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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, 2006
ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
THE CHINA-U.S.
GROWTH FUND
[GRAPHIC OMITTED]
ANNUAL REPORT [ALGER LOGO]
October 31, 2006
- --------------------------------------------------------------------------------
DEAR SHAREHOLDERS, DECEMBER 6, 2006
- --------------------------------------------------------------------------------
Looking back on the fiscal year that ended October 31, 2006, we were
reminded of the famous quotation from Shakespeare's THE TEMPEST: "O Wonder! How
many goodly creatures are there here! How beauteous mankind is! O brave new
world that has such people in't!"
"Brave New World" strikes us as a good metaphor for where U.S. investors
find themselves today. Early in 2006, Federal Reserve Chairman Ben Bernanke
discussed his own uncertainty about the "conundrum" of why long-term interest
rates weren't moving in sync with short-term rates. If Bernanke, a skilled and
experienced economist and policymaker, is perplexed about the world today, it is
hardly surprising that so many investors are feeling unsettled. More than at any
point in recent memory, the data that most of us use to gauge the health or
weakness of the economy and the markets offers little clarity. Inflation was a
concern, and then it wasn't; the job market was strong statistically, yet people
seem concerned about employment; corporate profits have accelerated at a
double-digit pace, yet the markets have held back. And overall, Wall Street
pundits and U.S. investors spent a good part of the year worrying and waiting
for a "Tempest" that never came.
One reason for the confusion, in our view, is that today's economic
reality reflects an international macro-economy, not just a national one. But
there are few metrics to track global data the way the major U.S. indicators
track our national economy. A few economists, market mavens, and commentators
have begun to grapple with this issue, but until systems can be created that
effectively gauge factors such as global inflation or global labor data, U.S.
investors may feel like Shakespeare's Miranda, washed up on the shores of an
uncharted, potentially dangerous island--with no overarching point of reference
and a profound sense of unease.
Take inflation. While gas prices soared until the summer, they came down
after. Home prices also began to soften, and in some regions of the country,
plummet. The earlier increase in both was widely felt by most consumers to be
proof of inflation, and for most people, it was. But statistically, it was a
different matter. Gasoline prices are not included in so-called "core
inflation," and home prices aren't either. Even core inflation is a strange
statistic, because nearly one-third of the core index is made up of "owner's
equivalent rent"--a component that reflects potential homebuyers who choose to
rent during a cooling housing market, while waiting for a more opportune time to
buy. As this group grew in the early months of the year, demand for rental units
increased, and rents went up. That meant that inflation readings went up as
well, largely because home prices didn't! And to add insult to injury, the rise
in inflation was triggered by the Fed raising rates--which meant that the very
act of increasing interest rates to contain inflation was instead causing it. No
wonder there has been such unease.
-1-
But as in Shakespeare's brave new world, unease sits side by side with
opportunity. Today's better companies are much farther ahead in their thinking
and planning than most countries and governments--think Prospero and his bag
of magic tricks. Because of the imperatives of competition and the demands of
the market, they are constantly innovating and changing their business models.
In fact, in our view, the best way a modern investor can stay informed is to
follow what the better managed companies do: ignore trends, and look at
investments on a case-by-case corporate basis. (And of course, today's
interested investors have a remarkable tool for this research: the Internet. O
Brave New World, indeed.)
Apart from the ongoing tectonic shifts, 2006 saw a number of milestones
nationally and globally. In early October, the Dow Jones Industrial Average(i)
broke 12,000 for the first time and showed no signs of retreating. In later
October, the Industrial & Commercial Bank of China held the world's largest IPO
ever, raising more than $21 billion in its initial public offering, most of it
from foreign institutional investors, which was yet one more sign that China has
emerged as the second engine of international growth, one which is directly
impacting a majority of the dynamic growth companies that we focus on.
And spurring the U.S. equity markets to their fall rally was one of the
year's most significant developments, when the Federal Open Market Committee
decided on August 8th to stop raising interest rates after 17 consecutive hikes
dating back to June 2004. For the first half of the year, relentless scrutiny of
whether or not the Fed would ever pause was actually obscuring what the better
companies were doing, and impeding multiple expansion. To the relief of U.S.
pundits, investors, and the equity markets in general, the Fed continued to hold
steady at 5.25% for the remainder of the year, and we believe that rates are not
likely to rise in the foreseeable future. The fact that the 10-year Treasury, at
about 4.5% is trading at the same level it was when the Fed began in 2004, is
yet another sign in our view that the global market is determining the economic
landscape more than any one central bank--even one as powerful as the Federal
Reserve.
What has been most surprising this year is how strong corporate earnings
have remained; and even though U.S. equity markets have risen they have still
lagged earnings. The companies of the S&P 500 Index(ii) have registered earnings
growth in the high teens--not to mention having increased almost 75% over the
past five years--while the S&P 500 itself was up approximately 12% year-to-date
through October 31. The major U.S. indices have fared about the same, with the
Nasdaq(iii) weaker. The result has been a steady compression of valuations, with
the forward multiple for the S&P 500 going from over 18X in 2002 to just over
14X in 2006, a compression of nearly 25%.
While economic growth slowed in the earlier part of the year in the United
States, it soared in China to a high of 11.3%. In fact, during the fiscal year
China began to surpasss the United States as the primary engine for global
trade. In July, China's exports ($80.34 billion) exceeded U.S. exports ($80.31
billion) a fact which is all the more startling given that even on a purchasing
power basis, China's economy is at best one third of the size of the U.S.
economy. Equally significant, China's appetite for the raw materials of an
industrial revolution--steel, aluminum, power generation
-2-
equipment, copper, zinc, iron ore and, of course, oil--has changed the global
price structure for these materials, forcing a spike in energy and commodity
prices that few companies or investors fully anticipated. Even today, with the
China story a mystery to no one, we believe that the longevity and intensity of
China's appetite for goods and services will continue to drive prices and propel
global trade more substantially than even "China bulls" suggest.
One other positive for the U.S. market occurred just after the end of our
fiscal year, namely the fall congressional elections. The uncertainty about the
outcome was for a time a headwind, and judging by the upward move of the markets
after, investors were apparently relieved by the outcome--not the victory of the
Democrats necessarily, but rather the end of the flurry of debates. Soon enough
attention will turn to the presidential election of 2008, but for a while at
least, politics will be less of a distraction.
As for our outlook for 2007: more of the same. We expect the gap between
how the U.S economy is doing (fine but not spectacular) and how innovative
growth companies are doing (extremely well) to continue. We also expect the
international economy to benefit U.S. companies that are competing in the global
marketplace, even as all of us continue to grapple with the unknowns of the new
and evolving landscape.
PORTFOLIO MATTERS
For the fiscal year ending October 31, 2006, The China-U.S. Growth Fund
gained 33.48%. During the same period the S&P 500 Index returned 16.34%, and the
MSCI Zhong Hua Index(iv) gained 33.21%.
An underweight position in the Financials sector contributed to the Fund's
fiscal year return. During the year, Financials at an average weight of 16.02%
of Fund assets were underweight compared to the benchmarks, outperforming the
S&P 500, but underperforming the Zhong Hua. Several Fund holdings in this sector
were among the stronger performers including China Life Insurance Co. Ltd., one
of China's leading providers of individual and group life insurance, Agile
Property Holdings Ltd., a residential property developer in China's Guangdong
province, and China Resources Land Ltd., an investment holding company whose
subsidiaries are engaged in land and property development.
The Fund's next largest average exposure was in the Consumer Discretionary
sector with an average weighting of 13.11% above both benchmarks. The Fund's
holdings provided a return that was also above both benchmarks' returns,
primarily due to Xinyu Hengdeli Holdings Ltd., a wholesaler of watches in the
Peoples Republic of China ("PRC"), Wynn Resorts Ltd., a $2.7 billion luxury
hotel and destination casino resort located in Las Vegas, and China Resources
Enterprise Ltd., a consumer business firm engaged in retail, beverage, food
processing and distribution, textile and property investment in both the
Mainland China and Hong Kong.
High oil costs had an impact on the global economy. The Fund's energy
holdings, at an average weight of 11.49%, were overweight to and outperformed
the S&P 500. They were underweight to and underperformed the Zhong Hua.
Contributors included strong returns from PetroChina Co., Ltd., one of the
largest producers and
-3-
distributors of petroleum and natural gas in the PRC, and Sinopec Zhenha, one of
the largest producers and sellers and sale of petroleum and petrochemical
products in the PRC, as well as oil and gas drilling companies, including
Schlumberger Ltd., the world's leading supplier of technology, project
management and information solutions to the oil and gas industry.
Despite high energy costs, both the materials and industrials sectors
performed well due to rising production. In the materials sector, the Fund was
overweight compared to both the U.S. and China benchmarks, and significantly
outperformed them. Solid contributors in the materials sector, included Oregon
Steel Mills, Inc., one of the most diversified steel manufacturers in North
America, Phelps Dodge Corp., one of the world's leading producers of copper, and
Jiangxi Copper Co. Ltd. one of China's leaders in copper mining, milling,
smelting and refining. In the Industrials sector, the Fund was overweight the
S&P 500, and underweight the Zhong Hua, but outperformed them both. In this
sector, the Fund saw strong performances from companies including Caterpillar,
Inc., the world's leading manufacturer of construction and mining equipment, and
Evergreen Solar, Inc., a developer and manufacturer of photovoltaic modules and
solar cells.
Our holdings in the information technology sector, at an average weight of
16.24%, were overweight compared to both the U.S. and China benchmarks, but
outperformed them. Our holdings in this sector were bolstered by performances
from Tencent Holdings, Ltd., operator of the leading Internet community in
China, The9, Ltd., a leading online game operator in China, and NVIDIA Corp.,
the worldwide leader in programmable graphics processor technologies. Strong
performances in the Fund compensated for some detractors including Broadcom
Corp., a global leader in semiconductors for wired and wireless communications,
and Lenovo Group, Ltd., an international provider of PC products.
The Fund's holdings in the health care sector, at an average weight of
3.64%, were underweight compared to the S&P 500 and underperformed it. The
Fund's performance in this sector was due to weaker contributions by Sino
Biopharmaceutical Ltd., an international leader in the research, development,
manufacture, and sales of biopharmaceuticals, and China Medical Technologies,
Inc. a high-tech enterprise specialized in R&D and manufacturing medical
equipment and bio-medical products. Against the Zhong Hua, however, the Fund was
overweight and outperformed.
-4-
IN SUMMARY
Shakespeare's THE TEMPEST ended with kings and navigators leaving an old,
brittle world behind, and looking towards a new world of possibilities and
rewards. We are all in that position today, heading towards an uncertain future
laden with unknowns and opportunities. At Alger, we are as passionate about
investing and about discovering innovative, dynamic companies as we have been
for the past four decades. And as the year comes to a close, we thank you for
the trust you place in us and for joining us as we explore this brave new world.
Respectfully submitted,
/s/ Daniel C. Chung /s/ Zachary Karabell
Daniel C. Chung Zachary Karabell
CHIEF INVESTMENT OFFICER CHIEF ECONOMIST
- ----------
(i) The Dow Jones Industrial Average is an index of common stocks comprised of
major industrial companies and assumes reinvestment of dividends. It is
frequently used as a general measure of stock market performance.
(ii) Standard & Poor's 500 Index is an index of the 500 largest and most
profitable companies in the United States.
(iii) Nasdaq is an index of 4000 domestic and non-U.S. companies listed on the
Nasdaq stock market.
(iv) The MSCI Zhong Hua Index is an aggregate of the MSCI Hong Kong Index (a
capitalization-weighted index that monitors the performance of stocks from
Hong Kong) and the MSCI China Free Index (an unmanaged market
capitalization-weighted index of Chinese companies available to
non-domestic investors).
Investors can not invest directly in an index.
-5-
This report and the financial statements contained herein are submitted
for the general information of shareholders of the Fund. This report is not
authorized for distribution to prospective investors in the Fund unless
proceeded or accompanied by an effective prospectus for the Fund.
The views and opinions of the Fund's management in this report are as of
the date of the Shareholder letter and are subject to change at any time. There
is no guarantee that any of the assumptions that formed the basis for the
opinions stated herein are accurate or that they will materialize. Moreover, the
information forming the basis for such assumptions is from sources believed to
be reliable, however, there is no guarantee that such information is accurate.
Any securities mentioned, whether owned in a portfolio or otherwise, are
considered in the context of the construction of an overall portfolio of
securities and therefore reference to them should not be construed as a
recommendation or offer to purchase or sell any such security. Inclusion of such
securities in a portfolio and transactions in such securities, if any, may be
for a variety of reasons, including without limitation, in response to cash
flows, inclusion in a benchmark and risk control. The reference to a specific
security should also be understood in such context and not viewed as a statement
that the security is a significant holding in a portfolio. Please refer to the
Schedule of Investments which is included in this report for a complete list of
fund holdings as of October 31, 2006.
A WORD ABOUT RISK
Growth stocks tend to be more volatile than other stocks as the price of
growth stocks tends to be higher in relation to their companies' earnings and
may be more sensitive to market, political and economic developments. Stocks of
small- and mid-sized companies are subject to greater risk than stocks of
larger, more established companies owing to such factors as limited liquidity,
inexperienced management, and limited financial resources. The Fund can
leverage. Leveraging is speculative and involves risks greater than those
associated with ordinary portfolio transactions. It may cause the Fund's net
asset value to be more volatile than that of funds that do not engage in
leveraging. Investing in Foreign securities involve additional risks (including
currency risk, risk related to political, social or economic conditions, and
risks associated with foreign markets, such as increased volatility, limited
liquidity and lack of industry diversification) and may not be suitable for all
investors. For a more detailed discussion of the risks associated with a Fund,
please see the Fund's Prospectus.
MUTUAL FUNDS ARE NOT INSURED BY THE FDIC, ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, OR GUARANTEED BY BANKS, AND ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
BEFORE INVESTING IN THE CHINA-U.S. GROWTH FUND, INVESTORS SHOULD CONSIDER
THE FUND'S INVESTMENT OBJECTIVE, RISKS AND CHARGES AND EXPENSES CAREFULLY. THE
FUND'S PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE FUND, AND MAY BE
OBTAINED BY ASKING YOUR FINANCIAL ADVISOR, CALLING US AT (800) 992-3863, OR
VISITING OUR WEBSITE AT WWW.ALGER.COM, OR CONTACTING THE FUND'S DISTRIBUTOR,
FRED ALGER & COMPANY, INCORPORATED, 111 FIFTH AVENUE, NEW YORK 10003. READ THE
PROSPECTUS CAREFULLY BEFORE INVESTING.
-6-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
FUND HIGHLIGHTS THROUGH OCTOBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
HYPOTHETICAL $10,000 INVESTMENT
FROM 11/3/03 TO 10/31/06
[LINE GRAPH]
China-U.S.Growth S&P 500 Index MSCI Zhong Hau Index
11/3/03 $ 9,475 $10,000 $10,000
10/31/04 $10,469.9 $10,762 $10,742
10/31/05 $ 12,308 $11,699 $12,098
10/31/06 $16,428.3 $13,612 $16,116
The chart above illustrates the change in value of a hypothetical $10,000
investment made in The China-U.S. Growth Fund, with an initial 5.25% maximum
sales charge, the S&P 500 Index and the MSCI Zhong Hau Index (unmanaged indices
of common stocks) on November 3, 2003, the inception date of The China-U.S.
Growth Fund, through October 31, 2006. Figures for The China-U.S. Growth Fund,
the S&P 500 Index and the MSCI Zhong Hau Index include reinvestment of
dividends.
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON AS OF 10/31/06
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1 SINCE
YEAR INCEPTION
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND (INCEPTION 11/3/03) 26.47% 64.28%
S&P 500 Index 16.34% 36.12%
MSCI Zhong Hau Index 33.21% 61.16%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NOT AN
INDICATION OR A GUARANTEE OF FUTURE RESULTS. 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. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER
THAN THE PERFORMANCE QUOTED. FOR PERFORMANCE CURRENT TO THE MOST RECENT MONTH
END, VISIT US AT WW.ALGER.COM OR CALL US AT (800) 992-3863.
PORTFOLIO SUMMARY+ (UNAUDITED)
- --------------------------------------------------------------------------------
VALUE (%)
- --------------------------------------------------------------------------------
United States 51.1%
China 12.1
VALUE (%)
- --------------------------------------------------------------------------------
Hong Kong 15.6%
Taiwan 15.6
Cash and Net Other Assets 5.6
- --------------------------------------------------------------------------------
100.0%
- --------------------------------------------------------------------------------
+ BASED ON NET ASSETS.
-7-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
SCHEDULE OF INVESTMENTS OCTOBER 31, 2006
- --------------------------------------------------------------------------------
COMMON STOCKS--94.4% SHARES VALUE
- --------------------------------------------------------------------------------
UNITED STATES--51.1%
AEROSPACE & DEFENSE--.9%
Boeing Company 7,850 $ 626,901
- --------------------------------------------------------------------------------
BEVERAGES--2.7%
Anheuser-Busch Companies, Inc. 18,750 889,125
PepsiCo, Inc. 17,150 1,087,996
- --------------------------------------------------------------------------------
1,977,121
- --------------------------------------------------------------------------------
BIOTECHNOLOGY--1.5%
Amgen Inc. 14,555 1,104,870
- --------------------------------------------------------------------------------
CAPITAL MARKETS--1.3%
Goldman Sachs Group, Inc. 5,000 948,950
- --------------------------------------------------------------------------------
COMMERCIAL BANKS--1.5%
Bank of America Corporation 20,350 1,096,254
- --------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT--3.3%
Corning Incorporated* 34,900 713,007
Motorola, Inc. 35,050 808,253
QUALCOMM Inc. 24,650 897,014
- --------------------------------------------------------------------------------
2,418,274
- --------------------------------------------------------------------------------
COMPUTER TECHNOLOGY--2.0%
Atheros Communications* 68,100 1,479,813
- --------------------------------------------------------------------------------
DRUGS & PHARMACEUTICALS--1.1%
United Therapeutics Corporation* 13,600 813,960
- --------------------------------------------------------------------------------
EDUCATION--.8%
New Oriental Education-SP ADR# 25,000 602,500
- --------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS--.9%
Emerson Electric Co. 7,900 666,760
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES--4.8%
Dril-Quip Inc. 11,100 437,118
Schlumberger Limited 12,800 807,424
Suntech Power Holdings Co., Ltd. ADR*# 69,350 1,803,100
Tenaris S. A. ADR# 11,800 455,362
- --------------------------------------------------------------------------------
3,503,004
- --------------------------------------------------------------------------------
FINANCE--1.0%
Intercontinental Exchange Inc.* 8,300 700,686
- --------------------------------------------------------------------------------
FREIGHT & LOGISTICS--.7%
FedEx Corp. 4,750 544,065
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE--1.3%
Home Inns & Hotels Management, Inc.* 12,250 300,615
Starbucks Corporation* 17,200 649,300
- --------------------------------------------------------------------------------
949,915
- --------------------------------------------------------------------------------
-8-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2006
- --------------------------------------------------------------------------------
COMMON STOCKS--(CONT.) SHARES VALUE
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS--2.0%
Procter & Gamble Company 23,150 $ 1,467,479
- --------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES--.8%
General Electric Company 15,950 560,005
- --------------------------------------------------------------------------------
INTERNET & CATALOG RETAIL--1.5%
eBay Inc.* 33,550 1,077,961
- --------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES--2.4%
Netease.com Inc. ADR*# 66,500 1,097,250
Yahoo! Inc.* 24,750 651,915
- --------------------------------------------------------------------------------
1,749,165
- --------------------------------------------------------------------------------
MACHINERY--2.0%
Joy Global Inc. 17,500 684,425
Manitowoc Company, Inc. 13,500 740,880
- --------------------------------------------------------------------------------
1,425,305
- --------------------------------------------------------------------------------
MEDIA--2.2%
Focus Media Holding Limited ADR*# 12,700 671,703
News Corporation Cl. A 45,100 940,335
- --------------------------------------------------------------------------------
1,612,038
- --------------------------------------------------------------------------------
MEDICAL DEVICES--1.1%
Mindray Medical International Limited* 42,556 770,264
- --------------------------------------------------------------------------------
METALS & MINING--6.1%
Cameco Corporation 12,250 430,342
Companhia Vale do Rio Doce (CVRD) ADR# 49,100 1,249,104
Freeport-McMoRan Copper & Gold, Inc. Cl. B 4,800 290,304
Phelps Dodge Corporation 11,450 1,149,351
Schnitzer Steel Industries, Inc. Cl. A 38,300 1,338,968
- --------------------------------------------------------------------------------
4,458,069
- --------------------------------------------------------------------------------
OIL & GAS--.9%
Petroleo Brasileiro S. A. ADR# 7,750 687,890
- --------------------------------------------------------------------------------
PERSONAL PRODUCTS--1.6%
Avon Products, Inc. 38,950 1,184,469
- --------------------------------------------------------------------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT--.7%
Freescale Semiconductor Inc. Cl. A* 13,400 527,558
- --------------------------------------------------------------------------------
SOFTWARE--.8%
BEA Systems, Inc.* 36,700 597,109
- --------------------------------------------------------------------------------
SPECIALTY RETAIL--2.2%
Circuit City Stores, Inc. 27,100 731,158
Tiffany & Co. 25,400 907,288
- --------------------------------------------------------------------------------
1,638,446
- --------------------------------------------------------------------------------
TEXTILES, APPAREL & LUXURY GOODS--1.0%
Polo Ralph Lauren Corporation Cl. A 9,850 699,350
- --------------------------------------------------------------------------------
-9-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2006
- --------------------------------------------------------------------------------
COMMON STOCKS--(CONT.) SHARES VALUE
- --------------------------------------------------------------------------------
UTILITIES--2.0%
Veolia Environnement 23,800 $ 1,456,560
- --------------------------------------------------------------------------------
TOTAL UNITED STATES
(Cost $34,090,485) 37,344,741
- --------------------------------------------------------------------------------
CHINA--12.1%
COMMUNICATION EQUIPMENT--1.1%
ZTE Corporation Cl. H 226,000 836,765
- --------------------------------------------------------------------------------
CONSTRUCTION & ENGINEERING--1.1%
China National Building Material Company Ltd.* 1,414,000 787,118
- --------------------------------------------------------------------------------
CONSUMER PRODUCTS--2.0%
GOME Electrical Appliances Holdings Limited 642,822 553,692
Win Hanverky Holdings Ltd. 2,262,000 924,745
- --------------------------------------------------------------------------------
1,478,437
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES--.8%
Datang International Power Generation Company
Limited 712,000 603,209
- --------------------------------------------------------------------------------
FINANCIAL SERVICES--2.1%
China Merchants Bank Co., Ltd. 490,500 765,526
Industrial and Commercial Bank Of China* 1,639,000 733,265
- --------------------------------------------------------------------------------
1,498,791
- --------------------------------------------------------------------------------
INSURANCE--2.0%
China Intl Life Insurance Co. Cl. H * 686,000 1,444,576
- --------------------------------------------------------------------------------
METALS & MINING--.8%
Angang New Steel Company Limited Cl. H 552,000 564,168
- --------------------------------------------------------------------------------
OIL & GAS--2.2%
China Petroleum & Chemical Corp. (Sinopec) 792,000 549,821
PetroChina Company Limited Cl. H 974,000 1,073,105
- --------------------------------------------------------------------------------
1,622,926
- --------------------------------------------------------------------------------
TOTAL CHINA
(Cost $8,095,333) 8,835,990
- --------------------------------------------------------------------------------
HONG KONG--15.6%
COMMERCIAL BANKS--1.2%
HSBC Holdings plc 16,400 309,508
The Bank of East Asia, Ltd. 114,600 547,326
- --------------------------------------------------------------------------------
856,834
- --------------------------------------------------------------------------------
CONSUMER PRODUCTS--.7%
Minth Group Ltd. 698,000 493,538
- --------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS--1.0%
AAC Acoustic Technology Holdings Inc.* 656,000 762,386
- --------------------------------------------------------------------------------
-10-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2006
- --------------------------------------------------------------------------------
COMMON STOCKS--(CONT.) SHARES VALUE
- --------------------------------------------------------------------------------
FINANCIAL SERVICES--2.3%
China Insurance International Holdings Company
Limited 1,100,000 $ 947,480
Hong Kong Exchanges & Clearing Limited 93,000 736,489
- --------------------------------------------------------------------------------
1,683,969
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE--.5%
Shangri-La Asia Limited 164,000 355,892
- --------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES--.8%
Peace Mark (Holdings) Limited 900,000 613,226
- --------------------------------------------------------------------------------
METALS--.9%
Lee Kee Holdings Limited* 1,866,473 664,667
- --------------------------------------------------------------------------------
OIL & GAS--.9%
CNOOC Limited 804,000 675,984
- --------------------------------------------------------------------------------
REAL ESTATE--1.6%
Cheung Kong (Holdings) Limited 56,000 609,061
Chinese Estates Holdings Limited 297,002 356,241
Sun Hung Kai Properties Limited 18,000 196,811
- --------------------------------------------------------------------------------
1,162,113
- --------------------------------------------------------------------------------
RESTAURANTS--.7%
Cafe De Coral Holdings Limited 318,000 497,122
- --------------------------------------------------------------------------------
UTILITIES--1.4%
Hong Kong and China Gas Company Limited 462,000 1,058,406
- --------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES--3.6%
China Mobile (Hong Kong) Limited 328,500 2,669,039
- --------------------------------------------------------------------------------
TOTAL HONG KONG
(Cost $10,350,170) 11,493,176
- --------------------------------------------------------------------------------
TAIWAN--15.6%
COMPUTERS & PERIPHERALS--.8%
Foxconn Technology Co. Ltd. 60,000 586,534
- --------------------------------------------------------------------------------
CONSUMER PRODUCTS--1.6%
Largan Precision Co., Ltd. 18,000 358,970
Uni-President Enterprises Corp 915,000 815,906
- --------------------------------------------------------------------------------
1,174,876
- --------------------------------------------------------------------------------
FINANCIAL INFORMATION SERVICES--1.4%
Cathay Financial Holding Co., Ltd. 517,000 1,004,563
- --------------------------------------------------------------------------------
FINANCIAL SERVICES--.9%
Shin Kong Financial Holding Co., Ltd. 737,000 652,742
- --------------------------------------------------------------------------------
-11-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2006
- --------------------------------------------------------------------------------
COMMON STOCKS--(CONT.) SHARES VALUE
- --------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES--2.1%
Cheng Uei Precision Industry Co., Ltd 171,000 $ 592,408
Epistar Corporation 168,000 464,600
Tripod Technology Corp. 142,000 442,747
- --------------------------------------------------------------------------------
1,499,755
- --------------------------------------------------------------------------------
INFORMATION TECHNOLOGY SERVICES--.7%
AU Optronics Corp. 364,000 491,254
- --------------------------------------------------------------------------------
IT SERVICES--7.2%
Delta Electronics Inc. 358,000 1,013,767
Hon Hai Precision Industry Co., Ltd. 287,000 1,863,186
MediaTek Incorporation 82,000 801,596
Simplo Technology Co., Ltd. 220,000 620,334
Taiwan Semiconductor Manufacturing Company Ltd. 542,000 995,993
- --------------------------------------------------------------------------------
5,294,876
- --------------------------------------------------------------------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT--.9%
Holtek Semiconductor Inc. 337,000 678,162
- --------------------------------------------------------------------------------
TOTAL TAIWAN
(Cost $11,393,300) 11,382,762
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $63,929,288) 69,056,669
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS--4.9%
Federal National Mortgage Association, 4.95%, 11/1/06
(Cost $3,585,000) $3,585,000 3,585,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Investments
(Cost $67,514,288)(a) 99.3% 72,641,669
- --------------------------------------------------------------------------------
Other Assets in Excess of Liabilities 0.7 505,483
- --------------------------------------------------------------------------------
NET ASSETS 100.0% $ 73,147,152
- --------------------------------------------------------------------------------
* NON-INCOME PRODUCING SECURITIES.
# AMERICAN DEPOSITARY RECEIPTS.
(a) AT OCTOBER 31, 2006, THE NET UNREALIZED APPRECIATION ON INVESTMENTS, BASED
ON COST FOR FEDERAL INCOME TAX PURPOSES OF $67,793,537 AMOUNTED TO
$4,848,035 WHICH CONSISTED OF AGGREGATE GROSS UNREALIZED APPRECIATION OF
$6,105,120 AND AGGREGATE GROSS UNREALIZED DEPRECIATION OF $1,257,085.
SEE NOTES TO FINANCIAL STATEMENTS. -12-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2006
- --------------------------------------------------------------------------------
ASSETS:
Investments in securities, at value
(cost $67,514,288), see accompanying schedule
of investments $ 72,641,572
Cash 525,672
Receivable for investment securities sold 196,215
Receivable for shares of beneficial interest sold 365,779
Dividends receivable 30,792
Receivable from Investment Manager--Note 3(a) 6,544
Prepaid Expenses 26,179
- --------------------------------------------------------------------------------
Total Assets 73,792,753
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities purchased $ 415,870
Payable for shares of beneficial interest redeemed 46,120
Investment advisory fees payable 93,270
Shareholder servicing fees payable 15,545
Trustees' fees payable 2,718
Accrued expenses 72,078
- --------------------------------------------------------------------------------
Total Liabilities 645,601
- --------------------------------------------------------------------------------
NET ASSETS $ 73,147,152
- --------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in capital $ 58,221,182
Undistributed net investment income (accumulated
loss) --
Undistributed net realized gain (accumulated loss) 9,798,686
Net unrealized appreciation (depreciation) of
investments 5,127,284
- --------------------------------------------------------------------------------
NET ASSETS $ 73,147,152
- --------------------------------------------------------------------------------
Net Asset Value Per Share $ 15.57
- --------------------------------------------------------------------------------
Offering Price Per Share $ 16.43
- --------------------------------------------------------------------------------
SHARES OF BENEFICIAL INTEREST OUTSTANDING--NOTE 6 4,699,213
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. -13-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Income:
Dividends $ 863,084
Interest 177,726
- --------------------------------------------------------------------------------
Total Income 1,040,810
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees--Note 3(a) $ 823,741
Custodian Fees 84,598
Shareholder servicing fees--Note 3(f) 137,290
Trustees fees 23,999
Professional Fees 60,246
Printing fees 35,150
Transfer agent fees and expenses--Note 3(b) 83,848
Registration Fees 27,193
Miscellaneous 18,786
- --------------------------------------------------------------------------------
1,294,851
Less expense reimbursement--Note 3(a) (86,698)
- --------------------------------------------------------------------------------
Total Expenses 1,208,153
- --------------------------------------------------------------------------------
NET INVESTMENT LOSS (167,343)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on investments 10,267,627
Net realized loss on foreign currency transactions (61,727)
Net change in unrealized appreciation
(depreciation) on investments and foreign
currency translations 3,319,935
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments
and foreign currency 13,525,835
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 13,358,492
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. -14-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the For the
Year Ended Year Ended
October 31, October 31,
2006 2005
- --------------------------------------------------------------------------------
Net investment loss $ (167,343) $ (176,426)
Net realized gain on investments and foreign
currency transactions 10,205,900 4,182,434
Net change in unrealized appreciation (depreciation)
on investments, foreign currency translations 3,319,935 779,610
- --------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 13,358,492 4,785,618
- --------------------------------------------------------------------------------
Distributions to Shareholders from:
Net realized gains (4,057,743) 0
- --------------------------------------------------------------------------------
Net increase from shares of beneficial interest
transactions--Note 5 27,215,916 5,554,861
- --------------------------------------------------------------------------------
Total increase in net assets 36,516,665 10,340,479
Net assets:
Beginning of year 36,630,487 26,290,008
- --------------------------------------------------------------------------------
END OF YEAR $73,147,152 $ 36,630,487
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. -15-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
- --------------------------------------------------------------------------------
For the For the November 3,
year ended year ended 2003(i) to
October 31, October 31, October 31,
2006 2005 2004(ii)
- ----------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 12.99 $ 11.05 $ 10.00
Net investment loss(iii) (0.04) (0.07) (0.08)
Net realized and unrealized gain on investments
and foreign currency 4.03 2.01 1.13
- ----------------------------------------------------------------------------------------------------------
Total from investment operations 3.99 1.94 1.05
- ----------------------------------------------------------------------------------------------------------
Distributions from net realized gains (1.41) -- --
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 15.57 $ 12.99 $ 11.05
- ----------------------------------------------------------------------------------------------------------
Total return(iv) 33.48% 17.56% 10.50%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $ 73,147 $ 36,630 $ 26,290
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 2.20%(vii) 2.26%(v) 2.44%(vi)
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment loss to average net assets (0.30)% (0.56)% (0.81)%
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 192.21% 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.
(vii) AMOUNT HAS BEEN REDUCED BY 0.16% DUE TO EXPENSE REIMBURSEMENTS.
SEE NOTES TO FINANCIAL STATEMENTS. -16-
- --------------------------------------------------------------------------------
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 readily
available 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 investment adviser, pursuant to policies
established by 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.
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.
-17-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND | NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
In September 2006, the Financial Accounting Standards Board (FASB) issued
STATEMENT ON FINANCIAL ACCOUNTING STANDARDS NO. 157, "FAIR VALUE MEASUREMENTS"
(FAS 157). This standard clarifies the definition of fair value for financial
reporting, establishes a framework for measuring fair value and requires
additional disclosures about the use of fair value measurements. FAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. As of October
31, 2006 the Fund does not believe the adoption of FAS 157 will impact the
amounts reported in the financial statements, however, additional disclosures
will be required about the inputs used to develop the measurements of fair value
and the effect of certain of the measurements reported in the statement of
operations for a fiscal period.
(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.
-18-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND | NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(e) Federal Income Taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
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.
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Funds' tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. At this time, management is
evaluating the implications of FIN 48 and its impact in the financial statements
has not yet been determined.
(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 and Administration Fees--Prior to September 12, 2006,
Fred Alger Management, Inc. ("Alger Management") provided both advisory services
and administrative services to the Fund pursuant to an investment advisory
agreement with the Fund. Effective September 12, 2006, the services provided by
Alger Management to the Fund were bifurcated into two separate agreements -- an
investment advisory agreement and an administration agreement. Fees for these
services incurred by the Fund, pursuant to the relevant agreement, are payable
monthly and computed based on the value of the average daily net assets of the
Fund, at the following rates:
Investment Advisory fee rate through September 11, 2006 1.50%
Advisory fee rate effective September 12, 2006 1.46
Administration fee rate effective September 12, 2006 0.04
Through September 12, 2006, JF International Management, Inc. ("JFIM"), a
registered investment adviser, acted as sub-advisor to the Fund under a written
sub-advisory agreement with Alger Management. Effective September 20, 2006,
Martin Currie, Inc., a registered investment advisor, replaced JFIM as
sub-advisor to the Fund under a written sub-advisory agreement with Alger
Management.
Effective February 28, 2006, 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 2.20% of average
daily net assets. For the year ended October 31, 2006, Alger Management
reimbursed the
-19-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND | NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Fund $86,698. Alger Management has contractually agreed to extend the expense
cap through February 28, 2007.
(b) Shareholder/Administrative Servicing Fees--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 Boston Financial Data Services, Inc. ("BFDS") and other related
services. During the year ended October 31, 2006, the Fund incurred fees of
$10,195 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, 2006, the initial sales charges
retained by Fred Alger & Company (the "Distributor"), were approximately $7,251.
Sales charges do not represent expenses of the Fund.
(d) Brokerage Commissions--During the year ended October 31, 2006, the Fund paid
Fred Alger & Company, Incorporated ("Alger Inc."), an affiliate of Alger
Management, $48,572 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. At October 31, 2006, Alger Management and its affiliates owned
1,113,591 shares of the Fund.
NOTE 4--SECURITIES TRANSACTIONS:
- --------------------------------------------------------------------------------
During the year ended October 31, 2006, purchases and sales of investment
securities, excluding short-term securities, aggregated $118,745,198 and
$97,743,534, 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 participates in a committed line of credit with other mutual funds
managed by Alger Management. 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, 2006, the Fund
had no borrowings.
-20-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND | NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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 FOR THE YEAR ENDED
OCTOBER 31, 2006 OCTOBER 31, 2005
- --------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------
Shares sold 2,119,274 $ 31,308,238 916,179 $ 11,342,864
Dividends reinvested 281,093 3,482,743 -- --
Shares redeemed (521,355) (7,575,065) (475,571) (5,788,003)
- --------------------------------------------------------------------------------
NET INCREASE 1,879,012 $ 27,215,916 440,608 $ 5,554,861
- --------------------------------------------------------------------------------
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, 2006 and the year
ended October 31, 2005, redemption fees were $29,634 and $15,404, respectively.
NOTE 7--TAX CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS:
- --------------------------------------------------------------------------------
The tax character of distributions paid during the year ended October 31, 2006
and the year ended October 31, 2005 were as follows:
YEAR ENDED YEAR ENDED
OCTOBER 31, 2006 OCTOBER 31, 2005
- --------------------------------------------------------------------------------
DISTRIBUTIONS PAID FROM:
- --------------------------------------------------------------------------------
Ordinary Income $3,828,244 $ --
Long-term capital gain 229,499 --
- --------------------------------------------------------------------------------
Total distributions paid $4,057,743 $ --
- --------------------------------------------------------------------------------
As of October 31, 2006, the components of distributable earnings on a tax basis
were as follows:
Undistributed ordinary income $8,336,709
- --------------------------------------------------------------------------------
Undistributed long-term gain 1,741,226
- --------------------------------------------------------------------------------
Unrealized appreciation $4,848,132
- --------------------------------------------------------------------------------
The difference between book basis and tax basis unrealized appreciation is
determined annually and 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 various regulatory authorities, in connection with their investigations of
practices in the mutual fund industry identified as "market timing" and "late
trading." On October 11, 2006, Alger Management, Alger Inc. and Alger
Shareholder Services, Inc. executed an Assurance of Discontinuance with the
Office of the New York State Attorney General ("NYAG"). On December 7, 2006,
Alger Management and Alger
-21-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND | NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Inc. executed Offers of Settlement with the Commission, and the settlement is
subject to approval of the Commission. As part of the settlements with the
Commission and the NYAG, without admitting or denying liability, the firms will
consent to the payment of $30 million to reimburse fund shareholders; a fine of
$10 million; and certain other remedial measures including a reduction in
management fees of $1 million per year for five years. The entire $40 million
and fee reduction will be available for the benefit of investors. Alger
Management has advised the Funds that the proposed settlement payment is not
expected to adversely affect the operations of Alger Management, Alger Inc. or
their affiliates, or adversely affect their ability to continue to provide
services to the Funds.
On August 31, 2005, the West Virginia Securities Commissioner (the "WVSC") 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 (the "WVUSA"), and ordered Alger Management and Alger
Inc. to cease and desist from further violations of the WVUSA 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 WVSC. 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 pretrial proceedings. In September 2004,
consolidated amended complaints involving these cases -- 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, but such lawsuit has since been
withdrawn.
The Derivative Complaint alleged (i) violations, by Alger Management and,
depending on the specific offense alleged, by Alger Inc. and/or the fund trustee
defendants, of Sections 36(a), 36(b), 47, and 48 of the Investment Company Act
of 1940, as amended, (the "Investment Company Act") and of Sections 206 and 215
of the Investment Advisers Act of 1940, as amended, 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,
including the Funds, and the current and former fund trustees and officers, of
Sections 11, 12(a)(2), and 15 of the Securities Act
-22-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND | NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
of 1933, as amended, Sections 10(b) (and Rule 10b-5 thereunder) and 20(a) of the
Securities Exchange Act of 1934, as amended, (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.
Motions to dismiss the Class Action Complaint and the Derivative Complaint were
subsequently filed. On November 3, 2005, the district court issued letter
rulings dismissing both complaints in their entirety with respect to the Alger
Mutual Funds and dismissing all claims against the other Alger defendants, other
than the claims under the 1934 Act and Section 36(b) of the 1940 Act (as to
which the court deferred ruling with respect to the Alger Mutual Fund Trustees),
with leave to the class action plaintiffs to file amended complaints against
those defendants with respect to claims under state law. Orders implementing the
letter rulings were entered. On March 31, 2006, attorneys for the class action
plaintiffs informed the district court that they had decided not to file amended
complaints with respect to the plaintiffs' state law claims. Answers to the
Class Action Complaint were filed by the Alger defendants on April 24, 2006.
In subsequent orders, all remaining claims in the Class Action Complaint and the
Derivative Complaint have been dismissed, other than claims under the 1934 Act
against Alger Management, Alger Inc., Alger Associates, Inc. and Alger
Shareholder Services, Inc., and certain present and former members of the senior
management of Alger Management and/or Alger Inc., and claims under Section 36(b)
of the 1940 Act against Alger Management, Alger Inc., Alger Associates, Inc. and
Alger Shareholder Services, Inc.
-23-
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, 2006, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended and the financial highlights for each of the periods
indicated therein. 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, 2006, 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, 2006, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the indicated
periods, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
December 12, 2006
-24-
- --------------------------------------------------------------------------------
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, 2006 and ending October 31, 2006.
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, 2006 TO
MAY 1, 2006 OCTOBER 31, 2006 OCTOBER 31, 2006(b)
- --------------------------------------------------------------------------------
Actual $1,000.00 $1,012.40 $11.16
Hypothetical(a) 1,000.00 1,014.12 11.17
- --------------------------------------------------------------------------------
(a) 5% ANNUAL RETURN BEFORE EXPENSES.
(b) EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 2.20%,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
184/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
-25-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
In accordance with subchapter M of the Internal Revenue Code of 1986, as
amended, for the year ended October 31, 2006, 6.63% of the Funds ordinary
dividend qualified for the dividends received deduction for corporations. For
the year ended October 31, 2006, certain dividends paid by the Funds may be
subject to a maximum rate of 15%, as provided by the Jobs and Growth Tax Relief
Reconciliation Act of 2003. Of the distributions paid during the fiscal year,
the following represents the maximum amount that may be considered qualified
dividend income $3,828,244.
Shareholders should not use the above information to prepare their tax returns.
Since the Fund's fiscal year is not the calendar year, another notification will
be sent with respect to calendar year 2005. Such notification, which will
reflect the amount to be used by taxpayers on their federal income tax returns,
will be made in conjunction with Form 1099 DIV and will be mailed in January
2006. Shareholders are advised to consult their own tax advisers with respect to
the tax consequences of their investment in the Fund.
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 AND/OR ARE OVERSEEN
WITH THE FUND PRINCIPAL OCCUPATIONS OFFICER SINCE BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
ZACHARY KARABELL (38) Senior Vice President (Vice President prior 2003 1
Chairman of the Board to October 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, CFA (44) Trustee/Director of all of the six 2003 23
Trustee investment companies in the Alger Fund
Complex since 2003; Director of Development,
Pennsylvania Ballet since 2004; Associate
Director of Development, College of Arts and
Sciences and Graduate School, University of
Virginia 1999-2003; Director of Development
and Communications, Lenox Hill Neighborhood
House 1997-99.
- ------------------------------------------------------------------------------------------------------------
-26-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
NUMBER
OF FUNDS IN
THE ALGER FUND
TRUSTEE COMPLEX WHICH
NAME, AGE, POSITION AND/OR ARE OVERSEEN
WITH THE FUND PRINCIPAL OCCUPATIONS OFFICER SINCE BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
LESTER L. COLBERT, JR. (72) Private investor since 1988; 2003 17
Trustee Trustee/Director of three of the six
investment companies in the Alger Fund
Complex since 2000, of one since 2003, and
of another since 1974. Chairman of the
Board, President and Chief Executive Officer
of Xidex Corporation 1972-87.
- ------------------------------------------------------------------------------------------------------------
STEPHEN E. O'NEIL (73) Attorney; Private investor since 1981; 2003 23
Trustee Director of Brown-Forman Corporation since
1978; Trustee/ Director of the six
investment companies in the Alger Fund
Complex since the inception of each; of
Counsel to the law firm of Kohler & Barnes
to 1998.
- ------------------------------------------------------------------------------------------------------------
NATHAN E. SAINT-AMAND Medical doctor in private practice; Member 2003 23
M.D. (68) of the Board of the Manhattan Institute
Trustee since 1988; Trustee/Director of each of the
six investment companies in the Alger Fund
Complex since the later of 1986 or its
inception; formerly Co-Chairman, Special
Projects Committee, Memorial Sloan Kettering.
- ------------------------------------------------------------------------------------------------------------
-27-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
NUMBER
OF FUNDS IN
THE ALGER FUND
TRUSTEE COMPLEX WHICH
NAME, AGE, POSITION AND/OR ARE OVERSEEN
WITH THE FUND PRINCIPAL OCCUPATIONS OFFICER SINCE BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------
OFFICERS
DAN C. CHUNG (44) President since September 2003 and Chief 2003 16
Trustee and Investment Officer and Director since 2001
President of Alger Management; President since 2003
and Director since 2001 of Alger Associates,
Inc. ("Associates"), Alger Shareholder
Services, Inc. ("Services"), Fred Alger
International Advisory S.A.
("International") (Director since 2003),
Director of Fred Alger & Co., Inc. ("Alger
Inc.") and Analysts Resources, Inc. ("ARI");
President of the six investment companies in
the Alger Fund Complex since September 2003;
Trustee/Director of four of the six
investment companies in the Alger Fund
Complex since 2001; senior analyst with
Alger Management 1998-2001.
- ------------------------------------------------------------------------------------------------------------
FREDERICK A. BLUM (52) Executive Vice President, Chief Financial 2003 N/A
Treasurer Officer and Treasurer of Alger Inc., Alger
Management, ARI and Services since September
2003 and Senior Vice President prior
thereto; Executive Vice President of
Associates since September 2003; Treasurer
or Assistant Treasurer of each of the six
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) since
2003.
- ------------------------------------------------------------------------------------------------------------
HAL LIEBES (42) Executive Vice President, Chief Legal 2005 N/A
Secretary and Officer, Director and Secretary of Alger
Chief Operating Management, Chief Operating Officer,
Officer Director and Secretary of Services, Director
of Associates; Executive Vice President,
Chief Legal Officer and Director of Alger,
Inc.; Secretary of the six investment
companies in the Alger Fund Complex.
Formerly Chief Compliance Officer 2004-2005,
AMVESCAP PLC; U.S. General Counsel 1994-2002
and Global General Counsel 2002-2004, Credit
Suisse Asset Management.
- ------------------------------------------------------------------------------------------------------------
-28-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
NUMBER
OF FUNDS IN
THE ALGER FUND
TRUSTEE COMPLEX WHICH
NAME, AGE, POSITION AND/OR ARE OVERSEEN
WITH THE FUND PRINCIPAL OCCUPATIONS OFFICER SINCE BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------
OFFICERS
MICHAEL D. MARTINS (41) Senior Vice President of Alger Management; 2005 N/A
Assistant Treasurer Assistant Treasurer of the six investment
companies in the Alger Fund Complex since
2004. Formerly Vice President, Brown
Brothers Harriman & Co. 1997-2004.
- ------------------------------------------------------------------------------------------------------------
LISA A. MOSS (41) Vice President and Assistant General Counsel 2006 N/A
Assistant Secretary of Alger Management since June 2006.
Formerly Director of Merrill Lynch
Investment Managers, L.P. from 2005-2006;
Assistant General Counsel of AIM Management,
Inc. from 1995-2005.
- ------------------------------------------------------------------------------------------------------------
BARRY J. MULLEN (53) Senior Vice President and Chief Compliance 2006 N/A
Chief Compliance Officer of Alger Management since May 2006.
Officer Formerly, Director of BlackRock, Inc. from
2004-2006; Vice President of J.P. Morgan
Investment Management from 1996-2004.
- ------------------------------------------------------------------------------------------------------------
Ms. Alger and Mr. Karabell are an "interested person" (as defined in the
Investment Company Act) of the Fund because of his affiliations with Alger
Management. 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.
-29-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
INVESTMENT MANAGEMENT AGREEMENT RENEWAL (UNAUDITED)
- --------------------------------------------------------------------------------
At an in-person meeting held on September 12, 2006, the Trustees, including the
Independent Trustees, unanimously approved, subject to the required shareholder
approval described herein, the New Investment Advisory Agreement. The
Independent Trustees were assisted in their review by independent legal counsel
and met with counsel in executive session separate from representatives of Alger
Management.
In evaluating the New Investment Advisory Agreement, the Trustees drew on
materials that they requested and which were provided to them in advance of the
meeting by Alger Management and by counsel to the Fund. The materials covered,
among other matters, (i) the nature, extent and quality of the services provided
by Alger Management under the Current Investment Advisory Agreement, (ii) the
investment performance of the Fund, (iii) the costs to Alger Management of its
services and the profits realized by Alger Management and Alger 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 New
Investment Advisory Agreement reflects these economies of scale. These materials
included an analysis of the Fund and Alger Management'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 approve the New Investment Advisory Agreement, the
Trustees considered various factors, including those enumerated above. They also
considered other direct and indirect benefits to Alger Management 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 proposed to be
provided by Alger Management pursuant to the New Investment Advisory Agreement,
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, and considered the nature,
extent and quality of the services provided by Alger Management pursuant to the
Current Investment Advisory Agreement. They noted that under the Advisory
Agreements, Alger Management is responsible for managing the investment
operations of the Fund, with the Fund's sub-adviser providing portfolio
management advice with respect to China securities. They also noted that
administrative, compliance, reporting and accounting services necessary for the
conduct of the Fund's affairs are provided under the separate Administration
Agreement. The Trustees reviewed the background and experience of Alger
Management's senior investment management personnel, including the individuals
currently responsible for the investment operations of the Fund. They also
considered the resources, operational structures and practices of Alger
Management in managing the Fund's portfolio and administering the Fund's
affairs, as well as Alger Management's overall investment management business.
They noted especially Alger
-30-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
management's established expertise in managing portfolios of "growth" stocks and
that, according to an analysis provided by Callan, the characteristics of the
Fund's portfolio had, since inception, been typical of a fund that holds itself
out to investors as growth-oriented. The Trustees concluded that Alger
Management's experience, resources and strength in those areas of importance to
the Fund are considerable. The Trustees considered the level and depth of Alger
Management's ability to execute portfolio transactions to effect investment
decisions, including those through Alger Inc. The Trustees also considered the
ongoing enhancements to the control and compliance environment at Alger
Management and within the Fund.
TRANSFER OF OWNERSHIP OF ALGER ASSOCIATES
The Trustees assessed the implications for Alger Management of the pending
transfer of ownership control of Alger Associates and Alger Management's ability
to continue to provide services to the Fund of the same scope and quality as are
currently provided. In particular, the Board inquired as to the impact of the
pending transfer on Alger Management's personnel, management, facilities and
financial capabilities, and received assurances in this regard from senior
management of Alger Management that the pending transfer would not adversely
affect Alger Management's ability to fulfill its obligations under the New
Investment Advisory Agreement, and to operate its business in a manner
consistent with past practices. The Board also considered that the New
Investment Advisory Agreement, and the fees paid thereunder, are substantively
identical in all respects to Current Investment Advisory Agreement, except for
the time periods covered by the Agreements and, that for administrative
convenience, the New Investment Advisory Agreement will permit the investment
advisory agreement of future Fund series to be combined with the investment
advisory agreement for the Fund as a single document.
INVESTMENT PERFORMANCE OF THE FUND
Drawing upon information provided at the meeting by Alger Management as well as
Callan and upon reports provided to the Trustees by Alger Management throughout
the preceding year, the Trustees determined that the overall performance of the
Fund had been excellent; they noted, for example, that the Fund's average annual
returns for the one- and two-year periods ended August 31, 2006 and since
inception, and its return for the year to date at August 31, 2006, had
substantially exceeded those of its peers and its benchmarks. They also noted,
however, that the services of the Fund's former sub-adviser had presumably
contributed to this performance and that a new sub-adviser would be responsible
for the Fund's investments in China securities in at least the immediate future.
FUND FEE AND EXPENSE RATIO; PROFITABILITY TO ALGER MANAGEMENT AND ITS AFFILIATES
The Trustees considered the profitability of the Current Investment Advisory
Agreement to Alger Management and its affiliates, and the methodology used by
Alger Management in determining such profitability. The Trustees reviewed
previously-provided data on the Fund's profitability to Alger Management and its
affiliates for the Fund's most recent fiscal year. In addition, the Trustees
reviewed the Fund's management
-31-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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 and expense ratio were approximately at the median for the funds in the
Callan reference group. The Trustees determined that this fact should be taken
into account in weighing the size of the fee against the nature, extent and
quality of the services to be provided. After analysis and discussion, they
concluded that, to the extent that Alger Management's and its affiliates'
relationships with the Fund had been profitable to those entities, the profit
margins were 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 Alger Management is likely to realize
economies of scale in the management of each Fund at some point as it grows in
size, but that in view of the current size of the Fund and the level of
profitability of the Fund to Alger Management and its affiliates, such economies
as might already exist were subsumed in the level of the management fee, and
that adoption of breakpoints in the advisory fee, while possibly appropriate at
a later date, could await further analysis of the sources and potential scale of
the economies and the fee structure that would best reflect them. Accordingly,
the Trustees requested that Alger Management address this topic with the
Trustees at future meetings.
OTHER BENEFITS TO ALGER MANAGEMENT
The Trustees considered whether Alger Management benefits in other ways from its
relationship with the Fund. They noted that Alger Management 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 Alger, Inc. provides a substantial portion of the
Fund's equity 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
Alger Management and its affiliates of their relationships with the Fund. As to
other benefits received, the Trustees decided that none were so significant as
to render Alger Management's fees excessive.
At the conclusion of these discussions, each of the Independent Trustees
expressed the opinion that he had been furnished with sufficient information to
make an informed business decision with respect to approval of the Fund's New
Investment Advisory Agreement. Based on its discussions and considerations as
described above, the Board made the following conclusions and determinations:
o The Board concluded that the nature, extent and quality of the services
provided by Alger Management are adequate and appropriate.
-32-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
o The Board determined that the pending transfer of ownership control of
Alger Associates would not be a detriment to Alger Management's ability to
continue to provide services to the Fund of the same scope and quality as
provided under the Current Investment Advisory Agreement, and that the
pending transfer would not adversely affect Alger Management's ability to
fulfill its obligations under the New Investment Advisory Agreement, and
to operate its business in a manner consistent with past practices.
o The Board concluded that the Fund's overall performance had been
excellent, while noting that a portion of that performance was
attributable to the services of the Fund's former sub-adviser.
o The Board concluded that the Fund's fee paid to Alger Management, which
was proposed to be the same under the New Investment Advisory Agreement as
under the Current Investment Advisory Agreement, was reasonable in light
of comparative performance and expense and advisory fee information, costs
of the services provided and profits to be realized and benefits derived
or to be derived by Alger Management from the relationship with the Fund.
o The Board determined that there were not at this time significant
economies of scale to be realized by Alger Management in managing the
Fund's assets and that, to the extent that material economies of scale
should be realized in the future, the Board would seek to ensure that they
were shared with the Fund.
The Board considered these conclusions and determinations and, without any one
factor being dispositive, determined that approval of the Fund's New Investment
Advisory Agreement was in the best interests of the Fund and its shareholders.
APPROVAL OF THE SUB-ADVISORY AGREEMENT
- --------------------------------------------------------------------------------
At an in-person meeting held on September 12, 2006, the Trustees, including the
Independent Trustees, unanimously approved, subject to the required shareholder
approval described herein, the New Sub-Advisory Agreement. The Independent
Trustees were assisted in their review by independent legal counsel and met with
counsel in executive session separate from representatives of Martin Currie and
Alger Management.
In evaluating the New Sub-Advisory Agreement, the Trustees drew on extensive
materials relating to Martin Currie that had been provided to them in advance of
the meeting, including a detailed account of (1) Martin Currie's experience,
resources and current investment management business relating to Greater China
securities, (2) its organizational structure and personnel, including the
individual designated to act as co-portfolio manager for the Fund with Messrs.
Chung and Karabell, as well as others in the organization who contribute to
Martin Currie's Greater China portfolio management activities, and the
compensation program for portfolio management personnel, (3) its general
investment philosophy, policies and procedures, including its research practices
and resources and its portfolio trading practices, (4) its regulatory history
and its policies and procedures relating to legal and regulatory matters, and
(5) its code of ethics and policies relating to personal trading and conflicts
of interest. The
-33-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
Trustees were also furnished with a lengthy and detailed document setting forth
Martin Currie's compliance policies and procedures, a summary of the annual
report of Martin Currie's Chief Compliance Officer, a copy of Martin Currie's
registration statement on Form ADV as filed with the SEC, the annual report of
Martin Currie's corporate parent, Martin Currie Limited ("MCL"), containing
audited consolidated financial statements for MCL and its subsidiaries
(including Martin Currie), and a report by KPMG LLP on its examination of the
internal investment management controls of MCL and certain of its subsidiaries
(including Martin Currie). Additional materials had been provided in advance of
the meeting by Alger Management and counsel to the Fund, including a memorandum
from counsel discussing the Trustees' legal responsibilities in evaluating the
New Sub-Advisory Agreement, a memorandum from Mr. Karabell describing in detail
Alger Management's search for a new sub-adviser to replace the Prior Sub-Adviser
and the basis for recommending the selection of Martin Currie, and a copy of the
New Sub-Advisory Agreement.
NATURE, EXTENT AND QUALITY OF SERVICES; INVESTMENT PERFORMANCE
In considering the nature, extent and quality of the services to be provided by
Martin Currie pursuant to the New Sub-Advisory Agreement, the Trustees relied on
the foregoing materials and discussions with Mr. Karabell and other Alger
Management personnel. They noted Martin Currie's extensive background and
resources as an investment management company in general and with respect to
Greater China investments in particular, the considerable experience and
qualifications of the Martin Currie personnel who would be supplying portfolio
management services to the Fund, the apparent financial soundness of the group
of companies of which Martin Currie is a part, Martin Currie's unblemished
regulatory and legal history, and its extensive and apparently well-managed and
fundamentally sound compliance procedures and internal controls. They also
considered the account in Mr. Karabell's memorandum of the lengthy process by
which Alger Management arrived at its recommendation of Martin Currie as the
best qualified among eight prospective sub-advisers as measured against a list
of important criteria and of the congenial fit of Martin Currie's investment
approach with that of Alger Management and the Fund. As to performance history,
they noted that none specifically relating to the Fund was available because
Martin Currie was being newly considered, but noted Alger Management's opinion
that the firm's overall performance was acceptable relative both to an
appropriate benchmark of China securities and to that of the other candidates.
The Trustees concluded that Martin Currie's experience, resources and strength
in the areas of importance to the Fund are considerable and that their control
and compliance programs appear to be satisfactory.
PROFITABILITY; ECONOMIES OF SCALE; SUB-ADVISORY FEE
In evaluating the proposed sub-advisory fee to the paid to Martin Currie, the
Trustees did not consider the potential profitability of the New Sub-Advisory
Agreement to Martin Currie and its affiliates because of the considerable
uncertainty inherent in any judgment as to costs and revenues associated with a
relationship that had not yet commenced. As to the topic of economies of scale,
the Trustees concluded that the topic
-34-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
would be more appropriately addressed in the course of a review of the Fund's
Investment Management Agreement with Alger Management. As to the sub-advisory
fee itself, the Trustees noted that the fee would be paid not by the Fund but by
Alger Management out of its own resources. After discussion with Alger
Management, they concluded that, in light of the services that Martin Currie
would be providing to the Fund and of the fee to be paid by the Fund to Alger
Management, there was no reason not to conclude that, as an initial
determination, the fee was fair and reasonable. Nor did they consider, at the
outset of the relationship with Martin Currie, that such foreseeable additional
benefits as might accrue to that firm by virtue of its relationship with the
Fund would render the sub-advisory fee excessive.
At the conclusion of these discussions, each of the Independent Trustees
expressed the opinion that he had been furnished with sufficient information to
make an informed business decision with respect to approval of the New
Sub-Advisory Agreement. Based on its discussions and considerations as described
above, the Board made the following conclusions and determinations:
o The Board concluded that it was reasonable to expect that the nature,
extent and quality of the services to be provided by Martin Currie would
be adequate and appropriate.
o The Board concluded that, on the basis of Martin Currie's general
performance as a manager of investments in China securities, the new
sub-adviser's contribution to the Fund's overall performance could
reasonably be expected to be satisfactory.
o The Board concluded that the fee to be paid to Martin Currie by Alger
Management was reasonable, notwithstanding that a determination at this
point as to the future profitability of Martin Currie's relationship with
the Fund would be impracticable.
o The Board determined that attention to economies of scale was more
appropriately paid in the context of a review of the Investment Advisory
Agreement with Alger Management.
The Board considered these conclusions and determinations and, without any one
factor being dispositive, determined that approval of the Fund's New
Sub-Advisory Agreement was in the best interests of the Fund and its
shareholders.
-35-
- --------------------------------------------------------------------------------
THE CHINA-U.S. GROWTH FUND
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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 EDGAR Database 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.
-36-
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.
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AAC 103106
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SAC 103106
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 Registrant has not amended its Code of Ethics during the period
covered by the shareholder report presented in Item 1 hereto.
(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, 2006 $26,700
October 31, 2005 $25,600
b) Audit-Related Fees: NONE
c) Tax Fees for tax advice, tax compliance and tax planning:
October 31, 2006 $4,120
October 31, 2005 $3,720
d) All Other Fees:
October 31, 2006 $6,000
October 31, 2005 $5,000
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, 2006 $217,212 and 26,884 Euros
October 31, 2005 $201,831 and 56,050 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: December 20, 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: December 20, 2006
By: /s/Frederick A. Blum
Frederick A. Blum
Treasurer
Date: December 20, 2006