1995 Annual Report
For the year ended December 31
Fundamental Investors
A fundamental perspective on 1995
[The American Funds Group(R)]
<PAGE>
Fundamental Investors
FUNDAMENTAL INVESTORS(SM) SEEKS LONG-TERM GROWTH OF CAPITAL AND INCOME THROUGH
INVESTMENTS IN COMMON STOCKS.
Fundamental Investors' Total Return Year by Year
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Capital Income Total
Results Return Return
1986 +19.0% +3.0% +22.0%
1987 +0.9 +2.9 +3.8
1988 +12.4 +3.6 +16.0
1989 +24.3 +4.3 +28.6
1990 -9.2 +3.0 -6.2
1991 +27.5 +2.8 +30.3
1992 +7.8 +2.4 +10.2
1993 +15.7 +2.5 +18.2
1994 -1.2 +2.5 +1.3
1995 +31.9 +2.3 +34.2
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
10-year average annual
compound rate of return +15.1%
10-year total return +308.5%
</TABLE>
Total return measures both capital results (changes in net asset value) and
income return (from income dividends), assuming reinvestment of all dividends
and capital gain distributions.
<TABLE>
<CAPTION>
<S> <C>
10 Most Profitable Holdings
For the twelve months Percent
ended 12/31/95 Change*
Case +112.8%
Potash Corp. of Saskatchewan +108.5
Adobe Systems +108.4
First Interstate Bancorp +101.9
Digital Equipment +92.9
Pharmacia & Upjohn +82.7
Intel +78.4
Allstate +74.1
Merck +72.5
Eli Lilly +71.4
</TABLE>
10 Least Profitable Holdings
<TABLE>
<CAPTION>
<S> <C>
For the twelve months Percent
ended 12/31/95 Change*
Tandem Computers -38.0%
Apple Computer -17.7
Tandy -17.0
True North Communications -14.0
Hanson -12.1
Betz Laboratories -7.3
Sun Co. -4.8
Armco -4.3
TRINOVA -2.6
Murphy Oil -2.4
</TABLE>
10 Largest Holdings
<TABLE>
<CAPTION>
<S> <C> <C>
For the twelve months Percent of Percent
ended 12/31/95 Net Assets Change*
Capital Cities/ABC 2.10% +44.7%
Deere 1.76 +59.6
Texaco 1.69 +31.1
Intel 1.61 +78.4
Seagram 1.53 +17.4
Time Warner 1.45 +7.8
News Corp. 1.44 +37.4
Astra 1.43 +48.6**
Pfizer 1.38 +63.1
British Petroleum 1.37 +10.0**
</TABLE>
* The percentage changes reflect the increase or decrease in market price.
**These securities were not held for the entire period. Astra's percentage
change reflects the increase from 3/27 - 12/31/95; British Petroleum's change
reflects the increase from 11/15 - 12/31/95.
Fund results in this report were computed without a sales charge unless
otherwise indicated. The fund's 30-day yield as of January 31, 1996, calculated
in accordance with the Securities and Exchange Commission formula, was 1.72%.
THE FIGURES IN THIS REPORT REFLECT PAST RESULTS. SHARE PRICE AND RETURN WILL
VARY, SO YOU MAY LOSE MONEY BY INVESTING IN THE FUND. THE SHORTER THE TIME
PERIOD OF YOUR INVESTMENT, THE GREATER THE POSSIBILITY OF LOSS. FUND SHARES ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR INSURED OR GUARANTEED BY, THE U.S.
GOVERNMENT, ANY FINANCIAL INSTITUTION, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, OR ANY OTHER AGENCY, ENTITY OR PERSON.
<PAGE>
Fellow shareholders:
We are pleased to report your fund's best year since Capital Research and
Management Company became its adviser in 1978. The value of your investment in
Fundamental Investors increased 34.2% in 1995 if you reinvested all dividends
and capital gain distributions. If you took dividends in cash, your investment
increased 31.6%.
To fulfill the fund's goal of providing income, shareholders were paid
quarterly 10-cent dividends, totaling 40 cents per share. This represented an
income return of 2.3%. Capital gain distributions totaled 68 cents per share --
20 cents paid in February and 48 cents in December.
This was an exceptional year by almost any measure -- competitive or historic.
Though the fund slightly lagged Standard & Poor's 500 Composite Index (which
returned 37.5% on a reinvested basis and 34.1% on a cash-dividend basis),
Fundamental Investors again outpaced its competitive mutual fund universe. The
Lipper Growth and Income Average -- an average of the 438 U.S. growth and
income funds -- increased 30.8% for the year.
Gains of 30% and higher don't come along very often. Over the last 30 years,
stocks have returned an average of only 10.7% a year, as measured by the
unmanaged S&P 500. Even in the unusually profitable recent ten-year period,
stocks had an average annual return of 14.8%. Your fund returned an average of
15.1% a year in that period.
THE ECONOMY WAS ON THE MEND
The U.S. economy continued to make slow progress in 1995. Washington
politicians on both sides of the aisle agreed on the premise that our country
should be a better place to do business. Though they bickered over the
particulars, they recognized the need to shrink deficits, cut needless red tape
and encourage investing. Amid the debate, economic expansion proceeded at a
moderate rate. We saw slower growth in the cost of living. Lower interest rates
reduced borrowing costs for businesses and consumers. Companies continued to
cut costs, generating greater profits. A weaker dollar for much of 1995 boosted
the competitive advantage of many U.S. companies.
It was difficult not to be mesmerized by the Dow Jones Industrial Average's
continuous climb last year. It set 69 records on its way past 4000 and 5000.
All the while, many experts predicted a correction. As fundamental investors,
we relied on solid research and focused on individual companies, not markets.
It was the companies that made the difference in your fund's portfolio in 1995.
You owned shares in 129 companies throughout the entire period, 116 of which
increased in value. Of these, 14 companies each represented more than 1% of the
portfolio. All but four increased more than 30%.
The fund benefited from a broad-ranging trend in corporate restructuring, as
you can see in the table below:
<TABLE>
<CAPTION>
<S> <C> <C>
Industry Mergers Fund holdings
initiated affected by
in 1995 mergers
Banking First Fidelity, First Union
First Union
Chemical Bank, Chemical Bank
Chase Manhattan
First Interstate Bank, First Interstate
Wells Fargo
Media/ Seagram, MCA Seagram
Entertainment Walt Disney, Disney and
Capital Cities/ABC Capital Cities/
ABC
Westinghouse, CBS CBS*
Time Warner, Time Warner
Turner Broadcasting
Pharmaceuticals Pharmacia, Upjohn
Upjohn
Railroads Union Pacific, Union Pacific and
Southern Pacific Southern Pacific
</TABLE>
*Sold on 11/8/95, after the merger
Our ten largest holdings include three newly structured media and entertainment
companies -- Capital Cities/ ABC, Seagram and Time Warner. This strong industry
weighting has been a reflection of our confidence in these firms as they gather
new channels of distribution.
Global opportunities are significant to our strategy for these companies and
others on the ten-largest list. Deere should benefit from the inevitable
expansion of agriculture in developing countries. (Case and Potash Corp., the
fund's two largest gainers, are already prospering from these trends.) Astra
and Pfizer, both with exceptional new drugs in their pipelines, are poised to
participate in the increasing demand for health care in developing nations.
TECHNOLOGY AND BANKING WERE SIGNIFICANT
Intel can be found on the lists for both the largest and most profitable
holdings in 1995. Its 78% gain represents the upside of technology this year.
Tandem Computers, our least profitable holding for the year with a 38% loss,
reflects the downside. (In 1994, it was our most profitable holding.) We aren't
just fair-weather investors. We look for enduring franchises and hold on to
them.
Banks, too, were important to the fund in 1995. Merger activity, along with
falling interest rates, made for a strong banking recovery. Representing 5.5%
of the fund's portfolio, none of the bank stocks we held had gains of less than
25% for the year. First Interstate, one of the ten most profitable holdings,
boasted the best of the banks' gains with nearly 102%.
We remain optimistic about long-term investing in fundamentally sound
companies. There may be short-term disappointments, but we are confident in our
approach to discovering wealth-building opportunities for the future.
In the feature on pages 4-13, we explore how 1995's business and economic
trends contributed to those opportunities.
Thank you for your continued support.
Cordially,
Walter P. Stern James E. Drasdo
Chairman of the Board President
February 14, 1996
FOLLOWING THE COURSE OF AN INVESTMENT IN FUNDAMENTAL INVESTORS
This chart illustrates how a $10,000 investment in the fund grew between August
1, 1978 -- when Capital Research and Management Company became Fundamental
Investors' investment adviser -- and December 31, 1995, taking into account the
maximum 5.75% sales charge. Sales charges are lower for accounts of $50,000 or
more. The chart also shows how a leading unmanaged stock market index fared
over this same period, and what happened to inflation (as measured by the
Consumer Price Index).
Here are the total returns and average annual compound returns with all
distributions reinvested for periods ended December 31, 1995, assuming payment
of the 5.75% maximum sales charge at the beginning of the stated periods:
<TABLE>
<CAPTION>
<S> <C> <C>
Total Average Annual
Return Compound Return
10 years +284.95% +14.43%
Five years +117.55% +16.82%
One year +26.48% --
</TABLE>
/1/Results reflect payment of the maximum sales charge of 5.75% on the $10,000
investment. Thus, the net amount invested was $9,425. As outlined in the
prospectus, the sales charge is reduced for larger investments. There is no
sales charge on dividends or capital gain distributions that are reinvested in
additional shares. The maximum initial sales charge was 8.5% prior to July 1,
1988. No adjustment has been made for income or capital gain taxes.
/2/Includes reinvested dividends of $21,012 and reinvested capital gain
distributions of $40,724.
/3/Includes reinvested capital gain distributions of $25,577, but does not
reflect income dividends of $14,022 taken in cash.
/4/For the period August 1, 1978 (when Capital Research and Management Company
became investment adviser) through December 31, 1978.
/5/Computed from data supplied by the U.S. Department of Labor, Bureau of Labor
Statistics.
Past results are not predictive of future results.
The indexes are unmanaged.
HOW A $10,000 INVESTMENT HAS GROWN
$121,500
S&P 500
Index
with
dividends
reinvested
$120,306 /1//2/
Fundamental
Investors
with
dividends
reinvested
$66,210 /1//3/
Fundamental
Investors
with
dividends
taken
in cash
$23,364 /5/
Consumer
Price
Index
(inflation)
$10,000 /1/
Original
Investment
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year Ended Capital Value Value at Total Value Value at Total
December 31 Dividends in Cash Year-End/1/ Dividends Reinvested Year-End/1/ Return
1978/4/ $216 $8,947 $217 $9,155 -8.5
1979 405 9,892 421 10,556 15.3
1980 552 11,390 603 12,807 21.3
1981 579 10,688 665 12,654 -1.2
1982 634 13,522 769 16,957 34.0
1983 594 16,424 755 21,389 26.1
1984 555 16,759 734 22,620 5.8
1985 581 21,148 795 29,448 30.2
1986 636 25,151 894 35,941 22.0
1987 717 25,463 1,034 37,295 3.8
1988 895 28,561 1,328 43,246 16.0
1989 1,225 35,438 1,877 55,597 28.6
1990 1,059 32,180 1,678 52,130 -6.2
1991 903 40,940 1,477 67,947 30.3
1992 989 44,059 1,655 74,871 10.2
1993 1,083 50,884 1,857 88,466 18.2
1994 1,238 50,319 2,171 89,641 1.3
1995 1,161 66,210 2,082 120,306 34.2
</TABLE>
<PAGE>
A FUNDAMENTAL PERSPECTIVE ON 1995
[Sidebar]
Down yesterday. Up today. What's an investor supposed to do? Stick to the
fundamentals.
[End Sidebar]
Keeping perspective on financial trends in 1995 was no easy business.
Bigger is better, many said. Others disagreed. They thought smaller units were
better. Some companies expanded globally. Others were riveted on domestic
markets. Technology stocks were showstoppers. They went up. And up. And down.
The media predicted a major market decline. The Dow refused to cooperate,
climbing past both the 4000 and 5000 marks.
What's an investor supposed to do?
If you were to talk to your fund's portfolio counselors -- and we're about to
do just that -- their collective advice would be to "stick to the
fundamentals."
A fundamental investor tries to focus on the basics amid the "noise" of the
market, the economy, the media and the crowd. That requires conviction,
discipline and a somewhat contrarian nature.
The key ingredient is a long-term attitude that isn't ruffled by short-term
events. After all, no matter what happens to the Dow Jones Industrial Average
today, there are companies out there making a profit.
KEEPING THE NOISE LEVEL DOWN
To avoid the deafening day-to-day din, the fundamental investor focuses on
understanding the quality -- and therefore the value -- of individual
companies.
How? By concentrating on the very essence of a company: its products, assets
and people.
THE PRODUCT
A product or service that's in demand can transcend short-term swings in the
marketplace. If it is globally competitive, it will win out over time.
THE ASSETS
Understanding which segments of a company contribute most to long-term profit
provides insight into value and opportunity.
THE PEOPLE
Vision, enthusiasm, intelligence and work ethic aren't charted in a technical
analyst's report. But over the years, we've seen the correlation between
quality people and quality businesses. It's people who serve as divining rods
to wealth-building companies of the future.
WHAT TO MAKE OF 1995'S BIGGEST TRENDS
The big trends of 1995 were many and memorable. Merger mania hit the banking,
pharmaceutical and entertainment businesses, among others. Vertical integration
- -- acquiring channels of distribution -- once again became the hot means for
control. Global capitalism nudged countries to open their eyes and wallets to
American products. Volatility, notably influenced by short-term reactions to
the technology arena, alternately chipped away and restored investor
confidence.
What does an investor make of all these trends? Let's find out. On the next few
pages, we will eavesdrop on a recent conversation with your fund's three
portfolio counselors -- Gordon Crawford, Jim Drasdo and Dina Perry -- as they
take a fundamental approach to the news and events of 1995.
IS THIS THE WRONG TIME TO INVEST?
DINA PERRY
Our shareholders shouldn't focus on the moment. Think long-term. We try to buy
good companies when they're cheap and sell them when they've reached their
values. We weren't buying technology stocks two months ago; we bought them two
years ago. As they reach their full value, we sell them.
JIM DRASDO
If the market drops, that's okay. Human nature says not to buy when stocks are
weak. But that's the right time to buy -- when they're on sale. I wouldn't mind
seeing a price drop. It's an opportunity.
GORDON CRAWFORD
People are worried about corrections. But the hallmark of this long bull
market has been rolling corrections in individual industry sectors, as the
overall market continued to march upward. I think that's pretty healthy.
JIM DRASDO
Keep the faith and stick with it, even when it's tough. Systematic investment
programs work. Compounding works.
DINA PERRY
Long-term investing works.
<PAGE>
THE FUNDAMENTAL INVESTOR'S APPROACH TO NEW STRUCTURES
[Sidebar]
Is bigger better? The trend in corporate consolidations led to a record number
of mergers and takeovers in 1995. Is it building value?
[End Sidebar]
Building something of value takes time. CEOs, accountants and lawyers can't
create it in one business deal. When two merging companies come together, each
brings the product of its long-term struggle to create its own brand of value.
The measure of the merger's success will be the ability to jointly enhance
those values.
By sharing assets, costs and distribution channels, many companies believe they
can create more value together than alone. The goal: translate the value into
greater market domination and increased profits.
"Fundamental Investors ended up owning several companies that merged this
year," says portfolio counselor Dina Perry, "but we weren't shopping for
takeovers. We look for well-managed, solid companies with value. It's not a
surprise that they'd be attractive to other companies, too."
How does a fundamental investor anticipate whether a new structure will build
additional value? "It helps to understand the value of the parts," says Jim
Drasdo, fund president and portfolio counselor. "If the assets are ever taken
apart and reassembled, the fundamental investor who's focused on the individual
parts has a leg up on the guy who's trying to put a superficial price on them."
"Look at Seagram," says Gordon Crawford, the third portfolio counselor in the
fund's troika. "It acquired MCA, parent of Universal Studios. We've followed
MCA since the late '60s, so we knew those assets inside and out. But most
Seagram investors were upset to find they now owned a movie company. The stock
went down and we bought a lot of it. Now it's way up."
"Knowing the parts helped us value the whole," explains Gordon, "giving us
conviction to take advantage while others floundered. We knew it was a good
fit."
Mergers are like that: trying to fit puzzle pieces together.
Take banking. To work the puzzle, one bank might try to fit its extensive
branch system with another's solid loan portfolio or with another's emerging
markets penetration. When the puzzle looks complete, duplicate pieces can be
discarded. Assets can be shared, costs cut. Strength and value are added.
"The role of banks has evolved," says Jim. "Competition from local banks,
national banks, mutual funds and even from home computers is fierce. To
maintain profitability, banks need to cut costs. On the horizon is unrestricted
interstate banking, which will offer the opportunity to share costs among a
number of branches while reaching more customers. The goal is to get bigger,
more efficient and more profitable."
Like banks, pharmaceutical firms worry about survival in the wake of stiffening
competition. Unlike banks, however, the focus is more on synergy than takeover.
Drug companies have merged to compensate for weak product lines, as in the
recent Pharmacia & Upjohn merger.
"Upjohn and Pharmacia was a merger of equals," Dina points out, "so there was
no premium paid. But the Upjohn stock appreciated when investors realized the
benefits of sharing costs of distribution, research and development. They were
more valuable together than on their own."
While many merging companies focus on cutting costs, media and entertainment
firms, among others, see consolidation as the path to increasing control over
windows of distribution. We will explore this trend, a form of vertical
integration, on the next two pages.
WILL SPINOFFS BE AS IMPORTANT AS MERGERS?
JIM DRASDO
Yes. Both the merger and spinoff trends are about focus. A lot of companies are
streamlining by selling off valuable nuggets as they sharpen their focus.
GORDON CRAWFORD
If you think back on all the breakups that have happened, they've all made a
lot of sense. Breaking up units of AT&T, ITT and Kodak all made sense for
long-term stockholders.
JIM DRASDO
Some of our most successful investments have been spinoffs from large
companies.
DINA PERRY
Sometimes we start out as an investor for one particular reason and then, after
a breakup occurs, we end up holding the stock for a totally different reason.
It still may offer value -- just a different type of value. We are very
flexible.
JIM DRASDO
But in every case, we look at more than just a company's earnings stream. We
look at the assets behind it and try to value them. That way, when they're spun
off, we're ahead of the game.
<PAGE>
THE FUNDAMENTAL INVESTOR'S APPROACH TO VERTICAL INTEGRATION
[Sidebar]
What good is a product no one sees? In today's competitive marketplace, the
goal is to control the most windows of distribution.
[End Sidebar]
"The term $vertical integration' may sound convoluted," says Gordon,"but it's
not. It's really no more than a corporate version of pig farming.
"When Walt Disney spends $40 million to make Beauty and the Beast, they're like
the world's greatest pig farmers," he chuckles. "They want to extract
everything they can from the pig except the squeal."
Jim pipes up, "Well, maybe a few squeals, too."
"It works like this," says Gordon. "Disney releases the movie in the U.S., then
to theaters around the world. When that phase is over, it goes to the home
video market. Then The Disney Channel airs it. While all of this is happening,
they're making Beauty and the Beast products to distribute through another
distribution channel -- The Disney Stores. The Beauty and the Beast concept
also reaches consumers through the theme park, the ice show and the Broadway
musical. In the end, they've generated $2 billion at retail from a $40 million
investment in the core product."
CONTROLLING THE WINDOWS OF DISTRIBUTION
"What vertical integration is all about," says Dina, "is controlling as many
windows of distribution as possible. From a fundamental investor's point of
view, it translates into greater control over a valuable product."
"Vertical integration helps companies maximize their profit," says Gordon. "In
the entertainment business, if they don't own their own distribution, they
won't maximize their profit potential in those windows owned by competitors."
"You can see this phenomenon in other businesses that are pressured to get the
most out of their products fast," says Jim.
SPREADING PRODUCTS FAR AND WIDE
Drug companies are a case in point. Manufacturers receive market exclusivity
and patents for only 20 years. After the lengthy FDA approval process, they
have little time to market their drugs and reap the benefit of their
multimillion-dollar research before generic distributors spin into action.
"To be a successful drug company," says Jim, "you'd better have an efficient
system of vertical integration to maximize the time you have to market your
product while its patent is still in effect. If you invent a cure for
something, you have to be able to leverage it around the world and through as
many channels -- hospitals and managed-care networks -- as you can. To use
Gordy's metaphor, you've got to get the oink out fast."
CREATING MORE EFFICIENT COMPANIES
The owners of the distribution channels know they're in the driver's seat, and
as can be seen in the railroad business, they're trying to take advantage of
their opportunities.
"Historically, it's been difficult to manage large railroads," says Jim. "But
computerization makes it possible for today's consolidations to be efficient.
The Union Pacific/ Southern Pacific and Burlington Northern/ Santa Fe Pacific
mergers, for example, save overhead and cut duplicative routes for better and
broader distribution to their customers."
Across the oceans, where the rails can't go, a new distribution frontier awaits
U.S. companies. On the next two pages, we'll explore the global capitalism
trend.
WHY IS ALL THIS CORPORATE RESTRUCTURING HAPPENING NOW?
DINA PERRY
This trend didn't start this year. It started three years ago, really.
Initially it began in the weak sectors of the economy. The drug companies were
the weak ones at the time. Then it began to spread.
JIM DRASDO
Many companies are changing the dynamic of their organizations.
DINA PERRY
Yes, and what we saw this year were mergers in industries that appear to be
healthy but really are not healthy enough to accommodate many players. The
banks are a prime example of that. The railroads are another example of a
healthy industry that isn't able to provide profit to a large number of
companies.
GORDON CRAWFORD
Cost-cutting is driving most restructurings. But that's not the case in the
entertainment business. There's little cost-cutting going on. The media and
entertainment mergers we've seen have all been about vertical integration.
<PAGE>
THE FUNDAMENTAL INVESTOR'S APPROACH TO GLOBAL CAPITALISM
[Sidebar]
Karl Marx lost. Adam Smith won. Capitalism is spreading. How can American
companies benefit?
[End Sidebar]
Are American products universal? Many products that have become an integral
part of the American fabric are new to our global neighbors. Are new customers
waiting for U.S. products in countries around the world?
TECHNOLOGY
"Computer chips, not potato chips," is the cry in India, where the attitude is
"if we have to let the foreign devils in, let's have them bring something
really useful." Countries with limited resources can leverage computer hardware
and software in order to leapfrog from traditionally backward economies to
prosperous ones.
"I think technology is an area of competitive advantage for the U.S.," says
Jim, "with a terrific opportunity in the emerging markets. But I also think
developed nations like Japan are important. Japan has fewer computers per
worker than we do. Microprocessor manufacturers say one of their strongest
sales markets is Japan."
MEDIA/ENTERTAINMENT
"Technology is a great facilitator for bringing entertainment and information
to the world," says Gordon. "As new markets open up, one of the first things
people want is recorded music, film and television shows. I think there's a
limitless desire by human beings to be entertained and informed.
"U.S. companies completely dominate this business. As other markets open up, as
these people have more disposable income, as technology keeps enhancing the way
these products can be consumed by people, we will continue to see exponential
growth in the revenues generated by these products."
CYCLICALS
Cyclical companies, whose products are in demand when the business cycle is on
an upswing, have potential for international expansion.
"The fund owns many different kinds of cyclicals," says Dina. "Caterpillar,
Parker Hannifin, General Motors$ some chemical, aluminum, paper and fertilizer
companies. The key to these companies is whether the economic recovery
continues."
"And," says Jim, "wouldn't you say that the global economy has become more of a
factor in cyclicals? You've got GATT and NAFTA. Free trade is on the rise. Adam
Smith has won. Karl Marx lost. So you have new markets where Caterpillar can
sell yellow tractors."
"Yes," adds Dina, "and I think what we're seeing -- minus a few hiccups -- is
that this is a long, world-wide cycle."
"One certainty about people in developing markets is if they get more
prosperous, they can afford to eat better," says Jim. "Cyclical companies like
Potash Corp. benefit from this. Demand for their fertilizer is rising while
world supply has declined."
DRUGS/HEALTH CARE
"The drug industry to me is still a phenomenal business," says Gordon, "because
of the world's aging population and the certain demand for pharmaceuticals.
Think of the percentage of the world's 5-and-a-half billion people who can
afford to impact their longevity and comfort of life. When developing nations
raise their standard of living, they're going to demand health care. I think
this business will be huge."
Companies who have the products, the assets and the people to achieve success
are best positioned to take advantage of increasing global prosperity.
IS GLOBAL CAPITALISM A THREAT OR AN OPPORTUNITY FOR U.S. COMPANIES?
JIM DRASDO
It's an opportunity. When you look at what the U.S. does well and what's
exportable, you come up with some major areas of concentration. With its real
costs plummeting, technology is an area of definite advantage for the U.S.
DINA PERRY
U.S. agriculture and farm products still dominate the world.
JIM DRASDO
Dina's right. Our area of greatest competitive advantage, if it's not
technology, is agriculture. Health care is also important. There's no question
that one thing people in a developing country will spend their money on is
health care.
GORDON CRAWFORD
And movies. U.S. companies completely dominate the business. The market share
of U.S. film companies in Japan is 60%, Germany 80%, France 60% and the U.K.
85%. I think it's one of the world's great global growth businesses.
<PAGE>
THE FUNDAMENTAL INVESTOR'S APPROACH TO MARKET VOLATILITY
[Sidebar]
How does an investor live with volatility? You can't take it away, but you can
use it to your advantage.
[End Sidebar]
The year 1995 was not one for the faint-hearted. Volatility was its hallmark,
but fortunately the ultimate direction was up$ way up.
"This was a market of momentum players," says Dina. "It's basically a game of
follow-the-leader. They assume that if the stock goes up today, it'll go up
tomorrow. In reality, many of them will follow a stock on the way up and on the
way down."
Fundamental investors can look like long-term fuddy-duddies in this kind of
market. They don't play the momentum game. It can get lonely in the long-term
corner, but, over time, it can be pretty lucrative too.
Technology companies made the most noise in the market this year. It was hard
to ignore them. The Dow Jones U.S. Technology Index shows a range of 50%
between the best day and the worst day of 1995 and it fluctuated continuously.
Technology, like any industry, doesn't have to be viewed in a short-term
vacuum. Fundamental investors look at technology companies the way they look at
any other company: They try to assess value on a long-term basis.
"A great number of tech companies notched way up in '95," says Jim, "but there
are only a handful of enduring franchises. Both in software and hardware there
are real niches being established. Intuit has created a home banking franchise
that is so impenetrable Microsoft tried to buy them. Most companies have almost
given up trying to unseat Microsoft as the operating system of choice. Every
second there are two Intel microprocessors sold around the world. These are
pretty entrenched companies.
"Two or three years ago," he adds, "we stocked up when these companies were
available at bargain prices. During the past year, we reaped the rewards and
stepped to the sidelines in some holdings. The fund owned a smaller percentage
of technology at the end of the year than at the beginning."
"The group is volatile," says Gordon. "It goes through its own periodic cycles
of overexuberance because it's such a fundamentally attractive business. There
are psychological booms and busts going on. It's still one of the most
attractive long-term areas to be invested in, but I don't think you can take
the volatility out of these stocks. It's a treacherous area full of
opportunity."
"No, you can't take the volatility out," agrees Jim, "so we try to use it to
our advantage. It's probably one of the most difficult businesses to understand
at some level so it's hard to know if many of the smaller companies have
defensible niches. The advantage, therefore, goes to the investor who's willing
to take the time to do the research and understand what others don't."
"Investors should keep in mind that the market may look volatile today," says
Dina, "but their investments don't necessarily mirror that volatility. We try
not to buy the high flyers. We're on the lookout for value. We're attempting to
take advantage of the short-timer's perspective by keeping our long-term
focus."
WILL THE MARKET REMAIN STRONG?
DINA PERRY
Who's to say what will happen in the short run? But, over the long term, it
looks like the economy is in a long cycle, with moderate growth in economic
activity and the resulting low inflation.
GORDON CRAWFORD
You have this global economy that is growing moderately, so excesses are not
developing. Inflation rates in most parts of the world are at 20-30 year lows.
Bond prices are going up and interest rates are going down. Even if there are
blips in the short run, to me it's still a phenomenal long-term backdrop.
JIM DRASDO
People are saving again. Stocks are a good way to do it. Stock mutual funds are
an even better way to do it. The Fundamental Investors team has years of
experience in an organization with one of the oldest and steadiest hands in the
industry. So if we do get a down draft, the fund's net asset value declines,
but we'll try to take advantage of the volatility to benefit the shareholders.
Opportunities will be created. If we correctly identify them, they will be the
stars in the portfolio in the years ahead.
<PAGE>
FUNDAMENTAL INVESTORS, INC.
INVESTMENT PORTFOLIO - December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Percent
Of net
LARGEST INDIVIDUAL HOLDINGS Assets
Capital Cities/ABC 2.10%
Deere 1.76
Texaco 1.69
Intel 1.61
Seagram 1.53
Time Warner 1.45
News Corp. 1.44
Astra 1.43
Pfizer 1.38
British Petroleum 1.37
LARGEST INVESTMENT CATEGORIES Percent of
Net Assets
Services 22.25%
Consumer Goods 18.97
Capital Equipment 13.75
Energy 10.71
Finance 10.11
LARGEST INDUSTRY HOLDINGS Percent of
Net Assets
Energy Sources 8.12%
Health & Personal Care 7.71
Broadcasting & Publishing 6.69
Business & Public Services 5.99
Banking 5.46
Shares or Market Percent
EQUITY-TYPE SECURITIES Principal Value Of
(Common and Preferred Stocks and Amount (000) Net Assets
Convertible Debentures)
- ---------------------------------------------------- ---------- ---------- ----------
ENERGY
ENERGY SOURCES- 8.12%
British Petroleum Co. PLC (American Depositary
Receipts) (United KIngdom) 640,000 65,360 1.37
Chevron Corp. 500,000 26,250 .55
Cyprus Amax Minerals Co., convertible preferred,
Series A 100,000 5,850 .12
Exxon Corp. 595,000 47,674 1.00
Murphy Oil Corp. 714,600 29,656 .62
Norsk Hydro AS (American Depositary Receipts)(Norway) 375,000 15,703 .33
Phillips Petroleum Co. 1,240,000 42,315 .89
Repsol SA (American Depositary Receipts)(Spain) 287,000 9,435 .20
Royal Dutch Petroleum Co. (New York Registered
Shares) (Netherlands) 130,000 18,346 .39
"Shell" Transport and Trading Co., PLC (United Kingdom) 50,000 4,069 .09
Sun Co., Inc. 48,186 1,319
Sun Co., Inc., Series A 146,314 4,060 .12
Texaco Inc. 1,025,000 80,463 1.69
TOTAL, Class B (American Depositary Receipts)
(France) 81,963 2,787 .06
Unocal Corp. 1,130,000 32,911 .69
UTILITIES: ELECTRIC & GAS- 2.59%
Detroit Edison Co. 900,000 31,050 .65
Eastern Utilities Associates 640,000 15,120 .32
Entergy Corp. 150,000 4,388 .09
Florida Progress Corp. 300,000 10,613 .22
General Public Utilities Corp. 180,000 6,120 .13
Houston Industries Inc. 1,350,000 32,738 .69
Long Island Lighting Co. 350,000 5,731 .12
Pacific Gas and Electric Co. 300,000 8,512 .18
SCEcorp. 250,000 4,437 .09
Texas Utilities Co. 120,800 4,968 .10
----------- -----------
509,875 10.71
----------- -----------
MATERIALS
BUILDING MATERIALS & COMPONENTS- 0.09%
Cemex, SA, Class B 4.25% convertible debentures 1997
(Mexico)/1/ $4,974,000 4,203 .09
CHEMICALS- 2.50%
Betz Laboratories, Inc. 200,000 8,200 .17
E.I. du Pont de Nemours and Co. 250,000 17,469 .37
Eastman Chemical Co. 600,000 37,575 .79
Georgia Gulf Corp. 1,100,000 33,825 .71
IMC Global Inc. 300,000 12,262 .26
Imperial Chemical Industries PLC (American Depositary
Receipts) (United Kingdom) 200,000 9,350 .20
FOREST PRODUCTS & PAPER- 1.24%
Rayonier Inc. (formerly ITT Rayonier Inc.) 310,000 10,346 .22
Union Camp Corp. 470,000 22,384 .47
Weyerhaeuser Co. 600,000 25,950 .55
METALS: NONFERROUS- 1.46%
Alumax Inc./2/ 300,000 9,188
Alumax Inc., convertible preferred, Series A 23,333 2,987 .26
Aluminum Co. of America 450,000 23,794 .50
Freeport-McMoRan Copper & Gold Inc., Class A 5,000 140
Freeport-McMoRan Copper & Gold Inc., Class B 70,173 1,974 .04
Inco Ltd. (Canada) 900,000 29,925 .63
Phelps Dodge Corp. 20,900 1,301 .03
METALS: STEEL- 0.23%
Armco Inc./2/ 600,000 3,525
Armco Inc., cumulative convertible preferred 150,000 7,462 .23
MISCELLANEOUS MATERIALS & COMMODITIES- 1.30%
Freeport-McMoRan Inc. 16,666 617 .01
Potash Corp. of Saskatchewan Inc. (Canada) 500,000 35,437 .75
TRINOVA Corp. 897,400 25,688 .54
----------- -----------
323,602 6.82
----------- -----------
CAPITAL EQUIPMENT
AEROSPACE & MILITARY TECHNOLOGY- 1.47%
Boeing Co. 385,000 30,174 .63
Litton Industries, Inc./2/ 500,000 22,250 .47
Sundstrand Corp. 250,000 17,594 .37
DATA PROCESSING & REPRODUCTION- 2.93%
Adobe Systems Inc. 625,000 38,750 .82
Apple Computer, Inc. 615,800 19,629 .41
Dell Computer Corp., convertible preferred,
Series A/1//2/ 232,418 8,047 .17
Digital Equipment Corp./2/ 484,000 31,036 .65
International Business Machines Corp. 355,000 32,571 .69
Tandem Computers Inc./2/ 850,000 9,031 .19
ELECTRONIC COMPONENTS- 2.97%
Intel Corp. 1,350,000 76,612 1.61
Motorola, Inc. 370,000 21,090 .44
Seagate Technology, 5.00% convertible
debentures 2003/1/ $8,105,000 14,873 .31
Texas Instruments Inc. 559,128 28,935 .61
ENERGY EQUIPMENT- 0.68%
Cooper Cameron Corp./2/ (formerly Cooper Industries, Inc.) 200,000 7,100 .15
Western Atlas Inc./2/ 500,000 25,250 .53
INDUSTRIAL COMPONENTS- 1.48%
Dana Corp. 600,000 17,550 .37
Goodyear Tire & Rubber Co. 700,000 31,763 .67
Rockwell International Corp. 400,000 21,150 .44
MACHINERY & ENGINEERING- 4.22%
Case Corp. 750,000 34,313 .72
Caterpillar Inc. 1,000,000 58,750 1.24
Deere & Co. 2,375,000 83,719 1.76
Parker Hannifin Corp. 700,000 23,975 .50
----------- -----------
654,162 13.75
----------- -----------
CONSUMER GOODS
APPLIANCES & HOUSEHOLD DURABLES- 2.19%
Philips Electronics NV (Netherlands) 1,450,000 52,019 1.09
Sony Corp. (American Depositary Receipts) (Japan) 850,000 52,169 1.10
AUTOMOBILES- 1.50%
Ford Motor Co., Class A 812,663 23,567 .50
General Motors Corp. 900,000 47,588 1.00
BEVERAGES & TOBACCO- 1.86%
Anheuser-Busch Companies, Inc. 100,000 6,687 .14
PepsiCo, Inc. 160,000 8,940 .19
Seagram Co. Ltd. (Canada) 2,100,000 72,713 1.53
FOOD & HOUSEHOLD PRODUCTS- 3.54%
Archer Daniels Midland Co. 1,500,000 27,000 .57
Colgate-Palmolive Co. 625,000 43,906 .92
CPC International Inc. 425,000 29,166 .61
General Mills, Inc. 125,000 7,219 .15
H.J. Heinz Co. 675,000 22,359 .47
Procter & Gamble Co. 375,000 31,125 .65
Ralston Purina Co. 126,300 7,878 .17
HEALTH & PERSONAL CARE- 7.71%
American Home Products Corp. 200,000 19,400 .41
AB Astra, Class A (American Depositary Receipts)
(Sweden) 1,700,000 67,885 1.43
Bristol-Myers Squibb Co. 300,000 25,762 .54
Johnson & Johnson 670,000 57,369 1.21
Eli Lilly and Co. 650,000 36,562 .77
McKesson Corp. 125,000 6,328 .13
Merck & Co., Inc. 992,500 65,257 1.37
Pfizer Inc. 1,045,000 65,835 1.38
Pharmacia & Upjohn, Inc. (formerly Upjohn Co.) 580,000 22,475 .47
RECREATION & OTHER CONSUMER PRODUCTS- 1.88%
Duracell International Inc. 750,000 38,813 .82
Eastman Kodak Co. 750,000 50,250 1.06
TEXTILES & APPAREL- 0.29%
Fruit of the Loom, Inc./2/ 575,000 14,016 .29
----------- -----------
902,288 18.97
----------- -----------
SERVICES
BROADCASTING & PUBLISHING- 6.69%
Capital Cities/ABC, Inc. 810,000 99,934 2.10
News Corp. Ltd. (American Depositary Receipts)
(Australia) 2,200,000 47,025
News Corp. Ltd., preferred shares (American Depositary
Receipts) 1,100,000 21,175 1.44
E.W. Scripps Co., Class A 700,000 27,562 .58
Tele-Communications, Inc., Series A, Liberty Media Group/2/ 251,003 6,746 .14
Tele-Communications, Inc., Series A, TCI Group/2/ 1,004,015 19,955 .42
(formerly Tele-Communications, Inc.)
Time Warner Inc. 1,824,000 69,084 1.45
Tribune Co. 200,000 12,225 .26
Viacom Inc., Class B/2/ 305,000 14,449 .30
BUSINESS & PUBLIC SERVICES- 5.99%
Avery Dennison Corp. 500,000 25,063 .53
Dun & Bradstreet Corp. 525,000 33,994 .71
Federal Express Corp./2/ 650,000 48,019 1.01
Interpublic Group of Companies, Inc. 725,000 31,447 .66
Omnicom Group Inc. 900,000 33,525 .71
True North Communications Inc. 500,000 9,250 .19
United HealthCare Corp. 400,000 26,200 .55
U.S. Healthcare, Inc. 1,200,000 55,800 1.17
WMX Technlogies, Inc. 725,000 21,659 .46
LEISURE & TOURISM- 1.54%
Walt Disney Co. 650,000 38,350 .81
McDonald's Corp. 775,000 34,972 .73
MERCHANDISING- 2.97%
May Department Stores Co. 500,000 21,125 .44
Sears, Roebuck and Co. 600,000 23,400 .49
Tandy Corp., preferred equity redemption
cumulative stock 275,714 11,442 .24
Toys "R" Us, Inc./2/ 700,000 15,225 .32
Wal-Mart Stores, Inc. 1,850,000 41,394 .87
Walgreen Co. 950,000 28,381 .61
TELECOMMUNICATIONS- 2.94%
AirTouch Communications/2/ 250,000 7,063 .15
ALLTEL Corp. 300,000 8,850 .19
Ameritech Corp. 90,000 5,310 .11
AT&T Corp. 685,000 44,354 .93
Bell Atlantic Corp. 425,000 28,422 .60
MCI Communications Corp. 506,200 13,224 .28
NYNEX Corp. 200,000 10,800 .23
Pacific Telesis Group 405,298 13,628 .29
Sprint Corp. 200,000 7,975 .16
TRANSPORTATION: AIRLINES- 1.06%
AMR Corp./2/ 350,000 25,987
AMR Corp., 6.125% convertible debentures 2024 $5,500,000 5,665 .67
Delta Air Lines, Inc. 250,000 18,468 .39
TRANSPORTATION: RAIL & ROAD- 1.06%
Conrail, Inc. 320,000 22,400 .47
Southern Pacific Rail Corp./2/ 62,293 1,495 .03
Union Pacific Corp. 400,000 26,400 .56
----------- -----------
1,057,442 22.25
----------- -----------
FINANCE
BANKING- 5.46%
Banc One Corp. 342,125 12,915 .27
Chemical Banking Corp. 200,000 11,750 .25
Citicorp 750,000 50,438 1.06
CoreStates Financial Corp 830,000 31,436 .66
First Fidelity Bancorporation 550,000 41,456 .87
First Interstate Bancorp 250,000 34,125 .72
First Union Corp. 100,000 5,563 .12
Fleet Financial Group, Inc. 500,000 20,375 .43
Norwest Corp. 900,000 29,700 .62
PNC Bank Corp. 680,000 21,930 .46
FINANCIAL SERVICES- 0.82%
Federal Home Loan Mortgage Corp. 150,000 12,525 .26
Federal National Mortgage Assn. 215,000 26,687 .56
INSURANCE- 3.83%
Aetna Life and Casualty Co. 250,000 17,313 .36
Allstate Corp. 608,110 25,008 .53
American International Group, Inc. 108,750 10,059 .21
CIGNA Corp. 300,000 30,975 .65
CNA Financial Corp./2/ 320,000 36,320 .76
General Re Corp. 250,000 38,750 .82
SAFECO Corp. 600,000 20,700 .44
TIG Holdings, Inc. 100,000 2,850 .06
----------- -----------
480,875 10.11
----------- -----------
MULTI-INDUSTRY
MULTI-INDUSTRY- 2.63%
CITIC Pacific Ltd. (Hong Kong) 8,500,000 29,077 .61
Hanson PLC (American Depositary
Receipts)(United Kingdom) 900,000 13,725 .29
Harsco Corp. 75,000 4,359 .09
Tenneco Inc. 475,000 23,572 .50
Textron Inc. 525,000 35,438 .75
U.S. Industries, Inc./2/ 1,000,000 18,375 .39
----------- -----------
124,546 2.63
----------- -----------
MISCELLANEOUS
Other equity-type securities in initial period
of acquisition 207,359 4.36
----------- -----------
TOTAL EQUITY-TYPE SECURITIES (cost: $3,158,356,000) 4,260,149 89.60
----------- -----------
Principal
Amount
(000)
Bonds & Notes
- -------------------------------------------------------- ---------- ---------- -----------
INDUSTRIALS - 1.25%
Adelphia Communications Corp. 12.50% 2002 $19,000 18,620 .39
Cablevision Systems Corp. 9.875% 2013 10,000 10,625
Cablevision Systems Corp. 9.875% 2023 21,850 22,724 .70
Time Warner Inc. 10.15% 2012 6,000 7,437 .16
---------- ----------
59,406 1.25
---------- ----------
TRANSPORTATION- 0.30%
Delta Air Lines, Inc. 1993 pass-through trusts,
Series A2, 10.50% 2016/3/ 11,500 14,497 .30
---------- ----------
U.S. TREASURY OBLIGATIONS- 0.75%
6.375% 1997 15,000 15,248 .32
6.875% 1997 20,000 20,394 .43
---------- ----------
35,642 .75
---------- ----------
TOTAL BONDS & NOTES (cost: $106,174,000) 109,545 2.30
---------- ----------
<PAGE>
SHORT-TERM SECURITIES
- ----------------------------------------------------
CORPORATE SHORT-TERM NOTES-6.40%
AIG Funding Inc. 5.65% due 1/31/96 18,000 17,913 .38 %
Associates Corp. of North America 5.99% due 1/2/96 15,860 15,855 .33
AT&T Corp. 5.75% due 2/2/96 20,800 20,690 .44
Beneficial Corp. 5.75% due 1/4/96 19,700 19,687 .41
CIT Group Holdings Inc. 5.70% due 1/8/96 8,100 8,090 .17
Emerson Electric Co. 5.66% due 1/25/96 17,000 16,933 .36
Ford Motor Credit Co. 5.70%-5.80% due 1/3-1/24/96 47,900 47,794 1.01
General Electric Capital Corp. 5.68% due 2/12/96 22,200 22,049 .46
H.J. Heinz Co. 5.58%-5.72% due 1/17-2/9/96 24,400 24,285 .51
Motorola, Inc. 5.67%-5.72% due 1/18-1/30/96 22,900 22,820 .48
PepsiCo, Inc. 5.58% due 2/8-2/9/96 8,300 8,249 .17
Pitney Bowes Credit Corp. 5.66% due 1/29/96 6,300 6,271 .13
Procter & Gamble Co. 5.66% due 1/9/96 29,000 28,959 .61
SAFECO Credit Co. Inc. 5.55% due 2/22/96 17,000 16,861 .35
Southwestern Bell Telephone Co. 5.50% due 2/15-2/22/96 20,200 20,050 .42
United Parcel Service of America Inc. 5.50% due 2/23/96 8,000 7,933 .17
---------- ----------
304,439 6.40
---------- ----------
FEDERAL AGENCY DISCOUNT NOTES-0.97%
Federal Home Loan Bank 5.61% due 1/22/96 13,700 13,653 .29
Federal Home Loan Mortgage Corp. 5.69% due 1/2/96 4,727 4,726 .10
Federal National Mortgage Assn. 5.61%-5.62% due 1/16-1/17/96 27,400 27,329 .58
---------- ----------
45,708 .97
---------- ----------
U.S. TREASURY OBLIGATIONS-0.43%
7.00% due 9/30/96 20,000 20,247 .43
---------- ----------
TOTAL SHORT-TERM SECURITIES (cost: $371,092,000) 370,394 7.80
---------- ----------
TOTAL INVESTMENT SECURITIES (cost: $3,635,622,000) 4,740,088 99.70
Excess of cash and receivables over payables 14,406 .30
---------- ----------
NET ASSETS $4,754,494 100.00 %
========== ==========
/1/ Purchased in a private placement transaction;
resale potential extends only to qualified institutional
buyers.
/2/ Non-income-producing securities.
/3/ Pass-through securities backed by a pool of mortgages
or other loans on which principal payments are
periodically made. Due to the possibility of early
principal payments, the effective maturity of these
securities is shorter than the stated maturity.
See Notes to Financial Statements
</TABLE>
EQUITY-TYPE SECURITIES APPEARING IN
THE PORTFOLIO SINCE JUNE 30, 1995
Aetna Life and Casualty
AirTouch Communications
Anheuser-Busch Companies
Archer Daniels Midland
British Petroleum
CNA Financial
E.I. du Pont de Nemours
Federal Home Loan Mortgage
Florida Progress
Fruit of the Loom
IMC Global
Philips Electronics
SCEcorp.
Sony
Southern Pacific Rail
United HealthCare
U.S. Healthcare
U.S. Industries
Unocal
Viacom
EQUITY-TYPE SECURITIES ELIMINATED FROM THE
PORTFOLIO SINCE JUNE 30, 1995
Amoco
Advanced Micro Devices
AmSouth Bancorporation
Atlantic Richfield
Baxter International
CBS
Chubb
General Electric
General Signal
Humana
The Limited
Marsh & McLennan Companies
Melville
Monsanto
Multimedia
New York Times
Oracle Systems
United Technologies
<PAGE>
Fundamental Investors, Inc.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Statement of Assets and Liabilities (dollars in thousands)
at December 31, 1995
- ---------------------------------------- ------------ ------------
Assets:
Investment securities at market
(cost: $3,635,622) $4,740,088
Cash 172
Receivables for-
Sales of investments $ 6,679
Sales of fund's shares 22,648
Dividends and accrued interest 9,482 38,809
------------ ------------
4,779,069
Liabilities:
Payables for-
Purchases of investments 19,379
Repurchases of fund's shares 3,215
Management services 1,245
Accrued expenses 736 24,575
------------ ------------
Net Assets at December 31, 1995-
Equivalent to $22.29 per share on
213,295,231 shares of $1 par value
capital stock outstanding (authorized
capital stock-300,000,000 shares) $4,754,494
=============
Statement of Operations
for the year ended December 31, 1995 (dollars in thousands)
------------ ------------
Investment Income:
Income:
Dividends $ 76,211
Interest 24,724 $ 100,935
------------
Expenses:
Management services fee 11,787
Distribution expenses 8,234
Transfer agent fee 3,387
Reports to shareholders 347
Registration statement and prospectus 512
Postage, stationery and supplies 584
Directors' fees 86
Auditing and legal fees 48
Custodian fee 343
Taxes other than federal income tax 1
Other expenses 36 25,365
------------ ------------
Net investment income 75,570
------------
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 145,011
Net increase in unrealized
appreciation on investments:
Beginning of year 289,213
End of year 1,104,466
Net unrealized appreciation ------------
on investments 815,253
Net realized gain and unrealized ------------
appreciation on investments 960,264
Net Increase in Net Assets Resulting ------------
from Operations $1,035,834
============
Statement of Changes in Net Assets (dollars in thousands)
- ---------------------------------------- ------------- -------------
Year December
ended 31
1995 1994
Operations: ------------- -------------
Net investment income $ 75,570 $ 56,402
Net realized gain on investments 145,011 82,430
Net unrealized appreciation
(depreciation) on investments 815,253 (110,266)
------------- -------------
Net increase in net assets
resulting from operations 1,035,834 28,566
------------- -------------
Dividends and Distributions Paid to
Shareholders:
Dividends from net investment income (71,173) (56,692)
Distributions from net realized
gain on investments (128,122) (61,479)
------------- -------------
Total dividends and distributions (199,295) (118,171)
------------- -------------
Capital Share Transactions:
Proceeds from shares sold:
76,628,416 and 51,307,623
shares, respectively 1,553,921 922,115
Proceeds from shares issued in
reinvestment of net investment income
dividends and distributions of net
realized gain on investments:
8,766,797 and 5,849,294 shares,
respectively 181,420 103,581
Cost of shares repurchased:
21,343,594 and 16,975,145
shares, respectively (428,456) (304,324)
Net increase in net assets resulting ------------- -------------
from capital share transactions 1,306,885 721,372
------------- -------------
Total Increase in Net Assets 2,143,424 631,767
Net Assets:
Beginning of year 2,611,070 1,979,303
End of year (including undistributed ------------- -------------
net investment income: $9,623 and
$5,226, respectively $4,754,494 $2,611,070
============= =============
</TABLE>
See Notes to Financial Statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FUNDAMENTAL INVESTORS, INC.
1. Fundamental Investors, Inc. (the "fund") is registered under the Investment
Company Act of 1940 as an open-end, diversified management investment company.
The fund seeks long-term growth of capital and income 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-type securities traded on a national securities exchange (or reported
on the NASDAQ national market) and securities traded in the over-the-counter
market are stated at the last reported sales price on the day of valuation;
other securities, and securities for which no sale was reported on that date,
are stated at the last quoted bid price. Bonds and notes are valued at prices
obtained from a bond-pricing service provided by a major dealer in bonds, 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 of their representative quoted bid and asked prices or, if such prices are
not available, at prices for securities of comparable maturity, quality, and
type. Short-term securities with original or remaining maturities in excess of
60 days are valued at the mean of their quoted bid and asked prices. Short-term
securities with 60 days or less to maturity are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith by the
Valuation Committee of the Board of Directors.
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 over the life of the respective
securities. The fund does not amortize premiums on securities purchased.
Dividends and distributions paid to shareholders are recorded on the
ex-dividend date.
Investment securities and other assets and liabilities denominated in
non-U.S. currencies are recorded in the financial statements after translation
into U.S. dollars utilizing rates of exchange on the last business day of the
year. Purchases and sales of investment securities, income and expenses are
calculated using the prevailing exchange rate as accrued. The fund does not
identify the portion of each amount shown in the fund's statement of operations
under the caption "Realized Gain and Unrealized Appreciation on Investments"
that arises from changes in non-U.S. currency exchange rates.
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 $343,000 includes $7,000 that was paid by these credits
rather than in cash.
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 December 31, 1995, net unrealized appreciation on investments for book
and federal income tax purposes aggregated $1,104,466,000, of which
$1,143,231,000 related to appreciated securities and $38,765,000 related to
depreciated securities. There was no difference between book and tax realized
gains on securities transactions for the year ended December 31, 1995. The cost
of portfolio securities for book and federal income tax purposes was
$3,635,622,000 at December 31, 1995.
3. The fee of $11,787,000 for management services was paid pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Directors of the fund are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.39% of the first $800 million of average net assets;
0.336% of such assets in excess of $800 million but not exceeding $1.8 billion;
0.30% of such assets in excess of $1.8 billion but not exceeding $3.0 billion;
and 0.276% of such assets in excess of $3.0 billion.
Pursuant to a Plan of Distribution, the fund may expend up to 0.25% of its
average net assets annually for any activities primarily intended to result in
sales of fund shares, provided the categories of expenses for which
reimbursement is made are approved by the fund's Board of Directors. Fund
expenses under the Plan include payments to dealers to compensate them for
their selling and servicing efforts. During the year ended December 31, 1995,
distribution expenses under the Plan were $8,234,000. As of December 31, 1995,
accrued and unpaid distribution expenses were $563,000.
American Funds Service Company (AFS), the transfer agent for the fund, was paid
a fee of $3,387,000. American Funds Distributors, Inc. (AFD), the principal
underwriter of the fund's shares, received $5,718,000 (after allowances to
dealers) as its portion of the sales charges paid by purchasers of the fund's
shares. Such sales charges are not an expense of the fund and, hence, are not
reflected in the accompanying statement of operations.
Directors of the fund who are unaffiliated with CRMC may elect to defer part or
all of the fees earned for services as members of the Board. Amounts deferred
are not funded and are general unsecured liabilities of the fund. As of
December 31, 1995, aggregate amounts deferred were $114,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both wholly
owned subsidiaries of CRMC. Certain Directors and officers of the fund are or
may be considered to be affiliated with CRMC, AFS, and AFD. No such persons
received any remuneration directly from the fund.
4. As of December 31, 1995, accumulated undistributed net realized gain on
investments was $46,767,000 and additional paid-in capital was $3,380,343,000.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $1,834,296,000 and $866,944,000, respectively, during
the year ended December 31, 1995.
<PAGE>
PER-SHARE DATA AND RATIOS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year ended December 31
--------- --------- -------- -------- --------
1995 1994 1993 1992 1991
--------- --------- -------- -------- --------
Net Asset Value, Beginning
of Year $17.50 $18.15 $17.52 $17.47 $14.32
--------- --------- -------- -------- --------
Income from Investment
Operations:
Net investment income .41 .42 .44 .44 .41
Net realized and unrealized
gain (loss) on investments 5.46 (.18) 2.65 1.27 3.82
Total income from --------- --------- -------- -------- --------
investment operations 5.87 .24 3.09 1.71 4.23
--------- --------- -------- -------- --------
Less Distributions:
Dividends from net investment
income (.40) (.44) (.43) (.42) (.40)
Distributions from net realized
gains (.68) (.45) (2.03) (1.24) (.68)
--------- --------- -------- -------- --------
Total distributions (1.08) (.89) (2.46) (1.66) (1.08)
--------- --------- -------- -------- --------
Net Asset Value, End of Year $22.29 $17.50 $18.15 $17.52 $17.47
========= ========= ======== ======== ========
Total Return* 34.21% 1.33% 18.16% 10.19% 30.34%
Ratios/Supplemental Data:
Net assets, end of year
(in millions) $4,754 $2,611 $1,979 $1,440 $1,156
Ratio of expenses to average
net assets .70% .68% .65% .65% .69%
Ratio of net income to
average net assets 2.08% 2.45% 2.43% 2.56% 2.50%
Portfolio turnover rate 25.47% 23.02% 29.22% 23.98% 17.07%
</TABLE>
* This was calculated without deducting a sales charge. The maximum sales
charge is 5.75% of the fund's offering price.
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders of
Fundamental Investors, Inc.
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio, of Fundamental Investors, Inc. ("the fund") as of
December 31, 1995, the related statement of operations for the year then ended
and of changes in net assets for the years ended December 31, 1995 and 1994,
and the per-share data and ratios for each of the five years in the period
ended December 31, 1995. These financial statements and the 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 the 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 the
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 December 31, 1995 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 referred to above and the per-share
data and ratios for each of the five years in the period ended December 31,
1995 present fairly, in all material respects, the financial position of
Fundamental Investors, Inc. at December 31, 1995, and the results of its
operations, the changes in its net assets and the per-share data and ratios for
the respective stated years, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
January 26, 1996
1995 Tax Information (Unaudited)
We are required to advise you within 60 days of the fund's fiscal year-end
regarding the federal tax status of distributions received by shareholders
during such fiscal year.
Corporate shareholders may exclude up to 70% of qualifying dividends received
during the year. For purposes of computing this exclusion, 63% of the
dividends paid by the fund from net investment income represents qualifying
dividends.
Certain states may exempt from income taxation that portion of the dividends
paid from net investment income that was derived from direct U.S. Treasury
obligations. For purposes of computing this exclusion, one percent of the
dividends paid by the fund from net investment income was derived from interest
on direct U.S. Treasury obligations.
Dividends and distributions received by retirement plans such as IRAs,
Keogh-type plans, and 403(b) plans need not be reported as taxable income.
However, many plan retirement trusts may need this information for their annual
information reporting.
SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV WHICH WILL BE MAILED IN
JANUARY 1996 TO DETERMINE THE AMOUNTS TO BE INCLUDED ON THEIR 1995 TAX RETURNS.
SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISERS.
<PAGE>
FUNDAMENTAL INVESTORS
DIRECTORS
GUILFORD C. BABCOCK, San Marino, California
Associate Professor of Finance,
School of Business Administration,
University of Southern California
CHARLES H. BLACK, Pacific Palisades, California
Private investor and consultant; former Executive
Vice President and Director, KaiserSteel Corporation
MARTIN FENTON, JR., San Diego, California
Chairman of the Board, Senior Resource Group, Inc.
(senior living centers management)
HERBERT HOOVER III, Pasadena, California
Private investor
GAIL L. NEALE, Burlington, Vermont
Executive Vice President of the Salzburg Seminar;
former Director of Development and of
the Capital Campaign, Hampshire College
KIRK P. PENDLETON, Southampton, Pennsylvania
President, Cairnwood, Inc.
(venture capital investment)
JAMES W. RATZLAFF, San Francisco, California
Senior Partner,
The Capital Group Partners L.P.
HENRY E. RIGGS, Claremont, California
President and Professor of Engineering,
Harvey Mudd College
R. MICHAEL SHANAHAN, Los Angeles, California
Chairman of the Board,
Capital Research and Management Company
WALTER P. STERN, New York, New York
Principal Executive Officer and
Chairman of the Board of the fund
Chairman of the Board,
Capital Group International, Inc.
CHARLES WOLF, JR., PH.D., Santa Monica, California
Dean, The RAND Graduate School;
Senior Economic Adviser,
The RAND Corporation
OTHER OFFICERS
JAMES E. DRASDO, Los Angeles, California
President of the fund
Senior Vice President and Director,
Capital Research and Management Company
GORDON CRAWFORD, Los Angeles, California
Senior Vice President of the fund
Senior Vice President and Director,
Capital Research Company
PAUL G. HAAGA, JR., Los Angeles, California
Senior Vice President of the fund
Senior Vice President and Director,
Capital Research and Management Company
DINA N. PERRY, Washington, D.C.
Senior Vice President of the fund
Vice President,
Capital Research and Management Company
MICHAEL T. KERR, Los Angeles, California
Vice President of the fund
Senior Vice President,
Capital Research Company
JULIE F. WILLIAMS, Los Angeles, California
Secretary of the fund
Vice President -- Fund Business Management Group,
Capital Research and Management Company
MARY C. HALL, Brea, California
Treasurer of the fund
Senior Vice President -- Fund Business Management Group,
Capital Research and Management Company
PATRICK F. QUAN, San Francisco, California
Assistant Secretary of the fund
Vice President -- Fund Business Management Group,
Capital Research and Management Company
ROBERT P. SIMMER, Norfolk, Virginia
Assistant Treasurer of the fund
Vice President -- Fund Business Management Group,
Capital Research and Management Company
OFFICES OF THE FUND
Four Embarcadero Center, Suite 1800
Mailing Address: P.O. Box 7650
San Francisco, California 94120-7650
INVESTMENT ADVISER
Capital Research and
Management Company
333 South Hope Street
Los Angeles, California 90071-1443
135 South State College Boulevard
Brea, California 92621-5804
TRANSFER AGENT FOR
SHAREHOLDER ACCOUNTS
American Funds Service Company
P.O. Box 2205
Brea, California 92622-2205
P.O. Box 659522
San Antonio, Texas 78265-9522
P.O. Box 6007
Indianapolis, Indiana 46206-6007
P.O. Box 2280
Norfolk, Virginia 23501-2280
CUSTODIAN OF ASSETS
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02105-1713
COUNSEL
Morrison & Foerster LLP
345 California Street
San Francisco, California 94104-2675
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1000 Wilshire Boulevard
Los Angeles, California 90017-2472
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071-1462
This report is for the information of shareholders of Fundamental Investors,
but it may also be used as sales literature when preceded or accompanied by the
current prospectus, which gives details about charges, expenses, investment
objectives and operating policies of the fund. Summary investment results are
documented in the current Statement of Additional Information. If used as sales
material after March 31, 1996, this report must be accompanied by an American
Funds Group Statistical Update for the most recently completed calendar
quarter.
<PAGE>
FUND SERVICES
THESE HANDY SERVICES CAN ADD CONVENIENCE AND FLEXIBILITY TO YOUR AMERICAN FUNDS
INVESTMENTS.
ADDING TO YOUR INVESTMENT
There are three ways you can group your American Funds purchases to qualify for
a quantity discount:
RIGHT OF ACCUMULATION
You can combine the value of your existing shares with those you are purchasing
to qualify for a discount.
STATEMENT OF INTENTION
You can, without obligation, use a Statement of Intention that allows you to
combine the value of your existing shares and the purchases you intend to make
over a 13-month period so you can take immediate advantage of the maximum
quantity discount available.
CONCURRENT PURCHASES
By purchasing shares in more than one American Fund simultaneously, you may
qualify for a quantity discount.
(Shares of money market funds purchased directly do not apply to quantity
discounts. Additionally, certain accounts may not be eligible to be grouped.
See the fund's prospectus or your investment professional for more details.)
SUBSEQUENT INVESTMENTS BY MAIL
Once your account has been established and you've selected a broker/dealer,
simply send a check for $50 or more, along with the bottom portion of your
account statement, to American Funds Service Company.
PUTTING YOUR INVESTMENTS ON AUTOPILOT
AUTOMATIC INVESTMENT PLAN
You can make automatic investments regularly by authorizing American Funds
Service Company to deduct a specified sum from your bank account.
AUTOMATIC EXCHANGE PLAN
You can automatically exchange $50 or more between funds on a regular basis.
AUTOMATIC WITHDRAWAL PLAN
You can arrange to have regular checks for specified amounts sent to you or to
anyone you designate in any month(s) you choose.
CHOOSING THE PAYOUT SYSTEM THAT'S RIGHT FOR YOU
AUTOMATIC REINVESTMENT
All dividends and capital gain distributions can be automatically reinvested in
additional fund shares without a sales charge.
CROSS-REINVESTMENT
You can reinvest dividends and/or capital gains from one fund to another fund
at no charge if you have a balance of at least $5,000 in the originating fund
or meet the minimum initial investment for the receiving fund.
DIVIDENDS IN CASH
You can elect to take dividends in cash.
REPORTS YOU'LL RECEIVE FROM US
CONFIRMATIONS OF TRANSACTIONS
You receive account statements reflecting the transactions in your account.
CONSOLIDATED QUARTERLY STATEMENTS
If you have more than one account with the American Funds, you can request a
quarterly statement combining certain accounts registered to the same
individual.
YEAR-END TAX REPORTS
At the end of each year, you will receive an individual report which shows the
tax status of the distributions paid to you during the year. In many instances,
these reports can help you calculate taxes due on shares sold by reporting
average cost.
SPECIAL SERVICES
EXCHANGE PRIVILEGES
You can transfer some or all of your holdings into other American Funds by mail
or by phone. Certain restrictions apply (a sales charge may apply if one has
not already been paid), and it's important to remember that an exchange
constitutes a sale and purchase for tax purposes.
TELEPHONE INFORMATION SERVICE
American FundsLine (R) is a toll-free service which gives you account
information as well as current prices for all American Funds. Just call
800/325-3590.
SAFEKEEPING OF CERTIFICATES
Your shares are credited to your account and certificates are not issued unless
specifically requested. (Certificates are not available for money market
funds.)
FREE CHECK-WRITING WITHDRAWAL SERVICE
If you have a money market fund account, this service enables you to write
checks for $250 or more against the account. The account continues to earn
daily interest until checks clear the fund's bank.
RETIREMENT PLANS
A wide variety of plans is available.
FOR MORE INFORMATION ABOUT THESE SERVICES OR ABOUT ANY OF THE AMERICAN FUNDS,
INCLUDING CHARGES AND EXPENSES, PLEASE OBTAIN A PROSPECTUS FROM YOUR SECURITIES
DEALER OR FINANCIAL PLANNER, OR PHONE THE FUND'S TRANSFER AGENT, AMERICAN FUNDS
SERVICE COMPANY, AT 800/421-0180. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
YOU INVEST OR SEND MONEY. THESE SERVICES ARE SUBJECT TO CHANGE OR TERMINATION.
Litho in USA CGD/FS/2783
Lit. No. Fl-011-0296
[The American Funds Group (R)]
