Putnam
Balanced
Government
Fund
(Artwork)
SEMIANNUAL REPORT
May 31, 1994
(Logo of Balance Scales)
B O S T O N * L O N D O N * T O K Y O
<PAGE>
Performance highlights
"Agency debt now offers more generous margins above
Treasury yields, with some types of bonds changing hands at their widest
spreads above Treasuries in several years."
- --Barron's, May 30, 1994.
Performance should always be considered in light of a fund's investment
strategy. Putnam Balanced Government Fund is designed for investors seeking
as high a level of current income as is consistent with preservation of
capital.
SEMIANNUAL RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Total return: Class A Class B
<S> <C> <C> <C> <C> <C>
...................................................................................
Six months ended 5/31/94 NAV POP NAV CDSC
(change in value during period
plus reinvested earnings) -1.73% -4.83% -2.23% -5.10%
Share value: NAV POP NAV
...................................................................................
11/30/93 $ 4.91 $ 5.07 $ 4.91
5/31/94 4.70 4.86 4.69
DISTRIBUTIONS: No. Income Total
...................................................................................
CLASS A 6 $0.126905 $0.126905
CLASS B 6 $0.112302 $0.112302
Class A Class B
CURRENT RETURN: NAV POP NAV
...................................................................................
END OF PERIOD
CURRENT DIVIDEND RATE(1) 5.10% 4.93% 4.47%
CURRENT 30-DAY SEC YIELD(2) 4.96 4.80 4.35
</TABLE>
Performance data represent past results. For performance over longer periods,
see page 8. POP assumes 3.25% maximum sales charge. CDSC assumes 3% maximum
contingent deferred sales charge. Total return data reflect an expense
limitation in effect through 2/16/94; without the limitation, total returns
would have been lower. (1)Income portion of most recent distribution,
annualized and divided by NAV or market price at end of period. (2)Based only
on investment income, calculated using SEC guidelines.
<PAGE>
(George Putnam photo)
George Putnam
Chairman of the Trustees
(C) Karsh, Ottawa
From the Chairman
Dear Shareholder:
The Federal Reserve Board's primary concern remains fighting not only
inflation but the fear of inflation. It is pursuing this goal by gradually
raising the short-term interest rates under its control to slow the economy's
growth to what it regards as a sustainable pace.
The policy continues as the effects of last year's tax increase are being
keenly felt by individuals and businesses. Dr. Robert Goodman, Putnam
Investments' senior economic advisor, believes this confluence could result
in a greater slowing of business than many observers now expect.
On a brighter note, I am pleased to report that Michael Martino took over
day-to-day management of Putnam Balanced Government Fund. Mike joined Putnam
in 1993 as Senior Vice President and Senior Portfolio Manager of Putnam's
taxable fixed-income group. Previously, he was a chief investment officer at
Back Bay Advisors and a senior portfolio manager at the New England Mutual
Life Insurance Company. He has 11 years of investment experience.
In the following report, Mike explains how he is positioning your fund's
portfolio to respond to 1994's unfolding events.
Respectfully yours,
(Signature of George Putnam)
George Putnam
Chairman of the Trustees
July 20, 1994
<PAGE>
Report from the fund manager
Michael Martino
The period in which we now write is indeed a challenging one. In early
February, after almost five years of declining interest rates, the Federal
Reserve Board embarked on a series of short-term rate increases--a total of
four by the end of Putnam Balanced Government Fund's semiannual period on May
31, 1994.
Initially, the higher rates had a negative effect on the bond markets.
However, we believe volatility is a natural occurrence at this stage in the
economic cycle. Investors are gradually adjusting to a whole new playing
field with a new set of realities.
While negative performance is always disappointing, your fund's return of
- -1.73% for the period (based on results for class A shares at net asset
value) was slightly ahead of results for the Lehman Brothers Mortgage-Backed
Securities Index, which delivered an average return of -1.87%. For more
complete details, please turn to the performance summary on page 8.
A FLEXIBLE PORTFOLIO STRATEGY HELPS PRESERVE VALUE
The fund's fiscal year began at the tail end of a five-year-old bond market
rally. In December and January, fixed-rate mortgage-backed securities (FRMs)
outperformed adjustable-rate mortgage-backed securities (ARMs), reflecting
the value of fixed-rate securities in a declining interest rate environment.
The fund's 62% weighting in FRMs and U.S. Treasuries at the start of the
period helped boost returns. By late 1993, however, short-term rates were
practically zero when adjusted for inflation, and we began to conclude they
would soon change direction.
Our forecast proved accurate: in early February, rates rose quickly and ARMs
outperformed FRMs. The fund's 40% weighting in ARMs--whose coupons adjust
with changes in interest rates--provided some defensive cushioning against
the declines in other areas of the portfolio (see chart on page 7). When
rates rise quickly, investors typically sell fixed-rate securities either to
avoid losses or to obtain newer, higher-coupon bonds.
<PAGE>
ADJUSTING TO HIGHER INTEREST RATES
All ARMs are not created equal, and one important step we took during the
period to help protect portfolio value was a reduction in the fund's holdings
of GNMA ARMs.
Government National Mortgage Association bonds have generally been included
in the portfolio because they are highly liquid--easy to buy and sell--and
they tend to outperform other types of ARMs during periods of accelerated
prepayments. When interest rates fall, as was the case in 1993, homeowners
often refinance (prepay) their existing mortgages to lock in lower monthly
payments. But in a rapidly rising interest rate environment, GNMA ARMs tend
to be less attractive because their coupons do not adjust as quickly as other
types of ARMs. To avoid any negative impact on the fund's performance, we
decreased its holdings in GNMA ARMs early in the period.
After the bond market sell-off, we reduced our holdings in other types of
ARMs as well, so that by the end of the period the total number represented
just 30% of net assets. Although our weighting in ARMs added value to the
fund during a critical period, we recognized that if
(Bar chart showing fund composition)
PORTFOLIO COMPOSITION
FRMs 51%
61%
ARMs 34%
25%
U.S. 11%
Treasuries 10%
Short-term 4%
investments 4%
11/30/93 5/31/94
<PAGE>
the pace of rising interest rates slowed, ARMs would begin to underperform.
In this scenario, demand for adjustable-rate mortgages declines as homeowners
attempt to lock in relatively low fixed rates. Banks then have fewer
adjustable-rate mortgages to sell to securities firms, securities firms have
fewer to sell to investors, and the general lack of demand tends to end up as
a drag on bond prices. Consequently, by the end of the period we saw
stronger income opportunities in fixed-rate longer-term securities.
MORTGAGE PREPAYMENTS RECONSIDERED
Despite the price declines of recent months, the increase in interest rates
that took place in early 1994 was not all bad news. Aside from setting the
stage for future bond rallies, higher rates have had a positive effect on
mortgage prepayments, which had vexed the mortgage-backed securities market
throughout 1993. Prepayment activity has dropped off dramatically from the
fast and furious pace experienced in late 1993. We believe this change will
increase the demand for mortgage-backed securities, as investors focus once
again on the yield advantage these securities have over comparable
Treasuries. Mortgage-backed securities have historically yielded more than
Treasuries of comparable maturities to compensate investors for their
potential prepayment risk.
Nevertheless, we have sought to further cushion the fund from prepayment risk
by increasing our holdings of seasoned FRMs--bonds with 30-year maturities
that were issued several years ago. These securities tend to be less
sensitive than newer bonds to prepayments since, presumably, the owners of
older mortgages have already taken an opportunity to refinance and are now
comfortable with their current monthly payments.
<PAGE>
BOND PRICES DECLINE AMID RISING RATES
(Graphic Line Chart of Bond prices and interest rates)
Plot Points for chart
Lehman Bros.
Adjustable Rate Lehman Bros.
Mortgage-Backed Mortgage Backed Federal
Securities Index Securities Index Funds Rate
12/31/93 0.75 0.81 3.000
1/31/94 0.47 0.99 3.500
2/28/94 -0.32 -0.70 3.500
3/31/94 -0.79 -2.60 3.625
4/30/94 -0.53 -0.74 4.000
5/31/94 -0.08 0.40 4.625
The chart illustrates the inverse relationship between interest rates and
bond prices. As short-term rates (represented here by the federal funds rate)
rose during the fund's semiannual period, returns on mortgage-backed
securities declined. Note the more volatile path taken by fixed-rate
securities (Lehman Brothers Mortgage-Backed Securities Index) than that of
adjustable-rate securities (Lehman Brothers Adjustable Rate Mortgage-Backed
Securities Index).
Federal funds rate shown at months' end. Indexes represent monthly total
returns since 11/30/93.
In the coming months, we will continue to monitor the fund's holdings of ARMs
and FRMs in light of the changing interest rate environment, making
adjustments when necessary. We believe, however, that the fund's flexible
investment strategy will continue to serve investors well by seeking to
provide a steady stream of income combined with minimum fluctuations of
principal.
<PAGE>
Performance summary
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares changed
over time, assuming you held the shares through the entire period and
reinvested all distributions back into the fund. We show total return in two
ways: On a cumulative long-term basis and how the fund might have grown each
year, on average, over varying periods. For comparative purposes, we show how
the fund performed relative to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDING 5/31/94
<TABLE>
<CAPTION>
Class A Class B
Lehman
Bros.
Mortgage-Backed
Securities
NAV POP NAV CDSC Index CPI
<S> <C> <C> <C> <C> <C> <C>
6 months -1.73% -4.83% -2.23% -5.10% -1.87% 1.17%
1 year -0.41 -3.70 -1.23 -4.05 0.08 2.29
Life
(2/16/93) 0.67 -2.65 -0.32 -3.13 1.62 3.44
Annual
average 0.52 -2.06 -0.25 -2.44 1.29 2.65
</TABLE>
TOTAL RETURN FOR PERIODS ENDING 6/30/94
(most recent calendar quarter)
<TABLE>
<CAPTION>
Class A Class B
NAV POP NAV CDSC
<S> <C> <C> <C> <C>
6 months -2.54% -5.79% -2.63% -5.49%
1 year -1.24 -4.49 -1.83 -4.64
Life
(2/16/93) 0.46 -2.85 -0.36 -3.16
Annual
average 0.33 -2.07 -0.26 -2.30
</TABLE>
Performance data represent past results. Investment returns and net asset
value will fluctuate so an investor's shares, when sold, may be worth more or
less than their original cost. Fund performance data do not take into account
any adjustment for taxes payable on reinvested distributions. Total return
data reflect an expense limitation in effect through 2/16/94; without the
limitation, returns would have been lower.
<PAGE>
TERMS AND DEFINITIONS
Class A shares are generally fund shares purchased with an initial sales
charge. In the case of your fund, which has no sales charge, it refers to
shares purchased or acquired through the exchange of class A shares from
another Putnam fund. Exchange of your fund's class A shares into another fund
may involve a sales charge, however.
Class B shares are generally shares purchased with no initial sales charge
but subject to a contingent deferred sales charge (CDSC) on redemption.
However, class B shares of your fund can be acquired only through exchange of
class B shares from another Putnam fund. They are subject to the same CDSC
schedule as the fund from which they were exchanged.
Net asset value (NAV) is the value of all fund assets, minus liabilities,
divided by the number of outstanding shares. It does not include any initial
or contingent deferred sales charges.
Public offering price (POP) is the price of a fund share plus the maximum
sales charge levied at the time of purchase. POP performance figures shown
here assume the maximum 3.25% sales charge.
Contingent deferred sales charge (CDSC) is applied on redemption of fund
shares. Your fund's CDSC declines from a 3% maximum during the first year to
1% during the fourth year. After the fourth year, the CDSC no longer applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Adjustable Rate Mortgage-Backed Index reflects performance of
adjustable-rate securities backed by GNMA, FHLMC, and FNMA Mortgage pools.
Lehman Brothers Mortgage-Backed Securities Index reflects performance of 15-
and 30-year fixed-rate securities backed by mortgage pools of the Government
National Mortgage Association, Federal Home Loan Mortgage Corporation, and
Federal National Mortgage Association. It reflects changes in market price
and reinvestment of all interest payments but does not take into account
brokerage commissions or other costs. Securities in the fund do not match
those in the index and may pose different risks.
Consumer Price Index is a commonly used measure of inflation. It does not
represent an investment return.
<PAGE>
Life cycle investing
As we move through life, our investment needs change. As these needs change,
so does the way we allocate our assets. Here are some basic rules for
setting up and maintaining an investment program and some examples of how
assets might be allocated.
DETERMINE YOUR INVESTMENT OBJECTIVES.
Objectives may include a new home, college education expenses, or retirement.
EVALUATE YOUR RISK TOLERANCE.
Generally, risk tolerance is higher for younger investors with longer
timelines and lower for older investors who may depend on their investment
for current income.
ALLOCATE YOUR INVESTABLE SAVINGS.
Your investment advisor will help you determine how much of your investable
dollars should be allocated to each investment category.
CHOOSE THE APPROPRIATE PUTNAM FUNDS.
Using Putnam's free exchange privilege, you can adjust your own Putnam
portfolio of funds as your financial needs change -- without a service fee.*
Look at the facing page for some ways you can allocate your assets, then turn
the page to see how the Putnam Fund Selector(TM) can help you make your
choices.
*Putnam reserves the right to change or terminate the exchange privilege. In
some cases, a sales charge may apply. See prospectus for details.
Four ways to allocate assets
<PAGE>
(Four graphic pie charts representing allocation of assets)
SEEKING MAXIMUM GROWTH
Risk tolerance: 40% - 50% Growth--------------------
Generally
investors with a
higher risk 30% - 40% Growth and Income---------
tolerance
(often in their 20s
and early 30s.) 5% - 20% Income or tax-free--------
SEEKING GROWTH AND SOME INCOME
Risk tolerance: 40% - 50% Growth and Income---------
Generally
investors with a
high to moderate 30% - 40% Growth--------------------
risk tolerance
(often in their late
30s and early 40s.) 10% - 30% Income or tax-free--------
SEEKING INCOME AND SOME GROWTH
WITH PROTECTION AGAINST INFLATION
Risk tolerance: 30% - 40% Growth and Income---------
Generally
investors with a
moderate risk 10% - 20% Growth--------------------
tolerance
(often in their late
40s and 50s.) 25% - 60% Income or tax-free--------
SEEKING HIGH CURRENT INCOME AND
PROTECTION AGAINST INFLATION
Risk tolerance: 20% - 30% Growth and Income---------
Generally
investors with
a moderate to 5% - 10% Growth--------------------
low risk
tolerance
(often over 60
and retired) 40% - 70% Income or tax-free--------
<PAGE>
The Putnam Fund Selector(TM)
The Putnam Fund Selector shows the many opportunities for investors within
every investment strategy. All investors should first accumulate a base of
conservative, cash-equivalent investments. Then, with the help of your
investment advisor, diversify your portfolio by investing in the Putnam
Family of Funds.
(Graphic--Triangular shape graphic showing Putnam Funds according to
risk/reward.)
<PAGE>
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Health Sciences Trust
Investors Fund
Natural Resources Trust
New Opportunities Fund
OTC Emerging Growth Fund
Overseas Growth Fund
Vista Fund
Voyager Fund
PUTNAM GROWTH
AND INCOME FUNDS
Convertible Income-Growth Trust
Dividend Growth Fund
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Managed Income Trust
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Adjustable Rate U.S. Government Fund
American Government Income Fund
Balanced Government Fund
Corporate Asset Trust
Diversified Income Trust
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Intermediate Tax Exempt Fund
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds*
Arizona, California, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, New York,
Ohio, and Pennsylvania
LIFESTAGE(SM) FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread your
money across a variety of stocks, bonds, and money market investments to help
maximize your return and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Growth Portfolio
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
MOST CONSERVATIVE
INVESTMENTS+
Putnam money market funds:
Daily Dividend Trust
Putnam Tax-Exempt Money Market Fund
CDs and savings accounts++
*Not available in all states.
+Relative to above
++Not offered by Putnam Investments. Certificates of deposit offer a fixed
rate of return and may be insured, up to certain limits, by federal/state
agencies. Savings accounts may also be insured up to certain limits.
Please call your financial advisor or
Putnam to obtain a prospectus for any
Putnam fund. It contains more complete
information, including charges and
expenses. Please read it carefully before
you invest or send money.
<PAGE>
Portfolio of investments owned
May 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
U.S. Government and Agency
Obligations (95.4%)(a)
Principal Amount Value
<S> <C> <C>
Federal Home Loan
Mortgage Corp.
$1,720,645 7-1/2s, April 12, 2024 $ 1,674,940
1,655,979 6-1/2s, March 1, 2005 1,639,419
2,609,166 6-1/2s, June 1, 2003 2,534,969
506,673 5-1/2s, February 1, 1999 500,182
Federal Home Loan Corp.
Adjustable Rate Mortgages
(ARMS)
716,456 6.391s, January 5, 2008 724,965
2,492,597 6.286s, January 1, 2008 2,556,470
1,009,964 5-3/4s, February 1, 2007 1,028,586
4,338,130 5-1/8s, April 1, 2007 4,369,310
Federal National Mortgage
Association
2,179,435 9s, March 25, 2000 2,195,782
2,450,000 8.4s, December 25, 2019 2,469,906
3,416,945 8s, with various due
dates to October 1, 2011 3,453,331
1,531,310 7-3/4s, October 1, 2002 1,536,095
6,259,717 7-1/2s, with various due
dates to July 1, 2007 6,222,459
5,732,927 6-1/2s, with various due
dates to April 1, 1999 5,503,149
739,494 6s, February 1, 2002 729,558
Federal National Mortgage
Association ARMS
881,751 5.724s, April 1, 2008 891,946
1,661,387 5.53s, October 1, 2021 1,694,096
1,117,947 5.117s, January 1, 2003 1,136,114
Government National
Mortgage Association
4,684,331 9s, with various due
dates to September 15,
2020 4,874,397
1,601,619 8-1/4s, with various due
dates to October 15, 2006 1,602,619
21,450 8s, February 15, 2004 21,403
13,046 8s, March 15, 2001 13,017
8,387,888 8s, with various due
dates to April 15, 2000 8,405,037
Principal Amount Value
Government National
Mortgage Association ARMS
$6,828 8s, September 15,
2006 $ 6,813
9,223,023 6s, with various due
dates to June 20, 2023 9,226,789
1,926,844 5-1/2s, due December 20,
2023 1,919,618
Government National
Mortgage Association
Midgets
1,318,191 8-1/2s, with various due
dates to June 15, 2007 1,358,147
3,945,306 7s, with various due
dates to March 15, 2009 3,839,275
5,250,000 U.S. Treasury Notes
8-1/2s, May 15, 1997 5,545,313
2,800,000 U.S. Treasury Notes
6-1/2s, April 30, 1999 2,768,500
Total U.S. Government and
Agency Obligations
(cost $83,674,699) $80,442,205
Short-Term Investments (4.0%)(a)
(cost $3,352,000)
Principal Amount Value
$3,352,000 Interest in $489,000,000
joint repurchase
agreement dated May 31,
1994 with Kidder Peabody,
due June 1, 1994 with
respect to various U.S.
Treasury
obligations--maturity
value of $3,352,395 for
an effective yield of
4.24% $ 3,352,000
Total Investments
(cost $87,026,699)(b) $83,794,205
</TABLE>
(a) Percentages indicated are based on net assets of $84,363,138, which
correspond to a net asset value per class A share and class B share of $4.70
and $4.69, respectively.
(b) The aggregate identified cost on a tax cost basis is $87,026,699,
resulting in gross unrealized appreciation and depreciation of $717 and
$3,233,211, respectively, or net unrealized depreciation of $3,232,494.
<PAGE>
Statement of assets and liabilities
May 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments in securities, at value (identified cost $87,026,699) (Note 1) $83,794,205
Cash 140
Interest and other receivables 766,331
Receivable for shares of the fund sold 485,973
Unamortized organizational expenses (Note 1) 37,108
Total assets 85,083,757
Liabilities
Distribution payable to shareholders 80,258
Payable for shares of the fund repurchased 60,666
Payable for compensation of Manager (Note 2) 422,997
Payable for compensation of Trustees (Note 2) 174
Payable for investor servicing and custodian fees (Note 2) 39,585
Payable for administrative services (Note 2) 1,486
Payable for distribution fees (Note 2) 46,466
Payable for organizational costs (Note 1) 49,893
Other accrued expenses 19,094
Total liabilities 720,619
Net assets 84,363,138
Represented by
Paid-in capital (Notes 4 and 5) 90,875,119
Distributions in excess of net investment income (301,603)
Accumulated net realized loss on investment transactions (2,977,884)
Net unrealized depreciation of investments (3,232,494)
Total--Representing net assets applicable
to capital shares outstanding $84,363,138
Computation of net asset value and offering price
Net asset value and redemption price per class A
shares ($60,308,277 divided by 12,842,912 shares) $4.70
Offering price per share (100/96.75 of $4.70)* $4.86
Net asset value and redemption price per class B shares
($24,054,861 divided by 5,124,551 shares)+ $4.69
</TABLE>
*On single retail sales of less than $100,000. On sales of $100,000 or more
and on group sales the offering price is reduced.
+Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of operations
For the six months ended May 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Interest income $ 3,526,075
Expenses:
Compensation of Manager (Note 2) $ 323,945
Investor servicing and custodian fees (Note 2) 103,122
Compensation of Trustees (Note 2) 5,069
Reports to shareholders 13,706
Auditing 10,454
Legal 5,670
Postage 4,907
Administrative services (Note 2) 4,395
Amortization of organization expenses (Note 1) 4,918
Distribution fees--class A (Note 2) 104,746
Distribution fees--class B (Note 2) 99,937
Registration fees 13,102
Other 883
Fees waived by the Manager (Note 2) (28,017)
Total expenses 666,837
Net investment income 2,859,238
Net realized loss on investments (Notes 1 and 3) (2,636,679)
Net unrealized depreciation of investments during the
period (2,455,402)
Net loss on investment transactions (5,092,081)
Net decrease in net assets resulting from operations $(2,232,843)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
For the period
February 16, 1993
Six months (commencement of
ended operations) to
May 31 November 30
1994* 1993
<S> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income $ 2,859,238 $ 2,340,846
Net realized loss on investments (2,636,679) (767,660)
Net unrealized depreciation of
investments (2,455,402) (777,092)
Net increase (decrease) in net assets
resulting from operations (2,232,843) 796,094
Distributions to shareholders from:
Net investment income
Class A (2,222,214) (1,914,742)
Class B (545,068) (393,310)
Increase (decrease) from capital share
transactions (Note 4) (25,571,597) 116,346,716
Total increase (decrease) in net assets (30,571,722) 114,834,758
Net assets
Beginning of period 114,934,860 100,102
End of period (including distributions
in excess of and undistributed net
investment income of $301,603 and
$32,896, respectively) $ 84,363,138 $114,934,860
</TABLE>
*Unaudited
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Highlights
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
For the period For the period
February 16 February 16
Six months (commencement Six months (commencement
ended of operations) to ended of operations) to
May 31 November 30 May 31 November 30
1994* 1993 1994* 1993
Class B Class A
<S> <C> <C> <C> <C> <C>
Net asset value,
Beginning of Period $ 4.91 $ 5.00 $ 4.91 $ 5.00
Investment operations
Net investment income .11(b) .18(a)(b) .13(b) .21(a)(b)
Net realized and
unrealized gain (loss)
on investments (.22) (.08) (.21) (.09)
Total from investment
operations (.11)(b) .10(b) (.08)(b) .12(b)
Less distributions from:
Net investment income (.11) (.19) (.13) (.21)
Total distributions (.11) (.19) (.13) (.21)
Net asset value, end of
period $ 4.69 $ 4.91 $ 4.70 $ 4.91
Total investment return
at net asset value (%)
(a) (4.46)(d) 2.47(d) (3.46)(d) 3.09(d)
Net assets, end of period
(in thousands) $24,055 $ 4,317 $60,308 $19,088
Ratio of expenses to
average net assets (%) 1.66(b)(d) 1.33(b)(d) 1.08(b)(d) .85(b)(d)
Ratio of net investment
income to average net
assets (%) 4.71(b)(d) 3.97(b)(d) 5.35(b)(d) 4.47(b)(d)
Portfolio turnover (%) 194.01(e) 309.80(e) 194.01(e) 309.80(e)
</TABLE>
* Unaudited
(a) Per share net investment income for the period ended November 30, 1993
has been determined on the basis of the weighted average number of shares
outstanding during the period.
(b) Reflects a voluntary expense limitation in effect during the period (see
Note 2). As a result of such limitation, expenses of the fund for the period
ended November 30, 1993 reflect a per share reduction of $0.01 per share for
class A and $0.01 per share for class B. For the six months ended May 31,
1994, expenses reflect a per share reduction of less than $0.01 for both
class A and class B.
(c) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(d) Annualized.
(e) Not annualized.
<PAGE>
Notes to financial statements
May 31, 1994 (Unaudited)
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The fund seeks high
current income, consistent with preservation of capital, through investments
primarily in U.S. government securities.
The fund offers both class A and class B shares. Class A shares are sold with
a maximum front-end sales charge of 3.25%. Class B shares 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 four years of purchase. Expenses of the fund are
borne pro-rata by the holders of both classes of shares, except that each
class bears expenses unique to that class (including the distribution fees
applicable to such class), and 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
policies are in conformity with generally accepted accounting principles.
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, except that
certain U.S. government obligations are stated at the mean between the last
reported bid and asked prices. 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 market
value following procedures approved by the Trustees.
B) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed 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 commitment will not fluctuate more than 2.0% from the
<PAGE>
principal amount.
The fund holds and maintains until the settlement date, cash or high-grade
debt obligations in an amount sufficient to meet the purchase price, or if
the fund enters into offsetting contracts for the forward sale of other
securities it owns. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in the value of the fund's other assets.
Unsettled TBA purchase commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with
<PAGE>
the intention of acquiring securities for its portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of a
commitment prior to settlement if the fund manager deems it appropriate to do
so.
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 on the commitment
without regard to any unrealized gain or loss on the underlying security. If
the fund delivers securities under the commitment, the fund realizes a gain
or loss from the sale of the securities based upon the unit price established
at the date the commitment was entered into.
<PAGE>
C) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission the fund may transfer uninvested cash
balances into a joint trading account, along with the cash of other
registered investment companies managed by Putnam Investment Management,
Inc., the fund's Manager, a wholly-owned subsidiary of Putnam Investments,
Inc. and certain other accounts. These balances may be invested in one or
more repurchase agreements and/or short-term money market instruments.
D) 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. The fund's Manager 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.
E) 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.
F) Federal taxes It is the policy of the fund to distribute all of its 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
<PAGE>
any excise tax under Section 4982 of the Internal Revenue Code of 1986.
Therefore, no provision has been made for federal taxes on income, capital
gains or unrealized appreciation of securities held and excise tax on income
and capital gains.
At November 30, 1993, the fund had a capital loss carryover of approximately
$297,544, which will expire November 30, 2001. In order to provide more level
daily distributions, the fund may at times pay taxable distributions from net
realized short-term gains that could have been retained by the fund and
offset by the capital loss carryover. In such circumstances, the fund would
lose the benefit of the carryover.
G) Distributions to shareholders Income dividends are recorded daily by the
fund and are distributed monthly. Capital gains distribution, if any, are
only recorded on the ex-dividend date and paid no less frequently than
annually.
H) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization aggregated $49,893. These expenses are being
amortized on a straight-line basis over a five-year period.
<PAGE>
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 for
the quarter. Such fee is based on the following annual rates: 0.60% of the
first $1 billion of average net assets, 0.50% of the next $500 million, and
0.45% of any amount over $1.5 billion, subject, under current law, to
reduction in any year to the extent that expenses (exclusive of distribution
fees, brokerage, interest and taxes) of the fund exceed 2.5% of the first $30
million of average net assets, 2% of the next $70 million, and 1.5% of any
excess over $100 million and by the amount of certain brokerage commissions
and fees (less expenses) received by affiliates of the Manager on the fund's
portfolio transactions.
The Manager voluntarily agreed to reduce its compensation through February
16, 1994, to the extent that expenses of the fund exceed 0.80% of the fund's
average net assets. The fund's expenses, subject to this limitation were
exclusive of brokerage, interest, taxes, insurance, amortization of deferred
organization expenses and extraordinary expenses if any, and expenses
incurred under the fund's distribution plan described below. This limitation
was accomplished by a reduction of the compensation payable under the
management contract to the Manager. As a result of the voluntary limitation,
expenses for the six months ended May 31, 1994 were reduced by $28,017.
The fund also reimburses the Manager 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. For the six months
ended May 31, 1994, the fund paid $4,395 for these services.
Trustees of the fund receive an annual Trustee's fee of $760 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons
<PAGE>
of the Manager and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
Custodial functions for the fund are provided by Putnam Fiduciary Trust
Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing
agent functions are currently provided by Putnam Investor Services, a
division of PFTC. Fees paid for these investor servicing and custodial
functions for the six months ended May 31, 1994 amounted to $103,122.
Investor servicing and custodian fees reported in the Statement of operations
for the six months ended May 31, 1994 have been reduced by credits allowed by
PFTC.
The fund has adopted a distribution plan with respect to its class A shares
(the "Class A Plan") pursuant to Rule 12b-1 under the Investment Company Act
of 1940. The purpose of Class A Plan 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 class A shares. The
Trustees have approved payment by the fund to Putnam Mutual Funds Corp. at an
annual rate of up to 0.25% of the fund's average net assets attributable to
class A shares. For the six months ended May 31, 1994, the fund paid $104,746
in distribution fees for class A shares.
The fund has adopted a separate distribution plan with respect to its class B
shares (the "Class B Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940. The purpose of the Class B Plan is to compensate Putnam
Mutual Funds Corp. for services provided and expenses incurred by it in
distributing class B shares. The Class B Plan provides for payments by the
fund to Putnam Mutual Funds Corp., at an annual rate of 0.85% of the fund's
average net asset value of class B shares. For the six months ended May 31,
1994, the fund paid Putnam Financial Services, Inc. distribution fees of
$99,937 for class B shares.
During the six months ended May 31, 1994, Putnam Mutual Funds Corp., acting
as an underwriter, received net commissions of $43,779 from the sale of class
A shares of the fund.
A deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares purchased as part of an investment of $1 million or more. For
the six months ended May 31, 1994, Putnam Mutual Funds Corp., acting as
underwriter, received $75,937 on such redemptions.
Putnam Mutual Funds Corp. also receives the proceeds of contingent deferred
sales charges levied on class B share redemptions within four years of
purchase. The charge is based on declining rates, which begin at 3% of the
net asset value of the redeemed shares. For the six months ended May 31,
1994, Putnam Mutual Funds Corp. received contingent deferred sales charges of
$41,694 from such redemptions.
<PAGE>
Note 3
Purchases and sales of securities
Purchases and sales of U.S. government obligations other than short-term
investments aggregated $209,378,215 and $252,730,363, 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 May 31, 1994, there was an unlimited number of shares of beneficial
interest authorized, divided into two classes, class A and class B capital
shares. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
For the period
February 16
Six months ended (commencement of operations)
May 31 to November 30
1994 1993
Class A Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 4,424,360 $ 21,438,082 24,648,597 $122,632,845
Shares issued in
connection with
reinvestment of
distributions 448,639 2,173,631 250,068 1,242,772
4,872,999 23,611,713 24,898,665 123,875,617
Shares
repurchased (11,118,097) (53,133,649) (5,830,455) (29,012,179)
Net increase
(decrease) (6,245,098) $(29,521,936) 19,068,210 $ 94,863,438
</TABLE>
<TABLE>
<CAPTION>
For the period
February 16
Six months ended (commencement of operations)
May 31 to November 30
1994 1993
Class B Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 2,159,316 $ 10,465,272 4,838,741 $24,072,683
Shares issued in
connection with
reinvestment of
distributions 98,609 475,649 46,116 229,077
2,257,925 10,940,921 4,884,857 24,301,760
Shares
repurchased (1,450,227) (6,990,582) (568,204) (2,818,482)
Net increase 807,698 $ 3,950,339 4,316,653 $21,483,278
</TABLE>
<PAGE>
Note 5
Reclassification of Capital Accounts
Effective December 1, 1993, Putnam Balanced Government Fund has adopted the
provisions of Statement of Position 93-2 "Determination and Financial
Statement Presentation of Income, Capital Gain and Return of Capital
Distributions by Investment Companies" (SOP). The Purpose of this SOP is to
report the accumulated net investment income (loss) and accumulated net
realized gain (loss) accounts in such a manner as to approximate amounts
available for future distributions (or to offset future realized capital
gains) and to achieve uniformity in the presentation of distributions by
investment companies.
As a result of the SOP, the fund has reclassified $426,455 to increase
distributions in excess of net investment income and to decrease accumulated
net realized loss on investment transactions.
These adjustments represent the cumulative amounts necessary to report these
balances through November 30, 1993, the close of the fund's most recent
fiscal year-end, for the financial reporting and tax purposes.
<PAGE>
Our commitment to quality service
CHOOSE AWARD-WINNING SERVICE.
Putnam Investor Services has won the DALBAR Quality Tested Service Seal every
year since the award's 1990 inception. DALBAR, an independent research firm,
ran more than 10,000 tests of 38 shareholder service components. In every
category, Putnam outperformed the industry standard.
HELP YOUR INVESTMENT GROW.
Set up a systematic program for investing with as little as $25 a month from
a Putnam fund or from your checking or savings account.*
SWITCH FUNDS EASILY.
You can move money from one account to another with the same class of shares
without a service charge. (This privilege is subject to change or
termination.)
ACCESS YOUR MONEY QUICKLY.
You can get checks sent regularly or redeem shares any business day at the
then-current net asset value, which may be more or less than their original
cost.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a helpful
Putnam representative.
To make an additional investment in this or any other Putnam fund, contact
your financial advisor or call our toll-free number: 1-800-225-1581.
*Regular investing, of course, does not guarantee a profit or protect against
a loss in a declining market. Investors should consider their ability to
continue purchasing shares during periods of low price levels.
<PAGE>
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 Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Donald S. Perkins
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Alan J. Bankart
Vice President
Michael Martino
Senior Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Balanced
Government Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives and operating policies of the fund.
<PAGE>
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------
Bulk Rate
U.S. Postage
Paid
Boston, MA
Permit No. 53749
- ---------------
398/428-12993
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS:
(1) Bold and italic typefaces are displayed in normal type.
(2) Headers (e.g., the name of the fund) are omitted.
(3) Certain tabular and columnar headings and symbols are displayed
differently in this filing.
(4) Bullet points and similar graphic signals are omitted.
(5) Page numbering is omitted.
(6) Trademark symbol replaced with (TM)
