SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. )
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/ / Preliminary Proxy Statement
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/ / Definitive Proxy Statement
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/ X / Definitive Additional Materials
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/ / Soliciting Material Pursuant to Sec. 240.14a-11(c) or
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PUTNAM AMERICAN GOVERNMENT INCOME FUND
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement,
if other than Registrant)
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Q & A for Putnam American Government Income Fund
On or about December 29, 1997 a proxy statement was sent to
shareholders of Putnam American Government Income Fund asking for
their vote on the following matters: (1) electing the fund's
Trustees; (2) ratifying the selection of the fund's independent
auditors; (3) approving a new management contract between the
fund and Putnam Investment Management, Inc. ("Putnam
Management"), including an increase in the management fee payable
by the fund; (4) approving an amendment to the fund's fundamental
investment restriction with respect to borrowing and (5)
approving an amendment to the fund's fundamental investment
restriction with respect to making loans.
Listed below are questions shareholders are likely to ask and
recommended responses.
Proposal 1
Election of Trustees
What is being proposed?
The Nominating Committee of the Trustees, which consists solely
of Trustees who are independent with no financial interest in
Putnam Management, recommends that shareholders vote for the
election of the nominees for Trustees.
What are the Trustees' responsibilities?
The Trustees are responsible for the general oversight of your
fund's business and for assuring that your fund is managed in the
best interests of the shareholders.
Proposal 2
Election of Auditors
Who has selected the independent auditors of the fund?
The Trustees have selected Price Waterhouse LLP as the
independent auditors of your fund and shareholders are being
asked to ratify the selection for the current year.
What were the reasons for the selection of Price Waterhouse LLP
as the independent auditors of the fund?
The Trustees selected Price Waterhouse primarily based on its
expertise as auditors of investment companies, the quality of its
audit services and the competitiveness of its fees.
Proposal 3
Approval of a new Management Contract
What is being proposed?
The Trustees of your fund recommend that shareholders approve a
new management contract with Putnam Management, which provides
for an increase in the management fees payable by the fund to
Putnam Management. The proposed contract is identical in all
substantive respects to the existing contract, except for changes
regarding certain administrative duties that have been divided
among various officers of the fund (see "Are there any other
proposed changes", below).
What do management fees pay for?
Management fees pay Putnam Management for the services it
provides in conducting the day-to-day operations of the fund.
These include providing the personnel, equipment, and office
facilities necessary for the management of the fund's investment
portfolio, determining the fund's daily net asset value,
maintaining the accounts and records of the fund, preparing
reports to shareholders, compliance with regulatory requirements,
and general administration of the fund's affairs.
Why did Putnam Management recommend a new management fee schedule
to the Trustees?
In recent years, Putnam Management has noted a general increase
in the complexity of the investment process and in the
competition for talented investment personnel. Putnam Management
recommended the new management fee schedule to help ensure that
Putnam Management receives fees for its services that are
competitive with fees paid to high-quality investment managers by
other mutual funds. Putnam Management believes that maintaining
competitive management fees will, over the longer term, enable it
to continue to provide high-quality management services to your
fund and to the other funds in the Putnam group. Putnam
Management also notes that your fund's current management fee
schedule has never been increased and is lower than the fees paid
to managers of many competitive funds.
How did your fund's Trustees arrive at the proposed management
fee?
Several years ago, the Trustees undertook a comprehensive review
of the management fees paid by the Putnam funds. This review was
conducted largely through the Contract Committee of the Trustees,
which consists solely of independent Trustees who have no
financial interest in Putnam Management. As a result of this
review, the Trustees and Putnam Management reached agreement on a
system of model fee schedules for the various types of funds in
the Putnam group. These model fee schedules have now been
implemented for most of the Putnam funds. The proposed new fee
schedule for the fund is identical to that which has been
implemented for many other Putnam funds.
The Trustees and Putnam Management also reached a general
understanding that these model fee schedules should be
implemented for a particular fund only following consideration of
the fund's comparative investment performance and expense levels.
After reviewing comparative data on competitive funds in recent
years and noting, among other things, the fund's strong relative
performance, the Trustees concluded that it would be appropriate
to implement a model fee schedule for your fund at this time.
What factors did the Trustees consider?
The Trustees placed primary emphasis upon the nature and quality
of the services being provided by Putnam Management, including,
in particular, the strong relative investment performance of the
fund in recent years. In this regard, the Trustees also
considered the relative complexity of managing the fund, and a
comparison of recent management fees and other expenses paid by
the fund with those of similar funds managed by other investment
advisers.
The Trustees also considered, among other things, information
provided by Putnam Management regarding the profitability of its
current and proposed management fee arrangements with the fund
(without regard to costs incurred by Putnam Management and its
affiliates in connection with the marketing of shares), the
benefits to Putnam Management and its affiliates resulting from
the fact that affiliates of Putnam Management currently serve as
shareholder servicing agent, distributor, and custodian for each
of the Putnam funds pursuant to separate contractual
arrangements, and Putnam Management's placing of portfolio
transactions to recognize research and brokerage services.
How has the fund performed?
The proxy that was sent to you contains performance information
for the fund. The proxy also contains tabular comparisons of the
fund's performance to that of an appropriate securities index and
to similar funds.
What is the effect of the new management fee schedule?
At all asset levels of the fund, the proposed management fee
would be higher than the fee under the existing contract.
For example, under the new management contract, the fund would
pay 0.65% of the first $500 million in assets as opposed to 0.60%
of the first $500 million under the existing contract. In
addition, the fund would pay 0.55% of the next $500 million under
the new contract, whereas under the existing contract the fund
would pay 0.50% of the next $1 billion. For a complete list of
the proposed and existing management fees, please refer to your
proxy.
Based on average net assets of the fund for the fiscal year ended
September 30, 1997 of approximately $1.693 billion the effective
annual management fee rate under the proposed fee schedule would
be 0.553% as compared to 0.521% under the existing schedule.
This represents an increase of approximately $0.03 in annual
expenses for each $100 invested in the fund. The new management
fee schedule, like the old, provides for lower management fee
rates as the fund's assets increase.
For its fiscal year ended September 30, 1997, the fund paid
management fees to Putnam Management of $8,812,467. If the
proposed new management contract had been in effect for the year,
the fund would have paid fees of $9,367,426, which is an increase
of approximately 6.3%.
Are there any other proposed changes?
The only other substantive changes in the new management contract
relate to the payment by the fund of the compensation and related
expenses of certain officers of the fund.
The existing contract requires the fund to reimburse Putnam
Management for the compensation and related expenses of the
fund's Vice Chairman and such other officers of the fund and
their assistants as the Trustees of the fund may determine.
Since January 1, 1992, the administrative duties previously
performed by the office of Vice Chairman have been divided among
various other officers of the fund. As a result, the new
contract provides for the payment by the fund of the compensation
and related expenses of such officers of the fund and their
assistants as the Trustees may determine. The new contract will
not result in an increase in the amount the fund reimburses
Putnam Management.
Proposal 4
Amending the fund's fundamental investment
restriction with respect to borrowing
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction with respect to borrowing be revised to
reflect the standard restriction expected to be used by other
Putnam funds and to grant the fund the maximum flexibility
permitted by the Investment Company Act of 1940, as amended (the
"1940 Act"). Under the 1940 Act, the fund may borrow up to
33 1/3% of its total assets.
If the proposed change is approved, the fund will be able to
borrow up to the 1940 Act limit. The fund will no longer be
restricted to borrowing only for redemption requests or for
extraordinary or emergency purposes, and would not be limited to
borrowing only from banks. The new restriction would not
prohibit the fund from borrowing for leveraging purposes,
although Putnam Management currently has no intention of
borrowing for such purposes. If the fund were to borrow money
for the purposes of leverage, its net assets would tend to
increase or decrease at a greater rate with market changes than
if leverage were not used.
The proposed revisions would permit the fund to participate
in a proposed " interfund lending program," (see proposal 5 below)
which would allow the fund to borrow from other Putnam funds.
As stated above, the fund may currently borrow money only from
banks. The fund would be able to borrow money under the
interfund lending program only if the rate on the loan is more
favorable to the fund than the interest rates otherwise available
for short-term bank loans, in addition to being more favorable to
the lending fund than available repurchase agreement rates.
Putnam Management believes that the ability to engage in such
borrowing transactions will allow the fund to pay lower interest
rates on its borrowings. The fund could, in certain
circumstances, have its loan recalled by a lending fund on one
day's notice. In these circumstances, the fund might have to
borrow from a bank at a higher interest rate if loans were not
available from other Putnam funds.
The interfund lending program would be implemented only upon
receipt of an exemptive order of the Securities and Exchange
Commission.
Putnam Management believes that this enhanced flexibility could
assist the fund in achieving its investment objective.
In circumstances in which the fund's available cash is not
sufficient to meet, among other things, shareholder redemptions,
Putnam Management believes that it may be advantageous at times
for the fund to borrow money instead of raising cash by selling
its portfolio securities, which could be disruptive to the fund's
investment strategy.
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Proposal 5
Amending the fund's fundamental investment
restriction with respect to making loans
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction with respect to making loans be revised to
reflect the standard restriction expected to be used by other
Putnam funds and to clarify that the fund is permitted to
participate in the proposed interfund lending program described
in Proposal 4.
If the proposal is approved, the fund would be able to
participate in an interfund lending
program and make loans to other Putnam funds.
As stated in Proposal 4, the fund would only make loans under the program if
it could receive an interest rate higher than those available for repurchase
agreements. There is a risk that the fund could experience a delay in
obtaining prompt repayment of a loan and, unlike repurchase agreements, the
fund would not necessarily have received collateral for its loan. A
delay in obtaining prompt payment could cause the fund to miss an
investment opportunity or to incur costs to borrow money to replace the
delayed payment.
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