Putnam
American
Government
Income Fund
SEMIANNUAL REPORT
March 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "[Putnam American Government Income Fund] just capped off its best
[calendar] year ever, on both an absolute and a relative basis.
Manager Mike Martino earned this outperformance in the standard
manner, by simply taking on a longer duration (i.e., more interest-
rate risk) than most of the fund's peers. He did so in part by
keeping the bulk of assets in Treasuries, reducing the fund's stake
in the prepayment-vulnerable mortgage sector to just 25% from August
through October [1995]."
-- Morningstar Mutual Funds, March 1, 1996
* For the year ended March 31, 1996, Putnam American Government Income
Fund's class A, class M, and class B shares were ranked 19, 24, and
36, respectively, out of 173 general U.S. government funds tracked by
Lipper Analytical Services. These rankings placed all three share
classes within the top 21% of all general U.S. government funds
rated, and in the case of class A shares, placed them in the top
11%.*
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
13 Financial statements
*Lipper is an independent mutual fund research organization. Its
rankings are based on total return performance, vary over time, and do
not reflect the effects of sales charges. The fund's class A shares were
ranked 61 out of 70 and 32 out of 36 general U.S. government funds for
5- and 10-year performance, respectively, through 3/31/96. Class B and
class M shares were not ranked over longer applicable periods. Past
performance is not indicative of future results.
[GRAPHIC OMMITTED: photo of George Putnam]
(copyright) Karsh, Ottawa
From the Chairman
Dear Shareholder:
For most of the first half of Putnam American Government Income Fund's
current fiscal year -- the six months ended March 31, 1996 -- bonds
enjoyed one of the most vibrant markets in recent memory, only to turn
abruptly downward toward the end of the period. Interest rates rose
markedly, causing losses in most sectors of the market.
The bond market, which characteristically retreats in anticipation of
bad inflation news, was reacting to concern over the possibility of
rising prices resulting from an accelerating economy. Foreseeing such
volatility, Fund Manager Michael Martino shifted to securities with
shorter durations to limit exposure to those sectors hit hardest by the
downturn. As the period came to a close, Mike was preparing to tilt your
fund's portfolio allocation more heavily toward mortgage-backed
securities in order to take advantage of higher interest rates.
Mike believes the market environment may remain somewhat unsettled over
the next few months. He provides a full discussion of your fund's
performance and outlook in the report that follows.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
May 15, 1996
Report from the Fund Manager
Michael Martino
The first six months of Putnam American Government Income Fund's 1996
fiscal year, the six months ended on March 31, spanned a sharply changing
environment in the fixed-income markets. Through the first three months
of the period, the bond market continued the strong performance that
capped off a successful calendar 1995. Signs of weakness began to appear
during January and February, however, culminating in a substantial
selloff on March 8 in the wake of February's stronger-than-expected
employment figures.
The convincing employment report led investors to conclude that the
Federal Reserve Board would be unlikely to reduce short-term interest
rates again any time in the near future. Moreover, in the often contrary
logic of the bond markets, investors frequently react negatively to
indications of economic strength out of fear that inflation could re-
emerge, which would erode the value of investments with fixed income
streams. Despite these market dislocations, your fund posted respectable
results for the period, while continuing to focus on strategies for
seeking high current income. (Please refer to the tables on pages 8 and
9 for complete performance information.)
* ACTIVE MANAGEMENT OF INTEREST-RATE EXPOSURE WAS KEY TO PERIOD'S
RESULTS
Perhaps the key determinant of your fund's performance over the period
was active management of the portfolio's duration. Duration is the
principal measure of interest-rate sensitivity for a given portfolio of
bonds. The longer the duration, the more sensitive a portfolio is to a
given change in rates. When rates are falling, as was the case during
the first three months of the period, bond prices rise, and a relatively
long duration enables the fund to capture a greater portion of that
price appreciation. Accordingly, we maintained a duration of
approximately six years over the first three months of the period.
When interest rates rise, however, a long duration has the opposite
effect, causing the portfolio's value to decline more rapidly for a
given change in rates. Beginning in mid-January, rates started moving
higher amid growing concern about an accelerating economy, potential
inflationary pressures, and disappointment over the lack of progress in
federal budget negotiations. Fortunately, we had shortened duration to
5.75 years by the beginning of January. We continued to trim duration
through the March market decline, bringing it to 4.4 years by March 31.
Although this strategy did not fully insulate the fund from the market's
downturn, shortening duration in a timely fashion did provide some
shelter for the portfolio when rates began their ascent.
* U.S. TREASURY HOLDINGS BOOST EARLY-PERIOD PERFORMANCE
Given that calendar 1995's bond rally was led by U.S. Treasury
securities, your fund's allocation to Treasuries, which ranged from 46%
of the portfolio at the beginning of the semiannual period to 56% at the
end, generally bolstered performance, especially early in the fiscal
period.
[GRAPHIC OMITTED: horizontal bar chart EFFECTIVE MATURITY BREAKDONW
(3/31/96)
showing:
0-1 8.7%
1-5 34.7%
5-10 41.7%
10-15 4.3%
15+ 10.6%
This chart illustrates the distribution of effective bond maturities in
the portfolio. The fund's emphasis on controlling exposure to interest-
rate fluctuations is demonstrated by the fact that, at the end of the
fiscal period, over 76% of the fund's assets were concentrated in bonds
with effective maturities between 1 and 10 years. Percentages are of
total market value of assets as of 3/31/96. Effective maturity is
derived from calculations that incorporate assumptions about prepayment
rates and cash flows of mortgage-backed securities. Measures of
effective maturity and the assumptions on which they are based will vary
over time.]
During the second half of the period, we shifted away from our strategy
of concentrating holdings in shorter-term Treasuries (those with
maturities of three to five years). Such a maturity structure tends to
perform best when the Fed is actively reducing short-term rates. Since
the expectation of further Fed easing waned late in the period, we
believed this positioning was unlikely to perform satisfactorily going
forward.
Consequently, by the end of the period, we had spread the fund's
Treasury holdings somewhat more evenly across the maturity spectrum.
Moreover, in keeping with our close monitoring of the fund's interest-
rate sensitivity, we reduced the average effective maturity of the
overall portfolio from approximately 15 years on September 30 to just
over 7 years on March 31.
Consistent with our normal approach, we kept a significant portion of
the fund's portfolio invested in Ginnie Maes* throughout the period.
Ginnie Maes are mortgage-backed securities that typically provide a
higher yield than Treasuries of comparable maturity but generally
underperform Treasuries in periods of rising or falling rates.
All told, while we adjusted the fund's weightings to capitalize on the
market sector that we believed offered the best opportunities, we
balanced these efforts with an unrelenting focus on managing interest-
rate risk as much as possible.
* GINNIE MAES FAVORED IN THE FACE OF MARKET UNCERTAINTY
While we cannot provide assurances, we believe it's likely the bond
market may move within a narrow range over the next few months. Further
signs of economic strength, Treasury note auctions that will continue
into May, and rising commodity prices -- oil being the most visible --
may put pressure on the market over the near term.
Based on this outlook, our current plan calls for favoring mortgage-
backed securities over Treasuries. Mortgage-backed securities typically
outperform Treasuries of similar maturities in periods when market
volatility is relatively low. And while we can't make predictions about
the level of fluctuation in the market, we still believe mortgages are
likely to perform well simply because they yield more than Treasuries.+
Accordingly, we are currently targeting an increase to upward of 45% of
the portfolio in mortgage securities, with Ginnie Maes representing the
bulk of the allocation.
*Bonds issued by the Government National Mortgage Association.
[GRAPHIC OMMITTED: vertical bar chart COMPARATIVE PORTFOLIO ALLOCATION*
showing:
U.S. Treasury securities
3/31/95 67.1%
9/30/95 46.1%
3/31/96 56.0%
Mortgage-backed securities
3/31/95 27.6%
9/30/95 49.8%
3/31/96 34.1%
Cash and short-term investments
3/31/95 5.3%
9/30/95 6.9%
3/31/96 9.1%
*Based on net assets as of the indicated date. Allocations will vary
over time.]
In general, we expect to maintain a slightly defensive approach to the
market until the economy's direction and interest-rate trends become
clearer. This will likely entail keeping duration near the U.S.
government fund group average -- that is, neither more aggressively nor
more conservatively positioned relative to similar funds -- while
increasing the weighting in Ginnie Maes for their yield advantages.
+It is important to remember, however, that mortgage-backed securities
are subject to prepayment risk, which is the risk that an investor's
principal will be returned in full at some point prior to the security's
stated maturity date. Such prepayment may cause an investor's actual
rate of return to differ from the expected rate of return.
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 3/31/96, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam American Government Income Fund is designed for
investors seeking high current income primarily through U.S. government
securities.
This section provides, at a glance, information about your fund's
performance. 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.
TOTAL RETURN FOR PERIODS ENDED 3/31/96
Class A Class B Class M
(inception date) 3/1/85 5/20/94 2/14/95
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
6 months 2.13% -2.71% 1.66% -3.27% 1.87% -1.43%
- -----------------------------------------------------------------------
1 year 11.14 5.87 10.27 5.27 10.77 7.13
- -----------------------------------------------------------------------
5 years 34.77 28.37 -- -- -- --
Annual average 6.15 5.12 -- -- -- --
- -----------------------------------------------------------------------
10 years 86.70 77.82 -- -- -- --
Annual average 6.44 5.92 -- -- -- --
- -----------------------------------------------------------------------
Life of class B -- -- 13.58 9.58 -- --
Annual average -- -- 7.01 4.99 -- --
- -----------------------------------------------------------------------
Life of class M -- -- -- -- 13.53 9.88
Annual average -- -- -- -- 11.56 8.47
- -----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/96
Lehman Bros.
Intermediate Consumer
Treasury Index Price Index
- ----------------------------------------------------------------
6 months 2.64% 1.63%
- ----------------------------------------------------------------
1 year 9.10 2.84
- ----------------------------------------------------------------
5 years 44.28 15.33
Annual average 7.61 2.89
- ----------------------------------------------------------------
10 years 113.69 43.11
Annual average 7.89 3.65
- ----------------------------------------------------------------
Life of class B 14.37 5.63
Annual average 7.60 2.96
- ----------------------------------------------------------------
Life of class M 11.79 3.59
Annual average 10.03 3.09
- ----------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions.
Investment returns and net asset value will fluctuate so that an
investor's shares, when sold, may be worth more or less than their
original cost. POP assumes 4.75% maximum sales charge for class A shares
and 3.25% for class M shares. CDSC for class B shares assumes the
applicable sales charge, with the maximum being 5%.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 3/31/96
Class A Class B Class M
- -----------------------------------------------------------------------
Distributions (number) 6 6 6
- -----------------------------------------------------------------------
Income $0.296 $0.265 $0.284
- -----------------------------------------------------------------------
Total $0.296 $0.265 $0.284
- -----------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- -----------------------------------------------------------------------
9/30/95 $8.65 $9.08 $8.62 $8.65 $8.94
- -----------------------------------------------------------------------
3/31/96 8.54 8.97 8.50 8.53 8.82
- -----------------------------------------------------------------------
Current return
- -----------------------------------------------------------------------
(End of period)
- -----------------------------------------------------------------------
Current dividend rate1 6.74% 6.42% 5.93% 6.47% 6.26%
- -----------------------------------------------------------------------
Current 30-day SEC yield2 6.29 5.98 5.55 6.04 5.84
- -----------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
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 maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B shares and assumes redemption at the end of
the period. Your fund's CDSC declines from a 5% maximum during the first
year to 1% during the sixth year. After the sixth year, the CDSC no
longer applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Intermediate Treasury Index is an unmanaged list of
Treasury bonds; it is used as a general gauge of the market for
intermediate-term fixed-income securities. The index does not take into
account brokerage commissions or other costs, may include bonds
different from those in the fund, and may pose different risks than the
fund. Securities indexes assume reinvestment of all distributions and
interest payments, and the performance of the fund will differ.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
<TABLE>
<CAPTION>
Portfolio of investments owned
March 31, 1996 (Unaudited)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (90.1%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Collaterized Mortgage Obligations (0.4%)
- ------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
$7,500,000 Ser. 89-23, Class D, 10.2s, September 25, 2018 $7,804,688
160,758 Principal Only (PO) Strips, Ser. 93-152, Class A,
zero %, February 25, 2017 [DOUBLE SECTION MARKER] 160,758
--------------
7,965,446
U.S. Agency Mortgage Pass-Throughs (33.7%)
- ------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
49,079,008 7s, Dwarfs, with various due dates from
May 1, 2009 to February 1, 2011 48,971,525
49,219,079 6 1/2s, Dwarfs, with various due dates from
July 1, 2010 to February 1, 2011 48,142,167
Government National Mortgage Association
77,920,772 9s, with various due dates from
November 15, 2008 to July 1, 2024 83,731,197
14,969,687 8 1/2s, with various due dates from
August 15, 2019 to September 15, 2024 15,799,908
69,584,918 8s, with various due dates from
August 15, 2006 to May 15, 2023 71,681,840
178,237,569 7 1/2s, with various due dates from
February 15, 2022 to September 15, 2025 178,143,615
246,415,227 7s, with various due dates from
April 15, 2023 to January 15, 2026 240,023,209
--------------
686,493,461
U.S. Treasury Obligations (56.0%)
- ------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
100,000,000 12s, August 15, 2013 144,359,000
50,000,000 9 7/8s, November 15, 2015 66,320,500
75,000,000 8 3/4s, November 15, 2008 85,195,500
U.S. Treasury Notes
50,000,000 9 1/8s, May 15, 1999 54,390,500
100,000,000 7 3/4s, February 15, 2001 106,859,000
50,000,000 7 1/2s, February 15, 2005 53,656,000
50,000,000 7 1/2s, May 15, 2002 53,258,000
100,000,000 7 1/2s, October 31, 1999 104,656,000
100,000,000 6 1/8s, September 30, 2000 100,016,000
35,000,000 5 3/4s, October 31, 2000 34,491,450
100,000,000 5 5/8s, February 15, 2006 94,844,000
100,000,000 5 1/4s, January 31, 2001 96,562,000
50,000,000 5 1/8s, February 28, 1998 49,422,000
100,000,000 5s, February 15, 1999 97,656,000
--------------
1,141,685,950
Total U. S. Government and Agency Obligations
(cost $1,848,543,506) $1,836,144,857
SHORT TERM INVESTMENTS (9.1%)*
PRINCIPAL AMOUNT VALUE
$20,000,000 Federal Home Loan Bank, effective yield of 5.1%,
September 6, 1996 $19,549,500
80,637,000 Interest in $844,579,000 joint repurchase agreement
dated March 29, 1996 with Morgan (J.P.) & Co., Inc.
due April 1, 1996 with respect to various U.S.
Treasury obligations--maturity value of
$80,745,860 for an effective yield of 5.4% 80,673,287
85,000,000 Interest in $750,000,000 joint repurchase agreement
dated March 29, 1996 with Goldman, Sachs & Co.,
due April 1, 1996 with respect to various U.S.
Treasury obligations--maturity value of
$85,113,687 for an effective yield of 5.35% 85,037,896
--------------
Total Short-Term Investments
(cost $185,260,683) $185,260,683
--------------
Total Investments (cost $2,033,804,189) *** $2,021,405,540
- ------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $2,037,748,697.
*** The aggregate identified cost on a tax basis is $2,033,804,189, resulting in gross unrealized
appreciation and depreciation of $54,526,251 and $66,924,900, respectively, or net unrealized
depreciation of $12,398,649.
[DOUBLE
SECTION
MARKER] Principal Only (PO) Strips represent the right to receive the monthly principal payments on an
underlying pool of mortgage loans. No payments of interest on the pool are passed through to
the PO holders.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31,1996 (Unaudited)
<S> <C>
Assets
- ------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $2,033,804,189) (Note 1) $2,021,405,540
- ------------------------------------------------------------------------------
Cash 650
- ------------------------------------------------------------------------------
Interest receivable 24,303,214
- ------------------------------------------------------------------------------
Receivable for shares of the fund sold 392,410
- ------------------------------------------------------------------------------
Receivable for securities sold 28,757
- ------------------------------------------------------------------------------
Total assets 2,046,130,571
Liabilities
- ------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,995,832
- ------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,692,084
- ------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 437,484
- ------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 3,869
- ------------------------------------------------------------------------------
Payable for administrative services (Note 2) 6,897
- ------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,327,246
- ------------------------------------------------------------------------------
Other accrued expenses 918,462
- ------------------------------------------------------------------------------
Total liabilities 8,381,874
- ------------------------------------------------------------------------------
Net assets $2,037,748,697
Represented by
- ------------------------------------------------------------------------------
Paid-in-capital (Notes 1 and 4) $3,484,468,331
- ------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (8,756,837)
- ------------------------------------------------------------------------------
Accumulated net realized loss on investments
(Note 1) (1,425,564,148)
- ------------------------------------------------------------------------------
Net unrealized depreciation of investments (12,398,649)
- ------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $2,037,748,697
Computation of net asset value and offering price
- ------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($2,019,847,217 divided by 236,524,440 shares) $8.54
- ------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.54)* $8.97
- ------------------------------------------------------------------------------
Net asset value and offering price per class B share
($17,081,700 divided by 2,009,150 shares)** $8.50
- ------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($819,780 divided by 96,070 shares) $8.53
- ------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.53)* $8.82
- ------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended March 31,1996 (Unaudited)
<S> <C>
Interest income: $74,202,559
- ------------------------------------------------------------------------------
Expenses:
- ------------------------------------------------------------------------------
Compensation of Manager (Note 2) 5,487,690
- ------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,694,753
- ------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 31,637
- ------------------------------------------------------------------------------
Administrative services (Note 2) 13,248
- ------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,687,073
- ------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 67,293
- ------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,856
- ------------------------------------------------------------------------------
Reports to shareholders 51,095
- ------------------------------------------------------------------------------
Registration fees 225
- ------------------------------------------------------------------------------
Auditing 20,270
- ------------------------------------------------------------------------------
Legal 16,538
- ------------------------------------------------------------------------------
Postage 273,161
- ------------------------------------------------------------------------------
Other 77,004
- ------------------------------------------------------------------------------
Total expenses 10,421,843
- ------------------------------------------------------------------------------
Expense reduction (Note 2) (604,735)
- ------------------------------------------------------------------------------
Net expenses 9,817,108
- ------------------------------------------------------------------------------
Net investment income 64,385,451
- ------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 53,645,086
- ------------------------------------------------------------------------------
Net unrealized depreciation on investments during the period (70,732,375)
- ------------------------------------------------------------------------------
Net loss on investments (17,087,289)
- ------------------------------------------------------------------------------
Net increase in net assets resulting from operations $47,298,162
- ------------------------------------------------------------------------------
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
March 31 September 30
1996* 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ------------------------------------------------------------------------------------------------
Operations:
- ------------------------------------------------------------------------------------------------
Net investment income $64,385,451 $148,626,707
- ------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 53,645,086 (16,549,652)
- ------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (70,732,375) 147,624,755
- ------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 47,298,162 279,701,810
- ------------------------------------------------------------------------------------------------
Distributions to shareholders
- ------------------------------------------------------------------------------------------------
From net investment income: -
Class A (72,725,222) (151,762,165)
- ------------------------------------------------------------------------------------------------
Class B (393,822) (283,676)
- ------------------------------------------------------------------------------------------------
Class M (23,244) (11,822)
- ------------------------------------------------------------------------------------------------
From net realized gain on investments:
Class A -- (13,778,422)
- ------------------------------------------------------------------------------------------------
Class B -- (25,755)
- ------------------------------------------------------------------------------------------------
Class M -- (1,073)
- ------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (129,943,301) (338,147,532)
- ------------------------------------------------------------------------------------------------
Total decrease in net assets (155,787,427) (224,308,635)
- ------------------------------------------------------------------------------------------------
Net assets
- ------------------------------------------------------------------------------------------------
Beginning of period 2,193,536,124 2,417,844,759
- ------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income of $8,756,837 and $0,
respectively) $2,037,748,697 $2,193,536,124
- ------------------------------------------------------------------------------------------------
* Unaudited.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
February 14,
1995
Six months (commencement Six months
ended of of operations) ended Year ended
March 31 to September 30 March 31 September 30
- --------------------------------------------------------------------------------------------------------
1996* 1995** 1996* 1995**
- --------------------------------------------------------------------------------------------------------
Class M Class B
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $8.65 $8.14 $8.62 $8.19
- --------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------
Net investment income .26 .29 .24 .46
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (.10) .62 (.09) .51
- --------------------------------------------------------------------------------------------------------
Total from investment operations .16 .91 .15 .97
- --------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- --------------------------------------------------------------------------------------------------------
From net investment income (.28) (.37) (.27) (.49)
- --------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- -- --
- --------------------------------------------------------------------------------------------------------
From return of capital -- (.03) -- (.05)
- --------------------------------------------------------------------------------------------------------
Total distributions (.28) (.40) (.27) (.54)
- --------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.53 $8.65 $8.50 $8.62
- --------------------------------------------------------------------------------------------------------
Total investment return at net
asset value (%) (a) 1.87(b) 11.44(b) 1.66(b) 12.32
- --------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $820 $672 $17,082 $9,099
- --------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) .61(b) .78(b) .86(b) 1.68
- --------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 2.86(b) 4.03(b) 2.62(b) 5.76
- --------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 145.21(b) 468.86 145.21(b) 468.86
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (Continued)
(For a share outstanding throughout the period)
May 20,
1994
(commencement Six months
of operations) ended
to September 30 March 31 Year ended September 30
- ----------------------------------------------------------------------------------------------------
1994** 1996* 1995 1994
- ----------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $8.43 $8.65 $8.21 $9.21
- ----------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------
Net investment income .21 .26 .55 .62
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (.25) (.07) .50 (.98)
- ----------------------------------------------------------------------------------------------------
Total from investment operations (.04) .19 1.05 (.36)
- ----------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------
From net investment income (.20) (.30) (.56) (.64)
- ----------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- -- --
- ----------------------------------------------------------------------------------------------------
From return of capital -- -- (.05) --
- ----------------------------------------------------------------------------------------------------
Total distributions (.20) (.30) (.61) (.64)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $8.19 $8.54 $8.65 $8.21
- ----------------------------------------------------------------------------------------------------
Total investment return at net
asset value (%) (a) (.52)(b) 2.13(b) 13.42 (4.06)
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $5,691 $2,019,847 $2,183,766 $2,412,154
- ----------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) .59(b) .48(b) .94 .83
- ----------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 2.22(b) 2.99(b) 6.62 6.93
- ----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 331.61 145.21(b) 468.86 331.61
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (Continued)
(For a share outstanding throughout the period)
Year ended September 30
- ---------------------------------------------------------------------------------------------
1993 1992 1991
- ---------------------------------------------------------------------------------------------
Class A
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $9.32 $9.60 $9.32
- ---------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------
Net investment income .77 .56 .70
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (.13) .12 .59
- ---------------------------------------------------------------------------------------------
Total from investment operations .64 .68 1.29
- ---------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------
From net investment income (.75) (.56) (.70)
- ---------------------------------------------------------------------------------------------
From net realized gain on investments -- (.40) (.31)
- ---------------------------------------------------------------------------------------------
From return of capital -- -- --
- ---------------------------------------------------------------------------------------------
Total distributions (.75) (.96) (1.01)
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $9.21 $9.32 $9.60
- ---------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (a) 7.20 7.56 14.49
- ---------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $3,530,130 $4,275,225 $5,045,139
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) .91 .96 .97
- ---------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 8.39 6.03 7.39
- ---------------------------------------------------------------------------------------------
Portfolio turnover (%) 235.61 798.43 469.45
- ---------------------------------------------------------------------------------------------
* Unaudited.
** Per share net investment income has been determined on the basis of the weighted average
number of shares outstanding during the period.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of
sales charges.
(b) Not annualized.
(c) The ratio of expenses to average net assets for the periods ended September 30, 1995 and
thereafter includes amounts paid through expense offset arrangements. Prior period ratios
exclude these amounts (Note 2).
</TABLE>
Notes to financial statements
March 31, 1996 (Unaudited)
Note 1
Significant accounting policies
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 current income, with preservation of capital as its
secondary objective.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares,
which convert to class A shares after approximately eight years, do not
pay a front-end sales charge, but pay a higher ongoing distribution fee
than class A shares, and are subject to a contingent deferred sales
charge, if those shares are redeemed within six years of purchase. Class
M shares are sold with a maximum front-end sales charge of 3.25% and pay
an ongoing distribution fee that is lower than class B shares and higher
than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuations 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 most securities traded over-the-counter--the last reported bid
price. 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 managed by Putnam Investment Management,
Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc. and certain other accounts. 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 102% of the resale price, including accrued
interest. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to
102% of 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. Discounts on zero
coupon bonds are accreted according to the effective yield method.
E) 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. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
At September 30, 1995, the fund had a capital loss carryover of
approximately $1,474,761,000 available to offset future capital gains,
if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- --------------------
$1,165,356,000 September 30, 1998
$ 45,648,000 September 30, 2001
$ 7,767,000 September 30, 2002
$ 255,990,000 September 30, 2003
F) 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 based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.60% of the
first $500 million of average net assets, 0.50% of the next $1 billion,
0.45% of the next $1 billion, 0.40% of the next $4.5 billion, 0.375% of
the next $2.5 billion, and 0.35% of any excess over $9.5 billion,
subject under current law, to reduction in any year to the extent that
expenses (exclusive of distribution fees, brokerage, interest and taxes)
of the fund exceed 2.5% of the first $30 million of average net assets,
2% of the next $70 million and 1.5% of any excess over $100 million by
the amount of certain brokerage commissions and fees (less expenses)
received by affiliates of Putnam Management on the fund's portfolio
transactions.
The fund reimburses Putnam Management 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.
Trustees of the fund receive an annual Trustees fee of $2,970 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 adopted a Trustee Fee Deferral Plan (the "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 the fund or in other Putnam funds until distribution
in accordance with the Plan.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the six months ended March 31, 1996, fund expenses were reduced by
$604,735 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 the assets utilized in connection
with the expense offset arrangements in an income producing asset if it
had not entered into such arrangements.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B and 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 0.35%,
1.00% and 1.00% of the average net assets attributable to class A, class
B and class M shares, respectively. The Trustees have approved payment
by the fund at an annual rate of 0.25%, 1.00% and 0.50% of the average
net assets attributable to class A, class B and class M shares
respectively.
For the six months ended March 31, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $58,148 and $404 from
the sale of class A and class M shares, respectively and received
$15,149 in contingent deferred sales charges from redemptions of class B
shares. A deferred sales charge of up to 1% is assessed on certain
redemptions of class A shares. For the six months ended March 31, 1996,
Putnam Mutual Funds Corp., acting as underwriter received $10,430 on
class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended March 31, 1996, purchases and sales of U.S
government obligations other than short-term investments aggregated
$2,909,072,079 and $3,158,637,853, respectively. 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 March 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended March 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 4,320,177 $37,749,445
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,022,194 35,034,337
- ----------------------------------------------------
8,342,371 72,783,782
Shares
repurchased (24,147,753) (211,168,944)
- ----------------------------------------------------
Net decrease (15,805,382) $(138,385,162)
- ----------------------------------------------------
Year ended September 30, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 6,624,630 $54,980,481
- ----------------------------------------------------
Shares issued
in connection with
reinvestment of
distributions 9,059,519 74,915,985
- ----------------------------------------------------
15,684,149 129,896,466
Shares
repurchased (57,082,955) (471,766,626)
- ----------------------------------------------------
Net decrease (41,398,806) $(341,870,160)
- ----------------------------------------------------
Six months ended March 31, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 1,258,162 $10,945,192
- ----------------------------------------------------
Shares issued
in connection with
reinvestment of
distributions 31,872 276,677
- ----------------------------------------------------
1,290,034 11,221,869
Shares
repurchased (336,350) (2,939,277)
- ----------------------------------------------------
Net increase 953,684 $8,282,592
- ----------------------------------------------------
Year ended September 30, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 1,205,771 $10,033,873
- ----------------------------------------------------
Shares issued
in connection with
reinvestment of
distributions 25,686 214,274
- ----------------------------------------------------
1,231,457 10,248,147
Shares
repurchased (871,188) (7,180,267)
- ----------------------------------------------------
Net increase 360,269 $3,067,880
- ----------------------------------------------------
Six months ended March 31, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 48,841 $420,938
- ----------------------------------------------------
Shares issued
in connection with
reinvestment of
distributions 2,368 20,604
- ----------------------------------------------------
51,209 441,542
Shares
repurchased (32,822) (282,273)
- ----------------------------------------------------
Net increase 18,387 $159,269
- ----------------------------------------------------
For the period February 14, 1995
(commencement of operations)
to September 30, 1995
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 76,597 $645,492
- ----------------------------------------------------
Shares issued
in connection with
reinvestment of
distributions 1,133 9,656
- ----------------------------------------------------
77,730 655,148
Shares
repurchased (47) (400)
- ----------------------------------------------------
Net increase 77,683 $654,748
- ----------------------------------------------------
Our commitment to quality service
* CHOOSE AWARD-WINNING SERVICE
Putnam Investor Services has won the DALBAR Quality Tested Service Seal
for the past six years. In 1995, over 146,000 tests of 56 shareholder
service components demonstrated that Putnam outperformed the industry
standard in every category.
* HELP YOUR INVESTMENT GROW
Set up a systematic program for investing with as little as $25 a month
from a Putnam money market fund or from your checking or savings
account.*
* SWITCH FUNDS EASILY
You can move money from one account to another with the same class of
shares without a service charge. (This privilege is subject to change or
termination.)
* ACCESS YOUR MONEY QUICKLY
You can get checks sent regularly or redeem shares any business day at
the then-current net asset value, which may be more or less than the
original cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a
helpful Putnam representative.
To make an additional investment in this or any other Putnam fund,
contact your financial advisor or call our toll-free number: 1-800-225-
1581.
* Regular investing of course, does not guarantee a profit or
protect against a loss in a declining market.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Alan J. Bankart
Vice President
Michael Martino
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam American
Government 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.
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
principal amount invested.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------
24525-033/292/895 5/96
