Putnam
Equity
Income
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
11-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Putnam Equity Income Fund's class A shares were ranked in the top 22% by
Lipper Analytical Services for the 5-year period ended December 31, 1998.
The shares ranked 18 out of 84 equity income funds ranked.*
* "[Fund Manager Edward] Bousa's search for value has been fruitful enough
to garner above-average returns. . . The fund's low-risk approach has been
a boon for performance in 1998 as well. Its below-average equity
allocation helped the fund hold its ground better than most in the group
when the stock market tanked in the third quarter."
-- Morningstar Mutual Funds,
November 20, 1998
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
15 Portfolio holdings
39 Financial statements
* Past performance is not indicative of future results. Lipper is an
industry research firm whose rankings are based on total return
performance, vary over time, and do not reflect the effects of sales
charges. For the 1-year period ended 12/31/98, the fund ranked 92 out of
222 funds, for the 3-year period, the fund ranked 47 out of 147 funds, and
for the 10-year period, the fund ranked 23 out of 41 funds. Performance of
other share classes will vary.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Amid the market turbulence of the past year, Putnam Equity Income Fund was
able to give a respectable account of itself while adhering steadfastly to
its investment style. Your fund's management team achieved these positive
results by making some timely portfolio moves and taking advantage of a
number of opportunities created by the market's volatility during the
fiscal year that ended on November 30, 1998.
To increase stability in the current market environment, for example, the
managers increased the allocation to consumer and electric utility stocks.
To take advantage of attractive prices created during market declines,
they were able to raise the fund's weighting in the hard-hit technology
sector. While the positive results of some of these choices were
immediately apparent, other selections were made in the expectation of a
future payback.
In the following report, your fund's management team reviews the fiscal
year's performance and provides commentary on prospects for the year
ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 20, 1999
Report from the Fund Managers
Edward P. Bousa, Lead Manager
James M. Prusko
David L. Waldman
Jeffrey J. Kobylarz
The second half of Putnam Equity Income Fund's fiscal year encompassed one
of the most volatile investment environments in quite some time. It has
been a remarkable year in terms of external events affecting valuations in
the stock market. The Asian financial crisis that started in 1997 began to
erode global economic and market conditions, which were hit again by
Russia's August default on some of its debt and the sharp decline of its
currency. These events -- along with the high-profile near collapse of a
hedge fund in September that helped feed a credit crunch crisis in the
fixed-income markets -- prompted the Federal Reserve Board to pursue an
aggressive policy of interest-rate reductions between the end of September
and the middle of November. The rate cuts helped spark a tremendous rally
in financial assets in October and November 1998.
Amid these swirling storm clouds, Putnam Equity Income Fund benefited from
some key strategic moves. The fund's cautious approach, which favors
less-volatile, attractively valued dividend-paying stocks, produced a
strong return of 12.91% at NAV (6.41% at public offering price) for its
class A shares for the fiscal year ended November 30, 1998. For complete
performance information, including the returns of all share classes and
over longer time periods, please see the tables that begin on page 9.
* FUND BENEFITS FROM SPLIT PERSONALITY OF U.S. ECONOMY
In spite of a general worldwide economic slowdown, the U.S. economy posted
fairly stable overall growth during your fund's fiscal year. Looking more
closely, we can see that the economy's performance diverged along two
different paths. On the positive side was the noncyclical portion of the
economy -- those areas that don't typically move in concert with the
economic cycle -- as well as cyclical industries that cater to the
consumer, such as automobiles and housing. Noncyclical sectors were
generally immune to the negative influence of the ongoing Asian financial
crisis. On the less positive side, more cyclical sectors of the economy
such as commodities, oil, and capital goods were disappointing; as the
Asian slowdown ate into demand for these products, their prices went into
a free fall.
Fortunately, by remaining on top of these trends, we were able to make
some timely portfolio shifts that helped boost the fund's performance.
Specifically we significantly increased the fund's consumer industry and
electric utility stocks earlier in the year and were rewarded with stable
performance when the market declined. Stocks in both sectors benefited
from the steady earnings growth their companies tend to provide, with
electric utilities offering the added bonus of solid yields. In gyrating
markets, these were the types of defensive characteristics toward which
investors gravitated.
* MARKET TURMOIL CREATES INVESTMENT OPPORTUNITIES
As it fell through the third quarter and into the beginning of the fourth
quarter of 1998, the market presented us with a number of opportunities to
buy cheap stocks of solid companies. When the market hit bottom, we
reallocated assets from the more defensive areas and invested them in
sectors that had been beaten down, most notably finance. The credit crunch
and illiquidity in the market hurt these stocks in the market downdraft.
However, when the Fed chose to cut short-term interest rates three times,
investors were reassured. As a result, liquidity returned to both the
equity and credit markets, helping to stabilize financial markets overall
and these finance stocks in particular.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Insurance and
finance 21.7%
Utilities 12.1%
Oil and gas 8.9%
Pharmaceuticals 6.1%
Food and
beverages 4.4%
Footnote reads:
*Based on net assets as of 11/30/98. Holdings will vary over time.
Stocks of bank and brokerage firms went on to post a significant rally and
buoy the fund's performance. Investments in Morgan Stanley and BankAmerica
were among the enormous value opportunities the fund was able to ride to
gains over the past few months. While these holdings, as well as 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.
Another area that proved fruitful was technology, a sector in which your
fund was overweighted relative to many other equity income funds. Here we
looked for companies selling products that offered a competitive
advantage. Asian producers of lower-priced electronic components have been
unable to afford capital equipment upgrades to keep pace with rapid change
and short product cycles. Hence firms such as Texas Instruments benefited
as domestic semiconductor manufacturers enjoyed a significant rebound. Sun
Microsystems with its Java Internet software also performed quite well, as
did GTE, the large telecommunications concern that is merging with Bell
Atlantic. Other companies involved with mergers also contributed to
positive performance, including Mobil and Exxon.
While the fund generally avoided cyclical areas that lagged, it did have
some exposure to industries that struggled. Airline stocks, for example,
were hurt by concerns related to capacity and the feared effects of a
potential domestic economic slowdown in 1999. The fund's commodity-based
investments such as paper and chemical companies suffered from oversupply
and dampened demand. Hospital-oriented companies stumbled over regulatory
issues, and in the retail sector, Sears did not meet earnings expectations
because of merchandising problems.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 EQUITY HOLDINGS
BankAmerica Corp.
Insurance and finance
Philip Morris Cos., Inc.
Consumer non durables
GTE Corp.
Utilities
Bristol-Myers Squibb Co.
Pharmaceuticals
Citigroup, Inc.
Insurance and finance
Exxon Corp.
Oil and gas
IBM Corp.
Computer services and software
Mobil Corp.
Oil and gas
Pharmacia & Upjohn, Inc.
Pharmaceuticals
Merck & Co., Inc.
Pharmaceuticals
Footnote reads:
These holdings represent 18.0% of the fund's net assets as of 11/30/98.
Portfolio holdings will vary over time.
* MORE VOLATILITY -- AND OPPORTUNITY -- ON HORIZON
Looking ahead to fiscal 1999, we believe the markets will remain volatile
as investors continue to sort out the short- and long-term ramifications
of the ongoing Asian dilemma. Yet we believe it will also be an especially
exciting time for value investors because volatility can breed
opportunity, much as it did in the latter part of the fiscal year with
finance stocks. The U.S. stock market should benefit from having unusually
low interest rates at its back, and we expect to see economic growth
sustained or revived worldwide.
We are optimistic about the fund's current positioning because it is
diversified in companies in such fields as technology and health care that
in our opinion should participate in growth. The fund also holds
investments in stocks that generally offer attractive yields, specifically
those of electric and telephone utilities. Both industries also offer
significant consolidation potential, with stocks selling at unusually low
valuations.
In sum, the fund seeks to combine significant downside protection if the
market is weak but also has exposure to companies that we expect to
perform well if the market continues to recover. It is important to note,
however, that more conservative stock funds such as this one will not
likely keep up with broad market averages such as the Standard & Poor's
500(R) Index if the market is extremely strong.
For us, regardless of market and economic conditions, the job remains the
same. We will continue to scour the markets for investments that offer
"cheapness and change," relying on intensive research and -- most
importantly -- extensive company visits to find the best ideas available
in the marketplace.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 11/30/98, 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 is designed for investors seeking high 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 11/30/98
Class A Class B Class M
(inception date) (6/15/77) (9/13/93) (12/2/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 12.91% 6.41% 12.04% 7.04% 12.35% 8.41%
- ------------------------------------------------------------------------------
5 years 135.08 121.54 126.69 124.69 128.97 120.86
Annual average 18.64 17.24 17.78 17.58 18.02 17.17
- ------------------------------------------------------------------------------
10 years 285.50 263.22 256.35 256.35 264.92 252.09
Annual average 14.45 13.77 13.55 13.55 13.82 13.41
- ------------------------------------------------------------------------------
Life of fund 1185.78 1111.62 958.47 958.47 1015.95 976.62
Annual average 12.64 12.33 11.62 11.62 11.90 11.71
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/98
Standard
& Poor's Consumer
500 Index Price Index
- ------------------------------------------------------------------------------
1 year 23.66% 1.55%
- ------------------------------------------------------------------------------
5 years 181.26 12.48
Annual average 22.98 2.38
- ------------------------------------------------------------------------------
10 years 457.61 36.33
Annual average 18.75 3.15
- ------------------------------------------------------------------------------
Life of fund 2473.57 170.18
Annual average 16.37 4.75
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 5.75% and
3.50%, respectively. Class B share returns for the 1-, 5-, and 10-year
(where available) 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.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
11/30/88
Fund's class A S&P 500 Consumer Price
Date shares at POP Index Index
11/30/88 9,425 10,000 10,000
11/30/89 11,094 13,084 10,466
11/30/90 9,923 12,631 11,122
11/30/91 11,821 15,199 11,455
11/30/92 13,199 18,007 11,804
11/30/93 15,451 19,826 12,120
11/30/94 15,697 20,033 12,444
11/30/95 20,904 27,441 12,768
11/30/96 26,121 35,087 13,184
11/30/97 32,167 45,092 13,425
11/30/98 $36,322 $55,761 $13,633
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $35,635 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $36,492 ($35,209 at public offering price). See first page of
performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
for 12 months ended 11/30/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 4 4 4
- ------------------------------------------------------------------------------
Income $0.280 $0.163 $0.199
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term 0.772 0.772 0.772
- ------------------------------------------------------------------------------
Short-term -- -- --
- ------------------------------------------------------------------------------
Total $1.052 $0.935 $0.971
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
11/30/97 $16.04 $17.02 $15.95 $15.96 $16.54
- ------------------------------------------------------------------------------
11/30/98 16.94 17.97 16.83 16.85 17.46
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 1.65% 1.56% 0.95% 1.16% 1.12%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 1.79 1.69 1.06 1.28 1.24
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 12/31/98
(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
- ------------------------------------------------------------------------------
1 year 12.69% 6.19% 11.89% 6.89% 12.21% 8.27%
- ------------------------------------------------------------------------------
5 years 135.75 122.24 127.03 125.03 129.75 121.65
Annual average 18.71 17.32 17.82 17.61 18.10 17.26
- ------------------------------------------------------------------------------
10 years 284.59 262.38 255.78 255.78 264.02 251.39
Annual average 14.42 13.74 13.53 13.53 13.79 13.39
- ------------------------------------------------------------------------------
Life of fund 1208.86 1133.37 976.99 976.99 1035.48 995.46
Annual average 12.68 12.37 11.67 11.67 11.94 11.75
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. 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 maximum 5.75% sales charge for class A
shares and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Standard's & Poor's 500 Index is an unmanaged list of large-capitalization
common stocks and is frequently used as a general gauge of stock market
performance. The index assumes reinvestment of all distributions and
interest payments and does not take into account brokerage fees or taxes.
Securities in the fund do not match those in the index and performance of
the fund will differ. It is not possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Quality Bond Fund +
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds -- three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
**An investment in a money market fund is neither insured nor guaranteed
by the U.S. government. These funds are managed to maintain a price of
$1.00 per share, although there is no assurance that this price will be
maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you invest
or send money.
Report of independent accountants
For the fiscal year ended November 30, 1998
To the Trustees and Shareholders of
Putnam Equity Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
Equity Income Fund (the "fund") at November 30, 1998, and the results of
its operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility
of the fund's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at November 30, 1998 by correspondence
with the custodian, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 14, 1999
<TABLE>
<CAPTION>
Portfolio of investments owned
November 30, 1998
COMMON STOCKS (88.5%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Aerospace and Defense (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
238,500 Raytheon Co. Class B $ 13,206,938
Agriculture (--%)
- --------------------------------------------------------------------------------------------------------------------------
1,101 PSF Holdings LLC Class A (acquired 10/28/94,
cost $39,564) (NON) (RES) 19,290
Automotive (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
416,200 Ford Motor Co. 22,995,050
234,000 General Motors Corp. 16,380,000
--------------
39,375,050
Basic Industrial Products (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
372,800 Deere (John) & Co. 13,024,700
249,000 Minnesota Mining & Manufacturing Co. 19,997,813
389,800 Owens-Illinois, Inc. (NON) 12,522,325
--------------
45,544,838
Broadcasting (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
78,700 Comcast Corp. Class A 3,816,950
Building and Construction (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Masco Corp. 1,732,500
230,000 Sherwin Williams Co. 6,526,250
--------------
8,258,750
Business Equipment and Services (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
156,800 Xerox Corp. 16,856,000
Chemicals (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
129,600 Dow Chemical Co. 12,619,800
373,600 du Pont (E.I.) de Nemours & Co., Ltd. 21,949,000
199,000 Eastman Chemical Co. 11,529,563
--------------
46,098,363
Computer Services and Software (4.3%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Apple Computer, Inc. 4,790,625
559,900 Compaq Computer Corp. 18,196,750
301,500 Computer Associates Intl., Inc. 13,341,375
182,000 IBM Corp. 30,030,000
170,500 Sun Microsystems, Inc. (NON) 12,627,656
--------------
78,986,406
Conglomerates (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
37,800 Allied-Signal, Inc. 1,663,200
103,600 Temple Inland, Inc. 5,562,025
--------------
7,225,225
Consumer Durable Goods (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
379,800 Hasbro, Inc. 13,316,738
3 Mothers Work, Inc. (NON) 36
--------------
13,316,774
Consumer Non Durables (2.9%)
- --------------------------------------------------------------------------------------------------------------------------
275,800 Kimberly-Clark Corp. 14,513,975
667,550 Philip Morris Cos., Inc. 37,341,078
--------------
51,855,053
Consumer Services (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
206,500 Tribune Co. 13,241,813
Electronics and Electrical Equipment (3.0%)
- --------------------------------------------------------------------------------------------------------------------------
46,800 Eaton Corp. 3,197,025
229,000 Emerson Electric Co. 14,885,000
252,700 Motorola, Inc. 15,667,400
18,500 Rockwell Intl. Corp. 905,344
262,550 Texas Instruments, Inc. 20,052,256
--------------
54,707,025
Food and Beverages (4.4%)
- --------------------------------------------------------------------------------------------------------------------------
303,000 Anheuser-Busch Cos., Inc. 18,369,375
514,000 ConAgra, Inc. 16,158,875
214,600 Heinz (H.J.) Co. 12,513,863
193,700 Nabisco Holdings Corp. Class A 7,723,788
265,200 Sara Lee Corp. 15,481,050
432,900 Whitman Corp. 9,794,363
--------------
80,041,314
Health Care (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
583,000 Columbia/HCA Healthcare Corp. 14,356,375
529,500 HEALTHSOUTH Corp. (NON) 7,115,156
--------------
21,471,531
Insurance and Finance (20.9%)
- --------------------------------------------------------------------------------------------------------------------------
306,800 Allstate Corp. 12,502,100
277,900 American General Corp. 19,574,581
495,000 Bank One Corp. 25,399,688
693,352 BankAmerica Corp. 45,197,889
128,900 BankBoston Corp. 5,365,463
307,100 Charter One Financial, Inc. 9,117,031
230,080 CIGNA Corp. 17,903,100
667,050 Citigroup, Inc. 33,477,572
263,000 Fannie Mae 19,133,250
250,300 First Union Corp. 15,205,725
173,500 Hartford Financial Services Group 9,575,031
348,500 Household International, Inc. 13,635,063
398,100 KeyCorp 12,216,694
161,000 Lincoln National Corp. 13,473,688
152,000 Mercantile Bancorp., Inc. 6,697,500
87,000 Merrill Lynch & Co., Inc. 6,525,000
121,800 Morgan (J.P.) & Co., Inc. 13,017,375
303,800 Morgan Stanley, Dean Witter, Discover and Co. 21,190,050
306,600 PNC Bank Corp. 15,809,063
312,700 Reliastar Financial Corp. 14,696,900
293,887 Synovus Financial Corp. 6,483,882
158,300 The Equitable Companies, Inc. 8,746,075
369,000 Washington Mutual, Inc. 14,298,750
610,300 Wells Fargo Co. 21,970,800
--------------
381,212,270
Medical Supplies and Devices (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
317,200 Baxter International, Inc. 20,162,025
Oil and Gas (8.8%)
- --------------------------------------------------------------------------------------------------------------------------
199,300 Atlantic Richfield Co. 13,253,450
240,161 British Petroleum PLC ADR (United Kingdom) 22,124,832
176,000 Chevron, Inc. 14,718,000
175,800 Conoco, Inc. (NON) 4,164,263
209,900 Elf Aquitane ADR (France) 13,066,275
247,000 Enron Corp. 12,982,938
424,100 Exxon Corp. 31,834,006
338,000 Halliburton Co. 9,928,750
278,000 Kerr-McGee Corp. 10,981,000
319,400 Mobil Corp. 27,528,288
--------------
160,581,802
Paper and Forest Products (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
390,700 Weyerhaeuser Co. 19,583,838
Pharmaceuticals (6.1%)
- --------------------------------------------------------------------------------------------------------------------------
450,400 American Home Products Corp. 23,983,800
279,800 Bristol-Myers Squibb Co. 34,292,988
170,000 Merck & Co., Inc. 26,328,750
518,270 Pharmacia & Upjohn, Inc. 26,982,432
--------------
111,587,970
Photography (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
161,000 Eastman Kodak Co. 11,682,563
Publishing (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
136,000 McGraw-Hill, Inc. 12,172,000
Real Estate (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
298,800 Equity Residential Properties Trust (R) 12,642,975
428,900 Starwood Lodging Trust 13,027,838
--------------
25,670,813
Retail (3.9%)
- --------------------------------------------------------------------------------------------------------------------------
225,900 Albertsons, Inc. 12,890,419
320,800 Federated Department Stores, Inc. (NON) 13,373,350
223,100 May Department Stores Co. 13,455,719
233,000 Penney (J.C.) Co., Inc. 12,815,000
392,200 Sears, Roebuck & Co. 18,604,988
--------------
71,139,476
Telecommunications (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
226,000 ALLTEL Corp. 11,978,000
245,000 MediaOne Group Inc. (NON) 9,922,500
--------------
21,900,500
Transportation (3.6%)
- --------------------------------------------------------------------------------------------------------------------------
566,100 Burlington Northern Santa Fe Corp. 19,247,400
224,200 Delta Air Lines, Inc. 12,036,738
369,000 Norfolk Southern Corp. 11,208,375
405,300 Ryder System, Inc. 11,576,381
182,700 UAL Corp. (NON) 11,635,706
--------------
65,704,600
Utilities (11.9%)
- --------------------------------------------------------------------------------------------------------------------------
374,200 American Telephone & Telegraph Co. 23,317,338
409,300 Ameritech Corp. 22,153,363
256,000 Bell Atlantic Corp. 14,240,000
269,834 Duke Energy Corp. 16,881,490
107,000 Edison International 2,942,500
414,900 Entergy Corp. 12,161,756
555,700 GTE Corp. 34,453,400
462,100 OGE Energy Corp. 12,909,919
364,000 P P & L Resources, Inc. 9,941,750
389,200 Potomac Electric Power Co. 10,143,525
405,206 SBC Communications, Inc. 19,424,563
470,000 Sempra Energy (NON) 11,779,375
187,100 Sprint Corp. 13,611,525
363,800 Western Resources, Inc. 12,710,263
--------------
216,670,767
--------------
Total Common Stocks (cost $1,397,740,160) $1,612,089,944
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (3.5%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp. Pass-through Certificates
$ 214,477 7s, September 1, 2028 $ 218,900
1,505,247 5 1/2s, with due dates from March 1, 2011 to April 1, 2011 1,483,102
510,000 Federal National Mortgage Association 5.94s,
December 12, 2005 531,675
Federal National Mortgage Association
Pass-through Certificates
739,367 7s, Dwarf, with due dates from January 1, 2011
to May 1, 2011 756,233
2,309,784 6 1/2s, with due dates from March 1, 2027
to November 1, 2028 2,324,735
284,099 6 1/2s, Dwarf, November 1, 2010 288,182
812,219 6s, Dwarf, with due dates from July 1, 2013
to October 1, 2013 813,236
Government National Mortgage Association
Adjustable Rate Mortgages
149,235 7 3/8s, with due dates from June 20, 2022 to June 20, 2023 151,309
350,944 7 1/8s, July 20, 2023 354,454
518,698 7s, with due dates from September 20, 2024
to October 20, 2024 523,881
225,133 6s, May 20, 2024 227,384
1,075 5 1/2s, April 15, 2028 1,076
Government National Mortgage Association
Pass-through Certificates
2,560,381 8s, with due dates from July 15, 2024
to December 15, 2027 2,663,102
43,429 7 1/2s, April 15, 2027 44,841
4,563,390 7s, with due dates from September 20, 2024
to May 15, 2028 4,661,287
408,171 6 1/2s, with due dates from February 15, 2026
to April 15, 2026 412,380
215,000 Government National Mortgage Association 7s, TBA,
December 15, 2028 220,106
--------------
15,675,883
U.S. Treasury Obligations (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
1,315,000 6 1/8s, November 15, 2027 1,482,873
6,912,900 5 1/2s, August 15, 2028 7,309,286
2,970,000 5 1/4s, November 15, 2028 3,052,596
U.S. Treasury Notes
280,000 6 1/4s, June 30, 2002 294,437
1,660,000 6s, July 31, 2002 1,734,185
525,000 5 7/8s, September 30, 2002 546,982
145,000 5 3/4s, August 15, 2003 151,593
202,000 5 5/8s, May 15, 2008 214,878
2,135,000 5 5/8s, December 31, 2002 (SEG) 2,209,063
3,175,000 5 1/2s, May 31, 2003 3,284,633
1,385,000 5 1/2s, March 31, 2003 1,430,013
1,130,000 5 1/2s, February 28, 2003 1,165,313
775,000 5 1/2s, January 31, 2003 798,979
1,670,000 5 1/2s, May 31, 2000 1,690,608
2,415,000 5 1/4s, August 15, 2003 2,484,818
2,610,000 4 3/4s, November 15, 2008 2,614,072
14,880,000 4 1/2s, September 30, 2000 14,859,019
2,620,000 4 1/4s, November 15, 2003 2,591,337
--------------
47,914,685
--------------
Total U.S. Government and Agency Obligations
(cost $62,931,405) $ 63,590,568
CORPORATE BONDS AND NOTES (2.8%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (--%)
- --------------------------------------------------------------------------------------------------------------------------
$ 50,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 53,500
5,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 5,250
60,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 65,400
10,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 10,600
60,000 Outdoor Systems, Inc. company guaranty 8 7/8s, 2007 63,300
--------------
198,050
Aerospace and Defense (--%)
- --------------------------------------------------------------------------------------------------------------------------
135,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 133,650
30,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 29,700
20,000 BE Aerospace, Inc. 144A sr. sub. notes 9 1/2s, 2008 21,100
10,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 9,800
10,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 10,100
360,000 Raytheon Co. notes 6.15s, 2008 366,660
40,000 Sequa Corp. bonds 8 3/4s, 2001 41,000
--------------
612,010
Agriculture (--%)
- --------------------------------------------------------------------------------------------------------------------------
205,000 IMC Global, Inc. notes 7.4s, 2002 208,036
12,786 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK)
(acquired 9/17/96, cost $12,514) (RES) 12,914
20,000 Purina Mills, Inc. sr. sub. notes 9s, 2010 20,600
--------------
241,550
Apparel (--%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 19,500
Automotive (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
9,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 9,450
405,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 469,209
305,000 Ford Motor Co. bonds 6 5/8s, 2028 314,894
60,000 Hayes Wheels International, Inc. company guaranty Ser. B,
9 1/8s, 2007 62,400
90,000 Lear Corp. sub. notes 9 1/2s, 2006 98,550
60,000 Navistar International Corp. sr. notes Ser. B, 7s, 2003 60,300
50,000 Talon Automotive Group sr. sub. notes Ser. B, 9 5/8s, 2008 48,000
--------------
1,062,803
Banks (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
25,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2008 24,750
10,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 10,000
365,000 First Citizens Bank Capital Trust I company guaranty 8.05s, 2028 361,350
250,000 Fuji JGB Inv. LLC 144A FLIRB bonds Ser. A, 9.87s, 2049 (Japan) 177,723
10,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 7,800
5,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 4,650
565,000 Peoples Bank- Bridgeport sub. notes 7.2s, 2006 529,614
5,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 5,114
250,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 259,575
300,000 Scotland International Finance 144A sub. notes
8.85s, 2006 (Netherlands) 344,538
155,000 State Street Institution 144A company guaranty 7.94s, 2026 175,696
230,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 244,667
285,000 Webster Capital Trust I 144A bonds 9.36s, 2027 299,313
325,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 335,221
--------------
2,780,011
Basic Industrial Products (--%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 American Standard Companies, Inc. sr. notes 7 3/8s, 2008 80,000
65,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 68,526
--------------
148,526
Broadcasting (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 23,625
35,000 Affinity Group Holdings sr. notes 11s, 2007 35,000
25,000 Allbritton Communications sr. sub. deb. Ser. B, 9 3/4s, 2007 26,500
30,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 30,300
25,000 American Radio Systems Corp. company guaranty 9s, 2006 27,125
25,000 Benedek Broadcasting sr. notes 11 7/8s, 2005 27,250
70,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 49,700
10,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02), 2009 (STP) 8,200
80,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 83,600
100 CBS Corp. sub. deb. 11 3/8s, 2009 (PIK) 117
10,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s, 2004 8,200
25,000 Chancellor Media Corp. sr. sub. notes 9 3/8s, 2004 26,500
20,000 Chancellor Media Corp. sr. sub notes Ser. B, 8 1/8s, 2007 20,000
90,000 Chancellor Media Corp. 144A sr. notes 8s, 2008 92,025
25,000 Comcast Corp. sr. sub. notes 9 1/2s, 2008 26,111
10,000 Comcast Corp. sr. notes sub. 9 1/8s, 2006 10,600
30,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 32,400
60,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 50,100
65,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 47,288
30,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 20,100
40,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 40,200
90,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 92,700
25,000 Granite Broadcasting Corp. sr. sub. notes 10 3/8s, 2005 25,500
10,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 9,550
5,000 Gray Communications Systems, Inc. sr. sub. notes 10 5/8s, 2006 5,375
40,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 45,300
20,000 Lenfest Communications, Inc. sr. sub. notes 8 1/4s, 2008 20,300
30,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 (STP) 29,850
10,000 Pegasus Communications Corp. 144A sr. notes 9 3/4s, 2006 10,088
25,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 27,250
3,000 Radio One Inc. company guaranty stepped-coupon Ser. B, 7s,
(12s, 5/15/00), 2004 (STP) 2,970
10,000 Sinclair Broadcast Group, Inc. sr. sub. notes 10s, 2005 10,475
25,000 Sinclair Broadcast Group, Inc. company guaranty 9s, 2007 25,375
10,000 Sinclair Broadcast Group, Inc. sr. sub. notes 8 3/4s, 2007 10,025
25,000 Spanish Broadcasting Systems sr. notes 12 1/2s, 2002 27,500
5,000 Spanish Broadcasting Systems sr. notes Ser. B, 11s, 2004 5,300
560,000 TCI Communications, Inc. sr. notes 8.65s, 2004 641,043
5,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 4,450
1,365,000 Viacom, Inc. sr. notes 7 3/4s, 2005 1,483,386
--------------
3,161,378
Building and Construction (--%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Albecca Inc. 144A sr. sub. notes 10 3/4s, 2008 30,600
10,000 American Architectural Products Corp. company guaranty
11 3/4s, 2007 8,500
5,000 Building Materials Corp. sr. notes Ser. B, 8 5/8s, 2006 5,200
20,000 Building Materials Corp. 144A sr. notes 8s, 2008 20,300
5,000 D.R. Horton Inc. company guaranty 10s, 2006 5,175
20,000 GS Superhighway Holdings sr. notes 9 7/8s 8,600
210,000 Guangdong Enterprises 144A sr. notes 8 7/8s, 2007 (China) 84,890
10,000 Jackson Products, Inc. company guaranty Ser. B, 9 1/2s, 2005 9,900
25,000 M.D.C. Holdings, Inc. notes Ser. B, 11 1/8s, 2003 26,500
10,000 Morris Material Handling, Inc. company guaranty 9 1/2s, 2008 7,600
10,000 Republic Group Inc. 144A sr. sub. notes 9 1/2s, 2008 9,700
25,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 27,125
--------------
244,090
Business Equipment and Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Cendant Corp. notes 7 1/2s, 2000 30,071
10,000 Cex Holdings, Inc. 144A sr. sub. notes 9 5/8s, 2008 9,600
30,000 Iron Mountain, Inc. med. term notes company guaranty
10 1/8s, 2006 32,700
5,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 4,750
40,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 44,000
50,000 U.S. Office Products Co. 144A sr.sub notes 9 3/4s, 2008 35,000
7,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 7,805
10,000 United Stationer Supply, Inc. 144A 8 3/8s, 2008 10,050
--------------
173,976
Cable Television (--%)
- --------------------------------------------------------------------------------------------------------------------------
51,187 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 (PIK) 53,490
50,000 Adelphia Communications Corp. 144A sr. notes 8 3/8s, 2008 51,188
20,000 Century Communications Corp. sr. notes 8 3/4s, 2007 21,550
25,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 29,250
5,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2023 5,550
10,000 CSC Holdings, Inc. sr. sub. deb. 7 7/8s, 2018 10,246
10,000 Globo Communicacoes 144A sr. notes 10 5/8s, 2008 (Brazil) 7,350
10,000 TeleWest Communications PLC 144A sr. notes 11 1/4s, 2008
(United Kingdom) 11,350
--------------
189,974
Chemicals (--%)
- --------------------------------------------------------------------------------------------------------------------------
255,000 Arco Chemical Co. deb. 9.8s, 2020 255,956
125,000 Equistar Chemicals LP notes 9 1/8s, 2002 130,469
20,000 Geo Specialty Chemicals 144A sr. sub. notes 10 1/8s, 2008 19,400
20,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 19,650
15,000 Huntsman Corp. 144A sr. sub. notes FRN 9.031s, 2007 14,250
5,000 Polytama International notes 11 1/4s, 2007 (Indonesia) 1,000
10,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 4,100
5,000 Union Carbide Global Enterprises sr. sub. notes Ser. B, 12s, 2005 5,250
--------------
450,075
Computer Services and Software (--%)
- --------------------------------------------------------------------------------------------------------------------------
385,000 Dell Computer Corp. deb. 7.1s, 2028 395,672
30,000 IPC Information Systems sr. disc. notes stepped-coupon zero %
(10 7/8s, 11/1/01), 2008 (STP) 18,900
50,000 PSINet, Inc. 144A sr. notes 11 1/2s, 2008 53,000
20,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 20,000
10,000 Unisys Corp. sr. notes 7 7/8s, 2008 10,500
20,000 Verio Inc. 144A sr. notes 11 1/4s, 2008 20,700
--------------
518,772
Conglomerates (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
70,000 Axia, Inc. company guaranty 10 3/4s, 2008 70,700
145,000 Canadian Pacific Ltd. deb. 9.45s, 2021 (Canada) 185,330
95,000 Tyco International Ltd. company guaranty 6 3/8s, 2005 96,306
480,000 Tyco International Ltd. company guaranty 6 1/4s, 2003 484,723
--------------
837,059
Consumer Durable Goods (--%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Iron Age Corp. company guaranty 9 7/8s, 2008 27,000
15,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 15,375
--------------
42,375
Consumer Non Durables (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 10,300
100,000 Doane Products Co. 144A sr. sub. notes 9 3/4s, 2007 102,250
10,000 French Fragrances, Inc. company guaranty Ser. D, 10 3/8s, 2007 10,100
50,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 48,250
90,000 Philip Morris Cos., Inc. notes 7 1/2s, 2004 96,488
185,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 195,280
180,000 Philip Morris Cos., Inc. notes 6.8s, 2003 188,487
20,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 19,750
30,000 Revlon, Inc. 144A sr. notes 9s, 2006 30,900
35,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 34,475
170,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2008 175,313
--------------
911,593
Consumer Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 34,213
25,000 Century Communications Corp. sr. notes 8 7/8s, 2007 27,063
60,000 Cinemark USA, Inc. sr. sub. notes Ser. D, 9 5/8s, 2008 (Mexico) (SEG) 62,850
50,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 54,500
20,000 Epic Resorts LLP 144A sr. notes 13s, 2005 19,000
20,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 19,500
10,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 10,475
25,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 22,500
60,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 65,250
21,000 Jones Intercable, Inc. sr. notes 9 5/8s, 2002 22,575
20,000 Protection One, Inc. sr. disc. notes stepped-coupon zero %,
(13 5/8s, 6/30/00), 2005 (STP) 22,800
10,000 Raintree Resorts International, Inc. sr. notes Ser. B, 13s, 2004 6,000
50,000 Rogers Cablesystems Ltd. sr. notes Ser. B, 10s, 2005 56,250
45,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 44,775
--------------
467,751
Electronics and Electrical Equipment (--%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s, 2006
(Canada) 5,475
6,430 Cirent Semiconductor sr. sub. notes 10.22s, 2002 6,302
6,823 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 6,687
10,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 9,725
10,000 Dobson Communications Corp. 11 3/4s, 2007 10,400
29,715 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 24,367
50,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 49,000
30,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 30,450
70,000 Metromedia Fiber Network, Inc. 144A sr. notes 10s, 2008 72,275
20,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 20,600
10,000 Samsung Electronics 144A company guaranty 9 3/4s, 2003 9,100
70,000 Wavetek Corp. company guaranty 10 1/8s, 2007 67,900
40,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 30,400
--------------
342,681
Energy-Related (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
585,000 CalEnergy, Inc. sr. notes 7.63s, 2007 592,687
20,000 Calpine Corp. sr. notes 7 7/8s, 2008 19,500
340,000 KN Capital Trust III company guaranty 7.63s, 2028 329,800
10,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004
(China) 5,000
210,000 Quezon Power Ltd. sr. notes 8.86s, 2017 (Philippines) 125,242
20,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 14,600
30,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 29,700
--------------
1,116,529
Entertainment (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 10,250
25,000 Aztar Corp. sr. sub. notes 11s, 2002 25,250
50,000 Coast Hotels & Casinos, Inc. 1st mtge. company guaranty Ser. B,
13s, 2002 56,000
10,000 Isle of Capri Black Hawk LLC 1st mortgage Ser. B, 13s, 2004 10,200
175,000 News America Holdings, Inc. deb. 7 3/4s, 2045 187,124
290,000 News America Holdings, Inc. deb. 7.7s, 2025 313,284
10,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 10,875
25,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 26,250
30,000 SFX Entertainment, Inc. 144A company guaranty Ser. B,
9 1/8s, 2008 30,000
30,000 SFX Entertainment Inc. 144A sr. sub. notes 9 1/8s, 2008 30,000
10,000 Silver Cinemas Inc. sr. sub. notes 10 1/2s, 2005 8,000
110,000 Six Flags Corp. sr. sub. notes 12 1/4s, 2005 121,550
435,000 Time Warner Entertainment Co. notes 8 7/8s, 2012 531,313
680,000 Time Warner Entertainment sr. notes 8 3/8s, 2033 839,895
25,000 Trump A.C. 1st mtge. 11 1/4s, 2006 23,375
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 58,800
40,000 Viacom International, Inc. sub. deb. 8s, 2006 41,300
--------------
2,353,766
Environmental Control (--%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 ATC Group Services Inc. company guaranty 12s, 2008 3,000
130,000 Waste Management, Inc. notes 6 5/8s, 2002 132,077
260,000 WMX Technologies, Inc. notes 4.1s, 2002 272,737
--------------
407,814
Food and Beverages (--%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 37,400
5,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 5,450
10,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 10,900
60,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 61,200
5,000 Fleming Companies, Inc. company guaranty Ser. B, 10 1/2s, 2004 4,900
20,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 18,300
25,000 Stater Brothers Holdings 144A sr. sub. notes 9s, 2004 24,000
--------------
162,150
Health Care (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 Conmed Corp. company guaranty 9s, 2008 10,050
25,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 24,125
35,000 Global Health Sciences company guaranty 11s, 2008 23,800
10,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 7,650
40,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007 39,500
30,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 29,250
115,000 Manor Care, Inc. sr. notes 7 1/2s, 2006 114,151
20,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007 (STP) 9,800
70,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 57,400
80,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 75,600
10,000 Paragon Corp. Holdings, Inc. company guaranty Ser. B,
9 5/8s, 2008 8,400
25,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 24,750
50,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 44,000
10,000 Sun Healthcare Group, Inc. 144A sr. sub. notes 9 3/8s, 2008 8,700
255,000 Tenet Healthcare Corp. sr. notes 8s, 2005 263,925
--------------
741,101
Hospital Management and Medical Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 50,202
Infrastructure (--%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Cia Latino Americana 144A company guaranty 11 1/8s, 2004
(Argentina) 3,400
Insurance and Finance (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 25,800
470,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 434,285
455,000 AFC Capital Trust company guaranty Ser. B, 8.207s, 2027 509,231
130,000 Allstate Financing II company guaranty 7.83s, 2045 141,833
685,000 American General Institute 144A company guaranty 8 1/8s, 2046 772,276
615,000 Associates First Capital Corp. sr. notes 6 1/4s, 2008 631,624
5,000 Colonial Capital I 144A company guaranty 8.92s, 2027 5,150
100,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 79,000
10,000 Dine S.A. de C.V. company guaranty 8 3/4s, 2007 (Luxembourg) 8,800
5,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 2006 5,050
65,000 DTI Holdings Inc. sr. disc. notes, stepped-coupon Ser. B, zero %
(12 1/2s, 03/01/03), 2008 (STP) 17,550
490,000 Executive Risk Capital Trust company guaranty Ser. B,
8.675s, 2027 485,629
300,000 Finova Capital Corp. notes 9 1/8s, 2002 325,422
325,000 Finova Capital Corp. notes 7.4s, 2007 338,913
160,000 Finova Capital Corp. notes 6 1/4s, 2002 160,549
120,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 125,678
145,000 Firstar Bank Milwaukee sr. bank notes 6 1/4s, 2002 149,047
280,000 Firstar Capital Trust I company guaranty Ser. B, 8.32s, 2026 313,578
264,000 Ford Motor Credit Corp. sr. notes 6s, 2003 268,176
60,000 Ford Motor Credit Co. notes 5 1/8s, 2001 59,706
150,000 GS Escrow Corp. 144A sr. notes 7 1/8s, 2005 146,585
165,000 Hartford Life, Inc. deb. 7.65s, 2027 184,731
285,000 Household Finance Corp. notes 6 1/2s, 2008 288,563
5,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 3,750
425,000 Lehman Bros Holdings, Inc. med. term notes 6.4s, 1999 427,644
650,000 Lehman Bros Holdings, Inc. notes 6 1/4s, 2003 643,533
260,000 Markel Capital Trust I company guaranty Ser. B, 8.71s, 2046 263,141
250,000 Money Store, Inc. notes 8.05s, 2002 269,635
10,000 Nationwide Credit Inc. sr. notes Ser. A, 10 1/4s, 2008 8,400
10,000 North Fork Capital Trust I company guaranty 8.7s, 2026 11,082
210,000 Norwest Corp. med. term sr. notes Ser. J, 6 3/4s, 2027 220,773
125,000 Orange Cogen Funding 144A company guaranty 8.175s, 2022 132,788
505,000 Paine Webber Group, Inc. sr. notes 6.55s, 2008 500,435
505,000 Paine Webber Group, Inc. sr. med. term notes 6.52s, 2005 502,475
100,000 Peoples Heritage Capital Trust company guaranty Ser. B,
9.06s, 2027 103,108
320,000 Phoenix Home Life Mutual Insurance Co. 144A notes
6.95s, 2006 335,053
635,000 Provident Companies, Inc. bonds 7.405s, 2038 666,706
10,000 PX Escrow Corp. sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 (STP) 5,500
10,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 10,248
100,000 Resource America Inc. 144A sr. notes 12s, 2004 84,000
400,000 Salomon, Inc. sr. notes 7.3s, 2002 419,464
505,000 Sears Roebuck Acceptance Corp. notes 6 1/2s, 2028 504,798
550,000 Sprint Capital Corp. company guaranty 6 7/8s, 2028 566,473
390,000 Sprint Capital Corp. company guaranty 5.7s, 2003 389,587
220,000 Salton Sea Funding Corp. company guaranty Ser. E, 8.3s, 2011 244,079
335,000 Sampoerna International Finance Co. 144A company guaranty
8 3/8s, 2006 (Indonesia) 174,200
5,000 Sovereign Capital Trust company guaranty 9s, 2027 4,790
460,000 The CIT Group, Inc. notes 5 1/2s, 2001 461,426
530,000 Tig Capital Trust I 144A bonds 8.597s, 2027 583,451
440,000 Toyota Motor Credit Corp. notes 5 5/8s, 2003 441,760
315,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 347,202
--------------
13,802,677
Medical Supplies and Devices (--%)
- --------------------------------------------------------------------------------------------------------------------------
15,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 15,000
25,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 27,125
10,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 11,500
5,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 4,825
25,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 26,063
30,000 Mediq, Inc. company guaranty 11s, 2008 28,200
20,000 Mediq, Inc. deb. zero %, 2009 (STP) 9,400
60,000 Wright Medical Technology, Inc. 144A notes Ser. C, 11 3/4s, 2000 36,000
--------------
158,113
Metals and Mining (--%)
- --------------------------------------------------------------------------------------------------------------------------
70,000 AK Steel Corp. sr. notes 9 1/8s, 2006 73,500
20,000 Ameristeel Corp. company guaranty Ser. B, 8 3/4s, 2008 19,400
10,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 5,400
10,000 Armco, Inc. sr. notes 9s, 2007 10,400
35,000 Continental Global Group sr. notes Ser. B, 11s, 2007 30,450
10,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12 3/4s, 2003 9,900
40,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 31,600
221,000 PT Alatief Freeport sr. notes 9 3/4s, 2001 (Netherlands) 167,960
20,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 19,400
10,000 WHX Corp. sr. notes 10 1/2s, 2005 9,550
--------------
377,560
Oil and Gas (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Abraxas Petroleum Corp. 144A company guaranty Ser. D,
11 1/2s, 2004 25,800
50,000 American Eco Corp. company guaranty Ser. B, 9 5/8s, 2008 32,500
40,000 Chesapeake Energy Corp. company guaranty Ser. B, 9 5/8s, 2005 36,600
5,000 CIA Naviera Perez Companc S.A. 144A bonds 9s, 2004
(Argentina) 4,900
525,000 Coastal Corp. bonds 6.95s, 2028 532,980
10,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 9,325
30,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 26,250
10,000 Dailey Petroleum Services Corp. company guaranty 9 1/2s, 2008 4,600
20,000 Eagle Geophysical, Inc. company guaranty Ser. B, 10 3/4s, 2008 18,000
170,000 Enron Corp. notes 6.4s, 2006 171,205
150,000 Express Pipeline Ltd. 144A sub. notes Ser. B, 7.39s, 2019 (Canada) 142,950
10,000 Gulf Canada Resources, Ltd. sr. notes 8.3/8s, 2005 (Canada) 10,288
205,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006 (Canada) 211,640
180,000 K N Energy, Inc. sr. notes 6.45s, 2003 182,554
635,000 Louis Dreyfus Natural Gas notes 6 7/8s, 2007 599,840
10,000 Michael Petroleum Corp. sr. notes Ser. B, 11 1/2s, 2005 8,000
10,000 Northern Offshore 144A company guaranty 10s, 2005 6,400
20,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 20,800
30,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 31,350
30,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 23,700
175,000 Petro Geo-Services AS ADR notes 7 1/2s, 2007 (Norway) 183,778
295,000 Saga Petroleum ASA deb. 7 1/4s, 2027 (Norway) 269,789
20,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 14,000
5,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 5,000
320,000 Transamerican Energy sr. disc. notes stepped-coupon Ser. B,
zero % (13s, 6/15/99), 2002 (STP) 112,000
60,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 22,800
23,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 18,400
--------------
2,725,449
Packaging and Containers (--%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 5,000
5,000 Radnor Holdings Inc. sr. notes 10s, 2003 4,950
15,000 Pindo Deli Finance Mauritius Ltd. company guaranty 10 3/4s,
2007 (Indonesia) 8,775
--------------
18,725
Paper and Forest Products (--%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s, 2004
(Indonesia) 19,350
40,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 31,200
10,000 Repap New Brunswick 144A sr. notes 9s, 2004 (Canada) 9,800
20,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 19,000
20,000 Riverwood International Corp. company guaranty 10 1/4s, 2006 20,350
--------------
99,700
Pharmaceuticals (--%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 59,400
Publishing (--%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 10,225
10,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 10,050
20,000 Gothic Production Corp. company guaranty Ser. B, 11 1/8s, 2005 16,400
--------------
36,675
Recreation (--%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 Circus Circus Enterprises, Inc. sr. notes 6.45s, 2006 8,999
20,000 Circus Circus Enterprises, Inc. sr. sub. notes 9 1/4s, 2005 20,600
10,000 Empress River Casino sr. notes 10 3/4s, 2002 10,725
25,000 Fitzgeralds Gaming Corp. company guaranty Ser. B, 12 1/4s, 2004 14,250
455,000 Mashantucket Pequot Tribe 144A bonds Ser. A, FSA, 6.57s, 2013 456,138
25,000 Mohegan Tribal Gaming Auth. sr. secd. notes Ser. B, 13 1/2s, 2002 30,688
25,000 Sun International Hotels Ltd. company guaranty 9s, 2007 26,250
25,000 Showboat Marina Casino 1st mtge. Ser. B, 13 1/2s, 2003 28,250
--------------
595,900
REIT's (Real Estate Investment Trust) (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
320,000 Avalon Properties, Inc. notes 6 7/8s, 2007 314,624
295,000 Avalon Properties, Inc. notes 6 5/8s, 2005 288,600
505,000 Equity Residential Properties notes 6.63s, 2005 497,258
645,000 First Industrial LP med. term notes 7s, 2006 620,935
345,000 First Industrial Realty Trust, Inc. notes 7.6s, 2007 342,195
60,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 59,100
510,000 OMEGA Healthcare Investors, Inc. notes 6.95s, 2007 452,513
80,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 80,000
15,000 Tanger Properties Ltd. partnership gtd. notes 8 3/4s, 2001 15,046
--------------
2,670,271
Retail (--%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Amazon.com Inc. sr. disc. notes stepped-coupon zero %
(10s, 05/01/03), 2008 (STP) 19,800
10,000 Eye Care Centers of America 144A sr. sub. notes 9 1/8s, 2008 9,800
295,000 Federated Department Stores, Inc. sr. notes 8 1/2s, 2003 326,072
10,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes 10 1/8s, 2008 9,825
20,000 K mart Corp. med. term notes 7.55s, 2004 19,998
10,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 10,300
50,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 49,000
50,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 42,500
10,000 Specialty Retailers, Inc. company guaranty Ser. B, 8 1/2s, 2005 9,000
5,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 5,475
5,000 William Carter Co. sr. sub. notes Ser. A, 10 3/8s, 2006 5,475
10,000 Zale Corp. sr. notes Ser. B, 8 1/2s, 2007 9,700
--------------
516,945
Satellite Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 31,350
20,000 ICG Communications, Inc. sr. disc. notes stepped-coupon
zero % (10s, 02/15/03), 2008 (STP) 10,600
10,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s, 2004
(Mexico) 8,400
10,000 TCI Satellite Entertainment, Inc. sr. sub. notes 10 7/8s, 2007 4,000
--------------
54,350
Specialty Consumer Products (--%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Decora Industries, Inc. sec. Ser. B, 11s, 2005 18,400
Telecommunications (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
410,000 AirTouch Communications, Inc. notes 6.65s, 2008 426,388
75,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (11 3/4s, 2/15/03), 2008 (STP) 36,750
20,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 20,000
390,000 AT&T Capital Corp. med. term notes 6.6s, 2005 379,665
30,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 15,450
70,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 53,900
10,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon zero %
(8.94s, 8/15/03), 2008 (Canada) (STP) 5,950
20,000 CapRock Communications Corp. sr. notes Ser. B, 12s, 2008 19,000
25,000 Celcaribe S.A. sr. notes 13 1/2s, 2004 (Colombia) 24,750
70,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 19,600
25,000 Cencall Communications Corp. sr. disc. notes stepped-coupon
zero % (10 1/8s, 1/15/99), 2004 (STP) 24,813
10,000 Centennial Cellular Corp. sr. notes 8 7/8s, 2001 10,600
10,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 (STP) 8,900
10,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero % (12s, 12/15/01), 2006
(United Kingdom) (STP) 8,400
DEM 625,000 Colt Telecommunications Group PLC sr. notes
8 7/8s, (United Kingdom) 376,350
DEM 215,000 Colt Telecommunications Group PLC bonds 7 5/8s,
2008 (United Kingdom) 124,388
$10,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 4,500
10,000 CTI Holdings S.A. sr. notes stepped-coupon zero %
(11 1/2s,4/15/03), 2008 (Argentina) (STP) 4,550
30,000 Dobson Wireline Co. 144A sr. notes 12 1/4s, 2008 27,600
40,000 E. Spire Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 (STP) 28,800
50,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 24,000
10,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 10,100
10,000 Facilicom International sr. notes Ser. B., 10 1/2s, 2008 8,200
70,000 Firstworld Communication Corp. sr. disc. notes
stepped-coupon zero % , 2008 (13, 4/15/03) (STP) 20,300
150,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 150,750
130,000 Global Crossing Holdings, Ltd. company guaranty
9 5/8s, 2008 139,100
80,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 59,800
20,000 Hyperion Telecommunications, Inc. sr. notes Ser. B, 12 1/4s, 2004 20,700
25,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (STP) 20,875
150,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 77,250
35,000 Intelcom Group (USA), Inc. company guaranty stepped-coupon
zero % (12 1/2s, 5/1/01), 2006 (STP) 25,900
20,000 Interact Systems, Inc. 144A units stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 1,000
65,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 45,988
30,000 Intermedia Communications, Inc. sr. notes Ser. B, 8.6s, 2008 29,250
225,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/01/01), 2006 (STP) 190,688
20,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 20,200
25,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 12,250
55,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon
zero % (11 7/8s, 10/15/02), 2007 (STP) 26,950
5,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 5,500
10,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 10,275
505,000 LCI International, Inc. sr. notes 7 1/4s, 2007 494,622
10,000 McCaw International Ltd sr. disc. notes stepped coupon zero %
(13s, 4/15/02), 2007 (STP) 5,400
5,000 MetroNet Communications Corp. sr. disc. notes stepped-coupon
zero % (10 3/4s, 11/1/02), 2007 (Canada) (STP) 3,300
80,000 MetroNet Communications Corp. 144A sr. notes 10 5/8s, 2008 85,600
40,000 MetroNet Communications Corp. sr. disc. stepped-coupon
notes zero % (9.95s, 6/15/03), 2008 (Canada) (STP) 24,800
20,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 15,050
80,000 Millicom International Cellular S.A. sr. disc. notes stepped-coupon
zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) (STP) 56,200
17,000 MJD Communications, Inc. notes Ser. B, FRN, 10s, 2008 16,320
10,000 MJD Communications, Inc. sr. sub. notes Ser. B, 9 1/2s, 2008 10,000
15,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 16,800
5,000 Netia Holdings B.V. 144A company guaranty 10 1/4s, (Poland) 4,400
70,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 1/8s, 4/15/03), 2008 (STP) 29,838
80,000 NEXTEL Communications, Inc. 144A sr. notes 12s, 2008 89,000
40,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (10.65s, 9/15/02), 2007 (STP) 26,500
40,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9.95s, 2/15/03), 2008 (STP) 24,800
40,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9 3/4s, 10/31/02), 2007 (STP) 25,300
65,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9 3/4s, 2/15/99), 2004 (STP) 63,700
30,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 29,400
40,000 NTL Inc. 144A sr. notes 11 1/2s, 2008 44,652
80,000 NTL Inc. 144A sr. notes stepped-coupon zero %
(9 3/4s, 4/01/03), 2008 (STP) 51,200
5,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 2,450
20,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 15,100
20,000 Price Communications Wireless Inc. 144A sr. notes 9 1/8s, 2006 20,800
10,000 Primus Telecommunications Group, Inc. sr. notes Ser. B,
9 7/8s, 2008 9,150
70,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 54,250
80,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (8.29s, 2/1/03), 2008 (STP) 60,200
30,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 (STP) 17,250
50,000 Rhythms Netconnections, Inc. sr. disc. notes Ser. B, zero %
(13 1/2s, 5/15/03), 2008 (STP) 20,500
10,000 RSL Communications, Ltd. company guaranty, stepped-coupon
zero % (10 1/8s, 3/1/03), 2008 (STP) 5,650
10,000 RSL Communications, Ltd. company guaranty 9 1/8s, 2008 9,300
15,000 Sprint Spectrum L.P. sr. notes 11s, 2006 17,250
20,000 Startec Global Communications Corp. sr. notes 12s, 2008 17,000
5,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 5,500
320,000 TCI Communications sr. notes 7 1/8s, 2028 349,882
10,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 9,700
5,000 Telesystem International Wireless Inc. sr. disc. notes
stepped-coupon Ser. C, zero % (10 1/2s, 11/1/02), 2007 (STP) 2,000
50,000 Teligent, Inc. sr. disc. notes stepped-coupon Ser. B, zero %
(11 1/2s, 3/1/03), 2008 (STP) 25,625
20,000 Teligent, Inc. sr. notes 11 1/2s, 2007 19,100
100,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 106,000
25,000 United International Holdings sr. disc. notes stepped-coupon
Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 14,625
20,000 US Xchange LLC 144A sr. notes 15s, 2008 21,000
15,000 Versatel Teleco 144A sr. notes 13 1/4s, 2008 14,985
85,000 Viatel, Inc. sr. notes 11 1/4s, 2008 84,363
15,000 WinStar Communications. Inc. 144A sr. sub. notes 15s, 2007 14,850
40,000 WinStar Communications. Inc. sr. sub. notes 11s, 2008 31,200
15,000 WinStar Equipment Corp. company guaranty 12 1/2s, 2004 15,600
--------------
4,599,642
Telephone Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Long Distance International, Inc. 144A sr. notes 12 1/4s, 2008 24,000
10,000 OnePoint Communications, Corp. 144A sr. notes 14 1/2s, 2008 5,590
260,000 U S West, Inc. notes 5 5/8s, 2008 262,262
--------------
291,852
Textiles (--%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Day International Group, Inc. company guaranty 9 1/2s, 2008 19,700
50,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 45,750
5,000 Glenoit Corp. company guaranty 11s, 2007 4,775
5,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 4,975
10,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 9,800
--------------
85,000
Transportation (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
420,000 Burlington Northern Santa Fe bonds 6 7/8s, 2027 423,881
200,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 204,950
10,000 Calair LLC company guaranty 8 1/8s, 2008 9,363
20,000 Canadian Airlines Corp. sr. notes 12 1/4s, 2006 (Canada) 15,400
20,000 Canadian Airlines Corp. secd. notes 10s, 2005 (Canada) 17,000
20,000 Cathay International Ltd. 144A sr. notes 13s, 2008 (China) 6,400
515,000 Continental Airlines, Inc. pass-through certificates Ser. 981C,
6.541s, 2009 499,777
615,000 Continental Airlines, Inc. pass-thru certificates Ser. 98-2,
6.32s, 2008 615,000
700,000 CSX Corp. deb. 7.95s, 2027 790,804
35,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003
(Greece) 33,250
10,000 Hermes Europe Railtel 144A sr. notes 11 1/2s, 2007
(Netherlands) 11,100
10,000 International Shipholding Corp. sr. notes 9s, 2003 10,288
80,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 76,800
10,000 Johnstown America Industries, Inc. company guaranty Ser. C,
11 3/4s, 2005 10,550
20,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 19,500
10,000 MC Shipping, Inc. sr. notes Ser. B, 11 1/4s, 2008 6,500
10,000 MCII Holdings sec. notes stepped-coupon 12s, 2002 7,600
610,000 Norfolk Southern Corp. bonds 7.05s, 2037 647,826
10,000 TFM S.A. de C.V. company guaranty stepped-coupon zero %
(11 3/4s, 6/15/02), 2009 (Mexico) (STP) 5,400
10,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 8,750
50,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 35,250
--------------
3,455,389
Utilities (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
240,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 245,448
60,000 Cleveland Electric Illuminating Co. bonds 6.86s, 2008 58,350
140,000 CMS Energy Corp. sr. notes 8 1/8s, 2002 142,857
320,000 CMS Energy Corp. pass-through certificates 7s, 2005 315,053
280,000 Connecticut Light & Power Co. 1st mtge. Ser. A, 7 7/8s, 2001 288,498
190,000 Connecticut Light & Power Co. 1st mtge. Ser. C, 7 3/4s, 2002 197,116
100,000 Edison Mission Energy 144A company guaranty 7.33s, 2008 105,867
297,000 EIP Funding-Public Service Co. of New Mexico deb.
10 1/4s, 2012 354,158
5,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 5,518
385,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 400,866
255,000 Israel Electric Corp., Ltd. 144A sr. notes 7 1/4s, 2006 (Israel) 252,414
81,968 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 85,969
10,000 Midland Funding Corp. II deb. Ser. A, 11 3/4s, 2005 11,620
20,000 Niagara Mohawk Power Corp. med. term notes 9.95s, 2000
(Philippines) 21,034
100,000 Niagara Mohawk Power Corp. sr. disc. notes Ser. H,
8 1/2s, 2010 75,250
60,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 63,893
20,000 Niagara Mohawk Power Corp. sr. notes Ser. F, 7 5/8s, 2005 20,613
74,651 Northeast Utilities System notes Ser. A, 8.58s, 2006 80,390
164,726 Northeast Utilities System notes Ser. B, 8.38s, 2005 170,469
160,000 Public Service of New Mexico Co. sr. notes Ser. B, 7 1/2s, 2018 154,896
250,000 Texas New-Mexico Power Utilities 1st mtge. 9 1/4s, 2000 263,513
400,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 436,544
345,000 Texas Utilities Electric Capital Trust V company guaranty
8.175s, 2037 375,181
--------------
$ 4,125,517
--------------
Total Corporate Bonds and Notes (cost $51,147,271) $ 50,928,701
CONVERTIBLE BONDS AND NOTES (0.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 50,000 APP Global Finance Ltd. 144A cv. company guaranty
3 1/2s, 2003 (United Kingdom) $ 33,375
4,030,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 3,410,388
30,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 24,413
6,240,000 Micron Technology, Inc. cv. sub. notes 7s, 2004 6,349,200
3,780,000 Western Digital Corp. 144A cv. sub. deb. zero %, 2018 1,039,500
25,000 WinStar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 31,250
--------------
Total Convertible Bonds and Notes (cost $11,116,748) $ 10,888,126
COLLATERALIZED MORTGAGE OBLIGATIONS (0.5%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 122,663 Amresco Commercial Mortgage Funding I Ser. 97-C1,
Class A1, 6.73s, 2029 $ 125,453
Chase Mortgage Finance Corp.
125,566 Ser. 93-3, Class B13, 7.461s 112,382
215,000 6 3/4s, 2028 216,478
Commercial Mortgage Acceptance Corp.
55,000 Ser. 97-ML1, Class D, 7.11s, 2030 54,639
760,000 Ser. 97-ML1, Class A3, 6.57s, 2007 794,794
250,000 Ser. 97-ML1, Class A2, 6.53s, 2007 260,469
780,000 6.03s, 2008 786,825
Fannie Mae Strip
20,154 Ser. 240, Class 2, 7s, 2023 3,577
585,644 Ser. 290, Interest Only(IO), 6.5, 2024 118,044
429,646 Ser. 294, Class 1, zero %, 2028 363,185
110,000 Freddie Mac, Ser. 2040, Class PE, 7 1/2s, 2028 118,666
Freddie Mac Strip
621,167 Ser. 194, IO, 6.5s, 2028 141,413
60,130 Ser. 199, IO, 6.5s, 2028 13,661
First Union-Lehman Brothers Commercial Mortgage Co.
285,000 Ser. 97-C2, Class D, 7.12s, 2012 278,688
470,000 Ser. 98-C2, Class D, 6.778s, 2013 445,288
185,000 Ser. 97-C2, Class A3, 6.65s, 2007 194,467
9,105,000 Ser. 98-C2, Class IO, 0.815s, 2028 375,581
195,969 GE Capital Mortgage Services, Inc. 144A Ser. 94-12,
Class B3, 6s, 2009 176,250
GMAC Commercial Mortgage Securities Inc.
373,000 Ser. 98-C1, Class E, 7.153s, 2030 371,616
518,582 Ser. 98-C1, Class A1, 6.44s, 2030 534,464
392,725 Ser. 98-C2, Class A2, 6.42s, 2008 406,915
GS Mortgage Securities Corp. II
170,000 Ser. 98-GLII, Class D, 7.191s, 2031 165,750
120,000 Ser. 98-GLII, Class A2, 6.562s, 2031 125,175
Housing Securities Inc.
28,783 Ser. 91-B, Class B6, 9s, 2006 28,765
302,886 Ser. 93-F, Class F9M2, 7s, 2023 288,594
17,428 Ser. 93-J, Class J4, 6.66s, 2009 16,879
17,243 Ser. 93-J, Class J5, 6.66s, 2009 14,387
19,785 Ser. 94-1, Class AB1, 6 1/2s, 2009 17,893
114,000 Merrill Lynch Mortgage Investors, Inc. Ser. 98-C2, Class D,
6.96s, 2030 113,003
Morgan Stanley Capital I
175,000 Ser. 96-WF1, Class A2, 7.218s, 2006 186,566
90,000 Ser. 98-XL1, Class E, 6.988s, 2030 89,381
Prudential Home Mortgage Securities
79,090 Ser. 92-25, Class B3, 8s, 2022 (In default) (NON) 80,746
81,076 Ser. 94-A, Class 4B, 7 1/2s, 2007 74,894
291,579 Ser. 94-A, Class 4B, 6.802s, 2024 274,996
Prudential Home Mortgage Securities 144A
82,821 Ser. 94-31, Class B3, 8s, 2009 78,822
130,329 Ser. 95-C, Class B1, 7.815s, 2001 130,065
449,079 Ser. 95-D, Class 5B, 7.54s, 2018 346,496
88,863 Ser. 94-D, Class B4, 6.312s, 2023 85,906
188,690 Ser. 94-D, Class 3B, 6.311s, 2009 186,508
52,130 Ser. 93-31, Class B2, 6s, 2000 45,875
360,000 Residential Asset Securitization Trust Ser. 98, Class A12,
8s, 2028 376,988
195,207 Ryland Mortgage Securities Corp. Ser. 94-7C, Class B2,
7.358s, 2025 200,118
--------------
Total Collateralized Mortgage Obligations (cost $8,886,726) $ 8,820,662
CONVERTIBLE PREFERRED STOCKS (0.3%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
200 Chancellor Media Corp. $3.00 cv. cum. pfd. $ 16,150
95,000 K mart Financing $3.875 cum. cv. pfd. 5,575,313
--------------
Total Convertible Preferred Stocks (cost $5,012,768) $ 5,591,463
FOREIGN GOVERNMENT BONDS AND NOTES (0.1%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
DEM 630,000 Germany (Federal Republic of) Unity Fund bonds
8s, 2002 $ 421,574
DEM 2,080,000 Germany (Federal Republic of) bonds Ser. 98,
5 5/8s, 2028 1,374,060
USD 660,000 Quebec (Province of) deb. Ser. NN, 7 1/8s, 2024 725,327
--------------
Total Foreign Government Bonds and Notes
(cost $2,285,540) $ 2,520,961
PREFERRED STOCKS (--%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
100 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. $ 5,138
169 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. (PIK) 20,153
20 Concentric Network Corp. Ser. B, 13.50% pfd. (PIK) 16,800
154 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 17,364
20 Dobson Communications 144A $12.25 pfd.(PIK) 18,400
8 El Paso Electric Co. $11.40 pfd (PIK) 850
15 Fresenius Medical Care Capital Trust I company guaranty,
Ser. D, 9.00s, pfd. (Germany) 15,675
85 Fresenius Medical Capital Trust II company guaranty 7.875% pfd.
(Germany) 84,363
25 Intermedia Communication Ser. B, 13.50% pfd. (PIK) 25,875
228 Nebco Evans Holding Co. 144A 11.25% pfd. (PIK) 11,400
408 Nextlink Communications, Inc. 144A $7.00 cum. pfd. 21,828
5 Paxson Communications Corp.13.25% cum. pfd. (PIK) 43,750
219 Public Service Co. of New Hampshire $2.65 1st mtge. pfd. 5,694
189 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. (PIK) 22,680
40 Spanish Broadcasting Systems 14.25% cum. pfd. (PIK) 40,300
27 Viatel, Inc. Ser. A, $10.00 cv. pfd. (PIK) 1,620
440 Webster Financial $7.375 pfd. 469,836
20 WinStar Communications, Inc. 144A 14.25% pfd.(PIK) 17,000
--------------
Total Preferred Stocks (cost $828,219) $ 838,726
ASSET-BACKED SECURITIES (--%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 341,089 Green Tree Recreational Equipment & Cons. Ser. 98-A,
Class A1C, 6.18s, 2019 $ 345,260
2,410,000 Lehman Manufactured Housing Ser. 98-1,
Class 1 IO, 0.819s, 2028 96,965
--------------
Total Asset-Backed Securities (cost $481,513) $ 442,225
UNITS (--%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
10 Bestel S.A.de CV units, stepped-coupon zero %
(12 3/4s,5/15/03), 2005 (Mexico) (STP) $ 6,000
20 Birch Telecom, Inc. 144A units 14s, 2008 18,600
40 Diva Systems Corp. 144A units stepped-coupon zero %
(13s, 5/15/01), 2008 (STP) 12,000
20 Telehub Communications Corp. units stepped-coupon
zero % (13 7/8s,7/31/02), 2005 (STP) 10,600
15 Transam Refinance, Inc. 144A units 16s, 2003 5,250
--------------
Total Units (cost $76,878) $ 52,450
WARRANTS (--%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
35 Allegiance Telecom, Inc. 2/3/08 $ 560
70 Cellnet Data Systems, Inc. 9/15/07 1,400
10 Club Regina, Inc. 144A 12/1/04 10
10 Colt Telecommunications Group PLC 12/31/06 2,400
135 Consorcio Ecuatoriano 144A (Equador) 12/31/06 68
325 DTI Holdings Inc. 3/1/08 16
10 Esat Holdings, Inc. (Ireland) 2/1/07 665
70 Firstworld Communication 12/1/06 700
197 Fitzgeralds Gaming Co. 12/19/98 98
15 Globalstar Telecom 144A 2/15/04 900
25 Hyperion Telecommunications 144A 4/15/01 1,533
25 Intermedia Communications 8/1/03 1,177
25 KMC Telecom Holdings, Inc. 4/15/08 63
25 Knology Holdings, Inc. 144A 10/15/07 38
30 Long Distance International, Inc. 144A 4/13/08 75
10 McCaw International Ltd. 4/15/07 40
10 Onepoint Communications, Inc. 6/1/08 10
20 Pathnet, Inc. 144A 4/15/08 200
200 Rhythms Netcon 144A 5/15/08 1,500
10 Spanish Broadcasting Systems 144A 6/30/99 2,050
20 STARTEC Global Communications Corp. 5/15/08 5
10 Sterling Chemicals Holdings 8/15/08 120
40 UIH Australia/Pacific, Inc. 144A 5/15/06 200
15 Versatel 144A 180
--------------
Total Warrants (cost $14,193) $ 14,008
SHORT-TERM INVESTMENTS (3.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$25,000,000 Federal Home Loan Mortgage Corp. effective yield of 5.03s,
December 21, 1998 $ 24,930,139
42,895,000 Interest in $756,318,000 joint repurchase agreement dated
November 30, 1998 with Merrill Lynch, Pierce, Fenner &
Smith due December 1, 1998 with respect to various
U.S. Treasury obligations -- maturity value of $42,901,315
for an effective yield of 5.30% 42,901,315
--------------
Total Short-Term Investments (cost $67,831,454) $ 67,831,454
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,608,352,875) (b) $1,823,609,288
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,822,297,439.
(b) The aggregate identified cost on a tax basis is $1,609,469,473, resulting in gross unrealized appreciation and
depreciation of $286,360,827 and $72,221,012, respectively, or net unrealized appreciation of $214,139,815.
(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.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at November 30, 1998 was $32,204 or less than 0.1% of net assets.
(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 November 30, 1998.
(R) Real Estate Investment Trust.
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 rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at November 30, 1998, which are subject to change based on the terms of the security.
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at November 30, 1998
Market Aggregate Face Delivery Unrealized
Value Value Date Appreciation
- -------------------------------------------------------------------------------
Deutschemarks $4,251,405 $4,177,756 12/16/98 $ 73,649
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at November 30, 1998
Market Aggregate Face Delivery Unrealized
Value Value Date Depreciation
- -------------------------------------------------------------------------------
Deutschemarks $6,453,323 $6,337,795 12/16/98 $(115,528)
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at November 30, 1998
Total Aggregate Face Expiration Unrealized
Value Value Date Appreciation
- -------------------------------------------------------------------------------
US Treasury Bonds
20-yr (Long) $3,758,219 $3,701,896 Mar-99 $ 56,323
- -------------------------------------------------------------------------------
TBA Sales Commitments at November 30, 1998
(Premium received $220,865)
Principal Settlement Market
Agency Amount Date Value
- -------------------------------------------------------------------------------
FHLMC, 7s, December 1999 $ 217,000 12/10/98 $ 221,475
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $1,608,352,875) (Note 1) $1,823,609,288
- -----------------------------------------------------------------------------------------------
Cash 646,936
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 5,391,133
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,697,087
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 24,483,022
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 35,594
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 73,649
- -----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 5,021
- -----------------------------------------------------------------------------------------------
Total assets 1,856,941,730
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 90,988
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 25,826,380
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 4,656,812
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,311,274
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 94,861
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 17,911
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 3,204
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,023,806
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 115,528
- -----------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $220,865) (Note 3) 221,475
- -----------------------------------------------------------------------------------------------
Other accrued expenses 282,052
- -----------------------------------------------------------------------------------------------
Total liabilities 34,644,291
- -----------------------------------------------------------------------------------------------
Net assets $1,822,297,439
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,438,030,838
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 267,930
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 168,732,815
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 215,265,856
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,822,297,439
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,114,690,452 divided by 65,805,672 shares) $16.94
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $16.94)* $17.97
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($638,659,549 divided by 37,953,006 shares)** $16.83
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($58,890,922 divided by 3,495,610 shares) $16.85
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $16.85)* $17.46
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class Y share
($10,056,516 divided by 593,590 shares) $16.94
- -----------------------------------------------------------------------------------------------
* 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
Year ended November 30, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $50,751) $ 32,079,193
- -----------------------------------------------------------------------------------------------
Interest 11,068,488
- -----------------------------------------------------------------------------------------------
Total investment income 43,147,681
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 9,079,077
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,484,130
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 31,222
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 19,096
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,520,043
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 5,668,308
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 418,641
- -----------------------------------------------------------------------------------------------
Reports to shareholders 137,179
- -----------------------------------------------------------------------------------------------
Auditing 54,546
- -----------------------------------------------------------------------------------------------
Legal 14,550
- -----------------------------------------------------------------------------------------------
Postage 243,463
- -----------------------------------------------------------------------------------------------
Other 97,977
- -----------------------------------------------------------------------------------------------
Total expenses 20,768,232
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (594,699)
- -----------------------------------------------------------------------------------------------
Net expenses 20,173,533
- -----------------------------------------------------------------------------------------------
Net investment income 22,974,148
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 166,543,705
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 273,160
- -----------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 7,619
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (180,427)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities
in foreign currencies during the year (312,342)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures, written
options, and TBA sale commitments during the year (3,685,001)
- -----------------------------------------------------------------------------------------------
Net gain on investments 162,646,714
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $185,620,862
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended November 30
-------------------------------
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $22,974,148 $19,540,090
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 166,644,057 119,363,105
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and assets and liabilities in foreign currencies (3,997,343) 86,444,086
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 185,620,862 225,347,281
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (15,753,429) (13,929,347)
- ---------------------------------------------------------------------------------------------------------------
Class B (4,888,322) (4,359,159)
- ---------------------------------------------------------------------------------------------------------------
Class M (600,344) (540,928)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (43,816,633) --
- ---------------------------------------------------------------------------------------------------------------
Class B (23,667,013) --
- ---------------------------------------------------------------------------------------------------------------
Class M (2,487,768) --
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 336,733,983 374,993,087
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 431,141,336 581,510,934
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 1,391,156,103 809,645,169
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $267,930 and $1,263,288, respectively) $1,822,297,439 $1,391,156,103
- ---------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended November 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $16.04 $13.29 $10.93 $8.49 $8.67
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .27(c) .30 .31 .32 .32
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.68 2.74 2.37 2.44 (.18)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.95 3.04 2.68 2.76 .14
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.28) (.29) (.32) (.32) (.32)
- ------------------------------------------------------------------------------------------------------------------------------------
From net
realized gains (.77) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.05) (.29) (.32) (.32) (.32)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $16.94 $16.04 $13.29 $10.93 $8.49
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 12.91 23.15 24.96 33.17 1.59
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,114,690 $878,766 $566,133 $391,551 $304,124
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .99 1.06 1.09 1.13 1.04
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.68 2.02 2.61 3.32 3.67
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 94.77 82.48 67.56 70.39 82.49
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Sept. 13, 1993+
operating performance 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 .15(c) .19 .21 .23 .26 .06(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.66 2.73 2.37 2.46 (.18) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.81 2.92 2.58 2.69 .08 (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.16) (.20) (.24) (.26) (.27) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net
Realized gains (.77) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.93) (.20) (.24) (.26) (.27) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $16.83 $15.95 $13.23 $10.89 $8.46 $8.65
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 12.04 22.24 24.06 32.30 .86 (.12)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $638,660 $463,506 $221,259 $83,646 $32,114 $14,800
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.74 1.81 1.84 1.87 1.78 .44*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .95 1.25 1.86 2.63 3.02 .55*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 94.77 82.48 67.56 70.39 82.49 125.85(d)
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Dec. 2, 1994+
operating performance 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 .19(c) .23 .25 .28(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 1.67 2.73 2.36 2.45
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.86 2.96 2.61 2.73
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.20) (.23) (.27) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
From net
realized gains (.77) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.97) (.23) (.27) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $16.85 $15.96 $13.23 $10.89
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 12.35 22.58 24.35 32.89*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $58,891 $48,884 $22,254 $7,051
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.49 1.56 1.59 1.60*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.17 1.50 2.11 2.99*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 94.77 82.48 67.56 70.39
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS Y
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Oct. 1, 1998+
operating performance to Nov. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $14.88
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .05(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 2.01
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 2.06
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income --
- ------------------------------------------------------------------------------------------------------------------------------------
From net
realized gains --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $16.94
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 13.84*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $10,057
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .12*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .33*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 94.77
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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.
</TABLE>
Notes to financial statements
November 30, 1998
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, class M and class Y shares. The fund
began offering class Y shares on October 1, 1998. Class A shares are sold
with a maximum front-end sales charge of 5.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than
class A shares, and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class M shares are
sold with a maximum front-end sales charge of 3.50% and pay an ongoing
distribution fee that is higher than class A shares but lower than class B
shares. Class Y shares which are sold at net asset value, are generally
subject to the same expenses as class A, class B and Class M shares, but
do not bear a distribution fee. Class Y shares are sold to defined
contribution plans that invest at least $250 million in a combination of
Putnam Funds and other accounts managed by affiliates of Putnam
Investments Management, Inc. ("Putnam Management"), the fund's Manager, a
wholly-owned subsidiary of Putnam Investments, Inc.
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 Management. 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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the fund is
informed of the ex-dividend date. Discounts on zero coupon bond, original
issue discount bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity basis.
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 year ended
November 30, 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. These
differences include temporary and permanent differences of losses on wash
sale transactions, foreign currency gains, nontaxable dividends, defaulted
bond interest, unrealized gains on certain futures contracts, paydown
gains and losses on mortgage-backed securities, market discount, and
interest on payment-in-kind securities. 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. For the year ended November 30, 1998, the fund reclassified
$2,727,411 to decrease undistributed net investment income and $19,469 to
increase paid-in-capital, with an increase to accumulated net realized
gains of $2,707,942. The calculation of net investment income per share in
the financial highlights table excludes these adjustments
Note 2
Management fees, administrative
services, and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.65% of the first $500
million of average net assets, 0.55% of the next $500 million, 0.50% of
the next $500 million, 0.45% of the next $5 billion, 0.425% of the next $5
billion, 0.405% of the next $5 billion, 0.395% of the next $5 billion, and
0.38% 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 year ended November 30, 1998, fund expenses were reduced by
$594,699 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $1,420
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 funds until distribution in
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 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 year ended November 30, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $712,387 and $35,548 from the sale
of class A and class M shares, respectively and $814,842 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 year ended November 30, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received $21,919 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended November 30, 1998, purchases and sales of investment
securities other than U.S. government obligations and short-term
investments aggregated $1,602,720,830 and $1,373,658,540, respectively.
Purchases and sales of U.S. government obligations aggregated
$122,629,270, and $100,308,116, 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 year $2,400,000 $15,249
- -----------------------------------------------------------------------------
Options opened
- -----------------------------------------------------------------------------
Options expired
- -----------------------------------------------------------------------------
Options closed (2,400,000) (15,249)
- -----------------------------------------------------------------------------
Written options
outstanding at
end of year $ -- $ --
- -----------------------------------------------------------------------------
Note 4
Capital shares
At November 30, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended
November 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 21,169,953 $344,177,669
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,840,524 43,521,128
- -----------------------------------------------------------------------------
24,010,477 387,698,797
Shares
repurchased (12,978,540) (209,394,730)
- -----------------------------------------------------------------------------
Net increase 11,031,937 $178,304,067
- -----------------------------------------------------------------------------
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 increase 12,177,881 $177,509,340
- -----------------------------------------------------------------------------
Year ended
November 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 17,303,591 $279,177,147
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,488,102 22,610,691
- -----------------------------------------------------------------------------
18,791,693 301,787,838
Shares
repurchased (9,903,764) (159,004,351)
- -----------------------------------------------------------------------------
Net increase 8,887,929 $142,783,487
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Year ended
November 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,517,130 $24,681,871
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 168,430 2,563,922
- -----------------------------------------------------------------------------
1,685,560 27,245,793
Shares
repurchased (1,252,920) (20,406,487)
- -----------------------------------------------------------------------------
Net increase 432,640 $ 6,839,306
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
For the period October 1
(Commencement of operations)
to November 30, 1998
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 670,650 $10,073,469
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- -----------------------------------------------------------------------------
670,650 10,073,469
Shares
repurchased (77,060) (1,266,346)
- -----------------------------------------------------------------------------
Net increase 593,590 $ 8,807,123
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund
hereby designates $133,142,100 as capital gain, for its taxable year ended
November 30, 1998.
The fund has designated 35.1% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
WELCOME TO
www.putnaminv.com
Now you can use your PC to get up-to-date information about your funds,
learn more about investing and retirement planning, and access market
news and economic outlooks from Putnam.
VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
* the benefits of investing with Putnam
* Putnam's money management philosophy
* complete fund information, daily pricing and long-term performance
* the latest on new funds and other Putnam news
You can also read Putnam economist Dr. Robert Goodman's commentary and
Putnam's Capital Markets outlook, search for a particular fund by name
or objective, use our glossary to decode investment terms . . . and much
more.
The site can be accessed through any of the major online services
(America Online, CompuServe, Prodigy) that offer web access. Of course,
you can also access it via Netscape or Microsoft Internet Explorer,
using an independent Internet service provider.
New features will be added to the site regularly.
So be sure to bookmark us at
http://www.putnaminv.com
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
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
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
Stephen Oristaglio
Vice President
Thomas V. Reilly
Vice President
Edward H. D'Alelio
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
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
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
AN020-48658 012/192/626/ 1/99
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ----------------------------------------------------------------------------
Putnam Equity Income Fund
Supplement to Annual Report dated November 30, 1998
The following information has been prepared to provide class Y shareholders
with a performance overview specific to their holdings. Class Y shares are
offered exclusively to defined contribution plans, including corporate IRAs,
investing $150 million or more in one or more of Putnam's funds or private
accounts. Performance of class Y shares, which incur neither a front-end
load, distribution fee, nor contingent deferred sales charge, will differ
from performance of class A, class B, and class M shares, which are
discussed more extensively in the annual report.
ANNUAL RESULTS AT A GLANCE
- ----------------------------------------------------------------------------
Total return
for periods ended 11/30/98: NAV
1 year 12.92%
Life of fund (since class A inception, 6/15/77) 1205.74
Annual average 12.62
- ----------------------------------------------------------------------------
Share value: NAV
10/1/98 (class Y inception date) $14.88
11/30/98 $16.94
- ----------------------------------------------------------------------------
Distributions No. Income Capital gains Total
0 -- -- --
- ----------------------------------------------------------------------------
Please note that past performance does not indicate future results. Class Y
shares are offered without an initial sales charge or CDSC. The class Y
share returns shown for periods before their inception (10/1/98) are derived
from the historical performance of class A shares for such periods, but have
not been adjusted to reflect differences in expenses, which are lower for
class Y shares than for class A shares. All returns assume reinvestment of
distributions at NAV. Investment return will fluctuate and may involve the
loss of principal. Performance of other share classes will vary. See full
Annual Report for information on comparative benchmarks. If you have
questions, please consult your fund prospectus or call Putnam toll free at
1-800-752-9894.
