 21
(logo) Dalbar
American Express(R) Funds' reports to shareholders have been awarded the
Communications Seal from Dalbar Inc., an independent financial services research
firm. The Seal recognizes communications demonstrating a level of excellence in
the industry.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 2
Fund Snapshot
AS OF DEC. 31, 2003
PORTFOLIO MANAGER
Portfolio manager* Larry S. Alberts
Since 6/03
Years in industry 24
* Effective Feb. 19, 2004, a team led by Warren Spitz, Steve Schroll and
Laton Spahr began managing the Fund.
FUND OBJECTIVE
For investors seeking capital appreciation and current income.
Inception dates
A: 8/1/88 B: 3/20/95 C: 6/26/00 Y: 3/20/95
Ticker symbols
A: INUTX B: IUTBX C: ACUIX Y: --
Total net assets $1.091 billion
Number of holdings 68
STYLE MATRIX
Shading within the style matrix indicates areas in which the Fund generally
invests.
STYLE
VALUE BLEND GROWTH
X LARGE
X MEDIUM SIZE
SMALL
TOP TEN HOLDINGS
Percentage of portfolio assets
Exelon (Utilities -- electric) 4.6%
Entergy (Utilities -- electric) 4.1
Dominion Resources (Utilities -- electric) 4.0
Equitable Resources (Utilities -- natural gas) 3.7
Kinder Morgan (Utilities -- natural gas) 3.7
Progress Energy (Utilities -- electric) 3.5
Constellation Energy Group (Utilities -- electric) 3.4
BellSouth (Utilities -- telephone) 3.4
Questar (Utilities -- natural gas) 3.2
PPL (Utilities -- electric) 3.1
For further detail about these holdings, please refer to the section entitled
"Investments in Securities."
Sector Composition
Percentage of portfolio assets
(pie chart)
Electric utilities 49.0%
Natural gas utilities 26.4%
Telephone utilities 13.2%
Short-term securities 3.9%
Cellular communications 3.9%
Energy & energy equipment 1.5%
Water utilities 1.1%
Other** 0.6%
** Media, metals and telecom equipment & services.
Because this Fund is a narrowly-focused sector fund, it may exhibit higher
volatility than funds with broader investment objectives.
Fund holdings are subject to change.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 3
Questions & Answers
WITH PORTFOLIO MANAGEMENT
Below, Larry Alberts, the Fund's portfolio manager as of Dec. 31, 2003,
discusses the Fund's results for the first half of the current fiscal year. On
Feb. 19, 2004, Warren Spitz, Steve Schroll and Laton Spahr began managing the
Fund, which was renamed AXP(R) Dividend Opportunity Fund and changed its
investment strategy.
Q: How did AXP Utilities Fund perform for the six months ended Dec. 31, 2003?
A: AXP Utilities Fund rose 5.97% (Class A shares, excluding sales charge), for
the six months ended Dec. 31, 2003. This was less than the broad, unmanaged
Standard & Poor's 500 Index, which advanced 15.14% for the period. The
Lipper Utility Funds Index, representing the Fund's current peer group,
rose 8.25%.
Q: What factors affected performance during the fiscal period?
A: As it has been since 1988, the Fund was managed more conservatively than
its peers in the Lipper Utility Funds Index. It is worth noting that the
composition of the Fund's peer group changed substantially in calendar year
2003. Lipper, an evaluator of mutual fund performance, reclassified
two-thirds of the funds in the peer group into other investment categories
such as telecommunications. The Fund's primary focus is current income.
Capital appreciation is a secondary consideration.
PERFORMANCE COMPARISON
For the six-month period ended Dec. 31, 2003
20%
(bar 2)
15% +15.14%
10% (bar 3)
(bar 1) +8.25%
5% +5.97%
0%
(bar 1) AXP Utilities Fund Class A (excluding sales charge)
(bar 2) S&P 500 Index(1) (unmanaged)
(bar 3) Lipper Utility Funds Index(2)
(1) Standard & Poor's 500 Index (S&P 500 Index), an unmanaged index of common
stocks, is frequently used as a general measure of market performance. The
index reflects reinvestment of all distributions and changes in market
prices, but excludes brokerage commissions or other fees. However, the S&P
500 companies may be generally larger than those in which the Fund invests.
(2) The Lipper Utility Funds Index, published by Lipper Inc., includes the 30
largest funds that are generally similar to the Fund, although some funds
in the index may have somewhat different investment policies or objectives.
Past performance is no guarantee of future results. The 5.75% sales charge
applicable to Class A shares of the Fund is not reflected in the bar chart; if
reflected, returns would be lower than those shown. The performance of Class B,
Class C and Class Y may vary from that shown above because of differences in
expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 4
Questions & Answers
(begin callout quote)> We see a steady, slow growth environment returning as
companies work to improve their finances and shed non-core businesses.(end
callout quote)
The majority of utility funds within the re-configured peer group emphasize
capital appreciation over current income. For periods in which higher beta
stocks outperform, as was the case in 2003, funds emphasizing growth
outperform more conservatively than managed funds. As a result,
growth-oriented funds within the peer group performed relatively better
than the Fund for the six months ended Dec. 31, 2003. Funds that
outperformed against the peer group in 2003 generally invested more heavily
in stocks of financially weak companies that paid little or no common
dividend; and/or had a low to mid-single digit share price at the beginning
of the year.
AVERAGE ANNUAL TOTAL RETURNS
Class A Class B Class C Class Y
(Inception dates) (8/1/88) (3/20/95) (6/26/00) (3/20/95)
NAV(1) POP(2) NAV(1) After CDSC(3) NAV(1) After CDSC(4) NAV(5) POP(5)
as of Dec. 31, 2003
6 months* +5.97% -0.13% +5.44% +0.44% +5.44% +4.44% +6.06% +6.06%
1 year +16.59% +9.89% +15.64% +11.64% +15.64% +15.64% +16.58% +16.58%
5 years -2.15% -3.31% -2.92% -3.07% N/A N/A -2.02% -2.02%
10 years +6.43% +5.80% N/A N/A N/A N/A N/A N/A
Since inception N/A N/A +7.40% +7.40% -6.41% -6.41% +8.37% +8.37%
* Not annualized.
(1) Excluding sales charge.
(2) Returns at public offering price (POP) reflect a sales charge of 5.75%.
(3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as
follows: first year 5%; second and third year 4%; fourth year 3%; fifth
year 2%; sixth year 1%; no sales charge thereafter.
(4) 1% CDSC applies to redemptions made within the first year of purchase.
(5) Sales charge is not applicable to these shares. Shares available to
institutional investors only.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, so that your shares, when redeemed, may be worth
more or less than the original cost. The performance shown for each class of
shares will vary due to differences in sales charges and fees. Short term
performance may be higher or lower than the figures shown. Visit
americanexpress.com/funds for current information.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 5
Questions & Answers
While small investments were made in a few such companies throughout 2003,
these speculative plays were modest due to the conservative management
style of the Fund.
A primary negative contributor to the Fund's performance during the period
was its exposure to stocks of regional Bell companies. At the start of the
fiscal period Verizon Communications and Bell South were the Fund's two
largest holdings. SBC Communications was another significant holding at
that time. Operating margin pressures for both wireless and wire-line
companies, unexpected regulatory pronouncements by the Federal
Communications Commission, the specter of cable companies offering voice
telecommunications service over their broadband networks, and perceived
problems associated with number portability, all had a negative impact on
the telecommunications sector in 2003.
Within the electric, natural gas and multi-utility sectors, the Fund
focused on companies with the following characteristics: higher quality --
as determined by balance sheet strength; their ability to maintain and/or
grow their dividends; the potential to take advantage of high natural gas
prices. During the fiscal period, the Fund benefited from holdings such as
Constellation Energy, a Baltimore area utility and PSE&G in New Jersey and
Pennsylvania. In 2003, the financially weak multi-utilities offered the
best returns. In general, the stock prices of the multi-utilities started
the year in the low-to-mid single digit range; the companies themselves pay
little or no common dividends and/or the companies tended to be associated
with the California power crisis of 2000/2001. Among electric utilities,
the Fund's fiscal period returns were negatively affected by a position in
FirstEnergy, an Ohio utility. FirstEnergy had numerous issues which
negatively impacted the stock during the year. These included a prolonged
nuclear plant outage, the August 2003 blackout, which apparently started
within its service territory, the unexpected death of its CEO and continued
regulatory uncertainty in Ohio. The stock is no longer in the portfolio.
Another factor influencing returns was the fact that high dividend-paying
stocks underperformed the overall equity market in calendar year 2003. This
general underperformance was surprising considering the passage of federal
tax legislation in July. Under the new law, qualified dividend income from
equity securities will now be taxed at lower federal rates. In 2004 and
beyond, we
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 6
Questions & Answers
believe the new tax law changes will have a positive effect on investor
demand for stocks that pay a dividend. In addition, we believe the aging of
the baby boomers may create renewed interest in dividend-paying stocks.
Q: What changes did you make to the portfolio?
A: We increased the number of holdings, and increased the Fund's positioning
in natural gas utilities from 16.9% as of June 30 to more than a quarter of
the Fund's portfolio as of Dec. 31. We positioned the portfolio to benefit
from the current imbalance in the supply and demand for natural gas in
North America. During the fiscal period, we benefited from strong returns
in Kinder Morgan, a gas pipeline company and Sempra Energy in Southern
California, a leader in the liquefied natural gas industry. Though
technology improvements have accelerated the pace of extraction, gas
supplies have not increased, creating upward pressure on prices. Long-term
supply solutions include drilling in new areas, accessing Canadian natural
gas resources and expanding use of liquefied natural gas, possibly from
overseas.
Another significant portfolio shift is that we reduced the Fund's exposure
to regional Bell companies as well as rural telecom firms such as Alltel.
Elsewhere in the telecommunications sector, we added long distance
providers such as AT&T and Sprint and wireless carriers like Nextel
Communications, AT&T Wireless and Sprint PCS. Nextel proved to be a strong
performer for the Fund for the period.
Within electric utilities, we are optimistic about companies that focus on
low-cost generation from coal or nuclear power. Such stocks include Exelon
Corp, which became the Fund's largest holding as of Dec. 31. Exelon
operates more nuclear plants than any other utility, primarily in the
Midwest and eastern Pennsylvania. Overall, the Fund's stock selection
process during the latest fiscal period concentrated on electric utilities
with strong balance sheets and the potential to show modest, yet achievable
earnings and dividend growth.
Finally, since June we have added to the Fund's holdings of international
utility stocks such as Vodaphone, a strong player on both the wireless side
and on the wire line side of telecommunications in Europe. The Fund's
largest holdings outside the U.S. were in Canada, and included positions in
Bell Canada and wireless providers in both Canada and Mexico.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 7
Questions & Answers
Q: How would you describe the utility sector's relative attractiveness as an
investment?
A: Currently, many utility companies are deploying "back to basics" strategies
that include an emphasis on returning cash to shareholders. Prior to the
mid to late 1990s, many utilities strived to generate a 3% to 5% dividend
yield and expand earnings by 2% to 3% per year from core businesses. We see
this steady, slow growth environment returning as companies work to improve
their finances and shed non-core businesses.
Q: How will the Fund be managed going forward?
A: The Fund pursued its historic strategy until the new portfolio managers
assumed responsibility in February. After that, in keeping with a directive
by the Fund's Board of Directors, the new managers shifted the portfolio to
a diversified mix of dividend paying stocks, some of which may be utility
stocks. Portfolio changes resulting from the change in strategy will be
discussed in the June 30, 2004 annual report, which will be distributed in
late August.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 8
Investments in Securities
AXP Utilities Fund
Dec. 31, 2003 (Unaudited)
(Percentages represent value of investments compared to net assets)
Common stocks (89.5%)
Issuer Shares Value(a)
Cellular telecommunications (4.0%)
America Movil ADR Series L 225,000(c) $6,151,500
Nextel Communications Cl A 95,000(b) 2,665,700
Vodafone Group ADR 1,375,000(c) 34,430,000
Total 43,247,200
Energy (1.1%)
Arch Coal 35,000 1,090,950
EnCana 240,000(c) 9,465,600
Pioneer Natural Resources 35,000(b) 1,117,550
Total 11,674,100
Energy equipment & services (0.5%)
Nabors Inds 130,000(b,c) 5,395,000
Media (0.1%)
Time Warner 60,000(b) 1,079,400
Metals (0.1%)
Peabody Energy 25,000 1,042,750
Miscellaneous (1.1%)
Philadelphia Suburban 541,250 11,961,625
Telecom equipment & services (0.5%)
Telus 295,000(c) 5,489,950
Utilities -- electric (43.9%)
Allete 360,000 11,016,000
American Electric Power 250,000 7,627,500
Black Hills 165,000 4,921,950
Cinergy 730,000 28,331,300
Constellation Energy Group 980,000 38,376,800
Dominion Resources 690,000 44,042,700
DTE Energy 280,000 11,032,000
Edison Intl 250,000(b) 5,482,500
Entergy 800,000 45,704,000
Exelon 765,000 50,765,399
FPL Group 535,000 34,999,700
Pepco Holdings 170,000 3,321,800
PG&E 585,000(b) 16,245,450
PPL 800,000 35,000,000
Progress Energy 865,000 39,149,900
Public Service Enterprise Group 545,000 23,871,000
SCANA 810,000 27,742,500
Southern Co 145,000 4,386,250
TXU 635,000 15,062,200
Vectren 155,000 3,820,750
Wisconsin Energy 780,000 26,091,000
Xcel Energy 155,000 2,631,900
Total 479,622,599
Utilities -- natural gas (25.5%)
AGL Resources 890,000 25,899,000
Enbridge 375,000(c) 15,521,295
Energen 130,000 5,333,900
Equitable Resources 960,000 41,203,200
KeySpan 440,000 16,192,000
Kinder Morgan 705,000 41,665,532
MDU Resources Group 1,220,000 29,048,200
New Jersey Resources 530,000 20,410,300
NiSource 905,000 19,855,700
ONEOK 65,000 1,435,200
Questar 1,015,000 35,677,250
Sempra Energy 440,000 13,226,400
TransCanada 615,000(c) 13,228,650
Total 278,696,627
Utilities -- telephone (12.7%)
AT&T 270,000 5,481,000
BCE 1,315,000(c) 29,403,400
BellSouth 1,355,000 38,346,500
SBC Communications 1,115,000 29,068,050
Telefonos de Mexico ADR Cl L 85,000(c) 2,807,550
Verizon Communications 945,000 33,150,600
Total 138,257,100
Total common stocks
(Cost: $824,546,302) $976,466,351
See accompanying notes to investments in securities.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 9
Preferred stocks (8.3%)
Issuer Shares Value(a)
ALLTEL
7.75% Cv 175,000 $8,697,500
Dominion Resources
9.50% Cv 200,000 11,450,000
DTE Energy
8.75% Cv 220,000 5,636,400
Duke Energy
8.25% Cv 400,000 5,536,000
FPL Group
8.50% Cv 200,000 11,546,000
Public Service Enterprise Group
10.25% Cv 150,000 9,303,000
Sempra Energy
8.50% Cv 550,000 15,653,000
TXU
8.75% Cv 650,000 22,555,000
Total preferred stocks
(Cost: $83,103,378) $90,376,900
Short-term securities (4.4%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agency (1.6%)
Federal Home Loan Mtge Corp Disc Nts
01-29-04 1.08% $6,100,000 $6,095,058
02-12-04 1.07 11,300,000 11,286,427
Total 17,381,485
Commercial paper (2.8%)
Charta LLC
01-08-04 1.09 900,000(d) 899,780
Kitty Hawk Funding
01-14-04 1.08 5,000,000(d) 4,997,900
Rabobank USA Finance
01-02-04 0.95 10,500,000 10,499,446
Scaldis Capital LLC
01-28-04 1.11 4,600,000(d) 4,596,129
Special Purpose Accounts Receivable
01-09-04 1.11 3,500,000(d) 3,499,029
UBS Finance (Delaware) LLC
01-02-04 0.96 5,600,000 5,599,701
Total 30,091,985
Total short-term securities
(Cost: $47,473,509) $47,473,470
Total investments in securities
(Cost: $955,123,189)(e) $1,114,316,721
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing
(c) Foreign security values are stated in U.S. dollars. As of Dec. 31, 2003,
the value of foreign securities represented 11.2% of net assets.
(d) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program or other
"accredited investors." This security has been determined to be liquid
under guidelines established by the board.
(e) At Dec. 31, 2003, the cost of securities for federal income tax purposes
was approximately $955,123,000 and the approximate aggregate gross
unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $161,770,000
Unrealized depreciation (2,576,000)
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Net unrealized appreciation $159,194,000
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 10
Financial Statements
Statement of assets and liabilities
AXP Utilities Fund
Dec. 31, 2003 (Unaudited)
Assets
Investments in securities, at value (Note 1)*
(identified cost $955,123,189) $1,114,316,721
Foreign currency holdings (identified cost $15,786) (Note 1) 15,786
Capital shares receivable 89,908
Dividends and accrued interest receivable 2,262,729
Receivable for investment securities sold 2,430,585
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Total assets 1,119,115,729
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Liabilities
Disbursements in excess of cash on demand deposit 162,305
Capital shares payable 216,129
Payable upon return of securities loaned (Note 5) 27,754,000
Accrued investment management services fee 17,807
Accrued distribution fee 14,503
Accrued service fee 3
Accrued transfer agency fee 5,171
Accrued administrative services fee 1,104
Other accrued expenses 88,239
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Total liabilities 28,259,261
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Net assets applicable to outstanding capital stock $1,090,856,468
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Represented by
Capital stock -- $.01 par value (Note 1) $ 1,682,561
Additional paid-in capital 1,607,487,956
Undistributed net investment income 194,691
Accumulated net realized gain (loss) (Note 7) (677,711,381)
Unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 159,202,641
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Total -- representing net assets applicable to outstanding capital stock $1,090,856,468
==============
Net assets applicable to outstanding shares: Class A $ 749,072,376
Class B $ 330,979,985
Class C $ 9,876,103
Class Y $ 928,004
Net asset value per share of outstanding capital stock: Class A shares 115,292,671 $ 6.50
Class B shares 51,290,412 $ 6.45
Class C shares 1,530,335 $ 6.45
Class Y shares 142,715 $ 6.50
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* Including securities on loan, at value (Note 5) $ 26,965,890
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See accompanying notes to financial statements.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 11
Statement of operations
AXP Utilities Fund
Six months ended Dec. 31, 2003 (Unaudited)
Investment income
Income:
Dividends $22,612,197
Interest 124,446
Fee income from securities lending (Note 5) 177,460
Less foreign taxes withheld (173,166)
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Total income 22,740,937
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Expenses (Note 2):
Investment management services fee 2,633,790
Distribution fee
Class A 943,137
Class B 1,651,230
Class C 48,997
Transfer agency fee 1,059,651
Incremental transfer agency fee
Class A 74,865
Class B 66,080
Class C 2,480
Service fee -- Class Y 413
Administrative services fees and expenses 212,675
Compensation of board members 6,983
Custodian fees 35,665
Printing and postage 151,131
Registration fees 15,820
Audit fees 14,250
Other 10,996
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Total expenses 6,928,163
Earnings credits on cash balances (Note 2) (5,381)
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Total net expenses 6,922,782
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Investment income (loss) -- net 15,818,155
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 24,386,565
Foreign currency transactions (22,225)
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Net realized gain (loss) on investments 24,364,340
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 19,243,040
----------
Net gain (loss) on investments and foreign currencies 43,607,380
----------
Net increase (decrease) in net assets resulting from operations $59,425,535
===========
See accompanying notes to financial statements.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 12
Statements of changes in net assets
AXP Utilities Fund
Dec. 31, 2003 June 30, 2003
Six months ended Year ended
(Unaudited)
Operations and distributions
Investment income (loss) -- net $ 15,818,155 $ 33,050,994
Net realized gain (loss) on investments 24,364,340 (255,795,663)
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 19,243,040 134,082,989
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Net increase (decrease) in net assets resulting from operations 59,425,535 (88,661,680)
---------- -----------
Distributions to shareholders from:
Net investment income
Class A (11,615,350) (24,817,610)
Class B (3,877,834) (8,844,495)
Class C (116,023) (233,141)
Class Y (14,257) (31,086)
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Total distributions (15,623,464) (33,926,332)
----------- -----------
Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 21,361,269 68,968,126
Class B shares 13,706,145 28,067,760
Class C shares 822,924 2,548,576
Class Y shares 213,115 1,024,781
Reinvestment of distributions at net asset value
Class A shares 10,819,127 23,109,938
Class B shares 3,741,967 8,531,540
Class C shares 112,399 225,368
Class Y shares 14,257 31,086
Payments for redemptions
Class A shares (107,952,486) (301,656,590)
Class B shares (Note 2) (46,394,115) (180,963,251)
Class C shares (Note 2) (1,673,700) (3,975,283)
Class Y shares (118,817) (1,613,806)
-------- ----------
Increase (decrease) in net assets from capital share transactions (105,347,915) (355,701,755)
------------ ------------
Total increase (decrease) in net assets (61,545,844) (478,289,767)
Net assets at beginning of period 1,152,402,312 1,630,692,079
------------- -------------
Net assets at end of period $1,090,856,468 $1,152,402,312
============== ==============
Undistributed net investment income $ 194,691 $ --
-------------- --------------
See accompanying notes to financial statements.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 13
Notes to Financial Statements
AXP Utilities Fund
(Unaudited as to Dec. 31, 2003)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Sector Series, Inc. and is registered under the
Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. AXP Sector Series, Inc. has 10 billion authorized
shares of capital stock that can be allocated among the separate series as
designed by the board. The Fund invests primarily in securities of public
utilities companies in the utilities industry.
The Fund offers Class A, Class B, Class C and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge (CDSC)
and automatically convert to Class A shares during the ninth calendar year
of ownership.
o Class C shares may be subject to a CDSC.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, incremental transfer agency fee and service fee (class
specific expenses) differ among classes. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses on investments
are allocated to each class of shares based upon its relative net assets.
The Fund's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to accounting principles generally
accepted in the United States of America requires management to make estimates
(e.g., on assets, liabilities and contingent assets and liabilities) that could
differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
American Express Financial Corporation (AEFC) may use fair value if a security's
value has been materially affected by events after the close of the primary
exchanges or markets on which the security is traded and before the NAV is
calculated. The fair value of a security may be different from the quoted or
published price. AEFC will price a security at fair value in accordance with
procedures adopted by the Fund and board if a reliable market quotation is not
readily available. Short-term securities maturing in more than 60 days from the
valuation date are valued at the market price or approximate market value based
on current interest rates; those maturing in 60 days or less are valued at
amortized cost.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 14
Option transactions
To produce incremental earnings, protect gains, and facilitate buying and
selling of securities for investments, the Fund may buy and write options traded
on any U.S. or foreign exchange or in the over-the-counter market where
completing the obligation depends upon the credit standing of the other party.
The Fund also may buy and sell put and call options and write covered call
options on portfolio securities as well as write cash-secured put options. The
risk in writing a call option is that the Fund gives up the opportunity for
profit if the market price of the security increases. The risk in writing a put
option is that the Fund may incur a loss if the market price of the security
decreases and the option is exercised. The risk in buying an option is that the
Fund pays a premium whether or not the option is exercised. The Fund also has
the additional risk of being unable to enter into a closing transaction if a
liquid secondary market does not exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Fund will
realize a gain or loss when the option transaction expires or closes. When an
option is exercised, the proceeds on sales for a written call option, the
purchase cost for a written put option or the cost of a security for a purchased
put or call option is adjusted by the amount of premium received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Fund may buy and
sell financial futures contracts traded on any U.S. or foreign exchange. The
Fund also may buy and write put and call options on these futures contracts.
Risks of entering into futures contracts and related options include the
possibility of an illiquid market and that a change in the value of the contract
or option may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the contract is closed
or expires.
Foreign currency translations and foreign currency contracts
Securities and other assets and liabilities denominated in foreign currencies
are translated daily into U.S. dollars. Foreign currency amounts related to the
purchase or sale of securities and income and expenses are translated at the
exchange rate on the transaction date. The effect of changes in foreign exchange
rates on realized and unrealized security gains or losses is reflected as a
component of such gains or losses. In the statement of operations, net realized
gains or losses from foreign currency transactions, if any, may arise from sales
of foreign currency, closed forward contracts, exchange gains or losses realized
between the trade date and settlement date on securities transactions, and other
translation gains or losses on dividend, interest income and foreign withholding
taxes. As of Dec. 31, 2003, foreign currency holdings were entirely comprised of
Canadian Dollars.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 15
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuation.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete its contract obligations.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute substantially all
of its taxable income to shareholders. No provision for income or excise taxes
is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts, the recognition of certain foreign currency gains
(losses) as ordinary income (loss) for tax purposes and losses deferred due to
"wash sale" transactions. The character of distributions made during the year
from net investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
Dividends to shareholders
Dividends from net investment income, declared and paid each calendar quarter,
when available, are reinvested in additional shares of the Fund at net asset
value or payable in cash. Capital gains, when available, are distributed along
with the last income dividend of the calendar year.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income is recognized on the ex-dividend date and interest income,
including amortization of premium, market discount and original issue discount
using the effective interest method, is accrued daily.
2. EXPENSES AND SALES CHARGES
The Fund has agreements with AEFC to manage its portfolio and provide
administrative services. Under an Investment Management Services Agreement, AEFC
determines which securities will be purchased, held or sold. The management fee
is a percentage of the Fund's average daily net assets in reducing percentages
from 0.61% to 0.48% annually. The fee may be adjusted upward or downward by a
performance incentive adjustment based on a comparison of the performance of
Class A shares of the Fund to the Lipper Utility Funds Index. The maximum
adjustment is 0.12% per year. If the performance difference is less than 0.50%,
the adjustment will be zero. The adjustment decreased the fee by $622,319 for
the six months ended Dec. 31, 2003.
Under an Administrative Services Agreement, the Fund pays AEFC a fee for
administration and accounting services at a percentage of the Fund's average
daily net assets in reducing percentages from 0.04% to 0.02% annually. A minor
portion of additional administrative service expenses paid by the Fund are
consultants' fees and fund office expenses. Under this
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 16
agreement, the Fund also pays taxes, audit and certain legal fees, registration
fees for shares, compensation of board members, corporate filing fees and any
other expenses properly payable by the Fund and approved by the board.
Under a Deferred Compensation Plan (the Plan), non-interested board members may
defer receipt of their compensation. Deferred amounts are treated as though
equivalent dollar amounts had been invested in shares of the Fund or other
American Express mutual funds. The Fund's liability for these amounts is
adjusted for market value changes and remains in the Fund until distributed in
accordance with the Plan.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $19.50
o Class B $20.50
o Class C $20.00
o Class Y $17.50
The incremental transfer agency fee is the amount charged to the specific
classes for the additional expense above the fee for Class Y.
In addition, AECSC is entitled to charge an annual closed-account fee of $5 per
inactive account, charged on a pro rata basis from the date the account becomes
inactive until the date the account is purged from the transfer agent system
generally within one year. However, the closed account fee is currently not
effective.
The Fund has agreements with American Express Financial Advisors Inc. (the
Distributor) for distribution and shareholder services. Under a Plan and
Agreement of Distribution, the Fund pays a fee at an annual rate up to 0.25% of
the Fund's average daily net assets attributable to Class A shares and up to
1.00% for Class B and Class C shares.
Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for
service provided to shareholders by financial advisors and other servicing
agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net
assets attributable to Class Y shares.
Sales charges received by the Distributor for distributing Fund shares were
$360,416 for Class A, $208,985 for Class B and $873 for Class C for the six
months ended Dec. 31, 2003.
During the six months ended Dec. 31, 2003, the Fund's custodian and transfer
agency fees were reduced by $5,381 as a result of earnings credits from
overnight cash balances. The Fund also pays custodian fees to American Express
Trust Company, an affiliate of AEFC.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $312,802,601 and $405,624,867, respectively, for the six
months ended Dec. 31, 2003. Realized gains and losses are determined on an
identified cost basis.
Brokerage clearing fees paid to brokers affiliated with AEFC were $117,531 for
the six months ended Dec. 31, 2003.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 17
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
Six months ended Dec. 31, 2003
Class A Class B Class C Class Y
Sold 3,476,840 2,255,579 134,915 34,641
Issued for reinvested distributions 1,729,828 602,157 18,087 2,273
Redeemed (17,543,797) (7,615,606) (274,595) (19,197)
----------- ---------- -------- -------
Net increase (decrease) (12,337,129) (4,757,870) (121,593) 17,717
----------- ---------- -------- ------
Year ended June 30, 2003
Class A Class B Class C Class Y
Sold 11,646,523 4,902,456 443,015 178,172
Issued for reinvested distributions 4,021,985 1,492,667 39,327 5,448
Redeemed (52,880,381) (31,563,229) (697,199) (280,608)
----------- ----------- -------- --------
Net increase (decrease) (37,211,873) (25,168,106) (214,857) (96,988)
----------- ----------- -------- -------
5. LENDING OF PORTFOLIO SECURITIES
As of Dec. 31, 2003, securities valued at $26,965,890 were on loan to brokers.
For collateral, the Fund received $27,754,000 in cash. Income from securities
lending amounted to $177,460 for the six months ended Dec. 31, 2003. The risks
to the Fund of securities lending are that the borrower may not provide
additional collateral when required or return the securities when due.
6. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
Deutsche Bank, whereby the Fund is permitted to have bank borrowings for
temporary or emergency purposes to fund shareholder redemptions. The Fund must
maintain asset coverage for borrowings of at least 300%. The agreement, which
enables the Fund to participate with other American Express mutual funds,
permits borrowings up to $500 million, collectively. Interest is charged to each
Fund based on its borrowings at a rate equal to either the LIBOR plus 0.50%, the
IBOR plus 0.50% or the higher of the Federal Funds Rate plus 0.25% and the Prime
Lending Rate. Borrowings are payable within 60 days after such loan is executed.
The Fund also pays a commitment fee equal to its pro rata share of the amount of
the credit facility at a rate of 0.09% per annum. The Fund had no borrowings
outstanding during the six months ended Dec. 31, 2003.
7. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund has a capital loss carry-over of
$667,884,812 as of June 30, 2003 that will expire in 2010 through 2012 if not
offset by capital gains. It is unlikely the board will authorize a distribution
of any net realized capital gains until the available capital loss carry-over
has been offset or expires.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 18
8. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating the
Fund's results.
Class A
Per share income and capital changes(a)
Fiscal period ended June 30, 2003(g) 2003 2002 2001 2000
Net asset value, beginning of period $6.23 $6.59 $ 9.23 $9.16 $9.91
Income from investment operations:
Net investment income (loss) .10 .18 .19 .14 .19
Net gains (losses) (both realized and unrealized) .27 (.36) (2.36) .45 (.03)
Total from investment operations .37 (.18) (2.17) .59 .16
Less distributions:
Dividends from net investment income (.10) (.18) (.18) (.13) (.18)
Distributions from realized gains -- -- (.29) (.39) (.73)
Total distributions (.10) (.18) (.47) (.52) (.91)
Net asset value, end of period $6.50 $6.23 $ 6.59 $9.23 $9.16
Ratios/supplemental data
Net assets, end of period (in millions) $749 $795 $1,086 $1,704 $1,484
Ratio of expenses to average daily net assets(c) 1.03% 1.15% 1.06% 1.03% .99%
Ratio of net investment income (loss) to average daily net assets 3.13% 3.02% 2.36% 1.62% 1.97%
Portfolio turnover rate (excluding short-term securities) 29% 134% 106% 85% 89%
Total return(e) 5.97%(f) (2.40%) (23.98%) 6.14% 1.68%
Class B
Per share income and capital changes(a)
Fiscal period ended June 30, 2003(g) 2003 2002 2001 2000
Net asset value, beginning of period $6.19 $6.54 $ 9.17 $9.16 $9.91
Income from investment operations:
Net investment income (loss) .07 .14 .12 .06 .12
Net gains (losses) (both realized and unrealized) .26 (.35) (2.34) .45 (.03)
Total from investment operations .33 (.21) (2.22) .51 .09
Less distributions:
Dividends from net investment income (.07) (.14) (.12) (.11) (.11)
Distributions from realized gains -- -- (.29) (.39) (.73)
Total distributions (.07) (.14) (.41) (.50) (.84)
Net asset value, end of period $6.45 $6.19 $ 6.54 $9.17 $9.16
Ratios/supplemental data
Net assets, end of period (in millions) $331 $347 $531 $839 $646
Ratio of expenses to average daily net assets(c) 1.80% 1.92% 1.83% 1.80% 1.75%
Ratio of net investment income (loss) to average daily net assets 2.36% 2.25% 1.59% .86% 1.21%
Portfolio turnover rate (excluding short-term securities) 29% 134% 106% 85% 89%
Total return(e) 5.44%(f) (3.04%) (24.65%) 5.27% .97%
See accompanying notes to financial highlights.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 19
Class C
Per share income and capital changes(a)
Fiscal period ended June 30, 2003(g) 2003 2002 2001 2000(b)
Net asset value, beginning of period $6.19 $6.54 $ 9.17 $9.16 $9.37
Income from investment operations:
Net investment income (loss) .07 .14 .12 .06 --
Net gains (losses) (both realized and unrealized) .26 (.35) (2.34) .45 (.21)
Total from investment operations .33 (.21) (2.22) .51 (.21)
Less distributions:
Dividends from net investment income (.07) (.14) (.12) (.11) --
Distributions from realized gains -- -- (.29) (.39) --
Total distributions (.07) (.14) (.41) (.50) --
Net asset value, end of period $6.45 $6.19 $ 6.54 $9.17 $9.16
Ratios/supplemental data
Net assets, end of period (in millions) $10 $10 $12 $12 $--
Ratio of expenses to average daily net assets(c) 1.81% 1.93% 1.84% 1.80% 1.75%(d)
Ratio of net investment income (loss) to average daily net assets 2.34% 2.23% 1.63% .88% 1.21%(d)
Portfolio turnover rate (excluding short-term securities) 29% 134% 106% 85% 89%
Total return(e) 5.44%(f) (3.03%) (24.64%) 5.27% (2.35%)(f)
Class Y
Per share income and capital changes(a)
Fiscal period ended June 30, 2003(g) 2003 2002 2001 2000
Net asset value, beginning of period $6.23 $6.59 $ 9.24 $9.16 $9.91
Income from investment operations:
Net investment income (loss) .10 .19 .20 .15 .20
Net gains (losses) (both realized and unrealized) .27 (.36) (2.36) .45 (.02)
Total from investment operations .37 (.17) (2.16) .60 .18
Less distributions:
Dividends from net investment income (.10) (.19) (.20) (.13) (.20)
Distributions from realized gains -- -- (.29) (.39) (.73)
Total distributions (.10) (.19) (.49) (.52) (.93)
Net asset value, end of period $6.50 $6.23 $ 6.59 $9.24 $9.16
Ratios/supplemental data
Net assets, end of period (in millions) $1 $1 $1 $2 $1
Ratio of expenses to average daily net assets(c) .86% .98% .90% .88% .83%
Ratio of net investment income (loss) to average daily net assets 3.26% 3.13% 2.54% 1.79% 2.14%
Portfolio turnover rate (excluding short-term securities) 29% 134% 106% 85% 89%
Total return(e) 6.06%(f) (2.23%) (23.92%) 6.29% 1.88%
See accompanying notes to financial highlights.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 20
Notes to financial highlights
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Inception date was June 26, 2000.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Dec. 31, 2003 (Unaudited).
Proxy Voting
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are stated in the Statement of Additional
Information (SAI). You may obtain a copy of the SAI without charge by calling
(800) 862-7919; by looking at the Web site americanexpress.com/funds; or by
searching the Web site of the Securities and Exchange Commission
http://www.sec.gov. You may view the Fund's voting record for all portfolio
companies whose shareholders meetings were completed the previous quarter on
americanexpress.com/funds or obtain a copy by calling the Fund's administrator,
Board Services Corporation, collect at (612) 330-9283. In addition, after Aug.
1, 2004, information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 will be
available at http://www.sec.gov.
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AXP UTILITIES FUND -- 2003 SEMIANNUAL REPORT -- 21
- --------------------------------------------------------------------------------
(logo)
AMERICAN
EXPRESS
(R)
- --------------------------------------------------------------------------------
American Express Funds
70100 AXP Financial Center
Minneapolis, MN 55474
This report must be accompanied or preceded by the Fund's current prospectus.
Distributed by American Express Financial Advisors Inc. Member NASD. American
Express Company is separate from American Express Financial Advisors Inc. and is
not a broker-dealer.
Item 2. Code of Ethics. Not applicable for semi-annual reports.
Item 3. Audit Committee Financial Expert. Not applicable for semi-annual
reports.
Item 4. Principal Accountant Fees and Services. Not applicable for
semi-annual reports.
Item 5. Audit Committee of Listed Registrants. Not applicable.
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. Not applicable.
Item 8. Purchase of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. Not applicable.
Item 9. Submission of matters to a vote of security holders. Not applicable
at this time.
Item 10. Controls and Procedures.
(a) The registrant's Principal Executive Officer and Principal
Financial Officer have evaluated the registrant's disclosure
controls and procedures within 90 days of this filing and have
concluded that the registrant's disclosure controls and
procedures by the registrant in this Form N-CSR was recorded,
processed, summarized, and reported timely.
(b) At the date of filing this Form N-CSR, the registrant's Principal
Executive Officer and Principal Financial Officer are aware of no
significant changes in the registrant's internal controls or in
other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Item 11. Exhibits.
(a)(1) Not applicable for semi-annual reports.
(a)(2) Separate certification for the Registrant's principal
executive officer and principal financial officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a)
under the Investment Company Act of 1940, are attached as
EX.99.CERT.
(a)(3) Not applicable.
(b) A certification by the Registrant's principal executive officer
and principal financial officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment
Company Act of 1940, is attached as EX.99.906 CERT.
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.
(Registrant) AXP Sector Series, Inc.
By /s/ Paula R. Meyer
------------------
Paula R. Meyer
President and Principal Executive Officer
Date March 5, 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/ Paula R. Meyer
------------------
Paula R. Meyer
President and Principal Executive Officer
Date March 5, 2004
By /s/ Jeffrey P. Fox
------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date March 5, 2004