Putnam
Balanced
Retirement
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-00
[SCALE LOGO OMITTED]
FROM THE TRUSTEES
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years during
which the global securities markets, the mutual fund industry, and
Putnam itself have experienced tremendous growth and change.
As we look to the future, we are certain that the changes will be
breathtaking in their scope. What will not change is the Trustees'
dedication to serving the best interests of our shareholders.
We welcome the challenges that lie ahead and are confident that Putnam
and your Board will continue to face those challenges successfully as
they have for more than 60 years. We look forward to helping you meet
your financial objectives for many years to come.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
December 20, 2000
REPORT FROM FUND MANAGEMENT
David L. King
Jeanne L. Mockard
James M. Prusko
and the Core
Fixed-Income Team
Putnam Balanced Retirement Fund's fiscal year, which ended October 31,
2000, was a tale of two market environments. From November 1999 through
the beginning of March 2000, high-flying technology shares soared above
the broader market, while the well-established, value-oriented stocks
pursued by your fund suffered. For the remainder of the period, however,
value stocks staged a long-awaited renaissance, and your fund regained
some lost ground with improved performance. On the fixed-income side, we
witnessed a similar shift. Investors relinquished their belief that the
Federal Reserve Board would pursue a protracted program of short-term
interest-rate hikes, and instead focused on the impact of a slowing
economy.
Total return for 12 months ended 10/31/00
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
-----------------------------------------------------------------------
5.37% -0.69% 4.47% -0.29% 4.54% 3.59% 4.66% 1.04%
-----------------------------------------------------------------------
Past performance is not indicative of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 6.
* STOCK MARKET SHIFT WAS A WELCOME CHANGE FOR VALUE STOCKS
As you probably know, your fund's value style of investing has struggled
during the past several years, when investors were willing to pay very
high prices for any stock related to technology. That behavior changed
in March, when the tech-laden Nasdaq peaked and then spiraled downward.
From that point, your fund benefited from the market's rotation toward
safer, steadier stocks that could benefit from a decline in interest
rates -- in other words, the kind that had come to populate your fund.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Banking 9.6%
Financial 7.3%
Oil and gas 5.3%
Electric utilities 4.1%
Regional Bells 3.9%
Footnote reads:
*Based on net assets as of 10/31/00. Holdings will vary over time.
A shift in the economic outlook triggered this move. Over the summer, it
became increasingly apparent that the Fed would halt its steady drumbeat
of short-term interest-rate increases designed to slow the economy and
head off inflation. Inflationary data remained tame, and indications
emerged that the economy was slowing from its torrid pace. Faced with
the uncertainty inherent in a slower-growth economy, investors turned
away from more economically sensitive areas and toward sectors such as
finance, utilities, and pharmaceuticals. These were precisely the
sectors where your fund was positioned, because we perceived that they
offered value.
* FUND MAINTAINS VALUE APPROACH WITH EYE TOWARD SOFT LANDING
History has shown that over time, industry sectors alternate in and out
of favor. Our investment strategy is to target sectors and stocks that
are, despite solid fundamentals, currently out of favor and undervalued.
We positioned the fund to take advantage of defensive stocks --
companies that post steady earnings growth regardless of the economic
backdrop. As a result, the fund has benefited over the last few months
of market volatility. We also targeted companies that would be helped by
steady or declining interest rates, within the context of a soft
landing, in which the Fed orchestrates a slowing of the economy without
sending it into recession.
That philosophy led us to favor utilities stocks, which are
interest-rate sensitive because they tend to offer relatively higher
yields. In addition, we maintained and built up the fund's holdings in
financials, which have made up a significant portion of the fund's
equity portfolio for some time. One of the biggest contributors to
performance was PaineWebber, which benefited from being acquired by UBS
AG, a global integrated investment services firm, during the second half
of the fiscal year. We sold our shares of PaineWebber after prices
appreciated on news of the takeover. For the most part, we focused our
financial investments on insurance companies such as Hartford Financial
Services and Cigna, and high-quality regional banks such as M&T Bank,
PNC, and Comerica. In addition, we held significant positions in Fannie
Mae and Freddie Mac. These companies offered two appealing attributes:
the potential of a substantial upgrade in their valuations -- because we
bought them at very inexpensive levels -- and the prospect of solid
fundamental growth within a volatile market.
"History shows that a combination of both stocks and bonds reduces
portfolio risk more than it reduces returns."
-- Business Week, November 6, 2000
Pharmaceutical and noncyclical consumer products companies also were
among our successful investments. These included Johnson & Johnson,
Abbott Laboratories, Pharmacia, and Phillip Morris. While these
holdings, along with others discussed in this report, were viewed
favorably at the end of the period, all portfolio holdings are subject
to review and adjustment in accordance with the fund's strategy and may
vary in the future.
Every period comes with some disappointments. During this fiscal year,
telecommunications stocks had a difficult time. Weaker long-distance
pricing hurt fund holdings AT&T and Sprint, but not to the point where
we removed them from the portfolio. A silver lining emerged toward the
end of the fiscal year, however, because two of the fund's larger
holdings, regional telephone companies, Verizon and SBC Communications,
looked as if they would benefit from their inroads into the
long-distance market.
* BOND PORTFOLIO REALLOCATED
As with stocks, bonds experienced two very different periods within your
fund's fiscal year. During the first half, investors coped with a
backdrop of rising interest rates. Treasury securities thrived when
demand skyrocketed in response to the U.S. Treasury's announcement that
it would cut back on auctions of new Treasury securities and buy back a
significant portion of its outstanding debt. All other sectors of the
bond market stumbled in the wake of the resulting Treasury rally. In the
second part of the fiscal year, the bond market adjusted to the
perception that economic growth was slowing and that the Fed would hold
interest rates steady or perhaps even lower them to head off recession.
As these concerns caused the market to price in a recession, corporate
bonds tumbled further.
[GRAPHIC OMITTED: TOP FIVE EQUITY HOLDINGS]
TOP FIVE EQUITY HOLDINGS
ExxonMobil Corp.
Oil and gas
SBC Communications, Inc.
Regional Bells
Citigroup, Inc.
Financial
Verizon Communications
Regional Bells
Fannie Mae
Financial
[GRAPHIC OMITTED: TOP FIVE FIXED-INCOME HOLDINGS]
TOP FIVE FIXED-INCOME HOLDINGS
Government National Mortgage
Association
pass-through certificates, 8s,
various due dates 2022-2030
U.S. Treasury Notes
6 3/4s, May 15, 2005
Federal National Mortgage
Association
pass-through certificates, 7 1/2s,
various due dates 2015-2030
Federal National Mortgage
Association
pass-through certificates, 7s,
various due dates 2029-2030
Government National Mortgage
Association
pass-through certificates, 7s,
various due dates 2023-2028
Footnote reads:
The top five equity holdings and the top five fixed-income holdings
represent 21.6% of the fund's net assets as of 10/31/00. Portfolio
holdings will vary over time.
Against this backdrop, we worked to reduce the allocation to corporate
bonds and increase its stake in both mortgage-backed securities and
Treasuries. The Treasuries offered safety in case the fears of recession
prove to be true. The mortgage-backed securities provided additional
yield without credit risk and fared well in a period of relative
interest-rate stability.
* OUTLOOK MERITS A VOTE FOR CONTINUITY
Looking ahead, we expect to continue the same approach we've followed
for some time. Our short-term outlook calls for a modestly positive
environment in which value stocks should thrive: a decelerating economy,
stable-to-declining interest rates, and falling corporate earnings
growth rates. We intend to look for stocks offering stability and
defensive qualities and we will try to avoid those areas that would
suffer from a cyclical downturn, such as manufacturing and capital
goods. The main question is whether or not value has truly come back
into vogue. Time will tell, but we think that it has, especially within
a soft landing scenario.
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 10/31/00, there is no guarantee the fund
will continue to hold these securities in the future.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Balanced Retirement Fund is designed for investors seeking high current
return and relative stability of principal from a diversified portfolio
of equity and debt securities.
TOTAL RETURN FOR PERIODS ENDED 10/31/00
Class A Class B Class C Class M
(inception dates) (4/19/85) (2/1/94) (7/26/99) (3/17/95)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
1 year 5.37% -0.69% 4.47% -0.29% 4.54% 3.59% 4.66% 1.04%
------------------------------------------------------------------------------
5 years 66.26 56.70 60.08 58.08 60.02 60.02 62.16 56.43
Annual average 10.70 9.40 9.87 9.59 9.86 9.86 10.15 9.36
------------------------------------------------------------------------------
10 years 233.41 214.07 209.31 209.31 209.01 209.01 217.10 205.90
Annual average 12.80 12.13 11.95 11.95 11.94 11.94 12.23 11.83
------------------------------------------------------------------------------
Annual average
(life of fund) 10.41 9.99 9.49 9.49 9.58 9.58 9.77 9.52
------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/00
Standard Lehman Brothers
& Poor's Govt./Corp. Consumer
500 Index Bond Index price index
-------------------------------------------------------------------------
1 year 6.09% 7.11% 3.45%
-------------------------------------------------------------------------
5 years 166.65 34.55 13.14
Annual average 21.66 6.11 2.50
-------------------------------------------------------------------------
10 years 490.83 115.94 30.26
Annual average 19.44 8.00 2.68
-------------------------------------------------------------------------
Annual average
(life of fund) 17.46 9.02 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 5.75% and
3.50%, respectively. Class B share returns for the 1-, 5- and 10-year,
if 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. For class C
shares, returns for periods prior to their inception are derived from
the historical performance of class A shares, adjusted to reflect both
the CDSC currently applicable to class C shares, which is 1% for the
first year and is eliminated thereafter, and the higher operating
expenses applicable to class C 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.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 10/31/90
Lehman Bros.
Fund's class A Standard & Poor's Govt./Corp. Consumer price
Date shares at POP 500 Index Bond Index index
10/31/90 9,425 10,000 10,000 10,000
10/31/92 13,536 14,679 12,750 10,622
10/31/94 15,831 17,524 13,816 11,199
10/31/96 21,782 27,497 16,915 11,858
10/31/98 27,927 44,315 20,296 12,277
10/31/00 $31,407 $59,083 $21,594 $13,026
Past performance is no assurance of future results. At the end of the
same time period, a $10,000 investment in the fund's class B and class C
shares would have been valued at $30,931 and $30,901, respectively and
no contingent deferred sales charges would apply; a $10,000 investment
in the fund's class M shares would have been valued at $31,710 ($30,590
at public offering price). See first page of performance section for
performance calculation method.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 10/31/00
Class A Class B Class C Class M
------------------------------------------------------------------------------
Distributions
(number) 4 4 4 4
------------------------------------------------------------------------------
Income $0.3379 $0.2599 $0.2879 $0.2879
------------------------------------------------------------------------------
Capital gains
Long-term 0.5310 0.5310 0.5310 0.5310
------------------------------------------------------------------------------
Short-term 0.1331 0.1331 0.1331 0.1331
------------------------------------------------------------------------------
Total $1.0020 $0.9240 $0.9520 $0.9520
------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
------------------------------------------------------------------------------
10/31/99 $10.66 $11.31 $10.56 $10.64 $10.61 $10.99
------------------------------------------------------------------------------
10/31/00 10.17 10.79 10.06 10.12 10.10 10.47
------------------------------------------------------------------------------
Current return (end of period)
------------------------------------------------------------------------------
Current
dividend
rate1 4.33% 4.08% 3.66% 3.75% 3.88% 3.74%
------------------------------------------------------------------------------
Current 30-day
SEC yield2 3.96 3.73 3.23 3.23 3.47 3.35
------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 9/30/00 (most recent calendar quarter)
Class A Class B Class C Class M
(inception dates) (4/19/85) (2/1/94) (7/26/99) (3/17/95)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
1 year 6.09% 0.03% 5.30% 0.50% 5.36% 4.40% 5.27% 1.55%
------------------------------------------------------------------------------
5 years 63.15 53.79 57.06 55.06 57.17 57.17 59.11 53.49
Annual average 10.29 8.99 9.45 9.17 9.47 9.47 9.73 8.95
------------------------------------------------------------------------------
10 years 221.06 202.78 197.87 197.87 197.84 197.84 205.07 194.50
Annual average 12.37 11.72 11.53 11.53 11.53 11.53 11.80 11.41
------------------------------------------------------------------------------
Annual average
(life of fund) 10.34 9.92 9.42 9.42 9.51 9.51 9.70 9.45
------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns and principal value will fluctuate so that an investor's shares
when sold may be worth more or less than their original cost. See first
page of performance section for performance calculation method.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
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 5.75% maximum sales charge for class A
shares and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B 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. The CDSC for class C shares is 1% for one
year after purchase.
COMPARATIVE BENCHMARKS
Standard & Poor's 500 Index* is an unmanaged list of
large-capitalization common stocks and is frequently used as a general
gauge of stock market performance.
Lehman Brothers Government/Corporate Bond Index* is an index of publicly
issued U.S. Treasury obligations, debt obligations of U.S. government
agencies (excluding mortgage-backed securities), fixed-rate,
nonconvertible, investment-grade corporate debt securities and U.S.
dollar-denominated, SEC-registered nonconvertible debt issued by foreign
governmental entities or international agencies used as a general
measure of the performance of fixed-income securities.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund will
differ. It is not possible to invest directly in an index.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss
for the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that
remain in the portfolio -- any change in unrealized gains or losses over
the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Putnam Balanced Retirement Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam
Balanced Retirement Fund (the "fund") at October 31, 2000, and the
results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with
accounting principles generally accepted in the United States of America.
These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
investments, owned at October 31, 2000 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 7, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
October 31, 2000
COMMON STOCKS (50.4%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Aerospace/Defense (0.8%
-------------------------------------------------------------------------------------------------------------------
48,600 Boeing Co. $ 3,295,688
24,400 General Dynamics Corp. 1,746,125
-------------
5,041,813
Automotive (0.4%)
-------------------------------------------------------------------------------------------------------------------
95,900 Ford Motor Co. 2,505,388
Banking (6.3%)
-------------------------------------------------------------------------------------------------------------------
116,000 Bank of America Corp. 5,575,250
91,900 BB&T Corp. 2,929,313
118,100 Charter One Financial, Inc. 2,708,919
61,600 Chase Manhattan Corp. 2,802,800
64,400 Comerica, Inc. 3,884,125
129,000 Firstar Corp. 2,539,688
86,300 FleetBoston Financial Corp. 3,279,400
32,300 M & T Bank Corp. 1,621,460
57,100 PNC Financial Services Group 3,818,563
72,000 Synovus Financial Corp. 1,552,500
112,400 U.S. Bancorp 2,718,675
75,600 Washington Mutual, Inc. 3,326,400
82,600 Wells Fargo Co. 3,825,413
-------------
40,582,506
Beverage (2.7%)
-------------------------------------------------------------------------------------------------------------------
107,700 Anheuser-Busch Cos., Inc. 4,927,275
15,700 Brown-Forman Corp. Class B 955,738
41,500 Coca-Cola Co. 2,505,563
163,000 Coca-Cola Enterprises, Inc. 2,995,125
114,400 Fortune Brands, Inc. 3,367,650
78,100 Pepsi Bottling Group, Inc. (The) 2,704,213
-------------
17,455,564
Chemicals (1.2%)
-------------------------------------------------------------------------------------------------------------------
42,700 Dow Chemical Co. 1,307,688
60,300 du Pont (E.I.) de Nemours & Co., Ltd. 2,736,113
74,200 Engelhard Corp. 1,548,925
39,500 PPG Industries, Inc. 1,762,688
-------------
7,355,414
Combined Utilities (0.3%)
-------------------------------------------------------------------------------------------------------------------
46,000 Constellation Energy Group 1,917,625
Computers (0.7%)
-------------------------------------------------------------------------------------------------------------------
47,400 Hewlett-Packard Co. 2,201,138
24,000 IBM Corp. 2,364,000
-------------
4,565,138
Conglomerates (1.2%)
-------------------------------------------------------------------------------------------------------------------
1,600 Berkshire Hathaway, Inc. (NON) 3,364,800
46,500 Cooper Industries, Inc. 1,778,625
42,900 Honeywell International, Inc. 2,308,556
-------------
7,451,981
Consumer Finance (0.6%)
-------------------------------------------------------------------------------------------------------------------
70,500 Household International, Inc. 3,547,031
Consumer Goods (0.4%)
-------------------------------------------------------------------------------------------------------------------
40,100 Kimberly-Clark Corp. 2,646,600
Distribution (0.5%)
-------------------------------------------------------------------------------------------------------------------
58,900 SYSCO Corp. 3,073,844
Electric Utilities (2.8%)
-------------------------------------------------------------------------------------------------------------------
63,400 Carolina Power & Light Co. 2,555,813
54,100 CiNergy Corp. 1,656,813
17,400 Dominion Resources, Inc. 1,036,388
91,700 DPL, Inc. 2,601,988
33,100 Duke Energy Corp. 2,861,081
39,800 Entergy Corp. 1,524,838
57,800 Pacific Gas & Electric Co. 1,556,988
42,500 Reliant Energy, Inc. 1,755,781
63,600 Texas Utilities Co. 2,357,175
-------------
17,906,865
Electrical Equipment (0.5%)
-------------------------------------------------------------------------------------------------------------------
45,500 Emerson Electric Co. 3,341,406
Electronics (0.3%)
-------------------------------------------------------------------------------------------------------------------
25,800 Grainger (W.W.), Inc. 823,988
53,000 Motorola, Inc. 1,321,688
-------------
2,145,676
Energy (0.4%)
-------------------------------------------------------------------------------------------------------------------
13,700 Schlumberger, Ltd. 1,042,913
22,400 Transocean Sedco Forex, Inc. 1,187,200
-------------
2,230,113
Financial (3.1%)
-------------------------------------------------------------------------------------------------------------------
161,000 Citigroup, Inc. 8,472,625
97,800 Fannie Mae 7,530,600
65,500 Freddie Mac 3,930,000
110 PSF Holdings LLC Class A (NON) 143,169
-------------
20,076,394
Food (1.2%)
-------------------------------------------------------------------------------------------------------------------
65,100 Heinz (H.J.) Co. 2,730,131
114,100 Ralston-Ralston Purina Group 2,766,925
116,700 Sara Lee Corp. 2,516,344
-------------
8,013,400
Gaming & Lottery (--%)
-------------------------------------------------------------------------------------------------------------------
748 Fitzgeralds Gaming Corp. (NON) 7
Health Care (1.4%)
-------------------------------------------------------------------------------------------------------------------
41,700 Baxter International, Inc. 3,427,219
30,500 CIGNA Corp. 3,719,475
49,300 HCA - The Healthcare Corp. 1,968,919
-------------
9,115,613
Insurance (2.2%)
-------------------------------------------------------------------------------------------------------------------
46,800 American General Corp. 3,767,400
39,400 Chubb Corp. (The) 3,326,838
67,300 Hartford Financial Services Group 5,009,644
45,700 Lincoln National Corp. 2,210,738
-------------
14,314,620
Investment Banking/Brokerage (0.8%)
-------------------------------------------------------------------------------------------------------------------
44,300 Bear Stearns Companies, Inc. (The) 2,685,688
25,000 Goldman Sachs Group, Inc. (The) 2,495,313
-------------
5,181,001
Lodging/Tourism (0.6%)
-------------------------------------------------------------------------------------------------------------------
44,300 Marriott International, Inc. Class A 1,794,150
62,100 Starwood Hotels & Resorts Worldwide, Inc. (R) 1,839,713
-------------
3,633,863
Machinery (0.4%)
-------------------------------------------------------------------------------------------------------------------
65,300 Caterpillar, Inc. 2,289,581
Manufacturing (0.3%)
-------------------------------------------------------------------------------------------------------------------
40,100 Illinois Tool Works, Inc. 2,228,056
Media (0.4%)
-------------------------------------------------------------------------------------------------------------------
74,000 Disney (Walt) Productions, Inc. 2,650,125
Natural Gas Utilities (0.7%)
-------------------------------------------------------------------------------------------------------------------
105,400 Sempra Energy 2,180,463
51,600 Williams Cos., Inc. 2,157,525
-------------
4,337,988
Oil & Gas (4.1%)
-------------------------------------------------------------------------------------------------------------------
30,500 Chevron, Inc. 2,504,813
35,400 Conoco, Inc. Class A 913,763
42,400 Conoco, Inc. Class B 1,152,750
138,000 ExxonMobil Corp. 12,307,875
91,500 Royal Dutch Petroleum Co. PLC ADR (Netherlands) 5,432,813
52,700 Tosco Corp. 1,508,538
34,500 TotalFinaElf S.A. ADR (France) 2,471,063
-------------
26,291,615
Paper & Forest Products (1.1%)
-------------------------------------------------------------------------------------------------------------------
68,300 Boise Cascade Corp. 1,959,356
32,300 Bowater, Inc. 1,748,238
65,700 Owens-Illinois, Inc. (NON) 390,094
58,200 Weyerhaeuser Co. 2,731,763
-------------
6,829,451
Pharmaceuticals (3.2%)
-------------------------------------------------------------------------------------------------------------------
84,400 Abbott Laboratories 4,457,375
63,200 Bristol-Myers Squibb Co. 3,851,250
64,200 Johnson & Johnson 5,914,425
73,200 Pharmacia Corp. 4,026,000
43,100 Schering-Plough Corp. 2,227,731
-------------
20,476,781
Photography/Imaging (0.4%)
-------------------------------------------------------------------------------------------------------------------
48,800 Eastman Kodak Co. 2,189,900
75,100 Xerox Corp. 633,656
-------------
2,823,556
Publishing (0.5%)
-------------------------------------------------------------------------------------------------------------------
36,300 McGraw-Hill, Inc. 2,330,006
29,700 Tribune Co. 1,100,756
-------------
3,430,762
Railroads (0.5%)
-------------------------------------------------------------------------------------------------------------------
72,300 Union Pacific Corp. 3,389,063
Real Estate (1.3%)
-------------------------------------------------------------------------------------------------------------------
45,500 Boston Properties, Inc. (R) 1,842,750
85,400 Equity Office Properties Trust (R) 2,572,675
87,700 Equity Residential Properties Trust (R) 4,127,381
-------------
8,542,806
Regional Bells (3.8%)
-------------------------------------------------------------------------------------------------------------------
93,600 BellSouth Corp. 4,522,050
206,000 SBC Communications, Inc. 11,883,625
135,400 Verizon Communications 7,827,813
-------------
24,233,488
Restaurants (0.5%)
-------------------------------------------------------------------------------------------------------------------
25 AmeriKing, Inc. (NON) 25
93,000 McDonald's Corp. 2,883,000
-------------
2,883,025
Retail (1.4%)
-------------------------------------------------------------------------------------------------------------------
61,600 Albertsons, Inc. 1,459,150
37,200 CVS Corp. 1,969,275
69,500 Federated Department Stores, Inc. (NON) 2,263,094
104,700 K mart Corp. (NON) 621,656
20,100 Lowe's Cos., Inc. 918,319
2 Mothers Work, Inc. (NON) 19
39,800 Sears, Roebuck & Co. 1,183,254
57,400 Staples, Inc. (NON) 817,950
-------------
9,232,717
Software (0.2%)
-------------------------------------------------------------------------------------------------------------------
30,500 Computer Associates International, Inc. 972,188
Technology (0.1%)
-------------------------------------------------------------------------------------------------------------------
17,900 Electronic Data Systems Corp. 840,181
Telecommunications (1.4%)
-------------------------------------------------------------------------------------------------------------------
48,600 ALLTEL Corp. 3,131,663
147,500 AT&T Corp. 3,420,156
104,400 Sprint Corp. 2,662,200
-------------
9,214,019
Textiles (0.2%)
-------------------------------------------------------------------------------------------------------------------
77,400 Shaw Industries, Inc. 1,436,738
Tobacco (1.0%)
-------------------------------------------------------------------------------------------------------------------
170,400 Philip Morris Cos., Inc. 6,240,900
Waste Management (0.5%)
-------------------------------------------------------------------------------------------------------------------
60,400 Republic Services, Inc. (NON) 811,625
131,300 Waste Management, Inc. 2,626,000
-------------
3,437,625
-------------
Total Common Stocks (cost $290,374,181) $ 323,882,527
<CAPTION>
CORPORATE BONDS AND NOTES (20.5%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Aerospace/Defense (1.2%)
-------------------------------------------------------------------------------------------------------------------
$ 1,885,000 Boeing Co. deb. 6 5/8s, 2038 $ 1,675,539
870,000 Litton Industries, Inc. 144A sr. notes 8s, 2009 883,181
2,335,000 Lockheed Martin Corp. bonds 8 1/2s, 2029 2,494,737
1,330,000 Raytheon Co. notes 6.45s, 2002 1,312,683
1,000,000 Raytheon Co. deb. 6.4s, 2018 855,300
380,000 Sequa Corp. sr. notes 9s, 2009 368,600
-------------
7,590,040
Agriculture (--%)
-------------------------------------------------------------------------------------------------------------------
142,320 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 128,800
Airlines (0.9%)
-------------------------------------------------------------------------------------------------------------------
709,963 Airbus Industries 144A notes Ser. A, 8.027s, 2020 718,759
1,628,361 Continental Airlines, Inc. pass-through certificates Ser. 981C,
6.541s, 2009 1,558,667
1,420,000 Delta Air Lines, Inc. notes 8.3s, 2029 1,208,079
470,000 Northwest Airlines, Inc. company guaranty 8.7s, 2007 439,845
1,995,024 Northwest Airlines, Inc. pass through certificates Ser. 1999-1A,
6.81s, 2020 1,840,709
-------------
5,766,059
Automotive (0.5%)
-------------------------------------------------------------------------------------------------------------------
1,365,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 1,215,341
950,000 Federal Mogul Corp. notes 7 1/2s, 2009 237,500
340,000 Federal Mogul Corp. notes 7 3/8s, 2006 88,400
710,000 Ford Motor Co. deb. 7.4s, 2046 622,429
105,000 Ford Motor Co. bonds 6 5/8s, 2028 86,502
190,000 Lear Corp. sub. notes 9 1/2s, 2006 189,149
580,000 Visteon Corp. sr. notes 8 1/4s, 2010 574,499
-------------
3,013,820
Banking (3.3%)
-------------------------------------------------------------------------------------------------------------------
1,135,000 Abbey National Capital Trust I company guaranty 8.963s, 2049 1,125,171
1,190,000 Bank One Corp. notes 7 5/8s, 2005 1,202,675
615,000 BankAmerica Corp. sr. notes 5 7/8s, 2009 554,748
264,000 Bank United Corp. sub. notes 8 7/8s, 2007 260,304
1,630,000 Bank United Corp. notes Ser. A, 8s, 2009 1,570,782
1,885,000 Citicorp sub. notes 6 3/8s, 2008 1,773,710
950,000 Colonial Bank sub. notes 8s, 2009 870,590
15,000 Colonial Capital II 144A company guaranty 8.92s, 2027 13,935
700,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 664,825
550,000 First Citizens Bank Capital Trust I company guaranty 8.05s, 2028 455,862
1,675,000 First Union Capital II company guaranty Ser. A, 7.95s, 2029 1,492,274
705,000 First Union Institute Capital I bonds 8.04s, 2026 626,675
470,000 Firstar Bank Milwaukee sr. notes 6 1/4s, 2002 462,912
1,240,000 FleetBoston Corp. sub. notes 7 3/8s, 2009 1,224,934
1,265,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 1,171,251
1,085,000 Imperial Bank sub. notes 8 1/2s, 2009 982,811
720,000 Norwest Corp. med. term sr. notes Ser. J, 6 3/4s, 2027 626,782
1,935,000 Peoples Bank-Bridgeport sub. notes 7.2s, 2006 1,789,391
15,000 Peoples Heritage Capital Trust company guaranty Ser. B,
9.06s, 2027 14,837
995,000 Royal Bank of Scotland Group PLC bonds Ser. 2, 8.817s, 2049
(United Kingdom) 1,035,128
980,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 994,700
985,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 961,173
1,310,000 Webster Capital Trust I 144A bonds 9.36s, 2027 1,124,321
-------------
20,999,791
Beverage (0.2%)
-------------------------------------------------------------------------------------------------------------------
1,095,000 Pepsi Bottling Group, Inc. (The) sr. notes Ser. B, 7s, 2029 1,007,466
Broadcasting (--%)
-------------------------------------------------------------------------------------------------------------------
70,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 64,400
66,600 AMFM Operating, Inc. deb. 12 5/8s, 2006 (PIK) 73,593
-------------
137,993
Building Materials (--%)
-------------------------------------------------------------------------------------------------------------------
70,000 Building Materials Corp. company guaranty 8s, 2008 21,000
Cable Television (0.1%)
-------------------------------------------------------------------------------------------------------------------
125,000 Adelphia Communications Corp. sr. notes 7 7/8s, 2009 98,750
75,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 79,500
260,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 189,800
60,000 NTL Communications Corp. 144A sr. notes 11 7/8s, 2010 56,400
410,000 NTL Communications Corp. sr. notes Ser. B, 11 1/2s, 2008 377,200
90,000 TeleWest Communications PLC sr. disc. notes stepped-coupon
zero %, (9 1/4s, 4/15/04) 2009 (United Kingdom) (STP) 40,500
-------------
842,150
Chemicals (0.3%)
-------------------------------------------------------------------------------------------------------------------
735,000 Equistar Chemicals LP notes 9 1/8s, 2002 739,410
100,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 80,000
1,100,000 Lyondell Petrochemical Co. sec. notes Ser. B, 9 7/8s, 2007 1,072,500
-------------
1,891,910
Coal (--%)
-------------------------------------------------------------------------------------------------------------------
140,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 16,800
Computers (0.1%)
-------------------------------------------------------------------------------------------------------------------
855,000 IBM Corp. deb. 7 1/8s, 2096 780,384
Conglomerates (0.5%)
-------------------------------------------------------------------------------------------------------------------
1,665,000 Tyco International, Ltd. company guaranty 6 3/8s, 2005 1,605,227
1,530,000 Tyco International, Ltd. company guaranty 6 1/4s, 2003 1,487,267
-------------
3,092,494
Construction (--%)
-------------------------------------------------------------------------------------------------------------------
110,000 Morrison Knudsen Corp. 144A company guaranty 11s, 2010 93,500
Consumer Finance (0.9%)
-------------------------------------------------------------------------------------------------------------------
565,000 Associates First Capital Corp. sub. deb. 8.15s, 2009 578,571
495,000 Associates First Capital Corp. deb. 6.95s, 2018 456,964
700,000 Associates First Capital Corp. sr. notes 6 1/4s, 2008 648,662
110,000 Capital One Financial Corp. notes 7 1/4s, 2006 103,851
185,000 Capital One Financial Corp. notes 7 1/4s, 2003 183,235
270,000 Conseco Financial Corp. sr. sub. notes 10 1/4s, 2002 186,300
140,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 (In default) (NON) 19,250
150,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 (In default) (NON) 21,000
1,500,000 Ford Motor Credit Corp. notes 7 3/8s, 2009 1,456,425
215,000 Ford Motor Credit Corp. notes 6.55s, 2002 212,915
1,405,000 Ford Motor Credit Corp. sr. notes 5.8s, 2009 1,234,447
525,000 Household Finance Corp. notes 6 1/2s, 2008 489,678
335,000 Household Finance Corp. sr. unsub. 5 7/8s, 2009 299,085
-------------
5,890,383
Containers & Packaging (--%)
-------------------------------------------------------------------------------------------------------------------
160,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 113,600
Electric Utilities (1.3%)
-------------------------------------------------------------------------------------------------------------------
1,005,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 972,569
960,000 CILCORP, Inc. sr. notes 8.7s, 2009 998,491
380,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 349,600
1,555,000 DPL, Inc. 144A sr. notes 8 1/4s, 2007 1,527,166
475,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 474,644
27,502 Northeast Utilities System notes Ser. A, 8.58s, 2006 28,004
446,133 Northeast Utilities System notes Ser. B, 8.38s, 2005 446,852
1,256,000 Public Service Co. of New Mexico deb. 10 1/4s, 2012 1,385,280
300,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 284,034
1,685,000 TXU Electrical Capital company guaranty 8.175s, 2037 1,602,452
-------------
8,069,092
Energy (0.1%)
-------------------------------------------------------------------------------------------------------------------
290,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 292,900
90,000 RBF Finance Co. company guaranty 11 3/8s, 2009 102,825
470,000 RBF Finance Co. company guaranty 11s, 2006 535,800
-------------
931,525
Entertainment (0.1%)
-------------------------------------------------------------------------------------------------------------------
190,000 United Artists Theatre sr. sub. notes 9 3/4s, 2008 (In default) (NON) 3,563
775,000 Walt Disney Co. med. term notes 5.62s, 2008 703,111
-------------
706,674
Financial (3.6%)
-------------------------------------------------------------------------------------------------------------------
400,000 Advanta Corp. notes Ser. C, 7.47s, 2001 393,000
40,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 38,405
295,000 Advanta Corp. notes Ser. C, 6.94s, 2001 289,094
150,000 Advanta Corp. notes Ser. D, 6.925s, 2002 135,101
140,000 Advanta Corp. med-term notes Ser. D, 6.92s, 2002 126,085
1,225,000 AFLAC, Inc. sr. notes 6 1/2s, 2009 1,134,056
605,000 American General Institute 144A company guaranty
8 1/8s, 2046 564,634
1,570,000 Conseco Financing Trust II company guaranty 8.7s, 2026 612,300
775,000 Conseco, Inc. med-term notes 6 1/2s, 2002 503,750
1,895,000 Executive Risk Capital Trust company guaranty Ser. B,
8.675s, 2027 1,802,410
6,665,000 Fannie Mae notes 6 1/2 2004 6,660,801
44,111 Freddie Mac notes 6s, 2029 41,387
140,000 Fremont General Corp. sr. notes Ser. B, 7.7s, 2004 80,500
520,000 Hartford Life, Inc. deb. 7.65s, 2027 496,382
1,030,000 Liberty Mutual Insurance 144A notes 7.697s, 2097 750,139
1,015,000 Markel Capital Trust I company guaranty Ser. B, 8.71s, 2046 638,070
785,000 Money Store, Inc. notes 8.05s, 2002 794,765
1,035,000 Newcourt Credit Group Inc. company guaranty Ser. A,
7 1/8s, 2003 1,021,607
1,445,000 Principal Financial Group 144A notes 7.95s, 2004 (Australia) 1,459,884
1,895,000 Provident Companies, Inc. bonds 7.405s, 2038 1,399,533
1,965,000 Sun Life Canada Capital Trust 144A company guaranty
8.526s, 2049 1,683,298
1,955,000 TIG Capital Trust I 144A bonds 8.597s, 2027 1,330,495
1,235,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 850,335
-------------
22,806,031
Gaming & Lottery (0.2%)
-------------------------------------------------------------------------------------------------------------------
330,000 International Game Technology 144A sr. notes 8 3/8s, 2009 320,100
170,000 International Game Technology sr. notes 7 7/8s, 2004 165,750
20,000 Mohegan Tribal Gaming sr. sub. notes 8 3/4s, 2009 19,500
410,000 Mohegan Tribal Gaming sr. notes 8 1/8s, 2006 395,650
580,000 Park Place Entertainment, Inc. sr. sub. notes 9 3/8s, 2007 584,350
-------------
1,485,350
Health Care (0.3%)
-------------------------------------------------------------------------------------------------------------------
400,000 HCA - The Healthcare Co. med. term notes 8.7s, 2010 396,000
140,000 HCA - The Healthcare Co. debs. 7.19s, 2015 117,600
30,000 HCA - The Healthcare Co.notes 6.63s, 2045 28,837
860,000 Omega Healthcare Investors, Inc. notes 6.95s, 2002 739,600
150,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 149,438
400,000 Tenet Healthcare Corp. sr. notes Ser. B, 8 1/8s, 2008 387,000
-------------
1,818,475
Homebuilding (0.1%)
-------------------------------------------------------------------------------------------------------------------
680,000 D.R. Horton, Inc. company guaranty 8s, 2009 601,800
Investment Banking/Brokerage (0.5%)
-------------------------------------------------------------------------------------------------------------------
500,000 Bear Stearns Companies, Inc. (The) notes 7 5/8s, 2009 486,005
1,045,000 Countrywide Home Loan Corp. company guaranty
6.935s, 2007 1,002,207
1,440,000 Goldman Sachs Group, Inc. (The) notes Ser. B, 7.35s, 2009 1,406,794
-------------
2,895,006
Lodging/Tourism (0.2%)
-------------------------------------------------------------------------------------------------------------------
1,300,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 1,194,375
Media (0.6%)
-------------------------------------------------------------------------------------------------------------------
1,210,000 News America Holdings, Inc. deb. 7 3/4s, 2045 1,048,913
700,000 News America Holdings, Inc. deb. 7.7s, 2025 626,647
2,385,000 Time Warner Entertainment, Inc. sr. notes 8 3/8s, 2033 2,483,167
-------------
4,158,727
Medical Services (--%)
-------------------------------------------------------------------------------------------------------------------
75,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007
(In default) (NON) 656
50,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008
(In default) (NON) 438
50,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-coupon
Ser. B, zero % (10 1/2s, 11/1/02), 2007 (In default) (STP) (NON) 500
180,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B, 9 1/2s,
2007 (In default) (NON) 1,800
220,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 (In default) (NON) 11,550
-------------
14,944
Metals (0.1%)
-------------------------------------------------------------------------------------------------------------------
645,000 AK Steel Corp. company guaranty 7 7/8s, 2009 580,500
25,710 Anker Coal Group, Inc. company guaranty Ser. B,
14 1/4s, 2007 (PIK) 12,341
220,000 LTV Corp. company guaranty 11 3/4s, 2009 114,400
-------------
707,241
Natural Gas Utilities (0.6%)
-------------------------------------------------------------------------------------------------------------------
1,550,000 KN Capital Trust III company guaranty 7.63s, 2028 1,302,406
880,000 Maritime & NE Pipeline 144A sec. notes 7.7s, 2019 (Canada) 844,571
880,000 Osprey Trust 144A sec. notes 8.31s, 2003 888,932
930,000 Sonat, Inc. notes 7 5/8s, 2011 923,416
-------------
3,959,325
Oil & Gas (1.2%)
-------------------------------------------------------------------------------------------------------------------
1,370,000 Amerada Hess Corp. bonds 7 7/8s, 2029 1,377,494
658,680 Express Pipeline, Ltd. 144A sub. notes Ser. B, 7.39s, 2019 (Canada) 556,110
370,000 Leviathan Gas Corp. 144A sr. sub. notes Ser. B, 10 3/8s, 2009 388,500
1,555,000 Norsk Hydro A/S notes 6.36s, 2009 (Norway) 1,450,753
60,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 60,750
90,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 89,550
1,045,000 Phillips Petroleum Co. notes 8 3/4s, 2010 1,139,719
540,000 Port Arthur Finance Corp. 144A sec. notes 12 1/2s, 2009 534,600
1,950,000 Union Oil Company of California company guaranty
7 1/2s, 2029 1,879,839
405,000 Union Pacific Resources Group, Inc. notes 7.3s, 2009 400,197
-------------
7,877,512
Paper & Forest Products (0.4%)
-------------------------------------------------------------------------------------------------------------------
1,730,000 Abitibi-Consolidated, Inc. deb. 8 1/2s, 2029 1,589,109
10,000 Boise Cascade Co. med. term notes Ser. A, 7.43s, 2005 9,723
470,000 Georgia Pacific Corp. bonds 7 3/4s, 2029 415,612
410,000 Norampac, Inc. sr. notes 9 1/2s, 2008 (Canada) 409,488
60,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 59,250
-------------
2,483,182
Pharmaceuticals (0.1%)
-------------------------------------------------------------------------------------------------------------------
150,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 148,125
400,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 398,000
-------------
546,125
Power Producers (0.1%)
-------------------------------------------------------------------------------------------------------------------
60,000 Calpine Corp. sr. notes 7 7/8s, 2008 56,898
130,000 Calpine Corp. sr. notes 7 3/4s, 2009 121,550
35,000 Midland Funding II Corp. deb. Ser. A, 11 3/4s, 2005 37,874
129,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 129,000
-------------
345,322
Railroads (0.2%)
-------------------------------------------------------------------------------------------------------------------
1,300,000 Norfolk Southern Corp. sr. notes 6.2s, 2009 1,187,888
Real Estate (0.2%)
-------------------------------------------------------------------------------------------------------------------
595,000 EOP Operating L.P. notes 6.8s, 2009 551,857
490,000 EOP Operating L.P. notes 6 3/8s, 2002 482,988
-------------
1,034,845
Regional Bells (0.1%)
-------------------------------------------------------------------------------------------------------------------
780,000 GTE Corp. deb. 6.46s, 2008 738,067
Retail (0.3%)
-------------------------------------------------------------------------------------------------------------------
750,000 Federated Department Stores, Inc. notes 6.3s, 2009 625,958
1,090,000 K mart Corp. notes 8 3/8s, 2004 939,558
60,000 K mart Corp. med. term notes 7.55s, 2004 52,698
425,000 Saks, Inc. company guaranty 8 1/4s, 2008 233,750
270,000 Southland Corp. sr. sub. deb. 5s, 2003 238,556
115,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 94,300
-------------
2,184,820
Shipping (--%)
-------------------------------------------------------------------------------------------------------------------
35,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 (Greece) 33,250
260,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 225,225
-------------
258,475
Software (--%)
-------------------------------------------------------------------------------------------------------------------
40,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 7,200
Technology (0.1%)
-------------------------------------------------------------------------------------------------------------------
360,000 Amkor Technologies, Inc. sr. notes 9 1/4s, 2006 349,200
90,000 Flextronics International, Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 86,625
-------------
435,825
Telecommunications (1.2%)
-------------------------------------------------------------------------------------------------------------------
170,000 Flag, Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 142,800
670,000 Global Crossing Holdings, Ltd. company guaranty 9 5/8s,
2008 (Bermuda) 639,850
180,000 Global Crossing Holdings, Ltd. company guaranty 9 1/2s,
2009 (Bermuda) 171,450
1,172,000 Nextel Communications, Inc. sr. notes 9 3/8s, 2009 1,136,840
415,000 Price Communications Wireless, Inc. 144A sr. notes 9 1/8s, 2006 412,925
200,000 Primus Telecommunications Group, Inc. sr. notes 12 3/4s, 2009 102,000
580,000 Sprint Capital Corp. company guaranty 6.9s, 2019 491,103
850,000 Sprint Capital Corp. company guaranty 6 7/8s, 2028 694,348
2,040,000 Sprint Capital Corp. company guaranty 6 1/8s, 2008 1,811,867
1,635,000 Sprint Capital Corp. company guaranty 5.7s, 2003 1,564,515
725,000 U S West, Inc. notes 5 5/8s, 2008 635,651
215,000 Williams Communications Group, Inc. sr. notes 10 7/8s, 2009 181,138
-------------
7,984,487
Telephone (0.1%)
-------------------------------------------------------------------------------------------------------------------
535,000 Hyperion Telecommunications Corp., Inc. sr. notes Ser. B,
12 1/4s, 2004 460,100
640,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 67,200
-------------
527,300
Textiles (--%)
-------------------------------------------------------------------------------------------------------------------
130,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 127,400
50,000 Kasper A.S.L., Ltd. sr. notes 12 3/4s, 2004 20,000
-------------
147,400
Tobacco (0.1%)
-------------------------------------------------------------------------------------------------------------------
600,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 583,944
Transportation Services (0.4%)
-------------------------------------------------------------------------------------------------------------------
1,616,089 Federal Express Corp. pass-through certificates Ser. 1998-1A,
6.72s, 2022 1,497,209
1,420,000 Hertz Corp. sr. notes 6 1/2s, 2006 1,344,555
-------------
2,841,764
Waste Management (0.2%)
-------------------------------------------------------------------------------------------------------------------
320,000 Allied Waste Industries, Inc. company guaranty Ser. B,
7 7/8s, 2009 275,200
1,100,000 Browning-Ferris Industries, Inc. deb. 7.4s, 2035 783,750
-------------
1,058,950
Water Utilities (0.1%)
-------------------------------------------------------------------------------------------------------------------
950,000 Azurix Corp. 144A notes 10 3/8s, 2007 912,000
-------------
Total Corporate Bonds and Notes (cost $143,451,139) $ 131,889,861
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (19.5%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
U.S. Government Agency Mortgage Obligations (11.7%)
-------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
Pass-Through Certificates
$ 1,394,747 8s, with due dates from February 1, 2027 to
November 1, 2029 $ 1,412,392
15,543,135 7 1/2s, with due dates from April 1, 2015 to May 1, 2030 15,653,937
14,728,020 7s, with due dates from December 1, 2029 to June 1, 2030 14,432,282
268,677 6 1/2s, September 1, 2010 263,177
Government National Mortgage Association
Pass-Through Certificates
1,311,125 8 1/2s, with due dates from October 15, 2017 to
November 15, 2017 1,349,086
28,104,196 8s, with due dates from January 15, 2022 to
October 15, 2030 28,591,091
12,439,428 7s, with due dates from April 15, 2023 to
December 15, 2028 12,281,386
1,616,069 6 1/2s, September 15, 2024 1,560,298
-------------
75,543,649
U.S. Treasury Obligations (7.8%)
-------------------------------------------------------------------------------------------------------------------
4,090,000 U.S. Treasury Bonds 6 1/4s, May 15, 2030 $ 4,355,850
U.S. Treasury Notes
19,285,000 6 3/4s, May 15, 2005 19,993,145
7,550,000 6 1/2s, February 15, 2010 7,902,736
2,390,000 6 1/8s, August 15, 2007 2,423,603
4,710,000 6 1/8s, December 31, 2001 (SEG) 4,702,652
10,020,000 6s, September 30, 2002 10,026,212
490,000 5 3/4s, August 15, 2010 489,559
-------------
49,893,757
-------------
Total U.S. Government and Agency Obligations
(cost $125,515,985) $ 125,437,406
<CAPTION>
COLLATERALIZED MORTGAGE OBLIGATIONS (6.4%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
Commercial Mortgage Asset Trust
$ 5,145,000 Ser. 99-C1, Class A3, 6.64s, 2010 $ 4,994,469
15,674,733 Ser. 99-C1, Class X, Interest Only (IO), 0.927s, 2020 980,895
CS First Boston Mortgage Securities Corp.
520,000 Ser. 99-C1, Class E, 7.92s, 2009 519,460
950,000 Ser. 00-C1, Class A2, 7.545s, 2010 973,750
1,442,281 DLJ Commercial Mortgage Corp. Ser. 98-CG1, Class A1A,
6.11s, 2007 1,404,421
Fannie Mae
1,426,070 Ser. 241, Class 2, IO, 8.5s, 2023 373,006
283,077 Ser. 176, Class 2, IO, 8s, 2022 75,723
2,379,103 Ser. 203, Class 2, IO, 8s, 2023 658,714
789,089 Ser. 217, Class 2, IO, 8s, 2023 211,081
987,337 Ser. 237, Class 2, IO, 8s, 2023 275,220
2,680,111 Ser. 251, Class 2, IO, 8s, 2023 742,056
1,807,099 Ser. 218, Class 2, IO, 7.5s, 2023 511,635
6,813,000 Ser. 252, Class 2, IO, 7.5s, 2023 1,969,353
1,565,128 Ser. 276, Class 2, IO, 6.5s, 2024 447,529
2,698,299 Ser. 97-92, Class SM, IO, 2.475s, 2022 213,334
Freddie Mac
1,735,000 Ser. 2028, Class SG, IO, 8.898s, 2023 848,523
1,027,362 Ser. 147, Class IO, 8s, 2023 285,414
10,302,543 Ser. 2090, Class SA, IO, 2.18s, 2028 590,787
3,593,324 Ser. 2090, Class SC, IO, 2.18s, 2028 206,055
740,000 GE Capital Mortgage Services, Inc. Ser. 98-11, Class 2A4,
6 3/4s, 2028 702,948
General Growth Properties-Homart
195,000 Ser. 99-C1, Class G, 9.12s, 2003 195,000
225,000 Ser. 99-C1, Class F, 8.87s, 2003 225,000
993,000 General Growth Properties-Ivanhoe Ser. 99-C1, Class F,
9.12s, 2004 993,000
3,785,000 GMAC Commercial Mortgage Securities Inc. Ser. 99-C1,
Class A2, 6.175s, 2003 3,574,903
Government National Mortgage Association
3,001,469 Ser. 00-17, Class SB, 9.15s, 2026 3,093,074
1,177,681 Ser. 99-29, Class WB, 6.555s, 2028 1,052,552
2,814,354 Ser. 99-46, Class SQ, IO, 1.83s, 2027 122,914
2,340,291 Ser. 98-2, Class EA, Principal Only (PO), zero %, 2028 1,642,592
Housing Securities Inc.
127,513 Ser. 91-B, Class B6, 9s, 2006 126,795
380,342 Ser. 93-F, Class F9M2, 7s, 2023 362,185
110,034 Ser. 94-1, Class AB1, 6 1/2s, 2009 96,238
LB Commercial Conduit Mortgage Trust
515,000 Ser. 99-C2, Class B, 7.425s, 2009 518,548
1,670,000 Ser. 99-C1, Class A2, 6.78s, 2009 1,634,078
Merrill Lynch Mortgage Investors, Inc.
520,000 Ser. 96-C2, Class E, 6.96s, 2028 463,008
1,261,507 Ser. 98-C2, Class A1, 6.22s, 2030 1,239,809
8,517,142 Ser. 98-C2, Class IO, 1.439s, 2030 576,610
437,857 Morgan Stanley Capital I Ser. 98-HF1, Class A1, 6.19s, 2007 429,373
Morgan Stanley Dean Witter Capital I
260,000 Ser. 00-LIFE, Class B, 7.575s, 2010 266,419
755,000 Ser. 00-LIFE, Class A2, 7.2s, 2010 755,472
686,746 Mortgage Capital Funding, Inc. Ser. 98-MC1, Class A1,
6.417s, 2007 675,372
Prudential Home Mortgage Securities
404,278 Ser. 92-25, Class B3, 8s, 2022 403,962
144,563 Ser. 94-31, Class B3, 8s, 2009 142,395
975,000 Residential Asset Securitization Trust Ser. 98-A12, Class A14,
8s, 2028 992,977
1,030,000 Salomon Brothers Mortgage Securities VII Ser. 00-C1, Class A2,
7.52s, 2009 1,051,445
2,012,997 Structured Asset Security Corp. Ser. 99-RF1, Class A, IO,
7.873s, 2028 2,035,644
1,549,612 TIAA Retail Commercial Mortgage Trust Ser. 99-1, Class A,
7.17s, 2008 1,559,684
-------------
Total Collateralized Mortgage Obligations
(cost $40,382,642) $ 41,213,422
<CAPTION>
ASSET-BACKED SECURITIES (0.9%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 504,000 Advanta Mortgage Loan Trust Ser. 00-1, Class A4, 8.61s, 2028 $ 516,333
1,870,000 Conseco Finance Securitization Corp. Ser. 00-5, Class A6,
7.96s, 2032 1,881,688
1,300,000 Ford Credit Auto Owner Trust Ser. 00-C, Class A3, 7.13s, 2002 1,302,431
7,521,277 Lehman Manufactured Housing Ser. 98-1, Class IO, 0.82s, 2028 185,094
1,033,380 Mach One CDO, Ltd. Ser. 00-1, Class A, 6.7s, 2030 987,847
1,125,990 Provident Bank Home Equity Loan Trust Ser. 99-1, Class A2,
6.801s, 2019 1,125,990
-------------
Total Asset-Backed Securities (cost $6,099,296) $ 5,999,383
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (0.8%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
USD 3,555,000 Ontario (Province of) sr. unsub. 5 1/2s, 2008 (Canada) $ 3,266,263
USD 2,320,000 Quebec (Province of) sr. unsub. 5 3/4s, 2009 (Canada) 2,126,976
-------------
Total Foreign Government Bonds and Notes
(cost 5,842,650) $ 5,393,239
<CAPTION>
PREFERRED STOCKS (0.4%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
1,603 AmeriKing, Inc. 3.25 pfd. (PIK) $ 1,603
1,430 Centaur Funding Corp 144A 9.08 cum. pfd. (Cayman Islands) 1,484,755
315 Chevy Chase Capital Corp. Ser. A, 5.188 pfd. (PIK) 15,908
7,175 CSC Holdings, Inc. Ser. M, 11.125 cum. pfd. (PIK) 769,519
55 Fresenius Medical Capital Trust I company guaranty, Ser. D,
9.00% pfd. (Germany) 53,900
320 Fresenius Medical Capital Trust II company guaranty 7.875%
pfd. (Germany) 300,000
-------------
Total Preferred Stocks (cost $2,645,158) $ 2,625,685
<CAPTION>
CONVERTIBLE BONDS AND NOTES (0.2%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 84,000 Advanced Energy Industries, Inc. cv. sub. notes 5 1/4s, 2006 $ 60,690
55,000 Alexion Pharmaceuticals, Inc. 144A cv. sub. notes 5 3/4s, 2007 62,700
94,000 BEA Systems, Inc. 144A cv. sub. notes 4s, 2006 208,798
61,000 Berkshire Hathaway, Inc. cv. sr. notes 1s, 2001 191,769
100,000 Conexant Systems, Inc. 144A cv. sub. notes 4s, 2007 61,250
39,000 Cor Therapeutics, Inc. 144A cv. notes 5s, 2007 69,908
205,000 Corecomm, Ltd. cv. sub. notes 6s, 2006 83,281
19,000 Critical Path, Inc. 144A cv. bonds 5 3/4s, 2005 15,224
80,000 Cypress Semiconductor Corp. cv. sub. deb. 3 3/4s, 2005 70,800
70,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 59,063
31,000 Imclone Systems, Inc 144A cv. sub. notes 5 1/2s, 2005 35,728
35,000 Inhale Therapeutic Systems 144A cv. sub. notes 5s, 2007 49,394
40,000 Invitrogen Corp. 144A cv. sub. notes 5 1/2s, 2007 45,150
70,000 IVAX Corp. 144A cv. sr. sub. notes 5 1/2s, 2007 97,038
250,000 MIDCOM Communications, Inc. 144A cv. sub. deb. 8 1/4s,
2003 (In default) (NON) 5,000
183,000 Mutual Risk Management cv. sub. deb. zero %, 2015 85,095
84,000 Safeguard Scientifics, Inc. 144A cv. sub. notes 5s, 2006 73,500
5,000 Sandoz Capital BVI Ltd. 144A cv. company guaranty 2s,
2002 (Switzerland) 7,269
230,000 Standard Commercial Corp. cv. sub. deb. 7 1/4s, 2007 136,563
360,000 System Software Associates, Inc. cv. sub. notes 7s, 2002
(In default) (NON) 19,800
-------------
Total Convertible Bonds and Notes (cost $1,812,989) $ 1,438,020
<CAPTION>
CONVERTIBLE PREFERRED STOCKS (--%) (a) (cost 20,000)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
14 World Access, Inc. 144A Ser. D, zero %, cv. pfd. $ 4,170
<CAPTION>
WARRANTS (--%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
1 Anker Coal Group, Inc. 144A 10/28/09 $ 1
45 McCaw International, Ltd. 4/15/07 900
30 Raintree Resort 144A 12/1/04 1
40 Telehub Communications Corp. 7/31/05 $ 20
125 UIH Australia/Pacific, Inc. 144A 5/15/06 1,873
-------------
Total Warrants (cost $11,505) $ 2,795
<CAPTION>
SHORT-TERM INVESTMENTS (10.3%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 33,894,000 Interest in $949,877,000 joint repurchase agreement
dated October 31, 2000 with Merrill Lynch due
November 1, 2000 with respect to various U.S.
Government obligations -- maturity value of
$33,900,214 for an effective yield of 6.60% $ 33,894,000
32,000,000 Interest in 680,000,000 joint repurchase agreement
dated October 31, 2000 with Morgan (J.P.) & Co., Inc.
due November 1, 2000 with respect to various
U.S. Government obligations -- maturity value of
32,005,867 for an effective yield of 6.60% 32,000,000
-------------
Total Short-Term Investments (cost $65,894,000) $ 65,894,000
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $682,049,545) (b) $ 703,780,508
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $642,673,933.
(b) The aggregate identified cost on a tax basis is $684,799,958,
resulting in gross unrealized appreciation and depreciation of
$57,344,632 and $38,364,082, respectively, or net unrealized
appreciation of $18,980,550.
(NON) Non-income-producing security.
(STP) The interest or dividend rate and date shown parenthetically
represent the new interest or dividend rate to be paid and the date the
fund will begin receiving interest or dividend income at this rate.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at October
31, 2000.
(R) Real Estate Investment Trust.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
ADR stands for American Depositary Receipts representing ownership of foreign
securities on deposit with a domestic custodian bank.
------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 2000
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
------------------------------------------------------------------------------
S&P 500 Index
(Long) $39,965,355 $39,231,341 Dec-00 $734,014
U.S. Agency 10 yr.
(Short) 3,900,766 3,855,748 Dec-00 (45,018)
U.S. Treasury Bond
(Long) 5,790,938 5,814,520 Dec-00 (23,582)
U.S. Treasury Note
10 yr. (Short) 5,941,484 5,934,749 Dec-00 (6,735)
------------------------------------------------------------------------------
$658,679
------------------------------------------------------------------------------
TBA Sales Commitments at October 31, 2000
(Proceeds receivable $15,023,574)
Principal Settlement
Amount Date Value
------------------------------------------------------------------------------
FNMA 7.5s,
November 2015 $5,500,000 11/16/00 $ 5,538,187
FNMA 7s, November
2030 4,750,000 11/13/00 4,653,528
GNMA 8s, November
2030 4,750,000 11/20/00 4,828,660
------------------------------------------------------------------------------
$15,020,375
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $682,049,545) (Note 1) $703,780,508
-------------------------------------------------------------------------------------------
Cash 1,664,521
-------------------------------------------------------------------------------------------
Dividends, interest, and other receivables 4,976,877
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 3,491,936
-------------------------------------------------------------------------------------------
Receivable for securities sold 76,392,288
-------------------------------------------------------------------------------------------
Receivable for variation margin 823,671
-------------------------------------------------------------------------------------------
Total assets 791,129,801
Liabilities
-------------------------------------------------------------------------------------------
Payable for securities purchased 37,064,452
-------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 94,656,328
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,121,463
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 226,863
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 29,494
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 3,096
-------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 229,948
-------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $15,023,574) 15,020,375
-------------------------------------------------------------------------------------------
Other accrued expenses 103,849
-------------------------------------------------------------------------------------------
Total liabilities 148,455,868
-------------------------------------------------------------------------------------------
Net assets $642,673,933
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $620,132,427
-------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 3,544,227
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (3,431,291)
-------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities
in foreign currencies 22,428,570
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $642,673,933
Computation of net asset value and offering price
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($478,967,873 divided by 47,111,456 shares) $10.17
-------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $10.17)* $10.79
-------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($146,552,263 divided by 14,561,190 shares)** $10.06
-------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($2,203,835 divided by 217,679 shares)** $10.12
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($13,078,236 divided by 1,294,887 shares) $10.10
-------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $10.10)* $10.47
-------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($1,871,726 divided by 184,227 shares) $10.16
-------------------------------------------------------------------------------------------
* 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
Year ended October 31, 2000
<S> <C>
Investment income:
-------------------------------------------------------------------------------------------
Interest $27,184,019
-------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $32,445) 9,562,268
-------------------------------------------------------------------------------------------
Total investment income 36,746,287
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,624,663
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,371,939
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 25,450
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 9,336
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,355,678
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,583,015
-------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 14,144
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 99,481
-------------------------------------------------------------------------------------------
Other 200,538
-------------------------------------------------------------------------------------------
Total expenses 9,284,244
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (241,872)
-------------------------------------------------------------------------------------------
Net expenses 9,042,372
-------------------------------------------------------------------------------------------
Net investment income 27,703,915
-------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,788,018
-------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 319,179
-------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 226
-------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 121,051
-------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures contracts and
TBA sale commitments during the year 1,207,394
-------------------------------------------------------------------------------------------
Net gain on investments 4,435,868
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $32,139,783
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended October 31
---------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 27,703,915 $ 27,634,227
--------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 3,107,423 51,531,002
--------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies 1,328,445 (26,506,872)
--------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 32,139,783 52,658,357
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (19,310,992) (22,241,851)
--------------------------------------------------------------------------------------------------
Class B (4,247,568) (4,915,559)
--------------------------------------------------------------------------------------------------
Class C (38,370) (1,606)
--------------------------------------------------------------------------------------------------
Class M (392,827) (420,624)
--------------------------------------------------------------------------------------------------
Class Y (610,919) (54,051)
--------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- (1,377,881)
--------------------------------------------------------------------------------------------------
Class B -- (304,518)
--------------------------------------------------------------------------------------------------
Class C -- (99)
--------------------------------------------------------------------------------------------------
Class M -- (26,057)
--------------------------------------------------------------------------------------------------
Class Y -- (3,348)
--------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (38,917,149) (39,936,334)
--------------------------------------------------------------------------------------------------
Class B (11,860,143) (9,547,631)
--------------------------------------------------------------------------------------------------
Class C (49,188) --
--------------------------------------------------------------------------------------------------
Class M (923,171) (749,842)
--------------------------------------------------------------------------------------------------
Class Y (542,593) --
--------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
Class A (539,897) --
--------------------------------------------------------------------------------------------------
Class B (164,714) --
--------------------------------------------------------------------------------------------------
Class C (580) --
--------------------------------------------------------------------------------------------------
Class M (12,701) --
--------------------------------------------------------------------------------------------------
Class Y (1,465) --
--------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) (171,548,430) 79,985,204
--------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (217,020,924) 53,064,160
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 859,694,857 806,630,697
--------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $3,544,227 and $140,244, respectively) $642,673,933 $859,694,857
--------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.66 $11.01 $11.48 $10.67 $9.84
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .38(c) .37(c) .40(c) .42 .44
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments .13 .35 .46 1.46 1.01
-----------------------------------------------------------------------------------------------------
Total from
investment operations .51 .72 .86 1.88 1.45
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.34) (.37) (.36) (.40) (.43)
-----------------------------------------------------------------------------------------------------
In excess of
net investment income -- (.02) -- -- --
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments (.65) (.68) (.97) (.67) (.19)
-----------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments (.01) -- -- -- --
-----------------------------------------------------------------------------------------------------
Total distributions (1.00) (1.07) (1.33) (1.07) (.62)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.17 $10.66 $11.01 $11.48 $10.67
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.37 6.73 7.86 18.87 15.31
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $478,968 $646,929 $644,902 $585,624 $496,882
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.08 1.09 1.13 1.15 1.20
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.85 3.36 3.51 3.73 4.28
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 139.30 144.87 124.34 152.66 142.36
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset and brokerage service
arrangements (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.
(d) Distributions in excess of net investment income amounted to less
than $0.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS B
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.56 $10.92 $11.40 $10.60 $9.80
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .30(c) .28(c) .31(c) .35 .36
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments .12 .35 .46 1.45 1.00
-----------------------------------------------------------------------------------------------------
Total from
investment operations .42 .63 .77 1.80 1.36
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.26) (.28) (.28) (.33) (.37)
-----------------------------------------------------------------------------------------------------
In excess of
net investment income -- (.03) -- -- --
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments (.65) (.68) (.97) (.67) (.19)
-----------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments (.01) -- -- -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.92) (.99) (1.25) (1.00) (.56)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.06 $10.56 $10.92 $11.40 $10.60
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.47 5.94 7.08 18.11 14.36
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $146,552 $195,502 $149,712 $82,759 $35,118
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.83 1.84 1.88 1.90 1.97
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.10 2.60 2.76 2.98 3.51
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 139.30 144.87 124.34 152.66 142.36
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset and brokerage service
arrangements (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.
(d) Distributions in excess of net investment income amounted to less
than $0.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS C
--------------------------------------------------------------
For the period
Per-share Year ended July 26, 1999+
operating performance October 31 to October 31
--------------------------------------------------------------
2000 1999
--------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $10.64 $11.09
--------------------------------------------------------------
Investment operations
--------------------------------------------------------------
Net investment income (c) .31 .06
--------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .12 (.40)
--------------------------------------------------------------
Total from
investment operations .43 (.34)
--------------------------------------------------------------
Less distributions:
--------------------------------------------------------------
From net
investment income (.29) (.11)
--------------------------------------------------------------
In excess of
net investment income -- --(d)
--------------------------------------------------------------
From net realized gain
on investments (.65) --
--------------------------------------------------------------
In excess of net realized gain
on investments (.01) --
--------------------------------------------------------------
Total distributions (.95) (.11)
--------------------------------------------------------------
Net asset value,
end of period $10.12 $10.64
--------------------------------------------------------------
Ratios and supplemental data
--------------------------------------------------------------
Total return at
net asset value (%)(a) 4.54 (3.08)*
--------------------------------------------------------------
Net assets, end of period
(in thousands) $2,204 $581
--------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.83 .49*
--------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.14 .63*
--------------------------------------------------------------
Portfolio turnover (%) 139.30 144.87
--------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset and brokerage service
arrangements (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.
(d) Distributions in excess of net investment income amounted to less
than $0.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.61 $10.96 $11.44 $10.63 $9.82
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .33(c) .31(c) .34(c) .36 .42
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments .11 .36 .45 1.47 .98
-----------------------------------------------------------------------------------------------------
Total from
investment operations .44 .67 .79 1.83 1.40
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.29) (.31) (.30) (.35) (.40)
-----------------------------------------------------------------------------------------------------
In excess of
net investment income -- (.03) -- -- --
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments (.65) (.68) (.97) (.67) (.19)
-----------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments (.01) -- -- -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.95) (1.02) (1.27) (1.02) (.59)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.10 $10.61 $10.96 $11.44 $10.63
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.66 6.27 7.30 18.41 14.76
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $13,078 $14,904 $12,017 $8,387 $3,551
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.58 1.59 1.63 1.65 1.72
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.35 2.85 3.01 3.23 3.74
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 139.30 144.87 124.34 152.66 142.36
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset and brokerage service
arrangements (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.
(d) Distributions in excess of net investment income amounted to less
than $0.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS Y
--------------------------------------------------------------
For the period
Per-share Year ended Dec. 31, 1998+
operating performance Oct. 31 to Oct. 31
--------------------------------------------------------------
2000 1999
--------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $10.66 $10.79
--------------------------------------------------------------
Investment operations
--------------------------------------------------------------
Net investment income (c) .52 .32
--------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments -- (.10)
--------------------------------------------------------------
Total from
investment operations .52 .22
--------------------------------------------------------------
Less distributions:
--------------------------------------------------------------
From net
investment income (.36) (.32)
--------------------------------------------------------------
In excess of
net investment income -- (.03)
--------------------------------------------------------------
From net realized gain
on investments (.65) --
--------------------------------------------------------------
In excess of net realized gain
on investments (.01) --
--------------------------------------------------------------
Total distributions (1.02) (.35)
--------------------------------------------------------------
Net asset value,
end of period $10.16 $10.66
--------------------------------------------------------------
Ratios and supplemental data
--------------------------------------------------------------
Total return at
net asset value (%)(a) 5.53 2.00*
--------------------------------------------------------------
Net assets, end of period
(in thousands) $1,872 $1,779
--------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .83 .70*
--------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.19 3.01*
--------------------------------------------------------------
Portfolio turnover (%) 139.30 144.87
--------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset and brokerage service
arrangements (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.
(d) Distributions in excess of net investment income amounted to less
than $0.01 per share.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
October 31, 2000
Note 1
Significant accounting policies
Putnam Balanced Retirement 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 return by
investing in a diversified portfolio of equity and debt securities,
with secondary objective of stability of principle.
The fund offers class A, class B, class C, class M and class Y shares.
Class A shares are sold with a maximum front-end sales charge of 5.75%.
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 C shares are subject to the same fees and
expenses as class B shares, except that class C shares have a one-year
1.00% contingent deferred sales charge and do not convert to class A
shares. Class M shares are sold with a maximum front end sales charge of
3.50% and pay an ongoing distribution fee that is higher than class A
shares but lower than class B and class C shares. Class Y shares, which
are sold at net asset value, are generally subject to the same expenses
as class A, class B, class C and class M shares, but do not bear a
distribution fee. Class Y shares are sold to defined contribution plans
that invest at least $150 million in a combination of Putnam funds and
other accounts managed by affiliates of Putnam Investment Management,
Inc. ("Putnam Management"), the fund's manager, a wholly-owned
subsidiary of Putnam Investment, Inc.
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 that fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sales price on its principal exchange, or if no sales
are reported -- as in the case of some securities traded
over-the-counter -- the last reported bid price. Short-term investments
having remaining maturities of 60 days or less are stated at amortized
cost, which approximates market value. Other investments, including
restricted securities, are stated at fair value following procedures
approved by the Trustees.
Market quotations are not considered to be readily available for certain
debt obligations; such investments are stated at fair value on the basis
of valuations furnished by a pricing service or dealers, approved by the
Trustees, which determine valuations for normal, institutional-size
trading units of such securities using methods based on market
transactions for comparable securities and variable relationships
between securities that are generally recognized by institutional
traders.
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 Management. These balances may be invested in one or more
repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Collateral for certain tri-party repurchase agreements is held at the
counterparty's custodian in a segregated account for the benefit of the
fund and the counterparty. Putnam Management is responsible for
determining that the value of these underlying securities is at all
times at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Gains or losses on securities sold are determined
on the identified cost basis.
Interest income is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date except that certain dividends from
foreign securities are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends, if any, are recorded at the fair
market value of the securities received. Discounts on zero coupon bonds,
original issue discount bonds, stepped-coupon bonds and payment in kind
bonds are accreted according to the yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such gains and losses are included with the net
realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net realized
exchange gains or losses on closed forward currency contracts,
disposition of foreign currencies and the difference between the amount
of investment income and foreign withholding taxes recorded on the
fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net unrealized appreciation and depreciation of assets and
liabilities in foreign currencies arise from changes in the value of
open forward currency contracts and assets and liabilities other than
investments at the period end, resulting from changes in the exchange
rate. Investments in foreign securities involve certain risks, including
those related to economic instability, unfavorable political
developments, and currency fluctuations, not present with domestic
investments.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term
investments). The U.S. dollar value of forward currency contracts is
determined using current forward currency exchange rates supplied by a
quotation service. The market value of the contract will fluctuate with
changes in currency exchange rates. The contract is "marked to market"
daily and the change in market value is recorded as an unrealized gain
or loss. When the contract is closed, the fund records a realized gain
or loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed. The fund
could be exposed to risk if the value of the currency changes
unfavorably, if the counterparties to the contracts are unable to meet
the terms of their contracts or if the fund is unable to enter into a
closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed. Realized gains and losses on purchased options are included in
realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed
unit price at a future date beyond customary settlement time. Although
the unit price has been established, the principal value has not been
finalized. However, the amount of the commitments will not fluctuate more
than .01% from the principal amount. The fund holds, and maintains until
settlement date, cash or high-grade debt obligations in an amount
sufficient to meet the purchase price, or the fund may enter into
offsetting contracts for the forward sale of other securities it owns.
Income on the securities will not be earned until settlement date. TBA
purchase commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the
risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the
underlying securities, according to the procedures described under
"Security valuation" above.
Although the fund will generally enter into TBA purchase commitments
with the intention of acquiring securities for their portfolio or for
delivery pursuant to options contracts it has entered into, the fund
may dispose of a commitment prior to settlement if Putnam Management
deems it appropriate to do so.
I) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale
commitments are not received until the contractual settlement date.
During the time a TBA sale commitment is outstanding, equivalent
deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover"
for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures
described under "Security valuation" above. The contract is
"marked-to-market" daily and the change in market value is recorded by
the fund as an unrealized gain or loss. If the TBA sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
fund realizes a gain or loss. If the fund delivers securities under the
commitment, the fund realizes a gain or a loss from the sale of the
securities based upon the unit price established at the date the
commitment was entered into.
J) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
October 31, 2000, the fund had no borrowings against the line of credit.
K) 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.
L) 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. These differences include temporary and permanent
differences of losses on wash sale transactions, foreign currency gains
and losses, nontaxable dividends, defaulted bond interest, unrealized
gains and losses on certain futures contracts, paydown gains and losses
on mortgage-backed securities, market discount and interest on
payment-in-kind securities. 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. For
the year ended October 31, 2000, the fund reclassified $300,744 to increase
undistributed net investment income and $1,256,285 to increase
paid-in-capital, with an increase to accumulated net realized losses of
$1,557,029. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
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: 0.65% 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 year ended October 31, 2000, fund expenses were reduced by
$241,872 under expense offset arrangements with PFTC and brokerage
service arrangements. 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 $901
has been allocated to the fund, and an additional fee for each Trustees
meeting attended. Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a 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, class C 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 Retail Management, Inc., 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 Retail Management, Inc. at an annual rate up to
0.35%, 1.00%, 1.00% and 1.00% of the average net assets attributable to
class A, class B, class C and class M shares, respectively. The Trustees
have approved payment by the fund at an annual rate of 0.25%, 1.00%,
1.00% and 0.75% of the average net assets attributable to class A, class
B, class C and class M shares, respectively.
For the year ended October 31, 2000, Putnam Retail Management, Inc.,
acting as underwriter received net commissions of $105,009 and $3,037
from the sale of class A and class M shares, respectively, and $416,501
and $707 in contingent deferred sales charges from redemptions of class
B and class C shares, respectively. A deferred sales charge of up to 1%
is assessed on certain redemptions of class A shares. For the year ended
October 31, 2000, Putnam Retail Management, Inc., acting as underwriter
received $4,776 on
class A redemptions.
Note 3
Purchases and sales of securities
During the year ended October 31, 2000, cost of purchases and proceeds
from sales of investment securities other than U.S. government
obligations and short-term investments aggregated $767,952,241 and
$937,792,055, respectively. Purchases and sales of U.S. government
obligations aggregated $235,329,324 and $268,473,519, respectively.
Note 4
Capital shares
At October 31, 2000, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended October 31, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 7,396,673 $ 72,327,938
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,793,338 47,240,176
---------------------------------------------------------------------------
12,190,011 119,568,114
Shares
repurchased (25,749,804) (250,761,569)
---------------------------------------------------------------------------
Net decrease (13,559,793) $(131,193,455)
---------------------------------------------------------------------------
Year ended October 31, 1999
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 10,012,163 $ 109,000,444
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,702,959 50,323,503
---------------------------------------------------------------------------
14,715,122 159,323,947
Shares
repurchased (12,603,424) (136,977,187)
---------------------------------------------------------------------------
Net increase 2,111,698 $ 22,346,760
---------------------------------------------------------------------------
Year ended October 31, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 2,968,928 $ 28,874,088
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,476,586 14,453,568
---------------------------------------------------------------------------
4,445,514 43,327,656
Shares
repurchased (8,398,899) (80,659,069)
---------------------------------------------------------------------------
Net decrease (3,953,385) $(37,331,413)
---------------------------------------------------------------------------
Year ended October 31, 1999
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 7,052,313 $ 76,141,950
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,215,074 12,903,110
---------------------------------------------------------------------------
8,267,387 89,045,060
Shares
repurchased (3,462,204) (37,141,730)
---------------------------------------------------------------------------
Net increase 4,805,183 $ 51,903,330
---------------------------------------------------------------------------
Year ended October 31, 2000
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 197,974 $1,928,456
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,338 81,463
---------------------------------------------------------------------------
206,312 2,009,919
Shares
repurchased (43,228) (418,347)
---------------------------------------------------------------------------
Net increase 163,084 $1,591,572
---------------------------------------------------------------------------
For the period July 26, 1999
(commencement of operations) to
October 31, 1999
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 54,840 $582,901
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 108 1,163
---------------------------------------------------------------------------
54,948 584,064
Shares
repurchased (353) (3,770)
---------------------------------------------------------------------------
Net increase 54,595 $580,294
---------------------------------------------------------------------------
Year ended October 31, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 389,985 $ 3,807,258
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 130,007 1,275,794
---------------------------------------------------------------------------
519,992 5,083,052
Shares
repurchased (630,248) (6,059,679)
---------------------------------------------------------------------------
Net decrease (110,256) $ (976,627)
---------------------------------------------------------------------------
Year ended October 31, 1999
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 589,317 $ 6,373,780
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 105,634 1,125,427
---------------------------------------------------------------------------
694,951 7,499,207
Shares
repurchased (386,587) (4,165,592)
---------------------------------------------------------------------------
Net increase 308,364 $ 3,333,615
---------------------------------------------------------------------------
Year ended October 31, 2000
---------------------------------------------------------------------------
Class Y Shares Amount
---------------------------------------------------------------------------
Shares sold 9,393,087 $ 91,340,581
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 117,367 1,154,976
---------------------------------------------------------------------------
9,510,454 92,495,557
Shares
repurchased (9,493,068) (96,134,064)
---------------------------------------------------------------------------
Net increase/
(decrease) 17,386 $ (3,638,507)
---------------------------------------------------------------------------
For the period December 31, 1998
(commencement of operations) to
October 31, 1999
---------------------------------------------------------------------------
Class Y Shares Amount
---------------------------------------------------------------------------
Shares sold 201,446 $2,200,269
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,589 38,727
---------------------------------------------------------------------------
205,035 2,238,996
Shares
repurchased (38,194) (417,791)
---------------------------------------------------------------------------
Net increase 166,841 $1,821,205
---------------------------------------------------------------------------
FEDERAL TAX INFORMATION
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the
Fund hereby designates $3,826,554 as capital gain, for its taxable year
ended October 31, 2000.
The fund has designated 26.46% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
FUND INFORMATION
WEB SITE
www.putnaminvestments.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
John A. Hill, Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
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
Deborah F. Kuenstner
Vice President
David L. King
Vice President and Fund Manager
Jeanne L. Mockard
Vice President and Fund Manager
James M. Prusko
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
This report is for the information of shareholders of Putnam Balanced
Retirement 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 and
Putnam's Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site:
www.putnaminvestments.com.
Not FDIC Insured, May Lose Value, No Bank Guarantee
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
---------------------
PRST STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
AN018 66572 034/243/908 12/00
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
----------------------------------------------------------------------------
Putnam Balanced Retirement Fund
Supplement to annual Report dated 10/31/00
The following information has been prepared to provide class Y shareholders
with a performance overview specific to their holdings. Class Y shares are
offered exclusively to defined contribution plans investing $150 million or
more in one or more of Putnam's funds or private accounts. Performance of
class Y shares, which incur neither a front-end load, distribution fee, nor
contingent deferred sales charge, will differ from performance of class A,
B, C, and M shares, which are discussed more extensively in the annual
report.
ANNUAL RESULTS AT A GLANCE
----------------------------------------------------------------------------
Total return for periods ended 10/31/00
NAV
1 year 5.53%
5 years 66.84
Annual average 10.78
10 years 234.56
Annual average 12.84
Life of fund (since class A inception, 4/19/85)
Annual average 10.43
Share value: NAV
10/31/99 $10.66
10/31/00 $10.16
----------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
4 $0.363 $0.664 $1.027
----------------------------------------------------------------------------
Please note that past performance is not indicative of future results. More
recent returns may be more or less than those shown. Returns shown for
class Y shares for periods prior to their inception are derived from the
historical performance of class A shares, adjusted to reflect the initial
sales charge currently applicable to class A shares. These returns have not
been adjusted to reflect differences in operating expenses which, for class
Y shares, typically are lower than the operating expenses applicable to
class A shares. All returns assume reinvestment of distributions at net
asset value. Investment return and principal value will fluctuate so your
shares, when redeemed, may be worth more or less than their original cost.
See full report for information on comparative benchmarks. If you have
questions, please consult your fund prospectus or call Putnam toll free
at 1-800-752-9894.
