N-CSRS 1 amcap_ncsr.htm N-CSR Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM N-CSR
Certified Shareholder Report of
Registered Management Investment Companies

Investment Company Act File Number: 811-01435



AMCAP Fund, Inc.
(Exact Name of Registrant as Specified in Charter)

333 South Hope Street
Los Angeles, California 90071
(Address of Principal Executive Offices)




Registrant's telephone number, including area code: (213) 486-9200

Date of fiscal year end: February 28 or 29

Date of reporting period: August 31, 2009





Vincent P. Corti
Capital Research and Management Company
333 South Hope Street
Los Angeles, California 90071
(Name and Address of Agent for Service)


Copies to:
Eric A.S. Richards
O’Melveny & Myers LLP
400 South Hope Street, 10th Floor
Los Angeles, California 90071
(Counsel for the Registrant)


 
 

 

ITEM 1 – Reports to Stockholders

[logo - American Funds®]

The right choice for the long term®

AMCAP Fund

[photo of the trunk of a large tree - more trees in the background]
 
Semi-annual report for the six months ended August 31, 2009

AMCAP Fund® seeks long-term growth of capital by investing primarily in U.S. companies with a record of above-average growth.
 
This fund is one of the 30 American Funds. For nearly 80 years, Capital Research and Management Company,SM the American Funds adviser, has invested with a long-term focus based on thorough research and attention to risk.

Fund results shown in this report, unless otherwise indicated, are for Class A shares at net asset value. If a sales charge (maximum 5.75%) had been deducted, the results would have been lower. Results are for past periods and are not predictive of results for future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. For current information and month-end results, visit americanfunds.com.

Here are returns on a $1,000 investment with all distributions reinvested for periods ended September 30, 2009 (the most recent calendar quarter-end):
 
                   
Class A shares
 
1 year
   
5 years
   
10 years
 
                   
Reflecting 5.75% maximum sales charge
                 
                   
Average annual total return
          0.81 %     2.75 %
Cumulative total return
    –4.42 %     4.12 %     31.10 %

The total annual fund operating expense ratio was 0.81% for Class A shares for the 12 months ended September 30, 2009. Note that the expense ratio shown above differs from those shown in the Financial Highlights table on pages 22 to 28 and the Expense Example on pages 29 and 30, which are annualized for the six-month period ended August 31, 2009.
 
Investment results assume all distributions are reinvested and reflect applicable fees and expenses. The fund’s investment adviser waived a portion of its management fees from September 1, 2004, through December 31, 2008. Fund results shown reflect the waiver, without which they would have been lower. See the Financial Highlights table on pages 22 to 28 for details.

Results for other share classes can be found on page 31.

Equity investments are subject to market fluctuations. See the prospectus and the Risk Factors section of this report for more information on these and other risks associated with investing in the fund.

Fellow shareholders:
 
[photo of the trunk of a large tree - more trees in the background]
 
U.S. stocks rallied sharply during the past six months ended August 31, 2009, as the global financial crisis eased and signs of recovery emerged. Today the U.S. economy has improved but is far from vigorous. A number of fundamental issues in the economy and the markets have yet to be resolved.

AMCAP posted a total return of 46.0% for the six months ended August 31, exceeding the 40.5% total return of the unmanaged Standard & Poor’s 500 Composite Index, a broad measure of mostly large U.S. stocks. AMCAP also outpaced the 45.0% total return of the Lipper Multi-Cap Core Funds Index and the 41.6% total return of the Lipper Growth Funds Index.

While we are pleased to report AMCAP’s strong returns, it is worth pointing out that the past six-month period began just before the market lows and ended close to the near-term market highs. In many ways, this period reflects a bounce back from the deep pessimism of the period leading up to the market’s low on March 9. Progress in the overall market from here will depend on how fast and how pervasively the signs of recovery turn into broad fundamental improvement.
 
Over the longer term, AMCAP continued to exceed the S&P 500 and the fund’s two Lipper peer-group indexes by a significant margin. For its 42-year lifetime, AMCAP provided an average annual return of 11.1%, outpacing the 9.2% of the S&P 500, the 9.0% of the Lipper Multi-Cap Core Funds Index and the 8.2% of the Lipper Growth Funds Index. The table below shows cumulative returns during selected periods. Note that the 10-year period encompasses two of the most severe declines in the postwar period.

Cumulative total returns
                       
                         
For periods ended August 31, 2009
 
Six months
   
1 year
   
5 years
   
10 years
 
                         
AMCAP (Class A shares)
    46.0 %     –10.1 %     8.9 %     33.5 %
Standard & Poor’s 500 Composite Index*
    40.5       –18.2       2.5       –7.7  
Lipper Multi-Cap Core Funds Index
    45.0       –17.0       9.2       9.7  
Lipper Growth Funds Index
    41.6       –19.7       0.6       –17.5  
                                 
*The S&P 500 is unmanaged, and its results do not reflect the effect of sales charges, commissions or expenses.
         
Lipper indexes do not include the effect of sales charges.
                               

Investment results analysis
The past six months ended August 31 was a very strong period for AMCAP. Many stocks bounced back from steep price losses in fiscal 2009 ended February 28, one of the most difficult periods in the fund’s history. Information technology is the fund’s largest industry sector, with 27.5% of the investment portfolio, followed by consumer discretionary stocks (16.3%), health care (11.9%), industrials (11.8%), financials (7.4%), energy (6.6%) and consumer staples (5.7%). AMCAP had 7.1% of its portfolio in cash and equivalents as of August 31.
 
Looking ahead
Signs of an economic recovery in the United States are clear, but uncertainties about the pace and strength of the upturn still exist. Unemployment remains high, and consumer spending has not yet returned to healthy levels. Personal and government debt levels remain high. Loan problems in commercial real estate continue, though there appears to be a recovery beginning in many residential real estate markets.

There is uncertainty about rising taxes and health care. Until these issues are resolved, small businesses may find it difficult to move forward with construction of new plants or make other major capital expenditures. Consumers may take some time to rebuild their balance sheets. Thus, this recovery may take longer than many previous recoveries and be more fragile than past upturns.

As the recovery continues, it is easy to get caught up in the minute-by-minute media coverage of fluctuating news and stock prices. But it is important to realize that underlying the sometimes volatile stock prices are real companies that provide real goods and services, with managements that are working hard, seeking long-term growth and fundamental strength. It’s good to remember that these are the types of companies we have in AMCAP.

At AMCAP, we are pleased to have a large and experienced team of analysts and portfolio counselors to carefully monitor economic conditions, industries and companies during this challenging time. As usual, we will continue to follow our long-term strategy of investing in quality growth companies at attractive prices.

We thank you for taking a long-term perspective on your mutual fund investments and for your continued support of AMCAP Fund.

Cordially,

/s/ Claudia P. Huntington

Claudia P. Huntington
Vice Chairman of the Board


/s/ Timothy D. Armour

Timothy D. Armour
President

October 13, 2009

For current information about the fund, visit americanfunds.com.
 
 
Summary investment portfolio, August 31, 2009
unaudited
 
The following summary investment portfolio is designed to streamline the report and help investors better focus on a fund’s principal holdings. See the inside back cover for details on how to obtain a complete schedule of portfolio holdings.
 
[begin pie chart]
   
Percent of
 
Industry sector diversification
 
net assets
 
       
Information technology     27.51  
Consumer discretionary     16.27  
Health care     11.91  
Industrials     11.77  
Financials     7.40  
Other industries
    18.03  
Short-term securities & other assets less liabilities
    7.11  
[end pie chart]
 
 
               
Percent
 
         
Value
   
of net
 
Common stocks  - 92.89%
 
Shares
      (000 )  
assets
 
                     
Information technology  - 27.51%
                   
Microsoft Corp.
    20,295,000     $ 500,272       2.71 %
Oracle Corp.
    17,920,000       391,910       2.12  
Accenture Ltd, Class A
    10,060,000       331,980       1.80  
Yahoo! Inc. (1)
    21,395,000       312,581       1.69  
SAP AG (2)
    5,163,300       252,375       1.37  
Cisco Systems, Inc. (1)
    11,669,300       252,057       1.37  
Google Inc., Class A (1)
    527,300       243,439       1.32  
Hewlett-Packard Co.
    5,400,000       242,406       1.31  
Corning Inc.
    15,260,000       230,121       1.25  
Apple Inc. (1)
    1,250,000       210,262       1.14  
Automatic Data Processing, Inc.
    4,100,000       157,235       .85  
MasterCard Inc., Class A
    725,000       146,907       .80  
Intel Corp.
    7,000,000       142,240       .77  
Logitech International SA (1)
    7,581,556       138,591       .75  
Other securities
            1,522,685       8.26  
              5,075,061       27.51  
                         
Consumer discretionary  - 16.27%
                       
Omnicom Group Inc.
    7,951,000       288,780       1.57  
Target Corp.
    5,795,600       272,393       1.48  
Johnson Controls, Inc.
    10,621,700       263,099       1.43  
Lowe's Companies, Inc.
    10,999,700       236,494       1.28  
YUM! Brands, Inc.
    5,976,000       204,678       1.11  
Best Buy Co., Inc.
    5,400,000       195,912       1.06  
Time Warner Inc.
    6,300,000       175,833       .95  
O'Reilly Automotive, Inc. (1)
    3,819,800       146,222       .79  
Staples, Inc.
    6,565,000       141,870       .77  
Carnival Corp., units
    4,725,200       138,212       .75  
Other securities
            937,158       5.08  
              3,000,651       16.27  
                         
Health care  - 11.91%
                       
Medtronic, Inc.
    10,030,000       384,149       2.08  
McKesson Corp.
    4,600,000       261,556       1.42  
WellPoint, Inc. (1)
    4,000,000       211,400       1.15  
Aetna Inc.
    6,313,700       179,940       .97  
Hologic, Inc. (1)
    9,370,000       154,137       .83  
Roche Holding AG (2)
    865,000       137,798       .75  
Other securities
            868,079       4.71  
              2,197,059       11.91  
                         
Industrials  - 11.77%
                       
Precision Castparts Corp.
    3,921,621       357,966       1.94  
General Dynamics Corp.
    4,365,000       258,364       1.40  
Robert Half International Inc.
    7,359,000       193,468       1.05  
Manpower Inc.
    3,506,000       181,260       .98  
United Technologies Corp.
    2,850,000       169,176       .92  
United Parcel Service, Inc., Class B
    2,820,000       150,757       .82  
CSX Corp.
    3,242,115       137,790       .75  
Union Pacific Corp.
    2,303,300       137,760       .74  
Other securities
            584,707       3.17  
              2,171,248       11.77  
                         
Financials  - 7.40%
                       
Capital One Financial Corp.
    7,251,200       270,397       1.47  
American Express Co.
    7,500,000       253,650       1.37  
Bank of New York Mellon Corp.
    7,136,000       211,297       1.15  
JPMorgan Chase & Co.
    3,700,000       160,802       .87  
Other securities
            467,932       2.54  
              1,364,078       7.40  
                         
Energy  - 6.63%
                       
Schlumberger Ltd.
    5,740,000       322,588       1.75  
FMC Technologies, Inc. (1)
    3,420,000       163,134       .88  
Other securities
            736,925       4.00  
              1,222,647       6.63  
                         
Consumer staples  - 5.68%
                       
PepsiCo, Inc.
    3,042,481       172,418       .93  
Walgreen Co.
    4,700,000       159,236       .86  
L'Oréal SA (2)
    1,450,000       143,079       .78  
Other securities
            572,886       3.11  
              1,047,619       5.68  
                         
Materials  - 2.02%
                       
Other securities
            372,986       2.02  
                         
                         
Other - 0.56%
                       
Other securities
            102,402       .56  
                         
                         
Miscellaneous  -  3.14%
                       
Other common stocks in initial period of acquisition
            579,831       3.14  
                         
                         
Total common stocks (cost: $15,380,861,000)
            17,133,582       92.89  
                         
                         
                         
Convertible securities  - 0.00%
                       
                         
Miscellaneous  -  0.00%
                       
Other convertible securities in initial period of acquisition
            583       .00  
                         
                         
Total convertible securities (cost: $230,000)
            583       .00  
                         
                         
                         
   
Principal amount
                 
Short-term securities  - 7.41%
    (000 )                
                         
Freddie Mac 0.20%-0.70% due  9/14/2009-5/17/2010
  $ 433,000       432,815       2.35  
U.S. Treasury Bills  0.161%-0.39% due 9/15/2009-2/4/2010
    321,100       321,027       1.74  
Federal Home Loan Bank  0.145-0.56% due 9/2-11/25/2009
    243,553       243,506       1.32  
Other securities
            369,329       2.00  
                         
                         
Total short-term securities (cost: $1,366,560,000)
            1,366,677       7.41  
                         
                         
Total investment securities (cost: $16,747,651,000)
            18,500,842       100.30  
Other assets less liabilities
            (56,068 )     (.30 )
                         
Net assets
          $ 18,444,774       100.00 %
 
"Miscellaneous" securities include holdings in their initial period of acquisition that have not previously been publicly disclosed.
"Other securities" includes all issues that are not disclosed separately in the summary investment portfolio. Some of these securities (with aggregate value of $188,495,000, which represented 1.02% of the net assets of the fund) may be resold in the U.S. in transactions exempt from registration, normally to qualified institutional buyers.
 
Investments in affiliates
 
A company is considered to be an affiliate of the fund under the Investment Company Act of 1940 if the fund's holdings in that company represent 5% or more of the outstanding voting shares of that company. The value of the fund's holdings in affiliated companies is included in "Other securities" under their respective industry sectors in the preceding summary investment portfolio.  Further details on these holdings and related transactions during the six months ended August 31, 2009, appear below.
 
   
Beginning
shares
   
Additions
   
Reductions
   
Ending
shares
     
Dividend
income
 (000)
     
Value of affiliates
at 8/31/09 (000)
 
Harman International Industries, Inc.
    3,320,000       755,900       -       4,075,900     $ -     $ 122,236  
Tractor Supply Co.1
    1,525,000       500,000       -       2,025,000       -       95,296  
Bare Escentuals, Inc.1
    5,735,000       -       -       5,735,000       -       53,221  
Portfolio Recovery Associates, Inc. 1
    975,391       17,609       -       993,000       -       43,613  
Medicis Pharmaceutical Corp., Class A3
    3,625,000       -       3,625,000       -       250       -  
Williams-Sonoma, Inc.3
    6,174,900       173,100       4,448,000       1,900,000       1,524       -  
                                    $ 1,774     $ 314,366  
 
The following footnotes apply to either the individual securities noted or one or more of the securities aggregated and listed as a single line item.
 
(1) Security did not produce income during the last 12 months.
(2) Valued under fair value procedures adopted by authority of the board of directors. The total value of all such securities, including those in “Miscellaneous” and “Other securities,” was $779,800,000, which represented 4.23% of the net assets of the fund. This entire amount relates to certain securities trading outside the U.S. whose values were adjusted as a result of significant market movements following the close of local trading.
(3) Unaffiliated issuer at 8/31/2009.
 
See Notes to Financials Statements
 
 
 
Financial statements
 
Statement of assets and liabilities
       
unaudited
 
at August 31, 2009
    (dollars in thousands)  
             
Assets:
           
 Investment securities, at value:
           
  Unaffiliated issuers (cost: $16,336,489)
  $ 18,186,476        
  Affiliated issuers (cost: $411,162)
    314,366     $ 18,500,842  
 Cash
            121  
 Receivables for:
               
  Sales of investments
    13,520          
  Sales of fund's shares
    22,039          
  Dividends and interest
    25,860       61,419  
              18,562,382  
                 
Liabilities:
               
 Payables for:
               
  Purchases of investments
    62,124          
  Repurchases of fund's shares
    32,918          
  Investment advisory services
    5,080          
  Services provided by affiliates
    13,665          
  Directors' deferred compensation
    1,664          
  Other
    2,157       117,608  
Net assets at August 31, 2009
          $ 18,444,774  
                 
Net assets consist of:
               
 Capital paid in on shares of capital stock
          $ 19,941,299  
 Undistributed net investment income
            47,294  
 Accumulated net realized loss
            (3,297,152 )
 Net unrealized appreciation
            1,753,333  
Net assets at August 31, 2009
          $ 18,444,774  
 
 
(dollars and shares in thousands, except per-share amounts)  
Total authorized capital stock - 2,000,000 shares, $1.00 par value (1,231,646 total shares outstanding)
             
   
Net assets
   
Shares outstanding
   
Net asset value per share*
 
Class A
  $ 12,237,741       812,457     $ 15.06  
Class B
    654,916       45,224       14.48  
Class C
    1,017,691       70,823       14.37  
Class F-1
    1,376,491       91,757       15.00  
Class F-2
    257,221       17,041       15.09  
Class 529-A
    425,151       28,322       15.01  
Class 529-B
    68,324       4,715       14.49  
Class 529-C
    121,997       8,416       14.50  
Class 529-E
    24,713       1,665       14.85  
Class 529-F-1
    17,412       1,159       15.02  
Class R-1
    35,818       2,452       14.61  
Class R-2
    356,984       24,457       14.60  
Class R-3
    507,865       34,120       14.88  
Class R-4
    385,758       25,727       14.99  
Class R-5
    652,182       43,128       15.12  
Class R-6
    304,510       20,183       15.09  
   
(*) Maximum offering price and redemption price per share were equal to the net asset value per share for all share classes, except for Classes A and 529-A, for which the maximum offering prices per share were $15.98 and $15.93, respectively.
 
                         
See Notes to Financial Statements
                       
 
 
Statement of operations
       
unaudited
 
for the six months ended August 31, 2009
    (dollars in thousands)
             
Investment income:
           
 Income:
           
  Dividends (net of non-U.S.
           
            taxes of $2,607; also includes
           
            $1,774 from affiliates)
  $ 120,350        
  Interest
    2,439     $ 122,789  
                 
 Fees and expenses*:
               
  Investment advisory services
    26,809          
  Distribution services
    25,512          
  Transfer agent services
    11,652          
  Administrative services
    4,572          
  Reports to shareholders
    968          
  Registration statement and prospectus
    2,677          
  Directors' compensation
    660          
  Auditing and legal
    44          
  Custodian
    116          
  State and local taxes
    1          
  Other
    642       73,653  
 Net investment income
            49,136  
                 
Net realized loss and unrealized appreciation
               
 on investments and currency:
               
 Net realized (loss) gain on:
               
  Investments (including $105,659 net loss from affiliates)
    (994,249 )        
  Currency transactions
    80       (994,169 )
 Net unrealized appreciation on:
               
  Investments
    6,774,363          
  Currency translations
    199       6,774,562  
   Net realized loss and unrealized appreciation
               
    on investments and currency
            5,780,393  
Net increase in net assets resulting
               
 from operations
          $ 5,829,529  
                 
(*) Additional information related to class-specific fees and expenses is included in the Notes to Financial Statements.
         
                 
See Notes to Financial Statements
               
                 
                 
                 
Statements of changes in net assets
      (dollars in thousands)
                 
   
Six months ended August 31, 2009*
   
Year ended
February 28, 2009
 
Operations:
               
 Net investment income
  $ 49,136     $ 188,389  
 Net realized loss on investments and currency transactions
    (994,169 )     (2,303,365 )
 Net unrealized appreciation (depreciation) on investments and currency translations
    6,774,562       (7,434,726 )
  Net increase (decrease) in net assets resulting from operations
    5,829,529       (9,549,702 )
                 
Dividends and distributions paid to shareholders:
               
 Dividends from net investment income
    (181,053 )     -  
 Distributions from net realized gain on investments
    -       (938,078 )
  Total dividends and distributions paid to shareholders
    (181,053 )     (938,078 )
                 
                 
Net capital share transactions
    (218,209 )     (1,160,523 )
                 
Total increase (decrease) in net assets
    5,430,267       (11,648,303 )
                 
Net assets:
               
 Beginning of period
    13,014,507       24,662,810  
 End of period (including undistributed
               
  net investment income: $47,294 and $179,211, respectively)
  $ 18,444,774     $ 13,014,507  
                 
*Unaudited.
               
                 
See Notes to Financial Statements
               
 
 
Notes to financial statements                                                                                                    
       unaudited
 
1. Organization and significant accounting policies
 
Organization – AMCAP 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 by investing primarily in U.S. companies with a record of above-average growth.

The fund has 16 share classes consisting of five retail share classes, five 529 college savings plan share classes and six retirement plan share classes. The 529 college savings plan share classes (529-A, 529-B, 529-C, 529-E and 529-F-1) can be used to save for college education. The six retirement plan share classes (R-1, R-2, R-3, R-4, R-5 and R-6) are generally offered only through eligible employer-sponsored retirement plans. The fund’s share classes are described below:

 
Share class
Initial sales charge
Contingent deferred sales charge upon redemption
Conversion feature
Classes A and 529-A
Up to 5.75%
None (except 1% for certain redemptions within one year of purchase without an initial sales charge)
None
Classes B and 529-B*
None
Declines from 5% to 0% for redemptions within six years of purchase
Classes B and 529-B convert to Classes A and 529-A, respectively, after eight years
Class C
None
1% for redemptions within one year of purchase
Class C converts to Class F-1 after 10 years
Class 529-C
None
1% for redemptions within one year of purchase
None
Class 529-E
None
None
None
Classes F-1, F-2 and 529-F-1
None
None
None
Classes R-1, R-2, R-3, R-4,  R-5 and R-6
None
None
None
 
*Effective April 21, 2009, Class B and 529-B shares of the fund are no longer available for purchase.

On May 1, 2009, the fund made an additional retirement plan share class (Class R-6) available for sale pursuant to an amendment to its registration statement filed with the Securities and Exchange Commission (“SEC”). Refer to the fund’s retirement plan prospectus for more details.

Holders of all share classes have equal pro rata rights to assets, dividends and liquidation proceeds. Each share class has identical voting rights, except for the exclusive right to vote on matters affecting only its class. Share classes have different fees and expenses ("class-specific fees and expenses"), primarily due to different arrangements for distribution, administrative and shareholder services. Differences in class-specific fees and expenses will result in differences in net investment income and, therefore, the payment of different per-share dividends by each class.

Significant accounting policies – The financial statements have been prepared to comply with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The following is a summary of the significant accounting policies followed by the fund:

Net asset value – The fund generally determines its net asset value as of approximately 4:00 p.m. New York time each day the New York Stock Exchange is open.

Security valuation – Equity securities are valued at the official closing price of, or 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. Prices for each security are taken from the principal exchange or market in which the security trades. Fixed-income securities, including short-term securities purchased with more than 60 days left to maturity, are valued at prices obtained from one or more independent pricing vendors when such prices are available. However, where the investment adviser deems it appropriate to do so, such securities will be valued in good faith at the mean quoted bid and asked prices that are reasonably and timely available (or bid prices, if asked prices are not available) or at prices for securities of comparable maturity, quality and type. Vendors base bond prices on, among other things, valuation matrices that incorporate dealer-supplied valuations, proprietary pricing models and evaluations of the yield curve as of approximately 3:00 p.m. New York time. Securities with both fixed-income and equity characteristics, or equity securities traded principally among fixed-income dealers, are valued in the manner described above for either equity or fixed-income securities, depending on which method is deemed most appropriate by the investment adviser. Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value. The value of short-term securities originally purchased with maturities greater than 60 days is determined based on an amortized value to par when they reach 60 days or less remaining to maturity.

Securities and other assets for which representative market quotations are not readily available or are considered unreliable by the investment adviser are fair valued as determined in good faith under guidelines adopted by authority of the fund's board of directors. Market quotations may be considered unreliable if events occur that materially affect the value of securities (particularly securities outside the U.S.) between the close of trading in those securities and the close of regular trading on the New York Stock Exchange. Various factors may be reviewed in order to make a good faith determination of a security’s fair value. These factors include, but are not limited to, the type and cost of the security; contractual or legal restrictions on resale of the security; relevant financial or business developments of the issuer; actively traded similar or related securities; conversion or exchange rights on the security; related corporate actions; significant events occurring after the close of trading in the security; and changes in overall market conditions. Fair valuations and valuations of investments that are not actively trading involve judgment and may differ materially from valuations that would have been used had greater market activity occurred.

Security transactions and related investment income – Security transactions are recorded by the fund as of the date the trades are executed with brokers. Realized gains and losses from security transactions are determined based on the specific identified cost of the securities. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. Market discounts, premiums and original issue discounts on fixed-income securities are amortized daily over the expected life of the security.

Class allocations – Income, fees and expenses (other than class-specific fees and expenses) and realized and unrealized gains and losses are allocated daily among the various share classes based on their relative net assets. Class-specific fees and expenses, such as distribution, administrative and shareholder services, are charged directly to the respective share class.

Dividends and distributions to shareholders Dividends and distributions paid to shareholders are recorded on the ex-dividend date.

Currency translation – Assets and liabilities, including investment securities, denominated in currencies other than U.S. dollars are translated into U.S. dollars at the exchange rates in effect on the valuation date. Purchases and sales of investment securities and income and expenses are translated into U.S. dollars at the exchange rates on the dates of such transactions. On the accompanying financial statements, the effects of changes in exchange rates on investment securities are included with the net realized gain or loss and net unrealized appreciation or depreciation on investments. The realized gain or loss and unrealized appreciation or depreciation resulting from all other transactions denominated in currencies other than U.S. dollars are disclosed separately.
 
2. Risk factors
 
Investing in the fund may involve certain risks including, but not limited to, those described below.

The value of the fund's portfolio holdings may fluctuate in response to events specific to the companies or markets in which the fund invests, as well as economic, political or social events in the U.S. or abroad.

The prices of securities held by the fund may decline in response to certain events taking place around the world, including those directly involving the companies whose securities are owned by the fund; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and currency, interest rate and commodity price fluctuations.

The growth-oriented, equity-type securities generally purchased by the fund may involve large price swings and potential for loss.

3. Taxation and distributions                                                                

Federal income taxation – The fund complies with the requirements under Subchapter M of the Internal Revenue Code applicable to mutual funds and intends to distribute substantially all of its net taxable income and net capital gains each year. The fund is not subject to income taxes to the extent such distributions are made. Therefore, no federal income tax provision is required. 

As of and during the period ended August 31, 2009, the fund did not have a liability for any unrecognized tax benefits. The fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statement of operations. During the period, the fund did not incur any interest or penalties.

The fund is not subject to examination by U.S. federal tax authorities for tax years before 2005 and by state tax authorities for tax years before 2004.

Non-U.S. taxation – Dividend income is recorded net of non-U.S. taxes paid.

 
Distributions – Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to different treatment for items such as currency gains and losses; short-term capital gains and losses; capital losses related to sales of certain securities within 30 days of purchase; deferred expenses; cost of investments sold; and net capital losses. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes.

The components of distributable earnings on a tax basis are reported as of the fund’s most recent year-end. As of February 28, 2009, the components of distributable earnings on a tax basis were as follows:

  (dollars in thousands)  
Undistributed ordinary income
  $ 180,952  
Post-October currency loss deferrals (realized during the period November 1, 2008, through February 28, 2009)*
    (181 )
Capital loss carryforward expiring 2017
    (860,717 )
Post-October capital loss deferrals (realized during the period November 1, 2008, through February 28, 2009)*
    (1,442,045 )
         
* These deferrals are considered incurred in the subsequent year.
       
†The capital loss carryforward will be used to offset any capital gains realized by the fund in the current year or in subsequent years through the expiration date. The fund will not make distributions from capital gains while a capital loss carryforward remains.
 

As of August 31, 2009, the tax basis unrealized appreciation (depreciation) and cost of investment securities were as follows:

  (dollars in thousands)  
Gross unrealized appreciation on investment securities
  $ 3,073,026  
Gross unrealized depreciation on investment securities
    (1,320,019 )
Net unrealized appreciation on investment securities
    1,753,007  
Cost of investment securities
    16,747,835  

The tax character of distributions paid to shareholders was as follows (dollars in thousands):
 
   
Six months August 31, 2009
   
Year ended February 28, 2009
 
  Share class  
Ordinary
 income
   
Long-term capital gains
   
Total distributions paid
   
Ordinary
income
   
Long-term capital gains
   
Total distributions paid
 
    
                                   
    Class A
  $ 132,921     $ -     $ 132,921     $ -     $ 621,109     $ 621,109  
    Class B
    1,312       -       1,312       -       39,384       39,384  
    Class C
    2,279       -       2,279       -       58,353       58,353  
    Class F-1
    14,462       -       14,462       -       92,611       92,611  
    Class F-2*
    2,791       -       2,791       -       -       -  
    Class 529-A
    4,608       -       4,608       -       18,357       18,357  
    Class 529-B
    204       -       204       -       3,329       3,329  
    Class 529-C
    395       -       395       -       5,770       5,770  
    Class 529-E
    205       -       205       -       1,043       1,043  
    Class 529-F-1
    230       -       230       -       749       749  
    Class R-1
    166       -       166       -       1,617       1,617  
    Class R-2
    1,184       -       1,184       -       16,318       16,318  
    Class R-3
    3,791       -       3,791       -       27,709       27,709  
    Class R-4
    4,322       -       4,322       -       16,070       16,070  
    Class R-5
    9,204       -       9,204       -       35,659       35,659  
    Class R-6
    2,979       -       2,979       -       -       -  
    Total
  $ 181,053     $ -     $ 181,053     $ -     $ 938,078     $ 938,078  
                                                 
                                                 
*Class F-2 was offered beginning August 1, 2008.
                                 
Class R-6 was offered beginning May 1, 2009.
                                 

4. Fees and transactions with related parties

Capital Research and Management Company ("CRMC"), the fund’s investment adviser, is the parent company of American Funds Service Company® ("AFS"), the fund’s transfer agent, and American Funds Distributors,® Inc. ("AFD"), the principal underwriter of the fund’s shares.

Investment advisory services - The Investment Advisory and Service Agreement with CRMC provides for monthly fees accrued daily. These fees are based on a declining series of annual rates beginning with 0.485% on the first $1 billion of daily net assets and decreasing to 0.290% on such assets in excess of $27 billion. For the six months ended August 31, 2009, the investment advisory services fee was $26,809,000, which was equivalent to an annualized rate of 0.331% of average daily net assets.

Class-specific fees and expenses – Expenses that are specific to individual share classes are accrued directly to the respective share class. The principal class-specific fees and expenses are described below:

Distribution services – The fund has adopted plans of distribution for all share classes, except Classes F-2, R-5 and R-6. Under the plans, the board of directors approves certain categories of expenses that are used to finance activities primarily intended to sell fund shares and service existing accounts. The plans provide for payments, based on an annualized percentage of average daily net assets, ranging from 0.25% to 1.00% as noted on the following page In some cases, the board of directors has limited the amounts that may be paid to less than the maximum allowed by the plans. All share classes with a plan may use up to 0.25% of average daily net assets to pay service fees, or to compensate AFD for paying service fees, to firms that have entered into agreements with AFD to provide certain shareholder services. The remaining amounts available to be paid under each plan are paid to dealers to compensate them for their sales activities.

For Classes A and 529-A, the board of directors has also approved the reimbursement of dealer and wholesaler commissions paid by AFD for certain shares sold without a sales charge. These classes reimburse AFD for amounts billed within the prior 15 months but only to the extent that the overall annual expense limit of 0.25% is not exceeded. As of August 31, 2009, there were no unreimbursed expenses subject to reimbursement for Classes A or 529-A.

Share class
Currently approved limits
Plan limits
Class A
0.25%
0.25%
Class 529-A
0.25
0.50
Classes B and 529-B
1.00
1.00
Classes C, 529-C and R-1
1.00
1.00
Class R-2
0.75
1.00
Classes 529-E and R-3
0.50
0.75
Classes F-1, 529-F-1 and R-4
0.25
0.50

Transfer agent services The fund has a transfer agent agreement with AFS for Classes A and B. Under this agreement, these share classes compensate AFS for transfer agent services including shareholder recordkeeping, communications and transaction processing. AFS is also compensated for certain transfer agent services provided to all other share classes from the administrative services fees paid to CRMC as described below.

Administrative services – The fund has an administrative services agreement with CRMC to provide transfer agent and other related shareholder services for all share classes other than Classes A and B. Each relevant share class pays CRMC annual fees up to 0.15% (0.10% for Class R-5 and 0.05% for Class R-6) based on its respective average daily net assets. Each relevant share class also pays AFS additional amounts for certain transfer agent services. CRMC and AFS may use these fees to compensate third parties for performing these services. Each 529 share class is subject to an additional administrative services fee payable to the Commonwealth of Virginia for the maintenance of the 529 college savings plan. The quarterly fee is based on a declining series of annual rates beginning with 0.10% on the first $30 billion of the net assets invested in Class 529 shares of the American Funds and decreasing to 0.06% on such assets between $120 billion and $150 billion. The fee for any given calendar quarter is accrued and calculated on the basis of the average net assets of Class 529 shares of the American Funds for the last month of the prior calendar quarter. Although these amounts are included with administrative services fees on the accompanying financial statements, the Commonwealth of Virginia is not considered a related party.

Expenses under the agreements described on the previous page for the six months ended August 31, 2009, were as follows (dollars in thousands):

Share class
Distribution services
Transfer agent services
Administrative services
CRMC administrative services
Transfer agent services
Commonwealth of Virginia administrative services
Class A
$12,465
$11,052
Not applicable
Not applicable
Not applicable
Class B
 2,985
 600
Not applicable
Not applicable
Not applicable
Class C
 4,490
 
 
 
 
 
 
Included
in
administrative services
$675
$157
Not applicable
Class F-1
1,482
797
83
Not applicable
Class F-2
 Not applicable
 113
 6
Not applicable
Class 529-A
 386
 267
 49
$184
Class 529-B
 302
 44
 14
 30
Class 529-C
 527
 77
 22
 53
Class 529-E
 53
 16
 3
 11
Class 529-F-1
 -
 11
 2
 8
Class R-1
 153
19
 9
Not applicable
Class R-2
 1,153
 231
 579
Not applicable
Class R-3
 1,105
 330
 171
Not applicable
Class R-4
 411
 236
 9
Not applicable
Class R-5
Not applicable
320
3
Not applicable
Class R-6*
Not applicable
43
-
Not applicable
Total
$25,512
$11,652
$3,179
$1,107
$286
*Class R-6 was offered beginning May 1, 2009.
Amount less than one thousand.

Directors’ deferred compensation – Since the adoption of the deferred compensation plan in 1993, directors who are unaffiliated with CRMC may elect to defer the cash payment of part or all of their compensation. These deferred amounts, which remain as liabilities of the fund, are treated as if invested in shares of the fund or other American Funds. These amounts represent general, unsecured liabilities of the fund and vary according to the total returns of the selected funds. Directors’ compensation of $660,000, shown on the accompanying financial statements, includes $218,000 in current fees (either paid in cash or deferred) and a net increase of $442,000 in the value of the deferred amounts.

Affiliated officers and directors – Officers and certain directors of the fund are or may be considered to be affiliated with CRMC, AFS and AFD. No affiliated officers or directors received any compensation directly from the fund.

5. Disclosure of fair value measurements

The fund classifies its assets and liabilities into three levels based on the method used to value the assets or liabilities. Level 1 values are based on quoted prices in active markets for identical securities. Level 2 values are based on significant observable market inputs, such as quoted prices for similar securities and quoted prices in inactive markets. Level 3 values are based on significant unobservable inputs that reflect the fund’s determination of assumptions that market participants might reasonably use in valuing the securities. The valuation levels are not necessarily an indication of the risk or liquidity associated with the underlying investment. For example, U.S. government securities are generally high-quality and liquid; however, they are reflected as Level 2 because the inputs used to determine fair value may not always be quoted prices in an active market. The following table presents the fund’s valuation levels as of August 31, 2009 (dollars in thousands):
 
Investment securities:
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Common stocks:
                       
Information technology
  $ 4,757,568     $ 317,493 *   $ -     $ 5,075,061  
Consumer discretionary
    2,976,669       23,982 *     -       3,000,651  
Health care
    2,030,840       166,219 *     -       2,197,059  
Industrials
    2,102,469       68,779 *     -       2,171,248  
Financials
    1,364,078       -       -       1,364,078  
Energy
    1,222,647       -       -       1,222,647  
Consumer staples
    904,540       143,079 *     -       1,047,619  
Materials
    372,986       -       -       372,986  
Other
    102,402       -       -       102,402  
Miscellaneous
    519,583       60,248 *     -       579,831  
Convertible securities
    583       -       -       583  
Short-term securities
    -       1,366,677       -       1,366,677  
Total
  $ 16,354,365     $ 2,146,477     $ -     $ 18,500,842  
                                 
                                 
(*) Includes certain securities trading outside the U.S. whose values were adjusted as a result of significant market movements following the close of local trading; therefore, $779,800,000 of investment securities were classified as Level 2 instead of Level 1.
 

6. Capital share transactions

Capital share transactions in the fund were as follows (dollars and shares in thousands):

Share class
 
Sales(1)
   
Reinvestments of dividends and distributions
   
Repurchases(1)
   
Net (decrease) increase
 
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
 
Six months August 31, 2009
                                               
Class A
  $ 793,170       60,669     $ 126,496       9,398     $ (1,128,382 )     (89,607 )   $ (208,716 )     (19,540 )
Class B
    15,294       1,255       1,266       98       (74,424 )     (6,128 )     (57,864 )     (4,775 )
Class C
    61,482       4,901       2,165       169       (101,023 )     (8,532 )     (37,376 )     (3,462 )
Class F-1
    151,368       11,457       12,582       939       (301,146 )     (24,342 )     (137,196 )     (11,946 )
Class F-2
    139,930       10,304       1,996       148       (21,785 )     (1,748 )     120,141       8,704  
Class 529-A
    26,296       2,019       4,608       343       (20,308 )     (1,588 )     10,596       774  
Class 529-B
    1,408       119       204       16       (3,116 )     (256 )     (1,504 )     (121 )
Class 529-C
    8,601       686       393       30       (7,606 )     (617 )     1,388       99  
Class 529-E
    1,957       152       205       16       (1,436 )     (115 )     726       53  
Class 529-F-1
    1,930       149       230       17       (1,744 )     (133 )     416       33  
Class R-1
    5,387       424       165       13       (4,397 )     (347 )     1,155       90  
Class R-2
    48,563       3,908       1,183       90       (39,355 )     (3,194 )     10,391       804  
Class R-3
    58,262       4,571       3,784       284       (59,975 )     (4,668 )     2,071       187  
Class R-4
    54,073       4,210       4,319       322       (38,201 )     (3,025 )     20,191       1,507  
Class R-5
    105,455       8,042       9,194       681       (323,099 )     (24,501 )     (208,450 )     (15,778 )
Class R-62
    263,078       19,978       2,979       221       (235 )     (16 )     265,822       20,183  
Total net increase
                                                               
   (decrease)
  $ 1,736,254       132,844     $ 171,769       12,785     $ (2,126,232 )     (168,817 )   $ (218,209 )     (23,188 )
                                                                 
Year ended February 28, 2009
                                                         
Class A
  $ 2,031,710       140,956     $ 596,800       34,698     $ (3,325,626 )     (233,947 )   $ (697,116 )     (58,293 )
Class B
    56,893       4,006       38,002       2,299       (203,079 )     (14,362 )     (108,184 )     (8,057 )
Class C
    184,522       13,664       55,790       3,401       (400,253 )     (28,945 )     (159,941 )     (11,880 )
Class F-1
    503,663       35,048       83,010       4,851       (1,051,411 )     (72,303 )     (464,738 )     (32,404 )
Class F-23
    117,839       9,582       -       -       (14,721 )     (1,245 )     103,118       8,337  
Class 529-A
    60,850       4,067       18,352       1,070       (43,463 )     (3,017 )     35,739       2,120  
Class 529-B
    6,477       450       3,329       201       (7,032 )     (509 )     2,774       142  
Class 529-C
    18,181       1,259       5,766       348       (18,794 )     (1,352 )     5,153       255  
Class 529-E
    4,038       281       1,043       61       (2,761 )     (192 )     2,320       150  
Class 529-F-1
    4,736       311       749       44       (3,407 )     (237 )     2,078       118  
Class R-1
    10,855       723       1,609       96       (10,141 )     (705 )     2,323       114  
Class R-2
    100,826       6,952       16,308       977       (107,330 )     (7,410 )     9,804       519  
Class R-3
    144,480       9,603       27,641       1,627       (255,728 )     (17,046 )     (83,607 )     (5,816 )
Class R-4
    130,418       8,744       16,066       938       (232,374 )     (14,267 )     (85,890 )     (4,585 )
Class R-5
    415,141       26,109       35,408       2,051       (174,905 )     (11,887 )     275,644       16,273  
Total net increase
                                                               
   (decrease)
  $ 3,790,629       261,755     $ 899,873       52,662     $ (5,851,025 )     (407,424 )   $ (1,160,523 )     (93,007 )
                                                                 
1Includes exchanges between share classes of the fund.
                                         
2Class R-6 was offered beginning May 1, 2009.
                                                 
3Class F-2 was offered beginning August 1, 2008.