[The American Funds Group(r)]
FUNDAMENTAL
INVESTORS
IDEAS MAKE THE DIFFERENCE
A 20-YEAR PERSPECTIVE
[illustration: abstract art depicting person looking through binoculars in a
grove of trees]
1998
Annual Report
For the Year Ended December 31
Fundamental Investors(SM) seeks long-term growth of capital and income
primarily through investments in common stocks.
Fundamental Investors is one of the 28 mutual funds in The American Funds
Group(r), managed by Capital Research and Management Company. Since 1931,
Capital has invested with a long-term focus based on thorough research and
attention to risk.
FUNDAMENTAL INVESTORS' RESULTS COMPARED TO ITS COMPETITION
Average Annual One Year Five Years 10 Years Lifetime*
Returns
Fundamental Investors
with dividends reinvested) + 16.72% + 19.26% + 17.31% + 16.51%
Lipper Growth & Income
Funds Index** + 13.58 + 17.83 + 15.54 + 15.45
*Since Capital Research and Management Company began managing the fund on
8/1/78.
**Tracks 30 of the largest U.S. growth-and-income funds. The index reflects
reinvested dividends.
20 YEARS OF FUNDAMENTAL INVESTORS RETURNS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Capital Income Total
Return Return Return
1978/1/ (5.1)% 2.3% (2.8)%
1979 10.7 4.6 15.3
1980 15.6 5.7 21.3
1981 (6.4) 5.2 (1.2)
1982 27.9 6.1 34.0
1983 21.6 4.5 26.1
1984 2.4 3.4 5.8
1985 26.7 3.5 30.2
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
1996 18.2 1.8 20.0
1997 25.0 1.7 26.7
1998 15.2 1.5 16.7
</TABLE>
10-year average annual compound rate of return +17.3%
10-year total return +393.5%
Lifetime total return (since 8/1/78) +2,165.7%
/1/Not a full year (8/1/78-12/31/78)
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.
Fund results in this report were computed without a sales charge unless
otherwise indicated. The fund's 30-day yield as of January 31, 1999, calculated
in accordance with the Securities and Exchange Commission formula, was 1.25%.
FIGURES SHOWN ARE PAST RESULTS. SHARE PRICE AND RETURN WILL VARY, SO YOU MAY
LOSE MONEY. INVESTING FOR SHORT PERIODS MAKES LOSSES MORE LIKELY. INVESTMENTS
ARE NOT FDIC-INSURED, NOR DEPOSITS OF OR GUARANTEED BY A BANK OR ANY OTHER
ENTITY.
FELLOW SHAREHOLDERS:
In the 20th year since Capital Research and Management Company took over the
management of Fundamental Investors, the fund recorded another double digit
return. The value of an investment in the fund increased 16.7% in 1998 if you
reinvested dividends and capital gain distributions.
As in the past, we continued to pay four quarterly dividends, each worth 10
cents a share. This represented an income return of 1.5%. The capital gain
distributions paid in February and December totaled $2.59 a share.
Over its 20-year lifetime with Capital Research, and for the more recent one-,
five- and 10-year periods, the fund has beaten its competitive universe - 30 of
the largest growth-and-income funds that comprise the Lipper Growth & Income
Funds Index. In 1998, our 16.7% return compares quite well to the index's 13.6%
gain.
The comparison is not as favorable against Standard & Poor's 500 Composite
Index. Up 28.5% for the year, the index's run was fueled by the gains of a
small number of large-company stocks. In 1998, the stocks of 15 large companies
accounted for more than half of the index's total return. (The unmanaged index
is calculated by weighting the returns of stocks by market capitalization, so
the largest stocks have the greatest influence.) The median stock in the S&P
500 rose only 6.6%, more than 21 points behind the index. The lack of breadth
in the market is further illustrated by the fact that the price of 209 of the
500 stocks in the index actually fell in 1998.
Despite the strong returns for the year, it was a period of unnerving
volatility, providing a long overdue wake-up call to investors who had begun to
believe that stocks only go up. By many measures the past year was the most
volatile since 1987. The unmanaged Dow Jones Industrial Average had ten swings
of at least 5%, two of them exceeding 15%. By the end of August, the Dow was
nearly 20% off its high for the year. Stocks seemed headed for a bear market.
Throughout the period, economists and professional investors struggled to
interpret the long-range effects of currency, debt and economic chaos in Asia,
Russia and Latin America. Within this context came the near-collapse of a major
U.S. hedge fund that was highly leveraged.
Investors sought safety in large growth stocks, willing to pay a premium for
their security, while overlooking the dividend-paying and economically
sensitive stocks that are most appropriate for a growth-and-income fund like
ours. Never able to resist a bargain, we stocked up on some good values. That
decision began to pay off in September when Federal Reserve Chairman Alan
Greenspan stepped in with the first of a series of interest rate cuts.
Financial meltdown averted, investors poured money back into the stock market.
They even shrugged off military action in Iraq and presidential impeachment.
LARGEST EQUITY HOLDINGS
<TABLE>
<CAPTION>
<S> <C> <C>
Percent
As Of Of Net Percent
December 31, 1998 Assets Change/1/
Time Warner 3.34% +100.2%
Monsanto 2.77 +13.1
Texas Instruments 2.52 +90.1
Astra 1.66 +20.4
Viacom 1.47 +78.6
Warner-Lambert 1.44 +81.9
U S WEST 1.42 + 43.2
American International Group 1.35 +33.3
News Corp. 1.28 + 20.7
MediaOne/2,3/ 1.26 + 14.2
</TABLE>
/1/Reflects increase in market price for the year ended 12/31/98. (Excludes
dividends.)
/2/Upon maturity converts to AirTouch Communications.
/3/Not held for entire period. Change reflects increase from 7/31/98-12/31/98.
By year-end, our largest holdings posted some of our best showings. Dominated
by media/entertainment and pharmaceutical companies, our list of ten-largest
holdings averaged a return of almost 50%. Time Warner (+100.2%) and Viacom
(+78.6%) reflect the recent turnaround in the entertainment business, bringing
the industry back in vogue among investors. Monsanto (+13.1%) and
Warner-Lambert (+81.9%), like other companies with pharmaceutical lines of
business, benefited from successful new products.
Swedish drug company Astra (+20.4%) agreed to be purchased by Zeneca (+22.1%)
this year, joining a long list of holdings attractive not only to us but to
other bidders and suitors. Other holdings that were involved in mergers
included AT&T/Tele-Communications, Inc., NationsBank/BankAmerica,
Chrysler/Daimler-Benz and Travelers/Citicorp, to name just a few.
Our very best returns this year came from telecommunications companies such as
Nokia (+244.1%) and MCI WorldCom (+137.2%), and technology firms like Lexmark
(+164.5%), Micron Technology (+94.5%) and Oracle (+93.3%). A representative
sample of our worst holdings reveals the common effect of the loss of demand in
Asia and Russia: Boeing (-33.3%), Schlumberger (-42.7%), Deere & Co. (-43.2%)
and Imperial Chemical (-46.2%).
We remain cautious short term, with lingering concerns about how the market may
be impacted by Brazil, Japan, and potential excesses in Internet stocks. Long
term, we will stay true to our fundamental approach to finding innovative
investment ideas.
The 20 years since we began managing this fund have been an extraordinary time
to be invested in the stock market. In 1978 we were a country floundering in
high inflation and slow growth. Today the U.S. is the envy of the world with
our low inflation, high employment and strong productivity.
We appreciate the support you've given us over the years and look forward to
continuing our relationship.
Sincerely,
/s/James F. Rothenberg
James F. Rothenberg
Chairman of the Board
/s/James E. Drasdo
James E. Drasdo
President
February 16, 1999
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, 1998, 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 the S&P 500 Index (an unmanaged measure of the
stocks of mostly large companies in U.S. markets) and the Lipper Growth &
Income Funds Index fared over this same period, and what happened to inflation
(as measured by the Consumer Price Index).
Here are the fund's total returns and average annual compound returns with all
distributions reinvested for periods ended December 31, 1998, assuming payment
of the 5.75% maximum sales charge at the beginning of the stated periods:
Total Average Annual
Return Compound Return
10 years +365.16% +16.62%
Five years +127.35% +17.85%
One year +10.01% -
/1/ All results are calculated with dividends and capital gains reinvested.
/2/ 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.
/3/ Includes reinvested dividends of $28,401 and reinvested capital gain
distributions of $86,744.
/4/ Tracks 30 of the largest U.S. growth-and-income funds.
/5/ Includes reinvested capital gain distributions of $50,185, but does not
reflect income dividends of $17,997 taken in cash.
/6/ Computed from data supplied by the U.S. Department of Labor, Bureau of
Labor Statistics.
/7/ 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.
HOW A $10,000 INVESTMENT HAS GROWN
$255,218/1/
S&P 500 Index
with dividends
reinvested
$213,421/1//2//3/
Fundamental
Investors
with dividends
reinvested
$187,884/1//4/
Lipper Growth
& Income
Funds Index
with dividends
reinvested
$112,292/2//5/
Fundamental
Investors
not including
dividends
$24,947/6/
Consumer
Price Index
(inflation)
$10,000/2/
original
investment
<TABLE>
<CAPTION>
Year CAPITAL TOTAL
Ended VALUE Value at VALUE Value at
December Dividends Year-End Dividends Year-End Total
31 in Cash /2/ Reinvested /2/ Return
<S> <C> <C> <C> <C> <C>
1978/7/ $216 $8,947 $217 $9,155 -8.4%
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
1996 1,197 78,143 2,188 144,351 20.0
1997 1,351 97,513 2,511 182,855 26.7
1998 1,427 112,292 2,690 213,421 16.7
</TABLE>
Average annual compound rate of return for 20-1/2 years 16.2%/2/
IDEAS MAKE THE DIFFERENCE
A 20-YEAR PERSPECTIVE
[illustrations: 3 illustrations depicting man in motion]
When fundamental investing is the soul of a company's investment management
style, how can that organization turn down the opportunity to adopt a new
family member named Fundamental Investors? It can't, and we didn't. Twenty
years ago, the directors of a mutual fund company called The Anchor Corp. were
unhappy with the investment management of their funds. Looking for a change,
they asked Capital Research and Management Company to take over as investment
adviser. The majority of the funds were merged into other American Funds, but
Anchor's flagship - Fundamental Investors (which began operations in 1932) -
joined our family as its 11th fund.
We set to work restructuring the fund to make it our own. The principles we
applied to the process 20 years ago are the same ones we use today at The
American Funds Group: find good companies with unrealized potential by
understanding their fundamentals. Over time, that strategy has paid off. Since
we began managing the fund, it has increased in value by 2,166%, or an average
annual total return of 16.5%.
What is at the core of that success? Ideas. Investment ideas. On the face of
it, investment management may look like merely a numbers business, but it's
much more than that. It is a creative process that requires the innovation,
ingenuity, patience, conviction and occasional loneliness inherent in new
ideas. We start with an original idea and then carry our research far beyond
the obvious.
MULTIPLE IDEAS
No one person can hope to come up with every good idea. That's why we have
chosen to approach the investment challenge with a multiple portfolio counselor
system and an extensive research network. This system creates an environment
that produces multiple ideas from a wide range of perspectives.
It works like this: Fundamental Investors' assets are divided into four parts.
Three of the sections are each managed individually by a portfolio counselor
who looks at investment opportunities from an informed generalist's point of
view. These portfolio counselors - Gordon Crawford, Jim Drasdo and Dina Perry -
structure their sections based on their own solutions to meeting the objectives
of the fund. The assets allotted to the fourth section - called the research
portfolio - are invested by our research analysts who are specialists and
invest in the specific industries they cover. The research portfolio gives the
analysts a place to invest in their own ideas, to go beyond advising others
when to buy and sell.
Though we combine the resources of generalists and specialists in one fund, we
avoid "group think" by apportioning assets into distinct parts. We don't water
down creativity by seeking committee consensus. Instead, each investment
professional is allowed the intellectual freedom to generate and act on his or
her own ideas.
TESTING IDEAS FUNDAMENTALLY
The goal is to discover investment opportunities before others do. It takes
courage to be first (or at least early). At that stage, there is no consensus
in the marketplace to provide the confidence that our ideas are correct. But we
can't afford to wait until conventional wisdom validates our ideas. By then the
company's potential may be recognized and the biggest opportunity for gains
will be gone.
So to give ourselves confidence in our ideas, we test them in every way we can.
We don't feel comfortable with an idea that is purely theoretical. We want to
understand the fundamental underpinnings of a company before we make a
decision. Reports and balance sheets must be studied, of course, but they are
not enough to help us really know the company we're eyeing. So we go deeper. We
research the company's product. We compare it with the competition. We go to
the plant where the product is made. We focus on how the plant is organized,
management style, productivity and morale of employees. We get to know the
managers personally in order to understand their philosophy about the business,
their industry, their challenges and their solutions.
We don't stop there. In order to feel comfortable with a company's financial
strength and stability, we talk with its bankers and other creditors. We also
talk with competitors - not just locally, but worldwide - so that we understand
the context within which the company must succeed.
FINDING IDEAS
Not all of our ideas turn out as planned, of course. But if we work hard enough
to keep searching for good ideas, we can be successful in meeting our goal of
providing you with long-term growth and income.
To give you more insight into how strong ideas have made a difference for
Fundamental Investors, we invite you to read the examples on the next several
pages. We have taken a look at some of the fund's ideas over the years and will
describe them to you in three categories:
* CONTRARIAN NOTIONS - ideas that went against the crowd
* HIDDEN TREASURES - ideas we found before others did
* "BIG IDEAS" - ideas that had a big impact on your investment over time.
Please join us.
GOING AGAINST THE CROWD
[Begin Sidebar]
"Be not astonished at new ideas . . . A thing does not . . . cease to be true
because it is not accepted by many."- Spinoza
[End Sidebar]
[Begin Caption]
[illustration of man in motion]
Contrarian idea
In 1992, investing in Chrysler was a very lonely idea, but a visit to Detroit
headquarters helped analyst Darcy Kopcho recognize a turnaround in progress.
Contrarian idea
When others saw little value in Time Warner, our knowledge of the people,
products and business gave us the conviction to be patient until the company
came back in favor.
[End Caption]
[Begin Sidebar]
YOU CAN'T BE EARLY IF YOU'RE FOLLOWING THE CROWD. BUT TO HAVE THE CONVICTION TO
BE EARLY, YOU HAVE TO BACK UP YOUR IDEAS WITH SOLID RESEARCH.
[End Sidebar]
LONELY IDEAS
"The research portfolio is often called the home for lonely ideas," says Darcy
Kopcho, auto analyst. In 1992, investing in Chrysler (now DaimlerChrysler) was
a very lonely idea. Ten years after the government bailout, the words Chrysler
and bankruptcy were still being used in the same sentence. The dividend had
been cut in 1991. Several years of revenue declines and losses had pushed the
stock price extremely low. Chrysler's bonds had been reduced to a BB rating. In
spite of this seemingly terrible time to invest in Chrysler, Darcy recommended
buying the stock.
"This doesn't happen very often," says Darcy, "but as an analyst, from time to
time, you have a chance to see a company in transition and it really hits you
in the face that you're watching it happen." Darcy's recommendation followed a
three-day trip she made to Chrysler's headquarters. She had done her homework
before she arrived and, while on her visit, witnessed a turnaround in progress.
It was a packed few days of test drives, tours of new plants with new work
methods and extensive meetings with management, including time with the
president, Bob Lutz. Out on the Chrysler proving ground, Darcy test-drove pilot
cars for the Dodge Intrepid and Chrysler Concorde. "These were like no other
Chrysler cars I had driven," said Darcy. "This team had put together a really
good car."
A tour of the new Jeep Grand Cherokee plant showed promise for a bet on a new
trend - the sport utility vehicle. Still under construction, Chrysler's
facility in Detroit-suburb Auburn Hills was a glimpse into the future. The
concept was to build under one roof a complete design, development and pilot
production facility organized by platform teams. Cars sharing the same
underbodies were developed by teams with that expertise. Overall, Darcy saw a
deep bench in management positioning itself to recover. Few other analysts had
gotten a peek into this world. She came home with a tremendous conviction to
encourage her colleagues to invest.
Though many of her associates were skeptical, Fundamental Investors' current
president, Jim Drasdo, saw the potential. He bought shares of the company for
his segment of the fund and Darcy bought some for the research portfolio. The
stock increased nearly nine-fold before Chrysler merged with Daimler-Benz last
year. The merged company remains important to the fund, representing almost 1%
of its assets as its 20th-largest holding.
CONVICTION COUNTS
Time Warner is the fund's largest holding, accounting for more than 3% of
assets. It has been a difficult position to hold for much of the past five
years. During that time, many investors were focused on the negative regulatory
environment and huge competitive threats to Time Warner's cable television
business. In addition, many thought the company had paid too much to acquire
Turner Broadcasting. Wall Street, industry insiders and the business press
could see little of value at Time Warner. We patiently retained our investment
in the company, ultimately benefiting our fund's shareholders. In the past two
years, Time Warner's stock price has more than tripled.
A long-term fundamental approach to research gave us the conviction to go
against the crowd. "We understood the values of the company's entertainment
properties," says Gordon Crawford, one of Fundamental Investors' portfolio
counselors and a long-time media and entertainment analyst. "We know the
entertainment business, the people at Time Warner and their products. Before
the acquisition, we were the largest stockholder in Turner, so we knew those
assets well and had a lot of confidence in them, in spite of all the critics.
We were willing to be patient until Time Warner came back in favor."
It was worth the wait. "The Turner business has grown 40% in each of the past
two years and now Time Warner's acquisition looks brilliant," says Gordon.
"Cable regulation's impact has dissipated. The company is starting to roll out
the three big products they've promised: telephony, high-speed cable modems and
digital set-top boxes. Competitive threats have diminished to a point where
profits in cable are growing at a rate of 16% even before the new products are
out. In general, the entertainment business is back in vogue."
Ironically, after being out of favor so long in the investment community, Time
Warner has now almost supplanted Disney as the one core holding to have in the
entertainment group, says Gordon.
[Begin Sidebar]
"An idea is worth nothing if it has no champion."- Source Unknown
[End Sidebar]
HUNTING FOR HIDDEN TREASURE
[illustration depicting man searching for diamond]
[Begin Caption]
Hidden idea
Once he started digging, analyst Martin Romo realized that with a single
investment, the fund actually got two companies - Monsanto and Searle - for the
price of one.
Hidden idea
Have you ever stared at a photograph and focused on what's lurking in the fuzzy
background? That's what led us to Texas Instruments' newfound success.
[End Caption]
[Begin Sidebar]
OUR APPROACH TO FUNDAMENTAL RESEARCH LEADS US TO MANY IDEAS WELL BEFORE OTHERS
FIND THEM. SOMETIMES YOU FIND ANSWERS TO QUESTIONS YOU DIDN'T EVEN KNOW TO ASK.
[End Sidebar]
DIGGING DEEPER
Analyst Martin Romo was covering Monsanto as if it were any other chemical
company. "As I started digging deeper," says Martin, "I saw that in the last
three years this company had transformed itself from a traditional chemical
company to a pharmaceutical/
agricultural biotechnology company. I actually got two companies - Monsanto and
Searle - for the price of one."
Searle was the immediate treasure. Monsanto bought the company in 1985 after
Wall Street had written it off as a "has been" with a tired product line. Since
then, a huge increase in research and development has paid off in a much
improved product line-up. The greatest excitement comes from Searle's
development of the Cox II Inhibitor molecule. This research led to the creation
of Celebrex, a just-approved arthritis drug, which could be one of the largest
selling drugs ever. The Cox II molecule also shows effectiveness in treating
colon, pancreatic and skin cancers as well as Alzheimer's disease. This has the
potential for creating a whole new class of drugs for Searle.
The other just-emerging treasure is Monsanto's agricultural biotechnology
business. "Monsanto is the first chemical company to recognize the value of
biotechnology," says Martin. Imagine fields of purple or green cotton,
henhouses with low-fat chickens and corn crops yielding nonfat corn oil. Think
about eliminating pesticides from our fields. That's what genetically enhanced
seeds may provide us someday. Already, Monsanto is selling bioengineered seeds
that are insect- and herbicide-resistant, and those that provide improved taste
and higher nutrition. Monsanto describes itself as creating the equivalent of a
computer operating system within the seed. This system can deliver a
made-to-order "superseed with stacked genetic traits to fight off local
insects, diseases or herbicides while increasing unsaturated fats in the
plant's oils.
A bevy of new products in agricultural biotechnology and pharmaceuticals, and
the leadership of CEO Bob Shapiro, show potential for dramatically improving
profitability and earnings growth over the next three to five years, says
Martin. Monsanto appears to be a discovery well worth the digging.
WHAT'S THAT LURKING IN THE BACKGROUND?
Have you ever stared at a photograph and looked not at what's in focus in the
foreground but what's lurking in the fuzzy background? That's what is behind
the investment idea that made Texas Instruments the third-largest holding in
the fund.
"Everyone focused on Texas Instruments as a memory chip company," says Gordon
Crawford. DRAMs (for Digital Random Access Memory), as the chips are known,
store computer information. They were the core of Texas Instruments' main
business, and it was a business in trouble. South Korean and Taiwanese
competitors began dumping low-cost memory chips into the U.S. market - cutting
prices by 60% in one year. Once Texas Instruments' largest semiconductor
product, DRAM sales began to decline dramatically. Many investors bailed out.
The image in the foreground of the picture was just too scary.
"We held on," says Jim Drasdo. "We were intrigued by their digital signal
processing business, something in the background others weren't really focusing
on." The solution came more quickly than even we had envisioned. In June,
Texas Instruments agreed to sell its DRAM business to Micron Technology for
cash and a stake in that company. Texas Instruments is already benefiting from
Micron's substantial profits. While the last of the other DRAM optimists sold
Texas Instruments when it sold out to Micron, we kept our eyes on the
background - the digital signal processors (DSPs).
Introduced in 1997, DSPs can process 1.6 billion instructions per second, 40
times the processing power of a comparable chip found in a typical computer
modem. DSPs represent a giant leap in power that makes cellular phone systems,
modems, compact disk players, digital cameras and other audiovisual devices
more efficient by allowing more information to be exchanged simultaneously.
While the DRAM drama was going on, Texas Instruments was building its DSP
business. Today it is the leading maker of DSPs, with about a 45% market share.
At a time when the worldwide semiconductor market is contracting, DSP demand is
up 20%.
"We've owned Texas Instruments for years," says Dina Perry, another portfolio
counselor for Fundamental Investors. "It is a resilient company that adjusts
well to change. This move into the telecommunications chip business gives Texas
Instruments entry to what is probably the hottest market in the semiconductor
industry today."
By knowing the whole business, not just what is at the forefront, we can make
discoveries that others perhaps couldn't or wouldn't.
[Begin Sidebar]
"No matter how good an idea sounds, test it first."- Henry Block
[End Sidebar]
IN SEARCH OF BIG IDEAS
[illustration of man in motion holding lantern]
[Begin Caption]
Big idea
A long-term approach to investing allows us to buy a company as controversial
as Fannie Mae was in 1983. Our perseverance has paid off.
Big idea
People are often the key to understanding an organization. "With Bob Noyce's
vision, Gordon Moore's practicality and Andy Grove's focus and diligence, Intel
is a grand company," says analyst Jim Martin.
[End Caption]
[Begin Sidebar]
SOMETIMES WE HIT UPON AN INVESTMENT IDEA THAT MAKES AN ESPECIALLY BIG IMPACT ON
THE FUND OVER TIME.
[End Sidebar]
THERE'S NO PLACE LIKE HOME
We first invested in Fannie Mae (the Federal National Mortgage Association) in
1983 when the government-sponsored enterprise charged with making mortgage
credit available to average Americans found itself in the swirl of historically
high interest rates, defaulting loans and an uncertain future.
A long-term approach to investing allows us to buy a company as controversial
as Fannie Mae was at that time. It had a high debt-to-equity ratio and some
even thought it would go bankrupt. Though short-term its prospects were poor,
long-term it was a good investment idea if you believed in the continuing
prosperity of the U.S. economy and the ongoing desire for Americans to own
homes. Our perseverance has paid off.
Fannie Mae has become a leader in introducing new mortgage products and in
taking advantage of its special government relationship. Today, it relies on
lucrative profits from repackaging mortgages as securities and from managing
its own portfolio of mortgages. In its mortgage-backed securities business,
Fannie Mae charges a fee for its guarantee against default. This accounts for a
third of the company's profits. The remaining two-thirds is derived from buying
mortgages and retaining them for investment income. The company finances this
portfolio by issuing bonds. Since Fannie Mae is able to borrow at very low
rates (almost as low as government rates), it takes advantage of the margins
achieved by this privilege and handily finances the purchase of its mortgage
investments.
Pessimists have emerged frequently over the years, most recently in 1996 when
talk turned once again to ending Fannie Mae's government-sponsored status. The
press had built up tremendous concern among investors about the possible
political risks. Unwilling to rely only on others' perceptions, Ross
Sappenfield, our analyst covering Fannie Mae, attended the hearings held in
Washington on this matter. In fact, the press accounts were inaccurate: there
was little support for a change in government sponsorship. With that in mind,
Ross turned back to the fundamentals behind the company, feeling confident of
its underlying value.
Though we have sold some of our holdings in Fannie Mae in recent years, over
the long run, our research, conviction and confidence in the company have paid
off - with an average return of about 19%* annually for the past 15 years.
*Return reflects price changes from the date of original purchase through
12/31/98, and monthly changes in size of holdings due to purchases and sales.
(Dividends are excluded.) Returns assume proceeds are reinvested at a 5%
short-term rate.
MORE POWER TO YOU
Oftentimes, understanding the people behind an organization is the key to
understanding the organization. With Intel, we had a special advantage. One of
Capital's semiconductor analysts, Jim Martin, got his start in the technology
business working side by side with some of the best minds at Intel. In the
1960s, Jim worked for Fairchild Camera and Instrument, the developers of the
silicon transistor and integrated circuit. Fairchild's employees went on to
form the braintrust of the best-known companies in Silicon Valley, including
Intel. "Bob Noyce and Gordon Moore could invent anything," says Jim. "Today,
with Noyce's vision, Moore's practicality and Andy Grove's focus and diligence,
Intel is a grand company."
When we first bought Intel for Fundamental Investors in 1992, the company was
holding on to market share for dear life. It had just slashed prices a steep
58% on its powerful microprocessor - the brain of a personal computer - in an
attempt to reassert its market dominance. Intel certainly showed resilience and
determination. After inventing the first memory chips and then being forced out
of the business by Japanese low-priced competitors in the '80s, Intel planned
to hold its ground in its microprocessor business.
Today, even with a 90% market share and very high margins, Intel cannot rest;
it wants to grow the overall business. "When we met with [Intel President Andy]
Grove recently, he talked about new uses for their products," says Jim. "For
instance, he loves the idea of video teleconferencing from your PC. If Intel
can get you to send pictures from your PC, you'll eat up Intel Pentium chip
power and need to buy more."
In the six years since the fund has owned Intel, we've increased our holdings
from 137,000 to 750,000 shares. Its share value has increased an average of
about 24%* a year, helping to power the overall returns of your investment in
Fundamental Investors.
As you can see, we use the tools of fundamental investing to find ideas that
can make a difference. Whether it means going against the crowd or digging for
treasure, we are always in search of the big idea.
[Begin Sidebar]
"Great ideas need landing gear as well as wings."- C.D. Jackson
[End Sidebar]
<PAGE>
<TABLE>
<S> <C> <C> <C>
FUNDAMENTAL INVESTORS, INC.
INVESTMENT PORTFOLIO - December 31, 1998
Percent
Of Net Percent
LARGEST EQUITY HOLDINGS Assets Change (1)
Time Warner 3.34% + 100.2%
Monsanto 2.77 +13.1
Texas Instruments 2.52 +90.1
Astra 1.66 + 20.4
Viacom 1.47 + 76.6
Warner-Lambert 1.44 +81.9
U S WEST 1.42 +43.2
American International 1.35 + 33.3
News Corp. 1.28 + 20.7
MediaOne (2) 1.26 +14.2 (3)
(1) Reflects increase in market price for the year ended 12/31/98.
(excludes dividends.)
(2) Upon maturity converts to AirTouch Communications.
(3) Not held for the entire period.
Change reflects the increase from 7/31/98-12/31/98.
Percent
Of Net
Largest Industry Holdings Assets
Broadcasting & Publishing 8.19%
Telecommunications 7.60
Health & Personal Care 6.78
Banking 5.99
Chemicals 5.80
Shares or Market Percent
EQUITY SECURITIES Principal Value of Net
(Common and Preferred Stocks and Amount (000) Assets
Convertible Debentures)
- ---------------------------------------------------- ---------- ---------- ----------
Broadcasting & Publishing- 4.88%
Time Warner Inc. 6,844,000 $424,756 3.34%
Viacom Inc., Class B (1) 1,355,000 100,270
Viacom Inc., Class A (1) 1,175,600 86,480 1.47
News Corp. Ltd. (ADR) (Australia) 3,150,000 83,278
News Corp. Ltd., preferred (ADR) (Australia) 3,200,000 79,000 1.28
Dow Jones & Co., Inc. 1,500,000 72,187 .57
Comcast Corp., Class A, special stock 1,110,784 65,189 .51
Fox Entertainment Group, Inc., Class A (1) 2,000,000 50,375 .40
E.W. Scripps Co., Class A 700,000 34,825 .27
Tele-Communications, Inc., Series A, Liberty Media Group (1) 564,756 26,014 .20
Tele-Communications, Inc., Series A, TCI Group (1) 300,000 16,594 .13
MediaOne Group Inc., Series D, 4.50% convertible preferred 27,000 2,565 .02
Telecommunications- 7.60%
U S WEST, Inc. 2,800,000 180,950 1.42
MediaOne Group, Inc., premium income exchangeable security,
6.25% 2001 2,400,000 159,600 1.26
AT&T Corp. 2,076,300 156,242 1.23
Sprint Corp. 1,414,300 118,978 .94
Frontier Corp. 3,100,000 105,400 .83
Telecomunicacoes Brasileiras SA (Brazil) 800,000 58,150 .46
Bell Atlantic Corp. 1,000,000 56,813 .44
Tele-Communications, Inc., Series A, TCI Ventures Group (1) 2,100,000 49,481 .39
Ameritech Corp. 700,000 44,363 .35
MCI WorldCom, Inc. (formerly WorldCom, Inc.) (1) 500,000 35,875 .28
Health & Personal Care- 6.78%
Astra AB Class A (ADR) (Sweden) 10,183,333 210,668 1.66
Warner-Lambert Co. 2,440,000 183,458 1.44
Zeneca Group PLC (United Kingdom) 2,000,000 86,987 .69
Gillette Co. 1,800,000 86,962 .69
Pfizer Inc 600,000 75,262 .59
Pharmacia & Upjohn, Inc. 1,200,000 67,950 .53
Amgen Inc. (1) 500,000 52,281 .41
American Home Products Corp. 725,000 40,827 .32
Johnson & Johnson 240,000 20,130 .16
Kimberly-Clark Corp. 350,000 19,075 .15
Eli Lilly and Co. 200,000 17,775 .14
Banking- 5.99%
Chase Manhattan Corp. 2,000,000 136,125 1.07
BankAmerica Corp. 1,900,000 114,237 .90
First Union Corp. 1,854,504 112,777 .89
Citigroup Inc. 2,000,000 99,000 .78
J.P. Morgan & Co. Inc. 700,000 73,544 .58
Washington Mutual Savings Bank 1,600,000 61,100 .48
Marshall & Ilsley Corp. 1,026,500 59,986 .47
Wells Fargo & Co. 1,400,000 55,913 .44
KeyCorp 1,200,000 38,400 .30
BANK ONE CORP. 209,000 10,672 .08
Chemicals- 5.80%
Monsanto Co. 7,403,200 351,652 2.77
Imperial Chemical Industries PLC (ADR) (United Kingdom) 3,500,000 122,281 .96
Air Products and Chemicals, Inc. 1,900,000 76,000 .60
Bayer AG (Germany) 1,480,000 61,711 .48
Dow Chemical Co. 625,000 56,836 .45
International Flavors & Fragrances Inc. 881,800 38,965 .30
Praxair, Inc. 394,700 13,913 .11
BOC Group PLC (United Kingdom) 600,000 8,589 .07
Witco Corp. 500,000 7,969 .06
Electronic Components- 5.40%
Texas Instruments Inc. 3,743,256 320,282 2.52
Corning Inc. 2,186,100 98,375 .77
Motorola, Inc. 1,502,300 91,734 .72
Intel Corp. 750,000 88,922 .70
AMP Inc. 697,800 36,329 .29
SCI Systems, Inc. (1) 600,000 34,650 .27
Micron Technology, Inc. (1) 200,000 10,113 .08
Western Digital Corp. 0% convertible
subordinated debentures 2018 (2) $22,500,000 6,806 .05
Insurance- 4.99%
American International Group, Inc. 1,770,000 171,026 1.35
Marsh & Mclennan Companies, Inc. 1,950,000 113,953 .90
EXEL Ltd. 1,059,200 79,440 .62
MGIC Investment Corp. 1,905,000 75,843 .60
Lincoln National Corp. 900,000 73,631 .58
Aetna Inc. 550,000 43,244
Aetna Inc., Class C, 6.25% convertible preferred 300,000 22,819 .52
20th Century Industries 2,000,000 46,375 .36
PMI Group, Inc. 160,000 7,900 .06
Energy Sources & Equipment- 4.65%
Suncor Energy Inc. (Canada) 3,890,000 116,725 .92
Murphy Oil Corp. 1,763,400 72,740 .57
Phillips Petroleum Co. 1,555,000 66,282 .52
Baker Hughes Inc. (formerly listed as Western Atlas Inc.) 3,441,530 60,872 .48
Atlantic Richfield Co. 700,000 45,675 .36
Unocal Capital Trust $3.125 convertible preferred 450,000 21,909
Unocal Corp. 700,000 20,431 .33
Texaco Inc. 800,000 42,300 .33
Royal Dutch Petroleum Co. (New York Registered)
(Netherlands) 500,000 23,938
"Shell" Transport and Trading Co., PLC
(New York Registered) (United Kingdom) 450,000 16,734 .32
Shell Canada Ltd., Class A (Canada) 2,649,900 40,189 .32
Sunoco, Inc. 680,500 24,541 .19
Imperial Oil Ltd. (Canada) 1,161,900 18,663 .15
Schlumberger Ltd. (Netherlands Antilles) 300,000 13,838 .11
Diamond Offshore Drilling, Inc. 3.75% convertible debentures 2007 $6,500,000 5,948 .05
Business & Public Services- 3.65%
FDX Corp. (1) 1,300,000 115,700 .91
Cendant Corp. (1) 2,700,000 51,469
Cendant Corp. 7.50% PRIDES convertible preferred 1,242,100 41,455 .79
Cendant Corp. 3.00% convertible debentures 2002 (2) $7,900,000 7,406
Electronic Data Systems Corp. 2,000,000 100,500 .79
Avery Dennison Corp. 1,000,000 45,063 .35
Columbia/HCA Healthcare Corp. 1,140,000 28,215 .22
First Data Corp. 700,000 22,181 .17
Galileo International, Inc. 400,000 17,400 .14
Waste Management, Inc. (formerly USA Waste Services, Inc.)
4.00% convertible debentures 2002 $11,000,000 13,090 .10
Budget Group, Inc. 6.25% TIDES convertible preferred 2005 300,000 11,550 .09
FIRST HEALTH Group Corp. (1) 672,500 11,138 .09
Data Processing & Reproduction- 3.36%
International Business Machines Corp. 500,000 92,375 .73
Hewlett-Packard Co. 1,350,000 92,222 .73
Microsoft Corp. (1) 500,000 69,344 .54
Computer Associates International, Inc. 1,100,000 46,887 .37
Oracle Corp. (1) 900,000 38,812 .31
Lexmark International Group, Inc., Class A (1) 270,000 27,135 .21
Compaq Computer Corp. 500,000 20,969 .16
GTECH Holdings Corp. (1) 700,000 17,937 .14
Silicon Graphics, Inc. (1) 885,500 11,401 .09
Gateway 2000, Inc. (1) 200,000 10,238 .08
Merchandising- 3.34%
American Stores Co. 4,045,000 149,412 1.18
May Department Stores Co. 1,300,000 78,488 .62
Limited Inc. 2,225,000 64,803 .51
Dillard's Inc. 1,400,000 39,725 .31
J.C. Penney Co., Inc. 600,000 28,125 .22
Lowe's Companies, Inc. 480,000 24,570 .19
Koninklijke Ahold NV 3.00% convertible debentures 2003
(Netherlands) $18,900,000 11,907 .09
Cardinal Health, Inc., Class A 154,650 11,734 .09
AutoZone, Inc. (1) 300,000 9,881 .08
Venator Group Inc. (1) 900,000 5,794 .05
Food & Household Products- 2.99%
Colgate-Palmolive Co. 1,000,000 92,875 .73
Dole Food Co., Inc. 2,700,000 81,000 .64
Kellogg Co. 1,700,000 58,013 .45
Unilever NV (New York Registered) (Netherlands) 600,000 49,763 .39
Archer Daniels Midland Co. 2,425,500 41,688 .33
Nabisco, Inc., Class A 1,000,000 41,500 .33
General Mills, Inc. 202,100 15,713 .12
Utilities: Electric & Gas- 2.62%
Baltimore Gas and Electric Co. 2,000,000 61,750 .49
Western Resources, Inc. 1,599,900 53,197 .42
KeySpan Energy Corp. (formerly MarketSpan Corp.) 1,584,000 49,104 .39
DTE Energy Co. 1,050,000 45,019 .35
Williams Companies, Inc. 1,000,000 31,187 .25
Southern Co. 982,400 28,551 .22
Florida Progress Corp. 500,000 22,406 .18
Eastern Utilities Associates 640,000 18,080 .14
Duke Energy Corp. 205,200 13,145 .10
Texas Utilities Co. 6.20% 2002 120,800 5,640 .04
Entergy Corp. 150,000 4,669 .04
Automobiles- 2.56%
DaimlerChrysler AG (New York Registered)
(formerly Chrysler Corp.) (Germany) (1) 1,247,000 119,790 .94
General Motors Corp. 1,350,000 96,609 .76
Nissan Motor Co., Ltd. (Japan) 23,000,000 70,034 .55
Honda Motor Co., Ltd. (Japan) 1,200,000 39,180 .31
Forest Products & Paper- 2.28%
Union Camp Corp. 1,100,000 74,250 .59
Weyerhaeuser Co. 1,450,000 73,678 .58
International Paper Co. 1,100,000 49,294 .39
Georgia-Pacific Corp. 400,000 23,425
Georgia-Pacific Corp., Timber Group 400,000 9,525 .26
Fort James Corp. 600,000 24,000 .19
Chesapeake Corp. 559,100 20,617 .16
Bowater Inc. 350,000 14,525 .11
Transportation: Airlines- 2.08%
Delta Air Lines, Inc. 2,806,600 145,943 1.15
AMR Corp. (1) 2,000,000 118,750 .93
Financial Services- 1.98%
Freddie Mac 1,200,000 77,325 .61
Household International, Inc. 1,700,000 67,363 .53
Capital One Financial Corp. 495,000 56,925 .45
Fannie Mae 600,000 44,400 .35
Bell Atlantic Financial Services, Inc., Senior Exchangeable
Notes, 4.25% 2005 (2) $5,000,000 5,125 .04
Leisure & Tourism- 1.81%
Mc Donald's Corp. 1,900,000 145,588 1.15
Walt Disney Co. 2,800,000 84,000 .66
Multi-Industry- 1.63%
AlliedSignal Inc. 2,200,000 97,488 .77
Textron Inc. 1,073,200 81,496 .64
Canadian Pacific Ltd. (Canada) 1,500,000 28,312 .22
Machinery & Engineering- 1.62%
Caterpillar Inc. 2,000,000 92,000 .72
Deere & Co. 2,200,000 72,875 .57
Parker Hannifin Corp. 1,275,000 41,756 .33
Aerospace & Military Technology- 1.60%
Raytheon Co., Class B 662,500 35,278
Raytheon Co., Class A 670,232 34,643 .55
Boeing Co. 1,741,340 56,811 .45
Northrop Grumman Corp. 700,000 51,187 .40
Sundstrand Corp. 500,000 25,937 .20
Recreation & Other Consumer Products- 1.40%
EMI Group PLC (United Kingdom) 12,863,600 85,779 .67
Eastman Kodak Co. 900,000 64,800 .51
Nintendo Co., Ltd. (Japan) 160,000 15,418 .12
Hasbro, Inc. 350,000 12,644 .10
Beverages & Tobacco- 1.28%
Seagram Co. Ltd. (Canada) 3,400,000 129,200 1.02
PepsiCo, Inc. 800,000 32,750 .26
Electrical & Electronics- 1.25%
Siemens AG (Germany) 1,200,000 77,338 .61
Telefonaktiebolaget LM Ericsson, Class B (ADR) (Sweden) 1,600,000 38,300 .30
Northern Telecom Ltd.(Canada) 613,440 30,749 .24
Nokia Corp., Class A (ADR) (Finland) 100,000 12,044 .10
Industrial Components- 1.19%
Federal-Mogul Corp. 1,450,000 86,275 .68
Dana Corp. 1,100,000 44,962 .35
Genuine Parts Co. 525,000 17,555 .14
Rockwell International Corp. 48,100 2,336 .02
Electronic Instruments- 0.94%
Perkin-Elmer Corp. 1,228,800 119,885 .94
Metals: Nonferrous- 0.91%
Alcoa Inc. (formerly Aluminum Co. of America) 900,000 67,106 .53
Phelps Dodge Corp. 800,000 40,700 .32
Cyprus Amax Minerals Co., Series A,
convertible preferred 230,000 7,878 .06
Textiles & Apparel - 0.71%
NIKE, Inc. Class B 2,000,000 81,125 .64
Nine West Group Inc. (1) 300,000 4,669 .04
Fruit of the Loom, Inc. (1) 280,000 3,867 .03
Metals: Steel- 0.46%
Allegheny Teledyne Inc. 2,850,000 58,247 .46
Real Estate - 0.35%
Meditrust Corp. 1,375,000 20,625 .16
AMB Property Corp. 720,000 15,840 .12
CCA Prison Realty Trust 400,000 8,200 .07
Wholesale & International Trade- 0.35%
Tech Data Corp.(1) 1,100,000 44,275 .35
Appliances & Household Durables- 0.11%
Newell Co. 5.25% convertible preferred 2027 254,000 13,399 .11
Transportation: Rail & Road- 0.09%
Union Pacific Corp. 6.25% convertible preferred 2028 (2) 260,000 11,895 .09
Miscellaneous Materials & Commodities- 0.04%
Owens-Illinois, Inc. 4.75% convertible preferred 2049 120,000 5,100 .04
Miscellaneous- 3.33%
Other equity securities in initial period
of acquisition 423,323 3.33
----------- -----------
TOTAL EQUITY SECURITIES (cost: $9,096,868,000) 11,865,296 93.33
----------- -----------
PRINCIPAL
AMOUNT
Bonds & Notes (OOO)
- -------------------------------------------------------- ---------- ---------- -----------
Industrials - 1.21%
Adelphia Communications Corp.
10.50% 2004 $25,000 $27,375
9.875% 2007 10,000 11,062 .38
Series B, 9.25% 2002 10,000 10,550
Ziff-Davis Inc. 8.50% 2008 35,000 34,125 .27
Falcon Holding Group, LP 8.375% 2010 20,000 20,100 .16
Fox Family Worldwide, Inc. 9.25% 2007 17,500 17,325 .14
Cablevision Systems Corp. 9.875% 2013 14,000 15,610 .12
Fox/Liberty Networks, LLC 8.875% 2007 10,000 10,200 .08
Time Warner Inc. 10.15% 2012 6,000 8,061 .06
Federal Agency Obligations- 0.28%
Federal Farm Credit Bank 5.32% 1999 35,000 35,000 .28
Transportation- 0.12%
Delta Air Lines, Inc., Series 1993-A2, 10.50% 2016 (3) 11,500 14,536 .12
---------- ----------
TOTAL BONDS & NOTES (cost: $193,575,000) 203,944 1.61
---------- ----------
Short-Term Securities
- ----------------------------------------------------
CORPORATE SHORT-TERM NOTES- 4.18%
Ford Motor Credit Co. 5.14%-5.18% due 1/8-2/1/1999 $65,800 $65,575 .52%
Lucent Technologies Inc. 5.05%-5.22% due 1/11-2/5/1999 54,900 54,698 .43
General Motors Acceptance Corp. 5.10% due 1/6/1999 50,000 49,957 .39
IBM Credit Corp. 5.05% due 1/7/1999 50,000 49,950 .39
Johnson & Johnson 5.05% due 2/3/1999 (2) 46,700 46,474 .37
Eastman Kodak Co. 5.07%-5.11% due 1/20-2/9/1999 45,400 45,179 .35
Procter & Gamble Co. 4.90%-5.25% due 1/15-1/25/1999 38,000 37,868 .30
E.I. du Pont de Nemours and Co. 4.98%-5.20% due 1/13-2/5/1999 37,000 36,910 .29
BellSouth Telecommunications, Inc. 5.02%-5.15% due 1/26-2/5/1999 35,950 35,802 .28
Motorola, Inc. 5.03%-5.08% due 1/28-3/23/1999 34,520 34,278 .27
Associates First Capital Corp. 5.125%-5.34% due 1/4-1/6/1999 32,400 32,372 .25
National Rural Utilities Cooperative Finance Corp.
5.00% due 1/12/1999 30,000 29,949 .24
Commerical Credit Co. 5.15%-5.22% due 1/14-2/5/1999 24,400 24,320 .19
Walt Disney Co. 4.96% due 1/14/1999 20,000 19,960 .16
American General Finance Corp. 5.05% due 1/5/1999 13,000 12,991 .10
Monsanto Co. 5.08% due 2/4/1999 (2) 10,400 10,348 .08
Monsanto Co. 5.10% due 2/5/1999 10,000 9,949 .08
Federal Short-Term Obligations-0.21%
Freddie Mac 5.00% due 3/29/1999 27,500 27,173 .21
---------- ----------
TOTAL SHORT-TERM SECURITIES (cost: $623,755,000) 623,753 4.90
---------- ----------
TOTAL INVESTMENT SECURITIES (cost: $9,914,198,000) 12,692,993 99.84
Excess of cash and receivables over payables 19,918 .16
---------- ----------
NET ASSETS $12,712,911 100.00%
========== ========
(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) Pass-through security backed by a pool of mortgages
or other loans on which principal payments are
periodically made. Therefore, the effective maturity
of these securities is shorter than the stated maturity.
ADR = American Deposit Receipts
See Notes to Financial Statements
EQUITY SECURITIES ADDED
SINCE JUNE 30, 1998
American Homes Products
AutoZone
BankAmerica
Bayer AG
Canadian Pacific
Citigroup
Colgate-Palmolive
Compaq Computer
Dillard's
Dole Food
EXEL
Federal-Mogul
Fox Entertainment Group
Gateway 2000
General Mills
Gillette
GTECH Holdings
Hasbro
Honda Motor
International Flavors & Fragrances
Kellogg
Kimberly-Clark
Koninklijke Ahold
MGIC Investments
Nabisco
Northern Telecom
Owens-Illinois
Sunoco
Telecomunicacoes Brasileiras
Telefonaktiebolaget LM Ericsson
Washington Mutual Savings Bank
EQUITY SECURITIES ELIMINATED
SINCE JUNE 30, 1998
Bay Networks
Boston Scientific
Bristish Telecommunications
Bristol-Myers Squibb
Cummings Engine
Data General
Deltic Timber
Deluxe
Dura Pharmaceuticals
Ecolab
Elf Aquitaine
Enron
Ford Motor
General Re
Goodyear Tire & Rubber
Halliburton
Hilton Hotels
IKON Office Solutions
Loews
Mellon Bank
Mercantile Stores
Merck & Co.
Mobil
Nordstrom
Norwest
Philips Electronics
PNC Bank
Potash
Reuters Group
Shared Medical Systems
Shohkoh Fund
Tektronix
Toronto-Dominion Bank
TOTAL
UNOVA
Waste Management Technologies
</TABLE>
<TABLE>
<S> <C> <C>
Fundamental Investors, Inc.
Financial Statements
Statement of Assets and Liabilities (dollars in thousands)
at December 31, 1998
- ---------------------------------------- ------------ ------------
Assets:
Investment securities at market
(cost: $9,914,198) $12,692,993
Cash 661
Receivables for-
Sales of investments $ 28,044
Sales of fund's shares 20,382
Dividends and interest 15,856 64,282
------------ ------------
12,757,936
Liabilities:
Payables for-
Purchases of investments 19,629
Repurchases of fund's shares 19,228
Management services 2,977
Other expenses 3,191 45,025
------------ ------------
Net Assets at December 31, 1998-
Equivalent to $28.92 per share on
439,574,020 shares of $1 par value
capital stock outstanding (authorized
capital stock-500,000,000 shares) $12,712,911
============
Statement of Operations
for the year ended December 31, 1998 (dollars in thousands)
------------ ------------
Investment Income:
Income:
Dividends $ 181,436
Interest 64,244 $ 245,680
------------
Expenses:
Management services fee 33,742
Distribution expenses 26,855
Transfer agent fee 8,550
Reports to shareholders 273
Registration statement and prospectus 1,219
Postage, stationery and supplies 2,367
Directors' fees 164
Auditing and legal fees 55
Custodian fee 444
Taxes other than federal income tax 1
Other expenses 94 73,764
------------ ------------
Net investment income 171,916
------------
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 1,319,973
Net increase in unrealized
appreciation on investments:
Beginning of year 2,486,223
End of year 2,778,798
Net gain and unrealized appreciation ------------
on investments 292,575
Net realized gain and unrealized ------------
appreciation on investments 1,612,548
Net Increase in Net Assets Resulting ------------
from Operations $1,784,464
============
Statement of Changes in Net Assets (dollars in thousands)
- ---------------------------------------- ------------- -------------
Year Ended December 31
1998 1997
Operations: ------------- -------------
Net investment income $ 171,916 $ 138,079
Net realized gain on investments 1,319,973 994,082
Net unrealized appreciation
on investments 292,575 905,436
------------- -------------
Net increase in net assets
resulting from operations 1,784,464 2,037,597
------------- -------------
Dividends and Distributions Paid to
Shareholders:
Dividends from net investment income (159,781) (135,717)
Distributions from net realized
gain on investments (1,046,680) (1,056,767)
------------- -------------
Total dividends and distributions (1,206,461) (1,192,484)
------------- -------------
Capital Share Transactions:
Proceeds from shares sold:
74,101,353 and 85,048,442
shares, respectively 2,164,869 2,340,020
Proceeds from shares issued in
reinvestment of net investment income
dividends and distributions of net
realized gain on investments:
39,927,149 and 41,671,055 shares,
respectively 1,142,562 1,123,929
Cost of shares repurchased:
56,364,713 and 36,786,737
shares, respectively (1,637,083) (1,009,875)
Net increase in net assets resulting ------------- -------------
from capital share transactions 1,670,348 2,454,074
------------- -------------
Total Increase in Net Assets 2,248,351 3,299,187
Net Assets:
Beginning of year 10,464,560 7,165,373
End of year (including undistributed ------------- -------------
net investment income: $21,310 and
$17,230, respectively) $12,712,911 $10,464,560
============= ============
See Notes to Financial Statements
</TABLE>
FUNDAMENTAL INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNT POLICIES
ORGANIZATION - 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
primarily through investments in common stocks.
SIGNIFICANT ACCOUNTING POLICIES - The following is a summary of the
significant accounting policies consistently followed by the fund in the
preparation of its financial statements:
SECURITY VALUATION - Equity securities, including depositary receipts, are
valued at the last reported sale price on the exchange or market on which such
securities are traded, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid price. In
cases where equity securities are traded on more than one exchange, the
securities are valued on the exchange or market determined by the investment
adviser to be the broadest and most representative market, which may be either
a securities exchange or the over-the-counter market. Fixed-income securities
are valued at prices obtained from a pricing service, when such prices are
available; however, in circumstances where the investment adviser deems it
appropriate to do so, such securities will be valued at the mean quoted bid and
asked prices or at prices for securities of comparable maturity, quality and
type. Securities with original maturities of one year or less having 60 days or
less to maturity are amortized to maturity based on their cost if acquired
within 60 days of maturity or, if already held on the 60th day, based on the
value determined on the 61st day. Securities and assets for which
representative market quotations are not readily available are valued at fair
value as determined in good faith by a committee appointed by the Board of
Directors.
NON-U.S. CURRENCY TRANSLATION - Assets or liabilities initially expressed in
terms of non-U.S. currencies are translated into U.S. dollars at the prevailing
market rates at the end of the reporting period. Purchases and sales of
securities and income and expenses are translated into U.S. dollars at the
prevailing market rates on the dates of such transactions. The effects of
changes in non-U.S. currency exchange rates on investment securities are
included with the net realized and unrealized gain or loss on investment
securities.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - As is customary in the
mutual fund industry, securities transactions are accounted for on the date the
securities are purchased or sold. Realized gains and losses from securities
transactions are reported on an identified cost basis. Dividend and interest
income is reported on the accrual basis. Discounts on securities purchased are
amortized. The fund does not amortize premiums on securities purchased.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions paid
to shareholders are recorded on the ex-dividend date.
2. FEDERAL INCOME TAXATION - 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, 1998, net unrealized appreciation on investments for book
and federal income tax purposes aggregated $2,778,795,000, of which
$3,217,323,000 related to appreciated securities and $438,528,000 related to
depreciated securities. There was no difference between book and tax realized
gains on securities transactions for the year ended December 31, 1998. Net
gains related to non-U.S. currency transactions of $24,000 were treated as
ordinary income for federal income tax purposes. The cost of portfolio
securities for book and federal income tax purposes was $9,914,198,000 at
December 31, 1998.
3. FEES AND TRANSACTIONS WITH RELATED PARTIES
INVESTMENT ADVISORY FEE - The fee of $33,742,000 for management services was
incurred 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.
The Board of Directors has approved a new Investment Advisory and Service
Agreement, effective September 1, 1998, under which the Investment Adviser
receives the lower of the current Agreement or the new Agreement which provides
for monthly fees, accrued daily, based on an annual rate of 0.39% of the first
$1 billion of the fund's average net assets; 0.336% of such assets in excess of
$1 billion but not exceeding $2 billion; 0.30% of such assets in excess of $2
billion but not exceeding $3 billion; 0.276% of such assets in excess of $3
billion but not exceeding $5 billion; 0.27% of such assets in excess of $5
billion but not exceeding $8 billion, 0.258% of such assets in excess of $8
billion but not exceeding $13 billion; and 0.252% of such assets exceeding $13
billion. The latter fee provides for lower fees when net assets exceed $8
billion. Beginning June 1, 1998, CRMC has voluntarily agreed to waive its
management fees in excess of those provided by the amended agreement. As a
result, the amount waived was $185,000.
DISTRIBUTION EXPENSES - 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 selling and servicing efforts. During the year ended
December 31, 1998, distribution expenses under the Plan were $26,855,000. As
of December 31, 1998, accrued and unpaid distribution expenses were $2,627,000.
American Funds Distributors, Inc. (AFD), the principal underwriter of the
fund's shares, received $7,753,000 (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.
TRANSFER AGENT FEES - American Funds Service Company (AFS), the transfer agent
for the fund, was paid a fee of $8,550,000.
DEFERRED DIRECTORS' FEES - 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, 1998, aggregate amounts deferred and earnings thereon
were $537,000.
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. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES
The fund made purchases and sales of investment securities, excluding
short-term securities, of $6,541,162,000 and $5,776,781,000, respectively,
during the year ended December 31, 1998.
As of December 31, 1998, accumulated undistributed net realized gain on
investments was $259,314,000 and additional
paid-in capital was $9,213,915,000. The fund reclassified $55,000 from
undistributed net realized gain to undistributed net investment income, and
$8,110,000 and $56,867,000 from undistributed net investment income and
undistributed net realized gain, respectively, to additional paid-in capital
for the year ended December 31, 1998.
Pursuant to the custodian agreement, the fund receives credits against its
custodian fee for imputed interest on certain balances with the custodian bank.
The custodian fee of $444,000 includes $52,000 that was paid by these credits
rather than in cash.
Dividend and interest income is recorded net of non-U.S. taxes paid. For the
year ended December 31, 1998, such non-U.S. taxes were $4,497,000. Net realized
currency gains on dividends, interest, and withholding taxes reclaimable, on a
book basis, were $55,000 for the year ended December 31, 1998.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Per-Share Data and Ratios
Year ended December 31
1998 1997 1996 1995 1994 1993
Net Asset Value, Beginning of Year $27.40 $24.54 $22.29 $17.50 $18.15 $17.52
------------ ------------ ---------- ---------- --------- ---------
Income From Investment Operations:
Net investment income $.42 $.41 $.41 $.41 $.42 $.44
Net gains (losses) on securities (both
realized and unrealized) $4.09 $6.00 $4.00 $5.46 ($.18) $2.65
------------ ------------ ---------- ---------- --------- ---------
Total income from operations 4.51 6.41 4.41 5.87 .24 3.09
----------- ----------- --------- ----------- --------- ---------
Less Distributions:
Dividends (from net investment income) (.40) (.42) (.40) (.40) (.44) (.43)
Distributions (from capital gains) (2.59) (3.13) (1.76) (.68) (.45) (2.03)
----------- ----------- --------- ----------- --------- ---------
Total distributions (2.99) (3.55) (2.16) (1.08) (.89) (2.46)
----------- ----------- --------- ---------- --------- ---------
Net Asset Value, End of Year $28.92 $27.40 $24.54 $22.29 $17.50 $18.15
========== ========== ======== ======== ======= =======
Total Return (1) 16.72% 26.67% 19.99% 34.21% 1.33% 18.16%
Ratios/Supplemental Data:
Net assets, end of year (in millions) $12,713 $10,465 $7,165 $4,754 $2,611 $1,979
Ratio of expenses to average net assets 0.63% 0.63% 0.66% 0.70% 0.68% 0.65%
Ratio of net income to average net assets 1.47% 1.54% 1.78% 2.08% 2.45% 2.43%
Portfolio turnover rate 52.57% 45.09% 39.07% 25.47% 23.02% 29.22%
(1) Excludes maximum sales charge of 5.75%.
</TABLE>
<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 of Fundamental Investors, Inc.("the Fund"), including
the investment portfolio, as of December 31, 1998, and the
related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years
in the period then ended, and the per-share data and ratios for
each of the five years in the period then ended. These
financial statements and per-share data and ratios are the
responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and
per-share data and ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
per-share data and ratios are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at December 31, 1998 by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other auditing
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. at December 31, 1998, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended, and the per-share data and ratios for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
/s/Deloitte & Touche LLP
Los Angeles, California
January 29, 1999
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. The distributions made during the fiscal year by the
fund were earned from the following sources:
<TABLE>
<CAPTION>
Dividends and Distributions
per Share
To Payment Date From Net From Net Realized
Shareholders Investment Long-term Gains
of Record Income
<S> <C> <C> <C>
February 13, 1998 February 17, 1998 $0.10 $0.11
May 22, 1998 May 26, 1998 0.10 -
August 14, 1998 August 17, 1998 0.10 -
December 23, 1998 December 24, 1998 0.10 2.48
</TABLE>
Corporate shareholders may exclude up to 70% of qualifying dividends received
during the year. For purposes of computing this exclusion, 90% of the dividends
paid by the fund from net investment income represent 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, 5% of the dividends paid
by the fund from net investment income were derived from interest on direct
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 retirement plan trusts may need this information for their annual
information reporting.
The fund also designates as a capital gain distribution a portion of earnings
and profits paid to shareholders in redemption of their shares.
SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV OR OTHER TAX INFORMATION WHICH
WAS MAILED IN JANUARY 1999 TO DETERMINE THE CALENDAR YEAR AMOUNTS TO BE
INCLUDED ON THEIR 1998 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT THEIR TAX
ADVISERS.
DIRECTORS AND OTHER OFFICERS
DIRECTORS
GUILFORD C. BABCOCK
San Marino, California
Associate Professor of Finance,
Marshall School of Business,
University of Southern California
JAMES E. DRASDO
Los Angeles, California
Principal Executive Officer
and President of the fund
Senior Vice President and Director,
Capital Research and Management Company
ROBERT A. FOX
Livingston, California
President and Chief Executive Officer,
Foster Farms Inc.
ROBERTA L. HAZARD
McLean, Virginia
Consultant; Rear Admiral,
U.S. Navy (retired)
LEONADE D. JONES
Burlingame, California
Former Treasurer,
The Washington Post Company
JOHN G. MCDONALD
Stanford, California
The IBJ Professor of Finance,
Graduate School of Business,
Stanford University
GAIL L. NEALE
Burlington, Vermont
President, The Lovejoy Consulting Group, Inc.;
former Executive Vice President of the
Salzburg Seminar; former Director of
Development and of the Capital Campaign,
Hampshire College
JAMES W. RATZLAFF
San Francisco, California
Senior Partner,
The Capital Group Partners L.P.
HENRY E. RIGGS
Claremont, California
President, Keck Graduate Institute
of Applied Life Sciences
JAMES F. ROTHENBERG
Los Angeles, California
Chairman of the Board of the fund
President and Director,
Capital Research and Management Company
PATRICIA K. WOOLF
Princeton, New Jersey
Private investor; lecturer,
Department of Molecular Biology,
Princeton University; corporate director
CHARLES H. BLACK, a Director of the fund
since 1978, retired as a Director on
December 31, 1998. The Directors wish
to thank him for his many contributions
to the fund.
OTHER OFFICERS
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
Senior Vice President, Capital Research and
Management Company
MICHAEL T. KERR
Los Angeles, California
Vice President of the fund
Executive Vice President and Director,
Capital Research Company
C. ROSS SAPPENFIELD
New York, New York
Vice President of the fund
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
SHERYL F. JOHNSON
Norfolk, Virginia
Treasurer 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
[The American Funds Group(r)]
OFFICES OF THE FUND
One Market, Steuart Tower
Suite 1800
San Francisco, California 94105-1409
INVESTMENT ADVISER
Capital Research and Management Company
333 South Hope Street
Los Angeles, California 90071-1443
135 South State College Boulevard
Brea, California 92821-5823
TRANSFER AGENT FOR SHAREHOLDER ACCOUNTS
American Funds Service Company
(Please write to the address nearest you.)
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
FOR INFORMATION ABOUT YOUR ACCOUNT OR ANY OF THE FUND'S SERVICES, PLEASE
CONTACT YOUR FINANCIAL ADVISER. YOU MAY ALSO CALL AMERICAN FUNDS SERVICE
COMPANY, TOLL-FREE, AT 800/421-0180 OR VISIT WWW.AMERICANFUNDS.COM ON THE WORLD
WIDE WEB.
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, 1999, this report must be accompanied by an American Funds Group
Statistical Update for the most recently completed calendar quarter.
PREPARING FOR THE YEAR 2000
The fund's key service providers - Capital Research and Management Company, the
investment adviser, and American Funds Service Company, the transfer agent -
have updated all significant computer systems to process date-related
information properly following the turn of the century. Testing of these and
other systems with business partners, vendors and other service providers will
continue through much of 1999. We will continue to keep you up to date in our
regular publications. If you'd like more detailed information, call Shareholder
Services at 800/421-0180, ext. 21, or visit our Web site at
www.americanfunds.com.
Litho in USA KBD/AL/3918
Lit. No. FI-011-0399
