Putnam
Equity
Income
Fund
SEMIANNUAL REPORT
May 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Over time, Putnam Equity Income Fund's value-oriented style sets it
apart from its peers. The fund's class A shares ranked 4 out of 59 equity
income funds tracked by Lipper Analytical services for the five-year
period ended June 30, 1997.*
* "Ed Bousa runs Putnam Equity Income Fund very carefully . . .
Bousa's strategy is the soul of prudence."
-- Barron's, April 26, 1997
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
31 Financial statements
* Lipper rankings are based on total return performance, vary over time,
and do not include the effects of sales charges. The fund's class A shares
ranked 62 out of 171 funds, and 19 out of 28 funds for the 1 and 10-year
periods, respectively. The fund's class B shares ranked 80 out of 171
funds and 23 out of 96 funds for the 1 and 3-year periods, respectively.
The fund's class M shares ranked 70 out of 171 funds for the 1-year
period. Past performance is not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The ability of Putnam Equity Income Fund's management team to identify and
invest in undervalued stocks was instrumental in yet another above-average
performance by your fund during the first half of its current fiscal year, the
six months ended May 31, 1997. Some of these stocks, purchased a while ago,
had endured periods of faltering performance before flowering into the
potential your fund's managers had seen in them at the time of acquisition.
It is this sort of willingness to invest for the long term that drives the
team's investment selection process. The sharp market decline this spring
provided opportunities your managers believe will result in positive future
performance.
I am pleased to note the appointment of Robert M. Paine to your fund's
management team. Bob joined Putnam's High-Yield Bond Group in 1989 and has
seven years of investment experience. In the following report, the managers
discuss performance during the period and prospects for the fiscal year's
second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 16, 1997
Report from the Fund Managers
Edward P. Bousa
Kenneth J. Taubes
Robert M. Paine
With stock market records occurring more frequently than ever and top
performance shifting from one sector to another, maintaining a consistent
long-term focus has become especially challenging for individual investors.
Fortunately, it seems that regardless of conditions in the broad market,
Putnam Equity Income Fund is able to maintain its solid investing discipline
and carefully researched stock selection.
For the semiannual period ended May 31, 1997, the fund's steady focus rewarded
investors with competitive returns; class A shares provided a total return of
10.86% at net asset value, exceeding the 10.12% average total return of the
Lipper Analytical Service's equity income category. The fund's total return at
maximum public offering price was 4.49%. Additional results for class A
shares, as well as for other share classes and comparative indexes, are listed
in the performance summary that begins on page 8.
* MARKET SUSTAINS VOLATILITY BUT EMERGES STRONGER THAN EVER
The stock market's positive returns for the semiannual period mask the abrupt
day-to-day changes of many market indexes. For much of the period, the market
was led by large, highly liquid companies believed to have reliable earnings
growth. March, however, brought a month-long correction in stock prices. In a
much-anticipated move, the Federal Reserve Board raised the target for the
federal funds rate one quarter of a percentage point to 5.5%. Investors,
anticipating further changes in interest rates and fearing the worst for
current and future corporate earnings, helped drive the Dow Jones Industrial
Average down nearly 10% by April 11 from its March 11 high. As expected, your
fund's strategy of targeting less volatile investments enabled it to weather
the March-April correction when compared with performance of the Standard &
Poor's 500(registered trademark) Index. From March 11 to April 11, the fund
was down 7.44% at net asset value, while the S&P 500 lost 8.93%.
Later on, however, when many corporate sectors announced strong first-quarter
earnings, the market began to recover amid optimism that the economy will
continue to grow steadily with few signs of inflation. This idea was further
reinforced by a surge in bond prices as a result of a positive interpretation
of economic data.
* STRONG STOCK SELECTION MARKS PERIOD
In our opinion, one reason for the fund's above-average performance was our
ability to select undervalued companies with the potential for positive
change. For example, Ryder System, the transportation-service company best
known to consumers for its yellow rental trucks seen on highways and college
campuses across the nation, actually sold off its rental division last year
and began a two-year $150 million cost cutting program. The company's primary
focus now is on its more profitable logistics-for-hire business, which helps
manufacturers like General Motors create more efficient ways of transporting
raw materials to their plants and then finished products to consumers.
Several other issues we purchased at bargain valuation levels have picked up
in price during the period. German car maker BMW has rebounded as the high-end
automobile market has strengthened. Fleet Financial, a major bank holding
company in the New England and the Mid-Atlantic states, has emerged from a
large acquisition two years ago as a more dynamic business.
[GRAPHIC HORIZONTAL BAR CHART OMITTED: TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Insurance and finance 15.4%
Utilities 12.2%
Oil and gas 10.1%
Chemicals 5.1%
Consumer nondurables 5.0%
Footnote reads:
* Based on net assets as of 5/31/97. Holdings will vary over time.
Delta Air Lines was another standout during the period. The airline, which we
consider to have one of the lowest cost structures in the industry, benefited
from a highly advantageous pricing environment as more consumers took to the
skies. In fact, the company recently announced record third-quarter profits.
The fund also benefited from owning stock in companies involved in favorable
acquisitions. Three examples from the past six months include ITT Industries,
Great Western Financial Corp., and U.S. Bancorp -- all of which were sold
prior to the end of the period. While these stocks, along with others
discussed in this report, were viewed favorably at the end of the fiscal
period, all portfolio holdings are subject to review and adjustment in
accordance with the fund's investment strategy and may vary in the future.
* TARGETING POTENTIAL PROSPECTS FOR THE FUTURE; NEUTRAL ON FIXED INCOME
Patience is an essential component of our equity investment discipline. Many
companies we target have been known to falter on a short-term basis while, in
our opinion, retaining the potential to blossom two or three years down the
line. An example was Pharmacia & Upjohn, Inc., one of the world's largest
pharmaceutical companies. The company's pipeline of new products had all but
dried up, much of its profits were hurt by the weak Japanese yen, and no
chairman was in place for several months. We believe these setbacks have
brought the stock price down to levels that do not reflect the company's
long-term potential. We are confident in the abilities of the new chairman and
expect the stock's price to recover as the company resumes its product
development efforts.
At the midpoint of the fiscal year, your fund had 7.1% of its net assets
invested in fixed-income securities. Within the fixed-income portion of your
portfolio, we are taking a more neutral position than had been the case at the
beginning of the fiscal year. Mostly, the rationale for our stance is that we
believe the economy is stronger than the market currently believes, however,
bond prices already discount some Fed activity. During the period, the fund
benefited from an overweighting in mortgage-backed securities relative to its
competitors. These securities tend to do well in relatively stable
interest-rate environments. We also reduced the size of the high-yield bond
position, eliminating those bonds we believed had become overvalued.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Exxon Corp.
Oil and Gas
Mobil Corp.
Oil and Gas
SBC Communications, Inc.
Utilities
Weyerhaeuser Co.
Paper and Forest Products
Sprint Corp.
Utilities
Minnesota Mining and Manufacturing Co.
Basic Industrial Products
Morgan (J.P.) & Co., Inc.
Insurance and Finance
Bank One Corp.
Insurance and Finance
Amoco Corp.
Oil and Gas
IBM Corp.
Business Equipment and Services
Footnote reads:
These holdings represent 14.9% of the fund's net assets as of 5/31/97.
Portfolio holdings will vary over time.
* STICKING WITH OUR STRENGTHS
Looking ahead, we will continue to pick stocks on the basis of a strict set of
valuation criteria, a company's inherent values, and its potential to improve
in the future. Many shareholders might wonder how it is we can find
undervalued stocks in such a long bull market. The fact of the matter is that
whatever the market environment, there always seem to be companies with
unrealized potential. Our challenge -- which we have met successfully for the
past six years -- is to identify this potential and put it to work for your
fund.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 5/31/97, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. The Putnam Equity Income Fund seeks current income by investing
primarily in a diversified portfolio of income-producing equity
securities. Capital growth is a secondary objective when consistent with
seeking current income.
TOTAL RETURNS FOR PERIODS ENDED 5/31/97
Class A Class B Class M
(inception date) (6/15/77) (9/13/93) (12/2/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 10.86% 4.49% 10.41% 5.41% 10.60% 6.73%
- ------------------------------------------------------------------------------
1 year 24.41 17.27 23.45 18.45 23.72 19.43
- ------------------------------------------------------------------------------
5 years 124.17 111.36 116.01 114.01 118.35 110.58
Annual average 17.52 16.15 16.65 16.44 16.90 16.06
- ------------------------------------------------------------------------------
10 years 195.89 178.86 172.43 172.43 179.04 169.29
Annual average 11.46 10.80 10.54 10.54 10.81 10.41
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/97
Consumer
S&P 500 Index Price Index
- ------------------------------------------------------------------------------
6 months 13.14% 0.95%
- ------------------------------------------------------------------------------
1 year 29.40 2.23
- ------------------------------------------------------------------------------
5 years 132.32 14.60
Annual average 18.37 2.76
- ------------------------------------------------------------------------------
10 years 293.98 41.56
Annual average 14.69 3.54
- ------------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 5.75% and 3.50%, respectively. Class B share returns for
the 1-, 5-, and 10-year periods reflect the applicable contingent deferred
sales charge (CDSC), which is 5% in the first year, declining to 1% in the
sixth year, and eliminated thereafter. Returns shown for class B and class
M for periods prior to their inception are derived from the historical
performance of class A shares, adjusted to reflect both the initial sales
charge or CDSC, if any, currently applicable to each class and, in the
case of class B and class M shares, the higher operating expenses
applicable to such shares. Returns shown for class A shares have not been
adjusted to reflect payments under the class A distribution plan prior to
its implementation. All returns assume reinvestment of distributions at
NAV and represent past performance; they do not guarantee future results.
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 5/31/97
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 2 2 2
- ------------------------------------------------------------------------------
Income $0.15 $0.108 $0.122
- ------------------------------------------------------------------------------
Capital gains -- -- --
- ------------------------------------------------------------------------------
Total $0.15 $0.108 $0.122
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
11/30/96 $13.29 $14.10 $13.23 $13.23 $13.71
- ------------------------------------------------------------------------------
5/31/97 14.57 15.46 14.49 14.50 15.03
- ------------------------------------------------------------------------------
Current return
- ------------------------------------------------------------------------------
End of period
- ------------------------------------------------------------------------------
Current dividend rate1 1.92% 1.81% 1.33% 1.52% 1.46%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 2.17 2.04 1.44 1.69 1.63
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 6/30/97
(most recent calendar quarter)
Class A Class B Class M
(inception date) (6/15/77) (9/13/93) (12/2/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 15.44% 8.81% 14.98% 9.98% 15.19% 11.19%
- ------------------------------------------------------------------------------
1 year 28.13 20.77 27.16 22.16 27.54 23.10
- -----------------------------------------------------------------------------
5 years 139.19 125.51 130.42 128.42 133.07 124.99
Annual average 19.06 17.66 18.17 17.96 18.44 17.61
- -----------------------------------------------------------------------------
10 years 197.09 180.01 173.60 173.60 180.30 170.56
Annual average 11.50 10.85 10.59 10.59 10.86 10.47
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns and
net asset value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. Please see the
preceding page for the method of performance calculation.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 5.75% sales charge for class A
shares and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Standard & Poor's 500 Stock Index is an index of common stocks frequently
used as a general measure of stock market performance. The index assumes
reinvestment of all distributions and interest payments and does not take
in account brokerage fees or taxes. Securities in the fund do not match
those in the indexes and performance of the fund will differ. It is not
possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund *
Health Sciences Trust
International Growth Fund +
International New Opportunities Fund
Investors Fund
New Opportunities Fund
OTC & Emerging Growth Fund [DBL. DAGGER]
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENTS **
Putnam money market funds: ++
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts [2 DBL. DAGGERS]
* Formerly Natural Resources Fund
+ Formerly Overseas Growth Fund
[DBL. DAGGER] Formerly OTC Emerging Growth Fund
[SECTION MARK] Not available in all states.
** Relative to above.
++ An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed to maintain a
price of $1.00 per share, although there is no assurance that this price
will be maintained in the future.
[2 DBL. DAGGERS] Not offered by Putnam Investments. Certificates of
deposit offer a fixed rate of return and may be insured
up to certain limits by federal/state agencies. Savings
accounts may also be insured up to certain limits. Please
call your financial advisor or Putnam at 1-800-225-1581 to
obtain a prospectus for any Putnam fund. It contains more
complete information, including charges and expenses.
Please read it carefully before you invest or send money.
Portfolio of investments owned
May 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (87.3%) *
NUMBER OF SHARES VALUE
<S> <C> <C> <C> <C>
Aerospace and Defense (1.2%)
- ------------------------------------------------------------------------------------------------------------
110,000 Lockheed Martin Corp. $ 10,298,750
34,000 Northrop Grumman Corp. 2,881,500
--------------
13,180,250
Agriculture (--%)
- ------------------------------------------------------------------------------------------------------------
1,101 PSF Holdings LLC Class A + 29,177
Automotive (3.0%)
- ------------------------------------------------------------------------------------------------------------
4,700 Bayerische Motoren Werke (BMW) AG (Germany) 3,856,481
293,374 Ford Motor Co. 11,001,525
222,000 General Motors Corp. 12,709,500
103,000 General Motors Corp. Class H 5,677,875
--------------
33,245,381
Basic Industrial Products (3.4%)
- ------------------------------------------------------------------------------------------------------------
179,000 Cooper Industries, Inc. 9,129,000
163,000 Deere (John) & Co. 8,333,375
177,000 Minnesota Mining & Manufacturing Co. 16,239,750
176,000 New Holland N.V. (Netherlands) + 4,312,000
--------------
38,014,125
Broadcasting (0.5%)
- ------------------------------------------------------------------------------------------------------------
340,000 Comcast Corp. Class A 5,907,500
Building and Construction (0.3%)
- ------------------------------------------------------------------------------------------------------------
80,000 Masco Corp. 3,110,000
60 Terex Corp. Rights + 645
--------------
3,110,645
Business Equipment and Services (3.7%)
- ------------------------------------------------------------------------------------------------------------
153,000 Deluxe Corp. 4,972,500
173,900 Hewlett-Packard Co. 8,955,850
162,000 IBM Corp. 14,013,000
55,500 Ikon Office Solutions, Inc. 1,609,500
167,000 Xerox Corp. 11,314,250
--------------
40,865,100
Chemicals (5.0%)
- ------------------------------------------------------------------------------------------------------------
178,300 Bayer AG ADR (Germany) 6,925,797
116,000 Dow Chemical Co. 9,671,500
63,600 du Pont (E.I.) de Nemours & Co., Ltd. 6,924,450
160,000 Eastman Chemical Co. 9,520,000
200,000 Hercules, Inc. 9,375,000
110,000 PPG Industries, Inc. 6,393,750
40,000 Rohm & Haas Co. 3,450,000
93,200 Witco Chemical Corp. 3,448,400
--------------
55,708,897
Computer Services and Software (1.2%)
- ------------------------------------------------------------------------------------------------------------
110,000 Computer Associates Intl., Inc. 6,022,500
206,000 NCR Corp. + 6,695,000
--------------
12,717,500
Conglomerates (1.8%)
- ------------------------------------------------------------------------------------------------------------
135,000 Temple Inland, Inc. 8,167,500
223,800 TRW, Inc. 11,973,300
--------------
20,140,800
Consumer Durable Goods (0.9%)
- ------------------------------------------------------------------------------------------------------------
196,000 Whirlpool Corp. 9,775,500
Consumer Non Durables (5.0%)
- ------------------------------------------------------------------------------------------------------------
194,500 American Brands, Inc. 9,530,500
132,000 Colgate-Palmolive Co. 8,184,000
227,800 Kimberly-Clark Corp. 11,418,475
291,000 Philip Morris Cos., Inc. 12,804,000
209,820 RJR Nabisco Holdings Corp. 6,792,923
185,000 Tupperware Corp. 6,706,250
--------------
55,436,148
Electronics and Electrical Equipment (2.8%)
- ------------------------------------------------------------------------------------------------------------
93,600 Eaton Corp. 7,464,600
94,800 Emerson Electric Co. 5,119,200
80,000 Motorola, Inc. 5,310,000
90,000 Siemens AG (Germany) 5,084,868
91,356 Texas Instruments, Inc. 8,210,621
--------------
31,189,289
Food and Beverages (4.0%)
- ------------------------------------------------------------------------------------------------------------
191,000 Anheuser-Busch Cos., Inc. 8,189,125
104,000 Dole Food Co. 4,420,000
202,500 Flowers Industries, Inc. 3,569,063
154,000 General Mills, Inc. 9,740,500
224,000 Sara Lee Corp. 9,156,000
375,000 Whitman Corp. 9,046,875
--------------
44,121,563
Insurance and Finance (14.8%)
- ------------------------------------------------------------------------------------------------------------
168,000 Ahmanson (H.F.) & Co. 6,846,000
209,000 American General Corp. 9,248,250
199,500 AON Corp. 9,725,625
354,000 Banc One Corp. 15,310,500
143,000 Bank of New York Company, Inc. 6,095,375
102,800 Bankers Trust New York Corp. 8,699,450
76,000 Beneficial Corp. 4,883,000
17,460 CIGNA Corp. 3,033,675
225,000 Fleet Financial Group, Inc. 13,753,125
80,000 Huntington Bancshares, Inc. 2,270,000
157,000 Keycorp 8,536,875
99,000 Mercantile Bancorpation, Inc. 5,841,000
150,000 Morgan (J.P.) & Co., Inc. 16,125,000
149,400 NationsBank Corp. 8,795,925
122,000 Norwest Corp. 6,527,000
40,000 Old Kent Financial Corp. 2,135,000
285,000 PNC Bank Corp. 11,934,375
113,000 Salomon, Inc. 6,059,625
37,000 Southtrust Corp. 1,438,375
79,000 St. Paul Cos., Inc. 5,658,375
152,925 Synovus Financial Corp. 3,937,819
296,000 USF&G Corp. 6,364,000
--------------
163,218,369
Medical Supplies and Devices (1.3%)
- ------------------------------------------------------------------------------------------------------------
262,800 Baxter International, Inc. 13,862,700
Metals and Mining (0.7%)
- ------------------------------------------------------------------------------------------------------------
24,400 Carpenter Technology Corp. 1,055,300
224,000 Freeport-McMoRan Copper & Gold Co., Inc. Class A 6,216,000
--------------
7,271,300
Oil and Gas (10.0%)
- ------------------------------------------------------------------------------------------------------------
169,000 Amoco Corp. 15,104,375
42,000 Atlantic Richfield Co. 6,111,000
58,000 British Petroleum PLC ADR (United Kingdom) 8,402,750
219,400 Elf Aquitane ADR (France)+ 11,436,225
314,000 Exxon Corp. 18,604,500
130,500 Mobil Corp. 18,253,688
307,000 Occidental Petroleum Corp. 7,137,750
226,000 PanEnergy Corp. 10,565,500
241,000 Total Corp. ADR (France) 10,995,625
138,000 YPF S.A. ADR (Argentina) 4,140,000
--------------
110,751,413
Packaging and Containers (0.9%)
- ------------------------------------------------------------------------------------------------------------
167,500 Crown Cork & Seal Co., Inc. 9,756,875
Paper and Forest Products (2.2%)
- ------------------------------------------------------------------------------------------------------------
95,000 Chesapeake Corp. 3,182,500
87,000 Rayonier, Inc. 3,730,125
39,000 Unisource Worldwide, Inc. 677,625
339,000 Weyerhaeuser Co. 16,907,625
--------------
24,497,875
Pharmaceuticals (2.5%)
- ------------------------------------------------------------------------------------------------------------
112,700 American Home Products Corp. 8,593,375
110,200 Bristol-Myers Squibb Co. 8,085,925
323,370 Pharmacia & Upjohn, Inc. 11,196,686
--------------
27,875,986
Photography (1.6%)
- ------------------------------------------------------------------------------------------------------------
139,000 Eastman Kodak Co. 11,519,625
120,000 Polaroid Corp. 6,120,000
--------------
17,639,625
Publishing (0.9%)
- ------------------------------------------------------------------------------------------------------------
182,000 McGraw-Hill, Inc. 9,941,750
Real Estate Investment Trust (REITs) (1.1%)
- ------------------------------------------------------------------------------------------------------------
173,000 Beacon Properties Corp. 5,363,000
56,000 Duke Realty Investments, Inc. 2,135,000
67,000 Equity Residential Properties Trust 3,165,750
67,000 LTC Properties, Inc. 1,189,250
--------------
11,853,000
Retail (2.2%)
- ------------------------------------------------------------------------------------------------------------
87,800 Dayton Hudson Corp. 4,225,375
331,000 Kmart Corp. + 4,634,000
149,300 Lowe's Cos., Inc. 5,878,688
22,200 Rite Aid Corp. 1,032,300
172,000 Sears, Roebuck & Co. 8,449,500
--------------
24,219,863
Telecommunications (0.8%)
- ------------------------------------------------------------------------------------------------------------
218,600 MCI Communications Corp. 8,388,775
Transportation (3.8%)
- ------------------------------------------------------------------------------------------------------------
38,200 Burlington Northern Santa Fe Corp. 3,170,600
192,000 CSX Corp. 10,176,000
119,000 Delta Air Lines, Inc. 11,156,250
39,000 Norfolk Southern Corp. 3,787,875
220,400 Ryder System, Inc. 7,300,750
100,000 Union Pacific Corp. 6,775,000
--------------
42,366,475
Utilities (11.7%)
- ------------------------------------------------------------------------------------------------------------
209,000 American Telephone & Telegraph Co. 7,706,875
169,000 Ameritech Corp. 11,069,500
84,000 Baltimore Gas & Electric Co. 2,205,000
154,100 Bell Atlantic Corp. 10,787,000
204,000 BellSouth Corp. 9,256,500
60,400 Carolina Power & Light Co. 2,098,900
198,000 Central & South West Corp. 4,207,500
256,463 Cinergy Corp. 8,976,205
157,000 GTE Corp. 6,927,625
177,000 NYNEX Corp. 9,513,750
109,000 OGE Energy Corp. 4,687,000
262,000 Pacific Enterprises 8,580,500
138,600 Potomac Electric Power Co. 3,187,800
66,000 Public Service Co. of Colorado 2,664,750
302,403 SBC Communications, Inc. 17,690,576
345,000 Sprint Corp. 16,861,875
58,700 Veba (Vereinigte Elektrizitaets Bergwerks) AG (Germany) 3,325,760
--------------
129,747,116
--------------
Total Common Stocks (cost $787,081,237) $ 964,832,997
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (3.8%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Pass-Through Certificates (2.1%)
- ------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
$3,361,313 8 1/2s, with due dates from November 1, 2026 to
April 1, 2027 $ 3,481,044
830,000 8 1/2s, TBA, June 16, 2027 859,565
1,055,000 7 1/2s, TBA, June 16, 2027 1,052,690
109,996 7s, February 15, 2027 94,415
1,780,349 5 1/2s, with due dates from March 1, 2011 to April 1, 2011 1,667,957
Federal National Mortgage Association
2,138,984 7s, with due dates from July 1, 2023 to February 1, 2027 2,081,492
3,560,000 7s, TBA, June 16, 2027 3,464,307
203,679 6s, Dwarfs, October 1, 2009 194,703
510,000 5.94s, December 12, 2005 477,967
Government National Mortgage Association
2,816,816 7 1/2s, with due dates from January 15, 2027 to
February 15, 2027 2,805,355
5,917,475 7s, with due dates from January 15, 2026 to April 15, 2027 5,756,586
1,111,594 6 1/2s, with due dates from October 15, 2024 to
June 15, 2026 1,051,490
--------------
22,987,571
U.S. Treasury Obligations (1.7%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
$ 1,180,000 11 5/8s, November 15, 2004 $ 1,521,280
175,000 10 3/4s, August 15, 2005 219,489
3,415,000 8 1/8s, August 15, 2019 3,840,270
U.S. Treasury Notes
385,000 11 7/8s, November 15, 2003 # 490,455
845,000 11 1/8s, August 15, 2003 1,038,294
325,000 7 1/4s, August 15, 2004 336,629
680,000 6 7/8s, May 15, 2006 689,030
4,880,000 6 1/2s, October 15, 2006 4,820,513
3,540,000 6 3/8s, April 30, 1999 3,551,611
2,690,000 6 1/4s, February 15, 2007 2,616,025
--------------
19,123,596
--------------
Total U.S. Government and Agency Obligations
(cost $42,118,426) $ 42,111,167
CORPORATE BONDS AND NOTES (2.2%) *
PRINCIPAL AMOUNT VALUE
Advertising (--%)
- ------------------------------------------------------------------------------------------------------------
$ 10,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 $ 10,263
15,000 Universal Outdoor, Inc. sr. sub. notes 9 3/4s, 2006 15,413
--------------
25,676
Aerospace and Defense (--%)
- ------------------------------------------------------------------------------------------------------------
5,000 Howmet Corp. sr. sub. notes 10s, 2003 5,400
5,000 L-3 Communications Corp. 144A sr. sub. notes 10 3/8s, 2007 5,263
10,000 Sequa Corp. bonds 8 3/4s, 2001 10,200
5,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 5,013
10,000 Wyman-Gordon Co. sr. notes 10 3/4s, 2003 10,800
--------------
36,676
Agriculture (--%)
- ------------------------------------------------------------------------------------------------------------
12,786 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 [2 DBL. DAGGERS] 13,618
Apparel (--%)
- ------------------------------------------------------------------------------------------------------------
5,000 GFSI, Inc. 144A sr. sub. notes 9 5/8s, 2007 5,063
Automotive (--%)
- ------------------------------------------------------------------------------------------------------------
9,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 9,990
180,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 171,113
5,000 CSK Auto, Inc. 144A sr. sub. notes 11s, 2006 5,238
5,000 Titan Wheel International Inc. sr. sub. notes 8 3/4s, 2007 5,075
--------------
191,416
Banks (0.3%)
- ------------------------------------------------------------------------------------------------------------
170,000 Abbey National PLC sub. notes 7.35s, 2049 (United Kingdom) 168,298
400,000 Advanta National Bank sr. notes 7.02s, 2001 383,480
10,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 10,000
300,000 Citicorp sub. notes 7 1/8s, 2005 298,005
300,000 Den Danske Bank 144A sub. notes 6.55s, 2003 (Denmark) 291,300
85,000 First National Bank of Omaha sub. notes 7.32s, 2010 81,762
10,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 10,900
10,000 North Fork Bancorp, Inc. 144A bonds 8.7s, 2026 9,715
5,000 Ocwen Federal Bank sub. deb. 12s, 2005 5,394
315,000 Peoples Bank- Bridgeport sub. notes 7.2s, 2006 304,350
5,000 Riggs Capital Trust 144A bonds 8 5/8s 4,843
250,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 248,750
300,000 Scotland International Finance 144A sub. notes 8.85s, 2006
(Netherlands) 329,436
5,000 Sovereign Capital Trust 144A company guaranty 9s, 2027 4,935
310,000 Sparbanken Sverige AB (Swedbank) 144A sub. 7 1/2s, 2006
(Sweden) 305,666
230,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 224,965
155,000 State Street Institution 144A company guaranty 7.94s, 2026 150,928
5,000 Webster Capital Trust I 144A bonds 9.36s, 2027 5,112
325,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 326,931
--------------
3,164,770
Basic Industrial Products (--%)
- ------------------------------------------------------------------------------------------------------------
5,000 Astor Corp. 144A sr. sub. notes 10 1/2s, 2006 5,225
15,000 Clark-Schwebel sr. notes 10 1/2s, 2006 15,975
5,000 Inter-City Products sr. notes 9 3/4s, 2000 5,100
5,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 4,989
--------------
31,289
Broadcasting (0.1%)
- ------------------------------------------------------------------------------------------------------------
15,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 15,488
5,000 Cablevision Systems Corp. sr. sub. deb. 9 7/8s, 2023 4,900
10,000 Capstar Broadcasting 144A sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 ++ 6,100
10,000 Comcast Corp. sr. sub. 9 1/8s, 2006 10,338
10,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 10,750
305,000 Continental Cablevision, Inc. sr. deb. 9 1/2s, 2013 341,917
20,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) ++ 13,550
5,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (13 1/2s, 9/30/99), 2004
(United Kingdom) ++ 4,100
5,000 Gray Communications Systems, Inc. sr. sub. notes 10 5/8s, 2006 5,250
10,000 Heartland Wireless Communications, Inc. sr. notes Ser. B,
14s, 2004 3,950
5,000 Jacor Communications, Inc. company guaranty 9 3/4s, 2006 5,200
15,000 Jacor Communications, Inc. sr. sub. notes 10 1/8s, 2006 15,900
10,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 10,675
15,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 14,625
25,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 ++ 21,500
25,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 27,375
5,000 RBS Participacoes S.A. 144A company guaranty 11s, 2007
(Brazil) 5,200
5,000 Rogers Cablesystems Ltd. deb. 10 1/8s, 2012 (Canada) 5,225
10,000 Sinclair Broadcasting Group sr. sub. notes 10s, 2005 10,425
5,000 Spanish Broadcasting Systems 144A sr. notes 11s, 2004 5,225
15,000 Sullivan Broadcasting sr. sub. notes 10 1/4s, 2005 15,375
5,000 TCI Satellite Entertainment 144A sr. sub. notes 10 7/8s, 2007 5,050
5,000 TV Azteca Sa De Cv 144A sr. notes 10 1/2s, 2007 (Mexico) 5,131
5,000 TV Filme, Inc. 144A sr. notes 12 7/8s, 2004 (Brazil) 5,213
--------------
568,462
Building and Construction (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 Atrium Companies Inc. 144A sr. sub. notes 10 1/2s, 2006 10,338
5,000 Building Materials Corp. sr. notes Ser. B, 8 5/8s, 2006 5,000
5,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 5,756
5,000 Cia Latino Americana 144A company guaranty 11 5/8s, 2004
(Argentina) 5,200
5,000 Continental Homes Holding Corp. sr. notes 10s, 2006 5,200
210,000 Guangdong Enterprises 144A sr. notes 8 7/8s, 2007
(Hong Kong) 211,313
15,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 16,875
--------------
259,682
Business Equipment and Services (--%)
- ------------------------------------------------------------------------------------------------------------
120,000 Boise Cascade Corp. deb. 7.35s, 2016 111,150
10,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 9,900
5,000 Iron Mountain, Inc. sr. sub. notes 10 1/8s, 2006 5,200
5,000 Loomis Fargo & Co. 144A sr. sub. notes 10s, 2004 5,163
10,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 11,150
5,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 5,325
--------------
147,888
Chemicals (0.1%)
- ------------------------------------------------------------------------------------------------------------
5,000 Freedom Chemicals, Inc. 144A sr. sub. notes 10 5/8s, 2006 5,225
15,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 15,900
125,000 Lyondell Petrochemical Co. notes 9 1/8s, 2002 135,293
230,000 Millennium America Inc. company guaranty 7 5/8s, 2026 217,260
5,000 NL Industries, Inc. sr. notes stepped-coupon zero %
(13s, 10/15/98), 2005 ++ 4,738
240,000 Sociedad Quimica Y Minera de Chile S.A. 144A bonds 7.7s,
2006 (Chile) 240,600
10,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 ++ 6,538
5,000 Union Carbide Global Enterprises sr. sub. Ser. B, 12s, 2005 5,656
--------------
631,210
Computer Services and Software (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 Unisys Corp. sr. notes 11 3/4s, 2004 10,763
Conglomerates (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 Congoleum Corp. sr. notes 9s, 2001 10,200
10,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 10,025
--------------
20,225
Consumer Durable Goods (--%)
- ------------------------------------------------------------------------------------------------------------
15,000 Icon Fitness Corp. 144A sr. disc. notes stepped-coupon Ser. B,
zero %, (14s, 11/15/01), 2006 ++ 8,025
10,000 Remington Products Co. sr. sub. notes Ser. B, 11s, 2006 8,350
95,000 RJR Nabisco, Inc. notes 8 3/4s, 2005 94,821
15,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 16,350
--------------
127,546
Consumer Non Durables (--%)
- ------------------------------------------------------------------------------------------------------------
5,000 E&S Holdings Corp. sr. sub. notes Ser. B, 10 3/8s, 2006 5,225
5,000 Foamex (L.P.) 144A sr. sub. notes 9 7/8s, 2007 5,088
15,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 15,225
80,000 Philip Morris Cos., Inc. deb. 7 3/4s, 2027 77,191
15,000 Revlon Worldwide Corp. 144A sr. disc. notes zero %, 2001 10,106
--------------
112,835
Consumer Services (--%)
- ------------------------------------------------------------------------------------------------------------
20,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 21,600
10,000 Affinity Group Holdings 144A sr. notes 11s, 2007 10,450
10,000 AMC Entertainment, Inc. 144A sr. sub. notes 9 1/2s, 2009 10,163
5,000 AmeriKing. Inc. sr. notes 10 3/4s, 2006 5,250
15,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 16,575
20,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 21,200
5,000 Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 5,025
5,000 Hollinger International Publishing, Inc. company guaranty
8 5/8s, 2005 5,025
10,000 Host Marriott Corp. sr. notes Ser. B, 9 1/2s, 2005 10,450
10,000 John Q Hammons Hotels, Inc. 1st mtge. 9 3/4s, 2005 10,488
--------------
116,226
Electronics and Electrical Equipment (--%)
- ------------------------------------------------------------------------------------------------------------
5,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s, 2006
(India) 5,363
7,397 Cirent Semiconductor, Inc. sr. sub. notes 10.22s, 2002 7,397
7,427 Cirent Semiconductor, Inc.144A sr. sub. notes 10.14s, 2004 7,427
5,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 5,000
5,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 10 1/8s, 2007 5,325
15,000 International Semi-Tech. Corp. sr. secd. disc. notes
stepped-coupon zero % (11 1/2s, 8/15/00), 2003
(Canada) ++ 9,150
10,000 Motors and Gears, Inc. sr. notes Ser. A, 10 3/4s, 2006 10,300
--------------
49,962
Energy-Related (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 Panda Global Energy Co. 144A sr. notes 12 1/2s, 2004 9,700
115,000 TermoEmcali Funding Corp. 144A secd. 10 1/8s, 2014
(Colombia) 122,475
--------------
132,175
Entertainment (0.1%)
- ------------------------------------------------------------------------------------------------------------
345,000 News America Holdings, Inc. deb. 7 3/4s, 2045 315,654
15,000 Premier Parks, Inc. sr. notes 9 3/4s, 2007 15,563
10,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 11,100
10,000 Six Flags Corp. sr. sub. notes stepped-coupon zero %
(12 1/4s, 6/15/98), 2005 ++ 10,200
715,000 Time Warner Entertainment Inc. deb. 7 1/4s, 2008 697,075
135,000 Time Warner Entertainment Inc. notes 8 7/8s, 2012 146,822
5,000 Viacom International, Inc. sub. deb. 8s, 2006 4,863
--------------
1,201,277
Environmental Control (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 Allied Waste Industries, Inc. 144A sr. disc. notes
stepped-coupon zero % (11.3s, 6/1/02), 2007 ++ 6,050
Food and Beverages (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 10,000
5,000 Del Monte Corp. 144A sr. sub. notes 12 1/4s, 2007 5,363
20,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 21,600
5,000 MBW Foods, Inc. 144A sr. sub. notes 9 7/8s, 2007 5,050
10,000 Stater Brothers sr. notes 11s, 2001 10,763
--------------
52,776
Health Care (0.1%)
- ------------------------------------------------------------------------------------------------------------
180,000 Columbia Healthcare Corp. deb. 8.36s, 2024 190,876
15,000 IMED Corp. sr. sub. notes 9 3/4s, 2006 15,225
5,000 Integrated Health Services, Inc. 144A sr. sub. notes
9 1/2s, 2007 5,150
10,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 10,850
5,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 4,975
255,000 Tenet Healthcare Corp. sr. notes 8s, 2005 255,319
5,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 5,050
5,000 Twin Laboratories, Inc. company guaranty 10 1/4s, 2006 5,200
--------------
492,645
Insurance and Finance (0.6%)
- ------------------------------------------------------------------------------------------------------------
130,000 Allstate Financing II company guaranty 7.83s, 2045 122,460
15,000 Coleman Escrow Corp. 144A sr. disc. notes zero %, 2001 9,675
5,000 Colonial Capital I 144A company guaranty 8.92s, 2027 4,877
265,000 Conseco Inc. sr. notes 10 1/2s, 2004 308,918
295,000 Discover Credit Corp. med. term notes 9.07s, 2012 334,430
5,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 2006 5,200
490,000 Executive Risk Capital Trust company guaranty Ser. B,
8.675s, 2027 485,002
300,000 Finova Capital Corp. notes 9 1/8s, 2002 325,485
120,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 118,898
280,000 Firstar Capital Trust I company guaranty Ser. B, 8.32s, 2026 279,807
420,000 Ford Motor Credit Corp. notes 8.2s, 2002 441,013
10,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006
(United Kingdom) 10,375
425,000 Lehman Bros Holdings, Inc. med. term notes 6.4s, 1999 421,243
260,000 Markel Capital Trust I 144A company guaranty 8.71s, 2046 258,050
330,000 Money Store, Inc. (The) notes 8.05s, 2002 333,102
125,000 Orange Cogen Funding 144A company guaranty 8.175s, 2022 125,465
320,000 Phoenix Home Life Mutual Insurance Co. 144A notes
6.95s, 2006 308,179
10,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 10,275
5,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 5,225
400,000 Salomon, Inc. sr. notes 7.3s, 2002 402,392
220,000 Salton Sea Funding Corp. company guaranty Ser. E, 8.3s, 2011 225,502
335,000 Sampoerna International Finance Co. 144A company guaranty
8 3/8s, 2006 (Indonesia) 338,987
305,000 Societe Generale 144A notes 7.85s, 2049 (France) 309,728
215,000 Southern Investments Service Co. sr. notes 6.8s, 2006
(United Kingdom) 206,613
165,000 State Development Bank of China notes 7 3/8s, 2007 (China) 162,372
355,000 Tig Capital Trust I 144A bonds 8.597s, 2027 356,136
315,000 Trenwick Capital Trust 144A bonds 8.82s, 2037 316,465
5,000 Vicap SA. 144A company guaranty 10 1/4s, 2002 (Mexico) 5,075
--------------
6,230,949
Medical Supplies and Devices (--%)
- ------------------------------------------------------------------------------------------------------------
25,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 27,938
10,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 11,100
10,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B,
10 3/4s, 2000 10,125
--------------
49,163
Metals and Mining (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 AK Steel Corp. sr. notes 9 1/8s, 2006 10,200
5,000 Continental Global Group 144A sr. notes Ser. A, 11s, 2007 5,225
5,000 Echo Bay Mines jr. sub. deb. 11s, 2027 (Canada) 5,063
10,000 Maxxam Group Holdings Inc. sr. notes Ser. B, 12s, 2003 10,300
190,000 Noranda Inc. notes 7s, 2005 (Canada) 184,496
221,000 PT Alatief Freeport sr. notes 9 3/4s, 2001 (Netherlands) 239,098
5,000 Royal Oak Mines, Inc. company guaranty Ser. B, 11s, 2006
(Canada) 4,988
20,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 21,200
--------------
480,570
Oil and Gas (0.1%)
- ------------------------------------------------------------------------------------------------------------
10,000 Abraxas Petroleum Corp. 144A sr. notes Ser. B, 11 1/2s, 2004 10,900
5,000 CIA Naviera Perez Companc S.A. 144A bonds 9s, 2004
(Argentina) 5,009
10,000 Parker Drilling Corp. 144A company guaranty 9 3/4s, 2006 10,375
175,000 Petro Geo-Services AS ADR notes 7 1/2s, 2007 (Norway) 174,235
5,000 Pride Petroleum Services, Inc. 9 3/8s, 2007 5,213
5,000 Transamerican Refining 144A 15s, 1998 5,000
38,000 TransTexas Gas Corp. sr. disc. notes stepped-coupon zero %
(13 1/4s, 12/16/01), 2003 ++ 24,700
155,000 El Paso Natural Gas Co. deb. 7 1/2s, 2026 150,837
17,000 Gerrity Oil & Gas Corp. sr. sub. notes 11 3/4s, 2004 18,615
205,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006 (Canada) 211,150
5,000 Maxus Energy Corp. notes 9 1/2s, 2003 5,175
100,000 Petroliam Nasional Berhad 144A notes 7 5/8s, 2026
(Malaysia) 97,815
295,000 Petroliam Nasional Berhad 144A notes 7 1/8s, 2005
(Malaysia) 292,970
--------------
1,011,994
Packaging and Containers (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 Innova S De R.L. 144A sr. notes 12 7/8s, 2007 (Mexico) 10,150
2,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 2,170
5,000 Radnor Holdings Inc. sr.notes 10s, 2003 5,100
5,000 US Can Corp. company guaranty Ser. B, 10 1/8s, 2006 5,281
--------------
22,701
Paper and Forest Products (--%)
- ------------------------------------------------------------------------------------------------------------
5,000 Domtar, Inc. deb. 9 1/2s, 2016 (Canada) 4,950
15,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 15,150
10,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 9,350
--------------
29,450
Publishing (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 10,725
420,000 News America Holdings, Inc. deb. 7.7s, 2025 390,260
5,000 Sun Media Corp. 144A sr. sub. notes 9 1/2s, 2007 (Canada) 4,988
--------------
405,973
Real Estate Investment Trust (REITs) (0.1%)
- ------------------------------------------------------------------------------------------------------------
70,000 American Health Properties, Inc. notes 7 1/2s, 2007 69,292
50,000 American Health Properties, Inc. notes 7.05s, 2002 49,567
345,000 First Industrial Realty Trust, Inc. notes 7.6s, 2007 345,904
120,000 Health Care Property Investors, Inc. sr. notes 6 1/2s, 2006 112,208
10,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 10,300
205,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 208,098
15,000 Tanger Properties Ltd. Partnership gtd. notes 8 3/4s, 2001 15,327
--------------
810,696
Recreation (--%)
- ------------------------------------------------------------------------------------------------------------
15,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 16,163
10,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 9,400
25,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B,
13s, 2002 27,750
10,000 Empress River Casino sr. notes 10 3/4s, 2002 10,600
15,000 Players International, Inc. sr. notes 10 7/8s, 2005 15,675
5,000 Trump A.C. 1st mtge. 11 1/4s, 2006 4,900
--------------
84,488
Retail (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 Brylane (L.P.) sr. sub. notes 10s, 2003 10,600
195,000 Federated Department Stores sr. notes 8 1/2s, 2003 205,629
10,000 Johns Manville International Group sr. notes 10 7/8s, 2004 10,975
10,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 10,350
10,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 10,300
5,000 Ralphs Grocery Co. 144A sr. sub. notes 11s, 2005 5,488
30,000 Southland Corp. 1st priority sr. sub. deb. 5s, 2003 25,238
10,000 Southland Corp. deb. Ser. C, 12s, 2009 10,025
5,000 Supermercados Norte 144A bonds 10 7/8s, 2004 (Argentina) 5,163
10,000 Waban, Inc. sr. sub. notes 11s, 2004 11,050
5,000 William Carter Co. 144A sr. sub. notes 12s, 2008 5,225
5,000 William Carter Co. sr. sub. notes Ser. A, 10 3/8s, 2006 5,225
--------------
315,268
Specialty Consumer Products (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 Coty Inc. gtd. sr. sub. notes 10 1/4s, 2005 10,600
5,000 Genesco, Inc. sr. notes 10 3/8s, 2003 5,100
15,000 Herff Jones, Inc. sr. sub. notes 11s, 2005 16,050
20,000 Sassco Fashions Ltd. 144A notes 12 3/4s, 1999 20,800
--------------
52,550
Telecommunications (0.1%)
- ------------------------------------------------------------------------------------------------------------
15,000 American Communications Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 7,200
5,000 Brooks Fiber Properties, Inc. 144A sr. notes 10s, 2007 5,038
25,000 Cencall Communications Corp. sr. disc. notes
stepped-coupon zero % (10 1/8s, 1/15/99), 2004 ++ 19,250
10,000 Centennial Cellular Corp. sr. notes 8 7/8s, 2001 9,925
10,000 Comcast Cellular 144A sr. notes 9 1/2s, 2007 10,013
10,000 Dobson Communications Corp. 144A sr. notes 11 3/4s, 2007 9,725
10,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 11,000
5,000 Frontiervision Operating Partners L.P. sr. sub. notes 11s, 2006 5,175
10,000 Globo Communicacoes 144A company guaranty 10 1/2s,
2006 (Brazil) 10,375
25,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 13,250
35,000 Intelcom Group (USA), Inc. company guaranty
stepped-coupon zero % (12 1/2s, 5/1/01), 2006 ++ 22,488
20,000 Interact Systems, Inc. sr. disc. notes stepped-coupon zero %
(14s, 8/1/99), 2003 ++ 9,000
25,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 ++ 14,750
10,000 Intermedia Communications, Inc. sr. notes Ser. B, 13 1/2s, 2005 11,300
20,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/01/01), 2006 ++ 13,600
5,000 ITC Deltacom, Inc. 144A sr. notes 11s, 2007 5,150
15,000 McLeod, Inc. 144A sr. disc. notes stepped-coupon zero %
(10 1/2s, 3/1/02), 2007 ++ 8,925
25,000 MFS Communications sr. disc. notes stepped-coupon zero %
(8 7/8s, 1/1/01), 2006 ++ 19,493
20,000 MFS Communications sr. disc. notes stepped-coupon zero %
(9 3/8s, 1/15/99), 2004 ++ 18,487
20,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 14,650
15,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 15,450
40,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9 3/4s, 2/15/99), 2004 ++ 30,400
15,000 Nextlink Communications sr. notes 12 1/2s, 2006 15,844
10,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 8,800
25,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 22,000
10,000 Orbcomm Global Capital Corp. sr. notes Ser. B, 14s, 2004 10,450
10,000 Paging Network, Inc. sr. sub. notes 10s, 2008 9,450
50,000 Pricellular Wireless Corp. sr. disc. notes stepped-coupon Ser. B,
zero % (14s, 11/15/97), 2001 ++ 52,625
5,000 Sprint Spectrum L.P. sr. notes 11s, 2006 5,525
5,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 4,950
15,000 Teleport Communications Group Inc. sr. disc. notes
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 10,538
490,000 WorldCom, Inc. notes 7 3/4s, 2007 497,963
--------------
922,789
Textiles (--%)
- ------------------------------------------------------------------------------------------------------------
5,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 5,175
15,000 Polysindo International Finance company guaranty 11 3/8s,
2006 (Indonesia) 16,313
10,000 Tultex Corp. sr. notes 10 5/8s, 2005 10,875
--------------
32,363
Transportation (0.1%)
- ------------------------------------------------------------------------------------------------------------
5,000 Atlantic Express, Inc. 144A company guaranty 10 3/4s, 2004 5,200
5,000 Blue Bird Body Co. sr. sub. notes Ser. B, 10 3/4s, 2006 5,338
325,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 305,737
10,000 Consorcio/MCII Holdings secd. notes stepped-coupon zero %
(12s, 11/15/98), 2002 ++ 8,675
110,000 Continental Airlines, Inc. 144A bonds 7.42s, 2008 110,073
315,000 CSX Corp. 144A deb. 7.95s, 2027 318,736
10,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003
(Greece) 9,875
10,000 International Shipholding Corp. sr. notes 9s, 2003 10,100
310,000 Norfolk Southern Corp. bonds 7.05s, 2037 310,298
--------------
1,084,032
Utilities (0.5%)
- ------------------------------------------------------------------------------------------------------------
180,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 173,569
260,000 California Energy Corp. disc. notes 10 1/4s, 2005 279,500
195,000 Citizens Utilities Co. bonds 7.68s, 2034 207,451
50,000 Cleveland Electric Illuminating Co. 1st mtge. Ser. E, 9s, 2023 51,395
140,000 CMS Energy Corp. sr. notes 8 1/8s, 2002 140,500
280,000 Connecticut Light & Power Co. 1st mtge. Ser. A, 7 7/8s, 2001 280,176
100,000 Edison Mission Energy 144A company guaranty 7.33s, 2008 98,691
307,000 EIP Funding-Public Service Co. of New Mexico deb.
10 1/4s, 2012 339,452
5,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 5,282
385,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 387,114
690,000 Enersis S.A. notes 7.4s, 2016 (Chile) 651,270
190,000 Enersis S.A. notes 6.6s, 2026 (Chile) 183,935
10,000 First PV Funding deb. 10.15s, 2016 10,732
110,000 Illinova Corp. sr. notes 7 1/8s, 2004 108,337
255,000 Israel Electric Corp., Ltd. 144A sr. notes 7 1/4s, 2006 (Israel) 250,048
110,409 Midland Cogeneration Ventures deb. 10.33s, 2002 118,138
10,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 11,430
5,000 Niagara Mohawk Power Corp. 1st mtge. 7 3/4s, 2006 4,853
20,000 Niagara Mohawk Power Corp. med. term notes 9.95s, 2000 19,975
79,696 Northeast Utilities System notes Ser. A, 8.58s, 2006 75,851
222,865 Northeast Utilities System notes Ser. B, 8.38s, 2005 214,140
120,000 Ras Laffan Natural Gas 144A secd. notes 8.294s, 2014 (Qatar) 122,850
235,000 Ras Laffan Natural Gas 144A secd. notes 7.628s, 2006 (Qatar) 236,469
250,000 Texas New-Mexico Power Utilities 1st mtge. 9 1/4s, 2000 263,035
400,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 398,532
345,000 Texas Utilities Electric Capital Trust V company guaranty
8.175s, 2037 341,453
290,000 US West Capital Funding, Inc. company guaranty 6.95s, 2037 286,743
--------------
5,260,921
--------------
Total Corporate Bonds and Notes (cost $24,126,985) $ 24,192,137
CONVERTIBLE PREFERRED STOCKS (0.6%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
169,000 Freeport-McMoRan Copper Co., Inc. $1.75 cv. pfd. $ 4,647,500
200 Granite Broadcasting $1.938 cv. pfd. 10,400
31,000 Kmart Financing I $3.875 cv. pfd. 1,829,000
--------------
Total Convertible Preferred Stocks (cost $5,365,276) $ 6,486,900
FOREIGN GOVERNMENT BONDS AND NOTES (0.5%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
DKK 2,275,000 Denmark (Government of) bonds 8s, 2006 $ 386,430
ITL 3,245,000,000 Italy (Government of) bonds 7 3/4s, 2001 1,984,346
USD 750,000 Quebec (Province of) deb. Ser. NN, 7 1/8s, 2024 693,248
ZAR 2,835,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 562,304
GBP 1,400,000 United Kingdom Treasury bonds 7 1/2s, 2006 2,341,206
--------------
Total Foreign Government Bonds and Notes
(cost $5,958,083) $ 5,967,534
CONVERTIBLE BONDS AND NOTES (0.3%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 1,300,000 Boston Chicken, Inc. cv. sub. deb. 7 3/4s, 2004 $ 1,228,500
10,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 6,100
JPY 150,000,000 Toyota Motor Corp. cv. deb. 1.2s, 1998 (Japan) 2,222,606
25,000 Winstar Communications. Inc. cv sr. disc. notes zero %
(14s, 10/15/00), 2005 ++ 15,250
--------------
Total Convertible Bonds and Notes (cost $3,010,433) $ 3,472,456
COLLATERALIZED MORTGAGE OBLIGATIONS (0.2%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 136,736 Chase Mortgage Finance Corp. Ser. 93-3, Class B13,
7.461s, 2024 $ 85,405
214,154 GE Capital Mortgage Services, Inc. 144A Ser. 94-12,
Class B3, 6s, 2009 190,597
Housing Securities Inc.
107,073 Ser. 91-B, Class B6, 9s, 2006 102,095
315,948 Ser. 93-F, Class F9M2, 7s, 2023 299,953
19,357 Ser. 93-J, Class J4, 6.664s, 2009 17,597
21,202 Ser. 93-J, Class J5, 6.664s, 2009 16,927
21,625 Ser. 94-1, Class AB1, 6 1/2s, 2009 19,564
Prudential Home Mortgage Securities
79,090 Ser. 92-25, Class B3, 8s, 2022 + 77,138
91,748 Ser. 92-13, Class B3, 7 1/2s, 2007 81,828
52,461 Ser. 93-31, Class B2, 6s, 2000 42,026
Prudential Home Mortgage Securities 144A
90,770 Ser. 94-31, Class B3, 8s, 2009 86,483
457,224 Ser. 95-D, Class 5B, 7.536s, 2024 334,035
328,019 Ser. 95-C, Class 1B1, 7.531s, 2001 318,554
295,682 Ser. 94-A, Class 4B, 6.803s, 2024 274,556
206,771 Ser. 94-D, Class 3B, 6.310s, 2009 192,205
97,266 Ser. 94-D, Class 4B, 6.310s, 2009 83,282
201,602 Ryland Mortgage Securities Corp. Ser. 94-7C, Class B2,
7.359s, 2025 194,232
--------------
Total Collateralized Mortgage Obligations
(cost $2,282,775) $ 2,416,477
BRADY BONDS (0.1%) * [DIAMOND]
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 161,890 Argentina (Republic of) deb. 6 3/4s, 2005 (Argentina) $ 150,962
640,000 United Mexican States Ser. C, 6.820s, 2019 (Mexico) 590,000
--------------
Total Brady Bonds (cost $734,571) $ 740,962
PREFERRED STOCKS (--%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
1 American Radio Systems Corp. 144A, $11.38 pfd. [2 DBL. DAGGERS] $ 106
134 Cablevision Systems Corp. Ser. M, $11.125 pfd. [2 DBL. DAGGERS] 12,663
145 Chancellor Radio Broadcasting 144A, $12.00 pfd. 15,733
100 Chevy Chase Capital Corp. Ser. A, $5.19 pfd. 4,925
266 El Paso Electric Co., $11.40 pfd [2 DBL. DAGGERS] 29,659
15 Fresenius Medical Care AG Ser. D, $9.00 pfd. (Germany) 15,375
346 Nextlink Communications, Inc. Ser. 144A, $7.00 pfd. [2 DBL. DAGGERS] 17,300
365 Public Service Co. of New Hampshire Ser. A, $2.65 pfd. 9,034
330 SD Warren Co. Ser. B, $3.50 pfd. 13,200
85 SFX Broadcasting, Inc. Ser. E, $12.63 pfd. [2 DBL. DAGGERS] 9,159
10 Spanish Broadcasting Systems 144A, 14.25% pfd. (Spain) [2 DBL. DAGGERS] 8,900
--------------
Total Preferred Stocks (cost $130,738) $ 136,054
UNITS (--%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
10 Advanced Radio Telecommunications units 14s, 2007 $ 10,500
10 Colt Telecommunications Group PLC units stepped-coupon
zero % (12s, 12/15/01), 2006 (United Kingdom) ++ 6,350
10 Esat Holdings Ltd. 144A units stepped-coupon zero %
(12 1/2s, 2/1/02), 2007 ++ 5,975
25 Fitzgerald Gaming Co. units 13s, 2002 19,500
15 Globalstar L.P. Capital 144A units 11 3/8s, 2004 15,188
10 McCaw International Ltd. 144A units stepped-coupon zero %
(13s, 4/15/02), 2007 ++ 4,825
5,000 Paging Network do Brasil 144A units 13 1/2s, 2005 (Brazil) 5,000
5,000 Stone Container Corp. units sr. sub. 12 1/4s, 2002 5,113
5 Wireless One Inc. units stepped-coupon zero %
(13 1/2s, 8/1/01), 2006 ++ 1,350
--------------
Total Units (cost $77,273) $ 73,801
WARRANTS (--%)*+
NUMBER OF WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------
25 Hyperion Telecommunications 144A 4/15/01 $ 750
20 Interact Systems, Inc. 144A 8/1/03 5
25 Intermedia Communications, Inc. 144A 6/1/00 688
335 Nextlink Communications, Inc. 144A 2/1/09 3
40 SDW Holdings Corp. 144A 12/15/06 520
10 Spanish Broadcasting Systems 144A 6/30/99 1,110
10 Sterling Chemicals Holdings 8/15/08 350
--------------
Total Warrants (cost $5,865) $ 3,426
PURCHASED OPTIONS OUTSTANDING (cost $6,253) (--%) *
NUMBER OF EXPIRATION DATE/
CONTRACTS STRIKE PRICE VALUE
- ------------------------------------------------------------------------------------------------------------
DEM 1,500,000 German Government 10 Year Bond July 1997/
Futures Contracts (Put) DEM 96.75 $ 836
TOTAL SHORT-TERM INVESTMENTS (cost $57,734,668) (5.2%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 57,717,000 Interest in $580,717,000 joint repurchase agreement dated
May 31, 1997 with S.B.C. Warburg Inc. due June 2, 1997
with respect to various U.S. Treasury obligations -- maturity
value of $57,743,502 for an effective yield of 5.51% $ 57,734,668
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $928,632,583) *** $1,108,169,415
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,105,298,296.
*** The aggregate identified cost on a tax basis is $929,059,374, resulting in gross unrealized appreciation
and depreciation of $186,003,874 and $6,893,833, respectively, or net unrealized appreciation of
$179,110,041.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically represent the new interest rate to be paid and the date
the fund will begin receiving interest at this rate.
[2 DBL. DAGGERS] Income may be received in cash or additional securities at the discretion of the issuer.
# A portion of this security was pledged and segregated with the custodian to cover margin
requirements for futures contracts at May 31, 1997.
[DIAMOND] Brady Bonds are foreign bonds collateralized by the U.S. Government. The rates are floating
and are the current rates at May 31, 1997.
144A after the name of a security represents those exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
ADR after the name of a foreign holding stands for American Depository Receipts, representing
ownership of foreign securities on deposit with a domestic custodian bank.
TBA after the name of a security represents to be announced securities (Note 1).
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at May 31, 1997
(aggregate face value $5,735,166)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 708,562 $ 716,574 9/17/97 $ (8,012)
Canadian Dollars 2,049 2,039 9/17/97 10
Canadian Dollars 36,069 35,868 6/18/97 201
Deutschemarks 3,067,619 3,115,237 6/18/97 (47,618)
Japanese Yen 1,933,083 1,865,448 6/18/97 67,635
- ----------------------------------------------------------------------------------------
$ 12,216
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Forward Currency Contracts to Sell at May 31, 1997
(aggregate face value $11,500,013)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 289,215 $ 289,158 9/17/97 $ (57)
British Pounds 2,338,043 2,326,754 9/17/97 (11,289)
Danish Krone 395,038 397,234 9/17/97 2,196
Deutschemarks 3,089,694 3,114,834 6/18/97 25,140
Italian Lira 2,020,860 2,046,901 9/17/97 26,041
Japanese Yen 1,353,664 1,515,877 1/28/98 162,213
Japanese Yen 15,634 17,611 7/28/97 1,977
Japanese Yen 1,909,337 1,791,644 6/18/97 (117,693)
- ----------------------------------------------------------------------------------------
$ 88,528
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts Outstanding at May 31, 1997
Aggregate Face Expiration
Total Value Value Date Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Note
Futures 5-Yr. (Short) $7,285,969 $7,288,867 Jun-97 $2,898
U.S. Treasury Note
Futures 10-Yr. (Short) 1,182,844 1,183,188 Jun-97 344
U.S. Treasury Bond
Futures 20-Yr. (Short) 660,188 658,714 Jun-97 (1,474)
- ----------------------------------------------------------------------------------------
$1,768
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TBA Sales Commitments at May 31, 1997
(proceeds receivable $1,046,597)
<S> <C> <C> <C> <C>
Agency Principal Amount Delivery Month Coupon Rate Market Value
- ----------------------------------------------------------------------------------------
GNMA $1,111,000 June 1997 6 1/2s $1,050,928
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1997 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $928,632,583) (Note 1) $ 1,108,169,415
- ---------------------------------------------------------------------------------------------------
Cash 2,424
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 3,834,686
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 8,890,964
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 10,114,285
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 290,546
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 75,371
- ---------------------------------------------------------------------------------------------------
Total assets 1,131,377,691
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 37,109
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 91,736
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 20,853,511
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,182,723
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,513,806
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 179,212
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,500
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,077
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 602,787
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 189,802
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 175,275
- ---------------------------------------------------------------------------------------------------
TBA sale commitments, at value (proceeds receivable $1,046,597) 1,050,928
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 191,929
- ---------------------------------------------------------------------------------------------------
Total liabilities 26,079,395
- ---------------------------------------------------------------------------------------------------
Net assets $ 1,105,298,296
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $ 931,698,209
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 1,360,461
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (7,395,205)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities
in foreign currencies 179,634,831
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $ 1,105,298,296
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($720,020,636 divided by 49,411,365 shares) $14.57
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $14.57)* $15.46
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($347,771,223 divided by 23,995,965 shares)** $14.49
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($37,506,437 divided by 2,586,184 shares) $14.50
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $14.50)* $15.03
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the
offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent deferred
sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended May 31, 1997 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $99,256) $ 11,746,235
- --------------------------------------------------------------------------------------------------
Interest 3,741,295
- --------------------------------------------------------------------------------------------------
Total investment income 15,487,530
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,818,331
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 827,234
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 13,060
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,282
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 788,506
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,366,296
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 106,419
- --------------------------------------------------------------------------------------------------
Reports to shareholders 58,015
- --------------------------------------------------------------------------------------------------
Registration fees 62,294
- --------------------------------------------------------------------------------------------------
Auditing 14,395
- --------------------------------------------------------------------------------------------------
Legal 8,940
- --------------------------------------------------------------------------------------------------
Postage 37,819
- --------------------------------------------------------------------------------------------------
Other 32,248
- --------------------------------------------------------------------------------------------------
Total expenses 6,139,839
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (262,300)
- --------------------------------------------------------------------------------------------------
Net expenses 5,877,539
- --------------------------------------------------------------------------------------------------
Net investment income 9,609,991
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 42,960,819
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (28,097)
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (7,346)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the period 10,067
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures and
TBA sale commitments during the period 46,805,651
- --------------------------------------------------------------------------------------------------
Net gain on investments 89,741,094
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 99,351,085
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
May 31 November 30
1997* 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 9,609,991 $ 14,644,060
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 42,925,376 59,990,004
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 46,815,718 65,236,825
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 99,351,085 139,870,889
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
- ----------------------------------------------------------------------------------------------------------------------
Class A (6,781,388) (12,084,890)
- ----------------------------------------------------------------------------------------------------------------------
Class B (2,046,123) (2,607,143)
- ----------------------------------------------------------------------------------------------------------------------
Class M (235,634) (271,912)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 205,365,187 202,489,950
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 295,653,127 327,396,894
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 809,645,169 482,248,275
- ----------------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $1,360,461 and $813,615, respectively) $1,105,298,296 $809,645,169
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share May 31
operating performance (Unaudited) Year ended November 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $13.29 $10.93 $8.49 $8.67 $7.72 $7.29
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .16 .31 .32 .32 .28 .42
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.27 2.37 2.44 (.18) 1.01 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.43 2.68 2.76 .14 1.29 .83
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.15) (.32) (.32) (.32) (.31) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.15) (.32) (.32) (.32) (.34) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.57 $13.29 $10.93 $8.49 $8.67 $7.72
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.86 * 24.96 33.17 1.59 17.06 11.66
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $720,021 $566,133 $391,551 $304,124 $328,251 $334,127
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .54 * 1.09 1.13 1.04 1.16 1.23
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.14 * 2.61 3.32 3.67 3.40 5.57
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 34.80 * 67.56 70.39 82.49 125.85 (d) 340.99
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (e) $.0509 $.0509
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended November 30, 1995 and thereafter,
includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios
exclude these amounts. (Note 2).
(c) Per share net investment has been determined on the basis of the weighted average number of shares outstanding
during the period.
(d) Portfolio turnover excludes the impact of assets received from the Putnam Equity Income Fund, formerly known as
Putnam Total Return Fund.
(e) Average commission rate paid on security trades is presented for fiscal periods beginning on or after September 1, 1995.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share May 31 Sept. 13, 1993+
operating performance (Unaudited) Year ended November 30 to Nov. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $13.23 $10.89 $8.46 $8.65 $8.66
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .11 .21 .23 .26 .06 (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.26 2.37 2.46 (.18) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.37 2.58 2.69 .08 (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.11) (.24) (.26) (.27) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.11) (.24) (.26) (.27) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.49 $13.23 $10.89 $8.46 $8.65
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.41 * 24.06 32.30 .86 (.12)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $347,771 $221,259 $83,646 $32,114 $14,800
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .91 * 1.84 1.87 1.78 .44 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .77 * 1.86 2.63 3.02 .55 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 34.80 * 67.56 70.39 82.49 125.85 (d)
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (e) $.0509 $.0509
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended November 30, 1995 and thereafter, includes amounts
paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (Note 2).
(c) Per share net investment has been determined on the basis of the weighted average number of shares outstanding during
the period.
(d) Portfolio turnover excludes the impact of assets received from the Putnam Equity Income Fund, formerly known as Putnam
Total Return Fund.
(e) Average commission rate paid on security trades is presented for fiscal periods beginning on or after September 1, 1995.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share May 31 Year ended Dec. 2, 19946+
operating performance (Unaudited) Nov. 30 to Nov. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $13.23 $10.89 $8.45
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .13 .25 .28 (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.26 2.36 2.45
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.39 2.61 2.73
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.12) (.27) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.12) (.27) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.50 $13.23 $10.89
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.60 * 24.35 32.89 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $37,506 $22,254 $7,051
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .79 * 1.59 1.60 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .90 * 2.11 2.99 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 34.80 * 67.56 70.39
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (e) $.0509 $.0509
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended November 30, 1995 and thereafter, includes amounts paid
through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (Note 2).
(c) Per share net investment has been determined on the basis of the weighted average number of shares outstanding during
the period.
(d) Portfolio turnover excludes the impact of assets received from the Putnam Equity Income Fund, formerly known as Putnam
Total Return Fund.
(e) Average commission rate paid on security trades is presented for fiscal periods beginning on or after September 1, 1995.
</TABLE>
Notes to financial statements
May 31, 1997 (Unaudited)
Note 1
Significant accounting policies
Putnam Equity Income Fund (the "fund") is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The objective of the fund is to seek current income by
investing primarily in a diversified portfolio of income-producing equity
securities. Capital growth is a secondary objective when consistent with
seeking current income.
The fund offers class A, class B and class M shares. Class A shares are sold
with a maximum front-end sales charge of 5.75%. Class B shares, which convert
to class A shares after approximately eight years, do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than class A shares,
and are subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class M shares are sold with a maximum
front-end sales charge of 3.50% and pay an ongoing distribution fee that is
lower than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if the
fund were liquidated. In addition, the Trustees declare separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price or if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price. Market
quotations are not considered to be readily available for long-term corporate
bonds and notes; such investments are stated at fair market value on the basis
of valuations furnished by a pricing service approved by the Trustees.
Short-term investments having remaining maturities of 60 days or less are
stated at amortized cost, which approximates market value, and other
investments are stated at fair value following procedures approved by the
Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc.. These balances may be invested in one
or more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date except that certain dividends from foreign
securities are recorded as soon as the fund is informed of the ex-dividend
date. Discounts on zero coupon bonds, original issue discounts, stepped-coupon
bonds and payment in kind bonds are accreted according to the effective yield
method.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, other assets and liabilities are recorded in the books and records
of the fund after translation to U.S. dollars based on the exchange rates on
that day. The cost of each security is determined using historical exchange
rates. Income and withholding taxes are translated at prevailing exchange
rates when accrued or incurred. The fund does not isolate that portion of
realized or unrealized gains or losses resulting from changes in the foreign
exchange rate on investments from fluctuations arising from changes in the
market prices of the securities. Such fluctuations are included with the net
realized and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or losses
on closed forward currency contracts, disposition of foreign currencies and
the difference between the amount of investment income and foreign withholding
taxes recorded on the fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized appreciation and depreciation of
assets and liabilities in foreign currencies arise from changes in the value
of open forward currency contracts and assets and liabilities other than
investments at the period end, resulting from changes in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell currencies
at a set price on a future date, to protect against a decline in value
relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value of
forward currency contracts is determined using forward currency exchange rates
supplied by a quotation service. The market value of the contract will
fluctuate with changes in currency exchange rates. The contract is "marked to
market" daily and the change in market value is recorded as an unrealized gain
or loss. When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed. The fund could be exposed to
risk if the value of the currency changes unfavorably, if the counterparties
to the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a future
date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount
of the commitments will not fluctuate more than 1.0% from the principal
amount. The fund holds, and maintains until settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the fund may enter into offsetting contracts for the forward sale of
other securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the underlying
securities, according to the procedures described under "Security valuation"
above.
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for their portfolio or for delivery pursuant
to options contracts it has entered into, the fund may dispose of a commitment
prior to settlement if Putnam Management deems it appropriate to do so.
H) TBA sale commitments The fund may enter into TBA sale commitments to hedge
its portfolio positions or to sell mortgage-backed securities it owns under
delayed delivery arrangements. Proceeds of TBA sale commitments are not
received until the contractual settlement date. During the time a TBA sale
commitment is outstanding, equivalent deliverable securities, or an offsetting
TBA purchase commitment deliverable on or before the sale commitment date, are
held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Security valuation" above. The contract is "marked-to-market" daily and the
change in market value is recorded by a fund as an unrealized gain or loss. If
the TBA sale commitment is closed through the acquisition of an offsetting
purchase commitment, the fund realizes a gain or loss. If the fund delivers
securities under the commitment, the fund realizes a gain or a loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
I) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
J) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At November 30, 1996, the fund had a capital loss carryover of approximately
$49,814,000 available to offset future net capital gain, if any, which will
expire on November 30, 1998.
K) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date. Capital
gain distributions, if any, are recorded on the ex-dividend date and paid at
least annually. The amount and character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. Reclassifications are made to the
fund's capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations.
Note 2
Management fees, administrative services, and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.65% of the first $500 million of
average net assets, 0.55% of the next $500 million, 0.50% of the next $500
million, 0.45% of the next $5 billion, 0.425% of the next $5 billion, 0.405%
of the next $5 billion, 0.395% of the next $5 billion, and 0.38% of any amount
thereafter.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended May 31, 1997, fund expenses were reduced by $262,300
under expense offset and brokerage service arrangements with PFTC. Investor
servicing and custodian fees reported in the Statement of operations exclude
these credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $1,150 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of the
Trustees receive additional fees for attendance at certain committee meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows the
Trustees to defer the receipt of all or a portion of Trustees Fees payable on
or after July 1, 1995. The deferred fees remain in the fund and are invested
in certain Putnam funds until distribution in accordance with the Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total compensation for the three years preceding
retirement. Pension expense for the fund is included in Compensation of
trustees in the Statement of operations. Accrued pension liability is included
in Payable for compensation of Trustees in the Statement of assets and
liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing shares
of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees have approved payment by the fund at an annual rate of 0.25%, 1.00%
and 0.75% of the average net assets attributable to class A, class B and class
M shares, respectively.
For the six months ended May 31, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $340,547 and $19,456 from the sale of
class A and class M shares, respectively and $193,207 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of
up to 1% is assessed on certain redemptions of class A shares. For the six
months ended May 31, 1997, Putnam Mutual Funds Corp., acting as underwriter
received $1,916 on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended May 31, 1997, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $405,836,153 and $214,615,968, respectively. Purchases and sales of
U.S. government obligations aggregated $106,274,842 and $94,508,651,
respectively. In determining the net gain or loss on securities sold, the cost
of securities has been determined on the identified cost basis.
Note 4
Capital shares
At May 31, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
May 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 12,713,302 $ 174,338,375
- ------------------------------------------------------------
Reinvestment of
distributions 396,535 5,334,991
- ------------------------------------------------------------
13,109,837 179,673,366
Shares
repurchased (6,294,326) (86,257,606)
- ------------------------------------------------------------
Net increase 6,815,511 $ 93,415,760
- ------------------------------------------------------------
Year ended
November 30, 1996
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 11,955,031 $143,244,258
- ------------------------------------------------------------
Reinvestment of
distributions 781,164 9,134,877
- ------------------------------------------------------------
12,736,195 152,379,135
Shares
repurchased (5,970,798) (70,796,533)
- ------------------------------------------------------------
Net increase 6,765,397 $ 81,582,602
- ------------------------------------------------------------
Six months ended
May 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 12,448,797 $170,486,516
- ------------------------------------------------------------
Reinvestment of
distributions 130,401 1,747,018
- ------------------------------------------------------------
12,579,198 172,233,534
Shares
repurchased (5,311,037) (72,617,796)
- ------------------------------------------------------------
Net increase 7,268,161 $ 99,615,738
- ------------------------------------------------------------
Year ended
November 30, 1996
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 12,982,383 $155,817,526
- ------------------------------------------------------------
Reinvestment of
distributions 186,237 2,182,469
- ------------------------------------------------------------
13,168,620 157,999,995
Shares
repurchased (4,120,485) (49,459,134)
- ------------------------------------------------------------
Net increase 9,048,135 $108,540,861
- ------------------------------------------------------------
Six months ended
May 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 1,175,333 $ 16,058,023
- ------------------------------------------------------------
Reinvestment of
distributions 15,849 212,533
- ------------------------------------------------------------
1,191,182 16,270,556
Shares
repurchased (286,613) (3,936,867)
- ------------------------------------------------------------
Net increase 904,569 $ 12,333,689
- ------------------------------------------------------------
Year ended
November 30, 1996
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 1,124,338 $ 13,449,727
- ------------------------------------------------------------
Reinvestment of
distributions 21,224 249,407
- ------------------------------------------------------------
1,145,562 13,699,134
Shares
repurchased (111,291) (1,332,647)
- ------------------------------------------------------------
Net increase 1,034,271 $ 12,366,487
- ------------------------------------------------------------
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Thomas V. Reilly
Vice President
Edward P. Bousa
Vice President and Fund Manager
Kenneth J. Taubes
Vice President and Fund Manager
Rosemary H. Thomsen
Vice President and Fund Manager
Robert M. Paine
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Equity Income
Fund. It may also be used as sales literature when preceded or accompanied by
the current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund, and the most recent copy of
Putnam's Quarterly Performance Summary. For more information, or to request a
prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam
Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board or any other agency,
and involve risk, including the possible loss of principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
34373-012/192/626 7/97
