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 811-2503
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AXP FIXED INCOME 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: 8/31
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Date of reporting period: 2/28
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AXP(R)
Diversified
Bond
Fund
Semiannual Report
for the Period Ended
Feb. 28, 2005
AXP Diversified Bond Fund seeks to provide shareholders with a high level of
current income while conserving the value of the investment for the longest
period of time.
(logo) (logo)
American AMERICAN
Express(R) EXPRESS
Funds (R)
Table of Contents
Fund Snapshot 3
Performance Summary 4
Questions & Answers
with Portfolio Management 5
Investments in Securities 10
Financial Statements 21
Notes to Financial Statements 24
Fund Expenses Example 36
Proxy Voting 38
CORPORATE REORGANIZATION
On Feb. 1, 2005, American Express Company, the parent company of the Fund's
investment manager, American Express Financial Corporation (AEFC), announced
plans to pursue a spin-off of 100% of the common stock of AEFC to shareholders
of American Express Company. The transaction, expected to be completed in the
third quarter of 2005, is subject to certain regulatory and other approvals, as
well as final approval by the board of directors of American Express Company.
Upon completion of the transaction AEFC will be a publicly traded company
separate from American Express Company. The current agreements between the Fund
and AEFC and its affiliates will remain in place. No changes in operations or
personnel, including the portfolio manager of the Fund, are anticipated.
(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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2 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Fund Snapshot AT FEB. 28, 2005
PORTFOLIO MANAGERS
Portfolio managers Since Years in industry
Jamie Jackson, CFA 6/03 16
Scott Kirby 2/03 18
Tom Murphy, CFA 2/03 18
Nic Pifer, CFA 2/03 14
Jennifer Ponce de Leon 2/03 15
FUND OBJECTIVE
For investors seeking a high level of current income while conserving the value
of the investment for the longest period of time.
Inception dates by class
A: 10/3/74 B: 3/20/95 C: 6/26/00 I: 3/4/04 Y: 3/20/95
Ticker symbols by class
A: INBNX B: ININX C: AXBCX I: -- Y: IDBYX
Total net assets $2.608 billion
Number of holdings 369
Weighted average life(1) 6.6 years
Effective duration(2) 4.0 years
Weighted average bond rating(3) AA
(1) Weighted average life measures a bond's maturity, which takes into
consideration the possibility that the issuer may call the bond before its
maturity date.
(2) Effective duration measures the sensitivity of a security's price to
parallel shifts in the yield curve (the graphical depiction of the levels
of interest rates from two years out to 30 years). Positive duration means
that as rates rise, the price decreases, and negative duration means that
as rates rise, the price increases.
(3) Weighted average bond rating represents the average credit quality of the
underlying bonds in the portfolio.
STYLE MATRIX
Shading within the style matrix indicates areas in which the Fund generally
invests.
DURATION
SHORT INT. LONG
X HIGH
X MEDIUM
X LOW
SECTOR COMPOSITION
Percentage of portfolio assets
(pie chart)
Mortgage-backed securities 40.7%
U.S. government obligations & agencies 22.7%
Corporate bonds* 20.2%
CMBS/ABS** 11.3%
Short-term securities*** 4.0%
Foreign government bonds 1.0%
Other 0.1%
* Includes 4.8% Communications, 3.9% Other financial, 2.3% Banks & brokers,
1.7% Utilities, 1.6% Technology, 1.4% Insurance, 1.3% Basic industries,
1.2% Consumer cyclical, 1.0% Energy, 0.7% Consumer non-cyclical and 0.3%
Capital goods.
** Commercial mortgage-backed securities/Asset-backed
securities
*** Of the 4.0%, 2.4% is due to security lending activity and 1.6% is the
Fund's cash equivalent position.
CREDIT QUALITY SUMMARY
Percentage of bond portfolio assets
AAA bonds 79.2%
AA bonds 4.5
A bonds 3.8
BBB bonds 8.6
Non-investment grade bonds 3.9
Individual security ratings are based on information from Standard & Poor's
Corp. and Moody's Investors Service. If a rating is unavailable, the rating is
determined through an internal analysis, if appropriate. 0.3% of the portfolio
rating above was determined through internal analysis.
Fund holdings are subject to change.
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3 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Performance Summary
(bar chart)
PERFORMANCE COMPARISON
For the six-month period ended Feb. 28, 2005
+2.12% +1.26% +1.58%
+2.12% = AXP Diversified Bond Fund Class A (excluding sales charge)
+1.26% = Lehman Brothers Aggregate Bond Index(1) (unmanaged)
+1.58% = Lipper Intermediate Investment Grade Index(2)
The performance information shown represents past performance and is not a
guarantee of future results. The investment return and principal value of your
investment will fluctuate so that your shares, when redeemed, may be worth more
or less than their original cost. Current performance may be lower or higher
than the performance information shown. You may obtain performance information
current to the most recent month-end by calling (800) 862-7919 or visiting
www.americanexpress.com/funds.
(1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of
a representative list of government, corporate, asset-backed and
mortgage-backed securities. The index is frequently used as a general
measure of bond market performance. The index reflects reinvestment of all
distributions and changes in market prices, but excludes brokerage
commissions or other fees. However, the securities used to create the index
may not be representative of the bonds held in the Fund.
(2) The Lipper Intermediate Investment Grade Index includes the 30 largest
investment grade funds tracked by Lipper Inc. The index's returns include
net reinvested dividends.
The 4.75% 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 other classes may vary from that shown because of differences in
expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
SEC YIELDS
At Feb. 28, 2005 by class
A: 3.68% B: 3.11% C: 3.11% I: 4.22% Y: 4.04%
At March 31, 2005 by class
A: 3.79% B: 3.22% C: 3.23% I: 4.34% Y: 4.15%
The Securities and Exchange Commission (SEC) yield is calculated by dividing
anticipated net investment income during a 31-day period by the public offering
price (POP) per share on the last day of the period, and converting the results
to yearly figures. See Average Annual Total Returns on page 5 for additional
performance information.
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4 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Questions & Answers
WITH PORTFOLIO MANAGEMENT
Below, AXP Diversified Bond Fund's portfolio management team discusses the
Fund's positioning and results for the first half of the current fiscal year.
Q: How did AXP Diversified Bond Fund perform for the
six months ended Feb. 28, 2005?
A: AXP Diversified Bond Fund's Class A shares gained 2.12%, excluding sales
charge, for the six months ended Feb. 28, 2005. The Fund outperformed both
its benchmark, the Lehman Brothers Aggregate Bond Index (Lehman Index),
which rose 1.26%, and the Lipper Intermediate Investment Grade Index,
representing the Fund's peer group, which advanced 1.58%.
AVERAGE ANNUAL TOTAL RETURNS
Class A Class B Class C Class I Class Y
(Inception dates) (10/3/74) (3/20/95) (6/26/00) (3/4/04) (3/20/95)
After After
NAV(1) POP(2) NAV(1) CDSC(3) NAV(1) CDSC(4) NAV(5) NAV(6)
at Feb. 28, 2005
6 months* +2.12% -2.73% +1.53% -2.47% +1.74% +0.74% +2.09% +1.99%
1 year +3.00% -1.89% +2.22% -1.75% +2.43% +2.43% N/A +3.17%
3 years +4.60% +2.92% +3.81% +2.88% +3.88% +3.88% N/A +4.77%
5 years +5.77% +4.74% +4.97% +4.80% N/A N/A N/A +5.94%
10 years +6.63% +6.11% N/A N/A N/A N/A N/A N/A
Since inception +9.49% +9.32% +5.85% +5.85% +5.37% +5.37% +3.55% +6.80%
at March 31, 2005
6 months* +0.86% -3.92% +0.48% -3.48% +0.28% -0.71% +1.04% +0.95%
1 year +1.50% -3.31% +0.74% -3.18% +0.73% +0.73% +1.89% +1.67%
3 years +4.78% +3.10% +3.99% +3.06% +3.91% +3.91% N/A +4.95%
5 years +5.52% +4.50% +4.73% +4.56% N/A N/A N/A +5.69%
10 years +6.48% +5.96% +5.68% +5.68% N/A N/A N/A +6.63%
Since inception +9.44% +9.27% +5.71% +5.71% +5.05% +5.05% +2.63% +6.67%
* Not annualized.
(1) Excluding sales charge.
(2) Returns at public offering price (POP) reflect a sales charge of 4.75%.
(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
eligible investors only, currently limited to AXP Portfolio Builder Series
funds, six affiliated funds-of-funds.
(6) Sales charge is not applicable to these shares. Shares available to
institutional investors only.
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5 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Questions & Answers
(begin callout quote)>The riskiest segments of the bond market -- high yield
corporate bonds and global bonds in emerging markets -- offered the highest
returns for the period. (end callout quote)
Q: What market conditions were present during the six months?
A: During the period, bond market investors closely watched interest rate
changes made by the Federal Reserve Board (the Fed) along with inflation
data. After the Fed's first three moves to tighten monetary policy in June,
August and September of 2004, the market's widespread expectation was that
it would pause to evaluate the effects of those rate hikes. Instead, the Fed
increased interest rates three more times, bringing the targeted federal
funds rate to 2.50% by the end of the reporting period. While rates at the
short end of the yield curve increased, yields for intermediate-term
securities remained low and yields for long-term securities even decreased
leading to a dramatic flattening of the yield curve. On the inflation front,
the core Consumer Price Index (CPI) -- the most closely watched gauge of
inflation, which excludes food and energy prices -- moved up approximately
2.3% for the six months ended Jan. 31, 2005. Despite the increase,
economists and Fed policy-makers agreed at the time that inflation remained
"well contained."
The riskiest segments of the bond market -- high yield corporate bonds and
global bonds in emerging markets -- offered the highest returns for the
period. Also, agency, corporate, asset-backed and mortgage-backed
securities, outperformed U.S. Treasuries for the six months. Finally, our
Treasury Inflation Protected Securities (TIPS) holdings provided strong
results.
Q: What factors most significantly affected Fund performance?
A: The Fund's results were aided by our shorter-than-Lehman Index duration
stance during the period, which reflected our view that interest rates would
move higher. Our effective positioning of securities along the yield curve
also helped performance, as the difference in yield between short and long
term securities continued to narrow. Individual bond selection also
benefited the Fund, especially in the corporate sector, where we favored
higher quality issues. The Fund's position in AAA-rated commercial
mortgage-backed securities (CMBS) contributed positively to the Fund's
results, as the CMBS market was able to successfully absorb a large number
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6 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Questions & Answers
(begin callout quote)>We intend to continue to focus on what we think are our
best corporate securities and reduce holdings that appear overvalued relative to
their fundamentals. (end callout quote)
of newly issued bonds. The Fund's semiannual returns were further boosted by
its allocation to high-yield corporate bonds. Later in the period, the
Fund's performance benefited from its small global bond position, which
advanced as the U.S. dollar weakened.
On the negative side, the Fund's lower-than-Lehman Index position in
mortgage-backed securities detracted from performance, as that sector
performed relatively well. The reason for our lower weighting was two-fold.
Not only were mortgage valuations expensive by historical standards, but we
also believed these securities would underperform other sectors if market
volatility increased. Indeed, our modest position in mortgages helped the
Fund in February 2005, when Treasury rate volatility dampened returns on
these securities.
Q: What changes did you make to the Fund and how is it currently positioned?
A: We sold some of the Fund's global bond positions when they reached the
valuations we had set for them. Also, we added intermediate-term TIPS to the
Fund's portfolio during the period, but sold these securities by the end of
the six months. The TIPS benefited from strong inflation accretion over the
short time the Fund owned them.
During the fiscal period, we reduced the Fund's exposure to corporate bonds,
bringing the Fund's weighting more in line with the Lehman Index. We
believed high-quality corporate bond yields already reflected the current
strength of the U.S. economy. The exception here was a modest increase in
the Fund's exposure to mortgage-backed securities late in the reporting
period. Still, we continued to favor a defensive, higher-coupon focus within
mortgages, which can offer both attractive yield and protection from higher
rates. We maintained an emphasis on CMBS and asset-backed securities, which,
in our view, offer attractive yield as well as the kind of defensive
characteristics we want in the current market environment. Finally, we
significantly reduced the Fund's position in high-yield corporate bonds,
based primarily on our view that valuations in this fixed income sector had
become relatively full.
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7 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Questions & Answers
Q: How do you intend to manage the Fund in the coming months?
A: We believe the U.S. economic recovery will continue and interest rates will
move still higher. Despite the Fed's February 2005 comments that underlying
inflation appears to be relatively low, we believe there may be cause for it
to increase interest rates more vigorously than the market currently
anticipates. In addition, we anticipate that after an extended period of
yield curve flattening, the yield spread between short- and long-term
maturities may widen in the coming months. In terms of currency, we believe
the recent stability of the U.S. dollar will be short-lived and that its
value will decline to new lows in 2005.
Based on this view, we intend to maintain the Fund's duration shorter than
the Lehman Index. At the same time, we are now positioning the Fund to
benefit from our expectation for a steeper yield curve in the months ahead.
Within bond market sectors, we remain cautious about valuations across many
areas of the investment grade corporate bond market.
The risk level in this sector will likely continue to increase as the Fed
removes liquidity from the financial markets and corporate America moves
away from bondholder-friendly actions, such as debt retirement and building
cash reserves, to more shareholder-friendly actions, such as equity buybacks
and acquisition activity, to bolster stock prices. We intend to continue to
focus on what we think are our best corporate securities and reduce holdings
that appear overvalued relative to their fundamentals. However, we are
respectful of what we see as a positive overall fixed-income environment.
Thus, even though CMBS and asset-backed securities suffered a bit in
February 2005 as the market focused its buying attention on lower-quality
substitutes, we continue to favor these two sectors
as a good alternative to corporate bonds. Within the mortgage sector, we
intend to stay defensive in terms of structure and coupon.
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8 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Questions & Answers
In other areas of the fixed income market, we intend to maintain a small
exposure to high-yield corporate bonds, adding exposure when bond values
appear attractive. Also, our expectation for a weak dollar boosts the
attractiveness of non-U.S. bonds. A falling dollar increases the value of
the Fund's foreign currency-denominated securities in U.S. dollar terms.
We will continue to monitor job creation and inflation numbers, as they
remain key indicators for the economy in the coming months. As always, we
maintain a disciplined focus on individual security selection, with a goal
of having higher-than-Lehman Index positions in securities that we believe
offer the greatest potential for outperformance.
(line chart)
U.S. TREASURY YIELDS
(Feb. 28, 2005 compared to Aug. 31, 2004)
(dotted line) 1.58% 1.79% 2.39% 2.73% 3.31% 4.12% 4.93%
(solid line) 2.75% 2.97% 3.60% 3.76% 4.01% 4.38% 4.72%
3 mos. 6 mos. 2 yrs. 3yrs. 5 yrs. 10 yrs. 30 yrs.
U.S. Treasury yields as of: solid line = 2/28/05
dotted line = 8/31/04
Source: Bloomberg
This chart, known as a yield curve, compares the income potential of U.S.
Treasury bills, notes and bonds as of Feb. 28, 2005 relative to six months
earlier. As you can see, the difference in yields has narrowed since last
autumn.
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9 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Investments in Securities
AXP Diversified Bond Fund
Feb. 28, 2005 (Unaudited)
(Percentages represent value of investments compared to net assets)
Bonds (99.4%)
Issuer Coupon Principal Value(a)
rate amount
Foreign government (1.0%)
Bundesrepublik Deutschland
(European Monetary Unit)
01-04-07 6.00% 5,790,000(c) $8,142,730
Pemex Project Funding Master Trust
(U.S. Dollar)
12-15-14 7.38 3,481,000(c) 3,896,980
United Kingdom Treasury
(British Pound)
12-07-06 7.50 4,010,000(c) 8,063,299
United Mexican States
(U.S. Dollar)
09-27-34 6.75 5,921,000(c) 6,030,539
Total 26,133,548
U.S. government obligations & agencies (23.6%)
Federal Home Loan Bank
05-22-06 2.88 27,255,000 27,045,736
12-17-07 3.25 5,615,000 5,508,652
Federal Home Loan Mtge Corp
07-15-06 5.50 12,821,000 13,153,718
04-15-08 5.75 49,035,000 51,549,319
03-18-09 3.76 6,890,000 6,782,454
01-15-12 5.75 38,075,000 40,885,049
11-15-13 4.88 17,226,000 17,561,735
Federal Natl Mtge Assn
04-13-06 2.15 33,200,000 32,712,491
08-15-08 3.25 86,170,000 83,908,899
02-15-09 3.25 2,990,000 2,890,221
U.S. Treasury
01-15-10 3.63 10,190,000(i) 10,019,623
02-15-10 3.50 21,370,000 20,897,532
11-15-14 4.25 39,780,000(i) 39,402,408
02-15-15 4.00 36,800,000(i) 35,742,000
08-15-23 6.25 91,304,000(p) 107,596,103
02-15-26 6.00 94,082,000(p) 108,933,032
02-15-31 5.38 8,865,000(i) 9,747,342
Total 614,336,314
Commercial mortgage-backed(f)/
Asset-backed securities
(11.7%) Aesop Funding II LLC
Series 2002-1A Cl A1 (AMBAC)
10-20-06 3.85 7,090,000(d,m) 7,113,776
AmeriCredit Automobile Receivables Trust
Series 2002-C Cl 4A (FSA)
02-12-09 3.55 2,660,000(m) 2,654,271
Series 2004-CA Cl A3 (AMBAC)
03-06-09 3.00 5,500,000(m) 5,427,813
Series 2004-DF Cl A3 (FSA)
07-06-09 2.98 4,300,000(m) 4,171,000
ARG Funding
Series 2005-1A Cl A3 (MBIA)
04-20-10 4.29 6,300,000(d.m) 6,231,832
Banc of America Commercial Mtge
Series 2004-5 Cl A4
11-10-41 4.94 3,600,000 3,596,220
Bear Stearns Commercial Mtge Securities
Series 2004-PWR6 Cl A6
11-11-41 4.83 5,000,000 4,944,350
Series 2004-T16 Cl A3
02-13-46 4.03 3,240,000 3,188,526
California State Teachers' Retirement System Trust
Series 2002-C6 Cl A3
11-20-14 4.46 1,678,913(d) 1,686,038
Commercial Mtge Pass-Through Ctfs
Series 2004-CNL Cl A1
09-15-14 2.81 6,000,000(d,q) 5,992,980
Series 2004-LB3A Cl A2
07-10-37 4.71 6,000,000 6,048,960
Series 2004-LB3A Cl A3
07-10-37 5.09 5,200,000 5,320,211
Series 2004-LB3A Cl A5
07-10-37 5.28 5,000,000(q) 5,174,289
CS First Boston Mtge Securities
Series 2004-C1 Cl A2
01-15-37 3.52 3,000,000 2,922,524
See accompanying notes to investments in securities.
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10 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Commercial mortgage-backed(f)/
Asset-backed securities (cont.)
Ford Credit Auto Owner Trust
Series 2005-A Cl A3
11-15-08 3.48% $14,000,000 $13,918,379
GE Capital Commercial Mtge
Series 2004-C2 Cl A2
03-10-40 4.12 3,000,000 2,943,720
GMAC Commercial Mtge Securities
Series 1999-C1 Cl B
05-15-33 6.30 5,800,000 6,187,198
Series 2004-C3 Cl A4
12-10-41 4.55 4,700,000 4,659,890
Series 2004-C3 Cl A5
12-10-41 4.86 5,500,000 5,443,955
Greenwich Capital Commercial Funding
Series 2005-GG3 Cl A1
08-10-42 3.92 3,700,000 3,681,944
Series 2005-GG3 Cl A4
08-10-42 4.80 6,200,000 6,127,398
Honda Auto Receivables Owner Trust
Series 2005-1 Cl A3
10-21-08 3.53 4,500,000 4,480,542
JPMorgan Chase Commercial Mtge Securities
Series 2003-CB6 Cl A1
07-12-37 4.39 7,973,891 7,908,026
Series 2003-CB6 Cl A2
07-12-37 5.26 4,200,000 4,320,053
Series 2004-CBX Cl A3
01-12-37 4.18 3,000,000 2,964,148
Series 2004-CBX Cl A5
01-12-37 4.65 5,000,000 4,969,001
Series 2004-CBX Cl A6
01-12-37 4.90 6,100,000 6,089,162
LB-UBS Commercial Mtge Trust
Series 2002-C2 Cl A3
06-15-26 5.39 7,360,000 7,661,248
Series 2002-C4 Cl A4
09-15-26 4.56 5,200,000 5,191,065
Series 2002-C4 Cl A5
09-15-31 4.85 6,000,000 6,052,705
Series 2002-C8 Cl A3
11-15-27 4.83 5,250,000 5,273,888
Series 2003-C3 Cl A2
05-15-27 3.09 14,900,000 14,384,243
Series 2003-C8 Cl A2
11-15-27 4.21 7,500,000 7,442,775
Series 2004-C2 Cl A2
03-15-29 3.25 10,190,000 9,746,938
Series 2004-C2 Cl A3
03-15-29 3.97 3,275,000 3,125,005
Series 2004-C4 Cl A3
06-15-29 4.99 3,000,000(q) 3,086,539
Series 2004-C6 Cl A4
08-15-29 4.58 1,275,000 1,272,190
Series 2004-C7 Cl A2
10-15-29 3.99 5,400,000 5,278,986
Series 2004-C8 Cl A2
12-15-29 4.20 5,800,000 5,725,064
Series 2004-C8 Cl A6
12-15-29 4.80 8,000,000 7,951,292
Series 2005-C1 Cl A4
02-15-30 4.74 5,500,000 5,417,115
Long Beach Auto Receivables Trust
Series 2004-C Cl A3 (FSA)
09-15-09 3.40 4,000,000(m) 3,917,000
Metris Master Trust
Series 2001-2 Cl C
11-20-09 4.50 3,425,000(d,q) 3,401,052
Series 2004-2 Cl D
10-20-10 5.85 1,200,000(d,q) 1,207,560
Series 2004-2 Cl M
10-20-10 2.89 2,700,000(q) 2,701,674
Morgan Stanley Auto Loan Trust
Series 2004-HB2 Cl A3
03-16-09 2.94 4,300,000 4,233,616
Morgan Stanley Capital I
Series 2003-IQ4 Cl A1
05-15-40 3.27 5,753,085 5,467,439
Series 2004-HQ4 Cl A5
04-14-40 4.59 3,600,000 3,562,920
Series 2004-IQ8 Cl A2
06-15-40 3.96 5,115,000 5,069,091
Series 2005-T17 Cl A5
12-13-41 4.78 4,500,000 4,442,175
Morgan Stanley, Dean Witter Capital 1
Series 2002-TOP7 Cl A2
01-15-39 5.98 5,900,000 6,345,123
Nissan Auto Lease Trust
Series 2004-A Cl A3
08-15-07 2.90 3,000,000 2,965,326
See accompanying notes to investments in securities.
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11 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Commercial mortgage-backed(f)/
Asset-backed securities (cont.)
Nissan Auto Receivables Owner Trust
Series 2003-A Cl A4
07-15-08 2.61% $2,500,000 $2,463,703
Series 2005-A Cl A3
10-15-08 3.54 5,475,000 5,430,926
Residential Asset Securities
Series 2002-KS1 Cl AI4 (AMBAC)
11-25-29 5.86 3,585,161(m) 3,592,116
Wachovia Bank Commercial Mtge Trust
Series 2005-C16 Cl A2
10-15-41 4.38 2,000,000 1,991,152
Series 2005-C16 Cl A3
10-15-41 4.62 5,500,000 5,463,211
Series 2005-C16 Cl A4
10-15-41 4.85 5,800,000 5,751,280
WFS Financial Owner Trust
Series 2004-3 Cl A3
03-17-09 3.30 5,000,000 4,951,461
World Omni Auto Receivables Trust
Series 2005-A Cl A3
06-12-09 3.54 7,500,000 7,451,625
Total 306,183,709
Mortgage-backed securities (42.2%)(f,h)
Adjustable Rate Mtge Trust
Series 2004-2 Cl 6A1
02-25-35 5.29 6,534,606(k) 6,624,502
Bank of America Alternative Loan Trust
Series 2003-11 Cl 1A1
01-25-34 6.00 8,257,417 8,435,364
Series 2004-3 Cl 1A1
04-25-34 6.00 12,827,798 13,188,580
Bank of America Mtge Securities
Series 2004-E Cl B1
06-25-34 4.05 2,956,004(k) 2,912,314
Series 2004-F Cl B1
07-25-34 4.15 5,318,300(k) 5,262,618
Countrywide Alternative Loan Trust
Series 2003-11T1 Cl A1
07-25-18 4.75 5,014,099 4,975,722
Series 2004-28CB Cl 6A1
01-25-35 6.00 7,995,837 8,195,383
Countrywide Home Loans
Series 2004-12 Cl 1M
08-25-34 4.66 3,547,137(k) 3,497,371
CS First Boston Mtge Securities
Series 2003-29 Cl 8A1
11-25-18 6.00 4,500,062 4,618,189
Series 2004-AR5 Cl CB1
06-25-34 4.45 3,379,528(k) 3,334,249
Federal Home Loan Mtge Corp
05-01-13 4.50 3,665,282 3,639,368
04-15-15 4.50 13,700,000 13,779,203
02-01-17 6.50 2,233,120 2,346,361
04-01-17 8.00 19,507 21,157
05-01-17 6.00 2,275,691 2,365,879
05-01-18 5.50 5,140,751 5,274,723
08-01-18 5.00 15,680,274 15,823,925
10-01-18 5.00 10,115,174 10,218,743
03-01-20 5.50 22,500,000(g) 23,097,655
02-01-23 6.00 16,996,034 17,534,279
10-01-23 5.50 6,854,267 6,951,144
12-01-23 6.00 13,530,952 13,955,067
08-01-24 8.00 685,717 742,788
10-01-28 7.00 97,907 103,319
12-01-30 5.50 2,751,657 2,786,072
04-01-33 5.50 13,201,045 13,415,029
04-01-33 6.00 9,249,522 9,586,838
06-01-33 5.50 9,128,627 9,228,092
07-01-33 5.00 5,795,239 5,734,166
Collateralized Mtge Obligation
12-15-14 4.50 17,624,850 17,714,261
03-15-22 7.00 2,113,364 2,118,296
02-15-27 5.00 10,070,000 10,164,892
10-15-27 5.00 21,553,000 21,743,257
06-15-28 5.00 13,925,000 14,051,495
11-15-28 4.50 6,113,338 6,139,962
01-15-33 5.00 1,285,334 1,283,374
02-15-33 5.50 9,499,641 9,824,957
07-25-43 7.00 5,215,096 5,510,072
Interest Only
02-15-14 7.40 4,391,909(l) 311,474
10-15-22 14.56 12,108,895(l) 956,600
Federal Natl Mtge Assn
03-01-08 7.00 2,011,178 2,099,395
07-01-08 6.50 858,242 893,599
06-01-10 6.50 2,100,891 2,187,441
11-01-10 4.47 1,661,479 1,648,575
08-01-11 8.50 2,200,029 2,321,049
12-01-11 5.10 5,044,290 5,153,575
11-01-12 4.84 1,181,597 1,176,091
01-01-13 4.92 5,629,878 5,696,562
02-01-13 4.83 6,371,042 6,411,772
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
12 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Natl Mtge Assn (cont.)
02-01-13 5.02% $5,788,775 $5,888,424
04-01-13 7.00 6,051,978 6,317,440
10-01-13 5.11 541,052 553,587
03-01-14 4.60 1,136,507 1,110,458
04-01-14 6.50 1,304,182 1,372,538
11-01-14 4.50 17,805,022 17,871,841
08-01-16 6.00 5,384,627 5,609,057
12-01-16 5.50 7,905,997 8,106,934
01-01-17 5.57 11,779,221 12,394,869
06-01-17 6.50 5,193,224 5,475,627
08-01-17 6.00 10,485,015 10,958,673
08-01-17 6.50 3,340,457 3,532,643
09-01-17 6.00 1,560,095 1,625,121
09-01-17 6.50 3,416,987 3,593,220
12-01-17 6.50 1,719,466 1,808,148
01-01-18 5.50 7,333,596 7,537,644
02-01-18 5.50 12,135,520 12,455,905
03-01-18 5.50 19,514,741 20,063,665
04-01-18 5.00 7,924,353 7,989,152
05-01-18 5.50 3,721,971 3,829,641
05-01-18 6.00 12,227,286 12,735,005
06-01-18 4.50 6,742,295 6,673,157
06-01-18 5.00 8,364,619 8,445,596
07-01-18 4.50 4,344,427 4,299,878
08-01-18 4.50 8,951,080 8,857,024
10-01-18 5.00 10,356,475 10,448,150
10-01-18 6.00 2,736,046 2,849,905
12-01-18 5.00 6,904,752 6,961,213
04-01-23 8.50 838,597 907,068
07-01-23 5.00 7,812,308 7,782,246
09-01-23 5.50 11,782,325 11,956,758
09-01-23 6.50 748,145 782,959
01-01-24 6.50 225,745 236,249
05-01-24 6.00 9,682,475 9,992,506
06-01-24 9.00 714,584 788,849
02-01-25 8.00 238,715 258,586
09-01-25 8.00 533,992 577,469
03-01-26 7.00 1,255,138 1,328,262
07-01-28 5.50 3,210,009 3,247,487
08-01-28 5.50 5,533,932 5,598,543
09-01-28 7.50 1,584,420 1,701,278
12-01-28 5.50 11,487,846 11,621,971
01-01-29 6.50 5,766,121 6,020,528
04-01-29 5.00 19,207,231 18,971,936
05-01-29 6.50 4,007,253 4,178,405
06-01-29 7.00 10,396 10,972
09-01-29 7.00 7,081,301 7,473,549
10-01-30 7.00 2,590,814 2,734,324
09-01-31 7.00 1,229,668 1,307,976
03-01-32 5.50 1,976,536 1,999,613
06-01-32 7.00 4,166,877 4,422,266
07-01-32 6.50 2,748,730 2,873,865
08-01-32 7.00 1,821,106 1,921,427
09-01-32 6.00 17,871,313 18,341,167
09-01-32 6.50 3,177,922 3,322,585
10-01-32 6.00 2,405,429 2,476,935
10-01-32 6.50 3,263,149 3,400,369
11-01-32 6.00 2,107,516 2,170,183
11-01-32 7.00 2,081,297 2,194,801
01-01-33 5.80 3,652,513 3,949,279
01-01-33 6.00 14,468,070 14,858,376
02-01-33 6.50 669,040 699,660
03-01-33 5.50 17,897,414 18,088,139
03-01-33 6.00 5,734,429 5,906,772
03-01-33 6.50 7,616,359 7,936,980
04-01-33 5.50 14,799,946 14,999,530
04-01-33 6.00 28,428,698 29,346,297
05-01-33 5.50 25,257,387 25,513,743
07-01-33 4.85 6,768,590(k) 6,777,863
07-01-33 5.00 13,652,630 13,490,983
07-01-33 5.50 10,062,123 10,159,683
08-01-33 5.50 1,070,442 1,080,821
12-01-33 4.97 9,065,993(k) 9,102,457
12-01-33 5.50 6,439,899 6,502,339
12-01-33 6.50 20,568,741 21,434,609
01-01-34 6.50 1,490,557 1,564,478
03-01-34 5.00 42,513,798 42,010,435
04-01-34 5.00 3,380,067 3,333,861
07-01-34 6.50 11,143,162 11,622,302
08-01-34 4.53 6,479,161(k) 6,483,437
09-01-34 4.84 1,935,552(k) 1,955,913
09-01-34 6.50 5,730,704 5,977,116
10-01-34 5.03 7,404,041(k) 7,535,152
12-01-34 4.40 2,693,328(k) 2,678,326
03-01-35 7.00 8,400,000(g) 8,856,750
Collateralized Mtge Obligation
12-25-26 8.00 4,935,671 5,245,243
06-25-44 7.50 5,071,806 5,453,399
Interest Only
12-25-12 13.29 4,081,979(l) 251,712
12-25-31 1.19 3,289,429(l) 610,695
First Horizon Alternative Mtge Securities
Series 2004-AA4 Cl A1
10-25-34 5.45 6,508,699 6,605,223
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
13 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
First Horizon Alternative Mtge Securities (cont.)
Series 2005-AA2 Cl A1
04-25-35 5.46% $6,725,000(k) $6,821,935
Govt Natl Mtge Assn
02-15-24 8.00 255,090 276,766
06-15-26 8.00 338,352 367,036
08-15-26 8.00 260,868 282,983
07-15-33 5.00 8,252,808 8,229,048
10-15-33 5.00 6,260,018 6,241,622
10-15-33 5.50 16,329,633 16,620,799
Collateralized Mtge Obligation
Interest Only
01-20-32 0.00 3,141,181(l) 377,813
08-20-32 0.00 12,847,466(l) 2,047,707
Harborview Mtge Loan Trust
Series 2004-3 Cl B1
05-19-34 4.39 4,392,119(k) 4,299,587
Master Adjustable Rate Mtge Trust
Series 2004-5 Cl B1
07-25-34 4.43 4,169,101(k) 4,102,145
Master Alternative Loans Trust
Series 2004-4 Cl 2A1
05-25-34 6.00 1,807,987 1,851,957
Series 2004-7 Cl 8A1
08-25-19 5.00 5,298,567 5,317,430
Series 2004-8 Cl 7A1
09-25-19 5.00 7,454,860 7,477,001
Series 2005-1 Cl 2A1
02-25-35 6.00 12,785,000 13,090,132
Structured Adjustable Rate Mtge Loan
Series 2004-3AC
03-25-34 4.94 5,575,412(k) 5,559,354
Series 2004-5 Cl B1
05-25-34 4.62 4,241,406(k) 4,146,016
Structured Asset Securities
Series 2003-33H Cl 1A1
10-25-33 5.50 17,529,112 17,562,055
Washington Mutual
Series 2004-CB2 Cl 6A
07-25-19 4.50 4,491,876 4,390,315
Series 2004-CB4 Cl 22A
12-25-19 6.00 5,778,694 5,967,946
Wells Fargo Mtge Backed Securities Trust
Series 2005-AR1 Cl 1A1
02-25-35 4.57 10,575,775(k) 10,511,072
Total 1,100,592,738
Aerospace & defense (0.1%)
L-3 Communications
06-15-12 7.63 2,000,000 2,180,000
07-15-13 6.13 190,000 196,175
Moog
Sr Sub Nts
01-15-15 6.25 165,000 169,125
Total 2,545,300
Automotive & related (0.2%)
Ford Motor
10-01-28 6.63 2,095,000 1,904,187
02-01-29 6.38 4,905,000 4,305,153
Total 6,209,340
Banks and savings & loans (2.5%)
Banknorth Group
Sr Nts
05-01-08 3.75 3,960,000 3,894,422
KFW Intl Finance
(U.S. Dollar)
10-17-05 2.50 18,400,000 (c) 18,302,406
Washington Mutual Bank FA
Sub Nts
08-15-14 5.65 10,770,000 11,261,543
Wells Fargo & Co
Sub Nts
02-09-15 4.75 8,300,000 8,159,929
Wells Fargo Bank NA
Sub Nts
02-01-11 6.45 20,382,000 22,380,436
Total 63,998,736
Beverages & tobacco (--%)
Cott Beverages
12-15-11 8.00 1,135,000 1,218,706
Building materials & construction (0.1%)
Louisiana-Pacific
Sr Nts
08-15-10 8.88 2,260,000 2,655,886
Norcraft Companies LP/Finance
Sr Sub Nts
11-01-11 9.00 570,000 612,750
Total 3,268,636
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
14 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Cable (1.5%)
Comcast
03-15-11 5.50% $17,560,000 $18,260,292
Comcast Cable Communications
11-15-08 6.20 12,555,000 13,315,720
CSC Holdings
Sr Nts
12-15-07 7.88 1,500,000 1,614,375
04-15-12 6.75 600,000(d) 649,500
DIRECTV Holdings LLC/Finance
Sr Nts
03-15-13 8.38 1,250,000 1,410,938
Echostar DBS
10-01-14 6.63 615,000(d) 631,913
Sr Nts
10-01-08 5.75 750,000 761,250
Kabel Deutschland
(U.S. Dollar)
07-01-14 10.63 480,000(c,d) 552,000
Videotron Ltee
(U.S. Dollar)
01-15-14 6.88 1,055,000(c) 1,107,750
Total 38,303,738
Cellular telecommunications (0.1%)
Nextel Communications
Sr Nts
10-31-13 6.88 1,875,000 2,025,000
Chemicals (0.2%)
Airgas
10-01-11 9.13 1,500,000 1,653,750
BCP Crystal US Holdings
Sr Sub Nts
06-15-14 9.63 430,000(d) 496,650
Compass Minerals Group
08-15-11 10.00 1,000,000 1,120,000
Georgia Gulf
Sr Nts
12-15-13 7.13 1,525,000 1,631,750
INVISTA
05-01-12 9.25 600,000(d) 673,500
MacDermid
07-15-11 9.13 575,000 638,250
Total 6,213,900
Energy (0.3%)
Chesapeake Energy
Sr Nts
06-15-14 7.50 375,000 420,000
08-15-14 7.00 1,045,000 1,144,275
01-15-16 6.88 165,000 177,375
Encore Acquisition
Sr Sub Nts
04-15-14 6.25 1,700,000 1,712,750
Grant Prideco Escrow
12-15-09 9.00 800,000 880,000
Newfield Exploration
Sr Nts
03-01-11 7.63 2,500,000 2,837,500
Sr Sub Nts
08-15-12 8.38 380,000 423,700
Peabody Energy
Series B
03-15-13 6.88 1,000,000 1,082,500
Total 8,678,100
Energy equipment & services (0.7%)
Halliburton
10-15-10 5.50 15,145,000 15,772,093
Key Energy Services
Series C
03-01-08 8.38 1,250,000 1,301,563
Pride Intl
Sr Nts
07-15-14 7.38 495,000 550,688
Total 17,624,344
Finance companies (2.1%)
Citigroup
Sub Nts
09-15-14 5.00 24,985,000 25,053,059
GMAC
09-15-11 6.88 29,788,000 29,536,977
Total 54,590,036
Financial services (1.8%)
ING Security Life Institutional Funding
01-15-10 4.25 14,565,000(d) 14,402,688
Pricoa Global Funding I
06-15-08 4.35 6,885,000(d) 6,909,511
01-15-10 4.20 26,410,000(d) 26,074,856
Total 47,387,055
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
15 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Food (0.1%)
Burns Philp Capital Property
(U.S. Dollar) Sr Sub Nts
02-15-11 10.75% $940,000(c) $1,057,500
Del Monte
Sr Sub Nts
02-15-15 6.75 385,000(d) 394,625
Total 1,452,125
Health care services (0.6%)
Cardinal Health
06-15-15 4.00 11,641,000 10,469,473
Community Health Systems
Sr Sub Nts
12-15-12 6.50 310,000(d) 311,938
HCA
Sr Nts
03-15-14 5.75 2,000,000 1,954,722
NeighborCare
Sr Sub Nts
11-15-13 6.88 1,160,000 1,223,800
Triad Hospitals
Sr Nts
05-15-12 7.00 1,000,000 1,058,750
Total 15,018,683
Home building (0.2%)
DR Horton
12-01-07 7.50 1,000,000 1,075,016
01-15-09 5.00 990,000 996,334
07-01-13 5.88 1,000,000 1,030,000
KB Home
01-15-15 5.88 700,000 707,565
Meritage Homes
Sr Nts
03-15-15 6.25 445,000(d,g) 446,669
Total 4,255,584
Industrial services (--%)
Allied Waste North America
04-15-11 6.38 855,000 831,488
Industrial transportation (--%)
Greater Beijing First Expressways
(U.S. Dollar) Sr Nts
06-15-07 9.50 3,640,000(b,c,n,o) --
Insurance (1.4%)
ASIF Global Financing XIX
01-17-13 4.90 37,015,000(d) 37,382,189
Leisure time & entertainment (0.1%)
Viacom
05-15-11 6.63 2,990,000 3,279,833
Lodging & gaming (0.2%)
Boyd Gaming
Sr Sub Nts
12-15-12 7.75 375,000 405,469
Hilton Hotels
12-01-12 7.63 1,250,000 1,445,674
MGM MIRAGE
10-01-09 6.00 670,000 686,750
Sr Nts
02-27-14 5.88 720,000 720,000
Mohegan Tribal Gaming Authority
Sr Nts
02-15-13 6.13 540,000(d) 550,800
Sr Sub Nts
04-01-12 8.00 750,000 814,688
Station Casinos
Sr Nts
04-01-12 6.00 1,000,000 1,036,250
Total 5,659,631
Machinery (0.1%)
Joy Global
Series B
03-15-12 8.75 1,500,000 1,680,000
Media (1.0%)
Corus Entertainment
(U.S. Dollar) Sr Sub Nts
03-01-12 8.75 395,000(c) 434,500
Dex Media West LLC/Finance
Sr Nts Series B
08-15-10 8.50 700,000 766,500
Emmis Operating
Sr Sub Nts
05-15-12 6.88 795,000 812,888
Lamar Media
01-01-13 7.25 425,000 454,750
News America
12-15-34 6.20 9,385,000(d) 9,679,745
Quebecor Media
(U.S. Dollar) Sr Nts
07-15-11 11.13 640,000(c) 723,200
Radio One
Series B
07-01-11 8.88 1,000,000 1,090,000
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
16 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Media (cont.)
Sr Sub Nts
02-15-13 6.38% $290,000(d) $295,800
Shaw Communications
(U.S. Dollar) Sr Nts
04-06-11 7.25 1,960,000(c) 2,136,400
Sun Media
(U.S. Dollar)
02-15-13 7.63 1,500,000(c) 1,620,000
Susquehanna Media
Sr Sub Nts
04-15-13 7.38 900,000 958,500
United Artists Theatre
07-01-15 9.30 8,121,862 8,284,299
Total 27,256,582
Metals (--%)
Russel Metals
(U.S. Dollar) Sr Nts
03-01-14 6.38 750,000(c) 757,500
Multi-industry (0.1%)
Tyco Intl Group
(U.S. Dollar)
02-15-11 6.75 2,415,000(c) 2,668,471
Paper & packaging (1.1%)
Ball
12-15-12 6.88 1,520,000 1,618,800
Boise Cascade LLC
Sr Sub Nts
10-15-14 7.13 930,000(d) 983,475
Cascades
(U.S. Dollar) Sr Nts
02-15-13 7.25 600,000(c) 639,000
Crown Paper
Sr Sub Nts
09-01-05 11.00 6,950,000(b,n,o) --
Domtar
(U.S. Dollar)
12-01-13 5.38 17,925,000(c) 17,359,968
Georgia-Pacific
02-01-10 8.88 850,000 990,250
Sr Nts
07-15-08 7.38 1,600,000 1,736,000
Graphic Packaging Intl
Sr Nts
08-15-11 8.50 430,000 467,625
Norampac
(U.S. Dollar) Sr Nts
06-01-13 6.75 1,260,000(c) 1,323,000
Owens-Illinois Glass Container
05-15-11 7.75 1,100,000 1,188,000
Silgan Holdings
Sr Sub Nts
11-15-13 6.75 1,225,000 1,267,875
Total 27,573,993
Retail -- general (0.2%)
Wal-Mart Stores
06-29-11 8.88 3,500,000 3,556,350
William Carter
Series B
08-15-11 10.88 405,000 451,575
Total 4,007,925
Telecom equipment & services (1.7%)
Qwest
03-15-12 9.13 880,000(d) 1,016,400
Sprint Capital
11-15-28 6.88 18,450,000 20,358,431
TELUS
(U.S. Dollar)
06-01-11 8.00 19,142,500(c) 22,357,808
Total 43,732,639
Textiles & apparel (0.3%)
Jones Apparel Group
11-15-14 5.13 2,880,000(d) 2,835,527
11-15-34 6.13 4,760,000(d) 4,736,952
Total 7,572,479
Utilities -- electric (1.5%)
Indianapolis Power & Light
1st Mtge
07-01-13 6.30 1,880,000(d) 2,013,367
IPALCO Enterprises
11-14-08 8.38 400,000 446,000
11-14-11 8.63 3,680,000 4,324,000
Metropolitan Edison
03-15-13 4.95 4,975,000 4,955,687
NorthWestern Energy
11-01-14 5.88 645,000(d) 652,809
Ohio Edison
Sr Nts
05-01-15 5.45 1,195,000 1,210,819
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
17 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Utilities -- electric (cont.)
Ohio Power
Sr Nts Series H
01-15-14 4.85% $7,395,000 $7,312,398
Potomac Edison
1st Mtge
11-15-14 5.35 3,195,000(d) 3,234,938
Progress Energy
1st Mtge
03-01-13 4.80 1,840,000 1,834,351
Texas Genco LLC/Financing
Sr Nts
12-15-14 6.88 360,000(d) 384,300
TXU
11-15-34 6.55 6,005,000(d) 6,125,749
Westar Energy
1st Mtge
07-01-14 6.00 6,500,000 6,974,812
Total 39,469,230
Utilities -- natural gas (0.3%)
ANR Pipeline
03-15-10 8.88 785,000 870,369
El Paso Natural Gas
Sr Nts Series A
08-01-10 7.63 680,000 737,800
Northwest Pipeline
03-01-10 8.13 2,135,000 2,345,831
Plains Exploration & Production
Sr Nts
06-15-14 7.13 790,000 872,950
Southern Natural Gas
03-15-10 8.88 875,000 969,063
Southern Star Central
08-01-10 8.50 550,000 606,375
Transcontinental Gas Pipe Line
Series B
08-15-11 7.00 2,250,000 2,486,250
Total 8,888,638
Utilities -- telephone (2.4%)
Telecom Italia Capital
(U.S. Dollar)
09-30-34 6.00 13,065,000(c,d) 13,160,126
Verizon Pennsylvania
Series A
11-15-11 5.65 47,200,000 49,206,472
Total 62,366,598
Total bonds
(Cost: $2,595,721,070) $2,593,162,788
Other (0.1%)
Issuer Shares Value(a)
Wayland Investment LLC 6,000,000(b,e,o) $2,461,860
Total other
(Cost: $6,671,880) $2,461,860
Short-term securities (4.1%)(j)
Issuer Effective Amount Value(a)
yield payable at
maturity
U.S. government agency (2.9%)
Federal Natl Mtge Assn
05-03-05 2.61% $50,000,000 $49,769,000
05-04-05 2.61 4,100,000 4,080,759
05-18-05 2.62 20,000,000 19,885,600
Total 73,735,359
Commercial paper (1.2%)
BNP Paribas North America
03-01-05 2.60 15,600,000 15,598,873
Windmill Funding
03-01-05 2.62 16,400,000 16,398,807
Total 31,997,680
Total short-term securities
(Cost: $105,735,528) $105,733,039
Total investments in securities
(Cost: $2,708,128,478)(r) $2,701,357,687
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
18 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing. For long-term debt securities, item identified is in
default as to payment of interest and/or principal.
(c) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in the currency indicated. At Feb. 28,
2005, the value of foreign securities represented 4.2% of net assets.
(d) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security
has been determined to be liquid under guidelines established by the
board. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At Feb. 28,
2005, the value of these securities amounted to $160,229,265 or 6.1% of
net assets.
(e) The share amount for Limited Liability Companies (LLC) or Limited
Partnerships (LP) represents capital contributions.
(f) Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real
property, and include single- and multi-class pass-through securities and
Collateralized Mortgage Obligations. These securities may be issued or
guaranteed by U.S. government agencies or instrumentalities, or by private
issuers, generally originators and investors in mortgage loans, including
savings associations, mortgage bankers, commercial banks, investment
bankers and special purpose entities. The maturity dates shown represent
the original maturity of the underlying obligation. Actual maturity may
vary based upon prepayment activity on these obligations. Unless otherwise
noted, the coupon rates presented are fixed rates.
(g) At Feb. 28, 2005, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$32,502,290.
(h) Comparable securities are held to satisfy future delivery requirements of
the following open forward sale commitments at Feb. 28, 2005:
Security Principal Settlement Proceeds Value
amount dates receivable
Federal Natl Mtge Assn
03-01-20 5.00% $ 6,150,000 03-17-05 $ 6,235,523 $ 6,190,356
03-01-20 5.50 7,000,000 03-17-05 7,208,906 7,168,434
03-01-35 5.00 31,550,000 03-14-05 31,510,563 31,086,594
03-01-35 5.50 5,275,000 03-14-05 5,372,258 5,317,859
03-01-35 6.50 570,000 03-14-05 595,071 593,513
(i) At Feb. 28, 2005, security was partially or fully on loan. See Note 5 to
the financial statements.
(j) Cash collateral received from security lending activity is invested in
short-term securities and represents 2.5% of net assets. See Note 5 to the
financial statements. 1.5% of the assets is the Fund's cash equivalent
position.
(k) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on Feb. 28, 2005.
(l) Interest only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of an
interest only is extremely sensitive to the rate of principal payments on
the underlying mortgage assets. A rapid (slow) rate of principal
repayments may have an adverse (positive) effect on yield to maturity. The
principal amount shown is the notional amount of the underlying mortgages.
Interest rate disclosed represents yield based upon the estimated timing
and amount of future cash flows at Feb. 28, 2005.
(m) The following abbreviations are used in the portfolio security description
to identify the insurer of the issue:
AMBAC -- American Municipal Bond Association Corporation
FSA -- Financial Security Assurance
MBIA -- MBIA Insurance Corporation
(n) Negligible market value.
- --------------------------------------------------------------------------------
19 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Notes to investments in securities (continued)
(o) Identifies issues considered to be illiquid as to their marketability (see
Note 1 to the financial statements). Information concerning such security
holdings at Feb. 28, 2005, is as follows:
Security Acquisition Cost
dates
Crown Paper
11.00% Sr Sub Nts 2005 02-10-00 thru 02-14-00 $4,216,724
Greater Beijing First Expressways
(U.S. Dollar) 9.50% Sr Nts 2007 09-16-98 --
Wayland Investment LLC 05-19-00 6,671,880
(p) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 6 to the financial statements):
Type of security Notional amount
Purchase contracts
U.S. Treasury Bond, June 2005, 20-year $ 69,200,000
Sale contracts
U.S. Treasury Note, March 2005, 5-year 48,900,000
U.S. Treasury Note, March 2005, 10-year 205,000,000
U.S. Treasury Note, June 2005, 10-year 86,600,000
(q) Interest rate varies either based on a predetermined schedule or to
reflect current market conditions; rate shown is the effective rate on
Feb. 28, 2005.
(r) At Feb. 28, 2005, the cost of securities for federal income tax purposes
was approximately $2,708,128,000 and the approximate aggregate gross
unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $ 22,564,000
Unrealized depreciation (29,334,000)
-----------
Net unrealized depreciation $ (6,770,000)
------------
How to find information about the Fund's portfolio holdings
(i) The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission (Commission) for the first and third
quarters of each fiscal year on Form N-Q;
(ii) The Fund's Forms N-Q are available on the Commission's website at
http://www.sec.gov;
(iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC (information on the operations of the
Public Reference Room may be obtained by calling 1-800-SEC-0330); and
(iv) The Fund's complete schedule of portfolio holdings, as disclosed in its
annual and semiannual shareholder reports and in its filings on Form N-Q,
can be found at www.americanexpress.com/funds.
- --------------------------------------------------------------------------------
20 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Financial Statements
Statement of assets and liabilities
AXP Diversified Bond Fund
Feb. 28, 2005 (Unaudited)
Assets
Investments in securities, at value (Note 1)*
(identified cost $2,708,128,478) $2,701,357,687
Cash in bank on demand deposit 2,367,868
Capital shares receivable 744,850
Dividends and accrued interest receivable 18,016,747
Receivable for investment securities sold 145,461,979
-----------
Total assets 2,867,949,131
-------------
Liabilities
Dividends payable to shareholders 960,550
Capital shares payable 831,929
Payable for investment securities purchased 142,705,651
Payable upon return of securities loaned (Note 5) 64,567,500
Accrued investment management services fee 107,311
Accrued distribution fee 86,670
Accrued service fee 1,622
Accrued transfer agency fee 34,824
Accrued administrative services fee 9,841
Other accrued expenses 259,605
Forward sale commitments, at value (proceeds receivable $50,922,321) (Note 1) 50,356,756
----------
Total liabilities 259,922,259
-----------
Net assets applicable to outstanding capital stock $2,608,026,872
==============
Represented by
Capital stock -- $.01 par value (Note 1) $ 5,345,916
Additional paid-in capital 2,713,831,178
Undistributed net investment income 4,765,249
Accumulated net realized gain (loss) (Note 8) (110,172,478)
Unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (Note 6) (5,742,993)
----------
Total -- representing net assets applicable to outstanding capital stock $2,608,026,872
==============
Net assets applicable to outstanding shares: Class A $1,814,805,422
Class B $ 576,995,837
Class C $ 19,409,834
Class I $ 9,938
Class Y $ 196,805,841
Net asset value per share of outstanding capital stock: Class A shares 372,031,693 $ 4.88
Class B shares 118,252,393 $ 4.88
Class C shares 3,973,014 $ 4.89
Class I shares 2,037 $ 4.88
Class Y shares 40,332,479 $ 4.88
---------- --------------
*Including securities on loan, at value (Note 5) $ 61,788,450
--------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
21 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Statement of operations
AXP Diversified Bond Fund
Six months ended Feb. 28, 2005 (Unaudited)
Investment income
Income:
Interest $ 61,923,344
Fee income from securities lending (Note 5) 253,096
-------
Total income 62,176,440
----------
Expenses (Note 2):
Investment management services fee 6,662,285
Distribution fee
Class A 2,323,199
Class B 2,998,367
Class C 100,457
Transfer agency fee 2,189,980
Incremental transfer agency fee
Class A 121,592
Class B 77,083
Class C 3,024
Service fee -- Class Y 99,355
Administrative services fees and expenses 645,553
Compensation of board members 7,742
Custodian fees 110,220
Printing and postage 245,500
Registration fees 46,540
Audit fees 21,500
Other 51,484
------
Total expenses 15,703,881
Expenses waived/reimbursed by AEFC (Note 2) (871,618)
--------
14,832,263
Earnings credits on cash balances (Note 2) (30,779)
-------
Total net expenses 14,801,484
----------
Investment income (loss) -- net 47,374,956
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 31,419,123
Foreign currency transactions (245,434)
Futures contracts 656,242
-------
Net realized gain (loss) on investments 31,829,931
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (27,504,279)
-----------
Net gain (loss) on investments and foreign currencies 4,325,652
---------
Net increase (decrease) in net assets resulting from operations $ 51,700,608
============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
22 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Statements of changes in net assets
AXP Diversified Bond Fund
Feb. 28, 2005 Aug. 31, 2004
Six months ended Year ended
(Unaudited)
Operations and distributions
Investment income (loss) -- net $ 47,374,956 $ 105,192,832
Net realized gain (loss) on investments 31,829,931 (4,621,473)
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (27,504,279) 68,359,517
----------- ----------
Net increase (decrease) in net assets resulting from operations 51,700,608 168,930,876
---------- -----------
Distributions to shareholders from:
Net investment income
Class A (35,546,126) (72,912,216)
Class B (9,189,291) (21,667,704)
Class C (308,119) (659,148)
Class I (206) (1,353)
Class Y (3,979,081) (8,189,423)
---------- ----------
Total distributions (49,022,823) (103,429,844)
----------- ------------
Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 90,958,982 251,088,529
Class B shares 37,513,195 89,582,880
Class C shares 2,022,057 5,454,766
Class I shares -- 821,608
Class Y shares 17,528,274 71,322,514
Reinvestment of distributions at net asset value
Class A shares 28,333,510 56,831,525
Class B shares 8,175,350 18,955,456
Class C shares 278,031 580,863
Class I shares -- 1,139
Class Y shares 3,011,926 6,500,832
Payments for redemptions
Class A shares (238,804,594) (699,205,028)
Class B shares (Note 2) (97,653,202) (397,699,256)
Class C shares (Note 2) (3,790,810) (12,180,164)
Class I shares -- (814,281)
Class Y shares (27,248,001) (147,874,937)
----------- ------------
Increase (decrease) in net assets from capital share transactions (179,675,282) (756,633,554)
------------ ------------
Total increase (decrease) in net assets (176,997,497) (691,132,522)
Net assets at beginning of period 2,785,024,369 3,476,156,891
------------- -------------
Net assets at end of period $2,608,026,872 $2,785,024,369
============== ==============
Undistributed net investment income $ 4,765,249 $ 6,413,116
-------------- --------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
23 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Notes to Financial Statements
AXP Diversified Bond Fund
(Unaudited as to Feb. 28, 2005)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Fixed Income Series, Inc. and is registered under
the Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. AXP Fixed Income Series, Inc. has 10 billion
authorized shares of capital stock that can be allocated among the separate
series as designated by the board. The Fund invests primarily in bonds and other
debt securities including securities issued by the U.S. government, corporate
bonds and mortgage- and asset-backed securities.
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.
The Fund offers an additional class of shares, Class I, exclusively to certain
institutional investors. Class I shares have no sales charge and are made
available through a separate prospectus supplement provided to investors
eligible to purchase the shares. At Feb. 28, 2005, American Express Financial
Corporation (AEFC) owned 100% of Class I shares.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, transfer agency fees 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.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. 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.
- --------------------------------------------------------------------------------
24 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Illiquid securities
At Feb. 28, 2005, investments in securities included issues that are illiquid
which the Fund currently limits to 10% of net assets, at market value, at the
time of purchase. The aggregate value of such securities at Feb. 28, 2005 was
$2,461,860 representing 0.09% of net assets. These securities are valued at fair
value according to methods selected in good faith by the board. According to
board guidelines, certain unregistered securities are determined to be liquid
and are not included within the 10% limitation specified above. Assets are
liquid if they can be sold or disposed of in the ordinary course of business
within seven days at approximately the value at which the asset is valued by the
Fund.
Securities purchased on a forward-commitment basis
Delivery and payment for securities that have been purchased by the Fund on a
forward-commitment basis, including when-issued securities and other
forward-commitments, can take place one month or more after the transaction
date. During this period, such securities are subject to market fluctuations,
and they may affect the Fund's net assets the same as owned securities. The Fund
designates cash or liquid securities at least equal to the amount of its
forward-commitments. At Feb. 28, 2005, the Fund has entered into outstanding
when-issued securities of $32,502,290.
The Fund also enters into transactions to sell purchase commitments to third
parties at current market values and concurrently acquires other purchase
commitments for similar securities at later dates. As an inducement for the Fund
to "roll over" its purchase commitments, the Fund receives negotiated amounts in
the form of reductions of the purchase price of the commitment.
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
options on debt securities or futures are exercised, the Fund will realize a
gain or loss. When other options are 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.
- --------------------------------------------------------------------------------
25 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
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 dividends, interest income and foreign
withholding taxes.
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.
Forward sale commitments
The Fund may enter into forward sale commitments to hedge its portfolio
positions or to sell mortgage-backed securities it owns under delayed delivery
arrangements. Proceeds of forward sale commitments are not received until the
contractual settlement date. During the time a forward sale commitment is
outstanding, equivalent deliverable securities, or an offsetting forward
purchase commitment deliverable on or before the sale commitment date, are used
to satisfy the commitment.
- --------------------------------------------------------------------------------
26 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Unsettled forward sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Valuation of securities" above. The forward sale commitment is
"marked-to-market" daily and the change in market value is recorded by the Fund
as an unrealized gain or loss. If the forward sale commitment is closed through
the acquisition of an offsetting purchase commitment, the Fund realizes a gain
or loss. If the Fund delivers securities under the commitment, the Fund realizes
a gain or a loss from the sale of the securities based upon the market price
established at the date the commitment was entered into. Forward sale
commitments outstanding at period end are listed in the "Notes to investments in
securities."
Guarantees and indemnifications
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, certain of the Fund's contracts with its
service providers contain general indemnification clauses. The Fund's maximum
exposure under these arrangements is unknown since the amount of any future
claims that may be made against the Fund cannot be determined and the Fund has
no historical basis for predicting the likelihood of any such claims.
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 the 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 daily and payable monthly, 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 or upon receipt of
ex-dividend notification in the case of certain foreign securities. Interest
income, including amortization of premium, market discount and original issue
discount using the effective interest method, is accrued daily.
- --------------------------------------------------------------------------------
27 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
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 that declines from 0.52%
to 0.395% annually as the Fund's assets increase.
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 that declines from 0.05% to 0.025% annually as the Fund's
assets increase. A minor portion of additional administrative service expenses
paid by the Fund are consultants' fees and fund office expenses. Under this
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 $20.50
o Class B $21.50
o Class C $21.00
o Class Y $18.50
The incremental transfer agency fee is the amount charged to the specific
classes for the additional expense above the fee for Class Y.
Class I pays a transfer agency fee at an annual rate per shareholder account of
$1. This amount is included in the transfer agency fee on the statement of
operations.
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 pursuant to Rule 12b-1, 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.
- --------------------------------------------------------------------------------
28 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Sales charges received by the Distributor for distributing Fund shares were
$1,180,925 for Class A, $366,585 for Class B and $2,819 for Class C for the six
months ended Feb. 28, 2005.
For the six months ended Feb. 28, 2005, AEFC and its affiliates waived certain
fees and expenses to 0.95% for Class A, 1.70% for Class B, 1.69% for Class C and
0.77% for Class Y. Of these waived fees and expenses, the transfer agency fees
waived for Class A, Class B, Class C and Class Y were $575,401, $219,293, $7,818
and $69,106, respectively. In addition, AEFC and its affiliates have agreed to
waive certain fees and expenses until Aug. 31, 2005. Under this agreement, net
expenses will not exceed 0.945% for Class A, 1.695% for Class B, 1.695% for
Class C, 0.735% for Class I and 0.775% for Class Y of the Fund's average daily
net assets.
During the six months ended Feb. 28, 2005, the Fund's custodian and transfer
agency fees were reduced by $30,779 as a result of earnings credits from
overnight cash balances.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $3,935,781,294 and $4,013,491,783, respectively, for the
six months ended Feb. 28, 2005. Realized gains and losses are determined on an
identified cost basis.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
Six months ended Feb. 28, 2005
Class A Class B Class C Class I Class Y
Sold 18,584,853 7,663,106 412,546 -- 3,580,280
Issued for reinvested distributions 5,788,398 1,669,030 56,688 -- 615,014
Redeemed (48,801,891) (19,948,348) (773,395) -- (5,575,014)
------------ ----------- ---------- -------- -----------
Net increase (decrease) (24,428,640) (10,616,212) (304,161) -- (1,379,720)
------------ ----------- ---------- -------- -----------
Year ended Aug. 31, 2004
Class A Class B Class C Class I* Class Y
Sold 51,888,177 18,469,701 1,122,760 166,209 14,733,853
Issued for reinvested distributions 11,728,875 3,911,848 119,675 231 1,341,478
Redeemed (144,542,248) (82,296,004) (2,511,111) (164,403) (30,501,584)
------------ ----------- ---------- -------- -----------
Net increase (decrease) (80,925,196) (59,914,455) (1,268,676) 2,037 (14,426,253)
------------ ----------- ---------- -------- -----------
* Inception date was March 4, 2004.
5. LENDING OF PORTFOLIO SECURITIES
At Feb. 28, 2005, securities valued at $61,788,450 were on loan to brokers. For
collateral, the Fund received $64,567,500 in cash. Cash collateral received is
invested in short-term securities, which are included in the short-term section
of the "Investments in securities." Income from securities lending amounted to
$253,096 for the six months ended Feb. 28, 2005. 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.
- --------------------------------------------------------------------------------
29 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
6. INTEREST RATE FUTURES CONTRACTS
At Feb. 28, 2005, investments in securities included securities valued at
$3,817,572 that were pledged as collateral to cover initial margin deposits on
692 open purchase contracts and 3,405 open sale contracts. The notional market
value of the open purchase contracts at Feb. 28, 2005 was $77,741,875 with a net
unrealized loss of $792,080. The notional market value of the open sale
contracts at Feb. 28, 2005 was $375,318,625 with a net unrealized gain of
$1,248,291. See "Summary of significant accounting policies" and "Notes to
investments in securities."
7. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
The Bank of New York, whereby the Fund may borrow for the temporary funding of
shareholder redemptions or for other temporary or emergency purposes. The
agreement went into effect Sept. 21, 2004. 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 higher of the Federal Funds Effective
Rate plus 0.50% or 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. Prior to this agreement, the Fund had a revolving credit agreement that
permitted borrowings up to $500 million with Deutsche Bank. The Fund had no
borrowings outstanding during the six months ended Feb. 28, 2005.
8. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund had a capital loss carry-over of
$134,156,528 at Aug. 31, 2004, that if not offset by capital gains will expire
as follows:
2009 2010 2013
$100,641,177 $26,118,914 $7,396,437
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.
- --------------------------------------------------------------------------------
30 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
9. 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 Aug. 31, 2005(g) 2004 2003 2002 2001
Net asset value, beginning of period $4.87 $4.78 $4.75 $4.86 $4.70
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .09 .18 .20 .25 .31
Net gains (losses) (both realized and unrealized) .01 .08 .03 (.10) .17
----- ----- ----- ----- -----
Total from investment operations .10 .26 .23 .15 .48
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.09) (.17) (.20) (.25) (.32)
Tax return of capital -- -- -- (.01) --
----- ----- ----- ----- -----
Total distributions (.09) (.17) (.20) (.26) (.32)
----- ----- ----- ----- -----
Net asset value, end of period $4.88 $4.87 $4.78 $4.75 $4.86
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $1,815 $1,933 $2,280 $2,438 $2,390
Ratio of expenses to average daily net assets(b) .95%(c),(d) .98%(d) .97% .95% .94%
Ratio of net investment income (loss) to average daily net assets 3.69%(c) 3.55% 4.16% 5.17% 6.51%
Portfolio turnover rate (excluding short-term securities) 152% 279% 256% 169% 115%
Total return(e) 2.12%(f) 5.54% 4.91% 3.13% 10.48%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Adjusted to an annual basis.
(d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratios of expenses for Class A would have been 1.01% for the six
months ended Feb. 28, 2005 and 1.00% for the year ended Aug. 31, 2004.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Feb. 28, 2005 (Unaudited).
- --------------------------------------------------------------------------------
31 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Class B
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2005(g) 2004 2003 2002 2001
Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.70
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .07 .14 .16 .21 .27
Net gains (losses) (both realized and unrealized) .01 .09 .03 (.10) .17
----- ----- ----- ----- -----
Total from investment operations .08 .23 .19 .11 .44
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.08) (.13) (.16) (.21) (.28)
Tax return of capital -- -- -- (.01) --
----- ----- ----- ----- -----
Total distributions (.08) (.13) (.16) (.22) (.28)
----- ----- ----- ----- -----
Net asset value, end of period $4.88 $4.88 $4.78 $4.75 $4.86
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $577 $628 $902 $1,047 $954
Ratio of expenses to average daily net assets(b) 1.70%(c),(d) 1.73%(d) 1.73% 1.71% 1.70%
Ratio of net investment income (loss) to average daily net assets 2.94%(c) 2.78% 3.40% 4.40% 5.74%
Portfolio turnover rate (excluding short-term securities) 152% 279% 256% 169% 115%
Total return(e) 1.53%(f) 4.95% 4.12% 2.35% 9.65%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Adjusted to an annual basis.
(d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratios of expenses for Class B would have been 1.77% for the six
months ended Feb. 28, 2005 and 1.75% for the year ended Aug. 31, 2004.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Feb. 28, 2005 (Unaudited).
- --------------------------------------------------------------------------------
32 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Class C
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2005(g) 2004 2003 2002 2001
Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.71
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .07 .14 .16 .21 .27
Net gains (losses) (both realized and unrealized) .02 .09 .03 (.10) .16
----- ----- ----- ----- -----
Total from investment operations .09 .23 .19 .11 .43
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.08) (.13) (.16) (.21) (.28)
Tax return of capital -- -- -- (.01) --
----- ----- ----- ----- -----
Total distributions (.08) (.13) (.16) (.22) (.28)
----- ----- ----- ----- -----
Net asset value, end of period $4.89 $4.88 $4.78 $4.75 $4.86
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $19 $21 $27 $24 $10
Ratio of expenses to average daily net assets(b) 1.69%(c),(d) 1.73%(d) 1.74% 1.72% 1.70%
Ratio of net investment income (loss) to average daily net assets 2.95%(c) 2.79% 3.34% 4.33% 5.62%
Portfolio turnover rate (excluding short-term securities) 152% 279% 256% 169% 115%
Total return(e) 1.74%(f) 4.95% 4.11% 2.35% 9.43%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Adjusted to an annual basis.
(d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratios of expenses for Class C would have been 1.77% for the six
months ended Feb. 28, 2005 and 1.75% for the year ended Aug. 31, 2004.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Feb. 28, 2005 (Unaudited).
- --------------------------------------------------------------------------------
33 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Class I
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2005(g) 2004(b)
Net asset value, beginning of period $4.88 $4.91
----- -----
Income from investment operations:
Net investment income (loss) .09 .11
Net gains (losses) (both realized and unrealized) .01 (.04)
----- -----
Total from investment operations .10 .07
----- -----
Less distributions:
Dividends from net investment income (.10) (.10)
----- -----
Net asset value, end of period $4.88 $4.88
----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $-- $--
Ratio of expenses to average daily net assets(c) .60%(d) .59%(d)
Ratio of net investment income (loss) to average daily net assets 4.03%(d) 3.13%(d)
Portfolio turnover rate (excluding short-term securities) 152% 279%
Total return (e) 2.09%(f) 1.43%(f)
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Inception date was March 4, 2004.
(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 Feb. 28, 2005 (Unaudited).
- --------------------------------------------------------------------------------
34 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Class Y
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2005(g) 2004 2003 2002 2001
Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.70
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .09 .18 .21 .25 .32
Net gains (losses) (both realized and unrealized) .01 .10 .03 (.10) .17
----- ----- ----- ----- -----
Total from investment operations .10 .28 .24 .15 .49
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.10) (.18) (.21) (.25) (.33)
Tax return of capital -- -- -- (.01) --
----- ----- ----- ----- -----
Total distributions (.10) (.18) (.21) (.26) (.33)
----- ----- ----- ----- -----
Net asset value, end of period $4.88 $4.88 $4.78 $4.75 $4.86
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $197 $203 $268 $297 $533
Ratio of expenses to average daily net assets(b) .77%(c),(d) .81%(d) .81% .78% .78%
Ratio of net investment income (loss) to average daily net assets 3.87%(c) 3.70% 4.34% 5.30% 6.66%
Portfolio turnover rate (excluding short-term securities) 152% 279% 256% 169% 115%
Total return(e) 1.99%(f) 5.92% 5.08% 3.29% 10.65%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Adjusted to an annual basis.
(d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratios of expenses for Class Y would have been 0.84% for the six
months ended Feb. 28, 2005 and 0.83% for the year ended Aug. 31, 2004.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Feb. 28, 2005 (Unaudited).
- --------------------------------------------------------------------------------
35 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Fund Expenses Example
(UNAUDITED)
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments; and (2) ongoing
costs, including management fees; distribution and service (12b-1) fees; and
other Fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the six months ended Feb. 28, 2005.
Actual Expenses
The first line of the table provides information about actual account values and
actual expenses. You may use the information in this line, together with the
amount you invested, to estimate the expenses that you paid over the period.
Simply divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number in the first
line under the heading titled "Expenses paid during the period" to estimate the
expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table provides information about hypothetical account
values and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads). Therefore, the second line of the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
- --------------------------------------------------------------------------------
36 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Beginning Ending Expenses
account value account value paid during Annualized
Sept. 1, 2004 Feb. 28, 2005 the period(a) expense ratio
Class A
Actual(b) $1,000 $1,021.20 $4.76 .95%
Hypothetical (5% return before expenses) $1,000 $1,020.08 $4.76 .95%
Class B
Actual(b) $1,000 $1,015.30 $8.49 1.70%
Hypothetical (5% return before expenses) $1,000 $1,016.36 $8.50 1.70%
Class C
Actual(b) $1,000 $1,017.40 $8.45 1.69%
Hypothetical (5% return before expenses) $1,000 $1,016.41 $8.45 1.69%
Class I
Actual(b) $1,000 $1,020.90 $3.01 .60%
Hypothetical (5% return before expenses) $1,000 $1,021.82 $3.01 .60%
Class Y
Actual(b) $1,000 $1,019.90 $3.86 .77%
Hypothetical (5% return before expenses) $1,000 $1,020.98 $3.86 .77%
(a) Expenses are equal to the Fund's annualized expense ratio as indicated
above, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
(b) Based on the actual return for the six months ended Feb. 28, 2005: +2.12%
for Class A, +1.53% for Class B, +1.74% for Class C, +2.09% for Class I and
+1.99% for Class Y.
- --------------------------------------------------------------------------------
37 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
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 website americanexpress.com/funds; or by
searching the website 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, information
regarding how the Fund voted proxies relating to portfolio securities during the
most recent 12-month period ended June 30 is available at http://www.sec.gov.
- --------------------------------------------------------------------------------
38 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
(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. The complete schedule of investments is included in Item 1 of this
Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchase of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. Not applicable.
Item 10. Submission of matters to a vote of security holders. Not applicable.
Item 11. Controls and Procedures.
(a) Based upon their evaluation of the registrant's disclosure
controls and procedures as conducted within 90 days of the filing
date of this Form N-CSR, the registrant's Principal Financial
Officer and Principal Executive Officer have concluded that those
disclosure controls and procedures provide reasonable assurance
that the material information required to be disclosed by the
registrant on this report is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal controls over
financial reporting 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 12. 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 Fixed Income Series, Inc.
By /s/ Paula R. Meyer
------------------
Paula R. Meyer
President and Principal Executive Officer
Date May 3, 2005
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 May 3, 2005
By /s/ Jeffrey P. Fox
------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date May 3, 2005