Putnam
Preferred
Income
Fund
SEMIANNUAL REPORT
May 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Over the past six months, bond yields have dropped while the
yield curve has flattened -- a favorable environment for preferred
income securities. The dividends-received deduction, which most of
our shareholders claim, makes the fund's after-tax yield extremely
attractive."
-- Jeanne L. Mockard, manager
Putnam Preferred Income Fund
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
16 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
While most other securities tossed about in the choppy waters
spawned by last year's Asian financial crisis, preferred stocks --
equities that act like bonds -- rode out the storm in the quiet
waters of their leeward harbor. The preferred market was
sufficiently active, however, to allow Putnam Preferred Income Fund
to deliver positive performance at net asset value for the first
half of fiscal 1998.
Although the fund does not invest in trust-preferred stocks because
they don't qualify for the corporate dividends-received tax
deduction, it was an indirect beneficiary, as steady issuance of
these stocks curtailed the supply of the traditional preferreds in
which the fund invests and drove their prices higher.
In the following report, Fund Manager Jeanne Mockard provides more
details about first-half performance and takes a look at prospects
for the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 15, 1998
Report from the Fund Manager
Jeanne L. Mockard
Throughout the six months ended May 31, 1998, the financial markets
remained abuzz with conflicting speculations about the Federal
Reserve Board's next move, the effect Asia's turmoil might have on
U.S. corporations, and the containment of inflation. The flight to
quality that has taken hold of world markets has allowed yields on
U.S. Treasury securities to trend lower across the maturity spectrum
with little difference between short- and long-term issues. Domestic
high-yield bonds and investment-grade corporate securities played an
unsuccessful game of catch-up with soaring U.S. Treasury bond
prices.
On the equity front, most stocks were able to recover quickly the
ground lost in late 1997, enabling the U.S. stock market to continue
its record-breaking climb through period's end. Amid this uncertain
environment, preferred stocks -- which are technically equity
securities, although they tend to perform in line with bonds --
maintained an even keel. Putnam Preferred Income Fund closed the
semiannual period with total returns for class A shares of 4.77% at
net asset value and 1.39% at public offering price. For complete
performance information, please refer to the summary that begins on
page 8.
* ALTERNATIVE SECURITIES KEEP SUPPLY TIGHT, DEMAND STRONG
Several factors have affected the supply/demand balance of preferred
stocks within the past year; among them were the specter of
unfavorable legislation and the increased popularity of a new type
of preferred stock classified as subordinated debt. A number of
federal budget proposals in 1997 threatened the tax deductibility of
interest paid by certain types of preferred securities. Most
relevant to the majority of fund shareholders was the recommendation
to reduce the dividends-received deduction for corporations from 70%
to 50%. The mere prospect of this legislation being approved,
although it ultimately was not, drastically reduced the volume of
new issuance.
The new kids on the block -- trust-preferred stocks -- also escaped
legislative tailoring. Issued by banks and insurance companies,
preferred stocks have the advantage of being classified as equity on
the issuer's balance sheet while allowing the issuer to account for
the dividends paid on these securities as a tax-deductible cost.
Although a proposal to eliminate this deductibility was considered
by Congress in 1997, it did not pass. Thus, the tax advantages
remain in place -- making the cost of issuing trust-preferred
securities more appealing to corporations than the issuance of
traditional preferred stock.
While your fund does not invest in trust-preferred stocks because
they do not qualify for the 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.
[GRAPHIC OMITTED: horizontal bar chart COMPARATIVE PORTFOLIO COMPOSITION]
COMPARATIVE PORTFOLIO COMPOSITION*
11/30/97 5/31/98
Perpetual preferreds 67.4% 76.9%
Adjustable-rate preferreds 22.1% 16.5%
Sinking-fund preferreds 6.8% 2.5%
Common stocks 0.4% 0.4%
Convertible securities 0.5% 2.4%
Cash and short-term securitie 2.3% 2.2%
*Based on net assets as of 11/30/97 and 5/31/98. Composition will
vary over time.
* CALL PROTECTION ACTIVELY EMPLOYED
In today's robust economy and low interest-rate environment,
corporate America is more fiscally fit than it has been in a long
time. Consequently, fewer companies are using preferred stock issues
to raise capital, another factor affecting supply. Furthermore, as
they have become more financially sound, many corporations can
afford to call in or buy back their older, higher-yielding preferred
stock.
Ford Motor Company, formerly the fund's top holding, is one such
example. Ford presented us with an attractive tender offer to buy
back its preferred stock at a price above its current market value.
The fund realized handsome profits as a result. Other top-performing
issues, many of which have been adjustable-rate preferred stocks,
have been called away, particularly in the industrial sector. Boise
Cascade and General Motors are two examples.
Calls interrupt the fund's stream of income, requiring us to
reinvest the assets in securities that may pay lower rates than
those issued years ago. 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 either are noncallable, such as perpetual-preferred
stocks, or have distant call dates.
* UNDERLYING TRENDS LEND SUPPORT TO CERTAIN SECTORS
Typically, preferred stocks are relatively well insulated from the
volatility of stock and bond markets. There are times, however, when
a current event or a prevailing trend can have an effect on how
these securities perform. Last year's proposed legislation is one
example. Similarly, the current widespread consolidation in the
financial arena and deregulation in the utility sector have helped
boost the overall performance of your fund's bank and utility
holdings. Furthermore, the changes occurring within the financial
sector combined with low interest rates have enabled many companies
to come to market with new issues more cost-effectively.
We were able to take advantage of many new opportunities and almost
doubled the fund's stake in financial securities. BankBoston, Bear
Stearns, and Donaldson, Lufkin & Jenrette are three new holdings
that seem likely to perform well over time. While the holdings
mentioned were viewed favorably at the end of the period, all
holdings are subject to review and adjustment in accordance with the
fund's investment strategy and may well vary in the future.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
El Paso Tennessee Pipeline Co. Series A, $4.125, preferred
Gas pipelines
Merrill Lynch & Co., Inc. Series A, $2.25, preferred
Investment services
IBM Corp. Series A, $1.875, preferred
Computer services and software
Anadarko Petroleum Corp. $5.46, preferred
Oil and gas
BankAmerica Corp. Series B, $6.00, adjustable-rate preferred
Financial services
Fleet Financial Group, Inc. Series E, $2.338, preferred
Financial services
McDermott Inc., Sinking Fund Series B, $2.60, preferred
Oil services
Lehman Brothers Holding, Inc., $5.00 convertible preferred
Financial services
Baltimore Gas & Electric Co., Series 93, $7.125, preferred
Gas and electric utilities
Florida Power & Light Co. Series. U, $6.75, preferred
Utilities
Footnote reads:
These holdings represent 30.0% of the fund's net assets as of 5/31/98.
Portfolio holdings will vary over time.
* OUTLOOK IS REASONABLY OPTIMISTIC
We believe your fund is well positioned as we enter the second half
of fiscal 1998. The portfolio's substantial exposure to perpetual
preferred stocks -- securities most sensitive to interest-rate
changes -- should continue to benefit the fund in today's relatively
stable rate environment. If the Fed should decide to raise rates
later in the year, the fund's sizable position in adjustable-rate
preferreds -- stocks whose dividends are reset quarterly based on
changes in the Treasury bill rate -- should help cushion the fund
against any ensuing volatility. Our plan is to continue monitoring
the landscape 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 5/31/98, 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 noncorporate investors.
TOTAL RETURN FOR PERIODS ENDED 5/31/98
Class A Class M
(inception date) (1/4/84) (4/20/95)
NAV POP NAV POP
- --------------------------------------------------------------------
6 months 4.77% 1.39% 4.66% 2.60%
- --------------------------------------------------------------------
1 year 11.19 7.62 10.82 8.58
- --------------------------------------------------------------------
5 years 46.59 41.82 43.83 40.95
Annual average 7.95 7.24 7.54 7.11
- --------------------------------------------------------------------
10 years 136.63 128.95 129.26 124.67
Annual average 9.00 8.64 8.65 8.43
- --------------------------------------------------------------------
Life of fund 234.37 223.51 220.42 214.01
Annual average 8.74 8.49 8.42 8.27
- --------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/98
Merrill Lynch
Perpetual Standard &
Preferred Poor's Consumer
Index* 500 Index Price Index
- --------------------------------------------------------------------
6 months 3.12% 15.06% 0.80%
- --------------------------------------------------------------------
1 year 8.77 30.68 1.69
- --------------------------------------------------------------------
5 years 42.57 172.19 12.90
Annual average 7.35 22.18 2.46
- --------------------------------------------------------------------
10 years -- 451.65 38.55
Annual average -- 18.62 3.32
- --------------------------------------------------------------------
Life of fund -- 939.62 60.71
Annual average -- 17.64 3.35
- --------------------------------------------------------------------
*The Merrill Lynch Perpetual Preferred Index was introduced on
2/28/89.
Past performance is not indicative 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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 5/31/98
Class A Class M
- --------------------------------------------------------------------
Distributions (number) 6 6
- --------------------------------------------------------------------
Income $0.274586 $0.263379
- --------------------------------------------------------------------
Capital gains -- --
- --------------------------------------------------------------------
Total $0.274586 $0.263379
- --------------------------------------------------------------------
Share value: NAV POP NAV POP
- --------------------------------------------------------------------
11/30/97 $9.00 $9.30 $8.97 $9.15
- --------------------------------------------------------------------
5/31/98 9.15 9.46 9.12 9.31
- --------------------------------------------------------------------
Current return (end of period)
- --------------------------------------------------------------------
Current dividend rate1 6.12% 5.92% 5.89% 5.77%
- --------------------------------------------------------------------
Taxable equivalent3 8.93 8.64 8.59 8.42
- --------------------------------------------------------------------
Current 30-day SEC yield2 5.75 5.56 5.49 5.38
- --------------------------------------------------------------------
Taxable equivalent3 8.39 8.11 8.01 7.85
- --------------------------------------------------------------------
1Income portion of most recent distribution, annualized and
divided by NAV or POP at end of period.
2Based only on investment income, calculated using SEC guidelines.
3The taxable equivalent examples in this table show the return
that a corporation taxed at the 35% Federal corporate tax rate
would have to earn from a non tax-advantaged investment to produce
an after-tax return equal to that of the fund's, assuming 100% of
distributions qualify for the dividend-received deduction.
TOTAL RETURN FOR PERIODS ENDED 6/30/98
(most recent calendar quarter)
Class A Class M
(inception date) (1/4/84) (4/20/95)
NAV POP NAV POP
- --------------------------------------------------------------------
6 months 5.11% 1.73% 4.89% 2.83%
- --------------------------------------------------------------------
1 year 10.79 7.15 10.43 8.22
- --------------------------------------------------------------------
5 years 46.67 41.90 43.91 41.03
Annual average 7.96 7.25 7.55 7.12
- --------------------------------------------------------------------
10 years 140.39 132.58 132.92 128.26
Annual average 9.17 8.81 8.82 8.60
- --------------------------------------------------------------------
Life of fund 237.99 227.01 223.83 217.36
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.
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Portfolio of investments owned
May 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCKS (95.9%) (a)
NUMBER OF SHARES VALUE
Automobiles (4.3%)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
115,000 General Motors Corp. Ser. B, $2.281 dep. shs.
cum. preferred (pfd.) $ 3,061,875
99,000 General Motors Corp. Ser. G, $2.28 875
shs. cum. pfd. 2,809,125
--------------
5,871,000
Banks (14.7%)
- ---------------------------------------------------------------------------------------------------------
38,662 BankAmerica Corp. Ser. B, $6.00 cum. Adjustable
Rate Preferred (ARP) 3,861,367
25,000 BankBoston Corp. Ser. C, $5.50 cum. ARP 2,437,500
20,239 Bankers Trust New York Corp. Ser. S,
$1.938 cum. pfd. (CUS) 526,214
16,000 Bankers Trust New York Corp. Ser. P, $1.875 cum. pfd. (CUS) 402,000
70,000 Bankers Trust New York Corp. Ser. Q,
$1.269 cum. dep. shs. ARP (CUS) 1,715,000
67,600 Chase Manhattan Corp. Ser. C, $2.71 cum. pfd. 2,087,150
75,000 Chase Manhattan Corp. Ser. B, $2.44 cum. pfd. 2,071,875
10,000 Fleet Financial Group, Inc. Ser. VI, $3.375 cum.pfd. 585,000
133,766 Fleet Financial Group, Inc. Ser. E, $2.338 dep. shs. cum. pfd. 3,728,727
52,000 Fleet Financial Group, Inc. Ser. V, $1.813 dep. shs. cum. pfd. 1,443,000
15,000 Indosuez Holdings 144A $2.594 pfd. ADS (Mexico) 431,250
11,500 Wells Fargo & Co. Ser. B, $2.75 cum. pfd. ARP 575,719
--------------
19,864,802
Chemicals (0.8%)
- ---------------------------------------------------------------------------------------------------------
12,750 du Pont (E.I.) de Nemours & Co., Ltd. Ser. B,
$4.50 cum. pfd. 1,086,938
Combined Utilities (13.7%)
- ---------------------------------------------------------------------------------------------------------
28,000 Baltimore Gas & Electric Co. Ser. 93, $7.125 cum. pfd. 3,216,500
15,000 Baltimore Gas & Electric Co. Ser. 95, $6.99 cum. pfd. 1,725,000
13,469 Baltimore Gas & Electric Co. Ser. 87, $6.75 cum. pfd. 1,357,002
15,000 Florida Power & Light Co. Ser. S, $6.98 cum. pfd. 1,706,250
28,100 Florida Power & Light Co. Ser. U, $6.75 cum. pfd. 3,178,813
9,000 Jersey Central Power & Light Co. Ser. E, $7.88 cum. pfd. 943,875
116,000 New York State Electric & Gas Corp. Ser. B,
$1.243 cum. ARP 2,943,500
76,000 Pacific Gas & Electric Co. Ser. U, $1.76 cum. pfd. 2,099,500
11,750 Public Service Electric & Gas Co. $6.92 cum. pfd. 1,289,563
--------------
18,460,003
Computer Software (3.3%)
- ---------------------------------------------------------------------------------------------------------
160,345 IBM Corp. Ser. A, $1.875 dep. shs. pfd. 4,429,531
Consumer Services (2.2%)
- ---------------------------------------------------------------------------------------------------------
99,373 AMERCO Ser. A, $2.125 cum.pfd. 2,583,698
5,000 Western Resources, Inc. $4.25 cum.pfd. 343,750
--------------
2,927,448
Electric Utilities (14.4)
- ---------------------------------------------------------------------------------------------------------
125,200 Alabama Power Co. Ser. 93, Class A, $1.19 cum. ARP 3,145,650
50,000 Arizona Public Service Co. Ser. W, $1.813 pfd. 1,262,500
20,000 Central Maine Power Co. Ser. A, $7.999 cum. pfd. 1,997,500
7,070 Commonwealth Edison Co. Ser. A, $8.40 cum. pfd. 724,675
80,941 Georgia Power Co. Ser. 93-2, Class A, $1.20 cum. ARP 2,033,643
50,000 Niagara Mohawk Power Corp. $2.375 cum. pfd. 1,343,750
40,000 Niagara Mohawk Power Corp. Ser. C, $1.75 cum. ARP 1,010,000
39,800 Niagara Mohawk Power Corp. Ser. A, $1.625 cum. ARP 945,250
17,500 Peco Energy $7.48 cum. pfd. 1,828,750
10,000 PP & L, Inc. $6.33 cum. pfd. 1,067,500
10,000 PP & L, Inc. $6.125 cum. pfd. 1,060,000
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. 1,356,250
--------------
19,380,468
Financial Services (19.4%)
- ---------------------------------------------------------------------------------------------------------
50,000 Bear Stearns & Co. Ser. E, $3.075 cum. pfd. 2,681,250
30,000 Bear Stearns & Co. Ser. F, $2.86 cum. pfd. 1,531,875
10,000 Bear Stearns & Co. Ser. A, $2.75 cum. ARP 501,250
10,000 Donaldson, Lufkin & Jenrette, Inc. Ser. B, $2.65 cum. pfd. 511,250
95,000 Heller Financial Inc. Ser. A, $2.031 cum. pfd. 2,541,250
65,850 Household International, Inc. Ser. 92-A, $2.063
dep. shs. cum. pfd. 1,942,575
20,000 Lehman Brothers Holding, Inc. Ser. C, $2.97 pfd. 1,022,500
75,000 MBNA Corp. Ser. B, $1.462 ARP 1,950,000
36,500 MBNA Corp. Ser. A, $1.875 cum. pfd. 980,938
171,824 Merrill Lynch & Co., Inc. Ser. A, $2.25 dep. shs. cum. pfd. 5,476,890
12,259 Morgan (J.P.) & Co., Inc. Ser. A, $5.00 cum. ARP 1,170,730
56,000 Morgan (J.P.) & Co. Inc. Ser. H, $3.313 dep. shs. cum. pfd. 3,073,000
50,150 Morgan Stanley $3.875 dep. shs. cum. pfd. 2,758,250
--------------
26,141,758
Gas Pipelines (4.4)
- ---------------------------------------------------------------------------------------------------------
105,000 El Paso Tennessee Pipeline Co. Ser. A, $4.125 pfd. 5,906,250
Insurance (3.7%)
- ---------------------------------------------------------------------------------------------------------
50,000 Travelers Group $3.183 pfd. 2,731,250
29,000 Travelers Group Inc. Ser. M, $2.932 cum. pfd. 1,500,750
25,000 Travelers Group Inc. Ser. K, $2.10 cum.pfd. 696,875
--------------
4,928,875
Metals and Mining (0.6%)
- ---------------------------------------------------------------------------------------------------------
11,050 Aluminum Co. $3.75 cum. pfd. 784,550
Natural Gas (1.0%)
- ---------------------------------------------------------------------------------------------------------
18,700 Puget Sound Energy, Inc. Ser. III, $2.125 pfd. 493,213
31,700 Puget Sound Energy, Inc. Ser. II, $1.862 cum. pfd. 871,750
--------------
1,364,963
Oil and Gas (5.3%)
- ---------------------------------------------------------------------------------------------------------
41,000 Anadarko Petroleum Corp. $5.46 dep. shs. pfd. 3,956,500
48,000 ENSERCH Corp. Ser. F, $1.279 cum.pfd. 1,155,360
20,000 Pennzoil Co. $6.49 cum.pfd. 2,000,000
--------------
7,111,860
Oil Services (3.6%)
- ---------------------------------------------------------------------------------------------------------
57,500 LASMO PLC ADS Ser. A, $2.50 cum. pfd.
(United Kingdom) 1,538,125
109,432 McDermott Inc. Sinking Fund Ser. B, $2.60 cum. pfd. 3,378,713
--------------
4,916,838
Paper (1.1%)
- ---------------------------------------------------------------------------------------------------------
60,000 Bowater, Inc. Ser. C, $2.10 dep. shs. cum. pfd. 1,530,000
Publishing (0.9%)
- ---------------------------------------------------------------------------------------------------------
49,500 Newscorp Overseas Corp. Ser. A, $2.156 cum. pfd. 1,243,688
Tobacco (1.3%)
- ---------------------------------------------------------------------------------------------------------
67,300 RJR Nabisco Holding Ser. B, $2.313 dep. shs. cum. pfd. 1,716,150
Utilities (0.2%)
- ---------------------------------------------------------------------------------------------------------
2,500 Pacificorp $7.70 cum.pfd. 271,563
Water Utilities (1.0%)
- ---------------------------------------------------------------------------------------------------------
13,500 United Water Resources, Inc. Ser. B, $7.625 cum. pfd. 1,387,125
--------------
Total Preferred Stocks (cost $123,388,216) $ 129,323,810
CONVERTIBLE PREFERRED STOCKS (2.4%) (a) ($3,035,745)
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
92,500 Lehman Brothers Holding, Inc. $5.00 cv. pfd. $ 3,249,063
COMMON STOCKS (0.4%) (a) (cost $479,754)
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
18,000 Pacific Gas & Electric Co. $ 567,000
SHORT-TERM INVESTMENTS (2.2%) (a) (cost $3,001,380)
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
$ 3,000,000 Interest in $700,000,000 joint repurchase agreement
dated May 29, 1998 with Morgan Stanley & Co.,
Inc. June 1, 1998 with respect to various
U.S. Treasury obligations -- maturity value of
$3,001,380 for an effective yield of 5.52% $ 3,001,380
- ---------------------------------------------------------------------------------------------------------
Total Investments (cost $129,905,095) (b) $ 136,141,253
- ---------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $134,807,676.
(b) The aggregate identified cost on a tax basis is $129,916,314
resulting in gross unrealized appreciation and depreciation of
$6,745,375 and $520,436, respectively, or net unrealized
appreciation of $6,224,939.
(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
May 31, 1998 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $129,905,095) (Note 1) $136,141,253
- ---------------------------------------------------------------------------------------------------
Cash 577,272
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 433,997
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 250,260
- ---------------------------------------------------------------------------------------------------
Total assets 137,402,782
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 193,221
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 2,000,000
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 115,789
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 217,362
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 23,179
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,946
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,059
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 4,564
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 30,986
- ---------------------------------------------------------------------------------------------------
Total liabilities 2,595,106
- ---------------------------------------------------------------------------------------------------
Net assets $134,807,676
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) 148,946,936
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (291,644)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (20,083,774)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 6,236,158
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $134,807,676
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($123,702,606 divided by 13,524,727 shares) $9.15
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/96.75 of $9.15)* $9.46
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($11,105,070 divided by 1,217,333 shares) $9.12
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/98.00 of $9.12)* $9.31
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $100,000.
On sales of $100,000 or more and group sales the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended May 31, 1998 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $10,781) $4,229,532
- --------------------------------------------------------------------------------------------------
Interest 168,413
- --------------------------------------------------------------------------------------------------
Total investment income 4,397,945
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 421,346
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 102,754
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 5,449
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,138
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 11,907
- --------------------------------------------------------------------------------------------------
Reports to shareholders 15,841
- --------------------------------------------------------------------------------------------------
Registration fees 2,749
- --------------------------------------------------------------------------------------------------
Auditing 17,642
- --------------------------------------------------------------------------------------------------
Legal 2,635
- --------------------------------------------------------------------------------------------------
Postage 271
- --------------------------------------------------------------------------------------------------
Other 1,402
- --------------------------------------------------------------------------------------------------
Total expenses 585,134
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (38,428)
- --------------------------------------------------------------------------------------------------
Net expenses 546,706
- --------------------------------------------------------------------------------------------------
Net investment income 3,851,239
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,735,192
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 434,507
- --------------------------------------------------------------------------------------------------
Net gain on investments 2,169,699
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $6,020,938
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
May 31 November 30
1998* 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 3,851,239 $ 7,651,598
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 1,735,192 461,151
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 434,507 3,522,848
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,020,938 11,635,597
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (3,651,794) (7,391,392)
- ----------------------------------------------------------------------------------------------------------------------
Class M (274,734) (411,702)
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) 8,823,823 (2,778,276)
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 10,918,233 1,054,227
- ----------------------------------------------------------------------------------------------------------------------
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 123,889,443 122,835,216
- ----------------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income of $291,644 and $216,355, respectively) $134,807,676 $123,889,443
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights **
(For a share outstanding throughout the period)
CLASS A
- ----------------------------------------------------------------------------------------------------
Six months
ended
Per-share May 31
operating performance (Unaudited) Year ended November 30
- ----------------------------------------------------------------------------------------------------
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 .27 .56 .58 .57 .56 .60
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .15 .30 .12 .73 (.93) .47
- ----------------------------------------------------------------------------------------------------
Total from
investment operations .42 .86 .70 1.30 (.37) 1.07
- ----------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------
From net
investment income (.27) (.57) (.58) (.59) (.56) (.60)
- ----------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (d) -- -- --
- ----------------------------------------------------------------------------------------------------
Total distributions (.27) (.57) (.58) (.59) (.56) (.60)
- ----------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.15 $9.00 $8.71 $8.59 $7.88 $8.81
- ----------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.77* 10.22 8.61 17.05 (4.41) 13.07
- ----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $123,703 $116,413 $117,502 $120,591 $119,822 $144,185
- ----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .44* .85 .89 .90 .81 .83
- ----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.98* 6.34 6.90 6.91 6.64 6.83
- ----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 23.31* 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)
- ----------------------------------------------------------------------------------------------------
Six months For the
ended period
Per-share May 31 Year ended Apr. 20, 1995+
operating performance (Unaudited) November 30 to Nov. 30
- ----------------------------------------------------------------------------------------------------
1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.97 $8.69 $8.58 $8.12
- ----------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------
Net investment income .26 .54 .56 .33
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .15 .29 .11 .46
- ----------------------------------------------------------------------------------------------------
Total from
investment operations .41 .83 .67 .79
- ----------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------
From net
investment income (.26) (.55) (.56) (.33)
- ----------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (d) --
- ----------------------------------------------------------------------------------------------------
Total distributions (.26) (.55) (.56) (.33)
- ----------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.12 $8.97 $8.69 $8.58
- ----------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.66* 9.85 8.22 9.88*
- ----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $11,105 $7,477 $5,333 $729
- ----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .57* 1.10 1.14 .67*
- ----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.76* 6.01 6.41 3.73*
- ----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 23.31* 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
May 31, 1998 (Unaudited)
Note 1
Significant accounting policies
Putnam Preferred Income Fund (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-
end management investment company. The fund seeks high after-tax
income for corporate shareholders and current income for all
investors with minimum fluctuations in principal.
The fund offers class A and class M shares. Class A shares are sold
with a maximum front-end sales charge of 3.25%. Class M shares are
sold with a maximum front-end sales charge of 2.00% and pay an
ongoing distribution fee.
Expenses of the fund are borne pro-rata by the holders of 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 six months ended May 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 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. Reclassifications are made
to the fund's capital accounts to reflect income and gains available
for distribution (or available capital loss carryovers) under income
tax regulations.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets
of the fund. Such fee is based on the following annual rates: 0.65%
of the 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 six months ended May 31, 1998, fund expenses were reduced by
$38,428 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
$430 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
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 payment by the fund to Putnam Mutual Funds Corp. at an annual
rate of up to 1.00% of the average net assets. The Trustees
currently limit payment by the fund to an annual rate of 0.25% of
the average net assets attributable to class M shares.
For the six months ended May 31, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $17,180 and $3,160
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 six months ended May 31, 1998, Putnam
Mutual Funds Corp., acting as underwriter received no monies on
class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended May 31, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$40,078,563 and $29,560,010, respectively. There were no purchases
and sales of U.S. government obligations. In determining the net
gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Note 4
Capital shares
At May 31, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were
as follows:
Six months
ended May 31, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,495,314 $13,604,580
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 276,122 2,516,704
- ------------------------------------------------------------
1,771,436 16,121,284
Shares
repurchased (1,185,323) (10,792,193)
- ------------------------------------------------------------
Net increase 586,113 $ 5,329,091
- ------------------------------------------------------------
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)
- ------------------------------------------------------------
Six months
ended May 31, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 518,266 $4,713,905
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 24,804 225,537
- ------------------------------------------------------------
543,070 4,939,442
Shares
repurchased (158,835) (1,444,710)
- ------------------------------------------------------------
Net increase 384,235 $3,494,732
- ------------------------------------------------------------
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
- ------------------------------------------------------------
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Strategic Income Fund *
High Quality Bond Fund +
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Money Market Fund **
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that
spread your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
** An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed to
maintain a price of $1.00 per share, although there is no
assurance that this price will be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to
obtain a prospectus for any Putnam fund. It contains more complete
information, including charges and expenses. Please read it
carefully before you invest or send money.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
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
- --------------------
SA037-43774 029/867 7/98
