| UNITED STATES | ||
| SECURITIES AND EXCHANGE COMMISSION | ||
| Washington, D.C. 20549 | ||
| FORM N-CSR | ||
| CERTIFIED SHAREHOLDER REPORT OF REGISTERED | ||
| MANAGEMENT INVESTMENT COMPANIES | ||
| Investment Company Act file number: (811- 05133) | ||
| Exact name of registrant as specified in charter: | Putnam High Income Securities Fund | |
| Address of principal executive offices: One Post Office Square, Boston, Massachusetts 02109 | ||
| Name and address of agent for service: | Beth S. Mazor, Vice President | |
| One Post Office Square | ||
| Boston, Massachusetts 02109 | ||
| Copy to: | John W. Gerstmayr, Esq. | |
| Ropes & Gray LLP | ||
| One International Place | ||
| Boston, Massachusetts 02110 | ||
| Registrant’s telephone number, including area code: | (617) 292-1000 | |
| Date of fiscal year end: August 31, 2008 | ||
| Date of reporting period: September 1, 2007— February 29, 2008 | ||
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
With a focus on investment performance and in-depth information about our funds, we put the interests of investors first and seek to set the standard for integrity and service.
Industry-leading service
We help investors, along with their financial representatives, make informed investment decisions with confidence.
Putnam
High Income
Securities Fund
2| 29| 08
Semiannual Report
| Message from the Trustees | 2 |
| About the fund | 4 |
| Performance snapshot | 6 |
| Interview with your fund’s Portfolio Leaders | 7 |
| Performance in depth | 12 |
| Your fund’s management | 14 |
| Terms and definitions | 16 |
| Trustee approval of management contract | 17 |
| Other information for shareholders | 22 |
| Financial statements | 23 |
| Shareholder meeting results | 50 |
Cover photograph: © Richard H. Johnson
Message from the Trustees
Dear Fellow Shareholder:
In 2008, financial markets and the economy face many challenges. The credit crisis that began as a rise in defaults for a limited segment of the U.S. mortgage market has spread across the global financial sector and produced a severe tightening of credit conditions. Growth has been curtailed as a result, and markets have reacted by sending stock prices lower. In the United States, the economy has weakened considerably, with many predicting that we are now in a recession, or will be soon. The good news is that policymakers are taking decisive action to counter these developments: The Federal Reserve Board has cut interest rates and added liquidity to the credit markets. In February, federal lawmakers, working with the president, approved a $168 billion fiscal stimulus plan, which will deliver tax rebate checks to tens of millions of Americans.
Still, as investors it is natural to feel discouraged. During these challenging times, it is important to remember the value of a long-term perspective and the counsel of your financial representative. The normal condition of the economy and corporate earnings is one of growth, albeit with occasional interruptions. If recent history is any indication, recessions in the United States are short-lived compared to economic expansions. Since 1960, the economy has experienced seven recessions lasting an average of 11 months, versus 64 months for the average expansion.
Starting this month, we have changed the portfolio manager’s commentary in this report to a question-and-answer format. We feel this new approach makes the information more readable and accessible, and we hope you think so as well.
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Lastly, we would like to take this opportunity to welcome new shareholders to the fund and to thank all of our existing investors for your continued confidence in Putnam. We note that Putnam Investments celebrated its 70th anniversary in November. From modest beginnings in Boston, Massachusetts, the company has grown into a global asset manager that serves millions of investors worldwide. Although the mutual fund industry has undergone many changes since George Putnam introduced his innovative balanced fund in 1937, Putnam’s guiding principles have not. As we celebrate this 70-year milestone, we look forward to Putnam continuing its long tradition of prudent money management.
Putnam High Income Securities Fund: Opportunities
from high-yield bonds and convertibles
The average investor may think of bonds as government-sponsored securities that offer relatively low risk and less volatility than the stock market. However, high-yield corporate bonds and convertible securities, the types of investments primarily held by Putnam High Income Securities Fund, are different. Both are issued by companies rather than the government. Moreover, high-yield corporates and convertibles can offer greater returns than other bonds — but also carry a greater potential for risk, such as the risk of corporate default or periodic illiquidity.
High-yield bonds are deemed to be less than investment-grade status (rated below Baa), which means their issuing companies are considered more likely to default on their loans than more creditworthy counterparts. High-yield bond prices tend to follow individual companies’ fundamentals as well as interest-rate levels. While lower-rated corporate bonds may carry higher risk, they provide potentially higher levels of yield to compensate investors for that risk. That is why extensive research based on credit analysis is vital to identifying better high-yield issuers with a lower risk of default.
What sets convertible securities apart is a unique built-in option that allows the investor to exchange — or convert — the bond for a fixed number of shares of stock of the issuer. Convertible securities pay interest like most bonds, although frequently at a lower rate, and the amount of interest does not change as the underlying stock’s price increases or decreases. Issuers range from large, well-known S&P 500 corporations to small, rapidly growing companies to those in cyclically depressed industries such as airlines, autos, and utilities.
Building a portfolio of high-yield bonds and convertible securities with the appropriate balance of risk and return potential requires intensive research and analysis. In the case of Putnam High Income Securities Fund, Putnam’s global equity and credit research analysts conduct rigorous research in an effort to determine the true worth of the issuing company’s business. The fund’s portfolio team then constructs a portfolio that it believes offers the best return potential without undue risk.
Lower-rated bonds may offer higher yields in return for more risk. Mutual funds that invest in bonds are subject to certain risks, including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. The fund’s shares trade on a stock exchange at market prices, which may be lower than the fund’s net asset value.
The “busted” convertible
One kind of security in which your fund may invest is the “busted” convertible. “Busted” refers to a security whose underlying stock price has fallen significantly below the conversion price. It becomes much less sensitive to the volatility of the underlying stock and is more bond-like, responding to interest-rate changes. A busted convertible may pay a higher yield than other convertibles, but may also carry a higher level of risk. (Some companies in this situation may eventually default on their bonds.)
The objective of buying a busted convertible is to take advantage of a company’s potential turnaround despite present challenges. For example, a company undergoing management turmoil may draw negative investor reactions, causing its stock price to tumble. However, if intensive research determines that the management crisis is likely to be resolved, the fund manager could buy the security at a steep discount. The goal is to sell it at a higher premium assuming the situation is corrected and the price of the security recovers.
Putnam High Income Securities Fund has held convertible
securities from a variety of sectors and industries.
Performance snapshot
Putnam High Income
Securities Fund
Average annual total return (%) comparison as of 2/29/08
Data is historical. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return and net asset value 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. Fund returns in the bar chart are at NAV. See pages 7 and 12–13 for additional performance information, including fund returns at market price. Index and Lipper results should be compared to fund performance at NAV. Lipper calculates performance differently than the closed-end funds it ranks, due to varying methods for determining a fund’s monthly reinvestment NAV.
* The Merrill Lynch All-Convertibles Speculative Quality Index began operations on 12/31/92. The JPMorgan Developed High Yield Index began operations on 12/31/94.
† Returns for the six-month period are not annualized, but cumulative.
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The period in review
How did the fund perform for the period, Dave?
Amid a difficult market environment, the fund performed well on a relative basis, outperforming its primary benchmark, the Merrill Lynch All-Convertibles Speculative Quality Index, by a significant margin. Specifically, the benchmark returned –4.16%, while the fund returned –1.72% . The fund also outperformed the –3.72% average return registered by its Lipper peer group, Convertible Securities Funds (closed-end). All in all, the fund held up quite well during a challenging period for equity markets and for the credit-sensitive areas of the fixed-income market.
What were the major factors that made the market environment challenging?
The major factor affecting the market environment was the contagion that began in the subprime mortgage-loan market and then spread to the high-yield market and beyond. The actual credit
Broad market index and fund performance
This comparison shows your fund’s performance in the context of broad market indexes for the six months ended 2/29/08. See page 6 and pages 12–13 for additional fund performance information. Index descriptions can be found on page 16.
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problems that spawned the contagion were in the mortgage market, not the high-yield convertible and bond markets. However, as market participants reassessed the risk exposures in their portfolios, the yields on any type of fixed-income security that carried credit risk rose as prices declined. Investors moved away en masse from risk to what they perceived to be more liquid and/or safe securities, such as U.S. Treasuries and other government bonds.
Rob, were there any factors specific to the high-yield bond market, separate from high-yield convertibles?
Yes. In the high-yield bond arena, supply-and-demand disruptions were an additional factor that weighed on the market. There was a considerable backlog of securities issued to finance leveraged buyouts and other mergers and acquisitions. Banks were left holding these securities when the market for riskier debt securities dried up.
Dave, to what do you attribute the fund’s relative outperformance?
It was attributable to a combination of good security selection and the structural differences that often exist between high-yielding convertible securities and low-quality securities. In other words, there are high-yield convertibles available that carry investment-grade credit ratings.
Credit quality overview
Credit qualities shown as a percentage of portfolio value as of 2/29/08. A bond rated Baa/BBB or higher is considered investment grade. Ratings will vary over time.
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What were some of the individual companies that added to results?
One of the top overall contributors to performance was an out-of-benchmark position in Vale Capital, Ltd., the financial holding company for Brazil-based Companhia Vale do Rio Doce, the world’s largest iron ore miner. This security offered a very high yield, but it was issued on behalf of an investment-grade company. At the same time, another top contributor to results was an overweight position in International Coal Group, which was a high-yield, below investment-grade issue. Similar to most of the issuers in the fund’s primary benchmark, International Coal’s convertibles carry a relatively low credit rating. However, because we manage the fund in a flexible way relative to the benchmark, we can find attractive opportunities among issuers with higher credit quality outside of the benchmark. So, during this period, the fund benefited from good security selection both within and outside the benchmark.
What other positions helped the fund’s returns?
Semiconductor manufacturer Advanced Micro Devices (AMD) contributed positively to results among the fund’s convertible holdings. AMD was an atypical investment for the fund because, normally, convertible bonds issued by the company don’t meet our yield parameters. However, as investors perceived an intensified competitive
Portfolio composition comparison*
This chart shows how the fund’s weightings have changed over the past six months. Weightings are shown as a percentage of portfolio value. Holdings will vary over time.
* Excludes short-term investments held as collateral for loaned securities.
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threat to AMD from market leader Intel, the prices of AMD’s common stock and convertible bonds plummeted during November and December. This price action drove the yields on the convertibles sharply higher and brought them onto our radar screen. Another standout was McMoRan Exploration, a company that is engaged in exploration, development, and production of oil and natural gas, both offshore in the Gulf of Mexico and onshore in the Gulf Coast area. Lastly, bottle and container manufacturer Owens Illinois helped the fund’s returns. The company’s convertibles performed well as a result of solid earnings and improved operating profit margins.
Which holdings were the main detractors from performance?
Reflecting weakness among consumer cyclical stocks generally and the stock of retailers specifically, the convertibles issued by Retail Ventures — which controls DSW Shoe Warehouse —performed poorly. Edge Petroleum, which is focused on exploration and production in the natural gas industry, fell short of expectations for developing new reserves and was another significant detractor. However, toward the end of the period, the company announced that it was investigating strategic alternatives, including the possible sale of the company, which provided a boost to our convertible preferred stock position. Lastly, Washington Mutual, the largest U.S.-based savings-and-loan company, saw prices for its common stock and convertibles decline as it suffered losses in its home-loan portfolio and dealt with rising credit-card defaults.
What’s the team’s outlook, Dave?
Uncertain and volatile market environments, such as the one we experienced during this period, create challenges for high-yield investors, but challenges also bring opportunities. For example, the problems that have gripped the financials sector have led banks such as Citigroup and Bank of America to issue high-yield convertibles to raise their capital levels. Because these are investment-grade companies that we believe have sustainable franchise value, we concluded that the risk-return trade-off was compelling and added or increased our investments in these and other bank-issued convertibles. Also, since many of these investment-grade issuers are not in the fund’s primary benchmark, at period’s end, the fund had a substantial overweight position in financial holdings versus the benchmark. While we can’t predict the future, we believe that at some point, financial stocks will rebound, which may provide a significant tailwind to our high-yield convertible holdings. In the meantime, we are, in effect, being paid well in the form of substantial yields to wait for the stocks of major money center banks and other high-quality financial companies to recover. That being said, we are proceeding with caution
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because, in the current environment, even seemingly safe investments can decline sharply.
Rob, do you have some concluding thoughts regarding the high-yield bond portion of the fund?
On the high-yield bond side of the portfolio, while default rates remain extremely low, it will take time for the market to work off the supply overhang that was created by heavy leveraged buyout issuance. As with high-yield convertibles, we will look to add to the fund’s high-yield bond holdings when we find what we believe are attractive opportunities, while maintaining our risk management discipline.
Thank you, gentlemen, for your time and insight today.
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.
I N V E S T M E N T I N S I G H T
The subprime mortgage financial crisis started in the United States during the fall of 2006, and became a global financial crisis by July 2007. Lax mortgage-lending practices in 2005 and 2006 resulted in rising debt loads for borrowers with weak credit histories. This situation was sustainable when mortgage rates were extremely low and home prices were rising, but as interest rates rose in early 2007, delinquencies and foreclosures began to spike. Many homeowners were unable or unwilling to meet financial commitments, and many lenders were left without a means to recoup their losses. As this report was being prepared, the problem continued to take its toll on markets around the world, most recently with the announced acquisition of Bear Stearns Cos. by JPMorgan Chase &Co. In past economic cycles, defaults would have been limited, but the repackaging, securitization, and wide-scale distribution of subprime mortgage debt by U.S. investment banks enabled the mortgage crisis to take on global proportions.
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Your fund’s performance
This section shows your fund’s performance, price and distribution information for periods ended February 29, 2008, the end of the first half of its current fiscal year. In accordance with regulatory requirements for mutual funds, we also include performance as of the most recent calendar quarter-end. Performance should always be considered in light of a fund’s investment strategy. Data represents past performance. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return, net asset value, and market price will fluctuate, and you may have a gain or a loss when you sell your shares.
Fund performance
Total return for periods ended 2/29/08
| NAV | Market price | |
|
| ||
| Annual average | ||
| Life of fund (since 7/9/87) | 9.79% | 8.88% |
|
| ||
| 10 years | 103.17 | 64.34 |
| Annual average | 7.35 | 5.09 |
|
| ||
| 5 years | 78.13 | 61.22 |
| Annual average | 12.24 | 10.02 |
|
| ||
| 3 years | 21.26 | 21.74 |
| Annual average | 6.64 | 6.78 |
|
| ||
| 1 year | –0.94 | –3.10 |
|
| ||
| 6 months | –1.72 | –1.79 |
|
| ||
Performance assumes reinvestment of distributions and does not account for taxes.
Fund performance as of most recent calendar quarter
Total return for periods ended 3/31/08
| NAV | Market price | |
|
| ||
| Annual average | ||
| Life of fund (since 7/9/87) | 9.65% | 8.64% |
|
| ||
| 10 years | 96.56 | 57.95 |
| Annual average | 6.99 | 4.68 |
|
| ||
| 5 years | 73.40 | 53.43 |
| Annual average | 11.64 | 8.94 |
|
| ||
| 3 years | 22.06 | 23.15 |
| Annual average | 6.87 | 7.19 |
|
| ||
| 1 year | –3.35 | –8.31 |
|
| ||
| 6 months | –5.98 | –8.13 |
|
| ||
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Comparative index returns
For periods ended 2/29/08
| Merrill Lynch | Lipper Convertible | |||||
| All-Convertibles | JPMorgan | Securities Funds | ||||
| Speculative | Developed High | (closed-end) | ||||
| Quality Index | Yield Index | category average‡ | ||||
|
| ||||||
| Annual average | ||||||
| (life of fund) | —* | —† | 9.06% | |||
|
| ||||||
| 10 years | 94.19% | 66.43% | 69.42 | |||
| Annual average | 6.86 | 5.23 | 5.38 | |||
|
| ||||||
| 5 years | 80.83 | 55.68 | 55.44 | |||
| Annual average | 12.58 | 9.26 | 9.15 | |||
|
| ||||||
| 3 years | 20.21 | 12.91 | 17.29 | |||
| Annual average | 6.33 | 4.13 | 5.45 | |||
|
| ||||||
| 1 year | -2.95 | -2.66 | -1.62 | |||
|
| ||||||
| 6 months | –4.16 | -1.54 | -3.72 | |||
|
| ||||||
Index and Lipper results should be compared to fund performance at net asset value. Lipper calculates performance differently than the closed-end funds it ranks, due to varying methods for determining a fund's monthly reinvestment NAV.
* The Merrill Lynch All-Convertibles Speculative Quality Index began operations on 12/31/92.
† The JPMorgan Developed High Yield Index began operations on 12/31/94.
‡ Over the 6-month, 1-year, 3-year, 5-year, 10-year, and life-of-fund periods ended 2/29/08, there were 12, 11, 10, 6, 5, and 2 funds, respectively, in this Lipper category.
Fund price and distribution information
For the six-month period ended 2/29/08
| Distributions | ||
|
| ||
| Number | 6 | |
|
| ||
| Income | $0.2754 | |
|
| ||
| Capital gains | — | |
|
| ||
| Total | $0.2754 | |
|
| ||
| Share value: | NAV | Market price |
|
| ||
| 8/31/07 | $9.15 | $8.24 |
|
| ||
| 2/29/08 | 8.69 | 7.82 |
|
| ||
| Current yield (end of period) | ||
| Current dividend rate* | 6.34% | 7.04% |
|
| ||
The classification of distributions, if any, is an estimate. Final distribution information will appear on your year-end tax forms.
* Most recent distribution, excluding capital gains, annualized and divided by NAV or market price at end of period.
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Your fund’s management
Your fund is managed by the members of the Putnam Large Cap Value and Fixed-Income High-Yield teams. David King and Robert Salvin are Portfolio Leaders of your fund. The Portfolio Leaders coordinate the teams’ management of the fund.
For a complete listing of the members of the Putnam Large Cap Value and Fixed-Income High-Yield teams, including those who are not Portfolio Leaders or Portfolio Members of your fund, please visit the Individual Investors section of www.putnam.com.
Investment team fund ownership
The table below shows how much the fund’s current Portfolio Leaders have invested in the fund and in all Putnam mutual funds (in dollar ranges). Information shown is as of February 29, 2008, and February 28, 2007.
Trustee and Putnam employee fund ownership
As of February 29, 2008, 12 of the 13 Trustees of the Putnam funds owned fund shares. The table below shows the approximate value of investments in the fund and all Putnam funds as of that date by the Trustees and Putnam employees. These amounts include investments by the Trustees’ and employees’ immediate family members and investments through retirement and deferred compensation plans.
| Total assets in | ||
| Assets in the fund | all Putnam funds | |
|
| ||
| Trustees | $834,000 | $ 88,000,000 |
|
| ||
| Putnam employees | $ 35,000 | $672,000,000 |
|
| ||
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Other Putnam funds managed by the Portfolio Leaders
David King is also a Portfolio Leader of Putnam New Value Fund and Putnam Convertible Income-Growth Trust. He is also a Portfolio Member of The Putnam Fund for Growth and Income.
Robert Salvin is also a Portfolio Member of Putnam High Yield Trust, Putnam High Yield Advantage Fund, Putnam Floating Rate Income Fund, and Putnam Convertible Income-Growth Trust.
David King and Robert Salvin may also manage other accounts and variable trust funds advised by Putnam Management or an affiliate.
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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.
Current yield is the annual rate of return earned from dividends or interest of an investment. Current yield is expressed as a percentage of the price of a security, fund share, or principal investment.
Comparative indexes
JPMorgan Developed High Yield Index is an unmanaged index of high-yield fixed-income securities issued in developed countries.
Merrill Lynch 91-Day Treasury Bill Index is an unmanaged index that seeks to measure the performance of U.S. Treasury bills available in the marketplace.
Merrill Lynch All-Convertibles Speculative Quality Index is an unmanaged index of U.S. convertible securities.
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 with Putnam Investment Management (“Putnam Management”) and the sub-management contract between Putnam Management’s affiliate, Putnam Investments Limited (“PIL”), and Putnam Management. In this regard, the Board of Trustees, with the assistance of its Contract Committee consisting solely of Trustees who are not “interested persons” (as such term is defined in the Investment Company Act of 1940, as amended) of the Putnam funds (the “Independent Trustees”), requests and evaluates all information it deems reasonably necessary under the circumstances. Over the course of several months ending in June 2007, the Contract Committee met several 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. The Contract Committee recommended, and the Independent Trustees approved, the continuance of your fund’s management contract and sub-management contract, effective July 1, 2007. (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.)
In addition, in anticipation of the sale of Putnam Investments to Great-West Lifeco, at a series of meetings ending in March 2007, the Trustees reviewed and approved new management and distribution arrangements to take effect upon the change of control. Shareholders of all funds approved the management contracts in May 2007, and the change of control transaction was completed on August 3, 2007. Upon the change of control, the management contracts that were approved by the Trustees in June 2007 automatically terminated and were replaced by new contracts that had been approved by shareholders. In connection with their review for the June 2007 continuance of the Putnam funds’ management contracts, the Trustees did not identify any facts or circumstances that would alter the substance of the conclusions and recommendations they made in their review of the contracts to take effect upon the change of control.
The Independent Trustees’ approval was based on the following conclusions:
• That the fee schedule in effect for your fund represented 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 this fee schedule represented 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.
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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.
Management fee schedules and categories; total expenses
The Trustees reviewed the management fee schedules in effect for all Putnam funds, including fee levels and breakpoints, and the assignment of funds to particular fee categories. In reviewing fees and expenses, the Trustees generally focused their attention on material changes in circumstances — for example, changes in a fund’s size or investment style, changes in Putnam Management’s operating costs or responsibilities, or changes in competitive practices in the mutual fund industry — that suggest that consideration of fee changes might be warranted. The Trustees concluded that the circumstances did not warrant changes to the management fee structure of your fund, which had been carefully developed over the years, re-examined on many occasions and adjusted where appropriate. The Trustees focused on two areas of particular interest, as discussed further below:
• Competitiveness. The Trustees reviewed comparative fee and expense information for competitive funds, which indicated that, in a custom peer group of competitive funds selected by Lipper Inc., your fund ranked in the 1st percentile in management fees and in the 1st percentile in total expenses as of December 31, 2006 (the first percentile being the least expensive funds and the 100th percentile being the most expensive funds). The Trustees expressed their intention to monitor this information closely to ensure that fees and expenses of your fund continue to meet evolving competitive standards.
• Economies of scale. The Trustees considered that most Putnam funds currently have the benefit of breakpoints in their management fees that provide shareholders with significant economies of scale, which means that the effective management fee rate of a fund (as a percentage of fund assets) declines as a fund grows in size and crosses specified asset thresholds. Conversely, as a fund shrinks in size — as has been the case for many Putnam funds in recent years — these breakpoints result in increasing fee levels. In recent years, the Trustees have examined the operation of the existing breakpoint structure during periods of both growth and decline in asset levels. The Trustees concluded that the fee schedules in effect for the funds represented an appropriate sharing of economies of scale at current asset levels. In reaching this conclusion, the Trustees considered the Contract Committee’s stated intent to
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continue to work with Putnam Management to plan for an eventual resumption in the growth of assets, and to consider the potential economies that might be produced under various growth assumptions.
In connection with their review of the management fees and total expenses of the Putnam funds, the Trustees also reviewed the costs of the services to be provided and profits to be realized by Putnam Management and its affiliates from the relationship with the funds. This information included trends in revenues, expenses and profitability of Putnam Management and its affiliates relating to the investment management and distribution services provided to the funds. In this regard, the Trustees also reviewed an analysis of Putnam Management’s revenues, expenses and profitability with respect to the funds’ management contracts, allocated on a fund-by-fund basis.
Investment performance during the review period
The quality of the investment process provided by Putnam Management represented a major factor in the Trustees’ evaluation of the quality of services provided by Putnam Management under your fund’s management contract. The Trustees were assisted in their review of the Putnam funds’ investment process and performance by the work of the Investment Process Committee of the Trustees and the Investment Oversight Committees of the Trustees, which had met 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 recognized that this does not guarantee favorable investment results for every fund in every time period. The Trustees considered the investment performance of each fund over multiple time periods and considered information comparing each fund’s performance with various benchmarks and with the performance of competitive funds.
The Trustees noted the satisfactory investment performance of many Putnam funds. They also noted the disappointing investment performance of certain funds in recent years and discussed with senior management of Putnam Management the factors contributing to such 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. In particular, they noted the important contributions of Putnam Management’s leadership in attracting, retaining and supporting high-quality investment professionals and in systematically implementing an investment process that seeks to merge the best features of fundamental and quantitative analysis. The Trustees indicated their intention to continue to monitor performance trends to assess the effectiveness of these changes and to evaluate whether additional changes to address areas of underperformance are warranted.
19
In the case of your fund, the Trustees considered that your fund’s common share cumulative total return performance at net asset value was in the following percentiles of its Lipper Inc. peer group (Lipper Convertible Securities Funds (closed-end)) for the one-, three- and five-year periods ended March 31, 2007 (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 |
|
| ||
| 10th | 46th | 17th |
(Because of the passage of time, these performance results may differ from the performance results for more recent periods shown elsewhere in this report. Over the one-, three- and five-year periods ended March 31, 2007, there were 10, 10 and 5 funds, respectively, in your fund’s Lipper peer group.* Past performance is no guarantee of future returns.)
As a general matter, the Trustees concluded that cooperative efforts between the Trustees and Putnam Management represent the most effective way to address investment performance problems. The Trustees noted that investors in the Putnam funds have, in effect, placed their trust in the Putnam organization, under the oversight of the funds’ Trustees, to make appropriate decisions regarding the management of the funds. Based on the responsiveness of Putnam Management in the recent past to Trustee concerns about investment performance, the Trustees concluded that it is preferable to seek change within Putnam Management to address performance shortcomings. In the Trustees’ view, the alternative of terminating a management contract and engaging a new investment adviser for an underperforming fund would entail significant disruptions and would not provide any greater assurance of improved investment performance.
Brokerage and soft-dollar allocations; other benefits
The Trustees considered various potential benefits that Putnam Management may receive in connection with the services it provides under the management contract with your fund. These include benefits related to brokerage and soft-dollar allocations, whereby a portion of the commissions paid by a fund for brokerage may be used to acquire research services that may be useful to Putnam Management in managing the assets of the fund and of other clients. The Trustees indicated their continued intent to monitor the potential benefits associated with the allocation of fund brokerage to ensure that the principle of seeking “best price and execution” remains paramount in the portfolio trading process.
* The percentile rankings for your fund’s common share annualized total return performance in the Lipper Convertible Securities Funds (closed-end) category for the one-, five- and ten-year periods ended March 31, 2008 were 50%, 25% and 17%, respectively. Over the one-, five- and ten-year periods ended March 31, 2008, the fund ranked 6th out of 11, 2nd out of 7 and 1st out of 5, respectively. Note that this more recent information was not available when the Trustees approved the continuance of your fund’s management contract.
20
The Trustees’ annual review of your fund’s management contract also included the review of your fund’s custodian agreement and investor servicing agreement with Putnam Fiduciary Trust Company (“PFTC”), which provide benefits to affiliates of Putnam Management. In the case of the custodian agreement, the Trustees considered that, effective January 1, 2007, the Putnam funds had engaged State Street Bank and Trust Company as custodian and began to transition the responsibility for providing custody services away from PFTC.
Comparison of retail and institutional fee schedules
The information examined by the Trustees as part of their annual contract review has included for many years information regarding fees charged by Putnam Management and its affiliates to institutional clients such as defined benefit pension plans, college endowments, etc. This information included comparison of such fees with fees charged to the funds, as well as a detailed assessment of the differences in the services provided to these two types of clients. The Trustees observed, in this regard, that the differences in fee rates between institutional clients and the 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 funds than for institutional clients, as well as the differences between the services that Putnam Management provides to the Putnam funds and those that it provides to institutional clients of the firm, but did not rely on such comparisons to any significant extent in concluding that the management fees paid by your fund are reasonable.
21
Other information for shareholders
Important notice regarding share repurchase program
In September 2007, the Trustees of your fund approved the renewal of a share repurchase program that had been in effect since 2005. This renewal will allow your fund to repurchase, in the 12 months beginning October 8, 2007, up to 10% of the fund’s common shares outstanding as of October 5, 2007.
Important notice regarding delivery of shareholder documents
In accordance with SEC regulations, Putnam sends a single copy of annual and semiannual shareholder reports, prospectuses, and proxy statements to Putnam shareholders who share the same address, unless a shareholder requests otherwise. If you prefer to receive your own copy of these documents, please call Putnam at 1-800-225-1581, and Putnam will begin sending individual copies within 30 days.
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, 2007, are available on the Individual Investors section of www.putnam.com, 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.
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.
22
Financial statements
A guide to financial statements
These sections of the report, as well as the accompanying Notes, 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 period.
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. Dividend sources are estimated at the time of declaration. Actual results may vary. Any non-taxable return of capital cannot be determined until final tax calculations are completed after the end of the fund’s fiscal year.
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.
23
The fund’s portfolio 2/29/08 (Unaudited)
| CORPORATE BONDS AND NOTES (38.6%)* | |||||
| Principal amount | Value | ||||
|
| |||||
| Basic Materials (3.3%) | |||||
| AK Steel Corp. company guaranty 7 3/4s, 2012 | $ | 305,000 | $ | 307,256 | |
| Aleris International, Inc. company guaranty 10s, 2016 | 180,000 | 123,525 | |||
| Aleris International, Inc. company guaranty 9s, 2014 ‡‡ | 160,000 | 119,200 | |||
| Algoma Acquisition Corp. 144A unsec. notes 9 7/8s, | |||||
| 2015 (Canada) | 80,000 | 64,400 | |||
| ARCO Chemical Co. debs. 10 1/4s, 2010 | 220,000 | 223,300 | |||
| Builders FirstSource, Inc. company guaranty sr. sec. | |||||
| FRN 7.315s, 2012 | 150,000 | 109,500 | |||
| Century Aluminum Co. company guaranty 7 1/2s, 2014 | 80,000 | 76,000 | |||
| Clondalkin Acquisition BV 144A company | |||||
| guaranty sr. sec. notes FRN 6.991s, 2013 (Netherlands) | 75,000 | 61,594 | |||
| Domtar Corp. company guaranty Ser. *, 7 7/8s, 2011 (Canada) | 280,000 | 275,800 | |||
| Freeport-McMoRan Copper & Gold, Inc. sr. unsec. | |||||
| bonds 8 3/8s, 2017 | 450,000 | 475,313 | |||
| Freeport-McMoRan Copper & Gold, Inc. sr. unsec. | |||||
| notes 8 1/4s, 2015 | 225,000 | 236,531 | |||
| Freeport-McMoRan Copper & Gold, Inc. sr. unsec. | |||||
| notes FRN 8.394s, 2015 | 80,000 | 76,800 | |||
| Georgia-Pacific Corp. debs. 9 1/2s, 2011 | 345,000 | 349,313 | |||
| Gerdau Ameristeel Corp. sr. notes 10 3/8s, 2011 (Canada) | 270,000 | 283,500 | |||
| Hercules, Inc. company guaranty 6 3/4s, 2029 | 315,000 | 292,950 | |||
| Hexion U.S. Finance Corp./Hexion Nova Scotia | |||||
| Finance, ULC company guaranty 9 3/4s, 2014 | 165,000 | 170,775 | |||
| Huntsman, LLC company guaranty 11 5/8s, 2010 | 2,000 | 2,120 | |||
| Jefferson Smurfit Corp. company guaranty 8 1/4s, 2012 | 49,000 | 45,693 | |||
| Metals USA, Inc. sec. notes 11 1/8s, 2015 | 340,000 | 335,750 | |||
| Momentive Performance Materials, Inc. company | |||||
| guaranty sr. unsec. notes 9 3/4s, 2014 | 320,000 | 286,400 | |||
| NewPage Corp. company guaranty 10s, 2012 | 105,000 | 105,263 | |||
| NewPage Corp. sec. notes 10s, 2012 | 135,000 | 135,338 | |||
| NewPage Holding Corp. sr. notes FRN 11.818s, 2013 ‡‡ | 54,534 | 45,536 | |||
| Norske Skog Canada, Ltd. company guaranty Ser. D, | |||||
| 8 5/8s, 2011 (Canada) | 170,000 | 142,375 | |||
| Novelis, Inc. company guaranty 7 1/4s, 2015 | 155,000 | 139,500 | |||
| Rockwood Specialties Group, Inc. company | |||||
| guaranty 7 5/8s, 2014 | EUR | 245,000 | 332,148 | ||
| Smurfit-Stone Container Enterprises, Inc. sr. unsec. | |||||
| unsub. notes 8s, 2017 | $ | 140,000 | 123,900 | ||
| Steel Dynamics, Inc. company guaranty sr. unsec. | |||||
| unsub. notes 6 3/4s, 2015 | 305,000 | 298,138 | |||
| Tube City IMS Corp. company guaranty 9 3/4s, 2015 | 160,000 | 141,200 | |||
| Ucar Finance, Inc. company guaranty 10 1/4s, 2012 | 3,000 | 3,098 | |||
| Verso Paper Holdings, LLC/ Verso Paper, Inc. company | |||||
| guaranty 11 3/8s, 2016 | 90,000 | 81,450 | |||
| 5,463,666 | |||||
24
| CORPORATE BONDS AND NOTES (38.6%)* continued | |||||
| Principal amount | Value | ||||
|
| |||||
| Capital Goods (3.5%) | |||||
| Alliant Techsystems, Inc. sr. sub. notes 6 3/4s, 2016 | $ | 165,000 | $ | 161,288 | |
| Allied Waste North America, Inc. sec. notes 6 1/2s, 2010 | 85,000 | 83,938 | |||
| Allied Waste North America, Inc. sec. notes Ser. B, 5 3/4s, 2011 | 30,000 | 29,250 | |||
| Baldor Electric Co. company guaranty 8 5/8s, 2017 | 80,000 | 78,400 | |||
| BBC Holding Corp. sr. notes 8 7/8s, 2014 | 215,000 | 189,738 | |||
| Blount, Inc. sr. sub. notes 8 7/8s, 2012 | 155,000 | 150,738 | |||
| Bombardier, Inc. 144A sr. notes 8s, 2014 (Canada) | 150,000 | 154,125 | |||
| Bombardier, Inc. 144A sr. unsec. notes FRN 7.465s, | |||||
| 2013 (Canada) | EUR | 115,000 | 167,785 | ||
| Crown Americas, LLC/Crown Americas Capital Corp. | |||||
| sr. notes 7 5/8s, 2013 | $ | 255,000 | 258,188 | ||
| General Cable Corp. company guaranty sr. unsec. | |||||
| notes FRN 7.104s, 2015 | 190,000 | 163,400 | |||
| Greenbrier Cos., Inc. company guaranty 8 3/8s, 2015 | 160,000 | 152,600 | |||
| Hawker Beechcraft Acquisition Co., LLC | |||||
| sr. sub. notes 9 3/4s, 2017 | 155,000 | 153,838 | |||
| Hawker Beechcraft Acquisition Co., LLC sr. unsec. | |||||
| notes 8 7/8s, 2015 ‡‡ | 200,000 | 204,000 | |||
| Hexcel Corp. sr. sub. notes 6 3/4s, 2015 | 350,000 | 336,875 | |||
| L-3 Communications Corp. company guaranty 7 5/8s, 2012 | 100,000 | 102,500 | |||
| L-3 Communications Corp. company guaranty 6 1/8s, 2013 | 110,000 | 108,900 | |||
| L-3 Communications Corp. company guaranty Ser. B, 6 3/8s, 2015 | 215,000 | 213,388 | |||
| L-3 Communications Corp. sr. sub. notes 5 7/8s, 2015 | 50,000 | 48,625 | |||
| Legrand SA unsec. unsub. debs. 8 1/2s, 2025 (France) | 395,000 | 440,182 | |||
| Manitowoc Co., Inc. (The) sr. notes 7 1/8s, 2013 | 200,000 | 194,500 | |||
| Milacron Escrow Corp. sec. notes 11 1/2s, 2011 | 225,000 | 168,750 | |||
| Owens-Brockway Glass Container, Inc. company | |||||
| guaranty 6 3/4s, 2014 | EUR | 100,000 | 138,229 | ||
| Owens-Illinois, Inc. debs. 7 1/2s, 2010 | $ | 55,000 | 56,238 | ||
| RBS Global, Inc. / Rexnord Corp. company guaranty | |||||
| 9 1/2s, 2014 | 375,000 | 337,500 | |||
| Ryerson Tull, Inc. 144A sec. notes 12s, 2015 | 60,000 | 56,400 | |||
| SPX Corp. sr. notes 7 5/8s, 2014 | 80,000 | 82,400 | |||
| TD Funding Corp. company guaranty 7 3/4s, 2014 | 290,000 | 288,550 | |||
| Tekni-Plex, Inc. sec. notes 10 7/8s, 2012 | 320,000 | 335,200 | |||
| Terex Corp. company guaranty 7 3/8s, 2014 | 215,000 | 213,388 | |||
| Terex Corp. sr. sub. notes 8s, 2017 | 40,000 | 40,000 | |||
| Titan International, Inc. company guaranty 8s, 2012 | 395,000 | 381,175 | |||
| WCA Waste Corp. company guaranty 9 1/4s, 2014 | 190,000 | 189,050 | |||
| 5,679,138 | |||||
|
| |||||
| Communication Services (3.2%) | |||||
| American Tower Corp. 144A sr. notes 7s, 2017 | 280,000 | 279,300 | |||
| Centennial Cellular Operating Co., LLC company | |||||
| guaranty 10 1/8s, 2013 | 90,000 | 90,900 | |||
| Centennial Cellular Operating Co., LLC sr. unsec. | |||||
| notes 8 1/8s, 2014 | 50,000 | 47,250 | |||
| Centennial Communications Corp. sr. notes 10s, 2013 | 145,000 | 139,925 | |||
25
| CORPORATE BONDS AND NOTES (38.6%)* continued | ||||
| Principal amount | Value | |||
|
| ||||
| Communication Services continued | ||||
| Centennial Communications Corp. sr. unsec. notes FRN | ||||
| 10.479s, 2013 | $ | 40,000 | $ | 36,800 |
| Citizens Communications Co. notes 9 1/4s, 2011 | 160,000 | 168,400 | ||
| Cricket Communications, Inc. company guaranty 9 3/8s, 2014 | 335,000 | 298,150 | ||
| Digicel Group, Ltd. 144A sr. notes 8 7/8s, 2015 (Jamaica) | 160,000 | 140,000 | ||
| Digicel, Ltd. 144A sr. notes 9 1/4s, 2012 (Jamaica) | 165,000 | 165,825 | ||
| Inmarsat Finance PLC company guaranty stepped-coupon | ||||
| zero % (10 3/8s, 11/15/08), 2012 (United Kingdom) †† | 240,000 | 232,200 | ||
| Intelsat Bermuda, Ltd. company guaranty sr. unsec. | ||||
| notes 11 1/4s, 2016 (Bermuda) | 430,000 | 432,150 | ||
| Intelsat Intermediate Holding Co., Ltd. company | ||||
| guaranty stepped-coupon zero % (9 1/4s, 2/1/10), | ||||
| 2015 (Bermuda) †† | 70,000 | 58,625 | ||
| iPCS, Inc. company guaranty sr. sec. notes FRN 5.364s, 2013 | 75,000 | 60,000 | ||
| Level 3 Financing, Inc. company guaranty 9 1/4s, 2014 | 200,000 | 162,000 | ||
| Level 3 Financing, Inc. company guaranty 8 3/4s, 2017 | 115,000 | 87,113 | ||
| MetroPCS Wireless, Inc. company guaranty sr. unsec. | ||||
| notes 9 1/4s, 2014 | 370,000 | 325,600 | ||
| PAETEC Holding Corp. company guaranty sr. unsec. | ||||
| unsub. notes 9 1/2s, 2015 | 190,000 | 176,225 | ||
| PanAmSat Corp. company guaranty 9s, 2014 | 245,000 | 245,000 | ||
| Qwest Communications International, Inc. company | ||||
| guaranty 7 1/2s, 2014 | 215,000 | 209,088 | ||
| Qwest Corp. sr. unsec. unsub. notes 7 1/4s, 2025 | 65,000 | 58,500 | ||
| Qwest Corp. sr. unsec. unsub. notes 8 7/8s, 2012 | 315,000 | 328,781 | ||
| Qwest Corp. sr. unsec. notes 7 1/2s, 2014 | 90,000 | 89,100 | ||
| Rural Cellular Corp. sr. unsec. notes 9 7/8s, 2010 | 150,000 | 154,125 | ||
| Rural Cellular Corp. sr. unsec. sub. FRN 8.989s, 2012 | 50,000 | 50,500 | ||
| Rural Cellular Corp. sr. unsec. sub. notes FRN 8.124s, 2013 | 105,000 | 105,525 | ||
| Syniverse Technologies, Inc. sr. sub. notes Ser. B, 7 3/4s, 2013 | 345,000 | 329,475 | ||
| Time Warner Telecom, Inc. company guaranty 9 1/4s, 2014 | 190,000 | 190,000 | ||
| West Corp. company guaranty 9 1/2s, 2014 | 95,000 | 83,125 | ||
| Windstream Corp. company guaranty 8 5/8s, 2016 | 295,000 | 300,163 | ||
| Windstream Corp. company guaranty 8 1/8s, 2013 | 155,000 | 154,613 | ||
| 5,198,458 | ||||
|
| ||||
| Consumer Cyclicals (6.7%) | ||||
| Allison Transmission 144A company guaranty 11s, 2015 | 80,000 | 68,400 | ||
| American Media, Inc. company guaranty 8 7/8s, 2011 | 40,000 | 27,300 | ||
| American Media, Inc. company guaranty Ser. B, 10 1/4s, 2009 | 295,000 | 202,075 | ||
| American Media, Inc. company guaranty sr. unsec. | ||||
| sub. notes 8 7/8s, 2011 | 1,454 | 992 | ||
| American Media, Inc. 144A company | ||||
| guaranty sr. unsec. sub. notes 10 1/4s, 2009 | 10,726 | 7,347 | ||
| Asbury Automotive Group, Inc. sr. sub. notes 8s, 2014 | 105,000 | 90,825 | ||
| Associated Materials, Inc. company guaranty 9 3/4s, 2012 | 300,000 | 297,000 | ||
| Autonation, Inc. company guaranty 7s, 2014 | 40,000 | 36,400 | ||
| Autonation, Inc. company guaranty sr. unsec. | ||||
| notes FRN 6.258s, 2013 | 60,000 | 49,200 | ||
26
| CORPORATE BONDS AND NOTES (38.6%)* continued | ||||
| Principal amount | Value | |||
|
| ||||
| Consumer Cyclicals continued | ||||
| Bon-Ton Stores, Inc. (The) company guaranty 10 1/4s, 2014 | $ | 140,000 | $ | 93,800 |
| Boyd Gaming Corp. sr. sub. notes 7 3/4s, 2012 | 25,000 | 23,063 | ||
| Boyd Gaming Corp. sr. sub. notes 7 1/8s, 2016 | 210,000 | 171,150 | ||
| Boyd Gaming Corp. sr. sub. notes 6 3/4s, 2014 | 290,000 | 239,250 | ||
| Dex Media, Inc. disc. notes stepped-coupon zero % | ||||
| (9s, 11/15/08), 2013 †† | 100,000 | 72,000 | ||
| Dex Media, Inc. notes 8s, 2013 | 55,000 | 39,050 | ||
| FelCor Lodging LP company guaranty 8 1/2s, 2011 (R) | 100,000 | 100,250 | ||
| Ford Motor Co. notes 7.45s, 2031 | 185,000 | 126,263 | ||
| Ford Motor Credit Co., LLC notes 7 7/8s, 2010 | 470,000 | 433,141 | ||
| Ford Motor Credit Co., LLC sr. notes 9 7/8s, 2011 | 550,000 | 507,220 | ||
| Ford Motor Credit Co., LLC sr. unsec. notes 9 3/4s, 2010 | 179,000 | 166,528 | ||
| Ford Motor Credit Co., LLC unsec. notes 7 3/8s, 2009 | 105,000 | 99,568 | ||
| General Motors Corp. debs. 9.4s, 2021 | 45,000 | 39,263 | ||
| General Motors Corp. sr. unsec. unsub. notes 7.2s, 2011 | 770,000 | 696,850 | ||
| Goodyear Tire & Rubber Co. (The) sr. notes 9s, 2015 | 270,000 | 284,175 | ||
| Hanesbrands, Inc. company guaranty sr. unsec. | ||||
| notes FRN Ser. B, 8.204s, 2014 | 340,000 | 299,200 | ||
| Harry & David Holdings, Inc. company guaranty 9s, 2013 | 115,000 | 101,200 | ||
| Harry & David Holdings, Inc. company | ||||
| guaranty sr. unsec. notes FRN 10.124s, 2012 | 40,000 | 37,200 | ||
| Host Marriott LP sr. notes 7 1/8s, 2013 (R) | 120,000 | 118,200 | ||
| Host Marriott LP sr. notes Ser. M, 7s, 2012 (R) | 245,000 | 238,875 | ||
| Jostens IH Corp. company guaranty 7 5/8s, 2012 | 415,000 | 400,475 | ||
| K. Hovnanian Enterprises, Inc. sr. notes 8 5/8s, 2017 | 15,000 | 11,925 | ||
| Lamar Media Corp. company guaranty 7 1/4s, 2013 | 130,000 | 125,775 | ||
| Lamar Media Corp. sr. unsec. sub. notes Ser. C, 6 5/8s, 2015 | 80,000 | 73,600 | ||
| Lear Corp. company guaranty 8 1/2s, 2013 | 190,000 | 171,475 | ||
| Levi Strauss & Co. sr. unsec. unsub. notes 9 3/4s, 2015 | 303,000 | 300,728 | ||
| Levi Strauss & Co. sr. unsec. notes 8 7/8s, 2016 | 145,000 | 138,113 | ||
| Mashantucket Western Pequot Tribe 144A bonds 8 1/2s, 2015 | 295,000 | 262,550 | ||
| Meritage Homes Corp. company guaranty 6 1/4s, 2015 | 175,000 | 131,250 | ||
| Meritage Homes Corp. sr. notes 7s, 2014 | 35,000 | 26,250 | ||
| MGM Mirage, Inc. company guaranty 8 1/2s, 2010 | 95,000 | 98,206 | ||
| MGM Mirage, Inc. company guaranty 6 3/4s, 2013 | 155,000 | 145,700 | ||
| MGM Mirage, Inc. company guaranty 6s, 2009 | 280,000 | 278,600 | ||
| MGM Mirage, Inc. sr. notes 6 3/4s, 2012 | 2,000 | 1,880 | ||
| Michaels Stores, Inc. company guaranty 11 3/8s, 2016 | 315,000 | 260,663 | ||
| Michaels Stores, Inc. company guaranty 10s, 2014 | 70,000 | 61,163 | ||
| Neiman-Marcus Group, Inc. company guaranty 9s, 2015 | 475,000 | 472,625 | ||
| NTK Holdings, Inc. sr. disc. notes zero %, 2014 | 225,000 | 119,250 | ||
| Oxford Industries, Inc. sr. notes 8 7/8s, 2011 | 100,000 | 96,000 | ||
| Pinnacle Entertainment, Inc. sr. sub. notes 8 1/4s, 2012 | 245,000 | 232,750 | ||
| Pinnacle Entertainment, Inc. 144A | ||||
| sr. sub. notes 7 1/2s, 2015 | 200,000 | 154,000 | ||
| Quebecor Media sr. unsec. notes 7 3/4s, 2016 (Canada) | 70,000 | 64,225 | ||
| Reader’s Digest Association, Inc. (The) 144A | ||||
| sr. sub. notes 9s, 2017 | 355,000 | 255,600 | ||
| Sealy Mattress Co. sr. sub. notes 8 1/4s, 2014 | 25,000 | 22,750 | ||
27
| CORPORATE BONDS AND NOTES (38.6%)* continued | ||||
| Principal amount | Value | |||
|
| ||||
| Consumer Cyclicals continued | ||||
| Seminole Hard Rock Entertainment, Inc. 144A sr. sec. | ||||
| notes FRN 7.491s, 2014 | $ | 315,000 | $ | 242,550 |
| Standard Pacific Corp. sr. unsec. notes 6 1/2s, 2008 | 155,000 | 146,475 | ||
| Station Casinos, Inc. sr. notes 6s, 2012 | 259,000 | 218,855 | ||
| Tenneco Automotive, Inc. company guaranty 8 5/8s, 2014 | 90,000 | 88,200 | ||
| Tenneco Automotive, Inc. sec. notes Ser. B, 10 1/4s, 2013 | 93,000 | 98,696 | ||
| Tenneco, Inc. 144A sr. unsec. notes 8 1/8s, 2015 | 35,000 | 35,088 | ||
| THL Buildco, Inc. (Nortek Holdings, Inc.) sr. sub. notes | ||||
| 8 1/2s, 2014 | 185,000 | 143,375 | ||
| Tropicana Entertainment, LLC sr. sub. notes 9 5/8s, 2014 | 140,000 | 67,200 | ||
| Trump Entertainment Resorts, Inc. sec. notes 8 1/2s, 2015 | 464,000 | 322,480 | ||
| UCI Holdco, Inc. sr. unsec. notes FRN 12.491s, 2013 ‡‡ | 225,694 | 199,739 | ||
| Vertis, Inc. company guaranty Ser. B, 10 7/8s, 2009 | 446,000 | 156,100 | ||
| Vertis, Inc. 144A unsec. sub. notes 13 1/2s, 2009 | 70,000 | 9,100 | ||
| Wynn Las Vegas, LLC/Wynn Las Vegas Capital Corp. 1st mtge. | ||||
| 6 5/8s, 2014 | 380,000 | 364,800 | ||
| Yankee Acquisition Corp. company guaranty Ser. B, 8 1/2s, 2015 | 325,000 | 271,375 | ||
| 10,935,371 | ||||
|
| ||||
| Consumer Staples (5.5%) | ||||
| Adelphia Communications Corp. escrow zero %, 2009 | 235,000 | 17,331 | ||
| Adelphia Communications Corp. escrow bonds zero %, 2010 | 20,000 | 1,500 | ||
| Affinion Group, Inc. company guaranty 11 1/2s, 2015 | 135,000 | 124,200 | ||
| Affinion Group, Inc. company guaranty 10 1/8s, 2013 | 335,000 | 328,300 | ||
| Affinity Group, Inc. sr. sub. notes 9s, 2012 | 360,000 | 324,000 | ||
| AMC Entertainment, Inc. company guaranty 11s, 2016 | 217,000 | 203,980 | ||
| Atlantic Broadband Finance, LLC company guaranty 9 3/8s, 2014 | 225,000 | 200,250 | ||
| Avis Budget Car Rental, LLC company guaranty 7 3/4s, 2016 | 150,000 | 125,250 | ||
| Avis Budget Car Rental, LLC company guaranty 7 5/8s, 2014 | 100,000 | 87,000 | ||
| Buffets, Inc. company guaranty 12 1/2s, 2014 (In default) † | 110,000 | 2,750 | ||
| Cablevision Systems Corp. sr. notes Ser. B, 8s, 2012 | 100,000 | 96,250 | ||
| CCH I, LLC sec. notes 11s, 2015 | 422,000 | 293,290 | ||
| CCH II, LLC sr. unsec. notes 10 1/4s, 2010 | 350,000 | 320,250 | ||
| CCH II, LLC sr. unsec. notes Ser. B, 10 1/4s, 2010 | 505,000 | 458,288 | ||
| Chiquita Brands International, Inc. sr. unsec. unsub. notes | ||||
| 8 7/8s, 2015 | 30,000 | 26,925 | ||
| Chiquita Brands International, Inc. sr. notes 7 1/2s, 2014 | 380,000 | 330,600 | ||
| Church & Dwight Co., Inc. company guaranty 6s, 2012 | 130,000 | 125,775 | ||
| Cinemark, Inc. sr. disc. notes stepped-coupon zero % | ||||
| (9 3/4s, 3/15/09), 2014 †† | 165,000 | 150,150 | ||
| CSC Holdings, Inc. debs. Ser. B, 8 1/8s, 2009 | 3,000 | 3,053 | ||
| CSC Holdings, Inc. sr. notes 6 3/4s, 2012 | 205,000 | 197,825 | ||
| CSC Holdings, Inc. sr. notes Ser. B, 7 5/8s, 2011 | 90,000 | 89,438 | ||
| Dean Foods Co. company guaranty 7s, 2016 | 125,000 | 109,375 | ||
| Del Monte Corp. company guaranty 6 3/4s, 2015 | 105,000 | 99,750 | ||
| Del Monte Corp. sr. sub. notes 8 5/8s, 2012 | 270,000 | 274,050 | ||
| DirecTV Holdings, LLC company guaranty 6 3/8s, 2015 | 330,000 | 306,075 | ||
| Echostar DBS Corp. company guaranty 7s, 2013 | 155,000 | 152,675 | ||
| Echostar DBS Corp. company guaranty 6 5/8s, 2014 | 30,000 | 28,875 | ||
| Echostar DBS Corp. sr. notes 6 3/8s, 2011 | 570,000 | 561,450 | ||
28
| CORPORATE BONDS AND NOTES (38.6%)* continued | ||||
| Principal amount | Value | |||
|
| ||||
| Consumer Staples continued | ||||
| Elizabeth Arden, Inc. company guaranty 7 3/4s, 2014 | $ | 155,000 | $ | 148,800 |
| Hertz Corp. company guaranty 8 7/8s, 2014 | 290,000 | 276,225 | ||
| Idearc, Inc. company guaranty 8s, 2016 | 535,000 | 315,650 | ||
| Ion Media Networks, Inc. 144A sr. sec. notes 10.508s, 2013 | 95,000 | 73,269 | ||
| Ion Media Networks, Inc. 144A sr. sec. notes 7.508s, 2012 | 120,000 | 99,600 | ||
| Jarden Corp. company guaranty 7 1/2s, 2017 | 280,000 | 245,350 | ||
| Marquee Holdings, Inc. sr. disc. notes 12s, 2014 | 185,000 | 135,050 | ||
| Nielsen Finance LLC/Nielsen Finance Co. company | ||||
| guaranty 10s, 2014 | 200,000 | 193,000 | ||
| Nielsen Finance LLC/Nielsen Finance Co. company | ||||
| guaranty stepped-coupon zero % (12 1/2s, 8/1/11), 2016 †† | 345,000 | 219,075 | ||
| Pinnacle Foods Finance LLC sr. sub. notes 10 5/8s, 2017 | 100,000 | 77,750 | ||
| Prestige Brands, Inc. sr. sub. notes 9 1/4s, 2012 | 387,000 | 383,130 | ||
| R.H. Donnelley Corp. sr. disc. notes Ser. A-1, 6 7/8s, 2013 | 40,000 | 23,600 | ||
| R.H. Donnelley Corp. sr. disc. notes Ser. A-2, 6 7/8s, 2013 | 145,000 | 85,550 | ||
| R.H. Donnelley Corp. sr. unsec. unsub. notes 8 7/8s, 2017 | 50,000 | 29,250 | ||
| R.H. Donnelley Corp. sr. unsec. notes 6 7/8s, 2013 | 70,000 | 41,300 | ||
| Rainbow National Services, LLC 144A sr. notes 8 3/4s, 2012 | 180,000 | 184,500 | ||
| Rental Services Corp. company guaranty 9 1/2s, 2014 | 160,000 | 130,800 | ||
| Rite Aid Corp. company guaranty 9 3/8s, 2015 | 180,000 | 139,500 | ||
| Rite Aid Corp. company guaranty 7 1/2s, 2015 | 105,000 | 94,238 | ||
| Rite Aid Corp. sec. notes 8 1/8s, 2010 | 45,000 | 43,425 | ||
| Rite Aid Corp. sec. notes 7 1/2s, 2017 | 65,000 | 56,875 | ||
| Sirius Satellite Radio, Inc. sr. unsec. notes 9 5/8s, 2013 | 180,000 | 148,500 | ||
| Spectrum Brands, Inc. company guaranty 7 3/8s, 2015 | 270,000 | 176,175 | ||
| Spectrum Brands, Inc. company guaranty sr. unsec. | ||||
| sub. notes stepped-coupon 11 1/2s (12, 4/2/08), 2013 †† ‡‡ | 150,000 | 120,375 | ||
| Universal City Florida Holding Co. sr. notes 8 3/8s, 2010 | 290,000 | 284,925 | ||
| Universal City Florida Holding Co. sr. unsec. | ||||
| notes FRN 7.989s, 2010 | 107,000 | 102,854 | ||
| Univision Communications, Inc. 144A company | ||||
| guaranty unsec. notes 9 3/4s, 2015 ‡‡ | 120,000 | 82,800 | ||
| 8,950,221 | ||||
|
| ||||
| Energy (5.2%) | ||||
| Arch Western Finance, LLC sr. notes 6 3/4s, 2013 | 445,000 | 438,325 | ||
| Chaparral Energy, Inc. company guaranty sr. unsec. | ||||
| notes 8 7/8s, 2017 | 380,000 | 324,900 | ||
| CHC Helicopter Corp. sr. sub. notes 7 3/8s, 2014 (Canada) | 240,000 | 238,200 | ||
| Chesapeake Energy Corp. company guaranty 7 3/4s, 2015 | 60,000 | 61,650 | ||
| Chesapeake Energy Corp. sr. notes 7 1/2s, 2013 | 190,000 | 195,225 | ||
| Chesapeake Energy Corp. sr. notes 7s, 2014 | 250,000 | 250,625 | ||
| Complete Production Services, Inc. company | ||||
| guaranty 8s, 2016 (S) | 215,000 | 206,669 | ||
| Compton Petroleum Corp. company guaranty 7 5/8s, | ||||
| 2013 (Canada) | 395,000 | 367,350 | ||
| Comstock Resources, Inc. sr. notes 6 7/8s, 2012 | 120,000 | 111,600 | ||
| Connacher Oil and Gas, Ltd. 144A sec. notes 10 1/4s, | ||||
| 2015 (Canada) | 300,000 | 297,000 | ||
29
| CORPORATE BONDS AND NOTES (38.6%)* continued | ||||
| Principal amount | Value | |||
|
| ||||
| Energy continued | ||||
| Denbury Resources, Inc. sr. sub. notes 7 1/2s, 2015 | $ | 345,000 | $ | 348,450 |
| Dresser-Rand Group, Inc. company guaranty 7 3/8s, 2014 | 14,000 | 13,685 | ||
| Encore Acquisition Co. sr. sub. notes 6 1/4s, 2014 | 60,000 | 55,800 | ||
| Encore Acquisition Co. sr. sub. notes 6s, 2015 | 213,000 | 191,168 | ||
| EXCO Resources, Inc. company guaranty 7 1/4s, 2011 | 140,000 | 134,750 | ||
| Forest Oil Corp. sr. notes 8s, 2011 | 150,000 | 156,000 | ||
| Harvest Operations Corp. sr. notes 7 7/8s, 2011 (Canada) | 365,000 | 332,150 | ||
| Helix Energy Solutions Group, Inc. 144A sr. unsec. | ||||
| notes 9 1/2s, 2016 | 285,000 | 285,000 | ||
| Hilcorp Energy I LP/Hilcorp Finance Co. 144A | ||||
| sr. unsec. notes 9s, 2016 | 320,000 | 320,000 | ||
| Inergy LP/Inergy Finance Corp. sr. unsec. notes 6 7/8s, 2014 | 485,000 | 470,450 | ||
| Key Energy Services, Inc. 144A sr. notes 8 3/8s, 2014 | 295,000 | 295,738 | ||
| Massey Energy Co. sr. notes 6 5/8s, 2010 | 330,000 | 328,350 | ||
| Newfield Exploration Co. sr. sub. notes 6 5/8s, 2014 | 210,000 | 205,800 | ||
| Pacific Energy Partners/Pacific Energy Finance Corp. | ||||
| sr. notes 7 1/8s, 2014 | 95,000 | 100,692 | ||
| Peabody Energy Corp. company guaranty 7 3/8s, 2016 | 275,000 | 284,625 | ||
| PetroHawk Energy Corp. company guaranty 9 1/8s, 2013 | 155,000 | 158,100 | ||
| Petroleum Development Corp. 144A sr. unsec. | ||||
| notes 12s, 2018 | 80,000 | 80,600 | ||
| Petroplus Finance, Ltd. company guaranty 6 3/4s, | ||||
| 2014 (Bermuda) | 80,000 | 72,600 | ||
| Petroplus Finance, Ltd. 144A company guaranty 7s, | ||||
| 2017 (Bermuda) | 240,000 | 217,850 | ||
| Plains Exploration & Production Co. company | ||||
| guaranty 7 3/4s, 2015 | 75,000 | 74,813 | ||
| Plains Exploration & Production Co. company guaranty 7s, 2017 | 375,000 | 360,000 | ||
| Pride International, Inc. sr. unsec. notes 7 3/8s, 2014 | 305,000 | 317,200 | ||
| Sabine Pass LNG LP sec. notes 7 1/2s, 2016 | 100,000 | 98,000 | ||
| Stallion Oilfield Services/Stallion Oilfield | ||||
| Finance Corp. 144A sr. unsec. notes 9 3/4s, 2015 | 345,000 | 269,100 | ||
| Targa Resources, Inc. company guaranty sr. unsec. | ||||
| notes 8 1/2s, 2013 | 410,000 | 380,275 | ||
| Whiting Petroleum Corp. company guaranty 7s, 2014 | 365,000 | 363,175 | ||
| 8,405,915 | ||||
|
| ||||
| Financial (1.7%) | ||||
| E*Trade Financial Corp. sr. unsec. notes 8s, 2011 | 105,000 | 91,088 | ||
| Finova Group, Inc. notes 7 1/2s, 2009 (In default) † | 201,597 | 32,256 | ||
| GMAC LLC sr. unsec. unsub. notes 7 3/4s, 2010 | 555,000 | 501,824 | ||
| GMAC LLC sr. unsec. unsub. notes 7s, 2012 | 75,000 | 60,795 | ||
| GMAC LLC sr. unsec. unsub. notes 6 7/8s, 2012 | 520,000 | 415,068 | ||
| GMAC LLC sr. unsec. unsub. notes 6 3/4s, 2014 | 450,000 | 338,944 | ||
| GMAC LLC sr. unsec. unsub. notes FRN 7.324s, 2014 | 60,000 | 45,039 | ||
| GMAC LLC sr. unsec. unsub. notes 5.85s, 2009 | 315,000 | 304,016 | ||
| GMAC LLC sr. unsec. unsub. notes 6 5/8s, 2012 | 140,000 | 112,109 | ||
| HUB International Holdings, Inc. 144A sr. unsec. unsub. | ||||
| notes 9s, 2014 | 165,000 | 130,350 | ||
30
| CORPORATE BONDS AND NOTES (38.6%)* continued | ||||
| Principal amount | Value | |||
|
| ||||
| Financial continued | ||||
| HUB International Holdings, Inc. 144A | ||||
| sr. sub. notes 10 1/4s, 2015 | $ | 180,000 | $ | 133,200 |
| Leucadia National Corp. sr. unsec. notes 8 1/8s, 2015 | 115,000 | 115,863 | ||
| Leucadia National Corp. sr. unsec. notes 7 1/8s, 2017 | 140,000 | 134,750 | ||
| Nuveen Investments, Inc. 144A sr. notes 10 1/2s, 2015 | 160,000 | 145,400 | ||
| Realogy Corp. company guaranty sr. unsec. | ||||
| notes 10 1/2s, 2014 (R) | 375,000 | 266,250 | ||
| USI Holdings Corp. 144A sr. unsec. notes FRN 6.94s, 2014 | 35,000 | 27,344 | ||
| 2,854,296 | ||||
|
| ||||
| Health Care (3.9%) | ||||
| Accellent, Inc. company guaranty 10 1/2s, 2013 | 320,000 | 252,800 | ||
| AMR Holding Co., Inc./EmCare Holding Co., Inc. | ||||
| sr. sub. notes 10s, 2015 | 320,000 | 339,200 | ||
| Community Health Systems, Inc. company | ||||
| guaranty 8 7/8s, 2015 | 435,000 | 426,844 | ||
| DaVita, Inc. company guaranty 6 5/8s, 2013 | 285,000 | 279,300 | ||
| Elan Finance PLC/Elan Finance Corp. company | ||||
| guaranty 7 3/4s, 2011 (Ireland) | 110,000 | 104,225 | ||
| HCA, Inc. company guaranty sr. sec. notes 9 5/8s, 2016 ‡‡ | 285,000 | 294,263 | ||
| HCA, Inc. sr. unsec. notes 6 3/8s, 2015 | 65,000 | 54,275 | ||
| HCA, Inc. sr. sec. notes 9 1/4s, 2016 | 600,000 | 615,000 | ||
| HCA, Inc. sr. notes 6.95s, 2012 | 70,000 | 66,150 | ||
| Health Management Associates, Inc. sr. notes 6 1/8s, 2016 | 360,000 | 300,600 | ||
| IASIS Healthcare/IASIS Capital Corp. | ||||
| sr. sub. notes 8 3/4s, 2014 | 355,000 | 350,563 | ||
| Omnicare, Inc. company guaranty 6 3/4s, 2013 | 10,000 | 8,900 | ||
| Omnicare, Inc. sr. sub. notes 6 1/8s, 2013 | 30,000 | 26,250 | ||
| Psychiatric Solutions, Inc. company guaranty 7 3/4s, 2015 | 375,000 | 371,250 | ||
| Select Medical Corp. company guaranty 7 5/8s, 2015 | 395,000 | 323,900 | ||
| Service Corporation International sr. notes 7s, 2017 | 65,000 | 64,513 | ||
| Stewart Enterprises, Inc. sr. notes 6 1/4s, 2013 | 340,000 | 319,600 | ||
| Sun Healthcare Group, Inc. company | ||||
| guaranty sr. unsec. unsub. notes 9 1/8s, 2015 | 330,000 | 317,625 | ||
| Surgical Care Affiliates, Inc. 144A sr. sub. notes 10s, 2017 | 80,000 | 60,800 | ||
| Surgical Care Affiliates, Inc. 144A sr. unsec. | ||||
| notes 8 7/8s, 2015 ‡‡ | 265,000 | 214,650 | ||
| Tenet Healthcare Corp. sr. unsec. notes 7 3/8s, 2013 | 275,000 | 238,563 | ||
| Tenet Healthcare Corp. sr. unsec. unsub. notes 6 3/8s, 2011 | 305,000 | 273,356 | ||
| US Oncology, Inc. company guaranty 9s, 2012 | 250,000 | 248,750 | ||
| US Oncology Holdings, Inc. sr. unsec. notes FRN | ||||
| 10.759s, 2012 ‡‡ | 90,000 | 69,300 | ||
| Vanguard Health Holding Co. II, LLC sr. sub. notes 9s, 2014 | 325,000 | 310,375 | ||
| Ventas Realty LP/Capital Corp. company guaranty 9s, 2012 (R) | 155,000 | 165,850 | ||
| Ventas Realty LP/Capital Corp. company | ||||
| guaranty 6 3/4s, 2010 (R) | 75,000 | 75,563 | ||
| Ventas Realty LP/Capital Corp. sr. notes 6 5/8s, 2014 (R) | 50,000 | 49,750 | ||
| Ventas Realty LP/Capital Corp. sr. notes 6 1/2s, 2016 (R) | 80,000 | 78,000 | ||
| 6,300,215 | ||||
31
| CORPORATE BONDS AND NOTES (38.6%)* continued | ||||
| Principal amount | Value | |||
|
| ||||
| Technology (3.1%) | ||||
| Activant Solutions, Inc. company guaranty 9 1/2s, 2016 | $ | 345,000 | $ | 286,350 |
| Advanced Micro Devices, Inc. sr. notes 7 3/4s, 2012 | 303,000 | 254,520 | ||
| Amkor Technologies, Inc. sr. notes 7 3/4s, 2013 | 364,000 | 338,520 | ||
| Avago Technologies Finance company guaranty 11 7/8s, | ||||
| 2015 (Singapore) | 115,000 | 119,313 | ||
| Avago Technologies Finance company guaranty 10 1/8s, | ||||
| 2013 (Singapore) | 120,000 | 126,600 | ||
| Celestica, Inc. sr. sub. notes 7 7/8s, 2011 (Canada) | 85,000 | 83,088 | ||
| Celestica, Inc. sr. sub. notes 7 5/8s, 2013 (Canada) | 280,000 | 264,600 | ||
| Compucom Systems, Inc. sr. sub. notes 12 1/2s, 2015 | 205,000 | 191,675 | ||
| Freescale Semiconductor, Inc. company | ||||
| guaranty sr. unsec. notes 8 7/8s, 2014 | 390,000 | 317,850 | ||
| Freescale Semiconductor, Inc. company guaranty sr. unsec. | ||||
| sub. notes 9 1/8s, 2014 ‡‡ | 220,000 | 167,200 | ||
| Freescale Semiconductor, Inc. sr. sec. notes 10 1/8s, 2016 (S) | 335,000 | 237,850 | ||
| Iron Mountain, Inc. company guaranty 8 3/4s, 2018 | 70,000 | 73,325 | ||
| Iron Mountain, Inc. company guaranty 8 5/8s, 2013 | 240,000 | 242,400 | ||
| Lucent Technologies, Inc. unsec. debs. 6.45s, 2029 | 150,000 | 112,500 | ||
| Lucent Technologies, Inc. notes 5 1/2s, 2008 | 50,000 | 49,688 | ||
| New ASAT Finance, Ltd. company guaranty 9 1/4s, 2011 | ||||
| (Cayman Islands) | 90,000 | 71,550 | ||
| Nortel Networks, Ltd. company guaranty sr. unsec. | ||||
| notes 10 3/4s, 2016 (Canada) | 165,000 | 155,100 | ||
| Nortel Networks, Ltd. company guaranty sr. unsec. | ||||
| notes FRN 8.508s, 2011 (Canada) | 180,000 | 155,700 | ||
| NXP BV/NXP Funding, LLC company guaranty sr. sec. | ||||
| notes FRN 7.008s, 2013 (Netherlands) | 170,000 | 137,275 | ||
| NXP BV/NXP Funding, LLC sec. notes 7 7/8s, 2014 | ||||
| (Netherlands) | 275,000 | 250,250 | ||
| Open Solutions, Inc. 144A sr. sub. notes 9 3/4s, 2015 | 330,000 | 260,700 | ||
| SunGard Data Systems, Inc. company guaranty 10 1/4s, 2015 | 178,000 | 177,110 | ||
| SunGard Data Systems, Inc. company guaranty 9 1/8s, 2013 | 506,000 | 509,795 | ||
| Travelport LLC company guaranty 11 7/8s, 2016 | 65,000 | 54,925 | ||
| Travelport LLC company guaranty 9 7/8s, 2014 | 190,000 | 167,200 | ||
| Xerox Capital Trust I company guaranty 8s, 2027 | 285,000 | 289,678 | ||
| 5,094,762 | ||||
|
| ||||
| Utilities & Power (2.5%) | ||||
| AES Corp. (The) sr. notes 8 7/8s, 2011 | 22,000 | 22,935 | ||
| AES Corp. (The) sr. unsec. unsub. notes 8s, 2017 | 70,000 | 71,400 | ||
| AES Corp. (The) 144A sec. notes 8 3/4s, 2013 | 150,000 | 156,938 | ||
| CMS Energy Corp. sr. notes 8 1/2s, 2011 | 70,000 | 75,319 | ||
| CMS Energy Corp. sr. notes 7 3/4s, 2010 | 40,000 | 42,473 | ||
| Colorado Interstate Gas Co. debs. 6.85s, 2037 | 95,000 | 91,950 | ||
| Colorado Interstate Gas Co. sr. notes 5.95s, 2015 | 10,000 | 10,068 | ||
| Dynegy-Roseton Danskamme company guaranty Ser. A, 7.27s, 2010 | 73,035 | 73,217 | ||
| Dynegy-Roseton Danskamme company guaranty Ser. B, 7.67s, 2016 | 125,000 | 125,000 | ||
| Edison Mission Energy sr. unsec. notes 7 3/4s, 2016 | 75,000 | 77,250 | ||
| Edison Mission Energy sr. unsec. notes 7 1/2s, 2013 | 90,000 | 92,250 | ||
32
| CORPORATE BONDS AND NOTES (38.6%)* continued | ||||
| Principal amount | Value | |||
|
| ||||
| Utilities & Power continued | ||||
| Edison Mission Energy sr. unsec. notes 7.2s, 2019 | $ | 155,000 | $ | 151,900 |
| Edison Mission Energy sr. unsec. notes 7s, 2017 | 110,000 | 108,075 | ||
| El Paso Natural Gas Co. debs. 8 5/8s, 2022 | 40,000 | 45,468 | ||
| Ferrellgas LP/Finance sr. notes 8 3/4s, 2012 | 280,000 | 285,600 | ||
| Ferrellgas LP/Finance sr. notes 6 3/4s, 2014 | 155,000 | 151,319 | ||
| Mirant Americas Generation, Inc. sr. unsec. notes 8.3s, 2011 | 170,000 | 171,700 | ||
| Mirant North America, LLC company guaranty 7 3/8s, 2013 | 235,000 | 235,881 | ||
| NRG Energy, Inc. company guaranty 7 3/8s, 2017 | 100,000 | 96,750 | ||
| NRG Energy, Inc. sr. notes 7 3/8s, 2016 | 730,000 | 703,538 | ||
| Orion Power Holdings, Inc. sr. unsec. notes 12s, 2010 | 125,000 | 135,625 | ||
| Sierra Pacific Power Co. general ref. mtge. 6 1/4s, 2012 | 35,000 | 36,682 | ||
| Sierra Pacific Resources sr. unsec. notes 8 5/8s, 2014 | 195,000 | 207,359 | ||
| Teco Finance, Inc. sr. unsec. unsub. notes 7s, 2012 | 60,000 | 64,699 | ||
| Teco Finance, Inc. sr. unsec. unsub. notes 7.2s, 2011 | 35,000 | 37,438 | ||
| Teco Finance, Inc. sr. unsec. unsub. notes 6 3/4s, 2015 | 10,000 | 10,266 | ||
| Tennessee Gas Pipeline Co. sr. unsec. unsub. debs. 7s, 2028 | 15,000 | 14,900 | ||
| Tennessee Gas Pipeline Co. sr. unsec. unsub. debs. 7 1/2s, 2017 | 40,000 | 44,355 | ||
| Texas Competitive Electric Holdings Co., LLC company | ||||
| guaranty 10 1/4s, 2015 | 430,000 | 419,250 | ||
| Transcontinental Gas Pipeline Corp. sr. unsec. debs. 7 1/4s, 2026 | 150,000 | 153,375 | ||
| Utilicorp United, Inc. sr. unsec. notes 9.95s, 2011 | 5,000 | 5,315 | ||
| Williams Cos., Inc. (The) sr. unsec. notes 8 1/8s, 2012 | 35,000 | 38,150 | ||
| Williams Partners LP/ Williams Partners | ||||
| Finance Corp. sr. unsec. notes 7 1/4s, 2017 | 75,000 | 75,563 | ||
| 4,032,008 | ||||
|
| ||||
| Total corporate bonds and notes (cost $68,581,036) | $ | 62,914,050 | ||
| CONVERTIBLE PREFERRED STOCKS (32.3%)* | ||||
| Shares | Value | |||
|
| ||||
| Basic Materials (3.6%) | ||||
| Freeport-McMoRan Copper & Gold, Inc. $6.75 cv. pfd. | 14,087 | $ | 2,077,833 | |
| Smurfit-Stone Container Corp. Ser. A, $1.75 cum. cv. pfd. | 79,320 | 1,655,805 | ||
| Vale Capital, Ltd. Ser. RIO, $2.75 cv. pfd. (Cayman Islands) | 24,600 | 1,651,275 | ||
| Vale Capital, Ltd. Ser. RIO P, $2.75 cv. pfd. (Cayman Islands) | 7,890 | 527,644 | ||
| 5,912,557 | ||||
|
| ||||
| Capital Goods (3.4%) | ||||
| Avery Dennison Corp. $3.938 cv. pfd. | 29,880 | 1,490,098 | ||
| Northrop Grumman Corp. Ser. B, $7.00 cum. cv. pfd. | 11,295 | 1,643,423 | ||
| Owens-Illinois, Inc. $2.375 cv. pfd. | 42,070 | 2,319,109 | ||
| 5,452,630 | ||||
|
| ||||
| Communication Services (2.2%) | ||||
| Cincinnati Bell, Inc. Ser. B, $3.378 cum. cv. pfd. | 30,900 | 1,267,518 | ||
| Crown Castle International Corp. $3.125 cum. cv. pfd. | 40,895 | 2,290,120 | ||
| 3,557,638 | ||||
33
| CONVERTIBLE PREFERRED STOCKS (32.3%)* continued | |||
| Shares | Value | ||
|
| |||
| Consumer Cyclicals (5.2%) | |||
| Emmis Communications Corp. Ser. A, $3.125 cum. cv. pfd. | 28,300 | $ | 735,800 |
| Ford Motor Co. Capital Trust II $3.25 cum. cv. pfd. | 70,000 | 2,345,000 | |
| General Motors Corp. $1.563 cum. cv. pfd. | 97,000 | 1,879,375 | |
| Retail Ventures, Inc. $3.312 cv. pfd. | 27,400 | 1,010,375 | |
| Six Flags, Inc. $1.813 cum. cv. pfd. | 63,200 | 837,400 | |
| Stanley Works (The) FRN 5.125% units cv. pfd. | 1,882,000 | 1,626,989 | |
| 8,434,939 | |||
|
| |||
| Consumer Staples (2.6%) | |||
| Bunge, Ltd. 5.125% cum. cv. pfd. | 1,740 | 1,792,200 | |
| Newell Financial Trust I $2.625 cum. cv. pfd. | 28,800 | 1,303,200 | |
| Universal Corp. 6.75% cv. pfd. | 870 | 1,204,515 | |
| 4,299,915 | |||
|
| |||
| Energy (3.0%) | |||
| Chesapeake Energy Corp. $4.50 cum. cv. pfd. | 18,400 | 2,136,700 | |
| Edge Petroleum Ser. A, $2.875 cum. cv. pfd. | 27,750 | 855,810 | |
| McMoRan Exploration Co. $6.75 cum. cv. pfd. | 16,100 | 1,914,709 | |
| 4,907,219 | |||
|
| |||
| Financial (7.1%) | |||
| Alleghany Corp. 5.75% cv. pfd. | 3,100 | 1,020,288 | |
| Bank of America Corp. Ser. L, 7.25% cv. pfd. | 1,387 | 1,478,889 | |
| Citigroup, Inc. Ser. T, $3.25 cv. pfd. | 36,980 | 1,839,755 | |
| Entertainment Properties Trust Ser. C, $1.437 cum. cv. pfd. (R) | 64,630 | 1,284,521 | |
| Fannie Mae Ser. 04-1, 5.375% cv. pfd. | 16 | 1,289,796 | |
| FelCor Lodging Trust, Inc. Ser. A, $0.488 cum. cv. pfd. (R) | 88,700 | 1,873,788 | |
| Nationwide Health Properties, Inc. $7.75 cv. pfd. | 13,800 | 1,921,650 | |
| Washington Mutual, Inc. Ser. R, 7.75% cv. pfd. | 985 | 924,669 | |
| 11,633,356 | |||
|
| |||
| Health Care (1.4%) | |||
| Mylan, Inc. 6.50% cv. pfd. | 980 | 877,155 | |
| Schering-Plough Corp. 6.00% cum. cv. pfd. | 7,100 | 1,462,600 | |
| 2,339,755 | |||
|
| |||
| Technology (0.9%) | |||
| Lucent Technologies Capital Trust I 7.75% cum. cv. pfd. | 1,800 | 1,404,000 | |
|
| |||
| Utilities & Power (2.9%) | |||
| AES Trust III $3.375 cv. pfd. | 27,800 | 1,323,975 | |
| El Paso Energy Capital Trust I $2.375 cv. pfd. | 36,050 | 1,324,838 | |
| Entergy Corp. $3.813 cv. pfd. | 33,100 | 2,060,475 | |
| 4,709,288 | |||
|
| |||
| Total convertible preferred stocks (cost $52,772,994) | $ | 52,651,297 | |
34
| CONVERTIBLE BONDS AND NOTES (24.9%)* | ||||
| Principal amount | Value | |||
|
| ||||
| Capital Goods (1.2%) | ||||
| Alliant Techsystems, Inc. cv. sr. sub. notes 2 3/4s, 2024 | $ | 115,000 | $ | 158,988 |
| DRS Technologies, Inc. 144A cv. unsec. notes 2s, 2026 | 270,000 | 298,350 | ||
| Trinity Industries, Inc. cv. sub. notes 3 7/8s, 2036 | 135,000 | 119,138 | ||
| WESCO International, Inc. cv. sr. unsec. company | ||||
| guaranty debs. 1 3/4s, 2026 | 1,633,000 | 1,375,803 | ||
| 1,952,279 | ||||
|
| ||||
| Communication Services (1.7%) | ||||
| Level 3 Communications, Inc. cv. sr. notes 3 1/2s, 2012 | 1,700,000 | 1,241,000 | ||
| NII Holdings, Inc. cv. unsec. notes 3 1/8s, 2012 | 1,700,000 | 1,474,750 | ||
| 2,715,750 | ||||
|
| ||||
| Consumer Cyclicals (2.8%) | ||||
| Fleetwood Enterprises, Inc. cv. sr. sub. notes 5s, 2023 | 1,400,000 | 1,267,000 | ||
| Pier 1 Imports, Inc. cv. company guaranty 6 3/8s, 2036 | 130,000 | 104,975 | ||
| Pier 1 Imports, Inc. 144A cv. sr. unsub. notes | ||||
| stepped-coupon 6 3/8s (6 1/8s, 2/15/11), 2036 †† | 1,541,000 | 1,244,358 | ||
| Rewards Network, Inc. cv. sub. debs. 3 1/4s, 2023 | 1,300,000 | 1,209,000 | ||
| WCI Communities, Inc. cv. sr. sub. notes 4s, 2023 | 900,000 | 673,875 | ||
| 4,499,208 | ||||
|
| ||||
| Consumer Staples (2.1%) | ||||
| Chiquita Brands International cv. unsec. sr. notes 4 1/4s, 2016 | 1,290,000 | 1,491,563 | ||
| Sinclair Broadcast Group, Inc. cv. bonds 6s, 2012 | 1,745,000 | 1,559,594 | ||
| Sinclair Broadcast Group, Inc. cv. sr. sub. notes | ||||
| stepped-coupon 4 7/8s (2s, 1/15/11), 2018 †† | 420,000 | 387,975 | ||
| 3,439,132 | ||||
|
| ||||
| Energy (1.5%) | ||||
| International Coal Group, Inc. 144A cv. company | ||||
| guaranty 9s, 2012 | 1,860,000 | 2,417,485 | ||
|
| ||||
| Financial (5.5%) | ||||
| BankUnited Financial Corp. cv. sr. notes 3 1/8s, 2034 | 1,499,000 | 858,178 | ||
| Boston Private Financial Holdings, Inc. cv. unsec. | ||||
| sr. notes 3s, 2027 | 1,700,000 | 1,445,000 | ||
| Charming Shoppes cv. sr. unsec. notes 1 1/8s, 2014 | 2,060,000 | 1,400,800 | ||
| Countrywide Financial Corp. 144A cv. company | ||||
| guaranty unsec. sr. notes FRN Ser. A, 0.758s, 2037 (S) | 1,800,000 | 1,593,000 | ||
| General Growth Properties, Inc. 144A cv. sr. | ||||
| notes 3.98s, 2027 | 1,800,000 | 1,431,000 | ||
| KKR Financial Holdings, LLC 144A cv. sr. unsec. | ||||
| notes 7s, 2012 | 1,157,000 | 989,235 | ||
| Sunstone Hotel Partnership, LLC 144A cv. company | ||||
| guaranty 4.6s, 2027 (R) | 1,600,000 | 1,286,365 | ||
| 9,003,578 | ||||
35
| CONVERTIBLE BONDS AND NOTES (24.9%)* continued | ||||
| Principal amount | Value | |||
|
| ||||
| Health Care (2.1%) | ||||
| CV Therapeutics, Inc. cv. sub. notes 3 1/4s, 2013 | $ | 1,650,000 | $ | 1,245,750 |
| EPIX Medical, Inc. cv. sr. notes 3s, 2024 | 1,470,000 | 984,900 | ||
| Omnicare, Inc. cv. debs. Ser. OCR, 3 1/4s, 2035 | 1,663,000 | 1,134,998 | ||
| 3,365,648 | ||||
|
| ||||
| Technology (6.6%) | ||||
| Acquicor Technology, Inc. 144A cv. notes 8s, 2011 | 532,000 | 399,000 | ||
| Advanced Micro Devices, Inc. cv. sr. unsec. | ||||
| notes 5 3/4s, 2012 | 1,900,000 | 1,508,125 | ||
| Borland Software Corp. 144A cv. sr. notes 2 3/4s, 2012 | 1,310,000 | 877,700 | ||
| Cray, Inc. cv. sr. sub. notes 3s, 2024 | 1,300,000 | 1,124,500 | ||
| Credence Systems Corp. cv. sub. notes 1 1/2s, 2008 | 1,200,000 | 1,185,000 | ||
| LSI Logic Corp. cv. sub. notes 4s, 2010 | 1,012,000 | 972,785 | ||
| Mentor Graphics Corp. cv. sub. notes FRN 4.795s, 2023 | 1,400,000 | 1,411,340 | ||
| RF Micro Devices, Inc. cv. unsec. sub notes 1s, 2014 | 1,370,000 | 935,025 | ||
| Safeguard Scientifics, Inc. cv. sr. notes 2 5/8s, 2024 | 200,000 | 161,500 | ||
| Safeguard Scientifics, Inc. 144A cv. sr. notes 2 5/8s, 2024 | 2,800,000 | 2,261,000 | ||
| 10,835,975 | ||||
|
| ||||
| Transportation (1.4%) | ||||
| ExpressJet Holdings, Inc. cv. company | ||||
| guaranty 4 1/4s, 2023 | 950,000 | 916,750 | ||
| JetBlue Airways Corp. cv. sr. bonds 3 1/2s, 2033 | 1,450,000 | 1,413,750 | ||
| 2,330,500 | ||||
|
| ||||
| Total convertible bonds and notes (cost $41,538,527) | $ | 40,559,555 | ||
| UNITS (1.2%)* | ||||
| Units | Value | |||
|
| ||||
| Elf Special Financing, Ltd. 144A cv. units FRN | ||||
| Ser. B, 5.341s, 2009 (Cayman Islands) | 7 | $ | 681,730 | |
| Hercules, Inc. cv. units 6 1/2s, 2009 | 1,540 | 1,309,000 | ||
|
| ||||
| Total units (cost $1,935,095) | $ | 1,990,730 | ||
| COMMON STOCKS (0.6%)* | ||||
| Shares | Value | |||
|
| ||||
| AboveNet, Inc. † | 43 | $ | 3,139 | |
| Adelphia Recovery Trust (Ser. ACC-1) † | 248,982 | 17,429 | ||
| Bohai Bay Litigation, LLC (Units) (F) | 406 | 5,747 | ||
| Cinemark Holdings, Inc. | 7,000 | 101,080 | ||
| Contifinancial Corp. Liquidating Trust Units † (F) | 585,159 | 59 | ||
| Del Monte Foods Co. | 5,600 | 50,288 | ||
| El Paso Corp. | 7,000 | 114,100 | ||
| Jarden Corp. † (S) | 3,570 | 86,001 | ||
| Mediq, Inc. † (F) | 294 | 179 | ||
| NRG Energy, Inc. † | 2,750 | 113,493 | ||
36
| COMMON STOCKS (0.6%)* continued | ||||||
| Shares | Value | |||||
|
| ||||||
| Pinnacle Entertainment , Inc. † | 4,700 | $ | 73,602 | |||
| Qwest Communications International, Inc. | 13,125 | 70,875 | ||||
| United Rentals, Inc. † | 3,700 | 74,370 | ||||
| Williams Cos., Inc. (The) | 5,420 | 195,228 | ||||
| XCL Warranty Escrow (F) | 406 | 28,986 | ||||
|
| ||||||
| Total common stocks (cost $1,410,428) | $ | 934,576 | ||||
| SENIOR LOANS (0.3%)* (c) | ||||||
| Principal amount | Value | |||||
|
| ||||||
| GateHouse Media, Inc. bank term loan FRN Ser. B, 7.07s, 2014 | $ | 91,033 | $ | 64,451 | ||
| GateHouse Media, Inc. bank term loan FRN Ser. DD, 6 1/2s, 2014 | 33,967 | 24,049 | ||||
| Sandridge Energy bank term loan FRN 8 5/8s, 2015 | 315,000 | 303,975 | ||||
| Sandridge Energy bank term loan FRN 8.354s, 2014 | 75,000 | 67,875 | ||||
|
| ||||||
| Total senior loans (cost $505,526) | $ | 460,350 | ||||
| FOREIGN GOVERNMENT BONDS AND NOTES (0.1%)* (cost $132,215) | ||||||
| Principal amount | Value | |||||
|
| ||||||
| Argentina (Republic of ) sr. unsec. unsub. bonds FRB 3.092s, 2012 $ | 140,625 | $ | 123,169 | |||
| WARRANTS (—%)* † | ||||||
| Expiration | Strike | |||||
| date | price | Warrants | Value | |||
|
| ||||||
| AboveNet, Inc. | 9/8/10 | $ | 24.00 | 20 | $ | 1,000 |
| AboveNet, Inc. | 9/8/08 | 20.00 | 17 | 935 | ||
| New ASAT Finance, Ltd. | ||||||
| (Cayman Islands) (F) | 2/1/11 | 0.01 | 23,400 | 543 | ||
| Odyssey Investment Partners 144A (F) | 6/15/09 | 0.01 | 270 | 1,337 | ||
| Smurfit Kappa Group PLC 144A (Ireland) | 10/1/13 | EUR | 0.01 | 119 | 8,798 | |
|
| ||||||
| Total warrants (cost $10,328) | $ | 12,613 | ||||
| SHORT-TERM INVESTMENTS (2.8%)* | ||||||
| Principal amount/shares | Value | |||||
|
| ||||||
| Putnam Prime Money Market Fund (e) | 2,806,739 | $ | 2,806,739 | |||
| Short-term investments held as collateral for loaned | ||||||
| securities with yields ranging from 2.80% to 4.48% | ||||||
| and due dates ranging from March 3, 2008 to | ||||||
| April 25, 2008 (d) | $ | 1,746,188 | 1,743,695 | |||
|
| ||||||
| Total short-term investments (cost $4,550,434) | $ | 4,550,434 | ||||
| TOTAL INVESTMENTS | ||||||
|
| ||||||
| Total investments (cost $171,436,583) | $ | 164,196,774 | ||||
37
Key to holding’s currency abbreviations
EUR Euro
USD / $ United States Dollar
* Percentages indicated are based on net assets of $162,840,913.
† 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.
‡‡ Income may be received in cash or additional securities at the discretion of the issuer.
(c) Senior loans are exempt from registration under the Securities 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 rates shown for senior loans are the current interest rates at February 29, 2008. 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).
(d) See Note 1 to the financial statements.
(e) See Note 5 to the financial statements regarding investments in Putnam Prime Money Market Fund.
(F) Is valued at fair value following procedures approved by the Trustees.
(R) Real Estate Investment Trust.
(S) Securities on loan, in part or in entirety, at February 29, 2008.
At February 29, 2008, liquid assets totaling $3,190,699 have been designated as collateral for open swap contracts and forward contracts.
144A after the name of an issuer represents securities exempt from registration under Rule 144A under the Securities Act of 1933, as amended. 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 February 29, 2008.
The dates shown on debt obligations are the original maturity dates.
| FORWARD CURRENCY CONTRACTS TO SELL at 2/29/08 (aggregate face value $680,238) (Unaudited) | |||||
| Aggregate | Delivery | Unrealized | |||
| Value | face value | date | depreciation | ||
|
| |||||
| Euro | $699,936 | $680,238 | 3/19/08 | $(19,698) | |
| CREDIT DEFAULT CONTRACTS OUTSTANDING at 2/29/08 (Unaudited) | ||||||
| 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. | ||||||
| Abitibibowater Inc., | ||||||
| 6 1/2%, 6/15/13 | $— | $45,000 | 12/20/08 | 550 bp | $ (6,603) | |
|
| ||||||
| Nalco, Co. | ||||||
| 7.75%,11/15/11 | — | 45,000 | 9/20/12 | 350 bp | (1,879) | |
|
| ||||||
| Citibank, N.A. | ||||||
| Abitibibowater Inc., | ||||||
| 6 1/2%, 6/15/13 | — | 45,000 | 12/20/08 | 825 bp | (5,375) | |
|
| ||||||
| Abitibibowater Inc., | ||||||
| 6 1/2%, 6/15/13 | — | 45,000 | 12/20/08 | 725 bp | (5,919) | |
|
| ||||||
| Abitibibowater Inc., | ||||||
| 6 1/2%, 6/15/13 | — | 45,000 | 12/20/08 | 800 bp | (5,627) | |
|
| ||||||
| Freescale | ||||||
| Semiconductor, 8 7/8%, | ||||||
| 12/15/14 | — | 120,000 | 9/20/12 | 495 bp | (18,001) | |
|
| ||||||
38
| CREDIT DEFAULT CONTRACTS OUTSTANDING at 2/29/08 (Unaudited) continued | ||||||
| Upfront | Fixed payments | Unrealized | ||||
| Swap counterparty / | premium | Notional | Termination | received (paid) by | appreciation/ | |
| Referenced debt* | received (paid)** | amount | date | fund per annum | (depreciation) | |
|
| ||||||
| Credit Suisse International | ||||||
| Advanced Micro Devices, | ||||||
| 7 3/4%, 11/1/12 | $ — | $ 60,000 | 6/20/09 | 165 bp | $ (4,936) | |
|
| ||||||
| Dynegy Holdings Inc., | ||||||
| 6 7/8%, 4/1/11 | — | 80,000 | 6/20/17 | 297 bp | (10,722) | |
|
| ||||||
| Deutsche Bank AG | ||||||
| Nalco, Co. 7.75%, | ||||||
| 11/15/11 | — | 35,000 | 12/20/12 | 363 bp | (1,418) | |
|
| ||||||
| Goldman Sachs International | ||||||
| Any one of the | ||||||
| underlying securities | ||||||
| in the basket of BB | ||||||
| CMBS securities | — | 108,000 (F) | (a) | 2.461% | (19,165) | |
|
| ||||||
| General Motors Corp., | ||||||
| 7 1/8%, 7/15/13 | — | 175,000 | 9/20/08 | 620 bp | 2,392 | |
|
| ||||||
| General Motors Corp., | ||||||
| 7 1/8%, 7/15/13 | — | 35,000 | 9/20/08 | 620 bp | 478 | |
|
| ||||||
| Lehman Brothers Special Financing, Inc. | ||||||
| Community Health | ||||||
| Systems, 8 7/8%, 7/15/15 | — | 143,000 | 12/20/12 | 360 bp | (11,615) | |
|
| ||||||
| Jefferson Smurfit Corp, | ||||||
| 7 1/2%, 6/1/13 | — | 20,000 | 3/20/13 | 645 bp | (176) | |
|
| ||||||
| Sungard Data Systems, | ||||||
| Inc., 9 1/8%, 8/15/13 | — | 100,000 | 9/20/12 | 395 bp | (4,472) | |
|
| ||||||
| Merrill Lynch Capital Services, Inc. | ||||||
| General Motors Corp., | ||||||
| 7 1/8%, 7/15/13 | — | 120,000 | 9/20/08 | 500 bp | 559 | |
|
| ||||||
| Merrill Lynch International | ||||||
| Dynegy Holdings Inc., | ||||||
| 6 7/8%, 4/1/11 | — | 80,000 | 6/20/17 | 295 bp | (11,534) | |
|
| ||||||
| Morgan Stanley Capital Services, Inc. | ||||||
| Aramark Services, Inc., | ||||||
| 8.5%, 2/1/15 | — | 135,000 | 12/20/12 | 355 bp | (10,963) | |
|
| ||||||
| Dynegy Holdings Inc., | ||||||
| 6 7/8%, 4/1/11 | — | 80,000 | 6/20/12 | 225 bp | (7,067) | |
|
| ||||||
| Jefferson Smurfit Corp, | ||||||
| 7.5%, 6/1/13 | — | 70,000 | 9/20/12 | 445 bp | (5,270) | |
|
| ||||||
| Nalco, Co. 7.75%, | ||||||
| 11/15/11 | — | 55,000 | 3/20/13 | 460 bp | (312) | |
|
| ||||||
| Nalco, Co. 7.75%, | ||||||
| 11/15/11 | — | 45,000 | 9/20/12 | 330 bp | (2,237) | |
|
| ||||||
| Total | $(129,862) | |||||
* 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.
(F) Is valued at fair value following procedures approved by the Trustees.
The accompanying notes are an integral part of these financial statements.
39
Statement of assets and liabilities 2/29/08 (Unaudited)
| ASSETS | |
|
| |
| Investment in securities, at value, including $1,697,160 of securities on loan (Note 1): | |
| Unaffiliated issuers (identified cost $168,629,844) | $161,390,035 |
| Affiliated issuers (identified cost $2,806,739) (Note 5) | 2,806,739 |
|
| |
| Cash | 1,694 |
|
| |
| Dividends, interest and other receivables | 1,994,093 |
|
| |
| Receivable for securities sold | 30,658 |
|
| |
| Unrealized appreciation on open swap contracts (Note 1) | 3,429 |
|
| |
| Total assets | 166,226,648 |
| LIABILITIES | |
|
| |
| Distributions payable to shareholders | 852,172 |
|
| |
| Payable for securities purchased | 56,193 |
|
| |
| Payable for shares of the fund repurchased (Note 4) | 103,470 |
|
| |
| Payable for compensation of Manager (Notes 2 and 5) | 282,505 |
|
| |
| Payable for investor servicing fees (Note 2) | 6,978 |
|
| |
| Payable for custodian fees (Note 2) | 4,147 |
|
| |
| Payable for Trustee compensation and expenses (Note 2) | 89,165 |
|
| |
| Payable for administrative services (Note 2) | 2,562 |
|
| |
| Payable for open forward currency contracts (Note 1) | 19,698 |
|
| |
| Unrealized depreciation on open swap contracts (Note 1) | 133,291 |
|
| |
| Collateral on securities loaned, at value (Note 1) | 1,743,695 |
|
| |
| Other accrued expenses | 91,859 |
|
| |
| Total liabilities | 3,385,735 |
|
| |
| Net assets | $162,840,913 |
| REPRESENTED BY | |
|
| |
| Paid-in capital (Unlimited shares authorized) (Note 4) | $186,101,900 |
|
| |
| Undistributed net investment income (Note 1) | 992,040 |
|
| |
| Accumulated net realized loss on investments and foreign currency transactions (Note 1) | (16,863,656) |
|
| |
| Net unrealized depreciation of investments and assets and liabilities in foreign currencies | (7,389,371) |
|
| |
| Total — Representing net assets applicable to capital shares outstanding | $162,840,913 |
| COMPUTATION OF NET ASSET VALUE | |
|
| |
| Net asset value per share | |
| ($162,840,913 divided by 18,734,364 shares) | $8.69 |
The accompanying notes are an integral part of these financial statements.
40
Statement of operations Six months ended 2/29/08 (Unaudited)
| INVESTMENT INCOME | |
|
| |
| Interest (net of foreign tax of $715) (including interest income of $65,059 | |
| from investments in affiliated issuers) (Note 5) | $ 4,276,099 |
|
| |
| Dividends | 1,838,271 |
|
| |
| Securities lending | 13,216 |
|
| |
| Total investment income | 6,127,586 |
| EXPENSES | |
|
| |
| Compensation of Manager (Note 2) | 595,172 |
|
| |
| Investor servicing fees (Note 2) | 42,641 |
|
| |
| Custodian fees (Note 2) | 7,269 |
|
| |
| Trustee compensation and expenses (Note 2) | 14,312 |
|
| |
| Administrative services (Note 2) | 6,464 |
|
| |
| Auditing | 54,023 |
|
| |
| Other | 90,154 |
|
| |
| Fees waived and reimbursed by Manager (Note 5) | (1,035) |
|
| |
| Total expenses | 809,000 |
|
| |
| Expense reduction (Note 2) | (4,045) |
|
| |
| Net expenses | 804,955 |
|
| |
| Net investment income | 5,322,631 |
|
| |
| Net realized loss on investments (Notes 1 and 3) | (208,501) |
|
| |
| Net realized gain on swap contracts (Note 1) | 128,285 |
|
| |
| Net realized loss on foreign currency transactions (Note 1) | (77,078) |
|
| |
| Net unrealized depreciation of assets and liabilities | |
| in foreign currencies during the period | (3,686) |
|
| |
| Net unrealized depreciation of investments | |
| and swap contracts during the period | (9,047,102) |
|
| |
| Net loss on investments | (9,208,082) |
|
| |
| Net decrease in net assets resulting from operations | $(3,885,451) |
The accompanying notes are an integral part of these financial statements.
41
Statement of changes in net assets
| DECREASE IN NET ASSETS | ||
| Six months ended | Year ended | |
| 2/29/08* | 8/31/07 | |
|
| ||
| Operations: | ||
| Net investment income | $ 5,322,631 | $ 11,713,161 |
|
| ||
| Net realized gain (loss) on investments | ||
| and foreign currency transactions | (157,294) | 9,511,710 |
|
| ||
| Net unrealized depreciation of investments | ||
| and assets and liabilities in foreign currencies | (9,050,788) | (2,290,270) |
|
| ||
| Net increase (decrease) in net assets resulting from operations | (3,885,451) | 18,934,601 |
|
| ||
| Distributions to shareholders (Note 1): | ||
|
| ||
| From ordinary income | ||
|
| ||
| Net investment income | (5,226,928) | (11,667,047) |
|
| ||
| Decrease from capital shares repurchased (Note 4) | (4,035,481) | (21,860,569) |
|
| ||
| Total decrease in net assets | (13,147,860) | (14,593,015) |
| NET ASSETS | ||
|
| ||
| Beginning of period | 175,988,773 | 190,581,788 |
|
| ||
| End of period (including undistributed net investment | ||
| income of $992,040 and $896,337, respectively) | $162,840,913 | $175,988,773 |
| NUMBER OF FUND SHARES | ||
|
| ||
| Shares outstanding at beginning of period | 19,235,900 | 21,616,241 |
|
| ||
| Shares repurchased (Note 4) | (501,536) | (2,378,016) |
|
| ||
| Retirement of shares held by the fund (Note 4) | — | (2,325) |
|
| ||
| Shares outstanding at end of period | 18,734,364 | 19,235,900 |
* Unaudited
The accompanying notes are an integral part of these financial statements.
42
Financial highlights (For a common share outstanding throughout the period)
| PER-SHARE OPERATING PERFORMANCE | ||||||
| Six months ended** | Year ended | |||||
| 2/29/08 | 8/31/07 | 8/31/06 | 8/31/05 | 8/31/04 | 8/31/03 | |
|
| ||||||
| Net asset value, | ||||||
| beginning of period | $9.15 | $8.82 | $8.69 | $8.37 | $7.73 | $6.56 |
|
| ||||||
| Investment operations: | ||||||
| Net investment income (loss) (a) | .28(d) | .55(d) | .54(d) | .52(d,f ) | .57(d) | .58 |
|
| ||||||
| Net realized and unrealized | ||||||
| gain (loss) on investments | (.49) | .30 | .06 | .36 | .63 | 1.15 |
|
| ||||||
| Total from | ||||||
| investment operations | (.21) | .85 | .60 | .88 | 1.20 | 1.73 |
|
| ||||||
| Less distributions: | ||||||
| From net investment income | (.28) | (.55) | (.53) | (.56) | (.56) | (.56) |
|
| ||||||
| Total distributions | (.28) | (.55) | (.53) | (.56) | (.56) | (.56) |
|
| ||||||
| Increase from repurchase | ||||||
| of shares | .03 | .03 | .04 | — | — | — |
|
| ||||||
| Increase from payments | ||||||
| by affiliates | — | — | .02(e) | — | — | — |
|
| ||||||
| Net asset value, | ||||||
| end of period | $8.69 | $9.15 | $8.82 | $8.69 | $8.37 | $7.73 |
|
| ||||||
| Market price, | ||||||
| end of period | $7.82 | $8.24 | $7.87 | $7.80 | $7.62 | $7.31 |
|
| ||||||
| Total return at | ||||||
| market price (%)(b) | (1.79)* | 11.64 | 8.05 | 9.89 | 12.06 | 24.73 |
|
| ||||||
| RATIOS AND SUPPLEMENTAL DATA | ||||||
|
| ||||||
| Net assets, end of period | ||||||
| (in thousands) | $162,841 | $175,989 | $190,582 | $195,644 | $115,776 | $106,934 |
|
| ||||||
| Ratio of expenses to | ||||||
| average net assets (%)(c) | .47*(d) | .96(d) | 1.05(d) | 1.06(d) | 1.09(d) | 1.13 |
|
| ||||||
| Ratio of net investment income | ||||||
| (loss) to average net assets (%) | 3.10*(d) | 5.96(d) | 6.18(d) | 6.13(d,f ) | 6.88(d) | 8.20 |
| Portfolio turnover (%) | 25.46* | 44.22 | 47.76 | 46.13 | 61.92 | 69.94 |
* Not annualized.
** Unaudited.
(a) Per share net investment income (loss) has been determined on the basis of the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment.
(c) Includes amounts paid through expense offset and brokerage/service arrangements (Note 2).
(d) Reflects an involuntary contractual expense limitation and/or waivers of certain fund expenses in connection with investments in Putnam Prime Money Market Fund in effect during the period. As a result of such limitation and/or waivers, the expenses of the fund for the periods ended February 29, 2008, August 31, 2007, August 31, 2006, August 31, 2005 and August 31, 2004 reflect a reduction of less than 0.01% of average net assets (Note 5).
(e) Reflects a voluntary reimbursement of $404,272 from Putnam Management relating to an operational error. The reimbursement had no impact on total return at market price and increased total return at net asset value by 0.24% .
(f) Reflects a non-recurring accrual related to Putnam Management’s settlement with the SEC regarding brokerage allocation practices, which amounted to less than $0.01 per share and less than 0.01% of average net assets.
The accompanying notes are an integral part of these financial statements.
43
Notes to financial statements 2/29/08 (Unaudited)
Note 1: Significant accounting policies
Putnam High Income Securities Fund (the “fund”), a Massachusetts business trust, is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company. The fund seeks to provide high current income as a primary objective and capital appreciation as a secondary objective by investing in a portfolio primarily consisting of high-yielding convertible and nonconvertible securities with the potential for capital appreciation. The fund may invest in higher yielding, lower rated bonds that may have a higher rate of default.
In the normal course of business, the fund enters into contracts that may include agreements to indemnify another party under given circumstances. The fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be, but have not yet been, made against the fund. However, the fund expects the risk of material loss to be remote.
The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily available are valued at the last reported sales price on their principal exchange, or official closing price for certain markets. If no sales are reported — as in the case of some securities traded over-the-counter — a security is valued at its last reported bid price. Market quotations are not considered to be readily available for certain debt obligations; such investments are valued on the basis of valuations furnished by an independent pricing service approved by the Trustees or dealers selected by Putnam Investment Management, LLC (“Putnam Management”), the fund’s manager, a wholly-owned subsidiary of Putnam, LLC. Such services or dealers determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships, generally recognized by institutional traders, between securities. Many securities markets and exchanges outside the U.S. close prior to the close of the New York Stock Exchange and therefore the closing prices for securities in such markets or on such exchanges may not fully reflect events that occur after such close but before the close of the New York Stock Exchange. Accordingly, on certain days, the fund will fair value foreign equity securities taking into account multiple factors, including movements in the U.S. securities markets. The number of days on which fair value prices will be used will depend on market activity and it is possible that fair value prices will be used by the fund to a significant extent. Securities quoted in foreign currencies, if any, are translated into U.S. dollars at the current exchange rate. Certain investments, including certain restricted securities and derivatives, are also valued at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees. The fair value of securities is generally determined as the amount that the fund could reasonably expect to realize from an orderly disposition of such securities over a reasonable period of time. By its nature, a fair value price is a good faith estimate of the value of a security at a given point in time and does not reflect an actual market price, which may be different by a material amount.
B) Joint trading account Pursuant to an exemptive order from the Securities and Exchange Commission (the “SEC”), the fund may transfer uninvested cash balances, including cash collateral received under security lending arrangements, into a joint trading account along with the cash of other registered investment companies and
44
certain other accounts managed by Putnam Management. These balances may be invested in issues of short-term investments having maturities of up to 397 days for collateral received under security lending arrangements and up to 90 days for other cash investments.
C) Security transactions and related investment income Security transactions are recorded on the trade date (the date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis.
Interest income is recorded on the accrual basis. Dividend income, net of applicable withholding taxes, is recognized on the ex-dividend date except that certain dividends from foreign securities, if any, are recognized as soon as the fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital or capital gains, if any, are reflected as a reduction of cost and/or as a realized gain.
All premiums/discounts are amortized/accreted on a yield-to-maturity basis.
The fund earned certain fees in connection with its senior loan purchasing activities. These fees are treated as market discount and are recorded as income in the Statement of operations.
D) Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The market value of foreign securities, currency holdings, and other assets and liabilities is recorded in the books and records of the fund after translation to U.S. dollars based on the exchange rates on that day. The cost of each security is determined using historical exchange rates. Income and withholding taxes are translated at prevailing exchange rates when earned or incurred. The fund does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on investments from fluctuations arising from changes in the market prices of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net realized exchange gains or losses on closed forward currency contracts, disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the fund’s books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized appreciation and depreciation of assets and liabilities in foreign currencies arise from changes in the value of open forward currency contracts and assets and liabilities other than investments at the period end, resulting from changes in the exchange rate. Investments in foreign securities involve certain risks, including those related to economic instability, unfavorable political developments, and currency fluctuations, not present with domestic investments.
E) Forward currency contracts The fund may buy and sell forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date. These contracts are used to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of a currency in which securities a fund intends to buy are denominated, when a fund holds cash reserves and short term investments), or for other investment purposes. The U.S. dollar value of forward currency contracts is determined using current forward currency exchange rates supplied by a quotation service. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is marked to market daily and the change in market value is recorded as an unrealized gain or loss. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties
45
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.
F) Credit default contracts The fund may enter into credit default contracts where one party, the protection buyer, makes an upfront or periodic payment to a 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. Payments are made upon a credit default event of the disclosed primary referenced obligation or all other equally ranked obligations of the reference entity. 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 an unrealized gain or loss. Payments received or made as a result of a credit event or termination of the contract are recognized, net of a proportional amount of the upfront payment, as realized gains or losses. In addition to bearing the risk that the credit event will occur, the fund could be exposed to market risk due to unfavorable changes in interest rates or in the price of the underlying security or index, the possibility that the fund may be unable to close out its position at the same time or at the same price as if it had purchased comparable publicly traded securities or that the counterparty may default on its obligation to perform. Risks of loss may exceed amounts recognized on the Statement of assets and liabilities. Credit default contracts outstanding at period end, if any, are listed after the fund’s portfolio.
G) Securities lending The fund may lend securities, through its agents, to qualified borrowers in order to earn additional income. The loans are collateralized by cash and/or securities in an amount at least equal to the market value of the securities loaned. The market value of securities loaned is determined daily and any additional required collateral is allocated to the fund on the next business day. The risk of borrower default will be borne by the fund’s agents; the fund will bear the risk of loss with respect to the investment of the cash collateral. Income from securities lending is included in investment income on the Statement of operations. At February 29, 2008, the value of securities loaned amounted to $1,697,160. The fund received cash collateral of $1,743,695 which is pooled with collateral of other Putnam funds into 53 issues of short-term investments.
H) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Code, as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains.
At August 31, 2007, the fund had a capital loss carryover of $16,686,575 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 | |
|
|
||
| $3,039,504 | August 31, 2009 | |
|
|
||
| 6,606,338 | August 31, 2010 | |
|
|
||
| 7,040,733 | August 31, 2011 | |
|
|
||
The aggregate identified cost on a tax basis is $171,278,821, resulting in gross unrealized appreciation
46
and depreciation of $7,933,360 and $15,015,407, respectively, or net unrealized depreciation of $7,082,047.
I) Distributions to shareholders Distributions to shareholders from net investment income are recorded by the fund on the ex-dividend date. Distributions from capital gains, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. Dividend sources are estimated at the time of declaration. Actual results may vary. Any non-taxable return of capital cannot be determined until final tax calculations are completed after the end of the fund’s fiscal year. 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.
Note 2: Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory services quarterly based on the average net assets (including assets, but excluding liabilities, attributable to leverage for investment purposes) of the fund. Such fee is based on the following annual rates: 0.70% of the first $500 million of average net assets, 0.60% of the next $500 million, 0.55% of the next $500 million, and 0.50% of the next $5 billion, with additional breakpoints at higher asset levels.
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 net assets (including assets, but excluding liabilities, attributable to leverage for investment purposes) 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 services for the fund’s assets were provided by Putnam Fiduciary Trust Company (“PFTC”), an affiliate of Putnam Management, and by State Street Bank and Trust Company (“State Street”). Custody fees are based on the fund’s asset level, the number of its security holdings, transaction volumes and with respect to PFTC, certain fees related to the transition of assets to State Street. Putnam Investor Services, a division of PFTC, provided investor servicing agent functions to the fund. Putnam Investor Services was paid a monthly fee for investor servicing at an annual rate of 0.05% of the fund’s average net assets. During the period ended February 29, 2008, the fund incurred $43,386 for custody and investor servicing agent functions provided by PFTC.
The fund has entered into expense offset arrangements with PFTC and State Street whereby PFTC’s and State Street’s fees are reduced by credits allowed on cash balances. The fund also reduced expenses through brokerage/service arrangements. For the six months ended February 29, 2008, the fund’s expenses were reduced by $2,393 under the expense offset arrangements and by $1,652 under the brokerage/service arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of which $293, 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 and industry seminars and for certain compliance-related matters. Trustees also are reimbursed for expenses they incur relating to their services as Trustees.
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
47
fees remain invested in certain Putnam funds until distribution in accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan (the “Pension Plan”) covering all Trustees of the fund who have served as 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. The retirement benefit is payable during a Trustee’s lifetime, beginning the year following retirement, for the number of years of service through December 31, 2006. Pension expense for the fund is included in Trustee compensation and expenses in the Statement of operations. Accrued pension liability is included in Payable for Trustee compensation and expenses in the Statement of assets and liabilities. The Trustees have terminated the Pension Plan with respect to any Trustee first elected after 2003.
Note 3: Purchases and sales of securities
During the six months ended February 29, 2008, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $42,643,480 and $43,570,673, respectively. There were no purchases or sales of U.S. government securities.
Note 4: Shares repurchased
In September 2007, the Trustees approved the renewal of the repurchase program to allow the fund to repurchase up to 10% of its outstanding common shares over the 12-month period ending October 7, 2008 (based on shares outstanding as of October 5, 2007). Prior to this renewal, the Trustees had approved a repurchase program to allow the fund to repurchase up to 10% of its outstanding common shares over the 12-month period ending October 6, 2007 (based on shares outstanding as of October 7, 2005). Repurchases are 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 six months ended February 29, 2008, the fund repurchased 501,536 common shares for an aggregate purchase price of $4,035,481, which reflects a weighted-average discount from net asset value per share of 11.1% .
Note 5: Investment in Putnam Prime
Money Market Fund
The fund invests in Putnam Prime Money Market Fund, an open-end management investment company managed by Putnam Management. Investments in Putnam Prime Money Market Fund are valued at its closing net asset value each business day. Management fees paid by the fund are reduced by an amount equal to the management fees paid by Putnam Prime Money Market Fund with respect to assets invested by the fund in Putnam Prime Money Market Fund. For the period ended February 29, 2008, management fees paid were reduced by $1,035 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 $65,059 for the period ended February 29, 2008. During the period ended February 29, 2008, cost of purchases and proceeds of sales of investments in Putnam Prime Money Market Fund aggregated $26,177,051 and $29,613,418, 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
48
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
In late 2003 and 2004, Putnam Management settled charges brought by the SEC and the Massachusetts Securities Division in connection with excessive short-term trading in Putnam funds. Payments from Putnam Management will be distributed to certain open-end Putnam funds and their shareholders. These allegations and related matters have served as the general basis for certain lawsuits, including purported class action lawsuits against Putnam Management and, in a limited number of cases, some Putnam funds. Putnam Management believes that these lawsuits will have no material adverse effect on the funds or on Putnam Management’s ability to provide investment management services. In addition, Putnam Management has agreed to bear any costs incurred by the Putnam funds as a result of these matters.
Note 8: New accounting pronouncements
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (the “Interpretation”). The Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken by a filer in the filer’s tax return. Upon adoption, the Interpretation did not have a material effect on the fund’s financial statements. However, the conclusions regarding the Interpretation may be subject to review and adjustment at a later date based on factors including, but not limited to, further implementation guidance expected from the FASB, and on-going analysis of tax laws, regulations and interpretations thereof.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (the “Standard”). The Standard defines fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. The Standard applies to fair value measurements already required or permitted by existing standards. The Standard is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Putnam Management is currently evaluating what impact the adoption of the Standard will have on the fund’s financial statements.
49
Shareholder meeting results (unaudited)
January 31, 2008 annual meeting
At the meeting, each of the nominees for Trustees was elected, as follows:
| Votes for | Votes withheld | |
|
| ||
| Jameson A. Baxter | 17,023,608 | 486,169 |
|
| ||
| Charles B. Curtis | 17,019,706 | 490,071 |
|
| ||
| Robert J. Darretta | 16,993,045 | 516,732 |
|
| ||
| Myra R. Drucker | 17,008,382 | 501,395 |
|
| ||
| Charles E. Haldeman, Jr. | 17,012,027 | 497,750 |
|
| ||
| John A. Hill | 17,016,454 | 493,323 |
|
| ||
| Paul L. Joskow | 17,011,501 | 498,276 |
|
| ||
| Elizabeth T. Kennan | 16,989,866 | 519,911 |
|
| ||
| Kenneth R. Leibler | 17,002,573 | 507,204 |
|
| ||
| Robert E. Patterson | 17,019,161 | 490,616 |
|
| ||
| George Putnam, III | 17,018,041 | 491,736 |
|
| ||
| W. Thomas Stephens* | 16,997,011 | 512,766 |
|
| ||
| Richard B. Worley | 17,002,647 | 507,130 |
|
| ||
All tabulations are rounded to the nearest whole number.
* Mr. Stephens retired from the Board of Trustees of the Putnam funds on March 14, 2008.
50
Fund information
About Putnam Investments
Founded over 70 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 | Elizabeth T. Kennan | Beth S. Mazor |
| Putnam Investment | Kenneth R. Leibler | Vice President |
| Management, LLC | Robert E. Patterson | |
| One Post Office Square | George Putnam, III | James P. Pappas |
| Boston, MA 02109 | Richard B. Worley | Vice President |
| Investment Sub-Manager | Officers | Francis J. McNamara, III |
| Putnam Investments Limited | Charles E. Haldeman, Jr. | Vice President and |
| 57–59 St James’s Street | President | Chief Legal Officer |
| London, England SW1A 1LD | ||
| Charles E. Porter | Robert R. Leveille | |
| Marketing Services | Executive Vice President, | Vice President and |
| Putnam Retail Management | Principal Executive Officer, | Chief Compliance Officer |
| One Post Office Square | Associate Treasurer and | |
| Boston, MA 02109 | Compliance Liaison | Mark C. Trenchard |
| Vice President and | ||
| Custodian | Jonathan S. Horwitz | BSA Compliance Officer |
| State Street Bank and | Senior Vice President | |
| Trust Company | and Treasurer | Judith Cohen |
| Vice President, Clerk and | ||
| Legal Counsel | Steven D. Krichmar | Assistant Treasurer |
| Ropes & Gray LLP | Vice President and | |
| Principal Financial Officer | Wanda M. McManus | |
| Trustees | Vice President, Senior Associate | |
| John A. Hill, Chairman | Janet C. Smith | Treasurer and Assistant Clerk |
| Jameson Adkins Baxter, | Vice President, Principal | |
| Vice Chairman | Accounting Officer and | Nancy E. Florek |
| Charles B. Curtis | Assistant Treasurer | Vice President, Assistant Clerk, |
| Robert J. Darretta | Assistant Treasurer and | |
| Myra R. Drucker | Susan G. Malloy | Proxy Manager |
| Charles E. Haldeman, Jr. | Vice President and | |
| Paul L. Joskow | Assistant Treasurer | |
51
Call 1-800-225-1581 weekdays between 8:30 a.m. and 8:00 p.m. or on Saturday 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.
52
Item 2. Code of Ethics:
Not Applicable
Item 3. Audit Committee Financial Expert:
Not Applicable
Item 4. Principal Accountant Fees and Services:
Not Applicable
Item 5. Audit Committee:
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:
Not applicable
Item 8. Portfolio Managers of Closed-End Management Investment Companies:
(a) Not applicable
(b) There have been no changes to the list of the registrant’s identified portfolio managers included in the registrant’s report on Form N-CSR for the most recent completed fiscal year.
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** | ||||
| September 1 - | ||||||||
| September 30, | ||||||||
| 2007 | 89,831 | $8.36 | 89,831 | 1,035,495 | ||||
| October 1 - | - | - | - | 1,035,495 | ||||
| October 5, | ||||||||
| 2007 | ||||||||
| October 6 - | ||||||||
| October 31, | ||||||||
| 2007 | 102,718 | $8.34 | 102,718 | 1,811,889 | ||||
| November 1 - | ||||||||
| November 30, | ||||||||
| 2007 | 95,836 | $7.92 | 95,836 | 1,716,053 | ||||
| December 1 - | ||||||||
| December 31, | ||||||||
| 2007 | 83,416 | $7.88 | 83,416 | 1,632,637 | ||||
| January 1 - | ||||||||
| January 31, | ||||||||
| 2008 | 50,113 | $7.80 | 50,113 | 1,582,524 | ||||
| February 1 - | ||||||||
| February 28, | ||||||||
| 2008 | 79,622 | $7.79 | 79,622 | 1,502,902 | ||||
*The Board of Trustees announced a repurchase plan on October 7, 2005 for which 1,125,978 shares were approved for repurchase by the fund. The repurchase plan was approved through October 6, 2006. On March 10, 2006, the Trustees announced that the repurchase program was increased to allow repurchases of up to a total of 2,251,955 shares over the original term of the program. On September 15, 2006, the Trustees voted to extend the term of the repurchase program through October 6, 2007. In September 2007, the Trustees announced that the repurchase program was increased to allow repurchases up to a total 1,914,607 shares through October 7, 2008.
**Information prior to October 6, 2007 is based on the total number of shares eligible for repurchase under the program, as amended through September 15, 2006. Information from October 6, 2007 forward is based on the total number of shares eligible for repurchase under the program, as amended through September 2007.
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) Not applicable
(a)(2) Separate certifications for the principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940, as amended, are filed herewith.
(b) The certifications required by Rule 30a-2(b) under the Investment Company Act of 1940, as amended, are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Putnam High Income Securities Fund
By (Signature and Title):
/s/Janet C. Smith
Janet C. Smith
Principal Accounting Officer
Date: April 29, 2008
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: April 29, 2008
By (Signature and Title):
/s/Steven D. Krichmar
Steven D. Krichmar
Principal Financial Officer
Date: April 29, 2008