N-30D 1 s6385r.txt AXP SELECTIVE FUND AXP(R) Selective Fund 2001 SEMIANNUAL REPORT American Express(R) Funds (icon of) clock AXP Selective Fund seeks to provide shareholders with current income and preservation of capital by investing in investment-grade bonds. A Quest for Quality Not all bonds are created equal. A bond's quality depends on the ability of its issuers to make the interest and principal payments owed to the bondholders. The quality is determined by independent rating agencies, which assign a credit rating (in the form of a letter grade) to each bond. Since its establishment in 1945, AXPSelective Fund has concentrated its investments in the four highest investment grades. Along the way, investors have enjoyed a steady stream of interest income with minimum risk to their principal. CONTENTS From the Chairman 3 From the Portfolio Manager 3 Fund Facts 5 The 10 Largest Holdings 6 Financial Statements (Fund) 7 Notes to Financial Statements (Fund) 10 Financial Statements (Portfolio) 16 Notes to Financial Statements (Portfolio) 18 Investments in Securities 22 ------------------------------------------------------------------------------- 2 AXP SELECTIVE FUND -- SEMIANNUAL REPORT (picture of) Arne H. Carlson Arne H. Carlson Chairman of the board From the Chairman For most of us investors, the past several months proved to be an extremely trying time. More recently, the events of this past September and the prospect of what may follow have added to our collective concern. While nothing can change what has happened, we can control how we respond. In broad terms, I would strongly advise that you keep a focus on your long-term financial goals and not let specific events dictate your investment decisions. Ultimately, it is where you finish, not where you are at the moment, that matters most. Your financial advisor plays an essential role in this process, so please let him or her help you by reviewing your situation and plotting the proper investment course. As I have indicated in the past, the role our Board plays in your financial future is to monitor and confirm that each American Express mutual fund meets its investment objective and that its management style stays on target. We want each fund to be able to deliver to you, the shareholder, the type of performance you expect and the best results that can be obtained. Toward that end, American Express has made significant changes in its investment management capability, and will continue to make changes as it strives to provide a consistent standard of excellence. On behalf of the Board, Arne H. Carlson (picture of) Brad Stone Brad Stone Portfolio manager From the Portfolio Manager The past six months was a good period for fixed-income investors, as an overall decline in interest rates and subdued inflation provided support for bond prices much of the time. For AXP Selective Fund's Class A shares, the result was a total return, which includes net asset value change and distributions, of 5.20% (excluding the sales charge) during the first half of the fiscal year -- June through November 2001. This compares with a return of 5.73% for the Lehman Brothers Aggregate Bond Index, an unmanaged group of bonds commonly used to measure the performance of mutual funds such as this. As history shows, bad news for the economy usually means good news for the bond market, and the past period was no exception. Confronted by weakening economic data, the Federal Reserve continued to cut short-term interest rates to provide a shot in the arm. ------------------------------------------------------------------------------- 3 AXP SELECTIVE FUND -- SEMIANNUAL REPORT Investors, who were also encouraged by the lack of a threat from higher inflation, responded by increasing their bond-buying. That, in turn, drove bond yields down and prices up across the maturity range from mid-summer to early November. The period would end on a sour note, though, as hints of potential improvement in the economy and progress in the war against terrorism led to a sudden change in investor sentiment and a wave of selling that sent yields soaring and prices slumping for much of the final month. `CORPORATES' LEAD THE WAY While the market's dramatic reversal erased much of the Fund's net-asset-value gain, price appreciation still accounted for more than half of the Fund's total return for the six months. Most of that came from investments in high-grade corporate bonds and mortgage-backed securities sponsored by federal agencies, which enjoyed good price gains. Holdings among U.S. Treasury issues generated more modest performance. Looking at portfolio changes, I reduced the duration somewhat in mid-summer to guard against a potential rise in interest rates. (Duration, a function of the average maturity of the portfolio's holdings, affects how sensitive the net asset value is to changes in interest rates. Generally, the longer the duration, the greater the sensitivity.) While that strategy tempered performance for a time, it proved beneficial during the bond market's nosedive in November. Among other changes, I gradually increased the exposure to high-grade `corporates,' given their relatively attractively yields and my expectation for an improving economy by the end of 2001. That shift penalized performance in the wake of September's terrorist attack when investors dumped corporates in favor of Treasuries, but helped late in the period as hopes for a recovering economy rose. As for what the rest of the fiscal year may hold, I think we'll see increasing indications of a light at the end of the economic tunnel and the conclusion of the Federal Reserve's interest-rate cuts. If so, that combination may well cause bond yields to drift higher and push prices lower. Therefore, I plan to maintain a somewhat defensive strategy that centers on a shorter portfolio duration. At the same time, because interest income is likely to account for most if not all of the Fund's return, I will continue the emphasis on corporates and mortgage-backed issues, whose yields currently exceed those of Treasuries. Brad Stone ------------------------------------------------------------------------------- 4 AXP SELECTIVE FUND -- SEMIANNUAL REPORT Fund Facts Class A -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 2001 $8.98 May 31, 2001 $8.74 Increase $0.24 Distributions -- June 1, 2001 - Nov. 30, 2001 From income $0.22 From long-term capital gains $ -- Total distributions $0.22 Total return* +5.20% Class B -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 2001 $8.98 May 31, 2001 $8.74 Increase $0.24 Distributions -- June 1, 2001 - Nov. 30, 2001 From income $0.18 From long-term capital gains $ -- Total distributions $0.18 Total return* +4.80% Class C -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 2001 $8.98 May 31, 2001 $8.74 Increase $0.24 Distributions -- June 1, 2001 - Nov. 30, 2001 From income $0.18 From long-term capital gains $ -- Total distributions $0.18 Total return* +4.80% Class Y -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 2001 $8.98 May 31, 2001 $8.74 Increase $0.24 Distributions -- June 1, 2001 - Nov. 30, 2001 From income $0.22 From long-term capital gains $ -- Total distributions $0.22 Total return* +5.28% * The total return is a hypothetical investment in the Fund with all distributions reinvested. Returns do not include sales load. The prospectus discusses the effect of sales charges, if any, on the various classes. ------------------------------------------------------------------------------- 5 AXP SELECTIVE FUND -- SEMIANNUAL REPORT The 10 Largest Holdings Percent Value (of net assets) (as of Nov. 30, 2001) GMAC 6.88% 2011 1.7% $28,372,819 AT&T Wireless Services 8.75% 2031 1.6 27,841,791 Qwest Capital Funding 5.88% 2004 1.5 25,873,510 France Telecom 7.75% 2002 1.5 24,755,912 Sprint Capital 5.88% 2004 1.2 20,451,220 Goldman Sachs Group 6.88% 2011 1.1 19,284,432 Ford Motor 7.45% 2031 1.1 19,040,840 MBNA 5.75% 2008 0.9 15,576,563 General Electric Capital 6.70% 2002 0.9 15,110,898 Tyco Capital 5.63% 2004 0.9 15,091,484 Excludes U.S. Treasury and government agencies holdings For further detail about these holdings, please refer to the section entitled "Investments in Securities." (picture of) pie chart The 10 holdings listed here make up 12.4% of net assets ------------------------------------------------------------------------------- 6 AXP SELECTIVE FUND -- SEMIANNUAL REPORT
Financial Statements Statement of assets and liabilities AXP Selective Fund, Inc. Nov. 30, 2001 (Unaudited) Assets Investment in Quality Income Portfolio (Note 1) $1,689,236,298 Capital shares receivable 251,409 ------- Total assets 1,689,487,707 ------------- Liabilities Capital shares payable 4,199 Dividends payable to shareholders 679,544 Accrued distribution fee 16,709 Accrued service fee 689 Accrued transfer agency fee 4,220 Accrued administrative services fee 2,209 Other accrued expenses 109,920 ------- Total liabilities 817,490 ------- Net assets applicable to outstanding capital stock $1,688,670,217 ============== Represented by Capital stock -- $.01 par value (Note 1) $ 1,881,222 Additional paid-in capital 1,655,856,768 Undistributed net investment income (249,769) Accumulated net realized gain (loss) (Note 5) 10,728,423 Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 20,453,573 ---------- Total -- representing net assets applicable to outstanding capital stock $1,688,670,217 ============== Net assets applicable to outstanding shares: Class A $1,097,191,627 Class B $ 331,879,983 Class C $ 6,949,843 Class Y $ 252,648,764 Net asset value per share of outstanding capital stock: Class A shares 122,231,506 $ 8.98 Class B shares 36,973,102 $ 8.98 Class C shares 774,285 $ 8.98 Class Y shares 28,143,335 $ 8.98 ---------- --------------
See accompanying notes to financial statements. ------------------------------------------------------------------------------- 7 AXP SELECTIVE FUND -- SEMIANNUAL REPORT
Statement of operations AXP Selective Fund, Inc. Six months ended Nov. 30, 2001 (Unaudited) Investment income Income: Dividends $ 201,860 Interest 44,269,341 ---------- Total income 44,471,201 ---------- Expenses (Note 2): Expenses allocated from Quality Income Portfolio 4,137,292 Distribution fee Class A 1,316,217 Class B 1,475,197 Class C 26,436 Transfer agency fee 932,860 Incremental transfer agency fee Class A 53,627 Class B 25,453 Class C 489 Service fee -- Class Y 116,755 Administrat ive services fees and expenses 384,968 Compensation of board members 5,960 Printing and postage 85,000 Registration fees 47,126 Audit fees 5,375 Other 595 --- Total expenses 8,613,350 Earnings credits on cash balances (Note 2) (17,111) ------- Total net expenses 8,596,239 --------- Investment income (loss) -- net 35,874,962 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 36,615,138 Futures contracts (1,671,101) Options contracts written 435,358 ------- Net realized gain (loss) on investments 35,379,395 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 6,960,061 --------- Net gain (loss) on investments and foreign currencies 42,339,456 ---------- Net increase (decrease) in net assets resulting from operations $78,214,418 ===========
See accompanying notes to financial statements. ------------------------------------------------------------------------------- 8 AXP SELECTIVE FUND -- SEMIANNUAL REPORT
Statements of changes in net assets AXP Selective Fund, Inc. Nov. 30, 2001 May 31, 2001 Six months ended Year ended (Unaudited) Operations and distributions Investment income (loss) -- net $ 35,874,962 $ 80,820,067 Net realized gain (loss) on investments 35,379,395 (5,721,951) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 6,960,061 69,508,963 --------- ---------- Net increase (decrease) in net assets resulting from operations 78,214,418 144,607,079 ---------- ----------- Distributions to shareholders from: Net investment income Class A (24,744,616) (57,805,147) Class B (5,781,219) (11,220,115) Class C (101,716) (68,694) Class Y (5,664,969) (11,461,005) ---------- ----------- Total distributions (36,292,520) (80,554,961) ----------- ----------- Capital share transactions (Note 3) Proceeds from sales Class A shares (Notes 2 and 6) 135,656,553 174,749,533 Class B shares 95,083,193 123,918,483 Class C shares 3,830,723 4,162,840 Class Y shares 58,592,164 106,067,010 Reinvestment of distributions at net asset value Class A shares 19,604,238 43,475,836 Class B shares 5,291,548 9,823,481 Class C shares 96,904 61,067 Class Y shares 5,791,917 11,422,265 Payments for redemptions Class A shares (90,288,905) (208,981,146) Class B shares (Note 2) (40,101,342) (65,880,375) Class C shares (Note 2) (998,357) (342,918) Class Y shares (35,821,521) (74,810,965) ----------- ----------- Increase (decrease) in net assets from capital share transactions 156,737,115 123,665,111 ----------- ----------- Total increase (decrease) in net assets 198,659,013 187,717,229 Net assets at beginning of period 1,490,011,204 1,302,293,975 ------------- ------------- Net assets at end of period $1,688,670,217 $1,490,011,204 ============== ============== Undistributed (excess of distributions over) net investment income $ (249,769) $ 167,789 -------------- --------------
See accompanying notes to financial statements. ------------------------------------------------------------------------------- 9 AXP SELECTIVE FUND -- SEMIANNUAL REPORT Notes to Financial Statements AXP Selective Fund, Inc. (Unaudited as to Nov. 30, 2001) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Fund has 10 billion authorized shares of capital stock. Class C shares of the Fund were offered to the public on June 26, 2000. Prior to this date, American Express Financial Corporation (AEFC) purchased 238 shares of capital stock at $8.41 per share, which represented the initial capital in Class C. 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. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, incremental transfer agency fee 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. Investment in Quality Income Portfolio The Fund invests all of its assets in Quality Income Portfolio (the Portfolio), a series of Income Trust (the Trust), an open-end investment company that has the same objectives as the Fund. The Portfolio invests primarily in investment-grade bonds. The Fund records daily its share of the Portfolio's income, expenses and realized and unrealized gains and losses. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The Fund records its investment in the Portfolio at the value that is equal to the Fund's proportionate ownership interest in the Portfolio's net assets. The percentage of the Portfolio owned by the Fund as of Nov. 30, 2001 was 99.99%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements" (included elsewhere in this report). 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. 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 the shareholders. No provision for income or excise taxes is thus required. ------------------------------------------------------------------------------- 10 AXP SELECTIVE FUND -- SEMIANNUAL REPORT 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. Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, 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. 2. EXPENSES AND SALES CHARGES In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: The Fund has an agreement with AEFC to provide administrative services. 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 in reducing percentages from 0.05% to 0.025% annually. 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 separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. The Fund pays AECSC 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 Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution, the Fund pays a distribution 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 $1,154,754 for Class A, $123,372 for Class B and $895 for Class C for the six months ended Nov. 30, 2001. During the six months ended Nov. 30, 2001, the Fund's transfer agency fees were reduced by $17,111 as a result of earnings credits from overnight cash balances. ------------------------------------------------------------------------------- 11 AXP SELECTIVE FUND -- SEMIANNUAL REPORT 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows:
Six months ended Nov. 30, 2001 Class A Class B Class C Class Y Sold 15,226,855 10,674,821 429,555 6,569,655 Issued for reinvested distributions 2,205,741 595,304 10,896 651,631 Redeemed (10,142,795) (4,509,006) (111,981) (4,022,583) ----------- ---------- -------- ---------- Net increase (decrease) 7,289,801 6,761,119 328,470 3,198,703 --------- --------- ------- --------- Year ended May 31, 2001 Class A Class B Class C* Class Y Sold 20,114,774 14,273,778 478,028 12,164,023 Issued for reinvested distributions 5,035,406 1,136,801 7,001 1,322,093 Redeemed (24,264,710) (7,638,038) (39,214) (8,631,923) ----------- ---------- ------- ---------- Net increase (decrease) 885,470 7,772,541 445,815 (4,854,193) ------- --------- ------- ----------
* Inception date was June 26, 2000 4. BANK BORROWINGS The Fund has a revolving credit agreement with U.S. Bank, N.A., whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The Fund must have asset coverage for borrowings not to exceed the aggregate of 333% of advances equal to or less than five business days plus 367% of advances over five business days. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $200 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to 90 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 0.05% per annum. The Fund had no borrowings outstanding during the six months ended Nov. 30, 2001. 5. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund has a capital loss carry-over of $22,500,692 as of May 31, 2001, that if not offset by subsequent capital gains, will expire in 2007 through 2010. 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. 6. FUND MERGER As of the close of business on July 14, 2000, AXP Selective Fund acquired the assets and assumed the identified liabilities of Strategist Quality Income Fund. The aggregate net assets of AXP Selective Fund immediately before the acquisition were $1,308,361,652. The merger was accomplished by a tax-free exchange of 87,827 shares of Strategist Quality Income Fund valued at $759,710. In exchange for the Strategist Quality Income Fund shares and net assets, AXP Selective Fund issued the following number of shares: Shares Net assets Class A 89,906 $759,710 Strategist Quality Income Fund's net assets at that date consisted of capital stock of $775,363 and unrealized depreciation of $15,653. ------------------------------------------------------------------------------- 12 AXP SELECTIVE FUND -- SEMIANNUAL REPORT
7. 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 May 31, 2001(f) 2001 2000 1999 1998 Net asset value, beginning of period $8.74 $8.32 $8.96 $9.23 $9.00 Income from investment operations: Net investment income (loss) .21 .52 .52 .54 .57 Net gains (losses) (both realized and unrealized) .25 .42 (.46) (.20) .31 Total from investment operations .46 .94 .06 .34 .88 Less distributions: Dividends from net investment income (.22) (.52) (.53) (.54) (.58) Distributions from realized gains -- -- (.17) (.07) (.07) Total distributions (.22) (.52) (.70) (.61) (.65) Net asset value, end of period $8.98 $8.74 $8.32 $8.96 $9.23 Ratios/supplemental data Net assets, end of period (in millions) $1,097 $1,004 $949 $1,170 $1,231 Ratio of expenses to average daily net assets(c) .97%(d) .97% .97% .89% .86% Ratio of net investment income (loss) to average daily net assets 4.64%(d) 6.01% 6.17% 5.85% 6.20% Portfolio turnover rate (excluding short-term securities) 195% 150% 62% 30% 20% Total return(e) 5.20% 11.52% .83% 3.68% 10.15% Class B Per share income and capital changes(a) Fiscal period ended May 31, 2001(f) 2001 2000 1999 1998 Net asset value, beginning of period $8.74 $8.32 $8.96 $9.23 $9.00 Income from investment operations: Net investment income (loss) .18 .45 .46 .47 .50 Net gains (losses) (both realized and unrealized) .24 .42 (.47) (.20) .31 Total from investment operations .42 .87 (.01) .27 .81 Less distributions: Dividends from net investment income (.18) (.45) (.46) (.47) (.51) Distributions from realized gains -- -- (.17) (.07) (.07) Total distributions (.18) (.45) (.63) (.54) (.58) Net asset value, end of period $8.98 $8.74 $8.32 $8.96 $9.23 Ratios/supplemental data Net assets, end of period (in millions) $332 $264 $187 $210 $153 Ratio of expenses to average daily net assets(c) 1.72%(d) 1.73% 1.73% 1.65% 1.62% Ratio of net investment income (loss) to average daily net assets 3.88%(d) 5.25% 5.41% 5.10% 5.44% Portfolio turnover rate (excluding short-term securities) 195% 150% 62% 30% 20% Total return(e) 4.80% 10.69% .06% 2.89% 9.32%
See accompanying notes to financial highlights. ------------------------------------------------------------------------------- 13 AXP SELECTIVE FUND -- SEMIANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended May 31, 2001(f) 2001(b) Net asset value, beginning of period $8.74 $8.40 Income from investment operations: Net investment income (loss) .18 .42 Net gains (losses) (both realized and unrealized) .24 .34 Total from investment operations .42 .76 Less distributions: Dividends from net investment income (.18) (.42) Distributions from realized gains -- -- Total distributions (.18) (.42) Net asset value, end of period $8.98 $8.74 Ratios/supplemental data Net assets, end of period (in millions) $7 $4 Ratio of expenses to average daily net assets(c) 1.72%(d) 1.73%(d) Ratio of net investment income (loss) to average daily net assets 3.85%(d) 5.16%(d) Portfolio turnover rate (excluding short-term securities) 195% 150% Total return(e) 4.80% 9.27%
Class Y Per share income and capital changes(a) Fiscal period ended May 31, 2001(f) 2001 2000 1999 1998 Net asset value, beginning of period $8.74 $8.32 $8.96 $9.23 $9.00 Income from investment operations: Net investment income (loss) .22 .53 .54 .55 .58 Net gains (losses) (both realized and unrealized) .24 .42 (.47) (.20) .31 Total from investment operations .46 .95 .07 .35 .89 Less distributions: Dividends from net investment income (.22) (.53) (.54) (.55) (.59) Distributions from realized gains -- -- (.17) (.07) (.07) Total distributions (.22) (.53) (.71) (.62) (.66) Net asset value, end of period $8.98 $8.74 $8.32 $8.96 $9.23 Ratios/supplemental data Net assets, end of period (in millions) $253 $218 $167 $196 $221 Ratio of expenses to average daily net assets(c) .81%(d) .82% .81% .81% .79% Ratio of net investment income (loss) to average daily net assets 4.80%(d) 6.16% 6.33% 5.93% 6.27% Portfolio turnover rate (excluding short-term securities) 195% 150% 62% 30% 20% Total return(e) 5.28% 11.70% .97% 3.77% 10.21%
See accompanying notes to financial highlights. ------------------------------------------------------------------------------- 14 AXP SELECTIVE FUND -- SEMIANNUAL REPORT Notes to financial highlights (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (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) Six months ended Nov. 30, 2001 (Unaudited). ------------------------------------------------------------------------------- 15 AXP SELECTIVE FUND -- SEMIANNUAL REPORT
Financial Statements Statement of assets and liabilities Quality Income Portfolio Nov. 30, 2001 (Unaudited) Assets Investments in securities, at value (Note 1)* (identified cost $1,952,037,604) $1,974,528,301 Dividends and accrued interest receivable 15,157,206 Receivable for investment securities sold 177,275,688 ----------- Total assets 2,166,961,195 ------------- Liabilities Disbursements in excess of cash on demand deposit 2,187,463 Payable for investment securities purchased 179,540,952 Payable for securities purchased on a when-issued basis (Note 1) 270,439,094 Payable upon return of securities loaned (Note 4) 25,260,000 Accrued investment management services fee 17,927 Other accrued expenses 4,501 Options contracts written, at value (premiums received $108,722) (Note 5) 160,000 ------- Total liabilities 477,609,937 ----------- Net assets $1,689,351,258 ============== *Including securities on loan, at value (Note 4) $ 24,461,280 --------------
See accompanying notes to financial statements. ------------------------------------------------------------------------------- 16 AXP SELECTIVE FUND -- SEMIANNUAL REPORT
Statement of operations Quality Income Portfolio Six months ended Nov. 30, 2001 (Unaudited) Investment income Income: Dividends $ 201,875 Interest 44,269,740 ---------- Total income 44,471,615 ---------- Expenses (Note 2): Investment management services fee 4,061,897 Compensation of board members 7,235 Custodian fees 47,786 Audit fees 13,975 Other 7,608 ----- Total expenses 4,138,501 Earnings credits on cash balances (Note 2) (915) ---- Total net expenses 4,137,586 --------- Investment income (loss) -- net 40,334,029 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 36,617,998 Futures contracts (1,671,101) Options contracts written (Note 5) 435,358 ------- Net realized gain (loss) on investments 35,382,255 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 6,960,250 --------- Net gain (loss) on investments and foreign currencies 42,342,505 ---------- Net increase (decrease) in net assets resulting from operations $82,676,534 ===========
Statements of changes in net assets Quality Income Portfolio Nov. 30, 2001 May 31, 2001 Six months ended Year ended (Unaudited) Operations Investment income (loss) -- net $ 40,334,029 $ 88,221,481 Net realized gain (loss) on investments 35,382,255 (5,722,347) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 6,960,250 69,524,334 --------- ---------- Net increase (decrease) in net assets resulting from operations 82,676,534 152,023,468 ---------- ----------- Proceeds from contributions 134,966,817 135,461,684 Fair value of withdrawals (20,033,279) (100,504,401) ----------- ------------ Net contributions (withdrawals) from partners 114,933,538 34,957,283 ----------- ---------- Total increase (decrease) in net assets 197,610,072 186,980,751 Net assets at beginning of period 1,491,741,186 1,304,760,435 ------------- ------------- Net assets at end of period $1,689,351,258 $1,491,741,186 ============== ==============
See accompanying notes to financial statements. ------------------------------------------------------------------------------- 17 AXP SELECTIVE FUND -- SEMIANNUAL REPORT Notes to Financial Statements Quality Income Portfolio (Unaudited as to Nov. 30, 2001) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Quality Income Portfolio (the Portfolio) is a series of Income Trust (the Trust) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Portfolio invests primarily in investment-grade bonds. The Declaration of Trust permits the Trustees to issue non-transferable interests in the Portfolio. The Portfolio'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. Option transactions To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Portfolio 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 Portfolio 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 Portfolio gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Portfolio 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 Portfolio pays a premium whether or not the option is exercised. The Portfolio 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 Portfolio will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio 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. ------------------------------------------------------------------------------- 18 AXP SELECTIVE FUND -- SEMIANNUAL REPORT Futures transactions To gain exposure to or protect itself from market changes, the Portfolio may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Portfolio is subject to the credit risk that the other party will not complete its contract obligations. Securities purchased on a when-issued or forward-commitment basis Delivery and payment for securities that have been purchased by the Portfolio on a when-issued or forward-commitment basis can take place one month or more after the transaction date. During this period, when-issued securities are subject to market fluctuations, and they may affect the Portfolio's gross net assets the same as owned securities. The Portfolio designates cash or liquid securities at least equal to the amount of its commitment. As of Nov. 30, 2001, the Portfolio had entered into outstanding when-issued or forward-commitments of $270,439,094. The Portfolio 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 Portfolio to "roll over" its purchase commitments, the Portfolio receives negotiated amounts in the form of reductions of the purchase price of the commitment. ------------------------------------------------------------------------------- 19 AXP SELECTIVE FUND -- SEMIANNUAL REPORT Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore does not pay any income dividends or capital gain distributions. 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 level-yield amortization of premium and discount, is accrued daily. 2. FEES AND EXPENSES The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with AEFC to manage its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets in reducing percentages from 0.52% to 0.395% annually. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the board. During the six months ended Nov. 30, 2001, the Portfolio's custodian fees were reduced by $915 as a result of earnings credits from overnight cash balances. The Portfolio also pays custodian fees to American Express Trust Company, an affiliate of AEFC. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $2,943,754,248 and $2,911,180,679, respectively, for the six months ended Nov. 30, 2001. For the same period, the portfolio turnover rate was 195%. Realized gains and losses are determined on an identified cost basis. ------------------------------------------------------------------------------- 20 AXP SELECTIVE FUND -- SEMIANNUAL REPORT 4. LENDING OF PORTFOLIO SECURITIES As of Nov. 30, 2001, securities valued at $24,461,280 were on loan to brokers. For collateral, the Portfolio received $25,260,000 in cash. Income from securities lending amounted to $24,777 for the six months ended Nov. 30, 2001. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. 5. OPTIONS CONTRACTS WRITTEN Contracts and premium amounts associated with options contracts written on interest rate futures are as follows: Six months ended Nov. 30, 2001 Puts Calls Contracts Premiums Contracts Premiums Balance May 31, 2001 675 $ 415,426 675 $ 355,896 Opened 3,077 1,398,697 8,131 1,255,952 Closed (3,592) (1,767,262) (8,646) (1,549,987) ------ ---------- ------ ---------- Balance Nov. 30, 2001 160 $ 46,861 160 $ 61,861 --- ----------- --- ----------- See "Summary of significant accounting policies." 6. INTEREST RATE FUTURES CONTRACTS As of Nov. 30, 2001, investments in securities included securities valued at $2,742,175 that were pledged as collateral to cover initial margin deposits on 602 open purchase contracts and 2,190 open sale contracts. The notional market value of the open purchase contracts as of Nov. 30, 2001 was $62,734,798 with a net unrealized gain of $183,921. The notional market value of the open sale contracts as of Nov. 30, 2001, was $234,561,750 with a net unrealized loss of $2,446,318. See "Summary of significant accounting policies." ------------------------------------------------------------------------------- 21 AXP SELECTIVE FUND -- SEMIANNUAL REPORT Investments in Securities Quality Income Portfolio Nov. 30, 2001 (Unaudited) (Percentages represent value of investments compared to net assets) Bonds (89.0%) Issuer Coupon Principal Value(a) rate amount Government obligations & agencies (12.5%) Overseas Private Investment U.S. Govt Guaranty Series 1996A 01-15-09 6.99% $7,777,778 $8,325,878 U.S. Treasury 03-31-03 4.25 45,000,000 46,117,799 05-15-04 7.25 5,000,000(i) 5,484,350 08-15-04 7.25 6,800,000 7,490,608 08-15-05 6.50 15,300,000 16,743,861 02-15-11 5.00 2,000,000 2,038,740 08-15-11 5.00 18,100,000(h) 18,447,882 08-15-21 5.95 50,000,000 16,186,500 02-15-26 6.00 22,225,000 23,513,383 05-15-30 6.25 8,300,000 9,277,823 02-15-31 5.38 14,000,000 14,223,160 TIPS 01-15-07 3.38 36,000,000(k) 41,007,575 United Mexican States (U.S. Dollar) 01-14-11 8.38 2,900,000(c) 2,982,650 Total 211,840,209 Mortgage-backed securities (39.3%) Federal Home Loan Mtge Corp 11-01-14 7.50 6,941,769 7,274,877 04-01-15 7.50 14,185,061 14,865,744 01-01-16 7.00 20,220,598 21,077,709 07-01-16 8.00 263 279 01-01-17 8.00 2,602 2,762 03-01-17 8.50 53,543 57,205 06-01-17 8.50 22,999 24,572 04-01-20 9.00 481,794 518,584 04-01-21 9.00 517,096 565,354 03-01-22 8.50 1,174,074 1,270,445 08-01-22 8.50 1,128,347 1,219,645 06-01-24 7.50 5,381,422 5,661,488 02-01-25 8.00 2,033,254 2,159,102 Collateralized Mtge Obligation 09-01-19 8.50 79,723 84,825 Interest Only 05-01-31 6.00 8,645,118(f) 2,153,690 Federal Housing Admin 01-01-24 7.43 4,156,884 4,115,315 Federal Natl Mtge Assn 11-01-02 10.00 24 25 02-15-05 7.13 8,000,000 8,789,768 05-15-08 6.00 21,450,000 22,687,107 05-15-11 6.00 10,450,000 10,859,295 01-01-14 6.00 12,154,949 12,376,216 04-01-14 6.00 12,638,644 12,868,717 04-01-14 6.50 12,782,216 13,151,096 05-01-14 6.00 8,534,305 8,680,420 08-01-14 6.50 12,151,523 12,475,520 12-01-14 6.50 43,000,000(b) 44,182,499 05-01-16 6.50 19,998,015 20,563,673 10-01-16 6.50 599,940 616,910 10-01-23 6.50 5,818,761 5,947,658 12-01-26 8.00 3,120,693 3,308,801 04-01-27 7.50 4,384,541 4,593,015 06-01-27 7.50 4,596,597 4,815,153 08-01-27 8.00 3,479,158 3,680,841 01-01-28 6.50 2,101,528 2,139,912 05-01-28 6.50 13,078,879 13,300,788 09-01-28 6.00 15,000,000(b) 14,779,688 12-01-28 6.50 14,743,954 14,994,114 02-01-29 6.50 14,240,900 14,482,525 03-01-29 6.00 3,122,458 3,104,677 03-01-29 6.50 11,685,723 11,878,691 03-01-29 7.50 2,000,000 2,078,518 05-01-29 6.00 27,988,355 27,863,443 06-01-29 7.00 15,631,167 16,102,790 07-01-29 6.00 12,670,723 12,598,570 09-01-29 7.00 15,468,001 15,934,702 12-01-29 7.00 58,000,000(b) 59,649,374 12-01-29 7.50 12,200,335 12,749,589 01-01-30 6.50 33,700,000(b) 33,942,218 01-01-30 8.00 3,293,097 3,478,457 03-01-30 8.00 10,068,185 10,634,896 06-01-30 7.00 5,782,675 5,954,299 12-01-30 7.50 95,000,000(b) 98,710,937 01-01-31 8.00 17,500,000(b) 18,402,344 06-01-31 6.50 10,353,851 10,481,518 See accompanying notes to investments in securities. ------------------------------------------------------------------------------- 22 AXP SELECTIVE FUND -- SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn (cont.) Collateralized Mtge Obligation 10-25-19 8.50% $1,448,659 $1,572,047 Principal Only 09-01-18 9.50 247,028(g) 207,756 Govt Natl Mtge Assn 05-15-26 7.50 6,435,383 6,756,200 Prudential Bache Collateralized Mtge Obligation 04-01-19 7.97 1,779,251 1,824,480 Total 664,270,843 Airlines (2.2%) American Airlines 10-01-06 7.80 5,600,000(d) 5,552,232 05-23-11 6.82 7,000,000(d) 6,646,653 Continental Airlines 02-02-19 6.55 9,353,577 8,223,546 Series D 12-01-06 7.57 3,000,000 2,187,300 Delta Air Lines 09-18-11 7.11 14,000,000 13,716,920 Total 36,326,651 Automotive & related (1.1%) Ford Motor 07-16-31 7.45 20,000,000 19,040,840 Banks and savings & loans (0.6%) Washington Mutual Bank 06-15-11 6.88 5,000,000 5,203,470 Wells Fargo Financial 05-03-04 5.45 5,000,000 5,186,840 Total 10,390,310 Chemicals (0.2%) Praxair 03-01-08 6.50 3,000,000 3,101,640 Communications equipment & services (4.3%) AT&T Wireless Services Sr Nts 03-01-11 7.88 7,000,000 7,483,364 03-01-31 8.75 24,700,000 27,841,791 Deutsche Telecom Intl Finance (U.S. Dollar) Company Guaranty 06-15-30 8.25 10,000,000(c) 10,986,050 Qwest Capital Funding 08-03-04 5.88 26,000,000(d) 25,873,510 Total 72,184,715 Energy (2.0%) Calpine Canada Energy Finance (U.S. Dollar) Company Guaranty 05-01-08 8.50 7,500,000(c) 7,466,070 Devon Financing ULC 09-30-11 6.88 6,500,000(d) 6,339,775 FirstEnergy 11-15-31 7.38 8,000,000 7,776,960 Phillips Petroleum 03-15-28 7.13 12,000,000 11,596,140 Total 33,178,945 Financial services (8.7%) Citibank Credit Card Issuance Trust 8th Series 2001A 12-07-06 4.10 10,000,000 10,000,000 Countrywide Home Company Guaranty Series H 04-15-09 6.25 10,000,000 10,047,670 Credit Suisse First Bank USA 08-01-06 5.88 6,000,000 6,173,502 GMAC 09-15-11 6.88 28,700,000 28,372,819 11-01-31 8.00 12,000,000 12,216,240 Goldman Sachs Group 01-15-11 6.88 18,550,000 19,284,432 Household Finance 10-15-11 6.38 7,000,000 7,064,260 MBNA 10-15-08 5.75 15,000,000 15,576,563 Morgan Stanley, Dean Witter, Discover & Co 06-15-05 7.75 10,000,000 10,961,850 Railcar Leasing 01-15-13 7.13 12,150,000(d) 13,014,959 Tyco Capital 05-17-04 5.63 14,500,000 15,091,484 Total 147,803,779 Food (0.4%) Delhaize America 04-15-06 7.38 6,000,000(d) 6,440,238 Health care (0.4%) American Home Products 03-15-04 5.88 7,000,000 7,302,582 Leisure time & entertainment (0.3%) AOL Time Warner 04-15-31 7.63 5,000,000 5,361,540 See accompanying notes to investments in securities. ------------------------------------------------------------------------------- 23 AXP SELECTIVE FUND -- SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Media (2.3%) Belo (AH) 11-01-08 8.00% $1,800,000 $1,826,280 Clear Channel Communications 11-01-06 6.00 6,500,000 6,440,402 Sr Nts 09-15-10 7.65 6,500,000 6,721,780 Comcast Cable Communications 11-15-08 6.20 6,000,000 6,014,304 Sr Nts 01-30-11 6.75 4,000,000 4,082,144 06-15-13 7.13 7,000,000 7,324,163 Time Warner Entertainment 03-15-23 8.38 5,000,000 5,659,505 Total 38,068,578 Metals (0.6%) Alcan (U.S. Dollar) 01-15-22 8.88 9,600,000(c) 10,055,203 Miscellaneous (0.6%) EOP Operating LP Sr Nts 07-15-11 7.00 10,000,000 10,173,960 Multi-industry conglomerates (0.9%) General Electric Capital Series A 10-01-02 6.70 14,600,000 15,110,898 Paper & packaging (0.5%) Intl Paper 09-01-11 6.75 9,000,000 9,131,166 Retail (1.3%) Federated Dept Stores Sr Nts 09-01-08 6.63 11,500,000 11,730,345 Target 06-15-23 7.88 8,850,000 9,466,668 Total 21,197,013 Transportation (1.9%) Burlington Northern Santa Fe 12-15-25 7.00 10,000,000 9,986,020 Enterprise Rent-A-Car USA Finance 02-15-08 6.80 10,000,000(d) 9,933,720 Union Pacific 01-15-11 6.65 11,700,000 11,980,648 Total 31,900,388 Utilities -- electric (3.4%) Calpine Sr Nts 02-15-11 8.50 8,500,000 8,464,096 Ipalco Enterprises 11-14-08 7.38 10,000,000(d) 9,809,880 11-14-11 7.63 6,000,000(d) 5,854,596 Mirant Americas Generation Sr Nts 05-01-11 8.30 10,150,000 10,015,492 NRG Energy 04-01-31 8.63 8,015,000 8,325,389 Sr Nts 09-15-10 8.25 8,000,000 8,286,032 Tiers-Mir 06-15-04 7.20 7,000,000(d) 6,944,945 Total 57,700,430 Utilities -- telephone (5.5%) AT&T Sr Nts 11-15-11 7.30 6,000,000(d) 6,063,960 AT&T - Liberty Media 02-01-30 8.25 2,635,000 2,479,522 Citizens Communications 08-15-08 7.63 11,000,000(d) 11,348,370 05-15-11 9.25 5,500,000 6,203,065 France Telecom (U.S. Dollar) 03-01-02 7.75 23,000,000(c,d,l) 24,755,912 Sprint Capital Company Guaranty 05-01-04 5.88 20,000,000 20,451,220 WorldCom 05-15-11 7.50 12,300,000 12,534,020 05-15-31 8.25 8,000,000 8,296,960 Total 92,133,029 Total bonds (Cost: $1,480,139,752) $1,502,712,957 Option purchased (--%) Issuer Notional Exercise Expiration Value(a) amount price date Put Jan. U.S. Treasury Bond $16,000,000 $102 Dec. 2001 $2,500 Total option purchased (Cost: $3,141) $2,500 See accompanying notes to investments in securities. ------------------------------------------------------------------------------- 24 AXP SELECTIVE FUND -- SEMIANNUAL REPORT Short-term securities (27.9%)(j) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies (22.3%) Federal Home Loan Bank Disc Nts 12-19-01 2.15% $17,100,000 $17,078,971 01-09-02 1.86 50,000,000 49,881,670 01-16-02 1.91 50,000,000 49,862,915 Federal Home Loan Mtge Corp Disc Nts 01-22-02 2.02 36,900,000 36,790,806 02-07-02 1.95 19,400,000 19,322,287 02-28-02 1.90 45,000,000 44,769,375 Federal Natl Mtge Assn Disc Nts 12-04-01 2.31 17,600,000 17,595,483 12-06-01 2.40 19,800,000 19,791,648 12-17-01 2.00 50,000,000 49,952,778 12-20-01 2.19 31,900,000 31,858,029 01-10-02 2.32 10,900,000 10,873,126 01-17-02 1.87 29,300,000 29,226,945 Total 377,004,033 Commercial paper (5.6%) Alpine Securitization 12-03-01 2.15 7,600,000(e) 7,598,638 Emerson Electric 12-14-01 2.05 12,500,000(e) 12,490,035 Morgan Stanley, Dean Witter, Discover & Co 01-24-02 2.06 3,600,000 3,588,540 Natl Rural Utilities 12-06-01 2.19 10,000,000 9,996,350 01-14-02 2.08 10,800,000 10,772,054 01-23-02 2.02 5,700,000 5,682,815 Procter & Gamble 12-12-01 2.22 7,600,000 7,594,376 Salomon Smith Barney 12-06-01 2.00 15,000,000 14,995,001 SBC Communications 12-10-01 2.10 6,500,000(e) 6,496,208 Toyota Motor Credit 12-04-01 2.07 7,800,000(e) 7,798,206 12-07-01 2.25 7,800,000(e) 7,796,588 Total 94,808,811 Total short-term securities (Cost: $471,894,711) $471,812,844 Total investments in securities (Cost: $1,952,037,604)(m) $1,974,528,301 Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At Nov. 30, 2001, the cost of securities purchased, including interest purchased, on a when-issued basis was $270,439,094. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of Nov. 30, 2001, the value of foreign securities represented 3.3% 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. (e) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (f) 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. (g) Principal-only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal-only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents original yield based upon the estimated timing of future cash flows. (h) Security is partially or fully on loan. See Note 4 to the financial statements. ------------------------------------------------------------------------------- 25 AXP SELECTIVE FUND -- SEMIANNUAL REPORT Notes to investments in securities (continued) (i) 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 Bonds, Dec. 2001, 30-year $ 27,700,000 U.S. Treasury Bonds, March 2002, 30-year 7,000,000 U.S. Treasury Notes, Dec. 2001, 10-year 25,500,000 Sale contracts U.S. Treasury Notes, Dec. 2001, 5-year 11,800,000 U.S. Treasury Notes, Dec. 2001, 10-year 25,500,000 U.S. Treasury Notes, March 2002, 5-year 181,700,000 (j) At Nov. 30, 2001, securities valued at $17,120,000 were held to cover open call options written as follows (see Note 5 to the financial statements): Issuer Notional Exercise Expiration Value(a) amount price date U.S. Treasury Note $16,000,000 $107 Dec. 2001 $155,000 At Nov. 30, 2001, cash or short-term securities were designated to cover open put options written as follows (see Note 5 to the financial statements): Issuer Notional Exercise Expiration Value(a) amount price date U.S. Treasury Note $16,000,000 $102 Dec. 2001 $5,000 (k) U.S. Treasury inflation-protection securities (TIPS) are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (l) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Nov. 30, 2001. (m) At Nov. 30, 2001, the cost of securities for federal income tax purposes was approximately $1,952,038,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $29,647,000 Unrealized depreciation (7,157,000) ---------- Net unrealized appreciation $22,490,000 ----------- ------------------------------------------------------------------------------- 26 AXP SELECTIVE FUND -- SEMIANNUAL REPORT AXP Selective Fund 70100 AXP Financial Center Minneapolis, MN 55474 americanexpress.com Ticker Symbol Class A: INSEX Class B: ISEBX Class C: N/A Class Y: IDEYX PRSRT STD AUTO U.S. POSTAGE PAID AMERICAN EXPRESS 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. S-6385 R (1/02)