PUTNAM ASSET ALLOCATION: GROWTH PORTFOLIO
ONE POST OFFICE SQUARE, BOSTON, MA 02109
PROSPECTUS - JANUARY 10, 1994,
AS REVISED FEBRUARY 7, 1994
THIS PROSPECTUS RELATES ONLY TO CLASS A SHARES OF THE FUND
OFFERED WITHOUT A SALES CHARGE THROUGH ELIGIBLE EMPLOYER-
SPONSORED DEFINED CONTRIBUTION PLANS ("DEFINED CONTRIBUTION
PLANS").
This Prospectus explains concisely what you should know before
investing in the Fund. Please read it carefully and keep it for
future reference. You can find more detailed information in the
January 10, 1994 Statement of Additional Information, as amended
from time to time. For a free copy of the Statement or other
information, including Prospectuses regarding other classes of
Fund shares or Class A shares for other investors, call Putnam
Investor Services at 1-800-752-9894. The Statement has been
filed with the Securities and Exchange Commission and is
incorporated into this Prospectus by reference.
THE FUND IS A SERIES OF PUTNAM ASSET ALLOCATION FUNDS (THE
"TRUST"), AN INVESTMENT COMPANY OFFERING THREE SEPARATE
PORTFOLIOS: PUTNAM ASSET ALLOCATION: GROWTH PORTFOLIO, PUTNAM
ASSET ALLOCATION: BALANCED PORTFOLIO AND PUTNAM ASSET
ALLOCATION: CONSERVATIVE PORTFOLIO. EACH PORTFOLIO IS AN ASSET
ALLOCATION FUND THAT ALLOCATES ITS INVESTMENTS AMONG EQUITIES AND
FIXED INCOME SECURITIES WITHIN PREDEFINED RANGES BASED ON ITS
INVESTMENT OBJECTIVE AND ECONOMIC AND OTHER CONDITIONS. THE FUND
SEEKS CAPITAL APPRECIATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PUTNAMINVESTMENTS
Putnam Defined
Contribution Plans
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ABOUT THE FUND.........................................2
Expenses summary.......................................2
Objective..............................................3
How objective is pursued...............................3
How performance is shown .............................13
How the Fund is managed ..............................13
Organization and history..............................14
ABOUT YOUR INVESTMENT
How to buy shares.....................................16
Distribution Plan.....................................16
How to sell shares....................................17
How to exchange shares................................17
How the Fund values its shares........................18
How distributions are made; tax information...........18
ABOUT PUTNAM INVESTMENTS, INC.........................19
APPENDIX
Fixed-income security ratings.........................19
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ABOUT THE FUND
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing in
the Fund. The following table summarizes the expenses which the
Fund expects to incur in its first fiscal year. The Example
shows the estimated cumulative expenses attributable to a
hypothetical $1,000 investment in shares of the Fund over
specified periods.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after expense
limitation discussed below) 0.64%
12b-1 Fees 0.25%
Other Expenses 0.38%
Total Fund Operating Expenses 1.27%
(after expense limitation)
The table is provided to help you understand your share of the
operating expenses which the Fund expects to incur during its
first fiscal year. The annual management fees shown in the table
reflect an expense limitation currently in effect. In the
absence of the expense limitation, estimated management fees for
the Fund would be 0.70% and estimated total Fund operating
expenses would be 1.33%. The 12b-1 fees shown in the table
reflect the amount to which the Trustees currently limit payments
under the Distribution Plan. "Other expenses" are based on
estimated amounts for the Fund's first fiscal year.
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return and redemption at the end of each
period:
1 YEAR 3 YEARS
$13 $40
The Example does not represent past or future expense levels.
Actual Fund expenses may be more or less than those shown.
Federal regulations require the Example to assume a 5% annual
return, but actual annual return will vary. The Example does not
reflect any charges or expenses related to your employer's plan.
The Fund also offers other classes of shares. See "Organization
and history" for additional information.
OBJECTIVE
THE FUND SEEKS CAPITAL APPRECIATION. The Fund is not intended to
be a complete investment program, and there is no assurance that
the Fund will achieve its objective.
HOW OBJECTIVE IS PURSUED
BASIC INVESTMENT STRATEGY
The Fund's strategic allocation indicates the typical percentage
allocation of its investments between equity securities and fixed
income securities (including money market instruments), although
Putnam Investment Management, Inc., the Fund's investment manager
("Putnam Management"), may adjust these allocations within the
ranges described below. The strategic allocation and the range
of active allocation are shown below:
STRATEGIC
ALLOCATION RANGE
EQUITY
CLASS 80% 65-95%
FIXED
INCOME
CLASS 20% 5-35%
The percentage limitations are applied at the time of purchase.
The Fund may also select other investments that do not fall
within the asset classes listed above.
Under normal market conditions, Putnam Management will allocate
the assets of the Fund within the specified ranges above or below
the strategic allocation whenever, based on Putnam Management's
experience in qualitative analysis and disciplined quantitative
techniques, its research and analysis indicate changes in
financial markets that reflect changed valuations within and
between the asset classes.
Allocating assets within a specified range above or below a
strategic allocation permits the Fund to attempt to optimize
performance consistent with its investment objective. The risks
of each asset class vary. For example, the values of equity
securities change in response to general market and economic
conditions and the activities and changing circumstances of
individual issuers, and the values of fixed income securities
change in response to changes in economic conditions, interest
rates and the creditworthiness of individual issuers. A
significant portion of the Fund's equity and fixed income
investments may consist of foreign securities, which involve the
risks set forth in "Risk factors" below.
EQUITY CLASS
THE FUND WILL INVEST ITS ASSETS ALLOCATED TO THE EQUITY CLASS IN
A DIVERSIFIED PORTFOLIO OF EQUITY SECURITIES THAT PUTNAM
MANAGEMENT BELIEVES HAVE THE POTENTIAL FOR CAPITAL APPRECIATION.
THESE MAY INCLUDE WIDELY TRADED COMMON STOCKS OF LARGER
COMPANIES, AS WELL AS COMMON STOCKS OF SMALLER, LESS WELL-KNOWN
COMPANIES. In selecting equity securities for the Fund, Putnam
Management will consider, among other things, an issuer's
financial strength, competitive position and projected future
earnings and dividends. Common stocks are normally the main type
of the Fund's equity investments. However, the Fund may purchase
preferred stocks, convertible securities and warrants.
The Fund may invest a portion of its assets in common stocks
Putnam Management believes are significantly undervalued. In
selecting such securities, Putnam Management will focus on
industries and issuers it considers to have particular
possibilities for long-term capital appreciation due to potential
growth of earnings which, in the judgment of Putnam Management,
is not fully reflected in current market prices. In selecting
undervalued securities, Putnam Management may consider investment
judgments contrary to those of most investors.
Investing in securities of smaller, less well-known companies may
present greater opportunities for capital appreciation, but may
also involve greater risks. These companies may have limited
product lines, markets or financial resources, or may depend on a
limited management group. Their securities may trade less
frequently and in limited volume. As a result, the prices of
these securities may fluctuate more than prices of securities of
larger, more established companies.
FIXED INCOME CLASS
THE FUND WILL INVEST ITS ASSETS ALLOCATED TO THE FIXED INCOME
CLASS IN A DIVERSIFIED PORTFOLIO OF DEBT SECURITIES, INCLUDING
BOTH U.S. AND FOREIGN GOVERNMENT OBLIGATIONS AND CORPORATE
OBLIGATIONS.
The values of fixed income securities generally fluctuate inboth
U.S. and foreign government obligations and corporate response to
changes in interest rates. Thus, a decrease in interest
ratesobligations. will generally result in an increase in the
value of the Fund's assets allocated to the Fixed Income Class.
Conversely, during periods of rising interest rates, the value of
the Fund's assets allocated to such Class will generally decline.
The magnitude of these fluctuations will generally be greater for
securities with longer maturities. Debt securities are subject
to varying degrees of risk of default depending upon, among other
factors, the creditworthiness of the issuer and the ability of
the borrower to meet its obligations.
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THE FUND MAY INVEST IN LOWER-RATED FIXED INCOME SECURITIES.
Lower-rated fixed income securities are generally regarded as
those rated below Baa by Moody's Investors Service, Inc.
("Moody's") or BBB by Standard & Poor's Corporation ("Standard &
Poor's") or securities of comparable quality as determined by
Putnam Management. The Fund will not purchase fixed income
securities rated at the time of purchase lower than Caa by
Moody's or CCC by Standard & Poor's, or, if unrated, determined
by Putnam Management to be of comparable quality, if, as a
result, more than 5% of the Fund's total assets would be invested
in securities of that quality. Such securities may be in default
and are generally regarded by the rating agencies as having
extremely poor prospects of ever attaining any real investment
standing. The values of lower-rated fixed income securities,
commonly known as "junk bonds," generally fluctuate more than
those of higher-rated fixed income securities. In addition, the
lower rating reflects a greater possibility that the financial
condition of the issuer, or adverse changes in general economic
conditions, or both, may impair the ability of the issuer to make
payments of interest and repayments of principal. The rating
services' descriptions of debt securities are included in the
Appendix to this Prospectus. The Fund will not necessarily
dispose of a security when its rating is reduced below its rating
at the time of purchase, although Putnam Management will monitor
the investment to determine whether continued investment in the
security will assist in meeting the Fund's investment objective.
Putnam Management may take full advantage of the entire range of
fixed income securities and may adjust the average maturity of
the Fund's portfolio from time to time depending on its
assessment of relative yields on securities of different
maturities and its expectations of future changes in interest
rates.
At times, some or all of the Fund's fixed income assets may be
invested in securities as to which the Fund, by itself or
together with other funds and accounts managed by Putnam
Management and its affiliates, holds a major portion or all of
such securities. Under adverse market or economic conditions or
in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell such
securities when Putnam Management believes it advisable to do so
or may be able to sell such securities only at prices lower than
if such securities were more widely held. Under such
circumstances, it may also be more difficult to determine the
fair value of such securities for purposes of computing the
Fund's net asset value. In order to enforce its rights in the
event of a default under such securities, the Fund may be
required to take possession of and manage assets securing the
issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the Fund's net
asset value.
Putnam Management seeks to minimize the risks of investing in
lower-rated securities through investment analysis and attention
to current developments in interest rates and economic
conditions. The lower ratings of certain fixed income securities
held by the Fund reflects a greater possibility that adverse
changes in the financial condition of their issuers, or in
general economic conditions, or both, or an unanticipated rise in
interest rates, may impair the ability of their issuers to make
payments of interest and principal. In addition, under such
circumstances the values of such securities may be more volatile,
and the markets for such securities may be less liquid, than
those for higher-rated securities, and the Fund may as a result
find it more difficult to determine the fair value of such
securities. When the Fund invests in fixed income securities in
the lower rating categories, the achievement of the Fund's goals
is more dependent on Putnam Management's investment analysis than
would be the case if the Fund was investing in fixed income
securities in the higher rating categories.
The Fund may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a
significant discount from their principal amount and pay interest
only at maturity rather than at intervals during the life of the
security. Payment-in-kind bonds allow the issuer, at its option,
to make current interest payments on the bonds either in cash or
in additional bonds. The value of zero-coupon bonds is subject
to greater fluctuation in response to changes in market interest
rates than bonds which pay interest currently. Both zero-coupon
and payment-in-kind bonds allow an issuer to avoid the need to
generate cash to meet current interest payments. Accordingly,
such bonds may involve greater credit risks than bonds paying
interest currently. Even though such bonds do not pay current
interest in cash, the Fund is nonetheless required to accrue
interest income on such investments and to distribute such
amounts at least annually to shareholders. Thus, the Fund could
be required at times to liquidate other investments in order to
satisfy its distribution requirements.
Certain securities held by the Fund may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were
to redeem securities held by the Fund during a time of declining
interest rates, the Fund might not be able to reinvest the
proceeds in securities providing the same investment return as
the securities redeemed.
FOR ADDITIONAL INFORMATION CONCERNING THE RISKS ASSOCIATED WITH
INVESTMENTS BY THE FUND IN SECURITIES IN THE LOWER RATING
CATEGORIES, SEE THE STATEMENT OF ADDITIONAL INFORMATION.
ASSET-BACKED AND MORTGAGE-BACKED SECURITIES. The Fund may invest
some or all of its assets allocated to the Fixed Income Class in
asset-backed and mortgage-backed securities, such as
collateralized mortgage obligations. Mortgage-backed securities
represent a participation in, or are secured by, mortgage loans
and include securities issued or guaranteed by the United States
government or one of its agencies or instrumentalities;
securities issued by private issuers that represent an interest
in or are collateralized by mortgage-backed securities issued or
guaranteed by the U.S. government or one of its agencies or
instrumentalities; or securities issued by private issuers that
represent an interest in or are collateralized by mortgage loans
or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement.
Asset-backed securities are structured like mortgage-backed
securities, but instead of mortgage loans or interests in
mortgage loans, the underlying assets may include motor vehicle
installment sales or installment loan contracts, leases of
various types of real and personal property, and receivables from
credit card agreements. The ability of an issuer of asset-backed
securities to enforce its security interest in the underlying
assets may be limited.
Due to the risk of voluntary prepayment, especially when interest
rates decline, mortgage-backed and asset-backed securities are
less effective than other types of securities as a means of
"locking in" attractive long-term interest rates and, as a
result, may have less potential for capital appreciation during
periods of declining interest rates than other securities of
comparable maturities. If the Fund purchases mortgage-backed and
asset-backed securities at a premium above their par value,
unscheduled prepayments made at par will cause the Fund to suffer
a loss equal to any unamortized premium.
MONEY MARKET INSTRUMENTS. The Fund may invest in high quality
money market obligations that present minimal credit risk and may
include U.S. government obligations, certificates of deposit,
bankers' acceptances, bank deposits, other financial institution
obligations, and commercial paper and other short-term corporate
obligations. These instruments have various maturities and may
have fixed or variable interest rates. The Fund may also hold a
portion of its assets in cash.
RISK FACTORS
INVESTMENTS IN FOREIGN SECURITIES. The Fund may invest up to 40%
of its assets in securities principally traded in foreign
markets. The Fund may also purchase Eurodollar certificates of
deposit without regard to this limit. Foreign investments
involve certain risks not present in domestic securities.
Because the Fund intends to purchase securities that are normally
denominated and traded in foreign currencies, the values of these
assets and any investment income derived from them may be
affected favorably or unfavorably by currency exchange rates and
exchange control regulations. In addition, although a portion of
the Fund's investment income may be received or realized in such
foreign currencies, the Fund will be required to compute and
distribute its income in U.S. dollars, which may subject the Fund
to various risks due to currency fluctuations. For example, if
the exchange rate for any such currency declines after the Fund's
income has been earned and translated into U.S. dollars but
before payment, the Fund could be required to liquidate portfolio
securities to make such distributions. The values of foreign
fixed income securities will fluctuate in response to changes in
U.S. and foreign interest rates. Income received by the Fund
from sources within foreign countries may be reduced by
withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may
reduce or eliminate such taxes. Any such taxes paid by the Fund
will reduce its net income available for distribution to
shareholders. Putnam Management will consider available yields,
net of any required taxes, in selecting foreign securities.
There may be less information publicly available about a foreign
issuer than about a U.S. issuer, and foreign issuers are not
generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the United States.
The securities of some foreign issuers are less liquid and at
times more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions and other fees are also generally
higher than in the United States. Foreign settlement procedures
and trade regulations may involve certain risks (such as delay in
payment or delivery of securities or in the recovery of the
Fund's assets held abroad) and expenses not present in the
settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange
controls, confiscatory taxation, political or financial
instability and diplomatic developments which could affect the
value of the Fund's investments in certain foreign countries.
Legal remedies available to investors in certain foreign
countries may be more limited than those available with respect
to investments in the United States or in other foreign
countries. The laws of some foreign countries may limit the
Fund's ability to invest in securities of certain issuers located
in those foreign countries. Special tax considerations apply to
foreign securities.
FOR MORE INFORMATION CONCERNING THE RISKS ASSOCIATED WITH
INVESTING IN FOREIGN SECURITIES, SEE THE STATEMENT OF ADDITIONAL
INFORMATION.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Putnam Management may
engage in foreign currency exchange transactions to protect
against uncertainty in the level of future exchange rates.
Putnam Management may engage in foreign currency exchange
transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect the
value of specific portfolio positions ("position hedging").
The Fund may engage in transaction hedging to protect against a
change in the foreign currency exchange rate between the date on
which the Fund contracts to purchase or sell the security and the
settlement date, or to "lock in" the U.S. dollar equivalent of a
dividend or interest payment in a foreign currency. The Fund may
purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate as part of its transaction hedging
strategies.
If conditions warrant, the Fund may also enter into contracts to
purchase or sell foreign currencies at a future date ("forward
contracts") and purchase and sell foreign currency futures
contracts as part of its transaction hedging strategies. A
foreign currency forward contract is a negotiated agreement to
exchange currency at a future time at a rate or rates that may be
higher or lower than the spot rate. Foreign currency futures
contracts are standardized exchange-traded contracts and have
margin requirements. The Fund may also purchase exchange-listed
and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies.
The Fund may engage in "position hedging" to protect against the
decline in the value relative to the U.S. dollar of the
currencies in which its portfolio securities are denominated or
quoted (or an increase in the value of the foreign currencies for
securities which the Fund intends to buy, when the Fund holds
cash reserves or short-term investments). For position hedging
purposes, the Fund may purchase or sell foreign currency futures
contracts, foreign currency forward contracts, and put and call
options on foreign currency futures contracts and on foreign
currencies on exchanges or in over-the-counter markets. In
connection with position hedging, the Fund may also purchase or
sell foreign currencies on a spot basis.
The Fund's currency hedging transactions may call for the
delivery of one foreign currency in exchange for another foreign
currency and may at times not involve currencies in which its
portfolio securities are then denominated. Putnam Management
will engage in such "cross hedging" activities when it believes
that such transactions provide significant hedging opportunities
for the Fund. Cross hedging transactions by the Fund involve the
risk of imperfect correlation between changes in the values of
the currencies to which such transactions relate and changes in
the value of the currency or other asset or liability which is
the subject of the hedge.
Hedging transactions involve costs and may result in losses.
There is no assurance that appropriate foreign currency exchange
transactions will be available with respect to all currencies in
which the Fund's investments may be denominated. The Fund's
ability to engage in hedging transactions may be limited by tax
considerations. The Fund's hedging transactions may affect the
character or amount of the Fund's distributions.
FOR MORE INFORMATION RELATING TO FOREIGN CURRENCY EXCHANGE
TRANSACTIONS, SEE THE STATEMENT OF ADDITIONAL INFORMATION. FOR
MORE INFORMATION ABOUT FUTURES CONTRACTS AND RELATED OPTIONS, SEE
"FINANCIAL FUTURES AND OPTIONS" BELOW.
SHORT-TERM TRADING. UNDER CERTAIN MARKET CONDITIONS, THE FUND
MAY SEEK PROFITS BY SHORT-TERM TRADING. The length of time the
Fund has held a particular security is not generally a
consideration in investment decisions. A change in the
securities held by the Fund is known as "portfolio turnover." To
the extent short-term trading strategies are used, the Fund's
portfolio turnover rate may be higher than that of other mutual
funds. Portfolio turnover generally involves some expense to the
Fund, including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and
reinvestment in other securities. Such transactions may result
in realization of taxable capital gains. While it is impossible
to predict the Fund's portfolio turnover rate, Putnam Management,
based on its experience, believes that such rate will not exceed
150%.
DEFENSIVE STRATEGIES
AT TIMES PUTNAM MANAGEMENT MAY JUDGE THAT CONDITIONS IN THE
SECURITIES MARKETS MAKE PURSUING THE FUND'S BASIC INVESTMENT
STRATEGY INCONSISTENT WITH THE BEST INTERESTS OF ITS
SHAREHOLDERS. At such times Putnam Management may temporarily
use alternative strategies, primarily designed to reduce
fluctuations in the value of the Fund's assets. In implementing
these "defensive" strategies, depending on the circumstances, the
Fund may invest without regard to the ranges described above for
investments in the various asset classes and may invest primarily
in equity securities, debt securities, preferred stocks, U.S.
government and agency obligations, cash or money market
instruments, or in other securities Putnam Management considers
consistent with such defensive strategies. It is impossible to
predict when, or for how long, the Fund will use such alternative
strategies.
FINANCIAL FUTURES AND OPTIONS
THE FUND MAY BUY AND SELL FINANCIAL FUTURES CONTRACTS ON STOCK
INDEXES, U.S. GOVERNMENT SECURITIES, FOREIGN FIXED INCOME
SECURITIES AND ON FOREIGN CURRENCIES. A futures contract is a
contract to buy or sell units of a particular stock index (an
"Index Future"), or a certain amount of a U.S. Government
security, foreign fixed income security or foreign currency, at
an agreed price on a specified future date. Depending on the
change in value of the index, security or currency between the
time when the Fund enters into and terminates a futures contract,
the Fund realizes a gain or loss. The Fund may purchase and sell
futures contracts for hedging purposes and to adjust the Fund's
exposure to the relevant stock or bond markets. For example,
when Putnam Management wants to increase the Fund's exposure to
equity securities, it may do so by taking long positions in
futures contracts on equity indices such as futures contracts on
the Standard & Poor's 500 Stock Index. Similarly, when Putnam
Management wants to increase the Fund's exposure to fixed income
securities, it may do so by taking long positions in futures
contracts relating to fixed income securities such as futures
contracts on U.S. Treasury bonds or notes. The Fund may buy and
sell call and put options on futures contracts or on stock
indices in addition to or as an alternative to purchasing or
selling futures contracts or, to the extent permitted by
applicable law, to earn additional income.
THE USE OF FUTURES AND OPTIONS INVOLVES CERTAIN SPECIAL RISKS.
FUTURES AND OPTIONS TRANSACTIONS INVOLVE COSTS AND MAY RESULT IN
LOSSES. Certain risks arise because of the possibility of
imperfect correlations between movements in the prices of
financial futures contracts and options and movements in the
prices of the underlying stock index, securities, or currencies
or of the securities or currencies which are the subject of the
hedge. The successful use of futures and options further depends
on Putnam Management's ability to forecast market or interest
rate movements correctly. Other risks arise from the Fund's
potential inability to close out its futures or related options
positions, and there can be no assurance that a liquid secondary
market will exist for any futures contract or option at a
particular time. The Fund's ability to terminate option
positions established in the over-the-counter market may be more
limited than for exchange-traded options and may also involve the
risk that securities dealers participating in such transactions
would fail to meet their obligations to the Fund. The use of
futures or options on futures for purposes other than hedging is
regarded as speculative.
Because the markets for options and futures on foreign equity and
fixed income securities and foreign currencies are relatively new
and still developing, the Fund's ability to engage in such
transactions may be limited. Certain provisions of the Internal
Revenue Code and certain regulatory requirements may also limit
the Fund's ability to engage in futures and options transactions.
A MORE DETAILED EXPLANATION OF FUTURES AND OPTIONS TRANSACTIONS,
INCLUDING THE RISKS ASSOCIATED WITH THEM, IS INCLUDED IN THE
STATEMENT OF ADDITIONAL INFORMATION.
INVESTMENTS IN PREMIUM SECURITIES
The Fund may invest some or all of its assets allocated to the
Fixed Income Class in securities bearing coupon rates higher than
prevailing market rates. Such "premium" securities are typically
purchased at prices greater than the principal amounts payable on
maturity. The Fund does not amortize the premium paid for such
securities in calculating its net investment income. As a
result, the purchase of such securities provides the Fund a
higher level of investment income distributable to shareholders
on a current basis than if the Fund had purchased securities
bearing current market rates of interest. Because the value of
premium securities tends to approach the principal amount as they
approach maturity (or call price in the case of securities
approaching their first call date), the purchase of such
securities may increase the Fund's risk of capital loss if such
securities are held to maturity (or first call date).
During a period of declining interest rates, some of the Fund's
portfolio investments will likely bear coupon rates which are
higher than the current market rates, regardless of whether such
securities were originally purchased at a premium. Such
securities would generally carry premium market values which
would be reflected in the net asset value of the Fund's shares.
As a result, an investor who purchases shares of the Fund during
such periods would initially receive higher taxable distributions
(derived from the higher coupon rates payable on the Fund's
investments) than might be available from alternative investments
bearing current market interest rates, but may face an increased
risk of capital loss as these higher coupon securities approach
maturity (or first call date). In evaluating the potential
performance of an investment in the Fund, investors may find it
useful to compare the Fund's current dividend rate with the
Fund's "yield," which is computed on a yield-to-maturity basis in
accordance with SEC regulations and which reflects amortization
of market premiums. See "How performance is shown."
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OTHER INVESTMENT PRACTICES
THE FUND MAY ALSO ENGAGE TO A LIMITED EXTENT IN THE FOLLOWING
INVESTMENT PRACTICES, EACH OF WHICH INVOLVES CERTAIN SPECIAL
RISKS. THE STATEMENT OF ADDITIONAL INFORMATION CONTAINS MORE
DETAILED INFORMATION ABOUT THESE PRACTICES, INCLUDING LIMITATIONS
DESIGNED TO REDUCE THESE RISKS.
OPTIONS. The Fund may seek to increase its current return by
buying and selling covered call and put options on securities it
owns or in which it may invest and on foreign currencies. The
Fund receives a premium from writing a call or put option, which
increases the Fund's return if the option expires unexercised or
is closed out at a net profit. When the Fund writes a call
option, it gives up the opportunity to profit from any increase
in the price of a security or currency above the exercise price
of the option; when it writes a put option, the Fund takes the
risk that it will be required to purchase a security or currency
from the option holder at a price above the current market price
of the security or currency. The Fund may terminate an option
that it has written prior to its expiration by entering into a
closing purchase transaction in which it purchases an option
having the same terms as the option written. The Fund may also
buy and sell put and call options for hedging purposes. The Fund
may also from time to time buy and sell combinations of put and
call options on the same underlying security or currency to earn
additional income. The aggregate value of the securities and
foreign currencies underlying options written by the Fund may not
exceed 25% of the Fund's assets. The Fund's use of options
strategies may be limited by applicable law.
SECURITIES LOANS, REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS.
The Fund may lend portfolio securities amounting to not more than
25% of its assets to broker-dealers and may enter into repurchase
agreements on up to 25% of its assets. These transactions must
be fully collateralized at all times. The Fund may also purchase
securities for future delivery, which may increase its overall
investment exposure and involves a risk of loss if the value of
the securities declines prior to the settlement date. These
transactions involve some risk to the Fund if the other party
should default on its obligation and the Fund is delayed or
prevented from recovering the collateral or completing the
transaction.
LIMITING INVESTMENT RISK
SPECIFIC INVESTMENT RESTRICTIONS HELP THE FUND LIMIT INVESTMENT
RISKS FOR ITS SHAREHOLDERS. THESE RESTRICTIONS PROHIBIT THE FUND
FROM: acquiring more than 10% of the voting securities of any
one issuer* and investing more than: (a) 5% of its total assets
(taken at current value) in securities of any one issuer (other
than the U.S. government or its agencies or instrumentalities or,
with respect to 25% of the Fund's total assets, securities issued
by or backed by the credit of, any foreign government, its
agencies or instrumentalities);* (b) 15% of its net assets in
securities restricted as to resale (excluding securities
determined by the Trustees (or the person designated by the
Trustees to make such determinations) to be readily marketable);*
(c) 25% of its total assets in any one industry (securities of
the U.S. government, its agencies or instrumentalities, or of any
foreign government, its agencies or instrumentalities, securities
of supranational entities, and securities backed by the credit of
a governmental entity are not considered to represent
industries);* (d) 5% of its net assets in warrants or more than
2% of its net assets in warrants not listed on the New York or
American Stock Exchanges; or (e) 15% of its net assets in any
combination of securities that are not readily marketable, in
securities restricted as to resale (excluding securities
determined by the Trustees (or the person designated by the
Trustees to make such determinations) to be readily marketable),
and in repurchase agreements maturing in more than seven days.
Restrictions marked with an asterisk (*) above are summaries of
fundamental policies. See the Statement of Additional
Information for the full text of these policies and the Fund's
other fundamental policies. Except for investment policies
designated as fundamental in this Prospectus or the Statement,
the investment policies described in this Prospectus and in the
Statement are not fundamental policies. The Trustees may change
any non-fundamental investment policies without shareholder
approval. As a matter of policy, the Trustees would not
materially change the Fund's investment objective without
shareholder approval.
HOW PERFORMANCE IS SHOWN
YIELD AND TOTAL RETURN DATA MAY FROM TIME TO TIME BE INCLUDED IN
ADVERTISEMENTS ABOUT THE FUND. "Yield" is calculated by dividing
the annualized net investment income per share during a recent
30-day period by the maximum public offering price per share on
the last day of that period. For this purpose, net investment
income is calculated in accordance with SEC regulations and may
differ from the Fund's net investment income as determined for
financial reporting purposes. SEC regulations require that net
investment income be calculated on a "yield-to-maturity" basis,
which has the effect of amortizing any premiums or discounts in
the current market value of fixed-income securities. The Fund's
current dividend rate is based on its net investment income as
determined for financial reporting purposes which may not reflect
amortization in the same manner. See "How objective is pursued -
- -Investments in premium securities." The Fund's yield reflects
the deduction of the maximum initial sales charge. "Total
return" for the life of the Fund through the most recent calendar
quarter represents the average annual compounded rate of return
on an investment of $1,000 in the Fund at the maximum public
offering price. Total return may also be presented for other
periods or based on investment at reduced sales charge levels.
Quotations of yield or total return for any period when an
expense limitation was in effect will be greater than if the
limitation had not been in effect. The Fund's performance may be
compared to various indices. See the Statement of Additional
Information. Because shares sold through eligible defined
contribution plans are sold without a sales charge, quotations of
yield and total return reflecting the deduction of a sales charge
will be lower than the actual yield and total return on shares
purchased through such plans.
ALL DATA IS BASED ON THE FUND'S PAST INVESTMENT RESULTS AND DOES
NOT PREDICT FUTURE PERFORMANCE. Investment performance, which
will vary, is based on many factors, including market conditions,
the composition of the Fund's portfolio, the Fund's operating
expenses and which class of shares you purchase. Investment
performance also often reflects the risks associated with the
Fund's investment objective and policies. These factors should
be considered when comparing the Fund's investment results to
those of other mutual funds and other investment vehicles.
HOW THE FUND IS MANAGED
THE TRUSTEES ARE RESPONSIBLE FOR GENERALLY OVERSEEING THE CONDUCT
OF THE FUND'S BUSINESS. Subject to such policies as the Trustees
may determine, Putnam Management furnishes a continuing
investment program for the Fund and makes investment decisions on
its behalf. Subject to the control of the Trustees, Putnam
Management also manages the Fund's other affairs and business.
Putnam Management's Global Asset Allocation Committee has primary
responsibility for the day-to-day management of the Fund's
portfolio.
The Fund pays its share of all expenses of the Trust that are not
assumed by Putnam Management, including Trustees' fees and
auditing, legal, custodial, investor servicing and shareholder
reporting expenses. Payments under the Fund's Distribution Plans
are borne entirely by the Fund and are in turn allocated to the
relevant class of shares. The Fund also reimburses Putnam
Management for its share of the compensation and related expenses
of certain officers of the Trust and their staff who provide
administrative services to the Fund. The total reimbursement is
determined annually by the Trustees.
Putnam Management places all orders for purchases and sales of
the Fund's securities. In selecting broker-dealers, Putnam
Management may consider research and brokerage services furnished
to it and its affiliates. Subject to seeking the most favorable
price and execution available, Putnam Management may consider
sales of shares of the Fund (and, if permitted by law, of the
other Putnam funds) as a factor in the selection of broker-
dealers.
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized on November
4, 1993. A copy of the Agreement and Declaration of Trust, which
is governed by Massachusetts law, is on file with the Secretary
of State of The Commonwealth of Massachusetts. As of January 10,
1994, Putnam Investments, Inc. owned all of the shares of the
Fund and the Trust and therefore may be deemed to "control" the
Fund and the Trust.
<PAGE>
The Trust is an open-end, diversified management investment
company with an unlimited number of authorized shares of
beneficial interest. Shares of the Trust may, without
shareholder approval, be divided into two or more series of
shares representing separate investment portfolios and are
currently divided into three series of shares. Any such series
of shares may be further divided without shareholder approval
into two or more classes of shares having such preferences and
special or relative rights and privileges as the Trustees
determine. The Fund currently offers three classes of shares.
Only the Fund's Class A shares are offered by this Prospectus.
Class B shares are sold at net asset value, but are subject to a
contingent deferred sales charge upon redemption and bear a
higher 12b-1 fee than Class A shares. Class Y shares, which are
offered only to defined contribution plans that initially invest
at least $250 million in a combination of Putnam funds and other
investments managed by Putnam Management or its affiliates, are
sold at net asset value and do not bear a 12b-1 fee. Because
Class B shares generally bear greater expenses than Class A
shares or Class Y shares, the investment return of Class B shares
will be lower than that of other classes. Each share has one
vote, with fractional shares voting proportionally. Shares shall
vote in the aggregate as a single class without regard to series
or classes of shares on all matters except, (i) when required by
the Investment Company Act of 1940 or when the Trustees have
determined that the matter affects the interests of one or more
series or classes materially differently, shares will be voted by
individual series or class; and (ii) when the Trustees have
determined that the matter affects only the interest of one or
more series or classes, then only shareholders of such series or
classes shall be entitled to vote thereon. Shares are freely
transferable, are entitled to dividends as declared by the
Trustees, and, if the Fund were liquidated, would receive the net
assets of the Fund. The Fund may suspend the sale of shares at
any time and may refuse any order to purchase shares. Although
the Trust is not required to hold annual meetings of its
shareholders, shareholders holding at least 10% of the
outstanding shares entitled to vote have the right to call a
meeting to elect or remove Trustees, or to take other actions as
provided in the Declaration of Trust.
If you own fewer shares than a minimum amount set by the Trustees
(presently 20 shares), the Fund may choose to redeem your shares
and pay you for them. You will receive at least 30 days' written
notice before the Fund redeems your shares, and you may purchase
additional shares at any time to avoid a redemption. The Fund
may also redeem shares if you own shares above a maximum amount
set by the Trustees. There is presently no maximum, but the
Trustees may establish one at any time, which could apply to both
present and future shareholders.
<PAGE>
THE TRUST'S TRUSTEES: GEORGE PUTNAM,* CHAIRMAN. President of the
Putnam funds. Chairman and Director of Putnam Management and
Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director,
Marsh & McLennan Companies, Inc.; WILLIAM F. POUNDS, VICE
CHAIRMAN. Professor of Management, Alfred P. Sloan School of
Management, M.I.T.; JAMESON ADKINS BAXTER, President, Baxter
Associates, Inc.; HANS H. ESTIN, Vice Chairman, North American
Management; JOHN A. HILL, Principal and Managing Director, First
Reserve Corporation; ELIZABETH T. KENNAN, President, Mount
Holyoke College; LAWRENCE J. LASSER,* Vice President of the
Putnam funds. President, Chief Executive Officer and Director of
Putnam Investments, Inc. and Putnam Management. Director, Marsh
& McLennan Companies, Inc.; ROBERT E. PATTERSON, Executive Vice
President, Cabot Partners Limited Partnership; DONALD S. PERKINS,
Director of various corporations, including AT&T, K mart
Corporation and Time Warner Inc.; GEORGE PUTNAM, III,*
President, New Generation Research, Inc.; A.J.C. SMITH,*
Chairman, Chief Executive Officer and Director, Marsh & McLennan
Companies, Inc.; and W. NICHOLAS THORNDIKE, Director of various
corporations and charitable organizations, including Providence
Journal Co. Also, Trustee and President, Massachusetts General
Hospital and Trustee of Eastern Utilities Associates. The
Trust's Trustees are also Trustees of the other Putnam funds.
Those marked with an asterisk (*) are "interested persons" of the
Trust, Putnam Management or Putnam Mutual Funds.
ABOUT YOUR INVESTMENT
HOW TO BUY SHARES
ALL ORDERS TO PURCHASE SHARES MUST BE MADE THROUGH YOUR
EMPLOYER'S DEFINED CONTRIBUTION PLAN. FOR MORE INFORMATION ABOUT
HOW TO PURCHASE SHARES OF THE FUND THROUGH YOUR EMPLOYER'S PLAN
OR LIMITATIONS ON THE AMOUNT THAT MAY BE PURCHASED, PLEASE
CONSULT YOUR EMPLOYER. Shares are sold to eligible defined
contribution plans at the net asset value per share next
determined after receipt of an order by Putnam Mutual Funds.
Orders must be received by Putnam Mutual Funds before the close
of regular trading on the New York Stock Exchange in order to
receive that day's net asset value. In order to be eligible to
purchase shares at net asset value, defined contribution plans
must initially invest at least $1,000,000 or be sponsored by
companies with more than 750 employees. Eligible plans may make
additional investments of any amount at any time. To eliminate
the need for safekeeping, the Fund will not issue certificates
for your shares. Putnam Mutual Funds may, at its expense,
provide additional promotional incentives or payments to dealers
that sell shares of the Putnam funds. In some instances, these
incentives or payments may be offered only to certain dealers who
have sold or may sell significant amounts of shares.
<PAGE>
DISTRIBUTION PLAN
The purpose of the Plan is to permit the Fund to compensate
Putnam Mutual Funds for services provided and expenses incurred
by it in promoting the sale of shares of the Fund, reducing
redemptions, or maintaining or improving services provided to
shareholders by Putnam Mutual Funds or dealers. The Plan
provides for payments by the Fund to Putnam Mutual Funds at the
annual rate of up to 0.35% of the Fund's average net assets
attributable to Class A shares, subject to the authority of the
Trustees to reduce the amount of payments or to suspend the Plan
for such periods as they may determine. Subject to these
limitations, the amount of such payments and the specific
purposes for which they are made shall be determined by the
Trustees. At present, the Trustees have approved payments under
the Plan at the annual rate of 0.25% of the Fund's average net
assets attributable to Class A shares for the purpose of
compensating Putnam Mutual Funds for services provided and
expenses incurred by it as principal underwriter of the Fund's
shares, including payments made by it to dealers under the
Service Agreements referred to below. Should the Trustees decide
in the future to approve payments in excess of this amount,
shareholders will be notified and this Prospectus will be
revised.
When Putnam Mutual Funds is not dealer of record, Putnam Mutual
Funds makes quarterly payments to qualifying dealers based on the
average net asset value of Class A shares which are attributable
to shareholders for whom the dealers are designated as the dealer
of record, in order to compensate such dealers (including, for
this purpose, certain financial institutions) for services
provided in connection with sales of Class A shares and the
maintenance of shareholder accounts. Putnam Mutual Funds makes
such payments at the annual rate of .25% of such average net
assets (including shares acquired through reinvestment of
distributions). Putnam Mutual Funds may suspend or modify these
payments at any time, and payments are subject to the
continuation of the Plan described above, the terms of Service
Agreements between dealers and Putnam Mutual Funds, and any
applicable limits imposed by the National Association of
Securities Dealers, Inc.
HOW TO SELL SHARES
SUBJECT TO ANY RESTRICTIONS IMPOSED BY YOUR EMPLOYER'S PLAN, YOU
CAN SELL YOUR SHARES THROUGH THE PLAN TO THE FUND ANY DAY THE NEW
YORK STOCK EXCHANGE IS OPEN. For more information about how to
sell shares of the Fund through your employer's plan, including
any charges that may be imposed by the plan, please consult with
your employer.
<PAGE>
Your plan administrator must send a signed letter of instruction
to Putnam Investor Services. The price you will receive is the
next net asset value calculated after the Fund receives your
request in proper form. All requests must be received by the
Fund prior to the close of regular trading on the New York Stock
Exchange in order to receive that day's net asset value. If you
sell shares having a net asset value of $100,000 or more, the
signatures of registered owners or their legal representatives
must be guaranteed by a bank, broker-dealer or certain other
financial institutions. See the Statement of Additional
Information for more information about where to obtain a
signature guarantee.
THE FUND GENERALLY PROVIDES PAYMENT FOR YOUR SHARES THE BUSINESS
DAY AFTER THE REQUEST IS RECEIVED. Under unusual circumstances,
the Fund may suspend repurchases, or postpone payment for more
than seven days, as permitted by federal securities law. The
Fund will only repurchase shares for which it has received
payment.
HOW TO EXCHANGE SHARES
Subject to any restrictions contained in your plan, you can
exchange your shares for shares of other Putnam funds available
through your plan at net asset value. Contact your plan
administrator or Putnam Investor Services on how to exchange your
shares or how to obtain prospectuses of other Putnam funds in
which you may invest. Shares of certain Putnam funds are not
available to residents of all states.
The exchange privilege is not intended as a vehicle for short-
term trading. Excessive exchange activity may interfere with
portfolio management and have an adverse effect on all
shareholders. In order to limit excessive exchange activity and
in other circumstances where the Trustees or Putnam Management
believes doing so would be in the best interests of the Fund, the
Fund reserves the right to revise or terminate the exchange
privilege, limit the amount or number of exchanges or reject any
exchange. Shareholders would be notified of any such action to
the extent required by law. Consult Putnam Investor Services
before requesting an exchange. See the Statement of Additional
Information to find out more about the exchange privilege.
HOW THE FUND VALUES ITS SHARES
THE FUND CALCULATES THE NET ASSET VALUE OF A SHARE OF EACH CLASS
BY DIVIDING THE TOTAL VALUE OF ITS ASSETS, LESS LIABILITIES, BY
THE NUMBER OF ITS SHARES OUTSTANDING. SHARES ARE VALUED AS OF
THE CLOSE OF REGULAR TRADING ON THE NEW YORK STOCK EXCHANGE EACH
DAY THE EXCHANGE IS OPEN. Portfolio securities for which market
quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are
stated at amortized cost, which approximates market value. All
other securities and assets are valued at their fair value
following procedures approved by the Trustees.
HOW DISTRIBUTIONS ARE MADE; TAX INFORMATION
The Fund distributes any net investment income and any net
realized capital gains at least annually. Distributions from net
capital gains are made after applying any available capital loss
carryovers.
The terms of your plan will govern how your plan may receive
distributions from the Fund. Generally, periodic distributions
from the Fund to your plan are reinvested in additional Fund
shares, although your plan may permit Fund distributions from net
investment income to be received by you in cash while reinvesting
capital gains distributions in additional shares or all Fund
distributions to be received in cash. If another option is not
selected, all distributions will be reinvested in additional Fund
shares.
The Fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other
requirements that are necessary for it to be relieved of federal
taxes on income and gains it distributes. The Fund will
distribute substantially all of its ordinary income and capital
gain net income on a current basis. Generally, Fund
distributions are taxable as ordinary income, except that any
distributions of net long-term capital gains will be taxed as
such. However, distributions by the Fund to employer-sponsored
defined contribution plans that qualify for tax-exempt treatment
under federal income tax laws will not be taxable. Special tax
rules apply to investments through such plans. You should
consult your tax adviser to determine the suitability of the Fund
as an investment through such a plan and the tax treatment of
distributions (including distributions of amounts attributable to
an investment in the Fund) from such a plan.
The foregoing is a summary of certain federal income tax
consequences of investing in the Fund. You should consult your
tax adviser to determine the precise effect of an investment in
the Fund on your particular tax situation (including possible
liability for state and local taxes).
ABOUT PUTNAM INVESTMENTS, INC.
PUTNAM MANAGEMENT HAS BEEN MANAGING MUTUAL FUNDS SINCE 1937.
Putnam Mutual Funds is the principal underwriter of the Fund and
of other Putnam funds. Putnam Defined Contribution Plans is a
division of Putnam Mutual Funds. Putnam Fiduciary Trust Company
is the Fund's custodian. Putnam Investor Services, a division of
Putnam Fiduciary Trust Company, is the Fund's investor servicing
and transfer agent.
Putnam Management, Putnam Mutual Funds, and Putnam Fiduciary
Trust Company are located at One Post Office Square, Boston,
Massachusetts, 02109 and are subsidiaries of Putnam Investments,
Inc., which is wholly-owned by Marsh & McLennan Companies, Inc.,
a publicly owned holding company whose principal businesses are
international insurance and reinsurance brokerage, employee
benefit consulting and investment management.
APPENDIX
THE RATINGS SERVICES' DESCRIPTIONS OF THE FIXED-INCOME SECURITIES
IN WHICH THE FUND MAY INVEST ARE:
MOODY'S INVESTORS SERVICE, INC.:
AAA -- Bonds which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt-edge." Interest payments
are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
AA -- Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
BAA -- Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
BA -- Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments
may be very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
CAA -- Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
CA -- Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
STANDARD & POOR'S CORPORATION:
AAA -- Bonds rated AAA have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated
issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest
and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds
in this category than in higher rated categories.
BB-B-CCC-CC-C -- Bonds rated BB, B, CCC, CC and C are
regarded, on balance, as predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such bonds
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
<PAGE>
D - Bonds rated D are in payment default. The D rating
category is used when interest payments or principal payments are
not made on the date due even if the applicable grace period has
not expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The D rating also will be
used on the filing of a bankruptcy petition if debt service
payments are jeopardized.
<PAGE>
PUTNAM ASSET ALLOCATION: CONSERVATIVE PORTFOLIO
ONE POST OFFICE SQUARE, BOSTON, MA 02109
PROSPECTUS - JANUARY 10, 1994,
AS REVISED FEBRUARY 7, 1994
THIS PROSPECTUS RELATES ONLY TO CLASS A SHARES OF THE FUND
OFFERED WITHOUT A SALES CHARGE THROUGH ELIGIBLE EMPLOYER-
SPONSORED DEFINED CONTRIBUTION PLANS ("DEFINED CONTRIBUTION
PLANS").
This Prospectus explains concisely what you should know before
investing in the Fund. Please read it carefully and keep it for
future reference. You can find more detailed information in the
January 10, 1994 Statement of Additional Information, as amended
from time to time. For a free copy of the Statement or other
information, including Prospectuses regarding other classes of
Fund shares or Class A shares for other investors, call Putnam
Investor Services at 1-800-752-9894. The Statement has been
filed with the Securities and Exchange Commission and is
incorporated into this Prospectus by reference.
THE FUND IS A SERIES OF PUTNAM ASSET ALLOCATION FUNDS (THE
"TRUST"), AN INVESTMENT COMPANY OFFERING THREE SEPARATE
PORTFOLIOS: PUTNAM ASSET ALLOCATION: GROWTH PORTFOLIO, PUTNAM
ASSET ALLOCATION: BALANCED PORTFOLIO AND PUTNAM ASSET
ALLOCATION: CONSERVATIVE PORTFOLIO. EACH PORTFOLIO IS AN ASSET
ALLOCATION FUND THAT ALLOCATES ITS INVESTMENTS AMONG EQUITIES AND
FIXED INCOME SECURITIES WITHIN PREDEFINED RANGES BASED ON ITS
INVESTMENT OBJECTIVE AND ECONOMIC AND OTHER CONDITIONS. THE FUND
SEEKS TOTAL RETURN CONSISTENT WITH PRESERVATION OF CAPITAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PUTNAMINVESTMENTS
Putnam Defined
Contribution Plans
ABOUT THE FUND.........................................2
Expenses summary.......................................2
Objective..............................................3
How objective is pursued...............................3
How performance is shown .............................13
How the Fund is managed ..............................14
Organization and history..............................14
ABOUT YOUR INVESTMENT
How to buy shares.....................................16
Distribution Plan.....................................16
How to sell shares....................................17
How to exchange shares................................17
How the Fund values its shares........................18
How distributions are made; tax information...........18
ABOUT PUTNAM INVESTMENTS, INC.........................19
APPENDIX
Fixed-income security ratings.........................19
<PAGE>
ABOUT THE FUND
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing in
the Fund. The following table summarizes the expenses which the
Fund expects to incur in its first fiscal year. The Example
shows the estimated cumulative expenses attributable to a
hypothetical $1,000 investment in shares of the Fund over
specified periods.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after expense
limitation discussed below) 0.64%
12b-1 Fees 0.25%
Other Expenses 0.38%
Total Fund Operating Expenses 1.27%
(after expense limitation)
The table is provided to help you understand your share of the
operating expenses which the Fund expects to incur during its
first fiscal year. The annual management fees shown in the table
reflect an expense limitation currently in effect. In the
absence of the expense limitation, estimated management fees for
the Fund would be 0.70% and estimated total Fund operating
expenses would be 1.33%. The 12b-1 fees shown in the table
reflect the amount to which the Trustees currently limit payments
under the Distribution Plan. "Other expenses" are based on
estimated amounts for the Fund's first fiscal year.
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return and redemption at the end of each
period:
1 YEAR 3 YEARS
$13 $40
The Example does not represent past or future expense levels.
Actual Fund expenses may be more or less than those shown.
Federal regulations require the Example to assume a 5% annual
return, but actual annual return will vary. The Example does not
reflect any charges or expenses related to your employer's plan.
The Fund also offers other classes of shares. See "Organization
and history" for additional information.
OBJECTIVE
THE FUND SEEKS TOTAL RETURN CONSISTENT WITH PRESERVATION OF
CAPITAL. The Fund is not intended to be a complete investment
program, and there is no assurance that the Fund will achieve its
objective.
HOW OBJECTIVE IS PURSUED
BASIC INVESTMENT STRATEGY
The Fund's strategic allocation which indicates the typical
percentage allocation of its investments between equity
securities and fixed income securities (including money market
instruments), although Putnam Investment Management, Inc., the
Fund's investment manager ("Putnam Management"), may adjust these
allocations within the ranges described below. The strategic
allocation and the range of active allocation are shown below:
STRATEGIC
ALLOCATION RANGE
EQUITY
CLASS 35% 25-45%
FIXED
INCOME
CLASS 65% 55-75%
The percentage limitations are applied at the time of purchase.
The Fund may also select other investments that do not fall
within the asset classes listed above.
Under normal market conditions, Putnam Management will allocate
the assets of the Fund within the specified ranges above or below
the strategic allocation whenever, based on Putnam Management's
experience in qualitative analysis and disciplined quantitative
techniques, its research and analysis indicate changes in
financial markets that reflect changed valuations within and
between the asset classes.
Allocating assets within a specified range above or below a
strategic allocation permits the Fund to attempt to optimize
performance consistent with its investment objective. The risks
of each asset class vary. For example, the values of equity
securities change in response to general market and economic
conditions and the activities and changing circumstances of
individual issuers, and the values of fixed income securities
change in response to changes in economic conditions, interest
rates and the creditworthiness of individual issuers. A
significant portion of the Fund's equity and fixed income
investments may consist of foreign securities, which involve the
risks set forth in "Risk factors" below.
<PAGE>
EQUITY CLASS
THE FUND WILL INVEST ITS ASSETS ALLOCATED TO THE EQUITY CLASS IN
A DIVERSIFIED PORTFOLIO OF EQUITY SECURITIES THAT PUTNAM
MANAGEMENT BELIEVES HAVE THE POTENTIAL FOR CAPITAL APPRECIATION.
THESE MAY INCLUDE WIDELY TRADED COMMON STOCKS OF LARGER
COMPANIES, AS WELL AS COMMON STOCKS OF SMALLER, LESS WELL-KNOWN
COMPANIES. In selecting equity securities for the Fund, Putnam
Management will consider, among other things, an issuer's
financial strength, competitive position and projected future
earnings and dividends. Common stocks are normally the main type
of the Fund's equity investments. However, the Fund may purchase
preferred stocks, convertible securities and warrants.
The Fund may invest a portion of its assets in common stocks
Putnam Management believes are significantly undervalued. In
selecting such securities, Putnam Management will focus on
industries and issuers it considers to have particular
possibilities for long-term capital appreciation due to potential
growth of earnings which, in the judgment of Putnam Management,
is not fully reflected in current market prices. In selecting
undervalued securities, Putnam Management may consider investment
judgments contrary to those of most investors.
Investing in securities of smaller, less well-known companies may
present greater opportunities for capital appreciation, but may
also involve greater risks. These companies may have limited
product lines, markets or financial resources, or may depend on a
limited management group. Their securities may trade less
frequently and in limited volume. As a result, the prices of
these securities may fluctuate more than prices of securities of
larger, more established companies.
FIXED INCOME CLASS
THE FUND WILL INVEST ITS ASSETS ALLOCATED TO THE FIXED INCOME
CLASS IN A DIVERSIFIED PORTFOLIO OF DEBT SECURITIES, INCLUDING
BOTH U.S. AND FOREIGN GOVERNMENT OBLIGATIONS AND CORPORATE
OBLIGATIONS.
The values of fixed income securities generally fluctuate in
response to changes in interest rates. Thus, a decrease in
interest rates will generally result in an increase in the value
of the Fund's assets allocated to the Fixed Income Class.
Conversely, during periods of rising interest rates, the value of
the Fund's assets allocated to such Class will generally decline.
The magnitude of these fluctuations will generally be greater for
securities with longer maturities. Debt securities are subject
to varying degrees of risk of default depending upon, among other
factors, the creditworthiness of the issuer and the ability of
the borrower to meet its obligations.
<PAGE>
THE FUND MAY INVEST IN LOWER-RATED FIXED INCOME SECURITIES.
Lower-rated fixed income securities are generally regarded as
those rated below Baa by Moody's Investors Service, Inc.
("Moody's") or BBB by Standard & Poor's Corporation ("Standard &
Poor's") or securities of comparable quality as determined by
Putnam Management. The Fund will not purchase fixed income
securities rated at the time of purchase lower than A by Moody's
or Standard & Poor's or, if unrated, determined to be of
comparable quality by Putnam Management, if as a result, more
than 10% of the Fund's total assets would be invested in
securities of that quality. In addition, the Fund will not
purchase fixed income securities rated at the time of purchase
lower than Caa by Moody's or CCC by Standard & Poor's, or, if
unrated, determined by Putnam Management to be of comparable
quality, if, as a result, more than 5% of the Fund's total assets
would be invested in securities of that quality. Such securities
may be in default and are generally regarded by the rating
agencies as having extremely poor prospects of ever attaining any
real investment standing. The values of lower-rated fixed
income securities, commonly known as "junk bonds," generally
fluctuate more than those of higher-rated fixed income
securities. In addition, the lower rating reflects a greater
possibility that the financial condition of the issuer, or
adverse changes in general economic conditions, or both, may
impair the ability of the issuer to make payments of interest and
repayments of principal. The rating services' descriptions of
debt securities are included in the Appendix to this Prospectus.
The Fund will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase,
although Putnam Management will monitor the investment to
determine whether continued investment in the security will
assist in meeting the Fund's investment objective.
Putnam Management may take full advantage of the entire range of
fixed income securities and may adjust the average maturity of
the Fund's portfolio from time to time depending on its
assessment of relative yields on securities of different
maturities and its expectations of future changes in interest
rates.
At times, some or all of the Fund's fixed income assets may be
invested in securities as to which the Fund, by itself or
together with other funds and accounts managed by Putnam
Management and its affiliates, holds a major portion or all of
such securities. Under adverse market or economic conditions or
in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell such
securities when Putnam Management believes it advisable to do so
or may be able to sell such securities only at prices lower than
if such securities were more widely held. Under such
circumstances, it may also be more difficult to determine the
fair value of such securities for purposes of computing the
Fund's net asset value. In order to enforce its rights in the
event of a default under such securities, the Fund may be
required to take possession of and manage assets securing the
issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the Fund's net
asset value.
Putnam Management seeks to minimize the risks of investing in
lower-rated securities through investment analysis and attention
to current developments in interest rates and economic
conditions. The lower ratings of certain fixed income securities
held by the Fund reflects a greater possibility that adverse
changes in the financial condition of their issuers, or in
general economic conditions, or both, or an unanticipated rise in
interest rates, may impair the ability of their issuers to make
payments of interest and principal. In addition, under such
circumstances the values of such securities may be more volatile,
and the markets for such securities may be less liquid, than
those for higher-rated securities, and the Fund may as a result
find it more difficult to determine the fair value of such
securities. When the Fund invests in fixed income securities in
the lower rating categories, the achievement of the Fund's goals
is more dependent on Putnam Management's investment analysis than
would be the case if the Fund was investing in fixed income
securities in the higher rating categories.
The Fund may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a
significant discount from their principal amount and pay interest
only at maturity rather than at intervals during the life of the
security. Payment-in-kind bonds allow the issuer, at its option,
to make current interest payments on the bonds either in cash or
in additional bonds. The value of zero-coupon bonds is subject
to greater fluctuation in response to changes in market interest
rates than bonds which pay interest currently. Both zero-coupon
and payment-in-kind bonds allow an issuer to avoid the need to
generate cash to meet current interest payments. Accordingly,
such bonds may involve greater credit risks than bonds paying
interest currently. Even though such bonds do not pay current
interest in cash, the Fund is nonetheless required to accrue
interest income on such investments and to distribute such
amounts at least annually to shareholders. Thus, the Fund could
be required at times to liquidate other investments in order to
satisfy its distribution requirements.
Certain securities held by the Fund may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were
to redeem securities held by the Fund during a time of declining
interest rates, the Fund might not be able to reinvest the
proceeds in securities providing the same investment return as
the securities redeemed.
FOR ADDITIONAL INFORMATION CONCERNING THE RISKS ASSOCIATED WITH
INVESTMENTS BY THE FUND IN SECURITIES IN THE LOWER RATING
CATEGORIES, SEE THE STATEMENT OF ADDITIONAL INFORMATION.
ASSET-BACKED AND MORTGAGE-BACKED SECURITIES. The Fund may invest
some or all of its assets allocated to the Fixed Income Class in
asset-backed and mortgage-backed securities, such as
collateralized mortgage obligations. Mortgage-backed securities
represent a participation in, or are secured by, mortgage loans
and include securities issued or guaranteed by the United States
government or one of its agencies or instrumentalities;
securities issued by private issuers that represent an interest
in or are collateralized by mortgage-backed securities issued or
guaranteed by the U.S. government or one of its agencies or
instrumentalities; or securities issued by private issuers that
represent an interest in or are collateralized by mortgage loans
or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement.
Asset-backed securities are structured like mortgage-backed
securities, but instead of mortgage loans or interests in
mortgage loans, the underlying assets may include motor vehicle
installment sales or installment loan contracts, leases of
various types of real and personal property, and receivables from
credit card agreements. The ability of an issuer of asset-backed
securities to enforce its security interest in the underlying
assets may be limited.
Due to the risk of voluntary prepayment, especially when interest
rates decline, mortgage-backed and asset-backed securities are
less effective than other types of securities as a means of
"locking in" attractive long-term interest rates and, as a
result, may have less potential for capital appreciation during
periods of declining interest rates than other securities of
comparable maturities. If the Fund purchases mortgage-backed and
asset-backed securities at a premium above their par value,
unscheduled prepayments made at par will cause the Fund to suffer
a loss equal to any unamortized premium.
MONEY MARKET INSTRUMENTS. The Fund may invest in high quality
money market obligations that present minimal credit risk and may
include U.S. government obligations, certificates of deposit,
bankers' acceptances, bank deposits, other financial institution
obligations, and commercial paper and other short-term corporate
obligations. These instruments have various maturities and may
have fixed or variable interest rates. The Fund may also hold a
portion of its assets in cash.
RISK FACTORS
INVESTMENTS IN FOREIGN SECURITIES. The Fund may invest up to 30%
of its assets in securities principally traded in foreign
markets. The Fund may also purchase Eurodollar certificates of
deposit without regard to this limit. Foreign investments
involve certain risks not present in domestic securities.
Because the Fund intends to purchase securities that are normally
denominated and traded in foreign currencies, the values of these
assets and any investment income derived from them may be
affected favorably or unfavorably by currency exchange rates and
exchange control regulations. In addition, although a portion of
the Fund's investment income may be received or realized in such
foreign currencies, the Fund will be required to compute and
distribute its income in U.S. dollars, which may subject the Fund
to various risks due to currency fluctuations. For example, if
the exchange rate for any such currency declines after the Fund's
income has been earned and translated into U.S. dollars but
before payment, the Fund could be required to liquidate portfolio
securities to make such distributions. The values of foreign
fixed income securities will fluctuate in response to changes in
U.S. and foreign interest rates. Income received by the Fund
from sources within foreign countries may be reduced by
withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may
reduce or eliminate such taxes. Any such taxes paid by the Fund
will reduce its net income available for distribution to
shareholders. Putnam Management will consider available yields,
net of any required taxes, in selecting foreign securities.
There may be less information publicly available about a foreign
issuer than about a U.S. issuer, and foreign issuers are not
generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the United States.
The securities of some foreign issuers are less liquid and at
times more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions and other fees are also generally
higher than in the United States. Foreign settlement procedures
and trade regulations may involve certain risks (such as delay in
payment or delivery of securities or in the recovery of the
Fund's assets held abroad) and expenses not present in the
settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange
controls, confiscatory taxation, political or financial
instability and diplomatic developments which could affect the
value of the Fund's investments in certain foreign countries.
Legal remedies available to investors in certain foreign
countries may be more limited than those available with respect
to investments in the United States or in other foreign
countries. The laws of some foreign countries may limit the
Fund's ability to invest in securities of certain issuers located
in those foreign countries. Special tax considerations apply to
foreign securities.
FOR MORE INFORMATION CONCERNING THE RISKS ASSOCIATED WITH
INVESTING IN FOREIGN SECURITIES, SEE THE STATEMENT OF ADDITIONAL
INFORMATION.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Putnam Management may
engage in foreign currency exchange transactions to protect
against uncertainty in the level of future exchange rates.
Putnam Management may engage in foreign currency exchange
transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect the
value of specific portfolio positions ("position hedging").
The Fund may engage in transaction hedging to protect against a
change in the foreign currency exchange rate between the date on
which the Fund contracts to purchase or sell the security and the
settlement date, or to "lock in" the U.S. dollar equivalent of a
dividend or interest payment in a foreign currency. The Fund may
purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate as part of its transaction hedging
strategies.
If conditions warrant, the Fund may also enter into contracts to
purchase or sell foreign currencies at a future date ("forward
contracts") and purchase and sell foreign currency futures
contracts as part of its transaction hedging strategies. A
foreign currency forward contract is a negotiated agreement to
exchange currency at a future time at a rate or rates that may be
higher or lower than the spot rate. Foreign currency futures
contracts are standardized exchange-traded contracts and have
margin requirements. The Fund may also purchase exchange-listed
and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies.
The Fund may engage in "position hedging" to protect against the
decline in the value relative to the U.S. dollar of the
currencies in which its portfolio securities are denominated or
quoted (or an increase in the value of the foreign currencies for
securities which the Fund intends to buy, when the Fund holds
cash reserves or short-term investments). For position hedging
purposes, the Fund may purchase or sell foreign currency futures
contracts, foreign currency forward contracts, and put and call
options on foreign currency futures contracts and on foreign
currencies on exchanges or in over-the-counter markets. In
connection with position hedging, the Fund may also purchase or
sell foreign currencies on a spot basis.
The Fund's currency hedging transactions may call for the
delivery of one foreign currency in exchange for another foreign
currency and may at times not involve currencies in which its
portfolio securities are then denominated. Putnam Management
will engage in such "cross hedging" activities when it believes
that such transactions provide significant hedging opportunities
for the Fund. Cross hedging transactions by the Fund involve the
risk of imperfect correlation between changes in the values of
the currencies to which such transactions relate and changes in
the value of the currency or other asset or liability which is
the subject of the hedge.
Hedging transactions involve costs and may result in losses.
There is no assurance that appropriate foreign currency exchange
transactions will be available with respect to all currencies in
which the Fund's investments may be denominated. The Fund's
ability to engage in hedging transactions may be limited by tax
considerations. The Fund's hedging transactions may affect the
character or amount of the Fund's distributions.
FOR MORE INFORMATION RELATING TO FOREIGN CURRENCY EXCHANGE
TRANSACTIONS, SEE THE STATEMENT OF ADDITIONAL INFORMATION. FOR
MORE INFORMATION ABOUT FUTURES CONTRACTS AND RELATED OPTIONS, SEE
"FINANCIAL FUTURES AND OPTIONS" BELOW.
SHORT-TERM TRADING. UNDER CERTAIN MARKET CONDITIONS, THE FUND
MAY SEEK PROFITS BY SHORT-TERM TRADING. The length of time the
Fund has held a particular security is not generally a
consideration in investment decisions. A change in the
securities held by the Fund is known as "portfolio turnover." To
the extent short-term trading strategies are used, the Fund's
portfolio turnover rate may be higher than that of other mutual
funds. Portfolio turnover generally involves some expense to the
Fund, including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and
reinvestment in other securities. Such transactions may result
in realization of taxable capital gains. While it is impossible
to predict the Fund's portfolio turnover rate, Putnam Management,
based on its experience, believes that such rate will not exceed
150%.
DEFENSIVE STRATEGIES
AT TIMES PUTNAM MANAGEMENT MAY JUDGE THAT CONDITIONS IN THE
SECURITIES MARKETS MAKE PURSUING THE FUND'S BASIC INVESTMENT
STRATEGY INCONSISTENT WITH THE BEST INTERESTS OF ITS
SHAREHOLDERS. At such times Putnam Management may temporarily
use alternative strategies, primarily designed to reduce
fluctuations in the value of the Fund's assets. In implementing
these "defensive" strategies, depending on the circumstances, the
Fund may invest without regard to the ranges described above for
investments in the various asset classes and may invest primarily
in equity securities, debt securities, preferred stocks, U.S.
government and agency obligations, cash or money market
instruments, or in other securities Putnam Management considers
consistent with such defensive strategies. It is impossible to
predict when, or for how long, the Fund will use such alternative
strategies.
FINANCIAL FUTURES AND OPTIONS
THE FUND MAY BUY AND SELL FINANCIAL FUTURES CONTRACTS ON STOCK
INDEXES, U.S. GOVERNMENT SECURITIES, FOREIGN FIXED INCOME
SECURITIES AND ON FOREIGN CURRENCIES. A futures contract is a
contract to buy or sell units of a particular stock index (an
"Index Future"), or a certain amount of a U.S. Government
security, foreign fixed income security or foreign currency, at
an agreed price on a specified future date. Depending on the
change in value of the index, security or currency between the
time when the Fund enters into and terminates a futures contract,
the Fund realizes a gain or loss. The Fund may purchase and sell
futures contracts for hedging purposes and to adjust the Fund's
exposure to the relevant stock or bond markets. For example,
when Putnam Management wants to increase the Fund's exposure to
equity securities, it may do so by taking long positions in
futures contracts on equity indices such as futures contracts on
the Standard & Poor's 500 Stock Index. Similarly, when Putnam
Management wants to increase the Fund's exposure to fixed income
securities, it may do so by taking long positions in futures
contracts relating to fixed income securities such as futures
contracts on U.S. Treasury bonds or notes. The Fund may buy and
sell call and put options on futures contracts or on stock
indices in addition to or as an alternative to purchasing or
selling futures contracts or, to the extent permitted by
applicable law, to earn additional income.
THE USE OF FUTURES AND OPTIONS INVOLVES CERTAIN SPECIAL RISKS.
FUTURES AND OPTIONS TRANSACTIONS INVOLVE COSTS AND MAY RESULT IN
LOSSES. Certain risks arise because of the possibility of
imperfect correlations between movements in the prices of
financial futures contracts and options and movements in the
prices of the underlying stock index, securities, or currencies
or of the securities or currencies which are the subject of the
hedge. The successful use of futures and options further depends
on Putnam Management's ability to forecast market or interest
rate movements correctly. Other risks arise from the Fund's
potential inability to close out its futures or related options
positions, and there can be no assurance that a liquid secondary
market will exist for any futures contract or option at a
particular time. The Fund's ability to terminate option
positions established in the over-the-counter market may be more
limited than for exchange-traded options and may also involve the
risk that securities dealers participating in such transactions
would fail to meet their obligations to the Fund. The use of
futures or options on futures for purposes other than hedging is
regarded as speculative.
Because the markets for options and futures on foreign equity and
fixed income securities and foreign currencies are relatively new
and still developing, the Fund's ability to engage in such
transactions may be limited. Certain provisions of the Internal
Revenue Code and certain regulatory requirements may also limit
the Fund's ability to engage in futures and options transactions.
A MORE DETAILED EXPLANATION OF FUTURES AND OPTIONS TRANSACTIONS,
INCLUDING THE RISKS ASSOCIATED WITH THEM, IS INCLUDED IN THE
STATEMENT OF ADDITIONAL INFORMATION.
INVESTMENTS IN PREMIUM SECURITIES
The Fund may invest some or all of its assets allocated to the
Fixed Income Class in securities bearing coupon rates higher than
prevailing market rates. Such "premium" securities are typically
purchased at prices greater than the principal amounts payable on
maturity. The Fund does not amortize the premium paid for such
securities in calculating its net investment income. As a
result, the purchase of such securities provides the Fund a
higher level of investment income distributable to shareholders
on a current basis than if the Fund had purchased securities
bearing current market rates of interest. Because the value of
premium securities tends to approach the principal amount as they
approach maturity (or call price in the case of securities
approaching their first call date), the purchase of such
securities may increase the Fund's risk of capital loss if such
securities are held to maturity (or first call date).
During a period of declining interest rates, some of the Fund's
portfolio investments will likely bear coupon rates which are
higher than the current market rates, regardless of whether such
securities were originally purchased at a premium. Such
securities would generally carry premium market values which
would be reflected in the net asset value of the Fund's shares.
As a result, an investor who purchases shares of the Fund during
such periods would initially receive higher taxable distributions
(derived from the higher coupon rates payable on the Fund's
investments) than might be available from alternative investments
bearing current market interest rates, but may face an increased
risk of capital loss as these higher coupon securities approach
maturity (or first call date). In evaluating the potential
performance of an investment in the Fund, investors may find it
useful to compare the Fund's current dividend rate with the
Fund's "yield," which is computed on a yield-to-maturity basis in
accordance with SEC regulations and which reflects amortization
of market premiums. See "How performance is shown."
OTHER INVESTMENT PRACTICES
THE FUND MAY ALSO ENGAGE TO A LIMITED EXTENT IN THE FOLLOWING
INVESTMENT PRACTICES, EACH OF WHICH INVOLVES CERTAIN SPECIAL
RISKS. THE STATEMENT OF ADDITIONAL INFORMATION CONTAINS MORE
DETAILED INFORMATION ABOUT THESE PRACTICES, INCLUDING LIMITATIONS
DESIGNED TO REDUCE THESE RISKS.
OPTIONS. The Fund may seek to increase its current return by
buying and selling covered call and put options on securities it
owns or in which it may invest and on foreign currencies. The
Fund receives a premium from writing a call or put option, which
increases the Fund's return if the option expires unexercised or
is closed out at a net profit. When the Fund writes a call
option, it gives up the opportunity to profit from any increase
in the price of a security or currency above the exercise price
of the option; when it writes a put option, the Fund takes the
risk that it will be required to purchase a security or currency
from the option holder at a price above the current market price
of the security or currency. The Fund may terminate an option
that it has written prior to its expiration by entering into a
closing purchase transaction in which it purchases an option
having the same terms as the option written. The Fund may also
buy and sell put and call options for hedging purposes. The Fund
may also from time to time buy and sell combinations of put and
call options on the same underlying security or currency to earn
additional income. The aggregate value of the securities and
foreign currencies underlying options written by the Fund may not
exceed 25% of the Fund's assets. The Fund's use of options
strategies may be limited by applicable law.
SECURITIES LOANS, REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS.
The Fund may lend portfolio securities amounting to not more than
25% of its assets to broker-dealers and may enter into repurchase
agreements on up to 25% of its assets. These transactions must
be fully collateralized at all times. The Fund may also purchase
securities for future delivery, which may increase its overall
investment exposure and involves a risk of loss if the value of
the securities declines prior to the settlement date. These
transactions involve some risk to the Fund if the other party
should default on its obligation and the Fund is delayed or
prevented from recovering the collateral or completing the
transaction.
LIMITING INVESTMENT RISK
SPECIFIC INVESTMENT RESTRICTIONS HELP THE FUND LIMIT INVESTMENT
RISKS FOR ITS SHAREHOLDERS. THESE RESTRICTIONS PROHIBIT THE FUND
FROM: acquiring more than 10% of the voting securities of any
one issuer* and investing more than: (a) 5% of its total assets
(taken at current value) in securities of any one issuer (other
than the U.S. government or its agencies or instrumentalities or,
with respect to 25% of the Fund's total assets, securities issued
by or backed by the credit of, any foreign government, its
agencies or instrumentalities);* (b) 15% of its net assets in
securities restricted as to resale (excluding securities
determined by the Trustees (or the person designated by the
Trustees to make such determinations) to be readily marketable);*
(c) 25% of its total assets in any one industry (securities of
the U.S. government, its agencies or instrumentalities, or of any
foreign government, its agencies or instrumentalities, securities
of supranational entities, and securities backed by the credit of
a governmental entity are not considered to represent
industries);* (d) 5% of its net assets in warrants or more than
2% of its net assets in warrants not listed on the New York or
American Stock Exchanges; or (e) 15% of its net assets in any
combination of securities that are not readily marketable, in
securities restricted as to resale (excluding securities
determined by the Trustees (or the person designated by the
Trustees to make such determinations) to be readily marketable),
and in repurchase agreements maturing in more than seven days.
Restrictions marked with an asterisk (*) above are summaries of
fundamental policies. See the Statement of Additional
Information for the full text of these policies and the Fund's
other fundamental policies. Except for investment policies
designated as fundamental in this Prospectus or the Statement,
the investment policies described in this Prospectus and in the
Statement are not fundamental policies. The Trustees may change
any non-fundamental investment policies without shareholder
approval. As a matter of policy, the Trustees would not
materially change the Fund's investment objective without
shareholder approval.
HOW PERFORMANCE IS SHOWN
YIELD AND TOTAL RETURN DATA MAY FROM TIME TO TIME BE INCLUDED IN
ADVERTISEMENTS ABOUT THE FUND. "Yield" is calculated by dividing
the annualized net investment income per share during a recent
30-day period by the maximum public offering price per share on
the last day of that period. For this purpose, net investment
income is calculated in accordance with SEC regulations and may
differ from the Fund's net investment income as determined for
financial reporting purposes. SEC regulations require that net
investment income be calculated on a "yield-to-maturity" basis,
which has the effect of amortizing any premiums or discounts in
the current market value of fixed-income securities. The Fund's
current dividend rate is based on its net investment income as
determined for financial reporting purposes which may not reflect
amortization in the same manner. See "How objective is pursued -
- -Investments in premium securities." The Fund's yield reflects
the deduction of the maximum initial sales charge. "Total
return" for the life of the Fund through the most recent calendar
quarter represents the average annual compounded rate of return
on an investment of $1,000 in the Fund at the maximum public
offering price. Total return may also be presented for other
periods or based on investment at reduced sales charge levels.
Quotations of yield or total return for any period when an
expense limitation was in effect will be greater than if the
limitation had not been in effect. The Fund's performance may be
compared to various indices. See the Statement of Additional
Information. Because shares sold through eligible defined
contribution plans are sold without a sales charge, quotations of
yield and total return reflecting the deduction of a sales charge
will be lower than the actual yield and total return on shares
purchased through such plans.
ALL DATA IS BASED ON THE FUND'S PAST INVESTMENT RESULTS AND DOES
NOT PREDICT FUTURE PERFORMANCE. Investment performance, which
will vary, is based on many factors, including market conditions,
the composition of the Fund's portfolio, the Fund's operating
expenses and which class of shares you purchase. Investment
performance also often reflects the risks associated with the
Fund's investment objective and policies. These factors should
be considered when comparing the Fund's investment results to
those of other mutual funds and other investment vehicles.
HOW THE FUND IS MANAGED
THE TRUSTEES ARE RESPONSIBLE FOR GENERALLY OVERSEEING THE CONDUCT
OF THE FUND'S BUSINESS. Subject to such policies as the Trustees
may determine, Putnam Management furnishes a continuing
investment program for the Fund and makes investment decisions on
its behalf. Subject to the control of the Trustees, Putnam
Management also manages the Fund's other affairs and business.
Putnam Management's Global Asset Allocation Committee has primary
responsibility for the day-to-day management of the Fund's
portfolio.
The Fund pays its share of all expenses of the Trust that are not
assumed by Putnam Management, including Trustees' fees and
auditing, legal, custodial, investor servicing and shareholder
reporting expenses. Payments under the Fund's Distribution Plans
are borne entirely by the Fund and are in turn allocated to the
relevant class of shares. The Fund also reimburses Putnam
Management for its share of the compensation and related expenses
of certain officers of the Trust and their staff who provide
administrative services to the Fund. The total reimbursement is
determined annually by the Trustees.
Putnam Management places all orders for purchases and sales of
the Fund's securities. In selecting broker-dealers, Putnam
Management may consider research and brokerage services furnished
to it and its affiliates. Subject to seeking the most favorable
price and execution available, Putnam Management may consider
sales of shares of the Fund (and, if permitted by law, of the
other Putnam funds) as a factor in the selection of broker-
dealers.
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized on November
4, 1993. A copy of the Agreement and Declaration of Trust, which
is governed by Massachusetts law, is on file with the Secretary
of State of The Commonwealth of Massachusetts. As of January 10,
1994, Putnam Investments, Inc. owned all of the shares of the
Fund and the Trust and therefore may be deemed to "control" the
Fund and the Trust.
The Trust is an open-end, diversified management investment
company with an unlimited number of authorized shares of
beneficial interest. Shares of the Trust may, without
shareholder approval, be divided into two or more series of
shares representing separate investment portfolios and are
currently divided into three series of shares. Any such series
of shares may be further divided without shareholder approval
into two or more classes of shares having such preferences and
special or relative rights and privileges as the Trustees
determine. The Fund currently offers three classes of shares.
Only the Fund's Class A shares are offered by this Prospectus.
Class B shares are sold at net asset value, but are subject to a
contingent deferred sales charge upon redemption and bear a
higher 12b-1 fee than Class A shares. Class Y shares, which are
offered only to defined contribution plans that initially invest
at least $250 million in a combination of Putnam funds and other
investments managed by Putnam Management or its affiliates, are
sold at net asset value and do not bear a 12b-1 fee. Because
Class B shares generally bear greater expenses than Class A
shares or Class Y shares, the investment return of Class B shares
will be lower than that of other classes. Each share has one
vote, with fractional shares voting proportionally. Shares shall
vote in the aggregate as a single class without regard to series
or classes of shares on all matters except, (i) when required by
the Investment Company Act of 1940 or when the Trustees have
determined that the matter affects the interests of one or more
series or classes materially differently, shares will be voted by
individual series or class; and (ii) when the Trustees have
determined that the matter affects only the interest of one or
more series or classes, then only shareholders of such series or
classes shall be entitled to vote thereon. Shares are freely
transferable, are entitled to dividends as declared by the
Trustees, and, if the Fund were liquidated, would receive the net
assets of the Fund. The Fund may suspend the sale of shares at
any time and may refuse any order to purchase shares. Although
the Trust is not required to hold annual meetings of its
shareholders, shareholders holding at least 10% of the
outstanding shares entitled to vote have the right to call a
meeting to elect or remove Trustees, or to take other actions as
provided in the Declaration of Trust.
If you own fewer shares than a minimum amount set by the Trustees
(presently 20 shares), the Fund may choose to redeem your shares
and pay you for them. You will receive at least 30 days' written
notice before the Fund redeems your shares, and you may purchase
additional shares at any time to avoid a redemption. The Fund
may also redeem shares if you own shares above a maximum amount
set by the Trustees. There is presently no maximum, but the
Trustees may establish one at any time, which could apply to both
present and future shareholders.
THE TRUST'S TRUSTEES: GEORGE PUTNAM,* CHAIRMAN. President of the
Putnam funds. Chairman and Director of Putnam Management and
Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director,
Marsh & McLennan Companies, Inc.; WILLIAM F. POUNDS, VICE
CHAIRMAN. Professor of Management, Alfred P. Sloan School of
Management, M.I.T.; JAMESON ADKINS BAXTER, President, Baxter
Associates, Inc.; HANS H. ESTIN, Vice Chairman, North American
Management; JOHN A. HILL, Principal and Managing Director, First
Reserve Corporation; ELIZABETH T. KENNAN, President, Mount
Holyoke College; LAWRENCE J. LASSER,* Vice President of the
Putnam funds. President, Chief Executive Officer and Director of
Putnam Investments, Inc. and Putnam Management. Director, Marsh
& McLennan Companies, Inc.; ROBERT E. PATTERSON, Executive Vice
President, Cabot Partners Limited Partnership; DONALD S. PERKINS,
Director of various corporations, including AT&T, K mart
Corporation and Time Warner Inc.; GEORGE PUTNAM, III,*
President, New Generation Research, Inc.; A.J.C. SMITH,*
Chairman, Chief Executive Officer and Director, Marsh & McLennan
Companies, Inc.; and W. NICHOLAS THORNDIKE, Director of various
corporations and charitable organizations, including Providence
Journal Co. Also, Trustee and President, Massachusetts General
Hospital and Trustee of Eastern Utilities Associates. The
Trust's Trustees are also Trustees of the other Putnam funds.
Those marked with an asterisk (*) are "interested persons" of the
Trust, Putnam Management or Putnam Mutual Funds.
ABOUT YOUR INVESTMENT
HOW TO BUY SHARES
ALL ORDERS TO PURCHASE SHARES MUST BE MADE THROUGH YOUR
EMPLOYER'S DEFINED CONTRIBUTION PLAN. FOR MORE INFORMATION ABOUT
HOW TO PURCHASE SHARES OF THE FUND THROUGH YOUR EMPLOYER'S PLAN
OR LIMITATIONS ON THE AMOUNT THAT MAY BE PURCHASED, PLEASE
CONSULT YOUR EMPLOYER. Shares are sold to eligible defined
contribution plans at the net asset value per share next
determined after receipt of an order by Putnam Mutual Funds.
Orders must be received by Putnam Mutual Funds before the close
of regular trading on the New York Stock Exchange in order to
receive that day's net asset value. In order to be eligible to
purchase shares at net asset value, defined contribution plans
must initially invest at least $1,000,000 or be sponsored by
companies with more than 750 employees. Eligible plans may make
additional investments of any amount at any time. To eliminate
the need for safekeeping, the Fund will not issue certificates
for your shares. Putnam Mutual Funds may, at its expense,
provide additional promotional incentives or payments to dealers
that sell shares of the Putnam funds. In some instances, these
incentives or payments may be offered only to certain dealers who
have sold or may sell significant amounts of shares.
DISTRIBUTION PLAN
The purpose of the Plan is to permit the Fund to compensate
Putnam Mutual Funds for services provided and expenses incurred
by it in promoting the sale of shares of the Fund, reducing
redemptions, or maintaining or improving services provided to
shareholders by Putnam Mutual Funds or dealers. The Plan
provides for payments by the Fund to Putnam Mutual Funds at the
annual rate of up to 0.35% of the Fund's average net assets
attributable to Class A shares, subject to the authority of the
Trustees to reduce the amount of payments or to suspend the Plan
for such periods as they may determine. Subject to these
limitations, the amount of such payments and the specific
purposes for which they are made shall be determined by the
Trustees. At present, the Trustees have approved payments under
the Plan at the annual rate of 0.25% of the Fund's average net
assets attributable to Class A shares for the purpose of
compensating Putnam Mutual Funds for services provided and
expenses incurred by it as principal underwriter of the Fund's
shares, including payments made by it to dealers under the
Service Agreements referred to below. Should the Trustees decide
in the future to approve payments in excess of this amount,
shareholders will be notified and this Prospectus will be
revised.
When Putnam Mutual Funds is not dealer of record, Putnam Mutual
Funds makes quarterly payments to qualifying dealers based on the
average net asset value of Class A shares which are attributable
to shareholders for whom the dealers are designated as the dealer
of record, in order to compensate such dealers (including, for
this purpose, certain financial institutions) for services
provided in connection with sales of Class A shares and the
maintenance of shareholder accounts. Putnam Mutual Funds makes
such payments at the annual rate of .25% of such average net
assets (including shares acquired through reinvestment of
distributions). Putnam Mutual Funds may suspend or modify these
payments at any time, and payments are subject to the
continuation of the Plan described above, the terms of Service
Agreements between dealers and Putnam Mutual Funds, and any
applicable limits imposed by the National Association of
Securities Dealers, Inc.
HOW TO SELL SHARES
SUBJECT TO ANY RESTRICTIONS IMPOSED BY YOUR EMPLOYER'S PLAN, YOU
CAN SELL YOUR SHARES THROUGH THE PLAN TO THE FUND ANY DAY THE NEW
YORK STOCK EXCHANGE IS OPEN. For more information about how to
sell shares of the Fund through your employer's plan, including
any charges that may be imposed by the plan, please consult with
your employer.
Your plan administrator must send a signed letter of instruction
to Putnam Investor Services. The price you will receive is the
next net asset value calculated after the Fund receives your
request in proper form. All requests must be received by the
Fund prior to the close of regular trading on the New York Stock
Exchange in order to receive that day's net asset value. If you
sell shares having a net asset value of $100,000 or more, the
signatures of registered owners or their legal representatives
must be guaranteed by a bank, broker-dealer or certain other
financial institutions. See the Statement of Additional
Information for more information about where to obtain a
signature guarantee.
THE FUND GENERALLY PROVIDES PAYMENT FOR YOUR SHARES THE BUSINESS
DAY AFTER THE REQUEST IS RECEIVED. Under unusual circumstances,
the Fund may suspend repurchases, or postpone payment for more
than seven days, as permitted by federal securities law. The
Fund will only repurchase shares for which it has received
payment.
HOW TO EXCHANGE SHARES
Subject to any restrictions contained in your plan, you can
exchange your shares for shares of other Putnam funds available
through your plan at net asset value. Contact your plan
administrator or Putnam Investor Services on how to exchange your
shares or how to obtain prospectuses of other Putnam funds in
which you may invest. Shares of certain Putnam funds are not
available to residents of all states.
The exchange privilege is not intended as a vehicle for short-
term trading. Excessive exchange activity may interfere with
portfolio management and have an adverse effect on all
shareholders. In order to limit excessive exchange activity and
in other circumstances where the Trustees or Putnam Management
believes doing so would be in the best interests of the Fund, the
Fund reserves the right to revise or terminate the exchange
privilege, limit the amount or number of exchanges or reject any
exchange. Shareholders would be notified of any such action to
the extent required by law. Consult Putnam Investor Services
before requesting an exchange. See the Statement of Additional
Information to find out more about the exchange privilege.
HOW THE FUND VALUES ITS SHARES
THE FUND CALCULATES THE NET ASSET VALUE OF A SHARE OF EACH CLASS
BY DIVIDING THE TOTAL VALUE OF ITS ASSETS, LESS LIABILITIES, BY
THE NUMBER OF ITS SHARES OUTSTANDING. SHARES ARE VALUED AS OF
THE CLOSE OF REGULAR TRADING ON THE NEW YORK STOCK EXCHANGE EACH
DAY THE EXCHANGE IS OPEN. Portfolio securities for which market
quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are
stated at amortized cost, which approximates market value. All
other securities and assets are valued at their fair value
following procedures approved by the Trustees.
HOW DISTRIBUTIONS ARE MADE; TAX INFORMATION
The Fund distributes any net investment income at least quarterly
and any net realized capital gains at least annually.
Distributions from net capital gains are made after applying any
available capital loss carryovers.
The terms of your plan will govern how your plan may receive
distributions from the Fund. Generally, periodic distributions
from the Fund to your plan are reinvested in additional Fund
shares, although your plan may permit Fund distributions from net
investment income to be received by you in cash while reinvesting
capital gains distributions in additional shares or all Fund
distributions to be received in cash. If another option is not
selected, all distributions will be reinvested in additional Fund
shares.
The Fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other
requirements that are necessary for it to be relieved of federal
taxes on income and gains it distributes. The Fund will
distribute substantially all of its ordinary income and capital
gain net income on a current basis. Generally, Fund
distributions are taxable as ordinary income, except that any
distributions of net long-term capital gains will be taxed as
such. However, distributions by the Fund to employer-sponsored
defined contribution plans that qualify for tax-exempt treatment
under federal income tax laws will not be taxable. Special tax
rules apply to investments through such plans. You should
consult your tax adviser to determine the suitability of the Fund
as an investment through such a plan and the tax treatment of
distributions (including distributions of amounts attributable to
an investment in the Fund) from such a plan.
The foregoing is a summary of certain federal income tax
consequences of investing in the Fund. You should consult your
tax adviser to determine the precise effect of an investment in
the Fund on your particular tax situation (including possible
liability for state and local taxes).
ABOUT PUTNAM INVESTMENTS, INC.
PUTNAM MANAGEMENT HAS BEEN MANAGING MUTUAL FUNDS SINCE 1937.
Putnam Mutual Funds is the principal underwriter of the Fund and
of other Putnam funds. Putnam Defined Contribution Plans is a
division of Putnam Mutual Funds. Putnam Fiduciary Trust Company
is the Fund's custodian. Putnam Investor Services, a division of
Putnam Fiduciary Trust Company, is the Fund's investor servicing
and transfer agent.
Putnam Management, Putnam Mutual Funds, and Putnam Fiduciary
Trust Company are located at One Post Office Square, Boston,
Massachusetts, 02109 and are subsidiaries of Putnam Investments,
Inc., which is wholly-owned by Marsh & McLennan Companies, Inc.,
a publicly owned holding company whose principal businesses are
international insurance and reinsurance brokerage, employee
benefit consulting and investment management.
<PAGE>
APPENDIX
THE RATINGS SERVICES' DESCRIPTIONS OF THE FIXED-INCOME SECURITIES
IN WHICH THE FUND MAY INVEST ARE:
MOODY'S INVESTORS SERVICE, INC.:
AAA -- Bonds which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt-edge." Interest payments
are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
AA -- Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
BAA -- Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
BA -- Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments
may be very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
CAA -- Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
CA -- Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
STANDARD & POOR'S CORPORATION:
AAA -- Bonds rated AAA have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated
issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest
and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds
in this category than in higher rated categories.
BB-B-CCC-CC-C -- Bonds rated BB, B, CCC, CC and C are
regarded, on balance, as predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such bonds
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D - Bonds rated D are in payment default. The D rating
category is used when interest payments or principal payments are
not made on the date due even if the applicable grace period has
not expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The D rating also will be
used on the filing of a bankruptcy petition if debt service
payments are jeopardized.
<PAGE>
PUTNAM ASSET ALLOCATION: BALANCED PORTFOLIO
ONE POST OFFICE SQUARE, BOSTON, MA 02109
PROSPECTUS - JANUARY 10, 1994,
AS REVISED FEBRUARY 7, 1994
THIS PROSPECTUS RELATES ONLY TO CLASS A SHARES OF THE FUND
OFFERED WITHOUT A SALES CHARGE THROUGH ELIGIBLE EMPLOYER-
SPONSORED DEFINED CONTRIBUTION PLANS ("DEFINED CONTRIBUTION
PLANS").
This Prospectus explains concisely what you should know before
investing in the Fund. Please read it carefully and keep it for
future reference. You can find more detailed information in the
January 10, 1994 Statement of Additional Information, as amended
from time to time. For a free copy of the Statement or other
information, including Prospectuses regarding other classes of
Fund shares or Class A shares for other investors, call Putnam
Investor Services at 1-800-752-9894. The Statement has been
filed with the Securities and Exchange Commission and is
incorporated into this Prospectus by reference.
THE FUND IS A SERIES OF PUTNAM ASSET ALLOCATION FUNDS (THE
"TRUST"), AN INVESTMENT COMPANY OFFERING THREE SEPARATE
PORTFOLIOS: PUTNAM ASSET ALLOCATION: GROWTH PORTFOLIO, PUTNAM
ASSET ALLOCATION: BALANCED PORTFOLIO AND PUTNAM ASSET
ALLOCATION: CONSERVATIVE PORTFOLIO. EACH PORTFOLIO IS AN ASSET
ALLOCATION FUND THAT ALLOCATES ITS INVESTMENTS AMONG EQUITIES AND
FIXED INCOME SECURITIES WITHIN PREDEFINED RANGES BASED ON ITS
INVESTMENT OBJECTIVE AND ECONOMIC AND OTHER CONDITIONS. THE FUND
SEEKS TOTAL RETURN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PUTNAMINVESTMENTS
Putnam Defined
Contribution Plans
<PAGE>
ABOUT THE FUND.........................................2
Expenses summary.......................................2
Objective..............................................3
How objective is pursued...............................3
How performance is shown .............................13
How the Fund is managed ..............................14
Organization and history..............................14
ABOUT YOUR INVESTMENT
How to buy shares.....................................16
Distribution Plan.....................................16
How to sell shares....................................17
How to exchange shares................................17
How the Fund values its shares........................18
How distributions are made; tax information...........18
ABOUT PUTNAM INVESTMENTS, INC.........................19
APPENDIX
Fixed-income security ratings.........................19
<PAGE>
ABOUT THE FUND
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing in
the Fund. The following table summarizes the expenses which the
Fund expects to incur in its first fiscal year. The Example
shows the estimated cumulative expenses attributable to a
hypothetical $1,000 investment in shares of the Fund over
specified periods.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after expense
limitation discussed below) 0.58%
12b-1 Fees 0.25%
Other Expenses 0.44%
Total Fund Operating Expenses 1.27%
(after expense limitation)
The table is provided to help you understand your share of the
operating expenses which the Fund expects to incur during its
first fiscal year. The annual management fees shown in the table
reflect an expense limitation currently in effect. In the
absence of the expense limitation, estimated management fees for
the Fund would be 0.70% and estimated total Fund operating
expenses would be 1.39%. The 12b-1 fees shown in the table
reflect the amount to which the Trustees currently limit payments
under the Distribution Plan. "Other expenses" are based on
estimated amounts for the Fund's first fiscal year.
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return and redemption at the end of the
period:
1 YEAR 3 YEARS
$13 $40
<PAGE>
The Example does not represent past or future expense levels.
Actual Fund expenses may be more or less than those shown.
Federal regulations require the Example to assume a 5% annual
return, but actual annual return will vary. The Example does not
reflect any charges or expenses related to your employer's plan.
The Fund also offers other classes of shares. See "Organization
and history" for additional information.
OBJECTIVE
THE FUND SEEKS TOTAL RETURN. The Fund is not intended to be a
complete investment program, and there is no assurance that the
Fund will achieve its objective.
HOW OBJECTIVE IS PURSUED
BASIC INVESTMENT STRATEGY
The Fund's strategic allocation which indicates the typical
percentage allocation of its investments between equity
securities and fixed income securities (including money market
instruments), although Putnam Investment Management, Inc., the
Fund's investment manager ("Putnam Management"), may adjust these
allocations within the ranges described below. The strategic
allocation and the range of active allocation are shown below:
STRATEGIC
ALLOCATION RANGE
EQUITY
CLASS 65% 50-75%
FIXED
INCOME
CLASS 35% 25-50%
The percentage limitations are applied at the time of purchase.
The Fund may also select other investments that do not fall
within the asset classes listed above.
Under normal market conditions, Putnam Management will allocate
the assets of the Fund within the specified ranges above or below
the strategic allocation whenever, based on Putnam Management's
experience in qualitative analysis and disciplined quantitative
techniques, its research and analysis indicate changes in
financial markets that reflect changed valuations within and
between the asset classes.
Allocating assets within a specified range above or below a
strategic allocation permits the Fund to attempt to optimize
performance consistent with its investment objective. The risks
of each asset class vary. For example, the values of equity
securities change in response to general market and economic
conditions and the activities and changing circumstances of
individual issuers, and the values of fixed income securities
change in response to changes in economic conditions, interest
rates and the creditworthiness of individual issuers. A
significant portion of the Fund's equity and fixed income
investments may consist of foreign securities, which involve the
risks set forth in "Risk factors" below.
EQUITY CLASS
THE FUND WILL INVEST ITS ASSETS ALLOCATED TO THE EQUITY CLASS IN
A DIVERSIFIED PORTFOLIO OF EQUITY SECURITIES THAT PUTNAM
MANAGEMENT BELIEVES HAVE THE POTENTIAL FOR CAPITAL APPRECIATION.
THESE MAY INCLUDE WIDELY TRADED COMMON STOCKS OF LARGER
COMPANIES, AS WELL AS COMMON STOCKS OF SMALLER, LESS WELL-KNOWN
COMPANIES. In selecting equity securities for the Fund, Putnam
Management will consider, among other things, an issuer's
financial strength, competitive position and projected future
earnings and dividends. Common stocks are normally the main type
of the Fund's equity investments. However, the Fund may purchase
preferred stocks, convertible securities and warrants.
The Fund may invest a portion of its assets in common stocks
Putnam Management believes are significantly undervalued. In
selecting such securities, Putnam Management will focus on
industries and issuers it considers to have particular
possibilities for long-term capital appreciation due to potential
growth of earnings which, in the judgment of Putnam Management,
is not fully reflected in current market prices. In selecting
undervalued securities, Putnam Management may consider investment
judgments contrary to those of most investors.
Investing in securities of smaller, less well-known companies may
present greater opportunities for capital appreciation, but may
also involve greater risks. These companies may have limited
product lines, markets or financial resources, or may depend on a
limited management group. Their securities may trade less
frequently and in limited volume. As a result, the prices of
these securities may fluctuate more than prices of securities of
larger, more established companies.
FIXED INCOME CLASS
THE FUND WILL INVEST ITS ASSETS ALLOCATED TO THE FIXED INCOME
CLASS IN A DIVERSIFIED PORTFOLIO OF DEBT SECURITIES, INCLUDING
BOTH U.S. AND FOREIGN GOVERNMENT OBLIGATIONS AND CORPORATE
OBLIGATIONS.
The values of fixed income securities generally fluctuate in
response to changes in interest rates. Thus, a decrease in
interest rates will generally result in an increase in the value
of the Fund's assets allocated to the Fixed Income Class.
Conversely, during periods of rising interest rates, the value of
the Fund's assets allocated to such Class will generally decline.
The magnitude of these fluctuations will generally be greater for
securities with longer maturities. Debt securities are subject
to varying degrees of risk of default depending upon, among other
factors, the creditworthiness of the issuer and the ability of
the borrower to meet its obligations.
THE FUND MAY INVEST IN LOWER-RATED FIXED INCOME SECURITIES.
Lower-rated fixed income securities are generally regarded as
those rated below Baa by Moody's Investors Service, Inc.
("Moody's") or BBB by Standard & Poor's Corporation ("Standard &
Poor's") or securities of comparable quality as determined by
Putnam Management. The Fund will not purchase fixed income
securities rated at the time of purchase lower than Baa by
Moody's or BBB by Standard & Poor's or, if unrated, determined to
be of comparable quality by Putnam Management, if, as a result,
more than 35% of the Fund's total assets would be invested in
securities of that quality. In addition, the Fund will not
purchase fixed income securities rated at the time of purchase
lower than Caa by Moody's or CCC by Standard & Poor's, or, if
unrated, determined by Putnam Management to be of comparable
quality, if, as a result, more than 5% of the Fund's total assets
would be invested in securities of that quality. Such securities
may be in default and are generally regarded by the rating
agencies as having extremely poor prospects of ever attaining any
real investment standing. The values of lower-rated fixed income
securities, commonly known as "junk bonds," generally fluctuate
more than those of higher-rated fixed income securities. In
addition, the lower rating reflects a greater possibility that
the financial condition of the issuer, or adverse changes in
general economic conditions, or both, may impair the ability of
the issuer to make payments of interest and repayments of
principal. The rating services' descriptions of debt securities
are included in the Appendix to this Prospectus. The Fund will
not necessarily dispose of a security when its rating is reduced
below its rating at the time of purchase, although Putnam
Management will monitor the investment to determine whether
continued investment in the security will assist in meeting the
Fund's investment objective.
Putnam Management may take full advantage of the entire range of
fixed income securities and may adjust the average maturity of
the Fund's portfolio from time to time depending on its
assessment of relative yields on securities of different
maturities and its expectations of future changes in interest
rates.
At times, some or all of the Fund's fixed income assets may be
invested in securities as to which the Fund, by itself or
together with other funds and accounts managed by Putnam
Management and its affiliates, holds a major portion or all of
such securities. Under adverse market or economic conditions or
in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell such
securities when Putnam Management believes it advisable to do so
or may be able to sell such securities only at prices lower than
if such securities were more widely held. Under such
circumstances, it may also be more difficult to determine the
fair value of such securities for purposes of computing the
Fund's net asset value. In order to enforce its rights in the
event of a default under such securities, the Fund may be
required to take possession of and manage assets securing the
issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the Fund's net
asset value.
Putnam Management seeks to minimize the risks of investing in
lower-rated securities through investment analysis and attention
to current developments in interest rates and economic
conditions. The lower ratings of certain fixed income securities
held by the Fund reflects a greater possibility that adverse
changes in the financial condition of their issuers, or in
general economic conditions, or both, or an unanticipated rise in
interest rates, may impair the ability of their issuers to make
payments of interest and principal. In addition, under such
circumstances the values of such securities may be more volatile,
and the markets for such securities may be less liquid, than
those for higher-rated securities, and the Fund may as a result
find it more difficult to determine the fair value of such
securities. When the Fund invests in fixed income securities in
the lower rating categories, the achievement of the Fund's goals
is more dependent on Putnam Management's investment analysis than
would be the case if the Fund was investing in fixed income
securities in the higher rating categories.
The Fund may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a
significant discount from their principal amount and pay interest
only at maturity rather than at intervals during the life of the
security. Payment-in-kind bonds allow the issuer, at its option,
to make current interest payments on the bonds either in cash or
in additional bonds. The value of zero-coupon bonds is subject
to greater fluctuation in response to changes in market interest
rates than bonds which pay interest currently. Both zero-coupon
and payment-in-kind bonds allow an issuer to avoid the need to
generate cash to meet current interest payments. Accordingly,
such bonds may involve greater credit risks than bonds paying
interest currently. Even though such bonds do not pay current
interest in cash, the Fund is nonetheless required to accrue
interest income on such investments and to distribute such
amounts at least annually to shareholders. Thus, the Fund could
be required at times to liquidate other investments in order to
satisfy its distribution requirements.
Certain securities held by the Fund may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were
to redeem securities held by the Fund during a time of declining
interest rates, the Fund might not be able to reinvest the
proceeds in securities providing the same investment return as
the securities redeemed.
FOR ADDITIONAL INFORMATION CONCERNING THE RISKS ASSOCIATED WITH
INVESTMENTS BY THE FUND IN SECURITIES IN THE LOWER RATING
CATEGORIES, SEE THE STATEMENT OF ADDITIONAL INFORMATION.
ASSET-BACKED AND MORTGAGE-BACKED SECURITIES. The Fund may invest
some or all of its assets allocated to the Fixed Income Class in
asset-backed and mortgage-backed securities, such as
collateralized mortgage obligations. Mortgage-backed securities
represent a participation in, or are secured by, mortgage loans
and include securities issued or guaranteed by the United States
government or one of its agencies or instrumentalities;
securities issued by private issuers that represent an interest
in or are collateralized by mortgage-backed securities issued or
guaranteed by the U.S. government or one of its agencies or
instrumentalities; or securities issued by private issuers that
represent an interest in or are collateralized by mortgage loans
or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement.
Asset-backed securities are structured like mortgage-backed
securities, but instead of mortgage loans or interests in
mortgage loans, the underlying assets may include motor vehicle
installment sales or installment loan contracts, leases of
various types of real and personal property, and receivables from
credit card agreements. The ability of an issuer of asset-backed
securities to enforce its security interest in the underlying
assets may be limited.
Due to the risk of voluntary prepayment, especially when interest
rates decline, mortgage-backed and asset-backed securities are
less effective than other types of securities as a means of
"locking in" attractive long-term interest rates and, as a
result, may have less potential for capital appreciation during
periods of declining interest rates than other securities of
comparable maturities. If the Fund purchases mortgage-backed and
asset-backed securities at a premium above their par value,
unscheduled prepayments made at par will cause the Fund to suffer
a loss equal to any unamortized premium.
MONEY MARKET INSTRUMENTS. The Fund may invest in high quality
money market obligations that present minimal credit risk and may
include U.S. government obligations, certificates of deposit,
bankers' acceptances, bank deposits, other financial institution
obligations, and commercial paper and other short-term corporate
obligations. These instruments have various maturities and may
have fixed or variable interest rates. The Fund may also hold a
portion of its assets in cash.
RISK FACTORS
INVESTMENTS IN FOREIGN SECURITIES. The Fund may invest up to 40%
of its assets in securities principally traded in foreign
markets. The Fund may also purchase Eurodollar certificates of
deposit without regard to this limit. Foreign investments
involve certain risks not present in domestic securities.
Because the Fund intends to purchase securities that are normally
denominated and traded in foreign currencies, the values of these
assets and any investment income derived from them may be
affected favorably or unfavorably by currency exchange rates and
exchange control regulations. In addition, although a portion of
the Fund's investment income may be received or realized in such
foreign currencies, the Fund will be required to compute and
distribute its income in U.S. dollars, which may subject the Fund
to various risks due to currency fluctuations. For example, if
the exchange rate for any such currency declines after the Fund's
income has been earned and translated into U.S. dollars but
before payment, the Fund could be required to liquidate portfolio
securities to make such distributions. The values of foreign
fixed income securities will fluctuate in response to changes in
U.S. and foreign interest rates. Income received by the Fund
from sources within foreign countries may be reduced by
withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may
reduce or eliminate such taxes. Any such taxes paid by the Fund
will reduce its net income available for distribution to
shareholders. Putnam Management will consider available yields,
net of any required taxes, in selecting foreign securities.
There may be less information publicly available about a foreign
issuer than about a U.S. issuer, and foreign issuers are not
generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the United States.
The securities of some foreign issuers are less liquid and at
times more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions and other fees are also generally
higher than in the United States. Foreign settlement procedures
and trade regulations may involve certain risks (such as delay in
payment or delivery of securities or in the recovery of the
Fund's assets held abroad) and expenses not present in the
settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange
controls, confiscatory taxation, political or financial
instability and diplomatic developments which could affect the
value of the Fund's investments in certain foreign countries.
Legal remedies available to investors in certain foreign
countries may be more limited than those available with respect
to investments in the United States or in other foreign
countries. The laws of some foreign countries may limit the
Fund's ability to invest in securities of certain issuers located
in those foreign countries. Special tax considerations apply to
foreign securities.
FOR MORE INFORMATION CONCERNING THE RISKS ASSOCIATED WITH
INVESTING IN FOREIGN SECURITIES, SEE THE STATEMENT OF ADDITIONAL
INFORMATION.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Putnam Management may
engage in foreign currency exchange transactions to protect
against uncertainty in the level of future exchange rates.
Putnam Management may engage in foreign currency exchange
transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect the
value of specific portfolio positions ("position hedging").
The Fund may engage in transaction hedging to protect against a
change in the foreign currency exchange rate between the date on
which the Fund contracts to purchase or sell the security and the
settlement date, or to "lock in" the U.S. dollar equivalent of a
dividend or interest payment in a foreign currency. The Fund may
purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate as part of its transaction hedging
strategies.
If conditions warrant, the Fund may also enter into contracts to
purchase or sell foreign currencies at a future date ("forward
contracts") and purchase and sell foreign currency futures
contracts as part of its transaction hedging strategies. A
foreign currency forward contract is a negotiated agreement to
exchange currency at a future time at a rate or rates that may be
higher or lower than the spot rate. Foreign currency futures
contracts are standardized exchange-traded contracts and have
margin requirements. The Fund may also purchase exchange-listed
and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies.
The Fund may engage in "position hedging" to protect against the
decline in the value relative to the U.S. dollar of the
currencies in which its portfolio securities are denominated or
quoted (or an increase in the value of the foreign currencies for
securities which the Fund intends to buy, when the Fund holds
cash reserves or short-term investments). For position hedging
purposes, the Fund may purchase or sell foreign currency futures
contracts, foreign currency forward contracts, and put and call
options on foreign currency futures contracts and on foreign
currencies on exchanges or in over-the-counter markets. In
connection with position hedging, the Fund may also purchase or
sell foreign currencies on a spot basis.
The Fund's currency hedging transactions may call for the
delivery of one foreign currency in exchange for another foreign
currency and may at times not involve currencies in which its
portfolio securities are then denominated. Putnam Management
will engage in such "cross hedging" activities when it believes
that such transactions provide significant hedging opportunities
for the Fund. Cross hedging transactions by the Fund involve the
risk of imperfect correlation between changes in the values of
the currencies to which such transactions relate and changes in
the value of the currency or other asset or liability which is
the subject of the hedge.
Hedging transactions involve costs and may result in losses.
There is no assurance that appropriate foreign currency exchange
transactions will be available with respect to all currencies in
which the Fund's investments may be denominated. The Fund's
ability to engage in hedging transactions may be limited by tax
considerations. The Fund's hedging transactions may affect the
character or amount of the Fund's distributions.
FOR MORE INFORMATION RELATING TO FOREIGN CURRENCY EXCHANGE
TRANSACTIONS, SEE THE STATEMENT OF ADDITIONAL INFORMATION. FOR
MORE INFORMATION ABOUT FUTURES CONTRACTS AND RELATED OPTIONS, SEE
"FINANCIAL FUTURES AND OPTIONS" BELOW.
SHORT-TERM TRADING. UNDER CERTAIN MARKET CONDITIONS, THE FUND
MAY SEEK PROFITS BY SHORT-TERM TRADING. The length of time the
Fund has held a particular security is not generally a
consideration in investment decisions. A change in the
securities held by the Fund is known as "portfolio turnover." To
the extent short-term trading strategies are used, the Fund's
portfolio turnover rate may be higher than that of other mutual
funds. Portfolio turnover generally involves some expense to the
Fund, including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and
reinvestment in other securities. Such transactions may result
in realization of taxable capital gains. While it is impossible
to predict the Fund's portfolio turnover rate, Putnam Management,
based on its experience, believes that such rate will not exceed
150%.
DEFENSIVE STRATEGIES
AT TIMES PUTNAM MANAGEMENT MAY JUDGE THAT CONDITIONS IN THE
SECURITIES MARKETS MAKE PURSUING THE FUND'S BASIC INVESTMENT
STRATEGY INCONSISTENT WITH THE BEST INTERESTS OF ITS
SHAREHOLDERS. At such times Putnam Management may temporarily
use alternative strategies, primarily designed to reduce
fluctuations in the value of the Fund's assets. In implementing
these "defensive" strategies, depending on the circumstances, the
Fund may invest without regard to the ranges described above for
investments in the various asset classes and may invest primarily
in equity securities, debt securities, preferred stocks, U.S.
government and agency obligations, cash or money market
instruments, or in other securities Putnam Management considers
consistent with such defensive strategies. It is impossible to
predict when, or for how long, the Fund will use such alternative
strategies.
FINANCIAL FUTURES AND OPTIONS
THE FUND MAY BUY AND SELL FINANCIAL FUTURES CONTRACTS ON STOCK
INDEXES, U.S. GOVERNMENT SECURITIES, FOREIGN FIXED INCOME
SECURITIES AND ON FOREIGN CURRENCIES. A futures contract is a
contract to buy or sell units of a particular stock index (an
"Index Future"), or a certain amount of a U.S. Government
security, foreign fixed income security or foreign currency, at
an agreed price on a specified future date. Depending on the
change in value of the index, security or currency between the
time when the Fund enters into and terminates a futures contract,
the Fund realizes a gain or loss. The Fund may purchase and sell
futures contracts for hedging purposes and to adjust the Fund's
exposure to the relevant stock or bond markets. For example,
when Putnam Management wants to increase the Fund's exposure to
equity securities, it may do so by taking long positions in
futures contracts on equity indices such as futures contracts on
the Standard & Poor's 500 Stock Index. Similarly, when Putnam
Management wants to increase the Fund's exposure to fixed income
securities, it may do so by taking long positions in futures
contracts relating to fixed income securities such as futures
contracts on U.S. Treasury bonds or notes. The Fund may buy and
sell call and put options on futures contracts or on stock
indices in addition to or as an alternative to purchasing or
selling futures contracts or, to the extent permitted by
applicable law, to earn additional income.
THE USE OF FUTURES AND OPTIONS INVOLVES CERTAIN SPECIAL RISKS.
FUTURES AND OPTIONS TRANSACTIONS INVOLVE COSTS AND MAY RESULT IN
LOSSES. Certain risks arise because of the possibility of
imperfect correlations between movements in the prices of
financial futures contracts and options and movements in the
prices of the underlying stock index, securities, or currencies
or of the securities or currencies which are the subject of the
hedge. The successful use of futures and options further depends
on Putnam Management's ability to forecast market or interest
rate movements correctly. Other risks arise from the Fund's
potential inability to close out its futures or related options
positions, and there can be no assurance that a liquid secondary
market will exist for any futures contract or option at a
particular time. The Fund's ability to terminate option
positions established in the over-the-counter market may be more
limited than for exchange-traded options and may also involve the
risk that securities dealers participating in such transactions
would fail to meet their obligations to the Fund. The use of
futures or options on futures for purposes other than hedging is
regarded as speculative.
Because the markets for options and futures on foreign equity and
fixed income securities and foreign currencies are relatively new
and still developing, the Fund's ability to engage in such
transactions may be limited. Certain provisions of the Internal
Revenue Code and certain regulatory requirements may also limit
the Fund's ability to engage in futures and options transactions.
A MORE DETAILED EXPLANATION OF FUTURES AND OPTIONS TRANSACTIONS,
INCLUDING THE RISKS ASSOCIATED WITH THEM, IS INCLUDED IN THE
STATEMENT OF ADDITIONAL INFORMATION.
INVESTMENTS IN PREMIUM SECURITIES
The Fund may invest some or all of its assets allocated to the
Fixed Income Class in securities bearing coupon rates higher than
prevailing market rates. Such "premium" securities are typically
purchased at prices greater than the principal amounts payable on
maturity. The Fund does not amortize the premium paid for such
securities in calculating its net investment income. As a
result, the purchase of such securities provides the Fund a
higher level of investment income distributable to shareholders
on a current basis than if the Fund had purchased securities
bearing current market rates of interest. Because the value of
premium securities tends to approach the principal amount as they
approach maturity (or call price in the case of securities
approaching their first call date), the purchase of such
securities may increase the Fund's risk of capital loss if such
securities are held to maturity (or first call date).
During a period of declining interest rates, some of the Fund's
portfolio investments will likely bear coupon rates which are
higher than the current market rates, regardless of whether such
securities were originally purchased at a premium. Such
securities would generally carry premium market values which
would be reflected in the net asset value of the Fund's shares.
As a result, an investor who purchases shares of the Fund during
such periods would initially receive higher taxable distributions
(derived from the higher coupon rates payable on the Fund's
investments) than might be available from alternative investments
bearing current market interest rates, but may face an increased
risk of capital loss as these higher coupon securities approach
maturity (or first call date). In evaluating the potential
performance of an investment in the Fund, investors may find it
useful to compare the Fund's current dividend rate with the
Fund's "yield," which is computed on a yield-to-maturity basis in
accordance with SEC regulations and which reflects amortization
of market premiums. See "How performance is shown.
OTHER INVESTMENT PRACTICES
THE FUND MAY ALSO ENGAGE TO A LIMITED EXTENT IN THE FOLLOWING
INVESTMENT PRACTICES, EACH OF WHICH INVOLVES CERTAIN SPECIAL
RISKS. THE STATEMENT OF ADDITIONAL INFORMATION CONTAINS MORE
DETAILED INFORMATION ABOUT THESE PRACTICES, INCLUDING LIMITATIONS
DESIGNED TO REDUCE THESE RISKS.
OPTIONS. The Fund may seek to increase its current return by
buying and selling covered call and put options on securities it
owns or in which it may invest and on foreign currencies. The
Fund receives a premium from writing a call or put option, which
increases the Fund's return if the option expires unexercised or
is closed out at a net profit. When the Fund writes a call
option, it gives up the opportunity to profit from any increase
in the price of a security or currency above the exercise price
of the option; when it writes a put option, the Fund takes the
risk that it will be required to purchase a security or currency
from the option holder at a price above the current market price
of the security or currency. The Fund may terminate an option
that it has written prior to its expiration by entering into a
closing purchase transaction in which it purchases an option
having the same terms as the option written. The Fund may also
buy and sell put and call options for hedging purposes. The Fund
may also from time to time buy and sell combinations of put and
call options on the same underlying security or currency to earn
additional income. The aggregate value of the securities and
foreign currencies underlying options written by the Fund may not
exceed 25% of the Fund's assets. The Fund's use of options
strategies may be limited by applicable law.
SECURITIES LOANS, REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS.
The Fund may lend portfolio securities amounting to not more than
25% of its assets to broker-dealers and may enter into repurchase
agreements on up to 25% of its assets. These transactions must
be fully collateralized at all times. The Fund may also purchase
securities for future delivery, which may increase its overall
investment exposure and involves a risk of loss if the value of
the securities declines prior to the settlement date. These
transactions involve some risk to the Fund if the other party
should default on its obligation and the Fund is delayed or
prevented from recovering the collateral or completing the
transaction.
LIMITING INVESTMENT RISK
SPECIFIC INVESTMENT RESTRICTIONS HELP THE FUND LIMIT INVESTMENT
RISKS FOR ITS SHAREHOLDERS. THESE RESTRICTIONS PROHIBIT THE FUND
FROM: acquiring more than 10% of the voting securities of any
one issuer* and investing more than: (a) 5% of its total assets
(taken at current value) in securities of any one issuer (other
than the U.S. government or its agencies or instrumentalities or,
with respect to 25% of the Fund's total assets, securities issued
by or backed by the credit of, any foreign government, its
agencies or instrumentalities);* (b) 15% of its net assets in
securities restricted as to resale (excluding securities
determined by the Trustees (or the person designated by the
Trustees to make such determinations) to be readily marketable);*
(c) 25% of its total assets in any one industry (securities of
the U.S. government, its agencies or instrumentalities, or of any
foreign government, its agencies or instrumentalities, securities
of supranational entities, and securities backed by the credit of
a governmental entity are not considered to represent
industries);* (d) 5% of its net assets in warrants or more than
2% of its net assets in warrants not listed on the New York or
American Stock Exchanges; or (e) 15% of its net assets in any
combination of securities that are not readily marketable, in
securities restricted as to resale (excluding securities
determined by the Trustees (or the person designated by the
Trustees to make such determinations) to be readily marketable),
and in repurchase agreements maturing in more than seven days.
Restrictions marked with an asterisk (*) above are summaries of
fundamental policies. See the Statement of Additional
Information for the full text of these policies and the Fund's
other fundamental policies. Except for investment policies
designated as fundamental in this Prospectus or the Statement,
the investment policies described in this Prospectus and in the
Statement are not fundamental policies. The Trustees may change
any non-fundamental investment policies without shareholder
approval. As a matter of policy, the Trustees would not
materially change the Fund's investment objective without
shareholder approval.
HOW PERFORMANCE IS SHOWN
YIELD AND TOTAL RETURN DATA MAY FROM TIME TO TIME BE INCLUDED IN
ADVERTISEMENTS ABOUT THE FUND. "Yield" is calculated by dividing
the annualized net investment income per share during a recent
30-day period by the maximum public offering price per share on
the last day of that period. For this purpose, net investment
income is calculated in accordance with SEC regulations and may
differ from the Fund's net investment income as determined for
financial reporting purposes. SEC regulations require that net
investment income be calculated on a "yield-to-maturity" basis,
which has the effect of amortizing any premiums or discounts in
the current market value of fixed-income securities. The Fund's
current dividend rate is based on its net investment income as
determined for financial reporting purposes which may not reflect
amortization in the same manner. See "How objective is pursued -
- -Investments in premium securities." The Fund's yield reflects
the deduction of the maximum initial sales charge. "Total
return" for the life of the Fund through the most recent calendar
quarter represents the average annual compounded rate of return
on an investment of $1,000 in the Fund at the maximum public
offering price. Total return may also be presented for other
periods or based on investment at reduced sales charge levels.
Quotations of yield or total return for any period when an
expense limitation was in effect will be greater than if the
limitation had not been in effect. The Fund's performance may be
compared to various indices. See the Statement of Additional
Information. Because shares sold through eligible defined
contribution plans are sold without a sales charge, quotations of
yield and total return reflecting the deduction of a sales charge
will be lower than the actual yield and total return on shares
purchased through such plans.
ALL DATA IS BASED ON THE FUND'S PAST INVESTMENT RESULTS AND DOES
NOT PREDICT FUTURE PERFORMANCE. Investment performance, which
will vary, is based on many factors, including market conditions,
the composition of the Fund's portfolio, the Fund's operating
expenses and which class of shares you purchase. Investment
performance also often reflects the risks associated with the
Fund's investment objective and policies. These factors should
be considered when comparing the Fund's investment results to
those of other mutual funds and other investment vehicles.
HOW THE FUND IS MANAGED
THE TRUSTEES ARE RESPONSIBLE FOR GENERALLY OVERSEEING THE CONDUCT
OF THE FUND'S BUSINESS. Subject to such policies as the Trustees
may determine, Putnam Management furnishes a continuing
investment program for the Fund and makes investment decisions on
its behalf. Subject to the control of the Trustees, Putnam
Management also manages the Fund's other affairs and business.
Putnam Management's Global Asset Allocation Committee has primary
responsibility for the day-to-day management of the Fund's
portfolio.
The Fund pays its share of all expenses of the Trust that are not
assumed by Putnam Management, including Trustees' fees and
auditing, legal, custodial, investor servicing and shareholder
reporting expenses. Payments under the Fund's Distribution Plans
are borne entirely by the Fund and are in turn allocated to the
relevant class of shares. The Fund also reimburses Putnam
Management for its share of the compensation and related expenses
of certain officers of the Trust and their staff who provide
administrative services to the Fund. The total reimbursement is
determined annually by the Trustees.
Putnam Management places all orders for purchases and sales of
the Fund's securities. In selecting broker-dealers, Putnam
Management may consider research and brokerage services furnished
to it and its affiliates. Subject to seeking the most favorable
price and execution available, Putnam Management may consider
sales of shares of the Fund (and, if permitted by law, of the
other Putnam funds) as a factor in the selection of broker-
dealers.
<PAGE>
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized on November
4, 1993. A copy of the Agreement and Declaration of Trust, which
is governed by Massachusetts law, is on file with the Secretary
of State of The Commonwealth of Massachusetts. As of January 10,
1994, Putnam Investments, Inc. owned all of the shares of the
Fund and the Trust and therefore may be deemed to "control" the
Fund and the Trust.
The Trust is an open-end, diversified management investment
company with an unlimited number of authorized shares of
beneficial interest. Shares of the Trust may, without
shareholder approval, be divided into two or more series of
shares representing separate investment portfolios and are
currently divided into three series of shares. Any such series
of shares may be further divided without shareholder approval
into two or more classes of shares having such preferences and
special or relative rights and privileges as the Trustees
determine. The Fund currently offers three classes of shares.
Only the Fund's Class A shares are offered by this Prospectus.
Class B shares are sold at net asset value, but are subject to a
contingent deferred sales charge upon redemption and bear a
higher 12b-1 fee than Class A shares. Class Y shares, which are
offered only to defined contribution plans that initially invest
at least $250 million in a combination of Putnam funds and other
investments managed by Putnam Management or its affiliates, are
sold at net asset value and do not bear a 12b-1 fee. Because
Class B shares generally bear greater expenses than Class A
shares or Class Y shares, the investment return of Class B shares
will be lower than that of other classes. Each share has one
vote, with fractional shares voting proportionally. Shares shall
vote in the aggregate as a single class without regard to series
or classes of shares on all matters except, (i) when required by
the Investment Company Act of 1940 or when the Trustees have
determined that the matter affects the interests of one or more
series or classes materially differently, shares will be voted by
individual series or class; and (ii) when the Trustees have
determined that the matter affects only the interest of one or
more series or classes, then only shareholders of such series or
classes shall be entitled to vote thereon. Shares are freely
transferable, are entitled to dividends as declared by the
Trustees, and, if the Fund were liquidated, would receive the net
assets of the Fund. The Fund may suspend the sale of shares at
any time and may refuse any order to purchase shares. Although
the Trust is not required to hold annual meetings of its
shareholders, shareholders holding at least 10% of the
outstanding shares entitled to vote have the right to call a
meeting to elect or remove Trustees, or to take other actions as
provided in the Declaration of Trust.
<PAGE>
If you own fewer shares than a minimum amount set by the Trustees
(presently 20 shares), the Fund may choose to redeem your shares
and pay you for them. You will receive at least 30 days' written
notice before the Fund redeems your shares, and you may purchase
additional shares at any time to avoid a redemption. The Fund
may also redeem shares if you own shares above a maximum amount
set by the Trustees. There is presently no maximum, but the
Trustees may establish one at any time, which could apply to both
present and future shareholders.
THE TRUST'S TRUSTEES: GEORGE PUTNAM,* CHAIRMAN. President of the
Putnam funds. Chairman and Director of Putnam Management and
Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director,
Marsh & McLennan Companies, Inc.; WILLIAM F. POUNDS, VICE
CHAIRMAN. Professor of Management, Alfred P. Sloan School of
Management, M.I.T.; JAMESON ADKINS BAXTER, President, Baxter
Management; HANS H. ESTIN, Vice Chairman, North American
Associates, Inc.; JOHN A. HILL, Principal and Managing Director,
First Reserve Corporation; ELIZABETH T. KENNAN, President, Mount
Holyoke College; LAWRENCE J. LASSER,* Vice President of the
Putnam funds. President, Chief Executive Officer and Director of
Putnam Investments, Inc. and Putnam Management. Director, Marsh
& McLennan Companies, Inc.; ROBERT E. PATTERSON, Executive Vice
President, Cabot Partners Limited Partnership; DONALD S. PERKINS,
Director of various corporations, including AT&T, K mart
Corporation and Time Warner Inc.; GEORGE PUTNAM, III,*
President, New Generation Research, Inc.; A.J.C. SMITH,*
Chairman, Chief Executive Officer and Director, Marsh & McLennan
Companies, Inc.; and W. NICHOLAS THORNDIKE, Director of various
corporations and charitable organizations, including Providence
Journal Co. Also, Trustee and President, Massachusetts General
Hospital and Trustee of Eastern Utilities Associates. The
Trust's Trustees are also Trustees of the other Putnam funds.
Those marked with an asterisk (*) are "interested persons" of the
Trust, Putnam Management or Putnam Mutual Funds.
ABOUT YOUR INVESTMENT
HOW TO BUY SHARES
ALL ORDERS TO PURCHASE SHARES MUST BE MADE THROUGH YOUR
EMPLOYER'S DEFINED CONTRIBUTION PLAN. FOR MORE INFORMATION ABOUT
HOW TO PURCHASE SHARES OF THE FUND THROUGH YOUR EMPLOYER'S PLAN
OR LIMITATIONS ON THE AMOUNT THAT MAY BE PURCHASED, PLEASE
CONSULT YOUR EMPLOYER. Shares are sold to eligible defined
contribution plans at the net asset value per share next
determined after receipt of an order by Putnam Mutual Funds.
Orders must be received by Putnam Mutual Funds before the close
of regular trading on the New York Stock Exchange in order to
receive that day's net asset value. In order to be eligible to
purchase shares at net asset value, defined contribution plans
must initially invest at least $1,000,000 or be sponsored by
companies with more than 750 employees. Eligible plans may make
additional investments of any amount at any time. To eliminate
the need for safekeeping, the Fund will not issue certificates
for your shares. Putnam Mutual Funds may, at its expense,
provide additional promotional incentives or payments to dealers
that sell shares of the Putnam funds. In some instances, these
incentives or payments may be offered only to certain dealers who
have sold or may sell significant amounts of shares.
DISTRIBUTION PLAN
The purpose of the Plan is to permit the Fund to compensate
Putnam Mutual Funds for services provided and expenses incurred
by it in promoting the sale of shares of the Fund, reducing
redemptions, or maintaining or improving services provided to
shareholders by Putnam Mutual Funds or dealers. The Plan
provides for payments by the Fund to Putnam Mutual Funds at the
annual rate of up to 0.35% of the Fund's average net assets
attributable to Class A shares, subject to the authority of the
Trustees to reduce the amount of payments or to suspend the Plan
for such periods as they may determine. Subject to these
limitations, the amount of such payments and the specific
purposes for which they are made shall be determined by the
Trustees. At present, the Trustees have approved payments under
the Plan at the annual rate of 0.25% of the Fund's average net
assets attributable to Class A shares for the purpose of
compensating Putnam Mutual Funds for services provided and
expenses incurred by it as principal underwriter of the Fund's
shares, including payments made by it to dealers under the
Service Agreements referred to below. Should the Trustees decide
in the future to approve payments in excess of this amount,
shareholders will be notified and this Prospectus will be
revised.
When Putnam Mutual Funds is not dealer of record, Putnam Mutual
Funds makes quarterly payments to qualifying dealers based on the
average net asset value of Class A shares which are attributable
to shareholders for whom the dealers are designated as the dealer
of record, in order to compensate such dealers (including, for
this purpose, certain financial institutions) for services
provided in connection with sales of Class A shares and the
maintenance of shareholder accounts. Putnam Mutual Funds makes
such payments at the annual rate of .25% of such average net
assets (including shares acquired through reinvestment of
distributions). Putnam Mutual Funds may suspend or modify these
payments at any time, and payments are subject to the
continuation of the Plan described above, the terms of Service
Agreements between dealers and Putnam Mutual Funds, and any
applicable limits imposed by the National Association of
Securities Dealers, Inc.
<PAGE>
HOW TO SELL SHARES
SUBJECT TO ANY RESTRICTIONS IMPOSED BY YOUR EMPLOYER'S PLAN, YOU
CAN SELL YOUR SHARES THROUGH THE PLAN TO THE FUND ANY DAY THE NEW
YORK STOCK EXCHANGE IS OPEN. For more information about how to
sell shares of the Fund through your employer's plan, including
any charges that may be imposed by the plan, please consult with
your employer.
Your plan administrator must send a signed letter of instruction
to Putnam Investor Services. The price you will receive is the
next net asset value calculated after the Fund receives your
request in proper form. All requests must be received by the
Fund prior to the close of regular trading on the New York Stock
Exchange in order to receive that day's net asset value. If you
sell shares having a net asset value of $100,000 or more, the
signatures of registered owners or their legal representatives
must be guaranteed by a bank, broker-dealer or certain other
financial institutions. See the Statement of Additional
Information for more information about where to obtain a
signature guarantee.
THE FUND GENERALLY PROVIDES PAYMENT FOR YOUR SHARES THE BUSINESS
DAY AFTER THE REQUEST IS RECEIVED. Under unusual circumstances,
the Fund may suspend repurchases, or postpone payment for more
than seven days, as permitted by federal securities law. The
Fund will only repurchase shares for which it has received
payment.
HOW TO EXCHANGE SHARES
Subject to any restrictions contained in your plan, you can
exchange your shares for shares of other Putnam funds available
through your plan at net asset value. Contact your plan
administrator or Putnam Investor Services on how to exchange your
shares or how to obtain prospectuses of other Putnam funds in
which you may invest. Shares of certain Putnam funds are not
available to residents of all states.
The exchange privilege is not intended as a vehicle for short-
term trading. Excessive exchange activity may interfere with
portfolio management and have an adverse effect on all
shareholders. In order to limit excessive exchange activity and
in other circumstances where the Trustees or Putnam Management
believes doing so would be in the best interests of the Fund, the
Fund reserves the right to revise or terminate the exchange
privilege, limit the amount or number of exchanges or reject any
exchange. Shareholders would be notified of any such action to
the extent required by law. Consult Putnam Investor Services
before requesting an exchange. See the Statement of Additional
Information to find out more about the exchange privilege.
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HOW THE FUND VALUES ITS SHARES
THE FUND CALCULATES THE NET ASSET VALUE OF A SHARE OF EACH CLASS
BY DIVIDING THE TOTAL VALUE OF ITS ASSETS, LESS LIABILITIES, BY
THE NUMBER OF ITS SHARES OUTSTANDING. SHARES ARE VALUED AS OF
THE CLOSE OF REGULAR TRADING ON THE NEW YORK STOCK EXCHANGE EACH
DAY THE EXCHANGE IS OPEN. Portfolio securities for which market
quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are
stated at amortized cost, which approximates market value. All
other securities and assets are valued at their fair value
following procedures approved by the Trustees.
HOW DISTRIBUTIONS ARE MADE; TAX INFORMATION
The Fund distributes any net investment income at least quarterly
and any net realized capital gains at least annually.
Distributions from net capital gains are made after applying any
available capital loss carryovers.
The terms of your plan will govern how your plan may receive
distributions from the Fund. Generally, periodic distributions
from the Fund to your plan are reinvested in additional Fund
shares, although your plan may permit Fund distributions from net
investment income to be received by you in cash while reinvesting
capital gains distributions in additional shares or all Fund
distributions to be received in cash. If another option is not
selected, all distributions will be reinvested in additional Fund
shares.
The Fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other
requirements that are necessary for it to be relieved of federal
taxes on income and gains it distributes. The Fund will
distribute substantially all of its ordinary income and capital
gain net income on a current basis. Generally, Fund
distributions are taxable as ordinary income, except that any
distributions of net long-term capital gains will be taxed as
such. However, distributions by the Fund to employer-sponsored
defined contribution plans that qualify for tax-exempt treatment
under federal income tax laws will not be taxable. Special tax
rules apply to investments through such plans. You should
consult your tax adviser to determine the suitability of the Fund
as an investment through such a plan and the tax treatment of
distributions (including distributions of amounts attributable to
an investment in the Fund) from such a plan.
The foregoing is a summary of certain federal income tax
consequences of investing in the Fund. You should consult your
tax adviser to determine the precise effect of an investment in
the Fund on your particular tax situation (including possible
liability for state and local taxes).
ABOUT PUTNAM INVESTMENTS, INC.
PUTNAM MANAGEMENT HAS BEEN MANAGING MUTUAL FUNDS SINCE 1937.
Putnam Mutual Funds is the principal underwriter of the Fund and
of other Putnam funds. Putnam Defined Contribution Plans is a
division of Putnam Mutual Funds. Putnam Fiduciary Trust Company
is the Fund's custodian. Putnam Investor Services, a division of
Putnam Fiduciary Trust Company, is the Fund's investor servicing
and transfer agent.
Putnam Management, Putnam Mutual Funds, and Putnam Fiduciary
Trust Company are located at One Post Office Square, Boston,
Massachusetts, 02109 and are subsidiaries of Putnam Investments,
Inc., which is wholly-owned by Marsh & McLennan Companies, Inc.,
a publicly owned holding company whose principal businesses are
international insurance and reinsurance brokerage, employee
benefit consulting and investment management.
APPENDIX
THE RATINGS SERVICES' DESCRIPTIONS OF THE FIXED-INCOME SECURITIES
IN WHICH THE FUND MAY INVEST ARE:
MOODY'S INVESTORS SERVICE, INC.:
AAA -- Bonds which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt-edge." Interest payments
are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
AA -- Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
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BAA -- Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
BA -- Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments
may be very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
CAA -- Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
CA -- Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
STANDARD & POOR'S CORPORATION:
AAA -- Bonds rated AAA have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated
issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest
and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds
in this category than in higher rated categories.
BB-B-CCC-CC-C -- Bonds rated BB, B, CCC, CC and C are
regarded, on balance, as predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such bonds
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D - Bonds rated D are in payment default. The D rating
category is used when interest payments or principal payments are
not made on the date due even if the applicable grace period has
not expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The D rating also will be
used on the filing of a bankruptcy petition if debt service
payments are jeopardized.
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