<PAGE>
[LOGO OF THE AMERICAN FUNDS GROUP(R)]
- --------------------------------------------------------------------------------
The New Economy
Fund(R)
Prospectus
FEBRUARY 1, 1998
<PAGE>
THE NEW ECONOMY FUND
333 South Hope Street
Los Angeles, CA 90071
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Expenses.................................................... 3
Financial Highlights........................................ 4
Investment Policies and Risks............................... 5
Securities and Investment Techniques........................ 6
Multiple Portfolio Counselor System......................... 8
Investment Results.......................................... 10
Dividends, Distributions and Taxes.......................... 11
Fund Organization and Management............................ 12
Shareholder Services........................................ 15
</TABLE>
- --------------------------------------------------------------------------------
The fund's investment objective is long-term growth of capital. Current income
is a secondary consideration. In seeking to achieve its objective, the fund
invests principally in the equity securities of companies that derive their
revenue primarily from operations in the services and information area of the
global economy or that appear to have future prospects tied importantly to that
area of the economy.
This prospectus presents information you should know before investing in the
fund. You should keep it on file for future reference.
YOU MAY LOSE MONEY BY INVESTING IN THE FUND. THE LIKELIHOOD OF LOSS IS GREATER
IF YOU INVEST FOR A SHORTER PERIOD OF TIME. YOUR INVESTMENT IN THE FUND IS NOT
A DEPOSIT OR OBLIGATION OF, OR INSURED OR GUARANTEED BY, ANY ENTITY OR PERSON
INCLUDING THE U.S. GOVERNMENT AND THE FEDERAL DEPOSIT INSURANCE CORPORATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
14-010-0298
<PAGE>
================================================================================
EXPENSES
The effect of the expenses described below is reflected in the fund's share
price and return.
You may pay certain shareholder transaction expenses when you buy or sell
shares of the fund. Operating expenses are paid by the fund.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum sales charge on purchases
(as a percentage of offering price) 5.75%
</TABLE>
..........................................
SALES CHARGES ARE REDUCED OR ELIMINATED FOR LARGER PURCHASES. There is no sales
charge on reinvested dividends, and no deferred sales charge or redemption or
exchange fees. A contingent deferred sales charge of 1% applies on certain
redemptions made within 12 months following purchases without a sales charge.
FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
- ------------------------------------------
<S> <C>
Management fees 0.43%
..........................................
12b-1 expenses 0.23%/1/
..........................................
Other expenses 0.15%
..........................................
Total fund operating expenses 0.81%
</TABLE>
/1/ 12b-1 expenses may not exceed 0.25% of the fund's average net assets
annually.
EXAMPLES
Assuming a hypothetical annual return of 5% and shareholder transaction and
operating expenses as described above, for every $1,000 you invested, you would
pay the following total expenses over the following periods:
- ------------------------------------------
<TABLE>
<S> <C>
One year $ 65
..........................................
Three years $ 82
..........................................
Five years $100
..........................................
Ten years $152
</TABLE>
THESE EXAMPLES ARE NOT MEANT TO REPRESENT YOUR ACTUAL INVESTMENT RESULTS OR
EXPENSES, WHICH MAY VARY. YOUR EXPENSES WILL BE LESS IF YOU QUALIFY TO PURCHASE
SHARES AT A REDUCED OR NO SALES CHARGE.
- --------------------------------------------------------------------------------
THE NEW ECONOMY FUND / PROSPECTUS 3
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
The following information has been audited by Deloitte & Touche LLP,
independent auditors. This table should be read together with the financial
statements which are included in the statement of additional information and
annual report.
SELECTED PER-SHARE DATA*
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
...............
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $18.50 $16.98 $14.65 $16.47 $13.17 $10.98 $ 9.80 $13.22 $10.48 $ 9.29
- ---------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .12 .14 .20 .17 .11 .08 .15 .27 .25 .22
.........................................................................................................
Net realized and
unrealized gain (loss)
on investments 3.57 2.26 2.99 (.59) 3.75 2.45 1.76 (1.79) 3.33 1.70
.........................................................................................................
Total income (loss)
from investment
operations 3.69 2.40 3.19 (.42) 3.86 2.53 1.91 (1.52) 3.58 1.92
- ---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.14) (.19) (.18) (.12) (.07) (.14) (.26) (.29) (.24) (.19)
.........................................................................................................
Distributions from net
realized gains (1.13) (.69) (.68) (1.28) (.49) (.20) (.47) (1.61) (.60) (.54)
.........................................................................................................
Total distributions (1.27) (.88) (.86) (1.40) (.56) (.34) (.73) (1.90) (.84) (.73)
.........................................................................................................
Net asset value, end of
year $20.92 $18.50 $16.98 $14.65 $16.47 $13.17 $10.98 $ 9.80 $13.22 $10.48
- ---------------------------------------------------------------------------------------------------------
Total return/1/ 21.64% 15.00% 23.22% (2.94%) 30.60% 23.58% 20.68% (13.39%) 36.87% 22.32%
- ---------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in millions) $4,804 $4,223 $3,523 $2,592 $1,912 $1,115 $ 908 $ 783 $ 888 $ 678
.........................................................................................................
Ratio of expenses to
average net assets .81% .84% .88% .85% .85% .89% .92% .92% .83% .81%
.........................................................................................................
Ratio of net income to
average net assets .66% .85% 1.33% 1.25% .76% .67% 1.33% 2.50% 2.13% 1.97%
.........................................................................................................
Average commissions
paid/2/ 2.58c 1.17c .16c .38c .30c 3.29c 4.42c 3.29c 6.54c 4.12c
.........................................................................................................
Portfolio turnover rate 31.62% 29.54% 27.03% 25.51% 26.97% 19.03% 18.52% 17.21% 23.31% 8.06%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* All per share data reflect the 100% stock dividend effected on May 26, 1994.
/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.
- --------------------------------------------------------------------------------
4 THE NEW ECONOMY FUND / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
INVESTMENT POLICIES AND RISKS
The fund aims to provide you with long-term growth of capital.
The fund seeks to achieve its objective by investing in securities of companies
that derive their revenues primarily from operations in the services and
information area of the global economy. These could include, for example,
companies involved in the areas of telecommunications, computer systems and
software, broadcasting and publishing, health care, advertising, leisure,
tourism, financial services, distribution and transportation.
The fund may invest up to 25% of its assets in companies outside the services
and information area. This percentage is measured at the time of a particular
investment. Up to 40% of the fund's assets may be invested in securities of
issuers that are domiciled outside the U.S. (which are generally denominated in
currencies other than the U.S. dollar).
The fund normally invests in equity securities, including common stocks or
other securities convertible into stocks. The fund may also invest in smaller
capitalization stocks which can involve greater risk than is customarily
associated with investing in stocks of larger, more established companies.
Transaction costs may be higher for smaller capitalization stocks, and there
may be more difficulty obtaining information about the issuers or valuing or
disposing of securities than for more widely held stocks. When prevailing
market, economic, political or currency conditions warrant, assets may also be
invested in debt securities generally rated in the top three quality categories
by any national rating service or unrated but determined to be of equivalent
quality by Capital Research and Management Company. In addition, the fund may
hold cash and cash equivalents of U.S. and non-U.S. issuers, and may enter into
repurchase agreements. MORE INFORMATION ON THE FUND'S INVESTMENT POLICIES IS
CONTAINED IN ITS STATEMENT OF ADDITIONAL INFORMATION.
Investment limitations are considered at the time securities are purchased.
These limits are based on the fund's net assets unless otherwise indicated. The
fund's fundamental investment restrictions (described in the statement of
additional information) and objective may not be changed without shareholder
approval.
THE FUND MAY NOT ACHIEVE ITS INVESTMENT OBJECTIVE DUE TO MARKET CONDITIONS AND
OTHER FACTORS. IN ADDITION, THE FUND MAY EXPERIENCE DIFFICULTY LIQUIDATING
CERTAIN PORTFOLIO SECURITIES DURING SIGNIFICANT MARKET DECLINES OR PERIODS OF
HEAVY REDEMPTIONS.
- --------------------------------------------------------------------------------
THE NEW ECONOMY FUND / PROSPECTUS 5
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
SECURITIES AND INVESTMENT TECHNIQUES
EQUITY SECURITIES
Equity securities represent an ownership position in a company. The prices of
equity securities fluctuate based on changes in the financial condition of
their issuers and on market and economic conditions. The fund's results will be
related to the overall market for these securities. The growth-oriented,
equity-type securities generally purchased by the fund may involve large price
swings and potential for loss.
DEBT SECURITIES
Bonds and other debt securities are used by issuers to borrow money. Issuers
pay investors interest and generally must repay the amount borrowed at
maturity. Some debt securities, such as zero coupon bonds, do not pay current
interest but are purchased at a discount from their face values.
The prices of debt securities fluctuate depending on such factors as interest
rates, credit quality and maturity. In general their prices decline when
interest rates rise and vice versa.
The fund may invest up to 10% of its total assets in debt securities rated Baa
or BBB or below by Moody's Investors Service, Inc. or Standard & Poor's
Corporation or in unrated securities that are determined to be of equivalent
quality by Capital Research and Management Company. These securities are
considered "investment grade" but also may have speculative characteristics.
Securities rated Ba and BB or below or unrated securities determined to be of
equivalent quality are commonly known as "high-yield, high-risk" or "junk"
bonds and are described by the ratings agencies as speculative and involve
greater risk of default or price changes due to changes in the issuer's
creditworthiness than higher rated bonds, or they already be in default. The
market prices of these securities may fluctuate more than higher quality
securities and may decline significantly in periods of general economic
difficulty. It may be more difficult to dispose of, or to determine the value
of, high-yield, high-risk bonds. The fund's high-yield, high-risk securities
may be rated as low as Ca or CC. Bonds rated Ca or CC are described by the
ratings agencies as "speculative in a high degree; often in default or [having]
other marked shortcomings." See the statement of additional information for a
complete description of the ratings.
The fund's investments in debt securities outside the U.S. will principally be
in securities issued or guaranteed as to principal and interest by governments
or their agencies or instrumentalities or by multinational agencies.
- --------------------------------------------------------------------------------
6 THE NEW ECONOMY FUND / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Capital Research and Management Company attempts to reduce the risks described
above through diversification of the portfolio and by credit analysis of each
issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
RESTRICTED SECURITIES AND LIQUIDITY
The fund may purchase securities subject to restrictions on resale. All such
securities whose principal trading market is in the U.S. will be considered
illiquid unless they have been specifically determined to be liquid under
procedures which have been adopted by the fund's board of trustees, taking into
account factors such as the frequency and volume of trading, the commitment of
dealers to make markets and the availability of qualified investors, all of
which can change from time to time. The fund may incur certain additional costs
in disposing of illiquid securities.
INVESTING IN VARIOUS COUNTRIES
The fund has the ability to invest outside the U.S. Investing outside the U.S.
involves special risks, particularly in certain developing countries, caused
by, among other things: fluctuating currency values; different accounting,
auditing, and financial reporting regulations and practices in some countries;
changing local and regional economic, political, and social conditions;
expropriation or confiscatory taxation; greater market volatility; differing
securities market structures; and various administrative difficulties such as
delays in clearing and settling portfolio transactions or in receiving payment
of dividends. However, in the opinion of Capital Research and Management
Company, investing outside the U.S. also can reduce certain portfolio risks due
to greater diversification opportunities.
Additional costs could be incurred in connection with the fund's investment
activities outside the U.S. Brokerage commissions may be higher outside the
U.S., and the fund will bear certain expenses in connection with its currency
transactions. Furthermore, increased custodian costs may be associated with the
maintenance of assets in certain jurisdictions.
CURRENCY TRANSACTIONS
The fund can purchase and sell currencies to facilitate securities transactions
and enter into forward currency contracts to hedge against changes in currency
exchange rates. While entering into forward transactions could minimize the
risk of loss due to a decline in the value of the hedged currency, it could
also limit any potential gain which might result from an increase in the value
of the currency. The fund will not generally attempt to protect against all
potential changes in exchange rates.
- --------------------------------------------------------------------------------
THE NEW ECONOMY FUND / PROSPECTUS 7
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
MULTIPLE PORTFOLIO COUNSELOR SYSTEM
The basic investment philosophy of Capital Research and Management Company is
to seek fundamental values at reasonable prices, using a system of multiple
portfolio counselors in managing mutual fund assets. Under this system the
portfolio of a fund is divided into segments which are managed by individual
counselors. Counselors decide how their respective segments will be invested
(within the limits provided by a fund's objective(s) and policies and by
Capital Research and Management Company's investment committee). In addition,
Capital Research and Management Company's research professionals may make
investment decisions with respect to a portion of a fund's portfolio.
The primary individual portfolio counselors for the fund are listed on the
following page.
- --------------------------------------------------------------------------------
8 THE NEW ECONOMY FUND / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
<TABLE>
<CAPTION>
YEARS OF EXPERIENCE
AS
INVESTMENT
PROFESSIONAL
(APPROXIMATE)
.......................
YEARS OF
EXPERIENCE
AS PORTFOLIO
COUNSELOR
(AND RESEARCH WITH CAPITAL
PROFESSIONAL, IF RESEARCH AND
APPLICABLE) FOR MANAGEMENT
PORTFOLIO COUNSELORS THE COMPANY OR
FOR THE NEW ECONOMY NEW ECONOMY FUND ITS TOTAL
FUND PRIMARY TITLE(S) (APPROXIMATE) AFFILIATES YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WILLIAM R. Chairman of the 14 years (since 28 years 35 years
GRIMSLEY Board and the fund began
Principal operations)
Executive
Officer of the
fund; Senior
Vice President
and Director,
Capital
Research and
Management
Company
- -------------------------------------------------------------------------------
TIMOTHY D. President and 7 years (in 15 years 15 years
ARMOUR Trustee of the addition to
fund; Chairman 5 years as a
and Chief research
Executive professional
Officer, prior to
Capital becoming a
Research portfolio
Company* counselor for
the fund)
- -------------------------------------------------------------------------------
CLAUDIA Senior Vice 3 years (in 20 years 22 years
HUNTINGTON President of addition to 11
the fund; years as a
Senior Vice research
President, professional
Capital prior to
Research and becoming a
Management portfolio
Company counselor for
the fund)
- -------------------------------------------------------------------------------
JAMES B. Senior Vice 7 years (in 16 years 16 years
LOVELACE President of addition to
the fund; 2 years as a
Senior Vice research
President, professional
Capital prior to
Research and becoming a
Management portfolio
Company counselor for
the fund)
- -------------------------------------------------------------------------------
GORDON Senior Vice 4 years (in 27 years 27 years
CRAWFORD President and addition to
Director, 5 years as a
Capital research
Research and professional
Management prior to
Company becoming a
portfolio
counselor for
the fund)
- -------------------------------------------------------------------------------
WILLIAM C. Senior Partner, 14 years (since 39 years 45 years
NEWTON The Capital the fund began
Group operations)
Partners L.P.*
- -------------------------------------------------------------------------------
</TABLE>
The fund began operations on December 1, 1983.
* Company affiliated with Capital Research and Management Company.
- --------------------------------------------------------------------------------
THE NEW ECONOMY FUND / PROSPECTUS 9
- --------------------------------------------------------------------------------
<PAGE>
===============================================================================
INVESTMENT RESULTS
The fund may from time to time compare investment results to various indices or
other mutual funds. Fund results may be calculated on a total return, yield
and/or distribution rate basis. Currently, the fund calculates investment
results only on a total return basis. Results calculated without a sales charge
will be higher.
X TOTAL RETURN is the change in value of an investment in the fund over a given
period, assuming reinvestment of any dividends and capital gain
distributions.
X YIELD is computed by dividing the net investment income per share earned by
the fund over a given period of time by the maximum offering price per share
on the last day of the period, according to a formula mandated by the
Securities and Exchange Commission. A yield calculated using this formula may
be different than the income actually paid to shareholders.
X DISTRIBUTION RATE reflects dividends that were paid by the fund. The
distribution rate is calculated by dividing the dividends paid over the last
12 months by the sum of the month-end price and the capital gain
distributions paid over the last 12 months.
INVESTMENT RESULTS
(FOR PERIODS ENDED DECEMBER 31, 1997)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL THE FUND THE FUND AT GROWTH
TOTAL AT NET MAXIMUM FUNDS
RETURNS: ASSET VALUE/1/ SALES CHARGE/1//2/ INDEX/3/ S&P 500/4/
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One year 28.85% 21.42% 28.08% 33.32%
................................................................................
Five years 16.83% 15.46% 17.08% 20.23%
................................................................................
Ten years 16.24% 15.56% 16.08% 18.01%
................................................................................
Lifetime/5/ 15.80% 15.31% 14.28% 17.03%
- --------------------------------------------------------------------------------
</TABLE>
/1/ These fund results were calculated according to a standard formula that is
required for all stock and bond funds.
/2/ The maximum sales charge has been deducted.
/3/ The Lipper Growth Funds Index tracks the 30 largest growth funds
(representing about 56% of all growth fund assets). This index is unmanaged
and does not reflect sales charges, commissions or expenses.
/4/ The Standard & Poor's 500 Index represents stocks. This index is unmanaged
and does not reflect sales charges, commissions or expenses.
/5/ The fund began investment operations on December 1, 1983.
- --------------------------------------------------------------------------------
10 THE NEW ECONOMY FUND / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Here are the fund's annual total returns calculated without a sales charge.
This information is being supplied on a calendar year basis.
[BAR CHART]
<TABLE>
<S> <C>
1988 15.74
1989 31.79
1990 (10.1)
1991 29.17
1992 16.82
1993 30.95
1994 (8.11)
1995 24.37
1996 12.89
1997 28.85
</TABLE>
[END BAR CHART]
Past results are not an indication of future results.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The fund usually pays dividends, which may fluctuate, in June and December.
Capital gains, if any, are usually distributed in December. When a dividend or
capital gain is distributed, the net asset value per share is reduced by the
amount of the payment.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash, and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, or the shareholder does
not respond to mailings from American Funds Service Company with regard to
uncashed distribution checks, the shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares.
FEDERAL TAXES
In any fiscal year in which the fund qualifies as a regulated investment
company and distributes to shareholders all of its net investment income and
net capital gains, the fund itself is relieved of federal income tax.
- --------------------------------------------------------------------------------
THE NEW ECONOMY FUND / PROSPECTUS 11
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Generally, all dividends and capital gains are taxable whether they are
reinvested or received in cash -- unless you are exempt from taxation or
entitled to tax deferral. Early each year, you will be notified as to the
amount and federal tax status of all income distributions paid during the prior
year. Such distributions may also be subject to state or local taxes. The tax
treatment of redemptions from a retirement plan account may differ from
redemptions from an ordinary shareholder account.
YOU MUST PROVIDE THE FUND WITH A CERTIFIED CORRECT TAXPAYER IDENTIFICATION
NUMBER (GENERALLY YOUR SOCIAL SECURITY NUMBER) AND CERTIFY THAT YOU ARE NOT
SUBJECT TO BACKUP WITHHOLDING. IF YOU FAIL TO DO SO THE IRS CAN REQUIRE THE
FUND TO WITHHOLD 31% OF YOUR TAXABLE DISTRIBUTIONS AND REDEMPTIONS. Federal law
also requires the fund to withhold 30% or the applicable tax treaty rate from
dividends paid to certain nonresident alien, non-U.S. partnership and non-U.S.
corporation shareholder accounts.
This is a brief summary of some of the tax laws that affect your investment in
the fund. Please see the statement of additional information and your tax
adviser for further information.
================================================================================
FUND ORGANIZATION AND MANAGEMENT
FUND ORGANIZATION AND VOTING RIGHTS
The fund, an open-end, diversified management investment company, was organized
as a Massachusetts business trust in 1983. All fund operations are supervised
by the fund's board of trustees which meets periodically and performs duties
required by applicable state and federal laws. Members of the board who are not
employed by Capital Research and Management Company or its affiliates are paid
certain fees for services rendered to the fund as described in the statement of
additional information. They may elect to defer all or a portion of these fees
through a deferred compensation plan in effect for the fund. The fund does not
hold annual meetings of shareholders. However, significant matters that require
shareholder approval, such as certain elections of board members or a change in
a fundamental investment policy, will be presented to shareholders at a meeting
called for such purpose. Shareholders have one vote per share owned. At the
request of the holders of at least 10% of the shares, the fund will hold a
meeting at which any member of the board could be removed by a majority vote.
- --------------------------------------------------------------------------------
12 THE NEW ECONOMY FUND / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
THE INVESTMENT ADVISER
Capital Research and Management Company, a large and experienced investment
management organization founded in 1931, is the investment adviser to the fund
and other funds, including those in The American Funds Group. Capital Research
and Management Company, a wholly owned subsidiary of The Capital Group
Companies, Inc., is headquartered at 333 South Hope Street, Los Angeles, CA
90071. Capital Research and Management Company manages the investment portfolio
and business affairs of the fund. The management fee paid by the fund to
Capital Research and Management Company may not exceed 0.60% of the fund's
average net assets annually and declines at certain asset levels. The total
management fee paid by the fund, as a percentage of average net assets, for the
previous fiscal year is discussed earlier under "Expenses."
Capital Research and Management Company and its affiliated companies have
adopted a personal investing policy that is consistent with the recommendations
contained in the May 9, 1994 report issued by the Investment Company
Institute's Advisory Group on Personal Investing. This policy has also been
incorporated into the fund's code of ethics.
PLAN OF DISTRIBUTION
The fund has a Plan of Distribution or "12b-1 Plan" under which it may finance
activities primarily intended to sell shares, provided the categories of
expenses are approved in advance by the board. The 12b-1 fee paid by the fund,
as a percentage of average net assets, for the previous fiscal year is
discussed earlier under "Expenses." Since these fees are paid out of the fund's
assets on an ongoing basis, over time they will increase the cost of an
investment and may cost you more than paying higher sales loads in lieu of
these fees.
PORTFOLIO TRANSACTIONS
Orders for the fund's portfolio securities transactions are placed by Capital
Research and Management Company, which strives to obtain the best available
prices, taking into account the costs and quality of executions. Fixed-income
securities are generally traded on a "net" basis with a dealer acting as
principal for its own account without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are usually purchased at a fixed price which includes an
amount of compensation to the dealer, generally referred to as a concession or
discount. On occasion, securities may be purchased directly from an issuer, in
which case no commissions or discounts are paid. In the over-the-counter
market, purchases and sales are transacted directly with principal market-
makers except in those circumstances where it appears better prices and
executions are available elsewhere.
- --------------------------------------------------------------------------------
THE NEW ECONOMY FUND / PROSPECTUS 13
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
THE NEW ECONOMY FUND / PROSPECTUS
Subject to the above policy, when two or more brokers (either directly or
through their correspondent clearing agents) are in a position to offer
comparable prices and executions, preference may be given to brokers who have
sold shares of the fund or have provided investment research, statistical, and
other related services for the benefit of the fund and/or other funds served by
Capital Research and Management Company.
PRINCIPAL UNDERWRITER AND TRANSFER AGENT
American Funds Distributors, Inc. and American Funds Service Company serve as
the principal underwriter and transfer agent for the fund, respectively. They
are headquartered at 333 South Hope Street, Los Angeles, CA 90071 and 135 South
State College Boulevard, Brea, CA 92821, respectively.
AMERICAN FUNDS SERVICE COMPANY SERVICE AREAS
[MAP OF UNITED STATES OF AMERICA]
CALL TOLL-FREE FROM ANYWHERE IN THE U.S.
(8 A.M. TO 8 P.M. ET):
800/421-0180
MAP
<TABLE>
<S> <C> <C> <C>
WESTERN SERVICE WESTERN CENTRAL EASTERN CENTRAL EASTERN SERVICE
CENTER SERVICE CENTER SERVICE CENTER CENTER
American Funds American Funds American Funds American Funds
Service Company Service Company Service Company Service Company
P.O. Box 2205 P.O. Box 659522 P.O. Box 6007 P.O. Box 2280
Brea, California San Antonio, Texas Indianapolis, Indiana Norfolk, Virginia
92822-2205 78265-9522 46206-6007 23501-2280
Fax: 714/671-7080 Fax: 210/530-4050 Fax: 317/735-6620 Fax: 757/670-4773
</TABLE>
- --------------------------------------------------------------------------------
14 THE NEW ECONOMY FUND / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
The fund offers you a valuable array of services you can use to alter your
investment program as your needs and circumstances change. These services,
which are summarized below, are available only in states where they may be
legally offered and may be terminated or modified at any time upon 60 days'
written notice. A COMPLETE DESCRIPTION OF SHAREHOLDER SERVICES AND ACCOUNT
POLICIES IS CONTAINED IN THE FUND'S STATEMENT OF ADDITIONAL INFORMATION. In
addition, an easy-to-read guide to owning a fund in The American Funds Group
titled "Welcome to the Family" is sent to new shareholders and is available by
writing or calling American Funds Service Company.
THE SERVICES DESCRIBED MAY NOT BE AVAILABLE THROUGH SOME RETIREMENT PLANS OR
ACCOUNTS HELD BY INVESTMENT DEALERS. IF YOU ARE INVESTING IN SUCH A MANNER, YOU
SHOULD CONTACT YOUR PLAN ADMINISTRATOR/TRUSTEE OR DEALER ABOUT WHAT SERVICES
ARE AVAILABLE AND WITH QUESTIONS ABOUT YOUR ACCOUNT.
- --------------------------------------------------------------------------------
PURCHASING SHARES
HOW TO PURCHASE SHARES
Generally, you may open an account by contacting any investment dealer
authorized to sell the fund's shares. You may add to your account through your
dealer or directly through American Funds Service Company by mail, computer,
wire, or bank debit. You may also establish or add to your account by
exchanging shares from any of your other accounts in The American Funds Group.
The fund and American Funds Distributors reserve the right to reject any
purchase order for any reason. This includes exchange purchase orders that may
place an unfair burden on other shareholders due to their frequency.
Various purchase options are available as described below, subject to certain
investment minimums and limitations described in the statement of additional
information and "Welcome to the Family."
X Automatic Investment Plan
You may invest monthly or quarterly through automatic withdrawals from your
bank account.
X Automatic Reinvestment
You may reinvest your dividends and capital gain distributions into the fund
(with no sales charge). This will be done automatically unless you elect to
have the dividends and/or capital gain distributions paid to you in cash.
- --------------------------------------------------------------------------------
THE NEW ECONOMY FUND / PROSPECTUS 15
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
X Cross-Reinvestment
You may invest your dividends and capital gain distributions into any other
fund in The American Funds Group.
X Exchange Privilege
You may exchange your shares into other funds in The American Funds Group,
generally with no sales charge. Exchanges of shares from the money market
funds that were initially purchased with no sales charge will generally be
subject to the appropriate sales charge. You may also elect to automatically
exchange shares among any of the funds in The American Funds Group. Exchange
requests may be made in writing, by telephone including American
FundsLine(R), by computer using American FundsLine OnLine(SM) (see below), or
by fax. EXCHANGES HAVE THE SAME TAX CONSEQUENCES AS ORDINARY SALES AND
PURCHASES.
X Retirement Plans
You may invest in the fund through various retirement plans. For further
information contact your investment dealer or American Funds Distributors.
SHARE PRICE
The fund's share price, also called net asset value, is determined as of 4:00
p.m. Eastern time (the normal close of trading) every day the New York Stock
Exchange is open. The fund calculates its net asset value per share, generally
using market prices, by dividing the total value of its assets after
subtracting liabilities by the number of its shares outstanding. Shares are
purchased at the offering price next determined after your investment is
received and accepted by American Funds Service Company. The offering price is
the net asset value plus a sales charge, if applicable.
SHARE CERTIFICATES
Shares are credited to your account, and certificates are not issued unless you
request them by writing to American Funds Service Company.
INVESTMENT MINIMUMS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
To establish an account................................................. $1,000
For a retirement plan account......................................... $ 250
For a retirement plan account through payroll deduction............... $ 25
To add to an account.................................................... $ 50
For a retirement plan account......................................... $ 25
</TABLE>
- --------------------------------------------------------------------------------
16 THE NEW ECONOMY FUND / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
SALES CHARGES
A sales charge may apply, as described below, when purchasing shares. Sales
charges may be reduced for larger purchases as indicated below.
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF
...................
DEALER
NET CONCESSION AS
OFFERING AMOUNT % OF OFFERING
INVESTMENT PRICE INVESTED PRICE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.00%
................................................................................
$50,000 but less than $100,000 4.50% 4.71% 3.75%
................................................................................
$100,000 but less than $250,000 3.50% 3.63% 2.75%
................................................................................
$250,000 but less than $500,000 2.50% 2.56% 2.00%
................................................................................
$500,000 but less than $1 million 2.00% 2.04% 1.60%
................................................................................
$1 million or more and certain other
investments described below see below see below see below
</TABLE>
PURCHASES NOT SUBJECT TO SALES CHARGES
Investments of $1 million or more and investments made by employer-sponsored
defined contribution-type plans with 100 or more eligible employees are sold
with no initial sales charge. A 1% CONTINGENT DEFERRED SALES CHARGE MAY BE
IMPOSED ON CERTAIN REDEMPTIONS MADE BY THESE ACCOUNTS WITHIN ONE YEAR OF
PURCHASE. Investments by retirement plans, foundations or endowments with $50
million or more in assets may be made with no sales charge and are not subject
to a contingent deferred sales charge. A dealer concession of up to 1% may be
paid by the fund under its Plan of Distribution and/or by American Funds
Distributors on investments made with no initial sales charge. Investments by
certain individuals and entities including employees and other associated
persons of dealers authorized to sell shares of the fund and Capital Research
and Management Company and its affiliated companies are not subject to a sales
charge.
ADDITIONAL DEALER COMPENSATION
In addition to the concessions listed, up to 0.25% of average net assets is
paid annually to qualified dealers for providing certain services pursuant to
the fund's Plan of Distribution. American Funds Distributors currently provides
additional compensation to the top 100 dealers who have sold shares of funds in
The American Funds Group based on the pro rata share of a qualifying dealer's
sales.
- --------------------------------------------------------------------------------
THE NEW ECONOMY FUND / PROSPECTUS 17
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
REDUCING YOUR SALES CHARGE
You and your immediate family may combine investments to reduce your costs. You
must let your investment dealer or American Funds Service Company know if you
qualify for a reduction in your sales charge using one or any combination of
the methods described below.
X Aggregation
Investments that may be aggregated include those made by you, your spouse
and your children under the age of 21, if (i) all parties are purchasing
shares for their own account(s), including any business account solely
"controlled by," as well as any retirement plan or trust account solely for
the benefit of, these individuals or (ii) these individuals are making gifts
to other individuals or charities. Investments made for multiple employee
benefit plans of a single employer or "affiliated" employers may be
aggregated provided they are not also aggregated with individual accounts.
Finally, investments made by a common trust fund or other diversified pooled
account not specifically formed for the purpose of accumulating fund shares
may be aggregated.
Purchases made for nominee or street name accounts will generally not be
aggregated with those made for other accounts unless qualified as described
above.
X Concurrent Purchases
You may combine concurrent purchases of two or more funds in The American
Funds Group, except direct purchases of the money market funds. Shares of
the money market funds purchased through an exchange, reinvestment or cross-
reinvestment from a fund having a sales charge do qualify.
X Right of Accumulation
You may take into account the current value of your existing holdings in The
American Funds Group to determine your sales charge. Direct purchases of the
money market funds are excluded.
X Statement of Intention
You may enter into a non-binding commitment to invest a certain amount
(which, at your request, may include purchases made during the previous
90 days) in non-money market fund shares over a 13-month period. A portion
of your account may be held in escrow to cover additional sales charges that
may be due if your total investments over the statement period are
insufficient to qualify for the applicable sales charge reduction.
- --------------------------------------------------------------------------------
18 THE NEW ECONOMY FUND / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
SELLING SHARES
HOW TO SELL SHARES
You may sell (redeem) shares in your account by contacting your investment
dealer or American Funds Service Company. You may also use American
FundsLine(R) or American FundsLine OnLine(SM) (see below). In addition, you may
sell shares in amounts of $50 or more automatically. If you sell shares through
your investment dealer you may be charged for this service. Shares held for you
in your dealer's street name must be sold through the dealer.
Shares are sold at the net asset value next determined after your request is
received in good order by American Funds Service Company. Sale requests may be
made in writing, by telephone, including American FundsLine(R), by computer
using American FundsLine OnLine(SM), or by fax. Sales by telephone, computer or
fax are limited to $50,000 in accounts registered to individual(s) (including
non-retirement trust accounts). In addition, checks must be made payable to the
registered shareholder(s) and mailed to an address of record that has been used
with the account for at least 10 days.
Proceeds will not be mailed until sufficient time has passed to provide
reasonable assurance that checks or drafts (including certified or cashier's
checks) for shares purchased have cleared (which may take up to 15 calendar
days from the purchase date). Except for delays relating to clearance of checks
for share purchases or in extraordinary circumstances (and as permissible under
the Investment Company Act of 1940), sale proceeds will be paid on or before
the seventh day following receipt and acceptance of an order. Interest will not
accrue or be paid on amounts that represent uncashed distribution or redemption
checks.
The fund may, with 60 days' written notice, close your account if due to a sale
of shares the account has a value of less than the minimum required initial
investment.
Generally, written requests to sell shares must be signed by you and must
include any shares you wish to sell that are in certificate form. Your
signature must be guaranteed by a member firm of a domestic stock exchange or
the National Association of Securities Dealers, Inc., bank, savings
association, or credit union that is an eligible guarantor institution. A
signature guarantee is not currently required for any sale of $50,000 or less
provided the check is made payable to the registered shareholder(s) and is
mailed to the address of record on the account, and provided the address has
been used with the account for at least 10 days. Additional documentation may
be required for sales of shares held in corporate, partnership or fiduciary
accounts.
- --------------------------------------------------------------------------------
THE NEW ECONOMY FUND / PROSPECTUS 19
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
You may reinvest proceeds from a redemption or a dividend or capital gain
distribution without a sales charge (any contingent deferred sales charge paid
will be credited to your account) in any fund in The American Funds Group
within 90 days after the date of the redemption or distribution. Redemption
proceeds of shares representing direct purchases in the money market funds are
excluded. Reinvestment will be at the next calculated net asset value after
receipt and acceptance by American Funds Service Company.
================================================================================
OTHER IMPORTANT THINGS TO REMEMBER
AMERICAN FUNDSLINE(R) AND AMERICAN FUNDSLINE ONLINESM
You may check your share balance, the price of your shares, or your most recent
account transactions, sell shares (up to $50,000 per shareholder each day), or
exchange shares around the clock with American FundsLine(R) or American
FundsLine OnLine(SM). To use these services, call 800/325-3590 from a
TouchTone(TM) telephone or access The American Funds Web site on the Internet
at www.americanfunds.com.
TELEPHONE AND COMPUTER PURCHASES, SALES AND EXCHANGES
Unless you opt out of the telephone or computer (including American
FundsLine(R) or American FundsLine OnLine(SM) or fax purchase, sale and/or
exchange options (see below), you agree to hold the fund, American Funds
Service Company, any of its affiliates or mutual funds managed by such
affiliates, and each of their respective directors, trustees, officers,
employees and agents harmless from any losses, expenses, costs or liabilities
(including attorney fees) which may be incurred in connection with the exercise
of these privileges, provided American Funds Service Company employs reasonable
procedures to confirm that the instructions received from any person with
appropriate account information are genuine. If reasonable procedures are not
employed, the fund may be liable for losses due to unauthorized or fraudulent
instructions.
Generally, all shareholders are automatically eligible to use these options.
However, you may elect to opt out of these options by writing American Funds
Service Company. (You may also reinstate them at any time by writing to
American Funds Service Company.)
ACCOUNT STATEMENTS
You will receive regular confirmation statements reflecting transactions in
your account. Dividend and capital gain reinvestments and purchases through
automatic investment plans and certain retirement plans will be confirmed at
least quarterly.
- --------------------------------------------------------------------------------
20 THE NEW ECONOMY FUND / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
NOTES
- --------------------------------------------------------------------------------
THE NEW ECONOMY FUND / PROSPECTUS 21
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
NOTES
- --------------------------------------------------------------------------------
22 THE NEW ECONOMY FUND / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
NOTES
- --------------------------------------------------------------------------------
THE NEW ECONOMY FUND / PROSPECTUS 23
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
FOR SHAREHOLDER FOR RETIREMENT PLAN FOR DEALER
SERVICES SERVICES SERVICES
<S> <C> <C>
American Funds Call your employer or American Funds
Service Company plan administrator Distributors
800/421-0180 ext. 1 800/421-9900 ext. 11
</TABLE>
FOR 24-HOUR INFORMATION
<TABLE>
<S> <C>
American American Funds
FundsLine(R) Internet Web site
800/325-3590 http://www.americanfunds.com
</TABLE>
Telephone conversations may be recorded or monitored for
verification, recordkeeping and quality assurance purposes.
------------------------------------------------------------
MULTIPLE TRANSLATIONS
This prospectus may be translated into other languages. In
the event of any inconsistency or ambiguity as to the
meaning of any word or phrase in a translation, the English
text will prevail.
------------------------------------------------------------
OTHER FUND INFORMATION
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance
information, portfolio holdings, a statement from portfolio
management and the independent auditors' report (in the
annual report).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more detailed information on all aspects of the
fund, including the fund's financial statements.
A current SAI has been filed with the Securities and
Exchange Commission ("SEC"). It is incorporated by
reference into this prospectus and is available along with
other related materials on the SEC's Internet Web site at
http://www.sec.gov.
CODE OF ETHICS
Includes a description of the fund's personal investing
policy.
To request a free copy of any of the documents above:
Call American Funds or Write to the Secretary
Service Company of the fund
800/421-0180 ext. 1 333 South Hope Street
Los Angeles, CA 90071
- --------------------------------------------------------------------------------
24 THE NEW ECONOMY FUND / PROSPECTUS
- --------------------------------------------------------------------------------
This prospectus has been printed on recycled paper.
[LOGO OF RECYCLED PAPER]
<PAGE>
THE NEW ECONOMY FUND
PART B
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 1998
This document is not a prospectus but should be read in conjunction with the
current prospectus of The New Economy Fund (the fund or NEF) dated February 1,
1998. The prospectus may be obtained from your investment dealer or financial
planner or by writing to the fund at the following address:
THE NEW ECONOMY FUND
Attention: Secretary
333 South Hope Street
Los Angeles, CA 90071
(213) 486-9200
Shareholders who purchase shares at net asset value through eligible retirement
plans should note that not all of the services or features described below may
be available to them, and they should contact their employer for details.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE NO.
<S> <C>
INVESTMENT POLICIES 1
DESCRIPTION OF CERTAIN SECURITIES 2
INVESTMENT RESTRICTIONS 3
FUND TRUSTEES AND OFFICERS 6
MANAGEMENT 9
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES 12
PURCHASE OF SHARES 16
REDEEMING SHARES 22
SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES 23
EXECUTION OF PORTFOLIO TRANSACTIONS 25
GENERAL INFORMATION 26
INVESTMENT RESULTS 28
APPENDIX - DESCRIPTION OF BOND RATINGS 33
FINANCIAL STATEMENTS ATTACHED
</TABLE>
INVESTMENT POLICIES
LOWER RATED DEBT SECURITIES -- The fund may invest up to 10% of its assets in
debt securities rated Baa or BBB or below by Moody's Investors Services, Inc.
(Moody's) or Standard & Poor's Corporation (S&P) or in unrated securities that
are determined to be of equivalent quality by the fund's investment adviser,
Capital Research and Management Company (the Investment Adviser). (See
"Appendix - Description of Bond Ratings" below for a more complete description
of bond ratings.)
CERTAIN RISK FACTORS RELATING TO HIGH-YIELD, HIGH-RISK BONDS
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES - High-yield, high-risk bonds
are very sensitive to adverse economic changes and corporate developments.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress that would adversely
affect their ability to service their principal and interest payment
obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaulted on its obligations to pay
interest or principal or entered into bankruptcy procedings, the fund may incur
losses or expenses in seeking recovery of amounts owed to it. In addition,
periods of economic uncertainty and changes can be expected to result in
increased volatility of market prices of high-yield, high-risk bonds.
PAYMENT EXPECTATIONS - High-yield, high-risk bonds, like other bonds, may
contain redemption or call provisions. If an issuer exercised these provisions
in a declining interest rate market, the fund would have to replace the
security with a lower yielding security, resulting in a decreased return for
investors. Conversely, a high-yield, high-risk bond's value will decrease in a
rising interest rate market, as it will with all bonds.
LIQUIDITY AND VALUATION - There may be little trading in the secondary market
for particular bonds, which may affect adversely the fund's ability to value
accurately or dispose of such bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield, high-risk bonds, especially in a thin
market.
The fund's investment adviser, Capital Research and Management Company (the
Investment Adviser), attempts to reduce these risks through diversification of
the portfolio, by credit analysis of each issuer as well as by monitoring broad
economic trends and corporate developments, but there can be no assuruance that
it will be successful in doing so.
DESCRIPTION OF CERTAIN SECURITIES
U.S. GOVERNMENT SECURITIES -- Securities guaranteed by the U.S. Government
include: (1) direct obligations of the U.S. Treasury (such as Treasury bills,
notes and bonds) and (2) federal agency obligations guaranteed as to principal
and interest by the U.S. Treasury. In these securities, the payment of
principal and interest is unconditionally guaranteed by the U.S. Government,
and thus they are of the highest possible credit quality. Such securities are
subject to variations in market value due to fluctuations in interest rates,
but, if held to maturity, will be paid in full.
Certain securities issued by U.S. Government instrumentalities and certain
federal agencies are neither direct obligations of, nor guaranteed by, the U.S.
Treasury. However, they generally involve federal sponsorship in one way or
another; some are backed by specific types of collateral; some are supported by
the issuer's right to borrow from the U.S. Treasury; some are supported by the
discretionary authority of the U.S. Treasury to purchase certain obligations of
the issuer; others are supported only by the credit of the issuing government
agency or instrumentality. These agencies and instrumentalities include, but
are not limited to, Federal Land Banks, Farmers Home Administration, Central
Bank Cooperatives, and Federal Intermediate Credit Banks.
CASH AND CASH EQUIVALENTS -- These securities include (1) commercial paper
(short-term notes up to 9 months in maturity issued by corporations or
governmental bodies), (2) commercial bank obligations (E.G. certificates of
deposit (interest-bearing time deposits), and bankers' acceptances (time drafts
on a commercial bank where the bank accepts an irrevocable obligation to pay at
maturity)), (3) savings association and bank obligations (E.G. certificates of
deposit issued by savings banks or savings associations), (4) securities of
the U.S. Government, its agencies or instrumentalities that mature, or may be
redeemed, in one year or less, and (5) corporate bonds and notes that mature,
or that may be redeemed, in one year or less.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements, under
which the fund buys a security and obtains a simultaneous commitment from the
seller to repurchase the security at a specified time and price. Repurchase
agreements permit the fund to maintain liquidity and earn income over periods
of time as short as overnight. The seller must maintain with the fund's
custodian collateral equal to at least 100% of the repurchase price, including
accrued interest, as monitored daily by the Investment Adviser. See
"Management" below. The fund will only enter into repurchase agreements
involving securities in which it could otherwise invest and with selected banks
and securities dealers whose financial condition is monitored by the Investment
Adviser. If the seller under the repurchase agreement defaults, the fund may
incur a loss if the value of the collateral securing the repurchase agreement
has declined and may incur disposition costs in connection with liquidating the
collateral. If bankruptcy proceedings are commenced with respect to the
seller, realization upon the collateral by the fund may be delayed or limited.
CURRENCY TRANSACTIONS -- The fund has the ability to enter into forward
currency contracts to protect against changes in currency exchange rates. A
forward currency contract is an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. Forward currency contracts entered into by the fund will involve the
purchase or sale of a currency against the U.S. dollar. The fund will
segregate liquid assets which will be marked to market daily to meet its
forward contract commitments to the extent required by the Securities and
Exchange Commission.
Certain provisions of the Internal Revenue Code (the Code) may limit the extent
to which the fund may enter into forward contracts. Such transactions may also
affect, for U.S. federal income tax purposes, the character and timing of
income, gain or loss recognized by the fund.
INVESTMENT RESTRICTIONS
The fund has adopted the following fundamental policies and investment
restrictions which may not be changed without a majority vote of its
outstanding shares. Such majority is defined within the Investment Company Act
of 1940 (the 1940 Act) as the vote of the lesser of (1) 67% or more of the
outstanding shares present at a meeting, if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (2) more than 50% of
the outstanding shares. Investment limitations expressed in the following
restrictions are considered at the time securities are purchased and are based
on the fund's net assets unless otherwise indicated. These restrictions
provide that the fund may not:
1. Invest in securities of another issuer (other than the U.S. or its agencies
or instrumentalities), if immediately after and as a result of such investment
more than 5% of the value of the total assets of the fund would be invested in
the securities of such other issuer, or more than 10% of the outstanding voting
securities of such issuer would be owned by the fund;
2. Invest in companies for the purpose of exercising control or management;
3. Purchase the securities of companies in a particular industry (other than
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities) if thereafter 25% or more of the value of its total assets
would consist of securities issued by companies in that industry;
4. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commissions, is involved, and only if immediately thereafter no more than 10%
of the value of the fund's total assets would be invested in such securities;
5. Buy or sell real estate in the ordinary course of its business; however,
the fund may invest in securities secured by real estate or interests therein
or issued by companies, including real estate investment trusts, which invest
in real estate or interests therein;
6. Buy or sell commodities or commodity contracts in the ordinary course of
its business provided, however, that entering into a forward currency contract
shall not be prohibited by this restriction;
7. Invest more than 10% of the value of its total assets in securities which
are not readily marketable or engage in the business of underwriting of
securities of other issuers, except to the extent that the disposal of an
investment position may technically constitute the fund an underwriter as that
term is defined under the Securities Act of 1933;
8. Lend any of its assets; provided, however that investment in government
obligations, short-term commercial paper, certificates of deposit and banker's
acceptances and publicly traded bonds, debentures, or other debt securities or
entering into repurchase agreements, shall not be prohibited by this
restriction;
9. Sell securities short, except to the extent that the fund contemporaneously
owns or has the right to acquire at no additional cost, securities identical to
those sold short;
10. Purchase securities on margin;
11. Enter into any repurchase agreement if, as a result, more than 10% of the
fund's total assets would be subject to repurchase agreements maturing in more
than seven days (see above);
12. Borrow amounts in excess of 5% of the value of its total assets or issue
senior securities; in any event, the fund may borrow only as a temporary
measure for extraordinary or emergency purposes and not for investment in
securities;
13. Mortgage, pledge or hypothecate its assets to any extent;
14. Purchase or retain the securities of any issuer, if those individual
officers and trustees of the fund, its investment adviser or distributor, each
owning beneficially more than 1/2 of 1% of the securities of such issuer,
together own more than 5% of the securities of such issuer;
15. Invest more than 5% of the value of its total assets in securities of
companies having, together with their predecessors, a record of less than three
years of continuous operation;
16. Invest in puts, calls, straddles or spreads, or combinations thereof; nor
17. Purchase partnership interests in oil, gas, or mineral exploration,
drilling or mining ventures.
Further investment policies of the fund include the following: the fund will
not invest more than 40% of its assets in securities of issuers outside the
U.S. and/or denominated in currencies other than the U.S. dollar; nor will the
fund invest more than 5% of the value of the fund's net assets in warrants,
valued at the lower of cost or market, with no more than 2% being unlisted on
the New York or American Stock Exchanges (warrants acquired by the fund in
units or attached to securities may be deemed to be without value for purposes
of this restriction).
All percentages relating to the policies and restrictions of the fund are
measured at the time the investment is made.
For purposes of investment restriction number 3, the fund will not invest 25%
or more of total assets in the securities of issuers in the same industry.
For purposes of investment restriction number 4, the fund may invest in
securities of other managed investment companies if deemed advisable by its
officers in connection with the administration of a deferred compensation plan
adopted by Trustees, and to the extent such investments are allowed by an
exemptive order granted by the Securities and Exchange Commission.
For purposes of investment restriction number 6, forward currency contracts are
not considered commodities or commodities contracts.
FUND TRUSTEES AND OFFICERS
TRUSTEES AND TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION PRINCIPAL OCCUPATION(S) DURING AGGREGATE TOTAL TOTAL NUMBER
AND AGE WITH PAST 5 YEARS (POSITIONS WITHIN THE COMPENSATION COMPENSATION OF FUND
REGISTRANT ORGANIZATIONS LISTED MAY HAVE (INCLUDING (INCLUDING BOARDS ON
CHANGED DURING THIS PERIOD) VOLUNTARILY VOLUNTARILY WHICH
DEFERRED DEFERRED TRUSTEE
COMPENSATION/1/) COMPENSATION/1/) SERVES/2/
FROM THE FUND FROM ALL FUNDS
DURING FISCAL YEAR MANAGED BY
ENDED 11/30/97 CAPITAL RESEARCH
AND
MANAGEMENT
COMPANY
<S> <C> <C> <C> <C> <C>
++ Timothy D. Armour President Chairman and Chief Executive none/4/ none/4/ 1
333 South Hope Street and Officer, Capital Research Company;
Los Angeles, CA 90071 Trustee Director, Capital Research and
Management Company
Age: 37
Richard G. Capen, Jr. Trustee Corporate Director and author, former $15,500 $34,000 2
Box 2494 United States Ambassador to Spain;
Rancho Santa Fe, CA former Vice Chairman of the Board;
92067 Kinight Ridder, Inc., former Chairman
Age: 63 and Publisher, The Miami Herald
H. Frederick Christie Trustee Private Investor; former President $14,611/3/ $163,900/3/ 18
P.O. Box 144 and Chief Executive Officer, The
Palos Verdes Estates, CA Mission Group (non-utility holding
90274 company, subsidiary of Southern
Age: 64 California Edison Company); former
President, Southern California Edison
Company
Alan E. Clements Trustee Private investor; former Executive $11,500 $26,000 2
16 Great Peter Street Director - Finance, Imperial Chemical
London SW1P3JF Industries PLC
England
Age: 69
Alan Greenway Trustee President, Greenway Associates, Inc. $15,000 $73,450 4
7413 Fairway Road (management consulting services)
La Jolla, CA 92037
Age: 70
++ William R. Grimsley Chairman Senior Vice President and Director, None/4/ None/4/ 3
P.O. Box 7650 of the Capital Research and Management
San Francisco, CA 94120 Board Company
Age: 59
++ Graham Holloway Trustee Former Chairman of the Board, None/4/ None/4/ 2
17309 Club Hill Drive American Funds Distributors, Inc.
Dallas, TX 75248
Age: 67
Leonade D. Jones Trustee Former Treasurer, The Washington $14,900/3/ $82,000/3/ 5
1536 Los Montes Drive Post Company
Burlingame, CA 94010
Age: 50
William H. Kling Trustee President, Minnesota Public Radio; $13,950/3/ $75,750/3/ 4
2619 Lake of the Isles President, Greenspring Co.; former
Parkway East President, American Public Radio
St. Paul, MN 55408 (now Public Radio International)
Age: 55
Norman R. Weldon Trustee Managing Director, Partisan $14,700 $39,900 2
15600 N.W. 67th Avenue Management Group, Inc; Chairman of
Miami, FL 33014 the Board, Novoste Corporation;
Age: 63 Director, Enable Medical; former
President and Director, Corvita
Corporation
Patricia K. Woolf Trustee Private investor; Lecturer, $14,100 $89,967 5
506 Quaker Road Department
Princeton, NJ 08540 of Molecular Biology, Princeton
Age: 63 University
</TABLE>
++ Trustees who are considered "interested persons" of the fund as defined in
the 1940 Act on the basis of their affiliation with the fund's Investment
Adviser, Capital Research and Management Company.
/1/ Amounts may be deferred by eligible directors/trustees under a
non-qualified deferred compensation plan adopted by the fund in 1993. Deferred
amounts accumulate at an earnings rate determined by the total return of one or
more of the funds in The American Funds Group as designated by the
director/trustee.
/2/ Capital Research and Management Company manages The American Funds Group
consisting of 28 funds: AMCAP Fund, American Balanced Fund, Inc., American
High-Income Municipal Bond Fund, Inc., American High-Income Trust, American
Mutual Fund, Inc., The Bond Fund of America, Inc., The Cash Management Trust of
America, Capital Income Builder, Inc., Capital World Growth and Income Fund,
Inc., Capital World Bond Fund, Inc., EuroPacific Growth Fund, Fundamental
Investors, Inc., The Growth Fund of America, Inc., The Income Fund of America.
Inc., Intermediate Bond Fund of America, The Investment Company of America,
Limited Term Tax-Exempt Bond Fund of America, The New Economy Fund, New
Perspective Fund, Inc., SMALLCAP World Fund, Inc., The Tax-Exempt Bond Fund of
America, Inc., The Tax-Exempt Fund of California, The Tax-Exempt Fund of
Maryland, The Tax-Exempt Fund of Virginia, The Tax-Exempt Money Fund of
America, The U.S. Treasury Money Fund of America, U.S. Government Securities
Fund and Washington Mutual Investors Fund, Inc. Capital Research and
Management Company also manages American Variable Insurance Series and Anchor
Pathway Fund which serve as the underlying investment vehicles for certain
variable insurance contracts; and Bond Portfolio for Endowments, Inc. and
Endowments, Inc whose shares may be owned only by tax-exempt organizations.
/3/ Since the deferred compensation plan's adoption, the total amounts of
deferred compensation accrued by the fund (plus earnings thereon) as of the
fiscal year ended November 30, 1997 for participating Trustees are as follows:
H. Frederick Christie ($21,371); William H. Kling ($57,333); and Leonade D.
Jones ($47,340). Amounts deferred and accumulated earnings thereon are not
funded and are general unsecured liabilities of the fund until paid to the
Trustee.
/4/ Timothy D. Armour, William R. Grimsley and Graham Holloway are affiliated
with the Investment Adviser and, accordingly, receive no compensation from the
fund.
OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NAME AND ADDRESS AGE POSITION(S) HELD WITH PRINCIPAL OCCUPATION(S) DURING
REGISTRANT PAST 5 YEARS
William R. Grimsley 59
(see above)
Timothy D. Armour 37
(see above)
Claudia P. Huntington 45 Senior Vice President Senior Vice President, Capital
333 South Hope Street Los Research and Management
Angeles, CA 90071 Company
James B. Lovelace 41 Senior Vice President Senior Vice President, Capital
333 South Hope Street Los Research and Management
Angeles, CA 90071 Company
Vincent P. Corti 41 Vice President Fund Business Management Group,
333 South Hope Street Los Capital Research and
Angeles, CA 90071 Management Company
Chad L. Norton 37 Secretary Vice President -- Fund Business
333 South Hope Street Los Management Group, Capital
Angeles, CA 90071 Research and Management
Company
Robert P. Simmer 36 Treasurer Vice President -- Fund Business
5300 Robin Hood Road Management Group, Capital
Norfolk, VA 2351 Research and Management
Company
</TABLE>
All of the officers listed also are officers or employees of the Investment
Adviser or affiliated companies. No compensation is paid by the fund to any
officer or Trustee who is a director, officer or employee of the Investment
Adviser or affiliated companies. The fund pays fees of $8,500 per annum to
Trustees who are not affiliated with the Investment Adviser, plus $800 for each
Board of Trustees meeting attended, plus $400 for each meeting attended as a
member of a committee of the Board of Trustees. No pension or retirement
benefits are accrued as part of fund expenses. The Trustees may elect, on a
voluntary basis, to defer all or a portion of these fees through a deferred
compensation plan in effect for the fund. The fund also reimburses certain
expenses of the Trustees who are not affiliated with the Investment Adviser.
As of January 1, 1998 the officers and Trustees of the fund and their families
as a group owned beneficially or of record less than 1% of the outstanding
shares of the fund.
MANAGEMENT
INVESTMENT ADVISER -- The Investment Adviser, founded in 1931, maintains
research facilities in the U.S. and abroad (Los Angeles, San Francisco, New
York, Washington D.C., London, Geneva, Hong Kong, Singapore and Tokyo), with a
staff of professionals, many of whom have a number of years of investment
experience. The Investment Adviser is located at 333 South Hope Street, Los
Angeles, CA 90071, and at 135 South State College Boulevard, Brea, CA 92821.
The Investment Adviser's professionals travel several million miles a year,
making more than 5,000 research visits in more than 50 countries around the
world. The Investment Adviser believes that it is able to attract and retain
quality personnel. The Investment Adviser is a wholly owned subsidiary of The
Capital Group Companies, Inc.
An affiliate of the Investment Adviser compiles indices for major stock markets
around the world and compiles and edits the Morgan Stanley Capital
International Perspective, providing financial and market information about
more than 2,400 companies around the world.
The Investment Adviser is responsible for more than $175 billion of stocks,
bonds and money market instruments and serves over eight million investors of
all types. These investors include privately owned businesses and large
corporations as well as schools, colleges, foundations and other non-profit and
tax-exempt organizations.
INVESTMENT ADVISORY AND SERVICE AGREEMENT -- The Investment Advisory and
Service Agreement (the Agreement) between the fund and the Investment Adviser
will continue in effect until November 30, 1998, and may be renewed from year
to year thereafter, provided that any such renewal has been specifically
approved at least annually by (1) the Board of Trustees, or by the vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the fund, and (2) the vote of a majority of Trustees who are not parties to the
Agreement or interested persons (as defined in the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on such approval.
The Agreement provides that the Investment Adviser has no liability to the fund
for its acts or omissions in the performance of its obligations to the fund not
involving willful misconduct, bad faith, gross negligence or reckless disregard
of its obligations under the Agreement. The Agreement also provides that
either party has the right to terminate it, without penalty, upon 60 days'
written notice to the other party and that the Agreement automatically
terminates in the event of its assignment (as defined in the 1940 Act).
The Investment Adviser, in addition to providing investment advisory services,
furnishes the services and pays the compensation and travel expenses of persons
to perform the executive, clerical and bookkeeping functions of the fund and
provides suitable office space, small office equipment and utilities, and
general purpose accounting forms, supplies, and postage used at the office of
the fund relating to the services furnished by the Investment Adviser. Subject
to the expense agreement described below, the fund will pay all expenses not
expressly assumed by the Investment Adviser, including, but not limited to,
registration and filing fees with federal and state agencies; blue sky
expenses; expenses of shareholders' meetings; the expense of reports to
existing shareholders; expenses of printing proxies and prospectuses; legal
and auditing fees; dividend disbursement expenses; the expense of the issuance,
transfer, and redemption of its shares; expenses pursuant to the fund's Plan of
Distribution (described below); custodian fees; printing and preparation of
registration statements; taxes; compensation, compensation and expenses paid to
Trustees unaffiliated with the Investment Adviser; association dues; and costs
of stationery, forms and certificates prepared exclusively for the fund.
As compensation for its services, the Investment Adviser receives a monthly fee
which is accrued daily, calculated at the lower of the annual rates of 0.60% on
the first $300 million of the fund's net assets, 0.48% on assets over $300
million to $750 million, 0.45% on assets over $750 million to $1.25 billion,
and 0.42% on assets over $1.25 billion; OR 0.58% on the first $500 million of
the fund's net assets, 0.48% on assets from $500 million to $1 billion, 0.44%
on assets from $1 billion to $1.5 billion, 0.41% on assets from $1.5 billion to
$2.5 billion, 0.39% on assets from $2.5 billion to $4 billion, 0.38% on assets
from $4 billion to $6.5 billion, and 0.375% on assets over $6.5 billion. The
latter fee schedule provides for lower fees when net assets exceed $3 billion.
The Agreement provides for an advisory fee reduction by any amount necessary to
assure that the fund's annual ordinary net operating expenses do not exceed
applicable expense limitations in any state in which the fund's shares are
being offered for sale. Only one state (California) continues to impose
expense limitations on funds registered for sale therein. The California
provision currently limits annual expenses to the sum of 2 1/2% of the first
$30 million of average net assets, 2% of the next $70 million and 1 1/2% of the
remaining average net assets. Rule 12b-1 distribution plan expenses are
excluded from this limit. Other expenses which are not subject to this
limitation are interest, taxes, and extraordinary items such as litigation.
Expenditures, including costs incurred in connection with the purchase or sale
of portfolio securities, which are capitalized in accordance with generally
accepted accounting principles applicable to investment companies, are
accounted for as capital items and not as expenses.
During the fiscal years ended November 30, 1997, 1996 and 1995, the Investment
Adviser's total fees amounted to $18,971,000, $17,016,000, and $13,517,000,
respectively.
PRINCIPAL UNDERWRITER -- American Funds Distributors, Inc. (the Principal
Underwriter) is the Principal Underwriter of the fund's shares. The Principal
Underwriter is located at 333 South Hope Street, Los Angeles, CA 90071, 135
South State College Boulevard, Brea, CA 92821, 8000 IH-10 West, San Antonio, TX
78230, 8332 Woodfield Crossing Boulevard, Indianapolis, IN 46240 and 5300 Robin
Hood Road, Norfolk, VA 23513. The fund has adopted a Plan of Distribution (the
Plan), pursuant to rule 12b-1 under the 1940 Act. The Principal Underwriter
receives amounts payable pursuant to the Plan (see below) and commissions
consisting of that portion of the sales charge remaining after the discounts
which it allows to investment dealers. Commissions retained by the Principal
Underwriter on sales of fund shares during the fiscal year ended November 30,
1997 amounted to $1,605,000 after allowance of $8,007,000 to dealers. During
the fiscal years ended November 30, 1996 and 1995 the Principal Underwriter
retained $2,388,000 and $2,620,000 respectively.
As required by rule 12b-1, the Plan (together with the Principal Underwriting
Agreement) has been approved by a majority of the entire Board of Trustees, and
separately by a majority of the Trustees who are not "interested persons" of
the fund and who have no direct or indirect financial interest in the operation
of the Plan or the Principal Underwriting Agreement, and the Plan has been
approved by the vote of a majority of the outstanding voting securities of the
fund. The officers and Trustees who are "interested persons" of the fund may
be considered to have a direct or indirect financial interest in the operation
of the Plan due to present or past affiliations with the Investment Adviser and
related companies. Potential benefits of the Plan to the fund include improved
shareholder services, savings to the fund in transfer agency costs, savings to
the fund in advisory fees and other expenses, benefits to the investment
process from growth or stability of assets and maintenance of a financially
healthy management organization. The selection and nomination of Trustees who
are not "interested persons" of the fund is committed to the discretion of the
Trustees who are not "interested persons" during the existence of the Plan.
The Plan is reviewed quarterly and must be renewed annually by the Board of
Trustees.
Under the Plan the fund may expend up to 0.25% of its average net assets
annually to finance any activity primarily intended to result in the sale of
fund shares provided the fund's Board of Trustees has approved the category of
expenses for which payment is being made. These include service fees for
qualified dealers and wholesaler compensation on sales of shares exceeding $1
million (including purchases by any employer-sponsored 403(b) plan or purchases
by any defined contribution plan qualified under Section 401(a) of the Code
including a 401 (k) plan with 100 or more eligible employees). Only expenses
incurred during the preceding 12 months and accrued while the Plan is in effect
may be paid by the fund. During the year ended November 30, 1997, the fund
paid or accrued $10,087,000 for compensation to dealers under the Plan.
The Glass-Stegall Act and other applicable laws, among other things, generally
prohibit commercial banks from engaging in the business of underwriting,
selling or distributing securities, but permit banks to make shares of mutual
funds available to their customers and to perform administrative and
shareholder servicing functions. However, judicial or administrative decisions
or interpretations of such laws, as well as changes in either federal or state
statutes or regulations relating to the permissible activities of banks or
their subsidiaries of affiliates, could prevent a bank from continuing to
perform all or a part of its servicing activities. If a bank were prohibited
from so acting, shareholder clients of such bank would be permitted to remain
shareholders of the fund and alternate means for continuing the servicing of
such shareholders would be sought. In such event, changes in the operation of
the fund might occur and shareholders serviced by such bank might no longer be
able to avail themselves of any automatic investment or other services then
being provided by such bank. It is not expected that shareholders would suffer
adverse financial consequences as a result of any of these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and certain banks and financial
institutions may be required to be registered as dealers pursuant to state law.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The fund intends to meet all the requirements and has elected the tax status of
a "regulated investment company" under the provisions of Subchapter M of the
Code. Under Subchapter M, if the fund distributes within specified times at
least 90% of the sum of its investment company taxable income, it will be taxed
only on that portion of such investment company taxable income that it retains.
To qualify, the fund must (a) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, and
gains from the sale or other disposition of stock, securities, currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; and (b) diversify its holdings so that, at the end of
each fiscal quarter, (i) at least 50% of the market value of the fund's assets
is represented by cash, cash items, U.S. Government securities, securities of
other regulated investment companies, and other securities, but such other
securities must be limited, in respect of any one issuer, to an amount not
greater than 5% of the fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies), or in two or more issuers which the fund controls and which are
engaged in the same or similar trades or businesses or related trades or
businesses.
Under the Code, a nondeductible excise tax of 4% is imposed on the excess of a
regulated investment company's "required distribution" for the calendar year
ending within the regulated investment company's taxable year over the
"distributed amount" for such calendar year. The term "required distribution"
means the sum of (1) 98% of ordinary income (generally net investment income)
for the calendar year, (2) 98% of capital gains (both long-term and short-term)
for the one-year period ending on October 31 (as though the one-year period
ending on October 31 were the regulated investment company's taxable year), and
(3) the sum of any untaxed, undistributed net investment income and net capital
gains of the regulated investment company for prior periods. The term
"distributed amount" generally means the sum of (1) amounts actually
distributed by the fund from its current year's ordinary income and capital
gain net income and (2) any amount on which the fund pays income tax for the
year. The fund intends to distribute net investment income and net capital
gains so as to minimize or avoid the excise tax liability.
The amount of any realized gain or loss on closing out a forward currency
contract such as a forward commitment for the purchase or sale of foreign
currency will generally result in a realized capital gain or loss for tax
purposes. Under Code Section 1256, forward currency contracts held by the fund
at the end of each fiscal year will be required to be "marked to market" for
federal income tax purposes, that is, deemed to have been sold at market value.
Code Section 988 may also apply to forward currency contracts. Under Section
988, each foreign currency gain or loss is generally computed separately and
treated as ordinary income or loss. In the case of overlap between Sections
1256 and 988, special provisions determine the character and timing of any
income, gain or loss. The fund will attempt to monitor Section 988
transactions to avoid an adverse tax impact.
Distributions of investment company taxable income, including short-term
capital gains, generally are taxable to the shareholder as ordinary income,
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the fund. The fund also intends to continue distributing
to shareholders all of the excess of net long-term capital gain over net
short-term capital loss on sales of securities. A capital gain distribution,
whether paid in cash or reinvested in shares, is taxable to shareholders as
long-term capital gains, regardless of the length of time a shareholder has
held the shares or whether such gain was realized by the fund before the
shareholder acquired such shares and was reflected in the price paid for the
shares.
Except for transactions the fund has identified as hedging transactions, the
fund is required for federal income tax purposes to recognize as income for
each taxable year its net unrealized gains and losses on forward currency
contracts as of the end of the year as well as those actually realized during
the year.
Sales of forward currency contracts which are intended to hedge against a
change in the value of securities or currencies held by the fund may affect the
holding period of such securities or currencies and, consequently, the nature
of the gain or loss on such securities or currencies upon disposition.
It is anticipated that any net gain realized from the closing out of forward
currency contracts will be considered gain from the sale of securities or
currencies and therefore be qualifying income for purposes of the 90% of gross
income from qualified sources requirement, as discussed above.
The fund will distribute to shareholders annually any net long-term capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the fund's fiscal year) on forward currency
contract transactions. Such distributions will be combined with distributions
of capital gains realized on the fund's other investments.
Dividends generally are taxable to shareholders at the time they are paid.
However, dividends declared in October, November and December and made payable
to shareholders of record in such a month are treated as paid and are thereby
taxable as of December 31, provided that the fund pays the dividend during
January of the following year.
If a shareholder exchanges or otherwise disposes of shares of the fund within
90 days of having acquired such shares, and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales charge for
shares of the fund, or of a different fund, the sales charge previously
incurred in acquiring the fund's shares shall not be taken into account (to the
extent such previous sales charges do not exceed the reduction in sales
charges) for the purpose of determining the amount of gain or loss on the
exchange, but will be treated as having been incurred in the acquisition of
such other shares. Also, any loss realized on a redemption or exchange of
shares of a fund will be disallowed to the extent substantially identical
shares are reacquired within the 61-day period beginning 30 days before and
ending 30 days after the shares are disposed of.
Under the Code, distributions of net investment income by the fund to a
shareholder who, as to the U.S., is a nonresident alien individual, nonresident
alien fiduciary of a trust or estate, non-U.S. corporation, or non-U.S.
partnership (a non-U.S. shareholder) will be subject to U.S. withholding tax
(at a rate of 30% or lower treaty rate). Withholding will not apply if a
dividend paid by the fund to a non-U.S. shareholder is "effectively connected"
with a U.S. trade or business, in which case the reporting and withholding
requirements applicable to U.S. citizens, U.S. residents, or domestic
corporations will apply. However, if the distribution is effectively connected
with the conduct of the non-U.S. shareholder's trade or business within the
U.S., the distribution would be included in the net income of the shareholder
and subject to U.S. income tax at the applicable marginal rate. Distributions
of net long-term capital gains are not subject to tax withholding, but if the
non-U.S. shareholder was an individual who was physically present in the U.S.
during the tax year for more than 182 days and such shareholder is nonetheless
treated as a nonresident alien, the distributions would be subject to a 30%
tax.
The fund may be required to pay withholding and other taxes imposed by foreign
countries generally at rates from 10% to 40% which would reduce the fund's
investment income. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. While the fund expects to invest
less than 50% of its assets outside the U.S. under current market conditions,
if more than 50% in value of the fund's total assets at the close of its
taxable year consists of securities of foreign issuers, the fund will be
eligible to file elections with the Internal Revenue Service pursuant to which
shareholders of the fund will be required to include their respective pro rata
portions of such withholding taxes in their federal income tax returns as gross
income, treat such amounts as foreign taxes paid by them, and deduct such
amounts in computing their taxable incomes or, alternatively, use them as
foreign tax credits against their federal income taxes. In any year the fund
makes such an election, shareholders will be notified as to the amount of
foreign withholding and other taxes paid by the fund.
As of the date of this statement of additional information, the maximum federal
individual stated tax rate applicable to ordinary income is 39.6% (effective
tax rates may be higher for some individuals due to phase out of exemptions and
elimination of deductions); the maximum individual tax rate applicable to net
capital gains on assets held more than eighteen months is 20%, and on assets
held more than one year and not more than eighteen months is 28%; and the
maximum corporate tax applicable to ordinary income and net capital gain is
35%. However, to eliminate the benefit of lower marginal corporate income tax
rates, corporations which have taxable income in excess of $100,000 for a
taxable year will be required to pay an additional income tax liability up to
$11,750 and corporations which have taxable income in excess of $15,000,000 for
a taxable year will be required to pay and additional amount of tax up to
$100,000. Naturally, the amount of tax payable by a taxpayer will be affected
by a combination of tax law rules covering, E.G., deductions, credits,
deferrals, exemptions, sources of income and other matters. Under the Code, an
individual is entitled to establish and contribute to an Individual Retirement
Account (IRA) each year (prior to the tax return filing deadline for that year)
whereby earnings on investments are tax-deferred. In addition, in some cases,
the IRA contribution itself may be deductible.
The foregoing is limited to a summary discussion of federal taxation and should
not be viewed as a comprehensive discussion of all provisions of the Code
relevant to investors. Dividends and capital gain distributions may also be
subject to state or local taxes. Shareholders should consult their own tax
advisers for additional details as to their particular tax status.
PURCHASE OF SHARES
<TABLE>
<CAPTION>
<S> <C> <C>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS
See "Investment Minimums and Fund $50 minimum (except where a lower minimum is noted
Numbers" for initial investment under "Investment Minimums and Fund Numbers").
minimums.
By Visit any investment dealer who is Mail directly to your investment dealer's address printed
contacting registered in the state where the on your account statement.
your purchase is made and who has a sales
investment agreement with American Funds
dealer Distributors.
By mail Make your check payable to the fund Fill out the account additions form at the bottom of a
and mail to the address indicated on the recent account statement, make your check payable to
account application. Please indicate an the fund, write your account number on your check, and
investment dealer on the account mail the check and form in the envelope provided with
application. your account statement.
By Please contact your investment dealer Complete the "Investments by Phone" section on the
telephone to open account, then follow the account application or American FundsLink
procedures for additional investments. Authorization Form. Once you establish the privilege,
you, your financial advisor or any person with your
account information can call American FundsLine(R)
and make investments by telephone (subject to
conditions noted in "Shareholder Account Services and
Privileges - Telephone and Computer Purchases,
Redemptions and Exchanges" below).
By Please contact your investment dealer Complete the American FundsLink Authorization Form.
computer to open account, then follow the Once you establish the privilege, you, your financial
procedures for additional investments. adviser or any person with your account information may
access American FundsLine OnLine(SM) on the Internet
and make investments by computer (subject to conditions
noted in "Shareholder Account Services and Privileges -
Telephone and Computer Purchases, Redemptions and
Exchanges" below).
By wire Call 800/421-0180 to obtain your Your bank should wire your additional investments in
account number(s), if necessary. the same manner as described under "Initial
Please indicate an investment dealer on Investment."
the account. Instruct your bank to wire
funds to:
Wells Fargo Bank
155 Fifth Street, 6th Floor
San Francisco, CA 94106
(ABA #121000248)
For credit to the account of:
American Funds Service Company
a/c #4600-076178
(fund name)
(your fund acct. no.)
THE FUNDS AND AMERICAN FUNDS DISTRIBUTORS RESERVE THE RIGHT TO REJECT ANY PURCHASE ORDER.
</TABLE>
INVESTMENT MINIMUMS AND FUND NUMBERS -- Here are the minimum initial
investments required by the funds in The American Funds Group along with fund
numbers for use with our automated phone line, American FundsLine(R) (see
description below):
<TABLE>
<CAPTION>
<S> <C> <C>
FUND MINIMUM FUND
INITIAL NUMBER
INVESTMENT
STOCK AND STOCK/BOND FUNDS
AMCAP Fund(R) $1,000 02
American Balanced Fund(R) 500 11
American Mutual Fund(R) 250 03
Capital Income Builder(R) 1,000 12
Capital World Growth and Income Fund(SM) 1,000 33
EuroPacific Growth Fund(R) 250 16
Fundamental Investors(SM) 250 10
The Growth Fund of America(R) 1,000 05
The Income Fund of America(R) 1,000 06
The Investment Company of America(R) 250 04
The New Economy Fund(R) 1,000 14
New Perspective Fund(R) 250 07
SMALLCAP World Fund(R) 1,000 35
Washington Mutual Investors Fund(SM) 250 01
BOND FUNDS
American High-Income Municipal Bond Fund(R) 1,000 40
American High-Income Trust(SM) 1,000 21
The Bond Fund of America(SM) 1,000 08
Capital World Bond Fund(R) 1,000 31
Intermediate Bond Fund of America(SM) 1,000 23
Limited Term Tax-Exempt Bond Fund of 1,000 43
America(SM)
The Tax-Exempt Bond Fund of America(R) 1,000 19
The Tax-Exempt Fund of California(R)* 1,000 20
The Tax-Exempt Fund of Maryland(R)* 1,000 24
The Tax-Exempt Fund of Virginia(R)* 1,000 25
U.S. Government Securities Fund(SM) 1,000 22
MONEY MARKET FUNDS
The Cash Management Trust of America(R) 2,500 09
The Tax-Exempt Money Fund of America(SM) 2,500 39
The U.S. Treasury Money Fund of America(SM) 2,500 49
___________
*Available only in certain states.
</TABLE>
For retirement plan investments, the minimum is $250, except that the money
market funds have a minimum of $1,000 for IRAs. Minimums are reduced to $50
for purchases through "Automatic Investment Plans" (except for the money market
funds) or to $25 for purchases by retirement plans through payroll deductions
and may be reduced or waived for shareholders of other funds in The American
Funds Group. TAX-EXEMPT FUNDS SHOULD NOT SERVE AS RETIREMENT PLAN INVESTMENTS.
The minimum is $50 for additional investments (except as noted above).
DEALER COMMISSIONS -- The sales charges you pay when purchasing the stock,
stock/bond, and bond funds of The American Funds Group are set forth below.
The money market funds of The American Funds Group are offered at net asset
value. (See "Investment Minimums and Fund Numbers" for a listing of the
funds.)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
AMOUNT OF PURCHASE SALES CHARGE AS DEALER
AT THE OFFERING PRICE PERCENTAGE OF THE: CONCESSION
AS PERCENTAGE
OF THE
OFFERING
PRICE
NET AMOUNT OFFERING
INVESTED PRICE
STOCK AND STOCK/BOND FUNDS
Less than $50,000 6.10% 5.75% 5.00%
$50,000 but less than $100,000 4.71 4.50 3.75
BOND FUNDS
Less than $25,000 4.99 4.75 4.00
$25,000 but less than $50,000 4.71 4.50 3.75
$50,000 but less than $100,000 4.17 4.00 3.25
STOCK, STOCK/BOND, AND BOND
FUNDS
$100,000 but less than $250,000 3.63 3.50 2.75
$250,000 but less than $500,000 2.56 2.50 2.00
$500,000 but less than $1,000,000 2.04 2.00 1.60
$1,000,000 or more none none (see below)
</TABLE>
Commissions of up to 1% will be paid to dealers who initiate and are
responsible for purchases of $1 million or more, for purchases by any
employer-sponsored 403(b) plan or purchases by any defined contribution plan
qualified under Section 401(a) of the Code including a "401(k)" plan with 100
or more eligible employees, and for purchases made at net asset value by
certain retirement plans of organizations with collective retirement plan
assets of $50 million or more: 1.00% on amounts of $1 million to $2 million,
0.80% on amounts over $2 million to $3 million, 0.50% on amounts over $3
million to $50 million, 0.25% on amounts over $50 million to $100 million, and
0.15% on amounts over $100 million. The level of dealer commissions will be
determined based on sales made over a 12-month period commencing from the date
of the first sale at net asset value.
The Principal Underwriter, at its expense (from a designated percentage of its
income), currently, provides additional compensation to dealers. Currently
these payments are limited to the top 100 dealers who have sold shares of the
fund or other funds in The American Funds Group. These payments will be based
on a pro rata share of a qualifying dealer's sales. The Principal Underwriter
will, on an annual basis, determine the advisability of continuing these
payments.
Any employer-sponsored 403(b) plan or defined contribution plan qualified under
Section 401(a) of the Code including a "401(k)" plan with 100 or more eligible
employees or any other purchaser investing at least $1 million in shares of the
fund (or in combination with shares of other funds in The American Funds Group
other than the money market funds) may purchase shares at net asset value;
however, a contingent deferred sales charge of 1% is imposed on certain
redemptions made within twelve months of the purchase. (See "Redeeming
Shares--Contingent Deferred Sales Charge.") Investments by retirement plans,
foundations or endowments with $50 million or more in assets may be made with
no sales charge and are not subject to a contingent deferred sales charge.
Qualified dealers currently are paid a continuing service fee not to exceed
0.25% of average net assets (0.15% in the case of the money market funds)
annually in order to promote selling efforts and to compensate them for
providing certain services. These services include processing purchase and
redemption transactions, establishing shareholder accounts and providing
certain information and assistance with respect to the fund.
NET ASSET VALUE PURCHASES -- The stock, stock/bond and bond funds may sell
shares at net asset value to: (1) current or retired directors, trustees,
officers and advisory board members of the funds managed by the Investment
Adviser, employees of Washington Management Corporation, employees and partners
of The Capital Group Companies, Inc. and its affiliated companies, certain
family members of the above persons, and trusts or plans primarily for such
persons; (2) current registered representatives, retired registered
representatives with respect to accounts established while active, or full-time
employees (and their spouses, parents, and children) of dealers who have sales
agreements with the Principal Underwriter (or who clear transactions through
such dealers) and plans for such persons or the dealers; (3) companies
exchanging securities with the fund through a merger, acquisition or exchange
offer; (4) trustees or other fiduciaries purchasing shares for certain
retirement plans, foundations, and endowments with assets of $50 million or
more; (5) insurance company separate accounts; (6) accounts managed by
subsidiaries of The Capital Group Companies, Inc.; and (7) The Capital Group
Companies, Inc., its affiliated companies and Washington Management
Corporation. Shares are offered at net asset value to these persons and
organizations due to anticipated economies in sales effort and expense.
STATEMENT OF INTENTION -- The reduced sales charges and offering prices set
forth in the rospectus apply to purchases of $50,000 or more made within a
13-month period subject to a statement of intention (the Statement). The
Statement is not a binding obligation to purchase the indicated amount. When a
shareholder elects to utilize a Statement in order to qualify for a reduced
sales charge, shares equal to 5% of the dollar amount specified in the
Statement will be held in escrow in the shareholder's account out of the
initial purchase (or subsequent purchases, if necessary) by the American Funds
Service Company (the Transfer Agent). All dividends and any capital gain
distributions on shares held in escrow will be credited to the shareholder's
account in shares (or paid in cash, if requested). If the intended investment
is not completed within the specified 13-month period, the purchaser will remit
to the Principal Underwriter the difference between the sales charge actually
paid and the sales charge which would have been paid if the total of such
purchases had been made at a single time. If the difference is not paid within
45 days after written request by the Principal Underwriter or the securities
dealer, the appropriate number of shares held in escrow will be redeemed to pay
such difference. If the proceeds from this redemption are inadequate, the
purchaser will be liable to the Principal Underwriter for the balance still
outstanding. The Statement may be revised upward at any time during the
13-month period, and such a revision will be treated as a new Statement, except
that the 13-month period during which the purchase must be made will remain
unchanged and there will be no retroactive reduction of the sales charges paid
on prior purchases. Existing holdings eligible for rights of accumulation (see
the prospectus and account application) may be credited toward satisfying the
Statement. During the Statement period reinvested dividends and capital gain
distributions, investments in money market funds, and investments made under a
right of reinstatement will not be credited toward satisfying the Statement.
In the case of purchase orders by the trustees of certain retirement plans by
payroll deduction, the sales charge for the investments made during the
13-month period will be handled as follows: The regular monthly payroll
deduction investment will be multiplied by 13 and then multiplied by 1.5. The
current value of existing American Funds investments (other than money market
fund investments) and any rollovers or transfers reasonably anticipated to be
invested in non-money market American Funds during the 13-month period are
added to the figure determined above. The sum is the Statement amount and
applicable breakpoint level. On the first investment and all other investments
made pursuant to the Statement, a sales charge will be assessed according to
the sales charge breakpoint thus determined. There will be no retroactive
adjustments in sales charges on investments previously made during the 13-month
period.
Shareholders purchasing shares at a reduced sales charge under a Statement
indicate their acceptance of these terms with their first purchase.
AGGREGATION -- Sales charge discounts are available for certain aggregated
investments. Qualifying investments include those by you, your spouse and your
children under the age of 21, if (I) all parties are purchasing shares for
their own account(s), which may include purchases through employee benefit
plan(s) such as an IRA, individual-type 403(b) plan or single-participant
Keogh-type plan or by a business solely controlled by these individuals (for
example, the individuals own the entire business) or by a trust (or other
fiduciary arrangement) solely for the benefit of these individuals or (ii)
these individuals are making gifts to other individuals or charities.
Individual purchases by a trustee(s) or other fiduciary(ies) may also be
aggregated if the investments are (1) for a single trust estate or fiduciary
account, including an employee benefit plan other than those described above or
(2) made for two or more employee benefit plans of a single employer or of
affiliated employers as defined in the 1940 Act, again excluding employee
benefit plans described above, or (3) for a diversified common trust fund or
other diversified pooled account not specifically formed for the purpose of
accumulating fund shares. Purchases made for nominee or street name accounts
(securities held in the name of an investment dealer or another nominee such as
a bank trust department instead of the customer) may not be aggregated with
those made for other accounts and may not be aggregated with other nominee or
street name accounts unless otherwise qualified as described above.
PRICE OF SHARES -- Purchases of shares are made at the offering price next
determined after the purchase order is received by the fund or the Transfer
Agent; this offering price is effective for orders received prior to the time
of determination of the net asset value and, in the case of orders placed with
dealers, accepted by the Principal Underwriter prior to its close of business.
In the case of orders sent directly to the fund or the Transfer Agent, an
investment dealer MUST be indicated. The dealer is responsible for promptly
transmitting purchase orders to the Principal Underwriter. Orders received by
the investment dealer, the Transfer Agent, or the fund after the time of the
determination of the net asset value will be entered at the next calculated
offering price. The prices which appear in the newspaper are not always
indicative of prices at which you will be purchasing and redeeming shares of
the fund, since such prices generally reflect the previous day's closing price
whereas purchases and redemptions are made at the next calculated price.
The price you pay for shares, the offering price, is based on the net asset
value per share which is calculated once daily at 4:00 p.m., New York Time each
day the New York Stock Exchange is open. For example, if the Exchange closes
at 1:00 p.m. on one day and at 4:00 p.m. on the next, the fund's share price
would be determined as of 4:00 p.m. New York time on both days. The New York
Stock Exchange is currently closed on weekends and on the following holidays:
New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas Day. The
net asset value per share is determined as follows:
1. 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. Forward currency contracts are valued at the mean
of representative quoted bid and asked prices.
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.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith under
policies approved by the fund's Board. The fair value of all other assets is
added to the value of securities to arrive at the total assets;
2. Liabilities, including accruals of taxes and other expense items, are
deducted from total assets; and
3. Net assets so obtained are then divided by the total number of shares
outstanding, and the result, rounded to the nearer cent, is the net asset value
per share.
Any purchase order may be rejected by the Principal Underwriter or the fund.
The Principal Underwriter will not knowingly sell shares of the fund directly
or indirectly to any person or entity, where, after the sale, such person or
entity would own beneficially directly or indirectly more than 4.5% of the
outstanding shares of the fund without the consent of a majority of the Board
of Trustees.
REDEEMING SHARES
<TABLE>
<CAPTION>
<S> <C>
By writing to the Transfer Send a letter of instruction specifying the name of the fund, the
Agent (at the appropriate number of shares or dollar amount to be sold, your name and
address indicated under account number. You should also enclose any share
"Fund Organization and certificates you wish to redeem. For redemptions over $50,000
Management - Principal and for certain redemptions of $50,000 or less (see below),
Underwriter and Transfer your signature must be guaranteed by a bank, savings
Agent" in the prospectus) association, credit union, or member firm of a domestic stock
exchange or the National Association of Securities Dealers,
Inc. that is an eligible guarantor institution. You should verify
with the institution that it is an eligible guarantor prior to
signing. Additional documentation may be required for
redemption of shares held in corporate, partnership or fiduciary
accounts. Notarization by a Notary Public is not an acceptable
signature guarantee.
By contacting your If you redeem shares through your investment dealer, you may
investment dealer be charged for this service. SHARES HELD FOR YOU IN YOUR
INVESTMENT DEALER'S STREET NAME MUST BE REDEEMED
THROUGH THE DEALER.
You may have a redemption You may use this option, provided the account is registered in
check sent to you by using the name of an individual(s), a UGMA/UTMA custodian, or a
American FundsLine(R) or non-retirement plan trust. These redemptions may not exceed
American FundsLine $50,000 per shareholder each day and the check must be
OnLine(SM) telephoning, made payable to the shareholder(s) of record and be sent to
faxing, or telegraphing the the address of record provided the address has been used with
Transfer Agent (subject to the account for at least 10 days. See "Fund Organization and
the conditions noted in this Management - Principal Underwriter and Transfer Agent" in the
section and in "Other Prospectus and "Exchange Privilege" below for the appropriate
Important Things to telephone or fax number.
Remember - Telephone and
Computer Purchases, Sales
and Exchanges" in the
prospectus)
In the case of the money Upon request (use the account application for the money
market funds, you may have market funds) you may establish telephone redemption
redemptions wired to your privileges (which will enable you to have a redemption sent to
bank by telephoning the your bank account) and/or check writing privileges. If you
Transfer Agent ($1,000 or request check writing privileges, you will be provided with
more) or by writing a check checks that you may use to draw against your account. These
($250 or more) checks may be made payable to anyone you designate and
must be signed by the authorized number of registered
shareholders exactly as indicated on your checking account
signature card.
</TABLE>
A SIGNATURE GUARANTEE IS NOT CURRENTLY REQUIRED FOR ANY REDEMPTION OF $50,000
OR LESS PROVIDED THE REDEMPTION CHECK IS MADE PAYABLE TO THE REGISTERED
SHAREHOLDER(S) AND IS MAILED TO THE ADDRESS OF RECORD, PROVIDED THE ADDRESS HAS
BEEN USED WITH THE ACCOUNT FOR AT LEAST 10 DAYS.
CONTINGENT DEFERRED SALES CHARGE -- A contingent deferred sales charge of 1%
applies to certain redemptions from funds other than the money market funds
made within twelve months of purchase on investments of $1 million or more and
on any investment made with no initial sales charge by any employer-sponsored
403(b) plan or defined contribution plan qualified under Section 401(a) of the
Code including a "401(k)" plan with 100 or more eligible employees. The charge
is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the total cost of such
shares. Shares held for the longest period are assumed to be redeemed first
for purposes of calculating this charge. The charge is waived for exchanges
(except if shares acquired by exchange were then redeemed within 12 months of
the initial purchase); for distributions from qualified retirement plans and
other employee benefit plans; for redemptions resulting from
participant-directed switches among investment options within a
participant-directed employer-sponsored retirement plan; for distributions from
403(b) plans or IRAs due to death, disability or attainment of age 591/2; for
tax-free returns of excess contributions to IRAs; for redemptions through
certain automatic withdrawals not exceeding 10% of the amount that would
otherwise be subject to the charge; and for redemptions in connection with
loans made by qualified retirement plans.
REDEMPTION OF SHARES -- The fund's Declaration of Trust permits the fund to
redeem the shares of any shareholder, at the current net asset value per share,
if at such time the shareholder owns shares having an aggregate net asset value
of less than the minimum initial investment required of new shareholders
($1,000).
SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES
AUTOMATIC INVESTMENT PLAN -- The automatic investment plan enables shareholders
to make regular monthly or quarterly investments in shares through automatic
charges to their bank accounts. With shareholder authorization and bank
approval, the Transfer Agent will automatically charge the bank account for the
amount specified ($50 minimum), which will be automatically invested in shares
at the offering price on or about the dates you select. Bank accounts will be
charged on the day or a few days before investments are credited, depending on
the bank's capabilities, and shareholders will receive a confirmation statement
at least quarterly. Participation in the plan will begin within 30 days after
receipt of the account application. If the shareholder's bank account cannot
be charged due to insufficient funds, a stop-payment order or closing of the
account, the plan may be terminated and the related investment reversed. The
shareholder may change the amount of the investment or discontinue the plan at
any time by writing to the Transfer Agent.
AUTOMATIC REINVESTMENT -- Dividends and capital gain distributions are
reinvested in additional shares at no sales charge unless you indicate
otherwise on the account application. You also may elect to have dividends
and/or capital gain distributions paid in cash by informing the fund, the
Transfer Agent or your investment dealer.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS - A shareholder in one fund
may elect to cross-reinvest dividends or dividends and capital gain
distributions paid by that fund (the paying fund) into any other fund in The
American Funds Group (the receiving fund) subject to the following conditions:
(1) the aggregate value of the shareholder's account(s) in the paying fund(s)
must equal or exceed $5,000 (this condition is waived if the value of the
account in the receiving fund equals or exceeds that fund's minimum initial
investment requirement), (2) as long as the value of the account in the
receiving fund is below that fund's minimum initial investment requirement,
dividends and capital gain distributions paid by the receiving fund must be
automatically reinvested in the receiving fund, and (3) if this privilege is
discontinued with respect to a particular receiving fund, the value of the
account in that fund must equal or exceed the fund's minimum initial investment
requirement or the fund shall have the right, if the shareholder fails to
increase the value of the account to such minimum within 90 days after being
notified of the deficiency, automatically to redeem the account and send the
proceeds to the shareholder. These cross-reinvestments of dividends and
capital gain distributions will be at net asset value (without sales charge).
EXCHANGE PRIVILEGE -- You may exchange shares into other funds in The American
Funds Group. Exchange purchases are subject to the minimum investment
requirements of the fund purchased and no sales charge generally applies.
However, exchanges of shares from the money market funds are subject to
applicable sales charges on the fund being purchased, unless the money market
fund shares were acquired by an exchange from a fund having a sales charge, or
by reinvestment or cross-reinvestment of dividends or capital gain
distributions.
You may exchange shares by writing to the Transfer Agent (see "Redeeming
Shares"), by contacting your investment dealer, by using American FundsLine(R)
or American FundsLine Online(SM) (see "American FundsLine(R) and American
FundsLine Online(SM)" below), or by telephoning 800/421-0180 toll-free, faxing
(see "Principal Underwriter and Transfer Agent" in the prospectus for the
appropriate fax numbers) or telegraphing the Transfer Agent. (See "Telephone
and Computer Purchases, Redemptions and Exchanges" below.) Shares held in
corporate-type retirement plans for which Capital Guardian Trust Company serves
as trustee may not be exchanged by telephone, computer, fax or telegraph.
Exchange redemptions and purchases are processed simultaneously at the share
prices next determined after the exchange order is received. (See "Purchase of
Shares--Price of Shares.") THESE TRANSACTIONS HAVE THE SAME TAX CONSEQUENCES AS
ORDINARY SALES AND PURCHASES.
AUTOMATIC EXCHANGES --You may automatically exchange shares (in amounts of $50
or more) among any of the funds in The American Funds Group on any day (or
preceding business day if the day falls on a non-business day) of each month
you designate. You must either meet the minimum initial investment requirement
for the receiving fund OR the originating fund's balance must be at least
$5,000 and the receiving fund's minimum must be met within one year.
AUTOMATIC WITHDRAWALS -- Withdrawal payments are not to be considered as
dividends, yield or income. Automatic investments may not be made into a
shareholder account from which there are automatic withdrawals. Withdrawals of
amounts exceeding reinvested dividends and distributions and increases in share
value would reduce the aggregate value of the shareholder's account. The
Transfer Agent arranges for the redemption by the fund of sufficient shares,
deposited by the shareholder with the Transfer Agent, to provide the withdrawal
payment specified.
ACCOUNT STATEMENTS -- Your account is opened in accordance with your
registration instructions. Transactions in the account, such as additional
investments and dividend reinvestments, will be reflected on regular
confirmation statements from the Transfer Agent. Dividend and capital gain
reinvestments and purchases through automatic investment plans and certain
retirement plans will be confirmed at least quarterly.
AMERICAN FUNDSLINE(R) AND AMERICAN FUNDSLINE ONLINE(SM) -- You may check your
share balance, the price of your shares, or your most recent account
transaction, redeem shares (up to $50,000 per shareholder each day), or
exchange shares around the clock with American FundsLine(R) and American
FundsLine Online(SM). To use this service, call 800/325-3590 from a
TouchTone(TM) telephone or access the American Funds Web site on the Internet
at www.americanfunds.com. Redemptions and exchanges through American
FundsLine(R) and American FundsLine Online(SM) are subject to the conditions
noted above and in "Shareholder Account Services and Privileges --Telephone and
Computer Purchases, Redemptions and Exchanges" below. You will need your fund
number (see the list of funds in The American Funds Group under "Purchase of
Shares--Investment Minimums and Fund Numbers"), personal identification number
(the last four digits of your Social Security number or other tax
identification number associated with your account) and account number.
TELEPHONE AND COMPUTER PURCHASES, REDEMPTIONS AND EXCHANGES -- By using the
telephone or computer (including American FundsLine(R) or American FundsLine
Online(SM)), fax or telegraph purchase, redemption and/or exchange options, you
agree to hold the fund, the Transfer Agent, any of its affiliates or mutual
funds managed by such affiliates, and each of their respective directors,
trustees, officers, employees and agents harmless from any losses, expenses,
costs or liability (including attorney fees) which may be incurred in
connection with the exercise of these privileges. Generally, all shareholders
are automatically eligible to use these options. However, you may elect to opt
out of these options by writing the Transfer Agent (you may also reinstate them
at any time by writing the Transfer Agent). If the Transfer Agent does not
employ reasonable procedures to confirm that the instructions received from any
person with appropriate account information are genuine, the fund may be liable
for losses due to unauthorized or fraudulent instructions. In the event that
shareholders are unable to reach the fund by telephone because of technical
difficulties, market conditions, or a natural disaster, redemption and exchange
requests may be made in writing only.
EXECUTION OF PORTFOLIO TRANSACTIONS
Orders for the fund's portfolio securities transactions are placed by the
Investment Adviser. The Investment Adviser strives to obtain the best
available prices in its portfolio transactions taking into account the costs
and promptness of executions. When circumstances relating to a proposed
transaction indicate that a particular broker (either directly or through their
correspondent clearing agents) is in a position to obtain the best price and
execution, the order is placed with that broker. This may or may not be a
broker who has provided investment research, statistical, or other related
services to the Investment Adviser or has sold shares of the fund or other
funds served by the Investment Adviser. The fund does not consider that it has
an obligation to obtain the lowest available commission rate to the exclusion
of price, service and qualitative considerations.
There are occasions on which portfolio transactions for the fund may be
executed as part of concurrent authorizations to purchase or sell the same
security for other funds served by the Investment Adviser, or for trusts or
other accounts served by affiliated companies of the Investment Adviser.
Although such concurrent authorizations potentially could be either
advantageous or disadvantageous to the fund, they are effected only when the
Investment Adviser believes that to do so is in the interest of the fund. When
such concurrent authorizations occur, the objective is to allocate the
executions in an equitable manner. The fund will not pay a mark-up for
research in principal transactions.
Brokerage commissions paid on portfolio transactions for the fiscal years ended
November 30, 1997, 1996 and 1995 amounted to $3,337,000, $2,495,000 and
$2,615,000 respectively.
GENERAL INFORMATION
CUSTODIAN OF ASSETS -- Securities and cash owned by the fund, including
proceeds from the sale of shares of the fund and of securities in the fund's
portfolio, are held by State Street Bank and Trust Company, 225 Franklin
Street, Boston, MA 02101, as Custodian. Non-U.S. securities may be held by the
Custodian pursuant to sub-custodial arrangements in non-U.S. banks or foreign
branches of U.S. banks.
TRANSFER AGENT -- American Funds Service Company, a wholly owned subsidiary of
the Investment Adviser, maintains the records of each shareholder's account,
processes purchases and redemptions of the fund's shares, acts as dividend and
capital gain distribution disbursing agent, and performs other related
shareholder service functions. American Funds Service Company was paid a fee
of $4,253,000 for the fiscal year ended November 30, 1997.
INDEPENDENT AUDITORS -- Deloitte & Touche LLP, 1000 Wilshire Boulevard, 15th
Floor, Los Angeles, CA 90017, have served as the fund's independent auditors
since its inception, providing audit services, preparation of tax returns and
review of certain documents to be filed with the Securities and Exchange
Commission. The financial statements included in this Statement of Additional
Information from the Annual Report have been so included in reliance on the
report of Deloitte & Touche LLP given on the authority of said firm as experts
in auditing and accounting.
REPORTS TO SHAREHOLDERS -- The fund's fiscal year ends on November 30.
Shareholders are provided at least semi-annually with reports showing the
investment portfolio, financial statements and other information. The
financial statements are audited annually by the fund's independent auditors,
Deloitte & Touche LLP, whose selection is determined annually by the Board of
Trustees. In an effort to reduce the volume of mail shareholders receive from
the fund when a household owns more than one account, the Transfer Agent has
taken steps to eliminate duplicate mailings of shareholder reports. To receive
additional copies of a report, shareholders should contact the Transfer Agent.
PERSONAL INVESTING POLICY -- The Investment Adviser and its affiliated
companies have adopted a personal investing policy consistent with Investment
Company Institute guidelines. This policy includes: a ban on acquisitions of
securities pursuant to an initial public offering; restrictions on acquisitions
of private placement securities; pre-clearance and reporting requirements;
review of duplicate confirmation statements; annual recertification of
compliance with codes of ethics; blackout periods on personal investing for
certain investment personnel; a ban on short-term trading profits for
investment personnel; limitations on service as a director of publicly traded
companies; and disclosure of personal securities transactions.
SHAREHOLDER AND TRUSTEE RESPONSIBILITY -- Under the laws of certain states,
including Massachusetts where the fund was organized and California where the
fund's principal office is located, shareholders of a Massachusetts business
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the fund. However, the risk of a shareholder incurring
any financial loss on account of shareholder liability is limited to
circumstances in which the fund itself would be unable to meet its obligations.
The Declaration of Trust contains an express disclaimer of shareholder
liability for acts, omissions, obligations or affairs of the fund and provides
that notice of the disclaimer may be given in each agreement, obligation, or
instrument which is entered into or executed by the fund or Trustees. The
Declaration of Trust provides for indemnification out of fund property of any
shareholder held personally liable for the obligations of the fund and also
provides for the fund to reimburse such shareholder for all legal and other
expenses reasonably incurred in connection with any such claim or liability.
Under the Declaration of Trust, the Trustees, officers, employees or agents of
the fund are not liable for actions or failure to act; however, they are not
protected from liability by reason of their willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct
of their office.
SHAREHOLDER VOTING RIGHTS -- At any meeting of shareholders, duly called and at
which a quorum is present, the shareholders may, by the affirmative vote of the
holders of a majority of the votes entitled to be cast thereon, remove any
trustee or trustees from office and may elect a successor or successors to fill
any resulting vacancies for the unexpired terms of removed trustees. The fund
has made an undertaking, at the request of the staff of the Securities and
Exchange Commission, to apply the provisions of section 16(c) of the 1940 Act
with respect to the removal of trustees, as though the fund were a common-law
trust. Accordingly, the trustees of the fund shall promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of any
trustee when requested in writing to do so by the record holders of not less
than 10% of the outstanding shares.
The financial statements including the investment portfolio and the report of
Independent Auditors contained in the Annual Report are included in this
Statement of Additional Information. The following information is not included
in the Annual Report:
<TABLE>
<CAPTION>
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND
MAXIMUM OFFERING PRICE PER SHARE -- NOVEMBER 28, 1997
<S> <C>
Net asset value and redemption price per share $20.93
(Net assets divided by shares outstanding)
Maximum offering price per share (100/94.25 of per $22.21
share net asset value, which takes into account
the fund's current maximum sales load)
</TABLE>
INVESTMENT RESULTS
The fund's yield is 0.53% based on a 30-day (or one month) period ended
November 30, 1997, computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
day of the period, according to the following formula:
YIELD = 2[(a-b/cd+1)/6/-1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
The fund's one-year total return and average annual total returns over the past
five- and ten-year periods as of November 30, 1997 were 14.63%, 15.54% and
16.11%, respectively. The average total return ("T") is computed by equating
the value at the end of the period ("ERV") with a hypothetical initial
investment of $1,000 ("P") over a period of years ("n") according to the
following formula as required by the Securities and Exchange Commission:
P(1+T)/n/ = ERV.
To calculate total return, an initial investment is divided by the public
offering price (which includes the sales charge) as of the first day of the
period in order to determine the initial number of shares purchased. Subsequent
dividends and capital gain distributions are reinvested at net asset value on
the reinvestment date determined by the Board of Trustees. The sum of the
initial shares purchased and shares acquired through reinvestment is multiplied
by the net asset value per share as of the end of the period in order to
determine ending value. The difference between the ending and the initial
investment value divided by the initial investment converted to a percentage
equals total return. The resulting percentage indicates the positive or
negative investment results that an investor would have experienced from
reinvested dividends and capital gain distributions and changes in share price
during the periods. Total return may be calculated for one-year, five-years,
ten-years and for other periods. The average annual total return over periods
greater than one year may also be computed by utilizing ending values as
determined above.
The following assumptions will be reflected in computations made in accordance
with the formulas stated above: (1) deduction of the maximum sales load of
5.75% from the $1,000 initial investment; (2) reinvestment of dividends and
distributions at net asset value on the reinvestment date determined by the
Board; and (3) a complete redemption at the end of any period illustrated.
The fund may also, at times, calculate total return based on net asset value
per share (rather than the offering price), in which case the figure would not
reflect the effect of any sales charges which would have been paid if shares
were purchased during the period reflected in the computation. Consequently,
total return calculated in this manner will be higher. These total returns may
be calculated over periods in addition to those described above. Total return
for the unmanaged indices will be calculated assuming reinvestment of dividends
and interest, but will not reflect any deductions for advisory fees, brokerage
costs or administrative expenses.
The fund may also calculate a distribution rate on a taxable and tax equivalent
basis. The distribution rate is computed by dividing the dividends paid by the
fund over the last 12 months by the sum of the month-end net asset value or
maximum offering price and the capital gains paid over the last 12 months. The
distribution rate may differ from the yield.
The fund may include information on its investment results and/or comparisons
of its investment results to various unmanaged indices (such as The Dow Jones
Average of 30 Industrial Stocks and The Standard and Poor's 500 Stock Composite
Index) or results of other mutual funds or investment or savings vehicles in
advertisements or in reports furnished to present or prospective shareholders.
The fund may refer to results compiled by organizations such as CDA Investment
Technologies, Ibbottson Associates, Lipper Analytical Services, Morningstar,
Inc., Wiesenberger Investment Companies Services and the U.S. Department of
Commerce. Additionally, the fund may, from time to time, refer to results
published in various periodicals, including BARRON'S, FORBES, FORTUNE,
INSTITUTIONAL INVESTOR, KIPLINGER'S PERSONAL FINANCE MAGAZINE, MONEY, U.S. NEWS
AND WORLD REPORT and THE WALL STREET JOURNAL.
The fund may, from time to time, compare its investment results with the
following:
(1) Average of Savings Institutions deposits, which is a measure of all kinds
of savings deposits, including longer-term certificates (based on figures
supplied by the U.S. League of Savings Institutions and the Federal Reserve
Board). Savings deposits offer a guaranteed rate of return on principal, but
no opportunity for capital growth. The period shown may include periods during
which the maximum rates paid on some savings deposits were fixed by law.
(2) The Consumer Price Index, which is a measure of the average change in
prices over time in a fixed market basket of goods and services (e.g. food,
clothing, shelter, and fuels, transportation fares, charges for doctors' and
dentists' services, prescription medicines, and other goods and services that
people buy for day-to-day living).
The fund may from time to time illustrate the benefits of tax-deferral by
comparing taxable investments to investments made through tax-deferred
retirement plans.
EXPERIENCE OF THE INVESTMENT ADVISER -- The Investment Adviser manages nine
common stock funds that are at least 10 years old. In the rolling 10-year
periods since January 1, 1967 (127 in all), those funds have had better total
returns than the Standard and Poor's 500 Composite Stock Index in 91 of the 127
periods.
Note that past results are not an indication of future investment results.
Also, the fund has different investment policies than the funds mentioned
above. These results are included solely for the purpose of informing
investors about the experience and history of the Investment Adviser.
The investment results set forth below were calculated as described in the
fund's prospectus. The fund's results will vary from time to time depending
upon market conditions, the composition of the fund's portfolio and operating
expenses of the fund, so that any investment results reported by the fund
should not be considered representative of what an investment in the fund may
earn in any future period. These factors and possible differences in
calculation methods should be considered when comparing the fund's investment
results with those published for other mutual funds, other investment vehicles
and unmanaged indices. The fund's results also should be considered relative
to the risks associated with the fund's investment objective and policies.
NEF VS. VARIOUS UNMANAGED INDICES
<TABLE>
<CAPTION>
Period NEF S&P 500/1/ DJIA/2/ NYSE/3/
<S> <C> <C> <C> <C>
12/1/83 - +613% +798% +886% +419%
11/30/97
</TABLE>
/1/ The Standard and Poor's 500 Stock Index is comprised of industrial,
transportation, public utilities and financial stocks, and represents a large
portion of the value of issues traded on the New York Stock Exchange. Selected
issues traded on the American Stock Exchange are also included.
/2/ The Dow Jones Average of 30 Industrial Stocks is comprised of 30
industrial companies such as General Motors and General Electric.
/3/ Index is a capitalization weighted index of all The New York Stock
Exchange Composite common stocks listed on the exchange.
IF YOU ARE CONSIDERING NEF FOR AN INDIVIDUAL RETIREMENT ACCOUNT...
<TABLE>
<CAPTION>
Here's how much you would have if you had invested $2,000
a year in NEF:
<S> <C> <C> <C>
2 Years 5 Years 7 Years 10 Years
(12/1/95- (12/1/92 - (12/1/90- (12/1/87-
11/30/97) 11/30/97) 11/30/97) 11/30/97)
$4,929 $15,450 $26,514 $48,025
</TABLE>
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM:
<TABLE>
<CAPTION>
If you had invested Periods ...and taken all
$10,000 in NEF 12/1-11/30 distributions in shares,
this many years... your investment would
Number have been worth this
of Years much at November 30, 1997:
Value ($)
1 1996 - 1997 11,463
<S> <C> <C>
2 1995 - 1997 13,181
3 1994 - 1997 16,249
4 1993 - 1997 15,767
5 1992 - 1997 20,590
6 1991 - 1997 25,447
7 1990 - 1997 30,706
8 1989 - 1997 26,603
9 1988 - 1997 36,406
10 1987 - 1997 44,544
11 1986 - 1997 42,149
12 1985 - 1997 51,146
13 1984 - 1997 70,879
14 1983 - 1997 71,317
</TABLE>
Illustration of a $10,000 investment in NEF with
dividends reinvested and capital gain distributions taken in shares
(For the lifetime of the fund, December 1, 1983 through November 30, 1997)
<TABLE>
<CAPTION>
COST OF SHARES VALUE OF SHARES
Fiscal Annual Total Investment From From Dividends Total
Year End Dividends Dividends Cost Initial Capital Gains Reinvested Value
11/30 (cumulative) Investment Reinvested
<S> <C> <C> <C> <C> <C> <C> <C>
1984 $ -- $-- $ 10,000 $ 9,485 $-- $-- $ 9,485
1985 199 199 10,199 12,864 -- 280 13,144
1986 140 339 10,339 14,560 913 477 15,950
1987 367 706 10,706 12,761 1,586 746 15,093
1988 315 1,021 11,021 14,396 2,858 1,208 18,462
1989 421 1,442 11,442 18,159 5,042 2,068 25,269
1990 566 2,008 12,008 13,462 6,417 2,007 21,886
1991 589 2,597 12,597 15,076 8,427 2,910 26,413
1992 328 2,925 12,925 18,091 10,676 3,874 32,641
1993 189 3,114 13,114 22,617 14,934 5,080 42,631
1994 307 3,421 13,421 20,124 16,436 4,816 41,376
1995 517 3,938 13,938 23,324 21,446 6,214 50,984
1996 578 4,516 14,516 25,412 25,793 7,426 58,631
1997 455 4,971 14,971 28,736 33,632 8,949 71,317
</TABLE>
The dollar amount of capital gain distributions during the period was $20,403
APPENDIX
DESCRIPTION OF BOND RATINGS
CORPORATE DEBT SECURITIES
MOODY'S INVESTORS SERVICE, INC. rates the long-term debt securities issued by
various entities from "Aaa" to "C".
"AA -- Best quality. These securities carry the smallest degree of investment
risk and are generally referred to as "gilt edge." Interest payments are
protected by a large, or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues."
"AA -- High quality by all standards. They are rated lower than the best bond
because margins of protection may not be as large as in Aa securities,
fluctuation of protective elements may be of greater amplitude, or there may be
other elements present which make the long-term risks appear somewhat greater."
"A -- Upper medium grade obligations. These bonds possess many favorable
investment attributes. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future."
"BAA -- Medium grade obligations. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well."
"BA -- Have speculative elements; future cannot be considered as well assured.
The protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Bonds in this class are characterized by uncertainty of position."
"B -- Generally lack characteristics of the desirable investment; assurance of
interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small."
"CAA -- Of poor standing. Issues may be in default or there may be present
elements of danger with respect to principal or interest."
"CA -- Speculative in a high degree; often in default or have other marked
shortcomings."
"C -- Lowest rated class of bonds; can be regarded as having extremely poor
prospects of ever attaining any real investment standing."
STANDARD & POOR'S CORPORATION rates the long-term securities debt of various
entities in categories ranging from "AAA" to "D" according to quality.
"AAA -- Highest rating. Capacity to pay interest and repay principal is
extremely strong."
"AA -- High grade. Very strong capacity to pay interest and repay principal.
Generally, these bonds differ from AAA issues only in a small degree."
"A -- Have a strong capacity to pay interest and repay principal, although they
are somewhat more susceptible to the adverse effects of change in circumstances
and economic conditions, than debt in higher rated categories."
"BBB -- Regarded as having adequate capacity to pay interest and repay
principal. These bonds normally exhibit adequate protection parameters, but
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal than for debt in
higher rated categories."
"BB, B, CCC, CC, C -- Regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C
the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions."
"C1 -- Reserved for income bonds on which no interest is being paid."
"D -- In default and payment of interest and/or repayment of principal is in
arrears."
<PAGE>
<TABLE>
THE NEW ECONOMY FUND
<S> <C> <C> <C>
Investment Portfolio, November 30, 1997
- ------------------------------------------- -------------
Largest Holdings by Industry
Broadcasting & Publishing 15.46%
Telecommunications 10.36
Miscellaneous Financial Services 8.19
Merchandising 7.48
Computer Services & Software 7.36
All Other Industries 39.88
Cash & Equivalents 11.27
- ------------------------------------------- -------------
Percent
of
Largest Equity-Type Holdings Net Assets
Fannie Mae 3.19%
Freddie Mac 2.66
Time Warner 2.35
Tele-Communications, Liberty Media Group 2.21
Carnival 2.10
Tele-Communications, TCI Group 1.91
Viacom 1.81
America Online 1.77
Telefonos de Mexico 1.59
Rentokil Group 1.53
- ------------------------------------------- ------------- -----------------------
Market Percent
Equity-Type Securities (Common and Shares or Value of Net
Preferred Stocks and Convertible Debentures) Principal Amou (000) Assets
- ---------------------------------------- ------------- -----------------------
BROADCASTING & PUBLISHING - 13.13%
Time Warner Inc. 1,940,220 $113,018 2.35%
Tele-Communications, Inc., Series A, Liberty Media
Group (1) 3,147,587 106,231 2.21
Tele-Communications, Inc., Series A, TCI Group 4,000,000 91,625 1.91
Viacom Inc., Class B (1) 2,485,000 86,975 1.81
Comcast Corp., Class A, special stock 2,300,000 64,400 1.34
Mediaset SpA (Italy) (2) 6,960,000 34,393
Mediaset SpA 1,450,000 7,165 .87
News Corp. Ltd., preferred shares (Australia) 2,845,362 13,792
News Corp. Ltd. 2,088,169 11,114
News Corp. Ltd. (American Depositary
Receipts) 470,000 10,193 .83
News Corp. Ltd., preferred shares
(American Depositary Receipts) 235,000 4,641
Tele-Communications International, Series A (1 2,250,000 36,141 .75
EMAP PLC (United Kingdom) 1,400,000 20,576 .43
ProSieben Media AG (Germany) (1) 410,000 19,649 .40
Chris-Craft Industries, Inc. (1) 318,270 15,953 .33
Thomson Corp. (Canada) 600,000 15,107 .31
Quebecor Printing Inc. (Canada) 1,000,000 14,312 .30
CANAL+ (France) 81,370 14,149 .29
TV Azteca, SA de CV (American Depositary
Receipts) (Mexico) (1) 682,900 14,127 .29
Grupo Televisa, SA (American Depositary
Receipts) (Mexico) (1) 345,000 12,765 .27
Scholastic Corp. (1) 236,200 9,020 .19
AUDIOFINA (Luxembourg) 185,000 6,513 .14
CBS Corp. 200,434 6,013 .13
FLEXTECH PLC (United Kingdom) 500,000 4,737 .10
Golden Books Family Entertainment, Inc. (1) 500,000 4,687 .10
Gaylord Entertainment Co., Class A 110,250 3,370 .07
SOFT BANK Corp. (Japan) 69,560 1,252 .03
Young Broadcasting Inc., Class A (1) 18,000 655 .01
TELECOMMUNICATIONS - 10.36%
Telefonos de Mexico, SA de CV, Class L
(American Depositary Receipts) (Mexico) 1,541,960 76,327 1.59
Telefonica de Espana, SA (Spain) 1,675,000 48,274
Telefonica de Espana, SA (American 1.31
Depositary Receipts) 170,000 14,705
AirTouch Communications (1) 1,450,000 56,912 1.18
Tele-Communications, Inc., Series A, TCI
Ventures (1) 2,300,000 52,037 1.08
Tele Danmark AS, Class B (American Depositary
Receipts) (Denmark) 704,700 21,053 .68
Tele Danmark AS, Class B 200,000 11,938
Mannesmann AG (Germany) 57,500 26,742 .56
MCI Communications Corp. 500,000 21,969 .46
SITEL Corp. (1) 2,350,000 21,884 .45
Telecom Corp. of New Zealand Ltd. (New Zealand 2,200,000 11,273
Telecom Corp. of New Zealand Ltd. (2) 2,028,400 10,394 .45
Sprint Corp. 350,500 20,526 .43
Hong Kong Telecommunications Ltd. (Hong Kong) 9,952,345 18,927 .39
LCI International, Inc. (1) 650,000 17,916 .37
Vodafone Group PLC (American Depositary
Receipts) (United Kingdom) 225,000 14,850 .31
Telefonica del Peru SA (American Depositary
Receipts) (Peru) 485,600 10,198 .21
APAC TeleServices, Inc. (1) 641,400 8,980 .19
Globalstar Telecommunications Ltd., 6.50%
convertible preferred (2) 100,000 8,500 .18
Telecom Argentina STET-France Telecom SA,
Class B (American Depositary Receipts)
(Argentina) 261,000 8,009 .17
TeleTech Holdings, Inc. (1) 600,000 6,375 .13
Telecom Italia SpA (Italy) 850,000 5,308
Telecom Italia SpA, savings shares 150,000 589 .12
Telefonica de Argentina SA (American
Depositary Receipts) (Argentina) 128,700 4,255 .09
AT&T Corp. 7,300 408 .01
MISCELLANEOUS FINANCIAL SERVICES - 8.19%
Fannie Mae (formerly Federal National
Mortgage Assn.) 2,900,000 153,156 3.19
Freddie Mac (formerly Federal Home Loan
Mortgage Corp.) 3,100,000 127,875 2.66
Capital One Financial Corp. 950,000 43,047 .90
SLM Holding Corp. (formerly
(Student Loan Marketing Assn.) 280,000 36,155 .75
First Data Corp. 600,000 16,988 .35
ORIX Corp. (Japan) 154,000 10,329 .22
Insignia Financial Group, Inc. Class A (1) 300,000 5,925 .12
MERCHANDISING - 7.48%
Viking Office Products, Inc. (1) 2,970,000 68,867 1.43
Consolidated Stores Corp. (1) 1,250,000 60,781 1.27
AutoZone, Inc. (1) 1,200,000 36,000 .75
Circuit City Stores, Inc.-Circuit City Group 575,000 18,867
Circuit City Stores, Inc.-Carmax Group (1) 900,000 10,744 .62
HSN, Inc. (1) 455,000 20,304 .42
Barnes & Noble, Inc. (1) 600,000 18,563 .39
Home Depot, Inc. 309,000 17,285 .36
Gymboree Corp. (1) 500,000 14,438 .30
Garden Ridge Corp. (1) 850,000 12,963 .27
DFS Furniture Co. PLC (United Kingdom) 1,300,000 12,793 .27
Limited Inc. 500,000 12,031 .25
Tesco PLC (United Kingdom) 1,474,410 11,908 .25
Giant Food Inc., Class A 250,000 8,438 .17
PETsMART, Inc. (1) 1,000,000 7,813 .16
MSC Industrial Direct Co., Inc., Class A (1) 178,700 6,947 .14
Michaels Stores, Inc. (1) 200,000 6,475 .13
JLK Direct Distribution Inc., Class A (1) 212,800 6,052 .13
CompuCom Systems, Inc. (1) 400,000 4,100 .09
Dickson Concepts (International) Ltd. (Hong Kong -
Incorporated in Bermuda) 1,561,400 2,929 .06
Giordano Holdings Ltd. (Hong Kong) 3,750,000 982 .02
COMPUTER SERVICES & SOFTWARE - 7.36%
Oracle Corp. (1) 1,900,000 63,294 1.32
CUC International Inc. (1) 1,945,000 55,919 1.16
Computer Associates International, Inc. 690,000 35,923 .75
Intuit Inc. (1) 1,100,000 33,206 .69
Shared Medical Systems Corp. 450,000 28,800 .60
Electronic Arts (1) 847,600 28,395 .59
PeopleSoft, Inc. (1) 300,000 19,631 .41
Policy Management Systems Corp. (1) 220,000 14,217 .30
Sybase, Inc. (1) 950,600 13,308 .28
American Management Systems, Inc. (1) 400,000 9,325 .19
Broderbund Software, Inc. (1) 300,000 8,719 .18
Netscape Communications Corp. (1) 300,000 8,550 .18
Electronic Data Systems Corp. 200,000 7,600 .16
MacNeal-Schwendler Corp. (1) 603,300 6,146 .13
Avid Technology, Inc. (1) 200,000 5,850 .12
HNC Software Inc. (1) 125,000 3,938 .08
Altron Inc.(1) 160,000 2,520 .05
Gemstar International Group Ltd. (1) 101,300 2,406 .05
First USA Paymentech, Inc. (1) 122,667 1,901 .04
Acclaim Entertainment, Inc. (1) 450,000 1,828 .04
Macromedia, Inc. (1) 150,000 1,495 .03
Verity, Inc. (1) 120,500 591 .01
INSURANCE - 6.90%
EXEL Ltd. (Bermuda) 1,150,000 70,725 1.47
Fairfax Financial Holdings Ltd. (Canada) (1) 226,000 47,540
Fairfax Financial Holdings Ltd. 30,000 6,310 1.12
ING Groep NV (Netherlands) 708,224 28,770
ING Groep NV, warrants, expire 2001 (1) 2,200,000 21,513 1.05
Travelers/Aetna Property Casualty Corp., Class 1,085,000 43,129 .90
Aetna Inc. 370,000 27,889 .58
PartnerRe Holdings Ltd. (Incorporated in Bermu 553,900 23,956 .50
American International Group, Inc. 225,000 22,683 .47
Topdanmark A/S (Denmark) 110,120 17,376 .36
20th Century Industries 474,200 11,944 .25
Trenwick Group Inc. 255,000 9,467 .20
ENTERTAINMENT & LEISURE - 5.64%
Carnival Corp., Class A 1,870,000 101,097 2.10
Walt Disney Co. 747,000 70,918 1.48
Mirage Resorts, Inc. (1) 1,500,000 35,625 .74
Midway Games Inc. (1) 900,000 18,112 .38
MGM Grand, Inc. (1) 400,000 15,650 .33
Nintendo Co., Ltd. (Japan) 120,000 12,397 .26
Circus Circus Enterprises, Inc. (1) 300,000 6,188 .13
Harrah's Entertainment, Inc. (1) 300,000 6,019 .12
Station Casinos, Inc. (1) 758,300 5,024 .10
BANKING - 5.07%
Norwest Corp. 1,260,000 47,171 .98
Wells Fargo & Co. 116,666 35,846 .75
Charter One Financial, Inc. 496,125 29,395 .61
First Chicago NBD Corp. 315,400 24,680 .51
Societe Generale de Belgique SA (Belgium) 259,500 24,192 .50
STB Cayman Capital Ltd., 0.50% convertible
debentures 2007 (Japan) $2,240,000 14,376 .30
Keystone Financial, Inc. 375,000 13,969 .29
Royal Bank of Canada (Canada) 250,000 13,380 .28
Sparbanken Sverige AB (Swedbank), Class A (Swe 490,000 12,466 .26
Grupo Financiero Banamex Accival, SA de CV,
Series L (Mexico) (1) 3,024,415 6,262
Grupo Financiero Banamex Accival, SA de CV, .21
Series B (1) 1,745,000 3,826
Sakura Finance (Bermuda) Trust, convertible
preference share units (Japan) 144 5,832 .19
Sakura Bank, Ltd. 891,000 3,110
Banco de Santander, SA (Spain) 200,000 6,046 .12
Philippine Commercial International Bank, Inc.
(Philippines) 807,600 3,193 .07
MISCELLANEOUS BUSINESS SERVICES - 4.52%
Rentokil Group PLC (United Kingdom) 17,399,800 73,276 1.53
Pittston Brink's Group 1,075,000 39,372 .82
Concord EFS, Inc. (1) 882,400 22,501 .47
Ceridian Corp. (1) 500,000 21,938 .45
Administaff, Inc. (1) 565,800 12,589 .26
Snyder Communications, Inc. (1) 350,000 11,878 .25
ABR Information Services, Inc. (1) 424,400 10,186 .21
Precision Response Corp. (1) 645,000 4,878 .10
Stewart Enterprises, Inc. Class A 100,000 4,344 .09
EarthWatch Inc., 12% convertible preferred,
Series C (1) (2) (3) (4) 500,000 4,000 .08
CorporateFamily Solutions, Inc. (1) 220,000 3,685 .08
MicroAge, Inc. (1) 150,000 3,019 .06
InaCom Corp. (1) 100,000 2,838 .06
Black Box Corp. (1) 75,700 2,697 .06
ELECTRONIC DATA PRODUCTS - 2.52%
America Online, Inc. (1) 1,130,000 85,315 1.77
Micron Technology, Inc. (1) 900,000 22,388 .47
Intel Corp. 175,000 13,584 .28
HEALTH & HOSPITAL SERVICES - 2.10%
Columbia/HCA Healthcare Corp. 1,030,000 30,385 .63
HealthCare COMPARE Corp. (1) 300,000 15,637 .32
Human Genome Sciences, Inc. (1) 300,000 12,300 .26
Nu Skin Asia Pacific, Inc., Class A (1) 585,000 11,700 .24
United HealthCare Corp. 200,000 10,412 .22
Cerner Corp. (1) 400,000 9,625 .20
Orthodontic Centers of America, Inc. (1) 500,000 9,063 .19
PacifiCare Health Systems, Inc., Class A (1) 35,200 1,813 .04
RESTAURANTS - 2.09%
Brinker International, Inc. (1) 3,050,000 44,987 .94
McDonald's Corp. 520,000 25,220 .52
Foodmaker, Inc. (1) 918,000 14,229 .30
Outback Steakhouse, Inc. (1) 400,000 11,975 .25
Sizzler International, Inc. (1) 1,375,000 4,039 .08
ENVIRONMENTAL SERVICES - 1.32%
Allied Waste Industries, Inc. (1) 1,220,400 26,696 .56
USA Waste Services, Inc. (1) 561,500 18,565 .39
Ecolab Inc. 200,000 10,200 .21
Waste Management, Inc. 320,000 7,880 .16
REAL ESTATE - 0.84%
Host Marriott Corp. (1) 1,300,000 27,056 .56
Mitsubishi Estate Co., Ltd. (Japan) 1,160,000 13,437 .28
INFORMATION & PRINTING SERVICES - 0.82%
Primark Corp. (1) 938,900 31,805 .66
Banta Corp. 300,000 7,500 .16
HOTELS & MOTELS - 0.80%
Marriott International, Inc. 530,000 38,392 .80
DIVERSIFIED SERVICES - 0.76%
Brambles Industries Ltd. (Australia) 1,350,000 25,733 .54
Benpres Holdings Corp. (Global Depositary
Receipts) (Philippines) (1) 3,581,536 10,566 .22
ENERGY SERVICES - 0.67%
Schlumberger Ltd. (Netherlands Antilles) 390,000 32,102 .67
ADVERTISING - 0.61%
Omnicom Group Inc. 200,000 14,825 .31
Interpublic Group of Companies, Inc. 300,000 14,381 .30
COMPUTER SYSTEMS - 0.52%
Silicon Graphics, Inc. (1) 1,120,300 14,704 .31
International Business Machines Corp. 94,000 10,299 .21
ELECTRIC UTILITIES - 0.44%
Southern Electric PLC (United Kingdom) 1,600,000 12,126 .25
National Power PLC (United Kingdom) 940,000 8,972 .19
AIRLINES - 0.27%
Southwest Airlines Co. 525,000 12,830 .27
RAIL & ROAD SERVICES - 0.25%
Werner Enterprises, Inc. 279,700 5,979 .12
Greyhound Lines, Inc. (1) 825,000 3,248 .07
Tranz Rail Holdings Ltd. (American Depositary
Receipts) (New Zealand) 225,000 2,925 .06
LEASING SERVICES - 0.19%
IKON Office Solutions, Inc. 300,000 9,131 .19
ENGINEERING & CONSTRUCTION - 0.17%
Jacobs Engineering Group Inc. (1) 317,100 8,383 .17
SAFETY AND SECURITY SERVICES - 0.10%
Securitas AB, Class B (Sweden) 153,000 4,596 .10
MISCELLANEOUS
Other equity-type securities in initial
period of acquisition 157,512 3.28
--------------
TOTAL EQUITY-TYPE SECURITIES
(cost: $2,755,130,000) 4,263,031 88.73
Principal --------------
Amount
Short-Term Securities (000)
- ---------------------------------------- ------------- ------------
CORPORATE SHORT-TERM NOTES - 9.56%
A.I. Credit Corp. 5.50%-5.54%
due 12/11/97-1/7/98 $47,500 47,343 .99
J. C. Penney Funding Corp. 5.50%-5.51%
due 12/1-12/17/97 (2) 47,100 47,026 .98
Ford Motor Credit Co. 5.54%-5.67% due
1/13-2/11/98 46,050 45,610 .95
International Lease Finance Corp. 5.49%-5.62%
due 12/4/97-1/16/98 40,250 40,037 .83
Abbott Laboratories 5.51%-5.56%
due 12/17-12/22/97 39,900 39,790 .83
Hershey Foods Corp.5.51%-5.53% due
12/22/97-1/30/98 36,500 36,256 .75
Warner-Lambert Co. 5.48%-5.52% due
12/8-12/30/97 (2) 34,000 33,882 .71
Lucent Technologies Inc. 5.49%-5.55% due
12/10/97-1/20/98 31,600 31,454 .65
General Electric Capital Corp. 5.55%-5.72%
due 1/8-1/14/98 30,000 29,803 .62
IBM Credit Corp. 5.53%-5.71%
due 12/9/97-1/16/98 25,750 25,628 .53
Emerson Electric Co. 5.48%-5.50% due
12/3-12/19/97 25,500 25,429 .53
AT & T Corp. 5.52%-5.53%
due 1/5-1/22/98 21,600 21,448 .45
Wal-Mart Stores Inc. 5.49%-5.50% due
12/1/97 17,900 17,897 .37
Baltimore Gas and Electric Co.
5.50%-5.55% due 12/4-12/18/97 17,800 17,775 .37
FEDERAL AGENCY DISCOUNT NOTES - 1.41%
Freddie Mac (formerly Federal Home Loan
Mortgage Corp.) 5.39%-5.43% due 12/15-12/23/9 45,600 45,479 .95
Federal Home Loan Banks 5.40%-5.47%
due 1/7-1/21/98 22,200 22,040 .46
NON-U.S. CURRENCY - 0.14%
New Taiwanese Dollar NT$226,295 7,050 .14
TOTAL SHORT-TERM SECURITIES ------------
(cost: $534,038,000) 533,947 11.11
------------
TOTAL INVESTMENT SECURITIES
(cost: $3,289,168,000) 4,796,978 99.84
Excess of cash and receivables over payables 7,372 .16
-----------------------
NET ASSETS $4,804,350 100.00%
=======================
(1) Non-income-producing securities.
(2) Purchased in a private placement transaction;
resale to the public may require registration
or sale only to qualified institutional
buyers.
(3) Valued under procedures established by the Board
of Trustees.
(4) Payment in kind. The issuer has the option of
paying additional securities in lieu of cash.
See Notes to Financial Statements
Equity-Type securities appearing in the
portfolio since May 31, 1997
- -------------------------------------------
Allied Waste Industries
APAC TeleServices
Black Box
CBS
CompuCom Systems
CorporateFamily Solutions
FLEXTECH
IKON Office Solutions
InaCom
Insignia Financial Group
Intel
JLK Direct Distribution
LCI International
Limited
MGM Grand
MicroAge
Micron Technology
Midway Games
Netscape Communications
PeopleSoft
PETsMART
Precision Response
ProSieben Media
Scholastic
SITEL
Snyder Communications
Societe Generale de Belgique
STB Cayman Capital
Tele-Communications, TCI Ventures
TeleTech Holdings
TV Azteca
20th Century Industries
USA Waste Services
Verity
Young Broadcasting
Equity-Type securities eliminated from the
portfolio since May 31, 1997
- -------------------------------------------
ACNielsen
All American Communications
Allied Irish Banks
AMR
Arnoldo Mondadori Editore
Ascend Communications
Avnet
Banc One
Bay Networks
BTG
Cascade Communications
CompuServe
DecisionOne Holdings
Helmerich & Payne
International Family Entertainment
MetaCreations
Nets
Old Kent Financial
Pep Boys - Manny, Moe & Jack
Technology Resources Industries
U S WEST Media Group
United Waste Systems
Vivra
Walgreen
Waste Management International
</TABLE>
<TABLE>
The New Economy Fund
Financial Statements
<S> <C> <C>
Statement of Assets and (dollars in
Liabilities at November 30, 1997 thousands)
---------------- ----------------
Assets:
Investment securities at market
(cost: $3,289,168) $4,796,978
Cash 79
Receivables for-
Sales of investments $ 12,855
Sales of fund's shares 2,283
Dividends 2,700 17,838
---------------- ----------------
4,814,895
Liabilities:
Payables for-
Purchases of investments 4,048
Repurchases of fund's shares 2,089
Management services 1,672
Accrued expenses 2,736 10,545
Net Assets at November 30, 1997- ---------------- ----------------
Equivalent to $20.92 per share on
229,607,286 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $4,804,350
=============
Statement of Operations (dollars in
for the year ended November 30, 1997 thousands)
- ---------------------------------------- ---------------- ----------------
Investment Income:
Income:
Dividends $ 39,696
Interest 24,740 $ 64,436
----------------
Expenses:
Management services fee 18,971
Distribution expenses 10,087
Transfer agent fee 4,253
Reports to shareholders 308
Registration statement and prospectus 260
Postage, stationery and supplies 781
Trustees' fees 114
Auditing and legal fees 49
Custodian fee 686
Taxes other than federal income tax 64
Other expenses 96 35,669
---------------- ----------------
Net investment income 28,767
----------------
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 396,363
Net increase in unrealized
appreciation on investments:
Beginning of year 1,067,480
End of year 1,507,804
Net unrealized appreciation ----------------
on investments 440,324
Net realized gain and unrealized ----------------
appreciation on investments 836,687
Net Increase in Net Assets ----------------
Resulting from Operations $865,454
=============
(dollars in
Statement of Changes in Net Assets thousands)
- ---------------------------------------- ------------- -------------
Year Ended November 30
1997 1996
Operations: ------------- -------------
Net investment income $ 28,767 $ 32,975
Net realized gain on investments 396,363 256,063
Net unrealized appreciation
on investments 440,324 251,881
------------- -------------
Net increase in net assets
resulting from operations 865,454 540,919
------------- -------------
Dividends and Distributions Paid to
Shareholders:
Dividends from net investment income (32,176) (40,512)
Distributions from net realized
gain on investments (257,536) (143,588)
------------- -------------
Total dividends and distributions (289,712) (184,100)
------------- -------------
Capital Share Transactions:
Proceeds from shares sold:
28,930,089 and 46,030,628
shares, respectively 535,948 791,270
Proceeds from shares issued in
reinvestment of net investment income
dividends and distributions of net
realized gain on investments:
16,361,452 and 10,959,728 shares,
respectively 275,377 174,287
Cost of shares repurchased:
43,976,233 and 36,172,855
shares, respectively (806,006) (621,663)
------------- -------------
Net increase in net assets resulting
from capital share transactions 5,319 343,894
------------- -------------
Total Increase in Net Assets 581,061 700,713
Net Assets:
Beginning of year 4,223,289 3,522,576
End of year (including undistributed ------------- -------------
net investment income: $17,008 and
$20,277, respectively) $4,804,350 $4,223,289
============= =============
See Notes to Financial Statements
</TABLE>
1. The New Economy Fund (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. The following paragraphs summarize the
significant accounting policies consistently followed by the fund in the
preparation of its financial statements:
Equity-type securities traded on a national securities exchange (or
reported on the Nasdaq national market) and securities traded in the
over-the-counter market are stated at the last reported sales price on the day
of valuation; other securities, and securities for which no sale was reported
on that date, are stated at the last quoted bid price. Short-term securities
with original or remaining maturities in excess of 60 days are valued at the
mean of their quoted bid and asked prices. Short-term securities with 60 days
or less to maturity are valued at amortized cost, which approximates market
value. Securities for which market quotations are not readily available are
valued at fair value by the Board of Trustees or a committee thereof.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. In the event
the fund purchases securities on a delayed delivery or "when-issued" basis, it
will segregate with its custodian liquid assets in an amount sufficient to meet
its payment obligations in these transactions.Realized gains and losses from
securities transactions are reported on an identified cost basis. Dividend and
interest income is reported on the accrual basis. Discounts and premiums on
securities purchased are amortized over the life of the respective securities.
Dividends and distributions paid to shareholders are recorded on the
ex-dividend date.
Investment securities and other assets and liabilities denominated in
non-U.S. currencies are recorded in the financial statements after translation
into U.S. dollars utilizing rates of exchange on the last business day of the
period. Purchases and sales of investment securities, income and expenses are
calculated using the prevailing exchange rate as accrued. 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.
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 $686,000 includes $41,000 that was paid by these credits
rather than in cash.
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 November 30, 1997 net unrealized appreciation on investments for book
and federal income tax purposes aggregated $1,507,810,000, of which
$1,684,939,000 related to appreciated securities and $177,130,000 related to
depreciated securities. There was no difference between book and tax realized
gains on securities transactions for the year ended November 30, 1997. The cost
of portfolio securities for book and federal income tax purposes was
$3,289,168,000 at November 30, 1997.
3. The fee of $18,971,000 for management services was paid pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Trustees of the fund are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily,
calculated at the lower of the annual rates of 0.60% of the first $300 million
of average net assets; 0.48% of such assets in excess of $300 million but not
exceeding $750 million; 0.45% of such assets in excess of $750 million but not
exceeding $1.25 billion; and 0.42% of such assets in excess of $1.25 billion;
OR 0.58% of the first $500 million of the fund's average net assets; 0.48% of
such assets in excess of $500 million but not exceeding $1 billion; 0.44% of
such assets in excess of $1 billion but not exceeding $1.5 billion; 0.41% of
such assets in excess of $1.5 billion but not exceeding $2.5 billion; 0.39% of
such assets in excess of $2.5 billion but not exceeding $4 billion; 0.38% of
such assets in excess of $4 billion but not exceeding $6.5 billion; and 0.375%
of such assets in excess of $6.5 billion. The latter fee schedule provides for
lower fees when net assets exceed $3 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 Trustees. Fund
expenses under the Plan include payments to dealers to compensate them for
their selling and servicing efforts. During the year ended November 30, 1997,
distribution expenses under the Plan were $10,087,000. As of November 30, 1997,
accrued and unpaid distribution expenses were $2,501,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $4,253,000. American Funds Distributors, Inc. (AFD), the
principal underwriter of the fund's shares, received $1,605,000 (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.
Trustees 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 November 30,
1997, aggregate amounts deferred and earnings thereon were $126,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both
wholly owned subsidiaries of CRMC. Certain Trustees and officers of the fund
are or may be considered to be affiliated with CRMC, AFS and AFD. No such
persons received any remuneration directly from the fund.
4. As of November 30, 1997, accumulated undistributed net realized gain on
investments was $394,957,000 and paid-in capital was $2,884,721,000.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $1,243,318,000 and $1,544,880,000, respectively,
during the year ended November 30, 1997.
Dividend and interest income is recorded net of non-U.S. taxes paid. For
the year ended November 30, 1997, such non-U.S. taxes were $2,587,000. Net
realized currency losses on dividends, interest, and withholding taxes
reclaimable were $62,000 for the year ended November 30, 1997.
<TABLE>
PER-SHARE DATA AND RATIOS (1)
<S> <C> <C> <C> <C> <C>
Year ended November 30
---------------------------------------
1997 1996 1995 1994 1993
---------------------------------------
Net Asset Value, Beginning
of Year 18.50 16.98 14.65 16.47 13.17
---------------------------------------
Income from Investment
Operations:
Net investment income .12 .14 .20 .17 .11
Net realized and unrealized
gain (loss) on investments 3.57 2.26 2.99 (.59) 3.75
Total income (loss) from ---------------------------------------
investment operations 3.69 2.40 3.19 (.42) 3.86
---------------------------------------
Less Distributions:
Dividends from net investment
income (.14) (.19) (.18) (.12) (.07)
Distributions from net realized
gains (1.13) (.69) (.68) (1.28) (.49)
---------------------------------------
Total distributions (1.27) (.88) (.86) (1.40) (.56)
---------------------------------------
Net Asset Value, End of Year 20.92 18.50 16.98 14.65 16.47
=======================================
Total Return (2) 21.64% 15.00% 23.22% (2.94) 30.60%
Ratios/Supplemental Data:
Net assets, end of year
(in millions) $4,804 $4,223 $3,523 $2,592 $1,912
Ratio of expenses to average
net assets .81% .84% .88% .85% .85%
Ratio of net income to
average net assets .66% .85% 1.33% 1.25% .76%
Average commissions
paid per share (3) 2.58c 1.17c .16c .38c .30c
Portfolio turnover rate 31.62% 29.54% 27.03% 25.51% 26.97%
(1) Adjusted to reflect the 100%
share dividend effective May
26, 1994.
2 Unaudited
(2) Calculated without
deducting a sales charge. The
maximum sales charge is 5.75%
of the fund's offering price.
4 Based on operations for the
period shown and, accordingly,
not representative of a full
year's operations.
(3) 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>
Independent Auditors' Report
To the Board of Trustees and Shareholders of The New Economy Fund:
We have audited the accompanying statement of assets and liabilities of
The New Economy Fund, including the schedule of portfolio investments, as of
November 30, 1996, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the per-share data and ratios for each of the five years
in the period then ended. These financial statements and per-share data and
ratios are the responsibility of the fund's management. Our responsibility is
to express an opinion on these financial statements and the per-share data and
ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the per-share
data and ratios are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of securities owned
at November 30, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other procedures. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and per-share data and ratios
referred to above present fairly, in all material respects, the financial
position of The New Economy Fund at November 30, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the per-share data and ratios for
each of the five years in the period then ended, in conformity with generally
accepted accounting principles.
/s/Deloitte & Touche LLP
Los Angeles, California
December 24, 1997
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.
Corporate shareholders may exclude up to 70% of qualifying dividends received
during the year. For purposes of computing this exclusion, 70% of the
dividends paid by the fund from net investment income represents qualifying
dividends.
Dividends and distributions received by retirement plans such as IRAs,
Keogh-type plans and 403(b) plans need not be reported as taxable income.
However, many plan retirement trusts may need this information for their annual
information reporting.
SINCE THE AMOUNTS ABOVE ARE REPORTED FOR THE FUND'S FISCAL YEAR AND NOT THE
CALENDAR YEAR, SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV WHICH WILL BE
MAILED IN JANUARY 1998 TO DETERMINE THE CALENDAR YEAR AMOUNTS TO BE INCLUDED ON
THEIR 1997 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISERS.
