[THE AMERICAN FUNDS GROUP(R)]
ICA
THE INVESTMENT COMPANY OF AMERICA
1997 ANNUAL REPORT
For the year ended December 31
THE VALUE OF LONG-TERM INVESTING IN CONTRASTING MARKET ENVIRONMENTS
[abstract charts: S&P 500 (1968 - 1982); S&P 500 1983 - 1997]
[Watermark: Then Now]
About Our Cover:
Charting Standard & Poor's 500 Composite Index shows the contrasting markets of
the first and last half of the 30-year period from the beginning of 1968 to the
end of 1997.
In the past, ICA has reported to you quarterly. With that information now
typically available from your financial adviser or the American Funds Web site
at www.americanfunds.com, the cost of producing quarterly reports no longer
appears justified. We will continue to provide annual and semi-annual reports.
ICA(SM)
The Investment Company of America(r) seeks long-term growth of capital and
income, placing greater emphasis on future dividends than on current income.
ICA is one of the 28 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.
1997 RESULTS AT A GLANCE
Year ended December 31, 1997
(with dividends and capital gain distribution reinvested)
Standard &
Poor's 500
ICA Composite Index
Income Return 2.08% 2.11%
Capital Return 27.73% 31.21%
Total Return 29.81% 33.32%
DIVIDENDS AND CAPITAL GAIN DISTRIBUTION PAID IN 1997
Per Share Payment Date
Income Dividends $0.12 March 10
$0.12 June 9
$0.12 Sept. 8
$0.12 + $0.02 Dec. 22
$0.50
Capital Gain Distribution $2.60 Dec. 22
Fund results in this report were computed without a sales charge unless
otherwise indicated. The fund's 30-day yield as of January 31, 1998, calculated
in accordance with the Securities and Exchange Commission formula, was 1.79%.
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
ICA recorded its third consecutive exceptional year in 1997. Cumulative total
return for the past three years was by far the highest in four decades. For
those of us who owned shares in ICA throughout these three years, our
investment doubled in value.
Led by many of its largest long-term holdings, ICA's gain last year was 29.8%
for the vast majority of shareholders who reinvested dividends as well as the
capital gain distribution of $2.60. That follows total returns of 19.3% in 1996
and 30.6% in 1995, for a three-year total return of 102.4%.
As in the previous two years, dividends from income came to 50 cents a share,
which included a two-cent special dividend. In 1997, this represented an income
return of 2.08% on the fund's value at the beginning of the year.
It has been 20 years since ICA had a negative-return year. The fund has
produced double-digit returns in 14 of those 20 years and 20% or more in nine
of them. Overall, the average annual compound return for this period is 16.8%,
well above the 13.5% average for ICA's 64-year life span.
THE VALUE OF EXPERIENCE
Which is why a word of caution is in order, lest recent results lift
expectations too high. Since memories can be far too short, we have devoted the
feature beginning on page six of this report to a comparison with a sharply
contrasting stock market environment. We believe the fund gains considerable
value from the fact that most of its portfolio counselors have been active long
enough to have experienced difficult periods firsthand.
In 1997, ICA reaped the benefits of its extensive research effort and pattern
of holding stocks for the long term. Of the fund's ten largest holdings, seven
rose by more than 30%, five by more than 50%; four of those five have been in
the portfolio for at least five years. Looking at the 30 largest holdings, much
the same is true: 19 rose more than 30%, ten more than 50%, and only two
declined. Most are long-term holdings.
ICA REAPED THE BENEFITS OF ITS LONG-TERM APPROACH.
In October, the overall stock market experienced the end of a record seven-year
run without so much as a 10% decline, the longest such period during the entire
20th century. The past year saw a one-day plunge in the Dow Jones Industrial
Average of 554 points. It also saw a second-half return for that average only
one-fifth as large as the first half, and high volatility as evidenced by 1997
having the most days this decade during which the Dow Jones Industrials moved
more than one percentage point.
ICA stood up well in that environment. While Standard & Poor's 500 Composite
Index dropped 10.8% in the period October 7-27 and the Dow Jones Industrials
fell 12.4%, ICA experienced only an 8.5% decline. Although the fund fell short
of matching the S&P 500's remarkable 33.3% total return for the year, it easily
topped the 24.9% total return for the Dow Jones Industrials. It also exceeded
the 27.0% average total return for its peer group as measured by the Lipper
Growth & Income Fund Index. Bear in mind that the stock market indices are
unmanaged, without expenses and include none of the short-term securities
normally held by ICA to cushion and to provide buying opportunities in periods
of falling prices.
[Begin sidebar]
MOST OF ICA'S PORTFOLIO COUNSELORS HAVE BEEN ACTIVE LONG ENOUGH TO HAVE
EXPERIENCED MARKETS QUITE DIFFERENT FROM THOSE OF RECENT YEARS.
[End sidebar]
PORTFOLIO LEADERS IN 1997
ICA's portfolio counselors identified the potential for growth in many of the
fund's largest holdings early in the current decade. Several stocks in health
care and banking - two industries out of favor at the time - have been big
contributors to ICA's strong results since. In the past year, Pfizer and
Warner-Lambert, both among the ten largest holdings, were up 80% and 65%,
respectively, along with Eli Lilly, the 21st-largest holding, which was up more
than 90%. The first two have been in the fund since mid-1991, Lilly since 1993.
Three financial services holdings included in the top ten also soared: Fannie
Mae (formerly Federal National Mortgage) +53%, Freddie Mac (formerly Federal
Home Loan Mortgage) +52% and BankAmerica +46%. Fannie Mae has been in the
fund's portfolio since 1985, BankAmerica since 1992; Freddie Mac is a more
recent addition, in 1995.
In a number of cases, being patient has meant riding out a bad spell. Time
Warner, one of the fund's longest-term holdings, dating from 1979, is an
example. After some rough periods in recent years, our confidence in the
company was again rewarded as the stock rose 65% last year.
RESISTANCE TO DOWN MARKETS
We have said many times that a fund's true success must be measured over a long
enough period to encompass bad as well as good stock markets. Demonstrating the
value of careful portfolio management, ICA has shown substantial resistance to
down markets. That resistance has helped the fund, over its 64 years, to
outdistance the S&P 500 Index on a total return basis by a compound annual rate
of nearly a percentage point and a half (13.5% as opposed to 12.1%).
Turn to the chart starting on the next page and you will see how much that
seemingly small percentage difference means in the long-term growth of an
investment. By the end of last year, an investment in the fund would have grown
more than 3,180-times larger than on January 1, 1934. An investment in the S&P
500 would have been roughly 1,500-times larger. It is important to note that in
both cases, reinvestment of dividends and compounding played a big role in
growth of such magnitude.
Thanks to your support, ICA continues to be one of the nation's largest growth
and income funds. As we've mentioned in these reports, of the dozen largest
equity funds in 1969, ICA is the only one to remain in the top twelve ever
since.
Most of you share with us a belief in maintaining a long-term approach to
investing. We recommend that you read the feature in this report for an
interesting perspective about the value of that approach.
Sincerely,
/s/ Jon B. Lovelace, Jr.
Jon B. Lovelace, Jr.
Chairman of the Board
/s/ William C. Newton
William C. Newton
President
February 12, 1998
FOLLOWING THE COURSE OF AN INVESTMENT IN ICA (1934-1997)
This chart illustrates a hypothetical $10,000 investment in The Investment
Company of America over the past 64 years, from January 1, 1934 through
December 31, 1997, showing the high, low and closing values for each year. The
figures in the table below the chart include the fund's total return for each
of those years.
As you look through the table, you will see that the fund's total return can
fluctuate greatly from year to year. In some years it was well into double
digits. In other years the fund had a negative return. During the entire
period, a $10,000 investment in the fund, with all dividends reinvested, would
have grown to $31,881,108 compared with $14,965,424 in the S&P 500 Index. Over
the same period, $10,000 in a savings account would have grown to $144,055 with
all interest compounded.*
You can use this table to estimate how the value of your own holdings has
grown. Let's say, for example, that you have been reinvesting all of your
dividends and want to know how your investment has done since the end of 1987.
At that time, the table shows the value of the investment illustrated here was
$7,049,178. Since then, it has more than quadrupled to $31,881,108. Thus, in
the same period, the value of your 1987 investment - regardless of size - has
also more than quadrupled.
* Based on figures from the U.S. League of Savings Institutions and the Federal
Reserve Board, reflecting all kinds of savings deposits (maximum allowable
interest rates imposed by law until 1983). Savings accounts are guaranteed; the
fund is not.
AVERAGE ANNUAL COMPOUND RETURNS/+/
For periods ended December 31, 1997
Ten Years +15.60%
Five Years +16.35%
One Year +22.34%
/+/Based on the maximum sales charge of 5.75%. Sales charges are lower for
investments of $50,000 or more.
$31,881,108/1,2/
ICA
with dividends reinvested
$14,965,424
S&P 500
with dividends reinvested
$4,142,648/1,3/
ICA
not including dividends
$10,000/1/
original investment
[begin chart]
<TABLE>
<CAPTION>
Year ended December 31 1934 1935 1936 1937 1938
<S> <C> <C> <C> <C> <C>
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested - - $398 1,006 181
Value at Year-End/1/ $11,822 21,643 31,560 19,424 24,776
Dividends in Cash - - $398 976 170
Value at Year-End/1/ $11,822 21,643 31,042 18,339 23,174
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 0.0% 0.0 1.8 3.2 0.9
Capital Return 18.2% 83.1 44.0 (41.7) 26.7
ICA TOTAL RETURN 18.2% 83.1 45.8 (38.5) 27.6
Fund Expenses/4/ 0.94% 1.13 1.19 1.53 1.89
Year ended December 31 1939 1940 1941 1942 1943
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested 536 891 1,262 1,186 1,101
Value at Year-End/1/ 24,986 24,384 22,590 26,376 35,019
Dividends in Cash 498 806 1,089 969 861
Value at Year-End/1/ 22,860 21,460 18,816 20,893 26,861
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 2.2 3.6 5.2 5.3 4.2
Capital Return (1.4) (6.0) (12.6) 11.5 28.6
ICA TOTAL RETURN 0.8 (2.4) (7.4) 16.8 32.8
Fund Expenses/4/ 2.02 1.88 1.95 2.13 1.72
Year ended December 31 1944 1945 1946 1947 1948
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested 1,242 1,191 1,775 2,409 2,685
Value at Year-End/1/ 43,193 59,091 57,692 58,217 58,430
Dividends in Cash 942 878 1,277 1,672 1,785
Value at Year-End/1/ 32,130 42,948 40,686 39,332 37,714
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 3.5 2.8 3.0 4.2 4.6
Capital Return 19.8 34.0 (5.4) (3.3) (4.2)
ICA TOTAL RETURN 23.3 36.8 (2.4) 0.9 0.4
Fund Expenses/4/ 1.45 1.06 0.98 1.10 1.08
</TABLE>
- ---
<TABLE>
<CAPTION>
Year ended December 31 1949 1950 1951 1952 1953
<S> <C> <C> <C> <C> <C>
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested 2,661 3,152 3,391 3,535 3,927
Value at Year-End/1/ 63,941 76,618 90,274 101,293 101,747
Dividends in Cash 1,689 1,911 1,970 1,974 2,113
Value at Year-End/1/ 39,436 45,185 51,159 55,305 53,362
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 4.6 4.9 4.4 3.9 3.9
Capital Return 4.8 14.9 13.4 8.3 (3.5)
ICA TOTAL RETURN 9.4 19.8 17.8 12.2 0.4
Fund Expenses/4/ 0.96 1.01 0.93 0.81 0.85
Year ended December 31 1954 1955 1956 1957 1958
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested 4,104 5,124 5,608 6,228 6,546
Value at Year-End/1/ 158,859 199,215 220,648 194,432 281,479
Dividends in Cash 2,127 2,579 2,748 2,969 3,028
Value at Year-End/1/ 80,780 98,530 106,303 90,911 128,040
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 4.0 3.2 2.8 2.8 3.4
Capital Return 52.1 22.2 8.0 (14.7) 41.4
ICA TOTAL RETURN 56.1 25.4 10.8 (11.9) 44.8
Fund Expenses/4/ 0.88 0.86 0.80 0.76 0.68
Year ended December 31 1959 1960 1961 1962 1963
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested 7,013 8,139 8,383 9,122 9,620
Value at Year-End/1/ 321,419 335,998 413,552 358,800 440,900
Dividends in Cash 3,161 3,582 3,603 3,831 3,936
Value at Year-End/1/ 142,882 145,597 175,370 148,178 177,833
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 2.5 2.5 2.5 2.2 2.7
Capital Return 11.7 2.0 20.6 (15.4) 20.2
ICA TOTAL RETURN 14.2 4.5 23.1 (13.2) 22.9
Fund Expenses/4/ 0.64 0.62 0.59 0.61 0.59
</TABLE>
- --
<TABLE>
<CAPTION>
Year ended December 31 1964 1965 1966 1967 1968
<S> <C> <C> <C> <C> <C>
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested 10,708 12,112 15,516 18,359 22,628
Value at Year-End/1/ 512,591 650,689 657,093 846,941 990,640
Dividends in Cash 4,285 4,742 5,946 6,869 8,270
Value at Year-End/1/ 202,346 251,553 248,034 312,473 356,572
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 2.4 2.4 2.4 2.8 2.7
Capital Return 13.9 24.5 (1.4) 26.1 14.3
ICA TOTAL RETURN 16.3 26.9 1.0 28.9 17.0
Fund Expenses/4/ 0.58 0.57 0.52 0.50 0.49
Year ended December 31 1969 1970 1971 1972 1973
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested 25,318 27,305 28,565 29,917 33,353
Value at Year-End/1/ 884,824 908,018 1,062,651 1,231,087 1,024,067
Dividends in Cash 9,024 9,438 9,569 9,750 10,569
Value at Year-End/1/ 309,611 307,421 349,727 394,701 317,911
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 2.6 3.1 3.1 2.8 2.7
Capital Return (13.3) (0.5) 13.9 13.1 (19.5)
ICA TOTAL RETURN (10.7) 2.6 17.0 15.9 (16.8)
Fund Expenses/4/ 0.48 0.55 0.51 0.49 0.47
Year ended December 31 1974 1975 1976 1977 1978
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested 52,187 49,800 46,441 49,838 55,969
Value at Year-End/1/ 840,310 1,137,660 1,474,369 1,436,402 1,647,483
Dividends in Cash 15,908 14,318 12,804 13,279 14,386
Value at Year-End/1/ 245,526 317,655 398,099 374,307 414,421
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 5.1 5.9 4.1 3.4 3.9
Capital Return (23.0) 29.5 25.5 (6.0) 10.8
ICA TOTAL RETURN (17.9) 35.4 29.6 (2.6) 14.7
Fund Expenses/4/ 0.49 0.48 0.46 0.49 0.49
</TABLE>
- --
<TABLE>
<CAPTION>
Year ended December 31 1979 1980 1981 1982 1983
<S> <C> <C> <C> <C> <C>
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested 69,960 91,302 115,901 146,105 147,156
Value at Year-End/1/ 1,963,310 2,380,187 2,401,091 3,211,997 3,859,712
Dividends in Cash 17,347 21,746 26,420 31,589 30,264
Value at Year-End/1/ 475,669 552,242 530,864 670,590 774,518
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 4.2 4.7 4.9 6.1 4.6
Capital Return 15.0 16.5 (4.0) 27.7 15.6
ICA TOTAL RETURN 19.2 21.2 0.9 33.8 20.2
Fund Expenses/4/ 0.47 0.46 0.45 0.46 0.44
Year ended December 31 1984 1985 1986 1987 1988
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested 160,449 174,890 203,830 267,489 318,747
Value at Year-End/1/ 4,117,187 5,491,890 6,685,657 7,049,178 7,989,285
Dividends in Cash 31,680 33,152 37,328 47,452 54,382
Value at Year-End/1/ 791,971 1,017,904 1,200,518 1,220,928 1,327,375
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 4.2 4.2 3.7 4.0 4.5
Capital Return 2.5 29.2 18.0 1.4 8.8
ICA TOTAL RETURN 6.7 33.4 21.7 5.4 13.3
Fund Expenses/4/ 0.47 0.43 0.41 0.42 0.48
Year ended December 31 1989 1990 1991 1992 1993
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested 370,835 406,318 320,422 357,779 374,395
Value at Year-End/1/ 10,338,589 10,409,027 13,171,892 14,092,236 15,729,365
Dividends in Cash 60,741 64,056 48,721 52,965 54,005
Value at Year-End/1/ 1,652,751 1,598,821 1,969,876 2,052,162 2,234,153
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 4.6 3.9 3.1 2.7 2.7
Capital Return 24.8 (3.2) 23.4 4.3 8.9
ICA TOTAL RETURN 29.4 0.7 26.5 7.0 11.6
Fund Expenses/4/ 0.52 0.55 0.59 0.58 0.59
Year ended December 31 1994 1995 1996 1997
YEAR-BY-YEAR SUMMARY OF RESULTS
Dividends Reinvested 407,211 450,124 480,065 510,312
Value at Year-End/1/ 15,753,834 20,578,696 24,560,540 31,881,108
Dividends in Cash 57,286 61,704 64,313 67,021
Value at Year-End/1/ 2,180,610 2,779,658 3,247,852 4,142,648
ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED
Income Return 2.6 2.9 2.3 2.1
Capital Return (2.4) 27.7 17.0 27.7
ICA TOTAL RETURN 0.2 30.6 19.3 29.8
Fund Expenses/4/ 0.60 0.60 0.59 0.56
</TABLE>
- ---
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
S&P 500 with dividends reinvested
1934 1935 1936 1937 1938 1939 1940 1941
9.8 14.6 19.5 12.7 16.6 16.5 15.0 13.2
1942 1943 1944 1945 1946 1947 1948 1949
15.9 20.0 24.0 32.7 30.0 31.8 33.5 39.8
1950 1951 1952 1953 1954 1955 1956 1957
52.4 64.9 76.9 76.1 116.1 152.7 162.7 145.1
1958 1959 1960 1961 1962 1963 1964 1965
208.1 232.9 233.9 296.8 270.8 332.5 387.3 435.5
1966 1967 1968 1969 1970 1971 1972 1973
391.7 485.7 539.4 493.8 513.1 586.6 697.8 595.7
1974 1975 1976 1977 1978 1979 1980 1981
437.9 600.7 744.8 691.5 736.8 873.9 1,156.2 1,098.8
1982 1983 1984 1985 1986 1987 1988 1989
1,334.8 1,635.8 1,738.5 2,289.0 2,714.0 2,857.4 3,330.8 4,384.0
1990 1991 1992 1993 1994 1995 1996 1997
4,246.7 5,637.2 5,957.6 6,556.4 6,641.2 9,133.9 11,225.6 14,965.4
</TABLE>
[end chart]
Average annual compound return for 64 years:
3.32%
10.11%
13.43%/1/
Past results are not predictive of future results. The S&P 500 Index is
unmanaged and does not reflect sales charges, commissions or expenses.
/1/These figures, unlike those shown earlier in this report, reflect payment of
the maximum sales charge of 5.75% on the $10,000 investment. Thus, the net
amount invested was $9,425. As outlined in the prospectus, the sales charge is
reduced for larger investments. There is no sales charge for dividends or
capital gain distributions that are reinvested in additional shares. The
maximum initial sales charge was 8.5% prior to July 1, 1988. No adjustment has
been made for income or capital gain taxes.
/2/Includes dividends of $5,953,722 and capital gain distributions of
$10,208,147 reinvested in the years 1936-1997.
/3/Includes reinvested capital gain distributions of $1,711,157 but does not
reflect income dividends of $1,064,871 taken in cash.
/4/Fund expense percentages are provided as additional information. They should
not be subtracted from any other figure on the table because all fund results
already reflect their effect.
THE VALUE OF LONG-TERM INVESTING IN CONTRASTING MARKET ENVIRONMENTS
[Begin pullquote]
"WE HAVE A LEGACY OF PAYING ATTENTION TO WHAT MIGHT HAPPEN IN A DOWN MARKET."
R. Michael Shanahan
[artist sketch: R. Michael Shanahan]
Began with ICA's management company, CRMC, in 1965. He currently serves as its
chairman and as a portfolio counselor and senior vice president of ICA.
[End pullquote]
Chances are, as a fellow ICA shareholder, you share with us a belief in the
importance of taking the long view in your investment decisions. In fact, more
than 17,000 of you have been with us at least a quarter century. That is long
enough to remember when the stock market didn't always go up and market
setbacks weren't always followed by overnight recoveries.
As we pointed out in these pages last year, a unique aspect of this fund is the
degree of shared interest in the long-term approach. On average, ICA
shareholders stay with the fund 12 years (based on redemption rates), compared
with eight for all growth and income funds. Similarly, ICA typically holds
securities longer than most funds - the annual turnover, the rate at which we
change the portfolio, was 26% last year, in sharp contrast to 66% for all
growth and income funds.*
There is at least one more significant difference between ICA and the industry.
Most of the fund's portfolio is managed by individuals who, like so many of
you, have been with ICA or with Capital Research and Management Company (CRMC),
ICA's investment adviser, for more than a quarter century. To be exact, six
portfolio counselors have at least that much tenure with Capital, two of them
more than 35 years. A seventh began her career as an investment professional
with another firm more than 25 years ago. The other two, while younger, have
been with Capital long enough to experience the brief but severe market break
of 1987.
This group represents quite a resource. We thought we'd draw on them in this
year's report to offer you some insights into what it was like to invest in a
different market environment, before the bulls began what is already a 15-year
run on Wall Street. To that end, we will examine the contrast between the last
15 years and the 15-year span from the beginning of 1968 to the end of 1982, a
period marked by one prolonged and several other significant market declines.
For ICA, the basic approach remained about the same through both periods. We
maintained a long-term perspective and employed painstaking research to find
companies that we believed offered real value in terms of management, business
prospects and future dividends. We believed then and we believe now that by
steering such a course, even though it often means not "following the crowd,"
we can achieve results that transcend the intervening swings in stock market
prices.
*Sources: Investment Company Institute, American Funds Distributors, Strategic
Insight, Lipper Analytical Services.
A BRIEF LOOK AT THE TWO PERIODS
The charts below show just how much contrast there was between the two periods.
The '68-'82 period encompassed the tail end of a highly speculative chapter in
U.S. stock market history, when the securities of a number of small and
medium-size companies, many not well-tested, became extreme high-fliers until
the bubble burst in 1969-70. What followed was a flight from those stocks to
those of large, well-established companies, names like Coca-Cola, Disney,
Eastman Kodak and Avon - the Nifty Fifty in the parlance of the day. They led
the market to new highs in 1972-73.
[Begin pullquote]
"WE'RE BRINGING YOUNGER PROFESSIONALS INTO ICA WITH THE MATURITY TO UNDERSTAND
WHAT'S GONE BEFORE."
William R. Grimsley
[artist sketch: William R. Grimsley]
Joined Capital in 1969 and became an ICA portfolio counselor in 1971. He is
chairman of CRMC's investment committee and a senior vice president of the
fund.
[End pullquote]
[Begin mountain chart]
Growth of a $10,000 Investment (with dividends reinvested)
<TABLE>
<CAPTION>
<S> <C> <C>
Date ICA S&P 500
1/1/68 10,000 10,000
1/31/68 9,624 9,562
2/28/68 9,275 9,263
3/31/68 9,419 9,427
4/30/68 10,261 10,200
5/31/68 10,629 10,314
6/30/68 10,735 10,487
7/31/68 10,493 10,293
8/31/68 10,642 10,411
9/30/68 11,226 10,894
10/31/68 11,461 10,973
11/30/68 11,997 11,499
12/31/68 11,697 11,105
1/31/69 11,747 11,014
2/28/69 11,113 10,492
3/31/69 11,375 10,939
4/30/69 11,553 11,174
5/31/69 11,537 11,149
6/30/69 10,734 10,609
7/31/69 10,237 9,970
8/31/69 10,602 10,370
9/30/69 10,446 10,192
10/31/69 10,915 10,643
11/30/69 10,602 10,267
12/31/69 10,447 10,166
1/31/70 9,601 9,389
2/29/70 10,297 9,883
3/31/70 10,294 9,984
4/30/70 9,325 9,081
5/31/70 8,756 8,527
6/30/70 8,421 8,184
7/31/70 9,062 8,784
8/31/70 9,550 9,174
9/30/70 9,913 9,568
10/31/70 9,675 9,459
11/30/70 10,031 9,907
12/31/70 10,721 10,565
1/31/71 11,192 10,992
2/29/71 11,294 11,092
3/31/71 11,783 11,589
4/30/71 12,214 12,010
5/31/71 11,817 11,511
6/30/71 11,887 11,609
7/31/71 11,540 11,129
8/31/71 12,105 11,531
9/30/71 12,026 11,540
10/31/71 11,511 11,058
11/30/71 11,389 11,029
12/31/71 12,547 12,078
1/31/72 12,888 12,297
2/29/72 13,202 12,608
3/31/72 13,291 12,772
4/30/72 13,408 12,828
5/31/72 13,571 13,049
6/30/72 13,137 12,856
7/31/72 13,064 12,866
8/31/72 13,664 13,329
9/30/72 13,465 13,358
10/31/72 13,575 13,482
11/30/72 14,370 14,097
12/31/72 14,536 14,367
1/31/73 13,938 14,121
2/29/73 13,226 13,591
3/31/73 13,087 13,686
4/30/73 12,493 13,108
5/31/73 12,061 12,860
6/30/73 11,928 12,877
7/31/73 12,748 13,366
8/31/73 12,488 12,876
9/30/73 13,376 13,499
10/31/73 13,376 13,481
11/30/73 11,843 11,946
12/31/73 12,091 12,264
1/31/74 12,182 12,141
2/28/74 12,424 12,097
3/31/74 12,048 11,917
4/30/74 11,773 11,452
5/31/74 11,396 11,068
6/30/74 11,160 11,017
7/31/74 10,688 10,160
8/31/74 9,979 9,242
9/30/74 9,043 8,243
10/31/74 10,287 8,587
11/30/74 9,987 9,077
12/31/74 9,922 9,017
1/31/75 11,025 10,124
2/28/75 11,454 10,730
3/31/75 11,957 11,084
4/30/75 12,704 11,608
5/31/75 13,224 12,120
6/30/75 13,917 12,786
7/31/75 13,077 11,921
8/31/75 12,848 11,670
9/30/75 12,486 11,385
10/31/75 13,046 12,067
11/30/75 13,442 12,385
12/31/75 13,433 12,367
1/31/76 15,169 13,831
2/28/76 15,260 13,673
3/31/76 15,699 14,221
4/30/76 15,608 14,065
5/31/76 15,586 13,863
6/30/76 16,383 14,574
7/31/76 16,234 14,457
8/31/76 16,142 14,383
9/30/76 16,657 14,853
10/31/76 16,194 14,522
11/30/76 16,356 14,410
12/31/76 17,408 15,334
1/31/77 16,662 14,559
2/28/77 16,271 14,244
3/31/77 16,163 14,192
4/30/77 16,438 14,192
5/31/77 16,306 13,860
6/30/77 17,071 14,665
7/31/77 16,805 14,427
8/31/77 16,540 14,124
9/30/77 16,530 14,256
10/31/77 15,959 13,637
11/30/77 16,762 14,005
12/31/77 16,960 14,237
1/31/78 15,970 13,362
2/28/78 15,832 13,031
3/31/78 16,622 13,537
4/30/78 18,229 14,693
5/31/78 16,899 14,763
6/30/78 18,810 14,686
7/31/78 20,404 15,476
8/31/78 21,080 15,879
9/30/78 20,648 16,856
10/31/78 18,219 14,495
11/30/78 19,054 14,736
12/31/78 19,452 15,169
1/31/79 20,186 15,772
2/29/79 19,136 15,196
3/38/79 20,475 16,252
4/30/79 20,608 16,279
5/31/79 20,184 15,850
6/30/79 21,110 16,699
7/31/79 21,555 16,845
8/31/79 23,168 17,739
9/30/79 23,219 17,971
10/31/79 21,145 16,738
11/30/79 22,384 17,452
12/31/79 23,131 17,993
1/31/80 24,682 19,030
2/28/80 23,789 18,947
3/31/80 21,672 17,237
4/30/80 22,039 17,946
5/31/80 23,279 18,782
6/30/80 23,727 19,559
7/31/80 25,747 20,831
8/31/80 26,003 20,952
9/30/80 26,512 21,753
10/31/80 26,800 22,102
11/30/80 28,408 24,365
12/31/80 28,103 23,804
1/31/81 27,268 22,715
2/28/81 28,141 23,017
3/31/81 29,426 24,133
4/30/81 29,204 23,567
5/31/81 29,805 23,528
6/30/81 29,642 23,576
7/31/81 29,163 23,524
8/31/81 28,077 22,063
9/30/81 27,190 21,163
10/31/81 28,257 22,203
11/30/81 28,871 23,016
12/31/81 28,350 22,622
1/31/82 28,291 22,225
2/28/82 27,553 20,879
3/31/82 27,767 20,972
4/30/82 28,882 21,811
5/31/82 28,199 20,957
6/30/82 28,273 20,855
7/31/82 27,908 20,375
8/31/82 31,515 22,739
9/30/82 31,689 23,243
10/31/82 35,588 25,809
11/30/82 37,327 26,741
12/31/82 37,925 27,481
</TABLE>
[End chart]
[Begin mountain chart]
<TABLE>
<CAPTION>
<S> <C> <C>
Date ICA S&P 500
1/1/83 10,000 10,000
1/31/83 10,206 10,331
2/28/83 10,555 10,528
3/31/83 10,923 11,002
4/30/83 11,536 11,826
5/31/83 11,339 11,680
6/30/83 11,888 12,225
7/31/83 11,470 11,821
8/31/83 11,501 11,955
9/30/83 11,835 12,208
10/31/83 11,814 12,023
11/30/83 12,121 12,232
12/31/83 12,017 12,255
1/31/84 11,818 12,142
2/28/84 11,282 11,670
3/31/84 11,595 11,963
4/30/84 11,617 12,029
5/31/84 11,030 11,315
6/30/84 11,338 11,659
7/31/84 11,247 11,467
8/31/84 12,354 12,687
9/30/84 12,237 12,784
10/31/84 12,503 12,783
11/30/84 12,410 12,590
12/31/84 12,818 13,025
1/31/85 13,658 13,990
2/29/85 13,719 14,110
3/31/85 13,858 14,220
4/30/85 13,673 14,155
5/31/85 14,622 14,920
6/30/85 14,896 15,260
7/31/85 15,008 15,186
8/31/85 14,933 15,004
9/30/85 14,561 14,633
10/31/85 15,201 15,255
11/30/85 16,142 16,248
12/31/85 17,098 17,149
1/31/86 17,399 17,189
2/29/86 18,781 18,418
3/31/86 19,681 19,566
4/30/86 19,710 19,289
5/31/86 20,313 20,258
6/30/86 20,689 20,716
7/31/86 19,936 19,501
8/31/86 21,239 20,889
9/30/86 19,793 19,262
10/31/86 20,522 20,316
11/30/86 21,004 20,753
12/31/86 20,815 20,332
1/31/87 23,008 23,011
2/29/87 23,987 23,861
3/31/87 24,303 24,672
4/30/87 24,143 24,390
5/31/87 24,255 24,537
6/30/87 25,197 25,913
7/31/87 26,177 27,163
8/31/87 27,429 28,112
9/30/87 26,979 27,618
10/31/87 22,275 21,608
11/30/87 20,659 19,763
12/31/87 21,946 21,407
1/31/88 22,573 22,272
2/29/88 23,548 23,204
3/31/88 22,720 22,618
4/30/88 22,896 22,832
5/31/88 23,143 22,904
6/30/88 24,187 24,126
7/31/88 24,134 23,996
8/31/88 23,477 23,069
9/30/88 24,406 24,212
10/31/88 24,818 24,840
11/30/88 24,370 24,371
12/31/88 24,873 24,953
1/31/89 26,450 26,728
2/28/89 25,950 25,954
3/31/89 26,589 26,723
4/30/89 27,854 28,062
5/31/89 29,002 29,048
6/30/89 28,941 29,075
7/31/89 31,137 31,645
8/31/89 31,490 32,136
9/30/89 31,903 32,182
10/31/89 31,489 31,372
11/30/89 31,903 31,891
12/31/89 32,187 32,843
1/31/90 30,371 30,583
2/28/90 30,751 30,844
3/31/90 31,537 31,856
4/30/90 31,239 31,000
5/31/90 33,455 33,851
6/30/90 33,324 33,849
7/31/90 33,109 33,672
8/31/90 30,513 30,496
9/30/90 29,713 29,204
10/31/90 29,621 28,009
11/30/90 21,248 30,747
12/31/90 32,407 31,816
1/31/91 34,103 33,137
2/28/91 26,246 35,366
3/31/91 36,333 36,428
4/30/91 36,333 36,439
5/31/91 37,941 37,844
6/30/91 36,078 36,331
7/31/91 37,696 37,961
8/31/91 38,380 38,707
9/30/91 38,313 38,267
10/31/91 38,795 38,721
11/30/91 27,373 37,020
12/31/91 41,009 41,484
1/31/92 40,328 40,658
2/28/92 40,985 41,047
3/31/92 40,186 40,434
4/30/92 141,154 41,562
5/31/92 41,485 41,602
6/30/92 40,917 41,198
7/31/92 42,437 42,821
8/31/92 41,843 41,793
9/30/92 42,558 42,499
10/31/92 42,008 42,589
11/30/92 43,275 43,878
12/31/92 43,874 44,633
1/31/93 44,340 44,947
2/28/93 44,683 45,419
3/31/93 45,398 46,582
4/30/93 44,681 45,398
5/31/93 45,670 46,429
6/30/93 45,917 46,802
7/31/93 45,892 46,553
8/31/93 49,133 48,158
9/30/93 47,433 48,004
10/31/93 48,459 48,935
11/30/93 47,909 48,303
12/31/93 48,971 49,117
1/31/94 50,567 50,714
2/29/94 49,023 49,190
3/38/94 47,158 47,255
4/30/94 47,921 47,800
5/31/94 48,763 48,393
6/30/94 47,702 47,448
7/31/94 49,105 48,942
8/31/94 51,037 50,782
9/30/94 49,575 49,757
10/31/94 50,400 50,796
11/30/94 45,803 48,789
12/31/94 49,047 49,753
1/31/95 49,769 50,961
2/28/95 51,268 52,799
3/31/95 52,441 54,592
4/30/95 53,699 56,118
5/31/95 55,794 58,156
6/30/95 57,002 59,794
7/31/95 58,969 61,695
8/31/95 59,222 61,675
9/30/95 60,747 64,548
10/31/95 60,267 64,226
11/30/95 62,960 66,863
12/31/95 64,068 68,428
1/31/96 66,025 70,680
2/28/96 66,618 71,150
3/31/96 67,390 72,097
4/30/96 68,135 73,065
5/31/96 69,387 74,735
6/30/96 69,147 75,324
7/31/96 66,690 71,879
8/31/96 71,109 73,231
9/30/96 25,950 77,635
10/31/96 26,289 79,664
11/30/96 77,674 85,509
12/31/96 76,465 84,098
1/31/97 79,937 89,255
2/28/97 81,262 89,784
3/31/97 89,591 86,368
4/30/97 81,762 91,412
5/31/97 86,675 96,767
6/30/97 90,268 101,413
7/31/97 96,700 109,336
8/31/97 92,847 103,055
9/30/97 97,535 108,998
10/31/97 94,946 105,240
11/30/97 97,503 109,932
12/31/97 99,257 112,116
</TABLE>
[end chart]
[begin chart]
Yearly Total Return
<TABLE>
<CAPTION>
<S> <C> <C>
Year ICA S&P 500
1967 28.89 24.00
1968 16.97 11.05
1969 -10.68 -8.45
1970 2.62 3.92
1971 17.03 14.32
1972 15.85 18.95
1973 -16.82 -14.63
1974 -17.94 -26.48
1975 35.39 37.16
1976 29.60 23.99
1977 -2.58 -7.15
1978 14.70 6.54
1979 19.17 18.62
1980 21.23 32.29
1981 0.88 -4.97
1982 33.77 21.48
</TABLE>
[end chart]
[begin chart]
<TABLE>
<CAPTION>
<S> <C> <C>
Year ICA S&P 500
1983 20.17 22.55
1984 6.67 6.28
1985 33.39 31.66
1986 21.74 18.56
1987 5.44 5.29
1988 13.34 16.57
1989 29.41 31.62
1990 0.68 -3.13
1991 26.54 30.39
1992 6.99 7.59
1993 11.62 10.05
1994 0.16 1.29
1995 30.63 37.53
1996 19.35 22.90
1997 29.81 33.32
</TABLE>
[Begin pullquote]
"WE JUST COULDN'T BRING OURSELVES TO BUY WHAT THE WORLD WAS SO HAPPY WITH."[end
chart]
James F. Rothenberg
[artist sketch: James F. Rothenberg]
Joined Capital in 1970 as an analyst. He is president of CRMC as well as a
portfolio counselor for ICA.
[End pullquote]
Then matters turned very sour, indeed. The nation, already suffering its
Vietnam nightmare, entered a troubled period of Watergate, war in the Middle
East, oil shocks, rising inflation and interest rates, and then recession.
Investor infatuation with the Nifty Fifty evaporated and the market headed into
a dreadful slide that lasted almost two years and left the S&P 500 index
(excluding income) down 48% from its high.
It wasn't until 1980 that the market as measured by the S&P 500 regained that
lost ground. Then it slipped again in 1981 and into mid-1982, a decline of 27%.
What has followed has been years of declining inflation, falling interest
rates, an economic regeneration in America as businesses restructured to become
more efficient, and the end of the Cold War. All of these positive developments
fueled huge market gains and only the briefest of severe market drops (34% in
late 1987 followed by full recovery in 18 months; 20% during the Gulf War
period of 1990 with full recovery in just six months). After 1990, there was a
record seven-year period without a decline of as much as 10%, ending with a
10.8% drop in October 1997.
ICA'S RECORD AND THE CASE FOR RATIONAL EXPECTATIONS
The table below offers a snapshot of average annual compound returns for the
stock market and for ICA for those periods.
<TABLE>
<CAPTION>
<S> <C> <C>
ICA S&P 500
1/1/68 to 12/31/82 9.3% 7.0%
1/1/83 to 12/31/97 16.5 17.5
Entire period 12.9 12.1
</TABLE>
The numbers tell two stories at once. One is that ICA's research-driven,
value-oriented investing approach did much better than the broad market in the
troubled first period and has managed to hold its own, despite its
traditionally more conservative nature, against the sharply rising market
since. The other is that it takes a long memory to understand that history
tells us not to look for high double-digit returns forever.
Which brings us to our discussion with those who are part of ICA's uncommonly
long institutional memory.
MAINTAINING A HEALTHY RESPECT FOR RISK
Probably because CRMC traces its roots to 1931, "we have a legacy of paying
attention to what might happen in a down market," says Mike Shanahan, one of
the portfolio counselors for the fund and CRMC's research director for part of
the first period we're examining. "You used to see one about every four years."
CRMC employs multiple counselors to manage ICA for a number of reasons. The
multiplicity of managers helps limit the amount of money each has
responsibility for in a large and growing fund. It provides for continuity in
case one departs. It engenders portfolio diversity because each counselor runs
a portion of the fund independently within the fund's overall objectives.
One thing they all share is a commitment to long-term, value-oriented
investing. By that they mean doing the hard research about individual companies
that can uncover a long-term investment opportunity not yet fully recognized in
the price of the stock. (See page 11 for a look at what goes into identifying
value.) Some also call it "full-cycle investing" - in other words, buying and
holding a stock that will survive a bad market and thus reward its owner over
the long pull.
"What I like to do is invest for at least a cycle-and-a-half," explains Jon
Lovelace, ICA's chairman and a 40-year veteran of the fund's management. The
point, he says, is to find a stock that is undervalued now that you think will
grow in an up market, be resilient in a down market and go on to new heights in
the succeeding recovery. To him, that's at least a six-year expectation.
THE SIREN SONG OF THE NIFTY FIFTY
Value investing and the Nifty Fifty period didn't exactly mesh very well.
During the run-up from mid-1970 to early 1973, the stocks ICA didn't then own -
Disney, Eastman Kodak, Coca-Cola - far outpaced the market. But not owning
those stocks helped soften the blow when that bubble burst. "We just couldn't
bring ourselves to buy what the world was so happy with," recalls Jim
Rothenberg, who began at Capital just as the Nifty Fifty started their run in
1970. At the end of 1972, only three of the Nifty Fifty were among ICA's ten
largest holdings; by the end of 1973, only one.
[Begin pullquote]
"GOOD RESEARCH IS WHAT HELPS TO REDUCE OUR RISK."
Gordon Crawford
[artist sketch: Gordon Crawford]
Became an analyst for Capital in 1971. He serves the fund in that capacity
today and is also a senior vice president and director of CRMC.
[End pullquote]
[Begin sidebar]
William C. Newton
[artist sketch: William C. Newton]
Has been with CRMC for 39 years and an ICA portfolio counselor for 36 years. He
became president of the fund in 1985.
[End sidebar]
[Begin pullquote]
"BEING FUNDAMENTAL AND BEING LONG-TERM ARE A GOOD COMPLEMENT TO EACH OTHER."
Joyce Gordon
[artist sketch: Joyce Gordon]
Has been with Capital since 1975 and an analyst since 1987. She serves as
coordinator of ICA's research portfolio, the portion of the fund's assets
managed directly by its analysts.
[End pullquote]
[Begin sidebar]
Jon B. Lovelace, Jr.
[artist sketch: Jon B. Lovelace, Jr.]
Has 46 years with Capital, including 40 years with ICA as a portfolio
counselor. He has served as chairman of the fund since 1970 and is vice
chairman of CRMC.
[End sidebar]
Jim Rothenberg tells of looking at Avon, selling at an extremely high 60-times
its then annual per-share earnings (commonly called its price/earnings or P/E
ratio). To justify that, Avon would have had to achieve a 30% compound rate of
earnings growth for the next 25 to 30 years, he figured. If they'd been able to
do that, "every man, woman and child would have had a bookcase full of their
little bottles. So it was just market euphoria and every time we looked at
basic value, we couldn't find it in the things most investors liked. So we
looked for other companies."
Long-term, that turned out well. But there was another lesson to be learned.
When the broad market broke and headed into its 48% slide in 1973-74, even the
"other" stocks got dragged down for a while. Listen to Bill Grimsley, another
ICA counselor who was there: "That market shook any smugness out of us. Stocks
went down, even with no change in the underlying earnings or dividends. Some
dropped from a P/E of 50 or more to 15 or even 10. It taught me that even when
you concentrate on value, there's no absolute."
Still, serious research paid off in many cases. Bill Newton, ICA's president,
took responsibility for large investments in both the Pennsylvania and the New
York Central railroads before their merger in 1968, but detected early the
potential for cost problems in the merged lines' future, ultimately their
downfall. "One of our analysts came back from a field trip and expressed
concern, so we sold," Bill relates. That was in the third quarter of 1968.
Within two years, Penn Central stock had plummeted from 86 to 6.
"Good research is what helps to reduce our risk," says Gordon Crawford, who for
more than 25 years has served the fund as an analyst with investment
responsibility in ICA's research portfolio - the segment of the fund's assets
managed by roughly two dozen analysts. "A stock we know well is less likely to
blow up on us."
Gregg Ireland, another quarter-century veteran as a CRMC analyst and counselor,
believes that the basic culture at Capital and ICA promotes consistency. "I can
feel very comfortable staying with my long-term convictions about a stock
without worrying about what's happening at any given time."
A CLOSE LOOK AT VALUE
[collage: dollar bill, portfolio listings, stock listings, mathematical
problems]
We talk so much about value-oriented investing that we want to define for you
how we go about determining value. Some of the effort involves crunching a lot
of numbers to arrive at estimates for future earnings and dividends. Some of
it, however, involves less tangible measures.
Jonathan Bell Lovelace, who founded Capital Research and Management Company in
1931 and began managing ICA in December 1933, was a pioneer in field research
as early as the 1920s, including getting to know managements firsthand. We
think a company's management makes a great deal of difference, so our analysts
go to great lengths to get to know the people who manage the companies we're
interested in, to understand their capabilities and their vision.
In addition, we look at a company's competitive position in the marketplace -
often a worldwide marketplace - and at the anticipated flow of new products or
services. We feed all this into a picture of what this company will be like
three to six years hence. Often, several of our analysts and portfolio
counselors are part of this exercise.
Finally, the question is whether the stock market has already set a value for
the company's shares that recognizes what we see as its future worth. If so, we
may wait for a dip in the market before investing. If not, we may begin
building a sizable position.
That research-based approach, we believe, helps us avoid being caught up in the
frenzy of a particular period in the stock market. Hindsight is always an
advantage, but keeping a tight focus on value certainly has helped us in the
past. In the early 1970s, for example, our analysts had one fairly simple
exercise: comparing the values of individual stocks in the Nifty Fifty with
some of those outside that high-flying group.
Take Avon and Disney, which were among the most favored by investors at the
time. Their shares were priced, respectively, in the rarefied air of 60- and
75-times their current per-share earnings by early 1973. In other words, if the
company expected to earn one dollar a share in its current year, then at
75-times earnings, the stock would be selling at $75. Placing that multiple on
current earnings means anticipating a continuation of spectacular growth.
Contrast that with Ford, not in the Nifty Fifty. It was selling at less than
nine-times earnings. Arguably, its prospects might not have appeared to be as
bright as those of the other two, yet they weren't that radically different.
That helps explain why you didn't find Avon and Disney in ICA's portfolio while
Ford was among the fund's biggest holdings in 1972.
When the overall stock market descended, all three of these stocks skidded,
bottoming out at much more subdued price/earnings valuations - nine for Avon,
13 for Disney and seven for Ford. Ford's stock price was driven down by an
earnings decline, but the stock recovered most of its lost ground much faster
than Avon and Disney. In fact, Avon only recovered to its 1973 peak last year.
Those ratios, of course, are only one measure of relative values. But sometimes
they speak loudly.
[Begin pullquote]
"I CAN FEEL VERY COMFORTABLE STAYING WITH MY LONG-TERM CONVICTIONS ABOUT A
STOCK..."
Gregg E. Ireland
[artist sketch: Gregg E. Ireland]
Has spent 25 years with Capital as an investment professional. He is a vice
president of the fund and became one of its portfolio counselors in 1991.
[End pullquote]
[Begin sidebar]
James B. Lovelace
[artist sketch: James B. Lovelace]
Has spent 16 years with Capital, and has been a portfolio counselor for ICA for
six years. He is a vice president of the fund.
[End sidebar]
CONSISTENCY THROUGH PAST ROUGH TIMES
Tough as the market was during the '68 -'82 period, ICA's consistency over the
long term shone through. Results for the seven rolling ten-year periods ended
December 1977 to December 1983 were all better than for the unmanaged S&P 500,
as shown below:
[begin bar chart]
Annualized Total Returns for 10-Year Periods
<TABLE>
<CAPTION>
<S> <C> <C>
10 Year Period ICA S&P 500
1/68 - 12/77 5.42 3.60
1/69 - 12/78 5.22 3.17
1/70 - 12/79 8.30 5.88
1/71 - 12/80 10.12 8.46
1/72 - 12/81 8.49 6.48
1/73 - 12/82 10.06 6.70
1/74 - 12/83 14.19 10.63
</TABLE>
[end chart]
The fund's results continued to exceed the S&P 500 figures over the next seven
rolling ten-year periods:
[begin bar chart]
Annualized Total Returns for 10-Year Periods
<TABLE>
<CAPTION>
<S> <C> <C>
10 Year Period ICA S&P 500
1/75 - 12/84 17.22 14.78
1/76 - 12/85 17.05 14.31
1/77 - 12/86 16.32 13.80
1/78 - 12/87 17.24 15.24
1/79 - 12/88 17.10 16.28
1/80 - 12/89 18.07 17.50
1/81 - 12/90 15.90 13.89
</TABLE>
[end chart]
ICA's results kept pace until the last three periods. As the market run-up
continued unabated, some of the fund's counselors became more cautious:
[begin bar chart]
Annualized Total Returns for 10-Year Periods
<TABLE>
<CAPTION>
<S> <C> <C>
10 Year Period ICA S&P 500
1/82 - 12/91 18.56 17.55
1/83 - 12/92 15.94 16.14
1/84 - 12/93 15.08 14.89
1/85 - 12/94 14.36 14.34
1/86 - 12/95 14.12 14.84
1/87 - 12/96 13.90 15.26
1/88 - 12/97 16.29 18.01
</TABLE>
[end chart]
POST-1982: STAYING WITH WHAT WORKS
Ask ICA portfolio counselors what has been different about ICA's investment
approach in the period since 1982 and they will likely say, "very little."
The commitment to research, to value and to long-term investing remains firm
even as the siren song of this relentless bull market has beckoned. "Being
fundamental and being long-term are a good complement to each other," observes
Joyce Gordon, an analyst for the fund since before the 1987 market break. "I
can't imagine being at a place where you constantly jump in and out." She notes
that many of the bank holdings that have been so profitable for the fund in
recent years were first identified in 1990, when banks were out of favor with
investors. Joyce now coordinates the
aforementioned research portfolio, which she regards as a valuable
communication tool. By looking at what an analyst has invested in, the
portfolio counselors can measure the analyst's convictions.
The mid-1990's market, like the market of the early 1970s, has featured an
uncommonly narrow focus on the stocks of a relatively few big companies. That
focus has shifted a bit to a broader field since last summer. Still, says Mike
Shanahan, the current period requires a different view of what you should pay
for growth and dividends. "It's a tough period because there are so few
benchmarks."
Gordon Crawford views the picture a little differently. He sees strong economic
fundamentals, a strong U.S. economy with low inflation, and little of the
troubled economic and political backdrop that affected the market of the 1970s.
Moreover, prices relative to earnings for most of the big stocks responsible
for much of the stock market's recent gains are still well below where they
were for many of the hottest stocks before the 1973-74 plunge.
Jon Lovelace observes, "Sticking to the value approach in this kind of stock
market can be too conservative for the moment, but often when the downturn
comes, it's like a flash flood that comes too fast to do much about it." In
sum, it pays to have a memory of other environments.
"Lots of people have contributed to ICA's success," says Bill Grimsley.
"Looking to the future, we're bringing some younger analysts and counselors
into the fund with the maturity to understand what's gone before and continue
our long-term approach."
As we've said many times, the long term is what really matters to us in our
investment effort. We believe that's what matters most to you, as well.
[Begin sidebar]
Dina N. Perry
[artist sketch: Dina N. Perry]
Has been a portfolio counselor for ICA for four years and with Capital for six.
She has been an investment professional for more than 25 years.
[End sidebar]
[Begin sidebar]
Donald D. O'Neal
[artist sketch: Donald D. O'Neal]
Has been with Capital 13 years. He is a vice president of the fund and has been
a portfolio counselor for the fund since 1991.
[End sidebar]
<TABLE>
INVESTMENT PORTFOLIO - December 31, 1997
- ------------------------------------------ ----------
Percent of
Largest Investment Categories Net Assets
- ------------------------------------------ ----------
Services 19.54%
Finance 18.52
Consumer Goods 17.02
<S> <C>
- ------------------------------------------ ----------
Percent of
Largest Individual Holdings Net Assets
- ------------------------------------------ ----------
Philip Morris 3.36%
Fannie Mae 3.02
Time Warner 1.93
Pfizer 1.80
AT&T 1.70
Royal Dutch Petroleum 1.69
DuPont 1.37
BankAmerica 1.36
Freddie Mac 1.33
Warner-Lambert 1.32
- ------------------------------------------ ----------
Percent of
Largest Industry Holdings Net Assets
- ------------------------------------------ ----------
Banking 9.56%
Health & Personal Care 7.35
Energy Sources 7.24
Telecommunications 6.94
Financial Services 5.47
COMPANIES WHOSE EQUITY SECURITIES WERE
ADDED TO OR ELIMINATED FROM THE PORTFOLIO
- ------------------------------------------
Companies appearing in the portfolio
since June 30, 1997
- ------------------------------------------
AMP
Cendant
Dillard's
Dow Jones
Emerson Electric
Fort James
Fujitsu
Genuine Parts
Kerr-McGee
Lowe's
Micron Technology
Newell
Woolworth
Zeneca Group
- ------------------------------------------
Companies eliminated from the portfolio
since June 30, 1997
- ------------------------------------------
Alcan Aluminium
American Home Products
Baker Hughes
ConAgra
El Paso Natural Gas
First Data
General Electric
Kimberly-Clark
Mannesmann
Tandem Computers
Toyota Motor
U S West Media Group
Wells Fargo
</TABLE>
<TABLE>
THE INVESTMENT COMPANY OF AMERICA
INVESTMENT PORTFOLIO, December 31, 1997
- ------------------------------------------
Equity Securities Market Percent
- ------------------------------------------ Number of Value of Net
Energy Shares (millions) Assets
- ------------------------------------------ ---------------------- -----------
<S> <C> <C> <C>
Energy Sources-7.24%
Amoco Corp. 2,300,000 $ 195.788 .49
Atlantic Richfield Co. 2,350,000 188.294 .47
British Petroleum Co. PLC (American Depositary
Receipts) 1,052,714 83.888 .21
Broken Hill Proprietary Co. Ltd. 3,857,507 35.796 .09
Chevron Corp. 3,450,000 265.650 .67
Elf Aquitaine (American Depositary Receipts) 3,000,000 175.875 .44
Exxon Corp. 800,000 48.950 .12
Kerr-McGee Corp. 860,800 54.487 .14
Mobil Corp. 1,500,000 108.281 .27
Murphy Oil Corp. 2,175,000 117.858 .30
Pennzoil Co. 500,000 33.406 .08
Phillips Petroleum Co. 3,800,000 184.775 .47
Royal Dutch Petroleum Co.
(New York Registered Shares) 12,400,000 671.925 1.69
Texaco Inc. 3,600,000 195.750 .49
TOTAL, Class B 1,359,340 148.123
TOTAL, Class B (American Depositary Receipts) 2,033,520 112.860 .66
Union Pacific Resources Group, Inc. 2,100,000 50.925 .13
Unocal Corp. 2,200,000 85.387 .22
USX-Marathon Group 3,500,000 118.125 .30
Utilities: Electric & Gas-1.03%
American Electric Power Co., Inc. 1,100,000 56.788 .14
Duke Energy Corp. 1,125,000 62.297 .16
Florida Progress Corp. 400,000 15.700 .04
GPU, Inc. 1,500,000 63.188 .16
Long Island Lighting Co. 4,100,000 123.513 .31
Southern Co. 2,500,000 64.688 .16
Union Electric Co. 550,000 23.787 .06
--------- ---------
3,286.104 8.27
--------- ---------
- ------------------------------------------
Materials
- ------------------------------------------
Chemicals-2.71%
Air Products and Chemicals, Inc. 1,935,000 159.154 .40
E.I. du Pont de Nemours and Co. 9,030,000 542.364 1.37
Eastman Chemical Co. 400,000 23.825 .06
Hoechst AG 350,000 12.267 .03
Imperial Chemical Industries PLC
(American Depositary Receipts) 1,600,000 103.900 .26
Monsanto Co. 5,613,100 235.750 .59
Forest Products & Paper-2.76%
Champion International Corp. 1,950,000 88.359 .22
Fort James Corp. 4,700,000 179.775 .45
Georgia-Pacific Corp., Georgia-Pacific Group 4,400,000 267.300
Georgia-Pacific Corp., Timber Group (1) 4,400,000 99.825 .92
International Paper Co. 1,500,000 64.688 .16
Louisiana-Pacific Corp. 2,900,000 55.100 .14
Union Camp Corp. 1,530,000 82.142 .21
Weyerhaeuser Co. 5300000 260.031 .66
Metals: Nonferrous-1.02%
Aluminum Co. of America 3,000,000 211.125 .53
Freeport-McMoRan Copper & Gold Inc., Class B 1,200,000 18.900 .05
Inco Ltd. 2,300,000 39.100 .10
Phelps Dodge Corp. 1,496,300 93.145 .24
WMC Ltd. 11,500,000 40.065 .10
Metals: Steel-0.12%
USX-U.S. Steel Group 1,500,000 46.875 .12
--------- ------
2,623.690 6.61
--------- ------
- ------------------------------------------
Capital Equipment
- ------------------------------------------
Aerospace & Military Technology-1.36%
Boeing Co. 2,420,000 118.429 .30
General Motors Corp., Class H 2,953,600 109.099 .28
Raytheon Co., Class A 2,310,305 113.927
Raytheon Co., Class B 1,700,000 85.850 .50
Sundstrand Corp. 1,212,600 61.084 .15
United Technologies Corp. 720,000 52.425 .13
Data Processing & Reproduction-3.50%
Cisco Systems, Inc. (1) 1,800,000 100.350 .25
Computer Associates International, Inc. 2,295,000 121.348 .31
Digital Equipment Corp. (1) 1,500,000 55.500 .14
Fujitsu Ltd. 5,654,000 60.647 .15
Hewlett-Packard Co. 2,750,000 171.875 .43
International Business Machines Corp. 3,884,600 406.183 1.03
Oracle Corp. (1) 12,793,750 285.461 .72
3Com Corp. (1) 2,600,000 90.838 .23
Xerox Corp. 1,300,000 95.956 .24
Electrical & Electronic-0.54%
Emerson Electric Co. 1,000,000 56.438 .14
Lucent Technologies Inc. 983,000 78.517 .20
Siemens AG 1,350,000 79.986 .20
Electronic Components-1.86%
AMP Inc. 600,000 25.200 .06
Intel Corp. 3,650,000 256.413 .65
Micron Technology, Inc. (1) 7,400,000 192.400 .48
Texas Instruments Inc. 5,940,000 267.300 .67
Energy Equipment-2.07%
Dresser Industries, Inc. 1,100,000 46.131 .12
Halliburton Co. 2,000,000 103.875 .26
Schlumberger Ltd. 6,400,000 515.200 1.30
Western Atlas Inc. (1) 2,100,000 155.400 .39
Industrial Components-0.53%
Dana Corp. 1,821,500 86.521 .22
Genuine Parts Co. 750,000 25.453 .06
Goodyear Tire & Rubber Co. 650,000 41.356 .10
Rockwell International Corp. 1,100,000 57.475 .15
Machinery & Engineering-2.70%
Caterpillar Inc. 8,910,000 432.692 1.09
Cummins Engine Co., Inc. (2) 1,041,800 61.531
Cummins Engine Co., Inc. (2,3) 958,200 56.594 .30
Deere & Co. 5,550,000 323.634 .81
Ingersoll-Rand Co. 2,400,000 97.200 .24
Parker Hannifin Corp. 2,210,000 101.384 .26
--------- ------
4,989.672 12.56
--------- ------
- ------------------------------------------
Consumer Goods
- ------------------------------------------
Appliances & Household Durables-0.22%
Newell Co. 2,106,600 89.530 .22
Automobiles-2.12%
Chrysler Corp. 8,300,000 292.056 .74
Ford Motor Co., Class A 3,700,000 180.144 .45
General Motors Corp. 2,800,000 169.750 .43
Honda Motor Co., Ltd. 843,000 30.938
Honda Motor Co., Ltd.
(American Depositary Receipts) 2,270,000 167.696 .50
Beverages & Tobacco-5.04%
Anheuser-Busch Companies, Inc. 1,563,000 68.772 .17
PepsiCo, Inc. 3,700,000 134.819 .34
Philip Morris Companies Inc. 29,400,000 1,332.188 3.36
RJR Nabisco Holdings Corp. 9,100,000 341.250 .86
Seagram Co. Ltd. 3,800,000 122.787 .31
Food & Household Products-2.05%
Archer Daniels Midland Co. 3,150,000 68.316 .17
Bestfoods (formerly CPC International Inc.) 1,441,100 155.278 .39
General Mills, Inc. 2,350,000 168.319 .43
Kellogg Co. 2,066,600 102.555 .26
Nestle SA 90,000 134.763 .34
Procter & Gamble Co. 900,000 71.831 .18
Unilever NV (New York Registered Shares) 1,800,000 112.387 .28
Health & Personal Care-7.35%
Abbott Laboratories 1,500,000 98.344 .25
Avon Products, Inc. 1,740,000 106.792 .27
Bristol-Myers Squibb Co. 1,600,000 151.400 .38
Gillette Co. 600,000 60.262 .15
Johnson & Johnson 900,000 59.288 .15
Eli Lilly and Co. 5,152,600 358.750 .91
Merck & Co., Inc. 3,000,000 318.750 .80
Pharmacia & Upjohn, Inc. 3,247,500 118.940 .30
Pfizer Inc 9,600,000 715.800 1.80
Schering-Plough Corp. 3,767,600 234.062 .59
SmithKline Beecham PLC
(American Depositary Receipts) 1,000,000 51.438 .13
Warner-Lambert Co. 4,223,500 523.714 1.32
Zeneca Group PLC 3,280,400 116.889
Zeneca Group PLC (American Depositary Receipts) 33,000 3.564 .30
Recreation & Other Consumer Products-0.24%
Eastman Kodak Co. 1,100,000 66.894 .17
Mattel, Inc. 800,000 29.800 .07
--------- ------
6,758.066 17.02
--------- ------
- ------------------------------------------
Services
- ------------------------------------------
Broadcasting & Publishing-5.01%
Dow Jones & Co., Inc. 1,469,800 78.910 .20
Houston Industries Inc., 7.00% ACES convertible prefe 500,000 28.531 .07
New York Times Co., Class A 2,200,000 145.475 .36
Tele-Communications, Inc., Series A,
Liberty Media Group (1) 8,278,125 300.082 .76
Tele-Communications, Inc., Series A,
TCI Group (1) 9,300,000 259.819 .65
Time Warner Inc. 12,350,000 765.700 1.93
Tribune Co. 140,000 8.715 .02
Viacom Inc., Class B (1) 9,750,000 404.015 1.02
Business & Public Services-2.37%
Browning-Ferris Industries, Inc. 700,000 25.900 .06
Cendant Corp. (1) 3,096,766 106.451 .27
Columbia/HCA Healthcare Corp. 7,100,000 210.338 .53
Electronic Data Systems Corp. 1,915,000 84.140 .21
Federal Express Corp. (1) 1,435,000 87.625 .22
Humana Inc. (1) 1,900,000 39.425 .10
Interpublic Group of Companies, Inc. 2,619,750 130.496 .33
United HealthCare Corp. 1,000,000 49.688 .13
Waste Management, Inc. 7,554,233 207.741 .52
Leisure & Tourism-1.34%
Walt Disney Co. 4,300,000 425.969 1.07
McDonald's Corp. 2,200,000 105.050 .27
Merchandising-2.97%
AutoZone, Inc. (1) 2,640,000 76.560 .19
Dillard's Inc. 1,900,000 66.975 .17
Limited Inc. 8,881,500 226.478 .57
Lowe's Companies, Inc. 3,500,000 166.906 .42
May Department Stores Co. 1,800,000 94.838 .24
J.C. Penney Co., Inc. 1,900,000 114.594 .29
Wal-Mart Stores, Inc. 8,400,000 331.275 .83
Woolworth Corp. (1) 5,000,000 101.875 .26
Telecommunications-6.94%
AirTouch Communications (1) 5,560,600 231.112 .58
Ameritech Corp. 4,647,300 374.108 .94
AT&T Corp. 11,035,000 675.894 1.70
MCI Communications Corp. 5,975,000 255.805 .65
SBC Communications Inc. 1,000,000 73.250 .18
Sprint Corp. 4,537,800 266.029 .67
Tele-Communications, Inc., Series A,
TCI Ventures Group (1) 5,931,600 167.938 .42
Telefonica de Espana, SA
(American Depositary Receipts) 1,900,000 173.019 .44
Telefonos de Mexico, SA de CV, Class L
(American Depositary Receipts) 3,057,400 171.405 .43
U S WEST Communications Group 5,200,000 234.650 .59
Vodafone Group PLC (American Depositary Receipts) 1,848,000 133.980 .34
Transportation: Airlines-0.55%
AMR Corp. (1) 1,250,000 160.625 .41
Delta Air Lines, Inc. 471,050 56.055 .14
Transportation: Rail & Road-0.36%
Union Pacific Corp. 2,275,000 142.045 .36
--------- ------
7,759.486 19.54
--------- ------
- ------------------------------------------
Finance
- ------------------------------------------
Banking-9.56%
H.F. Ahmanson & Co. 2,400,000 160.650 .40
Banc One Corp. 3,200,000 173.800 .44
Bank of New York Co., Inc. 2,800,000 161.875 .41
BankAmerica Corp. 7,400,000 540.200 1.36
Bankers Trust New York Corp. 1,077,400 121.140 .31
Chase Manhattan Corp. 3,500,000 383.250 .96
Citicorp 500,000 63.219 .16
Comerica Inc. 1,450,000 130.863 .33
CoreStates Financial Corp 2,750,000 220.172 .55
First Chicago NBD Corp. 1,850,000 154.475 .39
First Union Corp. 700,000 35.875 .09
Fleet Financial Group, Inc. 1,073,900 80.475 .20
KeyCorp 2,750,000 194.734 .49
J.P. Morgan & Co. Inc. 2,400,000 270.900 .68
National City Corp. 1,500,000 98.625 .25
Norwest Corp. 3,860,900 149.127 .38
PNC Bank Corp. 1,950,000 111.272 .28
Toronto-Dominion Bank 4,780,000 179.772 .45
U.S. Bancorp 943,750 105.641 .27
Wachovia Corp. 900,000 73.013 .18
Washington Mutual, Inc. 6,097,900 389.122 .98
Financial Services-5.47%
Fannie Mae (formerly Federal National Mortgage Assn.)21,000,000 1,198.312 3.02
Freddie Mac (formerly Federal Home Loan Mortgage Corp12,621,600 529.318 1.33
Household International, Inc. 1,200,000 153.075 .38
SLM Holding Corp. (formerly Student Loan Marketing
Assn.) 2,102,000 292.441 .74
Insurance-3.49%
Aetna Inc. 2,100,000 148.181 .37
Allstate Corp. 2,313,000 210.194 .53
American General Corp. 1,710,000 92.447 .23
American International Group, Inc. 2,733,750 297.295 .75
CIGNA Corp. 200,000 34.613 .09
General Re Corp. 1,217,800 258.174 .65
Lincoln National Corp. 1,050,000 82.031 .21
SAFECO Corp. 1,600,000 78.000 .20
St. Paul Companies, Inc. 2,240,000 183.820 .46
--------- ------
7,356.101 18.52
--------- ------
- ------------------------------------------
Other
- ------------------------------------------
Multi-Industry-0.89%
AlliedSignal Inc. 2,600,000 101.237 .26
Canadian Pacific Ltd. 2,100,000 57.225 .14
Minnesota Mining and Manufacturing Co. 120,000 9.847 .02
Tenneco Inc. 2,032,900 80.300 .20
Textron Inc. 1,700,000 106.250 .27
Gold Mines -0.52%
Barrick Gold Corp. 3,300,000 61.463 .16
Newmont Mining Corp. 2,750,000 80.781 .20
Placer Dome Inc. 5,000,000 63.437 .16
Miscellaneous-1.45%
Equity securities in initial period of 0
acquisition 575.710 1.45
--------- ------
1,136.250 2.86
--------- ------
Total Equity Securities (cost: $18,583.229
million) 33,909.369 85.38
--------- ------
Principal
- ------------------------------------------ Amount
Bonds & Notes (millions)
- ------------------------------------------ ---------
U.S. Treasuries-2.55%
5.875% July 1999 $250.000 250.703 .63
6.00% August 1999 250.000 251.210 .63
5.625% October 1999 250.000 249.765 .63
5.875% November 1999 250.000 250.897 .63
11.625% November 2004 10.000 13.273 .03
--------- ------
Total Bonds & Notes (cost: $1,009.132 million) 1,015.848 2.55
--------- ------
Total Investment Securities (cost: $19,592.361
million) 34,925.217 87.93
--------- ------
- ------------------------------------------
Short-Term Securities
- ------------------------------------------
U.S. Treasuries and Other Federal Agencies-6.62%
Treasury Notes 4.75%-8.875% due 8/31-12/31/98 875.000 873.021 2.20
Treasury Bills 5.105%-5.25% due 1/22-4/16/98 533.800 529.643 1.33
Fannie Mae 5.39%-5.63% due 1/13-3/27/98 443.925 440.105 1.11
Federal Home Loan Banks 5.40%-5.65%
due 1/7-3/25/98 374.060 371.357 .94
Freddie Mac 5.44%-5.66% due 2/10-3/6/98 261.092 258.874 .65
International Bank for Reconconstruction and Development
5.62%-5.70% due 1/15-2/26/98 155.700 154.610 .39
Corporate Short-Term Notes-5.11%
American Express Credit Corp. 5.82%-5.85%
due 1/2-1/6/98 50.000 49.971 .13
Ameritech Corp. 5.57%-5.83%
due 1/27-2/4/98 67.200 66.892 .17
Amoco Co. 5.51%-5.52%
due 2/19-2/23/98 75.000 74.387 .19
AT&T Corp. 5.52%-5.64%
due 2/2-2/17/98 80.100 79.582 .20
Bell Atlantic Financial Services, Inc. 5.75%-6.05%
due 1/8-1/26/98 121.000 120.693 .30
Campbell Soup Co. 5.50%-5.52%
due 1/20-1/28/98 75.000 74.706 .19
Coca-Cola Co. 5.49%-5.68%
due 1/12-3/24/98 109.200 108.553 .27
Walt Disney Co. 5.48%-5.50%
due 1/6-2/9/98 83.600 83.264 .21
E.I. du Pont De Nemours and Co. 5.51%-5.67%
due 2/10-3/5/98 92.400 91.629 .23
Duke Energy Corp. 5.68%-5.71%
due 1/15-2/6/98 73.095 72.781 .18
Ford Motor Credit Co. 5.51%-5.71% due 1/9-3/23/98 136.900 135.671 .34
Gannett Co., Inc. 5.55% due 1/9-1/20/98 (3) 102.300 102.096 .26
General Electric Capital Corp. 5.55%-5.62%
due 1/15-2/18/98 156.100 155.425 .39
H.J. Heinz Co. 5.58%-5.78%
due 1/9-2/26/98 111.400 110.886 .28
IBM Credit Corp. 5.48%-5.69% due 1/7-2/2/98 111.250 110.996 .28
Lucent Technologies Inc. 5.71%-6.15%
due 1/5-2/6/98 68.300 67.990 .17
Minnesota Mining and Manufacturing Co. 5.52%-5.67%
due 1/20-3/19/98 72.000 71.559 .18
Monsanto Co. 5.52%-5.68%
due 1/6-2/27/98 (3) 93.400 93.136 .23
J.C. Penney Funding Corp. 5.55%-5.72%
due 1/16-3/17/98 (3) 116.000 115.191 .29
Procter & Gamble Co. 5.47%-5.75%
due 1/14-3/2/98 130.700 129.942 .33
SBC Communications Inc. 5.54%-5.74%
due 1/5-2/19/98 (3) 115.000 114.498 .29
Total Short-Term Securities
(cost: $4,659.585 million) 4,657.458 11.73
Excess of cash and receivables over payables 134.998 .34
--------- ------
Total Short-Term Securities, Cash and Receivables,
Net of Payables 4,792.456 12.07
----------- ---------
Net Assets $39,717.673 100.00%
============ =========
(1) Non-income-producing securities.
(2) The fund owns 5.24% of the outstanding voting
securities of Cummins Engine Co., which represents
investment in an affiliate as defined in the Investment
Company Act of 1940.
(3) Purchased in a private placement transaction;
resale to the public may require registration or
sale only to qualified institutional buyers.
See Notes to Financial Statements
</TABLE>
<TABLE>
The Investment Company of America
- ------------------------------------------------------------------
Statement of Assets and Liabilities (dollars in
at December 31, 1997 millions)
- ------------------------------------------------------------------
Assets:
<S> <C> <C>
Investment securities at market
(cost: $19,592.361) $34,925.217
Short-term securities at market
(cost: $4,659.585) 4,657.458
Cash 9.098
Receivables for-
Sales of investments $78.655
Sales of fund's shares 41.047
Dividends and accrued interest 82.064 201.766
--------------------------
39,793.539
Liabilities:
Payables for-
Purchases of investments 37.248
Repurchases of fund's shares 23.477
Management services 8.230
Accrued expenses 6.911 75.866
--------------------------
Net Assets at December 31, 1997-
Equivalent to $28.25 per share on
1,405,903,965 shares of $1 par value
capital stock outstanding (authorized
capital stock--2,000,000,000 shares) $39,717.673
=============
Statement of Operations (dollars in
for the year ended December 31, 1997 millions)
- ------------------------------------------------------------------
Investment Income:
Income:
Dividends $600.461
Interest 279.098 $ 879.559
-------------
Expenses:
Management services fee 90.386
Distribution expenses 79.761
Transfer agent fee 20.141
Reports to shareholders 2.443
Registration statement and
prospectus 1.027
Postage, stationery and supplies 5.590
Directors' fees .494
Auditing and legal fees .103
Custodian fee .792
Taxes other than federal income tax .367
Other expenses .295 201.399
--------------------------
Net investment income 678.160
-------------
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 3,800.223
Net increase in unrealized
appreciation on investments 4,685.662
-------------
Net realized gain and increase in
unrealized appreciation on investments 8,485.885
-------------
Net Increase in Net Assets Resulting
from Operations $ 9,164.045
=============
- ------------------------------------------------------------------
(dollars in
millions)
Year ended Year ended
Statement of Changes in Net Assets 1997 1996
- ------------------------------------------------------------------
Operations:
Net investment income $ 678.160 $ 611.069
Net realized gain on investments 3,800.223 1,256.875
Net increase in unrealized
appreciation on investments 4,685.662 3,151.153
--------------------------
Net increase in net assets
resulting from operations 9,164.045 5,019.097
--------------------------
Dividends and Distributions Paid
to Shareholders:
Dividends from net investment income (639.699) (606.665)
Distributions from net realized
gain on investments (3,345.342) (1,256.817)
--------------------------
Total dividends and distributions (3,985.041) (1,863.482)
--------------------------
Capital Share Transactions:
Proceeds from shares sold: 142,732,538
and 154,894,329 shares, respectively 3,966.602 3,568.101
Proceeds from shares issued in reinvestment
of net investment income dividends and
distributions of net realized gain on
investments: 132,253,234 and 70,957,086
shares, respectively 3,660.294 1,707.735
Cost of shares repurchased: 143,511,101
and 139,431,152 shares, respectively (3,963.699) (3,234.297)
--------------------------
Net increase in net assets resulting from
capital share transactions 3,663.197 2,041.539
--------------------------
Total Increase in Net Assets 8,842.201 5,197.154
Net Assets:
Beginning of year 30,875.472 25,678.318
--------------------------
End of year (including undistributed
net investment income: $320.290
and $281.829, respectively) $39,717.673 $30,875.472
==========================
See Notes to Financial Statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. The Investment Company 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 long-term growth of capital and income,
placing greater emphasis on future dividends than on current income. 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 foreign currencies are
translated prior to the next determination of the net asset value of the fund's
shares into U.S. dollars at the prevailing market rates. The effects of
changes in foreign currency exchange rates on investment securities are
included with the net realized and unrealized gain or loss on investment
securities.
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 on securities
purchased are amortized. The fund does not amortize premiums on securities
purchased. 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 December 31, 1997, net unrealized appreciation on investments for
federal income tax purposes aggregated $15,340,051,000, of which
$15,789,687,000 related to appreciated securities and $449,636,000 related to
depreciated securities. During the year ended December 31, 1997, the fund
realized, on a tax basis, a net capital gain of $3,800,719,000 on securities
transactions. Net losses related to non-U.S. currency and other transactions of
$496,000 were treated as adjustments to ordinary income for federal income tax
purposes. The cost of portfolio securities for federal income tax purposes was
$24,242,624,000 at December 31, 1997.
3. The fee of $90,386,000 for management services was incurred pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Directors of the fund are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.39% of the first $1 billion of net assets; 0.336% of
such assets in excess of $1 billion but not exceeding $2 billion; 0.30% of such
assets in excess of $2 billion but not exceeding $3 billion; 0.276% of such
assets in excess of $3 billion but not exceeding $5 billion; 0.258% of such
assets in excess of $5 billion but not exceeding $8 billion; 0.246% of such
assets in excess of $8 billion but not exceeding $13 billion; 0.24% of such
assets in excess of $13 billion but not exceeding $21 billion; 0.235% of such
assets in excess of $21 billion but not exceeding $34 billion; and 0.231% of
such assets in excess of $34 billion.
Pursuant to a Plan of Distribution, the fund may expend up to 0.25% of its
average net assets annually for any activities primarily intended to result in
sales of fund shares, provided the categories of expenses for which
reimbursement is made are approved by the fund's Board of Directors. Fund
expenses under the Plan include payments to dealers to compensate them for
their selling and servicing efforts. During the year ended December 31, 1997,
distribution expenses under the Plan were $79,761,000. As of December 31, 1997,
accrued and unpaid distribution expenses were $6,236,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $20,141,000. American Funds Distributors, Inc. (AFD), the
principal underwriter of the fund's shares, received $16,839,000 (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 and Advisory Board members who are unaffiliated with CRMC may elect
to defer part or all of the fees earned for services as members of the Board.
Amounts deferred are not funded and are general unsecured liabilities of the
fund. As of December 31, 1997, aggregate amounts deferred and earnings thereon
were $566,000.
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. Option warrants are outstanding, which may be exercised at any time for the
purchase of 837,954 shares of the fund at approximately $5.242 per share. If
all warrants had been exercised on December 31, 1997, the net assets of the
fund would have been $39,722,066,000; the shares outstanding would have been
1,406,742,000; and the net asset value would have been equivalent to $28.24 per
share. During the year ended December 31, 1997, 15 warrants were exercised for
the purchase of 329 shares.
5. As of December 31, 1997, accumulated undistributed net realized gain on
investments and currency transactions was $455,005,000 and additional paid-in
capital was $22,205,782,000. To conform to its tax reporting, the fund
reclassified $96,000 to undistributed net realized gains from additional
paid-in capital for the year ended December 31, 1997.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $8,417,084,000 and $10,245,056,000, respectively,
during the year ended December 31, 1997.
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 $792,000 includes $97,000 that was paid by these credits
rather than in cash.
Dividend and interest income is recorded net of non-U.S. taxes paid. For the
year ended December 31, 1997, such non-U.S. taxes were $9,556,000. Net realized
currency losses on dividends and withholding taxes reclaimable were $400,000
for the year ended December 31, 1997.
<TABLE>
Year
Per-Share Data and Ratios ended
December
31
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Net Asset Value, Beginning of
Year $24.23 $21.61 $17.67 $18.72 $17.89
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income from Investment
Operations:
Net investment income .51 .49 .52 .51 .54
Net realized and unrealized
gain (loss) on investments 6.61 3.66 4.83 (.48) 1.51
------- ------- ------- ------- -------
Total income from
investment operations 7.12 4.15 5.35 .03 2.05
------- ------- ------- ------- -------
Less Distributions:
Dividends from net investment
income (.50) (.50) (.50) (.48) (.47)
Distributions from net
realized gains (2.60) (1.03) (.91) (.60) (.75)
------- ------- ------- ------- -------
Total distributions (3.10) (1.53) (1.41) (1.08) (1.22)
------- ------- ------- ------- -------
Net Asset Value, End of Year $28.25 $24.23 $21.61 $17.67 $18.72
============ ======= ======= ======= =======
Total return (1) 29.81% 19.35% 30.63% .16% 11.62%
Ratios/Supplemental Data:
Net assets, end of year (in
millions) $39,718 $30,875 $25,678 $19,280 $19,005
Ratio of expenses to average
net assets .56% .59% .60% .60% .59%
Ratio of net income to average
net assets 1.90% 2.17% 2.70% 2.83% 3.03%
Average commissions paid
per share (2) 4.87 c 5.79 c 6.16 c 5.11 c 6.20 c
Portfolio turnover -
common stocks 24.08% 17.46% 20.91% 17.94% 19.57%
Portfolio turnover -
investment securities 26.02% 19.56% 20.37% 31.08% 17.57%
(1) Excludes maximum sales charge of 5.75%.
(2) Brokerage commissions paid on portfolio
transactions increase the cost of
securities purchased or reduce the
proceeds of securities sold, and are
not separately reflected in the fund's statement
of operations. Shares traded on a
principal basis (without commissions), such as most
over-the-counter and fixed-income
transactions, are excluded.
Generally, non-U.S. commissions
are lower than U.S. commissions when
expressed as cents per share but
higher when expressed as a percentage
of transactions because of the lower
per-share prices of many non-U.S. securities.
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of The Investment Company of
America, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the per-share data and ratios present fairly, in all
material respects, the financial position of The Investment Company of America,
Inc. (the "Fund") at December 31, 1997, the results of its operations, the
changes in its net assets and the per-share data and ratios for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and per-share data and ratios (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 1997 by correspondence with the custodian and
brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Los Angeles, California
January 30, 1998
1997 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:
Dividends and Distributions per Share
<TABLE>
<CAPTION>
From Net From Net
Realized Realized
To From Net Short- Long-
Shareholders Investment Term Term
of Record Payment Date Income Gains Gains
<S> <C> <C> <C> <C>
March 7, 1997 March 10, 1997 $0.12 - -
June 6, 1997 June 9, 1997 0.12 - -
September 5, 1997 September 8, 1997 0.12 - -
December 19, 1997 December 22, 1997 0.14 $0.057 $2.543*
</TABLE>
*INCLUDES $0.979 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, 71% 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, 14% 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.
SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISERS.
For information about your account or any of the fund's services, please
contact your financial adviser. You may also call American Funds Service
Company, toll-free, at 800/421-0180 or visit www.americanfunds.com on the World
Wide Web.
This report is for the information of shareholders of The Investment Company 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 March 31, 1998, this report must be accompanied by an
American Funds Group Statistical Update for the most recently completed
calendar quarter.
Litho in USA BDA/GRS/3211
Lit. No. ICA-011-0298
Printed on recycled paper
BOARD OF DIRECTORS
CHARLES H. BLACK
Pacific Palisades, California
Private investor and consultant;
former Executive Vice President and
Director, KaiserSteel Corporation
ANN S. BOWERS
Palo Alto, California
Senior Trustee,
The Noyce Foundation
MALCOLM R. CURRIE, PH.D.
Agoura, California
Chairman Emeritus,
Hughes Aircraft Company
JON B. LOVELACE, JR.
Los Angeles, California
Chairman of the Board of the fund
Vice Chairman of the Board,
Capital Research and
Management Company
JOHN G. MCDONALD
Stanford, California
The IBJ Professor of Finance, Graduate
School of Business, Stanford University
BAILEY MORRIS-ECK
Washington, D.C.
Senior Vice President, The Brookings
Institution; Senior Adviser, InterAmerican
Affairs, White House/U.S. Department
of State; Senior Fellow, Institute for
International Economics; Consultant,
The Independent of London
RICHARD G. NEWMAN
Los Angeles, California
Chairman, President and Chief Executive
Officer, AECOM Technology Corporation
(architectural engineering)
WILLIAM C. NEWTON
Los Angeles, California
President of the fund
Senior Partner, The Capital Group
Partners L.P.
JAMES W. RATZLAFF
San Francisco, California
Executive Vice President of the fund
Senior Partner, The Capital Group Partners L.P.
OLIN C. ROBISON, PH.D.
Middlebury, Vermont
President of the Salzburg Seminar;
President Emeritus, Middlebury College
WILLIAM J. SPENCER, PH.D.
Austin, Texas
Chairman and Chief Executive Officer,
SEMATECH (research and
development consortium)
ADVISORY BOARD MEMBERS
THOMAS M. CROSBY, JR.
Minneapolis, Minnesota
Partner, Faegre & Benson (law firm)
ELLEN H. GOLDBERG, PH.D.*
Santa Fe, New Mexico
President, Santa Fe Institute
ALLAN E. GOTLIEB
Toronto, Canada
Former Canadian Ambassador
to the United States
WILLIAM H. KLING
St. Paul, Minnesota
President, Minnesota Public Radio;
President, Greenspring Co.; former
President, American Public Radio
(now Public Radio International)
ROBERT J. O'NEILL, PH.D.
Oxford, England
Professor and Fellow, All Souls College,
University of Oxford
NORMAN R. WELDON, PH.D.
Miami, Florida
Managing Director, Partisan Management
Group, Inc.; Chairman of the Board,
Novoste Corporation
JOHN F. BOOKOUT, who served as a Director from 1989 to 1996 and subsequently
became a member of the Advisory Board, has retired effective December 31.
MALCOLM FRASER, a member of the Advisory Board since 1985, completed his
service December 31.
The Board members wish to thank them for their many valued contributions to the
fund.
*effective January 1, 1998
OTHER OFFICERS
WILLIAM R. GRIMSLEY
San Francisco, California
Senior Vice President of the fund
Senior Vice President and Director, Capital Research and Management Company
R. MICHAEL SHANAHAN
Los Angeles, California
Senior Vice President of the fund
Chairman of the Board, Capital
Research and Management Company
GREGG E. IRELAND
Washington, D.C.
Vice President of the fund
Senior Vice President, Capital Research
and Management Company
ANNE M. LLEWELLYN
Los Angeles, California
Vice President of the fund
Associate, Capital Research
and Management Company
JAMES B. LOVELACE
Los Angeles, California
Vice President of the fund
Senior Vice President, Capital Research
and Management Company
DONALD D. O'NEAL
San Francisco, California
Vice President of the fund
Vice President, Capital Research
and Management Company
PATRICIA L. PINNEY
Los Angeles, California
Vice President of the fund
Vice President and Director,
Capital Research Company
VINCENT P. CORTI
Los Angeles, California
Secretary of the fund
Vice President - Fund Business
Management Group, Capital Research
and Management Company
MARY C. HALL
Brea, California
Treasurer of the fund
Senior Vice President - Fund Business
Management Group, Capital Research
and Management Company
JULIE F. WILLIAMS
Los Angeles, California
Assistant Secretary 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
[THE AMERICAN FUNDS GROUP(R)]
OFFICES OF THE FUND AND
OF THE INVESTMENT ADVISER,
CAPITAL RESEARCH AND
MANAGEMENT COMPANY
333 South Hope Street
Los Angeles, California 90071-1443
135 South State College Boulevard
Brea, California 92821-5804
TRANSFER AGENT FOR SHAREHOLDER ACCOUNTS
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
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, California 90071-2899
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
400 South Hope Street
Los Angeles, California 90071-2889
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071-1462
