Putnam
American
Government
Income Fund
SEMIANNUAL REPORT
March 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Putnam American Government Income Fund has produced noteworthy
competitive performance since Michael Martino took over the fund in February
1994. According to Lipper Analytical Services, the fund's class A shares were
ranked 12 out of 123 general U.S. government funds for 3-year performance
through March 31, 1997, placing them in the top 10% of competing funds.*
* "The fund has done well under Martino, and might have done even better in
a more-bullish environment. He has given long-term investors a reason not
to run away and potential investors cause to take a fresh look at the fund."
-- Morningstar Mutual Funds, March 28, 1997
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
13 Financial statements
*Lipper rankings are based on total return performance, vary over time,
and do not reflect the effects of sales charges. The fund's class A, class
B, and class M shares were ranked 36, 93, and 46, respectively, out of 173
general U.S. government funds for 1-year performance through 3/31/97. The
fund's class A shares were ranked 52 out of 75 and 38 out of 45 general
U.S. government funds for 5- and 10-year performance, respectively,
through 3/31/97. Class B and class M shares were not ranked over longer
applicable periods. Past performance is not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Anxiety over the effect of continued economic strength and the uncertain
course of interest rates defined the prevailing market environment during the
first half of Putnam U.S. Government Income Fund's current fiscal year. The
Federal Reserve Board's first increase in short-term interest rates in more
than two years provided a fitting climax to the period that ended on March 31,
1997.
Like many of his counterparts, Fund Manager Michael Martino responded by
taking defensive measures, such as shortening the fund's average duration and
moving the portfolio's maturity structure toward a "barbell" configuration. He
also increased the weighting of mortgage-backed securities, partly as another
defensive move and also in response to their superior performance relative to
U.S. Treasury securities.
Mike explains his strategies in detail and discusses prospects for the fiscal
year's second half in the following report.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 21, 1997
Report from the Fund Manager
Michael Martino
Despite changing interest-rate conditions, Putnam American Government Income
Fund's results generally kept pace with the market during the first half of
the fund's 1997 fiscal year, which ended on March 31. Your fund's class A
shares returned 2.76% at net asset value over the period, surpassing the
Lehman Brothers Intermediate Treasury Index -- the fund's principal market
benchmark -- which measured a return of 2.22%. The total return of class A
shares at public offering price was - 2.14%. (Please refer to the tables on
pages 8 and 9 for complete performance information including results for other
share classes.)
* DEFENSIVE POSITIONING IN LIGHT OF ECONOMIC STRENGTH AND MARKET GYRATIONS
U.S. economic data were broadly and consistently strong throughout much of the
period. As anticipated, revised fourth-quarter 1996 gross domestic product
growth came in at a healthy 3.8% annual rate. Lower-than-expected unemployment
figures and strong personal income gains helped keep consumer confidence at a
27-year high. Retail sales rebounded in January after a disappointing holiday
season. New-home sales remained strong, setting an 11-year record in January.
Industrial indicators suggested a vigorous manufacturing sector benefiting
from increased orders and tight inventories.
After seeing bond prices rise during the period's first three months, the
focus in the U.S. Treasury market shifted to concern that continuing robust
economic growth would prompt an interest-rate increase by the Federal Reserve
Board. The Fed finally acted as the period came to a close, raising the target
for short-term bank lending rates by a quarter of a percentage point to 5.50%,
its first increase in more than two years. Bond prices fell and yields, which
move in the opposite direction, rose in response to this demonstration of a
more restrictive monetary policy.
Against this changing market backdrop, we maintained a defensive strategy by
shortening the portfolio's duration, keeping it as much as 10% lower than that
of competing U.S. government funds. Duration, the principal indicator of
interest-rate sensitivity for a given portfolio of bonds, is measured in
years. The longer the duration, the more sensitive a portfolio is to a change
in rates. Thus, when interest rates rise, a relatively long duration causes
the portfolio's value to decline more rapidly with each rate increase.
Conversely, therefore, by keeping duration somewhat shorter than the fund's
peer group average, we were able to gain a modest performance advantage when
interest rates began to climb. As is frequently the case, active management of
the portfolio's duration was, once again, a key determinant of your fund's
performance over the period.
* FUND BENEFITS FROM INCREASED ALLOCATION AS MORTGAGE BACKEDS OUTPERFORM
TREASURIES
While your fund normally keeps a substantial portion of its portfolio in
mortgage-backed securities, we will adjust the weighting based on our
assessment of relative value and the risk/reward tradeoff versus Treasuries.
We began and ended the period with approximately 46% of the portfolio
allocated to mortgage-backed securities. However, in response to the
volatility in the Treasury market over the final three months of the period,
we currently plan to increase the fund's mortgage holdings to perhaps as much
as 55% of net assets over the next several months.
[GRAPHIC OMITTED:vertical bar chart:AVERAGE EFFECTIVE MATURITY AND DURATION]
AVERAGE EFFECTIVE MATURITY AND DURATION
1st figure represents average effective maturity at 3/31/97
2nd figure represents average effective maturity at 9/30/96
3rd figure represents average effective maturity at 3/31/97
Average Effective Maturity 7.1
10.4
9.4
1st figure represents duration at 3/31/97
2nd figure represents duration at 9/30/96
3rd figure represents duration at 3/31/97
Duration 4.4
5.8
4.8
Footnote reads:
This chart depicts the fund's average effective maturity and duration
at 6-month intervals over the 12 months ended 3/31/97. Average effective
maturity and duration, stated in years, are derived from calculations
that incorporate assumptions about prepayment rates and cash flows of
mortgage-backed securities. Measures of effective maturity, duration,
and the assumptions on which they are based will vary over time.
[GRAPHIC OMITTED: pie chart PORTFOLIO ALLOCATIONS (3/31/97)]
PORTFOLIO ALLOCATIONS (3/31/97)*
Cash and short-term investments -- 11.5%
U.S. Treasury securities -- 41.8%
Mortgage-backed securties -- 46.7%
Footnote reads:
* Based on total market value of assets. The allocation to mortgage-backed
securities is primarily concentrated in bonds issued by the Government
National Mortgage Association (Ginnie Mae). Allocations will vary over
time.
Given their higher income streams and considering that rising interest
rates have allayed prepayment fears, mortgage-backed securities outperformed
Treasuries of comparable maturities over the period. In fact, mortgage-backed
securities as a group represented the best-performing investment-grade bond
sector during the January-to-March 1997 period.+
* EMPHASIS ON MORTGAGE SECURITIES COMBINED WITH SHORT-AND LONG-TERM
TREASURIES
We continue to anticipate a modest acceleration in U.S. economic growth
coupled with low inflation over the balance of calendar 1997. Concern about
rising wage-inflation pressure may cause the Fed to boost rates further by
year's end.
+Source: Putnam Research. 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. Prepayment risk is greatest when interest rates
are falling, since mortgage holders rush to refinance, forcing retirement of
the bonds that back their existing mortgages.
In light of this outlook, we believe short- and intermediate-term bond yields
may rise more than long-term yields in the months ahead. Consequently, we are
structuring the fund's Treasury holdings in something of a barbell
configuration, concentrating holdings in very short-term and long-term
securities and avoiding intermediate maturities for now. Intermediate-term
bonds tend to underperform when interest rates are rising.
Although we cannot provide assurances, we believe this type of portfolio
composition -- overweighting mortgage securities and barbelling Treasuries --
may give the fund the potential to benefit in two ways. First, if the Fed
continues to raise rates, causing short-term rates to rise faster than
long-term rates, we would expect long-term bonds to outperform other
maturities, as they typically do in such an environment. By holding long-term
bonds and balancing them with very short-term securities such as cash
equivalents, we are attempting to position the fund to benefit while seeking
to manage the greater inherent volatility of long-term bonds. Our goal,
regardless, is to keep the portfolio's overall duration (or interest-rate
sensitivity) in the intermediate range of four to six years.
Second, although mortgage-backed bonds have outperformed Treasuries over the
past several months, we believe this trend may continue over the near term.
Not only do mortgage-backeds offer more attractive yields than Treasuries of
comparable maturities, the risk of prepayment, which reduces their
appreciation potential in declining-rate environments, lessens as interest
rates rise. In short, we believe mortgage securities represent a defensive
holding during periods of rising interest rates.
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 3/31/97, there is no guarantee the fund will continue to hold
these securities in the future. While U.S. government backing of individual
securities does not insure your principal, which will fluctuate with market
conditions, it does guarantee that the fund's government-backed holdings will
make timely payments of interest and principal. The fund may invest in
securities other than those issued or backed by the full faith and credit of
the U.S. government.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
American Government Income Fund is designed for investors seeking high
current income primarily through U.S. government securities.
TOTAL RETURN FOR PERIODS ENDED 3/31/97
Class A Class B Class M
(Inception dates) (3/1/85) (5/20/94) (2/14/95)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------------
6 months 2.76% -2.14% 2.39% -2.60% 2.75% -0.57%
- -----------------------------------------------------------------------------
1 year 4.27 -0.73 3.52 -1.38 4.12 0.70
- -----------------------------------------------------------------------------
5 years 31.53 25.31 -- -- -- --
Annual average 5.63 4.62 -- -- -- --
- -----------------------------------------------------------------------------
10 years 79.86 71.28 -- -- -- --
Annual average 6.04 5.53 -- -- -- --
- -----------------------------------------------------------------------------
Life of class -- -- 17.58 14.62 18.21 14.42
Annual average -- -- 5.81 4.87 8.17 6.53
- -----------------------------------------------------------------------------
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 principal 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%.
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/97
Lehman Bros.
Intermediate Consumer
Treasury Index Price Index
- ---------------------------------------------------------------------
6 months 2.22% 1.39%
- ---------------------------------------------------------------------
1 year 4.65 2.76
- ---------------------------------------------------------------------
5 years 36.69 14.86
Annual average 6.45 2.81
- ---------------------------------------------------------------------
10 years 107.03 42.73
Annual average 7.55 3.62
- ---------------------------------------------------------------------
Life of class B 19.69 8.48
Annual average 6.55 2.88
- ---------------------------------------------------------------------
Life of class M 16.99 6.45
Annual average 7.52 2.98
- ---------------------------------------------------------------------
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 principal value will fluctuate so that an
investor's shares, when sold, may be worth more or less than their
original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 3/31/97
Class A Class B Class M
- -----------------------------------------------------------------------------
Distributions (number) 6 6 6
- -----------------------------------------------------------------------------
Income $0.252 $0.221 $0.241
- -----------------------------------------------------------------------------
Total $0.252 $0.221 $0.241
- -----------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- -----------------------------------------------------------------------------
9/30/96 $8.39 $8.81 $8.35 $8.38 $8.66
- -----------------------------------------------------------------------------
3/31/97 8.37 8.79 8.33 8.37 8.65
- -----------------------------------------------------------------------------
Current return
(end of period)
- -----------------------------------------------------------------------------
Current dividend
rate1 6.02% 5.73% 5.33% 5.88% 5.69%
- -----------------------------------------------------------------------------
Current 30-day SEC
yield2 5.78 5.52 4.99 5.50 5.32
- -----------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
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 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. It is not possible
to invest directly in an index.
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, 1997 (Unaudited)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (87.9%) *
PRINCIPAL AMOUNT VALUE
Collateralized Mortgage Obligations (0.3%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$5,024,972 Federal National Mortgage Association Ser. 89-23,
class D, 10.2s, September 25, 2018 $ 5,182,363
U.S. Government Agency Mortgage Pass-Through Certificates (46.1%)
- ------------------------------------------------------------------------------------------------------------
Government National Mortgage Association
63,208,959 9s, with due dates from November 15, 2008
to July 1, 2024 66,945,213
12,354,878 8 1/2s, with due dates from August 15, 2019
to September 15, 2024 12,873,303
178,418,193 8s, with due dates from August 15, 2006
to January 15, 2027 180,140,108
280,832,273 7 1/2s, with due dates from February 15, 2022
to January 15, 2027 276,198,829
235,898,111 7s, with due dates from April 15, 2023
to January 15, 2026 225,243,808
--------------
761,401,261
U.S. Treasury Obligations (41.5%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
100,000,000 12s, August 15, 2013 137,484,000
50,000,000 9 7/8s, November 15, 2015 63,578,000
75,000,000 8 3/4s, November 15, 2008 81,762,000
5,000,000 6 3/4s, August 15, 2026 4,737,500
100,000,000 6 5/8s, February 15, 2027 94,094,000
U.S. Treasury Notes
150,000,000 9 1/8s, May 15, 1999 157,687,500
25,000,000 6 5/8s, July 31, 2001 24,875,000
125,000,000 6 1/4s, January 31, 2002 122,285,000
--------------
686,503,000
--------------
Total U.S. Government and Agency Obligations
(cost $1,492,323,475) 1,453,086,624
SHORT-TERM INVESTMENTS (11.4%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$50,000,000 Federal Home Loan Mortgage Corp. Discount Notes
effective yield of 5.29%, April 18, 1997 $ 49,867,750
50,000,000 Federal Home Loan Mortgage Corp. Discount Notes
effective yield of 5.25%, April 9, 1997 49,934,375
50,000,000 Federal Home Loan Mortgage Corp. Discount Notes
effective yield of 5.22%, April 18, 1997 49,876,750
38,336,000 Interest in $800,000,000 joint repurchase agreement
dated March 31, 1997 with Goldman Sachs, & Co. due
April 1, 1997 with year with respect to various U.S. Treasury
obligations -- maturity value of $38,342,922 for an effective
yield of 6.50% 38,342,922
--------------
Total Short-Term Investments (cost $188,021,797) $ 188,021,797
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,680,345,272) *** $1,641,108,421
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,652,262,953.
*** The aggregate identified cost on a tax basis is $1,680,345,272, resulting in gross unrealized appreciation
and depreciation of $5,325,118 and $44,561,969, respectively, or net unrealized depreciation of $39,236,851.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31, 1997 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,680,345,272) (Note 1) $1,641,108,421
- ---------------------------------------------------------------------------------------------------
Interest receivable 18,396,924
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 348,320
- ---------------------------------------------------------------------------------------------------
Total assets 1,659,853,665
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable to subcustiodian (Note 2) 7,241
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 3,374,484
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,213,589
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 510,996
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 21,014
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 5,588
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,065,396
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 392,404
- ---------------------------------------------------------------------------------------------------
Total liabilities 7,590,712
- ---------------------------------------------------------------------------------------------------
Net assets $1,652,262,953
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,126,168,461
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 3,805,316
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments
(Note 1) (1,438,473,973)
- ---------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (39,236,851)
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,652,262,953
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,624,631,325 divided by 194,160,048 shares) $8.37
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.37)* $8.79
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($26,477,097 divided by 3,178,957 shares)** $8.33
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,154,531 divided by 137,914 shares) $8.37
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.37)* $8.65
- ---------------------------------------------------------------------------------------------------
* 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, 1997 (Unaudited)
<S> <C>
Interest Income: $64,231,820
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,579,908
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,359,004
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 42,906
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 10,835
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,162,384
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 127,063
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 2,778
- --------------------------------------------------------------------------------------------------
Reports to shareholders 97,978
- --------------------------------------------------------------------------------------------------
Registration fees 100
- --------------------------------------------------------------------------------------------------
Auditing 9,079
- --------------------------------------------------------------------------------------------------
Legal 13,883
- --------------------------------------------------------------------------------------------------
Postage 66,192
- --------------------------------------------------------------------------------------------------
Other 68,612
- --------------------------------------------------------------------------------------------------
Total expenses 8,540,722
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (429,496)
- --------------------------------------------------------------------------------------------------
Net expenses 8,111,226
- --------------------------------------------------------------------------------------------------
Net investment income 56,120,594
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 10,553,766
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (16,308,631)
- --------------------------------------------------------------------------------------------------
Net loss on investments (5,754,865)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 50,365,729
- --------------------------------------------------------------------------------------------------
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
1997* 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 56,120,594 $ 124,987,325
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 10,553,766 29,742,994
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (16,308,631) (81,261,946)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 50,365,729 73,468,373
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (51,624,007) (123,617,463)
- ----------------------------------------------------------------------------------------------------------------------
Class B (660,421) (883,264)
- ----------------------------------------------------------------------------------------------------------------------
Class M (30,850) (48,099)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- (10,592,525)
- ----------------------------------------------------------------------------------------------------------------------
Class B -- (75,685)
- ----------------------------------------------------------------------------------------------------------------------
Class M -- (4,121)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (170,645,674) (306,925,164)
- ----------------------------------------------------------------------------------------------------------------------
Total decrease in net assets (172,595,223) (368,677,948)
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 1,824,858,176 2,193,536,124
- ----------------------------------------------------------------------------------------------------------------------
End of period (Including undistributed net investment
income of $3,805,316 and $ --, respectively) $1,652,262,953 $1,824,858,176
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share March 31
operating performance (Unaudited) Year ended September 30
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.39 $8.65 $8.21 $9.21 $9.32 $9.60
- -----------------------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income .27 .52 .55 .62 .77 .56
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.04) (.21) .50 (.98) (.13) .12
- -----------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .23 .31 1.05 (.36) .64 .68
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------------
From net
investment income (.25) (.53) (.56) (.64) (.75) (.56)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.04) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.40)
- -----------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.05) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (.25) (.57) (.61) (.64) (.75) (.96)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.37 $8.39 $8.65 $8.21 $9.21 $9.32
- -----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.76 * 3.64 13.42 (4.06) 7.20 7.56
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,624,631 $1,800,683 $2,183,766 $2,412,154 $3,530,130 $4,275,225
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .48 * .95 .94 .83 .91 .96
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.18 * 6.14 6.62 6.93 8.39 6.03
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 88.23 * 245.46 468.86 331.61 235.61 798.43
- -----------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for periods ended September 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted
average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- --------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share March 31 May 20, 1994+
operating performance (Unaudited) Year ended September 30 to Sept. 30
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.35 $8.62 $8.19 $8.43
- --------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------
Net investment income .24 .49 .46 (c) .21
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.04) (.26) .51 (.25)
- --------------------------------------------------------------------------------------------------------------
Total from
investment operations .20 .23 .97 (.04)
- --------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.46) (.49) (.20)
- --------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.04) -- --
- --------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- --
- --------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.05) --
- --------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.50) (.54) (.20)
- --------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.33 $8.35 $8.62 $8.19
- --------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.39 * 2.77 12.32 (.52)*
- --------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $26,477 $23,067 $9,099 $5,691
- --------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .85 * 1.70 1.68 .59 *
- --------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.81 * 5.46 5.76 2.22 *
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 88.23 * 245.46 468.86 331.61
- --------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for periods ended September 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted
average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- -------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share March 31 Year ended Feb. 14, 1995+
operating performance (Unaudited) Sept. 30 Sept. 30
- -------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.38 $8.65 $8.14
- -------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------
Net investment income .26 .53 .29 (c)
- -------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.03) (.26) .62
- -------------------------------------------------------------------------------------------------
Total from
investment operations .23 .27 .91
- -------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------
From net
investment income (.24) (.50) (.37)
- -------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.04) --
- -------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- --
- -------------------------------------------------------------------------------------------------
From return of capital -- -- (.03)
- -------------------------------------------------------------------------------------------------
Total distributions (.24) (.54) (.40)
- -------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.37 $8.38 $8.65
- -------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.75 * 3.24 11.44 *
- -------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,155 $1,108 $672
- -------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .60 * 1.20 .78 *
- -------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.07 * 5.94 4.03 *
- -------------------------------------------------------------------------------------------------
Portfolio turnover (%) 88.23 * 245.46 468.86
- -------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for periods ended September 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted
average number of shares outstanding during the period.
</TABLE>
Notes to financial statements
March 31, 1997 (Unaudited)
Note 1
Significant accounting policies
Putnam American Government 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 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 valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of 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 and certain other accounts managed by Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc.. These balances may be invested in one
or more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
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 nor for excise tax
on income and capital gains.
At September 30, 1996, the fund had a capital loss carryover of approximately
$1,447,359,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
------------- ------------------
$1,137,954,000 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.
As part of the custodian contract between the subcustodian bank and Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc., the subcustodian bank has a lien on the securities of the
fund to the extent permitted by the fund's investment restrictions to cover
any advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At March 31, 1997, the payable to the subcustodian bank
represents the amount due for cash advance for the settlement of a security
purchased.
Custodial functions for the fund's assets are provided by PFTC.
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.
Investor servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended March 31, 1997, fund expenses were reduced by
$429,496 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.
Trustees of the fund receive an annual Trustees fee of $2,010 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of the
Trustees receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Plan") which allows the
Trustees to defer the receipt of all or a portion of Trustees Fees payable on
or after July 1, 1995. The deferred fees remain in the fund and are invested
in certain Putnam funds until distribution in accordance with the 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 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, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $38,493 and $165 from the sale of
class A and class M shares, respectively and $37,678 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, 1997, Putnam Mutual Funds Corp., acting as underwriter
received $214 on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended March 31, 1997, purchases and sales of U.S.
government and agency obligations other than short-term investments aggregated
$1,449,314,799 and $1,794,753,419, 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, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
March 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 3,328,202 $28,368,665
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,017,834 25,680,861
- ------------------------------------------------------------
6,346,036 54,049,526
Shares
repurchased (26,796,096) (228,294,586)
- ------------------------------------------------------------
Net decrease (20,450,060) $(174,245,060)
- ------------------------------------------------------------
Year ended
September 30, 1996
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 7,763,736 $66,595,552
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,435,979 63,394,679
- ------------------------------------------------------------
15,199,715 129,990,231
Shares
repurchased (52,919,429) (451,949,272)
- ------------------------------------------------------------
Net decrease (37,719,714) $(321,959,041)
- ------------------------------------------------------------
Six months ended
March 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 1,128,516 $9,847,820
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 89,123 489,133
- ------------------------------------------------------------
1,217,639 10,336,953
Shares
repurchased (800,373) (6,788,755)
- ------------------------------------------------------------
Net increase 417,266 $3,548,198
- ------------------------------------------------------------
Year ended
September 30, 1996
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 2,556,309 $21,772,161
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 81,398 686,967
- ------------------------------------------------------------
2,637,707 22,459,128
Shares
repurchased (931,482) (7,885,924)
- ------------------------------------------------------------
Net increase 1,706,225 $14,573,204
- ------------------------------------------------------------
Six months ended
March 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 46,326 $393,838
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 590 4,973
- ------------------------------------------------------------
46,916 398,811
Shares
repurchased (41,111) (347,623)
- ------------------------------------------------------------
Net increase 5,805 $51,188
- ------------------------------------------------------------
Year ended
September 30, 1996
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 104,264 $884,487
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,761 48,808
- ------------------------------------------------------------
110,025 933,295
Shares
repurchased (55,599) (472,622)
- ------------------------------------------------------------
Net increase 54,426 $460,673
- ------------------------------------------------------------
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
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
William J. Curtin
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. You
can also learn more at Putnam Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board or any other agency,
and involve risk, including the possible loss of principal amount invested.
[PUTNAM LOGO OMITTED]
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
32908-033/292/895 5/97
