Putnam
Diversified
Income
Trust
SEMIANNUAL REPORT
March 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar Inc., an independent rating agency, awarded Putnam
Diversified Income Trust's class A shares a 4-star rating for overall
performance (based on the 3- and 5-year average annual returns) as of
March 31, 1998. Only 22.5% of the 1,403 in Morningstar's taxable bond
category received 4 stars.*
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
37 Financial statements
* Morningstar rates a fund relative to other funds with similar investment
objectives based on the fund's 3-, 5-, and 10-year performance, adjusted
for risk factors and sales charges. Ratings are updated monthly. 10% of
funds receive 5 stars and 22.5% receive 4 stars. For the 3- and 5-year
periods ended 3/31/98, there were 1,403 and 831 funds, respectively, in
the taxable bond category; the fund received 4 stars for each period. Past
performance is not indicative of future results. Performance of other
share classes will vary.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Access to a wide variety of fixed-income assets was one of Putnam Diversified
Income Trust's particularly useful attributes in the challenging global market
environment that prevailed during the first half of your fund's fiscal year.
As you might imagine, events in Asia dominated the thinking of your fund's
management team throughout the period.
The U.S. bond market actually thrived in the wake of the Asian currency and
debt crisis as investors worldwide shifted assets to the safe haven
represented by U.S. Treasury securities. Once again, the U.S. high-yield bonds
in your fund's portfolio continued to show the strongest performance. European
bonds also delivered solid results. Your fund's underweight position in
Japanese bonds helped ameliorate the effects of the Asian difficulties.
In the following report, your fund's managers provide commentary on each of
the portfolio's market sectors and discuss the strategies they employed in
each sector during the period. Then they offer their insights into the
prospects for the fiscal year's second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 20, 1998
Report from the Fund Managers
Jennifer Leichter, lead manager
Robert Paine
Michael Martino
D. William Kohli
Gail S. Attridge
As Putnam Diversified Income Trust began its fiscal year last October, we were
reasonably optimistic about prospects for fixed-income markets around the
world. Less than one month into the period, however, several Asian economies
experienced economic meltdowns, sparking the largest single-day point decline
in the history of the Dow Jones Industrial Average. This event, combined with
continued economic weakness and uncertainty in Asia, put the world's financial
markets, and investors' nerves, on edge.
While this backdrop has created a tumultuous environment for many markets, two
of the three key sectors in which your fund invests -- U.S. taxable
investment-grade securities and high-yield bonds -- actually fared quite well
during the period. International bond markets obviously faced tougher times,
but strategic portfolio shifts allowed us to soften the blow of Asia's
currency and debt crisis. For the six months ended March 31, 1998, your fund's
class A shares provided a total return of 3.35% at net asset value and -
1.53% at public offering price. For complete performance information, please
refer to the summary that begins on page 9.
* U.S. BONDS BENEFIT FROM ASIAN CRISIS
Throughout the period, the Asian crisis actually boosted performance in the
domestic bond market. Nervous international investors flocked to the high
credit quality and attractive yields offered by U.S. bonds, bidding up prices
of U.S. Treasuries dramatically. While this flight to quality was good news
for your fund, our focus on mortgage-backed securities, which also performed
well early in the period, meant we didn't take full advantage of the Treasury
rally. Toward the end of the period, the momentum of Treasuries slowed, while
the performance of mortgage-backed securities began to lag as well.
Our decision to focus on mortgage-backed securities was based on the
interest-rate climate during the period. When interest rates are falling,
mortgage-backed securities present a higher prepayment risk -- that is, the
chance that homeowners will refinance or pay off their mortgage loans early,
which dampens the value of these securities. To compensate investors for this
prepayment risk, mortgage-backed securities will carry a higher yield than
most other U.S. government issues. The fund's emphasis on mortgage-backed
securities was designed to take advantage of those higher yield opportunities.
* EMERGING MARKETS PLUNGE, THEN REBOUND
The Asian currency and debt crisis took its toll on many international
markets, hitting the emerging markets especially hard. As investors deserted
these bonds in favor of more established markets, emerging markets plunged in
October, although they posted handsome gains for most of calendar 1997. After
that rather brief swoon, however, these bonds staged a remarkable recovery. In
a situation similar to the Treasury rally, this rebound helped your fund, but
because we had positioned this portion of the portfolio defensively, the fund
did not take full advantage of the emerging-markets comeback.
In Europe, bond markets turned in robust returns as a result of sluggish
economic growth in Germany and expectations that the European Economic and
Monetary Union (EMU) would begin as scheduled in January 1999. The EMU will
unify the monetary policy and interest rates of 11 European countries.
Europe's peripheral markets, such as Spain, Italy, and Sweden, posted the best
performance, but your fund's underweight position in these areas dragged
performance somewhat. The fund benefited from a significant position in the
United Kingdom, where the bond market was buoyed by slowing economic growth
and low inflation. Our decision to underweight Japanese government bonds meant
the fund had only minimal exposure to these bonds, which were hurt by the
country's troubled political and economic climate and increasing concerns
about the long-term health of its economy.
[GRAPHIC OMITTED: horizontal bar chart TOP FIVE COUNTRY ALLOCATIONS
(INTERNATIONAL SECTOR)]
TOP FIVE COUNTRY ALLOCATIONS*
(INTERNATIONAL SECTOR)
United Kingdom 6.1%
Mexico 3.6%
Australia 2.6%
Germany 2.0%
South Africa 2.0%
Footnote reads:
*Based on net assets as of 3/31/98. Holdings will vary over time.
* HIGH YIELD SECTOR POWERS PORTFOLIO ONCE AGAIN
The high-yield bond market was the strongest-performing sector of the domestic
bond market in the first calendar quarter of 1998, propelled by the same
forces that pushed Treasury bonds and stocks higher. These forces included
solid economic growth and low inflation, which kept the Federal Reserve Board
from increasing interest rates.
Leading the way among high-yield issues were those of companies in the
telecommunications, cable TV, and broadcasting industries -- following a
pattern that has prevailed for well over a year. New issuance in the
high-yield market has continued at a record-breaking pace, driven by favorable
interest rates, expanding businesses, and strong investor demand. Another
factor boosting the high-yield bond market has been the tremendous amount of
merger and acquisition activity. Larger, more creditworthy companies that have
completed cost-cutting programs are buying smaller high-yield bond issuers in
an effort to further grow their businesses or add niche products. This
consolidation trend was evident in many sectors, including consumer products,
telecommunications, and cable TV.
Highlights among your fund's high-yield holdings included NEXTEL
Communications, which provides digital wireless communications service.
Several cable companies in your fund's portfolio also contributed to
performance during the period. The cable TV industry as a whole was boosted by
increasing interest in the delivery of Internet technology through
conventional cable systems.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR
HIGH-YIELD BONDS
Transamerican Energy, senior discount notes stepped-coupon,
zero% (13s, 6/15/99) 2002
Midland Funding Corp., debuntures, Series A, 11 3/4s 2005
Millicom International Cellular, S.A. senior discount notes stepped-coupon,
zero% (13 1/2s, 6/1/01) 2006 (Luxemburg)
FOREIGN BONDS
United Kingdom Treasury bonds, 7 1/4s, 2007
Government of Australia bonds ser. 808, 8 3/4s, 2008
Republic of South Africa bonds ser. 153, 13s, 2010
U.S. INVESTMENT-GRADE SECURITIES
Government National Mortgage Association (GNMA),
7 1/2s, with due dates from 12/15/22 to 12/15/27
U.S. Treasury bonds 6 5/8s, 6/30/01
U.S. Treasury bonds 5 3/4s, 11/30/02
Footnote reads:
* These holdings represent 23.8% of the fund's assets as of 3/31/98.
Portfolio holdings will vary over time.
Technology giant Microsoft's recent decision to invest $1 billion in
Philadelphia cable operator Comcast Corp. was a signal to investors that this
is an area with strong growth potential. While these holdings, along with
others discussed in this report, were viewed favorably at the end of the
fiscal period, all portfolio holdings are subject to review and adjustment in
accordance with the fund's investment strategy and may vary in the future.
* OUTLOOK: CURRENT TRENDS SHOULD CONTINUE
In general, we believe the domestic economy, driven by consumer demand, is
poised for continued strong growth with relatively low inflation. As a result,
we expect that demand for high-yield bonds will remain strong in the months
ahead as investor confidence remains high. We are more cautious about
international bond markets and the outlook for global economic growth.
Valuations in most foreign markets appear stretched, particularly after the
global flight to quality that has driven bond yields lower worldwide. We will
continue to monitor the Asian turbulence closely, realizing that its impact
may be greater than previously forecast. Your fund's ability to invest across
multiple fixed-income sectors should enable us to position the portfolio
defensively while taking advantage of attractive income opportunities.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 3/31/98, there is no guarantee the fund will continue to hold
these securities in the future. The lower credit ratings of high-yield
corporate bonds reflect a greater possibility that adverse changes in the
economy or their issuers may affect their ability to pay principal and
interest on the bonds. Investments in non-U.S. securities may be subject to
certain risks such as currency fluctuations, economic instability, and
political developments. Although the U.S. government guarantees the timely
payment of principal and interest on some of the underlying securities, the
value of the fund shares is not guaranteed and will fluctuate.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Diversified Income Trust is designed for investors seeking high current
income consistent with capital preservation through U.S. government,
investment grade, high-yield, and international fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 3/31/98
Class A Class B Class M
(inception date) (10/3/88) (3/1/93) (12/1/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 3.35% -1.53% 2.90% -2.10% 3.18% -0.21%
- ------------------------------------------------------------------------------
1 year 12.20 6.91 11.33 6.33 11.94 8.27
- ------------------------------------------------------------------------------
5 years 49.50 42.34 44.02 42.02 47.49 42.74
Annual average 8.37 7.32 7.57 7.27 8.08 7.38
- ------------------------------------------------------------------------------
Life of fund 145.46 133.82 127.65 127.65 138.39 130.62
Annual average 9.92 9.36 9.06 9.06 9.59 9.20
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/98
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield Price
Bond Index Bond Index Index Index
- ------------------------------------------------------------------------------
6 months 4.55% -0.98% 4.67% 0.62%
- ------------------------------------------------------------------------------
1 year 11.99 2.03 14.33 1.38
- ------------------------------------------------------------------------------
5 years 39.89 37.76 68.52 12.95
Annual average 6.95 6.62 11.00 2.47
- ------------------------------------------------------------------------------
Life of fund 128.21 115.04 190.50 35.39
Annual average 9.08 8.40 11.88 3.24
- ------------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 4.75% and 3.25%, respectively. Class B share returns for
the 1-, 5-, and 10-year (where available) and life-of-fund periods reflect
the applicable contingent deferred sales charge (CDSC), which is 5% in the
first year, declines to 1% in the sixth year, and is eliminated
thereafter. Returns shown for class B and class M shares for periods prior
to their inception are derived from the historical performance of class A
shares, adjusted to reflect both the initial sales charge or CDSC, if any,
currently applicable to each class and, in the case of class B and class M
shares, the higher operating expenses applicable to such shares. All
returns assume reinvestment of distributions at NAV and represent past
performance; they do not guarantee future results. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 3/31/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.426 $0.379 $0.414
- ------------------------------------------------------------------------------
Capital gains -- -- --
- ------------------------------------------------------------------------------
Total $0.426 $0.379 $0.414
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
9/30/97 $12.70 $13.33 $12.65 $12.67 $13.10
- ------------------------------------------------------------------------------
3/31/98 12.69 13.32 12.63 12.65 13.07
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.71% 6.40% 6.08% 6.55% 6.34%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 6.77 6.45 6.00 6.45 6.23
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Aggregate Bond Index* is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of
the original investment. Indexes are rebalanced monthly by market
capitalization.
Salomon Brothers Non-U.S. World Government Bond Index* is a market
capitalization-weighted benchmark that tracks the performance of the
government bond markets tracked by the Salomon Brothers World Government
Bond Index, excluding the United States.
First Boston High Yield Index* is an unmanaged index of lower-rated,
higher-yielding U.S. corporate bonds. It includes over 180 issues with an
average maturity range of 7 to 10 years.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
* Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Portfolio of investments owned
March 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (36.5%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.4%)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$6,225,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $6,847,500
6,090,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 6,303,150
10,615,000 Outdoor Communications Inc. sr. sub. notes
9 1/4s, 2007 11,039,600
--------------
24,190,250
Aerospace and Defense (0.5%)
- ------------------------------------------------------------------------------------------------------------
4,400,000 Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 4,840,000
1,900,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 1,942,750
4,000,000 Aviation Sales Co. 144A sr. sub. notes 8 1/8s, 2008 3,940,000
1,000,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 1,072,500
5,820,000 BE Aerospace, Inc. 144A sr. sub. notes 8s, 2008 5,805,450
2,500,000 Derlan Industries Ltd. sr. notes 10s, 2007 (Canada) 2,625,000
2,160,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 2,235,600
2,000,000 Sequa Corp. med. term notes 10s, 2001 2,087,620
2,405,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 2,486,169
2,310,000 United Defense Industries Inc. company guaranty
8 3/4s, 2007 2,361,975
--------------
29,397,064
Agriculture (0.2%)
- ------------------------------------------------------------------------------------------------------------
11,378,517 Premium Standard Farms, Inc. sr. secd. notes
11s, 2003 [2 DBL. DAGGERS] 12,288,799
Airlines (0.1%)
- ------------------------------------------------------------------------------------------------------------
3,630,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 3,838,725
3,530,000 Trans World Airlines, Inc. 144A notes 11 3/8s, 2006 3,556,475
--------------
7,395,200
Apparel (0.3%)
- ------------------------------------------------------------------------------------------------------------
2,460,000 GFSI, Inc. sr. disc. notes stepped-coupon Ser. B, zero %,
(11 3/8s, 9/15/04), 2009 ++ 2,706,000
1,135,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 1,191,750
2,500,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 2,550,000
4,955,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 5,227,525
2,215,000 William Carter Co. 144A sr. sub. notes 12s, 2008 2,403,275
--------------
14,078,550
Automotive Parts (0.7%)
- ------------------------------------------------------------------------------------------------------------
1,837,000 Aftermarket Technology Corp. sr. sub. notes
Ser. D, 12s, 2004 2,039,070
1,200,000 Cambridge Industries Inc. company guaranty
Ser. B, 10 1/4s, 2007 1,248,000
1,145,000 Hawk Corp. sr. notes 10 1/4s, 2003 1,242,325
5,850,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 6,171,750
980,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 1,033,900
5,150,000 Lear Corp. sub. notes 9 1/2s, 2006 5,716,500
13,660,000 Navistar International Corp. 144A sr. sub.notes
8s, 2008 13,608,775
5,100,000 Oxford Automotive, Inc. 10 1/8s, 2007 5,393,250
2,780,000 Safety Components International, Inc. sr. sub. notes
Ser. B, 10 1/8s, 2007 2,877,300
--------------
39,330,870
Banks (1.2%)
- ------------------------------------------------------------------------------------------------------------
1,965,000 Albank Capital Trust 144A company guaranty
Ser. AI, 9.27s, 2027 2,139,492
6,425,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 6,649,875
2,425,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 2,400,750
2,000,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 2,255,620
5,150,000 First Nationwide Holdings sr. notes 12 1/2s, 2003 5,896,750
3,330,000 Greenpoint Capital Trust I company guaranty
9.1s, 2027 3,643,619
1,000,000 Korea Development Bank bonds 7 3/8s, 2004 (Korea) 901,650
4,000,000 Korea Development Bank bonds 7 1/8s, 2001 3,761,360
2,145,000 North Fork Capital Trust I company guaranty
8.7s, 2026 2,338,458
5,000,000 Primestar Bank Loan, Inc. effective yield of 10 3/8%,
April 1, 2008 5,000,000
1,355,000 Ocwen Capital Trust I company guaranty
10 7/8s, 2027 1,504,050
2,265,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 2,525,475
1,195,000 Onbank & Trust Co. company guaranty 9 1/4s, 2027 1,380,076
2,540,000 Peoples Heritage Capital Trust company guaranty
Ser. B, 9.06s, 2027 2,796,438
1,315,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 1,334,725
2,400,000 Provident Capital Trust company guaranty 8.6s, 2026 2,539,992
1,385,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 1,469,790
2,045,000 Sovereign Capital Trust company guaranty 9s, 2027 2,222,506
12,300,000 Sumitomo Bank Treasury Co. 144A Ser. A, FRB,
9.4s, 2049 (Japan) 12,715,125
1,845,000 Webster Capital Trust I 144A bonds 9.36s, 2027 2,033,596
--------------
65,509,347
Basic Industrial Products (0.2%)
- ------------------------------------------------------------------------------------------------------------
2,555,000 American Standard Companies Inc. sr. notes
7 3/8s, 2008 2,516,675
2,140,000 Koppers Industries, Inc. 144A sr. sub. notes
9 7/8s, 2007 2,241,650
4,700,000 Roller Bearing Co. company guaranty Ser. B,
9 5/8s, 2007 4,829,250
2,725,000 W. R. Carpenter North America, Inc. company
guaranty 10 5/8s, 2007 2,915,750
--------------
12,503,325
Broadcasting (2.3%)
- ------------------------------------------------------------------------------------------------------------
4,880,000 Affinity Group Holdings sr. notes 11s, 2007 5,282,600
5,875,000 Affinity Group Holdings sr. sub. notes 11 1/2s, 2003 6,242,188
2,800,000 Allbritton Communications Co. sr. sub. deb. Ser. B,
9 3/4s, 2007 2,947,000
3,700,000 Allbritton Communications Co. 144A sr. sub. notes
8 7/8s, 2008 3,737,000
5,000,000 Australis Holdings PTY Ltd. sr. disc. notes
stepped-coupon zero % (15s, 11/01/00), 2002 in default ++ 2,000,000
856,252 Australis Media, Ltd. sr. sec. disc. notes zero %,
2000 (Australia) 590,814
26,218 Australis Media, Ltd. sr. disc. notes stepped-coupon
1 3/4s, (15 3/4s 5/15/00), 2003 (Australia) in default ++ [2 DBL. DAGGERS] 5,244
1,945,000 Benedek Communications Corp. sr. disc. notes stepped-
coupon zero % (13 1/4s, 5/15/01), 2006 ++ 1,556,000
6,860,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 ++ 5,179,300
2,890,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 3,034,500
1,665,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 1,698,300
2,250,000 Chancellor Media Corp. 144A sr. sub. notes
8 1/8s, 2007 2,289,375
2,914,720 Citadel Broadcasting Inc. sr. sub. notes 10 1/4s, 2007 3,228,052
15,257,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) ++ 12,663,310
9,135,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 10,254,038
9,490,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 9,845,875
4,600,000 Jacor Communications, Inc. sr. sub. notes 8s, 2010 4,600,000
7,237,000 Petracom Holdings, Inc. notes stepped-coupon
zero % (17 1/2s, 8/1/98), 2003 ++ 7,273,185
3,635,000 Radio One, Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/1/00), 2004 ++ 3,707,700
3,220,000 SFX Entertainment, Inc. 144A sr. sub. notes
9 1/8s, 2008 3,171,700
7,000,000 Sinclair Broadcast Group, Inc. company guaranty
9s, 2007 7,297,500
4,300,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 4,730,000
2,840,000 TCI Satellite Entertainment 144A sr. sub. notes
10 7/8s, 2007 3,003,300
4,275,000 TV Azteca S.A. De C.V. sr. notes Ser. B, 10 1/2s,
2007 (Mexico) 4,552,875
970,000 TV Azteca S.A. De C.V. sr. notes Ser. A, 10 1/8s,
2004 (Mexico) 1,013,650
9,215,000 Viacom International, Inc. sub. deb. 8s, 2006 9,410,819
--------------
119,314,325
Building and Construction (0.5%)
- ------------------------------------------------------------------------------------------------------------
2,040,000 American Architectural Products Corp. 144A
sr. notes 11 3/4s, 2007 2,131,800
7,460,000 Atrium Companies, Inc. 144A sub. notes 10 1/2s, 2006 7,833,000
3,050,000 Beazer Homes USA, Inc. 144A sr. notes 8 7/8s, 2008 3,053,813
4,060,000 Brand Scaffold Services 144A sr. notes 10 1/4s, 2008 4,181,800
2,080,000 Cia Latino Americana 144A company guaranty
11 5/8s, 2004 (Argentina) 2,158,000
6,300,000 GS Superhighway Holdings 144A sr. notes
10 1/4s, 2007 5,355,000
1,870,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 1,645,600
2,605,000 Presley Cos. sr. notes 12 1/2s, 2001 2,513,825
--------------
28,872,838
Building Products (0.2%)
- ------------------------------------------------------------------------------------------------------------
3,500,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 4,235,000
2,960,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 3,078,400
1,895,000 Waxman Industries Inc. sr. notes stepped-coupon,
zero % (12 3/4s, 6/1/99), 2004 ++ 1,729,188
--------------
9,042,588
Buses (0.2%)
- ------------------------------------------------------------------------------------------------------------
4,115,000 Blue Bird Body Co. sr. sub. notes Ser. B, 10 3/4s, 2006 4,557,363
9,740,000 Consorcio/MCII Holdings sec. notes stepped-coupon
zero % (12s, 11/15/98), 2002 ++ 9,009,500
--------------
13,566,863
Business Services (0.6%)
- ------------------------------------------------------------------------------------------------------------
1,850,000 ATC Group Services, Inc. 144A sr. sub. notes 12s, 2008 1,859,250
1,355,000 Axiohm Transactions Solutions, Inc. company guaranty
9 3/4s, 2007 1,378,713
4,800,000 Corporate Express, Inc. sr. sub. notes Ser. B,
9 1/8s, 2004 4,920,000
5,750,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 5,922,500
1,475,000 Iron Mountain, Inc. med. term notes company guaranty
10 1/8s, 2006 1,629,875
6,330,000 Morris Material Handling Inc. 144A sr. notes
9 1/2s, 2008 6,361,650
1,505,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B,
11s, 2006 1,610,350
6,080,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 6,916,000
1,655,000 Williams Scotsman, Inc. 144A sr. notes 9 7/8s, 2007 1,737,750
--------------
32,336,088
Cable Television (2.8%)
- ------------------------------------------------------------------------------------------------------------
3,565,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 ++ 2,932,213
15,602,090 Adelphia Communications Corp. sr. notes
9 1/2s, 2004 [2 DBL. DAGGERS] 16,343,189
4,780,000 Century Communications Corp. 144A sr. disc. notes
zero %, 2008 2,079,300
2,950,000 Charter Communications International, Inc. sr. notes
Ser. B, 11 1/4s, 2006 3,274,500
6,500,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 7,605,000
5,270,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 5,533,500
11,555,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) ++ 8,146,275
14,340,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) ++ 11,400,300
4,240,997 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 4,553,771
9,460,000 Falcon Holdings Group, L.P. 144A deb. stepped-
coupon zero % (9.285s, 4/15/03) 2010 5,990,923
9,125,000 Fox Kids Worldwide, Inc. 144A sr. disc. notes stepped-
coupon zero % (10 1/4s, 11/1/02), 2007 ++ 5,817,188
12,900,000 Fox Kids Worldwide, Inc. 144A sr. notes 9 1/4s, 2007 12,964,500
1,610,000 Globo Communicacoes 144A sr. notes 10 5/8s, 2008 1,636,163
3,325,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 3,383,188
15,350,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2008 (Mexico) ++ 12,280,000
8,225,000 Grupo Televisa S.A. 144A sr. notes 11 7/8s,
2006 (Mexico) 9,489,594
4,090,000 Heartland Wireless Communications, Inc. sr. notes
Ser. B, 14s, 2004 1,227,000
1,040,000 Heartland Wireless Communications, Inc. sr. notes
13s, 2003 187,200
950,000 Heartland Wireless Communications, Inc. sr. notes
Ser. D, 13s, 2003 171,000
7,230,000 Lenfest Communications, Inc. 144A sr. sub. notes
8 1/4s, 2008 7,320,375
6,490,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-coupon
zero % (14 1/4s, 6/15/00), 2005 ++ 5,889,675
3,640,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 ++ 3,458,000
7,960,000 RCN Corp. 144A sr. disc. notes stepped-coupon zero %
(9.8s, 2/15/03), 2008 ++ 4,994,900
12,985,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 5/15/01), 2006 (Australia) ++ 8,959,650
8,660,000 United International Holdings 144A sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/03), 2008 ++ 5,412,500
--------------
151,049,904
Cellular Communications (2.7%)
- ------------------------------------------------------------------------------------------------------------
3,540,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (9.27s, 8/15/02), 2007 (Canada) ++ 2,478,000
28,657,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 ++ 16,406,133
8,030,000 Cencall Communications Corp. sr. disc. notes stepped-
coupon zero % (10 1/8s, 1/15/99), 2004 ++ 7,789,100
12,400,000 Comunicacion Cellular bonds stepped-coupon zero %
(13 1/8s, 11/15/00), 2003 (Colombia) ++ 9,672,000
6,500,000 Dial Call Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (10 1/4s, 12/15/98), 2005 ++ 6,370,000
11,650,000 Dobson Communications Corp. sr. notes
11 3/4s, 2007 12,815,000
6,030,000 Interact Systems, Inc. 144A sr. disc. notes stepped-
coupon zero % (14s, 8/1/99), 2003 ++ 2,291,400
7,650,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 ++ 5,852,250
7,500,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 2/1/01), 2006 ++ 5,850,000
2,780,000 International Wireless Communications, Inc. sr. disc.
notes zero %, 2001 889,600
14,715,000 McCaw International Ltd sr. discount notes stepped
coupon zero % (13s, 4/15/02), 2007 ++ 9,785,475
23,340,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01),
2006 (Luxembourg) ++ 18,205,200
3,170,000 NEXTEL Communications, Inc. 144A sr. disc. notes stepped-
coupon zero % (12 1/8s, 4/15/03), 2008 ++ 1,905,963
9,150,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (9 3/4s, 10/31/02), 2007 ++ 5,947,500
13,180,000 NEXTEL Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (9.95s, 2/15/03), 2008 ++ 8,418,725
5,840,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 6,424,000
330,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 363,000
3,750,000 Omnipoint Corp. 144A sr. notes FRN 8.906s, 2006 3,768,750
2,400,000 Pricellular Wireless Corp. sr. disc. notes stepped-
coupon zero % (12 1/4s, 10/1/98), 2003 ++ 2,568,000
3,795,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 4,250,400
14,160,000 Teligent, Inc. 144A sr. disc. notes stepped-coupon
zero % (11 1/2s, 3/1/03), 2008 ++ 8,177,400
1,500,000 Western Wireless Corp. sr. sub. notes 10 1/2s, 2007 1,642,500
--------------
141,870,396
Chemicals (0.7%)
- ------------------------------------------------------------------------------------------------------------
6,650,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 6,882,750
400,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 436,000
4,690,000 Huntsman Corp. 144A sr. sub. notes FRN
9.188s, 2007 4,701,725
7,000,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 7,455,000
3,630,000 NL Industries, Inc. sr. notes stepped-coupon zero %
(13s, 10/15/98), 2005 ++ 3,711,675
2,120,000 Pharmaceutical Fine Chemicals 144A sr. sub. notes
9 3/4s, 2007 (Switzerland) 2,199,500
6,035,000 Polytama International company guaranty
11 1/4s, 2007 3,741,700
2,430,000 Radnor Holdings Corp. company guaranty 10s, 2003 2,545,425
4,450,000 Sterling Chemicals Holdings sr. disc. notes stepped-
coupon zero % (13 1/2s, 8/15/01), 2008 ++ 2,647,750
2,900,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 2,755,000
--------------
37,076,525
Conglomerates (--%)
- ------------------------------------------------------------------------------------------------------------
1,151,000 Axia, Inc. sr. sub. notes Ser. B, 11s, 2001 1,174,020
910,000 MacAndrews & Forbes Holdings, Inc. sub. deb.
notes 13s, 1999 913,413
--------------
2,087,433
Consumer Durable Goods (0.1%)
- ------------------------------------------------------------------------------------------------------------
660,000 Hedstrom Holdings, Inc. 144A sr. disc. notes zero %
(12s, 6/1/02), 2009 ++ 409,200
1,960,000 Remington Products Co. sr. sub. notes Ser. B, 11s, 2006 1,803,200
1,750,000 Sealy Mattress Co. 144A sr. sub. notes 9 7/8s, 2007 1,855,000
3,000,000 Terex Term Loan B effective yield of 8.179%,
March 6, 2005 3,000,000
--------------
7,067,400
Consumer Non-Durables (0.4%)
- ------------------------------------------------------------------------------------------------------------
1,050,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 1,095,938
3,846,154 Imperial Holly Term Loan A 7.656s, 2003 3,841,346
3,653,846 Imperial Holly Term Loan B 7.906s, 2005 3,653,846
530,000 Packaged Ice, Inc. 144A sr. notes 9 3/4s, 2005 537,950
6,880,000 Viasystems, Inc. 144A sr. sub. notes 9 3/4s, 2007 7,189,600
3,285,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 3,432,825
920,000 Sampoerna Intl. Finance Co. 144A company
guaranty 8 3/8s, 2006 (Indonesia) 662,400
--------------
20,413,905
Consumer Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
2,747,000 Coinmach Corp. sr. notes Ser. D 11 3/4s, 2005 3,062,905
Containers (0.2%)
- ------------------------------------------------------------------------------------------------------------
3,490,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 3,734,300
845,000 Printpack, Inc. sr. sub. notes Ser. B, 10 5/8s, 2006 906,263
1,400,000 Radnor Holdings Inc. sr. notes 10s, 2003 1,466,500
6,395,000 Vicap S.A. 144A company guaranty 11 3/8s, 2007 7,050,488
--------------
13,157,551
Cosmetics (0.5%)
- ------------------------------------------------------------------------------------------------------------
4,000,000 Carson, Inc. company guaranty Ser. B, 10 3/8s, 2007 4,120,000
2,430,000 Chattem, Inc. 144A sr. sub. notes 8 7/8s, 2008 2,460,375
1,225,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 1,304,625
12,850,000 Revlon Consumer Products 144A sr. sub. notes
8 5/8s, 2008 13,026,688
7,500,000 Revlon Worldwide Corp. sr. disc. notes Ser. B,
zero %, 2001 5,737,500
--------------
26,649,188
Electronic Components (0.5%)
- ------------------------------------------------------------------------------------------------------------
1,200,000 Details, Inc. sr. discount notes stepped-coupon
Ser. B, zero % (12 1/2s, 11/15/02), 2007 ++ 768,000
1,500,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 1,571,250
2,760,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 2,787,600
5,340,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 5,473,500
1,585,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 1,656,325
7,295,000 Motors and Gears, Inc. sr. notes Ser. B, 10 3/4s, 2006 7,878,600
6,825,000 Zilog, Inc. 144A sr. notes 9 1/2s, 2005 6,637,313
--------------
26,772,588
Electric Utilities (1.2%)
- ------------------------------------------------------------------------------------------------------------
7,075,000 AES China Generating Co. sr. notes 10 1/8s,
2006 (China) 6,951,188
2,800,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 3,104,612
3,420,000 Espirto Santo Centrais 144A sr. notes 10s,
2007 (Brazil) 3,343,050
6,819,000 First PV Funding deb. 10.15s, 2016 7,189,135
7,460,000 Long Island Lighting Co. deb. 9s, 2022 8,503,505
21,320,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 25,570,355
1,585,000 Midland Funding Corp. deb. Ser. B, 13 1/4s, 2006 2,035,584
3,490,000 Niagara Mohawk Power Corp. med. term notes
9.99s, 2004 3,559,451
2,498,932 Northeast Utilities System notes Ser. A, 8.58s, 2006 2,498,833
2,307,692 Northeast Utilities System notes Ser. B, 8.38s, 2005 2,349,785
--------------
65,105,498
Electronics (0.3%)
- ------------------------------------------------------------------------------------------------------------
3,405,000 Celestica Intl. Ltd. 144A sr. sub. notes 10 1/2s,
2006 (Canada) 3,711,450
3,025,000 Flextronics Intl. Ltd. 144A sr. sub. notes 8 3/4s, 2007 3,047,688
700,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 759,500
2,465,000 Therma-Wave, Inc. 144A sr. notes Ser. B, 10 5/8s, 2004 2,563,600
4,920,000 Wavetek Corp. company guaranty 10 1/8s, 2007 5,190,600
--------------
15,272,838
Energy-Related (0.3%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Calpine Corp. sr. notes 10 1/2s, 2006 1,090,000
1,900,000 Calpine Corp. sr. notes 9 1/4s, 2004 1,957,000
9,660,000 Panda Global Energy Co. company guaranty
12 1/2s, 2004 9,177,000
2,710,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 2,662,575
--------------
14,886,575
Entertainment (0.2%)
- ------------------------------------------------------------------------------------------------------------
2,850,000 Six Flags Corp. sr. sub. notes stepped-coupon zero %
(12 1/4s, 6/15/98), 2005 ++ 3,163,500
9,622,837 Six Flags Corp. bank-term loan B 10s, 2004 ## 9,658,923
--------------
12,822,423
Environmental Control (0.2%)
- ------------------------------------------------------------------------------------------------------------
3,645,000 Allied Waste Industries, Inc. company guaranty
10 1/4s, 2006 4,045,950
7,270,000 Allied Waste Industries, Inc. sr. disc. notes stepped-
coupon zero % (11.3s, 6/1/02), 2007 ++ 5,343,450
--------------
9,389,400
Financial Services (0.9%)
- ------------------------------------------------------------------------------------------------------------
6,120,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 6,181,200
1,500,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 1,377,585
1,425,000 Colonial Capital I 144A company guaranty 8.92s, 2027 1,528,980
2,100,000 Dine S.A. de C.V. 144A company guaranty 8 3/4s,
2007 (Mexico) 2,050,125
5,405,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 5,405,000
4,455,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 4,432,725
2,335,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006 2,498,450
2,890,000 Investors Capital Trust I company guaranty Ser. B,
9.77s, 2027 3,169,969
2,800,000 Local Financial Corp. 144A sr. notes 11s, 2004 3,038,000
3,350,000 Market Hub Partners 144A sr. notes 8 1/4s, 2008 3,417,000
1,640,000 Nationwide Credit, Inc. 144A sr. notes 10 1/4s, 2008 1,689,200
1,570,000 Netia Holdings B.V. 144A company guaranty
10 1/4s, 2007 (Poland) 1,613,175
890,000 Netia Holdings B.V. 144A company guaranty stepped-
coupon zero % (11 1/4s, 11/1/02), 2007 (Poland) 607,425
4,055,000 Resource America, Inc. 144A sr. notes 12s, 2004 4,288,163
2,750,000 SRI Receivables Purchase 144A notes 12 1/2s, 2000 2,908,125
2,900,000 Superior Financial Corp. 144A sr. notes 8.65s, 2003 2,907,250
--------------
47,112,372
Food Chains (0.5%)
- ------------------------------------------------------------------------------------------------------------
7,510,000 Ameriserve Food Co. company guaranty
10 1/8s, 2007 8,110,800
4,050,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 4,171,500
2,640,000 Nebco Evans Holding Co. sr. disc. notes stepped-
coupon zero % (12 3/8s, 7/15/02), 2007 ++ 1,821,600
10,975,000 Stater Brothers sr. notes 11s, 2001 11,962,750
4,150,000 Smithfield Foods, Inc. 144A sr. sub. notes 7 5/8s, 2008 4,129,250
--------------
30,195,900
Food and Beverages (0.4%)
- ------------------------------------------------------------------------------------------------------------
6,030,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D,
9 7/8s, 2007 6,482,250
1,885,000 Canandaigua Wine Co. sr. sub. notes Ser. C,
8 3/4s, 2003 1,922,700
3,855,000 Fleming Companies, Inc. company guaranty Ser. B,
10 1/2s, 2004 4,134,488
3,485,000 Jitney-Jungle Stores company guaranty 10 3/8s, 2007 3,624,400
4,790,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 4,945,675
660,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 702,900
--------------
21,812,413
Gaming (2.0%)
- ------------------------------------------------------------------------------------------------------------
5,900,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 6,534,250
4,785,000 Autotote Corp. company guaranty Ser. B,
10 7/8s, 2004 5,143,875
6,785,000 Coast Hotels & Casinos, Inc. 1st mtge. company
guaranty Ser. B, 13s, 2002 7,887,563
2,000,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B,
10 7/8s, 2001 2,020,000
8,804,200 Colorado Gaming & Entertainment Co. sr. notes
12s, 2003 9,552,557
6,040,000 Fitzgeralds Gaming Corp. 144A company guaranty
12 1/4s, 2004 6,100,400
7,650,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 8,453,250
2,085,000 Isle of Capri Black Hawk LLC 1st mortgage Ser. B,
13s, 2004 2,116,275
11,875,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 12,201,563
9,593,000 Louisiana Casino Cruises Corp. 1st mtge.
11 1/2s, 1998 9,688,930
9,250,000 Mohegan Tribal Gaming Auth. sr. notes Ser. B,
13 1/2s, 2002 11,863,125
1,350,000 Penn National Gaming, Inc. 144A sr. notes
10 5/8s, 2004 1,431,000
2,550,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 1,912,500
6,000,000 Sun International Hotels Ltd. company guaranty
9s, 2007 6,360,000
2,500,000 Trump A.C. company guaranty 11 1/4s, 2006 2,568,750
3,456,000 Trump Castle Funding Corp. notes 11 1/2s, 2000 3,490,560
11,475,000 Trump Holdings & Funding Corp. sr. notes
15 1/2s, 2005 13,167,563
--------------
110,492,161
Health Care (1.2%)
- ------------------------------------------------------------------------------------------------------------
4,940,000 Extendicare, Inc. 144A sr. sub. notes 9.35s,
2007 (Canada) 5,137,600
4,305,000 Genesis Eldercare 144A sr. sub. notes 9s, 2007 4,412,625
2,105,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 2,199,725
11,220,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 11,823,075
6,660,000 Magellan Health Services, Inc. 144A sr. sub. notes
9s, 2008 6,709,950
3,270,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 2,929,822
9,195,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 9,516,825
2,420,000 Paragon Corp. Holdings 144A sr. notes 9 5/8s, 2008 2,401,850
10,930,000 Paragon Health Networks, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 11,203,250
5,105,000 Sun Healthcare Group, Inc. 144A sr. sub. notes
9 1/2s, 2007 5,360,250
4,375,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 4,539,063
--------------
66,234,035
Insurance (0.1%)
- ------------------------------------------------------------------------------------------------------------
3,000,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 3,133,050
Lodging (0.3%)
- ------------------------------------------------------------------------------------------------------------
6,300,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 6,693,750
4,500,000 John Q Hammons Hotels, Inc. 1st mtge. 9 3/4s, 2005 4,781,250
5,635,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 6,085,800
--------------
17,560,800
Medical Supplies and Devices (0.5%)
- ------------------------------------------------------------------------------------------------------------
4,395,000 ALARIS Medical Systems, Inc. company guaranty
9 3/4s, 2006 4,702,650
2,930,000 Conmed Corp. 144A sr. sub. notes 9s, 2008 2,973,950
5,300,000 Dade International, Inc. sr. sub. notes Ser. B,
11 1/8s, 2006 5,922,750
6,100,000 Fresenius Medical Care AG 144A company guaranty
7 7/8s, 2008 (Germany) 6,100,000
2,105,000 Imagyn Medical Technologies company guarantee
12 1/2s, 2004 1,263,000
2,155,000 Kinetic Concepts, Inc. company guaranty Ser. B,
9 5/8s, 2007 2,214,263
4,915,000 Wright Medical Technology, Inc. 144A notes Ser. C,
11 3/4s, 2000 4,816,700
--------------
27,993,313
Metals and Mining (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,140,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 1,202,700
3,535,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 3,428,950
2,040,000 Armco, Inc. sr. notes 9s, 2007 2,116,500
2,705,000 Continental Global Group sr. notes Ser. B, 11s, 2007 2,894,350
3,030,000 Maxxam Group Holdings, Inc. sr. notes Ser. B,
12s, 2003 3,321,638
--------------
12,964,138
Motion Picture Distribution (0.3%)
- ------------------------------------------------------------------------------------------------------------
4,810,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 5,074,550
800,000 Cinemark Mexico USA, Inc. sr. sub. notes Ser. D,
9 5/8s, 2008 (Mexico) 839,000
7,860,000 Cinemark Mexico USA, Inc. sr. sub. notes Ser. B,
9 5/8s, 2008 (Mexico) 8,292,300
5,000,000 Panavision Term Loan B 8 1/8s, 3/15/05 5,000,000
--------------
19,205,850
Oil and Gas (2.1%)
- ------------------------------------------------------------------------------------------------------------
10,930,000 Abraxas Petroleum Corp. 144A sr. notes Ser. B,
11 1/2s, 2004 11,257,900
3,500,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 3,815,000
635,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 641,350
3,750,000 Chesapeake Energy Corp. sr. notes 10 1/2s, 2002 3,975,000
4,530,000 Cliffs Drilling Co. company guaranty Ser. B,
10 1/4s, 2003 4,892,400
2,720,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 2,556,800
6,230,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 6,292,300
3,180,000 Dailey International, Inc. 144A sr. notes 9 1/2s, 2008 3,180,000
2,025,000 DI Industries, Inc. sr. notes 8 7/8s, 2007 2,070,563
3,080,000 Michael Petroleum Corp. 144A sr. notes 11 1/2s, 2005 3,045,350
1,315,000 Newpark Resources, Inc. 144A sr. sub. notes
8 5/8s, 2007 1,344,588
2,655,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 2,681,550
1,950,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 2,076,750
2,590,000 Southwest Royalties, Inc. company guaranty
10 1/2s, 2004 2,331,000
3,600,000 Tokai Corp. 144A bonds FRB 9.98s, 2008 3,649,500
46,550,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/99), 2002 ++ 39,102,000
14,465,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 14,320,350
5,152,000 TransTexas Gas Corp. sr. sub. notes Ser. D,
13 3/4s, 2001 5,770,240
1,325,000 Wiser Oil Co. company guaranty 9 1/2s, 2007 1,278,625
--------------
114,281,266
Packaging and Containers (0.1%)
- ------------------------------------------------------------------------------------------------------------
1,830,000 AEP Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 1,919,213
3,290,000 Huntsman Packaging Corp. 144A sr. sub. notes
9 1/8s, 2007 3,372,250
--------------
5,291,463
Paging (0.3%)
- ------------------------------------------------------------------------------------------------------------
4,250,000 Metrocall, Inc. sr. sub. notes 9 3/4s, 2007 4,335,000
6,355,000 Mobile Telecommunications Tech. sr. notes
13 1/2s, 2002 7,483,013
1,680,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-
coupon zero % (15s, 2/1/00), 2005 ++ 1,495,200
900,000 Paging Network Do Brasil sr. notes 13 1/2s,
2005 (Brazil) 911,250
1,150,000 Paging Network, Inc. sr. sub. notes 10s, 2008 1,201,750
1,000,000 Pronet, Inc. sr. sub. notes 11 7/8s, 2005 1,080,000
--------------
16,506,213
Paper and Forest Products (1.5%)
- ------------------------------------------------------------------------------------------------------------
2,950,000 APP Finance II Mauritius Ltd. bonds stepped-coupon
zero % (12s, 2/14/09), 2049 (Indonesia) ++ 2,419,000
800,000 APP International Finance Co. notes 11 3/4s,
2005 (Netherlands) 768,000
3,185,000 Domtar, Inc. deb. 9 1/2s, 2016 (Canada) 3,433,143
9,495,000 Florida Coast Paper LLC 1st mtge. Ser. B,
12 3/4s, 2003 10,159,650
5,280,000 Impac Group, Inc. 144A sr. sub. notes 10 1/8s, 2008 5,372,400
14,410,000 Indah Kiat Financial Mauritius Ltd. company guaranty
10s, 2007 (Indonesia) 11,924,275
12,305,000 PT Pindo Deli Finance Mauritius Ltd. 144A company
guaranty 10 3/4s, 2007 (India) 9,967,050
10,660,000 PT Pabrik Kertas Tjiwi Kimia company guaranty
10s, 2004 8,794,500
11,585,000 Repap New Brunswick sr. notes 10 5/8s,
2005 (Canada) 11,758,775
2,000,000 Repap New Brunswick sr. notes 9 7/8s,
2000 (Canada) 2,055,000
6,640,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 6,889,000
7,570,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 7,626,775
2,800,000 Stone Container Corp. sr. notes 11 7/8s, 2016 3,038,000
--------------
84,205,568
Pharmaceuticals and Biotechnology (0.1%)
- ------------------------------------------------------------------------------------------------------------
4,020,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 4,256,175
3,600,000 PharMerica, Inc. 144A sr. sub. notes 8 3/8s, 2008 3,609,000
--------------
7,865,175
Photography (--%)
- ------------------------------------------------------------------------------------------------------------
1,880,000 Panavision, Inc. 144A sr. disc. notes stepped-coupon
zero % (9 5/8s, 2/1/02), 2006 ++ 1,337,150
Publishing (0.3%)
- ------------------------------------------------------------------------------------------------------------
5,270,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B,
8 3/4s, 2009 5,388,575
2,820,000 Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 2,989,200
1,745,000 Hollinger International Publishing, Inc. company guaranty
8 5/8s, 2005 1,832,250
4,520,000 Perry-Judd 144A sr. sub. notes 10 5/8s, 2007 4,836,400
2,925,000 Von Hoffman Press, Inc. 144A sr. sub. notes
10 3/8s, 2007 3,144,375
--------------
18,190,800
REIT's (Real Estate Investment Trust) (0.1%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 HMH Properties, Inc. company guaranty Ser. B,
8 7/8s, 2007 (Canada) 5,262,500
Railroads (0.2%)
- ------------------------------------------------------------------------------------------------------------
4,420,000 TFM S.A. de C.V. company guaranty 10 1/4s,
2007 (Mexico) 4,596,800
7,900,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero % (11 3/4s, 6/15/02), 2009 (Mexico) ++ 5,322,625
--------------
9,919,425
Real Estate (--%)
- ------------------------------------------------------------------------------------------------------------
1,640,000 Bluegreen Corp. 144A sr. notes 10 1/2s, 2008 1,631,800
Recreation (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,325,000 CLN Holdings, Inc. sr. disc. notes zero %, 2001 1,040,125
2,570,621 Elsinore Corp. 144A exch. 1st mortgage 11 1/2s, 2000 2,570,621
8,000,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 8,030,000
--------------
11,640,746
Restaurants (--%)
- ------------------------------------------------------------------------------------------------------------
2,200,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 2,403,500
Retail (0.3%)
- ------------------------------------------------------------------------------------------------------------
4,000,000 Brylane (L.P.) sr. sub. notes 10s, 2003 4,240,000
1,910,000 Color Spot Nurseries sr. sub. notes 10 1/2s, 2007 1,881,350
4,600,000 K mart Corp. pass-thru certificates Ser. 95K4,
9.35s, 2020 5,094,500
2,900,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 3,146,500
1,680,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 1,713,600
--------------
16,075,950
Satellite Services (1.0%)
- ------------------------------------------------------------------------------------------------------------
11,000,000 Echostar DBS Corp. company guaranty 12 1/2s, 2002 12,430,000
2,018,000 Echostar Satellite Broadcast Corp. sr. disc. notes stepped-
coupon zero % (13 1/8s, 3/15/00), 2004 ++ 1,841,425
3,200,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon
zero % (12 1/2s, 2/01/02), 2007 (Ireland) ++ 2,400,000
9,680,000 Globalstar L.P. Capital sr. notes 11 3/8s, 2004 10,139,800
9,350,000 ICG Services, Inc. 144A sr. disc. notes stepped-coupon
zero % (10s, 2/15/03), 2008 ++ 6,077,500
5,795,000 Iridium LLC/Capital Corp. company guaranty Ser. B,
14s, 2005 6,722,200
800,000 Iridium LLC/Capital Corp. 144A sr. notes
11 1/4s, 2005 848,000
3,500,000 Iridium LLC/Capital Corp. company guaranty
Ser. A, 13s, 2005 3,920,000
2,445,000 Pratama Datakom Asia BV 144A company guaranty
12 3/4s, 2005 (Indonesia) 1,198,050
4,996,000 Satelites Mexicanos S.A. de C.V. 144A company
guaranty FRB 9 3/8s, 2004 (Mexico) 5,002,130
3,375,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes
10 1/8s, 2004 (Mexico) 3,476,250
--------------
54,055,355
Semiconductors (0.3%)
- ------------------------------------------------------------------------------------------------------------
1,806,704 Cirent Semiconductor sr. sub. notes 10.22s, 2002 1,883,489
2,065,392 Cirent Semiconductor 144A sr. sub. notes
10.14s, 2004 2,158,336
3,248,792 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 3,646,770
9,090,000 Fairchild Semiconductor Corp. sr. sub. notes
10 1/8s, 2007 9,453,600
--------------
17,142,195
Shipping (0.3%)
- ------------------------------------------------------------------------------------------------------------
1,530,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 1,503,225
4,760,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 5,319,300
2,430,000 MC Shipping, Inc. 144A sr. notes 11 1/4s, 2008 2,442,150
1,000,000 Pegasus Shipping 144A company guaranty
11 7/8s, 2004 995,000
5,159,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003 5,236,385
--------------
15,496,060
Steel (0.4%)
- ------------------------------------------------------------------------------------------------------------
5,500,000 Ameristeel Corp. 144A sr. notes 8 3/4s, 2008 5,596,250
6,190,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 6,205,475
8,150,000 Ispat Mexicana, S.A. 144A bonds 10 3/8s,
2001 (Mexico) 8,455,625
3,350,000 WHX Corp. 144A sr. notes 10 1/2s, 2005 3,417,000
--------------
23,674,350
Telecommunications (2.8%)
- ------------------------------------------------------------------------------------------------------------
2,800,000 American Communication Services, Inc. sr. notes
13 3/4s, 2007 3,318,000
9,790,000 American Communication Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 7,880,950
2,385,000 Antenna TV S.A. 144A sr. notes 9s 2007 (Greece) 2,408,850
4,590,000 Barak ITC 144A sr. disc. notes stepped-coupon zero %
(12 1/2s, 11/15/02), 2007 (Israel) ++ 2,685,150
1,360,000 Consorcio Ecuatoiano notes 14s, 2002 (Ecuador) 1,428,000
2,420,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 2,649,900
2,825,000 Focal Communications Corp. 144A sr. disc. notes stepped-
coupon zero % (12 1/8s, 2/15/03), 2008 ++ 1,652,625
3,820,000 Frontiervision Holdings LP sr. disc. notes stepped-
coupon zero % (11 7/8s, 9/15/01), 2007 ++ 2,960,500
7,580,000 Frontiervision Operating Partners L.P. sr. sub. notes
11s, 2006 8,451,700
5,395,000 GST Equipment Funding sr. notes 13 1/4s, 2007 6,393,075
5,431,000 GST Telecommunications,Inc. company guaranty stepped-
coupon zero % (13 7/8s, 12/15/00), 2005 ++ 4,507,730
2,990,000 Hyperion Telecommunication Corp. sr. disc. notes stepped-
coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 2,294,825
6,205,000 Hyperion Telecommunications , Inc. sr. notes Ser. B,
12 1/4s, 2004 6,980,625
11,410,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 ++ 9,727,025
2,900,000 Intelcom Group (USA), Inc. company guaranty stepped-
coupon zero % (12 1/2s, 5/1/01), 2006 ++ 2,320,000
10,275,000 Intermedia Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 ++ 7,706,250
4,925,000 Intermedia Communications, Inc. sr. notes Ser. B,
8 1/2s, 2008 5,158,938
8,835,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon
zero % (11 7/8s, 10/15/02), 2007 ++ 5,301,000
3,020,000 L-3 Communications Corp. sr. sub. notes Ser. B,
10 3/8s, 2007 3,344,650
1,550,000 MetroNet Communications Corp. sr. notes 12s, 2007 1,759,250
2,150,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02),
2007 (Canada) ++ 1,429,750
2,720,000 Microcell Telecommunications sr. disc. notes
stepped-coupon Ser. B, zero % (14s, 12/1/01),
2006 (Canada) ++ 2,019,600
19,990,000 NTL, Inc. 144A sr. notes stepped-coupon zero %
(9 3/4s, 4/01/03), 2008 ++ 12,993,500
9,700,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 10,524,500
5,245,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 ++ 3,855,075
8,120,000 Teligent, Inc. sr. notes 11 1/2s, 2007 8,526,000
9,700,000 WinStar Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 8,075,250
3,340,000 WinStar Communications, Inc. 144A sr. sub. notes
11s, 2008 3,423,500
5,360,000 WinStar Communications, Inc. 144A sr. sub. notes
10s, 2008 5,440,400
5,610,000 WinStar Communications, Inc. 144A sr. sub. notes
15s, 2007 7,489,350
2,750,000 WinStar Equipment Corp. company guaranty
12 1/2s, 2004 3,148,750
--------------
155,854,718
Telephone Services (1.7%)
- ------------------------------------------------------------------------------------------------------------
7,850,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 8,222,875
1,220,000 Celcaribe S.A. sr. notes 13 1/2s, 2004 (Columbia) 1,281,000
15,295,000 Colt Telecom Group PLC sr. disc. notes stepped-coupon
zero % (12s, 12/15/01), 2006 (United Kingdom) ++ 12,236,000
9,055,000 Econophone, Inc. company guaranty 13 1/2s, 2007 10,413,250
2,490,000 Econophone, Inc. 144A sr. disc. notes stepped-coupon
zero % (11s, 2/15/03), 2008 ++ 1,469,100
2,690,000 Facilicom International 144A sr. notes 10 1/2s, 2008 2,811,050
1,500,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 1,680,000
2,830,000 IDT Corp. 144A sr. notes 8 3/4s, 2006 2,815,850
6,500,000 Ionica Group PLC sr. disc. notes stepped-coupon
zero % (15s, 5/1/02), 2007 (United Kingdom) ++ 2,762,500
3,343,000 ITC Deltacom, Inc. sr. notes 11s, 2007 3,794,305
3,900,000 McLeod USA, Inc. 144A sr. notes 8 3/8s, 2008 4,036,500
1,390,000 MGC communications, Inc. sr. notes Ser. B, 13s, 2004 1,393,475
4,930,000 NEXTLINK Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (9.45s, 4/15/03), 2008 ++ 3,118,225
9,570,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 ++ 6,387,975
14,525,000 RSL Communications, Ltd. company guaranty
12 1/4s, 2006 16,558,500
4,190,000 RSL Communications, Ltd. 144A sr. disc. notes stepped-
coupon zero % (10 1/8s, 3/1/03), 2008 ++ 2,634,463
2,805,000 RSL Communications, Ltd. 144A sr. notes 9 1/8s, 2008 2,833,050
5,475,000 Sprint Spectrum L.P. sr. notes 11s, 2006 6,323,625
1,800,000 Transtel S.A. 144A pass through certificates
12 1/2s, 2007 (Colombia) 1,723,500
3,115,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(15s, 1/15/00), 2005 ++ 2,928,100
--------------
95,423,343
Textiles (0.4%)
- ------------------------------------------------------------------------------------------------------------
2,200,000 Galey & Lord bank Term loan B 8.44s, 2005 2,205,500
2,000,000 Galey & Lord bank Term loan C 8.69s, 2006 2,005,000
3,390,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 3,500,175
2,560,000 Polymer Group, Inc. 144A sr. sub. notes 8 3/4s, 2008 2,604,800
4,470,000 Polysindo International Eka company guaranty 13s,
2001 (Indonesia) 3,263,100
7,125,000 Polysindo International Finance company guaranty
11 3/8s, 2006 (Indonesia) 4,845,000
3,000,000 PT Polysindo Eka Perkasa notes zero %,
1998 (Indonesia) 2,160,000
2,090,000 Worldtex, Inc. 144A sr. notes 9 5/8s, 2007 2,121,350
--------------
22,704,925
Transportation (0.4%)
- ------------------------------------------------------------------------------------------------------------
1,820,000 Coach USA, Inc. 144A company guaranty 9 3/8s, 2007 1,901,900
6,775,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s,
2003 (Greece) 7,000,269
2,790,000 Hermes Europe Railtel B.V. sr. notes 11 1/2s, 2007 3,159,675
5,320,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 5,586,000
2,720,000 Trico Marine Services, Inc. company guaranty Ser. D,
8 1/2s, 2005 2,737,000
--------------
20,384,844
Wireless Communications (--%)
- ------------------------------------------------------------------------------------------------------------
2,085,000 Telesystem International Wireless, Inc. sr. disc. notes
stepped-coupon Ser. C, zero % (10 1/2s, 11/1/02),
2007 ++ 1,323,975
--------------
Total Corporate Bonds and Notes
(cost $2,010,858,853) 2,011,885,989
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (30.2%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (15.1%)
- ------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
$12,088,596 7.143s, July 1, 2027 $12,269,926
19,399,973 7s, July 1, 2012 19,761,591
Federal National Mortgage Association
6,186,936 7.837s, May 1, 2025 6,449,881
46,335,563 6 1/2s, with due dates from January 1, 2026 to
December 1, 2026 45,814,314
Government National Mortgage Association
10,335,000 7 1/2s, TBA, April 15, 2028 10,596,579
43,765,000 7s, TBA, April 15, 2028 44,202,650
8,955,000 5 1/2s, TBA, April 15, 2028 9,002,551
Government National Mortgage Association
Pass-Through Certificates
862,195 8 1/2s, August 15, 2025 909,340
84,265,171 8s, with due dates from May 15, 2024 to
March 15, 2028 87,315,850
371,770,744 7 1/2s, with due dates from December 15, 2022 to
December 15, 2027 381,606,651
178,817,804 7s, with due dates from July 20, 2024 to
February 15, 2028 180,863,849
19,859,407 6 1/2s, with due dates from August 15, 2027 to
February 15, 2028 19,654,465
11,966,649 6s, July 20, 2024 12,288,253
691,903 5 1/2s, November 20, 2027 696,877
--------------
831,432,777
U.S. Treasury Obligations (15.2%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
27,125,000 8 1/8s, August 15, 2019 # 33,935,816
73,115,000 6 1/2s, November 15, 2026 # 78,027,597
68,080,000 6 1/8s, November 15, 2027 69,813,998
U.S. Treasury Notes
28,945,000 7s, July 15, 2006 31,283,177
62,105,000 6 7/8s, May 15, 2006 66,588,360
178,525,000 6 5/8s, June 30, 2001 183,573,687
102,712,000 6 1/2s, October 15, 2006 107,782,891
15,655,000 6 1/4s, August 31, 2002 15,997,375
35,575,000 6s, July 31, 2002 36,013,996
181,145,000 5 3/4s, November 30, 2002 # 181,683,001
9,495,000 5 5/8s, December 31, 2002 9,478,669
21,060,000 5 1/2s, February 28, 2003 20,934,904
--------------
835,113,471
--------------
Total U.S. Government and Agency Obligations
(cost $1,642,447,142) $1,666,546,248
FOREIGN GOVERNMENT BONDS AND NOTES (11.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
AUD 161,635,000 Australia (Government of) bonds Ser. 808
8 3/4s, 2008 $131,331,573
DEM 172,035,000 Germany (Federal Republic of) Unity Fund
bonds 8s, 2002 104,571,206
DKK 1,068,000 Denmark (Government of) bonds 6s, 2026 150,020
USD 23,360,000 Russia (Government of) deb. principal loans
zero %, 2020 +++ 14,862,800
ZAR 562,217,000 South Africa (Republic of) bonds Ser. 153,
13s, 2010 110,365,873
GBP 130,398,000 United Kingdom Treasury bonds 8s, 2007 239,466,669
GBP 16,925,000 United Kingdom Treasury bonds 8s, 2021 36,143,981
--------------
Total Foreign Government Bonds and Notes
(cost $627,624,536) $636,892,122
COLLATERALIZED MORTGAGE OBLIGATIONS (6.1%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$2,280,997 Citicorp Mortgage Securities, Inc. Ser. 92-14,
Class M, 7 1/2s, 2022 $2,286,700
16,405,000 Countrywide Mortgage Backed Securities, Inc.
Sec. 93-C, Class A8, 6 1/2s, 2024 15,847,394
10,700,000 Commercial Mortgage Acceptance Corp. Ser. 97-ML1,
Class D, 7.11s, December 15, 2030 10,740,125
217,925,000 Deutsche Mortgage & Asset Receiving Corp.
Ser. 98-C1, Class X, 1.254s, June 15, 2031 15,276,543
Fannie Mae Strip
18,540,311 Ser. 284, Class 2, 7 1/2s, 2027 4,414,912
17,943,811 Ser. 294, Class 2, 7s, 2028 5,057,912
68,701,553 Ser. 294, Class 1, zero%, 2028 50,280,950
20,885,000 Federal Home Loan Mortgage Corp. Ser. 25,
Class B, 6 1/2s, 2008 20,956,792
First Union-Lehman Brothers Commercial Mortgage
11,845,000 Ser. 97-C2, Class A2, 6.6s, 2007 12,011,570
23,350,000 Ser. 97-C2, Class A3, 6.65s, 2007 23,729,438
16,405,000 Ser. 97-C2, Class D, 7.12s, 2012 16,420,380
Freddie Mac
6,475,000 Ser. 2040, Class PE, 7 1/2s, 2028 6,958,602
6,345,872 Ser, 1717, Class L, 6 1/2s, 2024 6,297,643
7,446,000 Ser. 1602, Class PJ, 6 1/2s, 2023 7,513,479
6,134,000 Ser. 1832 Class G, 6 1/2s, 2011 6,089,912
Freddie Mac Strip
66,121,813 Ser. 192 Interest Only 6 1/2s, 2028 20,642,404
20,529,433 Ser. 191, Principal Only zero%, 2028 16,866,213
132,419 Hosing Securities, Inc. Ser. 94-1, Class A9, 2009 132,438
Merrill Lynch Mortgage Investors, Inc.
4,196,000 Ser. 98-C2, Class D, 6.96s, 2030 4,203,212
237,073,000 Ser. 98-C2, Class IO, 1.5868s, 2030 21,562,690
PNC Mortgage Securities Corp.
29,982,788 Ser. 97-4, Class 2PP3, 7 1/4s, 2027 30,372,565
21,188,478 Ser. 97-6, Class A2, 6.6s, 2027 21,248,071
6,590,000 Prudential Home Mortgage Securities Ser. 93-57,
Class A4, 5.9s, 2023 6,532,667
10,796,727 Rural Housing Trust Ser. 87-1, Class D, 6.33s,
April 1, 2026 10,802,017
--------------
Total Collateralized Mortgage Obligations
(cost $283,474,003) $336,244,629
BRADY BONDS (5.8%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$96,014,000 Argentina (Republic of) Ser. L-GP, stepped-coupon
5 3/4s (6s, 3/1/99), 2023 $73,575,528
62,149,871 Brazil (Government of) stepped-coupon
4 1/2s (5s, 4/30/98), 2014 ++ 52,286,686
34,170,000 Ivory Coast - FLIRB collateralized FRB 2s 2018 ## 2,042,802
34,170,000 Ivory Coast - Past due interest due bond FRB bonds
1.9s 2018 ## 2,318,856
56,215,000 Peru (Government of) 144A Ser. PDI 4s 2017 38,580,355
34,294,000 Philippines (Government of) Ser. B, 6 1/2s, 2017 30,178,720
16,365,000 Poland (Government of) bonds Ser. PDI, stepped-
coupon 4s (5s, 10/1/98), 2014 ++ 14,667,950
126,270,000 United Mexican States sec. Ser. B, 6 1/4s, 2019 107,177,976
--------------
Total Brady Bonds (cost $321,167,544) $320,828,873
PREFERRED STOCKS (3.2%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
1,527 American Communications Services $12.75 pfd. [2 DBL. DAGGERS] $1,775,138
82,079 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] 2,216,133
978 Anvil Holdings Ser. B, $3.25 pfd. [2 DBL. DAGGERS] 24,450
132,400 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 3,607,900
21,293 Capstar Broadcasting Inc. 144A $12.00 pfd. 2,501,928
130,000 CGA Group Ltd. 144A Ser. A, $13.75 pfd. [2 DBL. DAGGERS] 3,510,000
51,000 Chancellor Media Corp. $12.00 pfd. [2 DBL. DAGGERS] 6,222,000
99,570 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 5,078,070
42,173 Citadel Broadcasting, Inc. 144A $13.25 cum. pfd. [2 DBL. DAGGERS] 5,166,193
111,880 CSC Holdings Inc. Ser. M, $11.125 cum. [2 DBL. DAGGERS] 12,810,260
109,800 Diva Systems Corp. Ser. C, $6.00 pfd. 1,427,400
1,425 Echostar Communications, Inc. $12.125 pfd. 1,588,875
31,193 El Paso Electric Co. $11.40 pfd [2 DBL. DAGGERS] 3,466,322
2,000,000 Fresenius Medical care AG Ser. D, $9.00 pfd.
(Germany) 2,090,000
11,950 Grand Union Holdings 144A Ser. C, $12.00 pfd.
(acquired 11/5/93, cost $5,775 In Default) [DBL. DAGGERS]+ 120
10,254 Granite Broadcasting 144A $12.75 pfd. [2 DBL. DAGGERS] 11,638,290
2,141 Hyperion Telecommunications Ser. B, $12.875 pfd. [2 DBL. DAGGERS] 2,451,445
7,980 ICG Holdings, Inc. $14.00 pfd. [2 DBL. DAGGERS] 9,815,400
7,940 ICG Holdings, Inc. $14.25 pfd. (Canada) 9,607,400
9,939 Intermedia Communication Ser. B, 13.50% pfd. 12,175,275
5,841 IXC Communications, Inc. $12.50 pfd. [2 DBL. DAGGERS] 7,126,020
35,300 Nebco Evans Holding Co. 144A $11.25 pfd. [2 DBL. DAGGERS] 3,671,200
5,420 NEXTEL Communications, Inc. 144A Ser. E,
$11.125 pfd. [2 DBL. DAGGERS] 5,758,750
17,020 NEXTEL Communications, Inc. Ser. D, $13.00
cum. pfd. [2 DBL. DAGGERS] 19,743,200
166,363 Nextlink Communications, Inc. 144A $7.00 pfd. 10,480,869
2,393 NTL Inc. 144A Ser. B, $13.00 pfd. [2 DBL. DAGGERS] 2,877,583
5,000 Pantry Pride Inc. Ser. B, $14.875 pfd. 505,000
47,994 Public Service Co. of New Hampshire $2.65
1st mtge. pfd. 1,247,844
53,241 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 6,309,059
16,500 Sinclair Capital $11.625 cum. pfd. 1,831,500
8,709 Spanish Broadcasting Systems $14.25 cum. pfd. 9,144,450
32,000 Von Hoffman Corp. 144A $13.50 pfd. 1,080,000
6,080 Winstar Communications. Inc. 144A $14.25
cum. pfd. [2 DBL. DAGGERS] 7,417,600
--------------
Total Preferred Stocks (cost $158,986,766) $174,365,674
UNITS (1.5%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
8,235 Allegiance Telecom Inc. units stepped-coupon zero %
(11 3/4s, 2/15/03), 2008 4,776,300
1,025 American Mobile Satellite Corp. units 12 1/4s, 2008 1,063,438
2,960 Australis Media, Ltd. units stepped-coupon zero %
(15 3/4s, 5/15/03), 2003 (Australia) in default ++ + 592,000
877 Celcaribe S.A. 144A units 13 1/2s, 2004 (Columbia) 17,627,700
4,390 Club Regina, Inc. 144A units 13s, 2004 4,719,250
1,345 Concentric Network Corp. units 12 3/4s, 2007 1,580,375
3,815 Conecel Holdings 144A units 14s, 2000 4,139,275
12,218 Diva Systems Corp. 144A units stepped-coupon zero %
(12 5/8s, 3/1/03), 2008 ++ 6,719,900
11,480 DTI Holdings, Inc. units stepped-coupon zero %
(12 1/2s, 3/1/03), 2008 ++ 6,687,100
172,935 Fitzgeralds Gaming Co. Units 15s, 2005 5,188,050
9,460 KMC Telecom Holdings, Inc. units stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 ++ 5,628,700
4,250 Orbital Imaging Corp. units 11 5/8s, 2005 4,643,125
3,980 Signature Brands USA, Inc. units 13s, 2002 4,497,400
2,635 Stone Container Corp. units sr. sub. 12 1/4s, 2002 2,707,463
5,260 Transamerican Refining 144A units 16s, 2003 5,575,600
6,355 Wireless One, Inc. units stepped-coupon zero %
(13 1/2s, 8/1/01), 2006 ++ 762,600
3,945 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 5,128,500
24,177 XCL Ltd. 144A units cum. cv. pfd. 9 1/2s, 2006 [2 DBL. DAGGERS] 3,143,010
--------------
Total Units (cost $65,699,170) $85,179,786
ASSET-BACKED SECURITIES (1.1%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$12,195,000 Chemical Master Credit Card Trust Ser. 95-2, Class A,
6.23s, 2003 $12,267,316
18,752,178 GMAC Commercial Mortgage Securities Inc. Ser. 97-C2,
Class A1, 6.45s, December 15, 2004 18,904,540
20,705,000 Green Tree Financial Corp. Ser. 98-2, Class A5,
6.24s, 2016 20,650,002
7,637,237 Green Tree Recreational Equipment & Cons Ser. 97-B,
Class A1, 6.55s, 2028 7,694,517
--------------
Total Asset-Backed Securities (cost $59,775,249) 59,516,375
COMMON STOCKS (1.0%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
145,780 American Mobile Satellite Corp. + $2,077,365
1,750 AmeriKing, Inc. + 87,500
198,372 Celcaribe S.A. 144A + 1,339,011
172,600 CellNet Data Systems, Inc. + 1,898,600
120,810 Chattem, Inc. + 3,050,453
252,474 Chesapeake Energy Corp. + 1,483,285
52,587 Crompton & Knowles Corp. 1,521,736
45,000 Exide Corp. 762,188
3,026 Finlay Enterprises, Inc. 76,974
32,500 French Fragrances, Inc. + 552,500
539,505 Grand Union Co. [SECTION MARK]+ 219,174
40,029 Hedstrom Holdings, Inc. 144A 55,040
7,541 IFINT Diversified Holdings 144A + 52,787
49,679 Lady Luck Gaming Corp. + 71,414
392,400 NEXTEL Communications, Inc. Class A + 13,243,500
900 Paging Do Brazil Holdings Co., LLC Class B 9
1,184 PMI Holdings Corp. 144A + 592,000
1,942 Premium Holdings (L.P.) 144A + 7,768
979,968 PSF Holdings LLC Class A (acquired various dates
from 8/31/94 to 3/16/95, cost $34,291,491)[DBL. DAGGERS][SECTION MARK] + 29,399,040
66,840 Terex Corp. Rights expiration date 5/15/02 + 1,336,800
--------------
Total Common Stocks (cost $75,571,154) $57,827,144
CONVERTIBLE BONDS AND NOTES (0.7%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$5,045,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) $5,208,963
4,200,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 3,748,500
2,782,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-
coupon zero % (13 7/8s, 12/15/00), 2005 ++ 4,367,740
2,310,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 2,073,225
1,500,000 National Semiconductor Corp. 144A cv. deb.
6 1/2s, 2002 1,445,625
9,500,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-
coupon zero % (10 3/4s, 8/15/00), 2004 ++ 10,497,500
7,835,000 Winstar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 10,949,413
--------------
Total Convertible Bonds and Notes
(cost $23,269,402) $38,290,966
WARRANTS (0.3%) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ------------------------------------------------------------------------------------------------------------
70 America Communication Services, Inc. 144A 11/1/05 $12,250
185,000 Becker Gaming Corp. 144A 11/15/00 1,850
44,363 Capital Gaming International, Inc. 2/1/99 1,775
28,657 Cellnet Data Systems, Inc. 9/15/07 573,140
130,000 CGA Group Ltd. 144A 1/1/04 1,300
12,400 Comunicacion Cellular 144A (Colombia) 11/15/20 806,000
15,295 Colt Telecommunications Group PLC 12/31/06 2,064,825
9,350 County Seat Holdings, Inc. 10/15/98 187
4,650 Diva Systems Corp. 5/15/06 1,220,625
10,155 Econophone, Inc. 144A 2/15/08 507,750
3,200 Esat Holdings, Inc. (Ireland) 2/1/07 112,000
6,850 Fitzgerald Gaming Co. 144A 3/15/99 685
4,885 Foamex (L.P.) Capital Corp. 144A 7/1/99 29,310
5,350 Globalstar Telecom 144A 2/15/04 722,250
4,705 Grand Union Co. 6/16/00 47
2,352 Grand Union Co. 6/16/00 24
6,240 Heartland Wireless Communications, Inc. 144A 4/15/00 62
11,465 Hyperion Telecommunications 144A 4/15/01 802,550
65,538 Intelcom Group 144A 9/15/05 2,162,754
6,030 Interact Systems, Inc. 8/1/03 1,508
8,050 Intermedia Communications 6/16/00 1,296,050
2,780 International Wireless Communications
Holdings 144A 8/15/01 63,940
6,500 Iridium World Com 144A 7/15/05 1,592,500
8,835 Knology Holdings, Inc. 144A 10/15/07 4,418
8,025 Louisiana Casino Cruises, Inc. 144A 12/1/98 401,250
14,715 McCaw International Ltd. 4/15/07 4,415
1,550 Metronet Communications 144A 8/15/07 6,975
1,390 MGC communications, Inc. 144A 10/1/04 48,650
10,030 NEXTEL Communications Inc. 12/15/98 4,213
21,500 NEXTEL Communications Inc. 4/25/99 62,135
8,485 Orion Network Systems 1/15/07 84,850
13,800 Pagemart, Inc. 144A 12/31/03 103,500
17,500 Petracom Holdings, Inc. 9/30/99 140,000
28,800 Powertel, Inc. 2/1/06 216,000
37,527 President Riverboat Casinos, Inc. 9/30/99 18,764
7,800 RSL Communications Ltd. 11/15/06 756,600
3,450 Spanish Broadcasting Systems 144A 6/30/99 707,250
2,160 Sterling Chemicals Holdings 8/15/08 56,160
14,235 UIH Australia/Pacific, Inc. 144A 5/15/06 170,820
2,105 Urohealth Systems Inc. 4/10/04 21
6,375 Wireless One, Inc. 10/19/00 64
1,001 Wright Medical Technology, Inc. 144A 6/30/03 100,058
--------------
Total Warrants (cost $7,482,809) $14,859,525
SHORT-TERM INVESTMENTS (3.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$25,000,000 Delaware Funding Corp. effective yield of 5.57%,
April 29, 1998 $24,880,090
25,000,000 Morgan (J.P.) & Co., Inc. effective yield of 5.46%,
April 20, 1998 24,927,958
50,000,000 Merrill Lynch & Co., Inc. effective yield of 5.51%,
May 20, 1998 49,602,055
25,855,000 Sheffield Receivables Corp. effective yield of 5.55%,
April 20, 1998 25,779,267
TRL 473,401,000,000 Turkey Treasury bills zero %, July 29, 1998 14,121,959
TRL 418,886,000,000 Turkey Treasury bills zero %, June 17, 1998 14,550,466
TRL 375,941,000,000 Turkey Treasury bills zero %, June 4, 1998 13,080,266
$33,667,000 Interest in $321,730,000 joint repurchase
agreement dated March 31, 1998, with
Morgan (J.P.) & Co., Inc. due April 1, 1998,
with respect to various U.S. Treasury
obligations--maturity value of $33,672,518
for an effective yield of 5.90%. 33,672,518
--------------
Total Short-Term Investments (cost $200,171,308) $200,614,579
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $5,476,527,936) *** $5,603,051,910
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $5,511,307,163.
*** The aggregate identified cost on a tax basis is
$5,491,808,131 resulting in gross unrealized appreciation and depreciation of
$114,659,519 and $3,415,740, respectively, or net unrealized
appreciation of $111,243,779.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically represent the
new interest rate to be paid and the date the fund will begin receiving
interest 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 March 31, 1998 was
$29,399,040 or less than 1.0% of net assets.
[2 DBL. DAGGERS] Income may be received in cash or additional securities at the
discretion of the issuer.
# A portion of these securities were pledged and segregated with
the custodian to cover margin requirements for futures contracts at
March 31, 1998.
## When-issued securities (Note 1).
[SECTION MARK] Affiliated Companies (Note 5)
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).
FLIRB represents Front Loaded Interest Reduction bond.
The rate shown on Floating Rate Bonds (FRB) and Floating Rate
Notes (FRN) are the current interest rates shown at March 31, 1998
which are subject to change based on the terms of the security.
Diversification by Country
Distribution of investments by country of issue at March 31, 1998:
(as percentage of Market Value)
Argentina 1.4%
Australia 2.6
Brazil 1.1
Canada 1.1
Germany 2.0
Mexico 3.6
South Africa 2.0
United Kingdom 6.1
United States 78.0
Others 2.1
----
Total 100.0%
=====
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at March 31, 1998 (Unaudited)
(aggregate face value $1,045,600,410)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Danish Krone $24,291,475 $25,023,423 6/17/98 $(731,948)
Deutschemarks 289,247,059 295,295,780 6/17/98 (6,048,721)
French Franc 7,455,018 7,596,653 6/17/98 (141,635)
Italian Lira 169,803,453 172,747,101 6/17/98 (2,943,648)
Japanese Yen 309,957,065 323,752,262 6/17/98 (13,795,197)
Mexican Peso 6,977,384 6,650,748 5/11/98 326,636
Mexican Peso 8,661,353 8,313,430 5/12/98 347,923
Netherland 10,425,676 10,640,174 6/17/98 (214,498)
Philippines Peso 11,699,939 11,836,575 4/27/98 (136,636)
South Korean Won 24,101,346 21,827,381 3/11/99 2,273,965
Spanish Peseta 41,740,640 42,572,569 6/17/98 (831,929)
Swedish Krona 65,918,713 65,787,848 6/17/98 130,865
Swiss Franc 51,357,030 53,556,466 6/17/98 (2,199,436)
- --------------------------------------------------------------------------------------------
$(23,964,259)
- --------------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at March 31, 1998 (Unaudited)
(aggregate face value $1,140,384,290)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------------
Australian Dollars $132,948,081 $133,735,886 6/17/98 $787,805
British Pounds 269,317,572 264,822,593 6/17/98 (4,494,979)
Deutschemarks 374,361,254 381,262,177 6/17/98 6,900,923
French Franc 4,561,151 4,611,128 6/17/98 49,977
Italian Lira 95,635,052 97,303,131 6/17/98 1,668,079
Japanese Yen 152,418,077 158,512,416 6/17/98 6,094,339
New Zealand Dollar 10,532,758 10,999,446 6/17/98 466,688
South African Rand 35,336,612 35,687,410 6/17/98 350,798
Swiss Franc 51,193,327 53,450,103 6/17/98 2,256,776
- --------------------------------------------------------------------------------------------
$14,080,406
- --------------------------------------------------------------------------------------------
Forward Contracts Outstanding at March 31, 1998 (Unaudited)
Unrealized
Market Aggregate Face Expiration Appreciation/
Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------------
Euro Dm (Long) $101,199,743 $101,199,095 Mar-99 $(89,352)
Euro Lira (Short) 102,610,612 102,627,853 Mar-99 17,241
U.S. Treasury Bond 10yr.
(Short) 175,192,625 175,327,763 Jun-98 135,138
U.S. Treasury Bond 20yr.
(Long) 248,196,000 248,328,719 Jun-98 (132,719)
- --------------------------------------------------------------------------------------------
$(69,692)
- --------------------------------------------------------------------------------------------
TBA Sales Commitments at March 31, 1998 (Unaudited)
(Proceeds receivable $18,338,763)
Unrealized
Principal Expiration Appreciation/
Amount Date (Depreciation)
- --------------------------------------------------------------------------------------------
GNMA, 7s, April 2039 $3,235,830 4/20/98 $3,242,100
GNMA, 8s, Arpil 2039 15,102,933 4/20/98 15,093,784
- --------------------------------------------------------------------------------------------
$18,335,884
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31, 1998 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $5,476,527,936) (Note 1) $5,603,051,910
- ---------------------------------------------------------------------------------------------------
Cash 22,426,975
- ---------------------------------------------------------------------------------------------------
Foreign currency (cost $1,328,680) 1,330,044
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 79,661,931
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 34,016,828
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 126,017,442
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 19,380,384
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 4,530,321
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 427,670
- ---------------------------------------------------------------------------------------------------
Total assets 5,890,843,505
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 278,603,252
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 7,708,947
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 7,039,534
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 789,092
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 70,190
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 8,840
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 4,394,358
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 32,864,863
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 29,264,234
- ---------------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $18,338,763) 18,335,884
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 457,148
- ---------------------------------------------------------------------------------------------------
Total liabilities 379,536,342
- ---------------------------------------------------------------------------------------------------
Net assets $5,511,307,163
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $5,362,594,229
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (20,321,313)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 52,401,275
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 116,632,972
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $5,511,307,163
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($2,101,995,970 divided by 165,647,080 shares) $12.69
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $12.69)* $13.32
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($2,374,947,502 divided by 187,991,400 shares)** $12.63
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,011,288,503 divided by 79,961,105 shares) $12.65
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $12.65)* $13.07
- ---------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per class Y share
($23,075,188 divided by 1,818,851 shares) $12.69
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the
offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended March 31, 1998 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest $230,184,135
- --------------------------------------------------------------------------------------------------
Dividends 766,522
- --------------------------------------------------------------------------------------------------
Total investment income 230,950,657
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 13,886,989
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 4,477,995
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 45,096
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 17,528
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,612,547
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 11,713,521
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,886,246
- --------------------------------------------------------------------------------------------------
Registration fees 154,240
- --------------------------------------------------------------------------------------------------
Legal 80,157
- --------------------------------------------------------------------------------------------------
Postage 190,264
- --------------------------------------------------------------------------------------------------
Other 257,889
- --------------------------------------------------------------------------------------------------
Total expenses 35,322,472
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (639,711)
- --------------------------------------------------------------------------------------------------
Net expenses 34,682,761
- --------------------------------------------------------------------------------------------------
Net investment income 196,267,896
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 57,916,324
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 15,450,403
- --------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 1,015,376
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (69,372,930)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the period 4,369,760
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures, written options, and
TBA sale commitments during the period (41,423,364)
- --------------------------------------------------------------------------------------------------
Net loss on investments (32,044,431)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $164,223,465
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
March 31 September 30
1998* 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $196,267,896 $297,161,877
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 5,009,173 29,558,499
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies (37,053,604) 117,233,998
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 164,223,465 443,954,374
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (70,572,717) (138,128,131)
- ----------------------------------------------------------------------------------------------------------------------
Class B (70,686,270) (141,702,029)
- ----------------------------------------------------------------------------------------------------------------------
Class M (24,417,747) (9,536,880)
- ----------------------------------------------------------------------------------------------------------------------
Class Y (703,373) (768,670)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 508,968,248 820,638,498
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 506,811,606 974,457,162
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 5,004,495,557 4,030,038,395
- ----------------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of
net investment income of $20,321,313 and
$50,209,102, respectively) $5,511,307,163 $5,004,495,557
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share March 31
operating performance (Unaudited) Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.70 $12.29 $11.99 $11.64 $12.82 $12.66
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .48 (c) .89 (c) .89 .95 .78 .96
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.06) .39 .30 .36 (.88) .56
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .42 1.28 1.19 1.31 (.10) 1.52
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.43) (.87) (.89) (.80) (.71) (.94)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (.12) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.42)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (.16) (.17) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.43) (.87) (.89) (.96) (1.08) (1.36)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.69 $12.70 $12.29 $11.99 $11.64 $12.82
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.35 * 10.86 10.35 11.89 (.93) 12.85
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,101,996 $2,104,971 $1,845,901 $1,597,034 $1,539,076 $874,937
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .48 * .99 1.02 1.01 1.01 1.21
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.81 * 7.17 7.32 8.22 7.96 6.80
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 113.65 * 250.93 304.39 235.88 201.53 243.73
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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 periods ended September 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number of
shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share March 31 March 1, 1993+
operating performance (Unaudited) Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.65 $12.24 $11.95 $11.61 $12.79 $12.51
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .43 (c) .79 (c) .80 .88 .72 .49
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.07) .40 .29 .33 (.91) .39
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .36 1.19 1.09 1.21 (.19) .88
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.38) (.78) (.80) (.72) (.65) (.46)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (.10) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.14)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (.15) (.16) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.38) (.78) (.80) (.87) (.99) (.60)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.63 $12.65 $12.24 $11.95 $11.61 $12.79
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.90 * 10.08 9.47 11.01 (1.62) 7.21 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,374,948 $2,366,410 $2,135,148 $1,795,456 $1,644,860 $504,417
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .86 * 1.74 1.77 1.76 1.76 1.91 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.43 * 6.42 6.57 7.46 8.05 5.80 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 113.65 * 250.93 304.39 235.88 201.53 243.73
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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 periods ended September 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number of
shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share March 31 Dec. 1, 1994+
operating performance (Unaudited) Year ended September 30 to Sep. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $12.67 $12.27 $11.97 $11.34
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .46 (c) .82 (c) .86 .78
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.07) .43 .31 .63
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .39 1.25 1.17 1.41
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.41) (.85) (.87) (.65)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.41) (.85) (.87) (.78)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.65 $12.67 $12.27 $11.97
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.18 * 10.59 10.12 12.90 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,011,289 $513,351 $46,327 $14,751
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .61 * 1.24 1.28 1.07 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.70 * 6.88 7.09 6.30 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 113.65 * 250.93 304.39 235.88
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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 periods ended September 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number of
shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS Y
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share March 31 Year ended July 1, 1996+
operating performance (Unaudited) Sept. 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $12.70 $12.29 $12.07
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .49 (c) .93 (c) .24
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.06) .38 .20
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .43 1.31 .44
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.44) (.90) (.22)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.44) (.90) (.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.69 $12.70 $12.29
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.49 * 11.14 3.70 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $23,075 $19,763 $2,662
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .36 * .74 .19 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.94 * 7.29 1.95 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 113.65 * 250.93 304.39
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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 periods ended September 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number of
shares outstanding during the period.
</TABLE>
Notes to financial statements
March 31, 1998 (Unaudited)
Note 1
Significant accounting policies
Putnam Diversified Income Trust (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks high current income consistent
with preservation of capital by allocating its investments among the U.S.
government sector, high yield sector and international sector of the
fixed-income securities market.
The fund offers class A, class B, class M and class Y shares. Class A shares
are sold with a maximum front-end sales charge of 4.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge but pay a higher ongoing distribution fee than class A
shares, and may be subject to a contingent deferred sales charge, if those
shares are redeemed within six years of purchase. Class M shares are sold with
a maximum front end sales charge of 3.25% and pay an ongoing distribution fee
that is higher than class A shares but lower than class B shares. Class Y
shares, which are sold at net asset value, are generally subject to the same
expenses as class A shares, class B and class M shares, but do not bear a
distribution fee. Class Y shares are sold to defined contribution plans that
invest at least $250 million in a combination of Putnam Funds and other
accounts managed by affiliates of Putnam Investment Management, Inc. ("Putnam
Management"), the fund's Manager, a wholly-owned subsidiary of Putnam
Investments, Inc.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if
that fund were liquidated. In addition, the Trustees declare separate
dividends on each class of shares.
The following is a summary of significant accounting policies 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. Market quotations are not considered to be readily available
for long term corporate bonds and notes; such investments are stated at fair
market value on the basis of valuations furnished by a pricing service,
approved by the Trustees, or dealers, which determine valuations for normal,
institutional-size trading units of such securities using methods based on
market translations for comparable securities and variable relationships
between securities that are generally recognized by institutional traders.
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 market value
following procedures approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Management.
These balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. 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 stepped-coupon bonds, original issue discount bonds, zero
coupon bonds and payment-in-kind bonds are accreted according to the
yield-to-maturity method. Any premium resulting from the purchase of a stepped
coupon security is amortized on a yield-to-maturity basis.
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 gains and losses are included with the
net realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net 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 current forward currency
exchange rates supplied by a quotation service. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract
is "marked to market" daily and the change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The fund could be exposed to risk if the value of the currency changes
unfavorably, if the counterparties to the contracts are unable to meet the
terms of their contracts or if the fund is unable to enter into a closing
position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform. When
the contract closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a future
date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount
of the commitments will not fluctuate more than 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 the fund as an unrealized gain or loss.
If the TBA sale commitment is closed through the acquisition of an offsetting
purchase commitment, the fund realizes a gain or loss. If the fund delivers
securities under the commitment, the fund realizes a gain or a loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
J) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the six months ended March 31, 1998, the
fund had no borrowings against the line of credit.
K) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
L) Distributions to shareholders Distributions to shareholders 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: 0.70% of the first $500 million of
average net assets, 0.60% of the next $500 million, 0.55% of the next $500
million, 0.50% the next $5 billion, 0.475% of the next $5 billion, 0.455% of
the next $5 billion, 0.44% of the next $5 billion and 0.43% thereafter.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a 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 March 31, 1998, fund expenses were reduced by
$639,711 under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these credits.
The fund could have invested a portion of the assets utilized in connection
with the expense offset arrangements in an income producing asset if it had
not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $3,500 has
been allocated to the fund, and an additional fee for each Trustee's meeting
attended. Trustees who are not interested persons of Putnam Management and who
serve on committees of the Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing shares
of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00%, and 1.00% of the average net
assets attributable to class A, class B, and class M shares, respectively. The
Trustees currently limit payment by the fund to an annual rate of 0.25%,
1.00%, and 0.50% of the average net assets attributable to class A, class B,
and class M shares respectively.
For the six months ended March 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $340,051 and $1,338,192 from the sale
of class A and class M shares, respectively and received $2,128,487 in
contingent deferred sales charges from redemptions of class B and M shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of class
A shares. For the six months ended March 31, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received $35,480 on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended March 31, 1998, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $3,603,371,183 and $3,158,779,414, respectively. Purchases and
sales of U.S. government obligations aggregated $2,605,926,638 and
$2,588,437,476, respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the identified
cost basis.
Written option transactions during the period are summarized as follows:
Contract Premiums
Amounts Received
- ------------------------------------------------------------
Written options
outstanding at
beginning of period $42,695,000 $531,553
- ------------------------------------------------------------
Options opened 195,095,000 665,081
- ------------------------------------------------------------
Options expired -- --
- ------------------------------------------------------------
Options closed (237,790,000) (1,196,634)
- ------------------------------------------------------------
Written options
outstanding at
end of period $-- $--
- ------------------------------------------------------------
Note 4
Capital shares
At March 31, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
March 31, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 18,945,862 $239,175,912
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,854,583 48,514,152
- ------------------------------------------------------------
22,800,445 287,690,064
Shares
repurchased (22,914,308) (289,044,834)
- ------------------------------------------------------------
Net decrease (113,863) $(1,354,770)
- ------------------------------------------------------------
Year ended
September 30, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 50,428,499 $623,873,227
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,448,328 91,808,396
- ------------------------------------------------------------
57,876,827 715,681,623
Shares
repurchased (42,338,783) (523,016,705)
- ------------------------------------------------------------
Net increase 15,538,044 $192,664,918
- ------------------------------------------------------------
Six months ended
March 31, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 19,384,230 $243,775,583
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,695,063 46,334,692
- ------------------------------------------------------------
23,079,293 290,110,275
Shares
repurchased (22,212,390) (279,324,309)
- ------------------------------------------------------------
Net increase 866,903 $10,785,966
- ------------------------------------------------------------
Year ended
September 30, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 48,992,431 $603,519,098
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,385,800 90,713,708
- ------------------------------------------------------------
56,378,231 694,232,806
Shares
repurchased (43,686,864) (538,188,308)
- ------------------------------------------------------------
Net increase 12,691,367 $156,044,498
- ------------------------------------------------------------
Six months ended
March 31, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 43,094,891 $542,258,967
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 168,049 2,109,515
- ------------------------------------------------------------
43,262,940 544,368,482
Shares
repurchased (3,829,485) (48,118,643)
- ------------------------------------------------------------
Net increase 39,433,455 $496,249,839
- ------------------------------------------------------------
Year ended
September 30, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 38,634,020 $478,951,730
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 292,797 3,355,307
- ------------------------------------------------------------
38,906,817 482,307,037
Shares
repurchased (2,156,006) (26,629,199)
- ------------------------------------------------------------
Net increase 36,750,811 $455,677,838
- ------------------------------------------------------------
Six months ended
March 31, 1998
- ------------------------------------------------------------
Class Y Shares Amount
- ------------------------------------------------------------
Shares sold 726,502 $9,134,271
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 55,795 703,373
- ------------------------------------------------------------
782,297 9,837,644
Shares
repurchased (519,561) (6,550,431)
- ------------------------------------------------------------
Net increase 262,736 $3,287,213
- ------------------------------------------------------------
Year ended
September 30, 1997
- ------------------------------------------------------------
Class Y Shares Amount
- ------------------------------------------------------------
Shares sold 1,357,348 $16,476,493
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 62,495 768,670
- ------------------------------------------------------------
1,419,843 17,245,163
Shares
repurchased (80,288) (993,919)
- ------------------------------------------------------------
Net increase 1,339,555 $16,251,244
- ------------------------------------------------------------
Note 5
Transactions with Affiliated Issuers
Transactions during the year with companies in which the fund owns at least 5%
of the voting securities were as follows:
Purchase Sales Dividend Market
Affiliates cost cost Income Value
- -----------------------------------------------------------------------------
Name of affiliate
- -----------------------------------------------------------------------------
Grand Union Co. $-- $-- $-- $219,174
PSF Holdings LLC CL A -- -- -- 29,399,040
- -----------------------------------------------------------------------------
Totals $-- $-- $-- $29,618,214
- -----------------------------------------------------------------------------
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
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
William J. Curtin
Vice President
David Waldman
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
Robert M. Paine
Vice President and Fund Manager
Michael Martino
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
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Diversified
Income Trust. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund, and the most recent
copy of Putnam's Quarterly Performance Summary. For more information or to
request a prospectus, call toll free: 1-800-225-1581. You can also learn more
at Putnam Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution; are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency;
and involve risk, including the possible loss of the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
SA028 42041 075/387/803/2BC 5/98
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ----------------------------------------------------------------------------
Putnam Diversified Income Trust
Supplement to Semiannual Report dated 3/31/98
The following information has been prepared to provide class Y shareholders
with a performance overview specific to their holdings. Class Y shares are
offered exclusively to defined contribution plans investing $250 million or
more in one or more of Putnam's funds or private accounts. Performance of
class Y shares, which incur neither a front-end load, distribution fee, nor
contingent deferred sales charge, will differ from performance of class A,
B, and M shares, which are discussed more extensively in the semiannual
report.
SEMIANNUAL RESULTS AT A GLANCE
- ----------------------------------------------------------------------------
Total return: NAV
Six months ended 3/31/98 3.49%
One year ended 3/31/98 12.50
Five years ended 3/31/98 8.47
Annual average (since class A inception, 10/3/88) 9.98
- ----------------------------------------------------------------------------
Share value: NAV
9/30/97 $12.70
3/31/98 12.69
- ----------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
6 $0.443 -- $0.443
- ----------------------------------------------------------------------------
Current return (end of period) Total
Current dividend rate1 6.90%
Current 30-day SEC yield2 6.94
1Income portion of most recent distribution, annualized and divided by NAV
at end of period.
2Based only on investment income, calculated using SEC guidelines.
Class Y shares are offered without an initial sales charge or CDSC. The class
Y share returns shown for periods before their inception (7/1/96) are derived
from the historical performance of class A shares for such periods, but have
not been adjusted to reflect differences in expenses, which are lower for
class Y shares than for class A shares. All returns assume reinvestment of
distributions at NAV and represent past performance; they do not guarantee
future results. Investment return will fluctuate and may involve the loss of
principal. Performance of other share classes will vary. See full report for
information on comparative benchmarks. If you have questions, please consult
your fund prospectus or call Putnam toll free at 1-800-752-9894.
