UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-2503
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AXP FIXED INCOME SERIES, INC.
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(Exact name of registrant as specified in charter)
50606 AXP Financial Center, Minneapolis, Minnesota 55474
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(Address of principal executive offices) (Zip code)
Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268
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(Name and address of agent for service)
Registrant's telephone number, including area code: (612) 330-9283
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Date of fiscal year end: 8/31
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Date of reporting period: 2/28
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Semiannual Report
[LOGO RiverSource(SM)
Investments]
RIVERSOURCE(SM)
DIVERSIFIED BOND FUND
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SEMIANNUAL REPORT FOR THE
PERIOD ENDED FEB. 28, 2006
> RIVERSOURCE DIVERSIFIED BOND FUND
(FORMERLY AXP(R) DIVERSIFIED BOND FUND)
SEEKS TO PROVIDE SHAREHOLDERS WITH A
HIGH LEVEL OF CURRENT INCOME WHILE
CONSERVING THE VALUE OF THE
INVESTMENT FOR THE LONGEST
PERIOD OF TIME.
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TABLE OF CONTENTS
Fund Snapshot .............................................................. 3
Performance Summary ........................................................ 4
Questions & Answers with Portfolio Management .............................. 5
Investments in Securities .................................................. 10
Financial Statements ....................................................... 24
Notes to Financial Statements .............................................. 27
Fund Expenses Example ...................................................... 41
Approval of Investment Management Services Agreement ....................... 43
Proxy Voting ............................................................... 47
Results of Meeting of Shareholders ......................................... 48
[Dalbar LOGO]
RiverSource Funds' shareholder reports 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 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
FUND SNAPSHOT
AT FEB. 28, 2006
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PORTFOLIO MANAGERS
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PORTFOLIO MANAGERS SINCE YEARS IN INDUSTRY
Jamie Jackson, CFA 6/03 17
Scott Kirby 2/03 19
Tom Murphy, CFA 2/03 19
Nicholas Pifer, CFA 2/03 15
Jennifer Ponce de Leon 2/03 16
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FUND OBJECTIVE
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For investors seeking a high level of current income while conserving the value
of the investment for the longest period of time.
Inception dates by class
A: 10/3/74 B: 3/20/95 C: 6/26/00 I: 3/4/04 Y: 3/20/95
Ticker symbols by class
A: INBNX B: ININX C: AXBCX I: RDBIX Y: IDBYX
Total net assets $2.259 billion
Number of holdings 387
Weighted average life(1) 6.1 years
Effective duration(2) 4.2 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 rating represents the average credit quality
of the underlying bonds in the portfolio.
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SECTOR COMPOSITION
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Percentage of portfolio assets
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Mortgage-Backed 41.9%
U.S. Government Obligations & Agencies 24.2%
Corporate Bonds* 16.2%
Commercial Mortgage-Backed 10.4%
Short-Term Securities** 3.7%
Asset-Backed 2.0%
Foreign Government 1.6%
* Includes 4.9% Telecommunication, 3.0% Consumer Discretionary, 2.8%
Utilities, 1.7% Financials, 1.5% Consumer Staples, 1.1% Health Care, 0.7%
Industrials, 0.3% Energy and 0.2% Materials.
** Of the 3.7%, 2.4% is due to security lending activity and 1.3% is the
Fund's cash equivalent position.
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CREDIT QUALITY SUMMARY
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Percentage of bond portfolio assets
AAA bonds 81.4%
AA bonds 1.8
A bonds 4.9
BBB bonds 9.0
Non-investment grade bonds 2.9
Individual security ratings are based on information from Standard & Poor's
Corp. and Moody's Investors Service. If a rating is unavailable, the rating is
determined through an internal analysis, if appropriate. 0.3% of the portfolio
rating above was determined through internal analysis.
Investment products, including shares of mutual funds, involve investment risks
including possible loss of principal and fluctuation in value.
There are risks associated with an investment in a bond fund, including the
impact of interest rates and credit. These and other risk considerations are
discussed in the fund's prospectus. In general, bond prices rise when interest
rates fall and vice versa. This effect is usually more pronounced for
longer-term securities.
Lower-rated bonds generally have more volatile prices and carry more risk to
principal and income than investment grade securities.
Fund holdings as of the date given, are subject to change at any time and are
not recommendations to buy or sell any security.
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RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 3
PERFORMANCE SUMMARY
PERFORMANCE COMPARISON
For the six-month period ended Feb. 28, 2006
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
RiverSource Diversified Bond Fund Class A (excluding sales charge) -0.08%
Lehman Brothers Aggregate Bond Index(1) (unmanaged) -0.11%
Lipper Intermediate Investment Grade Index(2) -0.15%
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.riversource.com/funds.
(1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up
of a representative list of government, corporate, asset-backed and
mortgage-backed securities. The index is frequently used as a general
measure of bond market performance. The index reflects reinvestment of all
distributions and changes in market prices, but excludes brokerage
commissions or other fees.
(2) The Lipper Intermediate Investment Grade Index includes the 30 largest
investment grade funds tracked by Lipper Inc. The index's returns include
net reinvested dividends.
The 4.75% sales charge applicable to Class A shares of the Fund is not reflected
in the bar chart. If reflected, returns would be lower than those shown. The
performance of other classes may vary from that shown because of differences in
expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
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SEC YIELDS
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At Feb. 28, 2006 by class
A: 4.16% B: 3.60% C: 3.59% I: 8.11% Y: 4.53%
At March 31, 2006 by class
A: 4.15% B: 3.59% C: 3.58% I: 4.76% Y: 4.53%
The Securities and Exchange Commission (SEC) yield is calculated by dividing
anticipated net investment income during a 31-day period by the public offering
price (POP) per share on the last day of the period, and converting the results
to yearly figures. See Average Annual Total Returns on page 5 for additional
performance information.
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STYLE MATRIX
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[GRAPHIC OMITTED]
Shading within the style matrix indicates areas in which the Fund generally
invests.
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4 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
QUESTIONS & ANSWERS
WITH PORTFOLIO MANAGEMENT
Below, RiverSource Diversified Bond Fund's portfolio management team discusses
the Fund's results and positioning for the semiannual period ended Feb. 28,
2006. On March 10, 2006, the assets of RiverSource Selective Fund were merged
into RiverSource Diversified Bond Fund. This reorganization was completed after
shareholders of RiverSource Selective Fund approved the merger plan on Feb. 15,
2006.
Q: How did RiverSource Diversified Bond Fund perform for the first half of
the fiscal year?
A: RiverSource Diversified Bond Fund's Class A shares fell 0.08%, excluding
sales charge, for the six months ended Feb. 28, 2006. The Fund
outperformed its benchmark, the Lehman Brothers Aggregate Bond Index
(Lehman Index), which decreased 0.11%. The Fund also outperformed the
Lipper Intermediate
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AVERAGE ANNUAL TOTAL RETURNS
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CLASS A CLASS B CLASS C CLASS I CLASS Y
(INCEPTION DATES) (10/3/74) (3/20/95) (6/26/00) (3/4/04) (3/20/95)
AFTER AFTER
NAV(1) POP(2) NAV(1) CDSC(3) NAV(1) CDSC(4) NAV(5) NAV(6)
AT FEB. 28, 2006
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6 months* -0.08% -4.83% -0.45% -5.34% -0.45% -1.43% +0.28% +0.01%
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1 year +2.14% -2.70% +1.38% -3.53% +1.38% +0.39% +2.68% +2.31%
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3 years +3.25% +1.59% +2.47% +1.21% +2.47% +2.47% N/A +3.42%
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5 years +4.34% +3.33% +3.55% +3.21% +3.55% +3.55% N/A +4.46%
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10 years +5.30% +4.79% +4.51% +4.51% N/A N/A N/A +5.45%
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Since inception +9.28% +9.11% +5.43% +5.43% +4.65% +4.65% +3.13% +6.39%
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AT MARCH 31, 2006
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6 months* -0.03% -4.78% -0.41% -5.30% -0.62% -1.60% +0.33% +0.05%
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1 year +1.97% -2.88% +1.21% -3.69% +1.20% +0.22% +2.51% +2.14%
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3 years +2.90% +1.24% +2.13% +0.86% +2.05% +2.05% N/A +3.07%
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5 years +4.08% +3.08% +3.30% +2.95% +3.25% +3.25% N/A +4.21%
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10 years +5.27% +4.76% +4.48% +4.48% N/A N/A N/A +5.42%
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Since inception +9.22% +9.05% +5.30% +5.30% +4.37% +4.37% +2.58% +6.25%
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(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 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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RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 5
QUESTIONS & ANSWERS
> THE PORTFOLIO BENEFITED FROM HAVING ONLY A MODEST POSITION IN
MORTGAGE-BACKED SECURITIES EARLY IN THE PERIOD, WHEN THIS SECTOR STRUGGLED
DUE TO HIGHER INTEREST RATES AND WEAK INVESTOR DEMAND.
Investment Grade Index, representing the Fund's peer group, which declined
0.15%.
Q: What market conditions were present during the semiannual period?
A: The modestly negative returns of the fixed income market virtually across
the board were the result of sharply rising interest rates, particularly
in short-term securities. Interest rates rose during the period largely in
reaction to continued policy tightening by the Federal Reserve Board (the
Fed), which hiked interest rates four more times, bringing the targeted
federal funds rate to 4.50% by the end of February 2006. Rates also rose
in response to signs that economic growth had rebounded strongly in the
third calendar quarter and looked to be gaining momentum into the fourth
quarter and 2006.
Counterbalancing these fixed income market headwinds, core inflation was
modest, foreign demand for U.S. assets remained strong and the Fed made
changes to its policy statement that seemed to open the door for a pause
or a stop in its rate hikes in the near future. These factors kept yields
on longer-term bonds fairly contained, prompting a slight inversion of the
yield curve between two-year and ten-year Treasury notes. An inversion
occurs when short-term interest rates are higher than long-term rates. The
inversion -- though modest to date -- left market participants to
contemplate whether the market was signaling a dramatic economic slowdown
in the coming months or just reflecting robust demand for long-dated U.S.
assets on the part of foreign investors, central banks and pension funds.
Q: What factors most significantly affected Fund performance?
A: As rates rose during the period, particularly in the two-year to five-year
part of the yield curve, the Fund benefited from its comparatively short
duration positioning. Duration is a measure of the Fund's sensitivity to
changes in interest rates.
From a sector perspective, a sizable allocation to commercial
mortgage-backed securities (CMBS) and
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6 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
QUESTIONS & ANSWERS
asset-backed securities helped the Fund's results, as both of these
sectors outperformed Treasuries during the six months ended Feb. 28, 2006.
Exposure to high yield corporate bonds -- and effective issue selection
within this sector -- further boosted the Fund's returns. High yield
corporate bonds were among the best-performing fixed income sectors during
the period. Tactical sector positioning within mortgage-backed securities
helped Fund performance as well. The portfolio benefited from having only
a modest position in mortgage-backed securities early in the period, when
this sector struggled due to higher interest rates and weak investor
demand. The portfolio then benefited from a shift near the end of 2005 to
a more significant exposure to these securities, as mortgage-backed
securities began to rebound.
The Fund's position in Treasury Inflation Protected Securities (TIPS)
further helped its results, as TIPS outperformed nominal Treasury
securities, or non-inflation protected Treasury securities, during the
semiannual period.
Conversely, detracting from the Fund's results was its positioning in
non-U.S. dollar bonds, or bonds denominated in foreign currencies. The
U.S. dollar strengthened vs. the euro and the British pound during the
period, eroding the value of the portfolio's non-U.S. dollar bond holdings
in U.S. dollar terms. Remember, a strengthening U.S. dollar decreases the
value of the Fund's foreign currency denominated securities when expressed
in U.S. dollar terms and vice versa. Also, defensive positioning within
the Fund's allocation to mortgage-backed securities detracted from its
results -- in particular, exposure to higher-coupon securities, adjustable
rate mortgages (ARMs) and mortgages with attractive structural attributes.
These securities overall underperformed the mortgage sector as a whole.
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RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 7
QUESTIONS & ANSWERS
> WE INTEND TO POSITION THE FUND FOR ONGOING U.S. ECONOMIC EXPANSION AND
STILL HIGHER INTEREST RATES, AS THESE THEMES ARE LIKELY TO CONTINUE TO
WEIGH ON THE FIXED INCOME MARKETS FOR SOME TIME.
Q: What changes did you make to the Fund and how is it currently positioned?
A: We maintained a defensive duration position for the majority of the period
of approximately half a year shorter than the Lehman Index. At the end of
the period -- due to higher rates -- we became less defensive and moved
the Fund's duration to approximately a quarter of a year shorter than the
Lehman Index.
We added to the Fund's exposure to two-year U.S. Treasuries, based on our
view that short-term maturities had become an increasingly attractive
value. We maintained the Fund's more moderate allocation to ten-year
Treasuries and its more significant position in 25- to 30-year maturity
bonds. As mentioned earlier, we also added to the Fund's allocation to
mortgage-backed securities -- primarily in higher coupon securities --
upon weakness in the sector. We had started to see better value in these
securities, and we believed they looked increasingly attractive.
We sold the Fund's TIPS holdings, as these securities reached the price
targets we had set for them. In addition, we further reduced the Fund's
already modest position in corporate bonds. During 2005, corporate bonds
saw the downgrade to "junk" status of its two largest issuers -- Ford and
General Motors -- and a general rise in negative event risk, such as
merger and acquisition activity, leveraged buyouts and share buybacks. In
all, the Fund's portfolio turnover was 130% for the semiannual period.
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 expansion and
still higher interest rates, as these themes are likely to continue to
weigh on the fixed income markets for some time. We expect the combination
of solid economic growth and higher inflation risks to push the Fed to
raise rates higher than is implied by prevailing bond yields. We believe
the recent yield curve inversion -- and the resultant fears of an
impending recession -- are fleeting and generally not supported by recent
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8 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
QUESTIONS & ANSWERS
economic data. Though we believe the Fed is likely to pause when the
targeted federal funds rate reaches 5% or so, we also believe the economy
will continue to expand at a brisk pace for at least the first three
quarters of 2006. Strong economic growth -- and little excess productive
capacity -- will, in our view, force a revival of inflation pressures, in
turn putting upward pressure on longer-term interest rates.
Based on this view, we intend to maintain the Fund's duration shorter than
that of the Lehman Index for the near term. We believe fixed income yields
will move materially higher in the months ahead.
In the non-Treasury sectors, we intend to maintain a less-than-Lehman
Index allocation to corporate bonds. In mortgages, we plan to remain
defensively positioned, emphasizing premium coupons, ARMs and attractive
structural attributes. We intend to maintain the Fund's sizable positions
in CMBS and asset-backed securities, as valuations remain attractive in
those sectors. We also intend to maintain the Fund's modest positions in
high yield corporate bonds and in non-U.S. dollar bonds. Within high yield
corporate bonds, we continue to emphasize securities rated BB and bonds
that in our view have investment-grade quality fundamentals. As for
non-U.S. dollar bonds, we believe sustained dollar strength seems very
unlikely, so we are maintaining our current position.
We continue to monitor job creation and inflation numbers, as they remain
key indicators for the economy in the coming months. As always, we will
maintain a disciplined focus on individual security selection.
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RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 9
INVESTMENTS IN SECURITIES
RiverSource Diversified Bond Fund
FEB. 28, 2006 (UNAUDITED)
(Percentages represent value of investments compared to net assets)
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BONDS (101.5%)
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COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
SOVEREIGN (1.7%)
Bundesrepublik Deutschland
(European Monetary Unit)
01-04-07 6.00% 18,818,000(c) $ 23,010,522
United Kingdom Treasury
(British Pound)
12-07-06 7.50 8,906,000(c) 15,985,745
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Total 38,996,267
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U.S. GOVERNMENT OBLIGATIONS & AGENCIES (25.6%)
Federal Farm Credit Bank
10-10-08 4.25 9,800,000 9,651,344
Federal Home Loan Bank
01-18-08 4.63 36,820,000 36,630,009
04-18-08 4.13 25,615,000 25,224,141
Federal Home Loan Mtge Corp
06-15-08 3.88 36,935,000 36,112,458
10-15-08 5.13 21,950,000 22,058,170
12-19-08 4.63 8,000,000 7,938,320
03-18-09 3.76 6,890,000 6,649,608
07-12-10 4.13 47,870,000 46,371,047
Federal Natl Mtge Assn
01-15-08 4.63 5,215,000 5,183,848
08-15-08 3.25 86,170,000 82,934,316
10-15-08 4.50 11,800,000 11,678,849
U.S. Treasury
06-30-07 3.63 6,745,000 6,649,619
11-30-07 4.25 4,131,000 4,099,855
01-15-11 4.25 10,750,000 10,583,698
02-28-11 4.50 5,660,000(g) 5,634,796
02-28-11 4.50 5,985,000 5,958,349
11-15-15 4.50 54,095,000(p) 53,706,165
02-15-16 4.50 46,565,000(p) 46,390,381
08-15-23 6.25 79,219,000(n) 93,670,287
02-15-26 6.00 50,482,000 59,004,775
02-15-31 5.38 1,050,000 1,168,822
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Total 577,298,857
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ASSET-BACKED (2.0%)
Aesop Funding II LLC
Series 2004-2A Cl A1 (FGIC)
04-20-08 2.76 2,000,000(d,k) 1,957,327
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BONDS (CONTINUED)
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COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
ASSET-BACKED (CONT.)
AmeriCredit Automobile Receivables Trust
Series 2005-DA Cl A3
12-06-10 4.87% $ 2,200,000 $ 2,190,375
ARG Funding
Series 2005-1A Cl A3 (MBIA)
04-20-11 4.29 6,300,000(d,k) 6,078,761
Capital Auto Receivables Asset Trust
Series 2004-1
09-15-10 2.84 3,000,000 2,908,699
Capital One Auto Finance Trust
Series 2005-BSS Cl A3
11-15-09 4.08 4,700,000 4,618,737
Carmax Auto Owner Trust
Series 2005-1 Cl A4
03-15-10 4.35 2,400,000 2,362,144
Countrywide Asset-Backed Ctfs
Series 2005-10 Cl AF6
02-25-36 4.92 1,375,000 1,324,376
Long Beach Auto Receivables Trust
Series 2004-C Cl A3 (FSA)
09-15-09 3.40 4,000,000(k) 3,959,920
Metris Master Trust
Series 2004-2 Cl D
10-20-10 7.82 1,200,000(d,i) 1,212,240
Metris Master Trust
Series 2005-1A Cl D
03-21-11 6.47 1,375,000(d,i) 1,378,309
Morgan Stanley Auto Loan Trust
Series 2004-HB2 Cl A3
03-16-09 2.94 4,300,000 4,210,879
Popular ABS Mtge Pass-Through Trust
Series 2005-A Cl AF2
06-25-35 4.49 2,660,000 2,604,119
Renaissance Home Equity Loan Trust
Series 2005-4 Cl A3
02-25-36 5.57 3,420,000 3,418,461
Residential Asset Securities
Series 2006-KS1 Cl A2
02-25-36 4.72 7,225,000(i) 7,222,745
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Total 45,447,092
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See accompanying notes to investments in securities.
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10 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
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BONDS (CONTINUED)
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COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
COMMERCIAL MORTGAGE-BACKED (11.0%)(F)
Banc of America Commercial Mtge
Series 2005-1 Cl A4
11-10-42 4.88% $ 3,600,000 $ 3,567,001
Banc of America Commercial Mtge
Series 2005-6 Cl A4
09-10-47 5.18 5,875,000 5,852,870
Banc of America Large Loan
Series 2005-BOCA Cl A1
12-15-16 4.69 2,824,731(d,i) 2,825,363
Banc of America Large Loan
Series 2005-BOCA Cl A2
12-15-16 4.74 3,700,000(d,i) 3,701,703
Bear Stearns Commercial Mtge Securities
Series 2004-T16 Cl A3
02-13-46 4.03 3,240,000 3,117,101
Bear Stearns Commercial Mtge Securities
Series 2005-PW10 Cl A4
12-11-40 5.41 4,425,000 4,456,531
Bear Stearns Commercial Mtge Securities
Series 2005-PWR8 Cl A1
06-11-41 4.21 6,939,351 6,793,000
Bear Stearns Commercial Mtge Securities
Series 2005-T20 Cl E
10-12-42 5.16 2,400,000 2,346,000
California State Teachers' Retirement System Trust
Series 2002-C6 Cl A3
11-20-14 4.46 6,574,344(d) 6,425,621
CDC Commercial Mtge Trust
Series 2002-FX1 Cl A2
11-15-30 5.68 4,500,000 4,584,350
CDC Commercial Mtge Trust
Series 2006-CD2
01-15-46 5.42 6,500,000(g) 6,532,442
Citigroup Commercial Mtge Trust
Series 2005-EMG Cl A1
09-20-51 4.15 7,587,065(d) 7,433,025
Citigroup/Deutsche Bank Commercial Mtge Trust
Series 2005-CD1 Cl A4
07-15-44 5.23 7,000,000 7,005,319
Citigroup/Deutsche Bank Commercial Mtge Trust
Series 2005-CD1 Cl ASB
07-15-44 5.23 2,225,000 2,224,437
Commercial Mtge Pass-Through Ctfs
Series 2006-CN2A Cl BFL
02-05-19 4.90 1,950,000(d,i) 1,950,000
CS First Boston Mtge Securities
Series 2002-CKS4 Cl A1
11-15-36 4.49 4,760,372 4,656,573
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BONDS (CONTINUED)
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COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
COMMERCIAL MORTGAGE-BACKED (CONT.)
CS First Boston Mtge Securities
Series 2005-C5 Cl A2
08-15-38 5.10% $ 2,225,000 $ 2,213,507
Federal Natl Mtge Assn #385683
02-01-13 4.83 6,273,695 6,131,474
Federal Natl Mtge Assn #555806
10-01-13 5.11 533,704 529,652
GE Capital Commercial Mtge
Series 2004-C2 Cl A2
03-10-40 4.12 3,000,000 2,890,320
GE Capital Commercial Mtge
Series 2005-C3 Cl A1
07-10-45 4.59 4,381,131 4,316,702
General Electric Capital Assurance
Series 2003-1 Cl A3
05-12-35 4.77 7,650,000(d) 7,478,546
GMAC Commercial Mtge Securities
Series 1999-C1 Cl B
05-15-33 6.30 5,800,000 5,962,669
GMAC Commercial Mtge Securities
Series 2004-C3 Cl A4
12-10-41 4.55 4,700,000 4,533,023
GMAC Commercial Mtge Securities
Series 2005-C1 Cl A1
05-10-43 4.21 3,425,693 3,355,692
Greenwich Capital Commercial Funding
Series 2004-GG1 Cl A5
06-10-36 4.88 2,400,000 2,361,656
GS Mtge Securities II
Series 2004-GG2 Cl A4
08-10-38 4.96 4,300,000 4,239,141
GS Mtge Securities II
Series 2005-GG4 Cl A1
07-10-39 4.37 5,642,378 5,531,227
JPMorgan Chase Commercial Mtge Securities
Series 2002-CIB5 Cl A1
10-12-37 4.37 5,082,174 4,978,919
JPMorgan Chase Commercial Mtge Securities
Series 2003-CB6 Cl A1
07-12-37 4.39 7,311,135 7,084,929
JPMorgan Chase Commercial Mtge Securities
Series 2003-CB6 Cl A2
07-12-37 5.26 4,200,000 4,188,070
JPMorgan Chase Commercial Mtge Securities
Series 2003-LN1 Cl A1
10-15-37 4.13 3,358,808 3,225,648
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 11
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
COMMERCIAL MORTGAGE-BACKED (CONT.)
JPMorgan Chase Commercial Mtge Securities
Series 2003-ML1A Cl A1
03-12-39 3.97% $ 2,964,557 $ 2,855,200
JPMorgan Chase Commercial Mtge Securities
Series 2004-CBX Cl A3
01-12-37 4.18 3,000,000 2,896,449
JPMorgan Chase Commercial Mtge Securities
Series 2005-LDP2 Cl A1
07-15-42 4.33 5,338,657 5,244,003
JPMorgan Chase Commercial Mtge Securities
Series 2005-LDP5 Cl A4
12-15-44 5.18 8,675,000 8,656,674
LB-UBS Commercial Mtge Trust
Series 2002-C2 Cl A3
06-15-26 5.39 7,360,000 7,406,289
LB-UBS Commercial Mtge Trust
Series 2002-C4 Cl A4
09-15-26 4.56 5,200,000 5,054,077
LB-UBS Commercial Mtge Trust
Series 2002-C4 Cl A5
09-15-31 4.85 6,000,000 5,862,540
LB-UBS Commercial Mtge Trust
Series 2004-C2 Cl A3
03-15-29 3.97 3,275,000 3,068,511
LB-UBS Commercial Mtge Trust
Series 2004-C4 Cl A3
06-15-29 4.98 3,000,000 2,993,417
LB-UBS Commercial Mtge Trust
Series 2004-C6 Cl A4
08-15-29 4.58 4,425,000 4,293,830
LB-UBS Commercial Mtge Trust
Series 2004-C7 Cl A2
10-15-29 3.99 5,400,000 5,188,212
LB-UBS Commercial Mtge Trust
Series 2004-C8 Cl A2
12-15-29 4.20 5,800,000 5,616,256
LB-UBS Commercial Mtge Trust
Series 2005-C3 Cl A1
07-15-30 4.39 2,597,917 2,565,132
LB-UBS Commercial Mtge Trust
Series 2005-C5 Cl A2
09-15-30 4.89 4,600,000 4,539,786
Merrill Lynch Mtge Trust
Series 2005-MCP1 Cl A1
06-12-43 4.22 4,227,426 4,141,781
Morgan Stanley Capital I
Series 2003-IQ4 Cl A1
05-15-40 3.27 2,835,277 2,707,260
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
COMMERCIAL MORTGAGE-BACKED (CONT.)
Morgan Stanley Capital I
Series 2003-T11 Cl A2
06-13-41 4.34% $ 3,325,000 $ 3,236,603
Morgan Stanley Capital I
Series 2004-HQ4 Cl A5
04-14-40 4.59 3,600,000 3,478,644
Morgan Stanley Capital I
Series 2005-IQ10 Cl A4A
09-15-42 5.23 4,525,000 4,497,323
Morgan Stanley, Dean Witter Capital I
Series 2002-TOP7 Cl A2
01-15-39 5.98 10,900,000 11,309,953
Prudential Commercial Mtge Trust
Series 2003-PWR1 Cl A1
02-11-36 3.67 4,221,599 4,034,516
Wachovia Bank Commercial Mtge Trust
Series 2005-C16 Cl A2
10-15-41 4.38 2,000,000 1,942,917
Wachovia Bank Commercial Mtge Trust
Series 2005-C20 Cl A5
07-15-42 5.09 3,417,000 3,379,760
--------------
Total 247,461,644
- --------------------------------------------------------------------------------
MORTGAGE-BACKED (44.2%)(F,L)
Adjustable Rate Mtge Trust
Collateralized Mtge Obligation
Series 2005-12 Cl 2A1
03-25-36 5.74 7,737,915(h) 7,749,157
Adjustable Rate Mtge Trust
Collateralized Mtge Obligation
Series 2005-3 Cl 7A1
07-25-35 5.09 5,573,552(h) 5,501,626
Adjustable Rate Mtge Trust
Collateralized Mtge Obligation
Series 2006-1 Cl 2A1
03-25-36 5.99 8,775,000(h) 8,836,355
Banc of America Funding
Collateralized Mtge Obligation
Series 2006-A Cl 3A2
02-20-36 5.96 6,079,190(h) 6,126,303
Banc of America Mtge Securities
Collateralized Mtge Obligation
Series 2004-E Cl B1
06-25-34 4.03 2,928,895(h) 2,949,603
Banc of America Mtge Securities
Collateralized Mtge Obligation
Series 2004-F Cl B1
07-25-34 4.13 5,269,071(h) 5,095,772
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
12 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
MORTGAGE-BACKED (CONT.)
Bank of America Alternative Loan Trust
Collateralized Mtge Obligation
Series 2003-11 Cl 1A1
01-25-34 6.00% $ 6,547,136 $ 6,500,914
Bank of America Alternative Loan Trust
Collateralized Mtge Obligation
Series 2003-11 Cl 4A1
01-25-19 4.75 3,435,172 3,334,264
Bank of America Alternative Loan Trust
Series 2004-3 Cl 1A1
04-25-34 6.00 10,446,173 10,563,693
Bear Stearns Adjustable Rate Mtge Trust
Collateralized Mtge Obligation
Series 2004-10 Cl 13A1
01-25-35 5.01 6,667,370(h) 6,547,671
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2003-11T1 Cl A1
07-25-18 4.75 3,988,158 3,871,006
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-54CB Cl 2A3
11-25-35 5.50 5,331,187 5,264,963
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-54CB Cl 3A7
11-25-35 5.50 5,395,690 5,325,220
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-64CB Cl 1A1
12-25-35 5.50 9,445,065 9,401,874
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-6CB Cl 1A1
04-25-35 7.50 5,382,499 5,557,736
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-85CB Cl 2A2
02-25-36 5.50 3,444,483 3,427,188
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2006-2CB Cl A11
03-25-36 6.00 7,955,998 7,929,786
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2004-12 Cl 1M
08-25-34 4.59 3,541,042(h) 3,437,149
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
MORTGAGE-BACKED (CONT.)
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2005-R2 Cl 2A1
06-25-35 7.00% $ 7,105,082(d) $ 7,362,139
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2006-HYB1 Cl 1A1
03-20-36 5.42 5,188,002(h) 5,169,947
CS First Boston Mtge Securities
Collateralized Mtge Obligation
Series 2004-AR5 Cl CB1
06-25-34 4.39 3,354,699(h) 3,251,685
CS First Boston Mtge Securities
Collateralized Mtge Obligation
Series 2005-10 Cl 4A1
11-25-35 6.50 8,370,930 8,495,726
CS First Boston Mtge Securities
Collateralized Mtge Obligation
Series 2005-12 Cl 3A1
01-25-36 7.00 9,845,482 10,083,826
CS First Boston Mtge Securities
Collateralized Mtge Obligation
Series 2005-8 Cl 7A1
09-25-35 7.00 10,596,601 10,812,752
CS First Boston Mtge Securities
Series 2003-29 Cl 8A1
11-25-18 6.00 3,125,906 3,122,929
Downey Savings & Loan Assn Mtge Loan Trust
Collateralized Mtge Obligation
Interest Only
Series 2005-AR5 Cl X1
08-19-45 6.38 65,461,783(j) 920,556
Federal Home Loan Mtge Corp #290970
04-01-17 8.00 15,138 16,139
Federal Home Loan Mtge Corp #C00356
08-01-24 8.00 543,919 582,720
Federal Home Loan Mtge Corp #C00666
10-01-28 7.00 67,626 70,040
Federal Home Loan Mtge Corp #C53878
12-01-30 5.50 2,163,110 2,152,955
Federal Home Loan Mtge Corp #C78031
04-01-33 5.50 10,958,935 10,912,531
Federal Home Loan Mtge Corp #C79930
06-01-33 5.50 7,140,209 7,094,915
Federal Home Loan Mtge Corp #C90767
12-01-23 6.00 9,989,280 10,149,952
Federal Home Loan Mtge Corp #D96300
10-01-23 5.50 6,167,946 6,172,622
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 13
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
MORTGAGE-BACKED (CONT.)
Federal Home Loan Mtge Corp #E01127
02-01-17 6.50% $ 1,668,109 $ 1,709,433
Federal Home Loan Mtge Corp #E01419
05-01-18 5.50 3,998,408 4,016,152
Federal Home Loan Mtge Corp #E90216
05-01-17 6.00 1,894,415 1,926,564
Federal Home Loan Mtge Corp #E96516
05-01-13 4.50 2,778,369 2,702,943
Federal Home Loan Mtge Corp #E98725
08-01-18 5.00 12,648,134 12,511,030
Federal Home Loan Mtge Corp #E99684
10-01-18 5.00 8,494,319 8,400,812
Federal Home Loan Mtge Corp #G01108
04-01-30 7.00 4,258,594 4,407,097
Federal Home Loan Mtge Corp #G01535
04-01-33 6.00 7,723,539 7,851,927
Federal Home Loan Mtge Corp #G30225
02-01-23 6.00 13,077,649 13,295,863
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
01-15-18 6.50 3,514,873 3,654,341
03-15-22 7.00 1,266,569 1,264,664
10-15-27 5.00 21,553,000 21,261,224
06-15-28 5.00 13,925,000 13,733,304
12-15-28 5.50 6,005,000 5,996,389
02-15-33 5.50 8,687,494 8,709,750
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
02-15-14 17.16 2,988,591(j) 162,848
10-15-22 14.56 8,936,496(j) 500,341
Federal Natl Mtge Assn
03-01-21 6.00 6,000,000(g) 6,114,372
03-01-36 6.00 24,725,000(g) 24,949,059
03-01-36 6.50 23,000,000(g) 23,546,251
04-01-36 6.00 9,000,000(g) 9,078,750
Federal Natl Mtge Assn #190899
04-01-23 8.50 599,496 639,488
Federal Natl Mtge Assn #190944
05-01-24 6.00 7,343,982 7,429,694
Federal Natl Mtge Assn #190988
06-01-24 9.00 521,019 560,977
Federal Natl Mtge Assn #231309
09-01-23 6.50 163,589 168,333
Federal Natl Mtge Assn #231310
09-01-23 6.50 406,125 417,903
Federal Natl Mtge Assn #250330
09-01-25 8.00 364,893 389,636
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #250495
03-01-26 7.00% $ 820,265 $ 851,404
Federal Natl Mtge Assn #252498
06-01-29 7.00 7,593 7,867
Federal Natl Mtge Assn #253883
08-01-16 6.00 4,001,070 4,080,172
Federal Natl Mtge Assn #254608
12-01-17 6.50 1,082,508 1,112,054
Federal Natl Mtge Assn #254802
07-01-18 4.50 3,625,698 3,531,130
Federal Natl Mtge Assn #254916
09-01-23 5.50 9,419,583 9,419,756
Federal Natl Mtge Assn #268071
01-01-24 6.50 158,124 162,710
Federal Natl Mtge Assn #303226
02-01-25 8.00 164,925 176,149
Federal Natl Mtge Assn #313049
08-01-11 8.50 1,455,275 1,518,280
Federal Natl Mtge Assn #323933
09-01-29 7.00 5,137,147 5,322,811
Federal Natl Mtge Assn #455791
01-01-29 6.50 586,430 603,146
Federal Natl Mtge Assn #489888
05-01-29 6.50 2,883,056 2,964,129
Federal Natl Mtge Assn #496029
01-01-29 6.50 3,707,896 3,814,628
Federal Natl Mtge Assn #50700
03-01-08 7.00 1,069,809 1,087,499
Federal Natl Mtge Assn #545342
04-01-13 7.00 3,526,417 3,584,730
Federal Natl Mtge Assn #545869
07-01-32 6.50 1,986,652 2,045,815
Federal Natl Mtge Assn #545910
08-01-17 6.00 6,497,557 6,636,241
Federal Natl Mtge Assn #555343
08-01-17 6.00 1,602,223 1,633,899
Federal Natl Mtge Assn #555375
04-01-33 6.00 21,959,421 22,310,210
Federal Natl Mtge Assn #555458
05-01-33 5.50 20,543,055 20,401,924
Federal Natl Mtge Assn #555734
07-01-23 5.00 6,966,168 6,832,945
Federal Natl Mtge Assn #555740
08-01-18 4.50 7,455,727 7,260,888
Federal Natl Mtge Assn #555794
09-01-28 7.50 1,073,014 1,126,078
Federal Natl Mtge Assn #567840
10-01-30 7.00 1,794,098 1,858,940
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
14 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #587859
12-01-16 5.50% $ 6,094,385 $ 6,127,982
Federal Natl Mtge Assn #597374
09-01-31 7.00 894,347 933,900
Federal Natl Mtge Assn #606882
10-01-31 7.00 1,168,706 1,210,204
Federal Natl Mtge Assn #638969
03-01-32 5.50 1,597,589 1,587,874
Federal Natl Mtge Assn #646147
06-01-32 7.00 2,981,313 3,103,810
Federal Natl Mtge Assn #646446
06-01-17 6.50 1,369,276 1,406,649
Federal Natl Mtge Assn #649068
06-01-17 6.50 2,530,863 2,607,020
Federal Natl Mtge Assn #649263
08-01-17 6.50 2,549,186 2,625,898
Federal Natl Mtge Assn #654208
10-01-32 6.50 2,495,544 2,560,279
Federal Natl Mtge Assn #654682
10-01-32 6.00 1,487,894 1,509,522
Federal Natl Mtge Assn #654689
11-01-32 6.00 1,738,076 1,762,860
Federal Natl Mtge Assn #656908
09-01-32 6.50 2,487,483 2,571,569
Federal Natl Mtge Assn #662809
09-01-17 6.50 2,831,530 2,908,815
Federal Natl Mtge Assn #667787
02-01-18 5.50 2,403,591 2,415,831
Federal Natl Mtge Assn #670382
09-01-32 6.00 13,508,532 13,658,183
Federal Natl Mtge Assn #670387
08-01-32 7.00 1,346,120 1,393,948
Federal Natl Mtge Assn #678028
09-01-17 6.00 1,218,330 1,242,416
Federal Natl Mtge Assn #678065
02-01-33 6.50 565,431 581,225
Federal Natl Mtge Assn #678937
01-01-18 5.50 3,610,644 3,632,861
Federal Natl Mtge Assn #678941
02-01-18 5.50 4,589,329 4,617,690
Federal Natl Mtge Assn #678944
01-01-18 5.50 2,188,011 2,201,525
Federal Natl Mtge Assn #679095
04-01-18 5.00 6,611,748 6,536,246
Federal Natl Mtge Assn #681400
03-01-18 5.50 6,527,475 6,568,085
Federal Natl Mtge Assn #683274
02-01-18 5.50 3,109,495 3,128,805
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #684586
03-01-33 6.00% $ 4,435,543 $ 4,496,081
Federal Natl Mtge Assn #687051
01-01-33 6.00 12,182,883 12,296,055
Federal Natl Mtge Assn #689093
07-01-28 5.50 2,609,102 2,593,236
Federal Natl Mtge Assn #694628
04-01-33 5.50 5,209,590 5,182,374
Federal Natl Mtge Assn #694795
04-01-33 5.50 6,757,973 6,722,131
Federal Natl Mtge Assn #694988
03-01-33 5.50 13,808,209 13,721,811
Federal Natl Mtge Assn #695202
03-01-33 6.50 5,270,540 5,399,815
Federal Natl Mtge Assn #695385
03-01-18 5.50 8,008,483 8,085,719
Federal Natl Mtge Assn #695909
05-01-18 5.50 2,935,136 2,952,811
Federal Natl Mtge Assn #709901
06-01-18 5.00 6,967,127 6,891,021
Federal Natl Mtge Assn #710823
05-01-33 5.50 810,523 806,337
Federal Natl Mtge Assn #712057
07-01-18 4.50 4,473,880 4,357,189
Federal Natl Mtge Assn #720006
07-01-33 5.50 7,911,071 7,855,035
Federal Natl Mtge Assn #720378
06-01-18 4.50 5,890,226 5,736,593
Federal Natl Mtge Assn #723687
08-01-28 5.50 4,672,010 4,643,600
Federal Natl Mtge Assn #725232
03-01-34 5.00 19,679,246 19,190,169
Federal Natl Mtge Assn #725425
04-01-34 5.50 22,195,177 22,037,965
Federal Natl Mtge Assn #725684
05-01-18 6.00 9,858,675 10,053,923
Federal Natl Mtge Assn #725719
07-01-33 4.84 5,867,716(h) 5,740,386
Federal Natl Mtge Assn #725737
08-01-34 4.54 5,976,199(h) 5,924,087
Federal Natl Mtge Assn #725813
12-01-33 6.50 14,121,078 14,467,440
Federal Natl Mtge Assn #730153
08-01-33 5.50 794,752 789,123
Federal Natl Mtge Assn #735057
01-01-19 4.50 9,159,593 8,920,686
Federal Natl Mtge Assn #735160
12-01-34 4.34 2,252,328(h) 2,189,646
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 15
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #743262
10-01-18 5.00% $ 4,303,720 $ 4,256,098
Federal Natl Mtge Assn #747786
10-01-18 6.00 2,307,475 2,353,139
Federal Natl Mtge Assn #753074
12-01-28 5.50 9,261,365 9,205,048
Federal Natl Mtge Assn #753091
12-01-33 5.50 5,448,317 5,409,726
Federal Natl Mtge Assn #753919
12-01-33 4.94 7,042,311(h) 6,894,701
Federal Natl Mtge Assn #759342
01-01-34 6.50 1,090,057 1,127,077
Federal Natl Mtge Assn #765759
12-01-18 5.00 5,394,039 5,332,443
Federal Natl Mtge Assn #766641
03-01-34 5.00 5,241,451 5,102,682
Federal Natl Mtge Assn #776962
04-01-29 5.00 16,423,617 15,958,462
Federal Natl Mtge Assn #790759
09-01-34 4.81 1,450,965(h) 1,433,382
Federal Natl Mtge Assn #793188
07-01-34 6.50 7,882,041 8,072,425
Federal Natl Mtge Assn #811925
04-01-35 4.92 5,690,009(h) 5,643,833
Federal Natl Mtge Assn #821378
05-01-35 5.04 5,402,091(h) 5,380,022
Federal Natl Mtge Assn #837258
09-01-35 4.92 3,289,913(h) 3,252,375
Federal Natl Mtge Assn #845070
12-01-35 5.10 5,711,253(h) 5,667,262
Federal Natl Mtge Assn
Collateralized Mtge Obligation
12-25-26 8.00 3,448,277 3,657,017
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
12-25-12 0.21 2,205,470(j) 86,925
12-25-31 9.42 2,647,531(j) 431,039
First Horizon Alternative Mtge Securities
Collateralized Mtge Obligation
Series 2005-AA2 Cl 2A1
04-25-35 5.41 5,231,852(i) 5,247,024
First Horizon Alternative Mtge Securities
Collateralized Mtge Obligation
Series 2005-AA3 Cl 3A1
05-25-35 5.39 5,325,906(i) 5,308,756
Govt Natl Mtge Assn #345538
02-15-24 8.00 181,643 194,542
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
MORTGAGE-BACKED (CONT.)
Govt Natl Mtge Assn #398831
08-15-26 8.00% $ 221,927 $ 237,949
Govt Natl Mtge Assn #425004
10-15-33 5.50 4,251,235 4,267,856
Govt Natl Mtge Assn #426170
06-15-26 8.00 178,399 191,279
Govt Natl Mtge Assn #604708
10-15-33 5.50 9,037,824 9,073,160
Govt Natl Mtge Assn #606844
09-15-33 5.00 11,776,196 11,604,064
Govt Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2002-70 Cl IC
08-20-32 16.68 8,388,752(j) 1,338,447
Govt Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2002-80 Cl CI
01-20-32 20.00 1,753,535(j) 170,339
Harborview Mtge Loan Trust
Collateralized Mtge Obligation
Series 2004-3 Cl B1
05-19-34 4.39 4,245,992(h) 4,128,762
Harborview Mtge Loan Trust
Collateralized Mtge Obligation
Series 2005-16 Cl 3A1B
01-19-36 4.91 8,757,179(h) 8,753,330
IndyMac Index Mtge Loan Trust
Collateralized Mtge Obligation
Interest Only
Series 2005-AR8 Cl AX1
04-25-35 4.50 153,074,399(j) 1,674,251
IndyMac Index Mtge Loan Trust
Collateralized Mtge Obligation
Series 2005-AR25 Cl 1A21
12-25-35 5.90 8,169,298(h) 8,218,761
IndyMac Index Mtge Loan Trust
Collateralized Mtge Obligation
Series 2005-AR3 Cl 3A1
04-25-35 5.32 2,978,368(h) 2,954,735
Master Adjustable Rate Mtge Trust
Collateralized Mtge Obligation
Series 2004-5 Cl B1
07-25-34 4.40 4,139,217(h) 4,069,719
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
16 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
MORTGAGE-BACKED (CONT.)
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-2 Cl 4A1
02-25-19 5.00% $ 5,660,737 $ 5,600,592
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-4 Cl 2A1
05-25-34 6.00 1,381,654 1,382,676
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-7 Cl 8A1
08-25-19 5.00 4,477,903 4,393,226
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-8 Cl 7A1
09-25-19 5.00 6,112,909 5,997,559
Structured Adjustable Rate Mtge Loan Trust
Collateralized Mtge Obligation
Series 2004-3AC Cl B1
03-25-34 4.93 5,548,810(h) 5,487,773
Structured Adjustable Rate Mtge Loan Trust
Collateralized Mtge Obligation
Series 2004-5 Cl B1
05-25-34 4.60 4,230,304(h) 4,121,712
Structured Asset Securities
Collateralized Mtge Obligation
Series 2003-33H Cl 1A1
10-25-33 5.50 12,765,795 12,535,499
Washington Mutual Alternative Mtge Loan Trust
Pass-Through Certificates
Collateralized Mtge Obligation
Interest Only
Series 2005-AR1 Cl X2
12-25-35 7.10 53,556,090(j) 610,874
Washington Mutual
Collateralized Mtge Obligation
Series 2003-AR10 Cl A7
10-25-33 4.07 6,650,000(h) 6,451,017
Washington Mutual
Collateralized Mtge Obligation
Series 2004-CB2 Cl 6A
07-25-19 4.50 4,042,723 3,861,650
Washington Mutual
Collateralized Mtge Obligation
Series 2004-CB4 Cl 22A
12-25-19 6.00 4,549,503 4,585,328
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
MORTGAGE-BACKED (CONT.)
Washington Mutual
Collateralized Mtge Obligation
Series 2005-AR17 Cl A1C1
12-25-45 4.77% $ 4,506,666(h) $ 4,506,656
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-10 Cl A1
10-25-35 5.00 11,868,332 11,343,871
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-5 Cl 2A1
05-25-35 5.50 10,279,464 10,118,847
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-AR1 Cl 1A1
02-25-35 4.55 8,965,589(h) 8,815,954
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-AR16 Cl 6A3
10-25-35 5.00 6,352,399(h) 6,251,332
--------------
Total 998,241,890
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.1%)
DRS Technologies
02-01-16 6.63 1,645,000 1,653,225
L-3 Communications
06-15-12 7.63 1,340,000 1,410,350
--------------
Total 3,063,575
- --------------------------------------------------------------------------------
AUTOMOTIVE (0.2%)
DaimlerChrysler NA Holding
11-15-13 6.50 2,125,000 2,193,616
GMAC
08-28-07 6.13 2,475,000 2,357,477
--------------
Total 4,551,093
- --------------------------------------------------------------------------------
BANKING (1.0%)
Banknorth Group
Sr Nts
05-01-08 3.75 3,960,000 3,852,367
HSBC Bank USA
Sub Nts
08-15-35 5.63 8,420,000 8,271,134
Sovereign Bank
Sub Nts
03-15-13 5.13 1,525,000 1,489,640
Washington Mutual Bank
Sub Nts
08-15-14 5.65 8,976,000 9,048,257
--------------
Total 22,661,398
- --------------------------------------------------------------------------------
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 17
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
CHEMICALS (0.1%)
Airgas
10-01-11 9.13% $ 1,500,000 $ 1,591,875
MacDermid
07-15-11 9.13 575,000 606,625
--------------
Total 2,198,500
- --------------------------------------------------------------------------------
DIVERSIFIED MANUFACTURING (0.4%)
Tyco Intl Group
02-15-11 6.75 8,975,000(c) 9,415,493
- --------------------------------------------------------------------------------
ELECTRIC (2.5%)
Aquila Canada Finance
06-15-11 7.75 1,915,000(c) 1,977,238
CMS Energy
Sr Nts
01-15-09 7.50 1,275,000 1,316,438
Consumers Energy
1st Mtge
02-15-17 5.15 4,020,000 3,854,537
Consumers Energy
1st Mtge Series H
02-17-09 4.80 4,115,000 4,057,962
Dayton Power & Light
1st Mtge
10-01-13 5.13 4,460,000 4,401,498
Detroit Edison
1st Mtge
10-01-37 5.70 2,195,000 2,161,072
Dominion Resources
Sr Unsecured
Series C
07-15-15 5.15 3,785,000 3,636,049
DPL
Sr Nts
09-01-11 6.88 2,755,000 2,891,984
Exelon
06-15-10 4.45 4,155,000 4,005,383
IPALCO Enterprises
Secured
11-14-08 8.38 400,000 426,500
11-14-11 8.63 3,680,000 4,075,600
Metropolitan Edison
Sr Nts
03-15-10 4.45 2,610,000 2,516,489
Mirant North America LLC
Sr Nts
12-31-13 7.38 330,000(d) 338,663
Nevada Power
03-15-16 5.95 290,000(d) 291,088
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
ELECTRIC (CONT.)
NRG Energy
Sr Nts
02-01-14 7.25% $ 1,395,000 $ 1,429,875
02-01-16 7.38 665,000 684,950
Ohio Edison
06-15-09 5.65 6,005,000(d) 6,032,982
Ohio Edison
Sr Nts
05-01-15 5.45 1,195,000 1,184,974
Pacific Gas & Electric
03-01-34 6.05 2,590,000 2,676,713
PacifiCorp
1st Mtge
06-15-35 5.25 2,220,000 2,076,244
PSI Energy
10-15-35 6.12 5,540,000 5,664,494
--------------
Total 55,700,733
- --------------------------------------------------------------------------------
ENTERTAINMENT (0.3%)
United Artists Theatre Circuit
07-01-15 9.30 7,033,277 6,962,944
- --------------------------------------------------------------------------------
FOOD AND BEVERAGE (1.5%)
Cadbury Schweppes US Finance LLC
10-01-08 3.88 3,765,000(d) 3,632,005
Cott Beverages USA
12-15-11 8.00 1,135,000 1,166,213
Kraft Foods
06-01-12 6.25 15,711,000 16,436,879
Kraft Foods
Sr Unsecured
11-01-11 5.63 13,585,000 13,714,058
--------------
Total 34,949,155
- --------------------------------------------------------------------------------
GAMING (0.4%)
Caesars Entertainment
Sr Nts
04-15-13 7.00 2,535,000 2,682,506
MGM MIRAGE
10-01-09 6.00 670,000 664,975
07-15-15 6.63 2,165,000 2,173,118
MGM MIRAGE
Sr Nts
02-27-14 5.88 720,000 693,000
Mohegan Tribal Gaming Authority
Sr Nts
02-15-13 6.13 540,000 535,275
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
18 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
GAMING (CONT.)
Mohegan Tribal Gaming Authority
Sr Sub Nts
04-01-12 8.00% $ 750,000 $ 788,438
Station Casinos
Sr Nts
04-01-12 6.00 1,000,000 1,000,000
Station Casinos
Sr Sub Nts
03-01-16 6.88 1,515,000 1,541,513
--------------
Total 10,078,825
- --------------------------------------------------------------------------------
GAS PIPELINES (0.5%)
ANR Pipeline
03-15-10 8.88 875,000 935,000
Colorado Interstate Gas
Sr Nts
03-15-15 5.95 470,000 463,641
11-15-15 6.80 830,000(d) 863,200
Copano Energy LLC
Sr Nts
03-01-16 8.13 225,000(d) 234,000
Kinder Morgan Finance
01-05-16 5.70 4,160,000(d) 4,160,566
Pacific Energy Partners LP/Finance
09-15-15 6.25 620,000 616,900
Southern Natural Gas
03-15-10 8.88 875,000 935,918
Southern Star Central
Secured
08-01-10 8.50 750,000 800,625
Transcontinental Gas Pipe Line
Series B
08-15-11 7.00 1,915,000 2,010,750
Williams
Sr Nts
07-15-19 7.63 535,000 588,500
--------------
Total 11,609,100
- --------------------------------------------------------------------------------
HEALTH CARE (1.0%)
Cardinal Health
06-15-15 4.00 11,184,000 10,006,414
12-15-17 5.85 2,690,000 2,724,012
HCA
Sr Nts
03-15-14 5.75 1,000,000 956,194
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
HEALTH CARE (CONT.)
Omnicare
Sr Sub Nts
12-15-13 6.75% $ 1,315,000 $ 1,338,013
12-15-15 6.88 540,000 550,800
Triad Hospitals
Sr Nts
05-15-12 7.00 1,285,000 1,310,700
WellPoint
01-15-11 5.00 6,645,000 6,559,951
--------------
Total 23,446,084
- --------------------------------------------------------------------------------
INDEPENDENT ENERGY (0.3%)
Chesapeake Energy
08-15-17 6.50 1,860,000 1,871,625
Encore Acquisition
Sr Sub Nts
04-15-14 6.25 1,520,000 1,489,600
Newfield Exploration
Sr Nts
03-01-11 7.63 2,500,000 2,693,750
Newfield Exploration
Sr Sub Nts
08-15-12 8.38 380,000 407,550
Plains Exploration & Production
Sr Nts
06-15-14 7.13 790,000 823,575
--------------
Total 7,286,100
- --------------------------------------------------------------------------------
INTEGRATED ENERGY (--%)
Denbury Resources
Sr Sub Nts
12-15-15 7.50 100,000 105,000
- --------------------------------------------------------------------------------
LODGING (0.1%)
ITT
11-15-15 7.38 1,255,000 1,361,675
- --------------------------------------------------------------------------------
MEDIA CABLE (1.3%)
Comcast
03-15-11 5.50 9,010,000 8,983,691
03-15-16 5.90 10,720,000(g) 10,766,337
03-15-16 5.90 7,670,000 7,703,153
DIRECTV Holdings LLC/Financing
Sr Nts
03-15-13 8.38 406,000 437,465
Videotron Ltee
01-15-14 6.88 530,000(c) 541,925
12-15-15 6.38 330,000(c) 326,700
--------------
Total 28,759,271
- --------------------------------------------------------------------------------
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 19
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
MEDIA NON CABLE (0.6%)
Dex Media West LLC/Finance
Sr Nts Series B
08-15-10 8.50% $ 560,000 $ 593,600
Lamar Media
01-01-13 7.25 375,000 386,719
News America
12-15-35 6.40 10,210,000(d) 10,274,078
Radio One
Series B
07-01-11 8.88 1,000,000 1,050,000
Sun Media
02-15-13 7.63 745,000(c) 768,281
--------------
Total 13,072,678
- --------------------------------------------------------------------------------
METALS (0.1%)
Peabody Energy
Series B
03-15-13 6.88 1,640,000 1,685,100
- --------------------------------------------------------------------------------
OIL FIELD SERVICES (--%)
Pride Intl
Sr Nts
07-15-14 7.38 495,000 528,413
- --------------------------------------------------------------------------------
OTHER FINANCIAL INSTITUTIONS (0.6%)
Residential Capital
Sr Unsecured
06-30-10 6.38 13,510,000 13,641,128
- --------------------------------------------------------------------------------
PACKAGING (--%)
Plastipak Holdings
Sr Nts
12-15-15 8.50 90,000(d) 92,925
- --------------------------------------------------------------------------------
PAPER (--%)
Crown Americas LLC/Capital
Sr Nts
11-15-15 7.75 750,000(d) 781,875
- --------------------------------------------------------------------------------
PHARMACEUTICALS (0.2%)
AmerisourceBergen
09-15-15 5.88 1,225,000(d) 1,232,779
Merck & Co
03-01-15 4.75 2,600,000 2,489,742
--------------
Total 3,722,521
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
PROPERTY & CASUALTY (0.1%)
Marsh & McLennan Companies
Sr Unsecured
09-15-15 5.75% $ 2,770,000 $ 2,770,139
- --------------------------------------------------------------------------------
RETAILERS (0.9%)
CVS
09-15-09 4.00 2,700,000 2,587,818
09-15-14 4.88 6,275,000 6,002,370
May Department Stores
07-15-34 6.70 6,765,000 7,232,285
Wal-Mart Stores
Series C
06-29-11 8.88 3,500,000 3,533,670
--------------
Total 19,356,143
- --------------------------------------------------------------------------------
TRANSPORTATION SERVICES (0.2%)
ERAC USA Finance
05-01-15 5.60 3,555,000(d) 3,529,909
11-15-15 5.90 230,000(d) 233,353
Greater Beijing First Expressways
Sr Nts
06-15-07 9.50 3,640,000(b,c,m,o) --
Hertz
Sr Nts
01-01-14 8.88 580,000(d) 606,100
--------------
Total 4,369,362
- --------------------------------------------------------------------------------
WIRELESS (0.4 %)
Nextel Communications
Sr Nts Series F
03-15-14 5.95 4,855,000 4,879,989
US Cellular
Sr Nts
12-15-33 6.70 3,485,000 3,512,221
--------------
Total 8,392,210
- --------------------------------------------------------------------------------
WIRELINES (4.2%)
Qwest
03-15-12 8.88 1,075,000 1,204,000
Qwest
Sr Nts
06-15-15 7.63 620,000 664,950
Sprint Capital
01-30-11 7.63 7,860,000 8,593,747
11-15-28 6.88 6,165,000 6,717,618
Telecom Italia Capital
11-15-33 6.38 11,125,000(c) 11,006,663
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
20 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(A)
WIRELINES (CONT.)
TELUS
06-01-11 8.00% $ 21,031,500(c) $ 23,465,980
Verizon Pennsylvania
Series A
11-15-11 5.65 42,600,000 42,479,443
--------------
Total 94,132,401
- --------------------------------------------------------------------------------
TOTAL BONDS
(Cost: $2,319,721,681) $2,292,139,591
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OTHER (--%)
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE(A)
Wayland Investment LLC 6,000,000(e,m) $ 568,020
- --------------------------------------------------------------------------------
TOTAL OTHER
(Cost: $791,383) $ 568,020
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHORT-TERM SECURITIES (3.9%)(Q)
- --------------------------------------------------------------------------------
AMOUNT
EFFECTIVE PAYABLE AT
ISSUER YIELD MATURITY VALUE(A)
COMMERCIAL PAPER
Bear Stearns Companies
03-21-06 4.52% $ 15,000,000 $ 14,960,538
Chesham Finance LLC
03-01-06 4.57 3,700,000 3,699,530
Kitty Hawk Funding
03-27-06 4.54 15,000,000(r) 14,949,094
Park Avenue Receivables
03-14-06 4.52 10,000,000(r) 9,982,462
Sheffield Receivable
03-01-06 4.51 25,000,000(r) 24,996,868
Variable Funding Capital
03-03-06 4.50 20,000,000(r) 19,992,500
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(Cost: $88,592,111 ) $ 88,580,992
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost: $2,409,105,175)(s) $2,381,288,603
================================================================================
- --------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES
- --------------------------------------------------------------------------------
(A) Securities are valued by procedures described in Note 1 to the financial
statements.
(B) Non-income producing. For long-term debt securities, item identified is in
default as to payment of interest and/or principal.
(C) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in U.S. dollar currency unless otherwise
noted. At Feb. 28, 2006, the value of foreign securities represented 3.8%
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
Feb. 28, 2006, the value of these securities amounted to $80,106,557 or
3.5% of net assets.
(E) The share amount for Limited Liability Companies (LLC) or Limited
Partnerships (LP) represents capital contributions.
(F) Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real
property, and include single- and multi-class pass-through securities and
collateralized mortgage obligations. These securities may be issued or
guaranteed by U.S. government agencies or instrumentalities, or by private
issuers, generally originators and investors in mortgage loans, including
savings associations, mortgage bankers, commercial banks, investment
bankers and special purpose entities. The maturity dates shown represent
the original maturity of the underlying obligation. Actual maturity may
vary based upon prepayment activity on these obligations. Unless otherwise
noted, the coupon rates presented are fixed rates.
(G) At Feb. 28, 2006, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$86,566,452.
(H) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on Feb. 28, 2006.
(I) Interest rate varies either based on a predetermined schedule or to
reflect current market conditions; rate shown is the effective rate on
Feb. 28, 2006.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 21
- --------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES (CONTINUED)
- --------------------------------------------------------------------------------
(J) Interest only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of an
interest only is extremely sensitive to the rate of principal payments on
the underlying mortgage assets. A rapid (slow) rate of principal
repayments may have an adverse (positive) effect on yield to maturity. The
principal amount shown is the notional amount of the underlying mortgages.
Interest rate disclosed represents yield based upon the estimated timing
and amount of future cash flows at Feb. 28, 2006.
(K) The following abbreviations are used in the portfolio security
descriptions to identify the insurer of the issue:
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
MBIA -- MBIA Insurance Corporation
(L) Comparable securities are held to satisfy future delivery requirements of
the following open forward sale commitments atFeb. 28, 2006:
PRINCIPAL SETTLEMENT PROCEEDS
SECURITY AMOUNT DATE RECEIVABLE VALUE
--------------------------------------------------------------------------
Federal Natl Mtge Assn
03-01-21 5.00% $ 13,150,000 03-16-06 $ 12,926,039 $12,973,290
03-01-21 5.50 5,250,000 03-16-06 5,263,984 5,272,969
04-01-35 5.00 20,000,000 04-12-06 19,350,000 19,406,240
03-01-36 5.50 72,000,000 03-13-06 70,969,063 71,325,000
(M) Identifies issues considered to be illiquid as to their marketability (see
Note 1 to the financial statements). These securities may be valued at
fair value according to methods selected in good faith by the Fund's Board
of Directors. Information concerning such security holdings at Feb. 28,
2006, is as follows:
ACQUISITION
SECURITY DATES COSt
--------------------------------------------------------------------------
Greater Beijing First Expressways
9.50% Sr Nts 2007 09-16-98 $ --
Wayland Investment LLC 05-19-00 791,383
(N) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 6 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT
--------------------------------------------------------------------------
PURCHASE CONTRACTS
U.S. Long Bond, June 2006, 20-year $ 41,400,000
U.S. Treasury Note, June 2006, 2-year 52,000,000
SALE CONTRACTS
U.S. Treasury Note, March 2006, 5-year 22,800,000
U.S. Treasury Note, March 2006, 10-year 40,400,000
U.S. Treasury Note, June 2006, 5-year 6,400,000
(O) Negligible market value.
(P) At Feb. 28, 2006, security was partially or fully on loan. See Note 5 to
the financial statements.
(Q) Cash collateral received from security lending activity is invested in
short-term securities and represents 2.5% of net assets. See Note 5 to the
financial statements. 1.4% of net assets is the Fund's cash equivalent
position.
(R) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program or other
"accredited investors."This security has been determined to be liquid
under guidelines established by the Fund's Board of Directors. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At Feb. 28, 2006, the value of
these securities amounted to $69,920,924 or 3.1% of net assets.
- --------------------------------------------------------------------------------
22 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES (CONTINUED)
- --------------------------------------------------------------------------------
(S) At Feb. 28, 2006, the cost of securities for federal income tax purposes
was approximately $2,409,105,000 and the approximate aggregate gross
unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $ 8,976,000
Unrealized depreciation (36,792,000)
----------------------------------------------------------------
Net unrealized depreciation $ (27,816,000)
----------------------------------------------------------------
HOW TO FIND INFORMATION ABOUT THE FUND'S PORTFOLIO HOLDINGS
(I) The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission (Commission) for the first and third
quarters of each fiscal year on Form N-Q;
(II) The Fund's Forms N-Q are available on the Commission's website at
http://www.sec.gov;
(III) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC (information on the operations of the
Public Reference Room may be obtained by calling 1-800-SEC-0330); and
(IV) The Fund's complete schedule of portfolio holdings, as disclosed in its
annual and semiannual shareholder reports and in its filings on Form N-Q,
can be found at www.riversource.com/funds.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 23
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
RiverSource Diversified Bond Fund
FEB. 28, 2006 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------------
Investments in securities, at value (Note 1)*
(identified cost $2,409,105,175) $ 2,381,288,603
Cash in bank on demand deposit 119,846
Foreign currency holdings (identified cost $1,948,524) (Note 1) 1,931,622
Capital shares receivable 664,343
Accrued interest receivable 15,255,596
Receivable for investment securities sold 184,366,083
- ----------------------------------------------------------------------------------------------------------------
Total assets 2,583,626,093
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES
- ----------------------------------------------------------------------------------------------------------------
Dividends payable to shareholders 260,421
Capital shares payable 427,684
Payable for investment securities purchased 156,841,523
Unrealized depreciation on swap transactions, at value (Note 7) 23,774
Payable upon return of securities loaned (Note 5) 57,432,500
Accrued investment management services fee 31,015
Accrued distribution fee 432,222
Accrued service fee 369
Accrued transfer agency fee 3,973
Accrued administrative services fee 3,903
Other accrued expenses 307,206
Forward sale commitments, at value (proceeds receivable $108,509,086) (Note 1) 108,977,499
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 324,742,089
- ----------------------------------------------------------------------------------------------------------------
Net assets applicable to outstanding capital stock $ 2,258,884,004
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------
REPRESENTED BY
- ----------------------------------------------------------------------------------------------------------------
Capital stock -- $.01 par value (Note 1) $ 4,713,173
Additional paid-in capital 2,408,237,687
Undistributed net investment income 4,398,461
Accumulated net realized gain (loss) (Note 9) (130,678,117)
Unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (Note 6) (27,787,200)
- ----------------------------------------------------------------------------------------------------------------
Total -- representing net assets applicable to outstanding capital stock $ 2,258,884,004
================================================================================================================
Net assets applicable to outstanding shares: Class A $ 1,666,606,791
Class B $ 439,844,426
Class C $ 16,581,505
Class I $ 357,530
Class Y $ 135,493,752
Net asset value per share of outstanding capital stock: Class A shares 347,758,197 $ 4.79
Class B shares 91,760,498 $ 4.79
Class C shares 3,454,857 $ 4.80
Class I shares 74,546 $ 4.80
Class Y shares 28,269,211 $ 4.79
- ----------------------------------------------------------------------------------------------------------------
*Including securities on loan, at value (Note 5) $ 55,638,640
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
24 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
STATEMENT OF OPERATIONS
RiverSource Diversified Bond Fund
SIX MONTHS ENDED FEB. 28, 2006 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- ----------------------------------------------------------------------------------------------------
Income:
Interest $ 55,744,336
Fee income from securities lending (Note 5) 86,568
- ----------------------------------------------------------------------------------------------------
Total income 55,830,904
- ----------------------------------------------------------------------------------------------------
Expenses (Note 2):
Investment management services fee 5,808,863
Distribution fee
Class A 2,114,422
Class B 2,308,307
Class C 85,979
Transfer agency fee 1,799,574
Incremental transfer agency fee
Class A 113,891
Class B 63,218
Class C 2,679
Service fee -- Class Y 71,594
Administrative services fees and expenses 740,538
Compensation of board members 10,917
Custodian fees 123,110
Printing and postage 223,050
Registration fees 61,066
Audit fees 22,500
Other 40,867
- ----------------------------------------------------------------------------------------------------
Total expenses 13,590,575
Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (1,484,961)
- ----------------------------------------------------------------------------------------------------
12,105,614
Earnings credits on cash balances (Note 2) (78,153)
- ----------------------------------------------------------------------------------------------------
Total net expenses 12,027,461
- ----------------------------------------------------------------------------------------------------
Investment income (loss) -- net 43,803,443
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) -- NET
- ----------------------------------------------------------------------------------------------------
Net realized gain (loss) on:
Security transactions (Note 3) (17,927,418)
Foreign currency transactions (29,806)
Futures contracts 4,390,488
Swap transactions 229,774
- ----------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (13,336,962)
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (34,621,058)
- ----------------------------------------------------------------------------------------------------
Net gain (loss) on investments and foreign currencies (47,958,020)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ (4,154,577)
====================================================================================================
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 25
STATEMENTS OF CHANGES IN NET ASSETS
RiverSource Diversified Bond Fund
FEB. 28, 2006
SIX MONTHS ENDED AUG. 31, 2005
(UNAUDITED) YEAR ENDED
- ------------------------------------------------------------------------------------------------------------
OPERATIONS AND DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net $ 43,803,443 $ 91,755,329
Net realized gain (loss) on investments (13,336,962) 28,923,177
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (34,621,058) (14,927,428)
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations (4,154,577) 105,751,078
- ------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (33,910,157) (70,478,732)
Class B (7,515,532) (17,993,962)
Class C (279,110) (605,297)
Class I (280) (421)
Class Y (2,969,981) (8,081,878)
- ------------------------------------------------------------------------------------------------------------
Total distributions (44,675,060) (97,160,290)
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
- ------------------------------------------------------------------------------------------------------------
Proceeds from sales
Class A shares (Note 2) 147,835,545 259,770,664
Class B shares 46,994,628 84,427,800
Class C shares 2,058,102 4,052,182
Class I shares 346,914 --
Class Y shares 7,057,793 41,037,278
Reinvestment of distributions at net asset value
Class A shares 27,126,000 56,221,455
Class B shares 6,627,911 15,935,666
Class C shares 247,291 543,915
Class I shares 27 --
Class Y shares 2,899,761 6,719,948
Payments for redemptions
Class A shares (247,225,807) (480,335,355)
Class B shares (Note 2) (88,368,811) (245,851,411)
Class C shares (Note 2) (3,454,854) (7,443,384)
Class Y shares (73,555,823) (49,568,951)
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets from capital share transactions (171,411,323) (314,490,193)
- ------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (220,240,960) (305,899,405)
Net assets at beginning of period 2,479,124,964 2,785,024,369
- ------------------------------------------------------------------------------------------------------------
Net assets at end of period $ 2,258,884,004 $ 2,479,124,964
============================================================================================================
Undistributed net investment income $ 4,398,461 $ 5,270,078
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
26 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
NOTES TO FINANCIAL STATEMENTS
RiverSource Diversified Bond Fund
(Unaudited as to Feb. 28, 2006)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Fixed Income Series, Inc. and is registered under
the Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. AXP Fixed Income Series, Inc. has 10 billion
authorized shares of capital stock that can be allocated among the separate
series as designated by the Board. The Fund invests primarily in bonds and other
debt securities including securities issued by the U.S. government, corporate
bonds and mortgage- and asset-backed securities.
The Fund offers Class A, Class B, Class C and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge (CDSC)
and automatically convert to Class A shares during the ninth year of
ownership.
o Class C shares may be subject to a CDSC.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
The Fund offers an additional class of shares, Class I, exclusively to certain
institutional investors. Class I shares have no sales charge and are made
available through a separate prospectus supplement provided to investors
eligible to purchase the shares. At Feb. 28, 2006, Ameriprise Financial, Inc.
(Ameriprise Financial) and the affiliated fund-of-funds owned 100% of Class I
shares, which represents 0.02% 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.
The Fund'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.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 27
ILLIQUID SECURITIES
At Feb. 28, 2006, investments in securities included issues that are illiquid
which the Fund currently limits to 10% of net assets, at market value, at the
time of purchase. The aggregate value of such securities at Feb. 28, 2006 was
$568,020 representing 0.03% of net assets. These securities are valued at fair
value according to methods selected in good faith by the Board. According to
board guidelines, certain unregistered securities are determined to be liquid
and are not included within the 10% limitation specified above. Assets are
liquid if they can be sold or disposed of in the ordinary course of business
within seven days at approximately the value at which the asset is valued by the
Fund.
SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS
Delivery and payment for securities that have been purchased by the Fund on a
forward-commitment basis, including when-issued securities and other
forward-commitments, can take place one month or more after the transaction
date. During this period, such securities are subject to market fluctuations,
and they may affect the Fund's net assets the same as owned securities. The Fund
designates cash or liquid securities at least equal to the amount of its
forward-commitments. At Feb. 28, 2006, the Fund has entered into outstanding
when-issued securities of $86,566,452.
The Fund also enters into transactions to sell purchase commitments to third
parties at current market values and concurrently acquires other purchase
commitments for similar securities at later dates. As an inducement for the Fund
to "roll over" its purchase commitments, the Fund receives negotiated amounts in
the form of reductions of the purchase price of the commitment.
OPTION TRANSACTIONS
To produce incremental earnings, protect gains, and facilitate buying and
selling of securities for investments, the Fund may buy and write options traded
on any U.S. or foreign exchange or in the over-the-counter market where
completing the obligation depends upon the credit standing of the other party.
The Fund also may buy and sell put and call options and write covered call
options on portfolio securities as well as write cash-secured put options. The
risk in writing a call option is that the Fund gives up the opportunity for
profit if the market price of the security increases. The risk in writing a put
option is that the Fund may incur a loss if the market price of the security
decreases and the option is exercised. The risk in buying an option is that the
Fund pays a premium whether or not the option is exercised. The Fund also has
the additional risk of being unable to enter into a closing transaction if a
liquid secondary market does not exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Fund will
realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Fund will realize a
gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
- --------------------------------------------------------------------------------
28 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
FUTURES TRANSACTIONS
To gain exposure to or protect itself from market changes, the Fund may buy and
sell financial futures contracts traded on any U.S. or foreign exchange. The
Fund also may buy and write put and call options on these futures contracts.
Risks of entering into futures contracts and related options include the
possibility of an illiquid market and that a change in the value of the contract
or option may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the contract is closed
or expires.
FOREIGN CURRENCY TRANSLATIONS AND FOREIGN CURRENCY CONTRACTS
Securities and other assets and liabilities denominated in foreign currencies
are translated daily into U.S. dollars. Foreign currency amounts related to the
purchase or sale of securities and income and expenses are translated at the
exchange rate on the transaction date. The effect of changes in foreign exchange
rates on realized and unrealized security gains or losses is reflected as a
component of such gains or losses. In the statement of operations, net realized
gains or losses from foreign currency transactions, if any, may arise from sales
of foreign currency, closed forward contracts, exchange gains or losses realized
between the trade date and settlement date on securities transactions, and other
translation gains or losses on dividends, interest income and foreign
withholding taxes. At Feb. 28, 2006, foreign currency holdings consisted of
European monetary units and British pounds.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuation.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete its contract obligations.
FORWARD SALE COMMITMENTS
The Fund may enter into forward sale commitments to hedge its portfolio
positions or to sell mortgage-backed securities it owns under delayed delivery
arrangements. Proceeds of forward sale commitments are not received until the
contractual settlement date. During the time a forward sale commitment is
outstanding, equivalent deliverable securities, or an offsetting forward
purchase commitment deliverable on or before the sale commitment date, are used
to satisfy the commitment.
Unsettled forward sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Valuation of securities" above. The forward sale commitment is
"marked-to-market" daily and the change in market value is recorded by the Fund
as an unrealized gain or loss. If the forward sale commitment is closed through
the acquisition of an offsetting purchase commitment, the Fund realizes a gain
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 29
or loss. If the Fund delivers securities under the commitment, the Fund realizes
a gain or a loss from the sale of the securities based upon the market price
established at the date the commitment was entered into. Forward sale
commitments outstanding at period end are listed in the "Notes to investments in
securities."
TOTAL RETURN SWAP TRANSACTIONS
The Fund may enter into swap agreements to earn the total return on a specified
security or index of fixed income securities. Under the terms of the swaps, the
Fund either receives or pays the total return on a reference security or index
applied to a notional principal amount. In return, the Fund agrees to pay or
receive from the counterparty a floating rate, which is reset periodically based
on short-term interest rates, applied to the same notional amount.
The notional amounts of swap contracts are not recorded in the financial
statements. Swaps are valued daily, and the change in value is recorded as
unrealized appreciation (depreciation) until the termination of the swap, at
which time realized gain (loss) is recorded. Payments received or made are
recorded as realized gains (losses).
Total return swaps are subject to the risk that the counterparty will default on
its obligation to pay net amounts due to the Fund.
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 Subchapter M of the Internal Revenue Code
that applies to regulated investment companies and to distribute substantially
all of its taxable income to shareholders. No provision for income or excise
taxes is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of the deferred losses on
certain futures contracts, the recognition of certain foreign currency gains
(losses) as ordinary income (loss) for tax purposes and losses deferred due to
"wash sale" transactions. The character of distributions made during the year
from net investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
DIVIDENDS TO SHAREHOLDERS
Dividends from net investment income, declared daily and payable monthly, when
available, are reinvested in additional shares of the Fund at net asset value or
payable in cash. Capital gains, when available, are distributed along with the
last income dividend of the calendar year.
- --------------------------------------------------------------------------------
30 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
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.
2. EXPENSES AND SALES CHARGES
Under an Investment Management Services Agreement, RiverSource Investments, LLC
(the Investment Manager) determines which securities will be purchased, held or
sold. Prior to Oct. 1, 2005, investment management services were provided by
Ameriprise Financial. The management fee is a percentage of the Fund's average
daily net assets that declines from 0.52% to 0.395% annually as the Fund's
assets increase. Effective March 1, 2006, the fee percentage of the Fund's
average daily net assets declines from 0.48% to 0.29% annually as the Fund's
assets increase.
Under the current Administrative Services Agreement, the Fund pays Ameriprise
Financial a fee for administration and accounting services at a percentage of
the Fund's average daily net assets that declines from 0.07% to 0.04% annually
as the Fund's assets increase. Prior to Oct. 1, 2005, the fee percentage of the
Fund's average daily net assets declined from 0.05% to 0.025% annually as the
Fund's assets increased. A minor portion of additional administrative service
expenses paid by the Fund are consultants' fees and fund office expenses. Under
this agreement, the Fund also pays taxes, audit and certain legal fees,
registration fees for shares, compensation of board members, corporate filing
fees and any other expenses properly payable by the Fund and approved by the
Board.
Under a Deferred Compensation Plan (the Plan), non-interested board members may
defer receipt of their compensation. Deferred amounts are treated as though
equivalent dollar amounts had been invested in shares of the Fund or other
RiverSource 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, RiverSource Service Corporation (the
Transfer Agent) maintains shareholder accounts and records. The Fund pays the
Transfer Agent 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.
The Transfer Agent charges an annual closed account fee of $5 per inactive
account, charged on a pro rata basis for 12 months from the date the account
becomes inactive. These fees are included in the transfer agency fees on the
statement of operations.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 31
The Fund has agreements with Ameriprise Financial Services, 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
$1,156,040 for Class A, $415,059 for Class B and $1,912 for Class C for the six
months ended Feb. 28, 2006.
For the six months ended Feb. 28, 2006, the Investment Manager and its
affiliates waived certain fees and expenses to 0.90% for Class A, 1.66% for
Class B, 1.67% for Class C, 0.58% for Class I and 0.74% 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 $942,827, $270,392, $9,679 and $70,492, respectively
and the management fees waived at the Fund level were $191,571. Under this
agreement, which was effective until Feb. 28, 2006, net expenses would not
exceed 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.59% for Class
I and 0.73% for Class Y of the Fund's average daily net assets. Effective as of
March 1, 2006, the Investment Manager and its affiliates have agreed to waive
certain fees and expenses until Aug. 31, 2006, unless sooner terminated at the
discretion of the Board, such that net expenses will not exceed 0.89% for Class
A, 1.65% for Class B, 1.66% for Class C, 0.54% for Class I and 0.73% for Class Y
of the Fund's average daily net assets.
During the six months ended Feb. 28, 2006, the Fund's custodian and transfer
agency fees were reduced by $78,153 as a result of earnings credits from
overnight cash balances.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $2,881,392,157 and $2,954,011,318, respectively, for the
six months ended Feb. 28, 2006. Realized gains and losses are determined on an
identified cost basis.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
SIX MONTHS ENDED FEB. 28, 2006
CLASS A CLASS B CLASS C CLASS I CLASS Y
- -------------------------------------------------------------------------------------------------------------
Sold 30,766,100 9,771,871 427,636 72,503 1,464,390
Issued for reinvested distributions 5,653,861 1,381,478 51,491 6 604,384
Redeemed (51,461,154) (18,396,181) (718,035) -- (15,150,822)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) (15,041,193) (7,242,832) (238,908) 72,509 (13,082,048)
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2005
CLASS A CLASS B CLASS C CLASS I CLASS Y
- -------------------------------------------------------------------------------------------------------------
Sold 53,307,133 17,309,061 829,459 -- 8,423,475
Issued for reinvested distributions 11,524,807 3,264,247 111,266 -- 1,376,611
Redeemed (98,492,883) (50,438,583) (1,524,135) -- (10,161,026)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) (33,660,943) (29,865,275) (583,410) -- (360,940)
- -------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
32 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
5. LENDING OF PORTFOLIO SECURITIES
At Feb. 28, 2006, securities valued at $55,638,640 were on loan to brokers. For
collateral, the Fund received $57,432,500 in cash. Cash collateral received is
invested in short-term securities, which are included in the short-term section
of the "Investments in securities." Income from securities lending amounted to
$86,568 for the six months ended Feb. 28, 2006. The risks to the Fund of
securities lending are that the borrower may not provide additional collateral
when required or return the securities when due.
6. INTEREST RATE FUTURES CONTRACTS
At Feb. 28, 2006, investments in securities included securities valued at
$1,655,391 that were pledged as collateral to cover initial margin deposits on
674 open purchase contracts and 696 open sale contracts. The notional market
value of the open purchase contracts at Feb. 28, 2006 was $99,958,313 with a net
unrealized gain of $140,381. The notional market value of the open sale
contracts at Feb. 28, 2006 was $74,357,439 with a net unrealized gain of
$400,295. See "Summary of significant accounting policies" and "Notes to
investments in securities."
7. SWAP CONTRACTS
At Feb. 28, 2006, the Fund had the following open total return swap contracts:
UNREALIZED
TERMINATION NOTIONAL APPRECIATION
DATE PRINCIPAL (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------
Receive total return on Lehman Brothers Aaa 8.5+
Commercial Mortgage-Backed Securities Index and
pay a floating rate based on 1-month LIBOR less 0.25%
Counterparty: Citigroup 05/01/06 $13,450,000 $ (23,774)
8. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
JPMorgan Chase Bank, N.A. (JPMCB), 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. 20, 2005. The Fund must maintain asset
coverage for borrowings of at least 300%. The agreement, which enables the Fund
to participate with other RiverSource 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
0.40% or the JPMCB Prime Commercial 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 0.07%
per annum. Prior to this agreement, the Fund had a revolving credit agreement
that permitted borrowings up to $500 million with The Bank of New York. The Fund
had no borrowings outstanding during the six months ended Feb. 28, 2006.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 33
9. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund had a capital loss carry-over of
$104,817,787 at Aug. 31, 2005, that if not offset by capital gains will expire
as follows:
2009 2010
$78,698,873 $26,118,914
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.
10. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS
In December 2005, without admitting or denying the allegations, American Express
Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc.
(Ameriprise Financial)), the parent company of RiverSource Investments, LLC
(RiverSource Investments), entered into settlement agreements with the
Securities and Exchange Commission (SEC) and Minnesota Department of Commerce
(MDOC) related to market timing activities. In connection with these matters,
the SEC and MDOC issued orders (the Orders) alleging that AEFC violated certain
provisions of the federal and Minnesota securities laws by failing to adequately
disclose market timing activities by allowing certain identified market timers
to continue to market time contrary to disclosures in mutual fund and variable
annuity product prospectuses. The Orders also alleged that AEFC failed to
implement procedures to detect and prevent market timing in 401(k) plans for
employees of AEFC and related companies and failed to adequately disclose that
there were no such procedures. Pursuant to the MDOC Order, the MDOC also alleged
that AEFC allowed inappropriate market timing to occur by failing to have
written policies and procedures and failing to properly supervise its employees.
As a result of the Orders, AEFC was censured and ordered to cease and desist
from committing or causing any violations of certain provisions of the
Investment Advisers Act of 1940, the Investment Company Act of 1940, and various
Minnesota laws. Pursuant to the terms of the Orders, AEFC agreed to pay
disgorgement of $10 million and civil money penalties of $7 million. AEFC also
agreed to make presentations at least annually to its board of directors and the
relevant mutual funds' board that include an overview of policies and procedures
to prevent market timing, material changes to these policies and procedures and
whether disclosures related to market timing are consistent with the SEC order
and federal securities laws. AEFC also agreed to retain an independent
distribution consultant to assist in developing a plan for distribution of all
disgorgement and civil penalties ordered by the SEC in accordance with various
undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. In
addition, AEFC agreed to complete and submit to the MDOC a compliance review of
its procedures regarding market timing within one year of the MDOC Order,
including a summary of actions taken to ensure compliance with applicable laws
and regulations and certification by a senior officer regarding compliance and
supervisory procedures.
Ameriprise Financial and its affiliates have cooperated with the SEC and the
MDOC in these legal proceedings, and have made regular reports to the
RiverSource Funds' Boards of Directors/Trustees.
- --------------------------------------------------------------------------------
34 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
Ameriprise Financial and certain of its affiliates have historically been
involved in a number of legal or arbitration proceedings, including routine
litigation, class actions, and governmental actions, concerning matters arising
in connection with the conduct of their business activities. Ameriprise
Financial believes that the Funds are not currently the subject of, and that
neither Ameriprise Financial nor any of its affiliates are the subject of, any
pending legal or arbitration proceedings that are likely to have a material
adverse effect on the Funds or the ability of Ameriprise Financial or its
affiliates to perform under their contracts with the Funds. Ameriprise Financial
is required to make 10-Q, 10-K and, as necessary, 8-K filings with the
Securities and Exchange Commission on legal and regulatory matters that relate
to Ameriprise Financial and its affiliates. Copies of these filings may be
obtained by accessing the SEC website at www.sec.gov.
There can be no assurance that these matters, or the adverse publicity
associated with them, will not result in increased fund redemptions, reduced
sale of fund shares or other adverse consequences to the Funds.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 35
11. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating the
Fund's results.
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(A)
- ------------------------------------------------------------------------------------------------------------------------------
Fiscal period ended Aug. 31, 2006(G) 2005 2004 2003 2002
Net asset value, beginning of period $ 4.89 $ 4.87 $ 4.78 $ 4.75 $ 4.86
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .09 .18 .18 .20 .25
Net gains (losses) (both realized and unrealized) (.09) .03 .08 .03 (.10)
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations -- .21 .26 .23 .15
- ------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.10) (.19) (.17) (.20) (.25)
Tax return of capital -- -- -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (.10) (.19) (.17) (.20) (.26)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.79 $ 4.89 $ 4.87 $ 4.78 $ 4.75
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $1,667 $ 1,774 $1,933 $2,280 $ 2,438
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(b) .90%(c),(d) .94%(c) .98%(c) .97% .95%
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 3.94%(d) 3.67% 3.55% 4.16% 5.17%
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 130% 300% 279% 256% 169%
- ------------------------------------------------------------------------------------------------------------------------------
Total return(e) (.08%)(f) 4.38% 5.54% 4.91% 3.13%
- ------------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class A would have been 1.03% for the six months ended Feb. 28, 2006 and
1.02% and 1.00% for the years ended Aug. 31, 2005 and 2004, respectively.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Feb. 28, 2006 (Unaudited).
- --------------------------------------------------------------------------------
36 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(A)
- ------------------------------------------------------------------------------------------------------------------------------
Fiscal period ended Aug. 31, 2006(G) 2005 2004 2003 2002
Net asset value, beginning of period $ 4.89 $ 4.88 $ 4.78 $ 4.75 $ 4.86
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .08 .15 .14 .16 .21
Net gains (losses) (both realized and unrealized) (.10) .01 .09 .03 (.10)
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.02) .16 .23 .19 .11
- ------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.08) (.15) (.13) (.16) (.21)
Tax return of capital -- -- -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (.08) (.15) (.13) (.16) (.22)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.79 $ 4.89 $ 4.88 $ 4.78 $ 4.75
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 440 $ 484 $ 628 $ 902 $ 1,047
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(b) 1.66%(c),(d) 1.70%(c) 1.73%(c) 1.73% 1.71%
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 3.18%(d) 2.92% 2.78% 3.40% 4.40%
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 130% 300% 279% 256% 169%
- ------------------------------------------------------------------------------------------------------------------------------
Total return(e) (.45%)(f) 3.39% 4.95% 4.12% 2.35%
- ------------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class B would have been 1.79% for the six months ended Feb. 28, 2006 and
1.78% and 1.75% for the years ended Aug. 31, 2005 and 2004, respectively.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Feb. 28, 2006 (Unaudited).
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 37
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(A)
- ------------------------------------------------------------------------------------------------------------------------------
Fiscal period ended Aug. 31, 2006(G) 2005 2004 2003 2002
Net asset value, beginning of period $ 4.90 $ 4.88 $ 4.78 $ 4.75 $ 4.86
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .08 .15 .14 .16 .21
Net gains (losses) (both realized and unrealized) (.10) .02 .09 .03 (.10)
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.02) .17 .23 .19 .11
- ------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.08) (.15) (.13) (.16) (.21)
Tax return of capital -- -- -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (.08) (.15) (.13) (.16) (.22)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.80 $ 4.90 $ 4.88 $ 4.78 $ 4.75
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 17 $ 18 $ 21 $ 27 $ 24
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(b) 1.67%(c),(d) 1.70%(c) 1.73%(c) 1.74% 1.72%
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 3.17%(d) 2.93% 2.79% 3.34% 4.33%
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 130% 300% 279% 256% 169%
- ------------------------------------------------------------------------------------------------------------------------------
Total return(e) (.45%)(f) 3.60% 4.95% 4.11% 2.35%
- ------------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class C would have been 1.80% for the six months ended Feb. 28, 2006 and
1.79% and 1.75% for the years ended Aug. 31, 2005 and 2004, respectively.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Feb. 28, 2006 (Unaudited).
- --------------------------------------------------------------------------------
38 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
CLASS I
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(A)
- ------------------------------------------------------------------------------------------------------------------------------
Fiscal period ended Aug. 31, 2006(H) 2005 2004(B)
Net asset value, beginning of period $ 4.89 $ 4.88 $ 4.91
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .10 .20 .11
Net gains (losses) (both realized and unrealized) (.09) .02 (.04)
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .01 .22 .07
- ------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.10) (.21) (.10)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.80 $ 4.89 $ 4.88
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(c) .58%(d),(e) .60% .59%(e)
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 6.61%(e) 4.01% 3.13%(e)
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 130% 300% 279%
- ------------------------------------------------------------------------------------------------------------------------------
Total return(f) .28%(g) 4.53% 1.43%(g)
- ------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest
cent.
(b) Inception date is March 4, 2004.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(d) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratio of expenses for
Class I would have been 0.62% for the six months ended Feb 28, 2006.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
(h) Six months ended Feb. 28, 2006 (Unaudited).
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 39
CLASS Y
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(A)
- ------------------------------------------------------------------------------------------------------------------------------
Fiscal period ended Aug. 31, 2006(G) 2005 2004 2003 2002
Net asset value, beginning of period $ 4.89 $ 4.88 $ 4.78 $ 4.75 $ 4.86
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .10 .19 .18 .21 .25
Net gains (losses) (both realized and unrealized) (.10) .02 .10 .03 (.10)
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations -- .21 .28 .24 .15
- ------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.10) (.20) (.18) (.21) (.25)
Tax return of capital -- -- -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (.10) (.20) (.18) (.21) (.26)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.79 $ 4.89 $ 4.88 $ 4.78 $ 4.75
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 135 $ 202 $ 203 $ 268 $ 297
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(b) .74%(c),(d) .78%(c) .81%(c) .81% .78%
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 4.07%(d) 3.85% 3.70% 4.34% 5.30%
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 130% 300% 279% 256% 169%
- ------------------------------------------------------------------------------------------------------------------------------
Total return(e) .01%(f) 4.34% 5.92% 5.08% 3.29%
- ------------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class Y would have been 0.85% for the six months ended Feb. 28, 2006 and
0.86% and 0.83% for the years ended Aug. 31, 2005 and 2004, respectively.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Feb. 28, 2006 (Unaudited).
- --------------------------------------------------------------------------------
40 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
FUND EXPENSES EXAMPLE
(UNAUDITED)
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments; and (2) ongoing
costs, including management fees; distribution and service (12b-1) fees; and
other Fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the six months ended Feb. 28, 2006.
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.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 41
BEGINNING ENDING EXPENSES
ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED
SEPT. 1, 2005 FEB. 28, 2006 THE PERIOD(A) EXPENSE RATIO
Class A
Actual(b) $1,000 $ 999.20 $4.46(c) .90%
Hypothetical (5% return before expenses) $1,000 $1,020.33 $4.51(c) .90%
Class B
Actual(b) $1,000 $ 995.50 $8.21(c) 1.66%
Hypothetical (5% return before expenses) $1,000 $1,016.56 $8.30(c) 1.66%
Class C
Actual(b) $1,000 $ 995.50 $8.26(c) 1.67%
Hypothetical (5% return before expenses) $1,000 $1,016.51 $8.35(c) 1.67%
Class I
Actual(b) $1,000 $1,002.80 $2.88(c) .58%
Hypothetical (5% return before expenses) $1,000 $1,021.92 $2.91(c) .58%
Class Y
Actual(b) $1,000 $1,000.10 $3.67(c) .74%
Hypothetical (5% return before expenses) $1,000 $1,021.12 $3.71(c) .74%
(a) Expenses are equal to the Fund's annualized expense ratio as indicated
above, multiplied by the average account value over the period, multiplied
by 181/365 (to reflect the one-half year period).
(b) Based on the actual return for the six months ended Feb. 28, 2006: -0.08%
for Class A, -0.45% for Class B, -0.45% for Class C, +0.28% for Class I
and +0.01% for Class Y.
(c) Effective as of March 1, 2006, the Investment Manager and its affiliates
have contractually agreed to waive certain fees and expenses until Aug.
31, 2006, unless sooner terminated at the discretion of the Board, such
that net expenses will not exceed 0.89% for Class A; 1.65% for Class B;
1.66% for Class C; 0.54% for Class I; and 0.73% for Class Y of the Fund's
average daily net assets. In addition, on Feb. 15, 2006, shareholders
approved a change to the Investment Management Services Agreement. If the
revised fee schedules under the Investment Management Services Agreement
and the cap/fee waiver agreement had been in place for the entire
six-month period ended Feb. 28, 2006, the actual expenses paid would have
been $4.41 for Class A, $8.16 for Class B, $8.21 for Class C, $2.68 for
Class I and $3.62 for Class Y; the hypothetical expenses paid would have
been $4.46 for Class A, $8.25 for Class B, $8.30 for Class C, $2.71 for
Class I and $3.66 for Class Y.
- --------------------------------------------------------------------------------
42 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT
RiverSource Investments, LLC (RiverSource), a wholly-owned subsidiary of
Ameriprise Financial, Inc. (Ameriprise Financial, formerly, American Express
Financial Corporation), serves as the investment manager to the Fund. Under an
investment management services agreement (the IMS Agreement), the investment
manager provides investment advice and other services to the Fund. Throughout
the year, the Fund's Board of Directors (the Board) and the Board's Investment
Review and Contracts Committees monitor these services.
Ameriprise Financial had served as investment manager to the Fund until Sept.
29, 2005. On that date, and pursuant to the consent of the Board, Ameriprise
Financial transferred its rights, title, and interest and its burdens and
obligations under the IMS Agreement to RiverSource, its wholly-owned subsidiary.
Each year, the Board determines whether to continue the IMS Agreement by
evaluating the quality and level of services received and the costs associated
with those services. To assist the Board in making this determination, the
investment manager prepares detailed reports for the Board and its Contracts
Committee in March and April and provides data prepared by independent
organizations. The Board gives considerable weight to the work, deliberations
and conclusions of the Contracts and Investment Review Committees in determining
whether to continue the IMS Agreement.
BACKGROUND
This past year, prior to the Board's annual review process, on Feb. 1, 2005,
American Express Company, the former parent of Ameriprise Financial, announced
its intention to pursue a spin-off of Ameriprise Financial by distributing
shares of the common stock of Ameriprise Financial to shareholders of American
Express Company. Following this announcement, the Board determined to proceed
with its annual review process and, after thorough review of the reports and
data provided, at a meeting held in person on April 14, 2005, the Board,
including all of its independent members, determined that the quality and level
of advisory services provided pursuant to the IMS Agreement were satisfactory
and that fees were fair and reasonable. However, in light of the announced plans
of the spin-off, the Board approved continuation of the IMS Agreement with
Ameriprise Financial for only an interim period ending on the later of (i) the
effective date of the spin-off; or (ii) the approval of a new IMS Agreement with
Ameriprise Financial (or its subsidiary) by the shareholders of the Fund, but in
no event for a period longer than one year.
During the course of the six-month period following the April 2005 meeting, the
Board evaluated whether to approve new investment management services agreements
for each of the funds within the Ameriprise Financial fund complex (together,
the Funds) with post-spin Ameriprise Financial (or RiverSource). Independent
counsel, Schulte Roth & Zabel LLP (Schulte), assisted the Boards in fulfilling
their statutory and other responsibilities associated with the spin-off and the
resulting consideration of new contracts, including the new IMS Agreement. The
Board and its committees were provided with a wealth of written and oral
information in this regard. Furthermore, in connection with the Board's
considerations as to whether post-spin Ameriprise Financial, as an entity
independent from American Express Company, would be capable of continuing to
provide a high quality of services to the Funds,
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 43
the Board's independent members retained their own financial adviser, Credit
Suisse First Boston LLC (CSFB), to assist them in analyzing the capital adequacy
of post-spin Ameriprise Financial. (The costs of independent counsel and CSFB
and of additional meetings of the Boards were borne by Ameriprise Financial as
part of the commitment of the American Express Company to ensure a complete and
thorough review of the proposed spin-off and its effect on the services provided
by Ameriprise Financial and its subsidiaries.) At a meeting of the Board held on
Sept. 8, 2005, the Board, including all of its independent members, approved,
and recommended that shareholders approve, a proposed new IMS Agreement with
RiverSource (the New IMS Agreement). At a meeting of the Fund's shareholders
held on Feb. 15, 2006, shareholders approved the New IMS Agreement. The
following section, "Board Considerations Related to the New IMS Agreement,"
provides a detailed discussion of the Board's considerations and determinations
respecting the New IMS Agreement.
BOARD CONSIDERATIONS RELATED TO THE NEW IMS AGREEMENT
In carrying out its legal responsibilities associated with the consideration of
the New IMS Agreement, the Board evaluated the following factors:
Nature, Extent and Quality of Services to be Provided by Post-Spin Ameriprise
Financial (and Its Subsidiaries)
The Board recognized that only a few months had passed since its April 2005
conclusion that the nature, extent and quality of services provided by
Ameriprise Financial were satisfactory and consistent with those that would be
expected for a fund family of the size of the Funds and its determination to
renew the IMS Agreement for the interim period. However, the Board also
recognized the need to supplement this assessment with an evaluation of whether
the spin-off or other factors would result in changes to the advisory services
being provided under the current IMS Agreement.
The Board focused its evaluation on the following factors potentially impacting
the nature, extent and quality of advisory services to be provided by Ameriprise
Financial: (i) Ameriprise Financial's projected capital structure and capital
adequacy as a stand-alone entity; (ii) its legal and regulatory risks; (iii) its
ability to retain and attract personnel; and (iv) its ability to successfully
re-brand its products and services. Based on extensive presentations and reports
by Ameriprise Financial, CSFB and Schulte, the Board concluded that the proposed
capital structure (which includes certain indemnification commitments made by
American Express Company) should enable RiverSource to continue to provide a
high quality and level of advisory services to the Fund. In making this
determination, the Board took into account representations by management of
Ameriprise Financial that projected capital levels would allow Ameriprise
Financial and RiverSource to meet legal and compliance responsibilities, build
their distribution network, pursue technological upgrades, make capital
commitments necessary to retain and attract key personnel devoted to legal and
compliance responsibilities, portfolio management and distribution, and pursue
smaller asset management acquisitions to help grow the asset management
business. The Board accorded significant weight to CSFB's confirmation as to the
reasonableness of the proposed capital structure. The Board also considered the
fact that there were no expected departures of key personnel involved in the
portfolio management, operations and marketing of the Funds as a result of the
announcement of the spin-off.
- --------------------------------------------------------------------------------
44 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
The Board concluded that, based on all of the materials and information
provided, post-spin Ameriprise Financial (including RiverSource) would be in a
position to continue to provide a high quality and level of advisory services to
the Fund.
Investment Performance
The Board next focused on investment performance. The Board reviewed reports
documenting the Fund's performance over one-, three- and/or five-year periods,
as well as the entire period during which its current portfolio manager has
managed the Fund, and compared to relevant Lipper and market indices. The Board
took into account its determination in April 2005 that investment performance in
2004 exceeded the median.
The Board also considered that it had been receiving monthly performance reports
for the Fund and that there had been no significant deviations from April's
overall performance data.
Cost of Services Provided
The Board evaluated comparative fees and the costs of services under the current
IMS Agreement and the New IMS Agreement, including fees charged by Ameriprise
Financial (including RiverSource and other subsidiaries) to institutional
clients. The Board observed that the proposed advisory fee changes are designed
to work in tandem with proposed changes to administrative services fees and that
advisory fees under the New IMS Agreement would decrease. The Board studied
RiverSource's effort (i.e., its "pricing philosophy") to set substantially all
Funds' total expense ratios at or below the median expense ratio of comparable
mutual funds (as compiled by Lipper). It also noted that RiverSource has agreed
to voluntarily impose expense caps or waivers to achieve this pricing objective
whenever the expense ratio exceeded the median expense ratio by more than three
basis points.
The Board next considered the expected profitability to Ameriprise Financial and
RiverSource derived from their relationship with the Fund, recalling the April
2005 determination that the profitability level was appropriate. The Board noted
that projected profitability of Ameriprise Financial would allow it to operate
effectively and, at the same time, reinvest in RiverSource and its other asset
management businesses. The Board also considered that the proposed changes in
advisory fees and the mergers of certain other Funds would result in revenue
gains to Ameriprise Financial, but that these increases would not materially
alter profit margins due to expected increases in costs associated with the
spin-off, particularly re-branding and separation. CSFB also reported that
Ameriprise Financial's projected level of return on equity was generally
reasonable in light of the returns on equity of its industry competitors. In
evaluating profitability, the Board also considered the benefits Ameriprise
Financial obtains through the use of commission dollars paid on portfolio
transactions for the Fund and from other business relationships that result from
managing the Fund. The Board also considered the fees charged by Ameriprise
Financial (and its subsidiaries) to institutional clients as well as the fees
paid to, and charged by, subadvisers, noting the differences in services
provided in each case. In light of these considerations, the Board concluded
that projected profitability levels were appropriate.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 45
Economies of Scale
The Board also considered the "breakpoints" in fees that would be triggered as
Fund net asset levels grew and the extent to which shareholders would benefit
from such growth. The Board observed that the revised fee schedules under the
proposed New IMS Agreement would continue to provide breakpoints similar to
those in place pursuant to the current IMS Agreement. Accordingly, the Board
concluded that the proposed New IMS Agreement provides adequate opportunity for
shareholders to realize benefits as Fund assets grow.
Other Considerations
In addition, the Board accorded weight to the fact that, under the New IMS
Agreement, RiverSource Investments is held to a higher standard of care than
under the current IMS Agreement. The Board also noted Ameriprise Financial's
commitment to a culture that adheres to ethical business practice, assigns
accountability to senior management and seeks to identify conflicts and propose
appropriate action to minimize the risks posed by the conflicts.
Furthermore, the Board recognized that it was not limited to considering
management's proposed New IMS Agreement. In this regard, the Board evaluated the
circumstances under which it would consider the retention of an investment
adviser different from RiverSource Investments. The Board concluded, based on
its consultation with independent counsel, that pursuing the retention of a
different adviser was not necessary, primarily because, in its best judgment,
Ameriprise Financial continues to be basically the same organization (from a
functional and managerial standpoint), as it was prior to the spin-off. The
Board reasoned that shareholders purchased shares of the Fund with an
expectation that the current investment advisory organization would be servicing
the Fund.
- --------------------------------------------------------------------------------
46 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
PROXY VOTING
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are stated in the Statement of Additional
Information (SAI). You may obtain a copy of the SAI without charge by calling
(800) 862-7919; by looking at the website www.riversource.com/funds; or by
searching the website of the Securities and Exchange Commission (SEC) at
http://www.sec.gov. Information regarding how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available without charge by calling the Fund's administrator, Board Services
Corporation, collect at (612) 330-9283; by looking at the website
www.riversource.com/funds; or by searching the website of the SEC at
www.sec.gov.
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 47
RESULTS OF MEETING OF SHAREHOLDERS
RIVERSOURCE DIVERSIFIED BOND FUND
REGULAR MEETING OF SHAREHOLDERS HELD ON FEB. 15, 2006
(UNAUDITED)
A brief description of each proposal voted upon at the meeting and the votes
cast for, against or withheld, as well as the number of abstentions and broker
non-votes as to each proposal is set forth below. A vote is based on total
dollar interest in a fund.
ELECTION OF BOARD MEMBERS
AFFIRMATIVE WITHHOLD
Kathleen Blatz 1,518,639,338.21 43,630,439.78
Arne H. Carlson 1,515,446,110.81 46,823,667.18
Patricia M. Flynn 1,519,108,255.53 43,161,522.46
Anne P. Jones 1,516,147,262.18 46,122,515.81
Jeffrey Laikind 1,517,730,845.61 44,538,932.38
Stephen R. Lewis, Jr. 1,519,049,064.14 43,220,713.85
Catherine James Paglia 1,519,553,801.94 42,715,976.05
Vikki L. Pryor 1,518,830,533.98 43,439,244.01
Alan K. Simpson 1,512,374,955.08 49,894,822.91
Alison Taunton-Rigby 1,519,190,537.04 43,079,240.95
William F. Truscott 1,517,779,034.30 44,490,743.69
AMEND THE ARTICLES OF INCORPORATION TO PERMIT THE BOARD TO ESTABLISH THE MINIMUM
ACCOUNT VALUE AND TO CHANGE THE NAME OF THE CORPORATION
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
1,486,115,060.47 45,754,383.36 30,255,422.16 144,912.00
APPROVE AN INVESTMENT MANAGEMENT SERVICES AGREEMENT WITH RIVERSOURCE
INVESTMENTS, LLC
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
1,495,698,657.77 35,595,619.56 30,830,588.66 144,912.00
- --------------------------------------------------------------------------------
48 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
APPROVE CHANGES IN FUNDAMENTAL INVESTMENT POLICIES
DIVERSIFICATION
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
1,482,073,977.08 41,740,084.28 38,310,804.63 144,912.00
TEN PERCENT LIMITATION IN SINGLE ISSUER
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
1,484,905,329.37 43,554,189.37 33,665,347.25 144,912.00
LENDING
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
1,471,450,522.18 51,940,401.04 38,733,942.77 144,912.00
BORROWING
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
1,472,038,725.40 51,939,088.79 38,147,051.80 144,912.00
- --------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 49
[LOGO RiverSource(SM)
Investments]
RIVERSOURCE INVESTMENTS
200 AMERIPRISE FINANCIAL CENTER
MINNEAPOLIS, MN 55474
This report must be accompanied or preceded by the Fund's current prospectus.
RiverSource Funds are managed by RiverSource Investments, LLC and distributed by
Ameriprise Financial Services, Inc., Member NASD. Both companies are part of
Ameriprise Financial, Inc.
CONTACT INFORMATION AND SERVICES
INTERNET
Receive 24-hour access to your account information at www.riversource.com/funds.
CLIENT SERVICE
Obtain fund performance, fund prices, account values, recent account
transactions, and make account inquiries by calling Ameriprise Financial
Services at (800) 862-7919 or TTY: (800) 846-4852.
TELEPHONE TRANSACTION SERVICE
For sales and exchanges, dividend payments, or reinvestments and automatic
payment arrangements contact Ameriprise Financial Services at (800) 862-7919.
FIND AN AMERIPRISE FINANCIAL ADVISOR
If you are an existing Ameriprise Financial client who has recently moved and
would like to speak with a new advisor, please call your local Client Service
Coordinator at (800) 803-6284.
- --------------------------------------------------------------------------------
THIS PAGE IS NOT PART OF THE SEMIANNUAL REPORT
RIVERSOURCE(SM) DIVERSIFIED BOND FUND
70100 Ameriprise Financial Center
Minneapolis, MN 55474
RIVERSOURCE.COM/FUNDS
[LOGO RiverSource(SM) RiverSource Funds are managed by RiverSource
Investments] Investments, LLC and distributed by Ameriprise
Financial Services, Inc., Member NASD. Both companies
are part of Ameriprise Financial, Inc.
Item 2. Code of Ethics. Not applicable for semi-annual reports.
Item 3. Audit Committee Financial Expert. Not applicable for semi-annual
reports.
Item 4. Principal Accountant Fees and Services. Not applicable for
semi-annual reports.
Item 5. Audit Committee of Listed Registrants. Not applicable.
Item 6. The complete schedule of investments is included in Item 1 of this
Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchase of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. Not applicable.
Item 10. Submission of matters to a vote of security holders. Not applicable.
Item 11. Controls and Procedures.
(a) Based upon their evaluation of the registrant's disclosure
controls and procedures as conducted within 90 days of the filing
date of this Form N-CSR, the registrant's Principal Financial
Officer and Principal Executive Officer have concluded that those
disclosure controls and procedures provide reasonable assurance
that the material information required to be disclosed by the
registrant on this report is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal controls over
financial reporting that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits.
(a)(1) Not applicable for semi-annual reports.
(a)(2) Separate certification for the Registrant's principal
executive officer and principal financial officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a)
under the Investment Company Act of 1940, are attached as
EX.99.CERT.
(a)(3) Not applicable.
(b) A certification by the Registrant's principal executive officer
and principal financial officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment
Company Act of 1940, is attached as EX.99.906 CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) AXP Fixed Income Series, Inc.
By /s/ Paula R. Meyer
------------------
Paula R. Meyer
President and Principal Executive Officer
Date May 3, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ Paula R. Meyer
------------------
Paula R. Meyer
President and Principal Executive Officer
Date May 3, 2006
By /s/ Jeffrey P. Fox
------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date May 3, 2006