AXPSM Small Cap
Advantage
Fund
2000 ANNUAL REPORT
(PROSPECTUS ENCLOSED)
American
Express(R)
Funds
(icon of) ruler
AXP Small Cap Advantage Fund
seeks to provide shareholders
with long-term capital growth.
(This annual report includes a prospectus that describes in detail the Fund's
objective, investment strategy, risks, sales charges, fees and other matters of
interest. Please read the prospectus carefully before you invest or send money.)
AMERICAN
EXPRESS(R) (logo)
<PAGE>
Good Things,
Small Packages
Small-capitalization stocks may not measure up to the big blue-chips in terms of
market value, but that doesn't mean they have to take a back seat when it comes
to investment performance. To get the most out of the small-cap sector, this
Fund spreads its holdings among growth and value stocks that meet a variety of
strict selection criteria. The result is a portfolio of about 200 to 250 stocks
that provide broad representation in the small-cap sector.
AXP SMALL CAP ADVANTAGE FUND(This annual report is not part of the prospectus.)
<PAGE>
Table of Contents
2000 ANNUAL REPORT
The purpose of this annual report is to tell investors how the Fund performed.
From the Chairman 4
From the Portfolio Managers 4
Fund Facts 6
The 10 Largest Holdings 7
Making the Most of the Fund 8
The Fund's Long-term Performance 9
Independent Auditors' Report 10
Financial Statements 11
Notes to Financial Statements 14
Investments in Securities 21
Federal Income Tax Information 32
2000 PROSPECTUS
The prospectus, which is bound into the middle of this annual report, describes
the Fund in detail.
The Fund 3p
Goal 3p
Investment Strategy 3p
Risks 4p
Past Performance 4p
Fees and Expenses 5p
Management 6p
Buying and Selling Shares 7p
Valuing Fund Shares 7p
Investment Options 7p
Purchasing Shares 9p
Transactions through Third Parties 12p
Sales Charges 12p
Exchanging/Selling Shares 16p
Distributions and Taxes 21p
Other Information 23p
Financial Highlights 24p
(This annual report is not part of the prospectus.) ANNUAL REPORT - 2000
<PAGE>
(picture of) Arne H. Carlson
Arne H. Carlson
Chairman of the board
From the Chairman
The financial markets have always had their ups and downs, but in recent months
volatility has become more frequent and intense. While no one can say with
certainty what the markets will do, American Express Financial Corporation, the
Fund's investment manager, expects economic growth to continue this year,
accompanied by a modest rise in long-term interest rates. But no matter what
transpires, this is a great time to take a close look at your goals and
investments. We encourage you to:
o Consult a professional investment advisor who can help you cut through
mountains of data.
o Set financial goals that extend beyond those achievable through retirement
plans of your employer.
o Learn as much as you can about your current investments.
The portfolio manager's letter that follows provides a review of the Fund's
investment strategies and performance. The annual report contains other valuable
information as well. The Fund's prospectus describes its investment objectives
and how it intends to achieve those objectives. As experienced investors know,
information is vital to making good investment decisions.
So, take a moment and decide again whether the Fund's investment objectives and
management style fit with your other investments to help you reach your
financial goals. And make it a practice on a regular basis to assess your
investment options.
Sincerely,
Arne H. Carlson
(picture of) Kent A. Kelley
Portfolio manager
From the Portfolio Managers
An improving environment for small-capitalization stocks set the stage for a
solid return for the AXP Small Cap Advantage Fund. From May 4, 1999 (the Fund's
inception date) through March 2000 -- the Fund's Class A shares generated a
total return of 22.04% (excluding the sales charge).
Equity returns during the summer quarter of 1999 were quite modest, as concerns
about potentially higher inflation and rising interest rates pressured the stock
market. Nevertheless, smaller stocks began to attract investor attention, and
during this period actually outperformed larger-capitalization stocks for the
first time in several years.
AXP SMALL CAP ADVANTAGE FUND(This annual report is not part of the prospectus.)
<PAGE>
(picture of) Jacob (Jake) Hurwitz
Jacob (Jake) Hurwitz
Portfolio manager
We put shareholders' money to work quickly after the Fund's launch, and by the
middle of May the portfolio was fully invested. In keeping with an investment
style that aims to provide diversification through a blend of growth and value
investments, we built a portfolio consisting of approximately 200 stocks, with
about 65% in small-cap growth issues and the rest in small-cap value names.
BACK ON TRACK
The stock market rebounded sharply in October, thanks largely to reports of
still-tame inflation, healthy corporate profits and increasing excitement about
the potential of the Internet. The positive trend quickly turned into a
powerful, technology-led rally that gathered momentum through the end of 1999
and into the new year. While the broad market tailed off in January, small-cap
stocks continued to advance until early March, before retreating somewhat over
the final weeks of the period.
Small-cap technology stocks, thanks to very high expected revenue growth rates
and, in some cases, their strong earnings growth, attracted great interest from
investors and, consequently, were at the forefront of the market's advance.
While we kept the portfolio broadly diversified across economic sectors,
technology clearly was our primary focus over this period. Within the tech
sector, we focused on the telecommunications, semiconductor, enterprise software
and wireless communication stocks.
As the new fiscal year begins, we continue to be optimistic about the outlook
for small-cap stocks. Despite their recent strong performance, small-caps remain
relatively inexpensive given earnings growth prospects that exceed those of
large-cap stocks. Still, it would be naive to expect perfectly smooth sailing in
the months ahead, particularly in light of the Federal Reserve's willingness to
raise interest rates to slow down the economy and thereby avoid a run-up in
inflation. However, once concerns about inflation and interest rates subside, we
expect that a more normal investment environment will unfold, allowing for a
broader advance by the small-cap sector.
Kent A. Kelley
Jacob (Jake) Hurwitz
(This annual report is not part of the prospectus.) ANNUAL REPORT - 2000
<PAGE>
Fund Facts
Class A -- May 4, 1999* - March 31, 2000
(All figures per share)
Net asset value (NAV)
March 31, 2000 $6.07
May 4, 1999* $5.00
Increase $1.07
Distributions -- May 4, 1999* - March 31, 2000
From income $0.03
From capital gains $ --
Total distribution $0.03
Total return** +22.04%***
Class B -- May 4, 1999* - March 31, 2000
(All figures per share)
Net asset value (NAV)
March 31, 2000 $6.03
May 4, 1999* $5.00
Increase $1.03
Distributions -- May 4, 1999* - March 31, 2000
From income $0.03
From capital gains $ --
Total distribution $0.03
Total return** +21.24%***
Class Y -- May 4, 1999* - March 31, 2000
(All figures per share)
Net asset value (NAV)
March 31, 2000 $6.08
May 4, 1999* $5.00
Increase $1.08
Distributions -- May 4, 1999* - March 31, 2000
From income $0.03
From capital gains $ --
Total distribution $0.03
Total return** +22.24%***
*Inception date.
**Returns do not include sales load. The prospectus discusses the effect of
sales charges, if any, on the various classes.
***The total return is a hypothetical investment in the Fund with all
distributions reinvested.
AXP SMALL CAP ADVANTAGE FUND(This annual report is not part of the prospectus.)
<PAGE>
The 10 Largest Holdings
Percent Value
(of net assets) (as of March 31, 2000)
Gentex 1.11% $4,658,641
Mercury Interactive 1.08 4,525,174
Dycom Inds 1.06 4,450,874
CommScope 1.01 4,234,181
Zale 1.00 4,218,561
Varian Medical Systems .91 3,823,374
Pride Intl .88 3,698,269
U.S. Trust .85 3,590,999
Lattice Semiconductor .80 3,370,837
Micrel .78 3,273,599
For further detail about these holdings, please refer to the section entitled
"Investments in Securities."
(icon of) pie chart
The 10 holdings listed here
make up 9.48% of net assets
(This annual report is not part of the prospectus.) ANNUAL REPORT - 2000
<PAGE>
Making the Most of the Fund
BUILD YOUR ASSETS SYSTEMATICALLY
One of the best ways to invest in the Fund is by dollar-cost averaging -- a
time-tested strategy that can make market fluctuations work for you. To
dollar-cost average, simply invest a fixed amount of money regularly. You'll
automatically buy more shares when the Fund's share price is low, fewer shares
when it is high. The chart below shows how dollar-cost averaging works. In these
three hypothetical scenarios, you will see six months of share price
fluctuations.
This strategy does not ensure a profit or avoid a loss if the market declines.
But, if you can continue to invest regularly through changing market conditions
even when the price of your shares fall or the market declines, it can be an
effective way to accumulate shares to meet your long-term goals.
How dollar-cost averaging works
Jan Feb Mar Apr May Jun
$15 $16 $18 $20
$10 $10 $12 $14
$ 5
Accumulated shares* Average market Your average
price per share cost per share
42.25 $15 $14.20
-------------------------------------------------------------------------------
Jan Feb Mar Apr May Jun
$15
$10 $10 $8 $8 $10
$ 5 $5 $5
Accumulated shares* Average market Your average
price per share cost per share
85.0 $7.66 $7.05
-------------------------------------------------------------------------------
Jan Feb Mar Apr May Jun
$15
$10 $10 $8 $6 $7
$ 5 $4 $4
Accumulated shares* Average market Your average
price per share cost per share
103.5 $6.50 $5.80
-------------------------------------------------------------------------------
$100 invested per month. Total invested: $600
*Shares purchased is determined by dividing the amount invested per month by the
current share price.
THREE WAYS TO BENEFIT FROM A MUTUAL FUND:
o your shares increase in value when the Fund's investments do well
o you receive capital gains when the gains on investments sold by the Fund
exceed losses
o you receive income when the Fund's stock dividends, interest and short-term
gains exceed its expenses.
All three make up your total return. You potentially can increase your
investment if, like most investors, you reinvest your dividends and capital gain
distributions to buy additional shares of the Fund or another fund.
AXP SMALL CAP ADVANTAGE FUND(This annual report is not part of the prospectus.)
<PAGE>
The Fund's Long-term Performance
<TABLE>
<S> <C> <C> <C>
_______________________________________________________________________________
How $10,000 has grown in AXP Small Cap Advantage Fund
_______________________________________________________________________________
$20,000
Lipper Mid-Cap Growth Index
Russell 2000 Index
S&P Small Cap 600 Index
$10,000
$30,000
$9,425 $11,562
AXP Small Cap
Advantage Fund
Class A
(The printed version of this chart contains
a line graph with four lines corresponding
to the three Indexes and Fund noted above.)
6/1/99 6/30/99 7/31/99 8/31/99 9/30/99 10/31/99 11/30/99 12/31/99 1/31/00 2/29/00 3/31/00
</TABLE>
_______________________________________________________________________________
Total return (as of March 31, 2000)
_______________________________________________________________________________
Since
inception*
Class A +15.02%
Class B +16.24%
Class Y +22.24%
*Inception date was May 4, 1999.
Assumes: Holding period from 6/1/99 to 3/31/00. Returns do not reflect taxes
payable on distributions. Reinvestment of all income and capital gain
distributions for the Fund has a value of $60. Also see "Past Performance" in
the fund's current prospectus.
On the graph above you can see the Fund's total return compared to three
unmanaged performance indexes, the Standard & Poor's SmallCap 600 Index (S&P
600), the Russell 2000(R) Index, and the Lipper Small-Cap Core Index. In
comparing AXP Small Cap Advantage Fund to the indexes, you should take into
account the fact that the Fund's performance reflects the maximum sales charge
of 5.75%, while such charges are not reflected in the performance of the
indexes.
S&P 600 is an unmanaged market-weighted index that consists of 600 domestic
stocks chosen for market size, liquidity (bid-asked spread, ownership, share
turnover and number of no trade days) and industry group representation. The
index reflects reinvestment of all distributions and changes in market prices,
but excludes brokerage commission or other fees. The Fund may invest in stocks
that may not be listed in the index.
Russell 2000 Index, an unmanaged index, measures the performance of the 2,000
smallest companies in the Russell 3000 Index, which represents approximately 8%
of the total market capitalization of the Russell 3000 Index.
Lipper Small-Cap Core Index, an unmanaged index published by Lipper Inc.,
includes the 30 largest funds that are generally similar to the Fund, although
some funds in the index may have somewhat different investment policies or
objectives.
(This annual report is not part of the prospectus.) ANNUAL REPORT - 2000
<PAGE>
The financial statements contained in the Post-Efective Amendment #37 to
Registration Statement No. 2-89288 filed on or about May 16, 2000, are
incorporated herein by reference.
<PAGE>
Federal Income Tax Information
(Unaudited)
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. The dividends listed below are reported to you on Form 1099-DIV, Dividends
and Distributions. Shareholders should consult a tax advisor on how to report
distributions for state and local tax purposes.
AXP Small Cap Advantage Fund
Period ended March 31, 2000
Class A
Income distribution taxable as dividend income, 2.67% qualifying for deduction
by corporations.
Payable date Per share
Dec. 23, 1999 $0.02858
Total distribution $0.02858
The distribution of $0.02858 per share, payable Dec. 23, 1999, consisted of
$0.02858 from net short-term capital gains.
Class B
Income distribution taxable as dividend income, 2.67% qualifying for deduction
by corporations.
Payable date Per share
Dec. 23, 1999 $0.02858
Total distribution $0.02858
The distribution of $0.02858 per share, payable Dec. 23, 1999, consisted of
$0.02858 from net short-term capital gains.
Class Y
Income distribution taxable as dividend income, 2.67% qualifying for deduction
by corporations.
Payable date Per share
Dec. 23, 1999 $0.02858
Total distribution $0.02858
The distribution of $0.02858 per share, payable Dec. 23, 1999, consisted of
$0.02858 from net short-term capital gains.
AXP SMALL CAP ADVANTAGE FUND(This annual report is not part of the prospectus.)
<PAGE>
This page left blank intentionally
<PAGE>
This page left blank intentionally
<PAGE>
This page left blank intentionally
<PAGE>
This page left blank intentionally
<PAGE>
This page left blank intentionally
<PAGE>
This page left blank intentionally
<PAGE>
This page left blank intentionally
<PAGE>
American
Express(R)
Funds
AXP Small Cap Advantage Fund
200 AXP Financial Center
Minneapolis, MN 55474
AMERICAN
EXPRESS(R)(logo)
S-6427 C (5/00)
Distributed by American Express Financial Advisors Inc. Member NASD. American
Express Company is separate from American Express Financial Advisors Inc. and is
not a broker-dealer.
<PAGE>
STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) There are pictures, icons 2) Each picture, icon and
and graphs throughout the graph is described in
annual report. parentheses.
