PUTNAM
PREFERRED
INCOME
FUND
[Artwork]
SEMIANNUAL REPORT
May 31, 1995
[Putnam Logo]
Boston * London * Tokyo
<PAGE>
PERFORMANCE HIGHLIGHTS
"Looking first back, then forward, we are glad we took profits and realigned
assets when we did. We took advantage of undervalued perpetual preferreds at
the end of calendar 1994. We have since reaped some benefits from that decision
and will continue seeking out other undervalued securities during the latter
half of fiscal 1995."
-- Jeanne Mockard, fund manager
SEMIANNUAL RESULTS AT A GLANCE
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CLASS A
TOTAL RETURN: NAV POP
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(change in value during period
plus reinvested distributions)
6 months ended 5/31/95 10.10% 6.58%
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CLASS A CLASS M(1)
SHARE VALUE: NAV POP NAV POP
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11/30/94 $7.88 $8.08
4/20/95 -- -- $8.12 $8.29
5/31/95 8.35 8.63 8.34 8.51
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DISTRIBUTIONS: NO. INCOME TOTAL
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Class A 6 $0.309188 $0.309188
Class M(1) 2 0.061902 0.061902
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CLASS A CLASS M
CURRENT RETURN: NAV POP NAV POP
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End of period
Current dividend rate(2) 6.71% 6.49% 6.46% 6.33%
Taxable equivalent(3) 9.24 8.94 8.89 8.72
Current 30-day SEC yield(4) 6.79 6.62 6.52 6.29
Taxable equivalent(3) 9.35 9.12 8.98 8.66
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Performance data represent past results. For performance over longer periods,
see pages 8 and 9. POP for class A shares assumes the 2.5% maximum sales charge
in effect at the beginning of the period; during the period, the maximum sales
charge was raised to 3.25%, which would have resulted in lower performance. POP
for class M shares assumes a 2.00% maximum sales charge. (1) Class M shares co-
mmenced operations on 4/20/95; performance is not shown because of the brevity
of the reporting period. (2) Income portion of most recent distribution, annua-
lized and divided by NAV or POP at end of period. (3) The taxable equivalent
examples in this report show the return that a corporation taxed at the 35% cor-
porate tax rate would have to earn from a non tax-advantaged investment to pro-
duce an after-tax return equal to that of the fund's. (4) Based only on invest-
ment income, calculated using SEC guidelines.
<PAGE>
FROM THE CHAIRMAN [Photograph of George Putnam]
*(C) Karsh, Ottawa
DEAR SHAREHOLDER:
YOUR FUND HAS MADE AN IMPRESSIVE DEBUT UNDER ITS NEW NAME, PUTNAM PREFERRED IN-
COME FUND, WHICH BECAME EFFECTIVE ON MARCH 1, 1995. AS WE WROTE IN THE ANNUAL
REPORT LAST NOVEMBER, THE CHANGE MORE ACCURATELY IDENTIFIES THE FUND AS ONE OF
THE FEW MUTUAL FUNDS THAT INVEST PRIMARILY IN PREFERRED STOCKS.
DURING THE FIRST FIVE MONTHS OF CALENDAR 1995, BOTH THE EQUITY AND FIXED-INCOME
MARKETS HAVE MADE CONSIDERABLE PROGRESS IN RECOVERING FROM SOME OF THE MOST CHA-
LLENGING MARKET CONDITIONS IN YEARS. BY SKILLFULLY IDENTIFYING, THEN TAKING AD-
VANTAGE OF OPPORTUNITIES AS THEY PRESENTED THEMSELVES, FUND MANAGER JEANNE MO-
CKARD SUCCESSFULLY NAVIGATED YOUR FUND THROUGH THE UNSETTLED SIX MONTHS ENDED
MAY 31, 1995.
IN THE REPORT THAT FOLLOWS, SHE REVIEWS HER STRATEGY DURING THE FIRST HALF OF
FISCAL 1995 AND LAYS OUT HER PLANS FOR THE SECOND HALF.
RESPECTFULLY YOURS,
GEORGE PUTNAM
CHAIRMAN OF THE TRUSTEES
JULY 19, 1995
*(C) Copyright
<PAGE>
REPORT FROM THE FUND MANAGER
JEANNE MOCKARD
The six months ended May 31, 1995, provided plenty of opportunity for Putnam
Preferred Income Fund to recover from the past year's troubled markets and to
build for the future. We took advantage of the possibilities on both counts.
Your fund closed its semiannual period with a total return of 10.10% for class
A shares at net asset value, a striking improvement from the return provided in
fiscal 1994's environment. Its portfolio, fortified by additions acquired at
what we expect will prove to be bargain prices, is well positioned for the se-
cond half of fiscal 1995.
DEPRESSED MARKET, TAX-LOSS SALES CREATE BARGAINS
When your fund's fiscal year began on December 1, 1994, the bond market was in
the throes of one of its most difficult periods in recent years. To make matters
worse, many individual and institutional investors were selling into the already
depressed market, establishing losses to offset gains from other investments for
tax purposes.
This tax-loss selling exacerbated the market decline, further affecting your
fund's performance. However, it also created an ample supply of attractive secu-
rities, made even more compelling by their depressed prices. We were seeing ma-
ny of these bargain-priced securities among perpetual preferred stocks. To fi-
nance the acquisitions, we reduced the portfolio's weighting in common stocks.
Perpetual preferreds technically are equity securities, but they behave more
like fixed-income investments because of their fixed dividend rate. Unlike
bonds, however, they have no maturity dates. This attribute makes them much more
vulnerable to price changes when interest rates are fluctuating. As with fixed-
income securities, when interest rates rise, prices of perpetual preferreds ge-
nerally decline.
We offset this inclination toward price volatility with positions in sinking-
fund preferred stocks. These securities contain provisions that require the
issuing corporations to call portions
<PAGE>
of the issue over a scheduled period of time. While the securities carry no ma-
turity date, the sinking fund endows them with greater price stability than per-
petual preferreds.
Adjustable-rate preferred stocks also provide price stability, particularly in
a rising-rate environment. This is because their dividends are adjusted periodi-
cally to reflect changes in short-term rates. As a result, their price movements
are generally similar to those of shorter-maturity bonds.
LONG-TERM STABILITY FAVORED OVER SHORT-TERM GAINS
A number of your fund's adjustable-rate holdings have already produced substan-
tial gains. Nevertheless, we have resisted the temptation to take profits in
them and redirect the assets elsewhere. While the move might produce substantial
gains over the near term, we believe it could ultimately prove short-sighted.
Realizing gains on these securities would mean sacrificing the benefits of their
defensive attributes. More importantly, in our view, we
[Bar Chart - Page 5]
TOP INDUSTRY SECTORS 5/31/95 *
Banks 25.0 %
Electric utilities 19.4 %
Combined utilities 11.6 %
Insurance 6.9 %
Oil services 4.2 %
* As a percent of net assets. Portfolio composition will vary over time.
<PAGE>
would be giving up the ability to rebuild the position with similarly valued se-
curities at affordable prices down the road. Adjustable-rate securities that
meet our tough selection criteria are already scarce. Given the uncertainty of
current and projected market conditions, prospects of finding them later would
be even dimmer.
PORTFOLIO ADJUSTED IN ANTICIPATION OF MARKET SHIFT
Before the period had ended, our shift of some of the fund's common stock hol-
dings into perpetual preferreds had paid off. The stock market had performed
well, but bonds -- and perpetual preferred stocks -- had done even better. While
the stock market had lagged behind bonds, it continued to show signs of a sus-
tained rally.
On the strength of that prospect, we began trimming the portfolio weighting in
perpetual preferreds and, toward the end of the period, moved some assets back
into common stocks. We focused on some utility companies and a few real estate
investment trusts (REITs) that, in our opinion, offered compelling values.
Utility common stock purchases during the period included:
Entergy Corp., the holding company for five electric utilities serving 2.3 mi-
llion customers in Arkansas, Louisiana, Mississippi, and Texas.
Potomac Electric Power, provider of electric power to Washington, D.C., and the
adjoining parts of Maryland. The federal government is a major customer in its
640-square-mile service area.
Texas Utilities Company, which, through its electric utility subsidiary, serves
customers in the north central, eastern, and western parts of Texas.
Among the REITs purchased during the period were:
Cali Realty Corp., which develops, owns, manages, and leases more than a dozen
office properties and one multifamily residential property, located in northern
and central New Jersey.
CenterPoint Properties Corp., owner and manager of warehouse and industrial real
estate in the metropolitan Chicago area. The REIT concentrates on acquiring and
rehabilitating older industrial real estate.
<PAGE>
TOP 10 HOLDINGS (5/31/95)
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CHEMICAL BANKING CORP., Series L, $6.258, adjustable-rate preferred
Banking and financial services
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SUNAMERICA INC., Series C, $7.30, adjustable-rate preferred
Insurance and investment management
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USX CORP., $3.975, adjustable-rate preferred
Steel manufacturing and marketing
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MCDERMOTT INC., Sinking fund, Series B, $2.60 preferred
Petroleum services
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AON CORP., $2.00 preferred
Insurance
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BANK OF BOSTON CORP., Series E, $2.15, dep. shares preferred
Banking and financial services
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BOISE CASCADE CORP., Series F, $2.35, dep. shares preferred
Forest products and paper manufacturing
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GENERAL MOTORS CORP., Series B, $2.28125, dep. shares preferred
Automobile manufacturing
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LASALLE NATIONAL CORP., Series K, $4.375, preferred
Banking and financial services
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BANKAMERICA CORP., Series B, $6.00, adjustable-rate preferred
Banking and financial services
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These holdings represent 29.1% of the fund's net assets. Portfolio holdings
will vary over time.
OUTLOOK: STATUS QUO THROUGH END OF FISCAL '95
The bond market, in our view, should remain relatively stable over the next few
months. We don't expect the Federal Reserve Board to raise short-term interest
rates further, particularly in light of the recent cut in the federal funds ra-
te. Neither do we expect any significant reduction in rates. The yield curve has
flattened over a relatively brief period as short-term rates and long-term rates
approached parity. We expect it will remain flat or even slightly inverted for
a while yet, a situation arising when short-term rates are higher than long-term
rates.
Looking first back, then forward, we are glad we took profits and realigned
assets when we did. We took advantage of undervalued perpetual preferreds at the
end of calendar 1994. We have since reaped some benefits from that decision and
will continue seeking out other undervalued securities during the latter half
of fiscal 1995.
The views expressed in this report are exclusively those of Putnam Management,
and are not meant as investment advice. Although the described holdings were
viewed favorably as of May 31, 1995, there is no guarantee the fund will conti-
nue to hold these securities in the
<PAGE>
PERFORMANCE SUMMARY
This section provides, at a glance, information about your fund's performance.
Total return shows how the value of the fund's shares have changed over time,
assuming you held the shares through the entire period and reinvested all dis-
tributions back into the fund. We show total return in two ways: on a cumulative
long-term basis and on average how the fund might have grown each year over va-
rying periods. For comparative purposes, we show how the fund performed relative
to appropriate indexes and benchmarks.
Performance should always be considered in light of a fund's investment strate-
gy. Putnam Preferred Income Fund seeks a high level of income which qualifies
for the 70% corporate dividends-received deduction for federal income-tax purpo-
ses. The dividends-received deduction is not available to noncorporate inves-
tors.
TOTAL RETURN FOR PERIODS ENDED 5/31/95
S&P CONSUMER
CLASS A 500 PRICE
NAV POP INDEX INDEX
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6 months 10.10% 6.58% 19.17% 1.67%
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1 year 7.67 4.15 20.19 3.19
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5 years 58.58 53.41 71.87 17.80
Annual average 9.66 8.94 11.44 3.33
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10 years 113.47 106.57 289.28 41.85
Annual average 7.88 7.52 14.56 3.56
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TOTAL RETURN FOR PERIODS ENDED 6/30/95
(most recent calendar quarter)
Class A
NAV POP
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1 year 9.20% 5.59%
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5 years 60.33 55.19
Annual average 9.90 9.19
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10 years 112.30 105.36
Annual average 7.82 7.46
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Fund performance data do not take into account any adjustment for taxes payable
on reinvested distributions. The fund commenced operations on 1/4/84, offering
shares now known as class A shares. Class M shares commenced operations on
4/20/95. Performance for class M shares is not shown because of the brevity of
the reporting period. Past performance is no assurance of future results. Per-
formance data will differ for each share class. Investment returns and net asset
value will fluctuate so an investor's shares, when sold, may be worth more or
less than their original cost.
<PAGE>
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial sales charge and no 12b-1
fee.
CLASS M SHARES have a lower initial sales charge than class A shares and a 0.25%
12b-1 fee.
NET ASSET VALUE (NAV) is the value of all your fund's assets, minus any liabili-
ties, 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 3.25% sales charge for class A shares and 2.00% for class M
shares.
COMPARATIVE BENCHMARKS
STANDARD & POOR'S 500 INDEX is an unmanaged list of common stocks that is fre-
quently used as a general measure of stock market performance. The index assumes
reinvestment of all distributions and does not take into account brokerage co-
mmissions or other costs. The fund's portfolio contains securities that do not
match those in the index.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation; it does not
represent an investment return.
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
May 31, 1995 (Unaudited)
PREFERRED STOCKS (83.6%)*
NUMBER OF SHARES VALUE
AUTOMOBILES (4.1%)
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35,500 Ford Motor Co. Ser. B, $2.0625, dep. shs. preferred
(pfd.) $ 940,750
115,000 General Motors Corp. Ser. B, $2.28125 dep. shs. pfd. 3,119,375
40,000 General Motors Corp. Ser. G, $2.28, pfd. 1,110,000
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5,170,125
BANKS (25.0%)
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20,900 Ahmanson (H.F.) & Co. Ser. C, $2.10, dep. shs. pfd. 525,113
135,000 Bank of Boston Corp. Ser. E, $2.15, dep. shs. pfd. 3,442,500
32,000 BankAmerica Corp. Ser. B, $6.00, Adjustable Rate
Preferred (ARP) 2,584,000
51,200 BankAmerica Corp. Ser. F, $2.40625, pfd. 1,324,800
10,500 BankAmerica Corp. Ser. K, $2.09375, pfd. 266,438
70,000 Bankers Trust New York Corp. Ser. Q, $1.47475, ARP 1,435,000
37,000 Bankers Trust New York Corp. Ser. P, $7.50 dep. shs. pfd. 851,000
50,000 Chase Manhattan Corp. Ser. H, $2.44, pfd. 1,412,500
11,000 Chase Manhattan Corp. Ser. J, $2.27, pfd. 288,750
8,850 Chase Manhattan Corp. Ser. M, $2.10, pfd. 227,888
80,000 Chase Manhattan Corp. Ser. N, $1.59375, ARP 1,810,000
64,038 Chemical Banking Corp. Ser. L, $6.258, ARP 5,779,430
22,510 Citicorp Ser. 18, $1.491, ARP 495,220
17,400 Citicorp Ser.3, $7.00, ARP 1,618,200
44,500 First Chicago Corp. $3.50, ARP 2,119,313
6,500 First Chicago Corp. Ser. C, $6.50, ARP 572,000
92,655 First Interstate Bancorp Ser. F, $2.46875, dep. shs. pfd. 2,478,521
15,000 Indosuez Holdings 144A, ADS, $2.59375, pfd. 369,375
60,000 Lasalle National Corp. Ser. K, $4.375, pfd. 3,000,000
40,000 Union Bank Ser. A, $2.09375, dep. shs. pfd. 1,005,000
--------------
31,605,048
BROADCASTING (1.0%)
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49,500 Newscorp Overseas Corp. Ser. A, $2.15625, pfd. 1,212,750
COMBINED UTILITIES (10.3%)
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20,000 Cincinnati Gas & Electric Co. Sinking Fund, $7.375, pfd. 1,900,000
20,000 Cincinnati Gas & Electric Co. Sinking Fund, $9.15, pfd. 2,100,000
9,000 Jersey Central Power & Light Co. Ser. E, $7.88, pfd. 828,000
80,000 Long Island Lighting Co. Sinking Fund, Ser. NN, $0.4875,
pfd. 1,520,000
116,000 New York State Electric & Gas Corp. Ser. B, $1.555, ARP 2,508,500
20,000 Pacific Gas & Electric Co. $1.76, pfd. 475,000
15,000 Pacific Gas & Electric Co. $2.05, pfd. 391,875
11,750 Public Service Electric & Gas Co. $6.92, pfd. 1,010,500
23,200 Western Resources, Inc. Sinking Fund, $7.58, pfd. 2,331,600
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13,065,475
<PAGE>
PREFERRED STOCKS (continued)
NUMBER OF SHARES VALUE
ELECTRIC UTILITIES (16.0%)
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72,000 Alabama Power Co. Ser. 93-A, $1.485, ARP $ 1,566,000
4,865 Appalachian Pwr. 7.40, pfd. 445,148
50,000 Arizona Public Service Co. Ser. W, $1.8125, pfd. 1,150,000
10,000 Baltimore Gas & Electric Ser. 1993, $7.125, pfd. 1,000,000
20,000 Central Maine Power Co. Ser. A, $7.999, pfd. 1,910,000
3,740 Cleveland Electric Illuminating Co. Sinking Fund, Ser.
M, $7.04, ARP 344,080
10,000 Cleveland Electric Illuminating Co. Sinking Fund, Ser.
R, $8.80, pfd. 810,000
7,070 Commonwealth Edison Co. Ser. A, $8.40, pfd. 687,558
5,500 Detroit Edison Co. $7.45, pfd. 500,500
17,522 Gulf States Utilities Co. $8.52, pfd. 1,498,131
50,000 Niagara Mohawk Power Corp. $2.375, pfd. 1,281,250
39,800 Niagara Mohawk Power Corp. Ser. A, $1.625, ARP 776,100
40,000 Niagara Mohawk Power Corp. Ser. C, $2.0375, ARP 960,000
7,500 Northern States Power Co. Ser. B, $5.8227, ARP 652,500
13,000 PacifiCorp Sinking Fund, $7.12, pfd. 1,223,620
15,000 Peco Energy $7.48, pfd. 1,391,250
10,000 Pennsylvania Power & Light Co. Sinking Fund,
$6.125, pfd. 907,500
10,000 Pennsylvania Power & Light Co. Sinking Fund, $6.33, pfd. 930,000
18,000 Psi Energy, Inc. $1.86, pfd. 450,000
40,000 Puget Sound Power & Light Co. Ser. B, $1.6275, ARP 875,000
9,072 Virginia Electric & Power Co. Sinking Fund, $7.30, pfd. 842,562
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20,201,199
FINANCE (5.3%)
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10,000 Bear Stearns & Co. Ser. A, $3.025, ARP 415,000
28,300 Bear Stearns & Co. Ser. B, $1.97, dep. shs. pfd. 689,813
36,000 Ford Holdings Corp. Ser. A, $2.00, dep. shs. pfd. 927,000
95,000 Heller Financial Inc. Ser. A, $2.03125, sr. cum. pfd. 2,375,000
13,300 Merrill Lynch & Co., Inc. Ser. A, $2.25, dep. shs. pfd. 369,075
24,000 Morgan Stanley $1.84375, dep. shs. pfd. 576,000
50,000 Travelers Corp. Ser. D, $2.3125, dep. shs. pfd. 1,293,750
--------------
6,645,638
FOREST PRODUCTS (2.5%)
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120,000 Boise Cascade Corp. Ser. F, $2.35, dep. shs. pfd. 3,135,000
GAS PIPELINES (0.9%)
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13,000 ENSERCH Corp. Ser. E, $7.00. ARP 1,173,250
GAS UTILITIES (0.4%)
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18,700 Washington Natural Gas Co. Ser. III, $2.125, pfd. 469,838
INSURANCE (6.2%)
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143,500 Aon Corp. $2.00, pfd. 3,623,375
42,710 SunAmerica Inc. Ser. C, $7.30, ARP 4,180,241
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7,803,616
<PAGE>
PREFERRED STOCKS (continued)
NUMBER OF SHARES VALUE
NATURAL GAS (0.6%)
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28,000 Phillips Gas Co. Ser. A, $2.33, pfd. $ 742,000
OIL SERVICES (4.2%)
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57,500 LASMO PLC ADS Ser. A, $2.50, pfd. 1,372,813
129,051 McDermott Inc. Sinking Fund, Ser. B, $2.60, pfd. 3,936,056
--------------
5,308,869
PAPER (1.2%)
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60,000 Bowater, Inc. Ser. C, $2.10, dep. shs. pfd. 1,560,000
STEEL (3.2%)
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81,950 USX Corp. $3.975, ARP 4,015,550
TELEPHONE UTILITIES (0.4%)
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5,490 GTE Florida, Inc. $8.16, Pfd. 554,490
TOBACCO (1.3%)
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67,300 RJR Nabisco Holding $2.3125, dep. shs. pfd. 1,648,850
WATER UTILITIES (1.0%)
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13,500 United Water Resources, Inc. Ser. B, $7.625 pfd. 1,350,000
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TOTAL PREFERRED STOCKS (cost $109,201,560) $105,661,698
COMMON STOCKS (8.4%)*
NUMBER OF SHARES VALUE
COMBINED UTILITIES (1.3%)
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30,000 Pacific Gas & Electric Co. $ 870,000
39,000 Rochester Gas & Electric Corp. 833,625
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1,703,625
ELECTRIC UTILITIES (3.4%)
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35,000 Entergy Corp. 866,250
35,000 Northeast Utilities 835,625
41,000 Potomac Electric Power Co. 835,375
29,000 Public Service Enterprise Group, Inc. 862,750
24,000 Texas Utilities Co. 867,000
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4,267,000
INSURANCE (0.7%)
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15,000 Aetna Life & Casualty Co. 894,375
METALS AND MINING (0.4%)
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28,500 Copper & Gold Co., Inc. 491,625
NATURAL GAS (0.3%)
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15,000 UGI Corp. (New) 315,000
<PAGE>
COMMON STOCKS (continued)
NUMBER OF SHARES VALUE
REIT'S (1.5%)
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37,000 Cali Realty Corp. $ 656,750
32,000 CenterPoint Properties Corp. 636,000
27,000 Smith (Charles East) Residential Realty, Inc. 627,750
--------------
1,920,500
RETAIL (0.8%)
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84,000 K Mart Corp. 1,071,000
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TOTAL COMMON STOCKS (cost $10,565,513) $ 10,663,125
CONVERTIBLE PREFERRED STOCKS (1.1%)* (cost $1,250,000)
NUMBER OF SHARES VALUE
25,000 Unocal Corp. 144A $3.50, cv. pfd. $ 1,368,750
SHORT-TERM INVESTMENTS (6.5%)* (cost $8,239,384)
PRINCIPAL AMOUNT VALUE
$8,238,000 Interest in $476,166,000 joint repurchase
agreement dated May 31,1995 with J.P. Morgan
Securities, due June 1, 1995 with respect to various
U.S. Treasury Obligations - Maturity value of
$8,239,384 for an effective yield of 6.05%. $ 8,239,384
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TOTAL INVESTMENTS (cost $129,256,457)*** $125,932,957
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* Percentages indicated are based on net assets of $126,441,471, which corres-
pond to a net asset value per share for class A and class M shares of $8.35
and $8.34, respectively.
*** The aggregate identified cost on a tax cost basis is $129,256,457, resulting
in gross unrealized appreciation and depreciation of $2,453,094 and
$5,776,594, respectively, or net unrealized depreciation of $3,323,500.
144A after the name of a security represents those securities exempt from
registration under Rule 144A of the Securities Act of 1933. These securities
may be resold in transactions exempt from registration, normally to qualifi-
ed institutional buyers.
ADR/ADS after the name of a holding stands for American Depository Shares,
representing ownership of foreign securities on deposit with a domestic cus-
todian bank.
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1995 (Unaudited)
ASSETS
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Investments in securities, at value
(identified cost $129,256,457) (Note 1) $125,932,957
Dividends receivable 862,427
Receivable for shares of the fund sold 183,569
Cash 428
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TOTAL ASSETS $126,979,381
LIABILITIES
- -------------------------------------------------------------------------------
Distributions payable to shareholders 265,975
Payable for shares of the fund repurchased 31,840
Payable for compensation of Manager (Note 2) 201,468
Payable for administrative services (Note 2) 1,524
Payable for compensation of Trustees (Note 2) 182
Payable for investor servicing and custodian fees (Note 2) 2,699
Other accrued expenses 34,222
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TOTAL LIABILITIES 537,910
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NET ASSETS $126,441,471
REPRESENTED BY
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Paid-in capital (Notes 1and 4) $197,782,685
Distributions in excess of net investment income (Note 1) (19,926)
Accumulated net realized loss on investments (Note 1) (67,997,788)
Net unrealized depreciation of investments (3,323,500)
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TOTAL -- REPRESENTING NET ASSETS APPLICABLE TO
CAPITAL SHARES OUTSTANDING $126,441,471
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
- -------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($125,935,275 divided by 15,086,788 shares) $8.35
Offering price per share (100/96.75 of $8.35) * $8.63
Net asset value and redemption price of class M shares
($506,196 divided by 60,715 shares) $8.34
Offering price per share (100/98.00 of $8.34) * $8.51
- -------------------------------------------------------------------------------
* On single retail sales of less than $100,000. On sales of $100,000 or more
and on group sales the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF OPERATIONS
Six months ended May 31, 1995 (Unaudited)
INVESTMENT INCOME:
- -------------------------------------------------------------------------------
Dividends (net of foreign tax of $10,837) $ 4,669,792
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Interest 112,923
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TOTAL INVESTMENT INCOME 4,782,715
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EXPENSES:
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Compensation of Manager (Note 2) 391,064
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 29,551
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Compensation of Trustees (Note 2) 5,549
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Reports to shareholders and other expenses 22,862
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Registration fees 400
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Auditing 27,813
- -------------------------------------------------------------------------------
Legal 6,324
- -------------------------------------------------------------------------------
Postage 4,793
- -------------------------------------------------------------------------------
Administrative services (Note 2) 4,106
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 104
- -------------------------------------------------------------------------------
TOTAL EXPENSES 492,566
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,290,149
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (640,244)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 7,881,577
- -------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 7,241,333
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $11,531,482
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Six months ended Year ended
May 31 November 30
1995* 1994
- -------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $ 4,290,149 $ 8,811,131
- -------------------------------------------------------------------------------
Net realized loss on investments (640,244) (235,917)
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 7,881,577 (14,305,527)
- -------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 11,531,482 (5,730,313)
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
- -------------------------------------------------------------------------------
Net investment income
Class A (4,590,374) (8,815,414)
Class M (2,219) --
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (319,831) (9,816,937)
- -------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 6,619,058 (24,362,664)
- -------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------
Beginning of period 119,822,413 144,185,077
- -------------------------------------------------------------------------------
END OF PERIOD (including distributions in excess
of net investment income and undistributed net
investment income of $19,926 and $282,518,
respectively) $126,441,471 $119,822,413
- -------------------------------------------------------------------------------
* Unaudited.
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
APRIL 20, 1995 SIX
(COMMENCEMENT MONTHS
OF OPERATIONS) ENDED
TO MAY 31 MAY 31 YEAR ENDED NOVEMBER 30
1995+ 1995+ 1994* 1993* 1992* 1991* 1990*
- ----------------------------------------- ---------------------------------------------------------------------------------------
CLASS M CLASS A
- ----------------------------------------- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $8.12 $7.88 $8.81 $8.34 $8.00 $7.42 $8.25
- ----------------------------------------- ---------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net investment income .06 .29 .56 .60 .68 .70 .75
- ----------------------------------------- ---------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .22 .49 (.93) .47 .34 .57 (.80)
- ----------------------------------------- ---------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS .28 .78 (.37) 1.07 1.02 1.27 (.05)
- ----------------------------------------- ---------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
- ----------------------------------------- ---------------------------------------------------------------------------------------
From net investment
income (.06) (.31) (.56) (.60) (.68) (.69) (.78)
- ----------------------------------------- ---------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.06) (.31) (.56) (.60) (.68) (.69) (.78)
- ----------------------------------------- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $8.34 $8.35 $7.88 $8.81 $8.34 $8.00 $7.42
- ----------------------------------------- ---------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (a) 3.48(b) 10.10(b) (4.41) 13.07 13.08 17.86 (0.53)
- ----------------------------------------- ---------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $506 $125,935 $119,822 $144,185 $142,378 $129,688 $137,136
- ----------------------------------------- ---------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) .11(b) .41(b) .81 .83 .83 .93 .95
- ----------------------------------------- ---------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .69(b) 3.55(b) 6.64 6.83 8.23 8.98 9.55
- ----------------------------------------- ---------------------------------------------------------------------------------------
Portfolio turnover (%) 18.99(b) 18.99(b) 32.84 114.53 188.68 157.11 208.58
- ----------------------------------------- ---------------------------------------------------------------------------------------
<FN>
+ Unaudited
* These numbers have been restated to reflect a 5-for-1 share split declared by the fund to shareholders of record on November
29, 1994.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Not annualized.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
May 31, 1995 (Unaudited)
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The fund is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end management investment company. The fund seeks high
after-tax income for corporate shareholders and current income for all investors
with minimum fluctuations in principal.
The fund offers both class A and class M shares. The fund commenced its opera-
tions of class M shares on April 20, 1995. Class A shares are sold with a maxi-
mum front-end sales charge of 3.25% and do not pay an ongoing distribution fee.
Class M shares are sold with a maximum front-end sales charge of 2.00% and pay
an ongoing distribution fee. Expenses of the fund are borne pro-rata by the hol-
ders of both classes of shares, except that each class bears expenses unique to
that class (including the distribution fees applicable to such class). Each vo-
tes 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 divi-
dends on each class of shares.
The following is a summary of significant accounting policies consistently fo-
llowed by the fund in the preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles.
A) SECURITY VALUATION Investments for which market quotations are readily avail-
able are stated at market value, which is determined using the last reported sa-
le price. In the absence of sales of listed securities and with respect to secu-
rities for which the most recent sales prices are not deemed to represent fair
market value, securities are valued at the last reported bid price, except that
certain U.S. government obligations are stated at the mean between the bid and
asked prices. Securities whose market quotations are not readily available are
stated at fair value on the basis of valuations furnished by pricing services
approved by the Trustees, which determine valuations for normal, institutional-
size trading units of such securities using methods based on market transactions
for comparable securities and various relationships between securities that are
generally recognized by institutional traders. Short-term investments having re-
maining maturities of 60 days or less are stated at amortized cost, which appro-
ximates 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 compa-
nies managed by Putnam Investment Management, Inc. (Putnam Management), the
fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc., and cer-
tain
<PAGE>
other accounts. These balances may be invested in one or more repurchase agree-
ments 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. The fund's Manager 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). In-
terest income is recorded on the accrual basis and dividend income is recorded
on the ex-dividend date.
E) FEDERAL TAXES It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the In-
ternal 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 subject to Section 4982 of the Internal Revenue Code of 1986.
Therefore, no provision has been made for federal taxes on income, capital gains
or unrealized appreciation of securities held and excise tax on income and capi-
tal gains.
At November 30, 1994, the fund had a capital loss carryover of approximately
$150,840,000. This amount includes approximately $83,504,000 of capital loss ca-
rryovers acquired in connection with the fund's acquisition of the net assets of
Putnam Corporate Cash Trust-Adjustable Rate Preferred Portfolio in 1990, which
expire at various dates through July 13, 1998.
The amount of the capital loss carryover that can be used to offset realized ca-
pital gains by the fund in any one year may be limited by the Internal Revenue
Code and Regulations. To the extent that capital loss carryovers are used to
offset realized capital gains, it is unlikely that gains so offset would be dis-
tributed to shareholders since any such distribution might be taxable as ordina-
ry income.
LOSS CARRYOVERS EXPIRATION
-----------------------------------------------
$7,003,000 November 30, 1995
64,235,000 November 30, 1996
40,491,000 November 30, 1997
27,937,000 July 13, 1998
5,705,000 November 30, 1998
5,261,000 November 30, 1999
208,000 November 30, 2002
-----------------------------------------------
The fund has designated 100% of the investment income as qualifying for the di-
vidends-received deduction for corporations.
G) DISTRIBUTIONS TO SHAREHOLDERS The fund declares a distribution each day based
upon the projected net investment income and short-term capital gains for a pe-
riod, usually two months, calculated as if earned pro-rata throughout the period
on a daily basis. Such distributions are recorded daily and paid monthly. Long-
term capital gain distributions, if any, are recorded by the fund on the exdivi-
dend date and paid 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 non-taxable dividends.
<PAGE>
Reclassifications are made to the fund's capital accounts to reflect income and
gains available for distribution (or available capital loss carryovers) under
income tax regulations.
NOTE 2
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Management for management and investment advisory servi-
ces is paid quarterly based on the average net assets of the fund for the quar-
ter. 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 and 0.45% of any amount over $1.5 billion, subject, under current
law, to reduction in any year to the extent that expenses (exclusive of brokera-
ge, interest, taxes and credits allowed by PFTC) of the fund exceed 2.5% of the
first $30 million of average net assets, 2.0% of the next $70 million and 1.5%
of any amount over $100 million and by the amount of certain brokerage commi-
ssions and fees (less expenses) received by affiliates of the Manager on the
fund's portfolio transactions.
The fund also reimburses the Manager for the compensation and related expenses
of certain officers of the fund and their staff who provide administrative ser-
vices to the fund. The aggregate amount of all such reimbursements is determined
annually by the Trustees.
Trustees of the fund receive an annual Trustee's fee of $740 and an additional
fee for each Trustees' meeting attended. Trustees who are not interested persons
of the Manager and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
Custodial functions for the fund are provided by Putnam Fiduciary Trust Company
(PFTC), a wholly-owned subsidiary of Putnam Investments, Inc. Investor servicing
agent functions are provided by Putnam Investor Services, a division of PFTC.
Investor servicing and custodian fees reported in the statement of operations
for the six months ended May 31, 1995 have been reduced by credits allowed by
PFTC.
The fund has adopted a distribution plan ("the Plan") with respect to its class
M shares pursuant to Rule 12B-1 under the Investment Company Act of 1940. The
purpose of the Plan is to compensate Putnam Mutual Funds Corp., a wholly-owned
subsidiary of Putnam Investments Inc., for services provided and expenses incu-
rred by it in distributing class M shares of the fund. The class M plan provides
for payments by the fund to Putnam Mutual Funds Corp. at an annual rate of up to
1.00% of the average net assets attributable to class M shares. The Trustees ha-
ve approved payment by the fund at an annual rate of 0.25% of the average net
assets attributable to class M shares.
For the six months ended May 31, 1995, Putnam Mutual Funds Corp., acting as un-
derwriter received net commissions of $8,642 and $413 from the sale of class A
shares and class M shares, respectively. A deferred sales charge of up to 1%
is assessed on certain redemptions of class A shares purchased as part of an in-
vestment of $1 million or more. For the six months ended May 31, 1995, Putnam
Mutual Funds Corp., acting as underwriter received $2,257 on class A redemp-
tions.
<PAGE>
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the six months ended May 31, 1995, purchases and sales of investment se-
curities other than short-term investments aggregated $21,903,038 and
$27,820,033, respectively. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
NOTE 4
CAPITAL SHARES
At May 31, 1995, there was an unlimited number of shares of beneficial interest
authorized, divided into two classes, class A and class M capital shares.
Transactions in capital shares were as follows:
SIX MONTHS ENDED
MAY 31, 1995
CLASS A SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 1,013,203 $8,312,874
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 377,717 3,043,891
- -------------------------------------------------------------------------------
1,390,920 11,356,765
- -------------------------------------------------------------------------------
Shares repurchased (1,503,786) (12,173,808)
- -------------------------------------------------------------------------------
NET DECREASE (112,866) $(817,043)
- -------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1994
CLASS A SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 2,163,891 $18,804,139
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 703,150 5,424,810
- -------------------------------------------------------------------------------
2,867,041 24,228,949
- -------------------------------------------------------------------------------
Shares repurchased (4,030,872) (34,045,886)
- -------------------------------------------------------------------------------
NET DECREASE (1,163,831) $(9,816,937)
- -------------------------------------------------------------------------------
FOR THE PERIOD
APRIL 20, 1995
(COMMENCEMENT OF
OPERATIONS) TO
MAY 31, 1995
CLASS M SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 60,449 $494,993
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 266 2,219
- -------------------------------------------------------------------------------
60,715 497,212
- -------------------------------------------------------------------------------
Shares repurchased -- --
- -------------------------------------------------------------------------------
NET INCREASE 60,715 $497,212
- -------------------------------------------------------------------------------
<PAGE>
OUR COMMITMENT TO QUALITY SERVICE
CHOOSE AWARD-WINNING SERVICE.
Putnam Investor Services has won the DALBAR Quality Tested Service Seal for the
past five years, through 1994. DALBAR, an independent research firm, ran more
than 10,000 tests of 38 shareholder service components. In every category, Put-
nam outperformed the industry standard.
HELP YOUR INVESTMENT GROW.
Set up a systematic program for investing with as little as $25 a month from a
Putnam fund or from your checking or savings account. *
SWITCH FUNDS EASILY.
You can move money from one account to another with the same class of shares
without a service charge. (This privilege is subject to change or termination.)
ACCESS YOUR MONEY QUICKLY.
You can get checks sent regularly or redeem shares any business day at the then-
current net asset value, which may be more or less than their original cost.
For details about any of these or other services, contact your financial advisor
or call the toll-free number shown below and speak with a helpful Putnam repre-
sentative.
To make an additional investment in this or any other Putnam fund, contact your
financial advisor or call our toll-free number:
1-800-225-1581.
* Regular investing, of course, does not guarantee a profit or protect against
a loss in a declining market. Investors should consider their ability to con-
tinue purchasing shares during periods of low price levels.
<PAGE>
FUND INFORMATION
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman William F. Pounds, Vice Chairman
Jameson Adkins Baxter Hans H. Estin
John A. Hill Elizabeth T. Kennan
Lawrence J. Lasser Robert E. Patterson
Donald S. Perkins George Putnam, III
Eli Shapiro A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam Charles E. Porter
President Executive Vice President
Patricia C. Flaherty Lawrence J. Lasser
Senior Vice President Vice President
Gordon H. Silver Gary N. Coburn
Vice President Vice President
Alan J. Bankart Jeanne Mockard
Vice President Vice President and Fund Manager
William N. Shiebler John R. Verani
Vice President Vice President
Paul M. O'Neil John D. Hughes
Vice President Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Preferred 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 objec-
tives 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.
SHARES OF MUTUAL FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT IN-
SURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
<PAGE>
<PAGE>
---------------
PUTNAM INVESTMENTS Bulk Rate
U.S. Postage
THE PUTNAM FUNDS PAID
One Post Office Square Putnam
Boston, Massachusetts 02109 Investments
---------------
19010-029
<PAGE>
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED AND
EDGAR-FILED TEXTS:
(1) Boldface typeface is displayed with capital letters, italic typeface is
displayed in normal type.
(2) Because the printed page breaks are not reflected, certain tabular and
columnar headings and symbols are displayed differently in this filing.
(3) Bullet points and similar graphic signals are omitted.
(4) Page numbering has been omitted.
(5) The trademark symbol has been replaced by (TM).
(6) The copyright symbol has been replaced by (C).
(7) The registered mark symbol has been replaced by (R).
(8) The dagger symbol has been replaced by +
(9) The double dagger symbol has been replaced by ++
(10) The section symbol has been replaced by +++
