Putnam
Preferred
Income
Fund
ANNUAL REPORT
July 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Our strategy has certainly been tested over these past two months and
has held up in this recent period of volatility in the market."
-- Jeanne L. Mockard, manager
Putnam Preferred Income Fund
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
13 Portfolio holdings
17 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Having only recently received your semiannual report for Putnam Preferred
Income Fund, you may wonder why you are receiving an annual report so
soon. The reason is a change in your fund's fiscal year. It formerly ran
from December 1 of each year until the following November 30. It now runs
from August 1 through July 31.
With well over 100 funds in the Putnam organization, each requiring a
semiannual and an annual report every year, you can well imagine the
juggling of resources -- both Putnam's and those of Putnam's vendors --
required to keep the monthly load as evenly balanced as possible. Every so
often, in the interests of improving efficiency and seeking greater
economies of scale, we find it prudent to shift the fiscal years of some
funds.
When we change a fund's fiscal year, in effect, the time between the last
fiscal year-end and the new one, no matter how brief, becomes a fiscal
period for which a report must be issued. Thus the fiscal year in the
accompanying report covers the period from the last fiscal year-end on
November 30, 1997, through July 31, 1998. Our next report to you will come
after the new fiscal year's midpoint on January 31, 1999.
Respectfully you
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
September 16, 1998
Report from the Fund Manager
Jeanne L. Mockard
Since our last report to shareholders of Putnam Preferred Income Fund in
May, the stock market has been volatile, but the bond market has been calm
by comparison. Bond yields have dropped, while the yield curve has
flattened; therefore, we continue to see a favorable environment for
preferred income securities. Putnam Preferred Income Fund completed the
eight months ended July 31, 1998, with total returns for class A shares of
6.04% at net asset value and 2.62% at public offering price. For complete
performance information, including results for other share classes, please
turn to page 8.
The recent stock market volatility left many investors concerned about
what may be in store for the overall economy, and in particular, how the
fund's holdings could be affected. So it is appropriate to point out that
a large part of your fund's portfolio is made up of preferred stock issued
by domestic utilities. This composition means the fund is less exposed to
overall market volatility than, for example, a broader fund that has
holdings from all over the world.
* WHY SUPPLY/DEMAND BALANCE HAS BEEN AFFECTED
A relatively new type of preferred stock -- trust-preferred stock -- has
had substantial impact on the supply/demand balance of the preferred stock
market over the past eight months. These stocks have the advantage of
being classified as an equity on the issuer's balance sheet while allowing
the issuer to account for the dividend paid on these securities as a
tax-deductible cost.
While your fund does not invest in trust-preferred stocks because they do
not qualify for the corporate dividends-received deduction, it
nevertheless has been affected by their continued existence. The ongoing
availability of trust-preferred securities has helped to further restrict
supply of -- and heighten demand for -- traditional preferred stock,
boosting prices and benefiting your fund's portfolio.
The strong U.S. economy has also affected the supply, since fewer
companies are using preferred stock issues to raise capital. As these
corporations become more financially secure, they can afford to call in or
buy back their older, higher-yielding preferred stock. Ford Motor Company,
formerly one of the fund's top holdings, is an example. Ford presented us
an offer to buy back its preferred stock at a price above its current
market value, which resulted in handsome profits for your fund. When the
stock price subsequently declined, we re-established a position.
Other top-performing issues have been affected by calls, particularly in
the industrial sector. Boise Cascade was one position that was called
away, while the General Motors position has been reduced in anticipation
of a call. While these holdings, along with others discussed in this
report, were viewed favorably at the end of the fiscal period, all are
subject to review and adjustment in accordance with the fund's investment
strategy and may vary in the future.
Calls interrupt the fund's stream of income, requiring us to reinvest the
assets in securities that may pay lower rates than those issued
previously. Protecting the fund's portfolio from additional calls,
therefore, has been a key strategy for us over the period. Whenever
possible, we have traded out of issues featuring call dates within the
near future and redeployed assets in securities that have more distant
call dates.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Financial services 21.9%
Electric utilities 17.6%
Combined utilities 13.8%
Banks 11.5%
Oil and gas 5.3%
Footnote reads:
*Based on net assets as of 7/31/98. Holdings will vary over time.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
El Paso Tennessee Pipeline Co. Ser. A, $4.125, pfd.
Gas pipelines
Merrill Lynch & Co., Inc. Ser. A, $2.25, dep. shs. cum. pfd.
Financial services
Baltimore Gas & Electric Co. Ser. 93, $7.125, cum. pfd.
Combined utilities
IBM Corp. Ser. A, $1.875, dep. shs. pfd.
Computer software
Fleet Financial Group, Inc., Ser. E, $2.338, dep. shs. cum. pfd.
Banks
Anadarko Petroleum Corp. $5.46, dep. shs. pfd.
Oil and gas
Lehman Brothers Holding, Inc. $5.00, cv. pfd.
Financial services
Florida Power & Light Co. Ser. U, $6.75, cum. pfd.
Combined utilities
Alabama Power Co. Ser. 93, $1.145, cum. ARP
Electric utilities
J.P. Morgan & Co. Inc. Ser. H, $3.313, dep. shs. cum. pfd.
Financial services
Footnote reads:
These holdings represent 30.3% of the fund's net assets as of 7/31/98.
Portfolio holdings will vary over time.
We have also taken advantage of opportunities to strengthen the fund's
position in perpetual preferreds. These securities carry a fixed rate of
interest and no maturity date -- characteristics that increase their value
during periods of declining interest rates.
* OUTLOOK: FUND'S PREFERRED STOCK FOCUS SHOULD PROVIDE SOME STABILITY
After months of uncertainty, it is now clear that Asia's slowdown is
having an impact on the U.S. economy. While it is impossible to predict
the extent of the impact, any slowing in the U.S. economy should be
favorable for bond prices. The preferred market should benefit in turn as
declining rates prompt corporations to continue to call in existing issues
and as demand for preferreds outpaces supply. Additionally, the fact that
a significant part of the portfolio is invested in preferreds issued by
domestic utilities should help cushion any impact on the fund.
We are currently navigating through a mature kind of market, so we have
not made any substantial changes to the portfolio in the past two months.
Looking ahead, the fund's sizable position in adjustable-rate preferreds
should provide a useful cushion against the ramifications of continued
market volatility. As always, we will continue to search for new
opportunities that may benefit the fund in any market environment and to
enhance call protection whenever possible.
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 7/31/98, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
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 non
corporate investors.
TOTAL RETURN FOR PERIODS ENDED 7/31/98
Class A Class M
(inception date) (1/4/84) (4/20/95)
NAV POP NAV POP
- ------------------------------------------------------------------------------
8 months 6.04% 2.62% 5.89% 3.80%
- ------------------------------------------------------------------------------
1 year 8.51 5.00 8.14 6.01
- ------------------------------------------------------------------------------
5 years 44.65 39.95 41.91 39.07
Annual average 7.66 6.95 7.25 6.82
- ------------------------------------------------------------------------------
10 years 137.99 130.23 130.59 125.98
Annual average 9.06 8.70 8.71 8.49
- ------------------------------------------------------------------------------
Life of fund 238.44 227.44 224.18 217.70
Annual average 8.73 8.48 8.41 8.26
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/98
Merrill Lynch
Perpetual Standard &
Preferred Poor's Consumer
Index* 500 Index Price Index
- ------------------------------------------------------------------------------
8 months 4.55% 18.46% 1.05%
- ------------------------------------------------------------------------------
1 year 7.29 19.29 1.68
- ------------------------------------------------------------------------------
5 years 42.20 180.54 13.02
Annual average 7.30 22.92 2.48
- ------------------------------------------------------------------------------
10 years N/A 445.10 37.72
Annual average N/A 18.48 3.25
- ------------------------------------------------------------------------------
Life of fund N/A 970.36 61.11
Annual average N/A 17.65 3.32
- ------------------------------------------------------------------------------
*The Merrill Lynch Perpetual Preferred Index was introduced on 2/28/89.
Past performance is no assurance of future results. 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 shares for periods
prior to their inception are derived from the historical performance of
class A shares, adjusted to reflect both the initial sales charge
currently applicable to class M shares and the higher operating expenses
applicable to such shares. All returns assume reinvestment of
distributions at NAV. Investment return and principal value will fluctuate
so that an investor's shares when redeemed may be worth more or less than
their original cost.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 7/31/88
Standard & Poor's 500 Index $54,510
Fund's class A shares at POP $23,023
Consumer Price Index $13,772
Fund's class A Standard & Poor's Consumer
shares at POP 500 Index Price Index
7/31/88 9425 10000 10000
7/31/89 10588 13193 10498
7/31/90 10670 14051 11004
7/31/91 12160 15843 11494
7/31/92 14197 17870 11857
7/31/93 16036 19430 12187
7/31/94 16039 20432 12524
7/31/95 17477 25767 12870
7/31/96 18653 30037 13249
7/31/97 21172 45698 13545
7/31/98 $23023 $54510 $13772
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class M shares would have
been valued at $23,059 ($22,598 at public offering price). The Merrill
Lynch Perpetual Preferred Index is not shown because it has been in
existence for less than 10 years.
PRICE AND DISTRIBUTION INFORMATION
8 months ended 7/31/98
Class A Class M
- ------------------------------------------------------------------------------
Distributions (number) 8 8
- ------------------------------------------------------------------------------
Income $0.375830 $0.360475
- ------------------------------------------------------------------------------
Capital gains -- --
- ------------------------------------------------------------------------------
Total $0.375830 $0.360475
- ------------------------------------------------------------------------------
Share value: NAV POP NAV POP
- ------------------------------------------------------------------------------
11/30/97 $9.00 $9.30 $8.97 $9.15
- ------------------------------------------------------------------------------
7/31/98 9.16 9.47 9.13 9.32
- ------------------------------------------------------------------------------
Current return
(end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.11% 5.91% 5.88% 5.76%
- ------------------------------------------------------------------------------
Taxable equivalent3 8.42 8.14 8.10 7.93
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 5.70 5.51 5.39 5.28
- ------------------------------------------------------------------------------
Taxable equivalent3 7.85 7.59 7.42 7.27
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
2 Based only on investment income, calculated using SEC guidelines.
3 The 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 6/30/98
(most recent calendar quarter)
Class A Class M
(inception date) (1/4/84) (4/20/95)
NAV POP NAV POP
- ------------------------------------------------------------------------------
1 year 10.81% 7.17% 10.44% 8.23%
- ------------------------------------------------------------------------------
5 years 46.69 41.92 43.93 41.05
Annual average 7.96 7.25 7.55 7.12
- ------------------------------------------------------------------------------
10 years 140.44 132.62 132.96 128.30
Annual average 9.17 8.81 8.82 8.61
- ------------------------------------------------------------------------------
Life of fund 238.05 227.07 223.88 217.41
Annual average 8.77 8.52 8.45 8.30
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns and
principal value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. See first page of
performance section for performance calculation method.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge 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 3.25% maximum 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 in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Report of independent accountants
For the eight months ended July 31, 1998
To the Trustees and Shareholders of
Putnam Preferred Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
Preferred Income Fund (the "fund") at July 31, 1998, and the results of
its operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility
of the fund's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at July 31, 1998 by correspondence with
the custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 15, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
July 31, 1998
PREFERRED STOCKS (95.4%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Automobiles (4.5%)
- --------------------------------------------------------------------------------------------------------------------------
11,800 Ford Motor Co. Ser. B, $2.063, dep. shs.
cum. preferred (pfd) $ 342,200
115,000 General Motors Corp. Ser. B, $2.281, dep. shs. pfd. 3,047,500
99,000 General Motors Corp. Ser. G, $2.28, pfd. 2,796,750
--------------
6,186,450
Banks (11.5%)
- --------------------------------------------------------------------------------------------------------------------------
20,239 Bankers Trust New York Corp. Ser. S, 1.938, cum. pfd. (CUS) 541,393
70,000 Bankers Trust New York Corp. Ser. Q, 1.269,
Adjustable Rate Preferred (ARP) (CUS) 1,750,000
100,000 Bankers Trust New York Corp. Ser. R, 1.26, cum. pfd. (CUS) 2,500,000
23,100 Chase Manhattan Corp. Ser. G, 2.74, cum. pfd. 664,125
67,600 Chase Manhattan Corp. Ser. C, 2.71, cum. pfd. 2,087,150
51,700 Chase Manhattan Corp. Ser. B, 2.44, cum. pfd. 1,428,212
10,000 Fleet Financial Group, Inc. Ser. VI, 3.375, cum. pfd. 583,750
144,366 Fleet Financial Group, Inc. Ser. E, 2.338, dep. shs. cum. pfd. 4,042,248
41,400 Fleet Financial Group, Inc. Ser. V, 1.813, dep. shs. cum. pfd. 1,143,675
15,000 Indosuez Holdings 144A ADS 2.594, pfd. (Mexico) 427,500
11,500 Wells Fargo & Co. Ser. B, 2.75, cum. ARP 572,125
--------------
15,740,178
Chemicals (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
12,750 du Pont (E.I.) de Nemours & Co., Ltd. Ser. B,
4.50, cum. pfd. 1,115,625
Combined Utilities (13.4%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Baltimore Gas & Electric Co. Ser. 93, 7.125, cum. pfd. 4,530,000
15,000 Baltimore Gas & Electric Co. Ser. 95, 6.99, cum. pfd. 1,691,250
15,000 Florida Power & Light Co. Ser. S, 6.98, cum. pfd. 1,700,625
28,100 Florida Power & Light Co. Ser. U, 6.75, cum. pfd. 3,164,763
9,000 Jersey Central Power & Light Co. Ser. E, 7.88, cum. pfd. 933,750
116,000 New York State Electric & Gas Corp. Ser. B,
1.195, cum. ARP 2,929,000
76,000 Pacific Gas & Electric Co. Ser. U, 1.76, cum. pfd. 2,052,000
11,750 Public Service Electric & Gas Co. 6.92, cum. pfd. 1,270,469
--------------
18,271,857
Computer Software (3.3%)
- --------------------------------------------------------------------------------------------------------------------------
160,345 IBM Corp. Ser. A, 1.875, dep. shs. pfd. 4,469,617
Consumer Services (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
99,373 AMERCO Ser. A, 2.125, cum. pfd. 2,620,962
5,000 Western Resources, Inc. 4.25, cum. pfd. 345,000
--------------
2,965,962
Electric Utilities (17.6%)
- --------------------------------------------------------------------------------------------------------------------------
125,200 Alabama Power Co. Ser. 93, 1.145, cum. ARP 3,130,000
12,000 Arizona Public Service Co. Ser. W, 1.813, pfd. 303,000
20,000 Central Maine Power Co. Ser. A, 7.999, cum. pfd. 1,975,000
7,070 Commonwealth Edison Co. Ser. A, 8.40, cum. pfd. 711,419
2,900 Entergy Mississippi Inc. 4.92, cum. pfd. 253,025
80,941 Georgia Power Co. Ser. 93-2, 1.153, cum. ARP 2,023,525
50,000 Niagara Mohawk Power Corp. 2.375, cum. pfd. 1,318,750
40,000 Niagara Mohawk Power Corp. Ser. C, 1.75, cum. ARP 990,000
39,800 Niagara Mohawk Power Corp. Ser. A, 1.625, cum. ARP 930,325
59,000 Northern Indiana Public Services Ser. A, 3.00, cum. ARP 3,009,000
2,500 Pacificorp Sinking Fund 7.70, cum. pfd. 267,813
5,000 Pacificorp Sinking Fund 7.48 cum. pfd. 575,625
17,500 Peco Energy 7.48, cum. pfd. 1,815,625
15,000 Portland General Electric Sinking Fund 7.75, cum. pfd. 1,773,750
10,000 PP & L, Inc. 6.33, cum. pfd. 1,056,250
10,000 PP & L, Inc. 6.125, cum. pfd. 1,052,500
60,000 Texas Utilities Electric Co. Ser. A, 1.875,
dep. shs. cum. pfd. 1,590,000
50,000 Texas Utilities Electric Co. Ser. B, 1.805,
dep. shs. cum. pfd. 1,337,500
--------------
24,113,107
Financial Services (21.9%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Bear Stearns & Co Ser. E, 3.075, cum. pfd. 2,693,750
30,000 Bear Stearns & Co. Ser. F, 2.86, cum. pfd. 1,552,500
10,000 Bear Stearns & Co. Ser. A, 2.75, cum. ARP 500,000
20,000 Bear Stearns & Co. Ser. G, 2.745, cum. pfd. 992,500
10,000 Donaldson, Lufkin & Jenrette, Inc. Ser. B, 2.65, cum. pfd. 512,500
95,000 Heller Financial Inc. Ser. A, 2.031, cum. pfd. 2,517,500
65,850 Household International, Inc. Ser. 92-A, 2.063,
dep. shs. cum. pfd. 1,934,344
56,000 J.P. Morgan & Co. Inc. Ser. H, 3.313, dep. shs. cum. pfd. 3,059,000
20,000 Lehman Brothers Holding, Inc. Ser. C, 2.97, pfd. 1,060,000
30,000 Lehman Brothers Holding, Inc. Ser. D 2.835, pfd. 1,496,250
36,500 MBNA Corp. Ser. A, 1.875, cum. pfd. 994,625
75,000 MBNA Corp. Ser. B, 1.462, ARP 1,931,250
186,437 Merrill Lynch & Co., Inc. Ser. A, 2.25, dep. shs. cum. pfd. 5,849,460
22,259 Morgan (J.P.) & Co., Inc. Ser. A, 5.00, cum. ARP 2,147,994
50,150 Morgan Stanley 3.875, dep. shs. cum. pfd. 2,733,175
--------------
29,974,848
Gas Pipelines (4.3%)
- --------------------------------------------------------------------------------------------------------------------------
105,000 El Paso Tennessee Pipeline Co. Ser. A, 4.125, pfd. 5,853,750
Insurance (3.6%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Travelers Group 3.183, pfd. 2,762,500
29,000 Travelers Group Inc. Ser. M, 2.932, cum. pfd. 1,522,500
25,000 Travelers Group Inc. Ser. K, 2.10, cum. pfd. 684,375
--------------
4,969,375
Metals and Mining (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
11,050 Aluminum Co. 3.75, cum. pfd. 809,412
Natural Gas (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
18,700 Puget Sound Energy, Inc. Ser. III, 2.125, pfd. 488,538
31,700 Washington Natural Gas Ser. II, 1.862, cum. pfd. 855,900
--------------
1,344,438
Oil and Gas (5.3%)
- --------------------------------------------------------------------------------------------------------------------------
41,000 Anadarko Petroleum Corp. 5.46, dep. shs. pfd. 3,992,375
48,000 ENSERCH Corp. Ser. F, 1.279, cum. pfd. 1,176,000
20,000 Pennzoil Co. 6.49, cum. pfd. 2,050,000
--------------
7,218,375
Oil Services (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
57,500 LASMO PLC ADS Ser. A, 2.50, cum. pfd.
(United Kingdom) 1,538,125
Paper (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Bowater, Inc. Ser. C, 2.10, dep. shs. cum. pfd. 1,500,000
Publishing (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
49,500 Newscorp Overseas Corp. Ser. A, 2.156, cum. pfd. 1,225,125
Tobacco (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
67,300 RJR Nabisco Holding Ser. B, 2.313, dep. shs. cum. pfd. 1,724,562
Water Utilities (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
13,500 United Water Resources, Inc. Ser. B, 7.625, cum. pfd. 1,385,438
--------------
Total Preferred Stocks (cost $125,711,654) $ 130,406,244
CONVERTIBLE PREFERRED STOCKS (2.4%) (a) (cost $3,035,745)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
92,500 Lehman Brothers Holding, Inc. $5.00, cv. pfd. $ 3,341,563
COMMON STOCKS (0.4%) (a) (cost $479,754)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
18,000 Pacific Gas & Electric Co. $ 547,875
SHORT-TERM INVESTMENTS (1.6%) (a) (cost $2,196,345)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
2,196,000 Interest in 750,000,000 joint tri-party repurchase agreement
dated July 31, 1998 with Goldman Sachs & Co. due
August 3, 1998 with respect to various U.S. Treasury
obligations -- maturity value of 2,197,036 for an
effective yield of 5.66% $ 2,196,345
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $131,423,498) (b) $ 136,492,027
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $136,733,676.
(b) The aggregate identified cost on a tax basis is $131,434,747 resulting in gross unrealized appreciation and
depreciation of $5,629,756 and $572,476 respectively, or net unrealized appreciation of $5,057,280.
(CUS) This entity provides subcustodian services to the fund.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified
institutional buyers.
ADS after the name of a foreign holding stands for American Depository Shares representing ownership of foreign
securities on deposit with a domestic custodian bank.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
July 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $131,423,498) (Note 1) $136,492,027
- -----------------------------------------------------------------------------------------------
Cash 4,597
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 382,907
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 396,051
- -----------------------------------------------------------------------------------------------
Total assets 137,275,582
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 210,972
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 111,506
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 147,871
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 16,870
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,297
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 527
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,435
- -----------------------------------------------------------------------------------------------
Other accrued expenses 43,428
- -----------------------------------------------------------------------------------------------
Total liabilities 541,906
- -----------------------------------------------------------------------------------------------
Net assets $136,733,676
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $138,843,170
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (163,994)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (7,014,029)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,068,529
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $136,733,676
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($124,783,506 divided by 13,627,218 shares) $9.16
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/96.75 of $9.16)* $9.47
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($11,950,170 divided by 1,308,532 shares) $9.13
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/98.00 of $9.13)* $9.32
- -----------------------------------------------------------------------------------------------
* 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
Eight Months Year ended
ended July 31 November 30
1998* 1997
<S> <C>
Investment income:
- ---------------------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $10,782) $ 5,970,761 $ 8,484,812
- ---------------------------------------------------------------------------------------------------------------
Interest 192,931 117,942
- ---------------------------------------------------------------------------------------------------------------
Total investment income 6,163,692 8,602,754
Expenses:
- ---------------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 569,218 786,422
- ---------------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 135,869 178,004
- ---------------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 7,260 10,898
- ---------------------------------------------------------------------------------------------------------------
Administrative services 4,189 6,823
- ---------------------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 16,671 16,635
- ---------------------------------------------------------------------------------------------------------------
Registration fees 3,201 175
- ---------------------------------------------------------------------------------------------------------------
Auditing 33,019 28,781
- ---------------------------------------------------------------------------------------------------------------
Legal 3,559 6,098
- ---------------------------------------------------------------------------------------------------------------
Other 26,787 10,786
- ---------------------------------------------------------------------------------------------------------------
Total expenses 799,773 1,044,622
- ---------------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (42,359) (93,466)
- ---------------------------------------------------------------------------------------------------------------
Net expenses 757,414 951,156
- ---------------------------------------------------------------------------------------------------------------
Net investment income 5,406,278 7,651,598
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,926,691 461,151
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
during the period (733,122) 3,522,848
- ---------------------------------------------------------------------------------------------------------------
Net gain on investments 2,193,569 3,983,999
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $7,599,847 $11,635,597
- ---------------------------------------------------------------------------------------------------------------
* The fiscal year end has advanced from November 30 to July 31.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Eight months ended
July 31 Year ended November 30
1998* 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Increase in net assets
- -------------------------------------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 5,406,278 $ 7,651,598 $ 8,169,853
- -------------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 2,926,691 461,151 613,554
- -------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments (733,122) 3,522,848 1,099,640
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 7,599,847 11,635,597 9,883,047
- -------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- -------------------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (4,964,211) (7,391,392) (7,929,910)
- -------------------------------------------------------------------------------------------------------------------------------
Class M (389,706) (411,702) (187,209)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- -- (58,710)
- -------------------------------------------------------------------------------------------------------------------------------
Class M -- -- (1,386)
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share
transactions (Note 4) 10,598,303 (2,778,276) (191,510)
- -------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets 12,844,233 1,054,227 1,514,322
Net assets
- -------------------------------------------------------------------------------------------------------------------------------
Beginning of period 123,889,443 122,835,216 121,320,894
- -------------------------------------------------------------------------------------------------------------------------------
End of period (including distributions in
excess of net investment income of
$163,994, $216,355 and $60,096
respectively) $136,733,676 $123,889,443 $122,835,216
- -------------------------------------------------------------------------------------------------------------------------------
* The fiscal year end has advanced from November 30 to July 31.
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
- ------------------------------------------------------------------------------------------------------------------------------------
Eight month
Per-share ended
operating performance July 31+ Year ended November 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.00 $8.71 $8.59 $7.88 $8.81 $8.34
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .38 .56 .58 .57 .56 .60
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .16 .30 .12 .73 (.93) .47
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .54 .86 .70 1.30 (.37) 1.07
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.38) (.57) (.58) (.59) (.56) (.60)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (c) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.38) (.57) (.58) (.59) (.56) (.60)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.16 $9.00 $8.71 $8.59 $7.88 $8.81
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 6.04 * 10.22 8.61 17.05 (4.41) 13.07
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $124,784 $116,413 $117,502 $120,591 $119,822 $144,185
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .59 * .85 .89 .90 .81 .83
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.13 * 6.34 6.90 6.91 6.64 6.83
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 33.51 * 20.46 29.51 34.76 32.84 114.53
- ------------------------------------------------------------------------------------------------------------------------------------
+ The fiscal year end has advanced from November 30 to July 31.
++ 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) 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
- ------------------------------------------------------------------------------------------------------------------------------------
Eight months For the period
Per-share ended Apr. 20, 1995++
operating performance July 31+ Year ended November 30 to Nov. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.97 $8.69 $8.58 $8.12
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .37 .54 .56 .33
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .15 .29 .11 .46
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .52 .83 .67 .79
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.36) (.55) (.56) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (c) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.36) (.55) (.56) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.13 $8.97 $8.69 $8.58
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 5.89 * 9.85 8.22 9.88 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $11,950 $7,477 $5,333 $729
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .76 * 1.10 1.14 .67 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.88 * 6.01 6.41 3.73 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 33.51 * 20.46 29.51 34.76
- ------------------------------------------------------------------------------------------------------------------------------------
+ The fiscal year end has advanced from November 30 to July 31.
++ 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) Distributions in excess of net investment income amounted to less than $0.01 per share for each class.
</TABLE>
Notes to financial statements
July 31, 1998
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 each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if that 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.
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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the fund is
informed of the ex-dividend date.
E) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the eight months
ended July 31, 1998, the fund had no borrowings against the line of
credit.
F) 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 July 31, 1998, the fund had a capital loss carryover of approximately
$7,003,000 available to offset future capital gains, if any. 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
---------- -----------
$5,262,000 July 31, 1999
208,000 July 31, 2002
1,533,000 July 31, 2003
G) 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. These
differences include temporary and permanent differences of dividend
payable and capital loss carryover. Reclassifications are made to the
fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations. For the eight months ended July 31, 1998, the fund
reclassified $11,878,246 to decrease paid-in-capital, with a decrease to
accumulated net realized loss on investments of $11,878,246. The
calculation of net investment income per share in the financial highlights
table excludes these adjustments.
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 for
the quarter. Such fee is based on the following annual rates: 0.65% of the
first $500 million of average net assets, 0.55% of the next $500 million,
0.50% of the next $500 million, 0.45% of the next $5 billion, 0.425% of
the next $5 billion, 0.405% of the next $5 billion, 0.39% of the next $5
billion, and 0.38% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the eight months ended July 31, 1998, fund expenses were reduced by
$42,359 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $440 has
been allocated to the fund and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted 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 incurred 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 up to 1.00% of the average net assets. 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 eight months ended July 31, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $23,197 and $4,122 from
the sale of class A and class M shares, respectively. A deferred sales
charge of up to 1% is assessed on certain redemptions of class A shares.
For the eight months ended July 31, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received no monies on class A redemptions.
Note 3
Purchases and sales of securities
During the eight months ended July 31, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$54,752,890 and $43,057,810, 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 July 31, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Eight months ended
July 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,958,836 $17,861,242
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 374,099 3,416,156
- -----------------------------------------------------------------------------
2,332,935 21,277,398
Shares
repurchased (1,644,331) (15,007,112)
- -----------------------------------------------------------------------------
Net increase 688,604 $ 6,270,286
- -----------------------------------------------------------------------------
Year ended
November 30, 1997
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,175,906 $19,266,739
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 561,520 4,960,386
- -----------------------------------------------------------------------------
2,737,426 24,227,125
Shares
repurchased (3,283,503) (28,924,047)
- -----------------------------------------------------------------------------
Net decrease (546,077) $(4,696,922)
- -----------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------
Eight months ended
July 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 618,587 $5,631,081
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 35,190 320,568
- -----------------------------------------------------------------------------
653,777 5,951,649
Shares
repurchased (178,343) (1,623,632)
- -----------------------------------------------------------------------------
Net increase 475,434 $4,328,017
- -----------------------------------------------------------------------------
Year ended
November 30, 1997
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 496,220 $4,370,534
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 38,069 336,218
- -----------------------------------------------------------------------------
534,289 4,706,752
Shares
repurchased (314,630) (2,788,106)
- -----------------------------------------------------------------------------
Net increase 219,659 $1,918,646
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 100% of the distributions from net investment as
qualifying for the dividends received deduction for corporations.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
William J. Curtin
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
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 the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------
AN037-45526 029/295/867 9/98
