Putnam
Adjustable Rate
U.S. Government
Fund
SEMIANNUAL REPORT
April 30, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* For the 12 months ended April 30, 1996, Putnam Adjustable Rate
U.S. Government Fund's class A and class B shares were ranked 8 and 19,
respectively, out of 58 adjustable-rate mortgage funds tracked by Lipper
Analytical Services. These rankings placed both share classes within the
top 33% of all adjustable-rate mortgage funds ranked and in the case of
class A shares, actually placed them in the top 14%.*
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
13 Financial statements
*Lipper is an independent mutual-fund research organization. Its
rankings are based on total return performance, vary over time, and do
not reflect the effects of sales charges. The fund's class A shares were
ranked 7 out of 9 adjustable-rate mortgage funds for 5-year performance
through 4/30/96. Class B shares were not ranked over longer applicable
periods. Past performance is not indicative of future results.
[GRAPHIC OMITTED: photo of George Putnam]
(copyright) Karsh, Ottawa
From the Chairman
Dear Shareholder:
Putnam Adjustable Rate U.S. Government Fund's current fiscal year opened
in the midst of one of the U.S. bond market's strongest advances in
recent memory. It proved a fragile rally, derailed in March by hints of
a pickup in inflation caused by the economy's persistence in growing.
Anticipating such a possibility, Fund Manager Michael Martino had taken
some defensive measures that mitigated, but did not entirely neutralize,
the market's resulting decline.
All in all, the fund performed respectably within its universe during
the six months ended April 30, 1996, as Mike explains in the report that
follows. He also takes a look at prospects for the second half of fiscal
1996.
You will soon receive proxy materials regarding a proposed merger of
your fund into Putnam Intermediate U.S. Government Income Fund. The
proxy statement describes in detail the reasons for the proposed merger.
We urge you to read the materials and return your marked proxy card
promptly. Meanwhile, since May 6, 1996, your fund has been closed to new
investments.
Respectfully yours,
/s/George Putnam
Chairman of the Trustees
June 19, 1996
Report from the Fund Manager
Michael Martino
The first half of Putnam Adjustable Rate U.S. Government Fund's 1996
fiscal year -- the six months ended April 30 -- spanned a sharply
changing environment in the fixed-income markets. Through the first two
months of the period, the bond market continued the strong performance
that capped off a successful calendar 1995. Signs of weakness began to
appear during January and February, however, culminating in a
substantial selloff on March 8 in the wake of February's stronger-than-
expected employment figures. While the market regained some stability
during April, its underlying support remained decidedly fragile.
February's surprisingly robust employment report led investors to
conclude that the Federal Reserve Board would be unlikely to reduce
short-term interest rates again any time in the near future. Moreover,
in the often contrary logic of the bond markets, investors frequently
react negatively to indications of economic strength out of fear that
inflation could re-emerge, which would erode the value of investments
with fixed income streams. Despite these market dislocations, your fund
posted respectable results for the period and, for the year ended April
30, 1996, outperformed most other adjustable-rate mortgage funds on a
relative basis. (Please refer to the footnote on page 2 and to the
tables on pages 8 and 9 for complete performance information.)
* HIGH-COUPON ARMs PROVE ADVANTAGEOUS AS INTEREST RATES CHANGE
DIRECTION
Early in the fiscal year, our strategy was focused on structuring a
defensive portfolio that would minimize the fund's exposure to
prepayment risk.* Our plan was to shift the portfolio gradually into
lower-coupon adjustable-rate mortgage-backed securities (ARMs), which,
in an environment of falling interest rates, would be less susceptible
to prepayment. When rates began to move back up during February and
March, however, this strategy was no longer viable.
Footnote reads:
*Prepayment risk -- a central type of risk with all mortgage-backed
securities -- is the risk that an investor's principal will be returned
in full at some point prior to the security's stated maturity date. Such
prepayment may cause an investor's actual rate of return to differ from
the expected rate of return.
Interestingly, with the dramatic shift in the direction of interest
rates, the higher-coupon securities in the portfolio -- a position we
had been preparing to reduce -- began to outperform their lower-coupon
brethren as prepayment fears receded. As a result, instead of
redeploying these assets into lower-coupon securities in response to
falling rates, we maintained the fund's commitment to higher-coupon
ARMs. As the chart below indicates, at the end of the period we had
nearly 68% of the portfolio invested in securities with coupons of 7% or
greater. In the current higher-rate environment, higher-coupon ARMs
offer a degree of protection. Because of their higher coupons, their
prices are not likely to drop as rapidly as lower-coupon ARMs, which
become comparatively less attractive because of their smaller income
streams. In addition, higher-coupon ARMs help to boost the fund's
dividend income.
* TREASURIES BUFFETED BY MARKET UNCERTAINTY AND RISING RATES
The fund's average allocation of approximately 25% of the portfolio to
U.S. Treasuries proved to be a drag on performance as interest rates
moved up over the period. Treasuries with maturities from two to five
years were noticeable victims of the market's disenchantment with
economic strength and the diminished likelihood of additional Fed rate
reductions. We currently plan to maintain the fund's Treasury position,
but we expect to concentrate its holdings in securities with very short
maturities of less than two years. By doing so, we hope to keep the
fund's interest-rate sensitivity in check.
[GRAPHIC OMITTED: horizontal bar chart COUPON BREAKDOWN (4/30/96)*]
showing
Coupon% % of Portfolio
5%-6% 6.9%
6%-7% 25.5%
7%-8% 62.6%
8%+ 5.0%
Footnote reads:
*Based on percentage of total investments.
* GINNIE MAE ARMs PROVIDE FLEXIBILITY IN THE MIDST OF MARKET
FLUCTUATIONS
As we discussed in the fund's annual report dated October 31, 1995, we
built a small position in Ginnie Mae ARMs* late in fiscal 1995. We
maintained this allocation throughout the first half of fiscal 1996,
although we reduced it somewhat as the period ended. Because Ginnie Mae
ARMs tend to be somewhat more marketable than other types of ARMs, we
continued to find them attractive. The ability to move into and out of
Ginnie Mae ARMs with relative ease provided your fund with an important
source of flexibility amid the market uncertainties of the past few
months. What's more, the market has priced Ginnie Mae ARMs in such a way
that as of the period's end, we believed they offered more value to
investors than other ARM categories.
In keeping with our conservative approach with the fund, we continued to
invest exclusively in relatively straightforward government-backed ARMs
and Treasury securities. We avoided less-liquid privately issued ARMs
and other more exotic mortgage-backed securities, such as inverse
floaters, interest-only securities, and principal-only securities.
* DEFENSIVE APPROACH PLANNED IN LIGHT OF GROWTH FORECAST
Putnam's economists foresee the possibility of relatively strong
economic growth in the coming months. Rising prices for oil, metals,
grains, and other commodities, along with a recent indication of
potentially increasing labor costs for corporations, may spark
persistent inflation fears. Given such a scenario, we believe it's
likely the fixed-income market's latent trepidation over a Fed rate
increase could put pressure on short-term bonds -- the market sector
most immediately impacted by any Fed action.
Footnote reads:
*Securities issued by the Government National Mortgage Association.
[GRAPHIC OMITTED: COMPARATIVE PORTFOLIO COMPOSITION*]
LEDGEND READS [BLACK BAR] 10/31/95
[GREY BAR] 4/30/96
FNMA and FHLMC ARMS [BLACK BAR] 63.4%
[GREY BAR] 54.0%
U.S. Treasury securities [BLACK BAR] 25.6%
[GREY BAR] 25.4%
GNMA ARMS [BLACK BAR] 9.2%
[GREY BAR] 4.7%
FHA ARMs [BLACK BAR] 0.0%
[GREY BAR] 8.9%
Fixed-rate mortgage-backed securities [BLACK BAR] 0.2%
[GREY BAR] 0.1%
Cash and short-term investments [BLACK BAR] 1.6%
[GREY BAR] 6.9%
Footnote reads:
*Based on percentage of total investments. Holdings will vary over time.
FNMA is the Federal National Mortgage Association, or "Fannie Mae;"
FHLMC is the Federal Home Loan Mortgage Corporation, or "Freddie Mac;"
GNMA is the Government National Mortgage Association, or "Ginnie Mae;"
and FHA is the Federal Housing Administration.
Because of this outlook, we plan to maintain a defensive profile in your
fund's portfolio over the near term. Our current strategy is to keep the
portfolio's effective maturity quite short and to concentrate
investments in high-coupon ARMs and very short-term Treasuries. If the
present bearish tone in the market does persist -- which is by no means
certain -- high-coupon ARMs may hold their value better than their
lower-coupon counterparts, and extremely short-term Treasuries may
provide at least partial shelter from any further rise in rates. While
we can never provide assurances regarding performance or market
behavior, we believe such a defensive strategy is most conducive to
pursuing your fund's objectives of attractive current income and
preservation of capital.
Footnote reads:
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 4/30/96, there is no guarantee the fund will
continue to hold these securities in the future. While U.S. government
backing of individual securities does not insure your principal, which
will fluctuate, it does guarantee that the fund's government-backed
holdings will make timely payments of interest and principal.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Adjustable Rate U.S. Government Fund is designed for
investors seeking attractive current income and preservation of capital
primarily through U.S. adjustable rate mortgage securities.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 4/30/96
Class A Class B
(inception date) (1/5/88) (5/11/92)
NAV POP NAV CDSC
- ------------------------------------------------------------------------
6 months 2.54% -0.81% 2.23% -0.75%
- ------------------------------------------------------------------------
1 year 6.79 3.36 6.16 3.16
- ------------------------------------------------------------------------
5 years 19.58 15.73 -- --
Annual average 3.64 2.97 -- --
- ------------------------------------------------------------------------
Life of class 52.45 47.53 10.26 9.33
Annual average 5.20 4.78 2.49 2.27
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 4/30/96
Lehman Bros.
Mortgage-backed Consumer
Securities Index Price Index
- ------------------------------------------------------------------------
6 months 1.66% 1.69%
- ------------------------------------------------------------------------
1 year 8.64 2.90
- ------------------------------------------------------------------------
5 years 45.05 15.61
Annual average 7.72 2.94
- ------------------------------------------------------------------------
Life of class A 109.50 35.44
Annual average 9.28 3.71
- ------------------------------------------------------------------------
Life of class B 30.23 12.04
Annual average 6.83 2.91
- ------------------------------------------------------------------------
Footnote reads:
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions.
The fund began operations on 1/5/88, offering shares now known as class
A, however, performance data for periods before 6/1/91 do not represent
operations under the fund's current objectives and policies. Investment
returns and net asset value will fluctuate so that an investor's shares,
when sold, may be worth more or less than their original cost. POP
assumes 3.25% maximum sales charge for class A shares. CDSC for class B
shares assumes a 3% maximum contingent deferred sales charge during the
first year, declining 1% during the fourth year. After the fourth year,
the CDSC no longer applies.
TOTAL RETURN FOR PERIODS ENDED 3/31/96
(most recent calendar quarter)
Class A Class B
NAV POP NAV CDSC
- ------------------------------------------------------------------------
6 months 2.63% -0.72% 2.43% -0.56%
- ------------------------------------------------------------------------
1 year 7.06 3.61 6.53 3.53
- ------------------------------------------------------------------------
5 years 20.13 16.27 -- --
Annual average 3.74 3.06 -- --
- ------------------------------------------------------------------------
Life of class 51.72 46.82 9.88 8.96
Annual average 5.19 4.77 2.45 2.23
- ------------------------------------------------------------------------
Footnote reads:
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns
and net asset value will fluctuate so that an investor's shares, when
sold, may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 4/30/96
Class A Class B
- ------------------------------------------------------------------------
Distributions (number) 6 6
- ------------------------------------------------------------------------
Income $0.300 $0.269
- ------------------------------------------------------------------------
Total $0.300 $0.269
- ------------------------------------------------------------------------
Share value: NAV POP NAV
- ------------------------------------------------------------------------
10/31/95 $10.38 $10.73 $10.36
- ------------------------------------------------------------------------
4/30/96 10.34 10.69 10.32
- ------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------
Current dividend rate1 5.80% 5.61% 5.23%
- ------------------------------------------------------------------------
Current 30-day SEC yield2 5.00 4.83 4.40
- ------------------------------------------------------------------------
Footnote reads:
1 Income portion of most recent distribution, annualized and divided
by NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus
the maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 3.25% sales charge for class A
shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B shares and assumes redemption at the end of
the period. Your fund's CDSC declines from a 3% maximum during the first
year to 1% during the fourth year. After the fourth year, the CDSC no
longer applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Mortgage-Backed Securities Index reflects performance of
15- and 30-year fixed-rate securities backed by mortgage pools of the
Government National Mortgage Association, Federal Home Loan Mortgage
Corporation, and Federal National Mortgage Association. Index assumes
reinvestment of all distributions and does not take into account
brokerage commissions or other costs. The fund's portfolio contains
securities that do not match those in the index. It is not possible to
invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
<TABLE>
<CAPTION>
Portfolio of investments owned
April 30, 1996 (Unaudited)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (96.3%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Mortgage Association Adjustable
Rate Mortgage Participation certificates (ARMS)
$ 362,130 7.954s, December 1, 2022 $ 368,862
346,245 7.917s, February 1, 2020 356,578
4,385,788 7.897s, March 1, 2019 4,539,291
3,061,650 7 7/8s, April 1, 2018 3,156,377
1,188,054 7.785s, April 1, 2019 1,219,609
513,001 7.77s, February 1, 2018 526,468
1,936,106 7 3/4s, September 1, 2021 1,988,149
214,014 7.745s, December 1, 2018 218,964
54,773 7.72s, March 1, 2019 55,561
2,659,009 7.678s, March 1, 2019 2,748,751
1,289,417 7.603s, January 1, 2018 1,321,047
4,476,416 7.558s, February 1, 2022 4,580,627
975,992 7.525s, April 1, 2018 1,001,769
2,045,056 7 1/2s, November 1, 2016 2,085,957
1,399,537 7.464s, April 1, 2019 1,441,524
2,327,503 7 3/8s, February 1, 2018 2,371,865
4,567,032 7 1/8s, April 1, 2017 4,635,538
Federal Housing Authority ARMS
9,449,617 6s, November 20, 2025 9,456,988
Federal National Mortgage Association Pass-Through
Certificate
156,186 11 1/4s, October 1, 2010 174,586
Federal National Mortgage Association ARM
642,111 7.967s, March 1, 2019 653,549
204,732 7.95s, January 1, 2017 211,897
199,033 7.69s, February 1, 2027 199,905
483,088 7.686s, April 1, 2019 487,546
2,386,264 7.667s, December 1, 2019 2,469,783
1,662,991 7.58s, May 1, 2020 1,719,896
119,495 7.458s, May 1, 2016 121,287
3,682,112 7.429s, September 1, 2018 3,810,987
4,017,331 7.294s, June 1, 2018 4,107,078
2,721,112 7.238s, April 1, 2022 2,775,534
418,252 7.223s, April 1, 2019 425,245
7,092,739 6.975s, April 1, 2028 7,293,323
149,158 6.283s, November 1, 2024 148,599
207,355 6.283s, July 1, 2026 206,578
4,244 6.22s, February 1, 2016 4,228
Government National Mortgage Association ARMS
5,000,000 TBA, 6s, May 16, 2026 4,975,000
U.S. Treasury Notes
5,000,000 8 1/8s, February 15, 1998 5,175,000
5,000,000 7 7/8s, January 15, 1998 5,150,000
1,500,000 7 3/8s, November 15, 1997 1,530,465
$10,000,000 7 1/4s, November 15, 1996 $ 10,093,700
5,000,000 6s, August 31, 1997 5,004,700
--------------
Total U.S. Government and Agency Obligations
(cost $99,736,567) $ 98,812,811
SHORT-TERM INVESTMENTS (7.1%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
$5,000,000 Federal National Mortgage Association effective
yield of 5.17%, May 29, 1996 $ 4,979,176
2,300,000 Interest in $500,000,000 joint repurchase agreement
dated April 30, 1996 with Lehman Brothers, Inc.
due May 1, 1996 with respect to various
U.S. Treasury obligations-maturity value $2,300,342
for an effective yield of 5.35% 2,300,342
--------------
Total Short-Term Investments (cost $7,279,518) $ 7,279,518
--------------
Total Investments (cost $107,016,085)*** $106,092,329
- ---------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $102,602,157.
*** The aggregate identified cost on a tax cost basis is $107,016,085, resulting in gross unrealized appreciation
and depreciation of $148,291, and $1,072,047, respectively, or net unrealized depreciation of $923,756. TBA after
the name of a security represents to be announced securities (See Note 1 to financial statements). The rates shown
on Adjustable Rate Mortgages (ARMS) are the current interest rates at April 30, 1996, which are subject to change
based on the terms of the security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30,1996 (Unaudited)
<S> <C>
Assets
- --------------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $107,016,085 (Note 1) $106,092,329
- --------------------------------------------------------------------------------------------------------
Cash 258
- --------------------------------------------------------------------------------------------------------
Interest and other receivables 1,678,624
- --------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 752,970
- --------------------------------------------------------------------------------------------------------
Total assets 108,524,181
Liabilities
- --------------------------------------------------------------------------------------------------------
Payable for securities purchased 4,999,531
- --------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 683,046
- --------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 155,667
- --------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 3,695
- --------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 627
- --------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 35,854
- --------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 14,103
- --------------------------------------------------------------------------------------------------------
Other accrued expenses 29,501
- --------------------------------------------------------------------------------------------------------
Total liabilities 5,922,024
- --------------------------------------------------------------------------------------------------------
Net assets $102,602,157
Represented by
- --------------------------------------------------------------------------------------------------------
Paid-in-capital (Notes 1 and 4) $129,771,117
- --------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 298,794
- --------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (26,543,998)
- --------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (923,756)
- --------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $102,602,157
Computation of net asset value and offering price
- --------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($73,951,980 divided by 7,154,357 shares) $10.34
- --------------------------------------------------------------------------------------------------------
Offering price per class A share (100/96.75 of $10.34)* $10.69
- --------------------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares
($28,650,177 divided by 2,775,734 shares)** $10.32
- --------------------------------------------------------------------------------------------------------
* On single retail sales of less than $100,000. On sales of $100,000 or more and on group sales
the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended April 30,1996 (Unaudited)
<S> <C>
Investment Income
- --------------------------------------------------------------------------------------------------------
Interest $3,622,570
- --------------------------------------------------------------------------------------------------------
Total investment income 3,622,570
Expenses:
- --------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 318,011
- --------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 108,466
- --------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 5,455
- --------------------------------------------------------------------------------------------------------
Reports to shareholders 16,799
- --------------------------------------------------------------------------------------------------------
Auditing 12,773
- --------------------------------------------------------------------------------------------------------
Legal 514
- --------------------------------------------------------------------------------------------------------
Postage 8,528
- --------------------------------------------------------------------------------------------------------
Registration fees 225
- --------------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 96,711
- --------------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 121,785
- --------------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,753
- --------------------------------------------------------------------------------------------------------
Other expenses 1,617
- --------------------------------------------------------------------------------------------------------
Total expenses 694,637
- --------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (46,462)
- --------------------------------------------------------------------------------------------------------
Net expenses 648,175
- --------------------------------------------------------------------------------------------------------
Net investment income 2,974,395
- --------------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (216,115)
- --------------------------------------------------------------------------------------------------------
Net unrealized depreciation on investments during the period (188,041)
- --------------------------------------------------------------------------------------------------------
Net loss on investments (404,156)
- --------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $2,570,239
- --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
April 30 October 31
1996* 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- --------------------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------------------
Net investment income $ 2,974,395 $ 6,955,653
- --------------------------------------------------------------------------------------------------------
Net realized loss on investments (216,115) (472,237)
- --------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (188,041) 1,992,189
- --------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,570,239 8,475,605
- --------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- --------------------------------------------------------------------------------------------------------
From net investment income:
Class A (2,245,402) (4,678,220)
- --------------------------------------------------------------------------------------------------------
Class B (745,112) (1,453,488)
- --------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (6,465,185) (41,088,335)
- --------------------------------------------------------------------------------------------------------
Total decrease in net assets (6,885,460) (38,744,438)
- --------------------------------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------------------------------
Beginning of period 109,487,617 148,232,055
- --------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $298,794 and $314,913, respectively) $102,602,157 $109,487,617
- --------------------------------------------------------------------------------------------------------
* Unaudited
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
Six months
ended
April 30 Year ended October 31
---------------------------------------------------------------
1996* 1995 1994 1993
---------------------------------------------------------------
Class B
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.36 $10.15 $10.53 $10.91
- ---------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------
Net investment income .27 .54 .43 .52
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (.04) .14 (.46) (.45)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations .23 .68 (.03) .07
- ---------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------
Net investment income (.27) (.47) (.33) (.45)
- ---------------------------------------------------------------------------------------------------------------------
Tax return capital -- -- (.02) --
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (.27) (.47) (.35) (.45)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.32 $10.36 $10.15 $10.53
- ---------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b) 2.23 (c) 6.86 (0.31) 0.66
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $28,650 $29,375 $38,030 $43,851
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(d) .87 (c) 1.80 1.59 1.67
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average
net assets (%) 2.58 (c) 5.20 3.98 4.78
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 17.35 (c) 178.97 196.00 49.16
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
For the Period
May 11, 1992
(commencement Six months
of operations) to ended
October 31 April 30 Year ended October 31
- ----------------------------------------------------------------------------------------------------------------------------
1992 1996* 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $11.15 $10.38 $10.17 $10.55
- ----------------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income .33 (a) .30 .61 .55
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (.26) (.04) .13 (.52)
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .07 .26 .74 .03
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (.31) (.30) (.53) (.39)
- ----------------------------------------------------------------------------------------------------------------------------
Tax return capital -- -- -- (.02)
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.30) (.53) (.41)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.91 $10.34 $10.38 $10.17
- ----------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b) 0.58 (c) 2.54 (c) 7.48 0.30
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $42,017 $73,952 $80,112 $110,202
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(d) .82 (a)(c) .57 (c) 1.20 .99
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average
net assets (%) 2.45 (a)(c) 2.87 (c) 5.78 4.59
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 237.21 17.53 (c) 178.97 196.00
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year ended October 31
- -------------------------------------------------------------------------------------------------------------------------
1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
Class A
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.92 $11.25 $11.34
- -------------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------------
Net investment income .59 .75 (a) .96 (a)
- -------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (.44) (.34) (.02)
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations .15 .41 .94
- -------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- -------------------------------------------------------------------------------------------------------------------------
Net investment income (.52) (.74) (1.03)
- -------------------------------------------------------------------------------------------------------------------------
Tax return capital -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (.52) (.74) (1.03)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.55 $10.92 $11.25
- -------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b) 1.34 3.72 8.64
- -------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $193,510 $376,353 $203,492
- -------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(d) 1.07 1.12 (a) 1.29 (a)
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average
net assets (%) 5.42 6.44 (a) 8.02 (a)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 49.16 237.21 328.29
- -------------------------------------------------------------------------------------------------------------------------
* Unaudited
(a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses of
the fund for the years ended October 31, 1992 and 1991 reflect per share reductions of $0.01 and $0.02 (for class
A shares), respectively.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Not annualized.
(d) The ratio of expenses to average net assets for the year ended October 31, 1995 and thereafter includes
amounts paid through expenses offset arrangements. Prior period ratios exclude these amounts (See Note 2).
</TABLE>
Notes to financial statements
April 30, 1996 (Unaudited)
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The
fund seeks attractive current income and preservation of capital by
investing primarily in adjustable rate mortgage securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities.
The fund offers both class A and class B shares. Class A shares are sold
with a maximum front-end sales charge of 3.25%. Class B shares, which
convert to class A shares after approximately four years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than
class A shares, and may be subject to a contingent deferred sales
charge, if those shares are redeemed within four years of purchase.
Expenses of the fund are borne pro-rata by the holders of both classes
of shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale price, or, if no sales are reported -- as in the
case of 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, and
other investments are stated at fair value following procedures approved
by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies managed by Putnam Investment Management,
Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc. and certain other accounts. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Putnam Management is responsible for determining that the value of these
underlying securities is at all times at least equal to the resale
price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Interest income is recorded on the accrual basis.
E) 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 2.0% 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, generally 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 deem it
appropriate to do so.
F) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
At October 31, 1995, the fund had a capital loss carryover of
approximately $24,725,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- --------------------------------------------
$ 291,340 10/31/1998
$ 798,564 10/31/1999
$ 7,515,503 10/31/2006
$16,119,612 10/31/2002
G) 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 semiannually. The amount and character of income and gains to
be distributed are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Management, for managment and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.60% of the first $500
million, 0.50% of the next $500 million. 0.45% of the next $500 million,
0.40% of any amount over $1.5 billion subject, under current law, to
reduction in any year by the amount of certain brokerage commissions and
fees (less expenses) received by affiliates of Putnam Management on the
fund's portfolio transactions.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustees fee of $690 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and are invested in the fund or in other Putnam funds until distribution
in accordance with the Plan.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the six months ended April 30, 1996, fund expenses were reduced by
$46,462 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested the assets utilized in connection
with the expense offset arrangements in an income producing asset if it
had not entered into such arrangements.
The fund has adopted distribution plans (the "Plans") with respect to
its class A shares and class B shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35% and
1.00% of the average net assets attributable to class A and class B
shares, respectively. The Trustees have approved payment by the fund at
an annual rate of 0.25% and 0.85% of the average net assets attributable
to class A and class B shares, respectively.
For the period ended April 30, 1996, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $19,698 from the sale of
class A shares and $651 in contingent deferred sales charges from
redemptions of class B shares. A deferred sales charge of up to 1% is
assessed on certain redemptions of class A shares. For the period ended
April 30, 1996, Putnam Mutual Funds Corp., acting as underwriter
received $34,947 on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended April 30, 1996, purchases and sales of U.S.
government and agency obligations other than short-term investments
aggregated $15,862,793 and $21,713,342, respectively. In determining the
net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Note 4
Capital shares
At April 30, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
April 30, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 3,890,920 $40,363,426
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 147,878 1,531,067
- ----------------------------------------------------
4,038,798 41,894,493
Shares
repurchased (4,603,432) (47,746,396)
- ----------------------------------------------------
Net decrease (564,634) $(5,851,903)
- ----------------------------------------------------
Year ended
October 31, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 4,270,588 $43,668,758
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 326,061 3,329,547
- ----------------------------------------------------
4,596,649 46,998,305
Shares
repurchased (7,714,371) (78,844,222)
- ----------------------------------------------------
Net decrease (3,117,722) $ (31,845,917)
- ----------------------------------------------------
Six months ended
April 30, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 995,546 $10,303,752
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 55,935 578,262
- ----------------------------------------------------
1,051,481 10,882,014
Shares
repurchased (1,110,491) (11,495,296)
- ----------------------------------------------------
Net decrease (59,010) $ (613,282)
- ----------------------------------------------------
Year ended
October 31, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 1,322,585 $13,480,112
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 110,183 1,124,255
- ----------------------------------------------------
1,432,768 14,604,367
Shares
repurchased (2,343,549) (23,846,785)
- ----------------------------------------------------
Net decrease (910,781) $ (9,242,418)
- ----------------------------------------------------
Our commitment to quality service
* CHOOSE AWARD-WINNING SERVICE
Putnam Investor Services has won the DALBAR Quality Tested Service Seal
for the past six years. In 1995, over 146,000 tests of 56 shareholder
service components demonstrated that Putnam outperformed the industry
standard in every category.
* HELP YOUR INVESTMENT GROW
Set up a systematic program for investing with as little as $25 a month
from a Putnam money market fund or from your checking or savings
account.*
* SWITCH FUNDS EASILY
You can move money from one account to another with the same class of
shares without a service charge. (This privilege is subject to change or
termination.)
* ACCESS YOUR MONEY QUICKLY
You can get checks sent regularly or redeem shares any business day at
the then-current net asset value, which may be more or less than the
original cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a
helpful Putnam representative.
To make an additional investment in this or any other Putnam fund,
contact your financial advisor or call our toll-free number: 1-800-225-
1581.
Footnote reads:
* Regular investing of course, does not guarantee a profit or
protect against a loss in a declining market.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary Coburn
Vice President
Alan Bankart
Vice President
Michael Martino
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Adjustable
Rate U.S. Government Fund. It may also be used as sales literature when
preceded or accompanied by the current prospectus, which gives details
of sales charges, investment objectives, and operating policies of the
fund, and the most recent copy of Putnam's Quarterly Performance
Summary. For more information, or to request a prospectus, call toll
free: 1-800-225-1581.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution, are not insured by the
Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board
or any other agency, and involve risk, including the possible loss of
principal amount invested.
[PUTNAM INVESTMENTS LOGO GOES HERE]
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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