Putnam
Preferred
Income
Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
1-31-99
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Almost all preferreds yield more than the common stocks of the same
companies, but depending on convertibility and other features, they might
yield more or less than bonds. If your goal is to maximize income, then a
nonconvertible preferred might be the appropriate choice."
-- International Herald Tribune, January 9, 1999
* "Putnam Investments has an edge in the preferred markets because we are
one of the biggest players and have access to extensive research."
-- Jeanne L. Mockard, manager
Putnam Preferred Income Fund
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
16 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Preferred Income Fund's performance during the first half of fiscal
1999 reflects the turbulence that continues to plague most financial
markets these days. However, timely maneuvers on both the buy and sell
sides enabled the fund to sustain its steady stream of current income.
These moves reflect Fund Manager Jeanne Mockard's expertise, backed by
Putnam's extensive credit research capability.
The fiscal year's second half began with a renewal of market declines in
February, but Jeanne believes this is just more of the volatility that of
late seems to have become business as usual.
Jeanne reviews fiscal 1999 performance to date in the following report and
takes a generally optimistic view of prospects for the second half, based
mainly on continued economic strength and low inflation, consumer
willingness to spend, and an accommodative Federal Reserve Board policy on
interest rates.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
March 17, 1999
Report from the Fund Manager
Jeanne L. Mockard
The countervailing performance of stock and bond markets during the six
months ended January 31, 1999, largely resulted in a wash for Putnam
Preferred Income Fund in terms of performance for the first half of the
fund's current fiscal year. Its class A shares, at net asset value, ended
where they began; at public offering price, results were slightly
negative. More comprehensive performance results are shown in the tables
starting on page 9.
Because they are fixed-income securities, preferred stocks are generally
more sensitive to changing interest rates than to equity prices. Since
your fund's concentration in perpetual preferreds gives the portfolio a
relatively long duration, it benefited from last fall's bond price rally.
But stock market trends also affect the performance of preferred
securities, since prices of preferreds tend to reflect the performance of
the issuing companies' underlying common stock -- and the market
environment during the period was marked by continued turbulence. The
stock market first plunged and then made a rapid recovery. Three separate
cuts by the Federal Reserve Board reduced short-term interest rates by
three quarters of a percentage point also prompting the rally in bond
prices.
* DIFFERENT TYPES OF PREFERREDS PROVIDE INVESTMENT FLEXIBILITY
In addition to shifting its industry emphasis, your fund can also change
its weighting among different types of preferred stocks. Perpetual
preferreds offer the best opportunity when interest rates are trending
down because they offer a fixed rate of return with no maturity date. If
interest rates seem likely to head back up, we can adopt a more defensive
strategy by increasing the fund's emphasis on adjustable-rate preferreds
(ARPs). These tend to be relatively stable in price because the rates they
pay are adjusted at specified intervals (usually six months). A third
type, sinking fund preferred stocks, or sinkers, also have fixed rates,
but they are retired on a predetermined schedule. As such, they behave
somewhat like intermediate-term bonds and are appropriate when pursuing a
neutral strategy. As the fund entered the second half of fiscal 1999,
portfolio emphasis remained on perpetual preferreds.
* MONITORING CALLS IS CRUCIAL WHEN INTEREST RATES DECLINE
Companies typically issue perpetual rate preferreds when they wish to
raise capital without increasing debt levels or issuing new equity. If
conditions improve -- externally as a result of falling interest rates or
internally as profits rise and balance sheets strengthen -- companies are
likely to call in their preferreds as soon as their terms allow.
Consequently, we continually look forward at paper that may be about to be
called within the next several months and search for new buying
opportunities. Our goal is to stagger trades as each call date approaches,
selling the securities before they are called and redeploying assets in
securities with more distant call dates to avoid interrupting the fund's
income stream. Boise Cascade, Ford, and General Motors, discussed in our
last report to shareholders, were situations in which we reduced the
fund's holdings in anticipation of calls. In such cases, we often reinvest
proceeds in other preferreds issued by the same company, but we also look
for attractive new markets.
[GRAPHIC OMITTED: TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Electric utilities 24.0%
Finance 14.1%
Financial services 12.9%
Combined utilities 10.9%
Banks 10.0%
Footnote reads:
*Based on net assets as of 1/31/99. Holdings will vary over time.
* NEW OPPORTUNITIES FOR INDUSTRY DIVERSIFICATION
Historically companies in the financial, industrial, and public utilities
sectors have been the primary issuers of preferred securities, and these
kinds of companies continue to make up a large percentage of the fund's
portfolio. More recently companies in other industries have also begun to
issue preferreds to raise capital under challenging conditions. For
example, IBM issued preferred stock when it was experiencing difficulties,
resulting in a rewarding opportunity. Recently oil and gas companies also
began issuing preferred stock.
Unseasonably warm weather in the Northeast and Midwest has swelled oil and
gas supplies and hurt prices. In addition, financial crises overseas
dampened worldwide demand, especially in formerly fast-growing Asian
markets. As a result, several solid, well-managed energy companies issued
preferred stock -- a welcome change, since new issuance has slowed in
recent years.
One addition to the portfolio is Anadarko Petroleum Corp., one of the
world's largest independent oil and gas companies. Apache Corporation and
PennzEnergy present similar situations: strong, well-managed companies
that should be well positioned when the industry recovers. Although these
holdings, as well as other current holdings mentioned in this report, were
viewed favorably at the end of the reporting period, all are subject to
review and adjustment in accordance with the fund's investment strategy
and may vary in the future.
* PUTNAM'S EXPERTISE AND SIZE WORK TO SHAREHOLDERS' ADVANTAGE
Putnam Investments has an edge in the preferred markets because we are one
of the biggest players and have access to extensive research. This
combination of knowledge and buying power is invaluable in helping us
identify and capture opportunities when companies come to the preferred
markets for capital.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
El Paso Tennessee Pipeline Co. Ser. A, $4.125, cum. pfd.
Gas pipelines
Merrill Lynch & Co., Inc. Ser. A, $2.25, dep. shs. cum. pfd.
Finance
IBM Corp. Ser. A, $1.875, dep. shs. pfd.
Computer software
Baltimore Gas & Electric Co. Ser. 93, $7.125, cum. pfd.
Combined utilities
Chase Manhattan Corp. Ser. C, $2.71, cum. pfd.
Banks
Fleet Financial Group, Inc., Ser. E, $2.338, dep. shs. cum. pfd.
Banks
Anadarko Petroleum Corp. $5.46, dep. shs. pfd.
Oil and gas
Alabama Power Co., $1.30, pfd.
Electric utilities
J.P. Morgan & Co., Inc. Ser. H, $3.313, dep. shs. cum. pfd.
Financial services
Florida Power & Light Co. Ser. U, $6.75, cum. pfd.
Combined utilities
Footnote reads:
These holdings represent 33.6% of the fund's net assets as of 1/31/99.
Portfolio holdings will vary over time.
Another advantage of our leadership in this market is that we are
sometimes offered blocks of securities before they are offered to other
investors. For example, an insurance company might decide it no longer has
the resources to manage a portfolio of preferreds and call us to offer it
for purchase. We are often able to capitalize on such situations because
we know the individual issuers and can decide quickly whether we want to
take advantage of new opportunities.
These advantages help us maintain your fund's 100% dividends-received-
deduction (DRD) status for federal income tax purposes. Other companies
operate on the premise that in this limited market, they will do the best
they can to seek qualified dividends. We are able to hold paper for the
required period (or longer), and most of the holdings are domestic. We make
sure the income the fund receives from the few foreign securities in the
portfolio does not exceed our expenses so that all the dividend income is
qualified.
* PREFERRED MARKETS APPEAR CALMER AFTER RECENT VOLATILITY
Conditions in the preferred markets have improved since our last
shareholder report. Now that the threat of legislative action is gone and
the tax advantages to corporations of preferred stock dividends are
secure, those banks and other issuers that had hurried to market with new
trust preferreds now find themselves with capital adequate for their
needs. The result has been a slowdown in the pace of new issues that
together with the decline in interest rates, has tipped the supply and
demand equation in the fund's favor.
Meanwhile, the string of international problems that had set off the stock
market volatility began to look less menacing after a turbulent autumn.
This and the Fed's willingness to intervene to stabilize the U.S. economy
have contributed to a calmer atmosphere in the fixed-income markets.
Looking ahead, we anticipate a slowing but still strong economy supported
by the Fed and by consumers' willingness to spend. Oil and gas prices
continue to be low, but the quality companies represented in the fund's
portfolio seem well positioned to benefit in a gradually improving world
economy. Consequently, we enter the second half of the fund's fiscal year
with a sense of optimism about the current market environment and the
long-term potential of the fund's holdings.
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 1/31/99, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Preferred Income Fund seeks a high level of income that qualifies for the
70% corporate dividends-received deduction for federal income-tax
purposes. The dividends-received deduction is not available to
non-corporate investors.
TOTAL RETURN FOR PERIODS ENDED 1/31/99
Class A Class M
(inception date) (1/4/84) (4/20/95)
NAV POP NAV POP
- ------------------------------------------------------------------------------
6 months 0.00% -3.27% -0.01% -2.05%
- ------------------------------------------------------------------------------
1 year 3.22 -0.16 2.98 0.88
- ------------------------------------------------------------------------------
5 years 40.16 35.61 37.66 34.92
Annual average 6.99 6.28 6.60 6.17
- ------------------------------------------------------------------------------
10 years 131.01 123.50 124.08 119.61
Annual average 8.73 8.37 8.40 8.18
- ------------------------------------------------------------------------------
Life of fund 238.44 227.45 224.16 217.68
Annual average 8.43 8.19 8.12 7.97
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/99
Merrill Lynch
Perpetual Standard &
Preferred Poor's Consumer
Index 500 Index Price Index
- ------------------------------------------------------------------------------
6 months 3.80% 15.02% 0.86%
- ------------------------------------------------------------------------------
1 year 6.28 32.49 1.86
- ------------------------------------------------------------------------------
5 years 41.55 196.13 12.59
Annual average 7.20 24.25 2.40
- ------------------------------------------------------------------------------
10 years N/A* 462.67 35.92
Annual average N/A* 18.86 3.12
- ------------------------------------------------------------------------------
Life of fund N/A* 1131.17 62.49
Annual average N/A* 18.11 3.27
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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
its 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.
*The Merrill Lynch Perpetual Preferred Index was introduced on 3/28/89.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 1/31/99
Class A Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6
- ------------------------------------------------------------------------------
Income $0.304654 $0.293499
- ------------------------------------------------------------------------------
Capital gains -- --
- ------------------------------------------------------------------------------
Total $0.304654 $0.293499
- ------------------------------------------------------------------------------
Share value: NAV POP NAV POP
- ------------------------------------------------------------------------------
7/31/98 $9.16 $9.47 $9.13 $9.32
- ------------------------------------------------------------------------------
1/31/99 8.86 9.16 8.84 9.02
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.32% 5.96% 6.09% 5.87%
- ------------------------------------------------------------------------------
Taxable equivalent3 9.72 9.16 9.36 9.03
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 5.85 5.57 5.59 5.41
- ------------------------------------------------------------------------------
Taxable equivalent3 9.00 8.57 8.60 8.32
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based only on investment income, calculated using SEC guidelines.
3 The taxable equivalent examples in this table show the return that a
corporation taxed at the 35% Federal corporate tax rate would have to earn
from a non tax-advantaged investment to produce an after-tax return equal
to that of the fund's, assuming 100% of distributions qualify for the
dividend-received deduction.
TOTAL RETURN FOR PERIODS ENDED 12/31/98
(most recent calendar quarter)
Class A Class M
(inception date) (1/4/84) (4/20/95)
NAV POP NAV POP
- ------------------------------------------------------------------------------
6 months -0.14% -3.40% -0.27% -2.29%
- ------------------------------------------------------------------------------
1 year 4.99 1.60 4.62 2.57
- ------------------------------------------------------------------------------
5 years 41.93 37.32 39.24 36.46
Annual average 7.25 6.55 6.84 6.41
- ------------------------------------------------------------------------------
10 years 135.65 127.98 128.32 123.75
Annual average 8.95 8.59 8.61 8.39
- ------------------------------------------------------------------------------
Life of fund 237.57 226.61 223.01 216.56
Annual average 8.45 8.22 8.14 7.99
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. 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 summary for method of performance calculations.
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.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
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.
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
Global Governmental Income Trust
High Quality Bond Fund +
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic 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.
<TABLE>
<CAPTION>
Portfolio of investments owned
January 31, 1999 (Unaudited)
PREFERRED STOCKS (96.0%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Automobiles (3.2%)
- --------------------------------------------------------------------------------------------------------------------------
40,600 Ford Motor Co. Ser. B, $2.063, dep. shs. cum. pfd. $ 1,146,950
109,000 General Motors Corp. Ser. G, $2.28, pfd. 3,092,875
--------------
4,239,825
Banks (10.0%)
- --------------------------------------------------------------------------------------------------------------------------
20,239 Bankers Trust New York Corp. Ser. S, $1.938, cum. pfd. (CUS) 513,565
70,000 Bankers Trust New York Corp. Ser. R, $1.29, cum. pfd. (CUS) 1,618,750
11,600 Chase Manhattan Corp. Ser. G, $2.74, cum. pfd. 330,600
144,700 Chase Manhattan Corp. Ser. C, $2.71, cum. pfd. 4,286,738
54,200 Chase Manhattan Corp. Ser. B, $2.44, cum. pfd. 1,422,750
10,000 Fleet Financial Group, Inc. Ser. VI, $3.375, cum. pfd. 557,500
144,366 Fleet Financial Group, Inc. Ser. E, $2.338, dep. shs. cum. pfd. 3,897,882
15,000 Indosuez Holdings 144A $2.594, ADS pfd. (Mexico) 406,875
--------------
13,034,660
Chemicals (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
12,750 du Pont (E.I.) de Nemours & Co., Ltd. Ser. B, $4.50, cum. pfd. 1,091,719
10,000 du Pont (E.I.) de Nemours & Co., Ltd. Ser. A, $3.50, cum. pfd. 737,500
--------------
1,829,219
Combined Utilities (10.9%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Baltimore Gas & Electric Co. Ser. 93, $7.125, cum. pfd. 4,550,000
15,000 Baltimore Gas & Electric Co. Ser. 95, $6.99, cum. pfd. 1,736,250
28,100 Florida Power & Light Co. Ser. U, $6.75, cum. pfd. 3,168,275
9,000 Jersey Central Power & Light Co. Ser. E, $7.88, cum. pfd. 897,750
76,000 Pacific Gas & Electric Co. Ser. U, $1.76, cum. pfd. 2,052,000
20,000 Pacific Gas & Electric $1.643, cum. pfd. 545,000
11,750 Public Service Electric & Gas Co. $6.92, cum. pfd. 1,336,563
--------------
14,285,838
Computer Software (3.7%)
- --------------------------------------------------------------------------------------------------------------------------
178,345 IBM Corp. Ser. A, $1.875, dep. shs. pfd. 4,859,901
Consumer Services (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
99,373 AMERCO Ser. A, $2.125, cum. pfd. 2,583,698
Electric Utilities (24.0%)
- --------------------------------------------------------------------------------------------------------------------------
135,100 Alabama Power Co. $1.30, pfd. 3,411,270
20,000 Central Maine Power Co. Ser. A, $7.999, cum. pfd. 2,042,500
5,000 Consolidated Edison Co. of New York, Inc. Ser. J, $6.125,
cum. pfd. 513,750
5,416 Duke Energy Corp. Ser. Y, $7.04, cum. pfd. 613,362
12,000 Duke Energy Corp. Ser. 92-D, $1.55, cum. pfd. 319,500
2,900 Entergy Mississippi, Inc. $4.92, cum. pfd. 252,300
18,021 Florida Power & Light Co. Ser. S, $6.98, cum. pfd. 2,049,889
14,000 Indianapolis Power & Light $5.65, cum. pfd. 1,505,000
7,000 Kentucky Utilities Co. $6.53, cum. pfd. 787,500
50,000 Niagara Mohawk Power Corp. $2.375, cum. pfd. 1,293,750
40,000 Niagara Mohawk Power Corp. Ser. C, $1.75, cum.
Adjustable Rate Preferred (ARP) 1,010,000
39,800 Niagara Mohawk Power Corp. Ser. A, $1.625, cum. ARP 985,050
59,000 Northern Indiana Public Services Ser. A, $3.00, cum. ARP 2,891,000
8,700 Pacificorp Sinking Fund $7.48, cum. pfd. 1,001,588
17,500 Peco Energy $7.48, cum. pfd. 1,887,813
15,000 Portland General Electric Sinking Fund $7.75, cum. pfd. 1,717,500
10,000 PP & L, Inc. $6.33, cum. pfd. 1,066,250
10,000 PP & L, Inc. $6.125, cum. pfd. 1,057,500
18,700 Puget Sound Energy, Inc. Ser. III, $2.12, pfd. 486,200
20,300 Southern California Edison Co. $6.45, cum. pfd. 2,134,038
10,000 Southern California Edison Co. $6.05, cum. pfd. 1,051,250
60,000 Texas Utilities Electric Co. Ser. A, $1.875, dep. shs. cum. pfd. 1,575,000
50,000 Texas Utilities Electric Co. Ser. B, $1.805, dep. shs. cum. pfd. 1,287,500
3,700 Virginia Electric & Power Co. $7.05, cum. pfd. 425,963
--------------
31,365,473
Finance (14.1%)
- --------------------------------------------------------------------------------------------------------------------------
39,500 Bear Stearns & Co Ser. E, $3.075, cum. pfd. 1,935,500
30,000 Bear Stearns & Co. Ser. F, $2.86, cum. pfd. 1,395,000
10,000 Bear Stearns & Co. Ser. A, $2.75, cum. ARP 491,250
20,000 Bear Stearns & Co. Ser. G, $2.745, cum. pfd. 897,500
95,000 Heller Financial Inc. Ser. A, $2.031, cum. pfd. 2,493,750
15,200 MBNA Corp. Ser. A, $1.875, cum. pfd. 383,800
75,000 MBNA Corp. Ser. B, $1.745, ARP 1,884,375
204,437 Merrill Lynch & Co., Inc. Ser. A, $2.25, dep. shs. cum. pfd. 6,337,547
50,150 Morgan Stanley $3.875, dep. shs. cum. pfd. 2,701,831
--------------
18,520,553
Financial Services (12.9%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Citigroup, Inc. Ser. R, $3.1825, pfd. 2,693,750
29,000 Citigroup, Inc. Ser. M, $2.93, cum. pfd. 1,457,250
35,000 Citigroup, Inc. Ser. K, $2.10, cum. pfd. 949,375
10,000 Citigroup, Inc. Ser. U, $1.94, cum. pfd. 260,000
10,000 Donaldson, Lufkin & Jenrette, Inc. Ser. B, $2.65, cum. pfd. 501,250
65,850 Household International, Inc. Ser. 92-A, $2.063, dep. shs. cum. pfd. 1,827,338
33,259 J.P. Morgan & Co., Inc. Ser. A, $5.00, cum. ARP 3,034,884
62,200 J.P. Morgan & Co., Inc. Ser. H, $3.313, dep. shs. cum. pfd. 3,327,700
20,000 Lehman Brothers Holding, Inc. Ser. C, $2.97, pfd. 930,000
41,500 Lehman Brothers Holding, Inc. Ser. D, $2.835, pfd. 1,836,375
--------------
16,817,922
Gas Pipelines (6.9%)
- --------------------------------------------------------------------------------------------------------------------------
116,500 El Paso Tennessee Pipeline Co. Ser. A, $4.125, cum. pfd. 6,392,938
110,000 Enserch Corp. Ser. F, $1.279, cum. pfd. 2,681,250
--------------
9,074,188
Metals and Mining (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
11,050 Aluminum Co. $3.75, cum. pfd. 819,081
Natural Gas (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
31,700 Washington Natural Gas Ser. II, $1.862, cum. pfd. 871,750
Oil and Gas (5.1%)
- --------------------------------------------------------------------------------------------------------------------------
41,000 Anadarko Petroleum Corp. $5.46, dep. shs. pfd. 3,710,500
10,000 Apache Corp. Ser. B, $5.68, cum. pfd. 910,000
20,000 PennzEnergy Co. Ser. A, $6.49, cum. pfd. 2,077,500
--------------
6,698,000
Utilities (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
3,000 Monongahela Power Co. Ser. L, $7.73, cum. pfd. 351,060
2,500 Pacificorp $7.70, cum.pfd. 269,063
--------------
620,123
--------------
Total Preferred Stocks (cost $124,625,264) $ 125,620,231
CONVERTIBLE PREFERRED STOCKS (2.1%) (a) (cost $3,035,745)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
92,500 Lehman Brothers Holding, Inc. $5.00, cv. pfd. $ 2,751,875
SHORT-TERM INVESTMENTS (2.2%) (a) (cost $2,867,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 2,867,000 Interest in $407,512,000 joint repurchase agreement dated
January 29, 1999 with Warburg Securities due
February 1, 1999 with respect to various U.S. Treasury
obligations -- maturity value of $2,868,123 for an effective
yield of 4.70% $ 2,867,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $130,528,009) (b) $ 131,239,106
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $130,835,743.
(b) The aggregate identified cost on a tax basis is $130,539,258, resulting in gross unrealized appreciation and
depreciation of $3,578,569 and $2,878,721, respectively, or net unrealized appreciation of $699,848.
(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
January 31, 1999 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $130,528,009) (Note 1) $131,239,106
- -----------------------------------------------------------------------------------------------
Dividends, interest and other receivables 365,588
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 413,373
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 1,406,742
- -----------------------------------------------------------------------------------------------
Total assets 133,424,809
Liabilities
- -----------------------------------------------------------------------------------------------
Payable to subcustodian 1,396,027
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 288,720
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 702,157
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 145,514
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 17,139
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 5,322
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 503
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,683
- -----------------------------------------------------------------------------------------------
Other accrued expenses 31,001
- -----------------------------------------------------------------------------------------------
Total liabilities 2,589,066
- -----------------------------------------------------------------------------------------------
Net assets $130,835,743
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $137,360,773
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (821,199)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (6,414,928)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 711,097
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $130,835,743
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($117,690,074 divided by 13,277,240 shares) $8.86
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/96.75 of $8.86)* $9.16
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($13,145,669 divided by 1,487,016 shares) $8.84
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/98.00 of $8.84)* $9.02
- -----------------------------------------------------------------------------------------------
* 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 January 31, 1999 (Unaudited)
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $(5,391) $4,462,739
- -----------------------------------------------------------------------------------------------
Interest 43,612
- -----------------------------------------------------------------------------------------------
Total investment income 4,506,351
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 391,632
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 89,871
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,724
- -----------------------------------------------------------------------------------------------
Administrative services 2,476
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 14,487
- -----------------------------------------------------------------------------------------------
Reports to shareholders 12,820
- -----------------------------------------------------------------------------------------------
Registration fees 3,128
- -----------------------------------------------------------------------------------------------
Auditing 18,504
- -----------------------------------------------------------------------------------------------
Legal 793
- -----------------------------------------------------------------------------------------------
Postage 2,181
- -----------------------------------------------------------------------------------------------
Other 17,549
- -----------------------------------------------------------------------------------------------
Total expenses 560,165
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (21,705)
- -----------------------------------------------------------------------------------------------
Net expenses 538,460
- -----------------------------------------------------------------------------------------------
Net investment income 3,967,891
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 599,101
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (4,357,432)
- -----------------------------------------------------------------------------------------------
Net loss on investments (3,758,331)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $209,560
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Eight months ended Year ended
January 31 July 31 November 30
1999* 1998** 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets
- -----------------------------------------------------------------------------------------------------------------
Operations:
- -----------------------------------------------------------------------------------------------------------------
Net investment income $3,967,891 $5,406,278 $7,651,598
- -----------------------------------------------------------------------------------------------------------------
Net realized gain on investments 599,101 2,926,691 461,151
- -----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments (4,357,432) (733,122) 3,522,848
- -----------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 209,560 7,599,847 11,635,597
- -----------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- -----------------------------------------------------------------------------------------------------------------
From net investment income
Class A (4,223,418) (4,964,211) (7,391,392)
- -----------------------------------------------------------------------------------------------------------------
Class M (401,678) (389,706) (411,702)
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital
share transactions (Note 4) (1,482,397) 10,598,303 (2,778,276)
- -----------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (5,897,933) 12,844,233 1,054,227
- -----------------------------------------------------------------------------------------------------------------
Net assets
- -----------------------------------------------------------------------------------------------------------------
Beginning of period 136,733,676 123,889,443 122,835,216
- -----------------------------------------------------------------------------------------------------------------
End of period (including
distributions in excess of net
investment income of $821,199,
$163,994 and $216,355, respectively) $130,835,743 $136,733,676 $123,889,443
- -----------------------------------------------------------------------------------------------------------------
* Unaudited.
** The fiscal year end has advanced from November 30 to July 31.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights **
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended Eight months
Per-share January 31 ended
operating performance (Unaudited) July 31+ Year ended November 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.16 $9.00 $8.71 $8.59 $7.88 $8.81
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .27(d) .38 .56 .58 .57 .56
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.27) .16 .30 .12 .73 (.93)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations -- .54 .86 .70 1.30 (.37)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.30) (.38) (.57) (.58) (.59) (.56)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- --(c) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.30) (.38) (.57) (.58) (.59) (.56)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.86 $9.16 $9.00 $8.71 $8.59 $7.88
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 0.00* 6.04* 10.22 8.61 17.05 (4.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $117,690 $124,784 $116,413 $117,502 $120,591 $119,822
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .40* .59* .85 .89 .90 .81
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.93* 4.13* 6.34 6.90 6.91 6.64
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 19.60* 33.51* 20.46 29.51 34.76 32.84
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS A (continued)
- --------------------------------------------------------------------------------------------------------------------
Per-share Year ended
operating performance November 30
- --------------------------------------------------------------------------------------------------------------------
1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $8.34
- --------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------
Net investment income .60
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .47
- --------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.07
- --------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------
From net
investment income (.60)
- --------------------------------------------------------------------------------------------------------------------
In excess of net
investment income --
- --------------------------------------------------------------------------------------------------------------------
Total distributions (.60)
- --------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.81
- --------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 13.07
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $144,185
- --------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .83
- --------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.83
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 114.53
- --------------------------------------------------------------------------------------------------------------------
+ The fiscal year end has advanced from November 30 to July 31.
++ Commencement of operations.
* Not annualized.
** The table has been restated to reflect a 5-for-1 share split declared by the fund to shareholders of record
on November 29, 1994.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended November 30, 1995 and thereafter, includes amounts
paid through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
(c) Distributions in excess of net investment income amounted to less than $0.01 per share for each class.
(d) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended Eight months For the period
Per-share January 31 ended Apr. 20, 1995++
operating performance (Unaudited) July 31+ Year ended November 30 to Nov. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.13 $8.97 $8.69 $8.58 $8.12
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .25(d) .37 .54 .56 .33
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.25) .15 .29 .11 .46
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations -- .52 .83 .67 .79
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.29) (.36) (.55) (.56) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- --(c) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.29) (.36) (.55) (.56) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.84 $9.13 $8.97 $8.69 $8.58
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (0.01)* 5.89* 9.85 8.22 9.88*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $13,146 $11,950 $7,477 $5,333 $729
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .53* .76* 1.10 1.14 .67*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.78* 3.88* 6.01 6.41 3.73*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 19.60* 33.51* 20.46 29.51 34.76
- ------------------------------------------------------------------------------------------------------------------------------------
+ The fiscal year end has advanced from November 30 to July 31.
++ Commencement of operations.
* Not annualized.
** The table has been restated to reflect a 5-for-1 share split declared by the fund to shareholders of record
on November 29, 1994.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended November 30, 1995 and thereafter, includes amounts
paid through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
(c) Distributions in excess of net investment income amounted to less than $0.01 per share for each class.
(d) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
Notes to financial statements
January 31, 1999 (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 fee applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if that fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant policies consistently followed
by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of
some securities traded over the counter -- the last reported bid price.
Preferred stocks, for which reliable market quotations are not readily
available are stated at fair vale on the basis of valuations furnished by
pricing services approved by the Trustees, which determine valuation for
normal, institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various
relationships between securities that are generally recognized by
institutional traders. Short-term investments having remaining maturities
of 60 days or less are stated at amortized cost, which approximates market
value, and other investments are stated at fair value following procedures
approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the fund is
informed of the ex-dividend date.
E) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the six months
ended January 31, 1999, the fund had no borrowings against the line of
credit.
F) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated investment
companies. It is also the intention of the fund to distribute an amount
sufficient to avoid imposition of any excise tax under Section 4982 of the
Internal Revenue Code of 1986, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At July 31, 1998, the fund had a capital loss carryover of approximately
$7,003,000 available to offset future capital gains, if any. The amount of
the 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 offset would
be distributed to shareholders since any such distribution might be
taxable as ordinary income. The amount of the carryover and the expiration
dates are:
Loss Carryover Expiration
-------------- -------------
$5,262,000 July 31, 1999
208,000 July 31, 2002
1,533,000 July 31, 2003
G) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
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 base on the average net assets of the fund for
the quarter. Such fee is based on the following annual rates: 0.65% of the
first $500 million of average net assets, 0.55% of the next $500 million
of average net assets, 0.50% on 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.
As part of the subcustodian contract between the subcustodian bank and
Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments,
Inc. the subcustodian bank has a lien on the securities of the fund to the
extent permitted by the fund's investment restrictions to cover any
advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At January 31, 1999, the payable to the
subcustodian bank represents the amount due for cash advance for the
settlement of a security purchased.
The fund reimburses Putnam Management an allocate 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 PFTC, Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended January 31, 1999, fund expenses were reduced by
$21,705 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 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 Plans 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 Plans provide for payments by the fund to Putnam Mutual
Funds Corp. at an annual rate up to 1.00% of the average net assets. The
Trustees have approved payment by the fund to an annual rate of 0.25% of
the average net assets attributable to class M shares.
For the six months ended January 31, 1999, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $18,142 and $2,998 from
the sale of class A and 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 January 31, 1999, Putnam Mutual Funds Corp., acting as
underwriter received no monies on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended January 31, 1999, purchases and sales of
investment securities other than short-term investments aggregated
$26,130,452 and $28,295,696, 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 January 31, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
January 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,626,833 $14,666,387
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 316,742 2,848,339
- -----------------------------------------------------------------------------
1,943,575 17,514,726
Shares
repurchased (2,293,553) (20,584,090)
- -----------------------------------------------------------------------------
Net decrease (349,978) $(3,069,364)
- -----------------------------------------------------------------------------
Eight months ended
July 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,958,836 $17,861,242
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 374,099 3,416,156
- -----------------------------------------------------------------------------
2,332,935 21,277,398
Shares
repurchased (1,644,331) (15,007,112)
- -----------------------------------------------------------------------------
Net increase 688,604 $ 6,270,286
- -----------------------------------------------------------------------------
Year ended
November 30, 1997
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,175,906 $19,266,739
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 561,520 4,960,386
- -----------------------------------------------------------------------------
2,737,426 24,227,125
Shares
repurchased (3,283,503) (28,924,047)
- -----------------------------------------------------------------------------
Net decrease (546,077) $(4,696,922)
- -----------------------------------------------------------------------------
Six months ended
January 31, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 333,608 $ 2,977,663
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 34,910 312,780
- -----------------------------------------------------------------------------
368,518 3,920,443
Shares
repurchased (190,034) (1,703,476)
- -----------------------------------------------------------------------------
Net increase 178,484 $ 1,586,967
- -----------------------------------------------------------------------------
Eight months ended
July 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 618,587 $5,631,081
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 35,190 320,568
- -----------------------------------------------------------------------------
653,777 5,951,649
Shares
repurchased (178,343) (1,623,632)
- -----------------------------------------------------------------------------
Net increase 475,434 $4,328,017
- -----------------------------------------------------------------------------
Year ended
November 30, 1997
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 496,220 $4,370,534
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 38,069 336,218
- -----------------------------------------------------------------------------
534,289 4,706,752
Shares
repurchased (314,630) (2,788,106)
- -----------------------------------------------------------------------------
Net increase 219,659 $1,918,646
- -----------------------------------------------------------------------------
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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
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
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
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Thomas V. Reilly
Vice President
Anthony Kreisel
Vice President
Jeanne L. Mockard
Vice President and Fund Manager
Richard A. Monaghan
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]
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The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
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