Putnam
Preferred
Income
Fund
SEMIANNUAL REPORT
May 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "We believe the fund's adjustable-rate preferreds and sinking-fund
preferreds will continue to help dampen volatility. Looking ahead, we will
continue to look for mispriced securities and those that enhance the
fund's call protection."
-- Jeanne L. Mockard, manager
Putnam Preferred Income Fund
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
17 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Timely portfolio weighting shifts and thoughtful security selection made
significant contributions to Putnam Preferred Income Fund's positive
performance during the six months ended May 31, 1997. Fund Manager Jeanne
Mockard's timely strategy moves clearly took the edge off a challenging period
in the preferred securities markets.
Although the Federal Reserve Board has raised short-term rates at its March
meeting it did not take any additional action in May or July. Investors,
however, have been far from reassured and generally consider that with regard
to further increases, it is a matter of "when" rather than "if." In
anticipation of future increases, Jeanne stepped up the weighting of
adjustable-rate preferred stocks because of their tendency toward stability in
a rising rate environment.
In the following report, Jeanne explains the rationale behind her portfolio
moves during the first half of fiscal 1997 and takes a look at prospects
during the second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 16, 1997
Report from the Fund Manager
Jeanne L. Mockard
The winds of change provided some blustery moments during the first half of
Putnam Preferred Income Fund's 1997 fiscal year. For the six months ended May
31, 1997, those gusts included federal budget proposals that could affect the
types of securities held by the fund, the first increase in short-term
interest rates in more than two years, and increasing controversy about a new
type of security sold in the perpetual-preferred market. However, as is often
the case, change can bring opportunity. Your fund's total returns of 3.86% and
3.74% at net asset value for class A and class M shares, respectively, reflect
our ability to navigate those winds. The fund's returns at public offering
price were 0.52% and 1.64% for class A and class M shares, respectively. For
complete performance information, please see pages 9 and 10.
* ADJUSTABLE-RATE PREFERREDS CUSHION FUND AS RATES RISE
After leaving interest rates unchanged for more than two years, the Federal
Reserve Board raised short-term interest rates by a quarter of a percentage
point on March 25, 1997. A rising interest-rate environment can be challenging
for preferred stocks, which, although classified as equities on corporate
balance sheets, function more like bonds in the marketplace. In such an
environment, the prices of adjustable-rate preferred stocks (ARPs) tend to be
relatively stable. Because their dividends are adjusted to reflect changes in
interest rates, their price movements are comparable with those of shorter-
maturity bonds.
Consequently, in anticipation of additional interest-rate increases, we have
built up the ARPs in the fund's portfolio. At period's end, approximately
21.9% of the fund's net assets was invested in these securities.
* BUDGET PROPOSALS CAST UNCERTAINTY OVER THE PREFERRED MARKET
In his budget plan, President Clinton has reintroduced proposals that would
eliminate the deductibility of interest on some of the securities industry's
more exotic products. In doing so, he is bringing back to the table a set of
restrictions he had hoped would pass through Congress more than a year ago,
and raising general ire across Wall Street as some firms' products face the
prospect of extinction.
Among the proposals is one that would eliminate the deductibility of interest
on hybrid debt/equity securities, such as trust-preferred stocks. These
securities are subordinated debt issued to trusts, which in turn issue
preferred stock to investors. As we discussed in your fund's last annual
report, the fund benefited in 1996 from the issuance of these new securities
by banks and insurance companies.
Last October, the Fed instituted regulatory changes indicating that the
capital from these stocks should be classified as equity on banks' balance
sheets. This is consistent with the Fed's treatment of other types of
preferred stock. Meanwhile, the Internal Revenue Service, in effect, treats
trust-preferred stock as debt, allowing issuers to account for the dividends
paid on the securities as a tax-deductible cost. Other types of preferred
stock are typically viewed as equity by the IRS, which prevents dividends paid
from being treated as tax-deductible interest. As a result, an issuer's
after-tax costs for trust-preferred stock can be significantly lower than
those for other types of preferred stock.
[GRAPHIC HORIZONTAL BAR CHART OMITTED: COMPARATIVE PORTFOLIO COMPOSITION]
COMPARATIVE PORTFOLIO COMPOSITION*
Perpetual 66.2% 11/30/96
preferreds 64.8% 5/31/97
Adjustable-rate 21.1% 11/30/96
preferreds 21.9% 5/31/97
Sinking-fund 8.1% 11/30/96
preferreds 8.4% 5/31/97
Common 1.8% 11/30/96
stocks 0.3% 5/31/97
Convertible 0.0% 11/30/96
securities 0.5% 5/31/97
Cash and
short-term 4.1% 11/30/96
securities 4.1% 5/31/97
Footnote reads:
* Based on net assets as of 5/31/97. Composition will vary over time.
Bond and specialty product professionals have voiced opposition to budget
measures outlawing the tax-deductibility of trust-preferred stock. Many have
argued that trust-preferreds are a source of valuable long-term debt capital
for companies. If this mode of financing is taken away and the cost of capital
increases, companies may not take on new projects that lead to creation of
jobs.
On the upside, bank issuance of trust-preferred stock during this window of
opportunity bolstered the prices of other types of preferreds, giving them a
degree of scarcity value in the face of no new issuance by banks. At the
midpoint of your fund's fiscal year, more than 20% of the portfolio was
committed to bank preferreds, allowing the fund to take full advantage of the
rally.
Another proposal that may affect the type of securities held by your fund is
a measure to reduce the dividends-received deduction from 70% to 50%.
Although the probability that the dividends-received deduction will be lowered
remains uncertain, it has caused a slowdown in the overall issuance of
preferreds. We believe, therefore, that it is perhaps more advantageous than
ever to maintain a portfolio of high-coupon securities and to hold these
securities for as long as possible. Consequently, portfolio turnover has been
quite low relative to the fund's history. We will continue to monitor the
status of these proposals and any effects they may have on the securities in
which your fund invests.
* SIGNIFICANT WEIGHTINGS IN FINANCIALS, INDUSTRIALS, AND UTILITIES
Companies in the financial, industrial, and public utilities sectors are the
dominant issuers in the preferred stock market. At period's end, roughly 34%
of the fund's portfolio was devoted to utilities, with large percentages also
invested in industrials and financial companies.
[GRAPHIC OMITTED: TOP TEN HOLDINGS]
TOP 10 HOLDINGS
El Paso Tennessee Pipeline Co. Series A, $4.125 preferred
Gas pipelines
BankAmerica Corp. Series B, $6.00 adjustable-rate preferred
Banking and financial services
McDermott Inc. Series B, $2.60 sinking-fund preferred
Oil services
Ford Motor Co. Series B, $2.063, preferred
Automobile manufacturing
Merrill Lynch & Co., Inc. Series A, $2.25 preferred
Securities brokerage and investment management services
BankBoston Corp. Series E, $2.15, preferred
Banking and financial services
Boise Cascade Corp. Series F, $2.25 preferred
Forest products and paper manufacturing
General Motors Corp. Series B, $2.063 preferred
World leader in automobile manufacturing
Lasalle National Corp. Series 144A K, $4.375 preferred
Banking and financial services
Baltimore Gas & Electric Co. Series 93, $7.125 preferred
Gas and electric utilities
Footnote reads:
These holdings represent 28.8% of the fund's assets as of 5/31/97.
Portfolio holdings will vary over time.
BankAmerica Corporation, one of the fund's largest holdings and the nation's
third largest bank, is focusing on the growth of its investment products and
mortgage lending. Strong financial performance in 1996 and the first quarter
of this year have resulted from the bank's effective operating leverage,
prudent risk management, and disciplined capital management. The bank's
shareholder return was the highest of the 15 largest U.S. banking companies in
1996. While this portfolio holding and others discussed in this report, were
viewed favorably at the end of the period, all holdings are subject to review
and adjustment in accordance with the fund's investment strategy and may well
vary in the future.
Baltimore Gas and Electric Company, one of your fund's utility holdings,
exemplifies the recent increase in mergers and acquisitions among electric and
natural gas providers. Deregulation in the electric utility industry is
causing major operators to attempt to consolidate their control over
exploration, generation, and distribution of electric power. Numerous electric
utilities have merged with natural gas providers, believing they will compete
more effectively as combined rather than as separate entities.
Baltimore Gas and Electric (BGE) provides electricity to more than one million
customers in central Maryland. The company also serves natural gas to nearly
550,000 customers. BGE and electrical utility Potomac Electric plan to merge
to form the Constellation Energy Corp. The merger, which would create the 10th
largest U.S. utility, should allow the combined company to provide service
more efficiently and effectively.
Ford Motor Company, the world's second largest auto maker, is one of your
fund's largest industrial holdings. Ford is the world's leading provider of
auto financing. It also owns the Hertz car rental operation (#1 in the United
States) and has stakes in several foreign-based automakers, including an
interest giving it effective control of Japanese auto maker Mazda. Sales
outside the United States account for 30% of the total.
There is definitely a sense of urgency at Ford management to reduce structural
costs. Equally important, the company is focusing resources and capital on
where it can make money.
* OUTLOOK: PRUDENT SECURITY SELECTION FOR AN UNCERTAIN MARKET
Putnam Management believes the fund's adjustable-rate preferreds and
sinking-fund preferreds will continue to help dampen volatility. The preferred
market's activity remains slow because of uncertainty about President
Clinton's proposals to lower the dividends-received deduction. During the
second half of your fund's fiscal year, we will continue to look for mispriced
securities and those that enhance the fund's call protection.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 5/31/97, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Preferred Income Fund seeks a high level of income that qualifies for the
70% corporate dividends-received deduction for federal income-tax
purposes. The dividends-received deduction is not available to
noncorporate investors.
TOTAL RETURN FOR PERIODS ENDED 5/31/97
Class A Class M
(inception date) (1/4/84) (4/20/95)
NAV POP NAV POP
- ------------------------------------------------------------------------------
6 months 3.86% 0.52% 3.74% 1.64%
- ------------------------------------------------------------------------------
1 year 11.17 7.60 10.93 8.73
- ------------------------------------------------------------------------------
5 years 48.25 43.44 45.60 42.72
Annual average 8.19 7.48 7.8 7.37
- ------------------------------------------------------------------------------
10 years 115.81 108.77 109.19 105.05
Annual average 8.00 7.64 7.66 7.44
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/97
Merrill Lynch
Perpetual Standard &
Preferred Poor's Consumer
Index* 500 Index Price Index
- ------------------------------------------------------------------------------
6 months 3.77% 13.14% 0.95%
- ------------------------------------------------------------------------------
1 year 9.13 29.40 2.23
- ------------------------------------------------------------------------------
5 years 45.42 132.32 14.60
Annual average 7.78 18.37 2.76
- ------------------------------------------------------------------------------
10 years -- 293.98 41.56
Annual average -- 14.69 3.54
- ------------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 3.25% and 2.00%, respectively. Returns shown for class M
for periods prior to inception are derived from the historical performance
of class A shares, adjusted to reflect the initial sales charge currently
applicable and the higher operating expenses applicable to class M shares.
Returns shown for class A shares have not been adjusted to reflect
payments under the class A distribution plan prior to its implementation.
All returns assume reinvestment of distributions at NAV and represent past
performance; they do not guarantee future results. Investment return and
principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
* The Merrill Lynch Perpetual Preferred Index was introduced on 2/28/89.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 5/31/97
Class A Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6
- ------------------------------------------------------------------------------
Income $0.29118 $0.280304
- ------------------------------------------------------------------------------
Capital gains -- --
- ------------------------------------------------------------------------------
Total $0.29118 $0.280304
- ------------------------------------------------------------------------------
Share value: NAV POP NAV POP
- ------------------------------------------------------------------------------
11/30/96 $8.71 $9.00 $8.69 $8.87
- ------------------------------------------------------------------------------
5/31/97 8.75 9.04 8.73 8.91
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.40% 6.19% 6.16% 6.03%
- ------------------------------------------------------------------------------
Taxable equivalent3 8.81 8.52 8.48 8.30
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 6.68 6.46 6.41 6.28
- ------------------------------------------------------------------------------
Taxable equivalent3 9.20 8.89 8.83 8.65
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
3The taxable equivalent examples in this table show the return that a
corporation taxed at the 35% Federal corporate tax rate would have to earn
from a non tax-advantaged investment to produce an after-tax return equal
to that of the Fund's, assuming 100% of distributions qualify for the
dividend-received deduction.
TOTAL RETURN FOR PERIODS ENDED 6/30/97
(most recent calendar quarter)
Class A Class M
NAV POP NAV POP
- ------------------------------------------------------------------------------
6 months 5.11% 1.70% 4.99% 2.85%
- ------------------------------------------------------------------------------
1 year 12.01 8.40 11.77 9.55
- ------------------------------------------------------------------------------
5 years 49.47 44.62 46.78 43.86
Annual average 8.37 7.66 7.98 7.54
- ------------------------------------------------------------------------------
10 years 113.21 106.16 106.71 102.70
Annual average 7.87 7.50 7.53 7.32
- ------------------------------------------------------------------------------
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. Please see the
preceding page for the method of performance calculation.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge but carry
no 12b-1 fee.
Class M shares have a lower initial sales charge than class A shares and
carry a 12b-1 fee.
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 3.25% sales charge for class A
shares and 2.00% for class M shares.
COMPARATIVE BENCHMARKS
Merrill Lynch Perpetual Preferred Index* is an unmanaged list of perpetual
preferred stocks that is commonly used as a general measure of performance
for the preferred-stock market.
Standard & Poor's 500 Index* is an unmanaged list of common stocks that is
frequently used as a general measure of stock-market performance.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
* Securities indexes assume reinvestment of all distributions and interest
payments and do not take into account brokerage fees or taxes. Securities
in the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
WELCOME TO
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VISIT PUTNAM'S NEW SITE ON THE WORLD WIDE WEB TO FIND OUT:
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You can also read Dr. Robert Goodman's economic commentary and Putnam's
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New features will be added to the site on an ongoing basis. So, visit us
at http://www.putnaminv.com -- often!
Portfolio of investments owned
May 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCKS (95.1%) *
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Automobiles (6.8%)
- ------------------------------------------------------------------------------------------------------------
131,079 Ford Motor Co. Ser. B, $2.063, dep. shs. cum.
preferred (pfd) $ 3,604,670
115,000 General Motors Corp. Ser. B, $2.281, dep. shs. cum. pfd. 3,047,500
54,000 General Motors Corp. Ser. G, $2.28, cum. pfd. 1,525,500
--------------
8,177,670
Banks (20.1%)
- ------------------------------------------------------------------------------------------------------------
43,662 BankAmerica Corp. Ser. B, $6.00, cum. Adjustable Rate
Preferred (ARP) 3,978,700
25,000 BankBoston Corp. Ser. C, $5.50, cum. ARP 1,965,625
135,000 BankBoston Corp. Ser. E, $2.15, dep. shs. cum. pfd. 3,391,875
16,000 Bankers Trust New York Corp. Ser. P, $1.875, cum. pfd. 408,000
70,000 Bankers Trust New York Corp. Ser. Q, $1.423, cum. ARP 1,653,750
20,239 Bankers Trust New York Corp. Ser. S, $1.938, cum. pfd. 531,274
50,000 Chase Manhattan Corp. Ser. B, $2.44, cum. pfd. 1,412,500
17,400 Chase Manhattan Corp. Ser. C, $2.71, cum. pfd. 530,700
17,400 Citicorp Ser. 3, $7.00, cum. ARP 1,718,250
22,510 Citicorp Ser. 18, $1.449, cum. ARP 565,564
10,000 Fleet Financial Group, Inc. Ser. D, $2.325, dep. shs. cum. pfd. 257,500
66,766 Fleet Financial Group, Inc. Ser. E, $2.338, dep. shs. cum. pfd. 1,877,794
52,000 Fleet Financial Group, Inc. Ser. V, $1.813, dep. shs. cum. pfd. 1,358,500
15,000 Indosuez Holdings 144A, ADS, $2.594, pfd. (Mexico) 410,625
60,000 Lasalle National Corp. Ser. 144A K, $4.375, pfd. 3,037,500
40,000 UnionBanCal Corp. Ser. A, $2.094, cum. pfd. 1,015,000
--------------
24,113,157
Combined Utilities (13.1%)
- ------------------------------------------------------------------------------------------------------------
28,000 Baltimore Gas & Electric Co. Ser. 93, $7.125, cum. pfd. 2,975,000
15,000 Baltimore Gas & Electric Co. Ser. 95 $6.99, cum. pfd. 1,563,750
14,485 Baltimore Gas & Electric Co. Ser. 87, $6.75, cum. pfd. 1,506,440
9,000 Jersey Central Power & Light Co. Ser. E, $7.88, cum. pfd. 909,000
80,000 Long Island Lighting Co. Sinking Fund Ser. NN, $1.95,
cum. pfd. 1,980,000
116,000 New York State Electric & Gas Corp. Ser. B, $1.425,
cum. ARP 2,726,000
20,000 Pacific Gas & Electric Co. Ser. U, $1.76, cum. pfd. 527,500
11,750 Public Service Electric & Gas Co. $6.92, cum. pfd. 1,224,938
23,200 Western Resources, Inc. Sinking Fund $ 7.58, cum. pfd. 2,296,800
--------------
15,709,428
Computer Software (0.5%)
- ------------------------------------------------------------------------------------------------------------
24,033 IBM Corp. Ser. A, $1.875, dep. shs. pfd. 648,891
Electric Utilities (19.7%)
- ------------------------------------------------------------------------------------------------------------
100,000 Alabama Power Co. Ser. 93-A, $1.365, cum. ARP 2,375,000
50,000 Arizona Public Service Co. Ser. W, $1.813, pfd. 1,262,500
20,000 Central Maine Power Co. Ser. A, $7.999, cum. pfd. 2,010,000
7,070 Commonwealth Edison Co. Ser. A, $8.40, cum. pfd. 712,303
15,000 Florida Power & Light Co. Ser. S, $6.98, cum. pfd. 1,561,875
100,000 Georgia Power Co. Ser. 93, $1.495, cum. ARP 2,525,000
80,941 Georgia Power Co. Ser. 93-2, $1.375, cum. ARP 1,993,172
39,800 Niagara Mohawk Power Corp. Ser. A, $1.625, cum. ARP 766,150
40,000 Niagara Mohawk Power Corp. Ser. C, $1.75, cum. ARP 895,000
50,000 Niagara Mohawk Power Corp. $2.375, cum. pfd. 1,300,000
8,120 Northern States Power Co. Ser. B, $5.52, cum. ARP 801,850
15,000 Peco Energy $7.48, cum. pfd. 1,518,750
10,000 Pennsylvania Power & Light Co. Sinking Fund $6.33,
cum. pfd. 1,030,000
10,000 Pennsylvania Power & Light Co. Sinking Fund $6.125,
cum. pfd. 1,020,000
18,700 Puget Sound Energy, Inc. Ser. III, $2.125, cum. pfd. 488,538
18,000 PSI Energy, Inc. $1.86, cum. pfd. 456,750
60,000 Texas Utilities Electric Co. Ser. A, $1.875, dep. shs. cum. pfd. 1,575,000
50,000 Texas Utilities Electric Co. Ser. B, $1.805, dep. shs. cum. pfd. 1,337,500
--------------
23,629,388
Finance (9.4%)
- ------------------------------------------------------------------------------------------------------------
10,000 Bear Stearns & Co. Ser. A, $2.75, cum. ARP 447,500
28,300 Bear Stearns & Co. Ser. B, $1.97, dep. shs. cum. pfd. 721,650
95,000 Heller Financial Inc. Ser. A, $2.031, cum. pfd. 2,481,875
40,000 MBNA Corp. Ser. B, $1.745, cum. ARP 1,085,000
36,500 MBNA Corp. Ser. A, $1.875, cum. pfd. 958,125
116,324 Merrill Lynch & Co., Inc. Ser. A, $2.25, dep. shs. cum. pfd. 3,431,558
30,000 Morgan Stanley $3.875, dep. shs. cum. pfd. 1,582,500
24,000 Morgan Stanley $1.844, dep. shs. cum. pfd. 615,000
--------------
11,323,208
Financial Services (1.8%)
- ------------------------------------------------------------------------------------------------------------
38,350 Household International, Inc. Ser. 92-A, $2.063, dep.
shs. cum. pfd. 1,054,625
20,000 J.P. Morgan & Co. Inc. Ser. H, $3.313, dep. shs. cum. pfd. 1,042,500
--------------
2,097,125
Food Chains (2.2%)
- ------------------------------------------------------------------------------------------------------------
102,569 McDonalds Corp. Ser. E, $1.93, dep. shs. pfd. 2,602,688
Gas Pipelines (5.8%)
- ------------------------------------------------------------------------------------------------------------
80,000 El Paso Tennessee Pipeline Co. Ser. A, $4.125, cum. pfd. 4,230,000
28,000 Enserch Corp. Ser. E, $7.00, cum. ARP 2,789,500
--------------
7,019,500
Insurance (2.5%)
- ------------------------------------------------------------------------------------------------------------
52,500 AON Corp. $2.00, cum. pfd. 1,332,188
37,000 Berkley (W.R.) Corp. Ser. A, $1.844, cum. pfd. 948,125
27,735 Provident Cos., Inc. $2.025, dep shs. cum. pfd. 710,709
--------------
2,991,022
Natural Gas (1.4%)
- ------------------------------------------------------------------------------------------------------------
66,000 Phillips Gas Co. Ser. A, $2.33, cum. pfd. 1,691,250
Oil Services (4.4%)
- ------------------------------------------------------------------------------------------------------------
57,500 LASMO PLC ADS Ser. A,$2.50, cum. pfd.
(United Kingdom) 1,466,250
129,051 McDermott Inc. Sinking Fund Ser. B, $2.60, cum. pfd. 3,758,610
--------------
5,224,860
Paper (3.9%)
- ------------------------------------------------------------------------------------------------------------
60,000 Bowater, Inc. Ser. C, $2.10, dep. shs. cum. pfd. 1,567,500
120,000 Boise Cascade Corp. Ser. F, $2.35, dep. shs. cum. pfd. 3,120,000
--------------
4,687,500
Publishing (1.0%)
- ------------------------------------------------------------------------------------------------------------
49,500 Newscorp Overseas Corp. Ser. A, $2.156, cum. pfd. 1,231,313
Tobacco (1.4%)
- ------------------------------------------------------------------------------------------------------------
67,300 RJR Nabisco Holding Ser. B, $2.313, dep. shs. cum. pfd. 1,699,325
Water Utilities (1.1%)
- ------------------------------------------------------------------------------------------------------------
13,500 United Water Resources, Inc. Ser. B, $7.625, cum. pfd. 1,336,500
--------------
Total Preferred Stocks (cost $111,723,529) $ 114,182,825
CONVERTIBLE PREFERRED STOCKS (0.5%) * (cost $530,000)
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
20,000 Lehman Brothers Holding Inc. $5.00, cv. pfd. $ 562,500
COMMON STOCKS (0.3%) * (cost $479,754)
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
18,000 Pacific Gas & Electric Co. $ 416,250
SHORT-TERM INVESTMENTS (4.1%) * (cost $4,952,516)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
4,951,000 Interest in $580,717,000 joint repurchase agreement
May 30, 1997 with SBC Warburg Inc. due June 2, 1997
with respect to various U.S. Treasury obligations --
maturity value of $4,953,273 for an effective yield
of 5.51% $ 4,952,516
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $117,685,799) *** $ 120,114,091
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $120,101,909.
*** The aggregate identified cost on a tax basis is $117,694,498,
resulting in gross unrealized appreciation and depreciation of
$4,062,937 and $1,643,344, respectively, or net unrealized appreciation
of $2,419,593.
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.
ADS after the name of a foreign holding American Depository Shares,
representing ownership of foreign securities on deposit with a custodian
bank.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31,1997 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $117,685,799) (Note 1) $ 120,114,091
- ---------------------------------------------------------------------------------------------------
Cash 946
- ---------------------------------------------------------------------------------------------------
Dividends receivable 497,776
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 19,038
- ---------------------------------------------------------------------------------------------------
Total assets 120,631,851
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 222,115
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 79,568
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 192,291
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 6,275
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,195
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,441
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 26,057
- ---------------------------------------------------------------------------------------------------
Total liabilities 529,942
- ---------------------------------------------------------------------------------------------------
Net assets $ 120,101,909
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $ 149,931,037
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (235,290)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (32,022,130)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,428,292
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $ 120,101,909
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($112,830,983 divided by 12,896,637 shares) $8.75
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/96.75 of $8.75)* $9.04
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($7,270,926 divided by 833,074 shares) $8.73
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/98.00 of $8.73)* $8.91
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $100,000. On sales of $100,000 or more and group sales the
offering price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended May 31,1997 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $10,781) $ 4,239,068
- --------------------------------------------------------------------------------------------------
Interest 32,069
- --------------------------------------------------------------------------------------------------
Total investment income 4,271,137
Expenses:
Compensation of Manager (Note 2) 388,206
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 89,452
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 5,817
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,542
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 7,117
- --------------------------------------------------------------------------------------------------
Reports to shareholders 7,425
- --------------------------------------------------------------------------------------------------
Registration fees 175
- --------------------------------------------------------------------------------------------------
Auditing 14,166
- --------------------------------------------------------------------------------------------------
Legal 3,490
- --------------------------------------------------------------------------------------------------
Other 516
- --------------------------------------------------------------------------------------------------
Total expenses 519,906
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (52,332)
- --------------------------------------------------------------------------------------------------
Net expenses 467,574
- --------------------------------------------------------------------------------------------------
Net investment income 3,803,563
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 480,955
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 149,489
- --------------------------------------------------------------------------------------------------
Net gain on investments 630,444
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 4,434,007
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
May 31 November 30
1997* 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 3,803,563 $ 8,169,853
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 480,955 613,554
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 149,489 1,099,640
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,434,007 9,883,047
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (3,795,540) (7,929,910)
- ----------------------------------------------------------------------------------------------------------------------
Class M (183,217) (187,209)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- (58,710)
- ----------------------------------------------------------------------------------------------------------------------
Class M -- (1,386)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (3,188,557) (191,510)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (2,733,307) 1,514,322
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 122,835,216 121,320,894
- ----------------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income $235,290 and $60,096, respectively) $ 120,101,909 $ 122,835,216
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights **
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share May 31
operating performance (Unaudited) Year ended November 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.71 $8.59 $7.88 $8.81 $8.34 $8.00
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .28 .58 .57 .56 .60 .68
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .05 .12 .73 (.93) .47 .34
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .33 .70 1.30 (.37) 1.07 1.02
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.29) (.58) (.59) (.56) (.60) (.68)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- (d) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.29) (.58) (.59) (.56) (.60) (.68)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.75 $8.71 $8.59 $7.88 $8.81 $8.34
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.86 * 8.61 17.05 (4.41) 13.07 13.08
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $112,831 $117,502 $120,591 $119,822 $144,185 $142,378
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .43 * .89 .90 .81 .83 .83
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.18 * 6.90 6.91 6.64 6.83 8.23
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.25 * 29.51 34.76 32.84 114.53 188.68
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (c) $.0491 $.0564
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
** The table has 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) The ratio of expenses to average net assets for the period ended November 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts. (Note 2)
(c) Average commission rate paid on security trades is required for fiscal periods beginning on or
after September 1, 1995.
(d) Distributions in excess of net investment income amounted to less than $0.01 per share for each class.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights **
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share May 31 Year ended Apr. 20, 1995+
operating performance (Unaudited) Nov. 30 to Nov. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.69 $8.58 $8.12
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .27 .56 .33
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .05 .11 .46
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .32 .67 .79
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.28) (.56) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- (d) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.28) (.56) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.73 $8.69 $8.58
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.74 * 8.22 9.88 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $7,271 $5,333 $729
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .55 * 1.14 .67 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.99 * 6.41 3.73 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.25 * 29.51 34.76
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (c) $.0491 $.0564
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
** The table has 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) The ratio of expenses to average net assets for the period ended November 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts. (Note 2)
(c) Average commission rate paid on security trades is required for fiscal periods beginning on or
after September 1, 1995.
(d) Distributions in excess of net investment income amounted to less than $0.01 per share for each class.
</TABLE>
Notes to financial statements
May 31, 1997 (Unaudited)
Note 1
Significant accounting policies
Putnam Preferred Income Fund (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 class A and class M shares. Class A shares are sold with a
maximum front-end sales charge of 3.25%. 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 holders of both classes 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. Certain
preferred stocks, for which reliable 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 remaining maturities of
60 days or less are stated at amortized cost, which approximates market value,
and other investments are stated at fair value following procedures approved
by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc.. These balances may be invested in one
or more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date except that certain dividends from foreign
securities are recorded as soon as the fund is informed of the ex-dividend
date.
E) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986 as amended. Therefore, no provision has been made for federal taxes on
income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At November 30, 1996, the fund had a capital loss carryover of approximately
$51,330,000 available to offset future capital gains, if any. This amount
includes approximately $18,836,000 of capital loss carryovers acquired in
connection with the fund's acquisition of net assets of Putnam Corporate Cash
Fund-Adjustable Rate Preferred Portfolio in 1990. The amount of capital loss
carryover that can be used to offset realized capital 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 distributed to shareholders since
any such distribution might be taxable as ordinary income.
The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- ------------------ ------------------
29,523,000 November 30, 1997
14,805,000 November 30, 1998
5,261,000 November 30, 1999
208,000 November 30, 2000
1,533,000 November 30, 2003
F) Distributions to shareholders The fund declares a distribution each day
based upon the projected net investment income, for a specified period,
calculated as if earned prorata throughout the period on a daily basis. Such
distributions are recorded daily and paid monthly. Capital gain distributions,
if any, are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations.
Note 2
Management fee, 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 average net assets,
0.55% of the next $500 million, 0.50% of the next $500 million, 0.45% of the
next $5 billion, 0.425% of the next $5 billion, 0.405% of the next $5 billion,
0.39% of the next $5 billion, and 0.38% thereafter. Prior to March 20, 1997,
any amount over $1.5 billion was based on a rate of 0.45%.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended May 31, 1997, fund expenses were reduced by $52,332
under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the Statement
of operations exclude these credits. The fund could have invested a portion of
the assets utilized in connection with the expense offset arrangements in an
income producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $500 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 "Plan") which allows the
Trustees to defer the receipt of all or a portion of Trustees Fees payable on
or after July 1, 1995. The deferred fees remain in the fund and are invested
in certain Putnam funds until distribution in accordance with the Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total 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 a distribution plan (the "Plan") with respect to 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
incurred by it in distributing Class M shares of the fund. The Class M Plan
provides for payment 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 have 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, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $10,345 and $1,326 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. For the six months
ended May 31, 1997, Putnam Mutual Funds Corp., acting as underwriter received
no monies on class A redemptions.
Note 3
Purchase and sales of securities
During the six month ended May 31, 1997, purchases and sales of investment
securities other than short-term investments aggregated $10,816,290 and
$15,735,976, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Note 4
Capital shares
At May 31, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were
as follows:
Six months ended
May 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,024,569 $ 8,929,411
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 293,018 2,552,978
- ------------------------------------------------------------
1,317,587 11,482,389
Shares
repurchased (1,905,641) (16,586,936)
- ------------------------------------------------------------
Net decrease (588,054) $(5,104,547)
- ------------------------------------------------------------
Year ended
November 30, 1996
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 2,600,524 $22,095,872
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 606,063 5,145,980
- ------------------------------------------------------------
3,206,587 27,241,852
Shares
repurchased (3,757,062) (31,934,220)
- ------------------------------------------------------------
Net decrease (550,475) $(4,692,368)
- ------------------------------------------------------------
Six months ended
May 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 295,501 2,574,928
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 17,245 149,936
- ------------------------------------------------------------
312,746 2,724,864
- ------------------------------------------------------------
Shares
repurchased (93,111) (808,874)
- ------------------------------------------------------------
Net increase 219,635 $1,915,990
- ------------------------------------------------------------
Year ended
November 30, 1996
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 659,164 $5,596,724
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 19,994 169,452
- ------------------------------------------------------------
679,158 5,766,176
- ------------------------------------------------------------
Shares
repurchased (150,701) (1,265,318)
- ------------------------------------------------------------
Net increase 528,457 $4,500,858
- ------------------------------------------------------------
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund *
Health Sciences Trust
International Growth Fund +
International New Opportunities Fund
Investors Fund
New Opportunities Fund
OTC & Emerging Growth Fund [DBL. DAGGER]
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENTS **
Putnam money market funds: ++
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts [2 DBL. DAGGERS]
* Formerly Natural Resources Fund
+ Formerly Overseas Growth Fund
[DBL. DAGGER] Formerly OTC Emerging Growth Fund
[SECTION MARK] Not available in all states.
** Relative to above.
++ An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed to maintain a
price of $1.00 per share, although there is no assurance that this price
will be maintained in the future.
[2 DBL. DAGGERS] Not offered by Putnam Investments. Certificates of
deposit offer a fixed rate of return and may be insured up
to certain limits by federal/state agencies. Savings accounts
may also be insured up to certain limits. Please call your
financial advisor or Putnam at 1-800-225-1581 to obtain a
prospectus for any Putnam fund. It contains more complete
information, including charges and expenses. Please read
it carefully before you invest or send money.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Thomas V. Reilly
Vice President
Jeanne L. Mockard
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam 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
objectives, and operating policies of the fund, and the most recent copy of
Putnam's Quarterly Performance Summary. For more information, or to request a
prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam
Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution; are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board or any other agency;
and involve risk, including the possible loss of principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
34403-029/867 7/97
