Putnam
Equity
Income
Fund
SEMIANNUAL REPORT
May 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Our management team meets with corporate executives on an ongoing
basis, employing both on-site company visits and briefings at Putnam
headquarters as part of our research process. We believe that our
constant communication with the large companies we consider for the fund
distinguishes us from our competitors. It enhances the quality of our
analysis and of our decisions to add, maintain, and sell holdings in
the portfolio."
-- Edward P. Bousa, co-manager
Putnam Equity Income Fund
* According to Lipper Analytical Services, the return of Putnam Equity
Income Fund class A shares ranked 15 out of 75 equity income funds for
the 5 years ended June 30, 1998, placing the fund in the top 20% of its
investment category.*
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
35 Financial statements
* Past performance is not indicative of future results. Lipper Analytical
Services, an independent research organization, ranks funds according to
total return performance. Their rankings vary over time and do not reflect
the effects of sales charges. For the period ended 6/30/98, Putnam Equity
Income Fund class A shares ranked 121 out of 204 for 1-year return, 45 out
of 136 for 3-year return, and 26 out of 40 for 10-year return. Performance
of other share classes will vary.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Equity Income Fund found a generally agreeable environment in the U.S.
stock market during the first half of fiscal 1998 as it pursued its ongoing
search for undervalued stocks of companies paying attractive dividends. The
cautious strategy, which your fund's management calls "cheapness and change,"
provided another period of positive returns during the six months ended May
31, 1998.
One change that I am pleased to note is the addition of Jeffrey Kobylarz to
your fund's management team. Jeff joined Putnam in 1993 after a number of
years with Dean Witter InterCapital and W. R. Huff Asset Management. He has 11
years of investment management experience.
In the following report, your fund's managers review in detail the strategies
they pursued during the fiscal year's first half. They also discuss prospects
for the second half, a period they believe will continue to be generally
positive for equities, particularly the value stocks in which your fund
invests.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 15, 1998
Report from the Fund Managers
Edward P. Bousa
James M. Prusko
David L. Waldman
Jeffrey J. Kobylarz
Dark clouds sometimes have silver linings. In the past six months, persisting
financial problems in Asia cast gloom on global economic growth prospects but
simultaneously sparked a rally in U.S. securities markets, which offered
investors shelter from the storm that swept across Asia and most other
emerging markets.
Although such macroeconomic conditions have only a small influence on our
investment decisions for Putnam Equity Income Fund, they nonetheless formed
the backdrop to the fund's performance in the six months ended May 31, 1998 --
the first half of the fund's 1998 fiscal year. The fund's cautious strategy,
which favors less volatile, dividend-paying stocks, produced a solid return of
10.87% at NAV (4.48% at public offering price). Asia's slowdown did, however,
cast a shadow across certain industries, such as oil and technology, in which
the fund has significant holdings. For complete performance information,
including the returns of all share classes and over longer time periods,
please see the tables that begin on page 8.
* U.S. STOCKS CLIMB TO NEW HIGHS DESPITE ASIA'S PROBLEMS
As conditions throughout Asia have worsened in the past few months, investors
have shifted large amounts of capital to the United States. The bond market
has remained healthy, bolstered by this influx of foreign assets and a sudden
federal budget surplus. Consequently, low interest rates have stimulated
consumer spending and supported the prices of U.S. stocks. Large multinational
companies with high earnings growth remained the biggest beneficiaries of the
market's strength.
Although your fund's portfolio holdings also made gains, stocks with the
qualities of cheapness and change that we seek do not generally post the high
rates of earnings growth that investors are currently demanding. Furthermore,
fund holdings in the oil, paper, and technology industries with significant
Asian sales struggled in this period. Uncertainty about Asia's spreading
recession has caused many investors to regard large companies with high
earnings growth rates as safer havens. Such investors are not drawn to the
sort of positive changes that companies in your fund's portfolio undertake --
restructuring, cost-cutting, and share repurchases -- because these measures
are focused on improving earnings in the long run.
* FUND BENEFITS FROM MERGER ACTIVITY
Although the fund's strategy does not seek stocks in anticipation of merger
activity, it is also not unusual for our cheapness and change criteria to lead
us to companies that appear as attractive acquisition targets to their
industry competitors. After all, the essence of our strategy is to find
companies experiencing positive change and selling at low prices. Few would
understand a company's improving competitive position and its undervalued
stock price better than a rival in the same industry.
Early 1998 was an especially fruitful period for merger activity. After years
of rising stock prices, corporations were able to finance mergers by
exchanging equity instead of spending cash reserves. The lion's share of
merger activity involved financial companies. Your portfolio has favored this
sector for the past few years. Banks, in particular, have restructured and cut
costs dramatically, while their stocks continued to pay attractive dividends.
As a result, the fund was well positioned for the merger of Banc One with
First Chicago NBD, and held positions in Citicorp and Washington Mutual which
also were parties to mergers. In each of these combinations, the companies are
striving to expand their distribution networks and to widen the range of
financial services they can offer to customers. While these holdings, along
with others discussed in this report, were viewed favorably at the end of the
fiscal period, all are subject to review and adjustment in accordance with the
fund's investment strategy and may vary in the future.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Insurance and finance 19.9%
Utilities 10.2%
Oil and gas 9.7%
Food and
beverages 5.3%
Transportation 4.8%
Footnote reads:
* Based on net assets as of 5/31/98. Holdings will vary over time.
A similar pursuit of broader distribution networks motivated another series of
prominent mergers involving fund holdings Chrysler, SBC Communications, and
Ameritech. German manufacturer Daimler-Benz, with strong sales in Europe and
Asia, plans to acquire Chrysler, a major player in the United States. The new
entity will be a formidable automaker with global distribution power. In the
case of the U.S. telecom companies, SBC, which already has absorbed Pacific
Telesis, is seeking to control nearly half of the United States by joining
with Ameritech. In so doing, it can control the largest share of household
lines in the U.S. market.
* COMPANY VISITS INCREASE CONFIDENCE
Our research process requires not only intensive analysis of corporate
financial information but also on-site visits with the companies held in the
portfolio and with prospective additions. Your fund's team made an unusually
high number of visits in early 1998, and the experience increased our
confidence in many of our investment selections. Airline companies are an
excellent example. Although their earnings depend on volatile fuel prices and
the demand for leisure travel, our recent meetings with industry executives
persuaded us that the industry should be able to sustain profitability in
future sluggish periods. We are also encouraged by the recent agreement
between United and Delta to coordinate passenger bookings to squeeze even
greater efficiencies from their routes.
Our company visits also convince us that electric utilities are becoming more
attractive. Electric companies have long been a mainstay of the portfolio
because many pay above-average yields, but we have not overweighted them in
recent years because few have undertaken the cost-cutting measures that we
seek. The advance of industry deregulation in California and other states,
though, is finally prompting more companies to innovate in ways that meet our
criteria.
[GRAPHIC OMITTED: TOP 10 EQUITY HOLDINGS]
TOP 10 EQUITY HOLDINGS
E.I. du Pont de Nemours & Co. Ltd. (Du Pont)
Chemicals
Exxon Corp.
Oil and gas
Mobil Corp.
Oil and gas
NationsBank Corp.
Insurance and finance
American Home Products Corp.
Pharmaceuticals
Citicorp
Insurance and finance
Merck & Co., Inc.
Health care
Baxter International, Inc.
Medical supplies and devices
British Petroleum PLC ADR
Oil and gas
Pharmacia & Upjohn, Inc.
Pharmaceuticals
Footnote reads:
These holdings represent 14.7% of the fund's net assets as of 5/31/98.
Portfolio holdings will vary over time.
* OPTIMISTIC OUTLOOK FOR VALUE STOCKS
Although the possibility of slower economic growth remains on the horizon, we
believe that the outlook is strong for value stocks. Because their performance
has recently lagged that of the overall S&P 500(registered trademark) Index,
they continue to offer compelling value and have a chance to outperform as
more growth-oriented companies feel the impact of the Asian crisis. To mute
the impact of falling commodity prices, we have trimmed holdings in oil and
paper companies. As always, we will rely on the low prices and high dividends
of the fund's stocks and bonds to cushion volatility while looking forward to
the beneficial effects of the positive changes being undertaken by companies
in the portfolio.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holds were viewed
favorably as of 5/31/98, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance,
which should always be considered in light of its investment
strategy. 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 RETURN FOR PERIODS ENDED 5/31/98
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 10.87% 4.48% 10.42% 5.42% 10.60% 6.72%
- ------------------------------------------------------------------------
1 year 23.15 16.07 22.24 17.24 22.58 18.26
- ------------------------------------------------------------------------
5 years 144.80 130.68 136.00 134.00 138.52 130.30
Annual average 19.61 18.20 18.74 18.53 18.99 18.16
- ------------------------------------------------------------------------
10 years 303.77 280.33 272.58 272.58 281.87 268.32
Annual average 14.98 14.29 14.06 14.06 14.34 13.93
- ------------------------------------------------------------------------
Annual average
(life of fund) 12.86 12.54 11.84 11.84 12.11 11.92
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/98
S&P 500 Consumer
Index Price Index
- ------------------------------------------------------------------------
6 months 15.06% 0.80%
- ------------------------------------------------------------------------
1 year 30.68 1.69
- ------------------------------------------------------------------------
5 years 172.19 12.90
Annual average 22.18 2.46
- ------------------------------------------------------------------------
10 years 451.65 38.55
Annual average 18.62 3.32
- ------------------------------------------------------------------------
Annual average
(life of fund) 16.40 4.83
- ------------------------------------------------------------------------
Past performance is not indicative of future results. 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-, 10-year and life-of-fund periods reflect
the applicable contingent deferred sales charge (CDSC), which is 5%
in the first year, declines to 1% in the sixth year, and is
eliminated thereafter. Returns shown for class B and class M shares
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. All returns
assume reinvestment of distributions at NAV. 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 5/31/98
Class A Class B Class M
- ------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------
Income $0.140 $0.084 $0.102
- ------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------
Long-term 0.772 0.772 0.772
- ------------------------------------------------------------------------
Short-term -- -- --
- ------------------------------------------------------------------------
Total $0.912 $0.856 $0.874
- ------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------
11/30/97 $16.04 $17.02 $15.95 $15.96 $16.54
- ------------------------------------------------------------------------
5/31/98 16.78 17.80 16.67 16.69 17.30
- ------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------
Current dividend rate1 1.67% 1.57% 1.01% 1.22% 1.18%
- ------------------------------------------------------------------------
Current 30-day SEC yield2 1.53 1.44 0.78 1.03 0.99
- ------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided
by NAV or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 6/30/98
(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 9.42% 3.10% 9.02% 4.02% 9.27% 5.44%
- ------------------------------------------------------------------------
1 year 19.86 12.94 18.99 13.99 19.30 15.14
- ------------------------------------------------------------------------
5 years 143.48 129.47 134.50 132.50 137.18 128.75
Annual average 19.48 18.07 18.58 18.38 18.85 18.00
- ------------------------------------------------------------------------
10 years 285.06 262.99 255.65 255.65 264.28 251.51
Annual average 14.43 13.76 13.53 13.53 13.80 13.39
- ------------------------------------------------------------------------
Annual average
(life of fund) 12.84 12.53 11.82 11.82 12.10 11.91
- ------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. Investment returns and principal value will fluctuate
so that an investor's shares, when sold, may be worth more or less
than their original cost. See first page of performance section for
performance calculation method.
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 5.75% maximum 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.
Portfolio of investments owned
May 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (90.1%) (a)
NUMBER OF SHARES VALUE
Aerospace and Defense (0.8%)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
116,900 Lockheed Martin Corp. $ 13,122,025
Agriculture (--%)
- -------------------------------------------------------------------------------------------------------------
1,101 PSF Holdings LLC Class A (acquired 10/28/94,
cost $39,564) (NON) (RES) 19,290
Automotive (2.6%)
- -------------------------------------------------------------------------------------------------------------
235,000 Dana Corp. 12,249,375
352,200 Ford Motor Co. 18,270,375
205,200 Goodyear Tire & Rubber Co. (The) 14,748,750
--------------
45,268,500
Basic Industrial Products (3.7%)
- -------------------------------------------------------------------------------------------------------------
260,000 Caterpillar, Inc. 14,283,750
200,915 Cooper Industries, Inc. 12,933,903
244,800 Deere (John) & Co. 12,699,000
171,700 Minnesota Mining & Manufacturing Co. 15,903,713
164,600 Owens-Illinois, Inc. (NON) 7,396,713
--------------
63,217,079
Broadcasting (0.8%)
- -------------------------------------------------------------------------------------------------------------
417,800 Comcast Corp. Class A 14,322,706
Business Equipment and Services (3.9%)
- -------------------------------------------------------------------------------------------------------------
233,900 Hewlett-Packard Co. 14,549,685
192,000 IBM Corp. 22,536,000
271,300 Pitney Bowes, Inc. 12,751,100
160,400 Xerox Corp. 16,481,100
--------------
66,317,885
Chemicals (2.5%)
- -------------------------------------------------------------------------------------------------------------
374,200 du Pont (E.I.) de Nemours & Co., Ltd. 28,813,400
199,000 Eastman Chemical Co. 13,333,000
--------------
42,146,400
Computer Services and Software (1.5%)
- -------------------------------------------------------------------------------------------------------------
208,225 Computer Associates Intl., Inc. 10,931,813
384,500 Electronic Data Systems Corp. 13,986,188
--------------
24,918,001
Conglomerates (1.2%)
- -------------------------------------------------------------------------------------------------------------
199,000 Temple Inland, Inc. 11,691,250
160,800 TRW, Inc. 8,612,850
--------------
20,304,100
Consumer Durable Goods (0.8%)
- -------------------------------------------------------------------------------------------------------------
363,800 Hasbro, Inc. 13,915,350
Consumer Non Durables (2.8%)
- -------------------------------------------------------------------------------------------------------------
138,700 Colgate-Palmolive Co. 12,066,900
307,800 Kimberly-Clark Corp. 15,255,338
566,750 Philip Morris Cos., Inc. 21,182,281
--------------
48,504,519
Electronics and Electrical Equipment (2.9%)
- -------------------------------------------------------------------------------------------------------------
176,800 Eaton Corp. 15,878,850
271,000 Emerson Electric Co. 16,463,250
326,550 Texas Instruments, Inc. 16,776,506
--------------
49,118,606
Entertainment (0.8%)
- -------------------------------------------------------------------------------------------------------------
165,500 Time Warner, Inc. 12,877,969
Food and Beverages (5.3%)
- -------------------------------------------------------------------------------------------------------------
278,000 Anheuser-Busch Cos., Inc. 12,770,625
462,000 ConAgra, Inc. 13,513,500
211,200 General Mills, Inc. 14,414,400
268,300 Heinz (H.J.) Co. 14,236,669
193,700 Nabisco Holdings Corp. Class A 9,007,050
216,300 Sara Lee Corp. 12,734,663
635,900 Whitman Corp. 13,791,081
--------------
90,467,988
Health Care (4.5%)
- -------------------------------------------------------------------------------------------------------------
301,000 Columbia/HCA Healthcare Corp. 9,838,938
203,000 Merck & Co., Inc. 23,763,688
407,000 U.S. Surgical Corp. 16,178,250
208,900 United Healthcare Corp. 13,369,600
191,300 WeLLPoint Health Networks, Inc. (NON) 12,434,500
--------------
75,584,976
Insurance and Finance (19.2%)
- -------------------------------------------------------------------------------------------------------------
293,900 American General Corp. 19,728,038
197,900 AON Corp. 12,677,969
170,800 BankAmerica Corp. 14,123,025
122,600 BankBoston Corp. 12,918,975
112,800 Bankers Trust New York Corp. (CUS) 13,930,800
230,000 Charter One Financial, Inc. 7,877,500
199,080 CIGNA Corp. 13,636,980
161,700 Citicorp 24,113,513
73,600 Crestar Financial Corp. 4,227,400
223,000 Federal National Mortgage Association 13,352,125
227,100 First Chicago NBD Corp. 19,857,056
288,900 First Union Corp. 15,979,781
125,000 Firstar Corp. 4,585,938
181,000 Fleet Financial Group, Inc. 14,842,000
150,600 Hartford Financial Services Group 16,575,413
354,400 KeyCorp 13,445,050
156,300 Merrill Lynch & Co., Inc. 13,988,850
124,800 Morgan (J.P.) & Co., Inc. 15,498,600
339,200 NationsBank Corp. 25,694,400
357,700 Norwest Corp. 13,905,588
261,600 PNC Bank Corp. 15,107,400
293,888 Synovus Financial Corp. 6,594,101
182,000 Washington Mutual, Inc. 12,853,750
--------------
325,514,252
Medical Supplies and Devices (1.4%)
- -------------------------------------------------------------------------------------------------------------
411,200 Baxter International, Inc. 23,515,500
Oil and Gas (9.5%)
- -------------------------------------------------------------------------------------------------------------
468,800 Amoco Corp. 19,601,700
256,300 British Petroleum PLC ADR (United Kingdom) 22,714,588
225,900 Elf Aquitane ADR (France) (NON) 15,488,269
259,000 Enron Corp. 12,982,375
389,600 Exxon Corp. 27,466,800
154,000 Kerr-McGee Corp. 9,740,500
331,400 Mobil Corp. 25,849,200
273,700 Sonat, Inc. 10,725,619
276,000 Total Corp. ADR (France) 17,198,250
--------------
161,767,301
Paper and Forest Products (1.4%)
- -------------------------------------------------------------------------------------------------------------
95,000 Chesapeake Corp. 3,372,500
392,000 Weyerhaeuser Co. 19,918,500
--------------
23,291,000
Pharmaceuticals (4.1%)
- -------------------------------------------------------------------------------------------------------------
513,400 American Home Products Corp. 24,803,638
204,000 Bristol-Myers Squibb Co. 21,930,000
513,570 Pharmacia & Upjohn, Inc. 22,693,374
--------------
69,427,012
Photography (0.8%)
- -------------------------------------------------------------------------------------------------------------
188,000 Eastman Kodak Co. 13,418,500
Publishing (1.0%)
- -------------------------------------------------------------------------------------------------------------
219,300 McGraw-Hill, Inc. 17,146,519
Real Estate (0.7%)
- -------------------------------------------------------------------------------------------------------------
261,600 Starwood Lodging Trust 12,344,250
REIT's (Real Estate Investment Trust) (0.7%)
- -------------------------------------------------------------------------------------------------------------
170,000 Duke Realty Investments, Inc. 3,846,250
167,800 Equity Residential Properties Trust 8,211,713
--------------
12,057,963
Retail (2.3%)
- -------------------------------------------------------------------------------------------------------------
237,100 May Department Stores Co. 15,248,494
166,000 Sears, Roebuck & Co. 10,260,875
499,000 Toys "R" Us, Inc. (NON) 13,223,500
--------------
38,732,869
Telecommunications (0.4%)
- -------------------------------------------------------------------------------------------------------------
201,105 Cincinnati Bell, Inc. 6,397,653
192 NEXTEL Communications, Inc. Class A (NON) 4,524
--------------
6,402,177
Transportation (4.6%)
- -------------------------------------------------------------------------------------------------------------
188,700 Burlington Northern Santa Fe Corp. 18,775,650
126,100 Delta Air Lines, Inc. 14,501,500
250,800 FDX Corp. (NON) 16,082,550
405,300 Ryder System, Inc. 13,805,531
178,700 UAL Corp. (NON) 14,195,481
--------------
77,360,712
Utilities (9.9%)
- -------------------------------------------------------------------------------------------------------------
278,000 American Telephone & Telegraph Co. 16,923,250
484,300 Ameritech Corp. 20,552,481
256,000 BellSouth Corp. 16,512,000
280,034 Duke Energy Corp. 16,136,959
300,300 GTE Corp. 17,511,244
181,000 OGE Energy Corp. 9,706,125
283,900 Pacific Enterprises 10,805,944
260,900 Potomac Electric Power Co. 6,375,744
10,900 PP&L Resources, Inc. 240,935
385,206 SBC Communications, Inc. 14,974,896
513,200 Southern Co. 13,631,875
196,000 Sprint Corp. 14,063,000
274,000 Texas Utilities Co. 10,773,364
--------------
168,207,817
--------------
Total Common Stocks (cost $1,271,740,242) $1,529,291,266
CORPORATE BONDS AND NOTES (3.0%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (--%)
- -------------------------------------------------------------------------------------------------------------
$ 50,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 54,625
60,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 64,050
5,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 5,100
10,000 Outdoor Comunications Inc. sr. sub. notes 9 1/4s, 2007 10,200
60,000 Outdoor Systems, Inc. company guaranty 8 7/8s, 2007 61,950
--------------
195,925
Aerospace and Defense (0.1%)
- -------------------------------------------------------------------------------------------------------------
10,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 10,025
10,000 Aviation Sales Co. 144A sr. sub. notes 8 1/8s, 2008 9,800
10,000 BE Aerospace, Inc. 144A sr. sub. notes 8s, 2008 9,950
10,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 10,250
765,000 Raytheon Co notes 6.45s, 2002 774,371
10,000 Sequa Corp. bonds 8 3/4s, 2001 10,225
5,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 5,375
--------------
829,996
Agriculture (--%)
- -------------------------------------------------------------------------------------------------------------
265,000 Potash Corp. of Saskatchewan notes 7 1/8s, 2007 (Canada) 273,644
12,786 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 13,809
20,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 20,500
--------------
307,953
Apparel (--%)
- -------------------------------------------------------------------------------------------------------------
20,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 21,650
25,000 Tultex Corp. company guaranty 9 5/8s, 2007 24,875
--------------
46,525
Automotive (--%)
- -------------------------------------------------------------------------------------------------------------
9,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 9,934
180,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 197,557
60,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 62,850
50,000 Lear Corp. sub. notes 9 1/2s, 2006 55,125
60,000 Navistar International Corp. sr. notes Ser. B, 7s, 2003 60,300
50,000 Talon Automotive Group 144A sr. sub. notes 9 5/8s, 2008 50,500
--------------
436,266
Banks (0.2%)
- -------------------------------------------------------------------------------------------------------------
170,000 Abbey National First Capital PLC sub. notes 7.35s, 2049
(United Kingdom) 179,323
160,000 Banco Nacional Comercio Exterior bank guaranteed
8s, 2003 (Mexico) 156,000
25,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2008 25,625
10,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 10,250
300,000 Den Danske Bank 144A sub. notes 6.55s, 2003 (Denmark) 305,256
35,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 39,025
5,000 Ocwen Federal Bank sub. deb. 12s, 2005 5,500
530,000 Peoples Bank - Bridgeport sub. notes 7.2s, 2006 546,658
5,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 5,384
250,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 261,895
300,000 Scotland International Finance 144A sub. notes 8.85s, 2006
(Netherlands) 346,308
310,000 Sparbanken Sverige AB (Swedbank) 144A sub. notes 7 1/2s,
2006 (Sweden) 321,892
230,000 St Paul Bancorp sr. notes 7 1/8s, 2004 236,675
155,000 State Street Institution 144A company guaranty 7.94s, 2026 167,685
285,000 Webster Capital Trust I 144A bonds 9.36s, 2027 318,137
325,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 339,544
--------------
3,265,157
Basic Industrial Products (--%)
- -------------------------------------------------------------------------------------------------------------
15,000 Clark-Schwebel sr. notes 10 1/2s, 2006 16,650
10,000 Koppers Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 10,300
5,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 5,297
--------------
32,247
Broadcasting (0.2%)
- -------------------------------------------------------------------------------------------------------------
35,000 Affinity Group Holdings sr. notes 11s, 2007 37,800
25,000 Allbritton Communications sr. sub. deb. Ser. B, 9 3/4s, 2007 26,063
25,000 American Radio Systems Corp. company guaranty 9s, 2006 26,750
25,000 Benedek Broadcasting sr. notes 11 7/8s, 2005 28,125
50,000 Benedek Communications Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2006 (STP) 39,250
10,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02), 2009 (STP) 7,525
50,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 51,750
10,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s, 2004 9,900
25,000 Chancellor Media Corp. sr. sub. notes 9 3/8s, 2004 26,000
15,300 Chancellor Media Corp. sub. deb. 12s, 2009 18,666
10,000 Comcast Corp. sr. sub. 9 1/8s, 2006 10,625
25,000 Comcast Corp. sr. sub. notes 9 1/2s, 2008 26,788
305,000 Continental Cablevision, Inc. sr. deb 9 1/2s, 2013 358,918
5,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (13 1/4s, 9/30/99), 2004
(United Kingdom) (STP) 4,650
60,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 48,150
65,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 46,231
30,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 18,675
40,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 39,000
20,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 20,250
25,000 Granite Broadcasting Corp. sr. sub. notes 10 3/8s, 2005 26,313
10,000 Granite Broadcasting Corp. 144A sr. sub. notes 8 7/8s, 2008 10,025
5,000 Gray Communications Systems, Inc. sr. sub. notes 10 5/8s, 2006 5,475
60,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 65,550
40,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 45,400
30,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 (STP) 28,800
25,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 28,250
3,000 Radio One Inc. company guaranty stepped-coupon Ser. B, 7s,
(12s, 5/15/00), 2004 (STP) 3,060
50,000 Rogers Cablesystems Ltd. sr. notes Ser. B, 10s, 2005 (Canada) 55,250
10,000 SFX Entertainment Inc. 144A sr. sub. notes 9 1/8s, 2008 9,800
25,000 Sinclair Broadcast Group, Inc. company guaranty 9s, 2007 25,688
10,000 Sinclair Broadcast Group, Inc. sr. sub. notes 8 3/4s, 2007 10,150
10,000 Sinclair Broadcasting Group sr. sub. notes 10s, 2005 10,700
25,000 Spanish Broadcasting Systems sr. notes 12 1/2s, 2002 28,625
5,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 5,463
65,000 Sullivan Broadcasting sr. sub. notes 10 1/4s, 2005 73,450
5,000 TV Azteca SA de CV sr. notes 10 1/2s, 2007 (Mexico) 5,138
1,045,000 Viacom, Inc. sr. notes 7 3/4s, 2005 1,110,229
--------------
2,392,482
Building and Construction (--%)
- -------------------------------------------------------------------------------------------------------------
10,000 American Architectural Products Corp. 144A sr. notes
11 3/4s, 2007 10,450
35,000 Atrium Companies, Inc. 144A sub. notes 10 1/2s, 2006 36,750
10,000 Beazer Homes USA, Inc. 144A sr. notes 8 7/8s, 2008 9,750
10,000 Brand Scaffold Services 144A sr. notes 10 1/4s, 2008 10,200
5,000 Building Materials Corp. sr. notes Ser. B, 8 5/8s, 2006 5,150
5,000 Cia Latino Americana 144A company guaranty 11 5/8s, 2004
(Argentina) 5,075
5,000 D.R. Horton Inc. company guaranty 10s, 2006 5,400
20,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 17,200
210,000 Guangdong Enterprises 144A sr. notes 8 7/8s, 2007 (China) 188,114
10,000 Jackson Products, Inc. 144A company guaranty 9 1/2s, 2005 10,075
25,000 M.D.C. Holdings, Inc. notes Ser. B, 11 1/8s, 2003 27,250
70,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 72,100
--------------
397,514
Building Products (--%)
- -------------------------------------------------------------------------------------------------------------
25,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 27,875
Business Equipment and Services (--%)
- -------------------------------------------------------------------------------------------------------------
10,000 ATC Group Services Inc. 144A sr. sub. notes 12s, 2008 9,300
390,000 AT&T Capital Corp. med. term note 6.6s, 2005 391,950
5,000 Axiohm Transactions Solutions Inc. company guaranty
9 3/4s, 2007 5,063
10,000 Corporate Express Holdings, Inc. 144A sr. sub. notes
9 5/8s, 2008 10,050
30,000 Iron Mountain, Inc. sr. sub. notes 10 1/8s, 2006 32,700
10,000 Morris Material Handling Inc. 144A sr. notes 9 1/2s, 2008 9,900
5,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 5,313
40,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 45,200
7,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 7,980
10,000 United Stationer 144A sr. sub. notes 8 3/8s, 2008 10,025
50,000 Williams Scotsman, Inc. 144A sr. notes 9 7/8s, 2007 51,750
--------------
579,231
Cable Television (--%)
- -------------------------------------------------------------------------------------------------------------
30,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 24,600
25,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 29,000
5,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2023 5,475
10,000 Globo Communicacoes 144A sr. notes 10 5/8s, 2008 (Brazil) 9,650
20,000 Lenfest Communications, Inc. 144A sr. sub. notes 8 1/4s, 2008 20,400
330,000 TCI Communications, Inc. sr. notes 8.65s, 2004 366,406
--------------
455,531
Cellular Communications (--%)
- -------------------------------------------------------------------------------------------------------------
10,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 9,800
Chemicals (--%)
- -------------------------------------------------------------------------------------------------------------
15,000 Huntsman Corp. 144A sr. sub. notes FRN 9.094s, 2007 15,075
125,000 Lyondell Petrochemical Co. notes 9 1/8s, 2002 135,418
5,000 NL Industries, Inc. sr. notes stepped-coupon zero %
(13s, 10/15/98), 2005 (STP) 5,150
10,000 Pharmaceutical Fine Chemicals 144A sr. sub. notes 9 3/4s, 2007
(Switzerland) 11,150
5,000 Polytama International notes 11 1/4s, 2007 2,200
10,000 Radnor Holdings Corp. company guaranty 10s, 2003 10,375
5,000 Sovereign Specialty Chemical 144A sr. sub. notes 9 1/2s, 2007 5,200
10,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 5,950
5,000 Union Carbide Global Enterprises sr. sub. notes Ser. B, 12s, 2005 5,413
--------------
195,931
Communications (--%)
- -------------------------------------------------------------------------------------------------------------
51,187 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 (PIK) 53,490
10,000 American Cell Corp 144A sr. notes 10 1/2s, 2008 9,900
--------------
63,390
Computer Services and Software (--%)
- -------------------------------------------------------------------------------------------------------------
515,000 Dell Computer Corp. deb. 7.1s, 2028 517,575
10,000 Unisys Corp. sr. notes 7 7/8s, 2008 10,000
--------------
527,575
Computers (--%)
- -------------------------------------------------------------------------------------------------------------
30,000 IPC Information Systems sr. disc. notes stepped-coupon zero %
(10 7/8s, 11/1/01), 2008 (STP) 21,900
Consumer Durable Goods (--%)
- -------------------------------------------------------------------------------------------------------------
15,000 Icon Fitness Corp. sr. disc. notes stepped-coupon Ser. B, zero %
(14s, 11/15/01), 2006 (STP) 6,750
30,000 Iron Age Corp. 144A sr. sub. notes 9 7/8s, 2008 30,000
15,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 16,238
--------------
52,988
Consumer Non Durables (0.1%)
- -------------------------------------------------------------------------------------------------------------
10,000 Chattem, Inc. 144A sr. sub. notes 8 7/8s, 2008 9,950
50,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 51,000
50,000 Packaged Ice, Inc. 144A sr. notes 9 3/4s, 2005 50,500
80,000 Philip Morris Cos., Inc. deb. 7 3/4s, 2027 85,038
90,000 Philip Morris Cos., Inc. notes 7 1/2s, 2004 94,320
185,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 190,661
180,000 Philip Morris Cos. Inc. notes 6.8s, 2003 182,927
20,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 19,850
--------------
684,246
Consumer Products (--%)
- -------------------------------------------------------------------------------------------------------------
10,000 French Fragrances, Inc. 144A sr. notes 10 3/8s, 2007 10,700
40,000 Revlon Worldwide Corp. sr. disc. notes Ser. B, zero %, 2001 30,900
--------------
41,600
Consumer Services (--%)
- -------------------------------------------------------------------------------------------------------------
30,000 Amazon.com Inc. 144A sr. disc. notes stepped-coupon zero %
(10s, 5/1/08), 2008 (STP) 18,450
35,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 36,663
25,000 Century Communications Corp. sr. notes 8 7/8s, 2007 26,063
60,000 Cinemark USA, Inc. sr. sub. notes Ser. D, 9 5/8s, 2008 (Mexico) 61,800
50,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 56,250
25,000 Fitzgeralds Gaming Corp. 144A company guaranty 12 1/4s, 2004 25,000
20,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 21,900
10,000 Host Marriott Corp. sr. notes Ser. B, 9 1/2s, 2005 10,575
25,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 25,188
25,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 26,063
--------------
307,952
Electronics and Electrical Equipment (--%)
- -------------------------------------------------------------------------------------------------------------
5,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s, 2006
(Canada) 5,488
6,430 Cirent Semiconductor, Inc. sr. sub. notes 10.22s, 2002 6,688
7,180 Cirent Semiconductor, Inc.144A sr. sub. notes 10.14s, 2004 7,432
10,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 9,925
10,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 10,750
25,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 28,625
50,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 51,750
20,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 20,300
30,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 30,300
20,000 Motors and Gears Inc. sr. notes Ser. B, 10 3/4s, 2006 21,600
10,000 Samsung Electronics 144A company guaranty 9 3/4s, 2003 9,550
70,000 Wavetek Corp. company guaranty 10 1/8s, 2007 72,450
20,000 Zilog Inc. 144A sr. notes 9 1/2s, 2005 16,200
--------------
291,058
Energy-Related (0.1%)
- -------------------------------------------------------------------------------------------------------------
35,000 AES Corp. sr. sub. notes 8 3/8s, 2007 35,263
585,000 Calenergy, Inc. sr. notes 7.63s, 2007 589,639
10,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004 9,500
210,000 Quezon Power Ltd. sr. notes 8.86s, 2017 (Philippines) 190,451
10,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 10,125
--------------
834,978
Entertainment (0.2%)
- -------------------------------------------------------------------------------------------------------------
10,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 10,250
25,000 Aztar Corp. sr. sub. notes 11s, 2002 25,719
10,000 Isle of Capri Black Hawk LLC 1st mtge. Ser. B, 13s, 2004 10,250
375,000 News America Holdings, Inc. deb. 7 3/4s, 2045 392,419
360,000 News America Holdings, Inc. deb. 7.7s, 2025 378,857
10,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 11,075
25,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 25,469
10,000 Silver Cinemas Intl.144A sr. sub. notes 10 1/2s, 2005 10,100
110,000 Six Flags Corp. sr. sub. notes stepped-coupon zero % (12 1/4s,
6/15/98), 2005 (STP) 124,163
435,000 Time Warner Entertainment Co. notes 8 7/8s, 2012 520,978
680,000 Time Warner Entertainment Co. sr. notes 8 3/8s, 2033 799,109
560,000 Time Warner, Inc. notes 7 3/4s, 2005 600,281
30,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 30,300
60,000 United Artists Theatre 144A sr. sub. notes 9 3/4s, 2008 60,075
--------------
2,999,045
Environmental Control (--%)
- -------------------------------------------------------------------------------------------------------------
10,000 Allied Waste Industries, Inc. sr. disc. notes stepped-coupon
zero % (11.3s, 6/1/02), 2007 (STP) 7,350
130,000 Waste Management, Inc. notes 6 5/8s, 2002 130,670
260,000 WMX Technologies, Inc. notes 4.1s, 2002 272,103
--------------
410,123
Food and Beverages (--%)
- -------------------------------------------------------------------------------------------------------------
10,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 10,100
5,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 5,325
10,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 10,650
60,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 61,050
5,000 Fleming Companies, Inc. company guaranty Ser. B, 10 1/2s, 2004 5,225
20,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 20,200
40,000 Smithfield Foods, Inc. 144A sr. sub. notes 7 5/8s, 2008 40,100
10,000 Southern Foods Group 144A sr. sub. notes 9 7/8s, 2007 10,300
25,000 Stater Brothers Holdings sr. sub. notes 9s, 2004 25,500
--------------
188,450
Health Care (0.1%)
- -------------------------------------------------------------------------------------------------------------
25,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 25,125
15,000 Global Health Sciences 144A sr. notes 11s, 2008 14,663
10,000 Hudson Respiratory Care, Inc. 144A sr. sub. notes 9 1/8s, 2008 10,075
20,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007 20,750
20,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008 20,500
115,000 Manor Care, Inc. sr. notes 7 1/2s, 2006 112,907
50,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 45,142
20,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 19,500
10,000 Paragon Corp. Holdings 144A sr. notes 9 5/8s, 2008 9,600
70,000 Paragon Health Networks, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 70,700
25,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 25,625
50,000 Sun Healthcare Group Inc. 144A sr. sub. notes 9 1/2s, 2007 50,250
10,000 Sun Healthcare Group Inc. 144A sr. sub. notes 9 3/8s, 2008 10,025
255,000 Tenet Healthcare Corp. sr. notes 8s, 2005 262,650
3,000 Twin Laboratories, Inc. company guaranty 10 1/4s, 2006 3,270
--------------
700,782
Insurance and Finance (0.7%)
- -------------------------------------------------------------------------------------------------------------
470,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 439,267
455,000 AFC Capital Trust I company guaranty Ser. B, 8.207s, 2027 515,884
130,000 Allstate Financing II company guaranty 7.83s, 2045 137,220
580,000 American General Institute 144A company guaranty
8 1/8s, 2046 661,867
520,000 Amvescap Corp. PLC 144A sr. notes 6.6s, 2005 523,575
5,000 Colonial Capital II company guaranty Ser. A 8.92s, 2027 5,435
10,000 Dine S.A. de C.V. 144A company guaranty 8 3/4s, 2007 (Mexico) 9,600
5,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 2006 5,400
490,000 Executive Risk Capital Trust company guaranty Ser. B,
8.675s, 2027 532,390
300,000 Finova Capital Corp. notes 9 1/8s, 2002 328,335
365,000 First Citizens Bank Capital Trust I 144A company guaranty
8.05s, 2008 380,969
120,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 125,826
335,000 Firstar Bank Milwaukee sr. notes 6 1/4s, 2002 336,796
280,000 Firstar Capital Trust I company guaranty Ser. B, 8.32s, 2026 308,050
400,000 Fleet Credit Card LLC sr. notes 7.02s, 2001 409,184
300,000 Ford Motor Credit Corp. sr. notes 6s, 2003 298,173
265,000 Greenpoint Bank sr. notes 6.7s, 2002 268,882
125,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 140,321
165,000 Hartford Life, Inc. deb. 7.65s, 2027 181,421
5,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 5,000
425,000 Lehman Bros Holdings, Inc. med. term notes 6.4s, 1999 427,274
650,000 Lehman Brothers Holdings, Inc. notes 6 1/4s, 2003 648,941
260,000 Markel Capital Trust I company guaranty Ser. B, 8.71s, 2046 284,695
250,000 Money Store, Inc. notes 8.05s, 2002 264,673
10,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 10,150
145,000 North Fork Bancorporation, Inc. company guaranty 8s, 2027 149,926
10,000 North Fork Capital Trust I company guaranty 8.7s, 2026 11,065
10,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 10,900
125,000 Orange Cogen Funding 144A company guaranty 8.175s, 2022 137,688
240,000 Orion Capital Corp. 144A company guaranty 7.701s, 2028 247,546
505,000 Paine Webber Group sr. med. term notes 6.52s, 2005 506,263
505,000 Paine Webber Group, Inc. sr. notes 6.55s, 2008 506,894
100,000 Peoples Heritage Capital Trust company guaranty Ser. B,
9.06s, 2027 110,539
320,000 Phoenix Home Life Mutual Insurance Co. 144A notes
6.95s, 2006 329,062
635,000 Provident Companies, Inc. bonds 7.405s, 2038 644,525
10,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 10,452
400,000 Salomon, Inc. sr. notes 7.3s, 2002 415,544
220,000 Salton Sea Funding Corp. company guaranty Ser. E, 8.3s, 2011 241,952
335,000 Sampoerna International Finance Co. 144A company guaranty
8 3/8s, 2006 (Indonesia) 190,950
215,000 Southern Investments Service Co. sr. notes 6.8s, 2006
(United Kingdom) 220,730
5,000 Sovereign Capital Trust company guaranty 9s, 2027 5,468
215,000 Sumitomo Bank Treasury Co. 144A bonds Ser. A, FRB,
9.4s, 2049 (Japan) 209,980
530,000 Tig Capital Trust I 144A bonds 8.597s, 2027 574,382
315,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 338,805
430,000 Trenwick Group, Inc. 144A sr. notes 6.7s, 2003 429,703
150,000 USF&G Corp. 144A company guaranty 8.312s, 2046 176,921
--------------
12,718,623
Medical Supplies and Devices (--%)
- -------------------------------------------------------------------------------------------------------------
15,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 15,525
450,000 Beckman Coulter Inc. 144A company guaranty 7.1s, 2003 451,724
10,000 Conmed Corp. 144A sr. sub. notes 9s, 2008 9,950
25,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 28,313
20,000 Fresenius Medical Care AG 144A company guaranty 7 7/8s,
2008 (Germany) 19,700
10,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 11,100
5,000 Imagyn Medical Technologies, Inc. company guaranty 12 1/2s,
2004 2,800
5,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 5,063
25,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 26,866
40,000 Mediq, Inc. 144A sr. sub. notes 11s, 2008 40,800
60,000 Wright Medical Technology, Inc. 144A notes Ser. C, 11 3/4s, 2000 59,400
--------------
671,241
Metals and Mining (--%)
- -------------------------------------------------------------------------------------------------------------
20,000 Ameristeel Corp. 144A sr. notes 8 3/4s, 2008 20,000
10,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 9,200
10,000 Armco, Inc. sr. notes 9s, 2007 10,350
35,000 Continental Global Group sr. notes Ser. B, 11s, 2007 36,925
125,000 Freeport-McMoRan Copper & Gold Co., Inc. sr. notes 7 1/2s,
2006 98,080
20,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 19,450
40,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 40,200
10,000 Maxxam Group Holdings, Inc. sr. notes Ser. B, 12s, 2003 10,825
221,000 PT Alatief Freeport sr. notes 9 3/4s, 2001 (Netherlands) 211,364
20,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 21,650
10,000 WHX Corp. 144A sr. notes 10 1/2s, 2005 10,250
--------------
488,294
Motion Picture Distribution (--%)
- -------------------------------------------------------------------------------------------------------------
10,000 Panavision Inc. 144A sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 (STP) 7,125
Oil and Gas (0.2%)
- -------------------------------------------------------------------------------------------------------------
10,000 Abraxas Petrolem Corp. company guaranty Ser. D 11 1/2s, 2004 10,475
10,000 American Eco. Corp. 144A company guaranty 9 5/8s, 2008 10,075
20,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 19,600
40,000 Chesapeake Energy Corp. 144A sr. notes 9 5/8s, 2005 39,950
5,000 CIA Naviera Perez Companc S.A. 144A bonds 9s, 2004
(Argentina) 5,075
10,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 9,400
40,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 40,200
10,000 Dailey Petroleum Services Corp. company guaranty 9 1/2s, 2008 10,025
150,000 Express Pipeline Ltd. 144A sub. notes Ser. B, 7.39s, 2019
(Canada) 149,783
205,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006 (Canada) 223,169
420,000 K N Energy, Inc. sr. notes 6.45s, 2003 421,310
635,000 Louis Dreyfus Natural Gas notes 6 7/8s, 2007 635,718
10,000 Market Hub Partners 144A sr. notes 8 1/4s, 2008 10,125
10,000 Michael Ptroleum Corp. 144A sr. notes 11 1/2s, 2005 9,875
10,000 Northern Offshore 144A company guaranty 10s, 2005 9,900
30,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 30,375
175,000 Petro Geo-Services AS ADR notes 7 1/2s, 2007 (Norway) 185,043
225,000 Pioneer Natural Resources Co. bonds 7.2s, 2028 224,831
5,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 5,363
295,000 Saga Petroleum ASA deb. 7 1/4s, 2027 (Norway) 297,280
10,000 Seven Seas Petroleum 144A sub. notes 12 1/2s, 2005 10,100
5,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 5,075
10,000 Tokai Corp. 144A bonds FRB 9.98s, 2008 9,300
170,000 Transamerican Energy sr. disc. notes stepped-coupon Ser. B,
zero % (13s, 6/15/99), 2002 (STP) 141,100
20,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 19,200
23,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 25,530
10,000 Trico Marine Services, Inc. company guaranty Ser. D, 8 1/2s, 2005 10,075
10,000 Trico Marine Services, Inc. company guaranty Ser. B, 8 1/2s, 2005 10,100
--------------
2,578,052
Packaging and Containers (--%)
- -------------------------------------------------------------------------------------------------------------
10,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 10,525
15,000 Pindo Deli Finance Mauritius Ltd. company guaranty 10 3/4s,
2007 10,350
5,000 Radnor Holdings Inc. sr. notes 10s, 2003 5,275
5,000 Vicap SA. 144A company guaranty 10 1/4s, 2002 (Mexico) 5,050
--------------
31,200
Paper and Forest Products (--%)
- -------------------------------------------------------------------------------------------------------------
5,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 5,525
5,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 5,088
30,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s, 2004
(Indonesia) 21,000
40,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 41,000
60,000 Repap New Brunswick 144A sr. notes 9s, 2004 (Canada) 60,675
20,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 20,300
20,000 Riverwood International Corp. company guaranty 10 1/4s, 2006 20,600
--------------
174,188
Pharmaceuticals (--%)
- -------------------------------------------------------------------------------------------------------------
10,000 ICN Pharmaceuticals, Inc. sr. notes Ser. B 9 1/4s, 2005 10,750
Publishing (--%)
- -------------------------------------------------------------------------------------------------------------
10,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 10,825
10,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 10,175
--------------
21,000
Real Estate (0.1%)
- -------------------------------------------------------------------------------------------------------------
10,000 Bluegreen Corp. 144A sr. notes 10 1/2s, 2008 10,050
645,000 First Industrial LP med. term notes 7s, 2006 653,830
--------------
663,880
Recreation (--%)
- -------------------------------------------------------------------------------------------------------------
50,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B, 13s, 2002 57,875
10,000 Empress River Casino sr. notes 10 3/4s, 2002 10,825
25,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 25,750
25,000 Mohegan Tribal Gaming Auth. sr. notes Ser. B, 13 1/2s, 2002 31,875
25,000 Showboat Marina Casino 1st mtge. Ser. B, 13 1/2s, 2003 29,250
25,000 Sun International Hotels Ltd. company guaranty 9s, 2007 26,250
25,000 Trump A.C. 1st mtge. 11 1/4s, 2006 24,563
--------------
206,388
REIT's (Real Estate Investment Trust) (0.2%)
- -------------------------------------------------------------------------------------------------------------
320,000 Avalon Properties, Inc. notes 6 7/8s, 2007 323,696
295,000 Avalon Properties, Inc. notes 6 5/8s, 2005 293,903
235,000 Chelsea GCA Realty, Inc. notes 7 1/4s, 2007 237,543
505,000 Equity Residential Properties notes 6.63s, 2015 510,242
345,000 First Industrial Realty Trust, Inc. notes 7.6s, 2007 363,057
120,000 Health Care Property Investors, Inc. sr. notes 6 1/2s, 2006 117,794
585,000 National Health Investors, Inc. bonds 7.3s, 2007 594,313
510,000 OMEGA Healthcare Investors, Inc. notes 6.95s, 2007 504,558
80,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 85,600
205,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 212,956
15,000 Tanger Properities Ltd. notes 8 3/4s, 2001 15,594
--------------
3,259,256
Retail (0.1%)
- -------------------------------------------------------------------------------------------------------------
10,000 Color Spot Nurseries sr. sub. notes 10 1/2s, 2007 9,500
10,000 Eye Care Centers of America 144A sr. sub. notes 9 1/8s, 2008 10,000
295,000 Federated Department Stores, Inc. sr. notes 8 1/2s, 2003 323,125
180,000 Federated Department Stores, Inc. debentures 7s, 2028 180,977
10,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes 10 1/8s, 2008 10,100
25,000 Jitney-Jungle Stores company guaranty 12s, 2006 28,156
10,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 10,925
50,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 50,750
50,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 41,625
5,000 William Carter Co. 144A sr. sub. notes 12s, 2008 5,388
5,000 William Carter Co. sr. sub. notes Ser. A, 10 3/8s, 2006 5,350
10,000 Zale Corp. sr. notes Ser. B, 8 1/2s, 2007 10,150
--------------
686,046
Satellite Services (--%)
- -------------------------------------------------------------------------------------------------------------
10,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon zero %
(12 1/2s, 2/01/02), 2007 (Ireland) (STP) 7,400
20,000 ICG Services Inc. 144A sr. disc. notes stepped-coupon zero %
(10s, 2/15/03), 2008 (STP) 12,200
40,000 ICG Services, Inc. 144A sr. discount notes stepped-coupon
zero %, (9 7/8s, 5/1/03), 2008 (STP) 24,750
10,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s, 2004
(Mexico) 9,975
10,000 TCI Satellite Entertainment, Inc. sr. disc. notes stepped-coupon
zero % (12 1/4s, 2/102), 2007 (STP) 6,400
20,000 TCI Satellite Entertainment sr. sub. notes 10 7/8s, 2007 19,350
--------------
80,075
Specialty Consumer Products (--%)
- -------------------------------------------------------------------------------------------------------------
10,000 Coty Inc. gtd. sr. sub. notes 10 1/4s, 2005 10,700
20,000 Decora Industries, Inc. 144A sr. sec. notes 11s, 2005 19,550
5,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 5,213
--------------
35,463
Telecommunications (0.2%)
- -------------------------------------------------------------------------------------------------------------
30,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 30,000
10,000 Antenna TV S.A. 144A sr. notes 9s, 2007 (Greece) 10,150
30,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 18,000
20,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 20,675
25,000 Celcaribe S.A. sr. notes stepped coupon zero % (13.5s,
7/20/98), 2004 (Columbia) (STP) 26,375
70,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 40,075
25,000 Cencall Communications Corp. sr. disc. notes stepped-coupon
zero % (10 1/8s, 1/15/99), 2004 (STP) 24,438
10,000 Centennial Cellular Corp. sr. notes 8 7/8s, 2001 10,425
150,000 Cia de Telecomunicaciones de Chile S.A. notes 7 5/8s, 2006
(Chile) 152,850
10,000 Colt Telecom Group PLC sr. disc. notes stepped-coupon
zero % (12s, 12/15/01), 2006 (United Kingdom) (STP) 7,900
DEM 625,000 Colt Telecommunications Group PLC sr. notes 8 7/8s,
2007 (United Kingdom) 385,154
10,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 10,300
10,000 CTI Holdings S.A. 144A sr. notes stepped-coupon zero %
(11 1/2s, 4/15/03), 2008 (STP) 5,725
40,000 E. Spire Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 (STP) 31,600
30,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 17,400
10,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 10,600
10,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 11,175
120,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 123,600
10,000 Hermes Europe Railtel sr. notes 11 1/2s, 2007 (Netherlands) 11,300
5,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 3,675
20,000 Hyperion Telecommunications , Inc. sr. notes Ser. B,
12 1/4s, 2004 21,950
25,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (STP) 21,313
10,000 IDT Corp. 144A sr. notes 8 3/4s, 2006 9,800
35,000 Intelcom Group (USA), Inc. company guaranty stepped-coupon
zero % (12 1/2s, 5/1/01), 2006 (STP) 27,650
20,000 Interact Systems, Inc. sr. disc. notes stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 8,000
25,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 (STP) 19,000
75,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 55,125
30,000 Intermedia Communications, Inc. 144A sr. notes 8.6s, 2008 30,188
45,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/01/01), 2006 (STP) 36,900
15,000 Iridium LLC/Capital Corp. company guaranty Ser. B, 14s, 2005 16,725
20,000 IXC Communications, Inc. 144A sr. sub. notes 9s, 2008 19,775
25,000 Knology Holdings Inc. sr. disc. notes stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 (STP) 14,656
5,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 5,525
10,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 10,025
665,000 LCI International, Inc. sr. notes 7 1/4s, 2007 666,782
40,000 Level 3 Communication, Inc. 144A sr. notes 9 1/8s, 2008 39,000
10,000 McCaw International Ltd sr. discount notes stepped coupon
zero % (13s, 4/15/02), 2007 (STP) 6,625
5,000 MetroNet Communications Corp. sr. disc. notes stepped-
coupon zero % (10 3/4s, 11/1/02), 2007 (Canada) (STP) 3,350
10,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 7,400
80,000 Millicom International Cellular S.A. sr. disc. notes stepped-
coupon zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) (STP) 63,000
10,000 MJD Communications Inc. 144A sr. sub. notes 9 1/2s, 2008 10,175
17,000 MJD Communications Inc. 144A notes FRN, 10s, 2008 17,149
15,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 17,400
5,000 Netia Holdings B.V. 144A company guaranty 10 1/4s, 2007
(Poland) 4,956
70,000 NEXTEL Communicaitons, Inc. 144A sr. disc. notes stepped-
coupon zero % (12 1/8s, 4/15/03), 2008 (STP) 43,400
50,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (10.65s, 9/15/02), 2007 (STP) 33,250
40,000 NEXTEL Communications, Inc. 144A sr. disc. notes stepped-
coupon zero % (9.95s, 2/15/03), 2008 (STP) 25,250
80,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9 3/4s, 10/31/02), 2007 (STP) 51,600
65,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9 3/4s, 2/15/99), 2004 (STP) 62,888
30,000 NEXTLINK Communications, Inc. 144A sr. disc. notes stepped-
coupon zero % (9.45s, 4/15/03), 2008 (STP) 18,300
100,000 NTL Inc. 144A sr. notes stepped-coupon zero %
(9 3/4s, 4/01/03), 2008 (STP) 64,875
15,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 16,050
5,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 4,775
25,000 Paging Network, Inc. sr. sub. notes 10s, 2008 25,875
25,000 Pricellular Wireless Corp. sr. notes 10 3/4s, 2004 28,625
10,000 Primus Telecom Group 144A sr. notes 9 7/8s, 2008 9,900
20,000 Psinet, Inc. 144A sr. notes 10s, 2005 20,300
60,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (8.29s, 2/1/03), 2008 (STP) 42,300
30,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/07), 2007 (STP) 19,725
30,000 RCN Corp. 144A sr. disc. notes stepped-coupon zero %
(9.8s, 2/15/03), 2008 (STP) 18,900
10,000 RSL Communications, Ltd. 144A sr. disc. notes stepped-coupon
zero % (10 1/8s, 3/1/03), 2008 (STP) 6,125
10,000 RSL Communications, Ltd. 144A sr. notes 9 1/8s, 2008 9,850
5,000 Sprint Spectrum L.P. sr. notes 11s, 2006 5,763
5,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 5,525
10,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 10,100
5,000 Telesystem International Wireless Inc. sr. disc. notes stepped-
coupon Ser. C, zero % (10 1/2s, 11/1/02), 2007 (STP) 3,000
20,000 Teligent, Inc. sr. notes 11 1/2s, 2007 20,350
50,000 Teligent, Inc. 144A sr. disc. notes stepped-coupon zero %
(11 1/2s, 3/1/03), 2008 (STP) 27,500
25,000 United International Holdings sr. disc. notes stepped-coupon
Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 15,563
15,000 WinStar Communications. Inc. sr. sub. notes 15s, 2007 19,350
40,000 WinStar Communications. Inc. 144A sr. sub. notes 11s, 2008 38,500
25,000 WinStar Equipment Corp. company guaranty 12 1/2s, 2004 28,000
795,000 WorldCom, Inc. notes 7 3/4s, 2007 858,719
--------------
3,618,244
Textiles (--%)
- -------------------------------------------------------------------------------------------------------------
20,000 Day International Group, Inc. 144A sr. sub. notes 9 1/2s, 2008 20,050
5,000 Glenoit Corp. company guaranty 11s, 2007 5,375
5,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 5,125
10,000 Polymer Group, Inc. 144A sr. sub.notes 8 3/4s, 2008 10,100
10,000 Polysindo International Finance company guaranty 11 3/8s,
2006 (Indonesia) 4,800
10,000 Tultex Corp. sr. notes 10 5/8s, 2005 10,325
--------------
55,775
Transportation (0.2%)
- -------------------------------------------------------------------------------------------------------------
5,000 Blue Bird Body Co. sr. sub. notes Ser. B, 10 3/4s, 2006 5,488
325,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 326,271
420,000 Burlington Northern Santa Fe Corp. bonds 6 7/8s, 2027 418,681
10,000 Calair LLC 144A company guaranty 8 1/8s, 2008 9,963
20,000 Canadian Airlines Corp. sec. 10s, 2005 (Canada) 20,325
20,000 Cathay International Ltd. 144A sr. notes 13s, 2008 19,000
10,000 Consorcio/MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 (STP) 9,400
107,968 Continental Airlines Inc. pass-through certificates
Ser. 97CI, 7.42s, 2007 111,867
405,000 Continental Airlines, Inc. pass-through certificates
Ser. 981C, 6.541s, 2009 400,100
355,000 CSX Corp. deb. 7.95s, 2027 403,532
35,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 (Greece) 36,050
10,000 Facilicom International 144A sr. notes 10 1/2s, 2008 9,950
80,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 78,400
10,000 International Shipholding Corp. sr. notes 9s, 2003 10,275
10,000 Johnstown America Industries, Inc. company guaranty Ser. C,
11 3/4s, 2005 11,075
20,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 21,000
10,000 MC Shipping, Inc. 144A sr. notes 11 1/4s, 2008 10,025
715,000 Norfolk Southern Corp. bonds 7.8s, 2027 811,389
610,000 Norfolk Southern Corp. bonds 7.05s, 2037 648,461
10,000 Stena Line AB sr. notes 10 5/8s, 2008 (Sweden) 10,113
10,000 TFM S.A. de C.V. company guaranty stepped-coupon zero %
(11 3/4s, 6/15/02), 2009 (Mexico) (STP) 6,738
10,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 10,500
10,000 Trans World Airlines, Inc. 144A notes 11 3/8s, 2006 10,000
145,000 Wisconsin Central Transportation Corp. notes 6 5/8s, 2008 144,849
--------------
3,543,452
Utilities (0.3%)
- -------------------------------------------------------------------------------------------------------------
240,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 245,273
260,000 California Energy Corp. disc. notes 10 1/4s, 2005 278,330
140,000 CMS Energy Corp. sr. notes 8 1/8s, 2002 144,833
320,000 CMS Energy Corp. pass-through certificates 7s, 2005 310,707
280,000 Connecticut Light & Power Co. 1st mtge. Ser. A, 7 7/8s, 2001 286,479
190,000 Connecticut Light & Power Co. 1st mtge. Ser. C, 7 3/4s, 2002 194,395
100,000 Edison Mission Energy 144A company guaranty 7.33s, 2008 105,372
300,000 EIP Funding-Public Service Co. of New Mexico deb. 10 1/4s,
2012 352,191
5,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 5,609
385,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 392,511
190,000 Enersis S.A. notes 6.6s, 2026 (Chile) 186,204
10,000 Espirto Santo Centrais 144A sr. notes 10s, 2007 (Brazil) 8,975
4,000 First PV Funding deb. 10.15s, 2016 4,221
215,000 Illinova Corp. sr. notes 7 1/8s, 2004 220,287
255,000 Israel Electric Corp., Ltd. 144A sr. notes 7 1/4s, 2006 (Israel) 262,984
91,943 Midland Cogeneration Ventures LP deb. Ser. C-94 10.33s, 2002 99,272
10,000 Midland Funding Corp. II deb. Ser. A, 11 3/4s, 2005 12,001
20,000 Niagara Mohawk Power Corp. med. term notes 9.95s, 2000 20,309
74,651 Northeast Utilities System notes Ser. A, 8.58s, 2006 76,697
164,726 Northeast Utilities System notes Ser. B, 8.38s, 2005 167,982
250,000 Texas New-Mexico Power Utilities 1st mtge. 9 1/4s, 2000 264,025
400,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 424,744
345,000 Texas Utilities Electric Capital Trust V company guaranty 8.175s,
2037 362,633
590,000 US West Capital Funding, Inc. company guaranty 6.95s, 2037 633,023
--------------
5,059,057
--------------
Total Corporate Bonds and Notes (cost $48,847,270) $ 50,204,629
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (1.9%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (1.1%)
- -------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
$ 692 7s, February 15, 2027 $ 688
1,619,527 5 1/2s, with due dates from March 1, 2011 to April 1, 2011 1,568,917
145,035 Federal Home Loan Mortgage Corp. Adjustable Rate
Mortgage 7.143s, July 1, 2027 147,030
Federal National Mortgage Association
Adjustable Rate Mortgages
87,180 7.837s, May 1, 2025 90,776
510,000 5.94s, December 12, 2005 511,193
1,790,281 Federal National Mortgage Association 6 1/2s, with due dates
from March 1, 2027 to February 1, 2028 1,779,651
760,000 Government National Mortgage Association 6 1/2s, TBA,
June 15, 2028 756,436
Government National Mortgage Association
Adjustable Rate Mortgages
617,328 7 3/8s, with due dates from June 20, 2022 to June 20, 2023 634,153
417,413 7 1/8s, July 20, 2023 428,109
940,225 5 1/2s, April 15, 2028 945,220
Government National Mortgage Association
Pass-Through Certificates
3,276,657 8s, with due dates from July 15, 2024 to December 15, 2027 3,408,350
710,804 7 1/2s, with due dates from February 15, 2027
to October 15, 2027 732,571
6,216,284 7s, with due dates from July 20, 2024 to May 15, 2028 6,322,166
470,009 6s, with due dates from May 20, 2024 to July 20, 2024 481,641
930,291 6 1/2s, with due dates from February 15, 2026
to April 15, 2026 925,928
--------------
18,732,829
U.S. Treasury Obligations (0.8%)
- -------------------------------------------------------------------------------------------------------------
1,435,000 U.S. Treasury Bonds 6 1/8s, November 15, 2027 1,499,345
U.S. Treasury Notes
280,000 6 1/4s, June 30, 2002 286,345
2,060,000 6s, July 31, 2002 2,088,964
330,000 5 7/8s, September 30, 2002 333,198
270,000 5 3/4s, November 15, 2000 271,139
2,135,000 5 5/8s, December 31, 2002 (SEG) 2,136,665
530,000 5 5/8s, December 31, 1999 530,498
4,955,000 5 1/2s, March 31, 2003 4,937,212
1,130,000 5 1/2s, February 28, 2003 1,125,412
775,000 5 1/2s, January 31, 2003 771,854
60,000 5 1/2s, March 31, 2000 59,944
100,000 5 1/2s, February 28, 2000 99,906
--------------
14,140,482
--------------
Total U.S. Government and Agency Obligations
(cost $32,751,189) $ 32,873,311
FOREIGN GOVERNMENT BONDS AND NOTES (0.4%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
DEM 630,000 Germany (Federal Republic of) Unity Fund bonds
8s, 2002 395,294
DEM 2,080,000 Germany (Federal Republic of) bonds Ser. 98,
5 5/8s, 2028 1,197,894
USD 295,000 Korea (Republic of) unsub. 8 7/8s, 2008 275,088
USD 660,000 Quebec (Province of) deb. Ser. NM, 7 1/8s, 2024 699,521
USD 275,000 Russia (Government of) deb. principal loans FRB
6.719s, 2020 (POR) 152,955
ZAR 4,612,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 844,587
GBP 1,725,000 United Kingdom Treasury bonds 8s, 2007 3,131,398
--------------
Total Foreign Government Bonds and Notes
(cost $6,811,770) $ 6,696,737
COLLATERALIZED MORTGAGE OBLIGATIONS (0.5%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
Chase Mortgage Finance Corp.
$ 215,000 Ser. 98-2, 6 3/4s, 2028 $ 215,538
129,702 Ser. 93-3, Class B13, 7.461s, 2024 107,492
Commercial Mortgage Acceptance Corp.
760,000 Ser. 97-ML1, Class A2, 6.57s, 2007 774,844
250,000 Ser. 97-ML1, Class A2, 6.53s, 2007 254,531
175,000 Ser. 97-ML1, Class D, 7.11s, 2030 177,078
110,000 Federal Home Loan Mortgage Corp. Ser. 2040 7 1/2,
March 15, 2028 119,646
First Union-Lehman Brothers Commercial Mortgage
440,000 Ser. 97-C2, Class A3, 6.65s, 2007 450,931
285,000 Ser. 97-C2, Class D, 7.12s, 2012 288,251
First Union-Lehman Brothers Commercial Mortgage Co.
655,000 Ser. 98-C2, Class D, 6.778s, 2013 637,192
9,105,000 Ser. 98-C2, Class IO, 0.815s, 2028 413,993
202,955 GE Capital Mortgage Services, Inc. 144A Ser. 94-12,
Class B3, 6s, 2009 180,820
GMAC Commercial Mortgage Securities Inc.
373,000 Ser. 98-C1, Class E, 7.153s, 2030 377,837
238,000 Ser. 98-C1, Class A2, 6.7s, 2008 245,140
530,000 Ser. 98-C1, Class A1, 6.44s, 2030 537,205
1,386 Ser. 97-C2, Class A1, 6.45s, 2004 1,406
GS Mortgage Securities Corp. II
310,000 Ser. 98-GLII, Class A2, 6.562s, 2031 315,716
170,000 Ser. 98-GLII, Class D, 7.191s, 2031 170,213
Housing Securities Inc.
71,928 Ser. 91-B, Class B6, 9s, 2006 72,153
311,693 Ser. 93-F, Class F9M2, 7s, 2023 305,264
18,222 Ser. 93-J, Class J4, 6.66s, 2009 17,282
19,958 Ser. 93-J, Class J5, 6.66s, 2009 19,153
20,382 Ser. 94-1, Class AB1, 6 1/2s, 2009 16,890
114,000 Merrill Lynch Mortgage Investors, Inc. Ser. 98-C2, Class D,
6.96s, 2030 114,980
175,000 Morgan Stanley Capital I Ser. 96-WF1, Class A2, 7.218s, 2006 181,152
Prudential Home Mortgage Securities 144A
52,384 Ser. 93-31, Class B2, 6s, 2000 43,741
83,314 Ser. 94-A, Class 4B, 7 1/2s, 2007 77,169
92,327 Ser. 94-D, Class B4, 6.312s, 2009 87,696
79,090 Ser. 92-25, Class B3, 8s, 2022 (in default) (NON) 77,410
86,322 Ser. 94-31, Class B3, 8s, 2009 86,133
292,986 Ser. 94-A, Class 4B, 6.802s, 2024 288,042
195,467 Ser. 94-D, Class 3B, 6.311s, 2009 190,580
230,703 Ser. 95-C, Class B1, 7.815s, 2001 230,054
451,918 Ser. 95-D, Class 5B, 7.54s, 2005 340,633
210,000 Residential Funding Mortgage Exchange Corp.
Ser. 98, Class B 6 3/4s, 2008 209,231
197,099 Ryland Mortgage Securities Corp. Ser. 94-7C,
Class B2, 7.358s, 2025 196,699
--------------
Total Collateralized Mortgage Obligations
(cost $7,528,045) $ 7,822,095
CONVERTIBLE PREFERRED STOCKS (0.1%) (a) (cost $1,628,942)
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
31,000 K mart Financing $3.875 cv. pfd. $ 2,199,063
CONVERTIBLE BONDS AND NOTES (0.1%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 5,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) $ 4,325
50,000 APP Global Finance Ltd. 144A cv. company guaranty
3 1/2s, 2003 39,000
10,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 6,450
3,780,000 Western Digital Corp. 144A cv. sub. deb. zero %, 2018 1,285,200
25,000 WinStar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 36,750
--------------
Total Convertible Bonds and Notes (cost $1,418,779) $ 1,371,725
ASSET-BACKED SECURITIES (0.1%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 425,000 Green Tree Financial Corp. Ser. 98-2, Class A5, 6.24s, 2016 $ 426,926
411,258 Green Tree Recreational Equipment & Cons. Ser. 98-A,
Class A1C, 6.18s, 2019 411,258
2,410,000 Lehman Manufactured Housing Ser. 98-1, Class 1IO,
0.819s, 2028 115,040
--------------
Total Asset-Backed Securities (cost $955,186) $ 953,224
BRADY BONDS (0.1%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 690,000 Argentina (Republic of) Ser. L-GP stepped-coupon, 5 3/4s,
(6s, 3/31/99), 2023 (STP) $ 514,947
626,000 Peru (Government of) 144A Ser. PDI 4s, 2017 435,039
476,000 Philippines (Government of) Ser. B, 6 1/2s, 2017 421,260
720,000 United Mexican States sec. Ser. B, 6 1/4s, 2019 601,200
--------------
Total Brady Bonds (cost $2,003,305) $ 1,972,446
PREFERRED STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
1 American Radio Systems Inc. $11.375 pfd. $ 118
100 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 5,450
159 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. (PIK) 19,637
143 CSC Holdings Inc. Ser. M, $11.125 cum. (PIK) 16,517
20 Dobson Communications 144A $12.25 pfd. (PIK) 22,000
15 Fresenius Medical Care AG Ser. D, $9.00 pfd. (Germany) 15,675
25 Intermedia Communication Ser. B, $13.50 pfd. (PIK) 30,125
100 Nebco Evans Holding Co. 144A $11.25 pfd. (PIK) 10,200
382 Nextlink Communications, Inc. $7.00 cum. pfd. (PIK) 22,729
292 Public Service Co. of New Hampshire $2.65 1st mtge. pfd. 7,592
356 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. (PIK) 42,008
10 Spanish Broadcasting Systems $14.25 cum. pfd. 10,500
52 Time Warner Inc. Ser. M, $10.25 pfd. 59,020
440 Webster Financial $7.375 pfd. 443,552
20 WinStar Communications. Inc. 144A $14.25 cum. pfd. (PIK) 23,800
--------------
Total Preferred Stocks (cost $704,384) $ 728,923
UNITS (--%) (a)
NUMBER OF UNITS VALUE
- -------------------------------------------------------------------------------------------------------------
25 Allegiance Telecom, Inc. units sr. disc. stepped-coupon notes
zero % (11 3/4s, 2/15/08), 2008 (STP) $ 13,875
10 Bestel S.A.de CV units, stepped-coupon zero % (12 3/4s,
5/15/03), 2005 (STP) 6,850
10 Club Regina, Inc. 144A units 13s, 2004 10,800
40 Diva Systems Corp. 144A units stepped-coupon zero %
(12 5/8s, 3/1/03), 2008 (STP) 21,200
65 DTI Holdings, Inc. units stepped-coupon zero % (12 1/2s,
3/1/03), 2008 (STP) 37,050
40 Firstworld Communication 144A units zero % (13s, 4/15/08),
2008 (STP) 20,000
25 KMC Telecom Holdings, Inc. units stepped-coupon zero %
(12 1/2s, 2/15/03), 2008 (STP) 14,938
30 Long Distance International, Inc. 144A units 12 1/4s, 2008 30,600
30 Mediq 144A units, stepped-coupon zero % (13s, 6/1/09),
2009 (STP) 16,050
10 Onepoint Communications, Inc. units 14 1/2s, 2008 9,975
20 Pathnet, Inc. 144A units 12 1/4s, 2008 21,800
30 Rhythms Netcon 144A units stepped coupon zero %
(13 1/2s, 5/15/08), 2008 (STP) 14,700
10 Startec Global Communications Corp. units 12s, 2008 10,025
5 Stone Container Corp. units sr. sub. 12 1/4s, 2002 5,156
15 Transamerican Refining units 16s, 2003 15,750
15 Versatel Teleco units 13 1/4s, 2008 15,525
30 Viatel Global 144A units 11 1/4s, 2008 31,200
--------------
Total Units (cost $291,692) $ 295,494
MUNICIPAL BONDS AND NOTES (--%) (a) (cost $355,000)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 355,000 NJ Econ. Dev. Auth. Municipal Bond Investors
Assurance Corporation, Rev. Bonds, Ser. A,
7.425s, 2/15/29 Aaa $ 395,303
WARRANTS (--%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- -------------------------------------------------------------------------------------------------------------
150 Advanced Radio Telecommunications 2/15/07 $ 1,950
70 Cellnet Data Systems, Inc. 9/15/07 3,850
10 Colt Telecommunications Group PLC
(United Kingdom) 12/31/06 1,350
135 Consorcio Ecuatoriano 144A 10/1/00 68
10 Esat Holdings, Inc. (Ireland) 1/1/04 350
197 Fitzgeralds Gaming Co. 12/19/98 2
15 Globalstar Telecom 144A 2/15/04 2,100
25 Hyperion Telecommunications 4/15/01 2,675
20 Interact Systems, Inc. 8/1/03 5
25 Intermedia Communications 6/1/00 3,375
25 Knology Holdings, Inc. 144A 10/15/07 13
10 McCaw International Ltd. 4/15/07 3
10 Spanish Broadcasting Systems 144A 6/30/99 2,050
10 Sterling Chemicals Holdings 8/15/08 240
40 UIH Australia/Pacific, Inc. 144A 5/15/06 600
--------------
Total Warrants (cost $9,431) $ 18,631
SHORT-TERM INVESTMENTS (3.9%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 19,350,000 General Electric Capital Corp., Floating Rate
Note 5.53s, 6/19/98 $ 19,308,387
TRL 68,330,000,000 Turkey Treasury Bills zero %, June 4, 1998 251,485
TRL 48,400,000,000 Turkey Treasury Bills zero %, June 17, 1998 180,389
$ 47,000,000 Interest in $700,000,000 joint repurchase agreement
dated May 29, 1998 with Morgan Stanley due
June 1, 1998 with respect to various U.S. Treasury
obligations -- maturity value of $47,021,620
for an effective yield of 5.52% 47,021,620
--------------
Total Short-Term Investments (cost $66,725,607) $ 66,761,881
- -------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,441,770,842) (b) $1,701,584,728
- -------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,696,663,970.
(b) The aggregate identified cost on a tax basis is $1,442,051,261, resulting in gross unrealized
appreciation and depreciation of $285,070,392 and $25,536,925, respectively, or net unrealized
appreciation of $259,533,467.
(NON) Non-income-producing security.
(STP) 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.
(POR) A portion of the income will be received in additional securities.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at May 31, 1998.
(CUS) This entity provides subcustodian services to the fund.
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).
The rate shown on Floating Rate Bonds and Floating Rate Notes are the current interest rates shown at
May 31, 1998, which are subject to change based on the terms of the security.
The fund had the following industry group concentrations greater than 10% at May 31, 1998
(as a percentage of net assets):
Insurance and Finance 19.9%
Utilities 10.2
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Forward Currency Contracts to Buy May 31, 1998 (Unaudited)
(aggregate face value $4,910,221)
Aggregate Face Delivery Unrealized
Market Value Value Date Appreciation
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 21,780 $ 21,737 9/16/98 $ 43
Deutschemarks 4,637,189 4,571,560 6/17/98 65,629
South Korean Won 317,172 316,924 3/11/98 248
- --------------------------------------------------------------------------------------------
$65,920
- --------------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at May 31, 1998 (Unaudited)
(aggregate face value $10,007,867)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------------
British Pounds $ 3,081,757 $ 3,079,770 9/16/98 $ (1,987)
Deutschemarks 6,606,427 6,529,652 6/17/98 (76,775)
South African Rand 396,567 398,445 9/16/98 1,878
- --------------------------------------------------------------------------------------------
$ (76,884)
- --------------------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1998 (Unaudited)
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date Depreciation
- --------------------------------------------------------------------------------------------
Municipal Bond
Index (long) $ 992,500 $ 980,719 Jun-98 $ 11,781
US Treasury Bonds
20-yr (long) 1,944,000 1,938,491 Sep-98 5,509
US Treasury Bonds
20-yr (short) 973,750 969,750 Jun-98 (4,000)
- --------------------------------------------------------------------------------------------
$ 13,290
- --------------------------------------------------------------------------------------------
TBA Sales Commitments at May 31, 1998 (Unaudited)
(premium received $752,981)
Settlement Market
Agency Principal Amount Date Value
- --------------------------------------------------------------------------------------------
GNMA, 7.5s, June 99 $ 734,000 6/18/98 $ 756,475
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1998 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,441,770,842) (Note 1) $1,701,584,728
- ---------------------------------------------------------------------------------------------------
Cash 925,863
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 5,193,637
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 4,881,008
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 10,871,525
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 2,750
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 72,407
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 69,503
- ---------------------------------------------------------------------------------------------------
Total assets 1,723,601,421
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 90,990
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 20,327,486
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,239,741
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,349,037
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 253,167
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 13,251
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 3,197
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,023,795
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 83,371
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 443,320
- ---------------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $752,981) (Note 3) 756,475
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 353,621
- ---------------------------------------------------------------------------------------------------
Total liabilities 26,937,451
- ---------------------------------------------------------------------------------------------------
Net assets $1,696,663,970
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) 1,331,356,950
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 2,841,139
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and foreign currency
transactions (Note 1) 102,520,574
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities
in foreign currencies 259,945,307
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,696,663,970
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,044,646,507 divided by 62,238,530 shares) $16.78
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $16.78)* $17.80
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($595,162,030 divided by 35,697,033 shares)** $16.67
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($56,855,433 divided by 3,406,480 shares) $16.69
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $16.69)* $17.30
- ---------------------------------------------------------------------------------------------------
* 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, 1998 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $50,751) $ 15,410,292
- --------------------------------------------------------------------------------------------------
Interest 4,918,929
- --------------------------------------------------------------------------------------------------
Total investment income 20,329,221
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,389,936
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,287,496
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 2,068
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 9,493
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,215,465
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 2,696,280
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 209,085
- --------------------------------------------------------------------------------------------------
Reports to shareholders 69,308
- --------------------------------------------------------------------------------------------------
Registration fees 69,827
- --------------------------------------------------------------------------------------------------
Auditing 22,771
- --------------------------------------------------------------------------------------------------
Legal 7,681
- --------------------------------------------------------------------------------------------------
Postage 50,504
- --------------------------------------------------------------------------------------------------
Other 56,844
- --------------------------------------------------------------------------------------------------
Total expenses 10,086,758
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (414,097)
- --------------------------------------------------------------------------------------------------
Net expenses 9,672,661
- --------------------------------------------------------------------------------------------------
Net investment income 10,656,560
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 103,183,726
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 97,516
- --------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 7,619
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (149,104)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities
in foreign currencies during the period (144,447)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures, written
options, and TBA sale commitments during the period 40,826,555
- --------------------------------------------------------------------------------------------------
Net gain on investments 143,821,865
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $154,478,425
- --------------------------------------------------------------------------------------------------
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
1998* 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 10,656,560 $ 19,540,090
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 103,139,757 119,363,105
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments
and assets and liabilities in foreign currencies 40,682,108 86,444,086
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 154,478,425 225,347,281
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
- ----------------------------------------------------------------------------------------------------------------------
Class A (6,811,841) (13,929,347)
- ----------------------------------------------------------------------------------------------------------------------
Class B (1,999,758) (4,359,159)
- ----------------------------------------------------------------------------------------------------------------------
Class M (267,110) (540,928)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
- ----------------------------------------------------------------------------------------------------------------------
Class A (43,816,633) --
- ----------------------------------------------------------------------------------------------------------------------
Class B (23,667,013) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (2,487,767) --
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 230,079,564 374,993,087
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 305,507,867 581,510,934
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 1,391,156,103 809,645,169
- ----------------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $2,841,139 and $1,263,288, respectively) $1,696,663,970 $1,391,156,103
- ----------------------------------------------------------------------------------------------------------------------
* 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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $16.04 $13.29 $10.93 $8.49 $8.67 $7.72
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .16 .30 .31 .32 .32 .28
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.49 2.74 2.37 2.44 (.18) 1.01
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.65 3.04 2.68 2.76 .14 1.29
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.14) (.29) (.32) (.32) (.32) (.31)
- ------------------------------------------------------------------------------------------------------------------------------------
From net
realized gains (.77) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.91) (.29) (.32) (.32) (.32) (.34)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $16.78 $16.04 $13.29 $10.93 $8.49 $8.67
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.87* 23.15 24.96 33.17 1.59 17.06
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,044,647 $878,766 $566,133 $391,551 $304,124 $328,251
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .50* 1.06 1.09 1.13 1.04 1.16
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .82* 2.02 2.61 3.32 3.67 3.40
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 50.84* 82.48 67.56 70.39 82.49 125.85(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (e) $.0505 $.0511 $.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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.95 $13.23 $10.89 $8.46 $8.65 $8.66
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .09 .19 .21 .23 .26 .06(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.48 2.73 2.37 2.46 (.18) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.57 2.92 2.58 2.69 .08 (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.08) (.20) (.24) (.26) (.27) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net
Realized gains (.77) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.85) (.20) (.24) (.26) (.27) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $16.67 $15.95 $13.23 $10.89 $8.46 $8.65
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.42* 22.24 24.06 32.30 .86 (.12)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $595,162 $463,506 $221,259 $83,646 $32,114 $14,800
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .88* 1.81 1.84 1.87 1.78 .44*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .44* 1.25 1.86 2.63 3.02 .55*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 50.84* 82.48 67.56 70.39 82.49 125.85(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (e) $.0505 $.0511 $.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 Dec. 2, 1994+
operating performance (Unaudited) Year ended November 30 to Nov. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $15.96 $13.23 $10.89 $8.45
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .12 .23 .25 .28 (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 1.48 2.73 2.36 2.45
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.60 2.96 2.61 2.73
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.10) (.23) (.27) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
From net
realized gains (.77) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.87) (.23) (.27) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $16.69 $15.96 $13.23 $10.89
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.60* 22.58 24.35 32.89*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $56,855 $48,884 $22,254 $7,051
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .75* 1.56 1.59 1.60*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .57* 1.50 2.11 2.99*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 50.84* 82.48 67.56 70.39
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (e) $.0505 $.0511 $.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, 1998 (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 within approximately six to 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 original issue discount bonds, stepped-coupon bonds and
payment in kind bonds are accreted according to the yield-to-maturity basis.
Securities purchased or sold on a when-issued basis may be settled a month or
more after the trade date; interest income is accrued based on the terms of
the security. Losses may arise due to changes in the market value of the
underlying securities or if the counterparty does not perform under the
contract.
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 gains and losses 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 current 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) 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. 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. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
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.
H) 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.
I) 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 the 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.
J) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the six months ended May 31, 1998, the fund
had no borrowings against the line of credit.
K) 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.
L) 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, 0.39% of the next $5 billion, and 0.38% thereafter.
The fund reimburses Putnam Management an allocated amount 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 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, 1998, fund expenses were reduced by $414,097
under expense offset arrangements with PFTC and brokerage service
arrangements. 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.
Each Trustee of the fund receives an annual Trustee fee, of which $1,270 has
been allocated to the fund, 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 has adopted a Trustee Fee Deferral Plan (the "Deferral 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 accordance with the Deferral 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 retainer and meeting fees 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 currently limit payment by the fund to 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, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $394,642 and $21,553 from the sale of
class A and class M shares, respectively and $332,195 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, 1998, Putnam Mutual Funds Corp., acting as underwriter
received $5,876 on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended May 31, 1998, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $854,722,670 and $696,403,137, respectively. Purchases and sales of
U.S. government obligations aggregated $55,877,683 and $64,615,203,
respectively. In determining the net gain or loss on securities sold, the cost
of securities has been determined on the identified cost basis.
Written option transactions during the year are summarized as follows:
Contract Premiums
Amounts Received
- ------------------------------------------------------------
Written options
outstanding at
beginning of
period $ 2,400,000 $ 15,249
Options opened -- --
Options expired -- --
Options closed (2,400,000) (15,249)
- ------------------------------------------------------------
Written options
outstanding at
end of period -- --
- ------------------------------------------------------------
Note 4
Capital shares
At May 31, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
May 31, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 9,932,186 $162,696,361
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,840,524 43,521,128
- ------------------------------------------------------------
12,772,710 206,217,489
Shares
repurchased (5,307,915) (87,000,217)
- ------------------------------------------------------------
Net increase 7,464,795 $119,217,272
- ------------------------------------------------------------
Year ended
November 30, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 23,424,260 $341,520,121
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 772,535 11,185,040
- ------------------------------------------------------------
24,196,795 352,705,161
Shares
repurchased (12,018,914) (175,195,821)
- ------------------------------------------------------------
Net ioncrease 12,177,881 $177,509,340
- ------------------------------------------------------------
Six months ended
May 31, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 9,861,396 $159,618,985
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,488,101 22,610,691
- ------------------------------------------------------------
11,349,497 182,229,676
Shares
repurchased (4,717,541) (76,505,122)
- ------------------------------------------------------------
Net increase 6,631,956 $105,724,554
- ------------------------------------------------------------
Year ended
November 30, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 21,610,564 $312,136,112
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 258,530 3,731,249
- ------------------------------------------------------------
21,869,094 315,867,361
Shares
repurchased (9,531,821) (137,987,600)
- ------------------------------------------------------------
Net increase 12,337,273 $177,879,761
- ------------------------------------------------------------
Six months ended
May 31, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 762,367 $ 12,292,376
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 168,430 2,563,922
- ------------------------------------------------------------
930,797 14,856,298
Shares
repurchased (587,287) (9,718,560)
- ------------------------------------------------------------
Net increase 343,510 $ 5,137,738
- ------------------------------------------------------------
Year ended
November 30, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 2,338,352 $ 33,895,325
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 33,951 492,595
- ------------------------------------------------------------
2,372,303 34,387,920
Shares
repurchased (990,948) (14,783,934)
- ------------------------------------------------------------
Net increase 1,381,355 $ 19,603,986
- ------------------------------------------------------------
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
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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
Brett C. Browchuk
Vice President
Thomas V. Reilly
Vice President
Anthony I. Kreisel
Vice President
Edward P. Bousa
Vice President and Fund Manager
James M. Prusko
Vice President and Fund Manager
David L. Waldman
Vice President and Fund Manager
Jeffrey J. Kobylarz
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
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 the 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
- --------------------
SA020-43758 012/192/626 7/98
