Putnam
Utilities Growth
and Income
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* According to Lipper Analytical Services, Putnam Utilities Growth and
Income Fund's class A shares ranked in the top quartile of all utilities
funds tracked for the 3- and 5-year periods ended September 30, 1998,
finishing 14 out of 81 funds for 3 years and 6 out of 44 funds for 5
years. For the 1-year period ended September 30, the fund was 46 out of
100 funds tracked.*
*"Improving performance among utility stocks, one of the few sectors to
post positive returns for the third quarter, provides some evidence of
increasing confidence in the industry."
-- Marla Brill, "The Money Managers,"
Boston Globe, November 2, 1998
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
20 Financial statements
* Past performance is not indicative of future results. Lipper rankings
are based on total return performance, vary over time, and do not include
the effects of sales charges. Performance of other share classes will
vary.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Seasoned investors have learned that change, for all the uncertainty that
often surrounds it, frequently represents opportunity. Over the past
several years, deregulation has brought and continues to bring changes of
revolutionary proportions to many sectors of the utility industry.
Although the regulatory environment in which the industry still operates
is not likely ever to disappear completely, the effects of diminished
regulation have created a much more competitive marketplace. Utilities
companies must now scramble for business that once was assured. In the
process, many are being forced to reinvent themselves in order to grow
and, in many cases, in order to survive.
Identifying the companies with the brightest prospects within this
shifting setting is the challenge of your fund's new lead manager, Jeanne
Mockard. Jeanne, who has been with Putnam since 1985, has 13 years of
investment experience.
In the following report, Jeanne and co-manager Christopher Ray report on
Putnam Utilities Growth and Income Fund's recently concluded fiscal year
and discuss prospects for the year ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
December 16, 1998
Report from the Fund Managers
Jeanne L. Mockard, lead manager
Christopher A. Ray
During much of the fiscal year that ended on October 31, 1998, Putnam
Utilities Growth and Income Fund's strategy rested heavily on anticipated
changes in the utilities markets. For a good part of that period, the
fund's results lagged the Standard & Poor's(R) Utilities Index, primarily
as a result of our emphasis on gas utilities, which were adversely
affected by the warm winter and uncertainty about deregulatory issues.
However, a volatile summer for both stocks and bonds, coupled with an
improving regulatory outlook, brought long overdue attention to these
high-yielding stocks. By the final quarter of the fund's fiscal year, the
acquisition and divestiture activities we had awaited began to occur with
positive results for your fund's performance. During the fiscal year,
class A shares provided a total return of 21.06% at net asset value and
14.11% at public offering price.
As long as interest rates remain in their current low range, we believe
the fund's performance should continue to strengthen. The fund's class A
shares provided a current dividend rate of 3.18% at public offering price
at the end of October, compared with a yield of about 1.5% for the stocks
in the S&P 500. Yet the fund's stocks were selling at an average of 14.5
times 1999 earnings estimates, compared with more than 20 times earnings
for the S&P.1 Add to that a growth rate projected to be between 5% and 8%
and you have a better-than-average growth potential with below-average
risk. Performance over longer periods and results for other classes of
shares are shown on pages 9 and 10.
* DEREGULATION IS CHANGING CHARACTER OF UTILITIES COMPANIES
As the highest yielding group of equity securities, utilities will
probably always be considered defensive investments, but they may come to
be regarded as less stodgy than they have been. Today many gas and
electric utilities are departing from their traditional roles, divesting
some assets, acquiring others, forming strategic alliances, and finding
themselves with cash available to finance growth. Companies are crossing
geographical boundaries and even going international with an eye toward
enlarging their customer bases, strengthening their service offerings, and
competing more successfully.
Earnings of some financially sound, well-positioned gas and electric
companies are already improving dramatically as a result of merger and
acquisition decisions. We believe companies that are best equipped to
operate in the new regulatory environment could see potential growth rates
ranging from 8% to 10% annually. A prime example of this convergence is
Duke Energy, the product of a 1997 merger of Duke Power (a major electric
utility) and PanEnergy (a natural gas supplier).
As they become deregulated, many utilities companies are specializing by
focusing on one aspect of the business in which they have particular
expertise or other advantages. Some companies are selling their pipelines,
while others are divesting their power plants and expanding pipelines. Our
goal is to position your fund to benefit from both sides of these kinds of
transactions. The company making the sale has cash to finance growth,
while the acquiring company adds market share or improves its strategic
profile. For example, just as the fund's fiscal year ended, Duke Energy
announced plans to sell its pipeline assets to CMS Energy, another fund
holding. That leaves Duke with $1.9 billion in net cash to reinvest and
CMS with control of pipelines that improve the cost-effectiveness of its
distribution system. While these holdings, as well as others discussed in
this report, were viewed favorably during the period, all holdings are
subject to review in accordance with the fund's investment strategy and
may vary in future.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Electric utilities 40.2%
Telephone utilities 23.9%
Gas utilities 17.2%
Gas pipelines 4.4%
Oil and gas 2.3%
Footnote reads:
*Based on net assets as of 10/31/98. Holdings will vary over time.
Management's decisions on where and how a company should invest proceeds
from sales or other lump sums are crucial to a company's future success.
This is the point at which our ability to meet and get to know individual
management teams benefits your fund. We only invest in utilities in which
we are confident of management's ability to make sound business decisions
that will create synergies, minimize costs, and increase market share.
* COMMUNICATIONS: GROWTH SECTOR FOR VALUE INVESTORS
Sharply escalating demand for basic telephone services -- including second
lines and explosive growth in cellular telephones and data services -- has
helped reintroduce the word "growth" to the utility sector. Many telephone
companies now have regulated and nonregulated business divisions. They are
counting on customer loyalty and their long record of superior service to
give them a competitive edge over the cable companies now scrambling to
gain market share. As deregulation unfolds, even the traditional regulated
pieces of the telephone business are likely to change. In the meantime,
most companies are trying to reduce costs in order to be ready for the
transition.
AT&T -- the number one U.S. long distance carrier with projected 1998
revenues of about $52.4 billion1 -- was part of your fund's portfolio
throughout the fiscal year. Although this grande dame of the
telecommunications business has been among the most volatile of the fund's
holdings, it has had the highest yield of all the long-distance carriers,
and the stock continues to represent excellent value, based on its
price/earnings ratio. In June, AT&T announced a merger with
Telecommunications, Inc., a cable TV operator with a large customer base
and the ability to provide low-cost Internet and local phone services. In
July, AT&T announced a pact with European giant British Telecom that
should provide an edge in the international market. Although merger and
partnership activities such as these will continue to unsettle AT&T's
stock price, we believe this company is likely to emerge as the foremost
global telecommunications and information management industry in the next
century.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Duke Energy Corp.
Electric utility
SBC Communications, Inc.
Telephone utility
American Telephone & Telegraph Co.
Telephone utility
BellSouth Corp.
Telephone utility
Bell Atlantic Corp.
Telephone utility
Ameritech Corp.
Telephone utility
Enron Corp.
Gas pipelines
Sprint Corp.
Telephone utility
Sempra Energy
Utilities
Columbia Gas System, Inc.
Gas utilities
Footnote reads:
These holdings represent 27.7% of the fund's net assets as of 10/31/98.
Portfolio holdings will vary over time.
* FOREIGN, NONUTILITY INVESTMENTS PROVIDE BROADER DIVERSIFICATION
Many international utilities have growth rates that are substantially
higher than their U.S. counterparts. Currently the fund has about 6% of
assets invested in companies domiciled in South America, Spain, the United
Kingdom, and the Philippines, which is a relatively small but important
position. In selecting individual foreign utilities, we take into
consideration currency issues and the relative strength of each country's
economy as well as each company's growth potential, yield, and the flow
and quality of information available to investors. As with U.S. companies,
we concentrate the fund's investments in companies in which we have been
able to meet personally with management.
Nonutility investments, including stocks and some REITs with high yields,
have proved to be a boon for shareholders. We believe your fund's ability
to invest a portion of its portfolio outside the utilities industry gives
it a competitive edge. Pharmacia & Upjohn, one of our nonutility holdings,
has contributed a solid stream of dividends while appreciating
substantially in price.
The fund's bond section is below its customary level (only 8.9% as of
October 31, 1998). The decision to trim this section was based on the
market environment. Bond prices have been volatile and yields are
historically low. Although current opportunities in other parts of the
market seem more attractive, the ability to diversify assets into bonds
continues to be an important advantage for the fund and provides a
valuable source of income.
* HIGH YIELD, LOW PRICE, AND CHANGE GUIDE INVESTMENT PROCESS
It is relatively easy to screen for companies that seem to be priced low
in comparison with their peers, especially with the technology and
resources we have available to us as investment professionals. Yield, too,
is simple to identify. Our real work is to identify those companies likely
to progress and strengthen as a result of managements' initiatives and
regulatory or industry changes. We look for changes that will add
appreciation to yield for superior total return over the long term.
Our overall forecast for the U.S. economy is favorable for utility stocks.
We look for attractive returns as a result of changing industry trends, a
strong but stable economy, low interest rates, and a favorable regulatory
environment. We are optimistic that the underperformance of utilities
relative to other sectors is in the process of reversing as the stock
market emerges from an adverse environment.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 10/31/98, there is no guarantee the fund will
continue to hold these securities in the future. Funds investing in a
single sector may be subject to more volatility than funds investing in a
diverse group of sectors.
1 Source for earnings estimates: Value Line.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Utilities Growth and Income Fund is designed for capital growth and
current income through equity and debt securities issued by public utility
companies.
TOTAL RETURN FOR PERIODS ENDED 10/31/98
Class A Class B Class M
(inception date) (11/19/90) (4/27/92) (3/1/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 21.06% 14.11% 20.19% 15.19% 20.54% 16.34%
- ------------------------------------------------------------------------------
5 years 88.15 77.40 81.17 79.17 83.94 77.42
Annual average 13.48 12.15 12.62 12.37 12.96 12.15
- ------------------------------------------------------------------------------
Life of fund 176.63 160.68 160.61 160.61 166.29 156.82
Annual average 13.65 12.81 12.80 12.80 13.11 12.60
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/98
S&P Utility Consumer
Index Price Index
- ------------------------------------------------------------------------------
6 months 6.17% 0.80%
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1 year 26.65 1.36
- ------------------------------------------------------------------------------
5 years 73.34 12.42
Annual average 11.63 2.37
- ------------------------------------------------------------------------------
Life of fund 167.48 22.70
Annual average 13.09 2.59
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
5.75% and 3.50% respectively. Class B share returns for the 1-, 5-, and
10-year (where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares for periods prior to their inception
are derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M shares,
the higher operating expenses applicable to such shares. All returns
assume reinvestment of distributions at NAV. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
11/19/90
Fund's class A Standard & Poor's Consumer Price
Date shares at POP Utility Index Index
11/19/90 9,425 10,000 10,000
10/31/91 10,432 11,080 10,292
10/31/92 11,508 12,313 10,622
10/31/93 13,855 15,430 10,914
10/31/94 12,844 13,538 11,199
10/31/95 15,503 17,503 11,513
10/31/96 18,073 19,218 11,858
10/31/97 21,534 21,120 12,105
10/31/98 $26,068 $26,748 $12,270
Footnote reads:
Past performance is no assurance of future results. At the end of the
same time period, a $10,000 investment in the fund's class B shares
would have been valued at $26,061 and no contingent deferred sales
charges would apply; a $10,000 investment in the fund's class M shares
would have been valued at $26,629 ($25,682 at public offering price).
See first page of performance section for performance calculation
method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 4 4 4
- ------------------------------------------------------------------------------
Income $0.3768 $0.2778 $0.3168
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term 0.6840 0.6840 0.6840
- ------------------------------------------------------------------------------
Short-term 0.3112 0.3112 0.3112
- ------------------------------------------------------------------------------
Total $1.3720 $1.2730 $1.3120
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
10/31/97 $12.49 $13.25 $12.42 $12.47 $12.92
- ------------------------------------------------------------------------------
10/31/98 13.62 14.45 13.54 13.60 14.09
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 3.38% 3.18% 2.60% 2.91% 2.81%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 2.85 2.68 2.11 2.37 2.29
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 9/30/98
(most recent calendar quarter)
Class A Class B Class M
(inception date) (11/19/90) (4/27/92) (3/1/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 19.28% 12.44% 18.31% 13.31% 18.67% 14.55%
- ------------------------------------------------------------------------------
5 years 85.56 74.95 78.80 76.80 81.23 74.82
Annual average 13.16 11.84 12.32 12.07 12.63 11.82
- ------------------------------------------------------------------------------
Life of fund 172.57 156.85 156.95 156.95 162.38 153.05
Annual average 13.61 12.75 12.76 12.76 13.06 12.54
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns and
principal value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. See first page of
performance section for performance calculation method.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 5.75% maximum sales charge for class A
shares and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B 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
Standard & Poor's Utilities Index is an unmanaged list of common stocks
issued by utility companies. It assumes reinvestment of all distributions
and does not take into account brokerage commissions or other costs. The
fund's portfolio contains securities that do not match those in the index.
It is not possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Report of independent accountants
For the fiscal year ended October 31, 1998
To the Trustees and Shareholders of
Putnam Utilities Growth and Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
Utilities Growth and Income Fund (the "fund") as of October 31, 1998, and
the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at October
31, 1998 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 7, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
October 31, 1998
COMMON STOCKS (88.2%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Building and Construction (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Centrais Electricas Bras S. A. (Brazil) $ 2,162,797
430,000 Willbros Group, Inc. (NON) 2,848,750
--------------
5,011,547
Cellular Communications (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
300,000 PT Indosat ADR (Indonesia) 3,131,250
Conglomerates (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
155,800 Ogden Corp. 4,187,125
Electric Utilities (34.8%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Ameren Corp. 5,990,625
250,000 Baltimore Gas & Electric Co. 7,843,750
275,000 Carolina Power & Light Co. 12,615,625
100,000 Centrais Geradoras do Sul do Brasil SA (Brazil) (NON) 102,272
25,000 Chilectra S.A. 144A ADR (Chile) 484,375
81,600 CILCORP, Inc. 4,202,400
430,000 Cinergy Corp. 14,835,000
212,700 CMS Energy Corp. Class G 5,211,150
122,377 Companhia Energetica de Minas Gerais ADR (Brazil) 2,355,757
313,500 Companhia Paranaense de Energia-Copel ADR (Brazil) 2,429,625
276,300 Conectiv, Inc. 6,320,363
300,000 Consolidated Edison, Inc. 15,037,500
220,000 Dominion Resources, Inc. 10,161,250
650,000 DPL, Inc. 12,309,375
1,043,741 Duke Energy Corp. 67,516,996
566,600 Edison International 14,944,075
50,000 EDP-Electricidade de Portugal, S.A. ADR (Portugal) 2,500,000
17,000 Eletropaulo Metropolitana S.A. (Brazil) 572,890
17,000 Empresa Bandeirante de Energia S.A. (Brazil) (NON) 165,169
17,000 Empresa Paulista de Transmissao de Energia Electrica S.A. (Brazil) 52,729
730,000 Entergy Corp. 20,987,500
250,000 Florida Progress Corp. 10,484,375
150,000 GPU, Inc. 6,468,750
100,000 Hawaiian Electric Industries, Inc. 3,962,500
400,000 Houston Industries, Inc. 12,425,000
620,000 Iberdola S.A. (Spain) 10,028,443
705,000 Korea Electric Power Corp. (South Korea) 12,570,259
10,000 Light Participacoes, S.A. (Brazil) 6,287
100,000 MidAmerican Energy Holdings Co. 2,600,000
400,000 New Century Energies, Inc. 19,325,000
250,000 New England Electric Systems Inc. 10,171,875
673,000 NIPSCO Industries, Inc. 20,147,938
965,200 Northeast Utilities Co. (NON) 15,081,250
460,000 OGE Energy Corp. 12,218,750
500,000 P P & L Resources, Inc. 13,562,500
100,000 PacifiCorp 1,906,250
400,000 Peco Energy Co. 15,475,000
126,600 Pinnacle West Capital Corp. 5,546,663
442,600 Potomac Electric Power Co. 11,590,588
275,800 Puget Sound Energy, Inc. 7,446,600
400,000 Scana Corp. 13,525,000
661,200 Scottish Power PLC (United Kingdom) 6,508,271
500,000 Sierra Pacific Resources 18,218,750
124,100 Southern Co. 3,498,069
200,000 Teco Energy, Inc. 5,525,000
372,000 Texas Utilities Co. 16,275,000
500,000 TNP Enterprises, Inc. 16,875,000
300,000 Union Electrica Fenosa S.A. (Spain) 4,873,800
100,000 UniSource Energy Corp. (NON) 1,550,000
175,000 United Illuminating Co. 8,575,000
150,000 Utilicorp United, Inc. 5,390,625
26,000 Viag AG (Germany) 17,680,126
700,000 Wisconsin Energy Corp. 21,437,500
--------------
537,588,595
Energy-Related (0.9%)
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17,000 Empresa Metropolitana de Aguas Energia S.A. (Brazil) (NON) 18,526
300,000 Energy East Corp. 14,662,500
--------------
14,681,026
Gas Pipelines (4.4%)
- --------------------------------------------------------------------------------------------------------------------------
600,000 Coastal Corp. 21,150,000
630,000 Dynegy, Inc. 9,450,000
625,000 Enron Corp. 32,968,750
200,000 Williams Cos., Inc. 5,487,500
--------------
69,056,250
Gas Utilities (16.7%)
- --------------------------------------------------------------------------------------------------------------------------
380,000 AGL Resources, Inc. 7,956,250
483,600 Atmos Energy Corp. 14,356,875
236,000 Bay State Gas Co. 9,263,000
220,000 Cascade Natural Gas Corp. 3,643,750
200,000 Central Hudson Gas & Electric 8,100,000
409,950 Columbia Gas System, Inc. 23,725,856
150,000 Connecticut Energy Corp. 4,200,000
400,000 Eastern Enterprises 16,425,000
589,600 Energen Corp. 10,612,800
100,100 Equitable Resources, Inc. 2,784,031
93,333 Indiana Energy, Inc. 2,088,333
350,000 K N Energy, Inc. 17,390,625
146,300 Laclede Gas Co. 3,748,938
300,000 MCN Corp. 5,793,750
350,000 National Fuel Gas Co. 16,537,500
70,000 New Jersey Resources Corp. 2,690,625
300,000 NICOR Inc. 12,712,500
151,432 North Carolina Natural Gas Corp. 3,766,871
504,000 Northwest Natural Gas Co. 14,049,000
230,000 NUI Corp. 5,390,625
330,000 ONEOK, Inc. 11,302,500
200,000 Peoples Energy Corp. 7,375,000
200,000 Piedmont Natural Gas Co., Inc. 6,950,000
70,000 Providence Energy Corp. 1,435,000
200,000 Public Service Co. of North Carolina, Inc. 4,412,500
200,000 Questar Corp. 3,937,500
200,000 Sonat, Inc. 6,062,500
80,000 South Jersey Industries, Inc. 2,050,000
200,000 Southwest Gas Corp. 4,737,500
200,000 Transportadora de Gas del Sur ADR (Argentina) 2,062,500
200,000 Washington Gas Light Co. 5,287,500
200,000 Westcoast Energy, Inc. 3,912,500
313,400 WICOR, Inc. 7,639,125
200,000 Yankee Energy System, Inc. 6,125,000
--------------
258,525,454
Oil and Gas (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
422,600 El Paso Energy Corp. 14,975,888
380,000 KeySpan Energy 11,352,500
30,000 Mitchell Energy & Development Corp. Class B 421,875
--------------
26,750,263
Pharmaceuticals and Biotechnology (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
275,000 Pharmacia & Upjohn, Inc. 14,557,813
REITs (Real Estate Investment Trust) (1.0%)
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312,178 Equity Office Properties Trust 7,492,272
194,000 Equity Residential Properties Trust 8,148,000
--------------
15,640,272
Retail (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
133,400 Toys R Us (NON) 2,609,638
Telecommunications (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
74,000 ALLTEL Corp. 3,464,125
100,000 Cable & Wireless PLC ADR (United Kingdom) 3,362,500
18,000 Royal PTT Nederland N.V. ADR (Netherlands) 708,750
--------------
7,535,375
Telephone Services (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 British Telecommunications PLC ADR (United Kingdom) 11,711,250
Telephone Utilities (23.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 American Telephone & Telegraph Co. 62,250,000
670,000 Ameritech Corp. 36,138,125
770,120 Bell Atlantic Corp. 40,912,625
525,000 BellSouth Corp. 41,901,563
500,000 Cincinnati Bell, Inc. 12,968,750
400,000 GTE Corp. 23,475,000
100,000 Philippine Long Distance Telephone Co. (Philippines) 2,437,500
80,000 Portugal Telecom S.A. ADR (Portugal) 3,780,000
200,000 PT Telekomunikasi Indonesia ADR (Indonesia) 1,000,000
1,400,000 SBC Communications, Inc. 64,837,210
400,000 Sprint Corp. 30,700,000
120,000 Telebras Co. ADR (Brazil) 9,112,500
100,000 Telecom Argentina S.A. ADR (Argentina) 3,225,000
48,470 Telecom Corp. of New Zealand Ltd. (New Zealand) 742,197
80,000 Telecom Corp. of New Zealand Ltd. ADR (New Zealand) 2,640,000
555,555 Telecom Italia SPA (Italy) 4,022,544
20,000 Telefonica de Argentina S.A. ADR (Argentina) 661,250
250,000 Telefonica del Peru S.A. ADR (Peru) 3,250,000
300,000 U S West, Inc. 17,212,500
--------------
361,266,764
Tobacco (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
63,000 Dimon Inc. 815,063
Utilities (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,053,040 Sempra Energy 27,379,040
Water Utilities (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 American Water Works, Inc. 3,193,750
--------------
Total Common Stocks (cost $968,232,959) $1,363,640,475
CORPORATE BONDS AND NOTES (8.9%) (a)
PRINCIPAL AMOUNT VALUE
Cellular Communications (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
$3,000,000 AirTouch Communications, Inc. notes 6.65s, 2008 $ 3,139,680
Combined Utilities (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 Australian Gas & Light Co.144A sr. notes 6 3/8s, 2003
(Australia) 3,101,160
4,000,000 PG&E Gas Transmission Northwest sr. notes 7.1s, 2005 4,316,600
1,500,000 Public Service Electric & Gas Co. 1st mortgage 6 1/2s, 2000 1,525,230
--------------
8,942,990
Electric Utilities (5.4%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 Arizona Public Service Co. notes 6 1/4s, 2005 3,050,100
2,800,000 CMS Energy Corp. pass-through certificates 7s, 2005 2,789,976
4,000,000 Commonwealth Edison Co. 1st mtge. Ser. 83, 8s, 2008 4,528,400
2,000,000 Connecticut Light & Power Co. 1st mtge. Ser. A, 5 1/2s, 1999 1,998,540
1,500,000 Connecticut Light & Power Co. 1st mtge. Ser. D, 7 7/8s, 2024 1,569,540
4,000,000 Consolidated Edison, Inc. deb. 6.45s, 2007 4,283,960
3,500,000 Duquesne Light Co. deb. 8.7s, 2016 3,829,840
4,000,000 Hydro Quebec (Government of) guaranty 8.4s, 2022 (Canada) 4,786,680
3,000,000 Israel Electric Corp., Ltd. 144A sr. notes 7 1/4s, 2006 (Israel) 2,989,650
4,000,000 Kansas Gas & Electric deb. 8.29s, 2016 4,169,360
5,000,000 Ohio Edison Co. 1st mtge. 8 1/4s, 2002 5,374,350
2,938,000 Otter Tail Power Co. 1st mtge. 7 1/4s, 2002 3,149,830
5,000,000 Public Service Co. of Colorado coll. trust 6 3/8s, 2005 5,285,550
3,000,000 Public Service Co. of New Mexico sr. notes Ser. A, 7.1s, 2005 3,036,360
3,500,000 Sierra Pacific Power Co. med. term notes Ser. C, 6.82s, 2006 3,730,545
1,720,000 Salton Sea Funding Corp. company guaranty Ser. E, 8.3s, 2011 1,927,019
3,350,000 Southern California Edison Co. notes 6 1/2s, 2001 3,467,351
2,725,000 Southern Investments Service Co. sr. notes 6.8s, 2006
(United Kingdom) 2,826,561
3,000,000 Teco Energy, Inc. notes 5.54s, 2001 3,014,100
5,000,000 Texas Utilities Co. sec. lease fac. bonds 7.46s, 2015 5,355,550
3,400,000 Texas Utilities Electric Capital Trust V company guaranty
8.175s, 2037 3,667,716
4,500,000 Utilicorp United, Inc. sr. notes 8.2s, 2007 5,084,775
4,000,000 Western Resources, Inc. sr. notes 6 7/8s, 2004 4,159,200
--------------
84,074,953
Energy-Related (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 CalEnergy, Inc. sr. notes 7.63s, 2007 2,042,760
640,000 KN Capital Trust III company guaranty 7.63s, 2028 610,400
3,000,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 3,145,230
--------------
5,798,390
Gas Utilities (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
3,505,000 K N Energy, Inc. sr. notes 6.45s, 2003 3,599,775
3,500,000 Southwest Gas Corp. deb. 7 1/2s, 2006 3,968,101
--------------
7,567,876
Oil and Gas (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 Coastal Corp. deb. 6 1/2s, 2008 4,057,360
3,500,000 Columbia Gas System, Inc. notes Ser. E, 7.32s, 2010 3,707,970
2,500,000 Louis Dreyfus Natural Gas notes 6 7/8s, 2007 2,381,700
--------------
10,147,030
Telephone Services (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 Century Telephone Enterprises, Inc. deb. Ser. G, 6 7/8s, 2028 4,028,680
3,350,000 LCI International, Inc. sr. notes 7 1/4s, 2007 3,306,484
--------------
7,335,164
Telephone Utilities (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Bell Atlantic Corp. deb. 7 7/8s, 2029 6,006,150
2,215,000 WorldCom, Inc. notes 7 3/4s, 2007 2,474,820
--------------
8,480,970
Water Utility (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,500,000 Pennsylvania American Water Co. 144A mtge. 7.8s, 2026 2,792,175
--------------
Total Corporate Bonds and Notes (cost $132,895,849) $ 138,279,228
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (0.7%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Treasury Obligations (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Notes
$9,670,000 6 1/4s, June 30, 2002 $ 10,268,283
215,000 5 5/8s, May 15, 2008 231,764
--------------
Total U.S. Government and Agency Obligations
(cost $10,358,746) $ 10,500,047
SHORT-TERM INVESTMENTS (2.0%) (a)(cost $31,582,436)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$31,573,000 Interest in $468,338,000 joint repurchase agreement dated
October 30, 1998 with Warburg Securities due
November 2, 1998 with respect to various U.S. Treasury
obligations -- maturity value of $31,587,155 for an effective
yield of 5.38% $ 31,582,436
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,143,069,990) (b) $1,544,002,186
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,545,932,164.
(b) The aggregate identified cost on a tax basis is $1,143,076,191, resulting in gross unrealized appreciation and
depreciation of $440,544,445 and $39,618,450, respectively, or net unrealized appreciation of $400,925,995.
(NON) Non-income-producing security.
ADR after the name of a foreign holding stands for American Depository Receipts, representing ownership of
foreign securities on deposit with a domestic custodian bank.
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.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,143,069,990) (Note 1) $1,544,002,186
- -----------------------------------------------------------------------------------------------
Cash 538,535
- -----------------------------------------------------------------------------------------------
Dividends, interest, and other receivables 7,303,499
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,034,235
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 3,408,324
- -----------------------------------------------------------------------------------------------
Total assets 1,557,286,779
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 6,284,462
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,479,742
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,282,059
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 154,398
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 43,050
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,609
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 775,582
- -----------------------------------------------------------------------------------------------
Other accrued expenses 333,713
- -----------------------------------------------------------------------------------------------
Total liabilities 11,354,615
- -----------------------------------------------------------------------------------------------
Net assets $1,545,932,164
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,099,204,120
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 129,030
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 45,550,728
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 401,048,286
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,545,932,164
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($825,883,936 divided by 60,642,464 shares) $13.62
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $13.62)* $14.45
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($706,220,113 divided by 52,148,892 shares)** $13.54
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($13,828,115 divided by 1,017,003 shares) $13.60
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $13.60)* $14.09
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $412,279) $ 42,767,518
- -----------------------------------------------------------------------------------------------
Interest 14,508,217
- -----------------------------------------------------------------------------------------------
Total investment income 57,275,735
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 9,071,912
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,048,050
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 56,687
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 19,288
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,829,425
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 7,231,447
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 92,721
- -----------------------------------------------------------------------------------------------
Reports to shareholders 98,496
- -----------------------------------------------------------------------------------------------
Registration fees 28,252
- -----------------------------------------------------------------------------------------------
Auditing 2,032
- -----------------------------------------------------------------------------------------------
Legal 13,334
- -----------------------------------------------------------------------------------------------
Postage 204,073
- -----------------------------------------------------------------------------------------------
Other 144,021
- -----------------------------------------------------------------------------------------------
Total expenses 20,839,738
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (229,347)
- -----------------------------------------------------------------------------------------------
Net expenses 20,610,391
- -----------------------------------------------------------------------------------------------
Net investment income 36,665,344
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 50,518,651
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (1,905)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 117,552
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 182,656,785
- -----------------------------------------------------------------------------------------------
Net gain on investments 233,291,083
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $269,956,427
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
-------------------------------
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 36,665,344 $ 38,697,964
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions 50,516,746 108,764,010
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments
and assets and liabilities in foreign currencies 182,774,337 70,567,140
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 269,956,427 218,029,114
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (21,043,615) (21,360,424)
- ---------------------------------------------------------------------------------------------------------------
Class B (15,336,819) (17,213,285)
- ---------------------------------------------------------------------------------------------------------------
Class M (311,479) (229,303)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (52,646,523) (41,964,105)
- ---------------------------------------------------------------------------------------------------------------
Class B (53,835,060) (42,814,695)
- ---------------------------------------------------------------------------------------------------------------
Class M (997,941) (403,980)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) 95,477,710 (9,538,238)
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 221,262,700 84,505,084
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 1,324,669,464 1,240,164,380
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $129,030 and $--, respectively) $1,545,932,164 $1,324,669,464
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.49 $11.63 $10.40 $9.06 $10.56
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .37(c) .41 .44 .43 .46
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 2.14 1.67 1.25 1.38 (1.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 2.51 2.08 1.69 1.81 (.76)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.38) (.41) (.44) (.46) (.45)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.00) (.81) (.02) (.01) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.38) (1.22) (.46) (.47) (.74)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.62 $12.49 $11.63 $10.40 $9.06
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 21.06 19.16 16.57 20.71 (7.30)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $825,884 $653,205 $618,417 $593,226 $541,619
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.05 1.05 1.11 1.12 1.08
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.87 3.41 3.97 4.53 4.84
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 23.64 53.63 64.53 67.60 112.32
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 the year ended October 31, 1995 and thereafter,
include amounts paid through expense offset and brokerage service 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
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.42 $11.57 $10.36 $9.02 $10.52
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .28(c) .32 .36 .36 .39
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 2.12 1.66 1.23 1.39 (1.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 2.40 1.98 1.59 1.75 (.83)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.28) (.32) (.36) (.39) (.38)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.00) (.81) (.02) (.02) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.28) (1.13) (.38) (.41) (.67)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.54 $12.42 $11.57 $10.36 $9.02
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 20.19 18.28 15.57 19.92 (8.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $706,220 $659,594 $615,309 $578,505 $501,438
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.80 1.80 1.86 1.87 1.83
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.13 2.66 3.22 3.77 4.10
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 23.64 53.63 64.53 67.60 112.32
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 the year ended October 31, 1995 and thereafter,
include amounts paid through expense offset and brokerage service 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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share March 1, 1995+
operating performance Year ended October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $12.47 $11.61 $10.38 $9.14
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .32(c) .36 .38(c) .31
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 2.13 1.67 1.26 1.26
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 2.45 2.03 1.64 1.57
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.32) (.36) (.39) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.00) (.81) (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.32) (1.17) (.41) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.60 $12.47 $11.61 $10.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 20.54 18.62 16.12 17.50*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $13,828 $11,871 $6,438 $1,917
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.55 1.55 1.63 1.13*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.40 2.89 3.37 2.36*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 23.64 53.63 64.53 67.60
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 the year ended October 31, 1995 and thereafter,
include amounts paid through expense offset and brokerage service 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
October 31, 1998
Note 1
Significant accounting policies
Putnam Utilities Growth and Income Fund (the "fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks capital growth and current
income primarily through investments in equity and debt securities issued
by public utility companies.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 5.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than
class A shares, and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class M shares are
sold with a maximum front-end sales charge of 3.50% and pay an ongoing
distribution fee that is lower than class B shares and higher than class A
shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price on the principal market on which such securities are
traded, or, if no sales are reported -- as in the case of some securities
traded over-the-counter -- the last reported bid price. Short-term
investments having remaining maturities of 60 days or less are stated at
amortized cost which approximates market value, and other investments are
stated at fair value following procedures approved by the Trustees. Market
quotations are not considered to be readily available for long-term
corporate bonds and notes; such investments are stated at fair value on
the basis of valuations furnished by a pricing service, approved by the
Trustees, which determines valuations for normal, institutional-size
trading units of such securities using methods based on market
transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
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.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The fund
does not isolate that portion of realized or unrealized gains or losses
resulting from changes in the foreign exchange rate on investments from
fluctuations arising from changes in the market prices of the securities.
Such gains and losses are included with the net realized and unrealized
gain or loss on investments. Net realized gains and losses on foreign
currency transactions represent net realized exchange gains or losses on
closed forward currency contracts, disposition of foreign currencies and
the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized appreciation
and depreciation of assets and liabilities in foreign currencies arise
from changes in the value of open forward currency contracts and assets
and liabilities other than investments at the period end, resulting from
changes in the exchange rate.
F) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
October 31, 1998, the fund had no borrowings against the line of credit.
G) 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.
H) 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. These differences include temporary and permanent differences
of nontaxable dividends, market discount, realized gains and losses on
passive foreign investment companies. Reclassifications are made to the
fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations. For the year ended October 31, 1998, the fund reclassified
$155,599 to decrease distributions in excess of net investment income and
$113,630 to decrease paid-in-capital, with a decrease to accumulated net
realized gains of $41,969. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
Note 2
Management fees, 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% of 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 subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended October 31, 1998, fund expenses were reduced by
$229,347 under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the
Statement of operations exclude these credits. The fund could have
invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered
into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $1,430
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 have approved payment by the fund to an annual
rate of 0.25%, 1.00% and 0.75% of the average net assets attributable to
class A, class B and class M shares respectively.
For the year ended October 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $265,061 and $8,787 from the sale
of class A and class M shares, respectively and $625,171 in contingent
deferred sales charges from redemptions of class B shares. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended October 31, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received $5,971 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended October 31, 1998, purchases and sales of investment
securities other than U.S. government obligations and short-term
investments aggregated $301,951,677 and $300,600,598, respectively.
Purchases and sales of U.S. government obligations aggregated $37,168,059
and $39,788,775, respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Capital shares
At October 31, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
October 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 19,343,232 $254,107,737
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,120,728 65,168,272
- -----------------------------------------------------------------------------
24,463,960 319,276,009
Shares
repurchased (16,138,623) (211,228,211)
- -----------------------------------------------------------------------------
Net increase 8,325,337 $108,047,798
- -----------------------------------------------------------------------------
Year ended
October 31, 1997
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 18,486,173 $218,360,453
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,830,321 55,066,695
- -----------------------------------------------------------------------------
23,316,494 273,427,148
Shares
repurchased (24,185,008) (285,048,126)
- -----------------------------------------------------------------------------
Net decrease (868,514) $(11,620,978)
- -----------------------------------------------------------------------------
Year ended
October 31, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 19,076,366 $249,631,486
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,857,276 61,421,181
- -----------------------------------------------------------------------------
23,933,642 311,052,667
Shares
repurchased (24,883,349) (324,526,051)
- -----------------------------------------------------------------------------
Net decrease (949,707) $(13,473,384)
- -----------------------------------------------------------------------------
Year ended
October 31, 1997
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 10,001,400 $117,738,403
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,676,816 53,007,890
- -----------------------------------------------------------------------------
14,678,216 170,746,293
Shares
repurchased (14,740,560) (173,462,984)
- -----------------------------------------------------------------------------
Net decrease (62,344) $ (2,716,691)
- -----------------------------------------------------------------------------
Year ended
October 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,054,905 $13,939,652
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 97,401 1,236,300
- -----------------------------------------------------------------------------
1,152,306 15,175,952
Shares
repurchased (1,087,101) (14,272,656)
- -----------------------------------------------------------------------------
Net increase 65,205 $ 903,296
- -----------------------------------------------------------------------------
Year ended
October 31, 1997
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 656,690 $7,920,678
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 50,877 582,756
- -----------------------------------------------------------------------------
707,567 8,503,434
Shares
repurchased (310,433) (3,704,003)
- -----------------------------------------------------------------------------
Net increase 397,134 $4,799,431
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund
hereby designates $43,633,932 as capital gain, for its taxable year ended
October 31, 1998.
The fund has designated 100% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
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
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Thomas V. Reilly
Vice President
Anthony I. Kreisel
Vice President
Stephen Oristaglio
Vice President
Edward H. D'Alelio
Vice President
Jeanne L. Mockard
Vice President and Fund Manager
Christopher A. Ray
Vice President and Fund Manager
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Utilities
Growth and Income Fund. It may also be used as sales literature when
preceded or accompanied by the current prospectus, which gives details of
sales charges, investment objectives, and operating policies of the fund,
and the most recent copy of Putnam's Quarterly Performance Summary. For
more information or to request a prospectus, call toll free:
1-800-225-1581. You can also learn more at Putnam Investments' 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
www.putnaminv.com
- ---------------------
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U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
AN026 47861 840/884/869 12/98
