AXP(SM)
Selective
Fund
2000 ANNUAL REPORT
(PROSPECTUS ENCLOSED)
American
Express(R)
Funds
(icon of) clock
AXP Selective Fund seeks to provide shareholders with current income and
preservation of capital.
AMERICAN
EXPRESS (logo)
(This annual report includes a prospectus that describes in detail the Fund's
objective, investment strategy, risks, sales charges, fees and other matters of
interest. Please read the prospectus carefully before you invest or send money.)
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A Quest for Quality
Not all bonds are created equal. A bond's quality depends on the ability of its
issuers to make the interest and principal payments owed to the bondholders. The
quality is determined by independent rating agencies, which assign a credit
rating (in the form of a letter grade) to each bond.
Since its establishment in 1945, AXP Selective Fund has concentrated its
investments in the four highest investment grades. Along the way, investors have
enjoyed a steady stream of interest income with minimum risk to their principal.
AXP SELECTIVE FUND
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Table of Contents
2000 ANNUAL REPORT
The purpose of this annual report is to tell investors how the Fund performed.
From the Chairman 4
From the Portfolio Manager 4
Fund Facts 6
The 10 Largest Holdings 7
Making the Most of the Fund 8
The Fund's Long-term Performance 9
Independent Auditors' Report (Fund) 11
Financial Statements (Fund) 12
Notes to Financial Statements (Fund) 15
Independent Auditors' Report (Portfolio) 21
Financial Statements (Portfolio) 22
Notes to Financial Statements (Portfolio) 25
Investments in Securities 30
Federal Income Tax Information 39
ANNUAL REPORT - 2000
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(picture of) Arne H. Carlson
Arne H. Carlson
Chairman of the board
From the Chairman
The financial markets have always had their ups and downs, but in recent months
volatility has become more frequent and intense. While no one can say with
certainty what the markets will do, American Express Financial Corporation, the
Fund's investment manager, expects economic growth to continue this year,
accompanied by a modest rise in long-term interest rates. But no matter what
transpires, this is a great time to take a close look at your goals and
investments. We encourage you to:
o Consult a professional investment advisor who can help you cut through
mountains of data.
o Set financial goals that extend beyond those achievable through retirement
plans of your employer.
o Learn as much as you can about your current investments.
The portfolio manager's letter that follows provides a review of the Fund's
investment strategies and performance. The annual report contains other valuable
information as well. The Fund's prospectus describes its investment objectives
and how it intends to achieve those objectives. As experienced investors know,
information is vital to making good investment decisions.
So, take a moment and decide again whether the Fund's investment objectives and
management style fit with your other investments to help you reach your
financial goals. And make it a practice on a regular basis to assess your
investment options.
On behalf of the Board,
Arne H. Carlson
(picture of) Ray Goodner
Ray Goodner
Portfolio manager
From the Portfolio Manager
The U.S. bond market struggled most of the past 12 months, as rising interest
rates depressed bond prices for much of the period. AXP Selective Fund did
manage to finish with a positive result, however, as its Class A shares produced
a total return (excluding the sales charge) of 0.83% for the fiscal year -- June
1999 through May 2000.
AXP SELECTIVE FUND
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With the economy continuing to grow at a rapid rate, unemployment at a
record-low level and the price of oil more than doubling in a matter of months,
the unwelcome specter of higher inflation made bond investors uneasy throughout
the period. The Federal Reserve Board (the Fed) saw some threat to the
still-tame inflation environment, too, as it raised short-term interest rates
six times over the 12 months in an effort to cool off the economy and,
ultimately, relieve potential upward pressure on prices. The end result was that
interest rates across the maturity range crept higher from mid-1999 through last
January, pushing down bond prices in the process. Compounding the situation was
a heavy supply of corporate bonds, which further eroded support for the bond
market.
TREASURY BUY-BACK HELPS
Some relief finally did arrive in the form of a bond buy-back program
implemented by the U.S. Treasury. Prompted by a federal budget surplus, the
department decided to retire in advance of maturity some $30 billion of its
long-term debt. As it did so, yields on long-term Treasury issues fell
considerably from February through April, driving up prices in the process. The
rally benefited the Fund's long-term, high grade holdings.
Given the largely difficult environment for most of the year, I maintained a
defensive maturity structure in the portfolio. That centered on keeping a
shorter-than-average duration to provide some protection against rising interest
rates. (Duration, a function of the average maturity of the securities in the
portfolio, affects the Fund's sensitivity to interest-rate changes. Generally,
the longer the duration, the greater the sensitivity.) In addition, I held a
higher-than-normal level of cash reserves.
Looking at bond sectors, the biggest areas of investment were U.S. Treasury
bonds, which gave the Fund a substantial performance boost late in the period,
and mortgage-backed securities. The next-largest exposure was to high-grade
corporate bonds. I also held some foreign bonds denominated in U.S. dollars.
While they amounted to a modest portion of the portfolio, their strong price
gains did benefit performance.
Heading into the new fiscal year, it appears that economic growth is starting to
moderate, which should limit the Federal Reserve's need to raise interest rates.
If that outlook proves to be reasonably accurate, the bond market and the Fund
should enjoy a better environment. In the meantime, I plan to stay with a
largely conservative investment strategy to guard against a potential rise in
inflation.
Ray Goodner
ANNUAL REPORT - 2000
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Fund Facts
Class A -- 12-month performance
(All figures per share)
Net asset value (NAV)
May 31, 2000 $8.32
May 31, 1999 $8.96
Decrease $0.64
Distributions -- June 1, 1999 - May 31, 2000
From income $0.54
From capital gains $0.16
Total distributions $0.70
Total return* +0.83%**
Class B -- 12-month performance
(All figures per share)
Net asset value (NAV)
May 31, 2000 $8.32
May 31, 1999 $8.96
Decrease $0.64
Distributions -- June 1, 1999 - May 31, 2000
From income $0.47
From capital gains $0.16
Total distributions $0.63
Total return* +0.06%**
Class Y -- 12-month performance
(All figures per share)
Net asset value (NAV)
May 31, 2000 $8.32
May 31, 1999 $8.96
Decrease $0.64
Distributions -- June 1, 1999 - May 31, 2000
From income $0.55
From capital gains $0.16
Total distributions $0.71
Total return* +0.97%**
*Returns do not include sales load. The prospectus discusses the effect of sales
charges, if any, on the various classes.
**The total return is a hypothetical investment in the Fund with all
distributions reinvested.
AXP SELECTIVE FUND
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The 10 Largest Holdings
Percent Value
(of net assets) (as of May 31, 2000 )
Daimler-Benz North America 1.39% $18,168,591
7.38% 2006
Dayton Hudson 1.31 17,062,832
7.88% 2023
PDV America 1.18 15,453,454
7.88% 2003
New York Telephone 1.09 14,239,540
9.38% 2031
ARAMARK Services 1.07 13,958,025
6.75% 2004
Bayerische Landesbank 1.04 13,585,413
5.63% 2001
AETNA Services 1.00 13,010,907
6.38% 2003
SunAmerica .94 12,227,523
9.95% 2008
SAFECO Capital .93 12,177,960
8.07% 2037
Nationwide CSN Trust .91 11,900,453
9.88% 2025
Excludes U.S. Treasury and government agencies holdings.
For further detail about these holdings, please refer to the section entitled
"Investments in Securities."
(icon of) pie chart
The 10 holdings listed here
make up 10.86% of net assets
ANNUAL REPORT - 2000
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Making the Most of the Fund
BUILD YOUR ASSETS SYSTEMATICALLY
One of the best ways to invest in the Fund is by dollar-cost averaging -- a
time-tested strategy that can make market fluctuations work for you. To
dollar-cost average, simply invest a fixed amount of money regularly. You'll
automatically buy more shares when the Fund's share price is low, fewer shares
when it is high. The chart below shows how dollar-cost averaging works. In these
three hypothetical scenarios, you will see six months of share price
fluctuations.
This strategy does not ensure a profit or avoid a loss if the market declines.
But, if you can continue to invest regularly through changing market conditions
even when the price of your shares falls or the market declines, it can be an
effective way to accumulate shares to meet your long-term goals.
How dollar-cost averaging works
Jan Feb Mar Apr May Jun
$15 $16 $18 $20
$10 $10 $12 $14
$ 5
Accumulated shares* Average market Your average
price per share cost per share
42.25 $15 $14.20
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Jan Feb Mar Apr May Jun
$15
$10 $10 $8 $8 $10
$ 5 $5 $5
Accumulated shares* Average market Your average
price per share cost per share
85.0 $7.66 $7.05
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Jan Feb Mar Apr May Jun
$15
$10 $10 $8 $6 $7
$ 5 $4 $4
Accumulated shares* Average market Your average
price per share cost per share
103.5 $6.50 $5.80
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$100 invested per month. Total invested: $600
*Shares purchased is determined by dividing the amount invested per month by the
current share price.
THREE WAYS TO BENEFIT FROM A MUTUAL FUND:
o your shares increase in value when the Fund's investments do well
o you receive capital gains when the gains on investments sold by the Fund
exceed losses
o you receive income when the Fund's stock dividends, interest and
short-term gains exceed its expenses.
All three make up your total return. You potentially can increase your
investment if, like most investors, you reinvest your dividends and capital gain
distributions to buy additional shares of the Fund or another fund.
AXP SELECTIVE FUND
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The Fund's Long-term Performance
How $10,000 has growth in AXP Selective Fund
$30,000
Lehman Brothers
Aggregate Bond Index
X
$20,000 X
$20,497
AXP Selective
X Fund Class A
Lipper Corporate Debt-
A rated Index
(The printed version of this chart contains a line graph
with four lines corresponding to the three Indexes and
Fund noted above.)
$9,525
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00
Average Annual Total Returns (as of May 31, 2000)
1 year 5 years 10 years (A) Since inception (B&Y)
Class A -3.96% +4.34% +7.44% --%
Class B -3.65% +4.42% --% +5.59%*
Class Y +0.97% +5.50% --% +6.67%*
* Inception date was March 20, 1995.
Assumes: Holding period from 6/1/90 to 5/31/00. Returns do not reflect taxes
payable on distributions. Reinvestment of all income and capital gain
distributions for the Fund has a value of $11,514. Also see "Past Performance"
in the Fund's current prospectus.
On the graph above you can see how the Fund's total return compared to two
widely cited performance indexes, the Lehman Brothers Aggregate Bond Index and
the Lipper Corporate Debt - A rated Index. In comparing AXP Selective Fund
(Class A) to these indexes, you should take into account the fact that the
Fund's performance reflects the maximum sales charge of 4.75%, while such
charges are not reflected in the performance of the index.
Your investment and return values fluctuate so that your shares, when redeemed,
may be worth more or less than the original cost. Average annual total return
figures reflect the impact of the applicable sales charge up to a maximum of
4.75%. This was a period of widely fluctuating security prices. Past performance
is no guarantee of future results.
ANNUAL REPORT - 2000
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Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a
representative list of government, corporate, asset-backed and mortgage-backed
securities. The index is frequently used as a general measure of bond market
performance. The index reflects reinvestment of all distributions and changes in
market prices, but excludes brokerage commissions or other fees. However, the
securities used to create the indexmay not be representative of the bonds held
in the Fund.
Lipper Corporate Debt - A rated Index, an unmanaged index published by Lipper
Inc., includes the 30 largest funds that are generally similar to the Fund,
although some funds in the index may have somewhat different investment policies
or objectives.
AXP SELECTIVE FUND
<PAGE>
The financial statements contained in Post-Effective Amendment #90 to
Registration Statement No. 2-10700 filed on or about July 25, 2000, are
incorporated herein by reference.
<PAGE>
Federal Income Tax Information
(Unaudited)
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. The dividends listed below are reported to you on Form 1099-DIV, Dividends
and Distributions. Shareholders should consult a tax advisor on how to report
distributions for state and local tax purposes.
AXP Selective Fund, Inc.
Fiscal year ended May 31, 2000
Class A
Income distributions taxable as dividend income, 0.92% qualifying for deduction
by corporations.
Payable date Per share
June 23, 1999 $0.03925
July 26, 1999 0.04760
Aug. 26, 1999 0.04495
Sept. 22, 1999 0.03712
Oct. 25, 1999 0.04410
Nov. 23, 1999 0.04581
Dec. 22, 1999 0.05836
Jan. 24, 2000 0.04762
Feb. 24, 2000 0.04395
March 23, 2000 0.03978
April 24, 2000 0.04885
May 24, 2000 0.04334
Total $0.54073
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 22, 1999 $0.15911
Total distributions $0.69984
The distribution of $0.21747 per share, payable Dec. 22, 1999, consisted of
$0.04892 derived from net investment income, $0.00944 from net short-term
capital gains (a total of $0.05836 taxable as dividend income) and $0.15911 from
net long-term capital gains.
ANNUAL REPORT - 2000
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Class B
Income distributions taxable as dividend income, 0.92% qualifying for deduction
by corporations.
Payable date Per share
June 23, 1999 $0.03426
July 26, 1999 0.04149
Aug. 26, 1999 0.03930
Sept. 22, 1999 0.03220
Oct. 25, 1999 0.03809
Nov. 23, 1999 0.04058
Dec. 22, 1999 0.05309
Jan. 24, 2000 0.04184
Feb. 24, 2000 0.03851
March 23, 2000 0.03486
April 24, 2000 0.04319
May 24, 2000 0.03816
Total $0.47557
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 22, 1999 $0.15911
Total distributions $0.63468
The distribution of $0.21220 per share, payable Dec. 22, 1999, consisted of
$0.04365 derived from net investment income, $0.00944 from net short-term
capital gains (a total of $0.05309 taxable as dividend income) and $0.15911 from
net long-term capital gains.
AXP SELECTIVE FUND
<PAGE>
Class Y
Income distributions taxable as dividend income, 0.92% qualifying for deduction
by corporations.
Payable date Per share
June 23, 1999 $0.03981
July 26, 1999 0.04874
Aug. 26, 1999 0.04616
Sept. 22, 1999 0.03817
Oct. 25, 1999 0.04533
Nov. 23, 1999 0.04694
Dec. 22, 1999 0.05943
Jan. 24, 2000 0.04879
Feb. 24, 2000 0.04509
March 23, 2000 0.04084
April 24, 2000 0.05005
May 24, 2000 0.04442
Total $0.55377
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 22, 1999 $0.15911
Total distributions $0.71288
The distribution of $0.21854 per share, payable Dec. 22, 1999, consisted of
$0.04999 derived from net investment income, $0.00944 from net short-term
capital gains (a total of $0.05943 taxable as dividend income) and $0.15911 from
net long-term capital gains.
ANNUAL REPORT - 2000
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American
Express(R)
Funds
AXP Selective Fund
200 AXP Financial Center
Minneapolis, MN 55474
AMERICAN
EXPRESS (logo)
S-6376 U (7/00)
This report must be accompanied or preceded by the Fund's current prospectus.
Distributed by American Express Financial Advisors Inc. Member NASD. American
Express Company is separate from American Express Financial Advisors Inc. and is
not a broker-dealer.
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STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) There are pictures, icons 2) Each picture, icon and
and graphs throughout the graph is described in
annual report. parentheses.
