-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, s5tLv50wr4B4v+zp4x3AEZqXz3K4eqgF3d32CROMh0NfcrAqxp2l4043L31BF2AR Ferzlvof7DJxXnxD6Ohgng== 0000950146-95-000025.txt : 19950608 0000950146-95-000025.hdr.sgml : 19950608 ACCESSION NUMBER: 0000950146-95-000025 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19941130 FILED AS OF DATE: 19950130 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUTNAM BALANCED GOVERNMENT FUND CENTRAL INDEX KEY: 0000869797 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 046661044 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-06257 FILM NUMBER: 95503689 BUSINESS ADDRESS: STREET 1: ONE POST OFFICE SQUARE CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6172921458 MAIL ADDRESS: STREET 1: NULL FORMER COMPANY: FORMER CONFORMED NAME: PUTNAM BALANCED MORTGAGE FUND DATE OF NAME CHANGE: 19921223 FORMER COMPANY: FORMER CONFORMED NAME: PUTNAM FOCUS GROWTH FUND DATE OF NAME CHANGE: 19920703 N-30D 1 BALANCED GOVERNMENT FUND Putnam Balanced Government Fund ANNUAL REPORT November 30, 1994 (Art-- Balance Scales) B O S T O N * L O N D O N * T O K Y O Performance highlights From the Chairman > The fund's total return for class A shares ranked in the top 25% of the 346 government securities funds tracked by CDA/ Wiesenberger, an independent fund appraiser, for the year ending November 30, 1994.* > Performance should always be considered in light of a fund's investment strategy. Putnam Balanced Government Fund is designed for investors seeking as high a level of current income as is consistent with preservation of capital. FISCAL 1994 RESULTS AT A GLANCE
Class A Class B Total return NAV POP NAV CDSC ...................................................................................................... (change in value during period plus reinvested distributions) 12 months ended 11/30/94 -1.12% -4.24% -1.71% -4.52% Share value NAV POP NAV ...................................................................................................... 11/30/93 $4.91 $ 5.07 $4.91 11/30/94 4.60 4.75 4.60 Distributions Tax return No. Income of capital(1) Total ...................................................................................................... Class A 12 $0.236228 $0.02 $0.256228 Class B 12 0.207453 0.02 0.227453 Current return NAV POP NAV ...................................................................................................... End of period Current dividend rate(2) 5.89% 5.70% 5.29% Current 30-day SEC yield(3) 5.55 5.36 4.94
Performance data represent past results and will differ for each share class. For performance over longer periods, see page 8. POP assumes 3.25% maximum sales charge. CDSC assumes 3% maximum contingent deferred sales charge. Total return data reflect an expense limitation in effect through 2/16/94; without limitation, total returns would have been lower. (1)See page 21 for more detail. (2)Income portion of most recent distribution, annualized and divided by NAV or POP at end of period. (3)Based only on investment income, calculated using SEC guidelines. *CDA/Wiesenberger rankings vary over time and do not include the effects of sales charges. The firm ranked the fund's class A and class B shares 81 and 116, respectively, out of 346 government securities funds for the year ending November 30, 1994. Past performance is not indicative of future results. From the Chairman (Photo George Putanm) (C)Karsh, Ottawa Dear Shareholder: As we begin a new year, most investors won't regret the passing of the old. Since last February, when the Federal Reserve Board began a series of increases in interest rates, 1994 was marked by sharp corrections followed by small gains and extended uncertainty for virtually all financial markets. Well in advance of the Fed's first increase, Fund Manager Michael Martino had adopted defensive strategies designed to reduce the impact of rising rates on Putnam Balanced Government Fund's portfolio. While defensive strategies proved relatively successful, fund performance generally edged into the negative numbers. As you might expect, bonds bore the brunt of the downturn. Although shifts in the market as a whole inevitably affect your fund, Putnam Management's philosophy of selecting securities on an issue-by-issue basis with a thorough examination of each issuer's credit quality should continue to help protect your fund's portfolio. In the accompanying report, Mike discusses the fiscal year just ended and prospects in the challenging months ahead. Respectfully yours, (Signature George Putanm) George Putnam Chairman of the Trustees January 18, 1995 Report from the fund manager Michael Martino Following several years of declining interest rates during which bond prices soared, stronger-than-expected economic data in the fourth quarter of 1993 brought a historic multiyear bond market rally to a halt. In responding to the accelerating economy, the Federal Reserve Board, for the first time in five years, tightened its stance on U.S. monetary policy and, in February, initiated the first in a series of increases in short-term interest rates. Yields on fixed-income investments rose throughout the fiscal year ending November 30, 1994. These rises depressed bond prices and, in turn, the total return of Putnam Balanced Government Fund. Your fund's 12-month returns (-1.12% for class A shares and -1.71% for class B shares, at net asset value), although disappointing, were competitive when viewed in the context of the market's overall performance: the Lehman Brothers Mortgage-Backed Securities Index measured a return of -1.60% for the same period. See the performance summary on page 8 for more detail. Mortgage-backed securities played an important role in the fund's income and capital preservation strategies. Historically, mortgage-backed securities have yielded more than Treasuries with comparable maturities. As the risk of prepayments diminished throughout the year, rising investor demand helped support mortgage-backed securities prices. In addition, shareholders benefited from the fund's relatively short average maturity over the year. This spared portfolio holdings from much of the price volatility that afflicted longer-term fixed rate securities. > PRE-EMPTIVE STRATEGIES HELP LIMIT PRICE CHANGES By regularly balancing the portfolio, we have been able to capitalize on positive market conditions and interest rate relationships among different types of securities to help protect the fund's net asset value. During the early months of the fiscal year, the fund's 40% position in adjustable-rate mortgage-backed securities (ARMs) provided some defensive cushioning against declines in other parts of the market. These securities' coupons are adjusted periodically in response to market rates. Historically, this has kept their prices more stable over the longer term than those of comparable fixed-rate securities. The fund's ARM allocation is made up of FHLMC (Freddie Mac) and FNMA (Fannie Mae) securities whose coupons are adjusted relative to the one-year Constant Maturity Treasury Index (CMT). This index resets more frequently than does the other major yardstick for adjustable-rate mortgages, the 11th District Cost of Funds Index (COFI). Therefore, by emphasizing CMT-linked securities, the fund is better equipped to capture the higher coupons produced by the rising interest-rate environment. By late spring, income opportunities in fixed-rate mortgage-backed securities (FRMs) had grown stronger. Consequently, we reduced our investment in ARMs to 30% of net assets, the minimum dictated by the fund's investment policies. Proceeds from the sale of ARMs were reinvested in seasoned FRMs -- bonds with 30-year maturities that were issued several years ago. Seasoned FRMs tend to be less price-sensitive to rising interest rates and less susceptible to prepayments since, presumably, the owners of older mortgages have chosen not to take advantage of recent opportunities to refinance, and the final maturity dates are shorter. (Bar Chart) PORTFOLIO COMPOSITION as of 11/30/94 (Bar chart) Supply plot points Fixed-rate mortgage-backed securities Adjustable-rate mortgage-backed securities U.S. Treasuries and Short-term investments (End of bar chart) Each allocation represents a percentage of total net assets. Holdings may vary in the future. Within the Treasury sector, the fund's holdings have had a slight "barbell" orientation. We have concentrated assets in cash, one-year Treasury bills, and five-year Treasury notes. The objective of this strategy is to match the average yield of two- to three-year Treasuries, without actually purchasing those securities. We expect the prices of two- to three-year Treasuries to remain under pressure as long as the Fed continues its tightening of monetary policy. On November 30, 1994, your fund held 50% of net assets in FRMs, with 32% in ARMs and 18% in U.S. Treasuries and short-term investments. This allocation was fairly consistent throughout much of the fiscal year's second half. > MODEST LENGTHENING OF DURATION TO IMPROVE TOTAL RETURN POTENTIAL Duration measures a bond fund's sensitivity to interest rate changes. Typically, the shorter the duration of a portfolio, the more stable its net asset value. The fund's duration reached a low of 1.9 years in July, which helped to minimize share-price volatility and provided a measure of protection as interest rates continued to rise. Our repositioning efforts have extended the fund's duration toward the longer end of our target range of 1.5 years to 3.5 years. A longer duration positions the fund for greater share-price appreciation should inflation fears subside and interest rates stabilize or decrease. Typically, the duration of ARMs is relatively short because their coupons are periodically reset to reflect the interest rates being charged on adjustable-rate mortgages, which generally have shorter maturities than fixed-rate mortgages. > ADDITIONAL INTEREST RATE INCREASES LIKELY INTO 1995 While a genuine economic recovery has been under way for some time, certain sectors are still experiencing slower-than-average growth. Decreased retail sales and a leveling off in new home construction and industrial production would suggest that the Federal Reserve's tight monetary policy is having some effect. While we believe the most dramatic rise in interest rates is behind us, we also believe further Fed tightening is likely to continue this year. We will be looking for the Fed to walk a fine (Line Chart--Supply plot points) U.S. TREASURY VERSUS MORTGAGE SECURITIES Lehman Long Term Treasury Index Lehman Adjustable Rate Mortgage Backed Index Lehman Mortgage-Backed Securities Index This chart, which reflects changes in monthly total returns, illustrates the lower relative volatility offered by mortgage-backed securities of varying maturities versus long-term Treasury bonds for the year ending November 30, 1994 (End of line chart) line between fostering economic growth and keeping inflation in check. While the market has found some comfort in the fact that inflation remains moderate, the Fed must continue to act decisively if it is to dampen expectations of future inflation. Fiscal 1994 arguably encapsulated one of the worst bond-market performances in history. The dramatic run-up in short-term interest rates -- 2.75% in just 10 months -- created great uncertainty. Gauging the future course of interest rates is difficult at best. We believe, however, that the need for future rate increases should diminish as the effects of the Fed's tight monetary policy become more pervasive. In anticipation of this eventuality, we are gradually shifting the portfolio to reflect a more neutral outlook. Our goal is to have sector allocations of 30% to 35% in ARMs, 30% in FRMs, and the balance in Treasury securities. The views expressed in this report are exclusively those of Putnam Management and are not meant as investment advice. Although the described holdings were viewed favorably as of November 30, 1994, there is no guarantee the fund will continue to hold these securities in the future. Performance summary This section provides, at a glance, information about your fund's performance. Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions back into the fund. We show total return in two ways: on a cumulative long- term basis and on average how the fund might have grown each year over varying periods. For comparative purposes, we show how the fund performed relative to appropriate indexes and benchmarks. TOTAL RETURN FOR PERIODS ENDED 11/30/94
Class A Class B Lehman Bros. Mortgage-Backed Securities NAV POP NAV CDSC Index CPI 1 year -1.12% -4.24% -1.71 -4.52 -1.60% 2.68% Life (since 1.29 -2.04 0.21 -2.55 1.90 4.98 2/16/93) Annual average 0.72 -1.15 0.12 -1.43 1.08 2.75
TOTAL RETURN FOR PERIODS ENDED 12/31/94 most recent calendar quarter
Class A Class B NAV POP NAV CDSC 1 year -1.46% -4.75% -1.85% -4.65% Life (since 2/16/93) 1.57 -1.77 0.44 -2.31 Annual average 0.83 -0.94 0.23 -1.24
Fund performance data do not take into account any adjustment for taxes payable on reinvested distributions. Performance data represent past results and will differ for each share class. Investment returns and principal value will fluctuate so an investor's shares, when sold, may be worth more or less than their original cost. Class A shares are generally subject to an initial sales charge. Class B shares may be subject to a sales charge upon redemption. Net asset value (NAV) is the value of all your fund's assets, minus any liabilities, divided by the number of outstanding shares, not including any initial or contingent deferred sales charge. Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the maximum 3.25% sales charge. Contingent deferred sales charge (CDSC) is a charge applied at the time of the redemption of class B shares and assumes redemption at the end of the period. Your fund's CDSC declines from a 3% maximum during the first year to 1% during the fourth year. After the fourth year, the CDSC no longer applies. (Line chart--supply plot points) GROWTH OF A $10,000 INVESTMENT Cumulative total return of a $10,000 investment since 2/16/93 $10,000 10,325 10,190 9,796 9,671 Lehman Brothers Mortgage Backed Securities Index Lehman Brothers Adjustable Rate Mortgage Backed Securities Index Fund's Class A shares at NAV Past performance is no asurance of future results. A $10,000 investment in the fund's class B shares at inception (2/16/93) would have grown to $10,021 by 11/30/94 ($9,745 with a redemption at the end of the period). All data as of 11/30. (End of line chart) COMPARATIVE BENCHMARKS Lehman Brothers Mortgage-Backed Securities Index reflects performance of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association. Lehman Brothers Adjustable Rate Mortgage-Backed Securities Index reflects performance of adjustable-rate securities backed by GNMA, FNMA, and FHLMC mortgage pools. Lehman Brothers Long-Term Treasury Index is composed of all bonds covered by the Lehman Brothers Treasury Bond Index with maturities of 10 years or greater. Indexes reflect changes in market price and reinvestment of all interest payments but do not take into account brokerage commissions or other costs. Securities in the fund do not match those in the indexes and may pose different risks. Report of Independent Accountants For the fiscal year ended November 30, 1994 To the Trustees and Shareholders of Putnam Balanced Government Fund We have audited the accompanying statement of assets and liabilities of Putnam Balanced Government Fund, including the portfolio of investments owned, as of November 30, 1994, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the "Financial Highlights" for each of the periods indicated therein. These financial statements and "Financial Highlights" are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and "Financial Highlights" based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and "Financial Highlights" are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of November 30, 1994 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and "Financial Highlights" referred to above present fairly, in all material respects, the financial position of Putnam Balanced Government Fund as of November 30, 1994, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the "Financial Highlights" for each of the periods indicated therein, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Boston, Massachusetts January 12, 1995 Portfolio of investments owned November 30, 1994
U.S. Government and Agency Obligations (88.8%)(a) Principal Amount Value Federal Home Loan Mortgage Corp. $1,434,674 6-1/2s, March 1, 2005 $ 1,370,114 405,972 5-1/2s, February 1, 1999 386,942 Federal Home Loan Corp. Adjustable Rate Mortgages (ARMS) 2,341,754 6.191s, November 1, 2018 2,382,735 921,580 5-1/8s, December 1, 2017 918,124 3,972,987 5.625s, April 1, 2017 3,940,706 Federal National Mortgage Association 3,035,672 8s, with various due dates to May 1, 2013 3,010,474 2,557,631 7-1/2s, July 1, 2007 2,471,311 2,281,007 6-1/2s, with various due dates to January 1, 2001 2,147,711 621,132 6s, February 1, 2002 592,211 Federal National Mortgage Association ARMS 1,421,685 7.415s, October 1, 2021 1,427,016 979,684 5.810s, January 1, 2023 981,521 707,409 5.713s, January 1, 2018 706,525 4,750,876 5.47s, April 1, 2018 4,753,846 Government National Mortgage Association 4,279,767 9s , with various due dates to July 15, 2021 4,350,559 1,454,789 8-1/4s, with various due dates to July 15, 2021 1,409,763 5,248,606 8s, with various due dates to September 15, 2023 4,991,497 2,936,553 6-1/2s to October 1, 2024 2,839,280 Government National Mortgage Association ARMS 3,542,382 7s, to June 20, 2023 3,464,892 2,646,955 6-3/4s, June 1, 2023 2,613,868 Government National Mortgage Association Midgets 1,156,000 8-1/2s, June 15, 2007 1,164,971 2,873,337 8s, October 15, 2008 2,826,488 3,767,794 7s, March 15, 2009 3,526,407 10,000,000 Tennessee Valley Authority 7-5/8s to September 15, 1999 9,725,000 5,000,000 U. S. Treasury Notes 6-7/8s, August 31, 1999 4,817,188 Total U. S. Government and Agency Obligations (cost $70,516,248) $66,819,149 Short-Term Investments (11.1%)(a) Principal Amount Value $4,000,000 Federal National Mortgage Association 5.45% due December 8, 1994 $ 3,995,761 4,393,000 Interest in $500,000,000 joint repurchase agreement dated November 30, 1994 with Bankers Trust Inc., due December 1, 1994 with respect to various U.S. Treasury obligations-maturity value of $4,393,702 for an effective yield of 5-3/4%. 4,393,702 Total Short Term Investments (cost $8, 389,463 ) $ 8,389,463 Total Investments (cost $78,905,711 ) (b) $75,208,612
NOTES (a) Percentages indicated are based on net assets of $75,253,726, which correspond to a net asset value per class A share and class B share of $4.60 and $4.60 respectively. (b) The aggregate identified cost for Federal Income Tax purposes is $78,905,009, resulting in unrealized depreciation of $3,696,397. The accompanying notes are an integral part of these financial statements. Statement of assets and liabilities November 30, 1994
Assets Investments at value (identified cost $78,905,711) (Note 1) $75,208,612 Cash 238 Interest and other receivables 702,904 Receivable for shares of the fund sold 9,484 Unamortized organization expenses (Note 1) 32,108 Total assets 75,953,346 Liabilities Distributions payable to shareholders 300,225 Payable for shares of the fund repurchased 151,176 Payable for compensation of Manager (Note 2) 115,816 Payable for compensation of Trustees (Note 2) 120 Payable for investor servicing and custodian fees (Note 2) 14,513 Payable for administrative services (Note 2) 2,382 Payable for distribution fees (Note 2) 38,130 Payable for organizational costs (Note 1) 49,893 Other accrued expenses 27,365 Total liabilities 699,620 Net assets $75,253,726 Represented by Paid-in capital (Notes 1, 4 and 5) $82,869,386 Distributions in excess of net investment income (300,204) Accumulated net realized loss on investment transactions (3,618,357) Net unrealized depreciation of investments (3,697,099) Total--Representing net assets applicable to capital shares outstanding $75,253,726 Computation of net asset value and offering price Net asset value and redemption price of class A shares ($53,830,502 divided by 11,696,188 shares) $4.60 Offering price per share (100/96.75 of $4.60)+ $4.75 Net asset value and offering price of class B shares ($21,423,224 divided by 4,656,113 shares)+ $4.60
*On single retail sales of less than $100,000. On sales of $100,000 or more and on group sales the offering price is reduced. +Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. The accompanying notes are an integral part of these financial statements. Statement of operations For the year ended November 30, 1994
Interest income $ 6,285,216 Expenses: Compensation of Manager (Note 2) 566,802 Investor servicing and custodian fees (Note 2) 140,053 Compensation of Trustees (Note 2) 8,993 Reports to shareholders 30,072 Auditing 23,907 Legal 13,481 Postage 6,813 Administrative services (Note 2) 6,720 Amortization of organization expenses (Note 1) 9,917 Distribution fees--class A (Note 2) 176,133 Distribution fees--class B (Note 2) 198,670 Registration fees 13,227 Other 2,303 Fees waived by the Manager (Note 2) (28,017) Total expenses 1,169,074 Net investment income 5,116,142 Net realized loss on investments (Notes 1 and 2) (3,902,597) Net unrealized depreciation of investments during the period (2,920,007) Net loss on investment transactions (6,822,604) Net decrease in net assets resulting from operations $(1,706,462)
The accompanying notes are an integral part of these financial statements. Statement of changes in net assets
For the period February 16, 1993 (commencement of Year ended operations) to November 30 November 30 1994 1993 Increase (decrease) in net assets Operations: Net investment income $ 5,116,142 $ 2,340,846 Net realized loss on investments (3,902,597) (767,660) Net unrealized depreciation of investments (2,920,007) (777,092) Net increase (decrease) in net assets resulting from operations (1,706,462) 796,094 Distributions to shareholders from: Net investment income Class A (3,404,487) (1,914,742) Class B (992,855) (393,310) Tax return of capital Class A (355,268) -- Class B (103,607) -- Increase (decrease) from capital share transactions (Note 4) (33,118,455) 116,346,716 Total increase (decrease) in net assets (39,681,134) 114,834,758 Net assets Beginning of period 114,934,860 100,102 End of period (including distributions in excess of and undistributed net investment income of $300,204 and $32,896 respectively) $ 75,253,726 $114,934,860
The accompanying notes are an integral part of these financial statements. Financial Highlights (For a share outstanding throughout the year)
For the period For the period February 16, 1993 February 16, 1993 (commencement (commencement Year ended of operations) to Year ended of operations) to November 30 November 30 November 30 November 30 1994 1993 1994 1993 Class B Class A Net Asset Value, Beginning of Period $ 4.91 $ 5.00 $ 4.91 $ 5.00 Investment operations Net investment income .24(b) .18(a)(b) .27(b) .21(a)(b) Net realized and unrealized gain (loss) on investments (.32) (.08) (.32) (.09) Total from investment operations (.08)(b) .10(b) (.05)(b) .12(b) Distributions to shareholders from: Net investment income (.21) (.19) (.24) (.21) Tax return of capital (c) (.02) -- (.02) -- Total distributions (.23) (.19) (.26) (.21) Net Asset Value, End of Period $ 4.60 $ 4.91 $ 4.60 $ 4.91 Total investment return at net asset value (%) (d) (1.71) 1.95(e) (1.12) 2.44(e) Net assets, end of period (in thousands) $21,423 $ 4,317 $53,831 $19,088 Ratio of expenses to average net assets (%) 1.69 .67(b)(e) 1.09 1.05(b)(e) Ratio of net investment income to average net assets (%) 4.98 3.53(b)(e) 5.59 3.13(b)(e) Portfolio turnover (%) 351.62 309.80(e) 351.62 309.80(e)
(a) Per share net investment income for the period ended November 30, 1993 has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Reflects an expense limitation in effect during the period February 16, 1993 (commencement of operations) to November 30, 1993 (see Note 2). As a result of such limitation, expenses of the fund for the period February 16, 1993 (commencement of operations) to November 30, 1993 reflect a reduction of $0.01 per share for class A and $0.01 per share for class B. For the year ended November 30, 1994 the reduction is less than $0.01 per share for class A and less than $0.01 per share for class B. (c) Distributions from return of capital for the year ended November 30, 1994 have been calculated in accordance with Statement of Position 93-2 "Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" (see notes 1 and 5). (d) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (e) Not annualized. Notes to financial statements November 30, 1994 Note 1 Significant accounting policies The fund is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The fund seeks high current income consistent with preservation of capital, through investments primarily in U.S. government securities. The fund offers both class A and class B shares. Class A shares are sold with a maximum front-end sales charge of 3.25%. Class B shares do not pay a front-end sales charge, but pay a higher ongoing distribution fee than class A shares, and are subject to a contingent deferred sales charge, if those shares are redeemed within four years of purchase. Expenses of the fund are borne pro-rata by the holders of both classes of shares, except that each class bears expenses unique to that class (including the distribution fees applicable to such class), and votes as a class only with respect to its own distribution plan or other matters on which a class vote is required by law or determined by the Trustees. Shares of each class would receive their pro-rata share of the net assets of the fund, if the fund were liquidated. In addition, the Trustees declare separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles. A Security valuation Investments for which market quotations are readily available are stated at market value, which is determined using the last reported sale price, or, if no sales are reported--as in the case of some securities traded over-the-counter--the last reported bid price, except that certain U.S. government obligations are stated at the mean between the last reported bid and asked prices. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value, and other investments are stated at fair value following procedures approved by the Trustees. B Joint trading account Pursuant to an exemptive order issued by the Securities and Exchange Commission the fund may transfer uninvested cash balances into a joint trading account, along with the cash of other registered investment companies managed by Putnam Investment Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc. and certain other accounts. These balances may be invested in one or more repurchase agreements and/or short-term money market instruments. C Repurchase agreements The fund, or any joint trading account, through its custodian, receives delivery of the underlying securities, the market value of which at the time of purchase is required to be in an amount at least equal to the resale price, including accrued interest. The fund's Manager is responsible for determining that the value of these underlying securities is at all times at least equal to the resale price, including accrued interest. D Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis. E Federal taxes It is the policy of the fund to distribute all of its income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation of securities held and excise tax on income and capital gains. At November 30, 1994, the fund had a capital loss carryover of approximately $3,618,000, which may be available to offset realized gains, if any, to the extent provided by regulations. Of this amount $297,000 and $3,321,000 will expire November 30, 2001 and 2002 respectively. In order to provide more level daily distributions, the fund may at times pay taxable distributions from net realized short-term gains that could have been retained by the fund and offset by the capital loss carryover. In such circumstances, the fund would lose the benefit of the carryover. F Distributions to shareholders Income dividends are recorded daily by the fund and are distributed monthly. Capital gains distribution(s), if any, are only recorded on the ex-dividend date and paid no less frequently than annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include treatment of GNMA paydowns. Reclassifications are made to the funds capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended November 30, 1994 the fund reclassified $625,445 to increase distributions in excess of net investment income and increase accumulated net realized gains. G Unamortized organization expenses Expenses incurred by the fund in connection with its organization aggregated $49,893. These expenses are being amortized on a straight-line basis over a five-year period. Note 2 Management fee, administrative services, and other transactions Compensation of Putnam Management for management and investment advisory services is paid quarterly based on the average net assets of the fund for the quarter. Such fee is based on the following annual rates: 0.60% of the first $1 billion of average net assets, 0.50% of the next $500 million, and 0.45% of any amount over $1.5 billion, subject to reduction in any year to the extent that expenses (exclusive of distribution fees, brokerage, interest and taxes) of the fund exceed 2.5% of the first $30 million of average net assets, 2% of the next $70 million, and 1.5% of any excess over $100 million and by the amount of certain brokerage commissions and fees (less expenses) received by affiliates of the Manager on the fund's portfolio transactions. The Manager voluntarily agreed to reduce its compensation through February 16, 1994, to the extent that expenses of the fund exceed 0.80% of the fund's average net assets. The fund's expenses, subject to this limitation were exclusive of brokerage interest, taxes, insurance, amortization of deferred organization expenses and extraordinary expenses, if any, and expenses incurred under the fund's distribution plan described below. This limitation was accomplished by a reduction of the com- pensation payable under the management contract to the Manager. As a result of the voluntary limitation, expenses for the year ended November 30, 1994 were reduced by $28,017. The fund also reimburses the Manager for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Trustees of the fund receive an annual Trustee's fee of $530 or any additional fee for each Trustees' meeting attended. Trustees who are not interested persons of the Manager and who serve on committees of the Trustees receive additional fees for attendance at certain committee meetings. Custodial functions for the fund are provided by Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing agent functions are currently provided by Putnam Investor Services, a division of PFTC. Investor servicing and custodian fees reported in the Statement of operations for the year ended November 30, 1994 have been reduced by credits allowed by PFTC. The fund has adopted a distribution plan with respect to its class A shares (the "Class A Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of Class A Plan is to compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments, Inc., for services provided and expenses incurred by it in distributing class A shares. The Trustees have approved payment by the fund to Putnam Mutual Funds Corp. at an annual rate of 0.25% of the fund's average net assets attributable to class A shares. The fund has adopted a separate distribution plan with respect to its class B shares (the "Class B Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Class B Plan is to compensate Putnam Mutual Funds Corp. for services provided and expenses incurred by it in distributing class B shares. The Class B Plan provides for payments by the fund to Putnam Mutual Funds Corp., at an annual rate of 0.85% of the fund's average net asset value of class B shares. During the year ended November 30, 1994, Putnam Mutual Funds Corp., acting as an underwriter, received net commissions of $46,022 from the sale of class A shares of the fund. A deferred sales charge of up to 1% is assessed on certain redemptions of class A shares purchased as part of an investment of $1 million or more. For the year ended November 30, 1994, Putnam Mutual Funds Corp., acting as underwriter, received $79,622 on such redemptions. Putnam Mutual Funds Corp. also receives the proceeds of contingent deferred sales charges levied on class B share redemptions within four years of purchase. The charge is based on declining rates, which begin at 3% of the net asset value of the redeemed shares. For the year ended November 30, 1994, Putnam Mutual Funds Corp. received contingent deferred sales charges of $94,234 from such redemptions. Note 3 Purchases and sales of securities Purchases and sales of U.S. government obligations other than short-term investments aggregated $328,611,016 and $383,858,257, respectively. In determining the net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. Note 4 Capital shares At November 30, 1994, there was an unlimited number of shares of beneficial interest authorized, divided into two classes. Class A and class B capital shares transactions were as follows:
For the period February 16 (commencement of Year ended operations) to November 30 November 30 1994 1993 Class A Shares Amount Shares Amount Shares sold 6,328,904 $ 30,343,192 24,648,597 $122,632,845 Shares issued in connection with reinvestment of distributions 644,768 3,091,225 250,068 1,242,772 6,973,672 33,434,417 24,898,665 123,875,617 Shares repurchased (14,365,493) (68,320,646) (5,830,455) (29,012,179) Net increase (decrease) (7,391,821) $(34,886,229) 19,068,210 $ 94,863,438
For the period February 16 (commencement of Year ended operations) to November 30 November 30 1994 1993 Class B Shares Amount Shares Amount Shares sold 3,048,911 $ 14,623,970 4,838,741 $24,072,683 Shares issued in connection with reinvestment of distributions 174,536 830,767 46,116 229,077 3,223,447 15,454,737 4,884,857 24,301,760 Shares repurchased (2,884,188) (13,686,963) (568,204) (2,818,482) Net increase 339,259 $ 1,767,774 4,316,653 $21,483,278
Note 5 Reclassification of Capital Accounts Effective December 1, 1993, Putnam Balanced Government Fund has adopted the provisions of Statement of Position 93-2 "Determination and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" (SOP). The Purpose of this SOP is to report the accumulated net investment income (loss) and accumulated net realized gain (loss) accounts in such a manner as to approximate amounts available for future distributions (or to offset future realized capital gains) and to achieve uniformity in the presentation of distributions by investment companies. As a result of the SOP, the fund has reclassified $426,455, to increase distributions in excess of net investment income and to decrease accumulated net realized loss on investment transactions. These adjustments represent the cumulative amounts necessary to report these balances through November 30, 1993, the close of the fund's prior fiscal year-end, for financial reporting and tax purposes. Federal Tax Information RETURN OF CAPITAL FOR FISCAL YEAR ENDED NOVEMBER 30, 1994 Coincident with the year-end financial review of the portfolio, it was determined that approximately 9% of the fiscal year's distribution must be classified as a return of capital and is therefore not taxable to shareholders. Your Form 1099, mailed in January 1995, will indicate the exact amount of the distributions not subject to tax. You will need to adjust the cost basis of your shares when you eventually redeem or exchange them. In doing so, you will increase any capital gain or decrease any capital loss you incur at that time. The return of capital is related to the massive wave of mortgage refinancings that occurred during the fund's fiscal year, which resulted in early prepayment of principal on many of the fund's mortgage-backed securities. Since mortage-backed securities are backed by pools of mortgage loans, when homeowners refinance and thereby retire their existing mortgages early, the securities backed by those mortgages are also retired early. An Internal Revenue Service provision requires that the capital losses realized on these retired securities be reclassified as deductions from ordinary income for tax purposes. As a result, approximately 9% of the total per-share distribution for class A and class B shares represents a return of capital, with the balance being ordinary income dividends. Our commitment to quality service > CHOOSE AWARD-WINNING SERVICE. Putnam Investor Services has won the DALBAR Quality Tested Service Seal for the past five years, through 1994. DALBAR, an independent research firm, ran more than 10,000 tests of 38 shareholder service components. In every category, Putnam outperformed the industry standard. > HELP YOUR INVESTMENT GROW. Set up a systematic program for investing with as little as $25 a month from a Putnam fund or from your checking or savings account.* > SWITCH FUNDS EASILY. You can move money from one account to another with the same class of shares without a service charge. (This privilege is subject to change or termination.) > ACCESS YOUR MONEY QUICKLY. You can get checks sent regularly or redeem shares any business day the then-current net asset value, which may be more or less than their original cost. For details about any of these or other services, contact your financial advisor or call the toll-free number shown below and speak with a helpful Putnam representative. > To make an additional investment in this or any other Putnam fund, contact your financial advisor or call our toll-free number: 1-800-225-1581. *Regular investing, of course, does not guarantee a profit or protect against a loss in a declining market. Investors should consider their ability to continue purchasing shares during periods of low price levels. Fund information INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Mutual Funds Corp. One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P. TRUSTEES George Putnam, Chairman William F. Pounds, Vice Chairman Jameson Adkins Baxter Hans H. Estin John A. Hill Elizabeth T. Kennan Lawrence J. Lasser Robert E. Patterson Donald S. Perkins George Putnam, III A.J.C. Smith W. Nicholas Thorndike OFFICERS George Putnam President Charles E. Porter Executive Vice President Patricia C. Flaherty Senior Vice President John R. Verani Vice President Lawrence J. Lasser Vice President Gordon H. Silver Vice President Gary N. Coburn Vice President Alan J. Bankart Vice President Michael Martino Vice President and Fund Manager William N. Shiebler Vice President Paul M. O'Neil Vice President John D. Hughes Vice President and Treasurer Beverly Marcus Clerk and Assistant Treasurer This report is for the information of shareholders of Putnam Balanced Government Fund. It may also be used as sales literature when preceded or accompanied by the current prospectus, which gives details of sales charges, investment objectives, and operating policies of the fund, and the most recent copy of Putnam's Quarterly Performance Summary. For more information or to request a prospectus, call toll-free: 1-800-225-1581. 398/428-15840 PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 .................. Bulk Rate U.S. Postage Paid Putnam Investments .................. APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED AND EDGAR-FILED TEXTS: (1) Bold and italic typefaces are displayed in normal type. (2) Headers (e.g., the name of the fund) are omitted. (3) Certain tabular and columnar headings and symbols are displayed differently in this filing. (4) Bullet points and similar graphic signals are omitted. (5) Page numbering is omitted. (6) Trademark symbol replaced with (TM) -----END PRIVACY-ENHANCED MESSAGE-----