SEC File Nos.
811-1884
2-34371
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 48 (X)
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 27 (X)
ENDOWMENTS
(Exact name of registrant as specified in charter)
P.O. Box 7650, One Market, Steuart Tower, San Francisco, California 94120
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (415) 421-9360
Patrick F. Quan
Secretary
Endowments
P.O. Box 7650, One Market, Steuart Tower
San Francisco, California 94120
(Name and address of agent for service)
Copy to:
Robert E. Carlson, Esq.
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, California 90071
The Registrant has filed a declaration
pursuant to Rule 24f-2. On
September 25, 1998, it filed its 24f-2
Notice for fiscal 1998.
Approximate date of proposed public offering:
[X] It is proposed that this filing will
become effective on October 1, 1998
pursuant to paragraph (b) of Rule 485.
ENDOWMENTS
Cross Reference Sheet
PART A
Information Required in Prospectus
<TABLE>
<CAPTION>
Item Number Heading
<S> <C>
1 Cover Page
2 Expenses
3 Financial Highlights
4 Organization and Management of Endowments; Investment
Policies and Risks
5 Multiple Portfolio Counselor System;
Organization and Management of Endowments
5A Investment Results
6 Shareholder Services; Purchasing Shares--Share
Price; Dividends, Distributions and Taxes
7 Purchasing Shares--Share Price
8 Selling Shares
9 Not Applicable
</TABLE>
PART B
Information Required in Statement of Additional Information
<TABLE>
<CAPTION>
Item Number Heading
<S> <C>
10 Cover Page
11 Table of Contents
12 About Endowments
13 Description of Certain Securities; Fundamental
Policies and Investment Restrictions
14 Management of the Trust
15 Not Applicable
16 Management of the Trust
17 Execution of Portfolio Transactions
18 General Information
19 Purchase of Shares; Redemption of Shares
20 Dividends, Distributions and Federal Taxes
21 Not Applicable
22 Investment Results
23 Financial Statements
</TABLE>
PART C
<TABLE>
<CAPTION>
<S> <C>
24 Financial Statements and Exhibits
25 Persons Controlled by or under Common Control with
Registrant
26 Number of Holders of Securities
27 Indemnification
28 Business and Other Connections of Investment Adviser
29 Principal Underwriter
30 Location of Accounts and Records
31 Management Services
32 Undertakings
Signature Page
</TABLE>
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Endowments
Prospectus
OCTOBER 1, 1998
<PAGE>
ENDOWMENTS
One Market
Steuart Tower, Suite 1800
P.O. Box 7650
San Francisco, CA 94120
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Expenses 4 Investment Results 15
.................................. ..................................
Financial Highlights 5 Dividends, Distributions and Taxes 18
..................................
Investment Policies and ..................................
Risks 6 Organization and Management of Endowments
.................................. 19
Securities and Investment ..................................
Techniques 8 Shareholder Services 21
..................................
Multiple Portfolio
Counselor System 13
</TABLE>
Endowments (the "Trust") is an open-end management investment company with two
diversified series, Growth and Income Portfolio and Bond Portfolio
(collectively, the "funds"). In a transaction approved by shareholders and
completed on July 31, 1998, Growth and Income Portfolio acquired all of the
assets and liabilities of Endowments, Inc. Bond Portfolio entered into a
similar transaction with Bond Portfolio for Endowments, Inc. on the same date.
As a result, certain financial and other information appearing in this
prospectus reflects the operations of these predecessor entities through the
date of the reorganization.
GROWTH AND INCOME PORTFOLIO The primary investment objective of Growth and
Income Portfolio is long-term growth of principal, with income and preservation
of capital as secondary objectives. The fund strives to accomplish these
objectives by normally investing primarily in common stocks or securities
convertible into common stock. Major investment emphasis will be given to
stocks of companies which appear to have favorable prospects for long-term
growth of capital and income.
BOND PORTFOLIO The investment objective of Bond Portfolio is to seek as high a
level of current income as is consistent with the preservation of capital. Any
capital appreciation is incidental to the fund's objective of current income.
The fund strives to accomplish this objective by investing primarily in
quality-oriented fixed-income securities, as described further in this
prospectus.
<PAGE>
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ENDOWMENTS / PROSPECTUS
Shareholders of the Trust are limited to: (i) any entity exempt from taxation
under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended
("501(c)(3) organizations"); (ii) any trust, the present or future beneficiary
of which is a 501(c)(3) organization, and (iii) any other entity formed for the
primary purpose of benefiting a 501(c)(3) organization. The Trust may change
this policy at any time without the approval of the Trust's shareholders. An
investment in the funds involves a certain amount of risk and may not be
suitable for all investors. See "Investment Policies and Risks."
This prospectus presents information you should know before investing in the
fund(s). You should keep it on file for future reference.
YOU MAY LOSE MONEY BY INVESTING IN THE FUND(S). THE LIKELIHOOD OF LOSS IS
GREATER IF YOU INVEST FOR A SHORTER PERIOD OF TIME. YOUR INVESTMENT IN THE
FUND(S) IS NOT A DEPOSIT OR OBLIGATION OF, OR INSURED OR GUARANTEED BY, ANY
ENTITY OR PERSON INCLUDING THE U.S. GOVERNMENT AND THE FEDERAL DEPOSIT
INSURANCE CORPORATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
3
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ENDOWMENTS / PROSPECTUS
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EXPENSES
The effect of the expenses described below is reflected in the funds' share
prices and investment returns.
Shareholders pay no shareholder transaction expenses when buying or selling
shares of either fund. Operating expenses are paid by the funds.
SHAREHOLDER TRANSACTION EXPENSES
The funds have no sales charges on purchases or reinvested dividends, deferred
sales charges, redemption fees or exchange fees.
FUND OPERATING EXPENSES (as of July 31, 1998)
(as a percentage of average net assets after fee waiver)
<TABLE>
<CAPTION>
GROWTH
AND INCOME BOND
PORTFOLIO PORTFOLIO
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<S> <C> <C>
Management fees 0.50% 0.46%
................................................................................
12b-1 expenses none none
................................................................................
Other expenses 0.25% 0.29%
................................................................................
Total fund operating expenses 0.75%1 0.75%/1/
</TABLE>
/1/Priorto July 31, 1998, Capital Research and Management Company (the
"Investment Adviser") had been voluntarily waiving fees to the extent
necessary to ensure that the expenses of either Endowments, Inc. or Bond
Portfolio for Endowments, Inc. did not exceed 0.75% of average net assets per
annum. The Investment Advisory and Service Agreements between the Investment
Adviser and Endowments (on behalf of Growth and Income Portfolio and Bond
Portfolio), dated July 31, 1998, specify that Capital Research and Management
Company will reduce the fees payable to it by the amount ordinary operating
expenses of either fund exceeds 0.75% of its average net assets per annum.
Without such a waiver or reduction, fees for Growth and Income Portfolio--or
Endowments, Inc. prior to July 31, 1998--(as a percentage of average net
assets) would have been 0.89%; fees for Bond Portfolio--or Bond Portfolio for
Endowments, Inc. prior to July 31, 1998--(as a percentage of average net
assets) would have been 1.08%.
EXAMPLES
Assuming a hypothetical annual return of 5% and shareholder transaction and
operating expenses as described above, for every $1,000 you invested, you would
pay the following total expenses over the following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Growth and Income Portfolio $8 $24 $42 $93
................................................................................
Bond Portfolio $8 $24 $42 $93
</TABLE>
THESE EXAMPLES ARE NOT MEANT TO REPRESENT YOUR ACTUAL INVESTMENT RESULTS OR
EXPENSES, WHICH MAY VARY.
4
<PAGE>
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ENDOWMENTS / PROSPECTUS
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FINANCIAL HIGHLIGHTS
The following information for the eight years ended July 31, 1998 has been
audited by Deloitte & Touche llp, independent auditors, and for the two years
ended July 31, 1990 by KPMG Peat Marwick, independent auditors. These tables
should be read together with the financial statements which are included in the
statement of additional information and annual report of each respective
portfolio.
GROWTH AND INCOME PORTFOLIO
SELECTED PER-SHARE DATA*
<TABLE>
<CAPTION>
YEARS ENDED JULY 31
...........
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998** 1997 1996 1995 1994 1993 1992 1991 1990 1989
---------------------------------------------------------------------------------------------
Net asset value,
beginning of year $ 22.66 $18.61 $18.06 $17.18 $18.43 $18.26 $17.89 $16.91 $18.22 $16.71
- ----------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .51 .56 .58 .63 .65 .66 .78 .78 .89 .98
................................................................................
Net realized and
unrealized gain (loss)
on investments 1.16 6.04 1.73 2.21 (.16) 1.05 1.74 1.60 (.16) 2.52
................................................................................
Total income from
investment operations 1.67 6.60 2.31 2.84 .49 1.71 2.52 2.38 .73 3.50
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LESS DISTRIBUTIONS:
Dividends from net
investment income (.57) (.55) (.61) (.61) (.66) (.69) (.73) (.87) (1.01) (.89)
................................................................................
Distributions from net
realized gains (11.67) (2.00) (1.15) (1.35) (1.08) (.85) (1.42) (.53) (1.03) (1.10)
................................................................................
Total distributions (12.24) (2.55) (1.76) (1.96) (1.74) (1.54) (2.15) (1.40) (2.04) (1.99)
................................................................................
Net asset value,
end of year $ 12.09 $22.66 $18.61 $18.06 $17.18 $18.43 $18.26 $17.89 $16.91 $18.22
- ----------------------------------------------------------------------------------------------------------
Total return 9.05% 38.40% 13.22% 18.57% 2.77% 10.05% 15.74% 15.03% 4.13% 23.22%
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RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in millions) $43 $48 $59 $57 $53 $72 $58 $46 $39 $43
................................................................................
Ratio of expenses to
average net assets .75%1 .74% .82% .73% .73% .64% .70% .69% .68% .69%
................................................................................
Ratio of net income
to average net assets 2.69% 2.73% 3.12% 3.70% 3.78% 3.72% 4.37% 4.63% 5.08% 5.76%
................................................................................
Portfolio turnover rate 48.59% 50.69% 38.73% 24.04% 25.58% 29.70% 20.35% 34.43% 20.75% 19.70%
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</TABLE>
* All per share data reflects the 100-for-1 stock split effected on
February 16, 1988.
** On July 31, 1998, Growth and Income Portfolio acquired all of the assets and
liabilities of Endowments, Inc.
/1/HadCapital Research and Management Company not waived management services
fees, the fund's expense ratio would have been 0.89% for the fiscal year
ended 1998.
5
<PAGE>
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ENDOWMENTS / PROSPECTUS
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BOND PORTFOLIO
SELECTED PER-SHARE DATA*
<TABLE>
<CAPTION>
YEARS ENDED JULY 31
...........
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998** 1997 1996 1995 1994 1993 1992 1991 1990 1989
--------------------------------------------------------------------------------------------------
Net asset value,
beginning of year $17.17 $16.63 $16.82 $16.86 $19.66 $19.44 $17.76 $17.50 $17.83 $17.10
- ------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 1.19 1.21 1.22 1.26 1.32 1.49 1.47 1.49 1.61 1.60
................................................................................
Net realized and
unrealized gain (loss)
on investments (.09) .52 (.19) .01 (1.51) .64 1.70 .28 (.46) .61
................................................................................
Total income from
investment operations 1.10 1.73 1.03 1.27 (.19) 2.13 3.17 1.77 1.15 2.21
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (1.34) (1.19) (1.22) (1.24) (1.35) (1.48) (1.49) (1.51) (1.48) (1.48)
................................................................................
Distributions from net
realized gains -- -- -- (.07) (1.26) (.43) -- -- -- --
................................................................................
Total distributions (1.34) (1.19) (1.22) (1.31) (2.61) (1.91) (1.49) (1.51) (1.48) (1.48)
................................................................................
Net asset value,
end of year $16.93 $17.17 $16.63 $16.82 $16.86 $19.66 $19.44 $17.76 $17.50 $17.83
- ------------------------------------------------------------------------------------------------------------------
Total return 6.70% 10.83% 6.25% 7.97% (1.44)% 11.74% 18.69% 10.78% 6.86% 13.68%
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions) $29 $33 $41 $44 $46 $67 $65 $46 $39 $40
................................................................................
Ratio of expenses to
average net assets .75%/1/ .75%/1/ .75%/1/ .76% .77% .65% .68% .68% .69% .70%
................................................................................
Ratio of net income
to average net assets 6.87% 7.04% 7.17% 7.52% 6.99% 7.69% 8.04% 8.76% 9.25% 9.28%
................................................................................
Portfolio turnover
rate 50.40% 22.18% 54.43% 69.22% 82.12% 35.97% 63.30% 54.86% 42.90% 64.21%
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</TABLE>
* All per share data reflects the 50-for-1 stock split effected on
February 16, 1988.
** On July 31, 1998, Bond Portfolio acquired all of the assets and liabilities
of Bond Portfolio for Endowments, Inc.
/1/HadCapital Research and Management Company not waived management services
fees, the fund's ratios would have been 1.08%, 0.85% and 0.80% for the
fiscal years ended 1998, 1997 and 1996, respectively.
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INVESTMENT POLICIES AND RISKS
Growth and Income Portfolio's primary investment objective is long-term growth
of principal, with income and preservation of capital as secondary objectives.
The fund will normally invest primarily in common stocks or securities
convertible into common stock, including those issued by real estate investment
trusts. The fund will emphasize stocks of companies which have favorable
prospects for long-term growth of both capital and income. The fund may also
purchase preferred stocks and straight corporate debt securities that are rated
in the top three quality categories by Moody's Investors Service, Inc. or
Standard & Poor's, or unrated but determined to be of equivalent quality by
Capital
6
<PAGE>
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ENDOWMENTS / PROSPECTUS
Research and Management Company, the funds' investment adviser. In addition,
cash and cash equivalents and U.S. Government securities may also be held. The
fund may from time to time invest up to 10% of its assets in common stocks and
other securities of issuers domiciled outside the U.S. The fund will normally
diversify its investments among different industries although the degree of
diversification will vary from time to time in accordance with the judgment of
management.
Bond Portfolio's investment objective is to seek as high a level of current
income as is consistent with the preservation of capital.
The fund invests primarily in fixed-income securities, including bonds and
debentures. These securities will be investment grade, which are rated in the
top four quality categories (those rated Baa or above by Moody's or BBB or
above by S&P) or unrated but determined to be of equivalent quality by Capital
Research and Management Company, the fund's investment adviser. Securities
rated Baa or BBB are considered investment grade but may have speculative
characteristics.
Normally, at least 65% of the fund's assets will be invested in bonds. (For
this purpose, bonds are considered to be any debt securities having initial
maturities in excess of one year.) The fund may also invest up to 10% of its
assets in obligations of corporations or government entities outside the U.S.
and Canada. All Canadian and other non-U.S. securities purchased by the fund
will be liquid, U.S. dollar-denominated and meet the quality standards set
forth above. In addition, the fund may invest in notes and bonds issued by
governments, their agencies or instrumentalities, or corporations in which the
principal value and/or interest payments vary with the rate of inflation.
The fixed-income securities in which the fund invests may have stock conversion
or purchase rights; however, such securities will generally not exceed 20% of
the fund's assets. The fund will not acquire common stocks except through the
exercise of conversion or stock purchase rights and will retain such common
stocks only when it is consistent with the fund's objective of current income.
In addition, the fund may hold cash or cash equivalents.
---
As the majority of the funds' shareholders are non-profit institutions, the
funds' investments will be consonant with the standards generally considered
prudent by fiduciaries and trustees of such institutions.
7
<PAGE>
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ENDOWMENTS / PROSPECTUS
MORE INFORMATION ON THE FUNDS' INVESTMENT POLICIES AND INVESTMENT RESTRICTIONS
ARE CONTAINED IN THE STATEMENT OF ADDITIONAL INFORMATION.
Investment limitations are considered at the time securities are purchased.
These limits are based on the funds' net assets unless otherwise indicated. The
funds' fundamental investment restrictions (described in the statement of
additional information) and their investment objectives may not be changed
without shareholder approval.
THE FUNDS MAY NOT ACHIEVE THEIR INVESTMENT OBJECTIVES DUE TO MARKET CONDITIONS
AND OTHER FACTORS. IN ADDITION, THE FUNDS MAY EXPERIENCE DIFFICULTY LIQUIDATING
CERTAIN PORTFOLIO SECURITIES DURING SIGNIFICANT MARKET DECLINES OR PERIODS OF
HEAVY REDEMPTIONS.
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SECURITIES AND INVESTMENT TECHNIQUES
PERTAINS TO GROWTH AND INCOME PORTFOLIO AND BOND PORTFOLIO:
DEBT SECURITIES
Bonds and other debt securities are used by issuers to borrow money. Issuers
pay investors interest and generally must repay the amount borrowed at
maturity. Some debt securities, such as zero coupon bonds, do not pay current
interest, but are purchased at a discount from their face values. The prices of
debt securities fluctuate depending on such factors as interest rates, credit
quality and maturity. In general their prices decline when interest rates rise
and vice versa.
Capital Research and Management Company attempts to reduce the risks described
above through diversification of the portfolio and by credit analysis of each
issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
8
<PAGE>
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ENDOWMENTS / PROSPECTUS
OTHER SECURITIES
The funds may also invest in securities that have a combination of equity and
debt characteristics such as non-convertible preferred stocks and convertible
securities. These securities may at times resemble equity more than debt and
vice versa. Non-convertible preferred stocks are similar to debt in that they
have a stated dividend rate akin to the coupon of a bond or note even though
they are often classified as equity securities. The prices and yields of non-
convertible preferred stocks generally move with changes in interest rates and
the issuer's credit quality, similar to the factors affecting debt securities.
Bonds, preferred stocks, and other securities may sometimes be converted into
shares of common stock or other securities at a stated exchange ratio. These
securities prior to conversion pay a fixed rate of interest or a dividend.
Because convertible securities have both debt and equity characteristics their
value varies in response to many factors, including the value of the underlying
equity, general market and economic conditions, convertible market valuations,
as well as changes in interest rates, credit spreads, and the credit quality of
the issuer.
U.S. GOVERNMENT SECURITIES
The funds may invest in securities guaranteed by the U.S. Government including
(1) direct obligations of the U.S. Treasury (such as Treasury bills, notes and
bonds) and (2) federal agency obligations guaranteed as to principal and
interest by the U.S. Treasury.
Certain securities issued by U.S. Government instrumentalities and certain
federal agencies are neither direct obligations of, nor guaranteed by, the
Treasury. However, they generally involve federal sponsorship in one way or
another: some are backed by specific types of collateral; some are supported by
the issuer's right to borrow from the Treasury; some are supported by the
discretionary authority of the Treasury to purchase certain obligations of the
issuer; and others are supported only by the credit of the issuing government
agency or instrumentality.
RESTRICTED AND ILLIQUID SECURITIES
The funds may purchase securities subject to restrictions on resale. All such
securities whose principal trading market is in the U.S. will be considered
illiquid unless they have been specifically determined to be liquid under
procedures which have been adopted by the funds' board of trustees, taking into
account factors such as the frequency and volume of trading, the commitment of
dealers to make markets and the availability of qualified investors, all of
which can change from time to time. The funds may incur certain additional
costs in disposing of illiquid securities.
9
<PAGE>
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ENDOWMENTS / PROSPECTUS
INVESTING IN VARIOUS COUNTRIES
Investing outside the U.S. involves special risks caused by, among other
things, fluctuating currency values; different accounting, auditing, and
financial reporting regulations and practices in some countries; changing local
and regional economic, political, and social conditions; expropriation or
confiscatory taxation; greater market volatility; differing securities market
structures; and various administrative difficulties such as delays in clearing
and settling portfolio transactions or in receiving payment of dividends.
However, in the opinion of Capital Research and Management Company, investing
outside the U.S. also can reduce certain portfolio risks due to greater
diversification opportunities.
Additional costs could be incurred in connection with the funds' investment
activities outside the U.S. The Growth and Income Portfolio can purchase and
sell currencies to facilitate transactions in securities denominated in
currencies other than the U.S. dollar. Brokerage commissions may be higher
outside the U.S., and the Growth and Income Portfolio may bear certain expenses
in connection with its currency transactions. Furthermore, increased custodian
costs for either fund may be associated with the maintenance of assets in
certain jurisdictions.
PERTAINS TO GROWTH AND INCOME PORTFOLIO:
EQUITY SECURITIES
The fund will ordinarily invest in equity securities, which represent an
ownership position in a company. The prices of equity securities fluctuate
based on changes in the financial condition of their issuers and on market and
economic conditions. The fund's results will be related to the overall market
for these securities.
10
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ENDOWMENTS / PROSPECTUS
PERTAINS TO BOND PORTFOLIO:
PASS-THROUGH SECURITIES
The fund may invest in various debt obligations backed by a pool of mortgages
or other assets including loans on single family residences, home equity loans,
mortgages on commercial buildings, credit card receivables, and leases on
airplanes or other equipment. Principal and interest payments made on the
underlying asset pools backing these obligations are typically passed through
to investors. Mortgage-backed securities permit borrowers to prepay their
underlying mortgages. Prepayments can alter the effective maturity of these
instruments. Pass-through securities may have either fixed or adjustable
coupons. These securities include those discussed below.
"Mortgage-backed securities" are issued both by U.S. Government agencies,
including the Government National Mortgage Association (GNMA), the Federal
National Mortgage Association (FNMA), and the Federal Home Loan Mortgage
Corporation (FHLMC), and by private entities. The payment of interest and
principal on securities issued by U.S. Government agencies is guaranteed by the
full faith and credit of the U.S. Government (in the case of GNMA securities)
or the issuer (in the case of FNMA and FHLMC securities). However, the
guarantees do not apply to the market prices and yields of these securities,
which vary with changes in interest rates.
Mortgage-backed securities issued by private entities are structured similarly
to mortgage-backed securities issued by GNMA, FNMA, and FHLMC. These securities
and the underlying mortgages are not guaranteed by government agencies. In
addition, these securities generally are structured with one or more types of
credit enhancement. Mortgage-backed securities generally permit borrowers to
prepay their underlying mortgages. Prepayments by borrowers on underlying
obligations can alter the effective maturity of these instruments.
"Collateralized mortgage obligations" (CMOs) are also backed by a pool of
mortgages, mortgage-backed securities or mortgage loans, which are divided into
two or more separate bond issues. CMOs issued by U.S. Government agencies are
backed by agency mortgages, while privately issued CMOs may be backed by either
government agency mortgages or private mortgages. Payments of principal and
interest are passed through to each bond at varying schedules resulting in
bonds with different coupons, effective maturities, and sensitivities to
interest rates. In fact, some CMOs may be structured in a way that when
interest rates change the impact of changing prepayment rates on these
securities' effective maturities is magnified.
11
<PAGE>
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ENDOWMENTS / PROSPECTUS
"Commercial mortgage-backed securities" are backed by mortgages of commercial
property, such as hotels, office buildings, retail stores, hospitals, and other
commercial buildings. These securities may have a lower prepayment risk than
other mortgage-related securities because commercial mortgage loans generally
prohibit or impose penalties on prepayments of principal. In addition,
commercial mortgage-related securities often are structured with some form of
credit enhancement to protect against potential losses on the underlying
mortgage loans. Many of the risks of investing in commercial mortgage-backed
securities reflect the risks of investing in the real estate securing the
underlying mortgage loans, including the effects of local and other economic
conditions on real estate markets, the ability of tenants to make loan
payments, and the ability of a property to attract and retain tenants.
"Asset-backed securities" are backed by other assets such as credit card,
automobile or consumer loan receivables, retail installment loans, or
participations in pools of leases. Credit support for these securities may be
based on the underlying assets and/or provided through credit enhancements by a
third party. The values of these securities are sensitive to changes in the
credit quality of the underlying collateral, the credit strength of the credit
enhancement, changes in interest rates, and at times the financial condition of
the issuer. Some asset-backed securities also may receive prepayments which can
change the bonds' effective maturities.
FORWARD COMMITMENTS
The fund may enter into commitments to purchase or sell securities at a future
date. When the fund agrees to purchase such securities, it assumes the risk of
any decline in value of the securities beginning on the date of the agreement.
When the fund agrees to sell such securities, it does not participate in
further gains or losses with respect to the securities. If the other party to
such a transaction fails to deliver or pay for the securities, the fund could
miss a favorable price or yield opportunity, or could experience a loss. In
addition, the fund may also enter into reverse repurchase agreements, which are
the sale of a security by the fund and its agreement to repurchase the security
at a specified time and price at a later date.
The fund may also enter into "roll" transactions which are the sale of
mortgage-backed securities or other securities together with a commitment to
purchase similar, but not identical, securities at a later date. The fund
assumes the rights and risks of ownership, including the risk of price and
yield fluctuations as of the time of the agreement.
12
<PAGE>
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ENDOWMENTS / PROSPECTUS
REPURCHASE AGREEMENTS
The fund may enter into repurchase agreements, under which it buys a security
and obtains a simultaneous commitment from the seller to repurchase the
security at a specified time and price. The seller must maintain with the
fund's custodian collateral equal to at least 100% of the repurchase price
including accrued interest as monitored daily by Capital Research and
Management Company. The fund only enters into repurchase agreements involving
securities in which it could otherwise invest and with selected banks and
securities dealers whose financial condition is monitored by Capital Research
and Management Company. If the seller under a repurchase agreement defaults,
the fund may incur a loss if the value of the collateral securing the
repurchase agreement has declined and may incur disposition costs in connection
with liquidating the collateral. If bankruptcy proceedings are commenced with
respect to the seller, liquidation of the collateral by the fund may be delayed
or limited.
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MULTIPLE PORTFOLIO COUNSELOR SYSTEM
The basic investment philosophy of Capital Research and Management Company is
to seek fundamental values at reasonable prices. Capital Research and
Management Company utilizes a system of multiple portfolio counselors in
managing mutual fund assets. Under this system a fund's portfolio is divided
into segments which are managed by individual counselors. Counselors decide how
their respective segments will be invested (within the limits provided by a
fund's objective(s) and policies and by Capital Research and Management
Company's investment committee). In addition, Capital Research and Management
Company's research professionals may make investment decisions with respect to
a portion of a fund's portfolio. The primary individual portfolio counselors
for Growth and Income Portfolio and Bond Portfolio are listed on next page.
13
<PAGE>
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
YEARS OF EXPERIENCE
AS
INVESTMENT
PROFESSIONAL
(APPROXIMATE)
.................................
YEARS OF EXPERIENCE WITH CAPITAL
PORTFOLIO AS PORTFOLIO COUNSELOR RESEARCH AND
COUNSELORS (AND RESEARCH PROFESSIONAL, MANAGEMENT
FOR GROWTH IF APPLICABLE) FOR COMPANY OR
AND INCOME PRIMARY GROWTH AND INCOME PORTFOLIO ITS TOTAL
PORTFOLIO TITLE(S) (APPROXIMATE) AFFILIATES YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ROBERT G. Senior Vice 8 years (in 23 26 years
O'DONNELL President. addition to 18 years
Senior Vice years as a
President and research
Director, professional
Capital prior to
Research and becoming a
Management portfolio
Company counselor for
the fund).
- --------------------------------------------------------------------------------
CLAUDIA P. Vice President 3 years (in 21 23 years
HUNTINGTON (Growth and addition to 20 years
Income years as a
Portfolio). research
Senior Vice professional
President, prior to
Capital becoming a
Research and portfolio
Management counselor for
Company the fund).
</TABLE>
BOND PORTFOLIO
<TABLE>
<CAPTION>
YEARS OF EXPERIENCE AS
INVESTMENT
PROFESSIONAL
(APPROXIMATE)
.................................
YEARS OF
EXPERIENCE WITH CAPITAL
AS PORTFOLIO RESEARCH AND
PORTFOLIO COUNSELOR MANAGEMENT
COUNSELORS FOR BOND COMPANY OR
FOR PRIMARY PORTFOLIO ITS TOTAL
BOND PORTFOLIO TITLE(S) (APPROXIMATE) AFFILIATES YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ABNER D. Senior Vice 23 years 31 46 years
GOLDSTINE President. years
Senior Vice
President and
Director,
Capital
Research and
Management
Company
- -------------------------------------------------------------------------------
JOHN H. Vice President 10 years 15 16 years
SMET (Bond years
Portfolio).
Vice
President,
Capital
Research and
Management
Company
</TABLE>
Capital Research and Management Company has managed the funds' assets since
July 26, 1975.
14
<PAGE>
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS
- --------------------------------------------------------------------------------
INVESTMENT RESULTS
The funds may compare investment results to various indices or other mutual
funds. Fund results may be calculated on a total return, yield and/or
distribution rate basis.
- - TOTAL RETURN is the change in value of an investment in a fund over a given
period, assuming reinvestment of any dividends and capital gain
distributions.
- - YIELD is computed by dividing the net investment income per share earned by a
fund over a given period of time by the maximum offering price per share on
the last day of the period, according to a formula mandated by the Securities
and Exchange Commission. A yield calculated using this formula may be
different than the income actually paid to shareholders.
- - DISTRIBUTION RATE reflects dividends that were paid by a fund. The
distribution rate is calculated by dividing the dividends paid over the last
12 months by the sum of the month-end price and the capital gain
distributions paid over the last 12 months.
15
<PAGE>
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS
GROWTH AND INCOME PORTFOLIO
INVESTMENT RESULTS
(FOR PERIODS ENDED JUNE 30, 1998)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL THE FUND
TOTAL AT NET S&P
RETURNS: ASSET VALUE/1/ 500/2/
- --------------------------------------------------------------------------------
<S> <C> <C>
One year 19.75% 30.09%
................................................................................
Five years 16.80% 23.03%
................................................................................
Ten years 14.90% 18.52%
................................................................................
Lifetime/3/ 15.23% 16.03%
</TABLE>
- --------------------------------------------------------------------------------
Yield/1/: 2.64%
Distribution Rate: 1.97%
BOND PORTFOLIO
INVESTMENT RESULTS
(FOR PERIODS ENDED JUNE 30, 1998)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL THE FUND LEHMAN
TOTAL AT NET AGGREGATE
RETURNS: ASSET VALUE/1/ BOND INDEX/4/
- --------------------------------------------------------------------------------
<S> <C> <C>
One year 8.99% 10.54%
................................................................................
Five years 6.13% 6.88%
................................................................................
Ten years 9.05% 9.07%
................................................................................
Lifetime/3/ 9.73% 9.77%/5/
</TABLE>
- --------------------------------------------------------------------------------
Yield/1/: 5.63%
Distribution Rate: 7.17%
/1/These fund results were calculated according to a standard formula that is
required for all stock and bond funds.
/2/The Standard & Poor's 500 Composite Index represents stocks. This index is
unmanaged and does not reflect sales charges, commissions or expenses.
/3/For the period beginning July 26, 1975 (when Capital Research and Management
Company became the investment adviser of the funds' assets).
/4/Lehman Brothers Aggregate Bond Index represents investment grade debt. This
index is unmanaged and does not reflect sales charges, commissions or
expenses.
/5/Lehman Brothers Aggregate Bond Index did not exist until December 31, 1975.
For the period between July 31, 1975 and December 31, 1975, Lehman Brothers
Government/Corporate Bond Index results were used. The Lehman Brothers
indices are based on July 31, 1975 index value.
16
<PAGE>
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS
Here are the funds' annual total returns. This inforamtion is being suppled
on a calendar year basis for comparative purposes.
GROWTH AND INCOME PORTFOLIO
1988 13.37
1989 25.4
1990 0.42
1991 22.57
1992 9.56
1993 9.56
1994 1.54
1995 28.31
1996 17.43
1997 28.81
BOND PORTFOLIO
1988 9.18
1989 12.56
1990 6.04
1991 20.32
1992 9.4
1993 12.23
1994 -4.31
1995 15.99
1996 3.98
1997 8.72
Past results are not an indication of future results and may reflect a fee
waiver.
17
<PAGE>
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The funds usually pay dividends, which may fluctuate, in March, June, September
and December. Capital gains, if any, are usually distributed in December. When
a dividend or capital gain is distributed, the net asset value per share is
reduced by the amount of the payment.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash, and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, or the shareholder does
not respond to mailings from American Funds Service Company with regard to
uncashed distribution checks, the shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares.
FEDERAL TAXES
In any fiscal year in which the Trust qualifies as a regulated investment
company and distributes to shareholders all of its net investment income and
net capital gains, the Trust itself (and hence the funds) is relieved of
federal income tax.
Generally, all dividends and capital gains are taxable whether they are
reinvested or received in cash -- unless you are exempt from taxation or
entitled to tax deferral. Early each year, you will be notified as to the
amount and federal tax status of all income distributions paid during the prior
year. Such distributions may also be subject to state or local taxes.
This is a brief summary of some of the tax laws that affect your investment in
the funds. Please see the statement of additional information and your tax
adviser for further information.
18
<PAGE>
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS
- --------------------------------------------------------------------------------
ORGANIZATION AND MANAGEMENT OF ENDOWMENTS
TRUST ORGANIZATION AND VOTING RIGHTS
Endowments, Inc., the predecessor to the Growth and Income Portfolio, was
organized as a Delaware corporation in 1969; Bond Portfolio for Endowments,
Inc., the predecessor to the Bond Portfolio, was organized as a Delaware
corporation in 1970. Each fund is now a separate series of a Delaware business
trust which is a registered, open-end, diversified management investment
company. The Trust was organized on May 14, 1998. All fund operations are
supervised by the Trust's board of trustees who meet periodically and perform
duties required by applicable state and federal laws. The funds do not hold
annual meetings of shareholders. However, significant matters that require
shareholder approval, such as certain elections of board members or a change in
a fundamental investment policy, will be presented to shareholders at a meeting
called for such purpose. Shareholders have one vote per share owned. At the
request of the holders of at least 10% of the shares of either fund, that fund
will hold a meeting at which any member of the board could be removed by a
majority vote.
As of August 31, 1998, the following shareholders owned 5% or more of the
funds' outstanding shares:
Growth and Income Portfolio -- California Institute of the Arts (24700 McBean
Parkway, Valencia, CA 91355) (540,441 shares, 14.33%); Citizens' Scholarship
Foundation of America (1505 Riverview Road, P.O. Box 297, St. Peter, MN 56082)
(271,725 shares, 7.20%); DeKalb County Community Foundation (2225 Gateway
Drive, Sycamore, IL 60178) (204,761 shares, 5.43%); Foundation for Reproductive
Research and Education (333 E. Superior Street, Prentice 490, Chicago, IL
60611) (215,377 shares, 5.71%); and Loyola Marymount University (7900 Loyola
Boulevard, Los Angeles, CA 90045) (213,305 shares, 5.66%).
Bond Portfolio -- California Institute for the Arts (24700 McBean Parkway,
Valencia, CA 91355) (514,168 shares, 30.10%); Citizens' Scholarship of America
(1505 Riverview Road, P.O. Box 297, St. Peter, MN 56082) (139,962 shares,
8.19%); and Hudson Institute, 5395 Emerson Way, (P.O. Box 26919, Indianapolis,
IN 46226) (151,064 shares, 8.84%). As California Institute of the Arts owns in
excess of 25% of the voting shares of the fund, it is, pursuant to the
Investment Company Act of 1940, presumed to be a controlling person of the
fund.
Shareholder inquiries may be made in writing to Endowments, One Market, Steuart
Tower, Suite 1800, P.O. Box 7650, San Francisco, CA 94120 or by calling
415/393-7105.
19
<PAGE>
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS
THE INVESTMENT ADVISER
Capital Research and Management Company, a large and experienced investment
management organization founded in 1931, has managed the funds' assets since
July 25, 1975 and is the investment adviser to other funds, including those in
The American Funds Group. Capital Research and Management Company, a wholly
owned subsidiary of The Capital Group Companies, Inc., is headquartered at 333
South Hope Street, Los Angeles, CA 90071. Capital Research and Management
Company manages the investment portfolio and business affairs of the funds. The
management fee paid by the funds to Capital Research and Management Company may
not exceed 0.50% of each fund's average net assets annually and declines at
certain asset levels. The total management fees paid by each fund, as a
percentage of average net assets, for the previous fiscal year are discussed
earlier under "Expenses."
Capital Research and Management Company and its affiliated companies have
adopted a personal investing policy that is consistent with the recommendations
contained in the May 9, 1994 report issued by the Investment Company
Institute's Advisory Group on Personal Investing. This policy has also been
incorporated into the funds' code of ethics.
PORTFOLIO TRANSACTIONS
Orders for the funds' portfolio securities transactions are placed by Capital
Research and Management Company, which strives to obtain the best available
prices, taking into account the costs and quality of executions. Fixed-income
securities are generally traded on a "net" basis with a dealer acting as
principal for its own account without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are usually purchased at a fixed price which includes an
amount of compensation to the dealer, generally referred to as a concession or
discount. On occasion, securities may be purchased directly from an issuer, in
which case no commissions or discounts are paid. In the over-the-counter
market, purchases and sales are transacted directly with principal market-
makers except in those circumstances where it appears better prices and
executions are available elsewhere.
Subject to the above policy, when two or more brokers (either directly or
through their correspondent clearing agents) are in a position to offer
comparable prices and executions, preference may be given to brokers who have
provided investment research, statistical, and other related services for the
benefit of the funds and/or other funds served by Capital Research and
Management Company.
TRANSFER AGENT
American Funds Service Company serves as the transfer agent for the funds and
performs shareholder service functions. An agent of American Funds Service
Company who performs transfer agent services for the funds is located at
One Market, Steuart Tower, Suite 1800, San Francisco, CA 94105.
20
<PAGE>
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS
SHAREHOLDER SERVICES
The funds offer you a valuable array of services you can use to alter your
investment program as your needs and circumstances change. These services,
which are summarized below, are available only in states where they may be
legally offered and may be terminated or modified at any time upon 60 days'
written notice.
- --------------------------------------------------------------------------------
PURCHASING SHARES
Shares of the funds may be purchased directly from the funds only by (i) any
entity exempt from taxation under Section 501(c)(3) of the Internal Revenue
Code of 1986, as amended ("501(c)(3) organizations"); (ii) any trust, the
present or future beneficiary of which is a 501(c)(3) organization and (iii)
any other entity formed for the primary purpose of benefiting a 501(c)(3)
organization. The minimum initial purchase is $50,000 for either fund; there is
no minimum on subsequent investments. The minimum initial investment may be
reduced by the board of trustees for investments which meet certain standards.
Any shareholder which no longer fulfills the characteristics described above
must transfer its shares to an eligible entity or, at the shareholder's option,
sell its shares at net asset value.
The purchase of shares may be paid in cash or in acceptable securities valued
in accordance with the valuation procedures described in the statement of
additional information under "Purchase of Shares -- Price of Shares."
Acceptable securities are those securities deemed acceptable by Capital
Research and Management Company; that is, those securities which management
deems to be consistent with the investment objectives and policies of the
funds.
Various services are available as described below:
- - Automatic Reinvestment
Dividends and capital gain distributions are reinvested in additional shares
at no sales charge unless you indicate otherwise. You also may elect to have
dividends and/or capital gain distributions paid in cash.
- - Right of Accumulation
You may take into account the current value of your existing holdings in the
Growth and Income Portfolio and the Bond Portfolio, as well as your holdings
in The American Funds Group, to determine your sales charge on investments
in accounts eligible to be aggregated, or when making a gift to an
individual or charity.
21
<PAGE>
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS
- - Exchange Feature
As a shareholder of Growth and Income Portfolio or Bond Portfolio, you may
exchange all or part of your shares at net asset value for shares of the
other, and for shares of The Cash Management Trust of America or The U.S.
Treasury Money Fund of America, whose shares may be similarly exchanged for
shares of the Growth and Income Portfolio and/or the Bond Portfolio. The
Cash Management Trust of America and The U.S. Treasury Money Fund of America
are money market funds whose shares are sold at net asset value. This
feature is available only if the fund for which you are exchanging is
qualified in the state where you reside.
This exchange may or may not have potential tax consequences for the
shareholder. Shareholders should consult their tax or financial advisers
before exchanging their shares under this option.
- - Automatic Withdrawals
Shareholders may authorize automatic withdrawals from their accounts. All
shares owned or purchased by a shareholder will be credited to the
shareholder's withdrawal account, and a sufficient number of shares will be
sold from the account to meet the requested withdrawal payments. All income
dividends and other distributions, if any, must be reinvested in fund shares
at net asset value and credited to the withdrawal account. Liquidation of
shares in excess of investment income will reduce and may deplete a
shareholder's invested capital. Withdrawal payments, therefore, should not
be considered as a yield or income on the investment.
- - Account Statements
A shareholder account is opened in accordance with your registration
instructions. Transactions in the account, such as additional investments
and dividend reinvestments, will be reflected on regular confirmation
statements from American Funds Service Company.
SHARE PRICE
Each fund's share price, also called net asset value, is determined as of 4:00
p.m. New York time which is the normal close of trading on the New York Stock
Exchange, every day the Exchange is open. Each fund calculates its net asset
value per share, generally using market prices, by dividing the total value of
its assets after subtracting liabilities by the number of its shares
outstanding. Shares are purchased at the net asset value next determined after
your investment is received and accepted.
22
<PAGE>
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS
- --------------------------------------------------------------------------------
SELLING SHARES
Shares are credited to your account and shares of the funds are redeemable
through the funds at net asset value. Shareholders may sell (redeem) their
shares, by tendering a request in proper form, at the offices of the Trust,
P.O. Box 7650, One Market, Steuart Tower (Suite 1800), San Francisco,
California 94120. Proper tender of shares requires a written request for
redemption. Requests to sell must be signed and the authorized signature(s) of
the shareholder guaranteed by an "eligible guarantor" which includes a bank or
savings and loan association that is federally insured or a member firm of the
National Association of Securities Dealers, Inc. Notarization by a notary
public is not an acceptable signature guarantee.
The funds do not have dealer agreements and do not accept redemption orders
from broker-dealers. The price you receive for the shares you sell is the net
asset value next determined after your order and all required documents are
received. (See "Purchasing Shares -- Share Price.") Because the funds' net
asset values fluctuate, reflecting the market value of the funds' portfolios,
the amount a shareholder receives for shares sold may be more or less than the
amount paid for them.
- --------------------------------------------------------------------------------
OTHER IMPORTANT THINGS TO REMEMBER
YEAR 2000
The date-related computer issue known as the "Year 2000 problem" could have an
adverse impact on the quality of services provided to the funds and its
shareholders. However, the funds understand that their key service providers --
including the investment adviser and its affiliates -- are taking steps to
address the issue. In addition, the Year 2000 problem may adversely affect the
companies in which the funds invest. For example, companies may incur
substantial costs to address the problem. They may also suffer losses caused by
corporate and governmental data processing errors. The funds and their
investment adviser will continue to monitor developments relating to this
issue.
23
<PAGE>
ENDOWMENTS / PROSPECTUS
OTHER FUND INFORMATION
ANNUAL/SEMI-ANNUAL STATEMENT OF ADDITIONAL
REPORT TO SHAREHOLDERS INFORMATION (SAI)
Includes financial Contains more detailed
statements, detailed information on all aspects
performance information, of the funds, including the
portfolio holdings, a funds' financial statements.
statement from portfolio
management and the
independent auditor's
report.
A current SAI has been filed
with the Securities and
Exchange Commission ("SEC").
It is incorporated by
reference into this
prospectus and is available
along with other related
materials on the SEC's
Internet Web site at
http://www.sec.gov.
CODE OF ETHICS
Includes a description of
the funds' personal
investing policy.
To request a free copy of any of the documents above:
Write to the Secretary
of the Trust
P.O. Box 7650
San Francisco, CA 94120
This prospectus has been printed on recycled paper.
24
ENDOWMENTS
Part B
Statement of Additional Information
October 1, 1998
Endowments (the "Trust") is an open-end management investment company,
commonly known as a mutual fund. The Trust offers two diversified investment
portfolios, Growth and Income Portfolio and Bond Portfolio (collectively, the
"funds").
This document is not a prospectus but should be read in conjunction with
the current Prospectus of Endowments dated October 1, 1998. The Prospectus may
be obtained by writing to the funds' at the following address:
ENDOWMENTS
ATTENTION: SECRETARY
ONE MARKET STEUART TOWER, SUITE 1800
P.O. BOX 7650
SAN FRANCISCO, CALIFORNIA 94120
TELEPHONE: (415) 421-9360
Table of Contents
Item Page No.
ABOUT ENDOWMENTS 1
DESCRIPTION OF CERTAIN SECURITIES 2
FUNDAMENTAL POLICIES AND INVESTMENT RESTRICTIONS 6
MANAGEMENT OF THE TRUST 7
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES 11
PURCHASE OF SHARES 15
EXECUTION OF PORTFOLIO TRANSACTIONS 16
REDEMPTION OF SHARES 17
GENERAL INFORMATION 17
INVESTMENT RESULTS AND RELATED STATISTICS 18
FINANCIAL STATEMENTS ATTACHED
ABOUT ENDOWMENTS
Endowments is a business trust organized under the laws of the state of
Delaware on May 14, 1998 with two separate series, Growth and Income Portfolio
and Bond Portfolio. Growth and Income Portfolio was formerly known as
Endowments, Inc. and was organized as a Delaware corporation. Bond Portfolio
was formerly known as Bond Portfolio for Endowments, Inc. and was organized as
a separate Delaware corporation. Endowments, Inc. and Bond Portfolio for
Endowments, Inc. were reorganized as separate series of Endowments on July 31,
1998 with all of the assets of each predecessor fund transferred to Growth and
Income Portfolio and Bond Portfolio, respectively. As a result, certain
financial and other information appearing in the prospectus and statement of
additional information reflect the operations of these predecessor entities
through the date of the reorganization.
DESCRIPTION OF CERTAIN SECURITIES
BOND PORTFOLIO
DEBT SECURITIES - The fund has no current intention (at least during the next
12 months) of investing in securities rated BB or below by Standard & Poor's
("S&P") and Ba or below by Moody's Investors Service, Inc. ("Moody's")
(commonly known as "junk" bonds) or unrated but determined to be of equivalent
quality by Capital Research and Management Company ("CRMC"). The fund is not
normally required to dispose of a security in the event that its rating is
reduced below BBB or Baa (or it is not rated and its quality becomes equivalent
to such a security). The fund, however, has no current intention of holding
more than 5% of its net assets in junk bonds. Junk bonds are described by the
rating agencies as speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness than higher rated
bonds, or they may already be in default. The market prices of these
securities may fluctuate more than higher quality securities and may decline
significantly. It may be more difficult to dispose of or to determine the
value of junk bonds. See "Bond Ratings" for a complete description of the bond
ratings.
MATURITY - There are no restrictions on the maturity composition of the
portfolio, although it is anticipated that the fund normally will be invested
substantially in securities with maturities in excess of three years. Under
normal market conditions, longer term securities yield more than shorter term
securities, but are subject to greater price fluctuations.
FORWARD COMMITMENTS - The fund may enter into commitments to purchase or sell
securities at a future date. When a fund purchases such securities it assumes
the risk of any decline in value of the security beginning on the date of the
agreement. When a fund agrees to sell such securities, it does not participate
in further gains or losses with respect to such securities. If the other
party to such a transaction fails to deliver or pay for the securities, the
fund could miss a favorable price or yield opportunity, or could experience a
loss.
As the fund's aggregate commitments under these transactions increase, the
opportunity for leverage similarly may increase. The fund will not use these
transactions for the purpose of leveraging and will segregate liquid assets
which will be marked to market daily in an amount sufficient to meet its
payment obligations in these transactions. Although these transactions will
not be entered into for leveraging purposes, to the extent the fund's aggregate
commitments under these transactions exceed its segregated assets, the fund
temporarily could be in a leveraged position (because it will have an amount
greater than its net assets subject to market risk). Should market values of
the fund's portfolio securities decline while the fund is in a leveraged
position, greater depreciation of its net assets would likely occur than were
it not in such a position. The fund will not borrow money to settle these
transactions and, therefore, will liquidate other portfolio securities in
advance of settlement if necessary to generate additional cash to meet its
obligations thereunder.
The fund also may enter into "roll" transactions, which consist of the sale of
mortgage-backed securities or other securities together with a commitment to
purchase similar, but not identical, securities at a future date. The fund
intends to treat roll transactions as two separate transactions: one involving
the purchase of a security and a separate transaction involving the sale of a
security. Since the fund does not intend to enter into roll transactions for
financing purposes, it may treat these transactions as not falling within the
definition of "borrowing" set forth in Section 2(a)(23) of the Investment
Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS - This type of agreement involves the sale of a
security by the fund and its commitment to repurchase the security at a
specified time and price. The fund will identify liquid assets which will be
marked to market daily in an amount sufficient to cover its obligations under
reverse repurchase agreements with broker-dealers (but no collateral is
required on reverse repurchase agreements with banks). Under the Investment
Company Act of 1940, reverse repurchase agreements may be considered borrowings
by the fund. The use of reverse repurchase agreements by the fund creates
leverage which increases the fund's investment risk. As the fund's aggregate
commitments under these reverse repurchase agreements increases, the
opportunity for leverage similarly increases. If the income and gains on
securities purchased with the proceeds of reverse repurchase agreements exceed
the costs of the agreements, the fund's earnings or net asset value will
increase faster than otherwise would be the case; conversely if the income and
gains fail to exceed the costs, earnings or net asset value would decline
faster than otherwise would be the case.
WARRANTS AND RIGHTS - The fund may only acquire warrants or rights that are
issued together with bonds or preferred stocks. Warrants generally entitle the
holder to buy a stated amount of common stock or additional bonds to be
exercised at a specified price. At the time the warrant is issued, the
exercise price is usually higher than the current market price. Warrants may be
issued with an expiration date or in perpetuity. The fund may also acquire
rights to purchase common stocks. Rights are similar to warrants except that
they normally entitle the holder to purchase common stock at a lower price than
the current market price.
INFLATION-INDEXED BONDS - The fund may invest in inflation-indexed bonds
issued by governments, their agencies or instrumentalities, or corporations.
The principal value of this type of bond is periodically adjusted according to
changes in the rate of inflation. The interest rate is generally fixed at
issuance; however, interest payments are based on an inflation adjusted
principal value. For example, in a period of falling inflation, principal
value will be adjusted downward, reducing the interest payable.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The fund may also invest in other
bonds which may or may not provide a similar guarantee. If a guarantee of
principal is not provided, the adjusted principal value of the bond repaid at
maturity may be less than the original principal.
GROWTH AND INCOME PORTFOLIO
REPURCHASE AGREEMENTS - Although the fund has no current intention in doing
so, the fund may enter into repurchase agreements, under which it buys a
security and obtains a simultaneous commitment from the seller to repurchase
the security at a specified time and price. The seller must maintain with the
fund's custodian collateral equal to at least 100% of the repurchase price
including accrued interest as monitored daily by Capital Research and
Management Company. The fund only enters into repurchase agreements involving
securities in which they could otherwise invest and with selected banks and
securities dealers whose financial condition is monitored by Capital Research
and Management Company. If the seller under a repurchase agreement defaults,
the fund may incur a loss if the value of the collateral securing the
repurchase agreement has declined and may incur disposition costs in connection
with liquidating the collateral. If bankruptcy proceedings are commenced with
respect to the seller, liquidation of the collateral by the fund may be delayed
or limited.
CURRENCY TRANSACTIONS - Although the fund has no current intention to do so,
the fund has the ability to enter into forward currency contracts to protect
against changes in currency exchange rates. A forward currency contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. Forward currency
contracts entered into by the fund will involve the purchase or sale of a
currency against the U.S. dollar. The fund will segregate liquid assets which
will be marked to market daily to meet its forward contract commitments to the
extent required by the Securities and Exchange Commission.
Certain provisions of the Internal Revenue Code may affect the extent to which
the fund may enter into forward contracts. Such transactions may also affect,
for U.S. federal income tax purposes, the character and timing of income, gain
or loss recognized by the fund.
REAL ESTATE INVESTMENT TRUSTS - The fund may invest in securities issued by
real estate investment trusts (REITs), which are pooled investment vehicles
that invest primarily in real estate or real estate-related loans. REITs are
not taxed on income distributed to shareholders provided they meet requirements
imposed by the Internal Revenue Code. The return on REITs is dependent on such
factors as the skill of management and the real estate environment in general.
In addition, the risks associated with REIT debt and equity instruments, are
similar to the risks of investing in corporate-issued debt and common stocks,
respectively. Debt that is issued by REITs is typically rated by the credit
rating agencies as investment grade or above.
GROWTH AND INCOME PORTFOLIO AND BOND PORTFOLIO
BOND RATINGS - Growth and Income Portfolio may invest in debt securities which
are rated in the top three quality categories by any national rating service
(or determined to be equivalent by Capital Research and Management Company)
including bonds rated at least A by Standard & Poor's or Moody's Investors
Service, Inc. Bond Portfolio invests in bonds and debentures (including
straight debt securities), which are rated in the top four quality categories
by any national rating service (or determined to be equivalent by Capital
Research and Management Company). The top four rating categories for Standard
& Poor's and Moody's are described below:
Standard & Poor's:
"Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong."
"Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree."
"Debt rated 'A' has a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of change in
circumstances and economic conditions than debt in higher categories."
"Debt rated $BBB' has an adequate capacity to pay interest and repay principal.
Whereas they normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal than for debt in higher rated
categories."
Standard & Poor's applies indicators "+", no character and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
Moody's Investors Service, Inc.:
"Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as 'gilt
edge.' Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues."
"Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities, or fluctuation of protective elements may be
of greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger than the Aaa securities."
"Bonds rated A are judged to be of upper medium grade obligations. These
bonds possess many favorable investment attributes. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future."
"Bonds rated Baa are judged to be medium grade obligations, I.E., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well."
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the obligation ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and 3
indicates a ranking toward the lower end of that generic rating category.
CASH AND CASH EQUIVALENTS - Each fund may invest in cash or cash equivalents.
These securities include (1) commercial paper (short-term notes issued by
corporations or governmental bodies), (2) commercial bank obligations (E.G.,
certificates of deposit (interest bearing time deposits), and bankers'
acceptances (time drafts on a commercial bank where the bank accepts an
irrevocable obligation to pay at maturity)) , (3) savings association and
savings bank obligations (E.G., certificates of deposit issued by savings banks
or savings associations), (4) securities of the U.S. Government, its agencies
or instrumentalities that mature, at the time of purchase, or may be redeemed,
in one year or less, and (5) corporate bonds and notes that mature, at the time
of purchase, or that may be redeemed, in one year or less.
PORTFOLIO TURNOVER - Portfolio changes will be made without regard to the
length of time particular investments may have been held. Short-term trading
profits are not the funds' objective and changes in their investments are
generally accomplished gradually, though short-term transactions may
occasionally be made. Management's appraisal of changing economic conditions
and trends may cause a change in emphasis within the portfolio, both among
individual securities and among various types of fixed-income securities in
order to achieve the objectives of the funds. High portfolio turnover (100% or
more) involves correspondingly greater transaction costs in the form of dealer
spreads or brokerage commissions. Fixed-income securities are generally traded
on a net basis and usually neither brokerage commissions nor transfer taxes are
involved. The funds do not anticipate that their portfolio turnovers will
exceed 100% annually. A fund's portfolio turnover rate would equal 100% if each
security in either fund's portfolio were replaced once per year.
FUNDAMENTAL POLICIES AND INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental policies and investment restrictions
for the funds which cannot be changed without shareholder approval. The funds'
investment objectives described in the Prospectus and the following fundamental
investment restrictions require shareholder approval to be changed. (Approval
requires the affirmative vote of 67% or more of the voting securities present
at a meeting of shareholders, provided more than 50% of such securities are
represented at the meeting, or the vote of more than 50% of the outstanding
voting securities, whichever is less.) Investment limitations expressed in the
following restrictions are considered at the time securities are purchased and
are based on the funds' net assets unless otherwise indicated. The following
are the funds' fundamental investment restrictions:
1. A fund may not invest in a security if, as a result of such investment,
more than 25% of its total assets would be invested in the securities of
issuers in any particular industry, except that the restriction does not apply
to securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (or repurchase agreements with respect thereto).
2. A fund may not make loans, but this limitation does not apply (i) to
purchases of debt securities, loan participations, or the entry into of
repurchase agreements, or (ii) to loans of portfolio securities if, as a
result, no more than 33 1/3% of a fund's total assets would be on loan to third
parties.
3. A fund may not purchase or sell real estate unless acquired as a result
of ownership of securities or other instruments (this shall not prevent the
funds from investing in securities or other instruments backed by real estate,
or the securities of companies engaged in the real estate business).
4. A fund may not purchase or sell commodities or commodities contracts.
This restriction shall not prohibit the funds, subject to restrictions
described in the funds' prospectus and statement of additional information,
from purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or any
interest rate, securities-related or foreign currency-related hedging
instrument, including swap agreements and other derivative instruments, subject
to compliance with applicable provisions of the federal securities and
commodities laws.
5. A fund may not issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended.
6. A fund may not borrow money, except temporarily for extraordinary or
emergency purposes, in an amount not exceeding 5% of its total assets at the
time of such borrowing.
7. A fund may not, with respect to 75% of its total assets, invest more than
5% of the value of its total assets in the securities of any one issuer, or
acquire more than 10% of the voting securities of any one issuer. These
limitations do not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
8. A fund may not engage in the business of underwriting securities of other
issuers, except to the extent that a fund may be deemed an underwriter under
the Securities Act of 1933, as amended, in disposing of portfolio securities.
The following investment policies of the funds and all other policies
described in the funds' prospectus and this statement of additional information
are considered non-fundamental and may be changed at any time with the approval
of the Trust's board of trustees. The following nonfundamental policies apply
to both funds:
1. The funds may not invest in other companies for the purpose of exercising
control or management.
2. The funds may not purchase puts, calls or hedges.
3. The funds may not invest in securities of other investments companies,
except as permitted by the Investment Company Act of 1940, as amended.
The following non-fundamental policy applies to Growth and Income Portfolio
only:
1. The fund may not invest more than 10% of its total assets in securities
that are not readily marketable.
The following non-fundamental policy applies to Bond Portfolio only:
1. The fund may not invest more than 15% of its total assets in securities
that are not readily marketable.
Restricted securities are treated as not readily marketable by the funds,
with the exception of those securities that have been determined to be liquid
pursuant to procedures adopted by the Trust's board of trustees.
MANAGEMENT OF THE TRUST
The Trust is managed by its board of trustees. The Trustees and officers of
the Trust are listed below.
Trustees and Officers
(with their principal occupations for the past five years#)
TRUSTEES
ROBERT B. EGELSTON*, 333 South Hope Street, Los Angeles, CA 90071, Age: 67.
Chairman of the Board. Senior Partner, The Capital Group Partners L.P.; former
Chairman of the Board, The Capital Group Companies, Inc.
FRANK L. ELLSWORTH*, 333 South Hope Street, Los Angeles, CA 90071, Age: 55.
President and Trustee. Vice President, Capital Research and Management Company;
former President, Independent Colleges of Southern California.
STEVEN D. LAVINE, 24700 McBean Parkway, Valencia, CA 91355, Age: 51. Trustee.
President, California Institute of the Arts.
PATRICIA A. McBRIDE, 4933 Mangold Circle, Dallas, TX 75229, Age: 55. Trustee.
Chief Financial Officer, Kevin L. McBride, D.D.S., Inc.
GAIL L. NEALE, 154 Prospect Parkway, Burlington, VT 05401, Age: 63. Trustee.
President, The Lovejoy Consulting Group, Inc.
CHARLES R. REDMOND, 2198 Fairhurst Drive, La Canada, CA 91011, Age: 72.
Trustee. Former Chairman, Pfaffinger Foundation and former President and Chief
Executive Officer, Times Mirror Foundation.
THOMAS E. TERRY*, 333 South Hope Street, Los Angeles, CA 90071, Age: 60.
Trustee. Consultant; former Vice President and Secretary, Capital Research and
Management Company (retired 1994).
ROBERT C. ZIEBARTH, P.O. Box 2156, Ketchum, ID 83340, Age: 62. Trustee.
Management Consultant, Ziebarth Company.
All of the officers listed are officers or employees of the investment adviser
or affiliated companies. The Trust does not pay any salaries or fees to its
trustees or officers. However, the Trust reimburses certain expenses of the
trustees who are not affiliated with the investment adviser.
OFFICERS
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING
WITH REGISTRANT PAST 5 YEARS#
<S> <C> <C> <C>
Robert G. O'Donnell 54 Senior Vice Senior Vice President and Director,
P.O. Box 7650 President Capital Research and Management
San Francisco, CA 94120 Company
Abner D. Goldstine 68 Senior Vice Senior Vice President and Director,
11100 Santa Monica Blvd. President Capital Research and Management
Los Angeles, CA 90025 Company
Claudia P. Huntington 46 Vice President Vice President, Capital Research and
333 South Hope Street (Growth and Management Company
Los Angeles, CA 90071 Income Portfolio)
John H. Smet 42 Vice President Vice President, Capital Research and
11100 Santa Monica Blvd. (Bond Portfolio) Management Company
Los Angeles, CA 90025
Patrick F. Quan 40 Secretary Vice President, Fund Business
P.O. Box 7650 Management Group, Capital Research
San Francisco, CA 94120 and Management Company
Lisa G. Hathaway 36 Assistant Vice Assistant Vice President, Fund
333 South Hope Street President Business Management Group, Capital
Los Angeles, CA 90071 Research and Management Company
Anthony W. Hynes 35 Treasurer Vice President, Fund Business
135 South State College Management Group, Capital Research
Blvd. and Management Company
Brea, CA 92821
Susi M. Silverman 28 Assistant Assistant Vice President, Fund
135 South State College Treasurer Business Management Group, Capital
Blvd. Research and Management Company
Brea, CA 92821
</TABLE>
_________________
# Positions within the organizations listed may have changed during this
period.
* An "interested person" of the funds within the meaning of the Investment
Company Act of 1940 the basis of his affiliation with Capital Research and
Management Company, the funds' investment adviser.
All of the officers listed are officers or employees of Capital Research and
Management Company or affiliated companies.
All of the Trustees serve or have served on boards of tax-exempt 501(c)(3)
organizations and have had experience in dealing with the administrative and
financial needs of these institutions as indicated: Robert B. Egelston -
California Institute of the Arts, Claremont University Center, Los Angeles
Festival, The Los Angeles Philharmonic Association, The Music Center of Los
Angeles County, The Wharton School of Finance and Commerce, University of
Pennsylvania; Frank L. Ellsworth - Claremont University Center, English
Village, Seattle, Foundation for Independent Higher Education, Global Partners,
Canada, Graphic Arts Counsel--Los Angeles County Museum of Art, Independent
Colleges of Southern California, Inc., The Japanese-American National Museum,
Japanese Foundation of International Education, The Los Angeles Dance Center,
Pitzer College, Southwestern University School of Law; Steven D. Lavine -
American Council on the Arts, KCRW-FM National Public Radio, The Music Center
Operating Company, The Music Center of Los Angeles County; Patricia A. McBride
- - Commemara Conservancy Foundation, Dallas Museum of Art League, Dallas
Symphony Orchestra Association, Dallas Symphony Orchestra League, Dallas
Women's Foundation, Girl Scout Council, Inc., Eugene and Margaret McDermott Art
Fund, St. Mark's School of Texas, Southwest Museum of Science and Technology;
Gail L. Neale - Concern for Dying, The Flynn Theater, National Advisory
Council, Hampshire College, The JL Foundation, Shelburne Farms, The Vera
Institute of Justice; Thomas E. Terry - Academy of Arts and Sciences, Citizens'
Scholarship Foundation of America, Edgewood High School, Elvehjem Museum of
Art, Ketchum YMCA, Madison Community Foundation, Madison Opera, Inc., National
Football Scholarship Foundation, Ten Chimneys Foundation, Waisman
Center--University of Wisconsin; Charles R. Redmond - AMAN Folk Ensemble,
Catholic Charities of the Archdiocese of Los Angeles, Immaculate Heart High
School, Loyola Marymount University, Los Angeles Urban League, The Music Center
of Los Angeles County, A Noise Within, Pasadena Playhouse, Pfaffinger
Foundation, Times Mirror Foundation; Robert C. Ziebarth - Chicago Maternity
Center, Choate School, Foundation for Reproductive Research & Education, Latin
School of Chicago, National Association of Independent Schools, Naval
Historical Foundation, Northwestern Memorial Hospital.
INVESTMENT ADVISER - Capital Research and Management Company, the investment
adviser, founded in 1931, maintains research facilities in the United States
and abroad (Los Angeles, San Francisco, New York, Washington D.C., London,
Geneva, Singapore, Hong Kong and Tokyo), with a staff of professionals, many of
whom have a number of years of investment experience. Capital Research and
Management Company is located at 333 South Hope Street, Los Angeles, CA 90071,
and at 135 South State College Boulevard, Brea, CA 92821. Capital Research and
Management Company's research professionals travel several million miles a
year, making more than 5,000 research visits in more than 50 countries around
the world. Capital Research and Management Company believes that it is able to
attract and retain quality personnel.
An affiliate of Capital Research and Management Company compiles indices for
major stock markets around the world and compiles and edits the Morgan Stanley
Capital International Perspective, providing financial and market information
about more than 2,400 companies around the world.
Capital Research and Management Company is responsible for managing more than
$175 billion of stocks, bonds and money market instruments and serves over
eight million investors of all types. These investors include privately owned
businesses and large corporations as well as schools, colleges, foundations and
other non-profit and tax-exempt organizations.
INVESTMENT ADVISORY AND SERVICE AGREEMENT - The Investment Advisory and
Service Agreements (the "Agreements") between the Trust, on behalf of Growth
and Income Portfolio and Bond Portfolio, and Capital Research and Management
Company, dated July 31, 1998, may be renewed from year to year, provided that
any such renewal has been specifically approved at least annually by (i) the
board of trustees of the Trust, or by the vote of a majority (as defined in the
Investment Company Act of 1940) of the outstanding voting securities of the
Trust, and (ii) the vote of a majority of the Trustees who are not parties to
the Agreement or interested persons (as defined in said Act) of any such party,
cast in person, at a meeting called for the purpose of voting on such approval.
The Agreements also provide that either party has the right to terminate them
without penalty, upon 60 days' written notice to the other party, and that the
Agreements automatically terminates in the event of their assignment (as
defined in said Act). The Agreements are identical except for conforming
changes as the Investment Advisory and Service Agreements entered into by the
funds in 1975 before their reorganization as separate series of a Delaware
business trust.
Capital Research and Management Company, in addition to providing investment
advisory services, furnishes the services and pays the compensation and travel
expenses of persons to perform the executive, administrative, clerical and
bookkeeping functions of the funds, provides suitable office space, necessary
small office equipment and utilities, and provides general purpose accounting
forms, supplies, and postage used at the offices of the funds. The Trust pays
all expenses not specifically assumed by Capital Research and Management
Company, including, but not limited to, custodian, stock transfer and dividend
disbursing fees and expenses; costs of the designing, printing and mailing of
reports, prospectuses, proxy statements, and notices to shareholders; taxes;
expenses of the issuance and redemption of shares of the funds (including stock
certificates, registration and qualification fees and expenses); legal and
auditing expenses; expenses paid to Trustees unaffiliated with Capital Research
and Management Company; association dues; and costs of stationery and forms
prepared exclusively for the funds.
Capital Research and Management Company receives a management fee at the
annual rates of 1/2 of 1% of each fund's net assets up to $150,000,000 and 4/10
of 1% of such assets over $150,000,000.
The Agreements provide for an advisory fee reduction to the extent that a
fund's annual ordinary operating expenses exceed 0.75% of the average net
assets of the fund. Expenses which are not subject to this limitation are
interest, taxes, and extraordinary expenses. Expenditures, including costs
incurred in connection with the purchase or sale of portfolio securities, which
are capitalized in accordance with generally accepted accounting principles
applicable to investment companies are accounted for as capital items and not
as expenses.
During the years ended 1998, 1997 and 1996, Capital Research and Management
Company received from Growth and Income Portfolio advisory fees of $235,598,
$276,008 and $300,818, and from Bond Portfolio advisory fees of $154,762,
$177,223, and $214,202, respectively.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the funds and the purchase, ownership, and disposition of the funds'
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in
light of their particular circumstances. This discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended, the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, or disposition of the funds' shares,
as well as the tax consequences arising under the laws of any state, foreign
country or other taxing jurisdiction.
The Trust (including each fund) intends each year to qualify and elect to be
treated as a "regulated investment company" under the provisions of Subchapter
M of the Internal Revenue Code. Under Subchapter M, if the Trust distributes
within specified times at least 90% of its investment company taxable income,
it will be taxed only on that portion of such investment company taxable income
that it retains.
To qualify as a "regulated investment company," a fund must (a) in each
taxable year, derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans, and gains from the sale or
other disposition of stock, securities, currencies or other income derived with
respect to its business of investing in such stock, securities or currencies;
and (b) diversify its holdings so that, at the end of each fiscal quarter, (i)
at least 50% of the market value of the fund's assets is represented by cash,
cash items, U.S. Government securities, securities of other regulated
investment companies, and other securities (but such other securities must be
limited, in respect of any one issuer, to an amount not greater than 5% of the
fund's assets and 10% of the outstanding voting securities of such issuer), and
(ii) not more than 25% of the value of its assets is invested in the securities
of any one issuer (other than U.S. Government securities or the securities of
other regulated investment companies), or in two or more issuers which the fund
controls and which are engaged in the same or similar trades or businesses or
related trades or businesses.
Under the Internal Revenue Code, a nondeductible excise tax of 4% is imposed
on the excess of a regulated investment company's "required distribution" for
the calendar year ending within the regulated investment company's taxable year
over the "distributed amount" for such calendar year. The term "required
distribution" means the sum of (i) 98% of ordinary income (generally net
investment income) for the calendar year, (ii) 98% of capital gain net income
(both long-term and short-term) for the one-year period ending on October 31
(as though the one-year period ending on October 31 were the regulated
investment company's taxable year), and (iii) the sum of any untaxed,
undistributed net investment income and net capital gains of the regulated
investment company for prior periods. The term "distributed amount" generally
means the sum of (i) amounts actually distributed by the fund from its current
year's ordinary income and capital gain net income and (ii) any amount on which
the fund pays income tax for the year. The funds intend to distribute net
investment income and net capital gains so as to minimize or avoid the excise
tax liability.
The funds also intend to continue distributing to shareholders all of the
excess of net long-term capital gain over net short-term capital loss on sales
of securities. If the net asset value of shares of a fund should, by reason of
a distribution of realized capital gains, be reduced below a shareholder's
cost, such distribution would to that extent be a return of capital to that
shareholder even though taxable to the shareholder, and a sale of shares by a
shareholder at net asset value at that time would establish a capital loss for
federal tax purposes.
Dividends generally are taxable to shareholders at the time they are paid.
However, dividends declared in October, November and December and made payable
to shareholders of record in such a month are treated as paid and are thereby
taxable as of December 31, provided that the fund pays the dividend no later
than the end of January of the following year.
Any loss realized on a redemption or exchange of shares of a fund will be
disallowed to the extent substantially identical shares are reacquired within
the 61 day period beginning 30 days before and ending 30 days after the shares
are disposed of.
The funds may be required to pay withholding and other taxes imposed by
foreign countries which would reduce a fund's investment income. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes.
The funds may invest in shares of foreign corporations that may be classified
under the Internal Revenue Code as passive foreign investment companies
("PFICs"). In general, a foreign corporation is classified as a PFIC if at
least one-half of its assets constitute investment-type assets, or 75% or more
of its gross income is investment-type income. If the funds receive a
so-called "excess distribution" with respect to PFIC stock, the funds itself
may be subject to a tax on a portion of the excess distribution, whether or not
the corresponding income is distributed by the funds to shareholders. In
general, under the PFIC rules, an excess distribution is treated as having been
realized ratably over the period during which the funds held the PFIC shares.
The funds will itself be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior fund taxable years and an interest
factor will be added to the tax, as if the tax had been payable in such prior
taxable years. Certain distributions from a PFIC as well as gain from the sale
of PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
The funds may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the fund would be required to include in its gross income its
share of the earnings of a PFIC on a current basis, regardless of whether
distributions were received from the PFIC in a given year. If this election
were made, the special rules, discussed above, relating to the taxation of
excess distributions, would not apply. In addition, another election would
involve marking to market the fund's PFIC shares at the end of each taxable
year, with the result that unrealized gains would be treated as though they
were realized and reported as ordinary income. Any mark-to-market losses and
any loss from an actual disposition of PFIC shares would be deductible as
ordinary losses to the extent of any net mark-to-market gains included in
income in prior years.
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Dividends paid
by the funds to a corporate shareholder, to the extent such dividends are
attributable to dividends received by the funds from U.S. corporations, may,
subject to limitation, be eligible for the dividends received deduction.
However, the alternative minimum tax applicable to corporations may reduce the
value of the dividends received deduction.
If a fund purchases a debt security at a price lower than the stated
redemption price of such debt security, the excess of the stated redemption
price over the purchase price is "market discount". If the amount of market
discount is more than a DE MINIMIS amount, a portion of such market discount
must be included as ordinary income (not capital gain) by the fund in each
taxable year in which the fund owns an interest in such debt security and
receives a principal payment on it. In particular, the fund will be required
to allocate that principal payment first to the portion of the market discount
on the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for
each period is equal to the lesser of (i) the amount of market discount
accruing during such period (plus any accrued market discount for prior periods
not previously taken into account) or (ii) the amount of the principal payment
with respect to such period. Generally, market discount accrues on a daily
basis for each day the debt security is held by the fund at a constant rate
over the time remaining to the debt security's maturity or, at the election of
the fund, at a constant yield to maturity which takes into account the
semi-annual compounding of interest. Gain realized on the disposition of a
market discount obligation must be recognized as ordinary interest income (not
capital gain) to the extent of the "accrued market discount."
Certain debt securities acquired by a fund may be treated as debt securities
that were originally issued at a discount. Very generally, original issue
discount is defined as the difference between the price at which a security was
issued and its stated redemption price at maturity. Although no cash income on
account of such discount is actually received by the fund, original issue
discount that accrues on a debt security in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would
be subject to the distribution requirements applicable to regulated investment
companies. Some debt securities may be purchased by a fund at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes
(see above).
Any regulated futures contracts and certain options (namely, nonequity options
and dealer equity options) in which a fund may invest may be "section 1256
contracts." Gains (or losses) on these contracts generally are considered to
be 60% long-term and 40% short-term capital gains or losses. Also, section
1256 contracts held by a fund at the end of each taxable year (and on certain
other dates prescribed in the Internal Revenue Code) are "marked to market"
with the result that unrealized gains or losses are treated as though they were
realized.
Transactions in options, futures and forward contracts undertaken by a fund
may result in "straddles" for federal income tax purposes. The straddle rules
may affect the character of gains (or losses) realized by the fund, and losses
realized by the fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized. In
addition, certain carrying charges (including interest expense) associated with
positions in a straddle may be required to be capitalized rather than deducted
currently. Certain elections that a fund may make with respect to its straddle
positions may also affect the amount, character and timing of the recognition
of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the fund are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by a fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the recognition of
gains or losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Recently enacted rules may affect the timing and character of gain if a fund
engages in transactions that reduce or eliminate its risk of loss with respect
to appreciated financial positions. If a fund enters into certain transactions
in property while holding substantially identical property, the fund would be
treated as if it had sold and immediately repurchased the property and would be
taxed on any gain (but not loss) from the constructive sale. The character of
gain from a constructive sale would depend upon the fund's holding period in
the property. Loss from a constructive sale would be recognized when the
property was subsequently disposed of, and its character would depend on the
fund's holding period and the application of various loss deferral provisions
of the Internal Revenue Code.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a fund accrues income or other receivables or accrues expenses
or other liabilities denominated in a foreign currency and the time the fund
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of some
investments, including debt securities and certain forward contracts
denominated in a foreign currency, gains or losses attributable to fluctuations
in the value of the foreign currency between the acquisition and disposition of
the position also are treated as ordinary gain or loss. These gains and
losses, referred to under the Internal Revenue Code as "section 988" gains or
losses, increase or decrease the amount of the fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income. If section 988 losses exceed other investment company taxable income
during a taxable year, a fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his or her fund shares.
The foregoing is limited to a summary of federal income taxation and should
not be viewed as a comprehensive discussion of all tax considerations relevant
to investors. Dividends and capital gain distributions may also be subject to
state, foreign or local taxes. Investors are urged to consult their tax
advisers with specific reference to their own tax situations.
PURCHASE OF SHARES
The purchase of shares may be paid in cash or in a like value of acceptable
securities. Such securities will (i) be acquired for investment and not for
resale; (ii) be liquid securities which are not restricted as to transfer
either by law or liquidity of market; and (iii) have a value which is readily
ascertainable.
PRICE OF SHARES - The price you pay for shares is the net asset value per
share which is calculated once daily at 4:00 p.m., New York time each day the
New York Stock Exchange is open. For example, if the Exchange closes at 1:00
p.m. on one day and at 4:00 p.m. on the next, the funds' share prices would be
determined as of 4:00 p.m. New York time on both days. The New York Stock
Exchange is currently closed on weekends and on the following holidays: New
Year's Day, Presidents' Day, Martin Luther King, Jr.'s Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas Day.
Such net asset value is effective for orders to purchase shares of the funds
received by the funds before the close of trading on the New York Stock
Exchange; orders received after the close of trading will be entered at the net
asset value as computed as of the close of trading of the New York Stock
Exchange on the next business day. Prices which appear in the newspaper are
not always indicative of prices at which you will be purchasing and redeeming
shares of the funds, since such prices generally reflect the previous day's
closing price whereas purchases and redemptions are made at the next calculated
price.
All portfolio securities of funds managed by Capital Research and Management
Company, other than the money market funds, are valued, and the net asset value
per share is determined, as follows:
1. Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by Capital Research and Management Company to
be the broadest and most representative market, which may be either a
securities exchange or the over-the-counter market. Fixed-income securities
are valued at prices obtained from a pricing service, when such prices are
available; however, in circumstances where Capital Research and Management
Company deems it appropriate to do so, such securities will be valued at the
mean quoted bid and asked prices or at prices for securities of comparable
maturity, quality and type.
Securities with original maturities of one year or less having 60 days or less
to maturity are amortized to maturity based on their cost if acquired within 60
days of maturity or, if already held on the 60th day, based on the value
determined on the 61st day. Forward currency contracts are valued at the mean
of representative quoted bid and asked prices.
Assets or liabilities initially expressed in terms of non-U.S. currencies are
translated prior to the next determination of the net asset value of the fund's
shares into U.S. dollars at the prevailing market rates. Purchases and sales
of securities and income and expenses are translated into U.S. dollars at the
prevailing market rates on the dates of such transactions. The effects of
changes in non-U.S. currency exchange rates on investment securities are
included with the net realized and unrealized gain or loss on investment
securities.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith under
policies approved by the fund's Board. The fair value of all other assets is
added to the value of securities to arrive at the total assets;
2. Liabilities, including accruals of taxes and other expense items, are
deducted from total assets; and
3. Net assets so obtained are then divided by the total number of shares
outstanding, and the result, rounded to the nearer cent, is the net asset value
per share.
EXECUTION OF PORTFOLIO TRANSACTIONS
Orders for the funds' portfolio securities transactions are placed by the
investment adviser. The investment adviser strives to obtain the best
available prices in its portfolio transactions taking into account the costs
and promptness of executions. When circumstances relating to a proposed
transaction indicate that a particular broker (either directly or through their
correspondent clearing agents) is in a position to obtain the best price and
execution, the order is placed with that broker. This may or may not be a
broker who has provided investment research, statistical, or other related
services to the investment adviser or has sold shares of other funds served by
the investment adviser. The funds do not consider that they have an obligation
to obtain the lowest available commission rate to the exclusion of price,
service and qualitative considerations.
There are occasions on which portfolio transactions for the funds may be
executed as part of concurrent authorizations to purchase or sell the same
security for other funds served by the investment adviser, or for trusts or
other accounts served by affiliated companies of the investment adviser.
Although such concurrent authorizations potentially could be either
advantageous or disadvantageous to the funds, they are effected only when the
investment adviser believes that to do so is in the interest of the funds.
When such concurrent authorizations occur, the objective is to allocate the
executions in an equitable manner. The funds will not pay a mark-up for
research in principal transactions.
Brokerage commissions paid on portfolio transactions during the fiscal
years ended July 31, 1998, 1997 and 1996, amounted to $37,000, $61,000, and
$52,000 for Growth and Income Portfolio. There are no brokerage commissions
paid on portfolio transactions for Bond Portfolio.
REDEMPTION OF SHARES
For redemption requests received after the close of trading on the New York
Stock Exchange, the redemption price will be the net asset value determined as
of the close of trading on the next business day of the New York Stock
Exchange. There is no charge to the shareholder for redemption. Payment in
cash or in kind is made as soon as reasonably practicable after tender in
proper form (as described above), and must, in any event, be made within seven
days thereafter. Either fund may, however, suspend the right of redemption
during any period when: (a) trading on the New York Stock Exchange is
restricted as determined by the Securities and Exchange Commission or such
exchange is closed for other than weekends or holidays; (b) the Securities and
Exchange Commission has by order permitted such suspension; or (c) any
emergency as determined by the Securities and Exchange Commission exists,
making disposal of portfolio securities or valuation of net assets of the fund
not reasonably practicable.
Although they would not normally do so, the funds have the right to pay the
redemption price in whole or in part in portfolio securities as selected by the
board of trustees, taken at their value as used in determining net asset value
for purposes of computing the redemption price. A shareholder that redeems
fund shares, and is given by the fund a proportionate amount of the fund's
portfolio securities in lieu of cash, may incur brokerage commissions in the
event of a sale of the securities through a broker.
GENERAL INFORMATION
CUSTODIAN OF ASSETS - Securities and cash owned by the funds, including
proceeds from the sale of shares of the funds and of securities in the funds'
portfolios, are held by The Chase Manhattan Bank, One Chase Manhattan Plaza,
New York, NY 10081, as Custodian. Non-U.S. securities may be held by the
Custodian pursuant to sub-custodial arrangements in non-U.S. banks or foreign
branches of U.S. banks.
INDEPENDENT AUDITORS - Deloitte & Touche LLP, located at 1000 Wilshire
Boulevard, Los Angeles, CA 90017, serves as the Trust's independent auditors,
providing audit services, preparing tax returns and reviewing certain documents
of the Trust to be filed with the Securities and Exchange Commission. The
financial statements included in this statement of additional information from
the Annual Report have been so included in reliance on the reports of Deloitte
& Touche LLP given on the authority of said firm as experts in auditing and
accounting.
COUNSEL - Paul, Hastings, Janofsky & Walker LLP, 555 South Flower Street, Los
Angeles, CA 90071, has passed upon the legality of the shares offered hereby.
REPORTS TO SHAREHOLDERS - The Trust's fiscal year ends on July 31.
Shareholders are provided at least semi-annually with reports showing the
investment portfolio, financial statements and other information audited by the
funds' independent auditors, Deloitte & Touche LLP, whose selection is
determined annually by the board of trustees of the Trust.
The financial statements including the investment portfolios and the Reports
of Independent Auditors contained in the Annual Report as of July 31, 1998 are
included in this statement of additional information.
YEAR 2000 - The funds and its shareholders depend on the proper functioning of
computer systems maintained by the Investment Adviser and its affiliates and
other key service providers. Many computer systems in use today will require
reprogramming or replacement prior to the year 2000 because of the way they
store dates and make date-related calculations. The funds understand that
these service providers are taking steps to address the "Year 2000 problem".
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the fund. In addition, the funds' investments could be
adversely affected by the Year 2000 problem. For example, the markets for
securities in which the funds invest could experience settlement problems and
liquidity issues. Corporate and governmental data processing errors may cause
losses for individual companies and overall economic uncertainties. Earnings of
individual issuers are likely to be affected by the costs of addressing the
problem, which may be substantial and may be reported inconsistently.
PERSONAL INVESTING POLICY - Capital Research and Management Company and its
affiliated companies have adopted a personal investing policy consistent with
Investment Company Institute guidelines. This policy includes: a ban on
acquisitions of securities pursuant to an initial public offering; restrictions
on acquisitions of private placement securities; pre-clearance and reporting
requirements; review of duplicate confirmation statements; annual
recertification of compliance with codes of ethics; blackout periods on
personal investing for certain investment personnel; ban on short-term trading
profits for investment personnel; limitations on service as a trustee of
publicly traded companies; and disclosure of personal securities transactions.
REMOVAL OF TRUSTEES BY SHAREHOLDERS - At any meeting of shareholders, duly
called and at which a quorum is present, the shareholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be cast
thereon, remove any Trustee or Trustees from office and may elect a successor
or successors to fill any resulting vacancies for the unexpired terms of
removed Trustees. The Trustees shall promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any Trustees when
requested in writing to do so by the record holders of not less than 10% of the
outstanding shares of the Trust.
Investment Results and Related Statistics
Growth and Income Portfolio's yield was 3.94% and Bond Portfolio's yield was
5.93% based on a 30-day (or one month) period ended July 31, 1998, computed by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to
the following formula:
YIELD = 2[(a-b/cd+1)/6/-1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
(Growth and Income Portfolio and Bond Portfolio do not have a sales charge.)
Growth and Income Portfolio's average annual total return for the one-,
five- and ten-year periods ended on July 31, 1998 was +9.05%, +15.80% and
+14.62%, respectively. Bond Portfolio's average annual total return for the
one-, five- and ten-year periods ended on July 31, 1998 was +6.70%, +5.98% and
+9.09%, respectively. The average annual total return (T) is computed by
equating the value at the end of the period (ERV) with a hypothetical initial
investment of $1,000 (P) over a period of years (n) according to the following
formula as required by the Securities and Exchange Commission: P(1+T)/n/ =
ERV.
The following assumptions will be reflected in computations made in accordance
with the formula stated above: (1) reinvestment of dividends and distributions
at net asset value on the reinvestment date determined by the board of
trustees; and (2) a complete redemption at the end of any period illustrated.
The funds may also calculate a distribution rate on a taxable and tax
equivalent basis. The distribution rate is computed by dividing the dividends
paid by the fund over the last 12 months by the sum of the month-end net asset
value and the capital gains paid over the last 12 months. The distribution
rate may differ from the yield.
The funds may include information on their investment results and/or
comparisons of their investment results to various unmanaged indices (such as
The Dow Jones Average of 30 Industrial Stocks, The Standard & Poor's 500 Stock
Composite Index and the Lipper Growth & Income Fund Index for the Growth and
Income Portfolio and the Lehman Aggregate Bond Index for Bond Portfolio) or
results of other mutual funds or investment or savings vehicles in
advertisements or in reports furnished to present or prospective shareholders.
Total return for the unmanaged indices will be calculated assuming
reinvestment of dividends and interest, but will not reflect any deductions for
advisory fees, brokerage costs or administrative expenses.
The funds may refer to results and surveys compiled by organizations such as
CDA Investment Services, Ibbotson Associates, Lipper Analytical Services, and
Morningstar, Inc. and by the U.S. Department of Commerce. Additionally, the
funds may, from time to time, refer to results published in various newspapers
and periodicals, including Barrons, Forbes, Fortune, Institutional Investor,
Kiplinger's Personal Finance Magazine, Money, U.S. News and World Report and
The Wall Street Journal.
The funds may, from time to time, compare their investment results with the
Consumer Price Index, which is a measure of the average change in prices over
time in a fixed market basket of goods and services (E.G. food, clothing,
fuels, transportation, and other goods and services that people buy for
day-to-day living).
The investment results for the funds set forth below were calculated as
described in the funds' prospectus. The percentage increases shown in the
table below or used in published reports of the funds are obtained by
subtracting the index results at the beginning of the period from the index
results at the end of the period and dividing the difference by the index
results at the beginning of the period.
Growth and Income Portfolio vs. Various Unmanaged Indices
<TABLE>
<CAPTION>
10-Year Growth DJIA/1/ S&P 500/2/ Lipper Growth
8/1 - 7/31 and and Income/3/
Income
Portfolio
<S> <C> <C> <C> <C>
1988 - 1998 +291% +458% +443% +320%
1987 - 1997 +251 +336 +303 +252
1986 - 1996 +204 +330 +269 +220
1985 - 1995 +238 +391 +306 +255
1984 - 1994 +271 +385 +327 +290
1983 - 1993 +260 +333 +294 +249
1982 - 1992 +411 +528 +478 +381
1981 - 1991 +325 +392 +343 +290
1980 - 1990 +326 +392 +344 +301
1979 - 1989 +379 +409 +416 +387
1978 - 1988 +328 +308 +326 +329
1977 - 1987 +384 +388 +417 +412
1976 - 1986 +329 +208 +271 +301
1975 - 1985 +335 +177 +250 +287
1975# - 1985 +333 +177 +248 +287
</TABLE>
Bond Portfolio vs. Various Unmanaged Indices
<TABLE>
<CAPTION>
Lehman Lipper Average of
10-Year Brothers Corporate A-Rated
8/1 - 7/31 Bond Portfolio Aggregate/4/ Debt Funds/5/
<S> <C> <C> <C>
1988 - 1998 +139% +140% +134%
1987 - 1997 +143 +139 +135
1986 - 1996 +129 +126 +119
1985 - 1995 +161 +160 +148
1984 - 1994 +191 +193 +178
1983 - 1993 +219 +218 +201
1982 - 1992 +254 +251 +232
1981 - 1991 +253 +269 +233
1980 - 1990 +204 +217 +188
1979 - 1989 +195 +201 +184
1978 - 1988 +178 +178 +164
1977 - 1987 +157 +164 +151
1976 - 1986 +178 +181 +168
1975 - 1985 +157 N/A +158
1975# - 1985 +158 N/A N/A
</TABLE>
________________
# From July 26, 1975
/1/ The Dow Jones Average of 30 Industrial Stocks is comprised of 30 industrial
companies such as General Motors and General Electric.
/2/ The Standard & Poor's 500 Stock Composite Index is comprised of industrial,
transportation, public utilities, and financial stocks and represents a large
portion of the value of issues traded on the New York Stock Exchange. Selected
issues traded on the American Stock Exchange are also included.
/3/ The Lipper Growth & Income Fund Index is a non-weighted index of the 30
largest funds within the Lipper Growth & Income investment objective. It is
calculated daily with adjustments for income dividends and capital gain
distributions as of the ex-dividend dates.
/4/ The Lehman Brothers Aggregate Bond Index covers all sectors of the fixed
income market and is a combination of the Lehman Brothers Treasury Bond Index,
the Agency Bond Index, the Corporate Bond Index, the Yankee Bond Index and the
Mortgage Backed Securities Index. Its inception date is December 31, 1975.
/5/ The Lipper Average of Corporate A-Rated Debt Funds is an average of the
cumulative total reinvestment performance of funds that invest at least 65% of
assets in corporate debt issues rated "A" or better or government issues.
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM
<TABLE>
<CAPTION>
and had taken
all dividends and
If you had capital gain
invested $50,000 distributions
in Growth and Income in shares, your
Portfolio this investment would
many have been worth
years ago . . . this much at
7/31/98
| |
Number Periods
of Years 8/1 - 7/31 Value
<S> <C> <C>
1 1997 - 1998
$54,527
2 1996 - 1998
75,465
3 1995 - 1998
85,437
4 1994 - 1998
101,304
5 1993 - 1998
104,111
6 1992 - 1998
114,572
7 1991 - 1998
132,610
8 1990 - 1998
152,542
9 1989 - 1998
158,837
10 1988 - 1998
195,720
11 1987 - 1998
191,205
12 1986 - 1998
229,660
13 1985 - 1998
288,381
14 1984 - 1998
376,165
15 1983 - 1998
374,886
16 1982 - 1998
584,889
17 1981 - 1998
563,377
18 1980 - 1998
649,205
19 1979 - 1998
761,040
20 1978 - 1998
838,674
21 1977 - 1998
924,757
22 1976 - 1998
984,698
23 1975#- 1998
1,250,053
</TABLE>
# From July 26, 1975
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM
<TABLE>
<CAPTION>
. . . and had taken
all dividends and
If you had capital gain
invested $50,000 distributions
in Bond Portfolio this in shares, your
many investment would
years ago . . . have been worth
this much at
7/31/98
| |
<S> <C> <C>
Number Periods
of Years 8/1 - 7/31 Value
1 1997 - 1998 $53,348
2 1996 - 1998 59,124
3 1995 - 1998 62,819
4 1994 - 1998 67,828
5 1993 - 1998 66,850
6 1992 - 1998 74,699
7 1991 - 1998 88,657
8 1990 - 1998 98,212
9 1989 - 1998 104,945
10 1988 - 1998 119,305
11 1987 - 1998 129,585
12 1986 - 1998 135,305
13 1985 - 1998 163,670
14 1984 - 1998 197,451
15 1983 - 1998 213,160
16 1982 - 1998 264,220
17 1981 - 1998 312,852
18 1980 - 1998 298,531
19 1979 - 1998 309,609
20 1978 - 1998 331,228
21 1977 - 1998 333,655
22 1976 - 1998 375,540
23 1975#- 1998 421,544
</TABLE>
# From July 26, 1975
Illustration of a $50,000 investment in Growth and Income Portfolio with
dividends reinvested and capital gain distributions taken in shares
(for the period July 26, 1975 through July 31, 1998)
<TABLE>
<CAPTION>
COST OF SHARES VALUE OF SHARES
Year Total From From
Ended Annual Dividends Investment From Initial Capital Gains Dividends Total
July 31 Dividends (cumulative) Cost Investment Reinvested Reinvested Value
<S> <C> <C> <C> <C> <C> <C> <C>
1975# $ 0 $ 0 $50,000 $49,769 $0 $ 0 $49,770
1976 2,408 2,408 52,408 60,781 0 2,695 63,476
1977 2,454 4,862 54,862 62,331 0 5,259 67,590
1978 2,899 7,761 57,761 65,910 0 8,615 74,525
1979 3,511 11,272 61,272 69,263 0 12,868 82,131
1980 4,322 15,594 65,594 77,021 0 19,256 96,277
1981 6,326 21,920 71,920 79,847 4,739 26,356 110,942
1982 7,869 29,789 79,789 64,678 13,443 28,739 106,860
1983 6,722 36,511 86,511 96,477 20,052 50,197 166,726
1984 7,502 44,013 94,013 83,847 31,536 50,774 166,157
1985 9,036 53,049 103,049 95,601 53,303 67,832 216,736
1986 10,623 63,672 113,672 104,971 81,000 86,184 272,155
1987 12,851 76,523 126,523 104,222 123,158 99,505 326,885
1988 15,733 92,256 142,256 88,382 130,787 100,178 319,347
1989 17,918 110,174 160,174 96,368 167,745 129,388 393,501
1990 22,799 132,973 182,973 89,440 178,016 142,283 409,739
1991 21,836 154,809 204,809 94,623 202,831 173,872 471,326
1992 20,318 175,127 225,127 96,580 249,826 199,127 545,533
1993 21,415 196,542 246,542 97,479 279,694 223,176 600,349
1994 22,417 218,959 268,959 90,868 296,050 230,062 616,980
1995 22,961 241,920 291,920 95,522 369,066 266,973 731,561
1996 25,984 267,904 317,904 98,431 428,636 301,171 828,238
1997 25,982 293,886 343,886 119,852 629,560 396,858 1,146,270
1998 36,558 330,444 380,444 63,946 947,192 238,915 1,250,053
</TABLE>
# From July 26, 1975
The dollar amount of capital gain distributions during the period was
$1,174,453.
Illustration of a $50,000 investment in Bond Portfolio with
dividends reinvested and capital gain distributions taken in shares
(for the period July 26, 1975 through July 31, 1998)
<TABLE>
<CAPTION>
COST OF SHARES VALUE OF SHARES
Year Total From From
Ended Annual Dividends Investment From Initial Capital Gains Dividends Total
July 31 Dividends (cumulative) Cost Investment Reinvested Reinvested Value
<S> <C> <C> <C> <C> <C> <C> <C>
1975# $ 0 $0 $50,000 $50,065 $ 0 $ 0 $50,064
1976 3,466 3,466 53,466 52,455 0 3,668 56,123
1977 4,395 7,861 57,861 54,854 0 8,315 63,169
1978 4,798 12,659 62,659 51,161 0 12,472 63,633
1979 5,595 18,254 68,254 50,165 0 17,913 68,078
1980 7,331 25,585 75,585 46,568 0 24,036 70,604
1981 7,990 33,575 83,575 39,235 0 28,137 67,372
1982 9,678 43,253 93,253 40,739 0 39,032 79,771
1983 10,518 53,771 103,771 45,384 0 53,497 98,881
1984 11,193 64,964 114,964 43,796 0 62,950 106,746
1985 12,231 77,195 127,195 47,570 0 81,205 128,775
1986 13,557 90,752 140,752 52,296 0 103,480 155,776
1987 13,829 104,581 154,581 50,040 0 112,609 162,649
1988 13,553 118,134 168,134 48,557 5,210 122,900 176,667
1989 15,800 133,934 183,934 50,630 5,433 144,778 200,841
1990 17,213 151,147 201,147 49,693 5,332 159,584 214,609
1991 19,146 170,293 220,293 50,432 5,411 181,896 237,739
1992 20,570 190,863 240,863 55,202 5,923 221,039 282,164
1993 22,376 213,239 263,239 55,827 12,805 246,660 315,292
1994 22,971 236,210 286,210 47,876 29,925 232,942 310,743
1995 23,564 259,774 309,774 47,762 31,232 256,528 335,522
1996 25,003 284,777 334,777 47,223 30,879 278,391 356,493
1997 26,094 310,871 360,871 48,756 31,882 314,450 395,088
1998 31,811 342,682 392,682 48,075 31,436 342,033 421,544
</TABLE>
# From July 26, 1975
The dollar amount of capital gain distributions during the period was
$33,339.
EXPERIENCE OF INVESTMENT ADVISER - The Investment Adviser manages nine growth
and growth-income funds that are at least 10 years old. In the rolling 10-year
periods since January 1, 1968 (133 in all), those funds have had better total
returns than their comparable Lipper indexes in 124 of 133 periods.
Note that past results are not an indication of future investment results.
Also, the fund has different investment policies than the funds mentioned
above. These results are included solely for the purpose of informing
investors about the experience and history of Capital Research and Management
Company.
<TABLE>
<S> <C> <C> <C>
GROWTH AND INCOME PORTFOLIO
INVESTMENT PORTFOLIO, JULY 31, 1998
Shares or Percent
Principal Market Of Net
EQUITY SECURITIES Amount Value Assets
(common and preferred stocks and convertible debentures) ------ ------ ------
- -----------------------------------------------------
ENERGY
Energy Sources - 6.90%
Amoco Corp. 10,000 $417,500 0.97%
Atlantic Richfield Co. 17,000 1,151,750 2.67
Kerr-McGee Corp. 5,000 256,563 .59
Texaco Inc. 6,000 364,875 .85
Ultramar Diamond Shamrock Corp. 30,000 785,624 1.82
Utilities: Electric & Gas-8.14%
Ameren Corp. 10,000 378,125 .88
DPL Inc. 37,500 639,844 1.48
GPU Inc. 20,000 715,000 1.66
K N Energy, Inc. 12,000 593,250 1.38
Southern Electric PLC (United Kingdom) 60,000 545,615 1.26
Williams Companies, Inc. 20,000 641,250 1.48
------ ------
6,489,396 15.04
------ ------
MATERIALS
Chemicals-7.09%
Dow Chemical Co. 4,000 363,000 .84
International Flavors & Fragrances Inc. 15,000 630,000 1.46
Morton International, Inc. 30,000 725,625 1.68
Praxair, Inc. 15,000 738,750 1.71
Witco Corp. 25,000 603,125 1.40
Forest Products & Paper-2.62%
Georgia-Pacific Corp., Georgia-Pacific Group 5,000 256,875 .60
Georgia-Pacific Corp., Timber Group 5,000 112,188 .26
Union Camp Corp. 12,000 509,250 1.18
Weyerhaeuser Co. 6,000 252,000 .58
Metals: Nonferrous-1.12%
Aluminum Co. of America 7,000 485,188 1.12
Metals: Steel-1.40%
Allegheny Teledyne Inc. 30,000 599,999 1.40
------ ------
5,276,000 12.23
------ ------
CAPITAL EQUIPMENT
Data Processing & Reproduction-0.64%
Hewlett-Packard Co. 5,000 277,500 .64
Electrical & Electronics-1.01%
Nokia Corp., Class A (ADR)(Finland) 5,000 435,625 1.01
Electronic Components-1.81%
Corning Inc. 25,400 779,463 1.81
Energy Equipment-0.70%
Schlumberger Ltd. 5,000 302,813 .70
Industrial Components-2.72%
Eaton Corp. 10,000 652,500 1.51
Genuine Parts Co. 15,000 520,313 1.21
Machinery & Engineering-0.79%
Caterpillar Inc. 7,000 339,499 .79
------ ------
3,307,713 7.67
------ ------
CONSUMER GOODS
Automobiles-1.37%
Chrysler Corp. 10,000 591,875 1.37
Beverages & Tobacco-3.39%
Anheuser-Busch Companies, Inc. 10,000 516,875 1.19
Imperial Tobacco Ltd. (United Kingdom) 60,000 506,922 1.18
Philip Morris Companies Inc. 10,000 438,125 1.02
Food & Household Products-1.44%
General Mills, Inc. 10,000 619,375 1.44
Health & Personal Care-6.96%
Avon Products, Inc. 5,000 432,500 1.00
Glaxo Wellcome PLC (ADR)(United Kingdom) 15,000 912,188 2.11
Kimberly-Clark Corp. 15,000 674,063 1.56
Merck & Co., Inc. 8,000 986,499 2.29
------ ------
5,678,422 13.16
------ ------
SERVICES
Broadcasting & Publishing-3.00%
Gannett Co., Inc. 8,000 511,500 1.19
Houston Industries Inc. 7.00% Automatic Common Exchange
Securities convertible preferred 2000(1) 10,000 782,500 1.81
Business & Public Services-4.54%
Avery Dennison Corp. 10,000 575,625 1.33
Browning-Ferris Industries, Inc. 10,000 351,875 .82
Cendant Corp. 3.00% convertible debentures 2002(2) $800,000 749,000 1.74
Electronic Data Systems Corp. 8,000 281,500 .65
Merchandising-2.17%
American Stores Co. 15,000 347,813 .81
J.C. Penney Co., Inc. 10,000 586,875 1.36
Telecommunications-2.41%
Ameritech Corp. 15,000 737,813 1.71
AT&T Corp. 5,000 303,125 .70
Transportation: Rail & Road-1.38%
Norfolk Southern Corp. 20,000 597,499 1.38
------ ------
5,825,125 13.50
------ ------
FINANCE
Banking-8.64%
Bank of Tokyo-Mitsubishi, Ltd. (ADR)(Japan) 25,000 250,000 .58
First Financial Bancorp. 12,200 330,925 .77
Fulton Financial Corp. 50,962 1,239,014 2.87
Huntington Bancshares Inc. 27,709 838,197 1.94
Wells Fargo & Co. 3,000 1,067,625 2.48
Insurance-4.52%
Aetna Inc. 5,000 346,563 .80
General Re Corp. 2,000 474,000 1.10
Royal & Sun Alliance Insurance Group PLC (United Kingdom) 40,000 434,925 1.01
Trenwick Group Inc. 20,000 694,999 1.61
Real Estate-4.88%
Apartment Investment and Management Co., Class A 10,000 380,000 .88
Archstone Communities Trust (formerly Security Capital Pacific 34,285 719,985 1.67
Boston Properties, Inc. 10,000 323,125 .75
CCA Prison Realty Trust 15,000 323,438 .75
Spieker Properties, Inc. 10,000 359,374 .83
------ ------
7,782,170 18.04
------ ------
MISCELLANEOUS
Other equity securities in initial period of acquisition 201,413 .47
------ ------
TOTAL EQUITY SECURITIES (cost: $35,085,140) 34,560,239 80.11
------ ------
SHORT-TERM SECURITIES
Corporate Short-Term Notes-16.19%
A.I. Credit Corp. 5.49% due 8/13/98 $1,000 998,018 2.31
Abbott Laboratories 5.49% due 9/1/98 1,000 995,120 2.31
Bell Atlantic Financial Services, Inc. 5.50% due 8/6/98 900 899,175 2.08
Emerson Electric Co. 5.51% due 8/6/98 600 599,449 1.39
Lucent Technologies Inc. 5.52% due 9/11/98 1,000 993,560 2.30
Pitney Bowes Credit Corp. 5.50% due 8/7/98 1,000 998,931 2.32
St. Paul Companies., Inc. 5.55% due 8/7/98 500 499,460 1.16
Xerox Corp. 5.48% due 8/6/98 1,000 999,086 2.32
------ ------
6,982,799 16.19
------ ------
Federal Agency Discount Notes-2.19%
Freddie Mac 5.46% due 9/4/98 950 944,957 2.19
------ ------
TOTAL SHORT-TERM SECURITIES (cost: $7,927,756) 7,927,756 18.38
------ ------
TOTAL INVESTMENT SECURITIES (cost: $43,012,896) 42,487,995 98.49
Excess of cash and receivables over payables 652,905 1.51
------ ------
NET ASSETS 43,140,900 100.00
====== ======
(1)Security is convertible into Time Warner shares.
(2)Purchased in a private placement transaction;
resale may be limited to qualified institutional buyers;
resale to the public may require registration.
ADR = American Depositary Receipts
See Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C> <C>
Growth and Income Portfolio
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
at July 31, 1998
Assets:
Investment securities at market
(cost: $43,012,896) $42,487,995
Cash 603,738
Receivables for-
Sales of fund's shares 22,500
Dividends and accrued interest 77,576
Reimbursement of expenses from
investment adviser 24,279 124,355
------- -------
43,216,088
Liabilities:
Payables for -
Purchases of investments 20,903
Accrued expenses 54,285 75,188
------- -------
Net Assets at July 31, 1998 -
Equivalent to $12.09 per share on
3,569,108 shares of beneficial interest
issued and outstanding; unlimited
shares authorized $43,140,900
========
Statement of Operations
for the year ended July 31, 1998
Investment Income:
Income:
Dividends $ 1,053,909
Interest 557,735 $1,611,644
-------
Expenses:
Management services fee 235,598
Reports to shareholders 24,900
Registration statement and prospectus 23,816
Auditing fees 31,000
Legal fees 42,295
Custodian fee 874
Taxes other than federal income tax 29,862
Other expenses 28,093
-------
Total expenses before reimbursement 416,439
Reimbursement of expenses 63,974 352,464
------- -------
Net investment income 1,259,180
-------
Realized Gain and Change in Unrealized
Appreciation (Depreciation)
on Investments:
Net realized gain 13,791,367
Net change in unrealized appreciation
(depreciation) on investments (10,940,194)
-------
Net realized gain and change in unrealized
appreciation (depreciation) 2,851,173
on investments -------
Net Increase in Net Assets Resulting
from Operations $ 4,110,353
========
Statement of Changes in Net Assets
Year ended
1998 1997
Operations:
Net investment income $ 1,259,180 $ 1,504,304
Net realized gain on investments 13,791,367 14,485,532
Net unrealized (depreciation) appreciation
on investments (10,940,194) 1,781,952
------- -------
Net increase in net assets resulting
from operations 4,110,353 17,771,788
------- -------
Dividends and Distributions Paid to
Shareholders:
Dividends from net investment income (1,382,106) (1,543,830)
Distributions from net realized
gain on investments (26,584,691) (6,480,136)
------- -------
Total dividends and distributions (27,966,797) (8,023,966)
------- -------
Capital Share Transactions:
Proceeds from shares sold:
180,191 and 198,622
shares, respectively 3,165,176 3,944,263
Proceeds from shares issued in
reinvestment of net investment income
dividends and distributions of net
realized gain on investments:
1,930,591 and 396,508 shares,
respectively 27,173,082 7,514,541
Cost of shares repurchased:
647,743 and 1,675,374
shares, respectively (11,068,403) (32,784,034)
------- -------
Net increase (decrease) in net assets
resulting from capital share transactions 19,269,855 (21,325,230)
------- -------
Total Decrease in Net Assets (4,586,589) (11,577,408)
Net Assets:
Beginning of year 47,727,489 59,304,897
------- -------
End of year (including undistributed
net investment income: $0 and
$118,014, respectively) $43,140,900 $ 47,727,489
======== ========
See Notes to Financial Statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. On July 21, 1998 the shareholders of Endowments, Inc. (the "predecessor")
approved an Agreement and Plan of Reorganization providing for the transfer, on
July 31, 1998, of all its assets and liabilities in exchange for the issuance
of shares in Growth and Income Portfolio (the "fund"), a series of Endowments,
an open-end, diversified management investment company registered under the
Investment Company Act of 1940, in a tax-free reorganization. In accordance
with generally accepted accounting principles, the statement of operations, the
statement of changes in net assets and the per-share data and ratios presented
herein include those of the predecessor immediately prior to the
reorganization. The investment portfolio includes securities held by the fund
immediately following the reorganization. Because the fund acquired all the
assets and liabilities and adopted the same accounting policies of the
predecessor, the notes to financial statements relate to both the fund and its
predecessor.
The fund seeks to provide long-term growth of principal, with income and
preservation of capital as secondary objectives, primarily through investments
in common stocks. The following paragraphs summarize the significant accounting
policies consistently followed by the fund in the preparation of its financial
statements:
Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by the investment adviser to be the broadest
and most representative market, which may be either a securities exchange or
the over-the-counter market. Fixed-income securities are valued at prices
obtained from a pricing service, when such prices are available; however, in
circumstances where the investment adviser deems it appropriate to do so, such
securities will be valued at the mean quoted bid and asked prices or at prices
for securities of comparable maturity, quality and type. Securities with
original maturities of one year or less having 60 days or less to maturity are
amortized to maturity based on their cost if acquired within 60 days of
maturity or, if already held on the 60th day, based on the value determined on
the 61st day.
Assets or liabilities initially expressed in terms of foreign currencies are
translated into U.S. dollars at the prevailing market rates at the end of the
reporting period. Purchases and sales of securities and income and expenses are
translated into U.S. dollars at the prevailing market rates on the dates of
such transactions. The effects of changes in foreign currency exchange rates on
investment securities are included with the net realized and unrealized gain or
loss on investment securities.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith by a
committee appointed by the Board of Trustees.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses from securities transactions are reported on an identified cost
basis. Dividend and interest income is reported on the accrual basis. Discounts
on securities purchased are amortized. The fund does not amortize premiums on
securities purchased. Dividends and distributions paid to shareholders are
recorded on the ex-dividend date.
2. It is the fund's policy to continue to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required.
As of July 31, 1998, net unrealized depreciation on investments for book and
federal income tax purposes aggregated $524,901 of which $49,993 related to
appreciated securities and $574,894 related to depreciated securities. There
was no difference between book and tax realized gains on securities
transactions for the year ended July 31, 1998. The cost of portfolio securities
for book and federal income tax purposes was $43,012,896 at July 31, 1998.
3. The fee of $235,598 for management services was incurred pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Directors of the predecessor were affiliated. The
Investment Advisory and Service Agreement provides for monthly fees, accrued
daily, based on an annual rate of 0.50% of the first $150 million of average
net assets and 0.40% of such assets in excess of $150 million. The Investment
Advisory and Service Agreement provided for a fee reduction to the extent
annual ordinary operating expenses exceed 1.50% of the first $30 million of the
average net assets and 1.00% of the average net assets in excess thereof.
Expenses which are not subject to this limitation are interest, taxes,
brokerage commissions, transaction costs, and extraordinary expenses. As of
July 31, 1998, no such fee reduction was required.
In addition, CRMC voluntarily agreed to waive its management services fees to
the extent necessary to ensure that the predecessor's annual ordinary operating
expenses did not exceed 0.75% of average net assets. Fee reductions were
$63,974 for the year ended July 31, 1998. Following the reorganization, this
voluntary fee reduction was incorporated into the terms of the Investment
Advisory and Service Agreement.
No fees are paid by the fund to its officers and Trustees.
4. As of July 31, 1998, there was no accumulated undistributed net realized
gain on investments and paid-in capital was $43,683,871.
The predecessor made purchases and sales of investment securities, excluding
short-term securities, of $18,089,204 and $26,110,590, respectively, during the
year ended July 31, 1998.
Pursuant to the custodian agreement, the fund receives credits against its
custodian fee for imputed interest on certain balances with the custodian bank.
The custodian fee of $874 was paid by these credits rather than in cash.
<TABLE>
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA AND RATIOS
Year Ended July 31
------ ------ ------ ------ ------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Net Asset Value, Beginning of Year $22.66 $18.61 $18.06 $17.18 $18.43
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income .51 .56 .58 .63 .65
Net realized and unrealized
gain (loss) on investments 1.16 6.04 1.73 2.21 (.16)
------ ------ ------ ------ ------
Total income from investment operations 1.67 6.60 2.31 2.84 .49
------ ------ ------ ------ ------
Less Distributions:
Dividends from net investment income (.57) (.55) (.61) (.61) (.66)
Distributions from net realized gains (11.67) (2.00) (1.15) (1.35) (1.08)
------ ------ ------ ------ ------
Total distributions (12.24) (2.55) (1.76) (1.96) (1.74)
------ ------ ------ ------ ------
Net Asset Value, End of Year $12.09 $22.66 $18.61 $18.06 $17.18
====== ====== ====== ====== ======
Total Return 9.05% 38.40% 13.22% 18.57% 2.77%
Ratios/Supplemental Data:
Net assets, end of period (in millions) $43 $48 $59 $57 $53
Ratio of expenses to average net assets 0.75% (1) .74% .72% .73% .73%
Ratio of net income to average net assets 2.69% 2.73% 3.12% 3.70% 3.78%
Portfolio turnover rate 48.59% 50.69% 38.73% 24.04% 25.58%
(1) Had CRMC not waived management services fees, the fund's
expense ratio would have been 0.89%
for the fiscal year ended 1998.
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of Endowments and Shareholders of
Growth and Income Portfolio:
We have audited the accompanying statement of assets and liabilities of
Endowments, Growth and Income Portfolio (the "fund"), including the investment
portfolio, as of July 31, 1998, and the related statement of operations for the
year then ended, the statement of changes in net assets for the each of the two
years in the period then ended, and the per-share data and ratios for each of
the five years in the period then ended. These financial statements and
per-share data and ratios are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial statements and
per-share data and ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
per-share data and ratios are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at July 31, 1998 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and per-share data and ratios
referred to above present fairly, in all material respects, the financial
position of Endowments, Growth and Income Portfolio at July 31, 1998, 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 per-share
data and ratios for each of the five years in the period then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
August 28, 1998
<TABLE>
<S> <C> <C> <C>
Published Report Name Mkt Val
BOND PORTFOLIO
INVESTMENT PORTFOLIO, JULY 31, 1998 Shares or
Principal Percent
Amount Market of Net
BONDS, NOTES & PREFERRED STOCKS (000) Value Assets
Industrials - 12.80%
Bell Atlantic Financial Services, Inc. 5.75% convertible debentu $ 160 $ 165,600 .57%
Columbia/HCA Healthcare Corp. 8.85% 2007 125 133,358 .46
Comcast Cable Communications, Inc.: 250 278,673
8.375% 2007 250 298,980 1.99
8.875% 2017
Hutchison Whampoa Finance (CI) Ltd., Series D, 6.988% 2037 (1) 300 256,542 .88
Hyundai Semiconductor America, Inc. 8.625% 2007 (1) 450 351,000 1.21
Inco Ltd.:
9.875% 2019 300 316,620
9.60% 2022 700 780,136 3.77
Petrozuata Finance, Inc., Series A, 7.63% 2009(1) 250 250,433 .86
Scotia Pacific Company LLC, Timber Collateralized Notes:
Class A-1, 6.55% 2028(1) 250 248,480
Class A-2, 7.11% 2028(1) 250 246,203 1.70
Wharf International Finance Ltd., Series A, 7.625% 2007 500 396,938 1.36
-------- --------
3,722,963 12.80
-------- --------
Electric Utilities - 0.59%
Israel Electric Corp. Ltd. 7.75% 2027(1) 175 170,573 .59
-------- --------
Multi-Industry - 0.63%
Swire Pacific Capital Ltd. 8.84% cumulative guaranteed perpetual
capital securities(1) 10,000 shar 184,600 .63
-------- --------
Transportation - 9.69%
Airplanes Pass Through Trust, Series 1, Class C, 8.15% 2019 (2) $ 993 1,044,426 3.59
Canadian National Railway Company 6.45% 2036 (3) 250 250,558 .86
Jet Equipment Trust, Series 1994-A, 11.79% 2013(1) 750 1,029,098 3.54
USAir, Inc., Enhanced Equipment Notes, Class B, 7.50% 2009 (2) 470 494,247 1.70
-------- --------
2,818,329 9.69
-------- --------
Financial - 10.31%
AT&T Capital Corp. 6.60% 2005 500 502,180 1.73
Barnett Capital I 8.06% 2026 500 543,760 1.87
BNP U.S. Funding LLC, Series A, 7.738% 2049 (1)(3) 500 497,790 1.71
Household Finance Corp. 6.40% 2008 250 248,883 .86
IBJ Preferred Capital Company LLC noncumulative preferred securities,
Series A, 8.79% (1) 250 231,915 .80
MBNA Corp., MBNA Capital A, Series A, 8.278% 2026 300 313,731 1.08
NB Capital Corp., 8.35% exchangeable depositary shares 10,000 shar 258,400 .89
SB Treasury Company LLC noncumulative preferred securities,
Series A, 9.40% (1) $ 125 125,373 .43
Washington Mutual Capital I Subordinated Capital Income Securities,
8.375% 2027 250 274,974 .94
-------- --------
2,997,006 10.31
-------- --------
Real Estate - 3.03%
Irvine Co. 7.46% 2006 (1)(4) 500 510,125 1.75
ProLogis Trust 7.05% 2006 125 125,390 .43
SocGen Real Estate Co. LLC, Series A, 7.64% 2049(1) 250 246,568 .85
-------- --------
882,083 3.03
-------- --------
Collateralized Mortgage/Asset-Backed Obligations (2)- 3.36%
Asset-Backed Securities Investment Trust, Series 1997-D, 6.79% 2 250 250,390 .86
Merrill Lynch Mortgage Investors, Inc.,
Seller Manufactured Housing Contract, Series 1995-C2,
Class A-1, 7.0875% 2021 (3) 255 260,563 .90
Nomura Asset Securities Corp., Series 1998-D6, Class A-A1, 6.28% 244 246,325 .85
Structured Asset Securities Corp., Series 1996-CFL,
Class A2A, 7.75% 2028 217 218,356 .75
-------- --------
975,634 3.36
Governments (excluding U.S. Government) & -------- --------
Governmental Authorities - 3.85%
Quebec (Province of) 13.25% 2014 1,000 1,118,630 3.85
-------- --------
Federal Agency Obligations - Mortgage Pass-Throughs (2)- 10.79%
Fannie Mae:
9.00% 2020 197 209,280
6.167% 2033 (3) 416 418,298 2.16
Freddie Mac:
8.75% 2008 94 98,292
12.50% 2019 42 48,245 .86
9.00% 2020 97 103,296
Government National Mortgage Assn.:
8.50% 2008 278 295,630
10.00% 2019 298 327,485
6.875% 2024 (3) 555 563,579 7.77
7.375% 2024 (3) 517 525,374
7.50% 2024 531 546,883
-------- --------
3,136,362 10.79
U.S. Treasury Obligations - 38.50% -------- --------
9.25% August 1998 1,000 1,000,939
11.625% November 2002 775 950,948
7.25% May 2004 1,000 1,082,660
11.625% November 2004 1,250 1,644,525 38.50
9.125% May 2009 500 583,595
10.375% November 2012 2,000 2,660,620
8.875% August 2017 2,425 3,275,642
-------- --------
11,198,929 38.50
-------- --------
TOTAL BONDS, NOTES & PREFERRED STOCKS (cost: $27,232,852) $ 27,205,108. 93.55
-------- --------
TOTAL INVESTMENT SECURITIES (cost: $27,232,852) 27,205,109 93.55
Excess of cash and receivables over payables 1,874,293 6.45
-------- --------
NET ASSETS $ 29,079,402.100.00%
========== =======
(1) Purchased in a private placement transaction; resale
may be limited to qualified institutional buyers; resale
to the public may require registration.
(2) Pass-through securities backed by a pool of
mortgages or other loans on which principal
payments are periodically made. Therefore, the
effective maturities are shorter than
the stated maturities.
(3) Coupon rate may change periodically.
(4) Valued under procedures established
by the Board of Trustees.
See Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C> <C>
Bond Portfolio
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
at July 31, 1998
Assets:
Investment securities at market
(cost: $27,232,852) $27,205,109
Cash 1,434,347
Receivables for-
Sales of investments $ 1,651
Accrued interest 484,566
Reimbursement of expenses
from investment adviser 31,961 518,178
-------- --------
29,157,634
Liabilities:
Payables for-
Repurchases of fund's shares 22,500
Accrued expenses 55,732 78,232
-------- --------
Net Assets at July 31, 1998-
Equivalent to $16.93 per share on
1,717,266 shares of beneficial interest
issued and outstanding; unlimited
shares authorized $29,079,402
===========
Statement of Operations
for the year ended July 31, 1998
Investment Income:
Income:
Dividends $ 21,794
Interest 2,332,507 $ 2,354,301
--------
Expenses:
Management services fee $ 154,762
Reports to shareholders 25,208
Registration statement and prospectus 25,322
Auditing fees 33,250
Legal fees 42,131
Custodian fee 151
Taxes other than federal income tax 25,048
Other expenses 28,015
--------
Total expenses before reimbursement 333,887
Reimbursement of expenses 102,579 231,308
-------- --------
Net investment income 2,122,993
--------
Realized Gain and Change in Unrealized
Appreciation (Depreciation)
on Investments:
Net realized gain 543,139
Net change in unrealized appreciation
(depreciation) on investments:
Beginning of year 625,522
End of year (27,743)
--------
Net change in unrealized appreciation
(depreciation) on investments (653,265)
--------
Net realized gain and change in unrealized
appreciation (depreciation) (110,126)
on investments
--------
Net Increase in Net Assets Resulting
from Operations $ 2,012,867
===========
Statement of Changes in Net Assets
Year ended July 31
1998 1997
Operations:
Net investment income $ 2,122,993 $ 2,508,147
Net realized gain (loss) on investments 543,139 (216,967)
Net unrealized appreciation (depreciation) on
investments (653,265) 1,356,940
-------- --------
Net increase in net assets resulting
from operations 2,012,867 3,648,120
-------- --------
Dividends Paid to
Shareholders:
Dividends from net investment income (2,405,442) (2,533,400)
-------- --------
Capital Share Transactions:
Proceeds from shares sold:
129,544 and 187,635
shares, respectively 2,202,671 3,152,584
Proceeds from shares issued in
reinvestment of net investment income
dividends and distributions of net
realized gain on investments:
57,517 and 65,746 shares,
respectively 968,653 1,089,420
Cost of shares repurchased:
393,839 and 822,286
shares, respectively (6,732,042) (13,772,096)
-------- --------
Net decrease in net assets resulting
from capital share transactions (3,560,718) (9,530,092)
-------- --------
Total Decrease in Net Assets (3,953,293) (8,415,372)
Net Assets:
Beginning of year 33,032,695 41,448,067
-------- --------
End of year (including undistributed
net investment income: $0 and
$274,340, respectively) $29,079,402 $33,032,695
========= ===========
See Notes to Financial Statements
</TABLE>
Notes to Financial Statements
1. On July 21, 1998 the shareholders of Bond Portfolio for Endowments, Inc.
(the "predecessor") approved an Agreement and Plan of Reorganization providing
for the transfer, on July 31, 1998, of all its assets and liabilities in
exchange for the issuance of shares in Bond Portfolio (the "fund"), a series of
Endowments, an open-end, diversified management investment company registered
under the Investment Company Act of 1940, in a tax-free reorganization. In
accordance with generally accepted accounting principles, the statement of
operations, the statement of changes in net assets and the per-share data and
ratios presented herein include those of the predecessor immediately prior to
the reorganization. The investment portfolio includes securities held by the
fund immediately following the reorganization. Because the fund acquired all
the assets and liabilities and adopted the same accounting policies of the
predecessor, the notes to financial statements relate to both the fund and its
predecessor.
The fund seeks to provide as high a level of current income as is consistent
with preservation of capital. The following paragraphs summarize the
significant accounting policies consistently followed by the fund in the
preparation of its financial statements:
Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by the investment adviser to be the broadest
and most representative market, which may be either a securities exchange or
the over-the-counter market.
Fixed-income securities are valued at prices obtained from a pricing service,
when such prices are available; however, in circumstances where the investment
adviser deems it appropriate to do so, such securities will be valued at the
mean quoted bid and asked prices or at prices for securities of comparable
maturity, quality and type. Securities with original maturities of one year or
less having 60 days or less to maturity are amortized to maturity based on
their cost if acquired within 60 days of maturity or, if already held on the
60th day, based on the value determined on the 61st day.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith by a
committee appointed by the Board of Trustees.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses from securities transactions are reported on an identified cost
basis. Dividend and interest income is reported on the accrual basis. Discounts
on securities purchased are amortized. The fund does not amortize premiums on
securities purchased. Distributions paid to shareholders are recorded on the
ex-dividend date.
2. It is the fund's policy to continue to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required.
As of July 31, 1998, net unrealized depreciation on investments for book and
federal income tax purposes aggregated $27,743 of which $7,236 related to
appreciated securities and $34,979 related to depreciated securities. There was
no difference between book and tax realized gains on securities transactions
for the year ended July 31, 1998. The cost of portfolio securities for book
and federal income tax purposes was $27,232,852 at July 31, 1998.
3. The fee of $154,762 for management services was incurred pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Directors of the predecessor were affiliated. The
Investment Advisory and Service Agreement provides for monthly fees, accrued
daily, based on an annual rate of .50% of the first $150 million of average net
assets and .40% of such assets in excess of $150 million. The Investment
Advisory and Service Agreement provided for a fee reduction to the extent
annual ordinary operating expenses exceed 1.50% of the first $30 million of the
average net assets and 1.00% of the average net assets in excess thereof.
Expenses which are not subject to this limitation are interest, taxes,
brokerage commissions, transaction costs, and extraordinary expenses.
In addition, CRMC voluntarily agreed to waive its management services fees
to the extent necessary to ensure that the predecessor's annual ordinary
operating expenses did not exceed 0.75% of average net assets. Fee reductions
were $102,579 for the year ended July 31, 1998. Following the reorganization,
this voluntary fee reduction was incorporated into the terms of the Investment
Advisory and Service Agreement.
No fees are paid by the fund to its officers and Trustees.
4. As of July 31, 1998, accumulated net realized loss on investments was $316
and paid-in capital was $29,115,570.
The predecessor made purchases and sales of investment securities, excluding
short-term securities, of $14,161,693 and $15,734,147, respectively, during the
year ended July 31, 1998.
Pursuant to the custodian agreement, the fund receives credits against its
custodian fee for imputed interest on certain balances with the custodian bank.
The custodian fee of $151 was paid by these credits rather than in cash.
<TABLE>
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA AND RATIOS
Year Ended July 31
------- ------- ------- ------- -------
1998 1997 1996 1995 1994
Net Asset Value, Beginning of Year 17.17 16.63 16.82 16.86 19.66
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income 1.19 1.21 1.22 1.26 1.32
Net realized and unrealized
gain (loss) on investments (.09) .52 (.19) .01 (1.51)
------- ------- ------- ------- -------
Total income (loss) from investment
operations 1.10 1.73 1.03 1.27 (.19)
------- ------- ------- ------- -------
Less Distributions:
Dividends from net investment income (1.34) (1.19) (1.22) (1.24) (1.35)
Distributions from net realized gains - - - (.07) (1.26)
------- ------- ------- ------- -------
Total distributions (1.34) (1.19) (1.22) (1.31) (2.61)
------- ------- ------- ------- -------
Net Asset Value, End of Year 16.93 17.17 16.63 16.82 16.86
======= ======= ======= ======= =======
Total Return 6.70% 10.83% 6.25% 7.97% (1.44)%
Ratios/Supplemental Data:
Net assets, end of period (in millions) $29 $33 $41 $44 $46
Ratio of expenses to average net assets .75% (1) .75%(1) .75%(1) .76% .77%
Ratio of net income to average net assets 6.87% 7.04% 7.17% 7.52% 6.99%
Portfolio turnover rate 50.40% 22.18% 54.43% 69.22% 82.12%
(1) Had CRMC not waived management services fees, the fund's
expense ratio would have been 1.08%, 0.85%, and 0.80%
for the fiscal years ended 1998, 1997, and 1996, respectively.
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of Endowments and Shareholders of Bond Portfolio:
We have audited the accompanying statement of assets and liabilities of
Endowments, Bond Portfolio (the "fund"), including the investment portfolio, as
of July 31, 1998, 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 per-share data and ratios for each of the five years
in the period then ended. These financial statements and per-share data and
ratios are the responsibility of the fund's management. Our responsibility is
to express an opinion on these financial statements and per-share data and
ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per-share data
and ratios are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1998 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and per-share data and ratios
referred to above present fairly, in all material respects, the financial
position of Endowments, Bond Portfolio at July 31, 1998, 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 per-share data and ratios for
each of the five years in the period then ended, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
August 28, 1998
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Included in Prospectus - Part A
Financial Highlights
Included in Statement of Additional Information - Part B
Investment Portfolio
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
Selected Per-Share Data and Ratios
Independent Auditors' Report
(b) Exhibits.
1. On file (see SEC file nos. 811-1884 and 2-34371)
2. On file (see SEC file nos. 811-1884 and 2-34371)
3. None
4. None
5. On file (see SEC file nos. 811-1884 and 2-34371)
6. None
7. None
8. On file (see SEC file nos. 811-1884 and 2-34371)
9. On file (see SEC file nos. 811-1884 and 2-34371)
10. Not applicable to this filing
11. Consent of Independent Auditors
12. None
13. None
14. None
15. None
16. On file (see SEC file nos. 811-1884 and 2-34371)
17. Financial Data Schedule (EDGAR)
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
As of August 31, 1998, there were 66 record holders of shares of
beneficialinterest of Growth and Income Portfolio and 57 record holders of
shares of beneficial interest of Bond Portfolio.
Item 27. Indemnification.
Registrant is a joint-insured under Investment Adviser/Mutual Fund Errors and
Omissions Policies written by American International Surplus Lines Insurance
Company, Chubb Custom Insurance Company, and ICI Mutual Insurance Company which
insures its officers and trustees against certain liabilities.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant by the Registrant pursuant to the Trust's Trust Instrument, its
By-Laws or otherwise, the Registrant is aware that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and, therefore, is unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the successful defense
of any act, suit or proceeding) is asserted by such trustees, officers or
controlling persons in connection with shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issues.
Item 28. Business and Other Connections of Investment Adviser.
None.
Item 29. Principal Underwriters.
(a) Not Applicable.
(b) Not Applicable.
(c) Not Applicable.
Item 30. Location of Accounts and Records.
Accounts, books and other records required by Rules 31a-1 and 31a-2 under the
Investment Company Act of 1940 are maintained and held in the offices of its
investment adviser, Capital Research and Management Company, 333 South Hope
Street, Los Angeles, California 90071, and/or 135 South State College
Boulevard, Brea, California 92821, and/or the offices of the Registrant, One
Market, Steuart Tower (Suite 1800), San Francisco, California 94105.
Registrant's records covering shareholder accounts are maintained and kept by
the fund's transfer agent, American Funds Service Company, 135 South State
College Boulevard, Brea, California 92821, 8332 Woodfield Crossing Boulevard,
Indianapolis, IN 46240, 3500 Wiseman Boulevard, San Antonio, Texas 78251 and
5300 Robin Hood Road, Norfolk, VA 23513.
Registrant's records covering portfolio transactions are also maintained and
kept by the fund's custodian, The Chase Manhattan Bank, One Chase Manhattan
Plaza, New York, New York 10081.
Item 31. Management Services.
None.
Item 32. Undertakings.
(a) Not Applicable
(b) Registrant undertakes to furnish each person to whom a prospectus is
delivered a copy of the Registrant's latest annual report to shareholders upon
request and without charge.
(c) Registrant undertakes to call a meeting of shareholders for the purpose
of voting upon the question of removal of a person serving as Trustee if
requested in writing to do so by the holders of not less than 10% of the
outstanding shares of Registrant.
SIGNATURE OF REGISTRANT
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City and County of San Francisco, and State of California on
the 28th day of September, 1998.
ENDOWMENTS
By /s/ Patrick F. Quan
Patrick F. Quan, Secretary
ATTEST:
/s/ Jennifer L. Yardley
Jennifer L. Yardley
Pursuant to the requirements of the Securities Act of 1933, this amendment to
its registration statement has been signed below on September 28, 1998, by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
<S> <C> <C>
(1) Principal Executive Officer:
President and
/s/ Frank L. Ellsworth Trustee
(Frank L. Ellsworth)
(2) Principal Financial Officer and
Principal Accounting Officer:
/s/ Anthony W. Hynes, Jr. Treasurer
(Anthony W. Hynes, Jr.)
(3) Trustees:
/s/ Robert B. Egelston
Robert B. Egelston Chairman
Steven D. Lavine* Trustee
Patricia A. McBride* Trustee
Gail L. Neale* Trustee
Charles R. Redmond* Trustee
Thomas E. Terry* Trustee
Robert C. Ziebarth* Trustee
</TABLE>
*By /s/ Patrick F. Quan
Patrick F. Quan, Attorney-in-Fact
Counsel reports that the amendment does not contain disclosures that would
make the amendment ineligible for effectiveness under the provisions of Rule
485(b).
/s/ Michele Y. Yang
Michele Y. Yang, Counsel
CONSENT OF INDEPENDENT AUDITORS
Endowments:
We consent to (a) the use in this Post-Effective Amendment No. 48 to
Registration Statement No. 811-1884 on Form N-1A of our reports dated August
28, 1998 appearing in the Financial Statements, which are included in Part B,
the Statement of Additional Information of such Registration Statement, (b) the
references to us under the heading "General Information" in such Statement of
Additional Information and (c) the reference to us under the heading "Financial
Highlights" in the Prospectus, which is a part of such Registration Statement.
DELOITTE & TOUCHE LLP
Los Angeles, California
September 24, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 43,013
<INVESTMENTS-AT-VALUE> 42,488
<RECEIVABLES> 124
<ASSETS-OTHER> 604
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 43,216
<PAYABLE-FOR-SECURITIES> 21
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54
<TOTAL-LIABILITIES> 75
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 3,569,108
<SHARES-COMMON-PRIOR> 2,106,069
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (525)
<NET-ASSETS> 43,141
<DIVIDEND-INCOME> 1,054
<INTEREST-INCOME> 558
<OTHER-INCOME> 0
<EXPENSES-NET> 352
<NET-INVESTMENT-INCOME> 1,259
<REALIZED-GAINS-CURRENT> 13,791
<APPREC-INCREASE-CURRENT> (10,940)
<NET-CHANGE-FROM-OPS> 4,110
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,382
<DISTRIBUTIONS-OF-GAINS> 26,585
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 180,191
<NUMBER-OF-SHARES-REDEEMED> 647,743
<SHARES-REINVESTED> 1,930,591
<NET-CHANGE-IN-ASSETS> 19,270
<ACCUMULATED-NII-PRIOR> 118
<ACCUMULATED-GAINS-PRIOR> 12,780
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 236
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 416
<AVERAGE-NET-ASSETS> 46,782
<PER-SHARE-NAV-BEGIN> 22.66
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> 1.16
<PER-SHARE-DIVIDEND> 0.57
<PER-SHARE-DISTRIBUTIONS> 11.67
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.09
<EXPENSE-RATIO> .008
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
