N-CSR 1 a_mngdhghyld.htm PUTNAM MANAGED HIGH YIELD TRUST

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 - 07658 )

Exact name of registrant as specified in charter: Putnam Managed High Yield Trust

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: May 31, 2006

Date of reporting period: June 1, 2005 - May 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 Managed   
High Yield   
Trust   
 
5 | 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  26 
Financial statements  28 
Federal tax information  56 
Shareholder meeting results  57 
Compliance certifications  58 
About the Trustees  59 
Officers  65 

Cover photograph: © Richard H. Johnson

Message from the Trustees

Dear Fellow Shareholder

Investors continue to keep a close watch on the course of the economy. Globally, it appears that, assuming economic growth exceeds 4% in 2006, we will have seen the strongest economic performance over a four-year period in over thirty years. Corporate profits have boomed around the world, business capacity utilization rates have moved up, and unemployment rates have come down. Given such a sustained period of robust growth, it is not surprising that prices have begun to rise, inflation rates have crept up, and central banks in many countries, particularly the Federal Reserve (the Fed) in the United States, have pushed interest rates higher.

In recent weeks, investors have worried that these higher rates could threaten the fundamentals of the global economy, prompting a widespread sell-off. However, we believe that today’s higher interest rates, far from being a threat to global economic fundamentals, are in fact an integral part of them. Higher interest rates are bringing business borrowing costs closer to the rate of return available from investments. In our view, this should help provide the basis for a longer and more durable business expansion and a continued healthy investment environment.

You can be assured that the investment professionals managing your fund are closely monitoring the factors that influence the performance of the securities in which your fund invests. Moreover, Putnam Investments’ management team, under the leadership of Chief Executive Officer Ed Haldeman, continues to focus on investment performance and remains committed to putting the interests of shareholders first.

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In the following pages, members of your fund’s management team discuss the fund’s performance and strategies for the fiscal period ended May 31, 2006, and provide their outlook for the months ahead. As always, we thank you for your support of the Putnam funds.


Putnam Managed High Yield Trust: a disciplined
approach to seeking income and capital growth

Relative to most types of fixed-income investments, high-yield bonds are more dependent on the performance of issuing companies than on interest rates. For this reason, distinguishing between opportunities and pitfalls requires a rigorous investment process. With Putnam Managed High Yield Trust, this process is highlighted by exhaustive research, investment diversification, and portfolio adjustments.

Because of the risks of high-yield bond investing, in-depth credit research is essential. The fund’s research team — more than 20 professionals, including analysts who specialize by industry — visits with the management of issuing companies and analyzes each company’s prospects. The team then compares this information to the bond’s potential upside or downside before deciding whether it is an appropriate investment for the fund.

The fund’s portfolio typically consists of a broad range of industries and companies. Holdings are diversified across industry sectors and among bonds with differing credit ratings. While the fund invests primarily in the bonds of U.S. companies, its diversified approach allows it to include foreign bonds as well. Among these securities, investments in emerging-market bonds may be used to enhance the fund’s appreciation potential. Although diversification does not ensure a profit or protect against a loss and it is possible to lose money in a diversified portfolio, the fund’s diversification can help reduce the volatility that typically comes with higher-risk investments.

As the bond markets shift over time, the fund’s management looks for ways to capitalize on developments that affect fixed-income securities in general and high-yield bonds in particular. For example, when credit spreads are wide and expected to tighten, the fund

High-yield bonds have historically offered greater
return potential than investment-grade bonds.


may pursue the higher income potential offered by lower-quality issues. On the other hand, when credit spreads are narrow — that is, when the difference in yield between higher- and lower-rated bonds of comparable maturities is small — the fund may shift its emphasis to higher-quality high-yield bonds.

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. Additional risks may be associated with emerging-market securities, including illiquidity and volatility.

How do closed-end funds
differ from open-end funds?

More assets at work While open-end funds must maintain a cash position to meet redemptions, closed-end funds have no such requirement and can keep more of their assets invested in the market.

Traded like stocks Closed-end fund shares are traded on stock exchanges, and their market prices fluctuate in response to supply and demand, among other factors.

Market price vs. net asset value Like an open-end fund’s net asset value (NAV) per share, the NAV of a closed-end fund share is equal to the current value of the fund’s assets, minus its liabilities, divided by the number of shares outstanding. However, when buying or selling closed-end fund shares, the price you pay or receive is the market price. Market price reflects current market supply and demand and may be higher or lower than the NAV.


Putnam Managed High Yield Trust seeks high current income and, as a secondary objective, capital growth (to the extent consistent with seeking high current income), by investing in corporate high-yield bonds. The fund is designed for investors seeking higher fixed-income returns who are willing to accept the added risks of investing in below-investment-grade bonds.

Highlights 

*   		For the 12 months ended May 31, 2006, Putnam Managed High Yield Trust returned 8.03% at 
net asset value (NAV) and 18.23% at market price. 

*		 The fund’s benchmark, the JP Morgan Developed High Yield Index, returned 7.36%. 

*		 The average return for the fund’s Lipper category, High Current Yield Funds (closed-end), 
was 8.15%. 

*		 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 advisor, market conditions, fluctuations in supply and demand for the fund’s shares, and changes in fund distributions.

Total return for periods ended 5/31/06

Since the fund’s inception (6/25/93), average annual return is 6.30% at NAV and 5.45% at market price.

  Average annual return  Cumulative return 
  NAV  Market price  NAV  Market price 
 
10 years  5.26%  4.91%  66.97%  61.45% 
5 years  7.75  4.25  45.27  23.16 
3 years  10.46  6.79  34.76  21.80 
1 year  8.03  18.23  8.03  18.23 

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.

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Report from the fund managers

The year in review

During its fiscal year ended May 31, 2006, Putnam Managed High Yield Trust outperformed its benchmark, the JP Morgan Developed High Yield Index, based on results at net asset value (NAV). We attribute this outperformance primarily to successful security selection. The management team’s decision to overweight bonds from the strong-performing energy and utilities industries also buoyed performance, as did a modest position in emerging-market bonds (which are not a component of the benchmark) held earlier in the fiscal year. The fund’s results at NAV were in line with the average for its Lipper peer group. However, it is important to remember that comparisons in this category can be misleading because it contains only six funds, and at least one fund in the group uses leverage to boost returns.

Market overview

High-yield bonds performed well at the start of the fund’s 2006 fiscal year, mainly due to a strong corporate business climate. In addition, mergers and acquisitions activity was brisk and several high-yield companies were acquired by investment-grade firms, resulting in an upgrade of their credit ratings. However, the market made little progress during the last four months of calendar 2005, as generally solid corporate business fundamentals were offset by periodic negative news, including the bankruptcies of Delta and Northwest airlines in September 2005, auto parts supplier Delphi in October, and electric utility Calpine in December. The high-yield market also continued to digest the significant influx of debt that accompanied the credit-rating downgrades of Ford and General Motors earlier in the year. However, the tide turned in January, as investors focused on continued healthy business fundamentals, large deals that came to the market, consolidation activity, strong liquidity, and General Motor’s plan to sell its financing arm. In addition, even with the bankruptcies cited above, the overall default rate remained below historical averages, indicating the relative financial health of high-yield companies.

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While the Fed continued to raise short-term interest rates at each of its Open Market Committee meetings during the period, these moves did not have as much impact on the high-yield market as the relative health of corporate business fundamentals. Against that backdrop, there was a rally among the lower-quality segments of the high-yield market from January through the end of April. However, May brought with it increasing volatility across most asset classes, due to concerns about inflation that made investors more risk-averse. A sharp sell-off in the emerging markets spilled into the credit markets, leading to lower prices for high-yield bonds during May.

Strategy overview

For most of the fiscal year, we maintained a bias toward the higher-quality tiers of the high-yield bond market. Until May, the last month of the fiscal year, high-yield bond spreads — the yield advantage offered by high-yield bonds over comparable Treasuries —remained narrow, meaning investors were not being compensated for taking on the additional risk carried by lower-quality bonds. In addition, we believed that the Fed’s continued tightening of short-term interest rates would start to soften economic growth, a backdrop likely to favor bonds offering higher credit ratings. Overall, we sought to maintain a diversified portfolio, investing in companies offering a sustainable competitive advantage, a

Market sector performance   
These indexes provide an overview of performance in different market sectors for the   
12 months ended 5/31/06.   
 
Bonds   
 
JP Morgan Developed High Yield Index (high-yield corporate bonds)  7.36% 
Lehman Aggregate Bond Index (broad bond market)  –0.48% 
Lehman GNMA Index (Government National Mortgage Association bonds)  0.72% 
Lehman Municipal Bond Index (tax-exempt bonds)  1.88% 
Lehman Global Aggregate Bond Index (global bond markets)  0.61% 
Equities   
 
S&P 500 Index (broad stock market)  8.64% 
Russell 2000 Index (small-company stocks)  18.24% 
MSCI EAFE Index (international stocks)  28.24% 

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viable capital structure, sufficient cash-flow generation, and some sort of adequate downside protection. We continued to be selective in adding new names to the fund, relying on our rigorous fundamental credit research to evaluate potential investments.

With regard to industry and sector weightings, we maintained an overweight position in energy, particularly exploration and production companies, which continued to benefit from strong global demand and restricted supply. We also favored media, where valuations remained attractive and solid economic growth sustained advertising spending. In addition, we emphasized bonds issued by building materials companies, which benefited from demand growth, and  utilities, due to the stable cash flow characteristics offered by regulated utilities and pipeline companies.

Areas we chose to underweight, relative to the benchmark, included bonds issued by auto manufacturers and parts suppliers, several of whom filed for bankruptcy protection due in part to high costs and a lack of pricing power. We also underweighted paper and forest products because we felt their valuations were not compelling.

Your fund’s holdings

During the course of the fiscal year, our diversified approach helped stabilize returns. Although our high-quality bias held back performance when lower-quality bonds rallied in early 2006, it


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helped bolster relative returns during the last quarter of 2005 and again when the market struggled in May 2006. At the same time, we did maintain some exposure to lower-quality pockets of the market — when bonds offered attractive valuations and/or positive business fundamentals — and these investments were able to participate in the rally from January through April 2006.

One of the key contributors of positive results was Doane Pet Care. After this pet food manufacturer was acquired during the first half of the fiscal year, its bonds and preferred stock obligations were redeemed, resulting in significant capital appreciation for your fund. Williams Companies, which owns exploration and production as well as pipeline assets, also fared well due to rising natural gas prices. Your fund held bonds and common stock of Samsonite as the company improved its operating performance, and the stock advanced strongly. Bonds issued by advertising firm Vertis also appreciated during the lower-quality rally in the market in the first few months of 2006, and due to an improvement in the company’s business prospects. Finally, telecommunications services provider Qwest posted improved results because of strengthening business fundamentals and management’s de-leveraging of its balance sheet.

Each period brings with it some disappointments, and this fiscal year

Top holdings

This table shows the fund’s top holdings, and the percentage of the fund’s net assets that each comprised, as of 5/31/06. The fund’s holdings will change over time.

Holding (percent of fund’s net assets)  Coupon (%) and maturity date  Industry 
 
Ford Motor Credit Corp. (0.8%)  7.875%, 2010  Automotive 
CCH I, LLC (0.7%)  11%, 2015  Cable television 
DirecTV Holdings, LLC (0.7%)  6.375%, 2015  Broadcasting 
XCL, Ltd. Equity Units (0.7%)  N/A  Oil and gas 
Novelis, Inc. 144A (0.7%)  7.75%, 2015  Metals 
General Motors Acceptance Corp. (0.6%)  7.75%, 2010  Automotive 
Whiting Petroleum Corp. (0.6%)  7%, 2014  Oil and gas 
Affinion Group, Inc. 144A (0.6%)  10.125%, 2013  Advertising and 
    marketing services 
Qwest Communications     
International, Inc. (0.6%)  7.5%, 2014  Regional Bells 
Aero Invest 1 SA 144A     
(Luxembourg) (0.6%)  11.269%, 2015  Aerospace and defense 

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was no exception. The fund’s position in consumer products company Spectrum Brands declined because the company missed earnings expectations due to weakness in its battery business. Relative to the fund’s benchmark index, your fund’s performance was held back by not owning some index components that posted relatively strong returns. We avoided bonds issued by electric utility Calpine, which declared bankruptcy in December but subsequently rallied from distressed levels, posting strong performance during the lower-quality rally in the first four months of 2006. Communications technology firm Level 3 Communications, a distressed security, is also represented in the benchmark but was not a holding in the portfolio. Both of these securities strengthened in the first four months of 2006, dampening the fund’s relative performance.

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.

Of special interest

On May 12, 2006, the Trustees of the Putnam funds approved the merger of your fund into Putnam High Yield Trust, an open-end fund that pursues similar investment objectives and strategies and which is managed by the same investment team, led by Portfolio Leader Paul Scanlon. The merger is subject to shareholder approval and other conditions, and there is no certainty that the merger will occur. Proxy materials for the merger have been sent to the shareholders of Putnam Managed High Yield Trust and filed with the SEC.

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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 embark on a new fiscal year, we will focus on three main factors to determine our outlook. First, we consider company fundamentals. While some industries currently are facing challenges, the overall fundamental backdrop for corporations remains generally positive, although higher interest rates, fuel costs, and slowing growth expected in 2007 will provide some headwind in certain sectors. We also examine technicals, or the supply of and demand for high-yield bonds. Recently, these technicals have been less favorable: New issuance is currently running well ahead of last year’s levels and the quality of some new deals has deteriorated. One redeeming feature is that many bonds are being removed from the market by tenders, upgrades, and refinancing in the bank loan market. At this point, the technical outlook is difficult to predict, and we remain neutral. Finally, we consider valuations. While high-yield spreads are tighter than the long-term average — indicating that high-yield bonds are selling at relatively high valuations —they remain above their historically tightest levels. 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.

When we put this all together, we believe returns for fiscal 2007 will be generated mainly through interest income rather than capital appreciation or depreciation. Therefore, we intend to continue to build and maintain a diversified portfolio of relatively high-quality bonds.

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. 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 higher or lower than the fund’s net asset value.

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Your fund’s performance

This section shows your fund’s performance for periods ended May 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 and comparative index results for periods ended 5/31/06

        Lipper High 
      JP Morgan  Current Yield 
      Developed  Funds 
    Market  High-Yield  (closed-end) 
  NAV  price  Index  category average† 
 
Annual average         
Life of fund         
(since 6/25/93)  6.30%  5.45%  —*  6.86% 
10 years  66.97  61.45  95.26%  76.61 
Annual average  5.26  4.91  6.92  5.76 
5 years  45.27  23.16  53.12  44.01 
Annual average  7.75  4.25  8.89  7.50 
3 years  34.76  21.80  33.21  31.37 
Annual average  10.46  6.79  10.03  9.52 
1 year  8.03  18.23  7.36  8.15 

Performance assumes reinvestment of distributions and does not account for taxes.

Index and Lipper results should be compared to fund performance at net asset value. Lipper calculations for reinvested dividends may differ from actual performance.

* This index began operations on 12/31/94.

† Over the 1-, 3-, 5-, and 10-year periods ended 5/31/06, there were 6, 4, 4, and 4 funds, respectively, in this Lipper category.

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Fund price and distribution information     
For the 12-month period ended 5/31/06     
 
Distributions     
Number  12   
Income  $0.588   
Capital gains  —   
Total  $0.588   
Share value:  NAV  Market price 
 
5/31/05  $9.04  $7.97 
5/31/06  9.10  8.78 
Current yield (end of period)     
Current dividend rate1  6.46%  6.70% 
 
1 Most recent distribution, excluding capital gains, annualized and divided by NAV or market price at end of period. 
 
Fund performance for most recent calendar quarter   
Total return for periods ended 6/30/06     
 
  NAV  Market price 
Annual average     
Life of fund (since 6/25/93)  6.24%  5.40% 
10 years  66.02  59.95 
Annual average  5.20  4.81 
5 years  47.61  30.14 
Annual average  8.10  5.41 
3 years  30.79  21.92 
Annual average  9.36  6.83 
1 year  6.10  13.94 

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Your fund’s management

Your fund is managed by the members of the Putnam Core Fixed-Income High-Yield Team. Paul Scanlon is the Portfolio Leader. Norman Boucher and Robert Salvin are Portfolio Members of your fund. The Portfolio Leader and Portfolio Member coordinate the team’s management of the fund.

For a complete listing of the members of the Putnam Core Fixed-Income High-Yield Team, including those who are not Portfolio Leaders or Portfolio Members of your fund, visit Putnam’s Individual Investor Web site at www.putnam.com.

Fund ownership by the Portfolio Leader and Portfolio Members

The table below shows how much the fund’s current Portfolio Leader and Portfolio Members have invested in the fund (in dollar ranges). Information shown is as of May 31, 2006, and May 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 
 
Paul Scanlon  2006  *             
Portfolio Leader  2005  *             
Norman Boucher  2006  *             
Portfolio Member  N/A               
Robert Salvin  2006  *             
Portfolio Member  2005  *             

N/A indicates the individual was not a Portfolio Leader or Portfolio Member as of 5/31/05.

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Fund manager compensation

The total 2005 fund manager compensation that is attributable to your fund is approximately $50,000. 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 Officer of the fund’s broader investment category for his oversight responsibilities, calculated based on the fund assets he oversees taken as a percentage of the total assets he oversees. 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 Leader
and Portfolio Member

Paul Scanlon is also a Portfolio Leader of Putnam Floating Rate Income Fund, Putnam High Yield Advantage Fund, and Putnam High Yield Trust. He is also a Portfolio Member of Putnam Diversified Income Trust, Putnam Master Intermediate Income Trust, and Putnam Premier Income Trust.

Norman Boucher is also a Portfolio Member of Putnam High Yield Advantage Fund and Putnam High Yield Trust.

Robert Salvin is also a Portfolio Leader of Putnam High Income Securities Fund, and a Portfolio Member of Putnam Convertible Income-Growth Trust, Putnam High Yield Advantage Fund, and Putnam High Yield Trust.

Paul Scanlon, Norman Boucher, 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 May 31, 2006, Portfolio Member Norman Boucher joined and Portfolio Member Geoffrey Kelley left your fund’s management team.

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Fund ownership by Putnam’s Executive Board

The table below shows how much the members of Putnam’s Executive Board have invested in the fund (in dollar ranges). Information shown is as of May 31, 2006, and May 31, 2005.

      $1 –  $10,001 –  $50,001–  $100,001 
  Year                $0              $10,000  $50,000  $100,000  and over 
 
Philippe Bibi  2006  *        
Chief Technology Officer  2005  *        
Joshua Brooks  2006  *        
Deputy Head of Investments  2005  *        
William Connolly  2006  *        
Head of Retail Management  N/A           
Kevin Cronin  2006  *        
Head of Investments  2005  *        
Charles Haldeman, Jr.  2006    *      
President and CEO  2005    *      
Amrit Kanwal  2006  *        
Chief Financial Officer  2005  *        
Steven Krichmar  2006  *        
Chief of Operations  2005  *        
Francis McNamara, III  2006  *        
General Counsel  2005  *        
Richard Robie, III  2006  *        
Chief Administrative Officer  2005  *        
Edward Shadek  2006  *        
Deputy Head of Investments  2005  *        
Sandra Whiston  2006  *        
Head of Institutional Management  N/A           

N/A indicates the individual was not a member of Putnam’s Executive Board as of 5/31/05.

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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.

Lehman GNMA Index is an unmanaged index of Government National Mortgage Association bonds.

Lehman Municipal Bond Index is an unmanaged index of long-term fixed-rate investment-grade tax-exempt bonds.

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.

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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 and administrative services contract with Putnam Management and its sub-management contract with Putnam Management’s affiliate, Putnam Investments Limited (“PIL”). 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 beginning in March and ending in June 2005, the Contract Committee met five 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, administrative services contract and sub-management contract, effective July 1, 2005. Because PIL is an affiliate of Putnam Management and Putnam Management remains 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 should be deemed to include reference to PIL as necessary or appropriate in the context.

This approval was based on the following conclusions:

* That the fee schedule currently in effect for your fund, subject to certain changes noted 
below, 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.

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Model fee schedules and categories; total expenses

The Trustees’ review of the management fees and total expenses of the Putnam funds focused on three major themes:

* Consistency. The Trustees, working in cooperation with Putnam Management, have developed and implemented a series of model fee schedules for the Putnam funds designed to ensure that each fund’s management fee is consistent with the fees for similar funds in the Putnam family of funds and compares favorably with fees paid by competitive funds sponsored by other investment advisors. Under this approach, each Putnam fund is assigned to one of several fee categories based on a combination of factors, including competitive fees and perceived difficulty of management, and a common fee schedule is implemented for all funds in a given fee category. The Trustees reviewed the model fee schedule then in effect for the Putnam funds, including fee levels and breakpoints, and the assignment of your fund to a particular fee category under this structure. (“Breakpoints” refer to reductions in fee rates that apply to additional assets once specified asset levels are reached.)

Since their inception, Putnam’s closed-end funds have generally had management fees that are higher than those of Putnam’s open-end funds pursuing comparable investment strategies. These differences ranged from five to 20 basis points. The Trustees then reexamined this matter and recommended that these differences be conformed to a uniform five basis points. Under the new fee schedule, which went into effect on January 1, 2006, the fund pays a quarterly management fee to Putnam Management calculated at the annual rates set out below:

0.55% of the first $500 million of the fund’s average weekly assets (as described below
under “Approval of Amended and Restated Management Contract in July 2005”);
0.45% of the next $500 million;
0.40% of the next $500 million;
0.35% of the next $5 billion;
0.325% of the next $5 billion;
0.305% of the next $5 billion;
0.29% of the next $5 billion;
0.28% of the next $5 billion;
0.27% of the next $5 billion;
0.26% of the next $5 billion;
0.25% of the next $5 billion;
0.24% of the next $5 billion;
0.23% of the next $5 billion; and
0.22% thereafter.

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Your fund’s separate administrative services contract, which was amended in January 2006, provides for quarterly payment of fees to Putnam Management equal at all asset levels to 0.20% of the fund’s average weekly assets.

Based on net asset levels as of June 30, 2005, and without taking into account any leverage your fund may incur for investment purposes, the new management fee schedule for your fund will not change the combined management and administrative services fees, as a percentage of the fund’s net assets, currently paid by common shareholders. The Trustees approved the new fee schedules for the funds effective as of January 1, 2006, in order to provide Putnam Management an opportunity to accommodate the impact on revenues in its budget process for the coming year.

* Competitiveness. The Trustees also 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 50th percentile in management fees and in the first percentile in total expenses as of December 31, 2004 (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 the Putnam funds continue to meet evolving competitive standards.

* Economies of scale. The Trustees concluded that the fee schedule currently in effect for your fund, which as of January 1, 2006, reflects the changes noted above, represents an appropriate sharing of economies of scale at current asset levels. The Trustees examined the existing breakpoint structure of the Putnam funds’ management fees in light of competitive industry practices. The Trustees considered various possible modifications to the Putnam funds’ current breakpoint structure, but ultimately concluded that the current breakpoint structure continues to serve the interests of fund shareholders. Accordingly, the Trustees continue to believe that the fee schedules currently in effect for the funds, taking into account the changes noted above, represent an appropriate sharing of economies of scale at current asset levels.

In connection with their review of the management and administrative services 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.

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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 funds’ investment process and performance by the work of the Investment Oversight Committees 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 the 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 continued to discuss with senior management of Putnam Management the factors contributing to such underperformance 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. The Trustees indicated their intention to continue to monitor performance trends to assess the effectiveness of these changes and to evaluate whether additional remedial changes 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 High Current Yield Funds (closed-end)) for the one-, three-, and five-year periods ended December 31, 2004 (the first percentile being the best-performing funds and the 100th percentile being the worst-performing funds):

One-year period  Three-year period  Five-year period 
56th  40th  40th 

(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 December 31, 2004, there were 8, 4, and 4 funds, respectively, in your fund’s Lipper peer group.* Past performance is no guarantee of future performance.)

* The percentile rankings for your fund’s common share annualized total return performance in the Lipper High Current Yield Funds (closed-end) category for the one-, five-, and ten-year periods ended June 30, 2006, were 29%, 40%, and 40%, respectively. Over the one-, five-, and ten-year periods ended June 30, 2006, the fund ranked 2nd out of 6, 2nd out of 4, and 2nd out of 4 funds, respectively. Note that this more recent information was not available when the Trustees approved the continuance of your fund’s management contract.

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As a general matter, the Trustees believe that cooperative efforts between the Trustees and Putnam Management represent the most effective way to address investment performance problems. The Trustees believe 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 believe 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 advisor 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 principally benefits related to brokerage and soft-dollar allocations, whereby a portion of the commissions paid by a fund for brokerage is earmarked to pay for research services that may be utilized by a fund’s investment advisor, subject to the obligation to seek best execution. The Trustees believe that soft-dollar credits and other potential benefits associated with the allocation of fund brokerage, which pertains mainly to funds investing in equity securities, represent assets of the funds that should be used for the benefit of fund shareholders. This area has been marked by significant change in recent years. In July 2003, acting upon the Contract Committee’s recommendation, the Trustees directed that allocations of brokerage to reward firms that sell fund shares be discontinued no later than December 31, 2003. In addition, commencing in 2004, the allocation of brokerage commissions by Putnam Management to acquire research services from third-party service providers has been significantly reduced, and continues at a modest level only to acquire research that is customarily not available for cash. The Trustees will continue to monitor the allocation of the funds’ brokerage to ensure that the principle of “best price and execution” remains paramount in the portfolio trading process.

The Trustees’ annual review of your fund’s management contract and administrative services 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.

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

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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 have not relied on such comparisons to any significant extent in concluding that the management fees paid by your fund are reasonable.

Approval of amended and restated management contract in July 2005

In July 2005, the Trustees, including the Independent Trustees of your fund, approved an amendment to your fund’s management contract to take into account investment leverage in calculating management fees. The Trustees, including a majority of the Independent Trustees, have concluded that it would be in the best interest of your fund and its common shareholders to compensate Putnam Management on the basis of its “average weekly assets,” rather than its net assets. “Average weekly assets” is defined as the difference (as measured on a weekly basis) between the fund’s total assets (including assets attributable to leverage for investment purposes) and its total liabilities (excluding liabilities attributable to leverage for investment purposes). This formulation effectively allows for Putnam Management to receive management fees on leveraged assets. As a fundamental investment restriction prohibits the fund from issuing preferred shares, for all practical purposes the only form of investment leverage available would be borrowing. In the course of their evaluation, the Trustees considered the benefit to your fund from the additional investment management services that Putnam Management would perform in connection with a leveraged investment strategy, as well as the amount of compensation Putnam Management would receive under the proposed fee structure.

The Trustees noted that the amendment would align the fee arrangements for your fund more closely with those of other closed-end Putnam funds that currently engage in leverage for investment purposes. Furthermore, the Trustees were advised by Putnam Management that it is a customary and widespread practice in the closed-end fund industry to structure leveraged products in a manner that compensates advisors for their management of the assets acquired through leverage.

In evaluating the incentives and potential conflicts of interest created by an average weekly assets-based fee, the Trustees considered that the asset coverage restrictions under the 1940 Act, as well as other legal requirements, limit the extent to which a manager can expose a fund to additional risk through leverage. Furthermore, the Trustees considered the advantages of a management fee reduction mechanism that is included in the amended contract, which reduces the management fee dollar for dollar (subject to a specified maximum reduction)

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where the costs of carrying investment leverage outweigh the benefits (in terms of net income and short-term capital gains) to common shareholders from managing additional investment assets. In the event that your fund actually engages in leverage, the Trustees will have the opportunity, through regular reports from Putnam Management prepared in connection with the fee reduction mechanism described above, to continue monitoring the conflict of interest between Putnam Management and your fund.

Shareholders of your fund approved the amended and restated management contract at a meeting on December 6, 2005 (which was an adjournment of the fund’s annual meeting convened on October 28, 2005).

The Trustees also approved conforming changes to the sub-management contract between Putnam Management and PIL with respect to your fund, to provide for PIL’s fee to be calculated on the basis of the fund’s average weekly assets. The fee paid under the sub-management contract is paid by Putnam Management and not by your fund. Under the circumstances, the changes to the sub-management contract did not require shareholder approval.

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Other information
for shareholders

Important notice regarding 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. 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. Pending the outcome of shareholder voting on the proposal to merge the fund with Putnam High Yield Trust, the fund does not currently intend to repurchase shares under this program.

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, 2005, 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.

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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.

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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.

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Report of Independent Registered
Public Accounting Firm

The Board of Trustees and Shareholders
Putnam Managed High Yield Trust:

We have audited the accompanying statement of assets and liabilities of Putnam Managed High Yield Trust, including the fund's portfolio, as of May 31, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform our audit 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 May 31, 2006 by correspondence with the custodian and brokers or by other appropriate auditing procedures. 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 Managed High Yield Trust as of May 31, 2006, 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 five years in the period then ended in conformity with U.S. generally accepted accounting principles.


Boston, Massachusetts
July 10, 2006

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The fund’s portfolio 5/31/06         
 
CORPORATE BONDS AND NOTES (89.8%)*         
    Principal amount    Value 
 
Advertising and Marketing Services (0.9%)         
Affinion Group, Inc. 144A bonds 11 1/2s, 2015  $  100,000  $  101,750 
Affinion Group, Inc. 144A company guaranty 10 1/8s, 2013    400,000    414,000 
Lamar Media Corp. company guaranty 7 1/4s, 2013    100,000    99,125 
        614,875 
 
Automotive (5.5%)         
ArvinMeritor, Inc. notes 8 3/4s, 2012    25,000    25,125 
ArvinMeritor, Inc. sr. unsecd. notes 8 1/8s, 2015    55,000    52,938 
Avis Budget Care Rental, LLC 144A sr. notes 7 3/4s, 2016    110,000    110,825 
Ford Motor Co. notes 7.45s, 2031    255,000    184,875 
Ford Motor Credit Corp. bonds 7 3/8s, 2011    65,000    58,374 
Ford Motor Credit Corp. notes 7 7/8s, 2010    565,000    521,238 
Ford Motor Credit Corp. notes 7 3/8s, 2009    220,000    202,639 
Ford Motor Credit Corp. notes 6 1/2s, 2007    200,000    199,886 
General Motors Acceptance Corp. notes 7 3/4s, 2010    430,000    421,283 
General Motors Acceptance Corp. notes 6 7/8s, 2012    395,000    367,166 
General Motors Acceptance Corp. notes 6 3/4s, 2014    300,000    272,328 
General Motors Acceptance Corp. notes 5 1/8s, 2008    100,000    94,716 
General Motors Acceptance Corp. sr. unsub. notes 5.85s, 2009  200,000    188,752 
Hertz Corp. 144A sr. notes 8 7/8s, 2014    140,000    145,600 
Lear Corp. company guaranty Ser. B, 8.11s, 2009    75,000    73,125 
Lear Corp. sr. notes 8 1/8s, 2008  EUR  25,000    32,782 
Meritor Automotive, Inc. notes 6.8s, 2009  $  20,000    19,500 
Tenneco Automotive, Inc. company guaranty 8 5/8s, 2014    130,000    130,650 
Tenneco Automotive, Inc. sec. notes Ser. B, 10 1/4s, 2013    210,000    231,000 
TRW Automotive, Inc. sr. notes 9 3/8s, 2013    180,000    193,950 
TRW Automotive, Inc. sr. sub. notes 11s, 2013    145,000    160,588 
        3,687,340 
 
Beverage (0.1%)         
Constellation Brands, Inc. company guaranty Ser. B, 8s, 2008    45,000    46,125 
Constellation Brands, Inc. sr. sub. notes Ser. B, 8 1/8s, 2012    45,000    46,575 
        92,700 
 
Broadcasting (4.1%)         
British Sky Broadcasting PLC company         
guaranty 6 7/8s, 2009 (United Kingdom)    210,000    215,786 
DirecTV Holdings, LLC company guaranty 6 3/8s, 2015    520,000    488,800 
DirecTV Holdings, LLC sr. notes 8 3/8s, 2013    194,000    205,398 
Echostar DBS Corp. company guaranty 6 5/8s, 2014    165,000    155,925 
Echostar DBS Corp. sr. notes 6 3/8s, 2011    380,000    364,800 
Gray Television, Inc. company guaranty 9 1/4s, 2011    105,000    110,250 
LIN Television Corp. company guaranty Ser. B, 6 1/2s, 2013    110,000    102,025 
LIN Television Corp. sr. sub. notes 6 1/2s, 2013    125,000    115,938 
Paxson Communications Corp. 144A sec. FRN 11.318s, 2013    75,000    75,844 
Paxson Communications Corp. 144A sec. FRN 8.318s, 2012    90,000    91,800 

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CORPORATE BONDS AND NOTES (89.8%)* continued         
    Principal amount    Value 
Broadcasting continued         
Rainbow National Services, LLC 144A         
sr. notes 8 3/4s, 2012  $  155,000  $  164,300 
Rainbow National Services, LLC 144A         
sr. sub. debs. 10 3/8s, 2014    150,000    167,625 
Sirius Satellite Radio, Inc. sr. unsecd. notes 9 5/8s, 2013    140,000    132,300 
Young Broadcasting, Inc. company guaranty 10s, 2011    301,000    272,405 
Young Broadcasting, Inc. sr. sub. notes 8 3/4s, 2014    65,000    54,600 
        2,717,796 
 
Building Materials (2.1%)         
Associated Materials, Inc. company guaranty 9 3/4s, 2012    215,000    222,525 
Building Materials Corp. company guaranty 8s, 2008    60,000    60,750 
Goodman Global Holding Co., Inc. sr. notes FRN         
Ser. B, 7.491s, 2012    28,000    28,350 
Goodman Global Holding Co., Inc.         
sr. sub. notes 7 7/8s, 2012    85,000    83,300 
Jacuzzi Brands, Inc. sec. notes 9 5/8s, 2010    75,000    80,250 
NTK Holdings, Inc. sr. disc. notes zero %, 2014    250,000    188,750 
Owens Corning bonds 7 1/2s, 2018 (In default) †    5,000    5,450 
Owens Corning notes 7 1/2s, 2005 (In default) † ****    120,000    130,800 
Ply Gem Industries, Inc. sr. sub. notes 9s, 2012    30,000    28,275 
Texas Industries, Inc. sr. unsecd. notes 7 1/4s, 2013    225,000    229,500 
THL Buildco, Inc. (Nortek Holdings, Inc.)         
sr. sub. notes 8 1/2s, 2014    350,000    351,750 
        1,409,700 
 
Cable Television (2.7%)         
Adelphia Communications Corp. sr. notes 10 7/8s,         
2010 (In default) †    20,000    9,350 
Adelphia Communications Corp. sr. notes 10 1/4s,         
2011 (In default) †    90,000    45,675 
Adelphia Communications Corp. sr. notes 10 1/4s,         
2006 (In default) †    5,000    2,313 
Adelphia Communications Corp. sr. notes 9 3/8s,         
2009 (In default) †    5,000    2,438 
Adelphia Communications Corp. sr. notes Ser. B,         
9 7/8s, 2007 (In default) †    40,000    18,800 
Atlantic Broadband Finance, LLC company         
guaranty 9 3/8s, 2014    255,000    243,525 
Cablevision Systems Corp. sr. notes Ser. B, 8s, 2012    80,000    79,200 
CCH, LLC/Capital Corp. sr. notes 10 1/4s, 2010    205,000    204,488 
CCH I Holdings, LLC company guaranty stepped-coupon         
zero % (12 1/8s, 11/15/07), 2015 ††    35,000    18,725 
CCH I, LLC secd. notes 11s, 2015    582,000    496,155 
CCH II 144A sr. notes 10 1/4s, 2010    300,000    298,500 
CSC Holdings, Inc. debs. 7 5/8s, 2018    35,000    34,825 
CSC Holdings, Inc. sr. notes Ser. B, 7 5/8s, 2011    195,000    195,975 
CSC Holdings, Inc. 144A sr. notes 7 1/4s, 2012    155,000    151,706 
        1,801,675 

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CORPORATE BONDS AND NOTES (89.8%)* continued         
    Principal amount    Value 
Capital Goods (10.5%)         
Aero Invest 1 SA 144A company guaranty FRN 11.269s,         
2015 (Luxembourg) ‡‡  EUR  300,584  $  398,818 
Alliant Techsystems, Inc. sr. sub. notes 6 3/4s, 2016  $  240,000    235,500 
Allied Waste North America, Inc. company         
guaranty Ser. B, 8 1/2s, 2008    270,000    284,175 
Amsted Industries, Inc. 144A sr. notes 10 1/4s, 2011    360,000    388,800 
Argo-Tech Corp. sr. notes 9 1/4s, 2011    125,000    131,250 
Blount, Inc. sr. sub. notes 8 7/8s, 2012    155,000    159,650 
Browning-Ferris Industries, Inc. debs. 7.4s, 2035    80,000    72,800 
Browning-Ferris Industries, Inc. sr. notes 6 3/8s, 2008    145,000    145,000 
Crown Americas, LLC/Crown Americas Capital Corp.         
144A sr. notes 7 5/8s, 2013    255,000    256,275 
Crown Cork & Seal Co. Inc. debs. 8s, 2023    110,000    105,050 
Decrane Aircraft Holdings Co. company guaranty         
zero %, 2008 (acquired 7/23/04, cost $115,034) ‡    351,000    245,700 
Earle M. Jorgensen Co. sec. notes 9 3/4s, 2012    315,000    337,050 
Graham Packaging Co., Inc. company guaranty 8 1/2s, 2012    25,000    25,250 
Graham Packaging Co., Inc. sub. notes 9 7/8s, 2014    150,000    153,000 
Greenbrier Cos., Inc. company guaranty 8 3/8s, 2015    215,000    221,450 
Hexcel Corp. sr. sub. notes 6 3/4s, 2015    15,000    14,475 
Invensys PLC 144A notes 9 7/8s, 2011 (United Kingdom)    15,000    16,275 
K&F Acquisitions, Inc. company guaranty 7 3/4s, 2014    125,000    126,875 
L-3 Communications Corp. company guaranty 6 1/8s, 2013    325,000    306,313 
L-3 Communications Corp. sr. sub. notes Class B, 6 3/8s, 2015    165,000    155,925 
Legrand SA debs. 8 1/2s, 2025 (France)    310,000    364,250 
Manitowoc Co., Inc. (The) company guaranty 10 1/2s, 2012    91,000    98,963 
Manitowoc Co., Inc. (The) sr. notes 7 1/8s, 2013    290,000    295,800 
Milacron Escrow Corp. sec. notes 11 1/2s, 2011    240,000    226,200 
Mueller Group, Inc. sr. sub. notes 10s, 2012    175,000    191,188 
Owens-Brockway Glass company guaranty 8 1/4s, 2013    180,000    181,800 
Owens-Brockway Glass company guaranty 7 3/4s, 2011    40,000    40,500 
Owens-Brockway Glass sr. sec. notes 8 3/4s, 2012    125,000    132,188 
Owens-Brockway Glass Container, Inc. company         
guaranty 6 3/4s, 2014  EUR  155,000    199,863 
Owens-Illinois, Inc. debs. 7.8s, 2018  $  45,000    43,313 
Ray Acquisition SCA sr. notes 9 3/8s, 2015 (France)  EUR  210,000    286,829 
Siebe PLC 144A sr. unsub. 6 1/2s, 2010 (United Kingdom)  $  155,000    159,365 
Solo Cup Co. sr. sub. notes 8 1/2s, 2014    285,000    256,500 
TD Funding Corp. company guaranty 8 3/8s, 2011    235,000    249,688 
Tekni-Plex, Inc. 144A sec. notes 10 7/8s, 2012    240,000    267,600 
Terex Corp. company guaranty 9 1/4s, 2011    35,000    37,013 
Terex Corp. company guaranty 7 3/8s, 2014    18,000    18,045 
Terex Corp. company guaranty Ser. B, 10 3/8s, 2011    190,000    200,450 
        7,029,186 
 
Chemicals (4.9%)         
BCP Crystal US Holdings Corp. sr. sub. notes 9 5/8s, 2014    130,000    142,675 
Cognis Holding GmbH & Co. 144A sr. notes 11.644s,         
2015 (Germany)  EUR  75,000    99,309 

32

CORPORATE BONDS AND NOTES (89.8%)* continued         
    Principal amount    Value 
  
Chemicals continued         
Cognis Holding GmbH & Co. 144A sr. notes 9 1/2s,         
2014 (Germany)  EUR  210,000  $  302,472 
Compass Minerals International, Inc. sr. disc. notes         
stepped-coupon Ser. B, zero % (12s, 6/1/08), 2013 ††  $  50,000    46,000 
Compass Minerals International, Inc. sr. notes         
stepped-coupon zero % (12 3/4s, 12/15/07), 2012 ††    235,000    225,600 
Crystal US Holdings, LLC sr. disc. notes stepped-coupon         
Ser. A, zero % (10s, 10/1/09), 2014 ††    275,000    219,313 
Equistar Chemicals, LP/Equistar Funding Corp.         
company guaranty 10 1/8s, 2008    290,000    311,025 
Hercules, Inc. company guaranty 6 3/4s, 2029    140,000    133,000 
Huntsman, LLC company guaranty 11 5/8s, 2010    78,000    86,580 
Huntsman, LLC company guaranty 11 1/2s, 2012    40,000    45,500 
Ineos Group Holdings PLC 144A bonds 7 7/8s, 2016         
(United Kingdom)  EUR  115,000    141,491 
Innophos, Inc. company guaranty 8 7/8s, 2014  $  325,000    330,688 
Invista 144A notes 9 1/4s, 2012    45,000    47,700 
Lyondell Chemical Co. company guaranty 10 1/2s, 2013    155,000    173,600 
Nalco Co. sr. sub. notes 9s, 2013  EUR  65,000    89,824 
Nalco Co. sr. sub. notes 8 7/8s, 2013  $  190,000    195,463 
Nell AF S.a.r.l. 144A sr. notes 8 3/8s, 2015 (Luxembourg)    180,000    177,750 
PCI Chemicals Canada sec. sr. notes 10s, 2008 (Canada)    20,925    21,840 
PQ Corp. 144A company guaranty 7 3/4s, 2013    200,000    192,750 
Rockwood Specialties Group, Inc. company         
guaranty 7 5/8s, 2014  EUR  235,000    309,205 
Sterling Chemicals, Inc. sec. notes 10s, 2007  $  27,275    26,048 
        3,317,833 
 
Communication Services (7.0%)         
American Cellular Corp. company guaranty 9 1/2s, 2009    35,000    36,006 
American Cellular Corp. sr. notes Ser. B, 10s, 2011    320,000    343,600 
American Tower Corp. sr. notes 7 1/2s, 2012    65,000    66,300 
American Towers, Inc. company guaranty 7 1/4s, 2011    125,000    127,813 
Centennial Cellular Operating Co., LLC company         
guaranty 10 1/8s, 2013    75,000    80,813 
Centennial Communications Corp. sr. notes 10s, 2013    105,000    108,675 
Centennial Communications Corp. sr. notes FRN 10.74s, 2013    30,000    31,275 
Cincinnati Bell Telephone company guaranty 6.3s, 2028    25,000    21,625 
Cincinnati Bell, Inc. company guaranty 7s, 2015    60,000    58,050 
Cincinnati Bell, Inc. sr. sub. notes 8 3/8s, 2014    20,000    20,200 
Cincinnati Bell, Inc. unsub. notes 7 1/4s, 2023    70,000    66,675 
Citizens Communications Co. notes 9 1/4s, 2011    185,000    200,956 
Citizens Communications Co. sr. notes 6 1/4s, 2013    160,000    152,800 
Digicel, Ltd. 144A sr. notes 9 1/4s, 2012 (Jamaica)    120,000    126,000 
Dobson Cellular Systems sec. notes 9 7/8s, 2012    120,000    129,600 
Dobson Communications Corp. sr. notes FRN 9.318s, 2012    60,000    60,600 
Eircom Funding company guaranty Ser. US$, 8 1/4s,         
2013 (Ireland)    45,000    48,263 

33

CORPORATE BONDS AND NOTES (89.8%)* continued         
    Principal amount    Value 
   
Communication Services continued         
Horizon PCS, Inc. company guaranty 11 3/8s, 2012  $  30,000  $  34,050 
Inmarsat Finance PLC company guaranty 7 5/8s, 2012         
(United Kingdom)    114,000    116,280 
Inmarsat Finance PLC company guaranty stepped-coupon         
zero % (10 3/8s, 10/15/08), 2012 (United Kingdom)††    175,000    149,188 
Intelsat Subsidiary Holding Co., Ltd. company         
guaranty 8 7/8s, 2015 (Bermuda)    160,000    162,000 
Intelsat Subsidiary Holding Co., Ltd. sr. notes 8 1/2s, 2013         
(Bermuda)    75,000    75,281 
iPCS, Inc. sr. notes 11 1/2s, 2012    55,000    62,700 
IWO Holdings, Inc. sec. FRN 8.818s, 2012    20,000    20,750 
Madison River Capital Corp. sr. notes 13 1/4s, 2010    30,000    31,350 
Nordic Telephone Co. Holdings ApS 144A         
sr. notes 8 7/8s, 2016 (Denmark)    75,000    77,438 
PanAmSat Corp. company guaranty 9s, 2014    255,000    264,563 
Qwest Communications International, Inc. company         
guaranty 7 1/2s, 2014    410,000    407,950 
Qwest Corp. notes 8 7/8s, 2012    330,000    353,925 
Qwest Corp. sr. notes 7 5/8s, 2015    115,000    117,013 
Qwest Corp. debs. 7 1/4s, 2025    55,000    52,663 
Rogers Cantel, Inc. debs. 9 3/4s, 2016 (Canada)    180,000    209,700 
Rogers Wireless, Inc. sec. notes 9 5/8s, 2011 (Canada)    40,000    44,050 
Rogers Wireless, Inc. sec. notes 6 3/8s, 2014 (Canada)    250,000    242,500 
Rural Cellular Corp. sr. notes 9 7/8s, 2010    120,000    126,300 
Rural Cellular Corp. sr. sub. notes 9 3/4s, 2010    30,000    30,300 
Rural Cellular Corp. 144A sr. sub. notes FRN 10.899s, 2012    40,000    41,700 
Syniverse Technologies, Inc. sr. sub. notes Ser. B, 7 3/4s, 2013    130,000    129,675 
Time Warner Telecom, Inc. company guaranty 9 1/4s, 2014    185,000    197,256 
Valor Telecommunications Enterprises, LLC/Finance Corp.         
company guaranty 7 3/4s, 2015    60,000    61,800 
        4,687,683 
 
Consumer (0.8%)         
Jostens IH Corp. company guaranty 7 5/8s, 2012    245,000    240,713 
Samsonite Corp. sr. sub. notes 8 7/8s, 2011    260,000    271,050 
        511,763 
 
Consumer Goods (1.9%)         
Church & Dwight Co., Inc. company guaranty 6s, 2012    105,000    99,750 
Elizabeth Arden, Inc. company guaranty 7 3/4s, 2014    120,000    120,000 
Playtex Products, Inc. sec. notes 8s, 2011    305,000    319,488 
Prestige Brands, Inc. sr. sub. notes 9 1/4s, 2012    259,000    260,295 
Remington Arms Co., Inc. company guaranty 10 1/2s, 2011    105,000    89,250 
Scotts Co. (The) sr. sub. notes 6 5/8s, 2013    45,000    44,100 
Spectrum Brands, Inc. company guaranty 7 3/8s, 2015    335,000    272,188 
Spectrum Brands, Inc. sr. sub. notes 8 1/2s, 2013    80,000    69,600 
        1,274,671 

34

CORPORATE BONDS AND NOTES (89.8%)* continued         
    Principal amount    Value 
 
Consumer Services (1.0%)         
AMR Holding Co., Inc./EmCare Holding Co., Inc.         
sr. sub. notes 10s, 2015  $  85,000  $  90,525 
Brand Services, Inc. company guaranty 12s, 2012    235,000    267,900 
iPayment, Inc. 144A sr. sub. notes 9 3/4s, 2014    55,000    55,138 
United Rentals NA, Inc. company guaranty 6 1/2s, 2012    80,000    76,800 
United Rentals NA, Inc. sr. sub. notes 7 3/4s, 2013    18,000    17,640 
United Rentals NA, Inc. sr. sub. notes 7s, 2014    175,000    164,500 
        672,503 
 
Energy (7.5%)         
Arch Western Finance, LLC sr. notes 6 3/4s, 2013    270,000    261,900 
Bluewater Finance, Ltd. company guaranty 10 1/4s,         
2012 (Cayman Islands)    70,000    72,450 
Chaparral Energy, Inc. 144A sr. notes 8 1/2s, 2015    110,000    111,375 
CHC Helicopter Corp. sr. sub. notes 7 3/8s, 2014 (Canada)    185,000    181,300 
Chesapeake Energy Corp. company guaranty 7 3/4s, 2015    45,000    46,013 
Chesapeake Energy Corp. sr. notes 7 1/2s, 2013    210,000    214,725 
Chesapeake Energy Corp. sr. notes 7s, 2014    60,000    59,775 
Compton Petroleum Corp. company guaranty 7 5/8s,         
2013 (Canada)    145,000    141,375 
Comstock Resources, Inc. sr. notes 6 7/8s, 2012    95,000    91,438 
Delta Petroleum Corp. company guaranty 7s, 2015    365,000    333,975 
Denbury Resources, Inc. sr. sub. notes 7 1/2s, 2015    75,000    75,938 
Dresser-Rand Group, Inc. company guaranty 7 3/8s, 2014    22,000    22,110 
Encore Acquisition Co. sr. sub. notes 6 1/4s, 2014    45,000    41,288 
Encore Acquisition Co. sr. sub. notes 6s, 2015    152,000    135,660 
EXCO Resources, Inc. company guaranty 7 1/4s, 2011    175,000    170,625 
Forest Oil Corp. company guaranty 7 3/4s, 2014    70,000    71,400 
Forest Oil Corp. sr. notes 8s, 2011    145,000    150,438 
Forest Oil Corp. sr. notes 8s, 2008    35,000    35,700 
Hanover Compressor Co. sr. notes 9s, 2014    70,000    74,375 
Hanover Compressor Co. sr. notes 8 5/8s, 2010    40,000    41,200 
Hanover Equipment Trust sec. notes Ser. B, 8 3/4s, 2011    30,000    31,200 
Harvest Operations Corp. sr. notes 7 7/8s, 2011 (Canada)    275,000    268,813 
Inergy, LP/Inergy Finance Corp. sr. notes 6 7/8s, 2014    365,000    344,013 
KCS Energy, Inc. sr. notes 7 1/8s, 2012    65,000    65,163 
Massey Energy Co. sr. notes 6 5/8s, 2010    260,000    260,000 
Newfield Exploration Co. sr. notes 7 5/8s, 2011    130,000    133,250 
Newfield Exploration Co. sr. sub. notes 6 5/8s, 2014    125,000    119,688 
Pacific Energy Partners/Pacific Energy Finance Corp.         
sr. notes 7 1/8s, 2014    75,000    74,813 
Peabody Energy Corp. sr. notes 5 7/8s, 2016    135,000    126,563 
Plains Exploration & Production Co. sr. notes 7 1/8s, 2014    95,000    93,813 
Plains Exploration & Production Co.         
sr. sub. notes 8 3/4s, 2012    145,000    151,525 
Pogo Producing Co. sr. sub. notes 6 7/8s, 2017    140,000    132,300 
Pride International, Inc. sr. notes 7 3/8s, 2014    185,000    189,163 
Quicksilver Resources, Inc. company guaranty 7 1/8s, 2016    100,000    95,500 

35

CORPORATE BONDS AND NOTES (89.8%)* continued         
    Principal amount    Value 
  
Energy continued         
Stone Energy Corp. sr. sub. notes 6 3/4s, 2014  $  160,000  $  160,400 
Whiting Petroleum Corp. company guaranty 7s, 2014    435,000    419,775 
        4,999,039 
 
Entertainment (1.3%)         
AMC Entertainment, Inc. sr. sub. notes 8s, 2014    22,000    20,515 
AMC Entertainment, Inc. 144A company guaranty 11s, 2016    100,000    108,000 
Cinemark USA, Inc. sr. sub. notes 9s, 2013    60,000    63,900 
Cinemark, Inc. sr. disc. notes stepped-coupon zero %         
(9 3/4s, 3/15/07), 2014 ††    245,000    192,019 
Marquee Holdings, Inc. sr. disc. notes stepped-coupon         
zero % (12s, 8/15/09), 2014 ††    140,000    99,750 
Six Flags, Inc. sr. notes 8 7/8s, 2010    105,000    104,213 
Universal City Florida Holding Co. sr. notes 8 3/8s, 2010    220,000    224,400 
Universal City Florida Holding Co. sr. notes FRN 9.899s, 2010    75,000    77,438 
        890,235 
 
Financial (0.4%)         
Crescent Real Estate Equities, LP notes 7 1/2s, 2007 (R)    55,000    55,550 
E*Trade Finance Corp. sr. notes 8s, 2011    175,000    181,125 
Finova Group, Inc. notes 7 1/2s, 2009    169,070    54,525 
        291,200 
 
Food (1.8%)         
Archibald Candy Corp. company guaranty 10s,         
2007 (In default) (F) †    16,542    864 
Dean Foods Co. company guaranty 7s, 2016    105,000    102,900 
Dean Foods Co. sr. notes 6 5/8s, 2009    160,000    160,000 
Del Monte Corp. company guaranty 6 3/4s, 2015    80,000    75,800 
Del Monte Corp. sr. sub. notes 8 5/8s, 2012    205,000    213,713 
Doane Pet Care Co. sr. sub. notes 10 5/8s, 2015    265,000    329,482 
Nutro Products, Inc. 144A sr. notes FRN 9.23s, 2013    60,000    60,750 
Pinnacle Foods Holding Corp. sr. sub. notes 8 1/4s, 2013    285,000    280,013 
        1,223,522 
 
Forest Products and Packaging (2.9%)         
Abitibi-Consolidated, Inc. debs. 8.85s, 2030 (Canada)    45,000    39,038 
Abitibi-Consolidated, Inc. notes 7 3/4s, 2011 (Canada)    40,000    37,700 
Abitibi-Consolidated, Inc. notes 6s, 2013 (Canada)    90,000    76,050 
Chesapeake Corp. sr. sub. notes 7s, 2014  EUR  85,000    97,103 
Covalence Specialty Materials Corp. 144A         
sr. sub. notes 10 1/4s, 2016  $  300,000    303,000 
Georgia-Pacific Corp. debs. 9 1/2s, 2011    120,000    128,400 
Graphic Packaging International Corp. sr. notes 8 1/2s, 2011    40,000    40,300 
Jefferson Smurfit Corp. company guaranty 8 1/4s, 2012    18,000    16,920 
Jefferson Smurfit Corp. company guaranty 7 1/2s, 2013    15,000    13,500 
JSG Holding PLC 144A sr. notes 11 1/2s, 2015 (Ireland) ‡‡  EUR  114,009    151,180 
MDP Acquisitions PLC sr. notes 9 5/8s, 2012 (Ireland)  $  245,000    255,413 

36

CORPORATE BONDS AND NOTES (89.8%)* continued         
    Principal amount    Value 
Forest Products and Packaging continued         
MDP Acquisitions PLC sr. notes Ser. EUR, 10 1/8s,         
2012 (Ireland)  EUR  5,000  $  7,073 
NewPage Corp. sec. notes 10s, 2012  $  245,000    259,088 
Norske Skog Canada, Ltd. sr. notes 7 3/8s, 2014 (Canada)    110,000    101,200 
Smurfit Capital Funding PLC debs. 7 1/2s, 2025 (Ireland)    60,000    55,500 
Stone Container Corp. sr. notes 9 3/4s, 2011    115,000    118,738 
Stone Container Corp. sr. notes 8 3/8s, 2012    30,000    28,350 
Stone Container Finance company guaranty 7 3/8s,         
2014 (Canada)    215,000    192,425 
        1,920,978 
 
Gaming & Lottery (3.3%)         
Boyd Gaming Corp. sr. sub. notes 8 3/4s, 2012    160,000    169,200 
Boyd Gaming Corp. sr. sub. notes 7 3/4s, 2012    30,000    30,675 
Boyd Gaming Corp. sr. sub. notes 7 1/8s, 2016    145,000    142,463 
Boyd Gaming Corp. sr. sub. notes 6 3/4s, 2014    60,000    57,900 
MGM Mirage, Inc. company guaranty 8 1/2s, 2010    125,000    131,875 
MGM Mirage, Inc. company guaranty 6s, 2009    175,000    172,594 
Mirage Resorts, Inc. debs. 7 1/4s, 2017    40,000    39,400 
Park Place Entertainment Corp. sr. notes 7s, 2013    115,000    118,474 
Park Place Entertainment Corp. sr. sub. notes 7 7/8s, 2010    95,000    99,513 
Penn National Gaming, Inc. sr. sub. notes 6 3/4s, 2015    50,000    47,813 
Pinnacle Entertainment, Inc. sr. sub. notes 8 1/4s, 2012    130,000    131,950 
Resorts International Hotel and Casino, Inc. company         
guaranty 11 1/2s, 2009    120,000    130,800 
Scientific Games Corp. company guaranty 6 1/4s, 2012    130,000    125,125 
Station Casinos, Inc. sr. notes 6s, 2012    235,000    225,013 
Station Casinos, Inc. sr. sub. notes 6 7/8s, 2016    90,000    86,963 
Trump Entertainment Resorts, Inc. sec. notes 8 1/2s, 2015    260,000    254,800 
Wynn Las Vegas, LLC/Wynn Las Vegas Capital Corp. 1st         
mtge. 6 5/8s, 2014    280,000    265,650 
        2,230,208 
 
Health Care (5.7%)         
Athena Neurosciences Finance, LLC company         
guaranty 7 1/4s, 2008    270,000    268,650 
Community Health Systems, Inc.         
sr. sub. notes 6 1/2s, 2012    310,000    297,213 
DaVita, Inc. company guaranty 6 5/8s, 2013    225,000    216,281 
HCA, Inc. debs. 7.19s, 2015    60,000    59,491 
HCA, Inc. notes 8.36s, 2024    60,000    60,651 
HCA, Inc. notes 7.69s, 2025    70,000    66,452 
HCA, Inc. notes 6 3/8s, 2015    55,000    52,103 
IASIS Healthcare/IASIS Capital Corp. sr. sub. notes 8 3/4s, 2014    60,000    60,675 
Insight Health Services Corp. company guaranty FRB         
10.399s, 2011    230,000    207,288 
MedQuest, Inc. company guaranty Ser. B, 11 7/8s, 2012    40,000    36,200 
Omnicare, Inc. sr. sub. notes 6 7/8s, 2015    75,000    72,750 
Omnicare, Inc. sr. sub. notes 6 1/8s, 2013    120,000    113,400 

37

CORPORATE BONDS AND NOTES (89.8%)* continued         
    Principal amount    Value 
 
Health Care continued         
Psychiatric Solutions, Inc. company guaranty 7 3/4s, 2015  $  270,000  $  272,025 
Select Medical Corp. company guaranty 7 5/8s, 2015    225,000    200,813 
Service Corp. International debs. 7 7/8s, 2013    40,000    40,400 
Service Corp. International notes Ser. *, 7.7s, 2009    50,000    50,625 
Service Corp. International notes 6 1/2s, 2008    20,000    19,950 
Service Corp. International 144A sr. notes 7 1/4s, 2017    50,000    47,500 
Service Corp. International sr. notes 6 3/4s, 2016    140,000    131,250 
Stewart Enterprises, Inc. 144A sr. notes 7 3/4s, 2013    260,000    243,100 
Tenet Healthcare Corp. notes 7 3/8s, 2013    175,000    161,875 
Tenet Healthcare Corp. sr. notes 9 7/8s, 2014    175,000    178,063 
Triad Hospitals, Inc. sr. notes 7s, 2012    130,000    128,863 
Triad Hospitals, Inc. sr. sub. notes 7s, 2013    225,000    217,969 
Universal Hospital Services, Inc. sr. notes 10 1/8s,         
2011 (Canada)    65,000    68,250 
Vanguard Health Holding Co. II, LLC         
sr. sub. notes 9s, 2014    300,000    307,500 
Ventas Realty, LP/Capital Corp. company guaranty 9s, 2012 (R)    55,000    60,775 
Ventas Realty, LP/Capital Corp. company         
guaranty 6 3/4s, 2010 (R)    55,000    55,206 
Ventas Realty, LP/Capital Corp. sr. notes 6 5/8s, 2014 (R)    40,000    39,100 
Ventas Realty, LP/Capital Corp. sr. notes 6 1/2s, 2016 (R)    60,000    58,050 
        3,792,468 
 
Homebuilding (0.8%)         
Ashton Woods USA, LLC/Ashton Woods Finance Co.         
sr. sub. notes 9 1/2s, 2015    75,000    69,188 
Beazer Homes USA, Inc. company guaranty 8 5/8s, 2011    70,000    72,975 
K. Hovnanian Enterprises, Inc. company         
guaranty 8 7/8s, 2012    90,000    92,700 
K. Hovnanian Enterprises, Inc. sr. notes 6 1/2s, 2014    25,000    22,963 
Meritage Homes Corp. company guaranty 6 1/4s, 2015    60,000    53,100 
Schuler Homes, Inc. company guaranty 10 1/2s, 2011    70,000    73,937 
Standard Pacific Corp. sr. notes 7s, 2015    25,000    22,625 
Technical Olympic USA, Inc. company guaranty 10 3/8s, 2012    55,000    55,825 
WCI Communities, Inc. company guaranty 9 1/8s, 2012    45,000    43,931 
        507,244 
 
Household Furniture and Appliances (0.3%)         
Sealy Mattress Co. sr. sub. notes 8 1/4s, 2014    200,000    208,000 
 
Lodging/Tourism (0.5%)         
FelCor Lodging, LP company guaranty 8 1/2s, 2008 (R)    55,000    58,850 
Host Marriott, LP sr. notes Ser. M, 7s, 2012 (R)    165,000    165,413 
Starwood Hotels & Resorts Worldwide, Inc.         
debs. 7 3/8s, 2015    95,000    97,613 
        321,876 

38

CORPORATE BONDS AND NOTES (89.8%)* continued         
    Principal amount    Value 
Media (0.5%)         
Affinity Group, Inc. sr. sub. notes 9s, 2012  $  270,000  $  267,300 
Warner Music Group sr. sub. notes 7 3/8s, 2014    100,000    99,000 
        366,300 
 
Metals (3.0%)         
AK Steel Corp. company guaranty 7 3/4s, 2012    285,000    280,725 
Century Aluminum Co. company guaranty 7 1/2s, 2014    60,000    61,800 
Chaparral Steel Co. company guaranty 10s, 2013    240,000    267,000 
Gerdau Ameristeel Corp. sr. notes 10 3/8s, 2011 (Canada)    175,000    189,438 
Ispat Inland ULC sec. notes 9 3/4s, 2014    230,000    257,313 
Metals USA, Inc. 144A sec. notes 11 1/8s, 2015    120,000    133,800 
Novelis, Inc. 144A sr. notes 7 3/4s, 2015    460,000    439,300 
Steel Dynamics, Inc. company guaranty 9 1/2s, 2009    110,000    114,675 
Ucar Finance, Inc. company guaranty 10 1/4s, 2012    90,000    95,850 
United States Steel Corp. sr. notes 9 3/4s, 2010    114,000    122,550 
Wheeling-Pittsburgh Steel Corp. sr. notes 6s, 2010 ‡‡    7,790    6,154 
Wheeling-Pittsburgh Steel Corp. sr. notes 5s, 2011 ‡‡    14,089    11,130 
        1,979,735 
 
Publishing (4.1%)         
American Media, Inc. company guaranty Ser. B, 10 1/4s, 2009    250,000    230,625 
CanWest Media, Inc. company guaranty 8s, 2012 (Canada)    177,086    178,414 
Cenveo Corp, sr. sub. notes 7 7/8s, 2013    145,000    139,925 
Dex Media West, LLC/Dex Media Finance Co.         
sr. notes Ser. B, 8 1/2s, 2010    155,000    160,425 
Dex Media, Inc. disc. notes stepped-coupon zero %         
(9s, 11/15/08), 2013 ††    85,000    71,400 
Dex Media, Inc. notes 8s, 2013    65,000    65,813 
Houghton Mifflin Co. sr. sub. notes 9 7/8s, 2013    315,000    332,325 
Mail-Well I Corp. company guaranty 9 5/8s, 2012    135,000    144,113 
PRIMEDIA, Inc. company guaranty 8 7/8s, 2011    130,000    124,475 
PRIMEDIA, Inc. sr. notes 8s, 2013    190,000    171,000 
R.H. Donnelley Corp. sr. notes 6 7/8s, 2013    65,000    59,638 
R.H. Donnelley Corp. 144A sr. disc. notes Ser. A-2, 6 7/8s, 2013    110,000    100,650 
R.H. Donnelley Corp. 144A sr. notes Ser. A-3, 8 7/8s, 2016    145,000    146,088 
R.H. Donnelley Corp. 144A sr. disc. notes 6 7/8s, 2013    55,000    50,325 
Reader’s Digest Association, Inc. (The) sr. notes 6 1/2s, 2011    335,000    325,788 
Vertis, Inc. company guaranty Ser. B, 10 7/8s, 2009    340,000    333,625 
Vertis, Inc. 144A sub. notes 13 1/2s, 2009    120,000    97,200 
        2,731,829 
 
Restaurants (0.4%)         
Domino’s, Inc. sr. sub. notes 8 1/4s, 2011    80,000    82,400 
Sbarro, Inc. company guaranty 11s, 2009    155,000    156,550 
        238,950 
 
Retail (2.3%)         
Asbury Automotive Group, Inc. sr. sub. notes 8s, 2014    80,000    79,600 
Autonation, Inc. 144A company guaranty 7s, 2014    30,000    29,850 
Autonation, Inc. 144A company guaranty FRB 7.045s, 2013    40,000    40,400 

39

CORPORATE BONDS AND NOTES (89.8%)* continued         
    Principal amount    Value 
Retail continued         
Bon-Ton Stores, Inc. (The) 144A sr. notes 10 1/4s, 2014  $  215,000  $  201,025 
Burlington Coat Factory Warehouse Corp. 144A         
sr. notes 11 1/8s, 2014    150,000    147,188 
Harry & David Holdings, Inc. company guaranty 9s, 2013    60,000    55,200 
Jean Coutu Group, Inc. sr. notes 7 5/8s, 2012 (Canada)    115,000    111,838 
Jean Coutu Group, Inc. sr. sub. notes 8 1/2s, 2014 (Canada)    55,000    51,150 
Movie Gallery, Inc. sr. unsecd. notes 11s, 2012    50,000    38,000 
Neiman-Marcus Group, Inc. 144A sr. notes 9s, 2015    335,000    348,819 
Rite Aid Corp. company guaranty 9 1/2s, 2011    100,000    104,500 
Rite Aid Corp. company guaranty 7 1/2s, 2015    80,000    78,000 
Rite Aid Corp. sr. notes 9 1/4s, 2013    75,000    73,125 
United Auto Group, Inc. company guaranty 9 5/8s, 2012    205,000    216,531 
        1,575,226 
 
Technology (4.6%)         
Advanced Micro Devices, Inc. sr. notes 7 3/4s, 2012    130,000    134,225 
Amkor Technologies, Inc. sr. notes 7 3/4s, 2013    143,000    130,130 
Amkor Technologies, Inc. sr. unsecd. notes 9 1/4s, 2016    75,000    72,000 
Avago Technologies Finance 144A sr. notes 10 1/8s,         
2013 (Singapore)    90,000    96,300 
Celestica, Inc. sr. sub. notes 7 7/8s, 2011 (Canada)    70,000    70,175 
Celestica, Inc. sr. sub. notes 7 5/8s, 2013 (Canada)    110,000    109,175 
Freescale Semiconductor, Inc. sr. notes Ser. B, 7 1/8s, 2014    160,000    163,200 
Iron Mountain, Inc. company guaranty 8 5/8s, 2013    115,000    118,163 
Iron Mountain, Inc. company guaranty 7 3/4s, 2015    125,000    124,688 
Iron Mountain, Inc. company guaranty 6 5/8s, 2016    295,000    274,350 
Lucent Technologies, Inc. debs. 6 1/2s, 2028    10,000    8,650 
Lucent Technologies, Inc. debs. 6.45s, 2029    175,000    152,469 
Lucent Technologies, Inc. notes 5 1/2s, 2008    40,000    39,000 
New ASAT Finance, Ltd. company guaranty 9 1/4s, 2011         
(Cayman Islands)    65,000    57,200 
Sensata Technologies BV 144A 8s, 2014 (Netherlands)    75,000    73,875 
Serena Software, Inc. 144A sr. sub. notes 10 3/8s, 2016    30,000    31,350 
Solectron Corp. 144A sr. sub. notes 8s, 2016    135,000    135,675 
SunGard Data Systems, Inc. 144A sr. sub. notes 10 1/4s, 2015    192,000    200,640 
SunGard Data Systems, Inc. 144A sr. unsecd. notes 9 1/8s, 2013    326,000    341,893 
UGS Corp. company guaranty 10s, 2012    280,000    303,800 
Unisys Corp. sr. notes 8s, 2012    105,000    98,569 
Xerox Capital Trust I company guaranty 8s, 2027    130,000    132,763 
Xerox Corp. sr. notes 7 5/8s, 2013    45,000    46,125 
Xerox Corp. sr. notes 6 7/8s, 2011    180,000    181,800 
Xerox Corp. sr. notes 6.4s, 2016    5,000    4,775 
        3,100,990 
 
Textiles (0.6%)         
Levi Strauss & Co. sr. notes 9 3/4s, 2015    190,000    196,175 
Levi Strauss & Co. 144A sr. notes 8 7/8s, 2016    110,000    108,075 
Oxford Industries, Inc. sr. notes 8 7/8s, 2011    75,000    76,875 
        381,125 

40

CORPORATE BONDS AND NOTES (89.8%)* continued         
    Principal amount    Value 
Tire & Rubber (0.6%)         
Goodyear Tire & Rubber Co. (The) notes 8 1/2s, 2007  $  35,000  $  35,263 
Goodyear Tire & Rubber Co. (The) notes 7.857s, 2011    50,000    48,375 
Goodyear Tire & Rubber Co. (The) sr. notes 9s, 2015    330,000    335,775 
        419,413 
 
Transportation (0.6%)         
Calair, LLC/Calair Capital Corp. company guaranty 8 1/8s, 2008    170,000    162,350 
Kansas City Southern Railway Co. company guaranty 9 1/2s, 2008    200,000    209,500 
Kansas City Southern Railway Co. company guaranty 7 1/2s, 2009    30,000    30,150 
        402,000 
 
Utilities & Power (7.1%)         
AES Corp. (The) sr. notes 8 7/8s, 2011    13,000    13,813 
AES Corp. (The) sr. notes 8 3/4s, 2008    4,000    4,170 
AES Corp. (The) 144A sec. notes 9s, 2015    130,000    140,075 
AES Corp. (The) 144A sec. notes 8 3/4s, 2013    190,000    204,725 
ANR Pipeline Co. debs. 9 5/8s, 2021    135,000    160,776 
CMS Energy Corp. sr. notes 8.9s, 2008    130,000    135,525 
CMS Energy Corp. sr. notes 8 1/2s, 2011    40,000    42,200 
CMS Energy Corp. sr. notes 7 3/4s, 2010    30,000    30,750 
Colorado Interstate Gas Co. debs. 6.85s, 2037    75,000    75,656 
Colorado Interstate Gas Co. sr. notes 5.95s, 2015    20,000    18,681 
Copano Energy, LLC. 144A sr. notes 8 1/8s, 2016    60,000    61,500 
Dynegy Holdings, Inc. 144A sr. unsecd. notes 8 3/8s, 2016    145,000    144,275 
Dynegy-Roseton Danskamme company guaranty Ser. A,         
7.27s, 2010    65,000    66,219 
Dynegy-Roseton Danskamme company guaranty Ser. B,         
7.67s, 2016    100,000    102,875 
Edison Mission Energy 144A sr. notes 7 3/4s, 2016    55,000    54,450 
Edison Mission Energy 144A sr. notes 7 1/2s, 2013    70,000    69,300 
El Paso Corp. 144A notes 7 3/4s, 2010    40,000    41,000 
El Paso Corp. sr. notes 8.05s, 2030    95,000    94,763 
El Paso Corp. sr. notes 7 3/8s, 2012    65,000    65,325 
El Paso Corp. sr. notes Ser. MTN, 7.8s, 2031    65,000    63,456 
El Paso Natural Gas Co. debs. 8 5/8s, 2022    30,000    33,038 
El Paso Production Holding Co. company         
guaranty 7 3/4s, 2013    275,000    280,500 
Ferrellgas, LP/Finance sr. notes 8 3/4s, 2012    217,000    221,340 
Ferrellgas, LP/Finance sr. notes 6 3/4s, 2014    115,000    110,113 
Midwest Generation, LLC sec. sr. notes 8 3/4s, 2034    225,000    240,750 
Mirant North America, LLC 144A sr. notes 7 3/8s, 2013    175,000    172,813 
Mission Energy Holding Co. sec. notes 13 1/2s, 2008    135,000    152,381 
Monongahela Power Co. 1st mtge. 6.7s, 2014    70,000    72,514 
Nevada Power Co. 2nd mtge. 9s, 2013    55,000    60,116 
Northwestern Corp. sec. notes 5 7/8s, 2014    350,000    342,276 
NRG Energy, Inc. sr. notes 7 3/8s, 2016    365,000    365,456 
Orion Power Holdings, Inc. sr. notes 12s, 2010    100,000    112,750 
SEMCO Energy, Inc. sr. notes 7 3/4s, 2013    85,000    86,345 
SEMCO Energy, Inc. 144A sr. notes 7 3/4s, 2013    110,000    111,788 

41

CORPORATE BONDS AND NOTES (89.8%)* continued         
    Principal amount    Value 
Utilities & Power continued         
Sierra Pacific Power Co. general ref. mtge. 6 1/4s, 2012  $  25,000  $  24,802 
Sierra Pacific Resources sr. notes 8 5/8s, 2014    125,000    134,647 
Teco Energy, Inc. notes 7.2s, 2011    35,000    36,006 
Teco Energy, Inc. notes 7s, 2012    55,000    56,100 
Teco Energy, Inc. sr. notes 6 3/4s, 2015    10,000    10,000 
Tennessee Gas Pipeline Co. debs. 7s, 2028    15,000    14,283 
Tennessee Gas Pipeline Co. unsecd. notes 7 1/2s, 2017    30,000    30,971 
Transcontinental Gas Pipeline Corp. debs. 7 1/4s, 2026    120,000    121,950 
Utilicorp Canada Finance Corp. company         
guaranty 7 3/4s, 2011 (Canada)    105,000    109,463 
Utilicorp United, Inc. sr. notes 9.95s, 2011    75,000    83,813 
Williams Cos., Inc. (The) notes 8 3/4s, 2032    25,000    28,000 
Williams Cos., Inc. (The) notes 8 1/8s, 2012    25,000    26,500 
Williams Cos., Inc. (The) notes 7 5/8s, 2019    95,000    98,088 
Williams Cos., Inc. (The) 144A notes 6 3/8s, 2010    45,000    44,438 
York Power Funding 144A notes 12s, 2007         
(Cayman Islands) (In default) (F) †    65,719    5,481 
        4,776,256 
 
Total corporate bonds and notes (cost $60,583,420)      $  60,174,319 
 
 
CONVERTIBLE BONDS AND NOTES (2.6%)*         
    Principal amount    Value 
ArvinMeritor, Inc. 144A cv. unsec. stepped-coupon         
4 5/8s (zero %, 3/1/16) 2026 ††  $  65,000  $  68,413 
DRS Technologies, Inc. 144A cv. unsec. notes 2s, 2026    190,000    196,888 
Intel Corp. cv. sub. bonds 2.95s, 2035    120,000    98,700 
Kulicke & Soffa Industries, Inc. cv. sub. notes 0.5s, 2008    390,000    324,675 
L-3 Communications Corp. 144A cv. bonds 3s, 2035    125,000    121,250 
LIN Television Corp. cv. sr. sub. notes 2 1/2s, 2033    45,000    40,781 
Manor Care, Inc. 144A cv. sr. notes 2 1/8s, 2035    25,000    27,844 
Nash Finch Co. cv. sr. sub. notes stepped-coupon         
1.631s (zero %, 3/15/13) 2035 ††    375,000    142,031 
Safeguard Scientifics, Inc. cv. sr. notes 2 5/8s, 2024    425,000    322,469 
Sinclair Broadcast Group, Inc. cv. sr. sub. notes stepped-coupon         
4 7/8s (2s, 1/15/11) 2018 ††    315,000    276,019 
Wabash National Corp. cv. sr. notes 3 1/4s, 2008    60,000    62,775 
WCI Communities, Inc. cv. sr. sub. notes 4s, 2023    60,000    60,975 
Total convertible bonds and notes (cost $1,713,897)      $  1,742,820 
 
 
CONVERTIBLE PREFERRED STOCKS (2.0%)*         
    Shares    Value 
Chesapeake Energy Corp. Ser. *, $4.50 cum. cv. pfd    1,139  $  105,927 
Citigroup Funding, Inc. Ser. GNW, 5.02% cv. pfd    5,160    162,850 
Crown Castle International Corp. $3.125 cum. cv. pfd.    1,537    83,382 

42

CONVERTIBLE PREFERRED STOCKS (2.0%)* continued       
  Shares    Value 
 
Emmis Communications Corp. Ser. A, $3.125 cum. cv. pfd.  2,929  $  133,270 
Freeport-McMoRan Copper & Gold, Inc. 5.50% cv. pfd.  121    151,719 
Huntsman Corp. $2.50 cv. pfd.  6,062    252,331 
Interpublic Group of Cos., Inc. 144A Ser. B, 5.25% cum. cv. pfd  207    193,804 
Northrop Grumman Corp. Ser. B, $7.00 cum. cv. pfd.  2,225    289,250 
Total convertible preferred stocks (cost $1,403,385)    $  1,372,533 
 
 
COMMON STOCKS (1.1%)*       
  Shares    Value 
Coinmach Service Corp. IDS (Income Deposit Securities)  15,654  $  267,995 
Comdisco Holding Co., Inc.  86    1,333 
Compass Minerals International, Inc.  112    2,854 
Contifinancial Corp. Liquidating Trust Units  505,286    158 
Crown Castle International Corp. †  235    7,466 
Dobson Communications Corp. †  338    2,903 
HCA, Inc.  2,195    97,568 
Knology, Inc. †  33    295 
Legrand SA (France)  3,018    88,489 
Playtex Products, Inc. †  9,606    110,469 
Samsonite Corp. †  120,508    132,559 
Sterling Chemicals, Inc. †  10    128 
Sun Healthcare Group, Inc. †  178    1,461 
USA Mobility, Inc.  40    812 
VFB, LLC (acquired various dates from 12/21/99       
to 10/27/00, cost $214,226) (F) ‡ †  259,509    5,515 
VS Holdings, Inc. †  40,417    1 
WHX Corp. †  3,964    36,667 
Total common stocks (cost $2,053,805)    $  756,673 
 
 
UNITS (0.7%)* (cost $812,266)       
  Units    Value 
XCL, Ltd. Equity Units (F)  446  $  476,662 
 
 
PREFERRED STOCKS (0.3%)*       
  Shares    Value 
 
First Republic Capital Corp. 144A 10.50% pfd.  80  $  85,200 
Paxson Communications Corp. 14.25% cum. pfd. ‡‡  4    34,200 
Rural Cellular Corp. Ser. B, 11.375% cum. pfd.  49    60,270 
Total preferred stocks (cost $166,937)    $  179,670 

43

FOREIGN GOVERNMENT BONDS AND NOTES (0.2%)*       
      Principal amount    Value 
 
Argentina (Republic of ) FRB 4.889s, 2012    $153,125  $  140,648 
Philippines (Republic of ) bonds 9 1/2s, 2024    5,000    5,745 
Total foreign government bonds and notes (cost $146,250)    $  146,393 
 
SENIOR LOANS (0.1%)* (c) (cost $82,545)         
      Principal amount    Value 
 
Olympus Cable Holdings, LLC bank term loan FRN         
Ser. B, 10s, 2010      $90,000  $  87,445 
 
WARRANTS (—%)* †           
Expiration date    Strike price         Warrants    Value 
 
Dayton Superior Corp. 144A  6/15/09  $ 0.01  200  $  2 
MDP Acquisitions PLC 144A (Ireland)  10/01/13  EUR .001  89    2,492 
Ubiquitel, Inc. 144A  4/15/10  $22.74  350    4 
Total warrants (cost $23,541)        $  2,498 
 
SHORT-TERM INVESTMENTS (2.4%)* (cost $1,616,573)         
      Shares    Value 
 
Putnam Prime Money Market Fund (e)      1,616,573  $  1,616,573 
 
TOTAL INVESTMENTS           
Total investments (cost $68,602,619)        $  66,555,586 

* Percentages indicated are based on net assets of $67,033,343.

**** Security is in default of principal and interest.

† Non-income-producing security.

†† 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 May 31, 2006 was $251,215 or 0.4% of net assets.

‡‡ Income may be received in cash or additional securities at the discretion of the issuer.

(R) Real Estate Investment Trust.

(c) Senior loans are exempt from registration under the Security Act of 1933, as amended, but contain certain restrictions on resale and cannot be sold publicly. These loans pay interest at rates which adjust periodically. The interest rate shown for senior loans are the current interest rates at May 31, 2006. Senior loans are also subject to mandatory and/or optional prepayment which cannot be predicted. As a result, the remaining maturity may be substantially less than the stated maturity shown (Notes 1 and 6).

(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 May 31, 2006, liquid assets totaling $1,122,000 have been designated as collateral for open swap 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 May 31, 2006.

44

FORWARD CURRENCY CONTRACTS TO SELL at 5/31/06 (aggregate face value $2,048,592)   
      Aggregate  Delivery  Unrealized 
    Value  face value  date  depreciation 
Euro    $2,192,346  $2,048,592  6/21/06  $(143,754) 
 
CREDIT DEFAULT CONTRACTS OUTSTANDING at 5/31/06       
  Upfront      Fixed payments  Unrealized 
Swap counterparty /  premium  Notional  Termination  received (paid)  by appreciation/ 
Referenced Debt*  received (paid)**  amount  date  fund per annum  (depreciation) 
 
Bank of America, N.A.           
Abitibi-Consolidated,           
Inc., 8.375%, 4/1/2015  —  $75,000  6/20/11  365 bp  $(2,142) 
Citibank, N.A.           
Ford Motor Co., 7.45%,           
7/16/2031  —  60,000  6/20/07  620 bp  1,109 
Lear Corp., 8.11%,           
5/15/2009  —  45,000  6/20/08  845 bp  4,342 
Visteon Corp., 7%,           
3/10/2014  —  75,000  6/20/09  535 bp  (199) 
Deutsche Bank AG           
Ford Motor Co., 7.45%,           
7/16/2031  —  84,000  6/20/07  595 bp  1,302 
Lear Corp., 8.11%,           
5/15/2009  —  150,000  6/20/08  860 bp  14,922 
Visteon Corp., 7%,           
3/10/2014  —  75,000  6/20/09  535 bp  (199) 
Goldman Sachs Capital Markets, L.P.         
Ford Motor Co., 7.45%,           
7/16/2031  —  60,000  6/20/07  630 bp  1,215 
Visteon Corp., 7%,           
3/10/2014  —  50,000  6/20/09  545 bp  (10) 
Goldman Sachs International           
One of the underlying           
securities in the           
basket of BB CMBS           
securities  —  83,000  (a)  2.461%  4,037 
JPMorgan Chase Bank, N.A.           
Abitibi-Consolidated,           
Inc., 8.375%, 4/1/2015  —  45,000  6/20/11  365 bp  (1,291) 
Ford Motor Co., 7.45%,           
7/16/2031  —  60,000  6/20/07  635 bp  1,248 
Ford Motor Co., 7.45%,           
7/16/2031  —  75,000  6/20/07  665 bp  1,817 
Visteon Corp., 7%,           
3/10/2014  —  30,000  6/20/09  530 bp  (116) 
Lehman Brothers Special Financing, Inc.         
General Motors, 7 1/8%,           
7/15/2013  —  155,000  12/20/06  750 bp  (661) 
 
Total          $25,374 

* Payments related to the reference debt are made upon a credit default event.

** Upfront premium is based on the difference between the original spread on issue and the market spread on day of execution.

(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.

45

Statement of assets and liabilities 5/31/06

ASSETS   
 
Investment in securities, at value (Note 1):   
Unaffiliated issuers (identified cost $66,986,046)  $ 64,939,013 
Affiliated issuers (identified cost $1,616,573) (Note 5)  1,616,573 
Foreign currency (cost $79) (Note 1)  84 
Dividends, interest and other receivables  1,331,091 
Receivable for securities sold  211,020 
Unrealized appreciation on swap contracts (Note 1)  29,992 
Receivable for closed swap contracts (Note 1)  6,439 
Total assets  68,134,212 
 
LIABILITIES   
 
Distributions payable to shareholders  360,901 
Payable for securities purchased  299,118 
Payable for compensation of Manager (Notes 2 and 5)  127,968 
Payable for investor servicing and custodian fees (Note 2)  19,052 
Payable for Trustee compensation and expenses (Note 2)  41,903 
Payable for administrative services (Note 2)  3,708 
Payable for open forward currency contracts (Note 1)  143,754 
Unrealized depreciation on swap contracts (Note 1)  4,618 
Payable for closed forward currency contracts (Note 1)  151 
Other accrued expenses  99,696 
Total liabilities  1,100,869 
Net assets  $ 67,033,343 
 
REPRESENTED BY   
 
Paid-in capital (Unlimited shares authorized) (Note 1)  $103,767,957 
Undistributed net investment income (Note 1)  244,436 
Accumulated net realized loss on investments   
and foreign currency transactions (Note 1)  (34,813,438) 
Net unrealized depreciation of investments   
and assets and liabilities in foreign currencies  (2,165,612) 
Total — Representing net assets applicable to capital shares outstanding  $ 67,033,343 
 
COMPUTATION OF NET ASSET VALUE   
 
Net asset value per share   
($67,033,343 divided by 7,366,381 shares)  $9.10 

The accompanying notes are an integral part of these financial statements.

46

Statement of operations Year ended 5/31/06     
 
INVESTMENT INCOME     
 
Interest (including interest income of $51,597     
from investments in affiliated issuers) (Note 5)  $  5,385,288 
Dividends    225,062 
Total investment income    5,610,350 
 
EXPENSES     
 
Compensation of Manager (Note 2)    509,359 
Investor servicing fees (Note 2)    33,911 
Custodian fees (Note 2)    81,597 
Trustee compensation and expenses (Note 2)    26,565 
Administrative services (Note 2)    18,379 
Reports to shareholders    48,391 
Other    168,462 
Fees waived and reimbursed by Manager or affiliate (Note 5)    (1,628) 
Total expenses    885,036 
Expense reduction (Note 2)    (2,395) 
Net expenses    882,641 
Net investment income    4,727,709 
Net realized loss on investments (Notes 1 and 3)    (1,064,362) 
Net realized gain on swap contracts (Note 1)    15,488 
Net realized gain on foreign currency transactions (Note 1)    205,468 
Net unrealized depreciation of assets and liabilities     
in foreign currencies during the year    (265,695) 
Net unrealized appreciation of investments     
and swap contracts during the year    1,038,877 
Net loss on investments    (70,224) 
Net increase in net assets resulting from operations  $  4,657,485 

The accompanying notes are an integral part of these financial statements.

47

Statement of changes in net assets     
 
INCREASE (DECREASE) IN NET ASSETS     
  Year ended  Year ended 
  5/31/06  5/31/05 
Operations:     
Net investment income  $ 4,727,709  $ 4,694,336 
Net realized loss on investments     
and foreign currency transactions  (843,406)  (218,155) 
Net unrealized appreciation of investments     
and assets and liabilities in foreign currencies  773,182  1,863,485 
Net increase in net assets resulting from operations  4,657,485  6,339,666 
Distributions to shareholders: (Note 1)     
From net investment income  (4,377,047)  (4,638,801) 
Decrease from shares repurchased (Note 4)  (1,126,581)  — 
Total increase (decrease) in net assets  (846,143)  1,700,865 
 
NET ASSETS     
 
Beginning of year  67,879,486  66,178,621 
End of year (including undistributed net investment     
income of $244,436 and distributions in excess     
of net investment income of $504,220, respectively)  $67,033,343  $67,879,486 
 
NUMBER OF FUND SHARES     
Shares outstanding at beginning of year  7,507,107  7,507,107 
Shares repurchased (Note 4)  (140,726)  — 
Shares outstanding at end of year  7,366,381  7,507,107 

The accompanying notes are an integral part of these financial statements.

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Financial highlights (For a common share outstanding throughout the period)

PER-SHARE OPERATING PERFORMANCE         
      Year ended     
  5/31/06  5/31/05  5/31/04  5/31/03  5/31/02 
 
Net asset value,           
beginning of period  $9.04  $8.82  $8.45  $8.50  $9.49 
Investment operations:           
Net investment income (a)  .63(d)  .63(d)  .67(d)  .73  .86 
Net realized and unrealized           
gain (loss) on investments  —(e)  .21  .37  (.01)  (.86) 
Total from           
investment operations  .63  .84  1.04  .72  —(e) 
Less distributions:           
From net investment income  (.59)  (.62)  (.66)  (.76)  (.87) 
From return of capital  —  —  (.01)  (.01)  (.12) 
Total distributions  (.59)  (.62)  (.67)  (.77)  (.99) 
Increase from shares repurchased  .02  —  —  —  — 
Net asset value,           
end of period  $9.10  $9.04  $8.82  $8.45  $8.50 
Market price,           
end of period  $8.78  $7.97  $7.92  $9.02  $9.48 
Total return at           
market price (%)(b)  18.23  8.43  (4.99)  4.15  (2.91) 
 
RATIOS AND SUPPLEMENTAL DATA           
 
Net assets, end of period           
(in thousands)  $67,033  $67,879  $66,179  $63,418  $63,826 
Ratio of expenses to           
average net assets (%)(c)  1.30(d)  1.16(d)  1.19(d)  1.22  1.19 
Ratio of net investment income           
to average net assets (%)  6.96(d)  6.85(d)  7.57(d)  9.17  9.69 
Portfolio turnover (%)  58.51  53.12  66.18  73.72  73.39 

(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 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 May 31, 2006, May 31, 2005 and May 31, 2004 reflect a reduction of less than 0.01% based on average net assets (Note 5).

(e) Amount represents less than $0.01 per share.

The accompanying notes are an integral part of these financial statements.

49

Notes to financial statements 5/31/06

Note 1: Significant accounting policies

Putnam Managed High Yield Trust (the “fund”), a Massachusetts business trust, is registered under the Investment Company Act of 1940, as amended, as a non-diversified, closed-end management investment company. The fund’s primary investment objective is to seek high current income. Its secondary objective is capital growth to the extent consistent with seeking high current income. The fund intends to achieve its objective by investing in high yielding income securities. The fund invests in higher yielding, lower rated bonds that have a higher rate of default due to the nature of the issuers.

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. Other 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.

B) 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. All premiums/discounts are amortized/accreted on a yield-to-maturity basis.

The fund earned certain fees in connection with its senior loan purchasing activities. These fees are

50

treated as market discount and are recorded as income in the statement of operations.

C) 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.

D) 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.

E) 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 counterparty, 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

51

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.

F) 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 May 31, 2006, the fund had a capital loss carryover of $34,280,119 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 
 
$  2,584,483  May 31, 2007 
4,168,119  May 31, 2008 
3,778,275  May 31, 2009 
8,384,999  May 31, 2010 
11,264,568  May 31, 2011 
1,858,608  May 31, 2012 
1,322,746  May 31, 2013 
918,321  May 31, 2014 

Pursuant to federal income tax regulations applicable to regulated investment companies, the fund has elected to defer to its fiscal year ending May 31, 2007 $497,803 of losses recognized during the period November 1, 2005 to May 31, 2006.

G) 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 foreign currency gains and losses, post-October loss deferrals, dividends payable and amortization and accretion. Reclassifications are made to the fund’s capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended May 31, 2006, the fund reclassified $397,994 to decrease distributions in excess of net investment income and $18,594 to increase paid-in-capital, with an increase to accumulated net realized loss of $416,588.

The tax basis components of distributable earnings and the federal tax cost as of period end May 31, 2006, were as follows:

Unrealized appreciation  $ 1,452,379 
Unrealized depreciation  (3,542,949) 
  ——————— 
Net unrealized depreciation  (2,090,570) 
Undistributed ordinary income  494,979 
Capital loss carryforward  (34,280,119) 
Post-October loss  (497,803) 
Cost for federal income   
tax purposes  $ 68,646,156 

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

52

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). This fee is based on the following annual rates: 0.55% of the first $500 million of average weekly assets, 0.45% of the next $500 million, 0.40% of the next $500 million and 0.35% 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: 0.55% of the first $500 million of average weekly net assets, 0.48% of the next $500 million, 0.44% of the next $500 million and 0.40% thereafter.

In addition, the fund pays an administrative services fee to Putnam Management quarterly based on an annual rate of 0.20% of the average weekly assets of the fund.

Prior to January 1, 2006, the fund’s administrative services fee was based on the following annual rates: 0.20% of the first $500 million of average weekly net assets, 0.17% of the next $500 million, 0.16% of the next $500 million and 0.15% 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 (calculated in the same manner as under the fund’s management contract with Putnam Management) of the portion of the fund managed by PIL.

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 May 31, 2006, the fund incurred $115,508 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. For the year ended May 31, 2006, the fund’s expenses were reduced by $2,395 under these arrangements.

Each independent Trustee of the fund receives an annual Trustee fee, of which $255, 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. 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

53

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 May 31, 2006, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $38,465,509 and $39,781,137, 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. 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. 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 May 31, 2006, the fund repurchased 140,726 common shares for an aggregate purchase price of $1,126,581, which reflects a weighted-average discount from net asset value per share of 11.5% .

Note 5: Investment in Putnam Prime Money Market Fund

Pursuant to an exemptive order from the Securities and Exchange Commission, 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 May 31, 2006, management fees paid were reduced by $1,628 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 $51,597 for the year ended May 31, 2006. During the year ended May 31, 2006, cost of purchases and cost of sales of investments in Putnam Prime Money Market Fund aggregated $19,850,367 and $19,316,640, respectively.

Note 6: Senior loan commitments

Senior loans are purchased or sold on a when-issued or delayed delivery basis and may be settled a month or more after the trade date, which from time to time can delay the actual investment of available cash balances; interest income is accrued based on the terms of the securities. Senior loans can be acquired through an agent, by assignment from another holder of the loan, or as a participation interest in another holder’s portion of the loan. When the fund invests in a loan or participation, the fund is subject to the risk that an intermediate participant between the fund and the borrower will fail to meet its obligations to the fund, in addition to the risk that the borrower under the loan may default on its obligations.

Note 7: 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 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

54

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.

The Staff of the SEC has indicated that it believes that Putnam Management did not comply with certain disclosure requirements in connection with dividend payments to shareholders of your fund. Putnam Management is currently engaged in settlement negotiations with the SEC Staff regarding this matter.

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 8: Other matters

On May 12, 2006 the Trustees of Putnam Managed High Yield Trust approved the merger of the fund into Putnam High Yield Trust, an open-end fund managed by Putnam Management with similar investment objectives and strategies. The merger is subject to a number of conditions and there is no guarantee it will occur.

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Federal tax information
(Unaudited)

The fund designated 4.57% of ordinary income distributions as qualifying for the dividends received deduction for corporations.

For its tax year ended May 31, 2006, the fund hereby designates 4.57% 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.

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Shareholder meeting
results (Unaudited)

October 28, 2005 meeting

The annual meeting of shareholders of the fund was convened on October 28, 2005. At that meeting, consideration of all proposals was adjourned to a final meeting held on December 6, 2005.

December 6, 2005 meeting

At the meeting, each of the nominees for Trustees was elected, as follows:

  Votes for  Votes withheld 
 
Jameson A. Baxter  4,909,926  324,267 
Charles B. Curtis  4,903,686  330,507 
Myra R. Drucker  4,910,725  323,468 
Charles E. Haldeman, Jr.  4,913,137  321,056 
John A. Hill  4,912,541  321,652 
Paul L. Joskow  4,910,040  324,153 
Elizabeth T. Kennan  4,906,253  327,940 
John H. Mullin, III  4,906,968  327,225 
Robert E. Patterson  4,908,903  325,290 
George Putnam, III  4,908,040  326,153 
W. Thomas Stephens  4,723,916  510,277 
Richard B. Worley  4,907,646  326,547 

A proposal to amend the fund’s fundamental investment restriction with respect to borrowing to permit the fund to engage in investment leverage was approved as follows:

Votes for  Votes against  Abstentions  Broker non-votes 
 
3,537,729  811,197  148,972  736,295 

A proposal to approve the Amended and Restated Management Contract between the fund and Putnam Investment Management, LLC, which provides for payment of management fees with respect to fund assets attributable to investment leverage, was approved as follows:

Votes for  Votes against  Abstentions  Broker non-votes 
 
3,587,256  744,778  165,864  736,295 
 
All tabulations are rounded to the nearest whole number.     

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Compliance certifications
(Unaudited)

On December 7, 2005, 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 a Vice Chair of the Board of Trustees of Sarah Lawrence College, Vice Chair of the Board of Trustees of the Commonfund (a not-for-profit firm specializing in asset management for educational endowments and foundations) and a member of the Investment Committee of the Kresge Foundation (a charitable trust).

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. She is Chair of the Advisory Board of Hamilton Lane Advisors (an investment management firm) and a member of the Advisory Board of RCM (an investment management firm). 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

60

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.

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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 May 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 
and Principal Executive Officer  Since 2004 
Since 1989 
Senior Managing Director, Putnam 
Jonathan S. Horwitz (Born 1955)  Investments, Putnam Management 
Senior Vice President and Treasurer  and Putnam Retail Management. Prior 
Since 2004  to 2003, Senior Vice President, United 
Asset Management Corporation 
Prior to 2004, Managing Director, 
Putnam Investments  Francis J. McNamara, III (Born 1955) 
Vice President and Chief Legal Officer 
Steven D. Krichmar (Born 1958)  Since 2004 
Vice President and Principal Financial Officer 
Since 2002  Senior Managing Director, Putnam 
Investments, Putnam Management 
Senior Managing Director, Putnam  and Putnam Retail Management. Prior 
Investments. Prior to July 2001, Partner,  to 2004, General Counsel, State Street 
PricewaterhouseCoopers LLP  Research & Management Company 
 
Michael T. Healy (Born 1958)  Charles A. Ruys de Perez (Born 1957) 
Assistant Treasurer and Principal  Vice President and Chief Compliance Officer 
Accounting Officer  Since 2004 
Since 2000 
Managing Director, Putnam Investments 
Managing Director, Putnam Investments 
Mark C. Trenchard (Born 1962) 
Beth S. Mazor (Born 1958)  Vice President and BSA Compliance Officer 
Vice President  Since 2002 
Since 2002 
Managing Director, Putnam Investments 
Managing Director, Putnam Investments 
Judith Cohen (Born 1945) 
James P. Pappas (Born 1953)  Vice President, Clerk and Assistant Treasurer 
Vice President  Since 1993 
Since 2004 
Wanda M. McManus (Born 1947) 
Managing Director, Putnam Investments  Vice President, Senior Associate Treasurer 
and Putnam Management. During 2002,  and Assistant Clerk 
Chief Operating Officer, Atalanta/Sosnoff  Since 2005 
Management Corporation; prior to 2001, 
President and Chief Executive Officer,  Nancy E. Florek (Born 1957) 
UAM Investment Services, Inc.  Vice President, Assistant Clerk, 
Assistant Treasurer and Proxy Manager 
  Since 2005 
 

The address of each Officer is One Post Office Square, Boston, MA 02109.

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The Putnam
family of funds

The following is a complete list of Putnam’s open-end mutual funds. Investors should carefully consider the investment objective, risks, charges, and expenses of a fund before investing. For a prospectus containing this and other information for any Putnam fund or product, call your financial advisor at 1-800-225-1581 and ask for a prospectus. Please read the prospectus carefully before investing.

Growth funds  Value funds 
Discovery Growth Fund  Classic Equity Fund 
Growth Opportunities Fund  Convertible Income-Growth Trust 
Health Sciences Trust  Equity Income Fund 
International New Opportunities Fund*  The George Putnam Fund of Boston 
New Opportunities Fund  The Putnam Fund for Growth 
OTC & Emerging Growth Fund  and Income 
Small Cap Growth Fund  International Growth and Income Fund* 
Vista Fund  Mid Cap Value Fund 
Voyager Fund  New Value Fund 
  Small Cap Value Fund† 
 
Blend funds  Income funds 
Capital Appreciation Fund  American Government Income Fund 
Capital Opportunities Fund  Diversified Income Trust 
Europe Equity Fund*  Floating Rate Income Fund 
Global Equity Fund*  Global Income Trust* 
Global Natural Resources Fund*  High Yield Advantage Fund*† 
International Capital  High Yield Trust* 
Opportunities Fund*  Income Fund 
International Equity Fund*  Limited Duration Government 
Investors Fund  Income Fund‡ 
Research Fund  Money Market Fund§ 
Tax Smart Equity Fund®  U.S. Government Income Trust 
Utilities Growth and Income Fund   

* A 1% redemption fee on total assets redeemed or exchanged between 6 and 90 days of purchase may be imposed for all share classes of these funds.

† Closed to new investors.

‡ Formerly Putnam Intermediate U.S. Government Income Fund.

§ An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve your investment at $1.00 per share, it is possible to lose money by investing in the fund.

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Tax-free income funds  Putnam RetirementReady® Funds 
AMT-Free Insured Municipal Fund**  Putnam RetirementReady Funds — ten 
Tax Exempt Income Fund  investment portfolios that offer diversifica- 
Tax Exempt Money Market Fund§  tion among stocks, bonds, and money 
Tax-Free High Yield Fund  market instruments and adjust to become 
more conservative over time based on a 
State tax-free income funds:  target date for withdrawing assets. 
Arizona, California, Florida, Massachusetts, 
Michigan, Minnesota, New Jersey, New York,  The ten funds: 
Ohio, and Pennsylvania  Putnam RetirementReady 2050 Fund 
  Putnam RetirementReady 2045 Fund 
Asset allocation funds  Putnam RetirementReady 2040 Fund 
Income Strategies Fund  Putnam RetirementReady 2035 Fund 
Putnam RetirementReady 2030 Fund 
Putnam Asset Allocation Funds — three  Putnam RetirementReady 2025 Fund 
investment portfolios that spread your  Putnam RetirementReady 2020 Fund 
money across a variety of stocks, bonds,  Putnam RetirementReady 2015 Fund 
and money market investments.  Putnam RetirementReady 2010 Fund 
  Putnam RetirementReady Maturity Fund 
The three portfolios: 
Asset Allocation: Balanced Portfolio   
Asset Allocation: Conservative Portfolio   
Asset Allocation: Growth Portfolio   

** Formerly Putnam Tax-Free Insured Fund.

With the exception of money market funds, a 2% redemption fee may be applied to shares exchanged or sold within 5 days of purchase.

Check your account balances and the most recent month-end performance at www.putnam.com.

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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  Myra R. Drucker  James P. Pappas 
Putnam Investment  Charles E. Haldeman, Jr.  Vice President 
Management, LLC  Paul L. Joskow 
One Post Office Square  Elizabeth T. Kennan  Richard S. Robie, III 
Boston, MA 02109  Robert E. Patterson  Vice President 
George Putnam, III   
Investment Sub-Manager  W. Thomas Stephens  Francis J. McNamara, III 
Putnam Investments Limited  Richard B. Worley  Vice President and 
57–59 St. James Street  Chief Legal Officer 
London, England SW1A 1LD  Officers 
George Putnam, III  Charles A. Ruys de Perez 
Marketing Services  President  Vice President and 
Putnam Retail Management  Chief Compliance Officer 
One Post Office Square  Charles E. Porter 
Boston, MA 02109  Executive Vice President,  Mark C. Trenchard 
Associate Treasurer and  Vice President and 
Custodian  Principal Executive Officer  BSA Compliance Officer 
Putnam Fiduciary   
Jonathan S. Horwitz   Judith Cohen 
Trust Company  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 
Principal Financial Officer  Treasurer and Assistant Clerk 
Public Accounting Firm 
KPMG LLP  Michael T. Healy    Nancy E. Florek 
Assistant Treasurer and  Vice President, Assistant Clerk, 
Trustees  Principal Accounting Officer  and Proxy Manager 
John A. Hill, Chairman 
Jameson Adkins Baxter,  Beth S. Mazor 
Vice Chairman  Vice President   
Charles B. Curtis   

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.

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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) In July 2005, Putnam Investment Management, LLC, the Fund's investment manager, Putnam Retail Management Limited Partnership, the Fund's principal underwriter, and Putnam Investments Limited, the sub-manager for a portion of the assets of certain funds as determined by Putnam Management from time to time, adopted several amendments to their Code of Ethics. Insofar as such Code of Ethics applies to the Fund's principal executive officer, principal financial officer and principal accounting officer, the amendments provided for an exception to the standard 90-day holding period (one year, in the case of employees deemed to be “access persons” under the Code) for shares of Putnam mutual funds in the case of redemptions from an employee’s account in a college savings plan qualified under Section 529 of the Internal Revenue Code. Under this exception, an employee may, without penalty under the Code, make “qualified redemptions” of shares from such an account less than 90 days (or one year, as applicable) after purchase. “Qualified redemptions” include redemptions for higher education purposes for the account beneficiary and redemptions made upon death or disability. The July 2005 amendments also provide that an employee may, for purposes of the rule limiting the number of trades per calendar quarter in an employee’s personal account to a maximum of 10, count all trades of the same security in the same direction (all buys or all sells) over a period of five consecutive business days as a single trade.

The July 2005 amendments were incorporated into a restated Code of Ethics dated December 2005 (filed as an exhibit hereto).

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 all members of the Funds' Audit and Compliance Committee meet the financial literacy requirements of the New York Stock Exchange's rules and that Mr. Patterson, Mr. Stephens and Mr. Hill qualify as "audit committee financial experts" (as such term has been defined by the Regulations) based on their review of their 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 
 
May 31, 2006  $37,838  $--  $3,838  $ - 
May 31, 2005  $40,500  $--  $3,800  $ - 

For the fiscal years ended May 31, 2006 and May 31, 2005, the fund’s independent auditor billed aggregate non-audit fees in the amounts of $3,838 and $3,800 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.

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 
May 31,         
2006  $ -  $ -  $ -  $ - 
May         
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)
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 and Putnam Investments Limited’s (for funds having Putnam Investments Limited 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 Leader  Joined     
  Fund  Employer  Positions Over Past Five Years 
 
Paul Scanlon  2002  Putnam  Team Leader, US High Yield; Portfolio 
                                                                               Management            Manager; Analyst 
    1999 – Present   
 
Portfolio Members  Joined     
  Fund  Employer  Positions Over Past Five Years 
Norm Boucher  2005  Putnam  Portfolio Manager 
    Management   
    1998 – Present   
Rob Salvin  2005  Putnam  Portfolio Manager; Analyst; Convertible 
    Management  Specialist 
    2000 – Present   

(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 that pool  Other accounts (including separate accounts, 
Portfolio Leader or         Other SEC-registered open-end        assets from more than one        managed account programs and single- 
Member  and closed-end funds                     client  sponsor defined contribution plan offerings) 
  Number of  Assets  Number of        Assets               Number of accounts  Assets              
  accounts    accounts       
 
Norm Boucher  9  $4,176,900,000  3  $35,500,000  4  $209,100,000
Rob Salvin  10  $4,864,500,000  3  $35,500,000  4  $209,300,000 
Paul Scanlon  14  $10,148,600,000  7  $583,200,000  7  $427,900,000 

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.

      $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 
Paul  2006  *             
Scanlon                 
Portfolio  2005  *             
Leader                 
Norman  2006  *             
Boucher                 
Portfolio  N/A               
Member                 
Robert  2006  *             
Salvin                 
Portfolio  2005  *             
Member                 

(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  12,419  $7.84  12,419  738,292 
 
November 1 -         
November 30,         
2005  31,019  $7.91  31,019  707,273 
 
December 1 -         
December 31,         
2005  37,535  $7.97  37,535  669,738 
 
January 1 -         
January 31,         
2006  30,234  $8.14  30,234  639,504 
 
February 1 -         
February 28,         
2006  29,519  $8.08  29,519  609,985 
 
March 1 -         
March 31, 2006  -  -  -  - 
   
April 1 - April         
30, 2006  -  -  -  - 
   
May 1 - May         
31, 2006  -  -  -  - 
   

The Board of Trustees announced a repurchase plan on October 7, 2005 for which 375,355 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 750,711 shares over the original term of the program

*Information is based on the total number of shares eligible for repurchase under the program, as amended on March 10, 2006.

The registrant currently does not intend to repurchase shares under this program pending the outcome of voting by shareholders of the registrant on a proposal (as disclosed in a prospectus-proxy statement filed with the Commission by Putnam High Yield Trust) to merge the registrant into Putnam High Yield Trust, an open-end investment company.

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 Managed High Yield Trust

By (Signature and Title):

/s/Michael T. Healy
Michael T. Healy
Principal Accounting Officer

Date: July 27, 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: July 27, 2006

By (Signature and Title):

/s/Steven D. Krichmar
Steven D. Krichmar
Principal Financial Officer

Date: July 27, 2006