Statement of Additional Information - American Funds Mortgage Fund

elating to an issuer and the time a rating is assigned and updated. The investment adviser considers these ratings of securities asone of many criteria in making its investment decisions.Bond rating agencies may assign modifiers (such as +/–) to ratings categories to signify the relative position of a credit within therating category. Investment policies that are based on ratings categories should be read to include any security within that category,without giving consideration to the modifier except where otherwise provided. See the Appendix for more information about creditratings.Pass-through securities —The fund will invest in various debt obligations backed by pools of mortgages or other assets including,but not limited to, loans on single family residences, home equity loans, mortgages on commercial buildings, credit card receivablesand leases on airplanes or other equipment. Principal and interest payments made on the underlying asset pools backing theseobligations are typically passed through to investors, net of any fees paid to any insurer or any guarantor of the securities. Passthroughsecurities may have either fixed or adjustable coupons. These securities include:Mortgage-backed securities — These securities may be issued by U.S. government agencies and government-sponsoredentities, such as Ginnie Mae, Fannie Mae and Freddie Mac, and by private entities. The payment of interest and principal onmortgage-backed obligations issued by U.S. government agencies may be guaranteed by the full faith and credit of the U.S.government (in the case of Ginnie Mae), or may be guaranteed by the issuer (in the case of Fannie Mae and Freddie Mac).However, these guarantees do not apply to the market prices and yields of these securities, which vary with changes ininterest rates.Mortgage-backed securities issued by private entities are structured similarly to those issued by U.S. government agencies.However, these securities and the underlying mortgages are not guaranteed by any government agencies and the underlyingmortgages are not subject to the same underwriting requirements. These securities generally are structured with one or moretypes of credit enhancements such as insurance or letters of credit issued by private companies. Borrowers on the underlyingmortgages are usually permitted to prepay their underlying mortgages. Prepayments can alter the effective maturity of theseinstruments. In addition, delinquencies, losses or defaults by borrowers can adversely affect the prices and volatility of thesesecurities. Such delinquencies and losses can be exacerbated by declining or flattening housing and property values. This,along with other outside pressures, such as bankruptcies and financial difficulties experienced by mortgage loan originators,decreased investor demand for mortgage loans and mortgage-related securities and increased investor demand for yield, canadversely affect the value and liquidity of mortgage-backed securities.Adjustable rate mortgage-backed securities — Adjustable rate mortgage-backed securities (“ARMS”) have interest ratesthat reset at periodic intervals. Acquiring ARMS permits the fund to participate in increases in prevailing current interest ratesthrough periodic adjustments in the coupons of mortgages underlying the pool on which ARMS are based. Such ARMSgenerally have higher current yield and lower price fluctuations than is the case with more traditional fixed income debtsecurities of comparable rating and maturity. In addition, when prepayments of principal are made on the underlyingmortgages during periods of rising interest rates, the fund can reinvest the proceeds of such prepayments at rates higher thanthose at which they were previously invested.Page 4