[THE AMERICAN FUNDS GROUP(R)]
THE INCOME FUND OF AMERICA
ANNUAL REPORT FOR THE YEAR ENDED JULY 31, 1998
[cover caricature: construction of building in the shape of "IFA", floor by
floor]
HOW IFA CAREFULLY BUILDS ITS PORTFOLIO
The Income Fund of America 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.
THE INCOME FUND OF AMERICA(R) SEEKS CURRENT INCOME WHILE SECONDARILY STRIVING
FOR CAPITAL GROWTH THROUGH INVESTMENTS IN STOCKS AND FIXED-INCOME SECURITIES.
A LOOK AT IFA'S DIVIDEND RATE
Compared with the average of equity-income funds and Standard & Poor's 500
Stock Composite Index.
[begin line chart]
<TABLE>
<CAPTION>
The Income Fund Average of equity-
Date of America income funds S&P 500
<S> <C> <C> <C>
7/31/93 6.19 3.13 2.79
1/31/94 5.56 2.93 2.64
7/31/94 6.06 3.01 2.80
1/31/95 6.14 3.12 2.81
7/31/95 5.55 2.85 2.41
1/31/96 5.07 2.49 2.18
7/31/96 5.19 2.43 2.28
1/31/97 5.09 2.08 1.89
7/31/97 4.74 1.80 1.48
1/31/98 4.27 1.73 1.58
7/31/98 4.32 1.63 1.42
</TABLE>
[end chart]
ALL NUMBERS CALCULATED BY LIPPER ANALYTICAL SERVICES.
The 12-month dividend rate is calculated by taking the total of the trailing 12
months' dividends and dividing by the month-end net asset value adjusted for
capital gains.
THE FIGURES IN THIS REPORT REFLECT PAST RESULTS. SHARE PRICE AND RETURN WILL
VARY, SO YOU MAY LOSE MONEY BY INVESTING IN THE FUND. THE SHORTER THE TIME
PERIOD OF YOUR INVESTMENT, THE GREATER THE POSSIBILITY OF LOSS. FUND SHARES ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR INSURED OR GUARANTEED BY, THE U.S.
GOVERNMENT, ANY FINANCIAL INSTITUTION, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, OR ANY OTHER AGENCY, ENTITY OR PERSON.
FELLOW SHAREHOLDERS:
We report to you this year in the midst of a turbulent stock market. The Income
Fund of America's 1998 fiscal year ended on July 31, not long after the broad
market peaked. Since reaching a high on July 17, the market has been extremely
volatile and the unmanaged Standard & Poor's 500 Stock Composite Index fell
19.3% from its high to its most recent low on August 31. In this difficult
environment, your fund has also declined, but to a lesser extent, by 9.5%. This
compares with a decline of 16.2% in the Lipper Equity Income Funds Index, an
index of the 30 largest equity-income funds.
We believe IFA's emphasis on securities with above-average yields has provided
a cushion in this down period. IFA's dividend rate at the end of the fiscal
year was 4.2% - significantly more than the 1.6% average of the 211
equity-income funds tracked by Lipper and three times higher than the 1.4%
yield on the S&P 500. (See the inside front cover for a look at IFA's
consistent yield advantage.)
THE DISCIPLINE OF IFA'S INCOME APPROACH
Yield has proved to be a good guide to value over the long term, and while it's
been out of fashion until recently, we believe it will continue to be a
reliable measure. It is one of the few valuation guideposts of which an
investor can be reasonably certain: The price paid for a stock is known, and
the dividend is likely to be paid. In contrast, valuation measures such as the
price/earnings multiple are subject to unfavorable earnings surprises as well
as wide swings over time in what the market is willing to pay for a company's
expected earnings.
Just as important, income is a steadier component of total return than price
change. In December, IFA shareholders will receive their income distributions
regardless of short-term fluctuations in the value of the fund.
Shareholders will also receive a higher-than-average capital gain distribution
later this year. As in fiscal 1997, high valuations and the goal of maintaining
the fund's income per share have caused us to sell many lower yielding stocks
in the portfolio throughout fiscal 1998. We have a built-in discipline when it
comes to selling stocks. If the price of a stock holding goes up markedly, the
yield goes down (unless dividend growth keeps pace). If the yield falls far
enough relative to the market's yield, it encourages us to look for other
investment opportunities.
A LOOK AT THE PAST FISCAL YEAR
For the 12 months ended July 31, the fund produced a solid return of 11.3% with
dividends and capital gains reinvested. IFA outpaced the 10.5% average return
of Lipper's equity-income funds and the 9.3% average return of the "domestic
hybrid" category tracked by Morningstar, Inc.
The fund also outpaced the 7.9% total return of the Lehman Brothers Aggregate
Bond Index, but it was considerably below the 19.3% total return of the S&P
500. Of course, IFA is not directly comparable to either index. For example,
the S&P 500 is 100% invested in U.S. stocks (most of which fail to meet IFA's
yield criteria). At July 31, IFA was only 48.9% invested in U.S. stocks; 10.6%
of net assets was in non-U.S. stocks, 27.2% in bonds and 13.3% in cash. Over
time, IFA's mix of stocks, bonds and cash will vary in response to market
circumstances. IFA's current allocation of assets reflects our concern that
U.S. stock valuations are still high by historical standards despite the recent
market correction.
THE FUND'S YEAR IN TWO PARTS
The 1998 fiscal year can best be understood in two parts. For the first half of
the fiscal year through January 31, the total return for IFA (+5.9%) was
greater than for the S&P 500 (+3.6%). Sharp price gains by the fund's
telecommunications and utilities stocks and a strong contribution from
long-term government and corporate bonds aided the fund. Results also benefited
from the fund's resilience during several brief market declines.
The second half of the fiscal year proved to be more difficult. The fund had a
total return of 5.1% compared with 15.1% for the S&P 500. A narrow group of
highly valued companies provided much of the stock market's strength.
Microsoft, General Electric, Lucent Technologies, Wal-Mart Stores and
Coca-Cola, among the market's leaders during this period, pay low or no
dividends. Indeed, for the seven months ended July 31, the lowest yielding
stocks had the greatest price increases. No-yield stocks were up over 39% on
average and stocks that yielded 0% to 1% rose 24.8%. In contrast, stocks
yielding 3% or more (candidates for IFA's portfolio) were up only 6.2%. (See
charts below.)
Returns for the S&P 500 by Yield Sector (12/31/97 to 7/31/98)
[begin bar chart]
<TABLE>
<CAPTION>
<S> <C>
Yield Sectors Return
0% 39.4%
>0% - 1.0% 24.8%
1.0% - 2.0% 10.3%
2.0% - 3.0% 11.6%
>3.0% 6.2%
</TABLE>
[end chart]
Source: Prudential Securities Quantitative Monthly
[begin pie chart]
S&P 500 by Yield Sector as of July 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Yield Sector Percent of Total
0% 12.4
0-1% 27.6
1-2% 31.7
2-3% 19.6
>3% 8.7
</TABLE>
[end chart]
IFA'S CURRENT PORTFOLIO
It was a difficult year for some of the companies in IFA's portfolio, in large
part related to troubles caused by events outside the United States.
ENERGY COMPANIES, the fund's largest industry holding at 8.7% of net assets
(down from 9.9% a year ago), delivered particularly poor returns* as a result
of decreased demand for oil and gas in Asia. With the price of oil falling from
about $18 a barrel in late 1997 to about $14 as of July 31, stock prices
weakened. While some stocks still contributed positive total returns, two of
our largest holdings - Atlantic Richfield and Amoco - dropped about 6% each.
After IFA's fiscal year-end, British Petroleum announced its intention to
acquire Amoco in a $48.2 billion merger, and the stock rose sharply. Over the
long term, we expect the economies of Asia to revive and the prices of oil and
gas holdings to rise. Meanwhile, the industry continues to restructure, and the
stocks are paying above-average dividends while we wait.
*Return to the fund reflects monthly changes in size of holdings and dividends
received and also price changes from the beginning to the end of the fiscal
year. It assumes any net proceeds are reinvested at a 5% short-term rate.
FOREST PRODUCTS & PAPER (1.7% of net assets, down from 2.3% a year ago) was
another global industry hurt as Asian buying evaporated. Union Camp and
Weyerhaeuser both had negative returns of about 30%. However, we believe that
over time Asia's paper imports will continue to grow at a higher rate than the
more mature markets of North America. Consolidation trends and improving
productivity add to the long-term attractiveness of these holdings.
Several groups had a positive impact on the fund's results.
ELECTRIC & GAS UTILITIES increased to 8.1% of the portfolio from 7.2% a year
ago. These holdings contributed substantially to the fund's results. They did
so because long-term bonds were strong - stock prices of U.S. utilities often
parallel bond prices due to their competitive yields. Favorable federal and
state rulings on deregulation also helped total returns of these stocks.
Consolidated Edison (up 27%) and DTE Energy (up 35%) benefited from agreements
or anticipated settlements with state regulators. United Kingdom-based
utilities also contributed. Thames Water, yielding 3.7%, was up 37%. United
Utilities, yielding 4.5%, rose 28%.
BANK HOLDINGS (8.0% of net assets, up from 7.7% a year ago) helped as
cost-cutting and consolidation continued. First Union, the fund's largest
equity position at 2.5% of total assets, generated a 62% return including the
impact of the merger with CoreStates Financial. National Bank of Canada was up
34%. Banks with more international exposure, such as J.P. Morgan and Bankers
Trust, were under pressure from concerns about Asia but still provided positive
returns.
TELECOMMUNICATIONS (6.3% of net assets, up from 5.2% a year earlier) also
enhanced the fund's returns. These companies typically provide solid dividends.
Moreover, returns have been spurred by major merger and joint venture
announcements and strong earnings growth within the past 12 months. Among the
big contributors were U S WEST, the fund's fourth-largest holding, up 41%
because of strong earnings growth, and AT&T (up 54%), which announced the
acquisition of the largest U.S. cable television company, Tele-Communications,
as well as a global alliance with British Telecom.
FIXED-INCOME SECURITIES (including bonds, cash and cash equivalents) rose to
40.5% of the portfolio, up from 37.9% a year ago. Our fixed-income investments
made a solid contribution to yield and helped total return. U.S. government
bonds have been viewed as a safe haven during the Asian crisis and the more
recent market turmoil in Latin America and Russia. High-yielding, higher risk
corporate bonds, which now make up about 12% of the total portfolio, were also
generally strong for the fiscal year although they have weakened recently in
response to market uncertainty.
THE 25TH YEAR OF IFA'S INCOME APPROACH
As we write to you, we are entering the 25th year that The Income Fund of
America has been managed by Capital Research and Management Company. Over that
period, we have consistently provided above-average income, steady long-term
growth exceeding inflation, and a measure of resistance to market declines. We
will make every effort to build on this strong record in the future. The
feature article beginning on page 6 focuses on how we are attempting to
construct a sensible portfolio for today's low-yielding, volatile market.
We appreciate your support and urge you to continue to approach your investment
with a long-term view.
/s/Walter P. Stern /s/Janet A. McKinley
Walter P. Stern Janet A. McKinley
Chairman of the Board President
September 16, 1998
FOLLOWING THE COURSE OF AN INVESTMENT IN IFA
Here's how a $10,000 investment in IFA grew between December 1, 1973 - the day
that Capital Research and Management Company became the fund's investment
adviser - and July 31, 1998, the end of the fund's latest fiscal year.
As you can see, the $10,000 would have grown to $245,553 with all distributions
reinvested, an average increase of 13.9% a year.
The IFA 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, sales charges are
lower for accounts of $50,000 or more. There is no sales charge on dividends or
capital gain distributions that are reinvested in additional shares. No
adjustment has been made for income or capital gain taxes.
The fund's 30-day yield as of August 31, 1998, calculated in accordance with
the Securities and Exchange Commission formula, was 5.05%.
The fund's year-by-year results appear in the table under the chart. You can
use this table to estimate how much the value of your own holdings has grown.
AVERAGE ANNUAL COMPOUND RETURNS*
Periods Ended
<TABLE>
<CAPTION>
<S> <C> <C>
July 31, June 30,
1998 1998
Ten years +13.06% +13.25%
Five years +12.81 +13.19
One year 4.94 +11.35
</TABLE>
*Assumes reinvestment of all distributions and payment of the 5.75% sales
charge at the beginning of the stated periods.
HOW A $10,000 INVESTMENT HAS GROWN
[begin mountain chart]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year ended July 31 1974 # 1975 1976 1977 1978
VALUE OF DIVIDENDS
Dividends in Cash $344 735 860 780 842
Dividends Reinvested $347 785 998 969 1,117
VALUE OF INVESTMENT
Dividends in Cash $8,767 10,141 12,155 12,701 12,584
Dividends Reinvested $9,088 11,391 14,751 16,392 17,404
IFA TOTAL RETURN (9.1)% 25.3 29.5 11.1 6.2
Year ended July 31 1979 1980 1981 1982 1983
VALUE OF DIVIDENDS
Dividends in Cash 936 952 1,047 1,202 1,280
Dividends Reinvested 1,333 1,463 1,743 2,187 2,549
VALUE OF INVESTMENT
Dividends in Cash 12,693 12,490 12,818 12,256 16,112
Dividends Reinvested 18,921 20,162 22,485 23,664 33,685
IFA TOTAL RETURN 8.7 6.6 11.5 5.2 42.3
Year ended July 31 1984 1985 1986 1987 1988
VALUE OF DIVIDENDS
Dividends in Cash 1,344 4,438 1,550 1,636 1,543
Dividends Reinvested 2,896 3,365 3,909 4,431 4,479
VALUE OF INVESTMENT
Dividends in Cash 15,738 19,443 21,668 23,568 22,341
Dividends Reinvested 35,722 47,677 57,148 66,674 67,816
IFA TOTAL RETURN 6.0 33.5 19.9 16.7 1.7
Year ended July 31 1989 1990 1991 1992 1993
VALUE OF DIVIDENDS
Dividends in Cash 1,711 1,578 1,764 1,715 1,713
Dividends Reinvested 5,338 5,269 6,311 6,578 6,995
VALUE OF INVESTMENT
Dividends in Cash 25,644 24,351 25,390 28,370 29,917
Dividends Reinvested 83,702 84,643 95,050 113,242 126,686
IFA TOTAL RETURN 23.4 1.1 12.3 19.1 11.9
Year ended July 31 1994 1995 1996 1997 1998
VALUE OF DIVIDENDS
Dividends in Cash 1,726 1,751 1,766 1,968 1,959
Dividends Reinvested 7,471 8,046 8,581 10,075 10,531
VALUE OF INVESTMENT
Dividends in Cash 28,788 31,571 34,007 41,731 44,436
Dividends Reinvested 129,177 150,385 170,626 220,586 245,553
IFA TOTAL RETURN 2.0 16.4 13.5 29.3 11.3
</TABLE>
<TABLE>
<CAPTION>
Year Ended July 31 STANDARD & POOR'S 500 LEHMAN BROS.
COMPOSITE INDEX with AGGREGATE BOND
dividends reinvested INDEX/2/ with interest
compounded
<S> <C> <C>
11/20/73 $10,000 $10,000
1974 8,505 9,378
1975 9,979 10,580
1976 12,102 11,871
1977 12,077 13,189
1978 12,957 13,474
1979 14,101 14,373
1980 17,437 14,602
1981 19,692 13,871
1982 17,056 16,720
1983 27,194 20,383
1984 26,380 22,154
1985 34,935 27,452
1986 44,861 33,353
1987 62,488 34,859
1988 55,203 37,497
1989 72,798 43,200
1990 77,462 46,253
1991 87,330 51,204
1992 98,509 58,770
1993 107,097 64,746
1994 112,593 64,807
1995 141,929 71,358
1996 165,356 75,311
1997 251,525 83,417
1998 299,970 89,980
</TABLE>
[end chart]
$299,970
Standard & Poor's 500 Composite Index with dividends reinvested
$245,553/1/
IFA with dividends reinvested
$89,980 Lehman Bros. Aggregate Bond Index/2/ with interest compounded
$44,436/3/
IFA not including dividends
$10,000
original investment
Average annual compound return for 24-1/2 years
13.9%
#For the period December 1, 1973 (when Capital Research and Management Company
became the fund's investment adviser), through July 31, 1974.
/1/Includes reinvested dividends of $107,766 and reinvested capital gain
distributions of $47,736. From April 1990 to September 1994 the fund paid daily
dividends; therefore, total values for this period were adjusted for cumulative
dividends ex- but not yet paid. After this period, quarterly dividends were
resumed.
/2/From December 1, 1973, through December 31, 1975, the Lehman Brothers
Government/Corporate Bond Index was used because the Lehman Brothers Aggregate
Bond Index did not exist. From January 1, 1976, through July 31, 1998, the
Lehman Brothers Aggregate Bond Index was used.
/3/Includes capital gain distributions of $11,913 but does not reflect income
dividends of $34,140 taken in cash.
The indexes are unmanaged and do not reflect sales charges, commissions or
expenses.
Past results are not predictive of future results.
HOW IFA CAREFULLY BUILDS ITS PORTFOLIO
YOUR FUND'S GOALS ARE SIMPLE: GENERATE INCOME. PARTICIPATE IN RISING STOCK
MARKETS. HELP PROTECT INVESTORS IN MARKET DOWNTURNS. HERE'S HOW IFA ATTEMPTS TO
DO THAT.
Investors usually have basic goals. They want to invest for retirement or to
send a child to college. They don't want to lose money. They don't want to see
their nest egg eroded by inflation. They want to participate in a strong market
but don't want their fund shares to fall too far in a market correction.
The Income Fund of America was designed for these cautious, conservative
investors, who aren't looking for excitement. "We hope to provide above-average
income and a reasonably stable, growing investment," says Janet McKinley,
president of IFA. "Our first rule is: Do your best not to lose people's money."
Although that objective sounds simple, attempting to achieve the goals of
stability and prudent growth is a complicated process. Supported by painstaking
research, the fund invests in a diversified mix of stocks that offer
above-average dividends, convertible securities (bonds that are convertible
into stocks) and carefully selected investment-grade and high-yield bonds.
These investments have produced a continual flow of dividends and interest
payments and, in many periods, capital appreciation. High-yield stocks are the
largest part of the portfolio; bonds add income and a measure of stability.
FINDING HIGH-YIELD STOCKS IN A LOW-YIELD MARKET
In today's market, with dividend yields at historic lows, finding a successful
company that offers solid growth potential and also provides a high enough
dividend is a daunting task. "We're fishing in a very small pond," says Janet.
Take, for example, the unmanaged Standard & Poor's 500 Stock Composite Index,
which measures the stocks of 500 large U.S. companies and is widely used as a
benchmark for stock investors. Generally, IFA seeks to buy companies that
provide a yield of at least 3%. As of July 31, 1998, only 8.7% of the companies
in the S&P 500 had a yield of 3% or more. The yield of the S&P 500 was only
1.4%; IFA's dividend rate was 4.2%.
To find high-yielding stocks, the fund's portfolio counselors and analysts
often seek out companies in out-of-favor industries selling below their
long-term potential because of temporary problems. "But just because a company
has a high yield doesn't make it a good investment," says Janet. "Our job is to
sift through all these companies and figure out which ones we believe are going
to offer decent value over the long term. These days, it's a little like
panning for gold. How many pans of gravel and dirt do you have to go through
before you find one little piece of gold?"
[Begin Sidebar]
[Photo: Lecerf Family]
A FUND FOR CAUTIOUS EQUITY INVESTORS: THE LECERF FAMILY OF FARMINGTON HILLS,
MICHIGAN
Olivier and Diane Lecerf both have graduate business degrees from the
University of Michigan, but they prefer to entrust their assets to investment
professionals. They are cautious about the stock market, so they use IFA as an
anchor for a diversified collection of American Funds. The Lecerfs started
investing in IFA eight years ago to create a college fund for their two
children, Danielle, 9, and Marc, 7. "We consider the monthly investment for our
children's college fund the same as a mortgage payment," says Diane. Olivier is
director of engineering for an automobile seat company and Diane is a business
consultant. For fun, the family sails on the Great Lakes and goes bicycling.
[End Sidebar]
[Begin Sidebar]
[Photo: Mr. Black and college freshmen]
USING IFA TO PROVIDE SCHOLARSHIPS FOR COLLEGE FRESHMEN IN PASO ROBLES,
CALIFORNIA
Cullen S. Black, a retired educator, started a college scholarship fund in
honor of his late wife, Kathleen, who taught in the Paso Robles school system.
This fall eight new college students who graduated from Paso Robles High are
using scholarship money to help pay for their freshman year. Cullen spent 15
years saving money to start the fund. "I remember how hard it was to scrape up
money to go to college when I was young" says Cullen, who recalls having to
sleep on his sister's couch to save on rent. Cullen worked with a local
financial adviser to establish the fund, and they chose to invest in IFA
because it has produced above-average dividends that can be used to fund
scholarships. The scholarships are awarded on the basis of financial need,
citizenship, volunteerism and academic performance. Cullen poses with four 1998
scholarship recipients attending colleges in California and Colorado.
[End Sidebar]
That's where the in-depth research practiced by Capital Research and Management
Company, IFA's investment adviser, comes into play. "Often these companies have
high yields because their share prices have fallen in response to bad
short-term news or total confusion about the company or its industry," says
Janet. "It doesn't feel good to invest under these circumstances. You have to
be convinced from your research that the company will recover. You have to be
able to look farther out to see where the company will be in three or five
years."
BUYING COMPANIES THAT ARE OUT OF FAVOR
Pharmaceutical companies provide an example of IFA's strategy of buying
out-of-favor companies at above-average yields, says Stephen Bepler, an IFA
portfolio counselor based in New York. Beginning in 1991 and continuing through
1993, many pharmaceutical stocks suffered sharp price declines and reached
record high yields because of concerns about the financial impact of health
care reform. Based on our analysts' conclusion that investors had overreacted,
IFA began building a large position in pharmaceutical stocks in 1993 when the
stocks' relative yields sharply increased. (See chart on page 9.) Many stocks
recovered within a year. As prices continued to rise and yields declined, IFA
began selling shares in 1996 and continued selling in 1997 and 1998 when they
no longer met the fund's income requirements. "Pharmaceutical stocks did very,
very well for IFA," Steve says.
All through its history, IFA has followed a strategy of buying out-of-favor
companies with above-average relative yields. In the 1970s, the fund invested
in cyclical companies whose fortunes were closely tied to the economy; in the
1980s, telephone companies provided a good investment opportunity, and in the
early 1990s it was bank stocks. Over the past year, the fund has concentrated
on building positions in energy companies, a variety of basic industries,
utilities and automakers. Some of these investments have helped near-term
results and some have hurt, but they all meet the fund's longer term
objectives.
INVESTING FOR INCOME OUTSIDE THE U.S.
Since there have been fewer and fewer opportunities to buy high-yield stocks in
the United States, IFA has increased its efforts to find opportunities outside
the country on a limited basis. (The fund can invest up to 15% of its assets in
non-U.S. equities and is currently at around 10%.) Dina Perry, an IFA portfolio
counselor based in Washington, D.C., has invested in Australian banks and
retailers that she believes are "solid companies with above-average yields." A
number of significant overseas investments are in companies that are based in
the United Kingdom but do business globally, such as British Telecom and Glaxo
Wellcome, a British pharmaceutical firm. "Recently, we've seen better
opportunities overseas," says Dina.
CONVERTIBLE SECURITIES PROVIDE INCOME WITH LESS VOLATILITY
Convertible bonds and convertible preferred stock are hybrids - part bond and
part stock. As bonds, they provide a regular fixed-income stream, usually at a
yield lower than conventional bonds of the same company but higher than
dividends on the company's common stock. Because they can be converted into
stocks, they offer potential for appreciation and a way to cash in on the
issuing company's business success.
These securities are convertible into common stock at a predetermined price.
According to Hilda Applbaum, an IFA investment analyst who specializes in
convertible securities, the conversion price at issuance can be as low as 10%
or as high as 70% over the common stock's price. About 7% of the fund's assets
is invested in convertible securities.
[Begin Sidebar]
WHEN YIELDS ROSE, IFA BOUGHT DRUG STOCKS
IFA added pharmaceutical stocks when their prices declined and their dividend
yields rose. It began to sell once the market recognized their value and
relative yields declined.
[begin line graph]
Relative Price and Dividend Yield*
<TABLE>
<CAPTION>
<S> <C> <C>
Stock Price Relative Dividend Yield
to the S&P 500 Relative to
the S&P 500
7/91 100.0 100.0
7/92 100.5 125.4
7/93 64.6 196.7
7/94 64.3 193.9
7/95 85.4 154.3
7/96 98.3 143.6
7/97 109.8 143.8
7/98 132.8 135.1
</TABLE>
* Source: FactSet Research Systems, Inc.
[end chart]
Percent of IFA's Assets in Drug Stocks
[begin bar chart]
<TABLE>
<CAPTION>
<S> <C>
Years ended Percent of
7/31 Assets
1991 0.00%
1992 0.37%
1993 4.04%
1994 5.91%
1995 6.73%
1996 5.14%
1997 2.95%
1998 2.45%
</TABLE>
[end chart]
THE FUND HAS NEVER EXPERIENCED A LOSING FISCAL YEAR UNDER CAPITAL RESEARCH'S
STEWARDSHIP.
"Convertible securities allow IFA to invest in companies that are well regarded
by Capital Research analysts but whose dividends are too low for the stock to
be eligible for the fund," Hilda says. An example is an unusual convertible
security issued by Houston Industries, a Texas utility. Instead of its own
stock, the Houston security is convertible into shares of Time Warner, a
leading media and entertainment company that is well-liked by Capital Research
analysts. Houston Industries sold some assets to Time Warner and in exchange
received shares of Time Warner stock. Houston Industries decided that the most
tax-efficient way to sell the Time Warner stock was through a convertible
security. "It provides a current yield of 7% and participation in Time Warner
stock," Hilda says.
IFA'S FIXED-INCOME INVESTMENTS SEEK TO OFFER YIELD AND STABILITY
IFA's holdings in investment-grade bonds, government-agency securities and
mortgage-backed bonds help provide income and stability. "We have generated
good income, which is especially important for IFA when it's difficult to find
stocks with high yields," says Abner Goldstine, an IFA portfolio counselor.
High-yield corporate bonds, which currently constitute about 12% of the fund's
portfolio, play a key role in delivering both yield and total return, says
David Barclay, an IFA portfolio counselor who specializes in these higher risk
bonds. High-yield bonds are issued with a rating lower than "investment grade,"
which well-known blue chip companies typically carry. Sometimes the companies
are relatively new and don't have the record of sales and earnings that ratings
agencies require to merit an investment-grade rating. Other companies paying a
high yield today once had investment-grade ratings but were downgraded when
they ran into earnings problems or because they piled up too much debt.
IFA's portfolio counselors and analysts delve deeply into a company before they
decide to buy a high-yield bond. They meet with a company's top managers and
talk to competitors, customers and suppliers. They study its cash flow and
expenditures and ask about future plans. They want to determine whether the
company can meet its interest payments and if its bonds have the potential to
be upgraded to investment grade, in which case they are likely to rise in
value.
THE IMPORTANCE OF A CAREFUL STRATEGY
By looking carefully at a wide variety of securities - dividend-paying stocks,
high-quality and high-yield bonds, and convertible securities - IFA's portfolio
counselors believe they have created a portfolio for conservative investors.
What has this careful strategy meant to IFA shareholders? We can't predict the
future, but we can examine the past. Over the 24-1/2 years that the fund has
been managed by Capital Research, IFA has produced an annual compound return of
14.1%, just a shade below the 14.8% of the S&P 500 Index. Meanwhile, IFA has
provided a downside cushion in volatile markets. In the five largest stock
market declines* in IFA's lifetime, the fund did better than the market every
time and produced positive returns in two of the five declines.
The fund has also produced an investment return more than triple that of the
bond market as measured by the unmanaged Lehman Brothers Aggregate Bond Index.
Finally, IFA has never experienced a losing fiscal year under Capital
Research's stewardship. That's what professional management at The Income Fund
of America is all about.
*Stock market declines are defined as exceeding 15% in downward price change.
[Begin Sidebar]
[Photo: Marjorie Treadway]
TAKING INCOME FROM AN IFA INVESTMENT IN CLEARWATER, FLORIDA
Marjorie Treadway, a Clearwater retiree, made her one investment in IFA in the
early 1970s - and she didn't add to or subtract from it until recently. Today
she uses her IFA investment as a monthly supplement to her retirement income.
Looking back, she wishes she had invested regularly all along. "I got off to an
early start," she recalls. "It's proved to be a good investment. I would have
done even better if I had added to it regularly." Marjorie has been a
Clearwater resident for 30 years. "I love the beautiful beaches, the
intercoastal waterway and Tampa Bay." She spent many of her working years as a
tour director for senior citizens on trips around the U.S. Today she plays
golf, gardens and volunteers to help serve lunches to shut-in seniors.
[End Sidebar]
THE INCOME FUND OF AMERICA AT A GLANCE
RESULTS AT A GLANCE (with dividends reinvested or interest compounded)
<TABLE>
<CAPTION>
Total Returns for Periods Ended
July 31, 1998
12 Months 10 Years Lifetime/1/
<S> <C> <C> <C>
The Income Fund of America +11.3% +262.1% +2,506.1%
Standard & Poor's 500 Stock Composite Index +19.3 +443.4 +2,899.7
Salomon Smith Barney Long-Term High-Yield Bond Index +12.7 +223.7 -
Lehman Brothers Aggregate Bond Index/2/ +7.9 +140.0 +799.8
Consumer Price Index (inflation)/3/ +1.7 +37.7 +255.6
Average Savings Institution4 +4.2 +61.6 +380.9
</TABLE>
/1/Since December 1, 1973, when Capital Research and Management Company became
IFA's investment adviser.
/2/From December 1, 1973, through December 31, 1975, the Lehman Brothers
Government/Corporate Bond Index was used because the Lehman Brothers Aggregate
Bond Index did not yet exist.
/3/Computed from data supplied by the U.S. Department of Labor, Bureau of Labor
Statistics.
/4/Based on figures supplied by the U.S. League of Savings Institutions and the
Federal Reserve Board that reflect all kinds of savings deposits, including
longer term certificates.
GROWTH OF ONE SHARE through July 31, 1998
<TABLE>
<CAPTION>
With Capital Gains Reinvested
and Income Dividends:
Taken Reinvested in Value of
Year Ended July 31 Net Asset Value in Cash Additional Shares Investment**
<S> <C> <C> <C> <C>
1974* $11.23 $.44 $.44 $11.65
1975 12.99 .94 1.01 14.59
1976 15.57 1.10 1.28 18.89
1977 16.27 1.00 1.25 21.00
1978 8.06*** .78 1.43 22.31
1979 8.13 .60 1.71 24.25
1980 8.00 .61 1.89 25.86
1981 8.21 .67 2.24 28.84
1982 7.85 .77 2.81 30.36
1983 10.32 .82 3.27 43.21
1984 9.77 .84 3.71 45.81
1985 11.68 .87 4.32 61.13
1986 12.11 .88 5.01 73.27
1987 12.54 .88 5.68 85.47
1988 11.50 .80 5.74 86.95
1989 13.20 .88 6.85 107.33
1990 12.11 .80 6.76 107.91
1991 12.54 .88 8.09 121.09
1992 13.94 .85 8.43 144.39
1993 14.47 .84 8.96 161.56
1994 13.59 .83 9.57 164.66
1995 14.92 .83 10.31 192.77
1996 15.89 .83 11.00 218.73
1997 18.59 .90 12.91 282.74
1998 18.25 .82 13.50 314.72
Total $20.46 $138.17
</TABLE>
*For the period December 1, 1973, when Capital Research and Management Company
became IFA's investment adviser, through July 31, 1974.
**Assumes all dividends and capital gains reinvested.
***Stock split in February 1978.
<TABLE>
<S> <C> <C> <C>
ASSET MIX COMPARISON at July 31 fiscal year-end
FISCAL 1998
[begin pie chart]
INVESTMENT PORTFOLIO PERCENT OF
NET ASSETS
U.S. Equity Securities/+/ 48.9%
Non-U.S. Equity Securities 10.6
Government Bonds 7.4
Other Fixed-Income Securities 19.8
Cash & Equivalents 13.3
/+/Also includes 0.2% in Canadian equities that are part of the S&P 500.
[end pie chart]
FIVE LARGEST INDUSTRIES IN EQUITY HOLDINGS
Energy Sources 8.7%
Utilities: Electric & Gas 8.1
Banking 8.0
Telecommunications 6.3
Insurance 3.9
TEN LARGEST EQUITY HOLDINGS
First Union 2.5%
Atlantic Richfield 2.1
Chrysler 1.9
U S WEST 1.6
J.C. Penney 1.6
Texaco 1.5
AT&T 1.4
Ford Motor 1.3
Phillips Petroleum 1.2
Amoco 1.0
FISCAL 1997
[begin pie chart]
INVESTMENT PORTFOLIO
U.S. Equity Securities /++/ 52.7%
Non-U.S. Equity Securities 9.4
Government Bonds 9.0
Other Fixed-Income Securities 17.4
Cash & Equivalents 11.5
/++/Also includes 0.3% in Canadian equities that are part of the S&P 500.
[end pie chart]
FIVE LARGEST INDUSTRIES IN EQUITY HOLDINGS
Energy Sources 9.9%
Banking 7.7
Utilities: Electric & Gas 7.2
Telecommunications 5.2
Insurance 4.6
TEN LARGEST EQUITY HOLDINGS
Atlantic Richfield 2.4%
J.C. Penney 1.6
Chrysler 1.6
Texaco 1.5
USX-Marathon 1.4
U S WEST Communications Group 1.4
CoreStates Financial 1.3
Amoco 1.2
AT&T 1.1
Phillips Petroleum 1.0
The Income Fund of America Investment Portfolio July 31, 1998
Shares or Market Percent
Principal Value of Net
Equity Securities Amount (000) Assets
Energy Sources - 8.73%
Atlantic Richfield Co. 6,700,000 453,925 2.05
Texaco Inc. 5,325,000 323,827 1.46
Phillips Petroleum Co. 5,828,500 257,547 1.16
Amoco Corp. 5,450,000 227,538 1.03
USX-Marathon Group 4,100,000 139,912 .63
Sun Co., Inc. 3,232,000 120,998 .55
Occidental Petroleum Corp. 4,200,000 93,450 .42
Exxon Corp. 1,000,000 70,125 .32
Mobil Corp. 900,000 62,775 .28
Unocal Capital Trust $3.125 convertible preferred 1,040,000 54,080 .25
Ultramar Diamond Shamrock Corp. 1,750,000 45,828 .21
Ashland Inc. 570,000 29,569 .13
Chevron Corp. 320,000 26,440 .12
Loews Corp. 3.125% convertible debentures 2007 $15,000,000 12,984 .06
CalEnergy Capital Trust II 6.25% convertible preferred 2012 270,000 12,352 .06
1,931,350 8.73
Utilities: Electric & Gas - 8.13%
MarketSpan Corp. 5,910,000 162,894 .74
Florida Progress Corp. 3,685,000 143,254 .65
DTE Energy Co. 3,350,000 134,419 .61
Wisconsin Energy Corp. 4,310,000 122,566 .55
Consolidated Edison, Inc. 2,700,000 114,244 .52
Ameren Corp. 2,407,500 91,034 .41
Scottish Power PLC 7,200,000 69,764 .31
PECO Energy Co. 2,300,000 68,856 .31
SCANA Corp. 2,315,000 66,701 .30
MCN Energy Group Inc. 2,550,000 63,272 .29
BEC Energy (formerly Boston Edison Co.) 1,600,000 61,200 .28
Carolina Power & Light Co. 1,500,000 61,031 .28
Sempra Energy 2,366,938 59,617 .27
Peoples Energy Corp. 1,585,000 55,475 .25
Entergy Corp. 2,000,000 54,750 .25
Southern Co. 2,000,000 51,000 .23
National Power PLC 4,580,000 38,732 .17
Equitable Resources, Inc. 1,500,000 36,938 .17
Southern Electric PLC 3,692,307 33,576 .15
GPU, Inc. 840,400 30,044 .13
Duke Energy Corp. 500,000 28,563 .13
Consolidated Natural Gas Co. 530,000 27,394 .12
New Jersey Resources Corp. 750,000 25,688 .12
DQE, Inc. 730,000 25,459 .11
OGE Energy Corp. 950,000 24,759 .11
TECO Energy, Inc. 934,300 23,708 .11
AGL Resources Inc. 1,240,000 23,328 .10
Puget Sound Energy, Inc. 900,000 22,781 .10
MDU Resources Group, Inc. 600,000 13,613 .06
El Paso Natural Gas Co. 380,000 12,920 .06
South Jersey Industries, Inc. 500,000 12,906 .06
Citizens Utilities Trust 5.00% EPPICS convertible preferred 2036 250,000 10,984 .05
Western Resources, Inc. 275,000 10,725 .05
DPL Inc. 600,000 10,238 .05
WICOR, Inc. 266,400 5,711 .03
1,798,144 8.13
Banking - 8.01%
First Union Corp. 9,145,100 550,992 2.49
Bankers Trust New York Corp. 1,755,200 196,692 .89
SB Treasury Company LLC, Series A, 9.40% noncumulative
preferred securities, perpetual (1) 134,000,000 134,399 .61
National Bank of Canada 5,700,000 102,183 .46
Commonwealth Bank of Australia 7,949,978 99,248 .45
Westpac Banking Corp. 14,886,411 94,143 .43
J.P. Morgan & Co. Inc. 650,000 81,900 .37
PNC Bank Corp. 1,300,000 70,119 .32
First Hawaiian Bank (2) 1,900,000 62,937 .29
KeyCorp 1,800,000 61,200 .28
Banc One Corp. 1,140,700 58,960 .27
Bank of Nova Scotia 2,400,000 53,900 .24
Tokai Preferred Capital Co. LLC, Series A, 9.98% noncumulative preferred (1) 50,500,000 46,965 .21
First Security Corp. 1,590,000 34,930 .16
Keystone Financial, Inc. 1,000,000 33,438 .15
Bank of New York Co., Inc. 500,000 32,000 .14
Fuji JGB Investment LLC, Series A, 9.87% noncumulative preferred
securities, perpetual (1) 19,000,000 16,530 .07
NB Capital Corp. 8.35% exchangeable depositary shares 520,000 13,554 .06
IBJ Preferred Capital Co. LLC, Series A, 8.79% noncumulative
preferred securities, perpetual (1) 13,000,000 12,060 .05
California Federal Bank, FSB 11.50% preferred 100,000 11,375 .05
Banco Nacional de Mexico, SA 11.00% exchangeable notes 2003 (1) $4,175,000 4,259 .02
1,771,784 8.01
Telecommunications - 6.29%
U S WEST, Inc. 6,800,000 362,950 1.64
AT&T Corp. 4,950,000 300,094 1.36
Ameritech Corp. 3,650,800 179,574 .81
British Telecommunications PLC 11,280,000 163,348 .74
Hong Kong Telecommunications Ltd. 73,954,916 139,361 .63
Bell Atlantic Corp. 2,200,000 99,825 .45
Telecom Italia SpA nonconvertible savings shares 5,000,000 29,484 .14
Telecom Corp. of New Zealand Ltd. 9,647,600 23,938 .11
NTL Inc. 7.00% convertible debentures 2008 (1) $15,000,000 22,425 .10
SBC Communications Inc. 7.75% DECS exchangeable notes 2001 463,000 21,877 .10
France Telecom, SA 260,000 17,710 .08
Koninklijke PTT Nederland NV 330,000 14,472 .07
Deutsche Telekom AG 201,500 5,866 .03
NEXTEL Communications, Inc., Class A (3) 111,547 2,987
NEXTEL Communications, Inc. warrants, expire 1999 (3,4) 51,912 124 .01
Comunicacion Celular SA, Class B, warrants, expire 2003 (1,3) 31,000 2,108 .01
COLT Telecom Group PLC warrants, expire 2006 (1,3) 5,000 1,600 .01
Orion Network Systems, Inc. warrants, expire 2007 (3) 61,000 1,075 .00
Cellular Communications International, Inc. warrants, expire 2003 (3) 24,500 857 .00
Iridium World Communications Ltd. warrants, expire 2005 (1,3) 4,000 740 .00
CellNet Data Systems, Inc. warrants, expire 2007 (1,3) 15,450 464 .00
Allegiance Telecom, Inc. warrants, expire 2008 (1,3) 20,000 400 .00
ICG Holdings, Inc. warrants, expire 2005 (1,3) 19,800 376 .00
McCaw International, Ltd. warrants, expire 2007 (1,3) 31,500 118 .00
Conecel Holdings Ltd., Class B, warrants, expire 2000 (1,3,4) 39,825 60 .00
1,391,833 6.29
Insurance - 3.89%
Lincoln National Corp. 1,970,000 188,628 .85
American General Corp. 2,664,200 181,998 .82
Italy (Republic of) 5.00% PENs 2001 (exchangeable into INA SpA) 84,000,000 156,240 .71
St. Paul Companies, Inc. 2,560,000 92,640
St. Paul Capital LLC 6.00% MIPS convertible preferred 190,000 12,160 .48
Ohio Casualty Corp. (2) 2,280,000 97,185 .44
Aetna Inc., Class C, 6.25% convertible preferred 886,000 60,912 .28
MediaOne Group, Inc. (formerly U S WEST, Inc.) 7.625%
DECS exchangeable notes 1998 433,300 23,073 .10
PMI Group, Inc. 303,000 20,528 .09
Mutual Risk Management Ltd. 0% convertible debentures 2015 (1) $22,000,000 17,930 .08
CIGNA Corp. 120,200 7,941 .04
859,235 3.89
Automobiles - 3.44%
Chrysler Corp. 7,045,000 416,976 1.89
Ford Motor Co. 5,018,300 285,729 1.29
General Motors Corp. 800,000 57,850 .26
760,555 3.44
Health & Personal Care - 2.45%
Glaxo Wellcome PLC 6,270,000 193,263 .87
Pharmacia & Upjohn, Inc. 2,900,000 137,388 .62
Bristol-Myers Squibb Co. 815,000 92,859 .42
American Home Products Corp. 800,000 41,200 .19
Eli Lilly and Co. 600,000 40,350 .18
Dura Pharmaceuticals, Inc. 3.50% convertible subordinated notes 2002 $25,000,000 21,500 .10
Sepracor Inc. 6.25% convertible subordinated debentures 2005 (1) $7,350,000 10,106 .05
Glycomed Inc. 7.50% convertible debentures 2003 $5,000,000 4,550 .02
541,216 2.45
Merchandising - 2.22%
J.C. Penney Co., Inc. 6,000,000 352,125 1.59
Coles Myer Ltd. 17,400,700 65,011 .29
Thorn PLC 8,873,042 35,346 .16
PETsMart, Inc. 6.75% convertible subordinated notes 2004 (1) $17,500,000 21,110 .10
Staples, Inc. 4.50% convertible debentures 2000 (1) $7,500,000 17,025 .08
490,617 2.22
Beverages & Tobacco - 1.93%
Philip Morris Companies Inc. 4,200,000 184,012 .83
RJR Nabisco Holdings Corp. 3,300,000 80,644 .37
Southcorp Ltd. (formerly Southcorp Holdings Ltd.) 24,318,000 65,445 .30
UST Inc. 1,400,000 37,800 .17
Imperial Tobacco Ltd. 4,000,000 33,795 .15
Gallaher Group PLC 3,800,000 24,257 .11
425,953 1.93
Forest Products & Paper - 1.72%
Weyerhaeuser Co. 3,200,000 134,400 .61
Union Camp Corp. 1,810,000 76,812 .35
UPM-Kymmene Corp. 2,000,000 51,043 .23
Potlatch Corp. 1,200,000 45,825 .21
APP Finance (VI) Mauritius Ltd. 0% convertible preferred 2012 $144,000,000 27,360 .12
Georgia-Pacific Corp., Timber Group 1,200,000 26,925 .12
Stora Kopparbergs Bergslags AB, Class B 1,250,000 17,463 .08
379,828 1.72
Business & Public Services - 1.55%
United Utilities PLC 5,240,000 76,266 .34
Thames Water PLC 2,500,000 45,713 .21
Alexander & Baldwin, Inc. 1,375,000 33,988 .15
Browning-Ferris Industries, Inc. 942,500 33,164 .15
Budget Group, Inc. 6.25% TIDES convertible preferred 2005 (1) 600,000 32,700 .15
Hyder PLC 1,875,000 30,902 .14
Tenet Healthcare Corp. 6.00% exchangeable notes 2005 $25,000,000 21,563 .10
Moore Corp. Ltd. 1,900,000 20,425 .09
Omnicom Group Inc. 4.25% convertible debentures 2007 (1) $11,000,000 19,360 .09
Integrated Health Services, Inc. 280,000 8,680 .04
TNT Post Groep NV 330,000 7,894 .04
IKON Office Solutions, Inc. $5.04 ACES convertible preferred 1998 200,000 5,450 .03
Nationwide Health Properties Inc., Series A, 7.677% preferred cumulative
step-up premium rate 50,000 4,786 .02
Unisource Worldwide, Inc. 100,000 925 .00
341,816 1.55
Chemicals - 1.49%
Dow Chemical Co. 1,604,200 145,581 .66
Imperial Chemical Industries PLC (American Depositary Receipts) 2,050,000 107,497 .49
E.I. du Pont de Nemours and Co. 500,000 31,000 .14
Witco Corp. 1,002,000 24,173 .11
DSM NV 210,000 21,454 .09
329,705 1.49
Real Estate - 1.36%
Boston Properties, Inc. 2,634,600 85,131 .39
Equity Residential Properties Trust 1,190,000 49,980
Equity Residential Properties Trust, Series G, 7.25% convertible preferred 545,000 12,739 .28
Prologis Trust, Series D, 7.92% preferred 1,080,000 26,325 .12
CarrAmerica Realty Corp. 585,000 15,759
CarrAmerica Realty Corp., Series B, 8.57% cumulative redeemable preferred 280,000 6,982 .10
Weingarten Realty Investors 485,000 18,278 .08
Glenborough Realty Trust Inc., Series A, 7.75% convertible preferred 2049 800,000 17,600 .08
Duke Realty Investments, Inc., Series B, 7.99% preferred cumulative step-up premi 300,000 15,150 .07
Simon DeBartolo Group, Inc., Series C, 7.89% preferred cumulative step-up premium 300,000 14,596 .07
AMB Property Corp. 600,000 14,325 .06
Archstone Communities Trust (formerly Security Capital Pacific Trust) 564,000 11,844 .05
IAC Capital Trust, Series A, 8.25% TOPRS preferred 300,000 7,406 .03
New Plan Realty Trust, Series A, 7.80% preferred cumulative step-up premium rate 112,500 5,611 .03
301,726 1.36
Broadcasting & Publishing - 1.11%
Houston Industries Inc. 7.00% ACES convertible preferred 2000 1,780,000 139,285 .63
CSC Holdings, Inc. (formerly Cablevision Systems Corp.), Series I,
$2.125 cumulative convertible exchangeable preferred 760,000 49,590 .23
Tele-Communications International 4.50% convertible debentures 2006 $34,000,000 34,000 .15
MediaOne Group Inc. (formerly U S WEST Communications, Inc.),
Series D, 4.50% convertible preferred 225,000 22,908 .10
245,783 1.11
Electronic Components & Instruments - 0.80%
Micron Technology, Inc. 7.00% convertible subordinated notes 2004 $50,000,000 49,125 .22
EMC Corp. 3.25% convertible subordinated notes 2002 (1) $18,000,000 40,590 .19
Advanced Micro Devices, Inc. 6.00% convertible subordinated notes 2005 $40,000,000 31,500 .14
Western Digital Corp. 0% convertible subordinated debentures 2018 (1) $112,500,000 27,351 .12
National Semiconductor Corp. 6.50% convertible debentures 2002 (1) $15,000,000 13,575 .06
Thermo Instrument Systems Inc. 4.00% convertible subordinated debentures 2005 $10,000,000 9,500 .05
Maxtor Corp. 5.75% convertible debentures 2012 $7,500,000 4,875 .02
176,516 .80
Industrial Components - 0.75%
Federal-Mogul Corp. 7.00% convertible preferred 2027 (1) 1,000,000 67,875 .31
Tomkins PLC 6,750,000 34,824 .16
Tower Auto Capital Trust 6.75% convertible preferred 2018 (1) 450,000 23,006 .10
TXI Capital Trust I 5.50% convertible preferred 2028 450,000 19,125 .09
BTI Capital Trust 6.50% convertible preferred 2027 (1) 500,000 20,000 .09
164,830 .75
Financial Services - 0.55%
Household International, Inc. 2,453,280 122,051 .55
Food & Household Products - 0.53%
General Mills, Inc. 1,885,000 116,752 .53
Miscellaneous Materials & Commodities - 0.49%
English China Clays PLC (2) 18,224,000 55,016 .25
Crown Cork & Seal Co., Inc. 4.50% convertible preferred 2000 1,005,000 39,069 .17
Cooper Industries, Inc. 6.00% convertible preferred DECS 1999 1,000,000 15,000 .07
109,085 .49
Leisure & Tourism - 0.35%
Host Marriott Financial Trust 6.75% QUIPS convertible preferred 2026 (1) 600,000 30,150 .14
Premier Parks Inc. 7.50% PIES convertible preferred 2001 450,000 28,463 .13
AMF Bowling, Inc. 0% convertible debentures 2018 (1) $90,000,000 14,175 .06
Royal Caribbean Cruises Ltd., Series A, 7.25% convertible preferred 45,000 5,276 .02
78,064 .35
Metals: Nonferrous - 0.30%
Freeport-McMoRan Copper & Gold Inc., Series A, $1.75 convertible preferred 1,400,000 26,162
Freeport-McMoRan Copper & Gold Inc., Class B 300,000 4,444 .14
Cyprus Amax Minerals Co., Series A, $4.00 convertible preferred 465,000 20,692 .09
Inco Ltd. 5.75% convertible debentures 2004 $17,250,000 15,245 .07
66,543 .30
Machinery & Engineering - 0.25%
Ingersoll-Rand Co. 6.75% PRIDES convertible preferred 2049 1,400,000 34,650 .15
Thermo Electron Corp. 4.25% convertible subordinated debentures 2003 (1) $23,000,000 21,620 .10
56,270 .25
Transportation: Rail & Road - 0.20%
Union Pacific Capital Trust 6.25% TIDES convertible preferred 976,200 43,929 .20
Appliances & Household Durables- 0.18%
Newell Financial Trust 5.25% QUIPS convertible preferred 2027 668,000 40,080 .18
Protection One Alarm Monitoring, Inc. warrants, expire 2005 (1,3) 57,600 662 .00
40,742 .18
Recreation & Other Consumer Products - 0.16%
Jostens, Inc. 1,580,000 35,649 .16
Transportation: Airlines - 0.15%
Qantas Airways Ltd. 22,462,027 33,978 .15
Other Industries - 0.30%
Swire Pacific Capital Ltd. 8.84% cumulative guaranteed perpetual capital securiti 600,000 11,076
Swire Pacific Offshore Financing Ltd. 9.33% cumulative
guaranteed perpetual capital securities (1) 400,000 7,792 .08
Courtaulds Textiles PLC 4,500,000 17,412 .08
Bethlehem Steel Corp. $3.50 convertible preferred 250,000 10,875 .05
Wang Laboratories, Inc., Series B, 6.50% convertible preferred depositary shares 170,000 8,500 .04
Diamond Offshore Drilling, Inc. 3.75% convertible debentures 2007 $5,481,000 5,714 .03
Daewoo Corp. 0.50% Eurodollar convertible debentures 2007 (1) $5,000,000 3,650 .02
65,019 .30
MISCELLANEOUS: Other equity securities in initial period of acquisition 487,926 2.21
TOTAL EQUITY SECURITIES (cost: $10,060,003,000) 13,166,899 59.54
Shares or Market Percent
Principal Value of Net
Bonds & Notes Amount (000) Assets
Broadcasting, Advertising & Publishing - 3.04%
Time Warner Inc., Pass-Through Asset Trust 1997-2, 4.90% 1999 (1,5) 10,000 9,864
Time Warner Inc., Pass-Through Asset Trust 1997-1, 6.10% 2001 (1,5) 12,000 11,938
Time Warner Inc. 7.75% 2005 9,500 10,180
Time Warner Inc. 8.18% 2007 20,000 22,194
Time Warner Inc. 9.125% 2013 5,000 6,034
Time Warner Inc. 7.25% 2017 39,500 40,784 .46
Chancellor Radio Broadcasting Co. 9.375% 2004 28,000 29,400
Chancellor Radio Broadcasting Co. 8.125% 2007 39,500 40,092
Chancellor Radio Broadcasting Co., Series B, 8.75% 2007 4,500 4,680 .34
Comcast Cable Communications, Inc. 10.25% 2001 12,600 13,816
Comcast Cable Communications, Inc. 8.125% 2004 8,000 8,653
Comcast Cable Communications, Inc. 8.375% 2007 10,000 11,147
Comcast Cable Communications, Inc. 8.875% 2017 15,000 17,939 .23
CSC Holdings, Inc. (formerly Cablevision
Systems Corp.) 7.25% 2008 8,000 7,942
CSC Holdings, Inc. 8.125% 2009 18,250 19,436
CSC Holdings, Inc. 9.875% 2013 11,500 12,707 .18
Fox/Liberty Networks, LLC, FLN Finance, Inc. 0%/9.75% 2007 (6) 27,250 19,484
Fox/Liberty Networks, LLC, FLN Finance, Inc. 8.875% 2007 16,850 17,313 .17
NTL Inc. 0%/12.75% 2005 (6) 22,000 19,580
NTL Inc., Series B, 10.00% 2007 10,000 10,825
NTL Inc. 0%/9.75% 2008 (1,6) 5,000 3,350 .15
Falcon Holding Group, LP 0%/9.285% 2010 (1,6) 24,000 15,810
Falcon Holding Group, LP 8.375% 2010 (1) 15,000 15,450 .14
American Radio Systems Corp. 9.75% 2005 7,500 8,156
American Radio Systems Corp. 9.00% 2006 17,550 18,866 .12
Hearst-Argyle Television, Inc. 7.00% 2018 25,750 25,780 .12
Century Communications Corp. 8.75% 2007 13,200 14,124
Century Communications Corp. 0% 2008 23,250 10,986 .11
TeleWest PLC 9.625% 2006 5,000 5,375
TeleWest PLC 0%/11.00% 2007 (6) 20,500 17,271 .10
American Media Operations, Inc. 11.625% 2004 18,250 19,801 .09
Radio One, Inc. 7.00%/12.00% 2004 (6) 16,500 16,665 .08
Comcast UK Cable Partners Ltd. 0%/11.20% 2007 (6) 18,500 15,725 .07
News America Holdings Inc. 6.625% 2008 4,500 4,477
News America Holdings Inc. 10.125% 2012 5,000 5,793
News America Holdings Inc. 7.43% 2026 5,000 5,290 .07
TVN Entertainment 4.00% 2008 14,750 14,824 .07
Lenfest Communications, Inc. 7.625% 2008 (1) 2,000 2,060
Lenfest Communications, Inc. 8.25% 2008 (1) 10,500 11,078 .06
STC Broadcasting, Inc. 11.00% 2007 11,500 12,708 .06
Newsquest Capital PLC 11.00% 2006 8,700 9,831
Newsquest Capital PLC, Series B, 11.00% 2006 1,200 1,356 .05
TKR Cable I, Inc. 10.50% 2007 10,000 10,974 .05
Adelphia Communications Corp. 8.125% 2003 6,500 6,484
Adelphia Communications Corp. 10.50% 2004 3,000 3,315 .04
Multicanal Participacoes SA, Series B, 12.625% 2004 8,750 8,838 .04
Ziff-Davis Inc. 8.50% 2008 8,250 8,415 .04
V2 Music (Holdings) PLC, Dollar Units, 0%/14.00% 2008 (1,6) 14,750 7,818 .04
Sun Media Corp. 9.50% 2007 7,071 7,428 .03
RBS Participacoes SA 11.00% 2007 (1) 6,750 6,041 .03
Young Broadcasting Inc. 11.75% 2004 1,000 1,105
Young Broadcasting Inc. 10.125% 2005 3,750 4,059
Young Broadcasting Inc., Series B, 8.75% 2007 750 788 .03
Antenna TV SA 9.00% 2007 5,250 5,289 .02
Grupo Televisa, SA 11.875% 2006 750 833
Grupo Televisa, SA 0%/13.25% 2008 (6) 5,000 4,075 .02
Fox Family Worldwide, Inc. 0%/10.25% 2007 (6) 2,000 1,320
Fox Family Worldwide, Inc. 9.25% 2007 1,750 1,728 .01
Gray Communication Systems, Inc. 10.625% 2006 2,500 2,738 .01
Continental Cablevision, Inc. 8.50% 2001 2,000 2,120 .01
672,152 3.04
Telecommunications - 2.68%
NEXTEL Communications, Inc. 9.95% 2008 190,000 124,925 .56
Orion Network Systems, Inc. 11.25% 2007 61,000 66,795 .30
Omnipoint Corp. 8.875% 2006 14,950 14,950
Omnipoint Corp. 11.625% 2006 34,800 37,236 .24
WorldCom, Inc. 9.375% 2004 38,154 39,994
WorldCom, Inc. 8.875% 2006 7,747 8,381 .22
Tele-Communications, Inc. 10.125% 2001 5,000 5,534
TCI Communications, Inc. 8.00% 2005 15,000 16,308
TCI Communications, Inc. 8.75% 2015 6,500 7,728
TCI Communications, Inc. 8.75% 2023 8,000 8,762
Tele-Communications, Inc. 9.25% 2023 4,500 5,117 .20
Cable & Wireless Communications PLC, 6.625% 2005 26,500 26,628
Cable & Wireless Communications PLC, 6.75% 2008 10,000 10,028 .16
Qwest Communications International Inc. 0%/9.47% 2007 (6) 15,000 11,588
Qwest Communications International Inc. 10.875% 2007 12,000 13,920
QWest Communications International Inc. 0%/8.29% 2008 (6) 12,500 9,312 .16
SkyTel Communications Inc. (formerly Mobile Telecommunication
Technologies Corp.) 13.50% 2002 19,875 23,055 .10
Spectrasite Holdings 0%/12.00% 2008 (1,6) 36,000 21,600 .10
Time Warner Telecommunications 9.75% 2008 20,000 20,450 .09
Viatel, Inc., Units, 11.25% 2008 (1) 14,500 15,877 .07
Level 3 Communications, Inc. 9.125% 2008 (1) 13,000 12,805 .06
US Xchange LLC 15.00% 2008 (1) 10,500 10,999 .05
IMPSAT Corp. 12.375% 2008 (1) 10,000 10,225 .05
Netia Holdings BV 0%/11.25% 2007 (6) 10,500 6,772
Netia Holdings BV 10.25% 2007 3,625 3,426 .05
Allegiance Telecom, Inc. 0%/11.75% 2008 (6) 20,000 10,150 .05
CellNet Data Systems, Inc. 0%/14.00% 2007 (6) 18,450 10,147 .04
ICO Global Communications, Units, 15.00% 2005 10,000 10,000 .04
Comtel Brasileira Ltda. 10.75% 2004 (1) 9,200 9,131 .04
COLT Telecom Group PLC 0%/12.00% 2006 (6) 7,500 6,113 .03
Teligent, Inc. 11.50% 2007 4,500 4,579 .02
Iridium LLC, Series A, 13.00% 2005 4,000 4,080 .02
PanAmSat Corp. 6.125% 2005 4,000 3,935 .02
Conecel Holdings Ltd., Series A, 14.00% 2000 2,950 2,861 .01
593,411 2.68
Wireless Communications - 1.50%
NEXTEL Communications, Inc. 0%/9.75% 2004 (6) 35,500 35,589
NEXTEL Communications, Inc. 0%/10.125% 2004 (6) 5,000 5,063
NEXTEL Communications, Inc. 0%/9.75% 2007 (6) 61,500 41,205
NEXTEL Communications, Inc. 0%/10.65% 2007 (6) 9,000 6,188
NEXTEL Communications, Inc. 0%/12.125% 2008 (1,6) 33,200 19,920 .49
Comcast Cellular Corp., Series B, 9.50% 2007 32,500 34,206 .15
McCaw International, Ltd. 0%/13.00% 2007 (6) 46,850 31,155 .14
Centennial Cellular Corp. 8.875% 2001 23,500 25,086
Centennial Cellular Corp. 10.125% 2005 3,000 3,615 .13
Comunicacion Celular SA 0%/13.125% 2003 (6) 31,000 23,870 .11
Clearnet Communications 0%/14.75% 2005 (6) 23,000 19,838 .09
CCPR Services, Inc. 10.00% 2007 18,000 17,460 .08
PageMart Wireless, Inc. 0%/11.25% 2008 (6) 21,500 13,545 .06
American Cellular Corp. 10.50% 2008 (1) 12,500 12,687 .06
NEXTLINK Communications, Inc. 9.625% 2007 4,000 4,120
NEXTLINK Communications, Inc. 9.00% 2008 (1) 6,250 6,281 .05
Sprint Spectrum LP, Sprint Spectrum Finance Corp. 11.00% 2006 6,000 6,930 .03
Sygnet Wireless, Inc. 11.50% 2006 5,000 5,800 .03
Price Communications Cellular Holdings, Inc. 11.25% 2008 5,000 5,012 .02
Pinnacle Holdings Inc. 0%/10.00% 2008 (1,6) 6,700 4,489 .02
Esat Telecom Group PLC 0%/12.50% 2007 (6) 5,000 3,675 .02
Vanguard Cellular Systems, Inc. 9.375% 2006 3,000 3,210 .01
PTC International Finance BV 0%/10.75% 2007 (6) 4,000 2,780 .01
Geotek Communications, Inc., Series B, 0%/15.00% 2005 (6,7) 7,220 758 .00
332,482 1.50
Business & Public Services - 1.46%
Integrated Health Services, Inc. 10.25% 2006 16,900 17,745
Integrated Health Services, Inc., Series A, 9.50% 2007 28,985 29,710
Integrated Health Services, Inc., Series A, 9.25% 2008 36,250 36,794 .38
Columbia/HCA Healthcare Corp. 6.87% 2003 10,575 10,327
Columbia/HCA Healthcare Corp. 7.15% 2004 6,000 5,916
Columbia/HCA Healthcare Corp. 6.91% 2005 10,750 10,295
Columbia/HCA Healthcare Corp. 8.85% 2007 16,770 17,891
Columbia/HCA Healthcare Corp. 8.70% 2010 9,500 10,105 .25
Paracelsus Healthcare Corp. 10.00% 2006 30,100 30,551 .14
Allied Waste North America, Inc. 10.25% 2006 21,000 23,205 .11
Laidlaw Environmental Services, Inc. 9.25% 2008 (1) 22,000 22,550 .10
Waste Management, Inc. 7.00% 2005 5,000 5,162
Waste Management, Inc. 7.00% 2006 15,000 15,468 .09
Tenet Healthcare Corp. 8.00% 2005 9,500 9,737
Tenet Healthcare Corp. 8.125% 2008 (1) 10,000 10,138 .09
Katz Media Corp., Series B, 10.50% 2007 15,050 16,856 .08
Mariner Health Group, Inc. 9.50% 2006 12,750 13,770 .06
Protection One Alarm Monitoring, Inc. 13.625% 2005 11,685 13,438 .06
Federal Express Corp., pass-through certificates, Series 1994-A310,
Class A1, 7.53% 2006 9,450 9,880 .04
Omega Healthcare Investors, Inc. 6.95% 2002 5,000 4,995 .02
Allegiance Corp. 7.00% 2026 4,000 4,064 .02
Unison HealthCare Corp. 13.00% 1999 (1,7) 2,000 2,000
Unison HealthCare Corp. 13.00% 2006 (1,7) 4,000 1,780 .02
Iron Mountain Inc. 8.75% 2009 1,000 1,030 .00
323,407 1.46
Energy Sources and Energy Equipment & Services - 1.08%
CalEnergy Co., Inc. 9.875% 2003 5,000 5,334
CalEnergy Co., Inc. 0%/10.25% 2004 (6) 36,300 38,621 .20
Oryx Energy Co. 9.50% 1999 10,000 10,354
Oryx Energy Co. 8.00% 2003 5,345 5,615
Oryx Energy Co. 8.375% 2004 12,750 13,708
Oryx Energy Co. 8.125% 2005 8,500 9,012 .17
Pioneer Natural Resources Co. (formerly Parker &
Parsley Petroleum Co.) 8.25% 2007 5,000 5,289
Pioneer Natural Resources Co. 7.20% 2028 26,500 24,198 .13
Clark Refining & Marketing, Inc. 8.875% 2007 29,250 28,665 .13
J. Ray McDermott, SA 9.375% 2006 18,500 20,073 .09
Forcenergy Inc 9.50% 2006 10,000 10,100
Forcenergy Inc 8.50% 2007 3,750 3,563 .06
Petro Stopping Centers, LP 10.50% 2007 11,500 12,305 .06
Benton Oil and Gas Co. 9.375% 2007 10,000 9,725 .04
Cross Timbers Oil Co. 8.75% 2009 8,000 8,000 .04
OXYMAR 7.50% 2016 (1) 8,000 7,972 .04
Lomak Petroleum, Inc. 8.75% 2007 7,000 6,913 .03
Kelley Oil & Gas Corp. 10.375% 2006 6,000 6,150 .03
Newfield Exploration Co., Series B, 7.45% 2007 6,000 6,077 .03
Ocean Energy, Inc. 8.875% 2007 3,500 3,675 .02
Petrozuata Finance, Inc., Series A, 7.63% 2009 3,000 3,005 .01
238,354 1.08
Banking - 1.14%
MBNA Corp., MBNA Capital A, Series A, 8.278% 2026 10,000 10,458
MBNA Corp., MBNA Capital B, Series B, 6.519% 2027 (8) 32,000 31,014 .19
BNP U.S. Funding LLC, Series A, 7.738% 2049 (1) 32,500 32,356 .15
Riggs Capital Trust II 8.625% 2026 (1) 1,500 1,630
Riggs Capital Trust II 8.875% 2027 (1) 23,000 25,325
Riggs Capital Trust II 8.875% 2027 2,000 2,202 .13
Capital One Capital I 7.15% 2006 10,000 10,122
Capital One Capital I 7.268% 2027 (1,8) 13,500 13,905 .11
Advanta Corp., Series D, 6.60% 2000 4,000 3,859
Advanta Corp., Series D, 6.65% 2000 5,000 4,830
Advanta Corp. 7.50% 2000 4,000 3,870
Advanta Corp. 6.91% 2002 5,000 4,545
Advanta Corp. 6.925% 2002 5,000 4,547 .10
Dime Bancorp, Inc. 10.50% 2005 4,000 4,240
Dime Capital Trust I, Dime Bancorp, Inc., Series A, 9.33% 2027 11,300 13,093 .08
Chase Capital II, Global Floating Rate Capital Securities, Series B, 6.219% 2027 15,000 14,414 .07
BT Capital Trust I 6.438% 2026 (8) 12,500 12,500 .05
Washington Mutual Capital I Subordinated Capital Income Securities 8.375% 2027 10,000 10,999 .04
Ahmanson Capital Trust I Capital Securities, Series A, 8.36% 2026 (1) 8,000 8,641 .04
HSBC Americas, Inc. 7.808% 2026 (1) 8,000 8,032 .04
First Nationwide Holdings Inc. 12.50% 2003 5,500 6,353 .03
Midland American Capital Corp. 12.75% 2003 6,000 6,107 .03
Komercni Finance BV 9.00%/10.75% 2008 (1,6) 6,000 5,700 .02
First Union Corp. 6.82%/7.57% 2026 (6) 5,000 5,353 .02
BCI US Funding 8.01% (1) 5,000 4,952 .02
Chevy Chase Bank, FSB 9.25% 2005 4,000 4,050 .02
253,097 1.14
Transportation - 0.96%
Jet Equipment Trust, Series 1994-A, Class B1, 10.91% 2006 (1) 6,535 7,732
Jet Equipment Trust, Series 1995-B, 10.91% 2014 4,750 6,118
Jet Equipment Trust, Series 1995-B, Class A, 7.63% 2015 (1) 3,737 3,988
Jet Equipment Trust, Series 1995-A, Class B, 8.64% 2015 (1) 14,075 15,789
Jet Equipment Trust, Series 1995-B, Class C, 9.71% 2015 (1) 5,500 6,754
Jet Equipment Trust, Series 1995-A, Class C, 10.69% 2015 (1) 5,000 6,459 .21
USAir, Inc., pass-through certificates, Series 1993-A1, 8.625% 1998 8,500 8,500
USAir, Inc. 9.625% 2001 8,204 8,594
USAir, Inc., enhanced equipment notes, Class C, 8.93% 2009 7,517 8,459
USAir, Inc., pass-through trust, Series 1993-A3, 10.375% 2013 (5) 17,000 19,117 .20
Continental Airlines, Inc. 9.50% 2001 4,500 4,792
Continental Airlines, Inc., pass-through certificates, Series 1996-A, 6.94% 2015 8,650 8,964
Continental Airlines, Inc., pass-through certificates, Series 1996-C, 9.50% 2015 12,494 14,399 .13
Atlas Air, Inc., Pass-Through Trusts, Series 1998-1, Class A, 7.38% 2018 (1,5) 33,400 33,914 .15
Airplanes Pass Through Trust, pass-through certificates, Series 1, Class C, 8.15% 14,892 15,666 .07
United Air Lines, Inc. 9.00% 2003 8,000 8,875
United Air Lines, Inc., pass-through certificates, Series 1996-A2, 7.87% 2019 (5) 5,000 5,294 .07
Teekay Shipping Corp. 8.32% 2008 10,820 11,145 .05
Northwest Airlines, Inc. 7.625% 2005 7,500 7,345 .03
Delta Air Lines, Inc., pass-through certificates, Series 1992-A2, 9.20% 2014 (5) 5,000 5,949 .03
MC-Cuernavaca Trust 9.25% 2001 (1,5) 5,313 5,114 .02
212,967 .96
Forest Products & Paper - 0.69%
Container Corp. of America 9.75% 2003 45,550 48,739
Container Corp. of America, Series A, 11.25% 2004 19,500 21,158 .32
Pindo Deli Finance Mauritius Ltd. 10.25% 2002 11,000 7,535
Pindo Deli Finance Mauritius Ltd. 10.75% 2007 25,025 17,079 .11
Scotia Pacific 7.11% 2015 (1) 16,000 15,757 .07
Copamex Industrias, SA de CV, Series B, 11.375% 2004 13,450 13,551 .06
Grupo Industrial Durango, SA de CV 12.00% 2001 6,000 6,255
Grupo Industrial Durango, SA de CV 12.625% 2003 3,500 3,710 .04
Advance Agro PCL 13.00% 2007 8,000 7,960 .04
Paperboard Industries International Inc. 8.375% 2007 5,000 5,062 .02
Norampac Inc. 9.50% 2008 (1) 3,250 3,364 .02
Indah Kiat Finance Mauritius Ltd. 11.875% 2002 700 483
Indah Kiat Finance Mauritius Ltd. 10.00% 2007 3,050 2,059 .01
152,712 .69
Financial Services - 0.67%
AT&T Capital Corp. 6.60% 2005 24,000 24,105 .11
Wilshire Financial Services Group Inc. 13.00% 2004 20,750 22,359 .10
Capital One Bank 7.25% 2003 10,000 10,156
Capital One Bank 7.125% 2008 10,000 9,910 .09
GS Escrow Corp. 7.125% 2005 (1) 20,000 19,905 .09
AMRESCO, Inc. 9.875% 2005 17,000 17,255 .08
MBNA Corp. 6.75% 2008 12,500 12,630 .06
Wharf Capital International, Ltd. 8.875% 2004 10,000 9,020 .04
Ford Capital BV 10.125% 2000 5,500 5,974 .03
DVI, Inc. 9.875% 2004 5,000 5,325 .03
General Electric Capital Corp. 8.875% 2009 4,000 4,884 .02
ContiFinancial Corp. 8.125% 2008 3,250 3,139 .01
Green Tree Financial Corp. 6.50% 2002 2,635 2,597 .01
147,259 .67
Real Estate - 0.59%
SocGen Real Estate Co. LLC, Series A, 7.64%/8.40% 2049 (6) 45,000 44,382 .20
Security Capital Pacific Trust 7.15% 2007 17,500 17,389
Security Capital Pacific Trust 7.65% 2010 1,000 1,055
Security Capital Pacific Trust 7.20% 2013 15,000 14,633
Security Capital Pacific Trust 7.90% 2016 1,000 1,032 .15
Prologis Trust (formerly Security Capital Industrial Trust) 7.05% 2006 12,000 12,038
Prologis Trust 7.95% 2008 10,000 10,523 .10
Irvine Co., Series A, 7.46% 2006 (1,4) 10,000 10,202 .05
Beverly Finance Corp. 8.36% 2004 5,000 5,429 .03
EOP Operating LP 6.625% 2005 5,250 5,211 .02
Shopping Center Associates 6.75% 2004 (1) 5,000 4,994 .02
ERP Operating LP 7.95% 2002 3,750 3,942 .02
130,830 .59
Metals: Steel & Nonferrous - 0.47%
Kaiser Aluminum & Chemical Corp. 9.875% 2002 7,000 7,210
Kaiser Aluminum & Chemical Corp. 12.75% 2003 8,000 8,500
Kaiser Aluminum & Chemical Corp., Series B, 10.875% 2006 25,000 27,000 .19
Doe Run Co. 11.25% 2005 31,000 31,465 .14
Freeport-McMoRan Copper & Gold Inc. 7.50% 2006 9,500 7,315
Freeport-McMoRan Copper & Gold Inc. 7.20% 2026 16,000 12,480 .09
Inco Ltd. 9.875% 2019 6,500 6,860
Inco Ltd. 9.60% 2022 2,625 2,926 .05
103,756 .47
General Retailing & Merchandising - 0.47%
Fred Meyer, Inc. 7.375% 2005 21,000 21,012
Fred Meyer, Inc. 7.45% 2008 19,000 19,166 .18
Lifestyle Furnishings International Ltd. 10.875% 2006 21,100 24,054 .11
Boyds Collection 9.00% 2008 (1) 23,500 23,617 .11
May Department Stores Co. 8.375% 2024 10,000 10,908 .05
Venator Group Inc. (formerly Woolworth Corp.) 8.50% 2022 4,000 4,291 .02
103,048 .47
Utilities: Electric & Gas - 0.35%
Israel Electric Corp. Ltd. 7.70% 2018 (1) 22,500 22,333
Israel Electric Corp. Ltd. 8.10% 2096 (1) 7,500 7,298 .13
Tennessee Gas Pipeline Co. 7.625% 2037 17,750 18,970 .09
Long Island Lighting Co. 7.50% 2007 15,000 15,542 .07
Transener SA 9.25% 2008 (1) 13,500 13,044 .06
77,187 .35
Food Retailing: Food Products & Beverages - 0.35%
Stater Bros. Holdings Inc. 11.00% 2001 16,000 17,200 .08
Canandaigua Wine Co., Inc. 8.75% 2003 6,250 6,422
Canandaigua Wine Co., Inc., Series C, 8.75% 2003 2,500 2,569 .04
Friendly Ice Cream Corp. 10.50% 2007 7,750 7,905 .04
Gruma, SA de CV 7.625% 2007 7,750 7,508 .03
AKI Inc. 10.50% 2008 (1) 7,000 7,070 .03
Home Products International, Inc. 9.625% 2008 (1) 7,000 6,965 .03
Favorite Brands International, Inc. 10.75% 2006 (1) 6,750 6,176 .03
Carr-Gottstein Foods Co. 12.00% 2005 5,000 5,625 .03
Sparkling Spring Water Group Ltd. 11.50% 2007 4,000 4,140 .02
Randall's Food Markets, Inc. 9.375% 2007 2,000 2,130 .01
Star Markets Co., Inc. 13.00% 2004 1,500 1,699 .01
DGS International Finance Co. BV 10.00% 2007 (1) 1,250 987
DGS International Finance Co. BV 10.00% 2007 275 217 .00
76,613 .35
Leisure & Tourism - 0.24%
FelCor Suites LP 7.375% 2004 10,750 10,471
FelCor Suites LP 7.625% 2007 5,000 4,879 .07
Boyd Gaming Corp. 9.25% 2003 7,000 7,385 .04
Royal Caribbean Cruises Ltd. 7.00% 2007 7,000 7,141 .03
Aztar Corp. 11.00% 2002 6,000 6,150 .03
HMH Properties, Inc., Series B, 8.875% 2007 4,500 5,118 .02
CapStar Hotel Co. 8.75% 2007 4,900 5,096 .02
Mirage Resorts, Inc. 6.75% 2007 5,000 4,869 .02
KSL Recreation Group, Inc. 10.25% 2007 2,500 2,706 .01
53,815 .24
Electronic Components - 0.24%
Hyundai Semiconductor America, Inc. 8.25% 2004 (1) 6,650 5,453
Hyundai Semiconductor America, Inc. 8.625% 2007 (1) 20,700 16,146 .10
Flextronics International Ltd. 8.75% 2007 13,000 13,097 .06
Zilog, Inc. 9.50% 2005 (1) 16,000 12,480 .06
Advanced Micro Devices, Inc. 11.00% 2003 5,000 5,125 .02
52,301 .24
Other Industries - 1.61%
CBS Corp. 7.15% 2005 82,000 82,090 .37
PDVSA Finance Ltd. 7.40% 2016 (1) 34,000 32,301 .15
BREED Technologies Inc. 9.25% 2008 (1) 29,250 28,958 .13
AMF Group Inc. 0%/12.25% 2006 (6) 5,437 3,752
AMF Group Inc. 10.875% 2006 17,155 16,297 .09
Reliance Industries Ltd. 8.25% 2027 (1) 10,000 9,087
Reliance Industries Ltd. 10.50% 2046 5,750 5,373
Reliance Industries Ltd., Series B, 10.25% 2097 5,000 4,545 .09
Tultex Corp. 10.625% 2005 11,750 11,691
Tultex Corp. 9.625% 2007 7,000 6,650 .08
Hutchison Whampoa Finance (CI) Ltd., Series D, 6.988% 2037 (1) 21,000 17,958 .08
WestPoint Stevens Inc. 7.875% 2005 (1) 17,000 17,340 .08
Anchor Glass Container Corp. 11.25% 2005 12,750 13,674 .06
Owens-Illinois, Inc. 7.85% 2004 6,000 6,247
Owens-Illinois, Inc. 8.10% 2007 5,750 6,051 .06
Pan Pacific Industrial Investments PLC 0% 2007 (1) 33,500 11,444 .05
Texas Petrochemicals Corp. 11.125% 2006 8,750 9,406 .04
Graham Packaging Co., GPC Capital Corp. I, 8.75% 2008 (1) 3,975 4,015
Graham Packaging Co. 0%/10.75% 2009 (1,6) 8,000 5,120 .04
Unisys Corp., Series B, 12.00% 2003 5,000 5,656
Unisys Corp. 11.75% 2004 2,000 2,320 .04
Consumers International Inc. 10.25% 2005 7,000 7,542 .04
Printpack, Inc. 10.625% 2006 7,000 7,472 .03
Tekni-Plex, Inc. 9.25% 2008 7,250 7,341 .03
Philips Electronics NV 7.20% 2026 6,000 6,216 .03
Jefferson Pilot Corp. 8.14% 2046 (1) 5,000 5,330 .03
Innova, S de RL 12.875% 2007 5,000 5,100 .02
M.D.C. Holdings, Inc. 8.375% 2008 5,000 5,063 .02
Huntsman Corp. 9.031% 2007 (1,8) 5,000 5,025 .02
Samsung Electronics Co., Ltd. 7.45% 2002 (1) 5,000 4,200 .02
Tenneco Inc. 8.075% 2002 2,000 2,115 .01
355,379 1.61
Collateralized Mortgage/Asset-Backed Obligations (5) (excluding those
issued by federal agencies) - 2.08%
Collateralized Mortgage Obligation Trust, Series 63, Class Z, 9.00% 2020 58,858 61,875 .28
Green Tree Financial Corp., pass-through certificates, Series 1994-A,
Class NIM, 6.90% 2004 3,267 3,266
Green Tree Financial Corp., pass-through certificates, Series 1995-A,
Class NIM, 7.25% 2005 2,247 2,241
Green Tree Financial Corp., pass-through certificates, Series 1993-2,
Class B, 8.00% 2018 14,000 14,061
Green Tree Financial Corp., pass-through certificates, Series 1995-4,
Class B-2, 7.70% 2025 1,900 1,842
Green Tree Financial Corp., pass-through certificates, Series 1995-1,
Class B-2, 9.20% 2025 5,500 5,797
Green Tree Financial Corp., pass-through certificates, Series 1995-9,
Class A-5, 6.80% 2027 4,000 4,056
Green Tree Financial Corp., pass-through certificates, Series 1996-2,
Class B-2, 7.90% 2027 3,500 3,528
Green Tree Financial Corp., Series 1996-10, Class A-6, 7.30% 2028 3,000 3,117
Green Tree Financial Corp., pass-through certificates, Series 1998-3,
Class B-2, 8.07% 2028 5,000 5,025
Green Tree Financial Corp., pass-through certificates, Series 1998-4,
Class B-2, 8.11% 2028 6,650 6,677 .22
Gramercy, Series 1998-A, Class C, 8.95% 2002 (1) 35,000 34,755 .16
G3 Mortgage Reinsurance, Class B, 6.956% 2008 (1,8) 9,000 9,003
G3 Mortgage Reinsurance, Class A, 8.50% 2008 (1) 10,500 10,503
G3 Mortgage Reinsurance, Class C, 8.506% 2008 (1,8) 10,000 9,950 .13
Chase Commercial Mortgage Securities Corp., Series 1998-1,
Class D, 6.56% 2008 10,000 9,763
Chase Commercial Mortgage Securities Corp., Series 1998-1, Class A1, 6.34% 2030 14,845 14,938 .11
Morgan Stanley Capital I, Inc., Series 1998-WF1, Class A-1, 6.25% 2007 12,809 12,835
Morgan Stanley Capital I, Inc., Series 1998-WF2, Class A-1, 6.34% 2030 9,948 10,008 .10
MBNAM, Series 98-E, Class C, 6.60% 2010 (1) 22,500 22,455 .10
Deutsche Mortgage & Asset Receiving Corp., Series 1998-C1,
Class A-1, 6.22% 2031 4,915 4,921
Deutsche Mortgage & Asset Receiving Corp., Series 1998-C1,
Class B, 6.664% 2031
Deutsche Mortgage & Asset Receiving Corp., Series 1998-C1, 10,000 10,150
Class D, 7.231% 2031 5,000 5,047 .09
First Union Lehman, Series 1998-C2, Class A1, 6.28% 2035 19,837 19,915 .09
Resolution Trust Corp., Series 1992-CHF, Class E, 8.25% 2020 6,420 6,416
Resolution Trust Corp., Series 1993-C1, Class D, 9.45% 2024 6,143 6,143
Resolution Trust Corp., Series 1993-C1, Class E, 9.50% 2024 646 646
Resolution Trust Corp., Series 1993-C2, Class C, 8.00% 2025 3,000 3,000
Resolution Trust Corp., Series 1993-C2, Class D, 8.50% 2025 2,942 2,942 .09
UCFC Acceptance Corp., home-equity loan pass-through certificates,
Series 1995-B1, Class A-3, 6.75% 2016 10,965 11,035
UCFC Acceptance Corp., home-equity loan pass-through certificates,
Series 1996-D1, Class A-4, 6.776% 2016 4,250 4,276 .07
SMA, Series 1998-C1, Class A1, 6.27% 2005 (1) 14,815 14,861 .07
Residential Reinsurance, Series 1998-A, Class A, 9.848% 1999 (1,8) 15,000 14,850 .07
Merrill Lynch Mortgage Investors, Inc., Seller Manufactured Housing Contract, Series 1995-C2,
Class A-1, 7.157% 2021 11,003 11,227
Merrill Lynch Mortgage Investors, Inc., Mortgage Pass-Through Certificates, Series 1996-C2,
Class A-1, 6.69% 2028 (8) 2,994 3,040 .06
FIRSTPLUS Home Loan Owner Trust, Series 1996-4, Class A-3, 6.28% 2009 4,000 4,002
FIRSTPLUS Home Loan Owner Trust, Series 1997-1, Class A-6, 6.95% 2015 10,000 10,193 .06
DLJ Mortgage Acceptance Corp., Series 1997-CF1, Class A1A, 7.40% 2006 (1) 6,820 7,121
DLJ Mortgage Acceptance Corp., Series 1996-CF2, Class A1A, 6.86% 2021 (1) 5,248 5,371 .06
Mortgage Capital Funding, Inc., Series 1998-MC1, Class E, 7.06% 2030 10,000 10,113 .05
FMAC, Series 1998-A, Class A3, 6.69% 2020 10,100 10,084 .05
CSFB, Series 1998-FL1, Class E, 6.51% 2013 (1,8) 10,000 10,000 .05
Chase Manhattan Bank, NA, Series 1993-I, Class 2A5, 7.25% 2024 8,913 9,021 .04
GE Capital Mortgage Services, Inc., Series 1994-9, Class A9, 6.50% 2024 6,437 6,151 .03
Standard Credit Card Master Trust I, credit card participation certificates,
Series 1994-2A, 7.25% 2008 5,000 5,322 .02
NEBHELP Trust, Series I, Class A, 6.68% 2016 (1) 5,000 5,026 .02
Metropolitan Asset, Series 1998-A, Class B1, 7.728% 2014 (1) 4,669 4,683 .02
Grupo Financiero Banamex Accival, SA de CV 0% 2002 (1) 5,189 4,480 .02
SASCO, Series 1998-RF, Class 1, 8.712% 2021 (1) 2,415 2,592 .01
Trinity Trust, Class A1, 7.58% 1998 (1) 2,084 2,069 .01
460,392 2.08
Federal Agency Obligations: Mortgage Pass-Throughs 5 - 1.86%
Government National Mortgage Assn. 6.00% 2023-2028 17,590 17,156
Government National Mortgage Assn. 6.50% 2028 15,006 14,959
Government National Mortgage Assn. 6.875% 2023-2024 (8) 50,268 51,070
Government National Mortgage Assn. 7.00% 2008-2027 22,345 22,721
Government National Mortgage Assn. 7.00% 2022-2024 (8) 18,502 18,815
Government National Mortgage Assn. 7.375% 2022 - 2024 (8) 5,471 5,573
Government National Mortgage Assn. 7.50% 2017-2026 26,138 26,936
Government National Mortgage Assn. 8.00% 2017 4,146 4,336
Government National Mortgage Assn. 8.50% 2017-2027 23,586 24,935
Government National Mortgage Assn. 9.00% 2008-2025 8,542 9,151
Government National Mortgage Assn. 9.50% 2009-2021 11,989 12,971
Government National Mortgage Assn. 10.00% 2016-2019 1,008 1,109
Government National Mortgage Assn. 10.50% 2018-2019 99 110
Government National Mortgage Assn. 11.00% 2015 62 70 .95
Fannie Mae 6.00% 2013 - 2028 51,665 50,798
Fannie Mae 6.169% 2028 (8) 9,329 9,375
Fannie Mae 6.50% 2013 - 2028 23,873 23,830
Fannie Mae 7.00% 2028 3,000 3,042
Fannie Mae 7.50% 2007 - 2028 28,585 29,350
Fannie Mae 8.00% 2009 - 2024 8,152 8,478
Fannie Mae 8.50% 2014 - 2025 9,414 9,830
Fannie Mae 9.00% 2008 - 2025 7,466 7,934
Fannie Mae 9.50% 2022 6,780 7,280
Fannie Mae 10.00% 2005 - 2025 19,312 21,109
Fannie Mae 13.00% 2015 3,268 3,923
Fannie Mae 15.00% 2028 1,302 1,639 .80
Freddie Mac 8.50% 2008 - 2020 14,416 15,030
Freddie Mac 9.00% 2007 - 2021 8,009 8,429
Freddie Mac 10.00% 2019 121 132
Freddie Mac 11.50% 2000 8 8 .11
410,099 1.86
Federal Agency Obligations: Collateralized Mortgage Obligations 5 - 0.11%
Fannie Mae, Series 1996-4, Class ZA, 6.50% 2022 6,196 6,047
Fannie Mae, Series 1994-4, 6.50% 2024 5,248 4,995
Fannie Mae, Series 1991-78, Class PK, 8.50% 2020 4,714 4,793 .07
Freddie Mac, Series 1673, Class SA, 4.994% 2024 (9) 6,000 4,358
Freddie Mac, Series 178, Class Z, 9.25% 2021 3,202 3,418 .04
23,611 .11
Other Federal Agency Obligations - 0.12%
Federal Home Loan Banks 6.16% 2004 13,000 12,852
Federal Home Loan Banks 6.27% 2004 6,000 5,956 .08
Freddie Mac, 6.27% 2004 5,635 5,595
Freddie Mac, 6.44% 2003 3,000 2,984 .04
27,387 .12
Governments and Governmental Authorities (excluding U.S. government) - 1.40%
Venezuela (Republic of) Eurobond 6.625% 2007 (8) 5,881 4,593
Venezuela (Republic of) 9.25% 2027 160,000 109,040 .51
Argentina (Republic of), Series L, Eurobonds 6.625% 2005 (8) 2,850 2,579
Argentina (Republic of) 11.00% 2006 43,250 47,088
Argentina (Republic of) 11.375% 2017 14,250 15,625
Argentina (Republic of) 9.75% 2027 10,000 9,600 .34
United Mexican States Government Eurobonds, Series C, 0% 2003 (4) 2,307 0
United Mexican States Government Eurobonds, Global, 11.375% 2016 14,000 15,785
United Mexican States Government Eurobonds, Units, Series C, 6.617% 2019 (8) 1,500 1,355
United Mexican States Government Eurobonds, Global, 11.50% 2026 18,500 21,645 .18
Panama (Republic of) Past Due Interest Eurobond 6.688% 2016 (8) 527 412
Panama (Republic of) 8.875% 2027 21,500 20,183 .09
Philippines (Republic of) 8.875% 2008 17,250 16,603 .08
Poland (Republic of), Past Due Interest Bond, Bearer 4.00% 2014 (8) 13,750 12,633 .06
Mendoza (Province of) 10.00% 2007 (1) 12,250 11,515 .05
Korea (Republic of) 8.875% 2008 10,000 9,397 .04
Brazil (Federal Republic of), Debt Conversion Bond, Series L, 6.688% 2012 (8) 5,750 4,162
Brazil (Federal Republic of) Bearer 8.00% 2014 3,771 2,886 .03
Ontario (Province of) 7.75% 2002 2,500 2,648 .01
Ecuador (Republic of) Past Due Interest Bearer Bond 6.625% 2015 (8) 500 298
Ecuador (Republic of) Past Due Interest Discount Bond 6.625% 2025 (8) 1,556 1,093 .01
Peru (Republic of) Front-Loaded Interest Reduction Eurobond 3.25% 2017 (8) 250 144
Peru (Republic of) Past Due Interest Eurobond 4.00% 2017 (8) 1,250 786 .00
310,070 1.40
Floating Rate Eurodollar Notes (undated) (8) - 0.14%
Standard Chartered Bank 5.875% 15,000 10,087 .04
Canadian Imperial Bank of Commerce 5.813% 10,000 8,750 .04
Bank of Nova Scotia 5.813% 10,000 8,713 .04
Midland Bank PLC 6.00% 5,000 4,246 .02
31,796 .14
U.S. Treasury Obligations - 3.92%
9.25% August 1998 10,000 10,010 .05
8.875% February 1999 42,000 42,748 .19
9.125% May 1999 10,000 10,273 .05
8.75% August 2000 22,500 23,875 .11
8.50% November 2000 20,000 21,262 .10
7.75% February 2001 68,000 71,538 .32
8.00% May 2001 7,000 7,440 .03
3.711% July 2002 (10) 10,165 10,066 .04
11.625% November 2002 38,000 46,627 .21
10.75% February 2003 19,500 23,482 .11
7.25% May 2004 115,500 125,047 .56
11.625% November 2004 43,500 57,230 .26
7.50% February 2005 40,000 44,162 .20
6.50% May 2005 30,000 31,580 .14
10.75% August 2005 9,000 11,657 .05
3.493% January 2007 (10) 7,115 6,959 .03
6.125% August 2007 1,465 1,520 .01
10.00% May 2010 18,000 22,314 .10
7.50% November 2016 32,000 38,065 .17
8.875% August 2017 79,500 107,387 .49
7.125% February 2023 65,250 76,332 .35
6.50% November 2026 70,000 76,836 .35
866,410 3.92
TOTAL BONDS & NOTES (cost:$5,925,484,000) 6,008,535
Short-Term Securities
Corporate Short-Term Notes - 10.10%
Lucent Technologies Inc. 5.48% - 5.52% due 9/11 - 9/28/98 109,100 108,263 .49
General Motors Acceptance Corp. 5.49% - 5.52% due 8/5 - 10/22/98 99,000 97,995 .44
Coca-Cola Co. 5.48% - 5.50% due 8/14 - 9/22/98 95,000 94,579 .43
Emerson Electric Co. 5.47% - 5.53% due 8/18 - 9/2/98 87,700 87,336 .39
E.I. du Pont de Nemours and Co. 5.48% - 5.51% due 8/25 - 10/26/98 85,700 84,998 .38
Gillette Co. 5.46% - 5.47% due 8/31 - 10/27/98 (1) 85,500 84,862 .38
American Express Credit Corp. 5.50% - 5.51% due 8/26 - 9/21/98 84,000 83,494 .38
Procter & Gamble Co. 5.48% due 8/12 - 9/3/98 82,000 81,738 .37
General Electric Capital Corp. 5.51% - 5.53% due 8/17 - 9/16/98 81,400 80,906 .37
Monsanto Co. 5.49% - 5.52% due 8/24 - 11/17/98 (1) 81,300 80,149 .37
Xerox Corp. 5.47% - 5.50% due 8/10 - 9/4/98 78,700 78,478 .35
Ford Motor Credit Co. 5.49% - 5.52% due 8/31 - 10/8/98 79,000 78,239 .35
Motorola Inc. 5.48% - 5.50% due 8/4 - 10/22/98 77,700 77,444 .35
Ameritech Corp. 5.47% - 5.48% due 8/28 - 9/11/98 46,200 45,926
Ameritech Capital Funding Corp. 5.49% due 8/12/98 (1) 27,000 26,951 .33
Duke Energy Corp. 5.47% - 5.48% due 8/10 - 10/22/98 71,200 70,582 .32
Chrysler Financial Corp. 5.50% - 5.53% due 8/20 - 10/1/98 67,000 66,684 .30
National Rural Utilities Cooperative Finance Corp. 5.48% - 5.50% due 8/14 - 10/27 67,000 66,428 .30
Colgate-Palmolive Co. 5.50% - 5.52% due 9/10 - 9/29/98 (1) 66,000 65,460 .30
CIT Group Holdings Inc. 5.48% - 5.51% due 8/6 - 8/13/98 60,100 60,006 .27
Associates Corp. of North America 5.50% - 5.52% due 8/19 - 8/21/98 59,100 58,921 .27
Gannett Co., Inc. 5.48% - 5.55% due 8/3 - 8/25/98 (1) 57,900 57,788 .26
Chevron USA Inc. 5.49% - 5.51% due 8/17 - 9/14/98 57,800 57,557 .26
Commercial Credit Co. 5.50% due 8/18 - 10/15/98 55,900 55,514 .25
Amoco Co. 5.42% - 5.47% due 8/3 - 9/22/98 55,000 54,784 .25
Atlantic Richfield Co. 5.50% - 5.51% due 8/14 - 9/3/98 (1) 54,600 54,393 .25
A.I. Credit Corp. 5.47% - 5.51% due 8/24 - 10/5/98 50,900 50,588 .23
IBM Credit Corp. 5.47% due 8/7/98 50,000 49,946 .23
Minnesota Mining and Manufacturing Co. 5.44% - 5.48% due 8/11 - 8/20/98 48,800 48,677 .22
BellSouth Telecommunications, Inc. 5.49% due 8/11 - 8/26/98 48,300 48,163 .22
International Lease Finance Corp. 5.48% - 5.52% due 8/24 - 10/23/98 45,500 45,196 .20
H.J. Heinz Co. 5.49% - 5.54% due 8/6 - 9/9/98 40,300 40,147 .18
American General Finance Corp. 5.52% due 8/5/98 25,000 24,981
American General Corp. 5.55% due 8/18/98 15,000 14,958 .18
Kimberly-Clark Corp. 5.48% due 9/29/98 (1) 31,900 31,608 .14
Hershey Foods Corp. 5.47% due 9/11/98 20,000 19,871 .09
2,233,610 10.10
Federal Agency Short-Term Obligations - 3.20%
Freddie Mac 5.37% - 5.435% due 8/4 - 10/9/98 393,434 390,915 1.77
Fannie Mae 5.41% - 5.45% due 9/8 - 10/30/98 290,400 287,670 1.30
International Bank Reconstruction and Development 5.36% due 10/20/98 30,000 29,631 .13
708,216 3.20
Certificates of Deposit - 0.23%
Mellon Financial Co. 5.57% due 9/2/98 50,000 50,000 .23
TOTAL SHORT-TERM SECURITIES (cost: $2,991,931,000) 2,991,826 13.53
TOTAL INVESTMENT SECURITIES (cost: $18,977,418,000) 22,167,260 100.24
Excess of payables and cash over receivables 54,284 .24
NET ASSETS 22,112,976 100.00
(1) Purchased in a private placement transaction; resale to the public may require registration or sale
only to qualified institutional buyers.
(2) The fund owns 6.10%, 6.79% and 5.91% of the outstanding voting securities of First Hawaiian, Ohio
Casualty and English China Clays, respectively, and thus is considered an affiliate as defined in the
Investment Company Act of 1940.
(3) Non-income-producing security.
(4) Valued under procedures established by the Board of Directors.
(5) 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.
(6) Step bond; coupon rate will increase at a later date.
(7) Company is not making interest payments; bankruptcy proceedings pending.
(8) Coupon rate may change periodically.
(9) Inverse floater, which is a floating rate note whose interest rate moves in the opposite direction of
prevailing interest rates.
(10) Index-linked bond whose principal amount moves with a government retail price index.
See Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C> <C>
The Income Fund of America
Financial Statements
- -------------------------------- --------- ---------
Statement of Assets and Liabilities (dollars in
at July 31, 1998 thousands)
- -------------------------------- --------- ---------
Assets:
Investment securities at market
(cost: $18,977,418) $22,167,260
Cash 5,521
Receivables for-
Sales of investments $ 50,991
Sales of fund's shares 36,679
Dividends and accrued interest 153,195 240,865
--------- ---------
22,413,646
Liabilities:
Payables for-
Purchases of investments 269,719
Repurchases of fund's shares 17,536
Management services 5,080
Accrued expenses 8,335 300,670
--------- ---------
Net Assets at July 31, 1998-
Equivalent to $18.25 per share on
1,211,356,826 shares of $1 par value
capital stock outstanding (authorized
capital stock--1,600,000,000 shares) $22,112,976
============
- -------------------------------- --------- ---------
Statement of Operations (dollars in
for the year ended July 31, 1998 thousands)
- -------------------------------- --------- ---------
Investment Income:
Income:
Dividends $ 460,595
Interest 642,216 $ 1,102,811
---------
Expenses:
Management services fee 57,649
Distribution expenses 49,269
Transfer agent fee 8,974
Reports to shareholders 551
Registration statement and
prospectus 1,101
Postage, stationery and supplies 2,101
Directors' fees 135
Auditing and legal fees 60
Custodian fee 888
Taxes other than federal income tax 2
Other expenses 145 120,875
--------- ---------
Net investment income 981,936
---------
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 1,220,942
Net change in unrealized appreciation on
investments (34,156)
---------
Net realized gain and unrealized
appreciation on investments 1,186,786
---------
Net Increase in Net Assets Resulting
From Operations $2,168,722
============
- -------------------------------- --------- ---------
Statement of Changes in Net Assets (dollars in
thousands)
- -------------------------------- --------- ---------
Year ended July 31
1998 1997
Operations: --------- ---------
Net investment income
Net realized gain on investments $ 981,936 $ 836,925
Net change in unrealized appreciation 1,220,942 1,592,597
on investments
(34,156) 1,817,752
Net increase in net assets --------- ---------
resulting from operations
2,168,722 4,247,274
Dividends and Distributions --------- ---------
Paid to Shareholders:
Dividends from net investment income
Distributions from net realized (922,159) (857,023)
gain on investments
(1,524,937) (748,006)
Total dividends and distributions --------- ---------
(2,447,096) (1,605,029)
Capital Share Transactions: --------- ---------
Proceeds from shares sold:
205,557,632 and 131,090,765
shares, respectively
Proceeds from shares issued in 3,777,990 2,235,951
reinvestment of net investment
income dividends and distributions of
net realized gain on investments:
122,751,251 and 83,876,277
shares, respectively
Cost of shares repurchased: 2,182,454 1,403,146
129,064,287 and 112,767,826
shares, respectively
(2,383,307) (1,926,293)
Net increase in net assets --------- ---------
resulting from capital share
transactions
3,577,137 1,712,804
Total Increase in Net Assets --------- ---------
3,298,763 4,355,049
Net Assets:
Beginning of year
18,814,213 14,459,164
End of year (including undistributed --------- ---------
net investment income: $198,455
and $139,013, respectively)
$22,112,976 $18,814,213
=========== ===========
See Notes to Financial Statements
</TABLE>
Notes to Financial Statements
1. The Income Fund of America, Inc. (the "fund") is registered under the
Investment Company Act of 1940 as an open-end, diversified management
investment company. The fund seeks current income while secondarily striving
for capital growth through investments in stocks and fixed-income securities.
The following paragraphs summarize the significant accounting policies
consistently followed by the fund in the preparation of its financial
statements:
Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by the investment adviser to be the broadest
and most representative market, which may be either a securities exchange or
the over-the-counter market. Fixed-income securities are valued at prices
obtained from a pricing service, when such prices are available; however, in
circumstances where the investment adviser deems it appropriate to do so, such
securities will be valued at the mean quoted bid and asked prices or at prices
for securities of comparable maturity, quality and type. Securities with
original maturities of one year or less having 60 days or less to maturity are
amortized to maturity based on their cost if acquired within 60 days of
maturity or, if already held on the 60th day, based on the value determined on
the 61st day. Assets or liabilities initially expressed in terms of 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. 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.
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 paid to
shareholders are recorded on the ex-dividend date.
2. It is the fund's policy to continue to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required.
As of July 31, 1998, net unrealized appreciation on investments for federal
income tax purposes aggregated $3,189,885,000, of which $3,732,617,000 related
to appreciated securities and $542,732,000 related to depreciated securities.
During the year ended July 31, 1998, the fund realized, on a tax basis, a net
capital gain of $1,221,231,000 on securities transactions. Net losses related
to non-U.S. currency and other transactions of $51,000 were treated as an
adjustment to ordinary income for federal income tax purposes. The cost of
portfolio securities for federal income tax purposes was $18,977,375,000 at
July 31, 1998.
3. The fee of $57,649,000 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 0.24% of the first $1 billion of average net assets; 0.20%
of such assets in excess of $1 billion but not exceeding $2 billion; 0.18% of
such assets in excess of $2 billion but not exceeding $3 billion; 0.165% of
such assets in excess of $3 billion but not exceeding $5 billion; 0.155% of
such assets in excess of $5 billion but not exceeding $8 billion; 0.15% of such
assets in excess of $8 billion but not exceeding $13 billion; 0.145% of such
assets in excess of $13 billion but not exceeding $21 billion; and 0.14% of
such assets in excess of $21 billion; plus 2.25% of monthly gross investment
income.
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 July 31, 1998,
distribution expenses under the Plan were $49,269,000. As of July 31, 1998,
accrued and unpaid distribution expenses were $7,698,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $8,974,000. American Funds Distributors, Inc. (AFD), the
principal underwriter of the fund's shares, received $17,111,000 (after
allowances to dealers) as its portion of the sales charges paid by purchasers
of the fund's shares. Such sales charges are not an expense of the fund and,
hence, are not reflected in the accompanying statement of operations.
Directors who are unaffiliated with CRMC may elect to defer part or all of
the fees earned for services as members of the Board. Amounts deferred are not
funded and are general unsecured liabilities of the fund. As of July 31, 1998,
aggregate amounts deferred and earnings thereon were $487,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both
wholly owned subsidiaries of CRMC. Certain Directors and officers of the fund
are or may be considered to be affiliated with CRMC, AFS and AFD. No such
persons received any remuneration directly from the fund.
4. As of July 31, 1998, accumulated undistributed net realized gain on
investments was $1,066,672,000 and additional paid-in capital was
$16,446,722,000. The fund reclassified $332,000 of currency losses from
undistributed net realized gains to undistributed net investment income, $3,000
from undistributed net investment income to additional paid-in capital and
$39,000 from additional paid-in capital to undistributed net realized gains for
the year ended July 31, 1998.
The fund made purchases and sales of investment securities of $7,351,142,000
and $6,157,867,000, respectively, during the year ended July 31, 1998.
Pursuant to the custodian agreement, the fund receives credits against its
custodian fee for imputed interest on certain balances with the custodian bank.
The custodian fee of $888,000 includes $485,000 that was paid by these credits
rather than in cash.
Net realized currency losses on dividends, interest, withholding taxes
reclaimable, and sales of non-U.S. bonds and notes, on a book basis, were
$395,000 for the year ended July 31, 1998.
<TABLE>
<S> <C> <C> <C> <C> <C>
Per-Share Data and Ratios
Year ended July 31
------- ------- ------- ------- -------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Net Asset Value, Beginning of Year $18.59 $15.89 $14.92 $13.59 $14.47
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income .85 .86 .87 .85 .83
Net realized gain and change in
unrealized appreciation on investments 1.11 3.55 1.11 1.29 (.53)
------- ------- ------- ------- -------
Total income From
investment operations 1.96 4.41 1.98 2.14 .30
------- ------- ------- ------- -------
Less Distributions:
Dividends from net investment
income (.82) (.90) (.83) (.75) (.83)
Distributions from net
realized gains (1.48) (.81) (.18) (.06) (.35)
------- ------- ------- ------- -------
Total distributions (2.30) (1.71) (1.01) (.81) (1.18)
------- ------- ------- ------- -------
Net Asset Value, End of Year $18.25 $18.59 $15.89 $14.92 $13.59
======= ======= ======= ======= =======
Total Return* 11.32% 29.28% 13.46% 16.42% 1.98%
Ratios/Supplemental Data:
Net assets, end of year (in millions) $22,113 $18,814 $14,459 $12,290 $10,537
Ratio of expenses to average net assets .59% .61% .62% .65% .63%
Ratio of net income to average net assets 4.75% 5.09% 5.56% 6.12% 5.92%
Portfolio turnover rate 34.68% 40.92% 37.77% 26.26% 26.42%
* Excludes maximum sales of charge of 5.75%.
</TABLE>
Independent Auditors' Report
To the Board of Directors and Shareholders of
The Income Fund of America, Inc.:
We have audited the accompanying statement of assets and liabilities of The
Income Fund of America, Inc. (the "Fund"), including the investment portfolio,
as of July 31, 1998, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the per-share data and ratios for each of the five years
in the period then ended. These financial statements and per-share data and
ratios are the responsibility of the Fund's management. Our responsibility is
to express an opinion on these financial statements and per-share data and
ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per-share data
and ratios are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1998, by correspondence with the custodian 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 The Income Fund of America, Inc. at July 31, 1998, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the per-share data and ratios
for each of the five years in the period then ended, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
August 28, 1998
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>
<S> <C>
Dividends and Distributions per Share
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
To Shareholders Payment Date From Net From Net From Net Realized
of Record Investment Realized Long-term Gains
Income Short-term
Gains
September 19, 1997 September 22, 1997 $0.20 - -
November 17, 1997 November 18, 1997 - $0.126 $1.354*
December 26, 1997 December 29, 1997 0.22 - -
March 20, 1998 March 23, 1998 0.20 - -
June 19, 1998 June 22, 1998 0.20 - -
</TABLE>
*INCLUDES $0.853 LONG-TERM CAPITAL GAINS TAXED AT A MAXIMUM RATE OF 28%.
Corporate shareholders may exclude up to 70% of qualifying dividends received
during the year. For purposes of computing this exclusion, 37% 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, 6% 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 plan retirement trusts may need this information for their annual
information reporting.
SINCE THE AMOUNTS ABOVE ARE REPORTED FOR THE FUND'S FISCAL YEAR AND NOT THE
CALENDAR YEAR, SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV OR OTHER TAX
INFORMATION WHICH WILL BE MAILED IN JANUARY 1999 TO DETERMINE THE CALENDAR YEAR
AMOUNTS TO BE INCLUDED ON THEIR 1998 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT
THEIR TAX ADVISERS.
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
JANET A. MCKINLEY
New York, New York
President of the fund
Senior Vice President, Capital Research Company
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
OTHER OFFICERS
STEPHEN E. BEPLER
New York, New York
Senior Vice President of the fund
Senior Vice President, Capital Research Company
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
HILDA L. APPLBAUM
San Francisco, California
Vice President of the fund
Vice President, Capital Research Company
DARCY B. KOPCHO
Los Angeles, California
Vice President of the fund
Executive Vice President and Director,
Capital Research Company
DINA N. PERRY
Washington, D.C.
Vice President of the fund
Senior Vice President,
Capital Research and Management Company
JOHN H. SMET
Los Angeles, California
Vice President of the fund
Vice President, Capital Research and Management 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
MARY C. HALL retired as Treasurer of the fund effective August 13, 1998. She
had been an officer of the fund since 1986. We thank her for her many
contributions to the fund.
[THE AMERICAN FUNDS GROUP(R)]
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
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.
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 - are updating their computer systems to process
date-related information properly following the turn of the century. Both are
on track to complete modifications of significant internal systems by the end
of 1998. Testing with business partners, vendors and other service providers is
already under way. We will continue to keep you up-to-date in our regular
publications. If you'd like more detailed information, contact Shareholder
Services at 800/421-0180 or visit our Web site at www.americanfunds.com.
This report is for the information of shareholders of The Income Fund of
America, 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 September 30, 1998, this report must be accompanied by an
American Funds Group Statistical Update for the most recently completed
calendar quarter.
Printed on recycled paper
Litho in USA BDA/GRS/3922
Lit. No. IFA-011-0998
45019/15019
