Fundamental Investors
1996 Annual Report
Perspectives on how your fund's investment decisions are made
THE AMERICAN FUNDS GROUP (R)
for the year ended December 31
[Cover: Abstract illustration of ideas and concepts]
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>
CAPITAL INCOME TOTAL
RESULTS RETURN RETURN
<S> <C> <C> <C>
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
1996 +18.2 +1.8 +20.0
</TABLE>
10-year average annual
compound rate of return +14.9%
10-year total return +301.6%
Lifetime total return (since 8/1/78) +1,432.4%
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.
10 Most Successful Holdings
for the twelve months ended 12/31/96
<TABLE>
<CAPTION>
PERCENT
CHANGE
<S> <C>
Dell Computer +206.9%
Canadian National Railway System +153.3
Intel +130.7
U.S. Industries + 87.1
El Paso Natural Gas + 75.7
CITIC Pacific + 69.7
International Business Machines + 64.6
Citicorp + 53.2
Gillette + 49.2
Conrail + 42.3
</TABLE>
10 Least Successful Holdings
for the twelve months ended 12/31/96
<TABLE>
<CAPTION>
PERCENT
CHANGE
<S> <C>
Adobe Systems -39.7%
United HealthCare -31.3
Tele-Communications,TCI -28.1
Eastern Utilities Associates -26.5
Viacom -26.4
Armco -13.1
Georgia Gulf -12.6
Eastman Chemical -11.8
NYNEX -10.9
AirTouch Communications -10.6
</TABLE>
The percentage change reflects the increase or decrease in market price,
excluding dividends.
Fund results in this report were computed without a sales charge unless
otherwise indicated. The fund's 30-day yield as of January 31, 1997, calculated
in accordance with the Securities and Exchange Commission formula, was 1.52%.
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. KEEP IN MIND THAT THE FUND
MAY ALSO INVEST IN INTERNATIONAL SECURITIES WHICH CAN BE MORE VOLATILE SINCE
THEIR PRICES ARE INFLUENCED BY CURRENCY FLUCTUATIONS AS WELL AS TYPICAL
ECONOMIC AND BUSINESS FACTORS.
FELLOW SHAREHOLDERS:
We are pleased to report another strong year for fund shareholders. The value
of your investment in Fundamental Investors increased 20.0% in 1996 if you
reinvested all dividends and capital gain distributions.
The fund's income objective was reflected in four 10-cent quarterly dividends.
This represented an income return of 1.8% on a reinvested basis. The capital
gain distributions paid in February and November totaled $1.76 per share: 35
cents in short-term gains and $1.41 in long-term gains.
The last two years have been especially rewarding for investors in the fund
with this year's 20% gain following on 1995's 34% return. During this two-year
period, the Consumer Price Index advanced only 5.9%, so shareholders made real
progress in the quest to increase the value of their investments well beyond
the cost of living. A dollar invested in the fund at the beginning of 1995
would have been worth $1.61 at year-end 1996. The magnitude of the results for
this period are best appreciated in a historical context. Over the 30 years
ended in 1994, the total return on stocks (as measured by the unmanaged
Standard & Poor's 500 Composite Index) averaged about 10% annually - and only
about 4% after the effects of inflation.
We did, however, trail the 22.9% earned by the S&P 500 in 1996, the benchmark
by which we measure ourselves. There are two major reasons for the difference
in results. First, the S&P 500's increase was not broad-based. It reflected the
impact of extraordinary growth in a relatively small number of very large
capitalization stocks. Second, with the U.S. bull market growing long in the
tooth, the fund took advantage of its flexibility and invested almost 14% of
its assets in non-U.S. companies (9% outside the S&P 500). Another 5.2% was
held in cash equivalents, whereas the S&P 500 is fully invested.
We believe that diversifying into companies that have not fully participated in
the market run-up, are somewhat smaller, or are domiciled outside the U.S. are
ways to protect against a U.S. market correction. Another is to rely on
income-producing stocks as a possible buffer against volatility. In the past,
we invested in a number of banks and utilities for that income. However, we are
less certain about these sources as a result of the extraordinary three-year
rise in bank stocks and the less secure dividend environment for utilities in
this period of regulatory change. Consequently, we have looked for an
alternative source of income, increasing our stake in oil and other energy
companies from a total of 8.8% at year-end 1995 to 15.1% by the end of 1996.
We'll explore this shift more thoroughly in our feature story that begins on
page 4.
While we are cautious short term, long term we retain the optimism that has
been at the root of our success. Of 1996's ten most successful holdings, three
were technology-driven companies. Each decision to own these companies was
defined by our fundamental approach:
Intel's management team continues to impress us with its growing leadership of
the microprocessor revolution (+130.7%).
Dell Computer pioneered the direct distribution of personal computers using
Intel's microprocessor and Microsoft's operating system (+206.9%).
IBM has worked to create value through its increasingly effective field force
(+64.6%).
As has been the case throughout the fund's lifetime, the portfolio is dominated
by companies that most Americans know well, such as Boeing (+35.7%),
Caterpillar (+28.1%), Colgate-Palmolive (+31.3%) and Sears (+18.3%).
The fund remains focused on a number of entertainment companies in light of the
rapidly expanding worldwide market for their products. This year there were
some disappointments, such as Time Warner, which is on our list of ten largest
holdings (-1.0%). Long term, we are confident about this company's future, with
its rich assets and some indications of a changing attitude aimed at enhancing
shareholder value.
Though the poorest showing in the list of ten largest is AT&T (-4.7%), we have
taken advantage of price weakness and bought more of it, given our optimism
about changes in management.
We remain upbeat about the future of Fundamental Investors. Our fellow
shareholders opnow number over 300,000, many of whom invest in the fund as part
of a retirement plan. It is gratifying to see the fund used by those seeking to
achieve long-term goals, since we believe Fundamental Investors is best suited
for shareholders who have the time to let the value of compounding work.
We invite you to read our feature story and explore with us how ideas and
research are transformed into the fund's investment decisions.
Sincerely,
/S/Walter P. Stern
Walter P. Stern
Chairman of the Board
/s/James E. Drasdo
James E. Drasdo
President
February 14, 1997
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, 1996, 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, 1996, assuming payment
of the 5.75% maximum sales charge at the beginning of the stated periods:
TOTAL AVERAGE ANNUAL
RETURN COMPOUND RETURN
10 years +278.48% +14.24%
Five years +100.19% +14.89%
One year + 13.08% -
HOW A $10,000 INVESTMENT HAS GROWN
[chart]
<TABLE>
<CAPTION>
Capital S&P 500 Consumer
Value Total Value Index with Price Index
Year Ended Dividends Value at Dividends Value at Total dividends (inflation)
December 31 in Cash Year-End/1/ Reinvested Year-End/1/ Return reinvested /4/
<S> <C> <C> <C> <C> <C> <C> <C>
1978/5/ $216 $8,947 $217 $9,155 -8.4% $9,800 $10,304
1979 405 9,892 421 10,556 15.3 11,625 11,674
1980 552 11,390 603 12,807 21.3 15,379 13,136
1981 579 10,688 665 12,654 -1.2 14,616 14,307
1982 634 13,522 769 16,957 34.0 17,755 14,855
1983 594 16,424 755 21,389 26.1 21,759 15,419
1984 555 16,759 734 22,620 5.8 23,126 16,027
1985 581 21,148 795 29,448 30.2 30,449 16,636
1986 636 25,151 894 35,941 22.0 36,101 16,819
1987 717 25,463 1,034 37,295 3.8 38,010 17,565
1988 895 28,561 1,328 43,246 16.0 44,307 18,341
1989 1,225 35,438 1,877 55,597 28.6 58,316 19,193
1990 1,059 32,180 1,678 52,130 -6.2 56,492 20,365
1991 903 40,940 1,477 67,947 30.3 73,659 20,989
1992 989 44,059 1,655 74,871 10.2 79,250 21,598
1993 1,083 50,884 1,857 88,466 18.2 87,213 22,192
1994 1,238 50,319 2,171 89,641 1.3 88,342 22,786
1995 1,161 66,210 2,082 120,306 34.2 121,500 23,364
1996 1,197 78,143/3/ 2,188 144,351/2/ 20.0 149,324 24,140
</TABLE>
[end chart]
AVERAGE ANNUAL COMPOUND RATE OF RETURN FOR 18 1/2 YEARS 15.6%
/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 $23,200 and reinvested capital gain
distributions
of $50,406.
/3/ Includes reinvested capital gain distributions of $30,846, but does not
reflect income dividends of $15,219 taken in cash.
/4/ Computed from data supplied by the U.S. Department of Labor, Bureau of
Labor Statistics.
/5/ For the period August 1, 1978 (when Capital Research and Management Company
became investment adviser) through December 31, 1978.
Past results are not predictive of future results.
The indexes are unmanaged.
TURNING IDEAS AND RESEARCH INTO DECISIONS
Is investing an art or a science? Is it creative or is it technical? The
answer is "all of the above."
It's that delicate handoff from right brain to left brain that makes successful
investing so difficult. To better understand how Fundamental Investors goes
about that process, we will explore in the pages that follow the fund's basic
mission and its unusual approach to carrying out that mission. Through
conversations with your portfolio counselors, we'll also look at examples of
how the fund searches for growth and income while remaining attentive to market
conditions.
THE MISSION
As stated in your fund's prospectus, our mission is to seek long-term growth of
capital and income through investments in common stocks.
Translation:
You have entrusted us with your money and expect us to fulfill two core
assignments:
1. return more dollars to you in the future than you gave us initially; and
2. provide you with income you can either spend today or reinvest to act as a
buffer against market declines.
You expect us to make good on these assignments over the long term - say five
to ten years - by investing your money in stocks that appear capable of helping
us reach those goals over time.
Before we explore the particulars of how we work to achieve that mission, it
may be helpful to gain a perspective on how the very foundation and
philosophical approach of Fundamental Investors differs from other mutual
funds.
FUNDAMENTAL INVESTORS - WHAT MAKES US DIFFERENT?
Multiple managers. One of the biggest differences and greatest advantages
Fundamental Investors has over the typical mutual fund is that it is managed by
multiple investment professionals, not just one. Think of your fund as a pie
divided into four slices. Each section is managed independently: Three sections
are managed by portfolio counselors who are knowledgeable generalists; the
fourth section is managed by a group of research analysts who are specialists
in particular industries.
The three portfolio counselors - Gordon Crawford, Jim Drasdo and Dina Perry
(who have 78 years of combined investment experience) - each manage their
individual section as if it constituted an entire mutual fund. With their
portion of shareholders' assets, they make investment selections based on their
own ideas, information and convictions. Working to meet the fund's objective
and overall guidelines, they invest in a diverse range of stocks. Taken
together, this system provides shareholders with greater diversity of
investment style and preference than in funds managed by a single individual or
by committee consensus.
Adding further to that diversity is the fourth slice of the pie filled with
stocks purchased by a group of CRMC research analysts. Typically, analysts
conduct research and then offer "buy," "sell" or "hold" recommendations to
portfolio counselors. Our analysts, in addition to making recommendations to
others, put money where their conviction is by buying stocks in their industry
of expertise and get bonuses based on the outcome. When analysts urge portfolio
counselors to buy a stock, the counselors ask, "Do you own it in your research
portfolio?" Actions speak louder than "buy" recommendations.
No instant-gratification guarantee. While other funds may feel pressured to
take undue risk and make short-term decisions to look good today, we take a
different approach. We see our relationship with you as a long-term
proposition, and decisions are made with that in mind. We believe we can be
more successful with your investment over the long haul if we can focus on
finding undervalued, out-of-favor (and, therefore, inexpensive) companies
before others recognize their value. With a long-term perspective, we can
afford to wait for these values to materialize.
In good times and bad. Our long-term relationship with you carries with it an
obligation to which few pay heed in a raging bull market - to protect our
shareholders in bad times as well as enhance their investments in good times.
While others may be bent on taking advantage of the momentum of seemingly
ever-rising prices, we plan for the inevitable dip. We do that by trying to
provide you with a cushion of income, less volatile stocks and tried-and-true
companies that have a history of holding up in tough times. Sure, we want the
fund to participate in market advances, but not at the expense of unchecked
losses in the downhill phase. Long-term outlooks and reasoned decisions have
allowed us to meet our shareholders' long-term objectives for the past 18
years.
HOW HAVE WE MADE THAT HAPPEN? THAT'S WHAT WE'LL DISCUSS IN THE NEXT SEVERAL
PAGES. WE'LL TALK ABOUT TRYING TO FORETELL FUTURE GROWTH, THE CHALLENGING
SEARCH FOR INCOME AND HOW WE STRIVE TO SHIELD YOUR INVESTMENT FROM UNDUE RISK.
[Pull Quote]
How do we transform your dollars into securities that can help meet your
financial goals?
[End Pull Quote]
[Photo Caption]
Gordon Crawford
Jim Drasdo
Dina Perry
Research Portfolio
[End Photo Caption]
[illustration: pie cut in four equal portions, evenly distributed to Gordon
Crawford, Jim Drasdo, Dina Perry, and Research Portfolio]
FORETELLING A COMPANY'S FUTURE GROWTH
[illustration: pie cut in four equal portions]
The growth portion of your fund's objective is achieved if we can give you back
substantially more money than you gave us. The fund attempts to do that by
buying stock - or, more accurately, by becoming a part-owner of companies whose
future prospects appear so bright that their value will increase. As other
investors recognize a company's value, they are willing to pay a higher price
for the opportunity to own a share of its stock. And when the stock price
increases, your initial investment is worth more.
It sounds so easy. The hard part is foretelling the future - identifying the
companies that can provide us with the best growth opportunities.
HUNTING FOR BARGAINS
Recognized growth opportunities are often expensive, so the fund tries to hunt
for companies with unrecognized growth potential. These "bargains" take the
shape of well-run companies whose products or services are temporarily out of
favor; whose management or strategic approach may be in transition; whose
opportunities lie in new, burgeoning businesses or marketplaces; or whose value
isn't written on a balance sheet - visionary leaders, a creative strategy or a
shift in consumer demand, for instance.
STRONG SOURCES OF GROWTH
"One historically strong source of growth for the fund has been in the
technology field," says Jim Drasdo, president of Fundamental Investors and one
of its three portfolio counselors. "Two of the fund's ten largest holdings,
Intel (+130.7%) and Texas Instruments (+23.2%), illustrate how advantageous it
is to recognize value early."
When the fund became interested in buying Intel's stock in 1992, one could have
argued just as forcefully for a major competitor. "Both were attractive
microprocessing companies, but the competitor was much cheaper," said Jim.
"However, making a decision solely on price would have been the wrong thing to
do. We were able to recognize something early on at Intel that wasn't reflected
on a balance sheet - valuable intellectual property and a highly effective
management team. Intel has gone on to execute its plan flawlessly and the
fund's investment in the company has increased more than five-fold."
"Now I'm looking at Texas Instruments (owned by the fund since 1983) with the
same enthusiasm," continues Jim, "because I believe it has the potential to
become the most improved semiconductor company over the next few years."
As Dina Perry, another counselor, points out, "Texas Instruments' earnings are
in the tank right now." In spite of that - or perhaps because of that - all
three portfolio counselors have purchased more of TI in their portions of the
fund. "TI is doing the right things to prepare for its future," Dina continues,
"by selling its lucrative defense business and unprofit-able portable computer
business in order to invest in the high-growth digital-signal processing
portion of its semiconductor business. We may be early on this but we're
willing to wait."
"Technology is the fastest growing industry in the world," says Gordon
Crawford, the other counselor, "so I think it's a truly outstanding place to be
invested. Though the business goes through a downturn every few years, the good
companies tend to work through it quickly - and then things are off and running
again."
Other technology companies that have provided growth to the fund include the
recently acquired Dell Computer and the long-time holding of IBM. Dell, a
direct distributor of "Wintel" products, has soared on the wings of Microsoft's
Windows operating system and Intel's microprocessors. Purchased very
inexpensively, Dell was up 206.9% in 1996 and has increased almost 700% since
we began buying it just 18 months ago. IBM, on the other hand, has been a
holding since we began managing Fundamental Investors 18 years ago (and even
before that - the fund has owned IBM since 1956). In recent years we have
waited patiently for IBM to reemerge as an important player. Now, as the
technology industry's preeminent field organization, it adds significant value
to its clients (and in the last year, to the fund, +64.6%).
[illustration: abstract illustration from cover]
[Pull Quote]
The secret to growth-oriented investing is discovering value before others
recognize it.
[End Pull Quote]
THE CHALLENGING SEARCH FOR INCOME
"The hardest part about managing a growth-and-income fund in today's market is
coming up with the income," says Jim. No matter what's happening in the market,
the income objective carries a constant and specific goal the counselors have
set for themselves.
"All three of us strive to meet a certain income level," continues Jim. "We
have paid at least a dime a share for 62 consecutive quarters and hope to
continue that tradition."
Where does the "dime" come from? How does a growth-and-income fund earn the
income to pay out to its shareholders? We invest part of the portfolio in
stocks that pay high, regular dividends. These typically include banks,
utilities and oil companies.
GETTING INCOME FROM ENERGY
In this last year, all three portfolio counselors shifted their focus to energy
companies as an income source. Each, of course, arrived at the decision
separately, but collectively, they brought the fund's energy holdings (a
combination of oil, energy service and energy equipment companies) up from 8.8%
at the end of 1995 to 15.1% at the end of 1996.
"Energy is my largest industry holding in the fund," says Gordon. "I was
initially attracted to it for the income these stocks can provide. Several
things are going on in this field that appeal to me. First of all, the price of
oil is up, and though many analysts believe it won't last, prices keep hanging
up there. I think we're in a sustained, moderate economic recovery all across
the globe, so I believe demand for oil will remain pretty robust. Secondly,
energy service companies are utilizing breakthrough technology to find oil
inexpensively. And thirdly, this is a business that's ripe for cost-cutting and
restructuring."
"There are two other factors that appeal to me about energy," says Dina. "One
is instability in the Middle East, which has impacted the price of oil. The
other thing - and this is important to Fundamental Investors, which tries to
find companies that are fundamentally strong but undetected by the masses - is
that energy is really an unloved industry. Since it was not owned by many
institutions, it was relatively cheap. It had the yield and was a good value
for the price."
"I look around the world and see positive trends," says Jim. "The fall of
communism, the rise in capitalism and the trend toward free trade. The one
thing I worry about derailing all this is a flare-up in the Middle East that
would drive oil prices through the roof. So to me, owning oil companies is an
insurance policy to protect against that scenario."
THE BENEFIT OF RESEARCH
With many oil stocks selling at bargain prices and economic trends starting to
work in their favor, the question becomes which companies to buy. After all,
whether an industry is doing well or poorly, some companies will do better than
others. With that in mind, Jim consulted our oil analyst, Mike Kerr (who is
also an officer of your fund).
"I said to Mike, $I'm looking for two things - yield and a Middle East
insurance policy.' Of the three highest yielding oil companies, I asked him
which was in the best shape and which one has the most leverage if the Middle
East flares up."
"What I'm most excited about is new abilities to drill for oil in places you
heretofore couldn't - like the deep waters in the Gulf of Mexico," says Gordon.
"I don't know the companies like our analysts do, so together we look at all
the companies that make equipment to drill for oil in deep waters and determine
which have the best prospects."
Ideas and concepts, with the aid of research and information, lead to buying
decisions about individual companies. At the end of 1996, as you can see on
page 12 of the fund's portfolio, you owned a portion of 20 energy companies.
Together, they contributed significantly to each quarter's 10-cent-a-share
income dividend.
[illustration: pie cut in four equal portions]
[illustration: abstract illustration from cover]
[Pull Quote]
Some shareholders need income now; for others, it may provide a cushion against
rough spots in the market.
[End Pull Quote]
TAKING OUR FOOT OFF THE PEDAL
For several years now, the market has been speeding along, and we've had a
great ride. In our concern over encountering a market set back, we have
recently taken a more cautious approach.
"We don't want to be caught dancing too fast when the music stops," warns Jim.
"We've done a good job in the bull phase but no one knows when it will end. So
we've each done something in our own way to protect our shareholders while
still helping them achieve their goals."
STICKING TO UNDERVALUED COMPANIES
"One way to prepare for a down market," says Dina, "is to buy stocks that never
really went up when the rest of the market went up. The expectation is that
these stocks have a good chance of improving if the market continues to grow
and broaden, yet if the market corrects, they have less room to fall and
therefore won't get hurt quite as badly. One sector in that category is paper
and forest product companies. Since they haven't done that well yet, they have
the advantage of being cheap."
Jim agrees with that concept. "Even within a hot group like computers, a Tandem
Computers that's flat on its back probably wouldn't go down much if the market
fell since it's already at a near all-time low valuation."
GOING GLOBAL
An alternative to taking our foot off the pedal has been to go global.
"I still think we're in a uniquely benign environment," says Gordon, "so I want
to be fully invested in stocks. I don't expect a horrible market blowout like
we had from 1969 to '74. I think a more likely scenario might be that growth
stays very low, or that we have a recession and Europe never comes out of its
recession, and things just stay really sluggish. In an environment like that, I
think interest rates go a lot lower, helping quality growth companies do pretty
well.
"So if you look at my part of Fundamental Investors, you'll find global growth
companies that sell basic products people want. As people in Eastern Europe,
India, China, Russia, Latin America and the Pacific Basin get disposable
income, they want things we take for granted - toothpaste, toothbrushes,
batteries, razors, soda pop and videos. The companies that produce these
products are familiar and have established brand names, shelf space and
distribution. Unless something happens, these companies are likely to grow
15-20% over the next 20 years, regardless of what's going on in the U.S."
INFORMATION IS THE KEY
During uncertain times in the market, the best approach is to know as much as
we can about the companies in which the fund is invested, to ensure that we
make solid, long-term decisions.
"We have so many ways to get information," says Dina. "We meet with the
companies at their headquarters or they come to us. We go to conferences. Our
analysts visit the companies we are considering along with their competitors
and suppliers. We get information electronically, we read reports, we share
information with each other."
"We actually have too much information," says Gordon. "The challenge is making
sense of it all. Applying judgment to all this data is the key. Most of the
skill is figuring out which parts to focus on so you aren't overrun with
trivia."
KEEPING SIGHT OF OUR OBJECTIVES
As we take precautions against possible short-term market dips, we still keep
in mind our goals - to seek long-term growth of capital and income through
investments in common stocks. In other words, we will strive to return more
dollars to you in the future than you gave us initially, while providing a
cushion of income today.
We work to achieve these goals by seeking out 1) hidden value in
growth-oriented companies and 2) stability of income from dividend-paying
companies. We adjust our focus as opportunities and challenges present
themselves, while always keeping the fund's mission in mind.
[illustration: pie cut in four equal portions]
[illustration: abstract illustration from cover]
[Pull Quote]
We can take precautions while still seeking to meet our objectives of growth
and income.
[End Pull Quote]
<TABLE>
<S> <C> <C> <C>
FUNDAMENTAL INVESTORS, INC.
INVESTMENT PORTFOLIO - December 31, 1996
Percent
Of net
LARGEST EQUITY-TYPE HOLDINGS Assets
Atlantic Richfield 2.77%
Texas Instruments 2.24
Royal Dutch Petroleum/"Shell" Transport and Trading 1.53
Exxon 1.46
Pfizer 1.44
Time Warner 1.39
Seagram 1.33
AT&T 1.28
Intel 1.28
Walt Disney 1.25
Shares or Market Percent
EQUITY-TYPE SECURITIES Principal Value Of
(Common and Preferred Stocks and Amount (000) Net Assets
Convertible Debentures)
- ---------------------------------------------------- ---------- ---------- ----------
Energy Sources & Equipment- 15.14%
Atlantic Richfield Co. 1500000 $198,750 2.77%
Royal Dutch Petroleum Co. (New York Registered
Shares) (Netherlands) 612900 104653
"Shell" Transport and Trading Co., 1.53
PLC (New York Registered Shares) 50000 5119
(United Kingdom)
Exxon Corp. 1070000 104860 1.46
Murphy Oil Corp./1/ 1535000 74831 1.04
Baker Hughes Inc. 1950000 67275 .94
Halliburton Co. 1075000 64769 .90
Societe Nationale Elf Aquitaine (American Depositary Receipts)
(France) 1400000 63350 .88
Suncor Inc. (Canada) 1187000 49119 .69
Schlumberger Ltd. (Netherlands Antilles) 466700 46612 .65
Phillips Petroleum Co. 1050000 46462 .65
Western Atlas Inc./1/ 600000 42525 .60
Chevron Corp. 600000 39000 .54
Unocal Corp. 900000 36562 .52
Enterprise Oil PLC (United Kingdom) 3000000 33185 .46
Texaco Inc. 300000 29438 .41
British Petroleum Co. PLC (American Depositary
Receipts) (United Kingdom) 193370 27338 .38
Union Pacific Resources Group, Inc. 647421 18937 .26
TOTAL, Class B (American Depositary Receipts)
(France) 407013 16382 .24
Cyprus Amax Minerals Co., convertible preferred,
Series A 200000 10700 .15
Sun Co., Inc., Series A 146314 3676
Sun Co., Inc. 48186 1175 .07
Food & Household Products- 5.44%
Unilever NV (New York Registered Shares) (Netherlands) 405000 70976 .99
Colgate-Palmolive Co. 725000 66881 .93
Kellogg Co. 925000 60703 .85
General Mills, Inc. 775000 49116 .69
McCormick & Co. 1660000 39114 .55
Archer Daniels Midland Co. 1700000 37400 .52
H.J. Heinz Co. 1000000 35750 .50
CPC International Inc. 381100 29535 .41
Health & Personal Care- 5.35%
Pfizer Inc 1250000 103594 1.44
Merck & Co., Inc. 950000 75288 1.05
Johnson & Johnson 1340000 66665 .93
American Home Products Corp. 1000000 58625 .82
AB Astra, Class A (American Depositary Receipts)
(Sweden) 800000 39200 .55
Eli Lilly and Co. 300000 21900 .31
Kimberly-Clark Corp. 130000 12382 .17
Gillette Co. 75000 5831 .08
Electronic Components- 4.82%
Texas Instruments Inc. 2509128 159957 2.24
Intel Corp. 700000 91656 1.28
Motorola, Inc. 1300000 79787 1.11
Cirrus Logic, Inc. 6.00% convertible debentures 2003/2/ $15,000,000 13612 .19
Business & Public Services- 4.11%
Omnicom Group Inc. 1300000 59475 .83
Federal Express Corp./1/ 1300000 57850 .81
Shared Medical Systems Corp. 935000 46049 .64
Avery Dennison Corp. 1000000 35375 .49
Humana Inc./1/ 1800000 34425 .48
Browning-Ferris Industries, Inc. 1300000 34125 .48
United HealthCare Corp. 300000 13500 .19
Ecolab Inc. 300000 11288 .16
NCR Corp./1/ 75000 2503 .03
Banking- 4.03%
PNC Bank Corp. 1200000 45150 .63
Wells Fargo & Co. 166666 44958 .63
Fleet Financial Group, Inc. 900000 44887 .63
Norwest Corp. 1000000 43500 .61
CoreStates Financial Corp 830000 43056 .60
KeyCorp 450000 22725 .32
First Union Corp. 250000 18500 .26
Citicorp 150000 15450 .21
First Chicago NBD Corp. 200000 10750 .14
Chemicals- 3.86%
Mallinckrodt Inc. 1423000 62790 .88
Air Products and Chemicals, Inc. 775000 53572 .75
Engelhard Corp. 1900000 36337 .51
Imperial Chemical Industries PLC (American Depositary
Receipts) (United Kingdom) 500000 26000 .36
E.I. du Pont de Nemours and Co. 250000 23594 .33
Hoechst AG (Germany) 400000 18908 .26
Eastman Chemical Co. 300000 16575 .23
Witco Corp. 500000 15250 .21
Georgia Gulf Corp. 450000 12094 .17
IMC Global Inc. 300000 11738 .16
Telecommunications- 3.56%
AT&T Corp./1/ 2200000 91850 1.28
U S WEST Communications Group 2450000 79012 1.11
MCI Communications Corp. 600000 19613 .27
Bell Atlantic Corp. 300000 19425 .27
NYNEX Corp. 400000 19250 .27
Ameritech Corp. 259600 15738 .22
AirTouch Communications/1/ 250000 6312 .09
Pacific Telesis Group 100000 3675 .05
Forest Products & Paper- 3.50%
Weyerhaeuser Co. 1800000 85275 1.20
Union Camp Corp. 900000 42975 .60
Georgia-Pacific Corp. 400000 28800 .40
International Paper Co. 700000 28263 .39
Rayonier Inc. 675000 25903 .36
James River Corp. of Virginia 514300 17036 .24
Bowater Inc. 350000 13169 .18
Deltic Timber Corp./1/ /3/ 438571 9484 .13
Multi-Industry- 3.44%
AlliedSignal Inc. 900000 60300 .84
Textron Inc. 613500 57822 .81
CITIC Pacific Ltd. (Hong Kong) 8500000 49347 .69
U.S. Industries, Inc./1/ 1000000 34375 .48
Tenneco Inc./1/ 675000 30459 .42
Whitman Corp. 400000 9150 .13
Harsco Corp. 75000 5138 .07
Broadcasting & Publishing- 3.21%
Time Warner Inc. 2574000 96525
Time Warner Inc. 10.25% cumulative exchangeable 1.39
preferred, Series M 3145 3413
News Corp. Ltd. (American Depositary Receipts)
(Australia) 2200000 45925
News Corp. Ltd., preferred shares (American Depositary .91
Receipts) 1100000 19388
E.W. Scripps Co., Class A 700000 24500 .34
Comcast Corp., Class A, special stock 810784 14442 .20
Viacom Inc., Class B/1/ 305000 10637 .15
Tele-Communications, Inc., Series A, TCI Group/1/ 636115 8309 .12
Tele-Communications, Inc., Series A, Liberty Media Group/1/ 251003 7169 .10
Leisure & Tourism- 3.08%
Walt Disney Co. 1290085 89822 1.25
ITT Corp./1/ 1550000 67231 .94
McDonald's Corp. 1400000 63350 .89
Machinery & Engineering- 3.01%
Caterpillar Inc. 1000000 75250 1.05
Deere & Co. 1350000 54844 .77
Parker Hannifin Corp. 1150000 44562 .61
Cummins Engine Co., Inc./2/ 500000 23000 .32
Case Corp. 300000 16350 .23
Newport News Shipbuilding Inc./1/ 135000 2025 .03
Insurance- 2.82%
General Re Corp. 465000 73354 1.02
Aetna Inc. 450000 36000
Aetna Inc. 6.25% convertible preferred, Class C 50000 3969 .56
SAFECO Corp. 900000 35494 .50
CNA Financial Corp./1/ 320000 34240 .48
American International Group, Inc. 108750 11772 .16
Allstate Corp. 120000 6945 .10
Merchandising- 2.75%
Limited Inc. 4000000 73500 1.03
May Department Stores Co. 800000 37400 .52
Mercantile Stores Co., Inc. 725000 35797 .50
Sears, Roebuck and Co. 650000 29981 .42
Wal-Mart Stores, Inc. 450000 10294 .14
Toys "R" Us, Inc./1/ 342400 10272 .14
Data Processing & Reproduction- 2.62%
Hewlett-Packard Co. 1050000 52763 .74
International Business Machines Corp. 330000 49830 .70
Oracle Corp./1/ 600000 25050 .35
Dell Computer Corp./1/ 464836 24694 .34
Adobe Systems Inc. 625000 23359 .33
Tandem Computers Inc./1/ 850000 11688 .16
Aerospace & Military Technology- 1.88%
Raytheon Co. 925000 44516 .62
McDonnell Douglas Corp. 550000 35200 .49
Litton Industries, Inc./1/ 500000 23813 .33
Sundstrand Corp. 500000 21250 .31
Boeing Co. 90670 9645 .13
Utilities: Electric & Gas- 1.76%
DTE Energy Co. 1000000 32375 .45
Houston Industries Inc. 1350000 30544 .43
PanEnergy Corp 300000 13500 .19
Eastern Utilities Associates 640000 11120 .16
Florida Progress Corp. 300000 9675 .13
Edison International 450000 8944 .12
Long Island Lighting Co. 350000 7744 .11
Texas Utilities Co. 120800 4923 .07
Entergy Corp. 150000 4162 .06
El Paso Natural Gas Co. 62775 3170 .04
Beverages & Tobacco- 1.66%
Seagram Co. Ltd. (Canada) 2450000 94938 1.33
PepsiCo, Inc. 550000 16088 .22
Anheuser-Busch Companies, Inc. 200000 8000 .11
Electrical & Electronics- 1.58%
Nokia Corp., Class A (American Depositary Receipts)
(Finland) 1000000 57625 .81
Lucent Technologies Inc. 1198900 55449 .77
Recreation & Other Consumer Products- 1.56%
Duracell International Inc. 1200000 83850 1.17
Eastman Kodak Co. 350000 28087 .39
Industrial Components- 1.31%
Rockwell International Corp./1/ 635000 38656 .54
Goodyear Tire & Rubber Co. 700000 35962 .50
Dana Corp. 600000 19575 .27
Transportation: Airlines- 1.22%
AMR Corp./1/ 500000 44063 .61
Delta Air Lines, Inc. 610000 43234 .61
Metals: Nonferrous- 1.18%
Aluminum Co. of America 1150000 73312 1.02
Alumax Inc./1/ 250000 8344 .12
Inco Ltd. (Canada) 100000 3187 .04
Automobiles- 1.08%
General Motors Corp. 1100000 61325 .86
Ford Motor Co., Class A 505605 16116 .22
Transportation: Rail & Road- 1.07%
Union Pacific Corp. 764419 45961 .64
Conrail, Inc. 244954 24403 .34
Canadian National Railway System (Canada) 175000 6650 .09
Financial Services- 1.01%
Federal Home Loan Mortgage Corp. 350000 38544 .54
Federal National Mortgage Assn. 860000 32035 .45
Associates First Capital Corp., Class A 40000 1765 .02
Appliances & Household Durables- 1.01%
Philips Electronics NV (New York Registered Shares)
(Netherlands) 1741700 69668 1.01
Philips Electronics NV 58300 2364
Miscellaneous Materials & Commodities- 0.94%
Potash Corp. of Saskatchewan Inc. (Canada) 675000 57375 .80
TRINOVA Corp. 266700 9701 .14
Electronic Instruments- 0.59%
Tektronix, Inc. 825000 42281 .59
Metals: Steel- 0.40%
Allegheny Teledyne Inc. 1000000 23000 .32
Armco Inc., cumulative convertible preferred 124000 5363 .08
Miscellaneous
Other equity-type securities in initial period
of acquisition 308059 4.30
----------- -----------
TOTAL EQUITY-TYPE SECURITIES (cost: $5,107,564,000) 6684190 93.29
----------- -----------
Principal
Amount
(000)
Bonds & Notes
- -------------------------------------------------------- ---------- ---------- -----------
Industrials - 0.67%
Cablevision Systems Corp. 9.875% 2013 $14,000 13790 .19
Time Warner Inc. 10.15% 2012 6000 7196 .10
PriCellular Wireless Corp. 0%/12.25% 2003 /4/ 5000 4275 .06
J. Ray McDermott, SA 9.375% 2006 4000 4200 .06
Falcon Drilling Co., Inc.:
Series B, 8.875% 2003 2500 2550
Series B, 9.75% 2001 1500 1575 .06
Bell Cablemedia PLC 0%/11.95% 2004 /4/ 4000 3490 .05
MFS Communications Co., Inc. 0%/9.375% 2004 /4/ 4000 3470 .05
Forcenergy Inc. 9.50% 2006 2250 2346 .03
Abraxas Petroleum Corp. 11.50% 2004/2/ 2000 2135 .03
Texas Petrochemicals Corp. 11.125% 2006 1500 1612 .02
Cliffs Drilling Co., Series B 10.25% 2003 1500 1596 .02
---------- ----------
48235 .67
---------- ----------
Transportation- 0.20%
Delta Air Lines, Inc., Series 1993-A2, 10.50% 2016 /5/ 11500 14049 .20
---------- ----------
U.S. Treasury Obligations- 0.49%
6.875% 1997 20000 20072
6.375% 1997 15000 15077 .49
---------- ----------
35149 .49
---------- ----------
TOTAL BONDS & NOTES (cost: $93,273,000) 97433 1.36
---------- ----------
Short-Term Securities
- ----------------------------------------------------
CORPORATE SHORT-TERM NOTES-4.98%
IBM Credit Corp. 5.36%-5.49% due 1/14-1/28/97 $ 53,200 $ 53,007 0.74%
General Electric Capital Corp. 5.31%-6.50% due 1/2-2/3/97 53000 52889 .74
International Lease Finance Corp. 5.28%-5.30%
due 1/10-1/23/97 51000 50884 .71
National Rural Utilities Cooperative Finance Corp.
5.28%-5.31% due 1/10-1/22/97 49200 49109 .69
Ford Motor Credit Co. 5.32%-5.46% due 1/6-2/12/97 41500 41356 .58
Raytheon Co. 5.34%-5.39% due 1/13-1/17/97 37700 37617 .52
American Express Credit Corp. 5.32% due 1/3-1/7/97 30300 30284 .42
Gannett Co., Inc. 5.37% due 1/16/97 25300 25239 .35
Procter & Gamble Co. 5.28% due 1/9-1/24/97 16700 16662 .23
---------- ----------
357047 4.98
---------- ----------
FEDERAL AGENCY DISCOUNT NOTES-0.25%
Federal Home Loan Mortgage Corp. 5.295%-5.62%
due 1/23-1/30/97 17900 17838 .25
---------- ----------
TOTAL SHORT-TERM SECURITIES (cost: $374,887,000) 374885 5.23
---------- ----------
TOTAL INVESTMENT SECURITIES (cost: $5,575,724,000) 7156508 99.88
Excess of cash and receivables over payables 8865 .12
---------- ----------
NET ASSETS $7,165,373 100.00%
========== ==========
/1/ Non-income-producing securities.
/2/ Purchased in a private placement transaction;
resale to the public may require registration or sale
only to qualified institutional buyers.
/3/Represents a when-issued security.
/4/ Represents a step bond; coupon rate will increase at a later date.
/5/ Pass-through securities backed by a pool of mortgages
or other loans on which principal payments are
periodically made. Therefore, the effective maturity
is shorter than the stated maturity.
See Notes to Financial Statements
EQUITY-TYPE SECURITIES APPEARING IN
THE PORTFOLIO SINCE JUNE 30, 1996
Allegheny Teledyne
Bowater
Browning-Ferris Industries
Canadian National Railway System
Cirrus Logic
Comcast
Deltic Timber
El Paso Natural Gas
Elf Aquitaine
Engelhard
Enterprise Oil
International Paper
ITT
Kellogg
McCormick
McDonald's
McDonnell Douglas
NCR
Newport News Shipbuilding
PanEnergy
Raytheon
Shared Medical Systems
Societe Nationale Elf Aquitaine
Suncor
Union Pacific Resources
Witco
EQUITY-TYPE SECURITIES ELIMINATED FROM THE
PORTFOLIO SINCE JUNE 30, 1996
ALLTEL
Betz Laboratories
Bristol-Myers Squibb
Cemex
Chase Manhattan
Deutsche Bank
Digital Equipment
Dresser Industries
Fruit of the Loom
General Public Utilities
Interpublic Group of Companies
LIN Television
McKesson
Pacific Gas and Electric
Pharmacia & Upjohn
Siemens
Southern Pacific Rail
Tandy
TIG Holdings
Tribune
Walgreen
WMX Technologies
Xerox
</TABLE>
<TABLE>
<S> <C> <C>
Fundamental Investors, Inc.
Financial Statements
Statement of Assets and Liabilities (dollars in thousands)
at December 31, 1996
- ---------------------------------------- ------------ ------------
Assets:
Investment securities at market
(cost: $5,575,724) $7,156,508
Cash 112
Receivables for-
Sales of investments $ 11,060
Sales of fund's shares 13,127
Dividends and accrued interest 10,017 34,204
------------ ------------
7,190,824
Liabilities:
Payables for-
Purchases of investments 7,905
Repurchases of fund's shares 14,505
Management services 1,821
Accrued expenses 1,220 25,451
------------ ------------
Net Assets at December 31, 1996-
Equivalent to $24.54 per share on
291,977,471 shares of $1 par value
capital stock outstanding (authorized
capital stock-500,000,000 shares) $7,165,373
=============
Statement of Operations
for the Year Ended December 31, 1996 (dollars in thousands)
------------ ------------
Investment Income:
Income:
Dividends $ 119,649
Interest 25,526 $ 145,175
------------
Expenses:
Management services fee 18,267
Distribution expenses 13,010
Transfer agent fee 5,336
Reports to shareholders 214
Registration statement and prospectus 891
Postage, stationery and supplies 1,191
Directors' fees 105
Auditing and legal fees 49
Custodian fee 270
Taxes other than federal income tax 1
Other expenses 86 39,420
------------ ------------
Net investment income 105,755
------------
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 528,775
Net increase in unrealized
appreciation on investments:
Beginning of year 1,104,466
End of year 1,580,787
Net unrealized appreciation ------------
on investments 476,321
Net realized gain and unrealized ------------
appreciation on investments 1,005,096
Net Increase in Net Assets Resulting ------------
from Operations $1,110,851
============
Statement of Changes in Net Assets (dollars in thousands)
- ---------------------------------------- ------------- -------------
Year Ended December 31
1996 1995
Operations: ------------- -------------
Net investment income $ 105,755 $ 75,570
Net realized gain on investments 528,775 145,011
Net unrealized appreciation
on investments 476,321 815,253
------------- -------------
Net increase in net assets
resulting from operations 1,110,851 1,035,834
------------- -------------
Dividends and Distributions Paid to
Shareholders:
Dividends from net investment income (100,250) (71,173)
Distributions from net realized
gain on investments (470,174) (128,122)
------------- -------------
Total dividends and distributions (570,424) (199,295)
------------- -------------
Capital Share Transactions:
Proceeds from shares sold:
90,269,651 and 76,628,416
shares, respectively 2,123,860 1,553,921
Proceeds from shares issued in
reinvestment of net investment income
dividends and distributions of net
realized gain on investments:
21,801,000 and 8,766,797 shares,
respectively 534,260 181,420
Cost of shares repurchased:
33,388,411 and 21,343,594
shares, respectively (787,668) (428,456)
Net increase in net assets resulting ------------- -------------
from capital share transactions 1,870,452 1,306,885
------------- -------------
Total Increase in Net Assets 2,410,879 2,143,424
Net Assets:
Beginning of year 4,754,494 2,611,070
End of year (including undistributed ------------- -------------
net investment income: $15,128 and
$9,623, respectively) $7,165,373 $4,754,494
============= =============
See Notes to Financial Statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS
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 by the Board of Directors or a
committee thereof.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. In the event
the fund purchases securities on a delayed delivery or "when-issued" basis, it
will segregate with its custodian liquid assets in an amount sufficient to meet
its payment obligations in those transactions. 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 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.
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 $270,000 includes $23,000 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, 1996, net unrealized appreciation on investments for book
and federal income tax purposes aggregated $1,580,784,000, of which
$1,650,239,000 related to appreciated securities and $69,455,000 related to
depreciated securities. There was no difference between book and tax realized
gains on securities transactions for the year ended December 31, 1996. The cost
of portfolio securities for book and federal income tax purposes was
$5,575,724,000 at December 31, 1996.
3. The fee of $18,267,000 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, 1996,
distribution expenses under the Plan were $13,010,000. As of December 31, 1996,
accrued and unpaid distribution expenses were $921,000.
American Funds Service Company (AFS), the transfer agent for the fund, was paid
a fee of $5,336,000. American Funds Distributors, Inc. (AFD), the principal
underwriter of the fund's shares, received $7,993,000 (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 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,
1996, aggregate amounts deferred and earnings thereon were $252,000.
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, 1996, accumulated undistributed net realized gain on
investments was $105,368,000 and additional paid-in capital was $5,172,113,000.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $3,537,440,000 and $2,206,198,000, respectively,
during the year ended December 31, 1996.
<TABLE>
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA AND RATIOS
Year ended December 31
--------- --------- --------- -------- --------
1996 1995 1994 1993 1992
--------- --------- --------- -------- --------
Net Asset Value, Beginning
of Year 22.29 17.5 18.15 17.52 17.47
--------- --------- --------- -------- --------
Income from Investment
Operations:
Net investment income .41 .41 .42 .44 .44
Net realized and unrealized
gain (loss) on investments 4.00 5.46 (.18) 2.65 1.27
Total income from --------- --------- --------- -------- --------
investment operations 4.41 5.87 .24 3.09 1.71
--------- --------- --------- -------- --------
Less Distributions:
Dividends from net investment
income (.40) (.40) (.44) (.43) (.42)
Distributions from net realized
gains (1.76) (.68) (.45) (2.03) (1.24)
--------- --------- --------- -------- --------
Total distributions (2.16) (1.08) (.89) (2.46) (1.66)
--------- --------- --------- -------- --------
Net Asset Value, End of Year 24.54 22.29 17.5 18.15 17.52
========= ========= ========= ======== ========
Total Return/1/ 19.99% 34.21% 1.33% 18.16% 10.19%
Ratios/Supplemental Data:
Net assets, end of year
(in millions) $7,165 $4,754 $2,611 $1,979 $1,440
Ratio of expenses to average
net assets .66% .70% .68% .65% .65%
Ratio of net income to
average net assets 1.78% 2.08% 2.45% 2.43% 2.56%
Average commissions paid
per share/2/ 5.69ce 5.95cents 6.02cents 6.14cents 7.53cents
Portfolio turnover rate 39.07% 25.47% 23.02% 29.22% 23.98%
/1/ Calculated without deducting a
sales charge. The maximum sales
charge is 5.75% of the fund's
offering price.
/2/ Brokerage commissions paid on
portfolio transactions increase the
cost of securities purchased or
reduce the proceeds of securities
sold, and are not separately
reflected in the fund's statement
operations. Shares traded on a
principal basis (without commission),
such as fixed-income transactions,
are excluded.
</TABLE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of Fundamental Investors, Inc.:
We have audited the accompanying statement of assets and liabilities of
Fundamental Investors, Inc. (the "Fund"), including the schedule of portfolio
investments, as of December 31, 1996, 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
December 31, 1996 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
Fundamental Investors, Inc. as of December 31, 1996, 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
January 29, 1997
1996 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, 53% 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, two 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 WAS MAILED IN JANUARY
1997 TO DETERMINE THE AMOUNTS TO BE INCLUDED ON THEIR 1996 TAX RETURNS.
SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISERS.
DIRECTORS AND OTHER OFFICERS
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
San Marino, California
Private investor
GAIL L. NEALE
Burlington, Vermont
President, The Lovejoy Consulting Group, Inc.;
Executive Vice President of the Salzburg Seminar;
former Director of Development and of
the Capital Campaign, Hampshire College
KIRK P. PENDLETON
Southampton, Pennsylvania
Chairman and Chief Executive Officer, 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 and
Principal Executive Officer,
Capital Research and Management Company
WALTER P. STERN
New York, New York
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 and Management Company
PAUL G. HAAGA, JR., Los Angeles, California
SENIOR VICE PRESIDENT OF THE FUND
Executive 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
One Market
Steuart Tower, 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 92821-5804
TRANSFER AGENT FOR
SHAREHOLDER ACCOUNTS
(Please write to the address nearest you.)
American Funds Service Company
P.O. Box 2205
Brea, California 92822-2205
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
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, California 90071-2371
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. If used as sales material after
March 31, 1997, this report must be accompanied by an American Funds Group
Statistical Update for the most recently completed calendar quarter.
SHAREHOLDER SERVICES
ARE YOU AWARE OF YOUR RIGHTS?
Did you know you may be eligible for a sales charge discount when you buy
shares of most American Funds? The discounts begin when your investments total
$25,000 for bond funds or $50,000 for stock and stock/bond funds - and the good
news is you don't have to invest the whole amount at one time.
Through your RIGHT OF ACCUMULATION, when you purchase additional shares you can
add the purchase amount to the value of shares you already own - in any of our
eligible funds* - in order to qualify for a sales charge discount on the new
investment.
For example, suppose you already have $40,000 invested in several American
Funds and you want to add $10,000. The $10,000 isn't enough to qualify for a
sales charge discount by itself, but by adding your existing $40,000 account
value to the new $10,000 investment (for a total investment of $50,000), you'd
pass a sales charge breakpoint. The result: you have more money in your account
going to work for you immediately.
Sales charges are reduced on a sliding scale as your investments increase.
You'll find a detailed breakdown of all discounts in your fund's prospectus,
which you can obtain from your financial adviser or by calling a Shareholder
Services Representative.
OTHER WAYS TO REDUCE SALES CHARGES
You can establish a STATEMENT OF INTENTION that allows you to invest at a
reduced sales charge immediately, based on purchases you intend to make over a
13-month period. Or you can AGGREGATE ACCOUNTS. If your spouse or your children
under the age of 21 have accounts with The American Funds Group, you can add
the value of their accounts to your investment to reach a sales charge
breakpoint.* Because there are restrictions on certain types of accounts,
please check with one of our Shareholder Services Representatives to verify if
your accounts can be aggregated.
Whether you accumulate, aggregate or sign a statement of intention, it all adds
up - to more purchasing power for you.
SNOWED IN?
Are you being buried under a blizzard of paperwork? Let The American Funds
Group help you tame the storm.
THE PROBLEM: If you invest in more than one fund, account statements can pile
up fast - especially if some of your funds pay monthly dividends.
THE SOLUTION: Request a consolidated quarterly account statement. All your
dividend and capital gain activity in each of your funds will be consolidated
in one statement and mailed to you only four times a year. (You will continue
to receive confirmation statements for investment, redemption and exchange
transactions as they occur.)
TO REQUEST QUARTERLY ACCOUNT STATEMENTS: Your statements can generally be
consolidated if you have more than one account with The American Funds Group
and they are all registered to members of your immediate family. A Shareholder
Services Representative will be happy to verify if your accounts are eligible.
Simply call or write American Funds Service Company or talk with your financial
adviser.
For more complete information about these services or about any of the American
Funds, including charges and expenses, please obtain a prospectus from your
financial adviser or phone American Funds Service Company. Please read the
prospectus carefully before you invest or send money. These services are
subject to change or termination.
SERVICES TO MATCH YOUR LIFESTYLE
Our many free services are designed to accommodate your needs quickly,
effortlessly and efficiently.
AMERICAN FUNDSLINE(R) - Handle transactions over the phone 24 hours a day.
Obtain current prices and investment returns, exchange shares between funds,
redeem shares, check your share balances and confirm your most recent
transaction. Request duplicate statements and order checks. All on YOUR
timetable. Just call 800/325-3590.
AMERICAN FUNDSLINK (SM) - Link your American Funds accounts with your bank
account. You can have fund dividends or automatic fund withdrawals deposited
directly into your bank account for fast, convenient, worry-free banking. Or
you can invest money directly from your bank account into your fund account on
either a systematic or on-demand basis.
OTHER AUTOMATIC TRANSACTIONS - You can reinvest dividends into the same fund or
another fund, make withdrawals, and exchange shares between funds - quarterly,
monthly or during the months you specify.
DIVIDEND AND CAPITAL GAIN OPTIONS - Use your dividend and capital gain
distributions to meet your changing needs. You may:
- - Automatically reinvest distributions back into the fund at no sales charge.
- - Cross-reinvest dividends into another fund at no sales charge for added
diversification. You can cross-reinvest if you have a balance of at least
$5,000 in the originating fund or meet the minimum initial investment for the
receiving fund.
- - Have dividends mailed or sent electronically to you or to someone else to
help meet your obligations.
EXCHANGE PRIVILEGES - When you and your investment adviser feel it's time to
adjust your portfolio to meet your changing investment goals, you can easily
exchange shares from one American Fund to another - without paying a sales
charge.* If you are opening an account in a different fund, you must meet that
fund's minimum investment requirement. Please remember that fund exchanges
among many types of accounts constitute a sale and purchase for tax purposes.
RETIREMENT PLANS - Plan for the future while taking advantage of money-saving
tax benefits by establishing an individual retirement account (IRA) in The
American Funds Group. (Small and large businesses can also choose from a wide
selection of retirement plans. Our program includes support services ranging
from enrollment to administration. Administrative fees apply.)
OTHER SERVICES - Stay on top of your investments with ACCOUNT STATEMENTS that
keep you abreast of the activity in your account, CONSOLIDATED QUARTERLY
STATEMENTS to reduce paperwork if you have multiple accounts and YEAR-END TAX
REPORTS that show the dividends and capital gain distributions paid to you
during the year.
To reduce paperwork and avoid the problem of lost or destroyed certificates,
your shares are credited to your account and certificates are not issued unless
specifically requested.
*INVESTMENTS IN OUR MONEY MARKET FUNDS - THE CASH MANAGEMENT TRUST OF AMERICA,
THE TAX-EXEMPT MONEY FUND OF AMERICA AND THE U.S. TREASURY MONEY FUND OF
AMERICA - WHICH ARE PURCHASED WITHOUT A SALES CHARGE, GENERALLY DO NOT APPLY
WHEN DETERMINING YOUR SALES CHARGES. IF, HOWEVER, THE SHARES WERE ORIGINALLY
PURCHASED IN ANOTHER AMERICAN FUND THAT REQUIRED A SALES CHARGE, THEN LATER
EXCHANGED INTO OUR MONEY MARKET FUNDS, THE VALUE OF THE SHARES WOULD APPLY
TOWARD REDUCING SALES CHARGES.
TO TALK TO A SHAREHOLDER SERVICES REPRESENTATIVE, CALL TOLL-FREE (8 AM TO 8 PM
ET) FROM ANYWHERE IN THE U.S.: 800-421-0180.
[illustration: map of the United States of America]
WESTERN SERVICE CENTER
American Funds Service Company
P.O. Box 2205
Brea, California 92822-2205
WEST CENTRAL SERVICE CENTER
American Funds Service Company
P.O. Box 659522
San Antonio, Texas 78265-9522
EAST CENTRAL SERVICE CENTER
American Funds Service Company
P.O. Box 6007
Indianapolis, Indiana 46206-6007
EASTERN SERVICE CENTER
American Funds Service Company
P.O. Box 2280
Norfolk, Virginia 23501-2280
Printed on recycled paper
Litho in USA SG/GRS/3197
Lit. No. FI-011-0297
[The American Funds Group(R)]
