Putnam
American
Government
Income Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
3-31-99
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Putnam American Government Income Fund has got it right again. [Fund
Manager] Michael Martino doesn't do anything fancy with the fund. He
limits the portfolio to a tame hodgepodge of Treasury and agency debt, and
plain-vanilla mortgage passthroughs, shunning CMOs and derivatives."
-- Morningstar Mutual Funds, December 7, 1998
* "Mortgage-backed securities . . . which represent an ownership interest
in mortgage loans made by financial institutions, have held their own
lately, as rising interest rates reduced the mortgage prepayments that can
hurt these securities. The average fund that invests in mortgage-backed
securities rose 0.62% in the first quarter [of 1999]."
-- The Wall Street Journal, April 5, 1999
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
13 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam American Government Income Fund continued to benefit from
risk-averse global investors' focus on higher-quality investments during
the first half of its current fiscal year, the six months ended March 31,
1999.
Later in the semiannual period, however, the improvement in many of the
world's other markets encouraged investors to start moving assets from the
safe haven of U.S. Treasury bonds. As a result, we have begun to see a
return of prices and yields of Treasuries to more typical levels.
Nevertheless, Fund Managers Michael Martino and Kevin M. Cronin remain
optimistic about prospects for the market and your fund during the second
half of fiscal 1999.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 19, 1999
Report from the Fund Managers
Michael Martino
Kevin M. Cronin
U.S. government securities performed well early in the fourth quarter of
1998, before the value offered by other sectors of the bond market pulled
investors away and demand for U.S. Treasuries and other government
securities waned. As a result, while U.S. government securities offered
steady returns, their performance moderated over the first half of Putnam
American Government Income Fund's fiscal year. Mortgage-backed securities,
on the other hand, held their own as a slight rise in interest rates
reduced prepayment activity.
In this environment, your fund's neutral positioning strategy delivered a
total return of -1.22% for class A shares at net asset value (-5.87% at
public offering price) for the six months ended March 31, 1999. Please see
page 8 for more performance information, including the results for class B
and class M shares.
* STABILITY RETURNS TO FIXED-INCOME MARKETS
During the fourth quarter of 1998 and the first quarter of 1999, the
fixed-income markets rebounded from the dramatic flight to quality they
experienced in response to global economic turmoil in the third quarter of
1998. Motivated by problems in emerging markets such as Russia and those
in Southeast Asia -- as well as concern over possible currency
devaluations in Latin America -- investors flocked to the safe haven of
U.S. Treasuries. Most other segments of the fixed-income markets suffered.
The Federal Reserve Board responded to a lack of liquidity in the bond
markets by implementing a series of three 0.25 percentage point cuts in
the federal funds rate from late September through mid November. These
moves encouraged investors to return to non-Treasury sectors, bringing
their prices and yields relative to Treasuries back to more typical
levels. Overall, interest rates reached their nadir in the fourth quarter,
remained relatively flat until the end of 1998, and rose modestly during
the first three months of 1999.
In the meantime, the U.S. economy remained strong, but no significant
inflationary pressures surfaced. Observing that global economic problems
did not seem to be impeding the progress of U.S. economic growth, the Fed
pulled away from its bias toward lower rates and signaled a shift to a
more neutral stance.
* FUND DURATION ADJUSTED TO NEUTRAL STANCE
During the first two months of the semiannual period, your fund benefited
from a slightly long duration relative to others in its category as well
as from an increased focus on mortgage-backed securities, mainly GNMAs.
Duration is a measure of the portfolio's interest-rate sensitivity; the
longer the duration, the more sensitive the fund will be to a change in
interest rates. The fund also was positioned to take advantage of a modest
flattening of the yield curve (a representation of the difference between
short-term and long-term interest rates). Having benefited from these
positions during the tail end of the market turmoil in the latter stages
of 1998, we shifted the fund's structure in November, and as a consequence
its positioning over the final four months of the period reflected a more
neutral outlook toward the markets.
[GRAPHIC OMITTED: vertical bar chart AVERAGE EFFECTIVE MATURITY AND DURATION]
AVERAGE EFFECTIVE MATURITY AND DURATION
3/31/98 9/30/98 3/31/99
Average effective maturity 8.8 8.9 10.3
Duration 4.2 4.3 5.3
Footnote reads:
This chart depicts the fund's average effective maturity and duration at
6-month intervals over the 12 months ended 3/31/99. Average effective
maturity and duration stated in years are derived from calculations that
incorporate assumptions about prepayment rates and cash flow 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 (3/31/99)]
PORTFOLIO ALLOCATIONS (3/31/99)*
Mortgage-backed
securities -- 61.4%
Cash and short-term
investments -- 2.2%
U.S. Treasury
securities -- 36.4%
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 (GNMA). Allocations will vary over time.
With no strong indication of the future direction of interest rates, we
have brought the fund's duration back to about 5.3 years. Similarly, with
neither mortgages nor Treasuries offering compelling values, your fund's
allocation to those two sectors also reflected a neutral stance.
Mortgage-backed securities, primarily GNMAs, composed more than 60% of the
portfolio at the end of the period, with most of the remainder invested in
U.S. Treasury securities.
The stated interest rates, or coupons, of your fund's mortgage-backed
security investments generally were clustered in the 6.5% to 7.5% range.
While there was ample supply in this area, most higher-coupon securities
in the 9% to 9.5% range were removed from the market as mortgage holders
took advantage of declining interest rates to refinance their home loans
at more attractive levels. We believe that your fund's investments in 6.5%
to 7.5% coupons expose the portfolio to very little prepayment risk, which
is the chance that mortgage holders will pay off the principal on their
loans before maturity, leaving the fund to invest that principal in
securities that offer potentially lower yields.
At the end of the period, "neutral" was the word to describe your fund's
U.S. Treasury positions as well. Since we did not anticipate any
significant moves along the Treasury yield curve, our investments were
equally weighted among Treasury securities with varying maturities. We are
watching the markets closely for opportunities to shift duration, increase
exposure to bonds with particular maturities, or reallocate assets from
Treasuries to mortgage-backed securities. At this point, however, we find
no compelling reason to do so.
* OUTLOOK FOR A SLIGHTLY SLOWER ECONOMY
Although emerging markets have rebounded about three quarters of the way
back to where they were before the global economic downturn started in
late 1997, concerns linger about the effect potential problems in the
emerging markets might have on the U.S. economy. Events in Kosovo may
trigger another flight to quality, although investors have shrugged off
that situation so far. The U.S. government securities market experienced
some redemptions from Japanese investors as they prepared for the end of
their fiscal year on March 31. With that date past, we may see an influx
of Japanese capital back into the U.S. bond market.
Looking more closely at domestic issues, we expect that the economy may
strengthen over the next few months to the point at which inflation
concerns emerge. If that situation develops, increases in interest rates
- -- and concurrent decreases in bond prices -- could present buying
opportunities. From mid 1999 on, however, we expect the economy to slow
somewhat, with inflation remaining in check.
One statistic that bears watching is the price of oil. If the price of
crude oil increases from its current level of $13 to $14 per barrel to
$16.50 or more, we could see an increase in the producer price index --
the measure of change in wholesale prices. At the same time, we believe
this kind of increase would have little effect on the consumer price
index.
Overall, we expect a tame investment environment with inflation in check
and a slightly slower economy. As a result, we believe the Fed will keep
the fed funds rate unchanged throughout 1999. We intend to continue to
maintain a neutral stance with your fund until developments call for a
shift in strategy.
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 3/31/99, 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, with
preservation of capital as its secondary objective.
TOTAL RETURN FOR PERIODS ENDED 3/31/99
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 -1.22% -5.87% -1.71% -6.50% -1.46% -4.69%
- ------------------------------------------------------------------------------
1 year 5.59 0.56 4.61 -0.36 5.31 1.84
- ------------------------------------------------------------------------------
5 years 41.60 34.81 36.03 34.03 40.12 35.54
Annual average 7.20 6.16 6.35 6.03 6.98 6.27
- ------------------------------------------------------------------------------
10 years 104.27 94.61 88.61 88.61 99.10 92.57
Annual average 7.40 6.88 6.55 6.55 7.13 6.77
- ------------------------------------------------------------------------------
Life of fund 187.59 173.87 154.96 154.96 174.83 165.94
Annual average 7.79 7.42 6.87 6.87 7.44 7.19
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/99
Lehman Bros.
Intermediate
Treasury Consumer
Bond Index price index
- ------------------------------------------------------------------------------
6 months -0.17% 0.98%
- ------------------------------------------------------------------------------
1 year 6.60 1.73
- ------------------------------------------------------------------------------
5 years 38.78 12.09
Annual average 6.78 2.31
- ------------------------------------------------------------------------------
10 years 119.54 34.91
Annual average 8.18 3.04
- ------------------------------------------------------------------------------
Life of fund 224.31 55.66
Annual average 8.71 3.19
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 4.75% and
3.25% respectively. Class B share returns for the 1-, 5-, and 10-year
(where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares for periods prior to their inception
are derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M shares,
the higher operating expenses applicable to such shares. All returns
assume reinvestment of distributions at NAV. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 3/31/99
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.260 $0.227 $0.248
- ------------------------------------------------------------------------------
Capital gains -- -- --
- ------------------------------------------------------------------------------
Total $0.260 $0.227 $0.248
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
9/30/98 $9.11 $9.56 $9.08 $9.14 $9.45
- ------------------------------------------------------------------------------
3/31/99 8.74 9.18 8.70 8.76 9.05
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 5.77% 5.49% 5.10% 5.48% 5.30%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 5.19 5.03 4.44 4.94 4.84
- ------------------------------------------------------------------------------
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
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 4.75% maximum 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 Bond 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, 1999 (Unaudited)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (96.6%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
U.S. Government Agency Mortgage Obligations (60.6%)
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
$ 24,340,785 7s, with due dates from August 1, 2012
to November 1, 2012 $ 24,880,665
100,000,000 5 3/4s, due April 15, 2008 99,094,000
Federal National Mortgage Association
Pass-through Certificates
19,566,947 6 1/2s, with due dates from November 1, 2027
to October 1, 2028 19,475,178
133,553,323 6 1/2s, Dwarf, with due dates from October 1, 2010
to September 1, 2013 134,763,390
Government National Mortgage Association
Pass-through Certificates
16,982,701 9 1/2s, with due dates from December 15, 2017
to March 15, 2029 18,364,479
34,463,619 9s, with due dates from November 15, 2008
to July 15, 2024 36,960,740
7,913,384 8 1/2s, with due dates from February 15, 2005
to December 15, 2024 8,372,565
23,817,910 8s, with due dates from August 15, 2006
to March 15, 2028 24,899,735
105,005,964 7 1/2s, with due dates from February 15, 2022
to January 15, 2028 108,315,295
319,475,336 7s, with due dates from November 15, 2022
to December 15, 2028 324,502,656
126,662,858 6 1/2s, with due dates from December 15, 2023
to January 15, 2029 126,109,138
--------------
925,737,841
U.S. Treasury Obligations (36.0%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
50,000,000 9 7/8s, November 15, 2015 71,125,000
50,000,000 8 1/8s, August 15, 2019 62,961,000
5,665,000 6 1/8s, November 15, 2027 5,879,194
30,640,000 5 1/4s, February 15, 2029 28,964,298
165,000,000 5 1/4s, November 15, 2028 153,888,900
U.S. Treasury Notes
36,040,000 5 5/8s, May 15, 2008 36,687,631
86,000,000 5 3/8s, June 30, 2003 86,537,500
75,000,000 5s, February 28, 2001 75,012,000
25,000,000 4 3/4s, November 15, 2008 24,082,000
4,525,000 4 3/4s, February 15, 2004 4,455,722
--------------
549,593,245
--------------
Total U.S. Government and Agency Obligations
(cost $1,480,159,822) $1,475,331,086
SHORT-TERM INVESTMENTS (2.2%) (a) (cost $32,938,000)
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
$32,938,000 Interest in $500,000,000 joint repurchase agreement dated
March 31, 1999 with Salomon, Smith Barney Inc. due
April 1, 1999 with respect to various U.S. Treasury
obligations -- maturity value of $32,942,529 for an
effective yield of 4.95% $ 32,938,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,513,097,822) (b) $1,508,269,086
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,527,309,011.
(b) The aggregate identified cost on a tax basis is $1,513,120,016, resulting in gross unrealized appreciation and
depreciation of $16,894,271 and $21,745,201, respectively, or net unrealized depreciation of $4,850,930.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31, 1999 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,513,097,822) (Note 1) $1,508,269,086
- -----------------------------------------------------------------------------------------------
Cash 187,644
- -----------------------------------------------------------------------------------------------
Interest and other receivables 16,788,185
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 7,337,816
- -----------------------------------------------------------------------------------------------
Total assets 1,532,582,731
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,849,129
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,140,833
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 167,380
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 49,104
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,545
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 980,194
- -----------------------------------------------------------------------------------------------
Other accrued expenses 82,535
- -----------------------------------------------------------------------------------------------
Total liabilities 5,273,720
- -----------------------------------------------------------------------------------------------
Net assets $1,527,309,011
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,843,532,637
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (4,861,791)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (306,533,099)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (4,828,736)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,527,309,011
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,408,700,266 divided by 161,256,829 shares) $8.74
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.74)* $9.18
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($114,416,772 divided by 13,148,025 shares)** $8.70
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($4,191,973 divided by 478,735 shares) $8.76
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.76)* $9.05
- -----------------------------------------------------------------------------------------------
* 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
sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended March 31, 1999 (Unaudited)
<S> <C>
Interest Income: $ 47,746,163
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,363,820
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,035,327
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 10,708
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 9,147
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,808,042
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 505,386
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 9,966
- -----------------------------------------------------------------------------------------------
Reports to shareholders 30,535
- -----------------------------------------------------------------------------------------------
Registration fees 75
- -----------------------------------------------------------------------------------------------
Auditing 23,389
- -----------------------------------------------------------------------------------------------
Legal 6,381
- -----------------------------------------------------------------------------------------------
Postage 133,670
- -----------------------------------------------------------------------------------------------
Other 79,877
- -----------------------------------------------------------------------------------------------
Total expenses 8,016,323
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (171,169)
- -----------------------------------------------------------------------------------------------
Net expenses 7,845,154
- -----------------------------------------------------------------------------------------------
Net investment income 39,901,009
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,893,686
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (64,346,254)
- -----------------------------------------------------------------------------------------------
Net loss on investments (61,452,568)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(21,551,559)
- -----------------------------------------------------------------------------------------------
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
1999* 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 39,901,009 $ 87,466,663
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments 2,893,686 42,372,651
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (64,346,254) 43,680,120
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (21,551,559) 173,519,434
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (42,136,858) (89,363,617)
- ---------------------------------------------------------------------------------------------------------------
Class B (2,517,816) (2,093,444)
- ---------------------------------------------------------------------------------------------------------------
Class M (108,126) (98,251)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) 3,293,187 (77,444,612)
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (63,021,172) 4,519,510
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 1,590,330,183 1,585,810,673
- ---------------------------------------------------------------------------------------------------------------
End of period (including distributions in
excess of net investment income of $4,861,791
and $--, respectively) $1,527,309,011 $1,590,330,183
- ---------------------------------------------------------------------------------------------------------------
* 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
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.11 $8.65 $8.39 $8.65 $8.21 $9.21
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .23(c) .50(c) .54 .52 .55 .62
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.34) .49 .23 (.21) .50 (.98)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.11) .99 .77 .31 1.05 (.36)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.26) (.53) (.51) (.53) (.56) (.64)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (.05) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.26) (.53) (.51) (.57) (.61) (.64)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.74 $9.11 $8.65 $8.39 $8.65 $8.21
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (1.22)* 11.83 9.49 3.64 13.42 (4.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,408,700 $1,500,157 $1,553,706 $1,800,683 $2,183,766 $2,412,154
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .49* 1.01 .97 .95 .94 .83
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.59* 5.72 6.34 6.14 6.62 6.93
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 161.90* 316.47 253.26 245.46 468.86 331.61
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for 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
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.08 $8.61 $8.35 $8.62 $8.19 $8.43
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .20(c) .41(c) .48 .49 .46(c) .21
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.35) .53 .23 (.26) .51 (.25)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.15) .94 .71 .23 .97 (.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.23) (.47) (.45) (.46) (.49) (.20)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (.05) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.23) (.47) (.45) (.50) (.54) (.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.70 $9.08 $8.61 $8.35 $8.62 $8.19
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (1.71)* 11.20 8.72 2.77 12.32 (.52)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $114,417 $86,302 $30,935 $23,067 $9,099 $5,691
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .87* 1.76 1.72 1.70 1.68 .59*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.21* 4.87 5.59 5.46 5.76 2.22*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 161.90* 316.47 253.26 245.46 468.86 331.61
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for 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 Feb. 14, 1995+
operating performance (Unaudited) Year ended September 30 Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.14 $8.66 $8.38 $8.65 $8.14
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .22(c) .46(c) .53 .53 .29(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.35) .53 .24 (.26) .62
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.13) .99 .77 .27 .91
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.25) (.51) (.49) (.50) (.37)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.25) (.51) (.49) (.54) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.76 $9.14 $8.66 $8.38 $8.65
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (1.46)* 11.76 9.45 3.24 11.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $4,192 $3,871 $1,170 $1,108 $672
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .62* 1.26 1.22 1.20 .78*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.46* 5.34 6.10 5.94 4.03*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 161.90* 316.47 253.26 245.46 468.86
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for 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, 1999 (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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Discounts on original issue discount bonds are accreted according to the
yield-to-maturity 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, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At September 30, 1998, the fund had a capital loss carryover of
approximately $309,405,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------- ------------------
$ 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 rates: 0.65% of the first $500 million
of average net assets, 0.55% of the next $500 million, 0.50% of the next
$500 million, 0.45% of the next $5 billion, 0.425% of the next $5 billion,
0.405% of the next $5 billion, 0.39% of the next $5 billion, and 0.38%
thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended March 31, 1999, fund expenses were reduced by
$171,169 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $1,300
has been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted a distribution plan (the "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 Plan 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 to
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, 1999, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $126,918 and $2,679 from the
sale of class A and class M shares, respectively and $112,099 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, 1999, Putnam Mutual
Funds Corp., acting as underwriter received $24,859 on class A
redemptions.
Note 3
Purchase and sales of securities
During the six months ended March 31, 1999, purchases and sales of U.S.
government and agency obligations other than short-term investments
aggregated $2,494,945,691 and $2,415,228,012, 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, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
March 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 41,717,799 $ 372,128,411
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,588,782 23,028,410
- -----------------------------------------------------------------------------
44,306,581 395,156,821
Shares
repurchased (47,640,215) (424,990,045)
- -----------------------------------------------------------------------------
Net decrease (3,333,634) $ (29,833,224)
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 29,817,962 $ 264,047,180
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,334,109 46,827,065
- -----------------------------------------------------------------------------
35,152,071 310,874,245
Shares
repurchased (50,258,469) (443,308,545)
- -----------------------------------------------------------------------------
Net decrease (15,106,398) $(132,434,300)
- -----------------------------------------------------------------------------
Six months ended
March 31, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 10,928,002 $ 97,402,511
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 213,145 1,888,807
- -----------------------------------------------------------------------------
11,141,147 99,291,318
Shares
repurchased (7,494,640) (66,667,781)
- -----------------------------------------------------------------------------
Net increase 3,646,507 $ 32,623,537
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 8,932,737 $79,060,202
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 180,504 1,583,742
- -----------------------------------------------------------------------------
9,113,241 80,643,944
Shares
repurchased (3,202,832) (28,221,826)
- -----------------------------------------------------------------------------
Net increase 5,910,409 $52,422,118
- -----------------------------------------------------------------------------
Six months ended
March 31, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 294,824 $ 2,649,660
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 9,409 83,929
- -----------------------------------------------------------------------------
304,233 2,733,589
Shares
repurchased (249,152) (2,230,715)
- -----------------------------------------------------------------------------
Net increase 55,081 $ 502,874
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 372,928 $ 3,311,218
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,008 70,712
- -----------------------------------------------------------------------------
380,936 3,381,930
Shares
repurchased (92,479) (814,360)
- -----------------------------------------------------------------------------
Net increase 288,457 $ 2,567,570
- -----------------------------------------------------------------------------
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Edward H. D'Alelio
Vice President
Michael Martino
Vice President and Fund Manager
Kevin M. Cronin
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam 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' Web site:
http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
SA027-51845-033/292/895 5/99
