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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 811-21308
The China-U.S. Growth Fund
(Exact name of registrant as specified in charter)
111 Fifth Avenue New York, New York 10003
(Address of principal executive offices) (Zip code)
Mr. Hal Liebes
Fred Alger Management, Inc.
111 Fifth Avenue
New York, New York 10003
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-806-8800
Date of fiscal year end: October 31
Date of reporting period: October 31, 2005
ITEM 1. REPORT(S) TO STOCKHOLDERS.
THE CHINA-U.S.
GROWTH FUND
ANNUAL REPORT
OCTOBER 31, 2005
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Dear Shareholders, December 12, 2005
THE YEAR IN REVIEW
The past 12 months had more than their share of challenges. In the United
States, Hurricanes Katrina and Rita devastated the southern coast, leaving
hundreds of thousands jobless and without homes, and prompting investor fears of
high energy prices (which came true) and inflation (which did not). The war in
Iraq entered its third year, and the domestic debate about the war intensified.
The job market showed some improvement but job creation and wage growth remained
sub-par relative to economic growth and corporate profitability. The
Fed--concerned about inflation and the frothiness of the housing market--raised
overnight lending rates eight times to 3.75%, the highest level in 4.5 years. In
response, anxious investors--and Wall Street professionals, in
particular--remained skeptical, adopting a wait-and-see attitude.
Despite such understandable concerns, the U.S. equity markets have emerged
from the bear market of the early 2000s. In fact, since October of 2002, when
the market hit a post-bubble low, the major U.S. indices have been very strong.
So has the economy, both domestically and globally. Over the past year, the U.S.
economy showed steady growth of around 3.5%, core inflation excluding energy
remained muted at around 2%, and corporate earnings stayed in double-digits,
much to the surprise of most strategists. Growth companies in particular saw
healthy stock appreciation. Going forward, we see even greater potential for the
better growth managers to outperform their benchmarks and the overall markets.
In China, economic growth continued to surge. China has become an
increasingly dominant force in global markets, not just as a producer of goods
for export, but as a consumer of both raw materials and finished products. Over
the past 12 months, the Chinese economy overall generated growth in excess of
9.0%, with double-digit growth in provinces like Beijing, Shanghai, and the
Pearl River Delta. While there has been a moderate slowdown in capital spending
in China, and in foreign direct investment, this has been offset by increased
consumer spending and economic activity in the center of the country. This is
part of the government's strategy to encourage development of the consumer
economy and of the inland cities to the west of the more developed coastal
provinces. Hong Kong has solidified its position as a vital gateway to the
mainland, and for the year, the Hong Kong stock market (which includes many
mainland China companies) has outperformed U.S. exchanges.
In addition, just before the end of 2005, the Chinese government revised
its official GDP figures upward by nearly $300 billion. Many analysts believe
that this revision more accurately reflects the size and scope of China's
economy. It also adds weight to what companies doing business with China have
already realized: that Chinese consumption of goods and services rivals any
country in the world in its breadth and depth. With the revision, China is now
the fourth largest economy in the world in dollar terms.
In sum, for the 12 months ended October 31, 2005, the U.S. equity markets
experienced modest gains with the Dow gaining 6.4%, the Nasdaq up 8.1% and the
S&P 500 up 8.7%. While long-term Treasury yields were markedly inconsistent with
the Fed's overnight interest rate increases, the yield on the U.S. Treasury
10-year note was 4.57% on October 31, 2005, compared to 4.05% a year earlier.
PORTFOLIO MATTERS
For the fiscal year ending October 31, 2005, the China-U.S. Growth Fund
gained 17.56%. During the same period the S&P 500 Index returned 8.71%, and the
MSCI Zhong Hua Index (a free-float-adjusted index measuring China's and Hong
Kong's market performance) gained 12.63%.
In a year where the global economy was beset by rising oil costs, the
Fund's energy holdings, at an average weight of 8.73%, substantially
outperformed both the U.S. and China benchmarks. Contributors included strong
returns from Lone Star Technologies Inc., as well as oil and gas drilling
companies, including National Oilwell Varco Inc., Canadian Natural Resources
Ltd., and Schlumberger Ltd.
Both the materials and industrials sectors were also impacted by rising
energy prices. The Fund was overweight in these sectors compared to both the
U.S. and China benchmarks, and significantly outperformed them as well. In the
materials sector, the Fund saw strong performances from companies including
Companhia Vale do Rio Doce, a global mining company, and Phelps Dodge
Corporation, one of the world's leading producers of copper. In the industrials
sector, solid contributors included Joy Global Inc., one of the world's leading
providers of mining equipment and services, and Weichai Power Co. Ltd, a
manufacturer and seller of diesel engines.
Our holdings in the information technology sector, at an average weight of
18.35%, were overweight compared to both the U.S. and China benchmarks, but
outperformed them. Our holdings in this sector were bolstered by performances
from Netease.com, one of China's leading Internet and online game services
providers, Lenovo Group Limited, the largest PC-maker in China, and KongZhong
Corporation, a leading provider of wireless interactive entertainment and media
services in China.
In the financials sector, at an average weight of 9.88%, the Fund was
underweight both benchmarks, and had mixed performances--solidly outperforming
the S&P 500 and only slightly underperforming the MSCI Zhong Hua Growth Index.
Returns in this sector were a reflection of the rapid economic growth in China,
particularly in housing and development. Contributors included Far East
Consortium International Ltd., a major developer of commercial property in
China, and Hysan Development Company Limited, a prominent property investment
and development firm headquartered in Hong Kong.
The Fund's holdings in the health care sector, at an average weight of
2.34%, were underweight compared to the benchmarks and outperformed them. Solid
performers included Syneron Medical Ltd., a manufacturer and distributor of
medical aesthetic devices, Amgen Inc., a leading human therapeutics company in
the biotechnology industry, and Hologic, Inc., a developer and manufacturer of
proprietary x-ray systems.
LOOKING AHEAD
At Alger, we look for dynamic, innovative companies regardless of whether
the stock markets are dominated by bulls or bears. Our long-term success is not
a product of momentum or fads, but that of a highly-disciplined approach
grounded in fundamental, bottom-up research, and bolstered by the thorough
conviction of our analysts. Looking ahead in 2006, we anticipate a year similar
to 2005, with continued strong corporate earnings, and an equity market that
increasingly recognizes growth and responds in kind.
2
As we end another fiscal year, we'd like to take the opportunity to thank
you for growing with us, and continuing to entrust us with your investment
needs.
Respectfully submitted,
/s/ Daniel C. Chung /s/ Zachary Karabell
Daniel C. Chung Zachary Karabell
Chief Investment Officer Co-Portfolio Manager
IMPORTANT PERFORMANCE AND OTHER INFORMATION
The views of the fund's management and the portfolio holdings described in
this report are as of October 31, 2005; these views and portfolio holdings may
have changed subsequent to this date and they do not guarantee the future
performance of the markets or the Fund. Information provided in this report
should not be considered a recommendation to purchase or sell securities.
A WORD ABOUT RISK
For a more detailed discussion of the risks associated with a Fund, please
see the Fund's Prospectus.
PERFORMANCE
PERFORMANCE DATA QUOTED IS HISTORICAL. PAST PERFORMANCE IS NOT AN
INDICATION OR A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL
VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT
PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE QUOTED.
Investors should consider the Fund's investment objective, risks and
charges and expenses carefully before investing. The Fund's prospectus contains
this and other information about the Fund, and may be obtained by asking your
financial advisor, calling (800) 223-3810, visiting our website at
www.chinausgrowthfund.com, or contacting the Fund's distributor, Fred Alger &
Company, Incorporated, 30 Montgomery Street, Jersey City, New Jersey 07302. Read
the prospectus carefully before investing.
3
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND FUND HIGHLIGHTS THROUGH OCTOBER 31, 2005 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HYPOTHETICAL $10,000 INVESTMENT FROM 11/3/03 TO 10/31/05
- --------------------------------------------------------------------------------
CHINA-U.S. S&P 500 MSCI ENDING VALUE
GROWTH INDEX ZHONG HAU CHINA-U.S. GROWTH:
---------- ------- --------- $12,990
11/3/03 10000 10000 10000
10/31/04 11050 10762 10742 ENDING VALUE
10/31/05 12990 11699 12098 S&P 500 INDEX:
$11,699
ENDING VALUE
MSCI ZHONG HAU
INDEX:
$12,098
The chart above illustrates the change in value of a hypothetical $10,000
investment made in The China-U.S. Growth Fund, the S&P 500 Index and the MSCI
Zhong Hau Index on November 3, 2003, the inception date of The China-U.S. Growth
Fund, through October 31, 2005. Figures for The China-U.S. Growth Fund, the S&P
500 Index and the MSCI Zhong Hau Index (unmanaged indices of common stocks)
include reinvestment of dividends.
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON AS OF 10/31/05
AVERAGE ANNUAL AVERAGE ANNUAL
TOTAL RETURN TOTAL RETURN
1 SINCE
YEAR INCEPTION
-------------- --------------
THE CHINA-U.S. GROWTH FUND (INCEPTION 11/3/03) 11.38% 10.97%
S&P500 Index 8.71% 8.19%
MSCI Zhong Hau Index 12.63% 10.02%
================================================================================
THE FUND'S TOTAL RETURNS INCLUDE CHANGES IN SHARE PRICE AND REINVESTMENT OF
DIVIDENDS AND CAPITAL GAINS. THE GRAPH AND TABLE ABOVE DO NOT REFLECT THE
DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD HAVE PAID ON FUND DISTRIBUTIONS OR
ON THE REDEMPTION OF FUND SHARES. INVESTMENT RETURN AND PRINCIPAL WILL FLUCTUATE
AND THE FUND'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.
PORTFOLIO SUMMARY+ (UNAUDITED)
- -------------------------------------------------------------------------------
Value (%) Value (%)
- --------------------------------------- --------------------------------------
United States 49.6% Hong Kong 20.5
China 24.0 Cash and Net Other Assets 5.9
-----
100.0%
- --------------------------------------------------------------------------------
+ Based on net assets.
4
THE CHINA-U.S. GROWTH FUND
SCHEDULE OF INVESTMENTS
SHARES COMMON STOCKS--94.1% VALUE
-------- --------
UNITED STATES--49.6%
BIOTECHNOLOGY--1.9%
9,305 Amgen Inc.* ...................................... $ 704,947
------------
CHEMICALS--1.2%
10,350 Rohm and Haas Company ............................ 450,536
------------
COMMUNICATION EQUIPMENT--2.8%
26,750 Motorola, Inc. ................................... 592,780
11,400 QUALCOMM Inc. .................................... 453,264
------------
1,046,044
------------
COMPUTERS & PERIPHERALS--.7%
13,950 Memc Electronic Materials, Inc.* ................. 250,263
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS--4.5%
8,150 Emerson Electric Co. ............................. 566,833
58,300 Evergreen Solar, Inc.* ........................... 480,975
32,600 Photon Dynamics, Inc.* ........................... 567,566
------------
1,615,374
------------
ENERGY EQUIPMENT & SERVICES--1.7%
4,600 Schlumberger Limited ............................. 417,542
2,150 Tenaris S. A. ADR# ............................... 236,178
------------
653,720
------------
FOOD & BEVERAGES--1.6%
11,600 Yum! Brands, Inc. ................................ 590,092
------------
FOOD PRODUCTS--1.3%
18,900 Archer-Daniels-Midland Company ................... 460,593
------------
HEALTH CARE EQUIPMENT & SUPPLIES--2.1%
6,950 Hologic, Inc.* ................................... 385,447
22,400 Illumina, Inc.* .................................. 348,768
------------
734,215
------------
HOTELS AND OTHER LODGING PLACES--.5%
3,250 Ctrip.com International Ltd.* .................... 186,973
------------
HOTELS, RESTAURANTS & LEISURE--3.0%
16,200 Starbucks Corporation* ........................... 458,136
13,600 Wynn Resorts, Limited* ........................... 634,848
------------
1,092,984
------------
HOUSEHOLD PRODUCTS--1.4%
8,989 Procter & Gamble Company ......................... 503,308
------------
INSURANCE--1.6%
8,800 American International Group, Inc. ............... 570,240
------------
INTERNET & CATALOG RETAIL--1.9%
17,750 eBay Inc.* ....................................... 702,900
------------
INTERNET SOFTWARE & SERVICES--3.3%
6,250 Netease.com Inc. ADR*# ........................... 476,688
19,350 Tom Online Inc. ADR*# ............................ 348,300
16,200 VeriSign, Inc.* .................................. 382,806
------------
1,207,794
------------
5
THE CHINA-U.S. GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
October 31, 2005
SHARES COMMON STOCKS (CONTINUED) VALUE
-------- -------
LEISURE & ENTERTAINMENT--.4%
6,400 Shanda Interactive Entertainment Ltd.* ADR*# ..... $ 158,528
------------
MACHINERY--2.2%
15,050 Caterpillar Inc. ................................. 791,480
------------
METALS & MINING--8.0%
9,600 Cameco Corporation ............................... 458,880
15,450 Companhia Vale do Rio Doce (CVRD) ADR*# .......... 638,549
8,150 Freeport-McMoRan Copper & Gold, Inc. ............. 402,773
15,700 Inco Limited ..................................... 631,454
16,350 Oregon Steel Mills, Inc.* ........................ 415,120
3,750 Phelps Dodge Corporation ......................... 451,763
------------
2,998,539
------------
OIL & GAS--3.5%
9,750 Canadian Natural Resources Ltd. .................. 401,798
11,050 Marathon Oil Corporation ......................... 664,768
4,950 Talisman Energy Inc. ............................. 219,236
------------
1,285,802
------------
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT--3.0%
18,950 Ikanos Communications* ........................... 298,652
10,850 National Semiconductor Corporation ............... 245,536
106,350 Silicon Storage Technology Inc.* ................. 537,068
------------
1,081,256
------------
SPECIALTY RETAIL--1.1%
7,850 Abercrombie & Fitch Co. Cl. A .................... 408,122
------------
TEXTILES, APPAREL & LUXURY GOODS--1.9%
8,200 NIKE, Inc. Cl. B ................................. 689,210
------------
Total United States (Cost $16,498,170) 18,182,920
CHINA--24.0%
CHEMICALS--.8%
822,000 Jilin Chemical Indusrtial Company Limited* ....... 288,945
------------
COMMUNICATIONS EQUIPMENT--.9%
110,000 ZTE Corporation Cl. H ............................ 324,941
------------
COMPUTERS & PERIPHERALS--3.0%
2,242,000 Lenovo Group Limited ............................. 1,098,994
------------
DISTRIBUTORS--.9%
228,000 China Resources Enterprise Limited ............... 336,757
------------
DIVERSIFIED TELECOMMUNICATION SERVICES--.9%
205,000 China Netcom Group Corporation
(Hong Kong) Limited ............................ 323,941
------------
6
THE CHINA-U.S. GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
October 31, 2005
SHARES COMMON STOCKS (CONTINUED) VALUE
-------- -------
ELECTRICAL EQUIPMENT--.4%
184,000 Dongfang Electrical Machinery Company
Limited Cl .H ................................... $ 143,598
------------
FOOD & STAPLES RETAILING--.9%
768,000 China Yurun Food Group Limited* .................. 339,311
------------
HOTELS, RESTAURANTS & LEISURE--.9%
559,200 Shanghai Jinjiang Internation al Hotels
Development Co. Ltd. ........................... 313,152
------------
MACHINERY--1.7%
518,600 Hangzhou Steam Turbine Co., Ltd. ................. 632,849
------------
MEDIA--.7%
10,195 SINA Corp.* ...................................... 258,443
------------
OIL & GAS & CONSUMABLE FUELS--6.4%
757,000 CNOOC Limited .................................... 493,132
1,192,000 PetroChina Company Limited Cl. H ................. 907,203
788,000 Sinopec Zhenhai Refining and Chemical
Company Limited ................................ 919,921
------------
2,320,256
------------
REAL ESTATE--1.2%
1,662,000 China Resources Land Limited ..................... 455,582
------------
SOFTWARE--1.3%
37,604 KongZhong Corporation ADR*# ...................... 476,819
------------
TRANSPORTATION INFRASTRUCTURE--1.0%
220,000 Cosco Pacific Limited ............................ 360,415
------------
WIRELESS TELECOMMUNICATION SERVICES--3.0%
250,500 China Mobile (Hong Kong) Limited ................. 1,114,816
------------
Total China (Cost $8,450,936) .................... 8,788,819
------------
HONG KONG--20.5%
BIOTECHNOLOGY--1.0%
1,576,000 Sino Biopharmaceutical Limited ................... 345,606
------------
COMMERCIAL BANKS--.9%
867,000 CITIC International Financial Holdings Limited ... 315,947
------------
DIVERSIFIED TELECOMMUNICATION SERVICES--.8%
5,496,000 ZZNode Holdings Co., Ltd. ........................ 297,764
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS--.3%
190,000 AAC Acoustic Technology Holdings Inc.* ........... 95,586
------------
HOUSEHOLD DURABLES--.2%
602,000 Skyworth Digital Holdings Limited ................ 86,974
------------
INDUSTRIAL CONGLOMERATES--2.6%
101,000 Hutchinson Whampoa Limited ....................... 956,299
------------
INFORMATION TECHNOLOGY SERVICES--.8%
1,404,000 Tom Online Inc.* ................................. 302,454
------------
MEDIA--1.1%
3,358,000 One Media Group Limited* ......................... 385,520
------------
MULTILINE RETAIL--1.3%
316,000 Lifestyle International Holdings Limited ......... 456,543
------------
7
THE CHINA-U.S. GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
October 31, 2005
SHARES COMMON STOCKS (CONTINUED) VALUE
-------- -------
REAL ESTATE--7.2%
91,000 Cheung Kong (Holdings) Limited ................... $ 946,721
175,000 Hongkong Land Holdings Limited ................... 500,500
133,216 Hysan Development Company Limited ................ 288,697
4,722,000 Shanghai Real Estate Limited ..................... 694,396
29,500 Swire Pacific Limited ............................ 264,474
------------
2,694,788
------------
SOFTWARE--1.0%
1,160,000 China Lotsynergy Holdings* ....................... 381,570
------------
SPECIALTY RETAIL--3.1%
544,000 Giordano International Limited ................... 312,274
3,268,000 Xinyu Hengdeli Holdings Limited* ................. 788,315
------------
1,100,589
------------
TEXTILES & APPAREL & LUXURY GOODS--.2%
736,000 Texhong Textile Group Limited* ................... 75,953
------------
Total Hong Kong (Cost $7,710,877) ................ 7,495,593
------------
Total Common Stocks (Cost $32,659,983) ........... 34,467,332
------------
PRINCIPAL
AMOUNT
---------
SHORT-TERM INVESTMENTS--5.5%
U.S. AGENCY OBLIGATIONS
$2,007,000 Federal National Mortgage Association,
3.62%,11/1/05
(Cost $2,007,000) .............................. 2,007,000
------------
Total Investments
(Cost $34,666,983) (a) ................................ 99.6% 36,474,332
Other Assets in Excess of Liabilities ................... 0.4 156,155
----- ------------
Net Assets .............................................. 100.0% $ 36,630,487
===== =============
- ----------
* Non-income producing security.
# American Depositary Receipts.
(a) At October 31, 2005, the net unrealized appreciation on investments, based
on cost for federal income tax purposes of $34,906,513 amounted to
$1,567,819 which consisted of aggregate gross unrealized appreciation of
$2,824,293 and aggregate gross unrealized depreciation of $1,256,474.
See Notes to Financial Statements.
8
THE CHINA-U.S. GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2005
ASSETS:
Investments in securities, at value (cost $34,666,983), see
accompanying schedule of investments ........................ $36,474,332
Cash .......................................................... 173,072
Receivable for investment securities sold ..................... 480,599
Receivable for shares of beneficial interest sold ............. 291,080
Dividends receivable .......................................... 21,759
Receivable from Investment Manager--Note 3(a) ................. 23,689
Prepaid expenses .............................................. 19,626
-----------
Total Assets .............................................. 37,484,157
LIABILITIES:
Payable for investment securities purchased ................... $ 706,988
Payable for shares of beneficial interest redeemed ............ 13,266
Investment advisory fees payable .............................. 46,233
Shareholder servicing fees payable ............................ 7,706
Trustees' fees payable ........................................ 4,719
Accrued expenses .............................................. 74,758
-----------
Total Liabilities ......................................... 853,670
-----------
NET ASSETS ....................................................... $36,630,487
===========
NET ASSETS CONSIST OF:
Paid-in capital ............................................... $31,005,266
Undistributed net investment income (accumulated loss) ........ --
Undistributed net realized gain (accumulated loss) ............ 3,817,872
Net unrealized appreciation (depreciation) of investments ..... 1,807,349
-----------
NET ASSETS .................................................... $36,630,487
===========
Net Asset Value Per Share ..................................... $ 12.99
===========
Offering Price Per Share ...................................... $ 13.71
===========
Shares of beneficial interest outstanding--Note 6 ................ 2,820,201
===========
See Notes to Financial Statements.
9
THE CHINA-U.S. GROWTH FUND
STATEMENT OF OPERATIONS
For the year ended October 31, 2005
INVESTMENT INCOME:
Income:
Dividends (net of foreign witholding taxes
of $399) ....................................... $ 486,871
Interest ......................................... 48,684
----------
Total Income ................................... 535,555
----------
Expenses:
Investment advisory fees--Note 3(a) .............. $ 472,510
Custodian fees ................................... 122,435
Shareholder servicing fees--Note 3(f) ............ 78,752
Trustees' fees ................................... 25,950
Professional fees ................................ 45,065
Printing ......................................... 54,805
Transfer agent fees--Note 3(b) ................... 27,787
Registration fees ................................ 21,234
Miscellaneous .................................... 24,233
----------
872,771
Less expense reimbursement--Note 3(a) ............ (160,790)
----------
Total Expenses ................................. 711,981
----------
NET INVESTMENT LOSS ................................... (176,426)
REALIZED AND UNREALIZED GAIN (LOSS)ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on investments ...................... 4,187,983
Net realized loss on foreign currency transactions .... (5,549)
Net change in unrealized appreciation (depreciation
on investments and foreign currency translations ... 779,610
----------
Net realized and unrealized gain on
investments and foreign currency ............. 4,962,044
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS ......................................... 4,785,618
==========
See Notes to Financial Statements.
10
THE CHINA-U.S. GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR NOVEMBER 3, 2003(i)
ENDED TO
OCTOBER 31, 2005 OCTOBER 31, 2004
---------------- ----------------
Net investment loss ..................... $ (176,426) $ (153,711)
Net realized gain (loss) on investments
and foreign currency transactions .... 4,182,434 (114,742)
Net change in unrealized appreciation
(depreciation) on investments
and foreign currency translations .... 779,610 1,027,739
------------ ------------
Net increase in net assets
resulting from operations ...... 4,785,618 759,286
Net increase from shares of beneficial
interest transactions--Note 6 ........ 5,554,861 25,430,722
------------ ------------
Total increase in net assets ...... 10,340,479 26,190,008
------------ ------------
Net assets:
Beginning of period ................... 26,290,008 100,000
------------ ------------
End of period ......................... $ 36,630,487 $ 26,290,008
============ ============
- ----------
(i) Commencement of operations.
See Notes to Financial Statements.
11
THE CHINA-U.S. GROWTH FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING
THROUGHOUT THE PERIOD
FOR THE YEAR NOVEMBER 3, 2003 (i)
ENDED TO
OCTOBER 31, 2005 OCTOBER 31, 2004 (ii)
---------------- ---------------------
Net asset value, beginning of period ........... $ 11.05 $ 10.00
Net investment loss (iii) ...................... (0.07) (0.08)
Net realized and unrealized gain
on investments .............................. 2.01 1.13
---------- ----------
Total from investment operations ............... 1.94 1.05
---------- ----------
Net assets value, end of period ................ $ 12.99 $ 11.05
========== ==========
Total return (iv) .............................. 17.56% 10.50%
========== ==========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) ... $ 36,630 $ 26,290
========== ==========
Ratio of expenses to average net assets ..... 2.26%(v) 2.44%(vi)
========== ==========
Ratio of net investment loss
to average net assets ..................... (0.56)% (0.81)%
========== ==========
Portfolio turnover rate ..................... 288.53% 267.42%
========== ==========
- ----------
(i) Commencement of operations.
(ii) Ratios have been annualized; total return has not been annualized.
(iii) Amount was computed based on average shares outstanding during the period.
(iv) Does not reflect the effect of any sales charges.
(v) Amount has been reduced by 0.51% due to expense reimbursements.
(vi) Amount has been reduced by 0.43% due to expense reimbursements.
See Notes to Financial Statements.
12
THE CHINA-U.S. GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
NOTE 1--GENERAL:
The China-U.S. Growth Fund (the "Fund") is a diversified open-end registered
investment company organized as a business trust under the laws of the
Commonwealth of Massachusetts. The Fund's investment objective is long-term
capital appreciation. It seeks to achieve its objective by normally investing in
equity securities which are publicly traded in the United States, China, Hong
Kong and Taiwan markets. The Fund commenced operations on November 3, 2003 with
the issuance of 10,000 shares at $10.00 per share to Fred Alger Management, Inc.
("Alger Management"), the Fund's investment manager. The Fund's single share
class was re-designated as Class A shares effective January 24, 2005, and are
generally subject to an initial sales charge. The Fund's fiscal year ends on
October 31.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
(A) INVESTMENT VALUATION--Investments of the Fund are valued on each day the
New York Stock Exchange (the "NYSE") is open as of the close of the NYSE
(normally 4:00 p.m. Eastern time). Listed securities for which such information
is regularly reported are valued at the last reported sales price or, in the
absence of reported sales, at the mean between the bid and asked price or, in
the absence of a recent bid or asked price, the equivalent as obtained from one
or more of the major market makers for the securities to be valued. Securities
listed on foreign exchanges are valued at the last reported sales price or, in
the absence of reported sales, at the mean between the bid and asked price.
Securities included within the Nasdaq market shall be valued at the Nasdaq
official closing price ("NOCP") on the day of valuation, or if there be no NOCP
issued, at the last sale price on such day. Securities included within the
Nasdaq market for which there is no NOCP and no last sale price on the day of
valuation shall be valued at the mean between the last bid and asked prices on
such day.
Securities for which market quotations are not readily available are valued at
fair value, as determined in good faith pursuant to procedures established by
the Board of Trustees.
Securities in which the Fund invests may be traded in markets that close before
the close of the NYSE. Normally, developments that occur between the close of
the foreign markets and the close of the NYSE (normally 4:00 p.m. Eastern time)
will not be reflected in the Fund's net asset value. However, if it be
determined that such developments are so significant that they will materially
affect the value of the Fund's securities, the Fund may adjust the previous
closing prices to reflect what the Valuation Committee, under the direction of
the Board of Trustees, believes to be the fair value of these securities as of
the close of the NYSE. The Fund may also fair value securities in other
situations, for example, when a particular foreign market is closed but the Fund
is open.
13
THE CHINA-U.S. GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Short-term securities having a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Shares of mutual funds
are valued at the net asset value of the underlying mutual fund.
(B) SECURITIES TRANSACTIONS AND INVESTMENT INCOME--Securities transactions are
recorded on a trade date basis. Realized gains and losses from securities
transactions are recorded on the basis of identified cost. Dividend income is
recognized on the ex-dividend date and interest income is recognized on the
accrual basis. Occasionally, dividends are recorded as soon after the
ex-dividend date as the Fund, using reasonable diligence, becomes aware of such
dividends.
(C) FOREIGN CURRENCY TRANSLATIONS--The books and records of the Fund are
maintained in U.S. dollars. Foreign currencies, investments and other assets and
liabilities are translated into U.S. dollars at the prevailing rates of exchange
on the valuation date. Purchases and sales of investment securities and income
and expenses are translated into U.S. dollars at the prevailing exchange rates
on the respective dates of such transactions. Net realized gains and losses on
foreign currency transactions represent net gains and losses from the
disposition of foreign currencies, currency gains and losses realized between
the trade dates and settlement dates of security transactions, and the
difference between the amount of net investment income accrued and the U.S.
dollar amount actually received. The effects of changes in foreign currency
exchange rates on investments in securities are included in realized and
unrealized gain or loss on investments in the Statement of Operations.
(D) DIVIDENDS TO SHAREHOLDERS--Dividends and distributions payable to
shareholders are recorded by the Fund on the ex-dividend date. Dividends from
net investment income and distributions from net realized gains are declared and
paid annually after the end of the fiscal year in which earned.
The characterization of distributions to shareholders for financial statement
purposes is determined in accordance with federal income tax rules. Therefore,
the source of the Fund's distributions may be shown in the accompanying
financial statements as either from, or in excess of net investment income, net
realized gain on investment transactions or return of capital, depending on the
type of book/tax differences that may exist. Capital accounts within the
financial statements are adjusted for permanent book/tax differences.
Reclassifications result primarily from the differences in tax treatment of net
operating losses and foreign currency transactions. The reclassification had no
impact on the net asset value of the Fund and is designed to present the Fund's
capital accounts on a tax basis.
(E) FEDERAL INCOME TAXES--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
14
THE CHINA-U.S. GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
companies and to distribute all of its investment company taxable income to its
shareholders. Provided the Fund maintains such compliance, no federal income tax
provision is required.
(F) INDEMNIFICATION--The Fund enters into contracts that contain a variety of
indemnification provisions. The Fund's maximum exposure under these arrangements
is unknown. The Fund does not anticipate recognizing any loss related to these
arrangements.
(G) OTHER--These financial statements have been prepared using estimates and
assumptions that affect the reported amounts therein. Actual results may differ
from those estimates.
NOTE 3--INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES:
(A) INVESTMENT ADVISORY FEES--The Fund pays Alger Management a monthly fee at
an annual rate of 1.50% based on the value of the Fund's average daily net
assets. JF International Management Inc. ("JFIM"), a registered investment
adviser, acts as sub-adviser to the Fund under a written sub-advisory agreement
with Alger Management. JFIM's fees and compensation are paid by Alger
Management.
From December 23, 2003 to February 18, 2005, Alger Management established an
expense cap for the Fund, whereby it reimbursed the Fund if annualized operating
expenses (excluding interest, taxes, brokerage, and extraordinary expenses)
exceed 2.40% of average daily net assets. Effective February 18, 2005, Alger
Management reduced the expense cap to 2.20%. For the year ended October 31,
2005, Alger Management reimbursed the Fund $160,790. Alger Management has
contractually agreed to extend the expense cap through February 28, 2006.
(B) TRANSFER AGENT FEES--Alger Shareholder Services, Inc. ("Alger Services"),
an affiliate of Alger Management, served as transfer agent for the Fund. During
the year ended October 31, 2005, the Fund incurred fees of $940 for services
provided by Alger Services. Effective November 22, 2004, State Street Bank and
Trust Company replaced Alger Services as the Fund's transfer agent. Transfer
agent services are provided by State Street Bank and Trust Company's affiliate,
Boston Financial Data Services, Inc. ("BFDS"). Effective February 28, 2005, the
Fund has entered into a shareholder administrative services agreement with Alger
Services to compensate Alger Services on a per account basis for its liaison and
administrative oversight of BFDS and related services. During the year ended
October 31, 2005, the Fund incurred fees of $4,228 for these services provided
by Alger Services.
(C) SALES CHARGES--Purchases of shares of the Fund may be subject to initial
sales charges. For the year ended October 31, 2005, the initial sales charges
15
THE CHINA-U.S. GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
retained by Fred Alger & Company (the "Distributor"), were approximately
$10,526. Sales charges do not represent expenses of the Fund.
(D) BROKERAGE COMMISSIONS--During the year ended October 31, 2005, the Fund
paid Fred Alger & Company, Incorporated ("Alger Inc."), an affiliate of Alger
Management, $38,215 in connection with securities transactions.
(E) TRUSTEES' FEES--Certain trustees and officers of the Fund are directors and
officers of Alger Management, Alger Inc. and Alger Services. The Fund pays each
trustee who is not affiliated with Alger Management or its affiliates an annual
fee of $8,000.
(F) SHAREHOLDER SERVICING FEES--The Fund has entered into a shareholder
servicing agreement with Alger Inc. whereby Alger Inc. provides the Fund with
ongoing servicing of shareholder accounts. As compensation for such services,
the Fund pays Alger Inc. a monthly fee at an annual rate equal to .25% of the
value of the Fund's average daily net assets.
(G) OTHER TRANSACTIONS WITH AFFILIATES--Certain directors and officers of the
Fund are directors and officers of Alger Management, the Distributor and Alger
Services.
NOTE 4--SECURITIES TRANSACTIONS:
During the year ended October 31, 2005, purchases and sales of investment
securities, excluding short-term securities, aggregated $91,086,987 and
$85,831,872, respectively.
Transactions in foreign securities may involve certain considerations and risks
not typically associated with those of U.S. companies because of, among other
factors, the level of governmental supervision and regulation of foreign
security markets, and the possibility of political or economic instability.
NOTE 5--LINE OF CREDIT:
The Fund has a committed line of credit with a bank. All borrowings have
variable interest rates and are payable on demand. The Fund may borrow under
such line of credit exclusively for temporary or emergency purposes. For the
year ended October 31, 2005, the Fund had no borrowings.
NOTE 6--SHARE CAPITAL:
The Fund has an unlimited number of authorized shares of beneficial interest of
$.001 par value. Transactions of shares of beneficial interest were as follows:
FOR THE YEAR ENDED NOVEMBER 3, 2003 (I) TO
OCTOBER 31, 2005 OCTOBER 31, 2004
------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT
-------- ------------ ---------- ------------
Shares sold .......... 916,179 $ 11,342,864 2,538,362 $ 27,197,643
Shares redeemed ...... (475,571) (5,788,003) (168,768) (1,766,921)
-------- ------------ ---------- ------------
Net increase ......... 440,608 $ 5,554,861 2,369,594 $ 25,430,722
======== ============ ========== ============
- ----------
(i) Commencement of operations.
16
THE CHINA-U.S. GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Fund may impose a 2.00% redemption fee on Fund shares redeemed (including
shares redeemed by exchange) less than one year after such shares were acquired.
The fees retained by the Fund are included as paid-in capital on the Statement
of Assets and Liabilities. During the year ended October 31, 2005 and the period
from November 3, 2003 (commencement of operations) to October 31, 2004,
redemption fees were $15,404 and $29,528, respectively.
NOTE 7--DISTRIBUTIONS TO SHAREHOLDERS:
During the year ended October 31, 2005 and the period from November 3, 2003
(commencement of operations) to October 31, 2004, no distributions were paid.
As of October 31, 2005, the components of distributable earnings on a tax basis
were as follows:
Undistributed ordinary income ..................................... $3,828,018
Undistributed long-term gain ...................................... 229,384
Unrealized appreciation ........................................... 1,567,819
The difference between book basis and tax basis unrealized appreciation is
attributable primarily to the tax deferral of losses on wash sales.
NOTE 8--LITIGATION:
Alger Management has responded to inquiries, document requests and/or subpoenas
from regulatory authorities, including the United States Securities and Exchange
Commission ("SEC"), the Office of the New York State Attorney General, the
Attorney General of New Jersey, and the West Virginia Securities Commissioner,
in connection with their investigations of practices in the mutual fund industry
identified as "market timing" and "late trading."
On December 16, 2005, Alger Management received from the staff of the SEC a
"Wells Notice" which indicated that the staff intends to recommend that the
Commission bring civil enforcement action for possible violations of the federal
securities laws. "Wells Notices" also have been sent to certain companies
affiliated with Alger Management, as well as certain present and former members
of its senior management. The Wells Notices arose out of the SEC's staff ongoing
investigation of market timing and late trading practices in the mutual fund
industry. Alger Management and the other recipients have the opportunity to
respond to the staff before the staff makes a formal recommendation. Alger
Management plans to send a Wells submission to the staff in January 2006.
On August 31, 2005, the West Virginia Securities Commissioner in an ex parte
Summary Order to Cease and Desist and Notice of Right to Hearing concluded that
Alger Management and Alger Inc. had violated the West Virginia Uniform
Securities Act, and ordered Alger Management and Alger Inc. to cease and
17
THE CHINA-U.S. GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
desist from further violations of the Act by engaging in the market-timing
related conduct described in the order. The ex parte order provided notice of
their right to a hearing with respect to the violations of law asserted by the
Commissioner. Other firms unaffiliated with Alger Management were served with
similar orders. Alger Management and Alger Inc. intend to request a hearing for
the purpose of seeking to vacate or modify the order.
In addition, in 2003 and 2004 several purported class actions and shareholder
derivative suits were filed against various parties in the mutual fund industry,
including Alger Management, certain mutual funds managed by Alger Management
(the "Alger Mutual Funds"), and certain current and former Alger Mutual Fund
trustees and officers, alleging wrongful conduct related to market-timing and
late-trading by mutual fund shareholders. These cases were transferred to the
U.S. District Court of Maryland by the Judicial Panel on Multidistrict
Litigation for consolidated pre-trial proceedings. In September 2004,
consolidated amended complaints involving these cases (not yet including the
West Virginia action) -- a Consolidated Amended Fund Derivative Complaint (the
"Derivative Complaint") and two substantially identical Consolidated Amended
Class Action Complaints (together, the "Class Action Complaint") -- were filed
in the Maryland federal district court under the caption number 1:04-MD-15863
(JFM). In April 2005, a civil lawsuit involving similar allegations was filed by
the West Virginia Attorney General and also transferred to the Maryland District
Court.
The Derivative Complaint alleged (i) violations, by Alger Management and,
depending on the specific offense alleged, by its immediate parent, Alger Inc.,
which is the Distributor of the Alger Mutual Funds, and/or the fund trustee
defendants, of Sections 36(a), 36(b), 47, and 48 of the Investment Company Act
of 1940 (the "Investment Company Act") and of Sections 206 and 215 of the
Investment Advisers Act of 1940, breach of fiduciary duty, and breach of
contract, (ii) various offenses by other third-party defendants, and (iii)
unjust enrichment by all the named defendants. The Class Action Complaint
alleged, in addition to the offenses listed above, (i) violations, by Alger
Management, Alger Inc., their affiliates, the funds named as defendants, and the
current and former fund trustees and officers, of Sections 11, 12(a)(2), and 15
of the Securities Act of 1933, Sections 10(b) (and Rule 10b-5 thereunder) and
20(a) of the Securities Exchange Act of 1934 (the "1934 Act"), and Section 34(b)
of the Investment Company Act of 1940, (ii) breach of contract by the funds
named as defendants, and (iii) unjust enrichment of the defendants. The West
Virginia attorney general action also alleges violations of the West Virginia
Consumer Credit and Protection Act and other wrongful conduct.
Motions to dismiss the Class Action Complaint and the Derivative Complaint were
subsequently filed. On November 3, 2005, the district court dismissed
18
THE CHINA-U.S. GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
both complaints in their entirety with respect to the Alger Mutual Funds and
dismissed all claims against the other Alger defendants other than the claims
under the 1934 Act and Section 36(b) of the Investment Company Act, with leave
to the class action plaintiffs to file amended complaints against those
defendants with respect to claims under state law. It is anticipated that orders
implementing the rulings will be entered in or about January 2006, and that
motions for reconsideration will thereafter be filed.
Alger Management does not believe that the Alger Mutual Funds are themselves
targets of the regulatory investigations as potential enforcement defendants.
The SEC and, in some cases, state government authorities have a variety of
administrative and civil enforcement powers, including injunctive powers,
authority to assess fines and penalties and order restitution, authority to
limit the activities of a person or company and other enforcement powers, that
may be exercised administratively or through the courts.
Under Section 9(a) of the Investment Company Act, if any of the various
regulatory proceedings or lawsuits were to result in a court injunction against
Alger Management or Alger Inc., Alger Management would, in the absence of
exemptive relief granted by the SEC, be barred from serving as investment
adviser/sub-adviser for any registered investment company, including the Fund.
While exemptive relief from Section 9(a) has been granted in certain other
cases, there is no assurance that such exemptive relief would be granted if
sought. In addition, it is possible that these matters and/or other developments
resulting from these matters could result in loss of Alger Management personnel,
diversion of time and attention of Alger Management personnel, diminishment of
financial resources of Alger Management, or other consequences potentially
adverse to the Fund. Alger Management cannot predict the potential effect of
such actions upon Alger Management or the Fund. There can be no assurance that
the effect, if any, would not be material.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of
The China-U.S. Growth Fund:
We have audited the accompanying statement of assets and liabilities of The
China-U.S. Growth Fund (the "Fund"), including the schedule of investments, as
of October 31, 2005, and the related statement of operations for the year then
ended, the statement of changes in net assets and the financial highlights for
each of the two years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of October 31, 2005, by correspondence with the custodian
and brokers. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
China-U.S. Growth Fund at October 31, 2005, and the results of its operations
for the year then ended, and the changes in its net assets and the financial
highlights for each of the two years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
December 12, 2005
20
THE CHINA-U.S. GROWTH FUND
ADDITIONAL INFORMATION (UNAUDITED)
SHAREHOLDER EXPENSE EXAMPLE (UNAUDITED)
As a shareholder of the Fund, you incur two types of costs: transaction
costs, if applicable, including sales charges (loads) and redemption fees; and
ongoing costs, including management 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 below is based on an investment of $1,000 invested at the
beginning of the six-month period starting May 1, 2005 and ending October 31,
2005.
ACTUAL EXPENSES
The first line in the table below 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 would
have 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 entitled "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 in the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratios 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 other funds.
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any transaction costs, such as sales
charges (loads) and redemption fees. Therefore, the second line in 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.
EXPENSES PAID
BEGINNING ENDING DURING THE PERIOD
ACCOUNT VALUE ACCOUNT VALUE MAY 1, 2005 TO
MAY 1, 2005 OCTOBER 31, 2005 OCTOBER 31, 2005(B)
----------- ---------------- -------------------
Actual .................... $1,000.00 $1,115.00 $ 12.05
Hypothetical(a) ........... 1,000.00 1,013.81 11.47
- ----------
(a) 5% annual return before expenses.
(b) Expenses are equal to the Fund's annualized expense ratio of 2.26%,
multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
21
TRUSTEES AND OFFICERS OF THE FUND (UNAUDITED)
Information about the Trustees and officers of the Fund is set forth below. In
the table the term "Alger Fund Complex" refers to the Fund, The Alger Funds, The
Alger American Fund, The Alger Institutional Funds, Spectra Fund and Castle
Convertible Fund, Inc., each of which is a registered investment company managed
by Fred Alger Management, Inc. ("Alger Management"). Each Trustee serves until
an event of termination, such as death or resignation, or until his successor is
duly elected; each officer's term of office is one year. Unless otherwise noted,
the address of each person named below is 111 Fifth Avenue, New York, NY 10003.
NUMBER OF
FUNDS
IN THE ALGER FUND
TRUSTEE COMPLEX WHICH
NAME, AGE, POSITION WITH AND/OR ARE OVERSEEN
THE FUND AND ADDRESS PRINCIPAL OCCUPATIONS OFFICER SINCE BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Zachary Karabell (38) Senior Vice President (Vice President prior to October 2003 1
Chairman of the Board 2003) and Senior Economic Analyst of Alger
Management since 2002; consultant and author
since 1997. Research Fellow at the Miller Center,
University of Virginia 1998-2000 and Visiting
Professor, Dartmouth College 1997.
Hilary M. Alger (44) Trustee/Director of five of the six funds in the Alger 2003 17
Trustee Fund Complex; Director of Development,
Pennsylvania Ballet, formerly Associate Director of
Development, College of Arts and Sciences,
University of Virginia, formerly Director of
Development and Communications, Lenox Hill
Neighborhood House.
NON-INTERESTED TRUSTEES
Stephen E. O'Neil (73) Attorney; Private investor since 1981; Director of 2003 23
Trustee Brown-Forman Corporation; Trustee/Director of the
six funds in the Alger Fund Complex; formerly of
Counsel to the law firm of Kohler & Barnes.
Lester L. Colbert, Jr. (71) Private investor; Trustee/Director of five of the six 2003 17
Trustee funds in the Alger Fund Complex. Formerly Chairman
of the Board and Chief Executive Officer of Xidex
Corporation.
Nathan E. Saint-Amand, Medical doctor in private practice; Co-Partner Fishers 2003 23
M.D. (67) Island Partners; Member of the Board of the
Trustee Manhattan Institute; Trustee/Director of the
six funds in the Alger Fund Complex. Formerly
Co-Chairman Special Projects Committee of
Memorial Sloan Kettering.
22
NUMBER OF
FUNDS
IN THE ALGER FUND
TRUSTEE COMPLEX WHICH
NAME, AGE, POSITION WITH AND/OR ARE OVERSEEN
THE FUND AND ADDRESS PRINCIPAL OCCUPATIONS OFFICER SINCE BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------
OFFICERS
Dan C. Chung (43) President, Director and Chief Investment Officer 2003 16
President of Alger Management; President and Director
of Alger Associates ("Associates"), Fred Alger &
Company, Incorporated ("Alger Inc."), Alger
Properties, Inc. ("Properties"), Alger Shareholder
Services, Inc. ("Services"), Alger Life Insurance
Agency, Inc. ("Agency"), Fred Alger International
Advisory S.A. ("International"), Analysts Resources,
Inc. ("ARI") and Trust; Trustee/Director of four of
the six funds in the Alger Fund Complex.
Frederick A. Blum (51) Executive Vice President and Treasurer of Alger Inc., 2003 N/A
Treasurer Alger Management, Properties, Associates, ARI,
Services and Agency since September 2003 and
Senior Vice President prior thereto; Treasurer of
each of the other five investment companies in
the Alger Fund Complex since the later of 1996 or
its inception. Director of SICAV and International
and Chairman of the Board (and prior thereto,
Senior Vice President) and Treasurer of Alger
National Trust Company since 2003.
Hal Liebes (41) Executive Vice President, Chief Legal Officer and 2005 N/A
Secretary and Chief Secretary of Alger Inc., Secretary of the other five
Compliance Officer investment companies in the Alger Fund Complex--
2005. Formerly U.S. General Counsel 1994-2002
and Global General Counsel 2002-2004, Credit
Suisse Asset Management; Global Chief
Compliance Officer 2004, AMVESCAP PLC.
Michael D. Martins (39) Senior Vice President of Alger Management; 2005 N/A
Assistant Treasurer and Assistant Treasurer and Assistant Secretary of
Assistant Secretary the other five investment companies in the Alger
Fund Complex--2005. Formerly Vice President,
Brown Brothers Harriman & Co. 1997-2004.
Mr. Karabell is an "interested person" (as defined in the Investment Company
Act) of the Fund because of his affiliations with Alger Management. Mr. Karabell
is a son-in-law of Fred M. Alger III, who holds in excess of 25% of the
outstanding voting securities of Alger Associates, Inc. and may be deemed to
control that company and its subsidiaries, including Alger Management and Alger
Inc. Mr. Alger holds his shares through a limited liability company, of which he
is president and majority shareholder. Ms. Alger is an "interested person"
because she is an immediate family member of Mr. Alger. No Trustee is a director
of any public company except as may be indicated under "Principal Occupations."
The Statement of Additional Information contains additional information about
the Fund's Trustees and is available without charge upon request by calling
(800) 992-3863.
23
INVESTMENT MANAGEMENT AGREEMENT RENEWAL (UNAUDITED)
At an in-person meeting held on September 7, 2005, the Trustees of the Fund
considered renewal of the Investment Management Agreement (the "Agreement")
between the Fund and Fred Alger Management, Inc. (the "Adviser"). The Trustees
who are not "interested persons" of the Fund (the "Independent Trustees") within
the meaning of the Investment Company Act of 1940 (the "1940 Act") also met
separately with their counsel to consider the Agreement. In evaluating the
Agreement, the Trustees drew on materials that they requested and which were
provided to them in advance of the meeting by the Adviser and by counsel to the
Fund. The materials covered, among other matters, (i) the nature, extent and
quality of the services provided by the Adviser under the Agreement, (ii) the
investment performance of the Fund, (iii) the costs to the Adviser of its
services and the profits realized by the Adviser and its affiliates Fred Alger &
Company, Incorporated and Alger Shareholder Services, Inc. from their
relationship with the Fund, and (iv) the extent to which economies of scale
would be realized if and as the Fund grows and whether the fee level in the
Agreement reflects these economies of scale. These materials included an
analysis of the Fund and the Adviser's services by Callan Associates Inc.
("Callan"), an independent consulting firm whose specialties include assistance
to fund trustees and directors in their review of advisory contracts pursuant to
Section 15(c) of the 1940 Act. At the meeting, senior Callan personnel provided
a presentation to the Trustees based on the Callan materials.
In deciding whether to renew the Agreement, the Trustees considered various
factors, including those enumerated above. They also considered other direct and
indirect benefits to the Adviser and its affiliates from their relationship with
the Fund.
NATURE, EXTENT AND QUALITY OF SERVICES
In considering the nature, extent and quality of the services provided by the
Adviser, the Trustees relied on their prior experience as Trustees of the Fund,
their familiarity with the personnel and resources of Alger Management and its
affiliates, and the materials provided at the meeting. They noted that under the
Agreement the Adviser is responsible for managing the investment operations of
the Fund and for providing a full range of administrative, compliance, reporting
and accounting services necessary for the conduct of the Fund's affairs. The
Trustees reviewed the background and experience of the Adviser's senior
investment management personnel, including those individuals responsible for the
investment operations of the Fund. They also considered the resources,
operational structures and practices of the Adviser in managing the Fund's
portfolio and administering the Fund's affairs, as well as the Adviser's overall
investment management business. The Trustees concluded that the Adviser's
experience, resources and strength in those areas of importance to the Fund are
considerable. They noted especially the Adviser's history of expertise in
managing portfolios of "growth" stocks like that of the Fund. The Trustees also
considered the level and depth of the Adviser's ability to execute portfolio
transactions to effect investment decisions. They also noted the history of
extremely favorable reviews of the Adviser's shareholder-relations
representatives by an independent rating concern. Finally, the Trustees took
notice of the enhancements to the control and compliance environment at the
24
Adviser and within the Fund. In considering the portfolio management resources
and expertise brought to the Fund by the Adviser, the Trustees took into account
the contributions of the Fund's Sub-Adviser, JF International Management, Inc.
("JFIM"), with respect to the Fund's Asian portfolio securities, having been
provided with materials describing that firm's experience, personnel and
investment management resources. On the basis of their review, the Trustees
determined that the nature and extent of the services provided to the Fund by
the Adviser (including the Fund's performance, as discussed below) were of high
quality and could be expected to remain so.
INVESTMENT PERFORMANCE OF THE FUND
Drawing upon information provided at the meeting by the Adviser as well as
Callan and upon reports provided to the Trustees by the Adviser throughout the
preceding year, the Trustees determined that the Fund's performance since its
inception in November 2003 had been satisfactory. They noted that the Fund's
average annual returns for the year ended August 31, 2005 and for the period
from inception to that date beat both of the Fund's benchmark indexes as well as
the Lipper Global Index and placed the Fund in the 34th percentile or higher
among a selected Lipper peer group. There were similar results for the year 2005
to August 31, 2005, except that the Fund slightly lagged one of its benchmarks,
the MSCI Zhong Hau Index. They concluded that the performance of the Fund
supported renewal of the Agreement.
PROFITABILITY TO THE ADVISER AND ITS AFFILIATES
The Trustees considered the profitability of the advisory arrangement with the
Fund to the Adviser and the Adviser's affiliates and the methodology used by the
Adviser in determining such profitability. The Trustees had been provided with
data on the Fund's profitability to the Adviser and to the Adviser's affiliates
for the Fund's most recent fiscal year. In addition, the Trustees reviewed the
Fund's management fee and expense ratio and compared them with a group of
comparable funds. In order to assist the Trustees in this comparison, Callan
provided the Trustees with comparative information with respect to fees paid,
and expense ratios incurred, by similar funds. That information indicated that
the Fund's advisory fee was well below the median for the Callan peer group and
its expense ratio was slightly higher than the median. After discussing with
representatives of the Adviser and Callan the methodologies used in computing
the costs that formed the bases of the profitability calculations, they turned
to the data provided. After analysis and discussion of the profitability data
and the information provided on the Fund's fee and expense ratio, they concluded
that, to the extent that the Adviser's and its affiliates' relationships with
the Fund had been profitable to either or both of those entities, the
profitability was not unacceptable.
ECONOMIES OF SCALE
On the basis of their discussions with management and their analysis of
information provided at the meeting, the Trustees determined that the nature of
the Fund and its operations is such that the Adviser is likely to realize
economies of scale in the management of the Fund at some point as it grows in
size, but that in view of the comparatively small size of the Fund and the
current level of its profitability to the Adviser, adoption of breakpoints in
the advisory fee, while possibly at a later date, could await further analysis
of the
25
sources and potential scale of the economies and the fee structure that would
best reflect them. Accordingly, the Trustees requested that the Adviser address
this topic with the Trustees at future meetings.
OTHER BENEFITS TO THE ADVISER
The Trustees considered whether the Adviser benefits in other ways from its
relationship with the Fund. In that connection, they noted that the Adviser
maintains soft-dollar arrangements in connection with the Fund's brokerage
transactions, data on which is regularly supplied to the Trustees at their
quarterly meetings. The Trustees also noted that the Fund's Distributor, Fred
Alger & Company, Incorporated, provides a substantial portion of the Fund's
brokerage and receives shareholder servicing fees from the Fund as well, and
that Alger Shareholder Services, Inc. receives fees from the Fund under a
shareholder services agreement. The Trustees had been provided with information
regarding, and had considered, the brokerage and shareholder servicing fee
benefits in connection with their review of the profitability to the Adviser and
its affiliates of their relationship with the Fund. As to the benefits received
from the soft-dollar arrangements, the Trustees decided that, in light of the
nature and scale of the arrangements, they were not so significant as to render
the Adviser's fees excessive.
CONCLUSION
After weighing the foregoing factors, the Trustees, including the Independent
Trustees, approved the renewal of the Investment Management Agreement. They
reasoned that, considered in themselves, the services provided by the Adviser
were appropriate for the needs of the Fund and of high quality, that the recent
performance of the Fund had been satisfactory, and that the Adviser could
reasonably be expected to provide services of comparable quality in the future.
The Trustees determined that, especially in light of the fact that it was lower
than those charged by most funds in its Callan peer group, the fee was not so
high as to be unreasonable when considered in relation to the nature, extent and
high quality of the services currently provided, that the Fund's relationship
with the Adviser and its affiliates was not so profitable as to render the fee
excessive, that any additional benefits to the Adviser and/or its affiliates
other than those already considered in the profitability analysis were not of a
magnitude materially to affect the Trustees' deliberations, and that the Fund's
current size was such that the issue of sharing economies of scale with the
Fund, while inviting future consideration, was not of major current importance.
APPROVAL OF THE SUB-ADVISORY AGREEMENT
By its terms and under applicable law, the Trustees were also required to
approve the renewal of the Sub-Advisory Agreement between the Adviser and JFIM,
notwithstanding that the Fund is not a party to the Agreement and does not pay
JFIM's fee. On the basis of their review of the materials about JFIM provided
prior to the meeting and of JFIM's role in the management of the Fund's
portfolio, the Trustees determined that the nature, quality and extent of JFIM's
services were and could be expected to continue to be satisfactory. As to the
Fund's performance, the role of economies of scale, and profitability, the
Trustees determined that no inquiry beyond that already conducted in their
review of the Fund's Investment Management Agreement with the Adviser was
necessary. Accordingly, they approved the renewal of the Adviser's agreement
with JFIM for another year.
26
PROXY VOTING POLICIES
A description of the policies and procedures the Fund uses to determine how to
vote proxies relating to portfolio securities and the proxy voting record is
available, without charge, by calling (800) 254-3796 or online on the Fund's
website at http://www.chinausgrowthfund.com or on the EDGARDatabase on the SEC's
web site (http://www.sec.gov).
QUARTERLY FUND HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarter of each fiscal year on Form N-Q. Forms N-Q are available
online on the Fund's website at http://www.chinausgrowthfund.com or on the SEC's
website at HTTP://WWW.SEC.GOV. The Fund's Forms N-Q may be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C. Information regarding the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC-0330. A copy of the most recent quarterly holdings may also be
obtained from the Fund by calling (800) 254-3796.
27
NOTES:
THE CHINA-U.S. GROWTH FUND
111 Fifth Avenue
New York, NY 10003
(800) 254-3796
www.chinausgrowthfund.com
INVESTMENT MANAGER
Fred Alger Management, Inc.
111 Fifth Avenue
New York, NY 10003
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Boston Financial Data Services, Inc.
P.O. Box 8480
Boston, MA 02266
This report is submitted for the general information of the shareholders of The
China-U.S. Growth Fund. It is not authorized for distribution to prospective
investors unless accompanied by an effective Prospectus for the Fund, which
contains information concerning the Fund's investment policies, fees and
expenses as well as other pertinent information.
[ALGER LOGO] The China-U.S. Growth Fund
Boston Financial Data Services, Inc.
P.O. Box 8480
Boston, MA 02266
SAC 103105
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics (the "Code of Ethics")
that applies to its principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions.
(b) Not applicable.
(c) The amendments to the Code of Ethics are: The 60-day holding
period for selling securities at gains now applies to Access persons,
before it applied only to Advisory persons; Prohibition on IPO's now
applies to Access persons, before it applied only to Advisory persons;
Approval from Legal/Compliance is now necessary for investments in
Private Placements by Access persons, before, such approval was only
required of Advisory persons.
(d) The Registrant has not granted a waiver or an implicit waiver from
a provision of its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto.
(e) Not applicable.
(f) The Registrant's Code of Ethics is attached as an Exhibit hereto.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees of the Registrant determined that Stephen E.
O'Neil is an audit committee financial expert (within the meaning of
that phrase specified in the instructions to Form N-CSR) on the
Registrant's audit committee. Mr. O'Neil is an "independent" trustee -
i.e., he is not an interested person of the Registrant as defined in
the Investment Company Act of 1940, nor has he accepted directly or
indirectly any consulting, advisory or other compensatory fee from the
Registrant, other than in his capacity as Trustee.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
a) Audit Fees:
October 31, 2005 $25,600
October 31, 2004 $18,000
b) Audit-Related Fees: NONE
c) Tax Fees for tax advice, tax compliance and tax planning:
October 31, 2005 $3,720
October 31, 2004 $0
d) All Other Fees:
October 31, 2005 $1,650
October 31, 2004 $2,500
Other fees include a review and consent for Registrants registration
statement filing and a review of the semi-annual financial statements.
e) 1) Audit Committee Pre-Approval Policies And Procedures:
Audit and non-audit services provided by the Registrant's
independent registered public accounting firm (the "Auditors") on
behalf the Registrant must be pre-approved by the Audit
Committee. Non-audit services provided by the Auditors on behalf
of the Registrant's Investment Adviser or any entity controlling,
controlled by, or under common control with the Investment
Adviser must be pre-approved by the Audit Committee if such
non-audit services directly relate to the operations or financial
reporting of the Registrant.
2) All fees in item 4(b) through 4(d) above were approved by the
Registrants' Audit Committee.
f) Not Applicable
g) Non-Audit Fees:
October 31, 2005 $186,831 and 56,050 Euros
October 31, 2004 $157,449 and 82,300 Euros
h) The audit committee of the board of trustees has considered whether
the provision of the non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control, with the adviser that provides ongoing
services to the registrant that were not approved pursuant to
(c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with
maintaining the principle accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable
ITEM 6. SCHEDULE OF INVESTMENTS
Not applicable
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. PURCHASES 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.
None
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's principal executive officer and principal
financial officer have concluded that the Registrant's disclosure
controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended) are effective based on
their evaluation of the disclosure controls and procedures as of a
date within 90 days of the filing date of this document.
(b) No changes in the Registrant's internal control over financial
reporting occurred during the Registrant's second fiscal half-year
that materially affected, or are reasonably likely to materially
affect, the Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) (1) Code of Ethics as Exhibit 99.CODE ETH
(a) (2) Certifications of principal executive officer and principal
financial officer as required by rule 30a-2(a) under the Investment
Company Act of 1940 are attached as Exhibit 99.CERT
(b) Certifications of principal executive officer and principal
financial officer as required by rule 30a-2(b) under the Investment
Company Act of 1940 are attached as Exhibit 99.906CERT
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.
The China-U.S. Growth Fund
By: /s/Dan C. Chung
Dan C. Chung
President
Date: January 6, 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/Dan C. Chung
Dan C. Chung
President
Date: January 6, 2006
By: /s/Frederick A. Blum
Frederick A. Blum
Treasurer
Date: January 6, 2006