Putnam
U.S. Government
Income Trust
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
3-31-05
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
Throughout the period ended March 31, 2005, the Federal Reserve Board's
series of gradual increases in the federal funds rate occupied much of
investors' attention. However, these increases did not begin to have a
significant impact on stock and bond prices until approximately March
2005. Also in March, we began to see a measurable increase in
longer-term interest rates, which, along with continued record-high
energy prices, has slowed the stock market's momentum. Concerns about
inflation have also begun to influence the markets once again and may
affect bond prices going forward. In such an environment, security
selection takes on even greater importance and the in-depth,
professional research and active management mutual funds can provide
makes them an even more intelligent choice for today's investors.
Given these trends, we want you to know that Putnam Investments'
management team, under the leadership of Chief Executive Officer Ed
Haldeman, continues to focus on improving investment performance and
remains committed to putting the interests of shareholders first. In
keeping with these goals, we are including additional disclosure about
your fund's management team in this report. Following the Outlook for
Your Fund, we provide manager compensation information that pertains to
your fund, list any changes in your fund's Portfolio Leader and
Portfolio Members during the prior year, and disclose these individuals'
other fund management responsibilities at Putnam. We also show how much
these individuals, as well as the members of Putnam's Executive Board,
have invested in the fund (in dollar ranges). Furthermore, on page 18,
we provide information about the most recent approval by the Trustees of
your fund's management contract with Putnam.
In the following pages, members of your fund's management team discuss
the fund's performance, the strategies used to pursue the fund's
investment objective during the reporting period, and the team's plan
for responding to recent changes in the market climate.
As always, we thank you for your continuing confidence in Putnam.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
May 18, 2005
Report from Fund Management
Fund highlights
* For the six months ended March 31, 2005, Putnam U.S. Government Income
Trust's class A shares returned 1.02% without sales charges.
* The fund's benchmark, the Lehman GNMA Index, returned 1.27%.
* The average return for the fund's Lipper category, GNMA Funds, was
0.70%.
* See the Performance Summary beginning on page 10 for additional fund
performance, comparative performance, and Lipper data.
Performance commentary
The first half of your fund's 2005 fiscal year was marked by a
continuation of the Federal Reserve Board's (the Fed's) gradual
increases in short-term interest rates. Our defensive positioning --
designed to reduce the portfolio's interest-rate sensitivity -- helped
stabilize returns and preserve the fund's net asset value (NAV).
Although the fund's results at NAV were slightly behind those of its
benchmark, which consists solely of GNMA securities, the fund slightly
outperformed the average of its Lipper peer group, the GNMA Funds
category, which can also invest in other types of mortgage-backed
securities (MBSs). We attribute this outperformance to several key
strategic decisions. For example, we emphasized 30-year mortgages, which
benefited as the market accepted greater prepayment risk. In addition,
we effectively chose different coupon levels within the GNMA and FNMA
programs, and the combination worked well.
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TOTAL RETURN FOR
PERIODS ENDED 3/31/05
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Class A
(inception 2/8/84) NAV POP
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6 months 1.02% -3.50%
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1 year 2.00 -2.61
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5 years 31.31 25.43
Annual average 5.60 4.64
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10 years 79.86 71.75
Annual average 6.05 5.56
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Annual average
(life of fund) 7.44 7.21
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Data is historical. Past performance does not guarantee future results.
More recent returns may be less or more than those shown. Investment
return and principal 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. Returns at NAV do not
reflect a sales charge of 4.50%. For the most recent month-end
performance, visit www.putnaminvestments.com. A short-term trading fee
of up to 2% may apply.
FUND PROFILE
Putnam U.S. Government Income Trust seeks current income by investing in
obligations of the U.S. government and its agencies and
instrumentalities, such as Govern ment National Mortgage Association
certificates (Ginnie Maes), Federal National Mortgage Association cer
tificates (Fannie Maes), Federal Home Loan Mortgage Corporation
certificates (Freddie Macs), and U.S. Treasury securities. Ginnie Maes,
Fannie Maes, and Freddie Macs are generally high quality and typically
provide higher yields than Treasury securities of similar maturities.
The fund is designed primarily for investors seeking income, but it can
also lower volatility in a well-diversified portfolio.
Market overview
The first half of your fund's 2005 fiscal year was marked by positive
economic signals, including strong corporate earnings growth, improving
employment figures, and greater industrial capacity utilization. These
trends suggested that the current series of interest-rate increases,
which are determined by both Federal Reserve Board (Fed) policy and by
the sentiment of market participants, would continue. The Fed's measured
approach to raising the federal funds rate generally helped maintain
order in the bond markets during much of the period. Though rates rose,
they increased to a lesser degree than many investors had expected. MBSs
outperformed Treasuries of comparable maturities, which reflected
investors' willingness to assume more prepayment risk in search of
higher yields. Prepayment risk is the risk that the issuers of MBSs
could pay back principal early during a period of declining interest
rates, as large numbers of homeowners may opt to refinance their
mortgage loans at lower rates. The principal would then have to be
reinvested at the current prevailing rates, meaning a lower level of
income for MBS investors.
A similar theme was reflected in what we refer to as the "credit"
sectors, which are bond market sectors that have credit risk.
(Treasuries, which are backed by the full faith and credit of the United
States government, are considered to be free of credit risk.) Strong
demand for high-yield and investment-grade corporate bonds caused bond
yields to tighten to historically narrow spreads, relative to
Treasuries. During the period, the yield curve flattened dramatically as
both short- and long-term rates rose, though short-term rates rose to a
greater degree. From the start of the period to the end, the difference,
or spread, between yields on 2-year notes and 10-year Treasuries
declined from about 166 basis points to about 70 basis points (a basis
point is one one-hundredth of a percent). In February, the bond market
capitulated under the influence of continued, strong economic data.
Yields began to soar, and bond prices, which move in the opposite
direction of yields, fell.
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MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 3/31/05
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Bonds
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Lehman GNMA Index (Government National Mortgage Association bonds) 1.27%
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Lehman Aggregate Bond Index (broad bond market) 0.47%
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Lehman Municipal Bond Index (tax-exempt bonds) 1.22%
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JP Morgan Global High Yield Index (global high-yield corporate bonds) 3.23%
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Equities
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S&P 500 Index (broad stock market) 6.88%
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Russell 1000 Growth Index (large-company growth stocks) 4.71%
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Russell 1000 Value Index (large-company value stocks) 10.48%
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These indexes provide an overview of performance in different market
sectors for the six months ended 3/31/05.
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Strategy overview
There are six key strategy decisions that we make in managing the fund.
The first is called term structure and reflects our views of the
direction of interest rates based on factors such as economic
indicators, Fed statements and strategy, and market sentiment. We also
analyze the shape of the yield curve and strive to position your fund's
portfolio to benefit from expected shifts in the curve. Our second
strategic decision involves sector allocation. We seek to determine the
relative attractiveness of the different fixed-income sectors in which
your fund can invest -- Treasuries, agencies, and MBSs -- and then
position its portfolio to take advantage of our sector preferences. We
also weigh the relative attractiveness of the various programs in the
MBS market: Government National Mortgage Association certificates
(Ginnie Maes), Federal National Mortgage Association certificates
(Fannie Maes), and Federal Home Loan Mortgage Corporation certificates
(Freddie Macs). We make three other strategic decisions related to MBSs:
We seek to determine which maturity is most attractive (e.g., 30-year,
15-year, or adjustable-rate); we assess which coupon level (e.g., 5.5%,
6.5%, 7%, etc.) or what combination of coupons provides the best
risk/return tradeoff; and we consider the "seasoning" of mortgages. An
older or more seasoned mortgage is typically less likely to be prepaid.
Our sixth strategic decision concerns out-of-benchmark exposure; we
consider the relative attractiveness of securities that are not in the
fund's primary benchmark but are allowed under the fund's investment
guidelines.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
9/30/04 3/31/05
Average effective maturity in years 5.2 6.6
Duration in years 2.2 2.8
Footnote reads:
This chart compares changes in the fund's duration (a measure of its
sensitivity to interest-rate changes) and its average effective maturity
(a weighted average of the holdings' maturities).
Average effective maturity also takes into account put and call
features, where applicable, and reflects prepayments for mortgage-backed
securities.
How strategy decisions affected performance
During the period, the Fed continued to explain its actions and its
outlook so that markets would not react adversely to a series of mild
increases in the Fed funds rate. As a result, volatility was relatively
low for much of the semiannual period. We maintained a relatively short
portfolio duration, which contributed positively to results, as it
limited the fund's sensitivity to these incremental rate increases.
Since the fund's benchmark is composed of 100% Ginnie Mae securities,
anything the fund owns other than Ginnie Maes represents an active
decision to invest outside of benchmark territory. We invested 10% - 20%
in Fannie Mae mortgages, which typically offer higher coupons, and in
our view, offered better valuations than Ginnie Maes and greater
liquidity. However, Fannie Maes performed in line with Ginnie Maes, thus
our sector allocation had a neutral effect on results during the period.
As mentioned in the Strategy Overview section, when the fund considers
investments in MBSs, we consider not only the program (Ginnie Mae, Fannie
Mae, Freddie Mac) but also the most desirable maturity, coupon level, and
seasoning. With regard to the maturity decision, the fund emphasized
30-year mortgages, and this positioning had a beneficial effect on
returns. Although longer-maturity mortgages carry greater prepayment risk,
the market was willing to accept greater risk during the period, and
strong demand drove the value of the securities higher. The fund was well
diversified in terms of coupon levels. We emphasized lower coupons among
Ginnie Mae securities and higher coupons among Fannie Mae securities, and
this combination worked to the fund's advantage. With regard to seasoning,
the fund favored newer mortgages over older seasoned mortgages. In recent
years, historically low interest rates had set off a wave of refinancing
activity, and as a result there weren't many seasoned mortgages remaining
in the marketplace. Those that were available were not attractively
valued, in our opinion. Our emphasis on newer mortgages had a neutral
effect on portfolio results.
[GRAPHIC OMITTED: horizontal bar chart PORTFOLIO COMPOSITION AS OF 3/31/05]
PORTFOLIO COMPOSITION AS OF 3/31/05
U.S. government and agency obligations
Ginnie Mae 71.9%
Fannie Mae 8.2%
Freddie Mac 2.1%
Short-term investments 70.3%
Collateralized mortgage obligations 9.1%
Footnote reads:
Weightings are shown as a percentage of net assets. Holdings will vary
over time. A portion of the short-term investments reflects amounts used
to settle TBA purchase commitments.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary in
the future.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
In the coming year, we anticipate that inflation will increase at about
2%, in conjunction with a 4% real rate of economic growth. Given this
outlook, we believe the Fed will continue to raise the federal funds
rate, and so we expect to maintain the fund's defensive posture with
shorter-than-normal duration (which means the fund will have lower
interest-rate sensitivity). With current yield spreads so tight, we
believe that investors are not being adequately compensated to take on
the additional risks currently associated with agency debt. As long as
that remains the case, we intend to maintain the fund's relatively low
exposure to agency bonds. We believe that volatility will remain low,
provided that the Fed continues to give investors clear guidance before
it takes action on interest rates. If afforded this zone of comfort, we
anticipate that investors will continue to buy MBSs, so we will strive
to maintain reasonable exposure to them. We anticipate that we will
continue to favor lower-coupon Ginnie Maes and higher coupon Fannie Maes
in the foreseeable future. We will continue to emphasize 30-year
mortgages, which, because of their higher prepayment risk, offer
potentially higher returns. We are willing to accept higher prepayment
risk because we believe volatility and mortgage prepayment activity will
remain low for some time. In keeping with that theme, we believe that
certain mortgage derivatives now offer an attractive way to enhance the
fund's risk and reward profile. Mortgages can be split into derivative
securities, whereby one investor receives mortgage interest only (IO),
and another receives mortgage principal payments only. At the end of the
period, we purchased some IO securities, as these are currently
attractively valued and offer potentially higher yields. The fund's
exposure is quite small; nevertheless it is an active strategy, as the
benchmark does not hold any IO securities.
Current economic signals make it difficult to project whether short-term
or longer-term securities will outperform in the near term. As always,
we will continue to monitor the situation and strive to position the
fund to take advantage of attractive opportunities without assuming
undue risk.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Mutual funds that
invest in government securities are not guaranteed. Mortgage-backed
securities are subject to prepayment 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.
Your fund's management
Your fund is managed by the members of the Putnam Core Fixed-Income
Team. Kevin Cronin is the Portfolio Leader and Rob Bloemker and Daniel
Choquette are Portfolio Members of your fund. The Portfolio Leader and
Portfolio Members coordinate the team's management of the fund.
For a complete listing of the members of the Putnam Core Fixed-Income
Team, including those who are not Portfolio Leaders or Portfolio Members
of your fund, visit Putnam's Individual Investor Web site at
www.putnaminvestments.com.
Fund ownership
The table below shows how much the fund's current Portfolio Leader and
Portfolio Members have invested in the fund (in dollar ranges).
Information shown is for March 31, 2005, and March 31, 2004.
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FUND PORTFOLIO LEADER AND PORTFOLIO MEMBERS
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$1 - $10,001 - $50,001 - $100,001 - $500,001 - $1,000,001
Year $0 $10,000 $50,000 $100,000 $500,000 $1,000,000 and over
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Kevin Cronin 2005 *
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Portfolio Leader 2004 *
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Rob Bloemker 2005 *
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Portfolio Member 2004 *
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Dan Choquette 2005 *
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Portfolio Member N/A
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N/A indicates the individual was not a Portfolio Leader or Portfolio Member as of 3/31/04.
Fund manager compensation
The total 2004 fund manager compensation that is attributable to your
fund is approximately $930,000. This amount includes a portion of 2004
compensation paid by Putnam Management to the fund managers listed in
this section for their portfolio management responsibilities, calculated
based on the fund assets they manage taken as a percentage of the total
assets they manage. The compensation amount also includes a portion of
the 2004 compensation paid to the Chief Investment Officer of the team
and the Group Chief Investment Officer of the fund's broader investment
category for their oversight responsibilities, calculated based on the
fund assets they oversee taken as a percentage of the total assets they
oversee. These percentages are determined as of the fund's fiscal
period-end. For personnel who joined Putnam Management during or after
2004, the calculation reflects annualized 2004 compensation or an
estimate of 2005 compensation, as applicable.
Other Putnam funds managed by the Portfolio Leader and Portfolio Members
Kevin Cronin is also a Portfolio Leader of Putnam American Government
Income Fund, Putnam Global Income Trust, Putnam Income Fund, and Putnam
Limited Duration Government Income Fund. He is also a Portfolio Member
of Putnam Equity Income Fund and The George Putnam Fund of Boston.
Rob Bloemker is also a Portfolio Member of Putnam American Government
Income Fund, Putnam Diversified Income Trust, Putnam Income Fund, Putnam
Limited Duration Government Income Fund, Putnam Master Intermediate
Income Trust, and Putnam Premier Income Trust.
Daniel Choquette is also a Portfolio Member of Putnam American
Government Income Fund and Putnam Limited Duration Government Income
Fund.
Kevin Cronin, Rob Bloemker, and Daniel Choquette may also manage other
accounts and variable trust funds advised by Putnam Management or an
affiliate.
Changes in your fund's Portfolio Leader and Portfolio Members
During the year ended March 31, 2005, Portfolio Member Daniel Choquette
joined your fund's management team.
Fund ownership
The table below shows how much the members of Putnam's Executive Board
have invested in the fund (in dollar ranges). Information shown is for
March 31, 2005, and March 31, 2004.
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PUTNAM EXECUTIVE BOARD
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$1 - $10,001 - $50,001 - $100,001
Year $0 $10,000 $50,000 $100,000 and over
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Philippe Bibi 2005 *
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Chief Technology Officer 2004 *
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John Boneparth 2005 *
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Head of Global Institutional Mgmt 2004 *
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Joshua Brooks 2005 *
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Deputy Head of Investments N/A
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Kevin Cronin 2005 *
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Head of Investments N/A
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Charles Haldeman, Jr. 2005 *
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President and CEO 2004 *
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Amrit Kanwal 2005 *
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Chief Financial Officer 2004 *
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Steven Krichmar 2005 *
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Chief of Operations N/A
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Francis McNamara, III 2005 *
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General Counsel N/A
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Richard Monaghan 2005 *
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Head of Retail Management 2004 *
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Richard Robie, III 2005 *
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Chief Administrative Officer 2004 *
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Edward Shadek 2005 *
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Deputy Head of Investments N/A
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N/A indicates the individual was not a member of Putnam's Executive Board as of 3/31/04.
Performance summary
This section shows your fund's performance during the first half of its
fiscal year, which ended March 31, 2005. 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 and principal value will fluctuate and you may have a gain or a
loss when you sell your shares. For the most recent month-end
performance, please visit www.putnaminvestments.com.
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TOTAL RETURN FOR PERIODS ENDED 3/31/05
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Class A Class B Class C Class M Class R
(inception dates) (2/8/84) (4/27/92) (7/26/99) (2/6/95) (1/21/03)
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NAV POP NAV CDSC NAV CDSC NAV POP NAV
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6 months 1.02% -3.50% 0.62% -4.35% 0.62% -0.37% 0.88% -2.37% 0.92%
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1 year 2.00 -2.61 1.22 -3.73 1.29 0.30 1.80 -1.54 1.80
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5 years 31.31 25.43 26.51 24.51 26.58 26.58 29.80 25.64 29.81
Annual average 5.60 4.64 4.82 4.48 4.83 4.83 5.36 4.67 5.36
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10 years 79.86 71.75 66.61 66.61 66.85 66.85 75.34 69.63 75.56
Annual average 6.05 5.56 5.24 5.24 5.25 5.25 5.78 5.43 5.79
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Annual average
(life of fund) 7.44 7.21 6.55 6.55 6.63 6.63 7.09 6.92 7.17
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Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 4.50% and 3.25%, respectively (which
for class A shares does not reflect a reduction in sales charges that
went into effect on April 1, 2005; if this reduction had been in place
for all periods indicated, returns would have been higher). Class B
share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the
first year that is eliminated thereafter. Class R shares have no initial
sales charge or CDSC. Performance for class B, C, M, and R shares before
their inception is derived from the historical performance of class A
shares, adjusted for the applicable sales charge (or CDSC) and higher
operating expenses for such shares.
A 2% short-term trading fee may be imposed on shares exchanged or sold
within 5 days of purchase.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/05
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Lipper
GNMA Funds
Lehman category
GNMA Index average*
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6 months 1.27% 0.70%
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1 year 2.78 1.57
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5 years 37.66 32.76
Annual average 6.60 5.82
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10 years 96.59 81.23
Annual average 6.99 6.12
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Annual average
(life of fund) 9.03 7.98
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Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 6-month and 1-, 5-, and 10-year periods ended 3/31/05, there
were 64, 64, 46, and 31 funds, respectively, in this Lipper category.
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PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 3/31/05
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Class A Class B Class C Class M Class R
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Distributions (number) 6 6 6 6 6
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Income $0.204 $0.152 $0.152 $0.186 $0.191
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Capital gains -- -- -- -- --
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Total $0.204 $0.152 $0.152 $0.186 $0.191
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Share value: NAV POP NAV NAV NAV POP NAV
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9/30/04 $13.24 $13.86 $13.17 $13.22 $13.23 $13.67 $13.24
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3/31/05 13.17 13.79 13.10 13.15 13.16 13.60 13.17
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Current return
(end of period)
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Current dividend rate 1 3.10% 2.96% 2.38% 2.37% 2.83% 2.74% 2.92%
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Current 30-day
SEC yield 2 2.40 2.30 1.66 1.66 2.16 2.11 2.16
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1 Most recent distribution, excluding capital gains, annualized and divided by NAV or POP at end
of period.
2 Based only on investment income, calculated using SEC guidelines.
Understanding your fund's expenses
As a mutual fund investor, you pay ongoing expenses, such as management
fees, distribution fees (12b-1 fees), and other expenses. Using the
information below, you can estimate how these expenses affect your
investment and compare them with the expenses of other funds. You may
also pay one-time transaction expenses, including sales charges (loads)
and redemption fees, which are not shown in this section and would have
resulted in higher total expenses. For more information, see your fund's
prospectus or talk to your financial advisor.
Review your fund's expenses
The table below shows the expenses you would have paid on a $1,000
investment in Putnam U.S. Government Income Trust from October 1, 2004,
to March 31, 2005. It also shows how much a $1,000 investment would be
worth at the close of the period, assuming actual returns and expenses.
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EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming actual returns for the 6 months ended 3/31/05
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Class A Class B Class C Class M Class R
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Expenses paid per $1,000* $4.71 $8.45 $8.45 $5.96 $5.96
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Ending value (after expenses) $1,010.20 $1,006.20 $1,006.20 $1,008.80 $1,009.20
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* Expenses for each share class are calculated using the fund's annualized expense ratio for
each class, which represents the ongoing expenses as a percentage of net assets for the six
months ended 3/31/05. The expense ratio may differ for each share class (see the table at the
bottom of the next page). Expenses are calculated by multiplying the expense ratio by the
average account value for the period; then multiplying the result by the number of days in the
period; and then dividing that result by the number of days in the year.
Estimate the expenses you paid
To estimate the ongoing expenses you paid for the six months ended March
31, 2005, use the calculation method below. To find the value of your
investment on October 1, 2004, go to www.putnaminvestments.com and log
on to your account. Click on the "Transaction History" tab in your Daily
Statement and enter 10/01/2004 in both the "from" and "to" fields.
Alternatively, call Putnam at 1-800-225-1581.
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HOW TO CALCULATE THE EXPENSES YOU PAID
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Total
Value of your Expenses paid expenses
investment on 10/1/04 [DIV] $1,000 x per $1,000 = paid
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Example Based on a $10,000 investment in class A shares of your fund.
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$10,000 [DIV] $1,000 x $4.71 (see table above) = $47.10
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Comparing your fund's expenses with those of other funds
Using the SEC's method to compare expenses
The Securities and Exchange Commission (SEC) has established guidelines
to help investors assess fund expenses. Per these guidelines, the table
below shows your fund's expenses based on a $1,000 investment, assuming
a hypothetical 5% annualized return. You can use this information to
compare the ongoing expenses (but not transaction expenses or total
costs) of investing in the fund with those of other funds. All mutual
fund shareholder reports will provide this information to help you make
this comparison. Please note that you cannot use this information to
estimate your actual ending account balance and expenses paid during the
period.
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EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended 3/31/05
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Class A Class B Class C Class M Class R
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Expenses paid per $1,000* $4.73 $8.50 $8.50 $5.99 $5.99
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Ending value (after expenses) $1,020.24 $1,016.50 $1,016.50 $1,019.00 $1,019.00
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* Expenses for each share class are calculated using the fund's annualized expense ratio for
each class, which represents the ongoing expenses as a percentage of net assets for the six
months ended 3/31/05. The expense ratio may differ for each share class (see the table at the
bottom of this page). Expenses are calculated by multiplying the expense ratio by the average
account value for the period; then multiplying the result by the number of days in the period;
and then dividing that result by the number of days in the year.
Using industry averages to compare expenses
You can also compare your fund's expenses with the average of its peer
group, as defined by Lipper, an independent fund-rating agency that
ranks funds relative to others that Lipper considers to have similar
investment styles or objectives. The expense ratio for each share class
shown below indicates how much of your fund's net assets have been used
to pay ongoing expenses during the period.
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EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA
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Class A Class B Class C Class M Class R
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Your fund's annualized
expense ratio 0.94% 1.69% 1.69% 1.19% 1.19%
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Average annualized expense
ratio for Lipper peer group + 1.03% 1.78% 1.78% 1.28% 1.28%
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+ Simple average of the expenses of all front-end load funds in the fund's
Lipper peer group, calculated in accordance with Lipper's standard method
for comparing fund expenses (excluding 12b-1 fees and without giving
effect to any expense offset and brokerage service arrangements that may
reduce fund expenses). This average reflects each fund's expenses for its
most recent fiscal year available to Lipper as of 3/31/05. To facilitate
comparison, Putnam has adjusted this average to reflect the 12b-1 fees
carried by each class of shares. The peer group may include funds that are
significantly smaller or larger than the fund, which may limit the
comparability of the fund's expenses to the simple average, which
typically is higher than the asset-weighted average.
Understanding your fund's portfolio turnover
Putnam funds are actively managed by teams of experts who buy and sell
securities based on intensive analysis of companies, industries,
economies, and markets. Portfolio turnover is a measure of how often a
fund's managers buy and sell securities for your fund. A portfolio
turnover of 100%, for example, means that the managers sold and replaced
securities valued at 100% of a fund's assets within a one-year period.
Funds with high turnover may be more likely to generate capital gains
and dividends that must be distributed to shareholders as taxable
income. High turnover may also cause a fund to pay more brokerage
commissions and other transaction costs, which may detract from
performance.
Funds that invest in bonds or other fixed-income instruments may have
higher turnover than funds that invest only in stocks. Short-term bond
funds tend to have higher turnover than longer-term bond funds, because
shorter-term bonds will mature or be sold more frequently than
longer-term bonds. You can use the table below to compare your fund's
turnover with the average turnover for funds in its Lipper category.
- ------------------------------------------------------------------------------
TURNOVER COMPARISONS
percentage of holdings that change every year
- ------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------
Putnam U.S. Government
Income Trust 198% 332%* 277%* 157%* 133%
- ------------------------------------------------------------------------------
Lipper GNMA Funds
category average 220% 288% 262% 229% 215%
- ------------------------------------------------------------------------------
* Portfolio turnover excludes certain Treasury note transactions
executed in connection with a short-term trading strategy.
Turnover data for the fund is calculated based on the fund's fiscal-year
period, which ends on September 30. Turnover data for the fund's Lipper
category is calculated based on the average of the turnover of each fund
in the category for its fiscal year ended during the indicated year.
Fiscal years vary across funds in the Lipper category, which may limit
the compatibility of the fund's portfolio turnover rate to the Lipper
average. Comparative data for 2004 is based on information available as
of 3/31/05.
Risk comparison
This risk comparison is designed to help you understand how your fund
compares with other funds. The comparison utilizes a risk measure
developed by Morningstar, an independent fund-rating agency. This risk
measure is referred to as the fund's Overall Morningstar Risk.
Your fund's Overall Morningstar Risk is shown alongside that of the
average fund in its broad asset class, as determined by Morningstar. The
risk bar broadens the comparison by translating the fund's Overall
Morningstar Risk into a percentile, which is based on the fund's ranking
among all funds rated by Morningstar as of March 31, 2005. A higher
Overall Morningstar Risk generally indicates that a fund's monthly
returns have varied more widely.
[GRAPHIC OMITTED: chart MORNINGSTAR [REGISTRATION MARK] RISK]
MORNINGSTAR [REGISTRATION MARK] RISK
Fund's Overall
Morningstar Risk 0.06
Taxable bond
fund average 0.30
0% INCREASING RISK 100%
Morningstar determines a fund's Overall Morningstar Risk by assessing
variations in the fund's monthly returns -- with an emphasis on downside
variations -- over 3-, 5-, and 10-year periods, if available. Those
measures are weighted and averaged to produce the fund's Overall
Morningstar Risk. The information shown is provided for the fund's class
A shares only; information for other classes may vary. Overall
Morningstar Risk is based on historical data and does not indicate
future results. Morningstar does not purport to measure the risk
associated with a current investment in a fund, either on an absolute
basis or on a relative basis. Low Overall Morningstar Risk does not mean
that you cannot lose money on an investment in a fund. Copyright 2004
Morningstar, Inc. All Rights Reserved. The information contained herein
(1) is proprietary to Morningstar and/or its content providers; (2) may
not be copied or distributed; and (3) is not warranted to be accurate,
complete, or timely. Neither Morningstar nor its content providers are
responsible for any damages or losses arising from any use of this
information.
Terms and definitions
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 price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. NAV
is calculated by dividing the net assets of each class of shares by the
number of outstanding shares in the class.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.50% maximum sales charge for class A
shares (since reduced to 3.75%) and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth year,
the CDSC no longer applies. The CDSC for class C shares is 1% for one
year after purchase.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without an initial sales charge).
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption (except on certain
redemptions of shares bought without an initial sales charge).
Class R shares are not subject to an initial sales charge or CDSC and
are available only to certain defined contribution plans.
Comparative indexes
JP Morgan Global High Yield Index is an unmanaged index of global
high-yield fixed-income securities.
Lehman Aggregate Bond Index is an unmanaged index of U.S.
investment-grade fixed-income securities.
Lehman GNMA Index is an unmanaged index of Government National Mortgage
Association bonds.
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Russell 1000 Growth Index is an unmanaged index of those companies in
the large-cap Russell 1000 Index chosen for their growth orientation.
Russell 1000 Value Index is an unmanaged index of those companies in the
large-cap Russell 1000 Index chosen for their value orientation.
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 funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
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 each fund's management contract with Putnam
Management. In this regard the Board of Trustees, with the assistance of
its Contract Committee consisting solely of Independent Trustees,
requests and evaluates all information it deems reasonably necessary in
the circumstances. Over the course of several months beginning in March
and ending in June of 2004, the Contract Committee reviewed the
information provided by Putnam Management and other information
developed with the assistance of the Board's independent counsel and
independent staff. The Contract Committee reviewed and discussed key
aspects of this information with all of the Independent Trustees. Upon
completion of this review, the Contract Committee recommended and the
Independent Trustees approved the continuance of your fund's contract,
effective July 1, 2004.
This approval was based on the following conclusions:
* That the fee schedule currently in effect for your fund represents
reasonable compensation in light of the nature and quality of the
services being provided to the fund, the fees paid by competitive funds
and the costs incurred by Putnam Management in providing such service,
and
* That such fee schedule represents an appropriate sharing between fund
shareholders and Putnam Management of such economies of scale as may
exist in the management of the fund at current asset levels.
These conclusions were based on a comprehensive consideration of all
information provided to the Trustees and were not the result of any
single factor. Some of the factors that figured particularly in the
Trustees' deliberations are described below.
Model fee schedules and categories; total expenses
The Trustees, working in cooperation with Putnam Management, have
developed and implemented a series of model fee schedules for the Putnam
funds designed to ensure that each fund's management fee is consistent
with the fees for similar funds in the Putnam complex and compares
favorably with fees paid by competitive funds sponsored by other advisors.
The Trustees reviewed the model fee schedule currently in effect for the
fund, including fee levels and breakpoints, and the assignment of the fund
to a particular fee category under this structure. The Trustees also
reviewed comparative fee and expense information for competitive funds.
The Trustees concluded that no changes should be made in the fund's
current fee schedule at this time. The Trustees noted that expense ratios
for a number of Putnam funds had been increasing recently as a result of
declining net assets and the natural operation of fee breakpoints. They
noted that such expense ratio increases were currently being controlled by
expense limitations implemented in January 2004. They also noted that the
competitive landscape regarding mutual fund fees may be changing as a
result of fee reductions accepted by various other fund groups in
connection with recent regulatory settlements and greater focus on fees
and expenses in the mutual fund industry generally. The Trustees indicated
an intention to monitor these developments closely.
Economies of scale
As noted above, the Trustees concluded that the fee schedule currently
in effect for your fund represents an appropriate sharing of economies
of scale at current asset levels. The Trustees indicated their intention
to continue their ongoing consideration of economies of scale and in
particular to consider further the possible operation of such economies
in the event that a significant recovery in the equity markets or net
fund sales were to raise asset levels substantially above current
levels. In this regard, the Trustees noted that they had reviewed data
relating to the substantial increase in asset levels of the Putnam funds
that occurred during the years leading up to the market peak in 2000,
the subsequent decline in assets and the resulting impact on revenues
and expenses of Putnam Management. The Trustees also noted that recent
declines in net assets in many Putnam funds, together with significant
changes in the cost structure of Putnam Management have altered the
economics of Putnam Management's business in significant ways. The
Trustees concluded that they would monitor these changes carefully and
evaluate the resulting impact on Putnam Management's economics and the
sharing of economies of scale between the parties.
Investment performance
The quality of the investment process provided by Putnam Management
represented a major factor in the Trustees' evaluation of the quality of
services provided by Putnam Management under the Management Contracts.
The Trustees recognized that 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 -- does not guarantee favorable
investment results for every fund in every time period. The Trustees
considered the investment performance of each fund over multiple time
periods and considered information comparing the fund's performance with
various benchmarks and with the performance of competitive funds. The
Trustees noted the satisfactory investment performance of many Putnam
funds.
They also noted the disappointing investment performance of certain
funds in recent years and continued to discuss with senior management of
Putnam Management the factors contributing to such under-performance 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 in
an effort to address areas of underperformance. The Trustees indicated
their intention to continue to monitor performance trends to assess the
effectiveness of these changes and to evaluate whether additional
remedial changes are warranted. As a general matter, the Trustees
concluded that consultation between the Trustees and Putnam Management
represents the most effective way to address investment performance
problems. The Trustees believe that investors in the Putnam funds and
their financial advisors have, as a general matter, effectively placed
their trust in the Putnam organization, under the supervision of the
funds' Trustees, to make appropriate decisions regarding the management
of the funds. The Trustees believe that the termination of the
Management Contract and engagement of a new investment adviser for
under-performing funds, with all the attendant disruptions, would not
serve the interests of fund shareholders at this time and would not
necessarily provide any greater assurance of improved investment
performance.
Brokerage and soft-dollar allocations; other benefits
The Trustees considered various potential benefits that Putnam
Management may receive in connection with the services it provides under
the Management Contract with your fund. These include principally
benefits related to brokerage and soft-dollar allocations, which pertain
mainly to funds investing in equity securities. The Trustees believe
that soft-dollar credits and other potential benefits associated with
the allocation of fund brokerage represent assets of the funds that
should be used for the benefit of fund shareholders. The Trustees noted
recent trends in the allocation of fund brokerage, including commission
costs, the allocation of brokerage to firms that provide research
services to Putnam Management, and the sources and application of
available soft-dollar credits. Effective December 31, 2003, reflecting a
decision made by the Trustees earlier that year, Putnam Management
ceased allocating brokerage in connection with the sale of fund shares.
In addition, in preparing its budget for commission allocations in 2004,
Putnam Management voluntarily reduced substantially the allocation of
brokerage commissions to acquire research services from third-party
service providers. In light of evolving best practices in the mutual
fund industry, the Trustees concluded that this practice should be
further curtailed and possibly eliminated in the near future. The
Trustees indicated that they would continue to monitor the allocation of
the funds' brokerage to ensure that the principle of "best price and
execution" remains paramount in the portfolio trading process.
Comparison of retail and institutional fee schedules
The information examined by the Trustees as part of the annual contract
reviews included information regarding fees charged by Putnam Management
and its affiliates to institutional clients such as defined benefit
pension plans and college endowments. This information included
comparison of such fees with fees charged to the Putnam funds, as well
as a detailed assessment of the differences in the services provided to
these two types of clients. The Trustees devoted special attention to
these issues and reviewed recent articles by critics of mutual fund
fees, articles by the ICI defending such fee differences, and relevant
guidance provided by decisions of the courts. The Trustees observed, in
this regard, that the differences in fee rates between institutional
clients and mutual funds are by no means uniform when examined by
individual asset sectors, suggesting that differences in the pricing of
investment management services to these types of clients reflects to a
substantial degree historical competitive forces operating in separate
market places. In reaching their conclusions, the Trustees considered
the fact that fee rates across all asset sectors are higher on average
for mutual funds than for institutional clients, and also considered the
differences between the services that Putnam provides to the Putnam
funds and those that it provides to institutional clients of the firm.
Settlement of regulatory charges related to market timing
Finally, in reaching their conclusions, the Trustees considered all
matters pertinent to the administrative charges filed against Putnam
Management by the SEC and the Commonwealth of Massachusetts in October
2003 relating to market timing, the firm's settlement of those charges,
and the conclusions and recommendations of the Trustees' Audit and
Pricing Committee based on its review of these matters. The Trustees
considered the actions taken by the owner of Putnam Management and its
new senior management to terminate or discipline the individuals
involved, to implement new compliance systems, to indemnify the funds
against all costs and liabilities related to these matters, and
otherwise to ensure that the interests of the funds and their
shareholders are fully protected. The Trustees noted that, in addition
to the settlements of the regulatory charges which will provide
comprehensive restitution for any losses suffered by shareholders, the
new senior management of Putnam Management has moved aggressively to
control expense ratios of funds affected by market timing, to reduce
charges to new investors, to improve disclosure of fees and expenses,
and to emphasize the paramount role of investment performance in
achieving shareholders' investment goals.
Other information for shareholders
A note about duplicate mailings
In response to investors' requests, the SEC has modified mailing
regulations for proxy statements, semiannual and annual reports, and
prospectuses. Putnam is now able to send a single copy of these
materials to customers who share the same address. This change will
automatically apply to all shareholders except those who notify us. If
you would prefer to receive your own copy, please call Putnam at
1-800-225-1581.
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, 2004, are available on the Putnam Individual Investor Web site,
www.putnaminvestments.com/individual, and on the SEC's Web site,
www.sec.gov. If you have questions about finding forms on the SEC's Web
site, you may call the SEC at 1-800-SEC-0330. You may also obtain the
Putnam funds' proxy voting guidelines and procedures at no charge by
calling Putnam's Shareholder Services at 1-800-225-1581.
Fund portfolio holdings
For periods ending on or after July 9, 2004, 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.
A guide to the 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, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed 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.
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. For open-end
funds, a separate table is provided for each share class.
The fund's portfolio
March 31, 2005 (Unaudited)
U.S. government and agency mortgage obligations (84.3%) (a)
Principal amount Value
U.S. Government Guaranteed Mortgage Obligations (73.2%)
- -------------------------------------------------------------------------------
$34,815,016 Government National Mortgage
Association Adjustable Rate
Mortgages 4 1/2s, August 20, 2034 $34,846,315
Government National Mortgage
Association Graduated Payment
Mortgages
8,522 13 3/4s, November 20, 2014 10,368
25,542 13 1/2s, April 15, 2011 29,796
18,723 13 1/4s, December 20, 2014 22,541
53,430 12 3/4s, with due dates from
November 15, 2013 to December 20,
2014 63,340
12,134 12 1/2s, June 15, 2010 13,751
110,021 12 1/4s, with due dates from
September 15, 2013 to January 15,
2015 128,844
185,343 11 1/4s, with due dates from
September 15, 2015 to January 15,
2016 214,238
11,813 10 3/4s, February 15, 2016 13,519
66,817 10s, with due dates from November
15, 2009 to December 15, 2009 72,121
107,372 9 1/4s, with due dates from April
15, 2016 to May 15, 2016 118,186
Government National Mortgage
Association Pass-Through
Certificates
327,399 8 1/2s, with due dates from November
15, 2005 to December 15, 2019 328,655
50,122,812 8s, with due dates from May 15, 2024
to August 15, 2032 54,273,191
3,288,020 8s, with due dates from January 15,
2008 to November 15, 2009 3,447,562
50,634,055 7 1/2s, with due dates from October
15, 2021 to November 15, 2032 54,478,309
50,849 7 1/2s, with due dates from March
15, 2017 to May 15, 2017 54,642
61,425,631 7s, with due dates from March 15,
2022 to May 15, 2032 65,538,987
3,186,407 7s, with due dates from October 15,
2007 to August 15, 2012 3,373,502
38,908,867 6 1/2s, with due dates from October
15, 2023 to July 15, 2034 40,830,439
20,000,000 6 1/2s, TBA, March 1, 2035 20,913,282
1,842,048 6s, with due dates from November 15,
2023 to October 15, 2033 1,894,933
437,153 5 1/2s, March 15, 2033 442,156
48,000,000 5 1/2s, TBA, April 1, 2035 48,420,000
899,178,000 5s, TBA, April 1, 2035 886,673,851
--------------
1,216,202,528
U.S. Government Agency Mortgage Obligations (11.1%)
- -------------------------------------------------------------------------------
Federal Home Loan Mortgage
Corporation
1,252,131 6 1/2s, with due dates from June 1,
2031 to January 1, 2035 1,300,593
34,186,984 5s, with due dates from May 1, 2034
to May 1, 2034 33,497,901
Federal National Mortgage
Association Pass-Through
Certificates
4,070,669 7s, with due dates from January 1,
2024 to January 1, 2034 4,305,285
4,290,827 6 1/2s, with due dates from March 1,
2024 to August 1, 2034 4,462,932
61,274 6 1/2s, March 1, 2016 63,885
363,086 6s, November 1, 2017 375,368
Federal National Mortgage
Association Pass-Through
Certificates
138,836,000 5 1/2s, TBA, April 1, 2035 139,042,088
2,479 5s, August 1, 2033 2,432
1,752,775 4 1/2s, June 1, 2034 1,667,190
--------------
184,717,674
--------------
Total U.S. government and agency
mortgage obligations
(cost $1,390,263,100) $1,400,920,202
Collateralized mortgage obligations (9.1%) (a)
Principal amount Value
- -------------------------------------------------------------------------------
Fannie Mae
$752,850 Ser. 02-26, Class A2, 7 1/2s, 2048 $798,043
4,728,558 Ser. 04-T3, Class 1A4, 7 1/2s, 2044 5,019,654
4,628,318 Ser. 04-W9, Class 2A3, 7 1/2s, 2044 4,910,771
2,911,746 Ser. 02-T18, Class A4, 7 1/2s, 2042 3,086,832
9,075,528 Ser. 03-W3, Class 1A3, 7 1/2s, 2042 9,621,463
20,904 Ser. 02-T16, Class A3, 7 1/2s, 2042 22,159
10,909,096 Ser. 03-W2, Class 1A3, 7 1/2s, 2042 11,568,338
32,814 Ser. 02-W6, Class 2A, 7 1/2s, 2042 34,747
255,835 Ser. 02-W1, Class 2A, 7 1/2s, 2042 269,886
950,864 Ser. 02-14, Class A2, 7 1/2s, 2042 1,007,072
6,023,281 Ser. 01-T10, Class A2, 7 1/2s, 2041 6,370,593
432,003 Ser. 02-T4, Class A3, 7 1/2s, 2041 457,013
632,560 Ser. 01-T12, Class A2, 7 1/2s, 2041 669,313
1,610,804 Ser. 01-T8, Class A1, 7 1/2s, 2041 1,702,073
15,023,792 Ser. 01-T7, Class A1, 7 1/2s, 2041 15,861,034
2,216,153 Ser. 01-T3, Class A1, 7 1/2s, 2040 2,340,665
6,578,207 Ser. 01-T1, Class A1, 7 1/2s, 2040 6,960,417
2,740,599 Ser. 99-T2, Class A1, 7 1/2s, 2039 2,902,470
567,571 Ser. 03-W10, Class 1A1, 7 1/2s, 2032 601,713
6,142,839 Ser. 02-T1, Class A3, 7 1/2s, 2031 6,501,419
1,355,618 Ser. 00-T6, Class A1, 7 1/2s, 2030 1,431,164
494,113 Ser. 02-W7, Class A5, 7 1/2s, 2029 523,682
6,422,932 Ser. 01-T4, Class A1, 7 1/2s, 2028 6,823,141
2,172,453 Ser. 02-W3, Class A5, 7 1/2s, 2028 2,300,873
30,100,741 Ser. 350, Class 2, Interest only
(IO), 5 1/2s, 2034 6,963,148
50,718,766 Ser. 338, Class 2, IO, 5 1/2s, 2033 11,931,767
12,857,847 Ser. 333, Class 2, IO, 5 1/2s, 2033 3,027,561
69,769,560 Ser. 329, Class 2, IO, 5 1/2s, 2033 16,266,032
5,510,344 Ser. 352, Class 1, Principle only
(PO), zero %, 2034 4,186,839
Federal Home Loan Mortgage Corp.
Structured Pass-Through Securities
14,735,299 Ser. T-58, Class 4A, 7 1/2s, 2043 15,594,483
172,631 Ser. T-42, Class A5, 7 1/2s, 2042 182,777
6,298 Ser. T-41, Class 3A, 7 1/2s, 2032 6,656
3,535,173 Freddie Mac Ser. 223, IO, 5 1/2s,
2032 798,949
--------------
Total Collateralized mortgage
obligations (cost $157,824,569) $150,742,747
Short-term investments (70.3%) (a)
Principal amount Value
- -------------------------------------------------------------------------------
$248,796,000 Interest in $440,000,000 joint
tri-party repurchase agreement
dated 3/31/2005 with UBS Securities,
LLC MTG due April 1, 2005 with
respect to various U.S. Government
obligations -- maturity value of
$248,815,904 for an effective yield
of 2.88% (collateralized by Federal
Home Loan Bank and Freddie Mac with
rates ranging from 4.8% to 7.0% and
maturity dates ranging from February
25, 2013 through March 1, 2035,
respectively, valued at
$448,803,999) $248,796,000
106,783,000 Interest in $640,000,000 joint
tri-party repurchase agreement
dated March 31, 2005 with Bank of
America Sec. LLC due April 1,
2005 with respect to various U.S.
Government obligations -- maturity
value of $106,791,543 for an
effective yield of 2.88%
(collateralized by Freddie Mac and
Fannie Mae with rates ranging from
5.5% to 5.6% and maturity dates
ranging from December 1, 2018
through February 1, 2035,
respectively, valued at
$652,800,000) 106,783,000
1,000,000 U.S. Treasury Bills zero %, June 30,
2005 (SEG) 993,055
248,000,000 Federal National Mortgage
Association for an effective yield
of 2.78%, May 11, 2005 247,233,955
150,000,000 Federal Home Loan Banks for an
effective yield of 2.72%, April 20,
2003 149,784,666
65,985,000 Fannie Mae for an effective yield of
2.73%, April 20, 2004 65,889,927
189,400,000 Freddie Mac for an effective yield
of 2.72%, April 19, 2005 189,142,415
160,000,000 Federal National Mortgage
Association for an effective yield
of 2.62%, April 11, 2005 159,883,516
--------------
Total Short-term investments
(cost $1,168,506,494) $1,168,506,534
- -------------------------------------------------------------------------------
Total Investments
(cost $2,716,594,592) $2,720,169,483
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,661,988,859.
(SEG) This security was pledged and segregated with the custodian to
cover margin requirements for futures contracts at March 31, 2005.
TBA after the name of a security represents to be announced securities
(Note 1).
Futures contracts outstanding at March 31, 2005 (Unaudited)
Unrealized
Number of Expiration appreciation/
contracts Value date (depreciation)
- ------------------------------------------------------------------------------------------------------
U.S. Treasury Note
10 yr (Short) 1,202 $131,337,284 June-05 $1,223,069
U.S. Treasury Bond (Long) 875 97,453,125 June-05 149,374
U.S. Treasury Note
5 yr (Short) 311 33,306,156 June-05 (15,161)
- ------------------------------------------------------------------------------------------------------
$1,357,282
- ------------------------------------------------------------------------------------------------------
TBA sale commitments outstanding at March 31, 2005 (Unaudited)
(proceeds receivable $35,332,516)
Principal Settlement
Agency amount date Value
- ------------------------------------------------------------------------------------------------------
FNMA, 5 1/2s, April 1, 2035 $14,245,000 4/13/05 $14,266,145
GNMA, 6 1/2s, March 1, 2035 20,000,000 3/22/05 20,913,282
- ------------------------------------------------------------------------------------------------------
$35,179,427
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities
March 31, 2005 (Unaudited)
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$2,361,015,592) (Note 1) $2,364,590,483
- -------------------------------------------------------------------------------
Repurchase agreements (identified cost $355,579,000) (Note 1) 355,579,000
- -------------------------------------------------------------------------------
Cash 38,316,555
- -------------------------------------------------------------------------------
Interest and other receivables 5,850,581
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 447,922
- -------------------------------------------------------------------------------
Receivable for securities sold 41,552,929
- -------------------------------------------------------------------------------
Receivable for sales of delayed delivery securities (Note 1) 206,541,337
- -------------------------------------------------------------------------------
Receivable for variation margin (Note 1) 128,549
- -------------------------------------------------------------------------------
Total assets 3,013,007,356
Liabilities
- -------------------------------------------------------------------------------
Payable for securities purchased 39,062,658
- -------------------------------------------------------------------------------
Payable for purchases of delayed delivery securities (Note 1) 1,269,640,127
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 3,340,479
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,009,573
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 263,978
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 239,650
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,437
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,092,404
- -------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable
$35,332,516) (Note 1) 35,179,427
- -------------------------------------------------------------------------------
Other accrued expenses 187,764
- -------------------------------------------------------------------------------
Total liabilities 1,351,018,497
- -------------------------------------------------------------------------------
Net assets $1,661,988,859
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Unlimited shares authorized) (Notes 1 and 4) $1,691,050,550
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 11,525,600
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (45,672,553)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,085,262
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $1,661,988,859
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,337,043,440 divided by 101,508,913 shares) $13.17
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.50 of $13.17)* $13.79
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($244,238,109 divided by 18,643,408 shares)** $13.10
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($22,085,735 divided by 1,679,756 shares)** $13.15
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($46,076,089 divided by 3,502,137 shares) $13.16
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $13.16)* $13.60
- -------------------------------------------------------------------------------
Net asset value, offering price and redemption price per
class R share ($87,889 divided by 6,675 shares) $13.17
- -------------------------------------------------------------------------------
Net asset value, offering price and redemption price per
class Y share ($12,457,597 divided by 947,505 shares) $13.15
- -------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
Statement of operations
Six months ended March 31, 2005 (Unaudited)
Interest income $29,125,344
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,156,810
- -------------------------------------------------------------------------------
Investor servicing fees (Note 2) 1,301,254
- -------------------------------------------------------------------------------
Custodian fees (Note 2) 320,698
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 26,997
- -------------------------------------------------------------------------------
Administrative services (Note 2) 35,259
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,733,259
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,358,982
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 120,147
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 119,145
- -------------------------------------------------------------------------------
Distribution fees -- Class R (Note 2) 190
- -------------------------------------------------------------------------------
Non-recurring costs (Notes 2 and 5) 12,983
- -------------------------------------------------------------------------------
Costs assumed by Manager (Notes 2 and 5) (12,983)
- -------------------------------------------------------------------------------
Other 172,706
- -------------------------------------------------------------------------------
Total expenses 9,345,447
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (145,601)
- -------------------------------------------------------------------------------
Net expenses 9,199,846
- -------------------------------------------------------------------------------
Net investment income 19,925,498
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 17,896,305
- -------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 106,536
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures
contracts and TBA sale commitments during the period (21,013,389)
- -------------------------------------------------------------------------------
Net loss on investments (3,010,548)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $16,914,950
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Six months ended Year ended
March 31 September 30
Decrease in net assets 2005* 2004
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $19,925,498 $65,690,990
- -------------------------------------------------------------------------------
Net realized gain on investments 18,002,841 9,880,551
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments (21,013,389) (23,919,353)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 16,914,950 51,652,188
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From net investment income
Class A (21,437,045) (39,396,084)
- -------------------------------------------------------------------------------
Class B (3,159,840) (6,241,917)
- -------------------------------------------------------------------------------
Class C (277,699) (556,126)
- -------------------------------------------------------------------------------
Class M (672,890) (1,259,734)
- -------------------------------------------------------------------------------
Class R (1,094) (49)
- -------------------------------------------------------------------------------
Class Y (322,184) (1,151,865)
- -------------------------------------------------------------------------------
Redemption fees (Note 1) 7,132 1,795
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (171,177,157) (891,633,786)
- -------------------------------------------------------------------------------
Total decrease in net assets (180,125,827) (888,585,578)
Net assets
- -------------------------------------------------------------------------------
Beginning of period 1,842,114,686 2,730,700,264
- -------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $11,525,600 and
$17,470,854, respectively) $1,661,988,859 $1,842,114,686
- -------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- --------------------------------------------------------------------------------------------------------------------------------
Six months
ended
March 31
Per-share (Unaudited) Year ended September 30
operating performance 2005 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.24 $13.20 $13.22 $13.10 $12.55 $12.57
- --------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .16 .42 .28 .62 .75 .79
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.03) (.06) .05 .19 .56 (.02)
- --------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .13 .36 .33 .81 1.31 .77
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.20) (.32) (.35) (.69) (.76) (.79)
- --------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- -- -- (e)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.20) (.32) (.35) (.69) (.76) (.79)
- --------------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (e) -- (e) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.17 $13.24 $13.20 $13.22 $13.10 $12.55
- --------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 1.02* 2.81 2.52 6.41 10.74 6.43
- --------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,337,043 $1,441,252 $2,022,134 $2,432,891 $2,256,218 $1,929,653
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .47* .94 .88 .85 .86 .87
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.20* 3.24 2.12 4.74 5.87 6.40
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 336.26* (f) 198.47 331.95 (d) 277.25 (d) 156.53 (d) 133.29
- --------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy.
(e) Amount represents less than $0.01 per share.
(f) Portfolio turnover excludes dollar roll transactions.
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- --------------------------------------------------------------------------------------------------------------------------------
Six months
ended
March 31
Per-share (Unaudited) Year ended September 30
operating performance 2005 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.17 $13.12 $13.15 $13.04 $12.49 $12.51
- --------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .11 .32 .18 .51 .65 .70
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.03) (.05) .04 .20 .56 (.02)
- --------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .08 .27 .22 .71 1.21 .68
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.15) (.22) (.25) (.60) (.66) (.70)
- --------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- -- -- (e)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.15) (.22) (.25) (.60) (.66) (.70)
- --------------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (e) -- (e) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.10 $13.17 $13.12 $13.15 $13.04 $12.49
- --------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 0.62* 2.12 1.67 5.59 9.98 5.65
- --------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $244,238 $297,159 $529,386 $691,467 $500,366 $574,087
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .84* 1.69 1.63 1.60 1.61 1.62
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .83* 2.46 1.38 3.96 5.15 5.64
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 336.26* (f) 198.47 331.95 (d) 277.25 (d) 156.53 (d) 133.29
- --------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy.
(e) Amount represents less than $0.01 per share.
(f) Portfolio turnover excludes dollar roll transactions.
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS C
- --------------------------------------------------------------------------------------------------------------------------------
Six months
ended
March 31
Per-share (Unaudited) Year ended September 30
operating performance 2005 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.22 $13.17 $13.20 $13.08 $12.53 $12.55
- --------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .11 .32 .18 .50 .64 .70
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.03) (.05) .04 .21 .58 (.02)
- --------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .08 .27 .22 .71 1.22 .68
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.15) (.22) (.25) (.59) (.67) (.70)
- --------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- -- -- (e)
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (.15) (.22) (.25) (.59) (.67) (.70)
- --------------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (e) -- (e) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.15 $13.22 $13.17 $13.20 $13.08 $12.53
- --------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 0.62* 2.08 1.70 5.64 9.99 5.67
- --------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $22,086 $26,181 $53,235 $54,880 $27,512 $7,329
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .84* 1.69 1.63 1.60 1.61 1.62
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .83* 2.44 1.34 3.93 5.07 5.67
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 336.26* (f) 198.47 331.95 (d) 277.25 (d) 156.53 (d) 133.29
- --------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy.
(e) Amount represents less than $0.01 per share.
(f) Portfolio turnover excludes dollar roll transactions.
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS M
- --------------------------------------------------------------------------------------------------------------------------------
Six months
ended
March 31
Per-share (Unaudited) Year ended September 30
operating performance 2005 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.23 $13.18 $13.20 $13.08 $12.52 $12.55
- --------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .14 .39 .27 .57 .71 .76
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.02) (.05) .02 .21 .57 (.03)
- --------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .12 .34 .29 .78 1.28 .73
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.19) (.29) (.31) (.66) (.72) (.76)
- --------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- -- -- (e)
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (.19) (.29) (.31) (.66) (.72) (.76)
- --------------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (e) -- (e) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.16 $13.23 $13.18 $13.20 $13.08 $12.52
- --------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 0.88* 2.61 2.25 6.14 10.56 6.09
- --------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $46,076 $50,649 $73,355 $171,975 $144,285 $95,090
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .59* 1.19 1.13 1.10 1.11 1.12
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.07* 2.99 2.03 4.47 5.60 6.15
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 336.26* (f) 198.47 331.95 (d) 277.25 (d) 156.53 (d) 133.29
- --------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy.
(e) Amount represents less than $0.01 per share.
(f) Portfolio turnover excludes dollar roll transactions.
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS R
- ------------------------------------------------------------------------------------------------------
Six months
ended Year For the period
March 31 ended January 21, 2003+
Per-share (Unaudited) September 30 to September 30
operating performance 2005 2004 2003
- ------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.24 $13.20 $13.22
- ------------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------------
Net investment income (a) .14 .39 .18
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized
loss on investments (.02) (.06) (.02)
- ------------------------------------------------------------------------------------------------------
Total from
investment operations .12 .33 .16
- ------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------
From net
investment income (.19) (.29) (.18)
- ------------------------------------------------------------------------------------------------------
Total distributions (.19) (.29) (.18)
- ------------------------------------------------------------------------------------------------------
Redemption fees -- (d) -- (d) --
- ------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.17 $13.24 $13.20
- ------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 0.92* 2.54 1.23*
- ------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $88 $44 $1
- ------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .59* 1.19 .78*
- ------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.04* 2.98 1.30*
- ------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 336.26* (f) 198.47 331.95 (e)
- ------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Amount represents less than $0.01 per share.
(e) Portfolio turnover excludes certain treasury note transactions executed in connection with a
short-term trading strategy.
(f) Portfolio turnover excludes dollar roll transactions.
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS Y
- --------------------------------------------------------------------------------------------------------------------------------
Six months
ended
March 31
Per-share (Unaudited) Year ended September 30
operating performance 2005 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.22 $13.18 $13.21 $13.09 $12.54 $12.56
- --------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .19 .46 .31 .62 .78 .82
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.04) (.06) .04 .23 .56 (.02)
- --------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .15 .40 .35 .85 1.34 .80
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.36) (.38) (.73) (.79) (.82)
- --------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- -- -- (e)
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.36) (.38) (.73) (.79) (.82)
- --------------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (e) -- (e) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.15 $13.22 $13.18 $13.21 $13.09 $12.54
- --------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 1.16* 3.09 2.73 6.71 11.05 6.71
- --------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $12,458 $26,829 $52,590 $70,445 $43,306 $31,871
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .34* .69 .63 .60 .61 .62
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.35* 3.45 2.39 4.92 6.11 6.66
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 336.26* (f) 198.47 331.95 (d) 277.25 (d) 156.53 (d) 133.29
- --------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy.
(e) Amount represents less than $0.01 per share.
(f) Portfolio turnover excludes dollar roll transactions.
The accompanying notes are an integral part of these financial statements.
Notes to financial statements
March 31, 2005 (Unaudited)
Note 1
Significant accounting policies
Putnam U.S. Government Income Trust (the "fund"), a Massachusetts
business trust, is registered under the Investment Company Act of 1940,
as amended, as a diversified, open-end management investment company.
The fund's investment objective is to seek as high a level of current
income as is consistent with preservation of capital by investing mainly
in securities which have short to long-term maturities and are backed by
the full faith and credit of the United States.
The fund offers class A, class B, class C, class M, class R and class Y
shares. Class A and class M shares are sold with a maximum front-end
sales charge of 4.50% and 3.25%, respectively, and do not pay a
contingent deferred sales charge. Effective April 1, 2005, the class A
shares maximum front end sales charge decreased to 3.75%. Class B
shares, which convert to class A shares after approximately eight years,
do not pay a front-end sales charge and are subject to a contingent
deferred sales charge, if those shares are redeemed within eight years
of purchase. Class C shares are subject to the same fees as class B
shares, except that class C shares have a one-year 1.00% contingent
deferred sales charge and do not convert to class A shares. Class R
shares, which are offered to qualified employee-benefit plans are sold
without a front-end sales charge or a contingent deferred sales charge.
The expenses for class A, class B, class C, class M and class R shares
may differ based on each class' distribution fee, which is identified in
Note 2. Class Y shares, which are sold at net asset value, are generally
subject to the same expenses as class A, class B, class C, class M and
class R shares, but do not bear a distribution fee. Class Y shares are
sold to certain eligible purchasers including certain defined
contribution plans (including corporate IRAs), bank trust departments
and trust companies.
Effective April 19, 2004 (May 3, 2004 for defined contribution plans
administered by Putnam), a 2.00% redemption fee may apply to any shares
that are redeemed (either by selling or exchanging into another fund)
within 5 days of purchase. The redemption fee is accounted for as an
addition to paid-in-capital.
Investment income, realized and unrealized gains and losses and expenses
of the fund are borne pro-rata based on the relative net assets of each
class to the total net assets of the fund, except that each class bears
expenses unique to that class (including the distribution fees
applicable to such classes). Each class votes as a class only with
respect to its own distribution plan or other matters on which a class
vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund,
if the fund were liquidated. In addition, the Trustees declare separate
dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The 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, including mortgage backed securities,
are valued at fair value on the basis of valuations provided by an
independent pricing service, approved by the Trustees. Such service
providers use information with respect to transactions in bonds,
quotations from bond dealers, market transactions in com parable
securities and various relationships between securities in determining
value.
Restricted securities are valued at fair value following procedures
approved by the Trustees. Such valuations and procedures are reviewed
periodically by the Trustees. Short-term investments having remaining
maturities of 60 days or less are valued at amortized cost, which
approximates fair value.
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 certain other
accounts managed by Putnam Investment Management, LLC ("Putnam
Management"), the fund's manager, an indirect wholly-owned subsidiary of
Putnam, LLC. These balances may be invested in issues of high-grade
short-term investments having maturities of up to 397 days for
collateral received under security lending arrangements and up to 90
days for other cash investments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Collateral for certain tri-party repurchase agreements is held at the
counterparty's custodian in a segregated account for the benefit of the
fund and the counterparty. Putnam Management is responsible for
determining that the value of these underlying securities is at all
times at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are recorded on the trade date (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. All premiums/discounts are amortized /accreted on a
yield-to-maturity basis.
E) TBA purchase commitments The fund may enter into "TBA" (to be
announced) commitments to purchase securities for a fixed unit price at
a future date beyond customary settlement time. Although the unit price
has been established, the principal value has not been finalized.
However, the amount of the commitments will not significantly differ
from the principal amount. The fund holds, and maintains until
settlement date, cash or high-grade debt obligations in an amount
sufficient to meet the purchase price, or the fund may enter into
offsetting contracts for the forward sale of other securities it owns.
Income on the securities will not be earned until settlement date. TBA
purchase commitments may be considered securities themselves, and
involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the
risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at fair value of the underlying
securities, according to the procedures described under "Security
valuation" above. The contract is "marked-to-market" daily and the
change in market value is recorded by the fund as an unrealized gain or
loss.
Although the fund will generally enter into TBA purchase commitments
with the intention of acquiring securities for its portfolio or for
delivery pursuant to options contracts it has entered into, the fund may
dispose of a commitment prior to settlement if Putnam Management deems
it appropriate to do so.
F) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale
commitments are not received until the contractual settlement date.
During the time a TBA sale commitment is outstanding, equivalent
deliverable securities or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover"
for the transaction.
Unsettled TBA sale commitments are valued at fair value of the underlying
securities, generally according to the procedures described under
"Security valuation" above. The contract is "marked-to-market" daily and
the change in market value is recorded by the fund as an unrealized gain
or loss. If the TBA sale commitment is closed through the acquisition of
an offsetting purchase commitment, the fund realizes a gain or loss. If
the fund delivers securities under the commitment, the fund realizes a
gain or a loss from the sale of the securities based upon the unit price
established at the date the commitment was entered into. TBA sale
commitments outstanding at period end, if any, are listed after the fund's
portfolio.
G) Dollar rolls To enhance returns, the fund may enter into dollar rolls
(principally using TBAs) in which the fund sells securities for delivery
in the current month and simultaneously contracts to purchase similar
securities on a specified future date. During the period between the
sale and subsequent purchase, the fund will not be entitled to receive
income and principal payments on the securities sold. The fund will,
however, retain the difference between the initial sales price and the
forward price for the future purchase. The fund will also be able to
earn interest on the cash proceeds that are received from the initial
sale. The fund may be exposed to market or credit risk if the price of
the security changes unfavorably or the counterparty fails to perform
under the terms of the agreement.
H) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code of 1986 (the "Code") applicable
to regulated investment companies. It is also the intention of the fund
to distribute an amount sufficient to avoid imposition of any excise tax
under Section 4982 of the Code, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At September 30, 2004, the fund had a capital loss carryover of
$63,668,213 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
- ---------------------------------------
$8,892,718 September 30, 2005
23,731,356 September 30, 2008
31,044,139 September 30, 2009
The aggregate identified cost on a tax basis is $2,716,601,773,
resulting in gross unrealized appreciation and depreciation of
$13,100,387 and $9,532,677, respectively, or net unrealized appreciation
of $3,567,710.
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. 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 of the fund. Such fee
is based on the following annual rates: 0.57% of the first $500 million
of average net assets, 0.475% of the next $500 million, 0.4275% of the
next $500 million and 0.38% thereafter.
Putnam Management has agreed to waive fees and reimburse expenses of the
fund through September 30, 2005 to the extent necessary to ensure that
the fund's expenses do not exceed the average expenses of the front-end
load funds viewed by Lipper Inc. as having the same investment
classification or objective as the fund. The expense reimbursement is
based on a comparison of the fund's expenses with the average annualized
operating expenses of the funds in its Lipper peer group for each
calendar quarter during the fund's last fiscal year, excluding 12b-1
fees and without giving effect to any expense offset and brokerage
service arrangements that may reduce fund expenses. For the period ended
March 31, 2005, Putnam Management did not waive any of its management
fee from the fund.
For the year ended March 31, 2005, Putnam Management has assumed $12,983
of legal, shareholder servicing and communication, audit and Trustee fees
incurred by the fund in connection with certain legal and regulatory
matters (including those described in Note 5).
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company ("PFTC"), a subsidiary of Putnam, LLC. Putnam
Investor Services, a division of PFTC, provides investor servicing agent
functions to the fund. During the six months ended March 31, 2005, the
fund paid PFTC $1,620,918 for these services.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the six months ended March 31, 2005,
the fund's expenses were reduced by $145,601 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $2,168, 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.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded 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. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. 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.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B, class C, class M and class R shares pursuant to
Rule 12b-1 under the Investment Company Act of 1940. The purpose of the
Plans is to compensate Putnam Retail Management, a wholly-owned
subsidiary of Putnam, LLC and Putnam Retail Management GP, Inc., for
services provided and expenses incurred in distributing shares of the
fund. The Plans provide for payments by the fund to Putnam Retail
Management at an annual rate of up to 0.35%, 1.00%, 1.00%, 1.00% and
1.00% of the average net assets attributable to class A, class B, class
C, class M and class R shares, respectively. The Trustees have approved
payment by the fund at an annual rate of 0.25%, 1.00%, 1.00%, 0.50% and
0.50% of the average net assets attributable to class A, class B, class
C, class M and class R shares, respectively.
For the six months ended, March 31, 2005, Putnam Retail Management,
acting as underwriter, received net commissions of $17,634 and $1,981
from the sale of class A and class M shares, respectively, and received
$254,567 and $1,046 in contingent deferred sales charges from
redemptions of class B and class C shares, respectively.
A deferred sales charge of up to 1.00% and 0.40% is assessed on certain
redemptions of class A and class M shares, respectively. For the six
months ended March 31, 2005, Putnam Retail Management, acting as
underwriter, received $429 and no monies on class A and class M
redemptions, respectively.
Note 3
Purchases and sales of securities
During the six months ended March 31, 2005, cost of purchases and
proceeds from sales of U.S. government securities and agency obligations
other than short-term investments aggregated $2,752,297,764 and
$3,792,795,186, respectively.
Note 4
Capital shares
At March 31, 2005, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended March 31, 2005
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 4,294,875 $56,894,324
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 1,304,422 17,257,805
- ----------------------------------------------------------------
5,599,297 74,152,129
Shares repurchased (12,920,554) (171,130,641)
- ----------------------------------------------------------------
Net decrease (7,321,257) $(96,978,512)
- ----------------------------------------------------------------
Year ended September 30, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 11,347,759 $149,278,616
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,405,479 31,613,429
- ----------------------------------------------------------------
13,753,238 180,892,045
Shares repurchased (58,172,060) (764,678,837)
- ----------------------------------------------------------------
Net decrease (44,418,822) $(583,786,792)
- ----------------------------------------------------------------
Six months ended March 31, 2005
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 607,950 $8,009,344
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 201,510 2,652,294
- ----------------------------------------------------------------
809,460 10,661,638
Shares repurchased (4,729,347) (62,306,023)
- ----------------------------------------------------------------
Net decrease (3,919,887) $(51,644,385)
- ----------------------------------------------------------------
Year ended September 30, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 2,299,674 $30,054,012
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 395,617 5,173,173
- ----------------------------------------------------------------
2,695,291 35,227,185
Shares repurchased (20,474,276) (267,775,073)
- ----------------------------------------------------------------
Net decrease (17,778,985) $(232,547,888)
- ----------------------------------------------------------------
Six months ended March 31, 2005
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 62,700 $828,451
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 17,159 226,670
- ----------------------------------------------------------------
79,859 1,055,121
Shares repurchased (380,928) (5,031,819)
- ----------------------------------------------------------------
Net decrease (301,069) $(3,976,698)
- ----------------------------------------------------------------
Year ended September 30, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 472,007 $6,181,187
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 34,343 450,759
- ----------------------------------------------------------------
506,350 6,631,946
Shares repurchased (2,569,060) (33,698,582)
- ----------------------------------------------------------------
Net decrease (2,062,710) $(27,066,636)
- ----------------------------------------------------------------
Six months ended March 31, 2005
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 156,122 $2,061,105
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 8,745 115,569
- ----------------------------------------------------------------
164,867 2,176,674
Shares repurchased (492,086) (6,505,898)
- ----------------------------------------------------------------
Net decrease (327,219) $(4,329,224)
- ----------------------------------------------------------------
Year ended September 30, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 678,463 $8,929,446
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 20,566 270,006
- ----------------------------------------------------------------
699,029 9,199,452
Shares repurchased (2,437,251) (32,024,627)
- ----------------------------------------------------------------
Net decrease (1,738,222) $(22,825,175)
- ----------------------------------------------------------------
Six months ended March 31, 2005
- ----------------------------------------------------------------
Class R Shares Amount
- ----------------------------------------------------------------
Shares sold 3,723 $49,393
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 83 1,094
- ----------------------------------------------------------------
3,806 50,487
Shares repurchased (462) (6,128)
- ----------------------------------------------------------------
Net increase 3,344 $44,359
- ----------------------------------------------------------------
Year ended September 30, 2004
- ----------------------------------------------------------------
Class R Shares Amount
- ----------------------------------------------------------------
Shares sold 3,250 $43,063
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 4 49
- ----------------------------------------------------------------
3,254 43,112
Shares repurchased --* (3)
- ----------------------------------------------------------------
Net increase 3,254 $43,109
- ----------------------------------------------------------------
Six months ended March 31, 2005
- ----------------------------------------------------------------
Class Y Shares Amount
- ----------------------------------------------------------------
Shares sold 145,225 $1,920,339
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 24,391 322,184
- ----------------------------------------------------------------
169,616 2,242,523
Shares repurchased (1,251,378) (16,535,220)
- ----------------------------------------------------------------
Net decrease (1,081,762) $(14,292,697)
- ----------------------------------------------------------------
Year ended September 30, 2004
- ----------------------------------------------------------------
Class Y Shares Amount
- ----------------------------------------------------------------
Shares sold 571,639 $7,514,754
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 87,753 1,151,865
- ----------------------------------------------------------------
659,392 8,666,619
Shares repurchased (2,621,223) (34,117,023)
- ----------------------------------------------------------------
Net decrease (1,961,831) $(25,450,404)
- ----------------------------------------------------------------
* Amount represents less than 1 share.
Note 5
Regulatory matters and litigation
Putnam Management has entered into agreements with the Securities and
Exchange Commission and the Massachusetts Securities Division settling
charges connected with excessive short-term trading by Putnam employees
and, in the case of the charges brought by the Massachusetts Securities
Division, by participants in some Putnam-administered 401(k) plans.
Pursuant to these settlement agreements, Putnam Management will pay a
total of $193.5 million in penalties and restitution, with $153.5 million
being paid to shareholders and the funds. The restitution amount will be
allocated to shareholders pursuant to a plan developed by an independent
consultant, with payments to shareholders currently expected by the end of
the summer.
The SEC's and Massachusetts Securities Division's allegations and related
matters also serve as the general basis for numerous lawsuits, including
purported class action lawsuits filed against Putnam Management and
certain related parties, including certain Putnam funds. Putnam Management
will bear any costs incurred by Putnam funds in connection with these
lawsuits. Putnam Management believes that the likelihood that the pending
private lawsuits and purported class action lawsuits will have a material
adverse financial impact on the fund is remote, and the pending actions
are not likely to materially affect its ability to provide investment
management services to its clients, including the Putnam funds.
Putnam Investments has recorded a charge of $30 million for the estimated
cost that it believes will be necessary to address issues relating to the
calculation of certain amounts paid by the Putnam mutual funds in previous
years. The previous payments were cost reimbursements by the Putnam funds
to Putnam for transfer agent services relating to defined contribution
operations. Putnam currently anticipates that any payments made by Putnam
related to this issue will be paid to the Putnam funds. Review of this
issue is ongoing.
Results of November 11, 2004
and January 10, 2005
shareholder meetings
(Unaudited)
A special meeting of shareholders of the fund was held on November 11,
2004. At that meeting consideration of certain proposals was adjourned to
a final meeting held on January 10, 2005.
November 11, 2004 meeting
At the meeting, each of the nominees for Trustees was elected as follows:
Votes Votes
For Withheld
- ------------------------------------------------------------------------------
Jameson A. Baxter 84,448,012 3,868,055
Charles B. Curtis 84,440,340 3,875,727
Myra R. Drucker 84,421,299 3,894,768
Charles E. Haldeman, Jr. 84,402,945 3,913,122
John A. Hill 84,403,759 3,912,308
Ronald J. Jackson 84,494,282 3,821,785
Paul L. Joskow 84,476,121 3,839,946
Elizabeth T. Kennan 84,415,330 3,900,737
John H. Mullin, III 84,458,893 3,857,174
Robert E. Patterson 84,456,315 3,859,752
George Putnam, III 84,398,320 3,917,747
A.J.C. Smith* 84,368,981 3,947,086
W. Thomas Stephens 84,457,794 3,858,273
Richard B. Worley 84,385,863 3,930,204
A motion with respect to a proposal to approve an amendment to the fund's
Agreement and Declaration of Trust was not brought before the meeting and
accordingly no vote was taken with respect to the proposal.
* Mr. Smith resigned from the Board of Trustees on January 14, 2005.
All tabulations are rounded to nearest whole number.
A proposal to amend the fund's fundamental investment restriction with
respect to diversification of investments to enhance the fund's ability to
invest in registered investment companies such as Putnam Prime Money
Market Fund was approved as follows:
Votes Votes
For Against Abstentions
- ------------------------------------------------------------------------------
63,894,933 3,637,092 20,784,042
January 10, 2005 meeting
A proposal to approve the elimination of the fund's fundamental investment
restriction with respect to investments in options, puts, calls, straddles
and spreads was approved as follows:
Votes Votes
For Against Abstentions
- ------------------------------------------------------------------------------
60,362,835 6,312,438 22,240,451
A proposal to amend the fund's fundamental investment restriction with
respect to investments in commodities to permit the fund to invest in
financial futures contracts was approved as follows:
Votes Votes
For Against Abstentions
- ------------------------------------------------------------------------------
61,405,540 6,203,625 21,306,559
All tabulations are rounded to nearest whole number.
Fund information
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Myra R. Drucker
Charles E. Haldeman, Jr.
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin, III
Robert E. Patterson
George Putnam, III
W. Thomas Stephens
Richard B. Worley
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Associate Treasurer and
Principal Executive Officer
Jonathan S. Horwitz
Senior Vice President
and Treasurer
Steven D. Krichmar
Vice President and
Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Daniel T. Gallagher
Senior Vice President,
Compliance Liaison
and Staff Counsel
Beth S. Mazor
Vice President
James P. Pappas
Vice President
Richard S. Robie, III
Vice President
Mark C. Trenchard
Vice President and
BSA Compliance Officer
Francis J. McNamara, III
Vice President and
Chief Legal Officer
Charles A. Ruys de Perez
Vice President and
Chief Compliance Officer
Judith Cohen
Vice President, Clerk and
Assistant Treasurer
This report is for the information of shareholders of Putnam U.S.
Government Income Trust. It may also be used as sales literature when
preceded or accompanied by the current prospectus, the most recent copy
of Putnam's Quarterly Performance Summary, and Putnam's Quarterly
Ranking Summary. For more recent performance, please visit
www.putnaminvestments.com. Investors should carefully consider the
investment objective, risks, charges, and expenses of a fund, which are
described in its prospectus. For this and other information or to
request a prospectus, call 1-800-225-1581 toll free. Please read the
prospectus carefully before investing. The fund's Statement of
Additional Information contains additional information about the fund's
Trustees and is available without charge upon request by calling
1-800-225-1581.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
Call 1-800-225-1581 or visit our Web site
www.putnaminvestments.com.
SA038-223906 5/05
Not FDIC Insured May Lose Value No Bank Guarantee
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ----------------------------------------------------------------------------
Putnam US Government Income Fund
Supplement to Semiannual Report dated 3/31/05
The following information has been prepared to provide class Y
shareholders with a performance overview specific to their holdings. Class
Y shares are offered exclusively to clients that meet the eligibility
requirements specified in the fund's prospectus for such shares.
Performance of class Y shares, which do not incur a front-end load, a
distribution fee, or a contingent deferred sales charge, will differ from
the performance of class A, B, C, M, and R shares, which are discussed
more extensively in the semiannual report.
RESULTS AT A GLANCE
- ----------------------------------------------------------------------------
Total return for periods ended 3/31/05
NAV
6 months 1.16%
1 year 2.28
5 years 33.04
Annual average 5.88
10 years 84.25
Annual average 6.30
Life of fund (since class A inception, 2/8/84)
Annual average 7.58
Share value: NAV
9/30/04 $13.22
3/31/05 $13.15
- ----------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
6 $0.222 -- $0.222
- ----------------------------------------------------------------------------
Data represents past performance. Past performance does not guarantee
future results. More recent returns may be less or more than those shown.
Investment return and principal value will fluctuate and you may have a
gain or a loss when you sell your shares. For the most recent month-end
performance, please visit www.putnaminvestments.com.
Performance assumes reinvestment of distributions and does not account for
taxes. Returns shown for class Y shares for periods prior to their
inception (4/11/94) are derived from the historical performance of class A
shares, and are not adjusted to reflect the initial sales charge currently
applicable to class A shares. Returns have not been adjusted to reflect
differences in operating expenses which, for class Y shares, are lower
than the operating expenses applicable to class A shares. See full report
for information on comparative benchmarks. If you have questions, please
consult your fund prospectus or call Putnam toll free at 1-800-752-9894.
A short-term trading fee of up to 2% may apply.
Please see pages 12-13 of the accompanying shareholder report for a
discussion of the information appearing in the tables below:
- ----------------------------------------------------------------------------
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming actual returns for the 6 months ended 3/31/05
Class Y
Expenses paid per $1,000* $3.46
Ending value (after expenses) $1,011.60
- ----------------------------------------------------------------------------
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended 3/31/05
Class Y
Expenses paid per $1,000* $3.48
Ending value (after expenses) $1,021.49
- ----------------------------------------------------------------------------
EXPENSE RATIO COMPARISON USING ANNUALIZED DATA
Your fund's annualized expense ratio 0.69%
Average annualized expense ratio for Lipper peer group+ 0.78%
+ For class Y shares, Putnam has adjusted the Lipper total expense average
to reflect that class Y shares do not incur 12b-1 fees.
- ----------------------------------------------------------------------------
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: Not applicable
- --------------------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. Purchases of Equity Securities by Closed-End Management Investment
- --------------------------------------------------------------------------
Companies and Affiliated Purchasers: Not applicable
------------------------------------
Item 9. Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------
Not applicable
Item 10. 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 11. Exhibits:
- ------------------
(a) Not applicable
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act
of 2002 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.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: May 27, 2005
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: May 27, 2005
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: May 27, 2005