Q & A FOR PUTNAM MASTER INCOME TRUST
On or about July 20, 1998 a proxy statement was sent to
shareholders of Putnam Master Income Trust asking for their vote
on the following matters: (1) for fixing the number of and
electing the fund's Trustees; (2) ratifying the selection of the
fund's independent auditors; (3.A.) approving an amendment the
fund's fundamental investment restriction with respect to
diversification; (3.B.) approving an amendment to the fund's
fundamental investment restriction with respect to investments in
the voting securities of a single issuer; (3.C.) approving an
amendment to the fund's fundamental investment restriction with
respect to making loans; (3.D.) approving an amendment to the
fund's fundamental investment restriction with respect to
investments in commodities; (3.E.) approving an amendment to the
fund's fundamental investment restriction with respect to
investments in real estate; (4.A.) approving the elimination of
the fund's fundamental investment restriction with respect to
investments in securities of issuers in which management of the
fund or Putnam Investment Management, Inc. owns securities;
(4.B.) approving the elimination of the fund's fundamental
investment restriction with respect to margin transactions;
(4.C.) approving the elimination of the fund's fundamental
investment restriction with respect to short sales; (4.D.)
approving the elimination of the fund's fundamental investment
restriction with respect to pledging assets; (4.E.) approving the
elimination of the fund's fundamental investment restriction with
respect to investments in restricted securities; (4.F.) approving
the elimination of the fund's fundamental investment restriction
with respect to investments in oil, gas and mineral interests;
(4.G.) approving the elimination of the fund's fundamental
investment restriction with respect to investing to gain control
of a company's management; and (4.H.) approving the elimination
of the fund's fundamental investment restriction with respect to
investments in other investment companies.
Listed below are questions shareholders are likely to ask and
recommended responses.
PROPOSAL 1
ELECTION OF TRUSTEES
What is being proposed?
The Nominating Committee of the Trustees, which consists solely
of Trustees who are independent with no financial interest in
Putnam Management, recommends that the number of Trustees be
fixed at sixteen and that shareholders vote for the election of
the nominees for Trustees.
What are the Trustees' responsibilities?
The Trustees are responsible for the general oversight of your
fund's business and for assuring that your fund is managed in the
best interests of the shareholders.
PROPOSAL 2
ELECTION OF AUDITORS
Who has selected the independent auditors of the fund?
The Trustees have selected PricewaterhouseCoopers LLP (new name
for the combined firms of Coopers & Lybrand L.L.P. and Price
Waterhouse LLP) as the independent auditors of your fund and
shareholders are being asked to ratify the selection for the
current year.
What were the reasons for the selection of PricewaterhouseCoopers
LLP as the independent auditors of the fund?
The Trustees selected PricewaterhouseCoopers LLP primarily based
on its expertise as auditors of investment companies, the quality
of its audit services and the competitiveness of its fees.
PROPOSAL 3.A.
AMENDING THE FUND'S FUNDAMENTAL INVESTMENT
RESTRICTION WITH RESPECT TO DIVERSIFICATION
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction with respect to the diversification of its
investments be revised to reflect the standard restriction used
by other Putnam funds and to grant the fund the maximum
investment flexibility permitted by the Investment Company Act of
1940, as amended (the "1940 Act"). Under the 1940 Act, the fund,
as a diversified fund, generally may not, with respect to 75% of
its total assets, invest more than 5% of its total assets in the
securities of any one issuer (except U.S. government securities).
The remaining 25% of the fund's total assets is not subject to
this restriction.
If the proposal is approved, the fund will be able to invest up
to 25% of its total assets in the securities of any one issuer.
The amended restriction would continue to exclude from its
limitations U.S. government securities, and would clarify,
consistent with the definition under the 1940 Act, that U.S.
government securities include obligations issued or guaranteed as
to interest or principal by the U.S. government or its agencies
or instrumentalities. The fund will continue to be able to
invest up to 25% of its assets in debt obligations issued by, or
backed by the credit of, any foreign government or its agencies
or instrumentalities, to the extent consistent with the 1940 Act.
Putnam Management believes that this enhanced investment
flexibility could assist the fund in achieving its investment
objective. However, during times when Putnam Management invests
a higher percentage of the fund's assets in one or more issuers,
the value of the fund's shares may fluctuate more widely than the
value of shares of a portfolio investing in a larger number of
issuers.
PROPOSAL 3.B.
AMENDING THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION WITH
RESPECT TO INVESTMENTS IN THE VOTING SECURITIES OF A SINGLE
ISSUER
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction with respect to investments in the voting
securities of a single issuer be revised to reflect the standard
restriction used by other Putnam funds and to grant the fund the
maximum flexibility permitted under the 1940 Act. The 1940 Act
prohibits a diversified fund, such as the fund, from investing,
with respect to 75% of its total assets, in the securities of an
issuer if as a result it would own more than 10% of the
outstanding voting securities of that issuer.
The amendment enables the fund to purchase more than 10% of the
voting securities of an issuer with respect to 25% of the fund's
total assets. Since the fund invests primarily in fixed-income
securities, which are not typically voting securities, this
proposal will have little practical effect on the fund.
Nevertheless, Putnam Management believes it would be in the best
interest of the fund to conform the policy to provide the fund
with maximum flexibility should circumstances change.
To the extent the fund individually or with other funds and
accounts managed by Putnam Management or its affiliates were to
own all or a major portion of the outstanding voting securities
of a particular issuer, under adverse market or economic
conditions or in the event of adverse changes in the financial
condition of the issuer the fund could find it more difficult to
sell these voting securities when Putnam Management believes it
advisable to do so, or may be able to sell the securities only at
prices significantly lower than if they were more widely held.
PROPOSAL 3.C.
AMENDING THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION WITH
RESPECT TO MAKING LOANS
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction with respect to making loans be revised to
reflect the standard restriction expected to be used by other
Putnam funds and to clarify that the fund is permitted to
participate in a proposed "interfund lending program."
If the proposal is approved, your fund would be able to
participate in an interfund lending program that would allow the
fund, through a master loan agreement, from time to time to lend
available cash to other Putnam funds to meet such funds'
temporary or emergency borrowing needs. By the terms of the
program, a borrowing fund would be obligated to repay a lending
fund. As such, the lending fund could be viewed in such a
circumstance as effectively "purchasing" a debt obligation of
such a borrowing fund. The fund would only make loans under the
program if it could receive an interest rate higher than those
available for repurchase agreements. There is a risk that the
fund could experience a delay in obtaining prompt repayment of a
loan and, unlike repurchase agreements, the fund would not
necessarily have received collateral for its loan. A delay in
obtaining prompt payment could cause the fund to miss an
investment opportunity or to incur costs to borrow money to
replace the delayed payment.
Since the Putnam funds may be considered affiliated parties,
interfund lending may be prohibited by the 1940 Act and would be
implemented only upon receipt of an exemptive order of the
Securities and Exchange Commission.
PROPOSAL 3.D.
AMENDING THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION WITH
RESPECT TO INVESTMENTS IN COMMODITIES
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction with respect to investments in commodities
be revised to reflect the standard restriction used by other
Putnam funds.
Under the revised restriction, the fund will continue to be able
to engage in a variety of transactions involving the use of
financial futures and options, as well as various other financial
transactions to the extent consistent with its investment
objective and policies. Although the fund may already engage in
many of these activities, Putnam Management believes that the
revised language more clearly sets forth the fund's policy. The
addition of financial transactions not involving physical
commodities is intended to give the fund maximum flexibility to
invest in a variety of financial instruments that could
technically be considered commodities, but which do not involve
the direct purchase or sale of physical commodities, which is the
intended focus of the restriction. Foreign exchange transactions
are subject to many of the risks associated with futures and
options.
PROPOSAL 3.E.
AMENDING THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION WITH
RESPECT TO INVESTMENTS IN REAL ESTATE
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction with respect to investments in real estate
be revised to reflect the standard restriction used by other
Putnam funds and to grant the fund greater flexibility.
If the proposal is approved, the fund would be able to own real
estate directly as a result of the exercise of its rights in
connection with debt obligations it owns. In such cases, the
ability to acquire and dispose of real estate may serve to
protect the fund during times where an issuer of debt securities
is unable to meet its obligations. Putnam Management believes
that this enhanced flexibility could assist the fund in achieving
its investment objective.
To the extent the fund holds real estate-related securities, it
will be subject to the risks associated with the real estate
market. These risks may include declines in the value of real
estate, changes in general or local economic conditions,
overbuilding, difficulty in completing construction, increased
competition, changes in zoning laws, increases in property taxes
and operating expenses, and variations in rental income.
Generally, increases in interest rates will increase the costs of
obtaining financing, which may result in a decrease in the value
of such investments.
In addition, in order to enforce its rights in the event of a
default of an issuer of these securities, the fund may be
required to participate in various legal proceedings or take
possession of and manage assets securing the issuer's
obligations. This could increase the fund's operating expenses
and adversely affect the fund's net asset value.
PROPOSAL 4.A.
ELIMINATING THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION WITH
RESPECT TO INVESTMENTS IN SECURITIES OF ISSUERS IN WHICH
MANAGEMENT OF THE FUND OR PUTNAM INVESTMENT MANAGEMENT, INC. OWNS
SECURITIES
What are the Trustees proposing?
The Trustees are recommending eliminating the fund's fundamental
investment restriction which prevents the fund from investing in
the securities of issuers in which management of the fund or
Putnam Management owns a certain percentage of securities.
The fund originally adopted this restriction to comply with state
securities law requirements which are no longer applicable to the
fund. Since the 1940 Act does not require the fund to have such
a restriction, Putnam Management recommended that this
restriction be eliminated.
If this proposal is approved, the fund may invest in the
securities of any issuer without regard to ownership in such
issuer by management of the fund or Putnam Management, except to
the extent prohibited by the fund's investment policies or the
1940 Act. Putnam Management believes that this enhanced
flexibility could assist the fund in meeting its investment
objective.
PROPOSAL 4.B.
ELIMINATING THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION WITH
RESPECT TO MARGIN TRANSACTIONS
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction with respect to margin transactions be
eliminated. "Margin transactions" involve the purchase of
securities with money borrowed from a broker, with cash or
eligible securities being used as collateral against the loan.
The fund originally adopted this restriction to comply with state
securities law requirements which are no longer applicable to the
fund. Since the 1940 Act does not require the fund to have such
a restriction, Putnam Management recommended that this
restriction be eliminated.
If this proposal is approved, the fund would have no formal
restriction with respect to engaging in margin transactions.
However, the fund's potential use of margin transactions beyond
transactions in financial futures and options and for the
clearance of purchases and sales of securities, including the use
of margin in ordinary securities transactions, is currently
limited by SEC guidelines which prohibit margin transactions
because they create senior securities. The fund's ability to
engage in margin transactions is also limited by its investment
policies, which generally permit the fund to borrow money only in
limited circumstances.
PROPOSAL 4.C.
ELIMINATING THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION WITH
RESPECT TO SHORT SALES
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction with respect to short sales be eliminated.
The fund originally adopted this restriction to comply with state
securities law requirements which are no longer applicable to the
fund. Since the 1940 Act does not require the fund to have such
a restriction, Putnam Management recommended that this
restriction be eliminated.
If this proposal is approved, the fund would be able to engage in
short sales other than those "against the box" (in which the fund
owns or has the right to acquire at no added cost securities
identical to those sold short). However, Putnam Management does
not currently intend to engage in short sales on behalf of the
fund.
In a typical short sale, the fund would borrow securities from a
broker that it anticipates will decline in value in order to sell
to a third party. The fund becomes obligated to return
securities of the same issue and quantity at some future date,
and it realizes a loss to the extent the securities increase in
value and a profit to the extent the securities decline in value
(after including any associated costs). Since the value of a
particular security can increase without limit, the fund could
potentially realize losses with respect to short sales which are
not "against the box" that are significantly greater than the
value of the securities at the time they are sold short.
PROPOSAL 4.D.
ELIMINATING THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION WITH
RESPECT TO PLEDGING ASSETS
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction, which limits the fund's ability to pledge
its assets be eliminated.
The fund originally adopted this restriction to comply with state
securities law requirements which are no longer applicable to the
fund. Since the 1940 Act does not require the fund to have such
a restriction, Putnam Management recommended that this
restriction be eliminated.
This proposal would remove all restrictions on the fund's ability
to pledge assets. Putnam Management recommended the proposal to
the Trustees because it believes that the fund's current limits
on pledging may conflict with the fund's ability to borrow money
for temporary or emergency purposes. This conflict arises
because lenders may require borrowers such as the fund to pledge
assets in order to collateralize the amount borrowed. Often,
these collateral requirements are for amounts larger than the
principal amount of the loan. If the fund needed to borrow the
maximum amount permitted by it policies (currently 15% of its
total assets), it might be possible that a bank would require
collateral in excess of 15% of the fund's total assets.
Therefore, the limit on pledging assets may have the effect of
reducing the amount that the fund may borrow in these situations.
Pledging assets does entail certain risks. To the extent that
the fund pledges its assets, the fund may have less flexibility
in liquidating its assets. If a large portion of the fund's
assets were involved, the fund's ability to meet other
obligations could be delayed.
PROPOSAL 4.E.
ELIMINATING THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION
WITH RESPECT TO INVESTMENTS IN RESTRICTED SECURITIES
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction which limits the fund's investments in
securities subject to restrictions on resale, which are known as
"restricted securities," be eliminated.
Putnam Management recommended that this restriction be eliminated
because it is unnecessary in light of current regulatory
requirements; the 1940 Act does not require the fund to have such
a restriction. Current regulatory requirements relating to
"restricted securities" prohibit the fund from investing more
than 15% of its net assets in any combination of (a) securities
which are not readily marketable, (b) securities restricted as to
resale (excluding securities determined by the Trustees of the
fund (or the person designated by the Trustees of the fund to
make such determinations) to be readily marketable), and (c)
repurchase agreements maturing in more than seven days.
To the extent the fund invests in restricted securities, the fund
may encounter difficulty in determining the fair value of such
securities. The fund also may be unable to sell such securities
at a time when it may otherwise be desirable to do so or may have
to sell them at less than fair market value.
PROPOSAL 4.F.
ELIMINATING THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION WITH
RESPECT TO INVESTMENTS IN OIL, GAS AND MINERAL INTERESTS
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction relating to investments in oil, gas and
mineral interests be eliminated.
The fund originally adopted this restriction to comply with state
securities law requirements which are no longer applicable to the
fund. Since the 1940 Act does not require the fund to have such
a restriction, Putnam Management recommended that this
restriction be eliminated.
If this proposal is approved, the fund would be able to invest
directly in oil, gas and mineral interests, and in a variety of
securities the value of which is dependent upon the value of such
interests. Investments in oil, gas and other mineral leases,
rights or royalty contracts, and in securities which derive their
value in part from such instruments, entail certain risks. The
prices of these investments are subject to substantial
fluctuations, and may be affected by unpredictable economic and
political circumstances such as social, political, or military
disturbances, the taxation and regulatory policies of various
governments, the activities and policies of OPEC (an organization
of major oil producing countries), the existence of cartels in
such industries, the discovery of new reserves and the
development of new techniques for producing, refining and
transporting such materials and related products, the development
of new technology, energy conservation practices, and the
development of alternative energy sources and alternative uses
for such materials and related products. In addition, in order
to enforce its rights in the event of a default of an issuer of
these securities, the fund may be required to participate in
various legal proceedings or take possession of and manage assets
securing the issuer's obligations. This could increase the
fund's operating expenses and adversely affect the yield on its
shares.
PROPOSAL 4.G.
ELIMINATING THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION WITH
RESPECT TO INVESTING TO GAIN CONTROL OF A COMPANY'S MANAGEMENT
What are the Trustees proposing?
The Trustees are recommending that the fund's fundamental
investment restriction which states that the fund may not "[m]ake
investments for the purpose of gaining control of a company's
management" be eliminated. Eliminating the restriction would
make it clear that the fund can freely exercise its rights as a
shareholder of the various companies in which it may invest,
which activities could at times fall under the technical
definition of control under the securities laws. These rights
may include the right to actively oppose or support the
management of such companies.
Since the fund invests primarily in fixed-income securities, this
proposal will not impact the majority of the fund's investments.
Nevertheless, Putnam Management believes it would be in the best
interest of the fund to eliminate the restriction.
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