Putnam
Master
Income
Trust
SEMIANNUAL REPORT
April 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "During the six periods in the past decade when U.S. government
bonds lost more than 2%, junk bonds beat government bonds every time,
while international bonds went five for six. A portfolio that included a
fund representing each bond type would've outperformed government bonds in
each instance. Those who can't be bothered with picking several types of
bond funds might consider a multisector bond fund. . . the best choice for
one-stop diversification."
-- Morningstar Investor, April 1997
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
11 Portfolio holdings
27 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Global diversification, astute currency strategies, and careful security
selection all contributed to Putnam Master Income Trust's positive performance
during the semiannual period ended April 30, 1997. Supervision of such a
diverse, multinational portfolio requires a depth and breadth of expertise
your fund's management team is superbly equipped to provide.
I am pleased to announce the addition of Kenneth J. Taubes and Gail S.
Attridge to that team. Ken becomes the fund's lead manager and will oversee
the taxable investment-grade sector. He has been managing funds at Putnam for
nearly six years. Before joining Putnam, Ken was employed by United States
Trust Company of Boston, Home Owners Savings Bank, and Bank of New England,
N.A. He has 15 years of investment experience. Gail came to Putnam in 1993
from Keystone Custodian Funds, prior to which she was employed by County
NatWest Securities Asia and Data Resources/McGraw-Hill. She has 12 years of
investment experience, and will manage the fund's emerging markets securities.
In the following report, your fund's managers discuss overall results for the
fiscal year, then review prospects for the year ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 18, 1997
Report from the Fund Managers
Kenneth J. Taubes, lead manager
Jennifer E. Leichter
D. William Kohli
Gail S. Attridge
For most of the first half of Putnam Master Income Trust's fiscal year, U.S.
financial markets enjoyed a continuing trend of steady growth, falling
interest rates, and low inflation. During the final two months, however,
investors experienced a rather wild ride. After hitting a record high on March
11, the Dow Jones Industrial Average lost 9.8% -- nearly 700 points -- during
a four-week period. And, just weeks before the close of your fund's fiscal
year, the Dow made a dramatic recovery -- reaching near-record levels again
and regaining its earlier losses. Volatility could also be found in the U.S.
bond market as the Federal Reserve Board raised short-term interest rates in
the midst of the market decline. This action prompted investors to question
whether the Fed might raise rates again soon. The fact that the Fed didn't
raise rates in May only caused more speculation about when -- not if --
another increase would occur.
Your fund's portfolio was strategically positioned for this market
environment. Indeed, we had begun to adjust allocations in February, taking a
more defensive position in the taxable investment-grade sector, or "sleeve,"
and trimming back exposure to the high-yield market. High-yield bonds tend to
mirror the direction of the stock market, so this move enabled us to cushion
the fund against the expected stock market correction. Meanwhile, the
international sector, specifically investments in European countries, produced
attractive results through most of the period. For complete performance
information, see page 9 of this report.
* TELECOMMUNICATIONS AND MEDIA STRONG IN HIGH-YIELD SECTOR
Even with the cutback, the high-yield sector still made a handsome
contribution to the fund's performance over the period. Because we started
reducing exposure before the stock market correction began, we were able to
realize gains on most of the sales. In addition, this sector still includes
some of the fund's best-performing holdings.
Among the period's strongest performers were bonds of competitive local
exchange carriers, or CLECs -- smaller telephone companies that compete with
the large telephone providers, such as the Bell operating companies, within
local markets. CLECs benefited substantially from the Telecommunications Act
of 1996, which allowed them to enter local markets on a much wider basis. Also
contributing stellar performance were bonds of foreign cellular companies,
which are profiting from consumers who use cellular telephones as a replacement
for traditional wire-line phones. These companies are especially profitable in
countries such as Venezuela and Brazil, where it is difficult to get wire-line
phones installed. At the close of the period, the fund maintained a relatively
heavy weighting in telecommunications, an industry we believe has positive
fundamentals and strong long-term potential.
Broadcasting was another industry to profit from enactment of the
telecommunications legislation. The new law allows for ownership of multiple
radio and television stations, which boosted the value of many broadcasting
companies poised for expansion. Two examples in the fund's portfolio are
Chancellor Radio Broadcasting, which owns and operates about 50 stations in
more than a dozen major markets, and SFX Broadcasting, Inc., which owns and
provides programming for 80 AM and FM radio stations in the southern United
States. In early April, SFX announced the acquisition of three more stations
in Indiana. While these holdings, along with others discussed in this report,
were viewed favorably as of April 30, 1997, all portfolio holdings are subject
to review and adjustment in accordance with the fund's investment strategy and
may well vary in the future.
[GRAPHIC HORIZONTAL BAR CHART OMITTED: TOP FIVE COUNTRY ALLOCATIONS]
TOP FIVE COUNTRY ALLOCATIONS*
INTERNATIONAL SECTOR
France 8.4%
Germany 7.3%
United Kingdom 6.5%
Mexico 1.9%
Denmark 1.3%
Footnote reads:
* Based on net assets as of 4/30/97. Portfolio holdings will vary over time.
Outdoor advertising -- or billboards -- was another profitable sector for the
fund's high-yield sleeve. Universal Outdoor, Inc., which operates over 30,000
displays in 23 markets in the Midwestern, Southeastern, and Eastern United
States, performed well over this period. The company recently completed its
acquisition of Klein Outdoor Advertising, Inc., a privately held company based
in New Jersey. In the gaming sector, Argosy Gaming Company was a standout.
Argosy operates several riverboat casinos in the Midwest and Southeast, and is
building a new riverboat casino and entertainment complex near Cincinnati.
* CONTINUED EMPHASIS ON MORTGAGE-BACKED SECURITIES
The taxable investment-grade sector consists primarily of mortgage-backed
securities and U.S. Treasuries, in varying proportions. Throughout the
semiannual period, we maintained a relatively heavy weighting of
mortgage-backed securities, which offered higher yields and greater potential
price appreciation than U.S. Treasury holdings and appear likely to do so for
some time.
Please note that this portion of the portfolio was formerly known as the U.S.
government sector. Within this sector, the fund for several years has had the
flexibility to invest in investment-grade bonds rated A or higher as well as
U.S. government securities, and we believe the new name is a more accurate
reflection of its strategy.
The emphasis on mortgage-backed securities remains in place as we begin the
second half of fiscal 1997. In February, however, anticipating that the Fed
would begin to tighten monetary policy, we began moving the sector into a more
defensive position. We sold a significant portion of intermediate-term
Treasury securities in favor of a combination of cash and long-term bonds.
This configuration, known as a "barbell" strategy, emphasizes the shorter and
longer ends of the yield curve in order to shorten the portfolio's average
maturity. This barbell positioning can be beneficial in a period of rising
interest rates. We took the same approach with the fund's mortgage-backed
securities, swapping current coupon mortgages -- which had performed
exceptionally well -- for a combination of shorter-duration high-coupon
mortgages and long-term mortgage securities. This defensive configuration was
still in effect at the close of the period.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR*
HIGH-YIELD BONDS
Midland Funding Corp.
Ivex Packaging Corp.
Pricellular Wireless Corp.
FOREIGN BONDS
France Treasury bills
Federal Republic of Germany bonds
United Kingdom Treasury bonds
U.S. GOVERNMENT OBLIGATIONS
Government National Mortgage Association, 7.5%
Government National Mortgage Association, 7%
Federal National Mortgage Association, 7%
Footnote reads:
* Based on net assets as of 4/30/97. Holdings will vary over time.
* INTERNATIONAL FOCUS SHIFTS TO CORE EUROPE
Early in the fiscal year, the fund's international sector profited from
holdings in higher-yielding markets in Europe, such as Italy, Spain, and
Sweden. We had focused on bonds in these peripheral regions rather than in
core Europe because of the attractive yields they offered. These countries had
been making significant efforts to rein in fiscal budgets in order to gain
acceptance into the European Monetary Union (EMU), which intends to create a
single currency to be used among member nations. As a result of these efforts,
Italy, Spain, and Sweden made significant reductions in their inflation levels
- -- which resulted in lower bond yields. As yields declined, the fund's
holdings in these markets benefited from price appreciation.
Toward the middle of the period we began to reduce the fund's position in
peripheral Europe, taking profits and shifting the portfolio's focus toward
core European markets such as Germany and France. This positioning was
successful, as the higher-yielding markets later declined while bonds from
core Europe proved less volatile and delivered strong performance.
Keeping a low exposure to Japanese bonds had helped the fund's performance
during much of fiscal 1996. This was not the case during the first half of
fiscal 1997 as Japanese bonds performed better than we had expected. Toward
the end of the period, while many world bond markets declined in response to
the U.S. market decline, Japanese bonds began to rally. In fact, the Japanese
market became one of the top-performing bond markets during the period.
* OUTLOOK: POTENTIAL FOR MORE RATE INCREASES
We expect a modest acceleration in worldwide economic growth, accompanied by
low inflation during 1997. Within the United States, we believe concern about
inflation may result in additional interest-rate increases throughout the
year. At the same time, we anticipate a modest acceleration in economic
growth. In our opinion, the fund's portfolio is positioned appropriately for
this environment, and we believe its multisector strategy will allow it to
continue to take advantage of opportunities in fixed-income markets around the
world.
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 4/30/97, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Master Income Trust is designed for investors seeking
high current income, consistent with preservation of capital, through a
portfolio diversified among taxable investment-grade, high-yield, and
international fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 4/30/97
Salomon Bros. First
Lehman Bros. Non-U.S. Boston
Market Government World Govt. High-Yield
NAV price Bond Index Bond Index Index
- -------------------------------------------------------------------------------
6 months 1.80% 2.84% 1.32% -7.30% 6.00%
- -------------------------------------------------------------------------------
1 year 9.10 14.07 6.48 -2.07 12.05
- -------------------------------------------------------------------------------
5 years 61.96 47.28 41.91 53.17 71.39
Annual average 10.12 8.05 7.25 8.90 11.38
- ------------------------------------------------------------------------------
Life of fund
(12/28/87) 160.08 119.10 115.04 94.48 184.97
Annual average 10.78 8.76 8.55 7.39 11.88
- ------------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset value
and market price 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 4/30/97
- ------------------------------------------------------------------------------
Distributions (number) 6
- ------------------------------------------------------------------------------
Income $0.345
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term 0.144
- ------------------------------------------------------------------------------
Short-term --
- ------------------------------------------------------------------------------
Total $0.489
- ------------------------------------------------------------------------------
Share value NAV Market price
- ------------------------------------------------------------------------------
10/31/96 $9.33 $8.375
- ------------------------------------------------------------------------------
4/30/97 8.96 8.125
- ------------------------------------------------------------------------------
Current return end of period NAV Market price
- ------------------------------------------------------------------------------
Current dividend rate1 7.70% 8.49%
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
TOTAL RETURN FOR PERIODS ENDED 3/31/97
(most recent calendar quarter)
Market
(common shares) NAV price
- ------------------------------------------------------------------------------
6 months 2.90% 7.62%
- ------------------------------------------------------------------------------
1 year 9.62 14.05
- ------------------------------------------------------------------------------
5 years 62.43 51.96
Annual average 10.19 8.73
- ------------------------------------------------------------------------------
Life of fund
(12/28/87) 158.87 120.94
Annual average 10.82 8.94
- ------------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset value
and market price will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost.
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.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities and the net assets allocated to remarketed preferred shares,
divided by the number of outstanding common shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
COMPARATIVE BENCHMARKS
First Boston High Yield Index* is an unmanaged list of lower-rated
higher-yielding U.S. corporate bonds.
Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged
list of bonds issued by 10 countries.
Lehman Bros. Government Bond Index* is an unmanaged list of publicly
issued U.S. Treasury obligations.
* 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.
Portfolio of investments owned
April 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (31.5%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (23.1%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
$14,623,542 8 1/2s, with due dates from April 1, 2026 to April 1, 2027 $ 15,094,140
2,400,000 8 1/2s, TBA, June 16, 2027 2,477,232
Federal National Mortgage Association
Pass-Through Certificates
7,564,815 8s, with due dates from June 1, 2026 to October 1, 2026 7,664,069
16,116,584 7 1/2s, with due dates from September 1, 2025 to
February 1, 2027 15,995,725
6,466,615 7s, with due dates from October 1, 2025 to
April 15, 2027 6,264,534
2,376,002 6s, Dwarf, with due dates from February 1, 2012 to
March 1, 2012 2,260,173
2,400,000 Federal National Mortgage Association 6s, Dwarf, TBA,
June 15, 2012 2,283,000
Government National Mortgage Association
Pass-Through Certificates
7,630,084 8s, with due dates from September 15, 2025 to
February 15, 2027 7,721,534
26,104,285 7 1/2s, with due dates from September 15, 2022 to
February 15, 2027 25,886,850
25,374 7 1/2s, Midget, February 15, 2009 25,355
17,352,904 7s, with due dates from November 15, 2025 to
June 15, 2026 16,783,396
6,970,000 Government National Mortgage Association 8 1/2s,
TBA, May 16, 2027 7,194,295
--------------
109,650,303
U.S. Treasury Obligations (8.4%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
3,370,000 8 1/8s, August 15, 2019 3,770,727
13,230,000 6 1/2s, November 15, 2026 12,425,881
U.S. Treasury Notes
7,432,000 6 1/2s, October 15, 2006 7,310,041
835,000 6 3/8s, April 30, 1999 836,561
15,745,000 6 1/4s, March 31, 1999 15,742,481
--------------
40,085,691
--------------
Total U.S. Government and Agency Obligations
(cost $150,450,169) $149,735,994
CORPORATE BONDS AND NOTES (31.4%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.1%)
- ------------------------------------------------------------------------------------------------------------
$ 75,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 77,813
330,000 Universal Outdoor, Inc. sr. sub. notes 9 3/4s, 2006 326,700
--------------
404,513
Aerospace and Defense (0.7%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 1,030,000
275,000 Howmet Corp. sr. sub. notes 10s, 2003 292,875
225,000 L-3 Communications Corp. 144A sr. sub. notes 10 3/8s, 2007 231,750
185,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 190,550
1,250,000 Sequa Corp. bonds 8 3/4s, 2001 1,243,750
275,000 Tracor, Inc. 144A sr. sub. notes 8 1/2s, 2007 269,500
--------------
3,258,425
Agriculture (0.6%)
- ------------------------------------------------------------------------------------------------------------
1,994,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon
Ser. B, zero % (11 1/2s, 9/1/00), 2005 ++ 1,455,620
1,165,595 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 [2 DBL. DAGGERS] 1,241,359
--------------
2,696,979
Apparel (0.4%)
- ------------------------------------------------------------------------------------------------------------
80,000 Anvil Knitwear Inc. 144A sr. notes 10 7/8s, 2007 78,000
130,000 GFSI, Inc. 144A sr. sub. notes 9 5/8s, 2007 128,700
450,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 454,500
250,000 William Carter Co. 144A sr. sub. notes 12s, 2008 255,000
710,000 William Carter Co. 144A sr. sub. notes 10 3/8s, 2006 718,875
--------------
1,635,075
Automotive (0.1%)
- ------------------------------------------------------------------------------------------------------------
340,000 CSK Auto, Inc. 144A sr. sub. notes 11s, 2006 348,500
135,000 Hawk Corp. sr. notes 10 1/4s, 2003 136,013
--------------
484,513
Automotive Parts (0.5%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 A.P.S Inc. company guaranty 11 7/8s, 2006 1,000,000
383,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 1
2s, 2004 421,300
520,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005 234,000
305,000 Key Plastics Corp. 144A sr. sub. notes 10 1/4s, 2007 308,050
500,000 Lear Corp. sub. notes 9 1/2s, 2006 517,500
--------------
2,480,850
Banks (0.5%)
- ------------------------------------------------------------------------------------------------------------
145,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 145,000
750,000 First Nationwide Holdings sr. sub. notes 9 1/8s, 2003 750,000
250,000 North Fork Bancorp, Inc. 144A bonds 8.7s, 2026 242,398
135,000 Onbank Capital Trust I 144A company guaranty 9 1/4s, 2027 133,650
290,000 Peoples Heritage Capital Trust I 144A company guaranty
9.06s, 2027 288,188
285,000 Provident Capital Trust company guaranty 8.6s, 2026 275,025
165,000 Riggs Capital Trust 144A bonds 8 5/8s 166,036
230,000 Sovereign Capital Trust 144A company guaranty 9s, 2027 224,250
220,000 Webster Capital Trust I 144A bonds 9.36s, 2027 224,532
--------------
2,449,079
Basic Industrial Products (--%)
- ------------------------------------------------------------------------------------------------------------
170,000 Astor Corp. 144A sr. sub. notes 10 1/2s, 2006 173,400
Broadcasting (1.8%)
- ------------------------------------------------------------------------------------------------------------
500,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 512,500
765,000 Capstar Broadcasting 144A sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 ++ 426,488
1,300,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) ++ 897,000
600,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 639,000
2,040,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon zero %
(13 1/4s, 5/15/01), 2008 (Mexico) ++ 1,300,500
910,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 950,950
1,327,000 Petracom Holdings, Inc. notes stepped-coupon zero %
(17 1/2s, 8/1/98), 2003 ++ 1,273,920
305,000 Spanish Broadcasting Systems 144A sr. notes 11s, 2004 306,525
325,000 TCI Satellite Entertainment 144A sr. sub. notes 10 7/8s, 2007 308,750
1,822,000 Telemedia Broadcasting Corp. 144A deb. stepped-coupon
3.8s, (16s, 6/15/99), 2004 ++ 1,658,020
225,000 Telewest Communications PLC deb. stepped-coupon
zero % (11s, 10/1/00), 2007 (United Kingdom) ++ 151,875
140,000 TV Azteca Sa De Cv 144A sr. notes 10 1/2s, 2007 (Mexico) 137,725
--------------
8,563,253
Building Materials (0.2%)
- ------------------------------------------------------------------------------------------------------------
750,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 835,313
Building Products (0.1%)
- ------------------------------------------------------------------------------------------------------------
500,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 495,000
175,000 Waxman Industries Inc. sr. notes stepped-coupon
Ser. B, zero % (12 3/4s, 6/1/99), 2004 ++ 146,125
--------------
641,125
Building and Construction (1.1%)
- ------------------------------------------------------------------------------------------------------------
910,000 Atrium Companies Inc. 144A sr. sub. notes 10 1/2s, 2006 910,000
160,000 Continental Homes Holding Corp. sr. notes 10s, 2006 157,600
1,100,000 Presley Cos. sr. notes 12 1/2s, 2001 1,064,250
1,000,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 1,050,000
2,000,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 2,197,500
--------------
5,379,350
Buses (0.4%)
- ------------------------------------------------------------------------------------------------------------
95,000 Atlantic Express, Inc. 144A company guaranty 10 3/4s, 2004 97,375
765,000 Blue Bird Body Co. sr. sub. notes Ser. B, 10 3/4s, 2006 799,425
1,250,000 Consorcio/MCII Holdings secd. notes stepped-coupon
zero % (12s, 11/15/98), 2002 ++ 1,059,375
--------------
1,956,175
Business Services (0.3%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 970,000
80,000 Loomis Fargo & Co. 144A sr. sub. notes 10s, 2004 80,800
190,000 Outsourcing Solutions, Inc. 144A sr. sub. notes 11s, 2006 201,875
--------------
1,252,675
Cable Television (1.8%)
- ------------------------------------------------------------------------------------------------------------
1,135,000 Adelphia Communications Corp. 144A sr. notes 9 7/8s, 2007 1,072,575
1,465,000 American Telecasting, Inc. sr. disc. notes stepped-coupon
zero % (14 1/2s, 8/15/00), 2005 ++ 439,500
500,000 Century Communications Corp. sr. notes 9 1/2s, 2005 493,750
475,000 Charter Communications International sr. notes 11 1/4s, 2006 490,438
1,000,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) ++ 692,500
800,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (13 1/2s, 9/30/99), 2004
(United Kingdom) ++ 656,000
420,000 Diamond Cable Communications Co. 144A sr. disc.
notes stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) ++ 249,900
1,104,045 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 960,519
625,000 Grupo Televisa S.A. 144A sr. notes 11 7/8s, 2006(Mexico) 657,813
440,000 Heartland Wireless Communications, Inc. sr. notes
Ser. B, 14s, 2004 211,200
265,000 Heartland Wireless Communications, Inc. sr. notes
Ser. D, 13s, 2003 108,650
500,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-coupon
zero % (14 1/4s, 6/15/00), 2005 ++ 356,250
1,000,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 ++ 827,500
170,000 TV Filme, Inc. 144A sr. notes 12 7/8s, 2004(Brazil) 172,550
2,285,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 5/15/01), 2006(Australia) ++ 1,165,350
--------------
8,554,495
Cellular Communications (1.9%)
- ------------------------------------------------------------------------------------------------------------
1,875,000 Cencall Communications Corp. sr. disc. notes
stepped-coupon zero % (10 1/8s, 1/15/99), 2004 ++ 1,387,500
1,985,000 Dial Call Communication, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (10 1/4s, 12/15/98), 2005 ++ 1,473,863
1,710,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 ++ 955,463
3,085,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 2,159,500
400,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 312,000
2,545,000 Pricellular Wireless Corp. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 11/15/97), 2001 ++ 2,621,350
--------------
8,909,676
Chemicals (0.4%)
- ------------------------------------------------------------------------------------------------------------
730,000 Freedom Chemicals, Inc. sr. sub. notes 10 5/8s, 2006 757,375
425,000 NL Industries, Inc. sr. notes stepped-coupon zero %
(13s, 10/15/98), 2005 ++ 392,594
850,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 ++ 537,625
115,000 Texas Petrochemical Corp. sr. sub. notes 11 1/8s, 2006 119,600
--------------
1,807,194
Conglomerates (0.3%)
- ------------------------------------------------------------------------------------------------------------
460,000 Axia, Inc. sr. sub. notes Ser. B, 11s, 2001 478,400
800,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 802,000
--------------
1,280,400
Consumer Durable Goods (0.2%)
- ------------------------------------------------------------------------------------------------------------
515,000 Icon Fitness Corp. 144A sr. disc. notes stepped-coupon
zero % (14s, 11/15/01), 2006 ++ 267,800
895,000 Remington Products Co. LLC sr. sub. notes Ser. B, 11s, 2006 756,275
--------------
1,024,075
Consumer Non Durables (--%)
- ------------------------------------------------------------------------------------------------------------
145,000 E&S Holdings Corp. sr. sub. notes Ser. B, 10 3/8s, 2006 149,350
Consumer Services (0.4%)
- ------------------------------------------------------------------------------------------------------------
555,000 Affinity Group Holdings 144A sr. notes 11s, 2007 568,875
1,360,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 1,496,000
--------------
2,064,875
Containers (0.9%)
- ------------------------------------------------------------------------------------------------------------
590,000 Amtrol, Inc. sr. sub. notes 10 5/8s, 2006 610,650
395,000 Innova S De R.L. 144A sr. notes 12 7/8s, 2007(Mexico) 389,075
2,500,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 2,715,625
105,000 Printpack, Inc. sr. sub. notes Ser. B, 10 5/8s, 2006 107,756
170,000 Radnor Holdings Corp. 144A sr. notes 10s, 2003 172,550
550,000 Riverwood International company guranty 10 7/8s, 2008 456,500
--------------
4,452,156
Cosmetics (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,340,000 Revlon Worldwide Corp. 144A sr. disc. notes zero %, 2001 877,700
Electric Utilities (2.4%)
- ------------------------------------------------------------------------------------------------------------
1,800,000 AES China Generating Co. sr. notes 10 1/8s, 2006(China) 1,847,250
850,000 Calpine Corp. sr. notes 10 1/2s, 2006 907,375
750,000 Cleveland Electric Illuminating Co. 1st mtge. Ser. E, 9s, 2023 769,665
1,125,000 El Paso Electric Co. 1st mtge. Ser. E, 9.4s, 2011 1,196,809
125,000 Hidroelectric Pierda Aguila 144A bonds 10 5/8s,
2001(Argentina) 130,469
1,250,000 Long Island Lighting Co. deb. 9s, 2022 1,354,588
100,000 Long Island Lighting Co. deb. 8.9s, 2019 103,602
365,000 Long Island Lighting Co. refunding mtge. notes 9 5/8s, 2024 381,691
3,500,000 Midland Funding Corp. deb. Ser. B, 13 1/4s, 2006 4,170,355
480,662 Northeast Utilities System notes Ser. A, 8.58s, 2006 458,072
--------------
11,319,876
Electronic Components (0.1%)
- ------------------------------------------------------------------------------------------------------------
535,000 Motors and Gears Inc. 144A sr. notes Ser. A, 10 3/4s, 2006 536,338
Electronics (0.3%)
- ------------------------------------------------------------------------------------------------------------
460,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s,
2006 (Canada) 486,450
251,815 Cirent Semiconductor sr. sub. notes 10.22s, 2002 251,815
252,848 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 252,848
935,000 International Semi-Tech. Corp. sr. secd. disc. notes
stepped-coupon zero %, (11 1/2s, 8/15/00) 2003
(Canada) ++ 516,588
--------------
1,507,701
Energy-Related (0.1%)
- ------------------------------------------------------------------------------------------------------------
525,000 Panda Global Energy Co. 144A sr. notes 12 1/2s, 2004 498,750
Entertainment (0.3%)
- ------------------------------------------------------------------------------------------------------------
900,000 Six Flags Corp. sr. sub. notes stepped-coupon zero %
(12 1/4s, 6/15/98), 2005 ++ 888,750
450,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 508,500
--------------
1,397,250
Environmental Control (0.1%)
- ------------------------------------------------------------------------------------------------------------
370,000 Allied Waste Industries, Inc. 144A sr. sub. notes 10 1/4s, 2006 385,725
Financial Services (0.4%)
- ------------------------------------------------------------------------------------------------------------
735,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 683,550
165,000 Colonial Capital I 144A company guaranty 8.92s, 2027 160,334
180,000 Imperial Credit Industries, Inc. 144A sr. notes 9 7/8s, 2007 165,600
285,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s,
2006(United Kingdom) 293,550
345,000 Investors Capital Trust I 144A company guaranty
9.77s, 2027 344,138
290,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 313,925
--------------
1,961,097
Food (0.4%)
- ------------------------------------------------------------------------------------------------------------
115,000 Del Monte Corp. 144A sr. sub. notes 12 1/4s, 2007 118,450
830,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 881,875
780,000 Stater Brothers sr. notes 11s, 2001 830,700
--------------
1,831,025
Food and Beverages (--%)
- ------------------------------------------------------------------------------------------------------------
230,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 228,850
Gaming (1.5%)
- ------------------------------------------------------------------------------------------------------------
185,000 Alliance Gaming Corp. 12 7/8s, 2003 199,569
300,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 268,500
315,000 Casino Magic Corp. 144A 1st mtge. 13s, 2003 261,450
1,540,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B, 13s, 2002 1,686,300
1,478,650 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 [2 DBL. DAGGERS] 1,463,864
1,675,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 1,675,000
1,050,000 Mohegan Tribal Gaming sr. secd. notes Ser. B, 13 1/2s, 2002 1,375,500
--------------
6,930,183
Health Care (0.6%)
- ------------------------------------------------------------------------------------------------------------
1,790,000 Columbia/HCA Healthcare Corp. med. term notes
7.58s, 2025 1,764,564
455,000 IMED Corp. sr. sub. notes 9 3/4s, 2006 455,000
675,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 725,625
--------------
2,945,189
Hospital Management (--%)
- ------------------------------------------------------------------------------------------------------------
155,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 155,775
Lodging (0.3%)
- ------------------------------------------------------------------------------------------------------------
300,000 Host Marriott Corp. sr. notes Ser. B, 9 1/2s, 2005 305,250
350,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 343,000
600,000 Sun International Hotels Ltd. 144A sr. sub. notes 9s, 2007 592,500
--------------
1,240,750
Media (--%)
- ------------------------------------------------------------------------------------------------------------
190,000 RBS Participacoes S.A. 144A company guaranty
11s, 2007(Brazil) 191,862
Medical Management (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,160,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 1,096,200
Medical Supplies and Devices (0.3%)
- ------------------------------------------------------------------------------------------------------------
515,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 562,638
760,000 Interact Systems, Inc. stepped-coupon zero %
(14s, 8/1/99), 2003 ++ 402,800
500,000 Wright Medical Technology, Inc. sr. secd. notes
Ser. B, 10 3/4s, 2000 505,000
--------------
1,470,438
Metals and Mining (0.6%)
- ------------------------------------------------------------------------------------------------------------
135,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004(Argentina) 137,025
305,000 Continental Global Group 144A sr. notes Ser. A, 11s, 2007 314,150
205,000 Echo Bay Mines jr. sub. deb. 11s, 2027(Canada) 201,925
1,025,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 1,066,000
465,000 Maxxam Group Holdings Inc. sr. notes Ser. B, 12s, 2003 469,650
565,000 Royal Oak Mines, Inc. company guaranty Ser. B, 11s,
2006(Canada) 567,825
--------------
2,756,575
Motion Picture Distribution (0.5%)
- ------------------------------------------------------------------------------------------------------------
500,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 542,500
510,000 AMC Entertainment, Inc. 144A sr. sub. notes 9 1/2s, 2009 504,900
766,100 Cinemark Mexico USA notes Ser. B, 13s, 2003(Mexico) [2 DBL. DAGGERS] 739,287
51,700 Cinemark Mexico USA notes Ser. D, 13s, 2003(Mexico) [2 DBL. DAGGERS] 49,891
605,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 592,900
--------------
2,429,478
Networking (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,785,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/00), 2005 ++ 1,124,550
Office Equipment (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 1,110,000
Oil and Gas (1.5%)
- ------------------------------------------------------------------------------------------------------------
1,550,000 Abraxas Petroleum Corp. 144A sr. notes Ser. B, 11 1/2s, 2004 1,643,000
750,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 802,500
200,000 Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s, 2003 207,500
1,085,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 1,090,425
300,000 Maxus Energy Corp. notes 9 3/8s, 2003 315,750
400,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 411,000
300,000 Transamerican Refining Corp. 144A 15s, 1998 300,000
400,000 Transamerican Refining Corp. 1st mtge. variable rate
Ser. 2, 16 1/2s, (16s, 8/15/98), 2002 ++ 427,000
1,000,000 Trans american Refining Corp. 1st mtge. variable rate
stepped-coupon Ser. 1, zero % (18 1/2s, 2/15/98), 2002 ++ 927,500
1,264,000 TransTexas Gas Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 12/16/01), 2003 ++ 796,320
--------------
6,920,995
Packaging and Containers (--%)
- ------------------------------------------------------------------------------------------------------------
170,000 US Can Corp. company guaranty Ser. B, 10 1/8s, 2006 177,650
Paging (0.4%)
- ------------------------------------------------------------------------------------------------------------
1,250,000 Arch Communications Group sr. disc. notes
stepped-coupon zero % (10 7/8s, 3/15/01), 2008 ++ 568,750
625,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 618,750
1,250,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon
zero % (15s, 2/1/00), 2005 ++ 837,500
--------------
2,025,000
Paper and Forest Products (1.1%)
- ------------------------------------------------------------------------------------------------------------
1,500,000 APP International Finance Co. notes 11 3/4s,
2005 (Netherlands) 1,563,750
330,000 Domtar, Inc. deb. 9 1/2s, 2016(Canada) 323,400
1,335,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 1,281,600
1,090,000 Repap New Brunswick sr. notes 10 5/8s, 2005(Canada) 1,024,600
900,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 846,000
--------------
5,039,350
Publishing (0.5%)
- ------------------------------------------------------------------------------------------------------------
1,800,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 1,926,000
200,000 Hollinger International Publishing, Inc. company
guaranty 8 5/8s, 2005 197,500
--------------
2,123,500
Real Estate (0.1%)
- ------------------------------------------------------------------------------------------------------------
460,000 Prime Hospitality Corp. 144A sr. sub. notes 9 3/4s, 2007 469,200
Recreation (1.0%)
- ------------------------------------------------------------------------------------------------------------
880,000 Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000 501,600
1,000,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 1,025,000
1,554,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 1,569,540
500,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 360,000
250,000 Trump A.C. 1st mtge. 11 1/4s, 2006 243,125
864,000 Trump Castle Funding notes 11 1/2s, 2000 864,000
--------------
4,563,265
Restaurants (0.2%)
- ------------------------------------------------------------------------------------------------------------
135,000 AmeriKing, Inc. sr. notes 10 3/4s, 2006 139,725
700,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 724,500
--------------
864,225
Retail (0.6%)
- ------------------------------------------------------------------------------------------------------------
1,280,000 Brylane (L.P.) sr. sub. notes 10s, 2003 1,324,800
480,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 499,200
625,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 640,625
200,000 Supermercados Norte 144A bonds 10 7/8s, 2004(Argentina) 200,000
--------------
2,664,625
Semiconductors (0.2%)
- ------------------------------------------------------------------------------------------------------------
325,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 287,079
720,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 10 1/8s, 2007 727,200
--------------
1,014,279
Specialty Consumer Products (0.1%)
- ------------------------------------------------------------------------------------------------------------
575,000 Sassco Fashions Ltd. 144A notes 12 3/4s, 1999 595,125
Steel (0.4%)
- ------------------------------------------------------------------------------------------------------------
330,000 AK Steel Corp. sr. notes 9 1/8s, 2006 325,875
160,000 Altos Hornos De Mexico 144A bonds 11 7/8s, 2004 (Mexico) 162,000
1,500,000 Ispat Mexicana, S.A. 144A bonds 10 3/8s, 2001 (Mexico) 1,531,875
--------------
2,019,750
Supermarkets (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Eagle Food Centers. Inc. sr. notes 8 5/8s, 2000 970,000
Telecommunications (2.6%)
- ------------------------------------------------------------------------------------------------------------
695,000 American Communications Services, Inc. sr. disc.
notes stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 319,700
1,020,000 Brooks Fiber Properties, Inc. sr. disc. notes stepped-coupon
zero % (11 7/8s, 11/01/01), 2006 ++ 637,500
60,000 Brooks Fiber Properties, Inc. sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/1/01), 2006 ++ 39,300
155,000 Consorcio Ecuatoriano 144A notes 14s, 2002(Ecuador) 156,550
415,000 Dobson Communications Corp. 144A sr. notes 11 3/4s, 2007 398,400
1,155,000 Frontiervision Operating Partners L.P. sr. sub. notes 11s, 2006 1,157,888
1,322,000 GST Telecommunications,Inc. company guaranty
stepped-coupon zero % (13 7/8s, 15/15/00), 2005 ++ 819,640
940,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 479,400
3,705,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 ++ 2,482,350
1,325,000 Intermedia Communications, Inc. sr. notes Ser. B,
13 1/2s, 2005 1,477,375
1,620,000 International Cabletel, Inc. 144A sr. notes 10s, 2007 1,583,550
500,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 415,000
225,000 Nextlink Communications sr. notes 12 1/2s, 2006 232,313
900,000 Rogers Cantel, Inc. deb. 9 3/8s, 2008(Canada) 924,750
1,180,000 Teleport Communications Group Inc. sr. disc. notes
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 811,250
310,000 Winstar Equipment Corp. 144A company guaranty
12 1/2s, 2004 296,825
--------------
12,231,791
Telephone Services (0.3%)
- ------------------------------------------------------------------------------------------------------------
545,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 588,600
600,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 613,500
675,000 McLeod, Inc. 144A sr. disc. notes stepped-coupon
zero % (10 1/2s, 3/1/02), 2007 ++ 386,438
--------------
1,588,538
Textiles (0.3%)
- ------------------------------------------------------------------------------------------------------------
145,000 Polysindo Inernational Eka company guaranty
13s, 2001(Indonesia) 162,038
970,000 Polysindo International Finance company guaranty
11 3/8s, 2006 (Indonesia) 1,018,500
310,000 Reeves Industries Inc. sub. deb. 13 3/4s, 2001 263,500
--------------
1,444,038
Transportation (--%)
- ------------------------------------------------------------------------------------------------------------
100,000 Eletson Holdings, Inc. 1st pfd. mtge. notes
9 1/4s, 2003 (Greece) 98,000
Wireless Communications (0.5%)
- ------------------------------------------------------------------------------------------------------------
450,000 International Wireless Communications, Inc.
sr. disc. notes zero %, 2001 240,750
785,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 612,300
1,320,000 Paging Network, Inc. sr. sub. notes 10s, 2008 1,174,800
150,000 Western Wireless Corp. sr. sub. notes 10 1/2s, 2007 147,750
--------------
2,175,600
--------------
Total Corporate Bonds and Notes
(cost $148,920,946) $149,433,189
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (26.4%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUD 3,830,000 Australia (Government of) bonds Ser. 206, 10s, 2006 $ 3,390,943
USD 1,656,000 Bank of Foreign Economic Affairs of Russia
(Vnesheconombank) principal loan
FRN, 2020 +##+++ 970,830
DKK 16,950,000 Denmark (Government of) 8s, 2001 2,853,057
DKK 16,455,000 Denmark (Government of) bonds 8s, 2006 2,741,251
USD 290,000 Ecuador (Government of) 144A bonds
10.8125s, 2004 294,713
FRF 55,155,000 France (Government of) notes 5 1/2s, 2001 9,795,028
FRF 54,930,000 France (Government of) Treasury notes 7s, 2000 10,235,755
FRF 114,745,000 France (Government of) Treasury bill 4 1/2s, 1998 19,934,680
DEM 26,600,000 Germany (Federal Republic of) bonds
Ser. 121, 4 3/4s, 2001 15,490,516
DEM 8,940,000 Germany (Federal Republic of) bonds
Ser. 95, 7 3/8s, 2005 5,749,063
DEM 7,645,000 Germany (Federal Republic of) bonds
Ser. 96, 6 1/4s, 2006 4,582,491
DEM 14,705,000 Germany (Federal Republic of) bonds
Ser. 118, 5 1/4s, 2001 8,776,058
ITL 10,105,000,000 Italy Treasury bonds 6 1/4s, 2002 5,738,031
USD 205,000 Morocco (Government of) bonds
Ser. A 6.6563s, 2009 180,144
ZAR 1,540,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 307,377
SEK 52,800,000 Sweden (Government of) bonds Ser. 1039,
5 1/2s, 2002 6,508,455
GBP 4,480,000 United Kingdom Treasury bonds 7s, 2002 7,226,069
GBP 3,655,000 United Kingdom Treasury bonds 6s, 1999 5,832,392
GBP 9,090,000 United Kingdom Treasury bonds 7 1/2s, 2006 14,814,037
--------------
Total Foreign Government Bonds and Notes
(cost $131,646,027) $ 125,420,890
<CAPTION>
BRADY BONDS (2.0%) * [DIAMOND]
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 3,108,850 Argentina (Republic of) deb. 6.75s, 2005 $2,852,370
734,000 Argentina (Republic of) deb. Ser. L-GP, 5 1/2s, 2023 478,018
2,452,968 Brazil (Republic of) bonds 8s, 2014 +++ 1,861,189
300,000 Bulgaria (Republic of) deb. Ser. PDI, 6.5625s, 2011 187,875
530,000 Poland (Government of) bonds 6.9375s, 2024 514,763
3,020,000 United Mexican States deb. Ser. A, 6 1/4s, 2019 2,193,275
795,000 United Mexican States Ser. D, 6.35156s, 2019 704,072
714,284 Venezuela (Government of) deb. Ser. B, 6.75s, 2007 639,285
--------------
Total Brady Bonds (cost $9,455,371) $ 9,430,847
PREFERRED STOCKS (1.5%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
3,365 Alliance Gaming Corp. Ser. B, $15.00 pfd. [2 DBL. DAGGERS] $ 336,500
2,763 American Radio Systems Corp. 144A $11.375 pfd. 272,846
8,000 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] 212,000
7,382 Cablevision Systems Corp. Ser. M, $11.125 dep. shs. pfd. [2 DBL. DAGGERS] 679,144
4,350 Chancellor Radio Broadcasting 144A $12.00 pfd. 430,650
11,925 Chevy Chase Capital Corp. Ser. A, $10.375 pfd. 578,363
13,965 Diva Systems Corp. Ser. C, $6.00 pfd. 120,448
715 Granite Broadcasting Corp. 144A 12.75% pfd. [2 DBL. DAGGERS] 652,438
690 ICG Holdings, Inc. 14.25% pfd. (Canada) 665,850
300 ICG Holdings, Inc. 144A 14.00% pfd. (Canada) 288,000
100 Intermedia Communications, Inc. 144A 13.50% pfd. 967,500
810 NTL Inc. 144A 13.00% pfd. [2 DBL. DAGGERS] 785,700
5,760 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 571,680
390 Spanish Broadcasting Systems 144A 14.25% pfd. [2 DBL. DAGGERS] 343,200
--------------
Total Preferred Stocks (cost $7,166,545) $ 6,904,319
UNITS (1.3%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
315 Advanced Radio Telecommunications units 14s, 2007 $333,900
80 Anvil Holdings 144A units pfd. 13s, 2009 [2 DBL. DAGGERS] 78,800
150 Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ 1,965,000
1,635 Colt Telecommunications Group PLC units
stepped-coupon zero % (12s, 12/15/01),
2006(United Kingdom) ++ 956,475
690 Diva Systems Corp. 144A units stepped-coupon zero %
(13s, 5/15/01), 2006 ++ 415,725
370 Esat Holdings Ltd. 144A units stepped-coupon zero %
(12 1/2s, 2/1/02), 2007(Ireland) ++ 207,200
480 Globalstar L.P. Capital units 11 3/8s, 2004 475,200
630 McCaw International Ltd. 144A units stepped-coupon
zero % (13s, 4/15/02), 2007 ++ 308,700
12,320 Nextlink Communications 144A pfd. units 14s, 2009 [2 DBL. DAGGERS] 579,040
800 RSL Communications, Ltd. 144A units 12 1/4s, 2006 800,000
1,030 Wireless One Inc. units zero % (13 1/2s, 8/1/01), 2006 ++ 278,100
--------------
Total Units (cost $6,052,778) $ 6,398,140
ASSET-BACKED SECURITIES (1.1%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 1,611,000 Chemical Master Credit Card Trust I Ser. 95-2,
Class A, 6.23s, 2003 $ 1,589,848
505,000 Contimortgage Home Equity Loan Trust Ser. 97-1,
Class M2, 7.67s, 2028 502,791
3,315,000 Sears Credit Account Master Trust Ser. 95-5,
Class A, 6.05s, 2008 3,183,428
--------------
Total Asset-Backed Securities (cost $5,468,195) $ 5,276,067
COMMON STOCKS (0.8%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
200 AmeriKing, Inc. + $10,000
570 Applause Enterprises, Inc.(acquried 10/4/90 cost $64,125) +[DBL. DAGGER] 1,710
2,625 Axia Holding Corp. 144A + 131,250
29,974 Computervision Corp. + 104,909
25,000 Exide Corp. 403,125
57,441 Grand Union Co.(acquried 7/15/92 cost $3,250,000) +[DBL. DAGGER] 192,068
4,148 IFINT Diversified Holdings 144A + 66,368
671 PMI Holdings Corp. + 214,720
480 Premium Holdings L.P. 144A + 2,399
100,386 PSF Holdings LLC Class A 2,660,229
15,000 Specialty Foods Corp. + 7,500
4,000 Terex Corp. Rights(expiration date, 5/15/2002) + 36,000
--------------
Total Common Stocks (cost $7,856,710) $ 3,830,278
CONVERTIBLE BONDS AND NOTES (0.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
500,000 Argosy Gaming cv. sub. notes 12s, 2001 $ 355,000
300,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 252,750
234,000 GST Telecommunications, Inc. cv. sr. disc. notes
stepped-coupon zero % (13 7/8s, 15/15/00), 2005 ++ 163,800
280,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 236,250
185,000 National Semiconductor Corp. cv. deb. 6 1/2s, 2002 180,375
1,486,000 Pricellular Wireless Corp. 144A cv. sub. notes
stepped-coupon zero % (10 3/4s, 8/15/00), 2004 ++ 1,263,100
280,000 VLSI Technology, Inc. cv. sub. notes 8 1/4s, 2005 266,000
--------------
Total Convertible Bonds and Notes
(cost $2,410,662) $ 2,717,275
COLLATERALIZED MORTGAGE OBLIGATIONS (0.7%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$755,740 Federal Home Loan Mortgage Corp. Ser. 35, Class
JZ, 7s, February 15, 2027 $ 636,643
829,345 Federal National Mortgage Association Ser. 97-5,
Class Z, 7s, 2027 707,482
739,287 Federal National Mortgage Association Ser. 97-25,
Class Z, 7s, March 18, 2027 633,246
1,171,852 Rural Housing Trust Ser. 87-1, Class D, 6.33s,
April 1, 2026 1,144,782
--------------
Total Collateralized Mortgage Obligations
(cost $3,157,897) $ 3,122,153
WARRANTS (0.2%) *
NUMBER OF WARRANTS EXPIRATION DATE VALUE
- ------------------------------------------------------------------------------------------------------------
40,000 Becker Gaming Corp. 144A 11/15/00 $ 400
7,140 Cellnet Data Systems, Inc. 6/15/05 107,100
2,100 County Seat Holdings, Inc. 10/15/98 42
1,399 Grand Union Co. ( acquried 10/6/93 cost $560) [DBL. DAGGER] 6/16/00 280
2,799 Grand Union Co.(acquried 10/6/93 cost $280) [DBL. DAGGER] 6/16/00 84
940 Hyperion Telecommunications 144A 4/15/01 28,200
75,000 Insight Communications Co. 144A 3/31/98 206,250
8,514 Intelcom Group 144A 7/15/97 110,682
760 Interact Systems, Inc. 7/15/97 190
1,325 Intermedia Communications, Inc. 144A 6/1/00 26,500
450 International Wireless Communications Holdings 8/15/01 5
4,101 Louisiana Casino Cruises, Inc. 144A 12/1/98 205,050
5,290 Pagemart, Inc. 144A 12/31/03 34,385
2,000 Petracom Holdings, Inc. 2/1/03 14,250
4,238 President Riverboat Casinos, Inc. 9/30/99 2,119
2,940 SDW Holdings Corp. 144A 12/15/06 38,220
390 Spanish Broadcasting Systems 144A 6/30/99 42,900
275 Sterling Chemicals Holdings 8/15/08 9,625
31 Telemedia Broadcasting Corp. 4/1/04 23,295
9,660 UCC Investor Holding, Inc.
(acquried 3/16/94 cost $125,580) [DBL. DAGGER] 10/31/99 120,750
36 Wright Medical Technology, Inc. 144A 6/30/03 4,270
--------------
Total Warrants (cost $1,055,093) $ 974,597
CONVERTIBLE PREFERRED STOCKS (0.2%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
7,762 Cablevision Systems Corp. Ser. H, $11.75 pfd. $ 735,450
5,450 Granite Broadcasting $1.938 cv. pfd. 236,394
--------------
Total Convertible Preferred Stocks
(cost $1,065,789) $971,844
PURCHASED OPTIONS OUTSTANDING (0.2%) EXPIRATION DATE/
CONTRACT AMOUNT STRIKE PRICE VALUE
- ------------------------------------------------------------------------------------------------------------
JPY 1,600,000 Japanese Government Bond Futures May 97/
Contracts (Call) JPY 128 $ 6,299
$ 6,900,000 U.S. Dollars in exchange for June 97/
Swiss Francs (Call) CHF 1.4555 123,510
20,500,000 U.S. Dollars in exchange for May 97/
Deutschemarks (Call) DEM 1.692 483,800
6,900,000 U.S. Dollars in exchange for June 97/
Deutschemarks (Call) DEM 1.709 116,610
6,900,000 U.S. Dollars in exchange for June 97/
Japanese Yen (Call) JPY 125.25 92,460
--------------
Total Purchased Options Outstanding
(cost $521,903) $ 822,679
SHORT-TERM INVESTMENTS (5.3%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
MXP 290,523 Mexican bill zero %, April 2, 1998 $ 300,194
$ 25,000,000 Interest in $750,000,000 joint repurchase
agreement dated April 30, 1997 with
Goldman Sachs & Co. due May, 1 1997
with respect to various U.S. Treasury
obligations -- maturity value of
$25,003,733 for an effective yield
of 5.375% 25,003,733
--------------
Total Short-Term Investments (cost $25,303,927) $ 25,303,927
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $500,532,012) *** $ 490,342,199
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $475,589,327.
*** The aggregate identified cost on a tax basis is $501,957,297,
resulting in gross unrealized appreciation and depreciation of
$11,276,552 and $22,891,650, respectively, or net unrealized
depreciation of $11,615,098.
+ Non-income-producing security.
++ 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.
+++ A portion of the income will be received in additional
securities.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public resale.
The total market value of restricted securities held at
April 30, 1997 was $314,892 or 0.1% of net assets.
[2 DBL. DAGGERS] Income may be received in cash or additional securities at
the discretion of the issuer.
## When-issued securities (Note 1). The coupon rate will be LIBOR
plus 13/16.
[DIAMOND] Brady Bonds are foreign bonds collateralized by the U.S.
Government. The rates are floating and are the current rates at
April 30, 1997.
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.
TBA after the name of a security represents to be announced
securities (Note 1).
The rate shown on floating rate notes (FRN) are the current
interest rates shown at April 30, 1997, which are subject to change
based on the terms of the security.
Diversification by Country
Distributions of investments by country of issue at April 30,
1997: (as percentage of market value)
Canada 1.1%
Denmark 1.3
France 8.2
Germany 7.1
Italy 1.2
Mexico 1.8
Sweden 1.3
United Kingdom 6.3
United States 67.1
Other 4.6
------
Total 100.0%
======
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
TBA Sale Commitments at April 30, 1997
(proceeds receivable $7,165,178)
Principal Delivery Coupon
Agency Amount Month Rate Value
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
GNMA $6,975,000 May 8.5% $7,199,456
- -----------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at April 30, 1997
(aggregate face value $90,364,599)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -----------------------------------------------------------------------------------------
British Pounds $13,655,232 $ 13,492,130 6/18/97 $ (163,102)
Canadian Dollar 788,486 812,130 6/18/97 23,644
Danish Krone 1,554,577 1,603,894 6/18/97 49,317
Deutschemarks 26,717,690 27,277,869 6/18/97 560,179
French Franc 22,187,607 22,630,161 6/18/97 442,554
Italian Lira 2,799,388 2,837,200 6/18/97 37,812
Japanese Yen 7,118,020 7,257,877 6/18/97 139,857
Swedish Krona 6,335,150 6,490,143 6/18/97 154,993
Swiss Franc 7,870,893 7,963,195 6/18/97 92,302
- -----------------------------------------------------------------------------------------
$1,337,556
- -----------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at April 30, 1997
(aggregate face value $102,778,669)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- -----------------------------------------------------------------------------------------
Australian Dollars $3,018,377 $3,005,852 6/18/97 $ 12,525
British Pounds 492,993 497,089 6/18/97 (4,096)
Canadian Dollar 7,918,325 8,085,205 6/18/97 (166,880)
Deutschemarks 42,632,010 43,249,713 6/18/97 (617,703)
Italian Lira 8,761,042 8,804,316 6/18/97 (43,274)
Japanese Yen 18,378,163 19,307,420 6/18/97 (929,257)
Spanish Peseta 6,805,363 6,970,546 6/18/97 (165,183)
Swedish Krona 3,715,726 3,829,996 6/18/97 (114,270)
Swiss Franc 7,910,387 8,060,205 6/18/97 (149,818)
Thai Baht 967,700 968,327 6/18/97 (627)
- -----------------------------------------------------------------------------------------
$(2,178,583)
- -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30, 1997 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $500,532,012) (Note 1) $ 490,342,199
- ---------------------------------------------------------------------------------------------------
Cash 2,305,062
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 7,696,461
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 19,826,232
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 1,523,489
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 744,407
- ---------------------------------------------------------------------------------------------------
Total assets 522,437,850
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 3,051,118
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 31,747,214
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 873,374
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 93,223
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 7,103
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 668
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 2,364,516
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 1,409,636
- ---------------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $7,165,178) 7,199,456
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 102,215
- ---------------------------------------------------------------------------------------------------
Total liabilities 46,848,523
- ---------------------------------------------------------------------------------------------------
Net assets $ 475,589,327
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $ 485,106,018
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (1,800,810)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 3,422,263
- ---------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and
liabilities in foreign currencies (11,138,144)
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $ 475,589,327
Computation of net asset value
- ---------------------------------------------------------------------------------------------------
Net asset value per share ($475,589,327 divided by
53,095,749 shares) $8.96
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended April 30, 1997 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest income (net of forgein tax of $22,099) $ 19,430,024
- --------------------------------------------------------------------------------------------------
Dividends 354,797
- --------------------------------------------------------------------------------------------------
Total investment income 19,784,821
Expenses:
Compensation of Manager (Note 2) 1,796,432
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 316,436
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 16,181
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,856
- --------------------------------------------------------------------------------------------------
Reports to shareholders 20,889
- --------------------------------------------------------------------------------------------------
Auditing 31,225
- --------------------------------------------------------------------------------------------------
Legal 10,948
- --------------------------------------------------------------------------------------------------
Postage 42,646
- --------------------------------------------------------------------------------------------------
Exchange listing fees 24,513
- --------------------------------------------------------------------------------------------------
Other 4,680
- --------------------------------------------------------------------------------------------------
Total expenses 2,267,806
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (40,080)
- --------------------------------------------------------------------------------------------------
Net expenses 2,227,726
- --------------------------------------------------------------------------------------------------
Net investment income 17,557,095
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 5,785,091
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (916,562)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the period 282,733
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and TBA sale
commitments during the period (16,448,783)
- --------------------------------------------------------------------------------------------------
Net loss on investments (11,297,521)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 6,259,574
- --------------------------------------------------------------------------------------------------
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
1997* 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 17,557,095 $ 36,138,999
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions 4,868,529 18,198,111
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments
and assets and liabilities in foreign currencies (16,166,050) (2,465,875)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,259,574 51,871,235
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (18,323,523) (36,742,441)
- ----------------------------------------------------------------------------------------------------------------------
From realized gain on investments (7,653,029) --
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (417,980) (1,318,283)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (20,134,958) 13,810,511
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 495,724,285 481,913,774
- ----------------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess
on net investment income of $1,800,810 and
$1,034,382, respectively) $475,589,327 $495,724,285
- ----------------------------------------------------------------------------------------------------------------------
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period 53,147,249 53,311,249
- ----------------------------------------------------------------------------------------------------------------------
Shares liquidated (Note 4) (51,500) (164,000)
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at end of period 53,095,749 53,147,249
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share April 30
operating performance (Unaudited) Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $9.33 $9.04 $8.63 $9.62 $9.15 $8.80
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .33 .68 .68 .74 .73 .77
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.21) .30 .42 (.88) .61 .51
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .12 .98 1.10 (.14) 1.34 1.28
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.35) (.69) (.64) (.52) (.73) (.77)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (.14) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.14) -- -- (.08) -- (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- (.05) (.25) -- (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.49) (.69) (.69) (.85) (.87) (.93)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.96 $9.33 $9.04 $8.63 $9.62 $9.15
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period $8.125 $8.375 $8.125 $7.88 $8.88 $8.63
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value (%)(a) 2.84* 12.08 14.16 (1.92) 13.27 14.34
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $475,589 $495,724 $481,914 $460,760 $513,316 $488,266
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .46* .95 1.02 .95 .92 .95
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.59* 7.43 7.98 7.33 7.76 8.59
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 120.91* 280.38 290.44 201.95 132.24 221.30
- ------------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the periods ended October 31, 1995 and thereafter
includes amounts paid through expense offset arrangements. Prior period ratios
exclude these amounts. (Note 2).
Notes to financial statements
April 30, 1997 (Unaudited)
Note 1
Significant accounting policies
Putnam Master Income Trust (the "fund") is registered under the Investment
Company Act of 1940, as amended, as a diversified, closed-end management
investment company. The investment objective of the fund is to seek high
current income consistent with the preservation of capital. The fund intends
to diversify its investments among the following three sectors of the
fixed-income securities market: a U.S. government sector, consisting of debt
obligations of the U.S. government, its agencies and instrumentalities and
corporate obligations rated A or higher; a high-yield sector, consisting of
high yielding, lower-rated U.S. corporate fixed income securities; and an
international sector, consisting of obligations of foreign governments, their
agencies and instrumentalities and other fixed-income securities denominated
in foreign currencies.
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. Securities
quoted in foreign currencies are translated into U.S. dollars at the current
exchange rate. Short-term investments having remaining maturities of 60 days
or less are stated at amortized cost, which approximates market value, and
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 long-term corporate bonds and notes;
such investments are stated at fair value on the basis of valuations furnished
by a pricing service, approved by the Trustees, which determines valuations for
normal, institutional-size trading units of such securities using methods based
on market transactions for comparable securities and various relationships
between securities which 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 Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc.. These balances may be invested in one
or more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. 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. Discounts on zero coupon bonds, original issue discounts, stepped-coupon
bonds and payment in kind bonds are accreted according to the effective yield
method.
Securities purchased or sold on a when-issued or delayed delivery basis may be
settled a month or more after the trade date; interest income is accrued based
on the terms of the security. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not perform
under the contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, 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 fluctuations are included with the net
realized and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net 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.
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 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.
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 1.0% 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, 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 a 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 on the underlying
security. 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) 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.
K) Distributions to shareholders Distributions to shareholders are recorded by
the fund on the ex-dividend date. At certain times, the fund may pay
distributions at a level rate even though, as a result of market conditions or
investment decisions, the fund may not achieve projected investment results
for a given period. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. Reclassifications are
made to the fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.75% of the first $500 million of
average weekly net assets, 0.65% of the next $500 million, 0.60% of the next
$500 million, and 0.55% of any excess over $1.5 billion.
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 $880 and an additional
fee for each Trustee's meeting attended. Trustees who are not interested
persons of Putnam Management and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Plan") which allows the
Trustees to defer the receipt of all or a portion of Trustees Fees payable on
or after July 1, 1995. The deferred fees remain in the fund and are invested
in the fund or in other Putnam funds until distribution in accordance with the
Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
covering all Trustees of the Fund who have served as Trustee for at least five
years. Benefits under the 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 Trustee fees in the Statement of
operations. Accrued pension liability is included in Payable for compensation
of Trustees in the Statement of assets and liabilities.
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, 1997, fund expenses were reduced by $40,080
under expense offset arrangements with PFTC. Investor servicing and custodian
fees reported in the Statement of operations exclude these credits. The fund
could have invested a portion of these assets utilized in connection with the
expense offset arrangements in an income producing asset if it had not entered
into such arrangements.
Note 3
Purchase and sales of securities
During the six months ended April 30, 1997, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $318,287,621 and $296,320,476, respectively. Purchases and sales of
U.S. government obligations aggregated $253,370,244 and $281,257,400,
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
Share Repurchase Program
In November 1994, the Trustees authorized the fund to repurchase up to
2,650,000 of its shares in the open market. Repurchases will only be made when
the fund's shares are trading at less than net asset value and at such times
and amounts as is believed to be in the best interest of the fund's
shareholders. Any repurchases of shares will have the effect of increasing the
net asset value per share of remaining shares outstanding.
For the period ended April 30, 1997, the fund repurchased 51,500 shares for
$417,980, which reflects a discount from net asset value of $55,820 or 11.78%.
Actions by the Trustees
INVESTMENT POLICY CHANGES ADOPTED
The Trustees also approved the following modifications to the fund's investment
policies, effective immediately:
The fund may invest up to 65% of its assets in any of the three sectors of the
fixed-income market - (1) U.S. Government and high grade domestic corporate
bonds, (2) international fixed-income securities and (3) high-yield or below
investment grade securities - with a minimum allocation to each sector of 15%.
Securities purchased for the international sector will no longer need a minimum
rating of "A". Emerging markets securities issued by governmental entities will
be included in the international sector rather than, as previously, the high
yield sector. However, not more than 20 percent of the fund may be invested in
international fixed-income securities not rated investment grade by rating
agencies (or unrated securities of equivalent quality).
The fund will not invest more than 65% of its assets in securities rated below
investment grade by rating agencies (or unrated securities of equivalent quality).
These changes increase the fund's flexibility to make larger allocations to the
high yield and international markets, which have grown considerably in depth and
breadth since the fund was launched in 1988. The added flexibility is designed
to let the fund take greater advantage of these markets when the manager believes
it prudent while still maintaining the fund's character as a diversified
fixed-income fund with a commitment to each sector.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Kenneth J. Taubes
Vice President and Fund Manager
Jennifer E. Leichter
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Gail S. Attridge
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
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-to-date
information about the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
33898-072 6/97
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