Putnam
Preferred
Income
Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
1-31-00
[SCALE LOGO OMITTED]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The markets continued to provide their share of challenges and
opportunities as your fund closed its books on the first half of fiscal
2000. In the following report, the fund's manager discusses performance
for the period and prospects for the months ahead.
This is the last letter to you and the other shareholders of Putnam
Preferred Income Fund that I will be signing. After more than 30 years as
Chairman of the Trustees and President of the Putnam Funds, the time has
come for me to step aside. In June, John Hill will become Chairman. John
is currently an independent Trustee and has served on the board for the
past 14 years. In addition, my son, George Putnam, III, will take on the
role of President. I am confident that the leadership of the funds will be
in exceptionally strong hands.
I will become Chairman Emeritus, remain a Putnam shareholder, and stay in
close touch with the funds. It has been my privilege to serve you.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
March 15, 2000
Report from the Fund Manager
Jeanne L. Mockard
Putnam Preferred Income Fund held its own for the first half of its fiscal
year 2000, despite a mostly negative climate for the fixed-income markets
and for conservative investors generally. For the six months ended January
31, 2000, your fund's portfolio of preferred stocks provided an attractive
level of current income, 100% of which qualifies for dividends-received
deduction (DRD) status for federal income tax purposes. Meanwhile, the
value of the fund's shares proved to be slightly more stable than bond
prices overall. (Although preferred stocks are technically equity
securities, they tend to perform in line with the bond market, and bond
prices have been in a decline throughout the fiscal period in response to
rising interest rates.)
Total return for 6 months ended 1/31/00
Class A Class M
NAV POP NAV POP
- ----------------------------------------------------------------------------
-1.17% -4.39% -1.19% -3.11%
- ----------------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance calculation
methods begin on page 5.
* INFLATIONARY CONCERNS CONTINUE TO INFLUENCE FED POLICY
It came as no surprise to market observers when the Federal Reserve Board
raised interest rates by a quarter of a percentage point at its February
meeting -- the third such increase in the past six months. Although any
increase in interest rates depresses bond prices, the Fed's most recent
rate increase had been widely anticipated and the markets remained
relatively calm.
Even those who do not share the Fed's concerns about inflation understand
them. As of this March, the U.S. economy will have completed its ninth
consecutive year of vigorous growth and it shows no signs of slowing. Last
year, the gross domestic product expanded at 4%. Meanwhile unemployment is
at a three-decade low and productivity is high, both of which stimulate
consumer spending and inflation. Yet, despite rising oil prices, inflation
has remained in check. According to the Department of Commerce, consumer
prices advanced at a modest 2.7% rate in 1999.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Electric utilities 27.4%
Combined utilities 16.3%
Finance 13.8%
Financial services 12.6%
Gas pipelines 5.5%
Footnote reads:
*Based on net assets as of 1/31/00. Holdings will vary over time.
Information technology has been a key factor in the expansion, setting
loose a surge in productivity gains that have been the linchpin of
economic growth. Strong optimism regarding the growth prospects for a
narrow band of high-tech stocks continues to send the stock averages
toward new highs, tempting investors to set caution aside. Faced with
these trends, investors who own bonds, conservative equities, and
preferred stocks need to remind themselves that every mountain has two
sides. Although the current outlook for preferred stocks reflects the
prospect of further increases in interest rates, your fund's relative
price stability and attractive yield continue to enable it to meet the
objectives of the corporations for which it was designed.
* PORTFOLIO UNDERGOES FEW CHANGES
Perpetual preferreds (which offer a fixed coupon with no maturity date)
continue to account for more than three quarters of the fund's total
assets, and nearly half of these were issued by utilities. Adjustable rate
preferreds (ARPs) and sinking fund preferreds (sinkers) accounted for most
of the rest of the fund's investments as of the end of January 2000. Of
these instruments, perpetuals are the most sensitive to changes in
interest rates because they have the longest effective duration. Sinkers
are next in terms of interest-rate sensitivity because they generally have
a five-year call protected period, after which the issuer can buy back (or
sink) portions of the issue over a predetermined time frame. ARPs offer
the most price stability because the rate they pay is adjusted as interest
rates change. However, in the low interest-rate environment of the past
several years, most issuers opted for low, fixed-rate methods of
financing. As a result, ARPs that meet your fund's quality standards have
become hard to find.
[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
Chase Manhattan Corp.
Ser. C, $2.71 cum. pfd.
Banks
Baltimore Gas & Electric Co.
Ser. 93, $7.125 cum. pfd.
Combined utilities
Alabama Power Co.
$1.30 cum. pfd.
Electric utilities
Florida Power & Light Co.
Ser. U, $6.75 cum. pfd.
Combined utilities
Peco Energy
$7.48 cum. pfd.
Electric utilities
Morgan (J.P.) & Co., Inc.
Ser. H, $3.313 dep. shs. cum. pfd.
Financial services
Anadarko Petroleum Corp.
$5.46 dep. shs. pfd.
Oil and gas
General Motors Corp.
Ser.G, $2.28 dep. shs. cum. pfd.
Automobiles
Footnote reads:
These holdings represent 37.3% of the fund's net assets as of 1/31/00.
Portfolio holdings will vary over time.
Reflecting these facts, we made relatively few portfolio changes during
the semiannual period. In fact, the majority of portfolio holdings could
be described as coveted pieces in the current market environment --
coveted by virtue of their high rates and of the underlying financial
strength of many of the issuers. The fund's industry focus remains on
utilities largely because so many of these companies are benefiting from
deregulation. In turn, this benefit is allowing them to securitize old
debt and generate cash flow for future growth. We are confident that the
issues in the portfolio combine the financial strength needed to secure
payment obligations on preferreds and other debt instruments with equity
appeal for conservative investors.
* CALL DATES HAVE BEEN CAREFULLY STAGGERED
We have also been emphasizing staggered call dates to ensure that your
fund's income stream is not disturbed by having too many holdings become
callable at the same time. Especially now, when suitable investment
choices available for this fund are less plentiful than they were a few
years ago, we have been careful to stay ahead of the curve, replacing
securities in advance of their call dates in order to optimize cash flow
and maintain our goal of providing 100% DRD-qualified income for fund
shareholders.
Trades that occurred during the period include Fleet Financial Group
perpetual preferreds with a $2.338 coupon, which were sold in advance of
their December call date. The fund's IBM perpetual preferreds with a
$1.875 coupon were sold on strength in advance of a 2001 call date.
Purchases during the period included a new issue of perpetuals from SLM
Holding (formerly Sallie Mae) with a $3.485 coupon. This issue is typical
of what we are looking for because it provides diversification while
offering excellent value and high quality.
* OUTLOOK UNCHANGED UNTIL FED SEES MODERATING GROWTH
Looking ahead, we expect the yield curve to remain relatively flat, with
the differential in yield between 2-year Treasury notes and 30-year
Treasury bonds ranging between 15 and 25 basis points. We believe it is
possible that the Fed will raise interest rates yet again this spring,
which would extend the current climate for bonds through the second half
of the fund's fiscal year. We see little likelihood that the Fed will
deviate from its recent course until there is more concrete evidence of a
moderation in growth. Only at that point will the Fed be satisfied that a
benign inflation outlook is secure going forward.
Over the long term, Putnam's macroeconomic research team is forecasting a
gradually slowing growth trend with a contained inflation rate. In such a
scenario, the excitement exhibited by prices of many high-tech growth
stocks might play itself out and give way to a more conservative
environment. Such a trend would be favorable to the bond market as well as
to fund shareholders.
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 1/31/00, 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 1/31/00
Class A Class M
(inception dates) (1/4/84) (4/20/95)
NAV POP NAV POP
- ----------------------------------------------------------------------------
6 months -1.17% -4.39% -1.19% -3.11%
- ----------------------------------------------------------------------------
1 year -1.08 -4.32 -1.35 -3.31
- ----------------------------------------------------------------------------
5 years 43.14 38.45 40.66 37.89
Annual average 7.44 6.72 7.06 6.64
- ----------------------------------------------------------------------------
10 years 112.14 105.26 105.75 101.65
Annual average 7.81 7.46 7.48 7.27
- ----------------------------------------------------------------------------
Life of fund 235.02 224.13 220.01 213.62
Annual average 7.81 7.59 7.51 7.37
- ----------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/00
Merrill Lynch
Perpetual Standard &
Preferred Poor's Consumer
Index 500 Index price index
- ------------------------------------------------------------------------
6 months -3.63% 5.59% 1.44%
- ------------------------------------------------------------------------
1 year -3.36 10.35 2.67
- ------------------------------------------------------------------------
5 years 41.91 225.05 12.28
Annual average 7.25 26.59 2.34
- ------------------------------------------------------------------------
10 years 132.56 442.42 32.73
Annual average 8.81 18.43 2.87
- ------------------------------------------------------------------------
Life of fund N/A* 1258.54 66.93
Annual average N/A* 17.61 3.24
- ------------------------------------------------------------------------
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 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.
*The Merrill Lynch Perpetual Preferred Index was introduced on 2/28/89.
PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 1/31/00
Class A Class M
- ----------------------------------------------------------------------------
Distributions (number) 6 6
- ----------------------------------------------------------------------------
Income $0.282256 $0.270831
- ----------------------------------------------------------------------------
Capital gains -- --
- ----------------------------------------------------------------------------
Total $0.282256 $0.270831
- ----------------------------------------------------------------------------
Share value: NAV POP NAV POP
- ----------------------------------------------------------------------------
7/31/99 $8.59 $8.88 $8.56 $8.73
- ----------------------------------------------------------------------------
1/31/00 8.21 8.49 8.19 8.36
- ----------------------------------------------------------------------------
Current return (end of period)
- ----------------------------------------------------------------------------
Current dividend rate1 6.82% 6.60% 6.59% 6.70%
- ----------------------------------------------------------------------------
Taxable equivalent3 9.39 9.09 9.07 9.23
- ----------------------------------------------------------------------------
Current 30-day SEC yield2 6.26 5.96 6.01 5.80
- ----------------------------------------------------------------------------
Taxable equivalent3 8.62 8.21 8.28 7.99
- ----------------------------------------------------------------------------
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 12/31/99 (most recent calendar quarter)
Class A Class M
(inception dates) (1/4/84) (4/20/95)
NAV POP NAV POP
- -----------------------------------------------------------------
6 months -0.09% -3.35% -0.24% -2.28%
- -----------------------------------------------------------------
1 year 0.10 -3.17 -0.05 -2.04
- -----------------------------------------------------------------
5 years 48.24 43.46 45.51 42.59
Annual average 8.19 7.48 7.79 7.35
- -----------------------------------------------------------------
10 years 112.00 105.10 105.60 101.49
Annual average 7.80 7.45 7.47 7.26
- -----------------------------------------------------------------
Life of fund 237.95 226.98 222.90 216.45
Annual average 7.91 7.69 7.61 7.47
- -----------------------------------------------------------------
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 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.
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.
Welcome to www.putnaminv.com
Now you can use your PC to get up-to-date information about your funds, learn
more about investing and retirement planning, and access market news and
economic outlooks from Putnam.
VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
* the benefits of investing with Putnam
* Putnam's money management philosophy
* complete fund information, daily pricing and long-term performance
* your current account value, portfolio value and transaction history
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You can also read Putnam economist Dr. Robert Goodman's commentary and Putnam's
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The site can be accessed through any of the major online services (America
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access it via Netscape or Microsoft Internet Explorer, using an independent
Internet service provider.
New features will be added to the site regularly. So be sure to bookmark us at
http://www.putnaminv.com
A guide to the financial statements
These sections of the report constitute the fund's financial
statements.
The fund's portfolio lists all the fund's investments and their values as
of the last day of the reporting period. Holdings are organized by asset
type and industry sector, country, or state to show areas of concentration
and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for
the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that remain
in the portfolio -- any change in unrealized gains or losses over the
period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of
the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed here
may not match the sources listed in the Statement of operations because
the distributions are determined on a tax basis and may be paid in a
different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also
includes the current reporting period. For open-end funds, a separate
table is provided for each share class.
<TABLE>
<CAPTION>
The fund's portfolio
January 31, 2000 (Unaudited)
PREFERRED STOCKS (97.3%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Automobiles (4.5%)
- --------------------------------------------------------------------------------------------------------------------------
65,600 Ford Motor Co. Ser. B, $2.063 dep. shs. cum. preferred (pfd) $ 1,828,600
109,000 General Motors Corp. Ser. G, $2.28 dep. shs. cum. pfd. 3,024,750
--------------
4,853,350
Banks (5.0%)
- --------------------------------------------------------------------------------------------------------------------------
185,400 Chase Manhattan Corp. Ser. C, $2.71 cum. pfd. 5,075,325
15,000 Indosuez Holdings 144A $2.594 ADS pfd. (Mexico) 403,125
--------------
5,478,450
Chemicals (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,850 du Pont (E.I.) de Nemours & Co., Ltd. Ser. B, $4.50 cum. pfd. 188,100
10,000 du Pont (E.I.) de Nemours & Co., Ltd. Ser. A, $3.50 cum. pfd. 683,750
7,500 Praxair, Inc. Ser. B, $6.75 cum. pfd. 787,500
--------------
1,659,350
Combined Utilities (16.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,500 Avista Corp. Sinking Fund Ser. K, $6.95 pfd. 261,563
40,000 Baltimore Gas & Electric Co. Ser. 93, $7.125 cum. pfd. 4,210,000
15,000 Baltimore Gas & Electric Co. Ser. 95, $6.99 cum. pfd. 1,563,750
18,021 Florida Power & Light Co. Ser. S, $6.98 cum. pfd. 1,894,458
31,200 Florida Power & Light Co. Ser. U, $6.75 cum. pfd. 3,276,000
80,100 Pacific Gas & Electric Co. Ser. U, $1.76 cum. pfd. 2,062,575
20,000 Pacific Gas & Electric Co. Sinking Fund $1.643 cum. pfd. 502,500
11,750 Public Service Electric & Gas Co. $6.92 cum. pfd. 1,239,625
26,250 Rochester Gas and Electric Sinking Fund Ser. V,
$6.60 cum. pfd. 2,680,781
--------------
17,691,252
Consumer Services (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
99,373 AMERCO Ser. A, $2.125 cum.pfd. 2,459,482
Electric Utilities (27.4%)
- --------------------------------------------------------------------------------------------------------------------------
156,100 Alabama Power Co. $1.30 cum. pfd. 3,356,150
5,000 Atlantic City Electric Co. Sinking Fund $7.80 cum. pfd. 527,500
7,102 Central Maine Power Co. Sinking Fund Ser. A,
$7.999 cum. pfd. 697,772
5,416 Duke Energy Corp. Ser. Y, $7.04 cum. pfd. 571,388
2,900 Entergy Mississippi, Inc. $4.92 cum. pfd. 258,100
14,000 Indianapolis Power & Light $5.65 cum. pfd. 1,365,000
7,000 Kentucky Utilities Corp. $6.53 cum. pfd. 721,000
3,000 Monongahela Power Co. Ser. L, $7.73 cum. pfd. 319,125
40,000 Niagara Mohawk Power Corp. Ser. C, $1.75 cum.
Adjustable Rate Preferred (ARP) 990,000
39,800 Niagara Mohawk Power Corp. Ser. A, $1.625 cum. ARP 990,025
49,000 Northern Indiana Public Services Ser. A, $3.00 cum. ARP 2,352,000
15,800 Pacificorp $7.70 cum. pfd. 1,645,175
16,000 Pacificorp Sinking Fund $7.48 cum. pfd. 1,714,000
30,000 Peco Energy $7.48 cum. pfd. 3,262,500
15,000 Portland General Electric Sinking Fund
$7.75 cum. pfd. 1,693,125
6,000 Potomac Electric Power Co. Sinking Fund Ser. 92,
$1.70 cum. pfd. 312,750
10,000 PP & L, Inc. Sinking Fund $6.33 cum. pfd. 990,000
10,000 PP & L, Inc. Sinking Fund $6.125 cum. pfd. 990,000
22,500 Southern California Edison Co. Sinking Fund
$6.05 cum. pfd. 2,199,375
60,000 TXU Electric Co. Ser. A, $0.469 cum. pfd. 1,477,500
50,000 TXU Electric Co. Ser. B, $0.451 dep. shs. cum. pfd. 1,218,750
5,200 UGI Utilities Sinking Fund $7.75 cum. pfd. 581,100
13,700 Virginia Electric & Power Co. $7.05 cum. pfd. 1,438,500
1,000 Virginia Electric & Power Co. $6.98 cum. pfd. 105,875
--------------
29,776,710
Finance (13.8%)
- --------------------------------------------------------------------------------------------------------------------------
39,500 Bear Stearns Co. Ser. E, $3.075 cum. pfd. 1,678,750
30,000 Bear Stearns Co. Ser. F, $2.86 cum. pfd. 1,192,500
10,000 Bear Stearns Co. Ser. A, $2.75 cum. ARP 467,500
32,600 Bear Stearns Co. Ser. G, $2.745 cum. pfd. 1,255,100
15,200 MBNA Corp. Ser. A, $1.875 cum. pfd. 372,400
65,000 MBNA Corp. Ser. B, $1.504 cum. ARP 1,592,500
204,437 Merrill Lynch & Co., Inc. Ser. A, $2.25 dep. shs. cum. pfd. 5,954,225
50,150 Morgan Stanley $3.875 dep. shs. cum. pfd. 2,501,231
--------------
15,014,206
Financial Services (12.6%)
- --------------------------------------------------------------------------------------------------------------------------
21,000 Citigroup, Inc. Ser. F, $3.183 dep. shs. cum. pfd. 992,250
16,000 Citigroup, Inc. Ser. M, $2.932 dep. shs. cum. pfd. 680,000
10,000 Donaldson, Lufkin & Jenrette, Inc. Ser. B, $2.65 cum. ARP 485,000
65,850 Household International, Inc. Ser. 92-A, $2.063 dep.
shs. cum. pfd. 1,695,638
33,259 Morgan (J.P.) & Co., Inc. Ser. A, $5.00 cum. ARP 2,698,136
62,200 Morgan (J.P.) & Co., Inc. Ser. H, $3.313 dep. shs. cum. pfd. 3,203,300
20,000 Lehman Brothers Holdings, Inc. Ser. C, $2.97 pfd. 825,000
41,500 Lehman Brothers Holdings, Inc. Ser. D, $2.835 dep. shs. pfd. 1,644,438
30,000 SLM Holding Corp. $3.485 pfd. 1,451,250
--------------
13,675,012
Gas Pipelines (5.5%)
- --------------------------------------------------------------------------------------------------------------------------
116,500 El Paso Tennessee Pipeline Co. Ser. A, $4.125 cum. pfd. 5,999,750
Gas Utilities (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
58,500 Boston Gas Sinking Fund Ser. A, $1.605 cum. pfd. 1,542,938
Metals and Mining (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
11,050 Alcoa, Inc. $3.75 cum. pfd. 812,175
Natural Gas (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
31,700 Puget Sound Energy, Inc. Ser. II, $1.863 cum. pfd. 820,238
Oil and Gas (5.5%)
- --------------------------------------------------------------------------------------------------------------------------
41,000 Anadarko Petroleum Corp. $5.46 dep. shs. pfd. 3,167,250
10,000 Apache Corp. Ser. B, $5.68 cum. pfd. 796,250
20,000 Devon Energy Corp. Ser. A, $6.49 cum. pfd. 1,960,000
--------------
5,923,500
--------------
Total Preferred Stocks (cost $112,002,051) $ 105,706,413
CONVERTIBLE PREFERRED STOCKS (2.3%) (a) (cost $3,035,745)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
92,500 Lehman Brothers Holding, Inc. Ser. B, 5.00% cv. pfd. $ 2,520,625
SHORT-TERM INVESTMENTS (0.5%) (a) (cost $560,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$560,000 Interest in $525,429,000 joint repurchase agreement
dated January 31, 2000 with Morgan (J.P.) & Co., Inc. due
February 1, 2000 with respect to various U.S. Treasury
obligations -- maturity value of $560,088 for an effective
yield of 5.68% $ 560,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $115,597,796) (b) $ 108,787,038
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $108,573,995.
(b) The aggregate identified cost on a tax basis is $115,598,858, resulting in gross unrealized appreciation and
depreciation of $1,392,533 and $8,204,353, respectively, or net unrealized depreciation of $6,811,820.
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 Depositary Shares representing ownership of foreign
securities on deposit with a domestic custodian bank.
The rates shown on Adjustable Rate Preferreds (ARP) are the current interest rates shown at January 31, 2000, which
are subject to change based on the terms of the security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
January 31, 2000 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $115,597,796) (Note 1) $108,787,038
- -----------------------------------------------------------------------------------------------
Cash 43
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 339,002
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 116,436
- -----------------------------------------------------------------------------------------------
Total assets 109,242,519
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 193,194
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 235,679
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 187,590
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 13,916
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 12,437
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 493
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,153
- -----------------------------------------------------------------------------------------------
Other accrued expenses 23,062
- -----------------------------------------------------------------------------------------------
Total liabilities 668,524
- -----------------------------------------------------------------------------------------------
Net assets $108,573,995
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $118,973,886
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (607,049)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (2,982,084)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (6,810,758)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $108,573,995
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($98,392,432 divided by 11,980,791 shares) $8.21
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/96.75 of $8.21)* $8.49
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($10,181,563 divided by 1,243,228 shares) $8.19
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/98.00 of $8.19)* $8.36
- -----------------------------------------------------------------------------------------------
* 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, 2000 (Unaudited)
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends $3,976,929
- -----------------------------------------------------------------------------------------------
Interest 21,176
- -----------------------------------------------------------------------------------------------
Total investment income 3,998,105
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 380,905
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 56,215
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,255
- -----------------------------------------------------------------------------------------------
Administrative services 3,016
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 13,319
- -----------------------------------------------------------------------------------------------
Reports to shareholders 7,749
- -----------------------------------------------------------------------------------------------
Auditing 16,939
- -----------------------------------------------------------------------------------------------
Postage 253
- -----------------------------------------------------------------------------------------------
Other 3,850
- -----------------------------------------------------------------------------------------------
Total expenses 488,501
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (11,333)
- -----------------------------------------------------------------------------------------------
Net expenses 477,168
- -----------------------------------------------------------------------------------------------
Net investment income 3,520,937
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (861,799)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (3,833,218)
- -----------------------------------------------------------------------------------------------
Net loss on investments (4,695,017)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations ($1,174,080)
- -----------------------------------------------------------------------------------------------
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
January 31 July 31
2000* 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $3,520,937 $7,734,975
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (861,799) 373,548
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (3,833,218) (8,046,069)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (1,174,080) 62,454
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (3,604,697) (7,107,667)
- ---------------------------------------------------------------------------------------------------------------
Class M (340,710) (683,686)
- ---------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- (650,386)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (62,561)
- ---------------------------------------------------------------------------------------------------------------
From return of capital
Class A -- (36,261)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (3,488)
- ---------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (6,755,056) (7,803,543)
- ---------------------------------------------------------------------------------------------------------------
Total decrease in net assets (11,874,543) (16,285,138)
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 120,448,538 136,733,676
- ---------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of
net investment income of $607,049, and
$182,579, respectively) $108,573,995 $120,448,538
- ---------------------------------------------------------------------------------------------------------------
* 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 Eight months
Per-share January 31 Year ended ended
operating performance (Unaudited) July 31 July 31+ Year ended November 30
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.59 $9.16 $9.00 $8.71 $8.59 $7.88
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .25 .53 .38 .56 .58 .57
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.35) (.51) .16 .30 .12 .73
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.10) .02 .54 .86 .70 1.30
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.28) (.54) (.38) (.57) (.58) (.59)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.05) -- -- --(c) --
- ------------------------------------------------------------------------------------------------------------------------------------
From return
of capital -- --(c) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.28) (.59) (.38) (.57) (.58) (.59)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.21 $8.59 $9.16 $9.00 $8.71 $8.59
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (1.17)* 0.19 6.04* 10.22 8.61 17.05
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $98,392 $109,932 $124,784 $116,413 $117,502 $120,591
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .41* .88 .59* .85 .89 .90
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.04* 5.90 4.13* 6.34 6.90 6.91
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 6.95* 30.09 33.51* 20.46 29.51 34.76
- ------------------------------------------------------------------------------------------------------------------------------------
+ The fiscal year end was 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 and return of capital amounted to less than $0.01 per share for each class.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights **
(For a share outstanding throughout the period)
CLASS A (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share Year ended
operating performance November 30
- ------------------------------------------------------------------------------------------------------------------------------------
1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $8.81
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .56
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.93)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.37)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.56)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income --
- ------------------------------------------------------------------------------------------------------------------------------------
From return
of capital --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.56)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.88
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (4.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $119,822
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .81
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.64
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 32.84
- ------------------------------------------------------------------------------------------------------------------------------------
+ The fiscal year end was 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 and return of capital amounted to less than $0.01 per share for each class.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights **
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended Eight months For the period
Per-share January 31 Year ended ended Apr. 20, 1995++
operating performance (Unaudited) July 31 July 31+ Year ended November 30 to Nov. 30
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.56 $9.13 $8.97 $8.69 $8.58 $8.12
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .24 .50 .37 .54 .56 .33
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.34) (.51) .15 .29 .11 .46
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.10) (.01) .52 .83 .67 .79
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.27) (.51) (.36) (.55) (.56) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.05) -- -- --(c) --
- ------------------------------------------------------------------------------------------------------------------------------------
From return
of capital -- --(c) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.27) (.56) (.36) (.55) (.56) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.19 $8.56 $9.13 $8.97 $8.69 $8.58
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (1.19)* (0.07) 5.89* 9.85 8.22 9.88*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $10,182 $10,516 $11,950 $7,477 $5,333 $729
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .53* 1.13 .76* 1.10 1.14 .67*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.92* 5.60 3.88* 6.01 6.41 3.73*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 6.95* 30.09 33.51* 20.46 29.51 34.76
- ------------------------------------------------------------------------------------------------------------------------------------
+ The fiscal year end was 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 and return of capital amounted to less than $0.01 per share for each class.
</TABLE>
Notes to financial statements
January 31, 2000 (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
of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period.
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 sales price on its principal exchange, or if no sales are
reported -- as in the case of some securities traded over-the-counter --
the last reported bid price. Preferred stocks, for which reliable market
quotations are not readily available, are stated at fair value on the
basis of valuations furnished by pricing services approved by the
Trustees, which determine valuation for normal, institutional-sized
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. Other
investments, including restricted securities, 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). Gains or losses on securities sold are determined on
the identified cost basis.
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 maintains an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the six months
ended January 31, 2000, 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, 1999, the fund had a capital loss carryover of approximately
$1,741,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------- -------------
$ 208,000 July 31, 2002
1,533,000 July 31, 2003
G) Distributions to shareholders The fund declares a distribution each day
based upon the projected net investment income, for a specified period,
calculated as if earned prorata throughout the period on a daily basis.
Such distributions are recorded daily and paid monthly. Capital gain
distributions, if any, are recorded on the ex-dividend date and paid at
least annually. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations,
which may differ from generally accepted accounting principles.
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 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.
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 January 31, 2000, fund expenses were reduced by
$11,333 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 $592 has
been allocated to the fund, and an additional fee for each Trustees
meeting attended. 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
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 distribution plans (the "Plans") 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 shares of the fund.
The 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 attributable to class
M shares. 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, 2000, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $9,001 and $6,851 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 January 31, 2000, Putnam Mutual Funds Corp.,
acting as underwriter received $8,889 on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended January 31, 2000, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $8,001,478 and $14,833,627, respectively. There
were no purchases and sales of U.S. government obligations.
Note 4
Capital shares
At January 31, 2000, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended January 31, 2000
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,296,370 $ 10,957,356
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 224,101 1,882,503
- -----------------------------------------------------------------------------
1,520,471 12,839,859
Shares
repurchased (2,344,000) (19,722,822)
- -----------------------------------------------------------------------------
Net decrease (823,529) $ (6,882,963)
- -----------------------------------------------------------------------------
Year ended July 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,069,307 $27,301,650
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 589,123 5,222,099
- -----------------------------------------------------------------------------
3,658,430 32,523,749
Shares
repurchased (4,481,328) (39,663,072)
- -----------------------------------------------------------------------------
Net decrease (822,898) $(7,139,323)
- -----------------------------------------------------------------------------
Six months ended January 31, 2000
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 253,506 $ 2,139,823
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 23,286 194,588
- -----------------------------------------------------------------------------
276,792 2,334,411
Shares
repurchased (261,990) (2,206,504)
- -----------------------------------------------------------------------------
Net increase 14,802 $ 127,907
- -----------------------------------------------------------------------------
Year ended July 31, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 520,897 $ 4,605,090
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 66,455 587,010
- -----------------------------------------------------------------------------
587,352 5,192,100
Shares
repurchased (667,458) (5,856,320)
- -----------------------------------------------------------------------------
Net decrease (80,106) $ (664,220)
- -----------------------------------------------------------------------------
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds. 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.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Europe Growth Fund
Global Equity Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Century Growth Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Vista Fund
Voyager Fund
Voyager Fund II
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
Small Cap Value Fund
Utilities Growth and Income Fund
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
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
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
ASSET ALLOCATION 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
[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 not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at www.putnaminv.com.
Fund information
WEB SITE
www.putnaminv.com
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
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
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' Web site: 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
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
SA037-58961-029/867 3/00
