Putnam
Preferred
Income
Fund
ANNUAL REPORT
November 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "[O]n a positive note, preferred stock held up well during the
turmoil [of October 1997]. . . . During October, the Putnam fund returned
0.84% and on a year-to-date basis the fund has returned 9.76%. . . . And
the fund has managed this nifty return without holding any securities that
have ratings below investment grade."*
-- Barron's, November 17, 1997
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
13 Portfolio holdings
17 Financial statements
* For complete performance information, please refer to the summary that
begins on page 8.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Although they are technically equities, preferred stocks act more like bonds.
This anomaly worked to the advantage of Putnam Preferred Income Fund during
the fiscal year ended November 30, 1997. As the stock market continued to
experience volatility that was sharply heightened in October in the wake of a
global securities market disruption, the U.S. fixed-income market enjoyed
relative calm. In fact, it fairly boomed following the collapse of a number of
Southeast Asian currencies as investors dashed to the relative safety of U.S.
bonds.
What Congress chose not to do also worked to your fund's benefit during fiscal
1997. Legislators rejected proposals that would have curtailed two existing
tax breaks that heavily influence the preferred stocks in which your fund
invests. In the following report, Fund Manager Jeanne Mockard explains how the
global market disruption and the congressional decisions related to your
fund's performance during the fiscal year just ended. Then she offers insights
into prospects for the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 21, 1998
Report from the Fund Manager
Jeanne L. Mockard
For Putnam Preferred Income Fund, fiscal 1997 could be summarized with the
phrase "no news is good news." Federal budget proposals that might have
affected securities held by the fund were not passed, and the positioning of
the portfolio remained virtually unchanged since the fiscal year's midpoint.
This environment of nonevents proved advantageous, especially as financial
markets around the world experienced some turmoil during the latter months of
the period. For the 12 months ended November 30, 1997, the fund's class A and
class M shares provided total returns of 10.22% and 9.85%, respectively, at
net asset value. The fund's returns at public offering price were 6.67% and
7.62% for class A and class M shares, respectively. For complete performance
information, please see the summary that begins on page 8.
* FOCUS ON ADJUSTABLE-RATE PREFERREDS CONTINUED THROUGH YEAR-END
At the fiscal year's midpoint, we had increased the fund's holdings in
adjustable-rate preferred (ARP) stocks, anticipating additional increases in
short-term interest rates by the Federal Reserve Board. At that time, our
intention was to position the portfolio more defensively. In a rising rate
environment, the prices of ARPs tend to be more stable than the prices of
other types of preferred stocks held by the fund. In March 1997, the Fed had
made its first interest-rate increase in two years, a move we thought might be
the first of several. However, interest rates remained unchanged and we
maintained the fund's weighting of ARPs, choosing not to overemphasize
defensive positioning at the expense of performance potential. As the fiscal
year concluded, the Fed was still reluctant to raise U.S. interest rates as
economic turbulence in Southeast Asia was bringing significant volatility to
financial markets around the world.
* FEDERAL BUDGET PROPOSALS DO NOT PASS
Perhaps the most significant nonevent of fiscal 1997 was that federal budget
proposals to change certain types of preferred stocks did not pass. As we
reported earlier this year, President Clinton had reintroduced proposals that
would eliminate the tax deductibility of interest on some securities. Most
relevant for your fund was the proposal to reduce the dividends-received
deduction for corporations from 70% to 50%. The prospect of this legislation
being passed caused a slowdown in the overall issuance of preferred stocks.
And in typical supply/demand fashion, as issuance slowed, demand increased,
along with the value of the fund's holdings.
Meanwhile, legislation that was passed more than a year ago continued to have
a significant impact on the fund throughout fiscal 1997. In 1996, the Fed
passed regulation on trust-preferred stocks -- a new type of preferred stock
issued by banks and insurance companies. The legislation allows the capital on
trust-preferred stocks to be classified as equity on the issuers' balance
sheets. At the same time, issuers may account for the dividends paid on the
securities as a tax-deductible cost -- which is not allowed by the IRS for
other types of preferred stock. As a result, the after-tax cost to an issuer
of trust-preferred stock can be significantly lower than the cost of issuing
any other preferred stock. Among the 1997 budget proposals that did not pass
was one that would eliminate this interest deductibility for trust preferreds.
[GRAPHIC OMITTED: HORIZONTAL BAR CHART COMPARATIVE PORTFOLIO COMPOSITION]
COMPARATIVE PORTFOLIO COMPOSITION*
11/30/96 11/30/97
Perpetual preferreds 66.2% 67.4%
Adjustable-rate preferreds 21.1% 22.1%
Sinking-fund preferreds 8.1% 6.8%
Common stocks 1.8% 0.4%
Convertible securities 0.0% 0.5%
Short-term securities 4.1% 2.3%
Footnote reads:
* Based on net assets as of 11/30/96 and 11/30/97. Composition will vary over
time.
Your fund does not invest in trust-preferred stocks because they do not
qualify for the dividends-received deduction -- a very important benefit for
many fund shareholders. However, the mere existence of these new securities in
the preferred market has influenced the portfolio. As more corporations issue
trust-preferred stock, the types of securities in which your fund invests have
become more scarce -- another supply/demand factor that has boosted the value
of the fund's holdings. In this environment, we sought to hold securities in
the portfolio for as long as possible, resulting in very few changes to the
fund's holdings. In fact, during fiscal '97, portfolio turnover was at its
lowest level since the fund's inception.
Companies in the financial, industrial, and public utilities sectors are the
dominant issuers in the preferred stock market, and they represent the bulk of
the fund's portfolio at fiscal year's end. One of the rare additions to the
portfolio during the second half of the fiscal year was Du Pont preferred
stock. This large multinational chemical company has experienced several years
of solid financial performance. The company recently restructured and has made
several acquisitions in an effort to solidify its core businesses. The
availability of this stock -- which had been issued some time ago -- was an
unexpected opportunity to add another high-quality holding to the portfolio.
While this portfolio holding was 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.
* OPTIMISTIC OUTLOOK FOR FISCAL 1998
Throughout the fiscal year, your fund's holdings benefited from a relatively
strong U.S. bond market environment. Preferred stocks, although classified as
equities on corporate balance sheets, function more like bonds in the
marketplace. Throughout the fiscal year, the U.S. bond market was not nearly
as volatile as the equity market. Interest rates moved within a fairly narrow
range and bond market valuation was better than it had been in several years.
Toward the close of the period, the U.S. fixed-income market strengthened even
further as investors sought a safe haven from the stock market turmoil of late
October and November. As the fund's fiscal year concluded, the U.S. bond
market remained attractively valued relative to other major global bond
markets and inflationary pressures appeared to be low. We believe this
environment, combined with the attractive holdings in your fund's portfolio,
will continue to benefit the fund in the months ahead.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Ford Motor Co. Series B, $2.063, preferred
Automobile manufacturing
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
Merrill Lynch & Co.,Inc. Series A, $2.25 preferred
Securities brokerage and investment management services
Baltimore Gas & Electric Co, Series 93, $7.125 preferred
Gas and electric utilites
Boise Cascade Corp. Series F, $2.35 preferred
Forest products and paper manufacturing
General Motors Corp. Series B, $2.281 preferred
Automobile manufacturing
Enserch Corp. Series E, $7.00 adjustable-rate preferred
Gas piplines
New York State Electric & Gas Corp. Series B, $1.418
adjustable rate preferred
Combined utilities
These holdings represent 29.0% of the fund's net assets as of 11/30/97.
Portfolio holdings will vary over time.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 11/30/97, 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 11/30/97
Class A Class M
(inception date) (1/4/84) (4/20/95)
NAV POP NAV POP
- ------------------------------------------------------------------------------
1 year 10.22% 6.67% 9.85% 7.62%
- ------------------------------------------------------------------------------
5 years 51.43 46.51 48.54 45.57
Annual average 8.65 7.94 8.24 7.80
- ------------------------------------------------------------------------------
10 years 138.42 130.68 130.98 126.36
Annual average 9.08 8.72 8.73 8.51
- ------------------------------------------------------------------------------
Life of fund 219.15 208.78 206.17 200.05
Annual average 8.70 8.44 8.38 8.22
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED11/30/97
Merrill Lynch
Perpetual Standard & Poor's Consumer
Preferred Index 500 Index Price Index
- ------------------------------------------------------------------------------
1 year 9.45% 28.51% 1.83%
- ------------------------------------------------------------------------------
5 years 47.09 150.41 13.73
Annual average 8.02 20.15 2.61
- ------------------------------------------------------------------------------
10 years* -- 456.11 39.95
Annual average* -- 18.71 3.42
- ------------------------------------------------------------------------------
Life of fund -- 803.57 59.43
Annual average -- 17.14 3.41
- ------------------------------------------------------------------------------
* The Merrill Lynch Perpetual Preferred Index was introduced on 2/28/89.
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 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.
[GRAPHIC OMITTED: WORM CHART GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Plot Points
Date Fund's class A
shares at POP S&P 500 Index Consumer Price Index
11/87 9,675 10,000 10,000
11/88 10,352 12,325 10,425
11/89 11,491 16,132 10,910
11/90 11,430 15,568 11,594
11/91 13,471 18,734 11,941
11/92 15,234 22,190 12,305
11/93 17,224 24,432 12,634
11/94 16,464 24,686 12,972
11/95 19,271 33,802 13,310
11/96 20,930 43,216 13,744
11/97 23,068 55,611 13,995
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 $23,098 at net asset value on 11/30/97 ($22,636 at public offering
price). See first page of performance section for performance calculation
method. The Merrill Lynch Perpetual Preferred Index is not shown because it
has been in existence for less than 10 years.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 11/30/97
Class A Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12
- ------------------------------------------------------------------------------
Income $0.571910 $0.549825
- ------------------------------------------------------------------------------
Capital gains -- --
- ------------------------------------------------------------------------------
Total $0.571910 $0.549825
- ------------------------------------------------------------------------------
Share value: NAV POP NAV POP
- ------------------------------------------------------------------------------
11/30/96 $8.71 $9.00 $8.69 $8.87
- ------------------------------------------------------------------------------
11/30/97 9.00 9.30 8.97 9.15
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.22% 6.02% 5.99% 5.87%
- ------------------------------------------------------------------------------
Taxable equivalent3 8.56 8.29 8.25 8.08
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 6.00 5.80 5.75 5.64
- ------------------------------------------------------------------------------
Taxable equivalent3 8.26 7.99 7.92 7.77
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
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 12/31/97
(most recent calendar quarter)
Class A Class M
(inception date) (1/4/84) (4/20/95)
NAV POP NAV POP
- ------------------------------------------------------------------------------
1 year 10.80% 7.21% 10.55% 8.30%
- ------------------------------------------------------------------------------
5 years 51.43 46.51 48.71 45.73
Annual average 8.65 7.94 8.26 7.82
- ------------------------------------------------------------------------------
10 years 138.12 130.38 130.94 126.33
Annual average 9.06 8.70 8.73 8.51
- ------------------------------------------------------------------------------
Life of fund 221.54 211.10 208.75 202.58
Annual average 8.71 8.45 8.39 8.24
- ------------------------------------------------------------------------------
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 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 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
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 November 30, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments owned at November 30, 1997 by correspondence with
the custodian, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
January 12, 1998
Portfolio of investments owned
November 30, 1997
<TABLE>
<CAPTION>
PREFERRED STOCKS (96.3%)*
NUMBER OF SHARES VALUE
Automobiles (7.5%)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
165,079 Ford Motor Co. Ser. B, $2.063, dep. shs. cum. preferred (pfd.) $ 4,663,482
115,000 General Motors Corp. Ser. B, $2.281, dep. shs. pfd. 3,047,500
54,000 General Motors Corp. Ser. G, $2.28, pfd. 1,532,250
--------------
9,243,232
Banks (14.2%)
- ------------------------------------------------------------------------------------------------------------
43,662 BankAmerica Corp. Ser. B, $6.00, cum. Adjustable Rate
Preferred (ARP) 4,333,454
25,000 BankBoston Corp. Ser. C, $5.50, cum. ARP 2,281,250
20,239 Bankers Trust New York Corp. Ser. S, $1.938, cum. pfd. [UPSIDE DOWN DELTA] 531,274
16,000 Bankers Trust New York Corp. Ser. P, $1.875, cum. pfd. [UPSIDE DOWN DELTA] 406,000
70,000 Bankers Trust New York Corp. Ser. Q, $1.395, ARP [UPSIDE DOWN DELTA] 1,723,750
30,400 Chase Manhattan Corp. Ser. C, $2.71, cum. pfd. 938,600
50,000 Chase Manhattan Corp. Ser. B, $2.44, cum. pfd. 1,400,000
17,400 Citicorp Ser. 3, $7.00, cum. ARP 1,744,350
66,766 Fleet Financial Group, Inc. Ser. E, $2.338, dep. shs. cum. pfd. 1,861,102
52,000 Fleet Financial Group, Inc. Ser. V, $1.813, dep. shs. cum. pfd. 1,397,500
15,000 Indosuez Holdings 144A ADS $2.594, pfd. (Mexico) 418,125
11,500 Wells Fargo & Co. Ser. B, $2.75, cum. pfd. ARP 560,625
--------------
17,596,030
Chemicals (0.5%)
- ------------------------------------------------------------------------------------------------------------
7,550 du Pont (E.I.) de Nemours & Co., Ltd. Ser. B, $4.50,
cum. pfd. 615,325
Combined Utilities (15.7%)
- ------------------------------------------------------------------------------------------------------------
28,000 Baltimore Gas & Electric Co. Ser. 93, $7.125, cum. pfd. 3,164,000
15,000 Baltimore Gas & Electric Co. Ser. 95, $6.99, cum. pfd. 1,691,250
14,485 Baltimore Gas & Electric Co. Ser. 87, $6.75, cum. pfd. 1,499,198
20,100 Florida Power & Light Co. Ser. U, $6.75, pfd. 2,195,925
9,000 Jersey Central Power & Light Co. Ser. E, $7.88, cum. pfd. 924,750
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, $1.418, cum. ARP 2,769,500
60,000 Pacific Gas & Electric Co. Ser. U, $1.76, cum. pfd. 1,612,500
11,750 Public Service Electric & Gas Co. $6.92, cum. pfd. 1,279,281
23,200 Western Resources, Inc. Sinking Fund $7.58, cum. pfd. 2,366,400
--------------
19,482,804
Computer Software (0.8%)
- ------------------------------------------------------------------------------------------------------------
33,116 IBM Corp. Ser. A, $1.875, dep. shs. pfd. 914,830
Electric Utilities (19.6%)
- ------------------------------------------------------------------------------------------------------------
100,000 Alabama Power Co. Ser. 93-A, $1.318, cum. ARP 2,512,500
50,000 Arizona Public Service Co. Ser. W, $1.81, pfd. 1,275,000
20,000 Central Maine Power Co. Ser. A, $7.999, cum. pfd. 2,027,500
7,070 Commonwealth Edison Co. Ser. A, $8.4, cum. pfd. 718,489
15,000 Florida Power & Light Co. Ser. S, $6.98, cum. pfd. 1,642,500
100,000 Georgia Power Co. Ser. 93, $1.443, cum. ARP 2,512,500
80,941 Georgia Power Co. Ser. 93-2, $1.325, cum. ARP 1,962,819
50,000 Niagara Mohawk Power Corp. $2.375, cum. pfd. 1,293,750
40,000 Niagara Mohawk Power Corp. Ser. C, $1.75, cum. ARP 970,000
39,800 Niagara Mohawk Power Corp. Ser. A, $1.625, cum. ARP 915,400
8,120 Northern States Power Co. Ser. B, $5.52, cum. ARP 812,000
15,000 Peco Energy $7.48, cum. pfd. 1,627,500
10,000 PP & L, Inc. $6.33, cum. pfd. 1,058,750
10,000 PP & L, Inc. $6.125, cum. pfd. 1,056,250
18,000 PSI Energy, Inc. $1.86, cum. pfd. 459,000
18,700 Puget Sound Energy, Inc. Ser. III, $2.125, cum. pfd. 490,875
60,000 Texas Utilities Electric Co. Ser. A, $1.875, dep. shs. cum. pfd. 1,605,000
50,000 Texas Utilities Electric Co. Ser. B, $1.805, dep. shs. cum. pfd. 1,337,500
--------------
24,277,333
Finance (9.4%)
- ------------------------------------------------------------------------------------------------------------
10,000 Bear Stearns & Co. Ser. A, $2.75, cum. ARP 460,000
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. 2,565,000
36,500 MBNA Corp. Ser. A, $1.875, cum. pfd. 958,125
40,000 MBNA Corp. Ser. B, $1.573, ARP 1,070,000
116,324 Merrill Lynch & Co., Inc. Ser. A, $2.25, dep. shs. cum. pfd. 3,664,206
41,150 Morgan Stanley $3.875, dep. shs. cum. pfd. 2,242,675
--------------
11,681,656
Financial Services (1.8%)
- ------------------------------------------------------------------------------------------------------------
38,350 Household International, Inc. Ser. 92-A, $2.063, dep. shs. cum. pfd. 1,092,975
20,000 Morgan (J.P.) & Co. Inc. Ser. H, $3.313, dep. shs. cum. pfd. 1,100,000
--------------
2,192,975
Food Chains (2.1%)
- ------------------------------------------------------------------------------------------------------------
102,569 McDonalds Corp. Ser. E, $1.93, dep. shs. pfd. 2,577,046
Gas Pipelines (5.8%)
- ------------------------------------------------------------------------------------------------------------
80,000 El Paso Tennessee Pipeline Co. Ser. A, $4.125, cum. pfd. 4,420,000
28,000 Enserch Corp. Ser. E, $7.00, cum. ARP 2,810,500
--------------
7,230,500
Insurance (4.5%)
- ------------------------------------------------------------------------------------------------------------
37,000 Berkley (W.R.) Corp. Ser. A, $1.844, cum. pfd. 952,750
27,735 Provident Cos., Inc. $2.025, dep shs. cum. pfd. 700,309
50,000 Travelers Group $3.183, pfd. 2,562,500
29,000 Travelers Group Inc. Ser. M, $2.932, cum. pfd. 1,406,500
--------------
5,622,059
Metals and Mining (0.6%)
- ------------------------------------------------------------------------------------------------------------
11,050 Aluminum Co. $3.75, cum. pfd. 759,688
Natural Gas (2.0%)
- ------------------------------------------------------------------------------------------------------------
66,000 Phillips Gas Co. Ser. A, $2.33, cum. pfd. 1,650,000
31,700 Washington Natural Gas Ser. II, $1.863, cum. pfd. 871,750
--------------
2,521,750
Oil Services (4.5%)
- ------------------------------------------------------------------------------------------------------------
57,500 LASMO PLC ADS Ser. A, $2.5, cum. pfd. (United Kingdom) 1,538,125
129,051 McDermott Inc. Sinking Fund Ser. B, $2.60, cum. pfd. 4,032,844
--------------
5,570,969
Paper (3.8%)
- ------------------------------------------------------------------------------------------------------------
120,000 Boise Cascade Corp. Ser. F, $2.35, dep. shs. cum. pfd. 3,075,000
60,000 Bowater, Inc. Ser. C, $2.10, dep. shs. cum. pfd. 1,575,000
--------------
4,650,000
Publishing (1.0%)
- ------------------------------------------------------------------------------------------------------------
49,500 Newscorp Overseas Corp. Ser. A, $2.156, cum. pfd. 1,274,625
Tobacco (1.4%)
- ------------------------------------------------------------------------------------------------------------
67,300 RJR Nabisco Holding Ser. B, $2.313, dep. shs. cum. pfd. 1,707,738
Water Utilities (1.1%)
- ------------------------------------------------------------------------------------------------------------
13,500 United Water Resources, Inc. Ser. B, $7.625, pfd. 1,382,060
--------------
Total Preferred Stocks (cost $113,640,215) $119,300,620
CONVERTIBLE PREFERRED STOCKS (0.5%)* (cost $530,000)
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
20,000 Lehman Brothers Holding, Inc. $5.00, cv. pfd. $ 642,500
COMMON STOCKS (0.4%)* (cost $479,754)
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
18,000 Pacific Gas & Electric Co. $ 508,500
SHORT-TERM INVESTMENTS (2.3%)* (cost $2,827,335)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$2,826,000 Interest in $453,820,000 joint repurchase agreement dated
November 28, 1997 with JP Morgan due December 1, 1997
with respect to various U.S. Treasury obligations -- maturity
value of $2,827,335 for an effective yield of 5.67% $ 2,827,335
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $117,477,304)*** $123,278,955
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $123,889,443.
*** The aggregate identified cost on a tax basis is $117,488,553,
resulting in gross unrealized appreciation and depreciation of
$6,538,032 and $747,630, respectively, or net unrealized appreciation of
$5,790,402.
[UPSIDE DOWN DELTA] 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 intergral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $117,477,304) (Note 1) $123,278,955
- ---------------------------------------------------------------------------------------------------
Cash 104
- ---------------------------------------------------------------------------------------------------
Dividends receivable 573,684
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,024,615
- ---------------------------------------------------------------------------------------------------
Total assets 124,877,358
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 224,398
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 504,362
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 199,432
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 9,196
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 7,822
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,113
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 3,256
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 38,336
- ---------------------------------------------------------------------------------------------------
Total liabilities 987,915
- ---------------------------------------------------------------------------------------------------
Net assets $123,889,443
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $140,123,113
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (216,355)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (21,818,966)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,801,651
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $123,889,443
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($116,412,559 divided by 12,938,614 shares) $9.00
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/96.75 of $9.00)* $9.30
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($7,476,884 divided by 833,098 shares) $8.97
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/98.00 of $8.97)* $9.15
- ---------------------------------------------------------------------------------------------------
* 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
Year ended November 30, 1997
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $21,565) $ 8,484,812
- --------------------------------------------------------------------------------------------------
Interest 117,942
- --------------------------------------------------------------------------------------------------
Total investment income 8,602,754
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 786,422
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 178,004
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 10,898
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,823
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 16,635
- --------------------------------------------------------------------------------------------------
Registration fees 175
- --------------------------------------------------------------------------------------------------
Auditing 28,781
- --------------------------------------------------------------------------------------------------
Legal 6,098
- --------------------------------------------------------------------------------------------------
Other 10,786
- --------------------------------------------------------------------------------------------------
Total expenses 1,044,622
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (93,466)
- --------------------------------------------------------------------------------------------------
Net expenses 951,156
- --------------------------------------------------------------------------------------------------
Net investment income 7,651,598
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 461,151
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 3,522,848
- --------------------------------------------------------------------------------------------------
Net gain on investments 3,983,999
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $11,635,597
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended November 30
--------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 7,651,598 $ 8,169,853
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 461,151 613,554
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 3,522,848 1,099,640
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 11,635,597 9,883,047
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
- ----------------------------------------------------------------------------------------------------------------------
Class A (7,391,392) (7,929,910)
- ----------------------------------------------------------------------------------------------------------------------
Class M (411,702) (187,209)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net investment income
- ----------------------------------------------------------------------------------------------------------------------
Class A -- (58,710)
- ----------------------------------------------------------------------------------------------------------------------
Class M -- (1,386)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (2,778,276) (191,510)
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 1,054,227 1,514,322
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 122,835,216 121,320,894
- ----------------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $216,355 and $60,096,
respectively $123,889,443 $122,835,216
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights **
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended November 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 8.71 $ 8.59 $ 7.88 $ 8.81 $ 8.34
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .56 .58 .57 .56 .60
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .30 .12 .73 (.93) .47
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .86 .70 1.30 (.37) 1.07
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.57) (.58) (.59) (.56) (.60)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- --(d) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.57) (.58) (.59) (.56) (.60)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $ 9.00 $ 8.71 $ 8.59 $ 7.88 $ 8.81
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.22 8.61 17.05 (4.41) 13.07
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $116,413 $117,502 $120,591 $119,822 $144,185
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .85 .89 .90 .81 .83
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.34 6.90 6.91 6.64 6.83
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 20.46 29.51 34.76 32.84 114.53
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Apr. 20, 1995+
operating performance Year ended November 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 .54 .56 .33
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .29 .11 .46
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .83 .67 .79
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.55) (.56) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- (d) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.55) (.56) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $ 8.97 $ 8.69 $8.58
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.85 8.22 9.88*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $7,477 $5,333 $ 729
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.10 1.14 .67*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.01 6.41 3.73*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 20.46 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
November 30, 1997
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 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) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the year ended November 30, 1997, 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 November 30, 1997, the fund had a capital loss carryover of approximately
$21,808,000 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
- ------------------------------------------------------------
$14,805,000 November 30, 1998
5,262,000 November 30, 1999
208,000 November 30, 2002
1,533,000 November 30, 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 losses on wash sales transactions, non-taxable
dividends and expired capital loss carryforwards. Reclassifications are made
to the fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations. For the year ended November 30, 1997, the fund reclassified
$4,763 to increase distributions in excess of net investment income and
$10,218,205 to decrease paid-in-capital, with a decrease to accumulated net
realized loss on investments of $10,222,968. 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. 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.
Prior to March 20, 1997, any amount over $1.5 billion was based on a rate of
0.45%.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the year ended November 30, 1997, fund expenses were reduced by $93,466
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 Trustees 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 currently
limit payment by the fund at an annual rate of 0.25% of the average net assets
attributable to class M shares.
For the year ended November 30, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $25,334 and $3,343 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 year ended
November 30, 1997, Putnam Mutual Funds Corp., acting as underwriter received
no monies on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended November 30, 1997, purchases and sales of investment
securities other than short-term investments aggregated $23,998,949 and
$26,982,144, 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 November 30, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
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)
- ------------------------------------------------------------
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 income
as qualifying for the dividends received deduction for corporations.
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
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
Price Waterhouse 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
Gary N. Coburn
Vice President
William J. Curtin
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 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 36873 -- 029/867 1/98
