<DOCUMENT>
<TYPE>N-30D
<SEQUENCE>1
<FILENAME>fiar.txt
<TEXT>
[American Funds(SM)]
The right choice for the long term(SM)
FUNDAMENTAL INVESTORS
[color photograph of the statue of liberty looking out of a window at sunset]
The advantage of multiple perspectives
Annual report for the year ended December 31, 2001
Fundamental Investors(SM)
Fundamental Investors is one of the 29 American Funds,(SM) the nation's
third-largest mutual fund family. For seven decades, 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.
Fundamental Investors seeks long-term growth of capital and income primarily
through investments in common stocks.
A common link: The new logo of interlocking boxes has been adopted by the
American Funds and all The Capital Group Companies(SM) to signify our common
commitment to helping individuals and institutions meet their investment goals.
[begin table]
RESULTS AT A GLANCE FOR PERIODS ENDED DECEMBER 31, 2001
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS ONE YEAR FIVE YEARS 10 YEARS LIFETIME*
<s> <c> <c> <c> <c>
Fundamental Investors (with -9.55% +11.68% +13.95% +15.04%
dividends and capital gains
reinvested)
S&P 500 -11.83 +10.69 +12.91 +14.68
Lipper Multi-Cap Value Fund +1.30 +9.73 +12.31 +13.78
Index
Lipper Multi-Cap Core Fund -10.76 +9.32 +11.71 +13.51
Index
</TABLE>
*Since Capital Research and Management Company began managing the fund on
8/1/78.
[end table]
[begin table]
FUNDAMENTAL INVESTORS' TOTAL RETURN YEAR BY YEAR
<TABLE>
<CAPTION>
Capital return Income return Total return
<s> <c> <c> <c>
1992 +7.8% +2.4% +10.2%
1993 +15.7 +2.5 +18.2
1994 -1.2 +2.5 +1.3
1995 +31.9 +2.3 +34.2
1996 +18.2 +1.8 +20.0
1997 +25.0 +1.7 +26.7
1998 +15.2 +1.5 +16.7
1999 +23.2 +1.4 +24.6
2000 +3.1 +1.2 +4.3
2001 -10.9 +1.3 -9.6
</TABLE>
<TABLE>
<CAPTION>
<s> <c>
10-year average annual compound rate of return +13.9%
10-year total return +269.0%
Lifetime total return (since 8/1/78) +2,562.1%
</TABLE>
[end table]
Total return measures both capital results (changes in net asset value) and
income return (from income dividends), assuming reinvestment of all dividends
and capital gain distributions.
Fund results in this report were calculated for Class A shares at net asset
value (without a sales charge) unless otherwise indicated. Results for other
share classes can be found on page 26. Please refer to americanfunds.com for
the most current investment results. The inside back cover provides important
information about other share classes.
The fund's 30-day yield for Class A shares as of January 31, 2002, calculated
in accordance with the Securities and Exchange Commission formula, was 1.52%.
FIGURES SHOWN ARE PAST RESULTS AND ARE NOT PREDICTIVE OF FUTURE RESULTS. SHARE
PRICE AND RETURN WILL VARY, SO YOU 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. INVESTING OUTSIDE THE
UNITED STATES INVOLVES ADDITIONAL RISKS, SUCH AS CURRENCY FLUCTUATIONS,
POLITICAL INSTABILITY, DIFFERING SECURITIES REGULATIONS AND PERIODS OF
ILLIQUIDITY, WHICH ARE DETAILED IN THE FUND'S PROSPECTUS.
ABOUT THE COVER
On the cover and throughout this report, we've featured different views of the
well-known Lady Liberty to illustrate the value and diversity that can be
achieved with multiple perspectives. The American Funds multiple portfolio
counselor system captures the value of different perspectives. We invite you to
read more about it on pages 4-11.
Fellow shareholders:
[small color photograph of the statue of liberty]
In a year characterized by the terrorist attacks on September 11 and an
economic recession made worse by those tragedies, Fundamental Investors stayed
a course that has helped its shareholders through many tough periods in the
past. It remained focused on fundamentally strong companies with good prospects
for growth, while also seeking dividend-derived income - often a counter to
volatility.
It was a particularly challenging time for investors, as many companies
struggled with weaker business and declining earnings. The broad stock market,
as measured by the unmanaged Standard & Poor's 500 Composite Index, declined
for the second straight year, the first back-to-back decline since 1973-1974.
Over the past two-year period, Fundamental Investors resisted much of the
decline, recording a cumulative return of -5.7%, more than 14 percentage points
better than the S&P 500, which dropped 19.9%. For 2001, the contrast was
smaller; the fund posted a decline of 9.6% for the year with dividends and
capital gains reinvested, compared to an 11.8% decline in the S&P 500.
Because our fund doesn't fit neatly into one peer-group category, we measure
our returns against both the Lipper Multi-Cap Value Fund Index, which tracks
funds that invest in companies that are undervalued within their industries,
and the Lipper Multi-Cap Core Fund Index, which tracks funds that allow a wide
latitude of companies in their portfolios. The Multi-Cap Value Index returned
+1.3% for the year, while the Multi-Cap Core Index dropped 10.8%. (Lipper
includes the fund in its Multi-Cap Value Index.)
We are also pleased to report that, during a year when income was scarce, your
fund continued to pay 10-cent quarterly dividends, representing an income
return of 1.3%. A capital gain distribution of 37 cents a share was paid in
February.
A FOCUS ON FUNDAMENTALS
Despite the economic slowdown, we believe your fund's portfolio is strong and
well-positioned for growth. One look at the fund's largest holdings reiterates
Fundamental Investors' commitment to its core investment philosophy. Each is
dominant relative to its peers, which we believe gives these companies a
distinct - and sustainable - competitive edge.
Some of our most successful holdings demonstrate this fundamental strength in
market share. Lowe's (+108.6%) is the second-largest home-improvement retail
chain in the world. We increased our position in Microsoft (+52.7%) at the
height of its antitrust suit, when its stock price was depressed. Murphy Oil
(+39.1%) is a long-term holding that has grown from a regional family-owned
business into an international oil and gas exploration and production company.
Many of the pharmaceutical companies, though they have struggled in recent
months, have new products that should increase sales and boost profits over
time. For example, AstraZeneca (-8.9%), which at 2.3% of assets makes it the
fund's top holding, declined last year in part due to the loss of patent
protection on the company's ulcer drug, Prilosec. It should benefit, however,
from a new product, Crestor, a groundbreaking drug that slows the LDL-producing
enzyme that creates "bad" cholesterol.
Eli Lilly (-15.6%) also posted declines last year after its popular
antidepressant drug, Prozac, went off patent, but the company has a number of
new products that we believe will be positive for its long-term prospects.
TECHNOLOGY STOCKS STILL WEAK
The fund also suffered from a premature return to technology stocks. In early
2000, we had become quite defensive in the fund, selling off most of our
technology holdings. After many technology stocks experienced dramatic drops -
the technology-heavy Nasdaq Composite Index plunged 37.3% between March and May
2000 - we believed the worst was over and began to buy companies that seemed to
be bargains. Unfortunately, after a brief run-up that summer, many stock prices
fell further from their peaks before reaching bottom. Between July 17, 2000 and
September 21, 2001, Nasdaq dropped 66.7%. From September 21 through the end of
the year, Nasdaq rebounded 37.0%; your fund increased 18.3% during that period.
The media and entertainment industries, making up 8.6% of the fund's assets,
also faced some trying times. Companies such as Viacom (-5.6%) and AOL Time
Warner (-7.8%) have been hurt by the economic recession and the period
following September 11, which marked the largest decline in advertising since
World War II. These holdings have been in the portfolio for a long time,
however, and we continue to have confidence in them.
THE YEAR AHEAD
We believe the economy is in the early stages of recovery. But, with investors
chastened by the bear market, stock prices may be more dependent than they have
been in recent years on earnings growth, which is likely to be muted in the
months ahead.
Although short-term uncertainties always concern us, we stay focused on
providing good returns over the long term. Your portfolio represents companies
we believe have sound business models that will stand the test of time.
During this time, we have appreciated the support and confidence you've shown
us and look forward to continuing the relationship.
Sincerely,
/s/ James F. Rothenberg
James F. Rothenberg
Chairman
/s/ James E. Drasdo
James E. Drasdo
President
February 14, 2002
[Begin Sidebar]
HOW A $10,000 INVESTMENT HAS GROWN
This chart illustrates how a $10,000 investment in the fund grew between August
1, 1978 - when Capital Research and Management Company became Fundamental
Investors' investment adviser - and December 31, 2001, taking into account the
maximum 5.75% sales charge. Sales charges are lower for accounts of $25,000 or
more. The chart also shows how the S&P 500 and the Lipper Multi-Cap Value Fund
Index fared over this same period, and what happened to inflation (as measured
by the Consumer Price Index).
Here are the fund's total returns and average annual compound returns with all
distributions reinvested for periods ended December 31, 2001, assuming payment
of the 5.75% maximum sales charge at the beginning of the stated periods:
<TABLE>
<CAPTION>
<s> <c> <c>
Total return Average annual compound return
10 years +247.78% +13.27%
Five years +63.71 +10.36
One year -14.75 -
</TABLE>
[End Sidebar]
[begin mountain chart]
THE VALUE OF A LONG-TERM PERSPECTIVE
<table>
<s> <c> <c> <c> <c>
Fundamental Investors Fundamental Investors
with dividends not including
reinvested /1/,/2/ dividends /1/,/3/
Initial Investment 7/31/1978 $9,425 $9,425
1978 High 11-Sep 10,000 9,919
Low 14-Nov 8,667 8,596
Close 29-Dec 9,155 8,947
1979 Low 27-Feb 9,086 8,880
High 5-Oct 10,823 10,310
Close 31-Dec 10,556 9,892
1980 Low 21-Apr 9,625 8,907
High 20-Nov 13,131 11,876
Close 31-Dec 12,807 11,390
1981 High 27-Apr 13,986 12,308
Low 25-Sep 11,906 10,243
Close 31-Dec 12,654 10,688
1982 Low 22-Jan 10,593 8,947
High 7-Dec 17,346 13,833
Close 31-Dec 16,957 13,522
1983 Low 3-Jan 16,636 13,266
High 10-Oct 21,599 16,721
Close 30-Dec 21,389 16,424
1984 High 9-Jan 22,004 16,896
Low 24-Jul 18,549 13,980
Close 31-Dec 22,621 16,759
1985 Low 1-May 22,881 16,819
High 16-Dec 29,735 21,355
Close 31-Dec 29,448 21,148
1986 Low 14-Feb 31,766 22,813
High 4-Sep 36,571 25,757
Close 31-Dec 35,941 25,151
1987 High 25-Aug 50,132 34,478
Low 4-Dec 33,691 23,002
Close 31-Dec 37,295 25,463
1988 Low 20-Jan 36,464 24,895
High 5-Jul 43,076 28,988
Close 30-Dec 43,246 28,561
1989 Low 3-Jan 43,068 28,443
High 9-Oct 58,786 38,138
Close 29-Dec 55,597 35,438
1990 High 4-Jun 60,265 37,947
Low 11-Oct 46,988 29,390
Close 31-Dec 52,130 32,180
1991 Low 9-Jan 50,201 30,989
High 31-Dec 67,947 40,940
Close 31-Dec 67,947 40,940
1992 Low 8-Apr 66,472 39,828
High 12-Nov 72,487 42,938
Close 31-Dec 74,871 44,059
1993 Low 8-Jan 74,615 43,908
High 2-Nov 88,379 51,169
Close 31-Dec 88,466 50,884
1994 High 2-Feb 91,634 52,706
Low 8-Dec 86,773 48,708
Close 30-Dec 89,641 50,319
1995 Low 3-Jan 89,539 50,261
High 29-Nov 119,497 66,056
Close 29-Dec 120,306 66,210
1996 Low 10-Jan 117,715 64,784
High 26-Nov 145,601 79,119
Close 31-Dec 144,351 78,143
1997 Low 11-Apr 144,443 77,891
High 7-Oct 189,427 101,423
Close 31-Dec 182,855 97,513
1998 High 17-Jul 212,583 112,606
Low 8-Oct 173,533 91,600
Close 31-Dec 213,421 112,292
1999 Low 14-Jan 211,059 111,050
High 10-Dec 258,553 134,742
Close 31-Dec 265,881 138,151
2000 High 1-Sep 293,957 151,363
Low 21-Dec 266,380 136,743
Close 29-Dec 277,235 142,315
2001 High 1-Feb 287,822 147,750
Low 21-Sep 211,970 107,718
Close 31-Dec 250,761 126,959
S&P 500 Index with
dividends reinvested
Initial Investment 7/31/1978 $10,000
1978 High 12-Sep 10,627
Low 14-Nov 9,299
Close 29-Dec 9,799
1979 Low 27-Feb 9,801
High 5-Oct 11,802
Close 31-Dec 11,607
1980 Low 27-Mar 10,562
High 28-Nov 15,729
Close 31-Dec 15,373
1981 High 6-Jan 15,640
Low 25-Sep 13,082
Close 31-Dec 14,623
1982 Low 12-Aug 12,602
High 9-Nov 17,851
Close 31-Dec 17,767
1983 Low 3-Jan 17,477
High 10-Oct 22,530
Close 30-Dec 21,758
1984 Low 24-Jul 19,968
High 6-Nov 23,277
Close 31-Dec 23,111
1985 Low 4-Jan 22,619
High 16-Dec 30,243
Close 31-Dec 30,424
1986 Low 22-Jan 29,302
High 2-Dec 37,531
Close 31-Dec 36,088
1987 High 25-Aug 50,924
Low 4-Dec 34,094
Close 31-Dec 37,957
1988 Low 20-Jan 37,273
High 21-Oct 44,756
Close 30-Dec 44,220
1989 Low 3-Jan 43,836
High 9-Oct 58,767
Close 29-Dec 58,189
1990 High 16-Jul 61,793
Low 11-Oct 49,970
Close 31-Dec 56,376
1991 Low 9-Jan 53,179
High 31-Dec 73,478
Close 31-Dec 73,478
1992 Low 8-Apr 70,000
High 18-Dec 79,527
Close 31-Dec 79,069
1993 Low 8-Jan 77,860
High 28-Dec 87,262
Close 31-Dec 87,002
1994 High 2-Feb 89,903
Low 4-Apr 82,444
Close 30-Dec 88,184
1995 Low 3-Jan 88,159
High 13-Dec 121,636
Close 29-Dec 121,204
1996 Low 10-Jan 117,770
High 25-Nov 151,461
Close 31-Dec 148,960
1997 Low 2-Jan 148,210
High 5-Dec 200,504
Close 31-Dec 198,587
1998 Low 9-Jan 189,841
High 29-Dec 257,000
Close 31-Dec 255,224
1999 Low 14-Jan 251,686
High 31-Dec 308,855
Close 31-Dec 308,855
2000 High 24-Mar 320,461
Low 20-Dec 268,105
Close 29-Dec 280,722
2001 High 30-Jan 292,080
Low 21-Sep 206,662
Close 31-Dec 247,498
Lipper Multi-Cap Value
Fund Index with
dividends reinvested
Initial Investment 7/31/1978 $ 10,000
1978 Hi 31-Aug 10,452
Low 31-Oct 8,964
Close 29-Dec 9,503
1979 Low 28-Feb 9,655
Hi 31-Dec 12,179
Close 31-Dec 12,179
1980 Low 31-Mar 11,460
Hi 30-Nov 17,210
Close 31-Dec 16,418
1981 Hi 31-May 16,827
Low 30-Sep 14,758
Close 31-Dec 15,876
1982 Low 31-Jul 15,038
Hi 31-Dec 19,943
Close 31-Dec 19,943
1983 Low 31-Jan 20,541
Hi 30-Jun 25,073
Close 30-Dec 24,570
1984 Low 31-May 22,916
Hi 31-Dec 25,411
Close 31-Dec 25,411
1985 Low 31-Jan 27,107
Hi 31-Dec 31,853
Close 31-Dec 31,853
1986 Low 31-Jan 32,383
Hi 30-Jun 38,148
Close 31-Dec 36,847
1987 Hi 31-Aug 48,805
Low 30-Nov 36,634
Close 31-Dec 39,077
1988 Low 31-Jan 40,742
Hi 30-Dec 46,157
Close 30-Dec 46,157
1989 Low 28-Feb 48,445
Hi 31-Aug 57,692
Close 29-Dec 55,953
1990 Hi 31-May 56,248
Low 31-Oct 48,012
Close 31-Dec 52,178
1991 Low 31-Jan 54,419
Hi 31-Dec 66,222
Close 31-Dec 66,222
1992 Low 31-Jan 66,357
Hi 31-Dec 73,682
Close 31-Dec 73,682
1993 Low 31-Jan 74,957
Hi 31-Dec 83,799
Close 31-Dec 83,799
1994 Low 31-Mar 81,489
Hi 31-Aug 87,466
Close 30-Dec 83,890
1995 Low 31-Jan 85,186
Hi 29-Dec 109,905
Close 29-Dec 109,905
1996 Low 31-Jan 113,277
Hi 30-Nov 133,361
Close 31-Dec 132,974
1997 Low 31-Mar 135,217
Hi 31-Dec 168,757
Close 31-Dec 168,757
1998 Hi 30-Apr 189,102
Low 31-Aug 150,398
Close 31-Dec 179,769
1999 Low 28-Feb 176,204
Hi 30-Jun 202,462
Close 31-Dec 190,445
2000 Low 29-Feb 172,640
Hi 29-Dec 208,796
Close 29-Dec 208,796
2001 High 31-May 221,342
Low 30-Sep 187,804
Close 31-Dec 211,501
Consumer Price Index
(inflation)/5/
Initial Investment 7/31/1978 $10,000
1978 Low 31-Jul 10,000
High 29-Dec 10,304
Close 29-Dec 10,304
1979 Low 31-Jan 10,396
High 31-Dec 11,674
Close 31-Dec 11,674
1980 Low 31-Jan 11,842
High 31-Dec 13,135
Close 31-Dec 13,135
1981 Low 31-Jan 13,242
High 31-Dec 14,307
Close 31-Dec 14,307
1982 Low 31-Jan 14,353
High 31-Oct 14,947
Close 31-Dec 14,855
1983 Low 31-Jan 14,886
High 30-Dec 15,419
Close 30-Dec 15,419
1984 Low 31-Jan 15,510
High 31-Oct 16,027
Close 31-Dec 16,027
1985 Low 31-Jan 16,058
High 31-Dec 16,636
Close 31-Dec 16,636
1986 Low 30-Apr 16,530
High 31-Dec 16,819
Close 31-Dec 16,819
1987 Low 31-Jan 16,925
High 30-Nov 17,565
Close 31-Dec 17,565
1988 Low 31-Jan 17,610
High 30-Dec 18,341
Close 30-Dec 18,341
1989 Low 31-Jan 18,432
High 29-Dec 19,193
Close 29-Dec 19,193
1990 Low 31-Jan 19,391
High 30-Nov 20,365
Close 31-Dec 20,365
1991 Low 31-Jan 20,487
High 31-Dec 20,989
Close 31-Dec 20,989
1992 Low 31-Jan 21,020
High 30-Nov 21,613
Close 31-Dec 21,598
1993 Low 31-Jan 21,705
High 30-Nov 22,192
Close 31-Dec 22,192
1994 Low 31-Jan 22,253
High 30-Nov 22,785
Close 30-Dec 22,785
1995 Low 31-Jan 22,877
High 31-Oct 23,394
Close 29-Dec 23,364
1996 Low 31-Jan 23,501
High 30-Nov 24,140
Close 31-Dec 24,140
1997 Low 31-Jan 24,216
High 31-Oct 24,597
Close 31-Dec 24,551
1998 Low 31-Jan 24,597
High 31-Oct 24,962
Close 31-Dec 24,947
1999 Low 31-Jan 25,008
High 30-Nov 25,616
Close 31-Dec 25,616
2000 Low 31-Jan 25,693
High 30-Nov 26,499
Close 29-Dec 26,484
2001 Low 31-Jan 26,651
High 30-Sep 27,139
Close 31-Dec 26,895
</table>
<TABLE>
<CAPTION>
CAPITAL TOTAL
Year CAPITAL VALUE TOTAL VALUE
Ended VALUE Value at VALUE Value at
December Dividends Year-End Dividends Year-End Total
31 in Cash /1/ Reinvested /1/ Return
<s> <c> <c> <c> <c> <c>
1978/4/ $216 $8,947 $217 $9,155 -8.4%
1979 405 9,892 421 10,556 15.3
1980 553 11,390 603 12,807 21.3
1981 580 10,688 665 12,654 -1.2
1982 634 13,522 769 16,957 34.0
1983 594 16,424 755 21,389 26.1
1984 556 16,759 734 22,620 5.8
1985 582 21,148 795 29,448 30.2
1986 636 25,151 894 35,941 22.0
1987 717 25,463 1,034 37,295 3.8
1988 895 28,561 1,328 43,246 16.0
1989 1,225 35,438 1,877 55,597 28.6
1990 1,058 32,180 1,678 52,130 -6.2
1991 904 40,940 1,477 67,947 30.3
1992 988 44,059 1,655 74,871 10.2
1993 1,084 50,884 1,857 88,466 18.2
1994 1,238 50,319 2,171 89,641 1.3
1995 1,160 66,210 2,082 120,306 34.2
1996 1,196 78,143 2,188 144,352 20.0
1997 1,351 97,513 2,511 182,855 26.7
1998 1,428 112,292 2,690 213,421 16.7
1999 1,578 138,151 3,013 265,882 24.6
2000 1,716 142,315 3,319 277,235 4.3
2001 1,844 126,959/3/ 3,611 250,761/2/ -9.6
</TABLE>
Average
annual
compound
rate of
return for
23-1/2 years
14.7%/1/
The S&P 500 Index is unmanaged, does not reflect sales charges, commissions or
expenses and cannot be invested in directly.
/1/ Results reflect payment of maximum sales charge of 5.75% on the $10,000
investment. Thus the net amount invested was $9,425. As outlined in the
prospectus, the sales charge is reduced for larger investments.
/2/ Includes reinvested dividends of $38,348 and reinvested capital gain
distributions of $130,729.
/3/ Includes reinvested capital gain distributions of $73,002 but does not
reflect income dividends of $23,139 taken in cash.
/4/ For the period August 1, 1978 (when Capital Research and Management Company
became investment adviser) through December 31, 1978.
/5/ Computed from data supplied by the U.S. Department of Labor, Bureau of
Labor Statistics.
Past results are not predictive of future results.
[end mountain chart]
MULTIPLE PERSPECTIVES ARE BETTER THAN ONE
ONE PERSON CAN'T ALWAYS BE RIGHT
Even the most brilliant individuals can't be at their best 100% of the time.
And, even in the best periods, it's difficult to be right the majority of the
time when it comes to investing.
We've managed the American Funds for more than 70 years. In the early years we
had one individual managing each fund, as is customary in the mutual fund
industry. We also tried a committee approach. But more than 40 years ago, we
attempted something unique in the industry and found it worked. We created the
multiple portfolio counselor system. It's based on the simple premise that
several heads are better than one.
FOUR COUNSELORS, FIVE PERSPECTIVES
Here's how it works at Fundamental Investors. The fund has four portfolio
counselors and about 20 investment analysts managing the portfolio. The
counselors are generalists and the analysts are specialists. Each of
Fundamental Investors' four portfolio counselors is separately responsible for
one of five segments of the fund's assets. The fifth segment is managed
together by the investment analysts, each working on specific industries, and
is referred to as the research portfolio.
Your fund's portfolio counselors - Gordon Crawford, Jim Drasdo, Mike Kerr and
Dina Perry - each manage their segment of Fundamental Investors as if it were
an entire mutual fund. They stick to the same investment guidelines to make
sure that they're meeting the fund's objectives, but they can go about
achieving these objectives in their own unique ways - as you'll see later in
this article. While they consult with each other frequently, they make
independent decisions, thus avoiding the "watering down" tendency of a
committee trying to achieve consensus.
Normally, research analysts just make recommendations. At American Funds, they
can also buy and sell those stocks themselves in the research portfolio. That
changes the dynamic between portfolio counselor and analyst. Analysts have more
at stake than just an opinion. A barometer of the analyst's passion for his or
her recommendation is this common question from a portfolio counselor: "Do you
own it in the research portfolio?"
ENSURING DIVERSIFICATION
If a key attraction of mutual funds is that they can reduce investment risk by
providing diversification, the multiple portfolio counselor system offers an
opportunity for even greater diversification. Why? Despite each counselor
limiting investments to areas of highest conviction and greatest expertise, you
really get five mutual funds in one: the research portfolio plus the four
segments managed by the portfolio counselors. The diversity of expertise,
perspective and judgment represented in each segment of Fundamental Investors
combines to produce your fund's results.
Says portfolio counselor Dina Perry, "I wouldn't want to choose just one of us
to manage the fund, especially in the current environment. The combination of
our different approaches helps mitigate the downs and ideally helps in the up
times."
At times of uncertainty, most investors want to be more diversified. "The
multiple portfolio counselor system automatically reflects greater
diversification than just one person's view of the world," says portfolio
counselor Gordon Crawford. "Also, the diversity is highly focused because each
of us knows our own areas really well, so each segment of the fund is quite
strong."
In a typical mutual fund, a portfolio manager is expected to have a high degree
of confidence in each of the scores of securities he or she needs to own to
achieve adequate diversification. "You just can't know 50 different industries,
hundreds of companies and hundreds of managements well," says Gordy.
[Begin Sidebar]
[photograph of the statue of liberty's right hand holding the torch]
"The multiple portfolio counselor system automatically reflects greater
diversification than just one person's view of the world."
Gordon Crawford
Portfolio counselor
[photograph of Gordon Crawford]
[End Sidebar]
[Begin Sidebar]
[photograph of the face of the statue of liberty]
"We all come from different backgrounds so we're bound to come at this
differently."
Jim Drasdo
Portfolio counselor
[photograph of Jim Drasdo]
[End Sidebar]
"There are certain industries I know well, so I can feel comfortable owning
media, insurance, technology and some of the consumer stocks in my portfolio.
But that wouldn't be diversified enough for a whole mutual fund," continues
Gordy. "Alternatively, you can force me to run a more diversified portfolio,
but I'd be buying things like paper and auto companies, conglomerates and
energy companies that I don't really know much about."
"As a portfolio counselor, the advantage to me is that I'm not bearing the
weight of the world on my shoulders," says Mike Kerr. "Because I know I'm not
responsible for the entire fund, I can own more concentrated positions in my
part of the portfolio and do what I think is right for the shareholder. If it
takes time for my ideas to develop, I know the shareholders will still be
served by the other portfolio counselors and the research portfolio."
FOUR DISTINCT APPROACHES
In Fundamental Investors, the four counselors have diverse backgrounds and
distinct approaches.
Says Jim Drasdo, fund president and portfolio counselor, "We all come from
different backgrounds so we're bound to come at this differently. Gordy majored
in the classics. Dina's an economist by training. Mike was a working geologist
before he joined us as an energy analyst. My background is in chemistry and
science.
"When I invest," adds Jim, "I like to concentrate on what the market is valuing
least dearly in the $investment bargain bin.' But I'm not attracted to
everything that's on sale. I like to buy what I perceive to be good companies
when they are out of favor with investors. Sometimes I find what I call a
$freebie,' a valuable asset the market actually considers negative. A few years
ago, I bought a large utility for the fund that had a money-losing cable TV
subsidiary, but it had good cash flow. Once the subsidiary was sold, the
utility benefited from an enhanced earnings-per-share picture and the ability
to reduce debt due to the sale. I saw another bargain immediately following the
September 11 tragedy. Airline debt was on the $distressed merchandise table'
and yields hovered around 20%. I couldn't resist. I don't know if the major
airlines will ever become an attractive industry, but I'm quite certain that
the richest nation on earth will not let its major airlines fail due to the
acts of terrorists. Passengers are returning to the skies and the bonds have
already appreciated significantly."
Getting freebies isn't what drives Gordy. "I don't mind paying higher prices
for world-class companies," he says. "I think there are just a handful of them
in any given industry and if I think they have significant value and long-term
potential, I'll pay the price. I'm attracted to visionary leaders at those
companies that can succeed in all types of economic and market scenarios. My
job is to look at things as they're going to be 18 months from now and then
assemble a portfolio of stocks based on the smorgasbord of ideas that comes
from our research group. It all creates a mosaic of the world as I see it."
Dina's training as an economist helps her focus on economically sensitive
industries and companies and how they may be impacted by various parts of the
economic cycle. Two things typify Dina's approach to investing and serve to
contrast Gordy's style: "I'm a contrarian and I like to buy stocks cheap," says
Dina. "I'm able to buy things that maybe the others wouldn't look at because
the uncertainties are too great. But if I feel that we know the company well,
then I'm willing to take the risk. You can always find fundamentally sound
companies, but they're not always priced attractively. When I find one that is,
the key is to know whether the price is depressed for the right or wrong
reasons. Does Wall Street have a misimpression of the value of the company's
assets? Are investors unaware of changes being made at a company that have
negative short-term effects, but positive long-term impacts?"
Portfolio counselor Mike Kerr is a tire kicker. Like Gordy, he's heavily
influenced by observing the people who run companies. As an analyst, he has had
a reputation within the energy industry for getting to know management teams
and understanding their business. He applies that same model to his work as a
portfolio counselor.
[Begin Sidebar]
[photograph of the left hand of the statue of liberty]
"We are very different people with very different ways of looking at the world.
That's a benefit to our shareholders."
Mike Kerr
Portfolio counselor
[photograph of Mike Kerr]
[End Sidebar]
"I see my role as a combination of top-down and bottom-up thinking. The
top-down view is important to determine what's driving the market and the
economy in a given period of time. You get to listen to all the ideas that are
being generated across the market both within and outside our organization. To
me, the top-down approach is just observing and listening to all of that," says
Mike. "My bottom-up inspiration is the collective wisdom of our analysts. What
I try to do is to find companies recommended by our analysts that fit my view
of the world. The goal is to let these two overlapping filters guide the
selection of the companies in my piece of the portfolio."
SHARING IDEAS
The working life of a single portfolio manager at a mutual fund with a "star
manager" approach and limited in-house research is a solitary one. In contrast,
the multiple portfolio counselor system lends itself to sharing ideas. The goal
is not to gain agreement before making investment decisions, but to discuss
with other portfolio counselors the thought processes that helped them arrive
at their high levels of conviction.
Informal hallway interactions are elaborated on with regular meetings focused
on thorough discussions of fund holdings. Each counselor shares thoughts about
the companies they hold and the group talks in-depth about what they're doing
and why. At a recent research retreat, the analysts in the research portfolio
conducted lengthy discussions about each of their holdings in Fundamental
Investors.
"Conversations with our analysts help me gain conviction," says Dina. "That's
especially important if I'm going to make an out-of-favor decision."
Most important investment ideas come from the analysts. The counselors and
analysts have ample time to develop trusting relationships that make a
difference in sharing these ideas. "Over a decade or more, you figure out
who's particularly strong on certain ideas and issues," Mike explains. "For
example, I've known Rick Beleson, our pharmaceutical analyst, for 16 years. He
has a tremendous track record and is extraordinarily strong on the science
behind the drugs that drive these companies' earnings. Even when I don't think
it's the time to own drug companies, if Rick has conviction about a company as
a long-term growth prospect, I follow his advice."
Another example is Mark Merritt, one of our "newer" analysts; he's been with
the company for eight years - far longer than the average mutual fund industry
analyst. "Mark is a rare breed of retail store analyst," says Mike. "Most
retail stocks aren't appropriate long-term investments, so they wouldn't fit
into our approach. But Mark has a good eye for companies with a strong
fundamental story - those with five to eight years of growth ahead of them.
He's a good example of an analyst who knows what we're looking for in
Fundamental Investors."
EXPERIENCE IN UNCERTAIN TIMES
We believe the multiple portfolio counselor system works in any market
scenario, but it's especially important now. Given that few mutual fund
portfolio managers in the U.S. ever experienced a bear market until last year,
it's a huge advantage to have four professionals manage your Fundamental
Investors holdings who have considerable bear market experience.
"Times change," says Jim. "It's highly unlikely that the person who looked
brilliant in the recent euphoric times is going to be right today. It's not
likely that any one person will have all the answers in this new era of
opportunities, but also unprecedented risks. I think it's better for our
shareholders to have the benefit of the combined wisdom of four people who've
seen good and bad times and have done well - if not spectacularly well - in all
of these times."
Jim, Dina and Gordy all experienced the 1973-74 bear market's school of hard
knocks. Each had begun their investing careers just prior to that. Many
professional investors have studied those two years of sustained daily
downturns and a halving of the value of the market, but living it is another
thing.
While Mike hasn't invested in a broad-based bear market prior to this (the 1987
crash wasn't enduring enough to be a bear market), he has experienced three
serious bear markets within the energy industry he follows (1986, 1991-92 and
1998). What all four learned then, and since, helps form their distinctive
investment styles today. "That's part of what makes a good investor over a long
period of time," says Gordy, "living through all different market environments
and seeing different parts of the cycle. We have enough gray hair around here
that, on balance, we were better prepared for this difficult market than most."
So how has this experience changed the way they invest in today's environment?
As you're probably starting to see, it depends on the counselor.
Mike sees the advantage of having so many long-term shareholders in Fundamental
Investors. Stability contributes to the ability to invest with patience.
"September 11 was a horrible event for our country, but it clearly brought the
market down to lower levels and set in place a change in fiscal and monetary
policy that we hope will provide for better times ahead. Fortunately, we have
the ammunition to take advantage of this timing. The main thing I've learned in
bear markets is this: When you know that a company is well-managed and that it
will maintain its leadership and improve in the future, you have to buy it now.
I've found that if you don't buy those stocks when times are difficult, you
deeply regret it two years later."
Dina sees this as an opportunity to find the inexpensive stocks to which she's
always attracted. Her experience helps her determine which ones will be the
survivors - those that can come out on the other end of this cycle with
strength and prosperity. "We've had a major shock to the economy, and I need to
determine which companies can endure financial distress for a potentially long
period of time."
Much of this is about patience. "Over time I realized that this process takes a
lot longer than I thought," says Dina. "Look at IBM. It's a totally transformed
company, but that took a long time. You had to invest in it at a time of
uncertainty $ when it looked like it might not make it. Now, things have
changed. It's dominant in almost every sector of the technology business."
Says Jim, "When I talk to companies, I ask different questions today. I know
times are awful for just about everyone, so I ask questions like $How are you
using this downturn to make your business stronger when things turn around?'
I'm also much more focused on getting back to basics and examining things like
balance sheets. Cash flow doesn't lie. Companies with fatter wallets don't have
to cut staff, can take advantage of people who become available and can grab
opportunities that others can't. Companies producing favorable earnings are
hard to find, and they may not be the sexy names of the '90s. Utilities have
taken on a new glow for me."
Gordy, overall, continues to approach investing in the same way he always has -
looking for great companies with long-term potential. "It's the same process,
it's just that the data points are different," he says. He's thoughtful about
geopolitical uncertainty inserting itself into the market as part of his big
picture perspective and aware of individual reactions to these times.
"Everyone's a little less certain since the terrorist events of September 11.
It was such a seminal event in our lives. All the CEOs I talk with are just
trying to run their companies, deal with the current difficult environment and
cope. Most are optimistic and think it will pass."
THE VALUE OF MULTIPLE PERSPECTIVES
In times of uncertainty like this, a good way to reduce risk is through
diversification and experience. As you can see, the multiple portfolio
counselor system provides you and your fellow Fundamental Investors
shareholders with diversity of perspective, a range of deep experience and a
variety of investment styles.
"It's a very tight working group," says Mike. "We are very different people
with very different ways of looking at the world. That's a benefit to our
shareholders."
[Begin Sidebar]
[photograph of the statue of liberty]
"The combination of our different approaches helps mitigate the downs and
ideally helps in the up times."
Dina Perry
Portfolio counselor
[photograph of Dina Perry]
[End Sidebar]
INVESTMENT PORTFOLIO
FUNDAMENTAL INVESTORS
<table>
<s> <c> <c>
Largest Equity Holdings
Percent of net assets Percent Change*
AstraZeneca PLC 2.30% -8.87
Viacom 2.12 -5.64
AOL Time Warner 2.04 -7.76**
Eli Lilly 1.99 -15.61
Texas Instruments/Burr-Brown 1.89 -40.9
Microsoft 1.79 52.74
Dow Chemical 1.59 -7.77
Suncor Energy 1.44 28.76
American International Group 1.40 -19.44
Sanmina-SCI 1.38 2.61**
* Reflects change in market price for
the year ended 12/31/01. (Excludes
dividends.)
** Adjusted for mergers.
Largest Industry Holdings Percent of net assets
Pharmaceuticals 10.52%
Media 8.63
Oil & Gas 7.22
Insurance 5.03
Semiconductor Equipment & Products 4.85
</table>
<table>
<s> <c> <c> <c>
Shares/Principal Market Percent
Equity Securities Amount Value of Net
(Common and preferred stocks and (000) Assets
convertible debentures)
Pharmaceuticals - 10.52%
AstraZeneca PLC (United Kingdom) 8590000 393277
AstraZeneca PLC (ADR) 1600766 74596 2.3
Eli Lilly and Co. 5165000 405659 1.99
Johnson & Johnson 4400000 260040 1.28
Pharmacia Corp. 5933600 253068 1.24
Novartis AG (Switzerland) 3906000 141223
Novartis AG (ADR) 1148601 41924 0.9
American Home Products Corp. 2750000 168740 0.83
Pfizer Inc 3500000 139475 0.69
Bristol-Myers Squibb Co. 2000000 102000 0.5
Schering-Plough Corp. 2700000 96687 0.48
Elan Corp., PLC (ADR) (Ireland) /1/ 875000 39427 0.19
Forest Laboratories, Inc. /1/ 300000 24585 0.12
Media - 8.63%
Viacom Inc., Class B /1/ 7394500 326467
Viacom Inc., Class A /1/ 2351200 104041 2.12
AOL Time Warner Inc. /1/ 12906000 414283 2.04
News Corp. Ltd., preferred (ADR) 6200000 164052
(Australia)
News Corp. Ltd. (ADR) 3150000 100201 1.3
Fox Entertainment Group, Inc., Class A /1/ 3650000 96834 0.48
Dow Jones & Co., Inc. 1600000 87568 0.43
Clear Channel Communications, Inc. /1/ 1498100 76268 0.37
Adelphia Communications Corp. 6.00% 86000000 75336 0.37
convertible subordinated notes 2006
Comcast Corp., Class A, special stock /1/ 2000000 72000 0.35
Interpublic Group of Companies, Inc. 1860000 54944
Interpublic Group of Companies, Inc. 8168000 6507 0.3
1.87% convertible notes 2006 /2/
E.W. Scripps Co., Class A 700000 46200 0.23
Gannett Co., Inc. 500000 33615 0.17
NTL Communications Corp. 6.75% convertible 83000000 26767
subordinated notes 2008 /2/
NTL Inc. 5.75% convertible subordinated 65000000 6581 0.16
notes 2009
Knight-Ridder, Inc. 441200 28647 0.14
Tribune Co. 718400 26890 0.13
United Pan-Europe Communications NV, 1120 8960
convertible preferred
(Netherlands)/1/ /2/ /3/
United Pan-Europe Communications NV, 543826 0 0.04
warrants, expire 2007 /1/ /3/
Oil & Gas - 7.22%
Suncor Energy Inc. (Canada) 8862417 291593 1.44
Norsk Hydro AS (ADR) (Norway) 3559000 149478
Norsk Hydro AS 2701000 113151 1.29
Murphy Oil Corp. 2194900 184459 0.91
PanCanadian Energy Corp. (Canada) 7057512 183495 0.9
Phillips Petroleum Co. 2600000 156676 0.77
Unocal Corp. 2500000 90175
Unocal Capital Trust $3.125 convertible 450000 22672 0.56
preferred
Shell Canada Ltd., Class A (Canada) 3273200 94028 0.46
ChevronTexaco Corp. (merger of Chevron 800000 71688 0.35
Corp. and Texaco Inc.)
Imperial Oil Ltd. (Canada) 2261900 63062 0.31
Sunoco, Inc. 1000000 37340 0.18
ENI SpA (Italy) 850700 10641 0.05
Insurance - 5.03%
American International Group, Inc. 3600000 285840 1.4
Berkshire Hathaway Inc., Class A /1/ 3550 268380 1.32
Allstate Corp. 4400000 148280 0.73
Marsh & McLennan Companies, Inc. 840600 90322 0.44
XL Capital Ltd., Class A 970600 88674 0.44
21st Century Insurance Group 2892300 56255 0.28
Chubb Corp. 748000 51612 0.25
AMP Ltd. (Australia) 3600000 33882 0.17
Semiconductor Equipment & Products - 4.85%
Texas Instruments Inc. 12764324 357401
Burr-Brown Corp. 4.25% convertible 25000000 26685 1.89
subordinated notes 2007
Maxim Integrated Products, Inc. /1/ 2350000 123399 0.61
Applied Materials, Inc. /1/ 2800000 112280 0.55
Vitesse Semiconductor Corp. 4.00% 72000000 56614
convertible subordinated debentures 2005
Vitesse Semiconductor Corp. /1/ 3000000 37290 0.46
PMC-Sierra, Inc. /1/ 3250000 69095 0.34
Cypress Semiconductor Corp. /1/ 3225000 64274 0.32
National Semiconductor Corp. /1/ 1750000 53883 0.26
ASM Lithography 5.75% convertible 35000000 41913 0.21
debentures 2006 (Netherlands) /2/
LSI Logic Corp. /1/ 1900000 29982 0.15
Semtech Corp. 4.50% convertible 8000000 8858
subordinated notes 2007 /2/
Semtech Corp. 4.50% convertible 2000000 2215 0.05
subordinated notes 2007
Infineon Technologies AG (Germany) 75500 1579 0.01
Electric Utilities - 4.18%
TXU Corp. 4420800 208441 1.02
Exelon Corp. 3500000 167580 0.82
Dominion Resources, Inc. 1675000 100668 0.5
DTE Energy Co. 1591600 66752 0.33
American Electric Power Co., Inc. 1352100 58857 0.29
Edison International /1/ 3500000 52850 0.26
Xcel Energy Inc. 1800000 49932 0.25
CMS Energy Corp. 1800000 43254 0.21
Constellation Energy Group, Inc. 1241100 32951 0.16
Duke Energy Corp. 471900 18527
Duke Energy Corp., 8.25% units 2004 338000 8906 0.14
Southern Co. 719100 18229 0.09
FPL Group, Inc. 297500 16779 0.08
Entergy Corp. 150000 5867 0.03
Computers & Peripherals - 3.58%
International Business Machines Corp. 1600000 193536 0.95
Lexmark International, Inc., Class A /1/ 3000000 177000 0.87
Sun Microsystems, Inc. /1/ 13633400 167691 0.82
Hewlett-Packard Co. 4246200 87217 0.43
Compaq Computer Corp. 6000000 58560 0.29
Dell Computer Corp. /1/ 1550000 42129 0.21
EMC Corp. /1/ 193000 2594 0.01
Industrial Conglomerates - 3.48%
Minnesota Mining and Manufacturing Co. 1900000 224599 1.1
Tyco International Ltd. 3750000 220875 1.09
Siemens AG (Germany) 2000000 133263 0.66
General Electric Co. 3200000 128256 0.63
Banks - 3.27%
Bank of America Corp. 3200000 201440 0.99
BANK ONE CORP. 2500000 97625 0.48
Cullen/Frost Bankers, Inc. 2550000 78744 0.39
Wachovia Corp.(formerly First Union Corp.) 2000000 62720 0.31
KeyCorp 2500000 60850 0.3
National City Corp. 1778700 52009 0.25
FleetBoston Financial Corp. 1250000 45625 0.22
Sumitomo Mitsui Banking Corp. (Japan) 9000000 37993 0.19
Royal Bank of Canada (Canada) 850000 27663 0.14
Food Products - 2.80%
Unilever NV (New York Registered) 3730000 214885 1.06
(Netherlands)
Sara Lee Corp. 5684900 126375 0.62
H.J. Heinz Co. 2000000 82240 0.4
General Mills, Inc. 1404200 73032 0.36
Kellogg Co. 2400000 72240 0.36
Electronic Equipment & Instruments - 2.79%
Sanmina-SCI Corp. /1/ (merger of Sanmina 8680000 172732
Corp. and SCI Systems, Inc.)
Sanmina Corp., 0% convertible subordinated 166000000 63395
debentures 2020
SCI Systems, Inc. 3.00% convertible 54500000 45284 1.38
subordinated debentures 2007
Jabil Circuit, Inc. /1/ 7100000 161312 0.79
Agilent Technologies, Inc. /1/ 2500000 71275
Agilent Technologies, Inc. 3.00% 10370000 11627 0.41
convertible debentures 2021 /2/ /4/
Solectron Corp. 7.25% convertible 1200000 34380 0.17
preferred 2004, units /1/
DDi Corp. 5.25% convertible subordinated 10000000 6975 0.04
note 2008
Diversified Telecommunication
Services - 2.76%
SBC Communications Inc. 4500000 176265 0.87
Telefonos de Mexico, SA de CV, 4500000 157590 0.78
Class L (ADR) (Mexico)
AT&T Corp. 8400000 152376 0.75
Qwest Communications International Inc. 2161650 30544
Qwest Trends Trust, 5.75% convertible 370500 10907 0.2
preferred 2003 /2/
Sprint FON Group 1643700 33005 0.16
Communications Equipment - 2.47%
Cisco Systems, Inc. /1/ 9100000 164801 0.81
Motorola, Inc. 7861200 118075
Motorola, Inc., 7.00% convertible 400000 18696 0.67
preferred 2004, units /1/
Corning Inc. 9093000 81110
Corning Inc., 3.50% convertible 38000000 43305 0.61
debentures 2008
Telefonaktiebolaget LM Ericsson, 6000000 31320 0.16
Class B (ADR) (Sweden)
Lucent Technologies Inc. /1/ 4000000 25160 0.12
Crown Castle International Corp. /1/ 1500000 16020 0.08
Nortel Networks Corp. (Canada) 400000 3000 0.02
Chemicals - 2.37%
Dow Chemical Co. 9563600 323058 1.59
E.I. du Pont de Nemours and Co. 2500000 106275 0.52
Air Products and Chemicals, Inc. 1000000 46910 0.23
Syngenta AG (Switzerland) /1/ 98414 5100
Syngenta AG (ADR) /1/ 133740 1418 0.03
Aerospace & Defense - 2.04%
Honeywell International Inc. 5300000 179246 0.88
Lockheed Martin Corp. 2011900 93895 0.46
Boeing Co. 2400000 93072 0.46
RC Trust I, 8.25% convertible 890000 49618 0.24
preferred 2006, units
Paper & Forest Products - 2.02%
Norske Skogindustrier ASA, Class A (Norway) 6566900 123284 0.61
International Paper Co. 2800000 112980 0.55
Weyerhaeuser Co. 2025000 109512 0.54
Bowater Inc. 700000 33390 0.16
Georgia-Pacific Corp., 958640 26468 0.13
Georgia-Pacific Group
Plum Creek Timber Co., Inc. (merged 205500 5826 0.03
with Georgia-Pacific Timber Group)
Diversified Financials - 1.96%
Fannie Mae 1917800 152465 0.75
J.P. Morgan Chase & Co. (formerly 3300000 119955 0.59
Chase Manhattan Corp. and J.P. Morgan &
Household International, Inc. 1700000 98498 0.48
Co. Inc.)
Capital One Financial Corp. 450000 24278 0.12
Investor AB, Class B (Sweden) 381700 4180 0.02
Specialty Retail - 1.93%
Lowe's Companies, Inc. 5250000 243653 1.2
Limited Inc. 10110000 148819 0.73
Software - 1.92%
Microsoft Corp. /1/ 5500000 364375 1.79
Intuit Inc. /1/ 600000 25668 0.13
Metals & Mining - 1.64%
Alcoa Inc. 5480100 194818 0.96
BHP Billiton Ltd. (Australia) 12445030 66695 0.33
Massey Energy Co. 2011700 41703 0.2
Phelps Dodge Corp. 965620 31286 0.15
Machinery - 1.58%
Deere & Co. 3000000 130980 0.65
Parker Hannifin Corp. 2400000 110184 0.54
Caterpillar Inc. 1000000 52250 0.26
Illinois Tool Works Inc. 400000 27088 0.13
Road & Rail - 1.42%
Union Pacific Corp. 1900000 108300
Union Pacific Capital Trust 6.25% 160000 7620 0.57
TIDES convertible preferred 2028 /2/
Canadian Pacific Railway Ltd. (Canada) 5159000 100601 0.49
Burlington Northern Santa Fe Corp. 2547600 72683 0.36
Beverages - 1.34%
Coca-Cola Co. 3500000 165025 0.81
Anheuser-Busch Companies, Inc. 1500000 67815 0.34
PepsiCo, Inc. 800000 38952 0.19
Air Freight & Couriers - 1.07%
FedEx Corp. /1/ 2600000 134888 0.66
United Parcel Service, Inc., Class B 1509600 82273 0.41
Automobiles - 1.05%
General Motors Corp. 2800000 136080 0.67
Honda Motor Co., Ltd. (Japan) 1954000 77732 0.38
Airlines - 1.04%
Delta Air Lines, Inc. 2400000 70224 0.34
Continental Airlines, Inc., Class B /1/ 2675000 70112 0.34
AMR Corp. /1/ 2000000 44340 0.22
Southwest Airlines Co. 1500000 27720 0.14
Energy Equipment & Services - 0.86%
Baker Hughes Inc. 4800000 175056 0.86
Household Products - 0.85%
Colgate-Palmolive Co. 3000000 173250 0.85
Multiline Retail - 0.84%
Federated Department Stores, Inc. /1/ 3000000 122700 0.6
May Department Stores Co. 1300000 48074 0.24
Food & Drug Retailing - 0.65%
Walgreen Co. 3022300 101731 0.5
Albertson's, Inc. 998550 31444 0.15
Internet Software & Services - 0.65%
Yahoo Inc. /1/ 7500000 133050 0.65
Commercial Services & Supplies - 0.62%
Sabre Holdings Corp., Class A /1/ 2045304 86619 0.42
Ceridian Corp. /1/ 1200000 22500 0.11
Cendant Corp. 3.00% convertible 7900000 7950
debentures 2002 /2/
Cendant Corp. /1/ 293388 5753 0.07
Arbitron Inc. /1/ 109400 3736 0.02
Multi-Utilities - 0.50%
Questar Corp. 3000000 75150 0.37
Williams Companies, Inc. 1000000 25520 0.13
Personal Products - 0.49%
Gillette Co. 3000000 100200 0.49
Construction & Engineering - 0.41%
Fluor Corp. 2011700 75238 0.37
Foster Wheeler Ltd. 6.50% convertible 15000000 8958 0.04
subordinated notes 2007 /2/
IT Consulting & Services - 0.28%
Electronic Data Systems Corp. 600000 41130
Electronic Data Systems Corp., 279600 15728 0.28
7.625% convertible preferred,
FELINE PRIDES, 2004
Gas Utilities - 0.27%
KeySpan Corp. 1584000 54886 0.27
Health Care Equipment & Supplies - 0.26%
Applera Corp. - Applied Biosystems Group 1330200 52237 0.26
Other Industries - 0.94%
Equity Residential Properties Trust 1700000 48807 0.24
Vodafone Group PLC (ADR) (United Kingdom) 1809825 46476 0.23
Cardinal Health, Inc. 465700 30112 0.15
Chesapeake Corp. /5/ 859100 23892 0.12
Applera Corp. - Celera Genomics Group /1/ 528800 14114 0.07
Delphi Automotive Systems Corp. 914518 12492 0.06
Tupperware Corp. 500000 9625 0.05
Royal Caribbean Cruises Ltd. 0% 10750000 3392 0.02
convertible debentures 2021
MISCELLANEOUS - 2.50%
Other equity securities in initial 51062210 509046 2.5
period of acquisition
Total Equity Securities (cost: 18932119 93.08
$17,297,341,000)
Principal Market Percent
Amount Value of Net
Bonds & Notes (000) (000) Assets
Media - 0.93%
NTL Communications Corp.:
11.50% 2008 111687000 36019
Series B, 11.875% 2010 6950000 2259
NTL Inc.:
11.50% 2006 96120000 30758
12.75% 2005 38750000 12206
Comcast UK Cable Partners Ltd. 11.20% 2007 19570000 14090
Diamond Cable Communications PLC 14945000 3587 0.49
11.75% 2005
Charter Communications Holdings, 50000000 47750 0.24
LLC 8.25% 2007
United Pan-Europe Communications NV:
10.875% 2009 119615000 11961
11.50% 2010 30575000 3057
11.25% 2010 30175000 3017
0%/13.75% 2010 /6/ 33950000 2716
Series B, 11.25% 2009 15250000 1525 0.11
Cablevision Industries Corp. 9.875% 2013 10000000 10600 0.05
Time Warner Inc. 10.15% 2012 6000000 7529 0.04
Airlines - 0.54%
Northwest Airlines, Inc.:
8.875% 2006 34570000 29385
7.625% 2005 32360000 26859
8.52% 2004 24540000 21434 0.38
Continental Airlines, Inc. 8.00% 2005 28600000 24310 0.12
Delta Air Lines, Inc., Series 1993-A2, 11500000 9028 0.04
10.50% 2016 /7/
Commercial Services & Supplies - 0.01%
Sabre Holdings Corp. 7.35% 2011 /1/ 3000000 2751 0.01
Total Bonds & Notes (cost: $512,850,000) 300841 1.48
Principal Market Percent
Amount Value of Net
Short-Term Securities (000) (000) Assets
Federal Agency Discount Notes - 2.01%
Federal Home Loan Banks 1.73%-2.26% due 282000000 281484 1.38
1/7-3/20/2002
Fannie Mae 1.74%-2.30% due 1/10-3/21/2002 95000000 94785 0.47
Freddie Mac 1.74%-2.26% due 1/17-2/19/2002 33000000 32941 0.16
Corporate Short-Term Notes - 2.81%
American Express Credit Corp. 100500000 100313 0.49
1.78%-1.92% due 1/4-3/01/2002
J.P. Morgan Chase & Co. 2.00%-2.03% 61900000 61830 0.31
due 1/17-1/29/2002
SBC Communications Inc. 1.83%-2.00% 60000000 59872 0.3
due 1/23-3/8/2002 /2/
Equilon Enterprises LLC 1.75% due 25600000 25585
1/10-1/14/2002
Motiva Enterprises LLC 1.75%-1.79% 31000000 30963 0.28
due 1/9-1/28/2002
Three Rivers Funding Corp. 1.78%-1.88% 50000000 49955 0.25
due 1/10-1/22-2002 /2/
Procter & Gamble Co. 1.80% due 41800000 41716 0.21
2/6-2/11/2002 /2/
Pfizer Inc 1.80%-2.12% due 31000000 30959 0.15
1/24-1/31/2002 /2/
Tribune Co. 2.33% due 1/15/2002 /2/ 25000000 24976 0.12
BellSouth Corp. 2.00% due 1/18/2002 /2/ 25000000 24975 0.12
Kraft Foods Inc. 1.80% due 2/15/2002 25000000 24942 0.12
Merck & Co., Inc. 1.865% due 2/14/2002 25000000 24942 0.12
Household Finance Corp. 1.90%-2.03% 24000000 23985 0.12
due 1/11-1/31/2002
E.W. Scripps Co. 1.80%-1.81% due 23000000 22916 0.11
3/15-3/20/2002 /2/
Ciesco LP 1.84%-2.21% due 1/8-2/5/2002 22700000 22685 0.11
U.S. Treasuries - 0.10%
U.S. Treasury Bills 1.715%-2.05% 21000000 20909 0.1
due 3/14-4/4/2002
Total Short-Term Securities (cost: 1000733 4.92
$1,000,698,000)
Total Investment Securities (cost: 20233693 99.48
$18,810,889,000)
Excess of cash and receivables 106576 0.523965539
over payables
NET ASSETS 20340269 100.0039655
/1/ Non-income-producing security.
/2/ Purchased in a private placement
transaction; resale may be
limited to qualified institutional
buyers; resale to public
may require registration.
/3/ Valued under procedures established
by the authority of Board of Directors.
/4/ Coupon rate may change periodically.
/5/ The fund owns 5.66% of the
outstanding voting securities of
Chesapeake Corp. and thus is
considered an affiliate as defined
under the Investment Company Act of 1940.
/6/ Step bond; coupon rate will increase
at a later date.
/7/ Pass-through securities backed
by a pool of mortgages or other
loans on which principal payments are
periodically made. Therefore,
the effective maturities
are shorter than the stated maturities.
ADR = American Depositary Receipts
See Notes to Financial Statements
</table>
Equity securities added since June 30, 2001
ASM Lithography
Cullen/Frost Bankers
DDi
DuPont
Edison International
Equity Residential Properties Trust
Exelon
Johnson & Johnson
J.P. Morgan Chase
May Department Stores
National City
Novartis
Pancanadian Energy
RC Trust I
Schering-Plough
Solectron
Sumitomo Mitsui Banking
Sun Microsystems
Telefonos de Mexico
Tyco International Group
Vitesse Semiconductor
Vodafone Group
Equity securities eliminated since June 30, 2001
Adolph Coors
Avery Dennison
CNET Networks
Computer Associates International
Dole Food
Equifax
Freeport-McMoRan Copper & Gold
Intel
JDS Uniphase
Nippon Sheet Glass
ON Seminconductor
Royal Dutch Petroleum
USA Education
Walt Disney
Waste Management
Wells Fargo
Wm. Wrigley Jr.
<table>
<s> <c> <c>
Financial statements
Statement of assets and liabilities
at December 31, 2001 (dollars in thousands)
Assets:
Investment securities at market
(cost: $18,810,889) $20,233,693
Cash 201
Receivables for -
Sales of investments $102,791
Sales of fund's shares 44,214
Dividends and interest 47,148 194,153
20,428,047
Liabilities:
Payables for -
Purchases of investments 41,390
Repurchases of fund's shares 35,120
Management services 4,658
Other expenses 6,610 87,778
Net assets at December 31, 2001 $20,340,269
Total authorized capital stock -
1,000,000,000 shares, $1.00 par value
Class A shares:
Net assets $19,330,816
Shares outstanding 704,312,518
Net asset value per share $27.45
Class B shares:
Net assets $653,259
Shares outstanding 23,837,428
Net asset value per share $27.40
Class C shares:
Net assets $202,924
Shares outstanding 7,409,213
Net asset value per share $27.39
Class F shares:
Net assets $153,270
Shares outstanding 5,585,385
Net asset value per share $27.44
See notes to financial statements
Statement of operations
for the year ended December 31, 2001 (dollars in thousands)
Investment income:
Income:
Dividends $263,265
Interest 153,690 $416,955
Expenses:
Management services fee 54,760
Distribution expenses - Class A 48,690
Distribution expenses - Class B 5,054
Distribution expenses - Class C 919
Distribution expenses - Class F 158
Transfer agent fee - Class A 19,943
Transfer agent fee - Class B 620
Administrative services fees - Class C 241
Administrative services fees - Class F 127
Reports to shareholders 505
Registration statement and prospectus 1,912
Postage, stationery and supplies 2,635
Directors' fees 75
Auditing and legal fees 68
Custodian fee 944
Taxes other than federal income tax 2
Other expenses 46 136,699
Net investment income 280,256
Realized loss and unrealized
depreciation on investments:
Net realized loss (390,224)
Net unrealized depreciation on Investments (1,965,426)
Net realized loss and
unrealized depreciation
on investments (2,355,650)
Net decrease in net assets resulting
from operations (2,075,394)
See notes to financial statements
Statement of changes in net assets (dollars in thousands)
Year ended Year ended
ended December 31, December 31,
2001 2000
Operations:
Net investment income $280,256 $238,341
Net realized (loss) gain on investments (390,224) 1,436,000
Net unrealized depreciation
on investments (1,965,426) (981,026)
Net (decrease) increase in net assets
resulting from operations (2,075,394) 693,315
Dividends and distributions paid to
shareholders:
Dividends from net investment income:
Class A (273,343) (223,880)
Class B (3,448) (587)
Class C (578) -
Class F (928) -
Distributions from net realized gain on
investments:
Class A (245,208) (1,367,983)
Class B (4,538) (15,496)
Total dividends and distributions (528,043) (1,607,946)
Capital share transactions:
Proceeds from shares sold 5,005,326 5,434,428
Proceeds from shares issued in reinvestment
of net investment income dividends and
distributions of net realized gain on 499,137 1,527,294
investments
Cost of shares repurchased (2,731,440) (2,479,505)
Net increase in net assets resulting
from capital share transactions 2,773,023 4,482,217
Total increase in net assets 169,586 3,567,586
Net assets:
Beginning of year 20,170,683 16,603,097
End of year (including
undistributed net investment income:
$38,463 and $40,847, respectively)
$20,340,269 $20,170,683
See notes to financial statements
</table>
Notes to financial statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Fundamental Investors, 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 and income
primarily through investments in common stocks.
The fund offers four classes of shares as described below:
Class A shares are sold with an initial sales charge of up to 5.75%.
Class B shares are sold without an initial sales charge but are subject to a
contingent deferred sales charge ("CDSC") paid upon redemption. This charge
declines from 5% to zero over a period of six years. Class B shares
automatically convert to Class A shares after eight years.
Class C shares are sold without an initial sales charge but are subject to a
CDSC of 1% for redemptions within one year of purchase. Class C shares
automatically convert to Class F shares after ten years.
Class F shares, which are sold exclusively through fee-based programs, are sold
without an initial sales charge or CDSC.
Holders of all classes of shares have equal pro rata rights to assets,
dividends, liquidation and other rights. Each class has identical voting
rights, except for exclusive rights to vote on matters affecting only its
class. Each class of shares may have different distribution, administrative
services and transfer agent fees and expenses. Differences in class-specific
expenses will result in the payment of different per-share dividends by each
class.
SIGNIFICANT ACCOUNTING POLICIES - The financial statements have been prepared
in conformity with accounting principles generally accepted in the United
States of America. These principles require management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. 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. Fixed-income securities
are valued at prices obtained from a pricing service, when such prices are
available; however, in circumstances where the investment adviser deems it
appropriate to do so, such securities will be valued at the mean quoted bid and
asked prices or at prices for securities of comparable maturity, quality and
type. Short-term securities maturing within 60 days are valued at amortized
cost, which approximates market value. The ability of the issuers of the debt
securities held by the fund to meet their obligations may be affected by
economic developments in a specific industry, state or region. Securities and
other 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 fund's Board of Directors.
NON-U.S. CURRENCY TRANSLATION - Assets and 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 and other
assets and liabilities are combined with the net realized and unrealized gain
or loss on investment securities for financial reporting purposes.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security transactions are
accounted for as of the trade date. Realized gains and losses from securities
transactions are determined based on specific identified cost. 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.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions paid
to shareholders are recorded on the ex-dividend date.
CLASS ALLOCATIONS - Income, expenses (other than class-specific expenses) and
realized and unrealized gains and losses are allocated daily among the various
share classes based on their relative net asset values. Distribution expenses,
administrative services fees, certain transfer agent fees and other applicable
class-specific expenses are accrued daily and charged to the respective share
class.
2. NON-U.S. INVESTMENTS
INVESTMENT RISK - Investments in securities of non-U.S. issuers in certain
countries involve special investment risks. These risks may include, but are
not limited to, investment and repatriation restrictions, revaluation of
currencies, adverse political, social and economic developments, government
involvement in the private sector, limited and less reliable investor
information, lack of liquidity, certain local tax law considerations and
limited regulation of the securities markets.
TAXATION - Dividend and interest income is recorded net of non-U.S. taxes paid.
For the year ended December 31, 2001, non-U.S. taxes paid were $5,987,000.
CURRENCY GAINS AND LOSSES - Net realized currency losses on dividends, interest
and other receivables and payables, on a book basis, were $1,752,000 for the
year ended December 31, 2001.
3. FEDERAL INCOME TAXATION
The fund complies with the requirements of the Internal Revenue Code applicable
to regulated investment companies and intends to distribute all of its net
taxable income and net capital gains for the fiscal year. As a regulated
investment company, the fund is not subject to income taxes if such
distributions are made. Required distributions are based on net investment
income and net realized gains determined on a tax basis and may differ from
such amounts for financial reporting purposes. In addition, the year in which
amounts are distributed may differ from the year in which the net investment
income is earned and the net gains are realized by the fund.
As of December 31, 2001, the cost of investment securities for federal income
tax reporting purposes was $18,818,409,000. Net unrealized appreciation on
investments aggregated $1,415,284,000; $3,342,227,000 related to appreciated
securities and $1,926,943,000 related to depreciated securities. For the year
ended December 31, 2001 the fund realized tax basis net capital losses of
$95,737,000. These losses represent a net capital los carryforward at December
31, 2001 which may be used to offset capital gains realized during subsequent
years through 2009 and thereby relieve the fund and its shareholders of any
federal income tax liability with respect to the capital gains that are so
offset. The fund will not make distributions from capital gains while a capital
loss carryforward remains. The fund has recognized, for tax purposes, net
losses relating to non-U.S. currency transactions totaling $4,398,000, which
were realized during the period November 1, 2000 through December 31, 2000. In
addition, the fund has deferred, for tax purposes, to fiscal year ending
December 31, 2002, the recognition of net capital losses and losses relating to
non-U.S. currency transactions totaling $288,740,000 and $348,000,
respectively, which were realized during the period November 1, 2001 through
December 31, 2001. Net losses related to non-U.S. currency transactions of
$1,752,000 were treated as an adjustment to ordinary income for federal income
tax purposes.
4. FEES AND TRANSACTIONS WITH RELATED PARTIES
INVESTMENT ADVISORY FEE - The fee of $54,760,000 for management services was
incurred pursuant to an agreement with Capital Research and Management Company
("CRMC") with which officers and certain Directors of the fund are affiliated.
The Investment Advisory and Service Agreement provides for monthly fees accrued
daily, based on a series of rates beginning with 0.390% per annum of the first
$1 billion of daily net assets decreasing to 0.246% of such assets in excess of
$27 billion. For the year ended December 31, 2001, the management services fee
was equivalent to an annualized rate of 0.271% of average daily net assets.
DISTRIBUTION EXPENSES - The fund has adopted plans of distribution under which
it may finance activities primarily intended to sell fund shares, provided the
categories of expenses are approved in advance by the fund's Board of
Directors. The plans provide for annual expenses, based on average daily net
assets, of up to 0.25% for Class A shares, 1.00% for Class B and Class C
shares, and up to 0.50% for Class F shares.
All share classes may use up to 0.25% of these expenses to pay service fees, or
to compensate American Funds Distributors, Inc.("AFD"), the principal
underwriter of the fund's shares, for paying service fees to firms that have
entered into agreements with AFD for providing certain shareholder services.
The balance may be used for approved distribution expenses as follows:
CLASS A SHARES - Approved categories of expense include reimbursements to AFD
for commissions paid to dealers and wholesalers in respect of certain shares
sold without a sales charge. Those reimbursements are permitted for amounts
billed to the fund within the prior 15 months but only to the extent that the
overall 0.25% annual expense limit for Class A shares is not exceeded. For the
year ended December 31, 2001, aggregate distribution expenses were limited to
$48,690,000, equivalent to an annualized rate of 0.25% of average daily net
assets attributable to Class A shares. As of December 31, 2001, unreimbursed
expenses that remain subject to reimbursement totaled $1,644,000.
CLASS B SHARES - In addition to service fees of 0.25%, approved categories of
expense include fees of 0.75% per annum of average daily net assets
attributable to Class B shares payable to AFD. AFD sells the rights to receive
such payments (as well as any contingent deferred sales charges payable in
respect of shares sold during the period) in order to finance the payment of
dealer commissions. For the year ended December 31, 2001, aggregate
distribution expenses were $5,054,000, equivalent to an annualized rate of
1.00% of average daily net assets attributable to Class B shares.
CLASS C SHARES - In addition to service fees of 0.25%, the Board of Directors
has approved the payment of 0.75% per annum of average daily net assets
attributable to Class C shares to AFD to compensate firms selling Class C
shares of the fund. For the period ended December 31, 2001, aggregate
distribution expenses were $919,000, equivalent to an annualized rate of 1.00%
of average daily net assets attributable to Class C shares.
CLASS F SHARES - The plan has an expense limit of 0.50%. However, the Board of
Directors has presently approved expenses under the plan of 0.25% per annum of
average daily net assets attributable to Class F shares. For the period ended
December 31, 2001, aggregate distribution expenses were $158,000, equivalent to
an annualized rate of 0.25% of average daily net assets attributable to Class F
shares.
As of December 31, 2001, aggregate distribution expenses payable to AFD for all
share classes were $3,910,000.
AFD received $13,443,000 (after allowances to dealers) as its portion of the
sales charges paid by purchasers of the fund's Class A shares for the year
ended December 31, 2001. Such sales charges are not an expense of the fund and,
hence, are not reflected in the accompanying Statement of Operations.
TRANSFER AGENT FEE - A fee of $20,563,000 was incurred during the year ended
December 31, 2001, pursuant to an agreement with American Funds Service Company
("AFS"), the transfer agent for the fund. As of December 31, 2001, aggregate
transfer agent fees payable to AFS for Class A and Class B shares were
$1,753,000.
ADMINISTRATIVE SERVICES FEES - The fund has an administrative services
agreement with CRMC for Class C and Class F shares. Pursuant to this agreement,
CRMC provides transfer agency and other related shareholder services. CRMC may
contract with third parties to perform these services. Under the agreement, the
fund pays CRMC a fee equal to 0.15% per annum of average daily net assets of
Class C and Class F shares, plus amounts payable for certain transfer agency
services according to a specified schedule. For the period ended December 31,
2001, total fees under the agreement were $368,000. As of December 31, 2001,
aggregate administrative services fees payable to CRMC for Class C and Class F
shares were $55,000.
DEFERRED DIRECTORS' FEES - Since the adoption of the deferred compensation plan
in 1993, Directors who are unaffiliated with CRMC may elect to defer the
receipt of part or all of their compensation. Deferred compensation amounts,
which remain in 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. As of
December 31, 2001, the cumulative amount of these liabilities was $817,000.
Directors' fees on the Statement of Operations include the current fees (either
paid in cash or deferred) and the net increase or decrease in the value of
deferred compensation.
AFFILIATED OFFICERS AND DIRECTORS - CRMC is owned by The Capital Group
Companies, Inc. AFS and AFD are both wholly owned subsidiaries of CRMC.
Officers and certain Directors 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.
5. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES
The fund made purchases and sales of investment securities, excluding
short-term securities, of $9,059,542,000 and $5,403,106,000 respectively,
during the year ended December 31, 2001.
Pursuant to the custodian agreement, the fund receives credits against its
custodian fee for imputed interest on certain balances with the custodian bank.
For the year ended December 31, 2001, the custodian fee of $944,000 includes
$108,000 that was paid by these credits rather than in cash.
For the year ended December 31, 2001, the fund reclassified $4,343,000 from
undistributed net investment income to undistributed net realized gains and
$214,000 from undistributed net realized gains to additional paid-in-capital to
reflect permanent differences between book and tax reporting.
As of December 31, 2001, net assets consisted of the following:
<table>
<s> <c>
(dollars in thousands)
Capital paid in on shares of capital stock $19,270,988
Undistributed net investment income 38,463
Accumulated net realized loss (391,997)
Net unrealized appreciation 1,422,815
Net assets $20,340,269
</table>
Capital share transactions in the fund were as follows:
<table>
<s> <c> <c>
Year ended December 31, 2001
Amount (000) Shares
Class A Shares:
Sold $4,166,164 144,622,510
Reinvestment of dividends and distributions 490,005 16,799,066
Repurchased (2,663,924) (94,907,488)
Net increase in Class A 1,992,245 66,514,088
Class B Shares: /1/
Sold 452,377 15,660,219
Reinvestment of dividends and distributions 7,738 266,313
Repurchased (46,247) (1,695,149)
Net increase in Class B 413,868 14,231,383
Class C Shares: /2/
Sold 218,365 7,735,299
Reinvestment of dividends and distributions 555 20,276
Repurchased (9,224) (346,362)
Net increase in Class C 209,696 7,409,213
Class F Shares: /2/
Sold 168,420 6,008,121
Reinvestment of dividends and distributions 839 30,302
Repurchased (12,045) (453,038)
Net increase in Class F 157,214 5,585,385
Total net increase in fund $2,773,023 93,740,069
Year ended December 31, 2001
Amount (000) Shares
Class A Shares:
Sold $5,121,869 154,249,355
Reinvestment of dividends and distributions 1,511,665 48,749,136
Repurchased (2,471,417) (74,675,780)
Net increase in Class A 4,162,117 128,322,711
Class B Shares: /1/
Sold 312,559 9,345,451
Reinvestment of dividends and distributions 15,629 507,965
Repurchased (8,088) (247,371)
Net increase in Class B 320,100 9,606,045
Class C Shares: /2/
Sold - -
Reinvestment of dividends and distributions - -
Repurchased - -
Net increase in Class C - -
Class F Shares: /2/
Sold - -
Reinvestment of dividends and distributions - -
Repurchased - -
Net increase in Class F - -
Total net increase in fund $4,482,217 137,928,756
/1/ Class B shares were not
offered before March 15, 2000.
/2/ Class C and Class F shares
were not offered before March 15, 2001.
</table>
<table>
<s> <c> <c> <c>
Per-share data and ratios
Class A Class A Class A
Year ended Year ended Year ended
December 31 December 31 December 31
2001 2000 1999
Net asset value, beginning of year $31.16 $32.59 $28.92
Income from investment operations:
Net investment income .40 /1/ .42 /1/ .41
Net (losses)/gains on securities (3.34) /1/ .90 /1/ 6.45
(both realized and unrealized)
Total from investment operations (2.94) 1.32 6.86
Less distributions:
Dividends (from net investment income) (.40) (.40) (.40)
Distributions (from capital gains) (.37) (2.35) (2.79)
Total distributions (.77) (2.75) (3.19)
Net asset value, end of year $27.45 $31.16 $32.59
Total return /2/ (9.55)% 4.27% 24.58%
Ratios/supplemental data:
Net assets, end of year (in millions) $19,331 $19,872 $16,603
Ratio of expenses to average net assets .65% .64% .63%
Ratio of net income to average net assets 1.41% 1.28% 1.33%
Class A Class A
Year ended Year ended
December 31 December 31
1998 1997
Net asset value, beginning of year $27.40 $24.54
Income from investment operations:
Net investment income .42 .41
Net (losses)/gains on securities 4.09 6.00
(both realized and unrealized)
Total from investment operations 4.51 6.41
Less distributions:
Dividends (from net investment income) (.40) (.42)
Distributions (from capital gains) (2.59) (3.13)
Total distributions (2.99) (3.55)
Net asset value, end of year $28.92 $27.40
Total return /2/ 16.72% 26.68%
Ratios/supplemental data:
Net assets, end of year (in millions) $12,713 $10,465
Ratio of expenses to average net assets .63% .63%
Ratio of net income to average net assets 1.47% 1.54%
Class B Class B
Year ended March 15 to
December 31, December 31,
2001 2000 /3/
Net asset value, beginning of period $31.12 $31.93
Income from investment operations:
Net investment income /1/ .18 .15
Net (losses)/gains on securities (3.34) 1.02
(both realized and unrealized) /1/
Total from investment operations (3.16) 1.17
Less distributions:
Dividends (from net investment income) (.19) (.13)
Distributions (from capital gains) (.37) (1.85)
Total distributions (.56) (1.98)
Net asset value, end of period $27.40 $31.12
Total return /2/ (10.24)% 3.73 %
Ratios/supplemental data:
Net assets, end of period (in millions) $653 $299
Ratio of expenses to average net assets 1.42% 1.39% /4/
Ratio of net income to average net assets .64% .53% /4/
Class C Class F
March 15 to March 15 to
December 31, December 31,
2001 /3/ 2001 /3/
Net asset value, beginning of period $28.52 $28.56
Income from investment operations:
Net investment income /1/ .11 .28
Net (losses)/gains on securities (1.13) (1.12)
(both realized and unrealized) /1/
Total from investment operations (1.02) (.84)
Less distributions:
Dividends (from net investment income) (.11) (.28)
Distributions (from capital gains) -- --
Total distributions (.11) (.28)
Net asset value, end of period $27.39 $27.44
Total return /2/ (3.60)% (2.97)%
Ratios/supplemental data:
Net assets, end of period (in millions) $203 $153
Ratio of expenses to average net assets 1.55% /4/ .74% /4/
Ratio of net income to average net assets .49% /4/ 1.31% /4/
Supplemental data - all classes
Year ended Year ended Year ended
December 31 December 31 December 31
2001 2000 1999
Portfolio turnover rate 29.10% 43.43% 45.50%
Year ended Year ended
December 31 December 31
1998 1997
Portfolio turnover rate 52.57% 45.09%
/1/ Based on average shares outstanding.
/2/ Total returns exclude all sales charges,
including contingent deferred sales
charges.
/3/ Based on operations for the
period shown and,
accordingly, not representative
of a full year
(unless otherwise noted).
/4/ Annualized.
</table>
Independent Auditors' Report
To the Board of Directors and Shareholders of Fundamental Investors, Inc.:
We have audited the accompanying statement of assets and liabilities of
Fundamental Investors, Inc. (the "Fund"), including the investment portfolio,
as of December 31, 2001, 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 for Class A shares, and the period March 15,
2000 through December 31, 2000 and the year ended December 31, 2001 for Class B
shares, and the period March 15, 2001 through December 31, 2001 for Class C and
Class F shares. 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 auditing standards generally
accepted in the United States of America. 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 as of December 31, 2001,
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 Fundamental Investors, Inc. as of December 31, 2001, 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 for Class A shares, and the
period March 15, 2000 through December 31, 2000 and the year ended December 31,
2001 for Class B shares, and the period March 15, 2001 through December 31,
2001 for Class C and Class F shares, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE, LLP
Los Angeles, California
February 6, 2002
[begin table]
OTHER SHARE CLASS RESULTS (unaudited)
Class B, Class C and Class F
Returns for periods ended December 31, 2001:
<TABLE>
<CAPTION>
One year Life of class
<s> <c> <c>
CLASS B SHARES
Reflecting applicable contingent -14.65% -5.88%(1)
deferred sales charge (CDSC), maximum
of 5%, payable only if shares are
sold within six years of purchase
Not reflecting CDSC -10.24% -3.90%(1)
CLASS C SHARES
Reflecting CDSC, maximum of 1%, - -4.56%(2)
payable only if shares are sold
within one year of purchase
Not reflecting CDSC - -3.60%(2)
CLASS F SHARES
Not reflecting annual asset-based fee - -2.97%(2)
charged by sponsoring firm
</TABLE>
(1) Average annual compound return from March 15, 2000, when Class B shares
first became available.
(2) Total return from March 15, 2001, when Class C and Class F shares first
became available.
[end table]
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 certain distributions received by
shareholders during such fiscal year.
During the fiscal year ended December 31, 2001, the fund paid a long-term
capital gain distribution of $247,156,000. The fund also designated 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, 80% of the dividends
paid by the fund from net investment income represent 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.
SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV OR OTHER TAX INFORMATION WHICH
WILL BE MAILED IN JANUARY 2002 TO DETERMINE THE CALENDAR YEAR AMOUNTS TO BE
INCLUDED ON THEIR 2001 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT THEIR TAX
ADVISERS.
BOARD OF DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NAME AND AGE YEAR FIRST PRINCIPAL NUMBER OF BOARDS OTHER
ELECTED A OCCUPATION(S) DURING WITHIN THE FUND DIRECTORSHIPS(3)
DIRECTOR PAST FIVE YEARS COMPLEX(2) ON HELD BY DIRECTOR
OF THE WHICH DIRECTOR
FUND(1) SERVES
<s> <c> <c> <c> <c>
"NON-INTERESTED"
DIRECTORS
Guilford C. 1991 Emeritus Professor of 2 PIMCO Funds
Babcock, 70 Finance, Marshall
School of Business,
University of
Southern California
Robert A. Fox, 1998 Managing General 7 Crompton
64 Partner, Fox Corporation
Investments LP;
Professor and
Executive in
Residence, University
of California, Davis;
former President and
CEO, Foster Farms
Leonade D. 1998 Co-founder, 6 None
Jones, 54 VentureThink LLC and
Versura Inc.; former
Treasurer, The
Washington Post
Company
John G. 1998 The IBJ Professor of 8 Plum Creek Timber
McDonald, 64 Finance, Graduate Co.; Scholastic
School of Business, Corporation;
Stanford University iStar Financial,
Inc.; Varian,
Inc.; Capstone
Turbine Corp.
Gail L. Neale, 1985 President, The 5 None
67 Lovejoy Consulting
Group, Inc. (a pro
bono consulting group
advising nonprofit
organizations)
Henry E. Riggs, 1989 President, Keck 4 None
66 Graduate Institute of
Applied Life
Sciences; former
President and
Professor of
Engineering, Harvey
Mudd College
Patricia K. 1998 Private investor; 6 Crompton
Woolf, Ph.D., 67 Lecturer, Department Corporation;
of Molecular Biology, National Life
Princeton University; Holding Co.,
Corporate Director First Energy
Corporation
</TABLE>
<TABLE>
<CAPTION>
NAME, AGE YEAR FIRST PRINCIPAL OCCUPATION(S) DURING NUMBER OF OTHER
AND POSITION ELECTED A PAST FIVE YEARS AND POSITIONS BOARDS DIRECTORSHIPS(3)
WITH FUND DIRECTOR HELD WITH AFFILIATED ENTITIES WITHIN THE HELD BY DIRECTOR
OR OFFICER OR THE PRINCIPAL UNDERWRITER FUND
OF THE OF THE FUND COMPLEX(2)
FUND(1) ON WHICH
DIRECTOR
SERVES
<s> <c> <c> <c> <c>
"INTERESTED"
DIRECTORS(4)
James F. 1998 President and Director, 4 None
Rothenberg, Capital Research Chairman of
55 the Board and Management
Company; Director, American
Funds Distributors, Inc.;(5)
Director, American Funds
Service Company;(5) Director,
The Capital Group Companies,
Inc.;(5) Director, Capital
Guardian Trust Company;(5)
Director, Capital Group
Research, Inc.;(5) Director,
Capital Management Services,
Inc.(5)
James E. 1987 Senior Vice President, Capital 2 None
Drasdo, 56 Research President and
Principal and Management
Company; Director, The Capital
Executive Officer Group
Companies, Inc.;(5)Director,
Capital Research Company(5)
</TABLE>
<TABLE>
<CAPTION>
NAME, AGE AND POSITION YEAR FIRST PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS AND
WITH FUND ELECTED AN POSITIONS HELD WITH AFFILIATED ENTITIES OR THE
OFFICER OF PRINCIPAL UNDERWRITER OF THE FUND
THE FUND(1)
<s> <c> <c>
OTHER OFFICERS
Gordon Crawford, 55 1994 Senior Vice President, Capital Research and
Senior Vice President Management Company; Chairman of the Board and
Director, The Capital Group Companies, Inc.;(5)
Senior Vice President and Director, Capital
Management Services, Inc.(5)
Paul G. Haaga, Jr., 53 1994 Executive Vice President and Director, Capital
Senior Vice President Research and Management Company; Director, American
Funds Distributors, Inc.;(5) Director, The Capital
Group Companies, Inc.(5)
Michael T. Kerr, 42 1995 Senior Vice President, Capital Research Company(5)
Senior Vice President
Dina N. Perry, 56 1994 Senior Vice President, Capital Research and
Senior Vice President Management Company
Martin Romo, 34 1999 Vice President and Director, Capital Research Vice
President Company(5)
Patrick Quan, 43 1989-1998 Vice President - Fund Business Management Group,
Secretary 2000 Capital Research and Management Company
Sheryl F. Johnson, 33 1998 Vice President - Fund Business Management Group,
Treasurer Capital Research and Management Company
David A. Pritchett, 35 1999 Vice President - Fund Business Management Group,
Assistant Treasurer Capital Research and Management Company
</TABLE>
THE STATEMENT OF ADDITIONAL INFORMATION INCLUDES ADDITIONAL INFORMATION ABOUT
FUND DIRECTORS AND IS AVAILABLE WITHOUT CHARGE UPON REQUEST BY CALLING AMERICAN
FUNDS SERVICE COMPANY AT 800/421-0180. THE ADDRESS FOR ALL DIRECTORS AND
OFFICERS OF THE FUND IS 333 SOUTH HOPE STREET, LOS ANGELES, CA 90071,
ATTENTION: FUND SECRETARY.
(1) Directors and officers of the fund serve until their resignation, removal
or retirement.
(2) Capital Research and Management Company manages the American Funds,
consisting of 29 funds. Capital Research and Management Company also manages
American Funds Insurance Series(R) and Anchor Pathway Fund, which serve as the
underlying investment vehicles for certain variable insurance contracts; and
Endowments, whose shareholders are limited to certain nonprofit organizations.
(3) This includes all directorships (other than those in the American Funds)
that are held by each Director as a director of a public company or a
registered investment company.
(4) "Interested persons" within the meaning of the 1940 Act on the basis of
their affiliation with the fund's investment adviser, Capital Research and
Management Company, or affiliated entities (including the fund's principal
underwriter).
(5) Company affiliated with Capital Research and Management Company.
OFFICE OF THE FUND
One Market
Steuart Tower, Suite 1800
Mailing address: P.O. Box 7650
San Francisco, CA 94120-7650
INVESTMENT ADVISER
Capital Research and Management Company
333 South Hope Street
Los Angeles, CA 90071-1443
135 South State College Boulevard
Brea, CA 92821-5823
TRANSFER AGENT FOR SHAREHOLDER ACCOUNTS
American Funds Service Company
(Please write to the address nearest you.)
P.O. Box 25065
Santa Ana, CA 92799-5065
P.O. Box 659522
San Antonio, TX 78265-9522
P.O. Box 6007
Indianapolis, IN 46206-6007
P.O. Box 2280
Norfolk, VA 23501-2280
CUSTODIAN OF ASSETS
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02105-1713
COUNSEL
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, CA 90071-2371
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two California Plaza
350 South Grand Avenue
Los Angeles, CA 90071-3462
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, CA 90071-1462
There are several ways to invest in Fundamental Investors. Class A shares are
subject to a 5.75% maximum up-front sales charge that declines for accounts of
$25,000 or more. Other share classes, which are generally not available for
certain employer-sponsored retirement plans, have no up-front sales charges but
are subject to additional annual expenses and fees. Annual expenses for Class B
shares were 0.77% higher than for Class A shares; Class B shares convert to
Class A shares after eight years of ownership. If redeemed within six years,
Class B shares may also be subject to a contingent deferred sales charge (CDSC)
of up to 5% that declines over time. Class C shares were subject to annualized
expenses 0.90% higher than those for Class A shares and a 1% CDSC if redeemed
within the first year after purchase. Class C shares convert to Class F shares
after 10 years. Class F shares, which are available only through certain
fee-based programs offered by broker-dealer firms and registered investment
advisers, had higher expenses (0.09% annualized) than did Class A shares, and
an annual asset-based fee charged by the sponsoring firm. Expenses are deducted
from income earned by the fund. As a result, dividends and investment results
will differ for each share class.
FOR INFORMATION ABOUT YOUR ACCOUNT OR ANY OF THE FUND'S SERVICES, OR FOR A
PROSPECTUS FOR ANY OF THE AMERICAN FUNDS, PLEASE CONTACT YOUR FINANCIAL
ADVISER. YOU MAY ALSO CALL AMERICAN FUNDS SERVICE COMPANY AT 800/421-0180 OR
VISIT US AT AMERICANFUNDS.COM ON THE WORLD WIDE WEB. PLEASE READ THE PROSPECTUS
CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
This report is for the information of shareholders of Fundamental Investors,
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 March 31, 2002, this report must be accompanied by an American
Funds quarterly statistical update for the most recently completed calendar
quarter.
[American Funds(SM)]
WHAT MAKES AMERICAN FUNDS DIFFERENT?
Each of our funds is built on a tradition spanning seven decades of investing.
No matter which of the American Funds you may own, you can rest assured that
your fund will follow these time-tested approaches to investing your money.
* A long-term, value-oriented approach
* An unparalleled global research effort
* A unique method of portfolio management
* Experienced investment professionals
* A commitment to low operating expenses
Here are the 29 American Funds:
* GROWTH FUNDS
Emphasis on long-term growth through stocks
AMCAP Fund(R)
EuroPacific Growth Fund(R)
The Growth Fund of America(R)
The New Economy Fund(R)
New Perspective Fund(R)
New World Fund(SM)
SMALLCAP World Fund(R)
* GROWTH-AND-INCOME FUNDS
Emphasis on long-term growth and dividends through stocks
American Mutual Fund(R)
Capital World Growth and Income Fund(SM)
> Fundamental Investors(SM)
The Investment Company of America(R)
Washington Mutual Investors Fund(SM)
* EQUITY-INCOME FUNDS
Emphasis on above-average income and growth through stocks and/or bonds
Capital Income Builder(R)
The Income Fund of America(R)
* BALANCED FUND
Emphasis on long-term growth and current income through stocks and bonds
American Balanced Fund(R)
* BOND FUNDS
Emphasis on current income through bonds
American High-Income Trust(SM)
The Bond Fund of America(SM)
Capital World Bond Fund(R)
Intermediate Bond Fund of America(R)
U.S. Government Securities Fund(SM)
* TAX-EXEMPT BOND FUNDS
Emphasis on tax-free current income through municipal bonds
American High-Income Municipal Bond Fund(R)
Limited Term Tax-Exempt Bond Fund of America(SM)
The Tax-Exempt Bond Fund of America(R)
STATE-SPECIFIC TAX-EXEMPT FUNDS
The Tax-Exempt Fund of California(R)
The Tax-Exempt Fund of Maryland(R)
The Tax-Exempt Fund of Virginia(R)
* MONEY MARKET FUNDS
Seek stable monthly income through money market instruments
The Cash Management Trust of America(R)
The Tax-Exempt Money Fund of America(SM)
The U.S. Treasury Money Fund of America(SM)
THE CAPITAL GROUP COMPANIES
American Funds
Capital Research and Management
Capital International
Capital Guardian
Capital Bank and Trust
Lit. No. FI-011-0202
Litho in USA KBD/CG/5482
(C)2002 American Funds Distributors, Inc.
Printed on recycled paper
</TEXT>
</DOCUMENT>