Putnam
Balanced
Government
Fund
ANNUAL REPORT
November 30, 1994
(Art-- Balance Scales)
B O S T O N * L O N D O N * T O K Y O
<PAGE>
Performance highlights
From the Chairman
> The fund's total return for class A shares ranked in the top 25%
of the 346 government securities funds tracked by CDA/ Wiesenberger, an
independent fund appraiser, for the year ending November 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.
FISCAL 1994 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Class A Class B
Total return NAV POP NAV CDSC
<S> <C> <C> <C> <C> <C>
......................................................................................................
(change in value during period
plus reinvested
distributions)
12 months ended 11/30/94 -1.12% -4.24% -1.71% -4.52%
Share value NAV POP NAV
......................................................................................................
11/30/93 $4.91 $ 5.07 $4.91
11/30/94 4.60 4.75 4.60
Distributions Tax return
No. Income of capital(1) Total
......................................................................................................
Class A 12 $0.236228 $0.02 $0.256228
Class B 12 0.207453 0.02 0.227453
Current return NAV POP NAV
......................................................................................................
End of period
Current dividend rate(2) 5.89% 5.70% 5.29%
Current 30-day SEC yield(3) 5.55 5.36 4.94
</TABLE>
Performance data represent past results and will differ for each share class.
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
limitation, total returns would have been lower. (1)See page 21 for more
detail. (2)Income portion of most recent distribution, annualized and divided
by NAV or POP at end of period. (3)Based only on investment income,
calculated using SEC guidelines.
*CDA/Wiesenberger rankings vary over time and do not include the effects of
sales charges. The firm ranked the fund's class A and class B shares 81 and
116, respectively, out of 346 government securities funds for the year ending
November 30, 1994. Past performance is not indicative of future results.
<PAGE>
From the Chairman
(Photo George Putanm)
(C)Karsh, Ottawa
Dear Shareholder:
As we begin a new year, most investors won't regret the passing of the old.
Since last February, when the Federal Reserve Board began a series of
increases in interest rates, 1994 was marked by sharp corrections followed by
small gains and extended uncertainty for virtually all financial markets.
Well in advance of the Fed's first increase, Fund Manager Michael Martino had
adopted defensive strategies designed to reduce the impact of rising rates on
Putnam Balanced Government Fund's portfolio. While defensive strategies
proved relatively successful, fund performance generally edged into the
negative numbers.
As you might expect, bonds bore the brunt of the downturn. Although shifts in
the market as a whole inevitably affect your fund, Putnam Management's
philosophy of selecting securities on an issue-by-issue basis with a thorough
examination of each issuer's credit quality should continue to help protect
your fund's portfolio.
In the accompanying report, Mike discusses the fiscal year just ended and
prospects in the challenging months ahead.
Respectfully yours,
(Signature George Putanm)
George Putnam
Chairman of the Trustees
January 18, 1995
<PAGE>
Report from the fund manager
Michael Martino
Following several years of declining interest rates during which bond prices
soared, stronger-than-expected economic data in the fourth quarter of 1993
brought a historic multiyear bond market rally to a halt. In responding to
the accelerating economy, the Federal Reserve Board, for the first time in
five years, tightened its stance on U.S. monetary policy and, in February,
initiated the first in a series of increases in short-term interest rates.
Yields on fixed-income investments rose throughout the fiscal year ending
November 30, 1994. These rises depressed bond prices and, in turn, the total
return of Putnam Balanced Government Fund.
Your fund's 12-month returns (-1.12% for class A shares and -1.71% for class
B shares, at net asset value), although disappointing, were competitive when
viewed in the context of the market's overall performance: the Lehman
Brothers Mortgage-Backed Securities Index measured a return of -1.60% for the
same period. See the performance summary on page 8 for more detail.
Mortgage-backed securities played an important role in the fund's income and
capital preservation strategies. Historically, mortgage-backed securities
have yielded more than Treasuries with comparable maturities. As the risk of
prepayments diminished throughout the year, rising investor demand helped
support mortgage-backed securities prices. In addition, shareholders
benefited from the fund's relatively short average maturity over the year.
This spared portfolio holdings from much of the price volatility that
afflicted longer-term fixed rate securities.
> PRE-EMPTIVE STRATEGIES HELP LIMIT PRICE CHANGES
By regularly balancing the portfolio, we have been able to capitalize on
positive market conditions and interest rate relationships among different
types of securities to help protect the fund's net asset value. During the
early months of the fiscal year, the fund's 40% position in adjustable-rate
mortgage-backed securities (ARMs) provided some defensive cushioning against
declines in other parts of the market. These securities'
<PAGE>
coupons are adjusted periodically in response to market rates. Historically,
this has kept their prices more stable over the longer term than those of
comparable fixed-rate securities.
The fund's ARM allocation is made up of FHLMC (Freddie Mac) and FNMA (Fannie
Mae) securities whose coupons are adjusted relative to the one-year Constant
Maturity Treasury Index (CMT). This index resets more frequently than does
the other major yardstick for adjustable-rate mortgages, the 11th District
Cost of Funds Index (COFI). Therefore, by emphasizing CMT-linked securities,
the fund is better equipped to capture the higher coupons produced by the
rising interest-rate environment.
By late spring, income opportunities in fixed-rate mortgage-backed
securities (FRMs) had grown stronger. Consequently, we reduced our investment
in ARMs to 30% of net assets, the minimum dictated by the fund's investment
policies. Proceeds from the sale of ARMs were reinvested in seasoned FRMs --
bonds with 30-year maturities that were issued several years ago. Seasoned
FRMs tend to be less price-sensitive to rising interest rates and less
susceptible to prepayments since, presumably, the owners of older mortgages
have chosen not to take advantage of recent opportunities to refinance, and
the final maturity dates are shorter. (Bar Chart) PORTFOLIO COMPOSITION as of
11/30/94
(Bar chart)
Supply plot points
Fixed-rate mortgage-backed securities
Adjustable-rate mortgage-backed securities
U.S. Treasuries and Short-term investments
(End of bar chart)
Each allocation represents a percentage of total net assets. Holdings may
vary in the future.
<PAGE>
Within the Treasury sector, the fund's holdings have had a slight "barbell"
orientation. We have concentrated assets in cash, one-year Treasury bills,
and five-year Treasury notes. The objective of this strategy is to match the
average yield of two- to three-year Treasuries, without actually purchasing
those securities. We expect the prices of two- to three-year Treasuries to
remain under pressure as long as the Fed continues its tightening of monetary
policy.
On November 30, 1994, your fund held 50% of net assets in FRMs, with 32% in
ARMs and 18% in U.S. Treasuries and short-term investments. This allocation
was fairly consistent throughout much of the fiscal year's second half.
> MODEST LENGTHENING OF DURATION TO IMPROVE TOTAL RETURN POTENTIAL
Duration measures a bond fund's sensitivity to interest rate changes.
Typically, the shorter the duration of a portfolio, the more stable its net
asset value. The fund's duration reached a low of 1.9 years in July, which
helped to minimize share-price volatility and provided a measure of
protection as interest rates continued to rise.
Our repositioning efforts have extended the fund's duration toward the longer
end of our target range of 1.5 years to 3.5 years. A longer duration
positions the fund for greater share-price appreciation should inflation
fears subside and interest rates stabilize or decrease.
Typically, the duration of ARMs is relatively short because their coupons are
periodically reset to reflect the interest rates being charged on
adjustable-rate mortgages, which generally have shorter maturities than
fixed-rate mortgages.
> ADDITIONAL INTEREST RATE INCREASES LIKELY
INTO 1995
While a genuine economic recovery has been under way for some time, certain
sectors are still experiencing slower-than-average growth. Decreased retail
sales and a leveling off in new home construction and industrial production
would suggest that the Federal Reserve's tight monetary policy is having some
effect.
While we believe the most dramatic rise in interest rates is behind us, we
also believe further Fed tightening is likely to continue this year. We will
be looking for the Fed to walk a fine
<PAGE>
(Line Chart--Supply plot points)
U.S. TREASURY VERSUS MORTGAGE SECURITIES
Lehman Long Term Treasury Index
Lehman Adjustable Rate Mortgage Backed Index
Lehman Mortgage-Backed Securities Index
This chart, which reflects changes in monthly total returns, illustrates the
lower relative volatility offered by mortgage-backed securities of varying
maturities versus long-term Treasury bonds for the year ending
November 30, 1994
(End of line chart)
line between fostering economic growth and keeping inflation in check. While
the market has found some comfort in the fact that inflation remains
moderate, the Fed must continue to act decisively if it is to dampen
expectations of future inflation. Fiscal 1994 arguably encapsulated one of
the worst bond-market performances in history. The dramatic run-up in
short-term interest rates -- 2.75% in just 10 months -- created great
uncertainty. Gauging the future course of interest rates is difficult at
best. We believe, however, that the need for future rate increases should
diminish as the effects of the Fed's tight monetary policy become more
pervasive. In anticipation of this eventuality, we are gradually shifting the
portfolio to reflect a more neutral outlook. Our goal is to have sector
allocations of 30% to 35% in ARMs, 30% in FRMs, and the balance in Treasury
securities.
The views expressed in this report are exclusively those of Putnam Management
and are not meant as investment advice. Although the described holdings were
viewed favorably as of November 30, 1994, there is no guarantee the fund will
continue to hold these securities in the future.
<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 on average how the fund might have
grown each year over varying periods. For comparative purposes, we show how
the fund performed relative to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 11/30/94
<TABLE>
<CAPTION>
Class A Class B
Lehman Bros.
Mortgage-Backed
Securities
NAV POP NAV CDSC Index CPI
<S> <C> <C> <C> <C> <C> <C>
1 year -1.12% -4.24% -1.71 -4.52 -1.60% 2.68%
Life (since 1.29 -2.04 0.21 -2.55 1.90 4.98
2/16/93)
Annual average 0.72 -1.15 0.12 -1.43 1.08 2.75
</TABLE>
TOTAL RETURN FOR PERIODS ENDED 12/31/94
most recent calendar quarter
<TABLE>
<CAPTION>
Class A Class B
NAV POP NAV CDSC
<S> <C> <C> <C> <C>
1 year -1.46% -4.75% -1.85% -4.65%
Life (since
2/16/93) 1.57 -1.77 0.44 -2.31
Annual average 0.83 -0.94 0.23 -1.24
</TABLE>
Fund performance data do not take into account any adjustment for taxes
payable on reinvested distributions. Performance data represent past results
and will differ for each share class. Investment returns and principal value
will fluctuate so an investor's shares, when sold, may be worth more or less
than their original cost.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including any
initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance figures
shown here assume the maximum 3.25% sales charge.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 3% maximum during the first year to
1% during the fourth year. After the fourth year, the CDSC no longer applies.
<PAGE>
(Line chart--supply plot points)
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000
investment since 2/16/93
$10,000 10,325 10,190 9,796 9,671
Lehman Brothers Mortgage Backed Securities Index
Lehman Brothers Adjustable Rate
Mortgage Backed Securities Index
Fund's Class A shares at NAV
Past performance is no asurance of future results. A $10,000 investment in the
fund's class B shares at inception (2/16/93) would have grown to $10,021
by 11/30/94 ($9,745 with a redemption at the end of the period).
All data as of 11/30.
(End of line chart)
COMPARATIVE BENCHMARKS
Lehman Brothers Mortgage-Backed Securities Index reflects performance of 15-
and 30-year fixed-rate securities backed by mortgage pools of the Government
National Mortgage Association, Federal Home Loan Mortgage Corporation, and
Federal National Mortgage Association.
Lehman Brothers Adjustable Rate Mortgage-Backed Securities Index reflects
performance of adjustable-rate securities backed by GNMA, FNMA, and FHLMC
mortgage pools.
Lehman Brothers Long-Term Treasury Index is composed of all bonds covered by
the Lehman Brothers Treasury Bond Index with maturities of 10 years or
greater.
Indexes reflect changes in market price and reinvestment of all interest
payments but do not take into account brokerage commissions or other costs.
Securities in the fund do not match those in the indexes and may pose
different risks.
<PAGE>
Report of Independent Accountants
For the fiscal year ended November 30, 1994
To the Trustees and Shareholders of
Putnam Balanced Government Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Balanced Government Fund, including the portfolio of investments
owned, as of November 30, 1994, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the
two years in the period then ended and the "Financial Highlights" for each of
the periods indicated therein. These financial statements and "Financial
Highlights" are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
"Financial Highlights" based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
"Financial Highlights" are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of November 30, 1994 by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and "Financial Highlights" referred
to above present fairly, in all material respects, the financial position of
Putnam Balanced Government Fund as of November 30, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the "Financial Highlights" for
each of the periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 12, 1995
<PAGE>
Portfolio of investments owned
November 30, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
U.S. Government and Agency Obligations (88.8%)(a)
Principal Amount Value
Federal Home Loan Mortgage Corp.
$1,434,674 6-1/2s, March 1, 2005 $ 1,370,114
405,972 5-1/2s, February 1, 1999 386,942
Federal Home Loan Corp. Adjustable Rate Mortgages (ARMS)
2,341,754 6.191s, November 1, 2018 2,382,735
921,580 5-1/8s, December 1, 2017 918,124
3,972,987 5.625s, April 1, 2017 3,940,706
Federal National Mortgage Association
3,035,672 8s, with various due dates to May 1, 2013 3,010,474
2,557,631 7-1/2s, July 1, 2007 2,471,311
2,281,007 6-1/2s, with various due dates to January 1, 2001 2,147,711
621,132 6s, February 1, 2002 592,211
Federal National Mortgage Association ARMS
1,421,685 7.415s, October 1, 2021 1,427,016
979,684 5.810s, January 1, 2023 981,521
707,409 5.713s, January 1, 2018 706,525
4,750,876 5.47s, April 1, 2018 4,753,846
Government National Mortgage Association
4,279,767 9s , with various due dates to July 15, 2021 4,350,559
1,454,789 8-1/4s, with various due dates to July 15, 2021 1,409,763
5,248,606 8s, with various due dates to September 15, 2023 4,991,497
2,936,553 6-1/2s to October 1, 2024 2,839,280
Government National Mortgage Association ARMS
3,542,382 7s, to June 20, 2023 3,464,892
2,646,955 6-3/4s, June 1, 2023 2,613,868
Government National Mortgage Association Midgets
1,156,000 8-1/2s, June 15, 2007 1,164,971
2,873,337 8s, October 15, 2008 2,826,488
3,767,794 7s, March 15, 2009 3,526,407
10,000,000 Tennessee Valley Authority 7-5/8s to September 15, 1999 9,725,000
5,000,000 U. S. Treasury Notes 6-7/8s, August 31, 1999 4,817,188
Total U. S. Government and Agency Obligations (cost
$70,516,248) $66,819,149
Short-Term Investments (11.1%)(a)
Principal Amount Value
$4,000,000 Federal National Mortgage Association 5.45% due December
8, 1994 $ 3,995,761
4,393,000 Interest in $500,000,000 joint repurchase agreement dated
November 30, 1994 with Bankers Trust Inc., due December
1, 1994 with respect to various U.S. Treasury
obligations-maturity value of $4,393,702 for an effective
yield of 5-3/4%. 4,393,702
Total Short Term Investments (cost $8, 389,463 ) $ 8,389,463
Total Investments (cost $78,905,711 ) (b) $75,208,612
</TABLE>
<PAGE>
NOTES
(a) Percentages indicated are based on net assets of $75,253,726, which
correspond to a net asset value per class A share and class B share of $4.60
and $4.60 respectively.
(b) The aggregate identified cost for Federal Income Tax purposes is
$78,905,009, resulting in unrealized depreciation of $3,696,397.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of assets and liabilities
November 30, 1994
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments at value (identified cost $78,905,711) (Note 1) $75,208,612
Cash 238
Interest and other receivables 702,904
Receivable for shares of the fund sold 9,484
Unamortized organization expenses (Note 1) 32,108
Total assets 75,953,346
Liabilities
Distributions payable to shareholders 300,225
Payable for shares of the fund repurchased 151,176
Payable for compensation of Manager (Note 2) 115,816
Payable for compensation of Trustees (Note 2) 120
Payable for investor servicing and custodian fees (Note 2) 14,513
Payable for administrative services (Note 2) 2,382
Payable for distribution fees (Note 2) 38,130
Payable for organizational costs (Note 1) 49,893
Other accrued expenses 27,365
Total liabilities 699,620
Net assets $75,253,726
Represented by
Paid-in capital (Notes 1, 4 and 5) $82,869,386
Distributions in excess of net investment income (300,204)
Accumulated net realized loss on investment transactions (3,618,357)
Net unrealized depreciation of investments (3,697,099)
Total--Representing net assets applicable to capital shares
outstanding $75,253,726
Computation of net asset value and offering price
Net asset value and redemption price of class A shares
($53,830,502 divided by 11,696,188 shares) $4.60
Offering price per share (100/96.75 of $4.60)+ $4.75
Net asset value and offering price of class B shares
($21,423,224 divided by 4,656,113 shares)+ $4.60
</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 year ended November 30, 1994
<TABLE>
<CAPTION>
<S> <C>
Interest income $ 6,285,216
Expenses:
Compensation of Manager (Note 2) 566,802
Investor servicing and custodian fees (Note 2) 140,053
Compensation of Trustees (Note 2) 8,993
Reports to shareholders 30,072
Auditing 23,907
Legal 13,481
Postage 6,813
Administrative services (Note 2) 6,720
Amortization of organization expenses (Note 1) 9,917
Distribution fees--class A (Note 2) 176,133
Distribution fees--class B (Note 2) 198,670
Registration fees 13,227
Other 2,303
Fees waived by the Manager (Note 2) (28,017)
Total expenses 1,169,074
Net investment income 5,116,142
Net realized loss on investments (Notes 1 and 2) (3,902,597)
Net unrealized depreciation of investments during the period (2,920,007)
Net loss on investment transactions (6,822,604)
Net decrease in net assets resulting from operations $(1,706,462)
</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
(commencement of
Year ended operations) to
November 30 November 30
1994 1993
<S> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income $ 5,116,142 $ 2,340,846
Net realized loss on investments (3,902,597) (767,660)
Net unrealized depreciation of investments (2,920,007) (777,092)
Net increase (decrease) in net assets resulting from
operations (1,706,462) 796,094
Distributions to shareholders from:
Net investment income
Class A (3,404,487) (1,914,742)
Class B (992,855) (393,310)
Tax return of capital
Class A (355,268) --
Class B (103,607) --
Increase (decrease) from capital share transactions
(Note 4) (33,118,455) 116,346,716
Total increase (decrease) in net assets (39,681,134) 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 $300,204
and $32,896 respectively) $ 75,253,726 $114,934,860
</TABLE>
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, 1993 February 16, 1993
(commencement (commencement
Year ended of operations) to Year ended of operations) to
November 30 November 30 November 30 November 30
1994 1993 1994 1993
Class B Class A
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 4.91 $ 5.00 $ 4.91 $ 5.00
Investment operations
Net investment income .24(b) .18(a)(b) .27(b) .21(a)(b)
Net realized and unrealized gain
(loss) on investments (.32) (.08) (.32) (.09)
Total from investment operations (.08)(b) .10(b) (.05)(b) .12(b)
Distributions to shareholders from:
Net investment income (.21) (.19) (.24) (.21)
Tax return of capital (c) (.02) -- (.02) --
Total distributions (.23) (.19) (.26) (.21)
Net Asset Value, End of Period $ 4.60 $ 4.91 $ 4.60 $ 4.91
Total investment return at net asset
value (%) (d) (1.71) 1.95(e) (1.12) 2.44(e)
Net assets, end of period (in
thousands) $21,423 $ 4,317 $53,831 $19,088
Ratio of expenses to average net
assets (%) 1.69 .67(b)(e) 1.09 1.05(b)(e)
Ratio of net investment income to
average net assets (%) 4.98 3.53(b)(e) 5.59 3.13(b)(e)
Portfolio turnover (%) 351.62 309.80(e) 351.62 309.80(e)
</TABLE>
(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 an expense limitation in effect during the period February 16,
1993 (commencement of operations) to November 30, 1993 (see Note 2). As a
result of such limitation, expenses of the fund for the period February 16,
1993 (commencement of operations) to November 30, 1993 reflect a reduction of
$0.01 per share for class A and $0.01 per share for class B. For the year
ended November 30, 1994 the reduction is less than $0.01 per share for class
A and less than $0.01 per share for class B.
(c) Distributions from return of capital for the year ended November 30, 1994
have been calculated in accordance with Statement of Position 93-2
"Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies"
(see notes 1 and 5).
(d) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(e) Not annualized.
<PAGE>
Notes to financial statements
November 30, 1994 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 value
following procedures approved by the Trustees.
B Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission the fund may transfer uninvested cash
balances into a joint trading account, along with the cash of other
registered investment companies managed by Putnam Investment Management, Inc.
("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of
Putnam Investments, Inc. and certain other accounts. These balances may be
invested in one or more repurchase agreements and/or short-term money market
instruments.
C Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value
of which at the time of purchase is required to be in an amount at least
equal to the resale price, including accrued interest. 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.
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.
<PAGE>
E 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 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, 1994, the fund had a capital loss carryover of approximately
$3,618,000, which may be available to offset realized gains, if any, to the
extent provided by regulations. Of this amount $297,000 and $3,321,000 will
expire November 30, 2001 and 2002 respectively. 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.
F Distributions to shareholders Income dividends are recorded daily by the
fund and are distributed monthly. Capital gains distribution(s), if any, are
only recorded on the ex-dividend date and paid no less frequently than
annually.
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 treatment of GNMA
paydowns. Reclassifications are made to the funds capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended November 30,
1994 the fund reclassified $625,445 to increase distributions in excess of
net investment income and increase accumulated net realized gains.
G 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.
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 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 com-
<PAGE>
pensation payable under the management contract to the Manager. As a result
of the voluntary limitation, expenses for the year ended November 30, 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.
Trustees of the fund receive an annual Trustee's fee of $530 or any
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons 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.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended November 30, 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 0.25% of the fund's average net assets attributable to 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.
During the year ended November 30, 1994, Putnam Mutual Funds Corp., acting as
an underwriter, received net commissions of $46,022 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 year ended November 30, 1994, Putnam Mutual Funds Corp., acting as
underwriter, received $79,622 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 year ended November 30, 1994,
Putnam Mutual Funds Corp. received contingent deferred sales charges of
$94,234 from such redemptions.
Note 3
Purchases and sales of securities
Purchases and sales of U.S. government obligations other than short-term
investments aggregated $328,611,016 and $383,858,257, 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 November 30, 1994, there was an unlimited number of shares of beneficial
interest authorized, divided into two classes. Class A and class B capital
shares transactions were as follows:
<PAGE>
<TABLE>
<CAPTION>
For the period
February 16
(commencement of
Year ended operations) to
November 30 November 30
1994 1993
Class A Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 6,328,904 $ 30,343,192 24,648,597 $122,632,845
Shares issued in connection
with reinvestment of
distributions 644,768 3,091,225 250,068 1,242,772
6,973,672 33,434,417 24,898,665 123,875,617
Shares repurchased (14,365,493) (68,320,646) (5,830,455) (29,012,179)
Net increase (decrease) (7,391,821) $(34,886,229) 19,068,210 $ 94,863,438
</TABLE>
<TABLE>
<CAPTION>
For the period
February 16
(commencement of
Year ended operations) to
November 30 November 30
1994 1993
Class B Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 3,048,911 $ 14,623,970 4,838,741 $24,072,683
Shares issued in
connection with
reinvestment of
distributions 174,536 830,767 46,116 229,077
3,223,447 15,454,737 4,884,857 24,301,760
Shares repurchased (2,884,188) (13,686,963) (568,204) (2,818,482)
Net increase 339,259 $ 1,767,774 4,316,653 $21,483,278
</TABLE>
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 prior fiscal
year-end, for financial reporting and tax purposes.
<PAGE>
Federal Tax Information
RETURN OF CAPITAL FOR FISCAL YEAR ENDED NOVEMBER 30, 1994
Coincident with the year-end financial review of the portfolio, it was
determined that approximately 9% of the fiscal year's distribution must be
classified as a return of capital and is therefore not taxable to
shareholders.
Your Form 1099, mailed in January 1995, will indicate the exact amount of the
distributions not subject to tax. You will need to adjust the cost basis of
your shares when you eventually redeem or exchange them. In doing so, you
will increase any capital gain or decrease any capital loss you incur at that
time.
The return of capital is related to the massive wave of mortgage refinancings
that occurred during the fund's fiscal year, which resulted in early
prepayment of principal on many of the fund's mortgage-backed securities.
Since mortage-backed securities are backed by pools of mortgage loans, when
homeowners refinance and thereby retire their existing mortgages early, the
securities backed by those mortgages are also retired early. An Internal
Revenue Service provision requires that the capital losses realized on these
retired securities be reclassified as deductions from ordinary income for tax
purposes. As a result, approximately 9% of the total per-share distribution
for class A and class B shares represents a return of capital, with the
balance being ordinary income dividends.
<PAGE>
Our commitment to quality service
> CHOOSE AWARD-WINNING SERVICE.
Putnam Investor Services has won the DALBAR Quality Tested Service Seal for
the past five years, through 1994. 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 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
INDEPENDENT
ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John R. Verani
Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Alan J. Bankart
Vice President
Michael Martino
Vice President and Fund Manager
William N. Shiebler
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, 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.
<PAGE>
398/428-15840
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
..................
Bulk Rate
U.S. Postage
Paid
Putnam
Investments
..................
<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)
