UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21770
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SunAmerica Focused Alpha Growth Fund, Inc.
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(Exact name of registrant as specified in charter)
Harborside Financial Center, 3200 Plaza 5 Jersey City, NJ 07311
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(Address of principal executive offices) (Zip code)
Vincent M. Marra
Senior Vice President
AIG SunAmerica Asset Management Corp.
Harborside Financial Center,
3200 Plaza 5
Jersey City, NJ 07311
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(Name and address of agent for service)
Registrant's telephone number, including area code: (201) 324-6464
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Date of fiscal year end: December 31
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Date of reporting period: December 31, 2006
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Item 1. Reports to Stockholders
SUNAMERICA FOCUSED ALPHA GROWTH FUND
THOMAS F. MARSICO PHOTO RONALD BARON PHOTO
[MARSICO CAPITAL MANAGEMENT, LLC LOGO] [BARON LOGO]
2006 ANNUAL REPORT
[AIG SUNAMERICA MUTUAL FUNDS LOGO]
DECEMBER 31, 2006 ANNUAL REPORT
SUNAMERICA FOCUSED ALPHA GROWTH FUND
SUNAMERICA FOCUSED ALPHA GROWTH FUND (FGF)
TABLE OF CONTENTS
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SHAREHOLDERS' LETTER........................................ 1
STATEMENT OF ASSETS AND LIABILITIES......................... 3
STATEMENT OF OPERATIONS..................................... 4
STATEMENT OF CHANGES IN NET ASSETS.......................... 5
FINANCIAL HIGHLIGHTS........................................ 6
PORTFOLIO OF INVESTMENTS.................................... 7
NOTES TO FINANCIAL STATEMENTS............................... 9
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM............ 15
BOARD OF DIRECTORS APPROVAL OF INVESTMENT ADVISORY AND
MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENTS........... 16
DIVIDEND REINVEST AND CASH PURCHASE PLAN.................... 20
ANNUAL SHAREHOLDER MEETING.................................. 22
DIRECTORS AND OFFICERS INFORMATION.......................... 23
SHAREHOLDER TAX INFORMATION................................. 26
December 31, 2006 ANNUAL REPORT
SHAREHOLDERS' LETTER
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Dear Shareholders:
We are pleased to present the annual report for the SunAmerica Focused
Alpha Growth Fund for the year ended December 31, 2006 and thank you for
including this strategic investment solution in your investment plan.
In the year ended December 31, 2006, the SunAmerica Focused Alpha Growth
Fund's Net Asset Value (NAV) returned 17.4%, outperforming its benchmark,
the Russell 3000 Growth Index(1), which returned 9.5% for the same period.
The Fund's market price returned 23.7% during the same period. As of
December 31, 2006, the Fund's NAV was $21.68 and its market share price
was $19.74.
The past twelve months have been a volatile period for the equity markets.
The first half brought sluggish returns due to sharply-rising oil prices,
higher interest rates, and a significant slowdown in the U.S. housing
markets. Over the summer, in the face of weaker growth, the Federal Open
Market Committee (FOMC) paused in its two-year campaign of money
tightening. The Federal Reserve decided not to raise interest rates, and
left its bell-wether federal funds target rate at 5.25% through year-end.
The equity markets began to stage recoveries, and, as the remainder of the
year unfolded, interest rates declined, oil prices fell substantially,
inflation expectations waned and corporate profits remained at attractive
levels.
Around mid-year, the equity markets experienced a change in leadership
from small-cap, lower-quality, more cyclical stocks to larger-cap,
higher-quality, more predictable securities. Robust gains in the third and
fourth quarters propelled large capitalization indexes to strong returns
for the 12-month period as a whole. Large-cap value stocks, as measured by
the Russell 1000 Value Index(2), outperformed large-cap growth stocks for
2006, as measured by the Russell 1000 Growth Index(3), by more than 13%.
The SunAmerica Focused Alpha Growth Fund invests in a small number of
equity securities that its managers believe are well-managed companies
with strong fundamentals, established business models and growth
potential. The Fund is unique in that it brings together two of Wall
Street's best known equity managers, blending large- and small/mid-cap
growth investing. Marsico Capital Management LLC and BAMCO, Inc. each
contribute their favorite stock picks. Marsico emphasizes large-cap growth
investing, while BAMCO's Ron Baron and his team focus on small- to mid-cap
growth companies.
We value your ongoing confidence in us and look forward to serving your
investment needs in the future.
Sincerely,
/s/ Peter A. Harbeck
Peter A. Harbeck
President and CEO
AIG SunAmerica Asset Management Corp.
------------------
(1) The Russell 3000 Growth Index measures the performance of those
Russell 3000 Index companies with higher price-to-book ratios and
higher forecasted growth values. The Russell 3000 Index consists of
the 3,000 largest United States ("U.S.") companies based on total
market capitalization.
(2) The Russell 1000 Value Index measures the performance of those Russell
1000 companies with lower price-to-book ratios and lower forecasted
growth values. The Russell 1000 Index is a comprehensive large-cap
index measuring the performance of the largest 1,000 U.S. incorporated
companies.
(3) The Russell 1000 Growth Index measures the performance of those
Russell 1000 companies with higher price-to-book ratios and higher
forecasted growth values. The Russell 1000 Index is a comprehensive
large-cap index measuring the performance of the largest 1,000 U.S.
incorporated companies.
Indices are not managed and an investor cannot invest directly into an
index.
1
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
FUND REVIEW (UNAUDITED)
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BELOW, TOM MARSICO AND TEAM PORTFOLIO MANAGERS AT MARSICO CAPITAL MANAGEMENT,
LLC ("MARSICO") DISCUSS THE FUND'S PERFORMANCE OVER THE REPORTING PERIOD.
MARSICO MANAGES THE LARGE-CAP GROWTH PORTION OF THE FUND'S PORTFOLIO.
Over the past year, uncertainty surrounding the Federal Reserve's actions
appeared to create both a worry that inflation was on the rise and a conflicting
worry that the economy was heading into a recession. This uncertainty dampened
the stock prices in a few different areas of investment, and was the primary
market condition affecting the large-cap growth portion of the Fund's
performance.
Overall, stock selection had the largest impact on the large-cap growth portion
of the Fund's performance. This is in keeping with our focused investing
strategy. A position in Las Vegas Sands was the largest contributor in the
period. Other strong performers included Comcast, Cisco Systems and Goldman
Sachs Group. We also locked in gains from positions in UBS AG and the Chicago
Mercantile Exchange, both of which were sold during the reporting period. On the
flip side, holdings in Genentech and UnitedHealth Group limited performance, as
did Apple Computer, QUALCOMM and Lowe's Companies, all three prior to being
sold.
Although industry and sector allocations are a minor consideration compared to
our belief in the stories behind the companies that are owned in the portfolio,
the Fund did benefit by a significant overweight in the Consumer Discretionary
and Diversified Financials industry groups, both of which were strong-performing
areas of investment during the reporting period. Performance was also enhanced
by an underweight in the Software & Services group, which proved to be a
relatively weak-performing area of investment. On the flip side, performance was
tempered by the Fund's lack of exposure to the Telecommunications Services
sector.
BELOW, RON BARON AND TEAM PORTFOLIO MANAGERS AT BAMCO, INC. DISCUSS THE FUND'S
PERFORMANCE OVER THE REPORTING PERIOD. BAMCO INC. MANAGES THE SMALL/MID-CAP
PORTION OF THE FUND'S PORTFOLIO.
We look for companies that have sustainable competitive advantages, strong
financial characteristics and great management teams. Among the top performers
in the small/mid-cap segment of the Fund's portfolio over the reporting period
were shares of Four Seasons Hotel. The latter's stock was up significantly in
2006, mainly due to investor excitement over the opening of the first phase of
the company's $1.2 billion Macau casino. The Fund also benefited from its stock
in First Marblehead, which provides services to financial institutions
participating in the rapidly growing private student loan market. A position in
Encore Acquisition suffered with the drop in natural gas prices and a flattening
in the price of oil, however. Another poor performer was ChoicePoint, whose
shares fell due to concerns over the long-term profit potential in its marketing
and government services segment.
---------------------
Investors should carefully consider the SunAmerica Focused Alpha Growth Fund's
investment objective, strategies, risks, charges and expenses before investing.
The SunAmerica Focused Alpha Growth Fund should be considered as only one
element of a complete investment program. The Fund's equity exposure and
derivative investments involve special risks. An investment in this Fund should
be considered speculative. There is no assurance that the SunAmerica Focused
Alpha Growth Fund will achieve its investment objectives. The Fund is actively
managed and its portfolio composition will vary. Investing in the Fund is
subject to several risks, including: Non-Diversified Status Risk, Growth and
Value Stock Risk, Key Adviser Personnel Risk, Investment and Market Risk, Issuer
Risk, Foreign Securities Risk, Emerging Markets Risk, Income Risk, Hedging
Strategy Risk, Derivatives Risk, Preferred Securities Risk, Debt Securities
Risk, Small and Medium Capitalization Company Risk, Leverage Risk, Liquidity
Risk, Market Price of Shares Risk, Management Risk, Anti-Takeover Provisions
Risk, Portfolio Turnover Risk and Non-Investment Grade Securities Risk. The
price of shares of the Fund traded on the New York Stock Exchange will fluctuate
with market conditions and may be worth more or less than their original
offering price. Shares of closed-end funds often trade at a discount to their
net asset value, but may also trade at a premium.
2
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 2006
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ASSETS:
Long-term investment securities, at value (unaffiliated)*... $411,917,858
Short-term investment securities, at value
(unaffiliated)*........................................... 29,806,000
------------
Total investments......................................... 441,723,858
------------
Cash........................................................ 1,223
Receivable for:
Dividends and interest.................................... 178,363
Prepaid expenses and other assets........................... 4,824
------------
Total assets.............................................. 441,908,268
------------
LIABILITIES:
Payable for:
Investment advisory and management fees................... 381,552
Directors' fees and expenses.............................. 1,271
Administration fees....................................... 15,260
Other accrued expenses.................................... 174,889
------------
Total liabilities......................................... 572,972
------------
Net Assets.............................................. $441,335,296
============
NET ASSETS REPRESENTED BY:
Common stock, $0.001 par value (200,000,000 shares
authorized)............................................... $ 20,355
Additional paid-in capital.................................. 365,510,187
------------
365,530,542
Accumulated undistributed net investment income (loss)
(unaffiliated)............................................ --
Accumulated undistributed net realized gain (loss) on
investments (unaffiliated)................................ --
Unrealized appreciation (depreciation) on investments
(unaffiliated)............................................ 75,804,776
Unrealized foreign exchange gain (loss) on other assets and
liabilities............................................... (22)
------------
Net Assets.............................................. $441,335,296
============
NET ASSET VALUES
Net assets.................................................. $441,335,296
Shares outstanding.......................................... 20,355,236
Net asset value per share................................... $ 21.68
============
*Cost
Long-term investment securities (unaffiliated)............ $336,113,082
============
Short-term investment securities (unaffiliated)........... $ 29,806,000
============
See Notes to Financial Statements
3
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
STATEMENT OF OPERATIONS -- FOR THE PERIOD ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends (unaffiliated).................................... $ 3,412,693
Interest (unaffiliated)..................................... 1,524,811
-----------
Total investment income*................................ 4,937,504
-----------
EXPENSES:
Investment advisory and management fees..................... 4,147,050
Administration fees......................................... 165,880
Transfer agent fees and expenses............................ 23,853
Custodian and accounting fees............................... 93,376
Reports to shareholders..................................... 161,252
Audit and tax fees.......................................... 27,108
Legal fees.................................................. 91,723
Directors' fees and expenses................................ 35,418
Other expenses.............................................. 40,066
-----------
Total expenses before custody credits..................... 4,785,726
Custody credits earned on cash balances................... (994)
Fees paid indirectly (Note 4)............................. (9,524)
-----------
Net expenses.............................................. 4,775,208
-----------
Net investment income (loss)................................ 162,296
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCIES:
Net realized gain (loss) on investments (unaffiliated)...... 12,702,549
Net realized foreign exchange gain (loss) on other assets
and liabilities........................................... (58)
-----------
Net realized gain (loss) on investments and foreign
currencies................................................ 12,702,491
-----------
Change in unrealized appreciation (depreciation) on
investments (unaffiliated)................................ 54,090,024
Change in unrealized foreign exchange gain (loss) on other
assets and liabilities.................................... (11)
-----------
Net unrealized gain (loss) on investments and foreign
currencies................................................ 54,090,013
-----------
Net realized and unrealized gain (loss) on investments and
foreign currencies........................................ 66,792,504
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS................................................ $66,954,800
===========
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* Net of foreign withholding taxes on interest and dividends
of........................................................ $ 2,166
===========
See Notes to Financial Statements
4
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
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FOR THE PERIOD
FOR THE JULY 29, 2005@
YEAR ENDED THROUGH
DECEMBER 31, 2006 DECEMBER 31, 2005
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income (loss).............................. $ 162,296 $ (452,306)
Net realized gain (loss) on investments and foreign
currencies.............................................. 12,702,491 (249,038)
Net unrealized gain (loss) on investments and foreign
currencies.............................................. 54,090,013 21,714,741
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ 66,954,800 21,013,397
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... (162,238) --
Net realized gain on securities........................... (12,678,584) --
Return of capital......................................... (11,585,461) (10,177,618)
------------ ------------
Total distributions to shareholders......................... (24,426,283) (10,177,618)
------------ ------------
SHARE TRANSACTIONS (NOTE 8):
Proceeds from sales of shares issued in initial public
offering................................................ -- 353,350,000
Proceeds from the underwriters' over-allotment option of
common shares exercised................................. -- 35,335,000
Offering costs for common shares charged to additional
paid-in capital......................................... -- (814,000)
------------ ------------
Net increase in net assets from share transactions.......... -- 387,871,000
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS..................... 42,528,517 398,706,779
NET ASSETS:
Beginning of period......................................... 398,806,779 100,000
------------ ------------
End of period+.............................................. $441,335,296 $398,806,779
============ ============
------------
+ Includes accumulated undistributed net investment income
(loss).................................................. $ -- $ --
============ ============
@ Commencement of operations
See Notes to Financial Statements
5
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE JULY 29, 2005++
YEAR ENDED THROUGH
DECEMBER 31, 2006 DECEMBER 31, 2005
----------------- -----------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 19.59 $ 19.10(1)
INVESTMENT OPERATIONS:
Net investment income (loss)@............................... 0.01 (0.02)
Net realized and unrealized gain (loss) on investments...... 3.28 1.05
-------- --------
Total from investment operations.......................... 3.29 1.03
-------- --------
DISTRIBUTIONS FROM:
Net investment income....................................... (0.01) --
Net realized gains.......................................... (0.62) --
Return of capital........................................... (0.57) (0.50)
-------- --------
Total distributions....................................... (1.20) (0.50)
CAPITAL SHARE TRANSACTIONS:
Offering costs for common shares charged to additional
paid-in capital........................................... -- (0.04)
-------- --------
NET ASSET VALUE, END OF PERIOD.............................. $ 21.68 $ 19.59
======== ========
NET ASSET VALUE TOTAL RETURN(2)#............................ 17.37% 5.27%
MARKET VALUE, END OF PERIOD................................. $ 19.74 $ 17.03
MARKET VALUE TOTAL RETURN(3)#............................... 23.65% (12.42)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000's).......................... $441,335 $398,807
Ratio of expenses to average net assets..................... 1.16% 1.17%+
Ratio of net investment income (loss) to average net
assets.................................................... 0.04% (0.28)%+
Portfolio turnover rate..................................... 55% 28%
------------
++ Commencement of operations
@ Calculated based upon average shares outstanding
# Total return is not annualized.
+ Annualized
(1) Net asset value, beginning of period, reflects a deduction of $0.90 per
share sales charge from the initial offering price of $20.00.
(2) Based on net asset value per share, dividends and distributions, if any,
are assumed for purposes of this calculation to be reinvested at prices
obtained under the Fund's dividend reinvestment plan. NAV performance
reflects performance without imposition of initial sales charge in
connection with the initial public offering of the Fund and would be lower
if included.
(3) Based on market value per share, dividends and distributions, if any, are
assumed for purposes of this calculation to be reinvested at prices
obtained under the Fund's dividend reinvestment plan.
See Notes to Financial Statements
6
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
PORTFOLIO PROFILE -- DECEMBER 31, 2006 -- (UNAUDITED)
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INDUSTRY ALLOCATION*
Casino Hotels............................................. 13.4%
Cable TV.................................................. 10.8
Medical-HMO............................................... 10.1
Aerospace/Defense......................................... 8.6
Time Deposit.............................................. 6.8
Transport-Rail............................................ 6.8
Finance-Investment Banker/Broker.......................... 5.9
Medical-Biomedical/Gene................................... 4.9
Networking Products....................................... 4.9
Building-Residential/Commercial........................... 3.3
Hotels/Motels............................................. 2.8
Retail-Sporting Goods..................................... 2.8
Investment Management/Advisor Services.................... 2.7
Schools................................................... 2.2
Electric-Transmission..................................... 1.9
Medical-Nursing Homes..................................... 1.7
Data Processing/Management................................ 1.6
Transport-Services........................................ 1.5
Medical Instruments....................................... 1.3
Casino Services........................................... 1.2
Commercial Services....................................... 1.2
Retail-Automobile......................................... 1.2
Oil Companies-Exploration & Production.................... 1.0
Insurance-Reinsurance..................................... 0.8
Finance-Consumer Loans.................................... 0.7
-----
100.1%
=====
------------
* Calculated as a percentage of Net Assets
7
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2006
--------------------------------------------------------------------------------
VALUE
SECURITY DESCRIPTION SHARES (NOTE 2)
---------------------------------------------------------------------
COMMON STOCK -- 93.3%
AEROSPACE/DEFENSE -- 8.6%
General Dynamics Corp. ........... 282,790 $ 21,025,436
Lockheed Martin Corp. ............ 186,326 17,155,035
------------
38,180,471
------------
BUILDING-RESIDENTIAL/COMMERCIAL -- 3.3%
Lennar Corp., Class A............. 281,574 14,771,372
------------
CABLE TV -- 10.8%
Comcast Corp., Class A+........... 1,128,162 47,755,097
------------
CASINO HOTELS -- 13.4%
Boyd Gaming Corp. ................ 250,000 11,327,500
Las Vegas Sands Corp.+............ 331,133 29,629,781
Wynn Resorts, Ltd.+............... 195,000 18,300,750
------------
59,258,031
------------
CASINO SERVICES -- 1.2%
Scientific Games Corp., Class
A+.............................. 180,000 5,441,400
------------
COMMERCIAL SERVICES -- 1.2%
ChoicePoint, Inc.+................ 140,000 5,513,200
------------
DATA PROCESSING/MANAGEMENT -- 1.6%
SEI Investments Co. .............. 115,000 6,849,400
------------
ELECTRIC-TRANSMISSION -- 1.9%
ITC Holdings Corp. ............... 215,000 8,578,500
------------
FINANCE-CONSUMER LOANS -- 0.7%
The First Marblehead Corp. ....... 60,000 3,279,000
------------
FINANCE-INVESTMENT BANKER/BROKER --
5.9%
Goldman Sachs Group, Inc. ........ 89,633 17,868,339
Jefferies Group, Inc. ............ 300,000 8,046,000
------------
25,914,339
------------
HOTEL/MOTEL -- 2.8%
Four Seasons Hotels, Inc. ........ 150,000 12,298,500
------------
INSURANCE-REINSURANCE -- 0.8%
Axis Capital Holdings, Ltd. ...... 100,000 3,337,000
------------
INVESTMENT MANAGEMENT/ADVISOR
SERVICES -- 2.7%
Cohen & Steers, Inc. ............. 100,000 4,017,000
Nuveen Investments, Inc., Class
A............................... 150,000 7,782,000
------------
11,799,000
------------
MEDICAL INSTRUMENTS -- 1.3%
Edwards Lifesciences Corp.+....... 120,000 5,644,800
------------
MEDICAL-BIOMEDICAL/GENE -- 4.9%
Genentech, Inc.+.................. 264,675 21,473,083
------------
---------------------------------------------------------------------
SHARES/PRINCIPAL VALUE
SECURITY DESCRIPTION AMOUNT (NOTE 2)
MEDICAL-HMO -- 10.1%
Centene Corp.+.................... 150,000 $ 3,685,500
UnitedHealth Group, Inc. ......... 761,268 40,902,930
------------
44,588,430
------------
MEDICAL-NURSING HOMES -- 1.7%
Manor Care, Inc. ................. 160,000 7,507,200
------------
NETWORKING PRODUCTS -- 4.9%
Cisco Systems, Inc.+.............. 789,715 21,582,911
------------
OIL COMPANIES-EXPLORATION &
PRODUCTION -- 1.0%
Encore Acquisition Co.+........... 175,000 4,292,750
------------
RETAIL-AUTOMOBILE -- 1.2%
CarMax, Inc.+..................... 100,000 5,363,000
------------
RETAIL-SPORTING GOODS -- 2.8%
Dick's Sporting Goods, Inc.+...... 250,000 12,247,500
------------
SCHOOLS -- 2.2%
DeVry, Inc. ...................... 350,000 9,800,000
------------
TRANSPORT-RAIL -- 6.8%
Burlington Northern Santa Fe
Corp. .......................... 405,946 29,962,874
------------
TRANSPORT-SERVICES -- 1.5%
Expeditors International of
Washington, Inc. ............... 160,000 6,480,000
------------
TOTAL LONG-TERM INVESTMENT
SECURITIES
(cost $336,113,082)............... 411,917,858
------------
SHORT-TERM INVESTMENT
SECURITIES -- 6.8%
Time Deposits -- 6.8%
Euro Time Deposit with State
Street
Bank & Trust Co.
4.05% due 01/02/07
(cost $29,806,000).............. $29,806,000 29,806,000
------------
TOTAL INVESTMENTS
(cost $365,919,082)(1).............. 100.1% 441,723,858
Liabilities in excess of other
assets............................ (0.1) (388,562)
----------- ------------
NET ASSETS.......................... 100.0% $441,335,296
=========== ============
------------
+ Non-income producing securities
(1) See Note 6 for cost of investments on a tax basis
See Notes to Financial Statements
8
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006
--------------------------------------------------------------------------------
Note 1. Organization of the Fund
SunAmerica Focused Alpha Growth Fund, Inc. (the "Fund") is a non-diversified
closed-end management investment company. The Fund is traded on the New York
Stock Exchange ("NYSE") under the ticker symbol FGF. The Fund was organized
as a Maryland corporation on May 18, 2005 and is registered under the
Investment Company Act of 1940, as amended, (the "1940 Act"). The Fund sold
5,236 of its common stock shares ("Shares") on July 18, 2005 to AIG
SunAmerica Asset Management Corp. (the "Adviser" or "AIG SunAmerica"), an
indirect wholly-owned subsidiary of America International Group, Inc.
("AIG"). Investment operations commenced on July 29, 2005 upon settlement of
the sale of 18,500,000 shares in the amount of $353,350,000 (net of
underwriting fees and expenses of $16,650,000). In addition, on August 25,
2005 and September 13, 2005, the Fund issued 1,200,000 and 650,000 shares in
the amount of $22,920,000 and $12,415,000 (net of underwriting fees and
expenses of $1,080,000 and $585,000) in conjunction with the exercise of the
underwriters' over-allotment option. AIG SunAmerica paid certain
organizational expenses of the Fund and then offering costs of the Fund to
the extent they exceeded $.04 per share of the Fund's common stock.
The Fund's investment objective is to provide growth of capital. The Fund
seeks to pursue this objective by employing a concentrated stock picking
strategy in which the Fund, through subadvisers selected by the Adviser,
actively invests primarily in a small number of equity securities (i.e.,
common stocks) and to a lesser extent equity-related securities (i.e.,
preferred stocks, convertible securities, warrants and rights) primarily in
the U.S. markets.
INDEMNIFICATIONS: Under the Fund's organizational documents, its officers
and directors are indemnified against certain liability arising out of the
performance of their duties to the Fund. In addition, in the normal course
of business the Fund enters into contracts that may contain the obligation
to indemnify others. The Fund's maximum exposure under these arrangements is
unknown. Currently, however, the Fund expects the risk of loss to be remote.
Note 2. Significant Accounting Policies
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from these estimates. The
following is a summary of the significant accounting policies followed by
the Fund in the preparation of its financial statements:
SECURITY VALUATION: Stocks are generally valued based upon closing sales
prices reported on recognized securities exchanges. Stocks listed on the
NASDAQ are valued using the NASDAQ Official Closing Price ("NOCP").
Generally, the NOCP will be the last sale price unless the reported trade
for the stock is outside the range of the bid/ask price. In such cases, the
NOCP will be normalized to the nearer of the bid or ask price. For listed
securities having no sales reported and for unlisted securities, such
securities will be valued based upon the last reported bid price.
As of the close of regular trading on the NYSE, securities traded primarily
on security exchanges outside the U.S. are valued at the last sale price on
such exchanges on the day of valuation, or if there is no sale on the day of
valuation, at the last-reported bid price. If a security's price is
available from more than one exchange, the Fund uses the exchange that is
the primary market for the security. However, depending on the foreign
market, closing prices may be up to 15 hours old when they are used to price
the Fund's shares, and the Fund may determine that certain closing prices
are unreliable. This determination will be based on review of a number of
factors, including developments in foreign markets, the performance of U.S.
securities markets, and the performance of instruments trading in U.S.
markets that represent foreign securities and baskets of foreign securities.
If the Fund determines that closing prices do not reflect the fair value of
the securities, the Fund will adjust the previous closing prices in
accordance with pricing procedures approved by the Board of Directors (the
"Board" or the "Directors") to reflect what it believes to be the fair value
of the securities as of the close of regular trading on the NYSE. The Fund
may also fair value securities in other situations, for example, when a
particular foreign market is closed but the Fund is open. For foreign equity
securities, the Fund uses an outside pricing service to provide it with
closing market prices and information used for adjusting those prices.
9
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -- (CONTINUED)
--------------------------------------------------------------------------------
Short-term securities with 60 days or less to maturity are amortized to
maturity based on their cost to the Fund if acquired within 60 days of
maturity or, if already held by the Fund on the 60th day, are amortized to
maturity based on the value determined on the 61st day.
Securities for which market quotations are not readily available or where a
development/significant event occurs that may significantly impact the value
of the security, are fair valued, as determined pursuant to procedures
adopted in good faith by the Board of Directors.
REPURCHASE AGREEMENTS: For repurchase agreements, the Fund's custodian takes
possession of the collateral pledged for investments in repurchase
agreements. The underlying collateral is valued daily on a mark to market
basis to ensure that the value, including accrued interest, is at least 102%
of the repurchase price. In the event of default of the obligation to
repurchase, a Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. If the seller defaults and the
value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by
the Fund may be delayed or limited. At December 31, 2006, the Fund did not
enter into any repurchase agreements.
SECURITIES TRANSACTIONS, INVESTMENT INCOME, EXPENSES, DIVIDENDS AND
DISTRIBUTIONS TO SHAREHOLDERS: Security transactions are recorded on a trade
date basis. Realized gains and losses on sales of investments are calculated
on the identified cost basis. Interest income is accrued daily except when
collection is not expected. Dividend income is recorded on the ex-dividend
date except for certain dividends from foreign securities, which are
recorded as soon as the Fund is informed after the ex-dividend date. Foreign
income and capital gains may be subject to foreign withholding taxes and
capital gains taxes at various rates. Under applicable foreign law, a
withholding of tax may be imposed on interest, dividends, and capital gains
at various rates. Interest earned on cash balances held at the custodian are
shown as custody credits on the Statement of Operations.
The Fund has adopted a distribution policy (the "Distribution Policy") under
which the Fund will pay level quarterly dividend distributions, subject to
an adjusting dividend distribution in the fourth quarter as described below.
The Distribution Policy and the dividend distribution rate may be terminated
or modified at any time. The Fund intends to pay a level quarterly amount in
each of the first three quarters of the calendar year and increase, if
necessary, the amount payable for the fourth quarter to an amount expected
to satisfy the minimum distribution requirements of the Internal Revenue
Code of 1986, as amended (the "Code"), or as necessary to distribute
long-term capital gains in a manner consistent with the requirements of the
1940 Act, as amended, whichever is greater. Each quarter the Board of
Directors will review the amount of any potential dividend distribution and
the income, capital gains and capital available. A portion of the dividend
distribution may be treated as ordinary income (derived from short-term
capital gains) and qualifying dividend income for individuals. If the Fund
does not generate earnings from dividends, interest and net realized capital
gains equal to or in excess of the aggregate dividend distributions paid by
the Fund for the year, then the amount distributed in excess of the Fund's
investment income and net realized capital gains may be deemed a tax return
of capital. The final determination of the source of all dividend
distributions will be made after year-end. The Distribution Policy may,
under certain circumstances, have certain adverse consequences to the Fund
and its shareholder because it may result in a return of capital resulting
in less of a shareholder's assets being invested in the Fund and, over time,
increase the Fund's expense ratio. The Distribution Policy also may cause
the Fund to sell a security at a time it would not otherwise do so in order
to manage the distribution of income and/or gains.
The Fund intends to comply with the requirements of the Code, applicable to
regulated investment companies and distribute all of their taxable income,
including any net realized gain on investments, to its shareholders.
Therefore, no federal tax provisions are required.
On July 13, 2006, the Financial Accounting Standards Board ("FASB") released
FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes"
("FIN 48"). FIN 48 provides guidance for how uncertain tax positions should
be
10
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -- (CONTINUED)
--------------------------------------------------------------------------------
recognized, measured, presented and disclosed in the financial statements.
FIN 48 requires the evaluation of tax positions taken or expected to be
taken in the course of preparing the fund's tax returns to determine whether
the tax positions are "more-likely-than-not" of being sustained by the
applicable tax authority. Adoption of FIN 48 is required for fiscal years
beginning after December 15, 2006 and is to be applied to all open tax years
as of the effective date. However, Registered Investment Companies are not
required to implement FIN 48 until their last net asset value calculation in
the first required financial statement reporting period for fiscal years
beginning after December 15, 2006. At this time, management is evaluating
the implications of FIN 48 and its impact in the financial statements, if
any, has not yet been determined.
In September 2006, the FASB issued Statement on Financial Accounting
Standards No. 157, "Fair Value Measurements" ("FAS 157"). This standard
clarifies the definition of fair value for financial reporting, establishes
a framework for measuring fair value and requires additional disclosures
about the use of fair value measurements. FAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. As of December 31, 2006, the Fund
does not believe the adoption of FAS 157 will impact the amounts reported in
the financial statements, however, additional disclosures will be required
about the inputs used to develop the measurements of fair value.
FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Assets and liabilities denominated in foreign
currencies and commitments under forward foreign currency contracts are
translated into U.S. dollars based on the exchange rate of such currencies
against U.S. dollars on the date of the valuation. The Fund does not isolate
that portion of the results of operations arising as a result of changes in
the foreign exchange rates from the changes in the market prices of
securities held at the end of the year. Similarly, the Fund does not isolate
the effect of changes in foreign exchange rates from the changes in the
market prices of Fund securities sold during the year.
Change in unrealized foreign exchange gains and losses on other assets and
liabilities located in the Statement of Operations include foreign exchange
gains and losses from currency gains or losses between the trade and
settlement dates of securities transactions, the difference between the
amounts of interest, dividends and foreign withholding taxes recorded on a
Fund's books and the U.S. dollar equivalent amounts actually received or
paid and changes in the unrealized foreign exchange gains and losses
relating to other assets and liabilities arising as a result of changes in
the exchange rate.
Note 3. Investment Advisory and Management Agreement
Pursuant to its Investment Advisory and Management Agreement ("Advisory
Agreement") with the Fund, AIG SunAmerica manages the affairs of the Fund,
and selects, supervises and compensates the Subadvisers to manage the Fund's
assets. AIG SunAmerica monitors the compliance of the Subadvisers with the
investment objective and related policies of the Fund, reviews the
performance of the Subadvisers, and reports periodically on such performance
to the Directors. Pursuant to the Advisory Agreement, the Fund will pay AIG
SunAmerica a monthly fee at the annual rate of 1.00% of the average daily
total assets of the Fund.
AIG SunAmerica has engaged Marsico Capital Management, LLC ("Marsico"), a
wholly-owned subsidiary of Bank of America, and BAMCO, Inc. ("Baron"), a
wholly-owned subsidiary of Baron Capital Group, Inc., as Subadvisers to the
Fund to manage the investment and reinvestment of the Fund's assets.
Pursuant to the subadvisory agreements ("Subadvisory Agreements") among AIG
SunAmerica, the Fund and Marsico and Baron, respectively, Marsico and Baron
select the investments made by the Fund. Marsico will manage the large-cap
portion of the Fund and is entitled to receive a fee at the annual rate of
0.40% of the Fund's average daily total assets allocated to Marsico. Baron
will manage the small-and mid-cap portion of the Fund and is entitled to
receive a fee at the annual rate of 0.60% of the Fund's average daily total
assets allocated to Baron. Each Subadviser is paid by AIG SunAmerica and not
the Fund.
11
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -- (CONTINUED)
--------------------------------------------------------------------------------
AIG SunAmerica serves as administrator to the Fund. Under the Administrative
Services Agreement, AIG SunAmerica is responsible for performing or
supervising the performance by others of administrative services in
connection with the operations of the Fund, subject to the supervision of
the Fund's Board of Directors. AIG SunAmerica will provide the Fund with
administrative services, regulatory reporting, all necessary office space,
equipment, personnel and facilities for handling the affairs of the Fund.
AIG SunAmerica's administrative services include recordkeeping, supervising
the activities of the Fund's custodian and transfer agent, providing
assistance in connection with the Directors' and shareholders' meetings and
other administrative services necessary to conduct the Fund's affairs. For
its services as administrator, AIG SunAmerica is paid a monthly fee at the
annual rate of 0.04% of the Fund's average daily total assets.
Note 4. Expense Reductions
Through expense offset arrangements resulting from broker commission
recapture, a portion of the expenses of the Fund have been reduced. For the
year ended December 31, 2006, the amount of expense reductions received to
offset the Fund's non-affiliated expenses were $9,524.
Note 5. Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales and maturities of long-term
investments during the year ended December 31, 2006, were as follows:
Purchases (excluding U.S. government securities)............ $208,805,166
Sales and maturities (excluding U.S. government
securities)............................................... 257,531,037
Purchases of U.S. government securities..................... --
Sales and maturities of U.S. government securities.......... --
Note 6. Federal Income Taxes
The following details the tax basis distributions as well as the components
of distributable earnings. The tax basis components of distributable
earnings may differ from the amounts reflected in the Statement of Assets
and Liabilities due to temporary book/tax differences such as wash sales and
Post-October losses.
FOR THE YEAR ENDED DECEMBER 31, 2006
-------------------------------------------------------------------------------------
DISTRIBUTABLE EARNINGS TAX DISTRIBUTIONS
--------------------------------------------- -------------------------------------
LONG-TERM GAINS/ UNREALIZED LONG-TERM
ORDINARY CAPITAL AND OTHER APPRECIATION ORDINARY CAPITAL RETURN OF
INCOME LOSSES (DEPRECIATION) INCOME GAINS CAPITAL
-------- ----------------- -------------- ---------- ---------- -----------
$ -- $ -- $75,804,754 $5,743,383 $7,097,439 $11,585,461
The Fund utilized $225,073 of capital loss carryforwards.
The amounts of aggregate unrealized gain (loss) and the cost of investment
securities for federal tax purposes, including short-term securities were as
follows:
Cost (tax basis)............................................ $365,919,082
------------
Appreciation................................................ 80,191,639
Depreciation................................................ (4,386,863)
------------
Net unrealized appreciation (depreciation).................. $ 75,804,776
============
For the year ended December 31, 2006, reclassifications were made to
increase accumulated net investment income by $11,585,321 with an offsetting
adjustment to additional paid-in capital and accumulated realized gain in the
amount of $(11,810,534) and $225,213, respectively. The reclassifications
arising from book/tax differences were primarily due to return of capital and
distribution reclasses, taxable overdistribution and reclass of foreign currency
gain (loss).
12
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -- (CONTINUED)
--------------------------------------------------------------------------------
Note 7. Transactions with Affiliates
For the year ended December 31, 2006 the Fund incurred brokerage commissions
with Banc of America Securities LLC, an affiliated broker, of $165.
Note 8. Capital Share Transactions
Transactions in capital shares of the Fund were as follows:
FOR THE FOR THE PERIOD
YEAR ENDED JULY 29, 2005* THROUGH
DECEMBER 31, 2006 DECEMBER 31, 2005
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Initial seed capital, July 18,
2005.......................... -- $ -- 5,236 $ 100,000
Common shares issued in
connection with initial public
offering...................... -- -- 18,500,000 353,350,000
Common shares issued from
underwriters' over-allotment
option exercised.............. -- -- 1,850,000 35,335,000
------------ ------------ ------------ ------------
Net increase.................. -- $ -- 20,355,236 $388,785,000
============ ============ ============ ============
-------------------
* Commencement of operations
Note 9. Other Information
On February 9, 2006, AIG, the parent company and an affiliated person of AIG
SunAmerica, announced that it had consented to the settlement of an
injunctive action instituted by the Securities and Exchange Commission
("SEC"). In its complaint, the SEC alleged that AIG violated Section 17(a)
of the Securities Act of 1933, as amended, Sections 10(b), 13(a), 13(b)(2)
and 13(b)(5) of the Securities Exchange Act of 1934, as amended, and Rules
10b-5, 12b-20, 13a-1 and 13b2-1 promulgated thereunder, in connection with
AIG's accounting and public reporting practices. The conduct described in
the complaint did not involve any conduct of AIG or its subsidiaries related
to their investment advisory or distribution activities with respect to the
assets of the Fund.
AIG, without admitting or denying the allegations in the complaint (except
as to jurisdiction), consented to the entry of an injunction against further
violations of the statutes referred to above. Absent exemptive relief
granted by the SEC, the entry of such an injunction would prohibit AIG and
its affiliated persons from, among other things, serving as an investment
adviser of any registered investment management company or principal
underwriter for any registered open-end investment company pursuant to
Section 9(a) of the 1940 Act. Certain affiliated persons of AIG, including
the Adviser, received a temporary order from the SEC pursuant to Section
9(c) of the 1940 Act with respect to the entry of the injunction, granting
exemptive relief from the provisions of Section 9(a) of the 1940 Act. The
temporary order permits AIG and its affiliated persons, including AIG's
investment management subsidiaries, to serve as investment adviser or
sponsor of the Fund. The Adviser expects that a permanent exemptive order
will be granted, although there is no assurance the SEC will issue the
order.
Additionally, AIG and its subsidiaries reached a resolution of claims and
matters under investigation with the United States Department of Justice
("DOJ"), the Attorney General of the State of New York ("NYAG") and the New
York State Department of Insurance ("DOI"), regarding accounting, financial
reporting and insurance brokerage practices of AIG and its subsidiaries, as
well as claims relating to the underpayment of certain workers compensation
premium taxes and other assessments.
13
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -- (CONTINUED)
--------------------------------------------------------------------------------
As a result of the settlements with the SEC, the DOJ, the NYAG and the DOI,
AIG will make payments totaling approximately $1.64 billion. In addition, as
part of its settlements, AIG has agreed to retain for a period of three
years an Independent Consultant who will conduct a review that will include
the adequacy of AIG's internal controls over financial reporting and the
remediation plan that AIG has implemented as a result of its own internal
review.
Subject to receipt of permanent relief, the Adviser believes that the
settlements are not likely to have a material adverse effect on its ability
to perform investment advisory services relating to the Fund.
14
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of SunAmerica Focused Alpha Growth
Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of SunAmerica Focused Alpha Growth
Fund, Inc.(the "Fund") at December 31, 2006, the results of its operations for
the year then ended, and the changes in its net assets and the financial
highlights for the year then ended and for the period July 29, 2005
(commencement of operations) through December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities by correspondence with the
custodian and brokers at December 31, 2006, provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
Houston, Texas
February 16, 2007
15
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
APPROVAL OF ADVISORY AGREEMENT -- DECEMBER 31, 2006 -- (UNAUDITED)
--------------------------------------------------------------------------------
APPROVAL OF THE INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS
The Directors, including the Directors that are not interested persons of the
Fund or AIG SunAmerica and the subadvisers listed below, within the meaning of
the 1940 Act (the "Disinterested Directors"), approved the continuation of the
Advisory Agreement between the Fund and AIG SunAmerica for a one-year period
ending August 31, 2007, at a meeting held on August 29, 2006. At this same
meeting, the Board also approved the continuation of the Subadvisory Agreements
among the Fund, AIG SunAmerica and Marsico and among the Fund, AIG SunAmerica
and Baron, (Marsico and Baron are referred to herein each as a "Subadviser" and
collectively, the "Subadvisers"), for a one-year period ending August 31, 2007.
In accordance with Section 15(c) of the 1940 Act, the Board requested and the
Adviser provided materials relating to the Board's consideration of whether to
approve the continuation of the Advisory Agreement and Subadvisory Agreements.
In determining whether to approve the continuation of the Advisory Agreement and
Subadvisory Agreements, the Board, including the Disinterested Directors,
considered the following information:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY THE ADVISER AND SUBADVISERS
The Board, including the Disinterested Directors, considered the nature, quality
and extent of services to be provided by AIG SunAmerica and the Subadvisers. The
Board noted that the services include acting as investment manager and adviser
to the Fund, managing the daily business affairs of the Fund, and obtaining and
evaluating economic, statistical and financial information to formulate and
implement investment policies. Additionally, the Board observed that AIG
SunAmerica provides office space, accounting, legal, compliance, clerical and
administrative services (exclusive of, and in addition to, overseeing any such
service provided by any others retained by the Fund, including the Subadviser),
and has authorized any of its officers and employees, if elected, to serve as
officers or directors of the Fund without compensation. Finally, the Board noted
that AIG SunAmerica is responsible for monitoring and reviewing the activities
of affiliated and unaffiliated third-party service providers, including the
Subadviser.
In connection with the services provided by AIG SunAmerica, the Board analyzed
the structure and duties of AIG SunAmerica's fund administration, accounting,
legal and compliance departments and concluded that they were adequate to meet
the needs of the Fund. The Board further noted that AIG SunAmerica provides and
compensates a Chief Compliance Officer for the Fund and reviewed information
concerning AIG SunAmerica's compliance staff. The Board also reviewed the
personnel responsible for providing advisory services to the Fund, and the level
and process of monitoring the portfolio managers, and concluded, based on their
experience and interaction with the Adviser, that (i) the Adviser was able to
retain quality portfolio managers and other personnel; (ii) the Adviser
exhibited a high level of diligence and attention to detail in carrying out its
advisory responsibilities under the Advisory Agreement; (iii) the Adviser was
responsive to requests of the Board; and (iv) the Adviser had kept the Board
apprised of developments relating to the Fund and the industry in general. The
Board concluded that the nature and extent of services provided under the
Advisory Agreement were reasonable and appropriate in relation to the management
fee and that the quality of services continues to be high.
The Board also considered AIG SunAmerica's reputation and long-standing
relationship with the Fund and considered the benefit to shareholders of
investing in a fund that is part of a family of funds offering a variety of
types of mutual fund and shareholder services. The Board considered AIG
SunAmerica's experience in providing management and investment advisory and
administrative services to advisory clients, including approximately 154
registered mutual funds and the fact that as of June 30, 2006 AIG SunAmerica
managed, advised an/or administered approximately $44.7 billion of assets.
With respect to the subadvisory services provided by Marsico and Baron, the
Board also considered the nature, quality and extent of services. The Board
observed that each Subadviser is responsible for providing investment management
services, including investment research, advice and supervision, and determining
which securities will be purchased or sold by the Fund. The Board reviewed each
Subadviser's history, structure, size, visibility and resources, which are
needed
16
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
APPROVAL OF ADVISORY AGREEMENT -- DECEMBER 31,
2006 -- (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
to attract and retain highly qualified investment professionals. The Board
reviewed the personnel responsible for providing subadvisory services to the
Fund and concluded, based on their experience with each Subadviser, that Marisco
and Baron (i) were able to retain high quality portfolio managers and other
investment personnel; (ii) exhibited a high level of diligence and attention to
detail in carrying out its responsibilities under the Subadvisory Agreement; and
(iii) were responsive to requests of the Board and of AIG SunAmerica. With
respect to the administrative services provided by the Subadvisers, the Board
considered that each provides general marketing assistance and has developed
internal policies and procedures for monitoring compliance with the investment
objectives, policies and restrictions of the Fund as set forth in the Fund's
prospectus. The Board concluded that the nature and extent of services provided
by the Subadvisers under the Subadvisory Agreement were reasonable and
appropriate in relation to the subadvisory fee and that the quality of services
continues to be high.
The Board also considered AIG SunAmerica's and the Subadvisers' compliance and
regulatory history, and noted that neither AIG SunAmerica, Marsico nor Baron had
been the target of any regulatory actions or investigations that could
potentially affect its ability to provide investment management and advisory
services to the Fund.
INVESTMENT PERFORMANCE OF THE FUNDS AND THE ADVISER AND SUBADVISERS
The Board also reviewed and considered the performance of the Fund. In
preparation for the August 29, 2006 meeting, the Board was provided with reports
independently prepared by Lipper, Inc. ("Lipper"). In connection with its
review, the Board received and reviewed information regarding the investment
performance of the Fund as compared to the Fund's peer group ("Peer Group") and
peer universe ("Peer Universe"), as determined by Lipper, and to an appropriate
index or combination of indices. The Board also noted that it regularly reviews
the performance of the Fund periodically throughout the year.
Based on the Lipper reports, the Board reviewed the Fund's annualized total
return, since the Fund's inception in July 2005. The Board considered that the
Fund ranked in the first quintile of its peer group since its inception. The
Board further considered that Marsico's performance had recently improved and
had ranked in the first quartile of its category as determined by Morningstar,
Inc. ("Morningstar") for the fiscal quarter ended June 30, 2006. The Board also
considered that Baron's performance had ranked in the first quartile of its
category as determined by Morningstar for each of the three fiscal-quarters
ended June 30, 2006.
In considering AIG SunAmerica's performance as investment adviser, the Board was
provided with a presentation that compared the present and historical staffing
levels and annual budget of the Investments Department. In considering the
performance of AIG SunAmerica and the Subadvisers, the Board did not rely upon
comparisons of AIG SunAmerica's the Subadvisers' performance with respect to its
other advisory clients.
CONSIDERATION OF THE MANAGEMENT FEE AND SUBADVISORY FEE AND THE COST OF THE
SERVICES AND PROFITS REALIZED BY THE INVESTMENT ADVISER, SUBADVISER AND THEIR
AFFILIATES FROM THE RELATIONSHIP WITH THE FUND
The Board, including the Disinterested Directors, received and reviewed
information regarding the fees paid by the Fund to AIG SunAmerica for investment
advisory and management services and the fees paid by AIG SunAmerica to the
Subadvisers pursuant to the Subadvisory Agreements. The Board examined this
information in order to determine the reasonableness of the fees in light of the
nature and quality of services provided and any potential additional benefits
received by AIG SunAmerica, the Subadvisers or their affiliates in connection
with providing such services to the Fund.
To assist in analyzing the reasonableness of the fees, the Board received
reports prepared independently by Lipper. The reports showed comparative fee
information of the Fund's Peer Group and Peer Universe, including rankings
within the
17
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
APPROVAL OF ADVISORY AGREEMENT -- DECEMBER 31,
2006 -- (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
categories. In considering the reasonableness of the management fee, the Board
reviewed a number of expense comparisons, including: (i) contractual advisory
and subadvisory fees; and (ii) actual total operating expenses. The Board also
received information on fees charged by the Subadvisers for management of funds
similar to the Fund. This information assisted the Board in considering what
other clients pay the Subadvisers for similar services. The Board did not rely
upon comparisons of the fees earned by AIG SunAmerica with respect to other
investment advisory contracts. In considering the Fund's total operating
expenses, the Board compared the Fund's net expense ratios to those of other
funds within the Fund's Peer Group and Peer Universe as a guide to help assess
the reasonableness of the Fund's management fee. The Board acknowledged that it
was difficult to make precise comparisons with other funds in the Peer Group
since the exact nature of services provided under the Peer Group's fund
agreements is often not apparent. The Board noted that the Peer Group fee
information as a whole was useful in assessing whether the Adviser was providing
services at a cost that was competitive with other, similar funds.
In considering the subadvisory fees, the Board, including the Disinterested
Directors, considered that the Fund pays a fee to AIG SunAmerica pursuant to the
Advisory Agreement, and that, in turn, AIG SunAmerica and not the Fund, pays a
fee to each Subadviser. Therefore, the Board considered the amount of the
advisory fee retained by AIG SunAmerica and the fee paid to each Subadviser in
connection with the services provided.
The Board also considered AIG SunAmerica's profitability and the benefits AIG
SunAmerica and its affiliates received from its relationship with the Fund. The
Board reviewed financial statements relating to AIG SunAmerica's profitability
and financial condition with respect to the services it provided the Fund and
considered how profit margins could affect AIG SunAmerica's ability to attract
and retain high quality investment professionals. The Board was also provided
with a profitability analysis that detailed the revenues earned and the expenses
incurred on a fund by fund basis by AIG SunAmerica and its affiliates in
providing services to the Fund. Based on this information, the Board considered
the revenues received by AIG SunAmerica under the Advisory Agreement and the
Administrative Services Agreement. Additionally, the Board reviewed each
Subadviser's financial statements and considered whether each Subadviser had the
financial resources necessary to attract and retain high quality investment
management personnel, continue to perform its obligations under the respective
Subadvisory Agreement and to continue to provide the high quality of services
that it had provided the Fund to date.
With respect to indirect costs and benefits, the Board considered that (1) any
indirect costs incurred by AIG SunAmerica in connection with rendering
investment advisory services to the Fund are inconsequential based on
management's judgment on the analysis of the adequacy of the advisory fees, and
(2) any collateral benefits derived as a result of providing advisory services
to the Fund are de minimis according to management and do not impact upon the
reasonableness of the advisory fee. The Board did, however, consider the
reputational value to AIG SunAmerica from serving as investment adviser.
The Board concluded that AIG SunAmerica had the financial resources necessary to
perform its obligations under the Advisory Agreement and to continue to provide
the high quality of services that it had provided the Fund to date and that the
profitability of the Adviser and its affiliates as a result of their
relationships with the Fund was reasonable. The Board also concluded that the
level of the management fee was reasonable in light of the factors discussed
above.
ECONOMIES OF SCALE
The Board, including the Disinterested Directors, considered whether the Fund
has benefited from economies of scale and whether there is potential for future
realization of economies with respect to the Fund. The Board considered that the
funds in the AIG SunAmerica complex share common resources and as a result, an
increase in the overall size of the complex could permit each fund to incur
lower expenses than they otherwise would achieve as stand-alone entities. The
Board also considered the anticipated efficiencies in the processes of AIG
SunAmerica as it adds labor and capital to expand the scale of operations. The
Board also discussed with AIG SunAmerica whether economies of scale would be
realized by it in its management of the Fund at higher asset levels. The Board
determined that they were unable to assess at this time whether
18
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
APPROVAL OF ADVISORY AGREEMENT -- DECEMBER 31,
2006 -- (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
economies of scale would be realized if the Fund was to experience significant
asset growth (i.e., by virtue of an increase in net asset value and not new
subscriptions), however, the Board concluded that the management fee structure
was reasonable and that no changes were currently necessary to further reflect
economies of scale. The Board noted that it will continue to review fees in
connection with contract renewals, including whether the imposition of
breakpoints and expense caps would be appropriate in the future due to an
increase in asset size or otherwise.
OTHER FACTORS
The Board also reviewed the reports from the past year on soft dollar
commissions. These reports included information on brokers and total commissions
paid for the Fund. The reports also detailed the types of research and services
the Subadvisers obtained in connection with soft dollar commissions. The Board
also considered the potential benefits the Subadvisers derived from the Fund's
soft dollar arrangements whereby brokers provide research to the Subadvisers in
return for allocating fund brokerage.
CONCLUSION
After a full and complete discussion, the Board approved the continuation of the
Advisory Agreement and Subadvisory Agreements for the Fund, for a one-year
period ending August 31, 2007. Based upon their evaluation of all these factors
in their totality, the Board, including the Disinterested Directors, was
satisfied that the terms of the Advisory Agreement and Subadvisory Agreements
were fair and reasonable and in the best interests of the Fund and the Fund's
shareholders. In arriving at a decision to approve the continuation of the
Advisory Agreement and Subadvisory Agreement, the Board did not identify any
single factor or group of factors as all-important or controlling, but
considered all factors together. The Disinterested Directors were also assisted
by the advice of independent counsel in making this determination.
19
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN -- DECEMBER 31, 2006 -- (UNAUDITED)
--------------------------------------------------------------------------------
The Fund has adopted a Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), through which all net investment income dividends and capital gains
distributions are paid to Common Stock Shareholders in the form of additional
shares of the Fund's Common Stock (plus cash in lieu of any fractional shares
which otherwise would have been issuable), unless a Common Stock Shareholder
elects to receive cash as provided below. In this way, a Common Stock
Shareholder can maintain an undiluted investment in the Fund and still allow the
Fund to pay out the required distributable income.
No action is required on the part of a registered Common Stock Shareholder to
receive a distribution in shares of Common Stock of the Fund. A registered
Common Stock Shareholder may elect to receive an entire distribution in cash by
notifying Computershare Trust Co., N.A. ("Computershare"), P.O. Box 43010
Providence, RI 02940-3010, the Plan Agent and the Fund's transfer agent and
registrar, in writing so that such notice is received by Computershare no later
than 10 days prior to the record date for distributions to Common Stock
Shareholders. Computershare will set up an account for shares acquired through
the Plan for each Common Stock Shareholder who has not elected to receive
distributions in cash ("Participant") and hold such shares in non-certificated
form.
Those Common Stock Shareholders whose shares are held by a broker or other
financial intermediary may receive distributions in cash by notifying their
broker or other financial intermediary.
Computershare will set up an account for shares acquired pursuant to the Plan
for Participants who have not so elected to receive dividends and distributions
in cash. The shares of Common Stock will be acquired by the Plan Agent for the
Participants' accounts, depending upon the circumstances described below, either
(i) through receipt of additional unissued but authorized shares of Common Stock
from the Fund ("Additional Common Stock") or (ii) by purchase of outstanding
shares of Common Stock on the open market on the New York Stock Exchange or
elsewhere. If on the payment date for a dividend or distribution, the net asset
value per share of Common Stock is equal to or less than the market price per
share of Common Stock plus estimated brokerage commissions, Computershare shall
receive Additional Common Stock, including fractions, from the Fund for each
Participant's account. The number of shares of Additional Common Stock to be
credited shall be determined by dividing the dollar amount of the dividend or
distribution by the greater of (i) the net asset value per share of Common Stock
on the payment date, or (ii) 95% of the market price per share of the Common
Stock on the payment date. If the net asset value per share of Common Stock
exceeds the market price plus estimated brokerage commissions on the payment
date for a dividend or distribution, Computershare (or a broker-dealer selected
by Computershare) shall endeavor to apply the amount of such dividend or
distribution on each Participant's shares of Common Stock to purchase shares of
Common Stock on the open market. Such purchases will be made on or shortly after
the payment date for such dividend or distribution but in no event will
purchases be made on or after the ex-dividend date for the next dividend or
distribution. The weighted average price (including brokerage commissions) of
all shares of Common Stock purchased by Computershare shall be the price per
share of Common Stock allocable to each Participant. If, before Computershare
has completed its purchases, the market price plus estimated brokerage
commissions exceeds the net asset value of the shares of Common Stock as of the
payment date, the purchase price paid by Computershare may exceed the net asset
value of the Common Stock, resulting in the acquisition of fewer shares of
Common Stock than if such dividend or distribution had been paid in shares of
Common Stock issued by the Fund. Participants should note that they will not be
able to instruct Computershare to purchase shares of Common Stock at a specific
time or at a specific price.
20
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN -- DECEMBER 31,
2006 -- (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
There is no charge to Common Stock Shareholders for receiving their
distributions in the form of additional shares of the Fund's Common Stock.
Computershare's fees for handling distributions in stock are paid by the Fund.
There are no brokerage charges with respect to shares issued directly by the
Fund as a result of distributions payable in stock. If a Participant elects by
written notice to Computershare to have Computershare sell part or all of the
shares held by Computershare in the Participant's account and remit the proceeds
to the Participant, Computershare is authorized to deduct a $2.50 transaction
fee plus brokerage commissions from the proceeds.
Common Stock Shareholders who receive distributions in the form of stock are
subject to the same Federal, state and local tax consequences as are Common
Stock Shareholders who elect to receive their distributions in cash. A Common
Stock Shareholder's basis for determining gain or loss upon the sale of stock
received in a distribution from the Fund will be equal to the total dollar
amount of the distribution paid to the Common Stock Shareholder in the form of
additional shares.
21
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
ANNUAL SHAREHOLDER MEETING -- DECEMBER 31, 2006 -- (UNAUDITED)
--------------------------------------------------------------------------------
The Annual Meeting of the Shareholders of the Fund was held on April 19, 2006.
At this meeting Jeffrey S. Burum and William F. Devin were elected by
shareholders to serve as the Class I Directors of the Fund for three-year terms
and until their respective successors are duly elected and qualify.
The voting results of the shareholder meeting to elect Jeffrey S. Burum and
William F. Devin to the Board is as follows:
ELECTION OF JEFFREY S. BURUM TO THE BOARD OF DIRECTORS
FOR WITHHELD TOTAL
---------- -------- ----------
Shares Voted................................................ 19,139,453 433,452 19,572,905
ELECTION OF WILLIAM F. DEVIN TO THE BOARD OF DIRECTORS
FOR WITHHELD TOTAL
---------- -------- ----------
Shares Voted................................................ 19,135,800 437,105 19,572,905
22
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
DIRECTORS AND OFFICERS INFORMATION -- DECEMBER 31, 2006 -- (UNAUDITED)
--------------------------------------------------------------------------------
The following table contains basic information regarding the Directors and
Officers that oversee operations of the Fund and other investment companies
within the Fund Complex(1).
NUMBER OF
FUNDS
IN FUND
POSITION TERM OF COMPLEX
NAME, HELD WITH OFFICE AND OVERSEEN
ADDRESS AND SUNAMERICA LENGTH OF PRINCIPAL OCCUPATIONS BY OTHER DIRECTORSHIPS HELD
DATE OF BIRTH* COMPLEX TIME SERVED DURING PAST 5 YEARS DIRECTOR(1) BY DIRECTOR(2)
-------------- ---------- ----------- --------------------- ----------- ------------------------
DISINTERESTED DIRECTORS
Jeffrey S. Burum Director 2005-present Founder, Chairman and 42 None
DOB: February 27, 1963 CEO of Southern
California
Development
Corporation/National
Housing, Development
Corp. (1992 to
present); Founder,
Owner and Partner of
Colonies Crossroads,
Inc. (1999 to
present); Owner and
Managing Member of
Diversified Pacific
Development Group,
LLC (1998 to
present).
Dr. Judith L. Craven Director 2005-present Retired. 90 Director, Belo
DOB: October 6, 1945 Corporation (1992 to
present); Director,
Sysco Corporation (1996
to present); Director,
Luby's Inc. (1998 to
present); Director,
University of Texas
Board of Regents (2001
to present).
William F. Devin Director 2005-present Retired. 90 Director, Boston Options
DOB: December 30, 1938 Exchange (1985 to
present).
Samuel M. Eisenstat DOB: Chairman of 2005-present Attorney, solo 52 Director, North European
March 7, 1940 the Board practitioner. Oil Royalty Trust.
Stephen J. Gutman Director 2005-present Senior Associate, 52 None
DOB: May 10, 1943 Corcoran Group (Real
Estate) (2003 to
present); President
and Member of
Managing Directors,
Beau Brummell -- Soho
LLC (Licensing of
menswear specialty
retailing and other
activities) (June
1988 to present).
William J. Shea Director 2005-present President and CEO, 52 Director, Boston Private
DOB: February 9, 1948 Conseco, Inc. Holdings (October 2004
(Financial Services) to present).
(2001 to 2004);
Chairman of the Board
of Centennial
Technologies, Inc.
(1998 to 2001).
INTERESTED DIRECTOR
Peter A. Harbeck(3) Director 2005-present President, CEO and 99 None
DOB: January 23, 1954 Director, AIG
SunAmerica. (August
1995 to present);
Director, AIG
SunAmerica Capital
Services, Inc. ("AIG
SACS") (August 1993
to present) President
and CEO, AIG Advisor
Group, Inc. (June
2004 to present).
23
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
DIRECTORS AND OFFICERS INFORMATION -- DECEMBER 31,
2006 -- (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
NUMBER OF
FUNDS
IN FUND
POSITION TERM OF COMPLEX
NAME, HELD WITH OFFICE AND OVERSEEN
ADDRESS AND SUNAMERICA LENGTH OF PRINCIPAL OCCUPATIONS BY OTHER DIRECTORSHIPS HELD
DATE OF BIRTH* COMPLEX TIME SERVED DURING PAST 5 YEARS DIRECTOR(1) BY DIRECTOR(2)
-------------- ---------- ----------- --------------------- ----------- ------------------------
OFFICERS
Vincent M. Marra President 2005-present Senior Vice N/A N/A
DOB: May 28, 1950 President, AIG
SunAmerica (February
2003 to present);
Chief Administrative
Officer, Chief
Operating Officer and
Chief Financial
Officer, Carret &
Co., LLC (June 2002
to February 2003);
President and Chief
Operating Officer,
Bowne Digital
Solutions (1999 to
May 2002).
Donna M. Handel Treasurer 2005-present Senior Vice N/A N/A
DOB: June 25, 1966 President, AIG
SunAmerica (December
2004 to present);
Vice President, AIG
SunAmerica (1997 to
December 2004).
Gregory N. Bressler Secretary 2005-present Senior Vice President N/A N/A
DOB: November 17, 1966 and Chief and General Counsel,
Legal AIG SunAmerica (June
Officer 2005 to present);
Vice President and
Director of U.S.
Asset Management
Compliance, Goldman
Sachs Asset
Management, L.P.
(June 2004 to June
2005); Deputy General
Counsel, Credit
Suisse Asset
Management, LLC (June
2002 to June 2004);
Counsel, Credit
Suisse Asset
Management, LLC
(January 2000 to June
2002).
James Nichols Vice 2006-present Director, President N/A N/A
DOB: April 7, 1966 President and CEO, AIG SACS
(July 2006 to
present); Senior Vice
President, AIG SACS)
(March 2002 to July
2006); Vice
President, AIG
SunAmerica (1995 to
March 2002).
Cynthia Gibbons Chief 2005-present Vice President, AIG N/A N/A
DOB: December 6, 1967 Compliance SunAmerica (August
Officer 2002 to present);
Securities Compliance
Manager, American
General Investment
Management (June 2000
to August 2002).
Nori L. Gabert Vice 2005-present Vice President and N/A N/A
DOB: August 15, 1953 President Deputy General
and Counsel, AIG
Assistant SunAmerica (2001 to
Secretary present); Vice
President and
Secretary, VALIC
Company I and VALIC
Company II (2000 to
present); Formerly,
Associate General
Counsel, American
General Corporation,
(1997 to 2001).
---------------
* The business address for each Director and Officer is the
Harborside Financial Center, 3200 Plaza 5, Jersey City, NJ
07311-4992.
(1) The term "Fund Complex" means two or more registered
investment company portfolios that hold themselves out to
investors as related companies for purposes of investment
services or have a common investment adviser or an
investment adviser that is an affiliate of the Adviser. The
"Fund Complex" includes the SunAmerica Money Market Funds,
Inc. (2 funds), SunAmerica Equity Funds (10 funds),
SunAmerica Income Funds (5 funds), SunAmerica Focused
Series, Inc. (17 portfolios), the Fund (1 fund), SunAmerica
Focused Alpha Large-Cap Fund, Inc. (1 fund), Anchor Series
Trust (9 portfolios), SunAmerica Senior Floating Rate Fund,
Inc. (1 fund), SunAmerica Series Trust (35 portfolios),
VALIC Company I (32 portfolios), VALIC Company II (15
funds), Seasons Series Trust (24 portfolios) and AIG Series
Trust (6 portfolios).
24
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
DIRECTORS AND OFFICERS INFORMATION -- DECEMBER 31,
2006 -- (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
(2) Directorships of companies required to report to the
Securities and Exchange Commission under the Securities
Exchange Act of 1934 (i.e. "public companies") or other
investment companies registered under the 1940 Act.
(3) Mr. Harbeck is considered to be an Interested Director
because he serves as President, CEO and Director of the
Adviser.
The Fund's Statement of Additional Information includes
additional information about the Directors and is available,
without charge, upon request, by calling (800) 858-8850.
25
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
SHAREHOLDER TAX INFORMATION -- (UNAUDITED)
--------------------------------------------------------------------------------
Certain tax information regarding the SunAmerica Focused Alpha Growth Fund is
required to be provided to shareholders based upon the Fund's income and
distributions for the taxable year ended December 31, 2006. The information
necessary to complete your income tax returns is included with your Form
1099-DIV mailed to you in January 2007.
During the year ended December 31, 2006 the Fund paid the following dividends
per share:
ORDINARY
TOTAL AMOUNT INVESTMENT SHORT-TERM LONG-TERM RETURN OF
PAYABLE DATE RECORD DATE PAID PER SHARE INCOME CAPITAL GAINS* CAPITAL GAINS CAPITAL(1)
------------ ----------- -------------- ---------- -------------- ------------- ----------
Common Shares:
3/31/2006 3/21/2006 $0.3000 $0.0044 $0.1533 $ -- $0.1423
6/30/2006 6/19/2006 0.3000 0.0035 0.1209 0.0333 0.1423
9/29/2006 9/19/2006 0.3000 0.0000 0.0000 0.1577 0.1423
12/28/2006 12/18/2006 0.3000 0.0000 0.0000 0.1577 0.1423
------- ------- ------- ------- -------
Total Common Stock: $1.2000 $0.0079 $0.2742 $0.3487 $0.5692
QUALIFYING % FOR
THE 70% DIVIDENDS
RECEIVED DEDUCTION
------------------
Common Shares:
59.08%
59.08%
59.08%
59.08%
Total Common S
For the year ended December 31, 2006, certain dividends paid by the Fund may be
subject to a maximum tax rate of 15%, as provided by the Jobs and Growth Tax
Relief Reconciliation Act of 2003. Of the distributions paid during the fiscal
year, the maximum amount that may be considered qualified dividend income is
$3,261,573.
------------
* Short-term capital gains are treated as ordinary income for tax purposes.
(1) The amount received as a non-taxable (return of capital) distribution should
be applied to reduce the tax cost of shares. There was a $0.5692 per share
return of capital in 2006 on common shares.
26
SUNAMERICA FOCUSED ALPHA GROWTH FUND, INC.
ADDITIONAL INFORMATION -- (UNAUDITED)
--------------------------------------------------------------------------------
The Fund has filed with the NYSE its chief executive officer certification as
required by sec.303A.12 of the NYSE's Listed Company Manual. The Fund has also
filed with the SEC the certification of its principal executive officer and
principal financial officer required by Section 302 of the Sarbanes-Oxley Act
with respect to the most recently completed fiscal year end.
During the period, there were no material changes to the Fund's investment
objective or policies or to the Fund's articles of incorporation or by-laws that
were not approved by the shareholders or in the principal risk factors
associated with investment in the Fund. There have been no changes in the
persons who are primarily responsible for the day-to-day management of the
Fund's assets.
27
--------------------------------------------------------------------------------
(AIG LOGO)
DIRECTORS
Samuel M. Eisenstat
Peter A. Harbeck
Dr. Judith L. Craven
William F. Devin
Stephen J. Gutman
Jeffrey S. Burum
William J. Shea
OFFICERS
Vincent M. Marra, President and
Chief Executive Officer
Donna M. Handel, Treasurer
James Nichols, Vice President
Cynthia Gibbons, Chief Compliance Officer
Gregory N. Bressler, Chief Legal Officer and
Secretary
Gregory R. Kingston, Assistant Treasurer
Nori L. Gabert, Vice President
and Assistant Secretary
Corey A. Issing, Assistant Secretary
Kathleen Fuentes, Assistant Secretary
INVESTMENT ADVISER
AIG Sun America Asset Management Corp.
Harborside Financial Center
3200 Plaza 5
Jersey City, NJ 07311-4992
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 5607
Boston, MA 02110
TRANSFER AGENT
Computershare Shareholder Services, Inc.
250 Royall Street
Canton, MA 02021
VOTING PROXIES ON FUND PORTFOLIO SECURITIES
A description of the policies and procedures that the Fund uses to determine
how to vote proxies related to securities held in the Fund's portfolio, which
is available in the Fund's Form N-CSR, may be obtained without charge upon
request, by calling (800) 858-8850. This information is also available from
the EDGAR database on the U.S. Securities and Exchange Commission's website
at http://www.sec.gov.
DISCLOSURE OF QUARTERLY PORTFOLIO HOLDINGS
The Fund is required to file its complete schedule of portfolio holdings
with the U.S. Securities and Exchange Commission for its first and third
fiscal quarters on Form N-Q. The Fund's Forms N-Q are available on the
U.S. Securities and Exchange Commission's website at http://www.sec.gov.
You can also obtain copies of Form N-Q at the U.S. Securities and Exchange
Commission's Public Reference Room in Washington, DC (information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330).
PROXY VOTING RECORD ON FUND
PORTFOLIO SECURITIES
Information regarding how the Fund voted proxies related to securities
held in the Fund's portfolio during the most recent twelve month period
ended June 30, is available, once filed with the U.S. Securities and
Exchange Commission without charge, upon request, by calling (800)
858-8850 or on the U.S. Securities and Exchange Commission's website at
http://www.sec.gov.
This report is submitted solely for the general information of
shareholders of the Fund.
28
[AIG SUNAMERICA MUTUAL FUNDS LOGO]
SunAmerica open-end funds distributed by:
AIG SunAmerica Capital Services, Inc., Harborside Financial Center,
3200 Plaza 5, Jersey City, NJ 07311
800-858-8850 x6003 www.sunamericafunds.com
FGANN-12/06
Item 2. Code of Ethics
The SunAmerica Focused Alpha Growth Fund, Inc. (the "registrant") has
adopted a Code of Ethics applicable to its Principal Executive and
Principal Accounting Officers pursuant to Section 406 of the
Sarbanes-Oxley Act of 2002.
Item 3. Audit Committee Financial Expert.
The registrant's Board of Directors has determined that William J.
Shea, the Chairman of the registrant's Audit Committee, qualifies as
an audit committee financial expert, as defined in the instructions to
Item 3(a) of Form N-CSR. Mr. Shea is considered to be "independent"
for purposes of Item 3(a)(2) of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
(a)--(d) Aggregate fees billed to the registrant for the last two
fiscal years for professional services rendered by the registrant's
principal accountant were as follows:
2005 2006
(a) Audit Fees $35,625 $23,819
(b) Audit-Related Fees $ 0 $ 0
(c) Tax Fees $ 7,325 $12,495
(d) All Other Fees $ 0 $ 0
Audit Fees include amounts related to the audit of the registrant's
annual financial statements and services normally provided by the
principal accountant in connection with statutory and regulatory
filings, including the Fund's initial registration statement. Tax Fees
principally include tax compliance, tax advice, tax planning and
preparation of tax returns.
Aggregate fees billed to the investment adviser and Adviser Affiliates
(as defined below in Item 4(e)) that are required to be pre-approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X for
the last two fiscal years for services rendered by the Registrant's
principal accountant were as follows:
2005 2006
(b) Audit-Related Fees $ 0 $ 0
(c) Tax Fees $ 0 $ 0
(d) All Other Fees $ 0 $ 0
(e)
(1) The registrant's audit committee pre-approves all audit services
provided by the registrant's principal accountant for the registrant
and all non-audit services provided by the registrant's principal
accountant for the registrant, its investment adviser and any entity
controlling, controlled by, or under common control with the
investment adviser ("Adviser Affiliate") that provides ongoing
services to the registrant, if the engagement by the investment
adviser or Adviser Affiliate relates directly to the operations and
financial reporting of the registrant. The audit committee has not
presently established any pre-approval policies and procedures that
permit the pre-approval of the above services other than by the full
audit committee. Certain de minimis exceptions are allowed for non-
audit services in accordance with Rule 2-01(c)(7)(i)(C) of Regulation
S-X as set forth in the Registrant's audit committee charter.
(2) No services included in (b)-(d) above in connection with fees
billed to the registrant or the investment adviser or Adviser
Affiliates were approved pursuant to paragraph (c)(7)(i)(C) of
Rule 2-01 of Regulation S-X.
(f) Not Applicable.
(g) The aggregate fees billed for the most recent fiscal year and the
preceding fiscal year by the registrant's principal accountant for
non-audit services rendered to the registrant, its investment adviser,
and Adviser Affiliate that provides ongoing services to the registrant
for 2006 and 2005 were $12,495 and $7,325, respectively.
(h) Non-audit services rendered to the registrant's investment adviser and
any Adviser Affiliate that were not pre-approved pursuant to Paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X were considered by the
registrant's audit committee as to whether they were compatible with
maintaining the principal accountant's independence.
Item 5. Audit Committee of Listed Registrants.
The registrant has a separately designated audit committee consisting
of the following members:
Samuel Eisenstat
Judith Craven
William Devin
Jeffrey Burum
William Shea
Stephen Gutman
Item 6. Schedule of Investments.
Included in Item 1 to the Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
PROXY VOTING POLICIES AND PROCEDURES
Proxy Voting Responsibility. The Fund and the Underlying Funds have
adopted policies and procedures for the voting of proxies relating to portfolio
securities. The policies and procedures were drafted according to
recommendations by a proxy voting committee composed of senior management of the
Fund and the Fund's investment adviser. (i.e., representatives from the
investment, legal and compliance departments). The policies and procedures
enable the Fund to vote proxies in a manner consistent with the best interests
of the Fund's shareholders.
The Fund has retained a proxy voting service, Institutional Shareholder
Services ("ISS"), to effect votes on behalf of the Fund according to the Fund's
policies and procedures, and to assist the Fund with certain responsibilities
including record keeping of proxy votes.
Company Management Recommendations. When determining whether to invest in
the securities of a particular company, one of the key factors a portfolio
manager considers is the quality and depth of the company's management. In
holding portfolio securities, the Fund and/or Underlying Funds are seeking to
maximize the investment value for shareholders, but not necessarily exercise
control over the issuers of portfolio securities or otherwise advance a
particular social agenda. The Fund's policies and procedures therefore provide
that the Fund will generally vote in support of management recommendations on
most corporate matters. When a Corporation's portfolio manager is dissatisfied
with a company's management, the Fund typically will sell the holding.
Case-By-Case Voting Matters. The policies and procedures identify certain
voting matters that will be decided on a case-by-case basis. In these
circumstances, the proxy voting committee generally will rely on the guidance or
a recommendation from ISS, but may also rely on other appropriate personnel of
the investment adviser (or "AIG SunAmerica" or the "Adviser") and/or the
subadviser of a Portfolio and/or Underlying Fund, or other sources. In these
instances, such person(s) will recommend the vote that will maximize value for,
and is in the best interests of, the Fund's shareholders.
Examples of the Fund's Positions on Voting Matters. Consistent with the
approaches described above, the following are examples of the Fund's voting
positions on specific matters:
- Vote with management recommendations on most corporate matters;
- Vote on a case-by-case basis on proposals to increase authorized
common stock;
- Vote on a case-by-case basis on most mutual fund matters;
- Vote against the authorization of preferred stock with unspecified
voting, conversion, dividend distribution and other rights ("blank
check" preferred stock);
- Vote on a case-by-case basis regarding finance, merger and
acquisition matters;
- Abstain from voting on social responsibility or environmental
matters, unless the fund's objective is directly related to the
social or environmental matter in question;(1)
- Not vote proxies for index funds/portfolios and passively managed
funds/portfolios;(2)
- Not vote proxies for securities that are out on loan(3) Vote on a
case-by-case basis on equity compensation plans.
Conflicts of Interest. Members of the proxy voting committee will resolve
conflicts of interest presented by a proxy vote. In practice, application of the
Fund's proxy voting policies guidelines will in most instances adequately
address any possible conflicts of interest, as votes generally are effected
according to the guidelines or recommendations of the independent proxy voting
agent. Also, the proxy committee consists of members who are not involved in
marketing or other business units that may be likely to present conflicts.
However, if a situation arises where a vote presents a conflict between
the interests of the Trust's shareholders and the interests of AIG SunAmerica,
the Trust's principal underwriter, or one of AIG SunAmerica's or the
underwriter's affiliates, and the conflict is known to the Trust, senior
management of the Trust and AIG SunAmerica, including the proxy voting
committee, and possibly one or more Trustee(s) who are not interested persons,
as the term is defined in the 1940 Act will be consulted. Any individual with a
known conflict may be required by the proxy voting committee to recuse himself
or herself from being involved in the proxy voting decision. Senior management,
including the proxy voting committee, will evaluate the situation and ensure
that the Trust selects the vote that is in the best interests of the Trust's
shareholders.
Proxy Voting Records. The independent Proxy Voting agent will be
responsible for documenting its basis for any determination to vote in a
non-uniform or contrary manner, as well as, for ensuring the maintenance of
records for each proxy vote cast on behalf of the Trust. Pursuant to SEC
requirements, beginning in August of 2004, on an annual basis the Trust makes
available on its website its proxy voting record for the one-year period ending
on June 30th. The proxy voting record will also be available on the SEC's
website at http://www.sec.gov.
----------
(1) In these circumstances, the Fund will consider the effect that the vote's
outcome may have on the issuing company and the value of its securities as
part of the Fund's overall investment evaluation of whether to retain or
sell the company's securities. The Fund will either retain or sell the
securities according to the best interests of the Fund's shareholders.
(2) The Board of the Trustees has determined that the costs of voting proxies
for index and passively managed funds will generally outweigh any benefits
that may be achieved by voting such proxies because the outcome will not
directly affect whether the fund retains a particular security. That is,
the fund will retain or sell a particular security based on objective,
rather than subjective, criteria. For example, in the case of an index
fund, the fund will make a determination to retain or sell a security
based on whether the index retains or deletes the security.
(3) Similarly, the Board has determined that the costs of voting proxies with
respect to securities that are out on loan generally outweigh any benefits
that may be achieved by the voting of such proxies. The costs of voting
such proxies include the opportunity cost of lost securities lending
income when securities are recalled from a loan. However, under certain
circumstances, including where the investment adviser and/or subadviser to
a Fund determines that a proxy vote is materially important to the Fund's
interest and where it is feasible to recall the security on a timely
basis, the investment adviser will use its reasonable efforts to recall
the security.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
BAMCO, Inc. ("BAMCO") and Marsico Capital Management, LLC ("Marsico") are
the subadvisers to the registrant. Thomas F. Marsico is the portfolio manager
for Marsico and is primarily responsible for the day-to-day management of the
large-cap portion of the registrant's assets. Ronald Baron is the portfolio
manager for BAMCO and is primarily responsible for the day-to-day management of
the small-cap and mid-cap portion of the registrant's assets.
Mr. Marsico is the Chief Investment Officer of Marsico. Mr. Marsico has
over 20 years of experience as a securities analyst and a portfolio manager.
Prior to forming Marsico, Mr. Marsico served as the portfolio manager of the
Janus Twenty Fund from January 31, 1988 through August 11, 1997 and served in
the same capacity for the Janus Growth and Income Fund from May 31, 1991 (the
Fund's inception date through August 11, 1997.
Mr. Baron is the founder, Chief Executive Officer and Chairman of Baron
Capital Group, Inc. and its subsidiaries. BAMCO, Inc., established in 1987 is
one of its subsidiaries. He began to manage money for others on a discretionary
basis in 1975. In 1982 he established Baron Capital Inc. He has been portfolio
manager of the Baron flagship fund, Baron Asset Fund and of Baron Growth Fund
since their inception. Mr. Baron also manages the SunAmerica Focused Small-Cap
Growth Portfolio.
OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS
The following table indicates the number of other accounts managed by
each Portfolio Manager and the total assets in the accounts in each of the
following categories as of December 31, 2006: Registered Investment Company
("RIC"), Other Pooled Investment ("OPI"), and Other Accounts ("OA"). For each
category, the table also shows the number of accounts and the total assets in
the accounts with respect to which the advisory fee is based on account
performance.
Number of Other Accounts Managed Number of Accounts and Total Assets for
and Total Assets by Account Which Advisory Fee is Performance Based
Name of Investment Name of Portfolio ($ in millions) ($ in millions)
Adviser Manager RIC OPI OA RIC OPI OA
--------------------------------- ---------------------------------------
Marsico Capital Management Thomas F. Marsico 6 4 189 -- -- --
$34,993.69 $2,261.20 $28,219.01 -- -- --
BAMCO Inc. Ronald Baron 9 5 48 -- 2 --
$12,847 $198 $531 -- $86 --
POTENTIAL CONFLICTS OF INTEREST
As shown in the tables above, the portfolio managers are responsible for
managing other accounts for other clients, ("Other Client Accounts") in addition
to the Fund. In certain instances, conflicts may arise in their management of
the Fund and such Other Client Accounts. The portfolio managers aim to conduct
their activities in such a manner that permits them to deal fairly with each of
their clients on an overall basis in accordance with applicable securities laws
and fiduciary obligations. Notwithstanding, transactions, holdings and
performance, among others, may vary among the Fund and such Other Client
Accounts.
- Trade Allocations. Conflicts may arise between the Fund and Other Client
Accounts in the allocation of trades among the Fund and the Other Client
Accounts, as the case may be. For example, the Adviser and/or Portfolio
Managers may determine that there is a security that is suitable for the
Fund as well as for Other Client Accounts that have a similar investment
objective. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling that same security, or
the Adviser and/or Portfolio Managers may take "short" positions in Other
Client Accounts with respect to securities held "long" within the Fund, or
vice-versa, which may adversely affect the value of securities held by the
Fund. Such ownership or different interests may cause a conflict of
interest. The Fund, the Adviser and/or subadvisers have adopted policies,
procedures and/or practices regarding the allocation of trades and
brokerage, which address the conflicts associated with managing multiple
accounts for multiple clients (including affiliated clients). Subject to
cash and security availability and lot size, among other factors, the
policies, procedures and/or practices generally require that securities be
allocated among the Fund and Other Client Accounts with a similar
investment objective in a manner that is fair, equitable and consistent
with their fiduciary obligations to each.
- Allocation of Portfolio Managers' Time. The Portfolio Managers' management
of the Fund and Other Client Accounts may result in the Portfolio
Managers devoting a disproportionate amount of time and attention to the
management of the Fund and Other Client Accounts if the Fund and Other
Client Accounts have different objectives, benchmarks, time horizons, and
fees. Generally, such competing interests for the time and attention of
the Portfolio Managers are managed. Although the Adviser does not track
the time the Portfolio Managers spends on the Fund or a single Other
Client Account, the Adviser and/or subadvisers do periodically assess
whether the Portfolio Managers have adequate time and resources to
effectively manage all of such Portfolio Managers' accounts. In certain
instances, Portfolio Managers may be employed by two or more employers.
Where the Portfolio Manager receives greater
compensation, benefits or incentives from one employer over another, the
Portfolio Managers may favor one employer over the other (or Other Client
Accounts) causing a conflict of interest.
- Personal Trading by Portfolio Managers. The management of personal
accounts by a Portfolio Manager may give rise to potential conflicts of
interest. While generally, each sub-adviser's Code of Ethics
will impose limits on the ability of a Portfolio Manager to trade for his
or her personal account, especially where such trading might give rise to
a potential conflict of interest, there is no assurance that the Codes of
Ethics will eliminate such conflicts.
PORTFOLIO MANAGER COMPENSATION
MARSICO
Marsico's portfolio managers are generally subject to the compensation
structure applicable to all Marsico employees. As such, Mr. Marsico's
compensation consists of a base salary (reevaluated at least annually), and
periodic cash bonuses. Bonuses are typically based on two primary factors: (1)
Marsico's overall profitability for the period, and (2) individual achievement
and contribution.
Portfolio manager compensation takes into account, among other factors,
the overall performance of all accounts for which the manager provides
investment advisory services. Portfolio managers do not receive special
consideration based on the performance of particular accounts. Exceptional
individual efforts are rewarded through greater participation in the bonus pool.
Portfolio manager compensation comes solely from Marsico.
Although Marsico may compare account performance with relevant benchmark
indices, portfolio manager compensation is not directly tied to achieving any
pre-determined or specified level of performance. In order to encourage a
long-term time horizon for managing portfolios, Marsico seeks to evaluate the
portfolio manager's individual performance over periods longer than the
immediate compensation period. In addition, portfolio managers are compensated
based on other criteria, including effectiveness of leadership within Marsico's
Investment Team, contributions to Marsico's overall investment performance,
discrete securities analysis, and other factors. In addition to his salary and
bonus, Mr. Marsico may participate in other Marsico benefits to the same extent
and on the same basis as other Marsico employees.
BAMCO
Mr. Baron has an employment agreement in principal. His base compensation
includes a fixed salary and a bonus that approximates 42% of his base salary.
The bonus could increase if assets managed by Mr. Baron are higher than
predetermined levels. The contract is for five years, with automatic one year
extensions thereafter. Mr. Baron also has a line of credit from the Firm that
must be repaid annually if drawn, and loans for insurance premiums where
interest is paid by Mr. Baron annually. The Firm has also agreed to post
collateral up to a fixed amount for personal bank loans by Mr. Baron for which
the Firm is paid a fee for any amounts guaranteed. The terms of his contract are
based on Mr. Baron's role as the Firm's founder, chief executive officer, chief
investment officer, and his position as portfolio manager for the majority of
the Firm's assets under management. Consideration is given to Mr. Baron's
reputation, the long-term performance records of the funds under his management
and the profitability of the Firm.
PORTFOLIO MANAGER OWNERSHIP OF FUND SHARES
The following table shows the dollar range of shares beneficially owned by
each portfolio manager as of December 31, 2006.
DOLLAR RANGE OF EQUITY
NAME OF SECURITIES IN
PORTFOLIO MANAGER REGISTRANT
Thomas F. Marsico None
Ronald Baron $100,001 - $500,000
(b) Not applicable
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
None.
Item 10. Submission of Matters to a Vote of Security Holders.
There were no material changes to the procedures by which shareholders
may recommend nominees to the Registrant's board of directors that
were implemented after the Registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K
(17 CFR 229.407) (as required by 22(b)(15)) of Schedule 14A (17 CFR
240.14a-101), or this Item 10.
Item 11. Controls and Procedures.
(a) An evaluation was performed within 90 days of the filing of this
report, under the supervision and with the participation of the
registrant's management, including the President and Treasurer, of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as defined under Rule 30a-3(c)
under the Investment Company Act of 1940 (17 CFR 270.30a-3(c)). Based
on that evaluation, the registrant's management, including the
President and Treasurer, concluded that the registrant's disclosure
controls and procedures are effective.
(b) There was no change in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Investment
Company Act of 1940 (17 CFR 270.30a-3(d))) that occurred during the
second fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12. Exhibits.
(a) (1) Code of Ethics applicable to its Principal Executive and Principle
Accounting Officers pursuant to Section 406 of the Sarbanes-Oxley Act
of 2002 attached hereto as Exhibit 99.406. Code of Ethics.
(2) Certifications pursuant to Rule 30a-2(a) under the Investment
Company Act of 1940 (17 CFR 270.30a-2(a)) attached hereto as Exhibit
99.CERT.
(3) Not applicable.
(b) Certification pursuant to Rule 30a-2(b) under the Investment Company
Act of 1940 (17 CFR 270.30a-2(a)) and Section 906 of the
Sarbanes-Oxley Act of 2002 attached hereto as Exhibit 99.906.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SunAmerica Focused Alpha Growth Fund, Inc.
By: /s/ Vincent M. Marra
--------------------
Vincent M. Marra
President
Date: March 9, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Vincent M. Marra
--------------------
Vincent M. Marra
President
Date: March 9, 2007
By: /s/ Donna M. Handel
-------------------
Donna M. Handel
Treasurer
Date: March 9, 2007