Moreover,
as a
fundamental policy, the Fund will maintain a portfolio of securities such
that,
as of each day on which the Fund’s assets are valued for purposes of calculating
its net asset value, at least 85% of the Fund’s assets will either: (a) mature
by the next Redemption Payment Date; or (b) be capable of being sold between
the
Redemption Request Deadline and the Redemption Payment Date (as such terms
are
defined in the prospectus) at approximately the price used in computing
the
Fund’s net asset value. The Redemption Policy, as described in the prospectus,
also constitutes a fundamental policy of the Fund.
In
evaluating the
liquidity of its portfolio, the Fund makes certain assumptions as to
country,
currency, and equity market strength, the availability of potential purchasers
of particular securities the Fund may wish to sell, recent and longer
term price
performance of a security in a particular market, and other factors affecting
supply and demand for a security that would influence the security's
liquidity
and price. In determining to seek SEC approval to operate as an open-end
interval fund, the Fund further has considered the past behavior of its
shareholders in terms of their sensitivity to changes in the net asset
value of
the Fund’s shares and their desire to purchase additional shares or to sell
their shares to third party purchasers during periods of price instability.
Significant changes in any of these factors, both issuer-specific and
those
related more generally to the stability of a country's economy, currency
or
equity markets - some of which may further affect shareholder decisions
whether
to purchase or redeem shares of the Fund - could adversely affect the
price at
which the Fund will be able to sell a particular security in its portfolio,
with
the result that the value received at the time of such sale would be
less than
the value of the security prior to the onset of the intervening
events.
In
addition to the
investment restrictions described above, the Fund is subject to certain
diversification requirements based on its status as a "diversified" investment
company under the 1940 Act, which also may not be changed without a majority
vote of the Fund’s outstanding shares. Under these requirements, at least 75% of
the value of the Fund’s total assets must consist of cash and cash items, U.S.
Government securities, securities of other investment companies, and other
securities limited in respect of any one issuer to an amount not greater
in
value than 5% of the value of the Fund’s total assets. Thus, with respect to 75%
of the Fund’s total assets, the Fund may not invest more than 5% of its assets
in marketable obligations of a foreign national government or its agencies
or
instrumentalities.
These
policies
apply only at the time a transaction is entered into. Any subsequent change
in
the percentage of Fund assets invested in certain securities, or other
instruments resulting from market fluctuations or other changes in the
Fund’s
total assets, will not require the Fund to dispose of an
investment
until
Capital International, Inc. (the “Manager”) determines that it is practicable to
sell or close out the investment without undue market or tax consequences
to the
Fund.
With
respect to
investment restrictions 2., 3., and 5., the Fund interprets its fundamental
policies on issuing senior securities, investing in commodities, and effecting
short sales as not prohibiting it from entering into transactions in swap
agreements, options and futures on securities or securities indexes, provided
any such positions are covered by the maintenance of segregated assets
consisting of liquid assets, or by maintenance of an appropriate offsetting
position.
With
respect to
item (iii) of investment restriction 6., it is the current position of
the staff
of the SEC that only obligations of the U.S. Government and its agencies
and
instrumentalities may be excluded for purposes of determining compliance
with
that restriction and the Fund will only exclude such U.S. Government securities
for this purpose.
For
purposes of
applying the terms of investment restrictions number 6. and 9., the Fund
makes
reasonable determinations as to the identity of individual issuers of securities
in the Fund’s portfolio, and as to whether the Fund has acquired an investment
that would have the status of a “voting security” under U.S. law. Most issuers
represented in the Fund’s portfolio are organized under laws other than those of
the U.S., some of which may permit forms of organization and equity
participation not common in the U.S. Because of this, the Fund may be required
to consider a number of factors in order to reach definitive conclusions
as to
who is the effective “issuer” of a security (and as to whether a security is a
“voting security”). These factors may include the relative significance of legal
rights and remedies that attach to an investment; whether the issuer operates
alone or as part of a family of companies engaged in substantially the
same or
different lines of business; and, in the case of investments in pooled
investment vehicles, whether a particular investment opportunity is offered
by a
single issuer or by multiple issuers, whether they operate under common
control,
and whether they have the same objectives and policies.
Consistent
with
rules relating to the determination of beneficial ownership under the Securities
Exchange Act of 1934, a conversion feature or right to acquire a security
shall
be considered to be ownership of the underlying security by the Fund for
the
purposes of investment restrictions 6. and 9. With respect to the limits
described in investment restrictions 6. and 9. above, the Fund may make
purchases of securities in excess of such limits pursuant to the exercise
of
warrants or rights that would maintain the Fund’s
pro
rata
interest in an
issuer or a class of an issuer’s securities and provided that the Manager has
determined that such exercise is in the best interests of the Fund. The
Fund
will dispose of the securities so acquired within a reasonable time after
acquisition (presumptively, within approximately 90 days), unless compliance
with the limits otherwise has been restored.
The
Fund’s
limitation on borrowing does not prohibit borrowing in connection with
hedging a
particular currency exposure. The only type of borrowing contemplated thereby
is
the use of a letter of credit issued on the Fund’s behalf in lieu of depositing
initial margin in connection with currency futures contracts. Borrowing
by the
Fund will be covered in accordance with the requirements of the 1940
Act.
Notwithstanding
any
of the above investment restrictions, the Fund may establish wholly owned
subsidiaries or other similar vehicles for the purpose of conducting its
investment operations in qualified markets, where such subsidiaries or
vehicles
are required by local laws or regulations governing foreign investors such
as
the Fund. The Fund would “look through” any such vehicle to determine compliance
with its investment restrictions.
Although
the Fund’s
day-to-day compliance with its fundamental investment objectives and policies
has been delegated to the Manager, the Board of Directors oversees the
Fund’s
compliance with its fundamental policies and objectives.
CERTAIN
NON-FUNDAMENTAL POLICIES
Under
normal market
conditions, the Fund invests no less than 80% of its assets in securities
of
issuers in developing countries. The Fund invests principally in developing
country securities that are listed on a bona fide securities exchange
or are
actively traded in an over-the-counter (“OTC”) market and whose issuers are
domiciled and/or have their principal place of business in countries
that have
securities markets approved for investment by the Fund’s Board of Directors
(“Qualified Markets”). These exchanges or OTC markets may be either within or
outside the issuer’s domicile country, and the securities may be listed or
traded in the form of American Depositary Receipts (“ADRs”), Global Depositary
Receipts (“GDRs”), International Depositary Receipts (“IDRs”) or other types of
depositary receipts. The Fund may invest in securities of issuers that
are not
domiciled or do not have their principal place of business in developing
countries, provided that, at least 75% of such issuers’ assets are in developing
countries, or such issuers expect to derive at least 75% of their total
revenue
or profits from goods or services produced in or sales made in developing
countries. The Fund may invest a portion of its assets (not to exceed
10%) in
securities of issuers that are not domiciled and/or do not have their
principal
places of business in developing countries but that have or will have
substantial assets (at least 50%) in developing countries, and/or derive
or
expect to derive a substantial proportion (at least 50%) of their total
revenue
or profit from either goods and services produced in, or sales made
in,
developing countries.
The
Fund’s Board of
Directors will, in its discretion and in consultation with the Manager,
select
Qualified Markets for primary investment by the Fund taking into account,
among
other factors, market liquidity, availability of information and official
regulation, including fiscal and foreign exchange repatriation rules.
As of the
date of this statement of additional information, the markets in the
following
countries had been approved by the Board of Directors as Qualified Markets:
Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hong
Kong, Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco,
Pakistan, Peru, the Philippines, Poland, Russia, South Africa, South Korea,
Sri Lanka, Taiwan, Thailand, Turkey and Venezuela. The Board of Directors
will
revise its selection of Qualified Markets as additional markets are determined
by the Board of Directors to be appropriate, or as existing markets may
no
longer be deemed qualified for investment by the Fund based on the foregoing
factors.
The
Fund may
invest, with prior approval of the Board of Directors, in developing country
securities that are not readily marketable due to contractual or other
restrictions on resale or because of the absence of a secondary market
(“illiquid securities”) and in securities of issuers that are domiciled in
and/or have their principal place of business in a developing country but
not in
a Qualified Market (“non-qualified market developing country securities”). The
Fund’s Board of Directors currently has authorized investments by the Fund of
up
to 10% of the Fund’s assets in aggregate (taken at the time of purchase): (i) in
illiquid securities, and (ii) in non-qualified market developing country
securities (or investment companies that invest solely in non-qualified
market
developing country securities). The Fund’s investments in non-qualified market
developing country securities shall also be limited to 1% of the Fund’s assets
(taken at the time of purchase) in any one issuer and 2% of the Fund’s assets
(taken at the time of purchase) in the aggregate in issuers located and
having
their principal places of business in any one country. Subject to these
considerations and the fundamental restrictions to which the Fund is subject,
the particular mix of securities held by the Fund at any time will be determined
by the Manager under the supervision of, and within any guidelines established
by, the Board of Directors.
The
Fund seeks a
portfolio that is diversified both geographically and by industry sector.
A
variety of issuers are evaluated by the Fund’s Manager in seeking
diversification, and such evaluations generally focus on past performance
and
comparisons of the issuer with other companies in its industry or country,
detailed investigation into the current operations and future plans of
the
issuer, and other relevant factors.
The
Fund will not
purchase any security (other than marketable obligations of a national
government or its agencies or instrumentalities) if as a result, investments
in
a single issuer would exceed 10% of the Fund’s total assets. A change in this
limitation would require approval by the Fund’s Board of Directors and an
amendment to the Fund’s prospectus.
The
Fund may invest
a portion of its portfolio (not to exceed 15% of total assets) in long-and
short-term debt instruments, where the investment is consistent with the
Fund’s
objective of long-term capital growth. Such investments are considered
by the
Fund to be developing country securities, and could involve, for example,
the
purchase of bonds issued at a high rate of interest in circumstances where
the
government of a developing country employs programs to reduce inflation,
resulting in a decline in interest rates and an increase in the market
value of
such bonds. Debt instruments include “loan participations,” which involve the
purchase of a “portion” of one or more loans advanced by a lender (such as a
bank) to a corporate or sovereign borrower.
The
Fund also may
invest in shares of other investment companies that invest in one or more
Qualified Markets. If the Fund invests in such investment companies, the
Fund’s
shareholders will bear not only their proportionate share of expenses of
the
Fund (including operating expenses and the fees of the Manager), but also
will
bear indirectly similar expenses of the underlying investment
companies.
The
Fund may also
invest in shares of investment companies for which the Manager or an affiliate
of the Manager serves as manager. The Fund has received an SEC exemptive
order
permitting the Fund to invest in New Europe East Investment Fund, a closed-end,
Luxembourg investment fund organized by the Manager for the purpose of
investing
in securities of companies or commercial operations domiciled in the countries
of East Central Europe and the former Soviet Republics. The Fund has also
received an SEC exemptive order permitting the Fund to invest in New Asia
East
Investment Fund, a closed-end, Singapore investment fund organized by the
Manager for the purpose of investing in the South East Asia and China regions.
The Fund has also received SEC exemptive orders permitting the Fund to
invest in
each of Capital International Global Emerging Markets Private Equity Fund,
L.P.,
and Capital International Private Equity Fund IV, L.P., global private
equity
funds that have been organized by the Manager. With respect to any such
investments in investment companies advised by the Manager or an affiliate
thereof, the Manager will waive all fees attributable to the Fund’s holdings in
such investment companies. To effectuate this waiver, the Fund’s holdings in any
such investment company would be excluded from the net assets of the Fund
in the
calculation of the Manager's fee.
The
Fund may invest
up to 35% of its net assets in the securities of issuers in a single country.
As
of June 30, 2006, the Fund had invested approximately 16.5% of its net
assets in
South Korea, 11.1% of its net assets in Taiwan, 9.5% of its net assets
in South
Africa, 9.3% of its net assets in Brazil and 7.3% of its net assets in
China.
Investors should be aware that, given the extent of the Fund’s investment in
South Korea, Taiwan, South Africa, Brazil, and China, adverse developments
in
these countries could substantially affect the Fund’s investment
results.
RISK
FACTORS AND OTHER CONSIDERATIONS
The
Fund faces a
number of investment risks greater than those normally associated with
international investments in securities. These include:
Investment
and Repatriation Restrictions
A
number of
attractive emerging securities markets restrict, to varying degrees, foreign
investment in stocks. Repatriation of investment income, capital and the
proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. While the Fund will
only
invest in markets where these restrictions are considered acceptable, new
or
additional repatriation restrictions might be imposed subsequent to the
Fund’s
investment. If such restrictions were imposed subsequent to the Fund’s
investment in the securities of a particular country, the Fund’s response might
include, among other things, applying to the appropriate authorities for
waiver
of the restrictions or engaging in transactions in other markets designed
to
offset the risks of decline in that country. Such restrictions will be
considered in relation to the Fund’s liquidity needs and all other acceptable
positive and negative factors. Further, some attractive equity securities
may
not be available to the Fund because foreign shareholders hold the maximum
amount permissible under current laws.
Currency
Fluctuations
In
accordance with
its investment objective, the Fund’s assets will be invested in securities of
companies in developing countries and substantially all income will be
received
by the Fund in foreign countries. The value of the assets of the Fund as
measured in U.S. dollars would be adversely affected by devaluation in
foreign
currencies. Consistent with its investment objective, the Fund can engage
in
certain currency hedging transactions. These transactions involve certain
special risks. See “Additional Investment Strategies-Currency Hedging
Transactions.”
Potential
Market Volatility
Many
of the
emerging securities markets are relatively small, have low trading volumes,
suffer periods of illiquidity and are characterized by significant price
volatility.
Government
in the Private Sector
Government
involvement in the private sector varies in degree among the emerging securities
markets in which the Fund may invest. Such involvement may, in some cases,
include government ownership of companies in certain sectors, wage and
price
controls or imposition of trade barriers and other protectionist measures.
With
respect to any developing country, there is no guarantee that some future
economic or political crisis will not lead to price controls, forced mergers
of
companies, expropriation, or creation of government monopolies, to the
possible
detriment of the Fund’s investments
.
Investor
Information
The
Fund may
encounter problems in assessing investment opportunities in certain emerging
securities markets because of limitations on available information and
different
accounting, auditing and financial reporting standards. In such circumstances,
the Manager will seek alternative sources of information, and to the extent
the
Manager may not be satisfied with the sufficiency of the information obtained
with respect to a particular market or security, the Fund will not invest
in
such market or security.
Valuation
Risks
The
Manager
calculates the Fund's net asset value based on the best available
information at
the time of calculation. There are inherent risks and challenges
in determining
the valuation of developing markets securities and concurrently calculating
the
Fund’s net asset value. Examples include, among other things, tracking
and
analyzing changes in tax and regulatory matters, determining the
price of
illiquid securities, volatility of markets, different trading and
settlement
practices, difficulty in obtaining complete and timely market or
other
information, and the number of securities that may require fair valuation.
While
the Manager believes it has appropriate policies and procedures to
value the
Fund's portfolio securities and calculate its net asset value, given
these risks
and challenges, pricing information for a portfolio security may
not always be
accurate despite the Manager's reasonable efforts. As a general matter,
the Fund
does not recalculate its net asset value or reprocess shareholder
transactions
in the event that information used in the calculation of net asset
value proves
to be unreliable. The Fund, however, has adopted procedures that
provide for an
adjustment if the impact is significant and the Fund is adversely
affected. On
occasion, such adjustment may result in shareholder transactions
being
reprocessed in order to make the Fund whole.
Taxation
Taxation
of
dividends, interest and capital gains received by non-residents varies
among
developing countries and, in some cases, is comparatively high. In addition,
developing countries typically have less well-defined tax laws and procedures
and such laws may permit retroactive taxation so that the Fund could
in the
future become subject to tax that it had not reasonably anticipated in
conducting its investment activities or valuing its assets. Local tax
agents may
be engaged to assist the Fund with tax compliance in certain jurisdictions.
There can be no assurance that, despite the reasonable efforts of the
Manager,
the Fund’s auditor and any local tax agents, the Fund will become aware timely
of all changes to local tax laws and regulations in the developing market
countries in which the Fund invests or apply these local tax laws or
regulations
consistently with local custom.
Litigation
The
Fund and its
shareholders may encounter substantial difficulties in obtaining and enforcing
judgments against non-U.S. resident individuals and companies.
Fraudulent
Securities
It
is possible,
particularly in emerging markets, that securities purchased by the Fund
may
subsequently be found to be fraudulent or counterfeit due to differences
in the
level of regulation, disclosure requirements and recordkeeping practices
in
those markets and as a consequence the Fund could suffer a loss.
Loans
and
Loan Participations
The
Fund may
invest, subject to its overall limitation on debt securities, in loans
and loan
participations, typically made by a syndicate of banks to governmental
or
corporate borrowers for a variety of purposes. The underlying loans to
emerging
market governmental borrowers may be in default and may be subject to
restructuring under the Brady Plan. The underlying loans may be secured
or
unsecured, and will vary in term and legal structure. When purchasing loan
participations, the Fund may assume the credit risks associated with the
original bank lender as well as the credit risks associated with the borrower.
Investments in loans and loan participations present the possibility that
in the
U.S., the Fund could be held liable as a co-lender under emerging legal
theories
of lender liability. In addition, if the loan is foreclosed, the Fund could
be
part owner of any collateral, and could bear the costs and liabilities
of owning
and disposing of the collateral. Loan participations are generally not
rated by
major rating agencies and may not be protected by securities laws. Also,
loans
and loan participations are often considered to be illiquid.
Settlement
Risks
Settlement
systems
in emerging markets are generally less well organized than in developed
markets.
Supervisory authorities may also be unable to apply standards that are
comparable with those in developed markets. Thus there may be risks that
settlement may be delayed and that cash or securities belonging to the
Fund may
be in jeopardy because of failures or defects in the systems. In particular,
market practice may require that payment shall be made prior to receipt
of the
security which is being purchased or that delivery of a security must be
made
before payment is received. In such cases, default by a broker or bank
(the
“Counterparty”) through whom the relevant transaction is effected might result
in a loss being suffered by the Fund. The Fund will seek, where possible,
to use
Counterparties whose financial status is such that this risk is reduced.
There
can be no certainty, however, that the Fund will be successful in eliminating
this risk, particularly as Counterparties operating in emerging markets
frequently lack the substance or financial resources of those in developed
countries. There may also be a danger that, because of uncertainties in
the
operation of settlement systems in individual markets, competing claims
may
arise in respect of securities held by or to be transferred to the
Fund.
Russia
Investments
in
Russia will be subject to the risks set forth above as well as certain
heightened risks with regard to the ownership and custody of securities.
Ownership of securities in Russia is evidenced by entries in the books
of a
company or its registrar. No certificates representing ownership of Russian
companies will be held by the Fund’s custodian or subcustodian or in an
effective central depository system which would be the case in most emerging
and
developed markets. As a result of this system and the lack of effective
state
regulation and enforcement, the Fund could lose its registration and ownership
of Russian securities through fraud, negligence or even oversight. The
Fund will
attempt to ensure that its interest in securities continues to be recorded
by
having its custodian obtain extracts of share registers through regular
confirmations. However, such extracts are not legally enforceable and would
not
prevent loss or dilution of the Fund’s ownership rights from fraudulent or
negligent acts or oversights. In certain situations, management of a company
may
be able to exert considerable influence over who can purchase and sell
the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. The acquisition of depositary receipts
and
other securities convertible or exchangeable into Russian securities will
not
reduce this risk.
The
Fund seeks, as
feasible, to reduce these risks by careful management of its assets. There
can
be no assurance that these efforts will be successful.
ADDITIONAL
INVESTMENT STRATEGIES
Currency
Hedging Transactions
For
the purpose of
hedging currency exchange rate risk, the Fund may enter into forward currency
exchange contracts, currency futures contracts (and related options) and
purchase and sell options on currencies. A forward currency exchange contract
involves an obligation to purchase or sell a specific currency at a future
date,
which may be any fixed number of days from the date of the contract agreed
upon
by the parties, at a price set at the time of the contract. These contracts
are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks).
A
currency futures
contract is a standardized contract for the delivery of a specified amount
of a
currency at a future date at a price set at the time of entering into the
contract. Currency futures contracts traded in the U.S. are traded on regulated
exchanges. Parties to futures contracts must make initial "margin" deposits
to
secure performance of the contract, which generally range from 2% to 5%
of the
contract price. The parties also pay or receive daily “variation” margin
payments as the value of the futures contract fluctuates thereafter. Options
on
currency futures contracts give the holder of the option, in return for
a
premium, the right to take either the long or short position in a currency
futures contract at a specified price. Options on currencies are exchange-traded
or over-the-counter instruments that give the holder of the option the
right to
purchase or sell a specified amount of currency at a specified
price.
At
the maturity of
a forward or futures contract, the Fund may either accept or make delivery
of
the currency specified in the contract or, prior to maturity, enter into
a
closing transaction involving the purchase or sale of an offsetting contract.
Closing transactions with respect to forward contracts are usually effected
with
the currency trader who is a party to the original contract. Closing
transactions with respect to futures contracts are effected on an exchange.
The
Fund will only enter into such a forward or futures contract if it is expected
that the Fund will be able readily to close out such contract. There can,
however, be no assurance that it will be able in any particular case to
do so,
in which case the Fund may suffer a loss. Options on currency futures contracts
or currency options held by the Fund, to the extent not exercised, will
expire
and the Fund would experience a loss to the extent of any premium paid
for the
option. The Fund intends to engage in currency hedging transactions to
a limited
extent, and only in unusual circumstances and for temporary defensive purposes
would it attempt to hedge all the risks involved in holding assets denominated
in a particular currency.
Under
regulations
of the Commodity Futures Trading Commission (“CFTC”), the futures trading
activities described herein will not result in the Fund being deemed a
“commodity pool,” as defined under such regulations, provided that the Fund
adheres to certain restrictions. In particular, the Fund may purchase and
sell
futures contracts and options thereon only for bona fide hedging purposes,
as
defined under CFTC regulations, or otherwise may not purchase or sell any
such
futures contracts or options, if, immediately thereafter, the sum of the
amount
of initial margin deposits on the Fund’s existing futures positions and premiums
paid for outstanding options would exceed 5% of the fair market value of
its net
assets. Margin deposits may consist of cash or securities acceptable to
the
broker and in accordance with the rules governing the relevant contract
market.
The
Fund will not
enter into forward or futures contracts or maintain an exposure to such
contracts where the consummation of such contracts would obligate the Fund
to
deliver an amount of currency in excess of the value of the Fund’s portfolio
securities or other assets denominated in that currency. Where the Fund
is
obligated to make deliveries under futures or forward contracts, to avoid
leverage it will “cover” its obligation with liquid assets in an amount
sufficient to meet its obligations.
Such
transactions
may also affect the character and timing of income, gain, or loss recognized
by
the Fund for U.S. federal income tax purposes.
Options
on
Securities and Securities Indexes
The
Fund may
purchase and sell call and put options on individual securities or indexes
of
securities. Put options may be used to protect holdings in an underlying
or
related security against a substantial decline in market value. Call options
may
be used to protect against substantial increases in prices of securities
the
Fund intends to purchase, pending its ability to invest in such securities
in an
orderly manner. The Fund may sell put or call options it has previously
purchased, which could result in a net gain or loss depending on whether
the
amount realized on the sale is more or less than the premium and other
transaction costs paid on the put or call option which is sold. The Fund
may
write a call or put option only if the option is “covered” by the Fund holding a
position in the underlying securities or by other means which would permit
satisfaction of the Fund’s obligations as writer of the option. Prior to
exercise or expiration, an option may be closed out by an offsetting purchase
or
sale of an option of the same series.
Other
Financial Futures and Related Options
In
addition to
currency futures and related options, the Fund may enter into other financial
futures contracts and purchase and sell related options thereon. Such
investments may be standardized and traded on a U.S. or foreign exchange
or
board of trade, or similar entity, or quoted on an automated quotation
system.
Under applicable CFTC rules, the Fund may enter into certain financial
futures
contracts traded on non-U.S. exchanges, including related options, only
if the
contracts have been approved by the CFTC for offer and sale to U.S. persons.
The
Fund may make relevant futures and related options part of its investment
strategy as such investments are approved for use by U.S. persons. The
Fund may
enter into futures and options thereon that relate to securities indices
or
other baskets of securities.
The
Fund will
maintain a segregated account consisting of liquid assets (or, as permitted
by
applicable regulation, enter into certain offsetting positions) to cover
its
obligations under futures contracts and related options. Under applicable
CFTC
regulations, the Fund generally may use futures and related options only
for
bona fide hedging purposes (as defined in applicable regulations) or, subject
to
certain limits, other investment and speculative purposes (as discussed
above
under “Currency Hedging Transactions”).
Swap
Agreements
The
Fund may enter
into interest rate, credit default, equity and currency exchange rate swap
agreements. These transactions would be entered into in an attempt to obtain
a
particular return when it is considered desirable to do so, possibly at
a lower
cost to the Fund than if the Fund had invested directly in the asset that
yielded the desired return, or when regulatory or other restrictions limit
or
prohibit the Fund from investing in the asset directly. The Fund may also
use
interest rate swaps to alter the interest rate sensitivity and yield exposure
of
the Fund’s fixed income investments. Swap agreements are two party contracts
entered into primarily by institutional investors for periods ranging from
a few
weeks to more than one year. In a standard swap transaction, two parties
agree
to exchange the returns (or differentials in rates of return) earned or
realized
on particular predetermined investments or instruments, which may be adjusted
for an interest factor. The gross returns to be exchanged, or “swapped” between
the parties are generally calculated with respect to a “notional amount,”
i.e
.,
the return on or
increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a “basket” of securities
representing a particular index.
The
Fund intends to
enter into swap agreements that would calculate the obligations of the
parties
to the agreement on a “net basis.” Consequently, the Fund’s current obligations
(or rights) under a swap agreement would be equal only to the net amount
to be
paid or received under the agreement based on the relative values of the
positions held by each party to the agreement (the “net amount”). The Fund may
collateralize the net amount under a swap agreement by posting or receiving
agreed upon collateral, subject to certain thresholds and minimum transfer
amounts. In the case of interest rate or currency exchange rate swap agreements,
the Fund’s current obligations will typically be accrued daily (offset against
amounts owed to the Fund) and any accrued but unpaid net amounts owed to
a swap
counterparty will be covered by the maintenance of a segregated account
consisting of liquid assets to avoid any potential leveraging of the Fund’s
portfolio. Any swap agreement so covered will not be construed to be a
“senior
security” for purposes of the Fund’s investment restriction concerning senior
securities.
In
a typical equity
swap transaction involving a security (or index of securities), the Fund
would
agree to pay to a counterparty the negative return, if any, on the security
(or
index of securities), adjusted for an interest factor, in exchange for
an amount
equal to any positive return on the same security or index, with both negative
and positive returns calculated with respect to an agreed reference price.
The
Fund intends to segregate liquid assets equal to the maximum potential
exposure
under an equity swap agreement, plus any net amount owed with respect to
the
agreement. As such, the Fund does not believe that any of its commitments
under
equity swap agreements would constitute senior securities for purposes
of the
Fund’s investment restrictions concerning senior securities.
Equity
Linked Notes
The
Fund may,
subject to compliance with applicable regulatory guidelines, purchase equity
linked notes.
An
equity linked
note is a note whose performance is tied to a single stock, a stock index
or a
basket of stocks. Upon the maturity of the note, generally the holder receives
a
return of principal based on the capital appreciation of the linked securities.
Depending on the terms of the issuance, equity linked notes may also have
a
“cap” or “floor” on the maximum principal amount to be repaid to holders. For
example, a note may guarantee the repayment of the original principal amount,
but may cap the maximum payment at maturity at a certain percentage of
the
issuance price. Alternatively, the note may not guarantee a full return
on the
original principal, but may offer a greater participation in any capital
appreciation of the underlying linked securities. The terms of an equity
linked
note may also provide for periodic interest payments to holders at either
a
fixed or floating rate. Equity linked notes will be considered equity securities
for purposes of the Fund’s investment objective and policies.
The
ability of the
Fund to invest in equity linked notes may be limited by certain provisions
of
the U.S. federal commodities laws. Because the return on equity linked
notes is
linked to the value of the underlying securities, the notes may be viewed
as
having some of the characteristics of futures contracts with respect to
securities, the trading of which by U.S. persons other than on designated
commodity exchanges is prohibited absent an applicable exclusion or exemption.
The CFTC has adopted a statutory interpretation exempting certain so-called
“hybrid instruments” from this prohibition subject to certain
conditions.
Securities
Lending
For
the purpose of
achieving income, the Fund may lend its portfolio securities to brokers,
dealers, and other financial institutions. When making such a loan, the
Fund
will be entitled to any gain or loss on the security during the loan period,
and
the Fund will earn interest on the amount deposited as collateral for the
loan.
If the borrower fails to return the loaned securities, the Fund could use
the
collateral to replace the securities while holding the borrower liable
for any
excess replacement cost. As with any extension of credit, there are risks
of
delay in recovery and in some cases even loss of rights in the collateral
should
the borrower fail financially.
The
Fund may make
loans of its portfolio securities provided that: (i) the loan is secured
continuously by collateral consisting of U.S. Government Securities, cash
or
cash equivalents (negotiable certificates of deposits, bankers’ acceptances or
letters of credit) maintained on a daily mark-to-market basis in an amount
at
least equal to 102% and 105% of the market value of the loaned U.S. and
non-U.S.
securities, respectively; (ii) the Fund may at any time call the loan and
obtain the return of the securities loaned; (iii) the Fund will receive any
interest or dividends paid on the loaned securities; and (iv) the aggregate
market value of securities loaned will not at any time exceed 33
1
/
3
%
of the total
assets of the Fund (including the collateral received from such
loans).
When
voting or
consent rights which accompany loaned securities pass to the borrower,
the Fund
may call the loaned securities to permit the Fund to vote the securities
if the
matters involved
would
have a
material effect on the Fund’s investment in the securities. The Fund may pay
lending fees to a party arranging a loan.
RISK
FACTORS ASSOCIATED WITH ADDITIONAL
INVESTMENT
STRATEGIES
Currency
Hedging Transactions
The
Fund intends to
engage in currency hedging transactions to a limited extent, and only in
unusual
circumstances and for temporary defensive purposes would it attempt to
hedge all
the risks involved in holding assets denominated in a particular currency.
To
date, however, the Fund has engaged in a limited number of currency hedging
transactions. It is the Manager's view that the cost of engaging in hedging
transactions frequently equals or exceeds the expected benefits from the
potential reduction in exchange rate risk. Moreover, even if it was to
attempt
to do so, the Fund could not, through hedging transactions, eliminate all
the
risks of holding assets denominated in a particular currency, as there
may be an
imperfect correlation between price movements in the futures or forward
contracts and those of the underlying currency in which the Fund’s assets are
denominated. Also, where the Fund enters into a hedging transaction in
anticipation of a currency movement in a particular direction but the currency
moves in the opposite direction, the transaction would result in a less
favorable overall investment result than if the Fund had not engaged in
any such
transaction. In addition, it may not be possible for the Fund to hedge
against a
devaluation that is so generally anticipated that the Fund is not able
to
contract to sell the currency at a price above the devaluation level it
anticipates.
Options
on
Securities and Securities Indexes
The
purchase and
writing of options involves certain risks. During the option period, the
covered
call writer has, in return for the premium paid, given up the opportunity
to
profit from a price increase in the underlying securities above the exercise
price, but, as long as its obligations as a writer continues, has retained
the
risk of loss should the price of the underlying security decline. The writer
of
an option has no control over the time when it may be required to fulfill
its
obligation as a writer of the option. Once an option writer has received
an
exercise notice, it cannot effect a closing purchase transaction in order
to
terminate its obligation under the option and must deliver the underlying
securities at the exercise price. If a put or call option purchased by
the Fund
is not sold when it has remaining value, and if the market price of the
underlying security, in the case of a put, remains equal to or greater
than the
exercise price or, in the case of a call, remains less than or equal to
the
exercise price, the Fund will lose its entire investment in the option.
Also,
where a put or call option on a particular security is purchased to hedge
against price movements in a related security, the price of the put or
call
option may move more or less than the price of the related security. There
can
be no assurance that a liquid market will exist when the Fund seeks to
close out
an option position. Furthermore, if trading restrictions or suspensions
are
imposed on an option, the Fund may be unable to close out a
position.
Options
on non-U.S.
securities indexes generally may not be offered or sold to
U.S.
persons unless
the options have been approved by the CFTC. The Fund intends to include
non-U.S.
index
options as a part of its investment strategy as such investments become
available for its use.
Other
Financial Futures and Related Options
Several
risks are
associated with the use of futures and futures options. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the portfolio securities being hedged. An incorrect
correlation would result in a loss on both the hedged securities in the
Fund and
the hedging vehicle so that portfolio return might have been greater had
hedging
not been attempted. There can be no assurance that a liquid market will
exist at
a time when the Fund seeks to close out a futures contract or a futures
option
position. Most futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single day; once
the
daily limit has been reached on a particular contract, no trades may be
made
that day at a price beyond that limit. In addition, certain of these instruments
are relatively new and without a significant trading history. As a result,
there
is no assurance that an active secondary market will develop or continue
to
exist. Lack of a liquid market for any reason may prevent the Fund from
liquidating an unfavorable position and the Fund would remain obligated
to meet
margin requirements until the position is closed.
Swap
Agreements
Whether
the Fund’s
use of swap agreements will be successful in furthering its investment
objective
will depend on the Manager’s ability to predict correctly whether certain types
of investments are likely to produce greater returns than other investments.
Because they are two-party contracts and because they may have lengthy
terms,
swap agreements may be considered to be illiquid investments. Certain
restrictions imposed on the Fund by the Internal Revenue Code may limit
the
Fund’s ability to use swap agreements. In addition, the swaps market is a
relatively new market and is largely unregulated. It is possible that
developments in the swaps market, including potential government regulation,
could adversely affect the Fund’s ability to terminate existing swap agreements
or to realize amounts to be received under such agreements.
Equity
Linked Notes
The
price of an
equity linked note is derived from the value of the underlying linked
securities. The level and type of risk involved in the purchase of an equity
linked note by the Fund is similar to the risk involved in the purchase
of the
underlying security or other emerging market securities. Such notes therefore
may be considered to have speculative elements. However, equity linked
notes are
also dependent on the individual credit of the issuer of the note, which
will
generally be a trust or other special purpose vehicle or finance subsidiary
established by a major financial institution for the limited purpose of
issuing
the note. Like other structured products, equity linked notes are frequently
secured by collateral consisting of a combination of debt or related equity
securities to which payments under the notes are linked. If so secured,
the Fund
would look to this underlying collateral for satisfaction of claims in
the event
that the issuer of an equity linked note defaulted under the terms of the
note.
Equity
linked notes
are often privately placed and may not be rated, in which case the Fund
will be
more dependent on the ability of the Manager to evaluate the creditworthiness
of
the issuer, the underlying security, any collateral features of the note,
and
the potential for loss due to market and other factors. Ratings of issuers
of
equity linked notes refer only to the creditworthiness of the issuer and
strength of related collateral arrangements or other credit supports, and
do not
take into account, or attempt to rate, any potential risks of the underlying
equity securities. The Fund has no restrictions on investing in equity
linked
notes whose issuers are rated below investment grade (
e.g.,
rated below Baa by
Moody’s Investors Service, Inc. or BBB by Standard & Poor’s Corporation),
or, if unrated, or equivalent quality. Because rating agencies have not
currently rated any issuer higher than the rating of the country in which
it is
domiciled, and many emerging market countries are rated below investment
grade,
equity linked notes related to securities of issuers in those emerging
market
countries will be considered to be below investment grade. Depending on
the law
of the jurisdiction in which an issuer is organized and the note is issued,
in
the event of default, the Fund may incur additional expenses in seeking
recovery
under an equity linked note, and may have less legal recourse in attempting
to
do so.
As
with any
investment, the Fund can lose the entire amount it has invested in an equity
linked note. The secondary market for equity linked notes may be limited.
The
lack of a liquid secondary market may have an adverse effect on the ability
of
the Fund to accurately value the equity linked notes in its portfolio,
and may
make disposal of such securities more difficult for the Fund.
Counterparty
Risk
The
Fund bears the
risk of loss of the amount expected to be received under any of the financial
instruments described above if the counterparty defaults on any of these
instruments or declares bankruptcy. The Fund will enter into arrangements
only
with the counterparties that meet certain standards for creditworthiness
adopted
by the Manager.
PORTFOLIO
TURNOVER
The
Fund’s
portfolio turnover rates for the fiscal years ended June 30, 2006, 2005
and 2004
were 38.48%, 29.00% and 35.36%, respectively. The average value of portfolio
securities owned during the 2006 fiscal year decreased resulting in an
increase
to the Fund's portfolio rate. Portfolio changes will be made without regard
to
the length of time particular investments may have been held. Short-term
trading
profits are not the Fund’s objective, and changes in its investments are
generally accomplished gradually, though short-term transactions may
occasionally be made. High portfolio turnover involves correspondingly
greater
transaction costs in the form of dealer spreads or brokerage commissions,
and
may result in the realization of net capital gains, which are taxable when
distributed to certain shareholders. The portfolio turnover rate is expected
to
be less than 100% each fiscal year.
Brokerage
commissions paid on the Fund’s portfolio transactions, including investment
dealer concessions on underwritings, if applicable, for the fiscal years
ended
June 30, 2006, 2005, and 2004 amounted to $34,964,594, $35,943,685 and
$46,056,161, respectively. With respect to fixed-income securities, brokerage
commissions include explicit investment dealer concessions and may exclude
other
transaction costs which may be reflected in the spread between the bid
and asked
price. The volume of trading activity increased during the 2004 fiscal
year,
resulting in an increase in brokerage commissions paid on portfolio
transactions.
DISCLOSURE
OF PORTFOLIO HOLDINGS
The
Manager, on
behalf of the Fund, has adopted policies and procedures with respect to
the
disclosure of information about the Fund’s portfolio holdings. These policies
and procedures have been reviewed by the Fund’s Board of Directors and
compliance will be periodically assessed by the Board in connection with
reporting from the Fund’s Chief Compliance Officer.
Under
this policy,
summary reports containing information regarding the Fund’s twenty largest
equity holdings, dated as of the end of each calendar month, will be made
available to all institutional shareholders no earlier than the tenth business
day after the end of each month. Additionally, the Fund’s complete list of
portfolio holdings, dated as of the end of each calendar month, will be
provided
to shareholders and their respective service providers, upon their request,
no
earlier than the tenth business day after the end of such month. This
information, however, may be disclosed earlier to affiliated persons of
the Fund
(including the Fund’s Board members and officers, and certain personnel of the
Manager and its affiliates)
and
certain service
providers (such as the Fund’s custodian and outside counsel)
for legitimate
business and oversight purposes.
Affiliated
persons
of the Fund as described above who receive portfolio holding information
are
subject to restrictions and limitations on the use and handling of such
information pursuant to a code of ethics, including requirements to maintain
the
confidentiality of such information, pre-clear securities trades and report
securities transactions activity, as applicable. Third party service providers
of the Fund receiving such information are subject to confidentiality
obligations.
Neither
the Fund
nor the Manager or any of their affiliates receives compensation or other
consideration in connection with the disclosure of information about portfolio
holdings. Additionally, other than the persons described above, the Fund’s
portfolio holding information will not be disclosed to any person until
such
information is publicly filed with the SEC in a filing that is required
to
include such information.
The
Manager’s
executive officers are authorized to disclose the Fund’s portfolio holdings and
the authority to establish policies with respect to such disclosures resides
with the Manager. In exercising its authority, the Manager determines whether
disclosure of information about the Fund’s portfolio holdings is appropriate and
in the best interest of the Fund’s shareholders. The Manager has implemented
policies and procedures to address conflicts of interest that may arise
from the
disclosure of the Fund’s holdings. For example, the Manager’s code of ethics
specifically requires, among other things, the safeguarding of information
about
the Fund’s holdings and contains prohibitions designed to prevent the personal
use of confidential, proprietary investment information in a way that would
conflict with the Fund’s portfolio transactions. In addition, the Manager
believes that its current policy of not selling portfolio holdings information
and not disclosing such information to any party (other than the persons
described above, such as the Fund’s shareholders and certain service providers)
until such information is disclosed in a publicly available filing with
the SEC,
helps reduce potential conflicts of interest between the Fund’s shareholders and
the Manager and its affiliates.
MANAGEMENT
The
Board
of Directors
The
Board of
Directors, which is elected by the shareholders, sets the overall investment
policies and generally oversees the investment activities and management
of the
Fund. The Manager has the responsibility of implementing the policies set
by the
Board and is responsible for the Fund’s day-to-day operations and investment
activities. It is expected that both the Board of Directors and the Manager
will
cooperate in the effort to achieve the investment objective, policies and
purposes of the Fund. The Manager and the shareholders recognize that the
main
purpose of the Fund is to invest in those companies domiciled in developing
countries or in those companies that derive a substantial portion of their
revenue or profit from goods and services produced in or sales made in
developing countries, which will result in a favorable financial record
for the
Fund and which, at the same time, will assist in expanding the respective
securities markets and increasing their liquidity.
The
Bylaws of the
Fund, as amended (the “Bylaws”), provide that shareholders are required to elect
members of the Board of Directors only to the extent required by the 1940
Act.
The Fund does not hold annual meetings of shareholders. However, significant
matters which require shareholder approval, such as certain elections of
board
members or a change in a fundamental investment policy, will be presented
to
shareholders at a meeting called for such purpose. Shareholders have one
vote
per share owned. At the request of the holders of at least 10% of the shares,
the Fund will hold a meeting at which any member of the board could be
removed
by a majority vote.
Committees
of the Board of Directors
The
Fund has an
Audit Committee comprised of Paul N. Eckley, Raymond Kanner, L. Erik Lundberg,
Helmut Mader and Michael L. Ross none of whom is considered an “interested
person” of the Fund within the meaning of the 1940 Act. The function of the
Audit Committee is oversight of the Fund’s (1) accounting and financial
reporting policies and practices, (2) internal controls over financial
reporting
and (3) financial statements. The Audit Committee acts as a liaison between
the
Fund’s independent registered public accounting firm (who reports directly to
the Audit Committee) and the full Board of Directors. There were five Audit
Committee meetings held during the fiscal year ended June 30, 2006.
The
Fund has a
Committee on Directors comprised of Nancy C. Everett, Beverly L. Hamilton
and
Helmut Mader, none of whom is considered an “interested person” of the Fund
within the meaning of the 1940 Act. The Committee on Directors periodically
reviews such issues as the Board’s composition, responsibilities, committees,
compensation and other relevant issues, and recommends any appropriate
changes
to the full Board of Directors. The Committee on Directors reviews annually
the
independence of legal counsel and makes its recommendation to the full
Board of
Directors. The Committee on Directors also evaluates, selects and nominates
independent director candidates to the full Board of Directors. While the
Committee on Directors normally is able to identify from its own resources,
an
ample number of qualified candidates, it will consider shareholder suggestions
of persons to be considered as nominees to fill future vacancies on the
Board of
Directors. Such suggestions must be sent in writing to the Committee on
Directors, c/o the Fund’s Secretary, and must be accompanied by complete
biographical and occupational data on the prospective nominee, along with
a
written consent of the prospective nominee for consideration of his or
her name
by the Committee on Directors. Five Committee on Directors meetings were
held
for the Fund during the fiscal year ended June 30, 2006.
The
Fund has a
Contracts Committee comprised of all Directors who are not considered to
be
“interested persons” of the Fund within the meaning of the 1940 Act. The
Contracts Committee’s function is to request, review and consider the
information deemed necessary to evaluate the terms of certain agreements
between
the Fund and its Manager or the Manager’s affiliates, including the Investment
Advisory and Service Agreement and shareholder services agreement that
the Fund
may enter into, and make its recommendations to the full Board of Directors
on
these matters. One Contracts Committee meeting was held for the Fund during
the
fiscal year ended June 30, 2006.
While
the Fund is a
Maryland corporation, certain of its Directors and officers are not U.S.
residents and substantially all of the assets of such persons are generally
located outside the U.S. As a result, it will be difficult for U.S. investors
to
effect service of process upon such Directors or officers within the U.S.,
or to
enforce judgments of courts of the U.S. predicated upon civil liabilities
of
such Directors or officers under the federal securities laws of the U.S.
In
management's view, it is unlikely that foreign courts would enforce judgments
of
U.S. courts predicated upon the civil liability provisions of the federal
securities laws, or, that such courts would enforce such civil liabilities
against foreign Directors or officers in original actions. The following
Directors of the Fund are non-U.S. residents: Helmut Mader, William B.
Robinson
and Aje K. Saigal.
The
name and
principal occupation during the past five years and other information with
respect to each of the Directors and officers of the Fund are as
follows:
MANAGEMENT
OF THE FUND
|
Name
and Age
|
Position
with
the
Fund
|
Year
First
Elected
a
Director
of
the Fund
1
|
Principal
Occupation(s) During
Past
5 Years
|
Number
of Boards
Within
the Fund
Complex
2
on Which
Director
Serves
|
Other
Directorships
3
Held
by
Director
|
|
“Non-interested”
Directors
|
|
Paul
N.
Eckley
Age:
52
|
Director
|
2005
|
Senior
Vice
President, Investments, State Farm Insurance
Companies
4
|
1
|
None
|
|
Nancy
C.
Everett
Age:
51
|
Director
|
2005
|
Chairman,
Chief Executive Officer and former President and Chief Investment
Officer,
General Motors Investment Management Corporation; former Chief
Investment
Officer, Virginia Retirement System
|
1
|
General
Motors Asset Management Absolute Return Strategies Fund,
LLC
|
|
Beverly
L.
Hamilton
Age:
60
|
Vice
Chairman
of the Board (Independent and Non-Executive)
|
1991
|
Retired
President, ARCO Investment Management Company
|
1
|
Oppenheimer
Funds
(director
for
38 portfolios in the fund complex)
|
|
Raymond
Kanner
Age:
53
|
Director
|
1997
|
Director,
Global Equity Investments, IBM Retirement Funds
|
1
|
None
|
|
L.
Erik
Lundberg
Age:
47
|
Director
|
2005
|
Chief
Investment Officer, University of Michigan
|
1
|
None
|
|
Helmut
Mader
Age:
64
|
Director
|
1986
|
Former
Director, Deutsche Bank AG
|
1
|
None
|
|
William B. Robinson
Age:
68
|
Chairman
of
the Board (Independent and Non-Executive)
|
1986
|
Director,
Reckson Asset Management Australia Limited;
Director,
Unwired Australia Group Limited (Internet service provider);
former
Director, Deutsche Asset Management Australia Limited
|
1
|
None
|
|
Michael
L.
Ross
Age:
37
|
Director
|
2006
|
Chief
Investment Officer and Partner, Makena Capital Management,
LLC; former
Chief Investment Officer, Stanford Management Company
|
1
|
None
|
|
Aje
K.
Saigal
Age:
50
|
Director
|
2000
|
Director,
Investment Policy and Strategy, Government of Singapore Investment
Corporation Pte Ltd.
|
1
|
None
|
Board
of
Directors and Officers
|
Name
and Age
|
Position
with
the
Fund
|
Year
First
Elected
a
Director
and/or
Officer
of
the Fund
1
|
Principal
Occupation(s) During
Past
5 Years and
Positions
Held
with
Affiliated Entities
of
the Fund
|
Number
of Boards
Within
the Fund
Complex
2
on Which
Director
or
Officer Serves
|
Other
Directorships
3
Held
by
Director or Officer
|
|
"Interested"
Directors
5
|
|
Shaw
B.
Wagener
Age:
47
|
President
and
Chief Executive Officer
|
1997
|
Chairman
of
the Board, Capital International, Inc.; President and Director,
Capital
Group International, Inc.;
6
Director, The Capital Group
Companies, Inc.
6
|
1
|
None
|
|
Victor D. Kohn
Age:
49
|
Executive
Vice President
|
1996
|
President
and
Director, Capital International, Inc.; Director, Capital Guardian
Trust
Company
6
|
1
|
None
|
|
David
I.
Fisher
Age:
67
|
Director
|
1986
|
Vice
Chairman
of the Board, Capital International, Inc.; Chairman of the
Board, Capital
Guardian Trust Company;
6
Vice Chairman of the Board, Capital
International Limited;
6
Director, Capital International
Research, Inc.;
6
Director, Capital Group Research,
Inc.;
6
Chairman of the Board, Capital Group International,
Inc.;
6
Non-Executive Chairman, The Capital Group Companies,
Inc.
6
|
1
|
None
|
Chairman
Emeritus
7
|
Name
and Age
|
Position
with
the
Fund
|
Year
First
Elected
a
Director
and/or
Officer
of
the Fund
1
|
Principal
Occupation(s) During
Past
5 Years and
Positions
Held
with
Affiliated Entities
of
the Fund
|
Number
of Boards
Within
the Fund
Complex
2
on Which
Director
or
Officer Serves
|
Other
Directorships
3
Held
by
Director or Officer
|
|
Walter P. Stern
Age:
78
|
Chairman
Emeritus
|
1991
|
Vice
Chairman
of the Board, Capital International, Inc., Senior Partner;
Capital Group
International, Inc.
6
|
1
|
None
|
|
Name
and Age
|
Position
with
the
Fund
|
Year
First Elected
an
Officer
of
the Fund
1
|
Principal
Occupation(s) During
Past
5 Years and Positions Held
with
Affiliated Entities
|
|
Other
Officers
|
|
Nancy
J.
Kyle
Age:
56
|
Senior
Vice
President
|
1996
|
Vice
Chairman
of the Board, Capital Guardian Trust Company
6
|
|
Michael
A.
Felix
Age:
45
|
Vice
President and Treasurer
|
1993
|
Senior
Vice
President and Director, Capital International, Inc.; Senior
Vice
President, Treasurer and Director, Capital Guardian Trust
Company
6
|
|
Peter
C.
Kelly
Age:
47
|
Vice
President
|
1996
|
Senior
Vice
President, Senior Counsel, Secretary and Director, Capital
International,
Inc.; Senior Vice President, Senior Counsel and Director,
Capital Guardian
Trust Company;
6
Secretary,
Capital Group International, Inc.
6
|
|
Robert
H.
Neithart
Age:
41
|
Vice
President
|
2000
|
Executive
Vice President and Research Director of Emerging Markets,
and Director,
Capital International Research, Inc.;
6
Vice
President and Director, Capital Strategy Research
6
|
|
Abbe
G.
Shapiro
Age:
47
|
Vice
President
|
1997
|
Vice
President, Capital International, Inc.; Vice President,
Capital Guardian
Trust Company
6
|
|
M.
Elaine Teo
Age:
40
|
Vice President
|
2006
|
Senior Vice President, Capital International, Inc.; Executive Vice
President and Research Director - Emerging Markets, Capital
International
Research, Inc.
6
|
|
Lisa
B.
Thompson
Age:
41
|
Vice
President
|
2000
|
Senior
Vice
President, Capital International Research, Inc.
6
|
|
Ricardo V. Torres
Age:
36
|
Vice President
|
2006
|
Vice
President and Research Director - Emerging Markets, Capital
International
Research, Inc.
6
|
|
Nelson
N.
Lee
Age:
35
|
Secretary
|
2005
|
Counsel,
Capital International, Inc.; Counsel, Capital Guardian
Trust
Company
6
|
|
Laurie
D.
Neat
Age:
35
|
Assistant
Secretary
|
2005
|
Compliance
Manager, Capital International, Inc.; Compliance Manager,
Capital Guardian
Trust Company
6
|
|
Bryan
K.
Nielsen
Age:
33
|
Assistant
Treasurer
|
2006
|
Assistant
Vice President, Capital International, Inc.
|
|
Lee
K.
Yamauchi
Age:
44
|
Assistant
Treasurer
|
2000
|
Vice
President, Capital International, Inc.; Vice President,
Capital Guardian
Trust Company
6
|
|
1
|
Directors
and
officers of the Fund serve until their resignation, removal
or
retirement.
|
|
2
|
Capital
International, Inc. serves as investment manager for the
Fund, and does
not act as investment manager for other registered investment
companies.
|
|
3
|
This
includes
all directorships (other than those in the Fund) that are
held by each
Director as a director of a company with a class of securities
registered
pursuant to Section 12 of the Securities Exchange Act of
1934 or subject
to the requirements of Section 15(d) of the Securities Exchange
Act of
1934 or a company registered as an investment company under
the 1940
Act.
|
|
4
|
For
over five
years until his resignation on June 2006, Paul N. Eckley
served as senior
vice president of State Farm Mutual Funds Trust and of State
Farm Variable
Products Trust, each of which have certain funds that are
subadvised by
Capital Guardian Trust Company, an affiliate of the Manager.
|
|
5
|
“Interested
persons” within the meaning of the 1940 Act on the basis of their
affiliation with the Fund’s Manager, or its affiliated
entities.
|
|
6
|
Company
affiliated with the Manager
|
|
7
|
Mr.
Stern is
a non-voting member of the
Board.
|
The
address for all Directors and officers of the fund is
11100
Santa
Monica Boulevard, 15
th
Floor, Los
Angeles, California 90025-3384
,
attention: Fund Secretary
FUND
SHARES
OWNED BY DIRECTORS AS OF DECEMBER 31, 2006
|
Name
|
Aggregate
Dollar Range
1
of Fund Shares
Owned
|
|
“Non-Interested
Directors”
|
|
|
Paul
N. Eckley
|
Over
$100,000
|
|
Nancy
C.
Everett
|
None
|
|
Beverly
L. Hamilton
|
Over
$100,000
|
|
Raymond
Kanner
|
$10,001
-
$50,000
|
|
L.
Erik
Lundberg
|
None
|
|
Helmut
Mader
|
None
|
|
William
B. Robinson
|
None
|
|
Michael
L. Ross
|
None
|
|
Aje
K. Saigal
|
None
|
|
“Interested
Directors”
2
|
|
|
David
I. Fisher
|
Over
$100,000
|
|
Victor
D. Kohn
|
Over
$100,000
|
|
Shaw
B. Wagener
|
Over
$100,000
|
1
Ownership
disclosure is made using the following ranges: None; $1 - $10,000; $10,001
-
$50,000; $50,001 - $100,000 and Over $100,000.
2
“Interested
persons” within the meaning of the 1940 Act on the basis of their affiliation
with the Fund’s Manager, Capital International, Inc. or its affiliated
entities.
DIRECTOR
COMPENSATION
No
compensation is
paid by the Fund to any Director who is a director, officer or employee
of the
Manager or its affiliates. In 1998, the Fund began compensating Directors
who
are not affiliated with the Manager. Effective January 1, 2007, the Fund
pays to
each “non-interested” Director an annual fee of $37,000 plus an additional
annual retainer fee of (i) $15,000 to the independent chair of the Board,
(ii)
$5,000 to the independent vice chair of the Board, (iii) $5,000 to the
Audit
Committee chair and $3,000 each to the Committee on Directors chair and
the
Contracts Committee chair. The Fund also pays “non-interested” Directors $5,000
for each Board meeting attended and $1,500 for each committee meeting
attended
as a member of such committee, except for the independent chair who is
paid the
$1,500 attendance fee for attending any committee meeting either as a
member or
nonmember. Additionally, a $1,500 attendance fee is paid to the “non-interested”
Director who serves as the Fund’s representative and attends a committee meeting
held by certain private equity funds that have been organized by the
Manager and
in which the Fund has invested. Certain Directors are prohibited from
receiving
fees based on their employers' policies. Certain Directors have elected,
on a
voluntary basis, to defer all or a portion of their fees through the
Fund’s
deferred compensation plan. The Fund also pays the expenses of attendance
at
Board and Committee meetings for the Directors who are not affiliated
with the
Manager. Six Directors own Fund shares, three of whom are affiliated
with the
Manager. Four of the “non-interested” Directors have a business affiliation with
an institutional shareholder in the Fund. For the Fund’s Directors, the minimum
initial purchase and subsequent investment requirements have been waived.
Directors and certain of their family members are permitted to purchase
shares
of mutual funds advised by an affiliate of the Manager without paying
a sales
charge.
For
the fiscal year
ended June 30, 2006, the Fund paid the following compensation to Directors
of
the Fund:
DIRECTOR
COMPENSATION TABLE
|
Name
and Position
|
Aggregate
Compensation from Fund
|
Total
Compensation From Fund and Fund Complex Paid to
Directors
|
|
Paul
N.
Eckley
|
$30,000
|
$30,000
|
|
Nancy
C.
Everett
|
$25,500
1
|
$25,500
|
|
Beverly
L.
Hamilton
|
$54,500
2
|
$54,500
|
|
Raymond
Kanner
|
$45,333
1
|
$45,333
|
|
L.
Erik
Lundberg
|
$30,000
|
$30,000
|
|
Helmut
Mader
|
$58,500
2
|
$58,500
|
|
Michael
L.
Ross
|
$7,000
|
$7,000
|
|
William
B.
Robinson
|
$66,014
2
|
$66,014
|
|
Aje
K.
Saigal
|
$43,000
1
|
$43,000
|
1
Compensation was paid to the Director’s employer.
2
Since
the deferred compensation plan’s adoption, the total amount of deferred
compensation accrued by the Fund (plus earnings thereon) through June 30,
2006
for currently participating Directors is as follows: Beverly Hamilton
($381,784), Helmut Mader ($373,486) and William B. Robinson
($11,477).
The
Fund has
adopted a deferred compensation plan (the "Plan") that permits any Director
of
the Fund who so elects to have all or any portion of payment of the Director’s
compensation from the Fund (including the annual retainer, board and
committee
meeting fees) deferred to a future date or to the occurrence of certain
events,
such as upon the resignation or retirement of the Director. Payments
of deferred
compensation made pursuant to the Plan may be paid in a lump sum or in
annual or
quarterly installments over a period of years (not to exceed 30), as
specified
by the Director. Compensation deferred under the Plan is credited to
an account
established in the name of each Director on the books of the Fund, to
which
deferred compensation is credited. Any such deferred compensation so
credited
will be deemed to be invested for purposes of future earnings in one
or more
investment options, but the deferred compensation amounts payable to
the
Directors, as adjusted for any such earnings, are not funded and are
general
unsecured liabilities of the Fund until paid to the
Directors.
PRINCIPAL
SHAREHOLDERS
The
following table
identifies those investors who own of record or are known by the Fund
to own
beneficially 5% or more of its shares as of the opening of business on
December
31, 2006.
|
Name
& Address
|
Number
of shares owned of record
|
Percentage
of Outstanding Common Stock
|
|
New
York
State Common Retirement Fund
3
Chase
Metrotech Center, 5th Floor
Brooklyn,
NY
11245
|
12,438,391
|
6.626%
|
|
Alaska
Permanent Fund Corporation
801
West
10
th
Street, Suite 302
Juneau,
AK
99801-1878
|
11,646,709
|
6.204%
|
|
LA
County
Employees Retirement Association
300
North
Lake Avenue, Suite 850
Pasadena,
CA
91101-4109
|
9,837,733
|
5.241%
|
The
Directors and
officers of the Fund own, in the aggregate, less than 1% of the outstanding
shares of the Fund.
PORTFOLIO
MANAGER INFORMATION*
Portfolio
Manager Fund Holdings
Portfolio
managers
may personally own shares of the Fund. Pursuant to SEC rules, ownership
disclosure is made using the following ranges: None; $1 - $10,000; $10,001
-
$50,000; $50,001 -$100,000; $100,001 - $500,000; $500,001 - $1,000,000;
and Over
$1,000,000.
Christopher
Choe
and Luis Freitas de Oliveria do not own shares of the Fund. Lisa B. Thompson
and
Shaw B. Wagener own between $500,001 and $1,000,000 worth of Fund shares.
David
I. Fisher, Victor D. Kohn and Nancy J. Kyle own over $1,000,000 worth
of Fund
shares.
*Information
is as
of June 30, 2006, except for Lisa B. Thompson, whose information is as
of
December 31, 2006.
Other
Accounts Managed by Fund Portfolio Managers
Portfolio
managers
may also manage a portion of other funds or accounts
1
advised by the
Manager or its affiliates. The following tables reflect information regarding
such accounts:
|
Christopher
Choe
|
Number
of accounts without a performance-based fee
|
Total
assets in accounts without a performance-based fee
(in
billions)
|
Number
of accounts with a performance- based fee
|
Total
assets in accounts with a performance- based fee
(in
billions)
|
|
Registered
Investment Companies
2
|
2
|
$0.2
|
None
|
None
|
|
Other
Pooled Investment Vehicles
2
|
7
|
$11.0
|
None
|
None
|
|
Other
Accounts
2
|
50
|
$12.6
|
9
|
$2.8
|
|
David
I. Fisher
|
Number
of accounts without a performance-based fee
|
Total
assets in accounts without a performance-based fee
(in
billions)
|
Number
of accounts with a performance- based fee
|
Total
assets in accounts with a performance- based fee
(in
billions)
|
|
Registered
Investment Companies
2
|
25
|
$10.4
|
1
|
$1.0
|
|
Other
Pooled Investment Vehicles
2
|
30
|
$45.6
|
3
|
$0.5
|
|
Other
Accounts
2
|
299
|
$93.8
|
13
|
$9.0
|
|
Victor
D. Kohn
|
Number
of accounts without a performance-based fee
|
Total
assets in accounts without a performance-based fee
(in
billions)
|
Number
of accounts with a performance- based fee
|
Total
assets in accounts with a performance- based fee
(in
billions)
|
|
Registered
Investment Companies
2
|
2
|
$0.2
|
None
|
None
|
|
Other
Pooled Investment Vehicles
2
|
8
|
$9.8
|
None
|
None
|
|
Other
Accounts
2
|
9
|
$3.3
|
None
|
None
|
|
Nancy
J. Kyle
|
Number
of accounts without a performance-based fee
|
Total
assets in accounts without a performance-based fee
(in
billions)
|
Number
of accounts with a performance- based fee
|
Total
assets in accounts with a performance- based fee
(in
billions)
|
|
Registered
Investment Companies
2
|
14
|
$4.9
|
1
|
$1.0
|
|
Other
Pooled Investment Vehicles
2
|
28
|
$42.3
|
None
|
None
|
|
Other
Accounts
2
|
161
|
$53.8
|
10
|
$6.6
|
|
Luis
Freitas de Oliveira
|
Number
of accounts without a performance-based fee
|
Total
assets in accounts without a performance-based fee
(in
billions)
|
Number
of accounts with a performance- based fee
|
Total
assets in accounts with a performance- based fee
(in
billions)
|
|
Registered
Investment Companies
2
|
2
|
$0.2
|
None
|
None
|
|
Other
Pooled Investment Vehicles
2
|
5
|
$7.7
|
None
|
None
|
|
Other
Accounts
2
|
2
|
$0.5
|
None
|
None
|
|
Lisa
B. Thompson
|
Number
of accounts without a performance-based fee
|
Total
assets in accounts without a performance-based fee
(in
billions)
|
Number
of accounts with a performance- based fee
|
Total
assets in accounts with a performance- based fee
(in
billions)
|
|
Registered
Investment Companies
2
|
None
|
None
|
None
|
None
|
|
Other
Pooled Investment Vehicles
2
|
6
|
$8.6
|
None
|
None
|
|
Other
Accounts
2
|
4
|
$0.8
|
1
|
$0.2
|
|
Shaw
B. Wagener
|
Number
of accounts without a performance-based fee
|
Total
assets in accounts without a performance-based fee
(in
billions)
|
Number
of accounts with a performance- based fee
|
Total
assets in accounts with a performance- based fee
(in
billions)
|
|
Registered
Investment Companies
2
|
2
|
$0.2
|
None
|
None
|
|
Other
Pooled Investment Vehicles
2
|
6
|
$7.8
|
3
|
$0.5
|
|
Other
Accounts
2
|
3
|
$0.6
|
None
|
None
|
|
1
|
Personal
brokerage accounts of portfolio managers and their families
are not
reflected.
|
|
2
|
Assets
noted
represent the total net assets of registered investment companies,
other
pooled investment vehicles or other accounts and do not represent
the
total assets managed by the individual, which will be a substantially
lower amount.
|
Potential
Conflicts of Interest
The
Manager has
adopted policies and procedures that address potential conflicts of interest
that may arise between a portfolio manager’s management of the Fund and his or
her management of other funds and accounts, such as conflicts relating
to the
allocation of investment opportunities, personal investing activities,
portfolio
manager compensation and proxy voting of portfolio securities. While there
is no
guarantee that such policies and procedures will be effective in all cases,
the
Manager believes that all issues relating to potential material conflicts
of
interest involving the Fund and its other managed funds and accounts have
been
addressed.
Compensation
of Investment Professionals
As
described in the
prospectus, the Manager uses a system of multiple portfolio managers
in managing
Fund assets. In addition, the Manager’s investment analysts may make investment
decisions with respect to a portion of the Fund’s portfolio within their
research coverage. Portfolio managers and investment analysts may manage
assets
in other funds advised by the Manager or its institutional affiliates.
Portfolio
managers and investment analysts are paid competitive salaries. In addition,
they may receive bonuses based on their individual portfolio results
and also
may participate in profit-sharing plans. The relative mix of compensation
represented by bonuses, salary and profit sharing will vary depending
on the
individual’s portfolio results, contributions to the organization and other
factors. In order to encourage a long-term focus, bonuses based on investment
results are calculated by comparing pretax total returns over a four-year
period
to relevant benchmarks over both the most recent year and a four-year
rolling
average, with the greater weight placed on the four-year rolling average.
For
portfolio managers, benchmarks include both measures of the marketplaces
in
which the relevant fund invests and measures of the results of comparable
mutual
funds or consultant universe measures of comparable institutional accounts.
For
investment analysts, benchmarks include both relevant market measures
and
appropriate industry indices reflecting their areas of expertise. Analysts
are
also separately compensated for the quality of their research efforts.
The
benchmarks against which the Fund’s portfolio managers may be measured include
the MSCI Emerging Markets Index, the MSCI Emerging Markets Asia Index,
the MSCI
Emerging Markets ex-Asia Index and a customized index based on information
provided by various third party consultants.
INVESTMENT
ADVISORY AND OTHER SERVICES
The
Manager
The
Fund’s Manager,
Capital International, Inc., is located at 11100 Santa Monica Boulevard,
15th
Floor, Los Angeles, California 90025-3384 and 135 South State College Boulevard,
Brea, California 92821-5823. The Fund’s Manager was organized under the laws of
California in 1987 and is registered with the SEC under the Investment
Advisers
Act of 1940. The Capital Group Companies, Inc., 333 South Hope Street,
55th
Floor, Los Angeles, California 90071-1406, owns (indirectly through another
wholly-owned subsidiary) all of the Manager's outstanding shares of common
stock.
The
Manager has
full access to the research of its institutional investment management
affiliates. The investment management and research staffs of the Manager
and its
institutional investment management affiliates operate from offices in
Los
Angeles, San Francisco, Washington, New York, Geneva, London, Hong Kong,
Toronto, Singapore and Tokyo. The Manager and its institutional investment
management affiliates gather extensive information on emerging securities
markets and potential investments through a number of sources, including
investigations of the operations of particular issuers. These generally
include
personal discussions with the issuer's management and on-site examination
of its
manufacturing and production facilities.
Investment
Advisory and Service Agreement
Under
the
Investment Advisory and Service Agreement between the Fund and the Manager
(the
“Agreement”), the Manager makes investment decisions and supervises the
acquisition and disposition of securities by the Fund, all in accordance
with
the Fund’s investment objective and policies and under the general supervision
of the Fund’s Board of Directors. In addition, the Manager provides information
to the Fund’s Board of Directors to assist the Board in identifying and
selecting qualified markets. The Manager also provides and pays the compensation
and travel expenses of the Fund’s officers and Directors of the Fund who are
affiliated with the Manager; maintains or causes to be maintained for the
Fund
all required books and records, and furnishes or causes to be furnished
all
required reports or other information (to the extent such books, records,
reports and other information are not maintained or furnished by the Fund’s
custodian or other agents); determines the net asset value of the Fund’s shares
as required; and supplies the Fund with office space. The Fund pays all
of its
expenses of operation including, without limitation, custodian, stock transfer
and dividend disbursing fees and expenses (including fees or taxes relating
to
stock exchange listing); costs of preparing, printing and mailing reports,
prospectuses, proxy statements and notices to its shareholders; taxes;
expenses
of the issuance, sale or repurchase of shares (including registration and
qualification expenses); legal and auditing fees and expenses and fees
of legal
representatives; compensation fees and expenses (including travel expenses)
of
Directors of the Fund who are not affiliated with the Manager; and costs
of
insurance, including any directors and officers liability insurance and
fidelity
bonding.
For
its services,
the Manager receives from the Fund a fee, payable monthly in U.S. dollars,
at
the annual rate of 0.90% of the first $400 million of aggregate net assets
of
the Fund. The annual rate is reduced to 0.80% of the aggregate net assets
from
$400 million to $1 billion; to 0.70% of the aggregate net assets from $1
billion
to $2 billion; to 0.65% of the aggregate net assets from $2 billion to
$4
billion; to 0.625% of the aggregate net assets from $4 billion to $6 billion;
to
0.60% of the aggregate net assets from $6 billion to $8
billion; to 0.58% of the aggregate net assets from
$8 billion to $11 billion; to 0.56% of the aggregate net assets from $11
billion
to $15 billion; to 0.54% of the aggregate net assets from $15 billion to
$20
billion; and to 0.52% of such aggregate net assets in excess of $20 billion
as
determined on the last business day of every week and month. In addition,
other
Fund expenses are borne by the Fund. During the fiscal years ended June
30,
2006, 2005, and 2004 the management fees amounted to $78,679,499, $93,020,539
and $112,640,965, respectively. Under the Agreement, the Manager and its
affiliates are permitted to provide investment advisory services to other
clients, including clients which may invest in developing country securities.
The
Investment
Advisory and Service Agreement (the “Agreement”) between the Fund and the
Manager will continue in effect until June 20, 2007, unless sooner terminated,
and may be renewed from year to year thereafter, provided that any such
renewal
has been specifically approved at least annually by (i) the Board of Directors,
or by the vote of a majority (as defined in the 1940 Act) of the outstanding
voting securities of the Fund, and (ii) the vote of a majority of Directors
who
are not parties to the Agreement or interested persons (as defined in the
1940
Act) of any such party, cast in person at a meeting called for the purpose
of
voting on such approval. The Agreement provides that the Manager has no
liability to the Fund for its acts or omissions in the performance of its
obligations to the Fund not involving willful misconduct, bad faith, gross
negligence or reckless disregard of its obligations under the Agreement.
The
Agreement also provides that either party has the right to terminate it,
without
penalty, upon 60 days written notice to the other party, and that the Agreement
automatically terminates in the event of its assignment (as defined in
the 1940
Act).
Personal
Investing Policy
The
Fund, the
Manager and its affiliated companies, have adopted codes of ethics which
allow
for personal investments, including securities in which the Fund may invest
from
time to time. The codes of ethics include: a ban on acquisitions of securities
pursuant to an initial public offering; restrictions on acquisitions of
private
placement securities; pre-clearance and reporting requirements; review
of
duplicate confirmation statements; annual recertification of compliance
with
codes of ethics; blackout periods on personal investing for certain investment
personnel; a ban on short-term trading profits for investment personnel;
limitations on service as a director of publicly traded companies; and
disclosure of personal securities transactions.
PROXY
VOTING POLICIES AND PROCEDURES
The
Manager votes
the proxies of securities held by the Fund according to the Manager’s proxy
voting policy and procedures (as stated below), which have been adopted
by the
Fund’s Board of Directors. In addition, information relating to how the Fund
voted proxies during the most recent twelve-month period ending June 30
is
available (i) without charge, upon request, by calling (800) 421-0180,
ext.
96245; or (ii) on the SEC’s website at www.sec.gov.
Policy
The
Manager, a U.S.
based investment adviser, provides investment management services to clients
including institutional retirement plans and U.S and non-U.S. investment
funds.
The
Manager considers proxy voting an important part of those management services,
and as such, the Manager seeks to vote all proxies of securities held in
client
accounts for which it has proxy voting authority in the best interest of
those
clients. The procedures that govern this activity are reasonably designed
to
ensure that proxies are voted in the best inte
rest
of the
Manager’s clients.
Fiduciary
Responsibility and Long-term Shareholder Value
The
Manager’s
fiduciary obligation to manage its accounts in the best interest of its
clients
extends to proxy voting. When voting proxies, the Manager considers those
factors which would affect the value of its clients’ investment and acts solely
in the interest of, and for the exclusive purpose of providing benefits
to, its
clients. As required by ERISA, the Manager votes proxies solely in the
interest
of the participants and beneficiaries of retirement plans and does not
subordinate the interest of participants and beneficiaries in their retirement
income to unrelated objectives.
The
Manager
believes the best interests of clients are served by voting proxies in
a way
that maximizes long-term shareholder value. Therefore, the investment
professionals responsible for voting proxies have the discretion to make
the
best decision given the individual facts and circumstances of each issue.
Proxy
issues are evaluated on their merits and considered in the context of the
analyst’s knowledge of a company, its current management, management’s past
record, and the Manager’s general position on the issue. In addition, many proxy
issues are reviewed and voted on by a proxy voting committee comprised
primarily
of investment professionals, bringing a wide range of experience and views
to
bear on each decision.
As
the management
of a portfolio company is responsible for its day-to-day operations, the
Manager
believes that management, subject to the oversight of the relevant board
of
directors, is often in the best position to make decisions that serve the
interests of shareholders. However, the Manager votes against management
on
proposals where it perceives a conflict may exist between management and
client
interests, such as those that may insulate management or diminish shareholder
rights. The Manager also votes against management in other cases where
the facts
and circumstances indicate that the proposal is not in its clients’ best
interests.
Special
Review
From
time to time the Manager may vote a) on proxies of portfolio companies
that are
also clients of the Manager or its affiliates, b) on shareholder proposals
submitted by clients, or c) on proxies for which clients have publicly
supported
or actively solicited the Manager or its affiliates to support a particular
position. When voting these proxies, the Manager analyzes the issues on
their
merits and does not consider any client relationship in a way that interferes
with its responsibility to vote proxies in the best interest of its clients.
The
Manager’s Special Review Committee reviews certain of these proxy decisions for
improper influences on the decision-making process and takes appropriate
action,
if necessary.
Procedures
Proxy
Review Process
Associates
in the
Manager’s proxy voting department are responsible for coordinating the voting of
proxies. These associates work with outside proxy voting service providers
and
custodian banks and are responsible for coordinating and documenting the
internal review of proxies.
The
proxy voting
department reviews each proxy ballot for standard and non-standard items.
Standard proxy items are typically voted with management unless the research
analyst who follows the company or a member of an investment or proxy voting
committee requests additional review. Standard items currently include
the
uncontested election of directors, ratifying auditors, adopting reports
and
accounts, setting dividends and allocating profits for the prior year and
certain other administrative items.
All
other items are
sent by the proxy voting department to the research analyst who follows
the
company. The analyst reviews the proxy statement and makes a recommendation
about how to vote on the issues based on his or her in-depth knowledge
of the
company. Recommendations to vote with management on certain limited issues
are
voted accordingly. All other non-standard issues receive further consideration
by a proxy voting committee, which reviews the issue and the analyst’s
recommendation, and decides how to vote. A proxy voting committee may escalate
to the full investment committee(s) those issues for which it believes
a broader
review is warranted. Various proxy voting committees specialize in regional
mandates and review the proxies of portfolio companies within their mandates.
The proxy voting committees are comprised primarily of members of the Manager’s
and its institutional affiliates’ investment committees and their activity is
subject to oversight by those committees.
The
Manager seeks
to vote all of its clients’ proxies. In certain circumstances, the Manager may
decide not to vote a proxy because the costs of voting outweigh the benefits
to
its clients (e.g., when voting could lead to share blocking where the Manager
wishes to retain flexibility to trade
shares).
In
addition, proxies with respect to securities on loan through client directed
lending programs are not available to the Manager to vote and therefore
are not
voted.
Proxy
Voting Guidelines
The
Manager has
developed proxy voting guidelines that reflect its general position and
practice
on various issues. To preserve the ability of decision makers to make the
best
decision in each case, these guidelines are intended only to provide context
and
are not intended to dictate how the issue must be voted. The guidelines
are
reviewed and updated as necessary, but at least annually, by the appropriate
proxy voting and investment committees.
The
Manager’s
general position related to corporate governance, capital structure, stock
option and compensation plans and social and corporate responsibility issues
is
reflected below.
|
·
|
Corporate
governance
.
The Manager
supports strong corporate governance practices. It generally votes
against
proposals that serve as anti-takeover devices or diminish shareholder
rights, such as poison pill plans and supermajority vote requirements,
and
generally supports proposals that encourage responsiveness to
shareholders, such as initiatives to declassify the board. Mergers
and
acquisitions, reincorporations and other corporate restructurings
are
considered on a case-by-case basis, based on the investment merits
of the
proposal.
|
|
·
|
Capital
structure
.
The Manager
generally supports increases to capital stock for legitimate financing
needs. It generally does not support changes in capital stock that
can be
used as an anti-takeover device, such as the creation of or increase
in
blank-check preferred stock or of a dual class capital structure
with
different voting rights.
|
|
·
|
Stock-related
compensation plans
.
The Manager
supports the concept of stock-related compensation plans as a way
to align
employee and shareholder interests. However, plans that include
features
which undermine the connection between employee and shareholder
interests
generally are not supported. When voting on proposals related to
new plans
or changes to existing plans, the Manager considers, among other
things,
the following information to the extent it is available: the exercise
price of the options, the size of the overall plan and/or the size
of the
increase, the historical dilution rate, whether the plan permits
option
repricing, the duration of the plan, and the needs of the company.
Additionally,
the
Manager supports option expensing in theory and will generally
support
shareholder proposals on option expensing if such proposal language
is
non-binding and does not require the company to adopt a specific
expensing
methodology.
|
|
·
|
Corporate
social responsibility
.
The Manager
votes on these issues based on the potential impact to the value
of its
clients’ investment in the portfolio company.
|
Special
Review Procedures
If
a research
analyst has a personal conflict in making a voting recommendation on a
proxy
issue, he or she must disclose such conflict, along with his or her
recommendation. If a member of the proxy voting committee has a personal
conflict in voting the proxy, he or she must disclose such conflict to
the
appropriate proxy voting committee and must not vote on the issue.
Clients
representing 0.0025 or more of assets under investment management across
all
affiliates owned by The Capital Group Companies, Inc. (the Manager’s parent
company), are deemed to be “Interested Clients”. Each proxy is reviewed to
determine whether the portfolio company, a proponent of a shareholder proposal,
or a known supporter of a particular proposal is an Interested Client.
If the
voting decision for a proxy involving an Interested Client is against such
client, then it is presumed that there was no undue influence in favor
of the
Interested Client. If the decision is in favor of the Interested Client,
then
the decision, the rationale for such decision, information about the client
relationship and all other relevant information is reviewed by the Special
Review Committee (“SRC”). The SRC reviews such information in order to identify
whether there were improper influences on the decision-making process so
that it
may determine whether the decision was in the best interest of the Manager’s
clients. Based on its review, the SRC may accept or override the decision,
or
determine another course of action. The SRC is comprised of senior
representatives from the Manager’s and its institutional affiliates’ investment
and legal groups and does not include representatives from the marketing
department.
Any
other proxy
will be referred to the SRC if facts or circumstances warrant further
review.
The
Manager’s Proxy Voting Record
Upon
client
request, the Manager will provide reports of its proxy voting record as
it
relates to the securities held in the client’s account(s) for which the Manager
has proxy voting authority.
Annual
Assessment
The
Manager will
conduct an annual assessment of this proxy voting policy and related procedures
and will notify clients for which it has proxy voting authority of any
material
changes to the policy.
Effective
Date
This
policy is
effective as of March 30, 2006.
CUSTODIAN,
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR
The
JPMorgan Chase
Bank, 270 Park Avenue, New York, NY 10017-2070, acts as Custodian for the
Fund
pursuant to a custodian agreement. The Custodian employs sub-custodians
located
in countries where the Fund’s portfolio securities are traded.
American
Funds
Service Company, 135 South State College Blvd., Brea, California 92821-5823,
acts as the Fund’s dividend paying agent, transfer agent and registrar for the
shares. The Fund’s Luxembourg transfer agent is Banque Internationale à
Luxembourg, S.A.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM AND LEGAL COUNSEL
The
accounting firm
of PricewaterhouseCoopers LLP, 350 South Grand Avenue, Los Angeles, California
90071-2889, acts as independent registered public accounting firm for the
Fund.
The financial statements for the year ended June 30, 2006, have been
incorporated by reference in the statement of additional information from
the
Fund’s annual report and have been so incorporated in reliance on the report
of
PricewaterhouseCoopers LLP, independent registered public accounting firm,
given
on the authority of said firm as experts in auditing and
accounting.
Dechert
LLP, 1775 I
Street, N.W., Washington, D.C. 20006-2401, serves as legal counsel to the
Fund.
PORTFOLIO
TRANSACTIONS AND BROKERAGE
The
Manager strives
to obtain best execution when placing orders with broker-dealers for the
purchase and sale of securities for the Fund. When a particular broker-dealer
appears to be in a position to provide the best execution for a transaction,
the
order will be placed with that broker-dealer. The broker-dealer may or
may not
have provided research, statistical or other factual information to the
Manager
or its affiliates. The Manager does not consider itself obligated to obtain
the
lowest available commission rate to the exclusion of price, service and
qualitative considerations. However, traders are authorized only to negotiate
payment for transaction services rendered and not for research, statistical,
or
other services. Further, when placing orders for execution of the Fund’s
portfolio transactions, the Manager does not give any consideration to
whether a
broker-dealer has sold shares of investment companies advised or sub-advised
by
the Manager or its affiliates.
In
accordance with normal market practices, the Manager receives research,
statistical and other related services from broker-dealers. However,
the Manager
has not committed to direct any specific dollar amounts of brokerage
to these
firms in exchange for such services. Subject to the Manager’s policy of seeking
best execution, when two or more broker-dealers are in a position to
offer
comparable execution for a trade, the Manager may give preference to
broker-dealers that have provided research, statistical and other related
services for the ultimate benefit of the clients of the Manager and its
institutional investment management affiliates. If two or more of these
broker-dealers have provided such services, the Manager may consider
the
relative benefit of the services to the investment companies or other
clients
served by the Manager and its institutional investment management affiliates,
and the amount of trading previously executed with such broker-dealers.
There
may be
occasions when portfolio transactions may be executed as part of concurrent
authorizations to purchase or sell the same security for other investment
companies or accounts served by the Manager and its institutional investment
management affiliates. When such concurrent authorizations occur, the objective
is to allocate the executions in an equitable manner. The Fund recognizes
that
in some cases this procedure may adversely affect the size or price of
the
position obtainable for the Fund’s portfolio or its sale price of securities
sold.
The
Fund is
required to disclose information regarding investments in the securities
of its
“regular” broker-dealers (or parent companies of its regular broker-dealers)
that derive more than 15% of their revenue from broker-dealer, underwriter
or
investment adviser activities. A regular broker-dealer is (a) one of the
10
broker-dealers that received from the Fund the largest amount of brokerage
commissions by participating, directly or indirectly, in the Fund’s portfolio
transactions during the Fund’s most recent fiscal year; (b) one of the 10
broker-dealers that engaged as principal in the largest dollar amount of
portfolio transactions of the Fund during the Fund’s most recent fiscal year; or
(c) one of the 10 broker-dealers that sold the largest amount of securities
of
the Fund during the Fund’s most recent fiscal year.
At
the end of the
Fund’s most recent fiscal year, the Fund’s regular broker-dealers included UBS
AG, Citigroup Global Markets Inc., and Lehman Brothers Inc. As of the Fund’s
most recent fiscal year-end, the Fund held securities of UBS AG in the
amount of
$32,426,000, Citigroup Global Markets Inc. in the amount of $14,923,000,
and
Lehman Brothers Inc. in the amount of $4,766,000.
CAPITAL
STOCK
The
Board of
Directors has authorized that, for the Fund’s fiscal year beginning July 1,
1999, and each fiscal year thereafter until such authorization is amended
by
resolution of the Board of Directors, the authorized number of shares
of capital
stock of the Fund shall be an amount equal to (i) the number of shares
outstanding as of the end of the prior fiscal year, (ii) the number of
shares
authorized to be issued under the Board’s current net new share sale
authorization for such fiscal year and (iii) a number of shares sufficient
to
permit the reinvestment of dividends as authorized from time to time
by the
Board of Directors. As of June 30, 2006, the Fund had 729,886,445
1
shares issued and outstanding.
Shares
of the Fund
are fully paid and non-assessable. All shares of the Fund are equal as
to
earnings, assets and voting privileges. In the event of liquidation, each
share
is entitled to its proportion of the Fund’s assets after debts and expenses.
There are no cumulative voting rights for the election of directors. The
shares
of common stock are issued in registered form, and ownership and transfers
of
the shares are recorded by the Fund’s transfer agent.
Under
Maryland law,
and in accordance with the Bylaws of the Fund, the Fund is not required
to hold
an annual meeting of its shareholders in any year in which the election
of
directors is not required to be acted upon under the 1940 Act. The Bylaws
also
provide that each director will serve as a director for the duration of
the
existence of the Fund or until such director sooner dies, resigns or is
removed
in the manner provided by the Bylaws or as otherwise provided by statute
or the
Fund’s Articles of Incorporation, as amended. Consistent with the foregoing,
in
addition to the provisions of the Bylaws, the Fund will undertake to call
a
special meeting of shareholders for the purpose of voting upon the question
of
removal of a director or directors when requested in writing to do so by
the
holders of at least 10% of the outstanding shares of the Fund, and, in
connection with such meeting, to comply with the provisions of section
16(c) of
the 1940 Act relating to shareholder communications. Holders of a majority
of
the outstanding shares will constitute a quorum for the transaction of
business
at such meetings. Attendance and voting at shareholders meetings may be
by
proxy, and shareholders may take action by unanimous written consent in
lieu of
holding a meeting.
1
The
Board of Directors of the Fund approved a 5-for-1 stock split to occur
at the
close of business on January 12, 2007. The number of shares issued and
outstanding has been adjusted to reflect the stock split.
PURCHASE
AND PRICING OF SHARES
Purchasing
Shares
The
prospectus
describes the manner in which the Fund’s shares may be purchased and redeemed.
See “How to Purchase Shares” and “How to Redeem Shares”.
As
disclosed in the
prospectus, at the sole discretion of the Manager, investors may purchase
shares
by tendering to the Fund developing country securities that are determined
by
the Manager to be appropriate for the Fund’s investment portfolio. In
determining whether particular securities are suitable for the Fund’s investment
portfolio, the Manager will consider the following factors, among others:
the
type, quality and value of the securities being tendered; the extent to
which
the Fund is already invested in such securities or in similar securities
in
terms of industry, geography or other criteria; the effect the tendered
securities would have on the liquidity of the Fund’s investment portfolio and
other operational considerations; the Fund’s cash position; and whether the
Manager believes that issuing shares in exchange for the tendered securities
would be in the best interests of the Fund and its shareholders.
The
Manager may,
out of its own resources, pay compensation to financial intermediaries
or other
third parties whose customers or clients become shareholders of the Fund.
Such
compensation may be in the form of fees for services provided or
responsibilities assumed by such entities with respect to the servicing
of
certain shareholder accounts.
Pricing
Shares
The
net asset value
per share is calculated in U.S. Dollars on the last business day of each
week
and each month, and may be calculated at such other times as the Board
of
Directors may determine, in the following manner:
Equity
securities
are valued at the official closing price of, or the last reported sale
price on,
the principal exchange or market on which such securities are traded, as
of the
close of business or, lacking any sales, at the last available bid price.
Bonds
and notes are valued at prices obtained from a pricing service. However,
where
the investment adviser deems it appropriate, they will be valued at the
mean
quoted bid and asked prices or at prices for securities of comparable maturity,
quality and type.
Short-term
securities with original maturities of one year or less maturing within
60 days
are valued at amortized cost, which approximates market value. Forward
currency
contracts are valued at the mean of their representative quoted bid and
asked
prices.
Assets
and
liabilities denominated in non-U.S. currencies are translated into U.S.
dollars
at the exchange rates in effect prior to the determination of the net asset
value of the Fund’s shares.
Securities
and
assets for which representative market quotations are not readily available
or
are considered unreliable are fair valued as determined in good faith under
policies approved by the Fund’s Board. Various factors may be reviewed in order
to make a good faith determination of a security’s fair value. These factors
include, but are not limited to, the type and cost of the security; contractual
or legal restrictions on resale of the security; relevant financial or
business
developments of the issuer; actively traded similar or related securities;
related corporate actions; and changes in overall market conditions. If
significant events occur which affect the value of portfolio securities,
appropriate adjustments to closing market prices may be made to reflect
these
events. Events of this type may include, but are not limited to, significant
movements in the U.S. market or unanticipated market closures.
Liabilities,
including accruals of taxes and other expense items, are deducted from
total
assets.
Net
assets so
obtained are then divided by the total number of shares outstanding (excluding
treasury shares), and the results, rounded to the nearest cent, is the
net asset
value per share.
The
Fund will not
price shares on any day on which the New York Stock Exchange is closed
for
trading.
TAXES
AND
DISTRIBUTIONS
The
Fund has
elected to be treated as a regulated investment company under Subchapter
M of
the Internal Revenue Code (the “Code”). A regulated investment company
qualifying under Subchapter M of the Code is required to distribute to
its
shareholders at least 90% of its investment company taxable income (including
the excess of net short-term capital gain over net long-term capital losses)
and
generally is not subject to federal income tax to the extent that it distributes
annually 100% of its investment company taxable income and net realized
capital
gains in the manner required under the Code. The Fund intends to distribute
annually all of its investment company taxable income and net realized
capital
gains and therefore does not expect to pay federal income tax, although
in
certain circumstances, the Fund may determine that it is in the interest
of
shareholders to distribute less than that amount.
To
be treated as a
regulated investment company under Subchapter M of the Code, the Fund must
also
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to securities loans, net income from certain publicly traded
partnerships and gains from the sale or other disposition of securities
or
foreign currencies, or other income (including, but not limited to, gains
from
options, futures or forward contracts) derived with respect to the business
of
investing in such securities or currencies, and (b) diversify its holdings
so
that, at the end of each fiscal quarter (i) at least 50% of the market
value of
the Fund’s assets is represented by cash, U.S. government securities and
securities of other regulated investment companies, and other securities
(for
purposes of this calculation, generally limited in respect of any one issuer,
to
an amount not greater than 5% of the market value of the Fund’s assets and 10%
of the outstanding voting securities of such issuer) and (ii) not more
than 25%
of the value of its assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other regulated
investment companies); or two or more issuers which the Fund controls and
which
are determined to be engaged in the same or similar trades or businesses;
or the
securities of certain publicly traded partnerships.
Under
the Code, a
nondeductible excise tax of 4% is imposed on the excess of a regulated
investment company’s “required distribution” for the calendar year ending within
the regulated investment company’s taxable year over the “distributed amount”
for such calendar year. The term “required distribution” means the sum of (i)
98% of ordinary income (generally net investment income) for the calendar
year,
(ii) 98% of capital gains (both long-term and short-term) for the one-year
period ending on October 31 (as though the one-year period ending on October
31
was the regulated investment company’s taxable year), and (iii) the sum of any
untaxed, undistributed net investment income and net capital gains of the
regulated investment company for prior periods. The term “distributed amount”
generally means the sum of (i) amounts actually distributed by the Fund
from its
current year’s ordinary income and capital gain net income and (ii) any amount
on which the Fund pays income tax during the periods described above. Although
the Fund intends to distribute its net investment income and net capital
gains
so as to avoid excise tax liability, the Fund may determine that it is
in the
interest of the shareholders to distribute a lesser amount.
The
following
information may not apply to you if you hold fund shares in a tax-exempt
or a
tax deferred account, such as a qualified plan. Please see your tax adviser
for
more information.
Dividends
and Capital Gain Distributions
The
Fund will
generally distribute dividends and realized net gains, if any, to shareholders
annually. Shareholders may elect to reinvest dividends and/or capital gain
distributions to purchase additional shares of the Fund or shareholders
may
elect to receive them in cash. You may request a change in your election
at any
time. If, however, you request a change in your election after the first
business day of a month in which the Fund will make a distribution and
officers
of the Fund determine, in their sole discretion, that the change is not
in the
best interest of the Fund or its shareholders, the change will not take
effect
until the first business day of the following month.
Distributions
of
investment company taxable income and net realized capital gains to shareholders
will be taxable whether received in shares or in cash, unless such shareholders
are exempt from taxation. Shareholders electing to receive distributions
in the
form of additional shares will have a cost basis for federal income tax
purposes
in each share so received equal to the net asset value of that share on
the
reinvestment date. Dividends and capital gain distributions by the Fund
to a
tax-deferred retirement plan account are not taxable currently.
Dividends:
The Fund intends to follow the practice of distributing substantially
all of its investment company taxable income, which includes any excess
of net
realized short-term gains over net realized long-term capital losses. Investment
company taxable income generally includes dividends, interest, net short-term
capital gains in excess of net long-term capital losses, and certain foreign
currency gains, if any, less expenses and certain foreign currency losses.
To
the extent the Fund invests in stock of domestic and certain foreign
corporations, it may receive “qualified dividends.” The Fund will designate the
amount of “qualified dividends” to its shareholders in a notice sent within 60
days of the close of its fiscal year and will report “qualified dividends” to
shareholders on Form 1099-DIV. Shareholders must satisfy certain holding
period
requirements to obtain any benefit of lower rates on "qualified
dividends."
Under
the Code,
gains or losses attributable to fluctuations in exchange rates that occur
between the time the Fund accrues receivables or liabilities denominated
in a
foreign currency and the time the Fund actually collects such receivables,
or
pays such liabilities, generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated in a foreign
currency and on disposition of certain futures contracts, forward contracts
and
options, gains or losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contract and
the
date of disposition are also treated as ordinary gains or losses. These
gains or
losses, referred to under the Code as “Section 988 gains or losses,” may
increase or decrease the amount of the Fund’s investment company taxable income
to be distributed to its shareholders as ordinary income.
In
the case of Fund
transactions involving futures contracts, certain foreign currency contracts
and
listed options on debt securities, currencies and certain futures contracts
and
broad-based stock indices, Code Section 1256 generally will require any
gain or
loss arising from the lapse, closing out or exercise of such positions
to be
treated as 60% long-term and 40% short-term capital gain or loss, regardless
of
the holding period, although foreign currency gains and losses (as discussed
above) arising from certain of these positions may be treated as ordinary
income
and loss. In addition, the Fund generally will be required to mark to market
(i.e., treat as sold for fair market value) each such position that it
holds at
the close of each taxable year (and, for excise tax purposes, on October
31 of
each calendar year).
Generally,
certain
hedging transactions that the Fund may undertake may result in “straddles” for
U.S. federal income tax purposes. The straddle rules under the Code may
affect
the character of gains or losses realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be required
to
be deferred under the straddle rules, rather than being taken into account
in
calculating the taxable income for the taxable year in which the losses
are
realized. The tax consequences to the Fund of hedging transactions are
not
entirely clear. The hedging transactions may increase the amount of ordinary
income and short-term capital gain realized by the Fund which is taxed
as
ordinary income when distributed to shareholders.
If
the Fund invests
in stock of certain passive foreign investment companies (“PFICs”), the Fund may
be subject to U.S. federal income taxation on a portion of any “excess
distribution” with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably
to each
day of the Fund’s holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year
of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral
deemed
to have resulted from the ownership of the foreign company’s stock. Any amount
of distribution or gain allocated to the taxable year of the distribution
or
disposition would be included in the Fund’s investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed
by
the Fund as a dividend to its shareholders.
To
avoid such tax
and interest, the Fund may be eligible to elect alternative tax treatments
with
respect to PFIC shares. Under an election that currently is available in
some
circumstances, the Fund would be required to include in its gross income
its
share of the earnings and profits of a PFIC on a current basis, regardless
of
whether distributions were received from the PFIC in a given year, and
such
earnings and profits will be recognized by the Fund as ordinary income
and/or
net capital gain, depending upon the source of the income generated by
the PFIC.
In addition, another election would treat these securities as sold on the
last
day of the Fund’s fiscal and excise tax years and recognize any gains for tax
purposes at that time. Under this election, deductions for losses are allowable
only to the extent of any prior recognized gains, and both gains and losses
will
be treated as ordinary income or loss. The Fund will be required to distribute
any resulting income, even though it has not sold the security and received
cash
to pay such distributions. Upon disposition of these securities, any gain
recognized is treated as ordinary income and loss is treated as ordinary
loss to
the extent of any prior recognized gain.
The
Fund may invest
in one or more other countries through vehicles organized under local laws.
For
U.S. federal income tax purposes, the vehicle used may be treated as a
controlled foreign corporation (“CFC”). The income and net capital gains of a
CFC will be includable in the investment company taxable income of the
Fund,
which the Fund must distribute to its shareholders. The Fund’s investment in any
CFC (or in two or more CFCs in which the Fund owns 20% or more of the voting
stock) may be treated as the security of one issuer for the purposes of
the 5%
and 25% limits of the diversification requirement.
A
portion of the
difference between the issue price of zero coupon securities and their
face
value (“original issue discount”) is considered to be income for the Fund each
year, even though the Fund will not receive cash interest payments from
these
securities. This original issue discount (imputed income) will comprise
a part
of the investment company taxable income of the Fund which must be distributed
to shareholders in order to maintain the qualification of the Fund as a
regulated investment company and to avoid federal income taxation at the
level
of the Fund.
In
addition, some
of the bonds may be purchased by the Fund at a discount that exceeds the
original issue discount on such bonds, if any. This additional discount
represents market discount for federal income tax purposes. The gain realized
on
the disposition of any bond having a market discount may be treated as
taxable
ordinary income to the extent it does not exceed the accrued market discount
on
such bond or a fund may elect to include the market discount in income
in tax
years to which it is attributable. Generally, accrued market discount may
be
determined under either the ratable accrual method or constant interest
method.
If the Fund has paid a premium over the face amount of a bond, the Fund
has the
option of either amortizing the premium until bond maturity and reducing
the
Fund’s basis in the bond by the amortized amount, or not amortizing and treating
the premium as part of the bond’s basis. In the case of any debt security having
a fixed maturity date of not more than one year from its date of issue,
the gain
realized on disposition generally will be treated as a short-term capital
gain.
In general, any gain realized on disposition of a security held less than
one
year is treated as a short-term capital gain.
Dividend
and
interest income received by the Fund from sources outside the U.S. may
be
subject to withholding and other taxes imposed by such foreign jurisdictions.
Tax conventions between certain countries and the U.S., however, may reduce
or
eliminate these foreign taxes. Some foreign countries impose taxes on capital
gains with respect to investments by foreign investors.
Capital
Gain Distributions:
The
Fund also
intends to follow the practice of distributing the entire excess of net
realized
long-term capital gains over net realized short-term capital losses. Net
capital
gains for a fiscal year are computed by taking into account any capital
loss
carry-forward of the Fund.
The
taxation of
equity options (including options on narrow-based stock indices) and
over-the-counter options on debt securities is governed by Code Section
1234.
Pursuant to Code Section 1234, the premium received by the Fund for selling
a
put or call option is not included in income at the time of receipt. If
the
option expires, the premium is short-term capital gain to the Fund. If
the Fund
enters into a closing transaction, the difference between the amount paid
to
close out its position and the premium received is short-term capital gain
or
loss. If a call option written by the Fund is exercised, thereby requiring
the
Fund to sell the underlying security, the premium will increase the amount
realized upon the sale of such security and any resulting gain or loss
will be
long-term or short-term depending upon the holding period of the security.
With
respect to a put or call option that is purchased by the Fund, if the option
is
sold, any resulting gain or loss will be a capital gain or loss, and will
be
short-term or long-term depending upon the holding period of the option.
If the
option expires, the resulting loss is a capital loss and is short-term
or
long-term depending upon the holding period of the option. If the option
is
exercised, the cost of the option, in the case of a call option, is added
to the
basis of the purchased security and, in the case of a put option, reduces
the
amount realized on the underlying security in determining gain or
loss.
Under
certain
circumstances, the Fund may recognize gain from a constructive sale of
an
“appreciated financial position” it holds if it enters into a short sale,
forward contract or other transaction that substantially reduces both the
risk
of loss and the opportunity for gain with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but would not
recognize
any loss) from the constructive sale. The character of gain from a constructive
sale would depend on the Fund’s holding period in the property. Loss from a
constructive sale would be recognized when the property was subsequently
disposed of, and its character would depend on the Fund’s holding period and the
application of various loss deferral provisions of the Code. Constructive
sale
treatment does not apply to transactions closed in the 90-day period ending
with
the 30
th
day after the
close of the taxable year, if certain conditions are met.
If
any net
long-term capital gains in excess of net short-term capital losses are
retained
by the Fund for reinvestment, requiring federal income taxes to be paid
thereon
by the Fund, the Fund will treat such capital gains as having been distributed
to shareholders. As a result, each shareholder will report such capital
gains as
long-term capital gains taxable to individual shareholders at a maximum
15%
capital gains rate, will be able to claim a pro rata share of federal income
taxes paid by the Fund on such gains as a credit against personal federal
income
tax liability, and will be entitled to increase the adjusted tax basis
on fund
shares by the difference between a pro rata share of the retained gains
and such
shareholder’s related tax credit.
Shareholder
Taxation
In
January of each
year, individual shareholders holding Fund shares in taxable accounts will
receive a statement of the federal income tax status of all distributions.
Shareholders of the Fund also may be subject to state and local taxes on
distributions received from the Fund.
Dividends:
Fund
dividends are
taxable to shareholders as ordinary income. Under the Jobs and Growth Tax
Relief
Reconciliation Act of 2003, all or a portion of a Fund’s dividend distribution
may be a “qualified dividend." Dividends received by the Fund that are passed
through to Fund shareholders will be deemed to be a qualified dividend
distribution if they are derived from qualified dividends and the Fund
meets
certain holding period requirements. Interest income from bonds and money
market
instruments and nonqualified foreign dividends will generally be distributed
to
shareholders as nonqualified fund dividends. The Fund will report on Form
1099-DIV the amount of each shareholder’s dividend that may be treated as a
“qualified dividend.” If a shareholder meets the requisite holding period
requirement, “qualified dividends” are taxable at a maximum tax rate of
15%.
Capital
Gains:
Distributions
of
the excess of net long-term capital gains over net short-term capital losses
that the Fund properly designates as “capital gain dividends” generally will be
taxable as long-term gain. Regardless of the length of time the shares
of the
Fund have been held by individual shareholders, a capital gain distribution
by
the Fund is subject to a maximum rate of 15%. Any loss realized upon the
redemption of shares held at the time of redemption for six months or less
from
the date of their purchase will be treated as a long-term capital loss
to the
extent of any amounts treated as distributions of long-term capital gains
during
such six-month period.
Distributions
by
the Fund result in a reduction in the net asset value of the Fund’s shares.
Investors should consider the tax implications of buying shares just prior
to a
distribution.
The
price of shares
purchased at that time includes the amount of the forthcoming distribution.
Those
purchasing just prior to a distribution will subsequently receive a partial
return of their investment capital upon payment of the distribution, which
will
be taxable to them.
The
Fund may make
the election permitted under Section 853 of the Code so that shareholders
may
(subject to limitations) be able to claim a credit or deduction on their
federal
income tax returns for, and will be required to treat as part of the amounts
distributed to them, their pro rata portion of qualified taxes paid by
the Fund
to foreign countries (such taxes relate primarily to investment income).
The
Fund may make an election under Section 853 of the Code, provided that
more than
50% of the value of the total assets of the Fund at the close of the taxable
year consists of securities of foreign corporations. The foreign tax credit
available to shareholders is subject to certain limitations imposed by
the
Code.
Redemptions
of
shares may result in federal, state and local tax consequences (gain or
loss) to
the shareholder. Any loss realized on a redemption or exchange of shares
of the
Fund will be disallowed to the extent substantially identical shares are
reacquired within the 61-day period beginning 30 days before and ending
30 days
after the shares are disposed of.
The
Fund will be
required to report to the IRS all distributions of investment company taxable
income and capital gains as well as gross proceeds from the redemption
or
exchange of Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code,
distributions of investment company taxable income and capital gains and
proceeds from the redemption or exchange of a regulated investment company
may
be subject to withholding of federal income tax in the case of non-exempt
U.S.
shareholders who fail to furnish the investment company with their taxpayer
identification numbers and with required certifications regarding their
status
under the federal income tax law. Withholding may also be required if the
Fund
is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions
are
applicable, any such distributions and proceeds, whether taken in cash
or
reinvested in additional shares, will be reduced by the amounts required
to be
withheld.
The
foregoing
discussion of U.S. federal income tax law relates solely to the application
of
that law to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates). Each shareholder who is
not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder
may be
subject to a U.S. withholding tax at a rate of 30% (or a lower rate under
an
applicable income tax treaty) on dividend income received by the
shareholder.
Shareholders
should
consult their tax advisers about the application of federal, state and
local tax
law in light of their particular situation.
FINANCIAL
STATEMENTS
The
Fund’s audited
financial statements, including the related notes thereto, dated June 30,
2006, are incorporated by reference in the statement of additional information
from the Fund's annual report dated as of June 30, 2006.
PART
C:
OTHER
INFORMATION
Item
23
.
E
xhibits
(a)
(1)
Amended and
Restated Articles of Incorporation of Emerging Markets Growth Fund,
Inc.
1
(2)
Articles
Supplementary, effective January 12, 2007
(3)
Articles of
Amendment, effective January 12, 2007
(4)
Articles of
Amendment, effective January 15, 2007
(b)
Amended
By-Laws of
Emerging Markets Growth Fund, Inc.
2
(c)
Amended
Specimen
Certificate of Common Stock.
(d)
Investment
Advisory
and Service Agreement.
1
(e)
Not
Applicable.
(f)
Directors’
Deferred
Compensation Plan
(g)
(1)
Form of Custody
Agreement
1
(2)
Form of
Sub-Custody Agreement
1
(3)
Form of Global
Custody Agreement
1
(4)
Form of
Supplemental Custody Agreement
3
(h)
(1)
Form of
Securities Lending Agreement
1
(2)
Form of
Transfer Agent Agreement
1
(3)
Amended and
Restated Shareholder Services Agreement
4
(i)
Opinion
and Consent
of Counsel
5
(j)
Consent
of
Independent Public Accountants
(k)
Not
Applicable.
(l)
Not
Applicable.
(m)
Not
Applicable.
(n)
Not
Applicable.
(o)
Not
Applicable.
(p)
(1)
Code of Ethics
of Emerging Markets Growth Fund, Inc.
3
(2)
Code of Ethics
of The Capital Group Companies
1
Previously
filed.
Please see SEC File No. 811-4692.
2
Previously
filed as
an exhibit to Post-Effective Amendment No. 10 to Registration Statement
dated
August 29, 2006.
3
Previously filed
as an exhibit to Post-Effective Amendment No. 9 to Registration Statement
dated
August 29, 2005.
4
Previously filed
as an exhibit to Post-Effective Amendment No. 1 to Registration Statement
dated
August 24, 1999.
5
Previously filed
as an exhibit to Post-Effective Amendment No. 5 to Registration Statement
dated
August 28, 2002.
Item
24.
Persons
Controlled By or Under Common Control with Registrant
None.
Item
25.
Indemnification
The
Registrant is a
joint-insured under Investment Adviser/Mutual Fund Errors and Omissions
Policies, which insure its officers and directors against certain liabilities.
However, in no event will Registrant maintain insurance to indemnify
any such
person for any act for which Registrant itself is not permitted to
indemnify the
individual.
Section
2-418 of
the General Corporation Law of the State of Maryland, the State in
which the
Registrant was organized, empowers a corporation, subject to certain
limitations, to indemnify its directors and officers against expenses
(including
attorneys' fees, judgments, fines, and certain settlements) actually
and
reasonably incurred by them in connection with any suit or proceeding
to which
they was or are a party or are threatened to be made a party so long
as they
acted in good faith and in a manner reasonably believed to be in, or
not opposed
to, the best interests of the corporation, and, with respect to a criminal
action or proceeding, so long as they had no reasonable cause to believe
their
conduct to have been unlawful.
Article
6 of the
Registrant’s By-Laws provides:
|
|
(a)
|
Each
director
and each officer of the Corporation shall be indemnified
by the
Corporation to the fullest extent and in the manner provided
by Maryland
law and the Investment Company Act of 1940 (if applicable),
as they may be
amended. Indemnification may be against judgments, penalties,
fines,
settlements, and reasonable expenses actually incurred by
the director or
officer in connection with any proceeding. However, if the
proceeding was
one by or in the right of the Corporation, indemnification
may not be made
in respect of any proceeding in which the director or officer
shall have
been adjudged to be liable to the
Corporation.
|
In
the event of a
settlement, the indemnification shall be made only upon approval by
the court
having jurisdiction or upon determination by the Board of Directors
that such
settlement was or, if still to be made, is in the best interests of
the
Corporation. If the determination is to be made by the Board of Directors,
it
may rely as to all questions of law on the advice of general counsel
of the
Corporation, if such counsel is not involved therein or, if involved,
then on
the advice of independent counsel. The right of indemnification hereby
provided
shall be in addition to any other rights to which any director or officer
may be
entitled.
|
|
(b)
|
The
Corporation may purchase and maintain insurance on behalf
of any person
who is or was a director or officer of the Corporation or
who, while a
director or officer of the Corporation, is or was serving
at the request
of the Corporation as a director, officer, partner or trustee
of another
foreign or domestic corporation, partnership, joint venture,
trust, other
enterprise, or employee benefit plan, against any liability
asserted
against and incurred by such person in any such capacity
or arising out of
such person's position; provided, that no insurance may be
purchased which
would indemnify any director or officer of the Corporation
against any
liability to the Corporation or to its stockholders to which
he would
otherwise be subject by reason of willful misfeasance, bad
faith, gross
negligence or reckless disregard of the duties involved in
the conduct of
his office.
|
Item
26.
Business
and Other Connections of Investment Advisers and Their Officers and
Directors.
For
information
relating to the investment adviser’s officers and directors, reference is made
to Form ADV filed under the Investment Advisers Act of 1940 by Capital
International, Inc.
Item
27.
Principal
Underwriters
Not
Applicable.
Item
28.
Location
of
Accounts and Records
Accounts,
books and
other records required by Rule 31a-1 and 31a-2 under the Investment
Company Act
of 1940, as amended, are maintained and kept in the offices of the
Registrant’s
investment adviser, Capital International, Inc. at 11100 Santa Monica
Boulevard,
15th Floor, Los Angeles, CA 90025 and 333 S. Hope Street, Los Angeles,
CA 90071.
Certain accounting records are maintained and kept in the offices of
Registrant’s accounting department, 135 South State College Boulevard, Brea, CA
92821.
Records
covering
shareholder accounts are maintained and kept by the transfer agent,
American
Funds Service Company, 135 South State College Boulevard, Brea, CA
92821.
Records
covering
portfolio transactions are maintained and kept by the Registrant’s custodian,
JPMorgan Chase Bank, 270 Park Avenue, New York, NY 10017-2070.
Item
29.
Management
Services
Not
Applicable.
Item
30.
Undertakings
Not
Applicable.
Signatures
Pursuant
to the
requirements of the Securities Act of 1933 and the Investment Company
Act of
1940, the Registrant certifies that it meets all of the requirements
for
effectiveness of this registration statement under Rule 485(b) under
the
Securities Act of 1933 and has duly caused this registration statement
to be
signed on its behalf by the undersigned, duly authorized, in the City
of Los
Angeles, and State of California on the 17th day of January, 2007.
EMERGING
MARKETS
GROWTH FUND, INC.
By:
Shaw B.
Wagener
/s/
Shaw B.
Wagener
Shaw
B.
Wagener
President
and Chief
Executive Officer
Pursuant
to the
requirements of the Securities Act of 1933, this registration statement
has been
signed below on January 17, 2007 by the following persons in the capacities
indicated.
|
Signature
|
Title
|
|
|
|
(1)
Principal
Executive Officer:
|
|
|
Shaw
B.
Wagener
|
|
|
/s/
Shaw B.
Wagener
|
President
and
|
|
Shaw
B.
Wagener
|
Chief
Executive Officer
|
|
|
|
|
(2)
Principal
Financial Officer and
|
|
|
Principal
Accounting Officer:
|
|
|
|
|
|
Michael
A.
Felix
|
|
|
/s/
Michael
A. Felix
|
Vice
President
|
|
Michael
A.
Felix
|
and
Treasurer
|
|
|
|
|
(3)
Directors:
|
|
|
Paul
N.
Eckley*
|
Director
|
|
David
I.
Fisher*
|
Director
|
|
Beverly
L.
Hamilton*
|
Director
|
|
Raymond
Kanner*
|
Director
|
|
Victor
D.
Kohn*
|
Director
|
|
L.
Erik
Lundberg*
|
Director
|
|
Helmut
Mader*
|
Director
|
|
William
Robinson*
|
Director
|
|
Michael
L.
Ross*
|
Director
|
|
Aje
K.
Saigal*
|
Director
|
|
Shaw
B.
Wagener*
|
Director
|
|
|
|
|
*By:
/s/
Shaw B.
Wagener
|
|
|
Shaw
B.
Wagener, Attorney-in-Fact
|
|
Counsel
represents
that the amendment does not contain disclosures that would make the
amendment
ineligible for effectiveness under the provisions of Rule 485(b).
/s/
Nelson N.
Lee
Nelson
N.
Lee