Putnam
Strategic
Income
Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "We believe the recent downturn for high-yield bonds has been prompted
more by investor sentiment than by the fundamentals of the companies in
which the fund invests. We continue to focus on strong companies in robust
industries that have little or no exposure to overseas markets. Using our
in-depth credit research capabilities, we target high-yield bonds with the
potential to reward investors over time despite recent price declines. In
fact, we believe now is an ideal time to take advantage of their
compelling prices."
-- Jennifer Leichter, manager
Putnam Strategic Income Fund
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
34 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
By playing to the strengths and de-emphasizing the vulnerabilities of
Putnam Strategic Income Fund's trisector portfolio, the fund's managers
were able to moderate the effects of generally negative fixed-income
markets during the six months ended September 30, 1998. Thus results for
the first half of fiscal 1998, while not positive, were showing neither
the sharp declines nor the solid gains of many single-sector portfolios in
the prevailing environment.
I am pleased to announce the appointment of David L. Waldman and Jeffrey
A. Kaufman to your fund's management team. Before joining Putnam in 1997,
David held positions with Lazard Freres Asset Management and Goldman Sachs
Asset Management. He has 10 years of investment experience. Jeffrey joined
Putnam in 1998. He was formerly with MFS Investment Management and Salomon
Brothers and has 8 years of investment experience.
In the following report, your fund's management team discusses the
performance and strategies for the fiscal year's first half and then
provides perspectives on the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 18, 1998
Report from the Fund Managers
Jennifer E. Leichter
D. William Kohli
Jeffrey A. Kaufman
David L. Waldman
During the six months ended September 30, 1998, the anxiety pervading
world financial markets had its effect on the sectors in which Putnam
Strategic Income Fund invests. While your fund continued to benefit from
its diversification, its performance was subdued as investors became more
jittery and fled to the relative safety of U.S. Treasury securities. On
the final day of the semiannual period, the U.S. stock market, as measured
by the Dow Jones Industrial Average, ended its worst quarter in eight
years. Among the contributing factors were investor fears of worsening
global economic conditions, negative corporate profit warnings, and
dramatic selloffs in overseas markets.
For a while, your fund benefited from the turmoil, as equity investors
around the world turned to bonds as a more conservative investment option.
More recently, however, investors have begun to shy away from any
securities with the slightest hint of credit risk. This shift in sentiment
dampened the performance of the high-yield and corporate bonds in your
fund's portfolio. For the semiannual period, your fund's class A shares
provided a total return of -5.65% at net asset value and -10.10% at public
offering price. For complete performance information, please refer to the
summary that begins on page 9. While these short-term results are
disappointing, we see opportunities among the challenges. We are
optimistic about the fund's positioning and view the recent downturn as an
opportunity to take advantage of attractive prices in many bond sectors.
We also believe that recent decisions by the Federal Reserve Board to
lower short-term interest rates -- one at the close of the period and one
two weeks later -- bode well for fixed-income investments.
* RECORD-BREAKING SURGE FOR U.S. TREASURIES
Of all the bond market sectors, U.S. Treasury securities were by far the
strongest performers during the period. Treasury bonds rallied
dramatically as investors worldwide sought these securities, which are
backed by the full faith and credit of the U.S. government and are
considered among the safest investments in the world. The global economic
slowdown and continued low inflation also contributed to dramatically
rising Treasury bond prices. On the final day of the period, the 30-year
U.S. Treasury yield, which moves in the opposite direction of its price,
fell to the lowest level in its 21-year history. Your fund profited from
the Treasury rally, and at period's end, approximately 20% of net assets
were invested in U.S. Treasuries. However, these securities represent the
most conservative component of the portfolio; the fund's more aggressive
strategy typically targets bonds that offer higher risk along with the
potential to deliver higher yields and greater returns. Consequently, our
decision to focus a greater portion of the portfolio on mortgage-backed
securities limited the fund's gains from the rally.
Overshadowed by a flourishing Treasury market, mortgage-backed securities
also felt the effects of plunging interest rates, which prompted
homeowners to pay off mortgages ahead of schedule by refinancing.
Prepayment reduces the appreciation potential of mortgage-backed
securities and is a risk during periods of declining interest rates.
Despite prepayment risks, mortgage-backed securities, like Treasuries,
were dominant performers in the portfolio, largely as a result of the
global flight to quality. Our focus on securities with lower prepayment
sensitivity, such as adjustable-rate, lower-coupon, and 15-year maturity
mortgage-backed securities, also benefited the fund.
[GRAPHIC OMITTED: horizontal bar chart of TOP FIVE COUNTRY ALLOCATIONS
(international sector)]
TOP FIVE COUNTRY ALLOCATIONS*
(international sector)
United Kingdom 3.8%
France 2.8%
Germany 2.6%
Mexico 1.7%
Canada 1.2%
Footnote reads:
*Based on net assets as of 9/30/98. Holdings will vary over time.
* INTERNATIONAL SECTOR FOCUSES ON EUROPE
In the international portion of the portfolio, our focus on Europe proved
beneficial during the period. International investors remained nervous in
the wake of Asia's currency and debt crisis and sought safe haven in
fixed-income securities. As European bond markets registered strong gains,
the fund was invested primarily in the United Kingdom, Germany, and
France.
Most emerging markets were hit quite hard by continued economic turmoil. A
severe economic crisis unfolded in Russia while the country negotiated
with the International Monetary Fund for financial aid. As of the period's
end, we had completely eliminated the fund's position in Russian bonds.
The fund continues to focus on a few emerging-markets countries such as
Mexico and Bulgaria because we expect them to weather the current turmoil.
* HIGH-YIELD BONDS FEEL STING OF TROUBLED EQUITY MARKET
During the period, investors' aversion to risk was most evident in the
fund's high-yield sector. Since high-yield bonds tend to move more in line
with the stock market than with the bond market, their recent poor
performance is not surprising. The high-yield market has reflected
increasing concerns about heavy losses in foreign economies and the impact
of these losses on corporate profits. In addition, as investors shunned
riskier segments of the market, hundreds of companies put their borrowing
plans on hold. In the first half of 1998, corporate bonds were being
issued at a record pace, while September marked the slowest month since
1996.
We believe the recent downturn has been prompted more by investor
sentiment than by the underlying fundamentals of the companies in which
the fund invests. We continue to focus on high-yield bonds of strong
companies that are operating in robust domestic industries and that have
little or no exposure to overseas markets. The top performers continued to
be in cable television, broadcasting, and telecommunications, all of which
were strengthened by positive operating results and high equity
valuations.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR
HIGH-YIELD BONDS
Paine Webber Group, Inc. senior notes 6.55s, 2008
Provident Companies, Inc. bonds 7.405s, 2038
Nextel Communications senior discount notes stepped-coupon
(10.65s, 9/15/02), 2007
FOREIGN BONDS
Germany (Federal Republic of) bonds Series 98, 5.5/8s, 2028
France Treasury bill notes 4 1/2s, 2003
United Kingdom Treasury bonds 8s, 2000
U.S. GOVERNMENT AND AGENCY OBLIGATIONS
Federal National Mortgage Association 6s, dwarf, TBA, October 15, 2013
Government National Mortgage Association pass-through certificates 7s,
2025-2028
U. S. Treasury bonds 5 1/2s, 2028
Footnote reads:
These holdings represent 13.3% of the fund's net assets as of 9/30/98.
Portfolio holdings will vary over time.
* POTENTIAL STILL STRONG IN TELECOMMUNICATIONS
In the telecommunications sector, Teleport Communications Group, a
telephone service company, boosted the fund's results when AT&T bought it
at a premium. Teleport provides phone service by using wireless and
fiber-optic technologies to compete with local phone companies. In the
past, long-distance companies had to pay access charges to local phone
companies in order to connect to homes. With the acquisition of Teleport,
AT&T can eliminate those charges in many markets. While this holding,
along with others discussed in this report, was viewed favorably at the
end of the period, all are subject to review and adjustment in accordance
with the fund's investment strategy and may vary in the future.
* SEEKING OPPORTUNITIES AMONG CHALLENGES
As we mentioned earlier in this report, we believe that current market
volatility will allow us to take advantage of some compelling
opportunities, especially while many bonds offer attractively low prices.
Riskier sectors of the bond market tend to go out of favor in reaction to
short-term events. We will continue to rely on our strong research
capabilities to target the companies and bond market sectors that offer
the greatest potential. In addition, the fund's diversified structure will
allow us to take advantage of strengths in certain sectors while
offsetting potential underperformance in others.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 9/30/98, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit ratings
of high-yield corporate bonds reflect a greater possibility that adverse
changes in the economy or their issuers may affect their ability to pay
principal and interest on the bonds. Investments in non-U.S. securities
may be subject to certain risks such as currency fluctuations, economic
instability, and political developments. Although the U.S. government
guarantees the timely payment of principal and interest on some of the
underlying securities, the value of the fund shares is not guaranteed and
will fluctuate.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Strategic Income Fund is designed for investors seeking high current
income consistent with capital preservation through U.S. government,
high-yield, and international fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 9/30/98
Class A Class B Class M
(inception date) (2/26/96) (2/26/96) (2/26/96)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months -5.65% -10.10% -5.89% -10.42% -5.77% -8.81%
- ------------------------------------------------------------------------------
1 year -2.33 -6.99 -2.93 -7.42 -2.57 -5.68
- ------------------------------------------------------------------------------
Life of fund 13.41 8.07 11.35 8.56 12.68 8.96
Annual average 4.98 3.04 4.24 3.22 4.72 3.37
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/98
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield Price
Bond Index Bond Index Index Index
- ------------------------------------------------------------------------------
6 months 6.66% 11.44% -4.96% 0.74%
- ------------------------------------------------------------------------------
1 year 11.51 10.35 -0.52 1.36
- ------------------------------------------------------------------------------
Life of fund 24.44 13.70 21.00 5.49
Annual average 8.83 5.09 7.65 2.09
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
4.75% and 3.25%, respectively. Class B share returns for the 1-, 5-, and
10-year (where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. All
returns assume reinvestment of distributions at NAV. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 9/30/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.34685 $0.309252 $0.330133
- ------------------------------------------------------------------------------
Capital gains -- -- --
- ------------------------------------------------------------------------------
Total $0.34685 $0.309252 $0.330133
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
3/31/98 $8.70 $9.13 $8.70 $8.70 $8.99
- ------------------------------------------------------------------------------
9/30/98 7.88 8.27 7.89 7.88 8.14
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 8.37% 7.98% 7.66% 8.14% 7.88%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 8.13 7.74 7.39 7.95 7.68
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Aggregate Bond Index* is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of
the original investment. Indexes are rebalanced monthly by market
capitalization.
Salomon Brothers Non-U.S. World Government Bond Index* is a market
capitalization-weighted benchmark that tracks the performance of the
government bond markets tracked by the Salomon Brothers World Government
Bond Index, excluding the United States.
First Boston High Yield Index* is an unmanaged index of lower-rated,
higher-yielding U.S. corporate bonds. It includes over 180 issues with an
average maturity range of 7 to 10 years.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
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VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
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<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1998 (Unaudited)
CORPORATE BONDS AND NOTES (40.4%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 140,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 147,000
80,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 84,800
120,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 123,300
40,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 40,800
350,000 Outdoor Systems, Inc. company guaranty 8 7/8s, 2007 357,000
--------------
752,900
Aerospace and Defense (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
485,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 458,325
190,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 176,700
500,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 530,000
90,000 BE Aerospace sr. sub. notes Ser. B, 8s, 2008 88,200
70,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 68,600
260,000 Raytheon Co. notes 6.45s, 2002 270,447
75,000 United Defense Industries Inc. company guaranty 8 3/4s, 2007 75,188
--------------
1,667,460
Agriculture (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 AGCO Corp. sr. sub. notes 8 1/2s, 2006 237,500
263,597 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 (PIK) 278,095
--------------
515,595
Airlines (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Calair LLC company guaranty 8 1/8s, 2008 109,800
140,000 Canadian Airlines Corp. sr. notes 12 1/4s, 2006 (Canada) 120,400
200,000 Canadian Airlines Corp. secd. notes 10s, 2005 (Canada) 180,000
250,000 Cathay International Ltd. 144A sr. notes 13s, 2008 135,000
460,000 Continental Airlines, Inc. sr. notes 9 1/2s, 2001 478,400
90,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 84,825
280,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 246,400
--------------
1,354,825
Apparel (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 28,200
325,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 305,500
130,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 137,800
200,000 Tultex Corp. company guaranty 9 5/8s, 2007 160,000
65,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 66,950
135,000 William Carter Holdings Co. sr. sub. notes Ser. A, 10 3/8s, 2006 140,400
--------------
838,850
Automotive Parts (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
299,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 317,688
200,000 Cambridge Industries, Inc. company guaranty Ser. B,
10 1/4s, 2007 190,000
60,000 Hayes Wheels International, Inc. company guaranty Ser. B,
9 1/8s, 2007 58,200
90,000 Lear Corp. sub. notes 9 1/2s, 2006 97,200
460,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 457,700
--------------
1,120,788
Banks (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Banponce Financial Corp. med. term note 7 1/8s, 2002 126,563
170,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 164,900
120,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 63,600
80,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 48,000
45,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 51,023
250,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 290,000
250,000 Firstar Bank Milwaukee sr. bank notes 6 1/4s, 2002 260,900
395,000 Fuji JGB Inv. LLC 144A bonds FLIRB bonds 9.87s, 2049 175,194
45,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 48,553
500,000 Korea Development Bank bonds 7 3/8s, 2004 (Korea) 389,790
95,000 Merita Bank Ltd. sub. notes 6 1/2s, 2006 (Finland) 96,273
60,000 Provident Capital Trust company guaranty 8.6s, 2026 66,604
40,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 42,226
60,000 Sovereign Capital Trust company guaranty 9s, 2027 64,001
105,000 Sparbanken Sverige AB (Swedbank) 144A sub. 7 1/2s, 2049
(Sweden) 105,804
50,000 Webster Capital Trust I 144A bonds 9.36s, 2027 53,000
--------------
2,046,431
Basic Equipment Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 Cex Holdings, Inc. 144A sr. sub. notes 9 5/8s, 2008 156,400
Basic Industrial Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Axia, Inc. 144A sr. sub. notes 10 3/4s, 2008 193,000
35,000 Cia Latino Americana 144A company guaranty 11 1/8s, 2004
(Argentina) 25,200
400,000 Newcor, Inc. company guaranty Ser. B, 9 7/8s, 2008 352,000
30,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 28,800
--------------
599,000
Broadcasting (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
380,000 Affinity Group Holdings sr. notes 11s, 2007 368,600
2,861 Australis Media, Ltd. sr. disc. notes stepped-coupon 1 3/4s,
(15 3/4s 5/15/00), 2003 (In default) (Australia) (STP) (PIK) (NON) 21
400,000 Benedek Communications Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2006 (STP) 296,000
215,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02), 2009 (STP) 162,325
685,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 698,700
55,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s, 2004 49,500
120,000 Chancellor Media Corp. sr. sub notes Ser. B, 8 1/8s, 2007 115,800
90,000 Citadel Broadcasting Inc. sr. sub. notes 10 1/4s, 2007 96,300
200,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) (STP) 162,000
465,000 Echostar Satellite Broadcast Corp. sr. disc. notes
stepped-coupon zero % (13 1/8s, 3/15/00), 2004 (STP) 409,200
300,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 186,000
430,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 406,350
260,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 254,800
250,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 247,500
120,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 116,400
50,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 54,500
212,000 PHI Holdings, Inc. sr. notes zero %, 2001 160,717
125,000 Radio One Inc. company guaranty stepped-coupon Ser. B, 7s,
(12s, 5/15/00), 2004 (STP) 117,500
250,000 Sinclair Broadcast Group, Inc. company guaranty 9s, 2007 251,250
250,000 Turner Broadcasting Systems, Inc. sr. notes 8 3/8s, 2013 284,473
60,000 TV Azteca Holdings S.A. de C.V. sr. notes 11s, 2002 (Mexico) 42,000
100,000 TV Azteca Holdings S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 68,000
--------------
4,547,936
Building and Construction (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
125,000 American Architectural Products Corp. company guaranty
11 3/4s, 2007 115,000
100,000 Beazer Homes USA company guaranty 8 7/8s, 2008 93,000
270,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 113,400
70,000 Jackson Products, Inc. 144A company guaranty 9 1/2s, 2005 66,850
290,000 Republic Group Inc. 144A sr. sub. notes 9 1/2s, 2008 275,500
--------------
663,750
Building Products (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
160,000 Albecca Inc. 144A sr. sub. notes 10 3/4s, 2008 152,000
500,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 477,500
160,000 Consumers International 144A 10 1/4s, 2005 164,800
140,000 Morris Material Handling, Inc. company guaranty 9 1/2s, 2008 100,800
300,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 321,000
90,000 Presley Cos. sr. notes 12 1/2s, 2001 80,100
100,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero %
(12 3/4s, 6/1/99), 2004 (STP) 93,000
--------------
1,389,200
Buses (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
415,000 MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 (STP) 311,250
Business Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 38,300
270,000 U.S. Office Products Co. 144A sr. sub notes 9 3/4s, 2008 225,450
--------------
263,750
Cable Television (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 93,600
250,000 Century Communications Corp. sr. notes 8 7/8s, 2007 263,750
350,000 CSC Holdings, Inc. sr. notes 7 7/8s, 2007 367,836
300,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 240,750
410,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 287,000
110,000 Globo Communicacoes 144A sr. notes 10 5/8s, 2008 (Brazil) 56,100
85,000 Globo Communicacoes 144A company guaranty 10 1/2s, 2006
(Brazil) 44,200
400,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 440,000
240,000 Lenfest Communications, Inc. sr. sub. notes 8 1/4s, 2008 242,400
10,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-coupon zero %
(14 1/4s, 6/15/00), 2005 (STP) 9,300
150,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s, 2005
(Argentina) 63,000
200,000 United International Holdings sr. disc. notes stepped-coupon
Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 94,000
--------------
2,201,936
Cellular Communications (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 27,600
735,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (11 3/4s, 2/15/03), 2008 (STP) 316,050
595,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 285,600
160,000 McCaw International Ltd sr. discount notes stepped coupon
zero % (13s, 4/15/02), 2007 (STP) 80,000
420,000 MetroNet Communications Corp. sr. disc. notes zero %
(9.95s, 6/15/03), 2008 (Canada) (STP) 232,050
450,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) (STP) 285,750
710,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (12 1/8s, 4/15/03), 2008 (STP) 319,500
1,445,000 NEXTEL Communications sr. disc. notes stepped-coupon
zero % (10.65s, 9/15/02), 2007 (STP) 910,350
180,000 Price Communications Wireless Inc. 144A sr. notes 9 1/8s, 2006 176,400
--------------
2,633,300
Chemicals (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
700,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 665,000
120,000 Geo Specialty Chemicals 144A sr. sub. notes 10 1/8s, 2008 115,200
150,000 Huntsman Corp. 144A sr. sub. notes FRN 9.188s, 2007 142,500
446,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 361,260
165,000 Polytama International notes 11 1/4s, 2007 (Indonesia) 24,750
150,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 60,000
200,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 110,000
200,000 Union Carbide Global Enterprises sr. sub. notes
Ser. B, 12s, 2005 200,000
--------------
1,678,710
Computer Services and Software (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 37,000
180,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 180,000
200,000 Unisys Corp. sr. notes 11 3/4s, 2004 225,000
564,000 Unisys Corp. deb. 9 3/4s, 2016 569,640
--------------
1,011,640
Computers (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
330,000 IPC Information Systems sr. disc. notes stepped-coupon zero %
(10 7/8s, 11/1/01), 2008 (STP) 221,100
Consumer Durable Goods (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Hedstrom Holdings, Inc. sr. disc. notes stepped-coupon zero %
(12s, 6/1/02), 2009 (STP) 12,000
115,000 Icon Fitness Corp. 144A sr. disc. notes stepped-coupon Ser. B,
zero % (14s, 11/15/01), 2006 (STP) 5,750
100,000 Packaged Ice, Inc. company guaranty Ser. B, 9 3/4s, 2005 94,000
70,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 68,600
166,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 185,090
40,000 United Stationer Supply, Inc. 144A ssr. sub. notes 8 3/8s, 2008 39,900
--------------
405,340
Consumer Non Durables (--%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 30,800
Cosmetics (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 76,000
40,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 41,200
60,000 French Fragrances, Inc. company guaranty Ser. D, 10 3/8s, 2007 60,000
--------------
177,200
Electric Utilities (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Calpine Corp. sr. notes 10 1/2s, 2006 267,500
100,000 Calpine Corp. sr. notes 9 1/4s, 2004 101,000
290,000 Cleveland Electric Illuminating Co. bonds 6.86s, 2008 292,900
25,000 Commonwealth Edison Co. 1st mtge. 7s, 2005 26,873
85,000 Connecticut Light & Power Co. 1st mtge. Ser. A, 7 7/8s, 2001 88,331
75,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 78,740
45,000 Jersey Central Power & Light Co. 1st mtge. med. term note
6.85s, 2006 48,839
165,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 204,678
500,000 Niagara Mohawk Power Corp. sr. disc. notes stepped-coupon
Ser. H, zero % (8 1/2s, 7/1/03), 2010 (STP) 350,000
395,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 421,303
90,000 Niagara Mohawk Power Corp. sr. notes Ser. F, 7 5/8s, 2005 93,722
499,699 Northeast Utilities System notes Ser. A, 8.58s, 2006 542,238
180,000 York Power Funding 144A notes 12s, 2007 174,600
--------------
2,690,724
Electronics and Electrical Equipment (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s, 2006
(Canada) 31,800
44,827 Cirent Semiconductor sr. sub. notes 10.22s, 2002 44,379
47,564 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 47,088
150,000 Details Inc. sr. discount notes stepped-coupon Ser. B, 12 1/2s,
(12 1/2s, 11/15/02), 2007 (STP) 82,500
90,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 81,900
100,000 Dobson Communications Corp. 11 3/4s, 2007 100,000
100,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 95,000
50,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 50,000
90,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 93,600
90,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 87,300
40,000 Samsung Electronics 144A company guaranty 9 3/4s, 2003 29,400
40,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 36,800
180,000 Viasystems, Inc. 144A sr. notes 9 3/4s, 2007 153,000
30,000 Wavetek Corp. company guaranty 10 1/8s, 2007 27,600
--------------
960,367
Energy-Related (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 116,576
110,000 Gothic Production Corp. company guaranty Ser. B, 11 1/8s, 2005 80,300
535,000 KN Capital Trust III company guaranty 7.63s, 2028 539,414
350,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004
(China) 210,000
--------------
946,290
Entertainment (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 SFX Entertainment, Inc. 144A company guaranty Ser. B,
9 1/8s, 2008 102,300
150,000 Silver Cinemas Inc. sr. sub. notes 10 1/2s, 2005 142,875
40,000 Time Warner Entertainment Co. notes 8 7/8s, 2012 49,860
5,000 Time Warner, Inc. deb. 9.15s, 2023 6,482
130,000 United Artists Theatre 144A sr. sub. notes 9 3/4s, 2008 120,250
--------------
421,767
Environmental Control (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
180,000 Allied Waste Industries, Inc. sr. disc. notes stepped-coupon
zero % (11.3s, 6/1/02), 2007 (STP) 133,200
230,000 Allied Waste Industries, Inc. company guaranty 10 1/4s, 2006 250,700
60,000 ATC Group Services Inc. company guaranty 12s, 2008 34,800
90,000 WMX Technologies Inc. notes 7.1s, 2026 96,656
--------------
515,356
Financial Services (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
310,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 279,000
400,000 Advanta Corp. company guaranty Ser. B, 8.99s, 2026 260,000
200,000 Colonial Capital I 144A company guaranty 8.92s, 2027 206,438
135,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 135,124
70,000 Dine S.A. de C.V. 144A company guaranty 8 3/4s, 2007
(Mexico) 45,500
110,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 2006 106,700
750,000 DTI Holdings Inc. sr. disc. notes, stepped-coupon Ser. B, zero %
(12 1/2s, 03/01/03), 2008 (STP) 285,000
35,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 37,524
80,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 64,000
400,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 308,000
55,000 Lehman Brothers Holdings, Inc. notes 6 1/2s, 2002 53,267
200,000 Local Financial Corp. sr. notes 11s, 2004 202,000
525,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 498,750
40,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 36,000
55,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 56,100
35,000 Ocwen Financial Corp. notes 11 7/8s, 2003 35,000
1,140,000 Paine Webber Group, Inc. sr. notes 6.55s, 2008 1,147,022
180,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 72,000
400,000 Resource America Inc. 144A sr. notes 12s, 2004 334,000
75,000 Sampoerna International Finance Co. 144A company guaranty
8 3/8s, 2006 (Indonesia) 30,750
60,000 Southern Investments Service Co. sr. notes 6.8s, 2006
(United Kingdom) 63,189
100,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 103,762
--------------
4,359,126
Food and Beverages (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 117,700
95,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 96,900
200,000 Doane Products Co. sr. notes 10 5/8s, 2006 216,000
40,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 35,800
160,000 Purina Mills, Inc. sr. sub. notes 9s, 2010 156,800
240,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 223,200
20,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 20,200
--------------
866,600
Food Chains (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
135,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 118,800
645,000 Fleming Companies, Inc. company guaranty Ser. B, 10 5/8s, 2007 638,550
130,000 Fleming Companies, Inc. company guaranty Ser. B, 10 1/2s, 2004 126,100
45,000 Jitney-Jungle Stores company guaranty 12s, 2006 49,500
300,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02), 2007 (STP) 135,000
150,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 118,125
--------------
1,186,075
Gaming (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
290,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 308,125
200,000 Autotote Corp. company guaranty Ser. B, 10 7/8s, 2004 194,000
75,000 Casino America, Inc. sr. notes 12 1/2s, 2003 81,000
260,000 Coast Hotels & Casinos, Inc. 1st mtge. company guaranty
Ser. B, 13s, 2002 291,200
370,300 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 394,370
280,000 Fitzgeralds Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 190,400
100,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 106,000
70,000 Isle of Capri Black Hawk LLC 1st mortgage Ser. B, 13s, 2004 70,000
550,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 552,750
51,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 51,000
250,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 162,500
50,000 Showboat Marina Casino 1st mtge. Ser. B, 13 1/2s, 2003 54,750
250,000 Trump A.C. 1st mtge. company guaranty 11 1/4s, 2006 208,750
310,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 313,100
125,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 125,000
--------------
3,102,945
Health Care (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Conmed Corp. company guaranty 9s, 2008 94,250
190,000 Fresenius Medical Capital Trust II company guaranty
7 7/8s, 2008 (Germany) 175,750
30,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 28,950
200,000 Global Health Sciences company guaranty 11s, 2008 174,000
150,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 116,250
170,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007 164,900
260,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008 249,600
230,000 Magellan Health Services, Inc. 144A sr. sub. notes 9s, 2008 195,500
80,000 Manor Care, Inc. sr. notes 7 1/2s, 2006 82,750
80,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-coupon
Ser. B, zero % (10 1/2s, 11/1/02), 2007 (STP) 43,600
360,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 331,200
320,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 264,365
10,000 MedPartners, Inc. sr. sub.notes 6 7/8s, 2000 8,457
440,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 413,600
315,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 289,800
80,000 Paragon Corp. Holdings, Inc. company guaranty Ser. B,
9 5/8s, 2008 60,000
100,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 102,500
170,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 153,000
70,000 Tenet Healthcare Corp. sr. notes 8s, 2005 71,050
--------------
3,019,522
Insurance (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
95,000 Aegon N. V. sub. notes 8s, 2006 (Netherlands) 105,451
40,000 Allstate Financing II company guaranty 7.83s, 2045 42,405
240,000 American General Institute Capital Trust 144A company
guaranty Ser. B, 8 1/8s, 2046 270,900
50,000 Hartford Life, Inc. deb. 7.65s, 2027 54,202
145,000 Hartford Life, Inc. notes 7.1s, 2007 158,146
100,000 Phoenix Home Life Mutual Insurance Co. 144A notes
6.95s, 2006 107,660
935,000 Provident Companies, Inc. bonds 7.405s, 2038 945,519
125,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 128,851
--------------
1,813,134
Lodging (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Epic Resorts LLP 144A sr. notes 13s, 2005 114,000
460,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 454,250
300,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 310,500
720,000 Raintree Resorts International, Inc. sr. notes Ser. B, 13s, 2004 540,000
--------------
1,418,750
Medical Supplies and Devices (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 102,300
130,000 Imagyn Medical Technologies, Inc. company guaranty
12 1/2s, 2004 35,750
160,000 Wright Medical Technology, Inc. 144A notes Ser. C,
11 3/4s, 2000 143,200
--------------
281,250
Metals and Mining (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Acindar Industria Argentina de Aceros S.A. bonds 11 1/4s,
2004 (Argentina) 34,000
185,000 Ameristeel Corp. company guaranty Ser. B, 8 7/8s, 2008 170,200
80,000 Continental Global Group sr. notes Ser. B, 11s, 2007 69,600
120,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 98,400
110,000 WHX Corp. sr. notes 10 1/2s, 2005 101,200
--------------
473,400
Motion Picture Distribution (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
130,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 121,550
35,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 35,700
50,000 Panavision Inc. 144A sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 (STP) 28,500
750,000 Paramount Communications, Inc. deb. 7 1/2s, 2023 739,868
250,000 RBS Participacoes S.A. 144A company guaranty 11s, 2007
(Brazil) 85,000
220,000 Viacom International, Inc. sub. deb. 8s, 2006 221,650
--------------
1,232,268
Oil and Gas (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
175,000 Abraxas Petroleum Corp. 144A company guaranty 11 1/2s, 2004 136,500
20,000 American Eco Corp. company guaranty Ser. B, 9 5/8s, 2008 15,000
170,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 144,500
20,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 15,700
240,000 Chesapeake Energy Corp. company guaranty Ser. B, 9 5/8s, 2005 211,200
790,000 Coastal Corp. bonds 6.95s, 2028 764,001
60,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 54,600
120,000 Eagle Geophysical, Inc. 144A sr. notes 10 3/4s, 2008 105,600
30,000 Gothic Energy Corp. sr. disc. notes, stepped-coupon Ser. B,
zero % (14 1/8s, 5/1/03), 2006 (STP) 12,000
50,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006 (Canada) 52,281
175,000 K N Energy, Inc. sr. notes 6.45s, 2003 179,872
500,000 Kelley Oil & Gas Corp. sr. sub. notes Ser. B, 10 3/8s, 2006 405,000
100,000 Michael Petroleum Corp. sr. notes Ser. B, 11 1/2s, 2005 89,000
130,000 Northern Offshore 144A company guaranty 10s, 2005 96,200
55,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 44,000
55,000 Petro Geo-Services AS ADR notes 7 1/2s, 2007 (Norway) 58,670
120,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 114,000
90,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 82,800
100,000 Saga Petroleum ASA deb. 7 1/4s, 2027 (Norway) 90,372
300,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 244,500
45,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 45,225
85,000 Southwest Royalties, Inc. company guaranty 10 1/2s, 2004 45,050
1,810,000 Transamerican Energy sr. disc. notes stepped-coupon Ser. B,
zero % (13s, 6/15/99), 2002 (STP) 868,800
480,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 264,000
180,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 171,000
180,000 Union Pacific Resources Group Inc. notes 6 3/4s, 2008 183,677
--------------
4,493,548
Packaging and Containers (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
210,000 AEP Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 201,600
35,000 Radnor Holdings Inc. sr. notes 10s, 2003 34,300
440,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 365,200
50,000 Riverwood International Corp. company guaranty 10 5/8s, 2007 46,000
--------------
647,100
Paging (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 168,000
Paper and Forest Products (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
140,000 APP Finance II Mauritius Ltd. bonds sr. disc. notes
stepped-coupon 12s, (16s, 2/15/04), 2049 (Indonesia) (STP) 70,000
10,000 APP International Finance Co. notes 11 3/4s, 2005
(Netherlands) 5,900
250,000 Buckeye Cellulose Corp. sr. sub. notes 9 1/4s, 2008 258,750
30,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 28,350
115,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 109,250
180,000 Impac Group Inc. 144A sr. sub. notes 10 1/8s, 2008 170,100
300,000 Indah Kiat Financial Mauritius Ltd. company guaranty 10s, 2007
(Indonesia) 130,500
270,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s, 2004
(Indonesia) 114,750
265,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 166,950
75,000 Repap New Brunswick sr. notes 9s, 2004 (Canada) 68,438
--------------
1,122,988
Pharmaceuticals and Biotechnology (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
295,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 292,050
120,000 PharMerica, Inc. company guaranty 8 3/8s, 2008 108,000
--------------
400,050
Publishing (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
285,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 294,975
500,000 Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 513,750
50,000 News America Holdings, Inc. deb. 7 3/4s, 2045 52,827
70,000 Perry-Judd company guaranty 10 5/8s, 2007 67,200
50,000 Tri State Media, Inc. 144A sr. sub. notes 11s, 2008 48,625
45,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 45,675
--------------
1,023,052
Railroads (--%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 TFM S.A. de C.V. company guaranty stepped-coupon zero %,
(11 3/4s, 6/15/02), 2009 (Mexico) (STP) 90,100
Real Estate (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Bluegreen Corp. company guaranty Ser. B, 10 1/2s, 2008 27,300
120,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 110,400
--------------
137,700
Recreation (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
275,000 Six Flags Corp. sr. notes 8 7/8s, 2006 266,750
Restaurants (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 106,000
Retail (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
320,000 Amazon.com Inc. sr. disc. notes stepped-coupon zero %
(10s, 05/01/03), 2008 (STP) 176,000
200,000 Federated Department Stores, Inc. sr. notes 8 1/2s, 2003 224,696
25,000 Federated Department Stores, Inc. sr. notes 8 1/8s, 2002 27,309
177,000 Guitar Center Management Co. 144A sr. notes 11s, 2006 185,850
70,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes 10 1/8s, 2008 66,150
250,000 K mart Corp. med. term notes 7.86s, 2002 251,420
200,000 K mart Corp. deb. 7 3/4s, 2012 196,000
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 263,750
270,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 261,225
265,000 North Atlantic Trading Co. co. guaranty Ser. B, 11s, 2004 246,450
30,000 Service Merchandise Co., Inc. sr. sub. deb. 9s, 2004 18,000
--------------
1,916,850
Satellite Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
85,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon zero %
(12 1/2s, 2/01/02), 2007 (Ireland) (STP) 54,400
180,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 180,000
155,000 Iridium LLC/Capital Corp. company guaranty Ser. B, 14s, 2005 137,950
30,000 Iridium LLC/Capital Corp. company guaranty Ser. A, 13s, 2005 26,400
195,000 TCI Satellite Entertainment, Inc. sr. disc. notes stepped-coupon
zero % (12 1/4s, 2/102), 2007 (STP) 115,050
130,000 TCI Satellite Entertainment Inc. sr. sub. notes 10 7/8s, 2007 120,250
--------------
634,050
Semiconductors (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
695,344 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s,
2008 (PIK) 615,379
240,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 148,800
--------------
764,179
Shipping (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 Johnstown America Industries, Inc. company guaranty Ser. C,
11 3/4s, 2005 113,300
80,000 MC Shipping, Inc. sr. notes Ser. B, 11 1/4s, 2008 64,800
--------------
178,100
Specialty Consumer Products (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
160,000 Decora Industries, Inc. 144A sr. sec. notes 11s, 2005 140,800
120,000 Eye Care Centers of America 144A sr. sub. notes 9 1/8s, 2008 100,800
750,000 GS Escrow Corp. 144A sr. notes 6 3/4s, 2001 745,590
--------------
987,190
Telecommunications (4.7%)
- --------------------------------------------------------------------------------------------------------------------------
140,000 AT&T Capital Corp. med. term notes company guaranty
Ser. F, 6.6s, 2005 145,677
350,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 178,500
120,000 Caprock Communications Corp. 144A sr. notes 12s, 2008 108,000
200,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 (STP) 172,000
45,000 Consorcio Ecuatoiano notes 14s, 2002 (Ecuador) 23,850
200,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 186,000
300,000 Focal Communications Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 1/8s, 02/15/03), 2008 (STP) 150,000
740,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 721,500
882,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 635,040
630,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 305,550
90,000 Hermes Europe Railtel 144A sr. notes 11 1/2s, 2007
(Netherlands) 94,500
100,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 69,000
175,000 Hyperion Telecommunications Corp. sr. notes Ser. B,
12 1/4s, 2004 172,375
300,000 ICG Communications, Inc. sr. disc. notes stepped-coupon zero %
(10s, 02/15/03), 2008 (STP) 142,500
220,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (STP) 171,600
700,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 322,000
125,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 88,750
160,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 7/8s, 2007 160,800
400,000 Intermedia Communications, Inc. sr. notes Ser. B, 8.6s, 2008 396,000
220,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 1/2s, 2008 216,700
830,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/01/01), 2006 (STP) 676,450
190,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 188,100
280,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 128,800
290,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero %,
(11 7/8s, 10/15/02), 2007 (STP) 147,900
65,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 71,013
110,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 111,513
70,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02), 2007 (Canada) (STP) 42,350
390,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 276,900
30,000 Netia Holdings B.V. 144A company guaranty stepped-coupon
zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 12,300
250,000 Netia Holdings B.V. 144A company guaranty
10 1/4s, 2007 (Poland) 190,000
210,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 193,200
200,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 202,500
380,000 NTL Inc. 144A sr. notes stepped-coupon zero %
(9 3/4s, 4/01/03), 2008 (STP) 229,900
70,000 Sprint Spectrum L.P. sr. notes 11s, 2006 78,750
300,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 273,000
270,000 Teligent, Inc. sr. disc. notes stepped-coupon Ser. B, zero %
(11 1/2s, 3/1/03), 2008 (STP) 105,300
360,000 Teligent, Inc. sr. notes 11 1/2s, 2007 277,200
1,000,000 USN Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14 5/8s, 8/15/00), 2004 (STP) 400,000
550,000 WinStar Communications. Inc. sr. sub. notes 15s, 2007 539,000
100,000 WinStar Communications. Inc. sr. sub. notes 11s, 2008 70,000
300,000 WinStar Equipment Corp. company guaranty 12 1/2s, 2004 273,000
--------------
8,947,518
Telephone Services (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
470,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 390,100
60,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon zero %
(8.94s, 8/15/03), 2008 (Canada) (STP) 34,800
90,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero %, (12s, 12/15/01), 2006
(United Kingdom) (STP) 70,200
380,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 207,100
90,000 E. Spire Communications, Inc. sr. notes 13 3/4s, 2007 97,200
310,000 E. Spire Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 (STP) 228,625
90,000 Facilicom International sr. notes Ser. B., 10 1/2s, 2008 78,300
200,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 190,500
90,000 IDT Corp. sr. notes 8 3/4s, 2006 79,200
260,000 Intelcom Group (USA), Inc. company guaranty stepped-coupon
zero % (12 1/2s, 5/1/01), 2006 (STP) 185,250
110,000 Interact Systems, Inc. 144A stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 13,200
700,000 Ionica Group PLC sr. disc. notes stepped-coupon zero %
(15s, 5/1/02), 2007 (United Kingdom) (STP) 42,000
75,000 ITC Deltacom, Inc. sr. notes 11s, 2007 80,250
60,000 MJD Communications, Inc. 144A sr. sub. notes 9 1/2s, 2008 60,000
60,000 MJD Communications Inc. 144A FRN 6.232s, 2008 60,000
230,000 Pathnet Inc. sr. notes 12 1/4s, 2008 174,800
120,000 Primus Telecommunications Group, Inc. sr. notes Ser. B,
9 7/8s, 2008 104,400
175,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 134,750
320,000 RCN Corp. sr. disc. notes stepped-coupon zero %,
(11 1/8s, 10/15/02), 2007 (STP) 177,600
270,000 RCN Corp. sr. discount notes, stepped-coupon Ser. B, zero %
(9.8s, 2/15/03), 2008 (STP) 143,100
126,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 130,410
130,000 RSL Communications Ltd. company guaranty, stepped-coupon
zero % (10 1/8s, 3/1/03), 2008 (STP) 66,300
90,000 RSL Communications Ltd. company guaranty 9 1/8s, 2008 77,400
110,000 Sprint Spectrum L.P. sr. disc. notes stepped-coupon zero %
(12 1/2s, 8/15/01), 2006 (STP) 93,500
60,000 Transtel S.A. 144A pass-through certificates 12 1/2s, 2007
(Colombia) 24,000
100,000 Us Xchange Llc 144A sr. notes 15s, 2008 99,500
135,000 Versatel Teleco sr. notes 13 1/4s, 2008 128,250
500,000 Viatel, Inc. sr. notes 11 1/4s, 2008 475,000
--------------
3,645,735
Textiles (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
260,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 223,600
40,000 Glenoit Corp. company guaranty 11s, 2007 38,800
100,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 95,750
90,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 85,275
105,000 Tultex Corp. sr. notes 10 5/8s, 2005 90,300
--------------
533,725
Tobacco (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
230,000 Philip Morris Cos., Inc. notes 7 1/2s, 2004 250,521
80,000 Philip Morris Cos., Inc. notes 7 1/2s, 2002 84,672
--------------
335,193
Transportation (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Eleston Holdings Inc. 1st pfd. mtge. notes 9 1/4s 2003 147,750
170,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 170,000
--------------
317,750
Utilities (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
750,000 CMS Energy Corp. pass through certificates 7s, 2005 754,478
Wireless Communications (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
130,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 128,700
90,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 92,250
100,000 CTI Holdings S. A. 144A sr. notes stepped-coupon zero %
(11 1/2s, 4/15/03), 2008 (STP) 38,000
180,000 Dobson Wireline Co. 144A sr. notes 12 1/4s, 2008 172,800
140,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 131,600
60,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 22,200
70,000 Telesystem International Wireless Inc. sr. disc. notes
stepped-coupon Ser. C, zero %, (10 1/2s, 11/1/02), 2007 (STP) 32,550
660,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 663,300
--------------
1,281,400
--------------
Total Corporate Bonds and Notes (cost $80,805,483) $ 76,627,191
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (13.8%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Obligations (9.0%)
- --------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
$ 470,000 7s, Dwarf, TBA, October 15, 2013 $ 482,483
4,010,000 6s, Dwarf, TBA, October 15, 2013 4,051,343
Federal National Mortgage Association
Pass-Through Certificates
6,950,136 6 1/2s, with due dates from June 1, 2028 to
August 1, 2028 3,019,266
49,500 6 1/2s, Dwarf, July 1, 2013 50,536
Government National Mortgage Association
Pass-Through Certificates
2,389,439 8s, with due dates from December 15, 2026 to
November 15, 2027 2,489,482
2,640,585 7 1/2s, with due dates from October 15, 2022 to
October 15, 2027 2,738,406
3,639,305 7s, with due dates from October 15, 2025 to
May 15, 2028 3,756,695
520,310 6 1/2s, January 15, 2028 531,851
--------------
17,120,062
U.S. Treasury Obligations (4.8%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
$ 338,000 6 5/8s, February 15, 2027 (SEG) $ 410,670
2,280,000 6 1/8s, November 15, 2027 (SEG) 2,628,407
3,325,000 5 1/2s, August 15, 2028 3,594,126
1,230,000 5 1/4s, August 15, 2003 1,284,969
1,245,000 U.S. Treasury Notes 4 1/2s, September 30, 2000 1,249,868
--------------
9,168,040
--------------
Total U.S. Government and Agency Obligations
(cost $29,680,790) $ 26,288,102
FOREIGN GOVERNMENT BONDS AND NOTES (8.0%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
FRF 4,420,000 France (Government of) bonds 5 1/2s, 2029 $ 861,634
FRF 4,730,000 France (Government of) bonds 5 1/2s, 2007 938,123
FRF 18,500,000 France Treasury bill notes 4 1 /2s, 2003 3,424,579
DEM 6,425,000 Germany (Federal Republic of) bonds Ser. 98,
5 5/8s, 2028 4,328,887
USD 105,000 Korea (Republic of) unsub. 8 7/8s, 2008 88,200
NLG 920,000 Netherlands (Government of) deb. 7 1/2s, 2023 674,011
GBP 640,000 United Kingdom Treasury bonds 8s, 2021 1,572,496
GBP 1,715,000 United Kingdom Treasury bonds 8s, 2000 3,050,015
VEB 220,000 Venezuela (Government of) 13 5/8s, 2018 144,210
--------------
Total Foreign Government Bonds and Notes
(cost $14,643,707) $ 15,082,155
COLLATERALIZED MORTGAGE OBLIGATIONS (7.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
GBP 750,000 Blackstone Hotel Acquisition Co. sr. mtge.
loan FRN 3.3449s, 2003 $ 1,269,171
Commercial Mortgage Acceptance Corp.
$ 405,000 Ser. 97-ML1, Class D, 7.11s, 2030 427,148
630,000 Ser. 98-C2, Class D, 6.757s, 2009 645,159
420,000 Countrywide Mortgage Backed Securities, Inc. Ser. 93-C,
Class A8, 6 1/2s, 2024 427,148
Criimi Mae Commercial Mortgage Trust
1,475,000 Ser. 98-C1, Class A2, 7s, 2011 1,509,109
590,000 Ser. 98-C1, Class B, 7s, 2011 578,845
6,107,508 Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1,
Class X, 1.254s, 2031 400,805
First Union-Lehman Brothers Commercial Mortgage
475,000 Ser. 97-C2, Class D, 7.12s, 2012 485,205
580,000 Ser. 98-C2, Class D, 6.778s, 2013 574,268
255,000 Ser. 97-C2, Class A3, 6.65s, 2008 269,593
5,673,153 Ser. 97-C2, Interest Only, 1.092s, 2027 491,747
13,760,000 Ser. 98-C2, Class IO, 0.816s, 2028 602,537
Freddie Mac
115,000 Ser.1439, Class I, 7.5s, 2022 127,929
200,000 Ser. 2040, Class PE, 7.5s, 2028 227,834
GMAC Commercial Mortgage Securities Inc.
1,795,000 Ser. 98-C2, Class D, 6 1/2s,2031 1,783,150
9,458,004 Ser. 98-C2, Class X, IO, 0.823s,2031 434,847
185,000 Government National Mortgage Association Ser. 97-8,
Class PE, 7.5s, 2027 201,303
GS Mortgage Securities Corp. II
255,000 Ser. 98-GLII, Class D, 7.191s, 2031 258,984
470,000 Ser. 98-GLII, Class A2, 6.562s, 2031 493,206
Merrill Lynch Mortgage Investors, Inc.
111,000 Ser. 98-C2, Class D, 14.045s, 2030 115,249
210,000 Ser. 95-C3, Class D, 7.782s, 2025 225,586
Morgan Stanley Capital I
150,000 Ser. 98-WF1, Class D, 7.12s, 2008 155,953
145,000 Ser. 98-XL1, Class E, 6.989s, 2030 150,709
Mortgage Capital Funding, Inc.
425,000 Ser. 98-MC1, Class A2, 6.663s, 2008 449,039
6,652,256 Ser. 98-MC1, Class X, IO, 0.722s, 2009 296,233
416,980 PNC Mortgage Securities Corp. Ser. 97-6, Class A2, 6.6s, 2027 421,149
151,002 Prudential Home Mortgage Securities Ser. 93-57,
Class A4, 5.9s, 2023 151,888
300,000 Residential Funding Mortgage Sec. I Ser. 98-S13,
Class A21, 6 3/4s, 2028 315,351
753,643 Residential Asset Securitization Trust Ser. 98-A8, 6 3/4s, 2028 777,577
104,903 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 106,480
--------------
Total Collateralized Mortgage Obligations (cost $12,813,183) $ 14,373,202
BRADY BONDS (3.9%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 3,035,000 Brazil (Government of) disc. bonds FRB 6.625s, 2024 $ 1,790,650
2,440,000 Bulgaria (Government of) Ser. A, FRB, 2 1/4s, 2012 1,125,450
FRF 870,000 Ivory Coast -- 144A FLIRB collateralized FRB 2s, 2018 29,536
FRF 870,000 Ivory Coast -- 144A PDI bonds FRB 1.9s, 2018 33,422
$ 595,000 Panama (Republic of) bonds 3 3/4s, 2014 416,500
1,725,000 Peru (Government of) 144A Ser. PDI, 4s, 2017 866,813
3,415,000 United Mexican States Ser. B, 6 1/4s, 2019 2,492,950
1,080,000 Venezuela (Government of) Ser. W-A, 6 3/4s, 2020 707,400
--------------
Total Brady Bonds (cost $8,726,160) $ 7,462,721
PREFERRED STOCKS (3.3%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
600 Adelphia Communications Corp. Ser. B, $13.00 cum. pfd. $ 69,000
2,421 AmeriKing, Inc. $3.25 pfd. (PIK) 60,525
14,000 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 357,000
733 Capstar Broadcasting Inc. 144A $12.00 pfd. (PIK) 83,562
11,880 CGA Group Ltd. 144A Ser. A, $13.75 pfd. (PIK) 332,640
2,575 Chevy Chase Capital Corp. Ser. A, $5.19 pfd. 139,050
1,306 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. (PIK) 147,578
92 Concentric Network Corp. Ser. B, $13.50 pfd. (PIK) 80,500
3,851 CSC Holdings, Inc. Ser. M, $11.125 cum. (PIK) 423,610
1,750 Diva Systems Corp. Ser. C, $6.00 pfd. 19,250
9,000 Diva Systems Corp. Ser. D, $6.00 pfd. 99,000
183 Dobson Communications 144A 12.25% (PIK) 183,000
42 E. Spire Communications, Inc. 12.75% pfd. (PIK) 34,860
360 Fresenius Medical Care AG. Ser. D, 9.00%, pfd. (Germany) 358,200
206 Hyperion Telecommunications Ser. B, $12.875 pfd. (PIK) 168,920
305 ICG Holdings, Inc. $14.00 pfd. (PIK) (Canada) 320,250
451 Intermedia Communication Ser. B, 13.50% pfd. (PIK) 505,120
217 IXC Communications, Inc. $12.50 pfd. (PIK) 231,105
1,265 Nebco Evans Holding Co. 144A 11.25% pfd. (PIK) 82,225
1,132 NEXTEL Communications, Inc. Ser. D, $13.00 cum. pfd. (PIK) 1,199,920
2,879 Nextlink Communications, Inc. 144A $7.00 cum. pfd. 149,708
28 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 266,000
3,750 Public Service Co. of New Hampshire $2.65 1st mtge. pfd. 95,625
932 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. (PIK) 110,908
401 Spanish Broadcasting Systems 14.25% cum. pfd. (PIK) 392,980
1,100 Von Hoffman Corp. 144A $13.50 pfd. 34,100
165 Webster Financial $7.375 pfd. 174,075
200 WinStar Communications, Inc. 144A $14.25 pfd. (PIK) 180,000
--------------
Total Preferred Stocks (cost $6,340,062) $ 6,298,711
UNITS (1.3%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
350 Australis Media, Ltd. units stepped-coupon zero %,
(15 3/4s, 5/15/00), 2003 (In default) (Australia) (STP) (NON) $ 2,625
130 Bestel S.A.de CV units, stepped-coupon zero %
(12 3/4s,5/15/03), 2005 (Mexico) (STP) 72,800
120 Birch Telecom, Inc. 144A units 14s, 2008 105,600
4 Celcaribe S.A. 144A units 13 1/2s, 2004 (Colombia) 80,000
400 Decrane Aircraft Holdings 144A units 12s, 2008 402,000
433 Diva Systems Corp. 144A units stepped-coupon zero %
(12 5/8s, 3/1/03), 2008 (STP) 147,220
520 Firstworld Communication 144A units stepped-coupon zero %,
(13s,4/15/03), 2008 (STP) 156,000
220 ICO Global Communications (Holdings) Ltd. units 15s, 2005 171,600
320 Long Distance International, Inc. 144A units 12 1/4s, 2008 307,200
145 Mediq 144A units, stepped-coupon zero % (13s, 6/1/03),
2009 (STP) 72,500
70 Onepoint Communications, Inc. units 14 1/2s, 2008 51,100
220 Pegasus Shipping 144A units company guaranty zero %, 2008 (STP) 101,200
350 Rhythms Netcon 144A units stepped-coupon zero %
(13 1/2s, 5/15/03), 2008 (STP) 140,000
140 Startec Global Communications Corp. units 12s, 2008 121,100
100 Telehub Communications Corp. units stepped-coupon zero %,
(13 7/8s, 7/31/02), 2005 (STP) 53,000
175 Transam Refinance, Inc. 144A units 16s, 2003 117,250
225 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 236,250
2,000 XCL Ltd. 144A units cv. cum. pfd. 9 1/2s, 2006 (PIK) 184,000
--------------
Total Units (cost $3,327,162) $ 2,521,445
CONVERTIBLE BONDS AND NOTES (0.8%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 902,000 APP Global Finance (V) Ltd. cv. bond zero %, 2012
(United Kingdom) $ 92,455
60,000 APP Global Finance (V) Ltd. 144A cv. company guaranty
3 1/2s, 2003 (United Kingdom) 22,800
300,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) 177,000
485,000 Argosy Gaming cv. sub. notes 12s, 2001 451,050
150,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 136,500
250,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 124,063
4,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-coupon
zero %, (13 7/8s, 12/15/00), 2005 (STP) 5,200
160,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 108,000
200,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 138,000
150,000 WinStar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 195,000
--------------
Total Convertible Bonds and Notes (cost $1,695,873) $ 1,450,068
ASSET-BACKED SECURITIES (0.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 50,000 Capita Equipment Receivables Trust Ser. 96-1, Class A4,
6.28s, 2000 $ 50,484
70,000 Contimortgage Home Equity Loan Trust Ser. 97-1, Class M2,
7.67s, 2028 71,531
459,877 First Plus Ser. 98-A, Class A Cl A 8 1/2s, 2023 465,410
165,278 Green Tree Recreational Equipment & Cons Ser. 97-B,
Class A1, 6.55s, 2028 169,939
577,785 Sasco 98 Rf2 A 8.58s, 2028 629,605
--------------
Total Asset-Backed Securities (cost $1,363,823) $ 1,386,969
WARRANTS (0.1%) (a)(NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
315 Allegiance Telecom, Inc. 2/3/08 $ 5,040
615 Cellnet Data Systems, Inc. 10/1/07 24,600
11,800 CGA Group Ltd. 144A 4/15/01 236
720 Club Regina, Inc. 144A 4/15/06 4,320
90 Colt Telecommunications Group PLC 12/31/06 27,000
40 Concentric Network Corp. 12/15/07 3,600
1,620 Consorcio Ecuatoriano 144A (Ecuador) 10/1/00 608
35 Diva Systems Corp. 5/15/06 9,800
3,750 DTI Holdings Inc. 3/1/08 3,750
120 Epic Resorts 6/15/05 1
85 Esat Holdings, Inc. (Ireland) 2/1/07 2,975
1,024 Fitzgeralds Gaming Co. 3/15/99 10
120 Globalstar Telecom 144A 2/15/04 3,000
400 Hyperion Telecommunications 144A 4/15/01 16,896
110 Interact Systems, Inc. 8/1/03 1
25 Intermedia Communications 6/1/00 2,595
30 International Wireless Communications Holdings
144A 8/15/01 3
1,100 Iridium World Com 144A 7/15/05 132,000
280 KMC Telecom Holdings, Inc. 4/15/08 4,480
290 Knology Holdings, Inc. 144A 10/15/07 435
160 McCaw International Ltd. 4/15/07 640
140 Orbital Imaging Corp. 144A 3/1/05 5,600
160 Orion Network Systems 1/15/07 1,840
230 Pathnet, Inc. 144A 4/15/08 3,450
320 Paxson Communications Corp. 144A 6/30/99 3
100 Spanish Broadcasting Systems 144A 6/30/99 20,500
45 Sterling Chemicals Holdings 8/15/08 945
395 UIH Australia/Pacific, Inc. 144A 5/15/06 1,975
135 Versatel 144A 5/15/08 1,350
--------------
Total Warrants (cost $323,855) $ 277,653
COMMON STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
4,950 American Mobile Satellite Corp. (NON) $ 25,988
50 AmeriKing, Inc. (NON) 2,000
4,100 Chattem, Inc. (NON) 111,981
1,213 Hedstrom Holdings, Inc. 144A 1,516
73 Mothers Work, Inc. (NON) 785
3,059 NEXTEL Communications, Inc. Class A (NON) 61,754
60 Paging Do Brasil Holdings Co., LLC Class B (Brazil) 1
715 RSL Communications, Ltd. Class A (NON) 19,394
--------------
Total Common Stocks (cost $241,066) $ 223,419
CONVERTIBLE PREFERRED STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
1,000 Chancellor Media Corp. $3.00 cv. cum. pfd. $ 72,125
870 Chesapeake Energy Corp. 144A $3.50 cv. cum. pfd. 13,050
10 Paxson Communications Corp. 144A $9.75 cv. pfd. (PIK) 100,000
248 Viatel, Inc. Ser. A, $10.00 cv. pfd. (PIK) 14,880
125 XCL Ltd 144A Ser. A, 9.50% cv. pfd. (PIK) 11,500
--------------
Total Convertible Preferred Stocks (cost $319,111) $ 211,555
SHORT-TERM INVESTMENTS (19.9%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 5,160,000 U.S. Dollar GKO Pass Through Structured Note (Issued by
Deutsche Bank) The principal at redemption is linked to the
bid price for the Russian Treasury Bill at maturity, and the
change in the spot rate of the Russian Ruble from issue date
to maturity date zero %, October 28, 1998 (in default) $ 48,401
37,734,000 Interest in $750,000,000 joint tri-party repurchase agreement
dated September 30, 1998 with Credit Suisse First Boston
due October 1, 1998 with respect to various U. S. Treasury
obligations -- maturity value of $32,381,902 for an effective
yield of 5.45% 37,739,713
--------------
Total Short-Term Investments (cost $38,487,344) $ 37,788,114
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $198,767,619) (b) $ 189,991,305
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $189,625,612.
(b) The aggregate identified cost on a tax basis is $198,981,671, resulting in gross unrealized appreciation and
depreciation of $4,568,747 and $13,559,113, respectively, or net unrealized depreciation of $8,990,366.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the
fund will begin receiving interest at this rate.
(SEG) A portion of these securities were pledged and segregated with the custodian to cover margin requirements for
futures contracts at September 30, 1998.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified
institutional buyer.
ADR after the name of a foreign holding stands for American Depository Receipts representing ownership of
foreign securities on deposit with a domestic custodian bank.
TBA after the name of a security represents to be announced securities (Note 1).
FLIRB represents Front Loaded Interest Reduction Bond.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at September 30, 1998, which are subject to change based on the terms of the security.
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 1998 (Unaudited)
(aggregate face value $11,844,427)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
Australian Dollars $ 72,270 $ 70,861 12/16/98 $ 1,409
Danish Krone 544,178 518,410 12/16/98 25,768
Deutschemarks 3,851,030 3,716,677 12/16/98 134,353
Italian Lira 1,591,515 1,532,475 12/16/98 59,040
Japanese Yen 3,767,205 3,842,067 12/16/98 (74,862)
Spanish Peseta 910,790 870,523 12/16/98 40,267
Swedish Krona 1,302,286 1,293,414 12/16/98 8,872
- -------------------------------------------------------------------------------
$194,847
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 1998 (Unaudited)
(aggregate face value $22,874,342)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
British Pounds $5,478,880 $5,421,031 12/16/98 $(57,849)
Deutschemarks 8,342,199 8,044,351 12/16/98 (297,848)
Dutch Guilder 677,481 655,308 12/16/98 (22,173)
French Francs 5,174,278 4,947,243 12/16/98 (227,035)
Japanese Yen 3,732,481 3,806,409 12/16/98 73,928
- -------------------------------------------------------------------------------
$(530,977)
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at September 30, 1998 (Unaudited)
Total Aggregate Face Expiration Unrealized
Value Value Date Appreciation
- -------------------------------------------------------------------------------
U.S. Treasury Bond
20 yr. (long) $12,226,594 $11,616,305 Dec.-98 $610,289
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1998 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $198,767,619) (Note 1) $189,991,305
- -----------------------------------------------------------------------------------------------
Cash 741,208
- -----------------------------------------------------------------------------------------------
Foreign currency (cost $54,240) 42,362
- -----------------------------------------------------------------------------------------------
Dividends, interest, and other receivables 2,781,223
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 3,542,988
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 4,646,144
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 194,847
- -----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 268,924
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 130,781
- -----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 28,605
- -----------------------------------------------------------------------------------------------
Total assets 202,368,387
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 321,150
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 10,783,265
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 537,628
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 310,733
- -----------------------------------------------------------------------------------------------
Payable for investor servicing (Note 2) 35,982
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 6,598
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,674
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 137,518
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 530,977
- -----------------------------------------------------------------------------------------------
Other accrued expenses 77,250
- -----------------------------------------------------------------------------------------------
Total liabilities 12,742,775
- -----------------------------------------------------------------------------------------------
Net assets $189,625,612
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $203,161,711
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (1,675,839)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (3,344,199)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (8,516,061)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $189,625,612
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($73,370,562 divided by 9,308,870 shares) $7.88
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $7.88)* $8.27
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($106,647,166 divided by 13,525,260 shares)** $7.89
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($9,607,884 divided by 1,219,710 shares) $7.88
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $7.88)* $8.14
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended September 30, 1998 (Unaudited)
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest $ 7,219,627
- -----------------------------------------------------------------------------------------------
Dividends 457,109
- -----------------------------------------------------------------------------------------------
Total investment income 7,676,736
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 582,186
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 193,026
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 7,184
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,343
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 80,727
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 486,156
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 22,225
- -----------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 5,720
- -----------------------------------------------------------------------------------------------
Reports to shareholders 22,972
- -----------------------------------------------------------------------------------------------
Registration fees 15,356
- -----------------------------------------------------------------------------------------------
Auditing 37,918
- -----------------------------------------------------------------------------------------------
Legal 9,613
- -----------------------------------------------------------------------------------------------
Postage 3,791
- -----------------------------------------------------------------------------------------------
Other 39,369
- -----------------------------------------------------------------------------------------------
Total expenses 1,509,586
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (10,268)
- -----------------------------------------------------------------------------------------------
Net expenses 1,499,318
- -----------------------------------------------------------------------------------------------
Net investment income 6,177,418
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (4,482,360)
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (936,972)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1 and 3) 463,939
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the period (84,185)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the period (12,158,754)
- -----------------------------------------------------------------------------------------------
Net loss on investments (17,198,332)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(11,020,914)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
September 30 March 31
1998* 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 6,177,418 $ 9,271,377
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments and
foreign currency transactions (4,955,393) (161,453)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments and asset and liabilities in foreign currencies (12,242,939) 5,460,100
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (11,020,914) 14,570,024
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (2,554,568) (3,306,248)
- ---------------------------------------------------------------------------------------------------------------
Class B (3,413,503) (4,296,155)
- ---------------------------------------------------------------------------------------------------------------
Class M (340,639) (524,449)
- ---------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- (32,083)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (41,689)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (5,089)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A -- (199,916)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (293,062)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (33,891)
- ---------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
Class A -- (332,120)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (486,866)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (56,304)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 55,788,913 44,172,882
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 38,459,289 49,135,034
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 151,166,323 102,031,289
- ---------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess
of net investment income of $1,675,839
and $1,544,547, respectively) $189,625,612 $151,166,323
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share September 30 Feb. 26, 1996+
operating performance (Unaudited) Year ended March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.70 $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .33(c) .65(d) .63(d) .04(c)(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.80) .40 (.02) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.47) 1.05 .61 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.35) (.59) (.63) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net investment income -- (.01) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.03) (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net realized gain on investments -- (.06) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.35) (.69) (.65) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.88 $8.70 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (5.65)* 13.05 7.36 (1.41)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $73,371 $57,016 $39,178 $3,799
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .68* 1.26(d) 1.25(d) .13*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.93* 7.82(d) 7.74(d) .50*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 77.03* 211.24 169.27 18.98*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outsanding
during the period.
(d) Reflects an expense limitaton in effect during the period (Note 2). As a result of such limitation, expenses of the fund
reflect a reduction of approximately $0.01, $0.01, and $0.02 per share class for the year ended March 31, 1998, the year
ended March 31, 1997, and the period February 26, 1996 (commencement of operations) to March 31, 1996, respectively.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share September 30 Feb. 26, 1996+
operating performance (Unaudited) Year ended March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.70 $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .30(c) .59(d) .57(d) .03(c)(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.80) .40 (.03) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.50) .99 .54 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.31) (.53) (.56) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net investment income -- (.01) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.03) (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net realized gain on investments -- (.06) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.63) (.58) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.89 $8.70 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (5.89)* 12.20 6.56 (1.41)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $106,647 $85,379 $57,052 $5,048
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.05* 2.01(d) 2.00(d) .20*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.56* 7.07(d) 6.99(d) .44*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 77.03* 211.24 169.27 18.98*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outsanding
during the period.
(d) Reflects an expense limitaton in effect during the period (Note 2). As a result of such limitation, expenses of the fund
reflect a reduction of approximately $0.01, $0.01, and $0.02 per share class for the year ended March 31, 1998, the year
ended March 31, 1997, and the period February 26, 1996 (commencement of operations) to March 31, 1996, respectively.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share September 30 Feb. 26, 1996+
operating performance (Unaudited) Year ended March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.70 $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .32(c) .64(d) .61(d) .04(c)(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.81) .39 (.03) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.49) 1.03 .58 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.33) (.57) (.60) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net investment income -- (.01) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.03) (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net realized gain on investments -- (.06) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.33) (.67) (.62) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.88 $8.70 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (5.77)* 12.76 7.09 (1.41)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $9,608 $8,771 $5,802 $482
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .80* 1.51(d) 1.50(d) .14*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.82* 7.57(d) 7.48(d) .50*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 77.03* 211.24 169.27 18.98*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outsanding
during the period.
(d) Reflects an expense limitaton in effect during the period (Note 2). As a result of such limitation, expenses of the fund
reflect a reduction of approximately $0.01, $0.01, and $0.02 per share class for the year ended March 31, 1998, the year
ended March 31, 1997, and the period February 26, 1996 (commencement of operations) to March 31, 1996, respectively.
</TABLE>
Notes to financial statements
September 30, 1998 (Unaudited)
Note 1
Significant accounting policies
Putnam Strategic Income Fund (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management company. The fund seeks high current income consistent with the
preservation of capital by investing its assets in debt securities of
domestic or foreign issuers, including government and corporate
obligations. The fund may also invest in preferred stocks, common stocks,
and other equity securities, as well as in cash or money market
instruments.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than
class A shares, and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class M shares are
sold with a maximum front-end sales charge of 3.25% and pay an ongoing
distribution fee that is lower than class B shares and higher than class A
shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of
some securities traded over-the-counter -- the last reported bid price.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rate. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value, and other investments, including restricted
securities, are stated at fair value following procedures approved by the
Trustees. Market quotations are not considered to be readily available for
long-term corporate bonds and notes; such investments are stated at fair
value on the basis of valuations furnished by a pricing service, approved
by the Trustees, which determines valuations for normal,
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and various relationships
between securities that are generally recognized by institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the fund is
informed of the ex-dividend date. Discounts on zero coupon bonds, original
issue discount bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity basis. Any premium resulting
from the purchase of stepped-coupon securities is amortized on a
yield-to-maturity basis.
Securities purchased or sold on a when-issued or forward commitment or
delayed delivery basis may be settled a month or more after the trade
date; interest income is accrued based on the terms of the security.
Losses may arise due to changes in the market value of the underlying
securities or if the counterparty does not perform under the contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The fund
does not isolate that portion of realized or unrealized gains or losses
resulting from changes in the foreign exchange rate on investments from
fluctuations arising from changes in the market prices of the securities.
Such gains and losses are included with the net realized and unrealized
gain or loss on investments. Net realized gains and losses on foreign
currency transactions represent net realized exchange gains or losses on
closed forward currency contracts, disposition of foreign currencies and
the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized appreciation
and depreciation of assets and liabilities in foreign currencies arise
from changes in the value of open forward currency contracts and assets
and liabilities other than investments at the period end, resulting from
changes in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short term investments).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change in
market value is recorded as an unrealized gain or loss. When the contract
is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The fund could be exposed to risk if
the value of the currency changes unfavorably, if the counterparties to
the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the unit
price has been established, the principal value has not been finalized.
However, the amount of the commitments will not fluctuate more than 1.0%
from the principal amount. The fund holds, and maintains until settlement
date, cash or high-grade debt obligations in an amount sufficient to meet
the purchase price, or the fund may enter into offsetting contracts for
the forward sale of other securities it owns. Income on the securities
will not be earned until settlement date. TBA purchase commitments may be
considered securities in themselves, and involve a risk of loss if the
value of the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in the value of the
fund's other assets. Unsettled TBA purchase commitments are valued at the
current market value of the underlying securities, according to the
procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with
the intention of acquiring securities for their portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of
a commitment prior to settlement if Putnam Management deems it appropriate
to do so.
I) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the six months
ended September 30, 1998, the fund had no borrowings against the line of
credit.
J) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated investment
companies. It is also the intention of the fund to distribute an amount
sufficient to avoid imposition of any excise tax under Section 4982 of the
Internal Revenue Code of 1986, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
K) Distributions to shareholders The fund declares a distribution each day
based upon the projected net investment income, for a specified period,
calculated as if earned pro-rata throughout the period on a daily basis.
Such distributions are recorded daily and paid monthly. Capital gain
distributions, if any, are recorded on the ex-dividend date and paid at
least annually. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations.
L) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities and
Exchange Commission and with various states and the initial public
offering of its shares were $46,575. These expenses are being amortized on
projected net asset levels over a five-year period.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.70% of the first $500
million of average net assets, 0.60% of the next $500 million, 0.55% of
the next $500 million, 0.50% of the next $5 billion, 0.475% of the next $5
billion, 0.455% of the next $5 billion, 0.44% of the next $5 billion, and
0.43% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended September 30, 1998, fund expenses were reduced by
$10,268 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $600 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the
average net assets attributable to class A, class B and class M shares,
respectively. The Trustees have approved payment by the fund to an annual
rate of 0.25%, 1.00% and 0.50% of the average net assets attributable to
class A, class B and class M shares respectively.
For the six months ended September 30, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $71,554 and $5,862 from
the sale of class A and class M shares, respectively and $125,842 in
contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares. For the six months ended September 30, 1998, Putnam Mutual
Funds Corp., acting as underwriter received $107 on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended September 30, 1998, purchases and sales of
investment securities other than U.S. government obligations and
short-term investments aggregated $124,222,548 and $103,430,041,
respectively. Purchases and sales of U.S. government obligations
aggregated $15,019,723 and $13,616,520, respectively. In determining the
net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Note 4
Capital shares
At September 30, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended
September 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 4,032,869 $33,555,465
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 219,839 1,823,840
- -----------------------------------------------------------------------------
4,252,708 35,379,305
Shares
repurchased (1,495,389) (12,429,309)
- -----------------------------------------------------------------------------
Net increase 2,757,319 $22,949,996
- -----------------------------------------------------------------------------
Year ended
March 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,238,873 $27,807,851
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 332,350 2,863,744
- -----------------------------------------------------------------------------
3,571,223 30,671,595
Shares
repurchased (1,715,526) (14,718,694)
- -----------------------------------------------------------------------------
Net increase 1,855,697 $15,952,901
- -----------------------------------------------------------------------------
Six months ended
September 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 5,417,930 $45,597,367
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 278,263 1,966,156
- -----------------------------------------------------------------------------
5,696,193 47,563,523
Shares
repurchased (1,980,574) (16,509,910)
- -----------------------------------------------------------------------------
Net increase 3,715,619 $31,053,613
- -----------------------------------------------------------------------------
Year ended
March 31, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 5,105,604 $43,975,120
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 410,214 3,534,024
- -----------------------------------------------------------------------------
5,515,818 47,509,144
Shares
repurchased (2,549,062) (21,937,542)
- -----------------------------------------------------------------------------
Net increase 2,966,756 $25,571,602
- -----------------------------------------------------------------------------
Six months ended
September 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 454,129 $3,856,450
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 30,494 252,679
- -----------------------------------------------------------------------------
484,623 4,109,129
Shares
repurchased (272,675) (2,323,825)
- -----------------------------------------------------------------------------
Net increase 211,948 $1,785,304
- -----------------------------------------------------------------------------
Year ended
March 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 576,527 $4,919,785
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 51,603 444,562
- -----------------------------------------------------------------------------
628,130 5,364,347
Shares
repurchased (316,042) (2,715,968)
- -----------------------------------------------------------------------------
Net increase 312,088 $2,648,379
- -----------------------------------------------------------------------------
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Quality Bond Fund +
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds -- three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
**An investment in a money market fund is neither insured nor guaranteed
by the U.S. government. These funds are managed to maintain a price of
$1.00 per share, although there is no assurance that this price will be
maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuck
Vice President
Steven M. Oristaglio
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Jeffrey A. Kaufman
Vice President and Fund Manager
David L. Waldman
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Strategic
Income Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For more
information or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' website:
http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
SA029 47022 896/2BQ/2BR 11/98
