UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: (811-05133 )
Exact name of registrant as specified in charter: Putnam High Income Securities Fund
Address of principal executive offices: One Post Office Square, Boston, Massachusetts 02109
| Name and address of agent for service: | Beth S. Mazor, Vice President | |
| One Post Office Square | ||
| Boston, Massachusetts 02109 | ||
| Copy to: | John W. Gerstmayr, Esq. | |
| Ropes & Gray LLP | ||
| One International Place | ||
| Boston, Massachusetts 02110 | ||
| Registrant’s telephone number, including area code: | (617) 292-1000 | |
Date of fiscal year end: August 31, 2006
Date of reporting period: September 1, 2005 - August 31, 2006
Item 1. Report to Stockholders:
The following is a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Investment Company Act of 1940:
What makes Putnam different?
In 1830, Massachusetts Supreme Judicial Court Justice Samuel Putnam established The Prudent Man Rule, a legal foundation for responsible money management.
THE PRUDENT MAN RULE
All that can be required of a trustee to invest is that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.
A time-honored tradition
in money management
Since 1937, our values have been rooted in a profound sense of responsibility for the money entrusted to us.
A prudent approach to investing
We use a research-driven team approach to seek consistent, dependable, superior investment results over time, although there is no guarantee a fund will meet its objectives.
Funds for every investment goal
We offer a broad range of mutual funds and other financial products so investors and their financial representatives can build diversified portfolios.
A commitment to doing
what’s right for investors
We have stringent investor protections and provide a wealth of information about the Putnam funds.
Industry-leading service
We help investors, along with their financial representatives, make informed investment decisions with confidence.
Putnam
High Income
Securities Fund
8| 31| 06
Annual Report
| Message from the Trustees | 2 |
| About the fund | 4 |
| Report from the fund managers | 7 |
| Performance | 13 |
| Your fund’s management | 15 |
| Terms and definitions | 18 |
| Trustee approval of management contract | 19 |
| Other information for shareholders | 24 |
| Financial statements | 26 |
| Federal tax information | 55 |
| Shareholder meeting results | 56 |
| Compliance certifications | 57 |
| About the Trustees | 58 |
| Officers | 64 |
Cover photograph: © Richard H. Johnson
Message from the Trustees
Dear Fellow Shareholder
Beginning in May of this year, investors became increasingly preoccupied with the course of the economy. A more pessimistic outlook pervaded the markets as leading economic indicators began to warn of slower growth. The resulting correction undercut much of the progress that markets had achieved in the previous three months. However, in August, the Federal Reserve (the Fed) made the decision to leave interest rates unchanged, marking a milestone in its shift to a tighter monetary policy and contributing to a more favorable market environment as your fund’s reporting period drew to a close.
Despite investors’ ongoing concerns about the impact of higher rates, we believe that today’s interest-rate levels, far from being a threat to global economic fundamentals, are in fact an integral part of them. Higher rates in Europe and Japan are shifting the landscape in the fixed-income market and may lead to stronger performance from non-U.S. asset classes in the future. Economic growth may, indeed, be slowing somewhat, but we consider this a typical development for the middle of an economic cycle, and one that could help provide the basis for a longer and more durable business expansion and a continued healthy investment environment going forward.
Putnam Investments’ management team, under the leadership of Chief Executive Officer Ed Haldeman, continues to focus on investment performance, and the investment professionals managing your fund have been working to take advantage of the opportunities presented by this environment.
2
We would like to take this opportunity to announce the retirement of one of your fund’s Trustees, John Mullin, an independent Trustee of the Putnam funds since 1997. We thank him for his service.
In the following pages, members of your fund’s management team discuss the fund’s performance and strategies for the fiscal period ended August 31, 2006, and provide their outlook for the months ahead. As always, we thank you for your support of the Putnam funds.
Putnam High Income Securities Fund: opportunities
from high-yield bonds and convertibles
The average investor may think of bonds as government-sponsored securities that offer relatively low risk and less volatility than the stock market. However, high-yield corporate bonds and convertible securities, the types of investments held by Putnam High Income Securities Fund, are different. Both are issued by companies rather than the government. Moreover, high-yield corporates and convertibles can offer greater returns than other bonds — but carry a greater potential for risk, such as the risk of corporate default or periodic illiquidity.
High-yield bonds are deemed to be less than investment-grade status (rated below Baa), which means their issuing companies are considered more likely to default on their loans than more creditworthy counterparts. High-yield bond prices tend to follow individual companies’ fundamentals as well as interest-rate levels. While lower-rated corporate bonds may carry higher risk, they typically provide potentially higher levels of yield to compensate investors for that risk. That is why extensive research based on credit analysis is vital to identifying better high-yield issuers with a lower risk of default.
What sets convertible securities apart is a unique built-in option that allows the investor to exchange — or convert — the bond for a fixed number of shares of stock of the issuer. Convertible securities pay interest like most bonds, and the amount does not change as the underlying stock’s price increases or decreases. Issuers range from large, well-known S&P 500 corporations to small, rapidly growing companies to those in cyclically depressed industries such as airlines, autos, and utilities.
Putnam High Income Securities Fund has held convertible
securities from a variety of sectors and industries.
Building a portfolio of high-yield bonds and convertible securities with the appropriate balance of risk and return potential requires intensive research and analysis. In the case of Putnam High Income Securities Fund, Putnam’s global equity and credit research analysts conduct rigorous research to determine the true worth of the issuing company’s business. The fund’s portfolio team then constructs a portfolio that it believes offers the best return potential without undue risk.
Lower-rated bonds may offer higher yields in return for more risk. Mutual funds that invest in bonds are subject to certain risks, including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. The fund’s shares trade on a stock exchange at market prices, which may be lower than the fund’s net asset value.
The “busted” convertible
One kind of security in which your fund may invest is the “busted” convertible. “Busted” refers to a security whose underlying stock price has fallen signifi-cantly below the conversion price. It becomes much less sensitive to the volatility of the underlying stock and is more bond-like, responding to interest-rate changes. A busted convertible may pay a higher yield than other convertibles, but may also carry a higher level of risk. (Some companies in this situation may eventually default on their bonds.)
The objective of buying a busted convertible is to take advantage of a company’s eventual turnaround despite present challenges. For example, a company undergoing management turmoil may draw negative investor reactions, causing its stock price to tumble. However, if intensive research determines that the management crisis is likely to be resolved, the fund manager could buy the security at a steep discount. The goal is to sell it at a higher premium once the situation is corrected and the price of the security recovers.
Putnam High Income Securities Fund seeks high current income and, as a secondary objective, capital appreciation by investing in a portfolio of high-yielding convertible and nonconvertible securities with potential for capital appreciation.
Highlights
• For the 12 months ended August 31, 2006, Putnam High Income Securities Fund had a total return of 8.69% at net asset value (NAV) and 8.05% at market price.
• The fund’s primary benchmark, the Merrill Lynch All-Convertibles Speculative Quality Index, returned 9.76% . The fund’s secondary benchmark, the JP Morgan Developed High Yield Index, returned 5.37% .
• The average return for the fund’s Lipper category, Convertible Securities Funds (closed-end), was 7.85% .
• Additional fund performance, comparative performance, and Lipper data can be found in the performance section beginning on page 13.
Performance
It is important to note that a fund’s performance at market price may differ from its results at NAV. Although market price performance generally reflects investment results, it may also be influenced by several other factors, including changes in investor perceptions of the fund or its investment manager, market conditions, fluctuations in supply and demand for the fund’s shares, and changes in fund distributions.
Total return for periods ended 8/31/06
Since the fund’s inception (7/9/87), average annual return is 10.11% at NAV and 9.08% at market price.
| Average annual return | Cumulative return | ||||
| NAV | Market price | NAV | Market price | ||
|
| |||||
| 10 years | 8.83% | 6.88% | 133.00% | 94.59% | |
|
| |||||
| 5 years | 12.09 | 9.12 | 76.98 | 54.73 | |
|
| |||||
| 3 years | 12.14 | 9.99 | 41.01 | 33.05 | |
|
| |||||
| 1 year | 8.69 | 8.05 | 8.69 | 8.05 | |
|
| |||||
Data is historical. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return, net asset value, and market price will fluctuate and you may have a gain or a loss when you sell your shares. Performance assumes reinvestment of distributions and does not account for taxes.
6
Report from the fund managers
The year in review
Your fund delivered solid overall results for the fiscal year ended August 31, 2006. A generally positive equity market provided a favorable backdrop for both high-yield convertibles and bonds, since these securities tend to be influenced more by fundamentals supportive of common stocks and less by interest-rate trends. Strong overall security selection and a continuing emphasis on prudent risk management enabled your fund, at NAV, to outperform both its secondary benchmark and the average for its Lipper peer group. However, due to the strong performance of certain types of convertible securities that are represented in the fund’s primary benchmark but not generally targeted by the fund’s investment strategy, the fund’s performance lagged that of the benchmark.
Market overview
During the fund’s fiscal year ended August 31, 2006, the stock market provided a reasonably favorable environment for convertible securities. This environment was especially rewarding for speculative convertibles that are associated with the volatile stocks of relatively weak companies. These convertibles fall outside the realm of the fund’s normal investment universe, although they do make up a substantial portion of its primary benchmark, the Merrill Lynch All-Convertibles Speculative Quality Index, and their strength during the period accounts for the fund’s underperformance of the index.
In the high-yield bond market, the first half of the fiscal year was marked by the bankruptcies of several high-profile bond issuers, including Delta and Northwest airlines, auto parts maker Delphi, and independent power producer Calpine. However, the tide turned in January 2006, thanks to several positive influ-ences. These included continuing strong business fundamentals, persistent signs of economic growth, a decline in new issuance, improved market liquidity, and General Motors’ plan to sell its financing arm. Against this backdrop, there was a rally among the lower-quality segments of the high-yield market from January
7
through the end of April. May brought increasing volatility and negative returns, due to concerns about inflation that made investors more risk averse. A sharp sell-off in the emerging markets spilled over into the credit markets, hurting the performance of high-yield bonds. By the end of the period, however, a rally in U.S. Treasury securities resulted in an improved bond-market environment, which helped to stabilize the performance of high-yield bonds.
Strategy overview
Your fund invests mainly in a combination of convertible securities and high-yield corporate bonds, relying on our analysis of individual securities to identify what we consider to be the most attractive opportunities. In the convertible market, we prefer to invest in securities with relatively short maturities. If problems develop with a company’s capital structure — such as when a firm takes on too much debt and its business slows — then debt with shorter maturities, including convertibles, will often be retired first as the company restructures its balance sheet. Keeping the focus on shorter-maturity convertibles may provide the fund with an added layer of security should problems emerge at a company in which we’ve invested.
On the high-yield side of the portfolio, we maintained our bias toward bonds from the higher-quality tiers of the high-yield market. Until May, high-yield bond spreads — the yield advantage
Market sector performance
These indexes provide an overview of performance in different market sectors for the 12 months ended 8/31/06.
| Bonds | |
|
| |
| Merrill Lynch All-Convertibles Speculative Quality Index (high-yield U.S. convertible securities) | 9.76% |
|
| |
| JP Morgan Developed High Yield Index (high-yield corporate bonds) | 5.37% |
|
| |
| Lehman Aggregate Bond Index (broad bond market) | 1.71% |
|
| |
| Lehman Global Aggregate Bond Index (international bonds) | 1.58% |
| Equities | |
|
| |
| S&P 500 Index (broad stock market) | 8.88% |
|
| |
| Russell 2000 Index (small-company stocks) | 9.36% |
|
| |
| MSCI EAFE Index (international stocks) | 24.28% |
|
| |
8
offered by high-yield bonds over comparable Treasuries — remained extremely narrow, meaning investors were not being compensated for taking on the additional risk carried by lower-quality bonds. In addition, to guard against the possibility of slower economic growth, we maintained a moderately defensive portfolio structure. Should the economy begin to soften, we believe high-yield bonds with higher credit ratings are likely to perform better on a relative basis than lower-rated issues.
Your fund’s holdings
The fund benefited considerably from its investments in convertibles issued by airlines. Despite higher fuel costs, well-positioned airlines performed well, thanks to a strong economy which led to increased demand for air travel, and from higher airfares that resulted partly from fuel surcharges. Securities issued by AMR Corporation, the parent company of American Airlines, and Pinnacle Airlines, a regional airline affiliated with Northwest Airlines, were among the fund’s top-performing positions for the year. We sold the fund’s position in AMR by period-end.
The fund also enjoyed solid returns from convertible securities issued by General Motors. We had avoided GM’s convertibles until their prices dropped substantially in the wake of the automaker’s much-publicized sales
Portfolio composition comparison*
This chart shows how the fund’s weightings have changed over the last six months. Weightings are shown as a percentage of portfolio value. Holdings will vary over time.
* Excludes short-term investments held as collateral for loaned securities.
9
disappointments and the shrinkage of its U.S. market share. When we did invest, we purchased securities with short maturities to help manage the fund’s risk should GM’s fortunes worsen. However, investor confidence in the company’s turnaround plan, as well as demand for GM’s attractively priced securities, provided a substantial boost to both GM’s common stock and its convertibles.
Another contributor on the convertible side of the fund was supercomputer manufacturer Cray. Initially, the fund’s investment in Cray was disappointing as the convertible’s price trended downward. Believing that the company would benefit from new products it was bringing to market, we added to the position to take advantage of the lower price. Our forecast proved correct during the second half of the period when the convertible rebounded from previously depressed levels and advanced sharply in step with the firm’s common stock.
Strong performers from the high-yield bond portion of the portfolio included Decrane Aircraft Holdings, an aircraft parts supplier. Decrane’s bond prices rebounded from depressed levels as the company enjoyed a surge in demand from customers in the corporate aircraft industry.
The fund’s overweight position in Paxson Communications, now known as ION Media Networks, also delivered strong results. The company operates PAX TV, the national family
Top holdings
This table shows the fund’s top holdings, and the percentage of the fund’s net assets that each comprised, as of 8/31/06. The fund’s holdings will change over time.
| Holding (percent of fund’s net assets) | Security information | Sector |
|
| ||
| Convertible Securities | ||
|
| ||
| Northrop Grumman Corp. (2.2%) | Ser. B, $7.00 cum. cv. pfd. | Capital goods |
|
| ||
| General Motors Corp. (1.8%) | Ser. A, $1.125 cv. pfd. | Consumer cyclicals |
|
| ||
| Schering-Plough Corp. (1.6%) | $3.00 cv. pfd. | Health care |
|
| ||
| Freeport-McMoRan | ||
| Copper & Gold, Inc. (1.3%) | 5.50% cv. pfd. | Basic materials |
|
| ||
| FelCor Lodging Trust, Inc. (1.3%) | Ser. A, $0.488 cum. cv. pfd. | Financial |
|
| ||
| Corporate Bonds and Notes | ||
|
| ||
| NRG Energy, Inc. (0.4%) | Sr. notes 7.375%, 2016 | Utilities and power |
|
| ||
| DirecTV Holdings, LLC (0.3%) | Company guaranty 6.375%, 2015 | Consumer staples |
|
| ||
| CCH I, LLC/Capital Corp. (0.3%) | Sec. notes 11%, 2015 | Consumer staples |
|
| ||
| Novelis, Inc. (0.3%) | 144A sr. notes 7.25%, 2015 | Basic materials |
|
| ||
| Whiting Petroleum Corp. (0.3%) | Company guaranty 7%, 2014 | Energy |
|
| ||
10
entertainment network. In November, Paxson reached a settlement in its longstanding legal dispute with NBC, clearing the way for an eventual sale and recapital-ization of the company. Paxson’s existing high-yield debt rallied in the wake of the settlement.
Another positive contributor was Doane Pet Care. When this pet food manufacturer was acquired by Mars, Inc. during the period, its bonds and preferred stock obligations were redeemed, resulting in significant capital appreciation for the fund.
One of the principal detractors over the period was the fund’s position in convertibles issued by Owens Illinois, a manufacturer of packaging products and glass containers. The firm’s production processes are heavily dependent on natural gas, and as gas prices rose, the firm’s costs likewise increased, squeezing profit margins. The value of the fund’s investment declined through the spring and summer months before turning upward near the end of the period. We remain positive about the company’s longer-term business prospects, and so continued to hold the position as of the end of the period. Disappointments among high-yield bond holdings included our decision to underweight Level 3 Communications and sell the fund’s Dana Corp. bonds. Level 3, a communications technology firm whose securities are distressed, and auto parts supplier Dana Corp. both rebounded strongly during the market rally in early 2006.
Please note that the holdings discussed in this report may not have been held by the fund for the entire period. Portfolio composition is subject to review in accordance with the fund’s investment strategy and may vary in the future.
11
The outlook for your fund
The following commentary reflects anticipated developments that could affect your fund over the next six months, as well as your management team’s plans for responding to them.
As we move into the new fiscal year, our strategy in the convertibles market will be to continue our focus on high-yielding issues that are more sensitive to movements in the underlying common stock. At the same time, we are finding select opportunities among high-yield convertibles in industry groups such as retailing and tobacco distribution. We will continue our efforts to avoid companies that exhibit significant credit risk. After a period of sustained economic expansion such as we have recently seen in the United States, companies that carry substantial credit risk are often in extremely poor financial condition.
In the high-yield bond market, while the business fundamentals of many issuers are solid, the technical, or supply and demand, condition of the market is in flux. We anticipate that a substantial amount of new-issue supply will come to market over the balance of 2006 and into 2007. Many of these new issues are likely to be the result of leveraged buyouts, which tend to be structured aggressively and, we believe, may be likely to carry lower credit quality. Our approach to risk management, however, continues to dictate that we maintain our strategy of avoiding the lowest-quality segments of the market. Finally, high-yield spreads relative to investment-grade bonds are tight relative to historical averages, indicating that high-yield bonds are selling at relatively high valuations. Ordinarily, this would be of significant concern. However, defaults remain at low levels and show no sign of spiking. Therefore, we find valuations to be reasonable, as long as defaults don’t increase. Over the near term, we believe returns will be generated mainly through yield rather than capital appreciation.
The views expressed in this report are exclusively those of Putnam Management. They are not meant as investment advice.
Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in bonds are subject to certain risks including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses.
The fund’s shares trade on a stock exchange at market prices, which may be lower than the fund’s net asset value.
12
Your fund’s performance
This section shows your fund’s performance for periods ended August 31, 2006, the end of its fiscal year. In accordance with regulatory requirements for mutual funds, we also include performance as of the most recent calendar quarter-end. Performance should always be considered in light of a fund’s investment strategy. Data represents past performance. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return, net asset value, and market price will fluctuate, and you may have a gain or a loss when you sell your shares.
Fund performance
Total return for periods ended 8/31/06
| NAV | Market price | |
|
| ||
| Annual average | ||
| Life of fund (since 7/9/87) | 10.11% | 9.08% |
|
| ||
| 10 years | 133.00 | 94.59 |
| Annual average | 8.83 | 6.88 |
|
| ||
| 5 years | 76.98 | 54.73 |
| Annual average | 12.09 | 9.12 |
|
| ||
| 3 years | 41.01 | 33.05 |
| Annual average | 12.14 | 9.99 |
|
| ||
| 1 year | 8.69 | 8.05 |
|
| ||
Performance assumes reinvestment of distributions and does not account for taxes.
Fund performance for most recent calendar quarter
Total return for periods ended 9/30/06
| NAV | Market price | |
|
| ||
| Annual average | ||
| Life of fund (since 7/9/87) | 10.14% | 9.18% |
|
| ||
| 10 years | 130.59 | 92.99 |
| Annual average | 8.71 | 6.80 |
|
| ||
| 5 years | 88.90 | 70.64 |
| Annual average | 13.57 | 11.28 |
|
| ||
| 3 years | 39.75 | 32.12 |
| Annual average | 11.80 | 9.73 |
|
| ||
| 1 year | 10.19 | 11.25 |
|
| ||
13
Comparative index returns
For periods ended 8/31/06
| Lipper | ||||
| Merrill Lynch | JP Morgan | Convertible | ||
| All-Convertibles | Developed | Securities Funds | ||
| Speculative | High Yield | (closed-end) | ||
| Quality Index | Index | category average‡ | ||
|
| ||||
| Annual average | ||||
| Life of fund (since 7/9/87) | —* | —† | 9.34% | |
|
| ||||
| 10 years | 150.37% | 93.59% | 102.55 | |
| Annual average | 9.61 | 6.83 | 7.27 | |
|
| ||||
| 5 years | 58.17 | 54.97 | 35.72 | |
| Annual average | 9.60 | 9.16 | 6.15 | |
|
| ||||
| 3 years | 39.78 | 31.19 | 34.10 | |
| Annual average | 11.81 | 9.47 | 10.23 | |
|
| ||||
| 1 year | 9.76 | 5.37 | 7.85 | |
|
| ||||
Index and Lipper results should be compared to fund performance at net asset value.
* The Merrill Lynch All-Convertibles Speculative Quality Index began operations on 1/5/95.
† The JP Morgan Developed High Yield Index began operations on 12/31/94.
‡ Over the 1-, 3-, 5-, and 10-year periods ended 8/31/06, there were 10, 10, 5, and 5 funds, respectively, in this Lipper category.
Fund price and distribution information
For the 12-month period ended 8/31/06
| Distributions | ||
|
| ||
| Number | 12 | |
|
| ||
| Income | $0.5316 | |
|
| ||
| Capital gains | — | |
|
| ||
| Total | $0.5316 | |
|
| ||
| Share value: | NAV | Market price |
|
| ||
| 8/31/05 | $8.69 | $7.80 |
|
| ||
| 8/31/06 | 8.82 | 7.87 |
|
| ||
| Current yield (end of period) | ||
|
| ||
| Current dividend rate1 | 6.03% | 6.75% |
|
| ||
1 Most recent distribution, excluding capital gains, annualized and divided by NAV or market price at end of period.
14
Your fund’s management
Your fund is managed by the members of the Putnam Large-Cap Value and Core Fixed-Income High-Yield teams. David King and Robert Salvin are Portfolio Leaders of your fund. The Portfolio Leaders coordinate the team’s management of the fund.
For a complete listing of the members of the Putnam Large-Cap Value and Core Fixed-Income High-Yield teams, including those who are not Portfolio Leaders or Portfolio Members of your fund, visit Putnam’s Individual Investor Web site at www.putnam.com.
Investment team fund ownership
The table below shows how much the fund’s current Portfolio Leaders have invested in the fund and in all Putnam mutual funds (in dollar ranges). Information shown is as of August 31, 2006, and August 31, 2005.
Trustee and Putnam employee fund ownership
As of August 31, 2006, all of the 11 Trustees then on the Board of the Putnam funds owned fund shares. The table below shows the approximate value of investments in the fund and all Putnam funds as of that date by the Trustees and Putnam employees. These amounts include investments by the Trustees’ and employees’ immediate family members and investments through retirement and deferred compensation plans.
| Total assets in | ||
| Assets in the fund | all Putnam funds | |
|
| ||
| Trustees | $618,000 | $ 93,000,000 |
|
| ||
| Putnam employees | $ 57,000 | $413,000,000 |
|
| ||
15
Fund manager compensation
The total 2005 fund manager compensation that is attributable to your fund is approximately $100,000. This amount includes a portion of 2005 compensation paid by Putnam Management to the fund managers listed in this section for their portfolio management responsibilities, calculated based on the fund assets they manage taken as a percentage of the total assets they manage. The compensation amount also includes a portion of the 2005 compensation paid to the Group Chief Investment Officers of the fund’s broader investment categories for their oversight responsibilities, calculated based on the fund assets they oversee taken as a percentage of the total assets they oversee. This amount does not include compensation of other personnel involved in research, trading, administration, systems, compliance, or fund operations; nor does it include non-compensation costs. These percentages are determined as of the fund’s fiscal period-end. For personnel who joined Putnam Management during or after 2005, the calculation reflects annualized 2005 compensation or an estimate of 2006 compensation, as applicable.
Other Putnam funds managed by the Portfolio Leaders
David King is also a Portfolio Leader of Putnam Convertible Income-Growth Trust and Putnam New Value Fund. He is also a Portfolio Member of The Putnam Fund for Growth and Income.
Robert Salvin is also a Portfolio Member of Putnam Convertible Income-Growth Trust, Putnam High Yield Advantage Fund, Putnam High Yield Trust, and Putnam Managed High Yield Trust.
David King and Robert Salvin may also manage other accounts and variable trust funds advised by Putnam Management or an affiliate.
Changes in your fund’s Portfolio Leader and Portfolio Members
During the year ended August 31, 2006, Portfolio Member Robert Salvin became a Portfolio Leader of the fund.
16
Putnam fund ownership by Putnam’s Executive Board
The table below shows how much the members of Putnam’s Executive Board have invested in all Putnam mutual funds (in dollar ranges). Information shown is as of August 31, 2006, and August 31, 2005.
| $1 – | $10,001 – | $50,001 – | $100,001 – | $500,001 – | $1,000,001 | |||
| Year | $0 | $10,000 | $50,000 | $100,000 | $500,000 | $1,000,000 | and over | |
|
| ||||||||
| Philippe Bibi | 2006 | • | ||||||
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| Chief Technology Officer | 2005 | • | ||||||
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| Joshua Brooks | 2006 | • | ||||||
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| Deputy Head of Investments | 2005 | • | ||||||
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| William Connolly | 2006 | • | ||||||
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| Head of Retail Management | 2005 | • | ||||||
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| Kevin Cronin | 2006 | • | ||||||
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| Head of Investments | 2005 | • | ||||||
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| Charles Haldeman, Jr. | 2006 | • | ||||||
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| President and CEO | 2005 | • | ||||||
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| Amrit Kanwal | 2006 | • | ||||||
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| Chief Financial Officer | 2005 | • | ||||||
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| Steven Krichmar | 2006 | • | ||||||
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| Chief of Operations | 2005 | • | ||||||
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| Francis McNamara, III | 2006 | • | ||||||
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| General Counsel | 2005 | • | ||||||
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| Jeffrey Peters | N/A | |||||||
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| Head of International Business | N/A | |||||||
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| Richard Robie, III | 2006 | • | ||||||
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| Chief Administrative Officer | 2005 | • | ||||||
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| Edward Shadek | 2006 | • | ||||||
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| Deputy Head of Investments | 2005 | • | ||||||
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| Sandra Whiston | 2006 | • | ||||||
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| Head of Institutional Management | 2005 | • | ||||||
|
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N/A indicates the individual became a member of Putnam’s Executive Board after the reporting date.
17
Terms and definitions
Important terms
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.
Net asset value (NAV) is the value of all your fund’s assets, minus any liabilities, divided by the number of outstanding shares.
Market price is the current trading price of one share of the fund. Market prices are set by transactions between buyers and sellers on exchanges such as the New York Stock Exchange and the American Stock Exchange.
Comparative indexes
JP Morgan Developed High Yield Index is an unmanaged index of high-yield fixed-income securities issued in developed countries.
Lehman Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed-income securities.
Lehman Global Aggregate Bond Index is an unmanaged index of global investment-grade fixed-income securities.
Merrill Lynch All-Convertibles Speculative Quality Index is an unmanaged index of high-yield U.S. convertible securities.
Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged index of equity securities from developed countries in Western Europe, the Far East, and Australasia.
Russell 2000 Index is an unmanaged index of the 2,000 smallest companies in the Russell 3000 Index.
S&P 500 Index is an unmanaged index of common stock performance.
Indexes assume reinvestment of all distributions and do not account for fees. Securities and performance of a fund and an index will differ. You cannot invest directly in an index.
Lipper is a third-party industry-ranking entity that ranks mutual funds. Its rankings do not reflect sales charges. Lipper rankings are based on total return at net asset value relative to other funds that have similar current investment styles or objectives as determined by Lipper. Lipper may change a fund’s category assignment at its discretion. Lipper category averages reflect performance trends for funds within a category.
18
Trustee approval of
management contract
General conclusions
The Board of Trustees of the Putnam funds oversees the management of each fund and, as required by law, determines annually whether to approve the continuance of your fund’s management contract with Putnam Management and the sub-management contract between Putnam Management’s affiliate, Putnam Investments Limited (“PIL”), and Putnam Management. In this regard, the Board of Trustees, with the assistance of its Contract Committee consisting solely of Trustees who are not “interested persons” (as such term is defined in the Investment Company Act of 1940, as amended) of the Putnam funds (the “Independent Trustees”), requests and evaluates all information it deems reasonably necessary under the circumstances. Over the course of several months ending in June 2006, the Contract Committee met four times to consider the information provided by Putnam Management and other information developed with the assistance of the Board’s independent counsel and independent staff. The Contract Committee reviewed and discussed key aspects of this information with all of the Independent Trustees. Upon completion of this review, the Contract Committee recommended, and the Independent Trustees approved, the continuance of your fund’s management contract and sub-management contract, effective July 1, 2006. (Because PIL is an affiliate of Putnam Management and Putnam Management remain fully responsible for all services provided by PIL, the Trustees have not evaluated PIL as a separate entity, and all subsequent references to Putnam Management below include reference to PIL as necessary or appropriate in the context.)
This approval was based on the following conclusions:
• That the fee schedule in effect for your fund represents reasonable compensation in light of the nature and quality of the services being provided to the fund, the fees paid by competitive funds and the costs incurred by Putnam Management in providing such services, and
• That such fee schedule represents an appropriate sharing between fund shareholders and Putnam Management of such economies of scale as may exist in the management of the fund at current asset levels.
These conclusions were based on a comprehensive consideration of all information provided to the Trustees and were not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations and how the Trustees considered these factors are described below, although individual Trustees may have evaluated the information presented differently, giving different weights to various factors. It is also important to recognize that the fee arrangements for your fund and the other Putnam funds are the result of many years of review and discussion between the Independent Trustees and Putnam Management, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements in prior years.
19
Management fee schedules and categories; total expenses
The Trustees reviewed the management fee schedules in effect for all Putnam funds, including fee levels and breakpoints, and the assignment of funds to particular fee categories. In reviewing fees and expenses, the Trustees generally focused their attention on material changes in circumstances — for example, changes in a fund’s size or investment style, changes in Putnam Management’s operating costs, or changes in competitive practices in the mutual fund industry — that suggest that consideration of fee changes might be warranted. The Trustees concluded that the circumstances did not warrant changes to the management fee structure of your fund, which had been carefully developed over the years, re-examined on many occasions and adjusted where appropriate. The Trustees focused on two areas of particular interest, as discussed further below:
• Competitiveness. The Trustees reviewed comparative fee and expense information for competitive funds, which indicated that, in a custom peer group of competitive funds selected by Lipper Inc., your fund ranked in the 67th percentile in management fees and in the 33rd percentile in total expenses as of December 31, 2005 (the first percentile being the least expensive funds and the 100th percentile being the most expensive funds). The Trustees expressed their intention to monitor this information closely to ensure that fees and expenses of your fund continue to meet evolving competitive standards.
• Economies of scale. In recent years, the Trustees have examined the operation of the existing breakpoint structure during periods of both growth and decline in asset levels. (A “breakpoint” is a reduction in fee rates that applies to additional assets once specified asset levels are reached.) The Trustees concluded that the fee schedules in effect for the funds represented an appropriate sharing of economies of scale at current asset levels. In reaching this conclusion, the Trustees considered the Contract Committee’s stated intent to continue to work with Putnam Management to plan for an eventual resumption in the growth of assets, including a study of potential economies that might be produced under various growth assumptions.
In connection with their review of the management fees and total expenses of the Putnam funds, the Trustees also reviewed the costs of the services to be provided and profits to be realized by Putnam Management and its affiliates from the relationship with the funds. This information included trends in revenues, expenses and profitability of Putnam Management and its affiliates relating to the investment management and distribution services provided to the funds. In this regard, the Trustees also reviewed an analysis of Putnam Management’s revenues, expenses and profitability with respect to the funds’ management contracts, allocated on a fund-by-fund basis. Because many of the costs incurred by Putnam Management in managing the funds are not readily identifiable to particular funds, the Trustees observed that the methodology for allocating costs is an important factor in evaluating Putnam Management’s costs and profitability, both as to
20
the Putnam funds in the aggregate and as to individual funds. The Trustees reviewed Putnam Management’s cost allocation methodology with the assistance of independent consultants and concluded that this methodology was reasonable and well-considered.
Investment performance
The quality of the investment process provided by Putnam Management represented a major factor in the Trustees’ evaluation of the quality of services provided by Putnam Management under your fund’s management contract. The Trustees were assisted in their review of the Putnam funds’ investment process and performance by the work of the Investment Process Committee of the Trustees and the Investment Oversight Committee of the Trustees, which meet on a regular monthly basis with the funds’ portfolio teams throughout the year. The Trustees concluded that Putnam Management generally provides a high-quality investment process — as measured by the experience and skills of the individuals assigned to the management of fund portfolios, the resources made available to such personnel, and in general the ability of Putnam Management to attract and retain high-quality personnel — but also recognize that this does not guarantee favorable investment results for every fund in every time period. The Trustees considered the investment performance of each fund over multiple time periods and considered information comparing each fund’s performance with various benchmarks and with the performance of competitive funds.
The Trustees noted the satisfactory investment performance of many Putnam funds. They also noted the disappointing investment performance of certain funds in recent years and discussed with senior management of Putnam Management the factors contributing to such underperfor-mance and actions being taken to improve performance. The Trustees recognized that, in recent years, Putnam Management has made significant changes in its investment personnel and processes and in the fund product line to address areas of underperformance. In particular, they noted the important contributions of Putnam Management’s leadership in attracting, retaining and supporting high-quality investment professionals and in systematically implementing an investment process that seeks to merge the best features of fundamental and quantitative analysis. The Trustees indicated their intention to continue to monitor performance trends to assess the effectiveness of these changes and to evaluate whether additional changes to address areas of underperformance are warranted.
In the case of your fund, the Trustees considered that your fund’s common share cumulative total return performance at net asset value was in the following percentiles of its Lipper Inc. peer group (Lipper Convertible Securities Funds (closed-end)) for the one-, three- and five-year periods ended March 31, 2006 (the first percentile being the best performing funds and the 100th percentile being the worst performing funds):
21
| One-year period | Three-year period | Five-year period |
|
|
||
| 75th | 23rd | 15th |
(Because of the passage of time, these performance results may differ from the performance results for more recent periods shown elsewhere in this report. Over the one-, three- and five-year periods ended March 31, 2006, there were 11, 8, and 6 funds, respectively, in your fund’s Lipper peer group.* Past performance is no guarantee of future performance.)
As a general matter, the Trustees concluded that cooperative efforts between the Trustees and Putnam Management represent the most effective way to address investment performance problems. The Trustees noted that investors in the Putnam funds have, in effect, placed their trust in the Putnam organization, under the oversight of the funds’ Trustees, to make appropriate decisions regarding the management of the funds. Based on the responsiveness of Putnam Management in the recent past to Trustee concerns about investment performance, the Trustees concluded that it is preferable to seek change within Putnam Management to address performance shortcomings. In the Trustees’ view, the alternative of terminating a management contract and engaging a new investment adviser for an underperforming fund would entail significant disruptions and would not provide any greater assurance of improved investment performance.
Brokerage and soft-dollar allocations; other benefits
The Trustees considered various potential benefits that Putnam Management may receive in connection with the services it provides under the management contract with your fund. These include benefits related to brokerage and soft-dollar allocations, whereby a portion of the commissions paid by a fund for brokerage may be used to acquire research services that may be useful to Putnam Management in managing the assets of the fund and of other clients. The Trustees indicated their continued intent to monitor the potential benefits associated with the allocation of fund brokerage to ensure that the principle of seeking “best price and execution” remains paramount in the portfolio trading process.
The Trustees’ annual review of your fund’s management contract also included the review of your fund’s custodian and investor servicing agreements with Putnam Fiduciary Trust Company, which provide benefits to affiliates of Putnam Management.
* The percentile rankings for your fund’s common share annualized total return performance in the Lipper Convertible Securities Funds (closed-end) category for the one-, five- and ten-year periods ended September 30, 2006, were 19%, 17%, and 17%, respectively. Over the one-, five- and ten-year periods ended September 30, 2006, the fund ranked 2nd out of 10, 1st out of 5, and 1st out of 5 funds, respectively. Note that this more recent information was not available when the Trustees approved the continuance of your fund’s management contract.
22
Comparison of retail and institutional fee schedules
The information examined by the Trustees as part of their annual contract review has included for many years information regarding fees charged by Putnam Management and its affiliates to institutional clients such as defined benefit pension plans, college endowments, etc. This information included comparison of such fees with fees charged to the funds, as well as a detailed assessment of the differences in the services provided to these two types of clients. The Trustees observed, in this regard, that the differences in fee rates between institutional clients and the mutual funds are by no means uniform when examined by individual asset sectors, suggesting that differences in the pricing of investment management services to these types of clients reflect to a substantial degree historical competitive forces operating in separate market places. The Trustees considered the fact that fee rates across all asset sectors are higher on average for mutual funds than for institutional clients, as well as the differences between the services that Putnam Management provides to the Putnam funds and those that it provides to institutional clients of the firm, but did not rely on such comparisons to any significant extent in concluding that the management fees paid by your fund are reasonable.
23
Other information
for shareholders
Important notice regarding share repurchase program
In September 2006, the Trustees of your fund approved an extension of the current share repurchase program being implemented by Putnam Investments on behalf of your fund. The plan, as extended, allows your fund to repurchase, in the 24 months ending October 6, 2007, up to 10% of the shares outstanding as of October 7, 2005.
Putnam’s policy on confidentiality
In order to conduct business with our shareholders, we must obtain certain personal information such as account holders’ addresses, telephone numbers, Social Security numbers, and the names of their financial advisors. We use this information to assign an account number and to help us maintain accurate records of transactions and account balances. It is our policy to protect the confidentiality of your information, whether or not you currently own shares of our funds, and in particular, not to sell information about you or your accounts to outside marketing firms. We have safeguards in place designed to prevent unauthorized access to our computer systems and procedures to protect personal information from unauthorized use. Under certain circumstances, we share this information with outside vendors who provide services to us, such as mailing and proxy solicitation. In those cases, the service providers enter into confidentiality agreements with us, and we provide only the information necessary to process transactions and perform other services related to your account. We may also share this information with our Putnam affiliates to service your account or provide you with information about other Putnam products or services. It is also our policy to share account information with your financial advisor, if you’ve listed one on your Putnam account. If you would like clarification about our confidentiality policies or have any questions or concerns, please don’t hesitate to contact us at 1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.
Proxy voting
Putnam is committed to managing our mutual funds in the best interests of our shareholders. The Putnam funds’ proxy voting guidelines and procedures, as well as information regarding how your fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2006, are available on the Putnam Individual Investor Web site, www.putnam.com/individual, and on the SEC’s Web site, www.sec.gov. If you have questions about finding forms on the SEC’s Web site, you may call the SEC at 1-800-SEC-0330. You may also obtain the Putnam funds’ proxy voting guidelines and procedures at no charge by calling Putnam’s Shareholder Services at 1-800-225-1581.
24
Fund portfolio holdings
The fund will file a complete schedule of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Shareholders may obtain the fund’s Forms N-Q on the SEC’s Web site at www.sec.gov. In addition, the fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for information about the SEC’s Web site or the operation of the Public Reference Room.
25
Financial statements
A guide to financial statements
These sections of the report, as well as the accompanying Notes, preceded by the Report of Independent Registered Public Accounting Firm, constitute the fund’s financial statements.
The fund’s portfolio lists all the fund’s investments and their values as of the last day of the reporting period. Holdings are organized by asset type and industry sector, country, or state to show areas of concentration and diversification.
Statement of assets and liabilities shows how the fund’s net assets and share price are determined. All investment and noninvestment assets are added together. Any unpaid expenses and other liabilities are subtracted from this total. The result is divided by the number of shares to determine the net asset value per share. (For funds with preferred shares, the amount subtracted from total assets includes the liquidation preference of preferred shares.)
Statement of operations shows the fund’s net investment gain or loss. This is done by first adding up all the fund’s earnings — from dividends and interest income — and subtracting its operating expenses to determine net investment income (or loss). Then, any net gain or loss the fund realized on the sales of its holdings — as well as any unrealized gains or losses over the period — is added to or subtracted from the net investment result to determine the fund’s net gain or loss for the fiscal year.
Statement of changes in net assets shows how the fund’s net assets were affected by the fund’s net investment gain or loss, by distributions to shareholders, and by changes in the number of the fund’s shares. It lists distributions and their sources (net investment income or realized capital gains) over the current reporting period and the most recent fiscal year-end. The distributions listed here may not match the sources listed in the Statement of operations because the distributions are determined on a tax basis and may be paid in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund’s investment results, per-share distributions, expense ratios, net investment income ratios, and portfolio turnover in one summary table, reflecting the five most recent reporting periods. In a semiannual report, the highlight table also includes the current reporting period.
26
Report of Independent Registered
Public Accounting Firm
To the Trustees and Shareholders of
Putnam High Income Securities Fund:
In our opinion, the accompanying statement of assets and liabilities, including the fund’s portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Putnam High Income Securities Fund (the “fund”) at August 31, 2006, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments owned at August 31, 2006, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 13, 2006
27
| The fund’s portfolio 8/31/06 | ||||
|
| ||||
| CORPORATE BONDS AND NOTES (41.0%)* | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Basic Materials (5.0%) | ||||
| Abitibi-Consolidated, Inc. debs. 8.85s, 2030 (Canada) | $ | 60,000 | $ | 51,100 |
| Abitibi-Consolidated, Inc. notes 7 3/4s, 2011 (Canada) | 55,000 | 50,738 | ||
| Abitibi-Consolidated, Inc. notes 6s, 2013 (Canada) | 122,000 | 100,650 | ||
| AK Steel Corp. company guaranty 7 3/4s, 2012 | 375,000 | 365,620 | ||
| BCP Crystal US Holdings Corp. sr. sub. notes 9 5/8s, 2014 | 160,000 | 173,400 | ||
| Boise Cascade, LLC company guaranty 7 1/8s, 2014 | 215,000 | 199,950 | ||
| Century Aluminum Co. company guaranty 7 1/2s, 2014 | 80,000 | 79,600 | ||
| Chaparral Steel Co. company guaranty 10s, 2013 | 355,000 | 392,275 | ||
| Chesapeake Corp. sr. sub. notes 7s, 2014 | EUR | 185,000 | 215,590 | |
| Clondalkin Industries BV 144A sr. notes 8s, | ||||
| 2014 (Netherlands) | EUR | 220,000 | 297,206 | |
| Cognis Holding GmbH & Co. 144A sr. notes 12.282s, | ||||
| 2015 (Germany) ‡‡ | EUR | 205,854 | 258,994 | |
| Cognis Holding GmbH & Co. 144A sr. notes 9 1/2s, | ||||
| 2014 (Germany) | EUR | 50,000 | 68,987 | |
| Compass Minerals International, Inc. sr. disc. notes | ||||
| stepped-coupon Ser. B, zero % (12s, 6/1/08), 2013 †† | $ | 65,000 | 60,288 | |
| Compass Minerals International, Inc. sr. notes | ||||
| stepped-coupon zero % (12 3/4s, 12/15/07), 2012 †† | 310,000 | 299,538 | ||
| Covalence Specialty Materials Corp. 144A | ||||
| sr. sub. notes 10 1/4s, 2016 | 350,000 | 336,000 | ||
| Crystal US Holdings, LLC sr. disc. notes | ||||
| stepped-coupon Ser. A, zero % (10s, 10/1/09), 2014 †† | 360,000 | 291,600 | ||
| Equistar Chemicals LP/Equistar Funding Corp. company | ||||
| guaranty 10 1/8s, 2008 | 321,000 | 339,458 | ||
| Georgia-Pacific Corp. debs. 9 1/2s, 2011 | 320,000 | 344,800 | ||
| Gerdau Ameristeel Corp. sr. notes 10 3/8s, 2011 (Canada) | 240,000 | 258,600 | ||
| Hercules, Inc. company guaranty 6 3/4s, 2029 | 180,000 | 169,650 | ||
| Huntsman, LLC company guaranty 11 5/8s, 2010 | 97,000 | 107,670 | ||
| Huntsman, LLC company guaranty 11 1/2s, 2012 | 53,000 | 60,155 | ||
| Innophos, Inc. company guaranty 8 7/8s, 2014 | 130,000 | 130,000 | ||
| Jefferson Smurfit Corp. company guaranty 8 1/4s, 2012 | 74,000 | 70,115 | ||
| Jefferson Smurfit Corp. company guaranty 7 1/2s, 2013 | 150,000 | 137,250 | ||
| JSG Holding PLC 144A sr. notes 11 1/2s, 2015 (Ireland) ‡‡ | EUR | 118,138 | 155,741 | |
| Lyondell Chemical Co. company guaranty 10 1/2s, 2013 | $ | 290,000 | 319,000 | |
| MDP Acquisitions PLC sr. notes 9 5/8s, 2012 (Ireland) | 410,000 | 427,938 | ||
| Metals USA, Inc. 144A sec. notes 11 1/8s, 2015 | 225,000 | 248,063 | ||
| Nalco Co. sr. sub. notes 9s, 2013 | EUR | 190,000 | 261,784 | |
| Nalco Co. sr. sub. notes 8 7/8s, 2013 | $ | 125,000 | 128,750 | |
| Nell AF S.a.r.l. 144A sr. notes 8 3/8s, 2015 (Luxembourg) | 265,000 | 265,331 | ||
| Nell AF S.a.r.l. 144A sr. notes 8 3/8s, 2015 (Luxembourg) | EUR | 50,000 | 66,651 | |
| NewPage Corp. sec. notes 10s, 2012 | $ | 285,000 | 294,263 | |
| Norske Skog Canada, Ltd. company guaranty Ser. D, | ||||
| 8 5/8s, 2011 (Canada) | 65,000 | 63,863 | ||
| Norske Skog Canada, Ltd. sr. notes 7 3/8s, 2014 (Canada) | 325,000 | 296,563 | ||
| Novelis, Inc. 144A sr. notes 7 1/4s, 2015 | 605,000 | 574,750 | ||
28
| CORPORATE BONDS AND NOTES (41.0%)* continued | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Basic Materials continued | ||||
| PCI Chemicals Canada sec. sr. notes 10s, 2008 (Canada) | $ | 98,714 | $ | 102,416 |
| PQ Corp. company guaranty 7 1/2s, 2013 | 345,000 | 330,338 | ||
| Rockwood Specialties Group, Inc. company | ||||
| guaranty 7 5/8s, 2014 | EUR | 310,000 | 408,870 | |
| Steel Dynamics, Inc. company guaranty 9 1/2s, 2009 | $ | 180,000 | 186,300 | |
| Stone Container Corp. sr. notes 9 3/4s, 2011 | 285,000 | 292,838 | ||
| Stone Container Finance company guaranty 7 3/8s, | ||||
| 2014 (Canada) | 40,000 | 36,000 | ||
| United States Steel Corp. sr. notes 9 3/4s, 2010 | 154,000 | 163,625 | ||
| Wheeling-Pittsburgh Steel Corp. sr. notes Ser. A, 5s, 2011 ‡‡ | 23,486 | 18,319 | ||
| Wheeling-Pittsburgh Steel Corp. sr. notes Ser. B, 6s, 2010 ‡‡ | 13,329 | 10,397 | ||
| 9,511,034 | ||||
|
| ||||
| Capital Goods (4.1%) | ||||
| Alliant Techsystems, Inc. sr. sub. notes 6 3/4s, 2016 | 345,000 | 335,513 | ||
| Allied Waste North America, Inc. company | ||||
| guaranty Ser. B, 8 1/2s, 2008 | 333,000 | 347,153 | ||
| Allied Waste North America, Inc. sec. notes Ser. B, | ||||
| 5 3/4s, 2011 | 30,000 | 28,500 | ||
| Amsted Industries, Inc. 144A sr. notes 10 1/4s, 2011 | 475,000 | 513,000 | ||
| Berry Plastics Corp. company guaranty 10 3/4s, 2012 | 30,000 | 32,700 | ||
| Blount, Inc. sr. sub. notes 8 7/8s, 2012 | 200,000 | 200,250 | ||
| Browning-Ferris Industries, Inc. sr. notes 6 3/8s, 2008 | 140,000 | 138,950 | ||
| Crown Americas, LLC/Crown Americas Capital Corp. | ||||
| sr. notes 7 5/8s, 2013 | 340,000 | 341,700 | ||
| Crown Cork & Seal Co. Inc. debs. 8s, 2023 | 150,000 | 141,750 | ||
| Crown Euro Holdings SA company guaranty 6 1/4s, | ||||
| 2011 (France) | EUR | 190,000 | 258,015 | |
| Decrane Aircraft Holdings Co. company guaranty zero %, | ||||
| 2008 (acquired 7/23/04, cost $78,000) ‡ | $ | 238,000 | 166,600 | |
| Earle M. Jorgensen Co. sec. notes 9 3/4s, 2012 | 414,000 | 440,910 | ||
| Graham Packaging Co., Inc. company guaranty 8 1/2s, 2012 | 75,000 | 72,563 | ||
| Graham Packaging Co., Inc. sub. notes 9 7/8s, 2014 | 250,000 | 240,625 | ||
| Greenbrier Cos., Inc. company guaranty 8 3/8s, 2015 | 300,000 | 302,250 | ||
| K&F Acquisitions, Inc. company guaranty 7 3/4s, 2014 | 340,000 | 338,300 | ||
| L-3 Communications Corp. company guaranty 7 5/8s, 2012 | 100,000 | 102,500 | ||
| L-3 Communications Corp. company guaranty 6 1/8s, 2013 | 120,000 | 115,500 | ||
| L-3 Communications Corp. sr. sub. notes Class B, | ||||
| 6 3/8s, 2015 | 215,000 | 206,938 | ||
| Legrand SA debs. 8 1/2s, 2025 (France) | 405,000 | 461,700 | ||
| Manitowoc Co., Inc. (The) company guaranty 10 1/2s, 2012 | 184,000 | 198,490 | ||
| Manitowoc Co., Inc. (The) sr. notes 7 1/8s, 2013 | 90,000 | 88,650 | ||
| Milacron Escrow Corp. sec. notes 11 1/2s, 2011 | 320,000 | 305,600 | ||
| Owens Brockway Glass Container, Inc. company | ||||
| guaranty 6 3/4s, 2014 | EUR | 230,000 | 288,195 | |
| Owens-Brockway Glass company guaranty 8 1/4s, 2013 | $ | 160,000 | 162,000 | |
| Owens-Brockway Glass company guaranty 7 3/4s, 2011 | 55,000 | 56,238 | ||
| Owens-Brockway Glass sr. sec. notes 8 3/4s, 2012 | 157,000 | 166,813 | ||
| Owens-Illinois, Inc. debs. 7 1/2s, 2010 | 55,000 | 54,450 | ||
29
| CORPORATE BONDS AND NOTES (41.0%)* continued | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Capital Goods continued | ||||
| Ray Acquisition SCA sr. notes 9 3/8s, 2015 (France) | EUR | 340,000 | $ | 477,595 |
| RBS Global, Inc. and Rexnord Corp. 144A company | ||||
| guaranty 9 1/2s, 2014 | $ | 350,000 | 351,750 | |
| RBS Global, Inc. and Rexnord Corp. 144A | ||||
| sr. sub. notes 11 3/4s, 2016 | 40,000 | 41,200 | ||
| Solo Cup Co. sr. sub. notes 8 1/2s, 2014 | 380,000 | 330,600 | ||
| Tekni-Plex, Inc. 144A sec. notes 10 7/8s, 2012 | 320,000 | 355,200 | ||
| Terex Corp. company guaranty 9 1/4s, 2011 | 40,000 | 42,150 | ||
| Terex Corp. company guaranty 7 3/8s, 2014 | 24,000 | 24,000 | ||
| WCA Waste Corp. 144A sr. notes 9 1/4s, 2014 | 95,000 | 97,138 | ||
| 7,825,486 | ||||
|
| ||||
| Communication Services (3.5%) | ||||
| American Cellular Corp. company guaranty 9 1/2s, 2009 | 45,000 | 46,069 | ||
| American Cellular Corp. sr. notes Ser. B, 10s, 2011 | 420,000 | 436,800 | ||
| American Tower Corp. sr. notes 7 1/2s, 2012 | 90,000 | 91,575 | ||
| American Towers, Inc. company guaranty 7 1/4s, 2011 | 80,000 | 82,200 | ||
| Centennial Cellular Operating Co., LLC company | ||||
| guaranty 10 1/8s, 2013 | 90,000 | 94,950 | ||
| Centennial Communications Corp. sr. notes 10s, 2013 | 145,000 | 144,638 | ||
| Centennial Communications Corp. sr. notes FRN | ||||
| 11.258s, 2013 | 40,000 | 41,300 | ||
| Cincinnati Bell Telephone company guaranty 6.3s, 2028 | 35,000 | 29,925 | ||
| Citizens Communications Co. notes 9 1/4s, 2011 | 240,000 | 262,500 | ||
| Digicel, Ltd. 144A sr. notes 9 1/4s, 2012 (Jamaica) | 265,000 | 276,263 | ||
| Dobson Cellular Systems sec. notes 9 7/8s, 2012 | 160,000 | 170,800 | ||
| Dobson Communications Corp. sr. notes FRN 9.757s, 2012 | 75,000 | 75,938 | ||
| Horizon PCS, Inc. company guaranty 11 3/8s, 2012 | 40,000 | 45,100 | ||
| Inmarsat Finance PLC company guaranty 7 5/8s, 2012 | ||||
| (United Kingdom) | 100,000 | 102,500 | ||
| Inmarsat Finance PLC company guaranty stepped-coupon | ||||
| zero % (10 3/8s, 11/15/08), 2012 (United Kingdom) †† | 280,000 | 244,300 | ||
| Intelsat Bermuda, Ltd. 144A sr. notes 11 1/4s, 2016 (Bermuda) | 385,000 | 398,956 | ||
| Intelsat Subsidiary Holding Co., Ltd. company guaranty | ||||
| stepped-coupon 8 7/8s (8 5/8s, 1/15/15), 2015 (Bermuda)†† | 10,000 | 10,100 | ||
| Intelsat Subsidiary Holding Co., Ltd. sr. notes stepped-coupon | ||||
| 8 1/2s (8 1/4s, 1/15/13), 2013 (Bermuda)†† | 100,000 | 99,750 | ||
| iPCS, Inc. sr. notes 11 1/2s, 2012 | 70,000 | 78,750 | ||
| IWO Holdings, Inc. sec. FRN 9.257s, 2012 | 25,000 | 25,813 | ||
| Level 3 Financing, Inc. company guaranty 10 3/4s, 2011 | 30,000 | 31,238 | ||
| Level 3 Financing, Inc. 144A sr. notes FRN 11.424s, 2011 | 100,000 | 104,625 | ||
| Nordic Telephone Co. Holdings ApS 144A | ||||
| sr. notes 8 7/8s, 2016 (Denmark) | 75,000 | 78,000 | ||
| PanAmSat Corp. company guaranty 9s, 2014 | 335,000 | 340,863 | ||
| Qwest Communications International, Inc. company | ||||
| guaranty 7 1/2s, 2014 | 540,000 | 535,275 | ||
| Qwest Corp. debs. 7 1/4s, 2025 | 65,000 | 62,156 | ||
| Qwest Corp. notes 8 7/8s, 2012 | 430,000 | 465,475 | ||
| Qwest Corp. sr. notes 7 5/8s, 2015 | 150,000 | 153,938 | ||
30
| CORPORATE BONDS AND NOTES (41.0%)* continued | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Communication Services continued | ||||
| Rogers Cantel, Inc. debs. 9 3/4s, 2016 (Canada) | $ | 240,000 | $ | 289,200 |
| Rogers Wireless, Inc. sec. notes 9 5/8s, 2011 (Canada) | 265,000 | 296,800 | ||
| Rogers Wireless, Inc. sec. notes 6 3/8s, 2014 (Canada) | 330,000 | 324,225 | ||
| Rural Cellular Corp. sr. notes 9 7/8s, 2010 | 150,000 | 154,875 | ||
| Rural Cellular Corp. sr. sub. FRN 11.239s, 2012 | 50,000 | 51,500 | ||
| Rural Cellular Corp. sr. sub. notes 9 3/4s, 2010 | 70,000 | 69,650 | ||
| Syniverse Technologies, Inc. sr. sub. notes Ser. B, 7 3/4s, 2013 | 175,000 | 170,188 | ||
| Time Warner Telecom, Inc. company guaranty 9 1/4s, 2014 | 230,000 | 239,200 | ||
| Windstream Corp. 144A sr. notes 8 5/8s, 2016 | 295,000 | 311,963 | ||
| Windstream Corp. 144A sr. notes 8 1/8s, 2013 | 155,000 | 163,525 | ||
| 6,600,923 | ||||
|
| ||||
| Consumer Cyclicals (8.9%) | ||||
| American Media, Inc. company guaranty Ser. B, 10 1/4s, 2009 | 335,000 | 309,875 | ||
| ArvinMeritor, Inc. sr. unsecd. notes 8 1/8s, 2015 | 120,000 | 111,000 | ||
| Asbury Automotive Group, Inc. sr. sub. notes 8s, 2014 | 105,000 | 102,375 | ||
| Ashton Woods USA, LLC/Ashton Woods Finance Co. | ||||
| sr. sub. notes 9 1/2s, 2015 | 100,000 | 86,750 | ||
| Associated Materials, Inc. company guaranty 9 3/4s, 2012 | 350,000 | 343,000 | ||
| Autonation, Inc. 144A company guaranty 7s, 2014 | 40,000 | 39,450 | ||
| Autonation, Inc. 144A company guaranty FRN 7.507s, 2013 | 60,000 | 60,300 | ||
| Bon-Ton Stores, Inc. (The) company guaranty 10 1/4s, 2014 | 280,000 | 263,550 | ||
| Boyd Gaming Corp. sr. sub. notes 8 3/4s, 2012 | 30,000 | 31,425 | ||
| Boyd Gaming Corp. sr. sub. notes 7 3/4s, 2012 | 25,000 | 25,063 | ||
| Boyd Gaming Corp. sr. sub. notes 7 1/8s, 2016 | 195,000 | 185,494 | ||
| Boyd Gaming Corp. sr. sub. notes 6 3/4s, 2014 | 290,000 | 273,325 | ||
| Building Materials Corp. company guaranty 8s, 2008 | 70,000 | 69,738 | ||
| CanWest Media, Inc. company guaranty 8s, 2012 (Canada) | 4,956 | 4,795 | ||
| Delco Remy International, Inc. company guaranty 11s, 2009 | 4,000 | 2,435 | ||
| Dex Media West, LLC/Dex Media Finance Co. | ||||
| sr. notes Ser. B, 8 1/2s, 2010 | 245,000 | 251,125 | ||
| Dex Media, Inc. disc. notes stepped-coupon zero % | ||||
| (9s, 11/15/08), 2013 †† | 115,000 | 95,738 | ||
| Dex Media, Inc. notes 8s, 2013 | 85,000 | 84,575 | ||
| FelCor Lodging LP company guaranty 8 1/2s, 2008 (R) | 100,000 | 105,750 | ||
| Ford Motor Co. notes 7.45s, 2031 | 345,000 | 270,825 | ||
| Ford Motor Credit Corp. bonds 7 3/8s, 2011 | 90,000 | 86,573 | ||
| Ford Motor Credit Corp. notes 7 7/8s, 2010 | 545,000 | 535,636 | ||
| Ford Motor Credit Corp. notes 7 3/8s, 2009 | 190,000 | 186,354 | ||
| Ford Motor Credit Corp. sr. notes 9 7/8s, 2011 | 415,000 | 432,061 | ||
| Ford Motor Credit Corp. 144A sr. unsecd. notes 9 3/4s, 2010 | 179,000 | 185,284 | ||
| General Motors Acceptance Corp. notes 7 3/4s, 2010 (S) | 555,000 | 564,131 | ||
| General Motors Acceptance Corp. notes 6 7/8s, 2012 | 520,000 | 507,626 | ||
| General Motors Acceptance Corp. notes 6 3/4s, 2014 (S) | 375,000 | 359,508 | ||
| General Motors Acceptance Corp. notes 5 1/8s, 2008 | 135,000 | 131,257 | ||
| General Motors Acceptance Corp. sr. unsub. notes 5.85s, 2009 | 270,000 | 262,043 | ||
| General Motors Corp. notes 7.2s, 2011 | 100,000 | 89,625 | ||
| Goodman Global Holding Co., Inc. sr. notes FRN | ||||
| Ser. B, 8.329s, 2012 | 149,000 | 149,000 | ||
31
| CORPORATE BONDS AND NOTES (41.0%)* continued | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Consumer Cyclicals continued | ||||
| Goodyear Tire & Rubber Co. (The) notes 8 1/2s, 2007 | $ | 60,000 | $ | 60,450 |
| Goodyear Tire & Rubber Co. (The) sr. notes 9s, 2015 | 370,000 | 370,925 | ||
| Harry & David Holdings, Inc. company guaranty 9s, 2013 | 75,000 | 68,625 | ||
| Host Marriott LP sr. notes Ser. M, 7s, 2012 (R) | 215,000 | 216,613 | ||
| Houghton Mifflin Co. sr. sub. notes 9 7/8s, 2013 | 405,000 | 419,175 | ||
| iPayment, Inc. 144A sr. sub. notes 9 3/4s, 2014 | 75,000 | 75,938 | ||
| Jostens IH Corp. company guaranty 7 5/8s, 2012 | 500,000 | 490,000 | ||
| K. Hovnanian Enterprises, Inc. company guaranty 8 7/8s, 2012 | 50,000 | 48,250 | ||
| K. Hovnanian Enterprises, Inc. company guaranty 7 3/4s, 2013 | 100,000 | 92,000 | ||
| KB Home sr. sub. notes 9 1/2s, 2011 | 2,000 | 2,070 | ||
| Lamar Media Corp. company guaranty 7 1/4s, 2013 | 130,000 | 129,025 | ||
| Lamar Media Corp. 144A sr. sub. notes 6 5/8s, 2015 | 80,000 | 75,200 | ||
| Lear Corp. company guaranty Ser. B, 8.11s, 2009 | 95,000 | 91,675 | ||
| Lear Corp. sr. notes 8 1/8s, 2008 | EUR | 35,000 | 45,580 | |
| Levi Strauss & Co. sr. notes 9 3/4s, 2015 | $ | 253,000 | 261,855 | |
| Levi Strauss & Co. sr. notes 8 7/8s, 2016 | 145,000 | 141,738 | ||
| Meritage Homes Corp. company guaranty 6 1/4s, 2015 | 75,000 | 64,031 | ||
| Meritor Automotive, Inc. notes 6.8s, 2009 | 26,000 | 25,253 | ||
| MGM Mirage, Inc. company guaranty 8 1/2s, 2010 | 95,000 | 99,988 | ||
| MGM Mirage, Inc. company guaranty 6s, 2009 | 280,000 | 273,700 | ||
| MGM Mirage, Inc. sr. notes 6 3/4s, 2012 | 2,000 | 1,945 | ||
| Mirage Resorts, Inc. debs. 7 1/4s, 2017 | 25,000 | 24,063 | ||
| Movie Gallery, Inc. sr. unsecd. notes 11s, 2012 | 70,000 | 46,725 | ||
| Neiman-Marcus Group, Inc. company guaranty 9s, 2015 | 450,000 | 478,125 | ||
| NTK Holdings, Inc. sr. disc. notes zero %, 2014 | 240,000 | 160,800 | ||
| Oxford Industries, Inc. sr. notes 8 7/8s, 2011 | 100,000 | 101,000 | ||
| Park Place Entertainment Corp. sr. notes 7s, 2013 | 165,000 | 170,319 | ||
| Park Place Entertainment Corp. sr. sub. notes 7 7/8s, 2010 | 278,000 | 289,815 | ||
| Pinnacle Entertainment, Inc. sr. sub. notes 8 1/4s, 2012 | 340,000 | 341,700 | ||
| Ply Gem Industries, Inc. sr. sub. notes 9s, 2012 | 40,000 | 32,400 | ||
| PRIMEDIA, Inc. sr. notes 8s, 2013 | 330,000 | 294,525 | ||
| R.H. Donnelley Corp. sr. disc. notes Ser. A-1, 6 7/8s, 2013 | 70,000 | 62,825 | ||
| R.H. Donnelley Corp. sr. disc. notes Ser. A-2, 6 7/8s, 2013 | 145,000 | 130,138 | ||
| R.H. Donnelley Corp. sr. notes 6 7/8s, 2013 | 85,000 | 76,288 | ||
| R.H. Donnelley Corp. sr. notes Ser. A-3, 8 7/8s, 2016 | 195,000 | 192,075 | ||
| Reader’s Digest Association, Inc. (The) sr. notes 6 1/2s, 2011 | 440,000 | 421,300 | ||
| Resorts International Hotel and Casino, Inc. company | ||||
| guaranty 11 1/2s, 2009 | 158,000 | 165,308 | ||
| Samsonite Corp. sr. sub. notes 8 7/8s, 2011 | 335,000 | 344,213 | ||
| Scientific Games Corp. company guaranty 6 1/4s, 2012 | 175,000 | 165,813 | ||
| Sealy Mattress Co. sr. sub. notes 8 1/4s, 2014 (S) | 260,000 | 262,600 | ||
| Standard Pacific Corp. sr. notes 7s, 2015 | 115,000 | 100,913 | ||
| Starwood Hotels & Resorts Worldwide, Inc. company | ||||
| guaranty 7 7/8s, 2012 | 95,000 | 102,838 | ||
| Starwood Hotels & Resorts Worldwide, Inc. debs. 7 3/8s, 2015 | 120,000 | 127,800 | ||
| Station Casinos, Inc. sr. notes 6s, 2012 | 383,000 | 366,244 | ||
| Station Casinos, Inc. sr. sub. notes 6 7/8s, 2016 | 90,000 | 83,363 | ||
| Tenneco Automotive, Inc. company guaranty 8 5/8s, 2014 | 155,000 | 154,613 | ||
| Tenneco Automotive, Inc. sec. notes Ser. B, 10 1/4s, 2013 | 275,000 | 299,406 | ||
32
| CORPORATE BONDS AND NOTES (41.0%)* continued | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Consumer Cyclicals continued | ||||
| Texas Industries, Inc. sr. unsecd. notes 7 1/4s, 2013 | $ | 300,000 | $ | 300,000 |
| THL Buildco, Inc. (Nortek Holdings, Inc.) | ||||
| sr. sub. notes 8 1/2s, 2014 | 435,000 | 404,550 | ||
| Trump Entertainment Resorts, Inc. sec. notes 8 1/2s, 2015 | 345,000 | 333,788 | ||
| TRW Automotive, Inc. sr. notes 9 3/8s, 2013 | 245,000 | 261,538 | ||
| TRW Automotive, Inc. sr. sub. notes 11s, 2013 | 185,000 | 201,188 | ||
| United Auto Group, Inc. company guaranty 9 5/8s, 2012 | 275,000 | 289,438 | ||
| Vertis, Inc. company guaranty Ser. B, 10 7/8s, 2009 | 446,000 | 452,690 | ||
| Vertis, Inc. 144A sub. notes 13 1/2s, 2009 | 130,000 | 120,250 | ||
| Visteon Corp. sr. notes 7s, 2014 | 10,000 | 8,875 | ||
| Wynn Las Vegas, LLC/Wynn Las Vegas Capital Corp. | ||||
| 1st mtge. 6 5/8s, 2014 | 365,000 | 348,575 | ||
| 16,975,823 | ||||
|
| ||||
| Consumer Staples (7.2%) | ||||
| Adelphia Communications Corp. sr. notes 10 7/8s, | ||||
| 2010 (In default) † | 20,000 | 11,850 | ||
| Adelphia Communications Corp. sr. notes Ser. B, | ||||
| 9 7/8s, 2007 (In default) † | 235,000 | 139,825 | ||
| Affinion Group, Inc. 144A bonds 11 1/2s, 2015 | 135,000 | 136,350 | ||
| Affinion Group, Inc. 144A company guaranty 10 1/8s, 2013 | 525,000 | 544,688 | ||
| Affinity Group, Inc. sr. sub. notes 9s, 2012 | 360,000 | 360,000 | ||
| AMC Entertainment, Inc. company guaranty 11s, 2016 | 125,000 | 135,781 | ||
| AMC Entertainment, Inc. sr. sub. notes 8s, 2014 | 29,000 | 27,115 | ||
| Atlantic Broadband Finance, LLC company guaranty 9 3/8s, 2014 | 285,000 | 275,025 | ||
| Avis Budget Car Rental, LLC 144A sr. notes 7 3/4s, 2016 | 150,000 | 141,840 | ||
| Brand Services, Inc. company guaranty 12s, 2012 | 309,000 | 346,466 | ||
| Burlington Coat Factory Warehouse Corp. 144A | ||||
| sr. notes 11 1/8s, 2014 | 195,000 | 184,519 | ||
| Cablevision Systems Corp. sr. notes Ser. B, 8s, 2012 | 100,000 | 100,500 | ||
| CCH I, LLC/Capital Corp. sec. notes 11s, 2015 | 692,000 | 614,150 | ||
| CCH II, LLC/Capital Corp. sr. notes Ser. B, 10 1/4s, 2010 | 430,000 | 434,300 | ||
| CCH, LLC/Capital Corp. sr. notes 10 1/4s, 2010 | 280,000 | 283,500 | ||
| Chiquita Brands International, Inc. sr. notes 8 7/8s, 2015 | 30,000 | 27,975 | ||
| Chiquita Brands International, Inc. sr. notes 7 1/2s, 2014 | 380,000 | 334,400 | ||
| Church & Dwight Co., Inc. company guaranty 6s, 2012 | 130,000 | 122,200 | ||
| Cinemark USA, Inc. sr. sub. notes 9s, 2013 | 55,000 | 56,925 | ||
| Cinemark, Inc. sr. disc. notes stepped-coupon zero % | ||||
| (9 3/4s, 3/15/09), 2014 †† | 325,000 | 253,500 | ||
| Constellation Brands, Inc. company guaranty Ser. B, 8s, 2008 | 115,000 | 118,594 | ||
| Constellation Brands, Inc. sr. sub. notes Ser. B, 8 1/8s, 2012 | 10,000 | 10,363 | ||
| CSC Holdings, Inc. debs. 7 5/8s, 2018 | 50,000 | 50,438 | ||
| CSC Holdings, Inc. debs. Ser. B, 8 1/8s, 2009 | 3,000 | 3,098 | ||
| CSC Holdings, Inc. sr. notes Ser. B, 7 5/8s, 2011 | 255,000 | 260,738 | ||
| CSC Holdings, Inc. 144A sr. notes 7 1/4s, 2012 | 205,000 | 201,413 | ||
| Dean Foods Co. company guaranty 7s, 2016 | 240,000 | 237,600 | ||
| Dean Foods Co. sr. notes 6 5/8s, 2009 | 215,000 | 215,538 | ||
| Del Monte Corp. company guaranty 6 3/4s, 2015 | 105,000 | 99,750 | ||
| Del Monte Corp. sr. sub. notes 8 5/8s, 2012 | 270,000 | 282,488 | ||
33
| CORPORATE BONDS AND NOTES (41.0%)* continued | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Consumer Staples continued | ||||
| DirecTV Holdings, LLC company guaranty 6 3/8s, 2015 | $ | 690,000 | $ | 645,150 |
| DirecTV Holdings, LLC sr. notes 8 3/8s, 2013 | 185,000 | 194,250 | ||
| Domino’s, Inc. sr. sub. notes 8 1/4s, 2011 | 106,000 | 109,710 | ||
| Echostar DBS Corp. company guaranty 6 5/8s, 2014 | 210,000 | 201,863 | ||
| Echostar DBS Corp. sr. notes 6 3/8s, 2011 | 500,000 | 486,875 | ||
| Elizabeth Arden, Inc. company guaranty 7 3/4s, 2014 | 155,000 | 149,188 | ||
| Gray Television, Inc. company guaranty 9 1/4s, 2011 | 87,000 | 90,480 | ||
| Hertz Corp. 144A sr. notes 8 7/8s, 2014 | 185,000 | 191,938 | ||
| ION Media Networks, Inc. 144A sec. FRN 11.757s, 2013 | 95,000 | 95,713 | ||
| ION Media Networks, Inc. 144A sec. FRN 8.757s, 2012 | 120,000 | 120,900 | ||
| Jean Coutu Group, Inc. sr. notes 7 5/8s, 2012 (Canada) | 150,000 | 157,500 | ||
| LIN Television Corp. company guaranty Ser. B, 6 1/2s, 2013 | 185,000 | 170,663 | ||
| Marquee Holdings, Inc. sr. disc. | ||||
| notes stepped-coupon zero % (12s, 8/15/09), 2014 †† | 185,000 | 141,063 | ||
| NTL Cable PLC sr. notes 9 1/8s, 2016 (United Kingdom) | 100,000 | 103,250 | ||
| Nutro Products, Inc. 144A sr. notes FRN 9.23s, 2013 | 325,000 | 334,750 | ||
| Pinnacle Foods Holding Corp. sr. sub. notes 8 1/4s, 2013 | 375,000 | 368,438 | ||
| Playtex Products, Inc. sec. notes 8s, 2011 | 480,000 | 499,200 | ||
| Prestige Brands, Inc. sr. sub. notes 9 1/4s, 2012 | 342,000 | 340,290 | ||
| Rainbow National Services, LLC 144A sr. notes 8 3/4s, 2012 | 205,000 | 216,275 | ||
| Rainbow National Services, LLC 144A sr. sub. debs. 10 3/8s, 2014 | 200,000 | 222,750 | ||
| Remington Arms Co., Inc. company guaranty 10 1/2s, 2011 | 160,000 | 139,200 | ||
| Rite Aid Corp. company guaranty 7 1/2s, 2015 | 105,000 | 100,275 | ||
| Rite Aid Corp. sec. notes 8 1/8s, 2010 | 115,000 | 115,431 | ||
| Sbarro, Inc. company guaranty 11s, 2009 | 210,000 | 212,625 | ||
| Scotts Co. (The) sr. sub. notes 6 5/8s, 2013 | 55,000 | 53,075 | ||
| Sirius Satellite Radio, Inc. sr. unsecd. notes 9 5/8s, 2013 | 180,000 | 171,000 | ||
| Six Flags, Inc. sr. notes 8 7/8s, 2010 | 138,000 | 132,135 | ||
| Spectrum Brands, Inc. company guaranty 7 3/8s, 2015 | 545,000 | 422,375 | ||
| Spectrum Brands, Inc. sr. sub. notes 8 1/2s, 2013 | 100,000 | 83,125 | ||
| Swift & Co. company guaranty 10 1/8s, 2009 | 215,000 | 217,150 | ||
| United Rentals NA, Inc. company guaranty 6 1/2s, 2012 | 105,000 | 99,488 | ||
| United Rentals NA, Inc. sr. sub. notes 7 3/4s, 2013 | 24,000 | 22,980 | ||
| United Rentals NA, Inc. sr. sub. notes 7s, 2014 | 230,000 | 211,025 | ||
| Universal City Florida Holding Co. sr. notes 8 3/8s, 2010 | 290,000 | 291,813 | ||
| Universal City Florida Holding Co. sr. notes FRN 10.239s, 2010 | 107,000 | 109,408 | ||
| Young Broadcasting, Inc. company guaranty 10s, 2011 | 374,000 | 345,950 | ||
| Young Broadcasting, Inc. sr. sub. notes 8 3/4s, 2014 | 85,000 | 72,250 | ||
| 13,650,480 | ||||
|
| ||||
| Energy (3.9%) | ||||
| Arch Western Finance, LLC sr. notes 6 3/4s, 2013 | 340,000 | 328,100 | ||
| Bluewater Finance, Ltd. company guaranty 10 1/4s, | ||||
| 2012 (Cayman Islands) | 92,000 | 92,345 | ||
| CHC Helicopter Corp. sr. sub. notes 7 3/8s, 2014 (Canada) | 240,000 | 225,600 | ||
| Chesapeake Energy Corp. company guaranty 7 3/4s, 2015 | 60,000 | 61,200 | ||
| Chesapeake Energy Corp. sr. notes 7 1/2s, 2013 | 190,000 | 191,900 | ||
| Chesapeake Energy Corp. sr. notes 7s, 2014 | 250,000 | 247,500 | ||
34
| CORPORATE BONDS AND NOTES (41.0%)* continued | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Energy continued | ||||
| Compton Petroleum Corp. company guaranty 7 5/8s, | ||||
| 2013 (Canada) | $ | 355,000 | $ | 345,238 |
| Comstock Resources, Inc. sr. notes 6 7/8s, 2012 | 120,000 | 115,050 | ||
| Delta Petroleum Corp. company guaranty 7s, 2015 | 485,000 | 458,325 | ||
| Denbury Resources, Inc. sr. sub. notes 7 1/2s, 2015 | 100,000 | 101,000 | ||
| Dresser-Rand Group, Inc. company guaranty 7 3/8s, 2014 | 27,000 | 25,988 | ||
| Encore Acquisition Co. sr. sub. notes 6 1/4s, 2014 | 60,000 | 56,400 | ||
| Encore Acquisition Co. sr. sub. notes 6s, 2015 | 213,000 | 197,558 | ||
| EXCO Resources, Inc. company guaranty 7 1/4s, 2011 | 235,000 | 228,538 | ||
| Forest Oil Corp. sr. notes 8s, 2011 | 135,000 | 139,388 | ||
| Forest Oil Corp. sr. notes 8s, 2008 | 94,000 | 96,115 | ||
| Hanover Compressor Co. sr. notes 9s, 2014 | 90,000 | 95,400 | ||
| Hanover Equipment Trust sec. notes Ser. B, 8 3/4s, 2011 | 40,000 | 41,600 | ||
| Harvest Operations Corp. sr. notes 7 7/8s, 2011 (Canada) | 365,000 | 351,313 | ||
| Hilcorp Energy I LP/Hilcorp Finance Co. 144A | ||||
| sr. notes 9s, 2016 | 320,000 | 332,000 | ||
| Inergy LP/Inergy Finance Corp. sr. notes 6 7/8s, 2014 | 485,000 | 459,538 | ||
| Massey Energy Co. sr. notes 6 5/8s, 2010 | 335,000 | 329,975 | ||
| Newfield Exploration Co. sr. notes 7 5/8s, 2011 | 150,000 | 154,125 | ||
| Newfield Exploration Co. sr. sub. notes 6 5/8s, 2014 | 210,000 | 205,275 | ||
| Pacific Energy Partners/Pacific Energy Finance Corp. | ||||
| sr. notes 7 1/8s, 2014 | 95,000 | 95,950 | ||
| Peabody Energy Corp. sr. notes 5 7/8s, 2016 | 180,000 | 164,025 | ||
| PetroHawk Energy Corp. 144A sr. notes 9 1/8s, 2013 | 445,000 | 452,788 | ||
| Plains Exploration & Production Co. sr. notes 7 1/8s, 2014 | 205,000 | 210,125 | ||
| Plains Exploration & Production Co. sr. sub. notes 8 3/4s, 2012 | 190,000 | 199,500 | ||
| Pogo Producing Co. sr. sub. notes 6 7/8s, 2017 | 185,000 | 176,213 | ||
| Pogo Producing Co. 144A sr. sub. notes 7 7/8s, 2013 | 95,000 | 96,900 | ||
| Pride International, Inc. sr. notes 7 3/8s, 2014 | 210,000 | 213,675 | ||
| Targa Resources, Inc. 144A company guaranty 8 1/2s, 2013 | 345,000 | 344,138 | ||
| Whiting Petroleum Corp. company guaranty 7s, 2014 | 575,000 | 566,375 | ||
| 7,399,160 | ||||
|
| ||||
| Financial (0.2%) | ||||
| BCM Ireland Finance Ltd. 144A FRB 8.215s, 2016 | ||||
| (Cayman Islands) | EUR | 95,000 | 125,566 | |
| Crescent Real Estate Equities LP notes 7 1/2s, 2007 (R) | $ | 60,000 | 60,300 | |
| E*Trade Finance Corp. sr. notes 8s, 2011 | 230,000 | 238,625 | ||
| Finova Group, Inc. notes 7 1/2s, 2009 | 214,200 | 62,118 | ||
| 486,609 | ||||
|
| ||||
| Health Care (3.0%) | ||||
| AMR Holding Co., Inc./EmCare Holding Co., Inc. | ||||
| sr. sub. notes 10s, 2015 | 320,000 | 340,800 | ||
| Athena Neurosciences Finance, LLC company | ||||
| guaranty 7 1/4s, 2008 | 355,000 | 352,338 | ||
| Community Health Systems, Inc. sr. sub. notes 6 1/2s, 2012 | 408,000 | 381,480 | ||
35
| CORPORATE BONDS AND NOTES (41.0%)* continued | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Health Care continued | ||||
| DaVita, Inc. company guaranty 6 5/8s, 2013 | $ | 290,000 | $ | 282,750 |
| HCA, Inc. debs. 7.19s, 2015 | 82,000 | 66,302 | ||
| HCA, Inc. notes 6 3/8s, 2015 | 65,000 | 51,675 | ||
| HCA, Inc. sr. notes 6.95s, 2012 | 70,000 | 61,250 | ||
| IASIS Healthcare/IASIS Capital Corp. | ||||
| sr. sub. notes 8 3/4s, 2014 | 80,000 | 76,200 | ||
| MedQuest, Inc. company guaranty Ser. B, 11 7/8s, 2012 | 321,000 | 296,925 | ||
| Nycomed A/S 144A sr. notes 11 3/4s, 2013 (Denmark) ‡‡ | EUR | 250,000 | 332,774 | |
| Omnicare, Inc. sr. sub. notes 6 7/8s, 2015 | $ | 95,000 | 90,844 | |
| Omnicare, Inc. sr. sub. notes 6 1/8s, 2013 | 155,000 | 144,538 | ||
| Psychiatric Solutions, Inc. company guaranty 7 3/4s, 2015 | 360,000 | 347,400 | ||
| Select Medical Corp. company guaranty 7 5/8s, 2015 | 385,000 | 333,025 | ||
| Service Corp. International notes 6 1/2s, 2008 | 35,000 | 35,000 | ||
| Service Corp. International notes Ser. *, 7.7s, 2009 | 41,000 | 41,923 | ||
| Service Corp. International sr. notes 6 3/4s, 2016 | 180,000 | 171,000 | ||
| Service Corp. International 144A sr. notes 8s, 2017 | 65,000 | 62,238 | ||
| Stewart Enterprises, Inc. sr. notes 6 1/4s, 2013 | 340,000 | 300,900 | ||
| Tenet Healthcare Corp. notes 7 3/8s, 2013 (S) | 265,000 | 235,850 | ||
| Tenet Healthcare Corp. sr. notes 9 7/8s, 2014 | 245,000 | 238,875 | ||
| Triad Hospitals, Inc. sr. notes 7s, 2012 | 165,000 | 162,113 | ||
| Triad Hospitals, Inc. sr. sub. notes 7s, 2013 | 300,000 | 286,500 | ||
| Universal Hospital Services, Inc. sr. notes 10 1/8s, | ||||
| 2011 (Canada) | 100,000 | 103,500 | ||
| US Oncology, Inc. company guaranty 9s, 2012 | 160,000 | 165,600 | ||
| Vanguard Health Holding Co. II, LLC sr. sub. notes 9s, 2014 | 395,000 | 383,150 | ||
| Ventas Realty LP/Capital Corp. company guaranty 9s, 2012 (R) | 65,000 | 72,394 | ||
| Ventas Realty LP/Capital Corp. company | ||||
| guaranty 6 3/4s, 2010 (R) | 75,000 | 76,406 | ||
| Ventas Realty LP/Capital Corp. sr. notes 6 5/8s, 2014 (R) | 50,000 | 50,500 | ||
| Ventas Realty LP/Capital Corp. sr. notes 6 1/2s, 2016 (R) | 80,000 | 78,800 | ||
| 5,623,050 | ||||
|
| ||||
| Technology (2.0%) | ||||
| Advanced Micro Devices, Inc. sr. notes 7 3/4s, 2012 | 328,000 | 329,230 | ||
| Amkor Technologies, Inc. sr. notes 7 3/4s, 2013 | 184,000 | 172,960 | ||
| Amkor Technologies, Inc. sr. unsecd. notes 9 1/4s, 2016 | 95,000 | 90,488 | ||
| Avago Technologies Finance 144A sr. notes 10 1/8s, | ||||
| 2013 (Singapore) | 120,000 | 125,400 | ||
| Celestica, Inc. sr. sub. notes 7 7/8s, 2011 (Canada) | 85,000 | 84,788 | ||
| Iron Mountain, Inc. company guaranty 8 3/4s, 2018 | 70,000 | 71,575 | ||
| Iron Mountain, Inc. company guaranty 8 5/8s, 2013 | 355,000 | 362,100 | ||
| Iron Mountain, Inc. company guaranty 6 5/8s, 2016 | 45,000 | 41,850 | ||
| Lucent Technologies, Inc. debs. 6.45s, 2029 | 225,000 | 191,813 | ||
| Lucent Technologies, Inc. notes 5 1/2s, 2008 | 50,000 | 49,063 | ||
| New ASAT Finance, Ltd. company guaranty 9 1/4s, 2011 | ||||
| (Cayman Islands) | 90,000 | 71,550 | ||
| Nortel Networks, Ltd. 144A company guaranty 10 3/4s, | ||||
| 2016 (Canada) | 165,000 | 170,775 | ||
| Nortel Networks, Ltd. 144A company guaranty FRN | ||||
| 9.73s, 2011 (Canada) | 180,000 | 181,800 | ||
36
| CORPORATE BONDS AND NOTES (41.0%)* continued | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Technology continued | ||||
| Sensata Technologies BV 144A sr. notes 8s, 2014 (Netherlands) | $ | 95,000 | $ | 93,100 |
| Solectron Global Finance Corp. company guaranty 8s, | ||||
| 2016 (Cayman Islands) | 175,000 | 169,750 | ||
| SunGard Data Systems, Inc. company guaranty 10 1/4s, 2015 | 292,000 | 298,205 | ||
| SunGard Data Systems, Inc. company guaranty 9 1/8s, 2013 | 426,000 | 439,845 | ||
| UGS Capital Corp. II 144A sr. notes 10.38s, 2011 | 80,000 | 80,600 | ||
| UGS Corp. company guaranty 10s, 2012 | 240,000 | 258,000 | ||
| Xerox Capital Trust I company guaranty 8s, 2027 | 175,000 | 179,594 | ||
| Xerox Corp. company guaranty 9 3/4s, 2009 | 3,000 | 3,240 | ||
| Xerox Corp. sr. notes 7 5/8s, 2013 | 41,000 | 42,384 | ||
| Xerox Corp. sr. notes 6 7/8s, 2011 | 185,000 | 189,394 | ||
| Xerox Corp. unsec. sr. notes 6 3/4s, 2017 | 120,000 | 120,300 | ||
| 3,817,804 | ||||
|
| ||||
| Transportation (0.2%) | ||||
| CalAir, LLC/CalAir Capital Corp. company | ||||
| guaranty 8 1/8s, 2008 | 230,000 | 222,525 | ||
| Kansas City Southern Railway Co. company | ||||
| guaranty 9 1/2s, 2008 | 300,000 | 312,750 | ||
| 535,275 | ||||
|
| ||||
| Utilities & Power (3.0%) | ||||
| AES Corp. (The) sr. notes 8 7/8s, 2011 | 22,000 | 23,430 | ||
| AES Corp. (The) 144A sec. notes 9s, 2015 | 175,000 | 189,000 | ||
| AES Corp. (The) 144A sec. notes 8 3/4s, 2013 | 240,000 | 256,800 | ||
| ANR Pipeline Co. debs. 9 5/8s, 2021 | 180,000 | 217,429 | ||
| CMS Energy Corp. sr. notes 8.9s, 2008 | 60,000 | 62,700 | ||
| CMS Energy Corp. sr. notes 8 1/2s, 2011 | 70,000 | 75,075 | ||
| CMS Energy Corp. sr. notes 7 3/4s, 2010 | 40,000 | 41,700 | ||
| Colorado Interstate Gas Co. debs. 6.85s, 2037 | 95,000 | 95,547 | ||
| Colorado Interstate Gas Co. sr. notes 5.95s, 2015 | 30,000 | 28,220 | ||
| Dynegy-Roseton Danskamme company guaranty | ||||
| Ser. A, 7.27s, 2010 | 90,000 | 89,325 | ||
| Dynegy-Roseton Danskamme company guaranty | ||||
| Ser. B, 7.67s, 2016 | 125,000 | 123,594 | ||
| Edison Mission Energy 144A sr. notes 7 3/4s, 2016 | 75,000 | 75,000 | ||
| Edison Mission Energy 144A sr. notes 7 1/2s, 2013 | 90,000 | 90,000 | ||
| El Paso Corp. sr. notes 8.05s, 2030 (S) | 115,000 | 117,875 | ||
| El Paso Corp. sr. notes 7 3/8s, 2012 | 90,000 | 90,788 | ||
| El Paso Corp. sr. notes Ser. MTN, 7.8s, 2031 | 85,000 | 85,213 | ||
| El Paso Natural Gas Co. debs. 8 5/8s, 2022 | 40,000 | 45,127 | ||
| El Paso Production Holding Co. company | ||||
| guaranty 7 3/4s, 2013 | 360,000 | 365,400 | ||
| Ferrellgas LP/Finance sr. notes 8 3/4s, 2012 | 280,000 | 289,800 | ||
| Ferrellgas LP/Finance sr. notes 6 3/4s, 2014 | 155,000 | 149,188 | ||
| Midwest Generation, LLC sec. sr. notes 8 3/4s, 2034 | 280,000 | 298,200 | ||
| Mirant North America, LLC company guaranty 7 3/8s, 2013 | 230,000 | 227,700 | ||
| Mission Energy Holding Co. sec. notes 13 1/2s, 2008 | 155,000 | 173,406 | ||
| Monongahela Power Co. 1st mtge. 6.7s, 2014 | 90,000 | 95,384 | ||
37
| CORPORATE BONDS AND NOTES (41.0%)* continued | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Utilities & Power continued | ||||
| Nevada Power Co. 2nd mtge. 9s, 2013 | $ | 62,000 | $ | 67,585 |
| Northwestern Corp. sec. notes 5 7/8s, 2014 | 465,000 | 461,813 | ||
| NRG Energy, Inc. sr. notes 7 3/8s, 2016 | 720,000 | 709,200 | ||
| Orion Power Holdings, Inc. sr. notes 12s, 2010 | 125,000 | 141,875 | ||
| SEMCO Energy, Inc. sr. notes 7 3/4s, 2013 | 110,000 | 109,805 | ||
| SEMCO Energy, Inc. 144A sr. notes 7 3/4s, 2013 | 145,000 | 144,275 | ||
| Sierra Pacific Power Co. general ref. mtge. 6 1/4s, 2012 | 35,000 | 35,454 | ||
| Sierra Pacific Resources sr. notes 8 5/8s, 2014 | 165,000 | 177,360 | ||
| Teco Energy, Inc. notes 7.2s, 2011 | 35,000 | 36,138 | ||
| Teco Energy, Inc. notes 7s, 2012 | 60,000 | 61,725 | ||
| Teco Energy, Inc. sr. notes 6 3/4s, 2015 | 10,000 | 9,963 | ||
| Tennessee Gas Pipeline Co. debs. 7s, 2028 | 15,000 | 14,624 | ||
| Tennessee Gas Pipeline Co. unsecd. notes 7 1/2s, 2017 | 40,000 | 41,380 | ||
| Transcontinental Gas Pipeline Corp. debs. 7 1/4s, 2026 | 150,000 | 151,500 | ||
| Utilicorp Canada Finance Corp. company | ||||
| guaranty 7 3/4s, 2011 (Canada) | 140,000 | 146,650 | ||
| Utilicorp United, Inc. sr. notes 9.95s, 2011 | 5,000 | 5,529 | ||
| Williams Cos., Inc. (The) notes 8 3/4s, 2032 | 30,000 | 32,325 | ||
| Williams Cos., Inc. (The) notes 8 1/8s, 2012 | 35,000 | 36,925 | ||
| Williams Cos., Inc. (The) notes 7 5/8s, 2019 | 50,000 | 50,750 | ||
| Williams Cos., Inc. (The) 144A notes 6 3/8s, 2010 | 65,000 | 63,944 | ||
| 5,804,721 | ||||
|
| ||||
| Total corporate bonds and notes (cost $78,993,144) | $ | 78,230,365 | ||
| CONVERTIBLE PREFERRED STOCKS (35.7%)* | ||||
|
| ||||
| Shares | Value | |||
| Banking (3.0%) | ||||
| Marshall & Ilsley Corp. $1.625 cv. pfd. | 58,500 | $ | 1,574,820 | |
| Sovereign Capital Trust IV $2.188 cv. pfd. | 46,000 | 2,098,750 | ||
| Washington Mutual Capital Trust I $2.688 cum. cv. pfd. | 38,400 | 2,067,072 | ||
| 5,740,642 | ||||
|
| ||||
| Basic Materials (3.1%) | ||||
| Freeport-McMoRan Copper & Gold, Inc. 5.50% cv. pfd. | 1,900 | 2,488,525 | ||
| Huntsman Corp. $2.50 cv. pfd. | 25,500 | 1,013,625 | ||
| Smurfit-Stone Container Corp. Ser. A, $1.75 cum. cv. pfd. | 101,920 | 2,382,380 | ||
| 5,884,530 | ||||
|
| ||||
| Capital Goods (4.0%) | ||||
| Allied Waste Industries Ser. D, 6.25% cv. pfd. | 4,060 | 1,192,118 | ||
| Northrop Grumman Corp. Ser. B, $7.00 cum. cv. pfd. | 31,900 | 4,178,900 | ||
| Owens-Illinois, Inc. $2.375 cv. pfd. | 63,770 | 2,200,065 | ||
| 7,571,083 | ||||
|
| ||||
| Communication Services (2.0%) | ||||
| Cincinnati Bell, Inc. Ser. B, $3.378 cum. cv. pfd. (S) | 35,300 | 1,496,720 | ||
| Crown Castle International Corp. $3.125 cum. cv. pfd. | 42,235 | 2,344,043 | ||
|
3,840,763 | ||||
38
| CONVERTIBLE PREFERRED STOCKS (35.7%)* continued | |||
|
| |||
| Shares | Value | ||
|
| |||
| Consumer Cyclicals (3.9%) | |||
| Emmis Communications Corp. Ser. A, $3.125 cum. cv. pfd. | 24,100 | $ | 973,038 |
| Ford Motor Company Capital Trust II $3.25 cum. cv. pfd. | 66,700 | 2,267,800 | |
| General Motors Corp. Ser. A, $1.125 cv. pfd. (S) | 141,300 | 3,461,850 | |
| Retail Ventures, Inc. $3.312 cv. pfd. (S) | 12,720 | 650,310 | |
| 7,352,998 | |||
|
| |||
| Consumer Staples (2.4%) | |||
| Newell Financial Trust I 144A $2.625 cum. cv. pfd. | 35,400 | 1,619,550 | |
| Rite Aid Corp. $1.375 cum. cv. pfd. | 20,800 | 504,400 | |
| Six Flags, Inc. $1.813 cum. cv. pfd. | 63,200 | 1,358,800 | |
| Universal Corp. 6.75% cv. pfd. | 1,070 | 1,068,796 | |
| 4,551,546 | |||
|
| |||
| Energy (2.1%) | |||
| Chesapeake Energy Corp. 6.25% cv. pfd. | 8,620 | 2,324,168 | |
| Hanover Compressor Capital Trust $3.625 cum. cv. pfd. | 32,000 | 1,796,000 | |
| 4,120,168 | |||
|
| |||
| Financial (1.0%) | |||
| Fannie Mae Ser. 04-1, 5.375% cv. pfd. | 20 | 1,878,653 | |
|
| |||
| Health Care (1.6%) | |||
| Schering-Plough Corp. $3.00 cv. pfd. | 55,300 | 2,986,200 | |
|
| |||
| Insurance (2.7%) | |||
| Alleghany Corp. 5.75% cv. pfd. | 3,800 | 1,066,850 | |
| Aspen Insurance Holdings, Ltd. $2.813 cv. pfd. (Bermuda) | 20,000 | 1,025,000 | |
| Conseco, Inc. $1.375 cum. cv. pfd. | 58,300 | 1,472,075 | |
| IPC Holdings, Ltd. 7.25% cv. pfd. (Bermuda) | 18,500 | 497,188 | |
| Platinum Underwriters Holdings, Ltd. Ser. A, | |||
| 6.00% cv. pfd. (Bermuda) | 34,500 | 1,013,438 | |
| 5,074,551 | |||
|
| |||
| Investment Banking/Brokerage (1.8%) | |||
| Affiliated Managers Group, Inc. 144A $2.55 cv. pfd. | 21,500 | 1,072,313 | |
| Lehman Brothers Holdings, Inc. $1.563 cv. pfd. (S) | 40,190 | 1,075,083 | |
| Merrill Lynch & Co., Inc. Ser. JNC, 6.75% cv. pfd. | 30,260 | 1,272,736 | |
| 3,420,132 | |||
|
| |||
| Real Estate (1.8%) | |||
| FelCor Lodging Trust, Inc. Ser. A, $0.488 cum. cv. pfd. (R) | 99,200 | 2,430,400 | |
| Simon Property Group, Inc. $3.00 cv. pfd. | 15,100 | 1,058,888 | |
| 3,489,288 | |||
|
| |||
| Technology (1.1%) | |||
| Lucent Technologies Capital Trust I 7.75% cum. cv. pfd. | 2,100 | 2,115,750 | |
|
| |||
| Utilities & Power (5.2%) | |||
| El Paso Corp. 144A 4.99% cv. pfd. | 1,300 | 1,634,913 | |
| El Paso Energy Capital Trust I $2.375 cv. pfd. | 38,950 | 1,514,181 | |
39
| CONVERTIBLE PREFERRED STOCKS (35.7%)* continued | ||||
|
| ||||
| Shares | Value | |||
|
| ||||
| Utilities & Power continued | ||||
| Entergy Corp. $3.813 cv. pfd. | 40,900 | $ | 2,142,138 | |
| Great Plains Energy, Inc. $2.00 cum. cv. pfd. (S) | 80,000 | 1,960,000 | ||
| NRG Energy, Inc. 5.75% cv. pfd. | 4,100 | 1,049,600 | ||
| Southern Union Co. $2.50 cv. pfd. | 30,700 | 1,642,450 | ||
| 9,943,282 | ||||
|
| ||||
| Total convertible preferred stocks (cost $64,237,675) | $ | 67,969,586 | ||
| CONVERTIBLE BONDS AND NOTES (17.8%)* | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Capital Goods (1.3%) | ||||
| DRS Technologies, Inc. 144A cv. unsec. notes 2s, 2026 | $ | 365,000 | $ | 346,750 |
| GenCorp, Inc. cv. sub. notes 5 3/4s, 2007 | 2,030,000 | 2,088,363 | ||
| 2,435,113 | ||||
|
| ||||
| Communication Services (0.5%) | ||||
| Charter Communications, Inc. 144A cv. sr. notes 5 7/8s, 2009 | 1,300,000 | 1,139,125 | ||
|
| ||||
| Consumer Cyclicals (2.6%) | ||||
| ArvinMeritor, Inc. 144A cv. unsec. sr. notes stepped-coupon | ||||
| 4 5/8s (zero %, 3/1/16) 2026 †† | 1,040,000 | 1,036,100 | ||
| Fleetwood Enterprises, Inc. cv. sr. sub. notes 5s, 2023 | 1,700,000 | 1,636,250 | ||
| Pier 1 Imports, Inc. 144A cv. sr. unsub. notes | ||||
| stepped-coupon 6 3/8s (6 1/8s, 2/15/11) 2036 †† | 1,541,000 | 1,431,204 | ||
| WCI Communities, Inc. cv. sr. sub. notes 4s, 2023 | 900,000 | 865,125 | ||
| 4,968,679 | ||||
|
| ||||
| Consumer Staples (3.0%) | ||||
| Nash Finch Co. cv. sr. sub. notes stepped-coupon | ||||
| 1.631s (zero %, 3/15/13) 2035 †† | 6,170,000 | 2,390,875 | ||
| Rite Aid Corp. cv. notes 4 3/4s, 2006 | 1,060,000 | 1,054,700 | ||
| Sinclair Broadcast Group, Inc. cv. bonds 6s, 2012 | 2,055,000 | 1,813,538 | ||
| Sinclair Broadcast Group, Inc. cv. sr. sub. notes stepped-coupon | ||||
| 4 7/8s (2s, 1/15/11) 2018 †† | 420,000 | 376,425 | ||
| 5,635,538 | ||||
|
| ||||
| Energy (0.5%) | ||||
| McMoran Exploration Co. cv. sr. notes 6s, 2008 | 690,000 | 967,725 | ||
|
| ||||
| Financial (0.5%) | ||||
| Rewards Network, Inc. cv. sub. debs. 3 1/4s, 2023 | 1,300,000 | 1,064,375 | ||
|
| ||||
| Health Care (1.5%) | ||||
| Connetics Corp. cv. sr. notes 2s, 2015 | 1,300,000 | 1,080,625 | ||
| CV Therapeutics, Inc. cv. sub. notes 3 1/4s, 2013 | 1,300,000 | 1,067,625 | ||
| EPIX Medical, Inc. cv. sr. notes 3s, 2024 | 900,000 | 646,875 | ||
| 2,795,125 | ||||
40
| CONVERTIBLE BONDS AND NOTES (17.8%)* continued | ||||
|
| ||||
| Principal amount | Value | |||
|
| ||||
| Technology (5.7%) | ||||
| Agere Systems, Inc. cv. sub. notes 6 1/2s, 2009 | $ | 980,000 | $ | 980,000 |
| Cray, Inc. cv. sr. sub. notes 3s, 2024 | 1,400,000 | 1,256,500 | ||
| Fairchild Semiconductor International, Inc. cv. | ||||
| company guaranty 5s, 2008 | 980,000 | 968,975 | ||
| Kulicke & Soffa Industries, Inc. cv. sub. notes 1/2s, 2008 | 2,050,000 | 1,763,000 | ||
| Lucent Technologies, Inc. cv. debs. Ser. B, 2 3/4s, 2025 | 450,000 | 439,875 | ||
| Mentor Graphics Corp. cv. sub. notes FRN 7.13s, 2023 | 1,700,000 | 1,704,250 | ||
| ON Semiconductor Corp. cv. company guaranty Ser. B, | ||||
| zero %, 2024 | 1,500,000 | 1,303,125 | ||
| Safeguard Scientifics, Inc. cv. sr. notes 2 5/8s, 2024 | 200,000 | 157,000 | ||
| Safeguard Scientifics, Inc. 144A cv. sr. notes 2 5/8s, 2024 | 2,800,000 | 2,198,000 | ||
| 10,770,725 | ||||
|
| ||||
| Transportation (1.6%) | ||||
| JetBlue Airways Corp. cv. bonds 3 1/2s, 2033 | 1,750,000 | 1,581,563 | ||
| Pinnacle Airlines Corp. cv. sr. notes 3 1/4s, 2025 | 1,500,000 | 1,393,125 | ||
| 2,974,688 | ||||
|
| ||||
| Utilities & Power (0.6%) | ||||
| XCEL Energy, Inc. 144A cv. notes 7 1/2s, 2007 | 720,000 | 1,220,400 | ||
|
| ||||
| Total convertible bonds and notes (cost $32,181,257) | $ | 33,971,493 | ||
| UNITS (1.8%)* | ||||
|
| ||||
| Units | Value | |||
|
| ||||
| Elf Special Financing, Ltd. 144A cv. units, FRN, | ||||
| Ser. B, 5.62s, 2009 (Cayman Islands) | 10 | $ | 1,025,000 | |
| Hercules, Inc. cv. sub. debs. units, 6.50%, 2029 | 2,020 | 1,626,100 | ||
| XCL, Ltd. Equity Units (F) | 406 | 801,152 | ||
|
| ||||
| Total units (cost $3,205,349) | $ | 3,452,252 | ||
| COMMON STOCKS (0.5%)* | ||||
|
| ||||
| Shares | Value | |||
|
| ||||
| Blount International, Inc. † | 9,940 | $ | 89,957 | |
| Boyd Gaming Corp. | 3,424 | 123,812 | ||
| Coinmach Service Corp. IDS (Income Deposit Securities) | 10,067 | 173,656 | ||
| Compass Minerals International, Inc. | 147 | 3,929 | ||
| Contifinancial Corp. Liquidating Trust Units (F) | 574,207 | 57 | ||
| Knology, Inc. † | 32 | 326 | ||
| Playtex Products, Inc. † (S) | 12,585 | 165,493 | ||
| Pride International, Inc. † | 4,900 | 127,057 | ||
| Samsonite Corp. † | 155,734 | 137,046 | ||
| Sterling Chemicals, Inc. † | 50 | 625 | ||
| Sun Healthcare Group, Inc. † | 202 | 2,135 | ||
| USA Mobility, Inc. | 56 | 1,280 | ||
| VS Holdings, Inc. (F) | 28,292 | 1 | ||
41
| COMMON STOCKS (0.5%)* continued | ||||||
|
| ||||||
| Shares | Value | |||||
| WHX Corp. † | 3,964 | $ | 31,712 | |||
| Williams Cos., Inc. (The) | 5,875 | 144,701 | ||||
|
| ||||||
| Total common stocks (cost $2,165,231) | $ | 1,001,787 | ||||
| FOREIGN GOVERNMENT BONDS AND NOTES (0.1%)* (cost $155,657) | ||||||
|
| ||||||
| Principal amount | Value | |||||
| Argentina (Republic of ) FRB 5.59s, 2012 | $ | 168,750 | $ | 156,621 | ||
| PREFERRED STOCKS (—%)* | ||||||
|
| ||||||
| Shares | Value | |||||
| Ion Media Networks, Inc. 14.25% cum. pfd. ‡‡ | 5 | $ | 43,000 | |||
| Rural Cellular Corp. Ser. B, 11.375% cum. pfd. | 43 | 51,923 | ||||
|
| ||||||
| Total preferred stocks (cost $75,612) | $ | 94,923 | ||||
| WARRANTS (—%)* † | ||||||
|
| ||||||
| Expiration | Strike | |||||
| date | price | Warrants | Value | |||
|
| ||||||
| Dayton Superior Corp. 144A | 6/15/09 | $ 0.01 | 270 | $ | 3 | |
| MDP Acquisitions PLC 144A (Ireland) | 10/1/13 | EUR 0.001 | 119 | 3,332 | ||
| Ubiquitel, Inc. 144A | 4/15/10 | $22.74 | 420 | 4 | ||
|
| ||||||
| Total warrants (cost $28,984) | $ | 3,339 | ||||
| SHORT-TERM INVESTMENTS (5.2%)* | ||||||
|
| ||||||
| Principal amount/shares | Value | |||||
|
| ||||||
| Putnam Prime Money Market Fund (e) | 2,300,629 | $ | 2,300,629 | |||
| Short-term investments held as collateral for loaned | ||||||
| securities with yields ranging from 5.22% to 5.44% | ||||||
| and due dates ranging from September 1, 2006 | ||||||
| to October 6, 2006 (d) | $ | 7,706,382 | 7,693,220 | |||
|
| ||||||
| Total short-term investments (cost $9,993,849) | $ | 9,993,849 | ||||
| TOTAL INVESTMENTS | ||||||
|
| ||||||
| Total investments (cost $191,036,758) | $ | 194,874,215 | ||||
* Percentages indicated are based on net assets of $190,581,788.
† Non-income-producing security.
(S) Securities on loan, in part or in entirety, at August 31, 2006.
†† The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the fund will begin accruing interest at this rate.
‡ Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at August 31, 2006 was $166,600 or 0.1% of net assets.
42
‡‡ Income may be received in cash or additional securities at the discretion of the issuer.
(R) Real Estate Investment Trust.
(d) See Note 1 to the financial statements.
(e) See Note 5 to the financial statements regarding investments in Putnam Prime Money Market Fund.
(F) Security is valued at fair value following procedures approved by the Trustees.
At August 31, 2006, liquid assets totaling $3,011,036 have been designated as collateral for open swap contracts and forward contracts.
144A after the name of an issuer represents securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates at August 31, 2006.
The dates shown on debt obligations are the original maturity dates.
| FORWARD CURRENCY CONTRACTS TO BUY at 8/31/06 (aggregate face value $60,325) | ||||
|
| ||||
| Aggregate | Delivery | Unrealized | ||
| Value | face value | date | depreciation | |
|
| ||||
| Euro | $60,210 | $60,325 | 9/20/06 | $(115) |
| FORWARD CURRENCY CONTRACTS TO SELL at 8/31/06 (aggregate face value $3,397,531) | ||||
|
| ||||
| Aggregate | Delivery | Unrealized | ||
| Value | face value | date | appreciation | |
|
| ||||
| Euro | $3,357,838 | $3,397,531 | 9/20/06 | $39,693 |
| CREDIT DEFAULT CONTRACTS OUTSTANDING at 8/31/06 | ||||
|
| ||||
| Fixed payments | Unrealized | |||
| Swap counterparty / | Notional | Termination | received (paid) by | appreciation/ |
| Referenced debt* | amount | date | fund per annum | (depreciation) |
|
| ||||
| Bank of America, N.A. | ||||
| Abitibi-Consolidated, | ||||
| Inc., 8.375%, 4/1/15 | $100,000 | 6/20/11 | 365 bp | $ (3,106) |
|
| ||||
| Citibank, N.A. | ||||
| Celestica, Inc., 7 7/8%, 7/1/11 | 125,000 | 9/20/11 | 285 bp | 612 |
|
| ||||
| Ford Motor Co., 7.45%, | ||||
| 7/16/31 | 80,000 | 6/20/07 | 620 bp | 3,300 |
|
| ||||
| Visteon Corp., 7%, 3/10/14 | 100,000 | 6/20/09 | 605 bp | 8,464 |
|
| ||||
| Credit Suisse First Boston International | ||||
| Ford Motor Co., 7.45%, 7/16/31 | 175,000 | 9/20/07 | (487.5 bp) | (4,856) |
|
| ||||
| Ford Motor Co., 7.45%, 7/16/31 | 210,000 | 9/20/08 | 725 bp | 11,089 |
|
| ||||
| Ford Motor Co., 7.45%, 7/16/31 | 35,000 | 9/20/07 | (485 bp) | (961) |
|
| ||||
| Deutsche Bank AG | ||||
| Ford Motor Co., 7.45%, | ||||
| 7/16/31 | 112,000 | 6/20/07 | 595 bp | 4,344 |
|
| ||||
| Lear Corp., 8.11%, 5/15/09 | 200,000 | 6/20/08 | 860 bp | 20,558 |
|
| ||||
| Visteon Corp., 7%, 3/10/14 | 100,000 | 6/20/09 | 535 bp | 6,000 |
|
| ||||
| Goldman Sachs Capital Markets, L.P. | ||||
| Ford Motor Co., 7.45%, 7/16/31 | 80,000 | 6/20/07 | 630 bp | 3,379 |
|
| ||||
| Goldman Sachs International | ||||
| General Motors Corp., | ||||
| 7 1/8%, 7/15/13 | 175,000 | 9/20/08 | 620 bp | 6,959 |
|
| ||||
| General Motors Corp., | ||||
| 7 1/8%, 7/15/13 | 175,000 | 9/20/07 | (427.5 bp) | (3,686) |
|
| ||||
43
| CREDIT DEFAULT CONTRACTS OUTSTANDING at 8/31/06 continued | ||||
|
| ||||
| Fixed payments | Unrealized | |||
| Swap counterparty / | Notional | Termination | received (paid) by | appreciation/ |
| Referenced debt* | amount | date | fund per annum | (depreciation) |
|
| ||||
| Goldman Sachs International continued | ||||
| General Motors Corp., | ||||
| 7 1/8%, 7/15/13 | $ 35,000 | 9/20/07 | (425 bp) | $ (727) |
|
| ||||
| General Motors Corp., | ||||
| 7 1/8%, 7/15/13 | 35,000 | 9/20/08 | 620 bp | 1,392 |
|
| ||||
| L-3 Communications | ||||
| Corp. 7 5/8%, 6/15/12 | 40,000 | 9/20/11 | (108 bp) | (139) |
|
| ||||
| Any one of the underlying securities in | ||||
| the basket of BB CMBS securities | 108,000 | (a) | 2.46% | 6,350 |
|
| ||||
| JPMorgan Chase Bank, N.A. | ||||
| Abitibi-Consolidated, | ||||
| Inc., 8.375%, 4/1/15 | 60,000 | 6/20/11 | 365 bp | (2,143) |
|
| ||||
| Ford Motor Co., 7.45%, | ||||
| 7/16/31 | 80,000 | 6/20/07 | 635 bp | 3,418 |
|
| ||||
| Ford Motor Co., 7.45%, | ||||
| 7/16/31 | 100,000 | 6/20/07 | 665 bp | 4,567 |
|
| ||||
| Ford Motor Co., 7.45%, | ||||
| 7/16/31 | 30,000 | 9/20/08 | 550 bp | 492 |
|
| ||||
| Ford Motor Co., 7.45%, | ||||
| 7/16/31 | 30,000 | 9/20/07 | (345 bp) | (131) |
|
| ||||
| General Motors Corp., | ||||
| 7 1/8%, 7/15/13 | 30,000 | 9/20/07 | (350 bp) | (325) |
|
| ||||
| General Motors Corp., | ||||
| 7 1/8%, 7/15/13 | 30,000 | 9/20/08 | 500 bp | 427 |
|
| ||||
| Lehman Brothers Special Financing, Inc. | ||||
| General Motors Corp., | ||||
| 7 1/8%,7/15/13 | 200,000 | 12/20/06 | 750 bp | 6,808 |
|
| ||||
| Merrill Lynch Capital Services, Inc. | ||||
| Ford Motor Co., 7.45%, | ||||
| 7/16/31 | 85,000 | 9/20/07 | (345 bp) | (239) |
|
| ||||
| Ford Motor Co., 7.45%, | ||||
| 7/16/31 | 85,000 | 9/20/08 | 570 bp | 1,715 |
|
| ||||
| General Motors Corp., | ||||
| 7 1/8%, 7/15/13 | 120,000 | 9/20/07 | (335 bp) | (427) |
|
| ||||
| General Motors Corp., | ||||
| 7 1/8%, 7/15/13 | 120,000 | 9/20/08 | 500 bp | 1,022 |
|
| ||||
| Morgan Stanley Capital Services, Inc. | ||||
| Ford Motor Co., 7.45%, | ||||
| 7/16/31 | 30,000 | 9/20/07 | (345 bp) | (309) |
|
| ||||
| Ford Motor Co., 7.45%, | ||||
| 7/16/31 | 30,000 | 9/20/08 | 560 bp | 549 |
|
| ||||
| General Motors Corp., | ||||
| 7 1/8%, 7/15/13 | 30,000 | 9/20/07 | (335 bp) | (277) |
|
| ||||
| General Motors Corp., | ||||
| 7 1/8%, 7/15/13 | 30,000 | 9/20/08 | 500 bp | 427 |
|
| ||||
| Total | $74,546 | |||
* Payments related to the reference debt are made upon a credit default event.
(a) Terminating on the date on which the notional amount is reduced to zero or the date on which the assets securing the reference entity are liquidated.
The accompanying notes are an integral part of these financial statements.
44
Statement of assets and liabilities 8/31/06
| ASSETS | |
|
| |
| Investments in securities, at value, including $7,372,745 of securities on loan (Note 1): | |
| Unaffiliated issuers (identified cost $188,736,129) | $192,573,586 |
| Affiliated issuers (identified cost $2,300,629) (Note 5) | 2,300,629 |
|
| |
| Dividends, interest and other receivables | 2,390,405 |
|
| |
| Receivable for securities sold | 2,947,708 |
|
| |
| Unrealized appreciation on swap contracts (Note 1) | 91,872 |
|
| |
| Receivable for closed swap contracts (Note 1) | 5,400 |
|
| |
| Receivable for open forward currency contracts (Note 1) | 40,191 |
|
| |
| Receivable for closed forward currency contracts (Note 1) | 15,678 |
|
| |
| Total assets | 200,365,469 |
| LIABILITIES | |
|
| |
| Distributions payable to shareholders | 954,844 |
|
| |
| Payable for securities purchased | 408,289 |
|
| |
| Payable for shares of the fund repurchased (Note 4) | 182,488 |
|
| |
| Payable for compensation of Manager (Notes 2 and 5) | 341,280 |
|
| |
| Payable for investor servicing and custodian fees (Note 2) | 31,776 |
|
| |
| Payable for Trustee compensation and expenses (Note 2) | 78,797 |
|
| |
| Payable for administrative services (Note 2) | 2,185 |
|
| |
| Unrealized depreciation on swap contracts (Note 1) | 17,326 |
|
| |
| Payable for open forward currency contracts (Note 1) | 613 |
|
| |
| Payable for closed forward currency contracts (Note 1) | 522 |
|
| |
| Collateral on securities loaned, at value (Note 1) | 7,693,220 |
|
| |
| Other accrued expenses | 72,341 |
|
| |
| Total liabilities | 9,783,681 |
|
| |
| Net assets | $190,581,788 |
| REPRESENTED BY | |
|
| |
| Paid-in capital (Unlimited shares authorized) (Notes 1, 2 and 4) | $212,022,336 |
|
| |
| Undistributed net investment income (Note 1) | 326,956 |
|
| |
| Accumulated net realized loss on investments and foreign currency transactions (Note 1) | (25,719,191) |
|
| |
| Net unrealized appreciation of investments and assets and liabilities in foreign currencies | 3,951,687 |
|
| |
| Total — Representing net assets applicable to capital shares outstanding | $190,581,788 |
| COMPUTATION OF NET ASSET VALUE | |
|
| |
| Net asset value per share | |
| ($190,581,788 divided by 21,616,241 shares) | $8.82 |
The accompanying notes are an integral part of these financial statements.
45
Statement of operations Year ended 8/31/06
| INVESTMENT INCOME | |
|
| |
| Interest (including interest income of $241,851 | |
| from investments in affiliated issuers) (Note 5) | $ 9,484,400 |
|
| |
| Dividends (net of foreign tax of $310) | 4,294,965 |
|
| |
| Securities lending | 127,006 |
|
| |
| Total investment income | 13,906,371 |
| EXPENSES | |
|
| |
| Compensation of Manager (Note 2) | 1,378,706 |
|
| |
| Investor servicing fees (Note 2) | 96,278 |
|
| |
| Custodian fees (Note 2) | 137,361 |
|
| |
| Trustee compensation and expenses (Note 2) | 34,932 |
|
| |
| Administrative services (Note 2) | 20,615 |
|
| |
| Auditing fees | 110,667 |
|
| |
| Other | 248,240 |
|
| |
| Fees waived and reimbursed by Manager (Note 5) | (6,702) |
|
| |
| Total expenses | 2,020,097 |
|
| |
| Expense reduction (Note 2) | (5,836) |
|
| |
| Net expenses | 2,014,261 |
|
| |
| Net investment income | 11,892,110 |
|
| |
| Net realized gain on investments (Notes 1 and 3) | 7,484,374 |
|
| |
| Net realized gain on swap contracts (Note 1) | 37,894 |
|
| |
| Net realized loss on foreign currency transactions (Note 1) | (100,347) |
|
| |
| Net unrealized appreciation of assets and liabilities in foreign currencies during the year | 41,397 |
|
| |
| Net unrealized depreciation of investments and swap contracts during the year | (6,060,136) |
|
| |
| Net gain on investments | 1,403,182 |
|
| |
| Net increase in net assets resulting from operations | $13,295,292 |
The accompanying notes are an integral part of these financial statements.
46
Statement of changes in net assets
| INCREASE (DECREASE) IN NET ASSETS | ||
|
| ||
| Year ended | Year ended | |
| 8/31/06 | 8/31/05 | |
|
| ||
| Operations: | ||
| Net investment income | $ 11,892,110 | $ 10,015,052 |
|
| ||
| Net realized gain on investments | ||
| and foreign currency transactions | 7,421,921 | 5,057,492 |
|
| ||
| Net unrealized appreciation (depreciation) of investments | ||
| and assets and liabilities in foreign currencies | (6,018,739) | 443,982 |
|
| ||
| Net increase in net assets resulting from operations | 13,295,292 | 15,516,526 |
|
| ||
| Distributions to shareholders: (Note 1) | ||
|
| ||
| From net investment income | (11,792,306) | (10,948,219) |
|
| ||
| Increase from issuance of shares in connection with the merger | ||
| of Putnam High Income Opportunities Trust (Note 7) | — | 75,299,313 |
|
| ||
| Decrease from capital shares repurchased (Note 4) | (6,969,459) | — |
|
| ||
| Increase from payments by affiliates (Note 2) | 404,272 | — |
|
| ||
| Total increase (decrease) in net assets | (5,062,201) | 79,867,620 |
| NET ASSETS | ||
|
| ||
| Beginning of year | 195,643,989 | 115,776,369 |
|
| ||
| End of year (including undistributed net investment | ||
| income of $326,956 and distributions in excess of net | ||
| investment income of $53,589, respectively) | $190,581,788 | $195,643,989 |
| NUMBER OF FUND SHARES | ||
|
| ||
| Shares outstanding at beginning of year | 22,519,551 | 13,825,527 |
|
| ||
| Shares issued in connection with the merger of | ||
| Putnam High Income Opportunities Trust (Note 7) | — | 8,694,024 |
|
| ||
| Shares repurchased (Note 4) | (903,310) | — |
|
| ||
| Shares outstanding at end of year | 21,616,241 | 22,519,551 |
The accompanying notes are an integral part of these financial statements.
47
Financial highlights (For a common share outstanding throughout the period)
| PER-SHARE OPERATING PERFORMANCE | |||||
|
| |||||
| Year ended | |||||
| 8/31/06 | 8/31/05 | 8/31/04 | 8/31/03 | 8/31/02 | |
|
| |||||
| Net asset value, | |||||
| beginning of period | $8.69 | $8.37 | $7.73 | $6.56 | $7.30 |
|
| |||||
| Investment operations: | |||||
| Net investment income (a) | .54(d) | .52(d,f ) | .57(d) | .58 | .60 |
|
| |||||
| Net realized and unrealized | |||||
| gain (loss) on investments | .06 | .36 | .63 | 1.15 | (.72) |
|
| |||||
| Total from | |||||
| investment operations | .60 | .88 | 1.20 | 1.73 | (.12) |
|
| |||||
| Less distributions: | |||||
| From net investment income | (.53) | (.56) | (.56) | (.56) | (.62) |
|
| |||||
| Total distributions | (.53) | (.56) | (.56) | (.56) | (.62) |
|
| |||||
| Increase from repurchase | |||||
| of shares | .04 | — | — | — | — |
|
| |||||
| Increase from payments | |||||
| by affiliates | .02(e) | — | — | — | — |
|
| |||||
| Net asset value, | |||||
| end of period | $8.82 | $8.69 | $8.37 | $7.73 | $6.56 |
|
| |||||
| Market price, | |||||
| end of period | $7.87 | $7.80 | $7.62 | $7.31 | $6.35 |
|
| |||||
| Total return at | |||||
| market price (%)(b) | 8.05 | 9.89 | 12.06 | 24.73 | (6.77) |
| RATIOS AND SUPPLEMENTAL DATA | |||||
|
| |||||
| Net assets, end of period | |||||
| (in thousands) | $190,582 | $195,644 | $115,776 | $106,934 | $90,561 |
|
| |||||
| Ratio of expenses to | |||||
| average net assets (%)(c) | 1.05(d) | 1.06(d) | 1.09(d) | 1.13 | 1.10 |
|
| |||||
| Ratio of net investment income | |||||
| to average net assets (%) | 6.18(d) | 6.13(d,f ) | 6.88(d) | 8.20 | 8.65 |
|
| |||||
| Portfolio turnover (%) | 47.76 | 46.13 | 61.92 | 69.94 | 56.70 |
(a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment.
(c) Includes amounts paid through expense offset and brokerage service arrangements (Note 2).
(d) Reflects waivers of certain fund expenses in connection with investments in Putnam Prime Money Market Fund during the period. As a result of such waivers, the expenses of the fund for the periods ended August 31, 2006, August 31, 2005 and August 31, 2004 reflect a reduction of less than 0.01% of average net assets (Note 5).
(e) Reflects a voluntary reimbursement of $404,272 from Putnam Management relating to an operational error. The reimbursement had no impact on total return at market price and increased total return at net asset value by 0.24% (Note 2).
(f) Reflects a non-recurring accrual related to Putnam Management’s settlement with the SEC regarding brokerage allocation practices, which amounted to less than $0.01 per share and less than 0.01% of average net assets (Note 6).
The accompanying notes are an integral part of these financial statements.
48
Notes to financial statements 8/31/06
Note 1: Significant accounting policies
Putnam High Income Securities Fund (the “fund”), a Massachusetts business trust, is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company. The fund seeks to provide high current income as a primary objective and capital appreciation as a secondary objective by investing in a portfolio primarily consisting of high-yielding convertible and nonconvertible securities with the potential for capital appreciation. The fund invests in higher yielding, lower rated bonds that may have a higher rate of default.
In the normal course of business, the fund enters into contracts that may include agreements to indemnify another party under given circumstances. The fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be, but have not yet been, made against the fund. However, the fund expects the risk of material loss to be remote.
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 accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily available are valued at the last reported sales price on their principal exchange, or official closing price for certain markets. If no sales are reported — as in the case of some securities traded over-the-counter — a security is valued at its last reported bid price. Market quotations are not considered to be readily available for certain debt obligations; such investments are valued on the basis of valuations furnished by an independent pricing service approved by the Trustees or dealers selected by Putnam Investment Management, LLC (“Putnam Management”), the fund’s manager, an indirect wholly-owned subsidiary of Putnam, LLC. Such services or dealers determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships, generally recognized by institutional traders, between securities. Many securities markets and exchanges outside the U.S. close prior to the close of the New York Stock Exchange and therefore the closing prices for securities in such markets or on such exchanges may not fully reflect events that occur after such close but before the close of the New York Stock Exchange. Accordingly, on certain days, the fund will fair value foreign equity securities taking into account multiple factors, including movements in the U.S. securities markets. The number of days on which fair value prices will be used will depend on market activity and it is possible that fair value prices will be used by the fund to a significant extent. Securities quoted in foreign currencies, if any, are translated into U.S. dollars at the current exchange rate. Certain investments, including certain restricted securities, are valued at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees. The fair value of securities is generally determined as the amount that the fund could reasonably expect to realize from an orderly disposition of such securities over a reasonable period of time. By its nature, a fair value price is a good faith estimate of the value of a security at a given point in time and does not reflect an actual market price, which may be different by a material amount.
B) Joint trading account Pursuant to an exemptive order from the Securities and Exchange Commission, the fund may transfer uninvested cash balances, including cash collateral received under security lending arrangements, into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Management.
49
These balances may be invested in issues of high-grade short-term investments having maturities of up to 397 days for collateral received under security lending arrangements and up to 90 days for other cash investments.
C) Security transactions and related investment income Security transactions are recorded on the trade date (the date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis.
Interest income is recorded on the accrual basis. Dividend income, net of applicable withholding taxes, is recognized on the ex-dividend date except that certain dividends from foreign securities, if any, are recognized as soon as the fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital or capital gains, if any, are reflected as a reduction of cost and/or as a realized gain.
All premiums/discounts are amortized/accreted on a yield-to-maturity basis.
D) 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 earned 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, currency gains and losses realized between the trade and settlement dates on securities transactions 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. Investments in foreign securities involve certain risks, including those related to economic instability, unfavorable political developments, and currency fluctuations, not present with domestic investments.
E) Forward currency contracts The fund may buy and sell forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date. These contracts are used 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), or for other investment purposes. 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. Risks may exceed amounts recognized on the statement of assets and liabilities. Forward currency contracts outstanding at period end, if any, are listed after the fund’s portfolio.
50
F) Credit default contracts The fund may enter into credit default contracts where one party, the protection buyer, makes an upfront or periodic payment to a counter party, the protection seller, in exchange for the right to receive a contingent payment. The maximum amount of the payment may equal the notional amount, at par, of the underlying index or security as a result of a related credit event. An upfront payment received by the fund, as the protection seller, is recorded as a liability on the fund’s books. An upfront payment made by the fund, as the protection buyer, is recorded as an asset on the fund’s books. Periodic payments received or paid by the fund are recorded as realized gains or losses. The credit default contracts are marked to market daily based upon quotations from an independent pricing service or market makers and the change, if any, is recorded as unrealized gain or loss. Payments received or made as a result of a credit event or termination of the contract are recognized, net of a proportional amount of the upfront payment, as realized gains or losses. In addition to bearing the risk that the credit event will occur, the fund could be exposed to market risk due to unfavorable changes in interest rates or in the price of the underlying security or index, the possibility that the fund may be unable to close out its position at the same time or at the same price as if it had purchased comparable publicly traded securities or that the counterparty may default on its obligation to perform. Risks of loss may exceed amounts recognized on the statement of assets and liabilities. Credit default contracts outstanding at period end, if any, are listed after the fund’s portfolio.
G) Security lending The fund may lend securities, through its agents, to qualified borrowers in order to earn additional income. The loans are collateralized by cash and/or securities in an amount at least equal to the market value of the securities loaned. The market value of securities loaned is determined daily and any additional required collateral is allocated to the fund on the next business day. The risk of borrower default will be borne by the fund’s agents; the fund will bear the risk of loss with respect to the investment of the cash collateral. Income from securities lending is included in investment income on the statement of operations. At August 31, 2006, the value of securities loaned amounted to $7,372,745. The fund received cash collateral of $7,693,220 which is pooled with collateral of other Putnam funds into 42 issues of high grade short-term investments.
H) 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 of 1986 (the “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 Code, 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.
At August 31, 2006, the fund had a capital loss carryover of $25,677,813 available to the extent allowed by the Code to offset future net capital gain, if any. The amount of the carryover and the expiration dates are:
| Loss Carryover | Expiration |
|
| |
| $6,254,785 | August 31, 2009 |
|
| |
| 9,828,332 | August 31, 2010 |
|
| |
| 9,594,696 | August 31, 2011 |
|
| |
I) Distributions to shareholders Distributions to shareholders from net investment income are recorded by the fund on the ex-dividend date. Distributions from capital gains, 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. These differences include temporary and permanent differences of dividends payable and amortization and accretion. Reclassifications are made to the fund’s capital accounts to reflect income and gains
51
available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended August 31, 2006, the fund reclassified $280,741 to increase undistributed net investment income and $49,054 to increase paid-in-capital, with an increase to accumulated net realized losses of $329,795.
The tax basis components of distributable earnings and the federal tax cost as of August 31, 2006 were as follows:
| Unrealized appreciation | $ 10,098,036 |
| Unrealized depreciation | (6,131,500) |
| ————————————— | |
| Net unrealized appreciation | 3,966,536 |
| Undistributed ordinary income | 1,564,994 |
| Capital loss carryforward | (25,677,813) |
| Cost for federal income | |
| tax purposes | $190,907,679 |
Note 2: Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory services quarterly based on the “average weekly assets” of the fund. “Average weekly assets” is defined to mean the average of the weekly determinations of the difference between the total assets of the fund (including any assets attributable to leverage for investment purposes through incurrence of indebtedness) and the total liabilities of the fund (excluding liabilities incurred in connection with leverage for investment purposes through incurrence of indebtedness). This fee is based on the following annual rates: 0.70% of the first $500 million of average weekly assets, 0.60% of the next $500 million, 0.55% of the next $500 million and 0.50% of the next $5 billion, with additional breakpoints at higher asset levels.
Prior to January 1, 2006, the fund’s management fee was based on the following annual rates: 0.75% of the first $500 million of average weekly assets, 0.65% of the next $500 million, 0.60% of the next $500 million and 0.55% thereafter.
Putnam Investments Limited (“PIL”), an affiliate of Putnam Management, is authorized by the Trustees to manage a separate portion of the assets of the fund as determined by Putnam Management from time to time. Putnam Management pays a quarterly sub-management fee to PIL for its services at an annual rate of 0.40% of the average weekly assets of the portion of the fund managed by PIL.
During the year ended August 31, 2006, Putnam Management voluntarily reimbursed the fund $404,272 relating to an operational error that occurred during the prior fiscal year.
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, LLC. PFTC receives fees for custody services based on the fund’s asset level, the number of its security holdings and transaction volumes. Putnam Investor Services, a division of PFTC, provides investor servicing agent functions to the fund. Putnam Investor Services is paid a monthly fee for investor servicing at an annual rate of 0.05% of the fund’s average net assets. During the year ended August 31, 2006, the fund incurred $233,639 for these services.
The fund has entered into an arrangement with PFTC whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the fund’s expenses. The fund also reduced expenses through brokerage service arrangements. For the year ended August 31, 2006, the fund’s expenses were reduced by $5,836 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of which $280, as a quarterly retainer, has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees receive additional fees for attendance at certain committee meetings, industry seminars and for certain compliance-related matters.
52
Trustees also are reimbursed for expenses they incur relating to their services as Trustees. George Putnam, III, who is not an independent Trustee, also receives the foregoing fees for his services as Trustee.
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 invested in certain Putnam funds until distribution in accordance with the Deferral Plan.
The fund has adopted an unfunded noncontribu-tory defined benefit pension plan (the “Pension Plan”) covering all Trustees of the fund who have served as a Trustee for at least five years and were first elected prior to 2004. Benefits under the Pension Plan are equal to 50% of the Trustee’s average annual attendance and retainer fees for the three years ended December 31, 2005. Pension expense for the fund is included in Trustee compensation and expenses in the statement of operations. Accrued pension liability is included in Payable for Trustee compensation and expenses in the statement of assets and liabilities. The Trustees have terminated the Pension Plan with respect to any Trustee first elected after 2003.
Note 3: Purchases and sales of securities
During the year ended August 31, 2006, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $88,620,443 and $95,311,675, respectively. There were no purchases or sales of U.S. government securities.
Note 4: Share repurchase program
In October 2005, the Trustees of your fund authorized Putnam Investments to implement a repurchase program on behalf of your fund, which would allow your fund to repurchase up to 5% of its outstanding shares over the 12 months ending October 6, 2006 (based on shares outstanding as of October 7, 2005). In March 2006, the Trustees approved an increase in this repurchase program to allow the fund to repurchase a total of up to 10% of its outstanding shares over the same period. In September 2006, the Trustees extended the program on its existing terms through October 6, 2007. Repurchases will only be made when the fund’s shares are trading at less than net asset value and in accordance with procedures approved by the fund’s Trustees.
For the year ended August 31, 2006, the fund repurchased 903,310 common shares for an aggregate purchase price of $6,969,459, which reflects a weighted-average discount from net asset value per share of 11.2% .
Note 5: Investment in Putnam Prime
Money Market Fund
The fund invests in Putnam Prime Money Market Fund, an open-end management investment company managed by Putnam Management. Management fees paid by the fund are reduced by an amount equal to the management and administrative services fees paid by Putnam Prime Money Market Fund with respect to assets invested by the fund in Putnam Prime Money Market Fund. For the year ended August 31, 2006, management fees paid were reduced by $6,702 relating to the fund’s investment in Putnam Prime Money Market Fund. Income distributions earned by the fund are recorded as income in the statement of operations and totaled $241,851 for the year ended August 31, 2006. During the year ended August 31, 2006, cost of purchases and cost of sales of investments in Putnam Prime Money Market Fund aggregated $71,450,084 and $74,708,925, respectively.
Note 6: Regulatory matters and litigation
Putnam Management has entered into agreements with the Securities and Exchange Commission and the Massachusetts Securities Division settling charges connected with excessive short-term trading by Putnam employees and, in the case of the charges brought by the
53
Massachusetts Securities Division, by participants in some Putnam-administered 401(k) plans. Pursuant to these settlement agreements, Putnam Management will pay a total of $193.5 million in penalties and restitution, with $153.5 million being paid to certain open-end funds and their shareholders. The amount will be allocated to shareholders and funds pursuant to a plan developed by an independent consultant, and will be paid following approval of the plan by the SEC and the Massachusetts Securities Division.
The Securities and Exchange Commission’s and Massachusetts Securities Division’s allegations and related matters also serve as the general basis for numerous lawsuits, including purported class action lawsuits filed against Putnam Management and certain related parties, including certain Putnam funds. Putnam Management will bear any costs incurred by Putnam funds in connection with these lawsuits. Putnam Management believes that the likelihood that the pending private lawsuits and purported class action lawsuits will have a material adverse financial impact on the fund is remote, and the pending actions are not likely to materially affect its ability to provide investment management services to its clients, including the Putnam funds.
In connection with a settlement with the Securities and Exchange Commission relating to Putnam Management’s brokerage allocation practices, on October 13, 2005 the fund received $5,080 in proceeds paid by Putnam Management. The fund had accrued a receivable for this amount in the prior fiscal year.
Putnam Management and Putnam Retail Management are named as defendants in a civil suit in which the plaintiffs allege that the management and distribution fees paid by certain Putnam funds were excessive and seek recovery under the Investment Company Act of 1940. Putnam Management and Putnam Retail Management have contested the plaintiffs’ claims and the matter is currently pending in the U.S. District Court for the District of Massachusetts. Based on currently available information, Putnam Management believes that this action is without merit and that it is unlikely to have a material effect on Putnam Management’s and Putnam Retail Management’s ability to provide services to their clients, including the fund.
Note 7: Acquisition of Putnam High
Income Opportunities Trust
On January 24, 2005, the fund issued 8,694,024 shares in exchange for 3,712,567 shares of Putnam High Income Opportunities Trust to acquire that fund’s net assets in a tax-free exchange approved by the shareholders. The net assets of the fund and Putnam High Income Opportunities Trust on January 21, 2005, valuation date, were $119,743,477 and $75,299,313, respectively. On January 21, 2005, Putnam High Income Opportunities Trust had distributions in excess of net investment income of $439,279, accumulated net realized loss of $21,080,625 and unrealized appreciation of $4,326,390. The aggregate net assets of the fund immediately following the acquisition were $195,042,790.
Information presented in the statement of changes in net assets reflects only the operations of Putnam High Income Securities Fund.
Note 8: New accounting pronouncement
In June 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (the “Interpretation”). The Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken by a filer in the filer’s tax return. The Interpretation will become effective for fiscal years beginning after December 15, 2006 but will also apply to tax positions reflected in the fund’s financial statements as of that date. No determination has been made whether the adoption of the Interpretation will require the fund to make any adjustments to its net assets or have any other effect on the fund’s financial statements.
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Federal tax information
(Unaudited)
The fund designated 31.98% of ordinary income distributions as qualifying for the dividends received deduction for corporations.
For its tax year ended August 31, 2006, the fund hereby designates 31.99%, or the maximum amount allowable, of its taxable ordinary income distributions as qualified dividends taxed at the individual net capital gain rates.
The Form 1099 you receive in January 2007 will show the tax status of all distributions paid to your account in calendar 2006.
55
Shareholder meeting
results (Unaudited)
The annual meeting of shareholders of the fund was held on June 29, 2006.
At the meeting, each of the nominees for Trustees was elected, as follows:
| Votes for | Votes withheld | |
|
| ||
| Jameson A. Baxter | 14,009,095 | 898,936 |
|
| ||
| Charles B. Curtis | 14,012,613 | 895,418 |
|
| ||
| Myra R. Drucker | 14,024,039 | 883,992 |
|
| ||
| Charles E. Haldeman, Jr. | 14,014,019 | 894,012 |
|
| ||
| John A. Hill | 14,024,149 | 883,882 |
|
| ||
| Paul L. Joskow | 14,018,068 | 889,963 |
|
| ||
| Elizabeth T. Kennan | 14,012,532 | 895,499 |
|
| ||
| Robert E. Patterson | 14,026,557 | 881,474 |
|
| ||
| George Putnam, III | 14,008,051 | 899,980 |
|
| ||
| W. Thomas Stephens | 12,641,105 | 2,266,926 |
|
| ||
| Richard B. Worley | 14,013,240 | 894,791 |
|
| ||
A proposal to eliminate the fund’s fundamental investment restriction regarding investments in restricted securities was approved as follows:
| Votes for | Votes against | Abstentions | Broker non-votes |
|
| |||
| 10,893,042 | 1,210,713 | 356,506 | 2,447,770 |
A shareholder proposal requesting the Trustees to take action to provide for cumulative voting in the election of Trustees was defeated as follows:
| Votes for | Votes against | Abstentions | Broker non-votes |
|
| |||
| 2,096,759 | 9,684,352 | 679,150 | 2,447,770 |
All tabulations are rounded to the nearest whole number.
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Compliance certifications
(Unaudited)
On July 21, 2006, your fund submitted a CEO annual certification to the New York Stock Exchange (“NYSE”) on which the fund’s principal executive officer certified that he was not aware, as of that date, of any violation by the fund of the NYSE’s Corporate Governance listing standards. In addition, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC rules, the fund’s principal executive and principal financial officers have made quarterly certifications, included in filings with the SEC on Forms N-CSR and N-Q, relating to, among other things, the fund’s disclosure controls and procedures and internal control over financial reporting.
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About the Trustees
Jameson A. Baxter (Born 1943), Trustee since 1994, Vice Chairman since 2005
Ms. Baxter is the President of Baxter Associates, Inc., a private investment firm that she founded in 1986.
Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., Banta Corporation (a printing and digital imaging firm), Ryerson Tull, Inc. (a steel service corporation), the Mutual Fund Directors Forum, Advocate Health Care and BoardSource, formerly the National Center for Nonprofit Boards. She is Chairman Emeritus of the Board of Trustees, Mount Holyoke College, having served as Chairman for five years and as a board member for thirteen years. Until 2002, Ms. Baxter was a Director of Intermatic Corporation (a manufacturer of energy control products).
Ms. Baxter has held various positions in investment banking and corporate finance, including Vice President and Principal of the Regency Group, and Vice President of and Consultant to First Boston Corporation. She is a graduate of Mount Holyoke College.
Charles B. Curtis (Born 1940), Trustee since 2001
Mr. Curtis is President and Chief Operating Officer of the Nuclear Threat Initiative (a private foundation dealing with national security issues) and serves as Senior Advisor to the United Nations Foundation.
Mr. Curtis is a member of the Council on Foreign Relations and the Trustee Advisory Council of the Applied Physics Laboratory, Johns Hopkins University. Until 2003, Mr. Curtis was a member of the Electric Power Research Institute Advisory Council and the University of Chicago Board of Governors for Argonne National Laboratory. Prior to 2002, Mr. Curtis was a Member of the Board of Directors of the Gas Technology Institute and the Board of Directors of the Environment and Natural Resources Program Steering Committee, John F. Kennedy School of Government, Harvard University. Until 2001, Mr. Curtis was a member of the Department of Defense Policy Board and Director of EG&G Technical Services, Inc. (a fossil energy research and development support company).
From August 1997 to December 1999, Mr. Curtis was a Partner at Hogan & Hartson L.L.P., a Washington, D.C. law firm. Prior to May 1997, Mr. Curtis was Deputy Secretary of Energy and Under Secretary of the U.S. Department of Energy. He served as Chairman of the Federal Energy Regulatory Commission from 1977 to 1981 and has held positions on the staff of the U.S. House of Representatives, the U.S. Treasury Department, and the SEC.
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Myra R. Drucker (Born 1948), Trustee since 2004
Ms. Drucker is Chair of the Board of Trustees of Commonfund (a not-for-profit firm specializing in asset management for educational endowments and foundations), Vice Chair of the Board of Trustees of Sarah Lawrence College, and a member of the Investment Committee of the Kresge Foundation (a charitable trust). She is also a director of New York Stock Exchange LLC, a wholly-owned subsidiary of the publicly-traded NYSE Group, Inc. She is an advisor to Hamilton Lane LLC and RCM Capital Management (investment management firms).
Ms. Drucker is an ex-officio member of the New York Stock Exchange (NYSE) Pension Managers Advisory Committee, having served as Chair for seven years and a member of the Executive Committee of the Committee on Investment of Employee Benefit Assets.
Until August 31, 2004, Ms. Drucker was Managing Director and a member of the Board of Directors of General Motors Asset Management and Chief Investment Officer of General Motors Trust Bank. Ms. Drucker also served as a member of the NYSE Corporate Accountability and Listing Standards Committee and the NYSE/NASD IPO Advisory Committee.
Prior to joining General Motors Asset Management in 2001, Ms. Drucker held various executive positions in the investment management industry. Ms. Drucker served as Chief Investment Officer of Xerox Corporation (a technology and service company in the document industry), where she was responsible for the investment of the company’s pension assets. Ms. Drucker was also Staff Vice President and Director of Trust Investments for International Paper (a paper, paper distribution, packaging and forest products company) and previously served as Manager of Trust Investments for Xerox Corporation. Ms. Drucker received a B.A. degree in Literature and Psychology from Sarah Lawrence College and pursued graduate studies in economics, statistics and portfolio theory at Temple University.
John A. Hill (Born 1942), Trustee since 1985 and Chairman since 2000
Mr. Hill is Vice Chairman of First Reserve Corporation, a private equity buyout firm that specializes in energy investments in the diversified worldwide energy industry.
Mr. Hill is a Director of Devon Energy Corporation, TransMontaigne Oil Company and various private companies controlled by First Reserve Corporation, as well as Chairman of TH Lee, Putnam Investment Trust (a closed-end investment company advised by an affiliate of Putnam Management). He is also a Trustee of Sarah Lawrence College. Until 2005, he was a Director of Continuum Health Partners of New York.
Prior to acquiring First Reserve Corporation in 1983, Mr. Hill held executive positions in investment banking and investment management with several firms and with the federal government, including Deputy Associate Director of the Office of Management and Budget and Deputy
59
Director of the Federal Energy Administration. He is active in various business associations, including the Economic Club of New York, and lectures on energy issues in the United States and Europe. Mr. Hill holds a B.A. degree in Economics from Southern Methodist University and pursued graduate studies there as a Woodrow Wilson Fellow.
Paul L. Joskow (Born 1947), Trustee since 1997
Dr. Joskow is the Elizabeth and James Killian Professor of Economics and Management, and Director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology.
Dr. Joskow serves as a Director of National Grid plc (a UK-based holding company with interests in electric and gas transmission and distribution and telecommunications infrastructure) and TransCanada Corporation (an energy company focused on natural gas transmission and power services). He also serves on the Board of Overseers of the Boston Symphony Orchestra. Prior to February 2005, he served on the board of the Whitehead Institute for Biomedical Research (a non-profit research institution) and has been President of the Yale University Council since 1993. Prior to February 2002, he was a Director of State Farm Indemnity Company (an automobile insurance company), and, prior to March 2000, he was a Director of New England Electric System (a public utility holding company).
Dr. Joskow has published five books and numerous articles on topics in industrial organization, government regulation of industry, and competition policy. He is active in industry restructuring, environmental, energy, competition and privatization policies — serving as an advisor to governments and corporations worldwide. Dr. Joskow holds a Ph.D. and M. Phil from Yale University and a B.A. from Cornell University.
Elizabeth T. Kennan (Born 1938), Trustee since 1992
Dr. Kennan is a Partner of Cambus-Kenneth Farm (thoroughbred horse and cattle breeding). She is President Emeritus of Mount Holyoke College.
Dr. Kennan served as Chairman and is now Lead Director of Northeast Utilities. Until 2005, she was a Director of Talbots, Inc. She has served as Director on a number of other boards, including Bell Atlantic, Chastain Real Estate, Shawmut Bank, Berkshire Life Insurance and Kentucky Home Life Insurance. She is a Trustee of the National Trust for Historic Preservation, of Centre College and of Midway College in Midway, Kentucky. Until 2006, she was a member of The Trustees of Reservations. Dr. Kennan has served on the oversight committee of the Folger Shakespeare Library, as President of Five Colleges Incorporated, as a Trustee of Notre Dame University and is active in various educational and civic associations.
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As a member of the faculty of Catholic University for twelve years, until 1978, Dr. Kennan directed the post-doctoral program in Patristic and Medieval Studies, taught history and published numerous articles. Dr. Kennan holds a Ph.D. from the University of Washington in Seattle, an M.S. from St. Hilda’s College at Oxford University and an A.B. from Mount Holyoke College. She holds several honorary doctorates.
Robert E. Patterson (Born 1945), Trustee since 1984
Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman of Cabot Properties, Inc. (a private equity firm investing in commercial real estate).
Mr. Patterson serves as Chairman Emeritus and Trustee of the Joslin Diabetes Center and as a Director of Brandywine Trust Group, LLC. Prior to June 2003, he was a Trustee of Sea Education Association. Prior to December 2001, he was President and Trustee of Cabot Industrial Trust (a publicly traded real estate investment trust). Prior to February 1998, he was Executive Vice President and Director of Acquisitions of Cabot Partners Limited Partnership (a registered investment adviser involved in institutional real estate investments). Prior to 1990, he served as Executive Vice President of Cabot, Cabot & Forbes Realty Advisors, Inc. (the predecessor company of Cabot Partners).
Mr. Patterson practiced law and held various positions in state government and was the founding Executive Director of the Massachusetts Industrial Finance Agency. Mr. Patterson is a graduate of Harvard College and Harvard Law School.
W. Thomas Stephens (Born 1942), Trustee since 1997
Mr. Stephens is Chairman and Chief Executive Officer of Boise Cascade, L.L.C. (a paper, forest products and timberland assets company).
Until 2005, Mr. Stephens was a director of TransCanadaPipelines, Ltd. Until 2004, Mr. Stephens was a Director of Xcel Energy Incorporated (a public utility company), Qwest Communications, and Norske Canada, Inc. (a paper manufacturer). Until 2003, Mr. Stephens was a Director of Mail-Well, Inc. (a diversified printing company). He served as Chairman of Mail-Well until 2001 and as CEO of MacMillan-Bloedel, Ltd. (a forest products company) until 1999.
Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of Johns Manville Corporation. He holds B.S. and M.S. degrees from the University of Arkansas.
61
Richard B. Worley (Born 1945), Trustee since 2004
Mr. Worley is Managing Partner of Permit Capital LLC, an investment management firm.
Mr. Worley serves on the Executive Committee of the University of Pennsylvania Medical Center, is a Trustee of The Robert Wood Johnson Foundation (a philanthropic organization devoted to health care issues) and is a Director of The Colonial Williamsburg Foundation (a historical preservation organization). Mr. Worley also serves on the investment committees of Mount Holyoke College and World Wildlife Fund (a wildlife conservation organization).
Prior to joining Permit Capital LLC in 2002, Mr. Worley served as Chief Strategic Officer of Morgan Stanley Investment Management. He previously served as President, Chief Executive Officer and Chief Investment Officer of Morgan Stanley Dean Witter Investment Management and as a Managing Director of Morgan Stanley, a financial services firm. Mr. Worley also was the Chairman of Miller Anderson & Sherrerd, an investment management firm.
Mr. Worley holds a B.S. degree from University of Tennessee and pursued graduate studies in economics at the University of Texas.
Charles E. Haldeman, Jr.* (Born 1948), Trustee since 2004
Mr. Haldeman is President and Chief Executive Officer of Putnam, LLC (“Putnam Investments”). He is a member of Putnam Investments’ Executive Board of Directors and Advisory Council. Prior to November 2003, Mr. Haldeman served as Co-Head of Putnam Investments’ Investment Division.
Prior to joining Putnam Investments in 2002, Mr. Haldeman held executive positions in the investment management industry. He previously served as Chief Executive Officer of Delaware Investments and President & Chief Operating Officer of United Asset Management. Mr. Haldeman was also a partner and director of Cooke & Bieler, Inc. (an investment management firm).
Mr. Haldeman currently serves on the Board of Governors of the Investment Company Institute and as a Trustee of Dartmouth College, and he is a member of the Partners HealthCare Systems Investment Committee. He is a graduate of Dartmouth College, Harvard Law School and Harvard Business School. Mr. Haldeman is also a Chartered Financial Analyst (CFA) charterholder.
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George Putnam, III* (Born 1951), Trustee since 1984 and President since 2000
Mr. Putnam is President of New Generation Research, Inc. (a publisher of financial advisory and other research services), and of New Generation Advisers, Inc. (a registered investment advisor to private funds). Mr. Putnam founded the New Generation companies in 1986.
Mr. Putnam is a Director of The Boston Family Office, LLC (a registered investment adviser). He is a Trustee of St. Mark’s School and Shore Country Day School, and until 2002 was a Trustee of the Sea Education Association.
Mr. Putnam previously worked as an attorney with the law firm of Dechert LLP (formerly known as Dechert Price & Rhoads) in Philadelphia. He is a graduate of Harvard College, Harvard Business School and Harvard Law School.
The address of each Trustee is One Post Office Square, Boston, MA 02109.
As of August 31, 2006, there were 108 Putnam Funds. All Trustees serve as Trustees of all Putnam funds.
Each Trustee serves for an indefinite term, until his or her resignation, retirement at age 72, death, or removal.
* Trustees who are or may be deemed to be “interested persons” (as defined in the Investment Company Act of 1940) of the fund, Putnam Management, Putnam Retail Management, or Marsh & McLennan Companies, Inc., the parent company of Putnam, LLC and its affiliated companies. Messrs. Haldeman and Putnam, III are deemed “interested persons” by virtue of their positions as officers of the fund, Putnam Management or Putnam Retail Management and as shareholders of Marsh & McLennan Companies, Inc. Mr. Putnam, III is the President of your fund and each of the other Putnam funds. Mr. Haldeman is President and Chief Executive Officer of Putnam Investments.
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Officers
In addition to George Putnam, III, the other officers of the fund are shown below:
| Charles E. Porter (Born 1938) | Richard S. Robie, III (Born 1960) |
| Executive Vice President, Associate Treasurer, | Vice President |
| Compliance Liaison and Principal | Since 2004 |
| Executive Officer | |
| Since 1989 | Senior Managing Director, Putnam |
| Investments, Putnam Management | |
| Jonathan S. Horwitz (Born 1955) | and Putnam Retail Management. Prior |
| Senior Vice President and Treasurer | to 2003, Senior Vice President, United |
| Since 2004 | Asset Management Corporation |
| Prior to 2004, Managing Director, | Francis J. McNamara, III (Born 1955) |
| Putnam Investments | Vice President and Chief Legal Officer |
| Since 2004 | |
| Steven D. Krichmar (Born 1958) | |
| Vice President and Principal Financial Officer | Senior Managing Director, Putnam |
| Since 2002 | Investments, Putnam Management |
| and Putnam Retail Management. Prior | |
| Senior Managing Director, Putnam | to 2004, General Counsel, State Street |
| Investments. Prior to July 2001, Partner, | Research & Management Company |
| PricewaterhouseCoopers LLP | |
| Charles A. Ruys de Perez (Born 1957) | |
| Michael T. Healy (Born 1958) | Vice President and Chief Compliance Officer |
| Assistant Treasurer and Principal | Since 2004 |
| Accounting Officer | |
| Since 2000 | Managing Director, Putnam Investments |
| Managing Director, Putnam Investments | Mark C. Trenchard (Born 1962) |
| Vice President and BSA Compliance Officer | |
| Beth S. Mazor (Born 1958) | Since 2002 |
| Vice President | |
| Since 2002 | Managing Director, Putnam Investments |
| Managing Director, Putnam Investments | Judith Cohen (Born 1945) |
| Vice President, Clerk and Assistant Treasurer | |
| James P. Pappas (Born 1953) | Since 1993 |
| Vice President | |
| Since 2004 | Wanda M. McManus (Born 1947) |
| Vice President, Senior Associate Treasurer | |
| Managing Director, Putnam Investments | and Assistant Clerk |
| and Putnam Management. During 2002, | Since 2005 |
| Chief Operating Officer, Atalanta/Sosnoff | |
| Management Corporation; prior to 2001, | Nancy E. Florek (Born 1957) |
| President and Chief Executive Officer, | Vice President, Assistant Clerk, |
| UAM Investment Services, Inc. | Assistant Treasurer and Proxy Manager |
| Since 2005 | |
The address of each Officer is One Post Office Square, Boston, MA 02109.
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Fund information
About Putnam Investments
Founded over 65 years ago, Putnam Investments was built around the concept that a balance between risk and reward is the hallmark of a well-rounded financial program. We manage over 100 mutual funds in growth, value, blend, fixed income, and international.
| Investment Manager | Charles E. Haldeman, Jr. | James P. Pappas |
| Putnam Investment | Paul L. Joskow | Vice President |
| Management, LLC | Elizabeth T. Kennan | |
| One Post Office Square | Robert E. Patterson | Richard S. Robie, III |
| Boston, MA 02109 | George Putnam, III | Vice President |
| W. Thomas Stephens | ||
| Investment Sub-Manager | Richard B. Worley | Francis J. McNamara, III |
| Putnam Investments Limited | Vice President and | |
| 57–59 St. James Street | Officers | Chief Legal Officer |
| London, England SW1A 1LD | George Putnam, III | |
| President | Charles A. Ruys de Perez | |
| Marketing Services | Vice President and | |
| Putnam Retail Management | Charles E. Porter | Chief Compliance Officer |
| One Post Office Square | Executive Vice President, | |
| Boston, MA 02109 | Associate Treasurer, | Mark C. Trenchard |
| Compliance Liaison and | Vice President and | |
| Custodian | Principal Executive Officer | BSA Compliance Officer |
| Putnam Fiduciary | ||
| Trust Company | Jonathan S. Horwitz | Judith Cohen |
| Senior Vice President | Vice President, Clerk and | |
| Legal Counsel | and Treasurer | Assistant Treasurer |
| Ropes & Gray LLP | ||
| Steven D. Krichmar | Wanda M. McManus | |
| Independent Registered | Vice President and | Vice President, Senior Associate |
| Public Accounting Firm | Principal Financial Officer | Treasurer and Assistant Clerk |
| PricewaterhouseCoopers LLP | ||
| Michael T. Healy | Nancy E. Florek | |
| Trustees | Assistant Treasurer and | Vice President, Assistant Clerk, |
| John A. Hill, Chairman | Principal Accounting Officer | Assistant Treasurer and |
| Jameson Adkins Baxter, | Proxy Manager | |
| Vice Chairman | Beth S. Mazor | |
| Charles B. Curtis | Vice President | |
| Myra R. Drucker |
Call 1-800-225-1581 weekdays between 9:00 a.m. and 5:00 p.m. Eastern Time, or visit our Web site (www.putnam.com) anytime for up-to-date information about the fund’s NAV.
Item 2. Code of Ethics:
(a) The Fund’s principal executive, financial and accounting officers are employees of Putnam Investment Management, LLC, the Fund's investment manager. As such they are subject to a comprehensive Code of Ethics adopted and administered by Putnam Investments which is designed to protect the interests of the firm and its clients. The Fund has adopted a Code of Ethics which incorporates the Code of Ethics of Putnam Investments with respect to all of its officers and Trustees who are employees of Putnam Investment Management, LLC. For this reason, the Fund has not adopted a separate code of ethics governing its principal executive, financial and accounting officers.
(c) None
Item 3. Audit Committee Financial Expert:
The Funds' Audit and Compliance Committee is comprised solely of Trustees who are "independent" (as such term has been defined by the Securities and Exchange Commission ("SEC") in regulations implementing Section 407 of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe that each of the members of the Audit and Compliance Committee also possess a combination of knowledge and experience with respect to financial accounting matters, as well as other attributes, that qualify them for service on the Committee. In addition, the Trustees have determined that each of Mr. Patterson, Mr. Stephens and Mr. Hill meets the financial literacy requirements of the New York Stock Exchange's rules and qualifies as an "audit committee financial expert" (as such term has been defined by the Regulations) based on their review of his pertinent experience and education. Certain other Trustees, although not on the Audit and Compliance Committee, would also qualify as "audit committee financial experts." The SEC has stated that the designation or identification of a person as an audit committee financial expert pursuant to this Item 3 of Form N-CSR does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit and Compliance Committee and the Board of Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services:
The following table presents fees billed in each of the last two fiscal years for services rendered to the fund by the fund’s independent auditor:
| Fiscal | Audit- | |||
| year | Audit | Related | Tax | All Other |
| ended | Fees | Fees | Fees | Fees |
| August 31, 2006 | $100,437 | $51 | $9,504 | $215 |
| August 31, 2005 | $70,572 | $5,500* | $9,006 | $13 |
* Includes fees billed to the fund for services relating to one or more fund mergers. A portion of such fees was paid by Putnam Management.
For the fiscal years ended August 31, 2006 and August 31, 2005, the fund’s independent auditor billed aggregate non-audit fees in the amounts of $279,442 and $202,266 respectively, to the fund, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund.
Audit Fees represent fees billed for the fund’s last two fiscal years.
Audit-Related Fees represent fees billed in the fund’s last two fiscal years for services traditionally performed by the fund’s auditor, including accounting consultation for proposed transactions or concerning financial accounting and reporting standards and other audit or attest services not required by statute or regulation.
Tax Fees represent fees billed in the fund’s last two fiscal years for tax compliance, tax planning and tax advice services. Tax planning and tax advice services include assistance with tax audits, employee benefit plans and requests for rulings or technical advice from taxing authorities.
All Other Fees represent fees billed for services relating to valuation of derivative securities and an analysis of recordkeeping fees.
Pre-Approval Policies of the Audit and Compliance Committee. The Audit and Compliance Committee of the Putnam funds has determined that, as a matter of policy, all work performed for the funds by the funds’ independent auditors will be pre-approved by the Committee itself and thus will generally not be subject to pre-approval procedures.
The Audit and Compliance Committee also has adopted a policy to pre-approve the engagement by Putnam Management and certain of its affiliates of the funds’ independent auditors, even in circumstances where pre-approval is not required by applicable law. Any such requests by Putnam Management or certain of its affiliates are typically submitted in writing to the Committee and explain, among other things, the nature of the proposed engagement, the estimated fees, and why this work should be performed by that particular audit firm as opposed to another one.
The following table presents fees billed by the fund’s independent auditor for services required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
| Fiscal | Audit- | All | Total | |
| year | Related | Tax | Other | Non-Audit |
| ended | Fees | Fees | Fees | Fees |
| August 31, | ||||
| 2006 | $ - | $ 153,160 | $ - | $ - |
| August | ||||
| 31, 2005 | $ - | $ - | $ - | $ - |
Item 5. Audit Committee of Listed Registrants
(a) The fund has a separately-designated Audit and Compliance Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The Audit and Compliance Committee of the fund's Board of Trustees is composed of the following persons:
Robert E. Patterson (Chairperson)
Kenneth R. Leibler
W. Thomas Stephens
John A. Hill
(b) Not applicable
Item 6. Schedule of Investments:
The registrant’s schedule of investments in unaffiliated issuers is included in the report to shareholders in Item 1 above.
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End Management
Investment Companies:
Proxy voting guidelines of the Putnam funds
The proxy voting guidelines below summarize the funds’ positions on various issues of concern to investors, and give a general indication of how fund portfolio securities will be voted on proposals dealing with particular issues. The funds’ proxy voting service is instructed to vote all proxies relating to fund portfolio securities in accordance with these guidelines, except as otherwise instructed by the Proxy Coordinator, a member of the Office of the Trustees who is appointed to assist in the coordination and voting of the funds’ proxies.
The proxy voting guidelines are just that – guidelines. The guidelines are not exhaustive and do not include all potential voting issues. Because proxy issues and the circumstances of individual companies are so varied, there may be instances when the funds may not vote in strict adherence to these guidelines. For example, the proxy voting service is expected to bring to the Proxy Coordinator’s attention proxy questions that are company-specific and of a non-routine nature and that, even if covered by the guidelines, may be more appropriately handled on a case-by-case basis.
Similarly, Putnam Management’s investment professionals, as part of their ongoing review and analysis of all fund portfolio holdings, are responsible for monitoring significant corporate developments, including proxy proposals submitted to shareholders, and notifying the Proxy Coordinator of circumstances where the interests of fund shareholders may warrant a vote contrary to these guidelines. In such instances, the investment professionals will submit a written recommendation to the Proxy Coordinator and the person or persons designated by Putnam Management’s Legal and Compliance Department to assist in processing referral items pursuant to the funds’ “Proxy Voting Procedures.” The Proxy Coordinator, in consultation with the funds’ Senior Vice President, Executive Vice President, and/or the Chair of the Board Policy and Nominating Committee, as appropriate, will determine how the funds’ proxies will be voted. When indicated, the Chair of the Board Policy and Nominating Committee may consult with other members of the Committee or the full Board of Trustees.
The following guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals that have been put forth by management and approved and recommended by a company’s board of directors. Part II deals with proposals submitted by shareholders for inclusion in proxy statements. Part III addresses unique considerations pertaining to non-U.S. issuers.
The Putnam funds will disclose their proxy votes in accordance with the timetable established by SEC rules (i.e., not later than August 31 of each year for the most recent 12-month period ended June 30).
I. BOARD-APPROVED PROPOSALS
The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself (sometimes referred to as “management proposals”), which have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies and of the funds’ intent to hold corporate boards accountable for their actions in promoting shareholder interests, the funds’ proxies generally will be voted for the decisions reached by majority independent boards of directors, except as otherwise indicated in these guidelines. Accordingly, the funds’ proxies will be voted for board-approved proposals, except as follows:
Matters relating to the Board of Directors
Uncontested Election of Directors
The funds’ proxies will be voted for the election of a company’s nominees for the board of directors, except as follows:
* The funds will withhold votes for the entire board of directors if
• the board does not have a majority of independent directors,
• the board has not established independent nominating, audit, and compensation committees,
• the board has more than 19 members or fewer than five members, absent special circumstances,
• the board has not acted to implement a policy requested in a shareholder proposal that received the support of a majority of the shares of the company cast at its previous two annual meetings, or
• the board has adopted or renewed a shareholder rights plan (commonly referred to as a “poison pill”) without shareholder approval during the current or prior calendar year.
* The funds will on a case-by-case basis withhold votes from the entire board of directors where the board has approved compensation arrangements for one or more company executives that the funds determine are unreasonably excessive relative to the company’s performance.
* The funds will withhold votes for any nominee for director who:
• is considered an independent director by the company and who has received compensation from the company other than for service as a director (e.g., investment banking, consulting, legal, or financial advisory fees),
• attends less than 75% of board and committee meetings without valid reasons for the absences (e.g., illness, personal emergency, etc.),
• as a director of a public company (Company A), is employed as a senior executive of another public company (Company B) if a director of Company B serves as a senior executive of Company A (commonly referred to as an “interlocking directorate”), or
• serves on more than five unaffiliated public company boards (for the purpose of this guideline, boards of affiliated registered investment companies will count as one board).
Commentary:
Board independence: Unless otherwise indicated, for the purposes of determining whether a board has a majority of independent directors and independent nominating, audit, and compensation committees, an “independent director” is a director who (1) meets all requirements to serve as an independent director of a company under the final NYSE Corporate Governance Rules (e.g., no material business relationships with the company and no present or recent employment relationship with the company (including employment of an immediate family member as an executive officer)), and (2) has not accepted directly or indirectly any consulting, advisory, or other compensatory fee from the company other than in his or her capacity as a member of the board of directors or any board committee. The funds’ Trustees believe that the receipt of any amount of compensation for services other than service as a director raises significant independence issues.
Board size: The funds’ Trustees believe that the size of the board of directors can have a direct impact on the ability of the board to govern effectively. Boards that have too many members can be unwieldy and ultimately inhibit their ability to oversee management performance. Boards that have too few members can stifle innovation and lead to excessive influence by management.
Time commitment: Being a director of a company requires a significant time commitment to adequately prepare for and attend the company’s board and committee meetings. Directors must be able to commit the time and attention necessary to perform their fiduciary duties in proper fashion, particularly in times of crisis. The funds’ Trustees are concerned about over-committed directors. In some cases, directors may serve on too many boards to make a meaningful contribution. This may be particularly true for senior executives of public companies (or other directors with substantially full-time employment) who serve on more than a few outside boards. The funds may withhold votes from such directors on a case-by-case basis where it appears that they may be unable to discharge their duties properly because of excessive commitments.
Interlocking directorships: The funds’ Trustees believe that interlocking directorships are inconsistent with the degree of independence required for outside directors of public companies.
Corporate governance practices: Board independence depends not only on its members’ individual relationships, but also on the board’s overall attitude toward management. Independent boards are committed to good corporate governance practices and, by providing objective independent judgment, enhancing shareholder value. The funds may withhold votes on a case-by-case basis from some or all directors who, through their lack of independence, have failed to observe good corporate governance practices or, through specific corporate action, have demonstrated a disregard for the interest of shareholders. Such instances may include cases where a board of directors has approved compensation arrangements for one or more members of management that, in the judgment of the funds’ Trustees, are excessive by reasonable corporate standards relative to the company’s record of performance.
Contested Elections of Directors
* The funds will vote on a case-by-case basis in contested elections of directors.
Classified Boards
* The funds will vote against proposals to classify a board, absent special circumstances indicating that shareholder interests would be better served by this structure.
Commentary: Under a typical classified board structure, the directors are divided into three classes, with each class serving a three-year term. The classified board structure results in directors serving staggered terms, with usually only a third of the directors up for re-election at any given annual meeting. The funds’ Trustees generally believe that it is appropriate for directors to stand for election each year, but recognize that, in special circumstances, shareholder interests may be better served under a classified board structure.
Other Board-Related Proposals
The funds will generally vote for board-approved proposals that have been approved by a majority independent board, and on a case-by-case basis on board-approved proposals where the board fails to meet the guidelines’ basic independence standards (i.e., majority of independent directors and independent nominating, audit, and compensation committees).
Executive Compensation
The funds generally favor compensation programs that relate executive compensation to a company’s long-term performance. The funds will vote on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:
* Except where the funds are otherwise withholding votes for the entire board of directors, the funds will vote for stock option and restricted stock plans that will result in an average annual dilution of 1.67% or less (based on the disclosed term of the plan and including all equity-based plans).
* The funds will vote against stock option and restricted stock plans that will result in an average annual dilution of greater than 1.67% (based on the disclosed term of the plan and including all equity-based plans).
* The funds will vote against any stock option or restricted stock plan where the company's actual grants of stock options and restricted stock under all equity-based compensation plans during the prior three (3) fiscal years have resulted in an average annual dilution of greater than 1.67% .
* The funds will vote against stock option plans that permit the replacing or repricing of underwater options (and against any proposal to authorize such replacement or repricing of underwater options).
* The funds will vote against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.
* Except where the funds are otherwise withholding votes for the entire board of directors, the funds will vote for an employee stock purchase plan that has the following features: (1) the shares purchased under the plan are acquired for no less than 85% of their market value; (2) the offering period under the plan is 27 months or less; and (3) dilution is 10% or less.
Commentary: Companies should have compensation programs that are reasonable and that align shareholder and management interests over the longer term. Further, disclosure of compensation programs should provide absolute transparency to shareholders regarding the sources and amounts of, and the factors influencing, executive compensation. Appropriately designed equity-based compensation plans can be an effective way to align the interests of long-term shareholders with the interests of management. The funds may vote against executive compensation proposals on a case-by-case basis where compensation is excessive by reasonable corporate standards, or where a company fails to provide transparent disclosure of
executive compensation. In voting on a proposal relating to executive compensation, the funds will consider whether the proposal has been approved by an independent compensation committee of the board.
Capitalization
Many proxy proposals involve changes in a company’s capitalization, including the authorization of additional stock, the issuance of stock, the repurchase of outstanding stock, or the approval of a stock split. The management of a company’s capital structure involves a number of important issues, including cash flow, financing needs, and market conditions that are unique to the circumstances of the company. As a result, the funds will vote on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization, except that where the funds are not otherwise withholding votes from the entire board of directors:
* The funds will vote for proposals relating to the authorization and issuance of additional common stock (except where such proposals relate to a specific transaction).
* The funds will vote for proposals to effect stock splits (excluding reverse stock splits).
* The funds will vote for proposals authorizing share repurchase programs.
Commentary: A company may decide to authorize additional shares of common stock for reasons relating to executive compensation or for routine business purposes. For the most part, these decisions are best left to the board of directors and senior management. The funds will vote on a case-by-case basis, however, on other proposals to change a company’s capitalization, including the authorization of common stock with special voting rights, the authorization or issuance of common stock in connection with a specific transaction (e.g., an acquisition, merger or reorganization), or the authorization or issuance of preferred stock. Actions such as these involve a number of considerations that may affect a shareholder’s investment and that warrant a case-by-case determination.
Acquisitions, Mergers, Reincorporations, Reorganizations and Other Transactions
Shareholders may be confronted with a number of different types of transactions, including acquisitions, mergers, reorganizations involving business combinations, liquidations, and the sale of all or substantially all of a company’s assets, which may require their consent. Voting on such proposals involves considerations unique to each transaction. As a result, the funds will vote on a case-by-case basis on board-approved proposals to effect these types of transactions, except as follows:
* The funds will vote for mergers and reorganizations involving business combinations designed solely to reincorporate a company in Delaware.
Commentary: A company may reincorporate into another state through a merger or reorganization by setting up a “shell” company in a different state and then merging the company into the new company. While reincorporation into states with extensive and established corporate laws – notably Delaware – provides companies and shareholders with a more well-defined legal framework, shareholders must carefully consider the reasons for a reincorporation into another jurisdiction, including especially an offshore jurisdiction.
Anti-Takeover Measures
Some proxy proposals involve efforts by management to make it more difficult for an outside party to take control of the company without the approval of the company’s board of directors.
These include the adoption of a shareholder rights plan, requiring supermajority voting on particular issues, the adoption of fair price provisions, the issuance of blank check preferred stock, and the creation of a separate class of stock with disparate voting rights. Such proposals may adversely affect shareholder rights, lead to management entrenchment, or create conflicts of interest. As a result, the funds will vote against board-approved proposals to adopt such anti-takeover measures, except as follows:
* The funds will vote on a case-by-case basis on proposals to ratify or approve shareholder rights plans; and
* The funds will vote on a case-by-case basis on proposals to adopt fair price provisions.
Commentary: The funds’ Trustees recognize that poison pills and fair price provisions may enhance shareholder value under certain circumstances. As a result, the funds will consider proposals to approve such matters on a case-by-case basis.
Other Business Matters
Many proxies involve approval of routine business matters, such as changing a company’s name, ratifying the appointment of auditors, and procedural matters relating to the shareholder meeting. For the most part, these routine matters do not materially affect shareholder interests and are best left to the board of directors and senior management of the company. The funds will vote for board-approved proposals approving such matters, except as follows:
* The funds will vote on a case-by-case basis on proposals to amend a company’s charter or bylaws (except for charter amendments necessary or to effect stock splits to change a company’s name or to authorize additional shares of common stock).
* The funds will vote against authorization to transact other unidentified, substantive business at the meeting.
* The funds will vote on a case-by-case basis on other business matters where the funds are otherwise withholding votes for the entire board of directors.
Commentary: Charter and bylaw amendments and the transaction of other unidentified, substantive business at a shareholder meeting may directly affect shareholder rights and have a significant impact on shareholder value. As a result, the funds do not view such items as routine business matters. Putnam Management’s investment professionals and the funds’ proxy voting service may also bring to the Proxy Coordinator’s attention company-specific items that they believe to be non-routine and warranting special consideration. Under these circumstances, the funds will vote on a case-by-case basis.
II. SHAREHOLDER PROPOSALS
SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of the company’s corporate governance structure or to change some aspect of its business operations. The funds generally will vote in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:
* The funds will vote for shareholder proposals to declassify a board, absent special circumstances which would indicate that shareholder interests are better served by a classified board structure.
* The funds will vote for shareholder proposals to require shareholder approval of shareholder rights plans.
* The funds will vote for shareholder proposals that are consistent with the funds’ proxy voting guidelines for board-approved proposals.
* The funds will vote on a case-by-case basis on other shareholder proposals where the funds are otherwise withholding votes for the entire board of directors.
Commentary: In light of the substantial reforms in corporate governance that are currently underway, the funds’ Trustees believe that effective corporate reforms should be promoted by holding boards of directors – and in particular their independent directors – accountable for their actions, rather than imposing additional legal restrictions on board governance through piecemeal proposals. Generally speaking, shareholder proposals relating to business operations are often motivated primarily by political or social concerns, rather than the interests of shareholders as investors in an economic enterprise. As stated above, the funds’ Trustees believe that boards of directors and management are responsible for ensuring that their businesses are operating in accordance with high legal and ethical standards and should be held accountable for resulting corporate behavior. Accordingly, the funds will generally support the recommendations of boards that meet the basic independence and governance standards established in these guidelines. Where boards fail to meet these standards, the funds will generally evaluate shareholder proposals on a case-by-case basis.
III. VOTING SHARES OF NON-U.S. ISSUERS
Many of the Putnam funds invest on a global basis, and, as a result, they may be required to vote shares held in non-U.S. issuers – i.e., issuers that are incorporated under the laws of foreign jurisdictions and that are not listed on a U.S. securities exchange or the NASDAQ stock market. Because non-U.S. issuers are incorporated under the laws of countries and jurisdictions outside the U.S., protection for shareholders may vary significantly from jurisdiction to jurisdiction. Laws governing non-U.S. issuers may, in some cases, provide substantially less protection for shareholders. As a result, the foregoing guidelines, which are premised on the existence of a sound corporate governance and disclosure framework, may not be appropriate under some circumstances for non-U.S. issuers.
In many non-U.S. markets, shareholders who vote proxies of a non-U.S. issuer are not able to trade in that company’s stock on or around the shareholder meeting date. This practice is known as “share blocking.” In countries where share blocking is practiced, the funds will vote proxies only with direction from Putnam Management’s investment professionals.
In addition, some non-U.S. markets require that a company’s shares be re-registered out of the name of the local custodian or nominee into the name of the shareholder for the meeting. This practice is known as “share re-registration.” As a result, shareholders, including the funds, are not able to trade in that company’s stock until the shares are re-registered back in the name of the local custodian or nominee. In countries where share re-registration is practiced, the funds will generally not vote proxies.
The funds will vote proxies of non-U.S. issuers in accordance with the foregoing guidelines where applicable, except as follows:
Uncontested Election of Directors
Japan
* For companies that have established a U.S.-style corporate structure, the funds will withhold votes for the entire board of directors if
• the board does not have a majority of outside directors,
• the board has not established nominating and compensation committees composed of a majority of outside directors, or
• the board has not established an audit committee composed of a majority of independent directors.
* The funds will withhold votes for the appointment of members of a company’s board of statutory auditors if a majority of the members of the board of statutory auditors is not independent.
Commentary:
Board structure: Recent amendments to the Japanese Commercial Code give companies the option to adopt a U.S.-style corporate structure (i.e., a board of directors and audit, nominating, and compensation committees). The funds will vote for proposals to amend a company’s articles of incorporation to adopt the U.S.-style corporate structure.
Definition of outside director and independent director: Corporate governance principles in Japan focus on the distinction between outside directors and independent directors. Under these principles, an outside director is a director who is not and has never been a director, executive, or employee of the company or its parent company, subsidiaries or affiliates. An outside director is “independent” if that person can make decisions completely independent from the managers of the company, its parent, subsidiaries, or affiliates and does not have a material relationship with the company (i.e., major client, trading partner, or other business relationship; familial relationship with current director or executive; etc.). The guidelines have incorporated these definitions in applying the board independence standards above.
Korea
* The funds will withhold votes for the entire board of directors if
• the board does not have a majority of outside directors,
• the board has not established a nominating committee composed of at least a majority of outside directors, or
• the board has not established an audit committee composed of at least three members and in which at least two-thirds of its members are outside directors.
Commentary: For purposes of these guideline, an “outside director” is a director that is independent from the management or controlling shareholders of the company, and holds no interests that might impair performing his or her duties impartially from the company, management or controlling shareholder. In determining whether a director is an outside director, the funds will also apply the standards included in Article 415-2(2) of the Korean Commercial Code (i.e., no employment relationship with the company for a period of two years before serving on the committee, no director or employment relationship with the company’s largest shareholder, etc.) and may consider other business relationships that would affect the independence of an outside director.
United Kingdom
* The funds will withhold votes for the entire board of directors if
• the board does not have at least a majority of independent non-executive directors,
• the board has not established nomination committees composed of a majority of independent non-executive directors, or
• the board has not established compensation and audit committees composed of (1) at least three directors (in the case of smaller companies, two directors) and (2) solely of independent non-executive directors.
* The funds will withhold votes for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director (e.g., investment banking, consulting, legal, or financial advisory fees).
Commentary:
Application of guidelines: Although the U.K.’s Combined Code on Corporate Governance (“Combined Code”) has adopted the “comply and explain” approach to corporate governance, the funds’ Trustees believe that the guidelines discussed above with respect to board independence standards are integral to the protection of investors in U.K. companies. As a result, these guidelines will be applied in a prescriptive manner.
Definition of independence: For the purposes of these guidelines, a non-executive director shall be considered independent if the director meets the independence standards in section A.3.1 of the Combined Code (i.e., no material business or employment relationships with the company, no remuneration from the company for non-board services, no close family ties with senior employees or directors of the company, etc.), except that the funds do not view service on the board for more than nine years as affecting a director’s independence.
Smaller companies: A smaller company is one that is below the FTSE 350 throughout the year immediately prior to the reporting year.
Canada
In January 2004, Canadian securities regulators issued proposed policies that would impose new corporate governance requirements on Canadian public companies. The recommended practices contained in these new corporate governance requirements mirror corporate governance reforms that have been adopted by the NYSE and other U.S. national securities exchanges and stock markets. As a result, the funds will vote on matters relating to the board of directors of Canadian issuers in accordance with the guidelines applicable to U.S. issuers.
Commentary: Like the U.K.’s Combined Code, the proposed policies on corporate governance issued by Canadian securities regulators embody the “comply and explain” approach to corporate governance. Because the funds’ Trustees believe that the board independence standards contained in the proxy voting guidelines are integral to the protection of investors in Canadian companies, these standards will be applied in a prescriptive manner.
Other Matters
* The funds will vote for shareholder proposals calling for a majority of a company’s directors to be independent of management.
* The funds will vote for shareholder proposals seeking to increase the independence of board nominating, audit, and compensation committees.
* The funds will vote for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.
* The funds will vote on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of the company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of the company’s outstanding common stock where shareholders have preemptive rights.
As adopted January 13, 2006
Proxy Voting Procedures of the Putnam Funds
The proxy voting procedures below explain the role of the funds’ Trustees, the proxy voting service and the Proxy Coordinator, as well as how the process will work when a proxy question needs to be handled on a case-by-case basis, or when there may be a conflict of interest.
The role of the funds’ Trustees
The Trustees of the Putnam funds exercise control of the voting of proxies through their Board Policy and Nominating Committee, which is composed entirely of independent Trustees. The Board Policy and Nominating Committee oversees the proxy voting process and participates, as needed, in the resolution of issues that need to be handled on a case-by-case basis. The Committee annually reviews and recommends, for Trustee approval, guidelines governing the funds’ proxy votes, including how the funds vote on specific proposals and which matters are to be considered on a case-by-case basis. The Trustees are assisted in this process by their independent administrative staff (“Office of the Trustees”), independent legal counsel, and an independent proxy voting service. The Trustees also receive assistance from Putnam Investment Management, LLC (“Putnam Management”), the funds’ investment advisor, on matters involving investment judgments. In all cases, the ultimate decision on voting proxies rests with the Trustees, acting as fiduciaries on behalf of the shareholders of the funds.
The role of the proxy voting service
The funds have engaged an independent proxy voting service to assist in the voting of proxies. The proxy voting service is responsible for coordinating with the funds’ custodians to ensure that all proxy materials received by the custodians relating to the funds’ portfolio securities are processed in a timely fashion. To the extent applicable, the proxy voting service votes all proxies in accordance with the proxy voting guidelines established by the Trustees. The proxy voting service will refer proxy questions to the Proxy Coordinator (described below) for instructions under circumstances where: (1) the application of the proxy voting guidelines is unclear; (2) a particular proxy question is not covered by the guidelines; or (3) the guidelines call for specific instructions on a case-by-case basis. The proxy voting service is also requested to call to the Proxy Coordinator’s attention specific proxy questions that, while governed by a guideline, appear to involve unusual or controversial issues. The funds also utilize research services relating to proxy questions provided by the proxy voting service and by other firms.
The role of the Proxy Coordinator
Each year, a member of the Office of the Trustees is appointed Proxy Coordinator to assist in the coordination and voting of the funds’ proxies. The Proxy Coordinator will deal directly with the proxy voting service and, in the case of proxy questions referred by the proxy voting service, will solicit voting recommendations and instructions from the Office of the Trustees, the Chair of the Board Policy and Nominating Committee, and Putnam Management’s investment professionals, as appropriate. The Proxy Coordinator is responsible for ensuring that these questions and referrals are responded to in a timely fashion and for transmitting appropriate voting instructions to the proxy voting service.
Voting procedures for referral items
As discussed above, the proxy voting service will refer proxy questions to the Proxy Coordinator under certain circumstances. When the application of the proxy voting guidelines is unclear or a particular proxy question is not covered by the guidelines (and does not involve investment considerations), the Proxy Coordinator will assist in interpreting the guidelines and, as appropriate, consult with one of more senior staff members of the Office of the Trustees and the Chair of the Board Policy and Nominating Committee on how the funds’ shares will be voted.
For proxy questions that require a case-by-case analysis pursuant to the guidelines or that are not covered by the guidelines but involve investment considerations, the Proxy Coordinator will refer such questions, through a written request, to Putnam Management’s investment professionals for a voting recommendation. Such referrals will be made in cooperation with the person or persons designated by Putnam Management’s Legal and Compliance Department to assist in processing such referral items. In connection with each such referral item, the Legal and Compliance Department will conduct a conflicts of interest review, as described below under “Conflicts of Interest,” and provide a conflicts of interest report (the “Conflicts Report”) to the Proxy Coordinator describing the results of such review. After receiving a referral item from the Proxy Coordinator, Putnam Management’s investment professionals will provide a written recommendation to the Proxy Coordinator and the person or persons designated by the Legal and Compliance Department to assist in processing referral items. Such recommendation will set forth (1) how the proxies should be voted; (2) the basis and rationale for such recommendation; and (3) any contacts the investment professionals have had with respect to the referral item with non-investment personnel of Putnam Management or with outside parties (except for routine communications from proxy solicitors). The Proxy Coordinator will then review the investment professionals’ recommendation and the Conflicts Report with one of more senior staff members of the Office of the Trustees in determining how to vote the funds’ proxies. The Proxy Coordinator will maintain a record of all proxy questions that have been referred to Putnam Management’s investment professionals, the voting recommendation, and the Conflicts Report.
In some situations, the Proxy Coordinator and/or one of more senior staff members of the Office of the Trustees may determine that a particular proxy question raises policy issues requiring consultation with the Chair of the Board Policy and Nominating Committee, who, in turn, may decide to bring the particular proxy question to the Committee or the full Board of Trustees for consideration.
Conflicts of interest
Occasions may arise where a person or organization involved in the proxy voting process may have a conflict of interest. A conflict of interest may exist, for example, if Putnam Management has a business relationship with (or is actively soliciting business from) either the company soliciting the proxy or a third party that has a material interest in the outcome of a proxy vote or that is actively lobbying for a particular outcome of a proxy vote. Any individual with knowledge of a personal conflict of interest (e.g., familial relationship with company management) relating to a particular referral item shall disclose that conflict to the Proxy Coordinator and the Legal and Compliance
Department and otherwise remove himself or herself from the proxy voting process. The Legal and Compliance Department will review each item referred to Putnam Management’s investment professionals to determine if a conflict of interest exists and will provide the Proxy Coordinator with a Conflicts Report for each referral item that (1) describes any conflict of interest; (2) discusses the procedures used to address such conflict of interest; and (3) discloses any contacts from parties outside Putnam Management (other than routine communications from proxy solicitors) with respect to the referral item not otherwise reported in an investment professional’s recommendation. The Conflicts Report will also include written confirmation that any recommendation from an investment professional provided under circumstances where a conflict of interest exists was made solely on the investment merits and without regard to any other consideration.
As adopted March 11, 2005
Item 8. Portfolio Managers of Closed-End Management Investment Companies
(a)(1) Investment management teams. Putnam Management’s, Putnam Investments Limited’s and The Putnam Advisory Company’s (for funds having Putnam Investments Limited and/or The Putnam Advisory Company as sub-manager) investment professionals are organized into investment management teams, with a particular team dedicated to a specific asset class. The members of the team or teams identified in the shareholder report included in Item 1 of this report manage the fund’s investments. The names of all team members can be found at www.putnam.com.
The team members identified as the fund’s Portfolio Leader(s) and Portfolio Member(s) coordinate team efforts related to the fund and are primarily responsible for the day-today management of the fund’s portfolio. In addition to these individuals, each team also includes other investment professionals, whose analysis, recommendations and research inform investment decisions made for the fund.
| Portfolio | Joined | ||
| Leaders | Fund | Employer | Positions Over Past Five Years |
| David King | 2002 | Putnam Management | Senior Portfolio Manager |
| 1983 - Present | |||
| Robert Salvin | 2004 | Putnam Management | Portfolio Manager |
| 2000-Present | Previously, Convertible Specialist; | ||
| Analyst; Equity Capital Market | |||
| Specialist | |||
(a)(2) Other Accounts Managed by the Fund’s Portfolio Managers.
The following table shows the number and approximate assets of other investment accounts (or portions of investment accounts) that the fund’s Portfolio Leader(s) and Portfolio Member(s) managed as of the fund’s most recent fiscal year-end. The other accounts may include accounts for which the individual was not designated as a portfolio member. Unless noted, none of the other accounts pays a fee based on the account’s performance.
| Other accounts (including | ||||||
| separate accounts, | ||||||
| managed account | ||||||
| programs and single- | ||||||
| Portfolio | Other SEC-registered | Other accounts that pool | sponsor defined | |||
| Leader or | open-end and closed-end | assets from more than | contribution plan | |||
| Member | funds | one client | offerings) | |||
|
| ||||||
| Number | Assets | Number | Assets | Number | Assets | |
| of | of | of | ||||
| accounts | accounts | accounts | ||||
|
| ||||||
| Dave King | 6 | $6,058,600,000 | 3 | $80,600,000 | 5 | $290,600,000 |
| Robert Salvin | 10 | $4,602,600,000 | 3 | $29,200,000 | 4 | $210,200,000 |
|
| ||||||
Potential conflicts of interest in managing multiple accounts. Like other investment professionals with multiple clients, the fund’s Portfolio Leader(s) and Portfolio Member(s) may face certain potential conflicts of interest in connection with managing both the fund and the other accounts listed under “Other Accounts Managed by the Fund’s Portfolio Managers” at the same time. The paragraphs below describe some of these potential conflicts, which Putnam Management believes are faced by investment professionals at most major financial firms. As described below, Putnam Management and the Trustees of the Putnam funds have adopted compliance policies and procedures that attempt to address certain of these potential conflicts.
The management of accounts with different advisory fee rates and/or fee structures, including accounts that pay advisory fees based on account performance (“performance fee accounts”), may raise potential conflicts of interest by creating an incentive to favor higher-fee accounts. These potential conflicts may include, among others:
• The most attractive investments could be allocated to higher-fee accounts or performance fee accounts.
• The trading of higher-fee accounts could be favored as to timing and/or execution price. For example, higher-fee accounts could be permitted to sell securities earlier than other accounts when a prompt sale is desirable or to buy securities at an earlier and more opportune time.
• The trading of other accounts could be used to benefit higher-fee accounts (front- running).
• The investment management team could focus their time and efforts primarily on higher-fee accounts due to a personal stake in compensation.
Putnam Management attempts to address these potential conflicts of interest relating to higher-fee accounts through various compliance policies that are generally intended to place all accounts, regardless of fee structure, on the same footing for investment management purposes. For example, under Putnam Management’s policies:
• Performance fee accounts must be included in all standard trading and allocation procedures with all other accounts.
• All accounts must be allocated to a specific category of account and trade in parallel with allocations of similar accounts based on the procedures generally applicable to all accounts in those groups (e.g., based on relative risk budgets of accounts).
• All trading must be effected through Putnam’s trading desks and normal queues and procedures must be followed (i.e., no special treatment is permitted for performance fee accounts or higher-fee accounts based on account fee structure).
• Front running is strictly prohibited.
• The fund’s Portfolio Leader(s) and Portfolio Member(s) may not be guaranteed or specifically allocated any portion of a performance fee.
As part of these policies, Putnam Management has also implemented trade oversight and review procedures in order to monitor whether particular accounts (including higher-fee accounts or performance fee accounts) are being favored over time.
Potential conflicts of interest may also arise when the Portfolio Leader(s) or Portfolio Member(s) have personal investments in other accounts that may create an incentive to favor those accounts. As a general matter and subject to limited exceptions, Putnam Management’s investment professionals do not have the opportunity to invest in client accounts, other than the Putnam funds. However, in the ordinary course of business, Putnam Management or related persons may from time to time establish “pilot” or “incubator” funds for the purpose of testing proposed investment strategies and products prior to offering them to clients. These pilot accounts may be in the form of registered investment companies, private funds such as partnerships or separate accounts established by Putnam Management or an affiliate. Putnam Management or an affiliate supplies the funding for these accounts. Putnam employees, including the fund’s Portfolio Leader(s) and Portfolio Member(s), may also invest in certain pilot accounts. Putnam Management, and to the extent applicable, the Portfolio Leader(s) and Portfolio Member(s) will benefit from the favorable investment performance of those funds and accounts. Pilot funds and accounts may, and frequently do, invest in the same securities as the client accounts. Putnam Management’s policy is to treat pilot accounts in the same manner as client accounts for purposes of trading allocation – neither favoring nor disfavoring them except as is legally required. For example, pilot accounts are normally included in Putnam Management’s daily block trades to the same extent as client accounts (except that pilot accounts do not participate in initial public offerings).
A potential conflict of interest may arise when the fund and other accounts purchase or sell the same securities. On occasions when the Portfolio Leader(s) or Portfolio Member(s) consider the purchase or sale of a security to be in the best interests of the fund as well as other accounts, Putnam Management’s trading desk may, to the extent permitted by applicable laws and regulations, aggregate the securities to be sold or purchased in order to obtain the best execution and lower brokerage commissions, if any. Aggregation of trades may create the potential for unfairness to the fund or another account if one account is favored over another in allocating the securities purchased or
sold – for example, by allocating a disproportionate amount of a security that is likely to increase in value to a favored account. Putnam Management’s trade allocation policies generally provide that each day’s transactions in securities that are purchased or sold by multiple accounts are, insofar as possible, averaged as to price and allocated between such accounts (including the fund) in a manner which in Putnam Management’s opinion is equitable to each account and in accordance with the amount being purchased or sold by each account. Certain exceptions exist for specialty, regional or sector accounts. Trade allocations are reviewed on a periodic basis as part of Putnam Management’s trade oversight procedures in an attempt to ensure fairness over time across accounts.
“Cross trades,” in which one Putnam account sells a particular security to another account (potentially saving transaction costs for both accounts), may also pose a potential conflict of interest. Cross trades may be seen to involve a potential conflict of interest if, for example, one account is permitted to sell a security to another account at a higher price than an independent third party would pay. Putnam Management and the fund’s Trustees have adopted compliance procedures that provide that any transactions between the fund and another Putnam-advised account are to be made at an independent current market price, as required by law.
Another potential conflict of interest may arise based on the different investment objectives and strategies of the fund and other accounts. For example, another account may have a shorter-term investment horizon or different investment objectives, policies or restrictions than the fund. Depending on another account’s objectives or other factors, the Portfolio Leader(s) and Portfolio Member(s) may give advice and make decisions that may differ from advice given, or the timing or nature of decisions made, with respect to the fund. In addition, investment decisions are the product of many factors in addition to basic suitability for the particular account involved. Thus, a particular security may be bought or sold for certain accounts even though it could have been bought or sold for other accounts at the same time. More rarely, a particular security may be bought for one or more accounts managed by the Portfolio Leader(s) or Portfolio Member(s) when one or more other accounts are selling the security (including short sales). There may be circumstances when purchases or sales of portfolio securities for one or more accounts may have an adverse effect on other accounts. As noted above, Putnam Management has implemented trade oversight and review procedures to monitor whether any account is systematically favored over time.
The fund’s Portfolio Leader(s) and Portfolio Member(s) may also face other potential conflicts of interest in managing the fund, and the description above is not a complete description of every conflict that could be deemed to exist in managing both the fund and other accounts.
(a)(3) Compensation of investment professionals. Putnam Management believes that its investment management teams should be compensated primarily based on their success in helping investors achieve their goals. The portion of Putnam Investments’ total incentive compensation pool that is available to Putnam Management’s Investment Division is based primarily on its delivery, across all of the portfolios it manages, of
consistent, dependable and superior performance over time. The peer group for the fund, which is identified in the shareholder report included in Item 1, is its broad investment category as determined by Lipper Inc. The portion of the incentive compensation pool available to each investment management team varies based primarily on its delivery, across all of the portfolios it manages, of consistent, dependable and superior performance over time on (i) for tax-exempt funds, a tax-adjusted basis to recognize the different federal income tax treatment for capital gains distributions and exempt-interest distributions a before-tax basis or (ii) for taxable funds, on a before-tax basis.
Consistent performance means being above median over one year.
· Dependable performance means not being in the 4th quartile of the peer group over one, three or five years.
· Superior performance (which is the largest component of Putnam Management’s incentive compensation program) means being in the top third of the peer group over three and five years.
In determining an investment management team’s portion of the incentive compensation pool and allocating that portion to individual team members, Putnam Management retains discretion to reward or penalize teams or individuals, including the fund’s Portfolio Leader(s) and Portfolio Member(s), as it deems appropriate, based on other factors. The size of the overall incentive compensation pool each year is determined by Putnam Management’s parent company, Marsh & McLennan Companies, Inc., and depends in large part on Putnam’s profitability for the year, which is influenced by assets under management. Incentive compensation is generally paid as cash bonuses, but a portion of incentive compensation may instead be paid as grants of restricted stock, options or other forms of compensation, based on the factors described above. In addition to incentive compensation, investment team members receive annual salaries that are typically based on seniority and experience. Incentive compensation generally represents at least 70% of the total compensation paid to investment team members.
(a)(4) Fund ownership. The following table shows the dollar ranges of shares of the fund owned by the professionals listed above at the end of the fund’s last two fiscal years, including investments by their immediate family members and amounts invested through retirement and deferred compensation plans.
(b) Not applicable
Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and
Affiliated Purchasers:
Registrant Purchase of Equity Securities
| Maximum | ||||
| Total Number | Number (or | |||
| of Shares | Approximate | |||
| Purchased | Dollar Value ) | |||
| as Part | of Shares | |||
| of Publicly | that May Yet Be | |||
| Total Number | Average | Announced | Purchased | |
| of Shares | Price Paid | Plans or | under the Plans | |
| Period | Purchased | per Share | Programs | or Programs * |
| October 7- October 31,2005 | 42,963 | $7.50 | 42,963 | 2,208,992 |
| November 1 - November 30, | ||||
| 2005 | 21,959 | $7.71 | 21,959 | 2,187,033 |
| December 1 - December 31, | ||||
| 2005 | 88,982 | $7.58 | 88,982 | 2,098,051 |
| January 1 - January 31, | ||||
| 2006 | 79,528 | $7.79 | 79,528 | 2,018,523 |
| February 1 - February 28, | ||||
| 2006 | 78,656 | $7.85 | 78,656 | 1,939,867 |
| March 1 - March 31, 2006 | 75,269 | $7.88 | 75,269 | 1,864,598 |
| April 1 - April 30, 2006 | 74,759 | $7.73 | 74,759 | 1,789,839 |
| May 1 - May 31, 2006 | 107,975 | $7.68 | 107,975 | 1,681,864 |
| June 1 - June 30, 2006 | 85,073 | $7.66 | 85,073 | 1,596,791 |
| July 1 - July 31, 2006 | 140,271 | $7.63 | 140,271 | 1,456,520 |
| August 1 - August 31, 2006 | 107,875 | $7.82 | 107,875 | 1,348,645 |
The Board of Trustees announced a repurchase plan on October 7, 2005 for which 1,125,977 shares were approved for repurchase by the fund. The repurchase plan was approved through October 6, 2006. On March 10, 2006, the Trustees announced that the repurchase program was increased to allow repurchases of up to a total of 2,251,955 shares over the original term of the program. On September 15, 2006, the Trustees voted to extend the term of the repurchase program through October 6, 2007. This extension did not affect the number of shares eligible for repurchase under the program.
*Information is based on the total number of shares eligible for repurchase under the program, as amended through September 15, 2006
Item 10. Submission of Matters to a Vote of Security Holders:
Not applicable
Item 11. Controls and Procedures:
(a) The registrant's principal executive officer and principal financial officer have concluded, based on their evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the design and operation of such procedures are generally effective to provide reasonable assurance that information required to be disclosed by the registrant in this report is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.
(b) Changes in internal control over financial reporting: Not applicable
Item 12. Exhibits:
(a)(1) The Code of Ethics of The Putnam Funds, which incorporates the Code of Ethics of Putnam Investments, is filed herewith.
(a)(2) Separate certifications for the principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940, as amended, are filed herewith.
(b) The certifications required by Rule 30a-2(b) under the Investment Company Act of 1940, as amended, are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Putnam High Income Securities Fund
By (Signature and Title):
/s/Michael T. Healy
Michael T. Healy
Principal Accounting Officer
Date: October 26, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title):
/s/Charles E. Porter
Charles E. Porter
Principal Executive Officer
Date: October 26, 2006
By (Signature and Title):
/s/Steven D. Krichmar
Steven D. Krichmar
Principal Financial Officer
Date: October 26, 2006