N-CSRS 1 fixedincome-ncsrs.txt AXP FIXED INCOME SERIES, INC. 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 811-2503 ------------ AXP FIXED INCOME SERIES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 50606 AXP Financial Center, Minneapolis, Minnesota 55474 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268 -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (612) 330-9283 ----------------- Date of fiscal year end: 8/31 -------------- Date of reporting period: 2/28 -------------- AXP(R) Diversified Bond Fund Semiannual Report for the Period Ended Feb. 28, 2005 AXP Diversified Bond Fund seeks to provide shareholders with a high level of current income while conserving the value of the investment for the longest period of time. (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) Table of Contents Fund Snapshot 3 Performance Summary 4 Questions & Answers with Portfolio Management 5 Investments in Securities 10 Financial Statements 21 Notes to Financial Statements 24 Fund Expenses Example 36 Proxy Voting 38 CORPORATE REORGANIZATION On Feb. 1, 2005, American Express Company, the parent company of the Fund's investment manager, American Express Financial Corporation (AEFC), announced plans to pursue a spin-off of 100% of the common stock of AEFC to shareholders of American Express Company. The transaction, expected to be completed in the third quarter of 2005, is subject to certain regulatory and other approvals, as well as final approval by the board of directors of American Express Company. Upon completion of the transaction AEFC will be a publicly traded company separate from American Express Company. The current agreements between the Fund and AEFC and its affiliates will remain in place. No changes in operations or personnel, including the portfolio manager of the Fund, are anticipated. (logo) Dalbar American Express(R) Funds' reports to shareholders have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. -------------------------------------------------------------------------------- 2 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Fund Snapshot AT FEB. 28, 2005 PORTFOLIO MANAGERS Portfolio managers Since Years in industry Jamie Jackson, CFA 6/03 16 Scott Kirby 2/03 18 Tom Murphy, CFA 2/03 18 Nic Pifer, CFA 2/03 14 Jennifer Ponce de Leon 2/03 15 FUND OBJECTIVE For investors seeking a high level of current income while conserving the value of the investment for the longest period of time. Inception dates by class A: 10/3/74 B: 3/20/95 C: 6/26/00 I: 3/4/04 Y: 3/20/95 Ticker symbols by class A: INBNX B: ININX C: AXBCX I: -- Y: IDBYX Total net assets $2.608 billion Number of holdings 369 Weighted average life(1) 6.6 years Effective duration(2) 4.0 years Weighted average bond rating(3) AA (1) Weighted average life measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) Effective duration measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) Weighted average bond rating represents the average credit quality of the underlying bonds in the portfolio. STYLE MATRIX Shading within the style matrix indicates areas in which the Fund generally invests. DURATION SHORT INT. LONG X HIGH X MEDIUM X LOW SECTOR COMPOSITION Percentage of portfolio assets (pie chart) Mortgage-backed securities 40.7% U.S. government obligations & agencies 22.7% Corporate bonds* 20.2% CMBS/ABS** 11.3% Short-term securities*** 4.0% Foreign government bonds 1.0% Other 0.1% * Includes 4.8% Communications, 3.9% Other financial, 2.3% Banks & brokers, 1.7% Utilities, 1.6% Technology, 1.4% Insurance, 1.3% Basic industries, 1.2% Consumer cyclical, 1.0% Energy, 0.7% Consumer non-cyclical and 0.3% Capital goods. ** Commercial mortgage-backed securities/Asset-backed securities *** Of the 4.0%, 2.4% is due to security lending activity and 1.6% is the Fund's cash equivalent position. CREDIT QUALITY SUMMARY Percentage of bond portfolio assets AAA bonds 79.2% AA bonds 4.5 A bonds 3.8 BBB bonds 8.6 Non-investment grade bonds 3.9 Individual security ratings are based on information from Standard & Poor's Corp. and Moody's Investors Service. If a rating is unavailable, the rating is determined through an internal analysis, if appropriate. 0.3% of the portfolio rating above was determined through internal analysis. Fund holdings are subject to change. -------------------------------------------------------------------------------- 3 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Performance Summary (bar chart) PERFORMANCE COMPARISON For the six-month period ended Feb. 28, 2005 +2.12% +1.26% +1.58% +2.12% = AXP Diversified Bond Fund Class A (excluding sales charge) +1.26% = Lehman Brothers Aggregate Bond Index(1) (unmanaged) +1.58% = Lipper Intermediate Investment Grade Index(2) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (800) 862-7919 or visiting www.americanexpress.com/funds. (1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. However, the securities used to create the index may not be representative of the bonds held in the Fund. (2) The Lipper Intermediate Investment Grade Index includes the 30 largest investment grade funds tracked by Lipper Inc. The index's returns include net reinvested dividends. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. SEC YIELDS At Feb. 28, 2005 by class A: 3.68% B: 3.11% C: 3.11% I: 4.22% Y: 4.04% At March 31, 2005 by class A: 3.79% B: 3.22% C: 3.23% I: 4.34% Y: 4.15% The Securities and Exchange Commission (SEC) yield is calculated by dividing anticipated net investment income during a 31-day period by the public offering price (POP) per share on the last day of the period, and converting the results to yearly figures. See Average Annual Total Returns on page 5 for additional performance information. -------------------------------------------------------------------------------- 4 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Below, AXP Diversified Bond Fund's portfolio management team discusses the Fund's positioning and results for the first half of the current fiscal year. Q: How did AXP Diversified Bond Fund perform for the six months ended Feb. 28, 2005? A: AXP Diversified Bond Fund's Class A shares gained 2.12%, excluding sales charge, for the six months ended Feb. 28, 2005. The Fund outperformed both its benchmark, the Lehman Brothers Aggregate Bond Index (Lehman Index), which rose 1.26%, and the Lipper Intermediate Investment Grade Index, representing the Fund's peer group, which advanced 1.58%.
AVERAGE ANNUAL TOTAL RETURNS Class A Class B Class C Class I Class Y (Inception dates) (10/3/74) (3/20/95) (6/26/00) (3/4/04) (3/20/95) After After NAV(1) POP(2) NAV(1) CDSC(3) NAV(1) CDSC(4) NAV(5) NAV(6) at Feb. 28, 2005 6 months* +2.12% -2.73% +1.53% -2.47% +1.74% +0.74% +2.09% +1.99% 1 year +3.00% -1.89% +2.22% -1.75% +2.43% +2.43% N/A +3.17% 3 years +4.60% +2.92% +3.81% +2.88% +3.88% +3.88% N/A +4.77% 5 years +5.77% +4.74% +4.97% +4.80% N/A N/A N/A +5.94% 10 years +6.63% +6.11% N/A N/A N/A N/A N/A N/A Since inception +9.49% +9.32% +5.85% +5.85% +5.37% +5.37% +3.55% +6.80% at March 31, 2005 6 months* +0.86% -3.92% +0.48% -3.48% +0.28% -0.71% +1.04% +0.95% 1 year +1.50% -3.31% +0.74% -3.18% +0.73% +0.73% +1.89% +1.67% 3 years +4.78% +3.10% +3.99% +3.06% +3.91% +3.91% N/A +4.95% 5 years +5.52% +4.50% +4.73% +4.56% N/A N/A N/A +5.69% 10 years +6.48% +5.96% +5.68% +5.68% N/A N/A N/A +6.63% Since inception +9.44% +9.27% +5.71% +5.71% +5.05% +5.05% +2.63% +6.67%
* Not annualized. (1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 4.75%. (3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as follows: first year 5%; second and third year 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. (4) 1% CDSC applies to redemptions made within the first year of purchase. (5) Sales charge is not applicable to these shares. Shares available to eligible investors only, currently limited to AXP Portfolio Builder Series funds, six affiliated funds-of-funds. (6) Sales charge is not applicable to these shares. Shares available to institutional investors only. -------------------------------------------------------------------------------- 5 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Questions & Answers (begin callout quote)>The riskiest segments of the bond market -- high yield corporate bonds and global bonds in emerging markets -- offered the highest returns for the period. (end callout quote) Q: What market conditions were present during the six months? A: During the period, bond market investors closely watched interest rate changes made by the Federal Reserve Board (the Fed) along with inflation data. After the Fed's first three moves to tighten monetary policy in June, August and September of 2004, the market's widespread expectation was that it would pause to evaluate the effects of those rate hikes. Instead, the Fed increased interest rates three more times, bringing the targeted federal funds rate to 2.50% by the end of the reporting period. While rates at the short end of the yield curve increased, yields for intermediate-term securities remained low and yields for long-term securities even decreased leading to a dramatic flattening of the yield curve. On the inflation front, the core Consumer Price Index (CPI) -- the most closely watched gauge of inflation, which excludes food and energy prices -- moved up approximately 2.3% for the six months ended Jan. 31, 2005. Despite the increase, economists and Fed policy-makers agreed at the time that inflation remained "well contained." The riskiest segments of the bond market -- high yield corporate bonds and global bonds in emerging markets -- offered the highest returns for the period. Also, agency, corporate, asset-backed and mortgage-backed securities, outperformed U.S. Treasuries for the six months. Finally, our Treasury Inflation Protected Securities (TIPS) holdings provided strong results. Q: What factors most significantly affected Fund performance? A: The Fund's results were aided by our shorter-than-Lehman Index duration stance during the period, which reflected our view that interest rates would move higher. Our effective positioning of securities along the yield curve also helped performance, as the difference in yield between short and long term securities continued to narrow. Individual bond selection also benefited the Fund, especially in the corporate sector, where we favored higher quality issues. The Fund's position in AAA-rated commercial mortgage-backed securities (CMBS) contributed positively to the Fund's results, as the CMBS market was able to successfully absorb a large number -------------------------------------------------------------------------------- 6 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Questions & Answers (begin callout quote)>We intend to continue to focus on what we think are our best corporate securities and reduce holdings that appear overvalued relative to their fundamentals. (end callout quote) of newly issued bonds. The Fund's semiannual returns were further boosted by its allocation to high-yield corporate bonds. Later in the period, the Fund's performance benefited from its small global bond position, which advanced as the U.S. dollar weakened. On the negative side, the Fund's lower-than-Lehman Index position in mortgage-backed securities detracted from performance, as that sector performed relatively well. The reason for our lower weighting was two-fold. Not only were mortgage valuations expensive by historical standards, but we also believed these securities would underperform other sectors if market volatility increased. Indeed, our modest position in mortgages helped the Fund in February 2005, when Treasury rate volatility dampened returns on these securities. Q: What changes did you make to the Fund and how is it currently positioned? A: We sold some of the Fund's global bond positions when they reached the valuations we had set for them. Also, we added intermediate-term TIPS to the Fund's portfolio during the period, but sold these securities by the end of the six months. The TIPS benefited from strong inflation accretion over the short time the Fund owned them. During the fiscal period, we reduced the Fund's exposure to corporate bonds, bringing the Fund's weighting more in line with the Lehman Index. We believed high-quality corporate bond yields already reflected the current strength of the U.S. economy. The exception here was a modest increase in the Fund's exposure to mortgage-backed securities late in the reporting period. Still, we continued to favor a defensive, higher-coupon focus within mortgages, which can offer both attractive yield and protection from higher rates. We maintained an emphasis on CMBS and asset-backed securities, which, in our view, offer attractive yield as well as the kind of defensive characteristics we want in the current market environment. Finally, we significantly reduced the Fund's position in high-yield corporate bonds, based primarily on our view that valuations in this fixed income sector had become relatively full. -------------------------------------------------------------------------------- 7 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Questions & Answers Q: How do you intend to manage the Fund in the coming months? A: We believe the U.S. economic recovery will continue and interest rates will move still higher. Despite the Fed's February 2005 comments that underlying inflation appears to be relatively low, we believe there may be cause for it to increase interest rates more vigorously than the market currently anticipates. In addition, we anticipate that after an extended period of yield curve flattening, the yield spread between short- and long-term maturities may widen in the coming months. In terms of currency, we believe the recent stability of the U.S. dollar will be short-lived and that its value will decline to new lows in 2005. Based on this view, we intend to maintain the Fund's duration shorter than the Lehman Index. At the same time, we are now positioning the Fund to benefit from our expectation for a steeper yield curve in the months ahead. Within bond market sectors, we remain cautious about valuations across many areas of the investment grade corporate bond market. The risk level in this sector will likely continue to increase as the Fed removes liquidity from the financial markets and corporate America moves away from bondholder-friendly actions, such as debt retirement and building cash reserves, to more shareholder-friendly actions, such as equity buybacks and acquisition activity, to bolster stock prices. We intend to continue to focus on what we think are our best corporate securities and reduce holdings that appear overvalued relative to their fundamentals. However, we are respectful of what we see as a positive overall fixed-income environment. Thus, even though CMBS and asset-backed securities suffered a bit in February 2005 as the market focused its buying attention on lower-quality substitutes, we continue to favor these two sectors as a good alternative to corporate bonds. Within the mortgage sector, we intend to stay defensive in terms of structure and coupon. -------------------------------------------------------------------------------- 8 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Questions & Answers In other areas of the fixed income market, we intend to maintain a small exposure to high-yield corporate bonds, adding exposure when bond values appear attractive. Also, our expectation for a weak dollar boosts the attractiveness of non-U.S. bonds. A falling dollar increases the value of the Fund's foreign currency-denominated securities in U.S. dollar terms. We will continue to monitor job creation and inflation numbers, as they remain key indicators for the economy in the coming months. As always, we maintain a disciplined focus on individual security selection, with a goal of having higher-than-Lehman Index positions in securities that we believe offer the greatest potential for outperformance. (line chart) U.S. TREASURY YIELDS (Feb. 28, 2005 compared to Aug. 31, 2004) (dotted line) 1.58% 1.79% 2.39% 2.73% 3.31% 4.12% 4.93% (solid line) 2.75% 2.97% 3.60% 3.76% 4.01% 4.38% 4.72% 3 mos. 6 mos. 2 yrs. 3yrs. 5 yrs. 10 yrs. 30 yrs. U.S. Treasury yields as of: solid line = 2/28/05 dotted line = 8/31/04 Source: Bloomberg This chart, known as a yield curve, compares the income potential of U.S. Treasury bills, notes and bonds as of Feb. 28, 2005 relative to six months earlier. As you can see, the difference in yields has narrowed since last autumn. -------------------------------------------------------------------------------- 9 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Investments in Securities AXP Diversified Bond Fund Feb. 28, 2005 (Unaudited) (Percentages represent value of investments compared to net assets) Bonds (99.4%) Issuer Coupon Principal Value(a) rate amount Foreign government (1.0%) Bundesrepublik Deutschland (European Monetary Unit) 01-04-07 6.00% 5,790,000(c) $8,142,730 Pemex Project Funding Master Trust (U.S. Dollar) 12-15-14 7.38 3,481,000(c) 3,896,980 United Kingdom Treasury (British Pound) 12-07-06 7.50 4,010,000(c) 8,063,299 United Mexican States (U.S. Dollar) 09-27-34 6.75 5,921,000(c) 6,030,539 Total 26,133,548 U.S. government obligations & agencies (23.6%) Federal Home Loan Bank 05-22-06 2.88 27,255,000 27,045,736 12-17-07 3.25 5,615,000 5,508,652 Federal Home Loan Mtge Corp 07-15-06 5.50 12,821,000 13,153,718 04-15-08 5.75 49,035,000 51,549,319 03-18-09 3.76 6,890,000 6,782,454 01-15-12 5.75 38,075,000 40,885,049 11-15-13 4.88 17,226,000 17,561,735 Federal Natl Mtge Assn 04-13-06 2.15 33,200,000 32,712,491 08-15-08 3.25 86,170,000 83,908,899 02-15-09 3.25 2,990,000 2,890,221 U.S. Treasury 01-15-10 3.63 10,190,000(i) 10,019,623 02-15-10 3.50 21,370,000 20,897,532 11-15-14 4.25 39,780,000(i) 39,402,408 02-15-15 4.00 36,800,000(i) 35,742,000 08-15-23 6.25 91,304,000(p) 107,596,103 02-15-26 6.00 94,082,000(p) 108,933,032 02-15-31 5.38 8,865,000(i) 9,747,342 Total 614,336,314 Commercial mortgage-backed(f)/ Asset-backed securities (11.7%) Aesop Funding II LLC Series 2002-1A Cl A1 (AMBAC) 10-20-06 3.85 7,090,000(d,m) 7,113,776 AmeriCredit Automobile Receivables Trust Series 2002-C Cl 4A (FSA) 02-12-09 3.55 2,660,000(m) 2,654,271 Series 2004-CA Cl A3 (AMBAC) 03-06-09 3.00 5,500,000(m) 5,427,813 Series 2004-DF Cl A3 (FSA) 07-06-09 2.98 4,300,000(m) 4,171,000 ARG Funding Series 2005-1A Cl A3 (MBIA) 04-20-10 4.29 6,300,000(d.m) 6,231,832 Banc of America Commercial Mtge Series 2004-5 Cl A4 11-10-41 4.94 3,600,000 3,596,220 Bear Stearns Commercial Mtge Securities Series 2004-PWR6 Cl A6 11-11-41 4.83 5,000,000 4,944,350 Series 2004-T16 Cl A3 02-13-46 4.03 3,240,000 3,188,526 California State Teachers' Retirement System Trust Series 2002-C6 Cl A3 11-20-14 4.46 1,678,913(d) 1,686,038 Commercial Mtge Pass-Through Ctfs Series 2004-CNL Cl A1 09-15-14 2.81 6,000,000(d,q) 5,992,980 Series 2004-LB3A Cl A2 07-10-37 4.71 6,000,000 6,048,960 Series 2004-LB3A Cl A3 07-10-37 5.09 5,200,000 5,320,211 Series 2004-LB3A Cl A5 07-10-37 5.28 5,000,000(q) 5,174,289 CS First Boston Mtge Securities Series 2004-C1 Cl A2 01-15-37 3.52 3,000,000 2,922,524 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 10 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Commercial mortgage-backed(f)/ Asset-backed securities (cont.) Ford Credit Auto Owner Trust Series 2005-A Cl A3 11-15-08 3.48% $14,000,000 $13,918,379 GE Capital Commercial Mtge Series 2004-C2 Cl A2 03-10-40 4.12 3,000,000 2,943,720 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 5,800,000 6,187,198 Series 2004-C3 Cl A4 12-10-41 4.55 4,700,000 4,659,890 Series 2004-C3 Cl A5 12-10-41 4.86 5,500,000 5,443,955 Greenwich Capital Commercial Funding Series 2005-GG3 Cl A1 08-10-42 3.92 3,700,000 3,681,944 Series 2005-GG3 Cl A4 08-10-42 4.80 6,200,000 6,127,398 Honda Auto Receivables Owner Trust Series 2005-1 Cl A3 10-21-08 3.53 4,500,000 4,480,542 JPMorgan Chase Commercial Mtge Securities Series 2003-CB6 Cl A1 07-12-37 4.39 7,973,891 7,908,026 Series 2003-CB6 Cl A2 07-12-37 5.26 4,200,000 4,320,053 Series 2004-CBX Cl A3 01-12-37 4.18 3,000,000 2,964,148 Series 2004-CBX Cl A5 01-12-37 4.65 5,000,000 4,969,001 Series 2004-CBX Cl A6 01-12-37 4.90 6,100,000 6,089,162 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39 7,360,000 7,661,248 Series 2002-C4 Cl A4 09-15-26 4.56 5,200,000 5,191,065 Series 2002-C4 Cl A5 09-15-31 4.85 6,000,000 6,052,705 Series 2002-C8 Cl A3 11-15-27 4.83 5,250,000 5,273,888 Series 2003-C3 Cl A2 05-15-27 3.09 14,900,000 14,384,243 Series 2003-C8 Cl A2 11-15-27 4.21 7,500,000 7,442,775 Series 2004-C2 Cl A2 03-15-29 3.25 10,190,000 9,746,938 Series 2004-C2 Cl A3 03-15-29 3.97 3,275,000 3,125,005 Series 2004-C4 Cl A3 06-15-29 4.99 3,000,000(q) 3,086,539 Series 2004-C6 Cl A4 08-15-29 4.58 1,275,000 1,272,190 Series 2004-C7 Cl A2 10-15-29 3.99 5,400,000 5,278,986 Series 2004-C8 Cl A2 12-15-29 4.20 5,800,000 5,725,064 Series 2004-C8 Cl A6 12-15-29 4.80 8,000,000 7,951,292 Series 2005-C1 Cl A4 02-15-30 4.74 5,500,000 5,417,115 Long Beach Auto Receivables Trust Series 2004-C Cl A3 (FSA) 09-15-09 3.40 4,000,000(m) 3,917,000 Metris Master Trust Series 2001-2 Cl C 11-20-09 4.50 3,425,000(d,q) 3,401,052 Series 2004-2 Cl D 10-20-10 5.85 1,200,000(d,q) 1,207,560 Series 2004-2 Cl M 10-20-10 2.89 2,700,000(q) 2,701,674 Morgan Stanley Auto Loan Trust Series 2004-HB2 Cl A3 03-16-09 2.94 4,300,000 4,233,616 Morgan Stanley Capital I Series 2003-IQ4 Cl A1 05-15-40 3.27 5,753,085 5,467,439 Series 2004-HQ4 Cl A5 04-14-40 4.59 3,600,000 3,562,920 Series 2004-IQ8 Cl A2 06-15-40 3.96 5,115,000 5,069,091 Series 2005-T17 Cl A5 12-13-41 4.78 4,500,000 4,442,175 Morgan Stanley, Dean Witter Capital 1 Series 2002-TOP7 Cl A2 01-15-39 5.98 5,900,000 6,345,123 Nissan Auto Lease Trust Series 2004-A Cl A3 08-15-07 2.90 3,000,000 2,965,326 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 11 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Commercial mortgage-backed(f)/ Asset-backed securities (cont.) Nissan Auto Receivables Owner Trust Series 2003-A Cl A4 07-15-08 2.61% $2,500,000 $2,463,703 Series 2005-A Cl A3 10-15-08 3.54 5,475,000 5,430,926 Residential Asset Securities Series 2002-KS1 Cl AI4 (AMBAC) 11-25-29 5.86 3,585,161(m) 3,592,116 Wachovia Bank Commercial Mtge Trust Series 2005-C16 Cl A2 10-15-41 4.38 2,000,000 1,991,152 Series 2005-C16 Cl A3 10-15-41 4.62 5,500,000 5,463,211 Series 2005-C16 Cl A4 10-15-41 4.85 5,800,000 5,751,280 WFS Financial Owner Trust Series 2004-3 Cl A3 03-17-09 3.30 5,000,000 4,951,461 World Omni Auto Receivables Trust Series 2005-A Cl A3 06-12-09 3.54 7,500,000 7,451,625 Total 306,183,709 Mortgage-backed securities (42.2%)(f,h) Adjustable Rate Mtge Trust Series 2004-2 Cl 6A1 02-25-35 5.29 6,534,606(k) 6,624,502 Bank of America Alternative Loan Trust Series 2003-11 Cl 1A1 01-25-34 6.00 8,257,417 8,435,364 Series 2004-3 Cl 1A1 04-25-34 6.00 12,827,798 13,188,580 Bank of America Mtge Securities Series 2004-E Cl B1 06-25-34 4.05 2,956,004(k) 2,912,314 Series 2004-F Cl B1 07-25-34 4.15 5,318,300(k) 5,262,618 Countrywide Alternative Loan Trust Series 2003-11T1 Cl A1 07-25-18 4.75 5,014,099 4,975,722 Series 2004-28CB Cl 6A1 01-25-35 6.00 7,995,837 8,195,383 Countrywide Home Loans Series 2004-12 Cl 1M 08-25-34 4.66 3,547,137(k) 3,497,371 CS First Boston Mtge Securities Series 2003-29 Cl 8A1 11-25-18 6.00 4,500,062 4,618,189 Series 2004-AR5 Cl CB1 06-25-34 4.45 3,379,528(k) 3,334,249 Federal Home Loan Mtge Corp 05-01-13 4.50 3,665,282 3,639,368 04-15-15 4.50 13,700,000 13,779,203 02-01-17 6.50 2,233,120 2,346,361 04-01-17 8.00 19,507 21,157 05-01-17 6.00 2,275,691 2,365,879 05-01-18 5.50 5,140,751 5,274,723 08-01-18 5.00 15,680,274 15,823,925 10-01-18 5.00 10,115,174 10,218,743 03-01-20 5.50 22,500,000(g) 23,097,655 02-01-23 6.00 16,996,034 17,534,279 10-01-23 5.50 6,854,267 6,951,144 12-01-23 6.00 13,530,952 13,955,067 08-01-24 8.00 685,717 742,788 10-01-28 7.00 97,907 103,319 12-01-30 5.50 2,751,657 2,786,072 04-01-33 5.50 13,201,045 13,415,029 04-01-33 6.00 9,249,522 9,586,838 06-01-33 5.50 9,128,627 9,228,092 07-01-33 5.00 5,795,239 5,734,166 Collateralized Mtge Obligation 12-15-14 4.50 17,624,850 17,714,261 03-15-22 7.00 2,113,364 2,118,296 02-15-27 5.00 10,070,000 10,164,892 10-15-27 5.00 21,553,000 21,743,257 06-15-28 5.00 13,925,000 14,051,495 11-15-28 4.50 6,113,338 6,139,962 01-15-33 5.00 1,285,334 1,283,374 02-15-33 5.50 9,499,641 9,824,957 07-25-43 7.00 5,215,096 5,510,072 Interest Only 02-15-14 7.40 4,391,909(l) 311,474 10-15-22 14.56 12,108,895(l) 956,600 Federal Natl Mtge Assn 03-01-08 7.00 2,011,178 2,099,395 07-01-08 6.50 858,242 893,599 06-01-10 6.50 2,100,891 2,187,441 11-01-10 4.47 1,661,479 1,648,575 08-01-11 8.50 2,200,029 2,321,049 12-01-11 5.10 5,044,290 5,153,575 11-01-12 4.84 1,181,597 1,176,091 01-01-13 4.92 5,629,878 5,696,562 02-01-13 4.83 6,371,042 6,411,772 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 12 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn (cont.) 02-01-13 5.02% $5,788,775 $5,888,424 04-01-13 7.00 6,051,978 6,317,440 10-01-13 5.11 541,052 553,587 03-01-14 4.60 1,136,507 1,110,458 04-01-14 6.50 1,304,182 1,372,538 11-01-14 4.50 17,805,022 17,871,841 08-01-16 6.00 5,384,627 5,609,057 12-01-16 5.50 7,905,997 8,106,934 01-01-17 5.57 11,779,221 12,394,869 06-01-17 6.50 5,193,224 5,475,627 08-01-17 6.00 10,485,015 10,958,673 08-01-17 6.50 3,340,457 3,532,643 09-01-17 6.00 1,560,095 1,625,121 09-01-17 6.50 3,416,987 3,593,220 12-01-17 6.50 1,719,466 1,808,148 01-01-18 5.50 7,333,596 7,537,644 02-01-18 5.50 12,135,520 12,455,905 03-01-18 5.50 19,514,741 20,063,665 04-01-18 5.00 7,924,353 7,989,152 05-01-18 5.50 3,721,971 3,829,641 05-01-18 6.00 12,227,286 12,735,005 06-01-18 4.50 6,742,295 6,673,157 06-01-18 5.00 8,364,619 8,445,596 07-01-18 4.50 4,344,427 4,299,878 08-01-18 4.50 8,951,080 8,857,024 10-01-18 5.00 10,356,475 10,448,150 10-01-18 6.00 2,736,046 2,849,905 12-01-18 5.00 6,904,752 6,961,213 04-01-23 8.50 838,597 907,068 07-01-23 5.00 7,812,308 7,782,246 09-01-23 5.50 11,782,325 11,956,758 09-01-23 6.50 748,145 782,959 01-01-24 6.50 225,745 236,249 05-01-24 6.00 9,682,475 9,992,506 06-01-24 9.00 714,584 788,849 02-01-25 8.00 238,715 258,586 09-01-25 8.00 533,992 577,469 03-01-26 7.00 1,255,138 1,328,262 07-01-28 5.50 3,210,009 3,247,487 08-01-28 5.50 5,533,932 5,598,543 09-01-28 7.50 1,584,420 1,701,278 12-01-28 5.50 11,487,846 11,621,971 01-01-29 6.50 5,766,121 6,020,528 04-01-29 5.00 19,207,231 18,971,936 05-01-29 6.50 4,007,253 4,178,405 06-01-29 7.00 10,396 10,972 09-01-29 7.00 7,081,301 7,473,549 10-01-30 7.00 2,590,814 2,734,324 09-01-31 7.00 1,229,668 1,307,976 03-01-32 5.50 1,976,536 1,999,613 06-01-32 7.00 4,166,877 4,422,266 07-01-32 6.50 2,748,730 2,873,865 08-01-32 7.00 1,821,106 1,921,427 09-01-32 6.00 17,871,313 18,341,167 09-01-32 6.50 3,177,922 3,322,585 10-01-32 6.00 2,405,429 2,476,935 10-01-32 6.50 3,263,149 3,400,369 11-01-32 6.00 2,107,516 2,170,183 11-01-32 7.00 2,081,297 2,194,801 01-01-33 5.80 3,652,513 3,949,279 01-01-33 6.00 14,468,070 14,858,376 02-01-33 6.50 669,040 699,660 03-01-33 5.50 17,897,414 18,088,139 03-01-33 6.00 5,734,429 5,906,772 03-01-33 6.50 7,616,359 7,936,980 04-01-33 5.50 14,799,946 14,999,530 04-01-33 6.00 28,428,698 29,346,297 05-01-33 5.50 25,257,387 25,513,743 07-01-33 4.85 6,768,590(k) 6,777,863 07-01-33 5.00 13,652,630 13,490,983 07-01-33 5.50 10,062,123 10,159,683 08-01-33 5.50 1,070,442 1,080,821 12-01-33 4.97 9,065,993(k) 9,102,457 12-01-33 5.50 6,439,899 6,502,339 12-01-33 6.50 20,568,741 21,434,609 01-01-34 6.50 1,490,557 1,564,478 03-01-34 5.00 42,513,798 42,010,435 04-01-34 5.00 3,380,067 3,333,861 07-01-34 6.50 11,143,162 11,622,302 08-01-34 4.53 6,479,161(k) 6,483,437 09-01-34 4.84 1,935,552(k) 1,955,913 09-01-34 6.50 5,730,704 5,977,116 10-01-34 5.03 7,404,041(k) 7,535,152 12-01-34 4.40 2,693,328(k) 2,678,326 03-01-35 7.00 8,400,000(g) 8,856,750 Collateralized Mtge Obligation 12-25-26 8.00 4,935,671 5,245,243 06-25-44 7.50 5,071,806 5,453,399 Interest Only 12-25-12 13.29 4,081,979(l) 251,712 12-25-31 1.19 3,289,429(l) 610,695 First Horizon Alternative Mtge Securities Series 2004-AA4 Cl A1 10-25-34 5.45 6,508,699 6,605,223 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 13 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) First Horizon Alternative Mtge Securities (cont.) Series 2005-AA2 Cl A1 04-25-35 5.46% $6,725,000(k) $6,821,935 Govt Natl Mtge Assn 02-15-24 8.00 255,090 276,766 06-15-26 8.00 338,352 367,036 08-15-26 8.00 260,868 282,983 07-15-33 5.00 8,252,808 8,229,048 10-15-33 5.00 6,260,018 6,241,622 10-15-33 5.50 16,329,633 16,620,799 Collateralized Mtge Obligation Interest Only 01-20-32 0.00 3,141,181(l) 377,813 08-20-32 0.00 12,847,466(l) 2,047,707 Harborview Mtge Loan Trust Series 2004-3 Cl B1 05-19-34 4.39 4,392,119(k) 4,299,587 Master Adjustable Rate Mtge Trust Series 2004-5 Cl B1 07-25-34 4.43 4,169,101(k) 4,102,145 Master Alternative Loans Trust Series 2004-4 Cl 2A1 05-25-34 6.00 1,807,987 1,851,957 Series 2004-7 Cl 8A1 08-25-19 5.00 5,298,567 5,317,430 Series 2004-8 Cl 7A1 09-25-19 5.00 7,454,860 7,477,001 Series 2005-1 Cl 2A1 02-25-35 6.00 12,785,000 13,090,132 Structured Adjustable Rate Mtge Loan Series 2004-3AC 03-25-34 4.94 5,575,412(k) 5,559,354 Series 2004-5 Cl B1 05-25-34 4.62 4,241,406(k) 4,146,016 Structured Asset Securities Series 2003-33H Cl 1A1 10-25-33 5.50 17,529,112 17,562,055 Washington Mutual Series 2004-CB2 Cl 6A 07-25-19 4.50 4,491,876 4,390,315 Series 2004-CB4 Cl 22A 12-25-19 6.00 5,778,694 5,967,946 Wells Fargo Mtge Backed Securities Trust Series 2005-AR1 Cl 1A1 02-25-35 4.57 10,575,775(k) 10,511,072 Total 1,100,592,738 Aerospace & defense (0.1%) L-3 Communications 06-15-12 7.63 2,000,000 2,180,000 07-15-13 6.13 190,000 196,175 Moog Sr Sub Nts 01-15-15 6.25 165,000 169,125 Total 2,545,300 Automotive & related (0.2%) Ford Motor 10-01-28 6.63 2,095,000 1,904,187 02-01-29 6.38 4,905,000 4,305,153 Total 6,209,340 Banks and savings & loans (2.5%) Banknorth Group Sr Nts 05-01-08 3.75 3,960,000 3,894,422 KFW Intl Finance (U.S. Dollar) 10-17-05 2.50 18,400,000 (c) 18,302,406 Washington Mutual Bank FA Sub Nts 08-15-14 5.65 10,770,000 11,261,543 Wells Fargo & Co Sub Nts 02-09-15 4.75 8,300,000 8,159,929 Wells Fargo Bank NA Sub Nts 02-01-11 6.45 20,382,000 22,380,436 Total 63,998,736 Beverages & tobacco (--%) Cott Beverages 12-15-11 8.00 1,135,000 1,218,706 Building materials & construction (0.1%) Louisiana-Pacific Sr Nts 08-15-10 8.88 2,260,000 2,655,886 Norcraft Companies LP/Finance Sr Sub Nts 11-01-11 9.00 570,000 612,750 Total 3,268,636 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 14 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Cable (1.5%) Comcast 03-15-11 5.50% $17,560,000 $18,260,292 Comcast Cable Communications 11-15-08 6.20 12,555,000 13,315,720 CSC Holdings Sr Nts 12-15-07 7.88 1,500,000 1,614,375 04-15-12 6.75 600,000(d) 649,500 DIRECTV Holdings LLC/Finance Sr Nts 03-15-13 8.38 1,250,000 1,410,938 Echostar DBS 10-01-14 6.63 615,000(d) 631,913 Sr Nts 10-01-08 5.75 750,000 761,250 Kabel Deutschland (U.S. Dollar) 07-01-14 10.63 480,000(c,d) 552,000 Videotron Ltee (U.S. Dollar) 01-15-14 6.88 1,055,000(c) 1,107,750 Total 38,303,738 Cellular telecommunications (0.1%) Nextel Communications Sr Nts 10-31-13 6.88 1,875,000 2,025,000 Chemicals (0.2%) Airgas 10-01-11 9.13 1,500,000 1,653,750 BCP Crystal US Holdings Sr Sub Nts 06-15-14 9.63 430,000(d) 496,650 Compass Minerals Group 08-15-11 10.00 1,000,000 1,120,000 Georgia Gulf Sr Nts 12-15-13 7.13 1,525,000 1,631,750 INVISTA 05-01-12 9.25 600,000(d) 673,500 MacDermid 07-15-11 9.13 575,000 638,250 Total 6,213,900 Energy (0.3%) Chesapeake Energy Sr Nts 06-15-14 7.50 375,000 420,000 08-15-14 7.00 1,045,000 1,144,275 01-15-16 6.88 165,000 177,375 Encore Acquisition Sr Sub Nts 04-15-14 6.25 1,700,000 1,712,750 Grant Prideco Escrow 12-15-09 9.00 800,000 880,000 Newfield Exploration Sr Nts 03-01-11 7.63 2,500,000 2,837,500 Sr Sub Nts 08-15-12 8.38 380,000 423,700 Peabody Energy Series B 03-15-13 6.88 1,000,000 1,082,500 Total 8,678,100 Energy equipment & services (0.7%) Halliburton 10-15-10 5.50 15,145,000 15,772,093 Key Energy Services Series C 03-01-08 8.38 1,250,000 1,301,563 Pride Intl Sr Nts 07-15-14 7.38 495,000 550,688 Total 17,624,344 Finance companies (2.1%) Citigroup Sub Nts 09-15-14 5.00 24,985,000 25,053,059 GMAC 09-15-11 6.88 29,788,000 29,536,977 Total 54,590,036 Financial services (1.8%) ING Security Life Institutional Funding 01-15-10 4.25 14,565,000(d) 14,402,688 Pricoa Global Funding I 06-15-08 4.35 6,885,000(d) 6,909,511 01-15-10 4.20 26,410,000(d) 26,074,856 Total 47,387,055 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 15 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Food (0.1%) Burns Philp Capital Property (U.S. Dollar) Sr Sub Nts 02-15-11 10.75% $940,000(c) $1,057,500 Del Monte Sr Sub Nts 02-15-15 6.75 385,000(d) 394,625 Total 1,452,125 Health care services (0.6%) Cardinal Health 06-15-15 4.00 11,641,000 10,469,473 Community Health Systems Sr Sub Nts 12-15-12 6.50 310,000(d) 311,938 HCA Sr Nts 03-15-14 5.75 2,000,000 1,954,722 NeighborCare Sr Sub Nts 11-15-13 6.88 1,160,000 1,223,800 Triad Hospitals Sr Nts 05-15-12 7.00 1,000,000 1,058,750 Total 15,018,683 Home building (0.2%) DR Horton 12-01-07 7.50 1,000,000 1,075,016 01-15-09 5.00 990,000 996,334 07-01-13 5.88 1,000,000 1,030,000 KB Home 01-15-15 5.88 700,000 707,565 Meritage Homes Sr Nts 03-15-15 6.25 445,000(d,g) 446,669 Total 4,255,584 Industrial services (--%) Allied Waste North America 04-15-11 6.38 855,000 831,488 Industrial transportation (--%) Greater Beijing First Expressways (U.S. Dollar) Sr Nts 06-15-07 9.50 3,640,000(b,c,n,o) -- Insurance (1.4%) ASIF Global Financing XIX 01-17-13 4.90 37,015,000(d) 37,382,189 Leisure time & entertainment (0.1%) Viacom 05-15-11 6.63 2,990,000 3,279,833 Lodging & gaming (0.2%) Boyd Gaming Sr Sub Nts 12-15-12 7.75 375,000 405,469 Hilton Hotels 12-01-12 7.63 1,250,000 1,445,674 MGM MIRAGE 10-01-09 6.00 670,000 686,750 Sr Nts 02-27-14 5.88 720,000 720,000 Mohegan Tribal Gaming Authority Sr Nts 02-15-13 6.13 540,000(d) 550,800 Sr Sub Nts 04-01-12 8.00 750,000 814,688 Station Casinos Sr Nts 04-01-12 6.00 1,000,000 1,036,250 Total 5,659,631 Machinery (0.1%) Joy Global Series B 03-15-12 8.75 1,500,000 1,680,000 Media (1.0%) Corus Entertainment (U.S. Dollar) Sr Sub Nts 03-01-12 8.75 395,000(c) 434,500 Dex Media West LLC/Finance Sr Nts Series B 08-15-10 8.50 700,000 766,500 Emmis Operating Sr Sub Nts 05-15-12 6.88 795,000 812,888 Lamar Media 01-01-13 7.25 425,000 454,750 News America 12-15-34 6.20 9,385,000(d) 9,679,745 Quebecor Media (U.S. Dollar) Sr Nts 07-15-11 11.13 640,000(c) 723,200 Radio One Series B 07-01-11 8.88 1,000,000 1,090,000 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 16 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Media (cont.) Sr Sub Nts 02-15-13 6.38% $290,000(d) $295,800 Shaw Communications (U.S. Dollar) Sr Nts 04-06-11 7.25 1,960,000(c) 2,136,400 Sun Media (U.S. Dollar) 02-15-13 7.63 1,500,000(c) 1,620,000 Susquehanna Media Sr Sub Nts 04-15-13 7.38 900,000 958,500 United Artists Theatre 07-01-15 9.30 8,121,862 8,284,299 Total 27,256,582 Metals (--%) Russel Metals (U.S. Dollar) Sr Nts 03-01-14 6.38 750,000(c) 757,500 Multi-industry (0.1%) Tyco Intl Group (U.S. Dollar) 02-15-11 6.75 2,415,000(c) 2,668,471 Paper & packaging (1.1%) Ball 12-15-12 6.88 1,520,000 1,618,800 Boise Cascade LLC Sr Sub Nts 10-15-14 7.13 930,000(d) 983,475 Cascades (U.S. Dollar) Sr Nts 02-15-13 7.25 600,000(c) 639,000 Crown Paper Sr Sub Nts 09-01-05 11.00 6,950,000(b,n,o) -- Domtar (U.S. Dollar) 12-01-13 5.38 17,925,000(c) 17,359,968 Georgia-Pacific 02-01-10 8.88 850,000 990,250 Sr Nts 07-15-08 7.38 1,600,000 1,736,000 Graphic Packaging Intl Sr Nts 08-15-11 8.50 430,000 467,625 Norampac (U.S. Dollar) Sr Nts 06-01-13 6.75 1,260,000(c) 1,323,000 Owens-Illinois Glass Container 05-15-11 7.75 1,100,000 1,188,000 Silgan Holdings Sr Sub Nts 11-15-13 6.75 1,225,000 1,267,875 Total 27,573,993 Retail -- general (0.2%) Wal-Mart Stores 06-29-11 8.88 3,500,000 3,556,350 William Carter Series B 08-15-11 10.88 405,000 451,575 Total 4,007,925 Telecom equipment & services (1.7%) Qwest 03-15-12 9.13 880,000(d) 1,016,400 Sprint Capital 11-15-28 6.88 18,450,000 20,358,431 TELUS (U.S. Dollar) 06-01-11 8.00 19,142,500(c) 22,357,808 Total 43,732,639 Textiles & apparel (0.3%) Jones Apparel Group 11-15-14 5.13 2,880,000(d) 2,835,527 11-15-34 6.13 4,760,000(d) 4,736,952 Total 7,572,479 Utilities -- electric (1.5%) Indianapolis Power & Light 1st Mtge 07-01-13 6.30 1,880,000(d) 2,013,367 IPALCO Enterprises 11-14-08 8.38 400,000 446,000 11-14-11 8.63 3,680,000 4,324,000 Metropolitan Edison 03-15-13 4.95 4,975,000 4,955,687 NorthWestern Energy 11-01-14 5.88 645,000(d) 652,809 Ohio Edison Sr Nts 05-01-15 5.45 1,195,000 1,210,819 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 17 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- electric (cont.) Ohio Power Sr Nts Series H 01-15-14 4.85% $7,395,000 $7,312,398 Potomac Edison 1st Mtge 11-15-14 5.35 3,195,000(d) 3,234,938 Progress Energy 1st Mtge 03-01-13 4.80 1,840,000 1,834,351 Texas Genco LLC/Financing Sr Nts 12-15-14 6.88 360,000(d) 384,300 TXU 11-15-34 6.55 6,005,000(d) 6,125,749 Westar Energy 1st Mtge 07-01-14 6.00 6,500,000 6,974,812 Total 39,469,230 Utilities -- natural gas (0.3%) ANR Pipeline 03-15-10 8.88 785,000 870,369 El Paso Natural Gas Sr Nts Series A 08-01-10 7.63 680,000 737,800 Northwest Pipeline 03-01-10 8.13 2,135,000 2,345,831 Plains Exploration & Production Sr Nts 06-15-14 7.13 790,000 872,950 Southern Natural Gas 03-15-10 8.88 875,000 969,063 Southern Star Central 08-01-10 8.50 550,000 606,375 Transcontinental Gas Pipe Line Series B 08-15-11 7.00 2,250,000 2,486,250 Total 8,888,638 Utilities -- telephone (2.4%) Telecom Italia Capital (U.S. Dollar) 09-30-34 6.00 13,065,000(c,d) 13,160,126 Verizon Pennsylvania Series A 11-15-11 5.65 47,200,000 49,206,472 Total 62,366,598 Total bonds (Cost: $2,595,721,070) $2,593,162,788 Other (0.1%) Issuer Shares Value(a) Wayland Investment LLC 6,000,000(b,e,o) $2,461,860 Total other (Cost: $6,671,880) $2,461,860 Short-term securities (4.1%)(j) Issuer Effective Amount Value(a) yield payable at maturity U.S. government agency (2.9%) Federal Natl Mtge Assn 05-03-05 2.61% $50,000,000 $49,769,000 05-04-05 2.61 4,100,000 4,080,759 05-18-05 2.62 20,000,000 19,885,600 Total 73,735,359 Commercial paper (1.2%) BNP Paribas North America 03-01-05 2.60 15,600,000 15,598,873 Windmill Funding 03-01-05 2.62 16,400,000 16,398,807 Total 31,997,680 Total short-term securities (Cost: $105,735,528) $105,733,039 Total investments in securities (Cost: $2,708,128,478)(r) $2,701,357,687 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 18 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. At Feb. 28, 2005, the value of foreign securities represented 4.2% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Feb. 28, 2005, the value of these securities amounted to $160,229,265 or 6.1% of net assets. (e) The share amount for Limited Liability Companies (LLC) or Limited Partnerships (LP) represents capital contributions. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) At Feb. 28, 2005, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $32,502,290. (h) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at Feb. 28, 2005: Security Principal Settlement Proceeds Value amount dates receivable Federal Natl Mtge Assn 03-01-20 5.00% $ 6,150,000 03-17-05 $ 6,235,523 $ 6,190,356 03-01-20 5.50 7,000,000 03-17-05 7,208,906 7,168,434 03-01-35 5.00 31,550,000 03-14-05 31,510,563 31,086,594 03-01-35 5.50 5,275,000 03-14-05 5,372,258 5,317,859 03-01-35 6.50 570,000 03-14-05 595,071 593,513 (i) At Feb. 28, 2005, security was partially or fully on loan. See Note 5 to the financial statements. (j) Cash collateral received from security lending activity is invested in short-term securities and represents 2.5% of net assets. See Note 5 to the financial statements. 1.5% of the assets is the Fund's cash equivalent position. (k) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Feb. 28, 2005. (l) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at Feb. 28, 2005. (m) The following abbreviations are used in the portfolio security description to identify the insurer of the issue: AMBAC -- American Municipal Bond Association Corporation FSA -- Financial Security Assurance MBIA -- MBIA Insurance Corporation (n) Negligible market value. -------------------------------------------------------------------------------- 19 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Notes to investments in securities (continued) (o) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at Feb. 28, 2005, is as follows: Security Acquisition Cost dates Crown Paper 11.00% Sr Sub Nts 2005 02-10-00 thru 02-14-00 $4,216,724 Greater Beijing First Expressways (U.S. Dollar) 9.50% Sr Nts 2007 09-16-98 -- Wayland Investment LLC 05-19-00 6,671,880 (p) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 6 to the financial statements): Type of security Notional amount Purchase contracts U.S. Treasury Bond, June 2005, 20-year $ 69,200,000 Sale contracts U.S. Treasury Note, March 2005, 5-year 48,900,000 U.S. Treasury Note, March 2005, 10-year 205,000,000 U.S. Treasury Note, June 2005, 10-year 86,600,000 (q) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Feb. 28, 2005. (r) At Feb. 28, 2005, the cost of securities for federal income tax purposes was approximately $2,708,128,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 22,564,000 Unrealized depreciation (29,334,000) ----------- Net unrealized depreciation $ (6,770,000) ------------ How to find information about the Fund's portfolio holdings (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at www.americanexpress.com/funds. -------------------------------------------------------------------------------- 20 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Financial Statements Statement of assets and liabilities AXP Diversified Bond Fund Feb. 28, 2005 (Unaudited) Assets Investments in securities, at value (Note 1)* (identified cost $2,708,128,478) $2,701,357,687 Cash in bank on demand deposit 2,367,868 Capital shares receivable 744,850 Dividends and accrued interest receivable 18,016,747 Receivable for investment securities sold 145,461,979 ----------- Total assets 2,867,949,131 ------------- Liabilities Dividends payable to shareholders 960,550 Capital shares payable 831,929 Payable for investment securities purchased 142,705,651 Payable upon return of securities loaned (Note 5) 64,567,500 Accrued investment management services fee 107,311 Accrued distribution fee 86,670 Accrued service fee 1,622 Accrued transfer agency fee 34,824 Accrued administrative services fee 9,841 Other accrued expenses 259,605 Forward sale commitments, at value (proceeds receivable $50,922,321) (Note 1) 50,356,756 ---------- Total liabilities 259,922,259 ----------- Net assets applicable to outstanding capital stock $2,608,026,872 ============== Represented by Capital stock -- $.01 par value (Note 1) $ 5,345,916 Additional paid-in capital 2,713,831,178 Undistributed net investment income 4,765,249 Accumulated net realized gain (loss) (Note 8) (110,172,478) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Note 6) (5,742,993) ---------- Total -- representing net assets applicable to outstanding capital stock $2,608,026,872 ============== Net assets applicable to outstanding shares: Class A $1,814,805,422 Class B $ 576,995,837 Class C $ 19,409,834 Class I $ 9,938 Class Y $ 196,805,841 Net asset value per share of outstanding capital stock: Class A shares 372,031,693 $ 4.88 Class B shares 118,252,393 $ 4.88 Class C shares 3,973,014 $ 4.89 Class I shares 2,037 $ 4.88 Class Y shares 40,332,479 $ 4.88 ---------- -------------- *Including securities on loan, at value (Note 5) $ 61,788,450 --------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 21 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Statement of operations AXP Diversified Bond Fund Six months ended Feb. 28, 2005 (Unaudited) Investment income Income: Interest $ 61,923,344 Fee income from securities lending (Note 5) 253,096 ------- Total income 62,176,440 ---------- Expenses (Note 2): Investment management services fee 6,662,285 Distribution fee Class A 2,323,199 Class B 2,998,367 Class C 100,457 Transfer agency fee 2,189,980 Incremental transfer agency fee Class A 121,592 Class B 77,083 Class C 3,024 Service fee -- Class Y 99,355 Administrative services fees and expenses 645,553 Compensation of board members 7,742 Custodian fees 110,220 Printing and postage 245,500 Registration fees 46,540 Audit fees 21,500 Other 51,484 ------ Total expenses 15,703,881 Expenses waived/reimbursed by AEFC (Note 2) (871,618) -------- 14,832,263 Earnings credits on cash balances (Note 2) (30,779) ------- Total net expenses 14,801,484 ---------- Investment income (loss) -- net 47,374,956 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 31,419,123 Foreign currency transactions (245,434) Futures contracts 656,242 ------- Net realized gain (loss) on investments 31,829,931 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (27,504,279) ----------- Net gain (loss) on investments and foreign currencies 4,325,652 --------- Net increase (decrease) in net assets resulting from operations $ 51,700,608 ============
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 22 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Statements of changes in net assets AXP Diversified Bond Fund Feb. 28, 2005 Aug. 31, 2004 Six months ended Year ended (Unaudited) Operations and distributions Investment income (loss) -- net $ 47,374,956 $ 105,192,832 Net realized gain (loss) on investments 31,829,931 (4,621,473) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (27,504,279) 68,359,517 ----------- ---------- Net increase (decrease) in net assets resulting from operations 51,700,608 168,930,876 ---------- ----------- Distributions to shareholders from: Net investment income Class A (35,546,126) (72,912,216) Class B (9,189,291) (21,667,704) Class C (308,119) (659,148) Class I (206) (1,353) Class Y (3,979,081) (8,189,423) ---------- ---------- Total distributions (49,022,823) (103,429,844) ----------- ------------ Capital share transactions (Note 4) Proceeds from sales Class A shares (Note 2) 90,958,982 251,088,529 Class B shares 37,513,195 89,582,880 Class C shares 2,022,057 5,454,766 Class I shares -- 821,608 Class Y shares 17,528,274 71,322,514 Reinvestment of distributions at net asset value Class A shares 28,333,510 56,831,525 Class B shares 8,175,350 18,955,456 Class C shares 278,031 580,863 Class I shares -- 1,139 Class Y shares 3,011,926 6,500,832 Payments for redemptions Class A shares (238,804,594) (699,205,028) Class B shares (Note 2) (97,653,202) (397,699,256) Class C shares (Note 2) (3,790,810) (12,180,164) Class I shares -- (814,281) Class Y shares (27,248,001) (147,874,937) ----------- ------------ Increase (decrease) in net assets from capital share transactions (179,675,282) (756,633,554) ------------ ------------ Total increase (decrease) in net assets (176,997,497) (691,132,522) Net assets at beginning of period 2,785,024,369 3,476,156,891 ------------- ------------- Net assets at end of period $2,608,026,872 $2,785,024,369 ============== ============== Undistributed net investment income $ 4,765,249 $ 6,413,116 -------------- --------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 23 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Notes to Financial Statements AXP Diversified Bond Fund (Unaudited as to Feb. 28, 2005) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of AXP Fixed Income Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. AXP Fixed Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the board. The Fund invests primarily in bonds and other debt securities including securities issued by the U.S. government, corporate bonds and mortgage- and asset-backed securities. The Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth calendar year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. The Fund offers an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares have no sales charge and are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. At Feb. 28, 2005, American Express Financial Corporation (AEFC) owned 100% of Class I shares. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, transfer agency fees and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. The Fund's significant accounting policies are summarized below: Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. -------------------------------------------------------------------------------- 24 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Illiquid securities At Feb. 28, 2005, investments in securities included issues that are illiquid which the Fund currently limits to 10% of net assets, at market value, at the time of purchase. The aggregate value of such securities at Feb. 28, 2005 was $2,461,860 representing 0.09% of net assets. These securities are valued at fair value according to methods selected in good faith by the board. According to board guidelines, certain unregistered securities are determined to be liquid and are not included within the 10% limitation specified above. Assets are liquid if they can be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the asset is valued by the Fund. Securities purchased on a forward-commitment basis Delivery and payment for securities that have been purchased by the Fund on a forward-commitment basis, including when-issued securities and other forward-commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Fund's net assets the same as owned securities. The Fund designates cash or liquid securities at least equal to the amount of its forward-commitments. At Feb. 28, 2005, the Fund has entered into outstanding when-issued securities of $32,502,290. The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Fund to "roll over" its purchase commitments, the Fund receives negotiated amounts in the form of reductions of the purchase price of the commitment. Option transactions To produce incremental earnings, protect gains, and facilitate buying and selling of securities for investments, the Fund may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. The Fund also may buy and sell put and call options and write covered call options on portfolio securities as well as write cash-secured put options. The risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Fund pays a premium whether or not the option is exercised. The Fund also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Fund will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Fund will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. -------------------------------------------------------------------------------- 25 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Futures transactions To gain exposure to or protect itself from market changes, the Fund may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Fund also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. The Fund may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Fund and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Fund is subject to the credit risk that the other party will not complete its contract obligations. Forward sale commitments The Fund may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. -------------------------------------------------------------------------------- 26 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to-market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." Guarantees and indemnifications Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. -------------------------------------------------------------------------------- 27 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT 2. EXPENSES AND SALES CHARGES The Fund has agreements with AEFC to manage its portfolio and provide administrative services. Under an Investment Management Services Agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Fund's average daily net assets that declines from 0.52% to 0.395% annually as the Fund's assets increase. Under an Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets that declines from 0.05% to 0.025% annually as the Fund's assets increase. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other American Express mutual funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $20.50 o Class B $21.50 o Class C $21.00 o Class Y $18.50 The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. Class I pays a transfer agency fee at an annual rate per shareholder account of $1. This amount is included in the transfer agency fee on the statement of operations. In addition, AECSC is entitled to charge an annual closed account fee of $5 per inactive account, charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system generally within one year. However, the closed account fee is currently not effective. The Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. -------------------------------------------------------------------------------- 28 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Sales charges received by the Distributor for distributing Fund shares were $1,180,925 for Class A, $366,585 for Class B and $2,819 for Class C for the six months ended Feb. 28, 2005. For the six months ended Feb. 28, 2005, AEFC and its affiliates waived certain fees and expenses to 0.95% for Class A, 1.70% for Class B, 1.69% for Class C and 0.77% for Class Y. Of these waived fees and expenses, the transfer agency fees waived for Class A, Class B, Class C and Class Y were $575,401, $219,293, $7,818 and $69,106, respectively. In addition, AEFC and its affiliates have agreed to waive certain fees and expenses until Aug. 31, 2005. Under this agreement, net expenses will not exceed 0.945% for Class A, 1.695% for Class B, 1.695% for Class C, 0.735% for Class I and 0.775% for Class Y of the Fund's average daily net assets. During the six months ended Feb. 28, 2005, the Fund's custodian and transfer agency fees were reduced by $30,779 as a result of earnings credits from overnight cash balances. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $3,935,781,294 and $4,013,491,783, respectively, for the six months ended Feb. 28, 2005. Realized gains and losses are determined on an identified cost basis. 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows:
Six months ended Feb. 28, 2005 Class A Class B Class C Class I Class Y Sold 18,584,853 7,663,106 412,546 -- 3,580,280 Issued for reinvested distributions 5,788,398 1,669,030 56,688 -- 615,014 Redeemed (48,801,891) (19,948,348) (773,395) -- (5,575,014) ------------ ----------- ---------- -------- ----------- Net increase (decrease) (24,428,640) (10,616,212) (304,161) -- (1,379,720) ------------ ----------- ---------- -------- ----------- Year ended Aug. 31, 2004 Class A Class B Class C Class I* Class Y Sold 51,888,177 18,469,701 1,122,760 166,209 14,733,853 Issued for reinvested distributions 11,728,875 3,911,848 119,675 231 1,341,478 Redeemed (144,542,248) (82,296,004) (2,511,111) (164,403) (30,501,584) ------------ ----------- ---------- -------- ----------- Net increase (decrease) (80,925,196) (59,914,455) (1,268,676) 2,037 (14,426,253) ------------ ----------- ---------- -------- -----------
* Inception date was March 4, 2004. 5. LENDING OF PORTFOLIO SECURITIES At Feb. 28, 2005, securities valued at $61,788,450 were on loan to brokers. For collateral, the Fund received $64,567,500 in cash. Cash collateral received is invested in short-term securities, which are included in the short-term section of the "Investments in securities." Income from securities lending amounted to $253,096 for the six months ended Feb. 28, 2005. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. -------------------------------------------------------------------------------- 29 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT 6. INTEREST RATE FUTURES CONTRACTS At Feb. 28, 2005, investments in securities included securities valued at $3,817,572 that were pledged as collateral to cover initial margin deposits on 692 open purchase contracts and 3,405 open sale contracts. The notional market value of the open purchase contracts at Feb. 28, 2005 was $77,741,875 with a net unrealized loss of $792,080. The notional market value of the open sale contracts at Feb. 28, 2005 was $375,318,625 with a net unrealized gain of $1,248,291. See "Summary of significant accounting policies" and "Notes to investments in securities." 7. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by The Bank of New York, whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 21, 2004. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the higher of the Federal Funds Effective Rate plus 0.50% or the Prime Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.09% per annum. Prior to this agreement, the Fund had a revolving credit agreement that permitted borrowings up to $500 million with Deutsche Bank. The Fund had no borrowings outstanding during the six months ended Feb. 28, 2005. 8. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund had a capital loss carry-over of $134,156,528 at Aug. 31, 2004, that if not offset by capital gains will expire as follows: 2009 2010 2013 $100,641,177 $26,118,914 $7,396,437 It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. -------------------------------------------------------------------------------- 30 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT 9. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results.
Class A Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005(g) 2004 2003 2002 2001 Net asset value, beginning of period $4.87 $4.78 $4.75 $4.86 $4.70 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .09 .18 .20 .25 .31 Net gains (losses) (both realized and unrealized) .01 .08 .03 (.10) .17 ----- ----- ----- ----- ----- Total from investment operations .10 .26 .23 .15 .48 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.09) (.17) (.20) (.25) (.32) Tax return of capital -- -- -- (.01) -- ----- ----- ----- ----- ----- Total distributions (.09) (.17) (.20) (.26) (.32) ----- ----- ----- ----- ----- Net asset value, end of period $4.88 $4.87 $4.78 $4.75 $4.86 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $1,815 $1,933 $2,280 $2,438 $2,390 Ratio of expenses to average daily net assets(b) .95%(c),(d) .98%(d) .97% .95% .94% Ratio of net investment income (loss) to average daily net assets 3.69%(c) 3.55% 4.16% 5.17% 6.51% Portfolio turnover rate (excluding short-term securities) 152% 279% 256% 169% 115% Total return(e) 2.12%(f) 5.54% 4.91% 3.13% 10.48%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Adjusted to an annual basis. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses for Class A would have been 1.01% for the six months ended Feb. 28, 2005 and 1.00% for the year ended Aug. 31, 2004. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Feb. 28, 2005 (Unaudited). -------------------------------------------------------------------------------- 31 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005(g) 2004 2003 2002 2001 Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.70 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .07 .14 .16 .21 .27 Net gains (losses) (both realized and unrealized) .01 .09 .03 (.10) .17 ----- ----- ----- ----- ----- Total from investment operations .08 .23 .19 .11 .44 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.08) (.13) (.16) (.21) (.28) Tax return of capital -- -- -- (.01) -- ----- ----- ----- ----- ----- Total distributions (.08) (.13) (.16) (.22) (.28) ----- ----- ----- ----- ----- Net asset value, end of period $4.88 $4.88 $4.78 $4.75 $4.86 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $577 $628 $902 $1,047 $954 Ratio of expenses to average daily net assets(b) 1.70%(c),(d) 1.73%(d) 1.73% 1.71% 1.70% Ratio of net investment income (loss) to average daily net assets 2.94%(c) 2.78% 3.40% 4.40% 5.74% Portfolio turnover rate (excluding short-term securities) 152% 279% 256% 169% 115% Total return(e) 1.53%(f) 4.95% 4.12% 2.35% 9.65%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Adjusted to an annual basis. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses for Class B would have been 1.77% for the six months ended Feb. 28, 2005 and 1.75% for the year ended Aug. 31, 2004. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Feb. 28, 2005 (Unaudited). -------------------------------------------------------------------------------- 32 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005(g) 2004 2003 2002 2001 Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.71 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .07 .14 .16 .21 .27 Net gains (losses) (both realized and unrealized) .02 .09 .03 (.10) .16 ----- ----- ----- ----- ----- Total from investment operations .09 .23 .19 .11 .43 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.08) (.13) (.16) (.21) (.28) Tax return of capital -- -- -- (.01) -- ----- ----- ----- ----- ----- Total distributions (.08) (.13) (.16) (.22) (.28) ----- ----- ----- ----- ----- Net asset value, end of period $4.89 $4.88 $4.78 $4.75 $4.86 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $19 $21 $27 $24 $10 Ratio of expenses to average daily net assets(b) 1.69%(c),(d) 1.73%(d) 1.74% 1.72% 1.70% Ratio of net investment income (loss) to average daily net assets 2.95%(c) 2.79% 3.34% 4.33% 5.62% Portfolio turnover rate (excluding short-term securities) 152% 279% 256% 169% 115% Total return(e) 1.74%(f) 4.95% 4.11% 2.35% 9.43%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Adjusted to an annual basis. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses for Class C would have been 1.77% for the six months ended Feb. 28, 2005 and 1.75% for the year ended Aug. 31, 2004. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Feb. 28, 2005 (Unaudited). -------------------------------------------------------------------------------- 33 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Class I Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005(g) 2004(b) Net asset value, beginning of period $4.88 $4.91 ----- ----- Income from investment operations: Net investment income (loss) .09 .11 Net gains (losses) (both realized and unrealized) .01 (.04) ----- ----- Total from investment operations .10 .07 ----- ----- Less distributions: Dividends from net investment income (.10) (.10) ----- ----- Net asset value, end of period $4.88 $4.88 ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $-- $-- Ratio of expenses to average daily net assets(c) .60%(d) .59%(d) Ratio of net investment income (loss) to average daily net assets 4.03%(d) 3.13%(d) Portfolio turnover rate (excluding short-term securities) 152% 279% Total return (e) 2.09%(f) 1.43%(f)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was March 4, 2004. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Feb. 28, 2005 (Unaudited). -------------------------------------------------------------------------------- 34 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005(g) 2004 2003 2002 2001 Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.70 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .09 .18 .21 .25 .32 Net gains (losses) (both realized and unrealized) .01 .10 .03 (.10) .17 ----- ----- ----- ----- ----- Total from investment operations .10 .28 .24 .15 .49 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.10) (.18) (.21) (.25) (.33) Tax return of capital -- -- -- (.01) -- ----- ----- ----- ----- ----- Total distributions (.10) (.18) (.21) (.26) (.33) ----- ----- ----- ----- ----- Net asset value, end of period $4.88 $4.88 $4.78 $4.75 $4.86 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $197 $203 $268 $297 $533 Ratio of expenses to average daily net assets(b) .77%(c),(d) .81%(d) .81% .78% .78% Ratio of net investment income (loss) to average daily net assets 3.87%(c) 3.70% 4.34% 5.30% 6.66% Portfolio turnover rate (excluding short-term securities) 152% 279% 256% 169% 115% Total return(e) 1.99%(f) 5.92% 5.08% 3.29% 10.65%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Adjusted to an annual basis. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses for Class Y would have been 0.84% for the six months ended Feb. 28, 2005 and 0.83% for the year ended Aug. 31, 2004. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Feb. 28, 2005 (Unaudited). -------------------------------------------------------------------------------- 35 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Fund Expenses Example (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended Feb. 28, 2005. Actual Expenses The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. -------------------------------------------------------------------------------- 36 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT
Beginning Ending Expenses account value account value paid during Annualized Sept. 1, 2004 Feb. 28, 2005 the period(a) expense ratio Class A Actual(b) $1,000 $1,021.20 $4.76 .95% Hypothetical (5% return before expenses) $1,000 $1,020.08 $4.76 .95% Class B Actual(b) $1,000 $1,015.30 $8.49 1.70% Hypothetical (5% return before expenses) $1,000 $1,016.36 $8.50 1.70% Class C Actual(b) $1,000 $1,017.40 $8.45 1.69% Hypothetical (5% return before expenses) $1,000 $1,016.41 $8.45 1.69% Class I Actual(b) $1,000 $1,020.90 $3.01 .60% Hypothetical (5% return before expenses) $1,000 $1,021.82 $3.01 .60% Class Y Actual(b) $1,000 $1,019.90 $3.86 .77% Hypothetical (5% return before expenses) $1,000 $1,020.98 $3.86 .77%
(a) Expenses are equal to the Fund's annualized expense ratio as indicated above, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended Feb. 28, 2005: +2.12% for Class A, +1.53% for Class B, +1.74% for Class C, +2.09% for Class I and +1.99% for Class Y. -------------------------------------------------------------------------------- 37 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT Proxy Voting The policy of the Board is to vote all proxies of the companies in which the Fund holds investments. The procedures are stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling (800) 862-7919; by looking at the website americanexpress.com/funds; or by searching the website of the Securities and Exchange Commission http://www.sec.gov. You may view the Fund's voting record for all portfolio companies whose shareholders meetings were completed the previous quarter on americanexpress.com/funds or obtain a copy by calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283. In addition, information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available at http://www.sec.gov. -------------------------------------------------------------------------------- 38 -- AXP DIVERSIFIED BOND FUND -- 2005 SEMIANNUAL REPORT (logo) AMERICAN EXPRESS (R) American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 This report must be accompanied or preceded by the Fund's current prospectus. Distributed by American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. Item 2. Code of Ethics. Not applicable for semi-annual reports. Item 3. Audit Committee Financial Expert. Not applicable for semi-annual reports. Item 4. Principal Accountant Fees and Services. Not applicable for semi-annual reports. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. The complete schedule of investments is included in Item 1 of this Form N-CSR. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable. Item 9. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 10. Submission of matters to a vote of security holders. Not applicable. Item 11. Controls and Procedures. (a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's Principal Financial Officer and Principal Executive Officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) Not applicable for semi-annual reports. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) AXP Fixed Income Series, Inc. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date May 3, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date May 3, 2005 By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Principal Financial Officer Date May 3, 2005