[THE AMERICAN FUNDS GROUP(R)]
SMALLCAP WORLD FUND
1998
Annual Report
for the year ended September 30
[Global illustrations of North America, Europe, Australia/South Pacific areas]
THE SILVER LINING
in this year's market cloud
SMALLCAP World Fund(r) seeks long-term growth of capital through investments in
smaller companies in the United States and around the world.
SMALLCAP is one of the 28 mutual funds in The American Funds Group,(r) managed
by Capital Research and Management Company. Since 1931, Capital has invested
with a long-term focus based on thorough research and attention to risk.
[Begin Caption]
ON OUR COVER...
Investing in small companies presents unique challenges, requiring
around-the-clock and around-the-globe attention. Read more about how your fund
meets these challenges in the article beginning on page 4.
[End Caption]
INVESTMENT HIGHLIGHTS (Total returns for periods ended September 30, 1998, with
all distributions reinvested)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Salomon Smith
SMALLCAP Barney World S&P 500 MSCI
World Smallcap Index EAFE
Fund Index Index
Twelve months -20.7% -19.8% +9.0% -8.1%
Five years +47.5 +19.9 +147.5 +31.6
Since fund's +141.4 +71.9 +283.3 +65.7
inception on
April 30, 1990
Average annual +11.0 +6.6 +17.3 +6.2
compound
return since
fund's
inception
</TABLE>
The Salomon Smith Barney World Smallcap Index tracks more than 5,000 publicly
traded stocks in 22 countries with market capitalizations between $100 million
and $1.2 billion.
Standard & Poor's 500 Composite Index tracks the 500 largest U.S. stocks. The
Morgan Stanley Capital International EAFE(r) (Europe, Australasia, Far East)
Index tracks large-company stocks
in all major markets outside North America.
OUR 10 MOST SUCCESSFUL HOLDINGS
Holdings owned throughout the fiscal year ended 9/30/98
Adelphia Communications (U.S.; cable television) +222.7%
Century Communications (U.S.; cable television) +213.1
CSC Holdings (U.S.; cable television) +175.3
Infogrames Entertainment (France; video games) +102.8
Jones Intercable (U.S.; cable television) + 97.0
Lason (U.S.; electronic storage) + 85.5
Lernout & Hauspie Speech Products
(Belgium; voice recognition software) + 83.7
Shaw Communications
(Canada; cable television) + 80.4
Sixt (Germany; auto leasing) + 78.6
Hanover Direct (U.S.; catalog merchant) + 77.8
Our 10 least successful holdings
Holdings owned throughout the fiscal year ended 9/30/98
Acer Computer International
(Singapore; computer maker) - 86.4%
Avocet Mining (U.K.; gold mining) - 86.9
Waterfront Shipping (Norway; shipping line) - 87.9
QPL International Holdings
(Hong Kong; semiconductor equipment) - 89.3
Pricer (Sweden; retail pricing systems) - 90.7
London Sumatra (Indonesia; plantations) - 91.6
Banro Resource (Canada; gold exploration) - 93.6
Ethical Holdings (U.K.; health care) - 96.6
Sinocan Holdings (Hong Kong; can maker) - 97.3
Philippine Airlines (Philippines; air carrier) - 100.0
Both lists measured by changes in stock prices, excluding dividends.
All market indexes cited in this report are unmanaged and include reinvestment
of all distributions. Fund results were computed without a sales charge unless
otherwise indicated.
FIGURES SHOWN ARE PAST RESULTS. SHARE PRICE AND RETURN WILL VARY, SO YOU MAY
LOSE MONEY. INVESTING FOR SHORT PERIODS MAKE LOSSES MORE LIKELY. INVESTMENTS
ARE NOT FDIC-INSURED, NOR ARE THEY DEPOSITS OF OR GUARANTEED BY A BANK OR ANY
OTHER ENTITY. INVESTING OUTSIDE THE UNITED STATES IS SUBJECT TO ADDITIONAL
RISKS, SUCH AS CURRENCY FLUCTUATIONS AND POLITICAL INSTABILITY, WHICH ARE
DETAILED IN THE FUND'S PROSPECTUS.
FELLOW SHAREHOLDERS:
There's not much good to say about SMALLCAP World Fund's 1998 fiscal year,
except perhaps that it's over. In a period that saw severe volatility in
virtually every global market, small-company stocks experienced one of their
worst years in history. While your fund's results weren't out of line with its
investment universe or funds with similar objectives, the numbers are
nonetheless disappointing.
* The fund posted a 20.7% loss for the 12 months ended September 30, assuming
reinvestment of a five-cent-a-share dividend and a $2.50-a-share capital gain
distribution paid last December.
* The fund's return was modestly behind the 19.8% drop in the unmanaged Salomon
Smith Barney World Smallcap Index, which measures the fund's investment
universe, and the 18.8% loss posted by the average global small-company mutual
fund, as measured by Lipper Analytical Services. Over virtually any other
period of time - two years, three years, five years and the fund's lifetime -
SMALLCAP has handily outpaced these two important benchmarks.
* The fund's loss was 30 percentage points behind the 9.0% gain posted by
large-company stocks in the U.S. It was also well behind the 8.1% drop
experienced by large-company stocks in major non-U.S. markets, as shown in the
Investment Highlights box at left.
* Of the 420 stocks owned by the fund throughout the year, only 86 rose in
price while 331 fell. At the end of the year, the fund owned more than 500
stocks from 44 countries.
THE SILVER LINING
These are discouraging numbers no matter how you look at them. But we do
believe there is a silver lining in this cloud.
First, things could have been worse: At the low in August, the average U.S.
small-company stock was off 31.0% from its high in April, as measured by the
Russell 2000 Index. SMALLCAP held up better during this period, as it has in 11
of the 12 market declines of 5% or more since its inception. In addition, half
of all non-U.S. markets were down 30% or more for the fiscal year, according to
Morgan Stanley Capital International. The fund's stock selection, wide
diversification and exposure to more stable European markets helped cushion the
blow somewhat.
Second and most important, this decline has taken small-company stocks down to
a point we haven't seen since the bear market of 1973-74. Small-company stocks
today offer the best value, relative to larger companies, in a quarter century.
Prices can certainly get cheaper still; if the broad market moves lower, they
undoubtedly will. But for long-term investors, and for those with money to
invest today, that has to be good news.
We'll explore the issues of relative value and other insights about where we
might be headed in our feature article that begins on page 4. But first, let's
review the year at hand.
WHAT WENT WRONG
A little over a year ago many people were remarking at the near-perfect
economic environment. How did it unravel so quickly? Like many world events, it
started with a small seed that took years to germinate.
When China devalued its currency in 1994 to foster export growth, it set in
motion a series of events that, over the next few years, would undermine the
currencies of neighboring Asian nations. Rapid growth in Asia, investors came
to learn, had been fueled primarily by lax lending standards, an unprecedented
inflow of foreign capital and inflated currencies artificially pegged to the
U.S. dollar.
This precarious house of cards toppled after Thailand devalued the baht in July
1997 to combat an economic slowdown. Since then, nearly every Asian economy has
fallen into recession, foreign investment in the region has evaporated and
companies have been left with high levels of dollar-denominated debt to be
repaid with sharply lower local currencies. To make matters worse, most Asian
governments have been unwilling to undertake measures to right their economic
ships, including allowing many financially strapped companies to fail. Some,
including Malaysia, have taken steps, such as imposing currency controls, that
virtually assure a prolonged economic crisis.
[Begin Sidebar]
WHERE ARE SMALLCAP'S
PORTFOLIO COMPANIES LOCATED?
Geographical distribution of net assets on September 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
THE AMERICAS 56.7%
United States 51.1%
Canada 4.5
Mexico .5
Other Latin America .6
EUROPE 21.8%
United Kingdom 6.2%
Sweden 3.7
France 2.5
Germany 1.6
Denmark 1.4
Finland .9
Spain .9
Netherlands .8
Ireland .7
Norway .7
Switzerland .5
Other Europe 1.9
ASIA/PACIFIC 7.0%
Australia 2.4%
Hong Kong 1.1
Japan 1.1
Singapore .8
New Zealand .6
Other Asia 1.0
OTHER COUNTRIES 1.3%
CASH & EQUIVALENTS 13.2%
TOTAL 100.0%
</TABLE>
In early summer, Russia began to experience similar problems. The ensuing
economic debacle and political crisis unnerved investors worldwide. Latin
America quickly became a target for anxious investors, even though economies
there were on much stronger footing than in Asia or Russia. The market turmoil
was so severe, however, that it began to slow economic growth in several Latin
American nations.
Until mid-July, the U.S. market continued on as if blissfully unaware of world
events. Small-company stocks had been trending downward since April, but
large-company stocks continued to new heights. The combined effects of the
Russian economic collapse and growing concern about poor earnings reports from
U.S. corporations, however, ultimately sent U.S. stocks sharply lower, taking
European markets with them.
The near-panic selling that ensued caused a "flight to quality" among world
investors. Unprecedented buying of U.S. Treasury bonds drove U.S. Treasury
yields to decades-old lows. This quest for safety also drove investors further
away from small-company stocks in favor of the biggest, best-known companies.
As investors raced for the door, the resulting squeeze caused prices of
small-company stocks to drop precipitously. Much of the damage was caused by a
lack of liquidity in the small-capitalization market - that is, because fewer
shares are available, small-company stocks are not as easily traded and thus
susceptible to heightened volatility.
For the full fiscal year, small-company stocks in Asia dropped 39%, though they
lost only 10% in the final three months of the period - when other regions
began to feel the heat. European small stocks held up best, seeing only a 2%
loss for the full year; a 20% drop in the final quarter erased significant
earlier gains. The worst blow to small-company stocks, and to the fund, was
delivered in the U.S. Here at home, small-company stocks finished down 19%
after breaking even over the first three quarters of the year. (All statistics
provided by Salomon Smith Barney.)
WHAT HAVE WE BEEN DOING
One of the few good things we can say about the year is that the fund had less
than 5% of its assets invested in Asia. The extent of the declines in Indonesia
(-87.2%), Malaysia (-73.9%) and Thailand (-64.5%) were breathtaking, but even
regional stalwarts like Singapore (-49.2%) and Taiwan (-40.4%) experienced
shocking losses. (All figures in U.S. dollars.) It will be some time before
many of these countries see renewed strength, but a number of stocks in the
region now represent interesting value. An example is Indah Kiat, a pulp and
paper producer that, because of the devastating decline in the value of the
Indonesian currency, has a dramatic competitive edge in world markets.
Most of our focus has been, and is likely to continue to be, on the United
States and Europe. A bright spot in both regions was media and entertainment;
as the list on the inside front cover shows, four of our five best stocks were
U.S. cable television companies and the fifth was a French video game maker.
Markets in the U.S. and throughout Europe started the year off well and, by
midyear, had soared to unprecedented levels. As prices rose, we weeded out
stocks that appeared overvalued. While this was certainly helpful to overall
returns, it will result in the fund paying a capital gain distribution in late
December of about $1.40 a share.
When the market declined late in the fiscal year, our focus changed abruptly.
With many of our stocks down 30% or more, we undertook a thorough review of the
fund's holdings to reassess each company's prospects. This resulted in a number
of sales of companies whose potential now seems less certain; these sales were
typically made at a loss that helped reduce the size of the required capital
gain distribution.
More significantly, we began looking for new investment opportunities. Quite a
few stocks that have been out of our buying range - either because the
companies were too large or their stocks were too highly valued - now fall
within our investment parameters. We have compiled extensive shopping lists
and, with 13% of assets still in cash, have kept some powder dry to take
advantage of these opportunities.
WHERE DO WE GO FROM HERE
There was a book popular in the 1960s titled Been down so long it looks like up
to me. That's an apt description for how investors in small-company stocks must
feel. It certainly describes how we feel. We've been saying for a long time now
that small-company stocks offer good value, and for too many years we've had to
report that, once again, large-company stocks remained triumphant. How long, we
wonder, will investors keep the faith?
We believe that the recent decline was the final straw for many small-cap
investors. While that may sound like bad news, paradoxically it may be exactly
what the doctor ordered. What we may be seeing is the final capitulation of
discouraged small-cap investors; when everyone who wants to sell has sold, we
may finally turn the corner of the small-cap cycle. Indeed, that process may
have already begun.
Going forward, the primary risk to investors is a significant turn for the
worse in the U.S. or European economies. The Asian crisis, and its aftermath in
Russia and Latin America, will undoubtedly quell demand for exports, but will
it substantially weaken our reasonably sound economy? It has already hurt
Australia and Canada, but they are much more dependent on natural resources
than either the U.S. or Europe. Because the answer to this all-important
question is not yet clear, we believe it will continue to pay to be cautious,
to be selective and to keep in especially close contact with our portfolio
companies.
We've noted in our last two reports our concern about the high level of stock
prices. After such a vicious decline, it gives us no pleasure to have been
proved so right. But it does illustrate that whenever people start talking
about a new era - or, in the parlance of the late 20th century, a "new
paradigm" - it usually pays to be skeptical.
The temptation at times like this is to remind investors that stock market
declines are a natural part of a free enterprise system, and that may be true.
But we recognize that few if any words can assuage the discomfort of a market
decline this severe. From long experience, we can only say that this, too,
shall pass. What gives us hope is that we firmly believe value eventually gets
recognized.
Cordially,
/s/William R. Grimsley
William R. Grimsley
Chairman of the Board
/s/Gordon Crawford
Gordon Crawford
President
November 16, 1998
CHARTING THE COURSE OF A $10,000 INVESTMENT
This chart shows how a $10,000 investment in SMALLCAP World Fund grew from
April 30, 1990 - the date of the fund's inception - through September 30, 1998,
the end of the fund's latest fiscal year. The high, low and closing values are
shown for each year.
As you can see, that $10,000 would have grown to $22,749, even after deducting
the maximum 5.75% sales charge. (Sales charges are lower for accounts of
$50,000 or more.) This is significantly more than the $17,194 generated by an
investment in the unmanaged Salomon Smith Barney World Smallcap Index, which
tracks over 5,000 small-company stocks around the world with market
capitalizations (price per share multiplied by number of shares outstanding)
between $100 million and $1.2 billion. These are virtually the same parameters
we use when selecting stocks for the fund's portfolio. Of course, past results
are not predictive of future performance.
Average Annual Compound Returns
for periods ended September 30, 1998
Lifetime Since inception on April 30, 1990 +10.26%
Five years +6.81%
One year -25.25%
Assumes reinvestment of all distributions and payment of the maximum 5.75%
sales charge.
[Begin Mountain Chart]
$22,749/1/
SMALLCAP World Fund
$17,194
Salomon Smith Barney
World Smallcap Index
$12,692/2/
Consumer Price Index
$10,000
Original investment
<TABLE>
<CAPTION>
Date SMALLCAP Date Salomon Date Consumer Price
World Bros. World Index /3/
Fund, Inc. Smallcap
/1/ Index
<S> <C> <C> <C> <C> <C> <C>
Fiscal year 1990#
High 7/16/90 9,963 7/90 11,442 9/90 10,295
Low 9/28/90 8,288 9/90 8,919 4/90 10,000
Close 9/28/90 8,288 9/90 8,919 9/90 10,295
Fiscal year 1991
High 9/30/91 11,307 9/91 11,211 9/91 10,644
Low 10/11/90 8,231 11/90 9,352 10/90 10,357
Close 9/30/91 11,307 9/91 11,210 9/91 10,644
Fiscal year 1992
High 2/12/92 12,666 2/92 11,675 9/92 10,962
Low 10/9/91 11,140 11/91 10,797 10/91 10,659
Close 9/30/92 11,640 9/92 10,999 9/92 10,962
Fiscal year 1993
High 9/30/93 15,418 8/93 14,340 9/93 11,257
Low 10/5/92 11,368 10/92 10,822 10/92 11,001
Close 9/30/93 15,418 9/93 14,336 9/93 11,257
Fiscal year 1994
High 2/3/94 17,254 8/94 15,655 9/94 11,590
Low 6/24/94 15,474 11/93 13,652 10/93 11,303
Close 9/30/94 16,744 9/94 15,390 9/94 11,590
Fiscal year 1995
High 9/11/95 20,046 9/95 16,888 9/95 11,885
Low 1/30/95 15,821 1/95 14,547 10/94 11,598
Close 9/29/95 19,856 9/95 16,888 9/95 11,885
Fiscal year 1996
High 5/20/96 23,573 5/96 19,339 9/96 12,242
Low 12/18/95 19,323 10/95 16,284 12/95 11,908
Close 9/30/96 22,877 9/96 18,899 9/96 12,242
Fiscal year 1997
High 9/30/97 28,689 7/97 21,443 9/97 12,506
Low 4/28/97 22,594 4/97 18,539 10/96 12,281
Close 9/30/97 28,689 9/97 21,443 9/97 12,506
Fiscal year 1998
High 10/13/97 29,202 4/98 22,159 9/98 12,692
Low 8/31/98 22,174 8/98 16,689 10/97 12,537
Close 9/30/98 22,749 9/98 17,194 9/98 12,692
</TABLE>
[End chart]
#For the period April 30, 1990 (when the fund began
operations) through September 30, 1990.
/1/This figure, unlike those shown earlier in this report, reflects payment of
the maximum sales charge of 5.75% on the $10,000 investment. Thus, the net
amount invested was $9,425.
/2/Computed from data supplied by the U.S. Department of Labor, Bureau of Labor
Statistics.
THE SILVER LINING
in this year's market cloud
In this year's report, we address three important questions: Why was the stock
market decline so severe for smaller companies? Where do small companies stand
today as investments? What is the fund's strategy going forward?
[Photos: Rob Lovelace, Greg Wendt, Rob Lovelace and Greg Wendt]
[Begin Caption]
The backbone of this organization is and always has been research.
Rob Lovelace,
Los Angeles
[End Caption]
[Begin Caption]
There aren't nearly as many analysts following smaller companies as cover large
companies. Over time, we think we can exploit that weakness to our advantage.
Greg Wendt,
San Francisco
[End Caption]
You learn a lot about yourself as an investor during a market decline. Were you
taking more risk than, in retrospect, you were comfortable with? Did you know
enough about what you owned? Does your investment program really meet your
emotional, as opposed to your financial, needs? Few people ponder these
questions when the market is rising, but when prices head down everyone begins
to better understand the terms "risk," "volatility" and "long term."
"Any of the things people may be feeling right now - anxiety, fear, confusion -
they're entitled to feel," notes Bill Grimsley, SMALLCAP's chairman and until
recently one of its portfolio counselors. "It's a confusing time. Even as a
professional investor following the markets every day, I have no idea what
stock prices are going to do next. What I do know is that lots of attractive
smaller companies are selling at 50 cents on the dollar compared with where
they were several months ago. Can they go lower? You bet. But the important
question is whether the stocks you own today, or are buying today, represent
good value for the long run. That's where, as an investor, you have to place
your faith."
The recent market decline has certainly tested that faith, especially for
investors in small-company stocks. Part of the problem is that most investors
are unaccustomed to stock market declines: For most of the 20th century,
declines of 20% or more - the standard definition of a bear market - have
occurred once every three years on average; but until the recent drop, we
haven't seen a significant decline since 1990. Investors in small-company
stocks have another issue: why they, in particular, fared so poorly. After all,
haven't small companies done better than larger companies over the long run?
THE SMALL-CAP CONUNDRUM
In our reports to you over the past few years, we've talked about how
inexpensive small-company stocks have looked relative to their larger
counterparts. But that hasn't kept them from getting cheaper still. The chart
below shows that small-company and large-company stocks tracked fairly closely
from the time of SMALLCAP World Fund's introduction in April 1990 until
mid-1996. At that point, the lines diverge dramatically.
"These things always move in cycles," explains Gordon Crawford, the fund's
president and one of its six portfolio counselors. "This time it's been fairly
pronounced because so many people have been buying unmanaged index funds, which
funnel more and more money to the biggest stocks, and because so many foreign
investors, who prefer the big names, have been investing in the U.S."
That helps explain why large-company stocks rose more than small-company stocks
the past few years, but something else was going on during the recent decline.
"Much of the damage has been due to structural causes," notes Claudia
Huntington, another portfolio counselor. "Liquidity was a major issue for many
small-company stocks during the decline. They're simply harder to trade, and
even small increases in trading volumes can cause significant price movements."
[Begin Caption]
LARGE CAPS TAKE OFF
From the time SMALLCAP World Fund was introduced in April 1990 until mid-1996,
small-company stocks and large-company stocks fared equally well. But in recent
years - and especially during this year's market decline - large-company stocks
pulled far ahead.
[line graph]
LARGE-COMPANY STOCKS TAKE THE LEAD
Indexed to 100
<TABLE>
<S> <C> <C>
Global Large Global Small
Company Stocks Company Stocks
4/30/90 100.00 100.00
5/31/90 111.40 109.93
6/30/90 109.82 112.24
7/31/90 110.51 114.42
8/31/90 101.20 100.91
9/30/90 91.21 89.19
10/31/90 99.27 95.26
11/30/90 99.01 93.52
12/31/90 101.73 94.61
1/31/91 105.93 96.69
2/28/91 114.21 108.20
3/31/91 111.23 108.61
4/30/91 112.88 109.57
5/31/91 115.26 110.56
6/30/91 108.23 105.46
7/31/91 114.22 108.87
8/31/91 114.67 108.11
9/30/91 116.78 112.10
10/31/91 118.95 113.56
11/30/91 114.18 107.97
12/31/91 123.51 114.84
1/31/92 119.72 116.30
2/28/92 117.26 116.75
3/31/92 111.88 111.41
4/30/92 113.27 111.20
5/31/92 117.37 115.94
6/30/92 113.50 111.96
7/31/92 115.22 110.17
8/31/92 118.50 110.90
9/30/92 117.50 109.99
10/31/92 114.31 108.22
11/30/92 116.98 111.46
12/31/92 117.51 114.05
1/31/93 116.99 115.89
2/28/93 118.82 117.28
3/31/93 125.44 125.34
4/30/93 129.44 129.89
5/31/93 132.76 136.43
6/30/93 131.09 134.26
7/31/93 133.63 136.69
8/31/93 139.37 143.40
9/30/93 136.87 143.36
10/31/93 140.45 144.47
11/30/93 133.06 136.52
12/31/93 138.10 144.75
1/31/94 146.38 153.64
2/28/94 144.20 153.91
3/31/94 138.05 148.11
4/30/94 142.09 151.64
5/31/94 143.36 149.75
6/30/94 143.03 149.06
7/31/94 145.41 151.79
8/31/94 150.13 156.55
9/30/94 145.96 153.90
10/31/94 150.85 154.55
11/30/94 144.55 145.97
12/31/94 146.40 148.45
1/31/95 145.17 145.47
2/28/95 146.97 148.10
3/31/95 154.72 152.41
4/30/95 160.54 155.96
5/31/95 163.00 156.47
6/30/95 163.24 158.98
7/31/95 171.01 167.89
8/31/95 167.13 167.07
9/30/95 173.22 168.88
10/31/95 171.40 162.84
11/30/95 177.92 167.20
12/31/95 183.07 172.38
1/31/96 186.06 174.67
2/28/96 187.02 178.36
3/31/96 190.29 182.46
4/30/96 193.40 191.67
5/31/96 194.98 193.39
6/30/96 196.59 190.19
7/31/96 189.95 178.73
8/31/96 193.24 184.92
9/30/96 202.12 188.99
10/31/96 204.83 188.47
11/30/96 217.61 193.96
12/31/96 213.77 194.18
1/31/97 217.98 194.99
2/28/97 220.19 194.79
3/31/97 215.83 187.72
4/30/97 224.67 185.39
5/31/97 239.58 200.76
6/30/97 251.86 206.99
7/31/97 266.72 209.44
8/31/97 249.78 206.57
9/30/97 264.65 214.43
10/31/97 251.19 205.14
11/30/97 256.96 197.51
12/31/97 261.56 196.07
1/31/98 268.10 197.29
2/28/98 287.11 212.83
3/31/98 299.22 220.60
4/30/98 303.08 221.59
5/31/98 299.93 215.29
6/30/98 309.32 211.31
7/31/98 308.67 199.37
8/31/98 265.96 166.89
9/30/98 272.26 171.94
</TABLE>
Source: Salomon Smith Barney
[photos: Bill Grimsley, Gordon Crawford, Mark Denning]
[Begin Caption]
Investors are always too happy or too discouraged. The emotional pendulum
swings too far in both directions.
Bill Grimsley, San Francisco
[End Caption]
[Begin Caption]
We have great confidence in these companies. We know them well.
Gordon Crawford,
Los Angeles
[End Caption]
[Begin Caption]
Has the case for small caps changed? I don't think so. Some might argue that
size has advantages, but you're not nearly as nimble or hungry or focused when
you get big.
Mark Denning,
London
[End Caption]
Gordon recounts how, one day, "Our trading desk got a call from a dealer
telling us about a hedge fund that was liquidating its holdings. They had to
sell everything by the end of the day, regardless of price. That can take the
wind out of any stock, but especially a smaller one."
Claudia also identified another issue affecting small-company stocks. "We've
been in a period when the quality of companies selling stock for the first time
has not been particularly high. That has really had an impact on people's
perception of small companies. It's not an accurate perception, but both good
and bad companies have been tarred with the same brush."
But perhaps the best explanation for the severity of the decline is the oldest:
simple human emotion. "Over time, earnings drive stock prices," says Rob
Lovelace, a portfolio counselor based
in Los Angeles. "But right now, I don't think what has happened reflects what's
really going on with the companies. I guess that's the definition of panic -
when logic flies out the door."
AFTER THE DELUGE
Going back through history, you find that small-company stocks have seldom done
this poorly relative to large-company stocks over a one-year period.
"That's not the good news, that's not the bad news. It's just a fact," notes
Greg Wendt, a portfolio counselor and member of the fund's U.S. small-company
research team. "The important thing is that we don't think the situation is
sustainable. Why? Because the difference in value is enormous while the
underlying fundamentals are fairly similar."
Blair Frank, a small-company research analyst, put the same thought another
way: "On a relative basis, small stocks are as cheap as they've been in years.
And on an absolute basis, it's the first time in years you can easily justify
the prices of many of these stocks based on realistic assumptions about their
future earnings."
The chart below illustrates this point. It shows that, based on earnings,
small-company stocks haven't been this cheap relative to large-company stocks
since 1973. The chart on the next page shows another way to measure value:
dividend income. People don't typically buy small-company stocks for income,
but today they provide nearly as much income as large-company stocks. Thus,
while investors have historically paid a premium to invest in smaller companies
because they generally grow faster than larger ones, today they don't have to
pay anything for the higher growth potential.
[Begin Caption]
RELATIVE VALUES ARE AS GOOD AS EVER
Small-company and large-company stocks move in cycles. At the moment, the
relative value offered by small-company stocks is as good as it's been since
1973, as measured by price-to-earnings ratios (share price divided by
earnings), a commonly used measure of stock market value. The lower the line
goes, the better relative value small companies offer. (Below 100%, small-cap
P/E ratios are lower than those of large-caps.)
[line graph]
U.S. SMALL-COMPANY STOCKS
OFFER UNUSUAL VALUE
<TABLE>
<S> <C>
1/6/73 74.1
1/13/73 75.5
1/20/73 76.9
1/27/73 78.4
2/3/73 78.2
2/10/73 78.8
2/17/73 78
2/24/73 77.6
3/3/73 77.3
3/10/73 77.8
3/17/73 77.5
3/24/73 78.6
3/31/73 77.9
4/7/73 79.7
4/14/73 78.6
4/21/73 79.6
4/28/73 78.2
5/5/73 80.6
5/12/73 78.6
5/19/73 79.4
5/26/73 82.1
6/2/73 81.7
6/9/73 81.3
6/16/73 81.3
6/23/73 81.5
6/30/73 81.2
7/7/73 83.2
7/14/73 83.3
7/21/73 82.6
7/28/73 83
8/4/73 82.8
8/11/73 82.3
8/18/73 81.9
8/25/73 83
9/1/73 81.7
9/8/73 80
9/15/73 79.8
9/22/73 81.7
9/29/73 80.4
10/6/73 81.3
10/13/73 79.8
10/20/73 79.3
10/27/73 84.1
11/3/73 86
11/10/73 85
11/17/73 83.6
11/24/73 84.1
12/1/73 81.7
12/8/73 84.9
12/15/73 85.8
12/22/73 85.6
12/29/73 85.4
1/5/74 86.4
1/12/74 83.9
1/19/74 86
1/26/74 87.1
2/2/74 87.4
2/9/74 87.1
2/16/74 86.9
2/23/74 88
3/2/74 88.5
3/9/74 88.7
3/16/74 90.7
3/23/74 90.4
3/30/74 91.3
4/6/74 94.9
4/13/74 96.5
4/20/74 96.5
4/27/74 96.9
5/4/74 97.7
5/11/74 96
5/18/74 95.6
5/25/74 95.6
6/1/74 95.8
6/8/74 96.1
6/15/74 95.8
6/22/74 94.8
6/29/74 94.5
7/6/74 94.5
7/13/74 95.2
7/20/74 95.4
7/27/74 97
8/3/74 95.1
8/10/74 95.7
8/17/74 95.8
8/24/74 93.8
8/31/74 98.2
9/7/74 97.4
9/14/74 92.1
9/21/74 95.4
9/28/74 96.4
10/5/74 96.4
10/12/74 89.3
10/19/74 87.3
10/26/74 89.5
11/2/74 88.5
11/9/74 88.9
11/16/74 92
11/23/74 90.1
11/30/74 91.9
12/7/74 88.5
12/14/74 88.2
12/21/74 89.4
12/28/74 91.7
1/4/75 90.6
1/11/75 91.1
1/18/75 91.1
1/25/75 89.6
2/1/75 90.5
2/8/75 92.9
2/15/75 90.9
2/22/75 88.9
3/1/75 93.3
3/8/75 92.1
3/15/75 91.7
3/22/75 90.4
3/29/75 91
4/5/75 91
4/12/75 92
4/19/75 93.8
4/26/75 93.8
5/3/75 93.6
5/10/75 93.1
5/17/75 93.3
5/24/75 93
5/31/75 92.9
6/7/75 93.1
6/14/75 93.1
6/21/75 94.3
6/28/75 93.1
7/5/75 93.4
7/12/75 95.1
7/19/75 94.6
7/26/75 95.6
8/2/75 97.1
8/9/75 97.4
8/16/75 96.5
8/23/75 97.3
8/30/75 96.9
9/6/75 97.4
9/13/75 96.3
9/20/75 95.7
9/27/75 94.4
10/4/75 95.5
10/11/75 93.8
10/18/75 94.3
10/25/75 94.3
11/1/75 94
11/8/75 94
11/15/75 92.7
11/22/75 92.8
11/29/75 92.4
12/6/75 92.5
12/13/75 92.5
12/20/75 93.2
12/27/75 95.4
1/3/76 95.3
1/10/76 96.4
1/17/76 97
1/24/76 95.1
1/31/76 97.2
2/7/76 95.3
2/14/76 95.9
2/21/76 93.9
2/28/76 92.5
3/6/76 92.7
3/13/76 91.5
3/20/76 91.4
3/27/76 88.8
4/3/76 89.5
4/10/76 89.5
4/17/76 90.7
4/24/76 90.3
5/1/76 89.4
5/8/76 89.1
5/15/76 94.3
5/22/76 94.9
5/29/76 94.8
6/5/76 93.5
6/12/76 93
6/19/76 94.7
6/26/76 95.1
7/3/76 96.5
7/10/76 95.4
7/17/76 94.5
7/24/76 94.7
7/31/76 96.6
8/7/76 98.8
8/14/76 97.5
8/21/76 99
8/28/76 99.3
9/4/76 99.9
9/11/76 99.8
9/18/76 100.1
9/25/76 101
10/2/76 98.3
10/9/76 99.4
10/16/76 98.6
10/23/76 99.2
10/30/76 99
11/6/76 101.1
11/13/76 96.4
11/20/76 96.1
11/27/76 94.4
12/4/76 95.7
12/11/76 96.5
12/18/76 94.1
12/25/76 96.7
1/1/77 95.5
1/8/77 96.7
1/15/77 97.8
1/22/77 98.9
1/29/77 99.8
2/5/77 99.8
2/12/77 101.3
2/19/77 100.8
2/26/77 99.3
3/5/77 100.8
3/12/77 100.9
3/19/77 103.3
3/26/77 103.1
4/2/77 103.8
4/9/77 104.6
4/16/77 106.4
4/23/77 107.2
4/30/77 106
5/7/77 106.6
5/14/77 106.2
5/21/77 106.9
5/28/77 107.6
6/4/77 109
6/11/77 109.3
6/18/77 108.3
6/25/77 108.5
7/2/77 107.8
7/9/77 106.3
7/16/77 106.4
7/23/77 106.1
7/30/77 106.5
8/6/77 104.2
8/13/77 103.5
8/20/77 103.5
8/27/77 103.3
9/3/77 103.3
9/10/77 102
9/17/77 103.1
9/24/77 102.1
10/1/77 102.2
10/8/77 100.9
10/15/77 102.9
10/22/77 103
10/29/77 103.5
11/5/77 102.2
11/12/77 102.3
11/19/77 103.3
11/26/77 103
12/3/77 101
12/10/77 100.8
12/17/77 100.8
12/24/77 101.9
12/31/77 100.9
1/7/78 103.6
1/14/78 101.1
1/21/78 104.1
1/28/78 101.9
2/4/78 104
2/11/78 104.6
2/18/78 103.8
2/25/78 103
3/4/78 104.9
3/11/78 103.3
3/18/78 102.2
3/25/78 102.7
4/1/78 102.3
4/8/78 102.1
4/15/78 102.5
4/22/78 102.2
4/29/78 102.8
5/6/78 101.4
5/13/78 102.2
5/20/78 103.8
5/27/78 101.8
6/3/78 102.6
6/10/78 102.3
6/17/78 103.4
6/24/78 103.3
7/1/78 104.3
7/8/78 104.3
7/15/78 104.5
7/22/78 104
7/29/78 104.1
8/5/78 104.6
8/12/78 103.8
8/19/78 100.6
8/26/78 99.2
9/2/78 99.7
9/9/78 100.8
9/16/78 98.9
9/23/78 99.9
9/30/78 101.1
10/7/78 99.6
10/14/78 100
10/21/78 100.3
10/28/78 104.1
11/4/78 103.8
11/11/78 105.6
11/18/78 106.6
11/25/78 108.2
12/2/78 108
12/9/78 108
12/16/78 107.9
12/23/78 106.4
12/30/78 104.9
1/6/79 105.5
1/13/79 105.8
1/20/79 107
1/27/79 106.1
2/3/79 106.3
2/10/79 105.8
2/17/79 105.9
2/24/79 105.5
3/3/79 107.7
3/10/79 109.1
3/17/79 108.9
3/24/79 109.3
3/31/79 109.3
4/7/79 108.4
4/14/79 107.1
4/21/79 106.7
4/28/79 108.9
5/5/79 107.7
5/12/79 108.6
5/19/79 109.3
5/26/79 109.4
6/2/79 109.5
6/9/79 110.9
6/16/79 109.9
6/23/79 109.4
6/30/79 108.9
7/7/79 110
7/14/79 110.1
7/21/79 108.4
7/28/79 110.4
8/4/79 107.7
8/11/79 105.9
8/18/79 107.6
8/25/79 106.7
9/1/79 105.4
9/8/79 105.2
9/15/79 104.8
9/22/79 104
9/29/79 105.7
10/6/79 104.4
10/13/79 104.3
10/20/79 103.8
10/27/79 103.3
11/3/79 103.7
11/10/79 102.8
11/17/79 108.3
11/24/79 104.7
12/1/79 104.6
12/8/79 103.5
12/15/79 103.9
12/22/79 101
12/29/79 101.7
1/5/80 103.2
1/12/80 97.7
1/19/80 101.5
1/26/80 97.5
2/2/80 96.2
2/9/80 95.4
2/16/80 96.9
2/23/80 97.9
3/1/80 98.8
3/8/80 99.9
3/15/80 99
3/22/80 100.5
3/29/80 100
4/5/80 100.1
4/12/80 98
4/19/80 98.3
4/26/80 98.7
5/3/80 99.4
5/10/80 99.7
5/17/80 100.2
5/24/80 100.8
5/31/80 100.9
6/7/80 101.1
6/14/80 101.8
6/21/80 101
6/28/80 102.5
7/5/80 101.9
7/12/80 103.4
7/19/80 102.8
7/26/80 102.4
8/2/80 102
8/9/80 102.3
8/16/80 103.3
8/23/80 102.8
8/30/80 104.1
9/6/80 103.6
9/13/80 103.6
9/20/80 104.2
9/27/80 104.1
10/4/80 105.8
10/11/80 105.3
10/18/80 103.9
10/25/80 105.3
11/1/80 103.4
11/8/80 103.8
11/15/80 104.4
11/22/80 104.2
11/29/80 104.5
12/6/80 102.1
12/13/80 102.4
12/20/80 101.6
12/27/80 102.9
1/3/81 103.5
1/10/81 102.7
1/17/81 104.5
1/24/81 105.2
1/31/81 105.3
2/7/81 103.8
2/14/81 103.9
2/21/81 103.6
2/28/81 103
3/7/81 104.7
3/14/81 103.8
3/21/81 102.6
3/28/81 102.9
4/4/81 102.6
4/11/81 102.1
4/18/81 103.2
4/25/81 101.7
5/2/81 101.2
5/9/81 101.7
5/16/81 101.3
5/23/81 100.6
5/30/81 100.8
6/6/81 100.9
6/13/81 101.8
6/20/81 101.6
6/27/81 101.6
7/4/81 102.1
7/11/81 101.9
7/18/81 102.2
7/25/81 102.9
8/1/81 101.7
8/8/81 100.9
8/15/81 102.3
8/22/81 101.5
8/29/81 100.2
9/5/81 99.5
9/12/81 99.9
9/19/81 98.9
9/26/81 98.6
10/3/81 98.5
10/10/81 97.6
10/17/81 96.7
10/24/81 98.4
10/31/81 98.3
11/7/81 98.6
11/14/81 96.8
11/21/81 96.5
11/28/81 96.2
12/5/81 96.2
12/12/81 96.3
12/19/81 95.7
12/26/81 95.7
1/2/82 96.3
1/9/82 96.4
1/16/82 96.1
1/23/82 97.3
1/30/82 95.5
2/6/82 96.8
2/13/82 96.8
2/20/82 96.5
2/27/82 95.4
3/6/82 95.7
3/13/82 95.6
3/20/82 93.6
3/27/82 93
4/3/82 94.3
4/10/82 92.8
4/17/82 92
4/24/82 92.6
5/1/82 92.8
5/8/82 91.5
5/15/82 91.9
5/22/82 91.7
5/29/82 91.8
6/5/82 91.6
6/12/82 92.1
6/19/82 91.6
6/26/82 92.2
7/3/82 90.8
7/10/82 90.6
7/17/82 91.4
7/24/82 91.9
7/31/82 90.9
8/7/82 88.2
8/14/82 87
8/21/82 85.9
8/28/82 85.7
9/4/82 85.1
9/11/82 83.9
9/18/82 80.9
9/25/82 80.5
10/2/82 80.6
10/9/82 79.8
10/16/82 80.7
10/23/82 79.9
10/30/82 80.3
11/6/82 80.9
11/13/82 81.3
11/20/82 80.3
11/27/82 79.5
12/4/82 77.6
12/11/82 78.7
12/18/82 77.8
12/25/82 76.8
1/1/83 77.6
1/8/83 77.8
1/15/83 77.9
1/22/83 76.2
1/29/83 77
2/5/83 74.3
2/12/83 76.9
2/19/83 75.3
2/26/83 76.2
3/5/83 75.6
3/12/83 75.7
3/19/83 75
3/26/83 73.4
4/2/83 74.2
4/9/83 73.4
4/16/83 73.1
4/23/83 72.3
4/30/83 72.8
5/7/83 72.5
5/14/83 72.6
5/21/83 74.2
5/28/83 72.6
6/4/83 73.3
6/11/83 72.8
6/18/83 72.5
6/25/83 72.3
7/2/83 72.8
7/9/83 73.6
7/16/83 74
7/23/83 74.6
7/30/83 71.6
8/6/83 72.2
8/13/83 71.5
8/20/83 71.3
8/27/83 71.6
9/3/83 73.1
9/10/83 71.8
9/17/83 72.8
9/24/83 71.5
10/1/83 71.2
10/8/83 71.4
10/15/83 71.9
10/22/83 71.5
10/29/83 66.8
11/5/83 68.9
11/12/83 69
11/19/83 69.8
11/26/83 68.9
12/3/83 70.8
12/10/83 68.9
12/17/83 70
12/24/83 69.1
12/31/83 69.9
1/7/84 70
1/14/84 70.8
1/21/84 73.6
1/28/84 73.5
2/4/84 77.6
2/11/84 80
2/18/84 80.1
2/25/84 80.4
3/3/84 80.6
3/10/84 81.4
3/17/84 79.3
3/24/84 78.7
3/31/84 82.9
4/7/84 80.6
4/14/84 79.9
4/21/84 80.8
4/28/84 81.5
5/5/84 82.6
5/12/84 82.7
5/19/84 82.2
5/26/84 81.5
6/2/84 80.5
6/9/84 79.5
6/16/84 80.3
6/23/84 80
6/30/84 80
7/7/84 81
7/14/84 81.4
7/21/84 81.3
7/28/84 83.4
8/4/84 84
8/11/84 85.6
8/18/84 85.9
8/25/84 86.4
9/1/84 87
9/8/84 88.3
9/15/84 88.3
9/22/84 88.1
9/29/84 87.5
10/6/84 88.1
10/13/84 87.5
10/20/84 86.6
10/27/84 87.2
11/3/84 87.6
11/10/84 87.7
11/17/84 87.7
11/24/84 85.6
12/1/84 84.1
12/8/84 85.7
12/15/84 84.8
12/22/84 84.7
12/29/84 84.1
1/5/85 85.4
1/12/85 85.4
1/19/85 86.3
1/26/85 85.9
2/2/85 86.3
2/9/85 87.7
2/16/85 86.8
2/23/85 86.9
3/2/85 87.4
3/9/85 87.4
3/16/85 87.9
3/23/85 88.6
3/30/85 89
4/6/85 89.4
4/13/85 89.5
4/20/85 88.4
4/27/85 89.2
5/4/85 90.2
5/11/85 90.1
5/18/85 88.4
5/25/85 88.8
6/1/85 88.3
6/8/85 87.4
6/15/85 89.5
6/22/85 88.6
6/29/85 89.8
7/6/85 89.5
7/13/85 88.7
7/20/85 91.2
7/27/85 86
8/3/85 87.7
8/10/85 87.3
8/17/85 89.1
8/24/85 88.9
8/31/85 89.4
9/7/85 90.7
9/14/85 91.2
9/21/85 95.2
9/28/85 95.4
10/5/85 94.2
10/12/85 95.8
10/19/85 93
10/26/85 94.1
11/2/85 93.4
11/9/85 87.8
11/16/85 87.2
11/23/85 85.9
11/30/85 84.9
12/7/85 85.9
12/14/85 85.4
12/21/85 85.3
12/28/85 84.6
1/4/86 86.2
1/11/86 88.5
1/18/86 85.9
1/25/86 87.3
2/1/86 85.9
2/8/86 85.9
2/15/86 86.2
2/22/86 84.7
3/1/86 79.2
3/8/86 81.7
3/15/86 81.8
3/22/86 83.4
3/29/86 82.8
4/5/86 82.6
4/12/86 82.2
4/19/86 82
4/26/86 82.7
5/3/86 82.4
5/10/86 77.1
5/17/86 74
5/24/86 76.9
5/31/86 76.3
6/7/86 76.1
6/14/86 75.8
6/21/86 76.6
6/28/86 77.4
7/5/86 77.5
7/12/86 74.6
7/19/86 76.3
7/26/86 75.7
8/2/86 74.2
8/9/86 73.9
8/16/86 74.4
8/23/86 74
8/30/86 70.8
9/6/86 69.9
9/13/86 69.6
9/20/86 72.5
9/27/86 69.1
10/4/86 68.1
10/11/86 70.8
10/18/86 68.6
10/25/86 69.2
11/1/86 66.5
11/8/86 67.9
11/15/86 70.2
11/22/86 70.7
11/29/86 70.4
12/6/86 70.4
12/13/86 71
12/20/86 71.7
12/27/86 72.2
1/3/87 73.7
1/10/87 75.1
1/17/87 72.1
1/24/87 72.6
1/31/87 73.5
2/7/87 74.1
2/14/87 72.4
2/21/87 72.5
2/28/87 71.7
3/7/87 72
3/14/87 70
3/21/87 71.5
3/28/87 76.4
4/4/87 71.4
4/11/87 88.9
4/18/87 88.1
4/25/87 88.3
5/2/87 88
5/9/87 91
5/16/87 86.5
5/23/87 86.6
5/30/87 86.2
6/6/87 88.2
6/13/87 86.8
6/20/87 85.4
6/27/87 85.9
7/4/87 90.4
7/11/87 89
7/18/87 88.7
7/25/87 87.8
8/1/87 88
8/8/87 88.6
8/15/87 83.4
8/22/87 81.4
8/29/87 82.4
9/5/87 81.1
9/12/87 81.7
9/19/87 81.1
9/26/87 81.7
10/3/87 80.8
10/10/87 80.8
10/17/87 80
10/24/87 80
10/31/87 80.6
11/7/87 78.8
11/14/87 79.8
11/21/87 74.1
11/28/87 74
12/5/87 72.6
12/12/87 71.2
12/19/87 70.2
12/26/87 68.6
1/2/88 70.1
1/9/88 72.1
1/16/88 72.9
1/23/88 73.4
1/30/88 74.2
2/6/88 75
2/13/88 76
2/20/88 74.4
2/27/88 67.1
3/5/88 67.1
3/12/88 69.3
3/19/88 70.7
3/26/88 72.9
4/2/88 73.9
4/9/88 74.4
4/16/88 74.5
4/23/88 71.2
4/30/88 72
5/7/88 70.6
5/14/88 71
5/21/88 72.6
5/28/88 72
6/4/88 71.5
6/11/88 71
6/18/88 69
6/25/88 68.1
7/2/88 67.6
7/9/88 67.2
7/16/88 67.8
7/23/88 66.6
7/30/88 67.4
8/6/88 67.6
8/13/88 67.1
8/20/88 72.2
8/27/88 70.6
9/3/88 70
9/10/88 70.8
9/17/88 70.8
9/24/88 72
10/1/88 71.7
10/8/88 71.3
10/15/88 70.9
10/22/88 71.2
10/29/88 70.5
11/5/88 70.6
11/12/88 70.8
11/19/88 75.5
11/26/88 74.9
12/3/88 74.6
12/10/88 74.9
12/17/88 73.7
12/24/88 73.6
12/31/88 77.1
1/7/89 78.5
1/14/89 78.9
1/21/89 80.1
1/28/89 79.6
2/4/89 79.6
2/11/89 77.2
2/18/89 76.6
2/25/89 74.2
3/4/89 79.6
3/11/89 79.8
3/18/89 79.1
3/25/89 77.5
4/1/89 76.5
4/8/89 74.9
4/15/89 75.5
4/22/89 76.4
4/29/89 75.5
5/6/89 76
5/13/89 75.1
5/20/89 74.6
5/27/89 81.3
6/3/89 81.6
6/10/89 80.6
6/17/89 80.9
6/24/89 80.5
7/1/89 81.4
7/8/89 81.3
7/15/89 82.1
7/22/89 80.1
7/29/89 80.1
8/5/89 79.7
8/12/89 80.4
8/19/89 79.3
8/26/89 78.9
9/2/89 78.4
9/9/89 78.8
9/16/89 78
9/23/89 78.4
9/30/89 78.3
10/7/89 79.1
10/14/89 78.9
10/21/89 79.4
10/28/89 78.4
11/4/89 79.5
11/11/89 77.7
11/18/89 82.3
11/25/89 79.8
12/2/89 79.1
12/9/89 79.8
12/16/89 78.9
12/23/89 78.4
12/30/89 79.7
1/6/90 83.1
1/13/90 83.8
1/20/90 83.9
1/27/90 83.1
2/3/90 83.9
2/10/90 83.4
2/17/90 84.2
2/24/90 88.4
3/3/90 87.5
3/10/90 87.3
3/17/90 86.8
3/24/90 86.9
3/31/90 87.4
4/7/90 88.6
4/14/90 89.7
4/21/90 87.8
4/28/90 89.3
5/5/90 86.9
5/12/90 84.2
5/19/90 81.3
5/26/90 83.3
6/2/90 83.4
6/9/90 83.4
6/16/90 83.3
6/23/90 82.9
6/30/90 83.4
7/7/90 82.5
7/14/90 82.7
7/21/90 82.2
7/28/90 80.8
8/4/90 79.6
8/11/90 78.7
8/18/90 88
8/25/90 87.2
9/1/90 87.9
9/8/90 91.2
9/15/90 91.7
9/22/90 90.8
9/29/90 91.5
10/6/90 91.5
10/13/90 90.3
10/20/90 89.3
10/27/90 88.4
11/3/90 90.1
11/10/90 88.4
11/17/90 87.5
11/24/90 94.3
12/1/90 95
12/8/90 94.9
12/15/90 92.3
12/22/90 92.1
12/29/90 93.8
1/5/91 93.9
1/12/91 92.6
1/19/91 92.6
1/26/91 91.9
2/2/91 91.9
2/9/91 93
2/16/91 90
2/23/91 85.8
3/2/91 98.6
3/9/91 96.7
3/16/91 96.9
3/23/91 96.7
3/30/91 97.9
4/6/91 96.5
4/13/91 97.2
4/20/91 96.9
4/27/91 96.4
5/4/91 93.6
5/11/91 92
5/18/91 93.2
5/25/91 99.4
6/1/91 97.1
6/8/91 98.7
6/15/91 95
6/22/91 100.9
6/29/91 101.4
7/6/91 101.1
7/13/91 102.6
7/20/91 102.1
7/27/91 99.9
8/3/91 100.2
8/10/91 101.2
8/17/91 98.4
8/24/91 104.1
8/31/91 104
9/7/91 104.6
9/14/91 102.2
9/21/91 101.8
9/28/91 102.5
10/5/91 99.8
10/12/91 101.8
10/19/91 97.8
10/26/91 94.1
11/2/91 92.4
11/9/91 96.6
11/16/91 95.1
11/23/91 95.7
11/30/91 96.2
12/7/91 94.9
12/14/91 94.7
12/21/91 95.9
12/28/91 93.8
1/4/92 93.6
1/11/92 95.9
1/18/92 91.7
1/25/92 91.1
2/1/92 90
2/8/92 88.3
2/15/92 88.4
2/22/92 83.1
2/29/92 85.9
3/7/92 84.6
3/14/92 84.6
3/21/92 84.1
3/28/92 84.3
4/4/92 87.5
4/11/92 84.7
4/18/92 84.8
4/25/92 85.6
5/2/92 86.9
5/9/92 85.1
5/16/92 85.5
5/23/92 82.2
5/30/92 83.5
6/6/92 82.1
6/13/92 82.1
6/20/92 87.7
6/27/92 86.6
7/4/92 88
7/11/92 88.1
7/18/92 85.4
7/25/92 84
8/1/92 82.7
8/8/92 83.5
8/15/92 83
8/22/92 83.7
8/29/92 87
9/5/92 83.5
9/12/92 82.1
9/19/92 81.4
9/26/92 81.4
10/3/92 80.5
10/10/92 80.9
10/17/92 82.3
10/24/92 86.6
10/31/92 86.3
11/7/92 84.6
11/14/92 86.3
11/21/92 86.5
11/28/92 86
12/5/92 88.2
12/12/92 90.5
12/19/92 88.6
12/26/92 88.3
1/2/93 88.7
1/9/93 88
1/16/93 86.7
1/23/93 87.8
1/30/93 87.8
2/6/93 86.8
2/13/93 85.9
2/20/93 92.4
2/27/93 92.6
3/6/93 90.5
3/13/93 91.6
3/20/93 90.3
3/27/93 95.2
4/3/93 90.6
4/10/93 91.3
4/17/93 90.6
4/24/93 87.6
5/1/93 86.3
5/8/93 85.1
5/15/93 88.5
5/22/93 87.3
5/29/93 88.9
6/5/93 88.1
6/12/93 87.5
6/19/93 89.6
6/26/93 90.3
7/3/93 90
7/10/93 91.4
7/17/93 89.8
7/24/93 88.6
7/31/93 87.3
8/7/93 89.9
8/14/93 88.3
8/21/93 89.6
8/28/93 93.7
9/4/93 89.3
9/11/93 89.6
9/18/93 88.4
9/25/93 88.1
10/2/93 88.1
10/9/93 90.5
10/16/93 90.5
10/23/93 91.9
10/30/93 87.8
11/6/93 87.2
11/13/93 86.9
11/20/93 86.4
11/27/93 86.4
12/4/93 86.3
12/11/93 86.5
12/18/93 83.3
12/25/93 85.9
1/1/94 85.6
1/8/94 87.7
1/15/94 87.5
1/22/94 82.5
1/29/94 82.5
2/5/94 81.5
2/12/94 83.5
2/19/94 79.4
2/26/94 78.9
3/5/94 77.8
3/12/94 76.4
3/19/94 75.7
3/26/94 76
4/2/94 77.8
4/9/94 76.9
4/16/94 77
4/23/94 76.8
4/30/94 76.6
5/7/94 75.4
5/14/94 74.6
5/21/94 73.3
5/28/94 73.6
6/4/94 72.3
6/11/94 72
6/18/94 70.8
6/25/94 70.6
7/2/94 71
7/9/94 69.9
7/16/94 69.2
7/23/94 68.6
7/30/94 66.1
8/6/94 68.9
8/13/94 65.4
8/20/94 61
8/27/94 61.4
9/3/94 60.5
9/10/94 59
9/17/94 59.9
9/24/94 58.9
10/1/94 60.7
10/8/94 56.4
</TABLE>
Source: Leuthold Group
[End Caption]
"There's a fairly compelling case for smaller companies," says Mark Denning, a
London-based portfolio counselor. "But it does depend on a generally favorable
market environment. Very few stocks swim against the tide. In declining
markets, the tendency is to defer making investments. People figure they can
buy cheaper later, and maybe they can. But at some point you have to say, $This
is cheap enough for me.'"
How do we determine what "cheap enough" is? That decision will be based first
and foremost on our assessment of a company's fundamentals. As Mark notes,
"These companies by and large haven't changed in the past three months, but
their stock prices certainly have. The companies I'm seeing are looking at
their business plans and their balance sheets and don't understand the
dichotomy. Their businesses haven't deteriorated much at all, and certainly not
enough to justify a 50% stock decline."
Some stocks are down even more sharply than that. As Gordon recalls, "There's a
software company whose stock I've wanted to purchase for some time, but it was
too expensive. Recently it fell from $57 to $7. Unless the company goes
bankrupt, it's pretty much done what it's going to do with a fall like that.
Could it go to $5? Sure, but if over the next few years that stock goes to $28
- - half what it was - does it really matter whether or not you paid an extra two
dollars?"
Declines of that magnitude are hard on everyone - company management, employees
and investors. Notes Greg, "This is the third time I've been through this, and
I'm one of the younger guys around here. It feels the same every time.
Personally, it's discouraging and there are days when you're literally sick to
your stomach. You don't know what will put a bottom on it. But the bottom
always comes."
[Begin Caption]
EVEN DIVIDEND YIELDS ARE SIMILAR
No one looks to small-company stocks to provide much income, but in recent
years large-company U.S. stocks have gone up so quickly that their dividend
yields have dropped so low you can get almost as much income from smaller U.S.
companies.
[line graph]
YIELD DIFFERENCE BETWEEN
LARGE AND SMALL STOCKS
<TABLE>
<S> <C>
2/90 1.53
3/90 1.45
4/90 1.48
5/90 1.32
6/90 1.75
7/90 1.69
8/90 1.77
9/90 1.50
10/90 1.43
11/90 1.38
12/90 1.53
1/91 1.58
2/91 1.57
3/91 1.26
4/91 1.22
5/91 1.21
6/91 1.50
7/91 1.44
8/91 1.45
9/91 1.40
10/91 1.43
11/91 1.50
12/91 1.20
1/92 1.38
2/92 1.39
3/92 1.28
4/92 1.15
5/92 1.15
6/92 1.48
7/92 1.41
8/92 1.42
9/92 1.41
10/92 1.45
11/92 1.48
12/92 1.33
1/93 1.34
2/93 1.27
3/93 1.24
4/93 1.26
5/93 1.26
6/93 1.54
7/93 1.56
8/93 1.51
9/93 1.52
10/93 1.49
11/93 1.48
12/93 1.38
1/94 1.32
2/94 1.37
3/94 1.49
4/94 1.45
5/94 1.38
6/94 1.45
7/94 1.37
8/94 1.33
9/94 1.29
10/94 1.21
11/94 1.25
12/94 1.27
1/95 1.16
2/95 1.10
3/95 0.92
4/95 0.87
5/95 0.80
6/95 1.04
7/95 1.04
8/95 1.06
9/95 0.92
10/95 0.84
11/95 0.80
12/95 0.80
1/96 0.70
2/96 0.71
3/96 0.65
4/96 0.70
5/96 0.69
6/96 0.72
7/96 0.66
8/96 0.72
9/96 0.73
10/96 0.65
11/96 0.54
12/96 0.55
1/97 0.44
2/97 0.37
3/97 0.28
4/97 0.16
5/97 0.20
6/97 0.45
7/97 0.37
8/97 0.47
9/97 0.52
10/97 0.51
11/97 0.41
12/97 0.35
1/98 0.30
2/98 0.26
3/98 0.14
4/98 0.12
5/98 0.08
6/98 0.25
7/98 0.14
8/98 0.05
9/98 0.08
</TABLE>
Sources: S&P 500, Russell 2000
[End Caption]
Adds Claudia, "It's frustrating at the moment to watch these stocks go down,
but as an investor with a long time horizon you have to be excited about the
values today. If you're out there looking at companies, getting to understand
their businesses - which is our job - you see lots of smaller companies with
solid growth rates, run by very sharp people, whose stocks are selling at
ridiculously low prices. At the same time, I can name any number of large
companies with prospects not nearly as good, whose stocks are selling at three
to four times the valuation. I'm not convinced, given similar outlooks, that
that discrepancy is logical, or that it can last."
WHERE THE RUBBER MEETS THE ROAD
When it comes to investing, it's easy to talk a good game. But the only thing
that matters is what you achieve and how you achieve it. That's why most of our
recent discussions have focused on how best to be constructive - and productive
- - in the face of a significant shift in the market.
"Because of our multiple portfolio counselor system, we don't have a master
plan," notes Greg. "We invest as individuals. But we do talk, and one thing we
all agree on today is that we should keep some cash on hand, trust in our
research and step up to the plate when opportunities arise."
Without exception, the fund's portfolio counselors agree that this is a real
opportunity to upgrade the overall quality of the portfolio.
"In an expensive market, value-oriented investors like us focus on second-tier
companies that seem to offer better value," explains Blair. "But in a market
like this, when all stocks have come down indiscriminately, you have an
opportunity to invest in the highest quality companies that are often too
expensive to own."
"I've definitely been using the sell-off to upgrade my portfolio," adds Greg.
"Many stocks in the same industry are selling at similar levels regardless of
quality. For instance, you can buy stock in the Morton's steakhouse chain, a
nationwide leader that's growing rapidly, at the same valuation as mature
regional restaurant stocks. Which would you rather own?"
The fund's portfolio counselors are also looking for companies whose businesses
provide some insulation from a further market decline or economic downturn.
"My largest position right now is a German company developing children's
television programs," notes Martial Chaillet, a Geneva-based portfolio
counselor. "Another is a German theater owner. Even if growth slows in Europe,
as many expect, people will still watch TV and go to the movies."
Everyone has his or her favorite ideas. Claudia's include "a little company in
Taiwan that's one of the best educational game makers in the world. Its stock
has been hammered, but the company's prospects are excellent. Another company
arranges childcare centers in business offices. They have a wonderful solution
to a growing problem that addresses the needs of both employers and employees.
Nothing at all has changed for the company " it's even gotten better - but the
stock is down a lot."
THE BOTTOM LINE
One of our colleagues once said that successful investing depends on "informed
faith." No one knows what will happen next, so you can succeed only if you base
your decisions on sound reasoning and in-depth research. You must also be in it
for the long haul.
Market declines will test anyone's resolve, and unfortunately we can't offer
any assurances that the worst is over. We can, however, guarantee that we're
doing our best to position your fund for the future. And we will do whatever we
can to help you maintain the same long-term perspective.
"Someday," notes Greg, "we're going to wake up and see that those who want out
have sold, the trading volatility has subsided and liquidity is working in our
favor. I don't know when that will be, but I want to be fully invested when it
happens." *
[photos: Blair Frank, Martial Chaillet, Claudia Huntington]
[Begin Caption]
If you buy good companies at reasonable prices, the principles of long-term
investing will remain intact. The math hasn't changed.
Blair Frank, Los Angeles
[End Caption]
[Begin Caption]
When I find a company with a strong franchise and superior management, I look
at a stock decline as an opportunity.
Martial Chaillet, Geneva
[End Caption]
[Begin Caption]
Has our enthusiasm dimmed? Far from it. A year ago, we were concerned about
high stock prices. Today, we're seeing more interesting values than we've seen
in a long, long time.
Claudia Huntington, Los Angeles
[End Caption]
<TABLE>
SMALLCAP World Fund
INVESTMENT PORTFOLIO September 30, 1998
<S> <C>
[pie chart]
Industry Diversification
Business & Public Services 15.91%
Broadcasting & Publishing 10.42%
Merchandising 5.67%
Health & Personal Care 4.75%
Leisure & Tourism 4.22%
Other Industries 45.86%
Cash & Equivalents 13.17%
</TABLE>
<TABLE>
<S> <C>
Percent of
Largest Equity Holdings Net Assets
ISS-International Service System 1.17%
OM Gruppen 1.05
SkyTel Communications .95
HNC Software .91
Unibail .90
NTL .88
PMC-Sierra .85
Adelphia Communications .70
Corporate Services Group .70
CSC Holdings .68
</TABLE>
<TABLE>
<S> <C> <C> <C>
Percent
Shares or Market of
EQUITY-TYPE SECURITIES Principal Value Net
(common and preferred stocks and convertible debentures) Amount (000) Assets
Business & Public Services - 15.91%
ISS-International Service System A/S, Class B (Denmark) 1,569,041 $82,789 1.17
Corporate Services Group PLC (United Kingdom) (1), (2) 11,092,098 34,373
Corporate Services Group PLC, 7.50% convertible debentures 2005 (1) $6,000,000 9,067 .70
Corporate Services Group PLC (1) 2,000,000 6,198
Protection One, Inc. (USA) (3) 3,715,800 36,229 .51
Enator AB (Sweden) 1,550,000 35,976 .51
Renaissance Worldwide Inc. (USA) (3) 2,700,000 35,437 .50
MSC Industrial Direct Co., Inc., Class A (USA) (3) 1,521,000 30,420 .43
Vanstar Corp. (USA) (1), (3) 2,525,000 24,934
Vanstar Financing Trust, 6.75% convertible preferred (1), (2) 175,000 3,981 .41
NCO Group, Inc. (USA) (1), (3) 995,300 27,682 .39
Midas, Inc. (USA) 1,091,000 26,457 .37
Franklin Covey Co. (USA) (1), (3) 1,350,000 26,409 .37
Medicis Pharmaceutical Corp., Class A (USA) (3) 650,000 25,756 .36
ABR Information Services, Inc. (USA) (1), (3) 1,865,000 25,527 .36
Sapient Corp. (USA) (3) 747,100 25,495 .36
Universal Health Services, Inc., Class B (USA) (3) 500,000 20,875 .29
Concord EFS, Inc. (USA) (3) 794,100 20,498 .29
Black Box Corp. (USA) (3) 838,000 20,321 .29
USWeb Corp. (USA) (3) 1,550,000 20,247 .29
Kroll-O'Gara Co. (USA) (3) 850,000 19,869 .28
Rental Service Corp. (USA) (3) 1,100,000 19,800 .28
Casella Waste Systems, Inc., Class A (USA)(3) 575,500 19,567 .28
ChoicePoint Inc. (USA) (3) 400,000 19,250 .27
Brunel International NV (Netherlands) 592,892 18,535 .26
CBT Group PLC (ADR) (Ireland) (3) 1,341,700 18,113 .26
Rhon-Klinikum AG, preferred shares (Germany) 187,100 17,029 .24
Regis Corp. (USA) 525,000 16,538 .23
Trigon Healthcare, Inc. (USA) (3) 525,700 16,297 .23
Budget Group, Inc., Class A (USA) (3) 700,000 15,969 .22
Bally Total Fitness Holding Corp. (USA)(3) 860,500 14,951 .21
MemberWorks Inc. (USA) (1), (3) 961,700 14,906 .21
Intentia International AB, Class B (Sweden) (3) 540,000 14,531 .20
DeVry Inc. (USA) (3) 600,000 14,063 .20
Pittston Brink's Group (USA) 400,000 14,000 .20
Vincam Group, Inc. (USA) (1), (3) 1,017,750 13,930 .20
ProBusiness Services, Inc. (USA) (3) 400,000 13,600 .19
Primark Corp. (USA) (3) 445,512 13,588 .19
CKS Group, Inc. (USA) (3) 729,400 12,901 .18
Flextronics International Ltd. (USA - Incorporated in Singapore) (3) 358,200 12,694 .18
APAC TeleServices, Inc. (USA) (3) 2,408,200 12,192 .17
Bright Horizons Family Solutions, Inc. (USA) (3) 555,000 11,794 .17
American Disposal Services, Inc. (USA) (3) 300,000 11,681 .16
Lernout & Hauspie Speech Products NV (Belgium) (3) 284,000 11,413 .16
Cambridge Technology Partners (Massachusetts), Inc. (USA) (3) 500,000 11,156 .16
Superior Consultant Holdings Corp. (USA) (3) 250,000 10,875 .15
ARIS Corp. (USA) (3) 553,700 10,797 .15
Photobition Group PLC (United Kingdom) 3,354,670 9,968 .14
APCOA Parking AG (Germany) (1) 120,800 9,404 .13
Iron Mountain Inc. (USA) (3) 301,500 9,045 .13
SportsLine USA, Inc. (USA) (3) 500,000 8,719 .12
Data Processing Resources Corp., 5.25% convertible debentures 2005 (USA) (2) $8,500,000 8,500 .12
Lason, Inc. (USA) (3) 160,000 8,200 .12
Filofax Group PLC (United Kingdom) (1) 1,956,000 6,817 .10
Administaff, Inc. (USA) (3) 203,900 6,512 .09
PSS World Medical, Inc. (USA) (3) 325,700 6,025 .08
Strategic Distribution, Inc. (USA) (1), (3) 1,890,000 6,024 .08
G&K Services, Inc., Class A (USA) 124,600 5,841 .08
Freepages Group PLC (United Kingdom) (3) 11,250,000 5,158 .07
Coinmach Laundry Corp., Class A (USA) (3) 522,100 5,156 .07
Sylvan Learning Systems, Inc. (USA) (3) 219,850 5,139 .07
Saskatchewan Wheat Pool, non+D161voting shares, Class B (Canada)+D289 665,800 4,888 .07
InaCom Corp. (USA) (3) 250,000 4,719 .07
GTS Duratek, Inc. (USA) (3) 811,100 4,562 .06
SCB Computer Technology, Inc. (USA) (3) 580,000 4,495 .06
Snyder Communications, Inc. (USA) (3) 130,000 4,355 .06
Kanamoto Co., Ltd. (Japan) 1,086,000 4,216 .06
American Healthcorp, Inc. (USA) (1), (3) 522,000 4,209 .06
International Container Terminal Services, Inc., 1.75% convertible debentures $5,905,000 4,134 .06
2004 (Philippines)
AmSurg Corp., Class B (USA) (3) 309,972 1,899
AmSurg Corp., Class A (3) 250,000 1,719 .05
Lorien PLC (United Kingdom) 819,663 3,368 .05
Monro Muffler Brake, Inc. (USA) (3) 347,838 3,304 .05
MDC Communications Corp., Class A (Canada) (3) 433,333 3,224 .05
CompuCom Systems, Inc. (USA) (3) 800,000 3,200 .04
CCC Information Services Group Inc. (USA) (3) 244,700 3,059 .04
PRT Group (formerly PRT Corp. of America) (USA) (2), (3) 761,960 3,048 .04
Warrantech Corp. (USA) (1), (3) 860,000 3,010 .04
Taylor Nelson Sofres PLC (United Kingdom) 2,000,000 2,700 .04
UroCor, Inc. (USA) (1), (3) 600,000 2,625 .04
Alarmguard Holdings, Inc. (USA) (1), (3) 360,000 2,610 .04
Healthcare Recoveries, Inc. (USA) (3) 250,000 2,500 .04
Bellsystem24 Inc. (Japan) 15,000 2,362 .03
Insignia/ESG Holdings, Inc. (USA) (3) 200,000 2,300 .03
Four Media Co. (USA) (1), (3) 610,000 2,288 .03
JLK Direct Distribution Inc., Class A (USA) (3) 191,600 2,060 .03
Australian Hospital Care Ltd. (Australia) 3,619,500 2,038 .03
American Management Systems, Inc. (USA) (3) 61,000 1,670 .02
Rural/Metro Corp. (USA) (3) 200,000 1,600 .02
Pricer AB, Class B (Sweden) (3) 563,650 1,531 .02
Fujitsu Support and Service Inc. (Japan) 36,000 1,371 .02
Learning Tree International, Inc. (USA) (3) 100,000 1,281 .02
Prosolvia AB, Class B (Sweden) (2), (3) 111,150 663 .01
Broadcasting & Publishing - 10.42%
NTL Inc. (United Kingdom-Incorporated in USA) (3) 1,450,000 62,350 .88
Adelphia Communications Corp., Class A (USA) (3) 1,271,000 49,728 .70
CSC Holdings, Inc., Class A (formerly Cablevision Systems Corp.) (USA) (3) 1,120,000 48,370 .68
Century Communications Corp., Class A (USA) (3) 2,020,000 48,227 .68
United Video Satellite Group, Inc., Class A (USA) (3) 3,000,000 44,437 .62
Flextech PLC (United Kingdom) (3) 4,442,100 42,993 .60
Jones Intercable, Inc., Class A (USA) (3) 1,705,000 42,412 .60
Antena 3 de Television, SA (GDR) (Spain) (1), (2), (3), (4) 1,500 39,207 .55
United Television, Inc. (USA) 350,000 37,362 .53
Scottish Media Group PLC (United Kingdom) (1) 3,280,000 35,923 .51
Westwood One, Inc. (USA) (3) 1,943,100 34,733 .49
Scandinavian Broadcasting System SA (Denmark-Incorporated in Luxembourg) (1), (3) 887,900 18,868 .26
CanWest Global Communications Corp. (Canada) 1,554,946 18,857 .26
Emmis Broadcasting Corp., Class A (USA) (3) 476,100 17,973 .25
Shaw Communications Inc., Class B (Canada) 1,050,000 17,552 .25
Chrysalis Group PLC (United Kingdom) (1) 1,824,000 17,499 .25
Scholastic Corp. (USA) (3) 408,800 17,374 .24
United International Holdings, Inc., Class A (USA) (3) 1,625,000 15,742 .22
Ascent Entertainment Group, Inc. (USA) (1), (3) 1,930,000 15,440 .22
CD Radio Inc. (USA) (3) 600,000 11,400 .16
Rural Press Ltd. (Australia) 3,509,840 10,087 .14
Data Broadcasting Corp. (USA) (1), (3) 2,130,000 9,984 .14
NRJ SA (France) 47,284 7,678 .11
Australian Provincial Newspapers Holdings Ltd. (Australia) 5,518,911 7,361 .10
Central European Media Enterprises Ltd., Class A (USA - Incorporated in Bermuda) (3) 755,000 7,267 .10
HIT Entertainment PLC (United Kingdom) (1) 840,000 6,918 .10
Matav-Cable Systems Media Ltd. (ADR) (Israel) 320,000 6,400 .09
Media General, Inc., Class A (USA) 139,500 5,406 .08
@ Entertainment Inc. (USA) (3) 635,000 5,397 .08
Investec--Consultoria Internacional, SA (Portugal) 99,000 4,220 .06
P4 Radio Hele Norge ASA (Norway) 960,000 4,154 .06
Primedia Ltd., units (South Africa) 1,650,000 4,114 .06
Modern Times Group MTG AB, Class B (ADR) (Sweden) (3) 69,200 3,927 .05
CHUM Ltd., Class B (Canada) 158,200 3,925 .05
Alma Media Oyj (formerly Aamulehti Corp. Ltd.) (Finland) (3) 126,400 3,605 .05
Southern Star Group Ltd. (Australia) 3,870,000 3,556 .05
Prime Television Ltd. (Australia) 2,217,570 2,761 .04
Grupo Radio Centro, SA de CV (ADR) (Mexico) 420,000 2,678 .04
International Broadcasting Corp. Ltd. (Thailand) (3) 5,800,000 2,536 .04
StoryFirst Communications Inc., convertible preferred, Class B (Russia) 4,022 1,207 .02
(2), (3), (4)
Pacific Media PLC (United Kingdom) (3) 61,749,124 577 .01
Merchandising - 5.67%
Claire's Stores, Inc. (USA) 2,020,000 36,360 .51
Zale Corp. (USA) (3) 898,700 23,029 .32
Hanover Direct, Inc. (USA) (3) 3,837,440 11,512
Hanover Direct, Inc. (2), (3) 3,700,000 11,100 .32
Jo-Ann Stores, Inc., Class A (formerly Fabri-Centers of America, Inc.) 525,000 11,681
(USA) (1), (3)
Jo-Ann Stores, Inc., Class B (1), (3) 525,000 9,975 .30
PETsMART, Inc. (USA) (3) 3,000,000 20,812 .29
Michaels Stores, Inc. (USA) (3) 794,700 20,265 .28
EM.TV & Merchandising AG (Germany) 54,000 17,946 .25
DFS Furniture Co. PLC (United Kingdom) 5,202,700 17,580 .25
GrandVision SA (France) 721,704 16,729 .24
Rent-Way, Inc. (USA) (1), (3) 600,000 14,775 .21
Brylane Inc. (USA) (3) 919,600 14,714 .21
Mobel Walther AG, nonvoting preferred shares (Germany) 260,000 10,120
Mobel Walther AG 88,000 3,425 .19
Cost Plus, Inc. (USA) (1), (3) 500,000 13,313 .19
Hornbach Holding AG, preferred shares (Germany) 142,650 11,788 .17
Gymboree Corp. (USA) (1), (3) 1,435,600 10,767 .15
Haverty Furniture Companies, Inc. (USA) 545,000 10,355 .15
Migros Turk TAS (Turkey) 13,634,675 9,833 .14
AnnTaylor, Inc. (USA) (3) 428,400 8,702 .12
Homac Corp. (Japan) 663,000 8,255 .12
Komori Corp. (Japan) 675,000 7,910 .11
Williams-Sonoma, Inc. (USA) (3) 234,099 4,989
Williams-Sonoma, Inc. (2), (3) 134,099 2,858 .11
Sixt AG (Germany) 33,712 5,642
Sixt AG, nonvoting preferred shares 12,256 1,688 .10
CDnow, Inc. (USA) (3) 800,000 7,200 .10
Sunglass Hut International, Inc. (USA) (3) 1,200,000 6,900 .10
Marks Bros. Jewelers, Inc. (USA) (1), (3) 510,000 6,821 .10
Aaron Rents, Inc. (USA) 450,000 6,750 .10
Garden Ridge Corp. (USA) (3) 795,000 6,112 .09
Piercing Pagoda, Inc. (USA) (1), (3) 502,500 5,779 .08
Controladora Comercial Mexicana, SA de CV, units (Mexico) 10,737,000 5,764 .08
Chapters Inc. (Canada) (3) 324,200 4,144 .06
Liquidation World Inc. (Canada) (1), (3) 450,000 3,982 .06
Bilia AB, Class A (Sweden) 554,600 3,890 .05
Dickson Concepts (International) Ltd. (Hong Kong--Incorporated in Bermuda) 4,575,699 3,573 .05
Homeplace Holdings Inc., 7.00% convertible preferred (USA) (3), (4) 30,200 2,001 .03
T Eaton Co. Ltd. (Canada) (3) 386,100 1,772 .02
Disco SA (ADR) (Argentina) (3) 110,000 1,595 .02
Health & Personal Care - 4.75%
Andrx Corp. (USA) (2), (3) 730,000 26,827 .38
Gilead Sciences, Inc. (USA) (3) 850,000 18,381 .26
Orthodontic Centers of America, Inc. (USA) (3) 1,077,700 17,984 .25
Vertex Pharmaceuticals Inc. (USA) (3) 730,000 16,790 .24
SEQUUS Pharmaceuticals, Inc. (USA) (1), (3) 1,709,584 16,561 .23
GelTex Pharmaceuticals, Inc. (USA) (3) 685,000 14,471 .20
Pharmacyclics, Inc. (USA) (1), (2), (3) 580,000 9,643
Pharmacyclics, Inc. (1), (3) 215,000 3,574 .19
Mentor Corp. (USA) 1,100,000 12,512 .18
Protein Design Labs, Inc. (USA) (3) 500,000 12,000 .17
Nobel Biocare AB (Sweden) 940,000 11,388 .16
Thermedics Inc. (USA) (3) 1,390,000 10,425 .15
Anesta Corp. (USA) (1), (3) 550,000 10,244 .14
Chr. Hansen Holding A/S, Class B (Denmark) 80,000 10,080 .14
Zonagen, Inc. (USA) (1), (3) 640,000 9,920 .14
Cytyc Corp. (USA) (1), (3) 933,700 9,454 .13
Nature's Sunshine Products, Inc. (USA) 554,500 8,872 .12
Scios Nova Inc. (USA) (3) 1,485,000 8,446 .12
Ocular Sciences, Inc. (USA) (3) 400,000 8,400 .12
Vical Inc. (USA) (3) 700,000 7,700 .11
COR Therapeutics, Inc. (USA) (3) 947,300 7,342 .10
OrthoLogic Corp. (USA) (1), (3) 1,620,000 6,379 .09
Scotia Holdings PLC (United Kingdom) (3) 3,551,900 6,333 .09
Digene Corp. (USA) (1), (3) 800,000 5,800 .08
ImClone Systems Inc. (USA) (3) 650,000 5,687 .08
Martek Biosciences Corp. (USA) (3) 600,000 4,950 .07
Genelabs Technologies, Inc. (USA) (3) 2,085,000 4,822 .07
Aviron (USA) (3) 305,000 4,708 .07
Neose Technologies, Inc. (USA) (3) 400,000 4,450 .06
Alkermes, Inc. (USA) (3) 300,000 4,369 .06
i-STAT Corp. (USA) (3) 463,200 3,416
i-STAT Corp. (2), (3) 125,000 922 .06
Gensia Sicor Inc. (USA) (3) 964,000 3,916 .06
Computer Motion, Inc. (USA) (1), (3) 434,900 3,833 .05
KeraVision, Inc. (USA) (1), (3) 795,000 3,379 .05
NeoPath, Inc. (USA) (3) 621,400 3,068 .04
Grupo Casa Autrey, SA de CV (ADR) (Mexico) 500,000 2,875 .04
Cyberonics, Inc. (USA) (2), (3) 479,000 2,874 .04
Technical Chemicals and Products, Inc. (USA) (1), (3) 600,000 2,475 .03
Creative BioMolecules, Inc. (USA) (3) 700,000 2,100 .03
AVANT Immunotherapeutics, Inc. (formerly T Cell Sciences, Inc.) (USA) (2), (3) 1,000,000 1,375
AVANT Immunotherapeutics, Inc. (3) 500,000 688 .03
CIMA LABS Inc. (USA) (1), (3) 617,200 1,774 .03
Cardiovascular Diagnostics, Inc. (USA) (3) 332,200 1,661 .02
Virbac SA (France) 24,770 1,547 .02
Intercardia, Inc. (USA) (3) 300,000 1,200 .02
Applied Imaging Corp. (USA) (3) 435,000 1,115 .02
Vision-Sciences, Inc. (USA) (3) 484,500 727 .01
Ethical Holdings PLC (ADR) (United Kingdom) (3) 569,900 89 .00
Leisure & Tourism - 4.22%
Imax Corp. (Canada) (1), (3) 1,558,000 31,160 .44
Vail Resorts, Inc. (USA) (3) 1,170,000 23,327 .33
Consolidated Products, Inc. (USA) (1), (3) 1,250,000 21,953 .31
Alliance Atlantis Communications Corp., nonvoting shares, Class B (formerly 738,000 12,941
Alliance Communications Corp.) (Canada) (1), (3)
Alliance Atlantis Communications Corp., Class A (1), (3) 322,700 5,711 .31
Alliance Atlantis Communications Corp., special voting shares, Class C (1), (3) 8,975 3,148
Village Roadshow Ltd. (Australia) 8,201,596 14,100
Village Roadshow Ltd., 5.50% preferred shares, Class A 5,722,143 7,632 .31
Cheesecake Factory Inc. (USA) (1), (3) 1,295,500 20,080 .28
Florida Panthers Holdings, Inc., Class A (USA) (3) 1,175,000 12,705
Florida Panthers Holdings, Inc., Class A (2), (3) 500,000 5,406 .26
J D Wetherspoon PLC (United Kingdom) 5,204,935 17,322 .24
Rio Hotel & Casino, Inc. (USA) (3) 1,150,000 15,884 .22
CINAR Films Inc., Class B (Canada) (3) 830,600 14,899 .21
Ruby Tuesday, Inc. (USA) 841,800 12,732 .18
Four Seasons Hotels Inc. (Canada) 599,307 12,257 .17
Hoyts Cinemas Ltd., units (Australia) 10,332,807 10,045 .14
Spelling Entertainment Group Inc. (USA) (3) 1,300,000 9,181 .13
Morton's Restaurant Group, Inc. (USA) (1), (3) 415,000 8,923 .13
SFX Entertainment, Inc., Class A (USA) (3) 260,000 8,093 .11
Gaumont SA (France) 94,835 6,295 .09
Kinowelt Medien AG (Germany) (3) 30,000 3,943 .06
Filmes Lusomundo, SA, preferred shares (Portugal) 292,500 3,757 .05
Lions Gate Entertainment Corp. (Canada) (1), (3) 2,766,667 3,355 .05
Mandarin Oriental International Ltd. (Singapore) 6,540,217 3,074 .04
Capital Corp. PLC (United Kingdom) 2,900,000 2,955 .04
Norsk Lotteridrift ASA (Norway) (1), (3) 965,000 2,480 .04
Penske Motorsports, Inc. (USA) (3) 100,000 2,175 .03
Harry Ramsden's PLC (United Kingdom) 495,115 1,471 .02
Beyond International Ltd. (Australia) (3) 1,665,742 968 .01
CinemaxX AG (Germany) (3) 32,409 932 .01
Mainframe Entertainment, Inc. (Canada) (3) 506,500 830 .01
Electronic Components - 3.82%
PMC-Sierra, Inc. (USA) (1), (3) 1,900,000 60,563 .85
Micrel, Inc. (USA) (1), (3) 1,275,000 33,788 .48
Level One Communications, Inc. (USA) (3) 1,500,000 30,188 .43
Sanmina Corp. (USA) (3) 917,000 25,791 .36
NatSteel Electronics Ltd. (Singapore) 10,500,000 23,029 .32
Venture Manufacturing (Singapore) Ltd (Singapore) 3,038,000 9,364
Venture Manufacturing (Singapore) Ltd (2) 2,710,000 8,353 .25
Littelfuse, Inc. (USA) (3) 800,000 15,900 .22
Cymer, Inc. (USA) (1), (3) 1,500,000 13,688 .19
Stoneridge, Inc. (USA) (3) 697,700 11,294 .16
Wus Printed Circuit Co., Ltd. (Taiwan) (3) 4,056,000 8,598 .12
Rogers Corp. (USA) (3) 370,000 8,279 .12
Kinpo Electronics, Inc. (Taiwan) (3) 5,100,000 7,247 .10
Unicap Electronics Industrial Corp. (Taiwan) (3) 3,388,543 4,528 .06
Elcoteq Network Corp., Class A (Finland) 468,850 3,228 .05
SAIA-Burgess Electronics AG (Switzerland) (3) 17,360 3,018 .04
Pioneer-Standard Electronics, Inc. (USA) 275,400 1,738 .03
Accton Technology Corp. (GDR) (Taiwan) (3) 375,737 1,249 .02
QPL International Holdings Ltd. (Hong Kong - Incorporated in Bermuda) 9,290,000 899 .01
Megachips Corp. (Japan) (3) 30,000 780 .01
Energy Sources - 2.92%
Ranger Oil Ltd. (Canada) (1), (3) 7,018,915 46,062 .65
Hardy Oil & Gas PLC (United Kingdom) (1) 9,058,014 25,070 .35
Oil Search Ltd. (Australia) 13,740,000 17,105
Oil Search Ltd., 9.50% convertible preferred (3) 50,000 3,097 .32
Oil Search Ltd. (2) 2,300,000 2,863
Fletcher Challenge Energy (New Zealand) 13,756,562 20,489 .29
QCT Resources Ltd. (Australia) 27,787,331 18,449 .26
Premier Oil PLC (United Kingdom) 42,825,000 18,179 .26
Encal Energy Ltd. (Canada) (3) 4,335,000 16,482 .23
Ramco Energy PLC (United Kingdom) (1) 1,597,000 11,118 .16
Cabre Exploration Ltd. (Canada) (1), (3) 1,033,400 7,621 .11
Novus Petroleum Ltd. (Australia) 4,895,605 5,079 .07
Paladin Resources NL+D513 (Australia) (1), (3) 11,270,998 3,636 .05
Arcon International Resources PLC (Ireland) (3) 11,798,000 3,205 .05
Forcenergy Inc (USA) (3) 526,300 3,059 .04
Rubis & Cie (France) 107,000 2,521 .04
Aminex PLC (Ireland) (1), (2), (3) 3,250,000 1,656 .02
Sibir Energy PLC (United Kingdom) (3) 12,193,274 1,449 .02
Anzoil NL (Australia) (3) 2,730,000 267 .00
Banking - 2.78%
Keystone Financial, Inc. (USA) 787,500 23,330 .33
Citizens Banking Corp. (USA) 700,000 23,012 .32
UST Inc. (USA) 800,000 16,900 .24
Laurentian Bank of Canada (Canada) 987,100 16,662 .23
FirstMerit Corp. (USA) 680,000 15,937 .22
Provident Bankshares Corp. (USA) 595,350 15,107 .21
Fulton Financial Corp. (USA) 684,425 13,688 .19
Commerce Bancorp, Inc. (USA) 305,687 12,094 .17
AMCORE Financial, Inc. (USA) 524,400 11,930 .17
Yapi ve Kredi Bankasi AS (Turkey) 552,522,220 6,276
Yapi ve Kredi Bankasi AS, receipts (3) 436,492,553 4,958 .16
Imperial Bancorp (USA) (3) 718,200 10,863 .15
Banco de Galicia y Buenos Aires SA, Class B (ADR) (Argentina) 652,982 10,366 .15
Bank Handlowy w Warszawie SA (GDR) (Poland) 950,000 9,738 .14
BankUnited Financial Corp., Class A (USA) (3) 620,000 6,820 .10
Chemicals - 2.66%
Valspar Corp. (USA) 1,281,000 38,350 .54
Cambrex Corp. (USA) (1) 1,400,000 32,988 .46
OM Group, Inc. (USA) 1,050,000 29,597 .42
Airgas, Inc. (USA) (3) 2,269,500 27,518 .39
Ionics, Inc. (USA) (3) 750,000 19,875 .28
McWhorter Technologies, Inc. (USA) (1), (3) 706,000 14,252 .20
Georgia Gulf Corp. (USA) 550,300 8,598 .12
Kalon Group PLC (United Kingdom) 5,932,800 8,462 .12
Gurit-Heberlein AG (Switzerland) 3,000 6,629 .09
Landec Corp. (USA) (1), (3) 690,000 2,717 .04
Real Estate - 2.60%
Unibail (France) 459,000 64,296 .90
Castellum AB (Sweden) (1) 2,515,000 24,857 .35
Newhall Land and Farming Co. (USA) 850,000 19,869 .28
Cadiz Land Co., Inc. (USA) (1), (3) 2,122,000 17,772 .25
CCA Prison Realty Trust (USA) 915,700 16,483 .23
TBI PLC (United Kingdom) 9,718,400 16,172 .23
Sponda Oyj (Finland) (3) 1,330,000 8,895 .12
Diligentia AB (Sweden) 800,000 6,785 .10
Wiggins Group PLC (United Kingdom) (3) 30,868,000 5,864
Wiggins Group PLC, subscription rights (3) 2,057,866 17 .08
Asticus AB (Sweden) (3) 400,000 3,979 .06
Data Processing & Reproduction - 2.45%
HNC Software Inc. (USA) (1), (3) 1,595,000 64,797 .91
Macromedia, Inc. (USA) (3) 1,700,000 27,625 .39
Platinum Software Corp. (USA) (1), (3) 1,625,000 16,656 .23
Datacraft Asia Ltd. (Singapore) 4,489,000 12,120 .17
PictureTel Corp. (USA) (3) 1,500,000 9,656 .14
Scient Corp., convertible preferred, Series B (USA) (2), (3), (4) 1,417,323 9,000 .13
Primax Electronics Ltd. (Taiwan) 4,345,428 7,814 .11
Remedy Corp. (USA) (3) 860,000 7,740 .11
Edify Corp. (USA) (1), (3) 1,055,000 7,121 .10
Gretag Imaging Group (Switzerland) (3) 85,000 6,405 .09
Indus Group, Inc. (USA) (3) 860,000 4,193 .06
Acer Computer International Ltd. (Singapore) 2,300,000 587 .01
Electronic Instruments - 2.36%
Plantronics, Inc. (USA) (3) 575,000 27,708 .39
L-3 Communications Corp. (USA) (3) 550,000 21,828 .31
LoJack Corp. (USA) (1), (3) 1,347,000 14,480 .20
Disco Corp. (Japan) 709,000 13,761 .19
Trimble Navigation Ltd. (USA) (1), (3) 1,250,000 12,578 .18
Etec Systems, Inc. (USA) (3) 460,000 11,989 .17
ThermoQuest Corp. (USA) (3) 1,010,000 9,848 .14
Milltronics Ltd.-Milltronics Ltee (Canada) (1), (3) 900,000 8,791 .12
ANTEC Corp. (USA) (3) 570,000 8,764 .12
ITI Technologies, Inc. (USA) (3) 342,600 8,222 .12
Mercury Computer Systems, Inc. (USA) (3) 490,000 7,656 .11
Horiba, Ltd. (Japan) 803,000 7,470 .11
Harmonic Lightwaves, Inc. (USA) (3) 300,000 3,675 .05
Lumonics Inc. (Canada) (3) 710,000 3,630 .05
ASM Pacific Technology Ltd. (Hong Kong) 13,969,000 3,533 .05
Micronic Laser Systems AB (Sweden) (2), (3), (4) 400,000 1,938 .03
Vivid Technologies, Inc. (USA) (3) 200,000 1,419 .02
Voice Control Systems, Inc. (USA) (3) 175,000 295 .00
Food & Household Products - 1.96%
Metro-Richelieu Inc., Class A (Canada) 2,307,900 27,534 .39
Fyffes PLC, 8.25% convertible preferred (Ireland) 4,650,000 10,075
Fyffes PLC 4,600,000 7,904 .26
Geest PLC (United Kingdom) 2,250,000 16,333 .23
Nutreco Holding NV (Netherlands) 427,658 15,821 .22
Royal Canin SA (France) (3) 272,000 13,687 .19
Grupo Industrial Maseca, SA de CV, Class B (ADR) (Mexico) 1,272,500 13,043 .19
LDC SA (France) 47,000 9,226 .13
Celestial Seasonings, Inc. (USA) (1), (3) 520,000 7,865 .11
Devro PLC (United Kingdom) 1,500,000 6,240 .09
Ben & Jerry's Homemade, Inc., Class A (USA) (3) 300,000 4,462 .06
Karlshamns AB (Sweden) 616,000 4,360 .06
Tingyi (Cayman Islands) Holding Corp., 1.625% convertible debentures 2002 $6,000,000 2,340 .03
(China-Incorporated in the Cayman Islands)
Insurance - 1.82%
Independent Insurance Group PLC (United Kingdom) 8,150,000 37,503 .53
Mutual Risk Management Ltd. (USA-Incorporated in Bermuda) 800,000 28,300 .40
HCC Insurance Holdings, Inc. (USA) 1,290,000 24,994 .35
Harleysville Group Inc. (USA) 552,900 11,403 .16
LandAmerica Financial Group, Inc. (USA) 200,000 10,250 .14
Selective Insurance Group, Inc. (USA) 390,000 7,459 .10
Unipol Priv (Italy) 2,220,000 5,510 .08
Lindsey Morden Group Inc. (Canada) 230,000 3,015 .04
HIH Winterthur International Holdings Ltd. (Australia) 882,048 1,072 .02
Machinery & Engineering - 1.62%
KCI Konecranes International Corp. (Finland) (1) 911,700 35,887 .51
Svedala Industri AB (Sweden) 1,418,000 21,700 .30
Thermo Fibertek Inc. (USA) (3) 1,452,000 11,072
Thermo Fibertek Inc., 4.50% convertible debentures 2004 (2) $4,000,000 3,520 .20
SIG Swiss Industrial Co. Holding Ltd. (Switzerland) 22,280 12,267 .17
Crompton & Knowles Corp. (USA) 671,200 9,774 .14
Hussmann International, Inc. (USA) 600,000 8,513 .12
Miura Co., Ltd. (Japan) 500,000 6,043 .09
Powerscreen International PLC (United Kingdom) 3,550,000 5,425 .08
UMW Holdings Bhd. (Malaysia) (4) 2,505,500 877 .01
Transportation: Shipping - 1.56%
ICB Shipping AB, Class B (Sweden) 1,969,000 16,322 .23
MIF Ltd. (Greece) (1), (3) 682,902 13,853 .20
Stolt-Nielsen SA, Class B (ADR) (Multinational) 1,040,000 12,220 .17
Nordic American Tanker Shipping Ltd. (Bermuda) (1) 733,500 9,352 .13
Ugland International Holdings PLC (United Kingdom) (1) 7,342,000 9,038 .13
Great Eastern Shipping Co. Ltd. (India) (1) 14,402,500 7,766
Great Eastern Shipping Co. Ltd. (GDR) (1) 325,500 773 .12
Odfjell ASA, Class B (Norway) 445,000 4,694
Odfjell ASA, Class A 214,320 2,203 .10
N & T Argonaut AB, Class B (Sweden) (3) 7,703,790 5,993 .08
Bona Shipholding Ltd. (Norway) (3) 913,332 4,817 .07
Benor Tankers Ltd. (Norway) (1) 1,240,000 4,192 .06
Frontline Ltd. (formerly London & Overseas Freighters Ltd.) (Bermuda) (3) 4,833,000 4,103 .06
Shipping Corp. of India Ltd. (India) 5,391,600 3,632 .05
Knightsbridge Tankers Ltd. (Bermuda) 150,000 3,225 .04
Orient Overseas (International) Ltd. (Hong Kong - Incorporated in Bermuda) 8,800,000 3,067 .04
Wah Kwong Shipping Holdings Ltd. (Hong Kong) 5,713,000 2,138 .03
Mosvold Shipping Ltd. (Norway) (3) 2,580,000 1,291 .02
IMC Holdings Ltd. (Hong Kong) 11,000,000 1,278 .02
Waterfront Shipping ASA (Norway) (3) 3,411,000 461 .01
WABO ASA (Norway) (3) 3,411,000 115 .00
Industrial Components - 1.56%
Superior TeleCom Inc. (USA) 750,000 36,281 .51
Senior Engineering Group PLC (United Kingdom) 10,100,000 20,580 .29
Tower Automotive, Inc. (USA) (3) 805,400 15,907 .23
Material Sciences Corp. (USA) (1), (3) 1,000,000 8,750 .12
Hayes Lemmerz International, Inc. (USA) (3) 300,000 8,212 .12
Koito Manufacturing Co., Ltd. (Japan) 1,670,000 6,727 .10
BREED Technologies, Inc. (USA) 500,000 3,063
BTI Capital Trust, 6.50% convertible preferred (USA) (2) 125,000 2,438 .07
Applied Industrial Technologies, Inc. (USA) 300,000 4,894 .07
Roper Industries, Inc. (USA) 150,000 2,606 .04
Innovative International (Holdings) Ltd. (Hong Kong) 7,075,104 1,004
Innovative International (Holdings) Ltd., warrants, expire 8/31/1999 (3) 1 0 .01
Financial Services - 1.52%
OM Gruppen AB (Sweden) (1) 4,329,300 74,535 1.05
CB Richard Ellis Services Inc. (formerly CB Commercial Real Estate Services 1,042,800 20,921 .30
Group, Inc.) (USA) (1), (3)
American Capital Strategies, Ltd. (USA) 325,000 5,261 .07
Medallion Financial Corp. (USA) 275,000 4,331 .06
Insignia Financial Group, Inc., Class A (USA) (3) 300,000 2,963 .04
Recreation & Other Consumer Products - 1.49%
VTech Holdings Ltd. (Hong Kong) 5,925,000 23,628 .33
Infogrames Entertainment (France) (3) 343,000 18,423
Infogrames Entertainment, 2.00% convertible debentures 2002 $9,272 2,479 .30
Infogrames Entertainment, warrants, expire 2001 (3) 25,500 182
Midway Games Inc. (USA) (3) 1,593,400 18,623 .26
ACTIVISION, Inc. (USA) (1), (3) 645,000 7,256
ACTIVISION, Inc. (1), (2), (3) 570,000 6,413 .19
Galoob Toys, Inc. (USA) (3) 900,000 10,237 .14
Movado Group, Inc. (USA) 440,000 9,240 .13
Acclaim Entertainment, Inc. (USA) (3) 750,000 4,781 .07
Safety 1st, Inc. (USA) (1), (3) 460,000 2,473 .04
Crystal Dynamics, Inc., convertible preferred, Series D (USA) (2), (3), (4) 533,334 2,000 .03
Telecommunications - 1.29%
SkyTel Communications Inc. (formerly Mobile Telecommunications Technologies 3,725,000 67,516 .95
Corp.) (USA) (1), (3)
Cellular Communications International, Inc., 6.00% convertible debentures $7,500,000 11,475 .16
2005 (USA) (2)
Global TeleSystems Group, Inc. (USA) (3) 175,000 5,906 .08
CESKE RADIOKOMUNIKACE AS (GDR) (Czech Republic) (3) 113,300 2,934 .04
Nera ASA (Norway) 2,020,900 2,514 .04
TelDaFax AG (Germany) (3) 30,000 1,204 .02
Beverages & Tobacco - 1.28%
Beringer Wine Estates Holdings, Inc., Class B (USA) (3) 708,000 27,125 .38
Brau und Brunnen AG (Germany) (3) 146,000 15,737 .22
Corporate Investments Ltd. (New Zealand) (1) 27,900,000 12,132 .17
Oy Hartwall AB, Class A (Finland) 1,105,950 11,966 .17
Robert Mondavi Corp., Class A (USA) (3) 500,000 11,156 .16
Quilmes Industrial SA, preferred shares (ADR) (Argentina) 700,000 5,731 .08
AL-Ahram Beverages Co. (GDR) (Egypt) 120,000 3,780 .05
Guinness Anchor Bhd. (Malaysia) (4) 4,271,000 2,171 .03
San Miguel Brewery Hong Kong Ltd. (Hong Kong) 10,410,000 1,008 .02
Miscellaneous Materials & Commodities - 0.96%
Intertape Polymer Group Inc. (Canada) (1) 1,500,000 27,187 .38
Buckeye Technologies Inc. (USA) (3) 900,000 16,256 .23
Hog Hoganas AB, Class B (Sweden) 497,500 7,550 .11
Arisawa Manufacturing Co. (Japan) 680,000 6,475 .09
Carbide/Graphite Group, Inc. (USA) (1), (3) 511,800 5,694 .08
Ashton Mining Ltd. (Australia - Incorporated in Bermuda) 7,600,000 3,244 .05
PT PP London Sumatra Indonesia (Indonesia) 6,486,400 673 .01
New Indigo Resources Inc. (Canada) (3) 600,000 590 .01
Sinocan Holdings Ltd. (Hong Kong - Incorporated in Bermuda) 36,608,000 369 .00
Vilmorin & Cie SA (France) 3,186 321 .00
Textiles & Apparel - 0.70%
Wolford Group (Austria) (1) 324,000 19,383 .27
Esprit Asia Holdings Ltd. (Hong Kong) 39,314,000 11,923 .17
Hartmarx Corp. (USA) (1), (3) 1,787,900 11,733 .17
Culp, Inc. (USA) 635,000 5,040 .07
PT Indo-Rama Synthetics (Indonesia) 8,952,700 845 .01
Saha-Union Corp. Ltd. (Thailand) 1,991,000 618 .01
Construction & Housing - 0.64%
Societe Generale d'Entreprises (France) 815,000 30,468 .43
Palm Harbor Homes, Inc. (USA) (3) 604,101 15,027 .21
Wholesale & International Trade - 0.64%
Brightpoint, Inc. (USA) (1), (3) 2,732,500 21,006 .30
United Natural Foods, Inc. (USA) (3) 425,000 10,837 .15
Daewoo Corp., 0.50% convertible debentures 2007 (South Korea) $5,000,000 3,650
Daewoo Corp. 1,400,000 2,450 .09
Lazare Kaplan International Inc. (USA) (1), (3) 550,000 4,263 .06
Kamei Corp. (Japan) 637,000 3,140 .04
Electrical & Electronics - 0.63%
Elsag Bailey Process Automation NV (Netherlands) (3) 613,300 12,918 .18
Johnson Electric Holdings Ltd. (Hong Kong - Incorporated in Bermuda) 5,088,000 9,653 .14
Tandberg Television AS (Norway) (3) 1,061,500 7,321 .10
ERG Ltd. (Australia) 8,014,840 5,939 .09
Gilat Satellite Networks Ltd. (Israel) (3) 100,000 4,500 .06
Astec (BSR) PLC (United Kingdom) 1,900,000 1,548 .02
Muhlbauer Holding AG & Co. KGaA (Germany) (3) 15,000 1,214 .02
Advanced Systems Automation Ltd. (Singapore) 2,250,000 894 .01
Powerwave Technologies, Inc. (USA) (3) 70,000 595 .01
Building Materials & Components - 0.56%
Puerto Rican Cement Co., Inc. (USA) (1) 371,000 16,417 .23
Futuris Corp. Ltd. (Australia) 10,553,316 8,821 .13
Radex-Heraklith Industriebeteiligungs AG (Austria) 225,000 7,352 .10
Apasco, SA de CV (Mexico) 1,322,620 3,822 .05
Cia. Cimento Portland Itau, preferred shares (Brazil) 23,200,000 3,228 .05
Utilities: Electric & Gas - 0.52%
Australian Gas Light Co. (Australia) 3,895,920 26,836 .38
Centrais Eletricas de Santa Catarina SA - CELESC (Brazil) 13,500,000 6,150 .09
Cia. de Eletricidade do Estado da Bahia - COELBA (Brazil) 92,000,000 2,794 .04
Espirito Santo Centrais Eletricas SA - ESCELSA, ordinary nominative (Brazil) 17,460 884 .01
Metals: Nonferrous - 0.47%
Kaiser Aluminum Corp. (USA) (3) 1,850,000 11,331 .16
Century Aluminium Co. (USA) 735,000 7,901 .11
Gencor Ltd. (South Africa) 4,000,000 7,192 .10
Capral Aluminium Ltd. (Australia) 3,091,177 3,736 .05
QNI Ltd. (Australia) 5,840,000 3,220 .05
Appliances & Household Durables - 0.41%
Pittway Corp., Class A (USA) 916,000 21,870 .31
Otsuka Kagu Ltd. (Japan) (3) 143,300 7,137 .10
Energy Equipment - 0.35%
Shaw Industries Ltd., Class A (Canada) 1,493,700 11,309 .16
Petroleum Geo-Services ASA (ADR) (Norway) (3) 523,800 8,315 .12
Smedvig ASA, Class A (Norway) 538,800 4,955 .07
Multi-Industry - 0.33%
Corporacion Financiera Alba, SA (Spain) 178,449 21,530 .30
Aboitiz Equity Ventures (Philippines) (3) 86,063,940 2,018 .03
Equity Common Trusts - 0.30%
Atle AB, Class A (Sweden) 1,590,000 20,987 .30
Aerospace & Military Technology - 0.29%
Alvis PLC (United Kingdom) (1) 4,831,250 17,883 .25
Orbital Sciences Corp., 5.00% convertible debentures 2002 (USA) (2) $2,500,000 2,969 .04
Transportation: Rail & Road - 0.20%
Werner Enterprises, Inc. (USA) 500,000 7,875 .11
Tranz Rail Holdings Ltd. (ADR) (New Zealand) 1,051,200 4,205 .06
M.S. Carriers, Inc. (USA) (3) 105,700 2,101 .03
Forest Products & Paper - 0.18%
Caraustar Industries, Inc. (USA) 465,400 10,588 .15
PT Indah Kiat Pulp & Paper Corp. Tbk (Indonesia) 8,707,000 1,253 .02
Deltic Timber Corp. (USA) 42,100 758 .01
Gold Mines - 0.08%
Ashanti Goldfields Co. Ltd. (Ghana) 400,000 3,470 .05
Avocet Mining PLC (United Kingdom) (1), (2), (3) 2,750,000 864
Avocet Mining PLC (1), (3) 1,100,000 345 .02
Philippine Gold PLC (United Kingdom) (1), (3) 4,953,700 1,009 .01
Banro Resource Corp. (Canada) (3) 370,000 158
Banro Resource Corp., warrants, expire 1999 (3), (4) 295,000 101 .00
Metals: Steel - 0.05%
Tubos de Acero de Mexico, SA (ADR) (Mexico) 335,547 2,433 .03
Ispat Industries Ltd., 3.00% convertible debentures 2001 (India) $4,000,000 1,480 .02
Automobiles - 0.05%
Mahindra & Mahindra Ltd. (India) 550,000 2,367
Mahindra & Mahindra Ltd. (GDR) 250,000 1,025 .05
Transportation: Airlines - 0.00%
Philippine Airlines Inc. (Philippines) (3), (4) 64,494,643 0 .00
PR Holdings, Inc., subscription rights (Philippines) (2), (3), (4) 1,730,000 0 .00
Miscellaneous - 4.81%
Other equity securities in initial period of acquisition 342,052 4.81
TOTAL EQUITY SECURITIES (cost: $6,724,827,000) ----- -----
6,166,636 86.83
----- -----
Principal Market Percent
Amount Value of Net
SHORT-TERM SECURITIES (000) (000) Assets
Corporate Short-Term Notes - 9.50%
Dresdner U.S. Finance Inc. 5.50% due 10/5-10/7/98 $79,923 1.13
Canada Bills 5.32%-5.47% due 10/19-12/2/98 79,500 78,884 1.11
Commonwealth Bank of Australia 5.42%-5.515% due 10/6-12/14/98 73,000 72,842 1.03
Reed Elsevier Inc. 5.31%-5.49% due 10/9-12/15/98 (2) 70,000 69,561 .98
Daimler-Benz North America Corp. 5.33%-5.51% due 10/15-12/21/98 65,800 65,405 .92
Svenska Handelsbanken Group 5.33%-5.50% due 11/4-12/14/98 61,700 61,251 .86
Rio Tinto America Inc. 5.40%-5.52% due 10/23-12/7/98 (2) 60,350 59,984 .85
National Australia Funding (Delaware) Inc. 5.48%-5.50% due 10/22-10/26/98 55,500 55,298 .78
International Lease Finance Corp. 5.39%-5.50% due 10/6-11/20/98 46,632 46,392 .65
Ford Motor Credit Co. 5.50%-5.52% due 10/5-10/19/98 31,600 31,558 .44
Panasonic Finance Inc. 5.47% due 11/9/98 (2) 27,430 27,263 .38
BP America Inc. 5.32%-5.49% due 10/8-12/14/98 26,375 26,274 .37
Federal Agency Discount Notes - 3.80%
Freddie Mac 4.95%-5.45% due 10/1/98-2/24/99 161,581 159,568 2.25
Fannie Mae 5.40%-5.43% due 10/5-10/30/98 61,400 61,255 .86
Federal Home Loan Banks 5.08% due 2/12/99 50,000 49,062 .69
Non-U.S. Currency - 0.05%
New Taiwanese Dollar NT$118,204 3,456 .05
----- -----
TOTAL SHORT-TERM SECURITIES (cost: $948,686,000) 947,976 13.35
----- -----
TOTAL INVESTMENT SECURITIES (cost: $7,673,513,000) 7,114,612 100.18
Excess of payables over cash and receivables 13,052 .18
----- -----
NET ASSETS $7,101,560 100.00
===== =====
1 Represents an affiliated company as defined under the
Investment Company Act of 1940.
2 Purchased in a private placement transaction; resale to the public may
require registration or sale only to qualified institutional buyers.
3 Non-income-producing securities.
4 Valued under procedures established by the Board of Directors.
ADR = American Depositary Receipts
GDR = Global Depositary Receipts
The descriptions of the companies shown in the portfolio,
which were obtained from published reports and other sources
believed to be reliable, are supplemental and are not
covered by the Independent Auditors' Report.
See Notes to Financial Statements
</TABLE>
EQUITY-TYPE SECURITIES APPEARING IN THE
PORTFOLIO SINCE MARCH 31, 1998
Aaron Rents
Acer Computer International
Advanced Systems Automation
Alarmguard Holdings
American Capital Strategies
Asticus
Banro Resource
Bellsystem24
Brau und Brunnen
Bright Horizons Family Solutions
Buckeye Technologies
Cambridge Technology Partners (Massachusetts)
Casella Waste Systems
CCA Prison Realty Trust
CDnow
Centrais Eletricas de Santa Catarina - CELESC
CESKE RADIOKOMUNIKACE
CHUM
CinemaxX
Computer Motion
EM.TV & Merchandising
Espirito Santo Centrais Eletricas - ESCELSA
Fujitsu Support and Service
Indah Kiat Pulp & Paper
Gretag Imaging Group
Insignia/ESG Holdings
Intentia International
International Broadcasting
Ionics
Kinowelt Medien
Kinpo Electronics
Komori
Kroll-O'Gara
L-3 Communications
LandAmerica Financial Group
Laurentian Bank of Canada
L.D.C.
Learning Tree International
Lindsey Morden Group
Megachips
Muhlbauer Holding
Nature's Sunshine Products
Ocular Sciences
Otsuka Kagu
P4 Radio Hele Norge
Paladin Resources
ProBusiness Services
Regis
Remedy
Roper Industries
Royal Canin
Ruby Tuesday
SAIA-Burgess Electronics
Scient
SFX Entertainment
Shipping Corp. of India
Sibir Energy
Sponda
SportsLine USA
Taylor Nelson Sofres
T. Eaton
TelDaFax
Trigon Healthcare
Unicap Electronics Industrial
United Natural Foods
USWeb
Venture Manufacturing (Singapore)
Vilmorin
VTech Holdings
WABO
Warrantech
EQUITY-TYPE SECURITIES ELIMINATED FROM
THE PORTFOLIO SINCE MARCH 31, 1998
Abacan Resource
Ackerley Group
Acuson
Advanced Health
Aldeasa
Alliance Semiconductor
Allied Waste Industries
Alpha-Beta Technology
Alternative Resources
America West Holdings
American Radio Systems
ANADIGICS
Banta
Bell & Howell
BET Holdings
Black Sea Energy
Blue Range Resource
Borg-Warner Security
Camco International
Capex
Carolina First
Cash Converters International
Celeritek
Cerner
Championship Auto Racing Teams
Chauvco Resources
China-Hongkong Photo Products Holdings
CIDCO
COLT Telecom Group
Cultus Petroleum
Dah Sing Financial Holdings
DEKALB Genetics
Dialog
D'Ieteren
Digital Microwave
Dorling Kindersley Holdings
Dr Solomon's Group
Eagle USA Airfreight
Eidos
Energen
Epicore Networks
ERAMET
Federal-Mogul
First Midwest Bancorp
First Pacific Networks
Flughafen Wien
Fresh Del Monte Produce
Gargoyles
Gedeon Richter
Gemstar International Group
Globalstar Telecommunications
Golden Harvest Entertainment Holdings
Guinness Peat Group
HealthPlan Services
Hibbett Sporting Goods
ImmuLogic Pharmaceutical
Immune Response
Industriforvaltnings AB Kinnevik
InSite Vision
IntelliQuest Information Group
International Bank of Asia
International Precious Metals
Kolbenschmidt
Komag
Kos Pharmaceuticals
Larscom
Liberty
Life Medical Sciences
Lite-On Technology
Louis Dreyfus Natural Gas
Mastering
Mentor Graphics
MicroAge
Millennium Pharmaceuticals
Modern Photo Film
MoneyGram Payment Systems
More Group
Mulia Industrindo
Munters
Mycogen
Nasionale Pers Beperk
National Surgery Centers
Navan Resources
Neurocrine Biosciences
Newalta
NPS Pharmaceuticals
NuCo2
Paramount Resources
Pentex Energy
Pepsi-Gemex
Perkin-Elmer
Pete's Brewing
Physio-Control International
Pilipino Telephone
Pinkerton's
Precision Response
Prokom Software
Providence Resources
Rambus
Read-Rite
S3
Sadia Concordia
Schibsted
SIBIA Neurosciences
Silicon Gaming
Simon Transportation Services
SITEL
Smithfield Foods
SoftQuad International
St. John Knits
Standard Products
Sterling Financial
Swift Transportation
Talbots
Tandy Brands Accessories
TCI Music
TeleTech Holdings
Thermo Power
Thomas Group
Ticketmaster Group
Tidnings AB Marieberg
Tokyo Seimitsu
Triple P
ValueVision International
Washington Federal Savings and Loan
WMS Industries
Young Broadcasting
Yue Yuen Industrial Holdings
<TABLE>
SMALLCAP World Fund
FINANCIAL STATEMENTS
- ---------------------------------------- -----------------------
<S> <C> <C>
Statement of Assets and Liabilities
at September 30, 1998 (dollars inthousands)
- ---------------------------------------- -----------------------
Assets:
Investment securities at market:
Unaffiliated issuers (cost: $ 6,116,139) $5,651,249
Affiliated issuers (cost: $ 1,557,374) 1,463,363
$7,114,612
Cash 5,377
Receivables for -
Sales of investments 27,804
Sales of fund's shares 5,394
Dividends and interest 9,986 43,184
-----------------------
7,163,173
Liabilities:
Payables for -
Purchases of investments 42,790
Repurchases of fund's shares 12,884
Forward currency contract 100
Management services 3,987
Other expenses 1,852 61,613
-----------------------
Net Assets at September 30, 1998 -
Equivalent to $22.14 per share on
320,741,224 shares of $0.01 par value
capital stock outstanding (authorized
capital stock - 400,000,000 shares) $7,101,560
============
Statement of Operations
for the year ended September 30, 1998 (dollars inthousands)
- ---------------------------------------- -----------------------
Investment Income:
Income:
Dividends (includes $ 13,438 from affiliates) $ 70,684
Interest 45,865 $ 116,549
------------
Expenses:
Management services fee 59,135
Distribution expenses 20,206
Transfer agent fee 8,036
Reports to shareholders 509
Registration statement and
prospectus 840
Postage, stationery and supplies 1,701
Directors' fees 144
Auditing and legal fees 81
Custodian fee 1,608
Taxes other than federal income tax 222
Other expenses 258 92,740
-----------------------
Net investment income 23,809
------------
Realized Gain and Unrealized
Depreciation on Investments:
Net realized gain (including $ 3,422 net gain from affiliates) 493,492
Change from unrealized appreciation to
unrealized depreciation on investments:
Beginning of year 1,865,216
End of year (558,923)
Net unrealized depreciation on investments -----------(2,424,139)
------------
Net realized gain and unrealized depreciation
on investments (1,930,647)
------------
Net Decrease in Net Assets Resulting
from Operations $ (1,906,838)
============
Statement of Changes in Net
Assets (dollars inthousands)
- ---------------------------------------- ------------------------
Year ended September 30
1998 1997
-----------------------
Operations:
Net investment income $ 23,809 $ 30,264
Net realized gain on investments 493,492 756,663
Net unrealized (depreciation) appreciation
on investments (2,424,139) 1,029,222
-----------------------
Net (decrease) increase in net assets
resulting from operations (1,906,838) 1,816,149
-----------------------
Dividends and Distributions Paid
to Shareholders:
Dividends from net
investment income (15,213) (32,129)
Distributions from net realized
gain on investments (760,633) (591,521)
-----------------------
Total dividends and
distributions (775,846) (623,650)
-----------------------
Capital Share Transactions:
Proceeds from shares sold:
54,562,618 and 76,906,660
shares, respectively 1,498,043 2,051,195
Proceeds from shares issued in
reinvestment of net investment
income dividends and
distributions of net realized
gain on investments:
29,239,348 and 23,876,950
shares, respectively 743,523 597,206
Cost of shares repurchased:
64,322,473 and 44,913,003
shares, respectively (1,713,474)(1,191,845)
-----------------------
Net increase in net assets
resulting from capital share
transactions 528,092 1,456,556
-----------------------
Total (Decrease) Increase in Net Assets (2,154,592) 2,649,055
Net Assets:
Beginning of year 9,256,152 6,607,097
-----------------------
End of year (including undistributed
net investment income: $21,487 and
$14,749, respectively) $7,101,560 $9,256,152
=======================
See Notes to Financial Statements
</TABLE>
SMALLCAP WORLD FUND
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - SMALLCAP World Fund, Inc. (the "fund") is registered under
the Investment Company Act of 1940 as an open-end, diversified management
investment company. The fund seeks long-term growth of capital through
investments in smaller companies in the U.S. and around the world.
SIGNIFICANT ACCOUNTING POLICIES - The following is a summary of the
significant accounting policies consistently followed by the fund in the
preparation of its financial statements:
SECURITY VALUATION - 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. 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 their representative
quoted bid and asked prices. Securities and assets for which representative
market quotations are not readily available are valued at fair value as
determined in good faith by a committee appointed by the Board of Directors.
NON-U.S. CURRENCY TRANSLATION - Assets or liabilities initially expressed
in terms of non-U.S. currencies are translated into U.S. dollars at the
prevailing market rates at the end of the reporting period. Purchases and sales
of securities and income and expenses are translated into U.S. dollars at the
prevailing market rates on the dates of such transactions. The effects of
changes in non-U.S. currency exchange rates on investment securities are
included with the net realized and unrealized gain or loss on investment
securities.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - As is customary in
the mutual fund industry, securities transactions are accounted for on the date
the securities are purchased or sold. In the event the fund purchases
securities on a delayed delivery or "when-issued" basis, it will segregate with
its custodian liquid assets in an amount sufficient to meet its payment
obligations in these transactions. Realized gains and losses from securities
transactions are reported on an identified cost basis. Dividend and interest
income is reported on the accrual basis. Discounts and premiums on securities
purchased are amortized.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions
paid to shareholders are recorded on the ex-dividend date.
FORWARD CURRENCY CONTRACTS - The fund may enter into forward currency
contracts, which represent agreements to exchange currencies of different
countries at specified future dates at specified rates. The fund enters into
these contracts to reduce its exposure to fluctuations in foreign exchange
rates arising from investments denominated in non-U.S. currencies. The fund's
use of forward currency contracts involves market risk in excess of the amount
recognized in the statement of assets and liabilities. The contracts are
recorded in the statement of assets and liabilities at their net unrealized
value. The fund records realized gains or losses at the time the forward
contract is closed or offset by a matching contract. The face or contract
amount in U.S. dollars reflects the total exposure the fund has in that
particular contract. Risks may arise upon entering these contracts from the
potential inability of counterparties to meet the terms of their contracts and
from possible movements in non-U.S. exchange rates and securities values
underlying these instruments.
2. FEDERAL INCOME TAXATION - 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 September 30, 1998, net unrealized depreciation on investments,
excluding forward currency contracts, for book and federal income tax purposes
aggregated $558,901,000, of which $1,107,145,000 related to appreciated
securities and $1,666,046,000 related to depreciated securities. During the
year ended September 30, 1998, the fund realized, on a tax basis, a net capital
gain of $494,278,000 on securities transactions. Net losses related to non-U.S.
currency transactions of $844,000 were treated as an adjustment to ordinary
income for federal income tax purposes. In addition, the fund has deferred, for
tax purposes, to fiscal year ending September 30, 1999, the recognition of
losses related to non-U.S. currency transactions totaling $1,114,000 which were
realized during the period November 1, 1997 through September 30, 1998. The
cost of portfolio securities, excluding forward currency contracts, for book
and federal income tax purposes was $7,673,513,000 at September 30, 1998.
3. FEES AND TRANSACTIONS WITH RELATED PARTIES
INVESTMENT ADVISORY FEE - The fee of $59,135,000 for management services
was incurred pursuant to an agreement with Capital Research and Management
Company (CRMC), with which certain officers and Directors of the fund are
affiliated. The Investment Advisory and Service Agreement provides for monthly
fees, accrued daily, based on an annual rate of 0.80% of the first $1 billion
of average net assets; 0.70% of such assets in excess of $1 billion but not
exceeding $2 billion; 0.67% of such assets in excess of $2 billion but not
exceeding $3 billion; 0.65% of such assets in excess of $3 billion but not
exceeding $5 billion; 0.635% of such assets in excess of $5 billion but not
exceeding $8 billion; and 0.625% of such assets in excess of $8.0 billion. The
Board of Directors has approved an amended Investment Advisory and Service
Agreement, effective December 1, 1998, which provides for reduced fees at the
following annual rates: 0.625% of average net assets in excess of $8.0 billion
but not exceeding $13.0 billion; and 0.615% of such assets in excess of $13.0
billion.
DISTRIBUTION EXPENSES - Pursuant to a Plan of Distribution, the fund may
expend up to 0.30% of its average net assets annually for any activities
primarily intended to result in sales of fund shares, provided the categories
of expenses for which reimbursement is made are approved by the fund's Board of
Directors. Fund expenses under the Plan include payments to dealers to
compensate them for their selling and servicing efforts. During the year ended
September 30, 1998, distribution expenses under the Plan were $20,206,000. As
of September 30, 1998, accrued and unpaid distribution expenses were
$1,340,000.
TRANSFER AGENT FEE - American Funds Service Company (AFS), the transfer
agent for the fund, was paid a fee of $8,036,000. American Funds Distributors,
Inc. (AFD), the principal underwriter of the fund's shares, received $4,795,000
(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.
DEFERRED DIRECTORS' FEES - Directors who are unaffiliated with CRMC may
elect to defer part or all of the fees earned for services as members of the
Board. Amounts deferred are not funded and are general unsecured liabilities
of the fund. As of September 30, 1998, aggregate amounts deferred and earnings
thereon were $164,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both
wholly owned subsidiaries of CRMC. Certain Directors and officers of the fund
are or may be considered to be affiliated with CRMC, AFS and AFD. No such
persons received any remuneration directly from the fund.
4. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES
The fund made purchases and sales of investment securities, excluding
short-term securities, of $3,530,362,000 and $3,738,425,000, respectively,
during the year ended September 30, 1998.
As of September 30, 1998, accumulated undistributed net realized gain on
investments was $456,466,000 and additional paid-in capital was $7,179,323,000.
The fund reclassified $1,858,000 of currency losses from undistributed net
realized gains to undistributed net investment income for the year ended
September 30, 1998.
Pursuant to the custodian agreement, the fund receives credits against its
custodian fee for imputed interest on certain balances with the custodian bank.
The custodian fee of $1,608,000 includes $115,000 that was paid by these
credits rather than in cash.
Dividend and interest income is recorded net of non-U.S. taxes paid. For
the year ended September 30, 1998, such non-U.S. taxes were $5,820,000. Net
realized currency losses on dividends, interest, and withholding taxes
reclaimable, on a book basis, were $592,000 for the year ended September 30,
1998.
At September 30, 1998, the fund had outstanding forward currency contracts to
sell non-U.S. currencies as follows:
<TABLE>
<S> <C> <C> <C> <C>
Non-U.S. Currency Sale Contracts Contract Amount U.S. Valuation at 9/30/98
------ ------ ------
Unrealized
Non-U.S. U.S. Amount Depreciation
------ ------ ------ ------
Brazilian Real
expiring 10/6/98 R$ 3,701,000$ 3,000,000 $ 3,100,000 $ 100,000
</TABLE>
5. TRANSACTIONS WITH AFFILIATES - Affiliated issuers, as defined under the
Investment Company Act of 1940, are those in which the fund's holdings of an
issuer represent 5% or more of the outstanding voting securities of the issuer.
A summary of the fund's transactions in the securities of these issuers during
the year ended September 30, 1998 is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Market
Beginning Ending Dividend Value
Company Shares Purchases Sales Shares Income at 9/30/98
(000) (000)
AAPC 38,680,311 038,680,311 0 0 0
Abacan Resource 5,709,400 0 5,709,400 0 0 0
ABR Information Services 1,550,000 315,000 0 1,865,000 0 $25,527
ACTIVISION 900,000 315,000 0 1,215,000 0 13,669
Advanced Health 295,100 334,900 630,000 0 0 0
Alarmguard Holdings 360,000 0 0 360,000 0 2,610
Alliance Atlantis Communications 1,060,700 8,975 0 1,069,675 0 21,800
Alliance Semiconductor 2,510,000 75,000 2,585,000 0 0 0
Alvis 2,850,000 1,981,250 0 4,831,250 $380 17,883
American Healthcorp 522,000 0 0 522,000 0 4,209
Aminex 3,250,000 0 0 3,250,000 0 1,656
AmSurg (1) 0 559,972 0 559,972 0 0
Anesta 550,000 0 0 550,000 0 10,244
AnnTaylor (1) 955,900 580,000 1,107,500 428,400 0 0
Antena 3 de Television 1,500 0 0 1,500 0 39,207
Anzoil (1) 40,600,000 037,870,000 2,730,000 0 0
APCOA Parking 120,800 0 0 120,800 197 9,404
Ascent Entertainment Group 1,930,000 0 0 1,930,000 0 15,440
AVANT Immunotherapeutics (1) 1,300,000 200,000 0 1,500,000 0 0
Avocet Mining 2,100,000 1,750,000 0 3,850,000 0 1,209
Benor Tankers 1,240,000 0 0 1,240,000 124 4,192
Borg-Warner Security 1,000,000 200,000 1,200,000 0 0 0
Brightpoint 1,566,250 1,366,250 200,000 2,732,500 0 21,006
Cabre Exploration 993,400 40,000 0 1,033,400 0 7,621
Cadiz Land 1,915,000 207,000 0 2,122,000 0 17,772
Cambrex 550,000 850,000 0 1,400,000 147 32,988
Capral Aluminium (1) 12,237,825 124,669 9,271,317 3,091,177 632 0
Carbide/Graphite Group 511,800 0 0 511,800 0 5,694
Cardiovascular Diagnostics (1) 412,500 0 80,300 332,200 0 0
Cash Converters International 9,417,563 0 9,417,563 0 182 0
Castellum 2,375,000 140,000 0 2,515,000 706 24,857
CB Richard Ellis Services 500,000 542,800 0 1,042,800 0 20,921
Celestial Seasonings 260,000 260,000 0 520,000 0 7,865
Chauvco Resources 2,061,300 3,061,300 5,122,600 0 0 0
Cheesecake Factory 450,000 845,500 0 1,295,500 0 20,080
Chrysalis Group 1,824,000 0 0 1,824,000 88 17,499
CIDCO 913,000 0 913,000 0 0 0
CIMA LABS 565,500 51,700 0 617,200 0 1,774
Computer Motion 346,000 88,900 0 434,900 0 3,833
Consolidated Products 1,000,000 250,000 0 1,250,000 0 21,953
COR Therapeutics (1) 1,150,000 200,000 402,700 947,300 0 0
Corporate Investments 25,500,000 2,400,000 027,900,000 230 12,132
Corporate Services Group 10,060,398 3,031,700 013,092,098 1,296 40,571
Cost Plus 0 500,000 0 500,000 0 13,313
Cyberonics (1) 864,800 0 385,800 479,000 0 0
Cymer 0 1,500,000 0 1,500,000 0 13,688
Cytyc 933,700 0 0 933,700 0 9,454
Data Broadcasting 2,000,000 130,000 0 2,130,000 0 9,984
Digene 500,000 300,000 0 800,000 0 5,800
Edify 1,055,000 0 0 1,055,000 0 7,121
ELAN Energy 3,212,000 0 3,212,000 0 0 0
Epicore Networks 1,405,000 220,000 1,625,000 0 0 0
Filofax Group 1,956,000 0 0 1,956,000 142 6,817
Flextronics International (1) 825,000 33,200 500,000 358,200 0 0
Four Media 620,000 15,000 25,000 610,000 0 2,288
Franklin Covey 1,350,000 0 0 1,350,000 0 26,409
Frontline (1) 4,833,000 0 0 4,833,000 0 0
GelTex Pharmaceuticals (1) 0 750,000 65,000 685,000 0 0
Great Eastern Shipping 4,448,000 10,280,000 014,728,000 1,414 8,539
Gymboree 1,535,600 0 100,000 1,435,600 0 10,767
Hardy Oil & Gas 6,037,900 3,020,114 0 9,058,014 108 25,070
Hartmarx 1,287,400 500,500 0 1,787,900 0 11,733
Healthcare Recoveries (1) 0 650,000 400,000 250,000 0 0
HIT Entertainment 700,000 140,000 0 840,000 14 6,918
HNC Software 1,145,000 450,000 0 1,595,000 0 64,797
i-STAT (1) 852,000 0 263,800 588,200 0 0
Imax 1,558,000 0 0 1,558,000 0 31,160
International Precious Metals 1,155,000 0 1,155,000 0 0 0
Intertape Polymer Group 1,500,000 0 0 1,500,000 117 27,187
Jo-Ann Stores 1,050,000 0 0 1,050,000 0 21,656
KCI Konecranes International 975,000 0 63,300 911,700 524 35,887
KeraVision 795,000 0 0 795,000 0 3,379
Knightsbridge Tankers (1) 1,105,000 0 955,000 150,000 1,167 0
Landec 690,000 0 0 690,000 0 2,717
Lazare Kaplan International 500,000 50,000 0 550,000 0 4,263
Lions Gate Entertainment 2,075,000 691,667 0 2,766,667 0 3,355
Liquidation World 186,000 264,000 0 450,000 0 3,982
LoJack 1,347,000 0 0 1,347,000 0 14,480
Marks Bros. Jewelers 510,000 0 0 510,000 0 6,821
Material Sciences 1,000,000 0 0 1,000,000 0 8,750
McWhorter Technologies 706,000 0 0 706,000 0 14,252
MemberWorks 733,000 228,700 0 961,700 0 14,906
Micrel 0 1,275,000 0 1,275,000 0 33,788
MIF 668,202 14,700 0 682,902 0 13,853
Milltronics 900,000 0 0 900,000 0 8,791
MoneyGram Payment Systems 878,600 0 878,600 0 0 0
Morton's Restaurant Group 415,000 0 0 415,000 0 8,923
NCO Group 100,000 895,300 0 995,300 0 27,682
Nera (1) 3,287,500 0 1,266,600 2,020,900 56 0
Nordic American Tanker Shipping 762,000 0 28,500 733,500 1,090 9,352
Norsk Lotteridrift 965,000 0 0 965,000 0 2,480
Novus Petroleum (1) 5,670,461 2,040,523 2,815,379 4,895,605 62 0
OM Gruppen 1,443,100 2,886,200 0 4,329,300 1,839 74,535
Orbit Oil & Gas 2,681,000 0 2,681,000 0 0 0
OrthoLogic 1,250,000 370,000 0 1,620,000 0 6,379
Pacific Media (1) 88,249,124 026,500,00061,749,124 0 0
Paladin Resources 3,000,000 8,270,998 011,270,998 0 3,636
Paragon Trade Brands 787,700 0 787,700 0 0 0
Paramount Resources 2,493,000 0 2,493,000 0 77 0
PathoGenesis 1,035,000 0 1,035,000 0 0 0
Pharmacyclics 580,000 215,000 0 795,000 0 13,217
Philippine Gold 2,453,700 2,500,000 0 4,953,700 0 1,009
Piercing Pagoda 335,000 167,500 0 502,500 0 5,779
Pinkerton's 810,000 0 810,000 0 0 0
Pioneer-Standard Electronics (1) 1,660,000 0 1,384,600 275,400 196 0
Plantronics (1) 1,000,000 0 425,000 575,000 0 0
Platinum Software 0 1,625,000 0 1,625,000 0 16,656
PMC-Sierra 890,700 1,009,300 0 1,900,000 0 60,563
Precision Response 1,398,000 0 1,398,000 0 0 0
Premier Oil (1) 51,251,227 9,963,31618,389,54342,825,000 370 0
Primark (1) 1,350,000 0 904,488 445,512 0 0
Protection One (1) 920,000 2,795,800 0 3,715,800 0 0
PRT Group (1) 761,960 0 0 761,960 0 0
Puerto Rican Cement 371,000 0 0 371,000 254 16,417
Ramco Energy 1,597,000 0 0 1,597,000 0 11,118
Ranger Oil 4,350,000 2,668,915 0 7,018,915 0 46,062
Rent-Way 330,000 325,000 55,000 600,000 0 14,775
Rio Hotel & Casino (1) 1,382,700 100,000 332,700 1,150,000 0 0
Safety 1st 400,000 60,000 0 460,000 0 2,473
Sano 600,000 0 600,000 0 0 0
Scandinavian Broadcasting System 887,900 0 0 887,900 0 18,868
SCB Computer Technology (1) 562,350 562,350 544,700 580,000 0 0
Scotia Holdings (1) 5,062,200 0 1,510,300 3,551,900 0 0
Scottish Media Group 2,300,000 980,000 0 3,280,000 1,184 35,923
SEQUUS Pharmaceuticals 880,832 909,584 80,832 1,709,584 0 16,561
SkyTel Communications 3,525,000 200,000 0 3,725,000 0 67,516
SONUS Pharmaceuticals 550,000 0 550,000 0 0 0
Strategic Distribution 1,890,000 0 0 1,890,000 0 6,024
Suburban Ostomy Supply 563,000 0 563,000 0 0 0
Technical Chemicals and Products 600,000 0 0 600,000 0 2,475
Thermo Power 620,000 0 620,000 0 0 0
Thomas Group 388,500 0 388,500 0 0 0
Ticketmaster Group 1,600,000 0 1,600,000 0 0 0
Trident Microsystems 825,000 0 825,000 0 0 0
Trimble Navigation 1,000,000 250,000 0 1,250,000 0 12,578
Ugland International Holdings 5,000,000 2,342,000 0 7,342,000 609 9,038
UroCor 500,000 100,000 0 600,000 0 2,625
Vanstar 2,375,000 325,000 0 2,700,000 0 28,915
Vincam Group 203,100 839,250 24,600 1,017,750 0 13,930
Vivid Technologies (1) 600,000 0 400,000 200,000 0 0
Warrantech 600,000 260,000 0 860,000 0 3,010
WHG Resorts & Casinos 380,000 0 380,000 0 0 0
Wolford Group 324,000 0 0 324,000 233 19,383
Zale (1) 1,950,000 0 1,051,300 898,700 0 0
Zonagen 590,800 109,200 60,000 640,000 0 9,920
$13,438$1,463,363
1 Unaffiliated issuer at 9/30/98
</TABLE>
<TABLE>
PER-SHARE DATA AND
RATIOS
<S> <C> <C> <C> <C> <C>
Year ended September 30
---------------- -------- -------- --------
1998 1997 1996 1995 1994
- ----------------------- ----------------------------------- ---------
Net Asset Value
Beginning of Year $30.72 $26.92 $26.11 $23.61 $22.72
----------------------------------- ---------
Income (Loss) From Investment
Operations:
Net investment income .07 .10 .17 .22 .09
Net realized and
unrealized (loss) gain
on investments (6.10) 6.17 3.32 3.79 1.83
----------------------------------- ---------
Total (loss) income from
investment
operations (6.03) 6.27 3.49 4.01 1.92
----------------------------------- ---------
Less Distributions:
Dividends from
net investment
income (.05) (.12) (.23) (.16) (.06)
Distributions
from net
realized gains (2.50) (2.35) (2.45) (1.35) (.97)
----------------------------------- ---------
Total distributions (2.55) (2.47) (2.68) (1.51) (1.03)
----------------------------------- ---------
Net Asset Value, End
of Year $22.14 $30.72 $26.92 $26.11 $23.61
=================================== =========
Total Return(1) (20.70)% 25.41% 15.21% 18.59% 8.60%
Ratios/Supplemental
Data:
Net assets, end
of year (in
millions) $7,102 $9,256 $6,607 $4,625 $3,497
Ratio of expenses
to average net
assets 1.06% 1.07% 1.09% 1.13% 1.12%
Ratio of net income
to average net
assets .27% .40% .68% .97% .38%
Portfolio turnover
rate 44.31% 42.21% 42.88% 45.63% 29.43%
(1) Excludes maximum sales
charge of 5.75%.
</TABLE>
Independent Auditors' Report
To the Board of Directors and Shareholders of
SMALLCAP World Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
SMALLCAP World Fund, Inc. (the "fund"), including the investment portfolio as
of September 30, 1998, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended, and the per-share data and ratios for each of the five
years in the period then ended. These financial statements and per-share data
and ratios are the responsibility of the fund's management. Our responsibility
is to express an opinion on these financial statements and per-share data and
ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
per-share data and ratios are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at September 30, 1998 by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and per-share data and ratios
referred to above present fairly, in all material respects, the financial
position of SMALLCAP World Fund, Inc. at September 30, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the per-share data and ratios for
each of the five years in the period then ended, in conformity with generally
accepted accounting principles.
/s/Deloitte & Touche LLP
Los Angeles, California
November 6, 1998
1998 Tax Information (Unaudited)
We are required to advise you within 60 days of the fund's fiscal year-end
regarding the federal tax status of distributions received by shareholders
during such fiscal year. The distributions made during the fiscal year by the
fund were earned from the following sources:
<TABLE>
<S> <C> <C> <C> <C>
Dividends and Distributions per Share
From Net From Net Realized From Net Realized
To Shareholders of Record Payment Date Investment Income Short-Term Gains Long-Term Gains
December 15, 1997 December 16, 1997 $.05 $.538 $1.962
</TABLE>
The fund also designates as a capital gain distribution a portion of earnings
and profits paid to shareholders in redemption of their shares.
Corporate shareholders may exclude up to 70% of qualifying dividends received
during the year. For purposes of computing this exclusion, 52% 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 retirement plan trusts may need this information for their annual
information reporting.
SINCE THE AMOUNTS ABOVE ARE REPORTED FOR THE FUND'S FISCAL YEAR AND NOT THE
CALENDAR YEAR, SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV OR OTHER TAX
INFORMATION WHICH WILL BE MAILED IN JANUARY 1999 TO DETERMINE THE CALENDAR YEAR
AMOUNTS TO BE INCLUDED ON THEIR 1998 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT
THEIR TAX ADVISERS.
SMALLCAP WORLD FUND
BOARD OF DIRECTORS
AMBASSADOR RICHARD G. CAPEN, JR.
Rancho Santa Fe, California
Corporate director and author; former United States
Ambassador to Spain; former Vice Chairman of the
Board, Knight-Ridder, Inc.; former Chairman of the
Board and Publisher, The Miami Herald
H. FREDERICK CHRISTIE
Rolling Hills Estates, California
Private investor; former President and Chief Executive
Officer, The Mission Group; former President,
Southern California Edison Company
ALAN W. CLEMENTS
London, England
Private investor; former Executive Director - Finance,
Imperial Chemical Industries PLC
GORDON CRAWFORD
Los Angeles, California
President of the fund
Senior Vice President and Director,
Capital Research and Management Company
ALAN GREENWAY
La Jolla, California
Private investor; President,
Greenway Associates, Inc.
(management consulting services)
WILLIAM R. GRIMSLEY
San Francisco, California
Chairman of the Board of the fund
Senior Vice President and Director,
Capital Research and Management Company;
Director, The Capital Group Companies, Inc.
E. GRAHAM HOLLOWAY
Dallas, Texas
Former Chairman of the Board,
American Funds Distributors, Inc.
LEONADE D. JONES
Burlingame, California
Former Treasurer,
The Washington Post Company
WILLIAM H. KLING
St. Paul, Minnesota
President, Minnesota Public Radio;
President, Greenspring Co.; former President,
American Public Radio (now Public Radio International)
NORMAN R. WELDON, PH.D.
Evergreen, Colorado
Managing Director,
Partisan Management Group, Inc.;
Chairman of the Board, Novoste Corporation
PATRICIA K. WOOLF, PH.D.
Princeton, New Jersey
Private investor; lecturer,
Department of Molecular Biology,
Princeton University; Corporate director
OTHER OFFICERS
GREGORY W. WENDT
San Francisco, California
Senior Vice President of the fund
Senior Vice President and Director,
Capital Research Company
VINCENT P. CORTI
Los Angeles, California
Vice President of the fund
Vice President - Fund Business Management Group,
Capital Research and Management Company
ROBERT W. LOVELACE
Los Angeles, California
Vice President of the fund
Executive Vice President and Director,
Capital Research Company;
Vice President, Capital Research and Management Company
CHAD L. NORTON
Los Angeles, California
Secretary of the fund
Vice President - Fund Business Management Group,
Capital Research and Management Company
ROBERT P. SIMMER
Norfolk, Virginia
Treasurer of the fund
Vice President - Fund Business Management Group,
Capital Research and Management Company
[THE AMERICAN FUNDS GROUP(R)]
OFFICES OF THE FUND AND
OF THE INVESTMENT ADVISER,
CAPITAL RESEARCH AND
MANAGEMENT COMPANY
333 South Hope Street
Los Angeles, California 90071-1443
135 South State College Boulevard
Brea, California 92821-5823
TRANSFER AGENT FOR
SHAREHOLDER ACCOUNTS
American Funds Service Company
(Please write to the address nearest you.)
P.O. Box 2205
Brea, California 92822-2205
P.O. Box 659522
San Antonio, Texas 78265-9522
P.O. Box 6007
Indianapolis, Indiana 46206-6007
P.O. Box 2280
Norfolk, Virginia 23501-2280
CUSTODIAN OF ASSETS
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, New York 10081-0001
COUNSEL
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, California 90071-2899
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1000 Wilshire Boulevard
Los Angeles, California 90017-2472
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071-1462
PREPARING FOR THE YEAR 2000 The fund's key service providers - Capital
Research and Management Company, the investment adviser, and American Funds
Service Company, the transfer agent - are updating their computer systems to
process date-related information properly following the turn of the century.
Both are on track to complete modifications of significant internal systems by
the end of 1998. Testing with business partners, vendors and other service
providers is already under way. We will continue to keep you up-to-date in our
regular publications. If you'd like more detailed information, call Shareholder
Services at 800/421-0180, ext. 21, or visit our Web site at
www.americanfunds.com.
FOR INFORMATION ABOUT YOUR ACCOUNT OR ANY OF THE FUND'S SERVICES, PLEASE
CONTACT YOUR FINANCIAL ADVISER. YOU MAY ALSO CALL AMERICAN FUNDS SERVICE
COMPANY, TOLL-FREE, AT 800/421-0180, OR VISIT WWW.AMERICANFUNDS.COM ON THE
WORLD WIDE WEB.
This report is for the information of shareholders of SMALLCAP World Fund, but
it may also be used as sales literature when preceded or accompanied by the
current prospectus, which gives details about charges, expenses, investment
objectives and operating policies of the fund. If used as sales material after
December 31, 1998, this report must be accompanied by an American Funds Group
Statistical Update for the most recently completed calendar quarter.
Printed on recycled paper
Litho in USA BDA/L/3295
Lit. No. SCWF-011-1198
