EX-99.17J ANNUAL RPT 9 ex17j-s6263.txt ANNUAL REPORT FOR THE PERIOD ENDED JULY 31, 2005 FOR RIVERSOURCE DISCIPLINED EQUITY FUND. AXP(R) Quantitative Large Cap Equity Fund Annual Report for the Period Ended July 31, 2005 AXP Quantitative Large Cap Equity Fund seeks to provide shareholders with long-term capital growth. (This annual report is intended only for the information of shareholders or those who have received the offering prospectus of the Fund, which contains information about the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money.) Table of Contents Fund Snapshot 3 Performance Summary 4 Questions & Answers with Portfolio Management 5 The Fund's Long-term Performance 8 Investments in Securities 10 Financial Statements 15 Notes to Financial Statements 18 Report of Independent Registered Public Accounting Firm 29 Federal Income Tax Information 30 Fund Expenses Example 32 Board Members and Officers 34 Approval of Investment Management Services Agreement 37 Proxy Voting 39 CORPORATE REORGANIZATION On Feb. 1, 2005, American Express Company (American Express) announced plans to pursue a spin off of Ameriprise Financial, Inc. (Ameriprise Financial) (formerly American Express Financial Corporation) to American Express shareholders. The separation from American Express is expected to be completed on Sept. 30, 2005. After the separation from American Express, Ameriprise Financial will no longer be affiliated with American Express. Ameriprise Financial provides administrative services to the Fund and, through Sept. 30, 2005, investment management services to the Fund. Effective Oct. 1, 2005, RiverSource Investments, LLC, a wholly owned subsidiary of Ameriprise Financial, will provide investment management services to the Fund. In addition, Ameriprise Financial is the parent company of the Fund's distributor, Ameriprise Financial Services, Inc. (formerly American Express Financial Advisors Inc.); the Fund's transfer agent, RiverSource Service Corporation (formerly American Express Client Service Corporation); and the Fund's custodian, Ameriprise Trust Company (formerly American Express Trust Company). Effective Oct. 1, 2005, the Fund will change its name such that it no longer bears the American Express brand and instead will bear the RiverSourceSM brand. Information regarding the new name of the Fund and other changes will be separately communicated to shareholders. -------------------------------------------------------------------------------- 2 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Fund Snapshot AT JULY 31, 2005 PORTFOLIO MANAGERS Portfolio managers Since Years in industry Dimitris J. Bertsimas 4/03 12 Gina K. Mourtzinou 4/03 8 FUND OBJECTIVE This Fund seeks to provide shareholders with long-term capital growth. Inception dates by class A: 4/24/03 B: 4/24/03 C: 4/24/03 I: 7/15/04 Y: 4/24/03 Ticker symbols by class A: AQEAX B: -- C: -- I: ALEIX Y: -- Total net assets $119.4 million Number of holdings 185 STYLE MATRIX STYLE VALUE BLEND GROWTH X LARGE MEDIUM SIZE SMALL Shading within the style matrix indicates areas in which the Fund generally invests. SECTOR COMPOSITION Percentage of portfolio assets [PIE CHART] Financials 16.2% Health Care 14.3% Energy 12.6% Consumer Staples 11.5% Consumer Discretionary 10.8% Information Technology 8.3% Telecommunication Services 8.2% Industrials 6.1% Short-Term Securities 5.5% Utilities 5.0% Materials 1.5% TOP TEN HOLDINGS Percentage of portfolio assets Altria Group (Tobacco) 5.5% Exxon Mobil (Oil & Gas) 4.3 Johnson & Johnson (Pharmaceuticals) 3.2 Chevron (Oil & Gas) 2.8 iShares MSCI EAFE Index Fund (Diversified Financial Services) 2.4 SBC Communications (Diversified Telecommunication Services) 2.3 Wal-Mart Stores (Food & Staples Retailing) 2.3 UnitedHealth Group (Health Care Providers & Services) 2.3 Citigroup (Diversified Financial Services) 2.3 Merck & Co (Pharmaceuticals) 2.0 For further detail about these holdings, please refer to the section entitled "Investments in Securities." The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor's, a division of The McGraw-Hill Companies, Inc. The investment process used to manage the AXP Quantitative Large Cap Equity Fund employs new technologies and statistical methods that have not previously been used to managed open-end mutual funds. Shareholders should be prepared for the possibility that the Fund may underperform its benchmark. While RiverSource Investments seeks to control trading activity, the Fund may trade more often than other funds in its peer group. Trading activity may result in increased fees, expenses and taxes. Fund holdings are subject to change. -------------------------------------------------------------------------------- 3 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Performance Summary [BAR CHART] PERFORMANCE COMPARISON For the year ended July 31, 2005 +15.95% +14.05% +12.56% +15.95% = AXP Quantitative Large Cap Equity Fund Class A (excluding sales charge) +14.05% = S&P 500 Index (unmanaged) +12.56% = Lipper Large-Cap Core Funds Index (see "The Fund`s Long-term Performance" for Index descriptions) 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.riversource.com/investments. The 5.75% 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.
AVERAGE ANNUAL TOTAL RETURNS Class A Class B Class C Class I Class Y (Inception dates) (4/24/03) (4/24/03) (4/24/03) (7/15/04) (4/24/03) After After NAV(1) POP(2) NAV(1) CDSC(3) NAV(1) CDSC(4) NAV(5) NAV(6) at July 31, 2005 1 year +15.95% +9.28% +15.03% +10.03% +15.03% +14.03% +16.29% +16.25% Since inception +16.45% +13.45% +15.47% +13.99% +15.48% +15.48% +15.00% +16.63% at June 30, 2005 1 year +6.27% +0.15% +5.66% +0.66% +5.49% +4.49% N/A +6.72% Since inception +15.04% +11.96% +14.17% +12.60% +14.18% +14.18% +11.41%* +15.30%
(1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 5.75%. (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 Funds, six affiliated funds-of-funds. (6) Sales charge is not applicable to these shares. Shares available to institutional investors only. * Not annualized. -------------------------------------------------------------------------------- 4 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT AXP Quantitative Large Cap Equity Fund's Class A shares gained 15.95%, excluding sales charge, for the 12 months ended July 31, 2005. The Fund outperformed the Lipper Large-Cap Core Funds Index, representing the Fund's peer group, which returned 12.56%, as well as the Standard & Poor's 500 Index (S&P 500 Index), which gained 14.05% for the same period. Below, Portfolio Managers Dimitris Bertsimas and Gina Mourtzinou discuss the Fund's positioning and results for the fiscal year ended July 31, 2005. At July 31, 2005, approximately 68% of the Fund's shares were owned in aggregate by AXP Portfolio Builder Funds, a group of six asset allocation funds managed by RiverSource Investments, LLC* (RiverSource Investments). As a result, it is possible AXP Quantitative Large Cap Equity Fund may experience relatively large purchases or redemptions from AXP Portfolio Builder Funds (see page 23, Class I capital share transactions for related activity during the most recent fiscal period). RiverSource Investments seeks to minimize the impact of these transactions by structuring them over a reasonable period of time. AXP Quantitative Large Cap Equity Fund may experience increased expenses as it buys and sells securities to satisfy subscriptions and redemptions in AXP Portfolio Builder Funds. For more information on the Fund's expenses, see the discussions beginning on pages 22 and 32. Q: What factors most significantly affected performance? A: Stocks selected using the Fund's three quantitative models (value, momentum, and quality) drove strong performance relative to both the S&P 500 Index and its peers during the 12-month period. Indeed, for the annual period, each of the three quantitative models outperformed the S&P 500 Index, with the momentum model leading the way, followed by the value and then quality models. We believe the style diversification provided by the Fund's three quantitative models continues to be a significant investment advantage. Throughout the period, our use of risk modeling -- limits on individual holding size and on sector and industry allocations relative to the S&P 500 Index -- supported the Fund's strong relative performance as well. Another positive contributor to the Fund's relative results was its international exposure. The Fund's international position was established during the fourth calendar quarter of 2004 through MSCI EAFE iShares, an exchange-traded fund based on the MSCI EAFE Index. When we established the position, the U.S. dollar was weakening, thereby contributing to iShares' strong performance. The Fund's international exposure accounted for a small portion of its total net assets throughout the period, * Prior to Oct. 1, 2005, Ameriprise Financial, Inc. (formerly American Express Financial Corporation) served as investment manager to the AXP mutual funds. -------------------------------------------------------------------------------- 5 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Questions & Answers [BEGIN CALLOUT QUOTE] > Stocks selected using the Fund's three quantitative models (value, momentum and quality) drove strong performance relative to both the S&P 500 Index and its peers during the 12-month period. [END CALLOUT QUOTE] reaching as much as 4% of portfolio assets at one time and standing at an allocation of approximately 2% as of July 31, 2005. Q: Which equity sectors and securities affected the Fund's performance most during the fiscal year? A: The Fund's stock holdings are determined by our quantitative models. The Fund's sector allocations stem from these individual stock selections, rather than any prediction that certain sectors might perform better or worse than the market. That said, from a sector perspective, significant exposure to and effective stock selection within utilities and consumer staples made positive contributions to the Fund's annual performance. Strong stock selection in materials further boosted the Fund's relative results. The positive effect of a sizable allocation to energy more than offset the negative effect of the Fund's weak stock selection in this strongly performing sector. From an individual stock perspective, positions in Altria Group (a consumer staples beverages and tobacco stock selected by the momentum and value models), ConocoPhillips (an integrated oil company originally both a momentum and value model pick though currently just a value model selection), Johnson & Johnson (a health care giant selected by the quality model) and Qualcomm (a telecommunications equipment and services leader selected by the momentum model) particularly helped the Fund's relative performance. On the other hand, the Fund's ineffective stock selection in financials detracted most from relative performance. A position in Fannie Mae (a mortgage financer selected by the value model) particularly detracted. So, too, did a holding in Intel (a semiconductor industry bellwether selected by the momentum model). We maintained the Fund's holding in Fannie Mae, but sold its position in Intel by the end of the annual period. Q: What changes did you make to the portfolio and how is it currently positioned? A: During the period, the Fund maintained the following allocation among the three quantitative models: o 40% investment in the momentum model o 30% in the value model and o 30% in the quality model. -------------------------------------------------------------------------------- 6 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Questions & Answers [BEGIN CALLOUT QUOTE] > We will continue our strategy of monitoring weightings as a risk management tool, so that no individual security, industry or sector becomes too large within the Fund's portfolio. [END CALLOUT QUOTE] As indicated, we also established a position in MSCI EAFE iShares during the period, as our separate asset allocation model pointed to opportunities in international stocks. The Fund experienced significant inflows of cash during the annual period, including share purchases by the AXP Portfolio Builder Series asset allocation funds. We managed this influx by purchasing S&P 500 futures. While the influx triggered a need to rebalance the portfolio more than once a month, it had a rather neutral effect on Fund performance for the 12-month period. Indeed, we continued to improve trading and cash flow management through the fiscal year. As mentioned, the Fund's sector weightings are a by-product of the individual stocks selected by our three models. Over the course of the 12 months, our models became more positive on stocks in the energy and telecommunications services sectors. On the other hand, our models became more negative on stocks in the information technology and industrials sectors. At the end of the fiscal year, the Fund had significant exposures to the telecommunications services, energy and consumer staples sectors and more modest allocations to the information technology, financials and industrials sectors. Q: How do you intend to manage the Fund in the coming months? A: We believe the Fund's consistent, disciplined approach will benefit performance over the long term. Our focus going forward is to keep using our three well-tested models to find the best-performing stocks regardless of market conditions. We will continue our strategy of monitoring weightings as a risk management tool, so that no individual security, industry or sector becomes too large within the Fund's portfolio. We also intend to continue to employ the macroscopic aspects of our risk controls, including constraints on market capitalization, price, quality, turnover, transactions costs and more. Overall, we intend to maintain the high quality of the Fund's portfolio, while at the same time maintaining our style diversification. -------------------------------------------------------------------------------- 7 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT The Fund's Long-term Performance The chart on the facing page illustrates the total value of an assumed $10,000 investment in AXP Quantitative Large Cap Equity Fund Class A shares (from 5/1/03 to 7/31/05) as compared to the performance of two widely cited performance indices, the Standard & Poor's 500 Index and the Lipper Large-Cap Core Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 5.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. 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. Returns do not reflect taxes payable on distributions and redemptions. 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.riversource.com/investments. Also see "Past Performance" in the Fund's current prospectus. DISTRIBUTION SUMMARY The table below details the Fund's income and capital gain distributions for the fiscal years shown. More information on the other classes can be found in the Financial Highlights section of this report's Notes to Financial Statements. Class A Short-term Long-term Fiscal year ended Income capital gains capital gains Total July 31, 2005 $0.03 $0.07 $0.09 $0.19 July 31, 2004 0.02 0.11 0.01 0.14 July 31, 2003(1) -- -- -- -- (1) For the period from April 24, 2003 (when shares became publicly available) to July 31, 2003. -------------------------------------------------------------------------------- 8 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT [LINE CHART]
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN AXP QUANTITATIVE LARGE CAP EQUITY FUND AXP Quantitative Large Cap Equity Fund Class A (includes sales charge) ($13,315) $ 9,425 $10,254 $11,483 $13,315 S&P 500 Index(1) ($14,003) $10,000 $10,849 $12,278 $14,003 Lipper Large-Cap Core Funds Index(2) ($13,318) $10,000 $10,755 $11,832 $13,318 5/1/03 7/03 7/04 7/05
COMPARATIVE RESULTS Results at July 31, 2005 Since 1 year inception(3) AXP Quantitative Large Cap Equity Fund (includes sales charge) Class A Cumulative value of $10,000 $10,928 $13,315 Average annual total return +9.28% +13.45% S&P 500 Index(1) Cumulative value of $10,000 $11,405 $14,003 Average annual total return +14.05% +16.14% Lipper Large-Cap Core Funds Index(2) Cumulative value of $10,000 $11,256 $13,318 Average annual total return +12.56% +13.58%
Results for other share classes can be found on page 4. (1) The Standard & Poor's 500 Index (S&P 500 Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. (2) The Lipper Large-Cap Core Funds Index includes the 30 largest large-cap core funds tracked by Lipper Inc. The index's returns include net reinvested dividends. (3) Fund data is from April 24, 2003. S&P 500 Index and Lipper peer data is from May 1, 2003. -------------------------------------------------------------------------------- 9 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Investments in Securities AXP Quantitative Large Cap Equity Fund July 31, 2005 (Percentages represent value of investments compared to net assets) Common Stocks (99.8%) Issuer Shares Value(a) Aerospace & Defense (1.2%) Lockheed Martin 3,104 $193,690 Rockwell Collins 6,474 315,931 United Technologies 17,742 899,519 Total 1,409,140 Air Freight & Logistics (1.1%) FedEx 8,070 678,607 United Parcel Service Cl B 8,119 592,443 Total 1,271,050 Auto Components (0.1%) Johnson Controls 2,710 155,662 Automobiles (1.5%) Ford Motor 59,497 638,998 General Motors 19,047 701,310 Harley-Davidson 7,703 409,723 Total 1,750,031 Beverages (2.0%) Coca-Cola 54,536 2,386,495 Biotechnology (0.3%) Gilead Sciences 8,252(b) 369,772 Building Products (0.2%) Masco 5,949 201,731 Capital Markets (1.9%) Bear Stearns Companies 2,977 303,981 Franklin Resources 11,019 890,557 Lehman Brothers Holdings 6,573 691,019 Merrill Lynch & Co 3,855 226,597 Morgan Stanley 2,267 120,264 Total 2,232,418 Chemicals (0.9%) Dow Chemical 11,766 564,180 Monsanto 7,987 538,084 Total 1,102,264 Common Stocks (continued) Issuer Shares Value(a) Commercial Banks (2.1%) Bank of America 15,071 $657,096 Comerica 3,962 242,078 KeyCorp 5,983 204,858 Natl City 18,078 667,258 PNC Financial Services Group 10,111 554,285 Regions Financial 1,911 64,286 Wachovia 2,649 133,457 Total 2,523,318 Communications Equipment (0.3%) Comverse Technology 9,884(b) 249,966 Tellabs 11,862(b) 115,299 Total 365,265 Computers & Peripherals (2.8%) Apple Computer 29,129(b) 1,242,353 Gateway 29,177(b) 116,124 Hewlett-Packard 21,708 534,451 Lexmark Intl Cl A 1,816(b) 113,863 NCR 10,017(b) 347,690 Network Appliance 12,591(b) 321,196 QLogic 19,572(b) 607,711 Total 3,283,388 Consumer Finance (0.6%) MBNA 14,538 365,776 Providian Financial 7,465(b) 141,089 SLM 2,933 151,020 Total 657,885 Distributors (0.2%) Genuine Parts 4,854 222,265 Diversified Financial Services (5.5%) CIT Group 4,009 176,957 Citigroup 65,559 2,851,817 iShares MSCI EAFE Index Fund 56,400 3,042,216 Technology Select Sector Index Fund 23,600 497,016 Total 6,568,006 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 10 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Common Stocks (continued) Issuer Shares Value(a) Diversified Telecommunication Services (8.0%) AT&T 40,392 $799,762 BellSouth 84,339 2,327,756 SBC Communications 118,859 2,906,102 Sprint 45,198 1,215,826 Verizon Communications 69,594 2,382,202 Total 9,631,648 Electric Utilities (3.6%) Allegheny Energy 7,515(b) 214,178 American Electric Power 8,425 326,048 CenterPoint Energy 9,851 135,353 Edison Intl 4,888 199,821 Exelon 29,458 1,576,591 FPL Group 5,382 232,072 PG&E 10,993 413,667 TECO Energy 9,536 180,803 TXU 11,741 1,017,240 Total 4,295,773 Electrical Equipment (0.5%) American Power Conversion 6,587 185,161 Rockwell Automation 7,068 364,072 Total 549,233 Electronic Equipment & Instruments (0.1%) Jabil Circuit 3,704(b) 115,528 Energy Equipment & Services (1.6%) Halliburton 13,539 758,861 Noble 5,789 388,905 Transocean 13,356(b) 753,679 Total 1,901,445 Food & Staples Retailing (3.3%) Albertson's 9,051 192,877 Kroger 18,677(b) 370,738 Safeway 14,936 362,945 SYSCO 4,436 159,962 Wal-Mart Stores 58,504 2,887,173 Total 3,973,695 Food Products (0.6%) Archer-Daniels-Midland 28,840 661,590 Health Care Equipment & Supplies (0.9%) Becton, Dickinson & Co 3,982 220,483 Biomet 2,427 92,542 Medtronic 10,087 544,093 Zimmer Holdings 2,417(b) 199,064 Total 1,056,182 Common Stocks (continued) Issuer Shares Value(a) Health Care Providers & Services (6.4%) Aetna 10,729 $830,425 Cardinal Health 9,078 540,867 Caremark Rx 6,863(b) 305,953 CIGNA 9,990 1,066,433 HCA 9,971 491,072 Humana 8,427(b) 335,816 Medco Health Solutions 2,805(b) 135,874 Tenet Healthcare 11,188(b) 135,822 UnitedHealth Group 55,138 2,883,716 WellPoint 13,851(b) 979,820 Total 7,705,798 Hotels, Restaurants & Leisure (2.0%) Darden Restaurants 4,418 153,305 Harrah's Entertainment 8,056 634,329 Marriott Intl Cl A 7,230 495,038 Starbucks 5,346(b) 280,932 Starwood Hotels & Resorts Worldwide Unit 6,800 430,576 Yum! Brands 6,453 337,815 Total 2,331,995 Household Durables (2.1%) Black & Decker 2,610 235,709 Centex 7,611 563,062 DR Horton 22,231 913,249 KB HOME 5,316 435,434 Pulte Homes 3,146 294,529 Whirlpool 1,247 99,735 Total 2,541,718 Household Products (0.2%) Kimberly-Clark 3,802 242,416 Industrial Conglomerates (1.1%) 3M 14,197 1,064,775 Textron 3,415 253,291 Total 1,318,066 Insurance (3.5%) Allstate 15,708 962,272 Ambac Financial Group 4,537 325,938 Aon 11,958 304,212 Jefferson-Pilot 2,029 101,795 Lincoln Natl 6,281 303,372 Loews 4,520 378,008 Marsh & McLennan Companies 9,979 289,092 MBIA 5,309 322,469 Prudential Financial 11,757 786,543 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 11 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Common Stocks (continued) Issuer Shares Value(a) Insurance (cont.) Safeco 1,299 $71,367 Torchmark 3,597 188,015 UnumProvident 9,896 189,508 Total 4,222,591 Internet & Catalog Retail (0.4%) eBay 12,445(b) 519,952 IT Services (1.2%) Affiliated Computer Services Cl A 2,305(b) 115,181 Automatic Data Processing 5,141 228,311 Computer Sciences 2,552(b) 116,831 Convergys 11,645(b) 169,435 Electronic Data Systems 19,225 395,457 Sabre Holdings Cl A 6,183 118,714 SunGard Data Systems 3,167(b) 113,664 Unisys 17,838(b) 115,412 Total 1,373,005 Leisure Equipment & Products (0.5%) Eastman Kodak 15,799 422,466 Mattel 8,419 157,014 Total 579,480 Machinery (0.9%) Caterpillar 13,374 720,993 PACCAR 4,329 312,640 Total 1,033,633 Media (0.3%) Walt Disney 13,238 339,422 Metals & Mining (0.7%) Freeport-McMoRan Copper & Gold Cl B 4,687 188,792 Nucor 4,197 232,724 Phelps Dodge 3,550 377,898 Total 799,414 Multi-Utilities & Unregulated Power (1.7%) AES 31,821(b) 510,727 CMS Energy 10,719(b) 169,789 Duke Energy 24,072 711,087 Public Service Enterprise Group 7,731 497,103 Sempra Energy 2,652 112,710 Total 2,001,416 Common Stocks (continued) Issuer Shares Value(a) Multiline Retail (1.8%) Dollar General 7,198 $146,263 Federated Dept Stores 5,958 452,033 May Dept Stores 12,818 526,179 Nordstrom 9,150 338,642 Sears Holdings 4,466(b) 688,791 Total 2,151,908 Oil & Gas (11.6%) Amerada Hess 2,404 283,335 Anadarko Petroleum 5,403 477,355 Apache 2,021 138,236 Chevron 60,101 3,486,459 ConocoPhillips 7,228 452,401 Devon Energy 19,319 1,083,603 El Paso 37,470 449,640 EOG Resources 7,649 467,354 Exxon Mobil 92,215 5,417,630 Kinder Morgan 4,504 400,225 Marathon Oil 2,863 167,085 Unocal 8,370 542,795 Valero Energy 6,815 564,146 Total 13,930,264 Pharmaceuticals (7.4%) Abbott Laboratories 6,212 289,666 Bristol-Myers Squibb 65,709 1,641,411 Johnson & Johnson 62,672 4,008,500 Merck & Co 81,218 2,522,631 Wyeth 10,467 478,865 Total 8,941,073 Real Estate Investment Trust (0.3%) Archstone-Smith Trust 3,635 154,488 ProLogis 3,989 181,738 Total 336,226 Road & Rail (1.5%) Burlington Northern Santa Fe 16,941 919,049 CSX 6,339 288,678 Norfolk Southern 15,036 559,490 Total 1,767,217 Semiconductors & Semiconductor Equipment (0.6%) Advanced Micro Devices 13,354(b) 268,148 LSI Logic 11,706(b) 114,251 NVIDIA 11,473(b) 310,459 Total 692,858 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 12 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Common Stocks (continued) Issuer Shares Value(a) Software (3.9%) Adobe Systems 17,128 $507,674 Autodesk 9,357 319,916 Compuware 28,997(b) 244,445 Microsoft 69,193 1,772,033 Oracle 113,833(b) 1,545,852 Symantec 11,891(b) 261,245 Total 4,651,165 Specialty Retail (2.2%) Best Buy 4,212 322,639 Home Depot 46,869 2,039,271 Staples 12,394 282,211 Total 2,644,121 Textiles, Apparel & Luxury Goods (0.3%) Nike Cl B 4,448 372,742 Thrifts & Mortgage Finance (3.2%) Countrywide Financial 6,048 217,728 Fannie Mae 31,160 1,740,598 Freddie Mac 10,326 653,429 MGIC Investment 3,110 213,284 Washington Mutual 24,008 1,019,860 Total 3,844,899 Tobacco (6.1%) Altria Group 104,032 6,965,982 UST 6,330 291,307 Total 7,257,289 Trading Companies & Distributors (0.1%) WW Grainger 2,096 130,623 Wireless Telecommunication Services (0.6%) Nextel Communications Cl A 21,414(b) 745,207 Total Common Stocks (Cost: $113,013,983) $119,158,282 Short-Term Securities (5.8%) Issuer Effective Principal Value(a) yield amount U.S. Government Agency (4.9%) Federal Natl Mtge Assn Disc Nts 08-22-05 3.28% $2,600,000 $2,594,332 09-07-05 3.26 3,300,000 3,288,083 Total 5,882,415 Commercial Paper (0.9%) HSBC Finance 08-01-05 3.31 1,000,000 999,724 Total Short-Term Securities (Cost: $6,882,765) $6,882,139 Total Investments in Securities (Cost: $119,896,748)(c) $126,040,421 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 13 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Notes to Investments in Securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) At July 31, 2005, the cost of securities for federal income tax purposes was $119,994,041 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 7,865,150 Unrealized depreciation (1,818,770) ---------- Net unrealized appreciation $ 6,046,380 ----------- The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor's, a division of The McGraw-Hill Companies, Inc. 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.riversource.com/investments. -------------------------------------------------------------------------------- 14 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT
Financial Statements Statement of assets and liabilities AXP Quantitative Large Cap Equity Fund July 31, 2005 Assets Investments in securities, at value (Note 1) (identified cost $119,896,748) $126,040,421 Cash in bank on demand deposit 63,008 Capital shares receivable 43,455 Dividends and accrued interest receivable 194,530 Receivable for investment securities sold 5,782,959 --------- Total assets 132,124,373 ----------- Liabilities Capital shares payable 10,711 Payable for investment securities purchased 12,666,426 Accrued investment management services fee 1,976 Accrued distribution fee 455 Accrued transfer agency fee 141 Accrued administrative services fee 165 Other accrued expenses 69,384 ------ Total liabilities 12,749,258 ---------- Net assets applicable to outstanding capital stock $119,375,115 ============ Represented by Capital stock -- $.01 par value (Note 1) $ 177,771 Additional paid-in capital 109,222,972 Undistributed net investment income 503,820 Accumulated net realized gain (loss) 3,326,879 Unrealized appreciation (depreciation) on investments 6,143,673 --------- Total -- representing net assets applicable to outstanding capital stock $119,375,115 ============ Net assets applicable to outstanding shares: Class A $ 28,058,336 Class B $ 9,287,787 Class C $ 188,938 Class I $ 81,805,703 Class Y $ 34,351 Net asset value per share of outstanding capital stock: Class A shares 4,189,337 $ 6.70 Class B shares 1,402,057 $ 6.62 Class C shares 28,519 $ 6.62 Class I shares 12,152,084 $ 6.73 Class Y shares 5,118 $ 6.71 ----- ------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 15 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT
Statement of operations AXP Quantitative Large Cap Equity Fund Year ended July 31, 2005 Investment income Income: Dividends $1,295,906 Interest 73,221 ------ Total income 1,369,127 --------- Expenses (Note 2): Investment management services fee 408,720 Distribution fee Class A 44,025 Class B 51,693 Class C 1,420 Transfer agency fee 40,155 Incremental transfer agency fee Class A 3,114 Class B 2,060 Class C 71 Service fee -- Class Y 30 Administrative services fees and expenses 29,441 Compensation of board members 8,604 Custodian fees 27,540 Printing and postage 37,795 Registration fees 57,489 Audit fees 20,500 Other 5,942 ----- Total expenses 738,599 Expenses waived/reimbursed by Ameriprise Financial (formerly AEFC) (Note 2) (23,127) ------- 715,472 Earnings credits on cash balances (Note 2) (4,727) ------ Total net expenses 710,745 ------- Investment income (loss) -- net 658,382 ------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 3,680,690 Futures contracts 115,625 ------- Net realized gain (loss) on investments 3,796,315 Net change in unrealized appreciation (depreciation) on investments 5,439,579 --------- Net gain (loss) on investments 9,235,894 --------- Net increase (decrease) in net assets resulting from operations $9,894,276 ==========
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 16 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT
Statements of changes in net assets AXP Quantitative Large Cap Equity Fund Year ended July 31, 2005 2004 Operations and distributions Investment income (loss) -- net $ 658,382 $ 70,924 Net realized gain (loss) on investments 3,796,315 824,610 Net change in unrealized appreciation (depreciation) on investments 5,439,579 335,658 --------- ------- Net increase (decrease) in net assets resulting from operations 9,894,276 1,231,192 --------- --------- Distributions to shareholders from: Net investment income Class A (62,837) (32,550) Class B -- (921) Class C -- (88) Class I (142,494) -- Class Y (172) (94) Net realized gain Class A (327,285) (204,671) Class B (102,880) (35,467) Class C (3,213) (2,669) Class I (723,932) -- Class Y (727) (461) ---- ---- Total distributions (1,363,540) (276,921) ---------- -------- Capital share transactions (Note 4) Proceeds from sales Class A shares (Note 2) 21,609,484 6,113,596 Class B shares 6,978,820 2,111,340 Class C shares 77,713 99,094 Class I shares 66,292,986 9,070,761 Class Y shares 7,000 -- Reinvestment of distributions at net asset value Class A shares 346,177 96,546 Class B shares 100,334 34,783 Class C shares 2,894 2,508 Class I shares 866,109 -- Class Y shares 505 257 Payments for redemptions Class A shares (9,642,178) (1,001,408) Class B shares (Note 2) (1,046,545) (582,132) Class C shares (Note 2) (48,696) (31,819) Class I shares (150,008) (701) -------- ---- Increase (decrease) in net assets from capital share transactions 85,394,595 15,912,825 ---------- ---------- Total increase (decrease) in net assets 93,925,331 16,867,096 Net assets at beginning of year 25,449,784 8,582,688 ---------- --------- Net assets at end of year $119,375,115 $25,449,784 ============ =========== Undistributed net investment income $ 503,820 $ 52,439 ------------ -----------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 17 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Notes to Financial Statements AXP Quantitative Large Cap Equity Fund 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of AXP Growth Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. AXP Growth 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 equity securities of companies listed on U.S. exchanges with market capitalizations greater than $5 billion at the time of purchase. 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 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 July 31, 2005, Ameriprise Financial, Inc. (Ameriprise Financial) (formerly American Express Financial Corporation) and the AXP Portfolio Builder Funds owned 100% of Class I shares, which represents 68.53% of the Fund's net assets. At July 31, 2005, Ameriprise Financial and the AXP Portfolio Builder Funds owned approximately 68% of the total outstanding Fund 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 U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. -------------------------------------------------------------------------------- 18 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT 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. Pursuant to procedures adopted by the Board of Directors of the funds, Ameriprise Financial utilizes Fair Value Pricing (FVP). FVP determinations are made in good faith in accordance with these procedures. If a development or event is so significant that there is a reasonably high degree of certainty that the effect of the development or event has actually caused the closing price to no longer reflect the actual value, the closing prices, as determined at the close of the applicable foreign market, may be adjusted to reflect the fair value of the affected foreign securities as of the close of the New York Stock Exchange. Significant events include material movements in the U.S. securities markets prior to the opening of foreign markets on the following trading day. FVP results in an estimated price that reasonably reflects the current market conditions in order to value the portfolio holdings such that shareholder transactions receive a fair net asset value. 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. 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 an option is 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. 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. -------------------------------------------------------------------------------- 19 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT 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. 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 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. -------------------------------------------------------------------------------- 20 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been decreased by $1,498 and accumulated net realized gain been increased by $1,498. The tax character of distributions paid for the years indicated is as follows: Year ended July 31, 2005 2004 Class A Distributions paid from: Ordinary income $202,166 $228,642 Long-term capital gain 187,956 8,579 Class B Distributions paid from: Ordinary income 43,797 34,902 Long-term capital gain 59,083 1,486 Class C Distributions paid from: Ordinary income 1,368 2,645 Long-term capital gain 1,845 112 Class I* Distributions paid from: Ordinary income 450,678 -- Long-term capital gain 415,748 -- Class Y Distributions paid from: Ordinary income 481 536 Long-term capital gain 418 19 * Inception date is July 15, 2004. At July 31, 2005, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income $2,869,627 Accumulated long-term gain (loss) $1,058,365 Unrealized appreciation (depreciation) $6,046,380 Dividends to shareholders An annual dividend from net investment income, declared and paid at the end of the calendar year, when available, is reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the income dividend. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date and interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. -------------------------------------------------------------------------------- 21 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT 2. EXPENSES AND SALES CHARGES Under an Investment Management Services Agreement, RiverSource Investments, LLC (the Investment Manager) determines which securities will be purchased, held or sold. Prior to Oct. 1, 2005, investment management services were provided by Ameriprise Financial. The management fee is a percentage of the Fund's average daily net assets that declines from 0.60% to 0.48% annually as the Fund's assets increase. The fee may be adjusted upward or downward by a performance incentive adjustment based on a comparison of the performance of Class A shares of the Fund to the Lipper Large-Cap Core Funds Index. In certain circumstances, the board may approve a change in the index. The maximum adjustment is 0.12% per year. If the performance difference is less than 0.50%, the adjustment will be zero. The adjustment increased the fee by $15,749 for the year ended July 31, 2005. Under the current Administrative Services Agreement, the Fund pays Ameriprise Financial a fee for administration and accounting services at a percentage of the Fund's average daily net assets that declines from 0.05% to 0.02% annually as the Fund's assets increase. It is expected that the fee schedule to the agreement will be revised effective Oct. 1, 2005. Under the new agreement, the fee percentage of the Fund's average daily net assets will decline from 0.06% to 0.03% annually as the Fund's net 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, RiverSource Service Corporation (formerly American Express Client Service Corporation) (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual fee per shareholder account for this service as follows: o Class A $19.50 o Class B $20.50 o Class C $20.00 o Class Y $17.50 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. Beginning May 20, 2005, the Transfer Agent implemented an annual closed account fee of $5 per inactive account, charged on a pro rata basis for 12 months from the date the account becomes inactive. These fees were insignificant for the year ended July 31, 2005 and are included in the transfer agency fees on the statement of operations. -------------------------------------------------------------------------------- 22 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT The Fund has agreements with Ameriprise Financial Services, Inc. (formerly 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. Sales charges received by the Distributor for distributing Fund shares were $120,789 for Class A, $5,134 for Class B and $30 for Class C for the year ended July 31, 2005. For the year ended July 31, 2005, Ameriprise Financial and its affiliates waived certain fees and expenses to 1.25% for Class A, 2.04% for Class B, 2.06% for Class C and 1.06% 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 $18,458, $4,530, $104 and $35 respectively. In addition, Ameriprise Financial and its affiliates have agreed to extend the current agreement to waive certain fees and expenses through Sept. 30, 2005. It is expected that a new agreement to waive certain fees and expenses will be effective on Oct. 1, 2005 until July 31, 2006, such that net expenses, before giving effect to any performance incentive adjustment, will not exceed 1.25% for Class A, 2.04% for Class B, 2.06% for Class C, 0.93% for Class I and 1.06% for Class Y of the Fund's average daily net assets. During the year ended July 31, 2005, the Fund's custodian and transfer agency fees were reduced by $4,727 as a result of earnings credits from overnight cash balances. The Fund also pays custodian fees to Ameriprise Trust Company (formerly American Express Trust Company), an affiliate of Ameriprise Financial. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $126,724,187 and $41,805,397, respectively, for the year ended July 31, 2005. Realized gains and losses are determined on an identified cost basis. 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended July 31, 2005 Class A Class B Class C Class I Class Y Sold 3,401,658 1,109,408 12,216 10,493,500 1,160 Issued for reinvested distributions 54,345 15,850 457 135,541 79 Redeemed (1,531,238) (165,421) (7,726) (24,014) -- ---------- -------- ------ ------- ----- Net increase (decrease) 1,924,765 959,837 4,947 10,605,027 1,239 --------- ------- ----- ---------- ----- Year ended July 31, 2004 Class A Class B Class C Class I* Class Y Sold 1,028,744 358,722 17,252 1,547,177 -- Issued for reinvested distributions 16,447 5,946 429 -- 45 Redeemed (166,966) (99,601) (5,323) (120) -- -------- ------- ------ ---- -- Net increase (decrease) 878,225 265,067 12,358 1,547,057 45 ------- ------- ------ --------- --
* Inception date is July 15, 2004. -------------------------------------------------------------------------------- 23 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT 5. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by The Bank of New York, whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. 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 year ended July 31, 2005. 6. 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 July 31, 2005 2004 2003(b) Net asset value, beginning of period $5.95 $5.44 $5.00 ----- ----- ----- Income from investment operations: Net investment income (loss) .04 .02 .01 Net gains (losses) (both realized and unrealized) .90 .63 .43 ----- ----- ----- Total from investment operations .94 .65 .44 ----- ----- ----- Less distributions: Dividends from net investment income (.03) (.02) -- Distributions from realized gains (.16) (.12) -- ----- ----- ----- Total distributions (.19) (.14) -- ----- ----- ----- Net asset value, end of period $6.70 $5.95 $5.44 ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $28 $13 $8 Ratio of expenses to average daily net assets(c),(d) 1.25% 1.13% 1.22%(e) Ratio of net investment income (loss) to average daily net assets .84% .65% .81%(e) Portfolio turnover rate (excluding short-term securities) 64% 64% 17% Total return(f) 15.95% 11.99% 8.80%(g)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from April 24, 2003 (when shares became publicly available) to July 31, 2003. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Ameriprise Financial waived/reimbursed the Fund for certain expenses. Had Ameriprise Financial not done so, the annual ratios of expenses for Class A would have been 1.35%, 1.91% and 7.39% for the periods ended July 31, 2005, 2004 and 2003, respectively. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. -------------------------------------------------------------------------------- 24 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended July 31, 2005 2004 2003(b) Net asset value, beginning of period $5.90 $5.43 $5.00 ----- ----- ----- Income from investment operations: Net investment income (loss) .02 (.02) -- Net gains (losses) (both realized and unrealized) .86 .61 .43 ----- ----- ----- Total from investment operations .88 .59 .43 ----- ----- ----- Less distributions: Distributions from realized gains (.16) (.12) -- ----- ----- ----- Net asset value, end of period $6.62 $5.90 $5.43 ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $9 $3 $1 Ratio of expenses to average daily net assets(c),(d) 2.04% 1.95% 2.01%(e) Ratio of net investment income (loss) to average daily net assets .06% (.16%) (.08%)(e) Portfolio turnover rate (excluding short-term securities) 64% 64% 17% Total return(f) 15.03% 10.95% 8.60%(g)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from April 24, 2003 (when shares became publicly available) to July 31, 2003. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Ameriprise Financial waived/reimbursed the Fund for certain expenses. Had Ameriprise Financial not done so, the annual ratios of expenses for Class B would have been 2.13%, 2.73% and 8.18% for the periods ended July 31, 2005, 2004 and 2003, respectively. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. -------------------------------------------------------------------------------- 25 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended July 31, 2005 2004 2003(b) Net asset value, beginning of period $5.90 $5.43 $5.00 ----- ----- ----- Income from investment operations: Net investment income (loss) .01 (.02) -- Net gains (losses) (both realized and unrealized) .87 .61 .43 ----- ----- ----- Total from investment operations .88 .59 .43 ----- ----- ----- Less distributions: Distributions from realized gains (.16) (.12) -- ----- ----- ----- Net asset value, end of period $6.62 $5.90 $5.43 ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $-- $-- $-- Ratio of expenses to average daily net assets(c),(d) 2.06% 1.95% 2.01%(e) Ratio of net investment income (loss) to average daily net assets .02% (.17%) (.05%)(e) Portfolio turnover rate (excluding short-term securities) 64% 64% 17% Total return(f) 15.03% 10.96% 8.60%(g)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from April 24, 2003 (when shares became publicly available) to July 31, 2003. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Ameriprise Financial waived/reimbursed the Fund for certain expenses. Had Ameriprise Financial not done so, the annual ratios of expenses for Class C would have been 2.13%, 2.73% and 8.20% for the periods ended July 31, 2005, 2004 and 2003, respectively. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. -------------------------------------------------------------------------------- 26 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT
Class I Per share income and capital changes(a) Fiscal period ended July 31, 2005 2004(b) Net asset value, beginning of period $5.96 $5.99 ----- ----- Income from investment operations: Net investment income (loss) .04 .02 Net gains (losses) (both realized and unrealized) .92 (.05) ----- ----- Total from investment operations .96 (.03) ----- ----- Less distributions: Dividends from net investment income (.03) -- Distributions from realized gains (.16) -- ----- ----- Total distributions (.19) -- ----- ----- Net asset value, end of period $6.73 $5.96 ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $82 $9 Ratio of expenses to average daily net assets(c) .91% .93%(d),(e) Ratio of net investment income (loss) to average daily net assets 1.19% 5.35%(d) Portfolio turnover rate (excluding short-term securities) 64% 64% Total return(f) 16.29% (.50%)(g)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date is July 15, 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) Ameriprise Financial waived/reimbursed the Fund for certain expenses. Had Ameriprise Financial not done so, the annual ratio of expenses for Class I would have been 1.27% for the period ended July 31, 2004. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. -------------------------------------------------------------------------------- 27 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended July 31, 2005 2004 2003(b) Net asset value, beginning of period $5.95 $5.45 $5.00 ----- ----- ----- Income from investment operations: Net investment income (loss) .05 .03 .01 Net gains (losses) (both realized and unrealized) .91 .61 .44 ----- ----- ----- Total from investment operations .96 .64 .45 ----- ----- ----- Less distributions: Dividends from net investment income (.04) (.02) -- Distributions from realized gains (.16) (.12) -- ----- ----- ----- Total distributions (.20) (.14) -- ----- ----- ----- Net asset value, end of period $6.71 $5.95 $5.45 ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $-- $-- $-- Ratio of expenses to average daily net assets(c),(d) 1.06% .98% 1.01%(e) Ratio of net investment income (loss) to average daily net assets 1.03% .78% .90%(e) Portfolio turnover rate (excluding short-term securities) 64% 64% 17% Total return(f) 16.25% 11.87% 9.00%(g)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from April 24, 2003 (when shares became publicly available) to July 31, 2003. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Ameriprise Financial waived/reimbursed the Fund for certain expenses. Had Ameriprise Financial not done so, the annual ratios of expenses for Class Y would have been 1.18%, 1.76% and 7.20% for the periods ended July 31, 2005, 2004 and 2003, respectively. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. -------------------------------------------------------------------------------- 28 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Report of Independent Registered Public Accounting Firm THE BOARD AND SHAREHOLDERS AXP GROWTH SERIES, INC. We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of AXP Quantitative Large Cap Equity Fund (a series of AXP Growth Series, Inc.) as of July 31, 2005, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended July 31, 2005, and the financial highlights for each of the years in the two-year period ended July 31, 2005 and for the period from April 24, 2003 (when shares became publicly available) to July 31, 2003. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of July 31, 2005, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of AXP Quantitative Large Cap Equity Fund as of July 31, 2005, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with U.S. generally accepted accounting principles. KPMG LLP Minneapolis, Minnesota September 20, 2005 -------------------------------------------------------------------------------- 29 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Federal Income Tax Information (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. AXP Quantitative Large Cap Equity Fund Fiscal year ended July 31, 2005 Class A Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 35.08% Dividends Received Deduction for corporations 34.99% Payable date Per share Dec. 20, 2004 $0.09760 Capital gain distributions -- taxable as long-term capital gain. Payable date Per share Dec. 20, 2004 $0.09141 Total distributions $0.18901 Class B Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 35.08% Dividends Received Deduction for corporations 34.99% Payable date Per share Dec. 20, 2004 $0.06776 Capital gain distributions -- taxable as long-term capital gain. Payable date Per share Dec. 20, 2004 $0.09141 Total distributions $0.15917 -------------------------------------------------------------------------------- 30 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Class C Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 35.08% Dividends Received Deduction for corporations 34.99% Payable date Per share Dec. 20, 2004 $0.06776 Capital gain distributions -- taxable as long-term capital gain. Payable date Per share Dec. 20, 2004 $0.09141 Total distributions $0.15917 Class I Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 35.08% Dividends Received Deduction for corporations 34.99% Payable date Per share Dec. 20, 2004 $0.09909 Capital gain distributions -- taxable as long-term capital gain. Payable date Per share Dec. 20, 2004 $0.09141 Total distributions $0.19050 Class Y Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 35.08% Dividends Received Deduction for corporations 34.99% Payable date Per share Dec. 20, 2004 $0.10555 Capital gain distributions -- taxable as long-term capital gain. Payable date Per share Dec. 20, 2004 $0.09141 Total distributions $0.19696 -------------------------------------------------------------------------------- 31 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL 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 July 31, 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. -------------------------------------------------------------------------------- 32 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT
Beginning Ending Expenses account value account value paid during Annualized Feb. 1, 2005 July 31, 2005 the period(a) expense ratio Class A Actual(b) $1,000 $1,063.50 $6.32(c) 1.25% Hypothetical (5% return before expenses) $1,000 $1,018.39 $6.19(c) 1.25% Class B Actual(b) $1,000 $1,057.50 $10.29(c) 2.04% Hypothetical (5% return before expenses) $1,000 $1,014.52 $10.08(c) 2.04% Class C Actual(b) $1,000 $1,057.50 $10.39(c) 2.06% Hypothetical (5% return before expenses) $1,000 $1,014.42 $10.18(c) 2.06% Class I Actual(b) $1,000 $1,064.90 $4.61(c) .91% Hypothetical (5% return before expenses) $1,000 $1,020.06 $4.51(c) .91% Class Y Actual(b) $1,000 $1,063.40 $5.36(c) 1.06% Hypothetical (5% return before expenses) $1,000 $1,019.32 $5.25(c) 1.06%
(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 179/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended July 31, 2005: +6.35% for Class A, +5.75% for Class B, +5.75% for Class C, +6.49% for Class I and +6.34% for Class Y. (c) Pending final approval from the Fund's Board of Directors (Board), it is expected that, effective Oct. 1, 2005, the fee schedule under the Administrative Services Agreement between Ameriprise Financial and the Fund will be revised. It is also expected that Ameriprise Financial and its affiliates will contractually agree to waive certain fees and to absorb certain expenses until July 31, 2006, unless sooner terminated at the discretion of the Board. Under this expense cap/fee waiver agreement, net expenses, before giving effect to any performance incentive adjustment, will not exceed 1.25% for Class A; 2.04% for Class B; 2.06% for Class C; 0.93% for Class I and 1.06% for Class Y. If the revised fee schedule under the Administrative Services Agreement and the cap/waiver agreement had been in place for the entire six-month period ended July 31, 2005, the actual and hypothetical expenses paid would have been the same as those expenses presented in the table above for all classes, except Class I. The actual expenses paid for Class I would have been $4.66 and the hypothetical expenses paid would have been $4.56. -------------------------------------------------------------------------------- 33 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 14 Master Trust portfolios and 90 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board. Independent Board Members
Name, address, age Position held Principal occupation Other directorships with Fund and during past five length of years service --------------------------------------- ----------------- ---------------------- -------------------------------- Arne H. Carlson Board member Chair, Board 901 S. Marquette Ave. since 1999 Services Corporation Minneapolis, MN 55402 (provides Age 70 administrative services to boards). Former Governor of Minnesota --------------------------------------- ----------------- ---------------------- -------------------------------- Philip J. Carroll, Jr. Board member Retired Chairman and Scottish Power PLC, Vulcan 901 S. Marquette Ave. since 2002 CEO, Fluor Corporation Materials Company, Inc. Minneapolis, MN 55402 (engineering and (construction Age 67 construction) since materials/chemicals) 1998 --------------------------------------- ----------------- ---------------------- -------------------------------- Livio D. DeSimone* Board member Retired Chair of the Cargill, Incorporated 30 Seventh Street East since 2001 Board and (commodity merchants and Suite 3050 St. Paul, MN Chief Executive processors), General Mills, 55101-4901 Officer, Minnesota Inc. (consumer foods), Vulcan Age 71 Mining and Materials Company (construction Manufacturing (3M) materials/chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. --------------------------------------- ----------------- ---------------------- -------------------------------- Patricia M. Flynn Board member Trustee Professor of BostonFed Bancorp, Inc. 901 S. Marquette Ave. since 2004 Economics and (holding company) and its Minneapolis, MN 55402 Management, Bentley subsidiary Boston Federal Age 54 College since 2002; Savings Bank former Dean, McCallum Graduate School of Business, Bentley College from 1999 to 2002 --------------------------------------- ----------------- ---------------------- -------------------------------- Anne P. Jones Board member Attorney and 901 S. Marquette Ave. since 1985 Consultant Minneapolis, MN 55402 Age 70 --------------------------------------- ----------------- ---------------------- -------------------------------- Stephen R. Lewis, Jr. Board member Retired President Valmont Industries, Inc. 901 S. Marquette Ave. since 2002 and Professor of (manufactures irrigation Minneapolis, MN 55402 Economics, Carleton systems) Age 66 College --------------------------------------- ----------------- ---------------------- --------------------------------
* Livio D. DeSimone retired as a member of the Board, effective Sept. 8, 2005. -------------------------------------------------------------------------------- 34 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT
Independent Board Members (continued) Name, address, age Position held Principal occupation Other directorships with Fund and during past five length of service years -------------------------------------- ------------------ ---------------------- -------------------------------- Catherine James Paglia Board member Director, Enterprise Strategic Distribution, Inc. 901 S. Marquette Ave. since 2004 Asset Management, (transportation, distribution Minneapolis, MN 55402 Inc. (private real and logistics consultants) Age 52 estate and asset management company) since 1999 -------------------------------------- ------------------ ---------------------- -------------------------------- Alan K. Simpson Board member Former three-term 1201 Sunshine Ave. since 1997 United States Cody, WY 82414 Senator for Wyoming Age 73 -------------------------------------- ------------------ ---------------------- -------------------------------- Alison Taunton-Rigby Board member Founder and Chief Hybridon, Inc. (biotechnology) 901 S. Marquette Ave. since 2002 Executive Officer, Minneapolis, MN 55402 RiboNovix, Inc. Age 61 since 2004; President, Forester Biotech since 2000; prior to that, President and CEO, Aquila Biopharmaceuticals, Inc. -------------------------------------- ------------------ ---------------------- -------------------------------- Board Member Affiliated with Ameriprise Financial, Inc. (formerly AEFC)** Name, address, age Position held Principal occupation Other directorships with Fund and during past five length of service years -------------------------------------- ------------------ ---------------------- -------------------------------- William F. Truscott Board member Senior Vice 53600 Ameriprise Financial Center since 2001, President - Chief Minneapolis, MN 55474 Vice President Investment Officer Age 44 since 2002 of Ameriprise Financial, Inc. and RiverSource Investments, LLC since 2001. Former Chief Investment Officer and Managing Director, Zurich Scudder Investments -------------------------------------- ------------------ ---------------------- --------------------------------
** Interested person by reason of being an officer, director and/or employee of Ameriprise Financial, Inc. (formerly American Express Financial Corporation) or of RiverSource Investments, LLC, its wholly owned subsidiary. -------------------------------------------------------------------------------- 35 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers Name, address, age Position held Principal occupation Other directorships with Fund and during past five length of service years -------------------------------------- ------------------ ---------------------- -------------------------------- Jeffrey P. Fox Treasurer Vice President - 105 Ameriprise Financial Center since 2002 Investment Minneapolis, MN 55474 Accounting, Age 50 Ameriprise Financial, Inc., since 2002; Vice President - Finance, American Express Company, 2000-2002; Vice President - Corporate Controller, Ameriprise Financial, Inc., 1996-2000 -------------------------------------- ------------------ ---------------------- -------------------------------- Paula R. Meyer President Senior Vice President 596 Ameriprise Financial Center since 2002 and General Manager - Minneapolis, MN 55474 Mutual Funds, Age 51 Ameriprise Financial, Inc., since 2002 and Senior Vice President, RiverSource Investments, LLC since 2004; Vice President and Managing Director - American Express Funds, Ameriprise Financial, Inc., 2000-2002; Vice President, Ameriprise Financial, Inc., 1998-2000 -------------------------------------- ------------------ ---------------------- -------------------------------- Leslie L. Ogg Vice President, President of Board 901 S. Marquette Ave. General Counsel, Services Corporation Minneapolis, MN 55402 and Secretary Age 66 since 1978 -------------------------------------- ------------------ ---------------------- -------------------------------- Beth E. Weimer Chief Compliance Vice President and 172 Ameriprise Financial Center Officer since Chief Compliance Minneapolis, MN 55474 2004 Officer, Ameriprise Age 52 Financial, Inc., since 2001 and Chief Compliance Officer, RiverSource Investments, LLC since 2005; Vice President and Chief Compliance Officer, Ameriprise Financial Services, Inc. (formerly American Express Financial Advisors), 2001-2005; Partner, Arthur Andersen Regulatory Risk Services, 1998-2001 -------------------------------------- ------------------ ---------------------- --------------------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. -------------------------------------------------------------------------------- 36 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT Approval of Investment Management Services Agreement Ameriprise Financial, Inc. (formerly American Express Financial Corporation or AEFC) (the investment manager) is a wholly-owned subsidiary of American Express Company. Under an Investment Management Services Agreement (the Agreement), the investment manager provides investment advice and other services to the Fund. Throughout the year, the Funds' Board of Directors and the Board's Investment Review Committee monitor these services. Each year the Board determines whether to continue the Agreement by evaluating the quality and level of service received and the costs associated with those services. The investment manager prepares detailed reports for the Board and its Contracts Committee in March and April and provides data prepared by independent organizations to assist the Board in making this determination. The Board gives considerable weight to the work, deliberations and conclusions of the Contracts and Investment Review Committees in determining whether to continue the Agreement. On February 1, 2005, American Express Company announced its intention to pursue a spin-off of AEFC by distributing shares of the common stock of AEFC to shareholders of American Express Company. At a meeting held in person on April 14, 2005, the Board, including a majority of the independent members, approved the continuation of the Agreement for an interim period, not to exceed one year, ending on the later of (i) the effective date of the spin-off or (ii) the approval by the Fund's shareholders of a new investment management services agreement with the investment manager (the Interim Period). The spin-off will not result in an "assignment" of the Agreement under the Investment Company Act of 1940 and, therefore, will not cause the termination of the Agreement according to its terms. In connection with the spin-off the investment manager has proposed that going forward, services under the Agreement be provided by an affiliate, RiverSource Investments, LLC (RiverSource). Independent counsel advised the Board that it would be prudent, in connection with the spin-off, to consider a new agreement with RiverSource and to seek shareholder approval of that agreement as soon as practical thereafter. Investment performance is a major factor in the evaluation process, and the Board reviewed the Fund's performance over a range of different periods by comparing its performance to relevant Lipper and broader market indices. The Board considered that over time the Fund's investment performance should be above median for a peer group of funds with similar investment goals and noted that the Fund's investment performance in 2004 exceeded the median. The Board noted that, in addition to portfolio management and investment research, the investment manager provides portfolio trading, daily net asset value calculation, management of cash flow, product development, administration of its compliance and legal departments, access to distribution, accounting and recordkeeping, and reporting to the Board and shareholders. To evaluate these services, the Board referred to surveys and benchmarks established by commercial providers, trade associations and the investment manager's internal processes. The Board concluded that the services provided were consistent with services provided by investment managers to comparable mutual funds. -------------------------------------------------------------------------------- 37 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT The Board also evaluated the price paid for the services provided by the investment manager, noting the existence of a pricing philosophy, established by the Board and the investment manager, that seeks to maintain total Fund expenses within a range of the median expenses charged to comparable funds sold through financial advisors. The Board considered detailed information set forth in an annual report on fees and expenses, including, among other things, data showing a comparison of the Fund's expenses with median expenses paid by funds in its comparison group and data showing the Fund's contribution to the investment manager's profitability. The Board determined that the total expense ratio of the Fund is below median for its comparison group. The Board considered the economies of scale that might be realized by the investment manager as the Fund grew and took note of the extent to which Fund shareholders also might benefit from such growth. The Board considered that the Agreement provided for lower fees as assets increase at pre-established breakpoints and concluded that the Agreement satisfactorily provided for sharing these economies of scale. The Board took into account the Contracts Committee's discussion comparing the fees the investment manager charges to the Fund with those it charges to institutional clients, noting that the relatively higher fees paid by the Fund were principally attributable to the additional services required to manage a regulated mutual fund, like the Fund, and the operation of a large mutual fund family. The Board also considered the profitability realized by the investment manager and its affiliates from its relationship with the Fund. The Board took into account the services acquired by the investment manager through the use of commission dollars paid by the Fund on portfolio transactions. The Board concluded that the investment manager's overall costs and profitability were appropriate, although profitability may be too low on an ongoing basis. The Board noted that the fees paid by the Fund should permit the investment manager to offer competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. Based on the foregoing, the Board concluded that the fees paid to the investment manager under the Agreement were fair and reasonable and determined to approve renewal of the Agreement for the Interim Period. -------------------------------------------------------------------------------- 38 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL 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 www.riversource.com/investments; or by searching the website of the Securities and Exchange Commission (SEC) at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge by calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283; through the investment manager's website, www.riversource.com/investments; or by searching the website of the SEC at www.sec.gov. -------------------------------------------------------------------------------- 39 -- AXP QUANTITATIVE LARGE CAP EQUITY FUND -- 2005 ANNUAL REPORT American Express Funds 70100 Ameriprise Financial Center Minneapolis, MN 55474 This report must be accompanied or preceded by the Fund's current prospectus. Distributed by Ameriprise Financial Services, Inc. (formerly known as American Express Financial Advisors Inc.). Member NASD.