AXP(R)
Selective
Fund
Annual Report
for the Period Ended
May 31, 2005
AXP Selective Fund seeks to provide shareholders with current income and
preservation of capital.
(logo) (logo)
American AMERICAN
Express(R) EXPRESS
Funds (R)
Table of Contents
Fund Snapshot 3
Performance Summary 4
Questions & Answers with Portfolio Management 5
The Fund's Long-term Performance 8
Investments in Securities 10
Financial Statements (Portfolio) 18
Notes to Financial Statements (Portfolio) 21
Report of Independent Registered
Public Accounting Firm (Portfolio) 26
Financial Statements (Fund) 27
Notes to Financial Statements (Fund) 30
Report of Independent Registered
Public Accounting Firm (Fund) 40
Federal Income Tax Information 41
Fund Expenses Example 44
Board Members and Officers 46
Approval of Investment Management Services Agreement 49
Proxy Voting 50
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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 SELECTIVE FUND -- 2005 ANNUAL REPORT
Fund Snapshot AT MAY 31, 2005
PORTFOLIO MANAGERS
Portfolio managers Since Years in industry
Jamie Jackson, CFA 6/03 17
Scott Kirby 6/03 24
Tom Murphy, CFA 2/03 19
FUND OBJECTIVE
For investors seeking current income and preservation of capital.
Inception dates by class
A: 4/6/45 B: 3/20/95 C: 6/26/00 I: 7/15/04 Y: 3/20/95
Ticker symbols by class
A: INSEX B: ISEBX C: ASLCX I: ASTIX Y: IDEYX
Total net assets $913.9 million
Number of holdings 261
Weighted average life(1) 6.1 years
Effective duration(2) 3.7 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
MEDIUM QUALITY
LOW
SECTOR COMPOSITION
Percentage of portfolio assets
[PIE CHART]
Mortgage-backed securities 35.4%
U.S. government obligations & agencies 26.2%
Corporate bonds* 17.2%
CMBS/ABS** 13.7%
Short-term securities*** 5.5%
Foreign government bonds 2.0%
* Includes 7.6% Financials, 1.9% Telecommunications services, 1.7%
Industrials, 1.7% Information technology, 1.1% Consumer discretionary, 0.9%
Energy, 0.9% Utilities, 0.5% Consumer staples, 0.5% Health care and 0.4%
Materials.
** Commercial mortgage-backed/Asset-backed securities
*** Of the 5.5%, 2.5% is due to security lending activity and 3.0% is the
Portfolio's cash equivalent position.
CREDIT QUALITY SUMMARY
Percentage of bond portfolio assets
AAA bonds 80.6%
AA bonds 5.9%
A bonds 3.9%
BBB bonds 9.6%
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.
Fund holdings are subject to change.
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3 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Performance Summary
[BAR CHART]
PERFORMANCE COMPARISON
For the year ended May 31, 2005
+6.06% +6.82% +7.26%
+6.06% = AXP Selective Fund Class A (excluding sales charge)
+6.82% = Lehman Brothers Aggregate Bond Index (unmanaged)
+7.26% = Lipper Corporate Debt - A rated Funds Index
(see "The Fund`s Long-term Performance" for Index descriptions)
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.
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.
AVERAGE ANNUAL TOTAL RETURNS
Class A Class B Class C Class I Class Y
(Inception dates) (4/6/45) (3/20/95) (6/26/00) (7/15/04) (3/20/95)
After After
NAV(1) POP(2) NAV(1) CDSC(3) NAV(1) CDSC(4) NAV(5) NAV(6)
at May 31, 2005
1 year +6.06% +1.02% +5.26% +0.26% +5.26% +4.26% N/A +6.24%
3 years +3.59% +1.92% +2.81% +1.54% +2.81% +2.81% N/A +3.72%
5 years +5.38% +4.36% +4.59% +4.26% N/A N/A N/A +5.53%
10 years +5.37% +4.86% +4.58% +4.58% N/A N/A N/A +5.51%
Since inception +6.71% +6.62% +5.17% +5.17% +4.38% +4.38% +5.25%* +6.11%
at June 30, 2005
1 year +6.01% +0.98% +5.22% +0.22% +5.22% +4.22% N/A +6.32%
3 years +4.17% +2.49% +3.38% +2.12% +3.38% +3.38% N/A +4.33%
5 years +5.03% +4.01% +4.24% +3.90% +4.24% +4.24% N/A +5.20%
10 years +5.34% +4.83% +4.54% +4.54% N/A N/A N/A +5.49%
Since inception +6.71% +6.62% +5.16% +5.16% +4.38% +4.38% +5.68%* +6.11%
(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.
* Not annualized.
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4 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Questions & Answers
WITH PORTFOLIO MANAGEMENT
Below the Fund's portfolio management team discusses the Fund's results and
positioning for the period.
Q: How did AXP Selective Fund perform for the 12-month period ended May 31,
2005?
A: AXP Selective Fund's Class A shares (excluding sales charge) gained 6.06%
for the 12 months ended May 31, 2005. The Lehman Brothers Aggregate Bond
Index (Lehman Index) rose 6.82%, while the Lipper Corporate Debt - A rated
Funds Index, representing the Fund's peer group, advanced 7.26%.
Q: What factors most significantly affected performance during the annual
period?
A: Several factors contributed positively to the Fund's performance. As the
Federal Reserve Board (the Fed) raised interest rates eight times during the
annual period, bringing the targeted federal funds rate to 3%, short-term
Treasury rates rose dramatically. However, longer-term interest rates fell
sharply, as global growth moderated and inflation pressures appeared to
remain contained. As a result, the yield spread between two-year and 30-year
maturity Treasuries narrowed significantly causing a flattening of the yield
curve. We had prudently positioned the Fund with a modest exposure to
shorter maturity bonds in favor of longer maturity securities, which
outperformed.
The Fund's sector allocation also helped relative returns for the annual
period. Specifically, the Fund's positioning in mortgages, commercial
mortgage-backed securities (CMBS) and asset-backed securities benefited
performance. These high-quality spread sectors fared well during the fiscal
year, as investors sought incremental yield from these securities. Within
the mortgage sector, the Fund's relative results were also boosted by strong
issue selection and a better-than-Lehman Index yield profile. While
investment grade credit was the laggard of the spread sectors due mainly to
a series of high-profile earnings and cash flow warnings by both General
Motors and Ford, the Fund benefited from our tactical allocation shifts and
issue selection within investment grade credit over the fiscal year. In
particular, key holdings in cable, telecommunications and healthcare issues
outperformed the Lehman Index.
The Fund's performance was also modestly helped during the fiscal year by
its small global bond position, which included holdings denominated in
euros. These global bonds advanced due to the significant strengthening of
the euro vs. the U.S. dollar in late 2004, even though the euro fell back to
lower levels toward
SEC YIELDS
At May 31, 2005 by class
A: 3.43% B: 2.85% C: 2.85% I: 3.95% Y: 3.77%
At June 30, 2005 by class
A: 3.48% B: 2.91% C: 2.91% I: 4.00% Y: 3.83%
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 4 for additional
performance information.
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5 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Questions & Answers
[BEGIN CALLOUT QUOTE]> We had prudently positioned the Fund with a modest
exposure to shorter maturity bonds in favor of longer maturity securities,
which outperformed. [END CALLOUT QUOTE]
the end of the period. A weaker dollar increases the value of the Fund's
foreign currency denominated securities when expressed in U.S. dollar
terms.
Partially offsetting these positives was the Fund's focus within the
mortgage sector on higher coupon bonds. While these bonds offered both
attractive yields and potential protection from higher rates, lower coupon
bonds outperformed for the 12 months. Also detracting from the Fund's
relative results was its moderate position within agencies, which performed
well over the period. Furthermore, the Fund's investment strategy precludes
it from owning high yield corporate or emerging market bonds. These two
sectors, held by many funds in our peer group, significantly outpaced the
Lehman Index for the annual period. Overall, the Fund's conservative risk
profile hurt relative returns at a time when shorter-term securities
underperformed and long-term bonds rallied. We believed rates would move
more aggressively than they did and sought to reduce the Fund's exposure to
volatility when possible.
The Fund's duration positioning had a rather neutral effect on its relative
performance, as the yield on five-year Treasuries, a good proxy for the
duration of the Lehman Index, was essentially unchanged from the beginning
to end of the fiscal year.
Q: What changes did you make to the Fund and how is it currently positioned?
A: As the yield curve flattened dramatically, we removed some of the Fund's
yield curve flattening bias and reduced the portfolio's sensitivity to
changes in interest rates. While we kept duration shorter than the Lehman
Index throughout the annual period, we made minor adjustments to portfolio
duration and yield curve positioning as market conditions changed relative
to our view on interest rates.
Within the spread sectors, we maintained the Fund's significant exposure to
CMBS and asset-backed securities throughout the fiscal year, as we believe
these sectors offer attractive yield as well as the kind of defensive
characteristics we want in the current market environment. However, in
mortgages and investment grade credit, we tactically shifted Fund
allocations as our opinion of sector relative value evolved. We also
increased the Fund's cash position, patiently seeking opportunities to
invest in the market at higher yield levels.
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6 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Questions & Answers
[BEGIN CALLOUT QUOTE]> We will continue to monitor inflation numbers, as they
remain the key indicator for the economy in the coming months. [END CALLOUT
QUOTE]
Throughout the period, we constantly re-evaluated all of the Fund's
positions as we sought to have the best risk/reward opportunities in the
Fund across sectors, with an eye toward holding greater positions in
securities that may offer the highest likelihood of outperforming the Lehman
Index. Overall, the opportunistic changes we made in response to valuations
or market developments resulted in an annual portfolio turnover rate of
297%. At the end of the annual period, the Fund had a modest exposure to
investment grade credit and mortgage securities in favor of CMBS and
asset-backed securities and a small position in global bonds.
Q: How do you intend to manage the Fund in the coming months?
A: We intend to position the Fund for ongoing U.S. economic recovery and still
higher interest rates, as these themes are likely to continue to weigh on
the fixed income markets through the summer. There may be cause for the Fed
to deviate from its measured pace and increase interest rates more
vigorously than the market currently anticipates. Indeed, we will continue
to monitor inflation numbers, as they remain the key indicator for the
economy in the coming months. In addition, we anticipate that the yield
curve may flatten a bit more in the near term but that after an extended
period of yield curve flattening, the difference between short- and
long-term maturities may stabilize somewhat in the months ahead with more
parallel shifts across the yield curve.
Based on this view, we intend to maintain the Fund's duration shorter than
that of the Lehman Index for the near term. In the spread sectors, we intend
to maintain the Fund's modest exposure to investment grade credit and to
maintain a defensive position in mortgages by emphasizing premium coupons,
15-year mortgages and attractive structural attributes. We further intend to
maintain our emphasis on defensive investments such as AAA-rated CMBS and
asset-backed securities as high-quality substitutes for corporate bonds. As
always, we maintain a disciplined focus on individual security selection.
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7 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
The Fund's Long-term Performance
The chart on the facing page illustrates the total value of an assumed $10,000
investment in AXP Selective Fund Class A shares (from 6/1/95 to 5/31/05) as
compared to the performance of two widely cited performance indices, the Lehman
Brothers Aggregate Bond Index and the Lipper Corporate Debt - A rated Funds
Index. In comparing the Fund's Class A shares to these indices, you should take
into account the fact that the Fund's performance reflects the maximum sales
charge of 4.75%, while such charges are not reflected in the performance of the
indices. Returns for the Fund include the reinvestment of any distribution paid
during each period.
The performance information shown represents past performance and is not a
guarantee of future results. The value of your investment and returns will
fluctuate so that your shares, when redeemed, may be worth more or less than
their original cost. Returns do not reflect taxes payable on distributions and
redemptions. 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. Also see "Past Performance" in the Fund's current
prospectus. You should consider the investment objectives, risks, and charges
and expenses of the Fund carefully before investing.
DISTRIBUTION SUMMARY
The table below details the Fund's income and capital gain distributions for the
fiscal years shown. More information on the other classes can be found in the
Financial Highlights section of this report's Notes to Financial Statements.
Class A
Short-term Long-term
Fiscal year ended Income capital gains capital gains Total
May 31, 2005 $0.32 $ -- $ -- $0.32
May 31, 2004 0.28 -- -- 0.28
May 31, 2003 0.33 0.01 0.03 0.37
May 31, 2002 0.40 -- 0.02 0.42
May 31, 2001 0.52 -- -- 0.52
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8 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
[LINE CHART]
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN AXP SELECTIVE FUND
AXP Selective Fund Class A
(includes sales charge) $ 9,525 $ 9,936 $10,738 $11,828 $12,265 $12,367 $13,791 $14,460 $15,335 $15,155 $16,074
Lehman Brothers Aggregate
Bond Index(1) $10,000 $10,438 $11,306 $12,540 $13,085 $13,362 $15,115 $16,339 $18,231 $18,151 $19,389
Lipper Corporate Debt - A
rated Funds Index(2)
$10,000 $10,385 $11,227 $12,490 $12,815 $12,877 $14,521 $15,521 $17,264 $17,209 $18,459
`95 `96 `97 `98 `99 `00 `01 `02 `03 `04 `05
COMPARATIVE RESULTS
Results at May 31, 2005 Since
1 year 3 years 5 years 10 years inception(3)
AXP Selective Fund (includes sales charge)
Class A Cumulative value of $10,000 $10,102 $10,587 $12,379 $16,074 $472,624
Average annual total return +1.02% +1.92% +4.36% +4.86% +6.62%
Lehman Brothers Aggregate Bond Index(1)
Cumulative value of $10,000 $10,682 $11,866 $14,511 $19,389 N/A
Average annual total return +6.82% +5.87% +7.73% +6.85% N/A
Lipper Corporate Debt - A rated Funds Index(2)
Cumulative value of $10,000 $10,726 $11,893 $14,336 $18,459 N/A
Average annual total return +7.26% +5.95% +7.47% +6.32% N/A
Results for other share classes can be found on page 4.
(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 Corporate Debt - A rated Funds Index includes the 30 largest
corporate debt A rated funds tracked by Lipper Inc. The index's returns
include net reinvested dividends.
(3) Fund data is from April 6, 1945. The Fund began operating before the
inception of the Lehman Brothers Aggregate Bond Index and Lipper peer
group.
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9 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Investments in Securities
Quality Income Portfolio
May 31, 2005
(Percentages represent value of investments compared to net assets)
Bonds (100.4%)
Issuer Coupon Principal Value(a)
rate amount
Foreign government (2.1%)
Bundesrepublik Deutschland
(European Monetary Unit)
01-04-07 6.00% 4,673,000(c) $6,092,942
Pemex Project Funding Master Trust
(U.S. Dollar)
12-15-14 7.38 3,857,000(c) 4,321,769
United Kingdom Treasury
(British Pound)
12-07-06 7.50 3,223,000(c) 6,131,094
United Mexican States
(U.S. Dollar)
09-27-34 6.75 2,485,000(c) 2,625,403
Total 19,171,208
U.S. government obligations & agencies (27.8%)
Federal Home Loan Bank
05-22-06 2.88 14,730,000 14,620,438
08-11-06 3.25 7,050,000 7,013,199
04-18-08 4.13 2,585,000 2,603,144
06-14-13 3.88 10,500,000 10,299,933
Federal Home Loan Mtge Corp
09-15-06 3.63 7,265,000 7,257,938
06-15-08 3.88 18,350,000 18,367,800
03-18-09 3.76 2,810,000 2,789,962
07-15-09 4.25 10,000,000 10,112,073
01-15-12 5.75 14,425,000 15,750,831
Federal Natl Mtge Assn
05-15-11 6.00 3,520,000 3,859,184
Overseas Private Investment
U.S. Govt Guaranty Series 1996A
09-15-08 6.99 3,888,889 4,068,944
U.S. Treasury
12-31-05 1.88 3,000,000(l) 2,975,976
08-15-07 2.75 9,000,000 8,837,226
02-15-08 3.38 11,740,000 11,659,745
04-15-10 4.00 13,910,000(m) 14,053,440
05-15-10 3.88 5,425,000(m) 5,454,669
02-15-15 4.00 11,065,000(m) 11,039,064
05-15-15 4.13 12,975,000 13,100,702
08-15-23 6.25 19,435,000 23,944,522
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
U.S. government obligations & agencies (cont.)
U.S. Treasury (cont.)
02-15-26 6.00% $52,654,000(l) $63,964,342
02-15-31 5.38 2,080,000 2,408,900
Total 254,182,032
Commercial mortgage-backed(f)/
Asset-backed securities (14.6%)
AAA Trust
Series 2005-2 Cl A1
11-26-35 3.19 7,041,361(d,i) 7,041,360
Aesop Funding II LLC
Series 2004-2A Cl A1 (FGIC)
04-20-08 2.76 825,000(d,e) 808,603
AmeriCredit Automobile Receivables Trust
Series 2004-CA Cl A3 (AMBAC)
03-06-09 3.00 2,000,000(e) 1,982,188
Series 2004-DF Cl A3 (FSA)
07-06-09 2.98 1,500,000(e) 1,477,970
Series 2005-BM Cl A3 (MBIA)
02-06-10 4.05 3,000,000(b,e) 2,992,968
ARG Funding
Series 2005-1A Cl A3 (MBIA)
04-20-10 4.29 2,250,000(d,e) 2,242,002
Banc of America Commercial Mtge
Series 2004-5 Cl A4
11-10-41 4.94 1,300,000 1,331,447
Series 2005-1 Cl A4
11-10-42 5.03 1,250,000 1,288,599
Bear Stearns Commercial Mtge Securities
Series 2003-T10 Cl A1
03-13-40 4.00 3,024,821 2,976,818
Series 2004-PWR6 Cl A6
11-11-41 4.83 1,750,000 1,775,918
Series 2004-T16 Cl A3
02-13-46 4.03 600,000 595,113
California State Teachers' Retirement System Trust
Series 2002-C6 Cl A3
11-20-14 4.46 5,368,616(d) 5,407,821
Capital Auto Receivables Asset Trust
Series 2005-1 Cl A4
07-15-09 4.05 2,800,000(b) 2,801,750
See accompanying notes to investments in securities.
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10 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Commercial mortgage-backed(f)/
Asset-backed securities (cont.)
Capital One Auto Finance Trust
Series 2005-BSS Cl A3
11-15-09 4.08% $1,600,000(b) $1,599,927
Carmax Auto Owner Trust
Series 2005-1 Cl A4
03-15-10 4.35 900,000 906,227
Citigroup Commercial Mtge Trust
Series 2005-EMG Cl A1
09-20-51 4.15 4,500,000(d) 4,490,508
Commercial Mtge Pass-Through Ctfs
Series 2004-CNL Cl A1
09-15-14 3.31 3,280,000(d,i) 3,280,328
Series 2004-LB3A Cl A3
07-10-37 5.09 3,500,000 3,607,917
Series 2004-LB3A Cl A4
07-10-37 5.23 906,000 941,740
CS First Boston Mtge Securities
Series 2002-CKS4 Cl A1
11-15-36 4.49 1,922,104 1,934,633
Series 2004-C1 Cl A2
01-15-37 3.52 1,550,000 1,517,608
Federal Natl Mtge Assn
11-01-10 4.47 559,054 559,272
11-01-12 4.84 1,830,898 1,895,584
GE Capital Commercial Mtge
Series 2001-3 Cl A1
06-10-38 5.56 2,826,726 2,924,241
Series 2004-C2 Cl A2
03-10-40 4.12 3,250,000 3,223,253
GMAC Commercial Mtge Securities
Series 1999-C1 Cl B
05-15-33 6.30 2,200,000 2,347,532
Series 2004-C3 Cl A4
12-10-41 4.55 1,700,000 1,703,342
Series 2004-C3 Cl A5
12-10-41 4.86 1,800,000 1,828,044
Greenwich Capital Commercial Funding
Series 2005-GG3 Cl A1
08-10-42 3.92 1,242,393 1,238,268
Honda Auto Receivables Owner Trust
Series 2005-1 Cl A3
10-21-08 3.53 1,400,000 1,393,126
JPMorgan Chase Commercial Mtge Securities
Series 2002-CIB5 Cl A1
10-12-37 4.37 1,345,246 1,351,545
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Commercial mortgage-backed(f)/
Asset-backed securities (cont.)
JPMorgan Chase Commercial Mtge Securities (cont.)
Series 2003-CB6 Cl A2
07-12-37 5.26% $1,500,000 $1,565,945
Series 2003-LN1 Cl A1
10-15-37 4.13 1,290,694 1,277,434
Series 2003-ML1A Cl A1
03-12-39 3.97 1,113,017 1,099,182
Series 2004-CBX Cl A3
01-12-37 4.18 1,000,000 993,776
Series 2004-CBX Cl A5
01-12-37 4.65 1,500,000 1,509,350
Series 2005-CB11 Cl A3
08-12-37 5.20 1,557,000 1,616,425
LB-UBS Commercial Mtge Trust
Series 2002-C2 Cl A3
06-15-26 5.39 2,790,000 2,917,832
Series 2002-C4 Cl A4
09-15-26 4.56 1,800,000 1,810,012
Series 2003-C8 Cl A2
11-15-27 4.21 5,130,000 5,126,305
Series 2003-C8 Cl A3
11-15-27 4.83 1,150,000 1,173,748
Series 2004-C2 Cl A3
03-15-29 3.97 1,200,000 1,165,548
Series 2004-C4 Cl A3
06-15-29 4.99 1,000,000(i) 1,037,265
Series 2004-C6 Cl A2
08-15-29 4.19 1,995,000 1,983,090
Series 2004-C6 Cl A4
08-15-29 4.58 450,000 453,135
Series 2004-C7 Cl A2
10-15-29 3.99 1,000,000 987,500
Series 2004-C8 Cl A2
12-15-29 4.20 2,300,000 2,292,916
Long Beach Auto Receivables Trust
Series 2004-C Cl A3 (FSA)
09-15-09 3.40 1,400,000(e) 1,390,060
Metris Master Trust
Series 2004-2 Cl M
10-20-10 3.48 1,000,000(i) 1,000,650
Morgan Stanley Auto Loan Trust
Series 2004-HB2 Cl A3
03-16-09 2.94 1,500,000 1,478,513
Morgan Stanley Capital I
Series 2003-IQ4 Cl A1
05-15-40 3.27 4,331,446 4,148,087
See accompanying notes to investments in securities.
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11 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Commercial mortgage-backed(f)/
Asset-backed securities (cont.)
Morgan Stanley Capital I (cont.)
Series 2004-HQ4 Cl A5
04-14-40 4.59% $1,350,000 $1,357,655
Series 2004-IQ8 Cl A2
06-15-40 3.96 2,200,000 2,186,024
Morgan Stanley, Dean Witter Capital I
Series 2002-TOP7 Cl A2
01-15-39 5.98 2,235,000 2,426,912
Nissan Auto Lease Trust
Series 2004-A Cl A3
08-15-07 2.90 1,450,000 1,434,456
Nissan Auto Receivables Owner Trust
Series 2003-A Cl A4
07-15-08 2.61 980,000 966,691
Series 2005-A Cl A3
10-15-08 3.54 1,900,000 1,888,619
Popular ABS Mtge Pass-Through Trust
Series 2005-A Cl AF2
06-25-35 4.49 955,000 957,316
Prudential Commercial Mtge Trust
Series 2003-PWR1 Cl A1
02-11-36 3.67 1,539,505 1,506,232
Residential Asset Securities
Series 2002-KS1 Cl AI4 (AMBAC)
11-25-29 5.86 843,801(e) 844,113
Triad Auto Receivables Owner Trust
Series 2005-A Cl A3 (AMBAC)
03-12-10 4.05 2,700,000(e) 2,702,052
Wachovia Bank Commercial Mtge Trust
Series 2005-C16 Cl A2
10-15-41 4.38 1,500,000 1,502,545
Series 2005-C16 Cl A3
10-15-41 4.62 1,962,000 1,973,328
WFS Financial Owner Trust
Series 2004-1 Cl D
08-22-11 3.17 1,260,191 1,247,631
Series 2004-3 Cl A3
03-17-09 3.30 5,000,000 4,955,410
World Omni Auto Receivables Trust
Series 2005-A Cl A3
06-12-09 3.54 2,750,000 2,736,443
Total 133,177,852
Mortgage-backed securities (37.6%)(f,k)
Adjustable Rate Mtge Trust
Series 2004-2 Cl 6A1
02-25-35 5.28 2,086,882(j) 2,118,197
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Banc of America Mtge Securities
Series 2004-F Cl B1
07-25-34 4.14% $1,835,249(j) $1,858,152
Bank of America Alternative Loan Trust
Series 2003-11 Cl 1A1
01-25-34 6.00 2,476,547 2,522,586
Series 2003-11 Cl 4A1
01-25-19 4.75 1,401,362 1,401,513
Bear Stearns Adjustable Rate Mtge Trust
Series 2004-12 Cl 3A1
02-25-35 5.19 2,166,044(j) 2,191,863
Chaseflex Trust
Series 2005-2 Cl 2A2
06-25-35 6.50 3,453,833 3,574,717
Countrywide Alternative Loan Trust
Series 2003-11T1 Cl A1
07-25-18 4.75 1,599,027 1,594,559
Series 2005-6CB Cl 1A1
04-25-35 7.50 2,238,341 2,353,501
Countrywide Home Loans
Series 2004-12 Cl 1M
08-25-34 4.65 1,173,689(j) 1,177,069
CS First Boston Mtge Securities
Series 2004-AR5 Cl CB1
06-25-34 4.43 1,191,711(j) 1,176,018
Federal Home Loan Mtge Corp
05-01-13 4.50 2,129,169 2,137,222
11-01-14 7.50 1,768,937 1,886,044
07-01-16 8.00 142 153
01-01-17 8.00 1,038 1,127
03-01-17 8.50 12,705 13,798
06-01-17 8.50 4,163 4,522
07-01-17 7.00 5,912,492 6,204,201
05-01-18 5.50 1,962,852 2,016,935
09-01-18 5.00 3,704,708 3,754,184
10-01-18 5.00 5,809,495 5,882,930
01-01-19 5.50 794,006 815,884
09-01-19 8.50 36,615 39,867
04-01-21 9.00 107,581 117,366
03-01-22 8.50 232,099 253,610
08-01-22 8.50 213,851 233,767
02-01-25 8.00 304,288 329,803
01-01-32 6.50 4,278,916 4,461,572
03-01-32 6.50 1,587,287 1,655,795
06-01-32 7.00 1,461,576 1,546,635
07-01-32 7.00 5,097,801 5,374,965
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
12 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Home Loan Mtge Corp (cont.)
04-01-33 6.00% $5,788,878 $6,003,597
06-01-33 5.50 3,506,704 3,563,294
12-01-33 5.00 2,999,300 2,999,768
Collateralized Mtge Obligation
04-15-15 4.50 4,850,000 4,881,380
01-15-18 6.50 1,453,071 1,550,085
02-15-27 5.00 4,000,000 4,049,854
10-15-27 5.00 7,425,000 7,576,364
06-15-28 5.00 4,625,000 4,725,150
12-15-28 5.50 2,175,000 2,240,123
02-15-33 5.50 3,551,116 3,662,691
Interest Only
02-15-14 7.40 1,474,250(g) 109,183
Federal Natl Mtge Assn
04-01-14 6.00 2,563,871 2,659,617
06-01-15 5.50 4,600,000(b) 4,738,445
03-01-17 6.50 3,044,497 3,177,931
04-01-17 6.50 1,367,657 1,427,598
08-01-17 6.00 5,967,578 6,186,569
09-01-17 6.00 6,663,434 6,907,959
04-01-18 5.00 5,725,252 5,808,123
05-01-18 5.50 4,622,627 4,757,964
05-01-18 6.00 4,240,149 4,396,174
06-01-18 4.50 1,686,147 1,682,127
06-01-18 5.00 1,933,820 1,961,271
08-01-18 4.50 5,619,941 5,601,940
10-01-18 4.50 3,105,666 3,098,262
01-01-19 5.50 974,763 1,001,954
02-01-19 5.00 2,637,351 2,669,866
06-01-20 5.50 4,500,000(b) 4,619,529
06-01-20 6.00 9,000,000(b) 9,323,441
07-01-23 5.00 2,890,984 2,912,594
07-01-23 5.50 3,366,992 3,438,720
09-01-23 5.50 3,621,190 3,698,334
12-01-26 8.00 419,391 453,479
04-01-27 7.50 442,884 475,677
08-01-27 8.00 469,587 507,446
01-01-28 6.50 261,912 273,951
07-01-28 5.50 1,860,394 1,895,252
11-01-28 5.50 3,242,514 3,303,267
04-01-29 5.00 3,596,936 3,596,835
01-01-30 8.00 368,788 397,761
06-01-31 7.00 3,868,363 4,107,784
03-01-32 7.50 566,246 606,250
04-01-32 7.50 397,172 424,908
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Natl Mtge Assn (cont.)
05-01-32 7.50% $573,968 $614,699
06-01-32 7.50 1,364,799 1,460,107
07-01-32 6.50 1,034,085 1,079,934
08-01-32 6.50 6,100,410 6,365,411
08-01-32 7.00 651,536 688,379
09-01-32 6.50 2,456,792 2,556,035
11-01-32 6.50 1,329,503 1,390,369
01-01-33 6.00 4,439,520 4,577,162
02-01-33 6.00 9,170,032 9,476,708
04-01-33 5.50 20,908,591 21,281,458
04-01-33 6.00 9,840,429 10,210,997
05-01-33 5.50 5,640,146 5,731,855
07-01-33 4.85 2,267,564(j) 2,269,151
07-01-33 5.50 3,467,471 3,519,797
08-01-33 5.50 815,065 827,365
11-01-33 7.00 2,721,762 2,873,773
01-01-34 6.50 1,514,497 1,581,582
09-01-34 4.84 3,940,838(j) 3,976,716
12-01-34 4.40 1,029,324(j) 1,026,905
12-01-34 6.50 3,232,068 3,359,353
Collateralized Mtge Obligation
12-25-26 8.00 1,578,516 1,673,448
Interest Only
12-25-12 13.29 1,315,628(g) 68,593
12-25-22 3.19 1,178,687(g) 162,427
12-25-31 1.19 1,412,165(g) 227,696
Principal Only
09-01-18 4.72 27,473(h) 24,115
First Horizon Alternative Mtge Securities
Series 2004-AA4 Cl A1
10-25-34 5.43 2,002,221 2,043,788
Series 2005-AA2 Cl 2A1
04-25-35 5.45 2,619,895 2,676,301
Series 2005-AA3 Cl 3A1
05-25-35 5.44 2,380,039 2,421,238
Series 2005-AA4 Cl B1
06-25-35 5.40 724,909 735,669
Govt Natl Mtge Assn
05-15-26 7.50 679,575 730,627
12-15-32 6.00 9,762,847 10,095,530
07-15-33 5.00 2,541,253 2,563,921
10-15-33 5.00 2,595,756 2,618,480
10-15-33 5.50 4,102,369 4,194,641
Collateralized Mtge Obligation
Interest Only
01-20-32 0.00 1,012,063(g) 108,337
08-20-32 0.00 4,267,118(g) 595,315
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
13 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
IndyMac Index Mtge Loan Trust
Series 2005-AR3 Cl 3A1
04-25-35 5.34% $1,393,575(j) $1,414,576
Series 2005-AR8 Cl AX1
Interest Only
04-25-35 4.50 80,370,000(g,j) 1,054,856
Master Adjustable Rate Mtge Trust
Series 2004-5 Cl B1
07-25-34 4.41 1,459,135(j) 1,464,461
Master Alternative Loans Trust
Series 2004-4 Cl 2A1
05-25-34 6.00 3,856,207 3,957,047
Series 2004-7 Cl 8A1
08-25-19 5.00 1,735,610 1,744,791
Series 2004-8 Cl 7A1
09-25-19 5.00 2,445,120 2,458,862
Series 2005-1 Cl 2A1
02-25-35 6.00 3,173,446 3,265,202
Structured Adjustable Rate Mtge Loan
Series 2004-5 Cl B1
05-25-34 4.62 1,346,417(j) 1,331,876
Structured Asset Securities
Series 2003-33H Cl 1A1
10-25-33 5.50 5,539,682 5,567,174
Washington Mutual
Series 2003-AR10 Cl A7
10-25-33 4.07 2,375,000(j) 2,376,823
Series 2004-CB2 Cl 6A
07-25-19 4.50 1,684,910 1,651,835
Wells Fargo Mtge Backed Securities Trust
Series 2005-5 Cl 2A1
05-25-35 5.50 3,993,925 4,063,908
Series 2005-AR1 Cl 1A1
02-25-35 4.57 3,636,512(j) 3,636,730
Total 343,967,095
Automotive & related (0.3%)
Lear
Series B
08-01-14 5.75 2,625,000 2,392,953
Nissan Motor Acceptance
03-08-10 4.63 600,000(d) 600,354
Total 2,993,307
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Banks and savings & loans (3.1%)
Banknorth Group
Sr Nts
05-01-08 3.75% $3,370,000(l) $3,342,467
JPMorgan Chase & Co
03-01-15 4.75 2,440,000 2,428,993
KFW Intl Finance
(U.S. Dollar)
10-17-05 2.50 6,275,000(c) 6,250,540
Washington Mutual Bank FA
Sub Nts
06-15-11 6.88 2,175,000 2,428,031
08-15-14 5.65 2,875,000 3,042,153
Wells Fargo Bank NA
Sub Nts
02-01-11 6.45 9,949,000 10,940,248
Total 28,432,432
Broker dealers (0.3%)
Goldman Sachs Group
07-15-13 4.75 2,115,000 2,106,773
Morgan Stanley
03-01-13 5.30 900,000 928,881
Total 3,035,654
Cable (0.6%)
Comcast
03-15-11 5.50 4,915,000 5,123,543
Energy (0.4%)
Nexen
(U.S. Dollar)
03-10-35 5.88 1,705,000(c) 1,683,096
Occidental Petroleum
Sr Nts
01-15-12 6.75 1,975,000 2,223,876
Total 3,906,972
Energy equipment & services (0.5%)
Halliburton
10-15-10 5.50 4,405,000 4,606,027
Finance companies (0.9%)
Citigroup
Sr Nts
05-29-15 4.70 8,525,000(b) 8,545,622
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
14 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Financial services (1.9%)
Archstone-Smith Operating Trust
05-01-15 5.25% $3,070,000 $3,113,781
Capital One Financial
06-01-15 5.50 2,555,000 2,576,403
Pricoa Global Funding I
06-15-08 4.35 2,435,000(d) 2,444,618
01-15-10 4.20 9,325,000(d) 9,270,543
Total 17,405,345
Food (0.6%)
Kraft Foods
11-01-11 5.63 2,345,000 2,469,121
06-01-12 6.25 2,810,000 3,073,968
Total 5,543,089
Health care services (0.5%)
Cardinal Health
06-15-15 4.00 5,350,000 4,939,805
Industrial transportation (0.9%)
ERAC USA Finance
05-01-15 5.60 1,750,000(d) 1,795,917
Union Pacific
04-15-12 6.50 2,520,000 2,778,751
05-01-14 5.38 3,145,000 3,265,110
Total 7,839,778
Insurance (1.8%)
Allstate
Sr Nts
05-09-35 5.55 1,750,000 1,805,027
ASIF Global Financing XIX
01-17-13 4.90 5,015,000(d) 5,059,884
ING Security Life Institutional Funding
01-15-10 4.25 5,350,000(d) 5,327,873
Metropolitan Life Global Funding I
Sr Nts
05-05-10 4.50 3,215,000(d) 3,231,110
Pacific Life
09-15-33 6.60 635,000(d) 740,969
Total 16,164,863
Media (0.3%)
News America
12-15-34 6.20 2,360,000 2,439,995
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Multi-industry (0.9%)
Tyco Intl Group
(U.S. Dollar)
02-15-11 6.75% $7,710,000(c) $8,531,639
Paper & packaging (0.4%)
Weyerhaeuser
03-15-12 6.75 3,565,000 3,917,094
Telecom equipment & services (1.8%)
Sprint Capital
01-30-11 7.63 4,120,000 4,685,351
11-15-28 6.88 2,965,000 3,363,591
TELUS
(U.S. Dollar)
06-01-11 8.00 7,367,500(c) 8,593,039
Total 16,641,981
Utilities -- electric (0.9%)
Dayton Power & Light
1st Mtge
10-01-13 5.63 515,000(d) 534,081
Florida Power
1st Mtge
03-01-13 4.80 660,000 665,999
Ohio Power
Sr Nts Series H
01-15-14 4.85 2,545,000 2,570,272
Westar Energy
1st Mtge
07-01-14 6.00 4,150,000 4,510,888
Total 8,281,240
Utilities -- telephone (2.1%)
Deutsche Telekom Intl Finance
(U.S. Dollar)
07-22-13 5.25 1,240,000(c) 1,280,709
Telecom Italia Capital
(U.S. Dollar)
09-30-34 6.00 1,275,000(c,d) 1,293,092
Verizon Pennsylvania
Series A
11-15-11 5.65 15,740,000 16,422,959
Total 18,996,760
Total bonds
(Cost: $910,141,301) $917,843,333
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
15 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Short-term securities (5.9%)(n)
Issuer Effective Amount Value(a)
yield payable at
maturity
U.S. government agencies (1.3%)
Federal Home Loan Mtge Corp Disc Nt
06-28-05 2.97% $10,000,000 $9,976,939
Federal Natl Mtge Assn Disc Nt
06-22-05 2.74 1,600,000 1,597,323
Total 11,574,262
Short-term securities (continued)
Issuer Effective Amount Value(a)
yield payable at
maturity
Commercial paper (4.6%)
Barton Capital
06-02-05 3.02% $10,000,000 $9,998,322
HSBC Finance
06-01-05 3.07 2,000,000 1,999,829
Kitty Hawk Funding
06-01-05 3.02 15,000,000 14,998,742
Societe Generale North America
06-27-05 3.04 15,000,000 14,965,913
Total 41,962,806
Total short-term securities
(Cost: $53,541,373) $53,537,068
Total investments in securities
(Cost: $963,682,674)(o) $971,380,401
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At May 31, 2005, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$28,606,835.
(c) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in the currency indicated. At May 31,
2005, the value of foreign securities represented 5.1% 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
Fund's Board of Directors. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers. At
May 31, 2005, the value of these securities amounted to $53,569,063 or
5.9% of net assets.
(e) The following abbreviations are used in the portfolio security
descriptions to identify the insurer of the issue:
AMBAC -- Ambac Assurance Corporation
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
MBIA -- MBIA Insurance Corporation
(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) 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 May 31,
2005.
- --------------------------------------------------------------------------------
16 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Notes to investments in securities (continued)
(h) Principal only represents securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity of a
principal only is sensitive to the rate of principal payments on the
underlying mortgage assets. A slow (rapid) rate of principal repayments
may have an adverse (positive) effect on yield to maturity. Interest rate
disclosed represents yield based upon the estimated timing of future cash
flows at May 31, 2005.
(i) Interest rate varies either based on a predetermined schedule or to
reflect current market conditions; rate shown is the effective rate on May
31, 2005.
(j) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on May 31, 2005.
(k) Comparable securities are held to satisfy future delivery requirements of
the following open forward sale commitments at May 31, 2005:
Security Principal Settlement Proceeds Value
amount date receivable
Federal Natl Mtge Assn
06-20-20 4.50% $ 3,425,000 6-16-05 $ 3,377,906 $ 3,408,944
06-01-35 5.50 22,000,000 6-13-05 22,142,344 22,295,636
06-01-35 6.00 9,000,000 6-13-05 9,215,156 9,247,500
06-01-35 6.50 16,700,000 6-13-05 17,362,188 17,347,125
(l) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
Type of security Notional amount
Purchase contracts
U.S. Treasury Note, Sept. 2005, 5-year $20,000,000
Sale contracts
U.S. Treasury Note, Sept. 2005, 10-year 70,600,000
(m) At May 31, 2005, security was partially or fully on loan. See Note 4 to
the financial statements.
(n) Cash collateral received from security lending activity is invested in
short-term securities and represents 2.7% of net assets. See Note 4 to the
financial statements. 3.2% of net assets is the Portfolio's cash
equivalent position.
(o) At May 31, 2005, the cost of securities for federal income tax purposes
was $964,717,950 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
Unrealized appreciation $10,583,157
Unrealized depreciation (3,920,706)
----------
Net unrealized appreciation $ 6,662,451
-----------
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.
- --------------------------------------------------------------------------------
17 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Financial Statements
Statement of assets and liabilities
Quality Income Portfolio
May 31, 2005
Assets
Investments in securities, at value (Note 1)*
(identified cost $963,682,674) $ 971,380,401
Dividends and accrued interest receivable 7,252,470
Receivable for investment securities sold 74,507,301
----------
Total assets 1,053,140,172
-------------
Liabilities
Disbursements in excess of cash on demand deposit 8,527
Payable for investment securities purchased 61,498,339
Payable upon return of securities loaned (Note 4) 24,565,000
Accrued investment management services fee 52,004
Other accrued expenses 82,191
Forward sale commitments, at value (proceeds receivable $52,097,594) (Note 1) 52,299,205
----------
Total liabilities 138,505,266
-----------
Net assets $ 914,634,906
==============
* Including securities on loan, at value (Note 4) $ 24,139,420
--------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
18 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Statement of operations
Quality Income Portfolio
Year ended May 31, 2005
Investment income
Income:
Interest $42,248,895
Fee income from securities lending (Note 4) 160,492
-------
Total income 42,409,387
----------
Expenses (Note 2):
Investment management services fee 4,922,235
Compensation of board members 11,748
Custodian fees 114,200
Audit fees 33,000
Other 45,780
------
Total expenses 5,126,963
Earnings credits on cash balances (Note 2) (2,043)
------
Total net expenses 5,124,920
---------
Investment income (loss) -- net 37,284,467
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 3,371,857
Foreign currency transactions (15,574)
Futures contracts (2,636,370)
----------
Net realized gain (loss) on investments 719,913
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 21,053,971
----------
Net gain (loss) on investments and foreign currencies 21,773,884
----------
Net increase (decrease) in net assets resulting from operations $59,058,351
===========
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
19 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Statements of changes in net assets
Quality Income Portfolio
Year ended May 31, 2005 2004
Operations
Investment income (loss) -- net $ 37,284,467 $ 43,667,562
Net realized gain (loss) on investments 719,913 10,488,305
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 21,053,971 (66,112,279)
---------- -----------
Net increase (decrease) in net assets resulting from operations 59,058,351 (11,956,412)
---------- -----------
Proceeds from contributions 50,501,206 8,835,237
Fair value of withdrawals (184,551,000) (465,582,594)
------------ ------------
Net contributions (withdrawals) from partners (134,049,794) (456,747,357)
------------ ------------
Total increase (decrease) in net assets (74,991,443) (468,703,769)
Net assets at beginning of year 989,626,349 1,458,330,118
----------- -------------
Net assets at end of year $ 914,634,906 $ 989,626,349
============= ==============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
20 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Notes to Financial Statements
Quality Income Portfolio
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quality Income Portfolio (the Portfolio) is a series of Income Trust (the Trust)
and is registered under the Investment Company Act of 1940 (as amended) as a
diversified, open-end management investment company. The Portfolio invests
primarily in investment-grade bonds. The Declaration of Trust permits the
Trustees to issue non-transferable interests in the Portfolio.
The Portfolio's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to U.S. generally accepted
accounting principles 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. Securities
purchased on a forward-commitment basis
Delivery and payment for securities that have been purchased by the Portfolio 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 Portfolio's net assets the same as owned securities. The
Portfolio designates cash or liquid securities at least equal to the amount of
its forward-commitments. At May 31, 2005, the Portfolio has entered into
outstanding when-issued securities of $23,873,387 and other forward-commitments
of $4,733,448.
The Portfolio 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
Portfolio to "roll over" its purchase commitments, the Portfolio receives
negotiated amounts in the form of reductions of the purchase price of the
commitment.
- --------------------------------------------------------------------------------
21 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Option transactions
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Portfolio 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
Portfolio 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 Portfolio gives up the opportunity for
profit if the market price of the security increases. The risk in writing a put
option is that the Portfolio 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 Portfolio pays a premium whether or not the option is exercised. The
Portfolio 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 Portfolio
will realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Portfolio 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.
Futures transactions
To gain exposure to or protect itself from market changes, the Portfolio may buy
and sell financial futures contracts traded on any U.S. or foreign exchange. The
Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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.
- --------------------------------------------------------------------------------
22 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
The Portfolio 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 Portfolio and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Portfolio is subject to the credit risk that
the other party will not complete its contract obligations.
Forward sale commitments
The Portfolio 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.
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
Portfolio as an unrealized gain or loss. If the forward sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
Portfolio realizes a gain or loss. If the Portfolio delivers securities under
the commitment, the Portfolio 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 Portfolio's organizational documents, its officers and trustees are
indemnified against certain liabilities arising out of the performance of their
duties to the Portfolio. In addition, certain of the Portfolio's contracts with
its service providers contain general indemnification clauses. The Portfolio's
maximum exposure under these arrangements is unknown since the amount of any
future claims that may be made against the Portfolio cannot be determined and
the Portfolio has no historical basis for predicting the likelihood of any such
claims.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership and
each investor in the Portfolio is treated as the owner of its proportionate
share of the net assets, income, expenses and realized and unrealized gains and
losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore
does not pay any income dividends or capital gain distributions.
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.
- --------------------------------------------------------------------------------
23 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
2. FEES AND EXPENSES
The Trust, on behalf of the Portfolio, has an Investment Management Services
Agreement with American Express Financial Corporation (AEFC) to manage its
portfolio. Under this agreement, AEFC determines which securities will be
purchased, held or sold. The management fee is a percentage of the Portfolio's
average daily net assets that declines from 0.52% to 0.395% annually as the
Portfolio's assets increase.
Under the agreement, the Trust also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees, audit and certain legal
fees, fidelity bond premiums, registration fees for units, office expenses,
consultants' fees, compensation of trustees, corporate filing fees, expenses
incurred in connection with lending securities of the Portfolio and any other
expenses properly payable by the Trust or Portfolio and approved by the board.
Under a Deferred Compensation Plan (the Plan), non-interested trustees may defer
receipt of their compensation. Deferred amounts are treated as though equivalent
dollar amounts had been invested in shares of the underlying Fund or other
American Express mutual funds. The Portfolio's liability for these amounts is
adjusted for market value changes and remains in the Portfolio until distributed
in accordance with the Plan.
During the year ended May 31, 2005, the Portfolio's custodian fees were reduced
by $2,043 as a result of earnings credits from overnight cash balances.
According to a Placement Agency Agreement, American Express Financial Advisors
Inc. acts as placement agent of the Trust's units.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $2,647,379,968 and $2,763,783,105, respectively, for the
year ended May 31, 2005. Realized gains and losses are determined on an
identified cost basis.
4. LENDING OF PORTFOLIO SECURITIES
At May 31, 2005, securities valued at $24,139,420 were on loan to brokers. For
collateral, the Portfolio received $24,565,000 in cash. Cash collateral received
is invested in short-term securities, which are included in the short-term
section of the "Investment in securities." Income from securities lending
amounted to $160,492 for the year ended May 31, 2005. The risks to the Portfolio
of securities lending are that the borrower may not provide additional
collateral when required or return the securities when due.
5. INTEREST RATE FUTURES CONTRACTS
At May 31, 2005, investments in securities included securities valued at
$296,543 that were pledged as collateral to cover initial margin deposits on 200
open purchase contracts and 706 open sale contracts. The notional market value
of the open purchase contracts at May 31, 2005 was $21,753,126 with a net
unrealized gain of $66,388. The notional market value of the open sale contracts
at May 31, 2005 was $79,965,535 with a net unrealized loss of $258,843. See
"Summary of significant accounting policies" and "Notes to investments in
securities."
- --------------------------------------------------------------------------------
24 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
6. FINANCIAL HIGHLIGHTS
The table below shows certain important financial information for evaluating the
Portfolio's results.
Ratios/supplemental data
Fiscal period ended May 31, 2005 2004 2003 2002 2001
Ratio of expenses to average daily net assets(a) .54% .54% .52% .53% .52%
Ratio of net investment income (loss) to average daily net assets 3.93% 3.62% 4.33% 4.89% 6.44%
Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150%
Total return(b) 6.49% (.77%) 6.56% 5.34% 12.06%
(a) Expense ratio is based on total expenses of the Portfolio before reduction
of earnings credits on cash balances. The ratio does not include feeder
fund expenses.
(b) Total return is based on a calculated Portfolio net asset value and does
not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
25 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Report of Independent
Registered Public Accounting Firm
THE BOARD OF TRUSTEES AND UNITHOLDERS
INCOME TRUST
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of Quality Income Portfolio (a series
of Income Trust) as of May 31, 2005, the related statement of operations for the
year then ended, the statements of changes in net assets for each of the years
in the two-year period ended May 31, 2005, and the financial highlights for each
of the years in the five-year period ended May 31, 2005. These financial
statements and the financial highlights are the responsibility of portfolio
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of May 31, 2005, by correspondence with the custodian and
brokers or by other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Quality Income Portfolio as of May 31, 2005, and the results of its operations,
changes in its net assets and the financial highlights for each of the periods
stated in the first paragraph above in conformity with U.S. generally accepted
accounting principles.
KPMG LLP
Minneapolis, Minnesota
July 20, 2005
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26 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Financial Statements
Statement of assets and liabilities
AXP Selective Fund
May 31, 2005
Assets
Investment in Portfolio (Note 1) $914,505,520
Capital shares receivable 89,312
------
Total assets 914,594,832
-----------
Liabilities
Dividends payable to shareholders 397,638
Capital shares payable 213,724
Accrued distribution fee 30,297
Accrued service fee 552
Accrued transfer agency fee 11,045
Accrued administrative services fee 4,996
Other accrued expenses 74,007
------
Total liabilities 732,259
-------
Net assets applicable to outstanding capital stock $913,862,573
============
Represented by
Capital stock -- $.01 par value (Note 1) $ 1,051,806
Additional paid-in capital 938,558,301
Excess of distributions over net investment income (271,668)
Accumulated net realized gain (loss) (Note 5) (32,767,478)
Unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 7,291,612
---------
Total -- representing net assets applicable to outstanding capital stock $913,862,573
============
Net assets applicable to outstanding shares: Class A $591,107,900
Class B $124,736,789
Class C $ 4,242,590
Class I $143,290,359
Class Y $ 50,484,935
Net asset value per share of outstanding capital stock: Class A shares 68,029,020 $ 8.69
Class B shares 14,357,845 $ 8.69
Class C shares 488,313 $ 8.69
Class I shares 16,490,222 $ 8.69
Class Y shares 5,815,214 $ 8.68
--------- ------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
27 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Statement of operations
AXP Selective Fund
Year ended May 31, 2005
Investment income
Income:
Interest $42,243,400
Fee income from securities lending 160,469
-------
Total income 42,403,869
----------
Expenses (Note 2):
Expenses allocated from Portfolio 5,124,235
Distribution fee
Class A 1,638,968
Class B 1,516,008
Class C 49,992
Transfer agency fee 1,198,674
Incremental transfer agency fee
Class A 82,348
Class B 39,027
Class C 1,551
Service fee -- Class Y 64,993
Administrative services fees and expenses 477,298
Compensation of board members 9,573
Printing and postage 175,100
Registration fees 49,840
Audit fees 11,000
Other 16,615
------
Total expenses 10,455,222
Expenses waived/reimbursed by AEFC (Note 2) (665,654)
--------
9,789,568
Earnings credits on cash balances (Note 2) (29,958)
-------
Total net expenses 9,759,610
---------
Investment income (loss) -- net 32,644,259
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions 3,371,309
Foreign currency transactions (15,572)
Futures contracts (2,636,009)
----------
Net realized gain (loss) on investments 719,728
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 21,051,280
----------
Net gain (loss) on investments and foreign currencies 21,771,008
----------
Net increase (decrease) in net assets resulting from operations $54,415,267
===========
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
28 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Statements of changes in net assets
AXP Selective Fund
Year ended May 31, 2005 2004
Operations and distributions
Investment income (loss) -- net $ 32,644,259 $ 36,407,873
Net realized gain (loss) on investments 719,728 10,487,801
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 21,051,280 (66,106,407)
---------- -----------
Net increase (decrease) in net assets resulting from operations 54,415,267 (19,210,733)
---------- -----------
Distributions to shareholders from:
Net investment income
Class A (23,912,310) (26,365,292)
Class B (4,361,239) (5,744,369)
Class C (144,617) (180,386)
Class I (2,796,739) --
Class Y (2,459,415) (4,136,231)
---------- ----------
Total distributions (33,674,320) (36,426,278)
----------- -----------
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 45,644,903 79,211,532
Class B shares 11,147,044 22,932,095
Class C shares 642,495 1,212,212
Class I shares 153,620,994 --
Class Y shares 12,950,585 34,353,219
Reinvestment of distributions at net asset value
Class A shares 19,053,522 21,394,439
Class B shares 3,923,698 5,231,020
Class C shares 127,953 159,927
Class I shares 2,725,902 --
Class Y shares 2,448,606 4,205,827
Payments for redemptions
Class A shares (195,290,057) (311,025,257)
Class B shares (Note 2) (83,730,597) (142,694,010)
Class C shares (Note 2) (2,216,368) (4,975,937)
Class I shares (13,407,549) --
Class Y shares (53,143,328) (123,235,606)
----------- ------------
Increase (decrease) in net assets from capital share transactions (95,502,197) (413,230,539)
----------- ------------
Total increase (decrease) in net assets (74,761,250) (468,867,550)
Net assets at beginning of year 988,623,823 1,457,491,373
----------- -------------
Net assets at end of year $ 913,862,573 $ 988,623,823
============= ==============
See accompanying notes to financial statements.
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29 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Notes to Financial Statements
AXP Selective Fund
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Income Series, Inc. and is registered under the
Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. AXP 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 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 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.
Effective July 15, 2004, 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 May 31, 2005, AEFC and the AXP
Portfolio Builder Series funds owned 100% of Class I shares, which represents
15.68% of the Fund's net assets.
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.
Investment in Quality Income Portfolio
The Fund invests all of its assets in Quality Income Portfolio (the Portfolio),
a series of Income Trust (the Trust), an open-end investment company that has
the same objectives as the Fund. The Portfolio invests primarily in
investment-grade bonds.
The Fund records daily its share of the Portfolio's income, expenses and
realized and unrealized gains and losses. The financial statements of the
Portfolio are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
The Fund records its investment in the Portfolio at the value that is equal to
the Fund's proportionate ownership interest in the Portfolio's net assets. The
percentage of the Portfolio owned by the Fund at May 31, 2005 was 99.99%.
- --------------------------------------------------------------------------------
30 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
All securities held by the Portfolio 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.
Use of estimates
Preparing financial statements that conform to U.S. generally accepted
accounting principles requires management to make estimates (e.g., on assets,
liabilities and contingent assets and liabilities) that could differ from actual
results.
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 the shareholders. No provision for income or excise
taxes is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts, the recognition of certain foreign currency gains
(losses) as ordinary income (loss) for tax purposes, and losses deferred due to
"wash sale" transactions. The character of distributions made during the year
from net investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by $983,881
and accumulated net realized loss has been increased by $983,881.
- --------------------------------------------------------------------------------
31 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
The tax character of distributions paid for the years indicated is as follows:
Year ended May 31, 2005 2004
Class A
Distributions paid from
Ordinary income $23,912,310 $26,365,292
Long-term capital gain -- --
Class B
Distributions paid from:
Ordinary income 4,361,239 5,744,369
Long-term capital gain -- --
Class C
Distributions paid from:
Ordinary income 144,617 180,386
Long-term capital gain -- --
Class I*
Distributions paid from:
Ordinary income 2,796,739 N/A
Long-term capital gain -- N/A
Class Y
Distributions paid from:
Ordinary income 2,459,415 4,136,231
Long-term capital gain -- --
* Inception date was July 15, 2004
At May 31, 2005, the components of distributable earnings on a tax basis are as
follows:
Undistributed ordinary income $ 182,805
Accumulated long-term gain (loss) $(29,747,019)
Unrealized appreciation (depreciation) $ 4,214,318
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.
2. EXPENSES AND SALES CHARGES
In addition to the expenses allocated from the Portfolio, the Fund accrues its
own expenses as follows:
The Fund has an agreement with AEFC to provide administrative services. 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.
- --------------------------------------------------------------------------------
32 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
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.
Sales charges received by the Distributor for distributing Fund shares were
$377,503 for Class A, $209,403 for Class B and $1,184 for Class C for the year
ended May 31, 2005.
For the year ended May 31, 2005, AEFC and its affiliates waived certain fees and
expenses to 0.94% for Class A, 1.69% for Class B, 1.69% for Class C, 0.63% for
Class I 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 $481,790,
$127,820, $4,547 and $51,497, respectively. Beginning June 1, 2005, AEFC and its
affiliates have agreed to waive certain fees and expenses until May 31, 2006.
Under this agreement, net expenses will not exceed 0.89% for Class A, 1.64% for
Class B, 1.64% for Class C, 0.59% for Class I and 0.72% for Class Y of the
Fund's average daily net assets.
During the year ended May 31, 2005, the Fund's transfer agency fees were reduced
by $29,958 as a result of earnings credits from overnight cash balances.
- --------------------------------------------------------------------------------
33 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 2005
Class A Class B Class C Class I* Class Y
Sold 5,297,822 1,289,751 74,421 17,736,298 1,500,618
Issued for reinvested distributions 2,202,977 453,875 14,795 314,693 283,580
Redeemed (22,628,707) (9,719,218) (256,820) (1,560,769) (6,147,313)
----------- ---------- -------- ---------- ----------
Net increase (decrease) (15,127,908) (7,975,592) (167,604) 16,490,222 (4,363,115)
----------- ---------- -------- ---------- ----------
* Inception date was July 15, 2004.
Year ended May 31, 2004
Class A Class B Class C Class I Class Y
Sold 9,074,746 2,637,527 139,541 N/A 3,953,216
Issued for reinvested distributions 2,467,221 603,159 18,441 N/A 485,010
Redeemed (35,892,994) (16,404,096) (573,651) N/A (14,229,946)
----------- ----------- -------- ------ -----------
Net increase (decrease) (24,351,027) (13,163,410) (415,669) N/A (9,791,720)
----------- ----------- -------- ------ ----------
4. 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 year ended May 31, 2005.
5. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund had a capital loss carry-over of
$29,747,019 at May 31, 2005, that if not offset by capital gains will expire as
follows:
2011 2013 2014
$24,224,582 $5,017,493 $504,944
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.
- --------------------------------------------------------------------------------
34 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
6. 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 May 31, 2005 2004 2003 2002 2001
Net asset value, beginning of period $8.50 $8.88 $8.74 $8.74 $8.32
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .31 .28 .33 .40 .52
Net gains (losses) (both realized and unrealized) .20 (.38) .18 .02 .42
----- ----- ----- ----- -----
Total from investment operations .51 (.10) .51 .42 .94
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.32) (.28) (.33) (.40) (.52)
Distributions from realized gains -- -- (.04) (.02) --
----- ----- ----- ----- -----
Total distributions (.32) (.28) (.37) (.42) (.52)
----- ----- ----- ----- -----
Net asset value, end of period $8.69 $8.50 $8.88 $8.74 $8.74
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $591 $707 $955 $1,042 $1,004
Ratio of expenses to average daily net assets(b) .94%(c) 1.00% .98% .98% .97%
Ratio of net investment income (loss) to average daily net assets 3.54% 3.17% 3.89% 4.45% 6.01%
Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150%
Total return(d) 6.06% (1.17%) 6.05% 4.85% 11.52%
(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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class A would have been 1.02% for the year
ended May 31, 2005.
(d) Total return does not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
35 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Class B
Per share income and capital changes(a)
Fiscal period ended May 31, 2005 2004 2003 2002 2001
Net asset value, beginning of period $8.50 $8.88 $8.74 $8.74 $8.32
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .24 .21 .27 .33 .45
Net gains (losses) (both realized and unrealized) .20 (.38) .18 .02 .42
----- ----- ----- ----- -----
Total from investment operations .44 (.17) .45 .35 .87
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.25) (.21) (.27) (.33) (.45)
Distributions from realized gains -- -- (.04) (.02) --
----- ----- ----- ----- -----
Total distributions (.25) (.21) (.31) (.35) (.45)
----- ----- ----- ----- -----
Net asset value, end of period $8.69 $8.50 $8.88 $8.74 $8.74
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $125 $190 $315 $342 $264
Ratio of expenses to average daily net assets(b) 1.69%(c) 1.76% 1.74% 1.73% 1.73%
Ratio of net investment income (loss) to average daily net assets 2.78% 2.40% 3.12% 3.67% 5.25%
Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150%
Total return(d) 5.26% (1.92%) 5.25% 4.06% 10.69%
(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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class B would have been 1.78% for the year
ended May 31, 2005.
(d) Total return does not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
36 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Class C
Per share income and capital changes(a)
Fiscal period ended May 31, 2005 2004 2003 2002 2001(b)
Net asset value, beginning of period $8.50 $8.88 $8.74 $8.74 $8.40
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .24 .21 .27 .33 .42
Net gains (losses) (both realized and unrealized) .20 (.38) .18 .02 .34
----- ----- ----- ----- -----
Total from investment operations .44 (.17) .45 .35 .76
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.25) (.21) (.27) (.33) (.42)
Distributions from realized gains -- -- (.04) (.02) --
----- ----- ----- ----- -----
Total distributions (.25) (.21) (.31) (.35) (.42)
----- ----- ----- ----- -----
Net asset value, end of period $8.69 $8.50 $8.88 $8.74 $8.74
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $4 $6 $10 $9 $4
Ratio of expenses to average daily net assets(c) 1.69%(d) 1.76% 1.75% 1.74% 1.73%(e)
Ratio of net investment income (loss) to average daily net assets 2.79% 2.40% 3.07% 3.64% 5.16%(e)
Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150%
Total return(f) 5.26% (1.92%) 5.24% 4.06% 9.27%(g)
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Inception date was June 26, 2000.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class C would have been 1.79% for the year
ended May 31, 2005.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
- --------------------------------------------------------------------------------
37 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Class I
Per share income and capital changes(a)
Fiscal period ended May 31, 2005(b)
Net asset value, beginning of period $8.55
-----
Income from investment operations:
Net investment income (loss) .29
Net gains (losses) (both realized and unrealized) .15
-----
Total from investment operations .44
-----
Less distributions:
Dividends from net investment income (.30)
-----
Net asset value, end of period $8.69
-----
Ratios/supplemental data
Net assets, end of period (in millions) $143
Ratio of expenses to average daily net assets(c) .63%(d)
Ratio of net investment income (loss) to average daily net assets 3.92%(d)
Portfolio turnover rate (excluding short-term securities) 297%
Total return(e) 5.25%(f)
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Inception date was July 15, 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.
- --------------------------------------------------------------------------------
38 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Class Y
Per share income and capital changes(a)
Fiscal period ended May 31, 2005 2004 2003 2002 2001
Net asset value, beginning of period $8.49 $8.88 $8.74 $8.74 $8.32
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .32 .29 .35 .42 .53
Net gains (losses) (both realized and unrealized) .20 (.39) .18 .02 .42
----- ----- ----- ----- -----
Total from investment operations .52 (.10) .53 .44 .95
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.33) (.29) (.35) (.42) (.53)
Distributions from realized gains -- -- (.04) (.02) --
----- ----- ----- ----- -----
Total distributions (.33) (.29) (.39) (.44) (.53)
----- ----- ----- ----- -----
Net asset value, end of period $8.68 $8.49 $8.88 $8.74 $8.74
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $50 $86 $177 $188 $218
Ratio of expenses to average daily net assets(b) .77%(c) .84% .82% .81% .82%
Ratio of net investment income (loss) to average daily net assets 3.70% 3.30% 4.04% 4.61% 6.16%
Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150%
Total return(d) 6.24% (1.13%) 6.22% 5.02% 11.70%
(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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class Y would have been 0.86% for the year
ended May 31, 2005.
(d) Total return does not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
39 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Report of Independent
Registered Public Accounting Firm
THE BOARD AND SHAREHOLDERS
AXP INCOME SERIES, INC.
We have audited the accompanying statement of assets and liabilities of AXP
Selective Fund (a series of AXP Income Series, Inc.) as of May 31, 2005, the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period ended May 31,
2005, and the financial highlights for each of the years in the five-year period
ended May 31, 2005. These financial statements and the financial highlights are
the responsibility of fund management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of AXP
Selective Fund as of May 31, 2005, and the results of its operations, changes in
its net assets and the financial highlights for each of the periods stated in
the first paragraph above, in conformity with U.S. generally accepted accounting
principles.
KPMG LLP
Minneapolis, Minnesota
July 20, 2005
- --------------------------------------------------------------------------------
40 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Federal Income Tax Information
(UNAUDITED)
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. The dividends listed below are reported to you on Form 1099-DIV, Dividends
and Distributions. Shareholders should consult a tax advisor on how to report
distributions for state and local tax purposes.
AXP Selective Fund
Fiscal year ended May 31, 2005
Class A
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
June 25, 2004 $0.02401
July 26, 2004 0.02400
Aug. 25, 2004 0.02494
Sept. 24, 2004 0.02500
Oct. 25, 2004 0.02587
Nov. 24, 2004 0.02641
Dec. 22, 2004 0.02736
Jan. 27, 2005 0.02650
Feb. 24, 2005 0.02800
March 30, 2005 0.02800
April 28, 2005 0.02800
May 26, 2005 0.02800
Total distributions $0.31609
Class B
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
June 25, 2004 $0.01871
July 26, 2004 0.01849
Aug. 25, 2004 0.01960
Sept. 24, 2004 0.01966
Oct. 25, 2004 0.02034
Nov. 24, 2004 0.02106
Dec. 22, 2004 0.02235
Jan. 27, 2005 0.01993
Feb. 24, 2005 0.02297
March 30, 2005 0.02196
April 28, 2005 0.02286
May 26, 2005 0.02301
Total distributions $0.25094
- --------------------------------------------------------------------------------
41 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Class C
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
June 25, 2004 $0.01867
July 26, 2004 0.01856
Aug. 25, 2004 0.01964
Sept. 24, 2004 0.01966
Oct. 25, 2004 0.02036
Nov. 24, 2004 0.02107
Dec. 22, 2004 0.02236
Jan. 27, 2005 0.01997
Feb. 24, 2005 0.02298
March 30, 2005 0.02199
April 28, 2005 0.02289
May 26, 2005 0.02300
Total distributions $0.25115
Class I
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
July 26, 2004 0.00854
Aug. 25, 2004 0.02657
Sept. 24, 2004 0.02739
Oct. 25, 2004 0.02828
Nov. 24, 2004 0.02859
Dec. 22, 2004 0.02896
Jan. 27, 2005 0.02933
Feb. 24, 2005 0.03017
March 30, 2005 0.03070
April 28, 2005 0.03043
May 26, 2005 0.03031
Total distributions $0.29927
- --------------------------------------------------------------------------------
42 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Class Y
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
June 25, 2004 $0.02497
July 26, 2004 0.02523
Aug. 25, 2004 0.02621
Sept. 24, 2004 0.02618
Oct. 25, 2004 0.02707
Nov. 24, 2004 0.02761
Dec. 22, 2004 0.02847
Jan. 27, 2005 0.02787
Feb. 24, 2005 0.02912
March 30, 2005 0.02935
April 28, 2005 0.02914
May 26, 2005 0.02910
Total distributions $0.33032
- --------------------------------------------------------------------------------
43 -- AXP SELECTIVE FUND -- 2005 ANNUAL 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 May 31, 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.
- --------------------------------------------------------------------------------
44 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Beginning Ending Expenses
account value account value paid during Annualized
Dec. 1, 2004 May 31, 2005 the period(a) expense ratio
Class A
Actual(b) $1,000 $1,023.80 $4.79(c) .95%
Hypothetical (5% return before expenses) $1,000 $1,020.19 $4.78(c) .95%
Class B
Actual(b) $1,000 $1,020.00 $8.56(c) 1.70%
Hypothetical (5% return before expenses) $1,000 $1,016.45 $8.55(c) 1.70%
Class C
Actual(b) $1,000 $1,020.00 $8.56(c) 1.70%
Hypothetical (5% return before expenses) $1,000 $1,016.45 $8.55(c) 1.70%
Class I
Actual(b) $1,000 $1,025.50 $3.13 .62%
Hypothetical (5% return before expenses) $1,000 $1,021.84 $3.13 .62%
Class Y
Actual(b) $1,000 $1,024.70 $3.94(c) .78%
Hypothetical (5% return before expenses) $1,000 $1,021.04 $3.93(c) .78%
(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 182/365 (to reflect the one-half year period).
(b) Based on the actual return for the six months ended May 31, 2005: +2.38%
for Class A, +2.00% for Class B, +2.00% for Class C, +2.55% for Class I and
+2.47% for Class Y.
(c) Beginning June 1, 2005, AEFC and its affiliates have contractually agreed
to waive certain fees and to absorb certain expenses until May 31, 2006,
unless sooner terminated at the discretion of the Fund's Board of
Directors. Under this agreement, net expenses will not exceed 0.89% for
Class A; 1.64% for Class B; 1.64% for Class C and 0.72% for Class Y. If
this agreement had been in place for the entire six-month period ended May
31, 2005, the actual expenses paid would have been: $4.49 for Class A,
$8.26 for Class B, $8.26 for Class C and $3.63 for Class Y; the
hypothetical expenses paid would have been: $4.48 for Class A, $8.25 for
Class B, $8.25 for Class C and $3.63 for Class Y.
- --------------------------------------------------------------------------------
45 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Board Members and Officers
Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.
The following is a list of the Fund's board members. Each member oversees 14
Master Trust portfolios and 90 American Express mutual funds. Board members
serve until the next regular shareholders' meeting or until he or she reaches
the mandatory retirement age established by the board.
Independent Board Members
Name, address, age Position held Principal occupation during Other directorships
with Fund and past five years
length of
service
- -------------------------------------- --------------- ------------------------------ -----------------------------
Arne H. Carlson Board member Chair, Board Services
901 S. Marquette Ave. since 1999 Corporation (provides
Minneapolis, MN 55402 administrative services to
Age 70 boards). Former Governor
of Minnesota
- -------------------------------------- --------------- ------------------------------ -----------------------------
Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Scottish Power PLC, Vulcan
901 S. Marquette Ave. since 2002 Fluor Corporation Materials Company, Inc.
Minneapolis, MN 55402 (engineering and (construction
Age 67 construction) since 1998 materials/chemicals)
- -------------------------------------- --------------- ------------------------------ -----------------------------
Livio D. DeSimone Board member Retired Chair of the Board Cargill, Incorporated
30 Seventh Street East since 2001 and Chief Executive Officer, (commodity merchants and
Suite 3050 Minnesota Mining and processors), General Mills,
St. Paul, MN 55101-4901 Manufacturing (3M) Inc. (consumer foods),
Age 71 Vulcan Materials Company
(construction materials/
chemicals), Milliken &
Company (textiles and
chemicals), and Nexia
Biotechnologies, Inc.
- -------------------------------------- --------------- ------------------------------ -----------------------------
Patricia M. Flynn Board member Trustee Professor of BostonFed Bancorp, Inc.
901 S. Marquette Ave. since 2004 Economics and Management, (holding company) and its
Minneapolis, MN 55402 Bentley College since 2002; subsidiary Boston Federal
Age 54 former Dean, McCallum Savings Bank
Graduate School of Business,
Bentley College from 1999 to
2002
- -------------------------------------- --------------- ------------------------------ -----------------------------
Anne P. Jones Board member Attorney and Consultant
901 S. Marquette Ave. since 1985
Minneapolis, MN 55402
Age 70
- -------------------------------------- --------------- ------------------------------ -----------------------------
Stephen R. Lewis, Jr. Board member Retired President and Valmont Industries, Inc.
901 S. Marquette Ave. since 2002 Professor of Economics, (manufactures irrigation
Minneapolis, MN 55402 Carleton College systems)
Age 66
- -------------------------------------- --------------- ------------------------------ -----------------------------
- --------------------------------------------------------------------------------
46 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Independent Board Members (continued)
Name, address, age Position Principal occupation during Other directorships
held with past five years
Fund and
length of
service
- -------------------------------------- --------------- ------------------------------- ----------------------------
Catherine James Paglia Board member Director, Enterprise Asset Strategic Distribution,
901 S. Marquette Ave. since 2004 Management, Inc. (private Inc. (transportation,
Minneapolis, MN 55402 real estate and asset distribution and logistics
Age 52 management company) since 1999 consultants)
- -------------------------------------- --------------- ------------------------------- ----------------------------
Alan K. Simpson Board member Former three-term United
1201 Sunshine Ave. since 1997 States Senator for Wyoming
Cody, WY 82414
Age 73
- -------------------------------------- --------------- ------------------------------- ----------------------------
Alison Taunton-Rigby Board member Founder and Chief Executive Hybridon, Inc.
901 S. Marquette Ave. since 2002 Officer, RiboNovix, Inc. (biotechnology)
Minneapolis, MN 55402 since 2004; President,
Age 61 Forester Biotech since 2000;
prior to that, President and
CEO, Aquila
Biopharmaceuticals, Inc.
- -------------------------------------- --------------- ------------------------------- ----------------------------
Board Member Affiliated with AEFC*
Name, address, age Position held Principal occupation during Other directorships
with Fund and past five years
length of
service
- -------------------------------------- --------------- ------------------------------- ----------------------------
William F. Truscott Board member Senior Vice President - Chief
53600 AXP Financial Center since 2001, Investment Officer of AEFC
Minneapolis, MN 55474 Vice President since 2001. Former Chief
Age 44 since 2002 Investment Officer and
Managing Director, Zurich
Scudder Investments
- -------------------------------------- --------------- ------------------------------- ----------------------------
* Interested person by reason of being an officer, director and/or employee of
AEFC.
- --------------------------------------------------------------------------------
47 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
The board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. The officers serve at the
pleasure of the board. In addition to Mr. Truscott, who is vice president, the
Fund's other officers are:
Other Officers
Name, address, age Position held Principal occupation during Other directorships
with Fund and past five years
length of
service
- -------------------------------------- --------------- ------------------------------- ----------------------------
Jeffrey P. Fox Treasurer Vice President - Investment
105 AXP Financial Center since 2002 Accounting, AEFC, since
Minneapolis, MN 55474 2002; Vice President -
Age 50 Finance, American Express
Company, 2000-2002; Vice
President - Corporate
Controller, AEFC, 1996-2000
- -------------------------------------- --------------- ------------------------------- ----------------------------
Paula R. Meyer President Senior Vice President and
596 AXP Financial Center since 2002 General Manager - Mutual
Minneapolis, MN 55474 Funds, AEFC, since 2002; Vice
Age 51 President and Managing
Director - American Express
Funds, AEFC, 2000-2002; Vice
President, AEFC, 1998-2000
- -------------------------------------- --------------- ------------------------------- ----------------------------
Leslie L. Ogg Vice President of Board Services
901 S. Marquette Ave. President, Corporation
Minneapolis, MN 55402 Age 66 General
Counsel, and
Secretary
since 1978
- -------------------------------------- --------------- ------------------------------- ----------------------------
Beth E. Weimer Chief Vice President and Chief
172 AXP Financial Center Compliance Compliance Officer, AEFC,
Minneapolis, MN 55474 Officer since since 2001; Vice President
Age 52 2004 and Chief Compliance Officer,
AEFA, 2001-2005; Partner,
Arthur Andersen Regulatory
Risk Services, 1998-2001
- -------------------------------------- --------------- ------------------------------- ----------------------------
The SAI has additional information about the Fund's directors and is available,
without charge, upon request by calling (800) 862-7919.
- --------------------------------------------------------------------------------
48 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Approval of Investment Management Services Agreement
American Express Financial Corporation (AEFC), a wholly-owned subsidiary of
American Express Company, serves as the investment manager to the Fund. Under an
Investment Management Services Agreement (the Agreement), AEFC provides
investment advice and other services to the Fund. Throughout the year, the
Funds' Board of Directors and the Board's Investment Review Committee monitor
these services.
Each year the Board determines whether to continue the Agreement by evaluating
the quality and level of service received and the costs associated with those
services. AEFC prepares detailed reports for the Board and its Contracts
Committee in March and April and provides data prepared by independent
organizations to assist the Board in making this determination. The Board gives
considerable weight to the work, deliberations and conclusions of the Contracts
and Investment Review Committees in determining whether to continue the
Agreement.
On February 1, 2005, American Express Company announced its intention to pursue
a spin-off of AEFC by distributing shares of the common stock of AEFC to
shareholders of American Express Company. At a meeting held in person on April
14, 2005, the Board, including a majority of the independent members, approved
the continuation of the Agreement for an interim period, not to exceed one year,
ending on the later of (i) the effective date of the spin-off or (ii) the
approval by the Fund's shareholders of a new investment management services
agreement with AEFC (the Interim Period). The spin-off will not result in an
"assignment" of the Agreement under the Investment Company Act of 1940 and,
therefore, will not cause the termination of the Agreement according to its
terms. In connection with the spin-off AEFC has proposed that going forward,
services under the Agreement be provided by an affiliate, RiverSource
Investments, LLC (RiverSource). Independent counsel advised the Board that it
would be prudent, in connection with the spin-off, to consider a new agreement
with RiverSource and to seek shareholder approval of that agreement as soon as
practical thereafter.
Investment performance is a major factor in the evaluation process, and the
Board reviewed the Fund's performance over a range of different periods by
comparing its performance to relevant Lipper and broader market indices. The
Board considered that over time the Fund's investment performance should be
above the median for a peer group of funds with similar investment goals and
noted that the Fund's investment performance in 2004 approximated the median.
The Board noted that, in addition to portfolio management and investment
research, AEFC provides portfolio trading, daily net asset value calculation,
management of cash flow, product development, administration of its compliance
and legal departments, access to distribution, accounting and recordkeeping, and
reporting to the Board and shareholders. To evaluate these services, the Board
referred to surveys and benchmarks established by commercial providers, trade
associations and AEFC's internal processes. The Board concluded that the
services provided were consistent with services provided by investment managers
to comparable mutual funds.
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49 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
The Board also evaluated the price paid for the services provided by AEFC,
noting the existence of a pricing philosophy, established by the Board and AEFC,
that seeks to maintain total Fund expenses within a range of the median expenses
charged to comparable funds sold through financial advisors. The Board
considered detailed information set forth in an annual report on fees and
expenses, including, among other things, data showing a comparison of the Fund's
expenses with median expenses paid by funds in its comparison group and data
showing the Fund's contribution to AEFC's profitability. The Board determined
that while the Fund's expenses are relatively high for its comparison group, the
existing fee waiver has been increased to reduce further the expenses the Fund
will pay.
The Board considered the economies of scale that might be realized by AEFC as
the Fund grew and took note of the extent to which Fund shareholders also might
benefit from such growth. The Board considered that the Agreement provided for
lower fees as assets increase at pre-established breakpoints and concluded that
the Agreement satisfactorily provided for sharing these economies of scale.
The Board took into account the Contracts Committee's discussion comparing the
fees AEFC charges to the Fund with those it charges to institutional clients,
noting that the relatively higher fees paid by the Fund were principally
attributable to the additional services required to manage a regulated mutual
fund, like the Fund, and the operation of a large mutual fund family. The Board
also considered the profitability realized by AEFC and its affiliates from its
relationship with the Fund. The Board took into account the services acquired by
AEFC through the use of commission dollars paid by the Fund on portfolio
transactions. The Board concluded that AEFC's overall costs and profitability
were appropriate, although profitability may be too low on an ongoing basis.
The Board noted that the fees paid by the Fund should permit AEFC to offer
competitive compensation to its personnel, make necessary investments in its
business and earn an appropriate profit. Based on the foregoing, the Board
concluded that the fees paid to AEFC under the Agreement were fair and
reasonable and determined to approve renewal of the Agreement for the Interim
Period.
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.
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50 -- AXP SELECTIVE FUND -- 2005 ANNUAL 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.