[The American Funds Group(r)]
AMERICAN BALANCED FUND
[watermark: "INVESTING"]
BALANCED INVESTING: A TIME-TESTED APPROACH
1998 ANNUAL REPORT
For the year ended December 31
[Begin Sidebar]
American Balanced Fund(r) seeks conservation of capital, current income, and
long-term growth of both capital and income by investing in stocks and
fixed-income securities. It is managed as though it constitutes the complete
investment program of the prudent investor.
American Balanced Fund 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.
[End Sidebar]
[Begin Caption]
On our cover: Rows of tulips are balanced by trees and hills in Skagit Valley,
Washington. See the story beginning on page four for a look at balanced
investing through the decades.
[End Caption]
AMERICAN BALANCED FUND
RESULTS OVER THE PAST 23 YEARS*
<TABLE>
<CAPTION>
Value of Income Total
Principal Return Return (+)
<S> <C> <C> <C>
1976 +20.0% +6.0% +26.0%
1977 -4.5 +5.2 +0.7
1978 +0.6 +5.6 +6.2
1979 +1.6 +6.0 +7.6
1980 +7.1 +7.3 +14.4
1981 -3.5 +7.9 +4.4
1982 +20.8 +8.6 +29.4
1983 +8.4 +7.7 +16.1
1984 +2.2 +7.2 +9.4
1985 +22.3 +6.8 +29.1
1986 +10.9 +6.0 +16.9
1987 -2.4 +6.4 +4.0
1988 +6.6 +6.3 +12.9
1989 +15.0 +6.5 +21.5
1990 -7.3 +5.7 -1.6
1991 +18.6 +6.1 +24.7
1992 +4.4 +5.1 +9.5
1993 +6.3 +5.0 +11.3
1994 -4.2 +4.5 +0.3
1995 +22.4 +4.7 +27.1
1996 +9.2 +4.0 +13.2
1997 +17.1 +3.9 +21.0
1998 +7.5 +3.6 +11.1
</TABLE>
Average annual compound rate of return for 23 full calendar years: +13.3%
*Full calendar years since Capital Research and Management Company became the
fund's investment adviser on July 26, 1975.
(+)Total return measures capital appreciation and income return, which includes
reinvestment of dividends and capital gain distributions.
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.
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 3.11%.
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 ARE THEY DEPOSITS OF OR GUARANTEED BY A BANK OR ANY
OTHER ENTITY.
FELLOW SHAREHOLDERS:
The year just ended produced solid returns for shareholders of American
Balanced Fund as the stock market registered large gains and the bond market
enjoyed another good year.
American Balanced Fund earned a total return of 11.1% in 1998. The fund's
results assume reinvestment of income dividends totaling 56 cents a share and
$1.05 in capital gain distributions. This was the 22nd year of positive total
returns in the 23 full calendar years since Capital Research and Management
Company became the fund's investment adviser in July 1975.
For the year, the Lipper Balanced Funds Index had a total return of 15.1%,
surpassing your fund's return for the first time in five years. Stocks, as
measured by Standard & Poor's 500 Composite Index, gained 28.5%, and U.S.
investment-grade bonds produced an 8.7% return, as measured by the Lehman
Brothers Aggregate Bond Index. These indexes are unmanaged. This was the fourth
consecutive year in which the S&P 500 earned a total return above 20%, an
unprecedented occurrence in the U.S. equities market.
The stock market's upward run has been fueled recently by the gains of a small
number of large-company stocks. Because the S&P 500 is weighted by size, large
companies have a disproportionate impact on the index's results. In 1998, the
stocks of just 15 companies accounted for more than half of the S&P 500's total
return. The price of the median stock in the S&P 500 rose only 4.6%, more than
22 percentage points behind the index. The lack of breadth in the market was
further illustrated by the fact that the prices of 209 of the 500 stocks in the
index actually fell in 1998.
Stocks began the year strongly, and by mid-July the S&P 500 had risen 22.3%.
Between July 17 and August 31, however, the index lost 19.3% before recovering
to post strong gains late in the year. While volatility in the stock market is
not unusual, the extent of the decline in such a short time and its rapid
recovery were surprising. Between the market's bottom and the end of the year,
the S&P 500 gained 28.4%.
Market slumps and periods of turbulence can create opportunities. In late
summer, American Balanced Fund's managers took advantage of the lower prices to
commit a portion of the fund's cash reserves to stocks. Many of the equities
purchased had risen considerably by the end of the year.
[Begin Sidebar]
How American Balanced Fund has fared with Capital Research
and Management Company as investment adviser.
Since the fund invests in both stocks and bonds, its results should be weighed
against a combination of stock and bond indexes.
<TABLE>
<CAPTION>
Cumulative Average Annual
For the period Total Return Compound Return
7/26/75-12/31/98
<S> <C> <C>
AMERICAN BALANCED FUND +1,776.9% +13.3%
Standard & Poor's 500 Stock +3,188.9 +16.1
Composite Index
Lehman Brothers Aggregate +787.6 +9.8
Bond Index*
Consumer Price Index +202.4 +4.8
</TABLE>
Figures are based on the assumption that all distributions were reinvested.
*The Lehman Brothers Aggregate Bond Index did not exist until December 31,
1975. For the period between July 31, 1975, and December 31, 1975, Lehman
Brothers Government/Corporate Bond Index results were used. The Lehman Brothers
indexes are based on July 31, 1975, index value. All indexes are unmanaged.
[End Sidebar]
Merger activity had a positive impact on the fund's results. American Stores,
the fund's second-largest holding, is being acquired by its grocery store
competitor, Albertson's, and rose 80% during the year. Other fund holdings,
notably Chrysler, Wells Fargo, Amoco and Ameritech, were acquired or are in the
process of merging, and their prices have risen substantially.
Firms in a variety of other areas also made significant contributions. Nokia,
the Finnish telecommunications company, rose 244%. Most pharmaceutical stocks
were strong, led by Warner-Lambert, up 82%. We took some profits in our
pharmaceutical holdings during the year, believing that the stocks had become
expensive.
The most negative impact on the portfolio came from our exposure to the oil
industry. The collapse in oil prices put considerable pressure on those stocks,
which accounted for 5% of the portfolio at the end of the year. Sectors of the
basic materials group such as forest products and paper, chemicals and metals
were also weak. Nevertheless, we believe these investments will prove rewarding
in the long term.
This was another good year for high-quality bonds, which added value and
stability to the portfolio of American Balanced Fund. Inflation remained low
and interest rates ended the year lower, helping boost bond prices. Amid
concerns about a global economic slump and slower growth in the United States,
the Federal Reserve Board cut the federal funds rate (the rate banks charge
each other for overnight deposits) three times during 1998.
U.S. Treasury bonds were the primary beneficiaries of the lower rates and a
"flight to quality" as overseas investors became worried about economic turmoil
in Asia and Russia. Prices of U.S. Treasury securities and high-quality
corporate bonds increased in late summer and early fall, when the flight to
quality was at its peak and interest rates hit their lowest levels of the year.
American Balanced Fund, which only invests in investment-grade securities,
benefited from the rally.
It is American Balanced Fund's policy to always have between 50% and 75% of its
portfolio invested in equities. This percentage will vary based on our judgment
of the relative attractiveness of common stocks and bonds. At fiscal year-end,
we had 59% of net assets in equities, 31% in bonds and 10% in cash and
equivalents.
The number of shareholder accounts grew by 13% in 1998. We want to welcome our
new shareholders and look forward to reporting to you again in six months.
Cordially,
/s/Walter P. Stern /s/Robert G. O'Donnell
Walter P. Stern Robert G. O'Donnell
Chairman of the Board President
February 12, 1999
[Begin Sidebar]
FOLLOWING THE COURSE OF AN INVESTMENT IN AMERICAN BALANCED FUND
This chart shows how a $10,000 investment in American Balanced Fund grew
between July 26, 1975 - when Capital Research and Management Company became the
fund's investment adviser - and December 31, 1998.
As you can see, the $10,000 grew to $176,846 with all distributions reinvested.
Since the fund invests in both stocks and bonds, it should not be surprising
that its return lies between the stock index and bond index, both unmanaged,
tracked on the chart.
The fund's year-by-year results appear under the chart. You can use this table
to estimate how the value of your own holdings has grown. Let's say, for
example, that you have been reinvesting all your distributions and want to know
how your investment has done since December 31, 1988. At that time, according
to the table, the value of the investment illustrated here was $50,123. Since
then it has more than tripled to $176,846.
[End Sidebar]
How a $10,000 Investment Has Grown
Average Annual Compound Returns* (for periods ended December 31, 1998)
Ten Years: +12.77%
Five Years: +12.84%
One Year: + 4.72%
*Assumes reinvestment of all distributions and payment of the current 5.75%
maximum sales charge at the beginning of the stated periods.
$328,892
S&P 500
with dividends
reinvested
$176,846(1,2)
American
Balanced Fund
with dividends
reinvested
$88,756(3)
Lehman
Brothers
Aggregate
Bond Index
$10,000
original
investment(1)
[chart]
<TABLE>
<CAPTION>
Year Ended Dec. 31 1975# 1976 1977 1978 1979 1980 1981 1982
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL VALUE
Dividends Reinvested $305 594 656 709 801 1,050 1,303 1,474
Value at Year-End/1/ $9,948 12,533 12,620 13,404 14,427 16,498 17,224 22,280
AMBAL Total Return (0.5)% 26.0 0.7 6.2 7.6 14.4 4.4 29.4
Year Ended Dec. 31 1983 1984 1985 1986 1987 1988 1989 1990
TOTAL VALUE
Dividends Reinvested 1,724 1,852 1,912 2,202 2,710 2,780 3,284 3,457
Value at Year-End/1/ 25,869 28,291 36,527 42,690 44,406 50,123 60,915 59,959
AMBAL Total Return 16.1 9.4 29.1 16.9 4.0 12.9 21.5 (1.6)
Year Ended Dec. 31 1991 1992 1993 1994 1995 1996 1997 1998
TOTAL VALUE
Dividends Reinvested 3,684 3,816 4,072 4,131 4,335 4,684 5,167 5,781
Value at Year-End/1/ 74,765 81,853 91,080 91,386 116,179 131,475 159,131 176,846
AMBAL Total Return 24.7 9.5 11.3 0.3 27.1 13.2 21.0 11.1
</TABLE>
- -----
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended 7/26/75 1975 1976 1977 1978 1979 1980
December 31
American Balanced Fund
with Dividends
Reinvested /1//2/ 9,425 9,948 12,533 12,620 13,404 14,427 16,498
S&P 500 with
dividends reinvested 10,000 10,317 12,773 11,855 12,629 14,958 19,812
Lehman Brothers
Aggregate Bond Index/3/ 10,000 10,558 12,205 12,576 12,751 12,997 13,348
Year Ended 1981 1982 1983 1984 1985 1986 1987
December 31
American Balanced Fund
with Dividends
Reinvested /1//2/ 17,224 22,280 25,869 28,291 36,527 42,690 44,406
S&P 500 with
dividends reinvested 18,845 22,897 28,039 29,783 39,207 46,506 48,915
Lehman Brothers
Aggregate Bond Index/3/ 14,182 18,809 20,381 23,468 28,655 33,031 33,940
Year Ended 1988 1989 1990 1991 1992 1993 1994
December 31
American Balanced Fund
with Dividends
Reinvested/1//2/ 50,123 60,915 59,959 74,765 81,853 91,080 91,386
S&P 500 with
dividends reinvested 56,984 74,985 72,650 94,689 101,892 112,116 113,638
Lehman Brothers
Aggregate Bond Index/3/ 36,616 41,937 45,694 53,006 56,930 62,480 60,658
Year Ended 1995 1996 1997 1998
December 31
American Balanced Fund
with Dividends
Reinvested /1//2/ 116,179 131,475 159,131 176,846
S&P 500 with
dividends reinvested 156,189 191,955 255,906 328,892
Lehman Brothers
Aggregate Bond Index/3/ 71,864 74,473 81,663 88,756
</TABLE>
[end chart]
Average annual compound return for 23-1/2 years: 13.0%/1/
/1/These figures, unlike those shown elsewhere in this report, 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. Results shown do
not take into account income or capital gain taxes.
/2/Includes reinvested dividends of $62,483 and reinvested capital gain
distributions of $58,400.
/3/The Lehman Brothers Aggregate Bond Index did not exist until December 31,
1975. For the period between July 31, 1975, and December 31, 1975, Lehman
Brothers Government/Corporate Bond Index results were used. The Lehman Brothers
indexes are based on July 31, 1975, index value.
/#/For the period July 26, 1975 (when Capital Research and Management Company
became investment adviser), through December 31, 1975.
The indexes are unmanaged and do not reflect sales charges, commissions or
expenses.
Past results are not predictive of future results.
[Begin Sidebar]
[watermark: "Balanced"]
BALANCED INVESTING: A TIME-TESTED APPROACH
[black and white photo: office workers]
1930
The decade of the 1930s was a time of great volatility in the stock market. As
equity prices rose and fell, the benefits of balancing a portfolio of equities
with bonds became apparent. Stocks lost 1% in the decade while bonds* gained
96%. In 1932, the predecessor of American Balanced Fund, the Commonwealth
Investment Company, was established.
*The results of long-term corporate bonds are calculated by Ibbotson
Associates.
[black and white photo: woman working in airplane manufacturing plant]
1940
In the 1940s America fought in World War II, and women went to work in
factories. After the war, millions of soldiers went to college on the GI Bill,
and the first baby boomers were born. The stock market, as measured by the S&P
500, had a total return of 140%, and bonds had a 31% total return.
[black and white photo: men looking at stock ticker tape]
1950
Many people think of the 1950s as a dull era, but it was anything but that in
the nation's financial markets, which saw one of the longest bull markets in
history. The S&P 500 had a total return of 487% for the decade, and bonds
produced a total return of 11%.
[End Sidebar]
We will soon enter a new century and a new millennium, an event that most
investors expect will mark a time of great change and opportunity. Industries
not yet imagined will generate wealth for stockholders and lenders alike. At
the same time, many old industries will continue to thrive while others will
fade away.
As we stand on the verge of this new millennium, it is interesting to note that
the process of searching for investment opportunity has changed little since
the predecessors of today's mutual funds were formed in Scotland in the 1870s.
Today, the search for good investment opportunities begins with research, just
as it did more than 100 years ago. Successful long-term investing also means
paying attention to risk and, at times, going against the trend to find
securities that offer the best potential for long-term reward.
In the next few pages we'll look at the development of the first balanced fund
and discuss the fundamentals of successful long-term investing.
FROM BONDS TO STOCKS TO BALANCE
The investors who launched the forerunner of the first mutual fund, The
Scottish American Investment Trust, saw opportunity in bonds that had been
issued by exciting new companies in an emerging market -American railroads such
as the Atchison, Topeka and Santa Fe. By 1924, when the first open-ended U.S.
mutual funds were established, the focus had shifted from bonds to equities.
The unmanaged Standard & Poor's 500 Composite Index had a total return of 37.5%
in 1927 and 43.6% in 1928.
The bull market ended abruptly when the market collapsed in October 1929. From
the high in September 1929 to the end of the 1930s, the S&P 500 had a negative
31.5% total return while long-term corporate bonds returned 101.3%. Most people
know of the stock market crash in 1929, but few may realize that the market
recovered most of its losses in the spring of 1930 before entering a period of
wide price swings. For example, in 1936 the S&P 500 rose 33.9%; it then dropped
35.0% the following year before rising 31.1% in 1938.
During those turbulent years, high-quality bonds provided steady returns, and
funds that balanced stock holdings with bonds and cash were less volatile and
had higher returns than funds holding only stocks.
Interestingly, just one year before the market's collapse, Walter Morgan, a
young investment manager, established the first U.S. balanced fund, dubbed the
Industrial and Power Securities Company, which later became Vanguard Wellington
Fund.
"I thought it would be better to have a balanced fund that held common and
preferred stocks as well as high-quality corporate and government bonds. By
holding fixed-income instruments, you reduced your risk in the event the stock
market went down," Morgan said. At the time, Morgan's idea of adding bonds to
an equity portfolio for balanced investing was unconventional, but it didn't
take long for others to see the wisdom of a balanced approach. After Industrial
and Power Securities Company was introduced, others followed. Just four years
later, in 1932, the Commonwealth Investment Company, the predecessor of
American Balanced Fund, was founded, making it the oldest of the 28 funds in
the American Funds family.
[Begin Sidebar]
[WATERMARK: "TODAY"]
TODAY, THE SEARCH FOR GOOD INVESTMENT OPPORTUNITIES BEGINS WITH RESEARCH, JUST
AS IT DID MORE THAN 100 YEARS AGO.
[End Sidebar]
[Begin Sidebar]
[WATERMARK: "BASICS"]
THE BASICS OF WHAT DRIVES STOCK PRICES HAVEN'T CHANGED. A STOCK'S PRICE
ULTIMATELY WILL RISE IF THE COMPANY IS INCREASING ITS SALES, PROFITS AND
DIVIDENDS.
[End Sidebar]
A RECENT REMINDER OF THE FUNDAMENTALS
Investors don't have to look all the way back to the 1930s to find evidence of
the value of balanced investing and the benefits of diversification during a
turbulent stock market. Last summer, the S&P 500 lost 19.3% in just six weeks
while high-quality bonds registered gains. During the stock market's decline,
American Balanced Fund's diversified portfolio of high-quality stocks and bonds
helped it do considerably better; it lost only 9.1%.
Seasoned investors know that despite the long upward run in equities during the
1990s, setbacks are as much a part of a natural market cycle as gains. This
past summer's divergence between the stock and bond markets was a timely
reminder of the value of diversification among asset classes - the fundamental
reason for balanced investing, says Robert O'Donnell, a portfolio counselor for
and president of American Balanced Fund.
"In the last several years a lot of people have assumed that stocks and bonds
always move together. But this past August, when stocks fell and high-quality
bonds rose, demonstrated that's not the case," O'Donnell says.
Over the long term, stocks have outpaced bonds. During the past 70 years, the
S&P 500 has averaged a 10.5% annual return with dividends reinvested. Long-term
corporate bonds have produced a 5.8% annual return. There have been long
stretches, however, when bonds have done better than stocks.
Stock prices have also fluctuated more widely than bond prices. During 16 of
the past 70 years, the S&P 500 had a total return above 30%, and twice the
return was above 50%. Long-term bonds, on the other hand, have had a total
return above 30% only twice. But stocks have lost as much as 43% of their value
in a single year, while the worst year for bonds was an 8% loss.
THE FUNDAMENTALS REMAIN THE SAME
Some investors look to the future with great optimism, believing that
technological advances in the investment industry, such as instantaneous global
trading and a seemingly endless stream of information, will make successful
investing much easier in the next century. But experienced professionals say
the fundamentals of sound investing have changed little in the past 100 years
and probably won't change much in the next 100 years. Successful investors
still rely on firsthand research to find good companies at reasonable prices
and invest for the long term.
"The things that have changed recently are interesting but not of enduring
significance," O'Donnell says. "Being able to make a trade instantly on a
computer is technologically important, but it doesn't change the essence of
investing. The basics of what drives stock prices haven't changed. A stock's
price ultimately will rise if the company is increasing its sales, profits and
dividends," he says.
[Begin Sidebar]
[WATERMARK: "REWARDS"]
BALANCED INVESTING HAS REWARDED INVESTORS THROUGH THE DECADES
[BLACK AND WHITE PHOTO: AUTOMOBILES]
1960
During the 1960s world trade more than doubled as global exports and imports
surged. The S&P 500 had a total return of 112%, and bonds gained 18%.
[BLACK AND WHITE PHOTO: "PUMPS CLOSED" SIGN]
1970
Oil embargoes, gas lines and stagflation were the economic hallmarks of the
1970s. Bonds had a total return of 83%, outpacing the S&P 500's total return of
77% for the decade. In 1975, Capital Research and Management Company assumed
management of American Balanced Fund.
[black and white photo: chaotic scene on stock exchange floor]
1980
The 1980s was a good time in the world's financial markets. Although the U.S.
stock market cracked in October 1987, it recovered quickly and began a long
upward run. The S&P 500 had a total return of 404%, and bonds had a return of
240%.
[black and white photo: person working on laptop computer]
1990
The current decade began with a short-lived bear market but quickly turned into
one of history's best decades for investors. The number of Americans investing
in the stock market grew rapidly. From the beginning of the decade to the end
of 1998, stocks gained 340% and bonds rose 141%.
[End Sidebar]
Bond prices, too, are determined the same way they have been for generations:
primarily by interest rates, inflation rates, the credit standing of the issuer
and the supply and demand in the market.
A prudent investor should hold bonds in a diversified portfolio, notes Abner
Goldstine, a fixed-income portfolio counselor for American Balanced Fund with
more than 46 years' experience.
"With bonds you're not dependent on changes in the principal value to increase
your net worth, and bonds provide relatively steady and generous income for
spending," notes Goldstine.
THE VALUE OF A DISCIPLINED APPROACH
American Balanced Fund's blend of stocks, bonds and cash has been an important
element of the fund's long-term success, and this blend is a key reason the
fund hasn't been as volatile as funds dedicated to a single type of security.
In keeping with its balanced approach, the fund's equity position will not
exceed 75% of its assets nor fall below 50%. The fund's investment
professionals adjust the allocation within this range based on their judgments
of the relative values in the market.
Maintaining the fund's balance requires a disciplined approach to investing.
Thus, if stock prices surge and the fund's equity holdings approach 75% of
assets, the managers must sell equities to maintain the fund's proper balance.
Likewise, in a bear market, if the value of the portfolio's stocks drops near
50% of the fund's assets, the fund has to invest more in equities. This
disciplined approach requires the fund's managers to go against extremes in
market sentiment. After the stock market fell sharply last summer and sentiment
turned negative, the fund aggressively bought equities.
"Sometimes both stocks and bonds seem high," notes Victor Parachini, a
portfolio counselor with more than 36 years' experience. "In those cases I look
for the least risky securities or diversify into cash equivalents. I also look
closely at lower valued securities and try to make a judgment about their
future."
Making a judgment about the future of a company is never easy. Before investing
in the stocks or bonds of a company, American Balanced Fund's investment
professionals thoroughly research the firm. They talk to senior management and
interview suppliers, competitors and industry officials.
The reliance on firsthand research has changed little since the pioneering
Scottish investors considered U.S. railroad bonds in the 1870s. The first thing
they did was send a representative to get a look at America's rebuilding
efforts after the Civil War and make a judgment about the companies issuing the
bonds and the risks they faced.
As we approach the 21st century, an era of accelerating change, it's reassuring
to know that in the long run the basics of good investing haven't changed, and
the strengths of balanced investing, proven in many different market
environments over the past 70 years, don't go out of style.
<TABLE>
AMERICAN BALANCED FUND
INVESTMENT PORTFOLIO DECEMBER 31, 1998
<S> <C> <C> <C>
Percent of
Ten Largest Equity Holdings Net Assets
- -------------------------------------------- ---------
Hewlett-Packard 1.92%
American Stores 1.26
York International 1.18
Ameritech 1.13
Phillips Petroleum 1.05
Genuine Parts 1.02
Eaton 1.02
Philip Morris 1.00
Amoco .98
IBM .94
[begin pie chart]
Investment Mix by Security Type
- --------------------------------------------
Common Stocks 58%
Convertible Debentures and Preferred Stock 1%
Corporate Bonds 13%
Government Bonds 18%
Short-Term Securities & Cash Equivalents 10%
[end pie chart]
Market Percent
Number of Value of Net
Common Stocks Shares (000) Assets
- -------------------------------------------- --------- --------- ---------
ENERGY
Energy Sources - 5.05%
Amoco Corp. 950,000 57,356 .98
Ashland Inc. 450,000 21,769 .37
Atlantic Richfield Co. 300,000 19,575 .33
Kerr-McGee Corp. 500,000 19,125 .33
Murphy Oil Corp. 1,067,400 44,030 .75
Phillips Petroleum Co. 1,450,000 61,806 1.05
Ultramar Diamond Shamrock Corp. 1,800,000 43,650 .74
Valero Energy Corp. 1,400,000 29,750 .50
Utilities: Electric & Gas - 2.54%
Baltimore Gas and Electric Co. 1,200,000 37,050 .63
Central and South West Corp. 1,600,000 43,900 .75
Duke Energy Corp. 550,000 35,235 .60
FPL Group, Inc. 400,000 24,650 .42
Scottish and Southern Energy PLC (formerly Southern Electric PLC) 750,000 8,485 .14
--------- ---------
446,381 7.59
--------- ---------
MATERIALS
Chemicals - 4.37%
Air Products and Chemicals, Inc. 700,000 28,000 .48
Dow Chemical Co. 250,000 22,734 .39
E.I. du Pont de Nemours and Co. 100,000 5,306 .09
Mallinckrodt Inc. 1,150,000 35,434 .60
Millennium Chemicals Inc. 1,700,000 33,788 .57
Monsanto Co. 900,000 42,750 .73
Morton International, Inc. 2,100,000 51,450 .87
Praxair, Inc. 600,000 21,150 .36
Witco Corp. 1,050,000 16,734 .28
Forest Products & Paper - 3.80%
Georgia-Pacific Corp., Georgia-Pacific Group 650,000 38,066 .65
Georgia-Pacific Corp., Timber Group 700,000 16,669 .28
International Paper Co. 650,000 29,128 .50
Louisiana-Pacific Corp. 1,086,000 19,887 .34
Sonoco Products Co. 1,000,000 29,625 .50
Union Camp Corp. 650,000 43,875 .75
Weyerhaeuser Co. 900,000 45,731 .78
Metals: Nonferrous - 0.76%
Aluminum Co. of America 600,000 44,738 .76
Metals: Steel - 0.31%
Allegheny Teledyne Inc. 900,000 18,394 .31
Miscellaneous Materials & Commodities - 0.31%
Crown Cork & Seal Co., Inc. 600,000 18,488 .31
--------- ---------
561,947 9.55
--------- ---------
CAPITAL EQUIPMENT
Aerospace & Military Technology - 0.67%
Boeing Co. 450,000 14,681 .25
United Technologies Corp. 226,700 24,654 .42
Data Processing & Reproduction - 2.86%
Hewlett-Packard Co. 1,650,000 112,716 1.92
International Business Machines Corp. 300,000 55,425 .94
Electrical & Electronic - 1.79%
Nokia Corp., Class A (ADR) 300,000 36,131 .61
York International Corp. 1,700,000 69,381 1.18
Electronic Components - 1.16%
AMP Inc. 697,800 36,329 .62
Corning Inc. 700,000 31,500 .54
Energy Equipment - 0.94%
Schlumberger Ltd. 1,200,000 55,350 .94
Industrial Components - 2.39%
Dana Corp. 500,000 20,438 .35
Eaton Corp. 850,000 60,084 1.02
Genuine Parts Co. 1,800,000 60,188 1.02
Machinery & Engineering - 1.25%
Caterpillar Inc. 700,000 32,200 .55
Deere & Co. 1,250,000 41,406 .70
--------- ---------
650,483 11.06
--------- ---------
CONSUMER GOODS
Automobiles - 1.15%
DaimlerChrysler AG (New York Registered Shares) (formerly Chrysler Corp.) (1) 280,575 26,953 .46
Nissan Motor Co., Ltd. 6,000,000 18,270 .31
Suzuki Motor Corp. 1,900,000 22,406 .38
Beverages & Tobacco - 3.82%
Anheuser-Busch Companies, Inc. 600,000 39,375 .67
Imperial Tobacco Ltd. 3,500,000 36,576 .62
Philip Morris Companies Inc. 1,100,000 58,850 1.00
RJR Nabisco Holdings Corp. 1,500,000 44,531 .76
UST Inc. 1,295,000 45,163 .77
Food & Household Products - 0.95%
General Mills, Inc. 500,000 38,875 .66
Sara Lee Corp. 600,000 16,913 .29
Health & Personal Care - 2.20%
Astra AB, Class A (ADR) 2,000,000 41,375 .70
Eli Lilly and Co. 200,000 17,775 .30
Pfizer Inc 200,000 25,088 .43
Warner-Lambert Co. 600,000 45,112 .77
Recreation & Other Consumer Products- 0.53%
Pennzoil-Quaker State Co. (formerly Pennzoil Co.) (1) 1,055,527 15,635 .27
Stanley Works 550,000 15,263 .26
Textiles & Apparel - 0.58%
NIKE, Inc., Class B 850,000 34,478 .58
--------- ---------
542,638 9.23
--------- ---------
SERVICES
Broadcasting & Publishing - 0.89%
Gannett Co., Inc. 787,900 52,149 .89
Business & Public Services - 2.32%
Browning-Ferris Industries, Inc. 700,000 19,906 .34
Electronic Data Systems Corp. 900,000 45,225 .77
First Data Corp. 700,000 22,181 .38
IKON Office Solutions, Inc. 3,200,000 27,400 .46
Waste Management, Inc. 475,000 22,147 .37
Merchandising - 3.41%
American Stores Co. 2,000,000 73,875 1.26
Circuit City Stores, Inc. - Circuit City Group 647,000 32,310 .55
J.C. Penney Co., Inc. 850,000 39,844 .68
May Department Stores Co. 900,000 54,337 .92
Telecommunications - 2.83%
Ameritech Corp. 1,050,000 66,544 1.13
AT&T Corp. 400,000 30,100 .51
GTE Corp. 750,000 50,578 .86
U S WEST, Inc. 300,000 19,387 .33
Transportation: Rail & Road - 0.92%
Norfolk Southern Corp. 1,700,000 53,869 .92
--------- ---------
609,852 10.37
--------- ---------
FINANCE
Banking - 2.46%
BankAmerica Corp. 890,000 53,511 .91
Bank of Tokyo-Mitsubishi, Ltd. (ADR) 1,300,000 13,650 .23
First Virginia Banks, Inc. 480,450 22,581 .38
Fleet Financial Group, Inc. 650,000 29,047 .49
Sakura Bank, Ltd. 3,000,000 6,838 .12
Washington Mutual, Inc. 500,000 19,094 .33
Financial Services - 0.91%
Household International, Inc. 1,350,000 53,494 .91
Insurance - 3.61%
Aetna Inc. 450,000 35,381 .60
Allstate Corp. 700,000 27,037 .46
American General Corp. 650,000 50,700 .86
Lincoln National Corp. 300,000 24,544 .42
Royal & Sun Alliance Insurance Group PLC 2,800,000 22,480 .38
St. Paul Companies, Inc. 1,500,000 52,125 .89
Real Estate - 1.38%
Apartment Investment and Management Co., Class A 550,000 20,453 .35
Equity Residential Properties Trust 600,000 24,263 .41
Spieker Properties, Inc. 1,050,000 36,356 .62
--------- ---------
491,554 8.36
--------- ---------
MISCELLANEOUS
Miscellaneous - 1.69%
Other common stocks in initial period of acquisition 99,737 1.69
--------- ---------
Total Common Stocks 3,402,592 57.85
--------- ---------
Shares or
Principal
Convertible Securities and Preferred Stock Amount
- -------------------------------------------- ---------
SERVICES
Transportation: Rail & Road - 0.02%
Union Pacific Capital Trust TIDES 6.25% convertible preferred (2) 30,000 1,373 .02
--------- ---------
FINANCE
Banking - 0.13%
NB Capital Corp. 8.35% exchangeable depositary shares 300,000 7,800 .13
Financial Services - 0.93%
Bell Atlantic Financial Services, Inc. 5.75% convertible debentures 2003 (2) $10,000,000 10,325 .18
Bell Atlantic Financial Services, Inc., 4.25% convertible debentures 2005 $8,000,000 8,200 .14
BNP U.S. Funding LLC, Series A, 7.738% noncumulative preferred (2) 14,000,000 13,444 .23
Fuji JGB Investment LLC, Series A, 9.87% noncumulative preferred (2) 6,500,000 4,649 .08
IBJ Preferred Capital Co. LLC, Series A, 8.79% noncumulative preferred (2) 3,150,000 2,763 .05
Tokai Preferred Capital Co. LLC, Series A, 9.98% noncumulative preferred (2) 17,425,000 14,811 .25
Real Estate - 0.21%
Prologis Trust (formerly Security Capital Industrial 500,000 12,313 .21
Trust), Series D, 7.92% preferred
--------- ---------
74,305 1.27
--------- ---------
MISCELLANEOUS
Multi-Industry - 0.11%
Swire Pacific Capital Ltd. 8.84% cumulative guaranteed 370,000 6,660 .11
perpetual capital securities (2)
--------- ---------
Miscellaneous - 0.14%
Other convertible securities and preferred stock in initial 8,364 .14
period of acquisition
--------- ---------
Total Convertible Securities and Preferred Stock 90,702 1.54
--------- ---------
Total Equity Securities 3,493,294 59.39
--------- ---------
Principal
Amount
Bonds and Notes (000)
- -------------------------------------------- ---------
Industrials - 3.89%
Cendant Corp. 7.75% 2003 6,000 6,064 .10
Columbia/HCA Healthcare Corp. 7.15% 2004 4,000 3,900 .07
Comcast Cable Communications, Inc. 8.375% 2007 5,250 6,091 .10
Deere & Co. 8.95% 2019 7,330 9,033 .15
Fort James Corp. 6.625% 2004 10,000 10,184 .17
Freeport-McMoRan Copper & Gold Inc. 7.50% 2006 4,000 2,540
Freeport-McMoRan Copper & Gold Inc. 7.20% 2026 12,500 8,125 .18
Hearst-Argyle Television, Inc. 7.00% 2018 7,500 7,467 .13
Hutchison Whampoa Finance (CI) Ltd., Series D, 6.988% 2037 (2) 10,000 9,186 .16
Hyundai Semiconductor America, Inc. 8.625% 2007 (2) 11,025 8,158 .14
Inco Ltd. 9.875% 2019 4,200 4,392
Inco Ltd. 9.60% 2022 5,000 5,579 .16
Joseph E. Seagram & Sons, Inc. 6.625% 2005 3,500 3,480
Joseph E. Seagram & Sons, Inc. 6.80% 2008 2,500 2,491
Joseph E. Seagram & Sons, Inc. 7.50% 2018 3,500 3,521 .16
May Department Stores Co. 9.875% 2021 6,500 7,308 .12
News America Holdings Inc. 10.125% 2012 2,000 2,325
News America Holdings Inc. 7.43% 2026 10,000 10,406 .22
OXYMAR 7.50% 2016 (2) 6,000 5,713 .10
Pan Pacific Industrial Investments PLC 0% 2007 (2) 25,000 9,850 .17
PDVSA Finance Ltd. 7.40% 2016 (2) 12,000 10,113 .17
Philip Morris Companies Inc. 7.50% 2004 15,000 16,208 .28
Philips Electronics NV 7.20% 2026 7,500 8,031 .14
Pioneer Natural Resources Co. 7.20% 2028 5,000 3,483 .06
Reliance Industries Ltd. 10.50% 2046 1,500 1,185
Reliance Industries Ltd., Series B, 10.25% 2097 5,000 3,750 .08
Royal Caribbean Cruises Ltd. 7.00% 2007 17,000 17,024 .29
Samsung Electronics Co., Ltd. 7.45% 2002 (2) 2,000 1,780 .03
Scotia Pacific Co. LLC, Timber Collateralized Notes, 6,750 6,626
Class A-1, 6.55% 2028 (2)
Scotia Pacific Co. LLC, Timber Collateralized Notes, 3,750 3,333 .17
Class A-3, 7.71% 2028 (2)
TCI Communications, Inc. 8.75% 2015 4,000 4,969
Tele-Communications, Inc. 8.75% 2023 3,000 3,345 .14
Time Warner Inc. 9.125% 2013 3,000 3,798
Time Warner Inc. 7.25% 2017 5,000 5,436
Time Warner Inc. 6.85% 2026 4,825 4,981 .23
Wharf International Finance Ltd., Series A, 7.625% 2007 11,500 9,226 .17
--------- ---------
229,101 3.89
--------- ---------
Electrical Utilities - 0.56%
Commonwealth Edison Co. 9.875% 2020 11,000 13,205 .23
Israel Electric Corp. Ltd. 7.125% 2005 (2) 7,500 7,538
Israel Electric Corp. Ltd. 7.75% 2027 (2) 7,500 7,265 .25
Transener SA 9.25% 2008 (2) 3,050 2,653 .05
United Utilities 6.875% 2028 2,000 1,971 .03
--------- ---------
32,632 .56
--------- ---------
Gas Utilities - 0.04%
Energen Corp., Series B, 7.125% 2028 2,500 2,479 .04
--------- ---------
Telephone - 0.34%
Cable & Wireless Communications PLC 6.625% 2005 7,000 7,056
Cable & Wireless Communications PLC 6.75% 2008 5,000 5,086 .21
Sprint Capital Corp. 6.875% 2028 2,500 2,628 .04
U S WEST Capital Funding, Inc. 6.50% 2018 5,000 5,117 .09
--------- ---------
19,887 .34
--------- ---------
Transportation - 1.31%
Airplanes Pass Through Trust, pass-through certificates, 7,351 7,544 .13
Series 1, Class C, 8.15% 2019 (3)
Canadian National Railway Co. 6.45% 2036 (4) 2,000 2,057 .03
Continental Airlines, Inc., pass-through certificates, 3,000 3,018
Series 1998-3, Class C-2, 7.25% 2005 (3)
Continental Airlines, Inc., pass-through certificates, 5,000 5,033
Series 1998-3, Class A-2, 6.32% 2008 (3)
Continental Airlines, Inc., pass-through certificates, 1,898 2,087
Series 1996-2B, 8.56% 2014 (3)
Continental Airlines, Inc., pass-through certificates, 9,541 9,821
Series 1996-A, 6.94% 2015 (3)
Continental Airlines, Inc., pass-through certificates, 2,500 2,510 .38
Series 1997-4A, 6.90% 2018 (3)
Delta Air Lines, Inc., pass-through certificates, 1,500 1,662
Series 1992-A2, 9.20% 2014 (3)
Delta Air Lines, Inc., pass-through certificates, 5,000 6,320 .14
Series 1993-A2, 10.50% 2016 (3)
Jet Equipment Trust, Series 1995-B, Class B, 7.83% 2015 (2) 7,394 7,794
Jet Equipment Trust, Series 1995-A, Class B, 8.64% 2015 (2) 4,619 5,157 .22
United Air Lines, Inc. 10.67% 2004 5,000 5,916
United Air Lines, Inc., pass-through certificates, 5,965 6,677
Series 1995-A1, 9.02% 2012 (3)
United Air Lines, Inc., pass-through certificates, 4,000 4,525 .29
Series 1995-A2, 9.56% 2018 (3)
USAir, Inc., Class A, 6.76% 2009 6,967 6,898 .12
--------- ---------
77,019 1.31
--------- ---------
Financial - 2.46%
Abbey National PLC 6.70% (undated) 5,000 4,908 .08
Ahmanson Capital Trust I Capital Securities, Series A, 8.36% 2026 (2) 4,000 4,480 .08
AT&T Capital Corp. 6.60% 2005 10,000 9,581 .16
Bankers Trust New York Corp. 8.25% 2005 5,000 5,521
Bankers Trust New York Corp. 6.70% 2007 4,000 4,133 .16
Bank of Nova Scotia 5.813% Eurodollar Note (undated) (4) 4,000 3,080 .05
Bank of Scotland 7.00% 2049 4,225 4,217 .07
Barnett Capital I 8.06% 2026 4,000 4,494 .08
BHP Finance Ltd. 8.50% 2012 2,500 2,801 .05
Canadian Imperial Bank of Commerce 5.813% Eurodollar Note (undated) (4) 1,600 1,228 .02
Capital One Bank 6.375% 2003 6,000 5,880
Capital One Bank 7.15% 2006 10,000 10,052 .27
Chase Capital I, Capital Securities, Series A, 7.67% 2026 2,500 2,690
Chase Capital II, Global Floating Rate Capital Securities, 3,950 3,734 .11
Series B, 5.719% 2027 (4)
Den Norske CreditBank 5.50% (undated) (4) 3,000 2,130 .04
First Union Corp. 6.82%/7.57% 2026 (5) 4,500 4,985 .08
Fleet Capital Trust 6.226% 2028 (4) 3,500 3,465 .06
Fuji International Finance (Bermuda) Trust, Fuji Bank, Ltd. 8,000 5,280 .09
7.30% Eurodollar Note (undated) (4)
Household Finance Corp. 6.40% 2008 7,000 7,228 .12
HSBC America 7.808% 2026 (2) 2,500 2,395 .04
Lindsey Morden Group Inc., Series B, 7.00% 2008 8,000 5,138 .09
MBNA Corp., MBNA Capital A, Series A, 8.278% 2026 11,600 11,901 .20
Midland Bank 5.375% Eurodollar Note (undated) (4) 4,000 3,078 .05
National Westminster Bank PLC 7.75% (undated) 10,000 10,551 .18
Newcourt Credit Group Inc., Series A, 7.125% 2003 (2) 2,500 2,488 .04
Riggs National Corp. 8.875% 2027 (2) 2,000 2,104 .04
Spintab AB 7.50% (undated) (2) (4) 1,600 1,622 .03
Washington Mutual Capital I Subordinated Subordinated 4,050 4,442 .08
Capital Income Securities 8.375% 2027
Zurich Capital Trust I Capital Securities 8.376% 2037 (2) 10,000 11,178 .19
--------- ---------
144,784 2.46
--------- ---------
Real Estate - 0.83%
CarrAmerica Realty Corp. 6.875% 2008 5,000 4,763 .08
EOP Operating LP 6.625% 2005 4,500 4,411
EOP Operating LP 7.25% 2018 2,000 1,889 .11
ERP Operating LP 7.95% 2002 1,500 1,556 .03
Irvine Apartment Communities, LP 7.00% 2007 5,000 4,543 .08
Irvine Co. 7.46% 2006 (2) (6) 2,500 2,330 .04
ProLogis Trust 7.05% 2006 4,000 3,903
ProLogis Trust (formerly Security Capital Industrial Trust) 7.875% 2009 5,000 4,999 .15
Shopping Center Associates 6.75% 2004 (2) 5,000 4,941 .08
SocGen Real Estate Co. LLC, Series A, 7.64% 2049 (2) (5) 17,000 15,659 .26
--------- ---------
48,994 .83
--------- ---------
Collateralized Mortgage/Asset-Backed Obligations (3) - 3.68%
Asset-Backed Securities Investment Trust, Series 1997-D, 6.79% 2003 2,479 2,482 .04
Case Equipment Loan Trust, Series 1995-A, 7.30% 2002 811 812 .01
Chase Commercial Mortgage Securities Corp., pass-through certificates,
Series 1998-2, Class A-2, 6.39% 2030 6,000 6,179
Chase Commercial Mortgage Securities Corp., pass-through certificates,
Series 1998-2, Class E, 6.39% 2030 2,500 2,168 .15
Chase Manhattan Credit Card Master Trust, Series 1996-4, Class A, 6.73% 2003 7,000 7,028 .12
ComEd Transitional Funding Trust, Transitional Funding Trust
Notes, Series 1998, Class A-6, 5.63% 2009 7,500 7,445 .13
Commercial Mortgage Acceptance Corp., Series 1998-C1, Class A-1, 6.23% 2007 4,883 4,977 .09
CS First Boston Mortgage Securities Corp., Series 1998-C1, 3,385 3,454 .06
Class A-1A, 6.26% 2040
DLJ Mortgage Acceptance Corp., Series 1997-CF1, Class A1A, 7.40% 2006 (2) 2,714 2,846
DLJ Mortgage Acceptance Corp., Series 1996-CF2, Class A1B, 7.29% 2021 (2) 6,000 6,320
DLJ Mortgage Acceptance Corp., Series 1995-CF2, Class A1B, 6.85% 2027 (2) 6,000 6,191 .27
Deutsche Mortgage & Asset Receiving Corp., Series 1998-C1, 9,602 9,672 .16
Class A-1, 6.22% 2031
FIRSTPLUS Home Loan Owner Trust, Series 1997-1, Class A-6, 6.95% 2015 12,500 12,624 .21
GMAC Commercial Mortgage Securities, Inc., Series 1997-C1, 3,926 4,024
Class A1, 6.83% 2003
GMAC Commercial Mortgage Securities, Inc., Series 1997-C1, 5,000 5,297 .16
Class A3, 6.869% 2007
Green Tree Financial Corp., pass-through certificates, 10,000 10,125 .17
Series 1995-9, Class A-5, 6.80% 2027
Grupo Financiero Banamex Accival, SA de CV 0% 2002 (2) 3,593 3,181 .05
J.P. Morgan Commercial Mortgage Finance Corp., pass-through
certificates, Series 1996-C3, Class A-1, 7.33% 2028 4,593 4,804 .08
MBNA Master Credit Card Trust, Series 1998-E, Class C, 6.60% 2010 (2) 2,500 2,479 .04
Merrill Lynch Mortgage Investors, Inc., Seller Manufactured
Housing Contract, Series 1995-C2, Class A-1, 7.189% 2021 (4) 2,868 2,915
Merrill Lynch Mortgage Investors, Inc., Series 1995-C3, 7,000 7,295 .17
Class A-3, 7.062% 2025 (4)
Morgan Stanley Capital I Inc., Series 1998-WF1, Class A-1, 6.25% 2007 25,135 25,535
Morgan Stanley Capital I Inc., mortgage pass-through 4,958 4,958
certificates, Series 1998-1, 6.75% 2013
Morgan Stanley Capital I Inc., Series 1998-HF2, Class A-2, 6.48% 2030 10,000 10,381 .69
Nomura Asset Securities Corp., Series 1998-D6, Class A-A1, 6.28% 2030 (4) 14,244 14,389 .25
Norwest Asset Securities Corp., Series 1998-8, Class A-1, 6.50% 2013 4,608 4,622
Norwest Asset Securities Corp., Series 1998-31, Class A-1, 6.25% 2014 14,350 14,330 .32
PNC Mortgage Securities Corp., Series 1998-10, 6.50% 2028 (2) 5,990 5,828 .10
Sears Credit Account Master Trust II, Series 1998-2, Class A, 5.25% 2008 8,500 8,327 .14
Structured Asset Securities Corp., pass-through certificates,
Series 1998-RF2, Class A, 8.572% 2022 (2)(4) 12,020 12,908
Structured Asset Securities Corp., pass-through certificates,
Series 1996-CFL, Class A1C, 5.944% 2028 (4) 2,728 2,722 .27
--------- ---------
216,318 3.68
--------- ---------
Governments (excluding U.S. Government) and
Governmental Authorities - 0.09%
Canadian Government 4.25% 2026 (7) 7,847 5,219 .09
--------- ---------
Federal Agency Obligations - Mortgage Pass-Throughs (3) - 2.20%
Fannie Mae 6.00%-12.00% 2008-2028 127,347 130,015 2.21
Freddie Mac 7.50%-10.00% 2008-2024 12,786 13,555 .23
Government National Mortgage Assn:
7.00%-11.00% 2009-2026 103,058 106,807
6.875%-7.00% 2022-2023 (4) 8,953 9,098 1.97
--------- ---------
259,475 4.41
--------- ---------
Federal Agenncy Obligations - Other - 0.09%
Fannie Mae, Series 1997-28, Class C, 7.00% 2027 5,000 5,002 .09
--------- ---------
U.S. Treasury Obligations - 12.74%
5.50% February 2000 50,000 50,469 .86
7.125% February 2000 45,000 46,209 .79
8.75% August 2000 7,500 7,972 .13
14.25% February 2002 2,000 2,547 .04
6.50% May 2002 70,000 73,905 1.26
3.625% July 2002 (7) 87,017 86,436 1.47
10.75% February 2003 7,300 8,924 .15
10.75% May 2003 5,000 6,170 .10
11.125% August 2003 8,500 10,727 .18
11.875% November 2003 15,000 19,577 .33
7.25% May 2004 58,670 65,756 1.12
7.25% August 2004 25,000 28,105 .48
6.50% May 2005 60,000 65,756 1.12
7.00% July 2006 50,000 56,929 .97
3.375% January 2007 (7) 5,175 5,001 .08
3.625% January 2008 (7) 50,753 49,849 .85
10.375% November 2009 15,000 19,158 .33
10.00% May 2010 2,000 2,553 .04
10.375% November 2012 42,000 57,947 .99
7.25% May 2016 10,000 12,114 .21
7.50% November 2016 3,000 3,727 .06
8.875% August 2017 44,675 62,929 1.07
7.875% February 2021 5,000 6,576 .11
--------- ---------
749,336 12.74
--------- ---------
Total Bond & Notes 1,790,246 30.44
--------- ---------
Short-Term Securities
- --------------------------------------------
Corporate Short-Term Notes - 9.18%
American Express Credit Corp. 5.03%-5.12% due 1/5-2/1/99 22,900 22,834 .39
Atlantic Richfield Co. 4.81%-5.06% due 2/9-2/16/99 (2) 45,000 44,731 .76
Walt Disney Co. 4.95%-5.25% due 1/12-1/14/99 55,100 55,004 .94
Duke University 5.25% due 1/7/99 24,500 24,475 .42
Eastman Kodak Co. 5.07%-5.13% due 1/21-2/2/99 53,600 53,397 .91
Ford Motor Credit Co. 5.04%-5.16% due 1/11-1/15/99 26,100 26,050 .44
General Motors Acceptance Corp. 5.10%-5.18% due 1/6-1/20/99 35,900 35,837 .61
H.J. Heinz Co. 5.07%-5.08% due 1/22-1/27/99 39,000 38,857 .66
IBM Credit Corp. 5.15%-5.25% due 1/8-1/11/99 29,500 29,457 .50
International Lease Finance Corp. 5.02%-5.32% due 1/5-1/19/99 32,700 32,640 .55
Lucent Technologies Inc. 5.08%-5.15% due 1/29-2/3/99 59,800 59,528 1.01
Motorola, Inc. 5.08% due 1/28/99 26,128 26,024 .44
National Rural Utilities Cooperative Finance Corp. 5.00%-5.03% due 1/8-1/19/99 39,000 38,926 .66
SBC Communications Inc. 5.00%-5.25% due 1/4-1/19/99 (2) 52,300 52,220 .89
--------- ---------
539,980 9.18
--------- ---------
Federal Agency Short-Term Obligations - 1.28%
Freddie Mac 4.983%-5.08% due 1/25-3/19/99 75,600 75,189 1.28
--------- ---------
Total Short-Term Securities 615,169 10.46
--------- ---------
Total Investment Securities (cost $5,178,488,000) 5,898,709 100.29
Excess of payables over cash and receivables 17,312 .29
--------- ---------
Net Assets 5,881,397 100.00
========= =========
(1) Non-income-producing security.
(2) Purchased in a private placement transaction; resale
may be limited to qualified institutional buyers; resale to the
public may require registration.
(3) Pass-through securities backed by a pool of mortgages or
other loans on which principal payments are periodically made.
Therefore, the effective maturities are shorter than the
stated maturities.
(4) Coupon rates may change periodically.
(5) Step bond; coupon rate will increase at a later date.
(6) Valued under procedures established by the Board of Directors.
(7) Index-linked bond whose principal amount moves with a
government retail price index.
See Notes to Financial Statements
ADR = American Depositary Receipts
</TABLE>
American Balanced Fund
Equity securities added to the portfolio since June 30, 1998
Allegheny Teledyne
American Stores
Apartment Investment and Management
Central and South West
Corning
Crown Cork & Seal
Deere
First Data
GTE
Household International
IKON Office Solutions
Mallinckrodt
Monsanto
Morton International
NIKE
Nissan Motor
J.C. Penney
Schlumberger
Stanley Works
United Technologies
Valero Energy
Washington Mutual
Witco
Equity securities eliminated from the portfolio since June 30, 1998
Columbia/HCA Healthcare
Fannie Mae
J.P. Morgan
PP & L Resources
Royal Dutch Petroleum
Telefonaktiebolaget LM Ericsson
Texaco
Thorn
Union Pacific
Wal-Mart Stores
Wells Fargo
<TABLE>
American Balanced Fund
Financial Statements
- ------------------------------------------------------------- ------------
Statement of Assets and Liabilities (dollars in
at December 31, 1998 thousands)
- ------------------------------------------------------------- ------------
<S> <C> <C>
Assets:
Investment securities at market
(cost: $5,178,488) $5,898,709
Cash 979
Receivables for -
Sales of investments $ 456
Sales of fund's shares 10,869
Dividends and accrued interest 32,819 44,144
---------------- ------------
5,943,832
Liabilities:
Payables for -
Purchases of investments 30,322
Repurchases of fund's shares 29,259
Management services 1,429
Accrued expenses 1,425 62,435
---------------- ------------
Net Assets at December 31, 1998 -
Equivalent to $15.76 per share on
373,247,005 shares of $1 par value
capital stock outstanding (authorized
capital stock--500,000,000 shares) $5,881,397
============
Statement of Operations
for the year ended December 31, 1998 (dollars in
thousands)
- ------------------------------------------------------------- ------------
Investment Income:
Income:
Dividends $ 78,334
Interest 153,400 $ 231,734
----------------
Expenses:
Management services fee 16,104
Distribution expenses 13,816
Transfer agent fee 3,440
Reports to shareholders 156
Registration statement and prospectus 408
Postage, stationery and supplies 618
Directors' fees 86
Auditing and legal fees 44
Custodian fee 101
Taxes other than federal
income tax 2
Other expenses 68 34,843
---------------- ------------
Net investment income 196,891
------------
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 455,951
Change in unrealized appreciation on
investments:
Beginning of year 794,613
End of year 720,225 (74,388)
---------------- ------------
Net realized gain and change in unrealized
appreciation on investments 381,563
------------
Net Increase in Net Assets Resulting
from Operations $578,454
============
See Notes to Financial Statements
- ------------------------------------------------------------- ------------
Statement of Changes in Net Assets
(dollars in thousands)
December 31
1998 1997
- ------------------------------------------------------------- ------------
Operations:
Net investment income $ 196,891 $ 170,421
Net realized gain on investments 455,951 371,017
Net change in unrealized appreciation
on investments (74,388) 315,174
---------------- ------------
Net increase in net assets
resulting from operations 578,454 856,612
---------------- ------------
Dividends and Distributions Paid to
Shareholders:
Dividends from net investment income (191,659) (161,568)
Distributions from net realized gain on
investments (366,100) (386,924)
---------------- ------------
Total dividends and distributions (557,759) (548,492)
---------------- ------------
Capital Share Transactions:
Proceeds from shares sold: 87,886,110
and 78,721,605 shares, respectively 1,414,201 1,234,939
Proceeds from shares issued in reinvestment
of net investment income dividends and
distributions of net realized gain on
investments: 34,076,376 and 33,541,362 shares,
respectively 531,997 521,713
Cost of shares repurchased: 69,903,643
and 61,953,439 shares, respectively (1,121,345) (970,176)
---------------- ------------
Net increase in net assets resulting from
capital share transactions 824,853 786,476
---------------- ------------
Total Increase in Net Assets 845,548 1,094,596
Net Assets:
Beginning of year 5,035,849 3,941,253
---------------- ------------
End of year (including undistributed net
investment income: $30,440 and $25,214, $5,881,397 $5,035,849
respectively) ================ ============
See Notes to Financial Statements
</TABLE>
AMERICAN BALANCED FUND
Notes to Financial Statements
1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - American Balanced Fund, Inc.(the "fund") is registered under
the Investment Company Act of 1940 as an open-end, diversified management
investment company. The fund seeks conservation of capital, current income and
long-term growth of both capital and income by investing in stocks and
fixed-income securities.
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. 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 these
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 and premiums on securities purchased are
amortized.
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 $720,221,000, of which $891,992,000
related to appreciated securities and $171,771,000 related to depreciated
securities. There was no difference between book and tax realized gains on
securities transactions for the year ended December 31, 1998. The cost of
portfolio securities for book and federal income tax purposes was
$5,178,488,000 at December 31, 1998.
3. FEES AND TRANSACTIONS WITH RELATED PARTIES
INVESTMENT ADVISORY FEE - The fee of $16,104,000 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 0.42% of the first $500 million of
average net assets; 0.324% of such assets in excess of $500 million but not
exceeding $1 billion; 0.30% of such assets in excess of $1 billion but not
exceeding $1.5 billion; 0.282% of such assets in excess of $1.5 billion but not
exceeding $2.5 billion; 0.27% of such assets in excess of $2.5 billion but not
exceeding $4 billion; 0.262% of such assets in excess of $4 billion but not
exceeding $6.5 billion; 0.255% of such assets in excess of $6.5 billion but not
exceeding $10.5 billion; and 0.25% of such assets in excess of $10.5 billion.
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 their selling and servicing efforts. During the year ended
December 31, 1998, distribution expenses under the Plan were limited to
$13,816,000. Had no limitation been in effect, the fund would have paid
$13,926,000 in distribution expenses under the Plan. As of December 31, 1998,
accrued and unpaid distribution expenses were $1,075,000.
American Funds Distributors, Inc. (AFD), the principal underwriter of the
fund's shares, received $3,369,000 (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 FEE - American Funds Service Company (AFS), the transfer agent
for the fund, was paid a fee of $3,440,000.
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 $353,000.
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 $3,031,269,000 and $2,543,166,000, respectively,
during the year ended December 31, 1998.
As of December 31, 1998, accumulated undistributed net realized gain on
investments was $78,559,000 and additional paid-in capital was $4,678,926,000.
The fund reclassified $6,000 and $37,043,000 from undistributed net investment
income and undistributed net realized gains, 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 $101,000 includes $56,000 that was paid by these credits
rather than in cash.
<TABLE>
Per-Share Data and Ratios Year Ended
December 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $15.68 $14.55 $14.15 $12.00 $12.57
----------- ---------- ---------- --------- ---------
Income From Investment Operations:
Net investment income $.56 $.58 $.57 $.57 $.57
Net gains or losses on securities (both
realized and unrealized) $1.13 $2.41 $1.24 $2.61 ($.53)
----------- ---------- ---------- --------- ---------
Total from investment operations 1.69 2.99 1.81 3.18 .04
----------- --------- ----------- --------- ---------
Less Distributions:
Dividends (from net investment income) (.56) (.56) (.56) (.56) (.56)
Distributions (from capital gains) (1.05) (1.30) (.85) (.47) (.05)
----------- --------- ----------- --------- ---------
Total distributions (1.61) (1.86) (1.41) (1.03) (.61)
----------- --------- ---------- --------- ---------
Net Asset Value, End of Year $15.76 $15.68 $14.55 $14.15 $12.00
========== ======== ======== ======= =======
Total Return (1) 11.13% 21.04% 13.17% 27.13% .34%
Ratios/Supplemental Data:
Net assets, end of year (in millions) $5,881 $5,036 $3,941 $3,048 $2,082
Ratio of expenses to average net assets .63% .65% .67% .67% .68%
Ratio of net income to average net asset 3.57% 3.74% 4.01% 4.38% 4.76%
Portfolio turnover rate 54.05% 44.01% 43.85% 39.03% 32.05%
(1) Excludes maximum sales charge of 5.75%.
</TABLE>
Independent Auditors' Report
To the Board of Directors and Shareholders of American Balanced Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
American Balanced Fund, 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 American Balanced Fund, 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.
DELOITTE & TOUCHE LLP
Los Angeles, California
January 29, 1999
AMERICAN BALANCED FUND
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 Shareholders Payment Date From Net From Net From Net
of Record Investment Realized Short- Realized Long-
Income term Gains term Gains
<S> <C> <C> <C> <C>
February 13,1998 February 17, 1998 .14 - 0.08
May 22, 1998 May 26, 1998 .14 - -
August 14, 1998 August 17, 1998 .14 - -
December 21, 1998 December 22, 1998 .14 - 0.97
</TABLE>
Corporate shareholders may exclude up to 70% of qualifying dividends received
during the year. For purposes of computing this exclusion, 36% 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, 18% of the dividends
paid by the fund from net investment income were 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 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 CONSULT THEIR TAX ADVISERS.
[The American Funds Group(r)]
AMERICAN BALANCED FUND
BOARD OF DIRECTORS
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
ROBERT G. O'DONNELL, San Francisco, California
President of the fund
Senior Vice President and Director,
Capital Research and Management Company
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
WALTER P. STERN, New York, New York
Chairman of the Board of the fund
Chairman of the Board, Capital Group International, Inc.
PATRICIA K. WOOLF, Princeton, New Jersey
Private investor; lecturer, Department of Molecular
Biology, Princeton University; corporate director
OTHER OFFICERS
ABNER D. GOLDSTINE, 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
ERIC S. RICHTER, Washington, D.C.
Vice President of the fund
Senior Vice President and Director,
Capital Research Company
J. DALE HARVEY, Los Angeles, California
Vice President of the fund
Vice President and Director, Capital Research Company
PATRICK F. QUAN, San Francisco, California
Secretary of the fund
Vice President - Fund Business Management Group,
Capital Research and Management Company
ANTHONY W. HYNES, JR., Brea, California
Treasurer of the fund
Vice President - Fund Business Management Group,
Capital Research and Management Company
R. MARCIA GOULD, Brea, California
Assistant Treasurer of the fund
Vice President - Fund Business Management Group,
Capital Research and Management Company
OFFICE 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 92821-5823
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
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, New York 10081-0001
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 American Balanced Fund,
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.
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.
Printed on recycled paper
Litho in USA WG/CG/3911
Lit. No. AMBAL-011-0299
